Corporate Affairs Commission v ASC Timber Pty Ltd

GLEESON J: 1 On 16 August 2019, I made an order pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (Act) approving the plaintiffs' entry into a litigation funding agreement (funding agreement) on 15 August 2019, as well as ancillary orders. These are my reasons for making those orders.

Background Facts 2 In June 2017, this Court made orders deferring the deregistration of Liquor National Pty Ltd (in liq), Wine National Pty Ltd (in liq), Print National Pty Ltd (in liq) and Print National Australia Pty Ltd (in liq): James, in the matter of Liquor National Pty Ltd (in liq) v Liquor National Pty Ltd (in liq) [2017] FCA 721. The orders were made on the application of Mr James, the sole director of each of these four companies at the time of the commencement of their winding up. Jagot J set out the relevant background at [4]-[6]: [4] The relevant group of companies was part of a wine conglomerate. Rabobank held security over some companies in the group in respect of funds advanced to those companies to the amount of about $25 million and ANZ held security over other companies in the group in respect of funding advanced to those companies in the amount of about $12 to $13 million. [5] In 2013, ANZ appointed receivers to the ANZ funded companies, which triggered events of default under the contractual arrangements with Rabobank. Accordingly, Rabobank subsequently appointed receivers to the Rabobank funded companies. [6] The plaintiff submits that in the course of the liquidation of the companies, various unlawful actions by the ANZ receivers resulted in substantial detriment to the companies including trespass to or conversion of chattels and sale of assets at an undervalue. The plaintiff, over a relatively lengthy period of time, has sought to bring derivative actions against ANZ and the receivers on behalf of the companies in the Supreme Court of New South Wales, and has been unsuccessful for various reasons including lack of funding. 3 Her Honour noted (at [10]) that the evidence included a proposal for appointment of a liquidator who would be funded "up to the amount of only $50,000 for the purpose of enabling, if considered appropriate by the liquidator, investigation, including possible examinations of relevant persons, to determine whether the identified claims against ANZ and the ANZ receivers should be pursued". 4 Subsequently, in October 2017, her Honour appointed David Hurst (the first to seventh plaintiffs in various capacities) as special purpose liquidator (SPL) of the four companies above: James, in the matter of Liquor National Pty Ltd (in liq) v Liquor National Pty Ltd (in liq) (No 2) [2017] FCA 1154 (Liquor National 2). Her Honour explained the purpose of Mr Hurst's appointment as SPL at [3], as: [T]o examine affairs relating to the conduct of the ANZ receivers and ANZ Bank which the plaintiff, Mr James who is the former principal of the companies and asserts rights as a creditor of them, claims caused loss and damage to the companies. 5 At [12], her Honour noted that Mr James' mother, Irene James, had undertaken to provide initial funding of Mr Hurst in the amount of $50,000, and a further $50,000 should it appear that further investigation was warranted. 6 At various times between November 2014 and October 2017, Mr Hurst was also appointed as the liquidator of James Estate Wines Pty Ltd (in liq), Sundara Pty Ltd (in liq) and Killara 10 Pty Ltd (in liq). Mr James was the sole shareholder of each of these companies. These three companies together with the four companies of which Mr Hurst is SPL are, collectively, the Rabobank companies. 7 Following his appointments, Mr Hurst identified potential claims that each of the Rabobank companies have or may have against the ANZ receivers and the ANZ. The potential claims are set out in a draft statement of claim that was proposed to be filed in the Supreme Court of New South Wales on 16 August 2019, including trespass, conversion, negligence, and a claim for economic loss. The draft statement of claim alleges that the companies have suffered losses totalling $57.1 million. 8 However, the examinations contemplated by Jagot J have still not been conducted and Mr Hurst's proposal to file the statement of claim on 16 August 2019 was intended to avoid the possible expiry of a limitation period on 19 August 2019. Mr Hurst's intention is to refrain from serving the statement of claim until after examinations have been conducted. 9 Counsel for the plaintiffs, Mr Baird, explained that the failure to conduct examinations before now was attributable to litigation that has been occurring between Mr James and ANZ over the past two years. Mr Baird said that this litigation had diverted funding away from the proposed examinations.

The Agreement 10 On 15 August 2019, Mr Hurst entered into a document entitled "Litigation Funding Deed" with Mrs James. 11 Mr Hurst relied on two affidavits in support of his application for approval of the funding agreement, both sworn on 16 August 2019. Mr Hurst's evidence was that he now wishes to conduct the investigations for which he was appointed as SPL and that he now seeks to have summons issued for public examinations of six identified persons pursuant to s 596B of the Act, and for the production of books and documents by four identified persons and entities. Mr Hurst also seeks an expedited hearing of the proposed examinations. 12 An amount has been deposited into a trust account for payment of the costs of the proposed examinations pending approval of the funding agreement. The agreement also provides for further funding in the event the Mr Hurst decides to pursue the claims set out in the draft statement of claim. Mr Hurst stated his beliefs that the terms of the funding agreement are commercially reasonable, and that he had entered into the agreement in good faith to effectuate the purposes for which he was appointed as SPLs. According to Mr Hurst, Mrs James is the only realistic source of funding. 13 Mr Hurst noted that he had not sought approval from creditors of the companies to enter into the funding agreement because Rabobank is the secured creditor who may have an interest in the proposed proceedings, having opposed his appointments as SPLs, and Mr James, who is the major unsecured creditor, clearly supports it. 14 Mr Hurst also sought a confidentiality order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) in relation to the agreement and several paragraphs of one of his two affidavits, which described the terms of the agreement. This order was sought on the basis that the agreement contains confidential and commercially sensitive information that, if disclosed, would provide any defendants in the proposed litigation with an unfair advantage.

