Case Management & Insolvency: Matching Rhetoric & Reality

Key Note Speech at the Association of Independent Insolvency Practitioners Annual Conference

The Hon Justice Lee [1] 28 June 2019

In the early eighties I was a copyboy at what was then known as John Fairfax & Sons. One of the perks of the job was having ample spare time and being provided with free copies of magazines.

For reasons that surpass understanding, I recall being at Jones Street and reading an article by Auberon Waugh, the eldest son of one of England’s greatest 20th century novelists (and the nephew of a very mediocre one). The article recounted a story concerning one of the notable figures of Irish sporting history, Arthur MacMurrough Kavanagh (1831-1889).

The ‘unbelievable Mr Kavanagh’ was born without any arms or legs — or, as Waugh noted, “even the tiniest stumps”. He was a truly remarkable man in an unenlightened age that was not kind to those suffering any form of disability. Undaunted, however, he rode to hounds and shot with the best of them, sailed his own yacht, painted, and kept a seat in Parliament (as an Irish Conservative) from 1866 to 1880. As a young man, he even travelled overland to India. Apparently he arrived one day to stay with Waugh’s great-grandmother at Abbey Leix, in County Leix. “It is a most extraordinary thing,” he said to her, “I have not been here for 14 years, but, do you know, the station master recognised me”?

Waugh’s great-grandmother’s feelings of confusion were perhaps understandable. I thought of this story last year when I had a conversation with an unnamed, highly competent barrister practising in insolvency who said to me: “I have been involved in large and small-scale insolvency litigation for years – I cannot understand what it is – but the smaller insolvency work seems to have dried up”. For reasons I will explain, I think the answer is tolerably clear.

My contention is that the changing landscape of insolvency practice in Australia presents challenges for members of the legal profession and those that instruct them – but, more importantly, some of these challenges and the reasons why they exist seem to be imperfectly understood.

This year’s conference will focus on ‘Dealing with Change’ and will include presentations on a wide range of issues which go to the heart of insolvency practice in Australia. The programme will see presentations on topics including the changing landscape of litigation funding, the development of anti-phoenix legislation and the consequences of the Banking Royal Commission.

These are all topics which, given the opportunity, I could discuss, and discuss at some length. While I consider it fair to leave discussion of these important issues to the delegates presenting at this year’s conference, let me affirm that all merit examination in the context of the central theme of this conference: ‘Dealing with Change’.

My topic is narrower, and yet it spans a broad canvass. I have written a number of times of the need for those conducting litigation to do more than merely adapt to change. My cri de coeur is that those involved in litigation in general (and insolvency litigation in particular) do more than ‘deal’ with change. To ‘deal’ with a phenomenon, is an essentially reactive and potentially passive activity – rather, I am encouraging you involved in insolvency litigation, and those that you instruct, to do more: to both embrace and facilitate change. Let me explain why and how.

An informed participant or observer would conclude that the conduct of modern litigation reflects a number of interrelated developments. The first is the increased complexity and size of litigation. The second, connected to the first, but also partly explained by technological innovation, is the size and scale of evidentiary material placed before the courts in the process of quelling disputes. The third is the commercialisation of the law, discussed by a number of economic analysts of civil procedure who have observed that the primary modern method of remuneration of lawyers provides an incentive to maximise work and perform tasks that may genuinely be thought desirable or justifiable, but are unnecessary for the determination of the true issues in dispute. The fourth is that the courts are an arm of government dependent on public resources at a time of focus on the efficient allocation of those resources.[2]

It is not as if these developments have not been recognised and that attempts have not been made to address them.

The last 20 years has seen a significant period of procedural reform across all Australian jurisdictions. Central to this reform has been the renewed focus on achieving just outcomes through effective case management. The Access to Justice (Civil Litigation Reforms) Amendment Act[3] was passed in 2009 and required the Federal Court to assign particular focus to active case management of civil litigation. These measures were enacted in an attempt to realise the Court’s ‘Overarching Purpose’ “to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible”[4]. Such structural reform has enabled the Federal Court to undergo what I have previously described as ‘a revolution in case management’.[5] But revolutions are often tricky things. Some caught up in revolutions have a Jacobin-type tendency to want change for the sake of change; but others have a Bourbon-like resistance to change. As one author[6] noted:

No matter that there is a fundamental internal inconsistency between a result being ‘just’ as well as ‘quick’ and ‘cheap’. Justice done ‘too quickly’ on the ‘cheap’ is frequently not justice at all – the old nostrum (in its positive sense) made that clear – ‘Fiat iustitia, ruat coelum’ – the draftsman of that ‘Rule’ was not concerned with something quick, nor cheap. ‘It might be thought a truism that ‘case management principles’ should not supplant the objective of doing justice between the parties according to law’.

