Federal Court Confirms Pre-Judgment Interest Calculation in Liquidator Proceedings

On 16 August 2024, the Federal Court of Australia handed down its second judgment in the case of Stone (liquidator), in the matter of Ironbark Blacksmithing Pty Ltd (in liq) v Mizzi (No 2^[1]) ("Stone v Mizzi"). The judgment confirms the Court's position in relation to pre-judgment interest in proceedings commenced by a liquidator, namely, that interest is calculated from the date when the demand is sufficiently specified. The Court's clarity is welcomed in light of a recent, inconsistent, decision of the same Court.

Key facts

Ironbark Blacksmithing Pty Ltd ("Ironbark") operated a metal fabrication business. The sole directors and shareholders of Ironbark were two brothers, Andrew Mizzi and Stephen Mizzi. Ironbark failed to comply with a statutory demand served by the ATO, and the company was wound up on 6 February 2015. On 30 June 2020, the liquidator commenced proceedings against the directors seeking:

• recovery of shareholder loans made by Ironbark to the directors ("Loan Advances")
• damages for breaches of directors' duties ("Directors Duties Contraventions"); and
• damages for insolvent trading ("Insolvent Trading Claim").

On 28 June 2024, the Court handed down its primary judgment in the Stone v Mizzi, in which it made orders in favour of the liquidator. The parties were not able to reach an agreed position on costs and pre-judgment interest, and so the Court considered the parties' written submissions on the issues prior to handing down the second judgment.

The law

Section 51A(1) of the Federal Court of Australia Act 1976 (Cth) ("Act") provides that in a proceeding for the recovery of any money, the Court shall either order that interest is payable between the date when the cause of action arose and the date when judgment is entered, or, that a lump sum is paid in lieu of interest. Historically, in proceedings brought by liquidators, the date when the cause of action arose (and consequently, the date from which interest is to be paid), has differed depending on the cause of action itself. Interest has been allowed from the date of the liquidator's demand in cases concerning unfair preferences (Spedley[2] and Ferrier^[3]), uncommercial transactions (Capital Finance^[4]), and unreasonable director-related transactions (Cooper^[5]). However, in cases involving insolvent trading claims, the Court recently decided in Aquisite Pty Ltd v Moss (No 2^[6]) ("Aquisite"), citing Powell v Fryer^[7] (2001), that an award of pre-judgment interest should be made from the date of the appointment of the liquidator. The reason for this decision was that section 588M of the Corporations Act 2001 (Cth), which concerns recovery of compensation for loss resulting from insolvent trading, gives rise to a liability as and when each debt is incurred.

Submissions

The liquidator submitted that the date the causes of action arose (and consequently, the dates from which pre-judgment interest should be paid) were:

• in respect of the Loan Advances, the date the loan was made; and
• in respect of the Directors Duties Contraventions and the Insolvent Trading Claim, the date the liquidator was appointed (as per the decision in Aquisite).

The directors submitted that interest should only be payable from the date of the amended statement of claim in relation to all claims in the proceeding, because this was the first date from which the precise scope of the liquidator's claims was revealed.

The decision

The Court landed somewhat in the middle of the parties' respective positions and held that, consistent with the decision in Ferrier, interest was payable from:

• in respect of the Loan Advances and the Insolvent Trading Claim, the date the demands were made; and
• in respect of the Directors' Duties Contraventions, the date the amended statement of claim was filed (as this was found to be the first date that the demand was sufficiently specified).

The underlying rationale for the decision is that, until a liquidator makes a demand against a director, no cause of action can be relevantly said to have arisen for the purposes of s 51A of the Act. The rationale is equally applicable to insolvent trading claims, and to the extent that Powell or Aquisite might suggest that interest should run from the date of the appointment of the liquidator, the Court held that those decisions "were incorrect and contrary to the reasoning of the full Court in Ferrier".[8]

Costs

The second judgment in Stone v Mizzi also considered the question of costs payable by the directors. The directors contended that, although they were ultimately unsuccessful in the proceeding, they should only be required to pay 60% of the liquidator's costs as the award of costs ought reflect the portion of the claim for which the liquidator was successful. The Court disagreed, and the ordinary rule that costs follow the event was not displaced.

Key takeaways

The second decision of Stone v Mizzi provides clarity to the date from which interest will accrue in proceedings brought by liquidators against directors. Liquidators can rely on the general rule that pre-judgment interest will run from the date the demand is sufficiently specified, regardless of the cause of action. [1] [2024] FCA 927. [2] Spedley Securities Ltd (in liq) v Western United Ltd (in liq) (No 2) (1992) 7 ACSR 721. [3] Ferrier and Knight (as liquidators of Compass Airlines Pty Ltd) v Civil Aviation Authority (1994) 55 FCR 28. [4] Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185. [5] Cooper (as Liquidator of Runtong Investment and Development Pty Ltd (In Liq)) v CEG Direct Securities Pty Ltd (Costs) [2024] FCA 120. [6] [2023] FCA 727. [7] 159 FLR 433. [8] Stone (liquidator), in the matter of Ironbark Blacksmithing Pty Ltd (in liq) v Mizzi (No 2) [2024] FCA 927 at [36].