Re Kevin Jacobsen Pty Ltd (in liq)

[2016] NSWSC 538

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Kevin Jacobsen Pty Limited (in liquidation) [2016] NSWSC 538
Hearing dates:	5 April 2016
Decision date:	29 April 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Stand over application to allow liquidators an opportunity to lead further evidence of any inquiries as to proposed assignee’s capacity to fund proceedings.
Catchwords:	CORPORATIONS — Winding up — Liquidators — Deed of assignment — Application for approval of deed of assignment under s 477(2B) of the Corporations Act 2001 (Cth) – where liquidators by way of deed assigned certain causes of action of company on basis that assignee would pay a percentage of recoveries upon successful litigation to the company – where there were no other alternatives available to liquidators that offered prospects of return to creditors – whether the Court should approve entry into deed – whether the Court should assess assignability of causes of action before granting approval – whether the Court should refuse approval given insufficiency of evidence as to assignee’s ability to prosecute proceedings to completion – whether assignment will result in vexatious and improper litigation – whether liquidators should have assessed merits of relevant claims prior to entry into deed in circumstances of unfunded liquidation – whether the Court should give approval nunc pro tunc where liquidators failed to obtain approval prior to entry into deed – whether leave should be granted under s 477(2B) of the Corporations Act 2001 (Cth).
Legislation Cited:	- Australian Securities and Investments Commission Act 2001 (Cth), ss 12GF, 12GM - Corporations Act 2001 (Cth), ss 477, 506, 545, 588FB, 1041I, 1322 - Trade Practices Act 1974 (Cth), ss 82, 87
Cases Cited:	- Anderson v McPherson (No 2) [2012] WASC 19 - Aquatic Air Pty Ltd v Siewert [2015] NSWSC 928 Bank of Melbourne Ltd v HPM Pty Ltd (in liq) (1997) 26 ACSR 110 - Australia and New Zealand Banking Group Ltd v Dzienciol (by his guardian ad litem Dzienciol) [2001] WASC 305 - Chamberlain v RG & H Investments Pty Ltd (No 2) [2009] FCA 1531; (2009) 76 ACSR 415 - Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 - Gerard Cassegrain & Co Pty Ltd [2013] NSWSC 257 - Hutchison v Hillcrest Litigation Services Ltd [2010] NSWSC 934 - Jones, Saker, Weaver and Stewart (liquidators), Re; Great Southern Ltd (in liq) (recs and mgrs apptd) [2012] FCA 807 - Leigh; Re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315 - Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168 - Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 - Re 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 669 - Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296 - Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; 16 ACLC 1320 - Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 1613 - Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 - Re FAI Film Distribution Pty Ltd [2014] NSWSC 1904 - Re Gerard Cassegrain & Co Pty Ltd (in liq) [2014] NSWSC 1292 - Re Harris Scarfe Ltd (in liq) [2007] SASC 209 - Re HIH Insurance Ltd [2004] NSWSC 5 - Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 78 ACSR 405 - Re SCW Pty Ltd [2013] NSWSC 578 - Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 - Trendtex Trading Corporation v Credit Suisse (1982) AC 679 - Tillett v Varnell Holdings Pty Ltd [2009] NSWSC 1040
Category:	Principal judgment
Parties:	John Sheahan & Ian Russell Lock as Joint and Several Liquidators of Kevin Jacobsen Pty Limited (in liquidation) (First Plaintiff) Kevin Jacobsen Pty Limited (in liquidation) (Second Plaintiff)
Representation:	Counsel: K.L. Andronos SC/A Kaufmann (Liquidators) R Scruby/P Sharp (Creditors – Time of My Life Pty Ltd and Zoulos Pty Ltd)   Solicitors: SRM Lawyers (Liquidators) CBP Lawyers (Creditors)
File Number(s):	2015/233001

Judgment

1. By Originating Process filed on 10 August 2015, the Plaintiffs, Mr John Sheahan and Mr Ian Lock as joint and several liquidators of Kevin Jacobsen Pty Ltd (in liq) (“KJPL”) seek an order under s 477(2B) of the Corporations Act 2001 (Cth) approving their entry into a deed of assignment of choses in action dated 23 June 2015 (“Deed of Assignment”) (as varied by further deeds dated 23 August and 14 December 2015) and also seek a declaration under s 1322(4)(a) of the Corporations Act that their entry into the Deed of Assignment, and the Deed of Assignment itself, are not invalid by reason of their failure to obtain prior approval required by s 477(2B) of the Corporations Act. The application was stood over on several occasions at the parties’ request between 24 August 2015, when the matter was first listed before me, and the hearing of the application on 5 April 2016. For the reasons indicated in my ex tempore judgment delivered on that date, I granted leave to Time of My Life Pty Ltd (“TOML”) and Zoulos Pty Limited (“Zoulos”), which are entities associated with Mr Colin Jacobsen, to be heard in this application.

The affidavit evidence and factual background

2. I should first refer to the terms of the relevant documents, the affidavit evidence and the factual background, which I have drawn from the affidavit evidence, before turning to the issues raised by the parties’ submissions. The application is supported by several affidavits of Mr Lock, one of the joint and several liquidators of KJPL, dated 3 August 2015, 23 August 2015 and 6 October 2015. TOML and Zoulos in turn relied on the affidavits of their solicitor, Mr Hedge, dated 24 September 2015 and 19 October 2015 and on a tender bundle of documents in opposition to the application.

3. The history of dealings in respect of KJPL is set out in the affidavit evidence and in the liquidators’ report to creditors dated 6 September 2012 (Lock 3.8.15, Annexure IRL3). In 2008, Allind Pty Ltd (“Allind”), a company associated with a third party, registered a fixed and floating charge over KJPL’s assets and undertakings as security for a loan made to it. Receivers and managers were appointed to KJPL under that charge in April 2009 and, in mid-July 2009, Allind registered a second fixed and floating charge over KJPL’s assets. Other entities also registered a further fixed and floating charge over KJPL’s assets in January 2010. In February 2010, receivers and managers were appointed to KJPL under the second Allind charge and, in March 2010, a receiver was appointed to KJPL under the third charge.

4. Until October 2010, KJPL and Zoulos each held 50% of the shares in TOML, and the relevant shareholdings were the subject of a shareholders deed. TOML and associated entities had interests in the rights to a stage musical “Dirty Dancing” which had at one point been attributed a substantial value by a director of the relevant subsidiaries associated with Mr Colin Jacobsen’s interests. In March 2010, Zoulos issued a default notice in respect of, inter alia, TOML, relying on insolvency events which were said to have arisen from the appointment of receivers to KJPL under the second Allind charge in February 2010 and under the third charge in March 2010. By that default notice Zoulos purported to exercise a right to purchase KJPL’s shares in, inter alia, TOML at a price set by an independent valuer. The liquidators’ report identified a question, which the liquidators did not resolve and which it is not necessary to resolve for the purposes of this application, whether the appointment of receivers under the second Allind charge in February 2010 in fact constituted a default event under the shareholders deed. Notification was subsequently given to the Australian Securities and Investments Commission that, on 15 October 2010, KJPL’s shareholding in TOML was transferred to Zoulos at a consideration of $1.00.

5. Messrs Sheahan and Lock were appointed joint and several administrators of KJPL on 3 March 2011 and, on 7 April 2011, Messrs Sheahan and Lock became its joint and several liquidators. The liquidators’ report to creditors dated 6 September 2012 indicated that KJPL had no readily realisable assets, liabilities potentially amounting to over $7 million and that:

“The only sources of recovery we have been able to identify are potential legal claims against Allind and [Zoulos] in relation to the circumstances in which KJPL’s shareholdings in three subsidiary companies were dealt with by those entities.”

That report in turn referred to potential uncommercial transaction claims under s 588FB of the Corporations Act in respect of dealings with the shares in TOML and other entities. Those claims are not the subject of the Deed of Assignment in issue in this application.

6. On 27 September 2012, a meeting of creditors authorised the liquidators to enter into a third party funding agreement to enable further investigation into the relevant causes of action. However, the liquidators were subsequently unable to obtain any litigation funding to investigate and pursue potential legal claims of KJPL. The minutes of that creditors’ meeting also indicate that the liquidators then had a limited understanding of the relevant claims, noting that:

“… the liquidators were not in a position to approach a funder with an identified cause of action. Here, the funder was being asked to fund investigations which might lead to a cause of action being identified, an inherently higher risk proposition for any funder.”

