Can Liquidators Delay Service of Proceedings while trying to find Litigation Funding?

By Krisha Reddy, Law Clerk and Alicia Hill, Principal, MST Lawyers.

The recent decision of the New South Wales Court of Appeal in Choy v Tiaro Coal Ltd (in liq) [2018] NSWCA 205 serves as a reminder to liquidators of the need to follow court rules in regards to service. It discusses the operation of section 63 of the Civil Procedure Act 2005 (NSW) and when the Courts will exercise their discretion to invalidate a step of the proceedings.

Background

On 8 May 2017, the liquidators of Tiaro Coal Ltd (Liquidators) filed proceedings against the directors and CFO of Tiaro Coal Ltd (Defendants). The Defendants were alleged to have breached fiduciary duties and the Corporations Act 2001 (Cth) in regards to transactions associated with coal exploration permits. The Defendants were only served with the relevant documents during the first week of November 2017, almost six months after the filing of the originating process. The reason for this delay was that the Liquidators were attempting to secure a litigation funder. The Liquidators had originally entered into a funding agreement on 4 July 2017, but then this fell through in September 2017. They were only able to get approval from the Federal Court of Australia for their alternate funding agreement on 23 October 2017. Service was effected soon after.

The Defendants sought to have the proceedings set aside but were denied by the primary judge. They then appealed to the New South Wales Court of Appeal.

Issues

There were two main issues:

  1. The interaction between the service obligations on the Liquidators under the Supreme Court (Corporations) Rules 1999 (NSW) (Corporation Rules) and the Uniform Civil Procedure Rules 2005 (NSW) (Uniform Rules) which have different service requirements; and
  2. Whether the consequences of contravening these rules justified setting the proceedings aside.

Interaction Between The Rules

The Corporation Rules and the Uniform Rules both deal with the service of originating process as follows:

  1. Rule 2.7(1) of the Corporation Rules provides that ‘as soon as practicable after filing an originating process and, in any case, at least five days before the date fixed for hearing, the plaintiff must serve a copy of the originating process and any supporting affidavit…’
  2. Rule 6.2(4) of the Uniform Rules provides that an ‘originating process is valid for service… for six months after the date on which it is filed’.

Rule 1.3(2) of the Corporation Rules also provides that where both the Corporations Rules and Uniform Rules apply, the Uniform Rules are limited to the extent that they are not inconsistent with the Corporation Rules.

While the Liquidators complied with the six-month requirement under the Uniform Rules, the Defendants argued that this six month period was neither ‘as soon as practicable after filing’ nor ‘at least five days before the date fixed for hearing’, as required by the Corporation Rules.

Ultimately the Court of Appeal agreed with the Defendants, and it was found that the Liquidators had acted in contravention of Rule 2.7 of the Corporations Rules.

Consequences Of Contravention

Section 63 of the Civil Procedure Act provides that a failure to comply with rules of court is to be treated as an irregularity. However non-compliance alone will not invalidate any step of the proceedings (s.63(2)) unless the court decides to utilise its powers to make such an order (s.63(3)). Section 63 does not outline the matters which a court must have regard to before exercising its power to set aside service of the originating process.

As such it was at the trial judge’s discretion whether the six-month delay by the Liquidators while looking for litigation funding was enough for the court to utilise its power to invalidate the proceedings.

The primary judge rejected the submissions made by the Defendants that the Liquidators had knowingly non-complied and intentionally delayed service. It was found that the decision not to effect service until liquidation funding was confirmed was ‘appropriate, prudent and responsible and not a decision for which the liquidator can be justifiably criticised’ (citing Tolcher v Gordon [2005] NSWCA 135). Further, it was found that the delay did not adversely impact the Court’s exercise of discretionary power or cause actual prejudice. As such, the primary judge did not exercise his power under section 63(3).

The Defendants challenged the findings of the primary judge on a number of grounds including the finding that it was appropriate to delay service.  

The Court of Appeal rejected all the grounds, but importantly clarified the matter of delay as follows at [71]:

The primary judge was not finding, as a universal proposition, that a liquidator ought invariably be concerned to obtain funding before commencing substantial proceedings. His Honour addressed the unchallenged evidence that the reason for the delay, of almost six months, in effecting service was delays in obtaining funding and declined to find that there had been shown to have been any impropriety in the liquidators’ taking that stance.

On the facts of the case, the liquidators had acted appropriately, and the delays in gaining litigation funding were out of their control and ultimately did not prejudice the Defendants.

Practical Implications For Liquidators

The decision of the Court of Appeal affirms that liquidators may avoid sanctions for breach of service rules while securing litigation funding, which provides some relief for when funding agreements fall through or are difficult to organise. However, liquidators must be able to demonstrate that they have acted appropriately and not in a manner that will unduly prejudice the other parties.

If you have any queries regarding the issues raised in this article, please feel free to contact Alicia Hill by email or call +61 3 8540 0292.