Leave Refused – Court-appointed Liquidators Protected From Action By Third Parties - Insolvency/Bankruptcy

This week's TGIF considers the decision in Aardwolf Industries LLC v Riad Tayeh [2020] NSWSC 299, in which the Supreme Court of New South Wales refused an application for leave to sue court-appointed liquidators for damages for negligence and misleading and deceptive conduct.

Background

On 8 August 2011, liquidators were appointed to Herdgraph Pty Ltd and Aardwolf Pty Ltd (Companies), pursuant to a court order. As part of the winding-up process, the liquidators sold the Companies' trademarks to Mr Nguyen, a competitor of the two companies.

The plaintiffs were entities related to the Companies, with all four companies sharing directors. The plaintiffs sought to bring actions in negligence and misleading and deceptive conduct against the liquidators, on the basis that the Companies had abandoned the trademarks and ownership over them had passed to the plaintiffs. Thus, the Companies had no right to sell those trademarks. This proceeding involved the application of the plaintiffs for leave to sue the court-appointed liquidators.

Decision

Justice Rees ultimately refused leave, largely on the basis that the proposed claims had little prospect of success.

In relation to the negligence claim, her Honour considered that, in the circumstances, the liquidators did not owe a duty of care to third parties in the position of the plaintiffs. In relation to the misleading and deceptive conduct claim, her Honour considered that the statutory functions of the liquidators were not "in trade or commerce".

Relevant principles relating to the grant of leave

Justice Rees noted that courts will generally be protective of their officers, which include court-appointed liquidators. There is no rigid test for when leave to commence proceedings may be granted – the matter will depend on the circumstances and timing in which leave is sought, as well as the prospect of success of the proposed action.

Her Honour emphasised that courts are mindful of how any action against liquidators could interfere with the integrity of the liquidation process. In order to properly carry out their tasks, liquidators must feel safe against potential actions against them; this is particularly important when it comes to belated actions brought after the winding-up process has concluded and where there is no scope for the liquidator to be indemnified by the assets of the company in liquidation. This necessary protection means that no weakly-grounded action can be allowed to proceed against a liquidator.

Accordingly, her Honour turned her mind to the prospect of success of the two claims by the plaintiffs.

Negligence claim

The plaintiffs claimed that the liquidators were negligent by failing to exercise reasonable care and skill in investigating and determining the ownership of the trademarks before selling them. Justice Rees found that this negligence claim had little prospect of success because there was no real prospect that the liquidators owed a duty of care to the plaintiffs.

Liquidators can sometimes owe a duty of care to third parties such as the plaintiffs; critical to this is that the third party is vulnerable to the actions of the liquidator, in that they are unable to protect themselves from loss in the event that the liquidator fails to exercise reasonable care. No such vulnerability existed here. The liquidators had experienced great difficulty extracting books and records and information from the directors of the plaintiffs and the companies in liquidation. The directors were the only ones who knew that the plaintiffs had allegedly acquired rights in the trademarks. Despite being in contact with the liquidators during the winding-up process, the directors never communicated this information. The plaintiffs were not vulnerable; they could have protected themselves from harm by informing the liquidators that the Companies no longer had rights in the trademarks. The negligence claim therefore had little prospect of success.

Misleading and deceptive conduct claim

The trademarks were sold by the liquidators to Mr Nguyen by way of a deed of assignment. The plaintiffs claimed that by representing in the deed that the Companies held rights in the trademarks that were capable of being assigned, the liquidators had engaged in misleading and deceptive conduct in contravention of section 18 of the Australian Consumer Law. The plaintiffs argued that they had suffered loss and damage as a result of Mr Nguyen's reliance on these representations.

Justice Rees found that this claim had little prospect of success for two reasons. First, section 18 requires misleading or deceptive conduct to be "in trade or commerce". Here, the conduct of the liquidators was within their function of identifying assets of the companies in liquidation and realising those assets so that a distribution could be made to creditors. This is the statutory function of liquidators, and does not constitute conduct in trade or commerce.

Secondly, the claim was dependent upon Mr Nguyen having relied upon the representations made in the deed. This could not be established as Mr Nguyen was the one who brought the issue of the trademarks to the attention of the liquidators. As the source of the information, it would be difficult to find that Mr Nguyen had relied on the liquidators' understanding of the situation.

Additional reasons for refusing leave

In addition to the actions having no reasonable prospect of success, Justice Rees considered some further matters which went against the granting of leave. These included the failure of the directors of the plaintiffs and the companies in liquidation to cooperate with the liquidators, the fact that the information eventually provided to the liquidators by the directors was incomplete, and the large delay on the part of the plaintiffs in bringing these proceedings, or otherwise making a complaint about the sale of the trademarks.

Comment

This decision confirms the courts' protective attitude towards court-appointed liquidators. The liquidators are considered to be acting as a "delegate" of the court, and courts are concerned to protect the liquidators' functions as well as the court's own processes.

We can expect to see an uptick in court appointments in the wake of COVID-19. This decision should provide some comfort to liquidators who take on that role.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.