[2011] NSWSC 417
Korda v Silkchime Pty Ltd (2010) 243 FLR 269
[2010] WASC 155
In the matter of MF Global (2012) 267 FLR 27
[2012] NSWSC 994
In the matter of Direct Acceptance Corporation Ltd (Receiver Appointed) (in Liquidation) (2019) 136 ACSR 245
[2019] NSWSC 395
Re Danial Efrat Consulting Services (receiver appointed) (in liq) (1999) 91 FCR 154
Source
Original judgment source is linked above.
Catchwords
[2011] NSWSC 417
Korda v Silkchime Pty Ltd (2010) 243 FLR 269[2010] WASC 155
In the matter of MF Global (2012) 267 FLR 27[2012] NSWSC 994
In the matter of Direct Acceptance Corporation Ltd (Receiver Appointed) (in Liquidation) (2019) 136 ACSR 245[2019] NSWSC 395
Re Danial Efrat Consulting Services (receiver appointed) (in liq) (1999) 91 FCR 154[1999] FCA 412
Re Ansett Australia Ltd (2001) 39 ACSR 355[2001] FCA 1439
In the matter of Dungowan Manly Pty Ltd (in liquidation) (2017) 124 ACSR 218[2017] NSWSC 1771
Lewis & Templeton v LG Electronics Australia Pty Ltd (No 2) (2016) 48 VR 450[2016] VSC 63 at [152]
Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq) (2011) 196 FCR 479[2011] FCA 1028
Re Bell Group LtdEx parte Woodings (2013) 97 ACSR 117
[2016] NSWSC 1366
In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (No 2) (2018) 363 ALR 492
(1992) 10 ACLC 1,742
Humphris
in the matter of Hazelton Air Charter Pty Ltd v Mentha (2002) 41 ACSR 472
[2002] FCA 529
Dering v The Earl of Winchelsea (1787) 1 Cox 318
(1787) 29 ER 1184
HIH Claims Support Limited v Insurance Australia Limited (2011) 244 CLR 72
Judgment (7 paragraphs)
[1]
In the matter of Primespace Property Investment Limited (in liquidation) [2016] NSWSC 1821
Category: Principal judgment
Parties: Stephen Ernest Vaughan and Ian Richard Hall in their capacity as liquidators of BBY Limited (receivers and managers appointed) (in liquidation) (ACN 006 707 777) and other companies (First Plaintiffs)
BBY Limited (receivers and managers appointed) (in liquidation) (ACN 006 707 777) (Second Plaintiff)
BBY Holdings Pty Ltd (receivers and managers appointed) (in liquidation) (ACN 075 187 432) (Third Plaintiff)
Broker Services Australia Pty Ltd (in liquidation) (ACN 074 976 634) (Fourth Plaintiff)
Representation: Counsel:
Mr D Krochmalik (Plaintiffs)
[2]
Solicitors:
Ashurst Australia (Plaintiffs)
File Number(s): 2019/263477
Publication restriction: Publication restriction over parts of affidavits and exhibits read in support of the application
[3]
EX TEMPORE Judgment
HER HONOUR: The liquidators of:
1. BBY Limited (receivers and managers appointed) (in liquidation) (BBY),
2. BBY Holdings Pty Ltd (receivers and managers appointed) (in liquidation) (BBY Holdings) and
3. Broker Services Australia (in liquidation) (BSA),
seek directions pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations). These companies formed part of the BBY Group which, in about 1987, was established as an independent financial services group providing a range of financial serves including stock broking, dealing in financial products, asset management, financial management and research. BBY was the main operating entity in the BBY Group, BBY Holdings was the ultimate holding company and BSA was the employment entity that incurred liabilities to staff members of the BBY Group. The liquidators' investigations into the BBY Group have found that the companies' operations tended to be conducted as one firm rather than as discrete entities. Most creditors and employees did not differentiate between different companies in the BBY Group when dealing with the business.
The liquidators seek directions as to:
1. how to distribute the proceeds of a claim brought by the liquidators against the directors of these BBY companies for insolvent trading, and
2. how to apportion the costs and expenses of pursuing that claim,
between BBY, BBY Holdings and BSA.
[4]
Directions to liquidators
Section 90-15(1) of the Insolvency Practice Schedule provides that the Court may make such orders as it thinks fit in relation to the external administration of a company including determining any question arising in the external administration of the company: section 90-15(3)(a). The principles in relation to applications for directions were summarised by Black J in In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9].
The Court may give directions where it will be "of advantage in the liquidation": Dean-Wilcox v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79 at 81. The Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision or when no legal issue is raised, or where there is no attack on the propriety or reasonableness of the liquidator's decision, but it may do so where there is the prospect of such an attack: In the matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) [2013] NSWSC 669 at [20] per Black J; In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [17].
