Federal Court Permits Liquidators To Give Notices To Creditors Electronically And To Be Relieved Of The Requirement To Send A Creditors List -

This week's TGIF considers the recent case of Halifax Investment Services Pty Ltd (In liquidation) (No 4) [2019] FCA 604 where the Federal Court granted an application by liquidators of a company to electronically publish notices required to be sent to creditors as part of their initial reporting obligations in a winding up, to save costs and time, in circumstances where the communications with creditors was predominately via telephone and email.

The Court also confirms that liquidators are required to comply with section 497 of the Act, notwithstanding the assumption in section 446A(3) of the Act, which may be a drafting error following the ILRA amendments.

Background to the application

Halifax Investment Services Pty Ltd (Halifax) (in liquidation) was a financial services provider and its primary business was to deal with financial products on behalf of its clients through electronic trading platforms. On 20 March 2019, a meeting of creditors voted that Halifax be wound up pursuant to section 439C(c) of the Corporations Act 2001 (Cth) (Act).

Upon winding up, liquidators are required to send notices, reports, documents and communications to creditors via post under the Act, the Corporate Regulations 2001 (Cth) (Regulations) and the Insolvency Practice Rules (Corporations) 2016 (Cth) (Rules).

The issue that arose was the potential difficulty and expense of complying with initial reporting obligations and the ongoing statutory obligations directed to informing creditors of matters in the course of the liquidation. Halifax had a very large volume of investor creditors located in Australia and overseas, estimated to be approximately 12,500 investor creditors and a much smaller number of trade creditors. The estimated cost of postage was $100,000. Evidence suggested that the majority of the communications received from creditors to Halifax since the beginning of its administration had been via email or telephone.

The liquidators submitted that sending notice via post to every creditor would not be expedient or cost-effective and made an application under section 447A(1) of the Act and section 90-5(1) of the Insolvency Practice Rules to modify the operation of section 446A(2) of the Act to allow the liquidators to electronically send to creditors any notices, reports, documents and communications required to be sent under the Act, Regulations and Rules. Section 600G of the Act and reg 5.6.11A of the Corporations Regulations 2001(Cth) could not be relied upon as a large number of creditors (9,800 creditors) had not elected to accept communications electronically and there was insufficient time for the liquidators to email the creditors and seek consent for the initial reporting obligation requirement to be satisfied.

Electronic notice accepted

Justice Gleeson accepted that since creditors had habitually dealt with Halifax online, the most expedient and cost-efficient way for the liquidators to comply with their initial reporting obligations under sections 497(1) and 506A, and section 70-30 and 70-35 of the Insolvency Practice Rules (Corporations) 2016 (Cth) would be to:

publish the notices on ASIC's published notices website, the liquidators' website and Halifax's websites;
message clients of the company who used its electronic trading platforms to the publication, about the notices on Halifax's websites;
email a hyperlink to the notices, to each creditor using the email address in its records (if any); and
where the creditor did not have an email address on record, send the notice to the creditor by post.

Her Honour also ordered that the liquidators would first be required to undertake specified investigations to identify additional postal or email addresses of creditors. The investigations included reviewing all client service agreements, proofs of debts and other records and to call or fax numbers of creditors where no postal or email addresses had been provided.

Compliance with section 497 required notwithstanding section 446A(3)

The liquidators submitted that they were obliged to comply with section 497 of the Act notwithstanding the terms of section 446A(3) of the Act, and that section 446A(3) of the Act was affected by a drafting error. Section 446A(3) of the Act provides that section 497 of the Act is taken to be complied with in relation to the winding up. The liquidators submitted that the original section related to the first meeting of creditors, but after the amendments to section 497 of the Act, it now purported to relate to the all provision of information about the company's affairs.

Justice Gleeson proceeded on the basis that this submission was correct and the liquidators were obliged to comply with section 497.

Non-compliance of section 497: the creditor list

The liquidators sought to be relieved of their obligation under section 497 of the Act, which required them to send to each creditor a summary of the affairs of the company and a list of all the creditors of the company. The creditor list would identify 12,500 investor creditors as well as trade creditors. It was submitted that the creditor list was a valuable asset and an integral part of Halifax's business that should be protected so liquidators may attempt to sell the list for the benefit of all creditors. At the date of judgment, the liquidators had already received 14 unsolicited enquiries from third parties seeking to purchase the client list.

Justice Gleeson accepted that the liquidators should not be required to supply creditors with a client list to preserve their limited assets.

Implications of the decision

This case makes it clear that a Court will allow:

electronic notice of a liquidator's initial reporting requirements; and
non-compliance with requirements in section 497 of the Act to provide the client list, where the list is a valuable asset of the company.

It also provides that liquidators will be required to comply with section 497 notwithstanding the reading of section 446A(3) of the Act, and suggests that this may be a drafting error that ought to be rectified by the legislature.

On a general note, Justice Gleeson's decision demonstrates the Federal Court's inclination to assist liquidators in order to reduce costs for the benefit of creditors. The decision identifies potential circumstances in which it is appropriate for notices, reports, communication and documents in liquidation to be sent to creditors electronically.

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.