Federal Court revisits liquidators and trustees’ ability to seek judicial advice

The recent decision of Metigy Pty Ltd (in liq) (applications for settlement approval) [2023] FCA 818 reminds liquidators and trustees of the prerequisites they must satisfy in seeking judicial advice. Failure to meet these criteria may result in the court refusing to exercise its jurisdiction to give such advice.

The facts

Between 2020 and 2021, Metigy Pty Ltd (Metigy) conducted two capital raises through a convertible note and third-party share sale to investors for approximately $24 million. During both capital raises, Metigy’s director, Mr Fairfull, provided financial forecasts and reports to investors to persuade them to invest in the company. Shortly after, Mr Fairfull had Metigy provide a $7.7 million unsecured director’s loan to himself so that he could acquire a $10.5 million property.

In June 2022, Metigy’s Chief Financial Officer revealed that Metigy was unable to meet its payroll and provided a balance sheet for the 2022 financial year reflecting sales revenue of just $43,024.55, a stark contrast to the figure previously provided to investors. It appears that the information supporting the company’s fundraising may have contained significant inaccuracies. Metigy subsequently went into liquidation, with Mr Fairfull declaring bankruptcy, resulting in the appointment of a trustee (bankrupt estate).

On 5 May 2023, Metigy, its liquidators, the trustee of the bankrupt estate and the investors entered into a settlement deed which proposed an apportionment of the sale proceeds clawed back from the $10.5 million property (settlement deed).

Metigy’s liquidators and the trustee of the bankrupt estate sought directions from the court under sections 90-15 of the Insolvency Practice Schedule (Bankruptcy) and 90-15 Insolvency Practice Schedule (Corporations) as to whether they would be justified in entering into the settlement deed.

Legislative provision

Section 90-15 of the Insolvency Practice Schedule (Bankruptcy) allows a trustee of a bankrupt estate to seek a direction from the court regarding the administration of the bankrupt estate. Section 90-15 of the Insolvency Practice Schedule (Corporations) provides a similar power to liquidators during the external administration of a company.

Subsection 90-15(3) of both the Insolvency Practice Schedule (Bankruptcy) and the Insolvency Practice Schedule (Corporations) contains a non-exhaustive list of the orders a trustee or liquidator may seek. One of these orders is for the court to determine any question arising from the administration of the bankrupt estate or external administration of the company, otherwise known as judicial advice.

The decision

Before a court can give judicial advice to a trustee or liquidator, it must be satisfied that it has jurisdiction to do so. Justice Rares noted that this question rested on whether:

• the application for judicial advice is in the interest of the liquidation or trust and not in the interest of alleviating the liquidator’s or trustee’s fear in costs or personal liability
• the advice sought relates to a legal issue or reasonableness of a decision as opposed to a business or commercial decision
• the advice sought relates to an issue calling for the exercise of legal judgment.

Given the complexity of the claims to the funds, Justice Rares accepted that it was appropriate to exercise the court’s jurisdiction to give judicial advice to the trustee and liquidator to enter the settlement deed. In doing so, his Honour held that there was a “substantive doubt” as to who had the better claim to the sale proceeds but the settlement deed bespoke “…a compromise of complex factual and legal issues for which there is no particularly clear answer”.

On the one hand, Mr Fairfull’s misrepresentation of Metigy’s financials could give rise to an institutional constructive trust in favour of the investors. Meanwhile, Mr Fairfull’s involvement in the director’s loan was potentially a breach of his fiduciary duties owed to the company, entitling the liquidator to recoup the funds for the liquidation. His Honour also noted that the trustee of the bankrupt estate had a legal claim to the funds, albeit a comparatively weaker claim.

Key takeaways

The case illustrates four important takeaways:

• the court’s jurisdiction to give judicial advice to trustees of a bankrupt estate or liquidators only arises where there is a legal question to be determined
• the court will not allow an application for judicial advice in circumstances where it is to alleviate the trustee or liquidator’s fear of personal liability
• the court will not exercise its jurisdiction to give advice on commercial or business matters
• the importance of seeking judicial advice in circumstances involving a settlement deed between multiple parties with legally and factually complex claims.

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Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Chris Brodrick

Matthew Darling

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