DCT v Currockbilly

Supreme Court of NSW|2002-10-15|Before: Mr J, Macready J

CITATION : DCT v Currockbilly [2002] NSWSC 1061 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 1657 of 2001 HEARING DATE(S) : 14 and 15 October 2002 JUDGMENT DATE : 12 November 2002

PARTIES : Deputy Commissioner of Taxation v Currockbilly Pty Ltd JUDGMENT OF : Acting Justice Macready at 1

COUNSEL : Mr J Svehla for applicant SOLICITORS : Baker & McKenzie for applicant CATCHWORDS : Corporation - winding up. Application under s564 of the Corporations Act by creditor who granted indemnity and provided funds for liquidator to conduct examinations under Part 5.9. - Held: Litigation in the first limb of s564(a) included examinations under Part 5.9. A cause of action is property within the second limb of s564(a) which may be preserved so long as there has been a settlement of the cause of action and the proceeds recovered. State Bank of New South Wales v Brown [2001] NSWCA 223 Re Kyra Nominees Pty Ltd (1987) 5 ACLC 811 The Bell Group Ltd v Westpac (1996) 15 ACLC 8 Attorney General v Lord Sudeley [1896] 1 QB 354 at 359 Re Gleadell Pty Ltd (1991) 9ACLC 1014 Kingston v Keprose Pty Ltd No 3 (1987) 11 NSWLR 404 Norcol Pty Ltd v D'Amato (1988) 15 NSWLR 376 at 382, 384 and 388-9 CASES CITED : Proust v Blake (1989) 17 NSWLR 267 Blake v Norris (1990) 20 NSWLR 300 Fiorentino v Irons (1997) 79 FCR 327 Cheney v Spooner (1929) 41 CLR Re Interchase Corp Ltd (1996) 68 FCR 481 Re BPTC Ltd (No 2)(1992) 29 NSWLR 713 Doran Constructions Pty Ltd (in Liq) [2002] NSWSC 215 Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 13 ACLC 1569 DECISION : Paragraph 56

