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[2011] FCA 1028
Federal Court of Australia
2011-09-01
Gordon J
Original judgment source is linked above.
FOR THE PURPOSES OF THIS ORDER: ASIC means the Australian Securities and Investments Commission; The Legal Advices means the memorandum of advice of John Karkar QC and Wendy Harris dated 19 October 2010 referred to in paragraph 22 of the Vickers Affidavit and the memorandum of advice on allocation of settlement sum of Wendy Harris SC dated 7 March 2011 referred to in paragraphs 44 and 45 of the Vickers Affidavit; The Liquidators means David Laurence McEvoy, Derrick Craig Vickers, Kathryn Warwick, Gregory Winfield Hall, Martin Bruce Jones and Darren Gordon Weaver; The Mezzanine Companies means all the companies listed in the schedule attached to this Order; The Vickers Affidavit means the affidavit of Mr Derrick Craig Vickers sworn on 29 June 2011.
THE COURT ORDERS THAT:
AND THE COURT DIRECTS THAT: 10. Pursuant to ss 479(3) and 511 of the Act (as the case may be), the Applicants are justified in apportioning, between each of the Mezzanine Companies, the proceeds paid under the following Settlement Deeds as proposed in paragraphs 55 to 58 and confidential exhibit DCV-10 of the Vickers Affidavit:
AND THE COURT DECLARES THAT: 11. Pursuant to s 1322(4)(a) of the Act, the entry by the Applicants into the KPMG Deed and the Carey Deed are not invalid by reason of the Applicants having entered into them without the court's prior approval required under s 477(2B) of the Act. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. SCHEDULE PART 1 York Street Mezzanine Pty Ltd (ACN 090 631 057) (in liquidation) PART 2 Bayshore Mezzanine Pty Ltd (ACN 097 759 272 (in liquidation) Ann Street Mezzanine Pty Ltd (ACN 102 854 866) (in liquidation) Bayview Heritage Mezzanine Pty Ltd (ACN 105 235 738) (in liquidation) Market Street Mezzanine Pty Ltd (ACN 091 354 513) (in liquidation) Market Street Mezzanine No.2 Pty Ltd (ACN 088 363 384) (in liquidation) Cinema City Mezzanine Pty Ltd (ACN 090 584 820) (in liquidation) PART 3 Mount Street Mezzanine Pty Ltd (ACN 086 176 052) (in liquidation) PART 4 North Sydney Finance Pty Ltd (ACN 107 354 610) (in liquidation)
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 732 of 2011
IN THE MATTER OF YORK STREET MEZZANINE PTY LTD (ACN 090 631 057) (IN LIQUIDATION); BAYSHORE MEZZANINE PTY LTD (ACN 097 759 272) (IN LIQUIDATION); ANN STREET MEZZANINE PTY LTD (ACN 102 854 866) (IN LIQUIDATION); BAYVIEW HERITAGE MEZZANINE PTY LTD (ACN 105 235 738) (IN LIQUIDATION);
MARKET STREET MEZZANINE PTY LTD (ACN 091 354 513) (IN LIQUIDATION);
MARKET STREET MEZZANINE NO.2 PTY LTD (ACN 088 363 384) (IN LIQUIDATION);
CINEMA CITY MEZZANINE PTY LTD (ACN 090 584 820) (IN LIQUIDATION); MOUNT STREET MEZZANINE PTY LTD (ACN 086 176 052) (IN LIQUIDATION) AND
NORTH SYDNEY FINANCE LTD (ACN 107 354 610) (IN LIQUIDATION) BETWEEN: DERRICK CRAIG VICKERS AND KATHRYN WARWICK (IN THEIR CAPACITY AS LIQUIDATORS OF THE COMPANY LISTED IN PART 1 OF THE SCHEDULE)
DERRICK CRAIG VICKERS (IN HIS CAPACITY AS LIQUIDATOR OF THE COMPANIES LISTED IN PART 2 OF THE SCHEDULE)
DERRICK CRAIG VICKERS AND GREGORY WINFIELD HALL (IN THEIR CAPACITY AS LIQUIDATORS OF THE COMPANY LISTED IN PART 3 OF THE SCHEDULE)
MARTIN BRUCE JONES AND DARREN GORDON WEAVER (IN THEIR CAPACITY AS LIQUIDATORS OF THE COMPANY LISTED IN PART 4 OF THE SCHEDULE)
AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
JUDGE: GORDON J DATE: 1 September 2011 PLACE: MELBOURNE
INTRODUCTION 1 The applicant liquidators are the liquidators of the companies listed in the Schedule (the Mezzanine Companies). The Mezzanine Companies were part of the Westpoint group of companies. The Westpoint group was a large scale property development group, which undertook sizeable residential and retail developments. Generally, the development company for each project used both mezzanine and senior finance to fund its property development. The mezzanine finance company for each project raised funds through the issue of debt instruments, primarily promissory notes, to small investors. 2 In late 2005, the Westpoint group collapsed.