As this quote highlights, balancing justice and cost is a task not without challenges. Many courts throughout the common law world have tried to preserve time-tested procedures that guarantee procedural fairness, while realising the necessity that a radical approach may be required to tackle the problems of delay and cost in the litigation process. There is now a recognition that although they are not ends in themselves, speed and efficiency, in the sense of minimum delay and expense, are not only desirable, but are essential to providing access to justice and a just resolution of disputes.[7]

Parties to a civil proceeding now have an obligation to act consistently with the overarching purpose,[8] or at the very least ensure cooperation with the Court.[9] The Act requires lawyers to take account of the duty imposed on the party for which they act[10] and assist that party to comply with that duty[11]. Orders can be awarded against a party who has failed to conduct civil litigation in the spirit of the overarching purpose or have litigated in a manner which obstructs the Court’s ability to deliver a just outcome.

Addressing the Australian Insurance Law Association National Conference in 2018, Chief Justice Allsop made the following observations in relation to the exercise of effective case management:[12]

Case Management is the management and control of the resolution of disputes (not just litigation of disputes) by a judicial officer or judicial officers. It can be undertaken in a variety of ways, using a variety of procedural tools, including alternative dispute resolution, and other mechanisms under Court control to resolve disputes as quickly and as cost-effectively as possible.

Two propositions can be seen as valid: first, bad case management can be worse (in time and expense) than no case management; secondly, good case management is the best method of achieving cost effective and timely resolutions of disputes.

Mirroring these two propositions are two features to bear in mind: good case management involves skilled, experienced, sometimes imaginative problem solving, using procedures as tool, adjusting to the features of the individuals case: bad case management is often marked by process-driven costs, with unthinking application of standard operating procedures, irrespective of their necessity.

Such observations capture both the pitfalls and possibilities of active case management in the course of civil litigation, including insolvency litigation.

While this increased legislative and judicial attention on the role of active case management in achieving just and cost-effective resolutions may appear to have arisen out of the demands placed on the Court by modern litigation practice, the concept of active case management is not entirely new, nor has it arisen spontaneously.

The developments of case management in modern litigation have deep roots. I will come to a 19th century example later, but in 1935, the Supreme Court of the United States appointed an Advisory Committee comprised of academics and lawyers to prepare a unified system of general rules for federal courts. The rules were to be administered to “secure the just, speedy and inexpensive determination of every action and proceeding”.[13] In 1996, a report was produced to the Lord Chancellor by Lord Woolf that focused on Access to Justice in Civil Litigation in the United Kingdom and Wales.[14] The versatility and advantages of principles such as active judicial officer control of case management, intolerance for unexplained delays and adjournments, a focus on proportionality, and a focus on rules that combined the overriding principles of just, timely and cost effective resolution to the real issues in dispute were all examined in Lord Woolf’s report. The sweeping legislative reform subsequently experienced in Australia manifested itself out of these core principles.

In 2009, the High Court in Aon Risk Services Australia Ltd v Australian National University[15] affirmed the need for close attention to be given to ensuring that modern and flexible principles of case management are brought to bear in the resolution of commercial disputes. Such analysis may be described as ‘resolution by revolution’. It goes without saying that in order for this so called revolution to work, it is not only lawyers but also those instructing them that must be awake to the need for change.

Aligned to such resolve is the need for the Court to not only consider the interests of individual parties, but of potential future litigants as well. In 1991, Chief Justice King observed in United Motors Retail Ltd v Australian Guarantee Corporation Ltd[16] that:

‘… a party is entitled to his day in court but not to someone else’s day in court’.

