Lawrence, in the matter of Cool Breeze Clothing Pty Ltd (in liquidation)
[2022] FCA 985
•19 August 2022
FEDERAL COURT OF AUSTRALIA
Lawrence, in the matter of Cool Breeze Clothing Pty Ltd (in liquidation) [2022] FCA 985
File number: VID 421 of 2022 Judgment of: MOSHINSKY J Date of judgment: 19 August 2022 Catchwords: CORPORATIONS – liquidation – application by liquidators for approval to enter into a litigation funding agreement – where funding to be provided by the Commonwealth to enable the liquidators to conduct public examinations – approval granted Legislation: Corporations Act 2001 (Cth), ss 477, 556, 596A, 596B
Federal Court of Australia Act 1976 (Cth), ss 37AF, 37AG
Freedom of Information Act 1982 (Cth)
Cases cited: Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 15 Date of hearing: 19 August 2022 Counsel for the Plaintiffs: Mr J Kohn Solicitor for the Plaintiffs: ERA Legal ORDERS
VID 421 of 2022 IN THE MATTER OF COOL BREEZE CLOTHING PTY LTD (IN LIQUIDATION) (ACN 060 573 051)
BETWEEN: RICHARD LAWRENCE, RICHARD ALBARRAN AND JOHN VOURIS AS LIQUIDATORS OF COOL BREEZE CLOTHING PTY LTD (IN LIQUIDATION) (ACN 060 573 051)
Plaintiffs
ORDER MADE BY:
MOSHINSKY J
DATE OF ORDER:
19 AUGUST 2022
THE COURT ORDERS THAT:
1.Subject to further order, pursuant to ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, access to confidential exhibit RL-2 to the affidavit of Richard Lawrence affirmed on 12 July 2022 be restricted to the plaintiffs (and the exhibit be treated as “confidential” on the Court file).
2.The plaintiffs forthwith file:
(a)a complete (confidential) version of the affidavit of Richard Lawrence affirmed on 12 July 2022 (including exhibit RL-2); and
(b)a redacted version of the affidavit (omitting exhibit RL-2)
3.Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the liquidators of Cool Breeze Clothing Pty Ltd (in liquidation) (the Company) have approval to enter into a funding agreement with the Commonwealth of Australia in substantially the same form as the funding agreement set out in confidential exhibit RL-2 to the affidavit of Richard Lawrence affirmed on 12 July 2022.
4.The costs of the application be costs in the liquidation of the Company.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MOSHINSKY J:
Introduction
The first plaintiffs, Richard Lawrence, Richard Albarran and John Vouris (the Liquidators), are the liquidators of Cool Breeze Clothing Pty Ltd (in liquidation) (the Company).
The Liquidators seek approval under s 477(2B) of the Corporations Act 2001 (Cth) to enter into a litigation funding agreement (the Agreement) and suppression and non-publication orders under ss 37AF and 37AG of the Federal Court of Australia Act 1976 (Cth) in respect of the Agreement.
The Liquidators rely on the following affidavits:
(a)an affidavit of Richard Lawrence dated 12 July 2022;
(b)an affidavit of Blake O’Neill, a solicitor of Gallande Pty Ltd, trading as ERA Legal, the solicitors acting for the plaintiffs, dated 28 July 2022; and
(c)an affidavit of Abhinav Sharma, a solicitor of ERA Legal, dated 18 August 2022.
Background
The following summary of the background is based on the plaintiffs’ outline of submissions which, in turn, is based on the affidavit evidence.
On 24 April 2020, the members of the Company resolved to wind up the Company and appoint the Liquidators as joint and several liquidators of the Company.
Based on the Liquidators’ investigations and review of the Company’s records, prior to the appointment of the Liquidators:
(a)on 4 August 1993, the Company was incorporated;
(b)the Company was the corporate trustee of the Luke and Nicole Zappelli Family Trust (the Trust);
(c)the Trust was a trading trust;
(d)the Company operated a retail business in its capacity as trustee of the Trust trading as “Dimmeys”;
(e)the Dimmeys business involved the operation of 23 retail outlets in the eastern States of Australia; and
(f)on or about 26 March 2020, the Company ceased trading.
On 19 June 2020, the Liquidators were appointed by this Court as receivers and managers of the assets, property and undertakings of the Trust for the purpose of satisfying the indemnity of the former trustee, being the Company.
The Liquidators have prepared various reports to creditors. According to a report to creditors dated 16 July 2020 (the July 2020 Report), the total liabilities of the Company, as at the date of the report, were $9,415,000. It is likely that the quantum of the total liabilities will significantly increase because Westpac has not yet made a formal claim in respect of its debts. The potential amount owed to Westpac is $18,332,102.
The Liquidators have been provided with a number of books and records of the Company. In addition, the Liquidators have obtained from the Australian Taxation Office the Trust/ Company’s tax file pursuant to a request made under the Freedom of Information Act 1982 (Cth). According to the material, a number of taxation lodgements are outstanding.
The application
By originating process filed on 29 July 2022, the Liquidators seek approval under s 477(2B) of the Corporations Act to enter into the Agreement. The purpose of entering into the Agreement is to enable the Liquidators to conduct public examinations in regard to the affairs of the Company.
Applicable principles
Section 477(2B) of the Corporations Act provides:
Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:
(a)without limiting paragraph (b), the term of the agreement may end; or
(b)obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;
more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.
