Don’t scratch the service: Court clarifies rules for service for claims commenced under the Corporations Act

This week’s TGIF considers the case of Choy v Tiaro Coal Ltd (in liq) [2018] NSWCA 205, where the NSW Court of Appeal denied leave to appeal from a decision of Justice Black, in which his Honour dismissed an application to set aside an originating process on the basis that it was not served “as soon as practicable” after it was filed, as required by rule 2.7 of the Corporations Rules.

WHAT HAPPENED?

On 10 December 2015, liquidators were appointed to Tiaro Coal Ltd (in liq). Throughout 2016, the liquidators sought to obtain funding for proceedings against a number of current and former directors and officers of the company.

In order to prevent the company’s claims becoming time-barred, the liquidators filed an originating process in the Supreme Court of NSW, but did not serve it. After further negotiations, the liquidators finally secured funding and, shortly thereafter, served the originating process, just shy of six months of the date of filing.

Whilst this was within the timeframe that service is valid under the Uniform Civil Procedure Rules 2005 (UCPR), the defendants (applicants in the appeal) sought to set aside the originating process on the basis that service was not in accordance with rule 2.7 of the Supreme Court (Corporations) Rules 1999 (Corporations Rules).

Rule 2.7 of the Corporations Rules requires an originating process to be served “as soon as practicable after filing…and, in any case, at least 5 days before the date fixed for hearing”.

DECISION AT FIRST INSTANCE

Justice Black dismissed the application to set aside the originating process. His Honour was prepared to assume, in the defendants favour, that there was non-compliance with rule 2.7 of the Corporations Rules.

Nonetheless, his Honour considered that the liquidators’ decision to wait until funding had been secured before serving was not imprudent and reflected their proper concerns that proceedings should not be commenced until the company was in a position to not only commence the proceedings, but to continue them to a determination on their merits.

His Honour also noted that there was no evidence that the defendants had suffered any actual prejudice by the delay in service.

LEAVE TO APPEAL DENIED

The NSW Court of Appeal denied leave to appeal from Justice Black’s decision and provided much-needed guidance on the relationship between the rules for service for proceedings commenced under the Corporations Act and the rules for service generally applicable under the UCPR.

The Court of Appeal held there was an inconsistency between rule 6.2(4) of the UCPR and rule 2.7 of the Corporations Rules, and that the Corporations Rules prevailed to the extent of the inconsistency. Therefore, rule 6.2(4) of the UCPR did not authorise the liquidators to delay service of the originating process by up to six months, as that would not be consistent with rule 2.7 of the Corporations Rules.

Nonetheless, the Court of Appeal denied leave to appeal from the decision of Justice Black. The Court of Appeal noted that in the ordinary course, leave to appeal would only be granted where “there is an issue of principle, a question of general public importance, or an injustice which is reasonably clear, in the sense of going beyond what is merely arguable”. This was not such a case.

Furthermore, the Court of Appeal added that even if it had found that Justice Black’s discretion had miscarried in some way, it “very much doubt[ed]” that it would have decided the case differently. The Court of Appeal considered it relevant that the originating process had been served within the six month timeframe prescribed by rule 6.2(4); that the reason for the delay in service had been explained by the liquidators; and that there was no evidence of any actual prejudice suffered by the defendants as a consequence of the delay.

KEY TAKEAWAYS

An originating process for proceedings commenced under the Corporations Act must be served “as soon as practicable”, as required by rule 2.7 of the Corporations Rules, notwithstanding the longer period for service prescribed by rule 6.2(4) for proceedings generally.

If service is not effected in accordance with rule 2.7, a plaintiff risks the possibility that the originating process could be set aside. Whilst that did not occur in this case, in a case where the delay in service is not adequately explained, or where the defendant suffers prejudice as a consequence of the delay, the Court will be more likely to set aside the originating service for non-compliance with rule 2.7 of the Corporations Rules.