CORPORATIONS - Liquidation - Corporations Act 2001 (Cth) ss 477(2B), 511 - Liquidators seeking direction that they are justified in compromising proceeding and approval under s 477(2B) - All significant creditors opposing settlement of proceeding - Creditors' views an important consideration - Role and adequacy of legal advice on settlement - Liquidators personally at risk of adverse costs if proceeding is discontinued - Relationship between ss 477(2B) and 511 - Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83, Corporate Affairs Commission v ASC Timber Pty Ltd

1 The applicants, Ross John McDermott and John Stuart Potts, are the joint and several liquidators of Lonnex Pty Ltd ('Lonnex'). Before the appointment of Mr Potts, Mr McDermott as sole liquidator caused Lonnex to commence a proceeding against Lonnex & Millennium Management Holdings Pty Ltd ('LMMH'). Lonnex sought, among other things, declarations that a release of debts which it gave to LMMH was an uncommercial transaction under s 588FB of the Corporations Act 2001 (Cth) ('the Act') and an unreasonable director-related transaction under s 588FDA, and judgment in the sum of $22,000,000.

2 Following a mediation, the applicants made applications under ss 477(2B) and 511 of the Act for orders directing that they are justified in compromising the proceeding and approving their entry into terms of settlement accordingly. An associate judge refused that application.[1] The applicants seek leave to appeal, principally on the basis that the associate judge's exercise of discretion miscarried. The Federal Commissioner of Taxation ('the Commissioner'), being the largest creditor in the liquidation, appeared in opposition to the liquidators' application, both before the associate judge and in this Court. In broad overview, the applicants say that the proposed settlement is a reasonable commercial outcome and that they have not been put in funds to contest the proceeding. The Commissioner disputes the wisdom of accepting the settlement and wishes to have a different liquidator appointed to pursue the litigation.

3 For the reasons that follow, while leave to appeal should be granted, the appeal should be dismissed.

4 Before 2011, Lonnex operated two medical practices, one in Mill Park and one in Caroline Springs. A related company, Millennium Management Pty Ltd ('Millennium'), operated practices in Greenvale and Footscray. On 2 February 2011, Lonnex and Millennium established a tax consolidated group by entering into a tax sharing and funding agreement, together with related entities.

5 On 3 February 2011, Lonnex sold its two clinics to LMMH for $22,000,000, to be payable at LMMH's option by way of intercompany loan. Millennium entered into a similar transaction, selling its two clinics to LMMH for $18,000,000. LMMH elected to pay the respective purchase prices by entering into the loans. On the same day, the loans (less some liabilities) were forgiven by Lonnex and Millennium by entry into a deed of forgiveness and release.

6 The effect of these transactions was that the assets of Lonnex and Millennium were acquired by LMMH, along with some of their liabilities. Other liabilities, principally owed to the Commissioner and the Commissioner of State Revenue, were left with Lonnex and Millennium. The owner of the shares in LMMH, Dr Geoffrey Edelsten, subsequently sold them to Independent Practitioner Network Pty Ltd, a subsidiary of Sonic Healthcare Ltd ('Sonic').

7 On 10 October 2012 Lonnex was wound up by a members' resolution. Millennium was wound up by court order on 29 May 2013 following an application by the Commissioner of State Revenue. The liquidator of Millennium is Mr Andrew Yeo. The proceeding that is the subject of the present application ('the Lonnex proceeding') was commenced on 8 October 2015. A corresponding proceeding concerning the Millennium transaction ('the Millennium proceeding') was commenced on 3 February 2015. That proceeding is not the subject of an application regarding settlement.

8 By its defence and counterclaim in the Lonnex proceeding, LMMH pleads that the debt forgiven by Lonnex was not $22,000,000 but an amount just over $20 million (taking account of some residual liabilities). It further pleads that it made other payments to creditors of Lonnex in accordance with the contract of sale and the deed of forgiveness and that the deed of forgiveness was only part of a larger composite transaction in which Lonnex acquired various benefits such that the impugned transaction was not uncommercial or unreasonable. By way of counterclaim, LMMH alleges that it was a term of the contract of sale that Lonnex represented and warranted to LMMH that it was solvent and that, if it was insolvent, LMMH had suffered loss and damage equal to its liability (if any) on the primary claim. Corresponding allegations are pleaded by LMMH in the Millennium proceeding.

9 On 16 June 2017, LMMH made an offer to the applicants to settle the Lonnex proceeding for a sum of money.[2] The applicants have formed the view that the offer is commercially acceptable, will meet their remuneration, costs and expenses and will provide a substantial return to creditors. The Commissioner, who is a creditor for more than $7.7 million in unpaid taxation liabilities, disagrees. The Commissioner of State Revenue and Mr Yeo also disagree.

10 Lonnex's creditors are the Commissioner ($7,768,606.47), the Commissioner of State Revenue ($264,179.77), perhaps Dr Edelsten ($3,641,065.34), Medicare ($5,000) and minor creditors (approximately $10,000). Since the sale of LMMH, Dr Edelsten has been declared bankrupt in the United States and his claim is now controlled by his Florida-based trustee in bankruptcy. The validity of the claimed debt is contested by the applicants and the trustee has not lodged a proof of debt. But in any event, the Commissioner, the Commissioner of State Revenue and the trustee in bankruptcy all opposed the proposed settlement.

11 The Commissioner funded the applicants to conduct the Lonnex proceeding up to mediation. Agreement has not been reached on further funding. In particular, the Commissioner was not prepared to pay an unlimited amount by way of potential future liability of the applicants to meet adverse costs orders. The applicants have spent more on the proceeding than the Commissioner has funded to date.

