A recent decision in the Supreme Court of Western Australia has shed light on the types of costs agreements and retainers that, before they are entered into, liquidators must seek approval from a court or creditors: Kitay v Frigger (No 2) (WASC 2024)

Key Takeaways

• Section 477(2B) provides that a liquidator must obtain approval from a court, committee of inspection, or a resolution of creditors to enter into agreements on the company’s behalf if the term of the agreement; or the obligations of a party to the agreement may be discharged more than three months after the agreement commences.
• Approval is required: for retainers and costs agreement that extend over 3 months entered into by a liquidator as agent for, or as a representative of a company in liquidation where the company in liquidation is a party to the agreement or the company takes the benefit of the legal services.
• Approval is not required: for retainers and costs agreement (of any duration) in which solicitors advise a liquidator on the conduct of the liquidation or their duties.
• Approval is not required: for retainers and costs agreement (of any duration) entered into by a liquidator personally.

Brief Facts

Mr and Mrs Frigger (Defendants) were directors and members of Computer Accounting and Tax Pty Ltd (Company). On 6 May 2010, the Company was wound up in insolvency and Mr Kitay was appointed as liquidator.

The Defendants had applied for summary relief against the Liquidator on the basis that the Liquidator did not receive approval under s 477(2B) of the Corporations Act 2001 (Cth) (Act) for retention of the lawyers who acted for him and, consequently, the costs agreements and retainers were nullities.

In response, the Liquidator made an application to the Court seeking declarations to address the uncertainty in relation to a number of different costs agreements and retainers.

Judgment

The Court held that approval is required for agreements entered into by the liquidator as agent for, or representative of the company and agreements in the name of the company, but not agreements entered into by the liquidator in their own name. Furthermore, approval is not required when a liquidator retains lawyers to provide advice as to the conduct of the liquidation or their duties.

The Court held that the Liquidator entered into the first costs agreement personally. The Company was not named in the agreement as a party, the Company did not receive the benefit of any advice provided, and the Liquidator signed the agreement in his capacity as principal of his firm.

The Court held that the existence of a retainer was implied under the terms of a second cost agreement for the proceedings relating to a confidential affidavit. The steps taken by the Liquidator in these retainers were done in the discharge of his duties as liquidator of the Company, and there was no evidence adduced to support an inference that the Company was party to the second costs agreement or any retainers.

The Court granted approval nunc pro tunc for the Liquidator to enter into the third costs agreement and fourth costs agreement insofar as it was required. Approval was required because the initial letters of engagement referenced acting for both the Liquidator and the Company, and the Liquidator signed the costs agreements in his capacity as liquidator of the Company, not in his capacity as principal of his firm. Furthermore, the written agreements themselves listed both the Liquidator and the Company as clients of the law firm.

The Court granted approval nunc pro tunc for the Liquidator to enter into the conditional costs agreement and oral retainer. The evidence showed that at the time of entering into these agreements, the Liquidator knew, and his instructions were, for the counterclaim to be pursued on behalf of both himself and the Company. In providing this approval, the Court expressed the view that the scope of s477(2B) is not just limited to written agreements, but also includes oral retainers.

Implications

The case provides some clarity about the types of costs agreements for which approval must be obtained.

In determining whether the retainer and cost agreement is entered into by the Liquidator personally or as agent for the Company the Court will consider the substance of the agreement, whether the company was a party to the agreement or appears to have the status of a party to the agreement and who receives the benefit of the agreement.

Accordingly some care and attention needs to be placed on the issue at the time of the retainer.

Approval is necessary for costs agreements with the liquidator as agent for the Company.

A failure to obtain a required approval does not impact the obligations with other contracting parties (i.e. the solicitor) or any third parties. There is however an impact on the liquidator’s position with respect to the Company in liquidation; the agreement will not bind the Company.

Fortunately, where there has been omission or oversight, court approval can be obtained retrospectively.