Re Movitor Pty Ltd (In Liquidation)

[1996] FCA 205

CATCHWORDS

LIQUIDATORS - whether Liquidator has power to enter into a contract of insurance under which the Liquidator is provided with funds to bring actions for the benefit of the insolvency administration he is appointed to control - whether contract of insurance void as constituting champerty or maintenance.

CORPORATIONS LAW - s 477(2)(c) - meaning of "property of the company" - whether that term includes a share in the fruits of an action belonging to the insolvent company.

CHAMPERTY AND MAINTENANCE - exceptions - statutory power of Liquidator to sell "or otherwise dispose of, in any manner" all or any part of the property of the company - whether that section authorises a Liquidator to enter into an agreement to pay a percentage of the fruits of an action in return for assistance in running the action.

CHAMPERTY AND MAINTENANCE - necessity for outsider to have a genuine interest in litigation - broad approach to be adopted - interest of the outsider must be separate from the benefit the outsider seeks to derive from its support for the litigation.

CHAMPERTY AND MAINTENANCE - relevance of assignee making a profit to determination of illegality - requirement for Liquidator to act bona fide and to obtain fully informed consent of creditors.

CHAMPERTY AND MAINTENANCE - relevance of maintainer's refusal  to accept liability for the whole of the adverse party's costs, if the assisted litigation fails.

CORPORATIONS LAW - application to Court for directions under s 479(3) - effect of directions on non-parties to application.

Bankruptcy Act 1966 (Cth) - ss 5(1), 116, 120, 121, 122, 134, 134(1)(a), 135, 135(1)(a), 177
Bankruptcy Act 1869 (UK) - s 17
Corporations Law - ss 477(2)(c), 479, 479(3), 588M and 588W
Federal Court of Australia Act 1976 (Cth) - s 50
Insolvency Act 1986 (UK) - s 214

Cases Considered

Allen v Gulf Oil Refining Ltd [1981] AC 1001
Arnotts Ltd v Trade Practices Commission (1989) 24 FCR 313

Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334
Re MC Bacon Ltd (No 2) [1990] BCLC 607
Beatty v Brashs Pty Ltd (1995) 13 ACLC 925
Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1
Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499
Bulli Coal Mining Company v Osborne [1899] AC 351
Caboolture Park Shopping Centre Pty Ltd (In liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224
Clyne v Bar Association of New South Wales (1960) 104 CLR 186
The Corporation of the Director of Aboriginal and Islanders' Advancement v Peinkinna (1978) 52 ALJR 286
Giles v Thompson [1993] 3 All ER 321; [1994] 1 AC 142
Glegg v Bromley [1912] 3 KB 474
Guy v Churchill (1888) 40 ChD 481
In re The Bulli Coal Mining Company (1897) 18 NSWLR 146 (Eq)
Magor & St Mellons Rural District Council v Newport Corporation [1950] 2 All ER 1226
Martell v Consett Iron Co Ltd [1955] Ch 363
McFarlane v EE Caledonia Ltd (No 2) (1995) 1 WLR 366
GB Nathan & Co Pty Ltd (In liq) (1991) 24 NSWLR 674
Re Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320
Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306
Re Park Gate Waggon Works Company (1881) 17 ChD 234
Rajski v Computer Manufacture & Design Pty Ltd [1982] 2 NSWLR 443
Ramsey v Hartley [1977] 1 WLR 686
Roux v Australian Broadcasting Commission [1992] 2 VR 577
Seear v Lawson (1880) 15 ChD 426
Stein v Blake [1995] 2 WLR 710
Tharros Shipping Co Ltd v Bias Shipping Ltd (1995) 1 Lloyd's LR 541
Trendtex Trading Corporation v Credit Suisse [1982] AC 679
Yeomans v Walker (1986) 5 NSWLR 378

Cases Not Followed

Grovewood Holdings Plc v James Capel & Co Ltd [1995] 2 WLR 70
Hutley v Hutley (1873) LR 8 QB 112

IN THE MATTER OF  MOVITOR PTY. LTD. (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 006 724 036)
ANTHONY MILTON SIMS (Applicant)
VG 3408 of 1995

Drummond J
Brisbane
15 March, 1996

IN THE FEDERAL COURT OF AUSTRALIA   )     No. VG 3408 of 1995
GENERAL DIVISION                   )
BANKRUPTCY DISTRICT OF             )
THE STATE OF VICTORIA              )

IN THE MATTER OF   MOVITOR PTY. LTD. (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 006 724 036)

ANTHONY MILTON SIMS

Applicant

MINUTES OF ORDERS

JUDGE MAKING ORDER:                Drummond J
DATE OF ORDER:  15 March, 1996
WHERE MADE:  Brisbane

THE COURT DECLARES THAT:

1. The applicant has power under the Corporations Law to enter into a contract of insurance with Lumley General Insurance Limited ("Lumley") pursuant to the Lumley Debt Retrieval Agreement dated 1 March, 1995 in respect of the claims that the applicant and Movitor Pty. Ltd. (Receiver and Manager Appointed) (In Liquidation) wish to bring against the directors of Movitor Pty. Ltd. and against Ausind Investments Pty. Ltd..

THE COURT DIRECTS THAT:

1. The confidential exhibits in the material relied upon by the applicant in support of the application and the applicant's written submissions and these reasons be kept confidential until 4.00 p.m. on 25 March, 1996 and that they not be open to inspection by anyone before then without the leave of a Judge.

1. The applicant deliver written submissions and any affidavits upon which the applicant may wish to rely to the associate to Justice Drummond by 22 March, 1996, if he wishes to contend that any of this material should be kept confidential and that Drummond J should publish only an edited version of his reasons, deleting reference to material taken from confidential exhibits.

