BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2008] NSWSC 856 | Case summary

1933/01 BL & GY INTERNATIONAL CO LTD V HYPEC ELECTRONICS PTY LTD (IN LIQ) 4413/05 HYPEC ELECTRONICS PTY LTD (IN LIQ) V DEPARTMENT OF LANDS & ORS JUDGMENT 1 HIS HONOUR: There are three matters to be addressed in this judgment. 2 First, by an interlocutory process filed on 9 July 2008, Mr Colin Mead seeks orders under ss 447(2B) and 447(6) of the Corporations Act 2001 (Cth) giving the Court's approval to the liquidator of Hypec Electronics Pty Ltd ("HE") entering into a certain deed with HE, Mr Colin Mead and Mr Mead's solicitors, already executed conditionally on the Court's approval and dated 3 July 2008 ("the Deed"). The major part of my judgment will deal with this matter. 3 Secondly, consequently upon the Court's orders of 29 July 2008 dissolving injunctions that prevented the sale of properties of HE at Lot 2 Singleton Rd, Laughtondale and 34 Herbert St, West Ryde, the Court is asked to make orders preventing the liquidator of HE from paying certain monies to the Sixth Defendant for a limited period of time, and to deposit those monies into an interest-bearing bank account. Thirdly, the Court is asked to release and discharge the security for costs provided by sixth defendant, Wen Hua Tsui ("Mrs Tsui") and her agents including Lorna Lam, and consequently to require discharge of a mortgage granted by Ms Lam over her home unit property in Victoria Road Ryde. I shall return to these two matters after I have dealt with the question of approval of the Deed. 4 I note that at the hearing of these matters, the liquidator of HE, Mr Mead and Mrs Tsui were legally represented. There were also appearances in person by Mrs Mead and Grace Yang, and they addressed the Court. Before the second day of the hearing my associate received by e-mail what appear to be copies of long affidavits by Mrs Mead, Mr and Mrs Yang and Grace Yang. No attempt was made to tender the original affidavits at the hearing and therefore they are not in evidence. Background facts 5 There is a long and tangled history of litigation providing the background for the Deed. I shall not attempt any comprehensive account, but certain factual matters need to be understood for the purpose of considering whether to approve the liquidator entering into the Deed. 6 For many years Hypec Electronics Pty Ltd ("HE") carried on the business of importing computers and computer components from Taiwan. Its sole directors and shareholders were a husband and wife, Colin and Lucy Mead. Mrs Mead had come to Australia from Taiwan and was a 44% shareholder in a Taiwanese company called BL & GY International Co Ltd ("BL"). Other shareholders in BL were members of her immediate family. In 1996 Mr and Mrs Mead separated. HE has not traded since then and this Court made an order for its winding up on 7 May 2001. There is some evidence indicating that the business of HE has subsequently been carried on by Hypec Information Technology Services Pty Ltd ("HITS"). 7 Mr Mead claims to be a creditor of HE for an amount in excess of $100,000 (including interest) by virtue of a costs order in his favour against the company made on 4 December 2003, as well as being a 50% contributory. 8 A family law property proceeding (No SYF3359/97) between Mr and Mrs Mead was commenced in the Family Court of Australia in 1997 and is still continuing. An affidavit by Mr Mead, made on 28 February 2008, deposes that he has incurred very substantial costs in that proceeding, including applications for interim property orders and a contempt application brought against him. 9 There have also been substantial proceedings in the Common Law and Equity Divisions of this Court involving BL and HE, and Mr and Mrs Mead. The Common Law proceeding, No 12674/97, was a claim by BL against (inter alios) HE for substantial debt. As Mr Mead had been excluded from participation in the affairs of HE, and he wanted HE to file a cross claim against (inter alios) BL, he applied successfully to Einstein J in proceeding No 3832/01 for the leave to act on behalf of HE in the Common Law proceeding: BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705; (2001) 164 FLR 268. Mathews AJ delivered judgment in the Common Law proceeding on 14 February 2002, dismissing BL's claim against HE and also dismissing HE's claim against BL. Subsequently her Honour delivered a judgment on costs in the Common Law proceeding, ordering BL and Grace Yang (Mrs Mead's sister, who became bankrupt on a debtor's petition filed on 13 June 2008) to pay the costs of Mr Mead on the indemnity basis, including the cost of his conduct of the proceedings in the name of HE: BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2002] NSWSC 575. 