One must remember that the more expensive and time-consuming litigation becomes, the more it becomes inaccessible to potential future litigants. The deliverance of ‘justice’ must be seen to be delivered beyond the confines of the individual litigant. It must take into account the considerations of access to justice more generally.

This of course is an observation of profound relevance in the context of insolvency practice. The rights of the creditor are not advanced by unthinking application of cumbrous court practice resulting from a lack of imagination by those using the system.

But let us descend to specifics - what effect does this case management revolution have on insolvency practitioners?

The primary concern for any creditor is, of course, to obtain payment of his money with stipulated interest.[17] The oft-repeated critique of modern insolvency practice (not just insolvency litigation) is that it is expensive, with the unsecured creditor the resultant victim. Insolvency practitioners must look for ways to minimise expense and maximise efficiency both in the provision of insolvency services generally and within the formal structures of the court system more specifically. It costs money to recover money and the price of litigation can often be disproportionate. Too often, the funds made available by the creditor are either not pursued or are drained as a result of inefficient use of court resources. Let me provide an example of how the Court can assist in honouring the overarching purpose to guard against this problem.

In 2017, I delivered judgment in the matter of Kadam and Others v MiiResorts Group 1 Pty Ltd and Others (No 4)[18]. The matter involved two separate proceedings. The first proceeding was a class action pursuant to Part IVA of the Federal Court of Australia Act[19]. The second, separate proceeding was bought by a non-party, the Securities and Exchange Board of India.

Central to the factual and legal allegations made by the applicant in both proceedings was the contention that a ‘Ponzi’ scheme was conducted in the Republic of India which operated in the country as a form of unauthorised ‘collective investment scheme’. More than 9 billion dollars was invested by approximately 58.5 million people. It was alleged by both applicants that these funds were used to purchase a number of luxury hotels including the Sheraton Grand Mirage on the Gold Coast. The Sheraton Grand Mirage was allegedly purchased for 62.5 million dollars with an additional 20 million dollars spent on renovations.

The property was later sold but the distribution of the sale proceeds was enjoined. Among other things, the applicant sought a declaration that the applicant and group members had an equitable charge or lien over the proceeds of the sale. The Securities and Exchange Board of India sought similar relief on behalf of all investors being relief premised on the notion that in accordance with Indian domestic law that it was entitled to recover the funds contributed to the Ponzi scheme and return them to the investors.

The two proceedings were case managed together. A dispute subsequently arose as to whether the Securities and Exchange Board of India had standing. Such a question inevitably required discrete consideration of expert evidence on Indian domestic law. I formed the view that such a question should be referred to a referee for inquiry and report.

The factors informing my decision to order the use of a referee report are found in the provisions of the Federal Court of Australia Act. Section 54A was inserted in 2009 by the Federal Justice System Amendment (Efficiency Measures) Act.[20] In his second reading speech, the Honourable Robert McClelland (as his Honour then was), foreshadowed the benefits of the use of referees by stating the following:[21]

‘…procedural flexibility, combined with the referee’s specialist expertise, will allow the referee to quickly get to the core of the technical issues and reduce costs and delays for litigants, and this will enable the court to more effectively and efficiently manage large litigation.’

Section 54A was enacted to support the Court’s ‘Overarching Purpose’. It is important to revisit these provisions in some detail when examined in the context of the adoption of referee report in commercial disputes. Section 37M(2)[22] gives some guidance as to how this is done by setting out a number of objectives which include:

  1. The just determination of all proceedings before the Court.
  2. The efficient use of the judicial and administrative resources available for the purposes of the Court, and the efficient disposal of the Courts overall caseload.
  3. The disposal of the proceedings in a timely manner.
  4. The resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute.

These four factors reflect both the party-centric and macro considerations in relation to the administration of justice. When section 54A is viewed in the context of these considerations, the value of the adoption of a referee report becomes clear.

