Earlier this year, Brereton J in the case of Re SCW Pty Ltd  NSWSC 302, heard an application by the Liquidators of SCW Pty Ltd (in liq) (SCW), for judicial direction under section 479(3) of the Corporations Act 2001 (Cth) (Act).
The Liquidators had decided not to commence proceedings against one of the directors of SCW for alleged breaches of director’s duties. They sought direction from the Court on whether they would be justified accepting an offer to purchase those potential causes of action which would otherwise generate nothing for the company.
SCW was placed in liquidation not because it was insolvent, but because of a breakdown in the relationship between two of its directors, Ms Cantarella and Mr Schirato.
During the course of the liquidation, there were allegations made which concerned potential breaches of director’s duties owed to SCW by Ms Cantarella.
In mid 2011, the Liquidators had those allegations investigated and obtained legal advice on the issue from its own solicitors, Piper Alderman, who concluded that SCW had no viable cause of action against Ms Cantarella, and that it would not be appropriate to use company funds to commence an action against Ms Cantarella.
Following this, Mr Schirato engaged Mr Robert Newlinds SC (Mr Newlinds) to provide advice on the issue to the Liquidators.
Mr Newlinds agreed with Piper Alderman’s advice in all but three discrete causes of action against Ms Cantarella. Mr Newlinds concluded that there was one reasonably arguable cause of action and that there were at least two reasonably arguable breaches by Ms Cantarella, but that questions of causation and damages required further investigation.
The Liquidators then asked Piper Alderman to consider Mr Newlinds’ opinion. They subsequently advised that their views were unaffected by Mr Newlinds’ opinion and that they remained of the opinion that none of the three potential causes of action identified by him were reasonably arguable.
On these bases, the Liquidator formed the view that SCW had no viable causes of action against Ms Cantarella.
Realising that the Liquidators would not pursue any course of action against Ms Cantarella, in late 2011 Mr Schirato indicated he would be willing to pay at least $100,000 for the assignment of potential rights of SCW against Ms Cantarella.
The Liquidators then prudently sought judicial direction under section 479(3) of the Act as to whether the Liquidators, having decided not to commence proceedings against Ms Cantarella, would be justified in accepting an offer for the potential causes of action, which would, in their view at least, otherwise generate nothing for the company.
Brereton J reaffirmed the position that when considering what a liquidator is and is not justified in doing, the Liquidator must approach every matter from the perspective of what is in the best interests of the company as a whole.
In addition to the overarching best interest test, Brereton J considering (among other things) whether any of the following questions could be determined in the affirmative:
Will the proposed assignment deprive a party of their share of the proceeds in the realisation of assets in the company?
Is the claim, the subject of the proposed assignment, clearly hopeless? (ie has no chance whatsoever of success?)
Is the claim, the subject of the proposed assignment, frivolous or vexatious?
Will the proposed assignment delay the winding up?
Brereton J considered that, based on the facts of the case, none of the above questions could be answered in the affirmative, and on those bases, and with other reasons, he held that the Liquidator would not be justified in refusing to treat with Mr Schirato.
Lavan Legal comment
Importantly, this case supports the proposition that liquidators may assign rights to pursue a cause of action for value, when (among other things) it is in the best interests of the company as a whole to do so.
This case paves the way for liquidators to sell or assign potential causes of actions against directors and former directors for breach of duty, for significant value, in situations where it may not be viable for the company to pursue a cause of action.
For full details on this case, please click here.
…as a post script
Shortly after Brereton J’s decision discussed above, Rein J of the NSW Supreme Court refused to grant an application for an interlocutory injunction, bought by Ms Cantarella, under section 1321(1)(d) of the Act, to stop the Liquidator from selling SCW’s rights against Ms Cantarella by tender.
Ms Cantarella submitted, among other things, that the use of a tender process was unfair, as it gave the tenderers no opportunity to better an offer made by another tenderer.
In making his decision, Rein J noted that:
the fundamental duty of a liquidator is to obtain the highest possible price for the company’s assets sold by him or her; and
where an appeal under section 1321(1)(d) of the Act is brought against a discretionary decision of a liquidator, the Court will reverse the liquidator’s decision only when it is satisfied they were acting unreasonably or in bad faith.
Rein J found, on the evidence provided, there was no allegation of bad faith, and that the Liquidators were not acting unreasonably in conducting the tender. In making his decision, Rein J confirmed that:
a tender process means that each tenderer does not know what the others may have bid, but that is the process;
sale by tender is a legitimate method to sell property; and
whether the tender process is likely to yield a higher or lesser figure than some other process is a matter to which the Liquidator is to exercise a commercial judgement. So long as that judgement has been made, the decision, prima facie, cannot be said to be unreasonable.
For full details on this case, please click here.