Emerson Lewis recently acted for a liquidator in a successful application for the joinder of fifteen (15) defendants to a single proceeding in the Supreme Court of New South Wales and the contemporaneous transfer of various proceedings from the Local Court and the District Court of New South Wales to the Supreme Court of New South Wales.

The facts
Steve Naidenov of Aston Chace Group was appointed as the voluntary administrator and subsequently as the liquidator of MK Floors Qld Pty Ltd (in liq) and MK Floors NSW Pty Ltd (in liq). Shortly before the expiration of the three year limitation period to commence unfair preference proceedings pursuant to the Corporations Act 2001 (Cth)(Act), he commenced a number of separate proceedings against various defendants in the Local Court of New South Wales and the District Court of New South Wales.

The Liquidator gave evidence that separate proceedings were commenced in the lower courts, rather than together in the Supreme Court, because at the time of filing it was not apparent whether the defendants would contest the question of solvency. By way of reminder, demonstrating that a company was insolvent at the time payments were made to a creditor is a necessary ingredient of a successful unfair preference action.

Justice Black remarked that the approach taken by the Liquidator was reasonable because if the defendants had admitted insolvency, then all that would have remained to be conveniently determined in the lower courts would have been the separate defences available to particular defendants, for instance the “good faith” and “no knowledge of insolvency” defences under section 588FG of the Act.

However, by March 2020, it had emerged that each of the defendants had put the relevant company’s solvency in issue, whether by denying the allegation of insolvency or by putting the Liquidator to proof of insolvency. In those circumstances, there were multiple proceedings in the Local Court and the District Court, all of which raised the same issue as to the insolvency of each of the companies.

The decision
Justice Black was satisfied that orders joining the defendants to the single proceeding in the Supreme Court of New South Wales should be made pursuant to r 6.19 of the Uniform Civil Procedure Rules and that the different proceedings in the Local and District Court should be transferred to the Supreme Court pursuant to s 140(1) of the Civil Procedure Act 2005 (NSW).

His Honour found that the case had features that are common in cases in which courts have made orders for the joinder of several defendants in a single voidable transaction proceeding, and the determination of a common issue as to solvency in that proceeding. The Court’s attention was drawn to the decision in Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525 which has since been applied many times as identifying the structure of a “mothership” proceeding in which a liquidator of a company brings unfair preference claims against a number of defendants.

Justice Black highlighted that one of the key advantages of joining several defendants in a single proceeding is that the issue of solvency would only be determined once, as between the several defendants, and not in separate proceedings. This would avoid the risk of duplicated costs and, most importantly, inconsistent findings between different courts, which affects the administration of justice. His Honour observed that this case was a clear illustration of that proposition.

His Honour also considered the potential disadvantages to specific defendants arising from the joinder of the defendants. By way of example, the joinder would mean that one or more defendants would be required to be present during the course of the proceedings while issues affecting other defendants were being addressed. Justice Black observed that such risks can be mitigated by appropriate case management and by having a single determination as to solvency before deciding to sever off the proceedings to determine defences unique to each defendant.

Key takeaways
The key takeaways from this decision are that:

it is possible to join defendants to voidable transaction proceedings to a single proceeding, even after separate proceedings have been commenced against the defendants in different courts; and the approach to join defendants after separate proceedings have been commenced may in some instances be desirable as the need for joinder would only arise if the defendants contest the issue of solvency, which would then result in the unacceptable risk of inconsistent findings of solvency between different courts.

If you or your clients require assistance in relation to voidable transaction proceedings pursuant to the act, please be sure to get in touch with Emerson Lewis.