Re Octaviar Ltd (in liq) and Octaviar Administration Pty Ltd (in liq)

[2017] NSWSC 1005

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Octaviar Limited (in liq) and Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1005

Hearing dates:

18 July 2017

Decision date:

28 July 2017

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

The Court gives directions that the liquidators would be justified in allocating settlement proceeds in the manner proposed.

Catchwords:

CORPORATIONS — Winding up — Conduct of liquidation — Application for directions – where two companies settle overlapping claims against third party for global sum – where costs of proceedings borne predominantly by one company – whether liquidators would be justified in allocating settlement proceeds in manner proposed

Legislation Cited:

- Corporations Act 2001 (Cth), ss 477(2)(m), 479, 511
- Court Suppression and Non-publication Orders Act 2010 (NSW)
- Insolvency Law Reform Act 2016 (Cth)
- Corporations Regulations 2001 (Cth), reg 10.25.02(3)(h)

Cases Cited:

- 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 37
- Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53
- Dean-Willcocks Re Soluble Solution Hydroponics (1997) 42 NSWLR 209
- Fortress Credit Corporation II (Australia) Pty Ltd v Fletcher and Barnet as liquidators of Octaviar Administration Pty Ltd (in liq) [2015] NSWCA 85; (2015) 89 NSWLR 110
- Re Handberg (2010) 79 ACSR 373
- Re Hayes Steel Framing Systems Pty Ltd (admins apptd) [2017] NSWSC 385
- Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27
- Re One.Tel Networks Holdings Pty Ltd (2001) NSWSC 1065; (2001) 40 ACSR 83
- Re One.Tel (2014) 99 ACSR 247
- Re Primespace Property Investment Limited (in liq) [2016] NSWSC 1821
- Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171
- Stewart v Atco Controls Pty Ltd (in liq) (2014) 242 CLR 307
- Trio Capital Ltd (Admin App) v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425

Category:

Procedural and other rulings

Parties:

Amended Interlocutory Process filed by General Purpose Liquidators
William John Fletcher and Katherine Elizabeth Barnet (First Applicants on Interlocutory Process)
Octaviar Limited (receivers and managers appointed (in liquidation) (Second Applicants on Interlocutory Process)
Octaviar Administration Pty Ltd (in liquidation) (Third Applicant on Interlocutory Process)
David John Kerr (Respondent)

  Interlocutory Process filed by Special Purpose Liquidators
William John Fletcher and Katherine Elizabeth Barnet (First Plaintiff/Respondent)
Octaviar Limited (receivers and Managers appointed) (in liquidation) (Second Plaintiff)
Octaviar Administration Pty Ltd (in liquidation) (Third Plaintiff/Respondent)
David John Kerr (Applicant)

Representation:

Counsel:
A Bell SC/A Rao (Applicants/Respondents)
M Oakes SC (Respondent/Applicants)

 

M Oakes SC (Applicant/Respondent)
A Bell SC/A Rao (Respondents/Applicant)

    Solicitors:
Johnson Winter Slattery (Applicants/Respondents)
Thomson Geer (Respondent/Applicant)

File Number(s):

2011/397200

Judgment

The relief sought in this application

1. By Amended Interlocutory Process filed, by leave, on 18 July 2017, Mr William Fletcher and Ms Katherine Barnet, in their capacity as general purpose liquidators (“GPLs”) of Octaviar Limited (in liq) (“OL”) and as liquidators of Octaviar Administration Pty Ltd (in liq) (“OA”) (which is a subsidiary of OL), and OA and OL apply for directions under ss 479 and 511 of the Corporations Act 2001 (Cth) that they are justified in causing the settlement proceeds of litigation brought by OA and OL against KPMG (“KPMG proceedings”) to be distributed in the manner agreed between them and the special purpose liquidator (“SPL”) of OL. The GPLs also sought orders that their costs of and incidental to the Amended Interlocutory Process be costs in the winding up of, and paid out of the assets of, OA and OL with each company to bear 50% of those costs, and that the SPL’s costs of and incidental to the Amended Interlocutory Process be costs in the winding up of, and paid out of the assets of, OL. The GPLs’ application was supported by affidavits of Mr Fletcher dated 9 February 2017, 19 May 2017 and 29 May 2017 and by two affidavits of their solicitor, Mr Piesiewicz, both dated 17 July 2017.

