Brown v DML Resources Pty Ltd

Brown v DML Resources Pty Ltd - [2023] FCA 173 - FCA 2023 case summary — Zoe

[17]

A. Orders regarding ACD 14 of 2022

Pursuant to ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth), the following 3PG13 Documents are to be treated as confidential: (a) paragraphs 45, 46, 47 (second sentence), 57, 58 and 59 (second sentence) of the affidavit of Stephen John Hundy affirmed 22 April 2022 (April affidavit); (b) pages 328 to 351 and 353 to 378 of exhibit SJH-1 to the April affidavit; and (c) paragraphs 16.1, 16.3, 17.1, 17.3, 26, 27 and 29 (second sentence) of the submissions of counsel in support dated 15 November 2022 and 9 February 2023.
The 3PG13 Documents listed in order [1] are not to be published, made available (whether electronically or otherwise) or disclosed to any person or entity except to the liquidator of 3 Property Group 13 Pty Ltd (in liq), their legal representatives, and other persons as the Court may order on application under rule 2.32(4) of the Federal Court Rules 2011 (Cth).
Pursuant to section 477(2B) of the Corporations Act 2001 (Cth), entry by the second plaintiff into the agreements that are defined in the April affidavit as the First Funding Deed and the Second Funding Deed, copies of which are at pages 328 to 351 and pages 353 to 378 of exhibit SJH-1 to that affidavit, is approved.
The costs of the application be costs and expenses in the winding up of 3 Property Group 13 Pty Ltd (in liq) and be paid out of its assets. B. Orders regarding ACD 16 of 2022
Pursuant to ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth) the following Be Athletic Documents are to be treated as confidential: (a) paragraphs 36, 37 and 38 (second sentence) of the affidavit of Stephen John Hundy affirmed 22 April 2022 (April affidavit); (b) pages 210 to 269 of exhibit SJH-1 to the April affidavit; and (c) paragraphs 16.1, 16.3, 17.1, 17.3, 26, 27 and 29 (second sentence) of the submissions of counsel in support dated 15 November 2022 and 9 February 2023.
The Be Athletic Documents listed in order [5] are not to be published, made available (whether electronically or otherwise) or disclosed to any person or entity except to the liquidator of Be Athletic Canberra Pty Ltd (in liq), their legal representatives, and other persons as the Court may order on application under rule 2.32(4) of the Federal Court Rules 2011 (Cth).
Pursuant to section 477(2B) of the Corporations Act 2001 (Cth), entry by the second plaintiff into the agreement that is defined in the April affidavit as the Funding Deed, a copy of which is at pages 210 to 269 of exhibit SJH-1 to that affidavit, is approved.
The costs of the application be costs and expenses in the winding up of Be Athletic Canberra Pty Ltd (in liq) and be paid out of its assets. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[19]

