Liquidation, receivership, and the intersection with family law

Introduction

Liquidators are tasked with realising a company’s assets for the benefit of its creditors. Often, however, liquidators are faced with additional layers of complexity affecting their ability to discharge their duties.

Recently, the Cornwalls Sydney Insolvency team acted for a liquidator in connection with proceedings in the Federal Circuit and Family Court (Family Court Proceedings), in which the liquidator was successful in his application to be appointed as receiver and manager of certain trusts, while navigating a number jurisdictional and legal complications.

Background

The liquidator was appointed over a group of companies (Companies). At the time of appointment, the Companies held assets in their capacities as corporate trustees. This had not been disclosed to the liquidator at the time of his appointment. Investigations revealed that the relevant trust deeds contained ipso facto clauses terminating the Companies’ appointments as trustees upon liquidation, with the consequence that the significant trust assets were held by the Companies as bare trustees, creating uncertainty as to the liquidator’s right to deal with the trust property.

The liquidator instructed Cornwalls to urgently intervene in the Family Court Proceedings in order to protect the interests of creditors and to make an application for him to be appointed as the receiver and manager of the assets of the discretionary trusts.

Issues for the Court’s consideration in the receivership application

The Court was faced with a number of questions including:

1. did the liquidator have the ability to authorise the sale of company assets in his capacity as liquidator, notwithstanding those assets were held on trust?
2. was it necessary to appoint a receiver and manager over the assets of the various trusts in order to allow the liquidations to proceed?
3. did the Federal Circuit and Family Court of Australia have jurisdiction to make the orders sought by the liquidator?
4. what should be done with the proceeds of sale of the subject companies’ assets in light of the pending Federal Circuit and Family Court dispute?

Outcome of the Application

The Court appointed the liquidator as receiver and manager of the assets and undertakings of each of the relevant trusts and noted the following points:

In respect of questions (a), (b) and (c) the Court held that:

• the Federal Circuit and Family Court had jurisdiction – a receiver could be appointed over the assets of the trust pursuant to the Court’s jurisdiction under s 80(1)(k) of the Family Law Act 1975 (Cth), noting that the making of any order “necessary to do justice” extends to the appointment of a receiver on an interlocutory basis, if the court is satisfied such an order is necessary;
• the liquidator did not have authority to sell the companies’ assets, because at the time of appointment, the Companies held the trust property only as bare trustees. Accordingly, the liquidator only had authority to sell the legal, not the beneficial, interest in the trust property;
• the trustee’s power of sale cannot be exercised by the liquidator if the company ceases to be a trustee and s 477(2)(c) of the Corporations Act 2000 (Cth) (Corporations Act) does not empower a liquidator to sell trust property; and
• the appointment of the liquidator as receiver and manager of the trust assets was appropriate.

In respect of question (d), the Court held that:

• the liquidator’s appointment would not have the effect of disturbing any proprietary interest in the property, given that the liquidator agreed that upon realisation of the trust assets and their conversion into liquid funds, they would be held pending the outcome of the related Family Court Proceedings, which would have the effect of preserving the property pool and placing it into a form which is more easily divided once the parties’ entitlements have been determined.

Family Law proceedings often involve contested claims for property. Given the broad powers of the Family Court to bind companies controlled by a husband or wife to the proceedings, insolvency issues are not uncommon in that jurisdiction, particularly when there are court proceedings on foot in relation to assets owned by a company or trust.

Cornwalls regularly act for both liquidators and company directors in insolvency-related proceedings. If you have any questions about this article, please get in touch with one of our key contacts in our Restructuring, Turnaround, and Insolvency team