Re Ascot Vale Self-Storage Centre Pty Ltd (in liquidation)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT

CORPORATIONS LIST

No. 04313 of 2013

IN THE MATTER OF ASCOT VALE SELF-STORAGE CENTRE PTY LTD
(receivers and managers appointed) (in liquidation)

BETWEEN:

RE NOM DE PLUME NOMINEES PTY LTD (ACN 006 750 090) and RICHARD JOHN LEGGO	Appellants
v
SIMON WALLACE-SMITH (in his capacity as liquidator of Ascot Vale Self-Storage Centre Pty Ltd) (in liquidation) (ACN 092 643 939)	Respondent

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	25 November 2013
DATE OF JUDGMENT:	11 March 2014
CASE MAY BE CITED AS:	Re Ascot Vale Self-Storage Centre Pty Ltd (in liquidation)
MEDIUM NEUTRAL CITATION:	[2014] VSC 75

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CORPORATIONS – Appeal from Associate Judge granting approval under s 477(2B) of the Corporations Act2001 (Cth) for liquidator to enter a funding agreement – Whether funding agreement against interests of creditors – Whether the Associate Judge in exercising discretion to grant approval failed to take into account relevant factors - Whether funding agreement uncertain - Appeal allowed.

PRACTICE AND PROCEDURE - Whether error in refusing leave to admit into evidence witness statements filed in another proceeding – Home Office v Harman considered – Whether special circumstances existed – Discretion exercised to modify or release implied undertaking to admit statements into evidence.

PRACTICE AND PROCEDURE – Nature of appeal from an Associate Judge to a Judge of the Civil Division – Admissions of fresh evidence on appeal.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	P.J. Bick QC with B. Gibson	SBA Law
For the Respondent	M.N.C. Harvey with C.E. Gobbo	Piper Alderman

HIS HONOUR:

Introduction

I have before me an appeal from the decision of an Associate Judge who granted Simon Wallace-Smith, the liquidator of Ascot Vale Self-Storage Centre Pty Ltd (in liquidation) (AVSS), approval to enter into a funding agreement on behalf of AVSS where obligations entered into under the agreement may be discharged by performance more than three months after the agreement is entered into, under s 477(2B) of the Corporations Act 2001 (Cth) (the Act). For the reasons given below, I would allow the appeal.

The nature of the appeal

The appellants raised a preliminary issue as to the nature of the appeal. In the hearing before the Associate Judge the appellants had relied on an affidavit of Mr Schnaider, the solicitor for the appellants. Mr Schnaider deposed to matters relating to the affairs of AVSS that he had been informed of by Mr Leggo. In the appeal, the appellants wish to rely on an affidavit sworn by Mr Leggo, the second appellant, in which Mr Leggo verifies the instructions he gave to Mr Schnaider that Mr Schnaider included in his affidavit on information and belief. Further, the appellants also wish to lead evidence through Mr Leggo’s affidavit that he is prepared to fund a special liquidator for the limited purpose of investigating, and if it is in the interests of AVSS to do so, bringing proceedings to set aside the Fingal transactions (which I refer to below).

The appellants submit that the nature of an appeal from an Associate Judge to a Judge of the Trial Division falls between a strict appeal to the Court of Appeal or the High Court and a rehearing de novo, the old form of appeal from a Master.[1] The appellants say that an appeal to the Court of Appeal from a Judge of the Trial Division is a strict appeal. The appellants contend that in the case of a strict appeal the power to admit fresh evidence is strictly limited. In order for fresh evidence to be admitted, it is necessary to demonstrate that the evidence is truly fresh evidence and that it could not with reasonable diligence have been discovered in the gist of the trial. The appellants refer to McDonald v McDonald[2] in support of this proposition. The appellants submit that if it can be demonstrated in a strict appeal that there is evidence which is fresh evidence and that it could not with reasonable diligence have been discovered and adduced at trial, there are reasonable prospects of having that evidence admitted.
[1]Tr 23.
[2](1965) 113 CLR 529.

The appellants also contend that as an appeal from an Associate Judge to a Judge of the Trial Division is an appeal by way of a rehearing there is no need in advance to demonstrate error below as is the case in a strict appeal. The appellants contend that it is sufficient for an appellant, during the hearing of the appeal, to demonstrate an error of law or fact, or an error in the exercise of discretion. Such error need not necessarily be demonstrated in advance of the appeal to the Trial Division Judge. The appellants say that demonstrating error is not a threshold test for the conduct of the appeal. The appellants say that it is something that must be demonstrated during the appeal for the appeal to succeed.[3] The appellants submit that the error may only become apparent on the admission of fresh evidence or the consideration of evidence that the Associate Judge refused to admit.
[3]Tr 26-27.

The appellants submit that the power of this Court to admit fresh evidence on this appeal is the same power that the Associate Judge had to admit further evidence. The appellants say that such an application to admit fresh evidence does not have to meet the test in McDonald v McDonald.

The respondent says that the appeal is by way of rehearing and not a rehearing de novo. The respondent says that an appeal by way of rehearing requires the appellant to demonstrate error and that fresh evidence, as is sought to be admitted on this appeal, should not be admitted.

The respondent submits that in all relevant respects the nature of an appeal from the decision of an Associate Judge to a Judge of the Trial Division is the same as an appeal from the decision of a Judge of the Trial Division to the Court of Appeal.

The respondent referred to a comparison between Rules relating to an appeal from a decision of a Judge of the Trial Division to the Court of Appeal and the Rules relating to appeals from a decision of an Associate Judge to a Judge of the Trial Division and submitted that they are almost identical. In my opinion, the table set out below demonstrates that the Rules relating to an appeal from an Associate Judge to a Judge of the Trial Division have been modelled on the rules relating to an appeal from a Judge of the Trial Division to the Court of Appeal.

Supreme Court (General Civil Procedure) Rules 2005 (Vic)

Comparison of Appeal Provisions

From Associate Judge to Judge		From Judge to Court of Appeal
r 77.06.1	An appeal under Rule 77.06 shall be brought by notice in accordance with this Order.	r 64.02	An appeal to the Court of Appeal shall be brought by notice in accordance with this Order.
r 77.06.2	Time for Notice of Appeal	r 64.03	Time for Notice of Appeal
r 77.06.3	(1) A notice of appeal shall state – (a) whether the whole or part only and, if as to part, which part, of the judgment or order of the Associate Judge is the subject of the appeal; and (b) specifically and concisely the grounds of appeal and the judgment or order sought in place of that from which the appeal is brought. (2) A notice of appeal shall name each party or person upon whom it is proposed to serve the notice of appeal. (3) A notice of appeal may be amended at any time by leave of a Judge of the Court.	r 64.05	(1) A notice of appeal – (a) shall state whether the whole or part only and which part of the decision of the court of first instance is complained of; and (b) shall also state specifically and concisely the grounds of complaint and the judgment or order sought in place of that from which the appeal is brought. (2) A notice of appeal shall name each party or person upon whom it is proposed to serve the notice of appeal.
r 77.06.4	Service of notice of appeal	r 64.04	Service of notice of appeal
r 77.06.5	Filing of notice of appeal and list	r 64.07	Filing of notice of appeal
r 77.06.6	Stay
r 77.06.7	Cross-appeal	r 64.17	Cross-appeal
r 77.06.8	Notice of contention	r 64.17(5)
r 77.06.9	(1) On an appeal under Rule 77.06, a Judge of the Court shall have all the powers of the Court constituted by an Associate Judge.	r 64.22	(1) On an appeal the Court of Appeal shall have all the powers and duties as to amendment and otherwise of the Court of first instance.
(2) On an appeal under Rule 77.06, a Judge of the Court shall have power to – (a) draw inferences of fact; and (b) give any judgment and make any order which ought to have been given or made; and (c) make any further or other order as the case may require.	(2) The Court of Appeal shall have power to draw inferences of fact and to give any judgment and make any order which ought to have been given or made, and to make such further or other order as the case may require.
(3) On an appeal under Rule 77.06, a Judge of the Court shall have power to receive further evidence upon questions of fact, whether by oral examination in court, by affidavit, or by deposition taken before an examiner.	(3) The Court of Appeal shall have power to receive further evidence upon questions of fact, either by oral examination in court, by affidavit, or by deposition taken before an examiner.
(4) The powers of a Judge of the Court under this Rule may be exercised notwithstanding – (a) that no notice of appeal has been given in respect of any particular part of the judgment or order of the Associate Judge which is the subject of appeal under Rule 77.06 or by any particular party to the proceeding before the Associate Judge; or (b) that any ground for allowing the appeal or for affirming or varying the judgment or order of the Associate Judge is not specified in the notice of appeal.	(7) The powers of the Court of Appeal under this Rule may be exercised notwithstanding – (a) that no notice of appeal or notice of cross-appeal has been given in respect of any particular part of the decision of the Court of first instance or by any particular party to the proceeding in that Court; or (b) that any ground for allowing the appeal or for affirming or varying the decision of that Court is not specified in such a notice.

Practice Note No 4 of 2012 deals with appeals from Associate Judges to a Judge of the Trial Division. The practice note states that the Supreme Court (Associate Judges Appeals Amendment) Rules2012 (Vic) would commence on 1 January 2013 and that under the amendments appeals from Associate Judges to a Judge of the Trial Division would be by way of rehearing rather than by rehearing de novo. The practice note says that the rules are largely modelled on Order 64. Order 64 governs appeals to the Court of Appeal.

