One way of expressing the difference between the two scenarios is to say that Scenario 1 would give the DCT an advantage equal to 15% of its claim (100% - 85%) as against its having no advantage. (I note that in his two Scenarios Mr Chamberlain has shown the DCT's debt as $1,303,047.35 but the correct figure in accordance with the DCT's proof of debt is $1,300,273.53 and I will proceed on the correct figure.)
34 In the Earlier Reasons, I referred (at [86]) to State Bank of New South Wales v Brown 38 ACSR 715 and Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294. In The Australian Steel Co (Operations) Pty Ltd t/as Welded Mesh v EPS Group Pty Ltd (2007) 59 ACSR 602 Austin J referred to these cases and to Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd (2006) 224 ALR 490 (TJF EBC) and identified in the following passage (at [70]) considerations to which regard should be had under s 564:
As those cases point out, s 564 itself draws attention to the risk assumed by the funding creditor. It is therefore necessary to address the extent and nature of the risk that the funded recovery action will fail, and the extent of any consequent risk that the funds made available for the litigation might be irrecoverable. It appears from Spigelman CJ's judgment in the Brown case, at [40], and Brownie J's observations in the Household Financial Services case (at 296-7), that one has regard to factors including: whether the amounts involved are small; the value recovered; the size of the funding creditor's debt compared with other debts; the proportion that the funding creditor's expenditure bears to the amount recovered; whether the money advanced by the funding creditor has been refunded; whether other unsecured creditors oppose the distribution proposed to the funding creditor; whether other creditors have been given the opportunity to join in the funding and have failed to do so; and the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered. …
35 In the present case there is no question of the DCT receiving 100% of the recovery. Nor is there any suggestion of a disturbance of the priority debts and claims provided for in s 556(1) of the Act.
36 In the Earlier Reasons I summarised the effect of the Indemnities as follows:
32 The First Indemnity was dated 8 October 2007. By it the DCT agreed to indemnify Mr Chamberlain in respect of funding up to a maximum sum of $350,000 inclusive of GST. The First Indemnity provided for how this amount was to be paid and expended. It included an unlimited indemnity by the DCT in respect of any costs order made against Mr Chamberlain.
33 The Second Indemnity was dated 18 September 2008. By the Second Indemnity the DCT undertook to indemnify Mr Chamberlain in respect of funding up to a maximum sum of $198,665.47 inclusive of GST, payable progressively. The Second Indemnity also contained an indemnity against any costs order made against Mr Chamberlain but subject to a limit of $1,973,400.
37 As noted in the Earlier Reasons at [35], the DCT provided Mr Chamberlain with funding to the extent of $266,286.77 to prosecute the Transactions Proceeding. Mr Chamberlain has reimbursed the DCT in that sum. As noted by Austin J in the passage set out at [34] above, the fact that reimbursement in full has occurred is one consideration relevant to the exercise of the discretion under s 564.
38 In TJF EBC, Barrett J gave the funding creditor an advantage by stipulating that it should receive in priority to all other creditors 80% of the funds remaining for distribution to creditors in the winding up after allowing for priority claims under s 556(1), with the remaining 20% being paid to other creditors.
39 In Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 208 ALR 242, Campbell J noted (at 104) that an alternative approach is to give the indemnifying creditor an advantage calculated as a percentage of the investment that that creditor made in funding the litigation. His Honour noted that in assessing that percentage, one would need to take into account that the indemnifying creditor had not only a risk of losing the investment made, but also a risk of being liable to pay other expenses of the liquidator and the liquidator's solicitors, and possibly the costs of the other side. Campbell J noted (at [107]) that the funding creditor's entitlement could be compared, as a rough check, to the premium that would have been demanded by a litigation funder.
40 RGH submits that the Transactions Proceeding, although apparently complex, was not risky. RGH submits that there is no evidence before the Court that it was considered to be risky, although I note that in para 54(b) of Mr Chamberlain's affidavit of 7 August 2009, he claims there was a significant exposure to the risk of an adverse costs order. RGH submits that the Court should infer that if evidence to that effect was available, Mr Chamberlain would have adduced it.
41 RGH also makes the following submissions:
· the Court should infer that the risk that Mr Chamberlain and the Company would fail was even lower at the time when the DCT agreed to provide funding and executed the Indemnities, than it had been at the commencement of the Transactions Proceeding (the First Indemnity was given on 8 October 2007, nearly three years after the Transactions Proceeding was commenced on 21 December 2004);
· the Court should infer from the settlement of the Transactions Proceeding for a large amount of money without a hearing that it was not risky;
· the Court should infer that the DCT assumed only the ordinary risk of losing in litigation that any party with a strong case has, and, indeed, that the DCT was exposed to a reduced risk because it did not become involved in the Transactions Proceeding until that proceeding had reached an advanced stage.