2. The orders sought by the GPLs were somewhat more specific than the relief sought in the Amended Interlocutory Process, and sought a direction under s 479(3) of the Corporations Act in respect of OL (which was wound up by the Court) and an order under s 511 of the Corporations Act in the case of OA (which is in voluntary winding up) that they are justified in agreeing to an allocation of settlement proceeds, as set out in paragraph 9 of Mr Fletcher’s second affidavit, as liquidators of OA and are justified in causing the settlement proceeds to be distributed in accordance with that proposed allocation in their capacity as liquidators of OA and GPLs of OL.

3. By an Interlocutory Process filed on 26 May 2017, the SPL in turn sought a similar direction, under s 479(3) of the Corporations Act, that he was justified in agreeing to the proposed allocation of the settlement proceeds as set out in Mr Fletcher’s second affidavit. The orders sought by the SPL somewhat expanded that application, by introducing an additional condition as to the treatment of remuneration if the Court considered that condition was necessary. The SPL’s application was supported by his affidavit dated 24 May 2017, which was also relevant to the GPLs’ application.

4. Although, as noted above, I will refer to Mr Fletcher and Ms Barnett as the “GPLs” in this judgment, their submissions in this application were made in their capacity as liquidators of OA, and the respondent to the application, Mr Kerr as SPL of OL, represented OL’s interests in this application. Mr Kerr was appointed by the Court as SPL of OL on 8 December 2011, and the powers conferred on him were extended by an order made by the Court on 27 February 2017 to authorise him to represent OL’s interests in respect of the allocation of the settlement proceeds as between OA and OL.

The nature of the Court’s jurisdiction

5. This application is brought, in respect of OL, under s 479(3) of the Corporations Act which relevantly provides that, in the case of a Court-ordered winding up, a liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up. The application is brought, in the case of OA, under s 511 of the Corporations Act which relevantly provides that, in a voluntary winding up, the Court may exercise all or any of the powers that it may exercise if the company were being wound up by the Court and, if satisfied that the determination of a question will be just and beneficial, may make such order on the application as it thinks just. Mr Bell, who appears with Ms Rao for the GPLs, rightly points out that ss 479 and 511 of the Corporations Act were repealed by the InsolvencyLaw Reform Act 2016 (Cth) but continue to have operation until 1 September 2017 by reason of reg 10.25.02(3)(h) of the Corporations Regulations 2001 (Cth): Re Hayes Steel Framing Systems Pty Ltd (admins apptd) [2017] NSWSC 385. The Court therefore has jurisdiction to make the directions sought under those sections, if it is otherwise appropriate to do so, and it is not necessary to address the transitional provisions that may otherwise have been applicable, had this application been heard after 1 September 2017.

6. I summarised the scope of the Court’s power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows:

“Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator’s application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114; Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [46]. The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: Sanderson v Classic Car Insurances Pty Ltd above at 117; Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-7; 5 ACSR 673; 9 ACLC 1291; Re Ansett Australia Ltd above at [65]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 at [32].”

7. I also referred to the scope of the Court’s powers under s 511 of the Corporations Act in that decision and observed (at [8]) that:

“Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 … Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a Court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be ‘just and beneficial’ to give the relevant direction. The court may give such a direction where it will be ‘of advantage in the liquidation’: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty: Handberg v MIG Property Services Pty Ltd at [7].”

8. Mr Bell submits, and I accept, that the Court’s powers to give judicial advice and make directions under s 479(3) and s 511 of the Corporations Act are of substantially the same character and are intended to facilitate the performance of a liquidator’s functions and should be interpreted widely to give effect to that intention, and that the Court may give such advice or make such a direction where it is advantageous to the liquidation to do so: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83; Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [32]. Mr Oakes, who appears for the SPL, submits, and I accept, that the directions sought do not involve either the GPLs or the SPL seeking a direction as to the making of implementing of a business or commercial decision, which the Court will generally be reluctant to give.