Under r 77.06.3, the notice of appeal is to state specifically and concisely the grounds of appeal and the judgment or order sought in place of that from which the appeal is brought. Rule 64.05 contains the same requirement in relation of notices of appeal to the Court of Appeal.

In Neely v Southern Cross Feeds Pty Ltd (No 2),[4] Hargrave J held that from 1 January 2013 appeals from an Associate Judge ceased to be by way of rehearing de novo and were replaced by appeals in the strict sense “requiring error to be demonstrated.”[5]
[4][2013] VSC 238 (Neely).
[5]Ibid, [5].

In Turnbull v New South Wales Medical Board,[6] Glass JA described the various appeal processes as follows:[7]
[6][1976] 2 NSWLR 281.
[7]Ibid, 297-298. (Citations omitted.)

…Appeal is a term loosely employed to denote a number of different litigious processes which have few unifying characteristics. They vary greatly in the extent to which the appellate court may interfere with the result below. Graded in ascending order, in accordance with the width of the corrective power exercised by the appeal court, they are as follows:
(a) Appeals to supervisory jurisdiction. Only errors going to jurisdiction or denials of natural justice can be ventilated.
(b) Appeals on questions of law only, e.g. from the Workers’ Compensation Commission. Undetermined or wrongly determined issues of fact must be remitted.
(c) Appeals after a trial before judge and jury. The result below will be disturbed if the judge fell into error of law, or if the jury’s errors of fact transcend the bounds of reason. But, except for the assessment of damages, issues of fact must be redetermined in a new trial.
(d) Appeals from a judge in the strict sense, e.g. appeals to the High Court. If the judge has fallen into error of law, or has made a finding of fact which is clearly wrong, the appellate court will substitute its own judgment. Only such judgment can be given as ought to have been given at the original hearing. Later changes in the law are disregarded and additions to the evidence are not allowed.
(e) Appeals from a judge by way of rehearing, e.g. appeals under s 75A of the Supreme Court Act 1970. Judicial opinion differs on whether a power to receive fresh evidence is implied. Almost invariably, however, it is expressly conferred. If errors of law or wrong findings of fact have occurred below, the appellate court will try the case again on the evidence used in the court below, together with such additional evidence as it thinks fit to receive. Since it will decide the appeal in the light of the circumstances which then exist, changes in the law will be regarded.
(f) Appeals involving a hearing de novo, e.g. appeals from a Court of Petty Sessions to a Court of Quarter Sessions. All the issues must be retried. The party succeeding below enjoys no advantage, and must, if he can, win the case a second time.

The respondent contends that appeals from an Associate Judge squarely fall within paragraph (e) of Glass JA’s categories.

In Allesch v Maunz,[8] the High Court of Australia considered the nature of an appeal from a single justice of the Family Court to the Full Court of the Family Court. The Court dealt with the difference between an appeal de novo, an appeal by way of rehearing and a strict appeal as follows:[9]

For present purposes, the critical difference between an appeal by way of rehearing and a hearing de novo is that, in the former case, the powers of the appellate court are exercisable only where the appellant can demonstrate that, having regard to all the evidence now before the appellate court, the order that is the subject of the appeal is the result of some legal, factual or discretionary error, whereas, in the latter case, those powers may be exercised regardless of error. At least that is so unless, in the case of an appeal by way of rehearing, there is some statutory provision which indicates that the powers may be exercised whether or not there was error at first instance. And the critical distinction, for present purposes, between an appeal by way of rehearing and an appeal in the strict sense is that, unless the matter is remitted for rehearing, a court hearing an appeal in the strict sense can only give the decision which should have been given at first instance whereas, on an appeal by way of rehearing, an appellate court can substitute its own decision based on the facts and the law as they then stand.

[8](2000) 203 CLR 172.

[9]Ibid, [23] (Gaudron, McHugh, Gummow and Hayne JJ) (citations omitted).

In Applebee v Monash City Council,[10] Croucher J dealt with the nature of an appeal from an Associate Judge to a Judge of the Trial Division. His Honour referred to Hargrave J’s observations in Neely where Hargrave J said that r 77.06 provides for appeals in the strict sense requiring error to be demonstrated.[11] Croucher J said that Hargrave J appeared to be contrasting the old form of appeal by way of rehearing de novo with the new form of appeal requiring proof of error, rather than determining whether the new form of appeal is by way of an appeal in the strict sense or by way of rehearing. Croucher J addressed whether the appeal from an Associate Judge was an appeal in the strict sense or an appeal by way of a rehearing. He declined to resolve the issue but proceeded on the basis that the appeal cannot be allowed unless there is legal, factual or discretionary error in the order of the Associate Judge.[12]
[10][2013] VSC 481.
[11]Ibid, [12].
[12]Ibid, [20].

In so far as it is necessary for me to decide this point in the context of an application to tender fresh evidence, the nature of an appeal to a Judge of the Trial Division from a decision of an Associate Judge is not of a nature that falls between an appeal to the Court of Appeal and a rehearing de novo. In my opinion, on an appeal from an Associate Judge to a Judge of the Trial Division, fresh evidence may be admitted in the limited circumstances as described in McDonald v McDonald, as it would be on an appeal to the Court of Appeal.

The appellants have accepted that the evidence sought to be tendered in this appeal was known of and available at the time of the hearing before the Associate Judge. Implicitly the appellants concede that the evidence would not be admitted on an appeal to the Court of Appeal from the decision of a Judge in the Trial Division. The evidence is not fresh evidence.

For these reasons, the affidavit of Mr Leggo should not be admitted into evidence for the purpose of the appeal. It is unnecessary for me to make any further findings about the nature of the appeal.

The background to the application

In 2000, Mr John Crozier, Mr Richard Leggo, Mr Anthony Melville, Mr Geoffrey Turner and Mr Robert McNab agreed to undertake a joint venture to acquire and develop a property at 8 Burrowes Street, Ascot Vale into a fifty unit apartment complex. The joint venture was structured through a unit trust.

AVSS was incorporated on 1 May 2000 as Yarborough Holdings Pty Ltd and changed its name to AVSS on 27 November 2011. For clarity I will only refer to the body corporate as AVSS. AVSS was appointed the trustee of the Ascot Vale Self-Storage Centre Unit Trust. Mr Leggo was the sole shareholder of AVSS. On 5 April 2000, AVSS purchased 8 Burrowes Street Ascot Vale.

The precise structure of the joint venture and the relationship between AVSS, the unit holders and others involved in the venture is the subject of proceedings before Sifris J. In setting out the background to the application, I do not purport to decide any of the contentious issues that are raised in the proceedings before Sifris J.

Subject to that caveat, I continue with the background to the application. Units in the unit trust were issued to the five joint venturers or their companies. There are currently 1000 issued units in the Ascot Vale Self Storage Centre Unit Trust held as follows (where relevant, I have added the name and occupation of the relevant joint venturer after his company’s name):

(a) Rincon-Constructions Pty Ltd 200 units (Geoffrey Turner);

(b) Saiwai Pty Ltd 350 units (John Crozier);

(c) Richard Leggo 150 units (a solicitor);

(d) Robert McNab 100 units (a solicitor); and

(e) Croc Pot Pty Ltd 200 units (Anthony Melville) (a solicitor).

The joint venturers paid $1000 for each unit. AVSS has gone into liquidation and the joint venturers have fallen out. Fingal Developments Pty Ltd (Fingal), of which Mr Melville currently is sole director and shareholder, has sued Nom De Plume Nominees Pty Ltd (NDP), the first appellant. Mr Leggo is and has been at all times a director and shareholder of NDP, together with Peter Szanto.

As elaborated on below, Mr Leggo contends that the initial amounts paid for the units were loans by the unit holders lent directly to AVSS by the unit holders to be repaid out of profits from the development. On the other hand, Mr Melville and Mr Crozier contend that the initial amounts are to be treated as being lent to AVSS by Fingal (the Fingal loans) and the loans from Fingal to AVSS are held on trust by Fingal for the unit holders, and that the loans from Fingal to AVSS are secured by a charge given by AVSS to Fingal on 5 October 2007 over the assets and undertaking of AVSS.

Albury investors

On 1 September 2003, Fingal and AVSS entered into what was called the Principal Loan Agreement.[13] This loan agreement related to contributions made by further investors in the project called the Albury investors.[14]
[13]CB 314.
[14]Tr 68.

Fingal charge and Fingal loan agreement

On 5 October 2007, Fingal and AVSS entered into a loan agreement (the Fingal loan agreement).[15] Mr Crozier signed on behalf of both companies.[16] The Fingal loan agreement purportedly included the moneys contributed by the Albury investors[17] and the contributions by the unit holders. These are known as the Fingal loans. Mr Leggo and Mr McNab claim that they were not informed nor did they consent to the contributions made by them being treated as loans by Fingal to AVSS rather than loans by them to AVSS.
[15]CB 328.
[16]CB 340.
[17]Tr 72.

On 5 October 2007, Fingal as chargee and AVSS as chargor executed a debenture charge to secure the Fingal loans (the Fingal charge). Mr Crozier executed the Fingal charge on behalf of both companies. Mr Melville witnessed the execution of the Fingal loans and the Fingal charge. Mr Leggo and Mr McNab claim that they were not informed nor did they consent to the loans being secured under a charge given by AVSS to Fingal. Mr Crozier also executed a loan acknowledgement as at 31 March 2008 for the purposes of the Fingal loan agreement.[18]
[18]CB 394.

