Leave to Proceed Against a Company in Liquidation

Section 471B

Section 471B of the Act provides that:

The section is designed to prevent a multiplicity of actions against a company being carried on at the expense of creditors that would be expensive, time consuming and potentially unnecessary, and would eat away funds otherwise reserved for the benefit of creditors. As McPherson J explained in Ogilvie-Grant & Anor v East (1983) 7 ACLR 669:

The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is therefore reduced largely to one of choosing between alternative forms of procedure. The effect of [a predecessor of s 471B] is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute.3

As s 471B envisions, leave may be granted with conditions. For example, leave might be granted to seek declaratory and injunctive relief only, but not damages or an account of profits.4 Further conditions may be imposed, or exemptions given, in respect of how the proceedings are to be conducted, such as excusing the company in liquidation from any obligation to file a defence or play any further part in the proceeding.5

Exercise of the Court’s Discretion

A decision granting or refusing leave to proceed against a company in liquidation involves the exercise of a judicial discretion, however the section is silent as to how that discretion is to be exercised.6 In Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749 at [29] Gilmour J identified a number of factors that may be relevant to the exercise of that discretion, namely:

(a) the amount and seriousness of the claim;

(b) the degree and complexity of the legal and factual issues involved;

(c) the stage to which the proceedings, if commenced, may have progressed;

(d) whether a cross-claim arises out of the same factual matrix as the claims made in the primary proceedings;

(e) the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt;

(f) whether the claim has arguable merit;

(g) whether proceedings are already in motion at the time of liquidation;

(h) whether the proceedings will result in prejudice to the creditors;

(i) whether the claim is in the nature of a test case for the interest of a large class of potential claimants;

(j) whether the grant of leave will unleash an “avalanche of litigation”;

(k) whether the cost of the hearing will be disproportionate to the company’s resources;

(l) delay; and

(m) whether pretrial procedures, such as discovery and interrogatories, are likely to be required or beneficial.7

His Honour also reviewed some of the circumstances in which leave has been refused, those being:

(a) where leave is sought in third party proceedings which would slow the liquidation to the pace of an action under the control of others, and where the issues in the third party proceedings are distinct from those in the primary proceedings: Re Gordon at 319—20.

(b) where the claimant fails to adduce evidence demonstrating any seriousness or complexity to the claim, or the existence of a serious dispute: Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245 at [7];

(c) where the claimant asserts liability and sought a declaration of entitlement to be paid, of a type provable in liquidation: HP Mercantile Pty Ltd v Australian Rural Group Ltd (In liq) [2005] NSWSC 895 at [31]—[32];

(d) where the claim is too onerous on a liquidator, even if it may not be capable of resolution by the lodging of a proof of debt: for instance, where the company in liquidation is an insurer, and “the disruption to the work of the provisional liquidators and the expense which would be occasioned by dealing with [claims] on an ad hoc basis would unduly prejudice the creditors as a whole”: Roots v Trussmaster Pty Ltd [2001] QSC 295 at [8];

(e) where the proceeding would dissipate funds otherwise available to the creditors in circumstances where the liquidators agreed to admit a proof of debt in the entire amount of the claim: Rodgers v Schmierer [2002] FCA 717 at [15]—[16] (Rodgers).

What an Applicant Seeking Leave Must Establish

When seeking leave under s 471B, an applicant must establish that there is a serious question in dispute.8 This does not mean the applicant must establish a prima facie case in the technical sense of that term.9 That is, the plaintiff need not “necessarily prove every element in the case.”10 The Full Court of the Federal Court in Vagrand Pty Limited v Fielding (1993) 41 FCR 550 explained that:

There are authorities in which the term “prima facie case” has been used to describe the case required to be demonstrated by an applicant for leave. But we are not aware of any case in which it has been held that an applicant must adduce evidence of every element of its claim. To impose that burden would be to shut out many meritorious claims. It is commonplace for actions against companies to depend upon documentary evidence. Until there is discovery of relevant documents, it may be impossible for an applicant to prove each element in its case. On occasions, it may also be necessary for the applicant to interrogate the respondent or subpoena other parties. These steps cannot be taken until the action is commenced.11

What is required is evidence to support a claim that “has a solid foundation and gives rise to a serious dispute.”12 The test is akin to that used when considering whether interlocutory relief should be granted, namely that there is a serious question to be tried.13 In this respect, the court said:

Upon a close reading of the relevant authorities, it is apparent to us that the courts have not in fact required applicants for leave to demonstrate a prima facie case against the company in liquidation, in the technical sense of that term. They have required to be affirmatively satisfied that the claim has a solid foundation and gives rise to a serious dispute. Having regard to the course actually taken by the courts, the term “prima facie case” is misleading.  Perhaps it should be avoided in the future.