7. Mr Lock’s evidence is that, about May 2015, he and Mr Sheahan were approached by solicitors acting for Mr Kevin Jacobsen in respect of the sale or assignment of certain causes of action by KJPL against, inter alia, interests associated with Mr Colin Jacobsen (“KJPL Causes of Action”) and that (Lock 3.8.15 [13]):

“… Mr Sheahan and I formed the view that there were no further prospects of a return to creditors, save for any funds recovered through litigation of the KJPL Causes of Action. Accordingly, we considered as at 23 June 2015 (and remain of the view) that the assignment of the KJPL Causes of Action pursuant to the Deed of Assignment was (and is) in the best interest of creditors of [KJPL].”

8. By a further affidavit dated 23 August 2016 Mr Lock provided further information as to his then contact with Mr Kevin Jacobsen’s solicitors, including referring to a meeting in mid-June 2015 in which he was advised that Mr Jacobsen had “sorted out the funding to start the proceedings” (Lock 23.8.15 [5]). That advice did not provide any comfort that Mr Kevin Jacobsen had funding beyond the commencement of the proceedings or any detail of the relevant funding. Mr Lock also referred to a discussion with Mr Jacobsen’s solicitors that indicated that the “Dirty Dancing” musical had been successful in a number of countries and that (Lock 23.8.15 [9]):

“[If] successfully litigated, the KJPL Causes of Action could result in recoveries well in excess of $10 million, and could even be a significant multiple of that figure.”

It should be noted that, first, the qualification “if successfully litigated” is plainly a significant one and, second, the conversation to which Mr Lock refers does not explain the basis on which Mr Jacobsen, or his solicitors, had formed any view as to the likely recovery in the proceedings.

9. By the Deed of Assignment, KJPL purported to assign the KJPL Causes of Action to Mr Kevin Jacobsen. That Deed of Assignment recited that KJPL was the holder of shares in certain companies, including TOML and other entities and units in a trust. The Deed recited certain dealings between members of Mr Kevin Jacobsen’s family and members of Mr Colin Jacobsen’s family in 2009; that KJPL and members of Mr Kevin Jacobsen’s family entered into a series of agreements with Mr Colin Jacobsen and his family and Zoulos in about June 2009; referred to certain subsequent events; and noted that, according to Mr Kevin Jacobsen, the events in 2009 gave rise to KJPL having several claims against Mr Colin Jacobsen and his family and Zoulos, including causes of action for damages under certain statutory provisions, damages at common law, equitable compensation and damages for breach of contract.

10. Paragraphs 9 and 10 of the Deed of Assignment in turn recited that:

“9.   The liquidators of KJPL … consider that the KJPL Causes of Action may be available to the company or its liquidators including against Zoulos and its controllers, agents or related interests … including in relation to the [specified documents] and the transfer of the assets of KJPL.

10.   The liquidation of KJPL is currently without funds. The liquidators have undertaken investigations but have been unsuccessful in obtaining external funding to litigate the KJPL Causes of Action. Absent the assignment contemplated in this deed, the liquidators would propose to finalise the liquidation and seek [deregistration] of the company.”

11. Clause 11 of the Deed of Assignment (as later varied as set out below) provided that:

“11. The liquidators of KJPL hereby assign to Kevin Jacobsen, pursuant to section 477(2) of the Corporations Act 2001 (Cth), any and all property of the company comprising causes of action and any right, title or interest in causes of action, arising out of or connected with the matters referred to in the Recitals including (without limitation) in relation to the [specified documents] and the transfer of the assets of KJPL, unless any such causes of action are not capable of assignment, in which case only those causes of action that are capable of assignment shall be assigned, without warranty as to the nature and value of any such causes of action (including in relation to the KJPL Causes of Action).”

12. Clause 12 provided for the liquidators of KJPL, at Mr Kevin Jacobsen’s cost, to seek the Court’s approval under s 477(2B) of the Corporations Act for the assignment and contemplated that, following that application, the parties would enter into a comprehensive deed and, if the Court did not approve the assignment, the deed would be of no effect.

13. Clause 14 provided that, in consideration for the assignment, Mr Kevin Jacobsen agreed to:

“14.1   pay to KJPL five per cent (5%) of the gross recoveries made from, arising out of or in connection with any litigation he brings suing on any or all of the causes of action referred to in clause 11. The reference to recoveries is a reference to any judgment for damages or compensation including any settlement resulting in the payment of monies (other than in respect of reimbursement of assessed costs); and

14.2   indemnify KJPL and its liquidators for any expenses, costs or liabilities arising out of or in connection with any related litigation which relates to KJPL.”

14. Clause 15 provided that the liquidators agreed to make all books and records of KJPL and the liquidation available to Mr Kevin Jacobsen, subject to any statutory or Court ordered restrictions, and provided that the liquidators would, to the extent able, respond to subpoenas for the production of documents issued by or on behalf of Mr Kevin Jacobsen for documents in their possession without seeking to charge for their costs in respect of that production.

15. On 24 June 2015, after the Deed of Assignment was executed, Mr Kevin Jacobsen filed a Statement of Claim commencing proceedings in this Court (“Equity Division proceedings”), including in reliance on the KJPL Causes of Action. The Statement of Claim pleads that the Kevin Jacobsen family and the Colin Jacobsen family were in dispute in relation to matters concerning the affairs of, inter alia, TOML in April 2009 and refers to the appointment of receivers and managers by Allind and to proceedings commenced by Allind against Mr Kevin Jacobsen at that time. The Statement of Claim pleads an agreement in principle alleged to have been reached in May 2009 between Ms Amber Jacobsen on behalf of the Colin Jacobsen family and Zoulos on the one hand and the Kevin Jacobsen family and KJPL on the other and alleges the making of certain representations at that time; it pleads the entry into a heads of agreement dated 25 May 2009, and pleads the making of certain further representations including that documentation contemplated by the heads of agreement would be in accordance with that heads of agreement and the alleged representations; and pleads that some 113 documents subsequently executed on 25 and 26 June 2009 were executed on the basis of those representations. The Statement of Claim also pleads an agreement reached on the evening of 25 June 2009 that the shareholders agreement in respect of TOML would be amended to remove certain event of default provisions, and alleges a breach of that agreement. The Statement of Claim also pleads matters relating to subsequent transactions, including the appointment of receivers and managers to KJPL, Zoulos’ service of a default notice on KJPL and circumstances relating to the share transfers in, inter alia, TOML.

16. A range of claims are brought by Mr Kevin Jacobsen in reliance on these matters, including claims for misleading and deceptive conduct, unconscionable conduct, deceit and for breach of contract in respect of the alleged agreement to amend the event of default provisions. The Statement of Claim claims damages under ss 82 or 87 of the Trade Practices Act 1974 (Cth), s 1041I of the Corporations Act or ss 12GF or 12GM of the Australian Securities and Investments Commission Act 2001 (Cth), damages at common law, equitable compensation for unconscionable conduct and damages for breach of contract relating to specified matters.

17. The Deed of Assignment was subsequently amended by a Deed of Variation dated 23 August 2015 to exclude any provision for entry into the proposed comprehensive deed. By a second Deed of Variation dated 14 December 2015, KJPL and Mr Kevin Jacobsen further varied the Deed of Assignment by amending clause 11 to insert the additional words set out in italics in paragraph 11 above.

18. At a creditors’ meeting on 18 September 2015, KJPL’s creditors resolved to note their support for the application for retrospective court approval of the Deed of Assignment. I give limited weight to that resolution, where KJPL’s creditors comprise largely interests associated with Mr Kevin Jacobsen on the one hand and interests associated with Mr Colin Jacobsen on the other and, predictably enough, interests associated with Mr Kevin Jacobsen voted in favour of that resolution and interests associated with Mr Colin Jacobsen voted in opposition to it.

19. By letter dated 24 September 2015, the solicitors for TOML raised the question of the extent of inquiries made by the liquidators as to the prospects of the KJPL Causes of Action and the liquidators responded as follows (Ex R2, 14):

“1.   What investigations into the likely strength of the alleged causes of action proposed to be assigned to Mr Kevin Jacobsen have been undertaken?

We do not consider it appropriate to discuss with you what investigations we have made into the merits of the causes of action available to us and KJPL, bearing in mind that you also act for one or more of the proposed defendants. I confirm, however, that we consider it likely that a properly funded claim has good prospects of ultimately resulting in a significant recovery for KJPL and its creditors.

2.   Have the liquidators obtained the benefit of any legal advice in relation to those causes of action?

We do not propose to discuss with you what legal advice we have received in relation to the strength of possible causes of action.

