Australian Executor Trustees Limited v Provident Capital Limited

(REVISED FROM THE TRANSCRIPT) RARES J: 1 This is an application by the Court appointed receivers of Provident Capital Pty Limited (receivers and managers appointed) (In Liq) for an order seeking approval of their entry into a funding deed, substantially in the form of that appearing in the affidavit of Marcus Ayres, affirmed 2 March 2016. Mr Ayres is one of the receivers. He said that the purpose of the deed is to enable the receivers to conduct, at no financial risk to the estate under the debenture trust deeds of Provident, the proceedings that Provident commenced in the Supreme Court of New South Wales in 2014 against its former managing director and other directors. Those proceedings are currently being case managed in the commercial list in the Supreme Court, and a trial is expected next year.

Background 2 Mr Ayres believed that entry into the funding deed would be in the interests of Provident's creditors, including the debenture holders, who will rank in priority in any circumstances in which litigation realises a return to Provident. The receivers' latest financial report to the debenture holders as at 30 September 2015, forecasts that the debenture holders will receive an additional return of only four cents in the dollar in addition to the already paid interim distributions totalling 12 cents in the dollar, (or about $14.8 million), leaving aside any further receipt that may result from the Supreme Court litigation. Mr Ayres believed that by entering into the funding deed as much as possible of the forecast return of a further four cents in the dollar will be preserved, and that in the event that the Supreme Court proceedings settle, or result in a judgment in favour of Provident, that potentially the return will be enhanced. Mr Ayres said that, if the receivers were able to enter into the funding deed, Provident's resources would be freed up to pay distributions, the receivers could undertake further work to realise its remaining assets and the current assets of the estate will not be jeopardised if Provident were either unsuccessful or required itself to fund the litigation. 3 In their report as at 30 September 2015, the receivers recorded that, for the period up to 30 June 2015, they had incurred about $10.5 million (exclusive of GST) in professional fees but had only paid themselves $8.35 million (exclusive of GST). The receivers stated that they had not drawn any remuneration since 1 April 2014, in an effort to fairly balance the cash flow to debenture holders and future recoveries, in the context of the broader administration of the receivership. 4 In his second affidavit of 2 March 2016, Mr Ayres explained the process by which the receivers had sought to secure funding, and why they considered that it was appropriate for Provident to pursue the Supreme Court proceedings against the directors. He said that the receivers had approached a considerable number of potential funders, and that subsequently they had narrowed that field down to eight, with each of whom they entered into confidentiality agreements and provided access to an online data room for the purposes of enabling those potential funders to consider whether, and on what terms, they might offer funding to the receivers. At the end of the process in late 2015, the receivers concluded that they should enter into negotiations with the funder named in the deed for the purposes of finalising a draft funding agreement. That resulted in the form of the deed that the receivers wish to enter. 5 Suffice to say that the essential features of the proposed deed are that the funder will assume responsibility for any adverse costs orders in the Supreme Court proceedings against Provident and will, if required, provide security for the costs of Provident in that litigation. The draft provides that the receivers will remain substantively in control of the conduct of that litigation. In consideration for providing the funding, the funder will be entitled to a percentage fee based on a scale that varies depending on the actual amount of legal costs that it will have paid at any point, or points, of time. The fee increases with the quantum of payment that the funder has paid, reflecting, in a commercial way, the risk that it will actually have undertaken. The increases occur up to a particular point, after which the fee percentage remains constant.

Consideration 6 The receivers, as officers of the Court, are entitled to its assistance in circumstances such as these. Clause 2 of the draft deed provides that a condition precedent to the operation of the deed is that within three months of its date, the receivers must obtain "the approval" of this Court to then enter into it on behalf of Provident. 7 In giving judicial advice, the Court does not perform the function of approving the entry into documents in the way loosely contemplated in cl 2 of the deed. Rather, the Court gives advice to its officer that he or she would be justified, on the evidence, in acting in the way proposed: cf Letten v Templeton (2014) 102 ACSR 425 at 430-431 [18]-[20] per Davies J with whom Besanko and White JJ agreed. This traditional function of the Court giving advice to its officers in relation to the performance of their office is an incident of judicial power stemming from the source of the power that authorised the appointment of the officer: cf The Queen v Davison (1954) 90 CLR 353 at 368 per Dixon CJ and McTiernan J. The position of the receivers is different to that, for example, of a liquidator under s 477(2A) or (2B) of the Corporations Act 2001 (Cth) which require that the liquidator have the Court's approval to enter into particular transactions: see Lehmann Brothers Australia Limited (in liquidation) v Lehmann Brothers Special Financing Inc. [2015] FCA 1529. 8 There are reasons why the terms of such agreements in, among others, representative proceedings (or class action litigation) are sometimes required by courts to be disclosed, and why certain parts of any such agreements are nonetheless protected from disclosure. I discussed some of these in Coffs Harbour City Council v Australia and New Zealand Banking Group Limited [2016] FCA 306. 9 The quantum of the reward that litigation funders negotiate may be a matter which either the courts or Parliaments will need to address in terms of public policy at some stage, but it is not a matter with which I am currently concerned. 10 It is appropriate that parts of Mr Ayres' second affidavit and the proposed deed be kept confidential at the present time. I will make orders under s 37AF of the Federal Court of Australia Act 1976 (Cth) suppressing and prohibiting publication of those parts until further order but not in such a way as might interfere with any discretion that the Supreme Court might wish to exercise in relation to that subject matter if it were called on to do so. 11 I am satisfied from Mr Ayres' evidence that the receivers have diligently sought to test the market for the best terms on which funding of the Supreme Court proceedings is available. His evidence also establishes, based on his experience and other inquiries, that the litigation funding market can offer a funding rate or return to a funder substantially in excess of the maximum return in the deed.

Conclusion 12 For these reasons, I am of opinion that the receivers would be justified in entering, and causing Provident to enter, into the deed. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.