NOTE:Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA   )     No. VG 3408 of 1995
GENERAL DIVISION                   )
BANKRUPTCY DISTRICT OF             )
THE STATE OF VICTORIA              )

IN THE MATTER OF   MOVITOR PTY. LTD. (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 006 724 036)

ANTHONY MILTON SIMS

Applicant

CORAM:    Drummond J
PLACE:    Brisbane
DATE:     15 March, 1996

REASONS FOR JUDGMENT

The applicant, who is the liquidator of Movitor Pty. Ltd. ("Movitor"), seeks a direction from the Court, pursuant to s. 479(3) the Corporations Law, as to whether he has power to enter into a contract of insurance with Lumley General Insurance Ltd. ("Lumley") pursuant to the Lumley Debt Retrieval Agreement.

The purpose of the application is to obtain the Court's opinion on whether this arrangement is void as constituting champerty or maintenance: the liquidator intends to use the funds to be provided by Lumley pursuant to this contract to prosecute an action, pursuant to ss. 588M and 588W the Corporations Law, against former directors of Movitor and
Movitor's holding company, Ausind Investments Pty. Ltd., respectively, for contraventions of the Corporations Law in respect of insolvent trading.  He has legal advice that he has good prospects of recovering substantial damages.  Movitor has no funds.  Some of the creditors are prepared to assist the liquidator.  But the total amount offered by them, although substantial, is likely to be insufficient to fund the entire proceeding or to provide the liquidator with an indemnity for any costs he may be ordered to pay to the proposed defendants, if the planned action fails.

The applicant was ordered to give notice of the application to the Australian Securities Commission and the Commission has made helpful submissions.  The persons who will be respondents to any action the applicant may bring with assistance from Lumley are not parties to this application.  Any direction I give cannot bind them or affect their rights in any way.  Such a direction will therefore have no effect, apart from protecting the liquidator, if he has made full and fair disclosure to the Court of the material facts, from liability for any alleged breach of duty as liquidator to a creditor, a contributory or the company in respect of anything done by him in accordance with the direction.  See G.B. Nathan & Co. Pty. Ltd. (In liq.) (1991) 24 N.S.W.L.R. 674 per McLelland J at 679-680 and Australian Securities Commission v Melbourne Asset Management Nominees Pty. Ltd. (1994) 49 F.C.R. 334 at 352.

On 1 March, 1995, the firm of chartered accountants of which the applicant is a member, entered into the Debt Retrieval Agreement with Lumley.  This agreement is described as a form of litigation insurance; it is being marketed under the name "Cover Court".  The Debt Retrieval Agreement does not oblige Lumley to provide any assistance to the applicant or anyone else in respect of the contemplated action or any other action.  Instead, it permits the applicant's firm to submit proposals to Lumley from time to time for "insurance", defined in cl. 1.3 to mean "the agreement reached between the Insured and Lumley in respect of a particular Claim or Proceeding".  The "Insured" means the person controlling a "formal insolvency administration" and includes the organisation or person subject to that administration.  The only claims that can be the subject of "insurance" granted by Lumley are claims submitted to Lumley by the applicant's firm and which are claims brought by a person in his capacity as the person controlling a "formal insolvency administration".  This is defined in cl. 1 to mean:

"1.1in the case of a company:-

1.1.1Liquidation,

1.1.2Provisional Liquidation,

1.1.3Official Management,

1.1.4Scheme of Arrangement,

1.1.5Receivership, whether Court appointed or otherwise,

1.1.6Agency for a Mortgagee in Possession

1.1.7Voluntary Administration; and,

1.2in the case of an individual:-

1.2.1Bankruptcy,

1.2.2An administration under Part X of the Bankruptcy Act 1966 (Cwlth),

1.2.3An administration under Part XI of the Bankruptcy Act 1966 (Cwlth); and,

1.3in either or any case shall include any administration now or hereafter sanctioned by any legislation now or hereafter enacted for the administration of the affairs of insolvent persons or corporations;"

"Proceeding" is defined to mean a legal proceeding brought with the object of prosecuting a Claim against a debtor, i.e., a money claim.  Pursuant to cl. 2.1, Lumley is entitled, in its absolute discretion, to accept or reject any such proposals and is entitled to accept any proposal for "insurance" on such terms and conditions as it sees fit; it will be bound to provide that "insurance" if the Insured indicates its desire to proceed with the proposal on the terms on which Lumley is prepared to accept it.  So long as an "insurance" agreement exists in a particular case, Lumley is obliged, by cl. 3.1, to pay the "Expenses", defined to mean the professional costs and disbursements (including costs and disbursements of the applicant's firm and others commissioned by the solicitor approved by Lumley and retained by the applicant's firm to prosecute the Claim "on behalf of the Insured and Lumley") which are reasonably incurred in conducting a Proceeding in relation to a Claim, as and when claims for payment of those expenses are submitted to it by the solicitor.  Lumley is also obliged to indemnify the Insured against all costs, expenses and damages awarded in any judgment and against any financial exposure incurred by the Insured in a Proceeding.  So if an action the subject of an "insurance" provided pursuant to the Debt Retrieval Agreement
fails, Lumley will be under an obligation to the applicant's firm to meet the successful defendants' costs, if the member of the applicant's firm who has brought the action is ordered to pay them, at least to the extent (if any) that Lumley binds itself to the applicant's firm by the terms of the particular "insurance" agreement to indemnify that member in respect of those costs.  The agreement also contains the following provisions:

6.Confidentiality

6.1Save where required by law, or with the consent of Lumley, the Insured shall not disclose the existence of this Agreement or any of its contents to any third party including the Debtor [i.e. the person or entity against which the Insured wishes to make a Claim].

7.Solicitor's appointment and instructions

7.1The Solicitor shall be appointed jointly as the solicitor for both the Insured and Lumley.  Subject to the following provisions in this paragraph, the Insured shall be responsible for giving instructions to the Solicitor in respect of a Proceeding.  However, the Insured shall ensure that the Solicitor keeps Lumley apprised of the progress of the Proceeding and, without limiting the generality of the foregoing, the Insured shall ensure that the Solicitor notifies Lumley immediately he becomes aware of any matter which would or may:

7.1.1affect the premium which would be set by a reasonable insurer when assessing the Insurance; or,

7.1.2affect a reasonable insurer in making a decision whether or not to terminate the Insurance; or,

7.1.3lead to a settlement of the Proceeding.

