In the recent decision of Sheahan, in the matter of BCI Finances Pty Limited (in liq)  FCA 1499, Justice White of the Federal Court approved the entry by liquidators into an agreement compromising the debts owed to companies to which they were appointed. The case serves as a useful restatement of the requirements of section 477(2A) & (2B) of the Corporations Act 2001.
The plaintiffs in Sheahan were the joint and several liquidators of four companies (Liquidated Companies). In 2015, the liquidators caused the Liquidated Companies to commence proceedings against former directors for alleged breaches of their duties, as well as a number of associated entities and financial institutions.
The Liquidated Companies were successful against all but two of the respondents, with further hearings determining that the aggregate amount which could be recovered pursuant to the judgments was over $110 million.
Appeals by the unsuccessful respondents and cross appeals by the Liquidated Companies were heard over four days in August 2018. The Full Federal Court was reserved in its judgment at the time of the application in Sheahan. The parties to the appeals proceedings agreed to resolve the matters in dispute for significant undisclosed payments to each of the Liquidated Companies.
Powers of a liquidator to compromise debts
Section 477(1)(d) of the Corporations Act allows the liquidator of a company to compromise any debts owed to the company and give a complete discharge in respect of such debt. This power is subject to the approval of the Court, the committee of inspection, or the company’s creditors, where the amount is greater than $20,000 pursuant to s 477(2A) and where the agreement may result in a party’s obligations extending for more than 3 months pursuant to s 477(2B).
The liquidators in Sheahan conducted concurrent creditors’ meetings for each of the Liquidated Companies, where the creditors resolved pursuant to s 477(2B) to approve the liquidators entering into the proposed settlement agreement.
On the day before the agreement was to be signed, the other parties informed the liquidators that they would not proceed unless the agreement was also approved pursuant to s 477(2A). As a meeting of creditors was not scheduled to grant such approval until a month later, the liquidators urgently brought the application before the Court.
Matters taken into account by the Court in relation to s 477(2A)
White J emphasised that the Court will not simply rubber stamp any matters put forward by a liquidator and that approval does not equate to the Court’s endorsement of a proposed compromise. The approval is instead a permission for liquidators to exercise their own commercial judgment, once the Court is satisfied that there is no sound reason to intervene.
There were a number of matters which indicated to White J that it was appropriate for the Court to grant approval in the circumstances:
- The creditors of each of the Liquidated Companies had already given approval to the proposed agreement pursuant to s 477(2B) and had informally indicated their willingness to give approval pursuant to s 477(2A).
- Despite being informed of the hearing, none of the creditors sought to be heard by the Court.
- The number of creditors was quite limited and in all matters the Deputy Commissioner of Taxation was either the only creditor, or by far the largest of the creditors. Representatives from the Deputy Commissioner had been actively involved in the negotiation of the agreement.
- The liquidators took advice from solicitors and counsel, who advised in favour of entering into the agreement. The liquidators themselves were experienced and clearly deposed that they considered the compromise to be in the best interests of the Liquidated Companies’ creditors.
- Finally, the content of the agreement was detailed and complex, reflecting close consideration and attention by the parties. In other words, it was not hastily prepared such that it gave rise to any concerns from the Court.
Lessons for liquidators seeking to compromise debts
Where a liquidator appointed to a company seeks to reach a compromise in respect of the company’s debts, careful thought should be given to the application of s 477(2A) & (2B). In the context of time-sensitive negotiations with debtors, it may be impracticable to obtain the approval of the company’s creditors on short notice.
If the Court’s approval is sought to expedite matters, liquidators should seek legal advice as to the appropriateness of the settlement and ensure that the relevant agreement is carefully drafted, to avoid any appearance of an ill-considered compromise.
Pointon Partners have extensive experience in insolvency and restructuring matters and can assist at all stages of external administration.