Re Addstone Pty Ltd (In Liq)
[1998] FCA 638
•9 JUNE 1998
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - Liquidator’s application for directions under s 479(3) Corporations Law - application to Court for approval of funding arrangement to enable liquidator to pursue causes of action - whether proposed funding arrangement constitutes maintenance or champerty - whether falls within power under s 477(2)(c) of the Law to sell property of company - causes of action unable to be pursued without external funding - consideration of nature of proposed assignment - relevance of lack of consultation with all creditors - whether funds for litigation could have been procured from creditors - whether bona fide and for the benefit of creditors.
Corporations Law ss 9, 477(2)(c), 479(3)
Re Movitor Pty Ltd (In Liquidation) (1996) 64 FCR 380, considered and applied
Re Tosich Construction Pty Ltd (1997) 73 FCR 219, applied
UTSA Pty Ltd v Ultra Tune Australia Pty Ltd [1997] 1 VR 667, applied
IN THE MATTER OF ADDSTONE PTY LTD (IN LIQUIDATION) ACN 010 764 997
PETER IVAN MACKS
SG 3080 of 1995
MANSFIELD J
ADELAIDE
9 JUNE 1998
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
SG 3080 of 1995
IN THE MATTER OF ADDSTONE PTY LTD
(IN LIQUIDATION) ACN 010 764 997
PETER IVAN MACKS
APPLICANT
JUDGE:
MANSFIELD J
DATE OF ORDER:
9 JUNE 1998
WHERE MADE:
ADELAIDE
THE COURT ORDERS THAT:
The liquidator as liquidator of the Emanuel group has power under the Law to enter into the Funding Arrangement, being the arrangement and transactions identified in the documents annexed to the affidavit of the liquidator sworn on 29 May 1998.
The annexure to that affidavit be confidential and not be available for the inspection of any person except by leave of the Court or a Judge.
The liquidator, creditors and contributories of the Emanuel group have liberty to apply.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
SG 3080 of 1995
IN THE MATTER OF ADDSTONE PTY LTD
(IN LIQUIDATION) ACN 010 764 997
PETER IVAN MACKS
APPLICANT
JUDGE:
MANSFIELD J
DATE:
9 JUNE 1998
PLACE:
ADELAIDE
REASONS FOR JUDGMENT
NATURE OF APPLICATION
Peter Ivan Macks (“the liquidator”) is the liquidator of Emanuel Management Pty Ltd (in liquidation) and sixty-three other companies together known as the Emanuel group (“the Emanuel group”). He was appointed as liquidator of each of the Emanuel group companies on various dates between 13 June 1995 and 24 January 1996 save for Emanuel Investments Pty Ltd (in liquidation). In the case of that company, which is also a member of the Emanuel group, the liquidator was appointed on 9 January 1995 by resolution of its creditors, to succeed an earlier appointment of another person made by resolution of its members.
Many of the winding up orders were challenged by Mr Giuseppe Emanuele, but ultimately those challenges were unsuccessful: Emanuele v Australian Securities Commission (1997) 188 CLR 114, a decision of the High Court given on 5 June 1997. The liquidator’s status was, to some extent, under a cloud until that decision.
The liquidator applies pursuant to s 479(3) of the Corporations Law (“the Law”) for directions as to whether he has the power under s 477(2)(c) of the Law to enter into certain proposed arrangements and transactions with a view to procuring funding for the conduct of certain proposed litigation on behalf of the Emanuel group.
THE PROPOSED CLAIMS
There are two claims to which this application relates, although the ambit of the proposed litigation may be somewhat wider. Those two claims have each been instituted but, at the time of hearing this application, not served. They are not necessarily in their final form. They are:
The liquidator has commended proceedings in the name of Emanuel Management Pty Ltd (In Liquidation), Elizabeth House Pty Ltd (In Liquidation) and in his own name in proceedings numbered 2420 of 1996 in the Supreme Court of South Australia. The defendants are EFG Finance Ltd (“EFG”), Coopers & Lybrand and Murray Goldey Anderson.
The liquidator has also commenced proceedings in the name of Elizabeth House Pty Ltd (In Liquidation), Emanuel (South Aust) Pty Ltd, Hondel Pty Ltd (In Liquidation), Libra Pty Ltd (In Liquidation), Sayer Properties Pty Ltd (In Liquidation), Worando Trust Pty Ltd (In Liquidation) and Emanuel Investments Pty Ltd (In Liquidation) in proceedings numbered 167 of 1997 also in the Supreme Court of South Australia. The defendants to those proceedings are Coopers & Lybrand and Timothy James Cuming.
Although those two actions were commenced before funding was fully procured to conduct them, due to concern about possible statutory limitations, those proceedings as noted above had not been served at the time of hearing this application. The liquidator has to the time of this hearing obtained orders as necessary from the Supreme Court of South Australia that they be and remain confidential, and that the time for service of them be extended. In the meantime he has continued investigations into the matters to which they relate, at least to the extent that available funds have permitted. He has also been involved in protracted negotiations with a view to obtaining funding to prosecute each of those actions before having to serve them. It is because those protracted negotiations have resulted in an arrangement for the funding of those two actions that this application is now brought.
