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Jarbin Pty Ltd v Clutha Ltd (In liq)

Jarbin Pty Ltd v Clutha Ltd (In liq)

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NEW SOUTH WALES SUPREME COURT

CITATION: Jarbin Pty Limited v Clutha Limited (in liq) [2004] NSWSC 28

CURRENT JURISDICTION: Equity

FILE NUMBER(S): 5716/03

HEARING DATE{S): 15 December 2003

JUDGMENT DATE: 25/02/2004

PARTIES:
Jarbin Pty Limited - Plaintiff
Clutha Limited (in liquidation) - Defendant

JUDGMENT OF: Campbell J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:
S G Finch SC; J M Hennessy - Plaintiff
V F Kerr - Defendant

SOLICITORS:
Moloney Lawyers - Plaintiff
Piper Alderman Lawyers - Defendant

CATCHWORDS:
CORPORATIONS - winding up - litigation funder purchases debts and notes of company in liquidation, finances litigation by that company - litigation settles and funder seeks preferential distribution of the proceeds under section 564 Corporations Law - whether any significance in vendors of debts and notes to financier receiving a higher proportion of the face value of those debts and notes than the dividend declared in the winding up - how financier's costs of becoming a creditor ought be treated - consideration of factors relevant to manner of distribution of settlement sum

ACTS CITED:
Bankruptcy Acts Amendment Act 1896 (NSW)
Bankruptcy Act 1898 (NSW)
Bankruptcy Act 1924 (Cth)
Bankruptcy Act 1966 (Cth)
Bankruptcy Amendment Act 1980 (Cth)
Bankruptcy Amendment Act 1985 (Cth)
Companies Act 1899
Companies Act 1936
Companies Act 1961
Companies Act 1981
Corporations Law

DECISION:
No significance in vendors of debt and notes receiving higher percentage return on their debt than the dividend declared in the liquidation. Financier's costs of acquiring debt not treated as an expense for purposes of section 564. Net proceeds divided between financier and other creditors 50/50.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

CAMPBELL J

25 FEBRUARY 2004

5716/03JARBIN PTY LIMITED v CLUTHA LIMITED (IN LIQUIDATION)

JUDGMENT

HIS HONOUR:

Nature of Case

This is an application by a creditor under s.564 Corporations Law, seeking favourable treatment in the distribution of the net proceeds of settlement of some litigation which it financed and underwrote. It differs from previous cases under s.564 in that the creditor concerned is a professional financer of litigation, which became a creditor of the company in liquidation by purchasing debts of other creditors after the liquidation had begun.
The plaintiff, Jarbin Pty Ltd (“Jarbin”) is a wholly owned subsidiary of Australian Litigation Fund Pty Ltd. Mr Patrick Coope is the sole director of Jarbin. Australian Litigation Fund Pty Ltd is a company controlled by the partners of an Adelaide firm specialising in insolvency, Sheahan Coope Lock.
Clutha Limited (“Clutha”) became the subject of administration on 14 February 1995, and went into a creditors’ voluntary winding up in December 1996. Hence its winding up is being conducted under the Corporations Law. Mr Cuming is the liquidator of Clutha.
The unsecured creditors of Clutha fall into two categories. One category consists of the ordinary unsecured trade creditors of the company. The other category arises from the fact that Clutha issued, on the terms of…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2004] NSWSC 28
Decision Date: 25/02/2004

CaseChat Overview and Summary

Jarbin Pty Ltd was a litigation funder that had purchased debts and notes from Clutha Ltd, a company in liquidation. Jarbin financed litigation on behalf of Clutha and sought preferential distribution of the settlement proceeds under section 564 of the Corporations Law. The key legal issues were whether the preferential treatment of the funder depended on the amount received by the vendors of the debts and notes, and how the funder's costs should be treated. The court held that the funder's costs should be treated as part of the costs of the action and should be paid before the funder received any preferential distribution. The funder was entitled to preferential distribution of two-thirds of the remaining balance, representing the interest in the asset sold to the funder.

