Re Community Work Pty Ltd (in liq)

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FEDERAL COURT OF AUSTRALIA

Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425

File number: NSD 123 of 2018
Judge: GLEESON J
Date of judgment: 5 April 2018
Date of publication of reasons: 11 April 2018
Catchwords:

BANKRUPTCY AND INSOLVENCY – whether to approve nunc pro tunc liquidator’s entry into funding agreement on behalf of company in liquidation pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (“Act”) – whether to make justification order pursuant to s 90-15(1) of the Insolvency Practice Schedule (Corporations), being Sch 2 of the Act, regarding liquidator’s entry into funding agreement in circumstances where funder a potential debtor of the company

PRACTICE AND PROCEDURE – whether to make confidentiality order pursuant to ss 37AF(1)(b), 37AG(1)(a) and 37AJ of the Federal Court Act 1976 (Cth) to protect details of funding agreement where purpose is to fund public examinations to assist decision whether to commence litigation

Legislation:

Corporations Act 2001 (Cth) s 477(2B)

Federal Court of Australia Act 1976 (Cth) ss 37AF(1)(b), 37AG(1)(a), 37AJ

Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth) s 90-15(1)

Cases cited:

Buiscex Ltd v Panfida Food Ltd (1998) 28 ACSR 357

Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167

Hall v Poolman [2009] NSWCA 64; (2009) 254 ALR 333; (2009) 71 ACSR 139

Hamilton as liquidator of ACN 101 634 146 Pty Ltd (in liq) [2014] FCA 687

Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; (2010) 8 ACSR 163

Re Glengrant Civil Pty Ltd (In Liq) [2017] NSWSC 843

Re HIH Insurance Group Ltd (2001) 19 ACLC 1102

Re Octaviar Administration Pty Ltd (in liq) [2014] NSWSC 344

Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556

Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594

Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115

Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375

Walley, in the matter of Poles & Underground Pty Ltd [2017] FCA 486
Date of hearing: 7 March 2018
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 66
Counsel for the Plaintiff: Ms V Whittaker
Solicitor for the Plaintiff: Colin Biggers & Paisley

ORDERS

NSD 123 of 2018

IN THE MATTER OF COMMUNITY WORK PTY LTD (IN LIQUIDATION) ACN 098 501 752

PETER PAUL KREJCI AS LIQUIDATOR OF COMMUNITY WORK PTY LTD (IN LIQUIDATION) ACN 098 501 752

Plaintiff

JUDGE:

GLEESON J

DATE OF ORDER:

5 APRIL 2018

THE COURT ORDERS THAT:

1.Pursuant to ss 37AF(1) of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary to prevent prejudice to the proper administration of justice, the following documents are to be marked “confidential” on the electronic Court file and are not to be published or accessed, except pursuant to…

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Details
Case
[2018] FCA 425
Decision Date

CaseChat Overview and Summary

The case of Re Community Work Pty Ltd (in liq) involved a dispute concerning the liquidator's entry into a litigation funding agreement on behalf of a company in liquidation. The funder under the agreement was the State of New South Wales, represented by the Department of Family and Community Services (FACS). The key legal issues revolved around whether to approve the liquidator's entry into the funding agreement under section 477(2B) of the Corporations Act 2001 and whether to make a justification order regarding the liquidator's entry into the funding agreement in circumstances where the funder was a potential debtor of the company. Additionally, the court had to consider whether to make a confidentiality order to protect details of the funding agreement. The court concluded that it should approve the liquidator's entry into the funding agreement as it would enable investigations into potential claims against the company's directors and related entities and was in the best interests of the creditors. The court also granted the justification order and the confidentiality order to protect sensitive information related to the funding agreement and the public examinations.

Orders

Orders of the court

1. Pursuant to ss 37AF(1) of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary to prevent prejudice to the proper administration of justice, the following documents are to be marked “confidential” on the electronic Court file and are not to be published or accessed, except pursuant to an order of the Court, until such time as any litigation (including any appeal) arising out of the winding up and affairs of Community Work Pty Ltd (in liquidation) (“Community Work”) is concluded:

(a) confidential exhibit 2 to the affidavit of the plaintiff sworn on 14 March 2018 and marked “confidential”; and

(b) paragraphs 32 to 34 of the affidavit of the plaintiff sworn on 14 March 2018 not marked “confidential”.