Both in the United Kingdom and Australia, over a long period of time, references have been adopted by commercial courts as a way of ensuring that discrete issues in litigation are determined with maximum efficiency. As early as the 18th century the Court of Chancery would refer matters of detail or account ‘ad computandem’ to a Master or an Arbitrator. Prior to 1873, references were used in both the Court of Chancery and at common law under the Common Law Procedure Act [23]. Indeed, prior to the Judiciary Act[24] reforms, there were also references made by the Judicial Committee of the Privy Council in cases in which Sir Roundell Palmer (who later became Lord Selborne) and Sir Hugh Cairns were involved as counsel.[25]

These notable figures were central to the development of the modern notion of referees. Lord Selborne (who became Lord Chancellor in 1872) recommended the use of referees at the same time common law and equitable practice was fusing in the United Kingdom. The timing is not coincidental as such recommendations were made in order to achieve ‘speedy, economical and satisfactory despatch of the judicial business transacted by the Courts’.

What is perhaps less well-known is that the proposal of the Judicature Commissioners suggested the use of two forms of referee. One ‘official’ and one ‘special’. Official referees were paid and permanent officers of the Court with business distributed amongst them on a rotational basis. A special referee was appointed upon the agreement of the parties and remunerated by them.

Despite the procedural flexibility introduced by this reform, a relatively restrictive approach to the use of references was adopted by the Courts throughout most of the 20th century.[26] This approach reflected a resistance from both practitioners and judicial officers to adopt an approach perceived as relinquishing the Court’s authority to adjudicate disputes in their totality. It is fair to say that even throughout the sustained period of legislative reform in relation to case management of civil litigation experienced towards the conclusion of the 20th century, this restrictive approach has proven difficult to shake. There appears to remain some residual reluctance on behalf of practitioners and parties to adopt fully the expedience of referees, notwithstanding the potential for significant saving in court time and expense.

Returning to the present context, insolvency practitioners should not assume the effectiveness of referee reports can only be demonstrated in large and complex commercial disputes. The contrary is in fact true. Referee reports have the potential to assist across insolvency practice more broadly, both inside and out of the formal structure of the court room.

Corporate insolvency is a complex and ever-developing area of the law. Proving ‘insolvency’ in accordance with section 95A of the Corporations Act[27] is a critical first step for any creditor seeking to recoup moneys. As you all know, in Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation[28] Justice Palmer summarised the law relating to proof of insolvency by setting out the following principles:

  1. Determining whether a company is insolvent is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole.
  2. In considering such position, the Court must have regard to commercial realities.
  3. The Court must determine whether the company’s position reveals a temporary or endemic illiquidity.
  4. The Court must respect that the nature of commercial reality dictates that a creditor will normally allow some latitude in the payment of their debts.

Importantly for present purposes, in the process of determining a company’s solvency a debtor may be required to rebut the presumption of insolvency in order to demonstrate solvency for the purposes of section 95A. Throughout this process, the Court is often asked to consider a significant amount of evidence presented by the defendant company which can often require the assistance of experts or expert evidence. This evidence then must be tested through the process of cross-examination of witnesses. Such process is often time consuming and costly. It can also significantly drain the coffers of the creditor by requiring lengthy hearings.

What I hope is now obvious is that the early adoption of a referee report in insolvency litigation could remove the need for lengthy court hearings and, at the very least, simplify them considerably. As I have previously noted, such a proposal may well meet resistance by those used to doing things the same old way and it deserves the support of people like you who are responsible for instructing lawyers. Measures such as these have the ability to revolutionise how the Court case manage corporate insolvency matters and ensure funds that otherwise would be available for distribution are better deployed.

Appointment as a referee might also become a possible future source of work for those of you who have the necessary expertise and inclination for appointment.

Moreover, the proposal is not restricted to corporate insolvency. In personal insolvency matters, particular utility can be found in the adoption of referee reports when seeking to determine an individual’s solvency. In a recent bankruptcy matter, I referred the question of the value of the respondent’s properties to a referee who was asked to conduct an inquiry and report their findings in relation to the valuation of the properties. A report was subsequently produced by the referee quickly and cheaply and then was adopted by consent.

In short, like all other litigation, insolvency litigation should be viewed as a problem to be solved and must remain fair, just, certain and, to the extent possible, simple.

If the ever-developing, ever complex nature of modern litigation has taught us anything, it is that you simply cannot conduct the litigation of small and medium enterprise in the same manner in which larger scale litigation is conducted. The obligation of the insolvency practitioner and the commercial judge is to embrace these challenges and find collaborative solutions that drive innovation. In this way the rhetoric of the ‘Overarching Purpose’ must match the reality of insolvency practice.

