In the September Insolvency Update in the case of Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed)  FCA 807 , Siopsis J declined to approve the liquidator's entry into a litigation agreement. Liquidators' must adequately demonstrate prospects of success in potential litigation for the courts to approve entry into the agreement.
However, recently the Federal Court in Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed)  FCA 1072 (27 September 2012) reconsidered this decision, and granted approval to the liquidators to enter into the same funding agreement .
Gilmour J identified relevant principles to determining whether to grant approval under s 477(2B) of the Corporations Act 2001 (Cth) as:
- The role of the court is to grant or deny approval to the Liquidators' proposal: Re The Bell Group Ltd (in liq)  WASC 235 at ;
- The task of the court is not to reconsider all of the issues which have been weighed up by the Liquidators or to second guess the Liquidators' judgment. Thus the Court's role is not to determine if the Liquidators' proposal is the best available option, to develop some alternative proposal which might seem preferable or to substitute its own views for those of the Liquidators: Re The Bell Group Ltd (in liq) at ; Re Addstone Pty Ltd (In Liquidation) (1998) 83 FCR 583 at 593-594.
- Rather, the court must review the Liquidators' proposal to "be satisfied that the liquidator is acting in good faith in the making of the commercial judgment in respect of which the Court is being asked to make an order": Re Addstone Pty Ltd (In Liquidation) at 594.
In granting the application, His Honour found the following factors:
- It was in the best interests of creditors that the investigations be undertaken and the liquidators and a specified law firm be retained;
- Furthermore, the committee of inspection of the Companies had approved entry into the funding agreement and retainer of the lawyers;
- Without entry into the agreement there would be no returns to unsecured creditors;
- The liquidators made extensive enquiries as to alternative funding without success, and;
- The liquidators made the application in good faith.
Where the Court is satisfied that the liquidators have acted in good faith and for proper purposes, the Court will give liquidators' permission to exercise their own commercial judgment.
Initially, the liquidators had failed to adduce evidence which sufficiently addressed these factors.
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