Re Red Lancer Pty Ltd (in liq); Ex parte Bumbak - [2019] WASC 450

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   RE RED LANCER PTY LTD (IN LIQ); EX PARTE BUMBAK [2019] WASC 450
CORAM:   VAUGHAN J
HEARD:   29 NOVEMBER 2019
DELIVERED          :   29 NOVEMBER 2019
PUBLISHED           :   6 DECEMBER 2019
FILE NO/S:   COR 176 of 2019
BETWEEN:   JOHN ALLAN BUMBAK as liquidator of RED LANCER PTY LTD (ACN 125 740 669) (IN LIQUIDATION)
First Plaintiff
RED LANCER PTY LTD (ACN 125 740 669) (IN LIQUIDATION)
Second Plaintiff

Catchwords:

Corporations law - Winding up - Application by plaintiff liquidator for direction under s 90-15 of the Insolvency Practice Schedule (Corporations) that liquidator is justified and would be acting properly in entering into and performing a settlement agreement - Turns on own facts

Corporations law - Winding up - Application by plaintiff liquidator for order nunc pro tunc approving entry in a settlement agreement under s 477(2B) of the Corporations Act 2001 (Cth) - Turns on own facts

Legislation:

Corporations Act 2001 (Cth), sch 2 s 90-15, s 477(2B)

Result:

Application granted

Category: B

Representation:

Counsel:

First Plaintiff	:	P R Edgar
Second Plaintiff	:	P R Edgar

Solicitors:

First Plaintiff	:	Lavan
Second Plaintiff	:	Lavan

Cases referred to in decisions:

Jomima Pty Ltd v Palermo [2014] WADC 24.
Lumen Nominees Pty Ltd v Control Centre Pty Ltd [2014] WASC 163.
Palermo v Palermo [2013] WASC 412.
Palermo v Palermo [2015] WASCA 49.
Palermo v Palermo [No 2] [2014] WASC 6.
Re Great Southern Managers Australia Ltd (in liq); Ex Parte Jones, Weaver and Stewart (in their capacity as liquidators of Great Southern Managers Australia Ltd (in liq)) [2014] WASC 312 [61] (Re Great Southern Managers Australia Ltd).
Re McDermott and Potts (in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liq)) [2019] VSCA 23.
Re Newtronics Pty Ltd; Ex Parte Stewart [2007] FCA 1375.
Re The Palermo Unit Trust; Ex Parte Philip Milton Rundell (as trustee for various trusts) [2014] WASC 69.
Re The Palermo Unit Trust; Ex Parte Philip Milton Rundell (as trustee for various trusts) [2014] WASC 69 (S).
Rundell As Trustee for Palermo Unit Trust, MM Trust, Time Trust, Metro Trust, Parkfield Trust, Riverside Trust, Murray Trust, Timewize Trust, River Trust and River Gem Trust v Registrar of Titles [2014] WASC 230.

VAUGHAN J:

(These reasons were delivered orally at the conclusion of the hearing. They have been edited to correct matters of grammar and infelicity of expression. Authorities and other references have also been footnoted rather than appearing in the body of the reasons.)

Introduction

The plaintiff liquidator, John Bumbak, applies by an amended originating process dated 22 November 2019 for two substantive orders:
1.A direction pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that he was and is justified and acting properly in entering into and performing a Settlement Agreement.
2.An order nunc pro tunc pursuant to s 477(2B) of the Corporations Act 2001 (Cth) approving entry into the Settlement Agreement.
The 'Settlement Agreement' is comprised in an exchange of letters dated 2 July 2019.[1] Among other things the Settlement Agreement provides for settlement of a claim made by the plaintiff liquidator in action COR 8 of 2019 in this court. The Settlement Agreement is expressed to be subject to and conditional upon the plaintiff liquidator obtaining directions that it is proper for him to enter into the Settlement Agreement or such other directions as the parties may agree.
[1] Affidavit of J A Bumbak sworn 12 September 2019, attachments 'JAB-18' and 'JAB-19'.
The application is supported by the following materials:
1.Affidavits of Mr Bumbak sworn 3 September, 12 September and 20 November 2019 (the latter being a confidential affidavit).
2.Affidavits of a solicitor acting for the plaintiff liquidator, Anna Jones, affirmed 17 October, 6 November and 29 November 2019.
3.An affidavit of Michael Palermo sworn 27 August 2019. This too is expressed to be a confidential affidavit.
Michael Palermo is a director of the company in liquidation, Red Lancer Pty Ltd (ACN 125 740 669) (Company). Michael Palermo is also the son of the sole director of the counterparty to the Settlement Agreement, South West Pastoral Co Pty Ltd (SWPC).
My attention has also been drawn to an affidavit of Anthony Palermo sworn 20 November 2019.
Anthony Palermo is the uncle of Michael Palermo. Michael Palermo's father, John Palermo Sr (now deceased), was the brother of Anthony Palermo. Anthony Palermo claims to be a creditor of the Company; that claim is yet to be adjudicated upon. Anthony Palermo filed a notice of appearance in the proceedings on 9 October 2019. He was given notice that the proceedings were to be heard today. However, Anthony Palermo has not appeared. Nevertheless, quite properly, counsel for the plaintiff liquidator has directed my attention to Anthony Palermo's affidavit so that I am cognisant of Anthony Palermo's position and the concerns he has expressed as to the Settlement Agreement.

