Will the Court grant leave to continue proceedings when an association enters voluntary administration before final orders?

The NSW Court of Appeal has recently dealt with the issue of whether leave should be granted to allow proceedings to continue to final orders in a situation where administrators were appointed after publication of the Court's reasons, but before final orders were made.

 

Section 440D of the Corporations Act (Act) prevents proceedings from being commenced or continued during the period of administration of a company, except:

  1. with the administrator's written consent; or
  2. with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
The purpose section 440D of the Act is to stay (or freeze) proceedings against a company which is in voluntary administration, so that the administrator is not distracted by litigation against the company.

This section of the Act was relevant to a recent NSW Court of Appeal proceedings in which McCabe Curwood successfully represented the appellants, being the case of Lianos v Order of AHEPA NSW Inc (No 2) [2020] NSWCA 304. The appeal concerned the validity of changes to the constitution of Order of AHEPA NSW Inc (the Association), and resolutions purportedly passed in general meetings by members, a number of whose membership was also in dispute.

What was unique about this case is that the Association went into voluntary administration shortly after the Court of Appeal published its reasons, but before orders were made by the Court of Appeal to give effect to such reasons.

The administrators did not provide consent to the proceedings being continued.

As such, the Court had to decide whether to grant leave under section 440D(1)(b) of the Act to proceed to make final orders to give effect to its reasons.

In exercising the Court's discretion, it was noted that there was nothing before the Court to suggest that the financial position of the Association changed materially simply by reason of the Court's decision, as it must have been foreseen as a possibility that the appeal might be upheld, with whatever consequence that may have had on the liabilities of the Association.

Importantly, the Court also noted, "where a dispute concerns governance of an association, as is the present dispute, there would be every reason for leave to be granted to ensure certainty in relation to the administration or the winding up."

Having determined to grant leave, the Court then proceeded to make final orders and declarations in the form proposed by the appellants, including a costs order against the Association.

This is an interesting decision in the context of the operation of section 440D of the Act, as unlike other occasions, the Court had to consider whether leave should be granted for proceedings to continue in a situation where a company or association goes into voluntary administration in the period of time after publication of the Court's reasons, but before final orders were made.

The decision is important, given the clarity it provides in the approach the Court is likely to take on the question of granting leave under this section on matters concerning corporate governance, especially if it helps in providing certainty in relation to the administration or the winding up of a corporation.

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Lachlan Hallab Law Graduate