Adopting the language used by the High Court of Australia in Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 in relation to the grant or refusal of interlocutory injunctions, what the evidence must show is that, “there is a probability that at the trial of the action the plaintiff will be held entitled to relief”.15

However, the evidentiary hurdle may be surmounted by evidence of the party’s case that is incomplete in the sense that it “might well need to be supplemented by documentary evidence.”16

A failure to adduce the requisite evidence will lead to dismissal of the application.17 In this regard, the Supreme Court of the Australian Capital Territory has ruled that, “mere assertion, which is not supported by a solid foundation, will not be sufficient”.18 As such, it would appear that the existence of any serious question to be tried must be established by evidence rather than mere reference to the pleadings, as pleadings contain allegations and not evidence.

In Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245,19 White J dismissed an application for leave to proceed against a company in liquidation under s 471B in circumstances where there was no material before the Court to demonstrate the nature of the claim sought to be made against the defendant. The only evidence in support of the application put before his Honour by the plaintiff was a copy of a statement of liquidated claim and a copy of the defence filed by the defendants in another court. His Honour said:

Having regard to the paucity of the evidence adduced on the present application, I am not satisfied that this is an appropriate case for the grant of leave.20

Guidance as to what is required in order to demonstrate a serious question to be tried can be also found in the authorities concerning applications for leave to bring statutory derivative actions under s 237 of the Act. Those authorities demonstrate that to show a serious question to be tried, the application must be supported by evidence and that an “indication of the evidence” without actual evidence is not sufficient.21 More so, they show that the question at issue is not whether there is a cause of action as pleaded, but rather whether there is a sufficient evidentiary basis for the material facts alleged.22

The Case for the Corporate Regulator

The arguments available to the corporate regulator in support of an application for leave, in circumstances where the company in liquidation is unwilling to defend the action, can be said to include the following.

Where a plaintiff seeks only declaratory or injunctive relief and the company in liquidation is not going to defend the proceedings, there is no risk that the orderly distribution of funds by the liquidator will be interfered with, and similarly, there is no risk of diminution of funds otherwise available to meet the claims of unsecured creditors.

It is appropriate for a corporate regulator to seek declaratory relief, and there is utility in doing so, especially where the case is of significant public interest and notoriety. Further, it is equally appropriate that the court take the opportunity to declare its condemnation of a contravention, should one be established. In Australian Competition and Consumer Commission v Eurong Beach Resort Ltd [2005] FCA 1134, Kiefel J noted that declarations, “show that the conduct will not be condoned and serve to educate the public”,23 and that as a consequence the making of a declaration would not lack utility.24 Further, there is a line of Australian authority, which, in the words of Gilmore J in ASIC v Axis International Management Pty Ltd (2009) 73 ACSR 207, demonstrates that “the grant of declaratory relief on the application of a statutory body such as ASIC may serve important law enforcement purposes”, irrespective of whether substantive relief is sought in the proceeding.25

In respect of the public interest in any declarations a regulator might seek, the words of Bennett J in Australian Competition and Consumer Commission v Link Solutions Pty Ltd, made in granting leave to proceed pursuant to s 471B, are instructive.

Finally, it may be that the company in liquidation is a necessary party to the litigation and the appropriate defendant if it is accused of contravening the Act, regardless of whether it intends to defend the proceedings. Even if the company in liquidation will not actively defend the proceedings, where there are other parties joined as defendants who have an interest in defending themselves, the court will have the benefit of contradictors to oppose the regulator’s action.

The Case for Other Parties to the Litigation

Principles of natural justice require that any party to a proceeding likely to be adversely affected by a grant of leave be given a right to be heard.27 Where a party to the proceeding is alleged to have been knowingly concerned in a contravention of the Act, particularly where the proceeding has been brought to establish a foundation for possible future compensation claims to be brought by others against the party, to deny the party standing to oppose leave is to deny a party with a substantial interest in the question to be determined an opportunity to halt the proceedings.

While the party ought to have standing, there would appear to be very few persuasive arguments likely to be available to oppose leave being granted. So long as the regulator can adduce sufficient evidence of a serious question to be tried, it appears other parties to the litigation will be forced to defend their interests at trial.

It seems the argument that proceedings in which a declaration or injunction is sought lack utility will not prevent leave being granted, given the views expressed in this regard by Kiefel J in Australian Competition and Consumer Commission v Eurong Beach Resort Ltd and Gilmore J in ASIC v Axis International Management Pty Ltd.28

Finally, there would not seem to be grounds upon which to assert that it is oppressive for a defendant to have to litigate the same issues twice in circumstances where the proceedings are run only to encourage others to bring their own actions. In ASIC v Axis, Gilmore J rejected the argument that it is oppressive that a party be required to twice litigate the same issues, even were investors who many have suffered loss are already well aware of their potential claims.29

Conclusion

Given that the object of requiring a plaintiff to obtain leave before proceeding in an action against a company in liquidation is to prevent an unnecessary expenditure of funds that would otherwise be available to satisfy the demands of creditors, there appears to be little in the way of obstacles created by s 471B that a corporate regulator must surmount when pursuing declaratory or injunctive relief against a company in liquidation unwilling to devote resources necessary to defend the action.

