Cornelius v Coplex Resources NL

REASONS FOR JUDGMENT 1 The Court has before it a motion on notice whereby the liquidator of Coplex Resources NL ("the Company") seeks approval pursuant to s 477(2B) of the Corporations Act 2001 (Cth) ("the Act") to enter into a funding agreement in terms of a copy agreement annexed to the liquidator's affidavit sworn in support of the motion. 2 Approval from the Court or a committee of inspection or a resolution of creditors is required because the term of the agreement may end or obligations of a party to the agreement may be discharged by performance more than three months after entry into the agreement. 3 The liquidator explains in his affidavit why he has chosen not to put the matter to a committee of inspection or to the creditors and I accept his explanation. 4 The approach to be taken by a court to an application of this type has been discussed in several fairly recent authorities. They include Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1642, in particular at 1650 in relation to the Court's function; Re Spedley Securities Ltd (in liq) (1992) 10 ACLC 1742 at 1745; Carob Industries Pty Ltd (in liq) v Simto Pty Ltd (2000) 18 ACLC 177 at 181; Re Addstone Pty Ltd (in liq) (1998) 16 ACLC 1320 at 1330; Re Imobridge Pty Ltd (in liq) (1999) 18 ACLC 29 at 38-44; and Bendeich v Greatorex [2002] NSWSC 578 at [16]-[39]. Not all of those cases were applications of an identical type to the present one, but those that were not made under s 477(2B) are, in my view, strongly analogous. I shall not set out the various observations about the bases upon which the Court exercises its discretion in a matter such as this, but I have brought them to bear in deciding this motion. I now turn to the facts. 5 The Company was placed into liquidation on 22 July 2002. It is the events which took place between 16 May 1999 and 7 March 2000 and possibly for a period thereafter - see paragraph 7.4 of the liquidator's affidavit - which have resulted in this motion. In summary the evidence relating to those events is as follows. I should stress that in referring to this evidence I am not, of course, making any findings of fact. The evidence at this stage is solely in the form of the liquidator's affidavit and the annexures thereto. The evidence is untested. 6 On 16 May 1999, a Mr Michael Humphris was appointed administrator of the Company. From about June 1999 Mr Humphris negotiated with Helm Maritime SA, a Liberian company (based in Norway) ("Helm") to settle a Norwegian arbitration of disputes affecting the drilling rig "Galaxy Driller". The arbitration was settled by a Deed of Settlement made on 9 November 1999. As part of the terms of settlement Mr Humphris agreed to admit a proof of debt by Helm of US$11.273 million in the administration of the Company with the consequence that Helm became the Company's major creditor. Apparently the Company covenanted, under the Deed of Settlement, that its related entities would not prove for substantial debts. The Company had a number of non-related creditors, but they were in relatively small sums. 7 On 15 February 2000, the Company entered into an agreement to sell to Helm all its shares in Naftex Energy Corporation ("Naftex"), a Canadian listed company, in consideration of Helm releasing part of the debt owed to it by the Company. That part was expressed as being CAN$5.67 million. 8 On the same date, 15 February 2000, the Company entered a put and call option with Helm. The subject of that put and call option was all of the Company's shares in Petrolex Energy Corporation Inc ("Petrolex"). The consideration for the option was a release by Helm of the balance of the debt owed to it by the Company. The put and call option was conditional on the Company's directors approving a Deed of Company Arrangement. 9 On 2 March 2000, the Company entered into a Deed of Company Arrangement ("the DOCA") under which Mr Humphris and a Mr Lawrence Andrew Fitzgerald were appointed Joint Deed Administrators. The majority in number of the creditors voted against the DOCA at a creditors' meeting convened on 28 February 2000. Helm, as the creditor with an overwhelming majority of the debts, voted in favour of the DOCA and Mr Humphris (according to the evidence at present before the Court) cast his casting vote in favour of approving it. The consequence was that the Petrolex put and call option became unconditional. 10 On 7 March 2000, Mr Humphris and Mr Fitzgerald exercised the Petrolex put option for the Company and Helm became entitled to all of the Company's Petrolex shares. 11 The shares in Naftex and Petrolex were the Company's major assets. 12 The liquidator proposes to inquire into the circumstances in which the settlement of the Norwegian arbitration with Helm occurred whereby liability was admitted for almost the entire amount of Helm's claim (or the entire amount of the claim which was not frivolous). He also wishes to inquire into the circumstances in which the Naftex sale agreement, the Petrolex put and call option and the DOCA were made. Further the liquidator deposes to concerns about the fact that the put option was exercised at a time when, so his inquiries disclosed, a transaction was about to be completed which was likely to add significantly to the value of the Petrolex shares. He wishes to enquire about the reasons why Mr Humphris and Mr Fitzgerald did not enforce a provision of the DOCA under which Helm was to disgorge any value acquired by it in excess of the Helm debt. The liquidator deposes in his affidavit to the possibility that the value of the Petrolex and Naftex shares exceeded the Helm debt by a very substantial margin - many millions of dollars. He says