I shall refer to the two actions and the general ambit of the proposed litigation to which the proposed funding arrangements apply together as “the proposed claims”.
For reasons which appear below, it is necessary to identify the nature of the proposed claims to ensure that, to the extent to which the proposed funding arrangements sell or dispose of the proceeds or part of the proceeds of them, that sale or disposition is of “property” of the Emanuel group under s 477(2)(c).
The proposed claims arise from transactions during periods which (it is alleged) the Emanuel group, at least from 1987, and probably earlier, was insolvent but continued trading. The proposed claims are first against EFG, but also Elfic Ltd, Lensworth Properties Pty Ltd, and other associated companies (together with EFG, those other entities are called “the EFG group”). From at least 1987, various payments were made or transactions effected to or for the benefit of EFG or the EFG group at times when EFG and the EFG group knew that it was insolvent.
In respect of the payments made or transactions effected prior to 23 June 1993, that is prior to the commencement of Pt 5.7B of the Law, s 565 of the Law was in terms similar to s 451 of the Companies Code. Under those provisions, a settlement or transfer of property or a payment made or an obligation incurred by a company was void against the liquidator if, had it been made by a natural person, it would have been void against the trustee in bankruptcy. Under the Bankruptcy Act 1966 (Cth), settlements within five years of the relevant date may be avoided: s 120(1)(a), and fraudulent dispositions at any time may be avoided: s 121. The relevant date is said to be 23 March 1995, when an administrator was appointed to the Emanuel group: s 513C of the Law, and s 565(2) of the Law and s 451(2) of the Companies Code. On and subsequent to 23 June 1993, the provisions of Pt 5.7B of the Law apply to permit recovery in certain circumstances described in particular in ss 588FA - 588FF of the Law. Under each statutory regime, there are also provisions which permit recovery in certain circumstances for insolvent trading: previously s 556 of the Companies Code and now ss 588G and 588M of the Law.
The proposed claims relate in part to the payment of dividends by the Emanuel group to various members of the EFG group from 1985 pursuant to the terms of issue of certain redeemable preference shares, and then also to the payments made by the Emanuel group to various members of the EFG group in redemption of those redeemable preference shares in 1987, 1988 and 1990. In respect of each of those payments, it is proposed to be alleged that at the time of each of them the Emanuel group was insolvent and did not have funds available lawfully to make those payments, and that the EFG group knew or had reasonable grounds to suspect that the Emanuel group was insolvent at the time of each of those payments and that each of them was improper. The liquidator proposes to allege that those various claims came about because certain members of the EFG group participated in an active way in the affairs of the Emanuel group specifically, at least in part, to manage its “exposure” to the Emanuel group when it was otherwise vulnerable to substantial losses in the event of the failure of the Emanuel group, and that it then “propped up” the Emanuel group over a period of time whilst it restructured its advances and its securities so as to put itself in a favourable position at the expense of other creditors of the Emanuel group. It is also proposed to be alleged that certain monies held by EFG on trust for the Emanuel group from the proceeds of sale of certain properties of the Emanuel group were applied in 1990 in the redemption of preference shares issued to the EFG group in 1988 and in the payment of dividends due on the redeemable preference shares in 1990. The process of restructuring the security supporting the loans by the EFG group, and advancing further monies to prop up the Emanuel group, was (it is to be alleged) upon terms which led improperly to the creation of an extremely large debt upon inappropriate terms, whilst the EFG group was effectively controlling the operations of the Emanuel group. In 1994, the further provision of funds ceased and the loans were called up. That led to a dispute, ultimately compromised, including by a consent judgment in favour of EFG for $182 million as an alleged debt, and later in March 1995 by a Deed of Forbearance and Release whereunder, in consideration of $6 million paid to the directors of the Emanuel group personally (and certain other payments), those directors would cause the Emanuel group to transfer all of the property held to EFG and to grant a general release of EFG from all liabilities. All creditors except the Australian Taxation Office were to be paid, and the debt to EFG of $182 million was also to stand subject to its reduction by the ascribed value of the properties transferred. That ascribed value is alleged to be at a very substantial undervalue. That Deed is alleged to be the culmination of that improper course of conduct on the part of the EFG group, as well as being itself an improper instrument designed to enhance the EFG group interests at the expense of other creditors of the Emanuel group.
At the same time as that Deed was executed, there were certain other documents executed and other payments made. The liquidator alleges that those transactions overall involved breaches by the directors of the Emanuel group of ss 232(2), (4) and (6) of the Law, intentionally and dishonestly with intent to defraud the creditors of the Emanuel group. It is also alleged that the EFG group by its officers were directly and dishonestly involved in those breaches so as to commit the offence proscribed by s 1317FA of the Law and to give rise to the remedy prescribed by s 1317HD of the Law, including the setting aside of the Deed.
The proposed allegations against the EFG group thus involve:
the causes of action resulting from the payment of the monies in redemption of the preference shares, and in payment of dividends
the causes of action relating to the conduct of the affairs of the Emanuel group in the period 1990-1995 when officers of EFG were acting de facto as directors of the Emanuel group and in that capacity wrongfully continued an insolvent business and wrongfully incurred substantial debts to the benefit of EFG
the causes of action relating to the making and execution of the Deed of Forbearance and Release, including the impugning of the releases granted under that Deed.
