In a well known 2009 decision, Hall v Poolman [2009] NSWCA 64, a liquidator was criticised for pursuing a claim in circumstances where the entire sum recovered would be paid to the liquidator and his funder, leaving creditors without a return.

This criticism did not go unnoticed and, ever since then, the standard reaction to pretty much any foreshadowed legal action by a liquidator has been substantially as follows:

If you dare bring this claim, I will hit you over the head with Hall v Poolman so hard and so often you will be sorry you ever mentioned it. I will have your claim struck out as an abuse of process. I will have you criticised by the court. And when I’ve finished, I will get an order that you pay all of my legal costs. On the indemnity basis. Without recourse to the assets of the company. You bastard.

It is probably fair to say that liquidators have been feeling a little uneasy ever since Hall v Poolman was handed down. Some saw it as a prohibition on pursuing valid claims unless they were confident they could strike a dividend at the end of it.

This had a chilling effect on potential recovery action and shielded recalcitrant directors from the consequences of their misconduct, angering creditors and depriving liquidators of funding for further recoveries.

 

Developments this week

Fortunately, thanks to a decision of Brereton J (NSW Supreme Court) earlier this week, it is now clear that Hall v Poolman cannot be used to defend an otherwise meritorious claim.

Addressing the issue head on, the court sided wholly with the liquidator and said that, even if the claim was unlikely to return any funds to creditors, that was not a sufficient reason to strike it out.

The directors’ strike-out application was dismissed, and they were ordered to pay the liquidator’s legal costs.

 

Facts

In the matter of Mustang Marine Australia Services Pty Ltd [2014] NSWSC 1074 (link) concerned an insolvent trading claim against several directors of a company. The directors sought to have the claim struck out, alleging:

• The liquidator had only brought the claim in order to raise money to pay himself and his lawyers. In the circumstances the claim was an abuse of process and should be struck out.
• Further, the liquidator should not have commenced the action until he had satisfied himself that he actually had a good claim. The action should be stayed until he had done so.

The court rejected both contentions and found in favour of the liquidator on both counts.

 

First argument – no benefit to creditors

The directors contended that the proceedings would produce no worthwhile benefit for unsecured creditors, i.e. the standard Hall v Poolman argument.

The court was unimpressed with this submission. It observed that, even if the allegation were established on the evidence (which it was not), it would not be a matter the defendants could raise in their defence. It might be a disciplinary issue for the liquidator, but that would be the extent of it:

While, in Hall v Poolman, the Court of Appeal agreed that liquidators should not pursue litigation simply in order to generate fees without any view to the interests of creditors or the public interest, the Court disagreed with the proposition that liquidators were never entitled to bring proceedings where the only prospect of recovery was reimbursement of their own fees and expenses…

Moreover, that was said in the context of discussion of the professional responsibility of liquidators, and it does not follow that proceedings brought by liquidators inconsistently with that approach would be an abuse of process (though they may expose the liquidator to civil or disciplinary liability).

The court concluded by observing that even a “very substantial” risk that the costs of the proceedings would be disproportionate to the benefits would not render the proceedings an abuse of process.

 

Second argument – liquidator must be satisfied as to the strength of the case

The directors’ other argument was that a liquidator ought to be required to satisfy him- or herself as to the strength of his or her claim before commencing proceedings.

The court described this argument as “misconceived”:

The applicants’ submission implies that before instituting proceedings, a liquidator must conduct some kind of preliminary assessment and evaluation of the case in order to be satisfied of the constituent elements of the cause of action.

There is no such requirement of any plaintiff. A party is not required to conduct in its own mind a “mini-trial” to satisfy itself of the existence of the material facts that constitute its cause of action before instituting proceedings… A liquidator is in this respect in no different position from any other litigant.

The directors protested that Hall v Poolman expressly stated that a liquidator “is obliged to make the relevant decisions with the skill and care appropriate to his office” , and that any court proceedings “… should only be commenced after careful thought”.

The court agreed with these statements of principle but, consistently with its disposition of the other argument, pointed out that the context of the statements “was consideration of a liquidator’s professional responsibility, not the validity of proceedings”. The court said that the directors’ submission “conflates what may be proper or reasonable conduct on the part of a liquidator, with what may constitute an abuse of process”.

 

Conclusion

Thanks to yesterday’s decision, it is clear beyond doubt that it is no defence to a claim for insolvent trading (or any other monetary claim by a liquidator) that the claim is unlikely to result in a return to creditors.

This is a positive development which clarifies the law, assists the good guys, and should be welcomed by the profession.

That said, it is not the last we will hear of Hall v Poolman. Although the threat of strike out applications is diminished, the threat of disciplinary action and “civil liability” still looms large.

Accordingly, if a liquidator is in doubt about whether or not it would be appropriate to commence legal action in any given case, advice should always be sought from accomplished insolvency lawyers with experience in this field.