Directors Proceedings 3 In 2008 and 2009, under s 50 of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), the Australian Securities and Investments Commission (ASIC) commenced nine proceedings in this Court in the name of the Mezzanine Companies against various directors and former directors of the Mezzanine Companies, including Mr Norman Carey (the Directors Proceedings). 4 The central allegations against Mr Carey in the Directors Proceedings concerned alleged breaches of directors' duties and alleged knowing assistance in breaches of trust by the relevant Mezzanine Company. 5 Relief was sought in respect of the losses suffered by each of the Mezzanine Companies as a result of the payment away of the funds they had raised to Westpoint Corporation Pty Ltd (WPC). The relief sought against Mr Carey included declaratory relief, compensation under ss 1317J and 1317H of the Corporations Act 2001 (Cth) (the Act) and equitable compensation.
KPMG Proceeding 6 In 2008, under s 50 of the ASIC Act, ASIC commenced proceedings in the Supreme Court of Victoria against KPMG in the name of each of the Mezzanine Companies, except for Cinema City Mezzanine Pty Ltd (the KPMG Proceeding). 7 The central allegation in the KPMG Proceeding was that KPMG was negligent in the discharge of its duties as auditor. KPMG had been the auditor of WPC, which had acted as the central "banker" for the group, and also auditor of most of the Mezzanine Companies. The claims against KPMG by the relevant Mezzanine Companies, save for Mount Street Mezzanine Pty Ltd (Mount Street), were in respect of KPMG's auditing work performed for them directly and auditing work performed for WPC. In the case of Mount Street, its claim was only with respect to KPMG's auditing work undertaken for WPC, and losses claimed to be suffered by Mount Street as a result of its reliance on that auditing work. Cinema City Mezzanine Pty Ltd (Cinema City) brought no claim against KPMG and was not a party to this proceeding. 8 Relief was sought in respect of the losses suffered by each of the Mezzanine Companies because of KPMG's audits, including its audits of WPC. The relief sought included damages for negligence and damages or compensation under s 87 of the Trade Practices Act 1974 (Cth). 9 The KPMG Proceeding was transferred to this Court in April 2010. 10 On 18 May 2010, KPMG filed a proceeding in the High Court of Australia (the KPMG High Court Proceeding) against the Commonwealth of Australia and ASIC, seeking a declaration that s 50 of the ASIC Act, insofar as it empowers ASIC to begin and carry on a proceeding in the name of a company, was constitutionally invalid. 11 The last limitation period relating to some causes of action pursued in the KPMG Proceeding was believed to expire on 28 October 2010. The applicant liquidators were concerned to preserve the claims of the Mezzanine Companies in the event that the KPMG High Court Proceeding was successful. 12 The applicant liquidators brought an application for directions in this Court as to their proposed course of action. The application was heard by Finkelstein J on 21 October 2010. Prior to making that application, the applicant liquidators requested and received access to an advice from Counsel for ASIC as to their views regarding the merits of the claim against KPMG. They also received from ASIC, and had regard to, executive summaries of certain draft experts' reports. These were all communicated to the applicant liquidators on a confidential basis and subject to common interest privilege. 13 On 21 October 2010, Finkelstein J made orders that it was proper for the applicant liquidators to commence their proposed proceeding to preserve the claims of the Mezzanine Companies (the Preservation Proceeding). The Preservation Proceeding was filed in this Court on 27 October 2010.
