TGIF 1 November 2019: All aboard the mothership: Federal Court cures procedural irregularity in mothership proceeding

This week’s TGIF considers the decision in Dudley (Liquidator) v RGH Construction Fitout & Maintenance Pty Ltd (No 2) [2019] FCA 1355, where the Court exercised its discretion to cure a procedural irregularity in a mothership proceeding.

The Federal Court has confirmed its generally favourable attitude to the practice of commencing multiple preference claim actions in a single proceeding, known as a “mothership” proceeding.  The decision suggests that such proceedings are likely to remain a feature of the insolvency landscape, though liquidators should take note – while the Court was quick to regularise the irregular commencement of a mothership proceeding in this case, there may be less leeway now that the operation of the Federal Court rules has been clarified.

Background

A single mothership proceeding was lodged in the Federal Court by the liquidators of Precision Catering and Equipment Pty Ltd against 17 corporate defendants, seeking repayment of alleged unfair preferences.

Two of the defendants challenged the way in which the liquidators had commenced the proceeding.   They sought orders that they be removed as parties to the proceeding.  Because the statutory limitation period had expired since the proceeding was commenced, if the Court had removed the defendants as parties then the liquidators would have been statute barred from bringing separate proceedings against the defendants.

A previous edition of TGIF considered the earlier decision of the Federal Court that the liquidators were not authorised under the Federal Court Rules (Rules) rules of that Court to commence mothership proceedings without leave.  That was because, in a typical case, the agreements or arrangements with the company in liquidation, and the allegedly preferential payments, are unique to each separate defendant.

On that occasion, the Court ordered that the applicant defendants be removed from the proceeding, but stayed the operation of that order to permit the liquidators time to apply to regularise the position.

Present proceeding

In this proceeding, the Court considered the liquidators’ ensuing application to regularise the commencement of the mothership proceeding.  

The Court has the power to cure procedural irregularities or defects.  Indeed, in its decision, the Court emphasised that the object of the Court is not to punish parties for mistakes made in the conduct of their case, but to correct errors with the result that a decision can be made on the real matters in controversy.

In this case, the Court considered that:

1. There were good reasons for bringing a mothership proceeding.  Foremost among them was efficiency.  The Court acknowledged the time and expense involved in engaging with a large number of potential defendants and negotiating and resolving claims.
   
   
2. It was reasonable for the liquidators to wait until shortly before the expiration of the limitation period before bringing the proceeding.  In this regard, the Court noted that some claims were settled in the week before proceedings were commenced.
   
   
3. Because of the lengthy process involved in bringing the proceedings, and the flurry of settlement activity shortly before commencement, it could be inferred that it was not practical to seek ex parte leave, before the commencement of the proceeding, to bring the claims as a mothership proceeding.
   
   
4. If the applicant defendants were removed from the proceeding, unsecured creditors, who were not parties to the proceeding but who would benefit from any amounts recovered in the proceeding, would suffer irreversible prejudice.

The Court was, however, concerned with the fact that the liquidators did not seek leave promptly after commencement.  Ultimately, the Court considered that the liquidators had proceeded in good faith, in circumstances where the position under the Rules was uncertain.  This meant that the liquidators’ failure to seek leave did not weigh strongly against them.

Comment

While the Rules do not authorise liquidators to commence mothership proceedings without leave, the Federal Court, as with State Supreme Courts, takes a generally favourable attitude to such proceedings.  However, this decision and the previous decision in this matter carry some important lessons for liquidators and defendants to mothership proceedings:

1. In the Federal Court, leave is required to commence mothership proceedings.  If possible, liquidators should seek ex parte leave before commencing.
   
   
2. If ex parte leave is not practical, liquidators should seek leave as soon as possible after commencing mothership proceedings.
   
   
3. Don’t bank on the Court curing an irregularity in the commencement of mothership proceedings.   Now that the Court has clarified that leave is required, it is likely to look less favourably on liquidators who do not seek leave at the earliest opportunity.
   
   
4. If possible, liquidators should commence proceedings with sufficient time to allow any kinks to be ironed out before the expiration of the statutory limitation period.  If necessary, apply to extend the statutory time limit to build in a safety net.