The plaintiffs submit that this an appropriate case for directions to be given because the proposed directions provide guidance on matters of law arising in the liquidations and will protect the liquidators against accusations that they have acted unreasonably with respect to the allocation of the proceeds and expenses of the insolvent trading claim: In the matter of Bevillesta Pty Ltd (in voluntary administration) (2011) 254 FLR 324; [2011] NSWSC 417 at [10]; Korda v Silkchime Pty Ltd (2010) 243 FLR 269; [2010] WASC 155 at [32]; In the matter of MF Global (2012) 267 FLR 27; [2012] NSWSC 994 at [7]; In the matter of Direct Acceptance Corporation Ltd (Receiver Appointed) (in Liquidation) (2019) 136 ACSR 245; [2019] NSWSC 395 at [36]. Further, none of the creditors of the BBY companies have chosen to appear and, as a consequence, they will not be bound by the outcome of the proceeding. In the absence of directions, the liquidators may be exposed to a complaint or claim by one or more creditors in relation to the allocation of the proceeds and expenses of the insolvent trading claim: a direction protects the liquidators from liability for breach of duty or unreasonable behaviour if full disclosure is made to the Court: Re Danial Efrat Consulting Services (receiver appointed) (in liq) (1999) 91 FCR 154; [1999] FCA 412 at [13]; Re Ansett Australia Ltd (2001) 39 ACSR 355; [2001] FCA 1439 at [59]-[62]; In the matter of Dungowan Manly Pty Ltd (in liquidation) (2017) 124 ACSR 218; [2017] NSWSC 1771 at [3].
[5]
Facts
A draft solvency report prepared in December 2016 indicated that the directors of the BBY companies may have been involved in insolvent trading from 1 July 2014, although in In the matter of BBY Limited (receivers and managers appointed) (in liquidation) [2019] NSWSC 1272, I considered that the date of insolvency may have been as early as 1 January 2014: at [30]-[31]. In May 2015, administrators were appointed and, in June 2015, provided a report to creditors identifying possible avenues of recovery available to liquidators of the BBY Group if the companies were to be wound up, including possible claims against the directors for causing the companies to trade and incur debts at a time when the companies were insolvent. On 22 June 2015, the administrators were appointed as liquidators at a meeting of creditors. On 30 June 2015, the liquidators notified circumstances to insurers who had provided policies to the directors of the BBY companies which may respond to a claim for insolvent trading.
In March 2016, the liquidators entered into a litigation funding agreement which enabled them to undertake further investigations, including by conducting examinations in September 2016. The examinations revealed that claims for insolvent trading were also available to BBY Holdings and BSA. The litigation funding arrangements were varied accordingly. In December 2016, the liquidators forwarded a proposed statement of claim to the insurers, indicating that the liquidators intended to bring claims against the directors for inter alia insolvent trading and to seek compensation of some $31.4 million, of which:
1. $28.2 million or 89% of the total claim concerned insolvent trading by BBY;
2. $260,000 or 1% of the total claim concerned insolvent trading by BBY Holdings; and
3. $3.4 million or 10% of the total claim concerned insolvent trading by BSA.
The liquidators also provided a draft solvency report, already mentioned, to the insurers, which contained the detailed analysis supporting the proposed claim.
In February 2017, the proposed claim was also served on the directors of the BBY companies. In April 2017, the liquidators, insurers and directors participated in a mediation which was unsuccessful in resolving the claim but did result in entry into non-binding heads of agreement. At this point, it was envisaged that moneys would be paid to settle all claims proposed to be brought by the liquidators against the directors and related entities, not just the claim for insolvent trading.
[6]
Method of distribution
The liquidators have put forward three potential methods of distribution of the settlement moneys to the BBY companies.
1. The settlement moneys will be distributed in proportion to the amount of the claim for insolvent trading made in respect of each of the companies.
2. The amount will be distributed proportionally but adjusted for the strength or weakness of the claim in respect of each of the three companies: Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq) at [59]-[61]; Re Bell Group Ltd; Ex parte Woodings at [41].
3. The proceeds of settlement will be distributed equally between the three companies.
The distribution must be undertaken on a legal and equitable basis, and not merely subjectively, such as based on a desire to provide all companies or creditors with something: Re Great Southern Ltd (in liq) at [52] citing Re Gunns Plantations (in liquidation) (receivers & managers appointed) (No 3) [2014] VSC 267 at [38]; Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 87-88; (1992) 10 ACLC 1,742 at 1,746; Humphris; in the matter of Hazelton Air Charter Pty Ltd v Mentha (2002) 41 ACSR 472; [2002] FCA 529 at [51].