1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1657/2001 Deputy Commissioner of Taxation v Currockbilly Pty Ltd (Formerly known as Camsons Trading Pty Ltd) and William James Hamilton JUDGMENT 1 His Honour: This is an application brought by Mr Hamilton, the liquidator of the defendant ("the company"), by way of an amended interlocutory process filed 24 September 2002. The application is made under s 564 of the Corporations Act and seeks an order that certain creditors of the defendant receive 100 percent of any funds available to unsecured creditors in the liquidation of the defendant at an equal percentage rate of their debt claimed. 2 Notice of the application has been given to all the creditors of the defendant company and there has been no appearance by any of them to oppose the application. 3 The application is made in respect of a recovery by the liquidator of the two amounts. The first is the amount of $432,573.54 which amount was recovered as a result of settlement of threatened legal proceedings against Lurose Pty Ltd and the directors of the defendant company. The other amount related to the recovery of an overpayment made to an overseas supplier of $35,734.93. The background history 4 The company went into liquidation on 31 May 2001 and Mr Hamilton, an experienced liquidator, was appointed official liquidator. On 18 January 2001 the company had sold the whole of its business to another company Funtastic Ltd. On the sale one of the directors of the company became an employee of Funtastic Ltd. 5 After Mr Hamilton's appointment he took steps to obtain the books and records of the company from the directors. He made written demands upon Mr Mark Camiller for the books on 4 June and 14 June 2001 and made numerous telephone calls to him. He offered to pay for couriers to collect the books which were in Melbourne. Late in June and early in July there were a number of promises to deliver the books of the company to the liquidator. No books were delivered by 3 August when the liquidator made a report in respect of a meeting of creditors to be held on 21 August 2001. 6 On 4 June 2001 the liquidator also required the directors of the company to prepare and file a report as to the affairs of the company. The directors ignored the requests and their failure to file a report as to affairs was reported to ASIC. 7 In his report of 3 August 2001 Mr Hamilton referred to the difficulties that he had in knowing the position of the company. He indicated that it was likely that the company was insolvent at the time of sale of the company's business to Funtastic Ltd. In his report he suggested that there be examination of the directors of the company and some selected directors of Funtastic Ltd. He raised the fact that as the liquidation had no funds it would be necessary for creditors to indemnify the liquidator in respect of any examination under part 5.9 of the Corporations Law. 8 At the meeting on 21 August it was decided by all creditors present except the Australian Taxation Office that the creditors would be willing to indemnify the liquidator for the purpose of examining the directors under section 597 of the Corporations Law should it be decided that an examination was necessary. Mr Mark Camiller appeared at the creditors' meeting on 21 August and promised to deliver up the books within 10 days. Despite reminders this was not done and ultimately it was necessary for the liquidator to have a summons issued for the production of the books and records. On 13 October 2001 the liquidator eventually received 13 boxes of books and records from Mark Camiller. 9 The first examinations were held on 26 and 27 November 2001. As a result of a further examination on 20 December 2001 a formal demand was sent to Lurose Pty Ltd, an associated company controlled by Jamie Camiller, a director of the company. Further public examinations were held in February 2002. The liquidator, after this further examination, had sufficient information to enable him to recommend to the creditors they proceed with litigation. He reported to the creditors in respect of the investigations and sought indemnity in order to commence litigation. That was not forthcoming and in a further report to the creditors on 21 March 2002 the liquidator sought approval from the creditors to seek litigation funding to conduct the claims that he had been advised to bring. 10 This report was considered at the meeting of 8 April 2002 and the creditors approved the liquidator entering into a funding agreement to fund the proceedings against Lurose Pty Limited and the directors in respect of uncommercial transactions and an insolvent trading claim. 11 Following the conclusion of all the public examinations, copies of transcripts had been provided to DTA Lawyers who at that stage had acted for Peter Camiller, one of the directors of the company. A lawyer from that firm had been present in court throughout Mr Peter Camiller's public examination. On 16 April 2002 DTA Lawyers attended a without prejudice meeting at the liquidator's office to discuss the potential claims against their client. An offer to settle was made by the liquidator. 12 On 23 April 2002 the liquidator entered into a letter of agreement with Insolvency Fund concerning an interim funding arrangement. As a result of the examination of the documents and records obtained through the examination process the liquidator had prepared an insolvency report that indicated that the company was insolvent as far back as 30 June 2000. In the course of the negotiations this was shown to DTA Lawyers in support of the position taken by the liquidator. This led to an ultimate settlement of claims which settlement was achieved on 12 June 2001. It recovered for the liquidator $425,000 plus some interest. It was thus not necessary for the liquidator to commence proceedings. 13 The total claim that might have been recovered after litigation was in the order of $850,000. The settlement of the claim at the lower figure was clearly justified as unfortunately the costs of funding increased substantially if litigation was commenced. The funding costs rose from $30,000 to over $300,000 if this in fact happened. This with the costs of the proceedings and the passage of time meant the settlement was as effective as a final receipt of the claim after successful litigation. 