Deed of Settlement

Previously, in order to finance the development, AVSS had borrowed some $1.2 million from DBR Corporation Pty Ltd, which loan was secured by a second ranking charge over the assets and undertaking of AVSS. In July 2008, the loan and security were assigned to NDP (the NDP charge).

The development struggled and disputes arose between the joint venturers. These were ultimately resolved under a deed dated 23 March 2009, between AVSS, NDP, Mr Leggo and others. Under the deed, Fingal contends that NDP and Mr Leggo agreed, inter alia, to advance further funds to or for the benefit of AVSS as and when required to meet the costs of building the apartments in the project. This has been defined as the Deed of Settlement.[19]
[19]CB 81.

Under the deed, the parties acknowledged that AVSS was indebted to NDP for some $2.546 million and agreed that that sum and further sums advanced by NDP to AVSS would be secured by the second ranking NDP charge.[20] The Fingal charge was the third ranking charge.
[20]CB 94.

Appointment of receivers

On 21 June 2010, pursuant to the Fingal charge, Fingal appointed Mr Horne and Mr Vrsecky as receivers and managers of AVSS.[21] The next day, on 22 June 2010, NDP appointed Thomas Fernandez of Fernandez Partners as receiver and manager of AVSS under the NDP charge.[22]
[21]CB 498.
[22]CB 499.

In December 2010, Mr Fernandez retired as receiver and manager.[23] The appellants contend that Mr Horne and Mr Vrsecky have realised some $2 million of AVSS assets and remitted $1.1 million to Fingal in reduction of the debt secured by the Fingal charge.[24]
[23]CB 504.
[24]CB 504.

On 2 February 2011, AVSS was ordered to be wound up. The petitioning creditor was Galvin Constructions Pty Ltd (in liquidation) which was the builder of the development. Simon Wallace-Smith of Deloitte Touch Tohmatsu was appointed as liquidator.

The Fingal proceeding

On 8 March 2012, Fingal commenced Supreme Court proceedings against NDP and AVSS (in liquidation). Fingal seeks declarations and orders that NDP:

(a) made payments to various unsecured creditors of AVSS in circumstances where those payments were not subject to the NDP charge;

(b) as mortgagee in possession, breached its duties to Fingal as a subsequent security holder in respect of repayments to financiers of the Development.

In the Fingal proceeding, Fingal claims that:

(a) At all material times from no later than 5 October 2007, Fingal was a secured creditor of AVSS;

(b) $2,116,135 was advanced by the unit holders and then by Fingal, as trustee for the unit holders, to AVSS and that the loans were secured by a third ranking charge, the Fingal charge, dated 5 October 2007;

(c) On or about 23 July 2008, NDP took an assignment of a second ranking charge and mortgage, called the NDP charge and NDP mortgage;

(d) From an unknown date between May 2010 and 7 June 2010 NDP was a mortgagee in possession of AVSS pursuant to its NDP charge and NDP mortgage; and

(e) From on or about 10 June 2010 NDP, as mortgagee in possession, breached its duties to Fingal, the holder of the third ranking charge, by causing AVSS to make payments to persons other than Fingal when those payments ought to have been applied to Fingal’s secured debt.

By the amended defence and counterclaim dated 8 November 2011 in the Fingal proceeding, NDP disputes the validity of the alleged Fingal loans and Fingal charge and claims that:

(a) The purported creation of the Fingal charge on or about October 2007 was of no effect as at the time of its creation the Fingal charge secured no debt, the funds having already been lent to AVSS by the unit holders on an unsecured basis;

(b) The advances by the unit holders were to be treated as unsecured investments to be repaid from the profits of the trust once all debts and expenses of the trust, including unsecured debts, had been repaid;

(c) The unit holders were not a party to the purported loan agreements from the unit holders to Fingal and did not agree that their advances would be treated as loans from Fingal to AVSS, or that their advances would be secured by the Fingal charge so as to rank ahead of payments to unsecured creditors to AVSS; and

(d) The Fingal charge was entered into by Crozier, for and on behalf of both AVSS and Fingal, to the detriment of creditors of AVSS and in breach of his fiduciary duties to AVSS, at a time when the unit trust had negative assets.

NDP counterclaims, inter alia, seeking a declaration that the Fingal charge is void and unenforceable because it does not secure any debt, or has not secured any debt since 28 February 2011, or has not secured any debt since 4 April 2011.

Pursuant to orders made on 14 September 2012, AVSS was joined as second defendant to the Fingal proceeding. Since the joinder of the company to the Fingal proceeding, the company entered a consenting appearance.

The Fingal proceeding is at an advanced stage and being managed by Sifris J. Justice Sifris has adjourned the same to permit the determination of the application by the liquidator for approval to enter into the funding agreement.

In the Fingal proceeding witness statements have been filed including one from Mr Stirling Horne who is the receiver of AVSS. Mr Horne states that as receiver he has recovered more than $1.9 million under the Fingal charge, of which more than $1.1 million has been distributed to Fingal, and that Fingal claims to be owed a further $3,535,731 by AVSS.

Mr Schnaider, solicitor for the appellants, deposes in the liquidator’s application that Mr Leggo has informed him and he believes that despite the Fingal loan agreement and Fingal charge purporting to secure Mr Leggo’s investments in AVSS (and those of the other unit holders in AVSS) Mr Leggo was not made aware of the creation of the Fingal charge at the time it was entered into nor did he agree to it. Mr Schnaider says that he was also informed by Mr Leggo, and believes, that the moneys invested by him in AVSS were lent to AVSS directly, and not through Fingal, on the basis that they were only to be repaid from the profits of the AVSS development.

Mr Schnaider also deposes that he was informed by Mr Leggo, and believes, that on 24 June 2010 Mr Leggo received an email from Mr McNab, another unit holder in AVSS, in which Mr McNab stated “The unit holders’ loans were initially unsecured. The decision to take security was made by John [Crozier] (I think) well into the development without discussion with unit holders (so far as I can recall)... certainly I do not support enforcing the charge with a view to giving unit holders a leg-up over unsecured creditors”.

Investigations

The liquidator deposes that he has undertaken an extensive investigation into the examinable affairs of AVSS in accordance with his statutory obligations, including conducting a public examination of the director of the AVSS, Mr Leggo. The liquidator has also interviewed or caused to be interviewed various other parties associated with AVSS. The liquidator has had access to the books and records of AVSS presently held by its receivers and managers.

The liquidator deposes that through his investigations he has identified a series of claims in respect of which he has instituted proceedings in his own name and that of AVSS against Mr Leggo and NDP as defendants. The Originating Process in the proceeding was issued on 31 July 2013 (AVSS proceeding).

The liquidator deposes that he has identified the following claims in the liquidation of AVSS:

(a)Galvin Constructions Pty Ltd  $1,365,414
(b)Australian Taxation Office  $1,193,328
(c)Melbourne Business & Investment Commission $127,690
(d)AGL  $17,962
(e)Hellier McFarland  $5,449
(f)ECA Partners  $1,155
(g)Telstra  $92
(h)Fingal  $3,535,731

These total $6,246,821 and excluding the Fingal debt total $2,711,090.

The liquidator says that Fingal claims to be a secured creditor of AVSS for the amount claimed under the Fingal charge of $3,535,731.

The plaintiffs in the AVSS proceeding allege that, pursuant to a deed of settlement made 23 March 2009 between AVSS, NDP, Mr Leggo and others, NDP and Mr Leggo agreed, inter alia, to advance funds for the benefit of AVSS. The plaintiffs allege that AVSS has incurred debts with respect to building the apartments of $6,246,821 (the Debts) and that in breach of the deed of settlement neither NDP or Mr Leggo has advanced further funds for payment of the Debts. The plaintiffs allege that accordingly, NDP and Mr Leggo are indebted to AVSS in a sum not less than the Debts.

Further and alternatively, the plaintiffs allege that following the deed of settlement AVSS incurred debts with respect to building the apartments of $2,711,090 (Post-March Debts). The Post-March Debts exclude the secured liability owed to Fingal of $3,535,731. The plaintiffs allege that AVSS incurred the Post-March Debts whilst AVSS was insolvent and under the management of Mr Leggo. Further, the plaintiffs allege that Mr Wallace-Smith, as the liquidator, is entitled, pursuant to s 588M of the Act, to recover from Mr Leggo, as a debt due to AVSS, an amount equal to the Post-March Debts.

To pursue the claims in the AVSS proceeding, the liquidator has entered into a funding agreement with Fingal and Ryeland Nominees Pty Ltd (Ryeland). Mr Melville is the sole shareholder and director of Fingal. Mr Crozier and Mr Melville are the sole shareholders and directors of Ryeland.

The liquidator’s application under s 477(2B)

On 19 August 2013, pursuant to s 477(2B) of the Act, the liquidator sought approval for AVSS to enter into the funding deed (the liquidator’s application). Approval was required because under the funding deed, obligations of a party to the deed may be discharged more than 3 months after the deed was entered into.

The general effect of the funding deed is to enable the liquidator to conduct a proceeding against Mr Leggo and his company, NDP, for breach of contract or insolvent trading.

On 27 September 2013, approval was given to the liquidator by the Associate Judge to enter into the funding deed.

The Associate Judge also ordered that, pursuant to s 1322(4) of the Act, the funding deed was not invalid by reason of having been entered into by the liquidator prior to obtaining the approval of the Court. The proposed funding deed is between the liquidator, AVSS, Fingal and Ryeland (described as the “Funder”).

