The insolvency landscape is fraught with complexity, especially when one seeks to initiate a lawsuit against a company in external voluntary administration.
In this blog post, I explain the circumstances under which courts grant leave to commence an action against such a company.
The analysis hinges upon a recent Western Australian Supreme Court decision, "Hartland -v- Firm Construction Pty Ltd (IN LIQ) [2023] WASC 147", and several other relevant cases and legislative references.
Corporations Act 2001 (Cth) - Section 500(2)
Section 500(2) of the Corporations Act 2001 (Cth) stipulates that after the resolution for voluntary winding up, no civil proceeding can be commenced or continued against the company without the court's leave.
This measure aims to prevent a company in liquidation from being overwhelmed by multiple time-consuming and expensive actions (Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314; Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550).
The Court's Discretion
The discretion to grant or refuse leave under these circumstances is broad, and it is not feasible to outline all relevant considerations exhaustively.
However, the amount, seriousness, and nature of the claim, the degree of complexity of legal and factual issues, and the stage at which the proceedings have reached all play crucial roles (Re Gordon Grant; Viscariello v Bernsteen Pty Ltd (in liq) [2004] SASC 266).
Prejudice to Creditors
A critical principle is that the action should not prejudice the creditors or hamper the orderly winding up of the company. It is often said that there must be no such prejudice before the action is allowed to proceed (Re Gordon Grant and Grant Pty Ltd (in liq) (1982) 6 ACLR 727; Re Sydney Formworks Pty Ltd (in liq) [1965] NSWR 646).
Insurance and Asset Considerations
The court is less likely to grant leave if there is no prospect of surplus assets in the company and no question of insurance (Re AJ Benjamin Ltd (in liq) [1969] 2 NSWR 374). However, if an insurer stands behind the company in liquidation and is prepared to pay the amount of any judgment awarded, that factor strongly favours the grant of leave (Lawless v Mackendrick [No 2] [2008] WASC 15).
Demonstrating a Serious Question
A claimant seeking leave only needs to demonstrate a serious question to be tried (Vagrand Pty Ltd v Fielding).
Hartland -v- Firm Construction Pty Ltd (IN LIQ) [2023] WASC 147
In "Hartland -v- Firm Construction Pty Ltd (IN LIQ) [2023] WASC 147", the court was satisfied that there was a serious question to be tried, considering the nature and seriousness of the plaintiff's claim, the defendant's status as a company under external administration, and the existence of a relevant insurance policy.
Cases mentioned in this blog post:
Hartland -v- Firm Construction Pty Ltd (IN LIQ) [2023] WASC 147
Lawless v Mackendrick [No 2] [2008] WASC 15
Viscariello v Bernsteen Pty Ltd (in liq) [2004] SASC 266
Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550
Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 314
Re Gordon Grant and Grant Pty Ltd (in liq) (1982) 6 ACLR 727
Re AJ Benjamin Ltd (in liq) [1969] 2 NSWR 374
Re Sydney Formworks Pty Ltd (in liq) [1965] NSWR 646