Lewis & Templeton & Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S CI 2014 00883

IN THE MATTER of WAREHOUSE SALES PTY LTD (IN LIQUDIATION) (ACN 004 678 997) AND WHS2 PTY LTD (IN LIQUIDATION) (ACN 128 949 057)

BETWEEN

DARREN MICHAEL LEWIS AND DAMIAN JOHN TEMPLETON in their capacity as joint and several liquidators of WAREHOUSE SALES PTY LTD (in liquidation (and WHS2 PTY LTD (in liquidation)	Plaintiffs
and
LG ELECTRONICS AUSTRALIA PTY LTD & ORS	Defendants

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JUDGE:	SIFRIS J
WHERE HELD:	Melbourne
DATE OF HEARING:	15 December 2015
DATE OF JUDGMENT:	4 March 2016
CASE MAY BE CITED AS:	Lewis & Templeton & Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd & Ors (No 2)
MEDIUM NEUTRAL CITATION:	[2016] VSC 63

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CORPORATIONS – Liquidation – Liquidator seeks directions for approval of compromises – Section 511 Corporations Act 2001 (Cth) – Compromises desirable – Directions given and compromises approved.

LIQUIDATION – Authority to enter into settlement agreements – Performance involves a period exceeding three months – Section 447(2B) Corporations Act – Compromise desirable – Authority given and direction made.

LIQUIDATION – Whether settlement sums have priority in liquidation – Section 556(1)(a) Corporations Act – - Settlements constitute expenses properly incurred in realising or getting in property of company in liquidation – Priority accorded.

LIQUIDATORS – Conflict of interest – Whether liquidators have a conflict of interest having acted on erroneous legal advice causing some loss – No conflict in continuing to act – All stakeholders fully informed and no objection received – Liquidators did all that was reasonably necessary to resolve the conflict – No further action required.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr S J Maiden	Corrs Chambers Westgarth
For the Defendant	No appearance

TABLE OF CONTENTS

A...... Introduction.......................................................................................................................... 1
B...... The PPSA Judgment............................................................................................................ 2
The Goods............................................................................................................... 2
Arrangements for the supply of the Goods........................................................ 2
The retail customers’ interests and agreement.................................................. 4
WHS and WHS2 operations.................................................................................. 5
The critical issues – questions and answers....................................................... 6

C...... The Amended Interlocutory process................................................................................ 8
The questions for determination by the Court.................................................. 9

D...... The absence of a contradictor.......................................................................................... 10
Ex parte.................................................................................................................. 10
Contradictor.......................................................................................................... 13
Considerations...................................................................................................... 16

E...... Question 1: Should the settlements be approved?...................................................... 17
Preconditions for the grant of s 511 directions................................................ 18
Grounds on which s 511 orders will be made regarding compromises...... 20
The form of directions given.............................................................................. 24
Consideration........................................................................................................ 26
The Smeg settlement............................................................................................ 28
The Shriro settlement........................................................................................... 30
The Electrolux settlement................................................................................... 32

F...... Question 2: Authority under s 477(2B).......................................................................... 35
G...... Question 3: Do the settlement sums have s 556(1)(a) priority?................................. 37
Facts........................................................................................................................ 38
Submissions.......................................................................................................... 39
‘Expenses’.............................................................................................................. 40
‘Properly incurred’............................................................................................... 40
‘In preserving, realising or getting in the property’........................................ 43
Consideration........................................................................................................ 43

H..... Question 4: Should WHS pay compensation to WHS2?............................................ 46
I....... Question 4: Have the liquidators done all that was reasonably necessary to resolve the conflicts arising from the Wodonga stock?................................................................................... 48
Facts........................................................................................................................ 48
Consideration........................................................................................................ 54

J....... Question 5: Should costs be costs in the liquidations?............................................... 58

HIS HONOUR:

A Introduction

This proceeding was commenced by originating process filed on 27 February 2014, by which the plaintiff liquidators sought directions concerning stock in trade purchased by Warehouse Sales Pty Ltd (WHS) for sale by WHS from premises operated by WHS2 Pty Ltd (“WHS2”) at Wodonga (“the Wodonga stock”).

Three suppliers of Wodonga stock (“the Suppliers”) filed interlocutory processes by which they sought the delivery up of stock and payment of damages.

The original questions raised by the originating process were set down for separate hearing on 28 July 2014. By consent, the Suppliers’ applications were put off for later hearing.

Following a trial in November 2014, the liquidators’ questions were answered in reasons published on 17 December 2014: Lewis & Anor v LG Electronics Australia Pty Ltd & Ors.[1]
[1](2014) 291 FLR 407; [2014] VSC 644 (‘the PPSA judgment’).

By interlocutory process filed on 25 September 2015[2] the liquidators of WHS and WHS2 seek directions and declarations that should have the effect of finalising the proceeding.
[2]Amended at the hearing.

The liquidators now seek further relief as follows:

(a) directions approving the settlement of the suppliers’ applications;

(b) a declaration that settlement payments made to the Suppliers attract priority under s 556(1)(a) of the Corporations Act 2001 (Cth) (“the Act”);

(c) a direction that the liquidators are justified in causing WHS to pay WHS2 a sum of money to compensate it for the use of stock belonging to WHS2 to satisfy certain debts of WHS; and

(d) a direction that the liquidators are justified in taking no further steps to resolve conflicts of interest arising out of their dealings with the Wodonga stock.

If the settlements are approved, the Suppliers will discontinue their interlocutory processes, with the result that the proceeding will then be at an end.

At the conclusion of the hearing on 15 December 2015, I gave short reasons and made declarations and orders accordingly. I indicated that written detailed reasons would follow. These are the reasons.

B The PPSA Judgment

Although I will assume familiarity with the PPSA judgment, it is desirable to set out some relevant background matters.

The Goods

WHS carried on a business of selling white and brown goods[3] that it obtained from the Suppliers (and others) through stores in Victoria. WHS2 is a related or subsidiary company of WHS that operated a store also selling white goods in Wodonga (“the Wodonga store”).
[3]Hereinafter simply referred to as white goods.

Various white goods which were purchased from the Suppliers were in the possession of WHS and WHS2 at the time the Liquidators were appointed (“the Goods”).

Arrangements for the supply of the Goods

The Suppliers supplied the Goods on credit to WHS. There was no contractual relationship between the Suppliers and WHS2 and all purchases of the Goods from the Suppliers were purchases by WHS.

However, staff from WHS2’s Wodonga store placed orders for stock directly with the Suppliers (with the approval of a head office employee of WHS) and the stock was delivered directly to the Wodonga store by the Suppliers. From time to time Goods were also transferred between stores.

The Goods were supplied under retention of title terms. These terms provided that ownership in the Goods remained with each Supplier until the Goods were paid for in full or until all debts owing by WHS to each Supplier were paid for in full. These agreements also set out the terms of WHS’ right to dispose of the Goods in the ordinary course of business.

Extracts of some of the relevant terms of these agreements are as follows:

Electrolux Terms and Conditions of Sale Clause 6
(a)Ownership of the Products remains with the Supplier until the Customer has paid all indebtedness on an all monies basis to the Supplier on any account whatsoever…(d) The Customer shall be at liberty to sell the products subject to the condition that until payment has been made to the Supplier, the Customer shall sell as an agent and bailee for the Supplier.

Panasonic Australia Pty Ltd Terms and Conditions of Sale Clause 2
(a)Property in the Goods does not pass to the Buyer until such time as payment in full for the Goods shall have been made and no other money is owing by the Buyer to Panasonic on any account whatever and whether or not such other money has become due for payment…(b) The Buyer has the right to dispose of the Goods in the course of business for the account of Panasonic and pass good title in the Goods to its purchasers being bona fide consumers for value without notice of the rights of Panasonic. Sale of the Goods to a third party for further resale is not permitted unless the Buyer and Panasonic have entered into a current distribution Agreement.

LG Electronics Australia Standard Trading Terms Clause 4
Title and Risk. Title in the goods delivered by LGEAP to the customer (Goods) passes to the customer on payment to LGEAP, in full, of all sums owing to LFEAP by the customer whether under this or any other agreement… iii) subject to this clause 4 and clause 18, the customer may sell the Goods in the ordinary course of its business provided that the entire proceeds of sale or any other proceeds arising from the Goods or an insurance claim regarding the Goods are held in a separate account in trust for LGEAP.
Shriro Australia Pty Limited Terms & Conditions Clause 8
You do not own any of our product in your possession until all of our product you have purchased from us at any time and all other amounts owing by you to us on any account have been paid for in full… If you wish, you may promote and on-sell product in the ordinary course of business even if ownership of our product has not passed to you.
SMEG Terms and Conditions Clauses 37 and 39
37.Whilst the Applicant has not paid for the goods supplied in full at any time, the Applicant agrees that property and title in the goods shall not pass to the Applicant and the Supplier retains the legal and equitable title in those goods supplied and not yet sold.
39.The Applicant shall be entitled to sell the goods in the ordinary course of its business, but until full payment for the goods has been made to the Supplier, the Applicant shall sell as agent and bailee for the Supplier and the proceeds of sale of the goods shall be held by the Applicant on trust for the Supplier absolutely.

The Suppliers registered security interests over the Goods, including purchase money security interests and interests over all present and after acquired property of WHS, on the Personal Property Securities Register (“PPSR”).

The retail customers’ interests and agreement

Retail customers who purchased the Goods from WHS and WHS2 did so pursuant to different types of arrangements which included:

(a) customers who bought the Goods and paid in cash upon delivery of those Goods;

(b) customers who bought the Goods and paid cash before receiving the Goods; and

(c) customers who bought the Goods pursuant to layby agreements.

Pursuant to these agreements some of the customers had paid for the Goods in full, others had only paid in part and others had not paid for them at all. Of those who had paid in full, some had not collected the Goods.

WHS and WHS2 operations

WHS and WHS2 have the same directors, John Robert Wipfli and David Norman Wilkinson.

WHS owned 80% of the issued shares in WHS2 with the remaining 20% owned by Anthony Michael Cowan, the general manager of the Wodonga store.

There was a sublease between WHS and WHS2 for the Wodonga store, pursuant to which WHS2 paid WHS rent.

The staff of the Wodonga store were paid by WHS although WHS2’s ABN was on the group certificates issued to them.

There was a running account between WHS and WHS2 which recorded stock which was supplied by WHS to WHS2 (at cost price less supplier rebates and commissions) for sale in its Wodonga store. WHS issued monthly statements which were called ’tax invoice and statement’ to WHS2 recording amounts payable for stock, rent and the staff salaries.

WHS2 transferred amounts from its bank account to WHS’ bank account as and when funds were available. This occurred almost daily and was reflected in the changing debit balance of the running account.

At the time the Liquidators were appointed, the amount WHS2 owed WHS as evidenced by this running account was approximately $2.1 million.

The Goods which were held at the Wodonga store were recorded as assets of WHS2 in WHS2’s books.

When the Goods were sold at the Wodonga store, the customer was issued with an invoice which bore the name and ACN of WHS but also included the name and ABN of WHS2. The proceeds of these sales were banked into WHS2’s own bank account.

The critical issues – questions and answers

The critical issue was whether various suppliers, including the defendants retained a security interest in goods sold, subject to the usual retention of title clauses, to WHS, in circumstances where some of the goods were on-sold or transferred to WHS2, also in liquidation. WHS2 sold some of the goods to its retail customers and the unsold goods remain in its possession. WHS also remains in possession of some of the goods. There were other related issues in the case some of which are referred to below.

