Successful Application to Remove a Liquidator Without Allegation of Wrongdoing

Overview of the Decision

A recent Federal Court decision clarified when a liquidator can be removed, even without any allegation of misconduct. In Starbelle Energy Pty Ltd v Louttit [2024] FCA 1172, the Court considered an application to remove a liquidator on grounds that centred not on wrongdoing, but on concerns regarding independence, neutrality, and the proper administration of the liquidation.

The decision serves as a timely reminder that courts retain a broad power of discretion to supervise insolvency appointments and intervene where the interests of creditors and the integrity of the liquidation process may be compromised—even in the absence of misconduct.

Insolvency Appointment & Court Challenge

Mr Jamieson Louttit was appointed liquidator of Coal Contractors Pty Ltd (Coal Contractors)—in liquidation—on 13 May 2024. The company’s sole director, who also controlled its shareholder entity, Calais Investments Australia Pty Ltd, made this appointment of Mr Jamieson Louttit.

At that time, Starbelle Energy Pty Ltd (Starbelle)—a creditor—had ongoing litigation against both Coal Contractors and its Director. Starbelle, as a creditor of Coal Contractors and its Director, later applied to remove the liquidator, though it made no accusations of misconduct or impropriety.

In Louttit’s initial report lodged with ASIC on 21 June 2024, Mr Louttit noted a cash balance of only A$296.72. Asset categories i.e. Debtors and Other Assets were marked as “unknown.” Similarly, Liabilities were also incomplete. Only two (2) partly secured creditors appeared, with no confirmed values. The only clearly listed unsecured creditor debt was A$61,548.50. Debt to the Australian Taxation Office (ATO) had not yet been confirmed.

Starbelle filed its application on 5 September 2024. The Court heard the matter on 27 September and agreed to the removal of acting liquidator Mr Jamieson Louttit.

Legal Basis for Removing a Liquidator

The Court’s power to remove a liquidator is rooted in its inherent jurisdiction to oversee the proper administration of a liquidation. The legal framework draws on principles in kind to section 70(1) of the Trustee Act 1925 (NSW), which enables the Court to:

• Remove a Trustee

• Replace a Trustee

• Appoint a New or Additional Trustee

While these provisions centre on trustees, the Federal Court historically applies similar reasoning to the appointment and removal of liquidators. This was reinforced in Gadsden v MacKinnon (Liquidator), in the matter of Allibi Pty Ltd (in liq) [2023] FCA 647. Key principles and considerations include:

• Preservation of the Institution: Protecting the core functions of the trust or liquidation and ensuring it operates for its intended purpose.

• Protecting Beneficiaries or Creditors: Safeguarding the interests of those owed duties.

• Judicial Discretion: The Court must evaluate the totality of the circumstances.

• Caution in Intervention: The Court should avoid setting precedents that encourage disruption or opportunistic challenges.

Why the Court Removed the Former Liquidator

While the Court found no evidence of improper conduct, it identified several critical factors that justified removing the liquidator.

1. Uncertainty Around Funding & Fees

   Mr Louttit’s fees were capped at A$100,000. The director had paid A$40,000 of this amount. After Starbelle filed its application, the director offered to secure another A$200,000 from a third-party source. However, no evidence of the Director’s ability to fulfil this promise of this funding.

   In contrast, Starbelle placed A$200,000 in its solicitor’s trust account to fund the new liquidator. The timing and nature of the director’s proposal played a key role in the decision to remove the former Liquidator, as it appeared reactionary and lacked financial substantiation.

2. Limited Initiative of Former Liquidator

   The Former Liquidator—Mr Louttit—made little effort to investigate the company’s financial affairs or independently secure funding beyond what the director provided. Although the Former Liquidator cited limited resources, the Court found no genuine attempts to access the approved remuneration cap.

3. Impartial Conduct

   Notably, Starbelle approached the Court in a neutral manner, proposing three potential replacement liquidators without expressing any preference. This conduct underscored that Starbelle brought the application to ensure the liquidation proceeded properly, rather than to advance its own commercial interests.

4. Application Timing

   The liquidation was still in its early phase, with ample opportunity for meaningful investigation and recovery and little costs incurred by the Former Liquidator to defeat any potential return of creditors.

Key Lessons for Creditors & Practitioners

1. Misconduct is Not a Prerequisite for Removal

   The Court may remove a liquidator even in the absence of wrongdoing.

2. Act Promptly

   Where concerns exist, creditors should act swiftly to avoid unnecessary delays in the liquidation and ensure a smooth transition if a new appointee is sought.

3. Secure Replacement Funding

   Demonstrating that the proposed liquidator has adequate resources is essential. Secured funding serves as a compelling factor in securing a favourable outcome from the Court.

4. Objective Neutrality

   Applicants who act in good faith by nominating several replacement candidates and showing no preference are more likely to succeed. This signals a genuine interest in proper process and helps the Court choose the best candidate without questioning the applicant’s motives.

How We Can Assist— Insolvency Can Be Complex.

Our experienced Restructuring & Insolvency lawyers help creditors assert their rights, apply for the removal of liquidators, and suggest suitable replacements that meet legal standards and requirements.

Whether you’re a creditor seeking accountability or a stakeholder worried about how the liquidation is progressing, we provide clear guidance and fair solutions as seasoned lawyers in the insolvency space.

Contact us today to speak with one of our legal experts about how we can help you.

This article is provided for general informational purposes only and does not constitute legal advice. While every effort is made to ensure the accuracy of the information provided, Madison Marcus Law Firm makes no representations or warranties, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the content. Readers are advised to seek professional legal advice tailored to their specific circumstances before taking any action based on this information. Madison Marcus Law Firm accepts no liability for any loss or damage incurred as a result of reliance on the information presented herein.