I have recently been asked by several liquidators for my views on Mothership Proceedings.
A growing trend in litigation is the use of Mothership Proceedings by Liquidators in the recovery process of multiple Insolvent Trading claims. The process entails Liquidators initiating proceedings in the name of one company against numerous creditors in one court application.
Until recently there has been a long-held view that the most efficient court to initiate Mothership Proceedings has been the Supreme Court.
As stated by NSW Supreme Court Judge Brereton J in the matter of Bias Boating Pty Ltd [2017] NSWSC 1524
Indeed, the court has recently consolidated proceedings commenced separately, including by removing separate proceedings commenced in the District Court, to achieve that result.
There is inevitably a common issue of insolvency, and it is highly desirable that that question be litigated, if at all, once only, and that all parties be bound by the decision.
Further in Dean-Willcocks v Air Transit International [2002] NSWSC 525, Austin J stated:
The advantages to the liquidator are obvious. All claims are pursued in the same Court, regardless of the amounts involved. All parties to impugned transactions are bound by the decision of the Court with respect to such matters as insolvency, rather than being affected by presumptions which they may each rebut. There is a single filing fee (not an insubstantial consideration where a very large number of impugned transactions is involved).
In the first instance, it seemed that this prevailing view was reinforced when in Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd [2019] FCA 1355 two of the defendants challenged the manner in which the liquidators had commenced the proceeding by seeking an order that they be removed as parties to the proceeding under rule 9.08 of the Federal Court Rules 2011 (Cth).
The issue at play was whether the Liquidator needed to seek leave from the Court in order to commence mothership proceedings and the question the Court set out to address was how and to what extent the rules accommodate mothership proceedings.
As an aside, the claim was filed only a few days before the expiration of the statutory limitation period of three years from the relation backdate. If the defendants were successful in their application, the liquidators would be out of time to bring separate proceedings against them.
At first instance, the Court ordered that the applicant defendants be removed from the proceeding, but stayed the operation of that order to allow the lawyers acting for the liquidator to have another go at fixing their problem.
The second time around seems to have worked better [2019] FCA 1355, as the Court ruled that there were good reasons for bringing a mothership proceeding and that foremost among them was efficiency and acknowledged the time and expense involved in engaging with a large number of potential defendants and negotiating and resolving claims.
The Court also considered that it was reasonable for the liquidators to wait until shortly before the expiration of the limitation period before bringing the proceeding.
The Court was, however, concerned with the fact that the liquidators did not seek leave promptly after commencement, BUT ultimately considered that the liquidators had proceeded in good faith, in circumstances where the position under the Rules was uncertain. This meant that the liquidators’ failure to seek leave did not weigh strongly against them.
Takeouts
- The Federal Court is growing more comfortable with Mothership Proceedings; BUT
- Be sure to seek leave either prior to or at the start of the proceedings in order not to fall foul of the law; AND
- As always – where possible don’t leave things to the last minute.
