Deputy Commissioner of Taxation v Italian Prestige Jewellery Pty Ltd

MARKOVIC J: 1 This is an application for orders pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (Act) by Trevor Mark Pogroske, as liquidator (Liquidator) of Bower Projects Australia Pty Ltd (in liquidation) ACN 600 440 220 (Company) for approval of his entry on behalf of the Company into a litigation funding deed and associated retainer agreement with solicitors and for other associated and consequential orders. 2 The Liquidator relies on three affidavits sworn by him in support of his application: (1) an open affidavit sworn on 26 August 2019; (2) a confidential affidavit also sworn on 26 August 2019; and (3) an open affidavit sworn on 11 October 2019.

background 3 On 22 December 2016, the Liquidator, together with Philip Campbell-Wilson, was appointed as voluntary administrator pursuant to s 436A of the Act to the Company. 4 On 8 February 2017, the creditors of the Company resolved to appoint the Liquidator and Mr Campbell-Wilson as liquidators of the Company. Mr Campbell-Wilson subsequently retired as liquidator and Mr Henry Kazar was appointed as joint and several liquidator but retired on 29 June 2018 leaving the Liquidator as sole liquidator. 5 The Company carried on a property development business primarily involved in the construction of residential flat buildings. At the time of the Liquidator's appointment, the Company was undertaking a number of residential flat building contracts, including one pursuant to a contract with a company called Dyldam Property Developments Pty Ltd. 6 The Liquidator sets out the steps he has taken since his appointment as liquidator to investigate the Company's affairs. They include: (1) assessing the Company's assets, as a result of which he has determined that there are limited funds available in the winding up; (2) conducting limited preliminary investigations in respect of potentially voidable transactions and identifying other matters that warrant further investigations; (3) recovering a limited number of payments in respect of voidable transactions; (4) reporting to creditors, including indicating that in his preliminary view there are a number of matters requiring further inquiry; and (5) obtaining advice from counsel about the prospects of success of the potential claims. 7 The Liquidator has also taken steps to investigate the potential for and to subsequently secure litigation funding in respect of certain claims which may be open to him. Given the limited funds in the winding up, the Liquidator is of the opinion that there is a need for funding in order to take any further steps to investigate the potential claims. In that regard, the Liquidator has approached various commercial and government funders to ascertain the terms on which those entities may be prepared to provide funding. The Liquidator has provided evidence of the steps undertaken. 8 Ultimately, one potential funder, who I will refer to as the Funder, made an offer of funding which the Liquidator considers to be in the best interests of creditors (Funding Deed). Together with the Funding Deed, the Liquidator proposes to cause the Company to engage solicitors to act for it and for him in relation to the steps that will need to be taken with the benefit of the funding, which I will refer to as the Law Firm Engagement. 9 The Liquidator believes, based on his knowledge and expertise as a liquidator, that it is in the best interests of the creditors of the Company to enter into the Funding Deed for the following reasons: (1) the Funder does not require any share of recoveries beyond repayment of moneys advanced under the Funding Deed nor will it impose any rate of interest, making the proposal in the Funding Deed superior to all other offers and thus, of greatest benefit to creditors; (2) based on his investigations to date, there are matters of concern that the Liquidator considers warrant further investigation and that may, subject to the outcome of those investigations, necessitate claims to be made to attempt to recover funds for the benefit of the Company's creditors; (3) in circumstances where the Liquidator considers the books and records of the Company to be incomplete, it is necessary to conduct public examinations to obtain further documentation concerning the Company's affairs and to assess any claims that may be available; and (4) while the Liquidator has not yet called for formal proofs of debt, the total claims of the unsecured creditors is approximately $22.6m. As there are no substantial assets in the winding up, the assessment and, if available, pursuit of any claims is dependent on the liquidator obtaining funding. 10 The Liquidator also considers, based on his knowledge and expertise as a professional liquidator, that it is in the best interests of the Company to enter into the Law Firm Engagement because the law firm involved has discounted its standard hourly rates on a basis which he believes to be competitive, it has agreed to cap its fees and it will not charge any uplift for a successful recovery result. 11 The Liquidator gives further evidence about matters relevant to the proposal to enter into the Funding Agreement and the Law Firm Engagement in his confidential affidavit, which I do not propose to set out, but to which I have had regard in considering the Liquidator's application.

