Needham, in the matter of Bruck Textile Technologies Pty Ltd (in liq)
[2016] FCA 837
•5 July 2016
FEDERAL COURT OF AUSTRALIA
Needham, in the matter of Bruck Textile Technologies Pty Ltd (in liq) [2016] FCA 837
File number: NSD 619 of 2015 Judge: GLEESON J Date of judgment: 5 July 2016 Catchwords: BANKRUPTCY AND INSOLVENCY – application for approval for entry into a funding agreement – whether the entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator – approval granted
PRACTICE AND PROCEDURE – application for a suppression or non-publication order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) – clear public interest in the due and beneficial administration of estates of insolvent companies – disclosure of reasons for judgment an essential aspect of the principle of open justice
Legislation: Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
Cases cited: Tolric Pty Ltd v Taylor as Liquidator of Bruck Textile Technologies Pty Ltd (in liq) [2015] FCA 1051
McGrath & Anor re HIH Insurance Ltd & Ors [2010] NSWSC 404; (2010) 78 ACSR 405
Pascoe; in the matter of Matrix Group (in liquidation) [2011] FCA 1117
Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315
Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109
Stewart in the matter of Newtronics Pty Ltd [2007] FCA 1375
Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498
Re Octaviar Administration Pty Ltd (in liq) [2014] NSWSC 344
Date of hearing: 5 July 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 41 Solicitor for the Plaintiffs: Mr MR Catchpoole of Henry Davis York
Table of Corrections 30 May 2017 In the first sentence of [30] the word “fund” has been deleted and replaced with “funding agreement”. ORDERS
NSD 619 of 2015 IN THE MATTER OF BRUCK TEXTILE TECHNOLOGIES PTY LTD (IN LIQUIDATION) ACN 074 170 988
ANDREW FLETCHER NEEDHAM AND BARRY ANTHONY TAYLOR IN THEIR CAPACITY AS LIQUIDATORS OF BRUCK TEXTILE TECHNOLOGIES PTY LTD (IN LIQ)
Plaintiffs
JUDGE:
GLEESON J
DATE OF ORDER:
5 JULY 2016
THE COURT ORDERS THAT:
1.The entry by the Liquidators into the Funding Agreement that appears at page 1 of Exhibit AFN-5 to the affidavit of Andrew Fletcher Needham sworn on 29 June 2016 is approved.
2.The following documents are to be marked “Confidential” on the electronic court file and are not to be published or accessed except pursuant to an order of the Court, until such time that any litigation (including any appeal) arising out of the winding-up and affairs of Bruck Textile Technologies Pty Ltd (in liquidation) is concluded:
(a)the 24-paragraph affidavit titled “Affidavit of Andrew Fletcher Needham” sworn on 29 June 2016 (Needham 2);
(b)the exhibit marked “Exhibit AFN-5” to Needham 2 (AFN-5);
(c)the plaintiffs’ submissions;
(d)any transcript of the hearing of this application on 5 July 2016; and
(e)any reproduction of the words contained in Needham 2 or AFN-5, including but not limited to, in any reasons for judgment in this proceeding.
3.The grounds for order 2 are that it is necessary to prevent prejudice to the proper administration of justice.
4.The costs of this application be payable from the estate of Bruck Textile Technologies Pty Ltd (in liq).
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
GLEESON J:
On 5 July 2016, I made an order approving the entry by the liquidators of Bruck Textile Technologies Pty Ltd (in liq) (“Bruck”) into a funding agreement with the Commonwealth of Australia (“Commonwealth”). The application for the order was unopposed. These are my reasons for making that order.
The order was sought pursuant to s 506(1A) of the Corporations Act 2001 (Cth) (“the Act”). By s 506(1A)(a), s 477(2B) applies in relation to the liquidators. Section 477(2B) 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 … 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.
The Commonwealth is Bruck’s largest unsecured creditor, by reason of advances totalling approximately $3.5 million for payments to employee creditors of Bruck pursuant to the Department of Employment’s Fair Entitlements Guarantee scheme. By reason of those advances, it is also a priority creditor pursuant to s 560 of the Act.
The funding agreement was made on 11 May 2016. However, it is a condition precedent to the operation of the agreement that the liquidators obtain the approval to enter into the funding agreement pursuant to s 506(1A).
According to the second named plaintiff, Mr Needham, absent litigation recoveries, Bruck is unlikely to provide any return for unsecured creditors. Mr Needham gave the following affidavit evidence:
8.Based on my investigations I believe that a series of transactions were undertaken in the 18 months leading up to the liquidation of Bruck which had the effect of transferring all of the assets of Bruck to related parties with a view to making those assets unavailable to Bruck’s creditors as a class, including contingent creditors. I believe Bruck has claims against Bruck’s directors and other companies controlled by Mr Bart that may result in substantial recoveries to creditors.
9.Bruck’s largest unsecured creditor is the Commonwealth of Australia. The funding to be provided under the Funding Agreement will in effect be applied towards attempting to recover amounts for the benefit of creditors generally, including the Commonwealth.
