This Time it’s Personal - Proceedings against Court appointed Liquidators personally

As practitioners would know, upon appointment of a liquidator parties are precluded from commencing or proceeding with court action against the company absent leave of the court. [1] However, what, if any, protection is provided to court appointed liquidators in respect of civil claims against them personally?

Quite distinct from, but similar to, the protection afforded by section 471B of the Corporations Act, the common law provides that leave of the court must be obtained before a plaintiff can commence proceedings against a court appointed liquidator in their personal capacity (Leave Principle).  The recent decision of the Supreme Court of Victoria in Armitage v Gainsborough Properties Pty Ltd [2] (Armitage) examines the foundations of the Leave Principle and the circumstances where a liquidator may seek refuge within its ambit.

Background

In April 2004, the Liquidator of two related companies, Chairmakers Pty Ltd (Chairmakers) and Colorclad Pty Ltd (Colorclad), disposed of a forklift and an autophoretic plant (Property).  The plaintiff claimed that at the time of the Liquidator’s disposition, Chairmakers and Colorclad were not the rightful owners of these assets, and sought leave to sue the Liquidator personally for conversion of the Property or, in the alternative, negligence. 

Rationale and threshold of the Leave Principle

In his reasons, Almond J reviewed a number of cases which highlight the basis of the Leave Principle and what is required of a plaintiff in order to obtain such leave.  His Honour made the following observations:

• the rationale behind the Leave Principle is that “the Court will protect its officers from ‘spurious’ litigation and the integrity of the winding up process” [3]
• the integrity of the winding up process will be compromised “if, for example, proceedings are initiated or continued without any legal basis or prospect of success” [4]
• generally the Court will not allow the commencement of proceedings against a liquidator unless the plaintiff can establish a prima facie case [5] although other factors may come into play [6]
• a plaintiff’s delay in seeking leave to commence proceedings can be a “powerful factor” in deciding to refuse such leave. [7] 

The Leave Principle applied

In Armitage, the plaintiff contended that leave ought to be granted for two, alternative reasons. 

Firstly, the plaintiff argued that at the time of commencing the proceedings (September 2010) the Liquidator was no longer acting as official liquidator of Chairmakers or Colorclad, as both had been wound up in 2008.  Therefore, according to the Plaintiff, there was no requirement that leave be obtained.  His Honour categorically rejected this argument, aptly noting that if this were the case, potential plaintiffs could avoid the Leave Principle by simply waiting for the liquidator’s external administration of an insolvent company to end.

Secondly, the plaintiff argued that prima facie cases of conversion and negligence had been established.  His Honour noted that it is for the applicant to satisfy the court that it has a prima facie case against the Liquidator.  His Honour then held that the plaintiff had failed to do so, citing a number of deficiencies in the plaintiff’s evidence. 

In addition to rejecting the plaintiff’s two contentions, the Court held that the plaintiff had not advanced any reasonable excuse for his delay in commencing the proceedings.  This delay spanned just under six years which, not so coincidentally, was the statutory limitation period within which the plaintiff was required to commence the proceedings.

What’s a Liquidator to do?

Unfortunately, beyond discharging one’s duties with appropriate skill and diligence, there is little a court appointed liquidator can do to ensure they are afforded the protection of the Leave Principle.  Nevertheless, the decision in Armitage should provide some comfort to Liquidators that in order for a disgruntled party to issue proceedings against them, leave will be required, as will prima facie evidence of a cause of action.