12 The Commissioner has sought to remove the applicants as liquidators. In letters dated 25 August 2017 and 6 September 2017 he sought their resignation or the convening of a creditors' meeting to consider a resolution removing them as liquidators. The applicants declined to hold such a meeting. The Commissioner indicated before the associate judge a preparedness to enter into discussions with Mr Yeo regarding further funding of the Lonnex proceeding, should he be appointed as liquidator in place of the applicants. Before this Court, senior counsel for the Commissioner confirmed that his client would be prepared to enter into a funding arrangement with Mr Yeo on the Commissioner's usual terms. The Court was also informed, without objection, that Mr Yeo had consented to act as liquidator of Lonnex.

(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

14 After the filing of the application, s 511 was repealed and replaced by the Insolvency Law Reform Act 2016 (Cth). Nevertheless, the associate judge upheld the applicants' submission that the principles which formerly covered applications under s 511 and its counterpart in respect of court-appointed liquidators, s 479(3), apply equally to the replacement provisions contained in the new Act's Insolvency Practice Schedule (Corporations), namely ss 90-15 and 90-20.[3] The case therefore proceeded as an application under s 511 and no issue was taken about this course before us.

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.

16 It is not in dispute that approval of the proposed settlement was required under this provision.[4]

17 The associate judge observed that no creditor supported the application and that the Commissioner, the Commissioner of State Revenue and Dr Edelsten's trustee in bankruptcy opposed it.[5] He held that the creditors' views were an extremely important factor to take into consideration, especially since they all opposed the application.[6] The associate judge quoted Re Spedley Securities Ltd (in liq) in which Giles J held that

the attitudes of creditors are important in applications such as the present. The acquiescence of creditors is important because, as was said by Lindley LJ in Re English Scottish & Australian Chartered Bank [1893] 3 Ch 385 at 409:

If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be.[7]

18 The associate judge then turned to the circumstances submitted by the applicants to justify making the s 511 direction, which he summarised as follows:

(a) the [applicants] have undertaken a substantial and potentially costly piece of litigation in the Supreme Court of Victoria against a well-funded defendant;

(b) the [applicants], on the other hand, have no funding to continue the action;

(c) the [applicants] are personally at risk of adverse costs if the proceeding is discontinued for want of funding or should it fail;

(d) there are various risks associated with the action, which have been the subject of a detailed opinion obtained from suitably qualified counsel;

(e) any recovery made in the proceeding will be primarily for the benefit of the Commissioner of Taxation, who stands equally to benefit from the claims made by Mr Yeo in the Millennium Proceeding. In short, the Commissioner of Taxation has two avenues to recover the same debt: the Lonnex Proceeding and the Millennium Proceeding. Even if the Lonnex Proceeding is compromised, the Millennium Proceeding remains on foot. The Commissioner of Taxation's ability to recover the entirety of its debt is thereby preserved and is not compromised in any way by settlement of the Lonnex action;

(f) the Commissioner of Taxation opposes the proposed settlement and has been critical of the [applicants'] conduct, particularly in relation to their observance of their obligations under the funding deed. The [applicants] are entitled to seek judicial advice in the face of such criticism and it is appropriate that they do so;

(g) the return to creditors, including creditors other than the Commissioner of Taxation, under the proposed settlement is substantial; and

(h) if the proceeding is not compromised, there is a substantial risk that it will fail and not only fail to return any benefit to creditors, but will leave the [applicants] unpaid in respect of substantial costs and out of pocket for legal and other expenses.[8]

19 The associate judge then addressed the eight matters relied upon in turn. As to the cost of the litigation, he noted that the applicants must have known that the litigation would be costly when funding was first sought.[9] As to future funding of the litigation, he recognised that the applicants had no funding to continue the action but held that it was clear from the evidence that the Commissioner wished to have the applicants removed as liquidators and for the Lonnex proceeding to be continued along with the Millennium proceeding.[10] He found that it was clear that there would be no more funding of the applicants by the Commissioner.[11]

20 In relation to the risk of adverse costs orders, the associate judge accepted that if the proceeding were to be discontinued for want of funding or to fail, the applicants would be personally at risk for adverse costs.[12] He considered that there was no evidence that the proceeding would be discontinued for want of funding. To the contrary, it would continue, conducted by Mr Yeo together with the Millennium proceeding.[13] The associate judge considered that the applicants' concern about their potential exposure to adverse costs orders was understandable.[14] However, he said that it was Mr McDermott who convinced the Commissioner that it was a good idea to proceed with the litigation and that 'he may now need to bear the risk'.[15]

21 As to the fourth matter, the risks associated with the litigation, the applicants tendered a confidential opinion from their counsel. The associate judge summarised the criticisms that were made of this opinion by the Commissioner. First, the opinion did not contain any analysis of the journal entries in Lonnex's books that might be relied on to support Dr Edelsten's proof of debt. The associate judge made no specific finding on this point. Secondly, the Commissioner submitted that the confidential advice should have assessed the probability that the bankruptcy decision Re Sims; Ex parte Sheffeld[16] might apply to limit the amount recovered to that required to discharge the company from insolvency (a sum of about $12,500,000) or whether the potential recovery would be the total value of the impugned transaction ($22,000,000), the balance being for the benefit of shareholders, as was said to be supported by Sons of Gwalia Ltd v Margaretic.[17] The associate judge did not specifically address this criticism.

22 The associate judge criticised the confidential opinion on the basis that where the opinion considered the dollar amount that changed hands when LMMH was acquired by Sonic the figure was referred to as '$XXXX'. The Commissioner submitted that knowing that precise figure was critically important in valuing the claim. The associate judge held that this part of the opinion was difficult to follow and should have been more precise.[18]

23 The associate judge also accepted an argument by the Commissioner that the opinion contained no assessment as to the prospects of success of the offsetting claim of LMMH, which alleged that LMMH had suffered loss and damage by virtue of a breach of warranty of solvency on the part of Lonnex.[19]

24 The confidential opinion was further criticised as lacking detail on the issue whether the amount proposed to be paid in full settlement of the claim was reasonable. The associate judge held that this was a valid objection.[20] He held that overall, the advice was insufficient and that the criticisms of the Commissioner were valid.[21]

