Liquidators: get the Court’s seal of approval or pay the cost!
Litigation, Insolvency: 03 February 2025
Author: Caroline Skeoch - Our People
In Krejci, Greatcell Solar Ltd (in liquidation) [2024] FCA 1121 (Greatcell), joint and several liquidators for Greatcell Solar Limited (in liquidation) and Greatcell Solar Australia Pty Ltd (in liquidation) sought the Court’s approval pursuant to section 477(2B) of the Corporations Act 2001 (Cth) to enter into funding and costs agreements for the purpose of pursuing litigation. The liquidators had already entered into the agreements before applying to the Court for approval.
This application was the second of its kind, with the liquidators having brought a prior application for approval of a funding agreement retrospectively. The liquidators offered no explanation in either application as to why they could not have sought Court approval before entering into the agreements.
Section 477(2B) prohibits liquidators from entering into agreements on the Company’s behalf in the absence of approval from either the Court, the committee of inspection, or creditors where the performance of the agreement will extend beyond 3 months.
The Federal Court confirmed that it did have power to approve entry into an agreement retrospectively, after agreements had been entered into. However, in so deciding the Court placed great emphasis on the decision of Warren J in Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; 35 ACLC 167, in which her honour stated, at paragraphs 9 and 10:
“In the ordinary course of insolvency practice the court would ordinarily expect that an official liquidator would be fully mindful of his or her obligations under the Law when acting as liquidator of a company. If a liquidator is unaware or uncertain of his or her obligations then legal advice should be obtained. The court has an expectation that a liquidator will be aware of the obligations and powers particularly those contained under s 477 of the Law. In order to exercise certain powers such as those under s 477(2B) a liquidator ought be aware of the necessity to obtain leave of the court or approval of creditors or the committee of inspection.
Such approval should be obtained in advance of the exercise of the power in question, although the court has the power to give a retrospective sanction in a proper case to action taken without the requisite approval: see Re Associated Travel, Leisure & Services Ltd (in liq) [1978] 1 WLR 547 ; also, A R Keay, McPherson: The Law of Company Liquidation, 4th ed, LBC Information Services, 1999, p 349.”
Whilst the Court approved the application, it expressed its disapproval of the liquidators’ failure to seek approval in advance. As a result, the Court declined to make orders that the costs of the application be costs in the winding up. The Court ordered, instead, that the liquidators bear their own costs of the approval application.
Key takeaways:
- The Court can grant retrospective approval under section 477(2B) of the Corporations Act. However, the intention of section 477(2B) is that approval will be sought and granted before the relevant agreement is entered into.
- The Court emphasised the policy reason behind the law, namely, to protect against ill-advised and improper actions on the part of a liquidator and such policy is undermined if a liquidator takes matters into his or her hands and enters into an agreement which the liquidator knows requires prior approval.
- If an application for retrospective approval cannot be avoided, liquidators should explain why that was necessary, in their supporting affidavit.
- Where liquidators make frequent/unexplained applications without offering reasons for seeking retrospective approval, the court may require the liquidators to bear their own costs.