Re Jabiru Satellite Ltd (in liq) and NewSat Ltd (in liq)

Case •

[2022] NSWSC 459

•

14 April 2022

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of Jabiru Satellite Limited (in liq) and NewSat Limited (in liq) [2022] NSWSC 459
Hearing dates: 31 March 2022, 11 April 2022
Date of orders: 14 April 2022
Decision date: 14 April 2022
Jurisdiction:Equity - Corporations List
Before: Black J
Decision:

Plaintiffs’ Originating Process is dismissed. Plaintiffs to bring in a proposed suppression and non-publication order. Liberty to apply within 7 days reserved to interested persons as to costs.

Catchwords:

CORPORATIONS — Winding up — Liquidators — Appointment of special purpose liquidator — whether special purpose liquidator should be appointed to conduct certain proceedings on basis of funding agreement that provides for funding fee of 70% of the net resolution sum — where funder has minimal assets — where prospects of the proceedings to be pursued not exposed to third party funders — where funder contends it will not support the proceedings on any other basis.

Legislation Cited:

Corporations Act 2001 (Cth), s 477, 564

Insolvency Practice Schedule (Corporations) s 90-15

Cases Cited:

- Commonwealth of Australia (Department of Education, Skills and Employment) v Phoenix Institute of Australia Pty Ltd (in liq) [2020] FCA 937

- Fitz Jersey Pty Ltd v Fraser (2018) 129 ACSR 238; [2018] NSWSC 1189

- Glenfyne International Holding Limited v Glenfyne Farms International AU Pty Ltd (in liq); (2019) 101 NSWLR 358; [2019] NSWCA 304

- Helberg v Dean-Willcox [2020] VSC 313

- Lewis v Battery Mineral Resources Ltd (in liq) (2021) 156 ACSR 162; [2021] FCA 963

- Melhelm Pty Ltd v Boka Beverages Pty Ltd (in liq) (2019) 138 ACSR 95; [2019] FCA 1184

- Re Atlas Construction Group Pty Ltd (in liq) [2018] NSWSC 1189

- Re GDK Projects Pty Ltd v Umberto Pty Ltd (in liq) [2018] FCA 541

- Shangri-La Construction Pty Ltd v GVE Hampton Pty Ltd (2021) 152 ACSR 19; [2021] VSC 161

Category:Principal judgment
Parties: Rockgold Holdings Pty Ltd (First Plaintiff)
Ever Tycoon Limited (a company registered in the British Virgin Islands) (Second Plaintiff)
Jabiru Satellite Limited (in liquidation) (First Defendant)
NewSat Limited (in liquidation) (Second Defendant)
Glen Ian Livingston in his capacity as liquidator of Jabiru Satellite Limited (in liquidation) and liquidator of NewSat Limited (in liquidation) (Third Defendant)
Representation:

Counsel:
Mr D Sulan SC/A Campbell (Plaintiffs)
S Rosewarne/A Batroney (Interested Persons)

Solicitors:
Bridges Lawyers (Plaintiffs)
Allen & Overy (Interested Person`s)
File Number(s): 2022/63480

Judgment

Nature of the application and background

  1. By Originating Process filed on 4 March 2022, the Plaintiffs, Rockgold Holdings Pty Ltd (“Rockgold”) and Ever Tycoon Ltd (in liq) (a company registered in the British Virgin Islands) (“Ever Tycoon”) seek the appointment of Mr Arnautovic (“proposed SPL”) as special purpose liquidator to Jabiru Satellite Ltd (in liq) (“Jabiru”) and NewSat Ltd (in liq) (“NewSat”) (together, “Companies”) to conduct certain proceedings in the Supreme Court of Victoria (“Proceedings”). Several secured lenders (“Secured Lenders”) to the Companies, which are Defendants in the Proceedings, were heard in the application under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW). The application was part heard on 31 March 2022, then adjourned to allow an opportunity for the Plaintiffs to lead further evidence and the hearing was completed on 11 April 2022.

  2. By way of background, NewSat was a satellite communications provider and was previously listed on the Australian Securities Exchange (“ASX”) and traded with Jabiru in a group of companies known as the “NewSat Group”, which was established to launch and manage a commercial satellite to provide mobile communications carrier services in Australia and elsewhere. On 17 April 2015, Messrs Ayres and Parbery were appointed joint and several administrators of several companies within the NewSat Group, including the Companies. On the same date, secured creditors of NewSat Group appointed receivers (“Receivers”) to the Companies. Messrs Ayres and Parbery were appointed as liquidators of the NewSat Group, including the Companies, by resolution of their creditors on 7 August 2015. NewSat was subsequently delisted by the ASX and, after Mr Ayres’ resignation as liquidator on 6 March 2017, Mr Parbery remained as sole liquidator of the Companies. By order made by the Federal Court of Australia on 10 September 2020, after Mr Parbery’s resignation, he was subsequently replaced by Mr Livingstone as liquidator of the Companies. I will refer to Mr Livingstone as the general purpose liquidator (“GPL”), to distinguish his role from that of the proposed SPL.

