Deputy Commissioner of Taxation, in the matter of Italian Prestige Jewellery Pty Limited (in liq) v Italian Prestige Jewellery Pty Limited

YATES J: 1 The plaintiffs, Peter Paul Krejci and Andrew Cummins, are the joint and several liquidators of Greatcell Solar Limited (in liquidation) (GSL) and Greatcell Solar Australia Pty Ltd (in liquidation) (GSA) (the companies). They were appointed on 17 April 2019, pursuant to a resolution of creditors in the administrations of the companies. 2 In August 2022, the plaintiffs conducted public examinations of two directors of each company and another director of GSL. The plaintiffs, as liquidators, have formed the view, based on the answers given and documents produced in the public examination, and on legal advice they have obtained following the examinations, that the companies have reasonable claims against the directors for breaches of their duties arising from the companies trading while insolvent. They wish to bring proceedings in that regard (the insolvent trading litigation). They are of the view that there is no available safe harbour defence. 3 The claims are significant. The plaintiffs estimate that the quantum of the insolvent trading claim in respect of GSL is $2.4 million and, in respect of GSA, $1.4 million. However, costs will be incurred in pursuing those claims and the current cash held by the plaintiffs as liquidators is insufficient for that purpose. 4 Initially, the plaintiffs approached the Court for orders that: (a) the companies be pooled; and (b) approval be given for them to enter into a funding agreement with the Commonwealth of Australia (the Commonwealth), acting through the Department of Employment and Workplace Relations, and a costs agreement with their solicitors (Colin Biggers & Paisley Lawyers (CBP)), in respect of the insolvent trading litigation. 5 However, given opposition by the directors of the companies to the pooling, and after further consideration, the plaintiffs have reached a new agreement with the Commonwealth for funding the insolvent trading litigation. 6 By a further amended originating process, the plaintiffs seek an order pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Corporations Act) that retrospective approval be given to them to enter into a consolidated funding agreement with the Commonwealth and that approval be given to enter into an amended costs agreement with CBP. The application is supported by three affidavits made by Mr Krejci (6 December 2023, 15 August 2024, and 19 September 2024) and an affidavit made by a member of the plaintiffs' staff, Katherine Madonna La, on 10 September 2024. 7 Approval is necessary because s 477(2B) provides: CORPORATIONS ACT 2001 - SECT 477 Powers of liquidator … (2B) 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. … 8 The plaintiffs seek the Court's approval, rather than the creditors' approval, because the directors against whom the insolvent trading litigation is contemplated are substantial asserted creditors of the companies, who could influence the voting at any creditors' meeting to obtain approval for the funding. 9 Previously, the plaintiffs obtained the Court's approval to enter into funding agreements (the initial funding agreements) with the Commonwealth, acting through the Attorney-General's Department, to conduct the public examinations of the directors: Krejci, in the matter of Greatcell Solar Limited (in liq) [2022] FCA 67 (Greatcell No 1). 10 The funding for which approval is now sought consolidates the funding of the public examinations, the insolvent trading litigation, the pooling application (which is no longer pursued) and the s 477(2B) approval applications. 11 Previous attempts by the plaintiffs to obtain funding from the creditors (other than the Commonwealth) have not been successful. Absent the funding agreed to be provided by the Commonwealth under the consolidated funding agreement, the plaintiffs will be left to pursue private funders (who, if prepared to provide funding, would likely impose significantly more onerous terms than sought by the Commonwealth) or abandon their claims against the directors. 12 The consolidated funding agreement, like the initial funding agreements, includes an acknowledgement by the plaintiffs that the funding provided will be treated as a priority payment pari passu with the priority afforded to a liquidator's expenses under s 556(1)(a) of the Corporations Act. The plaintiffs consider this to be reasonable because, if a liquidator had the funds to meet the expense of bringing a claim, such as the insolvent trading litigation, the payment of that expense would have that priority in the liquidation in any event. The creditors will not, therefore, be prejudiced by this aspect of the consolidated funding agreement. 13 The consolidated funding agreement also requires that, if any recoveries are made by GSL in the insolvent trading litigation, the Commonwealth will be paid 30% of those recoveries as a priority. This amount is capped by the amount that the Commonwealth has paid through its Fair Entitlements Guarantee scheme for unpaid employee entitlements owed by the companies to their former employees. 14 The Commonwealth requires this priority payment for the funding arrangement to be commercial. The Commonwealth has paid a total of $727,045.64 to former employees of the companies for unpaid wages, annual leave, long service leave, payment in lieu of notice, and redundancy pay. 15 The plaintiffs are of the view that, notwithstanding this required priority payment, the funding under the consolidated funding agreement is preferable to funding from a commercial litigation funder. First, the priority payment is only in respect of recoveries by GSL (a commercial funder would require an uplift of a similar or higher amount for recoveries by GSL and GSA). Secondly, the priority payment will be applied to reduce the debt owed by the companies to the Commonwealth. The plaintiffs say that this will provide a greater return to the unsecured creditors (a commercial funder would keep the amount of the uplift). 16 Further, the Commonwealth has agreed to provide funding in circumstances where it is already familiar with the matter. The plaintiffs are of the view that it would not be a good use of resources to seek alternative funding now, especially where the terms of that funding are likely to be less favourable. 17 Importantly, the consolidated funding agreement provides that, in the event that the insolvent trading litigation does not result in a return to the companies, the plaintiffs are not required to repay the funding provided by the Commonwealth. Further, the Commonwealth will meet an adverse costs order against the plaintiffs up to a limited amount. 18 For these reasons, the plaintiffs are of the view that it is in the best interests of the companies and the creditors that funding under the consolidated funding agreement be accepted. 