The conduct of the EFG group is alleged to have been fraudulent, as against the creditors of the Emanuel group generally and including the Australian Taxation Office. The EFG group is alleged to have participated in breaches of fiduciary, statutory and contractual duties by the directors of the Emanuel group, as well as having participated in insolvent transactions extensively since 1990. Those breaches support claims under s 1317HD of the Law, as well as under Pt 5.7B of the Law.
The proposed claims also allege that Coopers & Lybrand, and Mr Anderson (together hereinafter called “C & L”) as auditors of the Emanuel group knew or had reasonable grounds for suspecting that the Emanuel group and each company in it was insolvent at all material times from 1990 and probably earlier. It is also alleged that over a period of time at least (for part of which the claim may be statute barred) C & L was negligent in the performance of its duty as auditors in certifying the accounts of certain members of the Emanuel group and in failing to qualify the accounts of certain members of the Emanuel group by permitting a specific treatment of redeemable preference shares in the accounts of certain members of the Emanuel group, and by certifying those accounts so as to enable the directors to declare and pay dividends on those shares. It is further to be alleged that C & L knowingly participated in what amounted to fraudulent breaches of trust by the directors of the Emanuel group in respect of the payment of those dividends, so as to entitle the liquidator to pursue those claims beyond the six year limitation period which would otherwise apply, and thereby to extend those claims into the period from about 1985-1990.
The proposed claims against C & L further extend to the redemption of the redeemable preference shares in the years 1987, 1988 and 1990, including payment of the premiums made upon those redemptions. Again, it is said that the auditors in certifying the relevant accounts and in failing to qualify those accounts enabled funds to be applied towards redemption of those shares when the Emanuel group was insolvent and those funds should not have been so applied.
The liquidator proposes also to allege that Coopers & Lybrand, essentially through Mr Cuming as the then liquidator of several of the companies in the Emanuel group was aware of the proposals which culminated in that Deed and its surrounding documents, and wrongly facilitated their execution and implementation so that they too are liable to the Emanuel group for the relief claimed.
I must stress, in fairness to the EFG group, to Coopers & Lybrand, and to Messrs Anderson and Cuming, that the proposed allegations set out above are no more than allegations at this point. I am not in any way to be taken as indicating that those allegations will or will probably be made out should the proposed claims proceed to trial. It is not the role of the Court at this point to make any such judgment. As I indicated, my purpose in identifying the nature of the proposed claims is simply to ascertain their nature sufficiently to be satisfied that the dealings of the liquidator with respect to them under the Funding Arrangement (defined below) constitute dealings in ‘property’ of the Emanuel group so as to entitle the liquidator under s 477(2)(c) of the Law to undertake those dealings.
In my view it is clear that those various causes of action relate to the property of the Emanuel group. Section 9 of the Law defines the term “property” widely as follows:
“any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action;”
Although relief under Pt 5.7B of the Law is granted upon the application of the liquidator: s 588FF(1), it is plain for the reasons given by Drummond J in Re Movitor Pty Ltd (In Liquidation) (1996) 64 FCR 380 (at 391-393) and by Lindgren J in Re Tosich Construction Pty Ltd (1997) 73 FCR 219 (at 235) that amounts so recovered are the property of the company.
THE PROPOSED FUNDING ARRANGEMENTS
The liquidator considers it appropriate and desirable in the interests of the creditors and members of the Emanuel group, in particular the named plaintiffs but also generally because of the close relationship and interaction of companies in the Emanuel group, that the proposed proceedings should be conducted by him. The funding arrangement he has negotiated contains the following general features:
(a)A loan facility to be made available to the liquidator by a bank, which funds are to be used to pay legal and other expenses to be incurred in pursuing the proposed claims.
(b)Repayment of the loan facility to be insured by an insurer, in the event that the proposed claims are unsuccessful.
(c)A premium to be charged by the insurer which, apart from a relatively small initial payment of $80,000 to be paid from funds made available by the bank, is an amount payable only from the proceeds of any successfully conducted action relating to the proposed claims.
The proposed funding arrangement is contained within a series of documents comprising:
Loan and Guarantee Facilities Agreement (“the Loan Agreement”)
Insurance Policy
Deed of Charge
Solicitor Client Agreement
Agency Agreement.
The Loan Agreement is between a bank and the liquidator. It provides for the bank to make available to the liquidator and to the Emanuel group firstly a loan facility, and secondly a guarantee facility, to pursue claims against EFG and the EFG group, and C & L including by legal proceedings. The loan facility is to be used to pay an insurance premium, legal and related expenses under the Solicitor Client Agreement, legal costs that the liquidator is personally ordered to pay, legal costs that any of the Emanuel group is ordered to pay by way of security for costs, and the liquidator’s remuneration and expenses in preparing any case brought to pursue such claims, and the bank’s interest and fees. The guarantee facility is available only to meet any court orders requiring a member of the Emanuel group to provide a bank guarantee as security for costs that may ultimately be awarded against any company in the Emanuel group. The amount of the facility available is, on the material before me, likely to be adequate to conduct the proposed claims and to meet any liabilities incurred in the course of their conduct. The bank is to be repaid in full in the event of receipt of moneys recovered in the proceedings or through the insurance arrangements.
