Federal Court of Australia

Shaw (Liquidator) v GO2 Recruitment Pty Ltd, in the matter of VCS Civil and Mining Pty Limited (in liq) [2021] FCA 681

ORDERS

THE COURT DECLARES THAT:

1.    Declares that pursuant to s 51(2) of the Federal Court of Australia Act 1976 (Cth), the proceeding is not invalid by reason of the unauthorised joinder of the claims against the Defendants in a single proceeding.

THE COURT ORDERS THAT:

2.    Orders that pursuant to r 1.34 of the Federal Court Rules 2011 (Cth) (Rules), the requirement for compliance with r 9.02(b) of the Rules be dispensed with in relation to the commencement of the proceedings on 5 February 2021.

3.    Orders that costs be reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

CHEESEMAN J:

1    The First and Second Plaintiffs are the liquidators of the Third Plaintiff, VCS Civil and Mining Pty Limited (receivers and managers appointed) (in liquidation) (the Company). The Plaintiffs commenced these proceedings against 18 defendants seeking to recover as unfair preferences separate payments made by the Company to each defendant. Proceedings of this type are sometimes called ‘mother’ or ‘mothership’ proceedings: see Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd [2019] FCA 1355 at [2].

2    The application before me is an Interlocutory Application by the Plaintiffs seeking to regularise the proceedings. The present proceedings were commenced irregularly by filing a single Originating Process under r 2.2 of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules). The irregularity derived from the fact that the proceedings were against multiple defendants but did not comply with Federal Court Rules 2011 (Cth) (Rules) in that the relief claimed does not “arise out of the same transaction or event or series of transactions or events” as is required by r 9.02(b) of the Rules.

3    The proceedings were commenced on 5 February 2021, immediately before expiration of the applicable three year limitation period imposed by s 588FF(3)(a)(i) of the Corporations Act 2001 (Cth)(Corporations Act). The application is significant for procedural and substantive reasons because if the Plaintiffs are required to commence new proceedings they will be out of time to do so. There is thus a potential for irreversible prejudice to the Company’s creditors if the Plaintiffs are required to recommence the proceedings: Johnston v Vintage Developments Pty Limited [2006] FCAFC 171 at [23].

4    For the reasons which follow I make orders substantially in the form sought by the Plaintiffs.

Background

5    The proceedings have now been resolved against 12 defendants but remain pending against six defendants. At the time the Plaintiffs’ Interlocutory Application was listed for hearing, a competing Interlocutory Application, filed by the Eighth Defendant was also listed for hearing. The Eighth Defendant sought to be removed as a party pursuant to r 9.08 of the Rules, or alternatively to have the proceedings against it dismissed. That hearing of that application was adjourned on the Eighth Defendant’s application. It proved to be unnecessary to determine the Eighth Defendant’s application because the Plaintiffs and the Eighth Defendant settled and the proceedings against the Eighth Defendant were dismissed by consent.

6    In support of their Interlocutory Application, the Plaintiffs read two affidavits of the First Plaintiff sworn on 4 February 2021 and 18 March 2021 respectively and two affidavits of Nicholas Berry, solicitor, affirmed on 18 March 2021 and 20 May 2021 respectively. Based on that evidence the following matters are established.

The Company

7    The Company was incorporated on 23 May 2012. It previously traded under the name Viento Contracting Services Pty Ltd. The Company’s sole director, Craig Matthew George Harding, was appointed on 20 May 2016. The Company’s ultimate holding company is VCS Holdings (Aust) Pty Ltd (in liquidation) (VCS Holdings).

8    The Company conducted a business of contract mining, civil earthworks and the lease of mining plant and equipment, particularly in respect of the Rose Dam Gold Mine and the Kalpini Gold Mine projects in the Pilbara region of Western Australia. The business was conducted in concert with a number of related entities.

9    At the time the Company was placed into voluntary administration, it employed approximately 139 staff. The Liquidators procured payment of unpaid employee entitlements through the Fair Entitlement Guarantee scheme.

External Appointments

Administrators

10    On 5 February 2018, Mr Harding placed the company into voluntary administration pursuant to a resolution under s 436A of the Corporations Act and the First and Second Plaintiffs were appointed as joint and several administrators of the Company under Part 5.3A of the Corporations Act. This date is deemed to be the Relation-back day: Corporations Act, s 91.