14 The liquidator reported on settlement to the creditors and this was considered at a meeting of the creditors on 5 August 2002. The meeting resolved that the liquidator apply to the court under s 564 of the Corporations Act for orders that the indemnifying creditors be given a priority over unsecured creditors so that they received full payment of their debts prior to the other creditors receiving a dividend. Six creditors totalling all $1,174,237.37 voted for the motion and two creditors voted against it representing debts of $55,008.55. The liquidator has accordingly brought forward the present application. 15 The amount of the funds that are now available for distribution by the liquidator amount to $160,030.57. If only the indemnifying creditors (amounting to $1,073,688.65) are admitted for a dividend they will receive 14.90 cents in the dollar. If all creditors (amounting to $1,246,078.23) are ranked pari passu the creditors will receive 12.8 4 cents in the dollar. 16 The liquidator sought and received a written indemnity from a large number of creditors in respect of the cost to be incurred in the examination. In addition he received from the creditors contributions to those costs. These contributions of $30,269.23 covered the cost of the examinations and will be returned to the creditors. The legal principles applicable 17 Under s 555 of the Corporations Act all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately. An exception to this general principle appears in Section 564 of the Corporations Act which provides as follows: -- "564. Power of Court to make orders in favour of certain creditors Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them. " 18 The present application has a number of unusual aspects. In the ordinary case creditors indemnify a liquidator in respect of the cost of litigation brought for the recovery of property. That did not happen in this case and the indemnity was only in respect of the liquidator's costs incurred in the public examinations. The litigation against the relevant persons was not in fact commenced and the claims that the liquidator wished to bring were settled prior to the step of commencing proceedings. The application also involves the creditors who indemnify the liquidator receiving the whole of the amount recovered. This circumstance is becoming more common nowadays although originally it was not favoured. 19 In State Bank of New South Wales v Brown [2001] NSWCA 223 the majority of the court expressed the object of S 564 in the following terms: "I accept that it is not the object of the section to encourage litigation for the sake of litigation, or for the private benefit of creditors who provide the indemnity or the funds. In my opinion, there are two public purposes involved in the encouragement of pursuit of claims by liquidators, namely to benefit creditors and shareholders generally, and to recover property from wrong-doers and thus discourage misconduct in relation to corporations. In my opinion, both purposes may be advanced by the grant of an advantage of 100 per cent of the recovered funds to supporting creditors in appropriate cases. Plainly, such a benefit can support the objective of recovering property from wrong-doers. In my opinion also, the grant of a 100 per cent advantage in cases where recovery turns out to be relatively small can also support the objective of benefiting creditors generally, by encouraging the support of litigation in cases where there is a prospect of a large recovery which would inure for the benefit of all creditors, but which may in certain eventualities result only in a small recovery. Of course, if a 100 per cent advantage is too readily granted in such cases, this could unduly encourage the settling of claims for less than their reasonable value; but this risk can be taken into account when settlements are approved, as well as in applications by supporting creditors to be given an advantage." Protection or Preservation of a cause of action 20 Before considering the risk assumed by the indemnifying creditors and whether they should receive a 100 per cent advantage it is necessary to determine whether the circumstances of the present matter fit within the requirements of subsection (a) of s 564. The liquidator submitted that he fell within both limbs but primarily within the second limb of the subsection. I will deal with this aspect first. 21 Section 9 of the Corporations Act defines property in these terms: "Property means any legal or equitable stable interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action." 22 The meaning of the expression "thing in action" has varied from time to time but that expression is now used to describe all personal rights of property that can be claimed or enforced only by action, and not by taking physical possession. See Halsburys Laws of England, Fourth Edition, Vol 6, Para 1. The question of whether such cause of action falls within the word "property" when used in s 564 has been the subject of some debate. There are two cases of interest, namely, Re Kyra Nominees Pty Ltd (1987) 5 ACLC 811 and The Bell Group Ltd v Westpac (1996) 15 ACLC 8. 23 The first case is the decision of Franklyn J of the Western Australian Supreme Court who was concerned with s 292(10) of the former uniform Companies Act, which was in similar terms to s 564 of the Corporations Act except for the use of the word "assets" instead of "property". At page 816 His Honour addressed the question of what were the assets at the time of litigation which were protected or preserved. He said: "The asset of the company in each case as it then existed was a chose in action, being the right to recover moneys. In the [first action] it was established by the judgment that the company was entitled to $20,000. In the [second] action the claim was compromised but the fact that such compromise involved payment to the company of $1,000 reveals that some right to recover was seen by the defendant to exist, and consequently in my view it follows that I should find that in fact there was at the time of the payment by the creditors in each such case an asset. ... In my opinion, although at the date the moneys were paid the assets in question were no more than choses in action which were protected or preserved by the funds enabling the actions to be prosecuted, the expression in the section 'distribution of those assets' necessarily extends to the distribution of the realisation of the assets. To hold to the contrary would mean that only moneys or other assets capable of being distributed in specie amongst all the creditors who made the requisite payment could be the subject of an order under the section. In my view this is not in accord with the intent of the Act and would produce an absurd and quite inequitable result." 