19 As to the costs agreement with CBP, the application for approval initially proceeded on the basis of paragraphs 42 to 46 of Mr Krejci's affidavit of 6 December 2023. These paragraphs were directed to a prior state of affairs, namely a costs agreement with CBP into which the plaintiffs had already entered, which provided for the costs of an application for a pooling order. As I have noted, a pooling order is no longer pursued at the present time. I was not prepared to approve a costs agreement in that form. It is to be noted that, as the costs agreement had already been entered into, the application was for retrospective approval. 20 The hearing of the application was adjourned on 11 September 2024 to enable the plaintiffs to negotiate a revised costs agreement which does not relate to work required to be performed for the purpose of any future pooling application. 21 A revised agreement has been negotiated. This is the costs agreement for which approval is now sought. As pointed out in Mr Krejci's affidavit of 19 September 2024, the amended costs agreement includes special conditions to enable CBP to be paid costs in excess of the amount of the funding to be provided by the Commonwealth. Mr Krejci has explained that, at the time of entering into the funding agreement with CBP, he did not expect CBP's costs to exceed the funded amount. As matters have transpired, additional work has been carried out. CBP has agreed that, in the event of a recovery, the plaintiffs will pay CBP's fees and disbursements exceeding the funded amount as a deferred expense under s 556(1)(de) of the Corporations Act. Mr Krejci is of the opinion that these special conditions are fair and reasonable. 22 On 28 August 2024, the plaintiffs issued a joint circular to the creditors of the companies notifying them of the hearing seeking approval. This circular was also uploaded to the plaintiffs' website. No creditor has sought to be heard on the application. The plaintiffs have not received any notice that a creditor objects to approval being granted. 23 In Greatcell No 1 (at [13]), Cheeseman J summarised the relevant principles regarding the application of s 477(2B). At [14], her Honour also noted some of the authorities on the question of retrospective approval. 24 The plaintiffs also referred to Markovic J's statement of principles in Goyal, in the matter of Tiaro Coal Limited (In Liquidation) [2017] FCA 1252 at [13] - [15]; Deputy Commissioner of Taxation, in the matter of Italian Prestige Jewellery Pty Limited (in liq) v Italian Prestige Jewellery Pty Limited [2018] FCA 983; 129 ACSR 115 at [43] - [45]. 25 The essential point is that, in considering whether to grant approval under s 477(2B) of the Corporations Act, it is not for the Court to supplant the exercise of a liquidator's judgment as to the commercial desirability of the agreement itself. Rather, the Court is concerned to determine whether entry into the agreement, on behalf of the company concerned, is a proper, bona fide exercise of the liquidator's powers. 26 Generally speaking, the Court will not interfere unless it discerns some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85 - 86; Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26]. None of those features are present here. Further, the fact that the Commonwealth itself is prepared to provide funding provides a measure of reassurance as to the propriety of the plaintiffs pursuing the insolvent trading litigation. 27 I am prepared, therefore, to grant the approvals that are sought. There are, however, some additional observations I wish to make. 28 Although the Court can grant retrospective approval under s 477(2B), the terms in which the provision is expressed ("must not enter") make it clear that Parliament's intention is that approval will be sought before an agreement (to which the provision relates) is entered into. 29 In Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; 35 ACLC 167, Warren J said (at [9] - [10]): 9 In the ordinary course of insolvency practice the court would ordinarily expect that an official liquidator would be fully mindful of his or her obligations under the Law when acting as liquidator of a company. If a liquidator is unaware or uncertain of his or her obligations then legal advice should be obtained. The court has an expectation that a liquidator will be aware of the obligations and powers particularly those contained under s 477 of the Law. In order to exercise certain powers such as those under s 477(2B) a liquidator ought be aware of the necessity to obtain leave of the court or approval of creditors or the committee of inspection. 10 Such approval should be obtained in advance of the exercise of the power in question, although the court has the power to give a retrospective sanction in a proper case to action taken without the requisite approval: see Re Associated Travel, Leisure & Services Ltd (in liq) [1978] 1 WLR 547 ; also, A R Keay, McPherson: The Law of Company Liquidation, 4th ed, LBC Information Services, 1999, p 349. 30 At [12], Warren J emphasised the obvious policy underlying the provision - namely, to protect against ill-advised and improper actions on the part of a liquidator. That policy is immediately defeated if a liquidator simply takes matters into his or her hands and ignores the provision by entering into an agreement which the liquidator knows requires prior approval. 31 Here, the plaintiffs have already entered into the consolidated funding agreement. They had also entered into a costs agreement with CBP (which will now be replaced by the proposed amended costs agreement). They have not explained why they adopted this course. There is no apparent justification for it. They must have been aware of the provision's mandatory requirement. The plaintiffs' failure is somewhat more egregious given that they chose to adopt the same course when entering into the initial funding agreements. At that time, Cheeseman J (at [23]) remarked on the fact that the plaintiffs had not explained what led to those agreements being executed prior to approval being sought. 32 I do not think that this conduct should lead the Court to decline the approval that is sought pursuant to s 477(2B) in respect of the consolidated funding agreement, given that this agreement is directed to facilitating the bringing of litigation that may well inure for the benefit of creditors. However, that approval should not be mistaken for approval of the plaintiffs' conduct in failing to seek the Court's prior approval. In the circumstances, I decline to make an order that the plaintiffs' costs of the approval application be costs in the liquidation of GSL and GSA. The plaintiffs should bear their own costs. 33 Finally, the plaintiffs seek orders under s 37AF of the Federal Court of Australia Act 1976 (Cth) in respect of the funding/costs agreements that are in evidence. Given the nature of those agreements, and the circumstances in which they have been, or will be, entered, I am satisfied that such orders are necessary to prevent prejudice to the proper administration of justice. Those orders should be made for a period of two years, subject to further order of the Court. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Yates.