By Jacob Reardon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
Under section 1337H of the Corporations Act 2001 (Cth) (“the Act”), a Court exercising Federal or State Jurisdiction can transfer a civil proceeding arising under the Act to another Court with appropriate jurisdiction where it considers that it is in the interests of justice to do so. What about where the defendant directors to an insolvent trading claim have commenced family law proceedings between themselves?
In Wiggett v Stone [2022] NSWSC 771, the liquidator had commenced insolvent trading proceedings in May 2021 in the District Court (“the District Court Proceedings”). The District Court Proceedings were brought against 2 company directors (“the Directors”) who had been married, but divorced in 2020. The Directors initially defended the proceedings jointly but by 2022 were separately represented.
In November 2021, separate proceedings had been commenced between the Directors in the Federal Circuit and Family Court of Australia seeking orders as to the division of matrimonial property under section 79 of the Family Law Act 1975 (Cth) (“the Family Court Proceedings”).
The liquidator was not a party to the Family Court Proceedings.
In December 2021, an application was filed in the New South Wales Supreme Court seeking the transfer of the District Court Proceedings to the Federal Circuit and Family Court of Australia. The liquidator opposed the transfer of the District Court Proceedings.
In support of the application it was contended that:
- The District Court Proceedings would have an impact on the Family Court Proceedings;
- There would be duplication of evidence;
- A risk of conflicting findings of fact could be avoided if one court dealt with both matters; and
- The transfer would result in the minimisation of costs.
In considering whether the discretionary power should be exercised, the Court noted that its decision depended on what the interests of justice required in the circumstances.
The Court quoted a number of factors identified by McKerracher J in Bankinvest AG v Seabrook (1988) 14 NSWLR 711 which included:
- The stage of the proceedings in the respective courts;
- The commonality or diversity of the parties;
- The nature of the proceedings;
- The commonality or diversity of the issues;
- The risk of conflicting findings of fact or conflicting orders;
- A costs benefit analysis;
- The potential unnecessary drain on judicial and other public and private resources; and
- Whether there is any particular judicial expertise residing in one court.
Separate and discrete issues
The Court found that while the risks of conflicting findings of fact were present, they did not appear to be significant and that there was no risk of conflicting orders given the differing issues which arose in the respective proceedings.
What was in issue in the District Court Proceedings concerned principally whether the Company traded whilst insolvent and whether the Directors could rely on any defence to the liquidator’s claim. On the other hand, the Family Law Proceedings concerned how the matrimonial assets should be divided.
Therefore, the Court found that the issues germane to the District Court Proceedings were separate and discrete to those in the Family Court Proceedings. Whilst both proceedings could be managed by the one court, the proposed transfer was unlikely to result in the minimisation of the overall cost burden which would ultimately disadvantage the “long out of pocket” creditors of the company in liquidation.
Delay and increase in costs
The Court said that in formulating a decision that promotes justice in all the circumstances of the matter, it is also required to consider the position of the liquidator and his responsibilities under the Act which, ultimately, are concerned with the interests of the creditors of the company.
Given that the Family Court Proceedings were only nascent and involved matters in which the liquidator was plainly not concerned, the Court found that:
- the proposed transfer would result in further unjustified delay of the resolution of the insolvent trading proceedings; and
- would lead to the inevitable further increase of the liquidator’s costs which would only disadvantage the creditors of the company in liquidation.
It appears to have been of particular relevance to the Court that the District Court Proceedings had been initiated first and were much further advanced than the Family Court Proceedings.
The Court ultimately dismissed the application for the proposed transfer with costs awarded to the liquidator.
Read the decision here
Applications to transfer proceedings (particularly in relation to insolvent trading claims) to the Federal Circuit and Family Court of Australia can sometimes be (or at least be suspected of being) a delay tactic utilised by directors to frustrate or delay the prosecution of claims by liquidators. The above case provides practitioners with some useful insight into how Courts will consider applications by parties to transfer proceedings pursuant to legislative cross-vesting under section 1337H of the Act.
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
