Litigation in Liquidation: What Do Courts Look at When Granting Leave to Proceed Against a Company in Liquidation

Litigation may be commenced for various cause of actions. However, it is important to firstly establish that the defendant has legal standing to be pursued.

Section 471B of the Corporations Act 2001 (Cth) (the Act) specifies that while a company is being wound up by the Court, or by a provisional liquidator, a person cannot commence proceedings against the company except with the leave of the Court.

The purpose of this section is to reduce complications associated with the liquidation process and to ensure that funds are not being siphoned from potential dividends to creditors to fund legal battles. Notwithstanding, section 471C of the Act stipulates that if the creditor is secured, by way of real property or otherwise, then section 471B will not affect a creditor’s right to realise or otherwise deal with that security interest.

The Court in Ogilvie-Grant & Anor v East (1983) 7 ACLR 669 noted the process available to creditors was lodging a ‘Proof of Debt’ to identify and attempt to recover its debt via any liquidation dividend. Creditors may appeal to the Court if the ‘Proof of Debt’ is rejected, which provides a cheaper alternative to pursuing an insolvent company.

Litigation in liquidation -what circumstances can leave be sought/granted?

Justice Gilmour in Swaby v Lift Capital Partners Pty Ltd [2009] FCA 749 at [29] established a number of factors which the court may take into consideration to determine whether to grant leave to proceed against a company in liquidation. These include the following:

(a) the amount and seriousness of the claim;
(b) the degree and complexity of the legal and factual issues involved;
(c) the stage to which the proceedings, if commenced, may have progressed;
(d) whether a cross-claim arises out of the same factual matrix as the claims made in the primary proceedings;
(e) the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt;
(f) whether the claim has arguable merit;
(g) whether proceedings are already in motion at the time of liquidation;
(h) whether the proceedings will result in prejudice to the creditors;
(i) whether the claim is in the nature of a test case for the interest of a large class of potential claimants;
(j) whether the grant of leave will unleash an “avalanche of litigation”;
(k) whether the cost of the hearing will be disproportionate to the company’s resources;
(l) delay; and
(m) whether pretrial procedures, such as discovery and interrogatories, are likely to be required or beneficial

While the above factors may be considered, generally leave to commence proceedings against a company in liquidation is rarely granted. In any event, in succeeding in obtaining leave, the applicant would need to demonstrate to the court that there is a ‘good reason’ as to why the ‘Proof of Debt’ avenue should be bypassed and that their claim “has a solid foundation and gives rise to a serious dispute.”

An example of where leave may be granted, is where the relief sought does not directly result in monetary relief, such as seeking that a ‘declaration’ be made. This may be necessary to commence legal action against another party but does not hinder the liquidation process or siphon funds from creditors for the party in liquidation.

How can we help?

If you are looking at commencing proceedings against a company in liquidation, or would like further advice in relation to liquidation and/or security interests, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected].

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