24 In The Bell Group Ltd v Westpac Templeman J, also of the Western Australian Supreme Court, was dealing with an application under s 564 which was made before the proceedings in respect of which creditors were considering indemnifying the liquidator were complete and in respect of which there had been no recovery. Apparently the liquidator sought to obtain an order under s 564 because he feared that the indemnifying creditors would not fund litigation if they did not know that orders would be made under the section. 25 Templeman J adopted the comments of Franklyn J in Kyra Nominees Pty Ltd and then proceeded to deal with the question that was before him which was whether an order could be made pursuant to s 564 before judgment had been obtained. His Honour considered the various cases that refer to or deal with the nature of choses in action. He referred to the comments of Lord Escher MR in Attorney General v Lord Sudeley [1896] 1 QB 354 at 359 to the following effect: -- "A lawsuit may be a suit in equity, or an action at law. In either case the question to be determined by it is -- what were the rights of the parties before the suit or action was commenced? The lawsuit does not create the right; it determines authoritatively that there was, before it began, a right, and it determines what the right was and is. What is called a "right of action" is not the power of bringing an action. Anybody can bring an action, though he has no right at all. The meaning of the phrase is, the person has a right or claim before the action which is determined by the action to be a valued right or claim. The action or suit does not confer a right which did not exist before it; it only declares that a right did exist before it. An action or suit is therefore mere procedure." 26 His Honour noted that there were many provisions in the Corporations Act which referred to property and must of necessity include choses in action prior to their adjudication by a court. 27 His Honour then decided not to follow Re Gleadell Pty Ltd (1991) 9ACLC 1014 where White AJ held that in similar circumstances to that facing Templeman J he could make an order. Templeman J was of the view that Kyra Nominees, followed by White AJ, was authority for the proposition that the proceeds of a chose in action can fall within the ambit of s 564 but is not authority for the proposition that an order could be made before the chose in action had been established by judgment 28 He then referred to a submission that a consideration of s 564 as a whole leads to the conclusion that the provision was not intended to apply to an asserted chose in action. At page 17 he said the following: "The respondents submitted further that a consideration of s564 as a whole leads also to the conclusion that the provision was not intended to apply to an asserted chose in action. The first limb of para (a) relates to property which "has been recovered". The second limb refers to property which "has been" protected or preserved. The Oxford Dictionary meaning of the verb to protect is to defend, guard against injury, shield from attack; whereas to preserve means to keep or retain, to keep safe, to keep in existence. These expressions, it is submitted, are applicable to property which is already in the hands of the liquidator and which needs to be safeguarded in some way. The recovery of property is the exclusive preserve of the first limb. And this can apply only after the existence of the property has been established. It may be said that expenditure of money on the issue of a writ to prevent the expiration of a limitation period does involve the protection of a cause of action in the liquidator's possession. However, until the outcome of the litigation is known, it cannot be said that "the property" has in fact been protected. Money spent purportedly on the protection of a claim may prove to have been spent for no good purpose. I accept the respondent's submission in relation to the construction of s564, viewed as a whole. I accept also the respondent's submission that because an order made in advance of litigation must be hypothetical, or of uncertain operation, it is unlikely that Parliament ever intended s564 to apply in those circumstances. These are considerations which apply equally to the exercise of the discretion. I shall deal with them under that head. Having considered all the submissions made to me by the applicants, I am not persuaded that the court has any jurisdiction to make an order under the second limb of s564(a) for the distribution of the proceeds of a claimed chose in action until that claim has been established by a judgment." 29 Although Templeman Js conclusion requires the claim to be established by judgment, His Honour was not faced with the factual circumstances in this case. His Honour's reasoning seems to have two strands. The first is that s 564 was not intended to apply to an asserted chose in action and the second is that until the outcome of litigation is known, money spent purportedly on the protection of a claim may prove to have been spent for no good purpose. A judgment verifies the existence of the right of action. The fact that a settlement does not necessarily prove the existence of a valid chose in action brings into play the first reason why Templeman J found as he did. It is interesting to note his conclusion as to the protection of the cause of action in the liquidator's possession. This echoes the words of Franklyn J in Kyra Nominees on this aspect. Templeman J, although conceding that there may be protection of the cause of action, refers to the fact that until the outcome of litigation is known it cannot be seen that the property has in fact been protected. This is so and it is probably the fundamental reason why an application under section 564 may be premature unless property that is the cause of action has in fact been preserved. 30 A settlement, although not authoritatively establishing a cause of action, involves the award of money in exchange for the release of the cause of action. In the vast majority of settlements, liability will not be admitted, and so the agreement to settle cannot verify the existence of a cause of action. Parties settle claims for a variety of reasons, without conceding that the claim itself has merit. And yet, an award under a settlement validates the money spent in protection or preservation of the asserted claim to the extent that it proves it to have been spent with good reason. However the outcome is determined, whether by settlement or judgment, the section requires the outcome to be known prior to an order being made, so that it can be seen that the chose in action has been protected or preserved.