The Insurance Policy is between an insurer and the liquidator. It insures the liquidator and the Emanuel group in relation to obligations to the bank under the Loan Agreement, and it also insures the bank in relation to the obligations of the liquidator and the Emanuel group under the Loan Agreement. It also insures the liquidator and the Emanuel group against liability for legal and related expenses under the Solicitor Client Agreement in the event that there are such expenses not discharged when the Loan Agreement comes to an end, and also the liquidator against any personal liability for costs in respect of proceedings to enforce the proposed claims which are not discharged when the Loan Agreement comes to an end. The insurer’s obligations are reflected in the relevant provision as follows:
“The maximum amount we will pay in total is the greatest amount stated in item 6. We will pay as follows:
·We will pay the bank the amount that the liquidator and the companies are required to pay it. We will pay this amount when the facilities under the facilities agreement ends. We will do so even if that agreement is wholly or partially unenforceable.
·We will pay the liquidator for the legal and related expenses of the liquidator and the companies that have been incurred but not paid when the facilities end, even if they are not then due. We will pay those expenses when the facilities end or when the expenses become due, whichever is later.
·We will pay the liquidator for the legal and related expenses of the liquidator and the companies incurred after the facilities end, but only if they are necessarily incurred in relation to discontinuance of the claim or the taxing or settlement of costs of a defendant or third party. We will pay these expenses when they are due.
·We will pay the costs of a defendant or third party to the person, when they are taxed by the court or agreed by the solicitors. If those costs are incurred after the facilities end, we will only pay them if they were necessarily incurred in relation to the discontinuance of the claim against the defendant or third party or the taxing or settlement of their costs.”
The evidence satisfies me that the maximum amount specified in the policy is a not unrealistic one.
The premium payable, as in similar arrangements, is comprised of two components:
(a) the initial premium, and
(b) the “risk” premium (“the risk premium”).
The initial premium is $80,000, which the Loan Agreement contemplates will be paid from funds advanced by the bank. The risk premium is substantial. It is only payable out of the excess of any amount recovered by the liquidator or the Emanuel group from the enforcement of the proposed claims after payment of specified payments being those payments covered by the clause set out above. The amount of recovery then remaining, after payment of those amounts, is called in the insurance policy and hereafter the “net recoveries”. In other words, the risk premium is only payable after expenses of conducting the proposed claims have been paid and, to the extent they have been paid from funds advanced by the bank, the bank has been repaid. The risk premium is approximately 35 per cent of net recoveries, but there is a weighting in its payment in respect of the net recoveries up to $A. The risk premium is $B of net recoveries up to $A. It is payable as to $C, as a first payment from net recoveries, then as to the next $D as 30.37974 per cent of net recoveries over $E, and finally as to $F from the net recoveries in excess of $G in proportion to those recoveries so as to reach $F when and if the net recoveries total $A. Effectively, after costs and expenses, the insurer recovers the first $C of any amount recovered in the proposed proceedings, and thereafter a little over 30 per cent of the balance of net recoveries, until they reach $H and then, until they reach $A the premium represents about 2.1 per cent of the net recoveries. The further component of the premium is 35 per cent of any amount by which the net recoveries exceed $A. Although I have not recorded above what the liquidator assesses to be the potential outcome of the proposed proceedings, as that may affect the attitude of the proposed defendants in the proposed proceedings, or may disadvantage the liquidator in any negotiations or communications in the course of conducting the proposed proceedings, it is proper to note that the potential outcome as assessed by the liquidator is considerably in excess of $A so that there is, in the liquidator’s view and on the material before me, a significant prospect of a very considerable sum ultimately becoming available to the creditors of the Emanuel group.
Overall, the premium is almost exactly 35 per cent of the net recoveries, but there is a bias towards the “risk premium” in that it is payable by way of a total priority in respect of the net recoveries up to $C and a disproportionate priority up to $H. If the net recoveries are $A or more, the liquidator will retain 65 per cent of them for the creditors. In that event, the liquidator would recover at least $J. If the net recoveries are less than $C then the liquidator will recover nothing. If they are between $C and $H the amount recovered will be on a sliding scale, but so that the greater the net recoveries the greater will be the proportionate amount available to the creditors of the Emanuel group. If the net recoveries are in excess of $H then again the amount recovered will be on a different sliding scale so that again the greater the net recoveries the greater will be the proportionate amount available to the creditors of the Emanuel group.
The Insurance Agreement specifically provides that the liquidator disposes to the insurer the share of the proceeds of the proposed claim to meet the premium payable. That provision makes it clear that there is a “sale or disposition” of the proceeds of the proposed claim to cause the transaction to fall under s 477(2)(c) of the Law: see the discussion on that point in Tosich (above) per Lindgren J at 235-236.
