Can A Liquidator Be Removed?

What is liquidation? ​
Liquidation is the formal process of winding up a company’s affairs, typically when the company is insolvent and unable to pay its debts. The purpose of liquidation is to sell the company’s assets, settle its liabilities to creditors as far as possible, and ultimately dissolve the company, governed by the Corporations Act 2001 (Cth) (“Act”), which provides the framework for managing companies facing insolvency.
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Types of liquidation
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Voluntary Liquidation: Initiated by the company's members or creditors when they agree that the company should be liquidated. There are two subtypes:
i.Members' Voluntary Liquidation (MVL): For solvent companies that wish to wind up.
ii. Creditors' Voluntary Liquidation (CVL): For insolvent companies that cannot pay their debts as they become due. -
Compulsory Liquidation: This occurs when a court orders the liquidation of a company, often following a petition by creditors who believe the company is insolvent.
The role of the liquidator
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The liquidator plays a critical role in the liquidation process. Once appointed, the liquidator assumes control of the company’s assets and is responsible for a range of duties. The liquidator's primary responsibilities include realising the company’s assets, which may involve selling property, inventory, and other assets, and distributing the proceeds to creditors according to a legally prescribed order of priority. The liquidator is also tasked with investigating the company’s affairs to identify any potential misconduct, fraud, or mismanagement.
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In addition to asset realisation and creditor distribution, the liquidator must file periodic reports with the Australian Securities and Investments Commission (ASIC) and update creditors on the progress of the liquidation. They also have an obligation to ensure that the process adheres to legal and regulatory standards, ensuring transparency and fairness for all parties involved.1 ​
1 Australian Securities & Investments Commission (ASIC). "Liquidators and Their Role". Available at: https://asic.gov.au ​
Removal of a liquidator
Liquidators are appointed to manage the company’s affairs during the liquidation process, but there may be situations where their removal is necessary. A liquidator can be removed by a resolution of the creditors, by a court order, or due to issues related to their professional qualifications.
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One of the most common methods of removing a liquidator is through a resolution passed by the creditors. Under Section 499 of the Act, creditors holding a majority of the voting rights can remove the liquidator during a meeting, however this does not apply to a provisional liquidator. A meeting must be convened for this purpose, and creditors vote on whether to remove the liquidator. For the resolution to pass, a majority in both number and value of creditors must approve the removal. If the liquidator is removed, the creditors typically appoint a new liquidator during the same meeting. If creditors resolve solely to remove a liquidator, the removal doesn’t take effect until a new liquidator is appointed.
In some cases, a liquidator can be removed by a court order. Section 473 of the Act outlines the grounds on which a court may remove a liquidator.
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The court may intervene if there is evidence that the liquidator has failed to carry out their duties properly, or if the liquidator has engaged in misconduct, such as fraud or conflict of interest. Additionally, a liquidator may be removed if they are deemed incompetent or incapable of fulfilling their responsibilities. A party seeking the removal of a liquidator must file an application with the court, and the court will assess the circumstances before granting an order for removal.
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In the case of Re St Gregory’s Armenian School (in liq) [2012] NSWSC 1215, Brereton J said that the onus of showing cause for removal of a liquidator is not “lightly discharged” and that:
“… it should not be seen to be easy to remove a liquidator merely because it can be shown that in one or possibly even more respects, his or her conduct has fallen short of the ideal.”
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In Queensland Mining Corporation Ltd v Butmall Pty Ltd, in the matter of Butmall Pty Ltd (in liquidation) [2016] FCA, Jagot J held that to support a successful removal application of liquidators, the evidence required must establish a real, not hypothetical, possibility of conflict of interest on the part of the liquidators. In instances where an application to remove a liquidator fails, the court may order the party bringing the action to pay the liquidator's costs of defending the application. The Butmall case emphasises the importance of substantial evidence when seeking to dismiss a liquidator on the basis of a conflict of interest.
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Furthermore, if a liquidator is found to be in breach of their professional responsibilities or ethical duties, they may also face disciplinary action from professional bodies such as the Australian Restructuring, Insolvency & Turnaround Association (ARITA) or ASIC.2
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What happens after the liquidator is removed?
The incoming liquidator must provide the outgoing liquidator with a written consent to act and a declaration of any relevant relationships, indemnities or other potential issues that could impact on their independence or that otherwise represents a conflict of interest or duty. The former liquidator may apply to the court to be reinstated, although the court may only reinstate them where it is satisfied that the removal of the former administrator was an improper use of the powers of one or more creditors.3
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2 Australian Restructuring, Insolvency & Turnaround Association (ARITA). "Liquidator’s Responsibilities and Removal". Available at: https://www.arita.com.au These bodies oversee the conduct of insolvency practitioners, including liquidators, and can disqualify or suspend a liquidator from practising if they are found to have acted improperly.
3 Michael Murray & Jason Harris, Keay's Insolvency: Personal and Corporate Law and Practice, (9th ed., Thomson Reuters, 2020), Chapter 15, Administration of the Winding Up, p. 575.
© Jenita Narayan – 17 January 2024