The funding deed provides as follows. Clause 1 sets out a number of definitions. Those definitions include:

Action Costs  All legal costs, expenses, disbursements reasonably   incurred by the liquidator, the company or their   lawyers …
Fingal charge         The charge given in favour of Fingal which is the   subject of the proceeding before Sifris J.
Funding Fee   The amount that is equal to 40% of the net proceeds.
Net Proceeds         The Recovery Amount less the Action Costs.
Recovery Amount   The value of such sum of money or property in   Australian dollars as is recovered by the company   and/or the liquidator pursuant to any settlement   of or judgment or order in the action.

Clause 3 refers to an indemnity. Clause 3.1 provides:

The Funder indemnifies, and will keep indemnified, the liquidator and the company and each of them against all damages, charges, costs, expenses and other sums whatsoever for which the liquidator and/or the company may be liable or become liable, pay, incur or sustain in respect of, or arising out of, or in connection with any Action Costs. The indemnity contained within this clause 3.1 is limited to the sum determined in accordance with clauses 3.2 to 3.4 below.

Clauses 3.2 to 3.4 deal with the mechanism for agreement as to the amounts payable by the Funder in relation to particular stages of the AVSS proceeding, or a mechanism otherwise to arrive at such amount.

Clause 4 deals with the term and termination. Clause 4.1 provides that the Funder may terminate upon the giving of 28 days’ notice in writing to the liquidator.

Clause 5 acknowledges that the liquidator will retain the lawyers to act on his behalf and on behalf of AVSS and that, although the liquidator is required to confer with the Funder, the liquidator is solely responsible for providing all instructions to the lawyers in relation to the proceedings.

Clause 9 deals with disbursal pursuant to any recovery. Clauses 9.1 and 9.2 deal with advances to the liquidator and the obligations arising thereunder.

Clause 9.3 is as follows:

Subject to clause 9.2, the terms of this Deed and any requirement of the Act, in consideration of the covenants and indemnities contained in this Deed, the parties agree that upon receipt of the Recovery Amount, the liquidator and the company will pay to the Funder out of the Recovery Amount, and as a first priority:
(a)such sum as is required to enable the Funder to pay, or alternatively to reimburse the Funder any amount it has paid, for procuring the indemnity referred to in clause 3.7;
(b)such Action Costs as have been paid by the Funder to the Liquidator and/or the company pursuant to the terms of this Deed;
(c)remuneration payable pursuant to clause 3.5; and
(d)any Action Costs which have not been paid by the Funder, by reason that they exceed the maximum sum determined in accordance with clauses 3.2 to 3.4.

Clause 9.4 provides:

If the balance of the recovery amount, after payment of the amounts referred to in clause 9.3, is sufficient to pay or reimburse in full:
(a)the Funding Fee payable to the Funder on the terms contained in this Deed (less the amount referred to in clause 9.3); and
(b)the Deferred Expenses in so far as they relate to the conduct of the Action;

these amounts shall be paid or reimbursed in full. If, however, the balance of the Recovery Amount, after payment of the amounts referred to in clause 9.3, is insufficient to pay or reimburse in full the amounts referred to in (a) to (b), those amounts shall be paid pari passu.

Clause 9.5 provides that the payment and/or reimbursement of each of the amounts to the Funder in accordance with clauses 9.3 and 9.4 are subject to, and conditional upon, AVSS having sufficient assets to pay or reimburse them following completion of the proceedings and enforcement of any judgment or reward.

Clause 12 deals with Fingal as the secured creditor. Clause 12.1 provides:

The liquidator undertakes in favour of Fingal not to make, bring or support any application or proceeding to set aside, avoid or otherwise challenge the enforceability of the Fingal charge.

Clause 12.2 deals with s 564 of the Act in the event that the Fingal charge is found void or otherwise unenforceable.

Clause 12.3 provides:

To the extent Fingal holds any security over or in respect of any Actions Fingal:
…
(c)will not make any claim to any proceeds on resolution of any Action that is otherwise subject to such security until payment in full of the Deferred Expenses and each of the payments in clause 9.4 and authorises and consents to the making of such payments …

Section 477(2B) of the Act is a prohibition against the liquidator of a company entering into an agreement on behalf of the company without the approval of the Court, of the committee of inspection or of a resolution of the creditors, 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.

Affidavit in support of the application

The liquidator deposes that he is satisfied as to the merits of the AVSS proceeding, of its prospects of success and that it is an appropriate action to bring having regard to his duties as an official liquidator.

The liquidator deposes that there are no funds in the liquidation of AVSS to date. He says that investigations to date have been largely unfunded and, save as expressed in his affidavit, his lawyers have agreed to act to this point on a speculative basis.

The liquidator says that he has spoken to a representative of the Australian Taxation Office, Mr Ross Burns, who informed him that the Australian Taxation Office would not agree to fund him and AVSS to conduct investigations and prosecute the claims.

Galvin Constructions Pty Ltd (Galvin) was the petitioning creditor for the winding up of AVSS and was placed into liquidation itself on 16 September 2011. The liquidator deposes that he is not aware of any interest from the liquidator of Galvin, Mr Richard Cauchi, to fund him in respect of the prosecution of the claims, nor is he aware whether Mr Cauchi has funds in the liquidation of Galvin to do so.

The liquidator deposes that he is informed by Mr Melville that Fingal has acquired by way of assignment the claim of Melbourne Business & Investment Commission.

The liquidator says that he has not written to creditors generally inviting them to fund him in his investigations and the prosecution of the claims he has identified.

Following the joinder of AVSS to the Fingal proceeding the liquidator instructed his solicitors, Piper Alderman, to make inquiries as to whether any professional litigation funding firms would be prepared to fund a public examination of Mr Leggo and any possible claims the liquidator might determine to bring in the liquidation.

The liquidator says that Litigation Lending Services declined to fund him at all. The liquidator deposes that he has been informed by Michael Lhuede, a partner of Piper Alderman, that he (Mr Lhuede) was informed by Mr Patrick Coope of LCM Litigation Fund Pty Ltd that LCM Litigation Fund Pty Ltd was interested in funding public examinations in the liquidation and would thereafter consider funding possible actions by the liquidator.

The liquidator says that following the joinder of AVSS to the Fingal proceeding he received from Mr Melville an expression of interest in funding him and AVSS in the prosecution of various actions against Mr Leggo and NDP.

The liquidator says that in November 2012 he received a series of proposals from Mr Melville to fund various possible causes of action in the liquidation of AVSS. Ultimately Mr Melville agreed on behalf of Fingal to fund the liquidator undertaking a public examination of Mr Leggo. This funding was on the basis that the liquidator would also cause interviews to be undertaken of other related parties including Mr Melville. The liquidator deposes that the agreement was not the subject of any formal deed.

The liquidator deposes that following the examination of Mr Leggo on 15 April 2013 he entered into a further and separate agreement with Mr Melville on behalf of Fingal. Under this further agreement Fingal agreed to fund the liquidator’s preparation of a statement of claim, to be settled by counsel, and the institution of the AVSS proceeding, as long as the liquidator was otherwise satisfied it was appropriate to bring such proceeding. The liquidator says that the agreement is not the subject of any formal deed. The liquidator says that the agreement did not impose on him any restraint or direction in determining the claims to bring in the AVSS proceeding.

The liquidator says that it was a condition of his agreeing to institute any proceedings that he receive an appropriate indemnity for his remuneration and the costs of prosecuting the proceedings, and an indemnity for any adverse costs orders in the event he was unsuccessful.

By a deed dated 30 July 2013 entered into between the liquidator, AVSS, Fingal and Ryeland (Funding Deed), the liquidator obtained funding on terms acceptable to him to prosecute the claims in the AVSS proceeding.

The liquidator says that pursuant to the terms of the Funding Deed the liquidator has retained his independence to prosecute the AVSS proceeding at his discretion and using his lawyers.

It was an express condition of the Funding Deed (clause 12) that the liquidator agreed not to “make, bring or support any application or proceeding to set aside, avoid or otherwise challenge the enforceability of the Fingal Charge”.

The liquidator says that he is aware that Mr Leggo may seek to impugn his agreeing to this. He makes the following observations:

(a) The Fingal charge remains registered over the assets and undertaking of AVSS and its receiver remains in place;

(b) He has not on behalf of AVSS in any way compromised any right of AVSS to challenge the Fingal charge but has merely agreed, as liquidator, to abide by any determination that may ultimately be made in that regard;

(c) By virtue of the existence of the Fingal charge, unless and until the liquidator either sets the Fingal charge aside or reaches agreement with Fingal the liquidator is not able to bring any major part of the AVSS proceeding, namely the prosecution of the claim under the settlement deed;

(d) He is aware that Mr Leggo has alleged the Fingal charge is voidable however it was not until a without prejudice discussion in the course of the mediation of the Fingal proceeding on 2 August 2013 that he understood the basis of such allegation;

(e)Mr Leggo has known of the liquidator’s wish to bring proceedings against him and NDP since, at the latest, the mediation on 21 November 2012;
(f)Mr Leggo, as a director of AVSS, and being involved in the Fingal proceeding, is aware that in the absence of creditor or litigation funding support the liquidator is without funds to prosecute any action or conduct meaningful investigations;
(g)Mr Leggo has never offered or suggested he would be willing to provide the liquidator with any funding to investigate any matters or bring any actions;
(h)While the Fingal charge remains in place the liquidator is unlikely to be able to procure any third party litigation funding without first having the agreement of Fingal as Fingal may well claim the proceeds of any action under its charge;
(i)If he did not accept the offer of funding from Fingal and Ryeland he would not have been able to bring the AVSS proceeding, which is exactly what Mr Leggo would prefer; and
(j)Absent a successful prosecution of the AVSS proceeding there is no prospect of a return to creditors of AVSS.