10 Another Equity proceeding brought by BL against HE was No 1933/01, an application to wind HE up in insolvency for failure to comply with a statutory demand. A winding up order was made on 7 May 2001 and a liquidator was appointed. 11 During the years when HE was active, assets were acquired in the names of Mr and Mrs Mead using the money of HE; additionally some assets were acquired in the name of another company connected with them, and some assets were acquired in the name of the wife's parents, Mr and Mrs Yang. In 2002 HE, by its liquidator, brought a proceeding against Mr and Mrs Mead, Mrs Mead's parents and the related company (proceeding No 1268/02) seeking to recover those assets. The assets included the properties at Laughtondale and West Ryde. Judgment was delivered in that proceeding on 3 November 2003: Hypec Electronics Pty Ltd (in liq) v Mead [2003] NSWSC 934 (Campbell J). His Honour found that the liquidator was estopped, and precluded under the principle in Ex parte James; in re Condon (1874) LR 9 Ch App 609, from recovering four items of corporate property, but he made orders declaring that some items of property were held by their registered proprietors in trust for the company. In particular, the Court declared that Mr and Mrs Mead held the property at Laughtondale in trust for the company, and Mr and Mrs Mead and Mr and Mrs Yang held the property at West Ryde in trust for the company. In each case the registered proprietors were directed to transfer title to the company. They subsequently did so. 12 A recital to the Deed says that Mr Mead sold some properties, pursuant to orders obtained in the Family Court, for the purpose of funding his case, and the case of HE, in the Common Law proceeding; and that Campbell J's judgment indicated that, were it not for an estoppel operating against HE, those properties would have been beneficially owned by HE. According to the recital, this means that if Mr Mead recovers under Mathews AJ's costs order against BL, he will be obliged to reimburse HE for the value of the property sold to pay costs. 13 The component of the litigious battles that is important for present purposes relates to mortgages over the Laughtondale and West Ryde properties, a matter that was addressed in Gzell J's judgment in Hypec Electronics Pty Ltd (in liq) v Registrar-General [2008] NSWSC 18 (29 January 2008), in proceeding No 4413/05. It appears that the two properties were used for worship in accordance with the Tao faith, and that Grace Yang, Mrs Mead's sister, is a spiritual leader of that religion. Another spiritual leader is Wen Hua Tsui ("Mrs Tsui"). Gzell J's judgment dealt with a cross claim by Mrs Tsui claiming the benefit of indefeasibility of title as mortgagee of the two properties, and entitlement to be paid approximately $1.175 million which she claimed to be secured by the mortgages. Mrs Tsui's cross claim was resisted by the liquidator of HE and Mr Mead. His Honour also dealt with a cross claim by Mr Mead seeking to establish that the mortgages were nullities that secured no indebtedness. Mrs Tsui was required to provide security for HE's costs in an amount of approximately $100,000. 14 Until 2 May 1997 the mortgagee of the properties was the Commonwealth Bank of Australia ("the Bank"). Prior to Campbell J's orders, the registered proprietors of the West Ryde property were Mr and Mrs Mead and Mrs Mead's parents, Mr and Mrs Yang. The mortgage over the West Ryde property secured debts owing by HE. The registered proprietors of the Laughtondale property were Mr and Mrs Mead, subject to a mortgage to the Bank that secured debts of Mrs Mead and Grace Yang (Mrs Mead's sister) and debts (including guarantee debts) of Mr and Mrs Mead. 15 In February 1997 the Bank was pressing for payment under the mortgages and threatening to exercise its powers of sale. It issued a letter of demand to Mrs Mead on 11 February 1997, and it gave notices to Mrs Mead under s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of both properties on 24 and 25 February 1997. By 2 May 1997 a total amount of about $1.175 million was owed to the Bank, comprising about $673,000 owed under an overdraft facility issued to HE, $501,000 on a commercial bill discount facility issued to Mrs Mead and Grace Yang, and about $1000 in legal fees. 16 Grace Yang gave evidence before Gzell J that she told Mrs Tsui that money was needed to purchase the West Ryde and Laughtondale