Canavan v ICRA Rolleston Pty Ltd

11. Pursuant to s 90-15(1) of the IPS that the second defendants would be justified in executing, on their own behalf as the liquidators and on behalf of the first defendant: (a) a funding deed in substantially the same form as the document exhibited to the Confidential Ayres Affidavit sworn 18 February 2022 (the Funding Agreement); and (b) an indemnity deed in substantially the same form as the document exhibited to the Confidential Ayres Affidavit sworn 18 February 2022 (the Indemnity Agreement).

12. Leave be granted pursuant to s 477(2B) of the Corporations Act for the second defendants to enter into the Funding Agreement and the Indemnity Agreement on behalf of the first defendant.
13. Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, that the Confidential Ayres Affidavit be kept confidential and not be provided or disclosed to any person until further order.

1. Rolleston Coal Holdings Pty Ltd, which was granted leave on 22 October 2021 to be heard in the proceeding without becoming a party, supports the making of the above orders and does not otherwise wish to be heard in relation to them. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Synopsis 1 On 18 February 2022, the second defendants (the liquidators) filed an interlocutory application which sought certain orders. 2 Orders were made at today's hearing, which were expressed to be by consent and which required the exercise of discretion by the Court. These are the reasons for making those orders.

Background facts 3 The following matters were common ground between the parties. 4 The plaintiff (Mr Canavan) was the sole director of the first defendant (Company) at the time of the commencement of the liquidation. The Company forms part of a group of companies known as the 'Winfield Energy Group' of which Mr Canavan is or was a director. The Winfield Energy Group includes Winfield Group Investments Pty Ltd (Winfield Investments). 5 The Company's external administration arose from a failure of a coal mining joint venture which was regulated by what was known as the "Rolleston Joint Venture Agreement" (under which the Company and the interested party (RCH) were parties), and a collapse of the commercial relationship between the joint venture parties. 6 On 10 July 2020, RCH issued cash call notices to the Company (which were not paid). Following the issuance of the notices, the Company's board approved the payment of substantial dividends to the Company's sole shareholder, ICRA Australia Pty Ltd. 7 At about this time, RCH withheld the Company's share of coal sale proceeds that it had received as manager under the joint venture. RCH asserted an entitlement over the sale proceeds as security for the unpaid cash calls. 8 On 11 August 2020, RCH commenced proceedings in the Supreme Court of Queensland against the Company for relief including declarations as to its entitlement to withhold the Company's share of the coal sale proceeds. An injunction was sought in this proceeding by the Company requiring that RCH pay the sale proceeds to the Company (amongst other relief). These actions were determined in favour of RCH by judgments delivered on 4 and 26 November 2020. 9 On 8 December 2020, RCH appointed Messrs Preston, Crawford and Harris of McGrathNicol as receivers and managers to certain property of the Company (receivers). In particular, the receivers were appointed over the Company's 12.5% interest in the joint venture and its associated assets. 10 On 10 December 2020, the Company's board (of which Mr Canavan was the only member at that time) appointed Mr Nick Combis as voluntary administrator under s 436A of the Corporations Act 2001 (Cth) (the Act). At the first creditors' meeting on 21 December 2020, RCH proposed that the liquidators replace Mr Combis as the Company's voluntary administrator. The resolution was passed, and the liquidators were appointed administrators. 11 In February 2021, the receivers sold assets of the Company that were subject to RCH's security. This sale involved a sale of the property by the receivers to RCH. The sale completed on 11 June 2021. 12 The adjourned second meeting of creditors was held on 7 September 2021. On this occasion, the chairperson (Mr Ayres) recommended that creditors resolve that the Company be wound up in liquidation. Mr Canavan opposed the resolution and proposed that the Company execute a deed of company arrangement. By reason of a deadlock between creditors, Mr Ayres used his casting vote in order to pass a resolution that the Company be wound up. Following this, Mr Ayres and Mr Parbery were appointed liquidators. 13 Since his appointment as administrator, Mr Ayres has identified a range of potential claims against Mr Canavan and his associated entities (Potential Canavan Claims), including insolvent trading claims and claims arising from the payment of substantial dividends to entities controlled by Mr Canavan at a time when the Company was financially distressed. Mr Ayres also identified claims for unreasonable director related transactions which may be recoverable under s 588FDA of the Act. Mr Ayres formed a view that these prospective claims were all "viable claims". 14 Mr Ayres has also undertaken a preliminary investigation into the sale process undertaken by the receivers including for the purpose of assessing whether any claim might be available to the Company against the receivers under s 420A of the Act (Potential Receivers Claims). No view has been reached by the liquidators as to whether the Potential Receivers Claims would have merit or prospects. 15 As to the position of the Company's creditors, RCH has claimed approximately $26,631,377.00 owing to it. Winfield Investments has claimed approximately $61,696,666.00 owing to it. Having regard to these claims, of the Company's total creditor pool of $88,391,545.00, the claim made by RCH represents 30.13% and the claim made by Winfield Investments represents 69.80% (in total amounting to 99.93% of creditor claims). 16 This proceeding was commenced by Mr Canavan on 23 September 2021. The proceeding concerned Mr Canavan's application for the removal of the second defendants as liquidators of the Company. 17 The Amended Points of Claim filed on 14 February 2021 raised various matters that are alleged to give rise to a view that a reasonable fair-minded observer might reasonably apprehend that the liquidators "might not discharge their duties as liquidators of the Company with independence and impartiality". The liquidators have disputed these allegations and, on 15 February 2021, filed an Amended Points of Defence. 18 In the liquidator's report to creditors of 7 December 2021, a net deficiency in assets of $129,074,077.00 was reported. There are no available funds in the external administration for the liquidation to advance in any meaningful respect. While the Company currently has $336,471.67 cash at bank, the liquidators have accrued significant expenses that remain unpaid. Mr Ayres has deposed that a deficiency arises when expenses are combined with remuneration. Without external funding, the liquidators are unfunded. 19 On about 17 February 2022, Mr Canavan, the liquidators and RCH agreed to a regime in which these proceedings could be brought to an end. 20 The parties agreed a form of orders which were attached to the outline of submissions filed by the liquidators on 18 February 2022 and which were intended to formalise the resolution of the proceedings. The proposed orders were supported by RCH. 21 As to whether there could be any material prejudice to any person by reason of the Court making the proposed orders, it is relevant that 99.93% of the Company's creditors by value (based on the proofs of debt lodged in the liquidation to date) supported the making of the orders. 22 The creditors of the Company were also notified of today's hearing and of the proposed orders by an email dated 18 February 2022 sent by Mr Ayres. No creditor sought to appear other than RCH.

