Alphena Pty Ltd (in liq) v PS Securities Pty Ltd as trustee of the Joseph Family Trust

Judgment 1By Interlocutory Process filed on 9 July 2013, the Applicant, Neil Cussen in his capacity as liquidator of Blue Mountains Helicopters Pty Limited (in liq) ("BMH") seeks approval to enter a litigation funding agreement with a litigation funder in the form annexed to his affidavit sworn 4 July 2013, and approval to enter into a retainer agreement with the firm of Champion Legal as annexed to his affidavit of the same date. Armstrong Scalisi Holdings Pty Limited ("ASH") sought leave to be heard on the application under rule 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW). It appears that ASH conducts an accounting practice which trades under the name CAP Accounting, is a creditor of BMH (Sam Cassaniti 30.9.2013 [8-10]) and is associated with a former director of BMH, Mr David Cassaniti. The application for ASH to be heard was not opposed by the liquidator and I granted leave for it to be heard under that rule. 2BMH was wound up on the application of the State Debt Recovery Office in respect of a debt relating to clean up orders issued by a local council in respect of two properties recorded as owned by it, at Hume Road Smithfield ("Hume Road Property") and Moore Street Liverpool ("Moore Street Property"). Mr Cussen's evidence in his affidavit dated 4 July 2013 is that he was appointed as official liquidator of BMH on 1 December 2011. At the time of his appointment, the director of BMH was Mr Raymond Hanna; and, between 4 July 2010 and 23 August 2011, Mr David Cassaniti had been a director of BMH. Mr David Cassaniti was also a director and principal of ASH and a director of two of the companies against which proceedings will potentially be brought, namely Hume Road Pty Limited and Moore Street Pty Limited. Mr Cussen's inquiries indicated that a mortgage facility with St George Bank was secured by the Hume Road Property and the Moore Street Property secured and that a number of other properties were cross-collateralised with those properties. 3It appears that, after Mr Cussen's appointment as liquidator, a member of his staff was advised by Mr Cassaniti that BMH had owned the Moore Street Property as trustee of the Moore Street Trust and had subsequently been replaced as trustee by another entity, Gold Crown Getup Pty Limited. Mr Cussen thereafter sent letters to Mr David Cassaniti requesting books and records of BMH and a report as to affairs in December 2011 and subsequently twice followed up on that request. His evidence is that to date, now two years later, he has still not received any books and records of BMH from Mr Cassaniti. Mr Cussen's evidence is that his further inquiries indicated that BMH held the Hume Road Property as trustee for the Hume Road Trust and held the Moore Street Property as trustee for the Moore Street Discretionary Trust. 4Proceedings were subsequently commenced, in which the notice of motion seeking approval for the funding agreement has been brought, seeking orders allowing BMH to lodge caveats on properties registered in the name of Hume Road Pty Limited and Moore Street Pty Limited and orders permitting lodgement of those caveats were made by consent. An undertaking was given in those proceedings that BMH (or possibly the liquidator) would apply for litigation funding approval and file a Statement of Claim within 21 days of any such approval being granted. The motion filed in these proceedings is brought in compliance with that undertaking. The applicable principles 5Section 477(2B) of the Corporations Act provides that, except with the Court's approval or the approval of a committee of inspection or a resolution of creditors, a liquidator must not enter into an agreement on a company's behalf if the term of that agreement may end, or obligations of a party to the agreement may be discharged by performance, more than 3 months after entry to the agreement. The principles relevant to the grant of approval to entry into a funding agreement under that section are well established. The Court is not concerned, in granting an approval to enter such an agreement under that section, with matters of commercial judgment but is concerned to be satisfied that the entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator: Empire Australia Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167; Re McGrath and Anor in their Capacity as Liquidators of HIH Insurance Ltd [2010] NSWSC 404; (2010) 78 ACSR 405. The Court will generally grant approval for entry into such an agreement if it is satisfied in the interests of the company, the creditors and the community to grant such approval: GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308. 