Analysis
28 The trustee's application raises two questions. The first question is whether the Funding Agreement is an unprofitable contract within s 133(5A) of the Act. If it is, then the trustee is entitled to a declaration that he has disclaimed the Funding Agreement, and the second question does not arise. The second question is whether the trustee should be given leave to disclaim the Funding Agreement in circumstances where it is not an unprofitable contract. A part of the second question is what, if any, terms should be imposed or orders made under s 133(5B) if leave to disclaim is given.
29 The Act does not contain a definition of the term, unprofitable contract. The cases to which I was referred were mainly company law cases. The Corporations Act 2001 (Cth) contains a similar provision to s 133(5A). Section 568(1A) of the Corporations Act provides that a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with leave of the Court. There are some differences in the related sections of the two statutory regimes.
30 An often cited bankruptcy case is Ex parte The Trustee in Bastable [1901] 2 KB 518. In that case, the Court of Appeal considered the provisions of s 55 of the Bankruptcy Act, 1883 in a different factual context. Collins LJ said (at 525 and 527):
The words of subs.2, which limit the operation of the section by providing that the disclaimer "shall not, except so far as is necessary for the purpose of releasing the bankrupt and his property and the trustee from liability, affect the rights or liabilities of any other person," seem to me to involve the cardinal idea that the right given is a right to get rid of onerous property - property subject to some burden. In the present case there is no such burden upon the property. The only suggestion made on behalf of the trustee as justifying his disclaimer is that the bankrupt's estate would be better off with the land than with the purchase-money of the land. It does not appear to me prima facie that such a case falls within the provisions of s. 55, or that the contract is within the class of property to which it relates.
… I think the effect of the section is only that which is obvious from the cardinal words which I have read, namely to enable the trustee to get rid of property which is subject to some burdensome obligation.
31 In the 1952 Modern Law Review Article, "Disclaimer of Contracts in Bankruptcy", which is referred to in a number of cases, Mr L W Melville makes the following observation (at 28-29):
It is probably true to say that "unprofitable" means, not simply a contract which is a bad bargain, but one the performance of which cannot satisfactorily be carried out by a trustee in bankruptcy.
32 In Re Real Investments Pty Ltd [1999] QSC 89; (2000) 2 Qd R 555, (Re Real Investments) a case concerning s 568(1A) of the Corporations Law, Chesterman J summarised the relevant principles as follows (at [21]):
• A contract is unprofitable for the purpose of s. 568 if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit.
• Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities.
• Contracts which will delay the winding-up of the company's affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable.
• No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus upon the nature and cause of the disadvantage.
• A contract is not unprofitable merely because the company could have made or could make a better bargain.
33 In Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) [2000] NSWSC 960; (2000) 35 ACSR 484, also a case concerning s 568(1A) of the Corporations Law, Santow J said (at [59]-[60]):
In defining what an unprofitable contract means, I am content to adopt the approach of Young J in Dekala Pty Ltd (in liq) v Perth Land and Leisure Ltd (1989) 17 NSWLR 664. At 667 he speaks of a contract which "would involve the liquidator in at least eight months' of work and in taking the chance the purchaser would obtain finance on terms and conditions ... satisfactory to it". Young J understandably concluded that: "This would seem to be a contract which cannot satisfactorily be carried out by a liquidator whose interest is to realise the company's property and to pay a dividend to creditors at the earliest possible time."
To say that an unprofitable contract is one the performance of which cannot satisfactorily be carried out still leaves the need for further elaboration of what is meant by "unsatisfactory". What is important in that context is whether the contract could be satisfactorily carried by a liquidator or trustee in bankruptcy, compatibly with the liquidator's duty to realise the company's property and pay a dividend at the earliest possible time. Consistent with that approach a contract must be more than merely financially disadvantageous as Hayne J concluded in Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq) [1995] 2 VR 457 at 466-7. Thus if a liquidator could perform a contract without prejudicing his obligation to realise the company's property and pay a dividend to creditors at the earliest possible time, he could not turn around and disclaim that contract merely on the expedient ground that he substitute a more profitable one. Such a notion of comparative financial disadvantage is not the applicable test. Indeed I do not understand Hodgson J in Rothwells Ltd v Spedley Securities Ltd (1990) 20 NSWLR 417 at 423 to have concluded otherwise.
