Marsden v Screenmasters Australia Pty Ltd, in the matter of Cardinal Group Pty Ltd (in liq)

In the case of Marsden v Screenmasters Australia Pty Ltd, in the matter of Cardinal Group Pty Ltd (in liq), the Federal Court was tasked with determining whether an inquiry should be ordered into the conduct of liquidators in relation to their performance of their duties. The dispute arose from a complaint made by Screenmasters, which alleged that the liquidators were pursuing proceedings without a reasonable prospect of benefiting the creditors of Cardinal Group or otherwise benefiting the liquidation, and that they had rejected a settlement offer due to negotiating terms with a litigation funder.

The central legal issues for the court to decide were whether the liquidators' decision to enter into a litigation funding agreement and commence recovery proceedings was legitimate, and if the liquidators had breached their duties by pursuing proceedings that had little likelihood of recovering more than the costs, expenses, and funder's fees. The court had to weigh the anticipated total recovery for creditors, the position of creditors, and the proportionality between costs and recovery, against other factors that might indicate impropriety.

The court's reasoning was grounded in the observations of the Court of Appeal in a previous case, which highlighted that the anticipated dividend rate for creditors was not relevant to the decision by a liquidator to commence or prosecute recovery proceedings. The court noted that the anticipated total recovery and the range of amounts to be distributed to individual creditors should be considered by a liquidator in deciding whether to take or continue with proceedings. The court also observed that factors such as the cost of litigation being borne by a funder, committees of inspection approving the funding arrangements, and liquidators renegotiating the funding arrangements to increase the distribution to unsecured creditors were relevant to the assessment of the objective propriety of the liquidators' position. However, these factors needed to be weighed against others that might point to impropriety.

The court concluded that the liquidators' decision to commence and continue the proceedings was legitimate, as they had incurred costs in preliminary investigations and in creditors' meetings, and considered that the prospective benefits to creditors justified further investigation. The court found that the pre-litigation costs were necessary or reasonably considered to be justified because of the prospective benefits to creditors, the litigation costs were reasonably incurred and proportionate to the prospective benefits, and the litigation funding agreement was not on manifestly unreasonable terms. The court was not satisfied that there was a sufficient basis to order an inquiry into the conduct of the liquidators of the Cardinal Group either pursuant to s 536(1)(b) or s 536(3) of the Corporations Act 2001 (Cth).

The final orders of the court were that Screenmasters’ Amended Interlocutory Process be dismissed, and that the defendant pay the plaintiffs’ costs. The court's decision underscored the importance of considering the context of the liquidation and the overall litigation strategy when evaluating the actions of liquidators in pursuing recovery proceedings.