TGIF 22 October 2021 – Submitted for your approval: Entry into post-liquidation agreements

This week’s TGIF considers a recent decision of the Federal Court of Australia in Re Aviation 3030 Pty Ltd (in liq) [2021] FCA 1244 on section 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act) and approval of a liquidator’s proposal to enter into a settlement agreement with obligations that extend beyond three months.

Key Takeaways

• The Court’s role in approving a proposed agreement under this section is not merely to ‘rubber stamp’ a liquidator’s assessment.
  
  
• Yet, the Court will not refuse its approval unless the liquidator’s exercise of commercial judgment is ill-advised or improper in some way.
  
  
• A key consideration is the impact the agreement may have on the duration of a liquidation.

What happened?

Aviation 3030 was a land development company which raised funds from investors for the purchase and development of a large parcel of land in Victoria. The investment was successful – the initial land parcel was purchased for $7.8 million and, following re-zoning of the land, subsequently sold for $135 million. While a substantial deposit was paid, the sale contract was not due to complete until April 2023.

Shortly after the rezoning, though, Aviation 3030 issued shares to entities controlled by individuals with close familial ties to two of the three directors for a nugatory sum. This significantly diluted the shareholding of some of the original investors.

Following an ASIC investigation, liquidators were appointed by the Court to Aviation 3030 on just and equitable grounds. 

The original proceeding

Following investigations and public examinations, the liquidators commenced proceedings in March 2020 against seven defendants who were involved in (or beneficiaries of) the disputed share issue. The Liquidators sought to set aside the second share issuance as an ‘unreasonable director-related transaction’ under sections 588FDA and 588 of the Corporations Act.

After an adjournment of the original proceeding part-heard and multiple attempts at settlement, the Taing Parties, comprising four of the seven defendants, agreed to two proposed deeds of settlement with the Liquidators (Proposed Deeds). 

The Liquidators then approached the Court for approval before entering into the Proposed Deeds pursuant to section 477(2B) of the Corporations Act. This was necessary because the Proposed Deed contained obligations that would not be discharged for at least three months.

The decision

Justice Anderson approved the Liquidators entering into the Proposed Deeds. His Honour helpfully canvassed the key factors and principles that should be considered by the Court in a section 477(2B) approval process. These include that:

• the Court’s approval is not an endorsement of the proposed agreement but is instead permission for the liquidator to exercise their own commercial judgment;
  
  
• the Court should not refuse approval unless there appears to be some lack of good faith, some error in law or principle or some other substantial grounds for doubting the commercial judgment exercised by the liquidator;
  
  
• the Court’s role is to approve or grant a proposal, not suggest alternatives which may appear preferable to the deal done;
  
  
• the primary consideration is whether any impact on the duration of a liquidation is reasonable in all the circumstances;
  
  
• the terms of any agreement must be clear; and
  
  
• ideally a liquidator should seek the Court’s approval of a proposal in advance of executing the agreement, although retrospective approval can be obtained.

Duration

For Justice Anderson, the primary consideration in a section 477(2B) approval was whether the agreement might ‘unduly increase the length of liquidation’.

Here, his Honour accepted the Liquidators’ view that the Proposed Deeds would not impact the length of the liquidation as, at a minimum, the liquidation would not be completed until April 2023, when the sale contract was due to settle.

Commercial basis

Rather than justifying their commercial judgment, the Liquidators were tasked with proving that entry into the Proposed Deeds was a ‘proper exercise’ of their power and not improper or ill-advised.

The reasons relied upon by the Liquidators for entering into the Proposed Deeds included:

• affidavit evidence and privileged legal advice considered by the Liquidators;
  
  
• the net benefit of an additional 40 million shares to the initial investors;
  
  
• each investor profiting off their initial investment – an outcome not otherwise guaranteed;
  
  
• that the settlement did not affect the ongoing claim against the remaining defendants;
  
  
• that the settlement was the product of lengthy negotiations, having had the benefit of evidence from the initial hearings in the original proceeding; and
  
  
• the evidence of the liquidators that the benefits of settlement with some of the defendants outweighed the benefits of continued litigation.

Having noted that the Court’s role was neither to ‘rubber stamp’ nor ‘endorse’ a commercial agreement, Justice Anderson broadly agreed with the views of the Liquidators.

A review of the relevant affidavits and advice had convinced his Honour that the Liquidators had properly and responsibly exercised their powers and commercial judgment.

Other factors

While the original proceeding remained complex, Justice Anderson was satisfied by the Liquidators’ position that the terms and administrative steps of the settlement were clear and included contingencies for the possible outcomes of the proceeding in respect of the remaining defendants.

On the evidence presented, Justice Anderson found that there were no reasons apparent or presented which favoured rejecting the Proposed Deeds.

Comment

The Court, in this case, appeared to be influenced by the comprehensive process the Liquidators had undertaken prior to exercising their commercial judgment – including obtaining advice from counsel and solicitors involved in the settled proceeding – all of which was detailed for the Court in confidential affidavit material. 

Given the Court’s repeated emphasis that its approval is not a “rubber stamping” process, it remains important for liquidators to ensure they have properly documented their reasoning and relied on expert advice where appropriate before seeking court approval.