Re Knightsbridge Managed Funds Ltd (in Liq)
[2007] WASC 306
•26 OCTOBER 2007
RE KNIGHTSBRIDGE MANAGED FUNDS LTD (IN LIQ); EX PARTE CARRELLO [2007] WASC 306
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2007] WASC 306 | |
| 17/12/2007 | |||
| Case No: | COR:151/2007 | 26 OCTOBER 2007 | |
| Coram: | EM HEENAN J | 26/10/07 | |
| 20 | Judgment Part: | 1 of 1 | |
| Result: | Leave to enter proposed LFA agreement subject to conditions | ||
| A | |||
| PDF Version |
| Parties: | GIOVANNI MAURIZIO CARRELLO |
Catchwords: | Corporations Liquidation Corporations Act 2001 (Cth) Application by liquidator for leave to enter into obligation where performance may take more than three months Trust obligations Separation of trust assets Managed investment scheme under court-appointed winding up Leave to apply under liberty to apply in original order Consolidation of proceedings Proposal to conduct litigation Litigation funding agreement (LFA) Potential effect on beneficiaries Relevant considerations Approval on conditions requiring notification to beneficiaries Undertaking by litigation funder to accept any variations to LFA which may later be ordered by the court |
Legislation: | Corporations Act 2001 (Cth) Trustees Act 1962 (WA) |
Case References: | Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 Australian Securities Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311 Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296 Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583 Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394 Re Enhill Pty Ltd [1983] 1 VR 561 Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 Re Suco Gold Pty Ltd (1983) 33 SASR 99 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
GIOVANNI MAURIZIO CARRELLO
Plaintiff
Catchwords:
Corporations - Liquidation - Corporations Act 2001 (Cth) - Application by liquidator for leave to enter into obligation where performance may take more than three months - Trust obligations - Separation of trust assets - Managed investment scheme under court-appointed winding up - Leave to apply under liberty to apply in original order - Consolidation of proceedings - Proposal to conduct litigation - Litigation funding agreement (LFA) - Potential effect on beneficiaries - Relevant considerations - Approval on conditions requiring notification to beneficiaries - Undertaking by litigation funder to accept any variations to LFA which may later be ordered by the court
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Legislation:
Corporations Act 2001 (Cth)
Trustees Act 1962 (WA)
Result:
Leave to enter proposed LFA agreement subject to conditions
Category: A
Representation:
Counsel:
Plaintiff : Mr K L Christensen
Solicitors:
Plaintiff : Christensen Vaughan
Case(s) referred to in judgment(s):
Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339
Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357
Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311
Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296
Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583
Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394
Re Enhill Pty Ltd [1983] 1 VR 561
Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308
Re Suco Gold Pty Ltd (1983) 33 SASR 99
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1 EM HEENAN J: This ex parte originating application, brought by Giovanni Maurizio Carrello, the duly appointed liquidator of Knightsbridge Managed Funds Ltd and Knightsbridge Finance Pty Ltd (the Knightsbridge companies), in effect sought approval of a litigation funding agreement. The application, as made, was pursuant to s 477(2B) of the Corporations Act 2001 (Cth), which provides:
Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a charge) if:
(a) without limiting paragraph (b), the term of the agreement may end; or
(b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;
more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.
2 The proposed agreement in respect of which the application was brought is a litigation funding agreement (LFA), between the liquidator of the Knightsbridge companies and Hillcrest Litigation Services Ltd (Hillcrest) This agreement is designed to assist the Knightsbridge companies to defend and cross-claim in proceedings currently pending in the Federal Court of Australia which were due to proceed to trial on 22 October 2007. In truth, however, the position in which Hillcrest and Mr Carrello, the liquidator, are placed is far more complicated than that application reveals. As a consequence, the urgent application necessitated an extended hearing over parts of two successive days. During that time it became apparent that the application could not adequately be determined without addressing the complexities raised.
Background
3 Part of the background to the present proceedings is set out in the reasons for decision of Pullin J in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339. That case concerned a contested application for, amongst other things, winding-up orders in respect of several managed investment schemes (some of which are also the subject of the present proceedings). I will come back to that decision later but, for present purposes, the following facts are relevant.
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Managed Investment Schemes
4 A major part of the business operations of the Knightsbridge companies has been to conduct and operate a series of managed investment schemes. One of these schemes, the KFM Scheme, of which Knightsbridge Managed Funds Ltd was the responsible entity, was registered by the Australian Securities and Investments Commission (ASIC) on 22 December 1999 pursuant to s 601EB of the Corporations Law as it then stood. There were a further 29 unregistered schemes.