31 In my view it is appropriate to construe the section having regard to the purpose of the legislation: See Kingston v Keprose Pty Ltd No 3 (1987) 11 NSWLR 404 per McHugh JA at 423; see also Norcol Pty Ltd v D'Amato (1988) 15 NSWLR 376 at 382, 384 and 388-9. The purpose of s 564 is clearly to encourage the pursuit of claims by liquidators, both for the benefit of creditors and shareholders, and for the recovery of property from wrongdoers. To construe the section narrowly by holding that a chose in action is property which has been preserved or protected only where established by judgment would defeat the purpose of the legislation. The section ought to be given a wider meaning to include what Templeman J describes as an asserted cause of action at the stage when the facts, that are alleged to be the protection or preservation of the cause of action, occurred.

32 To construe the section otherwise defeats the purpose of the legislation. A liquidator who has received a favourable settlement offer would be forced to reject it and seek judgment in order to be eligible for an order under s564. In such cases the amount awarded on judgment, once eroded by costs, may well be less than that offered on settlement. In such a case, the creditors and shareholders recoup less and the liquidator is forced to spend money on litigation costs that need not have been incurred, but for the restrictive operation of s564. In addition the waste of court time and resources in circumstances where a mutually acceptable settlement offer is available is contrary to public policy. In my view, a broader construction of the section gives a coherent meaning to it and best serves the intention of the legislation. 33 The preferable construction in my view is that until it can be established that the cause of action has been protected or preserved and that there is property available, whether as a result of judgement or a settlement, such that there can be a distribution, an application under the section is premature. The court cannot determine what is just with respect to the distribution until the property available for distribution has been determined. The matters in subsection (a) predate the task of the court when it has to consider what is just in respect of property that is to be distributed. There is no difficulty caused by including what is an asserted cause of action as an item of property that may be protected or preserved because the court has to make a factual finding to that effect. Cases where an asserted cause of action has no foundation at all are unlikely to result in a finding that the cause of action has been protected or preserved. 34 I turn to the question of whether the cause of action was protected or preserved. 35 Clearly a cause of action accrues when material facts occur so that the right to sue upon a cause of action is a claim to curial redress or remedy based upon events that have happened. Such cause of action may be lost in a practical sense by the loss of the means of proving it in court. It is a common experience that many claims may, in practical terms, be lost if documents are not available or are missing, witnesses die or memories fade. Logically the uncovering of facts so that a cause of action becomes apparent could be said to be preservation of the cause of action as it may then be realised by action. 36 The liquidator submitted that the very funding of the public examinations by the indemnifying creditors together with the related production orders was a crucial factor which enabled him to gather in sufficient evidence, to prepare an insolvency report, make detailed demands on the directors and achieve the pressure needed to persuade the directors and Lurose Pty Ltd to agree to the settlement. The facts that exist in this case certainly support the submission by the liquidator. Documents were only made available through the examination process and the evidence that was obtained in the examination process enabled detailed proposed claims to be articulated, documented and put to the proposed defendants. Franklyn J who did not allow recovery of costs of examinations did not seem to have the detailed evidence, which I have in this case, to establish a causal connection between the examination and the result achieved. 37 To the extent that these matters occurred, in a practical sense it can be said that what was achieved by the examination process was a protection or preservation of the chose in action. Giving a meaning to protect and preserve in a practical sense is consistent with the object of the section to which I have referred above. Recovery under an indemnity for costs of litigation 38 The liquidator also submitted that in the circumstances the present case would fall within the first limit of subsection (a). In this regard it was submitted that the word "litigation", when used in the section, would comprehend an examination of any directors, orders for production of books and examination of others connected with the company. In particular he referred to the provisions of Part 5.9 of the Corporations Act and the procedures set out therein dealing with such examinations. He referred to the public nature of such examinations, the control of the court over such examinations and the effects on parties examined. 39 The Shorter Oxford English Dictionary definition of litigation is: "1. The action carrying on a suit in law or equity; legal proceedings 1647. b the practice of going to law 1785. 2. Disputation (now rare) 1567." 40 Accordingly, if the examination can be characterised as "legal proceedings" it may be "litigation" for the purposes of s564(a). A number of authorities have considered the meaning of the term "proceedings".