With respect to the allegation of Mr Leggo that the Fingal charge is voidable the liquidator deposes that he has not investigated that allegation in any detail to date. In this regard the liquidator says that he has been conscious of a number of significant issues that might arise in any action to avoid such charge, including but not limited to:

(a)Mr Leggo having himself drafted and entered into the settlement deed the subject of the AVSS proceeding, which proceeding contemplates the validity of the Fingal charge; and
(b)Mr Leggo as a director of AVSS taking no steps to set aside or avoid the Fingal charge while he was in control of AVSS.

The liquidator deposes that he is satisfied that his entering into the Funding Deed is in the interests of the creditors of AVSS as a whole.

The issue on appeal

The appellants now seek to rely on the witness statements filed in the Fingal proceeding. The Associate Judge ruled that they could not be relied on and did not take them into account. The appellants argue that his Honour erred in so deciding. For the reasons given below, I find that his Honour did err. I find that the statements should have been admitted into evidence.

The liquidator was cross-examined before the Associate Judge. The liquidator conceded that he had received the statements several months prior to the issue of the AVSS proceeding on 31 August 2013. The liquidator said that he did not read them. The appellants say that he should have as they are highly relevant to what the liquidator is giving up under clause 12 of the Funding Deed.[25] The appellants referred to paragraphs 91 to 102 of the statement of Mr Crozier.
[25]Tr 73.

In those paragraphs, Mr Crozier states that in or around August/September 2007, another venture with which Mr Crozier was associated was experiencing some financial difficulties and advice was sought from an experienced insolvency practitioner. This ultimately led to a decision by Mr Crozier, Mr Turner and Mr Melville that security should be granted to the Albury lenders and should also extend to cover past unit holder loans and any future unit holder loans as and when advanced. As a result Mr Melville was instructed to prepare the debenture charge and other security documents referred to above as the Fingal charge.

Mr Crozier says that he does not remember telling Mr Leggo or Mr McNab about the decision to include the unit holder loans under the Fingal charge at the time the charge was created. He said that he was very busy with the Golf Club Properties during that time and it is quite likely that he forgot to update them.[26]
[26]CB 437.

The appellants submit that this information was highly relevant to any decision to give up the right to challenge the Fingal charge. The appellants submit that this information goes to the validity of the Fingal charge and the Fingal loan agreement and that it demonstrates that there are very good arguments that both the Fingal charge and the Fingal loan agreement are invalid or voidable.

The appellants contend that the significance for the liquidator is that $2 million has already been recovered by the receiver of AVSS and repaid to Fingal under the Fingal charge and the Fingal loan agreement. The appellants submit that the money ought to be repaid to AVSS and made available to the creditors generally in the liquidation.

The appellants submit that the liquidator is claiming against NDP and Mr Leggo, pursuant to the settlement deed, the balance of the secured loan said to be due under the Fingal charge and Fingal loan agreement. This is some $3.5 million. The appellants argue that this information in Mr Crozier’s witness statement would have shown the claim is not a good claim.[27]
[27]Tr 75.

The appellants submit that the information would have disclosed that the $5.5 million shown as being owed to Fingal by AVSS under the Fingal loan agreement was in fact originally owed by AVSS to the joint venturers and other lenders, on terms that require investigation, and not to Fingal. Secondly, the appellants contend that the solvency of AVSS should be considered without regard to the Fingal charge.[28] Thirdly, if the $2 million had been distributed to unsecured creditors and the investors’ loans were treated as deferred until units sold at a profit, that may have an effect on the solvency of AVSS.[29]
[28]Tr 80.
[29]Tr 78-81.

The appellants also rely on the witness statement of Mr Melville, which, they say, supports the statement given by Mr Crozier.[30] The appellants also rely on the witness statement of Geoffrey Turner, who controlled Rincon. He essentially confirmed the statement given by Mr Leggo. Mr Turner says Golf Club Properties was Mr Crozier’s main business and it was facing financial difficulties.[31]
[30]CB 2/463.
[31]CB 492.

The appellants refer to the witness statement of Mr Leggo and in particular his statement that he invested in the project on the basis that the investment was to be treated as equity to be repaid from profits only. The appellants say that none of the other witnesses dispute that contention.[32]
[32]CB 520, tr 83.

Legal principles

In the matter of Newtronics Pty Ltd,[33] Gordon J said:
[33][2007] FCA 1375.

There are a number of principles relevant to the exercise of the Court’s power under s 477(2B) which are worth restating:
(1)the Court does not simply “rubber stamp” whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (in liq) …
In relation to the powers of the liquidator to compromise claims:
[T]he 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 in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in where a compromise will be for the benefit of creditors.

(2)a Court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 2 ACLC 1,647;
(3)the role of the Court is to grant or deny approval of the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd … ;
(4)in reviewing the liquidator’s proposal, the task of the Court is:
[Not] to consider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in … a hearing de novo [but] … simply to review the liquidator’s proposal, paying due regard to his or her commercial judgement and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error or law or ground 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.

… The Court’s approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgement in the matter;
(5)Further, 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, inter alia, 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 is the proper realisation of the assets of the company or otherwise assists in the winding up of the company …[34]

[34]Ibid, [26].

In Re ACN 076 673 875 Ltd,[35] Austin J summarised relevant factors as including:
[35][2002] NSWSC 578. See also Leigh; Re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315.

(a)the liquidator’s prospects of success in a litigation;
(b)the interests of creditors other than the proposed defendants;
(c)possible oppression in bringing the proceedings;
(d)the nature and complexity of the cause of action;
(e)the extent to which the liquidator has canvassed other funding options;
(f)the level of the Funder’s premium;
(g)the liquidator’s consultations with creditors; and
(h)the risks 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 costs of the defendant in the event that the action is not successful, or towards any order for security for costs.

Grounds of appeal

The first ground of appeal is that the Associate Judge failed to find that the Funding Deed was not in the interest of creditors, despite the fact that:

(i)the liquidator agreed in favour of Fingal not to make, bring or support any application or proceeding to set aside, avoid or otherwise challenge the enforceability of the Fingal charge;
(ii)the liquidator agreed that in the event of a court of relevant jurisdiction determining that the Fingal charge is void or otherwise unenforceable as against AVSS, the liquidator will not oppose any application by Fingal for an order in its favour under s 564 of the Act;
(iii)the liquidator had not investigated the cause of action that the liquidator might have pursued in order to avoid the Fingal transactions. This failure to investigate included failing to read the witness statements filed in the Fingal proceeding; and
(iv)it could not be assumed that the Fingal proceeding would resolve all issues relating to the validity of the Fingal loan agreement and the Fingal charge.

The second ground of appeal is in substance that the learned Associate Judge erred in failing to find that the Funding Deed was uncertain in view of the potential inconsistency between clauses 9.3 and 9.4 of the Funding Deed.

The third ground is that the learned Associate Judge erred in declining to read the witness statements of Mr Leggo, Mr Crozier, Mr Turner, Mr Melville and Mr Horne filed in the Fingal proceeding, or to grant leave to the appellants to refer to and rely on the relevant passages.

It is convenient to deal with the third ground first, as this determines the material that I should have regard to in dealing with the other grounds of appeal.

Third ground of appeal

I have referred to the relevant passages from the Fingal proceeding witness statements above. They concern the circumstances surrounding the taking of the Fingal charge and the entry into the Fingal loan agreement.

The appellants contend that the contents of those witness statements support the contention that the Fingal charge and Fingal loan agreement were entered into for a purpose that included defeating (postponing) the interests of unsecured creditors of AVSS at a time when those who created the Fingal charge had concerns about AVSS’s solvency.

The Associate Judge declined to read the witness statements filed in the Fingal proceeding or have regard to the extracts of those witness statements referred to in the affidavits in opposition to the liquidator’s application for approval under s 477(2B).

In so declining the Associate Judge said that the filing of such witness statements, pursuant to the orders of Sifris J, was captured by the Commercial Court Practice Note No. 10, at paragraph 13.21, which provides:

A party receiving a witness statement is taken to have done so subject to an implied undertaking to the Court that the witness statement and its contents will not be used for any purpose other than for the legitimate purposes of the proceeding.

The Associate Judge said that leave was sought to rely upon the witness statements notwithstanding Practice Note No. 10 and notwithstanding the principles set out in Home Office v Harmon.[36] The Associate Judge said that he was not satisfied that special circumstances existed within the meaning of Springfield Nominees Pty Ltd v Bridgelands Securities Ltd.[37] The Associate Judge referred to the fact that Fingal was not privy to the application and the liquidator was merely a consenting party in the Fingal proceeding before Sifris J. The Associate Judge said that his task was not to embark upon a determination of the efficacy of the Fingal charge in order to determine whether or not to approve the Funding Deed. For the purposes of the application before him he said that it was sufficient to have regard to the matters set out in the amended defence and counterclaim filed on behalf of NDP.
[36][1981] Q.B. 534.
[37](1992) 38 FCR 217 (Springfield).

The appellants accepted that they could not rely on the witness statements filed in the Fingal proceeding unless they fell within special circumstances as explained in Springfield[38] and the Court exercised its discretion to modify or vary the implied undertaking.
[38]Ibid, 225.