  3. The GPL’s report dated 11 December 2020 indicated that the NewSat Group had limited assets, with a realisable value of approximately $314,350; 29 priority creditors had claims in an amount of about $1.5 million, which exceeded those assets; unsecured creditors had claims of over $47.7 million; and the Secured Lenders had claims with an estimated value of $174.4 million. That report also identified that possible unsecured creditor claims against NewSat of $47.7 million and against Jabiru in excess of $109 million. That report noted that the Receivers had attempted to restructure the Companies but were unable to obtain funding to continue trading the business or complete the construction of the satellite or reach agreement with the manufacturer of that satellite prior to the termination of the construction contract for the satellite.

  4. It appears that Rockgold subsequently caused the Proceedings to be commenced in the names of the Companies against, inter alia, the Secured Lenders with the GPL’s consent, on the condition that they would not be served unless agreement was reached with the GPL as to potential funding and an indemnity in respect of adverse costs. The nature of the Proceedings is described, in short form, in the GPL’s report to creditors dated 23 December 2021, which identified eight entities (including the Secured Lenders) against which the Proceedings were then brought and indicated that:

“The [P]roceedings themselves are complex and concern conduct of [inter alia, the Secured Lenders] which is alleged to have been in breach of an implied duty of good faith, or unconscionable conduct in contravention of s 21 of the Australian Consumer Law. The [P]roceedings seek orders for damages, and compensation under section 236 of the Australian Consumer Law that, if successful, would result in a return to creditors.”

  1. Rockgold subsequently filed an application in the Supreme Court of Victoria for leave to continue the Proceedings as derivative proceedings, and later discontinued that leave application. Rockgold and the GPL were subsequently unable to agree the terms of a funding arrangement in respect of the Proceedings and the Plaintiffs then brought this application for the appointment of the SPL.

The Funding Deed and affidavit evidence

  1. The Plaintiffs here seek the appointment of the SPL for the sole purpose of his pursuing the Proceedings on the terms of a proposed Funding Deed (“Funding Deed”) with Rockgold’s wholly owned subsidiary, NewSat Funder No 2 Pty Ltd (“NewSat Funder”). That purpose inevitably required consideration of the terms of the proposed Funding Deed, and the Plaintiffs tendered that Funding Deed. They did not press a claim to confidentiality in respect of the percentage of the Funding Fee, after I indicated a preliminary view that it would not be in the interests of justice to close the Court (as they had initially proposed) in a manner that would deprive creditors of knowledge of that percentage, where that percentage was well outside the range ordinarily seen by the Court . It will be convenient to address the terms of that Funding Deed before turning to the affidavits read in the proceedings.

  2. The proposed Funding Deed provides, in cl 4, for NewSat Funder to pay the Costs (as defined) on certain terms, and to indemnify the SPL and the Companies for all Adverse Costs Orders (as defined) with respect to the Proceedings and any Appeal, subject to NewSat Funder agreeing to fund the Appeal (as defined) in accordance with the Deed. Clause 5.5 provides for the Resolution Sum (as defined) to be paid to the solicitors and applied in a specified order of priority, initially to costs, then to the GPL limited to the claims of the Companies’ Priority Creditors (as defined) up to a maximum of $2 million (which exceeds their estimated claims), then to payment of the Funding Fee (as defined) to NewSat Funder, and only then to the GPL for distribution in accordance with the priorities set out in the Corporations Act 2001 (Cth) (“Act”).

  3. The term “Funding Fee” is defined as the higher of twice the Costs so far as they are paid or payable by the Funder or the “Percentage Payment”, which is in turn defined as 70% of the net Resolution Sum and any additional amount payable to NewSat Funder in respect of an Appeal under cl 6.3. It follows that at least 70% of the net Resolution Sum would be payable to NewSat Funder, if that amount exceeds twice the costs incurred, regardless of the extent of the costs that NewSat Funder incurs and without any cap on the amount payable to maintain any proportionality with the actual costs incurred. Clause 6.3 of the Funding Deed provides that, if NewSat Funder pays the costs in respect of one or more appeals, then the Funding Fee increases to an even higher percentage of the net Resolution Sum, again without any cap to maintain any proportionality with the actual costs incurred. The Funding Deed also contains termination rights, and cl 10.1 permits NewSat Funder to terminate its obligations under the Deed with 30 days written notice, and it is not then entitled to any payment of the Funding Fee. I need not otherwise address those rights.

  4. Turning now to the affidavit evidence, the Plaintiffs relied on the affidavit dated 4 March 2022 of Mr Philip King, who is the sole director of Rockgold, in support of the application (although two paragraphs of that affidavit were not read). I have drawn aspects of the background to the proceedings to which I referred above from this affidavit. Mr King refers to Rockgold’s entry into deeds of assignment dated 3 June 2021 and 7 June 2021 in relation to debts which he claims were owed by Jabiru to two entities. If the assigning entities were in fact creditors of Jabiru, then Rockgold would now be a creditor of Jabiru. Mr King’s evidence is also that:

“Rockgold is prepared to fund the Victorian proceedings, through its wholly owned subsidiary on the condition that Mr Sule Arnautovic of Hall Chadwick (proposed SPL) be appointed as special purpose liquidator for each of NewSat and Jabiru for the purpose of the care and conduct of the Victorian Proceedings any appeals therefrom (and on the terms set out in the funding agreement described below).”

That affidavit did not describe the Funding Deed, other than to note that funding was to be provided by NewSat Funder.