6The factors relevant to the approval of such an agreement were identified in Re Leigh; AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315 by Austin J as including the liquidator's prospects of success in the liquidation; the interests of creditors other than the proposed defendant; possible oppression in bringing the proceedings; the nature and complexity of the cause of action; the extent to which the liquidator had canvassed other funding options; the level of the funder's premium; the liquidator's consultation with creditors; and the risk involved in the claim, including specified matters. Those factors have been applied in subsequent case law determining whether to approve such agreements: for example, Fortress Credit Corporation (Aust) (II) Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24]; Re Gerard Cassegrain & Co Pty Ltd [2013] NSWSC 257 at [12]ff. In Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 at [14], Jacobson J noted that the question for the Court in such an application was whether the liquidator's judgment had been infected by a lack of good faith, or an error of law or principle, and whether there was a real or substantial ground for doubting the prudence of the liquidator's conduct in seeking to enter into the funding agreement. That question arises, in the context of s 477(2B), in the context of entry into a longer term agreement, the performance of which might otherwise delay the completion of the winding-up. The contest as to the proposed proceedings 7The application was initially the subject of written and oral submissions before me on 2 October 2013, when the liquidator tendered a draft form of the relief to be sought in the funded proceedings, but a draft Statement of Claim in the proceedings was not then available. Mr Golledge, who appears for the liquidator, initially submitted that Hume Road Pty Limited and Moore Street Pty Limited as successor trustees of the Hume Road and Moore Street Unit Trusts had been identified as potential defendants in the proceedings, but the proceedings potentially extended more widely to other claims for exoneration or indemnity available to BMH for liabilities incurred as trustee of four separate trusts, and were not limited to liabilities of BMH to the Commissioner of Taxation. A schedule to the funding agreement initially identified the principal cause of action as: "Claims by the Company to seek exoneration through its right of indemnity for liabilities incurred in its capacity as trustee of: - The Moore Street Unit Trust; - The Hume Road Unit Trust; - The Princess Highway Unit Trust; and - The Jedda Road Unit Trust. This includes seeking to exercise and recover on any rights of contribution and subrogation arising out of the guarantee and indemnity granted to St George Bank dated 31 March 2009" (Ex A1, p 269) 8ASH contested the merit of the potential claims. The liquidator accepted that the merits of the claim were relevant to an assessment of whether funding should be approved, since the Court was unlikely to approve a funding agreement where the pursuit of proceedings would be oppressive. On the other hand, the liquidator also pointed out that applications of this kind are often brought at an early stage, when evidence which would be available to the liquidator once proceedings are commenced is not yet available, and contended that the Court should not undertake a detailed assessment of the merits of the proceedings in the absence of the evidence which would be relevant to that assessment. That proposition appears to me to have particular strength where the liquidator has had, to say the least, difficulties in obtaining access to relevant documents. The liquidator also tendered a confidential memorandum of advice from Counsel in respect of the prospects of the proceedings. It appears that some aspects of that advice were based on incomplete information and, in particular, it appears that a subsequent refinancing of the facilities with St George Bank with ANZ Banking Group may not have been recognised at the time of that advice. That is not cause for criticism of the liquidator or his legal representatives given that he has been unable to obtain the Company's books noted above, but I give limited weight to that advice. 9There was initially argument before me as to whether the liquidator's claim extended to a right of contribution or subrogation in respect of facilities with St George Bank dated 1 October 2009, namely a bill facility for the amount of $4,930,000 ("Bill Facility") under which Mr David Cassaniti was principal borrower and an overdraft with a limit of $170,000 ("Overdraft Facility") under which ASH was principal borrower. ASH pointed out that those facilities were refinanced rather than discharged by a call on the guarantors (Sam Cassaniti [17]) and contended that no burden had been imposed upon a guarantor, so as to give rise to any right of contribution, and that there could be no subrogation by any guarantor to the position of St George Bank because there was no payment by any guarantor in discharge of St George Bank's claims. I accept that that cause of action was not available once that facility was paid out by an incoming financier, ANZ Banking Group. It is not necessary to address this issue further since it is not raised by the liquidator's draft Statement of Claim which has now been put before the Court. 