42 RGH points out that if the DCT was given the priority sought by Mr Chamberlain, the DCT would be paid $1,300,273.53 (RGH's submissions wrongly state $1,300,723.63), leaving Mr Chamberlain with $322,664.53 cash at bank ($1,622,938.06 minus $1,300,273.53). From this amount, the "Estimated Current Legals & Work in Progress" of $450,000.00 would be payable (Mr Chamberlain does not seek to disturb the s 556(1) priorities). In other words, not only would RGH and the Hardys have to rely on the monthly instalments totalling $855,000.00 to receive anything, but so too, in part, would Mr Chamberlain himself.
43 RGH has addressed submissions to the question of the absence of an offer of indemnity by RGH. In the Earlier Reasons I touched on this question at [30]-[31].
44 I accept that Ms Farmer, Mr Chamberlain's then solicitor, did not request RGH for funding or an indemnity, either at the meeting between her and RGH's solicitor, Mr Graham, on 22 June 2007 or at any other time. Ms Farmer did tell Mr Graham at that meeting, however, that Mr Chamberlain had sought funding to pursue the Transactions Proceeding by the DCT, and that he was awaiting a reply from the DCT, as he had been since February 2007. It would have been a simple matter for Mr Graham to have sought RGH's instructions as to whether RGH was prepared to join in.
45 Through Mr Graham, RGH in effect acquiesced in the DCT's funding of the further prosecution of the Transactions Proceeding. It is true that when Ms Farmer sought the "consent" of RGH as a contingent creditor to the First Indemnity, Mr Graham quite reasonably replied that he needed a copy before he could advise his client, and Ms Farmer declined to release it on grounds of confidentiality (notwithstanding Mr Graham's reasonable proffering of a confidentiality undertaking). The important point for present purposes, however, is that those exchanges related to RGH's consenting to the First Indemnity and that RGH did not itself take the initiative of offering to fund on any terms.
46 It is not to be overlooked that at that time RGH's own claim against the Company for unliquidated damages was in its early stages. The DCT's claim, on the other hand, was for a liquidated amount. Moreover, the Transactions Proceeding raised tax-related issues with which the DCT, but not RGH, would have been familiar or in which the DCT would have had a greater interest. In the circumstances, it is not unreasonable to think that RGH would not have been as ready as the DCT was to commit funding to the prosecution of the Transactions Proceeding. In any event, there is no evidence that RGH would have been willing to join in funding the Transactions Proceeding if asked, or would have been prepared to do so if provided more information in relation to particular matters.
47 I infer from all the circumstances that RGH was content to take the role of a bystander as distinct from itself becoming an investor in the Transactions Proceeding.
48 At paras 32-37 of his written submission, Mr Docker, counsel for RGH, makes the following helpful submissions:
32. Taking the first approach set out in [10] above [a percentage of the funds remaining after payment of priority debts and claims], an appropriate percentage of the net funds available for distribution which should be allocated for advantage to the DCT is 1/3rd. … The effect of this approach would be as follows:
a) the DCT would be entitled to 1/3rd of the total amount available, $2,027,938.06, being $675,979.35 by way of priority;
b) the balance of the DCT's debt, being $624,294.28 ($1,300,273.63 [sic] - $675,979.35) will rank with the other unsecured debts;
c) the total of the non priority unsecured debts will be $1,699,294.28 ($700,000 + $375,000 + $624,294.28);
d) the total available for distribution to the non priority unsecured debts will be $1,351,958.71 ($2,027,938.06 - $675,979.35);
e) the percentage recovery on unsecured debts will be 79.5% ($1,351,958.71/$1,699,294.28 x 100)
f) this means that:
i) the DCT will get a total of $1,172,293.30 ($675,979.35 + $496,313.95) which is 90.1% of its debt;
ii) RG&H will get $556,500.00, which is 79.5% of its debt; and
iii) Hardys' [sic] will get $298,125.00, which is 79.5% of their debt.
33. If the alternative method referred to in [10] above is used [a percentage of the investment made by the indemnifying creditor in providing funding] and the priority is calculated by reference to the amount invested by the DCT, $266,286.77, the above approach is supported. That is, the DCT will be receiving in priority an amount ($675,979.35) which is more than 2½ times the amount it invested as well as being reimbursed for the amount it invested.
34. A third way of checking the approach is by reference to what a litigation funder would have received. If the figure of 40% of the amount recovered is used (although the examples in Jarbin Pty Ltd v Clutha Ltd … suggest the figure is often lower) the amount the DCT would receive ($1,172,293.30) exceeds 40% of the recovery of $2,600,000.
35. The above figures do not take account of when the distributions will be made. The instalment payments add a level of complexity to the exercise. In short, the DCT should share the burden of the late payments with the other unsecured creditors. Presumably, the DCT was consulted about the settlement which resulted in the instalment regime. However, if the DCT seeks to be paid immediately, it should receive less.
36. Assuming the creditors all share in the delay, this would mean that the current amount available for distribution would be treated as one distribution and so would each instalment payment. For example, if $1,200,000 was available for distribution now:
a) DCT would get 1/3rd, being $400,000, as a priority; and
b) the other $800,000 would be distributed rateably amongst the 3 unsecured creditors in accordance with their non priority debts.