2. Any person demonstrating sufficient interest in order 1 above has liberty to apply on 3 days’ notice.

3. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), approval be granted nunc pro tunc for the plaintiff (in his capacity as liquidator of Community Work) to enter into and cause Community Work to enter into the funding and indemnity agreement dated 13 December 2017 that is confidential exhibit 1 to the affidavit of the plaintiff sworn 25 January 2018 (“funding agreement”).

4. Pursuant to s 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth), the plaintiff is justified in entering into the funding agreement and causing Community Work to enter into it, and in performing the obligations under it.

5. The costs of the application be costs and expenses in the winding up of Community Work.

6. The proceeding be stood over to 12 April 2018 at 9:30 am for submissions that any part of the reasons for judgment should be the subject of order 1 above.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The agreement is a litigation funding agreement (“funding agreement”) to enable the liquidator to conduct public examinations of persons regarding the company’s examinable affairs. The agreement was made on 13 December 2017, but provides that the liquidator “will seek either creditor (including Committee of Inspection) or Court approval” for the funding agreement. The funder under the agreement is the State of New South Wales, represented by and acting through the Department of Family and Community Services (“FACS”).BACKGROUND FACTS The company provided out of home care services to “at risk” youths. It is registered as a charity with the Australian Charities and Not-for-Profits Commission. On 1 July 2008, the company entered into a service agreement with Alpha Support Services Pty Ltd (“Alpha”), a related entity of the company (“service agreement”). On 27 February 2012, the company entered into a funding agreement with FACS (“FACS agreement”). According to Mr Krejci:(a)pursuant to the FACS agreement, the company was funded to ensure the placement of up to 27 young people in leased residences, located across greater Sydney; (b)pursuant to the service agreement, the company paid management fees to Alpha in return for which Alpha was to meet all costs and deliver all services required under the FACS agreement other than payroll obligations; and (c)the company’s books and records show that Alpha received management fees of approximately $19,627,861 between 2012 and 2017. On 1 July 2013, the company entered into a service agreement with Sunergos Support Services Pty Ltd (“Sunergos”), another related entity of the company. In 2014, disputes arose between FACS and the company. The company alleged that FACS refused it access to FACS’ referral system by which youths are placed into care, effectively restricting the company’s revenue streams. This dispute ultimately resulted in a discrimination claim brought by the company against FACS in the New South Wales Civil and Administrative Tribunal (“NCAT”). FACS engaged the professional services firm Deloitte Touche Tohmatsu (“Deloitte”) to prepare an investigative audit report to determine compliance with the FACS agreement. In September 2016, Deloitte issued a report which, amongst other things, reported breaches of the FACS agreement by the company including:(1)breach of financial reporting obligations;(2)payment of monies to unauthorised subcontractors, being Alpha and Sunergos; and(3)breach of an obligation relating to conflicts of interests. The company’s directors dispute the findings of Deloitte’s report and say that the company did not breach the FACS agreement. In early 2017, the company and FACS attempted unsuccessfully to mediate their disputes in the NCAT proceeding, and other claims which the company asserted against FACS including claims for the cost of repairs due to property damage at foster homes and reimbursement of payroll costs. Also in early 2017, FACS opened its service contract to a public tender process. The company submitted an application as part of the tender process but, in March 2017, was notified by FACS that it had been unsuccessful in its application. FACS subsequently offered a short-term extension of the FACS agreement which was due to expire on 30 June 2017. The extension was not accepted by the directors, leaving the company with no long term contract or source of income.