The Insurance Agreement further provides for circumstances in which the insurer is entitled to participate in decisions concerning the conduct of the proposed proceedings. Clauses 6-8 provide:
“6.The liquidator and the companies must obtain our approval before doing any of the following:
·applying for a trial date (including filing a certificate of readiness for trial)
· briefing counsel on trial
· settling or discontinuing the claim or the legal proceedings
· appealing against a final judgment.
If we do not give our written approval within a reasonable time, the liquidator and the companies may require us in writing to join them in choosing an independent senior counsel to advise whether the proposed action should be taken. The advice will be binding on all of us.
7.The liquidator and the companies must inform us in writing immediately they become aware of a change in any of the information given us before we entered into this contract. This includes the addition of a party to the legal proceedings and the making of a counterclaim. They must also:
·give us any other information in relation to the progress of the claim that we reasonably ask for at any time;
·allow us to inspect any documents that they are entitled to allow us to inspect;
·give us quarterly reports in writing, beginning one month after the date of this policy, on the progress of legal proceedings to enforce the claim; and
·give us daily oral reports, and if requested by us, reports in writing, on the progress of any trial to enforce the claim.
8.The liquidator and the companies must conduct the claim in a proper and responsible way. In doing so, they must:
·obtain professional advice when we ask them to, as to the prospects of success of the claim and whether it should be pursued, compromised or discontinued.
·contact us immediately they receive professional advice that they should compromise or discontinue the claim, or if they become aware of anything that significantly affects the risk of not recovering the total amount outstanding under the facilities.
· pay full regard to the professional advice they receive.”
There is nothing of particular significance in the Solicitor Client Agreement, and in the Agency Agreement (whereby solicitors in Victoria appoint as their agents solicitors in South Australia), or in the Deed of Charge, for the purpose of considering the application. Under the Solicitor Client Agreement and the Agency Agreement, the principal solicitors and the agent solicitors will be the solicitors on the record as, and will be acting as, solicitors for the liquidator. Their responsibilities will be to the liquidator rather than to any third party to the proposed proceedings.
Hereafter I shall call the funding arrangement encompassed in the documents described above “the Funding Arrangement”.
CONSIDERATION OF APPLICATION
In each of Movitor (above), UTSA Pty Ltd v Ultra Tune Australia Pty Ltd [1997] 1 VR 667 and on appeal (1997) 14 ACLC 1610 and Tosich (above) the Court has been asked under s 479(3) of the Law (in the UTSA case, under s 511 which applied in the particular circumstances because it was a voluntary liquidation) to make an order that a liquidator is empowered to enter into a proposed arrangement for the funding of litigation to be conducted by or on behalf of the company in liquidation. In each case, as might be expected, the proposed funding arrangement was somewhat different.
In my view, it is clear from those decisions that, in appropriate circumstances, the provision of funds by a stranger to litigation for the purpose of enabling a liquidator to pursue worthwhile claims on behalf of the company in liquidation is not necessarily unlawful as constituting maintenance or champerty. The rationale for that conclusion lies in the long established exception to the rule against maintenance or champerty that a trustee in bankruptcy may lawfully assign any of the bankrupt’s bare causes of action that have vested in the trustee on terms that the trustee is to receive a share of the proceedings of litigation if it is successful: s 134(1)(a) of the Bankruptcy Act 1966 (Cth), and in the similar power available to a liquidator under s 477(2)(c) of the Law to
“sell or otherwise dispose of, in any manner, all or any part of the property of the company.”
Such transactions do not infringe the rule because they are under express or implied statutory authority. I refer in particular to the analysis and reasons of Lindgren J in Tosich (above) at 226-234, with which I respectfully agree.
It is, therefore, necessary to consider whether the Funding Arrangement falls within the purview of s 477(2)(c), and whether in the particular circumstances it is appropriate to give the direction sought.
Both Movitor (above) and Tosich (above) determined that the sale or disposition of the prospective recoveries of an action, or a part of or an interest in those recoveries, by a liquidator fell within s 477(2)(c) so as not to fall foul of the law against champerty and maintenance. It is not only the sale or disposition of the cause of action itself, but the sale of the fruits or part of the fruits of such an action that fall under its aegis: see Movitor at 390-394, Tosich at 235. Again, I respectfully agree with the analysis and conclusions of Drummond J and Lindgren J respectively on that matter.
For the reasons expressed above, I have therefore reached the conclusion that the Funding Arrangement does constitute a ‘sale or disposition’ of part of “the property” of the Emanuel group.
There remains for consideration whether the Court should give the direction sought.
In each of Movitor and Tosich, the Court gave directions declaring that the liquidator had power to enter into a “debt retrieval agreement” with an insurance company, under which the insurer provided the liquidator with funds to finance the bringing of actions against former directors of the company in liquidation and its holding company. In each case, the proposed funds were to prosecute an action pursuant to ss 588M and 588W of the Law by reason of alleged insolvent trading. The agreement in each instance involved the insurer providing funds to the liquidator from time to time to meet the expenses (50 per cent in Movitor and 100 per cent in Tosich) incurred in conducting the proceedings, and in exchange, depending upon the successful outcome of the proceedings, the insurer would recover the amounts so advanced from the liquidator and a “risk premium” being a percentage of the recovery made after reimbursement of expenses. Drummond J observed in Movitor (at 386-387):
“The provision by strangers to the litigation of funds to insolvency administrators for the purpose of enabling them to pursue worthwhile claims on behalf of the entity under administration when, without that assistance, good claims might not be able to be prosecuted, will often serve a good public purpose.”
