Leave to proceed against a company in liquidation - Forging On

Background

On 23 December 2014, Rushleigh Services Pty Ltd (Rushleigh) commenced proceedings against Forge Group Ltd (In Liquidation) (Receivers and Managers Appointed) (Forge) in the New South Wales registry of the Federal Court.

Rushleigh proposed to sue Forge on behalf of those persons or entities who:¹

1. purchased shares in Forge on the Australian Securities Exchange (ASX) at any time during the period from 7 March 2012 to 1 November 2013 (relevant period).
   
2. entered into a litigation funding agreement with IMF Bentham Limited.
   
3. purportedly suffered loss or damage by reasons of certain conduct engaged in by Forge including failure to comply with continuous disclosure requirements imposed upon it pursuant to section 674 of the Corporations Act 2001 (Cth) (Act) and engaging in misleading and deceptive conduct or conduct that was likely to mislead or deceive.²
   

However, Rushleigh did not obtain the leave of the Court to proceed against Forge prior to commencing the proceedings – rather it sought retrospective leave to proceed pursuant to section 500(2) of the Act.³

On 21 September 2015, Rushleigh obtained leave of the Court to join Messrs Peter Geoffrey Hutchinson and David Michael Simson (directors of Forge) to the proceedings.⁴

Rushleigh also applied to join each of the D&O insurers to the proceedings and have the proceedings transferred to the Supreme Court of New South Wales to engage section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRMP Act).

For the purpose of this article, we are principally concerned with Rushleigh’s application for leave to proceed against Forge and the relevant principles which apply.

Relevant legislative provisions

Section 500(2) of the Act provides (amongst other things) that:

After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

However, the Act is silent with respect to the principles that should be utilised andapplied to determine an application for leave to proceed pursuant to section 500(2).⁵

Relevant case law

In Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314 at 315 – 317, McPherson J summarised the relevant principles of determining an application for leave to proceed against a company in liquidation as follows:⁶

1. A decision to grant or, alternatively, refuse leave to proceed against a corporation in liquidation is a matter of judicial discretion.
   
2. The prohibition against commencing or proceeding with an action or other proceeding against a company once a winding up order is made or the company is placed into liquidation has been a continuous feature of companies legislation.
   
3. Without the relevant restriction, a corporation in liquidation could be subjected to a multiplicity of actions which would be both expensive and time-consuming (and could, by extension, have a significant impact upon any return to creditors).
   
4. A claimant should proceed by way of lodgment of a proof of debt unless he or she 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.
   
5. It is impossible to state in an exhaustive manner all of the circumstances in which leave to proceed may be appropriate. However, those circumstances can include factors such as the amount and seriousness of the claim and the degree of complexity of the legal and factual issues involved and the status of the proceedings if they have already been commenced.
   

The above principles were also confirmed and expanded upon by His Honour Justice Foster in Eopply New Energy Technology Co Ltd v EP Solar Pty Ltd⁷, who stated:
In determining whether leave should be granted, the Court considered whether the balance of convenience lies in allowing the applicant to proceed by way of action to judgment, or whether the applicant should be left to pursue his or her claim by lodging a proof of debt with the liquidator. The matter is one of discretion and the onus is on the applicant to demonstrate why it is more appropriate in respect of the particular claim, to proceed by way of action.

For leave to be granted, it must be shown that there is a serious or substantial question to be tried and a real dispute between the parties. Leave will not be granted where the application does not have a genuine claim or where the claim would be futile.

Outcome

His Honour Justice Foster dismissed Rushleigh’s application for leave to proceed against Forge and ordered that Rushleigh pay the liquidators’ costs for the following reasons:

1. Claims made by Rushleigh against the directors of Forge in the Federal Court would (if successful) almost certainly exhaust all levels of cover under the directors and officers insurance policy leaving Forge with no access to the indemnity provided to it under that policy.⁸
   
2. Claims made in the NSWSC Proceedings could also potentially exhaust the proceeds under the insurance policy.⁹
   
3. The insurance policy was a costs inclusive policy meaning that the policy proceeds would be diminished by the payment of liquidators’ costs and the directors’ costs.¹⁰ and
   
4. It is unlikely that there would be any return to unsecured creditors.¹¹
   

Justice Foster stated (amongst other things) that:¹²

The Court must guard against permitting claims to be agitated by way of ordinary litigation against a company in liquidation because of the very real prospect that allowing such a course will needlessly diminish the assets of the company in liquidation.

…it is highly unlikely that…there will be any return to the general body of unsecured creditors…there is virtually no prospect that any part of the sum insured under that policy will be paid to Rushleigh pursuant to the indemnity granted by the insurers under that policy to Forge itself.

Lavan comment

The circumstances surrounding the liquidation of a company as a whole and the impact that commencing litigation against such a company may have on any return to creditors is of paramount importance (although not exhaustive) when determining whether to grant leave to a party to proceed against that company in liquidation.