Benjamin Hornigold Ltd v John Bridgeman Limited [2023] FCA 1195 | Case summary

LEGISLATIVE FRAMEWORK AND LEGAL PRINCIPLES 17 Section 453S is found in Pt 5.3B of Ch 5 of the Corporations Act titled "Restructuring of a company". It prohibits the commencement or maintenance of any claim against a company which is the subject of a restructuring under that Part and provides: (1) During the restructuring of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the restructuring practitioner's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. (2) Subsection (1) does not apply to: (a) a criminal proceeding; or (b) a prescribed proceeding. I note that s 453S(2) of the Corporations Act has no application in the present case. 18 Section 452A sets out the object of Pt 5.3B of the Corporations Act and provides: The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for a restructuring process for eligible companies that allows the companies: (a) to retain control of the business, property and affairs while developing a plan to restructure with the assistance of a small business restructuring practitioner; and (b) to enter into a restructuring plan with creditors. 19 The Explanatory Memorandum to the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) by which the small business restructuring regime found in Pt 5.3B of the Corporations Act was inserted into that Act assists in understanding its purpose. Relevantly Ch 1 of the Explanatory Memorandum titled "Debt restructuring" includes: 1.2 Schedule 1 inserts a new Part 5.3B into the Corporations Act to establish a formal debt restructuring process for eligible companies. This process enables financially distressed but viable firms to restructure their existing debts. 1.3 The intention of the debt restructuring process is to provide an alternative to the 'one-size-fits-all' voluntary administration regime for small businesses with non-complex debt. It reduces the complexity and cost of the administration process, providing a greater role for the company directors during the process and allowing them to retain control over the company throughout. These changes are intended to encourage more small businesses to seek debt restructuring earlier, increasing their chances of regaining viability. 1.4 The ultimate aim of restructuring is to have a plan in place which sets out an approach to repayment of the company's existing debts, thereby enabling the company to stay in business and avoid being wound up. The restructuring process covers the period during which a plan is being developed by the business owners, following the appointment of a small business restructuring practitioner. The restructuring process may also be referred to as the period where the company is 'under restructuring' or 'during restructuring'. The restructuring process ends once the plan is in place. … 1.8 The new debt restructuring process draws heavily on the established voluntary administration framework in Part 5.3A of the Corporations Act and shares many of its features. For example, secured creditors' rights under the debt restructuring process are consistent with existing voluntary administration processes. The moratorium that applies to a third party's ability to enforce rights against the company is also consistent with the moratorium employed during voluntary administration. 20 As to the operation of the restructuring scheme s 453B of the Corporations Act provides that the company may appoint a small business restructuring practitioner in writing if the "eligibility criteria" for restructuring are met on the day of the appointment and the board of the company has resolved that the company is insolvent or likely to become insolvent at some future time and that a restructuring practitioner should be appointed. 21 Section 453C(1) of the Corporations Act sets out the "eligibility criteria" for restructuring and provides that those criteria are met if on the day of appointment of the restructuring practitioner: (1) where the regulations prescribe a test for eligibility based on the liabilities of the company, that test is satisfied; and (2) no person who is or has been a director of the company within the last 12 months has been a director of another company that has been under restructuring or been the subject of a simplified liquidation process within a period prescribed by the regulations; and (3) the company has not been under restructuring or been the subject of a simplified liquidation process within a period prescribed by the regulations. 22 Regulation 5.3B.03(1) of the Regulations provides that for the purposes of s 453C(1)(a) the test for eligibility is that the total liabilities of the company on the day that the restructuring begins must not exceed $1 million. 23 There has, it seems, been no judicial consideration of s 453S of the Corporations Act. This is likely because of the relatively recent introduction of Pt 5.3B of the Corporations Act. However, as submitted by counsel appearing for BHL: the object of Pt 5.3B of the Corporations Act is analogous to the object of Pt 5.3A of that Act which concerns voluntary administration (see s 452A and s 453A respectively). Both Parts have as their purpose the object of allowing a company to continue in existence. Counsel appearing for BHL aptly described Pt 5.3B of the Corporations Act as "the Pt 5.3A lite version"; as stated in the Explanatory Memorandum the new debt restructuring process "draws heavily on the established voluntary administration framework in Part 5.3A of the Corporations Act and shares many of its features"; and s 453S of the Corporations Act is identical in its terms to s 440D appearing in Pt 5.3A of the Corporations Act which concerns the stay that arises upon the commencement of a voluntary administration. 24 Given that, in my view, the principles propounded in relation to the operation of s 440D of the Corporations Act would apply equally to a consideration of an application for leave under s 453S of the Corporations Act. That being so I set out below a summary of the principles in relation to the former. 25 First, insofar as the objects of Pt 5.3A and Pt 5.3B of the Corporations Act are analogous, in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207; [2011] NSWSC 1305 at [37]-[38] Hammerschlag J said the following about the policy objective in Pt 5.3A and s 440D of the Corporations Act: [37] The policy underlying Pt 5.3A, as evinced by s 435A, is to maximise the chances of the beleaguered company staying alive. [38] The stay of proceedings imposed by s 440D may facilitate the achievement of this object, among others, by (a) affording the administrator time to assess and report on the company without the distraction of the proceedings; (b) putting a brake on legal and associated costs; (c) allowing time for the development of proposals which might preserve the value of the company as a going concern; (d) giving the creditors time to consider their position for the purposes of the creditors' meeting; and (e) in appropriate circumstances, preventing a creditor from obtaining some advantage over other creditors or potential creditors. 