Buiscex Ltd v Panfida Foods Ltd

IN THE MATTER OF MATRIX GROUP LTD (IN LIQ) ACN 061 549 371 BETWEEN: SCOTT PASCOE (IN HIS CAPACITY AS LIQUIDATOR OF MATRIX GROUP LTD (IN LIQ))

JUDGE: JACOBSON J DATE: 6 SEPTEMBER 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 Mr Scott Pascoe, the liquidator of Matrix Group Limited ("the Company"), applies for the approval of the court to enter into a funding agreement under s 477(2B) of the Corporations Act 2001 (Cth) ("the Act") and a direction under s 479 of the Act that the liquidator would be justified in entering into the agreement. 2 The liquidator considers that the Company is likely to be entitled to pursue claims which, if successful, would raise significant funds in the winding up. However, the liquidator does not have sufficient funds to properly investigate or pursue any of the potential claims. The Company presently holds no money or other property, and no creditor or other person has offered an indemnity which would permit the liquidator to investigate or pursue the potential claims. 3 The liquidator has attempted to obtain funding from the Australian Securities and Investments Commission and the Australian Taxation Office, but both attempts have been unsuccessful. The funder under the proposed funding agreement is Mr Tom Oates, who is the sole creditor of the company. Needless to say, as the proposed funder, he consents to the entry by the liquidator into the proposed funding agreement. 4 The proposed funding agreement has some unusual aspects, which I will deal with shortly, but the liquidator is of the view that the funding agreement is "the best and only source of funding available to conduct the examinations". 5 I should observe here that the very fact that Mr Oates is the funder is one of the unusual aspects which the liquidator has considered in the exercise of his judgment that it is in the interests of those concerned with the winding up that he enter into the proposed funding agreement. 6 It is unnecessary to set out the terms of s 477(2B) of the Act. It is sufficient to say that the reason why the leave of the Court is (in the absence of approval by the committee of inspection or a resolution of the creditors of the company) necessary because it is a term of the proposed funding agreement that the agreement may end, or the obligations of a party to the agreement may be discharged, by performance more than three months after the agreement is entered into. 7 The relevant test was stated by Austin J in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23] ("Leigh"): Although the court has the statutory task [under s 477(2B)] of giving "approval" to a liquidator's agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete "merits review". As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6: ... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 8 There are a range of factors which the court may take into account in determining whether there are grounds for doubting the good faith or prudence of a liquidator proposing to enter into a funding agreement. The factors were set out in Leigh at [24] as well as in Re ACN 076 673 875 Ltd (Receiver and Manager Appointed) (in liq) (2002) 42 ACSR 296 ("Re ACN 076 673 875"). The Leigh factors were also referred to recently by a Full Court of the Federal Court in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89 ("Fortress") at [24]. I will not set out the factors which are sufficiently recorded in the judgments to which I have referred. 9 The relevance and importance of the various factors will vary according to the particular case. It was noted in Re ACN 076 673 875 at [29] that many of the factors are not fully applicable in circumstances where a litigation funding agreement is only for the purposes of the conduct of the examinations, subject to the funder's option to fund any ensuing litigation. 10 In Fortress, at [40], the Full Court observed that, in considering whether to give approval under s 477(2B) and to give directions under s 479(3), the Court must consider the purposes for which the powers of a liquidator exist. One overriding purpose is to serve the interests of those concerned in the winding up which is relevant in the present circumstances. This observation was also made by Barrett J in Re McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) (2010) 266 ALR 642 at [13] of Appendix 1 ("Re McGrath"). The principle seems to be drawn from Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83. 11 In making the present application, Mr Robertson, who appears for the liquidator, has drawn my attention to three aspects of the proposed funding agreement which are unusual and which are worthy of special comment. The features are as follows: 1. The "funder's premium" under the proposed funding agreement includes a share of any proceedings of litigation in respect of which the company is a non-active defendant. That proceeding is the matter of Oates v Hawkins and others (Case 4392 of 2009) in the Equity Division of the Supreme Court of New South Wales. 2. The proposed funding agreement contemplates an assignment to the funder of causes of action (or the whole of the proceeds of claims) against a particular entity which is incorporated in the United Kingdom. 3. The proposed funder has other connections with the company, or as Mr Robertson put it in his submissions, that Mr Oates wears "many hats". 