Over a generation ago, Chief Justice Gleeson of the New South Wales Supreme Court (as he then was) said in Super Pty Ltd v SJP Formwork (Aust) Pty Ltd that:

The proposition that all litigants are entitled to have a judge (or, presumably, a master) decide all issues of fact and law that arise out of any litigation, is unsustainable.

Like a slow turning ship, I am conscious of the pace at which change can be embraced, but the embrace must happen. I started with a story about self-awareness because my perception is that many lawyers with extensive insolvency practices are perhaps unaware or at least insufficiently sensitive to the need to reign in the costs of insolvency litigation, particularly in small matters. To be an early adaptor and become part of what I have previously described as a ‘case management revolution’, does not require the courage and fortitude of the indefatigable Mr Kavanagh, it merely requires a bit of imagination and a modicum of lateral thinking.

[1] A Judge of the Federal Court of Australia (the preparation of this paper has been contributed to by Lachlan Merrigan, a Legal Case Manager with the Federal Court of Australia currently working with Justice Lee).

[2] Kadam and Others v MiiResorts Group 1 Pty Ltd and Others (No 4) [2017] FCA 1139; (2017) 252 FCR 298 at 300 [1].

[3] Access to Justice (Civil Litigation Reforms) Amendment Act 2009 (Cth).

[4] Federal Court of Australia Act 1976 (Cth) s 37M(1).

[5] Kadam and Others v MiiResorts Group 1 Pty Ltd and Others (No 4) [2017] FCA 1139; (2017) 252 FCR 298 at 300 [2].

[6] Lee Aitken. “Bullfry and the ‘overriding purpose’” [2018] Journal of the NSW Bar Association 103.

[7] Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 at 213 [98].

[8] Carey v Freehills [2014] FCA 788 at [48] per White J.

[9] Jones v Treasury Wine Estates Ltd [2016] FCAFC 59; (2016) 241 FCR 111 at 115 [23] per Gilmour, Foster and Beach JJ.

[10] See Federal Court of Australia Act 1976 (Cth) s 37N(2).

[11] See Federal Court of Australia Act 1976 (Cth) s 37N(2);

[12] Jones v Treasury Wine Estates Ltd [2016] FCAFC 59; Suzlon Energy Ltd v Bangad [2011] FCA 921; (2011) 196 FCR 259 at 264 [19] per Rares J.

[14] Lord Woolf HK, Access to Justice: Final Report to the Lord Chancellor of the Civil Justice System in England and Wales (HMSO, 1996).

[15] Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175.

[16] United Motors Retail Ltd v Australian Guarantee Corporation Ltd (1991) 58 SASR 156 at 158.

[17] Roy Goode ‘Principles of Corporate Insolvency Law’ in Ewan MsKendrick (ed), Goode on Commercial Law (LexisNexis UK, 2016) 873.

[18] Kadam and Others v MiiResorts Group 1 Pty Ltd and Others (No 4) [2017] FCA 1139; (2017) 252 FCR 298.

[19] Federal Court of Australia Act 1976 (Cth) Pt IVA.

[20]  Federal Justice System Amendment (Efficiency Measures) Act 2009 (Cth) s 54A.

[21] Commonwealth, Parliamentary Debates, House of Representatives, 5 February 2009 at 575 (Robert McClelland, Attorney-General).

[22] Federal Court of Australia Act 1976 (Cth) s 37M(2).

[23] Common Law Procedure Act 1854 (UK) 17 Vict.

[24] Judiciary Act 1873 (UK) 36 Vict.

[25] CPB Contractors Pty Limited v Celsus Pty Limited (formerly known as SA Health Partnership Nominees Pty Ltd) (No 2) [2018] FCA 2112; (2018) 364 ALR 129 at 135-136 [26].

[26] See AT & NR Taylor & Sons Pty Ltd v Brival Pty Ltd [1982] VR 762 at 765-766 per Beach J.

[27] Corporations Act 2001 (CTH) s 95A.

[28] Southern Cross Interiors Pty Ltd (in liquidation) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 164 FLR 430; (2001) 53 NSWLR 213 at 440 (FLR) [54].

[29] Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 558.