FACTUAL BACKGROUND 3 The factual background to this application is outlined in an earlier judgment of the Court which concerned an application by various creditors of 3 Property and Be Athletic to intervene and be heard in respect of the liquidator's approval application: Hundy (liquidator), in the matter of 3 Property Group 13 Pty Ltd (in liquidation) [2022] FCA 1216 (intervention judgment) at [5] to [11]. The outcome of that application was that the intervening parties were granted leave to be heard, albeit on the strictly limited basis that they be permitted to rely on the written submissions that they had filed in support of their leave applications, along with those parts of the affidavit and documentary evidence that were specifically identified in the written submissions. They were not be permitted to appear at or take part in the hearing of the approval applications, or permitted to file any further evidence or make any further submissions. 4 Both 3 Property and Be Athletic were incorporated in 2017. Their directors included Mr Gary Kelly and Mr Jaime Farrelly, though both Mr Kelly and Mr Farrelly resigned as directors shortly before the appointment of the liquidator in October 2020 in the case of 3 Property, and November 2020 in the case of Be Athletic. 3 Property's shareholder is 3 Property Group Holdings 2 Pty Ltd (3PGH2) and Be Athletic's shareholders include Stormer Corporation Pty Ltd and KFT Group (ACT) Pty Ltd. 5 Both 3 Property and Be Athletic were incorporated for the purpose of purchasing properties which were to be developed. Both companies in due course purchased properties in the Canberra area in 2018. Both borrowed money from various sources to fund the property purchases. Both subsequently entered into contracts with Stone Living Pty Ltd for the construction of townhouses on the properties. Both subsequently had disputes with Stone in respect of the construction contracts. Those disputes, or at least some of them, were resolved in Stone's favour in adjudication decisions made under the Building and Construction Industry (Security of Payment) Act 2009 (ACT). The contracts with Stone were subsequently terminated. 3 Property retained Lifestyle Homes (ACT) Pty Ltd, a company associated with Mr Kelly and KFT Group, to finish building the townhouses. 6 Both 3 Property and Be Athletic sold the properties they had purchased to related entities in 2020. 3 Property sold its property to 3 Property Group 17 Pty Ltd (3PG17), a company of which Mr Kelly and Mr Farrelly were directors and the shares in which were owned by 3PGH2. Be Athletic sold its property to Sage Campbell Pty Ltd, a company of which Mr Kelly and Mr Farrelly were directors and the shares in which were held by Mr Kelly and Mr Farrelly. 7 3 Property was placed into liquidation on 23 October 2020 and Mr Hundy was appointed as liquidator pursuant to a resolution made by the sole shareholder. Be Athletic was placed into liquidation on 10 November 2020, Mr Hundy was appointed as liquidator pursuant to a resolution made by the shareholders. 8 The liquidator conducted investigations into the affairs of both 3 Property and Be Athletic, particularly those just referred to relating to the sale of the companies to apparently related entities shortly before they were placed into liquidation. Unfortunately the liquidator had relatively few funds available to him to continue to pursue those investigations. As a result, on 25 May 2021, the liquidator and 3 Property entered into an agreement with Stone to fund investigations into the affairs of 3 Property, including examinations of former officeholders (the 3 Property initial funding agreement). The liquidator subsequently conducted the examinations, though they were delayed for various reasons and did not proceed until February 2022. 9 In July 2021, the liquidator commenced proceedings in the Court in his capacity as liquidator of Be Athletic: Be Athletic Canberra Pty Ltd (in liq) & Anor v Sage Campbell Pty Ltd & Ors (NSD 664/2021). In September 2021, the liquidator commenced proceedings in the Court in his capacity as liquidator of 3 Property: 3 Property Group 13 Pty Ltd (in liq) & Anor v 3 Property Group 17 Pty Ltd & Ors (NSD 953/2021). The proceedings commenced by the liquidator in July and September 2021 will be referred to collectively as the substantive proceedings. The substantive proceedings were commenced urgently and at relatively short notice, a course which was necessitated by the liquidator's receipt of lapsing notices in respect of caveats he had caused to be registered in respect of the properties the sales of which were the subject of his investigations. 10 It is unnecessary to provide a detailed description of the substantive proceedings. It suffices to note that in the proceeding commenced on behalf of 3 Property relief is sought against 3PG17, Mr Kelly, Mr Farrelly, 3PGH2 and Lifestyle. In the proceeding commenced on behalf of Be Athletic, relief is sought against Sage Campbell, Mr Kelly and Mr Farrelly. The allegations that are said to justify the relief sought essentially arise out of transactions entered into by 3 Property and Be Athletic with related entities and in particular the alleged sale of properties to related entities at below market values shortly prior to the companies being placed into liquidation. The proceedings have progressed expeditiously and are now well advanced. 11 In August 2021, the liquidator and Be Athletic entered into a funding agreement with Stone (the Be Athletic funding agreement). In October 2021, the liquidator and 3 Property entered into a further funding agreement with Stone (the 3 Property further funding agreement). Under the terms of the Be Athletic funding agreement and the 3 Property further funding agreement, Stone agreed to provide funding in respect of the proceedings. 12 The 3 Property initial funding agreement, the Be Athletic funding agreement and the 3 Property further funding agreement are the agreements in respect of which the liquidator seeks the Court's approval pursuant to s 477(2B) of the Corporations Act. The liquidator did not seek the Court's approval of the funding agreements until it filed interlocutory applications in April 2022. The approval sought from the Court is thus retrospective in nature. 13 The liquidator has applied for non-publication orders in respect of information that discloses the terms of the funding agreements. For the reasons given later, those confidentiality orders will be made. It follows that I do not propose to discuss the terms of the funding agreements in these reasons in any great detail. It suffices at this point to note that the terms of the agreements ended, or the obligations of the parties under the agreements were to be discharged, more than three months after the agreements were entered into. It is for that reason that the liquidator requires the Court's retrospective approval of the agreements. 14 Proofs of debt have been lodged in the winding up of 3 Property by, relevantly: 3PGH2, 3 Property Group 11 Pty Ltd (3PG11), 3PG17, Stormer Corporation, KFT Group and Lifestyle. Proofs of debt have been lodged in the winding up of Be Athletic by, relevantly: 3PGH2, 3PG11, Sage Campbell, Stormer Corporation, KFT Group, Lifestyle and Stone. It was essentially those companies, as well as Mr Kelly and Mr Farrelly, who sought and were granted limited leave to intervene in respect of this application. 15 The interveners opposed the liquidator's application. They contended, in essence, that if the funding agreements were approved, it would be highly unlikely that the liquidator would investigate or pursue any claims that the companies may have against Stone. They also submitted that the funding agreements were likely to give Stone some form of priority in the winding up and that, as creditors, they should have been given the same opportunity to fund the liquidator on the same or similar terms.