Settlements 14 On 29 January 2009, Finkelstein J ordered that the Directors Proceedings and other Westpoint related proceedings be referred to mediation commencing on 15 June 2009 (the Mediation). 15 On 6 February 2009, Pagone J made orders referring the KPMG Proceeding to the Mediation. Subsequently, in late 2010, ASIC, the Mezzanine Companies and KPMG agreed to a further mediation (the Further Mediation) of the KPMG Proceeding. All information provided within the Mediation and Further Mediation was provided on a without prejudice basis. 16 As a result of the Mediation and Further Mediation, Deeds of Settlement and Release between the Mezzanine Companies, their liquidators and ASIC were entered into as follows: 1. The Schiftan deed dated 9 March 2010 between Lynnette Rochelle Schiftan and ASIC, the Mezzanine Companies, the applicant liquidators and David Laurence McEvoy (McEvoy) (a former liquidator of some of the Mezzanine Companies) (the Schiftan Deed); and 2. The Dixon deed dated 29 June 2010 between John Norman Dixon and ASIC, the Mezzanine Companies, the applicant liquidators and McEvoy (the Dixon Deed). Schiftan and Dixon were two of the defendants named in the Directors Proceedings. 17 Throughout late 2010 and early 2011, settlement negotiations continued between KPMG and the three remaining defendants in the Directors Proceedings - Richard Beck, Mr Carey and Graeme Rundle. Information provided to the applicant liquidators as to the progress of the settlement negotiations was provided on a confidential basis. 18 On 1 February 2011, the following documents were exchanged: 1. The KPMG Deed dated 1 February 2011 between KPMG, ASIC, the Mezzanine Companies, the applicant liquidators and McEvoy (the KPMG Deed); 2. The Carey Deed dated 1 February 2011 between Norman Phillip Carey and 27 companies described as the "Carey Related Entities", ASIC, the Mezzanine Companies, the applicant liquidators and McEvoy (the Carey Deed); 3. The Beck Deed dated l February 2011 between Cedric Richard Palmer Beck, Anna Harris (Mr Beck's wife and also a defendant to the Directors Proceedings) and six companies described as the 'Beck Companies', ASIC, the Mezzanine Companies, the applicant liquidators and McEvoy (the Beck Deed); and 4. The Rundle Deed dated 1 February 2011 between Graeme John Rundle and ASIC, the Mezzanine Companies, the applicant liquidators and McEvoy (the Rundle Deed). In these reasons for decision these settlement deeds together with the Schiftan and Dixon Deeds are referred to as the Settlement Deeds. 19 While the KPMG Deed expressly contemplates certain disclosures in any Court proceeding seeking approval for the distribution of any amounts paid by KPMG as between the Mezzanine Companies, pursuant to cl 7.4(e) of the KPMG Deed, the parties must use their best endeavours and take all necessary steps to keep the existence and terms of the KPMG Deed confidential. 20 Clause 9 of the Rundle, Beck and Carey Deeds and cl 13 of the Dixon Deed require the parties to keep the terms of those Deeds confidential. Clause 14 of the Schiftan Deed requires the parties to keep the Settlement Sum (as defined therein) confidential.
Application 21 This is an application for directions to be given to, and for the relief sought by, the applicant liquidators in relation to the Settlement Deeds. The applications were supported by ASIC. There are three applications. First, an application for approval under s 477(2B) of the Act in relation to the KPMG Deed and the Carey Deed because cl 3.4 of the KPMG Deed and cl 3(a)(ii) of the Carey Deed extend performance of certain obligations beyond three months. That approval is sought retrospectively. 22 Secondly, an application for directions under ss 479(3) and 511 of the Act that the applicant liquidators are justified in apportioning, between the Mezzanine Companies, the proceeds paid under the Settlement Deeds. Finally, an application for confidentiality orders. 23 For the reasons that follow, I would grant the applicant liquidators the orders and directions that they seek.
RELEVANT LEGISLATION AND LEGAL PRINCIPLES - SECTION 477(2B) 24 Section 477(2B) of the Act, often referred to as the "long-term agreements" provision, imposes restraints upon a liquidator. It provides: 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 a charge) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) the 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 terms may end, or the obligations may be discharged, within those 3 months. 25 Section 477(2B) appears in Pt 5.4B Div 2 of the Act governing Court-appointed liquidators. The section applies also to liquidators appointed under creditors' voluntary liquidations: s 506(1A) of the Act. Accordingly, it also applies to the applicant liquidators of Bayshore Mezzanine Pty Ltd (in liq), Bayview Heritage Mezzanine Pty Ltd (in liq), Market Street Mezzanine Pty Ltd (in liq), Market Street Mezzanine No 2 Pty Ltd (in liq), Mount Street Mezzanine Pty Ltd (in liq) and North Sydney Finance Pty Ltd (in liq). 26 What then are the principles the Courts apply in considering whether to exercise its discretion to grant approval under s 477(2B) of the Act? In Re Stewart; Newtronics Pty Ltd [2007] FCA 1375 at [26], the relevant principles were summarised as follows: (1) the court does not simply "rubber stamp" whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims: "[T]he Court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors." (2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647; (3) the role of the Court is to grant or deny approval to the liquidator's proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642; (4) in reviewing the liquidator's proposal, the task of the Court is: "[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in ... a hearing de novo [but] ... simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the "expeditious and beneficial administration" of the winding up." See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees [2005] FCAFC 265; (2006) 24 ACLC 1,019 at [60]. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter; … (6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein. 27 A liquidator ought to seek approval before entering into an agreement on behalf of the company: Re Stewart; Newtronics Pty Ltd [2007] FCA 1375 at [25]; Empire (Aust) Nominees Pty Ltd v Vince (2000) 35 ACSR 167 at [9]-[10]. In the present case, the KPMG Deed and the Carey Deed were entered into on 1 February 2011. As a result, the applicant liquidators seek retrospective approval. Such approval may be given by the Court where appropriate: Re Alpine Beef Pty Ltd (in liq) [2011] FCA 748 at [11]; Hutchison v Hillcrest Litigation Services Ltd [2010] NSWSC 934 at [25]; Chamberlain v RG & H Investments Pty Ltd (No 2) [2009] FCA 1531 at [19]; Parker, Re Purcom No 34 Pty Ltd (in liq) (2009) 262 ALR 85 at [11]; Re Stewart; Newtronics Pty Ltd at [25]; Re Read (2007) 164 FCR 237 at [41]-[42]; Re HIH Insurance Group Ltd 19 ACLC 1,102 at [6]; Empire (Aust) Nominees Pty Ltd v Vince at [10]. 28 Against the background of those principles, I turn to consider the present application.