5 Each scheme essentially involved one of the Knightsbridge companies acting as a mortgage broker, soliciting money from depositors pursuant to a prospectus, to establish a fund or funds which were used to make advances on mortgage to various borrowers. Some schemes involved one depositor/mortgagee making advances on mortgage to one or more of several mortgagors; other schemes involved multiple depositors/mortgagees making advances on mortgage to one or more borrowers/mortgagors. Further, some schemes involved the pooling of funds from various depositors which were then lent by Knightsbridge, or by an associated company, as mortgagee, to one or more borrowers/mortgagors. In the last of these cases, the nominal mortgagee made the advances and held the mortgage on trust for the benefit of the depositors.
6 Among the KFM Scheme loans, of which Knightsbridge Managed Funds Ltd was the responsible entity, two are relevant to the present application:
(1) CADIR00816 - Principal: $3,349,000 - 36 mortgagees - expiry date 3rd March 2002.
(2) CADIR00849 - Principal: $125,000 - 1 mortgagee - expiry date 3rd March 2002.
In both cases, Meadow Springs Fairway Resort Ltd (Meadow Springs) is the mortgagor. I will refer to these loans as the KFM Scheme (Meadow Springs) loans.
7 Effectively, and consistent with Pullin J’s description of the KFM Scheme in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [4] - [22], in the management of these scheme loans, both in relation to the receipt and payment of moneys from depositors, and in relation to the receipt and distribution of interest and repayments from the borrowers (less authorised fees and commissions), and in respect of the secured loans, Knightsbridge
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- Managed Funds Ltd, as the responsible entity of the KFM Scheme, was acting as an express trustee for the depositors/mortgagees.
Proceedings before Pullin J
8 By the beginning of 2001, the Knightsbridge companies were in financial difficulties. The directors of Knightsbridge Finance Pty Ltd and Knightsbridge Managed Funds Ltd placed those companies into voluntary administration, on 29 January 2001 and 20 February 2001 respectively, by appointing Mr Carrello as the voluntary administrator. From 29 January 2001, Mr Carrello began managing both the scheme loans and non-scheme loans. On 15 May 2001, Mr Carrello was appointed liquidator of Knightsbridge Finance Pty Ltd. On 8 October 2002, Mr Carrello was appointed liquidator of Knightsbridge Managed Funds Ltd.
9 Towards the end of 2001, an application was brought by ASIC in this court for orders to wind up the KFM Scheme and the 29 unregistered schemes and to appoint Mr Carrello as the person responsible for ensuring the winding up of the schemes pursuant to s 601ND(1), s 601NF(1) and s 601EE of the Corporations Act. The application was granted by Pullin J on 13 December 2001, after giving detailed reasons which contain a history of the establishment, operations and financial difficulties of the Knightsbridge companies, the managed investment schemes and the role of Mr Carrello. The orders made by Pullin J on that application (Annexure JC2 to the affidavit of Mr Carrello, sworn 24 October 2007), which are extensive, running to some 21 pages, materially include the following:
5. In relation to the [KFM] Scheme, the Liquidator [Mr Carrello]:
…
(m) may execute any document as may be necessary or appropriate to wind up the Scheme except that in the absence of the further order of the Court or the express authority of the relevant Scheme Members the Liquidator is not empowered to execute any lease, contract of sale on a mortgagee sale, transfer of the mortgaged property, transfer of mortgage or discharge of mortgage on behalf of Scheme Members registered as mortgagees.
...
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- 10. The Liquidator shall:
(a) not later than 7 days form the date of his appointment, in the case of a Loan that is a Non-Performing Loan [that is, a Loan in relation to which there is a continuing default by the borrower, as defined] as at that date; or
(b) not later than 7 days from the date that a Loan becomes a Non-Performing Loan, in the case of any other Loan;
give the Members who have an interest in the Loan 14 days written notice of the convening of a meeting of those Members …
11. At the First Meeting, to be chaired by the Liquidator, the Members may elect a representative committee to be known as the Committee of Inspection.
...
13. Where a Committee of Inspection has been appointed, the Liquidator shall, before making a Significant Decision in relation to the realisation of a Non-Performing Loan, consult with the Committee of Inspection. The Liquidator shall not be bound by the Committee of Inspection.
...
15. The Liquidator:
(a) may, if he cannot obtain the express authority of all members with interests in a particular Loan for the making of a Significant Decision;
(b) shall, if a meeting of Members convened pursuant to paragraph 14 requires him to do so;
make an application to the Court, and the Court may make such orders as it considers necessary or desirable in respect of the Non-Performing Loan.
...
27. The Liquidator have liberty to apply to the Court for directions and further orders relating to the exercise of his powers and discharge of his duties relating to the winding up of the Scheme and the Unregistered Schemes. Without limiting the generality of the foregoing, the Liquidator may apply for directions as to the payment of any liabilities of the Scheme or the Unregistered Schemes to any third parties from the assets of the Scheme or the Unregistered Schemes, respectively.
