Beware - unfair preference mothership proceedings and joinder

1st October, 2019

Liquidators are more frequently taking advantage of so-called ‘mothership proceedings’ to pursue unfair preference claims against multiple defendants in respect of the same corporate liquidation.

For a variety of reasons such as lack of funding, liquidators sometimes commence unfair preference actions mere days before the expiry of the 3 year time limit.

The rules of court in the various Australian state jurisdictions and the federal jurisdiction regarding joinder of multiple defendants in such actions are quite similar.

Liquidators ought to be aware that commencing mothership proceedings shortly before the expiry of the 3 year time limit is fraught with danger as they are generally non-compliant with the court rules regarding joinder, and may result in those claims being statute-barred.

 

The case of Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd[1]

The liquidators of a company (Precision) commenced mothership proceedings in the Federal Court against 17 defendants about 6 days before the expiry of the 3 year time limit.

After the 3 year time limit passed, two of the defendants applied seeking orders under the Federal Court Rules 2011 that they be removed as parties to the proceedings because the liquidator had improperly joined them contrary to the court rules.

If they were successful, the liquidators’ unfair preference actions against them would effectively be statute-barred because the rules provided that any subsequent joinder would take effect from the date of the joinder order.

The court rules allow joinder of multiple defendants in one action as of right if:

  1. The same question of fact or law arises in respect of each defendant, and
  1. All rights to relief arose out of the same transaction or event (or series thereof).

The mothership unfair preference proceedings did have a common question of fact – whether the company was insolvent during the relation-back period.

However, the rights to relief against the defendants did not arise out of the same transaction or events.

Therefore, the liquidators did not have an automatic right to commence the mothership proceedings and they were non-compliant with the court rules.

Separately, the court rules allow the court in its discretion to order joinder of defendants upon an application being made by the liquidators. However, in the present case, the liquidators had not filed such an application.

The defendants sought to take advantage of this by filing their application seeking that they be removed from the proceedings knowing that, if they were so removed, a future order to join them would be unlikely given that the action against them would be statute-barred.  

The court found that the 2 objecting defendants had been improperly joined and ordered that they be removed as parties to the action. However, the court was aware of the following:

  1. The incorrect commencement of the court proceedings by the liquidators did not render the action a nullity – they were simply irregular and could be regularised by court order nunc pro tunc (after the fact);
  1. The effect of such an order would be that the actions against those 2 defendants would be statute-barred;
  1. Such a result would deprive unsecured creditors (who played no part in the incorrect commencement of the proceedings) of the benefit of the actions against the 2 defendants.

In those circumstances, the court suspended the order for 30 days to allow the liquidators the opportunity to file an application for leave nunc pro tunc to permit the original joinder of all defendants and ask the court to authorise the joinder in its discretion.

 

Future lessons

The court made it clear the case was not to be seen as condoning improper commencement of mothership proceedings or suggesting courts might be in the habit of overlooking non-compliance with the court rules.

The liquidators ran into trouble because they left commencing the court proceedings until the end of the time limit.

The appropriate steps would have been for the liquidators to apply for leave before commencing the mothership proceedings in which multiple unrelated defendants were joined.

Another course would be to commence the mothership proceedings with plenty of time before the expiry of the 3 year time limit to allow the liquidators to immediately file (and have heard) an application for leave to join the multiple defendants nunc pro tunc. If that failed, then the liquidators would have enough time to commence individual unfair preference actions against each of the defendants.

It was only the potential for irreversible prejudice to the liquidators and innocent unsecured creditors which seemed to save the liquidators in the present case.

As a firm, we have significant experience with unfair preference actions. Please feel free to contact Tony Scoglio or David Tooth on (07) 3833 2100 or info@scogliolaw.com.au if you have any questions.

 

Note: This information is not legal advice and is only provided for your general information. If you require advice specific to your circumstances, please let us know.

 

[1] [2019] FCA 1355