9. I am satisfied that this application involves questions of law and of the reasonableness of the GPLs’ and SPL’s conduct which warrant the giving of directions by the Court. As Mr Bell points out, the proposed allocation of the settlement proceeds of the KPMG proceedings between OA and OL has an element of compromise about it, as to which it will often be appropriate for the Court to give directions: Re One.Tel Ltd above per Brereton J at [35]. I also proceed on the basis that, as Brereton J noted in Re One.Tel Ltd above at [36], the Court’s function in giving such a direction will not require it to reconsider all of the factors that the GPLs on the one hand and the SPL on the other have considered, but that:

“[T]he court needs to be satisfied, before making a direction, that the decision is proper and reasonable; at least usually, this will necessitate consideration of the liquidator’s reasons, and the process by which the decision has been reached.”

The affidavit evidence

10. The affidavits and their exhibits were subject to claims for confidentiality and for orders under the Court Suppression and Non-publication Orders Act 2010 (NSW), which I made on an interim basis, subject to the parties’ further review of those affidavits and exhibits to seek to identify those matters that could be made publicly available without risk to other litigation presently being conducted by the GPLs, OA or OL. I have had regard to but will generally not refer, in this judgment, to matters which are plainly subject to legal professional privilege or have the capacity to affect that litigation, and parts of this judgment may be redacted in respect of such matters.

11. By his affidavit dated 9 February 2017, Mr Fletcher referred to the circumstances in which OA and OL passed into liquidation in September 2009; to the commencement of the two KPMG proceedings, brought by each of OA and OL against KPMG, which Mr Fletcher notes were in materially identical form; and to the causes of action relied on and the damages or compensation claimed in those proceedings. I assume, given the nature of the claims, that an order had been or was likely to be made that the two proceedings brought by each of OA and OL against KPMG be heard together. Other proceedings were commenced by other entities against KPMG and an associated entity in the Supreme Court of Queensland. Those proceedings went to mediation and, prior to that mediation, the GPLs’ solicitors consulted with the SPL’s solicitors relating to their proposed approach to the mediation. That approach involved obtaining Counsels’ opinion as to the range within which it would be appropriate to settle OA’s and OL’s claims at mediation for a global amount, on the basis that the allocation of any global settlement amount would then be resolved between OA and OL by negotiation or application to the Court. [REDACTED]

12. In April 2016, OA and OL entered into a funding agreement with a third party litigation funder. The KPMG proceedings were subsequently settled at the mediation within the range contemplated by Counsels’ opinion obtained by the GPLs. A settlement deed was executed on or about 30 November 2016. In December 2016, the committees of inspection of each of OA and OL unanimously approved the GPLs’ entry into and compliance with the obligations contained in the settlement deed and a condition precedent to that settlement deed was satisfied. The amount payable under that settlement deed was received by the GPLs in late December 2016. Further proceedings have since been commenced to determine a dispute between OA, OL and the litigation funder as to the amount payable to that funder under the funding agreement on settlement of the KPMG proceedings.

13. Mr Fletcher’s second affidavit dated 19 May 2017 refers to discussions between Mr Fletcher, representing OA, and the SPL, representing OL, as to the allocation of the settlement proceeds in respect of the KPMG proceedings. The proposed allocation provides, first, for payment of the funder’s entitlement to the settlement proceeds, the amount of which remains to be determined as I noted above; second, for reimbursement of OA and OL for costs which each of them paid in respect of the KPMG proceedings, including legal costs and liquidators’ remuneration; and, third, for the distribution of 84.17% of the balance to OL and 15.83% of the balance to OA. I note, for completeness, that the remuneration payable to the GPLs was previously approved by the committees of inspection for OA and OL and no occasion for approval of that remuneration by the Court arises in this application. It is common ground between the GPLs and the SPL that that proposed allocation of the settlement proceeds is commercially justifiable, although several issues in respect of that approach were raised by the GPLs and SPL for consideration in this application.

14. Mr Fletcher’s second affidavit indicates that OA paid 98% of the costs referable to the conduct of the KPMG proceedings and OL paid 2% of those costs and also provided a substantial amount for security for costs which has since been repaid to it. Mr Fletcher’s evidence is that that course was taken with the knowledge of the committees of inspection for OA and OL; certain creditors which had commenced their own proceedings against KPMG did not receive all information concerning the KPMG proceedings and did not vote on issues concerning those proceedings; and the remaining members of OA’s and OL’s committees of inspection did not object to OA paying substantially all of the costs of the proceedings, but expressed the view that OA should recover those costs from any settlement of the KPMG proceedings. It appears the approach adopted reflected a difference in the financial capacity of OA and OL, where OA had greater capacity than OL to fund the costs of the KPMG proceedings.

