Niccol, in the matter of FLY365 Pty Ltd (in liq)
[2020] FCA 1303
•8 September 2020
FEDERAL COURT OF AUSTRALIA
Niccol, in the matter of FLY365 Pty Ltd (in liq) [2020] FCA 1303
File number: NSD 210 of 2020 Judgment of: STEWART J Date of judgment: 8 September 2020 Catchwords: CORPORATIONS – application for approval to enter into a funding agreement under s 477(2B) of the Corporations Act 2001 (Cth) – where work was carried out by liquidators prior to obtaining approval for the agreement – whether liquidators carrying out duties faithfully – approval granted
CORPORATIONS – application for direction under s 90-15 of the Insolvency Practice Schedule – whether liquidators justified in entering into funding agreement – direction made
PRACTICE AND PROCEDURE – application for suppression order under s 37AF of the Federal Court of Australia Act 1976 (Cth) – whether order necessary in the interests of justice – limited suppression orders made
Legislation: Corporations Act 2001 (Cth) s 477(2B); Sch 2, Insolvency Practice Schedule (Corporations) ss 90-15, 90-20
Federal Court of Australia Act 1976 ss 17(4); 37AE, 37AF, 37AG, 37AJ
Cases cited: In the matter of One.Tel Limited [2014] NSWSC 457
Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 1111
McGrath & Anor re HIH Insurance Ltd [2005] NSWSC 731
Motorola Solutions Inc. v Hytera Communications Corporation Ltd (No 2) [2018] FCA 17
Onefone Australia Pty Ltd v One.Tel Pty Ltd [2010] NSWSC 498; 78 ACSR 163
Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 26 Date of hearing: 8 September 2020 Solicitor for the Plaintiffs: J Scarcella and E Barrett of Johnson Winter & Slattery ORDERS
NSD 210 of 2020 IN THE MATTER OF FLY365 PTY LTD
IAN MALCOLM NICCOL & VINCENT JOSEPH PIRINA
IN THEIR CAPACITY AS LIQUIDATORS OF FLY365 PTY LTDPlaintiffs
ORDER MADE BY:
STEWART J
DATE OF ORDER:
8 SEPTEMBER 2020
THE COURT ORDERS THAT:
1.Ian Malcolm Niccol and Vincent Joseph Pirina in their capacities as joint and several liquidators of FLY365 Pty Ltd (In Liquidation) be named as plaintiffs in these proceedings in place of Nicarson Natkunarajah.
2.Pursuant to section 477(2B) of the Corporations Act 2001 (Cth) (Act) Ian Malcolm Niccol and Vincent Joseph Pirina (Liquidators), in their capacities as joint and several liquidators of FLY365 Pty Ltd (In Liquidation) (Company), be approved to enter into a funding agreement between the Liquidators and the Commonwealth Bank of Australia, Global Collect Services B.V and the Australian Federation of Travel Agents (Funding Agreement) in the form at pages 1 to 39 of Confidential Exhibit IMN-1 to the affidavit of Ian Malcolm Niccol sworn 3 September 2020 (Niccol Affidavit).
3.Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) that the Liquidators are justified in entering into the Funding Agreement and are authorised to carry its terms into effect.
4.Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth) that paragraphs 54 to 60 of the Niccol Affidavit and pages 40 to 63 of the Confidential Exhibit IMN-1 are not to be published or disclosed for a period of six years from 21 February 2020.
5.The plaintiffs’ costs of and incidental to this application be costs and expenses in the liquidation of the Company and be paid out of the assets of the Company.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(Revised from the transcript)STEWART J:
There is an interlocutory application before me by the liquidators of FLY365 Pty Ltd for three forms of relief:
(1)An order pursuant to section 477(2B) of the Corporations Act 2001 (Cth), granting approval to them in their capacities as joint and several liquidators of the company, to enter into a funding agreement between them and the Commonwealth Bank of Australia, Global Collect Services BV and the Australian Federation of Travel Agents.
(2)A direction, pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) that the liquidators are justified in entering into the funding agreement and are authorised to carry its terms into effect.
(3)An order pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) that paragraphs 37 and 54 to 60 of the affidavit of Ian Malcolm Niccol sworn on 3 September 2020 and confidential exhibit IMN-1 are not to be published or disclosed for a period of six years.
The plaintiffs, being the applicants on the motion, read the affidavit of Mr Niccol, to which I have already referred, and the affidavit of Nicarson Natkunarajah sworn on 28 February 2020.
The funding agreement in respect of which approval is sought has been executed by the funding parties but not by the liquidators. The funding pursuant to the funding agreement has not yet been provided, although the work the subject of the agreement has been conducted. The work was the conducting of examinations of two directors of the company and seeking orders for the production of documents. The examinations themselves took place over three days last month. The obligations under the agreement which are in the future and which may extend beyond a period of three months, which is what enlivens the need for approval under s 477(2B), concern the reimbursement of the funders out of proceeds recovered in future proceedings.