properties, and that Mrs Tsui agreed to assist by approaching friends of hers in Taiwan who were members of the Tao religion. Funds were transferred into Grace Yang's Australian bank account from Mrs Tsui ($500,000 in February 1996, initially for the purchase of another property) and three Taiwanese women (referred to by his Honour as "the Taiwanese ladies"). The money from the Taiwanese ladies came during the period from January to March 2007 and amounted, in total, to about $650,000. Gzell J found that they advanced their monies to Grace Yang for the purchase of the West Ryde and Laughtondale properties (at [78], [79], [80]). There was a contest before Gzell J as to whether Mrs Tsui and the Taiwanese ladies really did send money to Grace Yang, having regard to some discrepancies in remittance notices, but his Honour expressly found that the money was transmitted and received by Ms Yang as alleged by Mrs Tsui (at [76], [86]-[87]). He held that Ms Yang received the funds from the Taiwanese ladies and held them on trust to be contributed to the purchase price for the West Ryde and Laughtondale properties (at [87]). 17 In fact, Grace Yang did not purchase the West Ryde and Laughtondale properties but instead, the Bank transferred the mortgages over the properties to her in consideration of payment by her to the Bank of $1.175 million, the amount owing to the Bank. Gzell J did not find that the remittances from Mrs Tsui and the Taiwanese ladies were the single source of this payment, although he did find that in taking a transfer of the mortgages rather than the purchase of the properties, she was in breach of the trust upon which she held their remittances ([87]). 18 There was evidence that Mrs Mead and Ms Yang own a property at Quoin Island in Queensland, which (apparently) they mortgaged to I & L Securities Pty Ltd to raise (after expenses) about $485,000. Further, a person called Mary Short raised about $484,000 (after expenses) on the security of a property at Ryedale Road West Ryde (another place used for the purposes of the Tao religion) and also another property. Ms Yang denied that these monies, totalling about $969,000, were used to pay the Commonwealth Bank for the transfer of the mortgages over the West Ryde Laughtondale properties. According to her evidence, these funds were used as working capital for HITS. Gzell J found that it was unnecessary for him to resolve this contested issue of fact, but he said that had he been required to do so, he would have favoured the view that the $969,000 was used to pay for the transfer of the mortgages rather than as working capital for HITS (at [93]). The balance of the money paid to the Bank for transfer of the mortgages, about $205,000, was withdrawn from Ms Yang's bank account. Gzell J found that that amount, or a portion of it, may have been drawn from the money advanced by the Taiwanese ladies (at [90]). 19 On 2 November 2001 Grace Yang transferred the two mortgages to a company called Vinemoon Pty Ltd, of which she and her mother were the directors, in consideration of $300,000. That money was needed to pay BL's legal fees in various legal proceedings against HE. According to Mrs Tsui, Ms Yang did not tell her about this transaction and she did not find out about it until Ms Yang (semble, Vinemoon) was unable to repay the $300,000. 20 When Mrs Tsui found out about the transfer of the mortgages, she approached another member of the Tao religion, Ping Pack Paul To, for assistance, and he paid Vinemoon $300,000 and took an assignment of the mortgages, which he acknowledged he held in trust for Mrs Tsui. Mrs Tsui gave Mr To security over some property of hers in Taiwan. 21 On 21 April 2004, Mr To assigned the mortgages over the two properties to Mrs Tsui for no consideration. She became registered as first mortgagee of both properties on 27 April 2004. Therefore at the present time the registered proprietor of both properties is HE and the registered mortgagee is Mrs Tsui. 22 Gzell J found it unnecessary to decide whether the mortgages were transferred to Vinemoon as security for repayment of $300,000 or the $300,000 was the consideration for an absolute transfer of the mortgages, and whether the transfer of the mortgages to Mr To was by way of security or absolutely (at [25]). 