Appointment of special purpose liquidators 23 Paragraphs 1-7 of the proposed orders seek orders for the appointment of Mr Joseph Hansell and Ms Joanne Dunn as additional liquidators of the Company (special purpose liquidators) for particular purposes identified in paragraph 2 of the order. 24 Section 90-15 of the Insolvency Practice Schedule (Schedule 2 to the Corporations Act 2001 (Cth)) (IPS) confers broad powers on the Court relevant to the application. The provision relevantly provides: Court may make orders (1) The Court may make such orders as it thinks fit in relation to the external administration of a company. Orders on own initiative or on application (2) The Court may exercise the power under subsection (1): (a) on its own initiative, during proceedings before the Court; or (b) on application under section 90-20. Examples of orders that may be made (3) Without limiting subsection (1), those orders may include any one or more of the following: (a) an order determining any question arising in the external administration of the company; … (c) an order that another registered liquidator be appointed as the external administrator of the company; (d) an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company; … 25 Under s 5-15(c) of the IPS, a company is taken to be under "external administration" if a liquidator has been appointed to it. 26 As to standing, under s 90-20(1)(d) of the IPS, an officer of the company may apply for an order under s 90-15. Under s 9 of the Act, an "officer of the company" includes a liquidator and accordingly the liquidators have standing to apply for an order under s 90-15. 27 The following circumstances supported the appointment of the special purpose liquidators in the terms of paragraphs 1 to 7 of the proposed orders: (a) while the liquidators have not assessed or investigated the merit of any claim that might be available against the receivers (who are presumably indemnified by RCH), it is conceivable that the receivers may become the subject of a claim to be brought against them by the Company in relation to the realisation of assets by the receivers while at the same time, RCH will be funding a substantial aspect of the Company's liquidation (as addressed below); (b) there are also claims that are likely available against Mr Canavan and entities associated with him including Winfield Investments (i.e. the Potential Canavan Claims). The liquidators' investigations to date indicate that these are viable claims; (c) RCH and Winfield Investments comprise by far the largest of the Company's creditors, collectively representing 99.93% of the Company's debts, and they supported the appointment; (d) the liquidators have secured funding from RCH which funding may only be applied to the Potential Canavan Claims, and Mr Canavan has agreed to fund an initial investigation into the Potential Receivers Claims; and (e) Mr Ayres gave the following unchallenged evidence, which I accept: While I believe that Mr Parbery and I could effectively manage all potential litigation on behalf of the Company, in circumstances where Mr Canavan (being a creditor of the Company) had commenced this proceeding and sought orders to remove us as Liquidators, we were concerned with the costs that had been incurred, and were continuing to be incurred, to defend the proceeding and were conscious of taking a pragmatic approach to resolve the proceeding, if this could be achieved. Against this background, we were concerned that if we managed both sets of potential claims, particularly in circumstances where our investigations into the Potential Claim Against the Receivers are limited and have been the subject of complaints in this proceeding (which we do not believe have any merit), the confidence in the integrity and transparency of the liquidation for other creditors may be compromised and we would continue to incur further unnecessary costs. I am particularly cognisant of needing to ensure the orderly and uninterrupted progression of the external administration given the challenge that has been made to our appointments as liquidators by this proceeding. 28 Whether or not there is an actual or perceived conflict currently faced by the liquidators in light of the above matters, this is a situation where it would be useful and just that certain matters be investigated by a different liquidator: Markey (Liquidator), in the matter of Bestjet Travel Pty Ltd (in liq) v Bestjet Travel Pty Ltd (in liq) [2020] FCA 1881 at [16]. An appointment of a different liquidator with charge over the Potential Receivers Claims would enable the appointee to, for example, make a decision in relation to those claims (such as whether or not to pursue them) without being open to criticism of the kind which was made in this proceeding. 29 As set out in paragraph 2 of the proposed consent orders, the special purpose liquidators would be provided with a limited and defined remit to investigate and bring claims that the Company may have against RCH or the receivers in respect of the realisation of the Company's property by the receivers. 30 Notwithstanding this and during the hearing, Mr Wilkins of counsel, who appeared for Mr Canavan, sought to reserve Mr Canavan's rights to apply to the Court to augment the powers granted to the special purpose liquidators. This reservation of rights was challenged by Mr Doyle QC (for RCH) and, later, by Mr Dick SC (for the liquidators) on the basis that the proposed consent orders represented the embodiment of a negotiated compromise. It was not necessary to resolve this issue today. Whether Mr Canavan has the ability to obtain an order of the kind indicated is a matter for another day. 31 In all of the circumstances, I was satisfied that the appointment of the special purpose liquidators is appropriate and I made the orders contained in paragraphs 1 to 7 of the proposed orders, with one minor modification as discussed with counsel at the hearing.

