In a recent Federal Court decision NSD 382 of 2022 Cheeseman J refused to grant s 477(2A) approval nunc pro tunc (aka retrospectively) to a liquidator seeking to ratify his entering a conditional costs agreement lasting longer than three months.
The Background
The liquidator of AJW Interiors and Constructions Pty Ltd (in liquidation) began recovery proceedings that ultimately settled after a Public Examination was conducted but before legal proceedings were filed.
After two failed attempts to obtain s 477(2A) approval from the committee of inspection to compromise the debt and accept the settlement amount offered, the liquidator thought it best to seek court approval.
The liquidator also thought it prudent to seek s 477(2B) approval at the same time, approving his entering the conditional costs agreement with his lawyer and barrister.
The Law
Sections 477(2A) and (2B) condition the powers otherwise vested in liquidators under s 477 of the Act in that liquidators are prohibited from entering certain agreements unless to do so is sanctioned by the court or the committee of inspection or by a resolution of the creditors.
Section 477(2A) prohibits a liquidator from compromising a debt to the company if the amount claimed by the company is more than the prescribed amount, presently $100,000:
Section 477(2B) prohibits a liquidator from entering into an agreement on behalf of a company under the liquidator’s control where the term of the agreement or the obligations of a party to the agreement may end or be discharged by performance more than three months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those three months, except where the requisite approval has been obtained.
The Decision
s 477(2A)
Despite a nil return to creditors, the court provided s477(2A) approval for the liquidator to enter the Deed of Settlement.
In approving the settlement Cheesman J considered, amongst other issues, the following:
- The liquidator has no funding to pursue recovery proceedings.
- The liquidator had legal advice to support the decision to accept the settlement.
- The prospects of recovery against the main defendant was poor.
- Continuation of the proceedings may lead to a very real risk of an adverse costs order.
s 477(2B)
When refusing to grant to grant s 477(2B) nunc pro tunc, Cheesman J stated:
118…..Before a liquidator can enter into an agreement which exceeds the statutory period the liquidator must have entry into the agreement sanctioned by either the court, the COI or creditors. The effect of this constraint on the liquidator’s power is that the liquidator must establish to the satisfaction of the creditor stakeholders or the court that entry into long-term agreement is justified in the interests of the administration, even though it will, in all likelihood, prolong the duration of the administration. The court must be assiduous to guard against the potential for its capacity to grant approval nunc pro tunc to be used, whether wittingly or not, to circumvent the statutory purpose. The present application is a stark illustration of that risk manifesting.
Cheesman J further commented:
125 The liquidator has not exposed in his evidence any basis upon which he could reasonably have held an opinion that it was in the interests of the administration to cause the Recovery Proceeding to be commenced and for liabilities to be incurred under the costs agreement in actively progressing that proceeding. While I appreciate that the Court’s task is not to second guess the liquidator’s commercial judgement, that does not mean that the Court is bound to accept a bald assertion by the liquidator, as to the liquidator’s commercial judgement, in circumstances where that opinion cannot be reconciled with the evidence. The liquidator’s evidence as to the opinion he says he held is not supported by the material he has exhibited to his affidavit.
Interestingly, in a final comment on s 477(2B), Cheesman J was live to the issue as to whether or not approval must be obtained at all, however in this case, the issue proceeded on the basis that approval was required:
93 Finally, I note that there is an unresolved issue raised in recent single judge decisions of this Court as to whether s 477(2B) applies to an agreement between a liquidator in that capacity and a firm of solicitors: Jahani, in the matter of Ralan Property Services Pty Ltd (receivers and managers appointed) (in liq) [2023] FCA 738 at [36] to [37] Stewart J referring to Frigger v Kitay (No 2) [2020] FCA 497; 143 ACSR 655 at [47] to [51], (Charlesworth J); cf Lewis (liquidator), in the matter of Concrete Supply Pty Ltd (in liq) [2020] FCA 841; 145 ACSR 459 at [20] (White J).The plaintiffs did not raise this issue on this application and proceeded on the basis that approval was required, and that it should be granted nunc pro tunc. I will approach this application with a view to framing any orders made under s 477(2B) with the qualification that such orders, if made, are made to the extent necessary. On the approach taken by the plaintiffs, it is not necessary to determine whether entry into the costs agreement requires approval under s 477(2B) of the Act.
The Outtake
Whilst there seems to still be some uncertainty as to whether or not s 477(2B) approval is required at all when entering an agreement between a liquidator and legal counsel, it may be prudent to do so at the time you are obtaining approval to enter into your funding agreement with Pretium Funding!