Background Facts

Based on the affidavits I record the following matters by way of background facts:
1.The Company was incorporated on 1 June 2007. Its initial directors were Michael Palermo's father, John Palermo Sr, and Anthony Palermo. The Company undertook farming operations in the Pinjarra area.
2.Michael Palermo became a director of the Company on 4 September 2013.
3.Significant differences developed between John Palermo Sr and Anthony Palermo. Those differences have resulted in substantial litigation in this court. The litigation has extended to various other members of the Palermo family and their related entities. The litigation extends well beyond the operations of Red Lancer - although, as will be seen, the activities of Red Lancer have been drawn into the dispute. The extent of the dispute, and its uncompromising nature, can be gauged by identifying a selection of the decisions that have been generated. [2]
4.John Palermo Sr died on 15 March 2015.
5.SWPC was incorporated on 29 April 2014. Initially John Palermo Sr was its director. Later, in December 2014, John Palermo Sr's wife, Lida Palermo, became a director of SWPC. Lida Palermo remains SWPC's sole director. The sole shareholder of SWPC is another company in the stable associated with John Palermo Sr's side of the Palermo family, Lumen Nominees Pty Ltd. In 2014 the directors and shareholders of Lumen were John Palermo Sr, Lida Palermo, Michael Palermo and two of the other children of John Palermo Sr and Lida Palermo - John Palermo Jr and Marisa Palermo.
6.In mid-2014 there was a transaction between Red Lancer and SWPC. This transaction is at the heart of the litigation that is sought to be compromised by the Settlement Agreement.
[2] See, for example, Jomima Pty Ltd v Palermo [2014] WADC 24; Palermo v Palermo [2013] WASC 412; Palermo v Palermo [No 2] [2014] WASC 6; Re The Palermo Unit Trust; Ex Parte Philip Milton Rundell (as trustee for various trusts) [2014] WASC 69; Re The Palermo Unit Trust; Ex Parte Philip Milton Rundell (as trustee for various trusts) [2014] WASC 69 (S); Rundell As Trustee for Palermo Unit Trust, MM Trust, Time Trust, Metro Trust, Parkfield Trust, Riverside Trust, Murray Trust, Timewize Trust, River Trust and River Gem Trust v Registrar of Titles [2014] WASC 230; Lumen Nominees Pty Ltd v Control Centre Pty Ltd [2014] WASC 163; Palermo v Palermo [2015] WASCA 49.
Mr Bumbak deposes that the transaction was the subject of an undated and unsigned cattle sale agreement.[3] In substance the transaction resulted in SWPC receiving around 1,127 head of cattle, farming equipment and other assets (including tools, fuel, feed, sheds and super phosphate) for no consideration. While no consideration was in fact paid, the stated consideration payable for the cattle under the cattle sale agreement was some $600,000. Mr Bumbak considers that the approximate value of the cattle, as at the time of the transaction, was around $800,000.
[3] Affidavit of J A Bumbak sworn 3 September 2019, attachment 'JAB-4'.
By resolution made on 15 January 2016 it was resolved that Red Lancer be wound up. Mr Bumbak is now the sole liquidator for the purposes of the winding up.
Mr Bumbak is yet to adjudicate on creditor claims in the winding up. However, based on Mr Bumbak's review of the Company's books and records he has identified that there are three groupings of potential creditors:
1.Anthony Palermo and two companies associated with Anthony Palermo, namely, Finance People Pty Ltd and JDP Admin Pty Ltd - who claim to be creditors in the amounts of $100,000, $500,000 and $60,000 respectively.
2.Michael Palermo and a company associated with the John Palermo Sr side of the Palermo family, namely, Prime Corporate Management Pty Ltd - who claim to be creditors in the amounts of $11,000 and $18,679 respectively.
3.Philip Rundell as trustee of two trusts (the MM Trust and the Palermo Unit Trust) - who claims to be a creditor in the amounts of $647,781 and $1,230,028.32 respectively. Mr Rundell has been appointed as trustee of those two trusts by order of the court.
Accordingly, there are relatively few creditors in the winding up. All, with the exception of Mr Rundell, are associated with one faction of the Palermo family. Mr Rundell is by far the largest of the potential creditors and is also independent of the two sides of the Palermo family.
On 14 and 25 January 2019 the plaintiff liquidator commenced two proceedings in this court - action COR 8 of 2019 and action COR 19 of 2019.
Action COR 8 of 2019 concerns the mid-2014 transaction between Red Lancer and SWPC. The plaintiff liquidator makes application under s 588FF(1) of the Corporations Act 2001 (Cth). The transaction by which SWPC received the cattle, farming equipment and other assets is said to be a voidable transaction. More specifically, the plaintiff liquidator claims that it was an uncommercial transaction, or alternatively, an unreasonable director-related transaction. The plaintiff liquidator seeks an order that SWPC pay the value of the assets transferred as at the date of the transaction in an amount of at least $800,000.
The plaintiff liquidator's claim in action COR 8 of 2019 is supported by an affidavit of Mr Bumbak sworn 14 January 2019.[4]
[4] Affidavit of J A Bumbak sworn 3 September 2019, attachment 'JAB-3'.
Action COR 19 of 2019 concerns examination proceedings. Examination summonses have been issued to Michael Palermo and an employee of SWPC. There have also been directions issued to various associated parties to produce books and records. Mr Bumbak deposes that the purpose of the examination proceedings is to investigate what part Michael Palermo played in John Palermo Sr causing the various assets of Red Lancer to be transferred to SWPC.
The plaintiff liquidator had funding from Anthony Palermo to commence action COR 8 of 2019 and action COR 19 of 2019. The extent of that funding was limited: $16,500 for action COR 8 of 2019 and $110,000 for action COR 19 of 2019. At the moment Anthony Palermo is said to have refused to provide further funding. Nor is there any certainty as to whether Anthony Palermo would extend the current funding in the future or provide additional funding for further actions. Also, as matters stand at present, while the plaintiff liquidator enjoys an indemnity as to adverse costs in relation to action COR 8 of 2019, there is no adverse costs indemnity in relation to the examination proceedings in action COR 19 of 2019.
SWPC has sought to defend action COR 8 of 2019 but has yet to put on any substantive material by way of defence.
There is no evidence before me as to the status of the examination proceedings in action COR 19 of 2019. However, it was a condition of the Settlement Agreement that the examination proceedings be adjourned sine die. I assume that means that the examination proceedings are presently dormant pending the determination of this application.
As mentioned, on 2 July 2019 the plaintiff liquidator and SWPC entered into the Settlement Agreement to settle the COR 8 of 2019 proceedings and any other claims which the plaintiff liquidator or Red Lancer may have against SWPC, its officers, employees and others as specified. The key terms of the Settlement Agreement are as follows:
1.Michael Palermo is to pay to the plaintiff liquidator - for and on behalf of Red Lancer - an amount of $700,000.