Being unsure as to whether the security interests of the Suppliers attached to the goods in the possession of WHS2 (and WHS), Darren Michael Lewis and Damian John Templeton, the liquidators, properly commenced this proceeding seeking judicial advice under s 511 of the Act.

The Suppliers were later joined as defendants. The liquidators properly put forward the various scenarios and alternatives and the Suppliers effectively became contradictors.

The Director of Consumer Affairs Victoria was also given leave to appear as a friend of the Court.

On 28 July 2014, Ferguson J (as her Honour then was) formulated five preliminary questions for determination. The questions were as follows:

1.Who was the owner, at the date of the liquidators’ appointments, of stock located at the Wodonga store operated by WHS2 (“the Wodonga Stock”)?[4]
[4]Further Amended Originating Process dated 2 May 2014, [1(a)].
2.If WHS2 was the owner of the Wodonga Stock at the date of the appointments, then:
(a)did any security interest under the PPSA that had been granted by WHS to the supplier of that stock continue in that stock pursuant to s 32(1)(a) of the PPSA; and
(b)if so, did WHS2 take the property free of that security interest pursuant to s 46 of the PPSA?[5]

3.Are the liquidators justified in determining that where stock supplied to WHS had, in the period prior to the liquidators’ appointment, been identified or appropriated to a sales contract with a customer of WHS or WHS2, that customer is entitled to take the stock free of any security interest pursuant to s 32 or s 46 of the PPSA?[6]
4.Are the liquidators justified in deducting their reasonable costs of realisation of pre-appointment book debts of WHS prior to distributing the proceeds derived from those pre-appointment book debts?[7]

[5]Ibid [1(b)].

[6]Ibid [2(b)].

[7]Ibid [2(a)].

Before answering the questions, it was convenient and perhaps more relevant to deal with the three factual scenarios submitted by counsel for the Suppliers. The answers to those scenarios provided the necessary answers to the questions.

The first scenario was the sale by WHS – having purchased the Goods from the Suppliers on the terms referred to – to its retail customers.

In my opinion, the Suppliers did not have any security interest in goods sold by WHS to its retail customers other than layby sales because such sales were specifically authorised by the Suppliers and, other than layby sales, these sales took place.

The second scenario was the sale by WHS – having purchased the Goods from the Suppliers on the terms referred to – to WHS2.

In my opinion, the Suppliers (other than Panasonic) did not have any security interest in the Goods sold by WHS to WHS2 because these Goods were sold in the ordinary course of the business of WHS and such sale or disposition was authorised by the Suppliers other than Panasonic.

The third scenario was the same as the second scenario save that there was an on-sale to retail customers of WHS2.

Because the security interest (other than Panasonic) was extinguished following the sale or disposition to WHS2, the Goods (other than those supplied by Panasonic) were not subject to any security interest and purchasers from WHS2 were not affected. The position of Panasonic was different.

Accordingly, the questions were answered as follows:

·Question 1     ‑          WHS2, other than goods supplied by Panasonic.
·Question 2     ‑          No, other than goods supplied by Panasonic.
·Question 3     ‑          Yes, other than layby sales.
·Question 4     ‑          Yes
·Question 5     ‑          Yes

C The Amended Interlocutory process

The three suppliers whose settlements are the subject of the directions sought, namely:

(a) Smeg Australia Pty Ltd (Smeg);

(b) Shriro Australia Pty Limited (Shriro); and

(c) Electrolux Home Products Pty Limited (Electrolux),

consent to the making of the directions related to the settlements, and do not oppose the making of the other directions sought.[8]

[8]Affidavit of Darren Michael Lewis affirmed 6 November 2015, [9]-[10], ex. DML-12.

Other than the Suppliers, the only creditor with an economic interest in the outcome of the liquidation is the Commonwealth of Australia (via the Fair Entitlements Guarantee scheme, ‘FEG’).[9] The liquidators have corresponded with the relevant department, which has indicated that the Commonwealth does not intend to appear.[10]
[9]See Fair Entitlements Guarantee Act 2012 (Cth), s 29.
[10]Affidavit of Darren Michael Lewis affirmed 6 November 2015, [11]-[17], ex DML-13.

All creditors of WHS and WHS2 have been informed of the interlocutory process. None has elected to be heard.[11]
[11]See affidavit of Darren Michael Lewis affirmed 14 December 2015.

The plaintiffs rely on three affidavits affirmed by Darren Michael Lewis, namely:

(a) that affirmed on 22 September 2015 (“Lewis G”);

(b) that affirmed on 6 November 2015 (“Lewis H”); and

(c) that affirmed on 14 December 2015 (“Lewis I”).

The questions for determination by the Court

By an amended interlocutory process, the plaintiffs seek the following:

(a) Directions under s 511(1)(a) of the Act that the plaintiffs are justified in entering into settlements between WHS, WHS2 and each of:

(i) Smeg, on the terms set out in Lewis G, ex. DML-05 (p 69);

(ii) Electrolux, on the terms set out in Lewis G, ex. DML-06 (p 72); and

(iii) Shriro, on the terms set out in Lewis G, ex. DML-07 (p 76) –

and directions approving each of those settlements.

(b) A declaration that the payments to be made under those settlements fall within the scope of s 556(1)(a) of the Act.

(c) Orders nunc pro tunc approving entry into the settlements under s 477(2A).

(d) A direction under s 511(1)(a) of the Act that the plaintiffs are justified and acting reasonably in causing WHS to make payments to WHS2 on account of stock belonging to WHS2 that was handed back to creditors of WHS.

(e) A direction under s 511(1)(a) of the Act that the plaintiffs are justified in taking no further steps to resolve the conflicts arising from the circumstances referred to in Lewis G.

(f) An order that the costs of the application be costs in the winding up of WHS.

Before considering each of the six matters in turn it is convenient and necessary to deal with the absence of a contradictor.

D The absence of a contradictor

The application has not been brought ex parte, but no contradictor has been named. There is no obvious contradictor to any part of the application. The creditors the subject of the settlements have an interest in the approval of the settlements and the direction concerning s 556. While the unsecured creditors have a theoretical interest in the directions sought, they will not see any return in the liquidations.[12] Further, the Commonwealth, via FEG, has been given the opportunity to participate in the application and has elected not to.[13]
[12]Lewis H, [11]-[12].
[13]Ibid [12]-[16].

The liquidators have taken extensive steps to keep all creditors informed of the proceeding and to provide them with the opportunity to participate in the application.[14] No creditor having taken that opportunity, the liquidators submitted that it was appropriate to proceed without a contradictor.
[14]Ibid [5]-[8]; Lewis I [5]-[8].

The question of whether or not it is appropriate for the Court to make directions and declarations of the type sought can, it was submitted, be approached from two angles: first, by examining authorities on the question of whether it is appropriate to make orders under s 511 of the Act on an ex parte basis; and secondly, by examining cases of a variety of types in which courts have considered whether a contradictor is necessary.

Ex parte

In Shiraz Nominees Pty Ltd v Collinson,[15] Franklyn J stated:

The authorities are clear that ex parte applications under s 413 are inappropriate: see cases listed in Paterson Ednie and Ford, Aust Company Law, 3rd Ed, Vol 4, para [413/5]. However, I am told that in fact the Australian Taxation Office has viewed copies of all the material that is before me and has made no response and in those circumstances, and having regard to my conclusions as to the application it is probably of little significance that the application is so made.

[15](1985) 10 ACLR 7, 7-8.

However, in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd,[16] Young J held:

There are also authorities under s 511 or its predecessors that applications under the section cannot or should not be made ex parte. Although older cases such as Re Household Co-op Supply Co (1885) 11 VLR 295 tend to use the words “must not”, more modern cases use the words “should not” (Re Evers Motor Co Ltd [1962] QWN 6), or say that ex parte applications are “inappropriate”: Shiraz Nominees Pty Ltd v Collinson (1985) 10 ACLR 7. It is interesting to note that the only New South Wales case on this particular aspect of the matter, Re Nirvana Soap Co Ltd (1920) 37 WN (NSW) 87, was one where PW Street CJ in Eq said not one word against the application being made on an ex parte basis, but did demand that the court be furnished with evidence to determine whether its power should be exercised.
I can see no reason why, in a proper case, the court cannot exercise its powers under s 511 on an ex parte application. The present is the perfect example where such an application should be made, a case where there is no real dispute amongst the creditors as to what should happen “on the merits” of the matter, but the liquidator is unsure as to whether he is able to administer the companies on that basis.

[16](1997) 24 ACSR 79, 81.

In Re Anglican Insurance Ltd,[17] Barrett J refused to make s 511 directions on the ex parte application of a liquidator where the question concerned the respective obligations of the company in liquidation and a third party, Vero, holding at [40]–[41]:

I am not persuaded that it will be, in terms of s 511(2), “just and beneficial” for the court to determine the question whether the several instruments to which AIL became party were effective in such a way that insurance liabilities initially incurred by AIL have come to be liabilities of Vero to the exclusion of AIL. As I have said, Vero has already foreshadowed a claim for damages for breach of contract in consequence of the winding up of AIL. In addition, the result the liquidator seeks to achieve upon this application is a determination of the respective rights and obligations of AIL and Vero arising from the several existing contracts. A decision that the insurance liabilities are now liabilities of Vero to the exclusion of AIL — or that they remain liabilities of AIL to the exclusion of Vero — is something that directly affects Vero. It would, in my opinion, be inappropriate for the court to accede to the liquidator’s unilateral application by advising him on that question with a view to his proceeding with his administration accordingly, at the same time leaving entirely at large the possibility that properly constituted proceedings between AIL and Vero might later cause the respective rights and obligations to be determined in a binding way to some other effect.
Just as in Re Security Provident Fund Ltd (1984) 9 ACLR 56, Blackburn CJ declined, upon a liquidator’s ex parte application for directions, to determine the rights and liabilities of the parties to a mortgage granted to the company before winding up, so I should decline, upon the present ex parte application, to make what must of necessity be a determination of the respective rights and obligations of AIL and Vero derived from the several contracts entered into between 4 December 1984 and 19 January 2004.

[17][2008] NSWSC 41.

In Re Purchas as Liquidator of Astarra Asset Management Pty Ltd,[18] a liquidator sought directions under s 511 of the Act, alternatively judicial advice under the Trustee Act 1925 (NSW) and the Supreme Court Act 1970 (NSW). At the hearing, there was an appearance on behalf of liquidators of a company that had a claim on the fund the subject of the application, but those liquidators did not contend for any different assessment of the facts than that for which the plaintiff contended. There was no appearance on behalf of another potential claimant (apparently defunct). Ward J found the case appropriate for directions under s 511, observing at [35]:

Austin & Black further note that although a number of cases suggest that an application for determination of a question in a winding up under s 511(1)(a) should not be brought ex parte, that rule is not an inflexible one (referring to Shiraz Nominees (in liq) v Collinson (1985) 10 ACLR 7; 3 ACLC 706 and Soluble Solution Hydroponics at [21]).

[18][2011] NSWSC 91.

