All aboard the Mothership - Mothership preference actions in the Federal Court

In Jahani v Alfabs Mining Equipment Pty Ltd, in the matter of Delta Coal Mining Pty Limited (in liquidation) [2020] FCA 752, Stewart J considered the process for a liquidator to join multiple unrelated defendants to one set of ‘mothership’ unfair preference recovery proceedings in the Federal Court.

This decision confirms the approach to be taken for mothership proceedings in the Federal Court, and continues the trend of courts developing and applying a nationally consistent approach to mothership actions.

Mothership proceedings generally

Single actions by liquidators against multiple unrelated defendants for claims such as unfair preference recovery claims are known as ‘mothership’ proceedings or actions.

The key benefit of mothership proceedings is that they are almost always more efficient for liquidators to run, both in terms of time and money, given the common issues which will arise across the claims such as the date of insolvency.  They also avoid the risk of inconsistent judgments which can arise where multiple courts or judges are called upon to adjudicate on the same issue in different proceedings.

The main impediment to mothership proceedings is that in most courts, plaintiffs can only sue multiple defendants as of right where the claims against those defendants arise from a single set of transactions or facts.  In the case of unrelated unfair preference recipients, the claims against those parties will typically arise from different contracts and involve different fact scenarios

The solution has been for liquidators to apply for leave to join multiple defendants to the mothership proceedings even though the claims do not arise from a single set of transactions or facts.

The different State Supreme Courts and the Federal Court all have different procedural rules about how this type of joinder application should be made, but there appears to be a growing consensus that it would be useful for the courts to develop and apply a nationally consistent approach to this issue.

The Delta Coal application

The liquidators of Delta Coal Mining Pty Ltd (in liquidation), Delta Mining Pty Ltd (in liquidation), Delta SBD Ltd (in liquidation) and SBD Services Pty Ltd (in liquidation) (Companies) brought an urgent interlocutory application for orders to join 28 parties as defendants to an unfair preference recovery action (Proceeding).

The relevant background is as follows:

• the Companies were placed into voluntary administration on 31 May 2017, and then into liquidation on 18 August 2017;
• in the course of their investigations, the liquidators formed the view that the 28 defendants had received voidable unfair preference payments from the Companies;
• the liquidators were in a position to commence proceedings against the 28 defendants by May 2020;
• however, in light of a recent Federal Court decision regarding whether a mothership proceeding against multiple unrelated defendants could be brought as of right, the liquidators commenced the applied for urgent orders for leave to join the 28 defendants to the Proceeding (the Application); and
• the Application was heard and determined on 27 May 2020, 4 days before the expiry of the three year limitation period for the commencement of the Proceeding.

The decision that triggered the Application was the judgment of Jackson J in Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd [2019] FCA 1355.  In that case, Jackson J confirmed that for the purposes of claims in the Federal Court, liquidators could not commence mothership proceedings as of right against multiple defendants where the alleged preference payments and related arrangements were unique to each separate defendant, and liquidators would first have to seek leave under Rule 9.05 of the Rules of the Federal Court.

In considering the Application by the liquidators of the Companies, Stewart J noted the following:

• if the liquidators were not granted leave, they would have to commence 28 separate actions against the different defendants; and
• Rule 9.05 provides that leave to join parties can be granted where to do so would enable determination of a related dispute and, as a result, avoid multiplicity of proceedings.

Importantly, Stewart J also adopted (and added to) a number of observations from the leading decision of Austin J in the NSW Supreme Court in Dean-Willcocks v Air Transit International Pty Ltd (2002) 55 NSWLR 64, in particular that:

• the courts must consider the general objectives of fairness, practicability and judicial efficiency;
• it is not generally unfair to a defendant that they be joined to an action where the plaintiff makes identical or similar allegations against other defendants;
• however, disadvantage or unfairness can arise if for example making out a case against one defendant in some way hampers the defence of other defendants, or the joinder of multiple defendants leads to materially greater costs or delays for individual defendants, or a defendant is forced to defend their case in an inconveniently located court, or a defendant is forced to defend their case in a higher court and at a higher cost than they would be exposed to if sued alone in a lower court; and
• that being said, unfair preference proceedings have particular features that may justify the granting of leave, namely the nature of the claims which make them particularly amenable to intensive case management, the public policy and interests in favour of permitting liquidators to pursue recovery of unfair preferences in as efficient a manner as possible, and the central common issue of factual insolvency.

Having regard to these matters, Stewart J was satisfied that the proposed defendants should be joined to the Proceeding (and that such orders may be made nunc pro tunc) on the basis that:

• the joinder would enable the determination of a related dispute and avoid a multiplicity of proceedings;¹
• any defendant who was able to establish that conducting the Proceeding on a joint basis was prejudicial to them could apply for a separation out from the case and for subsequent issues to be determined separately; and
• commencing separate proceedings against each of the 28 defendants would require the allocation of significant judicial resources, which may lead to inconsistent findings in relation to the same ultimate subject matter and would bring the system into disrepute.²

Lavan comment

The decision in Delta Coal serves as a reminder to practitioners that there is a growing body of cases in support of the use of ‘mothership proceedings’ by liquidators for recovery actions, particularly in the context of large and complex liquidations.

However, practitioners should be mindful that the ability to commence proceedings against multiple defendants does not exist as of right and should carefully consider whether leave would be granted in a particular case and ensure that the rules of the relevant court are followed, or risk that any mothership proceeding is held to have been improperly constituted.