TGIF 4 November 2022 – Court grants limited intervention in Liquidator’s funding approval applications

This week’s TGIF considers Hundy (liquidator), in the matter of 3 Property Group 13 Pty Ltd (in liquidation) [2022] FCA 1216, in which the Federal Court of Australia granted leave under rule 2.13(1) of the Federal Court (Corporations) Rules 2000 (Cth) (FCCR) for intervening parties to be heard on a strictly limited basis in a liquidator’s application for retrospective approval of funding agreements under section 477(2B) of the Corporations Act 2001 (Cth) (Act).

Key takeaways

• It is not sufficient for an intervening party to simply rely on their status as a creditor, claimed creditor or officer of a creditor in seeking a court to grant leave for them to be heard in a liquidator’s application for approval of funding agreements.
  
  
• At a minimum, an intervening party needs to demonstrate,: that there is at least some evidentiary basis for it to be reasonably suspected that the funding agreements are or may be ill-advised, improper, the product of bad faith, or involve an error of law or principle on the part of the liquidator; or that they might otherwise be prejudiced or disadvantaged for some other reason if the liquidator’s application is approved.
  
  
• Even where there are a number of sound reasons for not permitting an intervening party to participate any further in a liquidator’s approval application, a court may nonetheless find it appropriate for them to be heard on a limited basis. 

Background

Be Athletic Canberra Pty Ltd (in liquidation) (Be Athletic) and 3 Property Group 13 Pty Ltd (in liquidation) (3 Property) were both incorporated in 2017.

In 2018, Be Athletic and 3 Property purchased properties in the Canberra area. Both companies then entered into contracts with Stone Living Pty Ltd (Stone) for the construction of townhouses on the properties. Subsequently there were disputes with Stone regarding the construction contracts, which were ultimately terminated.

3 Property retained Lifestyle Homes (ACT) Pty Ltd (Lifestyle), a company associated with one of the directors of Be Athletic and 3 Property, to finish building the townhouses. In 2020, Be Athletic and 3 Property sold the properties they had purchased to related entities.

A liquidator was appointed to the companies (Liquidator) and conducted investigations into the affairs of Be Athletic and 3 Property. During the course of these investigations, the Liquidator entered into agreements with Stone for funding in respect of certain aspects of the conduct of the winding up (the funding agreements).

The Liquidator’s approval applications

By virtue of section 477(2B) of the Act, the Liquidator was not permitted to enter into the funding agreements with Stone without the approval of either the Court, the committee of inspection or by a resolution of the creditors. Accordingly, the main Federal Court proceedings concern applications by the Liquidator seeking the Court’s retrospective approval of his entry into the funding agreements.

Applications by the intervening parties

A number of persons and entities who were or claimed to be creditors (or officers of creditors) of Be Athletic and 3 Property (collectively, the intervening parties) sought leave, pursuant to rule 2.13(1) of the FCCR, to be heard in the Liquidator’s applications without becoming parties to the proceedings. The intervening parties included the directors and Lifestyle and a number of the companies’ related entities.

The intervening parties submitted that they should be heard in respect of the Liquidator’s applications for approval of the funding agreements  because:

• they sought to argue that the funding agreements should not be approved (on the basis that the Liquidator had not objectively considered whether the companies have any claims against Stone);
  
  
• they have a legitimate interest to be heard as they were creditors, or officers of creditors, of Be Athletic and 3 Property; and
  
  
• their interests could be prejudiced by the approval of the funding agreements.

Requirements for exercising the discretion in rule 2.13 of the FCCR

Wigney J held that, in order to persuade the Court to exercise the discretion in rule 2.13 of the FCCR in their favour, it was not sufficient for the intervening parties to simply rely on their status as creditors, claimed creditors or officers of creditors. Rather, his Honour considered that the intervening parties needed to demonstrate (at a minimum):

• “at least some evidentiary basis, beyond mere assertion or speculation, for it to be reasonably suspected that the funding agreements are or may be ill-advised, or improper, or the product of bad faith, or involve an error of law or principle on the part of the liquidator”; or
  
  
• ”that the intervening parties may otherwise be prejudiced or disadvantaged for some other reason if the funding agreements were approved”.

Further, his Honour noted the intervening parties may also need to persuade the Court that their participation in the hearing would assist the Court’s consideration of the Liquidator’s approval applications.

Decision

Wigney J found that there were a number of sound reasons for not permitting the intervening parties to participate any further in the Liquidator’s applications including, among other things, that:

• the evidence adduced by the intervening parties in support of their applications did not give rise to any reasonable suspicion or inference that the Liquidator had acted otherwise than in good faith, improperly or on the basis of any error of law or principle in entering into the funding agreements;
  
  
• much of the evidence adduced by the intervening parties was not directed at the issue for determination in the main proceedings – that is, whether the funding agreements should be approved – such that they tended to distract rather than assist the Court;
  
  
• much of the evidence adduced by the intervening parties appeared to be driven by the interests of the directors and their associated companies as defendants to the substantive proceedings, rather than as creditors (or claimed creditors) of 3 Property and Be Athletic;
  
  
• their evidence regarding the conduct of Stone and the merits of the substantive proceedings ought to be raised in the substantive proceedings rather than these interlocutory proceedings;
  
  
• if the intervening parties were permitted to be heard further in relation to the liquidator’s approval applications, complications would arise concerning their access to much, if not all, of the material relied on by the Liquidator in support of his applications, some of which may be commercially confidential and sensitive;
  
  
• the cost of the interlocutory proceedings would “almost certainly be significantly increased” if the intervening parties were to be heard further; and
  
  
• the conduct of the intervening parties’ leave applications did not instil great confidence in the Court that their further participation would assist the Court in any material way.

Nonetheless, his Honour held that it was appropriate in the circumstances to grant leave for the intervening parties to be heard on a limited basis. His Honour considered that, in the particular and somewhat unusual circumstances of this case, it would be “somewhat unrealistic and artificial” for the Court to proceed to hear the Liquidator’s approval applications as if they were effectively unopposed, or on the basis that the submissions and evidence relied on by the intervening parties should be entirely disregarded.

Accordingly, his Honour allowed the intervening parties to rely on the written submissions they had filed in their leave applications (including the documentary and affidavit evidence referred to therein), but held that they would not be able to file anything further or appear at the hearing of the Liquidator’s applications. His Honour noted that the affidavit evidence filed by the intervening parties would be received and read on the basis that it had not been tested.

Comment

This decision reinforces the requirements for intervening parties to be granted leave to be heard under rule 2.13 of the FCCR.

Significantly, this case shows that even where there are a number of sound reasons for a court to refuse leave for an intervening party to be heard in a liquidator’s application for approval of funding agreements, leave may nonetheless be granted in particular circumstances. This includes instances in which it would be artificial to proceed on the basis that the liquidator’s applications were unopposed or where potentially relevant evidence and submissions would be disregarded as a result.

However, any such grant of leave may be strictly limited to the submissions relied upon (and evidence referred to therein) by the intervening party in its leave application and may not extend to filing further submissions or appearing at the hearing of the liquidator’s application.