Leave to proceed against a company in liquidation

The recent Federal Court decision of Harcourts WA Pty Ltd v Roy Weston Nominees Pty Ltd (No 7)1 (Harcourts), reiterates the factors considered by the Court when seeking leave to proceed against a company in liquidation.

Whether a court will grant leave to proceed is a question of discretion and so cases like Harcourts provide illumination on what factors tend to be either favourable or unfavourable for leave to be granted.

Harcourts cited and applied an authority in which the Full Court of the Supreme Court of South Australia2 had distilled the following factors:

  • what impact would the proceedings have on the company’s creditors, including the pari passu distribution and/or the company
  • whether there is insurance involved
  • whether the liquidator would be unduly distracted by the proceedings (considering the prospects of success and the utility of the expected outcome)
  • the nature of the proceedings proposed, particularly the complexity of the issues involved and the current stage of the proceedings and whether they would be better suited to the proof of debt process
  • whether the creditor will be able to obtain relief from the liquidation
  • who the applicant is
  • the complexity of the proceedings
  • whether the applicant’s case has a solid foundation
  • what stage the proceedings were at when the liquidator was appointed.

In applying these factors the Court held that the applicant should be granted leave to proceed because:

  • the continuation of the proceedings could have a positive impact for the creditors and the pari passu distribution
  • the existence of Director’s Guarantees and espoused intention to seek to rely on them to obtain payment of the costs order which would in turn reduce the quantum of the applicant’s proof of debt in the liquidation.  The flow on effect, as the applicant in this case was the largest creditor of the company in liquidation, if the proceedings were successful, would be an improved dividend to other creditors
  • the proceedings would not distract the liquidator, as they were limited to the determination of a costs order which the liquidator would have to do in any event in order to assess the applicant’s proof of debt.

The Court noted it was a significant factor that the liquidator in this matter did not oppose leave being granted and that the proceedings were at an extremely advanced stage (specifically no issues of liability remained).

This decision provides a clear indication of what factors are likely to be considered when either seeking to proceed against a company in external administration, or as an external administrator, what factors should be considered in determining whether or not to oppose such an application.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.