  1. Mr King’s evidence (King [49]) is also that, since the commencement of the Victorian Proceedings, Rockgold has provided more than $3.5 million of funding for the conduct of the Proceedings, including funds held in trust, although it is not apparent that they have advanced far beyond the Statement of Claim, the preparation of the Plaintiffs’ proposed Amended Statement of Claim and procedural disputes, including foreshadowed security for costs applications and a summary dismissal application by another defendant. Mr King did not there identify the matters which gave rise to difficulty in reaching agreement with the GPL as to the terms of funding.

  2. The Plaintiffs also relied on the affidavit dated 4 March 2022 of Ms Kylie Rae, who is a partner in a firm of solicitors acting for the Plaintiffs. Ms Rae gave evidence as to the factual position concerning Ever Tycoon, apparently partly based on information provided by a director of Ever Tycoon, Mr Ching. Ms Rae’s evidence is that Mr Ching is the sole director and shareholder of Ever Tycoon and was a director of the Companies and, on 21 February 2013, Ever Tycoon and Mr Ching entered into a convertible note deed (“CND”) with NewSat, by which Ever Tycoon agreed to subscribe for US$30 million of unsecured redeemable notes convertible into fully paid ordinary shares in NewSat and Ever Tycoon was to advance the sum of US$30 million to NewSat. Ms Rae refers to a document which records the transfer of US$30 million to NewSat, although I was not taken to any record of this amount in NewSat’s accounts. Ms Rae also refers to a loan agreement between NewSat, Ever Tycoon and Mr Ching and other arrangements. Ms Rae indicates that she was informed by the GPL that Ever Tycoon had been admitted for voting purposes by the administrators in the amount of $38,505,968, although there is no evidence that a proof of debt has yet been considered or admitted by the GPL. However, it appears that Mr Ching is a member of NewSat’s committee of inspection in his capacity as a representative of Ever Tycoon.

  3. Ms Rae indicates she was informed by the GPL that he has made unsuccessful attempts to obtain litigation funding to fund the Proceedings and there are insufficient funds in the liquidation of the Companies to conduct the Proceedings. Ms Rae refers to information provided by the GPL as to his approach to several funders between April 2020 and May 2021. There is no evidence of the information provided to those potential funders as to the Proceedings and, in particular, no evidence that they were provided prospects advice in respect of the proceedings, of then kind led in this application (and they could not have been, since it was not obtained until April 2022) or financial modelling of potential damages in the Proceedings of the kind on which the Plaintiffs relied in this application. In these circumstances, it is not apparent that the GPL’s approach to third party funders provides any assistance as to whether a third party funder, provided with adequate information, would have funded the proceedings with a funding fee of less than the Funding Fee now proposed by NewSat Funder.

  4. I also give little weight to Ms Rae’s evidence that the GPL has formed the view that it would not be fruitful to pursue further attempts at third party funding for the Proceedings, where that evidence is not supported by any consideration of the prospects advice that could be provided to third party funders in such an approach, or the terms of funding that could be proposed for their approval. By letter dated 4 March 2022, the GPL indicated that he supported the application by the Plaintiffs for the appointment of an SPL for the purposes specified and on the terms set out in the application. The evidence does not disclose whether he was provided with a copy of the Funding Deed or advised of the proposed Funding Fee before he formed that view.

  5. By a further affidavit dated 28 March 2022, Ms Rae referred to correspondence with the solicitors for the Defendants in the Proceedings, and with the GPL, and the certification by the solicitor acting in the Proceedings that each allegation of fact had a proper basis, on the factual and legal material available to her. Ms Rae’s third affidavit dated 11 April 2022 annexed documentary evidence which supported the contention that the two entities from which Rockgold had taken assignments were owed debts by Jabiru.

  6. The Plaintiffs also relied on the affidavit dated 3 March 2022 of Mr Arnautovic, the proposed SPL, who referred to his experience in running litigation to recover funds for the benefit of creditors of insolvent companies including actions for recoveries under the Act and complex litigation, and indicated he was willing to be appointed as special purpose liquidator of the Companies for the purpose of the conduct of the Proceedings. Mr Arnautovic’s affidavit indicated that he was in the process of negotiating a funding agreement with NewSat Funder for the funding of the Proceedings but did not address the matters which he had taken into account in doing so or provide any support for the proposition that his appointment would be in the interests of the Companies’ creditors generally.

  7. By a second affidavit dated 6 April 2022, Mr Arnautovic referred to his view that a successful outcome in the Proceedings by the Companies had the potential to produce a return to priority creditors and other unsecured creditors, because the “potential damages claim” available to the Companies from the Proceedings is significant. He refers to an allegation made in the Proceedings that the acts of the Secured Lenders caused the Companies’ business to fail, and to financial models which forecast the financial returns that the Companies were expected to generate with respect to their business. Mr Arnautovic himself makes no assessment of the basis of those financial models, to the extent that any damages claimed in the Proceedings depend upon them.