7.2...

7.3Lumley may at any time instruct the Solicitor to attempt to reach a settlement of a claim provided that [the company or individual the subject of the insolvency administration] is in no worse position than it would have been had the proceeding been ultimately successful.  If such a settlement is reached, the premium will be reduced to the surplus remaining after the subject entity receives what it would have received had the Proceeding been ultimately successful.

7.4In the event that any dispute arises between the Insured and Lumley as to the instructions which should be given to the Solicitor in relation to the settlement or conduct of a Proceeding, the Parties may refer the matter in dispute for advice from an independent third party to be mutually agreed ... failing which the matter in dispute shall be referred to an Arbitrator to be nominated by the President for the time being of the Law Institute of Victoria.

7.5...

[Control of the funded litigation is thus vested jointly in Lumley and the Insured; neither is given power to override the other's instructions to the solicitor.]

9.Premium Payment

9.1At Recovery [defined to mean `the point in time or points in time when the Insured receives into his control and possession all or part of the moneys to be received by him in relation to a claim whether by way of enforcement of a judgment debt, settlement or otherwise'] the Insured will pay any funds received into a credit bank account and remit the Premiums to Lumley immediately.

9.2In the event that only part of the moneys are received at Recovery, the Insured shall pay to Lumley that proportion of the Premium as the amount received bears to the Recovery Amount [defined to mean `the amount or amounts received or to be received including the claim, interest and costs'].

9.3...

9.4Notwithstanding anything to the contrary provided herein, the Insured shall not be liable to pay to Lumley any amount by way of Premium which exceeds the amount actually received in respect of a Claim.

On 3 May, 1995, Lumley advised the applicant's firm that it would accept the proposal for insurance submitted under the Debt Retrieval Agreement in respect of the proceedings the applicant intends to bring against the former directors of Movitor and Ausind on the following terms:

"1.Lumley will cover 50% of the expenses and other claims set forth in clauses 3.1.1 and 3.1.2 of the Lumley Debt Retrieval Funding Agreement.

2.The risk premium is to be expressed as 12% of the recovery made after reimbursement of all expenses (being the aggregate of the expenses financed by Lumley and the expenses financed by the Liquidator).

If the recovery action is not successful, Lumley will pay 50% of expenses as set out in Clauses 3.1.1 and 3.1.2 of the Lumley Debt Retrieval Agreement and also 50% of legal and associated costs of the defendant, should a court award such costs against the plaintiff."

By letter dated 11 May, 1995, the applicant informed Lumley of his intention to proceed with the insurance.

The Debt Retrieval Agreement is a standing facility which gives the applicant's firm the opportunity to request funding from Lumley to assist each of the members of the firm who are appointed to control insolvency administrations of companies and individuals to bring actions for the benefit of
the relevant administration.  If Lumley agrees to provide funding for any such action, the main consideration it will receive in the particular case is called a "premium" in the Debt Retrieval Agreement.  That is defined to mean "the amount expressed in any manner and by reference to any calculation whatsoever which is agreed by the parties to be payable by the Insured to Lumley at Recovery" and includes a premium expressed as a percentage of the Recovery Amount or as a dollar amount or as a percentage of the Recovery Amount (excluding costs) after reimbursement of the Expenses.

The consideration for the assistance Lumley has agreed to provide to the applicant under the insurance agreement made in the present case has two components:  first, reimbursement of all funds advanced by Lumley to or for the benefit of the applicant in connection with the action and, secondly, a "risk premium" fixed as a percentage of the net proceeds recouped in the litigation, i.e., after reimbursement of the advances made by Lumley to the applicant and reimbursement of the rest of the applicant's expenses of the action which have been met by the creditors.  This percentage share in the proceeds of the litigation is payable to Lumley only in the event that the action is successful and then only in the event that the judgment obtained in the action is satisfied, at least to the extent necessary to pay the premium (or a pro rata part of the agreed premium, if cl. 9.2 applies).

It is obviously advantageous in marketing its services for a firm of accountants practising in insolvency to have, by means of an agreement such as the Debt Retrieval Agreement, access to funds to enable members of the firm to run litigation for the benefit of insolvency administrations that they are appointed to control. It can be expected that, if there are no legal obstacles to this sort of arrangement, it will become a widespread practice for insolvency practitioners to enter into this sort of agreement. The provision by strangers to the litigation of funds to insolvency administrators for the purpose of enabling them to pursue worthwhile claims on behalf of the entity under administration when, without that assistance, good claims might not be able to be prosecuted, will often serve a good public purpose. The policy of the legislature, reflected in provisions such as ss. 588M and 588W the Corporations Law and ss. 120, 121 and 122 the Bankruptcy Act 1966 (Cth) will frequently be frustrated because the insolvency administrator will often not have access to the financial resources necessary to pursue, for the benefit of the administration, claims which have reasonable prospects of success.

But the question remains:  does such an arrangement involve maintenance or champerty?  If so, it will be illegal as contrary to public policy, even in those jurisdictions, including Victoria, in which the criminal offences and the civil torts of maintenance and champerty have been abolished.  See Roux v Australian Broadcasting Commission [1992] 2 V.R. 577 at 605. In Halsbury's Laws of Australia, Vol. 6, para. 110-7135, maintenance is defined as "assistance or encouragement, by a person who has neither an interest in the litigation nor any other motive recognised as justifying the interference, to a party to litigation".  Champerty is defined in para. 110-7140 as "a particular form of maintenance, namely maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject matter of the action".  Over the last century, the courts have adopted "an infinitely more liberal attitude towards the supporting of litigation by a third party than had previously been the case":  Trendtex Trading Corporation v Credit Suisse [1982] A.C. 679, per Lord Roskill at 702. The result, as has frequently been observed, is that now, much civil litigation is brought or defended by litigants with financial and other assistance from third parties, e.g., insurers, trade unions and solicitors, acting on the basis referred to in Clyne v Bar Association of New South Wales (1960) 104 C.L.R. 186 at 203. The existence of statutory legal aid schemes and the movement in the United Kingdom and Australia towards accepting that lawyers should be encouraged to assist litigants by being able to act on a true contingency basis, i.e., in return for taking not just their ordinary professional fees, but something in addition, out of the proceeds of the litigation, if successful, shows that substantial changes have occurred in the attitudes which shape the public policy that underlies the rules against maintenance and champerty. But those rules still remain in force.

