Section 477(2B) of the Corporations Act 2001 (Cth): Requirements and Practical Implications for Liquidators

To ensure that long-term contractual commitments are justified and in the best interests of creditors, section 477(2B) of the Corporations Act 2001 (Cth) (Act) requires liquidators to obtain approval from creditors, the committee of inspection, or Court to enter into an agreement on the company’s behalf if the term of the agreement lasts for, or the obligations of a party under the agreement may be discharged by performance, more than 3 months after the agreement is entered into.

When and why should 477(2B) Application be used?

Section 477(2B) of the Act can apply to a range of agreements entered into by liquidators. Where an agreement may extend beyond three months, liquidators should consider whether approval is required before entering it, or in the circumstances where the agreement has already been entered into, whether retrospective approval should be sought.

There are a number of common circumstances in which section 477(2B) approval may be required.‍

Costs Agreements with Solicitors

· For a retainer or costs agreement that is expected to exceed a three-month period, approval under section 477(2B) is required if the liquidator enters the agreement as agent for, or representative of, the company in liquidation or where the company benefits from the legal services.

· Approval is not required if the company is not a beneficiary of the advice or where the retainer or costs agreement is entered into by a liquidator personally.

· When determining whether the agreement has been entered into by the liquidator as agent for or representative of the company or in their own name, it is necessary to consider the substance of the agreement, whether the company is a party to the agreement or appears to have the status of a party under the agreement, and who receives the benefit of the services provided under the agreement: per Hill J in Kitay v Frigger [No 2] [2024] WASC 113 at [91]. If the agreement is with the liquidator but the company ultimately received the benefit of the advice or services provided, then approval may be needed.

Settlement Agreements

· Where a liquidator enters into a settlement agreement with another party which involves instalment payments or deferred obligations extending beyond three months of the execution date, the agreement will likely fall within the requirements of section 477(2B).

· While it is not the role of the Court to make commercial judgments for liquidators, court approval will ensure enforceability as well as protection from future claims that the liquidator acted perversely in entering the agreement.

Funding Agreements

· In circumstances where a liquidator enters a funding agreement with a third-party funder to meet the costs associated with litigation, an application under section 477(2B) will likely have to be made. Such agreements usually extend beyond three months.

Austin Jin In the matter of ACN 076 673 875 Ltd [2002] NSWSC 578 outlined a list of considerations relevant to a section 477(2B) application concerning a funding agreement, which have continued to be referred to and applied in subsequent decisions. These include:

· the nature and complexity of the cause of action;

· the prospects of success and risks involved in the proposed litigation;

· the manner in which the funding or indemnity will be provided under the agreement;

· the amount of costs likely to be incurred in the conduct of the action and the extent to which the financier is to contribute to those costs;

· the extent to which the financier is to contribute towards the costs of the defendant in the event that the action is not successful, or towards any order for security for costs by the Court before which the action is to be heard;

· the extent to which the liquidator has canvassed other funding options;

· the level of the financier's "premium"; and

· the extent to which the liquidator has consulted with the creditors of the company.

The Court’s key considerations in approving a Section 477(2B) Application

In considering whether to approve a section 477(2B) application, the Court seeks to prevent agreements being entered into that may be inconsistent with the proper conduct of a liquidation. The Court will not second guess the liquidator’s commercial judgment, but will rather assess whether the liquidator has acted in good faith and in a manner which is prudent and consistent with the interests of creditors in the winding up.

In Lewis (Liquidator), in the matter of Concrete Supply Pty Ltd (in liq) [2020] FCA 841, White J outlined the principles applied by the Court when considering a section 477(2B) application. This includes the following:

a. the Court considers the reasons as to why the liquidators’ powers exist, including the serving of the interests of the parties concerned in the winding up, the achievement of what is necessary for the proper realisation of the company’s assets, and assisting in its winding up: Re HIH Insurance Ltd [2004] NSWSC 5 at [15]; Stewart, Re Newtronics Pty Ltd [2007] FCA 1375 at [26(6)];

b. the impact of the agreement on the duration of the liquidation and whether that is, in all of the circumstances, reasonable in the interests of the liquidation: Re Opel Networks Pty Ltd [2013] NSWSC 1245 at [7]; Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [30];

c. the Court’s approval is not an endorsement, but merely permission for liquidators to exercise their commercial judgment: Re Bell Group Ltd (in liq); Ex parte Woodings (as liquidator of Bell Group Ltd) (in liq) [2009] WASC 235 at [58];

d. the Court does not generally refuse approval unless there is a lack of good faith, an error in law or principle or a real and substantial ground for doubting the prudence of the liquidator’s conduct: Re Spedley Securities Ltd (in liq) (1992) 10 ACLC 1742 at 1745;

e. the Court may refuse approval if the proposed agreement terms are unclear: Re United Medical Protection (No 4) [2002] NSWSC 516; (2002) 20 ACLC 1647 at [45]; and

f. the Court does not simply “rubber stamp” whatever is put forward by a liquidator: Re Stewart; Newtronics, at [26(1)].

Key Takeaways

Section 477(2B) approval is an important consideration whenever a liquidator proposes to enter into an agreement on the company’s behalf, including a costs agreement, settlement agreement, funding agreement or any other agreement that may extend beyond three months. In determining whether to grant approval, the Court will ensure the liquidator is acting in a manner that is commercially prudent, that the agreement will serve the interests of the parties to the winding up and is reasonably in the interests of the winding up. These considerations carry equal relevance where a committee of inspection or a resolution of creditors considers whether to approve an agreement.

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How We Can Help

The Insolvency Team at Watson Webb has vast experience acting for liquidators and is available to consider and advise in relation to any agreement that has been entered into or is being considered by a liquidator. If approval is required under section 477(2B), we can advise about and conduct that process, whether it is retrospective or prospective.

Disclaimer

The above is general commentary only and is not legal advice. It is also not an exhaustive statement of the law, nor is it specific to your circumstances. If you are considering making an application to the court for section 477(2B) approval, you should seek proper and tailored legal advice.