There was in each case, as in UTSA, evidence that the liquidator had had legal advice that there were good prospects of recovering substantial damages, but that the liquidator had no available funds to conduct the recovery proceedings either from within the company in liquidation or through its creditors. There is similar evidence before me, and evidence which I accept.
Almost, inevitably, the financing entity in such an arrangement as the Funding Arrangement presents, as in those cases, will be motivated at least in part by the anticipation of profit. It may be assumed that that financing entity will have considered the liquidator’s prospects of success in the proceedings and, if successful, the potential amount of any judgment and its recoverability. It will have proposed a “premium” or price for the asset it proposes to acquire, whether that asset is the cause of action, or some or all of the fruits of the action, to reflect that assessment. On the other hand, the liquidator will have explored the opportunities to procure funding for the proposed action with the creditors of the company in liquidation, and probably with other potential financing entities, as well as the one that is the party to the agreement the subject of the application. In doing so, there is no reason to think that the liquidator will have done other than endeavoured to arrive at a funding arrangement that is most favourable to, and in the best interests of, the creditors and members of the company in liquidation.
The Court’s role in entertaining an application under s 479(3) is not, however, to participate in that process or to “second guess” the liquidator’s judgment. It is to determine whether the proposed funding arrangement is in reality an exercise of the liquidator’s statutory power of sale. Thus, Drummond J in Movitor (at 394) said:
“If a liquidator were to dispose of the insolvent’s cause of action or the fruits of such an action in circumstances in which the purchaser was likely to make a grossly excessive profit, at the expense of the company, the liquidator’s exercise of the power of sale might well not be a bona fide exercise of the power, with the result that the transaction could not be held to be within the exception to the rules relating to maintenance and champerty. But such exceptional circumstances apart, the policy of the winding up in bankruptcy laws is to confide their administration in relation to individual insolvent entities to suitably qualified registered administrators, over whom the court exercises supervisory power and who are required to pay due regard to the wishes of the creditors. Unless there is some clear reason apparent from the circumstances of the case for thinking that a person stands to gain a grossly excessive profit from an agreement with a trustee in bankruptcy or a liquidator involving the disposal to that person of an interest in litigation belonging to the insolvent, if the administrator enters into such a transaction with the fully informed consent of the creditors, the sale or other disposition under the statutory power of an interest in litigation belonging to an insolvent is, I think, entitled to be treated an a bona fide exercise by the insolvency administrator of the statutory power, given the Court’s reluctance to interfere with decisions made by such functionaries.”
See also Hansen J in UTSA at 708; on matters going to the exercise of the liquidator’s discretion in that case, the Full Court (Brooking, Phillips and Hayne JJ.A) agreed without demur (see (1997) 14 ACLC 1610 at 1616).
I agree that the Court’s role is to determine whether the liquidator is acting bona fide under s 477(2)(c) in selling or disposing of the cause of action, or all or part of the proceeds received from the conduct of the proposed action, in any such arrangement. That question will be resolved having regard to such matters as the nature of the cause of action, its complexity, the amount of costs likely to be incurred in the conduct of the action, the extent to which the funding entity is to contribute to the costs of the action, the extent to which the funding entity is to contribute towards the costs of the respondent in the event that the action is not successful or towards any order for security for costs by the Court before which the action is to be heard, the extent to which the liquidator has canvassed other funding options, the level of the “premium”, the risks involved in the claim, and the liquidator’s consultations with the creditors of the company. There may be, indeed probably will be, other considerations. Some of those matters will not necessarily arise in each instance. It is important to observe that it is not for the Court simply to substitute its own view on such matters for those of the liquidator and the advisers to the liquidator. The liquidator and the advisers to the liquidator will have addressed such matters for the purpose of determining whether to enter into the proposed funding arrangements. The Court’s role is not to review the liquidator’s inquiries and assessments and decisions to see if they are the best ones available or are sound. It is only to be satisfied that the liquidator is acting in good faith in the making of the commercial judgment in respect of which the Court is being asked to make an order.
In Movitor, Drummond J placed weight upon the fact that the proposed arrangement was with the fully informed consent of the creditors. That matter was relevant to his Honour’s finding that the proposed arrangement was a bona fide exercise by the liquidator of the power to dispose of an interest in the company’s property. He said (at 394):
“. . . it will be essential, before a trustee in bankruptcy or a liquidator can lawfully enter into an arrangement of the kind here in question without fear that the arrangement will be champertous, for him to fully inform the creditors of the details of the funding arrangement proposed and to obtain their approval to his entering into the arrangement in the manner provided for by the relevant legislation, ie, either at a meeting of creditors or from the committee of inspection.”
No such general creditor approval has been obtained in the matter now under consideration.