10Initially, ASH contended that no substantial liability for which indemnity might be available to BMH existed, because a debt previously owed by BMH to the Commissioner of Taxation had been released. ASH pointed to an agreement apparently reached that the Commissioner of Taxation would withdraw a proof of debt lodged with a provisional liquidator, on the basis that the provisional liquidation would be terminated and BMH returned to the control of its directors. The liquidator pointed out that the Court orders made in 2008 do not record any such release, and contended that such an arrangement did not suggest that the proof of debt had been withdrawn for all time and for all purposes, referring to Barlaw Pty Ltd v Crouch [2013] FCA 961 at [147]. ASH did not seek to press this matter as a basis for denying leave to enter into the funding agreement. It also appears that the deeds by which BMH was replaced as trustee of the trusts purport to provide a release of claims by BMH. The liquidator contended that such a clause did not bar a claim for indemnity against the assets of the relevant trusts. It is not necessary to determine that question, since ASH did not rely on that release in opposition to approval for entry into the funding agreement. 11The scope of the proposed claims by BMH were clarified after I allowed the liquidator the opportunity, following oral submissions, to file further evidence identifying the claims that were to be pursued and to provide a draft Statement of Claim to the Court, and the liquidator filed a further affidavit annexing that draft Statement of Claim. The liquidator refers to a claim against Moore Street Pty Limited and Hume Road Pty Limited relating for indemnity against trust assets, and notes that claims may exist (although they cannot presently be particularised) against other trusts referred to in the proposed funding agreement, namely the Jedda Road Unit Trust and the Princess Highway Unit Trust relating to the circumstances of the sale of assets of those trusts allegedly to discharge debts owed by Mr David Cassaniti. The liquidator's affidavit indicates that the definition of the principal cause of action in the funding agreement, to which I referred above, is to be amended to remove the references to the Princess Highway Unit Trust and the Jedda Road Unit Trust and limits the request for approval of the funding agreement to the claims against Moore Street Pty Limited and Hume Road Pty Limited, although he notes that a further claim for approval may be made if funding becomes available for claims against those other entities. 12The draft Statement of Claim pleads claims against Moore Street Pty Limited and Hume Road Pty Limited as the current trustees of the Moore Street Trust and Hume Road Trust respectively. BMH pleads that Hume Road and Moore Street respectively are liable as successor trustees of the relevant trusts to cause the assets of those trusts to be applied so as to discharge BMH's right of indemnity, and that BMH holds an equitable charge over the assets of the Trusts as security for that right of indemnity. Claims are also brought against several other companies, which it is alleged granted BMH a charge over particular properties as security for its right of indemnity. At general law, a retiring trustee remains subject to liabilities properly incurred in execution of the trust but has an indemnity and lien over trust assets in respect of those liabilities: Collie v Merlaw Nominees Pty Ltd (in liq) [2001] VSC 39; (2001) 37 ACSR 361; Lemery Holdings Pty Ltd v Reliance Financial Services [2008] NSWSC 1344; (2008) 74 NSWLR 550. 13The draft Statement of Claim pleads that, as trustee of the Moore Street Trust, BMH incurred debts to the Commissioner of Taxation in the sum of $94,930.79 and to ASH in the sum of $20,000 and pleads BMH's right of indemnity under the terms of the Moore Street Trust Deed and at general law. The draft Statement of Claim also pleads a debt incurred by BMH as trustee of the Hume Road Unit Trust to ASH in the amount of $20,000 and the right of indemnity arising under the terms of the Trust Deed for that trust and at general law. ASH contends that, by itself, the funding of the latter claim would not be in creditors' interests. It is not necessary for me to address that submission since the latter claim is not proposed to be brought or funded as a stand alone claim. 14The claim also extends to liquidation costs, including remuneration and a proportion of the costs of the proceedings referable to the affairs of the Moore Street Trust and the Hume Road Trust respectively and relies on the decision in Alphena Pty Ltd (in liq) v PS Securities Pty Ltd as trustee of the Joseph Family Trust [2013] NSWSC 447; (2013) 94 ACSR 160 in that regard. ASH refers to the well-established proposition that a liquidator may be indemnified out of trust assets for his or her reasonable costs and expenses in identifying, recovering, realising, protecting, administering and distributing trust assets, but may not recover the costs of work which could not be fairly described as administering the trust from trust assets: 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377; Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd [2004] NSWSC 1224; (2004) 52 ACSR 198. ASH also refers to the observation of Brereton J in Dayroll Pty Ltd v Dayroll NSW Pty Ltd [2009] NSWSC 895 at [5] that: "It is uncontroversial that a trustee has a right of indemnity out of the trust assets for expenses or liabilities properly and reasonably incurred in the administration of the trust ..., that upon bankruptcy or liquidation of a trustee, its right of indemnity vests in its trustee in bankruptcy or liquidator ..., and that this indemnity extends to the proper costs and expenses of the liquidator of a corporate trustee, incurred in the administration of the trust .... However, this does not capture all the costs and expenses incurred by the liquidator of a corporate trustee, some of which will be attributable to liquidator's role as liquidator of the trustee company, and not to administration of the trust; it includes those costs and expenses reasonably incurred in identifying, recovering, realising, and protecting trust assets (or attempting to do so), and distributing them to those beneficially entitled ... [citations omitted]" ASH submits that the liquidator has led no evidence as to the quantum of any such costs properly referable to the Moore Street and Hume Street trusts. There is every reason to expect that such costs exist and I do not consider that it is necessary for the liquidator to quantify them at this stage, in order to obtain leave to enter the funding agreement, as distinct from in the funded proceedings in order to establish its entitlement to recover them. 15So far as the liquidator's prospects of success in the liquidation, the nature and complexity of the cause of action and possible oppression in bringing the proceedings are concerned, the liquidator contends that there are claims available to BMH for indemnity against the current trustees of the relevant trusts and trust assets for indemnity in respect of the liabilities incurred by BMH or claims in the winding up to which I have referred above. Those claims seem to me to be seriously arguable. I note that ASH accepted in submissions that a claim was made by the Australian Tax Office against BMH in its capacity as trustee of the Moore Street Discretionary Trust, and that there is a potential claim for indemnity of $94,000 against Moore Street Pty Limited, although it contended that other amounts claimed by the Australian Tax Office against BMH were made against it in other capacities. It is not necessary to address the strength of the liquidator's claim for indemnity in respect of costs of the winding up where the claims for indemnity for debts of the trust provide sufficient support for the merit of the proposed proceedings. The liquidator notes that those claims are unlikely to be pursued without the benefit of the funding (Cussen [71(a)]). 16So far as the interests of creditors other than the proposed defendants and the risk involved in the claim are concerned, the proposed funding includes an indemnity for adverse costs which limits the risk that BMH or its creditors will be worse off as a result of the liquidator's pursuit of the claims, and, as the liquidator points out, there are presently no funds in the liquidation which could be wasted by the pursuit of litigation in any event. The liquidator points out that creditors would be better off to the extent of any recovery in the proceedings, after taking into account the funder's premium and costs of liquidation (to the extent they are not recovered under the claim for indemnity in the proceedings) since a recovery may permit the payment of a dividend which would not presently be payable. 17ASH contends that the proposed action would be oppressive to the proposed defendants to the proceedings, which did not themselves seek to appear to put that submission. I give little weight to the submission where the Defendants have not put it. ASH also contends that the costs incurred in the proceedings would be disproportionate to the amount in issue. I also give little weight to that submission since one would expect the liquidator and the proposed defendants to act rationally and in accordance with s 56 of the Civil Procedure Act 2005 (NSW) in dealing with the proceedings and the costs incurred in them, and to settle proceedings that are not warranted by the amounts involved in them. In any event, I do not consider that it would amount to oppression for a liquidator to pursue a present trustee to enforce the former trustee's alleged right of indemnity, even if the amounts involved are relatively small, where it would be open to that present trustee to avoid or minimise the costs of the proceedings by acknowledging that right or otherwise narrowing the areas in dispute in the proceedings. 18ASH also relied on an observation of Palmer J in Hall v Poolman [2007] NSWSC 1330; 65 ACSR 123 at [388] questioning the conduct of funded proceedings that would only deliver a return to the litigation funder and the liquidator and not a substantive return to creditors. However, that view was not supported by the views expressed by the Court of Appeal on appeal from his Honour's decision in Hall v Poolman [2009] NSWCA 64; (2009) 71 ACSR 139 at [150], where the Court of Appeal held that, with some qualifications, if a liquidator had incurred investigation costs and the relevant company had no assets from which those costs could be paid, then he or she could legitimately and in accordance with his or her duties pursue litigation with the aid of a litigation funder, even if there is little or no likelihood of the recovery going beyond those costs and expenses and the funder's fees. 19ASH also contends that the liquidator and creditors would be better off seeking to negotiate with the proposed defendants for