12 Mr Robertson submits that none of the above mentioned aspects of the proposed funding agreement are sufficient to support a conclusion that the proposed agreement exhibits a "lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's [proposed] conduct". The proposed funding agreement contemplates that Mr Oates will be paid some of the proceeds of the existing litigation which would, otherwise, flow to the company in the event that the proceedings are successful. The Company has been joined in the proceedings as a defendant because if the proceedings are successful, it is anticipated that certain moneys will be paid or disgorged to the company. It is, therefore, a necessary party to those proceedings. The proceedings in the Equity Division were described in some detail in an interlocutory judgment by Bergin CJ in Equity, in Oates v Hawkins [2010] NSWSC 491. I was informed in the course of the present application that the proceedings in the Equity Division were scheduled to commence yesterday, 5 September 2011 and I understand that they are presently part-heard. 13 Whilst this feature of the proposed funding agreement may be described as unusual, I accept Mr Robertson's submission that it is properly characterised as forming part of the proposed "price" for assurance that the examinations will be funded, regardless of the outcome of the Equity Division proceedings. What is important is that, in exchange for agreeing to pay that price, the Company will be guaranteed funding to pursue the examinations (whether or not the Equity Division proceedings are successful) and the pre-existing proceeding will not be able to be discontinued or compromised without the consent of the liquidator. This follows from the provisions of clause 4.1 of the proposed funding agreement. Whilst that agreement is a confidential exhibit in the present application, reference was made to clause 4.1 in the application and I see no reason why I can not refer to it in my reasons for judgment. 14 Whilst this aspect of the proposed agreement contemplates that the company will pay a potentially higher price than one simply calculated as a percentage of the proceeds of future proceedings, the question of whether the price is an appropriate one seems to me to be primarily a matter for the liquidator's commercial judgment. There is no reason, on the material before me, to conclude that the liquidator's judgment in this regard has been infected by a lack of good faith or an error of law or principle, and there are no real or substantial grounds for doubting the prudence of the liquidator's proposed conduct in seeking to enter into the funding agreement. The proposed funding agreement also contemplates that the whole of the proceeds of any claims against a foreign entity will be assigned or paid to the funder. This is dealt with in clause 6.1(b)(ii) of the proposed agreement, which was another aspect of the agreement referred to in open court. 15 The liquidator has formed the view that, in assigning to Mr Oates the entire value of the proceeds of claim of that proceeding, he is not giving up anything of value. This is because he, apparently, takes the view that the cause of action is not a cause of action of the Company. In any event, the liquidator does not intend to pursue any claims against that entity for reasons which are explained by Mr Pascoe, so this reinforces the conclusion that, although 100 per cent of the proceeds of claim are given up, in actual fact, the liquidator is not foregoing anything which might be of value to the company. Once again, as Mr Robertson submits, this aspect of the proposed funding agreement simply forms part of the price for the agreement. A significant aspect of the proposed agreement is that Mr Oates has or has had a number of connections with the company. This gives rise to the "many hats" consideration on which I was addressed by Mr Robertson. 16 Significantly, Mr Oates was the petitioning creditor in the winding up application which resulted in the winding up of the Company. He is a former director of the Company and, as I have said, he is the plaintiff in the proceedings in the Equity Division. As was submitted, it is not unusual for a person with connections with a company to fund or grant an indemnity with respect to a liquidator's costs and expenses of pursuing claims in a winding up. For example, s 564 of the Act grants a power to the court to grant priority to creditors who provide an indemnity for the costs and expenses of litigation. I accept the submission that, subject to what I say below, no issue arises with regard to Mr Oates' connections with the Company. 17 The proposed funding agreement is a contractual arrangement under which Mr Oates will be bound to provide funding and may be entitled to receive certain moneys arising from the prosecution of proceedings if proceedings ensue. But what is of particular significant in the present case is that the liquidator remains solely responsible for the conduct of any proceedings, and Mr Oates has no right to direct the liquidator as to the manner in which the examinations and/or any proceedings which may ensue are to be pursued. I will refer to the relevant provision of the proposed funding agreement later. The relevant clause in clause 8, but I should observe that Mr Oates is given some rights to consult with the liquidator in relation to any proposed settlement of proceedings. I turn, then, to the factors discussed in Leigh, which address the question of whether approval under s 477(2B) ought to be granted. 