37. In an example with $60,000, the DCT would get $20,000 as a priority and the remaining $40,000 would be distributed rateably amongst the 3 unsecured creditors in accordance with their non priority debts.
49 Mr Dawson, counsel for Mr Chamberlain, submits that the merits based standing of the DCT as funding creditor outweighs that of RGH and the Hardys in the following respects in particular:
i) RGH elected not to lodge a proof of debt until the settlement of the Transactions Proceeding in November 2008, immediately prior to the scheduled hearing. The DCT entered into the Indemnities in circumstances in which it was the only creditor who had lodged a proof of debt in the winding up, and it is not "just" for the purposes of s 564 to recognise the interests of RGH asserted at such a late stage over those of the DCT;
ii) as noted above, there is no evidence that RGH would have funded the Transactions Proceeding; and
iii) the Hardys, being the only other creditor, do not oppose the DCT's application.
50 In my opinion, RGH's submissions understate the risk that was associated with the Transactions Proceeding. The pleadings are in evidence. They include a second further amended statement of claim and the separate defences of the first to sixth defendants and the seventh to twelfth defendants. The plaintiffs were the Company and Mr Chamberlain as its liquidator. The first to sixth defendants were the Hardy interests and the seventh to twelfth were the Company's accountants.
51 In his affidavit made on 7 August 2009, Mr Chamberlain summarises the claims made by the Company and himself in the Transactions Proceeding as follows (the summary was set out at [22] of the Earlier Reasons - having read the second further amended statement of claim, I think that his summary is adequate for present purposes):
(a) The Restructure was entered into at a time when the Company and its officers knew, or ought to have known, of liabilities outstanding, whether contingent or otherwise, to the DCT and CGU Workers Compensation Pty Limited;
(b) In the circumstances that existed the Restructure comprised an alienation of property with the intention to defraud creditors within the meaning of section 37A of the Conveyancing Act (NSW) 1919;
(c) The Restructure constituted an uncommercial transaction, an insolvent transaction and a void transaction within the meaning of sections 588FC and 588FE of the Corporations Act (Cth); and
(d) The Hardys, as officers of the Company, had breached their fiduciary duties, duty of care and diligence, duty to act in good faith and duty not to use their position o [sic] the detriment of the Company;
(e) The Hardys, as officers of the Company, allegedly advanced monies to the Company in order to fund the contributions to the Hardy International Super Fund. These director loans were outstanding at the time of the Restructure. As part of the Restructure the directors' loans were repaid. The Liquidator alleged that the repayment of the director's [sic] loans constituted "unfair preferences" within the meaning of sections 588FA, 588FC and 588FE of the Corporations Act (Cth).
(f) The Accountants who provided the advice in relation to the Hardy International Super Fund and the Restructure were in breach of their duty of care to the Company and were liable as accessories to the breaches of the duty by the directors.
52 The Transactions Proceeding promised to be lengthy, expensive and complex. RGH submits that these characteristics are not necessarily to be equated with riskiness. I agree. They are, however, suggestive of it. The greater the complexity and length, often the more opportunities for a slip. A person driving a motor vehicle on a 1,000 kilometre journey is usually thought of as exposed to a greater risk than one who drives on a ten kilometre journey. Yet close attention to any particular ten kilometre stretch of the longer journey may not, in isolation, expose a risk greater than that associated with the short trip.
53 It seems to me just, taking into account all of the considerations listed by Austin J in the passage quoted at [34] above, that the DCT should receive an advantage by receiving 92.5% of the DCT's debt. I readily concede that I have arrived at this percentage as the mid-point between the 100% of Mr Chamberlain's Scenario 1 and the 85% of his Scenario 2. In my view however, that mid-point fairly reflects all of the considerations referred to and in particular, (1) the ordinary rule that subject to s 556(1), unsecured creditors are to be treated equally, and (2) the fact that the DCT provided funding coupled with an indemnity in respect of any adverse costs order, in respect of complex, lengthy and costly litigation attended by at least a significant risk of an adverse result, which has generated the only funds available to unsecured creditors.
54 Although I arrived at 92.5% quite independently by the process mentioned, as it transpires it is only a little above the 90.1% in para 32 of RGH's submissions (see [48] above). This 92.5% of $1,300,273.53 is $1,202,753.02, leaving $825,185.04 for the other two unsecured creditors, RGH and the Hardys. This amount of $825,185.04 represents 76.76% of the amount of $1,075,000.00 ($700,000.00 + $375,000.00) owed to RGH and the Hardys respectively.
55 All three creditors should have to bear the disadvantage of waiting for payment of the monthly instalments and any risk of default in the payment of the instalments. Each dollar to be distributed should therefore be apportioned as to 59.31% to the DCT and 40.69% to RGH and the Hardys, as between those two pro rata according to the amounts of their debts.