2.$50,000 was payable immediately. The balance is payable on the Settlement Agreement becoming unconditional (although it cannot be disbursed until various appeal periods have expired).
3.The agreement is subject to and conditional on the plaintiff liquidator obtaining directions that it is proper for him to enter into the Settlement Agreement or such other directions as are agreed.
4.Michael Palermo is required to take various steps to assist in the conduct of the directions application including by providing a confidential affidavit disclosing his assets and liabilities.
5.In consideration of the payment of the $700,000 the plaintiff liquidator and Red Lancer will:
(a)release and discharge SWPC, SPWC's officers and employees (who would include Lida Palermo) and Red Lancer's former directors Marisa Palermo and John Palermo Jr from all claims;
(b)have action COR 8 of 2019 dismissed with no order as to costs; and
(c)terminate the examinations in COR 19 of 2019.
Unusually, the condition that the plaintiff liquidator obtain directions was introduced by the defendant to action COR 8 of 2019. That is, it was a requirement of the solicitors acting for SWPC and Michael Palermo. The direction requirement was explained on the basis that it was necessary to provide certainty and finality in what was an acrimonious environment where the liquidator's decision to settle may otherwise be subject to challenge.
Mr Bumbak deposes that, based on various identified sources, he formed the view that the value of the claim against SWPC was likely to be around $800,000 and interest. In deciding to accept the settlement offer Mr Bumbak took into consideration three main factors.
First, his view on the strength of the claims against SWPC and others who might be the subject of a claim in relation to the mid-2014 transaction but in respect of whom there was to be a release under the Settlement Agreement. Mr Bumbak's view was that the voidable transaction claim was strong as was a like potential claim - not yet commenced - as against the estate of John Palermo Sr for breach of directors' duties in relation to the same transaction. Mr Bumbak also considered that there were potential claims against Michael Palermo that varied as to prospects from reasonable to good to strong. The strength of claims against others, such as Lida, John Jr and Marisa Palermo, was said to be currently unknown.
Second, Mr Bumbak took legal advice. That legal advice has been provided to me on a confidential basis. To avoid unnecessary loss of confidentiality I will not repeat the substance of the advice. It suffices to state that Mr Bumbak sought and obtained legal advice as to the strength of the various claims that would be compromised under the Settlement Agreement. That advice went on to opine as to the estimated recoverable claim amount taking into account the value of the claim, interest and costs - both recoverable and non-recoverable. Mr Bumbak was provided with a low and high estimated claim amount. This assumed, however, that there was success in action COR 8 of 2019. It also assumed that the judgment debt was recovered as against every judgment debtor. For present purposes it suffices to observe that the $700,000 settlement amount is within the range of the assessed estimated recoverable claim amount before allowing for the plaintiff liquidator's own recovery costs. Accordingly, the settlement amount is within the range of the estimated recoverable amount assuming success in the litigation and recovery of the consequential judgment debt.
Third, Mr Bumbak took into account that there was no certainty of funding to pursue the claim the subject of action COR 8 of 2019 or any associated future actions.
In his first affidavit in support of the application Mr Bumbak deposed as follows:
Given those uncertainties [as to funding], the relative strengths of the Future Actions and the relative value of the transaction, I consider that accepting the Settlement Offer is commercially appropriate and in the interests of the winding up of Red Lancer on the basis that, in addition to the uncertainty as to the funding position, the potential returns from the strongest claims in respect of the transaction are limited to amounts which are less than the Settlement Offer.[5]
[5] Affidavit of J A Bumback sworn 3 September 2019, par 28.
Following entry into the Settlement Agreement the plaintiff liquidator has reviewed Michael Palermo's confidential affidavit disclosing his assets and liabilities. As this material is confidential I will not refer to the contents of the affidavit. Mr Bumbak says that, having read Michael Palermo's affidavit, he (Mr Bumbak) believes the settlement offer is reasonable. I accept, having also read Michael Palermo's affidavit, that Mr Bumbak's view is open.
The plaintiff liquidator proceeded to seek the putative creditors' views as to the Settlement Agreement.
Mr Rundell, the independent trustee, has stated as follows in an email dated 2 July 2019:
As Trustee of the MM Trust and Palermo Unit Trust, creditors of Red Lancer Pty Ltd, I consider it appropriate that you, as liquidator of Red Lancer Pty Ltd, accept the Offer set out in the 2 July 2019 CX Law letter to Lavan.[6]
[6] Affidavit of J A Bumback sworn 3 September 2019, attachment 'JAB-15'.
Initially solicitors acting for Anthony Palermo responded to the plaintiff liquidator's solicitors as follows:
Our client does not agree that the settlement offer nor the financial documents which have been provided by the defendant(s) are sufficient to justify entry into the settlement, but at this point does not intend to take any steps to prevent the liquidator from doing so.
Our client also draws to the liquidator's attention that the settlement offer is predicated on monies being paid by a person who has held himself out to be in an impaired financial position and thus we expect the liquidator has satisfied himself of any risk associated with a potential claw-back of any settlement monies so paid and the fact that the releases which your client proposes to give by accepting the offer would to our mind persist as against all released persons notwithstanding any future disgorgement of those funds by your client.[7]
[7] Affidavit of J A Bumback sworn 3 September 2019, attachment 'JAB-16'.
Having regard to all these matters Mr Bumbak then deposed:
I consider that:
37.1the Independent Creditors do not object to my acceptance of the Settlement Offer;
37.2[Anthony Palermo] did not agree with the Settlement Offer but will not oppose me entering into the arrangement or acting to finalise same; and
37.3the Settlement Offer:
37.3.1is commercially appropriate and in the interests of the winding up of Red Lancer having regard to the potential returns from the strongest claims in respect of the transaction;
37.3.2will result in a return to the unsecured creditors of Red Lancer; and
37.3.3is in the best interests of the creditors of Red Lancer.[8]
[8] Affidavit of J A Bumback sworn 3 September 2019, par 37.
Subsequently, however, Anthony Palermo's position has altered. Anthony Palermo has filed an affidavit sworn 20 November 2019. He deposes that this is to ensure that the court is aware of certain matters and for the court's assistance. It is certainly to the court's assistance that it be informed of Anthony Palermo's attitude to the application and the other matters raised in the affidavit. Accordingly, notwithstanding that Anthony Palermo did not participate at the hearing, I have paid close attention to his affidavit.

