Claims against companies in liquidation

Companies and liquidation

A company is said to be insolvent when it is unable to pay all its debts as and when they fall due.  The Corporations Act 2001 (Cth) (Act) sets out the procedure to appoint an official liquidator to wind-up the company.  During the winding-up process, a liquidator will ascertain the company’s debts, hold meetings with creditors, sell company assets, pay secured and unsecured creditors (if possible), enter arrangements, and eventually, deregister the company.

The aim of the insolvency process is to provide a fair and orderly process for dealing with an insolvent company’s financial affairs.

Prohibition against claims against a company in liquidation

A person cannot begin or proceed with a court action against a company or its property without the leave of the court where:

  1. a company is being wound up in insolvency by a Court order; or
  2. after the passing of a resolution for a voluntary winding up (sections 471B and 500(2) of the Act).

The purpose of the prohibition is to decrease the amount of expensive litigation brought against a company in insolvency and provide a liquidator with time to:

  • realise the value of the company’s assets; and
  • maximise any returns for the creditors.

How can creditors make claims against an insolvent company without legal proceedings?

The usual process to claim a company’s debt in liquidation is for the creditors to lodge a proof of debt with the liquidator.

A liquidator will consider creditors’ proofs of debt and determine distributions (if any) under the relevant rules dictating the priority of each creditors’ claim under the Act and the Personal Properties Security Act 2009 (Cth).

However, in some circumstances, if the claim against the company cannot be resolved by way of a proof of debt, it may be necessary to seek leave of the court to commence or continue proceedings against the company in liquidation.

What does the court consider in granting leave?

The Act does not set out the factors to be considered in granting leave to proceed against a company in liquidation. Accordingly, case law is the ultimate source for determining these applications.

The court’s discretion is broad but exercised cautiously.  In Federal Court decisions Harcourts WA Pty Ltd v Roy Weston Nominees Pty Ltd (No 7), and Swaby v Lift Capital Partners Pty Ltd, the Federal Court summarised several factors established through previous cases. Some of these included:

  • The nature of the claim, the amount of the claim, and the complexity of legal and factual issues
  • Whether the claim would be better suited to the proof of debt process
  • Whether proceedings have already commenced and, if so, the stage to which they have progressed
  • Whether the claim has arguable merit
  • The stage of the proceedings at the time a liquidator was appointed
  • Whether there is insurance involved
  • Whether the proceedings will result in prejudice to creditors
  • Whether the continuation of the proceedings could have a positive impact on the creditors
  • The court will be hesitant to grant leave where third parties seek proceedings, which are likely to delay the liquidation and make the winding-up process contingent upon the outcome or progress of the contemplated proceedings.

When has leave been granted?

The court has granted leave in some of the following situations:

  • Proceedings have been necessary to establish and submit the proof of debt
  • Where an insurer will be joined to the proceedings, and the insurer has not denied liability for the anticipated proceedings
  • money held by a third party on trust for the claimant (and subsequently given to the liquidated company), should have been subject to the same trust terms on behalf of the claimant

In all cases, leave must be considered in light of the particular circumstances, the available assets in the winding-up, and the creditors’ interests.

Key takeaways

  • A company’s liquidation poses a prohibition against commencing or continuing court proceedings against the company during the liquidation.
  • Claims against a company in liquidation are generally made by lodging a proof of debt with the liquidator.
  • The threshold for a Court to grant leave to begin or continue proceedings against a company in liquidation is generally high, and the decision to make an application to do so must be considered carefully.

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