In respect of the second method - proportionate distribution adjusted for prospects - the liquidators have been unable to sensibly assess whether any of the three companies had better or worse prospects of succeeding. Given the manner in which the three companies traded, that is, essentially as one, none of the three companies had any better or worse prospect of succeeding in the insolvent trading claim than the others. The period of insolvency was likely to have been found to be the same for each of the three companies and, to the extent that any defences were successfully raised by the directors, such defences would have applied to the claims of each of the three companies. Thus it is not proposed to proceed with this method. I agree that there is no legal, equitable or indeed common-sense basis for it in this case.
Mr Vaughan favours the proportional method of distribution as it is logically consistent with the nature of the claim which has been settled. The compensation awarded for insolvent trading pursuant to section 588M of the Corporations Act 2001 (Cth) is for the loss or damage suffered by creditors of the company by reason of the debts being incurred by the company. As Barrett J said in Edenden v Bignell [2007] NSWSC 1122 at [30]:
This section does not allow recovery of the amount of the creditor's debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor's insolvency. In some cases - perhaps most cases - this will be the equivalent of the amount of the debt: see, for example, Powell v Fryer (2001) 37 ACSR 589. In others - for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably - the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt.
[7]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 26 September 2019
Finally, as the liquidators have been appointed as liquidators of each of the BBY companies, they potentially have conflicting duties to each company and need guidance from the Court to avoid any allegation that their proposed distribution method favours the interests of one company over the interests of the others. Directions provide guidance for external administrators on how to deal with related companies whose affairs are intermingled: Lewis & Templeton v LG Electronics Australia Pty Ltd (No 2) (2016) 48 VR 450; [2016] VSC 63 at [152]. This includes cases where there is a question about the allocation of a settlement sum between several companies to which the same liquidator has been appointed: Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq) (2011) 196 FCR 479; [2011] FCA 1028 at [55]-[56]; Re Bell Group Ltd; Ex parte Woodings (2013) 97 ACSR 117; [2013] WASC 409 at [40]-[41]; and Re Great Southern Ltd (in liq) [2015] WASC 171 at [51]-[54].
As I noted in a judgment on a related question in In the matter of BBY Limited (receivers and managers appointed) (in liquidation) [2019] NSWSC 998 at [6], this liquidation has been complex, lengthy and involves a very large number of creditors. Proceedings arising out of the liquidation have been numerous and hard fought, including In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (2016) 116 ACSR 154; [2016] NSWSC 1366; In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (No 2) (2018) 363 ALR 492; [2018] NSWSC 346 and In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (No 3) [2018] NSWSC 1718. Thus it is appropriate for the Court to give directions as it will be of advantage in the liquidation, in particular, to enable the liquidators to distribute the proceeds of the claim for insolvent trading amongst the many unsecured creditors of these companies, and to protect the liquidators against criticism or complaint which may be made of by one of a very large number of creditors. Thus, I am prepared to give directions in this matter, essentially for the reasons submitted by the plaintiffs.
Protracted negotiations ensued and, in September 2018, the liquidators resolved only the insolvent trading claim with the insurers. A deed of settlement was entered into. Claims made by the liquidators against related entities of the directors which were not the subject of insurance cover were not the subject of any release and have continued to be prosecuted by the liquidators separately.
In October 2018, the liquidators received the settlement sum from the insurers and, after paying the litigation funders, placed the balance of the moneys, being $2,503,484.29, in the trust account of the liquidators' solicitors. The litigation funding did not cover all of the liquidators' remuneration or legal expenses incurred in pursuing the claim for insolvent trading. Unfunded remuneration of $678,585.60 and unfunded legal costs of $330,342.89 have been approved by creditors but are yet to be allocated between the BBY companies.
In August 2019, these proceedings were commenced. Creditors of the BBY companies have been notified of the directions sought and the differing methods of distribution of the settlement moneys, and apportionment of costs, which are being considered. No material response has been received from any creditor. The largest creditor of BSA is the Commonwealth Government, which provided some $1.87 million to BSA employees under the Fair Entitlements Guarantee. The Commonwealth Government has requested, and been provided with, detailed material from the liquidators in respect of the settlement of the insolvent trading claim and the proposed distribution of the settlement moneys. The Commonwealth Government does not wish to be heard on this application, notwithstanding that the method of distribution proposed by the liquidators - being a proportional distribution - will result in far less money being paid to the Commonwealth Government than equal distribution. This tends to suggest that the proposed method of distribution is fair and reasonable.