15. Mr Fletcher’s evidence is that he considered there were substantial benefits to OA in funding substantially all of the costs of the KPMG proceedings, including costs in respect of claims advanced by OL. Mr Fletcher expresses the view that OL had the strongest claim in respect of the proceedings, in respect of dividends paid by OL, which would contribute to the prospects of a settlement of the proceedings; [REDACTED]; and Mr Fletcher considered that the costs of pursuing both OL’s and OA’s claims were not substantially larger than the costs of pursuing only OA’s claim.

16. Mr Fletcher also refers to the methodology agreed between the GPLs and the SPL for allocation of the amount received by OA and OL under the settlement agreement, after the funder’s recovery, liquidators’ remuneration and costs, which was based on Counsels’ assessment of the prospects and value of the respective claims of OA and OL which had been obtained for the purposes of the mediation. Mr Fletcher notes that the greater recovery obtained by OL on that approach reflects the relative strength of its dividend claim against KPMG, consistent with Counsels’ opinion.

17. By his third affidavit dated 29 May 2017, Mr Fletcher provided further information as to the amount of the costs and remuneration paid by each of OA and OL in respect of the proceedings and corrected one aspect of an earlier spreadsheet provided to the SPL in that respect. Mr Fletcher also refers to the fact that, in permitting OA to fund substantially all of the costs of the KPMG proceedings, he was conscious of the fact that the claims brought against KPMG by OA and OL were not competing (in any sense that the success of one would bring about the failure of the other) and those claims had a relevantly identical factual basis although they differed in the loss and damage claimed. Mr Fletcher also emphasised his view that the pursuit of each claim assisted both OA and OL in establishing KPMG’s liability and, by implication, securing a settlement of the KPMG proceedings.

18. The GPLs also rely on two affidavits of their solicitor, Mr Piesiewicz, dated 17 July 2017, which refer to service of materials relating to the application on major creditors of OA and OL, including redacted copies of Mr Fletcher’s affidavits filed 15 February 2017 and 19 May 2017, which indicated, inter alia, the proposed manner of allocation of the settlement proceeds of the KPMG proceedings and also disclosed the extent to which OA rather than OL had funded the cost of the KPMG proceedings. Mr Piesiewicz’s evidence is that none of the major creditors of OA and OL have advised that they oppose the relief sought.

19. Mr Kerr’s evidence, by his affidavit dated 24 May 2017, is that he received briefings and information as to the proposed allocation of the settlement proceeds of the KPMG proceedings and as to the reimbursement of legal costs and liquidators’ remuneration associated with the KPMG proceedings. Mr Kerr confirms his view that, from a commercial perspective, and subject to specified matters, he supported reimbursements from the settlement proceeds as proposed by the GPLs and believed the methodology which they proposed as to the allocation of the balance of the settlement proceeds between OA and OL was appropriate. Mr Kerr’s affidavit noted two matters which properly should be addressed in these proceedings, which I will address below. Mr Kerr’s evidence was that, subject to those two matters, it seemed to him that Counsels’ advice as to the prospects of the KPMG proceedings provided a proper and sensible basis on which to calculate the allocation of the proceeds between OA and OL. That was the approach proposed by the GPLs. Mr Kerr also acknowledged the logic of the view that a party who had borne costs of proceedings should be reimbursed those costs from the settlement proceeds.

The treatment of litigation funding costs, legal costs and remuneration

20. Mr Kerr’s affidavit identified a question as to whether it was appropriate that legal costs and remuneration incurred by OA in the conduct of the KPMG proceedings be deducted from the settlement proceeds, having regard, inter alia, to the decision of the Court of Appeal of the Supreme Court of New South Wales in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet as liquidators of Octaviar Administration Pty Ltd (in liq) [2015] NSWCA 85; (2015) 89 NSWLR 110. Mr Kerr noted that that case considered circumstances where an approval that had originally been granted at first instance to the liquidators of OA to fund proceedings brought by OL against Fortress Credit Corporation (Australia) II Pty Ltd was set aside by the Full Court of the Federal Court of Australia, and a subsequent approval at first instance in this Court, of a further funding agreement between OA’s liquidators and OL, was also set aside by the Court of Appeal of the Supreme Court of New South Wales. The question whether such approval should be granted was then remitted to a judge at first instance for further consideration. I will address that decision below.