34 In the decision of In the matter of Blue Sennair Air Pty Ltd (in liq); In the matter of Eye Plantain Pty Ltd (in liq) [2016] NSWSC 772, also a case concerning s 568(1A) of the Corporations Act, Brereton J said (at [11]-[12]):
The term "unprofitable contract" in s 568(1A) is not the subject of any statutory definition, but has been elucidated by case law. An unprofitable contract is one under which the company has obligations or liabilities (such as to pay money, transfer property, or supply goods or services), the burden of which exceeds the benefits of the contract for the company, and the performance of which will impede the liquidator's ability to realise the assets and distribute the proceeds to the creditors and contributories. The purpose of the provision is to facilitate the due administration of liquidations, not to enable the liquidator to increase the divisible property by clawing back property the company has previously disposed. While the concept has not infrequently been expressed in terms that it is insufficient merely because performance of the contract will incur loss or that a better bargain could have been or could be made, the qualifier "merely" has significance; it means that the element that the contract is one under which the company does not make a profit is a necessary but insufficient feature of an "unprofitable contract". It is not possible to see how a contract under which the company makes a profit can satisfy the concept of an "unprofitable contract". The circumstance that, with leave, even a profitable contract can be disclaimed, tells against giving wider scope to the words "unprofitable contract" than their ordinary meaning bears.
The question whether a contract is unprofitable is one of fact. While it is necessary to identify from the contract the company's contractual obligations and liabilities, and compare them with its contractual rights and entitlements, it is the detriments and benefits that in fact flow from those obligations and entitlements that govern whether or not the contract is in fact profitable. Thus, it is necessary to have regard to the actual operation of the contract and the results its operation in fact produces.
(Citations omitted.)
35 There is no issue between the parties that the Funding Agreement forms part of the property of the bankrupt.
36 The trustee accepted that there were two limbs to the test of what constitutes an unprofitable contract. The first limb is that the contract is financially unprofitable, that is, it has financially onerous terms. The second limb is that the contract is incompatible with the proper and expedient administration of the bankruptcy.
37 The competing arguments of the parties tended to assume or be premised on extreme positions. On the one hand, the trustee said that the consideration under the Funding Agreement which he was providing was up to 85% of an apparently valuable cause of action in circumstances where the return to the bankrupt estate was likely to be nil or minimal. Meanwhile, he would be embroiled in the WA Proceeding without effective control of its progress or fate. The Funder, on the other hand, submitted that the trustee's objection properly understood boils down to a complaint about the amount of the premium and that if one thing emerges clearly from the authorities, it is that the fact the trustee might, or even is very likely to, secure a better bargain is not sufficient to lead to a conclusion that the contract is an unprofitable one. I think the Funder went so far as to submit that the bankrupt/trustee would suffer no detriment under the Funding Agreement because, as the Funder put it, the Funding Agreement was and is intrinsically connected to the WA Proceeding. It seems to me that this proposition assumes (incorrectly) that the claim has no value without this particular Funding Agreement.
38 The trustee submitted that, leaving aside the uncertainty about whether any profit would be received by the bankrupt estate, any profit actually received would not be a sufficient reciprocal benefit (Re Real Investments at [21]) or a commensurate benefit compared with the benefit and burden to the Funder. As I understood the submission, this is not to say that because a better bargain might have been made the contract in issue is an unprofitable one (a proposition clearly contrary to the authorities), but rather that there is a notion of proportionality involved and that where there is a significant difference or, to use the trustee's word, "mismatch", between benefit and burden, a modest profit does not mean that the contract is not an unprofitable one.
39 As I understood it, the Funder submitted that finding the obligations in the Funding Agreement were incompatible or inconsistent with a trustee in bankruptcy's obligations or duties would mean that all Funding Agreements would be unprofitable contracts or leave to disclaim would be granted in all cases. In the course of his submissions, counsel for the Funder referred to one of the clauses in the Funding Agreement as a standard clause. Whilst I am prepared to accept at a general level that a litigation funder will ordinarily have a say in the conduct of the proceedings and their resolution, there was no evidence before me of a standard litigation funding agreement. I can only proceed by reference to the particular agreement before the Court. In any event, in this case, for reasons I will give, the incompatibility or inconsistency comes in at the grant of leave stage where a number of other factors are also relevant.
