In Yeo (liquidator), in the matter of Tuftex Carpets Pty Ltd (in liquidation) [2025] FCA 1200 the liquidators sought approval from the court to enter into a settlement agreement. The claims underlying the settlement agreement were against the former director and parent company for insolvent trading and the resulting loss.
Key Takeaways
- Under section 477(2B) of the Corporations Act 2001 (Cth) (Act), liquidators are required to obtain committee of inspection or creditors’ or court approval to enter into a settlement agreement on the company’s behalf where the agreement could last longer than three months.
- Insolvency practitioners can seek a form of blessing from the court under section 90-15 of the Insolvency Practice Schedule (Corporations), to enter into and give effect to an agreement.
- Even if entry into the settlement agreement does not require court approval, under section 477(2B) liquidators can seek court approval to do so.
- Liquidators should apply to the court to enter settlement agreements only if it is a reasonable compromise to the relevant claims, and it is in the best interests of the company and creditors.
- It is not the role of the court to make commercial judgements for liquidators or administrators. However, the court can ‘bless’ the liquidator’s proposed action to protect the practitioner from future claims that he or she acted inappropriately or unreasonably in entering into the agreement.
Case Background
Tuftex Carpets Pty Ltd (in liquidation) and Tuftmaster Carpets Pty Ltd (in liquidation) (Companies) had claims against their former director and parent company for insolvent trading and recovery of loss resulting from insolvent trading. Before concluding the litigation, the Companies and the former director reached a settlement agreement.
The liquidators of the Companies sought court approval to enter into the agreement.
The Federal Court’s Reasoning
Section 477(2B) of the Act provides that, subject to resolution of the creditors or court approval, a liquidator may enter into an agreement on the company’s behalf which may last longer than three months. The justification for seeking approval from the court is to provide the ‘liquidator or administrator with protection against claims that he or she acted inappropriately or unreasonably’ by entering the company into the agreement.
Beach J highlighted that the court will not generally interfere with the transaction unless there is a lack of good faith, error in law or principle or a reason to ‘doubt the prudence of the liquidator.’
The Court confirmed that it is not qualified to make commercial decisions for the liquidators, nor is it part of the Court’s judicial function. The Court will ‘defer to the commercial judgment of the liquidator’ to determine if the terms of settlement are appropriate in the circumstances.
Outcome
As the liquidators believed entering into the agreement was in the best interests of the Companies and creditors, Beach J approved the application to enter into the settlement agreement noting that the terms of the agreement were commercial and constituted a reasonable compromise to the relevant claims.
Further Information
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