In the matter ofMustang Marine Australia Services Pty Ltd [2014] NSWSC 1074, Brereton J of the New South Wales Supreme Court held that there is no principle that before instituting proceedings a liquidator must be satisfied of the material facts that constitute its cause of action, and that absent such satisfaction the proceedings are an abuse of process. As long as proceedings are instituted for bona fide relief claimed and are not doomed then there is no abuse of process.

FACTS

Mustang Marine Australia Services Pty Ltd  (Mustang) went into voluntary administration in March 2010. The administrators called for and received “proofs of debt.” Thereafter, the administrators sold Mustang’s business to a third party. In May 2010 the creditors resolved to accept a Deed of Company Arrangement (DoCA) pursuant to which creditors would receive a divided from a deed fund.

Perpetual Trustee Company Limited, a creditor, brought proceedings to set aside the DoCA. Ward J set aside the DoCA in December 2010 and ordered the company be wound up, appointing the plaintiff liquidators. However, prior to Ward J’s order, the deed administrators had reviewed the “proofs of debt” and created a schedule that recorded the proofs received and the administrators’ full or partial acceptance or rejection of them.

On appointment, the liquidator commenced proceedings against the former directors of Mustang and Standard Bank Asia Ltd (SBAL), alleged to be a shadow director, pursuant to s588G of the Corporations Act 2001 (Cth) for compensation for insolvent trading. Standard Bank PLC (PLC) was also a party to the proceedings as, pursuant to s588Y of the Corporations Act 2001 (Cth), the plaintiff sought to subordinate PLC’s unsecured debt to that of other unsecured creditors of the company.  

In the current proceedings, SBAL and PLC sought orders from the Court that the proceedings commenced by the liquidators be struck out or stayed pending the adjudication of proofs of debt by the liquidator. The liquidator was relying on the schedule prepared by the deed administrators, but included debts that the administrator rejected. The liquidator did not propose to call for or adjudicate on proofs of debt until there was a fund for distribution of a dividend. Many of the claimed debts were disputed.

Further PLC argued that it submitted a proof as a priority creditor for $1.3 million and, therefore, if the liquidator recovered compensation for the unsecured debts of $1.5 million no purpose will be served by the proceedings besides generating remuneration and costs.

DECISION

The applicants contended that it was an abuse of process for the liquidator to maintain proceedings for insolvent trading without taking sufficient steps to assess and determine what debts were incurred and to what extent they remain unpaid, and simply to “plagiarise” the schedule prepared by the deed administrators for a different purpose and in a different context.

Brereton J held that there is no principle that before instituting proceedings a liquidator must be “satisfied” of the material facts that constitute its cause of action, and that absent such satisfaction the proceedings are an abuse of process. So long as proceedings are instituted bona fide for the relief claimed in them, and they are not doomed to fail, they are not an abuse of process.

Compensation proceedings under s 588M of the Corporations Act 2001 (Cth) necessarily involve litigation and determination of whether the alleged debts were incurred, when, and in what amount, and what loss or damage the creditor has suffered. A liquidator can a bring case under s588M that alleges particularised debts, some of which may be disputed, without first adjudicating proofs of debt.

Further, in light of the comments of The Court in Hall v Poolman,[1] His Honour held that while the claim may be for “as little as” $677,000 this was not so trifling as to be considered an abuse of process. Liquidators are entitled to bring proceedings even where the only prospect of recovery was reimbursement of their own fees and expenses as long as the interests of creditors and the public were considered.

COMMENT

This decision confirms the standard of proof liquidators must meet prior to commencing compensation proceedings under s588M for insolvent trading. Even if there are serious issues about aspects of the plaintiff liquidator’s case, there is no obligation on the liquidator to conduct some prior inquiry to resolve those issues. This does not, however, ameliorate the onus on the liquidator to establish the material facts of the case in the proceedings themselves.