26 Secondly, in Australian Securities and Investments Commission v Marco (No 5) [2020] FCA 1512, in the context of an application for leave pursuant to s 440D(1)(b) of the Corporations Act, at [20] McKerracher J identified the factors that apply in determining whether to grant leave to proceed as follows: The factors that apply in determining whether to grant leave to proceed pursuant to s 440D(1)(b) have been the subject of consideration in Buurabalayji Thalanyji Aboriginal Corporation v Onslow Salt Pty Ltd (No 7) [2020] FCA 572; (2020) 144 ACSR 621 (at [71]-[72]). As I noted in those paragraphs, authorities such as Re Senvion GmbH (No 2) [2019] FCA 1732 per Anastassiou J (at [48]), Hopkins v AECOM Australia Pty Ltd [2012] FCA 1204 per Nicholas J (at [20]), Attard v James Legal Pty Ltd [2010] NSWCA 311 per Tobias JA (with whom Beazley and Giles JJA agreed) (at [146]-[147]) and Pybar Mining Services Pty Ltd v Challenger Gold Operations Pty Ltd [2018] SASC 156 per Doyle J (at [16]) suggest the relevant factors include: (a) whether the claim has a solid foundation and gives rise to a serious dispute; (b) whether the administrator would be unreasonably distracted from his or her statutory duties and be obliged unnecessarily to incur substantial legal costs; (c) whether the company is insured against the liability that is the subject of the proceedings; (d) the stage which the proceedings have reached; (e) who appointed the administrator; (f) who is applying for leave to proceed; (g) whether the claim is a monetary one; (h) whether the applicant will suffer any disadvantage if leave is not granted; (i) what funds the company has available to defend against litigation; and (j) whether there are good reasons for allowing a creditor to depart from the general intention of Pt 5.3A, which is that a creditor ought not be able to take action against the company in such circumstances. 27 Thirdly, s 440D and s 453S of the Corporations Act both confer a discretion on the Court. As to the exercise of that discretion, in Lianos v Order of AHEPA NSW Inc (No 2) [2020] NSWCA 304 at [24] Emmett J (with whom Macfarlan and Meagher JJA agreed) said: The discretion conferred on the Court by s 440D(1)(b) must be exercised in the light of the objects of Pt 5.3A and the effect of s 440D(1). While there have been suggestions that leave will rarely be granted, that proposition must be understood in the circumstances of the particular case in which leave is sought. Thus, it may well be that leave will rarely be granted where a claimant seeks to enforce a debt against an association that is subject to administration, where either a DOCA or a liquidation will require the lodging of a proof of debt by the claimant. If there is a real dispute about the debt, leave might well be granted but on terms that no step be taken to enforce any judgment except by way of proof of debt in the administration or winding up. On the other hand, where a claim consists of a dispute as to the ownership of property, it may well be that there would be no reason to withhold the grant of leave. Further, where a dispute concerns governance of an association, as is the present dispute, there would be every reason for leave to be granted to ensure certainty in relation to the administration or the winding up. 28 That is, by analogy, as submitted by counsel for BHL while the object of Pt 5.3B of the Corporations Act is a relevant consideration for the purposes of an assessment of whether leave should be granted pursuant to s 453S of the Corporations Act, the particular circumstances of the case in question also warrant consideration. 29 Counsel for BHL also took me to two decisions concerning the exercise of the discretion under s 471B of the Corporations Act for leave to commence a proceeding in relation to a company being wound up in insolvency and submitted that some assistance may be also drawn from those decisions. 30 In particular, in Re Ozrac Engineering New South Wales Pty Ltd (in liq) [2013] NSWSC 740 Black J considered an application for leave under s 471B in similar circumstances to those before me namely, the expiry of a limitation period was imminent and it appeared that there may have been an insurance policy in place which may have responded to the claim. In making the orders sought to commence the proceeding against the company in liquidation at [9]-[11] his Honour said: [9] Secondly, SX must show that there is good reason why it is appropriate that it be permitted to commence proceedings, albeit in this case in parallel to rather than instead of the proof of debt process. Mr Marskell, who appears for SX, identifies two bases on which that good reason is shown. The first is that SX should not be put to the risk that, if it is later necessary to commence proceedings, then it is prejudiced in those proceedings by reason of the expiry of the limitation period. That approach is supported by the decision in Re Summit Design and Construction Pty Ltd [1999] NSWSC 1136, where Austin J granted leave under s 471B of the Corporations Act to a limited extent, to permit proceedings to be commenced on terms that no further steps be taken within them so as to avoid the expiry of the relevant limitation period. That reasoning, which seems to me to be compelling, would in itself be sufficient to support the grant of leave which is sought within the limited terms in which it is sought. [10] There is, however, a second basis identified by Mr Marskell on which grant of leave might be supported, which was not present in the decision in Re Summit Design and Construction Pty Ltd. It is well established that leave will be more readily granted where a company is insured against the relevant liability. In Re Coastal Constructions Pty Ltd (in liq) (1994) 13 ACSR 329 at 32 White J pointed out that, where an insurer stands behind the company to pay any judgment obtained against it, that action does not prejudice the creditors' rights. In the present case, there is a further good reason for the grant of leave to commence the proceedings, and preserve the limitation period, because the determination of SX's proof of debt would not, in itself, bind an insurer and Ozrac's liquidator may or may not ultimately be prepared to itself pursue proceedings against the insurer; so it may be necessary for SX to bring proceedings against Ozrac in order to seek to join the insurer to those proceedings. Where that possibility is realistically open, it reinforces the desirability of ensuring that SX is not prejudiced by a limitations defence potentially arising. [11] I note that SX has served the relevant application upon the liquidator. By letter dated 8 April 2013 the liquidator advised that he had limited time to review the document served upon him but neither consented nor objected to the application for leave. The liquidator was not represented on this application. To similar effect see: Re Reed Constructions Australia Pty Ltd (In Liquidation) [2015] NSWSC 2033.