[20]

applicable PRINCIPLES 16 The following summary of the applicable principles is largely taken from the intervention judgment at [21] to [30]. 17 Subsection 477(2B) of the Corporations Act provides as follows: 477 Powers of liquidator ... (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 an agreement under which a security interest arises or is created) 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. 18 The reason that approval is required in respect of agreements which may operate or involve obligations that extend beyond three months is that such agreements tend to cut across the general expectation that the winding up of a company will proceed expeditiously: Re HIH Insurance Ltd [2004] NSWSC 5 at [15]; Re Golden Sands Hospitality Pty Ltd (in liq) (No 2) [2017] NSWSC 450 at [15], [17]. 19 The requirement to obtain approval of such agreements affords some protection against ill-advised or improper actions on the part of the liquidator: Empire (Aust) Nominees Pty Ltd v Vince (2000) 35 ACSR 167; [2000] VSC 324 at [12]. The Court's task is not to second guess the liquidator's commercial judgment, but rather to determine whether there are grounds for suspecting a lack of good faith, some error of law or principle, or some other good reasons to intervene: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86; Leigh, re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]; Stewart, re Newtronics Pty Ltd [2007] FCA 1375 at [26]; Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher & Barnet (2015) 89 NSWLR 110; [2015] NSWCA 85 at [125] (Bathurst CJ, with Beazley P, Macfarlan, Meagher and Barrett JJA agreeing). 20 In respect of funding agreements that require approval pursuant to s 477(2B) of the Corporations Act, the factors that may be relevant to assessing whether approval should be granted include: the manner in which the funding or indemnity will be provided under the agreement; the prospects of success of the proposed litigation; the risks involved in the claim; the interests of creditors other than the proposed defendant or respondent; possible oppression; the nature and complexity of the cause of action; the extent to which the liquidator has canvassed other funding options; the level of the funder's premium, if any; and the extent to which the liquidator has consulted with creditors: Leigh at [25]; Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (2002) 42 ACSR 296; [2002] NSWSC 578 at [16]-[34]; Hughes, in the matter of Sales Express Pty Ltd (in Liq) [2016] FCA 423 at [20]. 21 The Court may give retrospective approval under s 477(2B) in appropriate circumstances: Hutchison v Hillcrest Litigation Services Ltd [2010] NSWSC 934 at [25]; Newtronics at [25]; Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq) (2011) 196 FCR 479; [2011] FCA 1028 at [27]; Hird (Liquidator), in the matter of Allmine Group Limited (in liq) [2018] FCA 781 at [33]. 22 A liquidator is not necessarily required to give creditors, or the defendant or respondent in proceedings that are to be funded by the agreement in respect of which approval is sought, notice of an application for approval of an agreement pursuant to s 477(2B): Re Bell Group Ltd (in liq) ACN 008 666 993 [2009] WASC 235 at [58]; Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed) [2012] FCA 1072 at [50]; Onefone Australia Pty Ltd v One.Tel Pty Ltd (2010) 78 ACSR 163; [2010] NSWSC 498 at [11]-[13], upheld on appeal in Deloughery & Ors v Weston (2010) 79 ACSR 180; [2010] NSWCA 148 at [36] (Giles JA and Handley AJA, with Spigelman CJ agreeing); Kogan, in the matter of Rogulj Enterprises Pty Ltd (in liq) [2021] FCA 856 at [35]; Thorn (liquidator), in the matter of South Townsville Developments Pty Ltd (in liq) [2022] FCA 143 at [52]-[57]. 23 As for the defendants to proceedings in respect of which funding approval is sought, it has been said that they have "no legitimate expectation of influencing decisions about how the winding up should be conducted and what the liquidators should or should not do in order to progress it": Fortress at [151] (Barrett JA, with whom Macfarlan and Meagher JJA relevantly agreed). 24 The Court's power to approve an agreement under s 477(2B) of the Corporations Act has been described as "a discretion to permit an administrative step to be taken which would otherwise be prohibited": Brown v DML Resources Pty Ltd (in liq) (2001) 52 NSWLR 685; [2001] NSWSC 590 at [55].

