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Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Caution against “reasoning backwards” in assessing the validity of liquidators’ litigation

A judge has cautioned against “reasoning backwards” to assume that insolvency practitioners’ failed or injudicious legal proceedings either should not reasonably have been commenced or continued, noting that the conduct of litigation often involves difficult strategic decisions, the outcomes of which are notoriously difficult to predict.

ASIC’s claim that the liquidator had breached his duties in continuing recovery litigation given the cost and time involved was rejected.

Following ASIC’s loss against a liquidator in the Federal Court, it has now suffered a further loss in a matter before a Supreme Court, though with part “success”: ASIC v Macks (No 4) [2020] SASC 209.

On ASIC’s application, Justice Doyle was applying for an inquiry into the conduct of a liquidator, Peter Macks, under former s 536(1) of the Corporations Act in relation to two aspects of Macks’ conduct as the liquidator of companies to which he was appointed in 2001.  ASIC had commenced its investigations in 2009.

The conduct of litigation after 2006

The first and main aspect of the inquiry was as to Macks’ claimed failure to exercise skill and care as liquidator under s 180 of the Corporations Act in pursuing and defending court recovery proceedings, from April 2006 onwards.  The costs of these proceedings greatly exceeded the amount sought to be recovered.

Justice Doyle analysed the legal strategy adopted by Macks in April 2006 as reasonable in the circumstances as they existed at the time. It initially appeared that this strategy had succeeded but with a “combative and at time vexatious approach” adopted by the other side, the matter continued for some time.

“This approach not only caused a large proportion of the legal fees that were incurred, but also added to the dilemma faced by Mr Macks in deciding an appropriate way forward at various stages in the litigation”.

While legitimate criticisms could be made of Macks’ conduct and that of his lawyers in handling of the litigation, this did not mean that he was in breach of his statutory duties under s 180.

The level of fees also reflected poorly on

“our legal system’s ability to ensure proportionate outcomes in litigation. Unfortunately, it is all too common an occurrence in modern litigation that the costs become disproportionate to the issues and amounts at stake”.

In making that finding, the Judge cautioned against “reasoning backwards” to assume that the proceedings either should not reasonably have been commenced, or continued, noting that the conduct of litigation often involves difficult strategic decisions, the outcomes of which are notoriously difficult to predict.

Cases such as Hall v Poolman recognise that

“there is often an element of public interest in the pursuit of recovery actions by liquidators, and that this may justify the pursuit of legal proceedings beyond the point where there is a realistic prospect of recovery by creditors and hence to a point where the only beneficiaries of success in the litigation will be the professionals who have incurred fees in its pursuit”.

There are limits to this, and proportionality remains a guiding consideration. Here, rather than Macks trying to exploit an opportunity to generate fees for himself, it seemed that he was generally concerned to keep the fees to a minimum, a concern he expressed to his legal advisers throughout.

“It would be unfortunate if an intransigent defendant, particularly one with access to a sympathetic person with legal qualifications, could force a liquidator to abandon a meritorious recovery action by adopting an abusive approach to the conduct of their defence of that action. As the Full Court in the Viscariello proceedings acknowledged, in circumstances where a liquidator is faced with a defendant who resists recovery proceedings in a manner calculated to cause maximum expense and delay, the courts must be astute to ensure that they do not provide a charter to recalcitrant defendants. Rather, a liquidator should, in my view, be afforded a degree of latitude in their response to a defendant who deploys such a tactic”.

That did not mean that a liquidator was entitled to

“take a bloody-minded approach to litigation when confronted with a difficult defendant. But is will sometimes be appropriate to permit a liquidator some latitude to adopt a robust approach in such circumstances, and to continue that approach past the point where there is any likelihood of a recovery …”.

That latitude is all the more appropriate in a case where the liquidator cannot unilaterally abandon the litigation in question without incurring significant (and potentially ongoing) costs.

Where a liquidator is spending funds that would otherwise go to creditors, the liquidator has less scope to continue with legal proceedings that have become uncommercial. But that was not the case here, with the risk borne solely by Macks’ then firm and his lawyers.

Macks’ creation of documents in 2010

The second aspect of the inquiry concerned what was said to be the ‘creation’ of documents which Doyle J found were fabricated by Macks ten years ago, in 2010, as to issues arising in 2002 and 2004, and dishonestly for the purpose of deceiving ASIC in its investigation into Macks’ conduct.  Macks’ claims that he had put post-it notes on the documents to indicate their later “made up” nature was not accepted.  The Judge did note the inherent risk associated with the use of post-it notes given they are designed to be easily removed; and here, he said it may be inferred that the documents were handled several times over.

Industry action

It seems that Macks’ membership of one of the industry bodies in Australia, ARITA, is suspended, but said to be based upon an early decision – Viscariello v Macks [2014] SASC 189 – that was then the subject of an appeal: see Discretionary Suspension of Membership – Mr Peter Macks, 21 December 2014.

Unlike the UK and New Zealand, Australian insolvency industry bodies are not relevantly regulated by the insolvency regulators in relation to their disciplinary proceedings and processes.

Delay

Australia has a reasonable system for the regulation and discipline of its liquidators, once action is taken, following reforms in 2017, although much depends on the regulator: see Keay’s Insolvency, 10th ed, 2018, ch 10.   The long history of this matter – set out in ASIC v Macks [2018] SASC 132  and on this website – is not representative of most such matters.

 

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