Settlement agreements & priority expenses: Lewis & Anor v LG Electronics Australia Pty Ltd v Ors [2016] VSC 63

Background

Warehouse Sales Pty Ltd (WHS) and WHS2 Pty Ltd (WHS2) were related companies which both carried on businesses of selling white and brown goods. Stock was provided by suppliers to WHS on credit pursuant to supply agreements, which contained retention of title clauses. Stock was also sold and transferred between WHS and WHS2.

Both WHS and WHS2 went into liquidation. The same liquidators were appointed over both companies.

Upon learning that legal advice received regarding ownership of the stock (Advice) may have been incorrect, the liquidators commenced a proceeding in the Supreme Court of Victoria to obtain directions regarding ownership. Some suppliers then applied to the Court seeking delivery of the stock and damages against the liquidators for breach of arrangements allowing for the collection and return of stock (Supplier Applications).

In Lewis & Anor v LG Electronics Australia Pty Ltd & Ors [2014] VSC 644 the Court held that the Advice was incorrect. Subsequently, the liquidators entered into conditional settlement agreements (Settlement Agreements) with some of the suppliers under which the Supplier Applications would be settled and payments made by WHS (Compromise Payments).

Issues for Consideration

The liquidators then sought from the Court:

1. Directions:
   1. under s 511(1)(a) of the Act providing that the liquidators were justified in entering into the Settlement Agreements; and
   2. approving the Settlement Agreements;
2. A declaration that the Compromise Payments would have priority under s556(1)(a) of the Act;
3. Orders approving the entry into the Settlement Agreements;
4. A direction under s 511(1)(a) of the Act that the liquidators were justified in causing WHS to pay a sum to compensate WHS2 for the use of stock belonging to WHS2 to satisfy debts of WHS; and
5. A direction that the liquidators were justified in not taking further steps to resolve conflicts of interest arising from their dealing with some of the stock under the Arrangements.

For the purposes of this article, only the decisions in respect of the matters raised in paragraphs 2(a)(ii) and 2(b) will be considered.

Directions Approving the Settlement Agreements

The Court provided directions approving the Settlement Agreements as:

1. They avoided the risks and costs associated with complex and expensive multi-party litigation;
2. They were agreed between legally advised parties who were negotiating at arms length after detailed investigations and negotiations;
3. The liquidators:
   1. acted bona fide;
   2. approached the resolution of the supplier disputes in a manner which was proportionate to the amounts involved and the assets in the liquidations; and
   3. had received advice that the Settlement Agreements were appropriate.

The possibility that the liquidators may have been held personally liable for breach of contract to the suppliers did not negate the ability of the Court to approve the Settlement Agreements.

Priority of the Compromise Payments

The Court also held that the Compromise Payments provided under the Settlement Agreements were priority payments under s 556(1)(a) as:

1. In entering into the Arrangements with some of the suppliers and postponing delivery of the stock under the Arrangements, the liquidators intended to properly preserve, realise and distribute the companies’ assets;
2. In agreeing to make the Compromise Payments, the intention of the liquidator was to minimise the costs of the liquidations and of the proceeding, and, in turn, attempting to preserve the assets of the companies;
3. The liquidators acted bona fide; and
4. That the Advice, though incorrect, was not unreasonable as it was based on the new PPSA regime which does not have a developed body of case law and provided in a high pressure situation.

The effect of the decision

This case is a reminder that:

1. Where a liquidator is seeking directions regarding a proposed compromise of litigation, the liquidator must ensure that more than commercial considerations are involved and that special circumstances have arisen that warrant the Court’s attention; and
2. In order to be successful in priority payment claims, liquidators should ensure that at all times they are acting bona fide and with due consideration being given to the quality of incurring an expense.

This article has been prepared by Jonathan Kramersh, Partner.