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- 28. The Liquidator have liberty to apply to the Court for directions and further orders with respect to any proposed action to recover moneys or other property or seek damages or compensation for the breach of any obligations or to enforce any liability owed to Members.
10 One of the issues raised before Pullin J on the application of ASIC, and in respect of which a number of members of various schemes were also heard, was whether or not it was suitable for Mr Carrello to be appointed as the person responsible to wind up any, or all, of the managed investment schemes because of potential conflicts of interest which might arise through his role as liquidator of Knightsbridge Finance Pty Ltd and/or as administrator of Knightsbridge Managed Funds Ltd. Pullin J found (at [82]) that 'there was no evidence of real conflict' so as to disentitle Mr Carrello from being appointed either as the person responsible for winding up the schemes, or, for that matter, as liquidator. However, his Honour also noted that, because of the many issues to be faced in the course of the winding up, if any conflict were to arise, there would be an opportunity for interested parties to apply to the court for directions or other necessary relief.
The Role of Mr Carrello
11 At this point it is already evident that there were (and are), in effect, two sets of winding-up proceedings. As liquidator of the Knightsbridge companies, Mr Carrello is responsible for identifying and, where possible, recovering the assets of those companies which were held both legally and beneficially by the companies and then, after due administration, appropriately distributing the proceeds as between secured and other persons entitled. For present purposes, it is enough to group that collection of claimants as the 'general claimants'.
12 In view of the role of the Knightsbridge companies as trustees of multiple separate managed investment schemes, those companies held legally, but not beneficially, assets of the various managed investment schemes for the respective beneficiaries of the separate schemes. Mr Carrello, as the person responsible to wind up those schemes, is responsible for the distribution, from the realisation of the assets of those various schemes, to the individual beneficiaries after trust creditors, whether secured or unsecured, have been satisfied. Those groups can generally be referred to as the ‘trust claimants'.
13 None of the general claimants of the Knightsbridge companies had, or has, any claim on the various assets of the schemes which were or are
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- held on trust. The Knightsbridge companies, as trustees, had, and now Mr Carrello, as the person appointed to wind up those schemes, has, in respect of those trust assets:
(1) the legal, but not the beneficial, interest in each and all of the trust assets;
(2) the right to charge against the trust assets proper expenses incurred by him in the course of the administration and winding up of the respective schemes (subject to accounting to the beneficiaries or to the court);
(3) a right of exoneration from those trust assets for the recovery or reimbursement of general assets or resources of the trustee, which have been properly applied in the conduct or administration of the trust schemes, either before or after Mr Carrello's appointment;
(4) no right to appropriate or in any way to charge the trust assets of the schemes for the general administration of the Knightsbridge companies or the winding up of the companies, as distinct from the managed investment schemes.
14 This exclusion of the assets held on trust by an insolvent corporation from availability to the general creditors, as opposed to the beneficiaries of the trust, is subject to some qualification so far as concerns the trustee's right of indemnity or exoneration. In Jacobs’ Law of Trusts in Australia (7th ed, 2006) [2114], the learned authors observe:
The Bankruptcy Act 1966 (Cth) by s 116(2)(a) excepts from the property divisible among the creditors the property held by the bankrupt in trust for another person.
- They also make the point, in a footnote (note 120 at [2114]), that:
The 'bankruptcy and insolvency legislation do not effect automatic removal of trustees upon sequestration or winding-up, but this may be a ground for removal by the equity court.
The authors then continue:
Nevertheless, from the series of authorities considered by the High Court in Octavo Investments Pty Ltd v Knight[[1979] 144 CLR 360], it appears that, to the extent that the bankrupt has, in respect of property held in trust, a right of indemnity for liabilities incurred as trustee, that right is a beneficial interest in the assets in question and it follows that the legal title thereto vests in the official receiver. Section 116(2)(a) has no application to insolvent corporate trustees. While the Corporations Act 2001 (Cth) does not expressly except trust assets from those divisible among creditors, s 556 thereof has the effect of excluding such assets from those to be
- applied in discharge of the liabilities of the company. A real question arises as to the effect of winding-up upon the trustee's right of indemnity; in particular, the question is whether the liquidator may apply the proceeds of the right of indemnity to meet private debts of the trustee or debts incurred in relation to another trust? (some footnotes omitted).
- The learned authors then proceed to consider and examine several authorities dealing with the accessibility of this right of indemnity, including Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394; Re Enhill Pty Ltd [1983] 1 VR 561; and Re Suco Gold Pty Ltd (1983) 33 SASR 99, in which the South Australian Full Court criticised, and refused to follow, Re Enhill Pty Ltd.
