Thinking | 5 May 2020

The show goes on: court’s flexible approach to civil applications in light of COVID-19

By Wayne Kelcey, Katherine Payne and Pia Rossignuolo

In the decision of Goyal [1] handed down on 7 April 2020, Justice Markovic of the Federal Court has given approval to liquidators to enter into a litigation funding agreement under section 477(2B) of the Corporations Act 2001 (Cth).

The decision is a good example of the courts adopting a flexible approach, both to the approval of funding agreements, and to dealing with civil applications in light of the current COVID-19 pandemic.

After we emerge from the COVID-19 crisis, the economic impact is likely to force many businesses into liquidation and, as a corollary, applications for approval to enter funding agreements will be more prevalent.

Background

The funding agreement concerns a potential claim to recover a related party loan in the sum of $1,344,608.18. As a result of their investigations, the liquidators believe that there are reasonable prospects of recovering the loan amount. Litigation funders agreed to fund the potential litigation and provided a letter of offer and proposed funding deed in December 2019.

The liquidators did not seek approval from the creditors for entry into the funding agreement because they did not consider it practical to do so. This was both because of the current lockdown, and the nature of the creditors:

  • The Deputy Commissioner of Taxation (DCT) is the only creditor which is not related to the proposed defendants. If only DCT attended, there would be no quorum.
  • The liquidators did not wish to disclose the terms of the proposed deed to parties that had a connection to the proposed defendants.
  • Mr Goyal, one of the liquidators, was not satisfied that it would be appropriate for him to exercise his casting vote, assuming that the related party creditors voted against the funding agreement and DCT voted for it. Mr Goyal noted that there would be a greater likelihood that his remuneration would be paid if the funding agreement were entered, because it would facilitate more recoveries.

The liquidators informed the DCT about the proposed funding arrangement, and that they did not intend to hold a creditors’ meeting to consider obtaining approval for entry into the funding arrangement but intended to make application to the court. At the time of filing the affidavit material on 11 March 2020, the liquidators had not received a response from the DCT.

Application

The court determined the application on the papers and handed down written reasons on 7 April 2020 after final written submissions were filed on 1 April 2020.

The liquidators invited the court to deal with this application on the papers. In light of the current COVID-19 pandemic and the nature of the matter, Justice Markovic agreed to do so. Her Honour was satisfied that determination of the matter would not be significantly aided by an oral hearing.

The court has an express power to deal with civil matters without an oral hearing under section 20A of the Federal Court of Australia Act (1976). The section is not often relied upon. Of relevance to her Honour’s decision to forego an oral hearing was that there was no real disputed issue of fact relevant to the determination of the matter and the legal arguments raised by the plaintiff were dealt with adequately by written submissions.

Her Honour stepped through some of the key principles concerning the role of the court in granting such approval emerging from the increasing body of case law relating to approval applications under section 477(2B) of the Corporations Act 2001 (Cth). The court’s role is to review the liquidator’s proposal, paying regard to their commercial judgment and knowledge of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety.

Overall, her Honour was satisfied that the liquidators’ acceptance of the letter of offer and their proposed entry into the funding deed was, in the case of the letter of offer, and is, in the case of the funding deed, a proper exercise of their powers and not an ill-advised or improper act on their part in either case.

Conclusion

The decision demonstrates that the courts are being flexible in their approach to dealing with civil applications in the current environment. The courts will not unnecessarily require an in-person hearing where determination of the matter would not be significantly aided by an oral hearing.

By way of another example, the Federal Court has made a number of orders in the decision of Eagle[2] to facilitate a voluntary administration in the current circumstances.

In this decision, the court made orders that allowed for electronic dissemination of notices, for meetings to be held electronically and short term relief from personal liability in respect of various lease obligations. Only time will tell whether this practice continues after the COVID-19 crisis. There would seem to be no sensible reason why legal practitioners should not request the court to permit a hearing on the papers where the criteria of section 20A of the Federal Court of Australia Act 1976 (Cth) applies. This approach is consistent with practitioners’ obligations under sections 37M and 37N of the Act, would reduce imposition on the court’s valuable time and of course avoid unnecessary expense.

After we emerge from the COVID-19 crisis, it is likely that there will be many companies that are wound up in insolvency. Although the measures implemented by the Federal Government [see our article COVID-19 update: Temporary relief for financially distressed businesses - changes to the Corporations Act 2001 (Cth)) are likely to reduce the number of insolvent trading claims, the ‘armoury’ of voidable transaction claims available to a liquidator remains. If the anticipated spike in insolvencies arrives, and the interest of litigation funders in Australia continues to grow, the post COVID-19 era would seem to be fertile ground for litigation. As a corollary, applications for approval to enter funding agreements will be more prevalent:

  • the ‘post-pandemic’ landscape will likely bring into calculation in assessing whether to commence a claim and seek litigation funding;
  • the likely delays in the court proceedings caused by a backlog of cases and so a corresponding delay in the finalisation of a liquidation; and
  • the ability to recover against a judgment debtor who might be adversely affected by the devastating economic impact of the pandemic.

[1] Goyal (liquidator), in the matter of OLI 1 (in liq) [2020] FCA 450.

[2] Eagle, in the matter of Techfront Australia Pty Limited (admin appt) [2020] FCA 542.

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