When must a liquidator seek approval? Section 477(2B) and cost agreements

Section 477(2B) of the Corporations Act 2001 (Cth) (the Act) requires liquidators to obtain approval (from creditors, the committee of inspection, or the Court) before entering into agreements that impose obligations lasting more than three months. This can apply to legal retainer agreements, and accordingly, liquidators and their representative should take care in identifying the appropriate parties and seek approval from the Court or creditors where the company in liquidation is a party.

Background

Section 477(2B) of the Act provides that, except with:

• approval of the Court,
• approval of the committee of inspection; or
• a resolution of creditors,

a liquidator must not enter into an agreement on behalf of a company in liquidation if the agreement may end, or obligations under that agreement may be discharged by performance, more than three months after the agreement was entered into.  This applies even if it is possible that the agreement may end sooner.

One of common types of agreement caught by this section are settlements between a company and a recalcitrant director or other debtor who has agreed to pay a settlement sum to a company over an extended period.

But what about the retainer with the solicitors who acted for them in that dispute?  Performance of such an agreement would generally be expected to be discharged over a period of more than three months.  Solicitors’ retainers (and funding agreements) have been the subject of several recent Court applications.  In accordance with section 477(2B) of the Act, and following those decisions, it is important for a liquidator to ensure he or she obtains approval to enter into those agreements or seeks the leave of the Court in a timely manner.

Kitay v Frigger

In Kitay v Frigger (No 2) [2024] WASC 113 (Frigger), Justice Hill of the Supreme Court of Western Australia considered the circumstances in which a liquidator requires creditor (or Court) approval to enter into a retainer agreement with solicitors.

The application was made in the context of a dispute between Mr Mervyn Kitay, in his capacity as liquidator of Computer Accounting and Tax Pty Ltd, and Mr Hartmut Frigger and Mrs Angela Frigger, who were former directors of the company.  The dispute involved multiple proceedings, in respect of which Mr Kitay engaged two separate firms of solicitors.

Mr and Mrs Frigger disputed that the solicitors acting for Mr Kitay (and by extension, the company) had authority to take steps in the various proceedings on behalf of the company, as Mr Kitay had not sought approval from creditors or the Court to enter into the relevant retainers by which he engaged two different law firms.

Mr Kitay applied to the Supreme Court seeking approval of the retainer agreements, should approval be required.  Mr and Mrs Frigger opposed the application.

In considering the application, Justice Hill set out the relevant legal principles:

1. Section 477(2)(a) of the Act makes it clear that it is the liquidator who defends legal proceedings on behalf of a company in liquidation. A liquidator may appoint a solicitor to assist them in defending such proceedings.
2. It is the liquidator who is liable to pay the solicitor in accordance with the terms of any costs agreement between them.
3. In accordance with section 556 of the Act, the legal expenses incurred by the liquidator under the costs agreement may be recouped by the liquidator as a priority under section 556(1)(a) or (dd) of the Act.

Justice Hill found that to the extent that the agreement is between Mr Kitay in his capacity as liquidator of the company on the one hand, and the solicitors on the other, section 477(2B) has no application.  In those circumstances, Mr Kitay correctly proceeded on the basis that he could enter into retainer agreements pursuant to which he would be liable to pay his solicitors and in respect of which he would be able to recover payments in accordance with section 556 of the Act.  As liquidator, he did not require court approval to enter into an agreement (regardless of the duration of the term) in his own capacity.

Where Mr Kitay entered into a retainer agreement in his and/or the company’s name, approval was required, which was granted retrospectively.  Justice Hill set out the principles to be applied by the Court in deciding whether to grant approval:

1. The role of the court is to determine whether entry into the agreement is a proper exercise of the liquidator’s powers.
2. The court is not concerned with matters of commercial judgment but considers whether it can be said that entry into the agreement is ill-advised or improper on the part of the liquidator.
3. The question for the court is whether the liquidator’s judgment has been infected by a lack of good faith, or an error of law or principle and whether there is a real or substantial ground for doubting the prudence of the liquidator’s conduct.
4. The task of the court is not to reconsider all of the issues which have been weighed up by the liquidator in deciding to enter into the agreement and to substitute its determination for the liquidators, but to review the agreement, having regard to the matters set out and 2 and 3 above, and weighing up whether there is any good reason to intervene in terms of the ‘expeditious and beneficial administration’ of the winding up.