approval OF ENTRY INTO the FUNDING DEED AND THE LAW FIRM ENGAGEMENT 12 The Liquidator seeks approval under s 477(2B) of the Act to enter into the Funding Deed and the Law Firm Engagement. That section relevantly provides that, except with the approval of the Court, of the committee of inspection or a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf 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. 13 In Deputy Commissioner of Taxation v Italian Prestige Jewellery Pty Ltd (2018) 129 ACSR 115; [2018] FCA 983, I summarised the relevant principles in relation to s 477(2B) of the Act at [44]-[45] as follows: 44 Section 477(2B) of the Act is taken to apply to a liquidator in a voluntary winding up as if he or she were a liquidator in a winding up in insolvency or by the Court: s 506 (1A). 45 In Deputy Commissioner of Taxationv ACN 154 520 199 Pty Ltd (in liq) (No 2) [2017] FCA 755 (ACN 154 520 199 Pty Ltd (No 2)) at [22] Gleeson J observed that the Court's role in considering an application under s 477(2B) is to determine whether it is a proper or bona fide exercise of the liquidator's powers. At [24]-[25] her Honour said: 24 The standard imposed under s 477(2B) concerns an assessment by the Court as to whether entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 at [11] per Black J citing. Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) (2010) 266 ALR 642; 78 ACSR 405; [2010] NSWSC 404. 25 In Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]: Although the court has the statutory task [under s 477(2B)] of giving "approval" to a liquidator's agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete "merits review". As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6: ... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 14 In Needham, in the matter of Bruck Textile Technologies Pty Limited (in liq) [2016] FCA 837 at [30], Gleeson J set out the factors relevant to assessing the good faith or prudence of the proposed litigation funding agreement to include: (1) the liquidator's prospects of success in the litigation; (2) the nature and complexity of the cause of action; (3) the extent to which the liquidator has canvassed other funding options; (4) the level of the funder's premium; (5) the liquidator's consultation with creditors; and (6) the risk involved in the claim, including the amount of costs likely to be incurred in the proposed litigation and the extent to which the funder is to contribute to the defendant's costs if the action is not successful or towards any order for security for costs. 15 The Liquidator submitted that based on his evidence it is appropriate and in the best interests of the creditors of the Company that he be granted leave to enter into the Funding Deed and Law Firm Engagement on behalf of the Company. I accept that submission. 16 As the Liquidator has pointed out, it is appropriate to make an order granting him leave on behalf of the Company to enter into those arrangements given that: (1) there appear to be claims available to the Company or the Liquidator and which, at a minimum, appear to require further investigation; (2) there are insufficient funds available in the winding up of the Company to investigate and prosecute those claims such that funding is required; (3) the Liquidator has taken steps to identify and to seek offers from litigation funders and has provided his assessment of the commercial merits of those various offers; (4) the terms of the Funding Deed and Law Firm Engagement are favourable to the Company with no uplift on recoveries or interest charged on funds advanced under the Funding Deed; (5) the Liquidator considers reasonably that he is, in the circumstances, unable to obtain approval from the creditors of the Company to enter into the arrangements; and (6) there is no suggestion that the Liquidator's conduct in seeking to enter into the Funding Deed and the Law Firm Engagement is imprudent or otherwise than in good faith.

direction under s 90-15 of the insolvency practice schedule (Corporations) 17 The Liquidator also seeks a direction that he would be justified in causing the Company to enter into the Funding Deed and the Law Firm Engagement under s 90-15(1) of the Insolvency Practice Schedule (Corporations) being Sch 2 to the Act (Insolvency Practice Schedule). 18 In Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425 at [45]-[49], Gleeson J considered s 90-15 of the Insolvency Practice Schedule, observing the following: 45 Section 90-20(1) of the Insolvency Practice Schedule (Corporations) ("Insolvency Practice Schedule"), being Sch 2 to the Act, permits a range of interested persons to apply to the Court for orders under s 90-15(1) of the Insolvency Practice Schedule. By s 90-15(1), the Court may make such orders as it thinks fit in relation to the external administration of a company. Such orders may include an order determining any question arising in the external administration: s 90-15(3)(a). 46 The principles applicable to the exercise of the Court's power under s 90-15 of the Insolvency Practice Schedule are, in effect, the same as those that applied to the exercise of the Court's power under ss 479(3) and 511 of the Act: Walley, in the matter of Poles & Underground Pty Ltd [2017] FCA 486 at [41]; Re Glengrant Civil Pty Ltd (in liq) [2017] NSWSC 843 at [11] and Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 ("Re Octaviar") at [5]. 47 The relevant principles were recently set out by Black J in Re Octaviar, where his Honour observed as follows: [7] I summarised the scope of the Court's power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows: Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator's application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114; Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [46]. The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: Sanderson v Classic Car Insurances Pty Ltd above at 117; Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-7; 5 ACSR 673; 9 ACLC 1291; Re Ansett Australia Ltd above at [65]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 at (32]. [8] I also referred to the scope of the Court's powers under s 511 of the Corporations Act in that decision and observed (at (8)) that: Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 ... Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be 'just and beneficial' to give the relevant direction. The court may give such a direction where it will be 'of advantage in the liquidation': Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty: Handberg v MIG Property Services Pty Ltd at [7]. [9] I also recognise that the Court's powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator's functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83; Re One. Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [32]; Re Octaviar Ltd (in liq) and Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1005. 48 A litigation funding proposal has some special elements that distinguish it from other commercial arrangements: Hall v Poolman at [134]. The decision to enter into a litigation funding agreement is not treated as a purely commercial decision because it affects the administration of justice and the efficient winding up of companies: Hall v Poolman at [171]. 49 A court would not be likely to decline to give directions concerning a litigation funding agreement solely on the ground that it should not make the liquidator's commercial decisions for them: Hall v Poolman at [173]. Rather, the question whether to give directions or decline to given them will depend upon the nature of the directions sought and the facts of the instance case, and in particular the extent to which the funding agreement and the contemplated recovery proceedings raise issues capable of affecting the administration of justice: Hall v Poolman at [173]. It may be appropriate to exercise the power to give directions (now the power to make orders) where a liquidator apprehends being accused of acting unreasonably: cf. Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117. 19 Given the matters set out by the Liquidator, particularly in his confidential affidavit, I accept that it is possible that the Liquidator might, in causing the Company to enter into the Funding Deed and the Law Firm Engagement, be criticised at some later point in time of acting unreasonably. In those circumstances, and in light of the matters that I have also taken into account in being satisfied that an order should be made under s 477(2B) of the Act (see [16] above), I am satisfied that it is appropriate that an order be made pursuant to s 90-15(1) of the Insolvency Practice Schedule as sought by the Liquidator.