15 For present purposes, it is not necessary to analyse or examine that question any further. In the present case, there is, at least so far, no suggestion that the claims to be pursued by Mr Carrello (described later in these reasons), in his capacity as the person responsible for winding up the managed investment schemes, might produce funds which could be payable to any person or body, other than the beneficiaries of the scheme loans, subject of course to the payment of expenses which would arise from the pursuit of those claims.
16 The point of present importance is that the claims proposed to be brought by Mr Carrello on behalf of Knightsbridge Managed Funds Ltd are trust claims, the advantage of which will pass to the beneficiaries of the KFM Scheme (Meadow Springs) loans and in respect of which no claim is presently made by general creditors of the Knightsbridge companies or by beneficiaries of other trusts which those companies have administered.
17 In a very real sense, therefore, the role of Mr Carrello, as liquidator of the Knightsbridge companies, does not directly involve him in the winding up of the managed investment schemes. It was, however, appropriate and convenient, because of the reasons given by Pullin J, for him to have both roles - that is, of liquidator of both the companies and as the person responsible for winding up the schemes - but that the administration of each role remains separate and distinct.
18 Accordingly, the conduct of Mr Carrello in the administration of the winding up of the several managed investment schemes, including the KFM Scheme (Meadow Springs) loans, takes it authority and content from the orders of Pullin J of 13 December 2001, the powers thereby conferred upon Mr Carrello by those orders, and any further or other powers or directions which might be granted or given by the court from
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- time to time under the various provisions of his Honour's order granting liberty to apply. Consequently, in my view, questions or controversies arising in relation to the course of the administration of the winding up of any particular managed investment scheme should be raised in the original proceedings and pursuant to the orders made by Pullin J, or, possibly, under s 90 or s 92 of the Trustees Act 1962 (WA). This being the case, one is then led to query whether any application concerning the administration of any of the managed investment schemes required or justified an application under the general provisions of the Corporations Act, including s 477(2B).
19 In my view, the answer to that query will depend upon the particular circumstances in any given case. In the present case, however, there is no escaping from the fact that, in exercising his powers as the court-appointed person responsible for the winding up of the schemes, Mr Carrello will need to invoke the general persona and powers of the Knightsbridge companies, at least to the extent to which these are needed to perform the duties of trustee for the benefit of the particular beneficiaries. Doing so, in particular instances, may involve him in committing the Knightsbridge companies to a course of conduct which requires performance over more than three months and, for that reason, gives rise to an independent need to obtain leave of the court to enter into such an obligation. In those circumstances, of which I am satisfied the present application is one, it seems to me that Mr Carrello needs leave, in his capacity as liquidator, to commit the trustee to contractual obligations which may require performance over more than three months. Having obtained that leave, Mr Carrello will need to obtain further leave or directions as to exactly how and what is to be done in his capacity as the court-appointed person for the winding up of the individual schemes.
20 Once this aspect of the application became apparent, I gave leave to Mr Carrello, on the undertaking by his counsel to file the necessary papers as soon as practicable, to make a concurrent application for leave and for directions in the original proceedings in which the orders of Pullin J had been made (COR 76 of 2001) and to deal with that application concurrently with the application under s 477(2B) of the Corporations Act which was already before the court.
Federal Court Proceedings
21 The proceedings pending in the Federal Court concern the liquidation and disbursement of assets of Meadow Springs, the mortgagor under the KFM Scheme loans set out earlier in these reasons. The events
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- giving rise to the Federal Court proceedings (and to earlier proceedings in that court, which subsequently settled on the basis that the present proceedings would be instituted) involve complex questions and controversies concerning the existence and priority of securities claimed to be held over Meadow Springs' assets. Only a brief and incomplete account of the history of these events can, or need, be given at present. This is because some of the material facts remain unknown and others are disputed in the Federal Court proceedings.
22 For the purpose of the present application, however, it is clear that depositors under the two KFM Scheme (Meadow Springs) loans, totalling some 37 separate depositors, contributed a total of $3,474,000 ($3,349,000 plus $125,000) which was then advanced on mortgage to Meadow Springs. How this occurred is somewhat convoluted. Essentially, the moneys from the depositors were received by Knightsbridge Managed Funds Ltd, as trustee. These funds were then pooled, but were not advanced directly to Meadow Springs. Rather, the funds were, somehow or other, transferred to Westralian Capital Holdings Pty Ltd (Westralian Capital) which then on lent the funds to Meadow Springs. Consequently, the charges taken to secure that loan were not taken in the name of Knightsbridge Managed Funds Ltd but, rather, in the name of Westralian Capital. These securities comprised a first registered mortgage over the land owned by Meadow Springs, which was to be the subject of the proposed development, and two registered debenture charges comprising fixed and floating charges over all the assets of Meadow Springs.