Anthony Palermo deposes that:
I neither support nor approve of the liquidator's application.[9]
[9] Affidavit of A Palermo sworn 20 November 2019, par 3.
Accordingly, it is not the case that Anthony Palermo merely neither supports nor opposes. There is no 'neutral' or 'agnostic' position. Anthony Palermo neither supports nor approves. While expressed awkwardly there is a degree of opposition by Anthony Palermo in stating that the application is without his approval.
Anthony Palermo goes on to explain that proceedings he currently prosecutes in this court - action CIV 2518 of 2017 - raise allegations which are bound up with the plaintiff liquidator's claim against SWPC in action COR 8 of 2019. Anthony Palermo attaches the statement of claim in CIV 2518 of 2017.[10]
[10] Affidavit of A Palermo sworn 20 November 2019, attachment 'AP-1'.
I accept that there is overlap between the two actions. In particular, at pars 3A and 3B of the pleading in action CIV 2518 of 2017 there is reference to Michael and Lida Palermo and their connection to Red Lancer. At par 6 there is reference to SWPC. Then, importantly, at pars 79 to 89, Anthony Palermo pleads out a case of misuse of position by John Palermo Sr and, moreover, dishonest and fraudulent appropriation, in relation to the transaction that is the subject of action COR 8 of 2019. Accessorial liability claims are pleaded against Lida and Michael Palermo. It is said that John Palermo Sr, Lida Palermo and SWPC are accountable to a company associated with Anthony Palermo for one-half of the amount of at least $800,000 as represents the value of the cattle, farming equipment and other assets transferred out of Red Lancer into SWPC.
The basis for Anthony Palermo's lack of support or approval for the Settlement Agreement is then provided at par 9 of Anthony Palermo's affidavit:
I am concerned that it would be premature to now grant the orders sought by the plaintiffs in circumstances where the progression of the Action, inclusive of any trial of the Action and any findings of fact that may be included in any judgment following a trial of the Action, have the potential to bear upon the steps that might be taken in the liquidation of Red Lancer, including providing a basis for the Liquidators to take actions against third parties which, to date, they have failed and or declined to take.
Counsel for the plaintiff liquidator has also drawn my attention to recent email communications between the plaintiff liquidator and Anthony Palermo.[11] Anthony Palermo has asked the plaintiff liquidator whether the liquidator will resign as liquidator of the Company. Anthony Palermo also asked, if the plaintiff liquidator will not resign, whether he will allow Anthony Palermo to run the examination proceedings at Anthony Palermo's cost. Accordingly, I infer that Anthony Palermo would be willing to provide further funding for the purpose of the examination proceedings in action COR 19 of 2019. There is, however, no suggestion of any further funding for the prosecution of action COR 8 of 2019.
[11] Affidavit of A M Jones affirmed 29 November 2019, attachment 'AMJ-1'.

