Earth to the Mothership: a reminder to liquidators bringing group unfair preference claims to follow the rules

2 March 2020
Kimberley Arden, Partner, Brisbane

Recently, some liquidators appear to prefer to commence unfair preference claims against multiple defendants within a single proceeding, rather than multiple separate proceedings. Proceedings commenced in this way are often referred to as ‘mothership proceedings’. The appeal of ‘mothership proceedings’ from the liquidators’ point of view is obvious.

Justice Brereton in Re Bias Boating Pty Ltd[1]  highlighted a number of efficiencies, both in terms of money and time, for liquidators and for the courts (and by extension the community) in conducting and managing one such proceeding rather than multiple proceedings.  His Honour also pointed out the advantage of having common questions, usually concerning insolvency, determined within a single proceeding before determining questions of defences unique to each individual defendant separately.

A party who wants to commence a mothership proceeding will need to have regard to the rules of joinder specific to each court. Ordinarily, a single proceeding involving multiple defendants should be commenced only where the claim as against those defendants arises out of a common question of fact or law.

In unfair preference claims, usually each defendant will have an agreement with the insolvent company and will have engaged in transactions with the insolvent company, which are completely separate from any interactions another defendant might have had with the insolvent company. In those circumstances, it can be difficult to identify a common question of fact.

Nonetheless, courts (particularly the Supreme Court of New South Wales) have readily granted leave to join parties in mothership unfair preference claims, particularly where:

    1. there is a common question on the date of insolvency;
    2. the limitation period in respect of the claim has expired;
    3. the parties are geographically proximate; and
    4. the claims are sizeable, and thus the applicable jurisdictional limits are consistent.[2]

However, it should not be readily assumed that leave to join parties will be granted.

 

Dudley & Cribb (Liquidators) v RHG Construction Fitout & Maintenance Pty Ltd [2019] FCA 1355 (RHG Construction)

In RHG Construction, the Liquidators commenced a single proceeding in respect of unfair preference claims against 17 defendants. The proceedings were accordingly mothership proceedings and were commenced a few days prior to the expiry of the relevant limitation period.

Two defendants brought an application to be removed as parties to the proceedings, by challenging the manner in which the Liquidators had commenced the proceedings. The stakes were relatively high. If the defendants were successful in their application to be removed as parties, the Liquidators would have been unable to commence separate proceedings against them due to the expiry of the relevant limitation period.

In considering the defendants’ application, Justice Jackson held that the Federal Court Rules 2011 (Cth) (the Rules) did not authorise the Liquidators to commence the claims as a mothership proceeding. Justice Jackson considered that the failure to observe the requirements of the Rules, however, did not necessarily mean that the proceedings were invalid, rather, they were irregular. Accordingly, his Honour considered that the Liquidators should have brought a separate application to regularise the proceedings under the Rules.

While the Court ordered that the defendants be removed as parties to the proceedings (as they had not been properly joined to the proceedings pursuant to the Rules) his Honour stayed the operation of that order for 30 days.  This would allow the Liquidators to bring an application to regularise the proceedings under the Rules.

Justice Jackson noted two factors he considered relevant to staying the operation of the order removing the defendants:

    1. The potential irreversible prejudice of removing the defendants which would prevent the Liquidators from pursuing their claims against them as a result of expiry of the limitation period; and
    2. That the Liquidators represent unsecured creditors, who had no input in the course taken by the Liquidators, and who should not be penalised as a result.

 

Possible Reform?

Decisions such as RHG Construction have led to suggestions that this issue should be the subject of reform to court rules insofar as they apply to liquidators’ proceedings for unfair preference claims against multiple defendants.

 

Key takeaway

While the courts can be generally supportive of mothership preference claims because of the time benefits and cost efficiencies, liquidators should not assume that this course will automatically be available.

Prior to commencing proceedings, it is wise to consider the applicable court rules and whether there is sufficient time before the end of any applicable limitation period to ensure that mothership proceedings can be regularised, if necessary.

 


[1] [2017] NSWSC 1524 at [18].

[2]Dean-Willcocks v Air Transit International Pty Ltd (2002) 55 NSWLR 64; Bias Boating Pty Ltd (In Liq) [2017] NSWSC 1524.

 


Authored by:

Kimberley Arden, Partner
Rachel Zagorskis, Associate

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

Get in touch