Recovery of cost of proceedings denied as a result of belated s477(2B) applications

In circumstances where the number of retrospective applications made by liquidators under section 477(2B) of the Corporations Act for Court approval to enter into agreements of more than 3 months in duration appears to be increasing, the recent decision of Lindgren J of the Federal Court in Chamberlain v RG & H Investments Pty Ltd (No 3) [2010] FCA 26 is a decision to be noted.

The decision concerned a liquidator who had entered into two indemnity agreements in October 2007 and September 2008 respectively without obtaining any of the necessary approvals under s477(2B), notwithstanding his solicitors' view that approval was required. The Court concluded that the liquidator had therefore deliberately contravened s477(2B).

Approval from the Court was not sought until August 2009. The Court gave its retrospective approval for the liquidator's entry into the agreements and the liquidator sought that the costs of the application be paid out of the assets of the company as costs of the liquidation. A creditor objected to such an order being made to the extent that the costs arose from the liquidator's delay in seeking the Court approval.

Although the costs involved were relatively minor (a few thousand dollars for the preparation of two affidavits seeking to explain the liquidator's delay), the Court found that the liquidator had not satisfactorily explained the delay and declined to order the costs arising from the delay be paid out of the liquidation.

Circumstances may well be different where there is some honest doubt as to whether s477(2B) is applicable to a particular agreement or there are other good reasons for not seeking approval prior to entering into an agreement (or very soon thereafter). However, this decision illustrates that a liquidator does potentially prejudice his or her ability to recover the costs of a belated s477(2B) application if a conscious decision is made not to seek approval when the agreement is entered into and in circumstances where the section is clearly applicable.