40 It seems to me that the most important consideration in determining whether a contract is an unprofitable contract within s 133(5A) is whether the continued performance of the contract is consistent with the prompt, orderly and beneficial administration of the bankrupt estate or, put another way, can be satisfactorily carried out by the trustee consistent with his or her duties and obligations. The financial advantage or disadvantage of the contract is an aspect of this assessment. The performance of a contract under which a company makes a profit is most unlikely to satisfy the definition of an unprofitable contract. A case in which it will incur a loss may be an unprofitable contract.
41 As far as I am aware, there are no authorities dealing with Funding Agreements and s 133(5A) of the Act or s 568(1A) of the Corporations Act. In this case, I have no objective evidence of the strength of the cause of action or of its value. This, together with the fact that the Funder Premium is so high, means that whether the trustee is likely to receive any funds which he can distribute to creditors is uncertain. There are two further matters which add to the uncertainty. There is no evidence of the prospects of recovery against the defendants who are two individuals and a proprietary company and it will be recalled that the Funder Premium is linked to the obligation to pay, not the ability to pay. There is the possibility that any claim for damages or compensation is vested in a third party as Mr Graham says in his affidavit. As the trustee put it, there is "no real evidence to say that there's a real prospect of a return".
42 All of this means that the issue of benefit to creditors is quite speculative. It is not possible for me to say it will or will not receive funds. Had I reached the conclusion that it would probably not receive funds, then coupled with the trustee's lack of control of the WA Proceeding, I would conclude that the Funding Agreement was an unprofitable contract. However, I have reached the conclusion that, in all the circumstances, the Funding Agreement is of doubtful profitability to the bankrupt estate. This is not a finding that the Funding Agreement is an unprofitable one and, in those circumstances, it is necessary for me to consider whether leave to disclaim the Funding Agreement should be granted.
43 The trustee said that he has not been able to identify any authorities which have addressed the principles which govern the exercise of the power to grant leave to disclaim under s 133(5A) of the Act. The Explanatory Memorandum refers to contracts, the profitability of which may be in doubt and which involve difficulties and risks that would render them completely inadvisable.
44 There are authorities on the grant of leave to disclaim to a liquidator under the Corporations Act and its predecessors.
45 In Re Middle Harbour Investments Ltd [1977] 2 NSWLR 653; (1976) ACLR 303, the company in liquidation held land where the amount secured by a mortgage over the land exceeded the value of the land and where there were ongoing liabilities associated with holding the land, such as rates and taxes. The liquidator sought leave to disclaim the land. The liquidation could not be completed while the land was held. Bowen CJ in Eq granted leave to disclaim the land. His Honour considered determinative the course which would advance the prompt, orderly and beneficial winding up of the company's affairs and be for the benefit of the unsecured creditors in the winding up. His Honour said (at 657):
The purpose of providing for disclaimer by an official receiver or trustee in bankruptcy or by a liquidator in winding up seems clear enough. It is to enable him to rid himself or, in the case of liquidation, the company, of burdensome financial obligations which might otherwise continue to the detriment of those interested in the administration; it is given to enable the official receiver, or trustee, or the liquidator to advance the prompt, orderly and beneficial administration of the bankrupt estate or, in the case of a company, of the winding up of its affairs … [Citations omitted]
A little later, his Honour said (at 660):
It appears to me that the liquidator in the present case may properly take the view that disclaimer would assist in the prompt and orderly winding up of the affairs of the company and, further, in view of the present excess of the amount secured over any amount likely to be realised upon sale of the property, that disclaimer would be for the benefit of unsecured creditors in the winding up.
46 The decision whether to grant leave to disclaim is a discretionary one and the effect of a grant of leave is a relevant matter. The prejudice to unsecured creditors must be considered as well as the prejudice to those who oppose a grant of leave to disclaim (Re Tulloch Ltd (in liq) (1978) 3 ACLR 808 at 816-817 per Needham J; Sullivan v Energy Services International Pty Ltd (in liq) [2002] NSWSC 937; (2002) 171 FLR 106.)