Submissions on the Application

At the hearing counsel for the plaintiff liquidator noted that the proposed directions had both a retrospective and prospective element. Directions were sought that:
1.As to entry into the Settlement Agreement, the plaintiff liquidator had acted properly and justifiably.
2.As to performance of the Settlement Agreement, the plaintiff liquidator would be acting properly and justifiably.
I expressed reluctance to grant relief in the form of a retrospective direction. That conduct had already occurred. Prima facie it is inappropriate by direction to sanction past conduct. SWPC appeared at the hearing by counsel. Counsel for SWPC informed the court that, for SWPC's purposes, in terms of satisfaction of the condition, it was only necessary that there be a prospective direction. On that basis counsel for the plaintiff liquidator only pressed the prospective direction.
Counsel for the plaintiff liquidator submitted that it was appropriate for a prospective direction of that nature to be made as:
1.The plaintiff liquidator was in possession of a rational and reasonable offer capable of performance which would see a return to creditors consistent with or better than that which might be expected in the event the litigation was successful.
2.The plaintiff liquidator was confronted by an acrimonious intra-family dispute which exposed him to the prospect of litigation if he settled with SWPC in the absence of court direction. It was said that the plaintiff liquidator had a bona fide belief, reasonably based, that any decision to perform the Settlement Agreement might be challenged given:
(a)the litigious environment of the intra-family dispute that formed the context in which the winding up of Red Lancer was being administered;
(b)the circumstance that Anthony Palermo neither supported nor approved the settlement agreement; and
(c)the correspondence asking that the plaintiff liquidator resign.
3.The independent creditor, Mr Rundell, supported the Settlement Agreement (and he was the largest of the potential creditors).
4.There was no purpose in continuing the examination proceedings if action COR 8 of 2019 was to be resolved - all the more so given the estimated return under the Settlement Agreement which was to the benefit of the creditors.
5.There was no proposal by Anthony Palermo to fund the continuation of action COR 8 of 2019. The funding as provided to the liquidator was limited. It was not apparent how the plaintiff liquidator was to continue to prosecute the proceedings - in the absence of adequate funding - which meant that the Settlement Agreement, and proceeds available through it, ought to be pursued.
As to the s 477(2B) approval, counsel for the plaintiff liquidator explained its necessity on the basis that the time for filing and hearing of the application meant that the three-month period had elapsed. It was submitted that the plaintiff liquidator had a proper purpose in entering into the Settlement Agreement - to recover funds for the creditors - and there was no allegation of bad faith. It was said to be unlikely that entry into the Settlement Agreement would needlessly protract the winding up. Rather, the Settlement Agreement would see an earlier resolution of the winding up than would be the position if action COR 8 of 2019 fell to be litigated.
Separately, counsel for the plaintiff liquidator sought an order under s 1322(4)(a) of the Corporations Act 2001 (Cth) to ensure validity of the Settlement Agreement as a belts and braces approach to the nunc pro tunc order.