Most recently, Pritchard J held in Re Great Southern Managers Australia Ltd:[19]

Although applications under s 511 of the Act are often brought on notice to parties affected by the decision, there is no invariable rule that such an application cannot be brought on an ex parte basis,[20] and it is not uncommon for applications under s 511 to be made ex parte. Whether that is appropriate will depend upon the nature of the direction or orders sought under s 511. A failure to make the application on notice to parties from whom the court would need to hear to properly consider the application would be a reason for refusing to make the direction sought.[21]

[19][2014] WASC 312, [43].

[20]Re 7 Steel Distribution Pty Ltd (in liq) [2013] NSWSC 669 [20] (Black J); Dean-Willcocks v Soluble Solutions Hydroponics Pty Ltd (1997) 24 ACSR 79, 81 (Young J).

[21]See, for example, Re 7 Steel Distribution Pty Ltd (in liq) [2013] NSWSC 669 [21], [24] (Black J).

Her Honour made identical remarks concerning applications under s 479(3) in Woods & White v Little Tiger Pty Ltd.[22]

Contradictor

[22][2014] WASC 372, [97].

In Purchas, Re RSP Group Pty Limited (in liq)[23], liquidators who were previously deed administrators sought retrospective approval of remuneration in the administration of the deed. Gyles J held at [21]–[22]:

There are other issues to be faced. The first is whether the section contemplates that an administrator can or should seek an ex post facto increase in the fees approved. A second is whether it would be appropriate to exercise such a power, if it exists, where the administrators had neglected to obtain the appropriate authorisation of creditors pursuant to s 445F of the Act. A third is whether it is appropriate to regard time costing as the sole method of assessing proper remuneration. A fourth is whether ‘remuneration’ includes payment to employees and other outgoings of a firm of which the administrators are principals. A fifth is the method by which a court should assess the appropriateness of the detail of the particular claim for remuneration based upon time charging.
In my opinion, it is inappropriate that the orders sought should be considered in the absence of a contradictor representing the interests of unsecured creditors of the company. The matters to which I have adverted received scant, if any, attention in the authorities to which I was referred.

[23][2006] FCA 1329.

Hall v Poolman[24] was an appeal from a trial judge’s decision to order an inquiry into liquidators’ conduct pursuant to s 536 of the Act. The Court of Appeal held at [7]-[8]:

The parties to the proceedings below have been joined as respondents to the appeal and the application for leave, on the basis that they may have an interest in maintaining his Honour’s decision, although none of them is directly affected by it. At a directions hearing on 10 April 2008, Mason P asked whether, in the absence of any appearance by the parties, a natural contradictor should be invited to appear, and he noted that the Australian Securities and Investments Commission (ASIC) was the most likely candidate for that role. Pursuant to his Honour’s request, by letter dated 4 August 2008, the appellants’ solicitors invited ASIC to intervene in the appeal. On 11 September 2008 ASIC replied, stating without reasons that it did not wish to intervene.
It is regrettable that ASIC has not been represented at the hearing of the appeal. Section 536 confers supervisory powers on both ASIC and the court which in our view are an important part of the regulatory system governing corporate liquidation, a matter of vital importance for the Australian economy. As we have said, this case raises important questions about the scope of s 536, and the use by liquidators of litigation funding to pursue litigation that will not produce any significant return for creditors. These are matters upon which the regulator can reasonably be expected to have an informed view. Indeed, with respect to two of the three bases upon which Palmer J ordered an inquiry, ASIC has the same statutory power as the court. In the absence of an appearance by ASIC, not only has the appeal proceeded without any contradictor, but the court has not had the benefit of the regulator’s view on some important matters.

[24](2009) 75 NSWLR 99.

In Re Jick Holdings Pty Ltd,[25] a deed administrator sought directions as to whether he was permitted to be appointed as liquidator. White J held at 389-390:

Mr Pleash has taken all reasonable steps to find a contradictor to represent the interests of the deed creditors and the other creditors of the company. The largest creditor, the Deputy Commissioner of Taxation, supports the application. The Australian Securities and Investments Commission has been given notice of the proceedings but has declined to make submissions. The former liquidators have also been served but have not sought to participate. They do not challenge the validity of the creditors’ resolution to appoint Mr Pleash as liquidator in their place. Mr Pleash caused a report to creditors to be circulated to all of the creditors of the company including those whose claims arose both before and after his appointment as administrator. The creditors were invited to complete a form indicating their attitude to the application. They were provided with an estimated return to creditors if the deed of company arrangement is terminated. The creditors were advised of the return date of the application. They were advised that they could express their views to the court by completing an enclosed form stating the amount of their debts that arose before and after 3 November 2006, whether they supported or opposed the termination of the deed of company arrangement, and whether they supported or opposed Mr Pleash remaining as liquidator. They were also advised that they could express their views by attending at court or by seeking their own legal advice. On the return date of 20 April 2009 the court was advised that one creditor, WDA Solutions Pty Ltd was considering whether it would be a contradictor. It had filed a winding-up application in 2006 prior to the company being placed into voluntary administration. In the result it did not appear as contradictor.
All reasonable steps to obtain a contradictor have been taken. Undesirable though it may be, it is necessary to decide the questions raised on the application in the absence of a contradictor.

[25](2009) 72 ACSR 387.

In Re Dalma No 1 Pty Ltd,[26] liquidators made an application for directions as to whether funds paid to employees by a company related to company in liquidation attracted subrogated priority under s 560. Brereton J held:[27]

It is preferable on an application of this kind that there be a contradictor. The liquidators have endeavored to elicit a contradictor. The originating process (with Mr Gleeson’s supporting affidavit) has been served on the Deputy Commissioner of Taxation (who is the major unsecured creditor); and on Dalma Constructions, whose interest is primarily at stake. In addition, the liquidators have distributed a circular to all known creditors. The only response received from any creditor or other person was from Dalma Constructions, whose solicitor responded on its behalf, indicating that it did not intend to seek to be heard.
Though it is preferable to have a contradictor, the absence of one is not an impediment to the determination of questions arising in the winding up, any more than it is to the giving of directions: as to which see Re Jick Holdings Pty Ltd (in liq) (2009) 72 ACSR 387; [2009] NSWSC 574 at [7] per White J. It would be unreasonable to decline to come to the aid of a liquidator, in a proper case for the determination of questions, just because, despite reasonable endeavors, it did not prove possible to elicit a contradictor.

[26](2013) 95 ACSR 641.

[27]Ibid [8]–[9].

Hewson v Gothard; Re Allco Finance Group Ltd (recs and mgrs apptd) (in liq)[28] concerned an application by potential litigants for access to documents produced on subpoena by ASIC at receivers’ examinations. Foster J held:[29]

None of ASIC, the Receivers or the liquidators wished to be heard in relation to the Hewsons’ access application. Each of those persons and ASIC informed the court that they neither consented to nor opposed the relief sought by the Hewsons. In those circumstances, the only contradictors who appeared at the hearing of the Hewsons‘ application were Dr Fell, Mr Lennox and Mr Lewis.
…
Here, although the interveners chose to participate in the Hewsons’ application as non-party interveners and thereby put themselves in the best position to resist an order for costs against them, had the Hewsons succeeded in that application, I cannot ignore the circumstance that the interveners were the only contradictors and that they performed that function appropriately. Had they not participated as they did, the court may well have had to require ASIC to appear and to act as contradictor. It would have been wholly undesirable for the Hewsons’ application to have proceeded unopposed.

[28][2014] FCA 412.

[29]Ibid [28], [34].

Re ICS Real Estate Pty Ltd (in liq); Re Independent Contractor Services (Aust) Pty Ltd (in liq)[30] was an application by a liquidator seeking directions that he was justified in treating certain money in the hands of a trustee company as company funds, not trust funds. Brereton J held:[31]

Courts have often referred to the desirability of a contradictor in applications of this kind [see, for example, Purchas, Re RSP Group Pty Ltd (in liq) [2006] FCA 1329; Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335; (2013) 279 FLR 80; (2013) 95 ACSR 641, [8]; Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18]; and of the practical need to make provision for payment of the contradictor‘s costs [Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 48 ACSR 97, [17]; Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426]. It is expedient for the purpose of saving expense — having regard to all of the circumstances, including the amount at stake and the size of the class of general beneficiaries — for Mr Lee to be joined as a defendant and appointed to represent that class pursuant to UCPR r 7.6(2)(c).

[30][2014] NSWSC 479.

[31]Ibid [4].

Re ExDVD Pty Ltd (in liq),[32] a liquidator sought directions as to whether a secured creditor (CBA) was entitled to priority in winding up for payments made in satisfaction of employee entitlements out of floating charge assets). White J held:[33]

I granted leave to CBA to appear on the application. No other party sought leave to appear. In particular, no party appeared to oppose the claims made by CBA. This was so despite the effect which acceptance of the CBA claim will have on the amount available for distribution to the unsecured creditors of ExDVD. Although satisfied that all creditors had been notified of the application, I was concerned that the court did not have a contradictor to the submissions of CBA. Accordingly, I directed the plaintiff to give separate notice of the proceedings, together with copies of the relevant documents, to the creditors of ExDVD claiming more than $500,000. In addition, the plaintiff gave notice to the Australian Securities and Investments Commission, the Australian Taxation Office and to the solicitors who had acted for creditors in a number of preference recovery actions.
However, as indicated, no other person or entity sought leave to appear in the proceedings. The explanation may well be that ExDVD’s creditors expect to receive only modest amounts from the liquidation and have taken the view that it is not economic for them to retain representation in relation to this matter.

The absence of a contradictor does not mean that the court should not determine the questions raised by the plaintiff: see Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335 at [9]; (2013) 279 FLR 80 at 84.

Considerations

[32](2014) 223 FCR 409.

[33]Ibid [17]–[19].

Insofar as any common theme can be drawn from the authorities described above, it is, it was submitted, that the absence of a contradictor is undesirable but not fatal to the provision of directions under s 511. If directions can be given on an ex parte basis, they can certainly, it was submitted, be given in the absence of a contradictor, particularly in the peculiar circumstances of this case. I agree and given the various matters referred to propose to proceed in the absence of a contradictor.

In the present case, every person with a potential interest in the outcome of the application has been informed of the relevant facts and circumstances and been given an opportunity to review the court documents and to appear or to have a view presented to the Court by the liquidators. None has expressed a desire to appear or to resist the relief sought.

Insofar as the compromises for which approval and authority are sought, the cost of funding a contradictor would be entirely disproportionate to the relatively modest sums involved in the settlements.

Further, the liquidators will only be protected against a claim for breach of duty if they act in accordance with any direction given, and to the extent that they have made full disclosure to the court.[34]
[34]Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409, [44] (Goldberg J); Re Idoport Pty Ltd (in liq) [2015] NSWSC 1412, [7] (Black J).

The matters the subject of the application are important to the finalisation of the liquidation and the resolution of the rights of several important creditors.

For these reasons, I proceeded to resolve the questions raised by the application without a contradictor. As noted earlier orders and directions were made on 15 December 2015. I indicated that reasons would follow. These are the reasons.[35]

E Question 1: Should the settlements be approved?

[35]I have gratefully adopted much of the very helpful submissions made by Mr S M Maiden of Counsel for the liquidators.

Section 511 of the Act provides (relevantly):

(1)The liquidator, or any contributory or creditor, may apply to the Court:
(a)to determine any question arising in the winding up of a company; or
(b)to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

…
(2)The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

Preconditions for the grant of s 511 directions

There is ample authority that supports the use of s 511 to seek orders that the compromise of litigation by a liquidator is justified.