23 His Honour rejected a submission by the liquidator that Grace Yang's payment of $1.175 million to the Bank extinguished the debts secured by the mortgages, so that thereafter the mortgages no longer secured any indebtedness. Rather, he held (relying on ss 51 and 52 of the Real Property Act) that Grace Yang's payment to the Bank was consideration for the transfer of the mortgages together with the obligations they secured, so the transfers vested in her all of the rights and liabilities of the Bank, including the right to receive payment of the debts formerly due to the Bank (at [33]-[34]), including the debt of Mr and Mrs Mead as guarantors secured by the Laughtondale mortgage (at [37]-[46]). 24 In separate judgments he found that there was no merger of Grace Yang's interest under the Laughtondale mortgage, under which she became a debtor and creditor (Hypec Electronic Pty Ltd (in liq) v Registrar-General (No 2) [2008] NSWSC 138), and that there was no set off in equity of Grace Yang's debt previously against her entitlement as transferee of the mortgages (Hypec Electronic Pty Ltd (in liq) v Registrar-General (No 3) [2008] NSWSC 167). 25 Since, however, Grace Yang had received funds from Mrs Tsui and the Taiwanese ladies in trust for purchase of the West Ryde and Laughtondale properties, it was a breach of that trust for her to take a transfer of the mortgages of those properties (at [87]) and consequently Grace Yang held the mortgages, acquired by her in breach of trust, in trust for Mrs Tsui. I infer that this was a constructive trust of property received in consequence of a breach of trust. In turn, Mrs Tsui held her interest in trust for herself and the other Taiwanese ladies (presumably in proportion to their contributions) (principal judgment at [69], [87] judgment No 3 at [2], [15]). As I read the judgment, his Honour's conclusions about this breach of trust do not depend upon any finding that the whole or part of the money used by Grace Yang to pay for the transfer of mortgages came from Mrs Tsui or the Taiwanese ladies and he made no such finding (see at [90]). I take it that the reasoning is based on the business opportunity concept: whether or not the funds used to acquire the transfers of mortgages came from the beneficiaries, Ms Yang as trustee was required by the terms of the trust to purchase the properties and her conduct in seizing the business opportunity to obtain the transfer of the mortgages for herself was inconsistent with the trust obligation. 26 Gzell J found that Mrs Tsui obtained indefeasible title as mortgagee, and the benefit of indefeasibility extended to the personal covenant to pay money, and therefore Mrs Tsui was entitled to payment of the debts secured by the mortgages (at [36]). I infer that in his Honour's view Mrs Tsui took her title to the mortgages subject to her fiduciary obligations as trustee. 27 His Honour rejected the liquidator's submission that the transfers of mortgages were shams (at [64]), and a submission by Mr Mead that the transfers of mortgages constituted fraud that would deny Mrs Tsui the benefit of indefeasibility of title under s 42 of the Real Property Act (at [70]-[109]). He rejected Mr Mead's cross claim (at [111]-[125]). 28 On 11 April 2008 Gzell J made orders giving effect to these reasons, and ordered HE and Mr Mead to pay Mrs Tsui's costs. The orders limited Mrs Tsui's entitlement to interest on the debts secured by the mortgages, having regard to the limitation period. The parties agreed that the maximum total amount secured by the mortgages in favour of Mrs Tsui was approximately $2.02 million (including interest). According to the recitals to the Deed, the liquidator of HE and Mr Mead estimate that the combined value of the two properties is about $3 million. Therefore at the present time HE has an equity in the properties worth about $0.98 million less Mrs Tsui's costs (ordered to be paid by HE). 29 HE has not filed a Notice of Intention to Appeal from Gzell J's judgments. However, on 8 July 2008 Mr Mead, who was a party to Mrs Tsui's cross claim, lodged a Notice of Appeal (case No 40200/08). Mr Mead has raised broadly ten grounds of appeal from Gzell J's judgments and orders. He seeks orders setting aside Gzell J's orders of 11 April, a declaration that the debt of Grace Yang and Mrs Mead of approximately $501,000 as at 2 May 1997 was discharged on that date, and a declaration that the mortgages secure the indebtedness of HE in the sum of approximately $674,000 plus interest. He also seeks a declaration that Mrs Tsui holds her interest as registered mortgagee subject to an equity, by which she is bound, to provide a registrable transfer of the mortgages in favour of Grace Yang upon tender of the sum of $300,000. He seeks costs orders against Mrs Tsui. 30 I note that the orders sought in the Notice of Appeal are more limited than those contemplated in Recitals M and R to the Deed, where it is said that Mr Mead intends to seek orders that the mortgages secure no debt and that HE stands to benefit in the whole amount of $2.02 million secured by the mortgages, as well as by reversal of the adverse costs order. 