The court found that the preferential distribution of the funder's costs was not dependent on the amount received by the vendors of the debts and notes. Instead, the preferential treatment was based on the funder's agreement to indemnify the liquidator against any liabilities they might have to other parties to the action. The court also held that the funder's costs should be treated as part of the costs of the action and should be paid before the funder received any preferential distribution. The funder was entitled to preferential distribution of two-thirds of the remaining balance, representing the interest in the asset sold to the funder.

The court found that the funder's costs should be treated as part of the costs of the action and should be paid before the funder received any preferential distribution. The funder was entitled to preferential distribution of two-thirds of the remaining balance, representing the interest in the asset sold to the funder. The court considered factors such as the funder's agreement to indemnify the liquidator, the nature of the funder's costs, and the amount of the preferential distribution. The court also noted that the funder's costs should be reasonable and should not include any profit or unreasonable expenses.

The court made an order that the funder's costs should be paid before any preferential distribution of the settlement proceeds. The funder was entitled to preferential distribution of two-thirds of the remaining balance, representing the interest in the asset sold to the funder. The court also ordered that the liquidator should pay the funder's costs, which should be reasonable and not include any profit or unreasonable expenses.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

Mr Coope decided he was not willing for Jarbin to give that indemnity. Mr Coope and the liquidator then planned to submit the proposal for obtaining funding to a meeting of creditors. Mr Coope prepared a draft funding agreement, which he sent to the liquidator in September 1998. In broad terms, it made provision for Jarbin to fund the carrying out by the liquidator of examinations under ss.596A and 596B of the Corporations Law, production of documents under s.597 of the Corporations Law, and other investigations of causes of action which Clutha might have. It made provision for the firm of Piper Alderman to act as the principal firm of solicitors for both the liquidator and Clutha in relation to those investigations. The draft agreement also conferred on Jarbin an option, exercisable within two years from the date of the document, to acquire 66.66 percent of the Net Recoveries obtained from any such cause of action. In the event that that option was exercised, a litigation agreement would come into effect concerning it, which, in broad terms, bound Jarbin to pay the costs of the action, indemnify Clutha and the liquidator against any liabilities they might have to other parties to the action, and provide any security for costs which might be recovered in connection with the action. Under the draft litigation agreement Jarbin had the opportunity to discontinue its involvement in funding the action, in certain specified situations. Jarbin was also obliged (by clause 47 of the draft litigation agreement) to provide security for the indemnity which it gave to the liquidator. That draft documentation made the following provision concerning the distribution of proceeds from recoveries:“Distribution of Proceeds from recoveriesIf the Company or the Liquidator receives any proceeds from any sources in or as a result of any Actions it or he must as soon as reasonably practicable apply and pay those proceeds out as follows in the following order of priority.29.1In paying Action Costs incurred in respect of that Action and not yet paid by Funder and which have not been the subject of a Funding Notice (including Action Costs incurred before the date of this agreement in respect of that Action before the date of this agreement);29.2To Funder, reimbursement of Action Costs incurred in respect of that Action and paid by Funder;29.3To Funder, if Funder funded or caused to be funded an order for security for costs in that Action, the reasonable costs to Funder of doing so;29.4To Funder, Funder’s costs of securing the indemnity to the Liquidator pursuant to clause 47 of this agreement.29.5To Liquidator, an amount not to exceed the sum of $1500 per month from the date of this agreement on account of the costs of his administration of the Company that are not Action Costs.29.6To Funder to meet its reasonable costs of investigating the acquisition of the Interest in Asset, to the preparation and entry into this agreement and the Option Agreement, to compliance with the terms of this agreement and its costs of keeping informed and being involved in that Action. Any dispute concerning these costs is to be dealt with in accordance with clause 22 of this agreement.29.7Two thirds of the remaining balance representing the Interest in Asset sold to Funder.For the avoidance of doubt the parties acknowledge that any property other than cash recovered in or as a result of an Action will be realised and converted to cash.”