Liquidating liquidators?

On several occasions during my years in private legal practice, I observed the phenomenon of a company liquidator and his solicitors whose main goal appeared to be transferring the company’s assets into their respective office accounts as quickly as possible.

Of course, it’s one thing to apprehend or suspect such a motivation, and quite another to allege it publicly in a specific case, let alone prove it.

That’s why I was fascinated to read the decision in Melbourne University Student Union Inc (in liq) v Ray and others, decided last week in the Supreme Court of Victoria.

The case concerned attempts by the MUSU liquidator Dean McVeigh to seek an injunction to restrain an alleged contempt of court on the part of Benjamin Cass, the former President of MUSU. Cass’s alleged contempt consisted of (supposedly) attempting to intimidate the liquidator into settling claims against Cass and others on favourable terms. Cass’s intimidatory acts were to make a series of inflammatory allegations against McVeigh, both in a circular letter to MUSU creditors and on Cass’s blog called Make McVeigh Pay.

Cass’s allegations included claims that McVeigh was a “crook”, “incompetent” and “less concerned about creditors than he is about the financial benefit of himself and his lawyers”.

The remarkable thing about the case is that the judge, Justice Hollingworth, seems to think at least the last of those claims is pretty fair and reasonable on the factual material before her!

The liquidator seeks to prevent the publication of any allegation that he is not or was not interested in achieving a financial return for MUSU creditors.

In a circular to creditors dated December 16, 2005, regarding “The Man Who Stole Christmas”, Mr Cass made various assertions including the following: that the MUSU liquidation involved “schemes, the rorts and the gross mismanagement” and had gone “from bad to worse”; that the Madgwicks partner, Mr Levy, was Mr McVeigh’s “Partner-in-Crime” in spending millions of dollars on fees; that Mr McVeigh’s conduct was under investigation by “a number of MPs”; that Mr McVeigh is incompetent; and that Mr McVeigh is not interested in maximising the financial return for creditors.

Enclosed with the circular was a copy of the liquidator’s Form 524 report to ASIC dated September 5, 2005, annotated with Mr Cass’s comments. The ASIC report showed that the liquidator had received amounts totalling about $5.28 million, made payments totalling about $4.65 million, had about $628,000 available but not distributed out of which he would be claiming about $495,000 for his own fees and expenses, and had received proofs of debt totalling about $4.48 million.

Next to those items, Mr Cass made comments such as: “McVeigh spends $4M. This is how much money McVeigh has paid out during the liquidation. Most of it went to lawyers and other professional hangers on.” and “Only $600K left! This is how much money McVeigh had left - as at 5 September 2005. Remember - creditors haven’t been paid yet!” Next to an item showing contingent assets estimated to produce $2M, Mr Cass had written “Only $2M from court cases? This is how much McVeigh reckons he will get out of suing bankrupts, near bankrupts, insolvent companies and 20 year olds!” The enclosure ends with the following words: “Creditors deserve better. Sack McVeigh now: Pay creditors what little is left.”

Mr Cass has made allegations on his website to a similar effect, namely that Mr McVeigh is less concerned about creditors than he is about the financial benefit of himself and his lawyers.

Mr Cass’s statements clearly give the impression that Mr McVeigh is not discharging his duties to creditors. The liquidator’s counsel conceded that it was not improper for Mr Cass to express an opinion about whether or not the liquidation has been handled competently. However, he sought to draw a distinction between alleging that Mr McVeigh is incompetent and alleging that Mr McVeigh is not, or was not, interested in achieving a financial return for MUSU creditors. The distinction does not seem to have merit to me.

These particular comments by Mr Cass appear to be reasonable and factually based, as far as the material before me is concerned. It is difficult to see how they might have the relevant tendency. As far as the balance of convenience is concerned, if Mr McVeigh has a simple explanation for the figures in the ASIC return, no doubt he can give it to the creditors and others interested in the MUSU liquidation.

Not surprisingly in the circumstances, Hollingworth J declined to grant an injunction to the liquidator.

I should emphasise that neither the merits of Cass’s claims nor those of the liquidator against Cass and others (including another right wing “bovver boy” blogger named Andrew Landeryou) have been substantively determined.

A judge on an injunction application is merely determining whether there is a “serious question to be tried” and where the “balance of convenience” lies as to whether an injunction ought to be granted until trial (in this case to restrain Cass from continuing to publish derogatory comments about the liquidator on his blog and to MUSU creditors directly).

Moreover, there is another possibly salient fact:

The plaintiff justifies having commenced this litigation by asserting that $1 million had gone overseas through the tenth defendant, Marbain Pty Ltd, a company controlled by Mr Landeryou and Mr Cass, but now in liquidation.

The judgment doesn’t explain whether the liquidator alleges that this $1 million was unlawfully appropriated by Cass and Landeryou’s company from MUSU, or what happened to it after it was shipped overseas, or what prospects (if any) there might now be of recovery. We can’t therefore eliminate the possibility that Cass and Landeryou are indeed attempting to create an elaborate smokescreen to coerce or bluff the liquidator into settling so that efforts to trace the allegedly missing $1 million are discontinued. The judgment seems implicitly to assume that the $1 million (if it ever existed) is irrecoverable, but no clear explanation is given.

In more general terms, this case brings into sharp focus the whole area of corporate liquidations. Leaving aside the specific facts of this case, I’ve always thought there is a massive conflict between a company liquidator’s duty to maximise recovery in the interests of creditors (and in rare cases, shareholders) and the liquidator’s self-interest in maximising his own fees.

Of course, that conflict exists for lawyers as well in matters generally. But lawyers are subject to the inherent discipline of having a client who will usually be reasonably diligent in ensuring that he isn’t charged utterly exorbitant fees, and clients can always insist on having their lawyer’s bill “taxed” by the Supreme Court.

Company liquidators generally don’t have a client in any meaningful sense, at least not one with any real vested interest in ensuring that the liquidator doesn’t overcharge or pursue unlikely avenues of possible recovery mostly in order to maximise fee income.

Generally the company’s shareholders have no expectation of ever recovering anything in the liquidation and therefore don’t give a stuff what the liquidator does; the directors are inherently suspect because they were the people who sent the company broke in the first place; and very commonly no single creditor is owed a large enough sum to create a strong vested interest in closely overseeing the liquidator’s activities.

Moreover, creditors commonly (and mostly correctly) assume that they have little or no chance of ever seeing a substantial payment from the liquidator, and so are reluctant to throw good money after bad by paying lawyers to scrutinise the liquidator’s conduct. And, even in the rare case where someone does bother to attempt to make the liquidator accountable, he only has to justify his fees before a Supreme Court or Federal Court Master or Registrar, who is invariably a lawyer with at best a hazy idea of what an accountant or liquidator actually does and how long it should take to do it.

I’m not in any sense suggesting that all or even most liquidators are crooks or incompetent or more interested in enriching themselves than recovering money for creditors. But I have no doubt that such liquidators exist, and the current system contains few real safeguards against abuse.

Given the lack of any effective market force or disciplines, I’ve always thought that there is a strong case to be made for liquidations to be handled by a specially created division of ASIC rather than by private sector accountants. Maybe it’s my residual socialist instincts, but I’d be pretty certain that the cost of insolvency administration would drop dramatically with little or no reduction in the effectiveness of recovery for creditors.

I’d be most interested in reader reactions, especially from the legal eagles among the readership. This isn’t in any sense my area of professional specialisation, so I’m quite prepared to be told that I don’t know what I’m talking about. But it’s at least worth discussing, I think.