25 The fifth matter relied upon by the applicants was that the Commissioner had two avenues to recover the same debt, the Lonnex and Millennium proceedings, and so his ability to recover the entirety of his debt would be preserved and not compromised in any way by settlement of the Lonnex proceeding.[22] The associate judge stated that the claims made by the applicants and Mr Yeo in the two proceedings mirrored each other and the defences raised by LMMH in both proceedings were almost identical.[23] He considered it 'remarkable' that in one proceeding the liquidators sought to accept the offer of settlement whereas in the other proceeding the liquidator refused to settle.[24] Mr Yeo submitted that the settlement of the Lonnex proceeding might allow the defendant in the Millennium proceeding to obtain a strategic advantage in dealing with the issue of loss by attempting to increase the apportioned value of the medical practices formerly owned by Lonnex.[25] The associate judge stated that he had doubts whether settlement of the Lonnex proceeding would affect the Millennium proceeding, but recognised that the possibility remained that there might be an argument in the Millennium proceeding along the lines suggested by Mr Yeo.[26] The associate judge concluded that 'this factor' was not important to the decision whether the settlement should be approved.[27] It appears that he meant by that, not that the possibility raised by Mr Yeo was not an important factor, but that the applicants' 'two avenues' of recovery point was not an important factor.

26 The associate judge next considered the sixth issue, being the applicants' entitlement to seek judicial advice in the face of the Commissioner's criticism. That in turn raised a question about whether the applicants had observed the requirements of a deed of indemnity entered into with the Commissioner. The associate judge decided that this had no bearing on the decision before him,[28] and no issue is now taken with that conclusion.

27 The applicants' seventh consideration was the return to creditors. The associate judge held that, depending on whether Dr Edelsten's trustee in bankruptcy lodged a proof of debt, the return to creditors would reflect 'not major returns' and that the creditors had decided that such returns were not in their interest.[29]

28 Finally, the associate judge addressed the risk that the claim would fail. He said that the 'creditors do not agree that there is a substantial risk that it would fail but are prepared to take that risk'.[30] Although the failure of the claim would leave the liquidators unpaid in respect of substantial costs and expenses, the associate judge concluded:

The [applicants] should be bringing the case for the creditors. [They] sought funding and funding was provided. Funding has now ceased. The [applicants] gave advice that the action should be brought and it has been brought. The [applicants'] self-interest, which is understandable, should not override the views of the creditors.[31]

29 The associate judge concluded by stating that, in the circumstances of the application, 'the views of the creditors must prevail'.[32] He stated that, while he understood the applicants' concerns, they had 'taken the risk and now they are stuck with it'.[33] The opinion had not shown that the settlement should be approved.

30 The associate judge did not separately consider s 477(2B). He set out the terms of s 511 and excerpts from authorities governing the approval of liquidators' compromises. He observed in passing that the applicants were 'also making application pursuant to s 477(2B) of the Act' and accepted the submission that entry into the settlement was not possible without the Court's leave pursuant to s 477(2B) because of the timing of the payments under the proposed settlement.[34] He did not otherwise refer to s 477(2B).

31 The applicants advance nine proposed grounds of appeal. However, neither the written cases nor the oral arguments proceeded by reference to the specified grounds. This places the Court in the unsatisfactory position of having to work out which submissions relate to which grounds. The most convenient course is to identify the grounds and then address the parties' arguments by reference to the points of substance advanced in oral argument.

32 The applicants allege in proposed ground 1 that the associate judge erred, or his discretion miscarried, because he failed to give any or sufficient weight to the following matters:

(a) the absence of funds or assets in the liquidation of Lonnex other than the claims in the Lonnex proceeding;

(b) the unavailability of external funding to continue the Lonnex proceeding or to meet an adverse order for costs;

(c) the applicants' accrued entitlements to remuneration and repayment of costs and expenses;

(d) the applicants' exposure to personal orders for costs if the Lonnex proceeding fails or is discontinued;

(e) the absence of any legal opinion, other than that of the applicants' counsel, as to the prospects of success of the Lonnex proceeding;

(f) the fact that a substantial offer has been made to settle the Lonnex proceeding, which would meet the applicants' remuneration, costs and expenses and provide a substantial return to creditors;

(g) the liquidators' opinion as to the merits of the proposed settlement; and

(h) the Commissioner's entitlement to prove in the liquidations of both Lonnex and Millennium for the same debt.

33 Under the second ground, the applicants submit that the associate judge erred, or his discretion miscarried, in that he gave weight or excessive weight to the following matters:

(a) the attitude of creditors to the proposed settlement;

(b) the fact that the applicants had instituted the Lonnex proceeding in the knowledge that it would be substantial and potentially costly litigation against a well-funded defendant;

(c) the associate judge's alleged belief that Mr Yeo would continue the Lonnex proceeding 'without funding'; and

(d) counsel's confidential advice as to the prospects of success of the Lonnex proceeding.

34 The applicants' third proposed ground of appeal is that the associate judge erred in concluding that, as Mr McDermott had 'convinced' the Commissioner that it was 'a good idea to proceed' with the Lonnex proceeding, the applicants were, or might be, obliged to bear the risk of exposure to costs.

35 Under their fourth proposed ground the applicants allege that the associate judge erred in concluding that, having undertaken the risk associated with commencing the Lonnex proceeding, the applicants were 'now stuck with it', despite the absence of ongoing funding.

36 The fifth proposed ground is that the associate judge erred in finding that the confidential advice of the applicants' counsel was insufficient and that the Commissioner's criticisms of it were valid.

37 The sixth proposed ground is that the associate judge erred in regarding Dr Edelsten's trustee in bankruptcy as a creditor of Lonnex.

38 By proposed ground 7, the applicants allege that the associate judge gave excessive weight to the proof of debt submitted by Dr Edelsten and no weight, or insufficient weight, to the failure of his trustee in bankruptcy to lodge a proof of debt.

39 Proposed ground 8 alleges that the associate judge erred in regarding the views of Mr Yeo, as 'a factor (albeit not an important factor)'.