31 Even with the more limited orders now sought, Mr Mead's successful prosecution of the appeal would have the effect of conferring substantial benefits on HE and consequently enhance the prospective dividends for its creditors. The capital charged on the West Ryde and Laughtondale properties would be reduced by $501,000 on the total amount of capital and interest would be in the vicinity of $860,000. Therefore, assuming that the properties have a value of approximately $3 million, HE's equity interest would be raised from about $0.98 million to about $1.84 million. Mr Mead will also seek orders that Mrs Tsui pay HE's costs as well as his own. 32 Additionally, there may be some benefit for HE if orders are made having the effect that the mortgages are re-transferred to Ms Yang. As mentioned above, Mr Mead has the benefit of a costs order against Ms Yang, made by Mathews AJ in the Common Law proceeding. Mr Mead apparently hopes that if Ms Yang acquires the mortgages pursuant to orders made in the appeal, he will be able to have access to the mortgages in order to satisfy the costs order. It appears that if he does, he may then become obliged to reimburse HE for the value of some property of HE that he sold in order to fund his costs in the Common Law case. Application for approval to enter into Deed 33 The liquidator of HE, Mr Whittingham, has formed the view, as a result of Gzell J's judgments, that it is unlikely that there will be a complete dividend to the creditors of HE. On 3 April 2008, he gave notice to HE's creditors indicating that he was unwilling to cause the company to conduct an appeal from its own funds, but that if, by 10 April 2008, any creditors informed him of their willingness to fund the company for the purpose of appealing, then he would consider any such proposals. The only affirmative response that Mr Whittingham has received has been from Mr Mead. 34 Senior counsel for Mr Mead outlined his client's case on appeal, during submissions on the application for the Court's approval to HE entering into the Deed. He said his client wants to raise the following matters: (i) that when Grace Yang took a transfer of the mortgage over the Laughtondale property, she became the creditor in respect of the facility debt owing by her and Mrs Mead, and in those circumstances the debt was extinguished; (ii) the transfers of mortgages to Vinemoon and Mr To were transfers by way of security and so Ms Yang was entitled to have the mortgages transferred back to her upon repayment of the $300,000 that had been advanced to her; (iii) when Mrs Tsui took transfers of the mortgages, she was fixed with an equity to re-transfer them to Ms Yang if the $300,000 was repaid, and that equity could be asserted against her notwithstanding that the transfers of mortgages were registered in her favour; (iv) as a matter of fact, his Honour erred in finding that Mrs Tsui and the Taiwanese ladies transferred money to Ms Yang, and therefore the factual foundation for his finding that Ms Yang transferred the mortgages in breach of trust should be reversed; (v) if, contrary to Mr Mead's submission, Mrs Tsui and the Taiwanese ladies transferred funds to Ms Yang as alleged, nevertheless those funds were not used by Ms Yang to provide the consideration for the transfers of mortgages; (vi) that being so, there was no breach of trust in Ms Yang acquiring the mortgages by transfer, the mortgages are not held in trust for Mrs Tsui and the Taiwanese ladies, and consequently Ms Yang's positions as creditor and debtor were not in separate capacities. 35 I am not sure that proposition (vi) fully addresses Gzell J's reasoning which, as I have said, seems to be based on the idea of improper misappropriation of a business opportunity rather than direct misappropriation of trust money. But the matters addressed by his Honour are of some difficulty and overall, it cannot be said that the issues to be raised on behalf of Mr Mead on appeal are obviously without foundation. Given the thorough submissions by senior counsel for Mr Mead, it seems to me appropriate for the Court to deal with the application for approval of entry into the Deed on the assumption that there is an arguable case for Mr Mead on appeal. 