Do liquidators have to obtain approval of the court, committee of inspection or the creditors to enter into costs agreements with their lawyers?
Yes – according to the NSW Supreme Court judgement handed down in Hutchison v Hillcrest Litigation Services Limited on 23 August 2010 (Hillcrest Proceedings).
Background to the Hillcrest Proceedings
Austin Australia Pty Limited (in liquidation) (Austin) had engaged lawyers to act in arbitration proceedings against the Auburn Council (Auburn Proceedings).
After Austin was placed into administration, Austin's administrators entered into a costs agreement with Austin's existing lawyers in the Auburn Proceedings.
Following the administrators' appointment as liquidators, Austin's existing lawyers continued to act in the Auburn Proceedings. The liquidators then entered into a litigation funding agreement with Hillcrest and later entered into a second costs agreement with Austin's lawyers.
The committee of inspection approved entry into the litigation funding agreement which provided for the retention of Austin's lawyers.
During the Hillcrest Proceedings, Hillcrest claimed that the costs agreements with Austin's lawyers were void and unenforceable as Austin's liquidators had not obtained approval under section 477(2B) of the Corporations Act 2001 (Cth).
To '477(2B)' or not to be
Section 477(2B) requires liquidators to obtain the approval of the court, the committee of inspection or a resolution of creditors before entering into an agreement which:
- has a term of three months or more; or
- imposes obligations which may be discharged more than three months after the agreement is entered.
Approval is required even if the term may end or the obligations may be discharged within the first three months of the agreement.
If approval is not obtained before entering into the agreement, liquidators are able to apply to the court for retrospective approval.
In the Hillcrest Proceedings, Austin's liquidators obtained the committee of inspection's approval after Hillcrest alleged that the costs agreements were void and unenforceable.
The court accepted the liquidator's evidence that he had not '...ever witnessed another liquidator seeking such approval before retaining lawyers to act in ongoing or prospective litigation.'
Having accepted that it was not ordinary practice for liquidators to obtain prior approval to enter into costs agreements with their lawyers, the court provided retrospective approval to enter into the costs agreements under section 477(2B) of the Corporations Act 2001 (Cth).
What does this mean for liquidators?
Although it does not appear practical, liquidators need to obtain approval to enter into costs agreements with their lawyers.
The approval should be obtained from the committee of inspection or the creditors.
If a litigation funding agreement is proposed, approval should be obtained for both the funding agreement and the costs agreement.
No longer will liquidators be able to place their hands on their hearts and say they have never heard of the need to seek approval to enter into a costs agreement with a lawyer.
For more information, please contact:
| Sydney | ||
| Martin Hirst | t (02) 9931 4871 | e mhirst@nsw.gadens.com.au |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