3.   What view have the liquidators formed, if any, about the likely prospects of success of the alleged causes of action that are proposed to be assigned?

As noted above, we consider it likely that a properly funded claim has good prospects of ultimately resulting in a significant recovery for KJPL and its creditors.

4.   What view have the liquidators formed about the likelihood of any return actually being generated from the assigned causes of action and the amount of any such return?

As noted above, we consider it likely that a properly funded claim has good prospects of ultimately resulting in a significant recovery for KJPL and its creditors.”

20. That letter also raised arrangements as to payment of the liquidators’ unpaid remuneration and the existence of any separate indemnity to the liquidators, and the liquidators responded that they had no separate indemnity and their outstanding fees would be paid from any recovery pursuant to the Deed of Assignment. The letter also raised the question of Mr Kevin Jacobsen’s capacity to fund the Equity Division proceedings, and the liquidators responded as follows:

“6.   You are aware that Mr Kevin Jacobsen is a recently discharged bankrupt. Please advise us if, to your client’s knowledge, Mr Kevin Jacobsen has secured funding to prosecute the claims purportedly assigned to him and the basis of that funding.

It is our understanding that Mr Jacobsen has substantial financial backing but we are not privy to the details.”

The letter also addressed the question of securities registered on the Personal Property Securities Register against the assets of KJPL, to which I will refer below.

21. By a second letter dated 24 September 2015, the solicitors acting for TOML and Zoulos noted they had received the application for Court approval of KJPL’s entry into the Deed of Assignment and the evidence in support of that application. That letter referred to the fact that Mr Kevin Jacobsen had also previously brought other proceedings against Zoulos, including proceedings in the Federal Court of Australia which had been discontinued and were the subject of an unsatisfied costs order, a matter to which I will refer below. The letter doubted Mr Jacobsen’s resources to prosecute the claims proposed to be assigned to the point where a return was payable pursuant to cl 14.1 of the Deed of Assignment and denied the merit of those claims, without further elaboration of the basis of that denial. It went on to observe that (Ex R2, 82):

“Zoulos, however, wishes to bring finality to the years of litigation pursued unsuccessfully by Mr Kevin Jacobsen. To that end, and without admissions, Zoulos is prepared to offer the liquidators the sum of $60,000 (inclusive of any GST) in order to purchase a full release of all causes of action that KJPL may have against any one or more of [TOML], Zoulos, Colin Jacobsen, Amber Jacobsen, Dalys Jacobsen or Clayton Jacobsen (or any associated entity of any of them).”

22. By a letter dated 25 September 2015, the liquidators rejected Zoulos’ offer, noting that (Ex R2, 86):

“[T]he offer would not pay even a reasonable proportion of outstanding professional fees and would therefore provide no tangible benefit to the unsecured creditors of the Company.”

That letter also reiterated the liquidators’ belief that a properly funded claim had “good prospects of ultimately resulting in a significant recovery for KJPL and its creditors” (Ex R2, 87).

23. Mr Lock’s evidence is that (Lock 3.8.15 [6]):

“From Mr Sheahan’s and my investigations into the affairs of [KJPL] we consider that [KJPL] may have available to it various potential causes of action (KJPL Causes of Action), however substantial further investigation would be required in order to substantiate and prosecute such claims.”

Mr Lock’s evidence is also that he and Mr Sheahan considered that it would be uncommercial for the liquidators to pursue, or cause KJPL to pursue, the KJPL Causes of Action without external funding (Lock 3.8.15 [7]). I noted above that the liquidators have not obtained such funding. Mr Lock’s evidence is also that the liquidators had obtained only modest recoveries in the liquidation of KJPL since their appointment, that their fees in excess of $130,000 had been approved by creditors and had unapproved fees for work in progress (as at July 2015) in excess of $80,000, and that they would propose to finalise the liquidation, absent the assignment of the KJPL Causes of Action to Mr Jacobsen (Lock 3.8.15 [11]).

24. By his further affidavit dated 23 August 2016, Mr Lock also explained why the liquidators took the view that they did not have sufficient time to seek creditor approval prior to signing the Deed of Assignment, apparently by reason of limitation periods which were identified in oral submissions as relating to personal claims of Mr Jacobsen that were the subject of the Equity Division proceedings, rather than to the KJPL Causes of Action (T37). Mr Lock also noted that he anticipated that creditors associated with Mr Colin Jacobsen would oppose any resolution for approval, although, I interpolate, the passage of other resolutions by creditors’ meetings suggest that a resolution for approval may well have been passed at a creditors’ meeting had it been called. Mr Lock in turn set out the basis on which he considered that it was in the interests of KJPL’s liquidation to assign the KJPL Causes of Action to Mr Jacobsen, namely that (Lock 23.8.15 [10]):

“(a)   [KJPL] have been unable to obtain litigation funding in order to pursue the KJPL Causes of Action;

(b)   there would be no, or negligible, ongoing costs in the administration, once the KJPL Causes of Action were assigned;

(c)   if the KJPL Causes of Action were not assigned, I was intending to conclude the administration, and de-register [KJPL] without any distribution to creditors; and

(d)   if successfully litigated, the KJPL Causes of Action could result in a significant gross recovery, of which [KJPL] would be entitled to 5%.”

25. As I noted above, TOML and Zoulos rely on Mr Hedge’s first affidavit dated 24 September 2015 which refers to the family relationship between Mr Kevin Jacobsen and Mr Colin Jacobsen, the existence of prior proceedings between them, Mr Kevin Jacobsen’s previous bankruptcy and an unsatisfied order for costs made in favour of TOML and other entities associated with Mr Colin Jacobsen against Mr Kevin Jacobsen and his wife. Mr Hedge also refers to other proceedings in the Federal Court of Australia which, he contends, made similar allegations and sought similar relief to that claimed in the Statement of Claim in the Equity Division proceedings. Mr Hedge notes that the Federal Court proceedings were discontinued on 21 March 2011 and Mr Kevin Jacobsen was ordered to pay the costs of several parties including Zoulos and TOML on an indemnity basis; a subsequent order for payment of those costs was made in a substantial amount; and those costs have not been paid.

26. By his second affidavit dated 19 October 2015, Mr Hedge refers to correspondence with the liquidators raising various issues in respect of the assignment, to which I have referred above; aspects of the execution of the documentation in mid-2009, which are likely to be in issue in the Equity Division proceedings; judgments in respect of other proceedings between Mr Jacobsen and others; and to the offer made on behalf of Zoulos on 24 September 2015 in the amount of $60,000 (inclusive of any GST) to purchase a full release of all causes of action that KJPL may have against any one or more of TOML, Zoulos and certain other persons, to which I also referred above.

The applicable legal principles

27. Section 477(2B) of the Corporations Act provides that, except with the Court’s approval or the approval of a committee of inspection or a resolution of creditors, a liquidator must not enter into an agreement on a company’s behalf if the term of that agreement may end, or obligations of a party to the agreement may be discharged by performance, more than 3 months after entry into the agreement. It was common ground between the parties that s 477(2B) of the Corporations Act applies by reason of s 506(1A) of the Corporations Act in a creditors’ voluntary winding up. In Re Harris Scarfe Ltd (in liq) [2007] SASC 209, Debelle J appears to have proceeded on that basis without directly addressing that question and I assumed, without deciding, that such approval was required in that situation in Re 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 669 at [16]. I will proceed on the same basis here where it was common ground between the parties. On that basis, it seems to me that the liquidators were correct to recognise that the Court’s approval under s 477(2B) of the Corporations Act 2001 (Cth) was required in respect of the entry into the Deed of Assignment, because at least the obligations of the liquidators to that agreement in respect of the production of documents on subpoena issued by Mr Kevin Jacobsen would continue beyond the three month period specified in that section.

28. It was also common ground between the parties that s 477(2B) of the Corporations Act is not a freestanding power to enter into the Deed of Assignment, which must be authorised by one of the powers of a liquidator, arising under s 477(2) of the Corporations Act, as applicable to a liquidator in a voluntary winding up by s 506(1) of the Corporations Act. Mr Andronos, who appeared with Mr Kaufmann for the liquidators, made clear that the liquidators rely only on their power under s 477(2)(c) of the Corporations Act to sell or otherwise dispose of company property. Although s 477(2)(c) of the Corporations Act permits a liquidator to assign a company’s causes of action notwithstanding the law of champerty and maintenance, at least in New South Wales, that section does not permit the assignment of causes of action that are otherwise not assignable: Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168 at [70]–[72]; Aquatic Air Pty Ltd v Siewert [2015] NSWSC 928 at [87]. Mr Andronos also confirmed that the liquidators do not rely on the liquidators’ further power under s 477(2)(m) of the Corporations Act to do all other things as are necessary for winding up KJPL’s affairs and distributing its property. It is therefore not necessary to address the submissions made by Mr Scruby, who appears for TOML and Zoulos, as to the scope of s 477(2)(m) of the Corporations Act.