The implied undertaking is that the witness statements served on Mr Leggo and NDP in the Fingal proceeding would not be used other than for the purpose of the Fingal proceeding. It is accepted that a litigant may be released from the implied undertaking if special circumstances for giving leave exist. In Crest Homes PLC v Marks[39] Lord Oliver said:[40]

… that the court will not release or modify the implied undertaking given on discovery save in special circumstances and where the release or modification will not occasion injustice to the person giving discovery.

[39][1987] AC 829.

[40]Ibid, 860.

This test was adopted by Burchett J in Holpitt Pty Ltd v Varimu Pty Ltd,[41] Lockhart J in Sweetman v Australian Thoroughbred Finance Pty Ltd[42] and Wilcox J in Springfield. In Springfield, Wilcox J said that for special circumstances to exist it was enough that there was a special feature of the case which afforded a reason for modifying or releasing the undertaking and which was not usually present. Wilcox J held that once special circumstances were shown to exist the Court’s discretion to modify or release the undertaking was enlivened. His Honour set out factors that may be relevant to the exercise of the Court’s discretion as follows:

[26] ….For "special circumstances" to exist it is enough that there is a special feature of the case which affords a reason for modifying or releasing the undertaking and is not usually present. The matter then becomes one of the proper exercise of the Court's discretion, many factors being relevant. It is neither possible nor desirable to propound an exhaustive list of those factors. But plainly they include the nature of the document, the circumstances under which it came into existence, the attitude of the author of the document and any prejudice the author may sustain, whether the document pre-existed litigation or was created for that purpose and therefore expected to enter the public domain, the nature of the information in the document (in particular whether it contains personal data or commercially sensitive information), the circumstances in which the document came into the hands of the applicant for leave and, perhaps most important of all, the likely contribution of the document to achieving justice in the second proceeding.
[27] Consideration of these factors leads me to the conclusion that it is proper to give leave in the present case. Mr Preston's statement was prepared for use in litigation; it was not pre-existing. It does not contain personal data or commercially sensitive material. Although the author of the document does not consent, and would prefer it not used, he does not resist leave or advance any argument of prejudice. The document came into the possession of the present applicant under circumstances which reflect no discredit on it or its representatives. I cannot say that the document will be important to the achievement of justice in the Aetna-Honking Bank case; much depends upon the course of that case and the evidence given in it. But it deals with matters relevant to that proceeding. It is a statement made by a person involved in transactions the subject of that proceeding. It has at least the potential to be important to the proper determination of that case. I propose to grant leave.

[41](1991) 29 FCR 576, 578-579.

[42](Unreported, Federal Court of Australia, Lockhart J, 23 July 1992).

In my view, “special circumstances” do exist in the liquidator’s application which afford a reason for modifying or releasing the undertaking. Both the Fingal proceeding and the AVSS proceeding concern the conduct of the joint venture. In the Fingal proceeding, Fingal has sued NDP and AVSS alleging that NDP made payments to various unsecured creditors and breached its duties to Fingal as the subsequent security holder. By its defence, NDP disputes the validity of the Fingal charge and the Fingal loan agreement.

Currently, Mr Melville is the sole director of Fingal. According to Fingal, the Fingal loans to AVSS are held on trust for the unit holders and the Albury investors. It is the joint venturers and the Albury investors that will benefit by the litigation if Fingal succeeds.

In the AVSS proceeding, the liquidator sues both NDP and Mr Leggo. The litigation is being funded by Fingal and Ryeland. Fingal’s sole director is one of Mr Leggo’s joint venturers in the joint venture. One cause of action arises out of the settlement deed between the joint venturers. The other alleges that AVSS incurred debts whilst insolvent and under the management of Mr Leggo. In the AVSS proceeding, the beneficiary of any success may be Fingal as the secured creditor and thus the joint venturers and the Albury investors as beneficiaries of the trust in their favour, at the expense of Mr Leggo, one of the joint venturers (that is if Fingal succeeds in establishing the trust in the Fingal proceeding).

In my view, the two pieces of litigation are both manifestations of the dispute that has arisen between the joint venture parties.

The witness statement of Mr Leggo can be put aside. He was perfectly free to give similar evidence in the liquidator’s application if he wished. The relevant statements are those of Messrs Crozier, Turner and Melville. Mr Melville is a party to the Funding Deed. I see no prejudice to him if his statement is used in this application which relates to his company and Ryeland funding a proceeding against his joint venturer, Mr Leggo, and NDP, Mr Leggo’s company.

The relevant subject matter of the witness statements is the dealings between the joint venture parties in relation to the conduct of the joint venture. The liquidator of AVSS is being financed by a company controlled by one of the joint venture parties to bring proceedings that may advance the interests of some joint venture partners over another joint venture partner, Mr Leggo. In my opinion, the learned Associate Judge erred in finding that special circumstances did not exist. In my view the Court’s discretion to vary or modify the undertaking was enlivened. It now remains for the Court to determine whether to exercise that discretion in the appellants’ favour.

The appellants submit that the witness statements in question:

(a) were prepared by Fingal, voluntarily, for the purpose of explaining the circumstances in which it says the Fingal charge and the Fingal loan agreement were created;

(b)were prepared for use in litigation with the expectation that they would be used in open court;
(c)were filed by Fingal in the Fingal proceeding in which Fingal asserts the validity of the Fingal charge and Fingal loan agreement;
(d)were served on both the appellants and the liquidator who are each parties to the Fingal proceeding;
(e)were filed in a proceeding that has so significant a factual overlap with the AVSS proceeding that both proceedings are likely to be heard together; and
(f)are plainly relevant and potentially important to determining the strength and value of the causes of action sought to be pursued by the liquidator and abandoned by the liquidator under the Funding Deed, and are therefore highly conducive to the achievement of justice in the proceeding.

The appellants submit that the witness statements were made available to the liquidator by Fingal prior to his entry into the Funding Deed, and ought to have been read and relied on by the liquidator in determining whether it was in the interests of creditors to enter into that deed. The liquidator in his evidence under cross-examination before the learned Associate Judge said his lawyers had had the witness statements for some time and that, in substance, he had chosen not to read them because he might not have been paid to do so. The witness statements were filed on 7 June 2013 during the period the liquidator was funded by Fingal and Ryeland to prepare the claim which he issued on 31 July 2013.

Dealing with the factors referred to by Wilcox J, the nature of the document is a witness statement which foreshadows the evidence to be given by the witness. The authors are members of the joint venture. The witness statements concern the joint venture dealings. In my view, no prejudice would be sustained by the joint venturers by the statements being used in the liquidator’s application. The documents did not pre-exist the Fingal proceeding. The information is expected to enter the public domain during the Fingal proceeding. The information in the witness statements is not commercially sensitive. The document came into Mr Leggo’s hands as the controller of NDP.

I consider that the witness statements will assist in justice being done in the liquidator’s application.

For these reasons, I will grant leave for the appellants to rely on the relevant witness statements filed in the Fingal proceeding as they have sought and as referred to above.

First ground of appeal – the interests of creditors

The appellants accept that the Associate Judge had regard to the relevant legal principles pertaining to the giving or withholding of approval for a liquidator’s funding agreement.[43]
[43]Tr 85.

The Associate Judge considered the issue of whether or not the liquidator was giving up anything of value and thus not in the interests of creditors other than the proposed defendants.

After setting out the relevant principles and in particular those summarised by Austin J in Re CAN 076 673 875 the Associate Judge said that “subject to what I have set out hereafter with respect to clause 12 of the funding agreement, I am satisfied that the liquidator’s proceeding is in the interest of creditors.”

His Honour said:

[36] The submission on behalf of Non de Plume also put that it was contrary to the liquidator’s duty to enter into the liquidator’s undertaking in the funding agreement. The undertaking is not in the interests of creditors.
[37] Whilst the argument has merit, the prevailing circumstances of already having filed the counterclaim in the Fingal proceeding militates against a determination that it is not in the interests of creditors to enter into the liquidator’s undertaking in the funding agreement. I cannot predict what might occur in the Fingal proceeding. If approval is given to the liquidator to enter into the Funding agreement, it might be that Fingal discontinues its claim. However, it does not follow that the counterclaim as to the efficacy of the Fingal charge would also be discontinued. To the contrary, as the efficacy of the Fingal charge and whether or not any moneys are secured thereby bears upon the issue of the solvency of the company during the relevant period, I cannot imagine that Non de Plume would lightly abandon prosecuting that claim. It is in its interest to have the issue determined before or concurrently with the insolvent trading claim.
[38] I am satisfied that the undertaking provided at clause 12 is an undertaking given solely by the liquidator in his capacity as liquidator of the company. Albeit that the undertaking binds the liquidator and any successor liquidator, in the event that Justice Sifris determines that the Fingal charge ought to be set aside, the undertaking does not prevent the company (not the liquidator) from seeking to recover repayments to Fingal by the company. If Justice Sifris were not to disturb the Fingal charge, although the liquidator has powers pursuant to Part 5.7B which are not all available to an ordinary litigant, it is difficult to see that the liquidator is giving up anything of value.

For Fingal to succeed against NDP in the Fingal proceeding, Fingal needs to establish that it is entitled to priority over unsecured creditors under the Fingal charge and that the charge does secure the alleged loans by Fingal to AVSS.