Legal Principles

Recently, in Re McDermott and Potts,[12] the Victorian Court of Appeal had occasion to consider the authorities and applicable principles when a liquidator seeks directions as to the compromise of proceedings under the now repealed s 511 of the Corporations Act 2001 (Cth). The present application is not brought under s 511; it relies on s 90-15 of the Insolvency Practice Schedule (Corporations). However, the power under s 90-15 is at least as wide as that which was formerly exercised under s 511. Accordingly, it is useful to have regard to, and apply, what was said by the Court of Appeal in Re McDermott and Potts.
[12] Re McDermott and Potts (in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liq)) [2019] VSCA 23 (Re McDermott and Potts).
The Court of Appeal surveyed the authorities on both s 511 and s 477(2B).[13] I have had regard to those paragraphs but will not now repeat that analysis. Before surveying the authorities the Court of Appeal stated the following:
Courts recognise that they are generally unqualified and ill-equipped to make or approve of business and commercial decisions. Thus, courts are loath to interfere with the commercial judgment of liquidators on matters within their powers, and will not give directions to liquidators on such matters where no issue arises in relation to a legal matter or in relation to the propriety or reasonableness of the decision. This does not inhibit courts from giving directions to liquidators in relation to the compromise of legal proceedings. The compromise of legal proceedings invariably raises legal issues, although it also usually requires the exercise of commercial judgment. As will be seen, liquidators often seek directions concerning the compromise of legal proceedings, and the courts give such directions when persuaded it is appropriate to do so.[14] (emphasis added)
[13] Re McDermott and Potts [67] ‑ [91].
[14] Re McDermott and Potts [65].
After conducting its review of the authorities, the Court of Appeal stated the following principles:
(1)The nature of the inquiry undertaken by the court when approval is sought under s 477(2B) in relation to a proposed compromise of litigation is different from the nature of the inquiry the court undertakes under s 511 when a liquidator seeks directions in relation to such a compromise.
(2)On a directions application the court must be positively persuaded that the liquidator's decision to enter into the compromise is, in all the circumstances, a proper one. This necessarily involves a broad consideration of all the relevant circumstances. A direction will exonerate the liquidator.
(3) In contrast, the discrete consideration of an application under s 477(2B) involves a more circumscribed inquiry. The court reviews the liquidator's proposal, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene. An order under s 477(2B) does not constitute an endorsement of the proposed compromise. An approval will not exonerate the liquidator.
(4)Given that the nature of the inquiry undertaken in relation to the directions application is broader than that under s 477(2B), it would usually be convenient to deal with the directions application first, and often that consideration would substantially overtake any discrete consideration of the application under s 477(2B).
(5)The court always pays due regard to the commercial judgment of the liquidator, and, on both applications, the attitudes of creditors are also important.
(6)On both applications, but particularly the application for directions, it would ordinarily be expected that a liquidator would have obtained appropriate legal advice in relation to the proposed compromise, and the nature and content of that advice is a relevant consideration.
(7)While the focus of s 477(2B) is delay, the inquiry under s 477(2B) still requires consideration of the substance of the proposed compromise. If a related application for directions reveals either that the directions should, or should not, be given, discrete consideration of the application under s 477(2B) may be superfluous.[15]
[15] Re McDermott and Potts [92].
On the question of the appropriateness of a direction it is also useful to have regard to what was said by Pritchard J, as her Honour then was, in Re Great Southern Managers Australia Ltd:
A further instance where directions may be given is in the context of a proposed compromise of litigation involving the liquidator. Even in such a case, the court will be reluctant to give directions if only commercial considerations are involved, but special circumstances may warrant directions being given. Those special circumstances may include where the liquidator is operating in an acrimonious environment in the liquidation, and the liquidator's proposed decision risks being subjected to criticism by a particular creditor or creditors as being unreasonable or made in bad faith, or where there is a degree of personal risk of litigation attached to the liquidator that could negatively affect the winding up process. It will suffice if such an attack is in prospect. In other words, a s 511 direction may be given to protect the liquidator in circumstances where the compromise could otherwise negatively affect the winding up process. From that perspective, it can be said that the direction would be just and beneficial to advancing the liquidation process as a whole. [16] (emphasis added)
[16] Re Great Southern Managers Australia Ltd (in liq); Ex Parte Jones, Weaver and Stewart (in their capacity as liquidators of Great Southern Managers Australia Ltd (in liq)) [2014] WASC 312 [61] (Re Great Southern Managers Australia Ltd) .
In Re Great Southern Managers Australia Ltd Pritchard J made a number of other observations on directions to liquidators that are worth repeating. In no particular order:
1.The effect of a direction is not to determine rights and liabilities arising out of particular transactions but to sanction a course of conduct proposed by a liquidator so as to protect the liquidator from liability for any alleged breach of duty.[17]
2.The protection afforded the liquidator by virtue of a direction is conditional upon the liquidator making full and fair disclosure of all relevant facts and circumstances before the court.[18]
3.A direction will not be given merely because the liquidator has a feeling of apprehension or unease about the business decision and wants reassurance.[19]
4.Ordinarily the liquidator will be expected to have obtained legal advice appropriate to the nature and value of the claims the subject of the proposed compromise.[20]
5.The court's directions are usually prospective and are concerned with affording protection to the liquidator in connection with a future action not ratifying action already taken by the liquidator.[21]
[17] Re Great Southern Managers Australia Ltd [57].
[18] Re Great Southern Managers Australia Ltd [58].
[19] Re Great Southern Managers Australia Ltd [60].
[20] Re Great Southern Managers Australia Ltd [64].
[21] Re Great Southern Managers Australia Ltd [65].
Pritchard J also addressed the principles to be applied in considering an application under s 477(2B). Her Honour noted:
1.The court's powers under s 477(2B) are concerned with ensuring that the court exercises some oversight of liquidators' actions.[22]
2.Section 477(2B) is concerned primarily to ensure that the timing of contractual obligations does not undermine the general objective that the winding up of a company will proceed as expeditiously as the circumstances permit.[23]
3.The primary consideration will be the impact of the agreement on the duration of the liquidation and whether that is, in all of the circumstances, reasonable and in the interests of the administration of the company.[24]
4.The court's approval is not an endorsement of the proposed agreement but merely constitutes permission for the liquidator to exercise his or her commercial judgment and alone does not exonerate a liquidator from personal liability for the decision to enter into the agreement.[25]
[22] Re Great Southern Managers Australia Ltd [76].
[23] Re Great Southern Managers Australia Ltd [76].
[24] Re Great Southern Managers Australia Ltd [76].
[25] Re Great Southern Managers Australia Ltd [77].
Otherwise, as to s 477(2B), it is useful to have regard to the principles synthesised by Gordon J in Re Newtronics Pty Ltd; Ex parte Stewart.[26] The court does not simply rubber stamp. However, the court generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The task of the court is to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the expeditious and beneficial administration of the winding up.
[26] Re Newtronics Pty Ltd; Ex Parte Stewart [2007] FCA 1375 [26].