29. In Re HIH Insurance Ltd [2004] NSWSC 5 at [15], Barrett J in turn referred to the purposes of s 477(2B) of the Corporations Act, noting that:

“Although [ss 477(2A)–(2B) of the Corporations Act] deal with different aspects of a liquidator’s powers, both are concerned to ensure that the court exercises some oversight of the liquidator’s actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court’s assessment must be made in light of the purposes for which liquidators’ powers exist. One overriding purpose is to serve “the interests of those concerned in the winding up – here the creditors” (Re Spedley Securities Ltd (1992) 9 ACSR 83 per Giles J); the other is to do whatever needs to be done “for the proper realisation of the assets of the company” or to assist its winding up (Re G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 per Young J). The court does not concern itself with the commercial desirability of the transaction. As Giles J said in the Spedley Securities case (above):

The court pays regard to the commercial judgment of the liquidator. That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities (Australia) Ltd [1973] 2 NSWLR 207 at 231–2, the court is necessarily confined in attempting to second guess a 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.

Although this was said in relation to s 477(2A), I consider the statement to be equally applicable to s 477(2B). As Austin J observed in Re United Medical Protection Ltd [2003] NSWSC 237, the considerations arising under both provisions are “much the same”, although I would add that s 477(2B) focuses particular attention on the need to ensure that contractual provisions as to timing do not cut across the general expectation that winding up will proceed in as expeditious a fashion as circumstances allow: Re G A Listing & Maintenance Pty Ltd (above), Re CIC Insurance Ltd (2001) 38 ACSR 181.”

30. It was common ground between the parties that the Court should have regard to whether the liquidators’ judgment has been “infected by a lack of good faith or error of law or principle, or whether there are real or substantial grounds for doubting the prudence of [their] conduct” in respect of entry into the relevant agreement: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85–86; Re Gerard Cassegrain & Co Pty Ltd (in liq) [2014] NSWSC 1292 at [6]. The Court is not concerned, in granting approval to the Deed of Assignment, with matters of commercial judgment but is concerned to be satisfied that the entry into that agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator: Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 78 ACSR 405.

31. In Re FAI Film Distribution Pty Ltd [2014] NSWSC 1904 at [16]–[17], Brereton J in turn noted:

“The role of the court is to grant or deny approval to the liquidator’s proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator’s proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances for the liquidation, but satisfies itself that there is no error of law or grounds for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up.

Importantly, the court’s approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus the approval completes the liquidator’s power to enter into the transaction, but does not amount to the court approving the transaction itself …”.

32. His Honour also there noted (at [18]) that:

“Section 477(2B) is concerned with long term agreements which might protract the liquidation and has the effect that the liquidator cannot enter such agreements without the approval of the committee of inspection, the creditors, or of the court. Its rationale is that the interests and wishes of those affected, particularly creditors, should be highly influential in determining whether the liquidator should assume a contractual obligation which would interfere with the expeditious completion of the winding up [Re GA Listing and Maintenance Pty Limited (1994) 15 ACSR 308; Re CIC Insurance Ltd (provisional liquidator appointed) [2001] NSWSC 438; Re HIH Insurance Ltd, [15]]. Thus in considering giving approval under s 477(2B), the main consideration is the impact of the agreement on the duration of the liquidation and whether that is in all the circumstances reasonable in the interests of the administration [Re Opel Networks Pty Ltd [2013] NSWSC 1245; in the matter of Re One.Tel Ltd, [30]] …”.

The issues in respect of the Deed of Assignment

33. The liquidators’ reasoning in respect of the entry into the Deed of Assignment appears to have been straightforward, namely that it offered a prospect of a return to creditors which Zoulos’ offer did not. I should add that there is force in Mr Andronos’ submission that, in taking that view, the liquidators properly preferred creditors’ interests to their own, in proceeding with a proposal that has some prospect of a return for creditors in preference to Zoulos’ proposal which would have allowed some return against the costs which they had incurred but no return to creditors.

34. TOML and Zoulos in turn raised, and the liquidators addressed, numerous issues in submissions, which I will deal with in turn to the extent that it is necessary to do so, while recognising that there may be overlap between them. Broadly, TOML and Zoulos submit that the proposal to assign the KJPL Causes of Action to Mr Kevin Jacobsen is ill-advised and there are real and substantial grounds for doubting its prudence and, in particular, the prospect of its generating any return for creditors is purely speculative; the Deed of Assignment will prolong the liquidation and add to its expense; there has been no assessment of Mr Kevin Jacobsen’s capacity to fund the litigation and the indemnities under the Deed of Assignment; Mr Kevin Jacobsen is in a poor financial position; and that additional costs may be imposed upon KJPL as a result of the Equity Division proceedings and the Deed of Assignment. I address these and a range of other associated and subsidiary issues raised by TOML and Zoulos below.

The length and costs of the liquidation

35. TOML and Zoulos refer to the history of the liquidation, since Messrs Sheahan and Lock were appointed administrators and then liquidators of KJPL in 2011, which they characterise as lengthy and unproductive. That characterisation may well be accurate, but it does not seem to me to provide any reason that the Court should not permit a further extension of the liquidation, if it provides a prospect of a recovery which would otherwise not be available to creditors, by comparison with the certainty of an earlier conclusion of the liquidation without recovery by creditors of KJPL.

36. The liquidators recognise that the entry into the Deed of Assignment will likely extend the liquidation, where it would otherwise have been finalised without any distribution to creditors. It seems to me, however, that there is no detriment to creditors in that course, where an extended liquidation with a prospect of recovery to creditors is preferable to a shorter liquidation with no such prospect of recovery, and where the additional costs of an extended liquidation for KJPL and its creditors are likely to be limited. I have regard, in this respect, to the fact that the liquidators’ obligations under cl 15 of the Deed of Assignment in respect of the production of documents on a subpoena issued by Mr Jacobsen, and their waiver of costs in that respect, will have no immediate impact upon creditors. Those costs will, at least initially, be borne by the liquidators themselves and would only become relevant to creditors in circumstances that recoveries in the Equity Division proceedings and a consequential payment to KJPL under cl 14 of the Deed of Assignment are sufficiently substantial that a distribution to creditors might otherwise be made. Even in that situation, the impact of those costs is likely to be limited, where it appears that the number of documents involved is relatively small, at least by the standards of complex commercial litigation, and the costs of their production should be modest.

Assessment of the merit of Mr Jacobsen’s and KJPL’s claims

37. TOML and Zoulos point to several matters which they contend have not been investigated by the liquidators, either adequately or at all. They submit that the liquidators did not make an adequate assessment of the underlying legal merits of Mr Jacobsen’s personal claims and the KJPL Causes of Action, both of which they submit are relevant to the ultimate prospect that KJPL will obtain any ultimate benefit, by way of the consideration payable under cl 14 of the Deed of Assignment, to which I referred above.

38. The evidence does not indicate the content of any substantive assessment of these matters by the liquidators, although I referred in paragraph 19 above to their expression of some confidence in the claims in their response to correspondence from TOML’s solicitors. I do not accept that the liquidators were required to make such an assessment, at least in the circumstances of a disposal of complex causes of action in an unfunded liquidation. In Bank of Melbourne Ltd v HPM Pty Ltd (in liq) (1997) 26 ACSR 110, to which TOML and Zoulos referred, and the correctness of which they did not challenge in submissions, Lee J observed (at 112) (omitting citations) that

“A liquidator's power of sale under s 477(2)(c) is similar to that conferred on a trustee in bankruptcy, by ss 134(1)(a) and 135(1)(a) of the Bankruptcy Act 1966 (Cth), to dispose of the property of a bankrupt. It entitles a liquidator to sell a bare right of action to a stranger, whether for a cash payment or on terms that the stranger will pay to the company part of the proceeds of the litigation, provided only, that the right of action is "property" of the company in liquidation … Such an assignment, made under statutory power, will be exempt from the rules against champerty and maintenance …

In determining whether a liquidator should be directed to make an assignment of a cause of action, a court should consider whether the assignment would lead to vexatious or improper litigation. However, there is no obligation on either the Court or the liquidator to conduct an investigation of the likelihood of success of the proceeding, indeed it is quite impractical to do so in an application of this nature, and such a conclusion should only be drawn where it is clear and obvious in the circumstances that the action has no reasonable prospect of success …”

39. It seems to me that, consistent with that approach, the liquidators in an unfunded liquidation could not sensibly be required to undertake a detailed investigation of the legal merits of a claim, prior to assigning it to a third party for the best value that could reasonably be achieved for it, so as to obtain a prospect of a return for creditors. The contrary view would have the likely result, in many cases including this case, that such an assignment could not take place and such value could not be realised for creditors, because the lack of funding that prevented the liquidators from pursuing the cause of action in the first place would also prevent a full investigation of its legal or factual merits. In that situation, it seems to me that there is no error in a liquidator reasoning that a proposal that allows some prospect of a return for creditors is preferable to one that has no prospect of a return for creditors. I note, for completeness, that that result is consistent with s 545 of the Corporations Act which provides that a liquidator is not liable to incur any expense in relation to a winding up of a company unless there is sufficient available property, although I have not relied on that section in reaching that result where the parties did not address it in submissions.