As indicated above, NDP in its defence and counterclaim contends that at the time of the creation of the Fingal charge, the charge secured no debt as the funds had already been lent to AVSS on an unsecured basis and that the Fingal charge was entered into by Mr Crozier, for and on behalf of AVSS and Fingal,[44] to the detriment of the creditors of AVSS and in breach of Mr Crozier’s duties to AVSS, at a time when AVSS had negative assets. The appellants contend that the defence and counterclaim raised by NDP in the Fingal proceeding squarely raises the issue of whether or not the Fingal loan agreement and the Fingal charge are valid and enforceable.
[44]CB 340 and 389.

The appellants submit, however, that the Funding Deed denies unsecured creditors the opportunity of the liquidator seeking to set aside the Fingal charge and Fingal loan agreement under s 588 FE and s 588FF of the Act as a voidable transaction.

This contention does not appear to be expressly addressed in the Associate Judge’s reasons. It was not argued before me that that issue was not open to be argued.

The respondent argues that under the Funding Deed, AVSS is not denied the opportunity to take any proceedings that may be of benefit to creditors. The respondent also submits that if in the Fingal proceeding, it is decided that the Fingal charge is voidable or void, then it is open for the creditors of AVSS to remove the current liquidator and appoint another liquidator who will be able to challenge the Fingal transactions under s 588FE and s 588FF.[45]
[45]Tr 107.

The respondent contends that the Funding Deed leaves open to AVSS the power to pursue its rights if it wants to. The respondent says that he is not able to bind any other person who is appointed liquidator. The respondent says that if leave is not granted there will be nothing for creditors. The respondent says that the choice is between agreeing to the Funding Deed and being able to pursue some claims, or not getting funding and having a moribund liquidation.

There is no dispute that if the liquidator did successfully challenge the validity and enforceability of the Fingal charge and the Fingal loan agreement, there would be considerable benefit to creditors. Fingal has already received over $1 million under the Fingal charge, and it would probably be required to disgorge that sum for the benefit of all unsecured creditors (or for the benefit of unpaid secured creditors) if the Fingal charge were avoided as a voidable transaction.

In my opinion, unless there were grounds to suggest that a liquidator could successfully bring proceedings under ss 588FE and 588FF of the Act to challenge the Fingal charge and the Fingal loan agreement as voidable transactions, there could be no suggestion of any material prejudice to unsecured creditors through the liquidator’s covenant not to pursue such proceedings.

Under ss 588FE and 588FF, the liquidator (but not the company in liquidation) may apply to have orders made about voidable transactions. Under s 588FE(2A) a transaction is voidable if it is:

(i) an uncommercial transaction of the company; or

(ii) an unfair preference given by the company to a creditor of the company; or

(iii) an unfair loan to the company; or

(iv) an unreasonable director-related transaction of the company;

and if it meets certain other conditions set out in s 588FE(2A).

The appellants submit that voidable transactions include transactions entered into with a view to defeating the interests of unsecured creditors. Section 588FE(5) provides:

The transaction is voidable if:
(a)    it is an insolvent transaction of the company; and
(b)    the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and
(c)    the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.

Section 588FC deals with insolvent transactions and states:

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i)the transaction is entered into; or
(ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b) the company becomes insolvent because of, or because of matters including:
(i)entering into the transaction; or
(ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

Under s 588FE(2) a transaction is voidable if it is an insolvent transaction and it was entered into, or any act was done for the purpose of giving effect to it: during the six months ending on the relation-back day; or after that day but on or before the day when the winding up began.

In this case, AVSS was ordered to be wound up on 2 February 2011, which is the relation-back day. The relevant transactions were entered into in 2007 and 2008. If the Fingal charge and Fingal loan agreement were insolvent transactions, the issue may arise whether an act was done for the purpose of giving effect to them during the 6 months prior to 2 February 2011, or on or after 2 February 2011 but before the winding up began.

As it is, there was no suggestion that an application by the liquidator under s 588FE and s 588FF would be out of time and I heard no submissions on the matter from either of the parties.

Further, the witness statements sought to be relied on by the appellants, as discussed above, in my opinion, support the argument that the Fingal charge and the Fingal loan agreement may have been entered into with AVSS for the purpose of defeating, delaying or interfering with the rights of any or all of AVSS’s creditors on a winding up of AVSS, within the meaning of s 588FE(5).

In those circumstances, I consider the relevant question to be: is it open to establish that the Fingal charge and/or the Fingal loan agreement were insolvent transactions of AVSS? The critical issue in answering that question is whether AVSS was insolvent at the time the Fingal charge and/or Fingal loan agreement were entered into, or, whether AVSS became insolvent because it entered into either or both of these transactions.

The liquidator prepared an insolvency report dated 31 July 2013. The liquidator observed that from late 2007, AVSS was unable to fund cost overruns and unit holders were asked to contribute funds to cover the same. The liquidator concluded that based on the material in his report he considered that AVSS was insolvent from at the latest March 2009, on account of certain matters. These included that from 30 June 2007 up to 21 June 2010, AVSS had minimal cash from its own resources in order to fund the development, and that the restated accounts show a deficiency in net assets from 30 June 2007.

In my opinion, the proposition that AVSS was insolvent as at October 2007, is reasonably open to be argued on the material before me. The liquidator does suggest AVSS was having financial difficulties at this time. More importantly, the liquidator says that in June 2007 AVSS had a deficiency of net assets. In other words, its liabilities exceeded its assets. That is one indicator of insolvency.

As mentioned above, the liquidator says that if the creditors wish for a liquidator to take proceedings under ss 588FE and 588FF they could replace the current liquidator. I do not consider that a satisfactory procedure. The respondent submitted that at law the current liquidator is unable to deprive a future liquidator of a statutory right under the Act by an agreement between the current liquidator and Fingal. Whether a liquidator may do so or not, the practical effect of the Funding Deed is that the current liquidator has deprived himself of the right to do so and, in my opinion, from a commercial point of view, that raises a large impediment to the statutory rights ever being invoked against Fingal.

If the Fingal charge and the Fingal loan agreement are held to be void or voidable, I accept the appellants’ submission that depending on the terms of the loans or contributions by the joint venturers, there may be some consequences for the solvency of AVSS and thus on the insolvent trading claim of the liquidator against Mr Leggo.

I also accept the appellants’ contention that a finding in the Fingal proceeding that the Fingal charge and the Fingal loan agreement are valid does not resolve whether or not they could be set aside as a voidable transaction under s 588FE.

In those circumstances, I am not satisfied that it is in the interests of creditors generally for the liquidator to surrender the opportunity to challenge the Fingal charge and Fingal loan agreement under s 588FE and s 588FF.

Another relevant factor in considering the liquidator’s application for approval, is that the liquidator has frankly admitted that he has not investigated in any detail the allegation of Mr Leggo that the Fingal charge is voidable. The liquidator has not read the witness statements that have been filed in the Fingal proceeding as evidence against AVSS and NDP. The liquidator has not had the funds to do so. Accordingly, the Court has not had the benefit of the liquidator’s considered opinion on a possible claim that the Fingal charge and Fingal loan agreement are voidable transactions.

The appellants contend that the Associate Judge overlooked that the liquidator has agreed to a course of action that enhances the rights of one ostensibly secured creditor to the disadvantage of the unsecured creditors. The appellants submit that the voidable transaction provisions, s 588FE and s 588FF exist for the benefit of unsecured creditors.[46]
[46]Tr 97.

The appellants contend that the Associate Judge made a further error in finding that there was no funding available to challenge the Fingal charge and the Fingal loan agreement. The appellants say that to get funding it is necessary at the outset to investigate the cause of action and identify why it might be a good cause of action so it can be pitched to potential lenders.[47]
[47]Tr 90.

The appellants contend that the liquidator justified his actions on the basis that the only claim that he could get funding for was the claim against Mr Leggo and NDP. The liquidator said that the claim against Mr Leggo and NDP may benefit creditors and is better than not making any claim at all. The liquidator says that it is either a case of Mr Melville and his company funding the liquidator to sue Mr Leggo, or nothing. The appellants submit that accepting this argument of the liquidator was a fundamental error by the Associate Judge.[48]
[48]Tr 88.

The appellants contend that his Honour could not be satisfied that there was no other funding available, because the liquidator had not made any assessment of the strength and prospects of success of any claim to avoid the Fingal loan agreement and the Fingal charge. The appellants submit that the liquidator knew that the Fingal loan agreement and the Fingal charge were subject to challenge, as he was a party to the Fingal proceeding, but that he had not investigated the matter.[49] The appellants submit that the Associate Judge erred in forming the view that nothing of value was given up because all those issues could be run before Sifris J. The appellants submit that is wrong as only the liquidator could challenge the Fingal transactions as insolvent transactions, which the appellants contend is the easiest path now that there is an insolvency report in existence.[50]
[49]Tr 86.
[50]Tr 90-91.

In answer to the appellants’ contention that the Associate Judge erred in failing to find that the liquidator had not investigated the allegations by Mr Leggo about the Fingal transactions, the liquidator makes the following submissions. First, the Fingal charge is still registered on AVSS. Secondly, Mr Leggo himself never challenged the appointment of Fingal’s receiver. Thirdly, Mr Leggo did not take any steps to invalidate the charge when he was the sole director of AVSS. Fourthly, the liquidator does not have the funds to enquire into the allegations made by Mr Leggo. Fifthly, it was not put to the liquidator in cross-examination that he had the funds to look into this issue but failed and neglected to do so. Sixthly, it was never put to the liquidator that the liquidator did not take proper steps to obtain funding. Finally, there is nothing in the deed of settlement that was entered into to resolve all issues between the parties, about the validity of the Fingal charge.[51]
[51]Tr 113-114.

