When are liquidators required to seek approval to retain legal counsel?

When does a liquidator (or the company he or she is appointed to) need court, creditor, or committee approval to validly retain a solicitor to act in a liquidation matter which is likely to extend for longer than three months? The answer to this question has only recently been settled.

The Corporations Act 2001 (the Act)

Section 477 (2)(b) of the Act gives a liquidator power to appoint a solicitor to assist them in their duties.

This power is subject to the limitation in section 477 (2B) of the Act which states:

Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

• Without limiting paragraph (b), the term of the agreement may end; or
• Obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged within those 3 months.

Issues arising

The interpretation of this section has been problematic, as indicated in the earlier case examples we examine below. Thankfully the most recent cases from Western Australia have added clarity on this issue. These issues arise because of the wording in the section. Also, depending on the nature of the liquidation matter, or just by how liquidators retain lawyers, the liquidator can retain a lawyer personally, in their own name, or can cause the company in liquidation to retain the lawyer.

The liquidator as the client

In some liquidation matters, such as seeking and conducting a public examination, or pursuing an unfair preference, the liquidator is the necessary plaintiff under the Act and so ought to be the client.

As the client, the liquidator then seeks indemnity for those legal costs from the company and clearly applies any remaining recovery (net of their administration costs and expenses) for the benefit of the company's creditors. In these scenarios the liquidator isn't entering into the retainer on the company's behalf, even though the company and its creditors are the intended beneficiaries of the legal work and the liquidator acts as the company's agent. Arguably, in such matters, retainers likely to be greater than three months don't need court approval as, strictly speaking, the retainer isn't on the company's behalf.

The company in liquidation as the client

Where a company in liquidation is suing a director for a breach of their duty as the plaintiff, or selling an asset, the company in liquidation is the solicitor's obvious client. These examples seem to squarely fall within section 477 (2B), if the three month time limit will be exceeded for the retainer.

Case examples

The legal uncertainty surrounding this section can be seen in the judgments in the following cases:

Naidenov, in the matter of AJW Interiors and Constructions Pty Ltd (in liq) [2024] FCA 25 (Naidenov)

Background

• In April 2022, the liquidator, on behalf of the company, entered into a conditional costs agreement with his solicitors in relation to the public examination of the former director and his spouse (previous employee of the company) and possible settlement negotiations for the recovery proceedings (Cost Agreement).
• Due to the nature of work, the terms of the Cost Agreement were considered "clearly likely" to exceed the three month period.
• Only after 14-months of the cost agreement being signed and the solicitors incurring costs, did the liquidator seek approval of the Cost Agreement from the court.

Decision

The Federal Court refused to approve the Costs Agreement under s 477 (2B) of the Act in the circumstances of what had happened.

Relevantly for our purposes, Cheeseman J stated:

"the purpose of s 477 (2B) is therefore to afford some protections against ill-advised or improper actions on the part of the liquidator": [91].

Her Honour noted at paragraph 93 of the judgment that there is an unresolved issue in recent court decisions as to whether s 477 (2B) also applies to agreements between a liquidator, in that capacity, retaining a solicitor. The court noted that although this issue was not raised, it proceeded on the basis that the approval was required .

Jahani, in the matter of Ralan Property Services Pty Ltd (receivers and managers appointed) (in liq) [2023] FCA 738

Background

• The liquidators commenced two proceedings in the Federal Court:
  • Proceedings against the former sales manager and his wife, for receiving substantive payments and the transfer of real property at undervalue from the companies, being voidable transactions; and,
  • Proceedings against the Australian Taxation Office (ATO) for unfair preferential payments in the amount of $2.27 million and $2.3 million in personal tax liabilities owed to the ATO by the Ralan Group's director and wife.
• Both proceedings had to be brought by the liquidator, as the first plaintiff, as only they had power to do so under the Act.
• The proceedings had separate funding agreements.

Decision

• Stewart J of the Federal Court of Australia made orders approving the solicitors costs agreements in respect of the separate legal proceedings, under s 477(2B) of the Act.
• At paragraph 36 of the judgment, His Honour considered the context of approvals of litigation funding agreements. His Honour noted that liquidators have different capacities. The costs agreements were approved, however, whether such a retainer by a liquidator with a solicitor falls within the ambit of s477 (2B) was left undecided.

Lewis (liquidator), in the matter of Concrete Supply Pty Ltd (in liq) [2020] FCA 841

Background

• In late 2019 the applicants entered into a written retainer with their solicitors in their capacity as liquidators to act in connection with the investigation and pursuit of potential claims against the directors of the company and against others.
• In the terms of engagement, it was required that that the applicants seek approval for the entry into the retainer under s 477 (2B) of the Act.
• The applicants only commenced the application to the court five months later.