36 The liquidator of HE tendered some legal advice he had received on the merits of the appeal and on his own position, while seeking to preserve privilege in respect of that advice. Having now considered the matters that were put to me in open court, I have decided it is unnecessary for me to consider that advice and therefore I have not read it. I shall direct that the exhibit be returned to liquidator and I shall not grant access to any other party. 37 As I have said, HE stands to gain from Mr Mead's successful prosecution of his appeal, in that its equity in the West Ryde and Laughtondale properties will increase by about $860,000, and instead of having to pay Mrs Tsui's costs, it may have the benefit of a costs order in its favour, and there may be some indirect benefits flowing from any order that causes the re-transfer of the mortgages to Ms Yang. According to Recital O to the Deed, Mr Mead will not pursue the appeal unless a binding and court-approved arrangement is reached with HE and the liquidator whereby Mr Mead obtains a direct financial benefit in return for incurring expense and risk in the conduct of the appeal. While the recital refers to prosecuting the appeal for "the primary benefit of Hypec and its creditors", it seems to me that there would be substantial benefits for Mr Mead in success on the appeal (for example, if Ms Yang re-acquires the mortgages and Mr Mead is then able to have access to them to satisfy the cost order made in his favour by Mathews AJ, although some of that benefit may flow through to HE). In the circumstances I am not persuaded that Mr Mead would be conducting the appeal primarily for the benefit of HE. 38 The liquidator and Mr Mead have negotiated the following arrangements (so far as material to the application), reflected in the terms of the Deed; (1) Mr Mead will conduct the Appeal aided by his solicitors and having, in substance, complete control over retention of counsel, discontinuation, amended grounds of appeal, and settlement (subject to a duty of full prior disclosure to the liquidator of proposed terms of settlement) (clauses 2.1-2.3); (2) HE will retain the Net Proceeds of sale of the two properties, less transaction costs and the amount of property attributable to the Mortgage Value upon conclusion of the Appeal, charged in favour of Mr Mead, and HE also charges any money it receives on account of any settlement of the Appeal (clause 3.1); (3) in the event of a Successful Outcome (essentially any outcome achieved by the Appeal whereby HE receives any financial benefit), the Net Proceeds are to be applied in accordance with listed priorities, for payment of costs (including a limited amount of costs for the liquidator to maintain a watching brief on the appeal) and thereafter for payment to Mr Mead of Mead's Entitlement (clause 3.2); (4) HE will be obliged to pay Mead's Appeal Costs immediately upon determination of the Appeal and the realisation of the Net Proceeds, but subject to any order of the Court or any statutory necessity for the Liquidator to approach the Court, and there are provisions for resolving any dispute about Mead's Appeal Costs (clauses 3.3, 3.3.1); (5) further, immediately upon determination of the Appeal and realisation of the Proceeds but subject to any order of the Court or any statutory necessity for the Liquidator to approach the Court, HE will pay the amount of Mead's Entitlement to his solicitors; (6) Mead's Entitlement is calculated by the application of complex formula under clause 3.4, but in substance it is approximately 85% of any reduction in the Mortgage Value after deduction of certain costs, 85% of the benefit conferred by a more favourable costs outcome, and 85% of any actual recovery by HE from Mr Mead pursuant to the Common Law costs order; (7) the amounts payable to Mr Mead in respect of certain aspects of Mead's Entitlement are capped at the Mortgage Value (clause 3.5.2); (8) the Deed is only binding when court approval is obtained (clause 5); (9) if the Court would give its approval, but for the specifically identified proportionate allocation of benefits under clause 3.4, Mr Mead may proffer to the Court alternative proportionate allocations (clause 5.4). 39 Words or phrases beginning with a capital letter are defined in the Deed. It is unnecessary to look at the details of the definitions for present purposes, apart from the definition of "Successful Outcome". 40 It will be seen that in essence, the Deed proposes that Mr Mead will prosecute an appeal, wholly under his own control, that will, if successful, led to benefits for HE. In return for his doing so, in the event of a "successful outcome" HE will cover Mr Mead's appeal costs and pay him 85% of the benefits it receives from the appeal, and will charge the net proceeds of sale of the West Ryde and Laughtondale properties for those purposes. 