Judicial responsibility for a company’s collapse, and other ‘guns to the head’.

Judges make important decisions about the legal rights of parties in dispute.  If the private parties agree, orders by consent will invariably be made as a matter of course.  Where broader issues exist, beyond the particular rights of the parties, or the court is put upon to make consent orders without time to consider the issues, the courts will resist being called upon to ‘rubber stamp’ the agreement.

We have seen that in the Westpac & ASIC decisions of the Federal Court of Australia in recent days.[1] 

In the context of insolvency, there are nearly always public interests existing.  Insolvency law in many cases requires court approval of a liquidator’s settlements with parties, or the liquidator’s entry into certain funding or service agreements. In other cases, the court approval will go to the continued existence or otherwise of the company in distress, for example to agree to a time limit being extended.

Those decisions are significant, ones that the courts need some little time to consider, and upon which to hear argument.

‘If your Honour does not approve these scheme orders immediately, you will be responsible for the collapse of the company …’

In a recent English decision, Re Noble Group[2] Justice Snowden of the High Court was presented with orders to approve a scheme of arrangement of an insolvent company under a timetable that was very short, despite the fact that the parties had been engaged in negotiations for a year.

They then came to the Court saying that unless the orders were made, the company would collapse and creditors would suffer.

The Judge was not impressed.

“178. …this is simply not an appropriate way for the parties involved to approach the Court at the end of a restructuring which has been under discussion for over a year.  As has been demonstrated on many occasions, flexibility and the ability to move swiftly when a genuine need arises is a particularly attractive and useful feature of the process for schemes of arrangement.  The Companies Court will also always do what it can to accommodate the business needs of its users.  However, it has been made crystal clear on numerous occasions that the Court is not a “rubber-stamp” for schemes of this (or any other) type.  It is important that the Court is not taken for granted and its willingness to assist must not be abused.

  1.           That means that the Judge hearing a scheme case needs to be given adequate time for pre-reading and for the hearing, including time to consider what decision to make and to prepare a judgment.  The parties involved in restructuring discussions must understand that they cannot run things down to the wire for their own benefit and without due regard for the proper process of the Court.  Negotiations must be finalised in good time.  The position should not be reached in which the Court is presented with a metaphorical “gun to the head” and the Judge is in effect told that if he does not comply with the company’s application immediately, he will be responsible for the collapse of the company because other creditors … will be unwilling to extend their deadlines”.

A gun to the head is a useful if dramatic metaphor, and one can understand judges’ response to such impositions. At the same time, there can be circumstances, which judges must accept, where urgency is inevitable.

Other examples

In some other types of cases, the parties’ lawyers ‘overlook’ that court approval is required and proceed regardless, until their oversight is realised. While courts are also not happy with such circumstances, they have accepted human failings and assisted the parties by making orders retrospectively, nunc pro tunc, as long as the orders are acceptable.[3]

Judicial guidance, or warnings

Messages are often conveyed to the profession by judges in these circumstances. Lawyers and clients will now have regard to the ASIC & Westpac precedents, and the comments of Justice Snowden in Noble.

Similar important guidance, or warning, to the insolvency profession was given by Justice Snowden in the 2016 case of Nordic Trustee v OGX,[4] as to the need for parties seeking recognition of foreign insolvency proceedings to give full disclosure to the court.  That was applied, in refusing a recognition application, in the Russian case of Danyaya Step.[5]

Too much of a rubber stamp?

In passing, it might also be said that some judges make consent orders too readily, without inquiring further.  There is the judicial pressure of time, and acceding to the parties’ decision. But there can be more involved. There was a time when the consent dismissal of a bankruptcy petition would not be made without evidence from the debtor of their solvency; nowadays, such orders are made readily. In other areas altogether, for example migration and refugee claims, consent orders are readily made.  They warrant a separate article.

Of general application

While these particular judicial comments are made in the context of financial regulation and insolvency, they are of more general application, across all litigation proceedings, but in particular where timing and the public interest is a factor.

 

 

[1] ASIC v Westpac [2019] FCA 1733; ASIC v Westpac (No 3) [2018] FCA 1701

[2] Re Noble Group Ltd [2018] EWHC 2911 (Ch) (02 November 2018)

[3] For example, In the matter of Kevin Jacobsen Pty Limited (in liquidation) [2016] NSWSC 538

[4] Nordic Trustee ASA & Anor v Ogx Petróleo E Gás SA (Em Recuperação Judicial) & Anor [2016] EWHC 25 (Ch) (12 January 2016)

[5] Cherkasov & Ors v Olegovich, the Official Receiver of Danyaya Step LLC [2017] EWHC 3153 (Ch) (05 December 2017)

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