23 In circumstances which were not fully explained, possibly because they are not yet fully understood, the mortgage was formally assigned to Knightsbridge Managed Funds Ltd, which took over the administration of the loans up to and including the date of liquidation.
24 For some reason, which is presently unknown, the two registered fixed and floating charges over the assets of Meadow Springs were not assigned to Knightsbridge Managed Funds Ltd, although Knightsbridge Managed Funds Ltd and Mr Carrello maintain that Westralian Capital held the benefit of those charges for Knightsbridge Managed Funds Ltd and on trust for the individual depositors to the KFM Scheme (Meadow Springs) loans.
25 This, possibly anomalous, method of securing loans by depositors under the KFM Scheme in respect of advances to Meadow Springs in the name of Westralian Capital, is at the focus of the litigation presently
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- pending in the Federal Court. However, the possibility of problems arising from this or similar arrangements was recognised as early as November 2001 when Pullin J observed, in his reasons for decision in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd:
Counsel for Mrs Kay [one of the depositors separately appearing] also pointed to the fact that some investors did not hold the mortgage security in their names. Other companies associated with Mr Clifton [a principal of the Knightsbridge companies] appeared on the title as the registered mortgagee. It was submitted that, in some cases, these companies had become registered mortgagees although they were 'unfunded'. It was submitted by counsel for Mrs Kay that these problems also meant that Mr Carrello should not be appointed to wind up these schemes. In my view, the existence of the circumstances referred to does not provide any reason for not appointing Mr Carrello. Once again, I see those sorts of problems as problems that the person appointed to wind up the schemes will have to grapple with [78].
I will return to the potential significance of the charges to secure advances made to Meadow Springs being originally in the name Westralian Capital later in these reasons.
26 At some point, Meadow Springs experienced financial difficulties. On 23 January 2002, Mr McMaster was appointed liquidator to wind up Meadow Springs. Acting as the first mortgagee, following the assignment of that mortgage from Westralian Capital, Knightsbridge Managed Funds Ltd called up the mortgage, exercised the power of sale and sold all the land at Meadow Springs. This realised approximately $3 million. However, it was not sufficient to discharge the whole of the debt then due to Knightsbridge Managed Funds Ltd as trustee for the depositors under the KFM Scheme (Meadow Springs) loans, leaving a significant deficiency of approximately $1.7 million.
27 At that point, the liquidator of Meadow Springs, believing it had a claim for negligence against the valuers of the land and other assets of the company which had been relied upon to enter into the mortgage and to embark upon the proposed development, made a claim against those valuers, Colliers International Consultancy & Valuation Pty Ltd (Colliers).
28 To advance that litigation, Meadow Springs entered into a LFA with IMF (Australia) Ltd (IMF) - a company quite separate and distinct from Hillcrest. In fact, this engagement of IMF was by Mr Carrello who, by then, and for this purpose, had been appointed as receiver and manager of
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- Meadow Springs. The reason for this step was concern by the Knightsbridge interests that Meadow Springs, under its liquidator, might not be entirely co-operative in pursuing proposed litigation against Colliers or, perhaps more realistically, in dealing with the fruits of that litigation if it were to prove successful. Just how far these steps by Mr Carrello as receiver and manager of Meadow Springs proceeded, and the extent to which they displaced the powers of its liquidator, is not known and it is unnecessary at present to enquire further.
29 As set out above, the first set of Federal Court proceedings, against Colliers, did not proceed to trial. A negotiated settlement without any admission of liability was reached. Under this settlement, Colliers paid $X (amount confidential) to Meadow Springs in full and final discharge of any liability which that firm might have had in respect of the development. This fund then became the principal, and only significant, asset of Meadow Springs. Disputes then arose over who had claims on the fund, whether any of the claims were secured and, if so, in what, if any, order of priority. These disputes are the subject of the second and present set of Federal Court proceedings.
The Present Application
30 Putting aside many of the complexities, the issues germane to the present application appear to be as follows:
(1) Meadow Springs claims that neither Knightsbridge Managed Funds Ltd nor Westralian Capital is a secured creditor of the company because:
(a) the original advances were not made by Westralian Capital to Meadow Springs;
(b) the only remaining charges, the two registered debenture fixed and floating charges, which are in the name of Westralian Capital, have never been assigned to Knightsbridge Managed Funds Ltd, and are not in respect of advances made by Westralian Capital; and
(c) Knightsbridge Managed Funds Ltd is, at most, an unsecured creditor of Meadow Springs and therefore entitled only to rank pari passu with other general creditors.