Where there is demonstrable public interest in obtaining a declaration that there has been a contravention of the Act or obtaining an injunction preventing future contravening conduct, it would seem the courts will be inclined to permit the regulator to proceed. The regulator’s largest concern, and its greatest susceptibility to attack by any other party to the litigation that wishes to oppose leave being granted, is the evidentiary burden it must meet to satisfy the court that there is a serious question to be tried.

Ben McEniery

Footnotes

1. This occurred in Swaby v Lift Capital Partners Pty Ltd (2009) 72 ACSR 627.
2. Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Ltd [2009] FCA 131 (Unreported, 19 February 2009), [6].
3. Ogilvie-Grant & Anor v East liquidator of Gordon Grant and Grant Pty Ltd (1983) 7 ACLR 669, 672-3 (McPherson J, Campbell CJ and Sheahan J concurring).
4. Executive Director of the Department of Conservation & Land Management v Ringfab Environmental Structures Pty Ltd & Ors [1997] FCA 1484 (Unreported, 6 November 1997).
5. Ibid; Swaby v Lift Capital Partners Pty Ltd (2009) 72 ACSR 627.
6. Ogilvie-Grant & Anor v East liquidator of Gordon Grant and Grant Pty Ltd (1983) 7 ACLR 669, 671; King v Yurisich (2006) 59 ACSR 598, [13].
7. Relevant factors were also set out in: Commonwealth of Australia v Davis Samuel Pty Ltd [No 5] (2008) 68 ACSR 336, [30] (Refshauge J); Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (in liq) (1993) 11 ACSR 516, 520 (Zeeman J); and Ogilvie-Grant & Anor v East liquidator of Gordon Grant and Grant Pty Ltd (1983) 7 ACLR 669, 672-3 (McPherson J).
8. Ogilvie-Grant & Anor v East liquidator of Gordon Grant and Grant Pty Ltd (1983) 7 ACLR 669, 671; King v Yurisich (2006) 59 ACSR 598, [9]-[15].
9. Vagrand Pty Limited v Fielding (1993) 41 FCR 550, 556.
10. Ibid citing Capita Financial Group Ltd v Rothwells Ltd (No 2) (1989) 7 ACLC 634, 637 (Rogers CJ).
11. Vagrand Pty Limited v Fielding (1993) 41 FCR 550, 553.
12. Vagrand Pty Limited v Fielding (1993) 41 FCR 550, 556.
13. Ibid.
14. Ibid. This statement has been widely endorsed in a number of cases as being the appropriate approach: Commonwealth of Australia v Davis Samuel Pty Ltd [No 5] (2008) 68 ACSR 336, [28]; O D Transport (Australia) Pty Ltd (in liq) v O D Transport Pty Ltd (1997) 80 FCR 290, 294; Hall v Mercury Information Technology (South Australia) Pty Ltd (2002) 20 ACLC 496, 503-4; Rousseau Pty Ltd (in liq) v Jay-O-Bees Pty ltd (in liq) (2004) 50 ACSR 565, 588; H P Mercantile Pty Ltd v Australian Rural Group Ltd (in liq) [2005] NSWSC 895, [24]; Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245, [6];  King v Peters [2007] NSWSC 200, [20].
15. Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, 153. See also Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57, [65] (Gummow and Hayne JJ).
16. Vagrand Pty Limited v Fielding (1993) 41 FCR 550, 556.
17. Swaby v Lift Capital Partner Pty Ltd (2009) 72 ACSR 627, [32] (Gilmour J); Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245, [7] (White J).
18. Commonwealth of Australia v Davis Samuel Pty Ltd [No 5] (2008) 68 ACSR 336, [29] citing Tolhurst Druce & Emmerson v Maryvell Investments Pty Ltd (in liq) [2007] VSC 271, [157]-[164].
19. The decision in this case was cited with approval by Gilmore J in Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749, [32].
20. Nu Life Air Conditioning Pty Ltd v Reef Building Contractors Pty Ltd [2006] NSWSC 1245, [9].
21. South Johnstone Mill Ltd v Dennis (2007) 163 FCR 343, [81] (Middleton J); Vinciguerra v MG Corrosion Consultants Pty Ltd (2010) 79 ACSR 293, [141] (Gilmour J).
22. Re Brighter Directions Pty Ltd [2010] VSC 287, [25] (Davies J).
23. Australian Competition and Consumer Commission v Eurong Beach Resort Ltd [2005] FCA 1134, [5] (Kiefel J).
24. Ibid [6].
25. ASIC v Axis International Management Pty Ltd (2009) 73 ACSR 207, [33].
26. Australian Competition and Consumer Commission v Link Solutions Pty Ltd [2008] FCA 1790, [13] (Bennett J).
27. See BP Australia Ltd v Brown (2003) 58 NSWLR 322, [133]-[136] (Spigelman CJ, with whom Mason P and Handley JA agreed) (exercising a power to extend time under s588FF(1) and s 588FF(3) of the Act).
28. Even in cases where injunctive relief is sought against those who have contravened provisions of the Act, such relief is available regardless of whether there is a likelihood that the conduct will be engaged in again: s 1324(6).
29. ASIC v Axis International Management Pty Ltd (2009) 73 ACSR 207, [52]-[54].