47 In Re ACN 103 753 484 Pty Ltd formerly known as Blue Chip Development Corporation Pty Ltd [2011] QSC 64, Boddice J considered an application by the liquidators of a company for leave to disclaim an arbitration agreement which his Honour considered imposed harsh and unnecessary burdens on the liquidators to the detriment of creditors in the winding up of the company. His Honour granted leave to disclaim the arbitration agreement for a number of reasons. One of those reasons was the burden the agreement placed on the company and its creditors. In this respect, his Honour said (at [18]):
The arbitration agreement imposes harsh and unnecessary burdens upon the applicants to the detriment of creditors in the winding up of the company. Those burdens require the company to pay large sums to the defendants, as well as to pay all the arbitrator's costs. The defendants are related to Mr Knell who has the sole power to appoint the arbitrator. Whilst it is contended arbitration will be cheaper than Court proceedings, that contention does not have regard to the fact that as there is no connection between the proposed place of arbitration and the proceeding, which relates solely to Queensland and governed by Queensland law, costs are likely to be significant.
48 In Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70; [1996] 1 All ER 737, the House of Lords considered the disclaimer provision in the Insolvency Act 1986 (UK). Lord Nicholls of Birkenhead said (at 86-87 AC; All ER 745-746):
The fundamental purpose of these provisions is not in doubt. It is to facilitate the winding up of the insolvent's affairs…
Equally clear is the essential scheme by which the statute seeks to achieve these purposes. Unprofitable contracts can be ended, and property burdened with onerous obligations disowned. The company is to be freed from all liabilities in respect of the property. Conversely, and hardly surprisingly, the company is no longer to have any rights in respect of the property. The company could not fairly keep the property and yet be freed from its liabilities.
Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.
49 Finally, as the trustee pointed out and as a general proposition, leave to disclaim is more readily granted in a bankruptcy than the winding up of a company because a trustee in bankruptcy in whom property vests is, absent an effective disclaimer, personally liable.
50 The Funder submitted that delay in the finalisation of the administration was less significant in the case of a bankruptcy compared with a liquidation. It referred to ss 58, 127 and 129AA of the Act in support of its argument. I am not sure that this is the case, but I do not need to decide the point because delay in the finalisation of the administration was not the form of incompatibility or inconsistency raised by the trustee in this case.
51 I have reached the conclusion that leave to disclaim should be granted for a number of reasons.
52 First, the terms of the Funding Agreement have the tendency to interfere with the trustee's control of the WA Proceeding and the potential to interfere with his ability to perform his duties as the trustee of the bankrupt estate (s 19 of the Act; ss 42-20 and 42-60 of the Insolvency Practice Rules (Bankruptcy) 2016 (Cth)). These provisions and the general statements in the authorities (see, for example, Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201) emphasise the important public nature of a trustee in bankruptcy's duties and the need for the trustee to maximise the assets of the estate, having regard to sound commercial judgment and efficiency balancing returns and reasonable costs. The Funding Agreement is such that the Funder, rather than the trustee, has considerable control over the proceedings. The Funder is able to appoint solicitors for the WA Proceeding and is able to provide day to day instructions to those solicitors. There was argument before me about which party could control, in the sense of provide instructions, to the solicitors. The fact is that any dispute might ultimately be resolved by the solicitors themselves and they may act in the interests of the Funder or contrary to the interests of the Funder (clause 13). The Funder in its sole discretion is able to terminate the Funding Agreement on seven days written notice. The trustee must pursue the WA Proceeding and is not able to discontinue the proceeding without the Funder's consent. The trustee is not able to settle the WA Proceeding without the Funder's consent or by following the dispute resolution procedure in clause 14. The Funder may direct the trustee to lodge and prosecute an appeal. It is true, as the Funder pointed out, that the trustee did not raise a number of these points in his correspondence, but I do not think that this means that they should be ignored. As the trustee pointed out, if they are present as a matter of objective fact, then they must be taken into account, even if the amount of the Funder Premium was the principal issue in dispute during the negotiations between the parties. I say the potential to interfere with the trustee's ability to perform his duties as trustee because, as far as I can see, there is no direct inconsistency between a statutory or common law duty and a term of the Funding Agreement. There is the potential for one to arise in the carrying out of the Funding Agreement and that potential is a relevant matter.
