Anstella Nominees Pty Ltd v St George Motor Finance Ltd

EX TEMPORE REASONS FOR JUDGMENT 1 The liquidators of BCI Finances Pty Ltd (in liquidation) (BCI Finances), seek the Court's approval, pursuant to s 477(2B) of the Corporations Act 2001 (Cth), to enter into a deed of indemnity with the Deputy Commissioner of Taxation. 2 The purpose of the deed is to provide the arrangements by which the Deputy Commissioner of Taxation will provide funding to enable the liquidators to undertake various steps in the prosecution of an action in this Court, namely, Action SAD 5 of 2015 (the Recovery Action). In the Recovery Action, BCI Finances is the applicant and the ten respondents are members of the Binetter family, an estate of one deceased member of the Binetter family, and companies said to be owned and/or controlled by members of the Binetter family. 3 The affidavit of Mr Lock filed in support of the application indicates as follows: (a) Mr Sheahan and Mr Lock were appointed joint and several liquidators of BCI Finances at a meeting of its creditors convened by its then administrators on 23 April 2014. (b) The Deputy Commissioner of Taxation had lodged a proof of debt in the administration in the amount of $14,059,657. To date, no other persons have lodged a proof of debt, although at the meeting at which the liquidators were appointed, a solicitor appeared indicating that he was representing three entities who asserted an indebtedness to them by BCI Finances of $600,000. In addition, one of the respondents to the Recovery Action has asserted that it too is a creditor of BCI Finances but it has not, to date, lodged a proof of debt. The effect, Mr Lock deposes, is that the Deputy Commissioner of Taxation is currently the only known creditor in the liquidation. (c) In the Statement of Claim in the Recovery Action, the liquidators allege a scheme in which each of the respondents participated. The essential elements of the scheme were the creation of a transaction between a bank in Israel and BCI Finances which, on its face, constituted a loan from the bank to BCI Finances secured by guarantees given by some of the respondents when, in reality, the respondents or some of them or entities associated with them, had deposited with the Israeli bank an amount equal to the amount of the putative loan; the on-lending by BCI Finances of the amount of the loan from the Israeli bank to some of the respondents in Australia in a way which permitted those respondents to claim an income tax deduction in respect of interest payments and BCI Finances to claim an income tax deduction in relation to the interest it paid to the Israeli bank; and no declaration of the income earned on the amount deposited with the Israeli bank which was used by way of security. The Statement of Claim alleges a number of causes of action, including contraventions by those respondents who were directors of BCI Finances of their duties as director, breaches of fiduciary duty, conspiracy and the knowing participation by the respondents in the breaches by the others so as to give rise to accessorial liability. (d) The losses of BCI Finances which the liquidators seek to recover in the Recovery Action comprise, principally, its liability to the Deputy Commissioner of Taxation for income tax, interest and penalties, for $12,120,295, together with the cost liabilities of BCI Finances resulting from proceedings in this Court arising from its objections to the Commissioner's assessments of its tax liability. BCI Finances did not pursue those proceedings and they were dismissed by consent. (e) BCI Finances is now insolvent. The only substantial assets which the liquidators have identified are the claims which it has against others. (f) Without the financial support of a third party, the liquidators may not be able to prosecute the claims available to BCI Finances. (g) The liquidators believe that pursuit of the causes of action identified in the Statement of Claim and the Recovery Action may lead to recoveries in liquidation for the benefit of the creditors. (h) The proposed deed of indemnity does not provide for any particular benefit or premium to the Deputy Commissioner in consideration of the provision of the litigation funding. The benefit to the Commissioner will arise if the litigation succeeds in obtaining recoveries which exceed the costs of the litigation. (i) The liquidators believe it to be in the best interests of BCI Finances and of its creditors that they pursue the Recovery Action. 4 Section 477(2B) of the Corporations Act provides as follows: (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 a charge) 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. 5 Section 477(2B) applies in this case because the obligations contained in the proposed deed are not likely to have been performed completely within three months. 6 The principles relating to the Court's exercise of the power under s 477(2B) are settled and may be summarised as follows: (1) The Court considers the application for approval in the context of the purpose for which the powers of liquidators exist: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 281 ALR 38 at [40]. (2) The role of the Court is to grant or refuse approval to the liquidators' proposal: Re Bell Group Ltd (in liq) [2009] WASC 235 at [57]. It is not the Court's role to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109. (3) The Court's approval is not an endorsement of the proposed agreement but a permission to the liquidators to exercise their own commercial judgment: ASC Timber at 117. (4) It is not necessary for the Court to reconsider all of the issues taken into account by the liquidators, nor to second-guess their judgment. Generally, the Court does not refuse approval 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 liquidators' proposed conduct. That is particularly so when the benefits and burdens of the proposed agreement require assessment on a commercial basis: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86. (5) At the same time, the Court does not simply "rubber stamp" whatever is put forward by a liquidator. (6) A Court is less likely to approve the entry into an agreement if its terms are unclear: Re United Medical Protection Ltd (No. 4) [2002] NSWSC 516; (2002) 42 ACSR 218. (7) It is relevant for the Court to consider whether any benefit given to the person providing the litigation funding is disproportionate to the risk undertaken in light of the funding: Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466; (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296. 