Receivers and Managers

11    Immediately following the appointment of the First and Second Plaintiffs as voluntary administrators, Jason Preston, Robert Brauer and Robert Kirman of McGrathNicol were appointed receivers and managers (the Remagen Receivers) of the Company by a secured creditor, being the trustee for the Remagen Lending Trust 2017-7.

Liquidators

12    On 13 March 2018, the Company’s creditors resolved for the Company to be wound up and the First and Second Plaintiffs were appointed as joint and several liquidators of the Company (the Liquidators) pursuant to s 491(1) of the Corporations Act.

13    On 5 February 2018, the Company’s holding company, VCS Holdings, was placed into voluntary administration, with the Liquidators being appointed first as voluntary administrators and, subsequently, as joint and several liquidators on 13 March 2018.

Insolvency of the Company

14    Based on their investigations, the Liquidators’ view is that the Company was insolvent during the Relation-back period, being the period from 5 August 2017 to the Relation-back day, and from at least 31 December 2016 up to the date of the Liquidators’ appointment.

15    As at the date of the appointment of the Liquidators, the Company had approximately 520 creditors. This included priority employee creditors, creditors claiming both fixed and floating security interests, and approximately 266 ordinary unsecured creditors. The Liquidators’ evidence is that the creditors are owed a total of over $35 million and that the debts relate primarily to costs from the Pilbarra gold mine projects. The Liquidators’ assessment of the quantum of the debts does not include the alleged preference payments which were made to creditors during the Relation-back period. The estimated quantum of the alleged preference payments made to the remaining six defendants is approximately $819,695.53.

Commencement of the Substantive Proceedings

16    As noted above, the Plaintiffs commenced one day before expiration of the 3 year limitation period under s 588FF of the Corporations Act, without obtaining leave to proceed against multiple defendants in circumstances where the precondition of doing so in r 9.02(b) was not met.

17    The Originating Process included a prayer for interim relief seeking an order, purportedly pursuant to r 9.02, that the Plaintiffs be granted leave to join the Defendants to the Originating Process as defendants. At the first case management hearing, which occurred after the expiration of the limitation period, the Plaintiffs sought timetabling orders to have the present application to regularise the proceedings heard. In their evidence the Plaintiffs explained the time taken to commence the proceedings by reference to the following issues:

(1)    difficulties the Liquidators experienced in accessing the Company’s books and records arising from their dealings with the Remagen Receivers;

(2)    inability to access the Company’s server without IT assistance occasioning a delay of several months;

(3)    inadequacy of the Company’s electronic accounting software;

(4)    the complexity of the Company's operations;

(5)    logistical constraints in accessing both hard copy materials and also electronic records arising because of restrictions imposed by the Federal and State governments in Western Australia during the period from March 2020 to June 2020 in response to the COVID-19 pandemic;

(6)    time engaged in review of voluminous documentation on the Company’s computer server, comprising 2.76 terabytes of data and including approximately 90 separate email account;

(7)    the Liquidators’ involvement in other court proceedings, including against the Company's former director for insolvent trading;

(8)    the issuing of demands or further demands to creditors which included the preparation of, and redaction of, draft pleadings, such redaction being necessary to avoid disclosure of the identity of proposed defendants which were publicly listed companies;

(9)    pre-commencement settlement of claims with the potential defendant creditors from about 14 January 2021 which gave rise to the need to amend draft court documentation to reflect those settlements and also to eliminate claims that the Liquidators ultimately elected not to pursue; and

(10)    attempts to properly exhaust all pre-litigation steps before commencing proceedings.

18    The Liquidators submit that in the circumstances they have acted with diligence. The Liquidators’ evidence demonstrates that prior to commencement they reconciled batch payments from the Company’s bank account, identified unfair preference payments in respect of 21 creditors, issued relevant demands and caused the settlement of claims against eight of the defendants.

The Position of the Defendants

19    The six defendants against whom the proceedings are still on foot have been notified of the present application. The First and Third Defendants consent to being joined to these proceedings. The Fifth Defendant through its solicitors has indicated that it neither consents to nor opposes the present application. Since the hearing of the application, the Plaintiffs have settled the proceedings against the Fifth Defendant.

20    The Fourth, Sixth, Eleventh and Seventeenth Defendants have not filed notices of appearance in these proceedings. They have each been served with copies of the Plaintiffs’ Interlocutory Application and the supporting affidavits relied on by the Plaintiffs, together with a password protected link through which the substantial exhibit to the First Plaintiff’s affidavit can be accessed. The Plaintiffs’ evidence, which was updated on the day of the hearing, confirmed that the Fourth, Sixth, Eleventh and Seventeenth Defendants have not communicated with the Plaintiffs in relation to the Interlocutory Application. They have not sought to be heard on the Interlocutory Application.