  8. Mr Arnautovic also refers to the terms of the proposed Funding Deed in his second email. His evidence is that he will ultimately be responsible for providing instructions and for the proceedings, although the Funding Deed substantially qualified that position, as I will note below. Mr Arnautovic also referred to the GPL’s unsuccessful attempts to obtain litigation funding, but also did not address the question of the information provided to third party litigation funders to allow them to assess the prospects of the proceedings. Mr Arnautovic expressed the view that there was little prospect of finding an alternative funder. I am not persuaded of that matter where, as I have noted above, there is no evidence that potential third party funders were provided with the information on which the Plaintiffs now rely as to the prospects of and potential recoveries in the proceedings, so it is impossible to know what attitude they would have taken had they been provided with that information.

  9. Mr Arnautovic also expresses the view that, absent the Proceedings, it appears that priority employee creditors (or, more likely, the Commonwealth of Australia as a subrogated creditor) are likely to receive a small, partial dividend and ordinary unsecured creditors will receive no dividend in the liquidation. Mr Arnautovic also notes that the funder is likely to be required to provide significant funding and the proceedings are likely to be complex and expensive, and I accept that proposition, although the costs and the complexities would likely be no greater than in many representative proceedings . Mr Arnautovic also refers to the form of security which he proposes to accept, for his benefit, for adverse costs orders, although I recognise that would not prevent the Secured Lenders seeking security for costs in another form.

  10. Mr Arnautovic refers to the asset position of Mr King and Mr Ching, although he does not say that he has made any real attempt to verify that position and they have not guaranteed NewSat Funder’s obligations under the Funding Deed. It seems to me that that the evidence provides no real basis for Mr Arnautovic’s view that the NewSat Funder, as a wholly-owned subsidiary of Rockgold, has the capacity to fund the Proceedings, where it has minimal assets and the fact that it is a subsidiary does not allow recourse to the assets of its holding company, Rockgold, still less to the assets of Mr King or Mr Ching. Mr Arnautovic’s evidence is that, if he is appointed as SPL, he will not seek remuneration or cause the payment of expenses other than in accordance with the terms of the proposed Funding Deed. I will note a possible difficulty with his independence arising from that matter below, although it is not necessary to decide that question in order to determine his application.

  11. By a confidential affidavit dated 7 April 2022, Mr Arnautovic exhibited Australian and English Counsel’s advice provided in respect of aspects of the Proceedings, a proposed Amended Statement of Claim to be filed in the Proceedings and a budget for the conduct of the Proceedings. The Plaintiffs claimed an order under the Court Suppression and Non-Publication Orders Act 2010 (Cth) in respect of the exhibit to that confidential affidavit (Ex P6). I am satisfied that such an order is warranted for that exhibit, other than as to the proposed Funding Deed, as to which the Plaintiffs did not press the application for such an order.

  1. Mr Arnautovic there refers to a budget and cashflow for the conduct of the Proceedings, which estimates substantial legal costs would be incurred to achieve a final hearing and judgment. He also refers to a proposed costs agreement with the solicitors acting in the Proceedings, which would require the Court’s approval under s 477 of the Act. Mr Arnautovic also expresses the view, which seems to me unconvincing in the circumstances, that the proposed Funding Deed should be entered into. He observes, with a degree of understatement, that the proposed Funding Fee payable to NewSat Funder is “a higher funding fee that [sic] I have previously seen in other funding arrangements in which I have been involved”. Mr Arnautovic then indicates the reasons why he considers the Funding Fee is appropriate for this case, which I find largely unpersuasive. He refers to the substantial costs which NewSat Funder will incur (putting aside its lack of assets), which seem to be no more than the costs that litigation funders would incur in many substantial representative actions, with percentage funding fees of a much lower percentage than the proposed Funding Fee; the “real risk” that the Proceedings will be unsuccessful; and the risk of an adverse costs order against NewSat Funder (if it had assets to meet such an order), which are again ordinary incidents of funding arrangements and do not ordinarily support funding fees of this magnitude. He refers to the absence of other funders willing to fund the Proceedings, but I noted above that there is no evidence that other funders have been provided with Counsels’ advice or the estimates of recoveries, and they could not have been provided with the former where it was not obtained until early April 2022, after the GPL’s dealings with third party funders had ceased. Mr Arnautovic also refers to having been provided with a damages analysis, prepared by the person associated with the shareholder which proposes to fund the Proceedings, but indicates that he has not undertaken any substantial analysis of that document. He also expresses the view, which I do not accept below, that the entry into the proposed Funding Deed would be beneficial to the creditors of the Companies.

  2. Mr Sulan took me through the proposed Amended Statement of Claim in the course of submissions. I have had regard to its contents, but do not outline them here given the Plaintiffs’ claim for legal professional privilege (until it is filed) and confidentiality in respect of it. I also have regard to the terms of the English and Australian Counsels’ advice and its qualifications, but do not address it further given the Plaintiffs’ claims to legal professional privilege and confidentiality over it. I will assume, without deciding, that the Proceedings are at least properly arguable, consistent with the solicitor’s certificate to which I referred above.

  3. Importantly, Mr Arnautovic did not address, either in his first affidavit or in any substantive way in his second affidavit or his confidential affidavit, any analysis that he had undertaken as to the question why it was appropriate that he enter a Funding Deed with NewSat Funder on the terms proposed, allowing the Funding Fee of at least 70% of the net Resolution Sum. He also did not indicate that he had given any consideration to whether the fact that Rockgold had already invested (on Mr King’s evidence) some $3.5 million of funding in conducting the Proceedings, and would likely be exposed to a claim for costs by the Defendants if it abandoned them, meant that the SPL had scope to negotiate a lesser funding fee or should press for a funding arrangement which left NewSat Funder to seek priority under s 564 of the Act, at a time that the Court could take into account the amount of any recovery that was in fact achieved in the Proceedings.