Decision

• His Honour referred to Frigger v Kitay (No 2) [2020] FCA at [47]-[51] which provides some support for the proposition that an agreement between a liquidator in such capacity and a solicitor is not an agreement to which s 477 (2B) applies.
• His Honour at [20] didn't express any concluded views as to whether this provision covers such agreements. He proceeded on the basis that the section applied. His Honour stated that:
  • It is reasonably arguable that, by entering into the retainer in their capacity as joint and several liquidators of the company, the applicants made it plain that they were doing so as agents of the company;
  • The very nature of the services for the most part, for the benefit of the company, rather than the liquidators; and
  • The nature of the ex parte application necessitated the court to act out of the abundance of caution.
• The Federal Court granted the applicants approval to enter into the retainer retrospectively for the purpose of fulfilling with duties as liquidators of Concrete Supply.

Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89

Background

• There were two separate proceedings, which related to:
  • An Investigation Agreement (Investigation Agreement) for the funding of public examinations by the Liquidators in their capacity as liquidators for the Claimant; and,
  • A Funding Agreement (Funding Agreement) for the funding of proceedings against Fortress by the Claimant and the Liquidators.
• Both documents were made between the Funder, the Claimant and the Liquidators in their capacity as liquidators.

Decision

• Although case doesn't delve into the issue of retainer specifically, it considered the approval of the Funding agreements.
• At [40], the Full Court observed that when considering whether to give approval under s 477(2B), the court must take into consideration that the purpose for which the powers of a liquidator exist are to, among other things, recover funds for the benefit of creditors.
• Due to the nature of the case, approval was granted however, whether a liquidator needs approval to enter into the agreement was not concluded by the court.

Frigger v Kitay (No 2) [2020] FCA 497

Background

• A sequestration order under s52 of the Bankruptcy Act 1966 was made against the Friggers on a creditors petition of two creditors, Mervyn Johnathon Kitay in his capacity as Liquidator of Computer Accounting and Tax Pty Ltd (CAT) and separately CAT.
• As the Liquidator of CAT, Mr Kitay in such capacity appointed Herbert Smith Freehills (HSF) to assist him in defending proceedings on the company's behalf.

Decision

• Charlesworth J of the Federal Court looked at whether the costs agreement was one to which the requirements of s 477(2B) applied.
• Her Honour at [51] did not express a concluded view as to whether approval was required, however, her Honour did accept that, to the extent that an agreement is between a liquidator (in their capacity as liquidator of a company), approval under section 477(2B) would not be required.

Re Jennifer Elizabeth Low; Ex Parte Jennifer Elizabeth Low [2023] WASC 489

Background

• The plaintiff was the liquidator of the company.
• The company's creditors resolved at a meeting to appoint a COI (comprising two members, the Fair Entitlements Guarantee branch of the Commonwealth Department of Employment and Workplace Relations (FEG) and the Northerly Group).
• The plaintiff commenced proceedings in the Supreme Court seeking orders for the conduct of public examinations.
• The plaintiff proposed to the COI by email that approval be given for entry into the retainer with solicitors. Only the Northly Group advised agreed to the plaintiff entering into the retainer, whilst the FEG abstained from voting, it had no objection to retaining solicitors.

Decision

• The issue the court dealt with was whether the informal approval to be obtained by email exchanges with the members of the COI to approve the retainer was sufficient.

• Hill J at [24] held that approval could have been validly established and sought from the COI under s 477(2B) of the Act.
• Hill J held that the plaintiff may act under the Funding Agreement and the Retainer as though they had been entered into with prior approval of the COI at the given meetings.
• The court did not answer the question as to whether approval was needed for a retainer that a liquidator can enter.

Western Australian decisions

Kitay v Frigger (No 2)[2024] WASC 113

Background

• The issue was squarely raised in this recent case, when the liquidator sought declarations that he was not required to seek Court approval of two law firm retainers and costs agreements. The defendants opposed those orders.
• The issue was expressly stated by the Court at [77] to be whether section 477 (2B) only applies to agreements entered into by a liquidator specifically on behalf of the company, or whether it can also apply to agreements entered into by a liquidator in their own name.
• Usefully, the Court identified that a costs agreement and a retainer are distinct and can exist independently. However, costs agreements may be part of a legal services agreement.

Decision

• The Court held that approval was not required for agreements entered into by the liquidator personally.
• Hill J. approved Colvin J's decision to the same effect in Kitay (in his capacity as liquidator of Computer Accounting & Tax Pty Ltd (in liq) v Frigger [No2].
• He found that the agreements with the solicitors in this case was not between the company in liquidation and the solicitors. Flowing from that, the liquidator would be personally liable to his solicitors for costs.
• His Honour stated that in order to ascertain who the client was in an agreement with, it is necessary to look at the substance of the agreement. This highlights the need for care when drafting any agreements retaining a law firm in a liquidation.

Conclusion

A key learning from these cases is that liquidators and their lawyers must ensure that the legal services retainer agreement and related costs agreement are made with the correct client. The client will be either the liquidator personally, or the company in liquidation. That decision can usually be determined by considering the type of matter and who the proper party is (if it involves Court proceedings). This process will help in deciding whether Court or COI approval is required for these agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.