40. I recognise that a higher level of inquiry has generally been required where a liquidator proposes himself or herself to conduct proceedings, with the aid of litigation funding, and both parties also referred to the principles applicable to the approval of a liquidator’s entry into a litigation funding agreement. In Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; 16 ACLC 1320, to which Mr Scruby referred, Mansfield J identified several matters which were applicable to the entry into a litigation funding agreement, to the extent that it amounted to a sale or disposition of property of the company for the purposes of s 477(2)(c) of the Act. His Honour there identified relevant considerations as including the nature and complexity of the cause of action; the amount of costs likely to be incurred in the conduct of the action and the extent to which the financier was to contribute to those costs; the extent to which the financier was to contribute to the defendant’s costs if the action was not successful, or to any security for costs; the extent to which the liquidator had canvassed other funding options; the level of the financier’s premium; the risks involved in the claim; and the liquidator’s consultation with the creditors of the company.

41. Those factors were applied by Austin J in Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296 at [28]–[29], in respect of approval of entry into a funding agreement under s 477(2B) of the Corporations Act and again in Leigh; Re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25], where his Honour identified relevant factors as including the liquidator's prospects of success; the interests of creditors other than the proposed defendant; possible oppression in bringing the proceedings; the nature and complexity of the cause of action; the extent to which the liquidator had canvassed other funding options; the level of the funder's premium; the liquidator's consultation with creditors; and the risks involved in the claim, including specified matters. Austin J also there noted (at [36]) that, although the court would not override a liquidator’s commercial judgment, there must be evidence that a commercial judgment has been made on the basis of appropriate advice. While I broadly accept that proposition, it seems to me that the appropriateness of the advice which a liquidator requires must be determined in the circumstances, having regard both to the complexity of the decision which he or she has to make, and having regard to the availability of funds to obtain such advice. In the present case, it seems to me that the liquidators did not require external advice in order to exercise a commercial judgment, where the question which they had to answer was ultimately a relatively straightforward one, given the limited options available to them, and where they were unfunded in the liquidation at the time a decision had to be made.

42. These factors have been applied in subsequent case law determining whether to approve litigation funding agreements: for example, Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24]; Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 at [17]ff; Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 at [12]ff; Jones, Saker, Weaver and Stewart (liquidators), Re; Great Southern Ltd (in liq) (recs and mgrs apptd) [2012] FCA 807 at [12]ff; and Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 1613 at [9]. Mr Andronos also referred to my summary of the relevant principles in Re Gerard Cassegrain & Co Pty Ltd(in liq) [2014] NSWSC 1292 at [6]ff as follows:

“The principles applicable to approval of funding agreements are well-established, and I have previously summarised them in respect of similar applications in Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 and in again in Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 1293 where I observed (at 127) that:

It is well-established that the Court is not concerned, in an application of this kind, with matters of commercial judgment but only to satisfy itself that the entry into the agreement is a proper exercise of power and not ill advised or improper on the Liquidator’s part, Re McGrath & Anor (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 78 ACSR 405; Re Gerard Cassegrain & Co Pty Ltd (in liq) above at [11]. Relevant factors were identified by Austin J in Re Leigh; AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315, and it is not necessary that I repeat them here. The factors which his Honour identified were in turn referred to by the Full Court of the Federal Court in Fortress Credit Corporation (Aust) II Pty Ltd v Fletcher [2011] FCAFC 89 at [24]; (2011) 85 ACSR 38; by Jacobson J in Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 117 at [14]and in Re Gerard Cassegrain & Co Pty Ltd (in liq)above at [12]. As Jacobson J noted in Pascoe; Re Matrix Group Ltd (in liq) above, the question for the Court is whether the Liquidator’s judgment has been infected by a lack of good faith or error of law or principle, or whether there are real or substantial grounds for doubting the prudence of his conduct in seeking to enter into the funding agreement.”

43. The cases concerning approval of litigation funding agreements seem to me to be distinguishable, where a liquidator itself conducting continuing litigation with the assistance of a funding agreement is quite different from the sale of an asset, namely a cause of action, to a third party who will then deal with it in its own right. Several of the factors identified in the cases concerning approval of funding agreements have their primary or only relevance to circumstances where a liquidator is itself conducting the proceedings. To the extent that those factors are relevant to an assignment of the KJPL Causes of Action in this case, the amount of costs likely to be incurred by KJPL in the conduct of the Equity Division proceedings is here minimal; the liquidators have canvassed other funding options, at least to the extent that they have sought to and failed to obtain third party litigation funding; and have considered and rejected an offer made by Zoulos, on the basis that they consider, rightly it seems to me, that it would deliver no benefit to creditors. Other matters, such as the level of the financier’s “premium” are of no relevance, where there is no financing arrangement involved in the sale of the causes of action. The risks involved in the claim are relevant, so far as they are a factor relevant to the recovery which might be made by KJPL and its creditors, if Mr Jacobsen were successful. However, as I will note below, that matter does not need to be assessed in the abstract, but only to the extent necessary to undertake a comparison with the other available offer in respect of the causes of action, namely the offer subsequently made by Zoulos.

44. In summary, it seems to me that a detailed assessment of the prospects of the KJPL Causes of Action is not necessary or material to the liquidators’ assessment of the desirability of the assignment from the perspective of creditors. First, there does not seem to me to be any room to suggest that Mr Kevin Jacobsen’s or KJPL’s claims would not have a prospect of success, if their factual basis is established. Neither the liquidators or the Court are presently in a position to assess whether the factual basis of the claims will be established at trial. The fact that Mr Jacobsen has not succeeded in or not pursued previous proceedings (in substantially different terms, as I will note below) does not demonstrate the claims as formulated in the Equity Division proceedings would fail, if properly funded, absent a previous determination of those claims on their merits. Second, as I noted above, Zoulos’ offer would not lead to a return to creditors and the Deed of Assignment at least offers a prospect of such a return. It seems to me that the liquidators could properly reason that the offer of a payment of $60,000 by Zoulos was of no benefit to creditors, where it would pay only a portion of the liquidators’ prior ranking costs and result in no recovery for creditors. In those circumstances, even a slim prospect of a substantially larger recovery by Mr Jacobsen, 5% of which would be capable of exceeding the liquidators’ costs, was preferable from the creditors’ perspective to the certainty of no recovery by them under the Zoulos offer.

Whether the KJPL Causes of Action are assignable

45. TOML and Zoulos contend that the Court must consider whether the causes of action sought to be assigned under the Deed are assignable, because the Court must consider the thing that it is asked to approve, and that requires identification of the causes of action the subject of the proposed assignment. I do not accept that submission. It is only necessary for the Court to address this matter so far as it would impact upon the assessment whether the order sought by liquidators under s 477(2B) of the Corporations Act should be made.

46. TOML and Zoulos submit that at least the statutory causes of action asserted by Mr Jacobsen in the Equity Division proceedings are incapable of assignment. TOML and Zoulos submit that claims under s 82 of the Trade Practices Act 1974 (Cth), claims under s 1041I of the Corporations Act and claims under ss 12GF and 12GM of the Australian Securities and Investment Commission Act are not assignable: Aquatic Air Pty Ltd v Siewert above at [87]. The liquidators do not contest the general accuracy of that proposition, although they submit that the relevant causes of action are assignable in the present circumstances. TOML and Zoulos accept, for the purposes of this application, that claims in deceit and claims for damages for breach of contract are assignable.

