Re Etrend Pty Limited; Pockett v Dean-Willcocks

[2004] NSWSC 251

CITATION:	Re Etrend Pty Limited; Pockett & Ors v Dean-Willcocks & anor [2004] NSWSC 251
HEARING DATE(S):	23 March 2004
JUDGMENT DATE:	2 April 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Windeyer J at 1
DECISION:	Interlocutory process dismissed
CATCHWORDS:	CORPORATIONS - arrangements - deed of company arrangement - application to discharge examination summonses and orders for production - whether part of champertous litigation funding agreement - whether outside proper purpose of deed administrators - s596B Corporations Act
CASES CITED:	Emanuel Investments Pty Limited (in liq); Saint v Macks [1999] SASC 264 Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 Re Movitor Pty Limited (1990) 6 ACLC 587 Re William Felton Pty Limited (1998) 28 ACSR 228; Trendex Trading Corporation v Credit Suisse [1982] AC 679
PARTIES :	Tom Pockett (First Applicant) So Sochim (Second Applicant) Penny Winn (Third Applicant) Mark Kelly (Fourth Applicant) Steven Bradley (Fifth Applicant) Gerard Rohl (Sixth Applicant) Dick Smith Electronics Pty Limited (Seventh Applicant) Intertan Australia Limited (Eighth Applicant) Woolworths Limited (Ninth Applicant) Ronald John Dean-Willcocks and Ian James Purchase (Respondents)
FILE NUMBER(S):	SC 6063 of 2003
COUNSEL:	C R C Newlinds SC with him Ms Angela Seward (Plaintiffs/Respondents) R Smith SC with him Mr R McHugh (Defendants/Applicants)
SOLICITORS:	Kemp Strang (Plaintiffs/Respondents) Corrs Chambers Westgarth (Defendant/Applicants)

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IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WINDEYER J

FRIDAY 2 APRIL 2004

6063/03 IN THE MATTER OF ETREND PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT); POCKETT & ORS V DEAN-WILLCOCKS & ANOR

JUDGMENT

1 This judgment concerns an interlocutory process filed on 20 February 2004 which seeks discharge of certain examination summonses and the setting aside of orders for production obtained by the deed fund administrators of Etrend Pty Limited a company subject to a deed of company arrangement. The basic facts are set out in a judgment I delivered on 18 March 2004, which should be read in conjunction with this judgment and I will not repeat the facts.

2 The applicants, being those persons and companies subject to the examination summonses and orders for production will be referred to in this judgment as in the previous one, as the Woolworths interests.

3 In addition to the orders for discharge orders for inspection of certain documents were sought, most importantly the affidavit filed by the deed administrators and relied on in support of the issue of the summonses. There is no longer any issue on the subpoenas and notice to produce referred to in my earlier judgment. During the hearing of the substantive matter I dealt with the remaining elements of the claim relating to those documents. For what appeared to be proper reasons I allowed inspection of the affidavit of the administrator. This leaves for decision the substantive question as to setting aside of the examination summonses and the orders for production.

4 The arguments on behalf of the Woolworths interest can be summarized as claiming that the summonses and orders were obtained as ancillary to a champertous arrangement, that they were obtained for an improper purpose, and that in any event as a matter of discretion they should be set aside.

5 The most substantive argument related to champerty. Put simply it is this. The deed administrators consider that Etrend may have a claim against the Woolworths interests for damages arising from misleading and deceptive conduct during negotiations between Etrend and the Woolworths interests for the development of an electronic gift card. The complaint made is that the deed of company arrangement under which the deed administrators are appointed administrators of the deed fund, goes beyond the scope of usual litigation funding arrangements, which are an exception to the ordinary public policy considerations applying to champertous arrangements. The deed of company arrangement provides as follows in clause 12:

12. LITIGATION

12.1 The Company and Directors undertake that the Administrators, as Administrators of this Deed, shall investigate and conduct the Examination and the Administrators may prosecute the Litigation subject to the Conditions and the provisions of this Deed.

12.2 The Directors shall do all things and provide all assistance as may be required of the Administrators, with respect to the Examination or the Litigation.

12.3 The parties intend that the Administrators will obtain Litigation Funding within three months of the date of this Deed, or such later date as the Administrators may absolutely determine, and in which event, subject to the provisions of this Deed:


(a) the Administrators shall prosecute the Litigation, as may be commenced, in accordance with the rules, practice or orders of the relevant Court; and

(b) the Directors shall use their best endeavours to assist the Administrators to pursue the Litigation.


12.4 In the event that, as a result of any investigation or the Examination, the Administrators obtain offers or proposals from more than one Funder, then the Administrators shall determine, in their absolute discretion, as to the appropriate Funder, and shall implement an arrangement with such Funder as may be determined by the Administrators.

12.5 For the avoidance of doubt, the Funder and the terms of the Litigation Funding shall be determined by the Administrators.


