Can we commence proceedings against a company under the Small Business Restructuring Regime? A Case Analysis of Benjamin Hornigold Ltd v John Bridgeman Limited [2023] FCA 1195

Introduction

In the matter of Benjamin Hornigold Ltd v John Bridgeman Limited [2023] FCA 1195, the Federal Court of Australia considered section 453S of the Corporations Act 2001 (Cth) (“Act”) and the circumstances as to when leave should be granted for proceedings to be commenced against a company undergoing a restructure pursuant to the small business restructuring (“SBR”) regime. It was the first case to consider the stay of proceedings for SBR, due to the relatively recent introduction of the SBR regime.

The decision provides clarity in that the legislation governing SBR should be interpreted similarly to the legislation governing voluntary administration. The Federal Court decision also provides guidance as to the factors considered by the Court when exercising its discretion to hand down grants of leave under section 453S of the Act.

 

Background

In 2017, Benjamin Hornigold Ltd (“BHL”), a listed investment company, had appointed John Bridgemen Limited (“JBL”) to provide financial services and assume responsibility for achieving BHL’s investment policy. JBL was an authorised corporate representative of JB Markets Pty Ltd (“JBM”), who held an Australian Financial Services Licence (“AFSL”).

BHL alleged that:

1. By allowing BHL to enter certain loan transactions and failing to exercise reasonable care and diligence when evaluating those transactions, JBL had breached certain duties;
2. JBL had breached its contractual obligation, implied duty of care and fiduciary duties that were owed to BHL when providing financial advice; and
3. JBM was liable for JBL’s conduct in connection with any loss suffered by BHL due to JBL’s conduct. As the holder of the AFSL, JBM had accordingly contravened its duties under the Act by failing to adequately monitor or train JBL.

On 25 August 2023, JBM invoked the SBR scheme and accordingly appointed a SBR practitioner in accordance with section 453B(1) of the Act. BHL was made aware of this eleven (11) days later and subsequently approached the court for urgent relief to commence proceedings against JBM under section 453S of the Act.

 

Legislation

Section 453S of the Act prohibits the commencement of any claim against a company which is the subject of a restructuring, unless the claim is commenced:

1. with the restructuring practitioner’s written consent; or
2. with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

Should it be interpreted analogously to voluntary administration?

The Court held that Part 5.3B of the Act was similar to the object of Part 5.3A of that Act (which concerns voluntary administration), allowing a company to continue in existence. The Explanatory Memorandum stated the SBR process “draws heavily on the established voluntary administration framework in Part 5.3A”, and section 453S of the Act mirrors the terms of section 440D which concerns the stay of proceedings for companies in voluntary administration.

Therefore, the Court held that principles in relation to granting of leave for voluntary administration (section 440D of the Act) would equally apply to an application for leave under section 453S.

Accordingly, the Court reviewed previous decisions and principles established regarding granting leave under s440D of the Act in cases of voluntary administration. The Court particularly considered the matters of Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207, which sets out how a stay of proceedings can facilitate the Act’s object to maximising a company’s chances of staying alive; and Australian Securities and Investments Commission v Marco (No 5) [2020] FCA 1512 (“Marko (No 5)”), which identified the factors that apply in determining whether to grant leave, including:

• whether the claim gives rise to a serious dispute;
• whether the administrator would be unreasonably distracted from their statutory duties;
• whether the company is insured against the liability that is the subject of the proceedings;
• whether the claim relates to a monetary order;
• whether not granting the leave will cause significant disadvantage to the applicant;
• what funds the company has available to defend against litigation; and
• whether there are good reasons for allowing a creditor to divert from the general intention of Pt 5.3A, which is that a creditor should not be able to commence action against the company in these circumstances.

Decision

Pursuant to s 453S(1)(b) of the Act, the Court granted leave to BHL to commence proceedings against JBM, on the condition that BHL is to take no further step against JBM without the leave of the Court.

The Court held that its reasons for granting leave were:

1. There is a serious dispute between the parties;
2. BHL is required to seek leave if they want to take further steps in the proceedings, meaning that the SBR practitioner would not be “unreasonably distracted” by the proceedings;
3. The restructuring practitioner did not object to the proceedings;
4. BHL would be prejudiced if it was unable to commence the proceedings against JBM due to a looming limitation date;
5. It is likely that JBM holds as insurance policy, as identified in Marco (No 5) as a relevant factor; and
6. Considering the BHL claim exceeds $1 million, there is a high probability that JBM will not meet the criteria for SBR.

Takeaway

If you have any questions surrounding a SBR or pending litigation against a company currently undergoing a SBR, please contact Mr Stipe Vuleta or Ms Sayward McKeown of our office.

 

*This article was prepared with the assistance of Claire Smith.