40 By proposed ground 9, the applicants contend that the associate judge erred, or his discretion miscarried, in failing to give reasons, or adequate reasons, for refusing leave under s 477(2B).

41 The parties' written and oral submissions, as mentioned earlier, were not organised by reference to the grounds of appeal. Instead, argument proceeded on the following issues:

(a) the significance of the fact that funding of the litigation and the applicants' past and future expenses and liabilities had not been secured: proposed grounds 1(a), (b), (c), (d), 2(b), (c), 3, 4 and 8;

(b) the significance of the creditors' opposition to the proposed settlement: proposed ground 2(a);

(c) the relevance and content of the legal opinion: proposed grounds 1(e), 2(d) and 5;

(d) whether the proposed settlement was in the interests of creditors (including whether Dr Edelsten's trustee in bankruptcy was a creditor): proposed grounds 1(f), (g), (h), 6 and 7.

The funding issue - proposed grounds 1(a), (b), (c), (d), 2(b), (c), 3, 4 and 8

42 The applicants stated in their written submissions that their main point was that the absence of funding to maintain large scale litigation is an overriding factor in determining whether it is appropriate for a liquidator to settle a proceeding. It was submitted that, if litigation cannot be maintained due to a lack of funding, it matters little that creditors disapprove of the proposed settlement or what view counsel takes as to the merits and risks of the action. Counsel for the applicants contended that there was no evidence to suggest that the Commissioner would fund an alternative liquidator to litigate the Lonnex proceeding and that the affidavit evidence merely suggested that the Commissioner would enter into negotiations with a new liquidator.

43 The applicants submitted that the suggestion that the liquidators were 'stuck with' the litigation, having commenced it, was wrong in fact and law. Plaintiffs are able to discontinue litigation and liquidators may decide that this course is commercially acceptable. The applicants referred to s 545(1) of the Act which states that 'a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property'. This meant that the applicants could not be compelled to continue the Lonnex proceeding without funding.

44 The Commissioner submitted that the applicants were seeking to take issue with the weight attached to relevant factors by the associate judge, rather than pointing to error of the kind described in House v The King,[35] which the applicants had to establish in order to review the exercise of judicial discretion under s 511. It was submitted that the associate judge had taken account of relevant factors and had not treated the applicants as obliged to fund the litigation merely because they had started it.

45 In any event, the Commissioner submitted, it was wrong to say that the applicants were obliged by the associate judge's decision to pursue the litigation at their own expense. Counsel for the Commissioner argued that it could be inferred that the Commissioner would fund Mr Yeo to take over as liquidator of Lonnex. As already mentioned, after taking instructions, counsel informed the Court that Mr Yeo had signed a consent to act as liquidator of Lonnex, that the Commissioner wished the Lonnex proceeding to continue, and that he would make an offer to fund the proceeding on its usual funding arrangement if run by Mr Yeo.

46 The applicants submitted that the relevant standard under s 511 is that the Court's approval should be granted unless there is a finding or allegation of impropriety or unreasonableness in the decision to settle.

47 It was argued that the associate judge had misapprehended his role by determining whether the proposed settlement was commercially prudent. The purpose of s 511 was to enable liquidators to be protected against allegations of impropriety, unreasonableness or breach of duty, not to have the court exercise a commercial judgment on their behalf. The applicants cited Sanderson v Classic Car Insurances Pty Ltd for the proposition that the court 'will only embark in itself considering the commercial view of the liquidator if there is some serious problem in which it is alleged that there is some want of good faith, or some erroneous approach in law or in principle'.[36] Young J held that:

The court does not usually consider it proper to intervene and make the liquidator's commercial decision for him. Indeed, the court is always reluctant to credit itself with any degree of competence in this field at all.[37]

48 The applicants further submitted that the associate judge mistakenly treated the views of the creditors as paramount, rather than carefully considering all relevant factors and according them appropriate weight according to the circumstances of the case.

49 The applicants cited Re Allebart Pty Ltd (in liq) for the proposition that where a liquidator has received funding from a creditor, this involves

the ever-present risk that the liquidator may either yield or appear to yield to partisan considerations in submitting to the urgings of a creditor in conjunction with accepting financial assistance from a creditor. A liquidator is bound to be on guard lest he compromise his position of independence and impartiality in all respects in the discharge of his functions as an officer of the Court administering the winding up of a company. Not only is it his prerogative to decide what steps should be taken, but it is his duty to exercise himself, according to the dictates of his own opinions, what should and what should not be done in the course of any given winding up. It is for him to decide what steps are to be taken, and when, how and by what means such steps are to be taken. Where he draws upon financial assistance from a creditor, it is incumbent upon him to ensure that he does not place in jeopardy his independence in the discharge of his duties.[38]

50 It was submitted that a liquidator must not act at the dictation of creditors and can act in what he or she perceives as the best interests of creditors even where the creditors are opposed. If creditor opposition to the settlement is irrational or not supported by evidence then those views should be given less weight in a s 511 application. The applicants contended that the Commissioner and the Commissioner of State Revenue had not fully articulated why they opposed the settlement. On that basis it was submitted that the mere fact that a creditor wants a different outcome is not a basis for denying a s 511 application unless it can be established that the liquidator is not acting in a reasonable or proper manner in compromising the proceeding.

51 The Commissioner submitted that the overriding duty of a liquidator is to serve the interests of the creditors.[39] The matters raised by the applicants related to their own interests rather than those of creditors. Moreover, the interests of creditors were plainly relevant to the exercise of the judicial discretion under s 511 and the associate judge was entitled to give them significant weight, as he did.

Legal opinion - proposed grounds 1(e), 2(d) and 5

52 The applicants addressed the criticisms made of the confidential legal opinion by the associate judge. In response to the criticism that the opinion did not analyse Dr Edelsten's alleged debt (and the journal entries underlying a potential proof of debt), the applicants submitted that Dr Edelsten's proof of debt had no relevance to the merits of the proceeding.