In Cuthbert v Cuthbert,[36] Bennett J set out a useful summary of the law relating to the use of s 511 to approve the settlement of litigation:
[36][2015] FamCA 567.

The effect of a Court direction made pursuant to s 511 is to provide protection to a liquidator from personal liability. In proposing to enter into Deeds of Settlement, Mr Curtin in his capacity as liquidator of the Company seeks the protection of Court directions that he is justified in doing so. It should be noted, however, that while any actions taken by Mr Curtin in accordance with the Court’s directions are protected, his decisions and actions taken in pursuance of those directions will remain open to legal challenge by parties adversely affected despite the existence of the direction.[37]
[37]See Re Equity Funds of Australia (in liq) [1977] CLC 40-303.
Pritchard J of the Supreme Court of Western Australia has recently provided a helpful summary of the principles applicable to s 511 in Re Great Southern Managers Australia Ltd (in liq) [2014] WASC 312 (citations omitted), as follows:
A direction may be sought under s 511 in respect of any question arising in the course of a winding up, and the section should be interpreted widely to facilitate the liquidator’s functions. However, a direction will not be given merely because the liquidator has a feeling of apprehension or unease about the business decision and wants reassurance — it is not the Court’s role to make what are regarded as commercial decisions for liquidators. Consequently, there must be some issue which calls for the exercise of legal judgment so as to warrant its direction — whether that be a legal issue of substance or procedure, or an issue of power, propriety or reasonableness. However, those categories are not exhaustive and other special circumstances may exist which warrant the giving of a direction.
A further instance where directions may be given is in the context of a proposed compromise of litigation involving the liquidator. Even in such a case, the court will be reluctant to give directions if only commercial considerations are involved, but special circumstances may warrant directions being given. Those special circumstances may include where the liquidator is operating in an acrimonious environment in the liquidation, and the liquidator’s proposed decision risks being subjected to criticism by a particular creditor or creditors as being unreasonable or made in bad faith, or where there is a degree of personal risk of litigation attached to the liquidator that could negatively affect the winding up process. It will suffice if such an attack is in prospect. In other words, a s 511 direction may be given to protect the liquidator in circumstances where the compromise could otherwise negatively affect the winding up process. From that perspective, it can be said that the direction would be just and beneficial to advancing the liquidation process as a whole.

Black J of the Supreme Court of New South Wales discussed s 511 in the earlier decision of In the Matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) (2013) 31 ACLC 13-021.[38] There, his Honour stated:
[38]Citing Re Purchas as Liquidator of Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91.
The Court may give such a direction where it will be “of advantage in the liquidation”, Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79; Handberg (in his capacity as Liquidator for S&D International Pty Ltd (in liq) v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]. It will be common for proceedings seeking directions under s 511 to be brought with notice to parties affected by the direction, although there is no invariable rule that such an application cannot be brought on an ex parte basis: Handberg (in his capacity as Liquidator for S&D International Pty Ltd (in liq) v MIG Property Services Pty Ltd above at [7]. The … Court will not generally give such a direction where the matter relates to the making or implementation of a business or commercial decision or where no legal issue is raised and there is no attack on the propriety of (sic) reasonableness of the Liquidators’ decision, but point out, correctly, that the Court may do so where such an attack is in prospect.

Judd J of the Supreme Court of Victoria expanded upon the last point in Re Gunns Plantations Limited (in liquidation) (receivers & managers appointed) (No 4) (2014) 32 ACLC 14-046 at [15], where his Honour stated that “… a court will only interfere with the exercise of commercial judgment if it is unreasonable, involves an error of law or principle, or is the result of some inappropriate conduct by the liquidators.”
I must be satisfied that the action to be taken, here being the liquidator entering into Deeds of Settlement with the husband, the wife and the accountant, is “just and beneficial”. Young J of the Supreme Court of New South Wales discussed the meaning of “just and beneficial” in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 15 ACLC 833 at 835–6, as follows:
… it seems to me that [the words “just and beneficial”] plainly mean that the court has a discretion as to whether making an order under the section will be of advantage in the liquidation. There are many questions where the only order that the court should make is that the liquidator or the claimant proceed in the ordinary courts in the ordinary way for the determination of a dispute. However, there are many other situations where the court can summarily solve the difficulty that has arisen in the liquidation by an order under the section in a cheap and efficient manner. Where this can be done it is “just and beneficial” to exercise the power.

In short, in determining whether an exercise of power will be just and beneficial, the question is whether it will be of advantage in the liquidation.[39]

[39]Re Bryant (in their capacities as joint and several liquidators of Gunns Plantations Ltd (in liq) (recs and mgrs apptd) [2014] VSC 239, [64], citing Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209, 212; Re Wilmott Forests Ltd (No 2) [2012] VSC 125, [55].

In Handberg v MIG Property Services Pty Ltd,[40] Warren CJ held:

[I]t is fair to say that the courts are restrained when approving the compromise of litigation pursuant to s 511, and that such approval will not be given absent a degree of personal risk attached to a particular liquidator that could negatively affect the winding up process.

Grounds on which s 511 orders will be made regarding compromises

[40](2010) 79 ACSR 373, 380 [19]. See similarly Re Octaviar Administration Pty Ltd (in liq) [2015] 107 ACSR 1, [13].

There is a distinction between:

(a) directions that a liquidator is justified in entering into a compromise (given under ss 479(3) or 511, for example); and

(b) orders approving the compromise of a debt under s 477(2A) or the entry into an agreement with a potential duration of longer than 3 months under s 477(2B).

According to Brereton J in Re One.Tel Ltd,[41] orders of the latter type are:

[N]ot an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus the approval confers, or completes, the liquidator's power to enter into the transaction, but does not amount to the court approving the transaction itself. The distinction is material, because it means that - unlike a direction under s 479(3) or s 511 - an approval under s 477(2A) or (2B) alone does not exonerate the liquidator from personal liability.

[41](2014) 99 ACSR 247, 253 [26].

Notwithstanding the differences in the two types of order, there is, it was submitted, some overlap in their operation.

In Re Spedley Securities Ltd (in liq),[42] Giles J considered the court’s power to authorise a liquidator to compromise a debt (the equivalent of what is now s 477(2A) of the Corporations Act). At 85–86, his Honour stated:

In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, 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 in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.
It is for these reasons that the attitudes of creditors are important in applications such as the present. The acquiescence of creditors is important because, as was said by Lindley LJ in Re English Scottish & Australian Chartered Bank [1893] 3 Ch 385 at 409:
If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be. This statement has been often repeated, for example in Re Landmark Corporation Ltd [1968] 1 NSWR 759, Re Codisco Pty Ltd (1974) CLC 40– 126, and Sanderson v Classic Car Insurances Pty Ltd.

[42](1992) 9 ACSR 83.

Giles J’s judgment has been applied to situations where liquidators seek directions approving entry into compromises. See for example:

(a) the remarks of Lindgren J in Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No 6) (2007) 160 FCR 423, 430 at [35];

(b) the obiter of McDougall J in Cosmoluce v Tsagaris (2010) 28 ACLC 10-059, [2010] NSWSC 1115, [15], concerning s 479(3); and

(c) ASIC v Piggott Wood & Baker (a firm) [2015] FCA 18, where Kerr J stated at [34]:

The principles to be applied in considering whether or not to grant approval are in any event essentially the same, whether the court is exercising its jurisdiction under s 477(2A), 477(2B), 479(3), 601EE(2) or pursuant to the liberty to apply reserved to Mr Hamilton.

On the other hand, in Boné v Smith,[43] Wigney J held at [25]:
Section 479(3) does not specifically deal with the approval of agreements or transactions. Rather, it provides that the liquidator may apply to the court for directions in relation to any particular matter arising under the winding up. Different considerations apply to the making of directions under s 479(3) to those that apply in relation to approval under ss 477(2A) and (2B).
[43][2015] FCA 870.
The distinction between the approach required to applications under s 477(2A) and applications under s 511 was considered by Brereton J in Re One.Tel Ltd.[44] His Honour held that:
[44](2014) 99 ACSR 247.

(a) When exercising the powers granted by s 477(2A) and 477(2B):[45]
[45]Ibid [26].

…The role of the court is to grant or deny approval to the liquidator’s proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up. …

(b) In contrast, as the effect of an order under s 511 is to exonerate the liquidator from personal liability in respect of a commercial judgment that might be contentious:[46]

… a closer examination of the liquidator’s decision is required than under s 477. In short, the court should not make a direction the effect of which is to exonerate the liquidator from personal liability in respect of a commercial judgment that the liquidator is concerned may prove contentious, unless satisfied that the liquidator’s decision is, in all the circumstances, a proper one.
Accordingly, I do not agree that the court will give a direction that a liquidator is justified in pursuing a certain course of action unless there is a lack of good faith, an error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct (as might be suggested by Bell Group[47] at [47]). While the court’s function under s 511 does not involve it in reconsidering every factor that has informed the liquidator’s decision, let alone developing alternatives or deciding whether the court would have made the same decision, the court needs to be satisfied, before making a direction, that the decision is proper and reasonable; at least usually, this will necessitate consideration of the liquidator’s reasons, and the process by which the decision has been reached.

[46]Ibid [35]–[36].

[47]Re Bell Group Ltd (in liq) [2009] WASC 235.

Brereton J’s approach was adopted by Beech J in Re Great Southern Ltd (in liq).[48]
[48][2015] WASC 171, [31].

In Re Great Southern Managers Australia Ltd (in liq),[49] Pritchard J held at [62]–[64]:

In Re The Bell Group Ltd (in liq); Ex parte Woodings as liquidator of the Bell Group (in liq) Hasluck J observed (in the context of an application for directions under s 479(3) of the Act) that the court ‘will not interfere or second guess the liquidator’s judgment unless there is a lack of good faith, error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct’.[50] Brereton J in Re One.Tel Ltd did not agree with those observations, to the extent that they suggested that the Court would give a direction unless there was a lack of good faith, an error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.[51] Brereton J took the view that the Court will not make a direction under s 511 unless satisfied that the liquidator’s decision is, in all of the circumstances, a ‘proper and reasonable’ one and that this would usually necessitate consideration of the liquidator’s reasons and the process by which the decision has been reached.[52] Although it appears that Hasluck J was drawing on observations made in earlier cases in relation to the grant of the Court’s approval under s 477(2A) and s 477(2B) of the Act (and their predecessors)[53] it is far from clear that the approach ultimately taken by his Honour in Re The Bell Group was different from that taken by Brereton J in Re One.Tel.[54]
In the case of an application under s 511 of the Act, the Court’s focus will be on whether the giving of the direction will be just and beneficial (that is, advantageous) in the winding up of the company. Determining whether the direction should be given will necessarily involve a broad consideration of matters including the nature of the proposed course of action about which the direction is sought, the circumstances relevant to that proposed course of action (especially those said to warrant the making of the direction), the reasons for and consequences of that proposed course of action (and in the case of a proposed compromise of litigation, the liquidator’s commercial judgment that the proposed settlement should be pursued), and in those cases involving the determination of a legal issue relevant to that decision, the principles relevant to the determination of that issue. All of these matters will be considered for the purpose of determining whether the liquidator would be justified in taking the proposed course of action, within the overall context of the liquidation.
Ordinarily the liquidator will be expected to obtain legal advice appropriate to the nature and value of the claims the subject of a proposed compromise.[55] However, the absence of such advice is not of itself a reason to refuse to grant a direction.[56]

The form of directions given

[49][2014] WASC 312.