21. Mr Bell points out that the approach proposed by the GPLs reflects the principle that the costs of bringing in the claims should be reimbursed before the net proceeds of the litigation are distributed to OA and OL. Mr Bell submits that the settlement proceeds of the KPMG proceedings represent, in an undifferentiated fashion, the gross proceeds from the settlement of the claims of OA and OL against KPMG; that the funder’s entitlement is an expense of that recovery; that each of OA and OL should then be reimbursed for costs that they have borne of realising the claims against KPMG (although the Court is not asked to approve the specific amount of remuneration or legal costs); and that the balance of the available funds reflects the amount properly available to OA and OL from the settlement. Mr Bell refers to the nature of the claims brought, which are also addressed in Mr Fletcher’s affidavit to which I referred above, and points out that the approach adopted at the mediation, with the intent of maximising recoveries by OA and OL, was to seek a global recovery in respect of both OA’s and OL’s claims against KPMG.

22. Mr Bell refers to the principles considered in Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171 and Stewart v Atco Controls Pty Ltd (in liq) [2015] HCA 15; (2014) 242 CLR 307 as supporting a liquidator’s equitable lien in respect of the costs incurred in realising an asset. Mr Oakes, for the SPL, also refers to the observations of Dixon J in Re Universal Distributing Co Ltd (in liq) above to the effect that the burden of the costs of recovery may properly be thrown upon the proceeds and remuneration for work done for the exclusive purpose of raising a fund may properly be charged against that fund.

23. The principle in Re Universal Distributing Co Ltd (in liq) above has the effect that remuneration, costs and expenses incurred by a liquidator in preserving, recovering and realising a fund on behalf of others would generally be paid out of, and are secured by an equitable lien over, the relevant fund: Re Universal Distributing Co Ltd (in liq) above; Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53; Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd [2010] NSWSC 941; (2010) 79 ACSR 425. In 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377 at [34], Finkelstein J observed that:

“These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.”

24. In Stewart v Atco Controls Pty Ltd (in liq) above, the High Court also considered the circumstances in which a liquidator’s equitable lien would be available over a settlement amount in liquidation, and observed that the principle in Re Universal Distributing Co Ltd (in liq) above applies where an insolvent company is in liquidation; the liquidator has incurred expenses and rendered services in the realisation of an asset; the resulting fund is insufficient to meet both the liquidator’s costs and expenses of realisation and the debt due to a secured creditor; and the secured creditor claims the fund. Their Honours noted that the application of the principle avoids the result that a secured creditor would unconscientiously take the benefit of the liquidator’s work without the liquidator’s expenses being met and observed (at [41]) that such a lien arose simply from the fact that the liquidator’s costs and remuneration were incurred in realising the assets that created the relevant fund. I also summarised, and applied, these principles in Re Primespace Property Investment Ltd (in liq) [2016] NSWSC 1821 at [69]–[70], on which I have drawn for the summary that appears above.

25. It was common ground, and there is no reason to doubt, that the funder’s entitlement under the funding agreement, as it may be determined by the Court in the proceedings that are presently on foot, or resolved by agreement between the parties, is properly deducted from the settlement proceeds before they are distributed to OA and OL. It seems to me that the position is the same in respect of costs and remuneration incurred by OA and OL and the liquidators in order to realise the claims, and it does not matter for that purpose that OA paid a substantial part of the costs while OL paid a relatively small proportion of those costs, reflecting their available financial resources. Mr Bell refers to several matters that support the reasonableness of that approach, including that the members of the committees of inspection of OA and OL who were not conflicted by involvement in other proceedings against KPMG did not object to that course; OL lacked financial capacity to fund the proceedings and OA had the capacity to do so; and, as Mr Fletcher’s evidence indicates, it was in OA’s interests to pay legal costs incurred by legal representatives acting for both OA and OL, where (I infer) the two proceedings would likely be heard together, OL’s dividend claim was assessed as the strongest claim and would likely contribute to the recovery on an overall settlement with KPMG, the trading loss claims would have been weakened if they had not been brought by both OA and OL and, on Mr Fletcher’s evidence, the costs of bringing both claims were not significantly greater than the costs of OA bringing its own claim.

