“If a liquidator of a company wishes to bring a single proceeding to recover unfair preferences from multiple defendants, it is open to him or her to file and serve the originating process, together with an interlocutory process seeking the court’s leave under Part 8 Rule 2, and supporting affidavit of evidence.”

Following the decision in Dean-Willcocks v Air Transit International [2002] NSWSC 525(“Air Transit”), liquidators, especially in the context of large scale liquidations, have been afforded with a more efficient, expeditious and cost effective method of prosecuting unfair preference claims under section 588FA of the Corporations Act 2001 (Cth.) (“the Act”) against multiple defendants by way of the ‘Mother Proceedings Model’ (“the Model”).

UNIFORM CIVIL PROCEDURE RULES 2005 – REG 6.19

An application for the joinder of multiple defendants would be required to be made under Rule 6.19 of the Uniform Civil Procedure Rules 2005(“the Rules”) which states: –

“(1)Two or more persons may be joined as plaintiffs or defendants in any originating process if:  

(a) separate proceedings by or against each of them would give rise to a common question of law or fact, and

(b) all rights to relief claimed in the originating process are in respect of, or arise out of, the same transaction or series of transactions,

or if the court gives leave for them to be joined.

(2) Leave under subrule (1) may be granted before or after the originating process is filed.”

Of interest is the question of transaction(s). Those applying for joinder under the Rule should bear in mind Barwick CJ and Mason J’s views in Payne v Young (1980) 145 CLR 609(“Payne v Young”) in relation to an application made pursuant to the equivalent but repealed Part 8 of Rule 2 of the New South Wales Supreme Court Rules, in that the word “series” should not be read in isolation and should be read as “same series” and given its intended full meaning.

In applying the decision in Payne v Young, Austin J in Air Transit drew the conclusion that it would be incorrect for a liquidator to apply for leave under subsection 1(a) of the Rule if the only link able to be made out by the liquidator is that the transaction(s) are similar by way of being unfair preferences – the likely result would be that leave would not be granted for that commonality alone.

In light of this, insolvency practitioners should understand that the grant of leave will more often than not be subject to a determination of the facts of the individual case, and should keep in mind the various practical and public policy considerations the Court would be required to weigh in exercising its judicial discretion under the Regulation.

THINGS TO BEAR IN MIND

There are a number of distinct advantages of the model to a liquidator and the company in the eyes of the public, and include:-

1. A greater return to unsecured creditors by reducing the large scale expenditure on filing fees and hearing allocation fees against a large number of individual creditors; see for example the many preference cases commenced by the liquidator of Harris Scarfe Ltd; and
2. As noted by Austin J in Air Transit the ability of the Corporations List to case manage such proceedings. The ability of the Corporations List to make directions specific to circumstances of each defendant would see time reductions resulting in lower costs to both defendants (i.e. various defendants claims can be divided and run as a separate hearing so as to not need sitting through the issues which have no bearing on the case against them) and the company in liquidation.

Despite the above, there are also a number of issues relating to the Model that ought first be considered by a liquidator and their advisors minded to commence proceedings against multiple defendants in the one proceeding before it be determined the most appropriate method of recovery.  These include: –

1. The real or perceived unfairnesses incurred by the defendants to the joinder of the proceedings, whether due to:-
   1. Hampering or making deficient in any way any of the defendants defence(s);
   2. Inconvenience of forum in which to defend the claim (see Austin J’s comments in Air Transit); and
   3. Increased costs and possible delay in the matter being heard, specifically the increased costs of defending the matter in the Supreme Court;
2. The issue of insolvency. Under 588E of the Act, a presumption exists that for the purposes of another or separate recovery proceeding in relation to the company, if insolvency has been established in an earlier proceeding, it must be the case that the company was also insolvent at the time it entered into the transaction in subsequent proceedings at that same date. However, as Justice Austin commented in Dean-Wilcocks v. Commissioner of Taxation [2004] NSWSC 286, if it appears from the creditors defences that insolvency is in issue, the court may make alternate arrangements to determine the insolvency element. This may include bringing the single proceeding to hearing or, alternatively, making an order under Part 8 Rule 6 (now Reg. 6.19) to run a test case which would have the presumptive effect under 588E; and
3. The possible unweildy number of defendants and ability to case manage.

PRACTICAL CONSIDERATIONS

Keeping the above in mind, it is important to consider some practical issues that may arise in proceeding under this model. These may include: –

1. Independent report as to solvency
   In an attempt to aid and fast track the court in determining the issue of insolvency, it may be appropriate, especially in large scale liquidations, to engage an expert to prepare a report as to the solvency of the company as at the relation back date and the six months subsequent.   Following the court making a determination, it would be to the liquidator’s benefit that the determination be binding on all defendants, instead of merely being made a rebuttable presumption pursuant to s588E as noted above.
2. File Management
   To capitalise on the earlier point of the Corporations Lists ability to case manage, liquidators and their advisors must ensure a coherent file management system is in place. Failure to do so, in light of the inevitable plethora of documentation and correspondence (especially in circumstances of settlement negotiations) that will stem from proceeding against such a large number of creditors, may negate any positive effects of the Corporations List’s ability to case manage.
3. Defences under 588FG of the Act – “If it looks like a duck, quacks like a duck and walks like a duck….”

A final note should be made on the careful process of reviewing and interpreting the evidence against potential defendants. The ‘running account defence’ under section 588FA (3) (see for example Richardson v The Commercial Banking Co. of Sydney (1952) 85 CLR 110) and the ‘good faith’ defence under section 588FG(2) must be given due consideration  when determining which creditors to add to the originating process (particularly when a decision is made as to what party will be the ‘lead defendant’).

To that end, a prudent insolvency practitioner should seek competent legal advice to consider the potential defenses available to each and every defendant when considering whether to bring Mother proceedings.