41 In those circumstances Mr Mead seeks the Court's approval under s 447(2B) of the Corporations Act to the liquidator of HE entering into the Deed, and also approval under s 477(6). 42 Section 477(2B) is in the following terms: "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, in accordance with 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." 43 In my view it is plain that the Deed is an agreement under which the obligations of a party may be discharged by performance more than 3 months after the agreement is entered into. Those obligations are contingent upon the prosecution and determination of an appeal, a process that is likely to take more than 3 months. Therefore the liquidator's entry into the Deed requires the Court's or creditors' approval. There is no approval by creditors. 44 Section 477(6) is as follows: "The exercise by the liquidator of the powers conferred by this section is subject to the control of the Court, and any creditor or contributory, or ASIC, may apply to the Court with respect to any exercise or proposed exercise of any of those powers." 45 The application under this provision is evidently made in response to some of observations made by Palmer J in Hall v Poolman ([2007] NSWSC 1330; (2007) 65 ACSR 123, concerning the Court's ability to control litigation funding. Given the view I have taken of the application under s 477(2B), it is unnecessary for me to express a view as to whether the Court's approval to entry into the Deed is also required by s 477(6)." 46 In considering whether to grant approval under s 477(2B), the Court's role is not to reconsider all the issues that the liquidator has considered, as if it were hearing a matter de novo. Rather the Court's role is: "simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all the circumstances of the liquidation, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the 'expeditious and beneficial administration' of the winding up …": Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1642, at 1650; see also A Keay, McPherson's Law of Company Liquidation , 4th edn, 1999, page 335. 47 I have no concern about error of law, bad faith or impropriety in this case. I am, however, concerned about whether there is good reason to intervene in terms of the expeditious and beneficial administration of the winding up. 48 It sometimes happens that a particular creditor wishes to conduct litigation for a company in liquidation while liquidator is reluctant to do so (typically because of limited funds). Normally such a situation is handled under s 564, which allows the Court to make orders with respect to the distribution of property of a company in liquidation for the benefit of a creditor where property has been recovered after the creditor has given an indemnity to cover the costs of litigation. I see no reason in principle why, in an appropriate case, the same problem might not be addressed by approving the liquidator's entry into an agreement with the creditor under s 477(2B) in the nature of a litigation funding agreement, under which both the creditor and the company will benefit from the proceeds of the litigation. 49 However, it seems to me that the Court must be vigilant, where such an arrangement is proposed, to ensure that the interests of creditors are properly protected. That is normally likely to mean that the liquidator will have to retain a measure of control, at least negative control, over the conduct of the litigation, and that any potential for conflict of interest between the creditor and the body of creditors generally is carefully addressed. Because of the need to cater for those matters, litigation under such an agreement is likely to be more expensive than litigation conducted, say, by the liquidator alone or by the creditor alone. Therefore the potential benefit for the liquidator needs to be substantial enough to justify the proposed arrangements. 50 In the present case the Deed does not meet these criteria in various respects. As I have said, Mr Mead is to have absolute control over the conduct of the appeal and the liquidator is confined to a watching brief. I cannot at present envisage circumstances in which Mr Mead will have to choose between pursuing his own interest in the appeal at the expense of the creditors generally, and pursuing their interest rather than his own. But such is the complexity of this matter that I have no confidence that such circumstances will not arise. If they do, the Deed allows Mr Mead to prefer his own interest and does not require him to consult with the liquidator. 