26. It seems to me that Mr Fletcher’s reasoning can be tested, and its correctness demonstrated, by a comparison with a position where OA and OL were unconnected entities, bringing separate proceedings against a third party arising from substantially the same factual circumstances which were or were likely to be heard together; in which they were represented by the same legal representatives in the absence of a conflict of interest between them; where the costs of the pursuit of both proceedings would not materially exceed the costs of pursuit of one of those proceedings; and where, I will assume, no issues of application of any remaining principles of champerty or maintenance arose. In that situation, if one of those parties had the financial capacity to pursue the claims and the other did not, and the claims of the first party or its prospects of a favourable settlement would be enhanced by the pursuit of the second party’s claims, then it would be a rational course for the first party to pay the reasonable costs of the parties’ common legal representatives, in whole or in large part and possibly subject to a formal or informal arrangement for, or expectation of, reimbursement on success in the proceedings or a favourable settlement. That course would be a rational one even if that allowed the second party to “free ride” on the payment of those costs in the interim because, in that situation, it would be to the advantage to the first party to take it even if the second party obtains a greater advantage from it.

27. I have had regard to the decision of the Court of Appeal in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnetas liquidators of Octaviar Administration Pty Ltd (in liq) above, to which Mr Kerr referred in raising this question for the Court’s consideration. Mr Bell addressed that decision in submissions to which I refer below. Mr Oakes, for the SPL, also submits that the arrangement for OA to “carry” the cost of OL’s claim against KPMG was of a different character from the funding agreement considered in that decision, in that that arrangement did not provide a return to OA generated by the funding; OA and OL had discrete claims against KPMG, so there was no real potential for a binary outcome; there was good reason for the GPLs to conclude that OA’s winding up would be enhanced by OA carrying the cost of OL’s claim against KPMG, having regard to Mr Fletcher’s evidence to which I have referred above; and the GPLs, as liquidators of OA, had power under s 477(2)(m) of the Corporations Act to cause OA to carry the cost of the proceedings by OL against KPMG.

28. It seems to me that the decision in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnetas liquidators of Octaviar Administration Pty Ltd (in liq) above is distinguishable, since this application does not involve any question of approval of a funding agreement, but arises in circumstances where the GPLs have incurred costs in respect of legal representation and other costs that benefited OA in the conduct of its claims against KPMG, notwithstanding that its doing also benefitted OL in respect of its claims against KPMG. It seems to me that there is no reason to doubt, as a general matter, that the GPLs’ payment of the substantial part of the legal and other costs of OA’s legal representatives in the KPMG proceedings was within their powers under s 477(2)(m) of the Corporations Act, even where it likely permitted OL to “free ride” on the payment of those costs, although I have not been asked to address that question in respect of any particular category of costs.

29. Second, Mr Bell submits, and I accept, that even if the position here could be treated as analogous to the entry into a funding agreement between OA and OL, the position here is distinguishable from that considered in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet as liquidators of Octaviar Administration Pty Ltd (in liq) above, where the Court of Appeal noted that the binary outcome of those proceedings suggested that there was no practical benefit to OA outlaying funds in support of proceedings brought by OL. In this case, as I have noted above, the evidence indicates there was a real practical benefit to OA in incurring the substantial part of the costs of the conduct of the KPMG proceedings, where the conduct of both proceedings by both OA and OL would likely maximise OA’s prospect of recovery in them. Third, in any event, the Court of Appeal did not hold that funding was not permissible in the situation which it addressed in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet as liquidators of Octaviar Administration Pty Ltd (in liq) above, but only that a more detailed analysis of possible outcomes was required, and remitted the matter to the primary judge for further consideration of that question.

30. Finally, even if I am incorrect as to any, or all, of those matters, it seems to me that they would also not displace the fundamental consideration, recognised in the case law including Re Universal Distributing Co Ltd (in liq) above, that OA and the GPLs, having incurred costs in the conduct of proceedings that brought about substantial recoveries for OA and even larger recoveries for OL, should be reimbursed for those costs before distribution of the surplus to OA and OL.