         In submitting that the arrangements here in question should not be held to involve maintenance or champerty, counsel for the applicant relied on the statements of Lord Mustill in Giles v Thompson [1994] 1 A.C. 142:

"[I] believe that the law on maintenance and champerty can best be kept in forward motion by looking to its origins as a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants.  For this purpose the issue should not be broken down into steps.  Rather, all the aspects of the transaction should be taken together for the purpose of considering the single question whether, in the terms expressed by Fletcher Moulton L.J. in the passage already quoted from in British Cash and Parcel Conveyors Ltd. v Lamson Store Service Co. Ltd. [1908] 1 K.B. 1006, 1014, there is wanton and officious intermeddling with the disputes of others in where [sic] the meddler has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse." (p. 164)

and:

"[I]s it then so wholly outrageous that the law should turn its back on it?  I cannot say so.  On the contrary, the balance of advantage is overwhelmingly in favour of those who receive professional and financial assistance to recover a valid claim which would otherwise go unsatisfied."  (p. 165)

I think it clear from what Lord Mustill said in the first of these passages, and from what he said immediately before that in his judgment at 164, that he was not suggesting that proof of an interest by the outsider in the litigation, which the law will accept as sufficient to justify what could otherwise be maintenance, is no longer necessary.  Rather does he say that, in determining whether an interest in litigation of a kind not previously recognised by the law as sufficient to justify the outsider's maintenance of one of the litigants should now be accepted as sufficient for that purpose, the broad approach outlined should be adopted.  The existence of such an interest on the part of the outsider remains essential if his participation in litigation between others is not to involve maintenance or champerty.  See Beatty v Brashs Pty. Ltd. (1995) 13 A.C.L.C. 925 at 937; Trendtex Trading Corporation v Credit Suisse, supra, and Brownton Ltd. v Edward Moore Inbucon Ltd. [1985] 3 All E.R. 499 where Lloyd LJ said at 509:

"I now attempt to summarise in my own words the principles established by the House of Lords in Trendtex, as follows.  (i) Maintenance is justified, inter alia, if the maintainer has a genuine commercial interest in the result of the litigation.  (ii)  There is no difference between the interest required to justify maintenance of an action and the interest required to justify the taking of a share in the proceeds, or the interest required to support an out-and-out assignment.  (iii)  A bare right to litigate, the assignment of which is still prohibited, is a cause of action, whether in tort or contract, in the outcome of which the assignee has no genuine commercial interest.  (iv)  In judging whether the assignee has a genuine commercial interest for the purpose of (i) to (iii) above, you must look at the transaction as a whole.  (v)  If an assignee has a genuine commercial interest in enforcing the cause of action it is not fatal that the assignee may make a profit out of the assignment.  (vi)  It is an open question whether, if the assignee does make such a profit, he is answerable to the assignor for the difference."

Old authority, such as Hutley v Hutley (1873) L.R. 8 Q.B. 112, that an interest in litigation which might justify a stranger maintaining one of the litigants can never be sufficient to justify champerty cannot be accepted as correctly stating the law. In re The Bulli Coal Mining Company (1897) 18 N.S.W.L.R. 146 (Eq), affirmed in Bulli Coal Mining Company v Osborne [1899] A.C. 351 at 359, is authority to the contrary, as is Brownton Ltd. v Edward Moore Inbucon Ltd., supra.

It is also essential, if an interest in litigation is to be sufficient to justify its maintenance by an outsider, including its maintenance in circumstances that involve champerty, that it be an interest in the litigation separate from the benefit the outsider seeks to derive from his support for the litigation.  If the agreement to assist another's litigation could itself provide an interest by the outsider in the litigation sufficient to take the agreement out of the area of maintenance and champerty, the rule against maintenance and champerty could always be easily circumvented.  See Giles v Thompson [1993] 3 All E.R. 321 at 333 and 347 and [1994] A.C. 142 at 163; Beatty v Brashs Pty. Ltd., supra, at 937.

Lumley agreed to provide funds to the liquidator necessary to enable an action to be brought for the benefit of, inter alia, the company's creditors and also agreed to indemnify the liquidator against part of the costs he may be ordered to pay the defendants in the contemplated litigation if the action fails.  In return for providing these funds, Lumley is, if the action succeeds, to be reimbursed and is also to receive 12% of the net proceeds; Lumley is also entitled to involve itself in the conduct of the litigation.

The arrangement between the applicant's firm, the applicant and Lumley, constituted by the Debt Retrieval Agreement and the individual insurance agreements for which it provides, involves both maintenance and champerty:  Lumley had no commercial (or other) interest of its own in the litigation planned by the applicant prior to making the insurance agreement with him.  It thus has no interest in this (or any of the other) litigation it may fund under the Agreement, other than the opportunity to make a commercial profit for itself from supporting the litigation, an interest which it acquires pursuant to the arrangement itself.  That involves "trafficking in litigation", i.e., one form of champerty.  See Trendtex Trading Corporation v Credit Suisse, supra, at 694 and Giles v Thompson [1993] 3 All E.R. 321 at 347, per Bingham M.R.. It would be artificial to segregate the Debt Retrieval Agreement from such insurance agreements that may arise under it and hold that the Debt Retrieval Agreement gives Lumley an interest anterior to the interest it acquires in particular litigation by force of the insurance agreement, sufficient to justify its involvement in that litigation. The Court must look at the totality of the transaction in determining whether it involves illegal maintenance or champerty: Trendtex Trading Corporation v Credit Suisse, supra, at 703 and Giles v Thompson [1994] 1 A.C. 142 at 164.
         That Lumley may have identified the provision of funding to enable insolvency administrators to recoup moneys for the benefit of those administrators that would otherwise not be recoverable as providing a beneficial public service, from which it may be able to make a commercial profit, cannot affect the position:  the motive of a maintainer is generally irrelevant - Martell v Consett Iron Co. Ltd. [1955] Ch. 363 at 399-400 - so that a non-malicious or even a worthy motive will of itself be no defence to an action for maintenance.