Disposition

I am satisfied that the plaintiff liquidator has made out his case for a prospective direction as sought and nunc pro tunc approval under s 477(2B). This is so, for the most part, for the reasons as articulated in the submissions of counsel for the plaintiff liquidator as I have previously recounted.
In coming to that conclusion I have given close consideration to what has been said by Anthony Palermo in his affidavit. I well appreciate that:
1.Anthony Palermo neither supports nor approves of the application (and, inferentially, the Settlement Agreement).
2.There is overlap between the plaintiff liquidator's proceedings in action COR 8 of 2019, as proposed to be compromised by the Settlement Agreement, and some of the allegations made by Anthony Palermo in action CIV 2518 of 2019.
3.Anthony Palermo genuinely believes that findings of fact made in action CIV 2518 of 2019 may have the potential to benefit the winding up of Red Lancer by providing a foundation for the plaintiff liquidator to take action against third parties (some of whom will be released under the Settlement Agreement).
Against that, however, are a number of powerful considerations. First, there is no certainty as to the likely outcome of Anthony Palermo's litigation or the time it may take. By contrast, the plaintiff liquidator has an offer from SWPC that is capable of immediate performance and will see substantial funds being recovered to the benefit of the winding up and the Company's creditors.
Second, the Settlement Agreement has the support of Red Lancer's independent and most substantial putative creditor. It is easy to understand why that might be so. Finalisation through the Settlement Agreement has the advantage of certainty. It will also bring forward the timing of a distribution in the winding up. There is an obvious advantage to creditors in receiving a certain amount at an earlier time.
Third, the plaintiff liquidator has sought and obtained appropriate legal advice as to the merits - including the commercial merits - of the Settlement Agreement.
Fourth, the assessment that has been made is that - before allowing for the plaintiff liquidator's own costs in managing the litigation - the return to creditors under the Settlement Agreement is within the range of the estimated recoverable claim amount, assuming that it is successful, and a judgment debt is recovered.
Fifth, the plaintiff liquidator is without funding to continue to prosecute the claim in action COR 8 of 2019 to trial.
In making these observations I am not second guessing the plaintiff liquidator's commercial decision. To the contrary, the liquidator has made his own decision. The plaintiff liquidator entered into the Settlement Agreement, even if only on a conditional basis, and has disclosed to the court his reasons for continuing to believe that the compromise under the Settlement Agreement is in the best interests of the Company's creditors. I am not asked to make and I am not making a direction as to whether the plaintiff liquidator has made an appropriate and reasonable commercial decision. Nevertheless, for the reasons I have given, I am persuaded that the plaintiff liquidator's willingness to perform the compromise under the Settlement Agreement is, in all the circumstances, a proposed act that is proper and justified.
In those circumstances, having regard to the matters I have referred to, in forming the view that I should give a direction that the plaintiff liquidator will be acting properly and justifiably in performing the Settlement Agreement:
1.The matters I have referred to negate any finding of unreasonableness or bad faith.
2.The matters I have referred to demonstrate that the plaintiff liquidator has taken an orthodox approach to the question of whether the Settlement Agreement should be pursued as being in the best interests of the creditors as a whole, consistent with the liquidator's duty of exercising due skill, care and diligence as an officer of the Company.