ANALYSIS OF THE SECTION 477(2B) APPLICATION 29 There are two "long-term agreements" falling within s 477(2B) - the KPMG Deed and the Carey Deed. Clause 3.4 of the KPMG Deed and cl 3(a)(ii) of the Carey Deed extend performance of certain obligations beyond three months. For the reasons set out below, I would grant approval of the entry into the two relevant deeds retrospectively. 30 First, the Court is not being asked to rubber stamp what is put in front of it. Mr Vickers, a liquidator of the Mezzanine Companies, has explained to the Court the relevant circumstances including the nature of the proceedings and the conduct of them by ASIC, the circumstances surrounding the settlement negotiations that took place and how the KPMG and Carey Deeds came to be entered into on 1 February 2011. In his evidence he also described the factors and considerations the applicant liquidators had weighed up in assessing the compromises and making their decision as to whether entry into the Deeds was in the interests of the creditors. I will return to consider those factors and considerations in further detail later in these reasons for decision. 31 Secondly, the terms of the two Deeds are clear. The Deeds were before the Court as Confidential exhibits DCV-6 and DCV-7 and I have had the benefit of reading them. Thirdly, and no less importantly, I accept the applicant liquidators' submission that the Deeds are demonstrably transactions entered into in the proper realisation of the assets of the Mezzanine Companies and/or otherwise assist in the winding up of those companies. 32 There is no doubt that a key consideration for the Court in these cases is whether it is in the interests of those concerned in the winding up; the creditors: Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,744. It is to that issue that I now turn. 33 Mr Vickers' affidavit summarised the considerations to which he and his fellow Mezzanine Company liquidators had regard in forming the view that the KPMG and Carey Deeds would not unduly delay completion of the liquidations and were otherwise in the interests of the creditors of the Mezzanine Companies. Those considerations may be summarised as follows: 1. The arrangements extending the time for performance of the obligations in each Deed were expected to result in additional moneys being available to the Mezzanine Companies; 2. The liquidators considered those provisions would not unduly extend the liquidations. The periods were relatively short and there remained a number of significant matters to be completed in the liquidations in any event; 3. If the KPMG Deed and the Carey Deed had not been entered into and the proceedings continued, it was likely that a longer period would have elapsed before the proceedings (including appeals) were concluded; 4. The settlements provided an early and certain outcome, as opposed to an uncertain outcome that could delay for several years any return to creditors; 5. The creditors of the Mezzanine Companies are primarily small investors, many of whom had invested their retirement savings in the relevant Westpoint project. Thus the fact that the settlements would mean a much earlier dividend payment to creditors was of higher than usual significance to the liquidators' decision to settle in this case. As ASIC was bearing the legal costs of both the Directors and KPMG Proceedings, a costs saving was not a factor in the decision to settle; 6. The settlement terms were negotiated at arm's length between legally represented parties: see by way of example, Australian Power Steering Pty Ltd v Exego Pty Ltd [2010] VSC 497 at [4]; and 7. The claims brought in the Directors Proceeding and the KPMG Proceeding involved sizeable risk. In respect of the claims against Mr Carey, there was also a sizeable risk that a significant proportion of any judgment would not be recoverable. The liquidators considered that the obtaining of the releases from Mr Carey and his related entities would also benefit creditors. 34 What was achieved by the settlements recorded in the KPMG Deed and the Carey Deed was explained at length by Mr Vickers. As Giles J observed with regard to the deeds before him in Re Spedley Securities at 1,744, it can be seen from the face of the Settlement Deeds that each is a product of extensive and detailed negotiations. That factor is important because the negotiations were conducted by ASIC on behalf of the Mezzanine Companies. Moreover, the applicant liquidators were not themselves directly involved in the conduct of the KPMG Proceeding or the Directors Proceeding. That last fact - that the applicant liquidators were not themselves directly involved in the conduct of the KPMG Proceeding or the Directors Proceeding - was resolved by a number of important facts and matters: 1. the applicant liquidators had direct knowledge of the claims made in the Directors Proceedings by reason of their own investigations and their prior commencement of proceedings against some directors (commonly referred to as the Ann Street and York Street Proceedings); 2. in relation to the KPMG Proceeding, the applicant liquidators: 2.1 had direct knowledge of the claims made in the KPMG Proceeding by virtue of their own application in the Preservation Proceeding; 2.2 had requested and received access to an opinion from Counsel for ASIC as to their views regarding the merits of the claim against KPMG, as well as to executive summaries of certain draft experts' reports; 2.3 were informed about the proceedings and about the settlement negotiations as they progressed, by ASIC and ASIC's solicitors, Johnson Winter and Slattery (JWS). 35 Finally, the applicant liquidators' considerations and conclusions as to the merits of the compromises represented by the KPMG Deed and the Carey Deed and the reasons why entry into them was, in their judgment and on balance, in the interests of creditors, was described at length by Mr Vickers. 36 As identified earlier, in the applicant liquidators' judgment, what was achieved was a certain and early distribution for creditors, which was of higher than usual significance to the decision to enter into the KMPG Deed and the Carey Deed: see [33.4] and [33.5] above. The prospect of benefits for creditors was and remains sufficiently substantial to warrant the applicant liquidators entering into the KMPG Deed and the Carey Deed: cf Re ACN 076 673 875 Ltd (2002) 42 ACSR 296 at [24]. 37 Further, it cannot here be said that the applicant liquidators have acted in bad faith or for improper purposes. The applicant liquidators believe the KMPG Deed and the Carey Deed to be for the benefit of the creditors of the Mezzanine Companies. There are no grounds, let alone substantial grounds, for doubting the prudence of the applicant liquidators' conduct and approach. The KMPG Deed and the Carey Deed bring an early, certain and substantial benefit to the creditors. For all those reasons, I accept that the Court should approve the applicant liquidators' entry into the KMPG Deed and the Carey Deed notwithstanding that the applicant liquidators executed the KMPG Deed and the Carey Deed without first obtaining approval from the Court or creditors.