[50]Re The Bell Group Ltd (in liq); Ex parte Woodings as Liquidator of the Bell Group Ltd (in liq) [2009] WASC 235 [47] (Hasluck J).

[51]Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 [36] (Brereton J).

[52]Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 [35] - [36] (Brereton J).

[53]See Re Spedley Securities Ltd (1992) 9 ACSR 83, 85 (Giles J), citing Re Mineral Securities (Australia) Ltd [1973] 2 NSWLR 207, 231 - 232.

[54]Cf Re The Bell Group Ltd (in liq); Ex parte Woodings as Liquidator of the Bell Group Ltd (in liq) [2009] WASC 235 [59] (Hasluck J).

[55]Re Spedley Securities Ltd (1992) 9 ACSR 83, 86 (Giles J); Handberg v MIG Property Services Pty Ltd (2012) 92 ACSR 38, [78] (Robson J).

[56]Handberg v MIG Property Services Pty Ltd [2012] VSC 551; (2012) 92 ACSR 38 [78]-[79] (Robson J).

In Re J W Murphy & P C Allen; Re BPTC Ltd (in liq),[57] McLelland CJ held:[58]

… both s 379(3) of the Companies Code (and the equivalent s 479(3) of the Corporations Law) and s 63 of the Trustee Act are essentially concerned with future action by a liquidator or a trustee, as the case may be. Typically, under either provision the court would give a direction to the effect that the applicant, as such liquidator or trustee as the case may be, would be justified in acting in a specified way or on a specified basis.
Frequently however, it is convenient for the liquidator or trustee first to enter into (or in the case of a liquidator cause the company to enter into) a transaction in respect of which the court’s sanction is desired, which is expressed to be conditional upon the court making an order or direction of some kind, and then to apply to the court for the requisite order or direction in order to satisfy the condition.
In such a case it is important that the order contemplated in the contractual condition is expressed in terms which the court can properly make in the particular circumstances. For example, the court could not properly make an order that an applicant is or would be justified in entering into a specified contract if that contract has already been entered into, albeit subject to the condition in question. In a case of that kind it is, in my view, preferable for the contract to be expressed to be conditional on the approval of the court and for application to be made to the court for an order approving the contract.
In the case of a liquidator such an order may be made under the inherent power of the court to supervise and guide the activities of its own officer (cf the analogous inherent jurisdiction in relation to a court-appointed receiver, as to which see Re Sandwell Park Colliery Co [1929] 1 Ch 277 and Kerr on Receivers, 5th ed at pp 186-87) …

[57](1996) 19 ACSR 569, 571 (“the BPTC”).

[58]Paragraph breaks added.

In Handberg v MIG Property Services Pty Ltd[59] (a case where execution of the settlement deed was conditional on court approval) Warren CJ made orders following the form suggested in Re BPTC.
[59](2010) 79 ACSR 373, 380 [19].

In Re Bell Group Ltd; ex parte Woodings,[60] Allanson J examined a proposed form of order approving the entry into and performance of a settlement deed, and held at [43]:

I have some reservations whether it would be a proper exercise of the power under s 479(3) to give a direction that each plaintiff “was” acting properly and justifiable (sic) in entering into the settlement deed. The function of directions is to advise the liquidator as to the proper course for him to take in the liquidation. It is essentially concerned with future action: Re Murphy & Allen; Re BPTC Ltd (in liq) (1996) 19 ACSR 569. With an agreement that is subject to a condition precedent, the distinction between what was done in entering it, and before satisfaction of the condition, and what will be done in performing it, may not always be neatly compartmentalised into past and future. I have had regard to the condition precedent in the settlement deed, both the way in which it operates and the wording of the approvals and directions it requires. I am not sure why the wording of the relevant clause in the settlement deed has not been followed. I will make directions that, in substance, meet the requirements of that clause.

[60](2013) 97 ACSR 117.

Pritchard J made a similar observation regarding the artificiality of ‘compartmentalising’ actions under conditional settlement deeds into past and future acts in Re Great Southern Managers Australia Ltd (in liq).[61]
[61][2014] WASC 312, [62].

In Re One.Tel Ltd,[62] Brereton J made a series of statements describing limits to the subject matter that is appropriate for judicial directions concerning compromises:[63]
[62](2014) 99 ACSR 247, 259–261.
[63]Ibid [55], [57], [60], [61].

As with judicial advice to trustees, the court is usually conservative in the advice it gives to liquidators under ss 479(3) and 511, and such advice is conventionally expressed in terms that “the liquidator would be justified” in adopting a particular course of action. The jurisdiction to give such directions is concerned with affording protection to the liquidator in connection with proposed future action, not with ratifying action that the liquidator has already taken.
…

It would not conform with the principles and practice applicable to s 511 to make direction (c) (in terms “approving the deed”), or direction (d) (approving the liquidators proceeding under the deed), even if there were jurisdiction to do so. A direction that the liquidators are justified in entering into and implementing the deed is all that is necessary to confer on them the requisite protection, and all that is appropriate.
…
The deed has already been executed. However, I agree, with respect, with the view expressed by Allanson J in the passage cited above, that in the case of an agreement that is subject to a condition precedent, the distinction between what was done in entering it and before satisfaction of the condition, and what will be done in performing it, may not always be neatly compartmentalised into past and future. As the deed is conditional upon the court’s giving directions under s 511, a direction that the liquidators are justified in entering into and implementing it does not involve ratifying past acts, as in the absence of such a direction there will be no relevant act, the condition precedent having, on that hypothesis, failed.
It would not, however, be consistent with the principles and practice to which I have referred, to make direction (b) in terms “that the SPL and GPLs otherwise acted properly and reasonably in entering into the deed and in procuring the One.Tel to enter into the deed”. What the court does is to provide advice as to whether the liquidator is justified in taking a particular course of action (that is entry into the deed), not declaring that he has otherwise generally acted properly in doing so. To make the direction sought would necessarily involve a much wider inquiry into the whole of the liquidator’s conduct in and about the negotiation and procuring of the deed, and would be quite unsuited to a s 511 inquiry, such that it would not (in the terms of s 511(3)) be just and beneficial to determine that question.

Consideration

What emerges from the authorities is that directions approving conditional liquidators’ compromises should be framed so as to:

(a) provide approval of the settlement, but not retrospective approval of the liquidators’ entry into the agreement; and

(b) not deal with the reasonableness or otherwise of the liquidators’ conduct.

In ReOne.Tel Ltd,[64] Brereton J considered the following factors when making a direction:
[64](2014) 99 ACSR 247.

(a) The special purpose liquidator held the view that the settlement was in the best interests of the company and its creditors, because of the uncertainty of the outcome of the litigation, the certain albeit small return for ordinary creditors, the cost and time associated with the trial and the likelihood of the appeal: [38].

(b) The uncertainty of any outcome and the high degree of risk that the action might fail: [29]-[44].

(c) The settlement was the result of a process of negotiation between commercially astute and informed parties: [45].

(d) Confidential advice by well-qualified and reputable silk strongly endorsed the settlement: [46].

(e) The creditors’ committee unanimously approved the compromise, and none sought to be heard on the application: [47].

(f) The special purpose liquidator had legitimate concerns that the reasonableness and propriety of the settlement might be called into question: [49].

In Re Great Southern Ltd (in liq),[65] Beech J considered factors including the following:
[65][2015] WASC 171.

(a) The proceedings that were compromised were legally and factually complex and involve significant uncertainty. A five week trial involving thousands of documents and extensive and conflicting expert reports had been set down: [40].

(b) The liquidators had detailed written advice from senior counsel and their solicitors. Settlement occurred after a two day mediation and extensive negotiation of terms: [43].

(c) The liquidators considered the settlement to be in the best interests of the company: [44].

(d) Resolution would expedite the liquidation of the group. Favourable finalization of the litigation would have taken several years: [45].

(e) The settlement provided certainty of returns to creditors, and an increase in returns to ordinary unsecured creditors: [46].

(f) The committee of inspection approved the deeds: [49].

In Re Octaviar Administration Pty Ltd (in liq),[66] Stevenson J considered factors including the following:
[66](2015) 107 ACSR 1.

(a) The special purpose liquidator faced the prospect of a seven week unfunded trial with no indemnity for any adverse costs order: [31].

(b) The litigation was risky: [31].

(c) The liquidator acted on advice: [32].

(d) The settlement relieved the company of the burden of further costs and the potential exposure to an adverse costs order: [33].

(e) The settlement involved converting a secured liability of more than $25 million into an unsecured liability: [33].

(f) The settlement would relieve the general purpose liquidators of exposure in respect of an undertaking as to damages that they had given in separate proceedings: [33].

(g) The settlement was better than other offers formerly made: [34].

(h) The settlement involved a certain cash payment whereas even success in the litigation involved a risk of no monetary recovery: [35].

(i) The liquidation involved a “huge history” of complex litigation: [38]–[39].

The Smeg settlement

Smeg filed an interlocutory process dated 25 June 2014 by which it sought, among other things, a declaration that the liquidators had breached terms of an agreement between the liquidators and Smeg dated 27 February 2014 (the effect of the breach alleged was a failure to allow Smeg to collect stock that it had supplied). Smeg sought damages of $137,708.09, interest and costs.

By conditional agreement dated 13 August 2015, the liquidators and Smeg seek to compromise Smeg’s claims.[67]
[67]Lewis G, DML-05 70-71.

The part of the settlement in respect of which the liquidators seek directions is clauses 3 to 7, which require WHS to pay Smeg $67,500 in connection with the matters set out in Smeg’s interlocutory process[68] and provide for consequential releases between Smeg, WHS, WHS2 and the liquidators concerning the Smeg stock and Smeg’s interlocutory process.
[68]Incorrectly referred to as being dated 11 June 2015.

According to Mr Lewis:

(a) the settlement would take account of the possible damages payable should Smeg’s claim succeed, and the costs that would be incurred if the interlocutory process continued to hearing;[69]
[69]Lewis G [52(a)].

(b) the settlement would involve a ‘reasonable’ cash payment to Smeg;[70]

(c) the settlement would result in a release of Smeg stock which can be realised and used by WHS to compensate WHS2 for stock used by WHS; and

(d) the liquidators’ solicitors have advised the liquidators that the settlement is appropriate.[71]

[70]Ibid [52(c)].

[71]Ibid [52(f)].

In my opinion the Smeg settlement should be approved for the following reasons:

(a) the settlement avoids the risk involved in the litigation on the interlocutory process;

(b) the settlement avoids the need for the liquidators to incur expenses and remuneration concerning the defence of the claim, the size of which is relatively modest;

(c) the settlement avoids the risk of adverse costs orders, including the risk of having to pay for costs incurred by the supplier to date;

(d) the settlement was agreed between legally advised commercial parties negotiating at arms’ length;[72]
[72]Ibid [45(c)].

(e) the settlement was reached after detailed correspondence, investigations and negotiations by the liquidators and their lawyers;[73]

(f) creditors have had the opportunity to consider the settlements and object should they so choose, and none has taken that opportunity or objected; and

(g) the liquidators have taken advice proportionate to the size and complexity of the claim, and have been advised that the settlement is appropriate.

