Court ousts liquidators for abuse of process

Issuing demands for payment of claims unproven at the time the demands are issued might well be a common practice but Federal Court judge David O’Callaghan has placed it on the endangered list.

In his decision in Gadsden v MacKinnon (Liquidator), in the matter of Allibi Pty Ltd (in liq) [2023] FCA 647 Justice O’Callaghan found that the pursuit of the directors of Allibi Pty Ltd in respect of an asserted but ultimately unfounded $69 million claim was an abuse of process.

“It is difficult to understand why the Liquidators would make a demand for $69,000,000 in circumstances where that demand cannot be reconciled with the facts. Nor can the making
of that demand evidence faithful performance of the Liquidators’ duties.” Justice David O’Callaghan.

In doing so, the judge found in favour of the directors of Allibi, who had applied to the court for orders removing Hamish MacKinnon and Nicholas Giasoumi as liquidators of Allibi Pty Ltd, appointed by court order on June 1, 2022.

The decision puts to an end a nine month period of brinkmanship during which the Dye & Co principals and their legal advisors at Francis Abourizk Lightowlers (FAL Lawyers) pursued Allibi directors John Gadsden and Daniel Lindsay on the basis that the April 2018 agreement through which they’d sold the Billi Australia business to UK-based Waterlogic via a specially incorporated intermediary entity was an uncommercial transaction and the $69 million proceeds of sale vested with them.

Allibi had been the corporate trustee of the Billi Unit Trust which operated the Billi water filtration business.

According to the judgement, MacKinnon and Giasoumi based their claim on two foundations. One was a claim against Allibi for $469,090.32 by supplier Asian Electronic Manufacturing Services Pty Limited (AEMS).

In 2018 AEMS had given Allibi notice of its claim but Lindsay disputed its validity and AEMS didn’t pursue it at that time.

Then on November 13, 2020, AEMS’ new solicitors (Madgwicks) made a further demand on Allibi, this time for US$344,490.84.

Allibi’s lawyers confirmed they would accept service but the paperwork was sent to Allibi’s old address which was by then occupied by new owner Waterlogic.

As a consequence neither Gadsden, Lindsay or their lawyers were aware made of the proceedings.

The demand therefore went unresponded to and default judgment was awarded to AEMS in January 2021 on the basis of there being no appearance. Cue the creation of a creditor.

Following their appointment MacKinnon and Giasoumi reasoned that the AEMS claims meant Allibi had had unpaid debts at the time of the sale of the business to Waterlogic.

The other basis for their insistence that the $69 million be returned to the company emerged during the hearing of the removal application over three days in May and June.

At one point during his cross-examination MacKinnon was grilled about how he and Giasoumi justified their demand for repayment of the $69 million.

“As I – I’ve already answered that question. I’ve said until I can work out what the creditors are – if I was to claim for a dollar, a creditor might have a go at me and say, “Well, hold on, why didn’t you claim for more. There’s – there’s $5 million of creditors that turn up”. If there’s $20 million of creditors turn up, and I only claim for 500,000 – being the AEMS’ debt – they could have criticised me as well,” MacKinnon told the court.

It doesn’t come over as a sound and solid basis for asserting entitlement to $69 million and threatening directors with reports to ASIC of potential misconduct, but when MacKinnon was re-examined by his counsel the other basis for the liquidators’ decision to issue a demand for the $69 million before they’d shored up the claim’s viability was revealed.

As it turns out, MacKinnon and Dye reasoned that because Allibi had sold vast quantities of tapware before it was wound up there was the potential for consumer warranty claims against Allibi which had by virtue of the sale agreement been stripped of the means to respond.

Unfortunately, the liquidators had no way of showing such claims existed.

The applicants’ counsel Michael Wyles KC however said the only unrelated creditor known to MacKinnon as at 30 August 2022 when the letter of demand was sent was AEMS.

“The proposition that the liquidators had a genuine concern about inchoate warranty claims being made by customers, in circumstances where the business ceased trading more than four years earlier and none had been made, should be rejected as a retrospective attempt to justify their conduct,” Wyles said.

“The notion of these potential warranty claims was raised by the liquidators for the first time in this proceeding, and never in any of the extensive correspondence that preceded it.”

There’s a fair bit more, similarly unedifying and it was more than enough to convince Justice O’Callaghan that in this instance the removal of liquidators by a court, which he acknowledged should not be seen as easy, was justified.

“It is difficult to understand why the Liquidators would make a demand for $69,000,000 in circumstances where that demand cannot be reconciled with the facts. Nor can the making
of that demand evidence faithful performance of the Liquidators’ duties,” the judge said.

He ordered that MacKinnon and Dye be removed, and that they be replaced by PwC’s Craig Crosbie and Robert Ditrich.

In delivering judgment Justice O’Callaghan not only provided insightful commentary on the sometimes contradictory obligations of liquidators to pursue the main chance on behalf of creditors (or themselves) whilst acting in accordance with their responsibilities as officers of the court but put insolvency practitioners on notice that the issuance of demands unsupported by adequate investigation is a practice the end of which may be nigh.