18 The first issue is the prospects of success in any proceeding. In Re ACN 076 673 875, at [19], the Court observed that it was too early to identify the proceedings, let alone make any assessment of the prospects of success. Litigation funding agreement would provide funds for an examination of directors and former directors, and a better assessment of the prospects of success could be made after the examination and production of documents. In the present case, some investigation into the affairs of the Company have been carried out by Mr Pascoe, and he has been able to reach a preliminary view that potential claims may be available and that matters should be further investigated in order to determine whether such claims may be pursued. 19 The investigations carried out by Mr Pascoe to date enable Mr Pascoe to reach the view that, as was the case in Re ACN 076 673 875, at [21], there are "good enough prospect of a viable claim to justify litigation funding agreements of the kind proposed". The next factor is the interests of creditors other than the proposed defendants. This issue was referred to by Fryberg J in Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280 at 296 [39]. His Honour there said that the fact that the most likely outcome of the litigation will benefit only the professionals involved in the winding up is not necessarily a reason to stifle the litigation; that there is also some chance of a benefit for the unsecured creditors without any detriment to them, to some degree, reinforces the case for bringing proceedings. 20 Mr Pascoe considers that that is the position here. He considers that substantial funds may be obtained. Even though some of those funds may need to be disgorged to other persons, nonetheless, he considers that the prospect of bringing proceedings is better than doing nothing and is in the interests of the winding up because the alternative would be to relinquish the possibility of further action. The total quantum of potential claims which Mr Pascoe has identified to date is substantial. Whilst entering into the proposed funding agreement necessarily involves a potential cost of the Company in the form of a premium and other amounts, this potential outcome must, as I have said, be compared against the likely alternative, namely, that no litigation will be pursued because of the lack of funds. 21 The liquidator's overall assessment is that it is in the commercial interests of the Company for him to enter into the proposed funding agreement on the Company's behalf. That is a matter to which I should give due and appropriate weight. The next factor is one which has caused me some concern. In Re ACN 076 673 875, at [25], Austin J noted that, if proceedings are funded by a litigation funding agreement, there may be oppression to another party in the proceedings or to a respondent to an application in third party proceedings. This may arise from delay by the liquidator, but there are also other factors which are relevant to the consideration of oppression. I am satisfied that the delay in bringing the present application is not a factor to be taken into account. This is because the funding was not available to Mr Pascoe until Friday, 2 September 2011, when an agreement was reached for Mr Oates to fund the application for me to seek approval for the liquidator to enter into the funding agreement, subject to the approval of the court. However, there were a number of other matters which concerned me about the possibility of oppression in the funding by Mr Oates of examinations of the proposed examinees pursuant to ss 596A and 596B of the Act. The first was the timing of the funding offered by Mr Oates. The funding was, in fact, offered on the eve of the commencement of the hearing of the proceedings in the Supreme Court Equity Division. 22 In those proceedings, as I have said, Mr Oates is the plaintiff and other directors or former directors are among the defendants. The statement of claim is in evidence before me, but the nature of the proceedings was described in some detail by Bergin CJ in Eq, in the interlocutory judgment to which I have referred above. What is important is that there is some overlap between the factual matters which arise in those proceedings and the matters which Mr Pascoe wishes to investigate in the examinations under ss 596A and 596B. What concerned me was that Mr Oates may be seeking to fund the examination process as a means of obtaining some advantage for which the examinations are not designed or some collateral advantage beyond what the law offers: see Williams v Spautz (1992) 174 CLR 509. Moreover, I was concerned that the examination may give rise to the possibility of oppression because of the timing of the funding agreement and the overlap with the issues that arise in the Supreme Court. 23 The relevant authorities were summed up by Lander J in Re Evans v Wainter Pty Ltd (2005) 145 FCR 176 at [252]; see also the discussion of the authorities in Austin RP, Ramsay IM, Ford's Principles of Corporations Law (14th ed, LexisNexis Butterworths, Sydney, 2009) at [27.170.1]. Nevertheless, counsel for Mr Pascoe has satisfied me that there are four answers to the concerns that I raised. 24 First, the question of Mr Oates' motivation is not relevant to the present application. This is because the funding is sought by the liquidator and will be expended by him under the terms of the proposed funding agreement. What is of particular importance is, as I said earlier, that clause 8 of the proposed funding agreement has the effect that Mr Pascoe is responsible for the conduct of the examinations. 