47. TOML and Zoulos also submit that claims for equitable compensation for unconscionable conduct are unknown to the law. It is not necessary to decide the correctness of that submission for the purposes of this application. However, I note that the question of the availability of equitable compensation for unconscionable conduct was left open by McLure J in Australia and New Zealand Banking Group Ltd v Dzienciol (by his guardian ad litem Dzienciol) [2001] WASC 305 at [413]. In Tillett v Varnell Holdings Pty Ltd [2009] NSWSC 1040 at [101], Brereton J observed that he would have ordered equitable compensation for unconscionable dealing, had it been established, where other remedies were not appropriate. In Anderson v McPherson (No 2) [2012] WASC 19 at [13], Edelman J also observed, in obiter, that compensation might be an available remedy for unconscionable dealing.

48. TOML and Zoulos also submit that there has been an error of law by the liquidators in the entry into the Deed of Assignment, so far as they may have assumed that the statutory causes of action were assignable. The Court might more readily draw that inference where the liquidators have not led evidence as to any legal analysis undertaken by them in respect of that issue. However, it seems to me that any such error is immaterial in the present circumstances, because any such error would ultimately not impugn the conclusion that the liquidators have reached for reasons that I note below. TOML and Zoulos also submit that the liquidators forming any view as to the appropriateness of accepting 5% of gross returns was done on a false basis, namely that all of the KJPL Causes of Action were assigned, or were assignable. It does not seem to me that the question of which causes of action were assignable had any impact on the appropriateness of accepting 5% of gross returns, for reasons that I also indicate below.

49. The liquidators initially submitted, in their outline of opening submissions, that the question whether any specific causes of action that may have accrued to KJPL are capable of assignment to Mr Jacobsen need not be determined in this application, although they altered that position and sought to have that matter determined in the course of oral submissions. Mr Andronos, relying on Trendtex Trading Corporation v Credit Suisse (1982) AC 679 at 702 (“Trendtex”), submitted that proprietary and equitable causes of action were assignable to Mr Jacobsen and that the better view was that non-proprietary, including statutory claims, were capable of assignment to Mr Jacobsen on the basis that he had a genuine commercial interest in the enforcement of the KJPL Causes of Action. Mr Andronos also fairly acknowledged that the application of Trendtex above in Australia may be uncertain, referring to Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [390]–[403] and to Aquatic Air Pty Ltd v Siewert above at [87].

50. I do not consider that it is either necessary or appropriate to determine the question of assignability of the KJPL Causes of Action in this application. It is not necessary to do so in order to assess the validity of the assignment because TOML and Zoulos accept that at least two causes of action, in deceit and for breach of contract, are assignable, and the Deed of Assignment only seeks to assign the statutory and other causes of action to the extent they are properly assignable. It is also not necessary to determine that question to assess the prudence of the liquidators’ conduct because, even if the statutory causes of action were not assignable, that would not have any impact upon the assessment of whether the entry into the Deed of Assignment was in the creditors’ interests, on the approach which the liquidators have taken. Notwithstanding the arguments put by TOML and Zoulos to the contrary, it seems to me that the amount payable to KJPL under the Deed of Assignment is 5% of the ultimate amount of any recovery by Mr Jacobsen in the Equity Division proceedings, not 5% of the amount recoverable on the KJPL Causes of Action as assigned by KJPL to Mr Kevin Jacobsen. I reach that conclusion, first, because it seems to me to reflect the proper construction of cl 14.1 of the Deed of Assignment, where the words “with any litigation he brings suing on any or all of” in that clause would be superfluous if the clause were to operate in the manner for which TOML and Zoulos contend. It also seems to me that that reading of the clause is consistent with the commercial circumstances in which the Deed of Assignment was executed, when neither Mr Jacobsen nor the liquidators would likely have objectively intended that the parties later have to engage in a complex exercise of dissecting the recoveries referable to potentially overlapping personal causes of action from those referable to the KJPL Causes of Action.

51. On that view, it does not matter whether any or all of the KJPL Causes of Action are assignable, because KJPL is entitled to 5% of the recoveries made by Mr Jacobsen, where the litigation he has commenced in fact “su[ed] on any or all of” the KJPL Causes of Action, irrespective of whether those causes of action are ultimately assignable or successful. I recognise that TOML and Zoulos also submit that the unassignability of the statutory causes of action makes the prospect of any return to creditors, if the deed is approved, more remote. That submission partly turns on a construction of the Deed of Assignment that treats the amount payable by Mr Jacobsen, on success in the proceedings, as referable only to the KJPL Causes of Action. I do not accept that submission for the reasons noted above. Whether the unassignability of the statutory causes of action would reduce total potential recoveries, and therefore the potential recovery for creditors, would also depend on the extent of overlap between Mr Jacobsen’s personal causes of action and the assigned statutory causes of action, which raises issues of factual complexity that cannot be addressed on the evidence led in this application. In any event, where KJPL will have a right to a fixed share of any recoveries made by Mr Jacobsen, the prospect of recovery for creditors under the Deed of Assignment, either because the statutory causes of action are assignable in whole or in part, or because Mr Kevin Jacobsen’s personal causes of action succeed, is still more advantageous to creditors than Zoulos’ proposal which would not deliver a recovery beyond part of the liquidators’ costs.

52. I have also not neglected the fact that, if Mr Jacobsen obtains a substantial recovery in the Equity Division proceedings, it would still be necessary for the liquidators to enforce their rights under cl 14.1 of the Deed of Assignment, if Mr Jacobsen were not to comply with his obligations under that clause. However, it seems to me that there is no reason to think that they could not or would not do so, if that result were to arise, funding such an action in their personal capacity or by litigation funding.

53. It is also not desirable to determine the assignability of the KJPL Causes of Action in this application, because the evidence does not establish a proper factual basis for a determination whether Mr Jacobsen in fact has a genuine and substantial or genuine commercial interest in the enforcement of the KJPL Causes of Action, and any determination as to the application of the Trendtex principles would therefore not be made on a proper factual basis.

The issues in and conduct of the Equity Division proceedings

54. TOML and Zoulos also submit that Mr Kevin Jacobsen and his family interests were represented by solicitors in the transactions which are the subject of dispute in the Equity Division proceedings. It seems to me that that is an issue which relates to the ultimate prospects of success of those proceedings. Even if that matter reduces the prospects of success of the Equity Division proceedings, it does not seem to me that it falsifies the liquidators’ reasoning that a prospect of recovery of a substantial amount, even a limited prospect of recovery of a substantial amount, is preferable to the certainty of no recovery for creditors under Zoulos’ subsequent offer to purchase a release from the claims.

54. TOML and Zoulos also foreshadow that Mr Colin Jacobsen and the other defendants in the Equity Division proceedings will apply to have the claim struck out or stayed pending payment of costs by Mr Jacobsen in respect of other proceedings and will seek security for costs by Mr Jacobsen. Those steps would place challenges in the path of the successful completion of the Equity Division proceedings and, if successful, may have the result that those proceedings are ultimately unable to proceed, and that may in turn have the result that there is no recovery for creditors under the Deed of Assignment. However, it again does not seem to me that those matters falsify the liquidators’ reasoning that the prospect of a return to creditors under the Deed of Assignment is preferable to no such prospect under Zoulos’ subsequent offer to purchase a release from the claims.

55. TOML and Zoulos also undertake a somewhat complex analysis of the fact that an alternate claim is advanced by Mr Jacobsen in the Equity Division proceedings, in the alternative to his claim as assignee of KJPL, on behalf of Amadeus Pty Ltd, as successor to KJPL as trustee for the Pan Family Trust. TOML and Zoulos submit that it is in Mr Kevin Jacobsen’s interests to assert claims on behalf of Amadeus and its beneficiaries in preference to claims on behalf of KJPL. They also submit that there is a conflict of interest between KJPL and Mr Jacobsen, so far as he seeks to assert claims on behalf of beneficiaries of the Pan Family Trust and Amadeus Pty Ltd. I do not accept these submissions, which each turn on the premise that any recovery under cl 14.1 of the Deed of Assignment is limited to the assigned causes of action, rather than being 5% of the proceeds of the Equity Division proceedings. I have not accepted that submission above. There is also no present prospect of a recovery by anyone other than Mr Kevin Jacobsen in the Equity Division proceedings which would fall outside the scope of that clause, since Mr Kevin Jacobsen is the only plaintiff in the Equity Division proceedings.