(2) Knightsbridge Managed Funds Ltd and Westralian Capital each maintain that one or both is a secured creditor in respect of the whole of the moneys owing by Meadow Springs under the original
- advances plus interest by virtue of the registered fixed and floating charges granted by Westralian Capital. In that regard, each of Knightsbridge Managed Funds Ltd and Westralian Capital contends that that charge was expressly granted, intended and accepted as being a transaction to secure the advances which were in fact made; and/or that Westralian Capital acted as the agent or trustee for Knightsbridge Managed Funds Ltd in taking that security; or, alternatively, that Meadow Springs accepted the advances under these arrangements and is estopped from contending otherwise, especially in the light of the course of administration of the loan both before and after the liquidation of the Knightsbridge companies
- (3) IMF contends that, because of the first LFA with Meadow Springs, it is entitled to a lien or other security for the fees and outlays which it incurred in bringing the claim against Colliers to a successful settlement, amounting to some 35% of the funds which were recovered as a result of that litigation. In this respect IMF relies upon a doctrine discussed, but not applied, by the New South Wales Court of Appeal in Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311.
(4) There are also claims by other creditors of Meadow Springs who claim to be secured creditors and who claim to rank in priority to any entitlements of any or all of the Knightsbridge companies, Westralian Capital and IMF, or others, to the funds produced by the settlement of the Colliers litigation.
31 To secure its claimed access and priority to the funds now held by the liquidator of Meadow Springs, Knightsbridge Managed Funds Ltd and Westralian Capital need to defend the claims made by other claimants to the funds, and to advance, by way of cross-claims, their claims to be secured creditors with priority to those funds. Pleadings have been filed in the current Federal Court proceedings which were scheduled to proceed to trial on 22 October 2007.
32 I have no doubt that it is necessary and desirable in the interests of Knightsbridge Managed Funds Ltd, and the beneficiaries of the KFM Scheme (Meadow Springs) loans, for those companies to be represented in this fashion in the Federal Court proceedings. Counsel has been retained and briefed to appear, although there is no opinion from counsel put forward on the present application regarding the prospects of success for Knightsbridge Managed Funds Ltd and Westralian Capital in those proceedings.
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33 It is to enable Knightsbridge Managed Funds Ltd and Westralian Capital to participate in these Federal Court proceedings that the LFA with Hillcrest is proposed. That document, which is Annexure JC11 to the affidavit of Mr Carrello, sworn 24 October 2007, needs some examination and explanation. Before turning to that, however, it is necessary to mention that there appear to be no other sources of funds for Knightsbridge Managed Funds Ltd or Westralian Capital to prosecute these Federal Court proceedings. Mr Carrello does not have sufficient available funds to pursue that enterprise. And, although they have not been directly canvassed, there is no reason to suppose that any of the beneficiaries of the KFM Scheme (Meadow Springs) loans would be willing, either alone or collectively, to contribute the funds necessary to allow the litigation to be pursued to completion. Consequently, Hillcrest appears to be the only possible source of finance.
34 In these circumstances, Mr Carrello, by his counsel in the present application, invites this court to examine the terms of the Hillcrest LFA, against the background which I have described, and to determine whether or not leave should be granted to allow Mr Carrello to enter into that agreement.
35 In support of that application, counsel refers to a number of authorities in which, on applications under s 477(2B) (or analogous subsections) of the Corporations Act, courts have been asked to consider whether or not it is appropriate for leave to be granted to allow a company in liquidation to enter into a LFA, and in which the various factors for consideration have been identified and examined. These authorities include Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583, which concerned an application under s 477(2)(c) of the Corporations Act, but which was accepted and followed in relation to a s 477(2)(b) application in Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296, and, in respect of the scope of 477(2)(b), Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 and also Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357.
36 Immediately, however, I should observe that each of these authorities relates to a case where a liquidator is seeking to recover assets or to enforce rights of a company in liquidation for the benefit of the general creditors. Unlike the present matter, none of the cases cited is an example of an application by a trustee to recover assets from or to enforce a right of action against third parties for the benefit of the beneficiaries of an express trust. These two situations are not identical because, where a trustee is concerned, the obligations are arguably more onerous. Further,
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- the consequences of embarking upon hazardous litigation, without the approval or leave of the court, is likely to have more serious consequences. Correspondingly, the scrutiny which a court should give to an application, effectively by a trustee, to embark upon major litigation for the advantages of beneficiaries, should be more extensive.
37 Nevertheless, I am satisfied that the authorities which have been referred to by counsel remain relevant and of assistance by way of analogy. Although, for the reasons just given, it may be necessary to exercise more rigorous scrutiny where the application for leave is being brought on behalf of a trustee.