53 In relation to the alleged failure of the opinion to address the Re Sims and Sons of Gwalia issue, namely whether recovery in the Lonnex proceeding would be capped at the value of the creditors' claims (plus costs of the liquidation), the applicants submitted that there is no authority for the proposition that the liquidators would be entitled to recover the full value of the transaction. They described the possibility as absurd and not requiring full analysis in the opinion.

54 As to the opinion's treatment of the prospects of success, counsel for the applicants accepted that the opinion did not put a percentage on the prospects of success. However, it was submitted that the role of the legal opinion was to state the legal issues and identify the strengths, weaknesses and risks in the proceeding rather than to comment on what the commercial judgment of the liquidator should be.

55 The 'XXXX' in the legal opinion was explained as an oversight, as the advice given to the associate judge was a draft version without the calculated figure. Nevertheless, it was submitted that in context the 'XXXX' was plainly a reference to the amount paid by Sonic for the acquisition of the LMMH shares.

56 Finally, the applicants suggested that, even if there were deficiencies in the legal opinion, they were not fatal to the s 511 application.

57 Counsel for the Commissioner repeated the criticisms made of the opinion by the associate judge and emphasised that the opinion did not explain how the amount of the compromise was reasonable, nor did it analyse the strength of the claim or likely damages. In that regard, the opinion also did not evaluate the offsetting claim for breach of warranty. As a result, the applicants had failed to demonstrate to the associate judge that they were justified in accepting the compromise.

Whether the settlement was in the interests of creditors - proposed grounds 1(f), (g), (h), 6 and 7

58 The applicants submitted that if the Lonnex proceeding was settled there would be a fund of cash, and the creditors would not have lost anything because they would still be able to recover their debts through the Millennium proceeding, which the proceeds of settlement would help to fund.

59 Counsel for the Commissioner submitted in response that there would be adverse consequences for the Millennium proceeding if the Lonnex proceeding were to be settled. First, if the Lonnex proceeding were to be settled, the defendant in the Millennium proceeding might seek to ascribe a higher market value to the Lonnex assets and a lower value to the Millennium assets. Secondly, if the Lonnex proceeding were to be settled, that would limit what the Millennium proceeding might be settled for in the future, especially as the Lonnex proceeding involves the larger claim.

60 The applicants also submitted that the associate judge erred in treating Dr Edelsten as a creditor and in having regard to the trustee in bankruptcy's opposition to the settlement. It was submitted that there was no evidence to support this and that the trustee had declined to lodge a proof of debt. The Commissioner did not address this issue.

Failure to give sufficient reasons for the s 477(2B) refusal - proposed ground 9

61 The applicants submitted that the associate judge failed to give any reasons for refusing the s 477(2B) application. He did not state that it was refused for the same reasons as the s 511 application. They submitted that it cannot be inferred that the associate judge refused the s 477(2B) application for the same reasons, because different factors govern the applications. Whereas s 511 provides for judicial advice, the refusal of which would still allow a settlement to occur, approval under s 477(2B) was required in order for the proposed settlement to occur.

62 The Commissioner argued that in light of the findings made by the associate judge in relation to the application for directions under s 511, it necessarily followed that the applicants were unable to satisfy s 477(2B). He submitted that creditors are generally the best judges of their commercial interests, and their views are an important discretionary factor in relation to any approval of a compromise under s 477(2B).

63 As the associate judge was exercising discretionary powers under ss 511 and 477(2B), it is necessary for the applicants to demonstrate that he acted on a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts, failed to take into account some material consideration, or reached a conclusion so unreasonable or plainly unjust that the appellate court may infer the existence of error.[40]

64 A review of some of the authorities concerning applications by liquidators for authorisation or directions concerning compromises is necessary. Before doing that some more general principles need to be stated.

65 Courts recognise that they are generally unqualified and ill-equipped to make or approve of business and commercial decisions.[41] Thus, courts are loath to interfere with the commercial judgment of liquidators on matters within their powers, and will not give directions to liquidators on such matters where no issue arises in relation to a legal matter or in relation to the propriety or reasonableness of the decision.[42] This does not inhibit courts from giving directions to liquidators in relation to the compromise of legal proceedings. The compromise of legal proceedings invariably raises legal issues, although it also usually requires the exercise of commercial judgment. As will be seen, liquidators often seek directions concerning the compromise of legal proceedings, and the courts give such directions when persuaded it is appropriate to do so.

66 Where an issue arises as to the interests of creditors, courts adopt the approach articulated by Lindley LJ in an oft-quoted passage of his judgment in Re English, Scottish, & Australian Chartered Bank, where he said:

If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be.[43]

67 An appropriate starting point for a review of authorities concerning applications by liquidators for authorisation or directions in relation to compromises is the decision of Giles J in Re Spedley Securities Ltd (in liq).[44]

68 Spedley was an application for authority to compromise, and for directions that the liquidators were justified in compromising, claims both by and against the insolvent companies. The application was made under the Companies (NSW) Code ('Code'), that is, under the legislation as it was prior to the Company Law Reform Act 1992 (Cth) which introduced major reforms consequent upon the recommendations of the Harmer report.[45] Under the Code the provision concerning compromises, s 377, required authorisation in much wider circumstances than the current ss 477(2A) and 477(2B).