Whilst I agree generally with the sentiments expressed by his Honour, I do not think that general creditor approval is necessarily a condition precedent to the Court being satisfied that the exercise of the power of sale or disposition is exercised bona fide. Indeed, his Honour did not so indicate, but rather that creditor consultation and approval is a firm indication that the exercise of the power is bona fide. In UTSA, Hansen J at 705 rejected a contention that the liquidator was bound to conduct a meeting of creditors before seeking directions under s 479(3) or s 511 for entering into a transaction of the nature under consideration. There will be obvious cases where consulting with, or seeking the approval of, creditors as a body is inappropriate, eg. where they include significant creditors who may also be potential respondents to proceedings. This may be such a case. EFG has a very substantial judgment against the Emanuel group.
There are five matters in particular which, to my mind, firmly indicate that the liquidator is acting bona fide in exercising the power of sale or disposition available under s 477(2)(c). The first matter relates to the consultations the liquidator has in fact undertaken. The amounts involved in the proposed claims, if successful, are very large but equally the costs of pursuing them will also be very substantial. The liquidator has addressed through the principal creditors of the Emanuel group, including in particular the Australian Taxation Office which is a creditor for some $50 million, whether they would provide indemnities or other financial support to him to enable him to maintain the further claims. Certain indemnities have been provided by the Australian Taxation Office in the past for other actions. It is now the position, on the material before me, that neither the Australian Taxation Office nor any other major creditor of the Emanuel group is prepared to provide the funding necessary for the liquidator to undertake the further claims. None of those creditors has sought to discourage or deter the liquidator from pursuing the proposed claims. There are no other creditors of such substance as might be expected to separately be consulted with a view to that creditor, alone or in combination with other creditors, providing the financial support necessary to maintain the proposed claims.
Secondly, the creditors of the Emanuel group have no doubt been aware of the general investigations of the liquidator, and of actions already taken following upon them. The liquidator has conducted examinations of a number of persons pursuant to Pt 5.9 of the Law concerning various members of the Emanuel group, during 1995 and 1996. The information obtained in his examinations, and from his general investigations, has been considered and has where necessary been the subject of legal advice. As a result, a number of causes of action potentially available to him as liquidator of the Emanuel group or of certain members of the Emanuel group have been identified. Some of those actions have already been instituted and are well advanced. It is unnecessary to refer to those last mentioned actions in detail. Some have been completed and some are still in train, either at first instance or on appeal or threatened appeal. This application does not relate to them. Nevertheless, those investigations have been directed in part to the proposed claims. There is nothing to suggest the creditors have not supported the liquidator in his endeavours in that regard.
Thirdly, despite the proceedings brought to date and the other assets available to him, the proposed claims will not be pursued unless the Court gives the direction sought. Despite those proceedings, some of which appear to have resulted in generating funds into the Emanuel group, the funds now available in the winding up of the Emanuel group are limited. I am satisfied on the information before me that the available funds (even putting aside issues arising from the need to recognise that those funds should be applied properly to the priority creditors and then other creditors in each of the members of the Emanuel group severally, depending upon which of the members of the Emanuel group owns those funds) are of relative insignificance to support funding of the further claims which are now proposed to be pursued.
Fourthly, but allied to that matter, the Funding Arrangement does not represent any detriment to the creditors of the Emanuel group or to the Emanuel group itself. The Funding Arrangement will not involve applying towards support of the proposed claims any of the assets of the Emanuel group. The expenses incurred in conducting the proposed claims will be paid by the bank progressively, and if the proposed proceedings are unsuccessful the advances by the bank will be paid back by the insurer. To the extent to which the liquidator and his staff are themselves involved in working in support of the proposed claims, their costs of doing so also will be met by the banker and insurer in the same way. The creditors of the Emanuel group will not be worse off by the Court’s approval of the Funding Arrangement and, depending upon the outcome of the proposed claims, will be very much better off.
Finally, as noted above, the liquidator has received detailed legal advice from senior counsel as to the availability of the proposed claims and as to the prospects of success of the proposed claims both on liability and damages; that advice does not (to adopt a neutral description) indicate that the liquidator should not pursue the proposed claims.
Those matters must be taken in conjunction. It will be rare that a liquidator will wish to enter into a third party funding arrangement whereby the third party will participate in the proceeds of the proposed action if the creditors of the company in liquidation might themselves provide that funding, or if the liquidator could do so from the resources of the company itself. But in this instance, I am satisfied that the liquidator has negotiated a funding option reasonably available to him through the Emanuel group or its creditors in respect of the proposed claims, and has conscientiously explored in an appropriate way with those creditors of the Emanuel group who might be in a position to do so whether they would provide that funding and has also explored with others the potential funding of the proposed claims.
In those circumstances, although the Funding Arrangement has not been presented to the creditors of the Emanuel group as a body for their consideration and approval, I do not regard that matter as one tending to indicate a lack of good faith on the part of the liquidator, or as militating in some other way against his eligibility for the direction sought. There is no reason to think that the creditors of the Emanuel group (other than the EFG group), or the committee of inspection, might resolve to direct the liquidator not to enter into the proposed arrangement: see s 479(1); and, of course, the liquidator although obliged to have regard to any such direction is not obliged to act in accordance with it but to act in accordance with the liquidator’s own discretion in the management of affairs and property of the company in liquidation, subject to the general provisions of Pt 5.4B: s 479(4).