That alone does not suffice to decide that it is appropriate to exercise the court's power under s 90-15 to give a direction. Here, however, I am satisfied that the plaintiff liquidator is operating in the context of an unusually acrimonious environment. There is a deep and entrenched history of litigation between the Palermos and the two factions of the Palermo family. By entering into and performing the Settlement Agreement, the plaintiff liquidator might be seen as having compromised with one side of the Palermo family against the wishes of the other. Anthony Palermo has refused to support or approve the Settlement Agreement. To the contrary, in at least some respects, Anthony Palermo is critical of the Settlement Agreement. His lawyers have stated that he does not agree that the settlement offer and the financial documents as provided are sufficient to justify entry into the settlement.
I am satisfied that, in the specific circumstances of the subject winding up, in proceeding to perform the Settlement Agreement the plaintiff liquidator risks being subject to criticism by Anthony Palermo or the putative creditors associated with Anthony Palermo. At the very least such an attack is 'in prospect' to use the words of Pritchard J in Re Great Southern Managers Australia Ltd.[27]
[27] Re Great Southern Managers Australia Ltd [61].
For those reasons I will make a prospective direction in the terms as sought by the plaintiff liquidator.
In circumstances where I will make such a prospective direction I am also prepared to grant approval to enter into the Settlement Agreement nunc pro tunc. I do not expect the Settlement Agreement to impede the finalisation of the winding up. If anything it will hasten a conclusion. Otherwise, for the reasons already given, I am satisfied that in exercising his commercial judgment to enter into the Settlement Agreement there is nothing to suggest bad faith or impropriety on the part of the plaintiff liquidator. Nor is there any good reason to intervene in terms of the expeditious and beneficial administration of the winding up. It is appropriate to give permission to enable settlement to occur pursuant to the Settlement Agreement.
Where approval is granted nunc pro tunc under s 477(2B) it has become commonplace to make an ancillary order under s 1322(4)(a) (if and to the extent required) to dispel any doubt about validity. I am prepared to do so in this case. The failure to seek approval was procedural and the plaintiff liquidator acted honestly. It is just and equitable that an order be made and no substantial injustice has been or is likely to be caused to any person.

Conclusion and Orders

Subject to hearing from counsel, I propose to make orders to the following effect:
1.Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) the court directs that the plaintiff, John Allan Bumbak in his capacity as liquidator of Red Lancer Pty Ltd (in liq) (ACN 125 740 669) (Company), will be acting properly and is justified in performing, and causing the Company to perform, the Settlement Agreement dated 2 July 2019 that is comprised in the letters that are copied as annexures JAB-18 and JAB-19 to the affidavit of Mr Bumbak sworn 12 September 2019 filed herein.
2.The plaintiff has approval, nunc pro tunc as and from 2 July 2019, pursuant to s 477(2B) of the Corporations Act 2001 (Cth) to enter into, and cause the Company to enter into, the Settlement Agreement.
3.If and to the extent required, pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth), the court declares that the Settlement Agreement is not invalid by reason of it having been entered into prior to obtaining the approval of the court.
The hearing proceeded in the absence of Anthony Palermo. I will also hear from counsel for the plaintiff liquidator as to whether the orders should be dated so as to take effect from 14 days after today's date so that Anthony Palermo might, if so advised, take steps before the orders come into operation to seek to set aside or otherwise challenge the orders.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
ZC
Associate to the Honourable Justice Vaughan
6 DECEMBER 2019