69 The reasons of Giles J commenced by considering s 377 (authorisation to compromise). He stated that the liquidator's power to compromise, when authorised to do so, was directed to achieving the efficient winding up of the company, that is, the collection and distribution of its assets for the general benefit of creditors (and contributories if there is any surplus). That in turn meant that in controlling the liquidator's exercise of that power the court 'looks to the interests of creditors' and asks whether the compromise is in their interests. The court might find that the compromise was for the benefit of all concerned even if some creditors did not agree.[46]

70 Giles J characterised s 377 (authorisation to compromise) as empowering the liquidator to do what he or she would otherwise lack power to do so. In contrast, the power to give directions (under the Code, s 379(3)) existed to guide the liquidator's conduct and afford protection against allegations of breach of duty.[47]

71 Giles J 'doubted' that any 'separate issue' existed in relation to directions, observing that, if authority was given pursuant to s 377 (authorisation to compromise), it 'will follow' that the liquidators are justified in exercising the power they will then have.[48]

72 Giles J then turned to consider the significance of the commercial judgment of the liquidator in an application under s 377 (authorisation to compromise). In observations which also touched upon the relevance of legal advice, Giles J stated:

In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator ... That is not to say that it rubber stamps whatever is put forward by the liquidator but ... 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 in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected ... to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.[49]

73 Significantly, Giles J went on to say that it is for these reasons that the attitudes of creditors are 'important' in applications such as those before him. In that connection he quoted the passage from the judgment of Lindley LJ in Re English, Scottish, & Australian Chartered Bank set out earlier.[50]

74 Giles J recognised that both the commercial judgment of the liquidator and the attitudes of creditors were important in applications of this kind.

75 After the Company Law Reform Act 1992 (Cth) and the introduction of reforms as a result of the Harmer report, Austin J decided Corporate Affairs Commission v ASC Timber Pty Ltd.[51] One of the matters before Austin J was an application by a liquidator for approval under s 477(2B) to enter into long term contracts for the disposal of certain of the company's assets. The proposed contracts were not to be completed for some years.

76 Austin J set out the relevant history of s 477(2B) and, in particular, its genesis in the recommendations of the Harmer report. He observed that the thrust of the relevant reforms was to remove restrictions which had existed requiring liquidators to seek approval from the creditors or the court before taking certain actions. Generally, the relevant Harmer recommendation was to remove those restrictions, but some restrictions were recommended to remain and a restriction concerning long term commitments (of any kind) was one. Austin J explained that the purpose of s 477(2B) was to give effect to this recommendation by restricting the unfettered exercise of powers in circumstances where that might not be conducive to 'an expeditious and beneficial administration'.[52]

77 Austin J emphasised that the focus of attention under s 477(2B) was the potential for agreements entered into by the liquidator, having a long term duration, to lead to delay in the finalisation of the administration.[53]

78 Austin J described what he considered to be the proper approach to be adopted by the court on an application under s 477(2B) as being

to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the 'expeditious and beneficial administration' of the winding up...[54]

79 He observed that this approach meant that approval could be granted in more 'circumscribed proceedings' than would be the case if the court's function were to reconsider all the issues which the liquidator had weighed up in what would amount to a 'hearing de novo'. Austin J observed that, given this position

the Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter.[55]

80 Austin J's analysis of the way the court should deal with an application under s 477(2B) in CAC v ASC Timber (repeated in Warne v GDK Financial Solutions Pty Ltd[56]) has been extensively and, it seems, universally adopted: Re Gate Gourmet Australia Pty Ltd (in liq),[57] Stewart, Re Newtronics Pty Ltd,[58] Re The Bell Group Ltd (in liq); Ex parte Woodings,[59] Re One.Tel Ltd,[60] Re Great Southern Managers Australia Ltd (in liq); Ex parte Jones,[61] Re Great Southern (in liq); Ex-parte Great Southern Ltd,[62] Lewis v LG Electronics Australia Pty Ltd [No 2],[63] and Robinson, Re Reed Constructions Australia Pty Ltd (in liq).[64] Gordon J's summary of the relevant principles in Re Newtronics is more often cited than Austin J in CAC v ASC Timber.

81 Giles J's approach in relation to the interrelationship between an authorisation under s 377 of the Code and directions has not been the approach adopted in relation to s 477(2B).

82 In Re One.Tel Brereton J considered an application by liquidators for approval of a deed of settlement under both ss 477(2A) and 477(2B) and for directions under s 511 concerning their conduct in entering into that deed of settlement. In relation to s 477(2B) Brereton J adopted the principles originally articulated by Austin J in CAC v ASC Timber, as repeated and summarised by Gordon J in Re Newtronics and by Hasluck J in Re Bell Group. Brereton J explained that the fact that approval under s 477(2B) did not amount to an endorsement of the proposed agreement or an approval of the transaction itself meant that, unlike a direction under s 511 or 479(3), an approval under ss 477(2A) or 477(2B) in itself would not exonerate the liquidator from personal liability.[65]

83 Brereton J emphasised the importance of directing attention to the subject matter of the two relevant provisions of s 477. Section 477(2A) is concerned with the compromise of 'debts' which would otherwise be assets in the administration. The 'interests and wishes of those affected by the compromise, chiefly the creditors, are a major consideration'.[66] Section 477(2B), on the other hand, is concerned with the effect of long term agreements. The 'interests and wishes of those affected, particularly creditors, should be highly influential in determining whether the liquidator should assume' such obligations.[67] The 'main consideration' in that context is 'the impact of the agreement on the duration of the liquidation'.[68]

84 Brereton J explained that the effect of a direction under s 511 was to sanction a course of conduct so that the liquidator could adopt that course free from the risk of personal liability for breach.[69]

85 Comparing the respective applications, Brereton J said:

But the fact that a direction under s 511 ― unlike an approval under s 477(2A) or s 477(2B) ― exonerates the liquidator from personal liability, means that a closer examination of the liquidator's decision is required than under s 477. In short, the court should not make a direction the effect of which is to exonerate the liquidator from personal liability in respect of a commercial judgment that the liquidator is concerned may prove contentious, unless satisfied that the liquidator's decision is, in all the circumstances, a proper one.[70]

86 Brereton J observed that as the inquiry under s 511 is the wider inquiry the convenient approach was to deal with that first.[71] In that context he considered in some detail the reasons given by the liquidators for the compromise emphasising, amongst other things, opinions which had been obtained from two members of senior counsel, and the fact that the committee of the creditors had unanimously approved the compromise.[72]

87 Brereton J dealt with the application under s 447(2B) very briefly. He simply observed that there were obligations in the deed of settlement which would be performed more than three months after the deed was entered into but that the persistence of those obligations would not 'unduly protract the litigation and are not inconsistent with its expeditious completion'.[73]

88 Brereton J gave directions (although not of the width sought by the liquidators) and made orders under ss 447(2A) and 477(2B).