I am satisfied that the liquidators have given proper explanation for the reason why the work was conducted prior to the agreement having been concluded by them, which would have required, as it does now, approval under s 477(2B) of the Act.
The explanation centres on the amount of work that the liquidators have had to do, and which they have done, and the heavy demands of this liquidation. Their explanation gives the Court comfort that the liquidators are faithfully carrying out their duties and acting in good faith for the purposes of s 90-15(4)(a) of the Insolvency Practice Schedule.
I am also satisfied that given the large number of creditors in this liquidation, the costs of holding a creditors meeting and the nature of the possible claims, including the potential defendants to those claims, it was not feasible or necessary that creditor approval was first obtained.
Insofar as the suppression orders are concerned, the matters in respect of which suppression was sought can conveniently be divided into three subjects. I will identify those shortly.
The requirement under the relevant provision of the FCA Act is that suppression orders will only be made if it is necessary to do so to prevent prejudice to the proper administration of justice: s 37AG of the FCA Act. In Motorola Solutions Inc. v Hytera Communications Corporation Ltd (No 2) [2018] FCA 17, Perram J summarised the relevant principles at [6] as follows:
(1)the FCA Act contains Part 5AA which relates to suppression and non-publication orders;
(2)the power of the Court to make such orders is contained in section 37AF and the grounds for making them are to be found in section 37AG which includes within it that ‘the order is necessary to prevent prejudice to the proper administration of justice’: s 37AG(1)(a);
(3)such an order is not lightly to be made. It must be necessary to prevent prejudice to the proper administration of justice and not be merely desirable: see Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 at 666 [39]; Australian Competition and Consumer Commission v Valve Corporation (No 5) [2016] FCA 741 at [8] per Edelman J;
(4)the Court may make any other order necessary to give effect to the primary order: s 37AF(2) of the FCA Act;
(5)the order, once made, must remain in place no longer than is reasonably necessary to achieve its purpose: s 37AJ(2); and
(6)the Court must take into account that a primary objective of the administration of justice is to safeguard the public interest in open justice (s 37AE) but no balancing exercise need be carried out between the utility of the order and the interest which open justice assumes under the FCA Act: Australian Competition and Consumer Commission v Air New Zealand (No 12) [2013] FCA 533 at [21].
There is a strong and clear public interest in open justice. However, the court may make confidentiality and non-publication orders if public knowledge of the proceedings is likely to defeat the paramount object of doing justice according to law.
With reference to the dicta of Barrett J in McGrath & Anor re HIH Insurance Ltd [2005] NSWSC 731 at [13], it is often the case that liquidators are in the unenviable position of needing approval from the court to fund claims against third parties where disclosing the identity of the third parties and nature of the claims against them is an incidental part of obtaining approval. Liquidators in those circumstances, unlike ordinary litigants, have to seek leave and this sets their case apart in such a way that justice will best be served by an examination of the matters the liquidators are bound to raise with the court in an atmosphere where they can lay them before the court fully and frankly and without any apprehension that the interests they are bound to serve will thereby be prejudiced.
On that authority and reasoning, I exercised the power under s 17(4) of the FCA Act and excluded members of the public from this hearing for a portion of the hearing when certain of the matters in respect of which suppression orders were sought were debated. That was to enable a proper and open debate and a proper ventilation of the issues to be undertaken. Once that had been done, the hearing was then reopened to members of the public and continued in an open fashion.
The first of the three subject matters I referred to in respect of which suppression is sought is in relation to paragraph 37 of Mr Niccol’s affidavit. That is where he refers to the company having professional indemnity insurance. Suppression was sought in order to minimise the risk of prejudice to any claim brought under the policy. No such potential claim has been identified but even if it had, my view in relation to it would be the same: that it is not necessary to suppress the existence of such a policy in order to prevent prejudice to the proper administration of justice. The liquidators have sought, no doubt in the interests of the insurers, to suppress the existence of the policy. They were, however, obliged to bring its existence to the attention of the Court as part of their obligations of full and frank disclosure in an application such as this. They can therefore not be criticised for doing so, but having done so, and having sought a suppression order in relation to the policy, I am not satisfied that such an order is justified.
The second subject matter in respect of which suppression orders are sought is in relation to paragraphs 54 to 56 of Mr Niccol’s affidavit and pages 43 to 63 of exhibit IMN-1, which cover details of potential claims that the liquidators are considering bringing, including with respect to unfair preferences and uncommercial transactions. The paragraphs also set out the liquidators’ views with regard to further investigations which they intend to pursue and also some conclusions they have drawn from the examinations that have already taken place. I am satisfied that it is necessary, in order to prevent injury to the proper administration of justice, to supress those paragraphs. The potential targets of the liquidators’ claims or actions would otherwise be given an undue advantage in seeking to frustrate or avoid the liquidators’ further investigations.