41 In Proust v Blake (1989) 17 NSWLR 267 Samuels JA and Matthews J held that: "the word 'proceedings' is a protean one which will take meaning from its context."

42 The court took a similar approach in Blake v Norris (1990) 20 NSWLR 300 where the question was whether there could be a transfer of only part of a proceeding. The relevant Act used the term "proceeding" rather than "proceedings" and the question was the meaning of the term "proceeding". The court considered a number of dictionary definitions and concluded that: "The word 'proceeding' is capable of such a variety of meaning that dictionary definitions as to its ordinary or natural meaning are not of much use… Any assistance as to its meaning has to be derived from the statutory context and the objects of the legislation in question."

43 The authorities appear to take a broad approach to the meaning of the word "proceedings" and one which relies heavily upon the context in which the word is used: see also Fiorentino v Irons (1997) 79 FCR 327. A number of decisions have specifically considered the status of liquidator's examinations under Pt 5.9.

44 In Cheney v Spooner (1929) 41 CLR 532 Isaacs J and Gavan Duffy J held that a liquidator's examination took place in a "proceeding", namely the winding up. Starke J took a different approach and said that a civil proceeding included any application by a suitor to a court in its civil jurisdiction for its intervention or an action and included a liquidator's application for examination. He referred to the adoption of this approach in English cases.

45 In Re Interchase Corp Ltd (1996) 68 FCR 481, Kifel J held that an examination under s596B of the Corporations Law was a "proceeding" in a Federal Court, within the meaning of s4(1) of the Evidence Act. She stated: "The examinations referred to in Div.1, Pt 5.9 of the Corporations Law are conducted by the court upon application to it, whether that be by a judge or by registrars acting under delegation…While it is not like usual court proceedings and is in the nature of a facilitated investigation by one party, s 4 of the Federal Court of Australia Act 1976 (Cth) in its definition of 'proceeding' does not require that all proceedings be inter partes." 46 In Re BPTC Ltd (No 2)(1992) 29 NSWLR 713 McClelland J held that examination proceedings were part of proceedings in the court and that accordingly the provisions of Part 36 r 12(1) applied to them.