[73]Ibid [45]

The only counter-argument of which the liquidators can conceive is that the settlement will result in WHS paying to settle claims notionally made against the liquidators themselves, as a result of the liquidators having allegedly breached a contract that they entered based on erroneous advice. But that ignores the fact that the agreement to deliver up the stock could only have been made by the liquidators in their capacities as agents of the relevant company. The slim chance of the liquidators bearing personal liability for breach of that contract is no reason for the Court not to approve a settlement which, in the context of the costs and risks involved, is otherwise entirely appropriate.

The Shriro settlement

The Shriro settlement is similar to the Smeg settlement.

Shriro filed an interlocutory process dated 11 June 2014 by which it sought, among other things, a declaration that the liquidators had breached terms of an agreement between the liquidators and Shriro dated 27 February 2014 (the effect of the breach alleged was a failure to allow Shriro to collect stock that it had supplied). The interlocutory process sought damages of $73,907.04, interest and costs, but Shriro ultimately sought $137,708.09 plus interest and costs.[74]
[74]Ibid [50].

By conditional agreement dated 13 August 2015, the liquidators and Shriro seek to compromise Shriro’s claims.[75]
[75]Ibid, DML-07 77-78.

The part of the settlement in respect of which the liquidators seek directions is clauses 3 to 7, which require WHS to pay Shriro $34,000 in connection with the matters set out in Shriro’s interlocutory process and provide for consequential releases between Shriro, WHS, WHS2 and the liquidators concerning the Shriro stock and Shriro’s interlocutory process.

According to Mr Lewis:

(a) the settlement would take account of the possible damages payable should Shriro’s claim succeed, and the costs that would be incurred if the interlocutory process continued to hearing;[76]
[76]Ibid [60(a)].

(b) at the date of the PPSA Judgment, the primary relief claimed by Shriro (i.e. collection of its goods) was otiose because the liquidators had permitted Shriro to collect stock to the value of its security from the assets of WHS;[77]

(c) the liquidators consider that the settlement amount is appropriate in light of the quantum of the damages and interest claim made by Shriro;[78] and

(d) Corrs Chambers Westgarth has advised the liquidators that the settlement is appropriate.[79]

[77]Ibid [60(b)].

[78]Ibid [60(c)].

[79]Ibid [60(e)].

Notably, the Shriro settlement has no impact on WHS2’s creditors.[80]
[80]Ibid [61].

The arguments and counter-arguments regarding the Smeg settlement apply equally in relation to the Shriro settlement. If anything, the lower quantum of the proposed Shriro payment and the fact that WHS2’s creditors will not be impacted by it makes the Shriro settlement more appropriate for approval.

The Electrolux settlement

Electrolux filed an interlocutory process dated 12 June 2014 by which it sought:

(a) declarations that it was entitled to certain stock that it had supplied to WHS;

(b) orders that the liquidators deliver up that stock to it;

(c) orders that the liquidators compensate it or pay it damages for conversion or detinue of its stock; and

(d) interest and costs.

Electrolux claimed $730,010.69, plus interest and costs.[81]
[81]Ibid [53].

As against the Electrolux claim, WHS2 had a claim against Electrolux for WHS2 stock that had been collected by Electrolux without any entitlement to it.[82]
[82]Ibid [54].

By conditional agreement dated 13 August 2015, the liquidators and Electrolux seek to compromise the claims by and against Electrolux.[83]
[83]Ibid, DML-06 73-75.

According to Mr Lewis:

(a) the settlement would take into account the possible damages payable should Electrolux’s claim succeed, and the costs that would be incurred if the interlocutory process continued to hearing;[84]
[84]Ibid [56(a)].

(b) it is the liquidators’ opinion that the interests of WHS2’s creditors that WHS2’s claim against Electrolux be resolved as part of a three-way settlement, rather than by trying to bring the claim separately.[85] A proposal for WHS to account to WHS2 is dealt with below;[86]
[85]Ibid [56(d)].
[86]See question 3.

(c) the settlement agreement adequately accounts for the strength of WHS2’s claim against Electrolux;[87]

(d) the settlement involves Electrolux releasing security over assets that it would otherwise have been entitled to, with a book value of $75,000;[88] and

(e) Corrs Chambers Westgarth has advised the liquidators that the settlement is appropriate.[89]

[87]Lewis G [56(e)].

[88]Ibid [56(f)].

[89]Ibid [56(h)].

In my opinion the Electrolux settlement should be approved for the following reasons:

(a) the settlement avoids the risk involved in the litigation on the interlocutory process and the need for WHS2 to institute proceedings to recover the value of goods taken by Electrolux;

(b) the settlement avoids the need for the liquidators to incur expense and remuneration claims concerning the defence and prosecution of the claims, which are relatively modest;

(c) the settlement avoids the risk of adverse costs orders, including the risk of having to pay for costs incurred by the supplier on its interlocutory process to date;

(d) the settlement was agreed between legally advised commercial parties negotiating at arms’ length;[90]
[90]Ibid [45(c)].

(e) the settlement was reached after detailed correspondence, investigations and negotiations by the liquidators and their lawyers;[91]

(f) creditors have had the opportunity to consider the settlements and object should they so choose, and none has taken that opportunity or objected; and

(g) the liquidators have taken advice proportionate to the size and complexity of the claim, and have been advised that the settlement is appropriate.

[91]Ibid [45].

The only counter argument of which the liquidators can conceive is that raised in relation to the Smeg and Shriro settlements, dealt with above. That argument is met with the same response as those relating to the Smeg and Shriro settlements.

In the final analysis, I am satisfied of the following matters:

(a) The liquidators have acted bona fide in investigating the actions, taking advice, negotiating with the suppliers and reaching the settlement agreements.

(b) In light of the relationship between the liquidators, WHS and WHS2 and the circumstances in which each of the suppliers came to bring its interlocutory process, the question of whether the settlement agreements are appropriate is more than just a matter for commercial judgement. Despite the apparent disinterest of the companies’ creditors in the applications, the conflicts that have arisen in the administrations and particularly in relation to the subject matter of the interlocutory processes justify the Court exercising its discretion to provide directions to the liquidators on the question of the proposed compromises.

Consideration

[124]Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd (2002) 174 FLR 1, 79-80 [292] (Warren J).

Each of the settlement agreements provides for WHS to pay the supplier a Compromise Payment ‘in connection with the matters set out in [that supplier’s] interlocutory process.’[125]
[125]Lewis G, DML-5 (Smeg), DML-6 (Electrolux), DML-7 (Shriro).

Each settlement had its origin in acts taken by the liquidator to deal with the company’s assets in the interests of those persons ultimately entitled to them. The liquidators took advice to the effect that certain of those assets were (either in part or in whole, and either absolutely or at least arguably) the property of suppliers who claimed to have security interests in them. Consequently, the liquidators negotiated arrangements for the return of some or all of that stock. It cannot be disputed that in so acting they intended to carry out their primary function of realising and distributing the companies’ assets in accordance with law.

When it emerged that the advice upon which they had acted was likely incorrect, the liquidators’ actions in withholding delivery of the stock[126] were taken in pursuance of the same objective: the liquidators were acting to preserve the assets in the companies’ possession and determine their ownership with a view to the proper realisation or distribution of those assets. The interlocutory processes were issued as a result of those actions.
[126]Also taken in reliance on legal advice: Lewis C, [20].

Finally, once the PPSA judgment had determined the parties’ respective entitlements, the liquidators agreed to make the Compromise Payments for the purpose of resolving the interlocutory processes. The settlement agreements are the culmination of extensive investigations, negotiations and advice, summarized at Lewis G [45]. In agreeing to make the Compromise Payments, the liquidators were acting to minimise the direct costs to the liquidations and truncate the litigation so as to prevent further expenses being incurred. Those actions, again, were undertaken for the purpose of preserving as much as possible of the companies’ assets for distribution.

It follows that the Compromise Payments are in my opinion ‘expenses’ which were ‘incurred in preserving, realising or getting in property of the company or in carrying on the company’s business.’ It only follows to consider whether those expenses were ‘properly’ incurred.

Although it might be argued, seeking to apply by analogy the James v Commonwealth Bank of Australia[127] and Re Beddoe[128] lines of authority, that because the expenses were incurred in reliance on erroneous advice, they are not expenses “properly incurred” for the purpose of s 556(1)(a) I do not consider this to be the case in the particular circumstances of this case.
[127](1992) 37 FCR 445, 455.
[128][1893] 1 Ch 547 at 562.

As the Full Federal Court found in Adsett v Berlouis, ‘[w]here the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment’.[129]
[129](1992) 37 FCR 201, 212.

While decisions concerning the meaning of ‘properly incurred’ under s 556(1)(a) have drawn on the Re Beddoe and Adsett v Berlouis line of authority, those decisions themselves concerned a different question, namely, whether a trustee is entitled to an indemnity from trust assets for expenses incurred. The first instance and intermediate appellate decisions in Bank of Queensland Ltd v KD Morris & Sons Pty Ltd (in liq) suggest that the liquidators’ intentions and bona fides play a greater role in the determination of the s 556(1)(a) question than they do in determining a trustee’s right of indemnity. Allowing a greater degree of latitude to liquidators in the exercise of their commercial judgment is in my view entirely consistent with the differences between the role of a liquidator and that of a trustee.

For that reason, the mere fact that the initial advice on which the liquidators acted was incorrect in relation to the three relevant suppliers does not of itself take the expenses that the liquidators incurred in reliance on that advice outside the scope of ‘properly incurred’ for the purposes of s 556(1)(a). The solicitors’ advice, although wrong, was not unreasonable, perverse or wrongheaded (to use the language of Re Beddoe). The PPSA was a new regime without the benefit of a developed body of explanatory case law, and when ventilated in Court, the questions of law raised took two days to argue and generated a detailed reserved judgment. While in hindsight it might be said that the liquidators’ dealings with the three suppliers resulted in unnecessary costs, and that it would have been better had the solicitors advised the liquidators to delay dealing with the assets at all prior to obtaining directions of the Court, at the time that the liquidators relied on the lawyers’ advice, they were confronted with claims by multiple suppliers to stock in the possession of two separate legal entities that was also the subject of potential claims by financiers, customers and another group company and stored in leased premises: a complex and high pressure situation.[130] In such circumstances, some reasonable allowance must be made for commercial realities and the exercise of professional judgement when a Court, with the benefit of hindsight, comes to assess the liquidators’ decisions to determine whether the expenses consequent upon those decisions were ‘properly incurred’.
[130]See Lewis G [11]–[12].

In the facts of this particular case, the Compensation Payments fall within s 556(1)(a).

H Question 4: Should WHS pay compensation to WHS2?

There is authority for the use of directions applications to seek guidance on how to deal with the affairs of related companies whose affairs are intermingled.[131]
[131]See e.g. Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 (Young J); Application of Whitton (as liquidator of Global Gossip Group of Companies) (2006) 230 ALR 323 (Austin J). In each of Vickers, Re York St Mezzanine (2011) 283 ALR 271, [55] – [56] (Gordon J), Re Bell Group Ltd (2013) 97 ACSR 117, [41] (Allanson J) and Re Great Southern Ltd (In Liq) [2015] WASC 171, [51]-[54] (Beech J) the allocation of a settlement sum between several companies to which the same liquidator had been appointed was an issue that supported the exercise of the power under s 511 or s 479(3).

Before the PPSA judgment was delivered, the liquidators had acted in reliance on incorrect advice and returned stock to certain suppliers. The value of those suppliers’ claims against WHS was reduced by the invoice cost value of the stock that was returned.[132]
[132]Lewis G [63].

Wodonga stock with an invoice value totalling $169,637.79 was returned to Electrolux and to another supplier, Sunbeam, and was the subject of corresponding reductions in those suppliers’ claims in the liquidation of WHS.[133] Wodonga stock that had originally been supplied by Electrolux and Sunbeam was the unencumbered property of WHS2.[134]
[133]Ibid [64].
[134]Ibid [62].

That is, WHS received a benefit to the invoice cost value of the Wodonga stock that was returned to Electrolux and Sunbeam, at the expense of WHS2, which was the owner of that stock.

However, the loss suffered by WHS2 as a result of that act was less than the benefit received by WHS, because:

(a) WHS2 could not have returned the goods to a supplier in exchange for a credit, as it had no credit relationship with the suppliers; and

(b) WHS could only have realised the stock at a discount.[135]

[135]Ibid [70].

Although stock with an invoice value of $146,535.01 was returned to Electrolux, the liquidators have concluded on the basis of previous sales of Electrolux stock in the liquidations that if WHS2 had realised the stock, it would have netted some $51,287.25.[136]
[136]Ibid [69]–[70].

Similarly, Sunbeam stock was returned to Sunbeam and the invoice value credited against WHS’s debt. However, that stock is effectively fungible and its value can be made up to WHS2 by allowing WHS2 a larger share of the proceeds of sale of the remaining Sunbeam stock.[137] As the Sunbeam stock has not yet all been realised, the liquidators seek an order providing for payment of a sum expressed as a proportion of realisations.
[137]Ibid [74]–[86].

Finally, the delay caused by waiting until the directions application was heard and determined before deciding whether stock could be realised or had to be returned to suppliers resulted in increased insurance and storage costs being incurred. The liquidators have apportioned those costs between WHS and WHS2 according to the value of the stock that belonged to each company. The liquidators propose that WHS compensates WHS2 for WHS2’s share of that expense, which they have quantified at $11,415.99.[138]
[138]Ibid [65], [87].

Mr Lewis deposes that if the payment is made, WHS and WHS2 will properly have accounted to one another for losses suffered based on the incorrect advice that the liquidators had received. That ought to remove any remaining question of conflict between the liquidators’ duties to WHS and their duties to WHS2.

The liquidators are not aware of any reason making it inappropriate for WHS to compensate WHS2 for the losses caused to it, and the basis on which they have quantified the compensation is reasonable and transparent. Accordingly, they seek an order in the following terms:

The Court directs under s 511(1)(a) of the Act that the plaintiffs are justified and acting reasonably in causing WHS to pay $70,789.22 to WHS2:
(a) $62,703.24; plus
(b)55.75% of the net proceeds of sale of the Sunbeam stock referred to in paragraph 85 of the affidavit of Darren Michael Lewis affirmed on 22 September 2015 –
on account of stock belonging to WHS2 that was handed back to creditors of WHS.

In my opinion, for the reasons given the direction is entirely appropriate and was made on 15 December 2015.

IQuestion 4: Have the liquidators done all that was reasonably necessary to resolve the conflicts arising from the Wodonga stock?

Facts

The interlocutory process presently seeks a direction under s 511 to the effect that the liquidators have taken all steps necessary to resolve the conflicts the subject of Lewis G. In light of authorities including Re J W Murphy & P C Allen; Re BPTC Ltd[139] and Re One.Tel Ltd[140] it is apparent that the direction sought should be framed so as to apply prospectively. For that reason, at the hearing, an oral application was made (and granted) to amend the direction sought to read as follows:

A direction under s 511(1)(a) of the Act that the liquidators of WHS and WHS2 are justified in taking no further steps to resolve ~~have taken all steps reasonably necessary to resolve~~ the conflicts arising from the circumstances referred to in the affidavit of Darren Michael Lewis sworn on 22 September 2015.

[139](1996) 19 ACSR 569, 571.

[140](2014) 99 ACSR 247, 259 [55].

The conflicts in question are summarized in Mr Lewis’s affidavits.

In Lewis C, affirmed on 2 June 2014, Mr Lewis deposes:

18.One of the many matters that the liquidators sought legal advice about was the ownership of the Wodonga Stock. We received and acted upon advice from our solicitors to the following effect:
(a)WHS2 was a trade debtor of the Company as it had not paid for the stock held at Wodonga;
(b)as WHS2 did not have the funds to pay for the sales it would not be able to complete any purchase in order to take title; and
(c)therefore, the Wodonga Stock remained the property of the Company.

19.We also sought specific legal advice as to the resolution of claims by many suppliers for the enforcement of interests in Wodonga Stock and in stock held at the Company’s other stores.
20.We dealt with all suppliers’ claims to the return of stock on their individual merits, and always acting on legal advice.
21.On the basis that the Wodonga Stock belonged to the Company (subject to any security interests or customer claims) and that some creditors had valid security interests over that stock, the liquidators allowed those creditors to collect goods from the Wodonga store in part satisfaction of those creditors’ respective claims against the Company. The effect of such arrangements included a reduction in the amount of the debt owed by the Company to the relevant supplier. In each such case, the reduction of the debt was equal to the total invoice cost price that the supplier had charged to the Company for the supply of the goods that it collected. No rebate reversals (to the extent that suppliers might have been entitled to make them) have been considered in that process to date.

…
63.After the directions application was filed, we received further legal advice to the effect that it was more likely that title to the Wodonga Stock passed to WHS2. Therefore, it became necessary to amend the originating process to deal with the questions of:
(a)whether property in the Wodonga stock had passed to WHS2; and
(b)if it had, whether WHS2 had taken the stock free of any security interest.

64.Those amendments were made pursuant to orders made by the Honourable Justice Ferguson on 2 May 2014, and resulted in the insertion of a new paragraph 1 in the originating process.

Conflict issues
65.If:
(a)the Wodonga Stock belonged not to the Company but to WHS2; and
(b)WHS2 took free of any security interest in the stock
then the effect of any adjudications and settlements that have resulted in Wodonga Stock being collected (or suppliers having a right to collect Wodonga Stock) appears to be that WHS2 assets have been applied in satisfaction of Company debts (albeit mistakenly and in good faith), with the effect that:
(c)WHS2 may have a post-liquidation claim against the Company, and also a claim against us as liquidators; and / or
(d)if agreements have been reached and stock has not yet been collected, the relevant supplier might make a claim against the liquidators and the companies.

66.The existence of those potential claims could put us in a position of conflict, because:
(a)in our capacity as the liquidators of WHS2, we may have to make a claim in the liquidation of the Company, and in our capacity as the liquidators of the Company, we would have to adjudicate on that claim; and
(b)in our capacity as liquidators of WHS2, we may have to investigate a claim against ourselves.

67.On the other hand, if all stock the subject of our existing adjudications as to the Wodonga stock:
(a) is the property of the Company; or
(b) is the subject of a valid security interest –
then there is no conflict of interest.
68.Further, the prospect of:
(a)there being potential claims against us and conflicts of interest if the Court were to direct that the stock belonged to WHS2 and that the stock was not the subject of enforceable security interests in favour of the suppliers; but
(b)there being no such claims if the Court were to direct that the stock belonged to the Company or that the stock remained subject to enforceable security interests in favour of the suppliers –

means that we may be seen as having personal interests in the outcome of the directions application in so far as it relates to the question raised by paragraph 1 of the originating process.
69.For that reason, we propose to adopt the following approach to that part of the application:
(a)We seek that the Court provide a direction as to whether the Wodonga Stock belonged to the Company or to WHS2, and as to whether WHS2 took any interest in that stock free of any security interests granted by the Company.
(b)We do not advocate any particular answer to either of those questions, but will equip the court with all relevant evidence and with all arguments of which we can conceive on both sides of each question.
(c)Every creditor of the companies will be provided with a detailed circular outlining the issues raised in this affidavit and these proceedings, and advising them that they can request a copy of the material filed with the Court from our office.
(d)Every supplier that falls within categories (c) and (d) will be provided with copies of all material filed to date, told that they have an interest in the outcome of the directions application, and advised to seek legal advice.
(e)If, between those suppliers and the amicus curiae Consumer Affairs Victoria, it does not appear that both sides of each argument will be agitated before the Court, we will explore the appointment of an additional contradictor.
(f)If, following the making of directions on paragraph 1 of the originating process, the conflict described at paragraph 66 above is found to exist, we will seek a further direction as to how that conflict should be managed.

70.In adopting that approach we have had regard to (among other things) clauses 6.11.1 and 6.18.1 of the Code of Professional Practice for Insolvency Practitioners (3rd Ed) published by the Australian Restructuring Insolvency and Turnaround Association.

Clause 6.11.1 of the Code referred to at [70] of that affidavit (the ARITA Code) provides:

If, after accepting the group appointment, a conflict arises, such as disputed inter-company loans or transactions that may result in dispute or litigation putting the Practitioner in effect on both sides of the dispute, then, in order to preserve independence, the Practitioner must:
(a) advise creditors on how the issue will be managed; or
(b)seek directions from the court; or
(c)seek approval for the appointment by the court of a special purpose administrator or liquidator.

It is not a breach of the Code to have accepted the appointment provided suitable enquiries were made prior to the appointment and no conflicts were identified, if the Practitioner takes appropriate action once any threat is identified.

In accordance with their obligations under general law and the ARITA Code, the liquidators sought directions to deal with the conflict issue as soon as it was practicable to do so once the issue had emerged. At the directions hearing on 13 June 2014, the liquidators sought leave to amend their originating process so as to deal with the conflict question, by seeking ‘further directions concerning the resolution of any conflict that might be found to exist …’ Ferguson J (as her Honour then was) declined that leave, but stated ‘that doesn’t foreclose the liquidators renewing that application …’.[141]
[141]Lewis H [19].

On 27 June 2014, the liquidators wrote to creditors in the following terms:[142]
[142]Lewis G Exhibit DML-09.

Wodonga Stock and conflict issues
As we are the liquidators of both WHS and WHS2 we have always been mindful that any decision regarding Wodonga Stock will affect the creditors of each company differently.
As referred to in our earlier circulars, we originally took the view (based on advice) that the Wodonga Stock had remained the property of WHS, and we adjudicated on each supplier’s claim to security accordingly. On that basis, settlements were reached with some suppliers, and some suppliers were allowed to collect some of the Wodonga Stock.
We have subsequently received different advice to the effect that it is likely that title in the stock at the Wodonga store passed from WHS to WHS2. Whether the stock was owned by WHS or WHS2 will impact on various creditors of each of WHS and WHS2. For those reasons, we have asked the Court to determine questions (a) and (b) above. Pending the determination of those questions, we have had to suspend the collection of any stock held by the Companies.

