Provisionally speaking : when can I ask for a provisional liquidator

Courts are commonly asked to consider applications for orders for the appointment of a “provisional” liquidator to a company’s affairs.

As a starting point, a provisional liquidator may be appointed after the commencement of winding up proceedings, but before those proceedings are concluded and final winding up orders made.

Such applications are brought where fundamental, intractable differences between stakeholders exist and, for example:

• there is an urgent need to act to preserve the assets of the company;
• it is necessary to have an independent person investigate the company and its affairs;
• there is a material conflict of interest between a director and the company; or
• there has been impropriety in the conduct of the company’s affairs.

It is well established that the Court’s wide power to appoint a provisional liquidator should only be exercised where:

• the Court is satisfied that there is a reasonable prospect that a winding up order will be made following the hearing of the winding up application; and
• some good reason is shown for placing the company’s affairs under external control prior to the hearing of the winding up application, such as public interest considerations, a need to preserve the status quo, or the protection of the company’s assets and affairs.

This reflects the reality that the appointment of a provisional liquidator is a drastic intrusion into the affairs of the company. Before appointing a provisional liquidator, it is necessary to consider whether less intrusive measures are available that would be adequate to preserve the status quo.

Such applications are not always successful.  One such recent example was In the matter of Glad Indigenous Pty Ltd [2023] NSWSC 1499 (Company), in which the Court’s observations may assist parties understand how the Court assesses ‘working relationships’ and when such relationships have or have not broken down to a degree, that justifies a provisional liquidation appointment.

In this case, the shares in the Company were owned by Mr Scott Franks (as to 51%) and Glad Holdings (as to 49%). Mr Natajle (Nick) Iloski was the sole director and shareholder of Glad Holdings. Mr Franks and Mr Iloski had been the two directors of the Company at all times since its incorporation on March 8, 2021. They were also the joint company secretaries of the Company. The Company was established as a vehicle for a new cleaning business to be operated as a joint venture between Mr Franks and Glad Holdings. Mr Iloski is also the principal of several other companies related to Glad Holdings that are collectively known as the ‘Glad Group’.

Over time, the relationship between Mr Franks and Mr Iloski deteriorated to the point where Mr Iloski formed the view that “a working relationship with him (Mr Franks) was no longer possible”, and Glad Holdings commenced proceedings seeking orders to appoint a provisional liquidator to the defendant on just and equitable grounds, citing “a significant and irredeemable breakdown in the relationship” of the parties. Mr Iloski (on behalf of the plaintiff, Glad Holdings) cited the following:

• Mr Franks caused the appointments of his son, Danny Franks, as General Manager and Mr Sundar Raman as bookkeeper by using his casting vote despite knowing of Mr Iloski’s concerns and votes against the appointments;
• Mr Franks intentionally excluded him from a meeting with a potential new client (Seraco Group Pty Ltd);
• Mr Franks had caused the Company’s bank to put a block on the Company’s bank account, preventing it from paying employees’ wages and making payments to the ATO; and
• At a board meeting held on the day before the winding up proceedings commenced, Mr Franks again used his casting vote to pass a number of resolutions to which Mr Iloski objected;

Mr Franks’ evidence on behalf of the Company (as the defendant) was:

• That he was concerned about the services provided and the service fees being charged to the Company;
• Tenders being prepared on behalf of the Company were often unsuccessful because they were non-compliant with the request for tender;
• He was not seeing any profits but had obtained information from a representative of the Company’s main client that led him to believe the Company should be profitable;
• The Company was transferring funds out of its account under the guise of a ‘loan repayment’ to the Glad Group, notwithstanding the Company never resolved to borrow money from the Glad Group;
• His request to see the records relating to the ‘loan’ had been denied;
• The Company’s bank account showed money transfers to an account he does not recognise; and
• He was being denied access to the books and records of the Company, as well as certain invoices of- and to- the Company which he had requested to view.

The following notable observations were made:

• The appointment of a provisional liquidator is a drastic intrusion into the affairs of a company and it is therefore necessary to first consider whether alternative options are available.

• While the Court has wide power to appoint a provisional liquidator it should only exercise this power where: (1) there is a reasonable prospect that a winding up order will be made following the hearing of the winding up application; and (2) a good reason (such as public interest considerations, the need to preserve the status quo, or protection of the company’s assets and affairs) is shown to justify making such an appointment.

• The “reasonable prospect” component is a key threshold that must be met— evidence that merely reaches to a “possibility” that a winding up order will be made following the hearing of the winding up application will not suffice.

• Where a “breakdown” of the relevant working relationship is cited, it is the effect of the breakdown on the company that is to be assessed. Even if, as in this case, there is a “breakdown of trust and confidence” between the relevant parties then so long as the company did not enter into a state of “paralysis” or “deadlock”, this would not suffice. In this case, the Court held that “to some extent, decisions continued to be made cooperatively, including in relation to the payment of wages, workers’ compensation insurance premiums and income tax” and resulted in the breakdown not being of a sufficient degree to justify the appointment of a provisional liquidator.

• The Court will consider whether the possibility exists that a relationship may be restored with time or under certain circumstances. In this case, the Court observed that there was a possibility that once Mr Franks received and reviewed the various records of the Company that he had requested, the parties’ relationship might improve. Therefore, until such time, it was “too early to characterise the breakdown of trust and confidence” as “irretrievable”.

If you find yourself considering your company’s future, MPH may be able to assist in resolving the matter through a various of means, ranging from buyouts and sale of shares to removals and appointments of directors and ultimately, court proceedings. For further discussion, please contact Dan Butler at (08) 9221 0033 or dbutler@mphlawyers.com.au.