that if Court proceedings are pursued, and they are successful, the major beneficiaries of a judgment will be the shareholders rather than the creditors of the Company. I take this to be a reference to the fact that of some $3.6 million owing to creditors, $3.4 million is owed to related entities, approximately $60,000 is owed in salaries having priority, leaving some $200,000 for other creditors. That is, if a substantial recovery is made, the external unsecured creditors stand to be repaid in full and, in terms of value to the shareholders, most of the benefit of the balance of the moneys (after deducting the amount payable to the proposed financier) will flow through to them. 13 The evidence is that the Company has in the order of 4,490 shareholders and that it is quite impracticable to canvass all their views about the proposal. I accept the liquidator's evidence, at paragraph 9.3 of his affidavit, in that regard. I note also the evidence that the directors and former directors of the Company who hold nearly 25% of the issued shares in the capital of the Company have negotiated the terms of the proposed funding agreement. I now turn to that agreement. 14 I do not think that it would be in the interests of those who stand to benefit from successful recovery proceedings (i.e. principally the shareholders) to set out much of the detail of the proposed agreement. 15 But I note that the financier has assumed liability to pay certain fees of the liquidator up to a stipulated maximum amount, the legal costs and disbursements of the Company in pursuing the proceedings proposed to be taken, and to indemnify the liquidator and the Company in respect of any adverse costs orders. 16 Out of any moneys recovered, the agreement requires the liquidator to reimburse any amount which the financier has advanced in respect of legal costs and disbursements and the liquidator's fees. He is also required to reimburse to the financier sums totalling $120,000 which are described as the "Fees" and which, in turn, are described as "Management Services" and a fee for assessing the documentary proposal provided by the liquidator to the financier when he sought funding. I shall refer further to this proposed payment in a moment. The balance then remaining is to be divided as to 40% to the financier and 60% to the Company. 17 As I have just mentioned, the agreement contemplates reimbursement to the financier of fees totalling $120,000. The "Management Services" for which a fixed sum of $100,000 is to be paid are defined as: "Assistance by [the financier] to the Lawyer [being the lawyers who will conduct the proceedings] in complying with their reporting obligation; assistance to the Lawyer in accounting in the agreed manner; ensuring appropriate payments are made pursuant to this Agreement." 18 It appears from the definitions clause and from Clause 5.3 of the funding agreement that there exists a "Lawyer's Fee Agreement" under which one of the obligations of the Lawyer is to comply with certain reporting and invoicing obligations. Clause 5.3 provides that the liquidator will instruct the Lawyer to comply with their reporting and invoicing obligations arising pursuant to the Lawyer's Fee Agreement. 19 There is no evidence before me about what might be involved in the assistance which the financier anticipates giving to the Lawyer in: · complying with their reporting obligation; · accounting in the agreed manner; and · ensuring appropriate payments are made pursuant to the Funding Agreement. 20 There is evidence that the financier has expended slightly over $100,000 in investigations to date of potential causes of action. But, on the face of it, the agreement refers to things which are to be done in the future. 21 I regard the provision for reimbursement of this sum of $120,000 as being a factor which weighs against granting the orders sought. 22 Another factor on that side of the scale is that the liquidator has not sought proposals to fund judicial proceedings from other potential litigation funders. 23 However, in his affidavit, the liquidator deposes to his reasons for not taking that course. I accept the weight and reasonableness of the reasons which he advances. Furthermore, I give weight to his evidence that the terms of the proposed funding arrangement are, in his view, reasonable and, in his experience, not out of line with "market rates". I do so partly on the basis that the liquidator is well known to be a very experienced insolvency practitioner. 24 I note that there are clauses in the proposed funding agreement preventing the financier from interfering in the conduct of the proceedings by the liquidator. 25 The proceedings contemplated are public examinations and any proceedings in relation to the administration of the Company which may be taken by the liquidator as a result of those examinations and upon the advice of his solicitors. 26 Applying and balancing the discretionary factors referred to in the cases which I have earlier listed, I am satisfied that it would be appropriate to make the orders sought. There will be orders as follows: 1. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), approval is given to Mr Garry John Trevor, liquidator of Coplex Resources NL ("the Company") to enter into a funding agreement in terms of the copy agreement annexed to the affidavit sworn by him on 7 October 2002 ("the Affidavit"). 2. The liquidator's costs of this application be paid out of the assets of the Company. 3. The Affidavit is to be placed forthwith in an envelope which is to be sealed and marked prominently with words to the effect that the envelope is not to be opened except by a Judge or pursuant to an order by a Judge.