In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594, Gleeson J set out the principles relevant to an application under s 477(2B) at [33]-[39]:
33In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 (“Fortress”) at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors: McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]; Pascoe; re Brentwood Village Ltd (in liq) [2014] FCA 1295, [44].
34The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 (“Cassegrain”) at [11] per Black J citing Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 266 ALR 642.
35In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 (“Pascoe”) at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]:
Although the court has the statutory task [under s 477(2B)] of giving “approval” to a liquidator’s agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete “merits review”. As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6:
... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.
36The Court’s task is to satisfy itself, having regard to the liquidator’s commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, re Newtronics Pty Ltd [2007] FCA 1375.
37In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors (identified by Austin J in Leigh re AP& PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25] and Re ACN 076 673 875 Ltd (rec’r & mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]-[34]) relevant to the Court’s assessment of a proposed litigation funding agreement:
(1)the prospects of success of the proposed litigation;
(2)the interests of creditors other than the proposed defendant;
(3)possible oppression;
(4)the nature and complexity of the cause of action;
(5)the extent to which the liquidator has canvassed other funding options;
(6)the level of the funder’s premium;
(7)consultations with creditors; and
(8)the risks involved in the claim.
38Generally, creditors are the best judge of their commercial interests, and the approval of creditors is an important discretionary factor in favour of the approval of the funding agreement: cf. Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 at 362.
39In Emu Brewery Developments Pty Ltd; re Emu Brewery Developments Pty Ltd [2009] FCA 1212, Gilmour J made an order approving a compromise of a claim that had been approved by creditors pursuant to s 477(2A). In that case, the deed giving effect to the compromise contained a condition precedent requiring the Court to make a direction that the liquidators were justified in entering into the deed. Similarly, in One.Tel Network Holdings [2001] NSWSC 1065; (2001) 40 ACSR 83, at [23], Austin J noted that his Honour had approved the liquidators’ entry into an agreement pursuant to s 477(2B) where that approval was a condition of the agreement and where another condition was the approval of the committee of inspection.
Consideration
The Liquidators submit, and I accept, that it is appropriate for the Court to approve the entry into the Agreement for the following reasons:
(a)First, the funding under the Agreement is limited to defined work related to or arising from proposed public examinations. Therefore, it is not necessary, at this stage, to consider the Liquidators’ prospects of success in any future litigation.
(b)Secondly, Mr Lawrence deposes that the entry into the Agreement is in the best interests of the creditors (other than the proposed examinees) because the proposed funding will give the Liquidators the opportunity to continue their investigations into the Company’s affairs. Mr Lawrence also deposes that, based on his investigations, the proposed examinees have the financial means to meet any judgment obtain against them and, absent any funding, no proceedings would be filed and there would be no potential recoveries for the creditors.
(c)Thirdly, public examinations are a common method by which liquidators can obtain information about the examinable affairs of a company. Mr Lawrence deposes to a number of potential causes of action that he seeks to investigate through the proposed public examinations. The causes of action include voidable transaction claims, trading while insolvent claims, and breach of directors’ duties claims. These causes of action are well-established and do not involve novel claims.
(d)Fourthly, the proposed examinees will be examined pursuant to s 596A or 596B of the Corporations Act. The application seeking the issuing of the summons for examination is unlikely to be complex.
(e)Fifthly, Mr Lawrence has explained why the Liquidators have not explored alternate funding to that secured by the Agreement. Mr Lawrence deposes that the terms of the Agreement are, in his assessment, as good a commercial approach to funding the proposed public examinations as possibly available because: (i) the conduct of the examinations will lie with the Liquidators and not the funder; and (ii) the funder does not seek to derive a premium or a return on the funding advanced.
(f)Sixthly, according to the Agreement, the Liquidators are only required to repay the funding in the event that recoveries are made as a result of the proposed public examinations. The Liquidators are, however, required pursuant to the Agreement to treat as a priority payment (pari passu with the priority afforded to the Liquidators’ costs and remuneration by s 556(1)(a) of the Corporations Act) the money proposed to be advanced pursuant to the Agreement. The Liquidators submit, and I accept, that this is reasonable since, if there were sufficient funds in the liquidation of the Company, the relevant costs would have been given priority pursuant to s 556(1)(a) of the Corporations Act.
(g)Seventhly, the Liquidators have consulted with creditors regarding the entry into of the Agreement. At a meeting held on 17 June 2022, the Liquidators sought creditor approval to enter into the Agreement. The resolution to approve the entry into the Agreement was rejected because creditors related to the proposed examinees voted against the resolution. Mr Lawrence deposes that, had it not been for the proxies of related parties received shortly prior to the meeting, the resolution to approve the Agreement would have passed.
(h)Finally, while there are risks in conducting public examinations, those risks are limited. Further, any risk that might arise is mitigated by the terms of the Agreement and the Liquidators’ obligations pursuant to the Agreement to keep their costs to a minimum and ensure that the costs are no more than is proportionate, fair and reasonable in all the circumstances.
In light of the above, I consider it appropriate to make an order approving the entry into the Agreement pursuant to s 477(2B).
I also consider it appropriate to make a suppression and non-publication order in relation to the Agreement. The rationale is that the Agreement relates to litigation funding and it may give an unfair advantage to examinees and potential respondents if they have access to the funding arrangements.
I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky. Associate:
Dated: 22 August 2022
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