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Supreme Court judgments

Supreme Court judgments

By Professor Greg Reinhardt

Courts Judgment 


Approval of compromise made by liquidators of company McDermott and Potts in their capacity as joint and several liquidators of Lonnex Pty Ltd (in liquidation) [2019] VSCA 23 (unreported, 19 February 2019, no S APCI 2018 0018, Whelan AP, McLeish and Hargrave JJA). Before the appointment of Mr Potts, Mr McDermott as sole liquidator caused Lonnex to commence a proceeding against Lonnex & Millennium Management Holdings Pty Ltd (LMMH). Lonnex sought, among other things, declarations that a release of debts which it gave to LMMH was an uncommercial transaction under s588FB of the Corporations Act 2001 (Cth) ‘the Act) and an unreasonable director-related transaction under s588FDA and judgment in the sum of $22 million. Lonnex sold two medical clinics to LMMH for $22 million payable by an intercompany loan. On the same day, the loan, less some liabilities, was forgiven by Lonnex. Lonnex was wound up by members’ resolution. Consequent upon a mediation, the liquidators sought the approval of the Court to compromise a settlement reached with LMMH under ss477(2B) and 511 of the Act (s479(3C) is the equivalent provision to s511 in relation to court-appointed liquidators) (and see now Insolvency Law Reform Act 2016 (Cth) (Insolvency Practice Schedule (Corporations) ss90-15 and 90-20)). This was opposed by all creditors, but particularly the Deputy Commissioner of Taxation who had provided funding to the liquidator. An associate judge of the Court refused to approve the compromise (the Commissioner appeared on the application to approve the compromise to oppose the application). The application for leave to appeal provided the opportunity for the Court of Appeal to review the principles relevant to compromise and the authorities relevant to those principles. The Court set out the principles drawn from the review at [92] as follows: “(1) The nature of the inquiry undertaken by the court when approval is sought under s477(2B) in relation to a proposed compromise of litigation is different from the nature of the inquiry the court undertakes under s511 when a liquidator seeks directions in relation to such a compromise. (2) On a directions application the court must be positively persuaded that the liquidator’s decision to enter into the compromise is, in all the circumstances, a proper one. This necessarily involves a broad consideration of all the relevant circumstances. A direction will exonerate the liquidator. (3) In contrast, the discrete consideration of an application under s477(2B) involves a more circumscribed inquiry. The court reviews the liquidator’s proposal, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene. An order under s477(2B) does not constitute an endorsement of the proposed compromise. An approval will not exonerate the liquidator. (4) Given that the nature of the inquiry undertaken in relation to the directions application is broader than that under s477(2B), it would usually be convenient to deal with the directions application first, and often that consideration would substantially overtake any discrete consideration of the application under s477(2B). (5) The court always pays due regard to the commercial judgment of the liquidator, and, on both applications, the attitudes of creditors are also important. (6) On both applications, but particularly the application for directions, it would ordinarily be expected that a liquidator would have obtained appropriate legal advice in relation to the proposed compromise, and the nature and content of that advice is a relevant consideration. (7) While the focus of s477(2B) is delay, the inquiry under s477(2B) still requires consideration of the substance of the proposed compromise. If a related application for directions reveals either that the directions should, or should not, be given, discrete consideration of the application under s477(2B) may be superfluous”. The Court noted at [93]: “It can be seen that the authorities present a tension in the circumstances of the applications the subject of the present case. The liquidator is ordinarily best placed to determine what course the liquidation should take, in the interests of creditors, any contributories and the proper recovery of the costs and expenses of the liquidation. The court will generally not enter into the merits of that determination, confining itself to the question whether the proposed course is a proper one for the liquidator to take. At the same time, the interests and wishes of creditors are highly influential and the creditors are, if properly informed, in the best position to evaluate what is in their own interests. As such, the views of the creditors as to the merits of the present proposal are a highly material consideration”. The Court concluded on an application of these principles at [107]: ”In summary, the associate judge took account of the issues regarding funding, the desires and wishes of the creditors, the commercial decision of the liquidators, the legal opinion and the relevance of the Millennium liquidation and proceeding. It has not been shown that, in weighing those matters, he applied a wrong test, ignored relevant matters or took account of things that were irrelevant to his decision. It was open to him to reach the decision he did. He was not bound to grant the relief sought, on the material before him. Error in the exercise of the associate judge’s discretion has not been established”. The application for leave to appeal was granted and the appeal dismissed. Professor Greg Reinhardt is executive director of the Australasian Institute of Judicial Administration and a member of the Faculty of Law at Monash University, ph 9600 1311, email Gregory.Reinhardt@monash.edu. The numbers in square brackets in the text refer to the paragraph numbers in the judgment. The full version of this judgment can be found at www.austlii.edu.au.

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