Mr Kevin Jacobsen’s impecuniosity and his capacity to procure funding for the Equity Division proceedings

57. TOML and Zoulos point out that Mr Jacobsen was formerly bankrupt and it is common ground that he is presently impecunious. TOML and Zoulos submit that the liquidators have failed to assess Mr Kevin Jacobsen’s ability to fund the Equity Division proceedings to completion. The evidence to which I have referred above suggests that the liquidators had made limited inquiries as to this matter, beyond a conversation with Mr Kevin Jacobsen’s solicitor who had referred to his ability to fund the commencement of the proceedings. It does not seem to me that that evidence is sufficient to establish that the liquidators have made adequate inquiry into Mr Kevin Jacobsen’s ability to fund the proceedings to completion, from his own or third party resources.

58. The liquidators respond that that matter is not of apparent relevance, where the liquidators consider that the assignment of the KJPL Causes of Action could result in a return to creditors that would otherwise not be available. I accept that, if the prospects of prosecution of the Equity Division proceedings to a successful conclusion and a substantial recovery in them were reduced (rather than excluded) by Mr Jacobsen’s impecuniosity, the liquidators could still reasonably consider a slim prospect of a substantial recovery to be more favourable for creditors than the certainty of no recovery to creditors from the Zoulos proposal. However, if Mr Kevin Jacobsen has no real prospect of procuring funding for the proceedings to a successful conclusion, the Deed of Assignment would have no real benefit to creditors. It seems to me that Mr Jacobsen’s ability to procure funding for the Equity Division proceedings (which he cannot fund himself) is material to the liquidators’ decision and a matter that could readily be identified by further inquiry.

59. It does not, however, follow that the Court should dismiss the application for approval under s 477(2B) of the Corporations Act by reason of the limited inquiry which the liquidators have to date made as to this matter. The liquidators seek approval for the assignment on a nunc pro tunc basis, and it seems to me that the Court may have regard to developments subsequent to the assignment in determining that application. It does not seem to me that the interests of the just, quick and cheap resolution of this application would be promoted by dismissing it, by reason of a gap in the liquidators’ inquiries or the evidence, if that gap could readily be filled by an inquiry or further evidence, particularly where the liquidators would then be free to bring a new application in which matters addressed in this application might again need to be addressed. Had this application been heard ex parte in the usual way, I would have allowed the liquidators an opportunity to make further inquiry and lead further evidence as to this issue before finally determining the application, and there is no reason to take a different approach because TOML and Zoulos have been afforded an opportunity to be heard in the application. I will therefore stand over the application for a short period to afford the liquidators an opportunity to lead further evidence as to this issue.

Claims of secured creditors

60. TOML and Zoulos also submit that two holders of securities registered on the Personal Property Securities Register have not consented to the Deed of Assignment. The liquidators respond that one of those entities has been deregistered and the other has not provided evidence that it is currently a creditor of KJPL. It does not seem to me that the existence of those securities impugn the liquidators’ decision in those circumstances.

Whether the assignment will permit relitigation of earlier proceedings

61. TOML and Zoulos also submit that the assignment would permit Mr Kevin Jacobsen to relitigate claims that are substantially similar to claims he has already attempted to litigate, and that question requires more detailed consideration. Mr Hedge’s affidavit dated 24 September 2015, on which TOML and Zoulos relies, refers (Hedge 24.9.15 [10]–[13]) to other proceedings prior to Mr Jacobsen’s bankruptcy arising from the issue of statutory demands to various entities including TOML. It does not seem to me that matter establishes that any aspect of the Equity Division proceedings are oppressive, both because it is not founded on the issue of such statutory demands, and because Mr Hedge’s affidavit provides no further information to identify the matters in issue in those earlier proceedings. Mr Hedge notes that costs orders were made in those proceedings, including one in favour of TOML which is unpaid. That does not seem to me to establish oppression where the defendants in the Equity Division proceedings are natural persons and Zoulos and not, so far as to the evidence goes, the parties to the earlier proceedings.

62. Mr Hedge also refers to proceedings in the Federal Court of Australia brought against three of the defendants in the Equity Division proceedings and other persons, which he says were “not in precisely identical form” to the Equity Division proceedings. He notes that the Federal Court proceedings were discontinued by Mr Kevin Jacobsen and a costs order was made against Mr Jacobsen, partly on an indemnity basis, which has not been paid. The characterisation of the Federal Court proceedings as being “not in precisely identical form” (Hedge 24.9.15 [18]) somewhat understates the extent of the differences between the two proceedings. The defendants to the two proceedings, as I noted above, overlap but are not identical. The Amended Statement of Claim in the Federal Court proceedings commenced with some 25 pages and 111 paragraphs of allegations relating to events from the 1950s onward, at least some of which had difficulties in form, which are not repeated in the Equity Division proceedings, and which seemed to be directed to establishing an allegation of a partnership dating back to the 1950s which is not made in the Equity Division proceedings. Paragraphs 112ff of the Amended Statement of Claim in the Federal Court proceedings refer to the Allind transaction, to which reference is made in significantly different form in the Equity Division proceedings. Paragraphs 135ff of the Amended Statement of Claim in the Federal Court proceedings plead aspects of the documents executed in mid-2009 which are also attacked in the Equity Division proceedings, but the pleading is in different form and significantly less precise than that in the Equity Division proceedings. The relief sought in the Amended Application in the Federal Court proceedings is also significantly different from that sought in the Equity Division proceedings.

63. There may be a question whether the partial overlap between some of the defendants and some of the subject matter between the Federal Court proceedings and the Equity Division proceedings is such that the Court could properly stay the Equity Division proceedings until the costs of the Federal Court proceedings are paid by Mr Kevin Jacobsen. However, it seems to me that that partial overlap is not sufficient to have the result that the commencement or conduct of the Equity Division proceedings is either vexatious or improper, for the purposes of determining whether to approve the liquidators’ entry into the Deed of Assignment under s 477(2B) of the Corporations Act.

64. In his second affidavit dated 19 October 2015, Mr Hedge also referred to proceedings brought by Mr Kevin Jacobsen and his associates seeking to wind up TOML and to other proceedings brought by another entity, which is said to be controlled by persons associated with Mr Kevin Jacobsen, against TOML. However, TOML is not a defendant in the Equity Division proceedings which do not seek winding up orders. It also does not seem to me that these matters indicate that the commencement or conduct of the Equity Division proceedings are either vexatious or improper.

Other issues raised by TOML and Zoulos

65. TOML and Zoulos also submit that there is no rational basis for the adoption of a 5% figure as the return to KJPL under the Deed of Assignment. I do not accept that submission. It does not seem to me that the liquidators were in a position to undertake an abstract analysis of the proportion of gross proceeds of the litigation which they ought accept, where a single offer had been made by Mr Kevin Jacobsen and there was no suggestion that either Mr Kevin Jacobsen or any third party would make a more favourable offer. It seems to me that, in the relevant circumstances, the liquidators were faced with a decision whether to accept what was then the only offer available to them, that made by Mr Kevin Jacobsen, and could reasonably accept it where it was preferable to terminating the winding up without a return to creditors. It also seems to me that that offer remains preferable, notwithstanding the later offer made by Zoulos, where it provides a prospect of a return to creditors that Zoulos’ later offer does not.

66. Mr Scruby also submits that the liquidators are proposing to dispose of causes of action the nature and value of which they have not assessed, which have not been the subject of valuation advice, and that the proposal to dispose of them has not been the subject of any competitive tender process. It seems to me that the liquidators are in a strong position to assess the value of those causes of action, where they have received offers to acquire them from Mr Kevin Jacobsen and to extinguish them from Zoulos. Notably, Zoulos has not increased its offer from the amount of $60,000 which it offered to obtain a release of those rights after the creditors’ meeting that supported this application. It seems to me that Mr Scruby’s submission that it might do so, if the Deed of Assignment were not approved and an auction process were now adopted, should be given little weight for that reason. No doubt, if the assignment of the rights to Mr Kevin Jacobsen is not approved, Zoulos might increase its existing offer as to the price to be paid to release the claims against it, TOML and the other persons referred to above, just as it might also reduce that offer. It seems to me that there is no reason that the Court should substitute its judgment for the liquidators’ commercial judgment as to those possibilities.

