In the recent decision of MSI (Holdings) Pty Ltd v Mainstreet International Group Ltd [2013] QCA 27, the Court of Appeal considered the meaning and application of sections 471B and 471C of the Corporations Act.

BACKGROUND

The decision involved receivers who were appointed to MSI (Holdings) Pty Ltd (receivers appointed) (in liquidation) (MSI) by Central Coast Projects Pty Ltd (Central Coast) pursuant to a charge it held over all property, assets and rights of MSI.

At issue was the validity of proceedings commenced by MSI to recover a debt against Mainstreet International Group Limited (Mainstreet). MSI eventually obtained a default judgment against Mainstreet in those proceedings and Mainstreet later filed an application seeking for the default judgment to be set aside.

In support of that application, Mainstream made a novel argument that the proceedings brought by MSI were invalid because under section 471B of the Corporations Act, the receivers required the Court’s permission to commence proceedings on behalf of a company in liquidation because the proceeding was “in relation to property of the company”.

At first instance, Mainstreet’s argument was successful and the default judgment was set aside. MSI appealed on the grounds that the judge erred in the application of 471B.

THE RELEVANT PROVISIONS

Section 471B of the Corporations Act states that while a company is being wound up in insolvency by the Court, or a provisional liquidator of a company is acting, a person cannot bring or proceed with:

  1. a proceeding in a court against the company or in relation to property of the company; or
  2. enforcement process in relation to such property, except with the leave of the Court.

Section 471C of the Corporations Act, however, provides that nothing in section 471B affects a secured creditor’s right to realise or otherwise deal with a security interest.

THE APPEAL PROCEEDINGS

On appeal Mainstreet argued that the exception in section 471C only applied in relation to the realisation of security interests where the underlying debt is uncontested and that legal proceedings to recover a charged debt did not fall within this exception.

The Court of Appeal was not convinced by Mainstreet’s argument. It held that legal proceedings to recover a charged debt require the making of a judicial determination of whether or not the debt exists and, therefore, are no less a process of realisation of the security interest than are legal proceedings in which the existence of the debt is uncontested.

Essentially, the Court found that the commencement of the proceedings to recover a charged debt was a realisation of Central Coast’s security interest and that section 471B did not operate to restrict such action.

COMMENTARY

This decision makes it clear that section 471B does not restrict secured creditors from realising a security interest in circumstances where the company is also in liquidation.

The decision also raises the issue of whether section 471B can restrict a company in liquidation from commencing proceedings in relation to the company’s property. The argument raised by Mainstreet was a novel one because section 471B is commonly thought to restrict persons, other than the company in liquidation, from commencing proceedings against the company or in relation to the company’s property.

Unfortunately, the Court did not grapple with the question of whether section 471B would have applied against MSI had the exception under section 471C not been enlivened. The Court did however note that “there is good reason to question whether [section 471B] applies with respect to a proceeding by the company itself to recover a debt owed to it”.