Each of the agreements constituting the arrangement is therefore void and contrary to public policy unless it falls within one of the recognised exceptions which accept that certain kinds of champertous arrangements are lawful.

One such exception, long established, is the rule that a trustee in bankruptcy may lawfully assign any of the bankrupt's bare causes of action that have vested in the trustee on terms that the trustee is to receive a share of the proceeds of the litigation, if it is successful, although such as assignment is generally unlawful because it is regarded as involving maintenance and champerty.  In Seear v Lawson (1880) 15 Ch.D. 426, the trustee in bankruptcy, after commencing proceedings to enforce a right of action of the bankrupt that had vested in the trustee, assigned the suit to a stranger for £2,000. The stranger had no interest in the litigation prior to taking it over. The defendant unsuccessfully challenged the assignee's right to continue the proceedings on the ground that the assignment involved conduct in the nature of maintenance and champerty. The Court of Appeal held that the right of action in question was within s. 17 the Bankruptcy Act 1869 (U.K.), which vested all the bankrupt's property in the trustee, and so fell within s. 25 of that Act, which empowered the trustee to sell all of the property of the bankrupt.  Jessell M.R. said, at 433:

"If the trustee gets a right of action, why is he not to realise it?  The proper office of the trustee is to realise the property for the sake of distributing the proceeds amongst the creditors.  Why should we hold as a matter of policy that it is necessary for him to sue in his own name?  He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding up of the bankruptcy till the end of the litigation.  Considering these things, it seems to me to be a priori probable that he would be entitled to sell it, but I prefer to rest my decision upon the plain words of the statute.  The words are, `all the property', and it does not appear to me that we have any right to exclude from the plain provision of the 25th section anything which has passed to the trustee under the 17th section."

In Guy v Churchill (1888) 40 Ch.D. 481, a trustee in bankruptcy's assignment to a creditor of the bankrupt of a right of action of the bankrupt on terms that the creditor should, at his own expense, prosecute the action but would pay to the trustee 25% of any recoveries from the action net of the creditor's costs of prosecuting the proceeding was held to be lawful and not to be a champertous arrangement. See also Ramsey v Hartley [1977] 1 W.L.R. 686 (and Stein v Blake [1995] 2 W.L.R. 710 at 719). These decisions were followed in Re
Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 F.C.R. 320.

A company liquidator has a power of sale similar to that which a trustee in bankruptcy has under ss. 134(1)(a) and 135(1)(a) the Bankruptcy Act 1966 (Cth); under s. 477(2)(c) the Corporations Law, he can "sell or otherwise dispose of, in any manner, all or any part of the property of the company" in aid of performing his duty of realising the company's assets. There is, in my opinion, no reason for denying to a liquidator exactly the same power as is possessed by a trustee in bankruptcy to dispose of a bare right of action to a stranger either for a cash payment or on terms that the stranger will pay to the company part of the proceeds of the litigation.  In Re Park Gate Waggon Works Company (1881) 17 Ch.D. 234, it was held that the statutory power of the liquidator to sell the property of the company included power to sell bare rights of action the company had against directors for misfeasance in office, something which, but for the statutory power, would have conflicted with the rule against maintenance. In Grovewood Holdings Plc v James Capel & Co. Ltd. [1995] 2 W.L.R. 70, Lightman J held that an agreement by a third party to fund and control litigation commenced by a liquidator against a financial adviser to the company for damages for negligence, in return for one half of the damages recovered, was champertous. At p. 76, Lightman J accepted, however, that the statutory power of sale possessed by both a trustee in bankruptcy and a liquidator exempted the sale of a bare cause of action by such an administrator in return for a share of recoveries from the rules relating to maintenance and champerty. His Lordship said that the liquidator's counsel correctly did not contend that there had been any sale of the cause of action itself; he referred to Glegg v Bromley [1912] 3 K.B. 474 (a case not involving the exercise of the statutory power of sale conferred on trustees in bankruptcy and liquidators) in which it was held, at 484, 488-489 and 489-491, that, quite apart from the special rules relating to insolvency, anyone can assign the fruits of an action, including an action in tort, as opposed to the cause of action itself, and that such an assignment will only amount to champerty and so infringe public policy if the purchaser is given the right to intervene in the conduct of the action. Lightman J held that, because there was no sale of a cause of action belonging to the company by the liquidator which would have been within the exemption from maintenance and champerty, the fact that the purchaser from the liquidator of a share in the fruits of the litigation was to be involved in the conduct of the litigation made it champertous. His Lordship said, at 76-77:

"[t]here is a critical distinction between a sale of the recoveries, or an interest in the recoveries, and a sale of a bare cause of action.  The statutory power of sale of a bare cause of action would be empty of effect if it did not at the same time confer on such a sale immunity from the (otherwise) applicable law of maintenance and this immunity has by judicial decision been recognised as extending to sales on terms providing for a division of recoveries.

I can see no basis in principle or authority for extending the statutory exemption applicable in case of sales of bare causes of action to sales of the fruits of litigation which include provision for the purchaser to finance the litigation."

