Proceedings have been set down for hearing. The trial date is imminent. The barristers are sharpening their cross-examination. Witnesses are lined up to give evidence. The final flurry before hearing is in full swing. But wait! The defendant has called time out! A voluntary administrator has been appointed in the countdown to kick-off. What now?
The time out whistle
Section 440D of the Corporations Act 2001 (Cth) provides for a freeze of proceedings against a company in administration unless and until either the administrator consents to a continuation or the Supreme or Federal Court grants leave to proceed.
Permission to play on
The Courts’ traditional stance has been that leave to proceed will rarely be granted. The Courts have been concerned about administrators being diverted from their core responsibilities and incurring legal costs running litigation on behalf of the company.
The idea that leave should only be granted in rare cases has, however, been challenged in recent years. We can now tentatively say it no longer represents the status quo.
In Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207, Justice Hammerschlag said that, whilst a stay is the starting point, each case must be looked at on its own merits to decide whether or not leave should be granted.
In our case, the administrator was appointed only days before a hearing was to commence in the District Court. The plaintiff’s claim related to unpaid invoices and was not disputed, however the defendant had filed a cross-claim seeking damages due to the supply of allegedly faulty products.
In granting leave to proceed, Justice Brereton noted that the administrator must have conducted some enquiries into the company before consenting to act. He should, therefore, have been aware of the proceedings and the impending hearing date. The eleventh hour appointment of the administrator afforded no reason to interfere with the progress of the proceedings, at least so far as the plaintiff’s claim was concerned.
Section 440D does not operate to stay a cross-claim filed by the company in administration. Therefore, the administrator could take his own course on the cross-claim and could seek an adjournment of the hearing the following day.
With leave granted, the plaintiff called game on and judgment was entered on the plaintiff’s claim. The defendant’s cross-claim was dismissed by the District Court Judge with a limited right to file any fresh proceedings within one month.
Prospective administrators should be aware that their appointment does not necessarily mean time out will be called on any litigation the company is involved in.
In particular, where a hearing date looms an administrator may be told to play on and cannot assume a stay will remain in place. The administrator must, therefore, look at any litigation the company is involved in prior to appointment and formulate a game plan.
Questions the administrator should ask include:
- What stage are the proceedings at? Has a hearing date been set? If so, when is it?
- What are the prospects of success for the case? What are the consequences of failure?
- What are the costs of continuing to run the matter to trial? How is that litigation to be funded?
- What are the reasons for the appointment of an administrator? Is the appointment simply an attempt to frustrate the claim by imposing a stay?
An administrator may be personally liable for legal costs of the litigation after his or her appointment. Accordingly, before getting swept up in the litigation, the administrator should ensure the assets of the company are sufficient to provide an indemnity for those costs.
Plaintiffs facing a late appointment of an administrator to a defendant company should note this does not necessarily mean they should retire to the locker room. They should consider whether an application for leave to proceed should be filed.
Where the defence consists of a cross-claim and the principal claim is not really in dispute, there may be grounds for the stay to be lifted, particularly where a judgment would not give the plaintiff priority or any other special advantage over other creditors.
Each case is unique and will need to be considered separately. To find out more, please contact Claire Latham or Stephen Polczynski on 02 9234 1500.