recovery of monies from which creditor claims could be paid. The liquidator's further affidavit draws attention to "without prejudice" offers exchanged with the present trustees of the Moore Street Trust and the Hume Street Trust in November 2012, which could not be tendered without the consent of those parties, and to a further open offer made to the solicitors for Hume Road Pty Limited and Moore Street Pty Limited (who also act for ASH) seeking to resolve the matter, following the submissions made by ASH at the hearing on 2 October 2013. On 11 October 2013, the solicitors for the former trustees (and ASH) responded offering to settle the matter for a payment of $20,000 inclusive of costs. On 24 October 2013, the date on which ASH lodged further written submissions in respect of the application, the solicitors acting for the proposed defendants (and ASH) made a further offer on behalf of Moore Street Pty Limited to settle the claims for $80,000 inclusive of the costs of the proceedings, including this motion; this may well be a more favourable offer, depending on the quantum of the costs of the proceedings as a whole. However, the liquidator points out, and I accept, that a negotiated resolution can be pursued even after approval of the funding agreement although, if that resolution is not achieved until after entry into the Funding Agreement, then a proportion of monies recovered will then be payable to the funder. As the liquidator also points out, there is no reason to think that any more favourable offer of settlement is more likely to be made by the proposed defendants if the threat of proceedings brought by the liquidator is removed by any inability to fund them. 20ASH contends that the liquidator has not adequately consulted with creditors in respect of seeking approval for the funding agreement. The liquidator contends that the Australian Tax Office and the State Debt Recovery Office have been informed of the application and either approve of it or do not object to it, although ASH was not consulted. That is perhaps surprising given its apparent relationship with the proposed defendants and it has, of course, now had an opportunity to be heard in this application. 21So far as the proposed retainer of Champion Legal is concerned, there is, on the evidence, no reason to think that the rates contemplated by that retainer or its other terms are unusual and the parties did not address substantive submissions to this matter. The Court's role, as I have noted above, is not to second guess the liquidator's judgment as to the experience and qualification of the solicitors retained and I am satisfied that approval should be given to that retainer. 22I have concluded, having regard to the matters set out above, that this is a proper case to grant leave to the liquidator to enter into the proposed funding agreement and retainer agreement. Costs and orders 23The liquidator's costs of an application of this kind would, in the ordinary course, be its costs in the liquidation. ASH does not seek its costs of the motion in circumstances that leave is granted, but submits that it should not be ordered to pay such costs where the liquidator would in any event have had to satisfy the Court that this was a proper case for the grant of the relevant leave. ASH was heard in these proceedings under r 2.13(1) of the Supreme Court (Corporations) Rules. If the Court considers that the attendance of a person to whom leave has been granted under r 2.13(1) has resulted in additional costs for any party or the corporation, which should be borne by the person to whom leave was granted, the Court may direct that the person pay the costs and order that the person not be further heard until the costs are paid or secured to the Court's satisfaction: r 2.13(2). I accept that the liquidator would have had to address at least the major issues initially raised by ASH in its opposition to leave, including the scope, quantum and prospects of the proposed claim, in obtaining the Court's approval for entry into the funding agreement and retainer agreement , and ASH's submissions may ultimately have assisted the liquidator to more precisely articulate the proposed claims. I do not consider that an order should be made against ASH in respect of costs of the application. 24Accordingly, I make the following orders:

1. An order, pursuant to s 477(2B) of the Corporations Act, approving the liquidator's entry into a litigation funding agreement with Small Claims Funding Pty Ltd in, or substantially to the effect of, the funding agreement annexed to the affidavit of Neil Robert sworn 4 July 2013, as amended in the manner noted in paragraph 13 of the Judgment .
2. An order pursuant to s 477(2B) of the Act approving the liquidator's entry into a retainer agreement with Champion Legal in, or substantially to the effect of, the agreement annexed to the affidavit of Neil Robert sworn 4 July 2013.
3. An order that the liquidator's costs and expenses of this application be the costs and expenses of the liquidation of the plaintiff.
4. Exhibits be returned to the solicitors acting for the liquidator in these proceedings, who must retain those exhibits pending the expiry of the time for any appeal.

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