In my opinion, the reason why the sale of a bare right of action by a trustee in bankruptcy or a liquidator does not involve maintenance and champerty is that, being a sale under statutory authority, to do that which Parliament has authorised, either expressly or by necessary implication, cannot involve the doing of anything that is unlawful.  Cf. Allen v Gulf Oil Refining Ltd. [1981] A.C. 1001 and The Corporation of the Director of Aboriginal and Islanders' Advancement v Peinkinna (1978) 52 A.L.J.R. 286, particularly at 291. That a power of sale capable of applying to choses in action is conferred by statute, e.g., on a mortgagee under a private arrangement with a borrower, will not necessarily mean that that is sufficient authority to do a particular thing that would otherwise be unlawful. But having regard to the statutory context in which s. 477(2)(c) the Corporations Law is found, there is every justification for giving the principle I have referred to the fullest operation.  The liquidator acts as an officer of the Court, on behalf of the Court.  He is invested with a range of powers in aid of maximising the funds available for distribution in the liquidation.  These include power to undo completed transactions of the company involving preferences and the like and those powers which enable him to take a range of compensatory proceedings against persons who have misconducted themselves in the management of the company.  As was indicated by Chitty J in the opening words of his judgment in Guy v Churchill, supra, at 485, and by Jessell M.R. in the passage from his judgment in Seear v Lawson, supra, which I have set out above, it is because the power of sale of the property of the insolvent is conferred by statute for this purpose that the transaction is immune from any rule of law otherwise applicable that would make the sale unlawful and open to challenge.

Whether he sells a bare right of action or the fruits of the action, the only authority a liquidator has to make any such sale is this statutory power.  It has long been accepted that a trustee in bankruptcy can lawfully sell a bare right of action owned by the insolvent to a stranger with no interest in it, although that would involve maintenance or champerty but for the fact that he sells under the statutory authority.  A liquidator has the same power.  In my opinion, there is no reason why this statutory authority should not make lawful any other sale of the insolvent company's property by a liquidator, including the sale of a share in the proceeds of an action belonging to the company to a person with no interest in the litigation on terms that that person is to have control of the litigation, although that would involve champerty but for the transaction being made under that authority.  This will be the position, provided only that the subject matter of the sale is "property of the company" within the statutory power.
The expression in ss. 134 and 135 the Bankruptcy Act 1966 (Cth), "the property of a bankrupt", is defined in s. 5(1) of the Act to mean the property divisible among the bankrupt's creditors pursuant to s. 116 the Bankruptcy Act 1966 (Cth) and, in addition, "any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt". The term "property" is defined in s. 5(1) to include "any estate interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property". The term "the property of a bankrupt", which the trustee in bankruptcy is given statutory power to sell, thus has an extremely wide reach. It includes a chose in action, although that term is not expressly referred to in any of the definition sections. Cf. Re Nguyen, supra, at 325.  It also includes, by express definition, "any ... interest or profit, whether present or future, vested or contingent arising out of or incident to any such" chose in action.  In my opinion, the expression "the property of a bankrupt", which the trustee has power to sell under the Bankruptcy Act 1966 (Cth), includes not only a chose in action regarded as the right to litigate, but also the whole or a share of the expected fruits of that chose in action.  Cf. Official Receiver in Bankruptcy v Schultz (1990) 170 C.L.R. 306 at 314. In Grovewood Holdings Plc v James Capel & Co. Ltd., supra, it was, in my respectful opinion, correctly acknowledged (at 76) that recoveries from an action are property distinct from the cause of action itself.
The subject matter of the litigation the subject of the funding arrangement between the applicant and Lumley is the statutory causes of action created by ss. 588M and 588W the Corporations Law.  In Re M.C. Bacon Ltd. (No. 2) [1990] B.C.L.C. 607, it was held that the liquidator's right to seek an order under the insolvent trading provisions of s. 214 the Insolvency Act 1986 (U.K.) against a director for such contributions to the company's assets as the Court considered to be proper was not itself an "asset of the company" (i.e., property of the company) within certain of the rules under that insolvency legislation.  Millett J said, at 613:

"I do not see how an application for such an order under the section can properly be described as an attempt to realise or get in an asset of the company.  This must, in my view, mean an existing asset and, until the order has been made and complied with, there is no such asset."

But given the differences between the insolvent trading provisions of s. 214 of the English legislation and those of ss. 588M and 588W the Corporations Law, this decision provides no authority, in my opinion, for contending that the property of the company does not include the expected fruits of an action brought under ss. 588M or under 588W. The right of the liquidator to recover damages created by each of these sections is described as a right to recover from the director and the holding company an amount equal to the loss or damage suffered as a result of the company's insolvent trading in which the director and the holding company were implicated "as a debt due to the company". That "debt" arises once the conditions of liability have been fulfilled, something that must occur prior to commencement of any action for recovery under either section. Such a "debt" can properly be regarded as part of the property of the company which the liquidator is empowered to sell. Even if the rights to compensation created by ss. 588M and 588W are not regarded as true debts but rights sui generis, Magor & St. Mellons Rural District Council v Newport Corporation [1950] 2 All E.R. 1226 at 1230-1231 is authority for holding that they are still well capable of falling within the definition of "property of a company" in the relevant provisions of the Corporations Law.

For these reasons, I am not prepared to draw the distinction that was drawn in Grovewood Holdings Plc v James Capel & Co. Ltd., supra, between a sale of the cause of action by a liquidator under the statutory power and a sale by him of the fruits of that cause of action under the same power.

Since a share in the fruits of an action belonging to an insolvent company is "property of the company" for the purposes of s. 477(2)(c) the Corporations Law, that section authorises the liquidator to make an agreement to pay a percentage of such recoveries in return for assistance in running the action, because the section empowers the liquidator not only to sell, but to "otherwise dispose of, in any manner" any part of the property of the company.

It remains to consider, firstly, whether the quantum of the profit which Lumley is to receive - 12% of the net recoveries on top of reimbursement of the funds it provides the liquidator to run the action - is of any relevance to determining whether the applicant is entitled to the direction sought and, secondly, whether the fact that Lumley will indemnify the applicant for only one half of the proposed defendants' costs if the action fails is of any relevance to that either.