47 In Doran Constructions Pty Ltd (in Liq) [2002] NSWSC 215 the court considered whether the Evidence Act applied in relation to examinations under Pt 5.9 of the Corporations Act. Section 4 of the Evidence Act provides that it applies to "all proceedings in a NSW court". Following consideration of the authorities, Campbell J applied the Evidence Act on the grounds that the word "proceedings" is a word applicable to a liquidator's examination.

48 The foregoing authorities support the proposition that a liquidator's examination under Pt 5.9 is a "proceeding". The appellation of the word "legal" to "proceedings" in the dictionary definition of "litigation" gives the context to the word "proceedings". It thus ceases to be protean. There is however another contextual matter that assists. 49 If one goes to the words in s 564(a), namely, "property has been recovered under an indemnity for costs of litigation" it can be seen that the recovery is linked to the giving of an "indemnity". It is not linked directly to litigation. There is thus no reason to suggest that the property must be recovered by an order in the proceedings. Accordingly, I am of the view that the word "litigation" when used in s 564(a) would comprehend examination proceedings under Pt 5.9. It is up to the court considering the matter to determine that there exists the necessary causal connection between the recovery and the indemnity. 50 In this case the evidence demonstrates a sufficient causal connection. The risk assumed by the indemnifying creditors 51 This has to be considered at the time that the creditors made the decision to indemnify the liquidator in August 2001. In State Bank of New South Wales v Brown Hodgson JA said: "In relation to Santow J's use of hindsight, in my opinion no error is shown in this respect. In my opinion, the words "risk assumed" in s.450 refer primarily to the risk as reasonably perceived by the funding or indemnifying creditors at the time of making payments or giving indemnity. However, in my opinion actual outcomes are relevant to assessing what risk would reasonably have been perceived at the earlier times when payments were actually made or indemnities given. In my opinion, that is essentially the way in which hindsight was used by Santow J in this case. Furthermore, plainly actual outcomes, including comparisons as to amounts spent and amounts actually recovered, are relevant to the exercise of discretion." 52 It will be recalled that the liquidator had not been able to obtain any books and records from the directors and had no report as to the company's affairs. In his report for August 2001 he dealt with only his analysis of the sale of the business of the company to Funtastic Pty Ltd. In his discussion on recovery of voidable transactions, uncommercial transactions, insolvent trading and breach of fiduciary duties his report clearly shows the difficulties facing him in regard to the lack of information. All his comments in the report were guarded although he spoke of his suspicions that insolvent trading had occurred and suspected that the directors may not have acted with due diligence in respect of the sale of the company's business. 53 It seems to me that there was a substantial risk that nothing may be uncovered in the examination. The process of the examination and different views, which the liquidator formed from time to time as it progressed, emphasise the difficulties in respect of the claims and their amount. A consideration of the report of 3 August 2001 shows very little evidence of facts to found actions.

54 In Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 13 ACLC 1569 Brownie J provided a useful summary of what has to be considered in assessing the risk. He said: "The last words of section 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances." 55 In the present case only a small number of creditors did not join in giving the indemnity. The amount that has been recovered is a reasonable sum having regard to the expenditure that was incurred on its recovery. The amount recovered is, unfortunately, not large having regard to the amount of the unsecured creditors' debts. There is no opposition to the application and I am satisfied that notice has been given to all creditors. Only two creditors opposed the resolution that the application be made in the terms that it has been made. As I have mentioned above the risk was quite substantial and unless the indemnifying creditors assumed the risk nothing would have been received in the liquidation. In these circumstances it seems appropriate to encourage creditors to give indemnities and I am satisfied that the indemnifying creditors should receive a 100 per cent recovery. 56 I make order 1 in the amended interlocutory process filed 24 September 2002. I will hear any submissions on costs. **********

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