  4. As I noted above, the Secured Lenders were granted leave to appear under r 2.13 of the Supreme Court (Corporations) Rules. By her affidavit dated 24 March 2022, their solicitor, Ms Sandell referred to the procedural history of the Proceedings, including the circumstances in which Rockgold’s application to bring a derivative action was discontinued, and to other delays by the Plaintiffs in the conduct of the Proceedings. By a second affidavit dated 30 March 2022, Ms Sandell referred to the timetable in the Proceedings and to correspondence in respect of the matter.

The applicable principles

  1. The Court has power to appoint a special purpose liquidator under s 90-15(1) of the Insolvency Practice Schedule (Corporations) (“IPSC”) which authorises it to “make such orders as it thinks fit in relation to the external administration of the company”, and s 90-15(3)(c) expressly includes the power the make an order that another registered liquidator be appointed as an external administrator of a company.

  2. In Re GDK Projects Pty Ltd v Umberto Pty Ltd (in liq) [2018] FCA 541 (“GDK Projects”) at [33], Farrell J observed that:

“The power to make orders conferred by s 90-15(1) contains no equivalent of [former] s 511(2) which permitted the Court to accede to an application “if satisfied that … the exercise of power will be just and beneficial”. The power is, in its terms, unconstrained. Section 90-15(4) lists some matters the Court is entitled to take into account but that list is expressed to be “[w]ithout limiting the matters which the Court may take into account when making orders”. In Re Walley (as administrators of Poles & Underground Pty Ltd (admins apptd) and Icon Plant Pty Ltd (admins apptd)) [2017] FCA 486, Gleeson J observed at [41] that the question of whether to exercise the power under s 90-15 of Sch 2 can be answered by reference to principles that applied to the exercise of the discretion under the provisions previously contained in ss 479(3) and 511. I agree that those cases can be a useful guide. Despite the breadth of the power conferred by s 90-15(1), it is difficult to envisage circumstances where the power would be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration.”

  1. In Fitz Jersey Pty Ltd v Fraser (2018) 129 ACSR 238; [2018] NSWSC 1189 at [90]-[91] (“Fitz Jersey”), Ward CJ in Eq (as the President then was), referred to several cases which had indicated that a creditor should not be permitted to appoint the liquidator of its choice solely on the basis that it declined to fund any other liquidator, and summarised the principles applicable to the appointment of a special purpose liquidator as follows:

“… the authorities make clear that on such an application it is necessary to identify with specificity the “special purposes” (or powers) for which the appointment of the special purpose liquidator is sought (see, for example, In the matter of Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079 at [13] (Ambient Advertising); In the matter of 77738930144 Pty Limited (in liq) (formerly Commercial Indemnity Pty Ltd) [2017] NSWSC 452 at [23] and [82(2)] (Commercial Indemnity); GDK Projects Pty Ltd v Umberto Pty Ltd (in liq) [2018] FCA 541 at [2] (GDK Projects); In the matter of ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002 at [22] (Hemisphere Technologies)).

Again, a special purpose liquidator will not be appointed unless it would be just and beneficial to creditors. In GDK Projects, Farrell J (at [33]) considered that the power should not be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration. Similarly, in Hemisphere Technologies, Gleeson JA at [21] determined the question by asking whether an additional liquidator was necessary (having regard to the special purposes identified in the amended originating process).”

  1. In Melhelm Pty Ltd v Boka Beverages Pty Ltd (in liq) (2019) 138 ACSR 95; [2019] FCA 1184 at [57]-[58] (“Melhelm”), Gleeson J identified matters that may support the appointment of a special purpose liquidator including that:

“(1)    there are matters that require investigation by a liquidator with a view to possible recovery for creditors;

(2)    the current liquidators have insufficient funds and insufficient prospects of obtaining funding to pursue an investigation;

(3)    a creditor is prepared to fund investigations and recovery actions but only on the condition that another liquidator be appointed; and

(4)    such an appointment would be beneficial to the winding up and the creditors as a whole: Deputy Commissioner of Taxation v Italian Prestige Jewellery Pty Ltd (in liq) (2018) 129 ACSR 115; [2018] FCA 983 (Italian Prestige Jewellery) at [34].

As to the first matter, it is necessary to identify with specificity the “special purposes” (or powers) for which the appointment of the special purpose liquidator is sought: Atlas at [90] citing, inter alia, GDK Projects at [2] and Hemisphere Technologies at [22]. Examples of purposes that have been identified as matters for investigation by an SPL include whether any of the directors or officers of a company breached their statutory and or fiduciary duties to the company; whether transactions between the company and a specified third party were voidable transactions within the meaning of s 588FE of the Act; any dealing with an asset owned legally or beneficially by the company to a specified third party; and any claim that the company may have or may have had against a specified third party.

It is not necessary or appropriate to make findings on the potential claims in determining the application for the appointment of the SPLs: GDK Projects at [36]; Italian Prestige Jewellery at [37].”