25 The following sub-clauses of clause 8 are significant: 8.4 The Insolvency Practitioner remains responsible, in his sole discretion, for the conduct of the Claims and Proceedings and the Oates Proceedings to the extent that the Company is a party to the Oates Proceedings. 8.5 Except in relation to settlement, which is dealt with below, if the Lawyers notify Oates and the Insolvency Practitioner that the Lawyers believe that circumstances have arisen such that they may be in a position of conflict with respect to any obligations they owe to Oates and those they owe to the Insolvency Practitioner and/or the Company, the Insolvency Practitioner, the Company and Oates agree that, in order to resolve that conflict, the Lawyers may: (a) give advice to the Insolvency Practitioner and take instructions from the Insolvency Practitioner, even though such advice and instructions is or may be contrary to Oates' interests; and (b) refrain from giving Oates advice in Oates' interests, where that advice or those interests is or ma be contrary to the Insolvency Practitioner's interests. 8.6 In recognition of the fact that Oates has an interest in the Resolution Sum, if the Insolvency Practitioner: (a) wants to settle the Claims or the Proceedings for less than Oates considers appropriate; or (b) does not want to settle the Claims or the Proceedings when Oates considers it appropriate for the Insolvency Practitioner to do so, then Oates and the Insolvency Practitioner must seek to resolve their difference of opinion by referring it to senior counsel for advice on whether, in senior counsel's opinion, settlement of the Claims or the Proceedings on the terms and in the circumstances identified by either Oates or the Insolvency Practitioner or both, is reasonable in all of the circumstances. 26 Second, clause 3.1 of the funding agreement and the definition of the "examinations" in the funding agreement make it clear that the examinations will not be carried out until after the conclusion of the hearing at first instance in the Equity Division proceedings brought by Mr Oates. Thus, the authorities which deal with the possibility of oppression in the use of the examination process for a foreign purpose in relation to existing or pending proceedings do not arise. 27 Third, Mr Pascoe has filed a further affidavit sworn 6 September 2011 which was read on the application. In particular, the following paragraphs of Mr Pascoe's supplementary affidavit are significant: 5. I am aware of some of the factual matters that I propose to investigate which may overlap with matters that are the subject of the Oates Proceedings (as defined in my previous affidavit). 6. I am also aware of the fact that limitations on my entitlement to apply for and obtain the issue of summonses under section 596A or 596B of the Act may apply where the matters that are proposed to be investigated overlap with matters which are the subject of other proceedings. 7. I am aware that this may mean that I will not be able to investigate all of the matters referred to in paragraph 8 of tab 1 by way of examination summonses. 8. Having regard to the matters referred to above, in the event that the proposed funding agreement is approved by the Court and entered into by the parties, I intend to obtain legal advice regarding the scope of examination summonses that I am entitled to apply for and ask my lawyers to draft the examination summonses. 28 Fourth, whilst on the evidence before me, I am not aware of the possibility of oppression in relation to the timing and obtaining of examination orders, I have not ruled out that process all together. What seems to be significant is that, as was submitted by Mr Robertson, oppression is not an inevitable outcome of the funding agreement. Indeed, as appears from Mr Pascoe's supplementary affidavit, I can be comforted in the view that Mr Pascoe will obtain legal advice as to the proper scope of examination summonses in the event that he considers it necessary to do so. Moreover, whilst it is undesirable that the process which is contemplated at this stage of the liquidation ought to open up further proceedings, I accept, as was submitted by counsel, that if an examinee were to consider that the examination order may be oppressive, it would always be open to that person to make application at the appropriate time. 29 The next factor is the nature and complexity of the cause of action. I do not need to say anything further about this other than to refer to the observations of Austin J in Re ACN 076 673 875 at [29]. His Honour there observed that the process of conducting examinations is not excessively complex and any litigation that may flow from it is likely to raise fairly well-established categories of directors' liability. That is, of course, not to deny the coercive nature of an order for examination, and I have taken into account the fact that the process is contemplated to take place after the completion of the existing proceeding in the equity division. The extent to which the liquidator has canvassed other funding options is the next relevant factor. Here, it was necessary to point out, as I have mentioned earlier, that the liquidator has made unsuccessful applications for funding to ASIC and the ATO. Importantly, Mr Pascoe expresses the view that the proposed funding agreement "is the best and only source of funding available to the liquidator to conduct examinations". The level of the funder's premium is the next factor. Whilst there are some unusual aspects of Mr Oates' rights under the proposed funding agreement, in my view the funder's premium is within the usual range for such premiums. The range of premiums was discussed recently, although in the context of representative proceedings by Flick J in Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277 at [16]. Whilst it has been said that in an insolvency context premiums as high as 75 per cent may be justifiable in some circumstances (see Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357), I should not be seen as giving my imprimatur to premiums of that order. 