89 Similar applications came before Pritchard J in Re Great Southern-Jones.

90 In relation to the application under s 511, Pritchard J said:

In the case of an application under s 511 of the Act, the Court's focus will be on whether the giving of the direction will be just and beneficial (that is, advantageous) in the winding up of the company. Determining whether the direction should be given will necessarily involve a broad consideration of matters including the nature of the proposed course of action about which the direction is sought, the circumstances relevant to that proposed course of action (especially those said to warrant the making of the direction), the reasons for and consequences of that proposed course of action (and in the case of a proposed compromise of litigation, the liquidator's commercial judgment that the proposed settlement should be pursued), and in those cases involving the determination of a legal issue relevant to that decision, the principles relevant to the determination of that issue. All of these matters will be considered for the purpose of determining whether the liquidator would be justified in taking the proposed course of action, within the overall context of the liquidation.

Ordinarily the liquidator will be expected to obtain legal advice appropriate to the nature and value of the claims the subject of the proposed compromise. However, the absence of such advice is not of itself a reason to refuse to grant a direction.[74]

91 As to the application under s 477(2B) of the Act, Pritchard J adopted the approach originally articulated by Austin J in CAC v ASC Timber as summarised by Gordon J in Re Newtronics,[75] as has been done in the other cases cited earlier.

92 The principles to be drawn from this review are the following:

(1) The nature of the inquiry undertaken by the court when approval is sought under s 477(2B) in relation to a proposed compromise of litigation is different from the nature of the inquiry the court undertakes under s 511 when a liquidator seeks directions in relation to such a compromise.

(2) On a directions application the court must be positively persuaded that the liquidator's decision to enter into the compromise is, in all the circumstances, a proper one. This necessarily involves a broad consideration of all the relevant circumstances. A direction will exonerate the liquidator.

(3) In contrast, the discrete consideration of an application under s 477(2B) involves a more circumscribed inquiry. The court reviews the liquidator's proposal, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene. An order under s 477(2B) does not constitute an endorsement of the proposed compromise. An approval will not exonerate the liquidator.

(4) Given that the nature of the inquiry undertaken in relation to the directions application is broader than that under s 477(2B), it would usually be convenient to deal with the directions application first, and often that consideration would substantially overtake any discrete consideration of the application under s 477(2B).

(5) The court always pays due regard to the commercial judgment of the liquidator, and, on both applications, the attitudes of creditors are also important.

(6) On both applications, but particularly the application for directions, it would ordinarily be expected that a liquidator would have obtained appropriate legal advice in relation to the proposed compromise, and the nature and content of that advice is a relevant consideration.

(7) While the focus of s 477(2B) is delay, the inquiry under s 477(2B) still requires consideration of the substance of the proposed compromise. If a related application for directions reveals either that the directions should, or should not, be given, discrete consideration of the application under s 477(2B) may be superfluous.

93 It can be seen that the authorities present a tension in the circumstances of the applications the subject of the present case. The liquidator is ordinarily best placed to determine what course the liquidation should take, in the interests of creditors, any contributories and the proper recovery of the costs and expenses of the liquidation. The court will generally not enter into the merits of that determination, confining itself to the question whether the proposed course is a proper one for the liquidator to take. At the same time, the interests and wishes of creditors are highly influential and the creditors are, if properly informed, in the best position to evaluate what is in their own interests. As such, the views of the creditors as to the merits of the present proposal are a highly material consideration.

94 It is now possible to return to the arguments raised by the parties.

95 First, it is apparent that it cannot be said that the absence of funding to conduct litigation is an 'overriding factor', if by that it is meant that the outcome of the applications is dictated by that consideration. The question whether the liquidator's proposed course of action is proper will involve more than this single factor. In the present case, that required consideration of the relevance of the Millennium proceeding and the possibility that Mr Yeo might be placed in funds to conduct the Lonnex proceeding. In circumstances where the source of those funds would be the principal creditor, this served to highlight the importance in this particular case of the attitude of creditors to the proposed compromise of the Lonnex proceeding.

96 Section 545 of the Act does not alter that position. It does not follow from the fact that a liquidator cannot be compelled to incur expenses in respect of which there are no funds for reimbursement that the court is obliged to approve the compromise of litigation to which the company is a party. At the very least, the question must require consideration of the terms of the compromise. Moreover, the liquidator in that position is not always without alternative options. Here, for example, the liquidators could resign so that Mr Yeo could be appointed.

97 In light of the associate judge's reliance on the views of creditors, his reasons are not to be taken to assert any general rule that, once a liquidator has commenced litigation, it must be continued irrespective of the availability of funds. Such a principle would run counter to s 545. The associate judge was merely describing the effect of refusing approval of a compromise, namely that so long as the liquidator remains in office, he or she is 'stuck with' its existence until the matter is either determined or a different compromise is achieved. In a case where compromise between the parties to litigation has not been achieved, it might be proper for the liquidator to discontinue litigation if funds to conduct it are unavailable. No party suggested that this would be so in the present case. The associate judge was right to describe the outcome of his analysis in the terms he did.

98 Secondly, the associate judge was correct to regard the wishes of creditors as a very important consideration. He would have erred not to have done so. But it is clear that he did not consider himself bound to act in accordance with their wishes. He took account of other matters, including the funding position, the Millennium proceeding and the legal opinion, before deciding that the applicants' applications should be dismissed. In doing so, he was not acting at the 'dictation' of creditors. He was recognising that their interests were highly influential in the exercise of his discretion.