  1. In Shangri-La Construction Pty Ltd v GVE Hampton Pty Ltd (2021) 152 ACSR 19; [2021] VSC 161 (“Shangri-La”) at [75]ff, Connock J in turn noted the Court’s power to appoint a special purpose liquidator under IPSC s 90-15 and factors relevant to the exercise of that power, and noted a common circumstance in which that power would be exercised was where “it has been demonstrated that there are matters that require investigation with a view to possible recovery for creditors in circumstances where it is of utility and just for such matters to be investigated by a different liquidator. His Honour also observed (at [87]) that:

“Matters to be taken into account in relation to whether an SPL should be appointed typically include how the SPL will be funded, whether the appointment of an SPL will burden the Company with added costs, and how else the appointment might impact upon the liquidation and potential return to creditors.” (citations omitted)

  1. I also bear in mind that the Court must have regard to the broad terms of s 90-15 and the particular circumstances before the Court: Glenfyne International Holding Limited v Glenfyne Farms International AU Pty Ltd (in liq) (2019) 101 NSWLR 358; [2019] NSWCA 304; Shangri-La at [84]. The relevant factors were also reviewed, in largely similar terms, in Commonwealth of Australia (Department of Education, Skills and Employment) v Phoenix Institute of Australia Pty Ltd (in liq) [2020] FCA 937 and Lewis v Battery Mineral Resources Ltd (in liq) (2021) 156 ACSR 162; [2021] FCA 963 at [79]ff (“Battery Resources”), where Griffiths J also noted (at [121]) that:

“While it may be accepted that the Court is not required to make final findings on the plaintiffs’ claims, the caselaw has also emphasised that the appointment of a SPL must have “sufficient utility” and be “just” for the interests of creditors ... That necessarily requires the plaintiffs to demonstrate that the appointment of a SPL for the specified special purposes could potentially lead to a recovery for the benefit of creditors (see Italian Prestige at [34] per Markovic J; Shangri-La at [85] per Connock J).”

The parties’ submissions and determination

  1. Mr Sulan, with whom Ms Campbell appeared for the Plaintiffs, put the application on the basis that Rockgold is a creditor of Jabiru and Ever Tycoon is a creditor of NewSat. Mr Sulan submits, and I accept, that a person with a financial interest in the external administration of a company may apply for an order under s 90-15 of the IPSC, and that a creditor is such person. He refers to the observation of Gleeson J in Melhelm at [46] as to the meaning of the concept of “creditor” specified in s 5-5 of the IPSC, as follows:

“… “creditor”, when used in relation to a company under external administration, means a creditor of the company. The core meaning of “creditor” is a person to whom a debt is owing: BE Australia WD Pty Ltd (subject to a deed of company arrangement) v Sutton (2011) 82 NSWLR 336; 285 ALR 532; 86 ACSR 507; [2011] NSWCA 414 (BE Australia) at [133]. In its widest sense, the word “creditor” includes all persons having any pecuniary claims against the company: Re Midland Coal, Coke & Iron Company [1895] 1 Ch 267 at 277 and see s 553 of the Act. A person has a claim within the meaning of s 553 if they have a basis, founded on an existing legal right, for asserting a right to participate in the division of the assets of the company: BE Australia at [107].”

  1. There is some evidence to support that submission, by reason of the assignments to Rockgold and the dealings between Ever Tycoon and NewSat to which I referred above. I will assume, without deciding, that Rockgold is a creditor of Jabiru and Ever Tycoon is a creditor of NewSat, where this application will in any event fail for the reasons set out below.

  2. Mr Sulan accepts that, despite the breadth of the power under s 90-15, it is difficult to envisage circumstances where the power would be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration: GDK Projects at [33]; Fitz Jersey at [91]. Mr Sulan submits and I also accept that the power conferred by s 90-15 has been used on several occasions to appoint a special purpose liquidator to conduct investigations of claims, although the application is not here made for that purpose, but instead to permit the SPL to conduct the Proceedings on the terms of the Funding Deed. Mr Sulan also referred to Gleeson J’s summary of relevant factors in Melhelm at [57] and to his Honour’s observation that it is not necessary or appropriate to make findings on the potential claims in determining the application for the appointment of a special purpose liquidator; however, as Griffiths J observed in Battery Resources, it will at least be necessary to determine whether the appointment of the SPL has “sufficient utility” and would be “just” for the interests of creditors.

  3. Mr Sulan refers to the history of the Proceedings, the allegations advanced in the Statement of Claim filed in the Proceedings, the certification by the solicitor acting in the Proceedings that there is a proper basis for the allegations on the legal and factual material presently before her, and the nature of the allegations proposed to be advanced in the Amended Statement of Claim. Mr Sulan submits that there are strong reasons for the appointment of the SPL, because the GPL does not have sufficient funding to conduct the Proceedings; the GPL has been unable to obtain funding from third party funders for the Proceedings, and has insufficient prospects of doing so; Rockgold, through a wholly-owned subsidiary, is prepared to provide funding to the SPL and not the GPL; and such an appointment would be beneficial to the winding up and the creditors as a whole for several reasons. I accept the first proposition, as a matter of the GPL’s present position. I do not accept the second proposition, where I have noted above that the evidence does not establish that sufficient information was provided to third party funders to allow them to determine whether they would fund the proceedings on less onerous terms than proposed by NewSat Funder. I do not accept that the third proposition establishes that the appointment of the SPL is in the interests of creditors, given that it is the wholly owned subsidiary of Rockgold, rather than Rockgold, which would provide the proposed funding, and there is no evidence that it is an entity of substance. I address the fourth proposition below.

