Carter, in the matter of the Spectrum Fire Group
[2012] FCA 1202
•31 August 2012
FEDERAL COURT OF AUSTRALIA
Carter, in the matter of the Spectrum Fire Group [2012] FCA 1202
Citation: Carter, in the matter of the Spectrum Fire Group [2012] FCA 1202 Parties: PHILIP PATRICK CARTER, CHRISTOPHER CLARKE HILL, GRANT DENE SPARKS, DANIEL MATTHEW BRYANT AND STEPHEN GRAHAM LONGLEY (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF THE COMPANIES IN THE SPECTRUM FIRE GROUP NAMED IN THE SCHEDULE) File number: NSD 837 of 2012 Judge: EMMETT J Date of judgment: 31 August 2012 Legislation: Corporations Act 2001 (Cth) s 477(2B) Date of hearing: 31 August 2012 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 14 Counsel for the plaintiffs: E Hyde Solicitor for the plaintiffs: Jones Day
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 837 of 2012
BETWEEN: PHILIP PATRICK CARTER, CHRISTOPHER CLARKE HILL, GRANT DENE SPARKS, DANIEL MATTHEW BRYANT AND STEPHEN GRAHAM LONGLEY (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF THE COMPANIES IN THE SPECTRUM FIRE GROUP NAMED IN THE SCHEDULE)
JUDGE:
EMMETT J
DATE OF ORDER:
31 AUGUST 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the plaintiffs be granted leave to:
a)enter into the litigation funding deed between the plaintiffs, the companies named in the Schedule attached and Westpac Banking Corporation (as annexed marked “Confidential Annexure PPC5” to the affidavit of Philip Patrick Carter dated 18 June 2012); and
b)engage Jones Day, solicitors for the plaintiffs, as outlined in Jones Day’s letter dated 18 October 2011 (as annexed marked “Annexure PPC6” to the affidavit of Philip Patrick Carter dated 18 June 2012).
2.Annexures to the affidavit of Philip Patrick Carter dated 18 June 2012 marked “Confidential Annexure PPC4” and “Confidential Annexure PPC5” remain confidential on the Court file and be filed in a sealed envelope and not be made available for inspection by any person without any further order of this Court.
3.An order that the costs of this application be costs in the winding-up of the companies named in the Schedule attached.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 837 of 2012
BETWEEN: PHILIP PATRICK CARTER, CHRISTOPHER CLARKE HILL, GRANT DENE SPARKS, DANIEL MATTHEW BRYANT AND STEPHEN GRAHAM LONGLEY (IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF THE COMPANIES IN THE SPECTRUM FIRE GROUP NAMED IN THE SCHEDULE)
JUDGE:
EMMETT J
DATE:
31 AUGUST 2012
PLACE:
SYDNEY
REASONS FOR JUDGMENT
The liquidators of six companies have applied for an order under s 477(2B) of the Corporations Act 2001 (Cth) (the Act). They seek approval for the entry into of a litigation funding agreement with Westpac Banking Corporation (Westpac). The six companies are members of a group known as the Spectrum Fire Group (the Group), which was formed in February 2006 through the incorporation of three entities and the subsequent acquisition and amalgamation of a number of established fire protection businesses into a national group. The Group operated a fire protection business from numerous sites across Australia, involving the provision of a range of fire protection products and services.
On 2 May 2010, Mr Philip Carter was appointed administrator of each of the six companies. He was appointed jointly and severally with various of his partners, Messrs Christopher Hill, Grant Sparks, Daniel Bryant and Stephen Longley. Mr Carter was appointed administrator of each of the six companies, and one or other of his partners was appointed administrator with him jointly and severally. The appointment of the administrators was made when it became apparent that the management of the Group was unable to negotiate a sale of its business quickly enough to allow them to feel comfortable in continuing trading. After the appointment, the administrators formed the view that it was desirable to sell the business as quickly as possible. The Group’s banker and largest creditor was Westpac. On 3 May 2010, the business of the Group was sold to the Hastie Group with the full support of Westpac.
