Australia: When will courts grant leave to proceed against a company in liquidation?

What you need to know

• At the end of last year the Federal Court denied a shareholder class action leave to proceed against a company in liquidation.
• The case, which stemmed from the appointment of liquidators to mining services company Forge Group Limited, neatly summarises the circumstances in which leave to proceed will be granted.
• Liquidators will find the decision useful, as it may assist them in closing out claims that often add to the cost of a company's liquidation while detracting attention from the issues that should be in focus.

Shareholder class actions

Over the last ten years, shareholders unhappy with the performance of a company have increasingly turned to class actions against the company and its directors. These shareholder class actions usually allege:

• breaches of reporting obligations under the ASX Listing Rules and the Corporations Act 2001 (Cth)(Act), and
• misleading and deceptive conduct.

Particularly when a company has gone into liquidation, the key claim is typically that shareholders have not been provided with a true and fair view of the company's financial position and performance. Because of that, the shareholders may claim they have suffered losses for which the company and its directors should be liable.

Insolvent companies

When a company is in liquidation, the law provides protection against lawsuits – including shareholder class actions. Sections 471B and 500(2) of the Act, for instance, provide that a court must give leave for any existing claims to proceed and for any new claims to be commenced.

This is to stop distressed companies being swamped by claims and expensive litigation at a time when the liquidators should be aiming to:

• realise any value in the company and its assets, and
• maximise any return to creditors.

The case

Forge Group Limited (in liquidation) (Forge) was a mining services company that ran into serious financial trouble in 2014 which resulted in the appointment of administrators / liquidators and receivers and managers.

In the Rushleigh case,¹ a group of shareholders in Forge commenced a shareholder class action in the Federal Court. The shareholders claimed they had suffered loss or damage because of alleged failures by Forge (and two of its directors) to properly report on its financial position as required by the ASX and the Act.

Because Forge was in liquidation, the shareholders needed the Court's leave to proceed against the company in liquidation. In considering the Rushleigh case, Justice Foster summarised the criteria for granting leave as follows:

• a decision granting or refusing leave to proceed against a corporation in liquidation involves the exercise of a judicial discretion
• 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, is a feature of companies legislation of long standing
• without the relevant restriction, a corporation in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well as in some cases completely unnecessary
• generally, what is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge who determines that appeal
• the courts are mindful to prevent claims being pursued by ordinary litigation against a company in liquidation because that will diminish the assets available in the liquidation
• a claimant should proceed by lodging 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
• it is impossible to exhaustively state all of the circumstances in which leave to proceed may be appropriate. However, in the past, those circumstances have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved and the stage to which the proceedings, if already commenced, may be progressed.

Due to the specific circumstances of the Rushleigh case, including complex insurance arrangements and Justice Foster's view that the application for leave to proceed was mainly brought to secure discovery from Forge for use against the former Forge directors, leave to proceed was denied. In particular, Justice Foster based his refusal of leave to proceed on a finding that there was no real prospect of any return to the general body of unsecured creditors of Forge. Justice Foster noted that in the circumstances there was virtually no prospect that any of the insurance policy proceeds would be available to cover claims against Forge, as it would be exhausted by the claims against the directors by the Rushleigh shareholders and other claims.

Key takeaway

The Rushleigh case provides a useful summary of when the courts are likely to grant leave to proceed against a company in liquidation. It is also useful for liquidators as it may enable them to close out distracting and expensive claims that detract from the task of realising the assets of a company in liquidation and maximising any return to creditors.

Footnotes

¹ Rushleigh Services Pty Ltd v Forge Group Ltd (In Liq) (Receivers and Managers Appointed); In the Matter of Forge Group Ltd (In Liq) (Receivers and Managers Appointed) [2016] FCA 1471 (Rushleigh).

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories