Marsden, in the matter of Unified Business Communications Group Pty Ltd (in liq)
[2018] FCA 272
•8 February 2018
FEDERAL COURT OF AUSTRALIA
Marsden, in the matter of Unified Business Communications Group Pty Ltd (in liq) [2018] FCA 272
File number: NSD 2186 of 2017 Judge: GLEESON J Date of judgment: 8 February 2018 Date of publication of reasons: 9 March 2018 Catchwords: BANKRUPTCY AND INSOLVENCY – whether to approve liquidator’s entry into litigation funding agreement and solicitors’ retainer pursuant to s 477(2B) of the Corporations Act 2001 (Cth) – approvals granted Legislation: Corporations Act 2001 (Cth) s 447(2B)
Federal Court of Australia Act 1976 (Cth) s 37AF
Cases cited: Hughes, re Sales Express Pty Ltd (in Liq) [2016] FCA 423
Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257
Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594
Date of hearing: 8 February 2018 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 30 Counsel for the Plaintiff: Mr D Neggo Solicitor for the Plaintiff: Stacks Law Firm ORDERS
NSD 2186 of 2017 IN THE MATTER OF UNIFIED BUSINESS COMMUNICATIONS GROUP PTY LTD (IN LIQUIDATION) ACN 151 465 422)
PETER WILLIAM MARSDEN AS LIQUIDATOR OF UNIFIED BUSINESS COMMUNICATIONS GROUP PTY LTD (IN LIQUIDATION) ACN 151 465 422
Plaintiff
JUDGE:
GLEESON J
DATE OF ORDER:
8 FEBRUARY 2018
THE COURT ORDERS THAT:
1.Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, the contents of the following documents be suppressed until further order of the Court:
(a)paragraphs 1 to 6 of the affidavit of Peter William Marsden affirmed on 4 December 2017 and marked “confidential”;
(b)annexure “A” to the affidavit of Peter William Marsden affirmed 4 December 2017 and marked “confidential”;
(c)the affidavit of Peter William Marsden affirmed on 6 February 2018 and marked “confidential” comprising seven paragraphs; and
(d)annexure “A” to the affidavit of Peter William Marsden affirmed on 6 February 2018 and marked “confidential”.
2.Leave be granted to the plaintiff to file the amended originating process dated 8 February 2018 electronically by 5 pm on 8 February 2018.
3.Unified Business Communications Group Pty Ltd (in liq) ACN 151 465 422 (“company”) and the plaintiff as liquidator of the company be authorised, nunc pro tunc, to enter into the litigation funding agreement in the form of annexure “A” to the confidential affidavit of Peter William Marsden affirmed on 4 December 2017.
4.The company and the plaintiff as liquidator of the company be authorised to enter into a retainer with Stacks/Southern Highlands Pty Ltd trading as Stacks Law Firm in the form of annexure “A” to the confidential affidavit of Peter of William Marsden affirmed on 6 February 2018.
5.Costs of and incidental to this originating process be costs in the winding up.
6.Any person demonstrating sufficient interest in the plaintiff’s application, including any creditor of the company, has liberty to apply on 3 days’ notice.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
GLEESON J:
On 8 February 2018, I made orders on the application of the plaintiff (“Mr Marsden”) as liquidator of Unified Business Communications Group Pty Ltd (in liquidation) (“company”) authorising his entry into a litigation funding agreement and an associated retainer with Stacks/Southern Highlands Pty Ltd (“Stacks”) pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (“Act”).
These are my reasons for making those orders.
BACKGROUND FACTS
Mr Marsden was appointed liquidator of the company by order of this Court on 13 July 2016, on the application of the Deputy Commissioner of Taxation filed on 5 May 2016. Accordingly, the relation-back day in relation to the winding up of the company is 5 May 2016: s 91 of the Act.
Vazrick Hovanessian has been a director of the company since 1 February 2012. Andrew Bray was a director of the company from 14 June 2011 to 30 August 2015.
Broad Investments Limited (“Broad”) holds all the issued share capital in the company.
For reasons set out in an affidavit affirmed on 4 December 2017 (“first December 2017 affidavit”), Mr Marsden has formed the view that he has not received all of the books and records of the company, and that he and/or the liquidator have potential recovery actions including against:
(1)Mr Hovanessian and Mr Bray for breach of directors duties and for insolvent trading;
(2)Broad for insolvent trading and for the recovery of payments that Mr Marsden believes are voidable transactions; and
(3)two related entities (Raxigi Pty Ltd and UBCG Pty Ltd (previously known as Broad Property Holdings Pty Ltd) (“UBCG”)) for the recovery of payments which Mr Marsden also believes are voidable transactions.
Also for reasons set out in his first December 2017 affidavit, Mr Marsden’s view is that the company was insolvent at all material times from 1 July 2013 to 13 July 2016, and potentially much earlier.
Mr Marsden considers the appropriate next step in the company’s winding up to be an application to the Court pursuant to ss 596A and 596B of the Act for the issue of summonses for examination of Mr Hovanessian and Mr Bray and other third parties. The principal purposes of the proposed examinations are set out in Mr Marsden’s first December 2017 affidavit, and include enabling Mr Marsden to determine whether there are any potential actions available to him and or the company (including those identified above).
After inviting the company’s creditors to offer funding, in September 2017 Mr Marsden informed the creditors that, in the absence of funding from them, he had entered into a litigation funding agreement on 20 September 2017 that was subject to the creditors’ approval (“litigation funding agreement”). He informed them that he would be seeking that approval at a meeting of creditors on 17 October 2017.
A report to creditors dated 28 September 2017 stated that in the event of successful litigation, pursuant to the litigation funding agreement, the funds recovered would be applied as follows:
ŸReimbursement to the Litigation Funder for fees and disbursements incurred as well as payment of additional legal costs incurred by the Legal Practitioners engaged by the Company and/or the Liquidator in relation to the legal proceedings;
ŸPremium payable to the Litigation Funder of 35% of any funds remaining after meeting the above payments; and
ŸAny remaining balance would then be forwarded to the Company’s Liquidator.
At the creditors meeting, Mr Marsden discussed the proposed public examinations and sought that a resolution be passed, intended to authorise the liquidator’s entry into the litigation funding agreement. At the meeting, Mr Hovanessian represented four out of the total of five attendees (the other being the Deputy Commissioner of Taxation). The parties represented by Mr Hovanessian were all related entities of the company, and have combined claims comprising approximately 80% of total claims.
Mr Marsden’s evidence was that he has claims against three of the four parties whom Mr Hovanessian represented, exceeding $600,000 in total. Mr Marsden also gave evidence that only 5 of the 11 creditors of the company are unrelated to the company.
By an affidavit affirmed on 6 February 2018 (“first February 2018 affidavit”), Mr Marsden explained that he signed the litigation funding agreement on the basis of his understanding that it was subject to funding approval and that his execution of the agreement was not inconsistent with s 477(2B). To the extent that Mr Marsden breached s 477(2B) by executing the agreement, Mr Marsden said that the breach was inadvertent and he sought authorisation nunc pro tunc to enter into the agreement.
Mr Marsden also gave evidence that he gave notice of this proceeding to 10 of the company’s 11 creditors by a circular to creditors dated 15 January 2018, to Mr Hovanessian and to THE Australian Securities and Investments Commission. The circular was not sent to the remaining creditor, UBCG, as previous notices had been marked “return to sender”. However, Mr Marsden noted that Mr Hovanessian is the sole director and secretary of UBCG.
Litigation funding agreement
A copy of the litigation funding agreement is annexed to a second affidavit affirmed by Mr Marsden on 4 December 2017. The agreement contains a warranty to the effect that the agreement is subject to “Funding Approval”, which is defined to include the approval of the agreement by a court.
Mr Marsden’s evidence is that, in his experience, the terms of the litigation funding agreement are typical, reasonable and competitive.
According to Mr Marsden, as at 4 December 2017, the prospective dividend to priority and unsecured creditors of the company was expected to be nil. If the prospective actions were to succeed, then the prospects of a return to creditors would improve significantly. Mr Marsden expressed the view that entry into the funding agreement is in the interests of creditors, as it will enable the public examinations to be conducted and, potentially, the prosecution of any claims identified following those examinations. In Mr Marsden’s opinion, neither of these steps would be possible without the agreement.
Retainer of Stacks Law Firm
In his first December 2017 affidavit, Mr Marsden gave evidence that he had instructed Stacks to act for him in applying for and conducting the public examination and in prosecuting any subsequent actions. Mr Marsden said that he had engaged Stacks on a speculative basis, meaning that it will only be entitled to payment of its professional fees if funds are recovered as a result of the resolution of any claims.
Mr Marsden’s evidence was that he was satisfied that the commercial terms of the retainer are appropriate, not unusual and generally in the interests of creditors. He was also satisfied that Stacks has the relevant expertise to conduct the matters for which it has been retained.
In a second affidavit affirmed on 6 February 2018, Mr Marsden annexed a copy of a proposed costs agreement with Stacks with respect to the public examinations.
LEGAL FRAMEWORK
The relevant legal framework is well known and is set out in Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 (“Reed”) at [31] to [37] and [41] as follows:
31.Section 477(2)(m) of the Corporations Act provides for a liquidator’s general power to “do all such other things as are necessary for winding up the affairs of the company and distributing its property”. That power is qualified in relation to the entry into agreements in the circumstances in s 477(2B).
32. Section 477(2B) of the Act provides:
Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or a an agreement under which a security interest arises or is created) if:
(a)without limiting paragraph (b), the term of the agreement may end; or
(b)obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;
more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged , within those 3 months.
33. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 (“Fortress”) at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors: McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]; Pascoe; re Brentwood Village Ltd (in liq) [2014] FCA 1295, [44].
34.The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 (“Cassegrain”) at [11] per Black J citing Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 266 ALR 642.
35.In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 (“Pascoe”) at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]:
Although the court has the statutory task [under s 477(2B)] of giving “approval” to a liquidator’s agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete “merits review”. As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6:
... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.
36.The Court’s task is to satisfy itself, having regard to the liquidator’s commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, re Newtronics Pty Ltd [2007] FCA 1375.
37.In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors (identified by Austin J in Leigh re AP& PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25] and Re ACN 076 673 875 Ltd (rec’r & mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]- [34]) relevant to the Court’s assessment of a proposed litigation funding agreement:
(1) the prospects of success of the proposed litigation;
(2)the interests of creditors other than the proposed defendant;
(3)possible oppression;
(4)the nature and complexity of the cause of action;
(5)the extent to which the liquidator has canvassed other funding options;
(6)the level of the funder’s premium;
(7)consultations with creditors; and
(8)the risks involved in the claim.
…
41.A liquidator should seek the Court’s approval before entering into a long term agreement. However, the Court may give retrospective approval to an agreement under s 477(2B) in appropriate circumstances: Hamilton, re ACN 101 634 146 Pty Ltd (in liq) [2014] FCA 687; Stewart, re Newtronics Pty Ltd [2007] FCA 1375 at [25]; Re HIH Insurance Group Ltd [2001] NSWSC 308; (2001) 19 ACLC 1102; Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167.
CONSIDERATION
Litigation funding agreement
I accepted Mr Marsden’s evidence to the effect that the terms of the litigation funding agreement are commercially reasonable. I also accepted the submission of Mr Neggo, counsel for the liquidator, that the terms of the agreement include appropriate safeguards to protect the liquidator from undue control by the funder. I noted that the funding premium does not appear to be excessive, and appeared to be within the range of premiums negotiated in agreements of this kind: cf. Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257at [12]; Hughes, re Sales Express Pty Ltd (in Liq) [2016] FCA 423 at [20].
The absence of creditor approval was not significant where the creditors who voted against approval are related to the potential examinees and the potential defendants.
I accepted that there was no reason to conclude that the liquidator’s entry into the litigation funding agreement was other than a proper exercise of his power, or to conclude that it was an ill-advised or improper act on the part of the liquidator.
Accordingly, I was satisfied that it was appropriate to approve the liquidator’s entry into the litigation funding agreement on behalf of the company.
In my view, the liquidator probably did enter into the litigation funding agreement by signing it in September 2017 contrary to the terms of s 477(2B), because the agreement required him to obtain funding approval within a period after the commencement of the agreement. I was satisfied that it was appropriate to make an order under s 477(2B) nunc pro tunc where the liquidator’s failure to seek approval prior to entry into the agreement was inadvertent and there was no reason to think that any prejudice would be suffered by reason of the making of the order in those terms.
Retainer of Stacks Law Firm
Further, I also accepted Mr Marsden’s evidence that the commercial terms of the retainer, set out in the proposed costs agreement are appropriate, not unusual and generally in the interests of creditors.
There was no reason to conclude that the liquidator’s entry into the proposed costs agreement was other than a proper exercise of his power, or to conclude that it was an ill-advised or improper act on the part of the liquidator.
Accordingly, I was satisfied that it was appropriate to approve the liquidator’s entry into the proposed costs agreement on behalf of the company.
Confidentiality
Finally, I was satisfied that it was appropriate to make an order pursuant to s 37AF of the Act to protect the commercial confidentiality of the terms of the litigation funding agreement and the proposed costs agreement: see Reed at [57] to [60].
I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate:
Dated: 9 March 2018
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