51 As to the benefits to be derived by HE and the body of creditors as a whole, on my reading of the Deed (clauses 3.2, 3.3 and 3.4), the payment obligations for HE are personal covenants by it, and Mr Mead's recourse is not limited to the net proceeds of sale of the properties. It also seems that the payment obligation of HE under clause 3.3 (Mr Mead's appeal costs) is not limited to the value of the "successful outcome" that may be achieved for it. The net result may be that HE is worse off after the appeal because Mr Mead's costs (over which the liquidator has no control) exceed, perhaps by a large amount, some limited benefit which causes the outcome of the appeal to be a " Successful Outcome" as defined. While, therefore, complete success will undoubtedly deliver substantial benefits to the body of creditors - by raising HE's equity in the two properties by about $860,000 and relieving it of an adverse costs order (and perhaps also permitting recovery from Mr Mead in respect of the Common Law costs order) - HE and the body of creditors could lose out if the appeal leads to more limited "success". 52 In all these circumstances, my view is that the Court should not grant approval under s 477(2B), notwithstanding that the liquidator, Mr Whittingham, has given evidence that he considers the Deed to be in the best interests of HE and that Mr Mead's proposal is preferable to litigation funding from an external funder. My reasoning implies that the Court would not approve the Deed or the liquidator's entering into it on any other bases such as under s 477(6). Other matters 53 Mr Mead seeks an order that until 28 days after the determination of his interlocutory process filed on 9 July 2008 (the application for approval of the liquidator's entry into the Deed), the liquidator be restrained from paying any monies to the Sixth Defendant, Mrs Tsui, that would otherwise be payable to her as a result of the declarations of her mortgage entitlements made by Gzell J. He also seeks an order that upon the sale of the West Ryde and Laughtondale properties and until the expiration of that 28 day period, the liquidator is to deposit those funds into an interest-bearing bank account. 54 I have now reached a decision on Mr Mead's interlocutory process. The decision raises a question as to whether Mr Mead will continue with his appeal. In those circumstances I see no good reason for restraining the liquidator for making such payments of funds as result from Gzell J's orders. 55 Mrs Tsui was required to provide security for prosecution of her cross claim and this led to Lorna Lam providing security over her home unit in Ryde. Mrs Tsui was successful in her cross claim. That would normally lead to the discharge of the security. Mr Mead has argued that the security should be retained pending the outcome of his appeal. I would have reservations on general grounds as to whether I should retain a third-party security provided for the prosecution of a claim at first instance, pending the resolution of appeal against an outcome that was in favour of the party required to provide security. If it transpires, during the course of the appeal, that security is needed, the Court is able to make an order at an appropriate time. More importantly, however, given my decision not to approve the liquidator's entry into the Deed, there is an issue as to whether the appeal will succeed. In those circumstances my decision is that the security should be discharged. Conclusions 56 I shall make the following orders: 1. The application by Colin Anthony Mead by interlocutory process filed in matter No 1933 of 2001 on 9 July 2008 is dismissed; 2. In matter No 4413 of 2005: (a) the security for costs provided by the Sixth Defendant on behalf of the Sixth Defendant by her agents, including Lorna Lam, be released and discharged; (b) the Registrar of the Supreme Court to execute a Discharge of Mortgage for the property Folio Identifier 8/SP11431 known as Unit 8/781 Victoria Rd Ryde in the State of New South Wales in relation to the release of security for costs provided by the Sixth Defendant on behalf of the Sixth Defendant by her agent Lorna Lam. 57 I shall hear the submissions of the parties as to costs.

BL & GY International Co Ltd v Hypec Electronics Pty Ltd

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Judgment (10 paragraphs)

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Legislation Cited (2)

Cases Cited (8)