Australia: Leave granted to proceed with claim against company in liquidation in most unusual circumstances

The case

The recent Federal Court decision in the most unusual matter of Baird & Ors v ACN 079 121 136 Pty Limited (In Liq)¹, confirms the principles by which the Court will grant leave to applicants under section 500(2) of the Corporations Act 2001 (Cth) (the Act) for leave to proceed with a claim against a company in liquidation.

The (most unusual) circumstances

While such applications are common, the circumstances of this case were out of the ordinary:

• Janice Baird had commenced proceedings against ACN 079 121 136 Pty Limited (the Company) in the Federal Court in Victoria on 18 November 2010.
• A Notice of Appearance was filed by the Company on 9 December 2010.
• The Statement of Claim was amended throughout 2011 and 2012 to add the rest of the remaining 41 respondents, and a further Defence of the Company was filed on 15 October 2012.
• The Company had appeared in the proceedings by its insurer, through solicitors acting for that insurer.
• On 4 October 2012, the applicants were informed that the respondent Company had been placed into liquidation as a result of a Creditors' Voluntary Liquidation (CVL), and by virtue of section 500(2) of the Act, the proceedings were therefore stayed (so far, so good).
• Oddly, the commencement of the CVL was on 6 September 2011. Unfortunately, this event was not brought to the attention of the solicitors for the applicants, nor to the attention of the solicitors for the respondent's insurer who were still conducting the proceedings, until October 2012. According to the judgment delivered on 31 May 2013:

• The applicants' solicitors had difficulty contacting the liquidators. One of them had died. Despite the remaining liquidator being aware of the claim, the applicants' solicitors were unable to discover the reason or reasons why they were not informed of the respondent being wound up.

• The solicitors for the insurer had provided a copy of the insurance policy to the solicitors for the applicants, and the only question in the proceedings was the extent to which the policy provided or limited recovery by the applicants for the claims made in the proceedings.
• The application for leave to proceed against the Company in liquidation was neither consented to nor opposed by the respondent Company or its insurer.

The principles

Justice Gordon noted that the principles relevant to an application for leave under section 500(2) were well established². Relevantly those principles are:

1. The purpose of having a requirement for leave is to prevent a corporation in liquidation being subjected to actions that are expensive and, therefore, carried on at the expense of the creditors of the company and, perhaps, unnecessarily.
2. In determining whether leave should be granted, the Court considers whether the balance of convenience lies in allowing the applicant to proceed by way of action to judgment, or whether the applicant should be left to pursue his or her claim by lodging a Proof of Debt with the liquidator. The matter is one of discretion and the onus is on the applicant to demonstrate why it is more appropriate in respect of the particular claim, to proceed by way of action.
3. For leave to be granted, it must be shown that there is a serious or substantial question to be tried and a real dispute between the parties. Leave will not be granted where the applicant does not have a genuine claim or where the claim would be futile.

More often leave will be granted to proceed against a company in liquidation where the claim against that company is covered by an insurance policy. In this particular case, the claim was already being defended by the insurer. Gordon J also found that the claim did raise a substantial question to be tried and that there was a real dispute between the parties. Her Honour further noted that the insurer was defending the claim and that there was no opposition to leave being granted. So, leave was granted.

But wait, there's more!

The one final curious aspect of this matter was that leave was granted on a very limited basis, namely that it was limited to the preparation for, and attendance at, a mediation before the Registrar by no later than 31 July 2013.

It was not made clear in the judgment why this limitation was imposed, particularly since no mention was made in the judgment of the effect of section 562 of the Act whereby the proceeds of any contract of insurance is to be paid to a third party claimant to the extent necessary to discharge that liability in priority to all payments in respect of the debts mentioned in section 556 of the Act (shorthand: these applicants would get paid first out of any insurance payment). This coincides with the "charge" created by section 6 of the NSW Law Reform (Miscellaneous Provisions) Act 1946 on all insurance moneys that are or may become payable in respect of such a liability by an insurer in circumstances where the insured is a corporation that is being wound up.

In other words, we see no reason why an unfettered grant of leave could not be given to permit the claims to be completely exhausted against the insurer under the relevant statutory provisions referred to above.

Taking a practical view of this strange case though, it is possible that Justice Gordon only needed to grant leave as a reason to force the parties together in order to get them to settle, and if they cannot achieve that at the mediation then an unqualified grant of leave will probably be subsequently made.

Footnotes

¹[2013] FCA 543.
²Altinova Nominees Pty Limited v Leveraged Capital Pty Limited (Receivers and Managers Appointed) (In Liquidation) (No 2) [2009] FCA 42 at [17]-[23]; The Executive Director of the Department of Conversation & Land Management v Ringfab Environmental Structures Pty Limited [1997] FCA 1484.

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