Cathro (Liquidator), in the matter of Metigy Pty Ltd (in liq) (applications for settlement approval)

Case [2023] FCA 818

FEDERAL COURT OF AUSTRALIA

Cathro (Liquidator), in the matter of Metigy Pty Ltd (in liq) (applications for settlement approval) [2023] FCA 818

File number(s): NSD 449 of 2023
NSD 461 of 2023
Judgment of: RARES J
Date of judgment: 4 July 2023
Catchwords:

BANKRUPTCY AND INSOLVENCY – application by trustee of bankrupt estate for order under s 90-15(1) and (3)(a) of Sch 2 to Bankruptcy Act 1966 (Cth) that trustee would be justified, and acting reasonably, in entering settlement of claims – where dispute factually and legally complex – whether trustee justified in entering settlement to protect estate from incurring costs and expenses in prosecuting or defending claim where uncertainty as to factual and legal results – Held: entry into settlement justified

CORPORATIONS – application by liquidators for order under s 90-15(1) and (3)(a) of Sch 2 to Corporations Act 2001 (Cth) that liquidators would be justified, and acting reasonably, in entering settlement of claims – where dispute factually and legally complex – whether liquidators justified in entering settlement to protect estate from incurring costs and expenses in prosecuting or defending claim where uncertainty as to factual and legal results – Held: entry into settlement justified

Legislation:

Bankruptcy Act 1966 (Cth) ss 58(3), 109, Sch 2 s 90-15(1), (3)(a)

Corporations Act 2001 (Cth) ss 180, 181, 182, 500(2), Pt 5.3A, Sch 2 s 90-15(1),(3)(a)

Cases cited:

Barnes v Addy (1874) LR 9 Ch App 244

Black v S Freedman & Co (1910) 12 CLR 105

Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654

Leroy (Trustee), in the matter of Vitale and Vitale (Bankrupts) [2016] FCA 999

Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66

Orix Australia Corporation Ltd v Moody Kiddell & Partners Pty Ltd [2005] NSWSC 1209

Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409

Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674
Division: General Division
Registry: New South Wales
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Number of paragraphs: 35
Date of hearing: 4 July 2023
Counsel for the plaintiffs in NSD 449 of 2023: Mr M Condon SC with Mr M Rose
Solicitors for the plaintiffs in NSD 449 of 2023: Addisons Lawyers
Counsel for the applicant in NSD 461 of 2023: Mr D Pritchard SC with Mr J Parrish
Solicitors for the applicant in NSD 461 of 2023: Daniela Fazio Lawyers Pty Ltd

 

ORDERS

NSD 449 of 2023

IN THE MATTER OF METIGY PTY LTD (IN LIQUIDATION) ACN 617 973 270 &

METIGY ADMINISTRATION PTY LTD (IN LIQUIDATION) ACN 167 887 907

SIMON CATHRO AND ANDREW BLUNDELL AS JOINT AND SEVERAL LIQUIDATORS OF METIGY PTY LTD (IN LIQUIDATION) ACN 617 973 270

First Plaintiff

METIGY ADMINISTRATION PTY LTD (IN LIQUIDATION) ACN 167 887 907

Second Plaintiff

ORDER MADE BY:

RARES J

DATE OF ORDER:

4 JULY 2023

THE COURT…

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Cathro (Liquidator), in the matter of Metigy Pty Ltd (in liq) (applications for settlement approval) [2023] FCA 818
Case
[2023] FCA 818
Decision Date

CaseChat Overview and Summary

In the case of Cathro (Liquidator), in the matter of Metigy Pty Ltd (in liq) (applications for settlement approval), the Court was asked to consider applications made by the trustee of a bankrupt estate and the liquidators of a company. The dispute centred on the settlement of claims related to the sale proceeds of two properties owned by the bankrupt and his wife. The Court had to decide whether the trustee and liquidators were justified in entering into a settlement to avoid incurring significant costs and expenses in prosecuting or defending the claims, given the complexity of the factual and legal issues involved.

The legal issues the Court needed to address were whether the trustee and liquidators were justified in entering into the settlement to protect the estate from incurring costs and expenses, where there was uncertainty about the factual and legal outcomes. The Court had to consider whether there was a substantive doubt about the claims and whether the settlement reflected a compromise of complex issues. The Court also had to determine if the settlement was reasonable and in the best interests of the creditors and the estate.

The Court found that there was indeed a substantive doubt about the claims, as each party's claim had strengths and weaknesses. The settlement terms reflected a compromise of complex factual and legal issues, and the legal right to the sale proceeds was not obvious. The Court emphasised the importance of protecting the interests of the trust and not merely alleviating the trustee's or liquidator's apprehension or unease about the business decision. The Court concluded that the trustee and liquidators were justified in entering into the settlement, as it was a reasonable and prudent decision given the circumstances.