FRAMING OF THE ORDERS 38 If retrospective approval is granted, I consider it appropriate that there also be an order under s 1322(4)(d) of the Act extending the period for applying for that approval to the date of the giving of the approval. The question of whether such an order is necessary has been the subject of differing judicial opinion: see Chamberlain v RG & H Investments Pty Ltd (ACN 000 599 477) (2009) 76 ACSR 415 at [22] and the authorities cited therein; cf Hutchinson v Hillcrest Litigation Services Limited [2010] NSWSC 934. I prefer the approach of Lindgren J in Chamberlain at [24] and would make an order that if and to the extent that an extension of time is required, time is extended.
APPLICATION FOR DIRECTIONS UNDER Section 479(3) AND Section 511 OF THE ACT AS TO APPORTIONMENT / DISTRIBUTION OF SETTLEMENT FUNDS 39 The applicant liquidators also sought orders concerning the appropriate distribution of the proceeds of all the settlements achieved in the Directors and KPMG Proceedings. These funds are currently held by ASIC. 40 Before turning to consider the question of whether directions of the kind sought should be made, it is necessary to consider the two opinions of Counsel to which the applicant liquidators have had regard in forming their views as to entry into the KPMG Deed and as to the fair and proper apportionment of the proceeds of the settlements. Unusually, these opinions were not provided to the Court prior to the hearing of the application. Two reasons were proffered: 1. The privilege in the opinions is not only the liquidators'. The opinions are subject to common interest privilege held also by ASIC. Therefore, the applicant liquidators submitted, it was a question for ASIC as to whether it would agree to the opinions being placed before the Court. 2. Recent decisions, specifically Australian Power Steering Pty Ltd v Exego Pty Ltd [2010] VSC 497, Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288 and Weston v Publishing and Broadcasting Ltd [2011] NSWSC 14, have called into question the extent to which privilege in such opinions may be maintained once they are used in an application before the Court. 41 In relation to the first reason, this case is unusual. The proceedings have not been conducted by the liquidators on behalf of the companies in liquidation. Rather they have been conducted by ASIC and their lawyers pursuant to s 50 of the ASIC Act for the benefit of the creditors of the companies in liquidation and those proceedings have resulted in settlements. 42 The second reason is more complicated. Until recently, in applications for judicial advice or directions by the Court required to be brought under a legislative provision, Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar; the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand (2006) 66 NSWLR 112 was authority for the following principles: 1. Legal professional privilege is a rule of substantive law and cannot be abrogated by the principles of natural justice in a statutory proceeding for judicial advice or directions, absent express or implied abrogation by statute or the rules of the Court (assuming a procedural rule could do so): at [35]; 2. It cannot be said that an application for judicial advice or directions under s 63 of the Trustee Act 1925 (NSW) - and, by analogy, a liquidator's application for approval or directions under ss 477(2A) and (2B), s 479(3) or s 511 - is "a proceeding in the Court", so that any material before the Court becomes "evidence" to which the Evidence Act 1995 (Cth) (the Evidence Act) applies. Accordingly, s 122 of the Evidence Act cannot apply to material placed before the Court on such an application, such that legal professional privilege in that material could be held to have been waived pursuant to it. Why? Because "[a]pplications for judicial advice have a particular pedigree": at [40]. They are not adversarial proceedings. The order made is permissive in nature and does not carry with it the usual consequences of an order made in adversarial proceedings: - "it does not create a res judicata. It does not finally determine the rights of parties": at [41]. It simply gives the protection of the Court's "permission" or approval to take a particular action. It cannot be breached, but if improperly obtained may be revoked: at [40]-[43]; see also Application of Macedonian Orthodox Community Church St Petka Incorporated (No 2) (2005) 63 NSWLR 441 at [23] and Application of Perpetual Trustee Company Ltd [2003] NSWSC 1185 at [14]. 3. Even if that view is wrong (and I do not consider that it is), s 122 of the Evidence Act (implied waiver of privilege) does not assist the challenger of privilege in a legal opinion placed before the Court in such a case because (at [44]-[45]): 3.1 the communication or its substance is not disclosed "to another person" in such a case, as the Court is not "another person" within the meaning of s 122(2); 3.2 if the legal opinion is provided to the Court on a confidential basis, then plainly enough the applicant is objecting to further disclosure and so any disclosure is as a confidential communication, thus again privilege is not waived under s 122(2); and 3.3 if the legal opinion is provided to the Court not only on a confidential basis but also otherwise than by adduction of evidence, then there can be no waiver under s 122(1) as the party has not consented to the privileged evidence being adduced. 