Legal Principles 15 Section 477(2B) of the Act qualifies the general power of liquidators under s 477(2)(m) to "do all such things as are necessary for the winding up the affairs of the company and distributing its property". 16 The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 (Cassegrain) at [11] per Black J citing McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]. 17 In Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]: 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. 18 The Court's task is to satisfy itself, having regard to the liquidator's commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, Re Newtronics Pty Ltd [2007] FCA 1375. 19 In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24], the Full Court endorsed the following comprehensive list of factors relevant to the Court's assessment of a proposed litigation funding agreement: (1) the liquidator's prospects of success in the litigation; (2) the nature and complexity of the cause of action; (3) the extent to which the liquidator has canvassed other funding options; (4) the level of the funder's premium; (5) the liquidator's consultation with creditors; and (6) the risk involved in the claim (including the amount of costs likely to be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the defendant's costs if the action is not successful, or towards any order for security for costs). 20 A liquidator should seek the Court's approval before entering into a long term agreement. However, the Court may give retrospective approval to an agreement under s 477(2B) in appropriate circumstances: Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425at [43].

Consideration 21 I have read the agreement, which was tendered as a confidential exhibit. 22 It is unsatisfactory that approval of the funding agreement was sought after a significant delay following the deferral of company deregistrations to enable investigations that are only now funded, and at the last minute before the expiry of a limitation period. 23 However, Mr Baird submitted that this delay is explained by the continuing litigation between Mr James and the ANZ, to which the matters that Mr Hurst seeks to examine are related. I was prepared to accept that explanation. 24 Although the prospects of the proposed litigation are not yet known, the quantum of the potential claims are significant and I had no reason to doubt that they should be investigated. On the available evidence, there was no reason to conclude that Mr Hurst's entry into the agreement was other than a proper exercise of his powers, or to conclude that it was an ill-advised or improper act on his part. The agreement was signed only the day before the approval application was made. In those circumstances, I was satisfied that it was appropriate to approve Mr Hurst's entry into the funding agreement under s 477(2B) of the Act and to grant the approval sought nunc pro tunc. 25 Further, I accepted that the information contained in the agreement is confidential and commercially sensitive. In the circumstances, I considered that an order pursuant to s 37AF of the Federal Court Act should be made in the terms sought. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

First Schedule NSD 1313 of 2019 Plaintiffs Fourth Plaintiff: DAVID HURST IN HIS CAPACITY AS SPECIAL PURPOSE LIQUIDATOR OF PRINT NATIONAL AUSTRALIA PTY LTD (IN LIQUIDATION) (SPECIAL PURPOSE LIQUIDATOR APPOINTED) (ACN 132 502 697) Fifth Plaintiff: DAVID HURST IN HIS CAPACITY AS LIQUIDATOR OF JAMES ESTATE WINES PTY LTD (IN LIQUIDATION) (ACN 062 569 444) Sixth Plaintiff: DAVID HURST IN HIS CAPACITY AS LIQUIDATOR OF SUNDARA PTY LTD (IN LIQUIDATION) (ACN 003 647 130) Seventh Plaintiff: DAVID HURST IN HIS CAPACITY AS LIQUIDATOR OF KILLARA 10 PTY LTD (IN LIQUIDATION) (ACN 085 902 174)

Second Schedule No: NSD1313/2019 Federal Court of Australia District Registry: New South Wales Division: General LIQUOR NATIONAL PTY LTD (IN LIQUIDATION) (SPECIAL PURPOSE LIQUIDATOR APPOINTED) (ACN 100 586 776) WINE NATIONAL PTY LTD (IN LIQUIDATION) (SPECIAL PURPOSE LIQUIDATOR APPOINTED) (ACN 100 586 785) PRINT NATIONAL PTY LTD (IN LIQUIDATION) (SPECIAL PURPOSE LIQUIDATOR APPOINTED) (ACN 132 502 697) PRINT NATIONAL AUSTRALIA PTY LTD (IN LIQUIDATION) (SPECIAL PURPOSE LIQUIDATOR APPOINTED) (ACN 107 512 649) JAMES ESTATE WINES PTY LTD (IN LIQUIDATION) (ACN 062 569 444) SUNDARA PTY LTD (IN LIQUIDATION) (ACN 003 647 130) KILLARA 10 PTY LTD (IN LIQUIDATION) (ACN 085 902 174)