If the Court finds that title in the Wodonga stock passed to WHS2, WHS2 and some suppliers may have claims against WHS and/or us arising from the dealings with the Wodonga Stock. Such claims would put us in a position of conflict. Further, the existence of those potential conflicts means that we might be seen to have an interest in the outcome of questions (a) and (b).
We have dealt with those issues by:
(i)notifying the Court of the issues;
(ii)asking the Court to give directions regarding the conflict issues after it determines questions (a) and (b) above;
(iii)informing all creditors of the issues (by way of this circular); and
(iv)adopting a neutral position on the resolution of questions (a) and (b) above. At the hearing of the request for directions on questions (a) and (b):
(1)a group of creditors (Electrolux Home Products Pty Limited, Shriro Australia Pty Ltd and Smeg Australia Pty Ltd) will argue that title to the Wodonga Stock did not pass to WHS2, and that if it did, the suppliers’ security interests in that stock survived the transfer;
(2)Consumer Affairs Victoria will argue that title to the Wodonga Stock passed to WHS2 and that security interests in that stock granted by WHS can no longer be exercised over that stock; and
(3)the liquidators will put the necessary facts before the Court (by way of affidavits that have already been filed) and will identify arguments on either side of each question, but will not agitate for any particular resolution to the questions.

At the hearing on 13 June, the Court indicated that it was not necessary to add conflict questions to the list of matters to be dealt with in the proceeding at that time. Following the determination of questions (a) and (b), the liquidators will consider any question of conflict that becomes apparent, and will then act accordingly.

Creditors were given the opportunity to obtain the court documents and be heard at the hearing.

The liquidators’ written submissions filed in advance of the hearing before me highlighted the existence of the conflict issue.[143]
[143]Liquidators’ written submissions dated 27 October 2014, 4-7 [12]–[19]

On 12 October 2015, after issuing their interlocutory process, the liquidators further circularized the creditors, informing them that the liquidators sought directions including a direction that the liquidators had taken all steps reasonably necessary to resolve the conflicts that had arisen.[144] Creditors were offered copies of the court documents, and the opportunity to be heard on the application, and were provided with a pro forma notice of submission.[145] FEG was provided with a copy of the application and the affidavit in support.[146]
[144]Lewis H, [5]; DML-10, 2-3.
[145]Lewis H, [5]; DML-10, 3.
[146]Lewis H, [13]; DML-13.

WHS has suffered loss and damage as a result of the liquidators’ acts in reliance on the incorrect legal advice. The liquidators have candidly observed that it might be argued that they are responsible for some part of that loss (although they do not admit having caused any loss).[147] The loss is summarized in confidential sealed exhibit DML-C1.
[147]Lewis H, [22].

To the best of Mr Lewis’s knowledge, no creditor has expressed any criticism of the liquidators’ conduct, whether by reference to the conflicts or otherwise.[148]
[148]Ibid [32].

It is the liquidators’ view that:

(a) if the Court makes the orders sought in their interlocutory process, they will then have taken all reasonable necessary steps to identify the relevant conflicts, bring them to the creditors’ attention and resolve them; and

(b) if any creditor wished to take any steps arising from the conflicts, they have been adequately equipped to do so by the correspondence from the liquidators.[149]

[149]Lewis G, [94]; Lewis H, [32].

Nevertheless, given the conflicts and the liquidators’ involvement in the circumstances that led to them, they wish to obtain the court’s advice as to whether or not they are justified in taking no further steps to resolve the conflicts that have arisen.

Consideration

Having given the appropriate direction under question 3 above, there is no longer any conflict between the interests of WHS and WHS2.[150] But there remains the impact on WHS of the actions taken by the liquidators in reliance on the incorrect legal advice that they obtained at the outset of the administration.
[150]Although if Frenkel Partners compensates the companies for matters including the costs paid to the contradictors, there may be an issue as to how that compensation should be divided as between WHS and WHS2. In confidential exhibit DML-C1, Mr Lewis deposes that he intends to seek Court approval of any settlement with Frenkel Partners.

The liquidators have conceded that if a creditor brought an action to remove them, there is a chance that it would succeed. The liquidators have candidly observed that it might be argued that they bear some responsibility for the creation of the conflicts (although they do not accept that that is so).

In Re National Safety Council of Australia Victoria Division,[151] the Full Court allowed an appeal from an order appointing as liquidator of a company a member of the firm that had been the company’s auditors, in circumstances where the liquidator may have had to investigate the relationship between the company and its auditors. The Court explicitly noted that there was not ‘the slightest evidence’ to support any allegations of negligence or breach of duty by the auditors,[152] but stated that the mere prospect of the investigation was sufficient to call for the liquidator not to have been appointed. The Full Court held that:

the conflict lies in the need of the liquidator to be seen to be independent of any matter which his duties as liquidator may require him to investigate … the point is that the liquidator must necessarily be free to investigate the relationship just as he would be able to investigate any other relationship between consultants to the company and the company.[153]

[151][1990] VR 29.

[152]Ibid 34.

[153]Ibid 35.

Similarly, in Tracker Software International Inc v Smith,[154] Mandie J removed a liquidator on the application of a shareholder because there was sufficient material to raise a case to investigate the actions of the liquidator in the sale of the company’s business during a period when he acted as voluntary administrator. His Honour held that:

the actual material produced raises a case for investigation, and puts the defendant in an impossible situation. It seems to me that he cannot, having regard to these allegations, be expected to act or at least appear to act objectively and impartially as liquidator, and the creditors of this company are entitled to nothing less.”[155]

[154](1997) 24 ACSR 644.

[155]Ibid 649.

Other examples can be found: see City & Suburban Pty Ltd v Smith[156] and Public Trustee (Qld) v Octaviar Ltd (in prov liq).[157]
[156](1998) 28 ACSR 328, 336.
[157](2009) 74 ACSR 109.

In Re Club Superstores (in liq) Thomas J stated that

once a realistic possibility of conflict arises, it is not possible to wait and see [and that i]t is necessary in the interests of efficiency and of avoiding disquiet that an order be made.[158]

[158](1993) 10 ACSR 730, 735.

However the authorities are clear that conflict will not require the removal of liquidators in all cases.[159] Other relevant factors will also need to be considered.
[159]Re South Australian Ships Pty Ltd (in liq) [2000] SASC 221, [7] (Debelle J).

The financial impact of a change in liquidators will fall on the creditors,[160] and so the views of the creditors (if properly informed[161]) are important, although not decisive.[162]
[160]Re Dunquil Pty Ltd (in liq) (1985) 9 ACLR 950, 955.
[161]Public Trustee (Qld) v Octaviar Ltd (2009) 74 ACSR 109, 120 [38].
[162]Re Dunquil Pty Ltd (in liq) (1985) 9 ACLR 950, 955; Re Giant Resources Ltd [1991] 1 Qd R 107, 115; Public Trustee (Qld) v Octaviar Ltd (2009) 74 ACSR 109, 120 [38].

The degree to which the liquidator has become acquainted with the business and affairs of the company, and how close the liquidation is to being finalised, are also relevant factors,[163] although likely to be of less weight than the existence of the conflict.[164] ‘It is well settled that an applicant seeking to remove a liquidator in these circumstances has an onus of proof which will not easily be discharged if the liquidator has become well-acquainted with the business and affairs of the company and the process of the winding up is nearing completion’.[165]
[163]Multi-Core Aerators Ltd v Dye [1999] VSC 205, [48] (Warren J).
[164]Re National Safety Council of Australia Victoria Division [1990] VR 29, 35.
[165]Re South Australian Ships Pty Ltd (in liq) [2000] SASC 221, [23] (Debelle J).

In Re South Australian Ships Pty Ltd (in liq)[166] Debelle J took into account the fact the existence of a committee of inspection and the fact that the committee could meet at any time and make such application as it might feel necessary if it perceived that a difficulty had developed.
[166]Ibid [15].

In Re Giant Resources Ltd,[167] Ryan J held

The critical question is whether the appointment should be set aside because the substantial and real interest of the liquidation requires or justifies the removal.

[167][1991] 1 Qd R 107, 115.

And in National Australia Bank Ltd v Wily[168] Burchett AJ held:

In Re Biposo Pty Ltd (1995) 17 ACSR 730 at 734, Young J said the question was "whether in the interests of the public the removal of the liquidator would be for the general advantage of persons interested in the winding up", and his Honour has reiterated this view in National Australia Bank Ltd v Market Holdings Pty Ltd (in liq) (2001) 37 ACSR 629 at 660, after pointing out (at 659) that the liquidator’s duty is owed "to the creditors as a whole". If the Court is to decide such a matter in this way, a breach of a liquidator’s strict duty, and certainly one of a merely technical or theoretical nature, or a breach not shown to have had actual deleterious consequences, may, in some circumstances, not lead to removal of the liquidator. The Court will consider the consequences for all concerned, including particularly the general body of creditors. "[T]he due cause [for removal] is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed": In re Adam Eyton, Limited. Ex parte Charlesworth [1887] 36 Ch D 299 at 306, per Bowen LJ.

[168][2002] NSWSC 573, [20].

At present, nobody is seeking the removal of the liquidators and nobody has (so far as they know) even criticised their actions. It could not be said that the absence of criticism is because the creditors are uninformed of the circumstances. Since detecting the conflict the liquidators have been scrupulous in drawing it to the attention of the Court and the creditors and giving the creditors every reasonable opportunity to be heard about it. They have kept the Court informed of the conflict and sought to have it brought before the Court on two occasions.

Given the lengths to which the liquidators have gone to identify the conflict, manage it and keep the Court and creditors informed about it, and given the absence of any economic interest in any unsecured non-priority creditors, it is in my opinion reasonable to infer that no complaint will ever be made.

The liquidators are pursuing a claim against the solicitors who gave the advice that led to the conflict arising. They have attempted to open negotiations to resolve that claim.[169] The liquidation is well-advanced. It has been complicated and the level of knowledge is extraordinary.
[169]See confidential exhibit DML-C1.

In all of those circumstances, it is in my opinion entirely appropriate that the liquidators continue to administer the winding up of each company. For them to resign would be against the interests of the liquidations. There is no person with any interest in the liquidation who argues that any further action needs to be taken. If anybody with a relevant interest in the liquidation wishes to have the liquidators removed or their conduct investigated, it remains open to them to take such action as they may be advised to. But it is not necessary for the liquidators now to do anything further to manage the conflicts.

The liquidators sought a direction in the terms of the proposed amended interlocutory process. The direction was made on 15 December 2015.

J Question 5: Should costs be costs in the liquidations?

It is usual on an application for liquidators’ directions for costs of the application to be ordered as costs in the winding up. Such orders have been made even where the directions sought were not granted.[170]
[170]See e.g. Re Dungowan Manly Pty Ltd (in liq) [2015] NSWSC 915, [49].

Unless the Court were of the view that the liquidators’ costs of bringing the application were not ‘properly incurred’ within the meaning of s. 556(1)(a), the liquidators’ costs would be paid as a priority out of the liquidation in any event.

Although the need for the directions application was generated in part by the conflict created by the liquidators acting in reliance on the erroneous advice, that fact should not in my opinion require that the usual order as to costs be disturbed. The fact is that there are legal questions that require an answer in order to enable the liquidations of the companies to be completed. Whether those questions were resolved by these liquidators or others, the directions sought by the interlocutory process (save for that relating to the ongoing management of the conflict) would be required. The interests of the creditors have been served by the application, and it was properly brought.

The costs of the application should be costs in the winding up of WHS, which was the company that benefited as a result of the conflicts which were the subject of the application.

[2016] VSC 63

4 March 2016