At the second creditors’ meeting for each of the companies in the Group, held on 4 June 2010, the creditors of each company resolved that the company be wound up and that the respective administrators of each company be appointed jointly and severally as liquidators. Since that time, Mr Carter and his relevant partners have acted as liquidators of the six companies. In the course of doing so, the liquidators have formed the view that the companies in the Group were each insolvent throughout the period of six months prior to their appointment as administrators.
The approach of the administrators, in making an assessment of the solvency of each of the companies, has been to assess the solvency position of the Group as a whole, on a consolidated basis. They adopted that approach because the treasury arrangements, internal reporting, operations, and, most significantly, guarantee arrangements in place between each of the companies in the Group, were all on a group consolidated basis. Accordingly, the solvency position of each of the companies was intricately connected to that of all of the other companies in the Group. The administrators have therefore taken the view that the solvency of each company was accurately reflected by the overall solvency of the entire Group. Where possible, some cross-checking has been undertaken against analysis on a single company basis. That cross-checking confirmed the view that had been formed by the administrators.
Mr Carter has formed the view that certain payments made to the Australian Taxation Office (ATO) resulted in the ATO receiving more than it would have received if the payments were set aside and the ATO had to prove as an unsecured creditor in the relevant liquidations. The total amount of the payments in question is in excess of $4,500,000.
Mr Carter has obtained legal advice dated 20 June 2011 from Jones Day, solicitors, in relation to the prospects of recovering moneys from the ATO. Mr Carter seeks an order that the terms of the advice, which has been made available to the Court, be kept confidential. He has not intended to waive confidentiality or privilege in relation to that advice. Based on that advice, and his assessment of the solvency position of the six companies, Mr Carter considers that it is appropriate to pursue a claim against the ATO to recover some or all of the payments to which I have referred. However, the liquidators do not have sufficient funds available to them to pursue a claim against the ATO. They therefore propose to enter into a funding arrangement with Westpac.
At the commencement of the administration, Westpac held security over all of the assets of all of the companies in the Group, except for three of the companies. The amount of the indebtedness of the companies to Westpac was in excess of $35,600,000. Although it would have been entitled under the terms of its security to appoint receivers, Westpac chose not to appoint receivers but consented to the appointment of the administrators. Having regard to the extent of security held by Westpac and the size of the debt owed to it, it is highly likely that Westpac would be the only creditor affected by an increase or decrease in any realisations on sale of the assets of the Group, other than preferred payments owing to employees. More than $30 million is still owing to Westpac, which is the largest creditor in the liquidation of the companies. Its debt represents about 75 per cent of all indebtedness. It would be approximately 67 per cent if the ATO were required to repay the whole of the $4.5 million that would be the subject of the proposed preference claim. Unless moneys can be recovered from the ATO, there are not likely to be any further realisations that would enable any further distribution to be made to Westpac or to any of the unsecured creditors. All employee claims have been satisfied, either by transfers of employment to the Hastie Group or payment in full for employees whose services were made redundant.
As I have said, the liquidators have insufficient cash reserves to fund the proposed proceeding against the ATO. The current cash balance is something in excess of $27,000. Westpac has indicated that it is prepared to enter into an agreement to fund the liquidators in the conduct of a claim against the ATO. A draft litigation funding deed has been brought into existence and has been made available to the Court. Again, it is appropriate that the terms of the litigation funding agreement be kept confidential. Under the litigation funding deed, Westpac will be entitled to receive moneys recovered by the liquidators upon the occurrence of various outcomes of the proposed proceeding against the ATO. The remaining creditors may also receive moneys recovered by the liquidators, in accordance with the terms of the proposed litigation funding deed.
It has taken some months for the terms of the litigation funding deed to be negotiated. During that time, Mr Carter made inquiries regarding the possibility of obtaining funding from other sources. He is satisfied that the terms of the proposed litigation funding deed with Westpac, and the terms of a proposed retainer of Jones Day to act in connection with the recovery, are appropriate in all of the circumstances. A committee of inspection was appointed in respect of each of the companies in the Group. The committee consists of a representative of Westpac and a representative of one other creditor, being Pertronic Industries Pty Limited. It is unsurprising that there is limited interest in being a member of a committee in circumstances where creditors, other than Westpac as secured creditor, are unlikely to receive anything by way of dividend.