  4. Mr Sulan submits that an appointment would be beneficial to the winding-up and creditors because the Proceedings are unlikely to continue without the appointment of the SPL. I do not accept that proposition, where it would be open to the Plaintiffs to put a funding proposal consistent with market commission rates or fund the GPL, relying on s 564 of the Act, if the application is refused. The suggestion that they will not do so was not more than assertion, and their taking that approach would both abandon their substantial existing investment in the Proceedings and likely expose them to the risk of a costs order in favour of the Defendants in the Proceedings. Mr Sulan also points to the fact that there are priority creditors and unsecured creditors of the Companies. It does not seem to me that the position of priority creditors, and the relatively small recovery which they (or the Commonwealth in their place) might receive goes far enough to support this application, given the other findings that I have reached.

  5. Mr Sulan also submits that the solicitor for the Plaintiffs has certified that the Proceedings have a proper basis, and I also bear in mind the legal opinions to which I have referred above. Mr Sulan also points out that the GPL consents to the appointment of the SPL and I bear that in mind. However, as I noted above, it is not apparent whether he had been advised of the magnitude of the Funding Fee to be charged by NewSat Funder before taking that position, and, in any event, the Court must reach its own decision as to the appointment of the SPL, having regard to the relevant matters including those which I have addressed above. Mr Sulan submits and I also accept that Mr Arnautovic is highly experienced, including with complex litigation, but that experience is no substitute for an adequate review of the alternatives to entering a Funding Deed on these onerous terms.

  6. Mr Sulan, in supplementary non-confidential submissions, submits that the Companies had a “large potential value”, prior to their failure, and that significant damages “may be ordered” against the Secured Lenders if the allegations are established. I assume, without deciding, that possibility exists, although the evidence supporting the financial modelling that underpins that submission is limited. However, that submission highlights the extent to which a diversion of at least 70% of those “large” and “significant” recoveries to a funder associated with shareholders, uncapped by any multiple of the costs expended by that funder, is adverse to the interests of the Companies’ unsecured creditors. Mr Sulan also refers to Mr Arnautovic’s satisfaction that Rockgold, the parent company of NewSat Funder, has capacity to provide the required funding, but that is not to the point, where Rockgold assumes no obligation to do so. He also refers to the assets of Mr King and Mr Ching, but that has the difficulty that, as I noted above, they have also not committed their assets to support the funding arrangements.

  7. In confidential supplementary submissions, Mr Sulan also refers to the potential scale of the Companies’ business, and the possibility that its loss of business value or loss of opportunity is significant, if the claim in the Proceedings is successful. Mr Sulan refers to material that is confidential and subject to a claim for legal professional privilege as to the basis on which damages could be calculated, which indicates claims for damages which range from large amounts to very large amounts indeed. The weight to be given to those calculations is uncertain, because they assume the prospects of the proceedings, and Mr Sulan fairly accepts that they would need to be discounted as loss of opportunity claims. I will proceed on the basis that the Plaintiffs’ claim for damages is very large, although its prospects are uncertain. It is ultimately not necessary to seek to reach any more precise finding where, on the most optimistic view of the Plaintiffs’ case, the Funding Fee payable to NewSat Funder would be wholly disproportionate to the costs it incurrred; and, if the prospects of the proceedings do not extend beyond their being reasonably arguable, it has not been established that any settlement of them, or recovery from them, would bring about a benefit to creditors that is sufficient to support the SPL’s entry into the Funding Deed on these onerous terms.

  1. Mr Sulan also submits that the costs of conducting the proceedings will be substantial, and I accept that that is so, although I have noted above that they would likely not be larger than the costs funded by litigation funders in many representative proceedings. He then sets out a table of the potential claims, discounted so far as they reflect a loss of opportunity, then applying a set-off of the Secured Lenders’ debts, and deducting budgeted legal fees, the SPL’s fees and a modest return to priority creditors, before calculating the Funding Fee payable to NewSat Funder. A corrected version of that table was provided, by leave, after the completion of the hearing. As I noted above, the Funding Fee payable to NewSat Funder would, on the low end of that calculation, be very large and on the high end of that calculation would be enormous, leading to a return on NewSat Funders’ investment which is many times what would ordinarily be seen in funding arrangements.

  2. In oral submissions, Mr Sulan again submits that there is no real prospect of the Proceedings being funded or prosecuted if the SPL is not appointed. That submission has not been established, as a matter of fact; but, even if that were the case, it would reflect the Plaintiffs’ choice not to continue the proceedings on the basis that they could at an appropriate time seek a priority return under s 564 of the Act. It does not seem to me that the Court should proceed, in appointing a special purpose liquidator, on the basis that the mere prospect of a modest return to priority creditors, and a residual return to unsecured creditors if the case were to succeed, warrants the appointment of a special purpose liquidator who proposes to enter into a funding deed which will divert the substantial majority of proceeds from any recovery from unsecured creditors to an entity associated with shareholders who would have a lower priority in a winding up.