53 Secondly, the financial terms of the Funding Agreement are extremely favourable to the Funder and extremely disadvantageous to the trustee. Not only is there a Funder Premium or charge of 80% (85% in the case of an appeal), but it is calculated on the amount ordered to be paid, not the amount actually recovered. I also take into account the following. First, the fact that the trustee has identified a reasonably experienced firm of solicitors who are prepared to act on a contingency basis with no uplift in their fees. Of course, I must also balance against this consideration the fact that the solicitors have the right to withdraw their services and that there is no coverage for Adverse Costs as there is in the Funding Agreement. Secondly, the Funder has agreed to halve its premium to 40%. As against these two matters, I take into account the detriment to the parties if the WA Proceeding is unsuccessful. In the case of the Funder, it will be significant. Nevertheless, all things considered, the financial terms of the Funding Agreement are extremely favourable to the Funder.
54 Thirdly, I must and do take into account that, to a point, the Funder will be prejudiced by the disclaimer of the Funding Agreement. However, the extent of that prejudice is affected by the following factors: (1) there is no evidence from the Funder which goes towards establishing the value of the cause of action previously held by Mr Tonner; (2) Mr Graham, on behalf of the Funder, described the WA Proceeding as complex and likely to be lengthy and that there is a significant risk that any damages would be payable to a different party and settlement is unlikely without the cooperation of other parties; (3) the Funder would not lose the entire commercial benefit of the Funding Agreement because the agreement would not be affected, as far as the other litigants are concerned, and the Funder has indicated that it will pursue the WA Proceeding as far as Mrs Tonner's claim is concerned.
55 Mr Graham deposes to the fact that the Funder has incurred approximately $127,986 "in relation to the Proceeding". It is true, as the trustee submits, that it is not clear from Mr Graham's evidence how much of this amount relates to the Funder assessing its risk and how much of the amount relates directly to the conduct of the WA Proceeding. Another way of putting this point is that it is not clear how much of this amount is Action Costs within the Funding Agreement, that is to say, Costs "incurred in relation to" the WA Proceeding. Under s 133(12) a third party who suffers loss by reason of the disclaimer may prove the Costs as a debt in the bankruptcy.
56 In reaching the conclusion, I have not overlooked the points raised by the Funder which I now address. First, it is true that the trustee does not have any financial obligations under the Funding Agreement other than to allow the Funder Premium to be paid and to meet the obligation in clause 25. Secondly, whilst it is true to a point that the trustee does not have any onerous "non-financial obligations" under the Funding Agreement and that he can choose to do very little, the significant matter is that this state of affairs brings about the difficulty faced by the trustee in complying with his obligations under the Act. Thirdly, the Funder contends that it would suffer a disproportionately adverse loss of its entitlement to its "Funder Premium" in circumstances where it has already incurred substantial costs with respect to this matter. The precise point the Funder makes is not clear to me. I have already referred to the matters bearing upon the value of the entitlement to the Funder Premium in relation to Mr Tonner's claim and the significance of the costs the Funder has already incurred in relation to this mater. Fourthly, the Funder claims that it will suffer prejudice if leave to disclaim is granted because the plaintiffs in the WA Proceeding will no longer be able to present a united front in any settlement negotiations with the defendants. This is a possible detriment, but not a substantial matter. Fifthly, the Funder contends that the creditors of the bankrupt estate would be no worse off were the Funding Agreement to stand. At present, they are creditors of a bankrupt estate with virtually no assets and the Funding Agreement may mean that they receive a dividend. However, in my opinion, this is not the relevant comparison. The trustee holds a chose in action which may, with a significantly less expensive funding agreement, yield a dividend for the creditors of the bankrupt estate. Sixthly, the Funder contends that if leave to disclaim is granted, it will have a substantial claim in the bankruptcy for the loss of the profit it may have earned under the Funding Agreement thereby increasing "the creditor pool". This is certainly a possibility, although the amount of any such claim is uncertain at this stage. However, if such a claim was made, the Funder would rank pari passu with the other creditors. Seventhly, the Funder pointed out that the trustee could assign his vested rights to a third party, including the Funder or Mr Tonner after his bankruptcy. That may be so, but I do not view it as a significant matter.
57 The Funder asked the Court to impose a condition on the grant of leave in the exercise of the power in s 133(5B) of the Act. It was said that the imposition of a condition that the trustee enter into an equivalent contract with a Funder Premium of 40% meets the statutory criteria of what is just and equitable. I do not accept this argument. No authority has been cited in which the Court has ordered a trustee in bankruptcy or liquidator to enter into a new contract. The problem with the Funding Agreement is not just with the amount of the premium, as I have explained. It seems to me that, in the ordinary case at least, it is not for the Court to rewrite the contract for the parties.