67. TOML and Zoulos also submit that the proposed assignment is unfair as between creditors because it “effectively renders Kevin Jacobsen and his associates immune from any claims which could have been brought by KJPL”. In particular, Mr Scruby submits that the effect of cl 11 of the Deed of Assignment is to assign to Mr Jacobsen any causes of action that KJPL may have against him and his related interests as a result of the matters referred to in the Deed of Assignment, and that aspect of the proposal is unfair as between creditors and demonstrates that it is “ill advised”. As Mr Andronos points out in oral submissions (T34), there would be little commercial justification for KJPL to pursue proceedings against Mr Kevin Jacobsen, whatever their merit, given that it is common ground that he personally is impecunious. Mr Andronos also submits that, where only Mr Kevin Jacobsen is prepared to pursue the Equity Division proceedings, so as to generate a return (or, I interpolate, a prospect of a return) for creditors, then the creditors are better off with that proposal even if its cost includes abandoning any claim against Mr Jacobsen.

68. I do not accept TOML’s and Zoulos’ submission that there is unfairness as between creditors in this respect. Where one party to proceedings is a potential assignee of cause(s) of action and another party to the proceeding is a potential target of the cause(s) of action, then the assignment of the company’s causes of action to one party will, in a practical sense, typically reduce the prospect of proceedings against the assignee and promote the likelihood that the assignee will bring proceedings in the company’s name against the other party. That would have been the likely result, for example, of the tender process for the causes of action considered by the Court in Re SCW Pty Ltd [2013] NSWSC 578, so far as a successful tenderer would likely not bring a claim against itself. In that situation, it seems to me that a liquidator should be concerned to maximise the prospects of recovery by creditors and the result that action is brought against one or other party is simply a consequence of its doing so. It also seems to me that there is no unfairness in the target of such proceedings of being exposed to them, where that results from a step taken by the liquidator to maximise the prospects of the recovery for creditors, particularly if (as here) that target has made a less attractive bid for the rights than the party that acquired them.

69. TOML and Zoulos also point out, with substantial force, that it is unlikely that the indemnity under cl 14.2 given by Mr Jacobsen to KJPL and its liquidators for any expenses, costs or liabilities arising out of or in connection with any related litigation is of any value, where it is common ground that Mr Jacobsen is impecunious. While I accept that submission, it does not seem to me to undermine the liquidators’ decision. So far as a claim is made against the liquidators personally, it is the liquidators’ commercial risk as to whether that indemnity will be valuable. So far as a claim may be made against KJPL, it is presently an entity in liquidation with a very substantial deficiency of assets against liabilities, so the practical likelihood of such a claim may be limited; the Court would first have to be persuaded that leave should be granted to pursue such a claim; and such a claim would presumably have little practical impact on creditors who will receive no recovery from the liquidation, other than by reason of the Deed of Assignment and any recovery by Mr Kevin Jacobsen. That indemnity, of course, would come to have value if Mr Kevin Jacobsen were successful in the Equity Division proceedings, to such an extent as to make substantial recoveries, and was no longer impecunious. TOML also submits that cl 15 of the Deed imposes obligations on the liquidators, which are likely to lead to the incurring of additional expense in the liquidation. As I noted above, those costs will presently be borne by the liquidators personally, and the only circumstance where that would be relevant to creditors would be if Mr Jacobsen has in fact made a recovery in the Equity Division proceedings, such that a distribution to creditors might otherwise be paid, and the indemnity would then have potential value.

70. TOML and Zoulos also contend that the effect of the assignment would have the result that the litigation against the interests associated with Mr Colin Jacobsen would be oppressive, so far as they may be deprived of the opportunity to seek security for costs which would be available, had the Equity Division proceedings been brought by KJPL. I do not accept that submission. If security for costs is properly to be ordered against Mr Jacobsen, the judge that hears the Equity Division proceedings may make such an order, and it is not to the point, so far as the interests of creditors are concerned, for TOML or Zoulos to complain that Mr Kevin Jacobsen is a natural person rather than a company.

71. TOML and Zoulos also complain that cl 15 of the Deed will cause the liquidators to assist Mr Jacobsen but not other creditors (by which they presumably mean, TOML, Zoulos and interests associated with Mr Colin Jacobsen). That matter is consequential on the acceptance of Mr Kevin Jacobsen’s offer to acquire the rights which, as noted above, was more favourable to creditors than the offer subsequently made by Zoulos. It does not seem to me that Zoulos has reason to complain of that consequence, where it could have made a more substantial offer to the liquidators at any time up to the point of the hearing before me.

72. Mr Scruby also pointed out, in oral submissions, that the Deed of Assignment did not require Mr Kevin Jacobsen to prosecute KJPL’s Causes of Action. That matter would be adverse to the prospect of recovery under the Deed of Assignment, if the amount payable was limited to 5% of KJPL’s Causes of Action, as distinct from 5% of the gross proceeds of the Equity Division proceedings. However, the prospects of recovery of KJPL do not depend upon whether Mr Jacobsen pursues the KJPL Causes of Action, where the proper construction of cl 14 of the Deed of Assignment extends to 5% of the gross proceeds of the Equity Division proceedings and not only 5% of the proceeds of KJPL’s Causes of Action. It is unlikely that Mr Kevin Jacobsen would not pursue the proceedings generally, if properly funded to do so, given the efforts that he appears to have devoted to their preparation to date.

Recoverability of a judgment against the defendants

73. In oral submissions, Mr Scruby also raised the possibility that a judgment, at least of the magnitude foreshadowed by Mr Kevin Jacobsen, could not be enforced against the defendants in the proceedings brought by Mr Jacobsen, because they would not have sufficient substance to meet it. I accept that that is a relevant consideration, so far as the Deed of Assignment provides for KJPL to share in such a recovery. However, TOML and Zoulos led no evidence of substance as to their financial position, or that of their principals and associates, and I should infer that any evidence which they could have led in that respect would not have assisted them. Quite apart from that matter, the recoverability of any judgment can be treated, for present purposes, as an inherent risk of the proceedings and does not undermine the liquidators’ reasoning that a prospect of a substantial recovery, which would allow a return to creditors, is more favourable to creditors’ interests than the absence of such a recovery if they had accepted Zoulos’ offer for a payment of $60,000 to release the relevant causes of action.

The application for nunc pro tunc approval

74. Zoulos submits that the liquidators have not adequately explained why they “did not comply” with s 477(2B) of the Corporations Act. TOML and Zoulos also submit that a failure by the liquidators to explain not obtaining approval under s 477(2B) of the Act, prior to entry into the Deed of Assignment, is itself sufficient reason to withhold approval for entry into the Deed nunc pro tunc. I do not accept that submission. Mr Lock offers at least some explanation for the course of action which was taken, notwithstanding that TOML and Zoulos criticise its accuracy, and it seems to me that the time pressures affecting the liquidators at the time of entry into the Deed of Assignment provides some explanation for their failure to seek approval prior to the assignment being made. Second, and more fundamentally, the jurisdiction under s 477(2B) of the Corporations Act is directed to promoting the interests of the liquidation and the creditors, not the exercise of disciplinary functions over liquidators who delay in seeking approvals under the section. Even if the liquidators not having sought approval prior to the assignment were open to criticism, it does not follow that creditors should be deprived of the potential benefit of an assignment which is otherwise in their interests.

75. The case law indicates that retrospective approval of the Deed of Assignment is possible, either nunc pro tunc or under s 1322(4)(d) of the Corporations Act or on both bases: Chamberlain v RG & H Investments Pty Ltd (No 2) [2009] FCA 1531; (2009) 76 ACSR 415 at [24]. Where the Court can give retrospective approval to such an agreement under s 477(2B) of the Corporations Act, it seems to me that a further order under s 1322(4)(d) of the Corporations Act is not necessary: Hutchison v Hillcrest Litigation Services Ltd [2010] NSWSC 934; Re Colorado Products Pty Ltd (in prov liq) above at [10].

Conclusion

76. Notwithstanding the subtlety and range of the arguments that TOML and Zoulos raised in opposition to the application, I am satisfied that, other than in respect of the need for further inquiries and evidence to confirm Mr Jacobsen’s ability to procure funding for the proceedings, the liquidators properly exercised their commercial judgment to enter into the Deed of Assignment, and that Deed of Assignment and any consequential lengthening of the liquidation are, subject to the above matter, in creditors’ interests. The liquidators should be afforded a brief opportunity to make those further inquiries and lead that further evidence. I would expect that that issue should be capable of determination on the papers, rather than the parties incurring the costs of a further oral hearing, and I will make orders to facilitate that process. Depending on the outcome of those inquiries and that evidence, the Court may well approve the entry into the Deed of Assignment, nunc pro tunc, under s 477(2B) of the Corporations Act. If such an order is made, it would not be necessary to determine the liquidators’ further application under s 1322(4) of the Corporations Act.

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Decision last updated: 02 May 2016