Evidence

Evidence Before The Court

The ATO has not raised any issue with Mr Krejci concerning his entry into the funding agreement.Mr Krejci’s evidence concerning funding agreement Mr Krejci’s belief is that it would be in the best interests of the company and its creditors that FACS provide funding to the company to conduct the proposed public examinations, in accordance with the funding agreement, because:(1)Mr Krejci is without sufficient funds to conduct extensive investigations or conduct the proposed public examinations;(2)no other creditor has offered to provide funding; in particular, the ATO, which is the other member of the committee of inspection, has not indicated a willingness to provide funding to Mr Krejci;(3)the pursuance of any claim against the directors of the company or its related entities is dependent on the liquidator being able to conduct public examinations due to the lack of cooperation of the related entities and the lack of books and records of the company;(4)unless the liquidator is able to investigate potential claims against the directors of the company or the related entities and advisors, the prospects of successfully pursuing claims against those individuals or entities and recovering monies for the benefit of creditors are greatly diminished; and(5)the funding agreement does not seek an uplift/premium and therefore is an economical source of essential funding for this purpose. Mr Krejci also identified, and addressed, the following concerns in respect of the agreement:(1)The possible perception of a conflict in circumstances where FACS is a potential creditor whose debt has not been formally adjudicated but may also be a debtor of the company. Mr Krejci states that he is satisfied that the terms of the funding agreement sufficiently protect his independence such that there is no actual conflict.(2)Due to their concern over the conduct of the directors of the company, FACS sought more involvement in the public examinations than would ordinarily be the case in a commercial funding agreement, and the negotiated agreement reflects that position by providing for significant active involvement by FACS in the public examinations, including as an eligible applicant, and active cooperation by the liquidator. Mr Krejci stated that, in his experience, it is not uncommon for funders to require consultation and active cooperation and he is comfortable that his independence is preserved.(3)The funding agreement gives substantial rights of termination to the funder. Mr Krejci noted that, in his experience, it is not uncommon for funding agreements to give substantial rights of termination to the funder. (4)The funding agreement seems to provide that any costs incurred in examining FACS’ claim as a creditor of the company are discretionary. Mr Krejci’s view is that this is unlikely to have a practical effect because the circumstances of FACS’ claim as a creditor of the company appear to be intertwined with the other examinable affairs of the company. Mr Krejci’s ultimate opinion is therefore that:[E]ntering into the funding agreement is in the best interests of creditors. I am satisfied that it is the only mechanism available to me by which potential recoveries from the directors of the Company and the related entities can be investigated and possibly, pursued. In circumstances where I am otherwise without funds to conduct investigations or the proposed examinations, I do not have the full books and records of the Company available to me and no other creditor has offered to provide me with funding, I am comfortable that it is appropriate to enter into the funding agreement. The fact that a not for profit company has potentially used funds provided by FACS to subcontract with its related entities in potential breach of the FACS Agreement adds a public interest element that requires investigation.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

A court would not be likely to decline to give directions concerning a litigation funding agreement solely on the ground that it should not make the liquidator’s commercial decisions for them: Hall v Poolman at [173]. Rather, the question whether to give directions or decline to given them will depend upon the nature of the directions sought and the facts of the instance case, and in particular the extent to which the funding agreement and the contemplated recovery proceedings raise issues capable of affecting the administration of justice: Hall v Poolman at [173]. It may be appropriate to exercise the power to give directions (now the power to make orders) where a liquidator apprehends being accused of acting unreasonably: cf. Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117. CONSIDERATIONApproval of funding agreement The liquidator identified the following matters in favour of the Court approving the funding agreement:(1)the company has insufficient funds to conduct investigations without funding;(2)potential claims have been identified, including potential claims against the directors of the company and related entities arising from allegations made by FACS monies may have been misappropriated in breach of the FACS agreement;(3)the scope and purpose of the funding is clear, that is, for the specific purpose of enabling a view to be formed about the prospects of recovery from the potential claims;(4)Mr Krejci’s belief that he has not received all of the books and records of the Company and that books and records will be obtained through activities funded under the funding agreement;(5)there is no uplift or interest under the funding agreement; although the liquidator has not canvassed other funding options, no other creditor has offered to provide funding and, in Mr Krejci’s experience, commercial litigation funders will seek an uplift or premium on recoveries;(6)Mr Krejci’s independence is preserved under the funding agreement as he will have an active role in the conduct and control of the public examinations; although the funding agreement provides for consultation and cooperation with FACS, the liquidator retains the right to direct, control and conduct the Public Examinations consistent with his obligations as a liquidator; and(7)Mr Krejci’s belief that it would be in the best interests of the company, and its creditors, to obtain funding from FACS under the funding agreement. I am satisfied that I should approve the liquidator’s entry into the funding agreement, having regard to the matters identified by him. I see no evidence of any lack of good faith or error of law or principle on Mr Krejci’s part in entering into the agreement, or grounds for doubting his prudence in doing so (except to the extent that he entered into the agreement prior to seeking the Court’s approval). It is in the interests of creditors generally that the examinable affairs of the company be investigated with the aim of improving the liquidator’s prospects of recovering funds for the benefit of creditors. Further, there is a strong public interest in the investigation of possible breaches of directors’ fiduciary and statutory duties in connection with the use of State Government funds.