Removing a Liquidator: A Guide for Creditors

Removing and replacing a liquidator is a significant step in the course of a company’s winding up. Although liquidators are charged with important public‑interest obligations and performance standards, there are circumstances in which their conduct, independence, or efficiency may fall short.

If a liquidator’s conduct, for example, falls short, creditors have two principal mechanisms through which a liquidator may be replaced: by resolution of creditors, or by order of the Court. Both options for relief are governed by the Insolvency Practice Schedule (Corporations) (IPSC) and Schedule 2 to the Corporations Act 2001 (Cth) (the Act) and case law.

Removal by Resolution of Creditors

Under IPSC s 90-35, both voluntary and court-appointed liquidators may be replaced at any time by a resolution of creditors. This mechanism gives creditors meaningful oversight of the administration of the Company.

Notice and voting requirements

• Creditors must be given at least 5 business days’ notice of the meeting proposing the liquidator’s removal (s 90-35(2)).
• The resolution will pass only if supported by a majority in number and in value of creditors present and voting.
• Reasons for removal by resolution may range from dissatisfaction with the liquidator’s performance to concerns regarding conflicts of interest or issues of convenience.

If a liquidator contests their removal?

• A liquidator who has been removed, may apply to the Court seeking reappointment.

The Court may reinstate the liquidator if satisfied that the removal constituted an improper exercise of creditor power.

Removal by Court Order

Where a resolution is not able to be obtained, creditors may apply to the Court to remove a liquidator under s 503 the Act. The Court may make any orders it considers fit in connection with a liquidator, including removal, even on its own initiative (IPSC s 45-1).

In exercising these powers as contained in IPSC s 90-15, the Court may consider

• whether the liquidator has faithfully performed their duties;
• whether any action or omission has not been in compliance with the Act, Rules, or court orders;
• whether any person has suffered, or is likely to suffer, loss because of the liquidator’s conduct;
• the seriousness of any consequences, including impacts on confidence in liquidators as a group.

Court-developed principles: FW Projects Pty Ltd (in liq) [2019] NSWSC 892

The following well-established principles guide the exercise of the Court’s discretion:

• Benefit to the liquidation: Removal must be for the benefit of the liquidation and those interested in it, supporting confidence in the integrity, objectivity, and impartiality of the process. This is arguably the most important factor for the court.
• Mere hostility is insufficient: animosity between the liquidator and a party is not enough, especially where hostility originates from the party seeking removal, or where that party seeks to manipulate the outcome.
• Imperfect conduct is not enough: Removal is not justified merely because the liquidator’s conduct is less than ideal. Replacement often entails delay, cost, and duplication of work.
• Better conduct of the liquidation: The applicant must show that removal is for the better conduct of the winding up or for the general advantage of those interested in it.
• Advanced liquidations: It is more difficult to justify removal where the liquidation is well advanced, and the liquidator is already familiar with the company’s affairs.

Onus and Difficulty of Removal

Applicants seeking removal via a court order must show at least a prima facie case that removal is for the general advantage of those interested in the winding up. The threshold is high, particularly when the liquidator is already familiar with the company’s affairs (SingTel Optus Pty Ltd v Weston [2012] NSWSC 674; Re St Gregory’s Armenian School Inc [2012] NSWSC 1215).

The Court is cautious where a party appears to be attacking the liquidator merely to avoid scrutiny or the consequences of potential wrongdoing. Courts also consider the cost and inefficiency associated with replacing a liquidator who has already completed substantial work (Re Biposo Pty Ltd (1995) 120 FLR 399).

A Court is also less likely to discharge a liquidator at the end stages of a winding up.

Takeaways

The removal of a liquidator is not a step taken lightly by the Court. Whether initiated by creditor resolution or pursued through the court, the process is governed by strict statutory safeguards designed to protect the integrity of the winding up.

Case law makes clear that animosity between the liquidators and the creditors will rarely justify removal on their own – given it is almost a rite of passage that this is to occur to some extent. Rather, applicants must demonstrate that replacing the liquidator will genuinely benefit the liquidation and those interested in it.

The key question is not whether the liquidator has been perfect, but whether the liquidation will be better conducted by someone else. Applications to remove liquidators are therefore possible but succeed only in limited circumstances where a clear advantage to the liquidation can be shown.

Contributors

• Samantha Jack, Associate
• Heidi Windybank, Law Graduate