Mr Kitay’s explanation for his delay in seeking approval, that, on the basis of a previous decision in a related proceeding, it was not necessary for him to do so, was also a relevant factor.

Bredenkamp

In Bredenkamp (Liquidator), in the matter of Coolgardie Minerals Limited (in liq) [2025] FCA 404, Justice Jackson granted approval for a liquidator to enter into a funding agreement in respect of which approval was sought after the relevant proceeding was filed.  The application was made retrospectively, as the liquidator was confronted with a limitation period prior to filing.

It was the opinion of the liquidator that the terms of the funding agreement were commercially reasonable and that it was in the interests of the Company to enter into the proposed legal costs agreement.  Justice Jackson similarly found that nothing in the terms of the agreement gave rise to any doubt as to that opinion.

Justice Jackson also observed that the Court must consider whether there is any lack of good faith, or error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.  However, it is not necessary for the Court to appraise the commercial desirability of the agreements, nor is it for the Court to assess the risks inherent in the proceeding.

Naidenov

In Naidenov, in the matter of AJW Interiors and Constructions Pty Ltd (in liq) [2024] FCA 25 (Naidenov), Justice Cheeseman considered whether to grant approval nunc pro tunc pursuant to section 477(2B) of the Act in respect of a conditional costs agreement with a law firm entered into by a liquidator on behalf of a company in liquidation.  Her Honour dismissed the application.

Justice Cheeseman considered the purpose of section 477(2B) of the Act, being a safeguard against prolonged liquidations with no benefit to creditors.  The purpose of the section could be defeated where liquidators do not seek such approval until a substantial and inadequately explained delay has already been occasioned.

As the proceeding to which the costs agreement related was commenced on the eve of the limitation period, and where the issues of prospects of success and the likelihood of recovery were not adequately addressed beforehand, Justice Cheeseman was not satisfied that approval ought to be granted.

McCabe

In McCabe, in the matter of Sargon Capital Pty Limited (receivers and managers appointed) (in liq) [2023] FCA 345, Justice Yates considered whether he ought to retrospectively approve a retainer agreement entered into by the liquidators of Sargon Capital Pty Limited, Mr Andrew McCabe and Mr Joseph Hayes.

His Honour considered that section 477(2B) of the Act is directed at agreements entered into on the company’s behalf.  It is not directed to agreements entered into by a liquidator on his or her own behalf in respect of which the company is not a party.

Here, Mr McCabe did not have a written retainer agreement in respect of the services provided by his solicitors. Accordingly, his Honour could not determine whether the agreement was between the liquidators and their solicitors or between the solicitors and the liquidators as agents for Sargon.  His Honour proceeded on the basis that the company was a party.

Justice Yates found that entering into the retainer agreement for legal services in respect of Sargon’s liquidation was a proper exercise of the plaintiffs’ powers for the following reasons:

1. the liquidators would require legal assistance in the conduct of the liquidation;
2. the agreement was at commercial rates, which did not involve any premium, uplift, or similar increase conditioned on any successful recovery;
3. the creditors approved the agreement, although not in a way that satisfied section 477(2B); and
4. the proceedings in respect of which the retainer was entered into were not without merit, and there was no reason to doubt that they were brought for a proper purpose.

Practical considerations with respect to section 447(2B)

The above authorities provide practitioners with clarity in respect of when approval for agreements under section 447(2B) must be sought, being when the agreement is in the name of the company (even if the liquidator is also a party).

From a practical perspective:

1. When the company is not a beneficiary of the advice, for example, if the liquidator seeks advice in respect of the conduct of the litigation, then a liquidator will not require leave of the court under s 477(2B) of the Act to enter into the relevant costs agreement.
2. Where the company is not named in the retainer, even if it is a party to litigation and has exposure in respect of costs orders, leave may not be required unless the relevant company is the moving party, for example, a claim or counterclaim is brought in the name of the company.

Want Insolvency & Restructuring updates delivered straight to your inbox? Click here to subscribe.