How to sue an insolvent company

Boase v Axis International Management Pty Ltd [no 2] [2012] WASC 334
(an interlocutory decision in Boase v Axis International Management P/L & Ors - CIV 1709/2008)

Background

Mr Timothy Boase and Mrs Jenny Lee Boase¹ had invested funds in Firepower Holdings Group Ltd (FHG), part of the Firepower group of companies (Firepower).  They claimed that Mr Quentin Ward, as a director of Axis International Management Pty Ltd and agent of Sagecorp Securities Pty Ltd (in liq) (Sagecorp) had made false and misleading statements to them, in reliance on which they purchased approximately $365,000 of FHG shares.  Sagecorp was an Australian financial planning company involved in the promotion of the failed fuel technology company.  The proposed claim against Sagecorp was based on Sagecorp’s failure to stop Mr Ward selling FHG shares, which were not on Sagecorp's approved list of shares, when it knew or ought to have known of Mr Ward’s actions.

Mr and Mrs Boase faced the difficulty that Sagecorp was wound up voluntarily in December 2008 after Firepower’s claims in relation to a fuel additive pill were revealed to be false.  This liquidation was itself controversial as Mr and Mrs Boase claimed that Sagecorp had simply used liquidation as a cloak to transfer its business and employees to a replacement company called Peak Financial Partners Pty Ltd, essentially alleging circumstances sought to be addressed by ASIC’s new “anti-phoenixing” powers.

Decision

On 14 September 2012, Beech J handed down a decision considering matters including the question of whether to allow Mr and Mrs Boase leave under section 500(2) of the Corporations Act 2001 (Cth) (Act)² to commence proceedings against Sagecorp despite Sagecorp being in liquidation.

Beech J cited the following principles with approval in determining whether to grant leave to proceed:

• the choice between leave to commence proceedings or to lodge a proof of debt is essentially one of choosing between alternative forms of procedure³ and discretion to grant or refuse leave is broad;

• a claimant seeking leave need only demonstrate a serious question to be tried⁴;

• it is not possible or appropriate to attempt to state exhaustively the relevant considerations, but they include the amount, seriousness and nature of the claim, the degree of complexity and legal factual issues, the stage the proceedings have reached⁵, and whether there is any prejudice to the creditors or the orderly winding up of the company⁶;

• leave may also be granted if a claimant has an arguable proprietary claim;

• leave will be refused if there is no possibility that the company will be able to meet any part of damages awarded against it⁷ as the court would not give its imprimatur to fruitless proceedings⁸ but the position would be different if there is an insurer standing behind the company in liquidation that will pay the amount of any judgment awarded⁹; and

• a major factor against granting leave is whether the costs of defending the action to trial would substantially deplete the limited assets available for creditors¹⁰.

His Honour rejected submissions that refusal of leave would shut the door on investigating the directors’ conduct as the liquidator of the company was required to maintain the company’s records for five years¹¹.  Ultimately, his Honour held that Sagecorp would be unlikely to meet judgment and there was insufficient utility in granting leave.

Lavan Legal comments

A creditor with a claim against an insolvent company has the choice of lodging a proof of debt or seeking relief through litigation.  In general, the latter is only preferable if:

• the company is able to meet the judgment amount or there is non-monetary relief sought with utility to the claimant that cannot be obtained from the liquidator of the company;

• an insurer is standing behind the company in liquidation, which has not denied liability for the claim; or

• the creditor can make an arguable proprietary claim against the company.