In brief - Judgment opens scope of liquidator's duty to creditors being extended to actions beyond selling company's property
Declaration of interest: Colin Biggers & Paisley acted in the case discussed in this article.
In Perpetual Nominees Limited v McGoldrick (No. 3)  VSC 78, the Supreme Court of Victoria has held that a liquidator owes a common law duty of care to guarantors when exercising a power of sale to realise assets of the company in liquidation. The judgment will be of great interest to insolvency practitioners as it is the first time in Australia that a Court has determined that such a duty of care exists after a full trial.
Racso defaults on loans secured by mortgage over vacant land it owned, liquidators appointed
The defendants were from time to time directors of two companies known as Racso Pty Ltd and Zido Pty Limited. Racso and Zido borrowed money from Perpetual Nominees Ltd, as custodian for OnePath Funds Management Ltd, a financier and responsible entity for a mortgage pool. The defendants guaranteed the liability of Racso and Zido to OnePath pursuant to written guarantees. The loans were secured by a mortgage over vacant land owned by Racso that were executed in favour of Perpetual. The land was Racso's only asset.
Racso defaulted on the loans owing approximately $4.6 million. Subsequently, Mr Sule Anautovic and Glenn Crisp of Jirsch Sutherland were appointed as joint and several administrators of Racso. Shortly afterwards it was resolved that they should be appointed as joint and several liquidators.
The liquidators commenced a process for sale of the Racso land. At the conclusion of the sale the land was sold for $3 million leaving a shortfall owed to Perpetual. Perpetual sought to recover the balance of its debt from the defendant guarantors.
In their defence the defendants alleged that the liquidators owed them various duties which bound them to act in the defendants' interests, as sureties of Racso's liability to Perpetual, to ensure that the Racso land was sold for market value. These alleged duties were said to be a duty of care; a duty to act in good faith; and a duty to refrain from acting in a manner in which no reasonable administrator or liquidator would act. Various criticisms of the sales process were alleged that were said to be in breach of the alleged duties.
Liquidator owes common law duty of care when exercising a power of sale to avoid economic loss caused to guarantor, judge finds
In rejecting the defendants' defence and vindicating the liquidators' and the associated real estate agents' conduct, Vickery J found that the criticisms of the sale process were unfounded. However, his Honour's finding that a liquidator owes a common law duty of care when exercising a power of sale to avoid economic loss caused to a guarantor runs against the widely accepted view in Australia that receivers (by analogy) do not owe a common law duty of care to the mortgagor but only an equitable duty to act in good faith and for a proper purpose.
It has long been considered that liquidators have a duty to discharge their obligations with due care and skill and in the interests of creditors as a whole, in addition to their statutory duties as officers of the company. In the case of realising company property, it is reasonably settled that the liquidator's duty is to take reasonable care to get the best price possible in the circumstances, similar to the statutory obligations of controllers and mortgagees.
The exact nature of the duty has not been settled, but until this judgment it was generally not considered to be in the nature of a common law duty of care owed to all creditors or to guarantors. The standard required to breach a duty of care is a lower standard than is required to prove that a receiver, administrator or liquidator acted in bad faith or without proper purpose. In analysing the liquidator's actions in realising company property in terms of common law duty of care principles, the judgment opens the scope of the liquidator's duty to creditors being extended to actions beyond selling the company's property.
However, the lesson from the case, given his Honour's findings on the content of the duty, is that if a liquidator discharges his or her duties to the company as has always been required, liability to a third party guarantor is very unlikely to follow.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.