Application For Leave to Proceed – s471B, s440D AND s453S

It is often the case that on the appointment of an administrator/liquidator/SBR that the company is part way through litigation. In the case of liquidations, including provisional liquidations, the rule is that proceedings are stayed unless the Court grants leave to proceed. Leave will generally be granted in circumstances where the claims are in the nature of a compensation claim where an insurance policy stands behind the company for the purposes of compensation or loss. In other words, the position of the ordinary unsecured creditors will not be affected by the outcome of the litigation.

The position of a company under administration or Small Business Restructuring is slightly different in that in addition to a Court, an administrator/SBRP can give consent.

The rationale for this rule is that the claimants to the litigation should be treated in the same way as the general body of creditors which is through the proof of debt process.

In a recent decision of the NSW Supreme Court, leave was granted for the limited purpose of adopting a referee’s report. (See: in Rialto Sports Pty Ltd -v -Cancer Care Associates Pty Ltd; CCA Estates Pty Ltd; Davjul Holdings Pty Ltd; Armmam Pty Ltd (2)[2023] NSWCA 246).

The background to the case is that at the date of appointment of the administrators, the applicants in the proceeding had obtained judgement against the company for breach of its contractual obligations to provide a property free of defects. The question of damages had been referred by the Court to a referee.

The applicants sought to have the Court adopt the referee’s report but that application was opposed by the administrators on the basis that the claim should be dealt with through the proof of debt process.

The Court noted two general themes as to the desirability of the freezing of proceedings, namely that:

1. an administrator ought not be distracted from his or her statutory duties and being required to incur expense with regard to litigation, and
    
2. to avoid one creditor advancing their own interest in respect of some disputed matter at the expense of or at least ahead of the interests of creditors more generally.

The Court observed that there has been some divergence in the authorities namely that:

1. As to whether the exercise of the Court’s discretion to grant leave should be approached with an assumption that leave will only rarely be granted; or

2. Whether such an approach is an unwarranted confinement of the Court’s discretion.

The NSW Court of Appeal looked at this suggested divergence of approach and opined there was little practical difference between the approaches because in any decision there must be circumstances which warrant the displacement of the general rule, namely the freezing of civil litigation.

The Court gave a useful guide as to some of the factors which the authorities have identified relevant to the exercise of the discretion to grant leave, namely:

• whether the proceedings have a solid foundation and give rise to a serious dispute;
• whether, and the extent to which, the administrator would be distracted by the proceedings from his or her own duties and obliged to incur legal costs;
• the state which the proceedings have reached;
• who appointed the administrator and the circumstances of that appointment;
• who is applying for leave to proceed;
• whether the claim is one in respect of which the company is insured;
• any disadvantage to the applicant in not being granted leave to proceed; and
• whether there are otherwise good reasons for allowing a creditor to depart from the general intention of Pt 5.3A which is that a creditor ought not be able to take action against the company.

In looking at the facts of this particular case, the Court of Appeal determined that the discretion ought to be exercised because the litigation had been concluded, judgement obtained and the only issue that remained was whether the Court should adopt some or all of the referee’s report.

The Court concluded that:

• the claim by the applicants (lot owners) for an adoption of the report gave rise to a serious dispute (a threshold issue),

• the underlying claim of each of the lot owners involved a monetary amount for damages, interest and costs, and the nature of the application for the adoption of the report is not one which could easily be dealt with under the proof of debt procedure,

• if leave to proceed was not granted the lot owners would suffer disadvantage of having to re-litigate the substance of their claim for damages, costs and interest which was already the subject of a referee’s report,

• the proof of debt procedure or any appeal therefrom would be less convenient and would involve delay and more expense than the limited litigation involved in whether and to what degree the Court should adopt the referee’s report,

• the obtaining of judgement in an amount would not create any preference as the grant of leave would be subject to the usual condition including enforcement of any judgement,

• the administrator would not be unduly distracted from their other statutory duties and were unlikely to incur any additional costs given the advanced stage of the referral proceeding, and

• the Court observed that the appointment of the administrators very shortly before the hearing of the referee’s report inferred that the administration was designed to frustrate the referral process.

The Lessons

The lessons to be learned from this are that a Court will not always decide that the proof of debt process is the most cost effective solution.

Advisors and practitioners need to consider whether the timing of the appointment of administrators may in fact be counterproductive.

It remains to be seen as to whether a Court or Tribunal will apply the same analysis to a SBR but care need to be taken if the Court or Tribunal takes the view, on the evidence, that the appointment of a SBRP is an attempt to thwart litigation that is of an advanced stage.