Long-term agreements proposed by the liquidator – the obligation to obtain approval

27 April 2015

In this issue:

Approval requirements under section 477(2B) Corporations Act reviewed
Long-term agreements commonly brought before the courts (or creditors) for approval
Principles developed by the courts in determining whether approval should be granted

Introduction

Under section 477 (2B) Corporations Act, unless approval of the court (or the committee of inspection or resolution of creditors) is obtained, a liquidator of a company must not enter into an agreement on the company’s behalf if the term of the agreement may end, or obligations of a party to the agreement may be discharged, more than three months after the agreement is entered into. The section is commonly referred to as the “long-term agreements” provision: see Stewart, in the matter of Newtronics Pty Ltd (2007) FCA 1375, 28/8/2007 at para 24.

Although section 477(2B) appears to govern court-appointed liquidators, the section also applies to liquidators appointed under a voluntary winding up (see section 506 (1A) Corporations Act), and to provisional liquidators (see section 472 (5) Corporations Act).

Note: Although we are primarily concerned with reviewing cases involving court approval under section 477 (2B), approval may also be obtained from a committee of inspection or by resolution of creditors. Liquidators will often seek to implement this expedient and usually cost-effective option. In doing so principles employed by the courts when reviewing approval applications can provide useful guidelines for liquidators and creditors to adopt.

Policy justification

What is the policy justification for introducing the approval requirement? The Court in Empire (Aust) Nominees Pty Ltd v Vince (2000) VSC 324, 18/8/2000, describes the policy justification in these terms:

“There is an obvious policy underlying the requirements of section 477(2B)…..namely that it is intended to afford some protection against ill-advised or improper actions on the part of a liquidator.” (para 12).

Essentially, oversight of the liquidator’s long-term agreements under section 477(2B) ensures there is no error of law, or ground for suspecting bad faith or impropriety on the part of the liquidator; as well as ensuring that the objectives of the winding up process, and in particular the interests of creditors, are not being compromised by the long term nature of the proposed agreement.

Specific long-term agreements coming before the courts (or creditors) for approval

Applications by liquidators for court (or creditor) approval under section 477(2B) most commonly – but not exclusively – involve the following long-term agreements.

Litigation funding agreements

Where a liquidator lacks the necessary funds to undertake investigations and issue proceedings arising from those investigations the liquidator may propose entering into a funding agreement under which the external funder agrees to provide the necessary funds to cover the liquidator’s costs associated with the investigations and any proceedings. Because the term of such funding agreements are likely to extend beyond three months after entering into the agreement the liquidator must obtain approval under section 477(2B): see Jones, Saker, Weaver and Stewart (liquidators), in the matter of Great Southern Limited (in liq) (receivers and managers appointed) (2012) FCA 1072, 27/9/2012; Re Ascot Vale Self-Storage Centre Pty Ltd (in liq) (2014) VSC 75, 11/3/2014.

Indemnity agreements

Where a company in liquidation is without funds the liquidator may consider that a creditors of the company are the best available source of funding to enable preliminary investigations to be carried out as well as subsequent proceedings should they eventuate. In these circumstances indemnifying creditors will enter into an Agreement to Indemnify which will require approval under section 477(2B) where it is likely that the financial support gives rise to obligations extending beyond three months after the agreement is entered into: see Stewart, in the matter of Newtronics Pty Ltd (2007) FCA 1375, 28/8/2007.

Settlement agreements

A liquidator, on behalf of the company in liquidation, may propose entering into a Deed of Compromise resolving all outstanding issues in a proceeding between the company and another party. In circumstances where the settlement involves the payment of monies beyond three months after entering into the Deed, the liquidator will be obliged to seek approval of the terms of the settlement under section 477(2B). Note: In the event that the settlement involves the compromise of a debt in excess of $100,000 the liquidator will be required to seek court approval under both section 477(2A) and (2B) Corporations Act: see Re S & D International Pty Ltd (in liq) (No 7) (2012) VSC 551, 15/11/2012.

Lease agreements

In Re G A Listing and Maintenance Pty Ltd (1994) 15 ACSR 308, the company was a real estate developer that owned a number of properties. The liquidator formed the view that to obtain optimum prices the properties needed to be sold in an orderly manner. In the opinion of the liquidator, pending realization, this necessitated leasing the properties for terms in excess of three months thereby requiring approval under section 477(2B). Approval was granted by the Court which recognized that the leasing arrangements contributed to the beneficial winding up of the company.

Contract for sale of the company’s business

A contract for the sale of the business of a company in liquidation may contain provisions that establish rights or obligations that cannot be settled within three months of entering into the contract of sale.

For example, in Chan v Four C Realty Pty Ltd (in liq) (No 2) (2013) FCA 959, 23/9/2013, the company in liquidation previously acted as selling agent for a number of multi-story apartment developers whereby the company facilitated off-the-plan sales to purchasers. Typically the company was paid half the commission upon a purchaser entering into a contract of sale with the balance payable when the contract was completed at settlement. In the event the contract of sale did not settle the company was liable to repay to the developer the commission previously received. These various rights and corresponding obligations were to continue over a number of years following the winding up of the company.

With the terms of the proposed contract of sale of the company’s business embodying these long-term rights and corresponding liabilities, court approval under section 477(2B) was sought and obtained by the liquidator.

Principles governing exercise of court’s discretion under section 477(2B)

The most frequently cited summary of relevant principles is to be found in Re Stewart; Newtronics Pty Ltd (2007) FCA 1375, 28/8/2007. They may be stated (without reference to the various citations) as follows:

The court does not simply “rubber stamp” whatever is put forward by a liquidator. The particular concern of the court will be whether there are real or substantial grounds for doubting the prudence of the liquidator’s conduct.
A court will not approve an agreement if its terms are unclear on matters of real importance.
The role of the court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable.
The court’s approval is not an endorsement of the proposed agreement but merely a finding that the liquidator is acting reasonably and in good faith in the exercise of commercial judgement in respect of the proposed agreement before the court.
Generally the court will grant approval where the transaction amounts to a proper realization of the assets of the company and assists in the winding up of the company.

With respect to litigation funding agreements additional factors have been adopted by the courts (see In the matter of ACN 076 673 875 Ltd (2002) NSWSC 578, 26/6/2002), in particular:

The nature and complexity of the cause of action.
The liquidator’s prospects of success in the litigation.
Likely benefit for creditors.
The amount of costs likely to be incurred and the extent to which the funder is to contribute to those costs, including the costs of the defendant in the event the action is unsuccessful.
The extent to which the liquidator has canvassed other funding options.
The level of the funder’s “premium”.
The liquidator’s consultations with creditors of the company.

Note: As section 477(2B) makes clear, court consideration of an approval application should occur in advance of the liquidator entering into an agreement on behalf of the company. However retrospective approval may be given where the court determines that the contract under review warrants approval: see Empire (Aust) Nominees Pty Ltd v Vince (2000) VSC 324, 18/8/2000.

Summing up

Section 477(2B) has provided the courts (or creditors) with a supervisory role over liquidators and their proposals for long-term agreements. To discharge this role the courts have developed comprehensive principles and guidelines. In developing and applying these principles the courts have acknowledged that the key considerations are whether what is being proposed by the liquidator is commercially prudent, contributes to the beneficial winding up of the company and promotes the interests of those concerned in the winding up. These considerations have equal relevance to those occasions where a liquidator is seeking approval from a committee of inspection or by resolution of creditors.