Anstella Nominees Pty Ltd v St George Motor Finance Ltd

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IRLMOND PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

REASONS FOR JUDGMENT 1 The liquidator of Irlmond Pty Ltd (Receivers and Managers Appointed) (in liq) ("Irlmond") seeks permission under ss 477(2B) and 479(3) of the Corporations Act 2001 (Cth) to enter into what is known as a "funding agreement" which will put the company into funds so that it can become a party to, and meet the costs of, a proceeding instituted by its shareholders, and others. In that proceeding, the applicants seek to set aside a judgment obtained against them and Irlmond on the ground that it was obtained by fraud. 2 At one time, most funding arrangements were regarded as illegal contracts evidencing a champertous arrangement. Now such agreements have become commonplace in virtue of two exceptions to the rules against maintenance and champerty, those exceptions being: (1) a person with a genuine commercial interest in an action may fund it (Trendtex Trading Corporation v Credit Suisse [1982] AC 679) and (2) the statutory power of sale of property given to a trustee in bankruptcy and to a liquidator is beyond the reach of the rules (UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667, 685 and the cases cited at 682). Strictly speaking, the funding agreement proposed by the liquidator falls outside the rules because it involves a sale of the recoveries of the action and not a sale of a bare cause of action: Glegg v Bromley [1912] 3 KB 474. 3 The liquidator has received advice to the effect that the claims Irlmond wishes to pursue in the action have reasonable prospects of success. Naturally, this is relevant to the question whether permission should be granted. Also relevant is the liquidator's own opinion that the company has "good claims on substantial grounds". 4 While these factors indicate that the liquidator should obtain the relief he seeks, there are a number of other matters that must also be considered before any order is made. The first concerns the terms of the proposed funding agreement. The terms have undergone some change. Initially, the liquidator put forward a form of agreement which he said was in acceptable terms. Usually, a liquidator will be in a far better position than a judge to make this kind of evaluation. On the other hand, there were a number of provisions in the proposed agreement which appeared to be undesirable. Although these provisions have now been removed, it is appropriate that I mention them. 5 The initial version of the draft agreement required the liquidator to surrender his power to control the destiny of the action in the event of disagreement between the liquidator and the other applicants concerning the settlement or discontinuance of the action. The draft agreement provided that the liquidator could not instruct his solicitors to settle or discontinue the proceeding without obtaining the consent of the other applicants. If there was a dispute, the matter had to go to arbitration. 6 There is authority which suggests that the surrender by a party (including a liquidator) of his power to control proceedings has the potential of converting an otherwise lawful transaction (that is, a transaction which falls within one of the exceptions to the rules against maintenance and champerty) into one that involves unlawful maintenance and champerty: Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 137 ALR 260, 272; Re Tosich Construction Pty Ltd (1997) 73 FCR 219, 236. Whether this is correct is not a matter that need be resolved. The difficulty identified in those cases cannot arise in relation to an agreement which does not, on any view, fall within the purview of the rules. 7 It seemed to me, however, that the proposal gave rise to a much greater difficulty, namely whether there are any circumstances under which a liquidator can lawfully give up his statutory powers or duties. There is a view that, while a liquidator may listen to the opinion of others on what steps he should take in a particular situation, in the end he must exercise his own judgment on what is or is not in the best interests of the creditors or contributories. For this reason he cannot give up control of litigation in which his company is a party. This is the view taken by Lightman J in Grovewood Holdings Plc v James Capel & Co Ltd [1995] Ch 80. I note that in Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380 Drummond J did not follow this view. It is not clear why he did not do so. Perhaps he thought that the mere existence of the statutory power of sale of a chose in action carried with it the right to agree on any terms as to the sale. I prefer the view of Lightman J which seems to accord with principle. Be that as it may, a liquidator who leaves the conduct of litigation to an arbitrator may not be able to shield himself from responsibility for the latter's negligence by saying that under an agreement he left the matter entirely in the arbitrator's hands. 8 Recognising the potential difficulty he was in, the liquidator sought time to see whether Insolvency Litigation Fund Pty Ltd ("ILF") (the company providing the funding) could be persuaded to change the terms. This is in fact what occurred. The liquidator was able to negotiate the removal of the restriction on his ability to settle or discontinue the proceeding if Irlmond became a party to the action. 9 Another matter of concern was a provision which allowed ILF to terminate its obligations but keep its share in the proceeds of the action. This would have enabled ILF to end its obligation to provide funding immediately after executing the agreement, yet still retain the benefit of the agreement. It seemed to me that this was not what the parties had in mind. Subsequent events have borne this out. Following discussions between the liquidator and ILF, it is now proposed that if ILF terminates the agreement it will only be entitled to recover any money it has paid. It will not receive any of the proceeds of the litigation. 10 Another aspect of the agreement should be noted. It provides that a co-applicant, Anstella Nominees Pty Ltd, will receive, out of the money recovered in the action, (1) an amount equal to any costs order it may obtain against the respondents and (2) either $100,000 or 10 per cent of the proceeds, whichever is greater. The payment of costs does not create any difficulty. The obligation only comes about if there has been a costs order in favour of Anstella which the respondents are not able to meet. This is an unlikely event given the status of the respondents. As to the other payment, the liquidator has said that it is reasonable in the circumstances. There is no reason why I should go behind his assessment. 11 Turning now to other matters, when judging whether or not a liquidator should be given permission to enter into a funding agreement, it is always important to ensure that the person providing the funding is not being given a disproportionate benefit. By this I mean a benefit which is disproportionate to the risk undertaken in the light of the funding that is promised. Put another way, the person providing the funding should not receive a grossly excessive profit. 12 The liquidator wishes to keep confidential the terms of the funding agreement. For that reason I will not mention the details of the funding which ILF will provide or the "profit" it will receive in exchange. I can say, however, that the terms relating to funding and profit are in line with those contained in other funding agreements which have been approved by courts. I do not believe that the profit ILF will receive is disproportionate. 13 The last matter concerns the creditors of Irlmond. In an application such as this, it is often desirable to have regard to the views of creditors especially when, as here, there is a committee of inspection which represents their interests. In fact, the liquidator has not raised the matter with the committee. There may be some justification for this. The respondents to the proceeding which Irlmond wishes to join include creditors of Irlmond. They are creditors because of the very judgment which Irlmond seeks to have set aside. In dealing with the liquidator, the committee may have taken into account the interests of the judgment creditors. This suggests to me that the liquidator's approach to the court as his first port of call was justified. I am fortified in this view by the fact that the present application was made on notice to the judgment creditors who took up the opportunity to appear. Through their counsel they identified the deficiencies in the initially proposed funding agreement which led to the changes that I have identified. The judgment creditors do not otherwise oppose the orders sought. 14 In my view, it is appropriate that the orders be made. However, the liquidator must pay the creditors their costs of this application. Those costs and the liquidator's own costs will be in the winding up. I certify that the preceding 14 (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate: Dated: 27 May 2003 Counsel for the Applicants: Mr R Attiwell

Solicitor for the Applicants: Home Wilkinson Lowry

Counsel for the 1st & 2nd respondents and proposed 8th respondent Mr I R Jones

Solicitor for the 1st & 2nd respondents and proposed 8th respondent Middletons

Counsel for the 3rd, 4th & 5th respondents: Mr E W Woodward

Solicitor for the 3rd, 4th & 5th respondents: Minter Ellison

Appearance for the 6th & 7th respondents: Mr Scotter

Solicitor for the 6th & 7th respondents: Hunt & Hunt

Date of Hearing: 8 May 2003

Date of Judgment: 14 May 2003