Considering Conflicts: Queensland Supreme Court rejects application to restrain liquidators’ choice of representation

This matter involved the former director and former accountant of CGS Constructions (QLD) Pty Ltd filing proceedings seeking an injunction to restrain the Liquidators from engaging Cornwalls Lawyers to act on the basis that:

1. Cornwalls also acted for a substantial creditor, Union Share Pty Ltd; and
2. the Liquidators, by engaging Cornwalls, had manifested a tendency to favour certain interests at the expense of others.

Background

On 30 October 2020, Mr McLeod and Mr Karageozis (the Liquidators) were appointed as liquidators of CGS Constructions (QLD) Pty Ltd (the Company). The other relevant parties were Mr Flint, who was the Company’s sole director and secretary, and Mr Harris, the former accountant of the Company.

On 22 December 2020, the Liquidators provided a report to the creditors pursuant to section 70-40 of the Insolvency Practice Rules (Corporations) 2016 (Cth). The report identified a number of issues requiring further investigation, including inadequate records, potential voidable transactions and insolvent trading. The report also stated that further investigations would require conducting a public examination of the relevant parties, and that there was insufficient funding to do so.

The Liquidators subsequently sought external funding from creditors to proceed with proposed public examinations, including of Mr Flint and Mr Harris.

On 16 April 2021, the Liquidators provided a further report to creditors which advised that Union Share Pty Ltd (Union Share), ‘a proven creditor in the Liquidation’, had expressed interest in providing litigation funding to conduct a public examination. The report also stated that without funding, the Liquidators would be unable to pursue an insolvent trading claim against the director and/or conduct a public examination of the director. The Liquidators invited any other creditor who may be potentially interested in providing funding for litigation to contact them.

On 30 April 2021, Mr Flint’s lawyers sent a letter to the Liquidators expressing concerns about Union Share funding the examinations, calling it an ‘abuse of process’ being offered with an ‘ulterior motive’. The ‘ulterior motive’ being the fact that there was an existing dispute between Mr Flint and the director of Union Share, Mr Chen. The letter alluded to the fact that the funding offer made by Union Share was contingent upon Union’s solicitors undertaking the legal work on behalf of the Liquidators, and described this as ‘clearly inappropriate due to Union Share’s ulterior motives and the very clear and obvious conflict of interest Union Share’s solicitors would find themselves in’.

Creditors meeting

On 6 May 2021, a meeting of creditors was held and Mr Karageozis, one of the Liquidators, was the Chairperson for the meeting. The Chairperson informed the creditors that the funding from Union Share was conditional upon Union Share’s solicitors, Cornwalls Lawyers, being engaged for the purposes of the public examinations.

In relation to voting on the resolution to enter into the funding agreement, the minutes record that there was one vote in favour (that being Union Share’s vote), five votes against, and one who abstained. Of the five who voted against, one was Mr Flint’s lawyers and two were entities associated with Mr Harris. The Chairperson used his casting vote and as a result, a resolution authorising entry into the funding agreement with Union Share was passed.

Creditors were given an opportunity to object or apply to the Court to challenge the agreement. Objections were received from representatives and associated entities of both Mr Harris and Mr Flint, however no application to any court was made to prevent the funding deed being entered into. After giving objecting parties two extra weeks to take action if they wished, the funding deed was executed on 14 June 2021.

Not long thereafter, the Liquidators served examination summonses on Mr Flint and Mr Harris. Mr Flint and Mr Harris then filed proceedings seeking an injunction to restrain the Liquidators from engaging Cornwalls as contemplated by the funding deed.

Decision

In dismissing the application, the test applied by Bowskill SJA was ‘whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice required that the solicitor be so prevented from acting, at all times giving due weight to the public interest that a litigant should not be deprived of his or her choice of solicitor without good cause’. Her Honour noted the power to restrain a solicitor from acting for a litigant is an exceptional step and should be exercised with caution.

Her Honour rejected arguments by Mr Flint and Mr Harris that the Liquidators, by engaging Cornwalls, had manifested a tendency to favour certain interests at the expense of others. Especially since the Liquidators had already formed the view that it was necessary to conduct the public examinations before Cornwalls were retained.

Her Honour was not persuaded that a fair-minded, reasonably informed observer would:

• view the history of antagonism between the parties and conclude that it would compromise the Liquidators’ independence to an unacceptable degree; and
• conclude the proper administration of justice would require that the Liquidators be prevented from retaining Cornwalls to act for them in relation to the public examinations.

Her Honour also observed that the purpose of a public examination is to gather information, which is to the potential benefit of all creditors, not merely the funding creditor. Notably, Her Honour found that the interests of Union Share, as a creditor, were the same as the interests of the other creditors; and not in conflict with them.

Her Honour also considered the following in rejecting the application:

• that it was not a conflict that one of the Liquidators had voted in favour of the funding agreement given his honest belief that it was in the best interests of the creditors;
• without the funding from Union Share, the Liquidators would not have had the resources to conduct the public examinations; and other creditors were given a reasonable opportunity to object, and to take action to prevent the deed from being entered into if they wished. However, they did not.

Key takeaway

• Restraining a litigant’s choice of representation is a decision which is exercised with extreme caution and will not be exercised lightly.
• Acting for both a creditor and the liquidator will not necessarily give rise to a conflict of interest, but specific regard must be given to the factual circumstances surrounding the engagement.
• To restrain a litigant from engaging their desired representation, a court must conclude that a fair-minded, reasonably informed observer would perceive that allowing the engagement would be against the administration of justice.

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Authored by:
Irene Gallagher, Solicitor