Lack of likely recovery leads to refusal of leave to proceed against company in liquidation

Articles Written by Sam Johnson (Partner), Nicholas Briggs (Special Counsel)

A recent decision by the Federal Court of Australia may be useful for liquidators faced with an application to commence or continue civil proceedings against a company in liquidation.

The decision – in brief

Forge Group Limited (In Liquidation) (Receivers and Managers Appointed) was a mining services company that went into liquidation in 2014. A group of the company’s shareholders subsequently commenced a class-action in the Federal Court, claiming loss and damage arising out of alleged failures by the company and some of its directors to properly report on the company’s financial position. As a result of the company being in liquidation, the plaintiff, Rushleigh Services Pty Ltd, which had brought the class action on behalf of the shareholders, was required to seek the court’s leave to proceed against the company in liquidation under s500(2) of the Corporations Act 2001 (Cth) (the Act).

In refusing the plaintiff’s application for leave under s500(2) of the Act, Justice Foster found in Rushleigh Services Pty Limited v. Forge Group Limited (In Liquidation) (Receivers and Managers Appointed) [2016] FCA 1471 that the proposed proceedings lacked utility in circumstances where:

  1. claims made by the plaintiff and group members against the directors of the company in the Federal Court would (if successful) almost certainly exhaust all levels of cover under the director’s and officer’s insurance policy leaving the company with no access to the indemnity provided to it under that policy1;
  2. claims made in other proceedings could also potentially exhaust the proceeds under the insurance policy2;
  3. the insurance policy was a costs inclusive policy meaning that the policy proceeds would be diminished by the payment of the liquidator’s costs and the director’s costs3; and
  4. it is unlikely that there would be any return to unsecured creditors4.

His Honour concluded that the plaintiff’s main motivation in pressing its application for leave was to secure discovery from the company in an attempt to build its claim against the company’s directors. As well as expressing “considerable doubt” as to whether that was an appropriate motivation, his Honour also found it to be an insufficient reason to make orders under s500(2) of the Act.5

Principles which apply to applications under s500(2) of the Corporations Act

Justice Foster noted in Rushleigh that a claimant should proceed by way of proof of debt unless he or she can demonstrate “some good reason” why a departure from that procedure is justified.That question is one of judicial discretion. However, relevant considerations include:

  1. whether there is a serious question to be tried;
  2. the amount and seriousness of the claim; 
  3. the degree of complexity of the legal and factual issues involved; 
  4. whether the company in liquidation has insurance which will respond to the plaintiff’s claim; and 
  5. the stage to which the proceedings, if already commenced, may be progressed.7

As noted above, in the case of Rushleigh, the lack of any likely recovery if the plaintiff was successful in the litigation was a sufficient basis to refuse the grant of leave.

The takeaway

The decision provides a useful summary of the principles that a Court will consider when faced with an application for leave to proceed against a company in liquidation under s500(2) of the Act. It is a long-standing restriction8 which can enable a liquidator to draw a line under time-consuming and expensive actions that detract from a liquidator’s primary focus of realising any value in the company and its assets and maximising returns to creditors. When considering an application under s500(2), the Court will have regard to the likely sources of any recoveries resulting from the action and the impact on any return to creditors.

1 Rushleigh Services Pty Limited v. Forge Group Limited (In Liquidation)(Receivers and Managers Appointed) [2016] FCA 1471 at [52]

2 Ibid at [52]

3 Ibid at [53]

4 Ibid at [54]

5 Ibid at [70]

6 Ibid at [68]

7 Ibid at [15] to [18] citing Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314 and Eopply New Energy Technology Co Ltd v EP Solar Pty Ltd [2013] FCA 356

8 Re Benjamin  Ltd (In Liq) [1969] 2 NSWR 374

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