38 In Re Addstone Pty Ltd (in liq), Mansfield J observed that the court's role in entertaining such an application (in that case an application pursuant to s 477(2)(c) of the Corporations Act) is to determine whether the liquidator was acting bona fide:
That question will be resolved having regard to such matters as the nature of the cause of action, its complexity, the amount of costs likely to be incurred in the conduct of the action, the extent to which the funding entity is to contribute to the costs of the action, the extent to which the funding entity is to contribute towards the costs of the respondent in the event that the action is not successful or towards any order for security for costs by the Court before which the action is to be heard, the extent to which the liquidator has canvassed other funding options, the level of the 'premium', the risks involved in the claim, and the liquidator's consultations with the creditors of the company. There may be, indeed probably will be, other considerations. Some of those matters will not necessarily arise in each instance. It is important to observe that it is not for the Court simply to substitute its own view on such matters for those of the liquidator and the advisers to the liquidator. The liquidator and the advisers to the liquidator will have addressed such matters for the purpose of determining whether to enter into the proposed funding arrangements. The Court's role is not to review the liquidator's inquiries and assessments and decisions to see if they are the best ones available or are sound. It is only to be satisfied that the liquidator is acting in good faith in the making of the commercial judgment in respect of which the Court is being asked to make an order (594).
- These seven (non-exclusive) factors identified by Mansfield J were subsequently applied by Austin J in Re ACN 076 673 875 Ltd [29] - [29] in relation to an application under a s 477(2B) of the Corporations Act.
39 These factors are adequately addressed in the applicant's submissions in support of the present application. First, the complexity of the matter is evidenced in the synopsis, albeit limited, of the present Federal Court proceedings in these reasons for decision. Further, the LFA provides that
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- Hillcrest will contribute to the costs incurred in the conduct of the action, including the meeting of any adverse orders as to costs. More importantly, however, is the lack of options open to the liquidator, and, thereby, to the beneficiaries of the KFM Scheme (Meadow Springs) loans, to recover funds from Meadow Springs.
40 In a real practical sense, the only prospect for the beneficiaries of the KFM Scheme (Meadow Springs) loans for any further recovery lies in obtaining access, and preferably prior access, to the funds resulting from the claim against Colliers. Success for Knightsbridge Managed Funds Ltd and/or Westralian Capital in that litigation, the present Federal Court proceedings, will, so I was informed, and accept, probably involve those beneficiaries having their various claims satisfied in full. By contrast, if Knightsbridge Managed Funds Ltd and/or Westralian Capital were held to be unsecured creditors - or worse, if their claims were to be entirely rejected - there would be no prospect for any further recovery for those beneficiaries.
41 There are a number of intermediate positions in which the claims of Knightsbridge Managed Funds Ltd and Westralian Capital might be classified as secured but ranking in priority subsequent to the claims of other creditors, including IMF. It is not possible to say exactly what the practical result of such a particular finding would be, but it is clear that it would result in the beneficiaries of the KFM Scheme (Meadow Springs) loans recovering only part of their presently outstanding claims.
42 I am satisfied that there is no other realistic source of finance and that, without finance from the litigation funder, there is a danger that the litigation will not be pursued, or adequately pursued, in the interests of Knightsbridge Managed Funds Ltd and/or Westralian Capital.
43 The remuneration sought by the litigation funder, Hillcrest, is 35% of the amounts recovered. This may seem high but it is in keeping with amounts which have been approved in relation to other similar litigation funding agreements, such as IMF's LFA when pursuing Colliers in the first Federal Court proceedings, and those considered in Re Addstone Pty Ltd (in liq) and Re ACN 076 673 875 Ltd (where the entitlement had the potential to amount to 40% of the amount recovered). Further, it must not be forgotten that Hillcrest is accepting an obligation to underwrite the litigation without seeking any indemnity from Mr Carrello or Knightsbridge Managed Funds Ltd in the event of failure and without any outlay by the liquidator or the company.
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44 In the present case, Hillcrest has taken an assignment of part of cause of action which, in the cases of Re Addstone Pty Ltd (in liq) and Re ACN 076 673 875 Ltd, was considered acceptable and was designed to avoid any risk of the application of the doctrines of maintenance or champerty. However, according to Recital E of the LFA (Attachment JC11 of the affidavit of Mr Carrello, sworn 24 October 2007), the litigation funder seeks to recover, not only the moneys payable in respect of this present Federal Court litigation, but the funds which would have been payable to it under the arrangement with Mr Carrello and Meadow Springs in the Colliers litigation which settled. To this extent, Hillcrest claims a novation of the anterior agreement between Mr Carrello, Meadow Springs and Hillcrest.