7 For understandable reasons, the liquidators wish to keep confidential several of the terms of their proposed agreement with the Deputy Commissioner of Taxation. That being so, I do not intend to outline presently all the details of the proposed agreement. 8 It is sufficient to record that the proposed deed is, as its title suggests, a deed of indemnity by which the Deputy Commissioner agrees to indemnify the liquidators up to an identified sum in respect of certain of the costs and other liabilities which might be incurred in the Recovery Action. The deed does not provide for the Deputy Commissioner to receive any particular premium or benefit in consideration of the provision of the indemnity, although the Commissioner, as the major creditor, will obviously benefit if the Recovery Action is successful. The agreement provides in a conventional way for the manner in which the indemnity is to be provided. It does oblige the liquidators to keep the Deputy Commissioner fully informed of all matters relating to the Recovery Action, but does not give the Deputy Commissioner any right of control of the conduct of the litigation. The liquidators may not compromise the Recovery Action without first ascertaining the views of the Deputy Commissioner, but the liquidators are not bound to act in accordance with those views. If the liquidators and the Deputy Commissioner disagree about a particular proposal for settlement, the deed provides for the opinion of senior counsel to be obtained and for the liquidators to act in accordance with that advice. 9 The deed fixes the hourly rates which may be charged by the legal practitioners retained for the Recovery Action and by the liquidators and their staff. 10 The authorities indicate a variety of matters which bear upon the exercise of the Court's power to grant approval. These include the prospects of success in the litigation, the nature and complexity of the proposed courses of action, the extent to which the liquidators have canvassed other funding options, the level of the funder's premium when that is applicable and the liquidators' consultation with creditors. Obviously enough, some of those matters will be more prominent in the case of some applications for approval than in other cases. 11 In the present case, the liquidators have not provided the Court with any assessment of the prospects of success of the litigation other than making the general statement that they consider the pursuit of the Recovery Action to be in the best interests of BCI Finances and its creditors. No assessment by independent counsel has been provided, nor have the liquidators provided any indication of the evidence available to them to support the allegations in the Statement of Claim or of the resources of the respondents which may be available to meet the amount of any judgment which BCI Finances obtains. I do note however, in relation to the latter, that on 30 January, 11 February and 13 February 2015, this Court made orders freezing the assets of a number of the respondents, implying, at least, that there may be some resources available to meet any judgment. In relation to the prudence of the proceedings, counsel drew attention to the certificate of the solicitor preparing the statement of claim which is attached to the statement of claim. In that certificate the solicitor certifies that the factual and legal material available to him provides a proper basis for each allegation in the pleading. Although that certificate does provide some assurance to the Court, it is not equivalent to the opinion of independent counsel. 12 Despite the absence of evidence about those matters, I do consider it appropriate to grant the approval which the liquidators seek. I am so satisfied, having regard in particular to the circumstance that the proposed agreement is a deed of indemnity and not a litigation funding agreement providing for an agreed premium or benefit to a funder in exchange for the provision of funding. It regulates the terms of the assistance to be provided by the Deputy Commissioner in the litigation. It is also very pertinent that the funder in this case is the Deputy Commissioner of Taxation who is the only creditor to have lodged a proof of debt. It is natural that a major creditor, especially a creditor lodging a proof of debt of the size lodged by the Deputy Commissioner, may wish to assist liquidators in an action designed to achieve a recovery of monies to be available for distribution to creditors. 13 None of the respondents to the Recovery Action has attended at today's hearing, and no person has asserted an entitlement to be heard in opposition to the grant of the Court's approval. 14 On the material before me, there is no reason to think that the liquidators' judgment about the entry into the deed with the Deputy Commissioner has been infected by a lack of good faith or an error of law or principle, and there is no real or substantial basis for doubting the prudence of the liquidators' proposed conduct in seeking to enter into the deed. Furthermore, there is no indication that entry into the deed will cause prejudice to other creditors or any form of oppression about which the Court should be concerned. I accept that without the Deputy Commissioner's assistance the liquidators may not be able to pursue the claims in the Recovery Action. 15 Accordingly, I order, pursuant to s 477(2B) of the Corporations Act 2001, that approval be given to the liquidators to enter into the deed of indemnity in the form of annexure "IRL4" to the affidavit of Ian Russell Lock affirmed 5 February 2015. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.