Examination and litigation are defined in the deed as follows:-

“Examination” means the possible examination pursuant to Part 5.9 of the Corporations Act of, inter alia, Woolworths in respect of the subject matter of the Litigation, including preparatory investigation.
“Litigation” means the likely proceedings by the Administrators and/or the Company as may be commenced against inter alia, Woolworths following further investigation and Examination.

6 The deed envisages that the proposed examination would be funded from the proceeds of the cash retained by the administrators and the proceeds of sale of the company assets (other than the chose in action against Woolworths) these forming the first two parts of the deed fund, as defined, and that after the examination has been conducted, and presumably depending upon the result of the examination, litigation funders will be approached to provide funding to enable the company to take action against Woolworths if it seems that such an action is justified. Thus it is said that the stated purpose of the examination is to obtain evidence to place before a funder with a view to entering into a champertous arrangement with such funder. This is claimed to be an improper purpose.

7 All litigation funding agreements involve in one way or another trading in causes of action and often with persons with no interest in the litigation until the trade is made. The law has for some time recognized this as a exception to the general public policy which sets its face against champertous arrangements on the grounds that the Bankruptcy Acts and Companies Acts give power to trustees in bankruptcy and liquidators and now administrators and deed administrators to dispose of property of a bankrupt or an insolvent company and to assign a mere right of action. See Re William Felton Pty Limited (1998) 28 ACSR 228; Re Movitor Pty Limited (1990) 6 ACLC 587. There are many other cases. It is not necessary to discuss the principles further.

8 Counsel for the applicant argues that clause 12.3 is “on all fours with the covenant which the House of Lords in Trendex Trading Corporation v Credit Suisse [1982] AC 679 at 694-695 and 702-704 held amounted to trafficking in litigation, and was void”. But the instant case differs from Trendex as a result of the insolvency. The possible claim against the Woolworths interests is at least a possible asset of Etrend. The deed administrators have a proper interest in conducting examinations to ascertain the strength of the claim. If it appears as a result of such examination that the claim has substance then there is no reason why funding should not be sought to pursue the claim. The proposed actions are proper; there is not shown to be any collateral purpose. The purpose of the examination is to assess the strength of the claim. If the chose in action appears to have value then entering into a funding agreement would be proper. That would seem to be an end to the matter.

9 The second argument of the applicant really follows the first. It is that the examinations do not have a proper purpose, because the purpose is to obtain information to pass on to a litigation funder to enable that funder to assess the prospects of success of the litigation. The argument relies on the decision of Emanuel Investments Pty Limited (in liq); Saint v Macks [1999] SASC 264 at 268.

10 The decision in that case can be distinguished on the facts. The liquidator had obtained funding; the purpose of the examinations was to obtain details of insurance the defendants to the litigation may have had, which information would be passed to the funder. It is not necessary to decide whether or not I should follow that decision. The position is different in the instant case where it is not argued there is no basis for a claim against the Woolworths interests. If there is a proper chose in action it is property. It is in the interests of creditors to realise some sum for the property. If this can only be done if litigation funding is obtained then a proper purpose is to obtain information on the strength of the claim. Finally, the purpose of the deed was to obtain funding to bring the action. The examinations are for that purpose. There is no application to set the deed aside.

11 A number of other matters were put forward on the question of exercise of discretion in favour of the applicants. These included the following:

(a) That the examination will give an unfair forensic advantage to Etrend and the deed administrators.

(b) That the litigation is largely in the interests of a particular director, the largest creditor.

(c) That the examinees are employees of the Woolworths interests, not directors or officers of Etrend.

(d) That the deed administrators are not officers of the Court.

Other matters are set out in the applicants’ written submissions, which I will leave with the papers. None separately nor all together would I consider justify an order setting aside the summonses and orders. It is not put that a claim against the Woolworths interests has no possible substance. If that were put and seen to have some foundation then there might be some force in paragraph 33 of the applicants’ written submissions, which I set out:

33. If the present examinations are permissible, this Court will have authorised a new development in Litigation associated with potentially insolvent corporations. Any company of borderline solvency which wishes to explore the viability of possible litigation need only enter a deed of company arrangement to obtain access to all the coercive powers available under section 596B. The startling effect of the examination orders is that under administration Etrend is in a much better position to sue Woolworths than it was before the administration began. The Administrators have all the advantages of section 596B and none of the disadvantages normally associated with a liquidation.

12 The administrators’ report to the second meeting of creditors states that the company had received preliminary legal advice on the Woolworths’ claim prior to the appointment of the administrators. There is no reason to think the purpose of administration was to enable the action to be brought for the benefit of Mr Blundy, nor is there any evidence to suggest Etrend was only teetering on insolvency. The forensic advantage argument has been rejected some years ago: Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 518-520.

13 The interlocutory process filed on 23 February 2004 should be dismissed with costs. I will, if required, hear argument on the costs of the interlocutory process filed on 15 March 2004.

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Last Modified: 04/21/2004