30 The next factor is the liquidator's consultations with the creditors. The sole creditor of the company in this case, as I have said, supports the orders sought. It would in theory have therefore been open to the liquidator to obtain the approval of Mr Oates for the purpose of s 477(2B) rather than to approach the court. Nevertheless, the liquidator has taken the view that it would be inappropriate for him to simply rely upon the consent of the sole creditor bearing in mind, as I have said, the fact that Mr Oates wears many hats. The liquidator has therefore taken the view that as an officer of the court he should make this application. 31 It seems to me that this approach is consistent with that which was referred to by Barrett J in Re McGrath at [13]. His Honour pointed out that the aim of s 477(2B) is to ensure that the Court exercises some oversight of a liquidator's actions and, in effect, confer to or complete the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. For the reasons I have mentioned above, I consider that such a case has been demonstrated. The last of the relevant factors is the risk and cost involved in the claim. The proposed funding agreement would require the funder to pay the costs of the proposed examinations (up to a pre-agreed cap) as well as any adverse costs order as well as security for costs. 32 The pre-agreed cap was arrived at having regard to an estimate of the legal fees and liquidator's fees likely to be incurred in the examinations. As I have said earlier, if the proposed funding agreement is entered into the company receives a guaranteed source of funding without the risk of adverse costs orders or having to provide security for costs and regardless of the outcome in the equity division. It is also necessary to bear in mind that the liquidator takes this approach because he considers that serious further issues are to be considered and that those issues should be pursued by examination of proposed examinees in order to determine whether to pursue the possible fruitful litigation. The liquidator in the exercise of his commercial judgment considers that the price offered in exchange for the funding is an appropriate price to accept. 33 For those reasons, while the proposed funding agreement and the circumstances in which it is to be entered have some unusual aspects, there is no evidence of a lack of good faith or an error of law, principle or real or substantial grounds for doubting the prudence of the liquidator's proposed conduct in entering into the agreement. 34 It follows that I will make an order approving the entry into the agreement pursuant to s 477(2B) of the Act. Mr Pascoe also seeks, as I have said, a direction under s 479(3) of the Act that he will be justified in entering into the proposed funding agreement. The relevant test was stated by Goldberg J in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at [65]. 35 The passage has been cited on other occasions: see, for example, Re HIH Insurance Ltd [2004] NSWSC 5 at [19] per Barrett J. It is unnecessary to set out the passage in full. It is sufficient to say that what is required is that there be a legal issue of substance or procedure and that it may be an issue of power, propriety or reasonableness. Having regard to the unusual aspects of the proposed funding agreement to which I have referred above, in my view it is appropriate for me to give the directions which are sought. This is because the unusual aspects raise what might be described as issues of "propriety" in relation to the winding up of the company. 36 In particular the matters to which I have referred raise the issue of whether it is appropriate in the exercise of a liquidator's ordinary commercial judgment to enter into a funding agreement with a person who has or has had a number of different connections with the company and which takes the unusual approach of including part of the proceeds of pre-existing (rather than prospective) litigation as part of the price for the proposed funding agreement. It also takes into account the overlap of the matters in respect of which the liquidator proposes to inquire in the examination process with the matters which are in issue in the proceedings in the equity division. For these reasons, I will give the direction which is sought. 37 The orders include a confidentiality order under s 50 of the Federal Court of Australia Act 1976 (Cth). I have considered the contents of Confidential Exhibit SP-2. Save for the terms of the proposed funding agreement to which I have referred above, I consider that this is an appropriate case of the exercise of the power under s 50. I should add that one of the tabs of the exhibit was included in the confidential exhibit by mistake. That is the Further Amended Statement of Claim which is behind tab 7. No confidentiality, of course, attaches to that document. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.