It can be accepted that, if the business of providing financial support for litigation by others is conducted by reputable organisations who compete with each other for that business, the fees charged by them for the provision of such assistance are likely to be kept to a level which will truly reflect the risk that the particular litigation being assisted may fail and so will provide for no more than a reasonable commercial profit.  The evidence does not indicate whether such competitive forces are already at work and no attempt was made to prove how the 12% premium to be paid to Lumley by the applicant was arrived at.  Rather were submissions confined to simply asserting that it was such a small figure that it should be assumed to be reasonable recompense for Lumley's bearing the risk that it might have to fund one half of the costs incurred by the applicant in running the litigation and also to meet one half of the costs he will be ordered to pay to the other parties, if the litigation turns out to be unsuccessful.  If the legality of this arrangement depended on proof that the percentage profit that Lumley is to receive, if the action succeeds, is a reasonable one, the applicant would not be entitled to the direction sought.  But I do not think the absence of such proof disentitles the applicant to that direction.

In Brownton Ltd. v Edward Moore Inbucon Ltd., supra, the Court was dealing with the general position and not with sales of interests in litigation made by trustees in bankruptcy and liquidators under the statutory power of sale.  Lloyd LJ, at 509, concluded that, if the assignee of a cause of action has a genuine commercial interest in enforcing it, it is not fatal that the assignee may make a profit out of the assignment.  Megaw LJ said, at 506, that if there was a prospect that the assignee of a cause of action in which he prima facie had a sufficient interest to prevent it being regarded as involving champerty might make "an excessive profit", that "might properly be a factor in deciding whether the commercial interest relied on by the assignee was genuine".

But whatever be the position with respect to such arrangements outside insolvency, that the purchaser of an interest in litigation from a trustee in bankruptcy or a liquidator intends to make a profit from the transaction cannot, in my opinion, provide any reason of itself to hold that such a transaction is outside the exception and so will involve champerty.  Persons who have no colour of interest in causes of action belonging to an insolvent can buy the cause of action or the fruits of that action and the right to conduct the litigation from the insolvency administrator without there being any infringement of the rules relating to champerty.  A profit-making motive may be the only reason such a person is prepared to participate in such a speculative exercise.  The question whether an arrangement a liquidator has entered into is within the exception to the rules relating to champerty and maintenance must depend on whether the arrangement is truly an exercise of the liquidator's statutory power of sale.  If a liquidator were to dispose of the insolvent's cause of action or the fruits of such an action in circumstances in which the purchaser was likely to make a grossly excessive profit, at the expense of the company, the liquidator's exercise of the power of sale might well not be a bona fide exercise of the power, with the result that the transaction could not be held to be within the exception to the rules relating to maintenance and champerty.  But such exceptional cases apart, the policy of the winding up and bankruptcy laws is to confide their administration in relation to individual insolvent entities to suitably qualified registered administrators, over whom the Court exercises supervisory power and who are required to pay due regard to the wishes of the creditors.  Unless there is some clear reason apparent from the circumstances of the case for thinking that a person stands to gain a grossly excessive profit from an agreement with a trustee in bankruptcy or a liquidator involving the disposal to that person of an interest in litigation belonging to the insolvent, if the administrator enters into such a transaction with the fully informed consent of the creditors, a sale or other disposition under the statutory power of an interest in litigation belonging to an insolvent is, I think, entitled to be treated as a bona fide exercise by the insolvency administrator of the statutory power, given the Court's reluctance to interfere with decisions made by such functionaries.  Cf. McPherson's Law of Company Liquidation, 3rd Ed., p. 232 and Yeomans v Walker (1986) 5 N.S.W.L.R. 378 at 383. That will be enough, in my opinion, to ensure that such a transaction will not be regarded as involving maintenance or champerty. Despite the lack of evidence as to the reasonableness of Lumley's profit, in view of the support of the creditors for the arrangement with Lumley that the evidence reveals and the other circumstances of the case, I accept that the arrangement is a bona fide exercise by the applicant of his power to dispose of an interest in Movitor's property.

I agree with the position adopted by the Commission in its submissions that it will be essential, before a trustee in bankruptcy or a liquidator can lawfully enter into an arrangement of the kind here in question without fear that the arrangement will be champertous, for him to fully inform the creditors of the details of the funding arrangement proposed and to obtain their approval to his entering into the arrangement in the manner provided for by the relevant
legislation, i.e., either at a meeting of creditors or from the committee of inspection.

This may sometimes involve provision of those details to a person who is both a creditor and a potential defendant in an action to be brought by the liquidator and that may, in turn, result in challenges to the propriety of the maintainer's assistance. But the need to show that an arrangement by which a liquidator, in return for litigation finance, bargains away what may be a very significant asset of the company is a bona fide exercise of the statutory power, in my opinion, outweighs such inconveniences. Moreover, a trustee in bankruptcy (pursuant to s. 177 the Bankruptcy Act 1966 (Cth)) and a liquidator (pursuant to s. 479 the Corporations Law), is bound to have regard to the creditors' wishes, but is not obliged to give effect to them; so a creditor with dominant voting power who is also a potential defendant in an action the liquidator wishes to bring should not be able to frustrate the liquidator's plan to raise finance to sue that creditor because he is privy to the details of that plan, if the liquidator has the support of the other creditors.

Counsel for the applicant submits that the confidentiality clause in the Debt Retrieval Agreement which the Commission criticises was not intended to prohibit the applicant, as liquidator, from disclosing the existence of the arrangements he and his firm have made with Lumley; he points out that the liquidator, at a meeting of creditors held on 15 November, 1994, mentioned the availability of Cover Court insurance and that at the meeting of the committee of inspection held on 17 March, 1995, at which a decision was made to pursue actions against the directors of Movitor and against Ausind and at which a number of committee members and other creditors offered financial assistance to run the proposed actions, which was approximately equal to 50% of the anticipated legal costs and liquidator's remuneration, the committee agreed that Cover Court should be used to fund the other 50%.  The letter from Lumley, which the liquidator tabled at this meeting, set out the remuneration that Lumley would require to fund one half of all expenses in relation to the contemplated proceedings.  Although it is preferable that the liquidator make a full disclosure to creditors of the details of the arrangements made to show clearly that the liquidator's disposition of an interest in litigation belonging to the company is a bona fide exercise of the statutory power, here, the liquidator has made a substantial disclosure to the creditors of those details.  I also think that, because of the potential for ambiguity in the confidentiality clause in this Debt Retrieval Agreement, it is preferable that a liquidator not enter into such an arrangement unless it expressly permits disclosure of the existence of the agreement and its provisions to the creditors in the relevant insolvency administration.  But that has largely been done here already by the applicant.