Where, as here, there will be no return to unsecured creditors apart from the proceeds of the insolvent trading claim, the loss or damage is equivalent to the debts incurred during the period of insolvency. BBY, as the principal operating entity of the group, incurred the most debts whilst insolvent and thus had the largest claim. A proportional distribution will have the result that it will receive the bulk of the settlement moneys. This will also, unsurprisingly, benefit the largest number of unsecured creditors. This seems to me to have a principled legal or equitable basis as the company with the largest claim, likely reflected in the insurers' decision to pay a certain amount in settlement of the claim, should receive a proportionate amount of the settlement monies in the absence of any features which delineate one company's claim from another.
Further, if the moneys are distributed equally, then BBY Holdings will have a surplus in the winding up which may require the liquidators to make distributions to the secured creditor or the shareholders of BBY Holdings, including entities related to the directors, notwithstanding that an insolvent trading claim is brought to compensate unsecured creditors of a company whose debts are unpaid: see section 588M(1)(c). As such, a proportional distribution of the settlement moneys is preferable to an equal distribution across the three companies. Otherwise, it seems to me that BBY Holdings and entities not necessarily harmed by insolvent trading will receive a windfall.
Mr Vaughan also proposes that the distribution of costs and expenses incurred in pursuing the insolvent trading claims be distributed proportionally rather than equally between the three entities. It was submitted that it is appropriate that the BBY companies that stand to benefit from the distribution of the insolvent trading claim proceeds also share the proportionate burden of the costs incurred to achieve the recovery, consistently with the equitable principle qui sentit commodum sentire debet et onus (that he or she who derives the advantage ought to sustain the burden): Dering v The Earl of Winchelsea (1787) 1 Cox 318; (1787) 29 ER 1184 at 1185-1186; HIH Claims Support Limited v Insurance Australia Limited (2011) 244 CLR 72; [2011] HCA 31 at [37].
Nor does adjustment need to be made, it was submitted, to reflect the pursuit of claims against related parties which did not form part of the settlement as the evidence establishes that the work done by the liquidators, their staff and their lawyers was overwhelmingly referable to realising the insolvent trading claim and cannot be allocated specifically to any one of the three BBY companies (cf. In the matter of Primespace Property Investment Limited (in liquidation) [2016] NSWSC 1821 at [46] ff). I am hesitant to make no adjustment for the costs of claims which did not form part of the settlement and have since been pursued separately. However, the evidence indicated that any adjustment would be nominal and the amount of any adjustment would not be supported by evidence but would be more in the nature of a guess, so I will refrain from making one.
Further, if the costs and expenses are distributed equally then that may have the potential to leave BBY Holdings and BSA with insufficient funds to pay the costs incurred. Whilst it will generate the greatest surplus for BBY, it will leave the liquidators in a position where they may be unable to pay the costs of the unfunded recovery works in the windings up of BBY Holdings and BSA. This would result in the insolvent trading claim becoming overall a net burden in the windings up of BBY Holdings and BSA rather than providing a benefit. This would be a counterintuitive outcome. A proportionate distribution of both the settlement sum and the costs of achieving it, Mr Vaughan considers, will give a fair result as it will ensure that there are surplus funds to each of the BBY companies. It may even enable a distribution to be paid to ordinary unsecured creditors of BSA when its share of these recoveries have been combined with additional unfair preference recoveries realised by the liquidators in the winding up of that company.
It seems to me in all of the circumstances that the proposed method of allocation of the settlement sum and the costs and disbursements should be in the proportionate manner suggested by Mr Vaughan. For these reasons, I make the following orders in addition to those made earlier today:
1. Direct that the first plaintiffs are justified in allocating the net proceeds of the settlement of the claim (Claim) against the directors of the second, third and fourth plaintiffs received by them (Net Settlement Proceeds) to, and in the windings up of, each of the second, third and fourth plaintiffs as follows:
1. 89% of the Net Settlement Proceeds be allocated to the second plaintiff;
2. 1% of the Net Settlement Proceeds be allocated to the third plaintiff; and
3. 10% of the Net Settlement Proceeds be allocated to the fourth plaintiff.
1. Direct that the first plaintiffs are justified in apportioning the non-externally funded costs and disbursements of the first plaintiffs in connection with the Claim (Claim Costs) amongst, and in the windings up of, each of the second, third and fourth plaintiffs as follows:
1. 89% of the Claim Costs be borne by the second plaintiff;
2. 1% of the Claim Costs be borne by the third plaintiff; and
3. 10% of the Claim Costs be borne by the fourth plaintiff.
1. Order that the plaintiffs' costs of and incidental to these proceedings be costs in the windings up of each of the second, third and fourth plaintiffs and be paid out of the assets of the second, third and fourth plaintiffs as follows:
1. 89% by the second plaintiff;
2. 1% by the third plaintiff; and
3. 10% by the fourth plaintiff.