21    The Eighth Defendant initially opposed the Interlocutory Application but as noted above ultimately reached a settlement with the Plaintiffs and the proceedings have been dismissed against the Eighth Defendant.

Relevant LAW

Federal Court of Australia Act

22    Section 51 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) provides:

51    Formal defects not to invalidate

(1)    No proceedings in the Court are invalidated by a formal defect or an irregularity, unless the Court is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of the Court.

(2)    The Court or a Judge may, on such conditions (if any) as the Court or Judge thinks fit, make an order declaring that the proceeding is not invalid by reason of a defect that it or he or she considers to be formal, or by reason of an irregularity.

The Rules

23    The Corporations Rules do not in terms address the issue before the Court. By reason of r 1.3(2) of the Corporations Rules, the Rules apply.

24    The relevant Rules are extracted as follows:

1.34    Dispensing with compliance with Rules

The Court may dispense with compliance with any of these Rules, either before or after the occasion for compliance arises.

9.02    Joinder of parties—general

An application may be made by 2 or more persons, or against 2 or more persons, if:

(a)    a separate proceeding could be made by or against each person in which the same question of law or fact might arise for decision; and

(b)    all rights to relief claimed in the proceeding (whether joint, several or alternative) arise out of the same transaction or event or series of transactions or events.

Non-compliance with r 9.02

25    The present application is concerned with the consequence of the Plaintiffs having commenced proceedings against multiple defendants in circumstances where the claims pursued in the proceedings do not satisfy the precondition in r 9.02(b).

26    The Plaintiffs conceded that the proceedings were not commenced in accordance with r 9.02. They did not argue that r 9.02 authorised them to commence a single set of proceedings against multiple defendants where the alleged preference payments, and the agreements under which they were made, were unique to each defendant. Such an argument was rejected in Dudley at [23].

27    In Dudley and Dudley (Liquidator) v RHG Construction Fitout & Maintenance Pty Ltd (No 2) [2019] FCA 1723 (Dudley No 2), Jackson J considered the consequence of starting mothership proceedings without complying with r 9.02 and the principles informing the exercise of the Court’s discretion to make orders regularising such proceedings. The Dudley cases involved competing applications. In Dudley, the Court was dealing with an application by several defendants under r 9.08 in which they sought to be removed as parties. The defendants were successful in obtaining orders for their removal, however those orders were stayed to permit the plaintiffs to bring an application to regularise the proceedings. In Dudley No 2, the Court determined the subsequent application by the plaintiffs to regularise the proceedings, ultimately making orders in favour of the plaintiffs under s 51 of the Federal Court Act and r 1.34 of the Rules, as well as vacating its earlier orders for the removal of the defendants.

28     Based on the comprehensive review of the relevant authorities in Dudley and Dudley No 2 the principles relevant to the present application may be summarised as follows:

Consequence of Non-compliance

(1)    As a matter of procedure, multiple claims may only be combined in one proceeding if the necessary preconditions in r 9.02(a) and (b) are satisfied: Dudley at [27].

(2)    Failing to observe the requirements in r 9.02 does not necessarily render the commencement of proceedings a nullity, invalid or otherwise of no effect. There is no general principle that a failure to comply with a rule when taking a procedural step invalidates the step, or makes it a nullity or otherwise ineffective: Dudley at [27] and [34] citing Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; (2006) 225 CLR 364 at [14] (Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ).

(3)    Where a person makes an application required or permitted to be made to the Court by filing an originating process and the registry accepts the originating process for filing before expiration of the limitation period then proceedings have been commenced even if the manner in which they were commenced did not comply with r 9.02: Dudley at [31].

(4)    That is not to say that breaching the rules of the Court will be condoned or will have no consequences: Dudley at [34].

(5)    The unauthorised joinder of multiple parties to new proceedings is an irregularity: Dudley at [39] - [41].

(6)    Such an irregularity may be remedied under s 51 of the Federal Court Act: Dudley at [47] - [48]; Dudley No 2 at [4(3)].

(7)    The discretion in r 1.34 to dispense with compliance with the Rules is a very wide discretion and the Court ought to do what justice appears to require. The discretion extends to waiving compliance with r 9.02(b): Dudley at [45]; Dudley No 2 at [4(4)] and [16].

