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Is it Easier to bring Proceedings Against Companies in Administration?

 

15 December, 2011

 

In brief: 

 

In a welcome development for anyone wanting to bring court proceedings against a company in administration, the NSW Supreme Court has lifted the statutory moratorium on proceedings against a company in administration to allow a plaintiff to enforce an arbitral award. It has also clarified its role in enforcing arbitral awards. 

 

How does it affect you?

 

  • There is no general rule that the court will only grant leave to bring proceedings against a company in voluntary administration on rare occasions.

 

  • Depending on the nature of the award, a court may lift the statutory stay of proceedings to allow a party to enforce an arbitral award against a company in administration.

 

Background and facts

 

Larkden Pty Limited and Lloyd Energy Systems Pty Limited were parties to a licensing agreement for certain technologies (the technologies). Their agreement contained an arbitration clause.

 

In 2010, a dispute arose between the parties regarding the ownership of certain improvements to the technologies. These improvements were included in a patent application filed in a number of jurisdictions (the patent application family) by Solfast Pty Limited. Lloyd was Solfast's sole shareholder. The dispute was arbitrated.

 

On 7 September 2011, the arbitrator published draft reasons finding in favour of Larkden on the intellectual property aspects of the arbitration. Lloyd then went into voluntary administration on 13 September 2011. Voluntary administration creates a stay on proceedings in a court,* unless the administrator gives consent or the court grants leave. However, an arbitration is not a proceeding in a court and so it is not stayed by a voluntary administration.**

 

On 21 September 2011, the arbitrator issued his arbitral award. The orders included a declaration that Lloyd's rights, title and interest in Solfast were to be held on constructive trust for Larkden and an order that Lloyd procure Solfast to transfer its patent application family to Lloyd.

 

Larkden commenced proceedings in the NSW Supreme Court seeking to have the arbitral award recognised and enforced against Lloyd under section 35 of the Commercial Arbitration Act 2010 (NSW) and seeking leave to proceed against Lloyd to enable it to do so. Justice Hammerschlag delivered two separate decisions: the first on the leave application;*** and the second on the application to enforce the award.****

 

The application to lift stay

 

Courts have rarely been prepared to grant leave to permit a party to bring proceedings against a company in administration. Where leave has been granted in the past, it has often been with conditions.*****

 

Lloyd's administrators opposed Larkden's application for leave. They contended that the proceedings would distract the administrators and lead to costs being incurred by Lloyd. Lloyd also relied on prior cases which said that leave to proceed against a company in administration should only rarely be granted****** and that the issue should be approached with caution.******* Justice Hammerschlag, however, held that to adopt an approach requiring a greater degree of caution to be exercised than the court would when exercising discretion in other statutory contexts would be an 'unwarranted confinement' of the court's discretion******** and go beyond what is required under s440D. He lifted the stay, allowing Larkden to continue with the proceedings, because:

 

  • as the arbitration had concluded, these proceedings would be of minimal distraction to the administrator;

 

  • he had given the administrator an extension for the convening period for the second creditors' meeting, giving him more time to perform his role;

 

  • the orders the subject of the award were largely proprietary in nature and there would be minimal prejudice to other unsecured creditors; and

 

  • the objections that the administrators had to the recognition of the award were largely based on points of law rather than fact.

 

While granting leave, his Honour noted that decisions to grant leave for a party to commence proceedings would be determined on a case-by-case approach.

 

Justice Hammerschlag noted that, unlike court proceedings, arbitrations are not stayed by voluntary administration. A court can only refuse to enforce arbitral awards in defined circumstances.********* While a stay is not a refusal, it is an impediment to enforcement.

 

Recognition and enforcement of award

 

Lloyd objected to the recognition and enforcement of the award asserting that the orders in the award relating to Lloyd's interests, the patent application family and in Solfast itself were matters outside the scope of the arbitration clause in the licensing agreement********** and the recognition or enforcement of the award would be contrary to the public policy.*********** Justice Hammerschlag rejected these objections and made orders to recognise and enforce the award. 

 

Comment

 

The implications of this decision arguably make it easier for a person to proceed against a company in administration. The traditional approach of there being a starting point that leave should rarely be granted has been superseded by one that looks to the circumstances of each case. This is a welcome development from the perspective of any person wanting to bring court proceedings against a company in administration. Where the proceedings relate to the enforcement of an arbitral award in relation to an arbitral hearing that has occurred before the administration began, the level of disruption on the administrator would be minimal, as the substantive issues have already been the subject of the arbitration. In such cases, as was the case here, the court is likely to lift the stay.

 

Footnotes

 

*Corporations Act 2001 (Cth) s440D(1).

**Auburn Council v Austin Australia Pty Limited (Administrators Appointed) (2004) 22 ACLC 766.

***Larkden Pty Limited v Lloyd Energy Systems Pty Limited [2011] NSWSC 1305.

****Larkden Pty Limited v Lloyd Energy Systems Pty Limited [2011] NSWSC 1331.

*****See for eg Foxcroft v The Inc Group Pty Limited (1994) 15 ACSR 203, 205 (Justice Young).

******Ibid.

*******Brian Rochford Limited v Textile Clothing and Footwear Union of NSW (1998) 30 ACSR 38, 58 (Justice Austin).

********[2011] NSWSC 1305, [36].

*********see Commercial Arbitration Act 2010 (NSW) s36.

**********Commercial Arbitration Act 2010 (NSW) s36(1)(a)(iii).

***********Commercial Arbitration Act 2010 (NSW) s36(1)(b)(ii).

 

 

For further information, please contact:

 

Michael Quinlan, Allens Arthur Robinson

michael.quinlan@aar.com.au

 

Jonathan Adamopoulos, Allens Arthur Robinson

jonathan.adamopoulos@aar.com.au 

 

 

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