Court finds that a liquidator owes a duty of care to a guarantor

Judgment was handed down today in the matter of Perpetual Nominees Ltd v McGoldrick & Anor (No 3) [2017] VSC 78 where it was held that the liquidators owed a duty of care to the guarantors of a company debt.

Gadens acted on behalf of the successful Plaintiff, Perpetual Nominees Ltd, as custodian for OnePath Funds Management Ltd, in proceedings issued against Mr Ian McGoldrick and Dr Frederique Bentley. The Defendants were, at different times, directors of Racso Pty Ltd (in liq). The fifth and sixth Defendants by counterclaim (Mr Sule Arnautovic and Mr Glenn Crisp) were the joint and several liquidators and former joint and several administrators of Racso (the Liquidators). Mr McGoldrick became bankrupt before the final addresses in the trial were heard.

Racso was the registered owner of the land at 441 and 443 Maroondah Highway, Lilydale (the Property). The Plaintiff claimed $4.6m from the Defendants pursuant to guarantees of loans to Racso Pty Ltd (in liq) and another company. The Defendants resisted the claim on the basis that the Liquidators, who were initially appointed by the Plaintiff as administrators of Racso under s.436C of the Corporations Act 2001 (Cth), sold the Property for less than their market value. The Defendants argued that the Liquidators (and administrators) owed them various duties which effectively bound them to act, in the interests of the Defendants as guarantors of Racso’s liability to the Plaintiff, in such a way as to ensure that the Property was sold for market value. The Defendants said that, to the extent that the Liquidators failed to do so, they have thereby exposed the Defendants to liability for any shortfall under their guarantees and the Liquidators are liable to them for damages. The Defendants also said that the Liquidators acted at all times as agents of the Plaintiff.

A central question determined by Vickery J was whether a liquidator owes a duty of care to third parties in the position of the Defendants (as guarantors). Vickery J noted that this area of law is developing and a variety of factors and principles need to be considered by a Court when determining if the duty exists. The “salient features” Vickery J considered were:

Indeterminacy of Liability: The Liquidators were aware of the guarantors’ liability to indemnify Racso and that their liability was limited to the amount of the shortfall between the debt and the sale proceeds.

Knowledge of the risk and its magnitude: The Liquidators knew of the risk and its magnitude, in that they were aware the sale price would directly affect the Defendants.

Vulnerability: The Defendants were vulnerable in the sense their liability was dependent on what the Liquidators sold the Properties for.

Individual autonomy: Found not to be relevant.

Proximity: There was a sufficiently close relationship to give rise to a duty of care given the Liquidators knew the sale of the Property would affect the liability of the Defendants.

Inconsistent duties: Entirely consistent with other duties a liquidator owes to creditors.

Vickery J found the Liquidators owed a duty of care to the Defendants, and that duty was to sell the Property acting in good faith and with due care and skill to an extent that was reasonable in all the circumstances. This meant taking reasonable care to sell the Property for the best price possible in the commercial context existing at the time.

The complaints made by the Defendants against the Liquidators in relation to the sale of the Property included:- the marketing campaign was too short, the agent was not suitable, the sales campaign was not stopped and re-launched, there was a failure to obtain and provide a feasibility report, the Information Memorandum was provided late, a failure to market the Property separately, the advertising was deficient, an issue with the weekly reports, a delay in provision of sales contracts, and acceptance of the sale price offered. In light of the evidence, whereby Vickery J accepted and preferred the Plaintiff and Liquidators’ experts, His Honour was satisfied that the Liquidators’ conduct was not undertaken without due care and skill to an extent that was reasonable in all the circumstances and therefore that the duty of care was not breached. He noted that all of the decisions made were of a commercial character to be judged at the time, acting on professional advice and without the benefit of hindsight. Although a duty of care was found to be owed by the Liquidators to the Defendants as guarantors, it was not shown that the conduct was flawed in such a way as to adversely affect the outcome of the sale or the interests of the Defendants.

In relation to the allegation that the Liquidators were the agent of the Plaintiff, Vickery J noted that although an administrator and liquidator are appointed as agents of the company, in certain circumstances they could become an agent of the appointor. He referred to the more common situation of a receiver being an agent of their appointor but observed that the case law could be applied by way of analogy to administrators and liquidators. In this case, Vickery J was not satisfied that the involvement of Perpetual in the sale process was more than mere consultation and indications of preferences, and that Perpetual was not so involved in the Liquidators’ decisions that the relationship was one of principal and agent.