31. Mr Bell submits, and I also accept, that the ratio by which the balance of the settlement proceeds, after the funder’s entitlement, the liquidators’ remuneration and legal costs, is proposed to be distributed by OA and OL has been determined on a principled basis, by reference to Counsels’ opinion as to the prospects of the parties that underpinned the approach adopted by OA and OL in the settlement negotiations in respect of the KPMG proceedings. I am satisfied that each of the GPLs on the one hand and the SPL on the other are properly entitled to proceed on that basis.

Whether it is necessary or appropriate that remuneration payable to the liquidators of OA, to be reimbursed to OA under the allocation of the settlement proceeds, first be approved by OL’s committee of inspection

32. Mr Kerr’s affidavit raised a second question whether remuneration payable to the liquidators of OA in respect of the KPMG proceedings could properly be reimbursed to OA prior to the allocation of the settlement proceeds between OA and OL, and whether that remuneration should first be approved by OL’s committee of inspection. Mr Kerr’s evidence was that his hesitation as to whether OA should be reimbursed from settlement proceeds, for remuneration of the GPLs incurred for their work in relation to the KPMG proceedings, was whether that course may reallocate remuneration of OA’s liquidators, that had been approved by OA’s committee of inspection and drawn by the liquidators from funds available in OA, to OL and have the consequential effect that OL’s creditors would retrospectively bear a proportion of that remuneration.

33. It seems to me that that matter was properly raised, but I am satisfied that the GPLs and SPL would be justified in proceeding on the basis such remuneration should properly be reimbursed to OA (and, if applicable, OL) prior to allocating the balance of the settlement proceeds between OA and OL for the reasons noted above, and that further approval of the remuneration paid to OA’s liquidators by the committee of creditors of OL (or vice versa) is not necessary. The reimbursement of that remuneration, before determining the balance of the settlement proceeds to be allocated between OA and OL, cannot properly be characterised as a retrospective imposition on OL or its creditors, since OL is in fact receiving a substantial benefit, being a substantial part of the proceeds of the KPMG settlement less the costs and remuneration incurred in obtaining that settlement, rather than having a burden imposed upon it. The reimbursement of liquidators’ remuneration, like the reimbursement of the funder’s expenses and legal costs, is founded on the principles recognised in Re Universal Distributing Co Ltd (in liq) above and Stewart v Atco Controls Pty Ltd (in liq) above and extends to expenses properly incurred in bringing in the settlement amount. The remuneration payable to the liquidators of OA is properly incurred, for the purposes of these principles, because it has been approved by OA’s committee of inspection and that position would not change if OL’s committee of inspection considered that it should be a lesser amount. It therefore does not seem to me that it is either necessary or appropriate that reimbursement of the remuneration payable to the liquidators of OA should be conditioned on a further approval of the committee of inspection for OL, or vice versa.

Orders

34. Accordingly, I make the following orders and directions:

1. Pursuant to s 479(3) of the Corporations Act 2001 (Cth) (“Act”) in the case of the Second Plaintiff, and pursuant to s 511 of the Act in the case of the Third Plaintiff:

(a)   The First Plaintiffs are justified in agreeing to the proposed allocation of the Settlement Proceeds as set out in paragraph 9 of the affidavit of William John Fletcher sworn 19 May 2017 in their capacity as liquidators of Octaviar Administration Pty Ltd (in liq) (“OA”); and

(b)   The First Plaintiffs are justified in causing the settlement proceeds (within the meaning given in paragraph 8 of the Second Fletcher Affidavit) to be distributed in accordance with the proposed allocation, in their capacity as liquidators of OA and general purpose liquidators of Octaviar Limited (in liq) (“OL”).

2.   The Plaintiffs’ costs of and incidental to the interlocutory processes be costs in the winding up of, and paid out of the assets of, OA and OL with each company to bear 50% of those costs.

3. Pursuant to s 479(3) of the Act, Mr David Kerr would be justified in agreeing to the proposed allocation in his capacity as special purpose liquidator of OL.

4.   Mr Kerr’s costs of and incidental to his interlocutory process be costs in the winding up of, and paid out of the assets of, OL.

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