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Leave to proceed against a company in liquidation

The insolvency of a company often leads to its liquidation whether instigated voluntarily or by court order.

A liquidator is appointed to ascertain and bring in company assets (if any) and convert those assets into cash for distribution amongst the company’s creditors in accordance with the Corporations Act 2001 (Cth) (the Act).

The liquidator has broad powers to take over the company’s affairs. The liquidator will ascertain debts, pay creditors, enter arrangements, bring or defend proceedings on the company’s behalf, dispose of property and, eventually, wind up and dissolve the company.

Section 471B of the Act provides that whilst a company is in liquidation, a person cannot without leave of the court, commence or proceed against the company or its property, or continue enforcement proceedings in relation to company property. This means that litigation proceedings on foot are suspended and proceedings cannot be commenced against the company generally, or to recover or enforce a debt unless the court approves. Similar provisions are contained in s 500(2) in the case of a creditors’ voluntary winding-up.

The usual process to claim a debt owed by a liquidated company is for creditors to lodge a proof of debt with the liquidator. The proof of debt is considered amongst the claims of other creditors. Distributions, if any are then made according to priorities set out in the Act. Creditors often only receive a portion of the amount owed.

Generally, lodging a proof of debt is the preferred (or only) option of claiming against the liquidated company. However, it may be desirable to seek leave of the court to commence or continue proceedings against the company. In doing so, the court must be convinced of certain facts, and the decision must be carefully balanced with the expense of litigation and likely success of such an application.

 

Why the prohibition on pursuing a company in liquidation?

In considering an application for leave to proceed against a liquidated company it is important to understand the purpose of the prohibitions which are essentially policy-driven.

Courts are hesitant to allow proceedings that take attention away from the task of liquidation to deal with a multitude of actions, rather than the uniform and orderly winding up of the company as a whole.

The lodgement of a proof of debt (by each creditor) to be verified by a liquidator as opposed to individual claims is no doubt a more efficient and cost-effective process. Consideration of separate proceedings would deplete the pool of assets otherwise available to all creditors.

 

What does the court consider in granting leave?

The Act does not set out the factors to be considered in granting leave to proceed against a liquidated company. Accordingly, case law is the ultimate source for determining these applications.

The court’s discretion is broad but exercised cautiously. There must be a serious question to be tried and the applicant must show good reason to commence litigation and depart from the usual process.

The matter of Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749 summarised several factors established through previous cases. Some of these included:

  • The nature of the claim, the amount and the complexity of legal and factual issues. An applicant must establish that the contemplated proceedings are serious and complex. If the subject of the proceedings can be dealt with by the proof of debt process, then leave is unlikely to be granted.
  • Whether proceedings have already commenced and, if so, the stage to which they have progressed.
  • The likely prejudice to creditors should the proceedings be allowed. The court is unlikely to allow proceedings that will be expensive and onerous on the liquidator to the extent that creditors will be unduly prejudiced as a whole. Where a proof of debt lodged by the proposed applicant has already been accepted in full and the anticipated proceedings will dissipate funds available to all creditors, leave will not be granted.
  • The court will be hesitant to grant leave where proceedings are sought by third parties which are likely to delay the liquidation and make the winding-up process contingent upon the outcome or progress of the contemplated proceedings.

 

When has leave been granted?

Leave has been granted when proceedings have been necessary to establish and submit the proof of debt. However, leave will not be granted if, all things considered, the proceedings would be fruitless in that the defendant company would be unable to satisfy a successful judgment for the applicant.

A creditor with a secured interest or proprietary claim against an insolvent company may be granted leave to apply. For example, a recent case involved a submission that money held by a third party on trust for the claimant (and subsequently given to the liquidated company), should have been subject to the same trust terms on behalf of the claimant.

Finally, leave may be granted to proceed against the liquidated company, joining its insurer who has not denied liability for anticipated proceedings. This is on the basis that any judgement ordered against the company will be satisfied by the insurer, without prejudice to the creditors. The purpose of the prohibition on proceedings is not to protect an insurer.

In all cases, leave must be considered in light of the particular circumstances, the available assets in the winding up and the interests of the creditors.

 

Conclusion

The liquidation of a company poses a general embargo against proceeding or carrying on litigation.

If you have a claim against a company in liquidation it may be desirable or necessary to seek leave to continue or commence proceedings in support of that claim. The threshold is generally high and the decision to do so will take into account careful consideration of a costs / benefit ratio.

If you would like further information, please contact us on (02) 9274 8820 or email ch@lawbase.com.au

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