Re Lewis

Case [2020] FCA 841

FEDERAL COURT OF AUSTRALIA

Lewis (liquidator), in the matter of Concrete Supply Pty Ltd (in liq) [2020] FCA 841

File number: SAD 72 of 2020
Judge: WHITE J
Date of judgment: 16 June 2020
Catchwords:

CORPORATIONS – application pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Act) for approval for liquidators to enter into a retainer with the solicitors who have represented and continue to represent the largest creditor of company being wound up – application under s 90‑15 of Div 90, Sch 2 to the Act – whether s 477(2B) is applicable to retainer between solicitors and liquidators – whether approval should be given retrospectively – whether there would be prejudice to the liquidator’s independence.

Held: application granted.

Legislation:

Corporations Act 2001 (Cth) ss 445D, 477, 1322(4)(d)

Insolvency Practice Schedule (Corporations) cll 5‑15, 90‑15

Cases cited:

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846

Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) v Adelaide Brighton Cement Limited [2019] FCA 2202

Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1642

Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 18 ACLC 738

Frigger v Kitay (No 2) [2020] FCA 497

GDK Projects Pty Ltd, in the matter of Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541

In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481

In the matter of HIH Casualty and General Insurance Limited (in liquidation and Subject to Schemes of Arrangement) ACN 008 482 291 [2018] NSWSC 1886

In the matter of Kala Capital Pty Limited (in liq) [2012] NSWSC 1073

Re ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801

Re Bell Group Ltd (in liq); Ex parte Woodings as liquidator of The Bell Group Ltd (in liq) [2009] WASC 235

Re Bellafountain Pty Ltd [2017] NSWSC 391

Re HIH Insurance Ltd [2004] NSWSC 5

Re Ji Woo International Education Centre Pty Ltd [2019] NSWSC 93; (2019) 134 ACSR 448

Re Laurie Cottier Productions Pty Ltd (in liq) (1992) 9 ACSR 513

Re MF Global Australia Ltd (in liq) [2012] NSWSC 994

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

Re One.Tel Ltd [2014] NSWSC 457, (2014) 99 ACSR 247

Re Opel Networks Pty Ltd [2013] NSWSC 1245

Re Read [2007] FCA 1985; (2007) 164 FCR 237

Re Spedley Securities Ltd (in liq) (1992) 10 ACLC 1742

Re United Medical Protection (No 4) [2002] NSWSC 516; (2002) 20 ACLC 1647

Smarter Way (Aust) Pty Ltd v D’Aloia [2000] VSC 408; (2000) 35 ACSR 595

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

Vickers, in the matter of York Street Mezzanine (in liq) [2011] FCA 1028

Warner (Liquidator), in the matter of Sakr Bros…

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Details
AGLC
Re Lewis [2020] FCA 841
Case
[2020] FCA 841
Decision Date

CaseChat Overview and Summary

The case of Re Lewis involves an application by the liquidators of Concrete Supply, Mr Lewis and Mr Kidman, for approval to enter into a retainer with Lipman Karas, who have represented the largest creditor of Concrete Supply, Adelaide Brighton Cement Limited (ABCL). The application was made under section 477(2B) of the Corporations Act 2001 (Cth) and clause 90-15 of the Insolvency Practice Schedule (Corporations). The primary legal issues were whether section 477(2B) applied to the retainer between the liquidators and Lipman Karas, whether approval should be granted retrospectively, and whether there would be prejudice to the liquidators' independence.

The court considered that it was reasonably arguable that the liquidators were acting as agents for Concrete Supply by entering into the retainer, the services under the retainer would primarily benefit Concrete Supply, and it was appropriate for the court to act cautiously. The court found that the liquidators had a reasonable basis to believe that retaining Lipman Karas was in the interests of Concrete Supply, the terms of the retainer were clear, and the fees were consistent with commercial rates. The nature of the work and its duration made it unlikely to be completed within the three-month period specified in section 477(2B). The court decided to grant the approval retrospectively, taking into account the disruptions caused by the COVID-19 pandemic. The application for an extension of time was not necessary as the court found that section 1322(4)(d) did not apply in the circumstances.

The final orders included granting the liquidators approval to enter into the retainer with Lipman Karas, directing that the liquidators would be justified in entering into the retainer, and that the costs of the application were costs in the winding up of Concrete Supply and could be paid from its assets.

Orders

Orders of the court

1. The hearing of the Interlocutory Process scheduled for 17 June 2020 at 9.30 am be vacated.

2. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), Mr Lewis and Mr Kidman, as the liquidators of Concrete Supply (the Liquidators), have approval nunc pro tunc to enter into the retainer agreement dated 20 December 2019 a copy of which is Annexure ML-1 to the affidavit of Martin Lewis sworn 1 May 2020 (Retainer) on behalf of Concrete Supply.

3. Pursuant to Insolvency Practice Schedule cl 90-15, the Liquidators would be acting properly and would be justified in:

(a) entering into, and causing Concrete Supply to enter into the Retainer; and

(b) performing, and causing Concrete Supply to perform, the Retainer.

4. The costs of this application are costs in the winding up of Concrete Supply and may be paid of out the assets of that company.

