Alfonso, in the matter of Pinnacle Fire Protection Pty Ltd (in liq) v Woods

Federal Court of Australia|2021-11-24|Before: Re J, Mr J, Cheeseman J

Pursuant to s. 477(2B) of the Corporations Act 2001 (Cth), the first plaintiffs be granted approval nunc pro tunc to enter into the amending agreement in the form located at Annexure BFK-3 to the Affidavit of Barry Frederic Kogan sworn 4 November 2021.
Pursuant to ss. 37AI, 37AF and 37AG of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, the Affidavit of Barry Frederic Kogan sworn 4 November 2021 and Annexure BFK-3 be marked confidential on the Court file, not be published, disclosed or accessed except pursuant to an order of the Court and that their contents be supressed until the conclusion of the liquidation of the second plaintiff. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

CHEESEMAN J: 1 On 23 July 2021 I made orders approving nunc pro tunc the entry by the first plaintiffs, as liquidators of the second plaintiff, Rogulj Enterprises Pty Ltd (in liquidation) (the Company), into a funding agreement with a litigation funder: Kogan, in the matter of Rogulj Enterprises Pty Ltd (in liq) [2021] FCA 856 (Rogulj Enterprises (No 1)). The liquidators and the funder have since agreed to a variation to that funding agreement (the amending agreement). These reasons concern an interlocutory application dated 4 November 2021 by which the liquidators seek approval under s 477(2B) of the Corporations Act 2001 (Cth) of their entry into the amending agreement. 2 In support of the application the liquidators rely upon the affidavit of Mr Kogan sworn 4 November 2021 (Second Kogan Affidavit). The liquidators also rely upon the earlier affidavit of Mr Kogan sworn 5 July 2021 and an earlier confidential exhibit, exhibit BK-2, which was relied upon for the purpose of the first approval. 3 Confidentiality orders are sought in respect of the Second Kogan Affidavit and annexure BFK-3 to that affidavit which comprises the amending agreement. In Rogulj Enterprises (No 1) I made a confidentiality order in respect of the original funding agreement for the reasons set out at [28] - [33]. In the present application, Mr Kogan has deposed to his concern that a wider disclosure of the funding arrangements may provide defendants to any proposed litigation an unfair advantage to the detriment of the Company and its creditors. In the circumstances, I am satisfied that the confidentiality orders sought should be made under ss 37AI, 37AF and 37AG of the Federal Court of Australia Act 1976 (Cth) on the ground that the order is necessary to prevent prejudice to the proper administration of justice. 4 For the reasons that follow, approval is granted to the liquidators under s 477(2B) of the Act to enter into the amending agreement noting that such approval is required because the term of the agreement is likely to exceed 3 months.

background 5 The background to the application, and the circumstances in which the original funding agreement was entered into, is summarised at [2] - [14] of Rogulj Enterprises (No 1). It is not necessary to repeat that summary save to note the following matters: (1) the liquidators were appointed on 24 December 2018 pursuant to an order of the Supreme Court of New South Wales; (2) the Company has been without available cash and reportedly owed creditors in excess of $31 million; (3) with the assistance of solicitors, the liquidators identified a number of potential claims and secured funding; (4) after an extensive process including negotiation, the liquidators reached agreement with the funder; (5) given looming limitation dates, an urgent application was made on 6 July 2021 for the approval of the liquidators' entry into the funding agreement that had been entered into on that date; and (6) on 23 July 2021 orders were made in this proceeding approving, on a retrospective basis, the entry into the funding agreement between the liquidators, the Company and the funder. 6 Mr Kogan deposes in his second affidavit to the events that have transpired since retrospective approval was given on 23 July 2021. In essence, following investigations into the examinable affairs of the Company and consideration of the potential claims available, the liquidators and the funder agreed to certain changes to the funding agreement. The changes are summarised in the evidence read on this application and are contained in the confidential evidence on this application. 7 In broad terms, the amendments provide for a change to the quantum of funding, a change to the structure of the provision of the funding and a change to the priority of distribution. I note in relation to the latter that Mr Kogan explained in his evidence why that change to the priority of distribution does not adversely impact the interests of creditors.

LEGAL PRINCIPLES 8 Section 477(2B) provides: (2B) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. 9 The principles relevant to the Court's approach to applications under s 477(2B) of the Act is summarised at [15] - [19] of Rogulj Enterprises (No 1) and in a recent decision of Alfonso, in the matter of Pinnacle Fire Protection Pty Ltd (in liq) v Woods [2021] FCA 1402 at [13] - [15]. 10 Commercial agreements between parties are commonly the subject of variation, it is not unusual for the Court to consider changes to funding agreements (and applications for approval which may necessarily follow) which were the subject of prior approval under s 477(2B): see for example Re J M Kelly Builders Pty Ltd (in liquidation) [2019] FCA 918; Re J M Kelly Builders Pty Ltd (In Liq) (No 2) [2019] FCA 1789; Re J M Kelly Builders Pty Ltd (In Liq) (No 3) [2019] FCA 2141.

Consideration 11 The amending agreement falls within the ambit of s 477(2B) given that the term of the arrangement (as amended) may end or obligations of a party to the arrangement may be discharged by performance more than three months after the agreement is entered into. For this reason, approval under s 477(2B) is necessary. Court approval under s 477(2B) is also a condition precedent to the operation of the amending agreement. 12 The object of the approval process under s 477(2B) is to ensure that the contractual terms of the proposed agreement do not give rise to an error of law or reason to suspect lack of good faith or other impropriety on the part of the liquidator of the company: Pascoe, re Matrix Group Ltd (in liq) [2011] FCA 1117 at [7] (Jacobson J) citing Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23] (Austin J). In considering whether approval ought to be granted, the Court does not simply "rubber stamp" whatever the liquidator puts forward: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 (Gordon J) at [26], cited by Gleeson J in Hird (Liquidator), in the matter of Allmine Group Limited (in liq) [2018] FCA 781 at [32]. However, it is important to note that the role of the Court does not involve exhaustively or closely considering the commercial merits or otherwise of the proposed agreement: Re CIC Insurance Ltd [2001] NSWSC 438; (2001) 38 ACSR 181 at 183 [9] (Barrett J). 13 I am satisfied, having regard to Mr Kogan's evidence and in reviewing the funding agreement, as varied by the amending agreement, that approval under s 477(2B) ought to be granted for the following reasons. 14 First, Mr Kogan, who is registered liquidator with over 20 years of experience in insolvency and restructuring, has deposed to his view that the entry into the amending agreement is in the Company's interest. I note in particular that the amending agreement increases the funds available to the liquidators to conduct initial investigations to an amount almost twice of that available under the original funding agreement. In my view, the amending agreement is directed at advancing the interests of creditors insofar as the increased funding will enable the liquidators to investigate and prosecute claims which may result in recoveries for creditors. 15 While I am mindful that the amending agreement has the effect of changing the order of priorities in the agreement, I accept Mr Kogan's evidence that the variation to the priorities of distribution was the result of a compromise between the funder and the liquidators and that the impact is neutral insofar as it relates to any potential distribution to creditors. 16 Thirdly, there is no suggestion that the liquidators' entry into the amending agreement is not a proper exercise of the liquidators' powers or is otherwise ill-advised. In any event, approval under s 477(2B) does not operate as approval of the underlying agreement itself, such that the approval does not exonerate the liquidator from any liability he or she may have in respect of the transaction: In the matter of One.Tel Limited [2014] NSWSC 457; (2014) 99 ACSR 247 at 254 [26] (Brereton J). 17 Accordingly, I will make orders in the form sought by the liquidators approving entry into the amending agreement. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.

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