When Can You Appoint a Special Purpose Liquidator?

In Lewis v Battery Mineral Resources Ltd (in liq) [2021] FCA 963, Justice Griffiths considered the circumstances in which an application for the appointment of a special purpose liquidator will be appropriate.  The case serves as a stark reminder that special purpose liquidators (SPL) are not appointed to investigate the conduct of other external administrators.

Background

Battery Mineral Resources (in liquidation) (BMR) was a mining company with significant assets in Canada, South Korea and the United Kingdom. Its business primarily consisted of mining for cobalt, lithium and other minerals required for batteries.

On 11 November 2019, BMR’s board placed the company into voluntary administration. Fairly quickly, the administrators decided to sell the Canadian subsidiary of the business.

On 21 November 2019, a Committee of Inspection (COI) was appointed, which included Mr Lewis, the founder and former CEO of BMR. The next day, the administrators presented the COI with a confidential report, recommending that they accept a bid to purchase the Canadian subsidiary of the business from Weston Energy LLC (Weston).

Mr Lewis objected to the sale and left the meeting before it had concluded. After he departed, the COI resolved not to object to the bid from Weston. The sale was formalised with an agreement entered into on 2 December 2019 and completed two days later on 4 December 2019.

About 14 months after the sale to Weston, Mr Lewis applied to the Federal Court for the appointment of an SPL under s 90-15 of the Insolvency Practice Schedule (IPS). Later, Mr Lewis amended his application to make an additional alternate claim for the appointment of a reviewing liquidator under s 90-23 of the IPS. The purpose of the appointment was to investigate the conduct of the administrators (who had since become the liquidators) and to review their earlier decision to accept the bid from Weston.

Principles

Justice Griffiths provided a helpful summary of the principles that apply when considering whether or not to appoint an SPL. He observed:

• The Court’s power to appoint an SPL is found in s 90-15(1) of the IPS to “make such orders as it thinks fit in relation to the external administration of the company”.

The “special purpose” for the appointment is a primary consideration and must be “just and of sufficient utility to the external administration” of the company. Justice Griffiths observed that this generally requires the applicant to prove that the appointment could lead to a recovery for the benefit of creditors.. Whether or not the special purpose is “substantial and serious” is also relevant.

• If the applicant is willing to fund the SPL, this will generally weigh in favour of the appointment.
• The Court will also consider whether or not the appointment will maintain confidence in the administration, be beneficial to the winding up and creditors as a whole, and be in the public interest.

Significantly, Justice Griffiths noted that there were no reported cases in which an SPL had been appointed to investigate the conduct of an incumbent liquidator (either in that capacity or its prior capacity as an administrator). Instead, it appeared that SPLs had exclusively been appointed to investigate or conduct claims in respect of which the incumbent liquidator had, or may have had, a conflict of interest or duty.

In relation to the appointment of reviewing liquidators, Justice Griffiths noted that there were also no reported cases in which a reviewing liquidator had been appointed to review the conduct of an external administrator. Drawing upon the legislation and case law concerning the appointment of SPLs, Justice Griffiths found that the following factors were relevant to the Court’s discretion to appoint a reviewing liquidator:

• Whether the external administrator had engaged in conduct that required regulation, supervision, discipline or correction.
• Whether the matters for investigation by the reviewing liquidator had been stated with sufficient clarity and were supported by sufficient evidence to justify the appointment.
• Whether the applicant was willing to fund the reviewing liquidator.
• Whether or not the appointment would maintain confidence in the administration, and be beneficial to the winding up and creditors as a whole.

Application

In the present case, Mr Lewis sought the appointment of an SPL to investigate what he referred to as the “hasty sale” of BMR’s assets. Given that the special purpose for the appointment was to investigate the conduct of the voluntary administrators, Justice Griffiths found that the Court did not have the power to appoint an SPL and rejected the application. However, even if the Court did have the power to appoint an SPL, Justice Griffiths indicated that he would have refused to exercise his discretion because:

• Mr Lewis had not discharged his onus of establishing that the appointment could potentially lead to a recovery for the benefit of creditors.
• There was no suggestion that the external administrators had acted other than in good faith.
• The appointment would further delay the liquidation, which was against the interests of the creditors as a whole.
• The application was supported by only one creditor, so the appointment would not be just or beneficial to the other creditors, who had not opposed the administrators’ decision.
• Mr Lewis failed to provide an explanation for the 14-month delay between the acceptance of the bid from Weston and his application for an SPL to be appointed.

In relation to the alternative appointment, Justice Griffiths found that the Court had the power to appoint a reviewing liquidator. However, he ultimately declined to exercise his discretion for substantially the same reasons that he had declined to appoint an SPL, and in particular, because there was no suggestion that the external administrators had acted other than in good faith.

Conclusion

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