The funding and indemnity agreements 32 A confidentiality order was made during the hearing in respect of the Confidential Ayres Affidavit and Confidential Exhibit "MWA-3" to the affidavit which contains the evidence relevant to this aspect of the application. That order was made in terms of paragraph 13 of the proposed orders attached to the written submissions of the liquidators. I was satisfied that such an order was appropriate having regard to the evidence contained in the Confidential Ayres Affidavit, which affidavit has been placed into a sealed envelope in the Queensland Registry. 33 Proposed orders 11 and 12 deal with the liquidators' application concerning their entry into two deeds, being documents in substantially the same form as the documents exhibited to the Confidential Affidavit of Mr Ayres (being the Funding Agreement and the Indemnity Agreement). This aspect of the application was brought under s 477(2B) of the Act and s 90-15(1) of the IPS. 34 Section 477(2B) of the Act provides: 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. 35 As to the application for approval under s 477(2B) of the Act: (a) each agreement contains provisions which include obligations which may be discharged more than three months after the agreement is entered into, and the term of each may last beyond three months. For this reason, the requirement that approval be obtained under s 477(2B) arises; (b) there is a need for funding given the financial position of the Company's external administration and the availability of potential claims that require at least investigation and possible prosecution; (c) Mr Ayres deposed to the difficulty in securing funding in these circumstances because, according to him, litigation funders are typically reluctant to fund proceedings when substantial creditors are not prepared to do so themselves; (d) the Funding Agreement and the Indemnity Agreement were made available to the Court; (e) Mr Ayres deposed that the funding arrangement will benefit the Company's external administration and creditors; (f) Mr Ayres also deposed to the other funding options and challenges faced by the liquidators in the particular context of the external administration; and (g) there was no suggestion that the entry into the Funding Agreement or the Indemnity Agreement would not be a proper exercise of the liquidators' power or was otherwise ill-advised. 36 In light of these matters, I was satisfied that, having regard to the liquidators' commercial judgment, there is no error of law, grounds for suspecting bad faith or any other good reason to intervene, and therefore the order under s 477(2B) of the Act was warranted in the circumstances. For this reason, I made the order in paragraph 12 of the proposed orders attached to the written submissions for the liquidators. 37 Particularly given the litigious history of the Company's external administration (including the allegations made in this proceeding), I was also satisfied that a direction under s 90-15 of the IPS was warranted. For this reason, I made the order in paragraph 11 of the proposed orders.

Dismissal of proceedings and costs 38 The balance of the orders (being those in paragraphs 8 to 10 of the proposed orders) were by consent and were appropriate. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Downes.