The terms of the litigation funding deed are not unusual for circumstances such as those presently before me. Westpac agrees to pay the costs of investigating the claims against the ATO, subject to a monetary cap. The liquidators agree to provide certain documents to Westpac, such as their solvency report and legal advice, and afford Westpac the opportunity, after considering those documents, to decline to proceed to fund the claims. Assuming Westpac agrees to continue with the funding, it is obliged to fund the liquidators’ remuneration and costs, including legal costs, of the claims against the ATO, subject to fixed limits, and to meet any adverse costs order that might be made against the liquidators or the companies. The liquidators agree to keep Westpac informed of the progress of the claims. Provision is also made in the litigation funding deed for the costs of any appeal, either by the liquidators or the ATO. Westpac has the opportunity to consider whether it wishes to provide funding for any such appeal.
The litigation funding deed provides for the proceeds of recovery to be applied in payment of investigation and litigation funding provided, and remuneration and costs of the liquidators, including costs of the administration. The balance is to be divided between Westpac and the liquidators in proportions that are specified, with provision for an increase in the proportion to be paid to Westpac depending upon when the recovery occurs.
The proposed litigation funding deed has been approved by the members of the committee of inspection, having regard to the obvious interest of Westpac. The liquidators, nevertheless, seek an order under s 477(2B) of the Act. That provision prohibits the liquidator of a company from entering into certain agreements, except with the approval of the Court or the committee of inspection or a resolution of creditors. The agreements that are prohibited are agreements that provide that the term of the agreement may end, or the obligations of a party to the agreement may be discharged by performance, more than three months after the agreement is entered into, even if the term may end or the obligations may be discharged within those three months. Clearly enough, as a practical matter, the proposed litigation funding deed and the proposed retainer of Jones Day may well not be performed in full within three months. However efficient the Court might be, it is unlikely that the claim would be finalised within that period.
I have considered the legal advice which has been received by the liquidators. It is not for the Court to rubber-stamp a proposal such as that which is now before the Court. On the other hand, the question of such a proceeding and the terms of litigation funding are commercial matters for the judgment of the liquidators. All that the Court can do is consider whether or not the proposals are within the range of what might be undertaken by a liquidator acting rationally and reasonably. Various considerations might be taken into account in deciding whether or not to give approval under s 477(2B). They include such things as the liquidator’s prospects of success, the benefit that might accrue to unsecured creditors, the nature and complexity of the proceedings, the level of the funder’s premium, the extent to which the liquidators have consulted with creditors and the risks involved in the claim.
The proportion of the recovery which is to be applied to Westpac is within what might be considered to be a range that is common in agreements of this type. On one view, the whole of the proceeds of the recovery would go to Westpac, on the basis of its security. In all of the circumstances, I am satisfied that the proposed litigation funding deed and the retainer should be approved under s 477(2B).
I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 31 October 2012
SCHEDULE
Company name Appointee 1 Appointee 2 Spec FS NSW Pty Ltd (Formerly Spectrum Fire and Security (NSW) Pty Ltd) ABN 99 096 173 125 Philip Patrick Carter Christopher Clarke Hill Spec FS QLD Pty Ltd (Formerly Spectrum Fire and Security (QLD) Pty Ltd) ABN 82 010 630 967 Philip Patrick Carter Grant Dene Sparks Spec FS SA Pty Ltd (Formerly Spectrum Fire and Security (SA) Pty Ltd) ABN 99 117 907 034 Philip Patrick Carter Daniel Matthew Bryant Spec FS VIC Pty Ltd (Formerly Spectrum Fire and Security (VIC) Pty Ltd) ABN 73 105 992 265 Philip Patrick Carter Stephen Graham Longley Spec F Pty Ltd (Formerly Spectrum Fire Pty Ltd) ABN 33 117 906 322 Philip Patrick Carter Christopher Clarke Hill On-Line Pro Pty Ltd (Formerly On-Line Fire Protection Pty Ltd) ABN 92 050 207 175 Philip Patrick Carter Daniel Matthew Bryant
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