The Benefits of Boarding the Mothership
04 June 2020
1. Unfair Preference Claims
One of the most commonly utilised recovery tools in a liquidator's toolbox is the "unfair preferenceclaim. This claim is brought pursuant to section 588FA of the Corporations Act and enables a liquidator to recover payments made to creditors in the six months leading up to the insolvency event (or two years if they are a related party) that were preferential in nature, in that the creditor received more from the company than it would in a winding up scenario.
In most liquidations there will be many such claims ranging in quantum and against both trade creditors, unsecured lenders and government bodies such as the ATO and SRO. Each liquidator will have their own notion of the most effective way to pursue these claims, but a typical approach will involve pursuing the "low-hanging fruit€, namely one of the easier claims to obtain some money (often against the ATO or SRO) which is used to fund the other claims.
While there are differing strategies in the pursuit of preference claims, an important but under-utilised mechanism involves "mother proceedingsor "mothership proceedingswhich can be used to pursue multiple unfair preference claims under one umbrella proceeding. For the appropriate matter, there are economies of scale in this strategy that can mean a greater return for the creditors of the insolvency company.
2. What is a Mothership Proceeding?
In the insolvency context a mothership proceeding involves a plaintiff, generally a liquidator, issuing a single proceeding in respect of multiple unfair preference claims. As stated by Austin J in Dean-Willcocks v Air Transit International, 'the advantages to the liquidator [of a mothership proceeding] are obvious'. They include:
- All claims are pursued in the same Court, regardless of the amount involved;
- All parties to impugned transactions are bound by the decision of the Court with respect to such matters as insolvency, rather than being affected by presumptions which they may each rebut; and
- Most importantly, from a financial perspective, there is a single filing fee (which is not an insubstantial consideration where a very large number of impugned transactions are involved).
Can I board the Mothership?
While courts have indicated a general willingness for multiple preference claims to be brought in a single proceeding, liquidators will need to be conscious of the differing requirements of the rules specific to each Court. In any event, it is advisable to seek the leave of the Court in commencing a mothership proceeding prior to such commencement, or at the least as soon as practicable after that commencement.
The key question in joinder of claims is whether there is a common question of law or fact that arises in all the proceedings. While there are often quite different and unique factual matrices in the various preference claims, for example in the creditor's knowledge or suspicion of insolvency (and therefore the common question of fact is not satisfied) , courts in both Victoria and New South Wales have demonstrated a willingness to allow mothership preference claims in circumstances where:
- there is a common question on the date of insolvency, and the factors that give rise to the conclusion that the Company is insolvent;
- there is geographical proximity of the parties;
- there is a public interest in minimising the costs.
It should be noted that while there has been a recent trend to allowing this type of joinder, it is dangerous to assume that the Court will permit mothership proceedings. We strongly recommend applying for leave to proceed in this way, and doing so well in advance of the expiry of the limitation period - this will allow the regularisation of the proceedings, or if necessary to consider the commerciality of bringing the proceedings separately if the Court is not willing to grant the requested leave.
Aitken Partners' Insolvency team is here to assist insolvency practitioners in assessing the merits of unfair preference claims and the best mechanism to maximise the returns from litigation. If you need legal assistance with any aspect of an unfair preference claim, please contact the following members of our team:
With Sam Merrylees