43 The common law rules of waiver do not apply where the applicant seeks to protect the legal opinion from disclosure by placing it before the Court on a 'confidential basis': The position is even stronger where the applicant has placed the legal opinion before the Court only after the Court has indicated that doing so is necessary before it can be in a proper position to give the judicial advice or directions sought: at [46]-[53]. As Beazley JA and Giles JA stated in Macedonian Orthodox at [53]: … the claimant did not waive privilege when the legal opinion was placed before the Court as an annexure to the statement. It is a usual practice in proceedings of this type for a Court to be assisted by a legal opinion. Indeed, the Court would, in many instances, be at a serious disadvantage if it did not have that assistance. However, in circumstances where the judicial advice proceedings remain essentially non-adversarial, notwithstanding that there is a contradictor, it would be contrary to principle to find an implied waiver in the claimant's conduct in placing the matter before the Court. 44 Australian Power Steering and Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288, both handed down in November last year, appear to cast some doubt on these principles. In Australian Power Steering, Pagone J refused to keep written advice from Counsel confidential, holding that there was nothing in the advice which justified an order for confidentiality: at [5]. In Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288, Barrett J granted access to the content of several affidavits of the special purpose liquidator and to Counsel's submissions, on the basis that privilege had been waived in the material in question because, inter alia, the privileged material had been used to obtain the extension order, which they knew would be controversial and likely to be challenged: see [43]-[51] and, in particular, [46]-[47]. 45 However, Barrett J in Weston [2010] did not doubt the principles in Macedonian Orthodox. To the contrary, his Honour expressly endorsed the reasons of Beazley JA and Giles JA in Macedonian Orthodox and stated that the fact that the material was placed before the Court for the purposes of an ex parte application for an extension of the time for service did not result in the privilege in the material being lost. In that case however, there was an "added dimension" which took it outside the scope of Macedonian Orthodox - while in an immediate sense the material was deployed in an ex parte context, the wider landscape was such as to raise a well-founded expectation that the decision based on the material would in due course itself become the subject of an interlocutory proceeding of an adversarial kind: at [44]-[46]. 46 In Barrett J's subsequent decision in the same proceeding handed down in February 2011 (Weston v Publishing and Broadcasting Limited [2011] NSWSC 14), which concerned the question of privilege of a litigation funding agreement, his Honour referred to his earlier decision of November 2010 and noted that that "added dimension" was inapplicable to the litigation funding agreement: at [18]-[19]. His Honour noted that the special purpose liquidator had placed it before the Court in another context, being a context similar to the present - in an ex parte application for approval of his entry into the agreement under s 477(2B) of the Act - and he was entitled to pursue that application without notice to either the committee of inspection or the creditors generally. In making a confidentiality order in respect of the litigation funding agreement, Barrett J stated at [21] that: In the context of the s 477(2B) application, the position of the special purpose liquidator was very closely analogous with that of a trustee seeking judicial advice and, for that purpose, placing confidential legal advice before the court on a confidential basis. That, coupled with the fact that no one other than the special purpose liquidator participated in the hearing of the s 477(2B) application, makes entirely applicable the reasoning in Macedonian Orthodox … [2006] NSWCA 160; (2006) NSWLR 112 discussed at [2010] NSWSC 1288, paragraph [43]. For that reason, the particular deployment of the litigation funding agreement upon the s 477(2B) application was not inconsistent with retention of privilege in the document's content and did not cause the privilege to be lost. 47 Barrett J held that the litigation funding agreement was protected by client legal privilege, the deployment of the agreement by the special purpose liquidator in his s 477(2B) application did not cause privilege to be lost and there was no basis for finding that privilege had otherwise been waived or lost: at [23]-[24]. 48 Notwithstanding Pagone J's decision in Australian Power Steering, in my view Macedonian Orthodox remains authoritative. However, to come squarely within the ambit of Macedonian Orthodox and thereby maintain privilege in the two opinions, two circumstances should exist: 1. the opinion is not provided to the Court by adduction of evidence: see Macedonian Orthodox at [44]-[45]; and 2. the opinion is provided to the Court only after the Court has indicated that doing so is necessary before it can be in a proper position to give the judicial advice or directions sought: see Macedonian Orthodox at [51]. 49 Both those circumstances exist in the present case. Indeed, Counsel for the applicant liquidators and Counsel for ASIC did not contend otherwise. In those circumstances, I was provided with a copy of the advices. For the limited purposes identified, I have read them and relied on them. The orders I will make in this proceeding will record those facts. 50 I now turn to consider the substantive applications for directions. 51 Section 479(3) of the Act applies to Court appointed liquidators. It provides that "[t]he liquidator may apply to the court for directions in relation to any particular matter arising under the winding up". That section applies to the liquidators of York Street Mezzanine Pty Ltd, Ann Street Mezzanine Pty Ltd and Cinema City Mezzanine Pty Ltd (all in Liquidation). 