The third subject matter in respect of which suppression is sought is in relation to paragraphs 57 to 60 of Mr Niccol’s affidavit and also pages 1 to 39 of exhibit IMN-1. The paragraphs give the details of the funding agreement for which approval is sought and the agreement itself is at the mentioned pages of the exhibit. In view of the fact that the work to be done under that agreement has already taken place and that all that remains to be done is for payment to be made and then for a possible reimbursement of the funders out of future recoveries, I do not see that it is necessary in order to prevent harm to the proper administration of justice to suppress those details. This is a different type of funding agreement to the one that the courts often face in applications for approval under s 477(2B) of the Act. It does not deal with funding of future litigation and the details of it will not give future adversaries in litigation undue advantage in the litigation.
I therefore decline parts of the suppression that were sought, but I am satisfied in respect of one aspect of it, being that in relation to the details of the claims that are still being investigated.
Turning now to the question of approval under s 477(2B) of the Act, the relevant principles were summarised by Gordon J in Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26]. That summary has been approved and adopted in subsequent cases. The relevant principles include the following:
(1)The court does not simply “rubber stamp” whatever is put forward by a liquidator.
(2)The court will not approve an agreement if its terms are unclear.
(3)The role of the court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable.
(4)In reviewing the liquidator’s proposal the task of the court is not to reconsider all of the issues weighed by the liquidator in developing the proposal, and substitute its determination in a hearing de novo, but to pay due regard to the liquidator’s commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or grounds for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the expeditious and beneficial administration of the winding up.
(5)In judging whether or not a liquidator should be given permission to enter into a funding agreement, whether retrospective or not, it is important to ensure, amongst other things, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a “grossly excessive profit”.
(6)Generally the court grants approval under s 477(2B) of the Act only where the transaction relates to the proper realisation of the assets of the company or otherwise assists in the winding up of the company.
In addition to these matters, the court will have regard to the impact that entering into the agreement will have upon the duration of the liquidation and whether that impact is, in all the circumstances, reasonable in the interests of the administration: In the matter of One.Tel Ltd [2014] NSWSC 457 at [30] per Brereton J.
The terms of the funding agreement are comprehensive. They deal with an indemnity for adverse costs, reimbursement of the funding creditors, the priority for reimbursement of the funding creditors, certain reporting requirements, default and confidentiality. They are, in my assessment, sufficiently clear and certain, in an ordinary form, and the liquidators are satisfied with their commercial terms.
The purpose of the funding agreement is for the benefit of creditors as it provides the first step towards potential recoveries for the benefit of creditors. It also aided the liquidators’ knowledge of the affairs of the company, through the examinations that were carried out. That is especially so in the light of the paucity of information and documents that were received from the directors. The examination of the directors would not have been possible without the funding agreement, as the liquidators were otherwise without funds for that purpose. I am satisfied that the proper purpose and good faith elements are accordingly met.
The examinations were necessary as a consequence of a number of factors, including that the directors were not co-operating fully with the liquidators by failing to respond to requests for information and to provide books and records of the company. There was a transfer of a substantial sum of money to related entities of the company in the days prior to the appointment of the liquidators. The related entities failed to respond to demands from the liquidators and there was a need to investigate potential claims against the directors and others.
The unsecured creditors of the company are not prejudiced by the terms of the funding agreement as it only entitles the funding creditors to a priority for the funds provided for the examination and does not otherwise provide the funding creditors with any uplift. Since the work under the funding agreement has already taken place, clearly, the liquidation of the company is not prolonged by entry into the funding agreement.
For those reasons, I am satisfied that there should be approval under s 477(2B) of the Act for the liquidators to conclude the funding agreement.
Turning now to the question of a direction under s 90-15, the liquidators seek an order that they are justified in entering into the funding agreement and are authorised to carry its terms into effect. The liquidators clearly have standing to bring the application given that they are officers and thus qualify under s 90-20(d) of the Insolvency Practice Schedule.
The principles governing the exercise of the court’s powers under s 90-15 of the Insolvency Practice Schedule were recently set out in Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 1111 at [7] to [11]. No purpose is served in repeating them. As a further point, the fact of approval being given under s 477(2B) of the Act does not mean that there is no justification for a direction under s 90-15: Onefone Australia Pty Ltd v One.Tel Pty Ltd [2010] NSWSC 498; 78 ACSR 163 at [17] per Barrett J.
Under s 90-15 of the Insolvency Practice Schedule, different considerations are at play in circumstances as here, where the liquidation is unfunded, the directors have failed to produce books and records to assist the liquidators, and significant funds have been transferred from the company to related entities in the days prior to the liquidation. In my view, the liquidators’ conduct in obtaining funding for the purposes of investigating the conduct of the directors and the related entities was in good faith and reasonable.
The evidence establishes that the liquidators proposed to enter into the funding agreement for proper purposes and for the benefit of the creditors, and they ought to be given the protection of a direction. I will order accordingly.
I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart. Associate:
Dated: 10 September 2020
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