Is the Court's stamp out of ink? A review of liquidators' settlement applications
A recent decision of the Victorian Supreme Court of Appeal confirms a view that a Court will not merely rubber stamp a settlement reached by a liquidator.
You can access the full decision here.
The basic facts, decision and key takeaways are set out below.
Background: Prior to 2011, Lonnex Pty Ltd (In Liquidaton) (Lonnex) operated two medical practices. A related company, Millennium Management Pty Ltd (Millennium) also ran two medical practices. Lonnex and Millennium established Lonnex & Millennium Management Holdings Pty Ltd (LMMH) and in February 2011, Lonnex and Millennium sold their practices to LMMH for a total value of $40,000,000 for the four medical practices. LMMH entered into loans with Lonnex and Millennium for the purchase of the medical practices. On the same day, the loans were forgiven by both Lonnex and Millennium by way of a deed of forgiveness and release. Lonnex was wound up on October 2012, through a members' resolution, and the applicants were appointed as liquidators (Liquidators).
The Federal Commission of Taxation (Commissioner) was the largest creditor in the liquidation. The Liquidators commenced numerous proceedings which related to transactions alleged to have been phoenix transactions. The Commissioner was funding the Liquidators up to mediation in the Lonnex matter. In June 2017 and after mediation, LMMH made an offer to the Liquidators to settle the Lonnex matter. The Commissioner rejected approval of the settlement. The Liquidators applied to the Court under sections 477(2B) and 511 of the Corporations Act 2001 (Cth) (Act).
Decision: At first instance, the Liquidators application was dismissed. This decision was upheld in the Victorian Supreme Court of Appeal. After the application was filed, s 511 of the Act was repealed and replaced by the Insolvency Law Reform Act 2016 (Cth) (Reform Act). During the proceeding, submissions were made that the principles of applications under s 511 of the Act applied equally to the replacement provisions contained in the Reform Act. The Court reviewed the circumstances in which the application was made, which included, amongst other things, that no Lonnex creditor supported the application; the Liquidators had no further funding to continue; the Commissioner was willing to provide further funding if the Liquidators were removed and new liquidators appointed; and legal advice provided to the Liquidators. The Associate Judge held that the creditors' views were an extremely important factor to take into consideration when determining the application. The Court held that the Associate Judge was correct to regard the wishes of creditors as a very important consideration. The Court determined that the absence of funding cannot be said to be an 'overriding factor', if it means that the outcome of applications is dictated by this consideration. Nor is the Court obliged to approve the compromise of litigation due to a lack of funds.
In the circumstances, the Liquidators had alternative options. The Associate Judge criticised the legal opinion obtained by the Liquidators, in that it contained no assessment of the prospects of success and lacked detail as to whether the proposed settlement amount was reasonable. The Court also held that while it is not the role of lawyers to assess commercial reasonableness, they do identify strengths and weaknesses of a legal position and can describe degrees of risk accordingly
Key Takeaway: The courts will not simply 'rubber stamp' settlements for liquidators. Liquidators need to ensure that there is a sound commercial basis for any proposed settlement. Creditors ought to be notified and given the opportunity to comment on settlement, and in some cases, legal opinion should be sought, which properly identifies strengths and weaknesses.
If you require our assistance, or have any queries about this decision or insolvency in general, please feel free to contact us on (08) 6188 3340 or by email to aaron@pragma.law or elizabeth@pragma.law.