The precise terms of the funding agreement are a matter for the liquidator. To the extent that the Court has treated features of such funding agreements as possibly relevant to whether or not to give a direction under s 479(3), I note that:
the Funding Arrangement does provide adequately for the costs of the proposed defendants in the proposed claims in the event that one or more of those claims is unsuccessful, and to enable the liquidator to have funds available to meet any order for security for costs if one is made (although I note that in Movitor, Drummond J at 396 regarded that matter as irrelevant to whether the funding arrangement there under consideration was within s 477(2)(c) so as not to offend the law against maintenance and champerty),
the limited rights of the insurer under clauses 6-8 of the Insurance Policy in the liquidator’s conduct of the proceedings do not raise any issue as to whether that might deprive the disposition of its character under s 477(2)(c) so as to qualify for exemption from the law against maintenance and champerty, as ultimate control of the proceeding remains with the liquidator and those rights are no more than the right to be kept informed and to invoke the advice and conciliation/mediation procedures provided (cp. UTSA at 704-705, Tosich at 236),
the Funding Arrangement is expressed to operate to a certain time, after which the premium might be adjusted; however, to make it clear that that term of the Funding Arrangement could not indicate a want of good faith on the part of the liquidator, it also provides for any material alteration proposed to its terms concerning the premium upon that review requires the further consideration of the Court; that is, the Funding Arrangement does not involve the liquidator having exposed himself or the Emanuel group after the effluxion of a period of time, to an increased premium to a level over which he has no influence,
the liquidator properly has also drawn to the Court’s attention certain additional matters which might be relevant to the exercise of that discretion, including his contention that under the Funding Arrangement the “costs recoverable” include the premium; he refers to In re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171 at 175; Moodemere Pty Ltd (in Liquidation) v Waters (1987) 5 ACLC 790. The liquidator has also disclosed to the Court that, by letter of 6 January 1997, his solicitors wrote to solicitors for the EFG on certain matters and included therein the following:
“We note your request for at least 7 days notice of any future applications that may concern the creditors of the companies in liquidation. We undertake to give you such notice where possible.”
He deposes that, as various members of the EFG group are to be defendants in the proposed actions, his advice is that it would not be appropriate to have given notice of this application. He has not done so. Those matters also do not cause me to reach any different view as to the bona fides of the liquidator in the exercise of his power under s 477(2)(c) nor do they otherwise cause me to conclude that I should not exercise the power available under s 479(3) of the Law.
CONCLUSION
The above consideration leads me to the view that I should give the direction which is sought. I propose to do so. There is nothing apparent to me to suggest that the proposed claims reflect a desire on the part of the liquidator to engage in vexatious or improper litigation. He has caused the proposed claims to be extensively explored by the examination procedure available under the Law, and he is acting consistently with advice provided to him by senior counsel.
I have not identified the other parties to the Funding Arrangement or the detail of its terms beyond what I consider necessary to indicate the foundation for my conclusions, as the liquidator submitted that disclosure of those matters might disadvantage him in the conduct of the proposed claims. That is self evidently so, in the case of matters such as the amount of the bank loan or of the insurance level. It is not so apparent in respect of the identity of the bank or of the insurer. I have, however, accepted the liquidator’s submission in that regard, at this point, although I propose to give liberty to apply to the creditors and contributories of the companies comprising the Emanuel group. I also propose to order that certain of the materials presented to me on the hearing should be confidential, until further order of the Court.
I announced my decisions on this application on 20 February and 11 March 1998. In accordance with the procedure adopted by Drummond J in Movitor (above, at 396), I made a copy of these reasons available in the first instance to the liquidator with the direction that, if the liquidator wished to contend that any material referred to in these reasons should be confidential, he should make any written submissions and file copies of any affidavits upon which he wished to rely. As a result, I have deleted reference to the particular dollar amounts and thresholds by reference to which the premium is to be determined, as it was contended that such information may significantly advantage a potential defendant in the proceedings contemplated in any negotiations. I do not wish to be taken as accepting that that procedure should be adopted in any other such matter. It will depend upon the particular circumstances.
I also required the liquidator to file an affidavit exhibiting the final and executed copies of all the documents comprising the Funding Arrangement. That affidavit has now been filed on 29 May 1998. I accordingly order that the liquidator as liquidator of the Emanuel group has power under the Law to enter into the Funding Arrangement, being the arrangement and transactions identified in the documents annexed to the affidavit of the liquidator sworn on 29 May 1998. I order that the annexure to that affidavit be confidential and not be available for the inspection of any person except by leave of the Court or a Judge.
The liquidator, creditors and contributories of the Emanuel group have liberty to apply.
I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.
Associate:
Dated: 9 June 1998
Counsel for the Applicant: Mr D Meagher QC
with him
Mr J CudmoreSolicitors for the Applicant: Ward & Partners Hearing Dates: 19 & 20 February 1998;
11 March 1998Date of Judgment: 9 June 1998
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