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Permission versus forgiveness

30 September 2013

Readers would be familiar with section 477(2B) of the Corporations Act 2001 which provides that a liquidator "must not enter into" an agreement on the company's behalf which will operate for a period longer than three months without obtaining approval from the Court or the company's creditors.  The wording of the section appears to require prospective approval.  If such an agreement has been entered into without such approval, however, does the section's prospective phrasing mean that all is lost?

In the recent case of Chan v Four C Realty Pty Ltd (in liq) [1], the plaintiff had made an offer to purchase the company's business, which included an obligation to indemnify the company for commissions that it may be required to refund in relation to development contracts that were yet to settle and which might fail to settle. An agreement was entered into which would extend longer than three months because of the nature of the indemnities.

Interestingly, it was the plaintiff, with the approval of the liquidators, who sought the Court's retrospective approval.  Gordon J noted that, "as the express words of section 477(2B) make clear and consistent with the policy underlying the section, a liquidator should seek the Court's approval before entering into a long term agreement...".  However, she went on to note that in certain circumstances, retrospective approval may be given by the Court to such agreements.

In making her determination, Gordon J outlined the principles the Courts will apply in considering whether to exercise the discretion under section 477(2B) [2]. Her Honour stated that courts will not simply "rubber stamp" whatever is put forward by a liquidator.  A court will not approve an agreement if its terms are unclear. Additionally, the Court's role is not to develop some alternative proposal which might seem preferable, but to review the liquidator's proposal having regard to his or her commercial judgment and knowledge, determine whether there has been an error of law or ground for suspecting bad faith, and weigh up whether there is a good reason to intervene in the winding up. But, the Court will grant approval under the section only where the transaction is for the proper realisation of the assets of the company or where it will assist in the winding up.  

In granting the application, Gordon J found that approving the agreement would be in the best interests of the creditors and members as there was no certainty that if the agreement was set aside and the sale process re-opened, that a better offer for the purchase of the business would be obtained. Her Honour stated that, in this case, "certainty is to be preferred over merely speculative possibilities, especially where it is inevitable that considerable time and expense would be incurred in reopening the sales process."

This decision is helpful in identifying the main considerations a Court will take into account when exercising its discretion under section 477(2B). Importantly, however, this case confirms a position postulated by earlier authorities [3], that such approval may be granted retrospectively, despite the section's prospective phrasing.

[1] Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) (No 2) [2013] FCA 959.

[2] Gordon J quoting from Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375.

[3] See Re HIH Insurance Group Limited & Ors [2001] NSWSC 308 and Empire (Aust) Nominees Pty Ltd v Vince (2000) 18 ACLC 738.


For more information, please contact:

Mark Madsen | Partner
Mullins Lawyers
t (07) 3224 0241
f (07) 3224 0333

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