CONSIDERATION 31 Insofar as the proceeding commenced by BHL was concerned I was satisfied that I should exercise my discretion in favour of making the order BHL sought granting it leave to commence the proceeding against JBM for the following reasons: (1) the claims as set out in the draft statement of claim appear to have a solid foundation and support a conclusion that there is a serious dispute between the parties including as between BHL and JBM; (2) as the relief sought by BHL was limited to the commencement of this proceeding and it will require leave if it is to take any further step in the proceeding against JBM, the restructuring practitioner could not be unreasonably distracted by the proceeding nor required to incur substantial legal costs as a consequence of the grant of leave; (3) relatedly, while Mr Weatherley, the restructuring practitioner did not consent to the grant of leave to commence the proceeding against JBM he informed BHL that he had no objection to it (see [16] above); (4) given the imminent expiry of the limitation period in relation to BHL's claims arising from one of the loan transactions, it would be prejudiced if it was unable to commence the proceeding against JBM in relation to those claims prior to the expiry of the limitation period; (5) it is likely that JBM holds an insurance policy which would respond to BHL's claims. As identified by McKerracher J in Marco (No 5) a relevant factor to be considered in the exercise of the discretion under s 440D of the Corporations Act, and by analogy s 453S, is whether the company is insured. See too the approach taken in Ozrac; and (6) having regard to the value of BHL's claim, which exceeds $1 million, there is a real likelihood that the restructuring process will come to an end. That is, JBM will not meet the eligibility criteria for the restructuring process provided for in Pt 5.3B of the Corporations Act (see [21]-[22] above). Indeed, Mr Weatherley seems to acknowledge that possibility in his letter dated 6 September 2023 (see [16] above). 32 In short, as submitted by BHL, the likely termination of the restructuring together with the imminent expiry of the limitation period for some of the claims made by it in its draft statement of claim is a further and somewhat compelling reason to permit BHL to depart from the general intention of Pt 5.3B of the Corporations Act. Namely that a creditor ought not to be permitted to take action against a company that is the subject of a Pt 5.3B restructuring.

Benjamin Hornigold Ltd v John Bridgeman Limited

At a glance

Court

Decision date

Before

Source

Judgment (9 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (12)