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

Background

Background to the litigation

The applicants also seek a direction pursuant to cl 90‑15 of the Insolvency Practice Schedule (Corporations) (IPS) that it is appropriate for them to retain Lipman Karas, despite Lipman Karas having acted for Adelaide Brighton Cement Limited (ABCL) in the proceedings culminating in the Liability Judgment and in the application by Concrete Supply for a stay of the orders made on 19 November 2019. Lipman Karas are also continuing to act for ABCL in relation to its claim against Concrete Supply. Background to the winding up Between August 2009 and November 2017, ABCL had supplied concrete to Concrete Supply. In October 2017, ABCL discovered that it had been underpaid about $12 million by Concrete Supply and that this underpayment had been disguised in its own records by a series of false entries made by one of its employees. ABCL sought payment of the shortfall from Concrete Supply. However, on 14 November 2017, the directors of Concrete Supply resolved that it was, or was likely to become, insolvent and appointed Messrs Cooper and Cantone at Worrells as administrators. Subsequently, on 19 December 2017, the creditors of Concrete Supply resolved that it enter into the DOCA. ABCL, which had opposed the entry into the DOCA, brought proceedings to have it set aside and to recover the full amount of the shortfall. Following a substantial trial extending over 20 days, in the judgment delivered on 12 November 2019 the Judge found that ABCL’s employee had caused statements of account to be sent to Concrete Supply which significantly understated its indebtedness to ABCL; that two of the directors of Concrete (Rino and Jason Obbiettivo) had recognised that the statements of account were mistaken; that they had sought to take advantage of that situation by various forms of subterfuge so as to prevent ABCL becoming aware of the mistake; that Rino and Jason had not believed that the understatements in the statements of account represented rebates granted by ABCL; and that Concrete Supply was indebted to ABCL. The orders made by the Court on 19 November 2019 to give effect to the judgment of 12 November 2019, included:(a)an order pursuant to s 445D of the Act terminating the DOCA and appointing the applicants as joint and several liquidators of Concrete Supply;(b)a declaration that Concrete Supply is indebted to ABCL in the sum of $12,457,472.22; and(c)a declaration that, between April 2009 and November 2017, Concrete Supply had failed to keep written financial records which complied with s 286 of the Act. In consequence of the Court’s refusal of the application by Concrete Supply for a stay of the operation of these orders pending the hearing and determination of its appeal, the appointment of the applicants as its liquidators took effect from close of business on 17 December 2019. The retainer On 20 December 2019, the applicants entered into a written retainer with Lipman Karas for it to provide legal services. The retainer comprises a letter from Lipman Karas to the applicants dated 19 December 2019 and the accompanying “Terms of Engagement”. The applicants executed the retainer on 20 December 2019.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Declarations to similar effect have been made in some of the authorities. However, given the character of a declaration as a binding determination of rights, I consider that it would be inappropriate to make such a declaration without giving those who may be affected by it the opportunity to be heard. When this was pointed out to the applicants, they did not persist with this part of the application, and it need not be considered.Conclusion I will make orders appropriate to give effect to these reasons.

Ratio Decidendi

Legal Principle Established

In the absence of argument on the question, I would prefer not to express any concluded view. I propose instead to proceed on the basis that s 477(2B) is applicable. I am doing so for three reasons: (a)it is at least reasonably arguable that, by entering into the retainer in their capacity as joint and several liquidators of Concrete Supply, the applicants made it plain that they were doing so as agents for the company;(b)the very nature of the services to be provided under the retainer would, at least for the most part, be to, or for the benefit of, Concrete Supply, and not to the applicants personally; and(c)on this ex parte application, it is appropriate for the Court to act out of an abundance of caution. Consideration of approval under s 477(2B) In my view, putting to one side the issue of retrospectivity, it is appropriate for the Court to grant the applicants’ approval to enter into the retainer: (a)the applicants have, with the benefit of a detailed judgment of this Court, formed the view that it is appropriate that solicitors be retained to investigate and pursue potential recovery actions;(b)the applicants have entered into the retainer for the purpose of fulfilling their duties as liquidators of Concrete Supply;(c)the applicant have formed the view, on reasonable grounds, that it is in the interests of Concrete Supply for Lipman Karas to be the legal firm engaged in the matter;(d)the terms of the retainer are clear;(e)although there is no evidence that the applicants have sought to negotiate the rates proposed by Lipman Karas as may have been possible in the circumstances, Mr Lewis has deposed that those terms and fees are consistent with his experience of the commercial rates and terms of solicitors in Adelaide engaged in the kind of work to be undertaken under the retainer; and(f)this is a case in which the very nature of the work to be undertaken, and its expected duration, makes it improbable that the work to be undertaken pursuant to it could be completed within the period of three months.Should the approval be given retrospectively? As is apparent from its terms, s 477(2B) requires the approval to which it refers to be sought before a liquidator enters into an agreement, but the Court has power to give the approval retrospectively, in an appropriate case: Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324, (2000) 18 ACLC 738 at [10]; Vickers, in the matter of York Street Mezzanine (in liq) [2011] FCA 1028 at [27]. The time which elapsed between the entry into the retainer and the making of the application for approval is longer than one would ordinarily expect. However, there is no reason not to accept the explanation proffered by Mr Lewis. I take into account in particular the disruptions caused by the Covid‑19 pandemic which can be taken to have been operative from at least mid‑March 2020. I will direct that the approval take effect as from 20 December 2019. The application for the extension of time The Originating Application indicates that the applicants seek, if and to the extent that it is required, an extension of the time for the making of the present application. There are different views in the authorities as to whether an extension of time is required in circumstances like the present. Orders granting such an extension have been made in a number of cases, including Empire (Aust) v Vince, at [15]‑[16]; and in Re Stewart; Newtronics, at [30]. However, in Re Read [2007] FCA 1985; (2007) 164 FCR 237, French J suggested at [33] and [39] that s 1322(4)(d) has no application in the present circumstances and disagreed with the authorities in which a different view had been taken.