BACKGROUND FACTS
Bruck was part of a group of companies that operated in the synthetic and natural textile industry. According to the liquidators, in the 18 months prior to their appointment, significant assets with a book value of $8.656 million were transferred to related entities for no real or cash consideration. Instead, Bruck declared a series of dividends and capital reductions which were used by the related entities to extinguish loan accounts owed to Bruck. Further, on the day prior to the liquidators’ appointment, Bruck’s remaining business and assets were sold to a related company for $1 plus the assumption of various liabilities owed by Bruck to other related entities.
The liquidators were appointed on 11 July 2014 pursuant to a creditors voluntary winding up, initiated by Australian Textile Group Pty Ltd, the beneficial owner of 100% of the issued shares in Bruck.
Bruck and the liquidation were left without funds.
At the time of the liquidators’ appointment, Bruck employed approximately 180 people in its textile manufacturing operation in Wangaratta, Victoria. Although the purchaser of Bruck’s business offered employment to approximately 120 of Bruck’s employees, the liquidators were required to terminate the employment of 58 employees and assist them with lodging claims with the Department of Employment to receive assistance under the Fair Entitlements Guarantee Act 2012 (Cth).
Bruck has priority and unsecured creditors of at least $4,539,647.34, including the Commonwealth. According to the submissions made on behalf of the liquidators, Bruck also owes money to its redundant employee priority creditors, to employees for other liabilities and there is one disputed trade creditor.
A related company to Bruck, Sisely Properties Pty Ltd, claims $8,024,715.00 as damages for breach of a lease of factory premises. Bruck entered into the lease in January 2012. The liquidators have not admitted this claim.
Steps taken in the liquidation
On 23 December 2014, the liquidators published a report to creditors (“first report”) which records that the liquidators lodged a report with the Australian Securities and Investments Commissioner (“ASIC”) pursuant to s 533 of the Act on 5 August 2014. In that report, the liquidators informed ASIC that it appeared to them that the directors of Bruck may be guilty of an offence under s 596AB of the Act. Section 596AB(1) provides:
A person must not enter into a relevant agreement or a transaction with the intention of, or with intentions that include the intention of:
(a) preventing the recovery of the entitlements of employees of a company; or
(b) significantly reducing the amount of the entitlements of employees of a company that can be recovered.
On 18 August 2014, ASIC requested that the liquidators lodge a supplementary report to provide more detail on matters raised in the initial s 533 report.
On 4 December 2014, the liquidators executed a funding agreement with ASIC to investigate certain matters and report to it by mid-February 2015.
The liquidators prepared an annual report to creditors dated 9 October 2015, pursuant to s 508 of the Act (“second report”). The second report records that the liquidators had prepared the requested supplementary report pursuant to s 533(2), which cost $68,949.56 and was paid for by ASIC from its Assetless Administration Fund (“AAF”).
The second report also records that ASIC subsequently agreed to provide an additional amount of approximately $270,000 from the AAF in order for the liquidators to conduct public examinations of relevant persons and prepare a further report on the outcomes and/or findings from the public examinations.
In September 2015, the liquidators defended (with substantial success) an application to set aside orders for production of documents obtained by the liquidators: Tolric Pty Ltd v Taylor as Liquidator of Bruck Textile Technologies Pty Ltd (in liq) [2015] FCA 1051.
The liquidators have conducted ten days of public examinations before this Court, with a particular focus on examining whether contraventions of the Act have been committed.
Features of funding agreement
The funding agreement is the result of Mr Needham’s successful application for litigation funding under the Department of Employment’s recently announced Fair Entitlements Guarantee Recovery Programme (“FEG recovery programme”).
There is no funding premium payable under the funding agreement. Further, in the event of no recoveries, the funding is provided on a non-recourse basis. Mr Needham’s opinion is that, so far as the interests of creditors are concerned, the Commonwealth is offering superior terms pursuant to the FEG recovery programme than could be available in the private litigation funding market.
The funding agreement provides for the repayment of funds advanced by the Commonwealth and the Commonwealth’s admitted debt in priority to other creditors. However, as the Commonwealth is already a priority creditor pursuant to s 560, Mr Needham does not believe that the interests of any third party creditors are compromised as a result of the funding agreement.
Other relevant features of the agreement are:
(1)The Commonwealth will meet adverse costs orders with respect to the proposed litigation;
(2)The Commonwealth will provide security for costs in connection with the litigation;
(3)The Commonwealth will pay 80% of the liquidator’s fees and 80% of the lawyer’s fees, meaning that the liquidators and their solicitors will only be paid the final 20% of their fees in the event that the estate comes into sufficient funds.
Mr Needham deposed to his belief that there are no unusual or onerous terms attached to the funding agreement.
Liquidator’s opinion
Mr Needham’s evidence is that:
(1)The funding agreement represents the best way to secure funding to pursue recovery actions for the benefit of the creditors of Bruck;
(2)Without funding from the Commonwealth, Bruck was without resources to pursue litigation for the benefit of creditors and there would almost certainly be a nil return for creditors;
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In written submissions on behalf of the liquidators, it was submitted that the recovery proceedings have the potential to provide a 100 cents in the dollar return to unsecured creditors.