The Court made orders approving the settlement and directing the distribution of the sale proceeds. The trustee was allowed to receive certain costs and expenses, and the remaining funds were to be distributed equally between the liquidators and the investors. The Court also ordered that the trustee's costs in relation to the application would be properly incurred in the administration of the bankrupt estate.

Orders

Orders of the court

1. Pursuant to s 90-15 of the Insolvency Practice Schedule (Bankruptcy), Sch 2 to the Bankruptcy Act 1966 (Cth) (IPS), the applicant in his capacity as trustee of the bankrupt estate of David Frazer Ewan Fairfull (bankrupt estate) is justified, and would otherwise be acting reasonably, in entering into and in giving effect to the settlement set out in the terms of settlement dated 5 May 2023 between him, Metigy Pty Ltd (in liq), Meitgy Administration Pty Ltd (in liq) and Metigy Global Pty Ltd (in liq) (collectively Metigy), Simon Cathro and Andrew Blundell as joint and several liquidators of Metigy (the liquidators) and Regal Funds Management Pty Limited ACN 107 576 821 as trustee for Regal Emerging Companies Fund II, Regal Emerging Companies Fund III and Regal Emerging Companies Opportunities Fund, Five V ESVC Fund I, LP acting through its general partner Five V ESVC Fund I UGP Pty Ltd ACN 638 344 448, Five V Bare Nominees VC1 Pty Ltd ACN 649 721 399 and Sirius Enterprises Pty Ltd ACN 619 137 254 as trustee for the Sirius Trust (the investors).

2. Pursuant to s 90-15(1) of the IPS, the applicant takes all steps necessary to cause the moneys held in the controlled moneys account, bearing BSB 032 143 and account number 965471 (the controlled moneys account), to be paid as follows:

(a) up to $100,0000 to the applicant in respect of the applicant’s costs and expenses of this application, including his remuneration, costs, charges (including any realisation charge) and expenses;

(b) $176,200 to the applicant in respect of the applicant’s past costs and expenses in respect of the bankrupt estate, including his remuneration, costs, charges (including any realisation charge) and expenses, on an indemnity basis in a fixed amount of $176,200;

(c) $200,000 to the applicant in respect of the applicant’s future costs and expenses in respect of the bankrupt estate, including his remuneration, costs, charges (including any realisation charge) and expenses on an indemnity basis, and subsequently for distribution in accordance with s 109 of the Bankruptcy Act 1966 (Cth); and

(d) as to the balance remaining in the controlled moneys account:

(i) 50% to the liquidators; and

(ii) 50% to the investors.

3. Pursuant to s 90-15(1) of the IPS, the applicant is justified, and would otherwise be acting reasonably, in causing the payments identified in order 2 to be made.

4. The applicant’s costs of, and incidental to, this application are costs properly incurred in the administration of the bankrupt estate.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Under s 90-15(1) and (3)(a) in Sch 2 of each of the Bankruptcy Act and Corporations Act, the Court may make orders in relation to the administration of a regulated debtor’s estate in the case of a bankrupt or the external administration of a company and, without limiting those, determine any question arising in the respective administration. BACKGROUND On 1 June 2023, Markovic J ordered that:·the proceedings by each of the liquidators and the trustee be heard together today and evidence in one be evidence in the other;·each of the trustee and liquidators send a copy of his or their application in the respective proceeding and her Honour’s orders by email or post in accordance with email or postal addresses known to the liquidators or trustee, respectively, to:(a)all known creditors of each of, first, Mr Fairfull’s bankrupt estate and, secondly, Metigy, together with its related companies, Metigy Administration Pty Ltd (in liq) and Metigy Global Pty Ltd (in liq) (collectively, the Metigy group), which were also parties to the terms of settlement and were also being wound up by the liquidators;(b)in the case of the bankrupt’s estate, the wife of the bankrupt, Deborah Fairfull (Mrs Fairfull), all shareholders of Metigy and all noteholders of Metigy previously notified by the liquidators to Mr Gleeson; and(c)in the case of the liquidations, all creditors of each member of the Metigy group who had lodged a proof of debt, all shareholders in the Metigy group and all persons issued with convertible notes by Metigy; (collectively, the interested parties)·any interested party who wished to make a proprietary claim on the balance of monies realised from the sale of two properties owned by the bankrupt and Mrs Fairfull, being $4,134,137.27 paid into a controlled monies account held in the liquidators’ names (the sale proceeds) referred to in the respective orders, had to apply to the Court by 26 June 2023 for orders that either:(d)they be joined as a party to the proceeding; or (e)they be granted leave to commence a proceeding against: (i)Metigy under s 500(2) of the Corporations Act and proceed by way of points of claim within the liquidation proceeding; or (ii)the bankrupt’s estate under s 58(3) of the Bankruptcy Act and proceed by way of points of claim within the bankruptcy proceeding; and·any application made by an interested party was returnable on 29 June 2023. The liquidators’ amended originating application contained more information, for the purposes of persons whose interests may be affected, than in Mr Gleeson’s application. That is because the amendments to the liquidators’ application identified how, under the terms of settlement, the parties proposed the sale proceeds be distributed. The liquidators’ amended originating application sought orders that:·they take all steps necessary to cause the sale proceeds to be distributed as follows:(a)up to $100,000 to Mr Gleeson in his capacity as trustee of the bankrupt’s estate in respect of his costs and expenses, including remuneration, costs, charges, any realisation charge and expenses for his application to the Court;(b)$176,000 in respect of Mr Gleeson’s current costs and expenses in respect of the bankrupt’s estate fixed in the amount of $176,200;(c)$200,000 to Mr Gleeson in respect of his future remuneration, costs, charges and expenses on an indemnity basis and in respect of any realisation charge and, subsequently, for distribution to unsecured creditors in accordance with s 109 of the Bankruptcy Act; and(d)by paying the balance in equal shares to the liquidators, in their official capacity, and to the investors; and·they would be justified, and would otherwise be acting reasonably, in not proving in the bankrupt’s estate of Mr Fairfull in respect of the $200,000 payment to Mr Gleeson.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

In Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at 428 [65], Goldberg J said that:the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease. There must be an issue calling for the exercise of legal judgment. (emphasis added) A decade earlier, McLelland J expressed a similar view in Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 679F–680C (see also Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654 at [19]–[20] per Yates J and Leroy (Trustee), in the matter of Vitale and Vitale (Bankrupts) [2016] FCA 999 at [37] per Wigney J). I am satisfied that the application by each of Mr Gleeson and the liquidators is based on there being a substantive doubt as to whether either of them or the investors has a better claim to the sale proceeds. Each of the three parties’ claims has strengths and weaknesses, albeit that Mr Gleeson’s is much weaker in comparison to the other two claims. The terms of settlement are not merely reflective of a commercial judgment but bespeak a compromise of complex factual and legal issues for which there is no particularly clear answer. While often it can be said that fraud unravels all, here, the facts suggest that Mr Fairfull has engaged in, what might charitably be called questionable, commercial dealings that have given rise to the current disputed claims to the sale proceeds, at least on the basis of Mr McCallum’s evidence and that of the liquidators as to Metigy’s financial status. The legal right to the sale proceeds that a court, in contested litigation, ultimately may find in resolving the various claims to the sale proceeds of the investors, the liquidators and the bankrupt’s estate is not obvious. There are conflicting legal authorities, and it will obviously be necessary for a detailed factual investigation to occur in a complex, commercial trial. Such a proceeding would require considerable pre-trial preparation and consume substantial amounts of whatever might ultimately be realised, if anything, by each of the trustee and liquidators, who only will have recourse to the assets of their respective estates with which to pursue any such litigation.

Ratio Decidendi

Legal Principle Established

The investors, on the other hand, asserted that they had a proprietary claim, based on their being able to trace through the sale proceeds from Mr Fairfull’s fraudulent conduct that had induced their investments in the convertible notes and or shares to his application of those monies, including because of his admission to Mr McCallum that monies they had invested were, in part, at least, connected to, or funded, Metigy’s loan of $7.7 million that he caused it to make to himself and his wife to purchase the two properties. CONSIDERATION The various legal arguments the subject of the position papers, which are subject to without prejudice privilege, but are in evidence before me for the purposes of these applications, suggested that the underlying dispute, particularly between Metigy and the investors, as to which might have a better claim to the sale proceeds, was highly complex, factually and legally. While Mr Fairfull may have been able, through his trustee, to assert some right to those monies, the agreed proposed manner of distribution of the sale proceeds reflects the substantively weaker claim that Mr Gleeson, as trustee of Mr Fairfull’s estate, would be able to maintain in respect of those funds. Applications of the present kind by a trustee or liquidator are, in substance, for judicial advice to resolve doubt about whether it is proper for the trustee or liquidator to incur costs and expenses in prosecuting or defending litigation. As Gummow ACJ, Kirby, Hayne and Heydon JJ said in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 93–94 [71]–[72]: No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee’s fear of personal liability for costs.It is, therefore, not right to see a trustee’s application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust. In Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at 428 [65], Goldberg J said that:the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease. There must be an issue calling for the exercise of legal judgment. (emphasis added)