45 No disclosure of the proposed LFA with Hillcrest, or the latest development in the Federal Court proceedings, has been made by Mr Carrello, Knightsbridge Managed Funds Ltd or Westralian Capital to the beneficiaries under the KFM Scheme (Meadow Springs) loans. No committee of management of the Meadow Springs' creditors under this non-performing loan has ever been established or consulted. Further, the actual details of the proposed LFA and, in particular, the novation of the previous agreement with Hillcrest, have not been explained or disclosed.
46 In these circumstances I concluded that, before the court should approve Mr Carrello entering into such an agreement, notice of the effect of doing so should be given to the beneficiaries under the KFM Scheme (Meadow Springs) loans, so that they could be given an opportunity to be heard after having access to material documentation. In effect, I considered that final approval of the terms of the proposed LFA should be withheld until an opportunity for that had been afforded and, if necessary, the beneficiaries had been given a chance to be heard. The difficulty, of course, was accommodating this in circumstances where the trial of the Federal Court proceedings were to be commenced before that would be possible.
47 In the result, I concluded that I should order that provisional approval be granted to Mr Carrello, on behalf of the beneficiaries of the KFM Scheme (Meadow Springs) loans, to defend proceedings in the Federal Court and to prosecute the associated cross-claims, and, to that end, to enter into the proposed LFA, subject to any variations or terms imposed, if any, by the court after the beneficiaries had had an opportunity to be heard.
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48 As this would only be possible if the litigation funder, Hillcrest, accepted that it will be bound by any variations or terms imposed upon the LFA after it had been more closely examined, I enquired of counsel whether an undertaking might be available from Hillcrest that it would abide by any order of the court in this respect, subject, of course, to any right of appeal. The proceedings were adjourned for a short period to enable counsel to obtain instructions from Hillcrest, and the response was that an undertaking, as sought, was proffered. In those circumstances, therefore, I accepted the undertaking and made the following orders:
1. The applicant, Giovanni Maurizio Carrello, be given liberty to apply in COR 76 of 2001 for directions and approvals in connection with proposed activity in the administration of the two Meadow Springs Fairway Resort Ltd Registered Schemes ('Schemes'), of which he is the Court appointed person responsible for ensuring the winding up of those Schemes under sections 601ND, 601NF and 601NF of the former Corporations Law.
2. That application be treated as being heard and determined with the present application.
3. The two actions, COR 151/07 and COR 76/01, be consolidated.
4. The applicant, as the person responsible for the winding up of the Schemes may, in his capacity as liquidator of Knightsbridge Managed Funds Ltd and Knightsbridge Finance Pty Ltd, and in association with Westralian Capital Holdings Pty Ltd:
a. defend and continue to defend the proceedings brought against those 3 companies and others by Meadow Springs Fairway Resort Ltd;
b. prosecute the cross-claim by Knightsbridge Managed Funds Ltd against Meadow Springs Fairway Resort Ltd in the same proceedings; and
c. defend the cross-claim brought against Knightsbridge Managed Funds Ltd by IMF (Australia) Ltd,
all of which are currently pending in the Federal Court action No WAD 150 of 2007.
5. The Court approves of the applicant, in his capacity as the person appointed to wind up the Schemes as trustee, and in his capacity as liquidator of Knightsbridge Managed Funds Ltd and Knightsbridge Finance Pty Ltd, entering into a proposed litigation funding agreement with Hillcrest Litigation Services Ltd in the form submitted to the Court and comprising annexure JC 11 to the
- affidavit of Mr Giovanni Maurizio Carrello, sworn 25 October 2007, subject to the following conditions:
- a. Within 7 days the applicant and/or Knightsbridge Managed Funds Ltd shall despatch to each of the beneficiary mortgagees of the Schemes:
i. a copy of the proposed litigation funding agreement;
ii. an explanatory memorandum detailing its significance for the proposed litigation and, in summary form, the remuneration or expenses which would be refundable to Hillcrest Litigation Services Ltd in the event of the success of that litigation - specifically drawing to the attention of beneficiaries Hillcrest Litigation Services Ltd's entitlement to repayment under the agreement, of which the agreement constitutes a novation; and
iii. a copy of these orders.
b. All or any of the beneficiaries under the Schemes shall have liberty to apply to the Court within 21 days of receipt of those documents to seek an order which would have the effect of varying the terms of the litigation funding agreement.
c. In the event of any such application being made, Hillcrest Litigation Services Ltd shall be given notice of the application and shall have a right to appear and to be heard on or in opposition to the application.
d. Hillcrest Litigation Services Ltd undertaking to abide by any direction or order of the Court made to vary the terms of the litigation funding agreement, subject to its right to be heard and any rights of appeal.
- 6. The applicant be given approval pursuant to s 477(2B) of the Corporations Act 2001 (Cth) to enter into the litigation funding agreement.
7. Costs of the application be reserved.
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