52 Section 511 of the Act applies to liquidators appointed under a voluntary winding up. It provides: (1) The liquidator, or any contributory or creditor, may apply to the Court: (a) to determine any question arising in the winding up of a company; or (b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. … (2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just. That section applies to Bayshore Mezzanine Pty Ltd, Bayview Heritage Mezzanine Pty Ltd, Market Street Mezzanine Pty Ltd, Market Street Mezzanine No 2 Pty Ltd, Mount Street Mezzanine Pty Ltd and North Sydney Finance Pty Ltd (all in Liquidation). 53 It was common ground that ss 479(3) and 511 of the Act are the modern manifestations of the long-standing ability of liquidators, akin to that of trustees, to seek directions from the Court in relation to particular matters arising in the winding up: see s 34 of the Joint Stock Companies Winding Up Act 1848 (UK) and s 23 of the Companies (Winding Up) Act 1890 (UK). 54 In providing directions, the Court does not make commercial decisions for a liquidator. As Giles JA said in Re Spedley Securities Ltd (in liq) at 1744-1745: It is generally not appropriate in an application for directions to make the liquidator's commercial decisions for him where he has full power to act and the liquidator should not seek directions as a kind of insurance that he has made the right commercial decision. (Citations omitted.) 55 In the present case, the apportionment between the Mezzanine Companies is a complex and difficult one. The situation is complicated by the fact that one of the liquidators, Mr Vickers, is either a liquidator or the liquidator for all bar one of the Companies - North Sydney Finance Pty Ltd. 56 For that and the following reasons, I accept the applicant liquidators' submission that this is a case where it is appropriate for the applicant liquidators to inform the Court of the matter and seek its directions. 57 First, ASIC achieved a significant global compromise of the proceedings brought by ASIC in the name of the Mezzanine Companies. The applicant liquidators were left to determine a basis for allocating the proceeds of the settlement across the Mezzanine Companies that is the most fair and equitable in all the circumstances. They approached that task by focusing on the claims giving rise to the payment under the KPMG Deed. Why? Because the vast majority of the total funds available for distribution from the settlements are attributable to the KPMG Deed. 58 Secondly, given that the applicant liquidators had no direct role in the conduct of the proceedings that led to the settlement and were only peripherally involved in the settlement negotiations, the applicant liquidators are at something of a disadvantage in bringing the application to the Court. However, the evidence discloses that they have endeavoured to inform themselves as fully as reasonably practicable, in the unusual circumstances they face, of the factors relevant to the apportionment question. So, for example, the liquidators requested and obtained an opinion from ASIC's Counsel about: 1. the alternative bases of quantification of the plaintiffs' claims in the KPMG Proceeding, and the quantum of those claims, and 2. any differences in the merits of the claims of the respective plaintiffs, which might appropriately be reflected in any distribution of the KPMG settlement sum as between those companies. The evidence also discloses that the applicant liquidators have had careful regard to that opinion in reaching their views as to a fair and proper apportionment of the settlement sum. 59 What then did the applicant liquidators do? The approach they adopted may be summarised as follows: 1. First, the liquidators considered that the total fund should be proportionally distributed to each company based on the relative quantum of that company's claim against KPMG. 2. Next, they considered the relative merits of each company's claim against KPMG and whether adjustment should be made to reflect any differences in those merits. 3. Then, to reflect the giving of a release by Cinema City as required by KPMG, the liquidators considered a distribution to that company as consideration for its co-operation, even though it was not a party to the KPMG Proceeding. 60 The liquidators arrived at three alternative methods of distribution. Those methods were described at length by Mr Vickers and may be summarised as follows: 1. Method 1 - the funds are distributed based on the relative proportion of each company's claim against KPMG, no adjustments for merit and no distribution to Cinema City; 2. Method 2 - builds on Method 1 but makes one merit adjustment - reduces Mount Street's claim by 40% to reflect the fact that Mount Street's claim is in respect of KPMG's auditing of WPC's accounts only, not of its own accounts; 3. Method 3 - builds on Method 2, by allowing a distribution to Cinema City of $500,000, with a rateable reduction in the moneys distributed across the remaining Mezzanine Companies. A confidential spreadsheet setting out the three alternative methods of distribution, showing how each method affects the proportion of recovery for each Mezzanine Company and setting out projected estimated returns for the creditors of each company under each alternative method was produced to the Court. 61 After completing their projections and evaluations, the liquidators concluded that Method 3 was the most fair and equitable method of apportioning the fund across the Mezzanine Companies and the applicant liquidators sought the Court's direction as to whether, in all the circumstances, they are justified in apportioning and distributing the funds in this manner. I consider that they are so justified.