  3. Mr Rosewarne, with whom Ms Batrouney appears for the Secured Lenders, referred to Shangri-La at [84]ff and to Connock J’s observation that it would be difficult to envisage circumstances in which the power to appoint a special purpose liquidator would be exercised if the Court could not be satisfied that it would be just and of sufficient utility to the external administration to make the appointment. Mr Rosewarne also submitted, and I accept, that the principles relevant to approval of the proposed funding agreement would also be relevant to the present application, relying on Fitz Jersey at [92]-[93] and [120]-[124]. He noted that the proportionality of the Funding Fee and the extent of NewSat Funder’s control over the conduct of the Proceedings would be relevant considerations, referring to Shangri-La at [177]-[178]. Mr Rosewarne also submits that the capacity of NewSat Funder to fund the Proceedings is a relevant matter, and refers to Helberg v Dean-Willcox [2020] VSC 313 in that respect. Mr Rosewarne also points to the absence of evidence as to the financial position of NewSat Funder, beyond the fact that the latter was registered on 1 March 2022 and has $100 in paid up capital, and its sole director is a partner of the law firm representing the Plaintiffs in this application. Mr Rosewarne also points to the availability of other alternatives for the Plaintiffs to pursue the claims, including the derivative claim which they have now abandoned in the Proceedings, and to delays in the conduct of the Proceedings to date. It is not necessary to address those matters given the conclusions which I have reached on other grounds.

  4. By supplementary submissions, Mr Rosewarne in turn pointed to the question of Rockgold’s standing to bring the application as a creditor, which I have noted above; and the fact that Mr Arnautovic’s evidence was not directed to the capacity of NewSat Funder to fund the Proceedings, and that it was not to the point whether Rockgold could have done so, which I have addressed above. Mr Rosewarne also submits, and I accept, that cl 9 of the Funding Deed would potentially provide an inappropriate degree of control to NewSat Funder, inconsistent with Mr Arnautovic’s evidence that he would control the Proceedings, in providing that:

“The Funder will provide instructions to the solicitors (where required) in relation to factual matters and other matters relevant to the preparation of pleadings, evidence and discovery. The Funder will advise the liquidator of the instructions it provides to the Solicitors.”

  1. The Funding Deed then went further to provide for the SPL to follow the solicitors’ recommendation, in the event of a conflict between the SPL’s instructions to the solicitors and the funder’s instructions to the solicitors, inverting the usual and proper relationship between a client and its legal representatives, by which a client gives instructions which the solicitor follows, and then provided for a meeting between the SPL and NewSat Funder to resolve any conflict between them. However, I treat that matter as relevant to whether the Funding Deed would have been approved by the Court in its present form, to the extent that such approval was required under s 477 of the Act, rather than as relevant to the determination of this application.

  2. In summary, as I noted above, the sole identified purpose of the proposed appointment of the SPL is to permit him to pursue the Proceedings on the terms of the proposed Funding Deed with NewSat Funder. I recognise that the proposed SPL would need to bring, and foreshadowed bringing, an application for approval of that Funding Deed under s 477 of the Act, if he was appointed. However, the reason for his appointment was undermined by size of the proposed Funding Fee, where NewSat Funder has minimal assets; the advice as to prospects and financial modelling said to support the merit of the claims had not been exposed to third party funders who might offer less onerous terms than those offered by NewSat Funder; and the suggestion that the Proceedings would collapse unless the Court appointed the SPL on this basis, because NewSat Funder would not support fund them on any other basis, reflected NewSat Funder’s choice not to fund the Proceedings on a less onerous basis or on the basis that it could take priority against recoveries, in a proper case, by application to the Court under s 564 of the Act. I have concluded that the Court should not appoint the SPL on that basis and, where there is no other purpose served by the appointment of the SPL, he should not be appointed. Faced with that result, NewSat Funder and those associated with it may or may not take a different approach, either by proposing a funding fee that is within ordinary market expectations, with a cap linked to the costs actually incurred in conducting the proceedings, or by providing funding on the basis contemplated by s 564 of the Act. That decision will be a matter for them.

  3. For completeness, there may be a further difficulty with the order for the proposed SPL’s appointment which was sought on terms, to which the proposed SPL consented, that he only be entitled to make a claim for payment of his remuneration, costs, disbursements and expenses under s 556 of the Act from proceeds received by the Companies as a result of the Proceedings. I recognise that that term would preserve the Companies’ assets under control of the GPL. However, it may also have compromised the SPL’s independence in the conduct of the Proceedings, by incentivising him to settle the Proceedings rather than to conduct them to a final hearing, so as to reduce the uncertainty which would otherwise exist as to whether he would recover his remuneration, costs, disbursements and expenses. The parties made no submissions as to that matter and I do not need to decide it given the findings that I have reached on other grounds. I also note, for completeness, that the parties did not address the question whether NewSat Funder is required to have, or has, an Australian financial services licence.

Orders

  1. For these reasons, the Originating Process is dismissed. I direct the Plaintiffs to bring in a suppression and non-publication order to give effect to my finding in paragraph 20 above within 7 days. Ordinarily, the Secured Lenders who appeared under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW) would not have an expectation of recovering their costs of their appearance. However, I also reserve liberty for them to apply in respect of costs within 7 days.

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Decision last updated: 14 April 2022

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