The liquidator is not the sole plaintiff in the AVSS proceeding. AVSS is also a plaintiff and is seeking to enforce the very loan agreement and charge that the liquidator precludes himself from challenging under clause 12 of the Funding Deed. AVSS is also a party to the Funding Deed, and is therefore also bound by clause 12. The appellants say that AVSS is seeking to uphold the Fingal charge in the AVSS proceeding. They submit that it is unlikely that AVSS, in another proceeding, would be permitted to run a claim inconsistent with the AVSS proceeding.

The appellants submit that something over and above what could be achieved by their counterclaim has been given up. The appellants submit that it has been pleaded by Fingal that Mr Leggo is estopped from contending the Fingal charge and the Fingal loan agreement are invalid as Mr Leggo went along with those transactions for a couple of years before challenging them. The appellants submit that although the counterclaim could fail, a statutory claim brought by the liquidator in respect of the voidable transactions cannot be defeated by things such as estoppel.[52]
[52]Tr 96.

The appellants say that the issue before Sifris J is whether or not the parties agreed to the Fingal charge and the Fingal loan agreement. The cause of action given up turns not on whether the parties agreed to the Fingal transactions, but on whether they would adversely affect the interests of creditors.[53]
[53]Tr 99.

There is another aspect of the Funding Deed that I consider is a relevant factor to take into account in considering the liquidator’s application for approval. The liquidator is to act for the benefit of all creditors without fear or favour. In this case, the joint venture parties have fallen out. The Fingal proceeding involves a claim by a company associated with Mr Melville (Fingal) against a company associated with Mr Leggo (NDP). Mr Melville, through his company, seeks to finance the liquidator of AVSS to pursue a claim against Mr Leggo and NDP for the primary benefit of Fingal, as Fingal will have priority rights as a secured creditor to any moneys recovered. A term of that finance is that the liquidator will not challenge the Fingal charge despite the possibility that AVSS was insolvent when the charge was created, and the possibility that the charge was created to defeat the interests of the unsecured creditors. Thus, Mr Melville (and those joint venturers siding with him) have been able to sue NDP directly in the Fingal proceeding, and put pressure on NDP and Mr Leggo through the liquidator suing them in the AVSS proceeding, while at the same time preventing an attack by the liquidator on the Fingal transactions which are the very securities that support the Fingal proceeding.

In my view, the Associate Judge had a discretion in exercising his power to approve the Funding Deed under s 477(2B). The Act lays out no express criteria to be taken into account when exercising that discretion, but the decided cases have identified various factors that should be taken into account, as discussed above. After taking all these matters into account, for the reasons given above, I find that the Associate Judge failed to take into account all relevant matters when he exercised his discretion whether or not to approve the Funding Deed, and thereby erred in exercising his discretion.[54]
[54]In House v The King (1936) 55 CLR 499, 504-505, Dixon, Evatt and McTiernan JJ held that:
It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

Accordingly, it falls to me to exercise the discretion vested in the Court by s 477(2B) to deciding whether or not to approve of AVSS entering into the Funding Deed.

For the reasons canvassed, I do not consider that it is in the interests of the liquidation to approve the Funding Deed. I would refuse the application and uphold this ground of appeal.

Second ground

The second ground of appeal is in substance that the learned Associate Judge erred in failing to find that the Funding Deed was uncertain in view of the alleged inconsistency in the construction of clauses 9.3 and 9.4 of the Funding Deed.

In my opinion, the Funding Deed is not uncertain in the sense that certain necessary terms have not been agreed upon and it is thus incomplete. Nor do I find that there is any inconsistency in the construction of clause 9.3 and 9.4 of the Funding Deed.

The Funding Deed defines the Funding Fee to mean the amount that is equal to 40 per cent of the Net Proceeds. The Net Proceeds are defined to mean the Recovery Amount less the Action Costs. The Recovery Amount is essentially the amount recovered by AVSS or the liquidator in the proceedings. In substance, the Action Costs are the costs of bringing the proceeding but do not include the liquidator’s remuneration.

Clauses 9.3 and 9.4 provide as follows:

Clause 9.3
Subject to clause 9.2, the terms of this Deed and any requirement of the Act, in consideration of the covenants and indemnities contained in this Deed, the parties agree that upon receipt of the Recovery Amount, the liquidator and the company will pay to the Funder out of the Recovery Amount, and as a first priority:
(a)     such sum as is required to enable the Funder to pay, or alternatively to reimburse the Funder any amount it has paid, for procuring the indemnity referred to in clause 3.7;
(b)     such Action Costs as have been paid by the Funder to the Liquidator and/or the company pursuant to the terms of this Deed;
(c)       payments made by the Funder on account of the Liquidator’s remuneration payable pursuant to clause 3.5; and
(d)     any Action Costs which have not been paid by the Funder, by reason that they exceed the maximum sum determined in accordance with clauses 3.2 to 3.4.

Clause 9.4

If the balance of the recovery amount, after payment of the amounts referred to in clause 9.3, is sufficient to pay or reimburse in full:
(a) the Funding Fee payable to the Funder on the terms contained in this Deed (less the amount referred to in clause 9.3); and
(b) the Deferred Expenses in so far as they relate to the conduct of the Action;
these amounts shall be paid or reimbursed in full. If, however, the balance of the Recovery Amount, after payment of the amounts referred to in clause 9.3, is insufficient to pay or reimburse in full the amounts referred to in (a) to (b), those amounts shall be paid pari passu.

Clause 9.5 provides that the payment and/or reimbursement of each of the amounts to the Funder in accordance with clauses 9.3 and 9.4 are subject to, and conditional upon, AVSS having sufficient assets to pay or reimburse them following completion of the proceedings and enforcement of any judgment or reward.

It is not my function to give a binding construction of the Funding Deed. In resolving any dispute about its meaning the Court may need to consider extrinsic material and take into account a thorough analysis of the Funding Deed as a whole, and the Funder would need to be heard.

Under clause 9.3 certain amounts are to be paid out of the Recovery Amount as a first priority. These amounts include the cost of the liquidator’s indemnity paid by the Funder, Action Costs paid by the Funder, remuneration paid to the liquidator by the Funder and other Action costs that have not been paid by the Funder. Clause 9.4 deals with the payment of “the balance of the Recovery Amount” after payment of the amounts referred to clause 9.3.

Clause 9.4 deals with two situations. First, if the balance of the Recovery Amount is sufficient to pay or reimburse in full two categories of expenses, and secondly if the balance of the Recovery Amount is insufficient to pay or reimburse in full those amounts. In the former case the expenses are to be paid in full. If not, then between the two categories of expenses, the amount is to be paid pari passu.

The first category of expense is the Funding Fee payable to the Funder (less the amount referred to in clause 9.3). The second category of expense is the Deferred Expenses insofar as they relate to the conduct of the Action.

Thus on a plain reading of the words in clause 9.3, the Funder is to be paid (including reimbursements under clause 9.3) no more than 40 per cent of the Net Proceeds. The other 60 per cent goes to Deferred Expenses, AVSS and the liquidator.

The appellants contend, however, that there is a conundrum. The appellants ask, do the costs of clause 9.3 come out of the 40 per cent or not? In my view, they do. The alternate construction was not put forward by the appellants.

The appellants also contend that even if the terms of the Funding Deed are certain, the Funding Deed should nevertheless not be approved because of the respondent’s and the Associate Judge’s varying and conflicting views on the effect of the terms.

The appellants submit that initially the respondent argued that the Funder was entitled to 40 per cent of the Net Proceeds and the reimbursement of some or all of the expenses paid by the Funder referred to in clause 9.3.

The respondent in his supplementary written submissions of 13 September 2013 withdrew that construction. The respondent now supports the construction that I give to the clauses. The appellants submit that this reversal of position arises because the construction of clauses 9.3 and 9.4 is unclear.

The respondent in his supplementary submissions says that the Associate Judge put to counsel that by virtue of clause 9.3(a) of the Funding Deed, the “price” of the funding to AVSS included the Funding Fee of 40 per cent as defined in clause 1.1 plus the cost incurred by the Funder in procuring an indemnity from a third party. The respondent conceded this construction but withdrew the concession in his submissions of 13 September 2013 to the Associate Judge. In my view, the change of position by the respondent does not establish that the meaning of clauses 9.3 and 9.4 is unclear.

The appellants also submits that there are other drafting problems in clause 9.4 including the question of which amounts are to be paid pari passu where there are insufficient funds. The appellants ask whether it is all of the amounts in clauses 9.3(a)-(d) and 9.4(a) and (b), or just the amounts referred to in clause 9.4(a) and (b).

The appellants contend that these problems were themselves a good reason for the Court to refuse to approve the Funding Deed.

I reject the appellants’ submission. It is clear that 9.4(a) refers to a net amount and clause 9.4(b) refers to net amount. It is these net amounts that are to be reduced pari passu.

I would dismiss this ground of appeal.

Conclusion

I propose to make the following orders that :

(a) appeal allowed;

(b) orders 2 and 3 of the orders made on 27 September 2013 be set aside; and

(c) the respondent’s application for approval under s 477(2B) of the Act to enter into the funding agreement, made by originating motion dated 20 August 2013 filed in the proceeding is refused.

I will hear the parties on the question of costs.

[2014] VSC 75

11 March 2014