TGIF 9 July 2021 – By your leave? Principles for leave to sue companies in liquidation clarified

This week’s TGIF considers the decision of Palace v RCR O’Donnell Griffin Pty Ltd (in liq) [2021] QCA 137, in which the Queensland Court of Appeal provided useful guidance on the principles to be applied when a party seeks leave under section 500(2) of the Corporations Act 2001 (Cth) to bring proceedings against a company in liquidation.

Key Takeaways

• In deciding whether to grant leave to bring proceedings against a company in liquidation, a court will take into account the interests of creditors and the practicalities of the proposed claim.
  
  
• The purpose of the requirement to obtain leave is to protect companies in liquidation from being harassed by unnecessary litigation. There accordingly needs to be some reason in the particular case why the ordinary procedure of lodging a proof of debt should be departed from.
  
  

• If the company is insured in relation to the claim, that is a strong factor in favour of granting leave.

Background

The respondent in this case, Sun Metals Corporation Pty Ltd (SMC), was the head contractor overseeing the construction of a solar farm.  The appellant was an electrician employed by a subcontracted labour hire company.

The employee alleged that he had suffered heatstroke and consequential physical injuries to his knee and ankles because the respondent (amongst others) had failed to provide a safe work environment. He sought to bring a personal injury claim against various parties, including SMC.

Before the employee commenced proceedings, SMC went into voluntary liquidation. For the employee to bring proceedings against SMC leave was required, pursuant to section 500(2) of the Corporations Act 2001 (Cth), which provides that where a company passes a resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of a court and subject to such terms as the court imposes.

SMC was insured against claims like the employee’s, but there was a $100,000 deductible which meant the first $100,000 of any judgment in favour of the employee would have to be paid out of the assets of the company in liquidation, to the potential prejudice of the creditors. The employee quantified his claim at around $1 million.

Proceedings

At first instance, the judge refused the employee’s application for leave to bring proceedings. The Court of Appeal overturned the first instance decision on the basis that the judge had not correctly applied the legal principles.

Principles for granting leave 

The Court of Appeal explained that the purpose of the leave procedure under section 500(2) is to protect companies in liquidation from being harassed by unnecessary litigation. The requirement for leave to bring proceedings exists because there must be some reason in the particular case why the ordinary procedure of lodging a proof of debt should be departed from.

The Court identified a number of relevant considerations to the determination of whether leave should be granted:

• whether the applicant has demonstrated that the proposed proceedings have sufficient merit to warrant leave and that there is a serious question to be tried;
  
  
• whether there would be any procedural or substantive prejudice to the creditors resulting from the proceedings;
  
  
• whether there is a good reason to depart from the proof of debt procedure, including whether the liquidator is likely to reject any proof of debt lodged by the applicant so that an appeal to the court would be necessary;
  
  
• the amount and seriousness of the claim together with the degree of complexity of the legal question involved;
  
  
• whether the existence of pre-trial procedures, such as discovery and interrogatories, are likely to be required or beneficial; and
  
  
• the fact that the applicant has claims against others raising substantially the same issues in which case there is a real question of inconvenience to the applicant of having to follow different procedures in respect of all claims.

Analysis

Applying these principles, the Court of Appeal held that leave should be granted.

First, the Court held that there was a serious question to be tried. The employee had gone into detail regarding the events that had caused his injuries in a statutory declaration exhibited to his solicitor’s affidavit.  

There was also evidence, in the form of the subcontract between SMC and the labour-hire company, that made it at least arguable that SMC shared responsibility for the employee’s safety. Expert evidence also bolstered the prospects of success, since it suggested that it was arguable that there had been unreasonable acts that may have led to foreseeable harm.

Secondly, the Court held that the potential damages far exceeded the $100,000 deductible. Expert medical evidence detailed the employee’s injuries, and the employee’s statutory declaration explained how the injuries had affected his ability to earn income. This evidence provided a solid enough foundation to infer that there was a live possibility that the employee could recover damages well in excess of the deductible.  

The Court of Appeal stressed that it was not making any assessment of whether the employee would ultimately succeed in his claim. Indeed it pointed to a number of significant obstacles to a successful prosecution of the claim, including the subcontract between SMC and the labour hire company indemnifying SMC with respect to liability for personal injuries. However, that was not the applicable test; what was held to be relevant was that the employee’s claim held sufficient merit to warrant a grant of leave.

Comment

The fact that SMC was insured carried great weight in the Court of Appeal since, if the employee made out his claim, he would be able to recover substantial damages that would ultimately be paid by the insurer, not SMC and its creditors.    

However, to protect the interests of creditors in light of the $100,000 deductible, the Court exercised its discretion under section 500(2) and granted leave on terms. The condition was that, if the appellant should be successful, he would not be able to enforce any judgment without the leave of the Court.

The decision helpfully clarifies the principles that apply to grants of leave under section 500(2), while also providing useful guidance on how these principles are to be applied in practice.  

It is particularly noteworthy that the Court engaged deeply with the underlying purpose of section 500(2), i.e to protect creditors, when assessing whether to grant leave, which will be informative for how courts approach this issue in future.  

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