Australia: Referees enter the insolvency game

Federal Court refers the determination of insolvency questions to independent expert

In brief

The Federal Court has ordered that an insolvency professional be appointed to act as a referee and to decide questions of insolvency in relation to a series of alleged unfair preferences, rather than have the judge undertake that task.


Key takeaways

Predicting the future in restructuring and insolvency work is currently a difficult, albeit topical, pastime. One thing is certain - we can expect more new liquidations next year than is currently the case.  A recent Federal Court decision may give us a glimpse of the future for companies where there are sizeable and numerous preference claims to be pursued.  And the future may be more work for insolvency practitioners.

In the recent case of Jahani (liquidator) v Commissioner of Taxation, in the matter of Delta Coal Mining Pty Ltd (in liq) [2020] FCA 1642, Justice Stewart in the Federal Court ordered that an insolvency practitioner decide the question of when a company was insolvent, acting as a referee and reporting on that factual issue, rather than have the judge consider herself or himself the evidence to reach a conclusion on solvency.

In detail

In 2017, administrators were appointed to four related companies - Delta Coal Mining Pty Ltd, Delta Mining Pty Ltd, SBD Services Pty Ltd and Delta SBD Ltd (the Delta Group), which subsequently entered liquidation. The now liquidators commenced proceedings in the Federal Court this year pursuing 28 recipients of payments in the 6 months before the administration commenced, as unfair preference payments. Separate proceedings were brought against the Commissioner of Taxation (Commissioner). A key issue in all of these proceedings was whether the Delta Group was insolvent on each of the various dates of the respective payments. 

In working out the best way to efficiently manage these claims, Justice Stewart addressed two sets of issues: (a) whether to allow one combined "mothership" proceeding and (b) how to manage the issue of the multiple parties' competing allegations as to the question of insolvency.

In the Federal Court, before a plaintiff brings proceedings (in this case, unfair preference claims) against multiple separate defendants, the Court must approve that course and give leave. Here, Justice Stewart gave that leave in May 2020.  By November 2020, the liquidators had settled with 14 parties, leaving 14 still in the proceedings. For the more orderly resolution of the remaining claims, the liquidators sought to join the proceedings against the Commissioner. The judge agreed there should be one mothership proceeding, and consolidated the two cases.

The liquidators also applied for a referee to be appointed to conduct an enquiry and report as to when the Delta Group was insolvent. The Federal Court has a broad power to refer questions in a proceeding for report by a referee. Justice Stewart made orders to this effect on the basis that it was appropriate. Overall, the desirability of avoiding the possibility of multiple defendants, each putting up competing positions, coupled with duplicated cross-examination, the overall time commitment required in a trial, the procedural messiness, and the overall cost, weighed in favour these questions being determined by an expert. Parties have an opportunity to make submissions as to whether or not all or part of the report should be adopted at a hearing following the completion of the report.

This decision follows a number of other recent Federal Court decisions where the question of insolvency has also been referred out. In both Weston v Rajan [2019] FCA 1455 and Stone v Ebeid [2020] FCA 343 the Court ordered the question of insolvency in two insolvent trading claims against one director be sent to a referee. In both cases, a registered liquidator was appointed to undertake that role.

Together, the cases appear to mark a trend for at least the Federal Court to have these matters effectively determined by a third party. That approach can have advantages from a liquidator's perspective in reducing the cost and effort of pursuing multiple claims, and at the same time from a creditor's perspective reducing the forensic scrutiny of the evidence on that questio

This alert was authored by Emmalee Pacillo.


Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.