confidentiality orders 20 I turn then to consider the orders sought by the Liquidator for confidentiality pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and s 531 of the Act. Section 37AF of the FCA Act provides: (1) The Court may, by making a suppression order or non‑publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of: (a) information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or (b) information that relates to a proceeding before the Court and is: (i) information that comprises evidence or information about evidence; or (ii) information obtained by the process of discovery; or (iii) information produced under a subpoena; or (iv) information lodged with or filed in the Court. (2) The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1). 21 Section 37AG(1) of the FCA Act provides that the Court may make a suppression order or non-publication order on one or more of the grounds set out therein, which includes where the order is necessary to prevent prejudice to the proper administration of justice. Section 37AG(2) provides that a suppression order or non-publication order must specify the ground or grounds on which the order is made. 22 In Hird (Liquidator), in the matter of Allmine Group Limited (in liq) [2018] FCA 781, Gleeson J said at [47]-[48]: 47 It is conventional to make a confidentiality order to protect the terms of funding arrangements between liquidators and funders: cf. Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; (2010) 8 ACSR 163 at [2] ("Onefone"). 48 The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of granting an order under s 37AF in this case: see Onefone at [3]. 23 Her Honour's observations apply equally to this case and I accept that it is appropriate in the circumstances of this case, and necessary to prevent prejudice to the proper administration of justice, that an order be made pursuant to s 37AF of the FCA Act preventing the publication of the Liquidator's confidential affidavit and the exhibit thereto. 24 The period for which that order should subsist must be specified. In the circumstances of this case, where the Liquidator is at the stage of investigating any potential claims, it is appropriate that the order remain in place until the conclusion of any litigation that is commenced or, if no litigation is commenced at all, then for a period expiring at the conclusion of any limitation period for the commencement of any potential cause of action. 25 Finally, it is necessary to consider s 531 of the Act. That section was the subject of consideration in Matrix Group Ltd (in liq) (Trustee) v Oates, in the matter of Matrix Group Ltd (in liq) (Trustee) (No 3) [2017] FCA 417 by Gleeson J at [44]-[46] and [54]-[55], where her Honour relevantly said: 44 Section 531 of the Act was repealed by the Insolvency Law Reform Act 2016 (Cth) ("ILR Act"), but continues to apply to the records that Mr Oates seeks access to in the present proceedings by virtue of s 1593 of the Act. Section 531 of the Act provides: A liquidator or provisional liquidator must keep proper books in which he or she must cause to be made entries or minutes of proceedings at meetings and of such other matters as are prescribed, and any creditor or contributory may, unless the Court otherwise orders, personally or by an agent inspect them. 45 Regulation 5.6.01 of the Corporations Regulations 2001(Cth) provides: For section 531 of the Act, the prescribed matters are those that are required to give a complete and correct record of the liquidator's or provisional liquidator's administration of the company's affairs. 46 Regulation 5.6.02 provides: The liquidator or provisional liquidator must ensure that the books kept under section 531 of the Act are available at his or her office for inspection in accordance with that section. … 54 Since 1 March 2017, the obligations of administrators of companies to keep "books" of the company have been governed by Division 70, Subdivision C of Schedule 2 to the Act. 55 Section 70-35(1) of Schedule 2 to the Act, read with s 1596 of the Act, places an obligation on liquidators analogous to the old s 542(2), as follows: Retention period for books (1) The last external administrator of a company must retain all books of the company, and of the external administration of the company, that: (a) are relevant to affairs of the company; and (b) are in the external administrator's possession or control at the end of the external administration; for a period (the retention period) of 5 years from the end of the external administration. … 26 I am satisfied, having regard to matters included in the Liquidator's confidential affidavit that it is appropriate for an order to be made under s 531 of the Act in the terms sought by the Liquidator.

notification of the application 27 For completeness, I also note that the Liquidator has taken appropriate steps to notify the creditors of the Company of the existence of this proceeding, including of today's hearing. The Liquidator gives evidence of the steps that have been taken to bring his application to the attention of creditors. However, he has been unable to notify all creditors of the Company. In those circumstances, it is appropriate that an order be made granting leave to any interested party affected by these Orders to relist them for the purpose of making any application in relation to them on seven days' notice.

conclusion 28 I will make orders in accordance with the orders sought by the Liquidator in his originating application filed on 28 August 2019, subject to those amendments necessitated by my reasons set out above. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.