[21]

THE AGREEMENTS SHOULD BE APPROVED 25 The liquidator, who is an experienced insolvency practitioner, filed detailed affidavits which explained the circumstances in which the relevant agreements were entered into and the reasons he entered into them on behalf of 3 Property and Be Athletic. Those agreements are annexed to the liquidator's affidavits. I have carefully considered the liquidator's evidence and the terms and conditions of the three funding agreements in question. I have also taken into account the intervening parties' opposition to the liquidator's application and the evidence and submissions relied on by those parties as articulated in the course of their application to intervene. I have concluded, in all the circumstances, that the Court should retrospectively approve the liquidator's entry into those agreements. That is so for the following reasons. 26 First, I am satisfied that the entry into the agreements represented a proper exercise of power on the part of the liquidator acting in good faith. There is no evidence of any lack of good faith or error of law on the part of the liquidator in entering into the agreements. Nor is there any evidence to suggest that the entry into the agreements was in any way improper or ill-advised. I reject the intervening parties' apparent contention to the contrary. For the reasons given in the intervention judgment, that contention was unsupported by admissible, reliable or cogent evidence. These reasons should be read together with the intervention judgment and should be taken to include the findings made in that judgment concerning the various claims made by the intervening parties (see in particular [35]-[47]). 27 Second, the funding agreements were and are clearly directed at advancing the interests of the creditors by funding investigations and proceedings that may result in recoveries on behalf of 3 Property and Be Athletic. It is readily apparent that the liquidator would not otherwise have been able to fully investigate and prosecute the claims which are the subject of the proceedings which are before the Court. A successful outcome of the proceedings would no doubt benefit the companies' creditors as a whole, noting, however, that some of the creditors are respondents to the proceedings. 28 The liquidator has formed the view that the claims that are made in the substantive proceedings are reasonably arguable and that he has reasonable prospects of success. While it is difficult for me to form a view as to the liquidator's prospects of success in the substantive proceedings given the limited material before me, there is nothing whatsoever to suggest that the liquidator does not have a sound and reasonable basis for his views concerning the substantive proceedings. There is no reason or basis to second-guess the liquidator's commercial judgment concerning the prosecution of the substantive proceedings. 29 Third, I am satisfied, both from the liquidator's evidence and the terms of the agreements themselves, that the funding agreements are commercially reasonable and do not contain any unusual, onerous or disadvantageous terms or conditions. Indeed, the terms of the agreements are fairly typical in the context of funding agreements entered into by liquidators, if not more favourable or more commercially attractive, from the liquidator's perspective, than is typically the case. As indicated earlier, given the need to preserve the confidentiality of the terms of the agreements in question, I do not propose to refer to any particular terms of the agreements. There are, however, two important points to note about what is not in the agreements. The non-publication orders sought by the liquidator do not preclude the disclosure of these two points. First, the agreements do not require the payment of any funder's premium or uplift to Stone in the event of a successful outcome. Second, the agreements do not give Stone any right to control the conduct of the proceedings in any way, or in any way encroach upon the liquidator's authority concerning the conduct of the proceedings. 30 Fourth, it is perhaps regrettable that the liquidator's application was not made prior to the agreements being entered into. It is equally regrettable that there has been a delay in the prosecution of the approval applications. I am nevertheless satisfied that the liquidator has given a reasonable explanation for why he did not apply for the Court's approval prior to entering into the agreements and why there has been a delay in prosecuting the applications. In short summary, the liquidator had limited funds to pursue the approval application prior to actually securing the funding. It was also necessary to commence the substantive proceedings as a matter of urgency and at relatively short notice. The liquidator has also been fully engaged in those proceedings since the time that they were commenced. The prosecution of the approval application was complicated and delayed as a result of the application by the intervention application and by a change in solicitors. In any event, the retrospective nature of the application and the delay in seeking approval does not appear to have caused any prejudice to any person or delayed the progress of the substantive proceedings. 31 It should also be added in this context that the liquidator has reasonably explained why he did not seek the approval of the creditors before entering into the funding agreements. The main reason was that a number of the creditors were proposed respondents to the proceedings. That led the liquidator to form the view that seeking the approval of the creditors would lead to wasted time and expense because those creditors were likely to refuse to approve the funding agreements. 32 I reiterate that I have taken into account the evidence adduced and the submissions made by the intervening parties in the context of the intervention application. I am not satisfied or persuaded that any of the evidence relied on by the intervening parties, or any of the submissions advanced by them, provide a sound or reasonable basis for refusing to approve the liquidator's entry into the funding agreements. 33 The orders sought by the liquidator concerning the approval of his entry into the funding agreements will accordingly be made.

At a glance

Court

Decision date

Before

Source

Judgment (23 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (26)