Discretionary Factors

(1)    Mothership proceedings come with significant procedural advantages. There will be issues of law and fact common to the claims against each of the defendants. They will potentially include the issue of when the company became insolvent, which may give rise to a substantial dispute of fact and law: Dudley No 2 at [4(1)].

(2)    Where mothership proceedings are commenced irregularly a factor in favour of the exercise of the power under r 9.08 to remove a defendant as a party will be any failure by the plaintiff to take steps to promptly regularise the proceedings: Dudley at [56]. I interpolate to add that the steps a plaintiff takes to regularise the proceedings will similarly be a significant factor in the exercise of the Court’s discretion in an application under s 51 of the Federal Court Act and r 1.34.

(3)    In an application to regularise mothership proceedings which were commenced without leave and in circumstances where expiration of the limitation period was imminent, the plaintiffs should explain why proceedings were commenced so close to the end of the limitation period, why it was not practicable to apply for leave ex parte before joining multiple unrelated defendants, and why they did not seek an extension of time to commence proceedings under s 588FF(3)(b) of the Corporations Act: Dudley at [57]; Dudley No 2 at [4(8)].

(4)    A significant factor in an application to remove a party as a defendant, and I interpolate, to regularise mothership proceedings, in the context where the relevant limitation period has expired post commencement of the proceedings, is the potential for irreversible prejudice if the liquidators are prevented from pursuing claims in the interests of unsecured creditors, who presumably have had no input into the course the liquidators have taken: Dudley at [58] - [59]; Dudley No 2 at [4(7)].

(5)    The prejudice to unsecured creditors is a substantial factor which weighs in favour of exercising the discretion to regularise proceedings of this kind. The object of the Court is not to punish parties for mistakes made in the conduct of their case, but to correct errors with the result that a decision can be made on the real matters in controversy: Caason Investments Pty Ltd v Cao [2015] FCAFC 94; (2015) 236 FCR 322 at [20] (Gilmour and Foster JJ). Even less is it the object of the Court to punish third parties for the mistakes of those who represent their interests: Dudley No 2 at [14].

29    In Jahani (liquidator) v Alfabs Mining Equipment Pty Ltd, in the matter of Delta Coal Mining Pty Limited (in liq) [2020] FCA 752 at [17] - [19], Stewart J, in the context of an urgent application for leave to join multiple defendants to mothership proceedings that had been irregularly commenced, observed that the commencement of separate proceedings would add significant costs to the pursuit of the unfair preference claims, would require allocation of significant judicial resources and would risk inconsistent findings in relation to common issues of law and fact. Justice Stewart further noted that the Court has available to it in mothership proceedings case management strategies to accommodate issues that are unique to individual defendants, including where necessary separating out from the case against a particular defendant under r 9.06 of the Rules at a stage in the proceedings when it becomes appropriate to do so. I have also taken these matters identified by Stewart J into account in considering the present application.

Consideration

30    I am satisfied on the basis of the Plaintiffs’ evidence with the explanation for why the proceedings were commenced in the way and at the time that they were. I am also satisfied that the Plaintiffs made clear their intention to seek interim relief to regularise the proceedings in their Originating Process and took steps to bring forward their application to do so at the first case management hearing.

31    Only one of the defendants actively opposed the present application based on individual factors pertaining to that defendant. That opposition fell away when the proceedings against that defendant settled. Two of the defendants consent, another neither consents nor opposes and the remaining three defendants have been notified but have taken no active part in the proceedings, including in response to the present application.

32    In addition to these matters in making the orders sought by the Plaintiffs, I have placed substantial weight on two factors in particular. First, the likely prejudice to unsecured creditors of the Company if the orders are not made. Secondly, the gains in terms of procedural efficiency and consistency in allowing the proceedings to continue in the form of mothership proceedings if and until such time as it proves to be desirable to separate out any of the claims from the proceedings as a whole.

33    Accordingly, I will make a declaration as to the validity of these proceedings under s 51(2) of the Federal Court Act and an order under r 1.34 of the Rules dispensing with compliance with r 9.02(b) in respect of the commencement of these proceedings. Counsel for the Plaintiffs accepted that the grant of relief in these terms obviates any utility in making a joinder order under r 9.05 nunc pro tunc.

Associate:

Dated:    30 June 2021

SCHEDULE OF PARTIES