The last question is whether the refusal of a person who funds another's litigation to accept liability for the adverse party's costs, if the assisted litigation fails, is relevant to whether the funding arrangement involves maintenance or champerty or is otherwise unlawful.  This has been considered in a number of recent cases.  See McFarlane v E.E. Caledonia Ltd. (No. 2) (1995) 1 W.L.R. 366, Tharros Shipping Co. Ltd. v Bias Shipping Ltd. (1995) 1 Lloyd's L.R. 541 and Roux v Australian Broadcasting Commission, supra, at 606.  Despite what Rix J had to say about McFarlane v E.E. Caledonia Ltd. (No. 2), supra, I think it is difficult to reconcile his decision in Tharros Shipping Co. Ltd. v Bias Shipping Ltd., supra, with the earlier case.  However, in a passage at 557-559 in Tharros Shipping Co. Ltd. v Bias Shipping Ltd., supra, Rix J, in my respectful opinion, gives persuasive reasons for his conclusion that, so long as the maintainer has a legitimate interest in the litigation, that will save it from illegality and it is not an additional condition of the lawfulness of the maintenance of another's action that the maintainer, if the action is unsuccessful, be liable to pay the winner's costs.  If injustice might occur in a particular case because a maintainer has refused to accept liability for the adverse party's costs, if that party is successful, the Court is not without the means to prevent that injustice:  it has wide power to require the applicant (whether a corporation or a natural person) to provide security for the respondent's costs.  See Bell Wholesale Co. Ltd. v Gates Export Corporation (1984) 2 F.C.R. 1 at 2-3; Rajski v Computer Manufacture & Design Pty. Ltd. [1982] 2 N.S.W.L.R. 443. And the Court has power, in an appropriate case, to order a non-party to pay a party's costs: see Caboolture Park Shopping Centre Pty. Ltd. (In liq.) v White Industries (Qld) Pty. Ltd. (1993) 45 F.C.R. 224.

But even if this approach be incorrect, I think that the fact that Lumley is only prepared to accept liability to meet part of the costs of the proposed defendants, if the applicant's action against them fails, is irrelevant to whether that consideration should be regarded as converting otherwise unobjectionable assistance to the applicant into unlawful maintenance and champerty, for other reasons.  The arrangement here in question, for the reasons given, stands entirely outside the area of possible maintenance and champerty.  The only relevant question is whether the failure of Lumley to assume liability to meet the entirety of any costs that the applicant might be ordered to pay to the defendants, if his action is unsuccessful, is sufficient to turn what would otherwise be a disposition pursuant to the statutory power into a transaction not authorised by the statutory power.  It is only if that is the case that it would then be open to consider whether the arrangement was unlawful as involving maintenance and champerty or illegal for other reasons.  In my opinion, the answer is clear:  the fact that a liquidator procures funding from an insurer for an action to be brought for the benefit of his administration in return for payment to the insurer of a share of the proceeds if the action succeeds, on terms that the insurer will not meet the whole or even any part of the costs the liquidator might be ordered to pay to the successful defendants if his action fails, cannot prevent such an arrangement being a disposition of the company's property and so within the statutory power of disposition on any terms and in any manner the liquidator considers appropriate.  Commercial practicalities are likely, in any event, to make this kind of insurance saleable to liquidators only if it does include an appropriate measure of protection in respect of the liquidator's potential liability to meet the defendant's costs if his action fails; this is especially so since liquidators begin proceedings at their own risk and, if unsuccessful, will generally be personally liable to meet the costs of the successful party subject to the right of indemnity in respect of those costs against the assets of the company, for whatever that may be worth.

There will be a direction in terms of paragraph 1.1 of the application to the effect that the liquidator has the necessary power.

The applicant requests that the confidential exhibits and submissions not be put on the Court file, but be returned to the applicant after judgment. That is inappropriate. If confidentiality is justified, this material can be made the subject of an order under s. 50 the Federal Court of Australia Act 1976 (Cth).

But the applicant's stated concern for confidentiality raises the question whether I should give a direction that these reasons are also to be kept confidential since I refer in them to the confidential exhibits.  If I do this, I would probably have to produce for publication an edited version of them.  I doubt, however, that is justified.  See Arnotts Ltd. v Trade Practices Commission (1989) 24 F.C.R. 313 at 316-318, although this case is not perhaps on all fours with the present one in this respect. But the applicant is entitled to an opportunity to demonstrate that I should follow that course. There will therefore be a direction that the confidential exhibits in the material relied upon by the applicant in support of the application and the applicant's written submissions and these reasons be kept confidential until 4.00 p.m. on 25 March, 1996 and that they not be open to inspection by anyone before then without the leave of a Judge. There will also be a direction that the applicant deliver written submissions and copies of any affidavits upon which the applicant may wish to rely to my associate by 22 March, 1996, if he wishes to contend that any of this material should be kept confidential and that I should publish only an edited version of these reasons, deleting reference to material taken from confidential exhibits.

I certify that this and the preceding
32 pages are a true copy of the
reasons for judgment herein of the
Honourable Justice Drummond.

Associate:
Date:        15 March, 1996

Counsel for the applicant:           Mr. G. Bigmore Q.C.

Solicitors for the applicant:        Purves Clarke Richards

Solicitors for the amicus curiae:     Australian Securities Commission

Date of Hearing:  15 September, 1995

Place of Hearing:  Melbourne