CONFIDENTIALITY 62 The applicant liquidators assumed obligations of confidentiality under the terms of the Settlement Deeds - cl 7.4(e) of the KPMG Deed, cl 9 of the Carey Deed, the Rundle Deed and the Beck Deed and cl 13 of the Dixon Deed. Unsurprisingly, the applicant liquidators sought orders preserving the confidentiality of the KPMG Deed and the Carey Deed as well as other documents summarising certain aspects of the Settlement Deeds and settlement negotiations. For example, the applicant liquidators submitted that estimates and projections that appeared in spreadsheets recording the settlement sums were based on a number of assumptions and subject to a number of significant variables. As will be readily apparent, those estimates were provided to assist the Court in considering the application under s 477(2B) of the Act but can be treated as a rough guide only. If they were not kept confidential, they may mislead creditors as to the likely amount of any final dividend. 63 Applications by liquidators for confidentiality orders in respect of compromises for which they have sought Court approval are not unusual: see Elderslie Finance Corporation Limited v Newpage Pty Ltd (No 6) (2007) 160 FCR 423 at [43]. As Lindgren J said in Elderslie Finance at [43]-[44] (citing McGrath re HIH Insurance Ltd [2005] NSWSC 731 and Re JN Taylor Holdings Ltd (in liq) [2007] SASC 193): The administration of justice including the just and efficient winding up of a company, requires that proper compromises be facilitated rather than obstructed. Apart from the requirement of leave, Mr Hamilton would have been entitled to bargain for and reach agreement upon a confidentiality regime in respect of the compromise that he has reached with Mr Parsons and CBI. He and they would have been entitled, in particular, to preserve their negotiations and agreement against disclosure to Mr Yii [a director]. …It would discourage the negotiation of compromises if liquidators knew that all their negotiations and compromise agreements were to be made public, a fortiori in a case such as the present one … 64 For the same reasons, orders will be made preserving confidentiality of the Settlement Deeds and the documents associated with them. As Lindgren J said, such orders are in the interests of the administration of justice including the just and efficient winding up of the Mezzanine Companies. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.
Associate: Dated: 1 September 2011 SCHEDULE PART 1 York Street Mezzanine Pty Ltd (ACN 090 631 057) (in liquidation) PART 2 Bayshore Mezzanine Pty Ltd (ACN 097 759 272 (in liquidation) Ann Street Mezzanine Pty Ltd (ACN 102 854 866) (in liquidation) Bayview Heritage Mezzanine Pty Ltd (ACN 105 235 738) (in liquidation) Market Street Mezzanine Pty Ltd (ACN 091 354 513) (in liquidation) Market Street Mezzanine No.2 Pty Ltd (ACN 088 363 384) (in liquidation) Cinema City Mezzanine Pty Ltd (ACN 090 584 820) (in liquidation) PART 3 Mount Street Mezzanine Pty Ltd (ACN 086 176 052) (in liquidation) PART 4 North Sydney Finance Pty Ltd (ACN 107 354 610) (in liquidation)
DERRICK CRAIG VICKERS AND KATHRYN WARWICK (IN THEIR CAPACITY AS LIQUIDATORS OF THE COMPANY LISTED IN PART 1 OF THE SCHEDULE), DERRICK CRAIG VICKERS (IN HIS CAPACITY AS LIQUIDATOR OF THE COMPANIES LISTED IN PART 2 OF THE SCHEDULE), DERRICK CRAIG VICKERS AND GREGORY WINFIELD HALL (IN THEIR CAPACITY AS LIQUIDATORS OF THE COMPANY LISTED IN PART 3 OF THE SCHEDULE) and MARTIN BRUCE JONES AND DARREN GORDON WEAVER (IN THEIR CAPACITY AS LIQUIDATORS OF THE COMPANY LISTED IN PART 4 OF THE SCHEDULE)
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
[2010] VSC 497
[2007] SASC 193
(2009) 262 ALR 85
(2007) 164 FCR 237
(2006) 66 NSWLR 112
(2005) 63 NSWLR 441
(2007) 160 FCR 423