The court’s approach to granting leave to proceed against a corporation in liquidation under section 500(2) of the Corporations Act
Atlas Copco Australia Pty Ltd v Max Smith Enterprises Pty Ltd  FCA 1054, Federal Court of Australia, Foster J, 17 September 2009
This case concerned judicial consideration of the principles that apply where an applicant seeks leave to commence civil proceedings against a company in liquidation. In summary, an applicant for leave must satisfy the court that there is a serious or substantial question to be tried, and that granting leave would be in the interests of justice. The court may impose conditions on the granting of leave, as was the case in this matter, directed at minimising interference with the orderly winding up of the company in liquidation.
The principal proceeding to which the leave application in this case related concerned Atlas Copco Australia Pty Ltd (Applicant), a manufacturer of construction and mining equipment, who alleged that Max Smith Enterprises Pty Ltd and Max Smith (together, Respondents) were guilty of misleading and deceptive conduct in respect of the sale of mining compressors.
In defence, the Respondents claimed that they were not responsible for the quality of the mining compressors, as the machinery had been obtained from Bedrock Drilling (Aust) Pty Ltd (In Liq) (Bedrock), who represented that the mining compressors were compliant with Australian Standard 1210 (“Unfired Pressure Vessel Code”) and certified by State WorkCover authorities.
Consequently, the Respondents wanted to bring a cross-claim against Bedrock, arguing that Bedrock was the real perpetrator of the misleading and deceptive conduct.
Bedrock was placed into liquidation on 4 June 2009 by way of creditors’ voluntary winding up, with Mr Blair Alexander Pleash (Liquidator) being appointed liquidator of the company. Bedrock had liabilities of up to $430,000 and no assets, and it was clear that the Respondents had no prospect of recovering any money from Bedrock.
Consequently, the Respondents sought an order pursuant to section 500(2) of the Corporations Act 2001 (Cth) (Act) that they be granted leave to commence proceedings against Bedrock. Section 500(2) of the Act requires the leave of the Court to be obtained before an action may be commenced against a company in liquidation.
Justice Foster granted the Respondents leave to commence proceedings against Bedrock, under section 500(2) of the Act, on the condition that the Respondents would not seek to enforce any judgment which they may obtain against Bedrock without the prior leave of the court.
(i) Relevant principles
In Foster J’s decision, his Honour was influenced by the reasoning of Lee J in Executive Director of the Department of Conservation and Land Management v Ringfab Environmental Structures Pty Ltd  FCA 1484. In that case, Lee J stated that the purpose of section 500(2) of the Act was to prevent a company in liquidation being subject to actions that are expensive and, therefore, carried on at the expense of the creditors of the company.
In determining whether leave should be granted under section 500(2) of the Act, Lee J considered whether:
- the balance of convenience lay in allowing the applicant to proceed by way of action to judgment, or by lodging a proof of debt with the liquidator (with the applicant bearing the onus of proof);
- there was a serious or substantial question to be tried; and
- there was a real dispute between the parties.
Justice Lee stated that where a liquidator has no funds to conduct a defence and there is little prospect of funds becoming available, there are strong reasons for refusing leave under section 500(2) of the Act. However, his Honour also stated that a grant of leave can be made subject to conditions directed at minimising interference with the orderly winding up of a company in liquidation.
(ii) Application of principles
Justice Foster had some reservations about granting leave under section 500(2) of the Act, as Bedrock did not have any assets and the Court ultimately could not order any monetary judgment in favour of the Respondents against Bedrock. However, the fact that a monetary judgment was unlikely to be ordered was not a determinative point, and Foster J found that the prospect of making declarations was enough to justify the grant of leave, particularly given the serious subject matter of this case, being workers safety.
In reaching an outcome, Justice Foster considered whether:
- the Respondents should be left to pursue the claim by lodging a proof of debt;
- there was a public interest in ensuring that Bedrock was identified and dealt with by the court; and
- the subject matter of the contraventions, being workers safety, was sufficiently serious.
In this case, Foster J noted that there would almost certainly be difficulties in the Respondents successfully lodging a proof of debt in the liquidation of Bedrock. However, this was not a significant matter, as there was no prospect that any funds would be available to meet a proof in any event.
In reaching the decision to grant leave, Foster J highlighted the public interest in identifying errant entities where the contraventions involved serious issues, such as the safety of workers on mine sites, as was the case in this matter.
Co-authored by Sarah Bitcon.
Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.