99 It cannot be said that the views of creditors were irrational or unsupported by evidence. The preparedness of the Commissioner to fund the Millennium proceeding and to entertain funding Mr Yeo to conduct the Lonnex proceeding is indicative of a carefully made commercial decision on the part of the Commissioner. There was also considerable force in the Commissioner's argument that the compromise of the Lonnex proceeding might impact adversely on the conduct of the Millennium proceeding.

100 Thirdly, it is true that any deficiencies in the legal opinion were not of themselves a reason to refuse to approve the compromise. But the associate judge did not suggest that they were. He found substance in the criticisms that were made of the legal opinion and took that into account. Those criticisms meant that the opinion did not support a conclusion that the proposed course of conduct was a proper one.

101 The associate judge did not err in this respect. The opinion did not explain why the amount of the compromise was reasonable. It may be accepted, as the applicants submitted, that it is not the role of lawyers to assess the commercial reasonableness of a course of action. But lawyers do identify the strengths and weaknesses of a legal position and ascribe degrees of risk accordingly. The opinion here did not do that. It did not assess the overall strength of Lonnex's claim or the amount of damages that it would yield if successful, beyond identifying some features of the case which might lead to a recovery below the full amount of the claim (including the Re Sims point). Nor did it evaluate the strength of the offsetting claim for breach of warranty. While affording grounds for settling the proceeding, it therefore offered little support for the view that it would be proper for the applicants to enter into the particular compromise proposed.

102 In another case this might not have mattered. But here there was an alternative course of action, advocated by the creditors and which one of them had indicated a preparedness to fund. It was necessary for the applicants to establish that, notwithstanding those matters, the compromise was a proper one.

103 The criticisms that were made regarding the opinion's treatment of Dr Edelsten's proof of debt and the Re Sims point, standing alone, might have had little if any weight. But in the context of the opinion's failure to evaluate the likely financial outcome of the proceeding, these matters can be seen to be part of a wider problem. The same may be said of the somewhat cryptic reference to '$XXXX'. Each of these matters which the opinion addressed provided grounds for apprehending that the claim might not succeed in whole. But the opinion did not go further and evaluate the overall prospects of success in light of these matters.

104 Fourthly, the applicants contended that the settlement was in the interests of creditors. The observation of Lindley LJ in Re English, Scottish & Australian Chartered Bank warns the Court against entering into this territory. The creditors plainly take a different view and have rational grounds for doing so.

105 Nothing turns on the question whether the associate judge erred in treating Dr Edelsten as a creditor and having regard to his trustee in bankruptcy's opposition to the compromise. On any view of the matter, all the principal creditors were of the same mind.

106 Finally, although the associate judge did not separately address the application under s 477(2B), he had decided that it was not appropriate to give the applicants the direction they sought under s 511 in circumstances where all the principal creditors saw their interests as being opposed to that course. Equally, in the unusual circumstances of the case, conferring power to enter into the compromise would be contrary to the interests of creditors and it therefore followed that the application under s 477(2B) should be refused. The reasons for refusing each application were largely the same in this instance. The allegation of a failure to give reasons is therefore not made out.

107 In summary, the associate judge took account of the issues regarding funding, the desires and wishes of the creditors, the commercial decision of the liquidators, the legal opinion and the relevance of the Millennium liquidation and proceeding. It has not been shown that, in weighing those matters, he applied a wrong test, ignored relevant matters or took account of things that were irrelevant to his decision. It was open to him to reach the decision he did. He was not bound to grant the relief sought, on the material before him. Error in the exercise of the associate judge's discretion has not been established.

108 Leave to appeal should be granted but the appeal should be dismissed.

[1] Re Lonnex Pty Ltd (i_n liq)_ [2017] VSC 734 ('Reasons').

[2] In light of the fact that the litigation remains on foot, these reasons do not disclose the sum.

[7] Reasons [51], quoting Re Spedley Securities Ltd (in liq) (1992) 9 ASCR 83, 85-6.

[16] (1896) 3 Mans 340.

[35] (1936) 55 CLR 499.

[36] (1985) 10 ACLR 115, 117 (Young J) ('Sanderson'), citing Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382, 383 and Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207, 231-2.

[38] [1971] 1 NSWLR 24, 28 (Street J).

[39] Re Ascot Vale Self Storage Centre Pty Ltd [2015] VSC 751 [25] (Judd J).

[40] House v The King (1936) 55 CLR 499, 505 (Dixon, Evatt and McTiernan JJ).

[41] Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207, 232 (Street CJ in Eq) and Re Ansett Australia Ltd [No 3] [2002] FCA 90; (2002) 115 FCR 409, 422 [47] (Goldberg J) ('Ansett').

[42] Ansett [2002] FCA 90; (2002) 115 FCR 409, 428-9 [66]; Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, 116-7 (Young J).

[43] [1893] 3 Ch 385, 409.

[45] Australian Law Reform Commission, General Insolvency Inquiry (Report No 45, 13 December 1988).

[51] (1998) 29 ACSR 109 ('CAC v ASC Timber').

[56] (2006) 233 ALR 181, 194 [57]-[60].

[57] [2005] NSWSC 392; (2005) 23 ACLC 834, 836-7 [10] (Einstein J).

[58] [2007] FCA 1375 [26] (Gordon J) ('Re Newtronics').

[59] [2009] WASC 235 [55]-[59] (Hasluck J) ('Re Bell Group').

[60] [2014] NSWSC 457; (2014) 99 ACSR 247, 253-4 [26] (Brereton J) ('Re One.Tel').

[61] (2014) 9 BFRA 555, 564 [42], 571-2 [75]-[78] (Pritchard J) ('Re Great Southern-Jones').

[62] [2015] WASC 171 [34] (Beech J).

[63] [2016] VSC 63; (2016) 48 VR 450, 471 [73], 472-4 [78]-[80] (Sifris J).

[64] [2017] FCA 594 [34]-[36] (Gleeson J).

[65] Re One.Tel [2014] NSWSC 457; (2014) 99 ACSR 247, 253-4 [26].

[74] Re Great Southern-Jones (2014) 9 BFRA 555, 568-9 [63]-[64] (citations omitted).