TGIF 6 September 2019: Warning from the Mothership: requirements for group preference claim proceedings

This week’s TGIF considers the decision in Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd [2019] FCA 1355, which serves as a reminder of the steps to be taken before commencing a ‘mothership’ preference claim proceeding.

The Federal Court has considered for the first time under its current rules the practice of commencing multiple preference claim actions in a single proceeding, known as a ‘mothership’ proceeding, and in the process seeks to remind practitioners that this approach cannot be embarked on at the expense of compliance with the rules of court.

Mothership proceedings

Each court will conduct litigation in accordance with its particular rules and these vary significantly.   Preference claims, while a creature of federal corporations legislation, are determined by both state and federal courts.  Commencing a single proceeding against multiple defendants in the preference claim scenario is governed by the rules of joinder specific to each court.

Generally, a single proceeding may only be issued against multiple defendants where it is necessary because of a common question of law or fact that arises for determination.   In the preference claim scenario, the common question of fact is not immediately apparent as each of the defendants will have had its own agreement with the insolvent company and the relevant transactions are not the same.

As a result, each state has developed its own practice for dealing with mothership proceedings, taking into account the specific rules regarding joinder.

The leading decision on this issue is Dean-Willcocks v Air Transit International Pty Ltd (2002) 55 NSWLR 64.  Since then, the Supreme Court of NSW has been a pioneer in this area and has expressed a preference in favour of mothership preference claim proceedings where possible.  

In the later decision of In the matter of Bias Boating Pty Ltd (In Liq) [2017] NSWSC 1524, Brereton J identified a number of factors for consideration in an application by the liquidator for leave to join 23 defendants to a preference claim proceeding.  Leave was required because the 23 claims did not arise out of the same transaction and, therefore, the joinder of all defendants was not available as of right.  By reference to Dean-Willcocks and the Court’s policy objectives, the relevant factors in determining whether leave to conduct the claims as a mothership proceeding were:

• The common question of the date of insolvency;
  
  
• Whether the claims would be statute barred if leave was not granted;
  
  
• The geographical location of the defendant parties; and
  
  
• The size of the claims and, therefore, the applicable jurisdictional limits.

It was also noted that sufficient time should be allowed to initiate proceedings and seek leave to join all the defendants so that, if leave is denied in respect of any of them, a separate proceeding can be issued.

Present application

A single proceeding was lodged in the Federal Court by the liquidators of Precision Catering & Equipment Pty Ltd (In Liq) against 17 corporate defendants seeking repayment of alleged unfair preferences.  

Two of the defendants challenged the manner in which the liquidators had commenced the proceeding by seeking an order that they be removed as parties to the proceeding under rule 9.08 of the Federal Court Rules 2011 (Cth).  The question the Court set out to address was how and to what extent the rules accommodate mothership proceedings.  

Relevantly, the claim was filed only a few days before the expiration of the statutory limitation period of three years from the relation back date.  If the defendants were successful in their application, the liquidators would be out of time to bring separate proceedings against them.

Outcome

The Court looked to Dean-Willcocks and Bias Boating for guidance on the basis that it is desirable to implement a nationally consistent approach.  The relevant rules were held to not authorise the liquidators to commence a mothership proceeding in this case.  However, it did not then follow that the proceeding was invalid, it was merely irregular.  A separate application for leave to proceed in this way would be required from the liquidators.

On the question as to whether the applicant defendants should be removed from the proceeding, the Court said that the failure of the liquidators to take any step to regularise the joinder of parties or to extend the limitation period is a significant factor in favour of exercising the discretion to remove those defendants.

Ultimately, the Court was concerned to protect the interests of the unsecured creditors who were to receive the greatest benefit from any recoveries made from the claims, but who had no input into the course taken by the liquidators.  To achieve this, the Court ordered that the defendants be removed from the proceeding because of the liquidators failure to comply with the rules, but stayed the operation of that order to allow the liquidators time to regularise the position.

Comment

While the courts are supportive of the recent trend towards mothership preference claim proceedings because of the efficiencies that may be achieved, liquidators should not assume that this course is automatically available to them or available in respect of all defendants.  

Care should be taken to ensure that the applicable rules of court are complied with and sufficient time is allowed before the end of the limitation period to ensure that the position can be regularised if necessary.