LEGAL PRINCIPLES
The overriding purposes of a liquidation are to recover funds for the benefit of creditors and investigate the reasons for the failure of a particular company, including reporting on offences and other breaches of the Act.
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 being a matter of the Court exercising commercial judgment: McGrath & Anor re HIH Insurance Ltd & Ors [2010] NSWSC 404; (2010) 78 ACSR 405 (per Barrett J).
In Pascoe; in the matter of Matrix Group Ltd (in liquidation) [2011] FCA 1117 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.
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 in the matter of Newtronics Pty Ltd [2007] FCA 1375.
Factors relevant to doubting the good faith or prudence of a proposed litigation funding agreement include:
(1)The liquidator’s prospects of success in the litigation;
(2)The nature and complexity of the cause of action;
(3)The extent to which the liquidator has canvassed other funding options;
(4)The level of the funder’s premium;
(5)The liquidator’s consultation with creditors; and
(6)The risk involved in the claim (including the amount of costs likely to be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the defendant’s costs if the action is not successful, or towards any order for security for costs).
CONSIDERATION
I have read the funding agreement, which was tendered as part of a confidential exhibit. Having regard to the matters set out above, I am satisfied that the funding agreement does not prejudice the rights of creditors of Bruck.
There is no reason to consider that the liquidators could secure funding on any basis more favourable to Bruck’s creditors.
The Court has not been furnished with detailed evidence concerning the prospects of success of the contemplated litigation. However, there is no reason to doubt that the liquidators are acting properly and in good faith in pursuing that litigation where the liquidators’ investigations, including substantial public examinations, have been funded by ASIC, and where the Commonwealth has now decided to fund recovery proceedings pursuant to its FEG recovery programme on the basis of the work funded by ASIC. Mr Needham’s stated belief that Bruck has reasonable prospects of pursuing claims is reflected in the terms of the funding agreement by which the liquidators and their solicitors fees have agreed to accept payment of only 80% of their fees unless the estate comes into sufficient funds to pay the remaining 20%.
For these reasons, I was satisfied, on the basis of Mr Needham’s evidence and my review of the funding agreement, that there are no grounds for suspecting bad faith, any error of law or principle or any grounds for doubting the prudence of the liquidator’s conduct in entering into the funding agreement.
CONFIDENTIALITY
Section 37AF of the Federal Court of Australia Act 1976 (Cth) provides:
(1) The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of:
(a) information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or
(b) information that relates to a proceeding before the Court and is:
(i) information that comprises evidence or information about evidence; or
(ii) information obtained by the process of discovery; or
(iii) information produced under a subpoena; or
(iv)information lodged with or filed in the Court.
(2) The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).
By s 37AG(1)(a), the Court may make a suppression order or non-publication order on the ground that the order is necessary to prevent prejudice to the proper administration of justice. By s 37AG(2), a suppression order or non-publication order must specify the ground or grounds on which the order is made.
As Barrett J noted in Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498 at [2], the subject matter of an application of this kind is “commercially confidential and sensitive… related to aspects of the litigation that any plaintiff, protecting its own interests and the integrity of the litigation process in which it is engaged, would take particular care to keep from the other party or parties to the litigation. Those aspects relate to the funding of the litigation”.
The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of s 37AF orders in this case.
In Re Octaviar Administration Pty Ltd (in liq) [2014] NSWSC 344 at [20] to [21], Ball J noted that disclosure of reasons for judgments is an essential aspect of the principle of open justice. On the other hand, his Honour observed, when considering a request for access to reasons for orders made pursuant to s 477(2B) of the Corporations Act 2001 (Cth) approving the entry by the liquidators into a litigation funding deed, it is appropriate to give the liquidators an opportunity to make submissions on which parts of the material to which access is sought is confidential and should remain the subject of a suppression order. Ball J stated:
Without intending to be exhaustive, that material would include material that would put the Liquidators in a disadvantageous position compared to that of an ordinary litigant. Disclosure of material of that type would not be conducive to the proper administration of justice. Fortress accepts that the court should hear submissions from the Liquidators on the question of confidentiality in its absence.
Accordingly, I gave the liquidators an opportunity to make submissions on which parts of these reasons, should be redacted in accordance with the s 37AF order. In written submissions, which themselves fall within order 2(c) of the orders made on 5 July 2016, the liquidators contended that paragraph 24(3) above contains information which could provide defendants in the proposed litigation with an unfair advantage. That unfair advantage was said to arise because the information goes to:
(a)the liquidators’ belief as to the nature of the claims available to Bruck and the recoverability of those claims; and
(b)the liquidators’ strategy to launch recovery proceedings to recover funds for the benefit of Bruck’s creditors.
I accept that the information is information of the kind identified by the liquidators which, if disclosed, could confer an unfair advantage on defendants in the proposed litigation.
I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate:
Dated: 4 August 2016
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