Domson P/L & 6 Ors v Zhu & 1 Or

Domson P/L & 6 Ors v Zhu & 1 Or - [2005] NSWSC 1070 - NSWSC 2005 case summary — Zoe

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6627/04 Domson Pty Ltd & 6 Ors v Peter Tao Zhu & 1 Or JUDGMENT 1 HIS HONOUR: The plaintiffs lent money to fund litigation on the basis they would obtain a share of the recoveries. They seek to enforce their agreement. Mr Peter Zhu claims that the agreement is void for champerty, and the plaintiffs cannot recover. 2 In May 2001, Mr Zhu was suing the Sydney Organising Committee for the Olympic Games. He had entered into an agreement with TOC Management Services Pty Ltd ("TOC") which authorised and obliged him to sell memberships to an "Olympic Club" to residents of China. He sued SOCOG for interfering with that agreement. The proceedings were listed for hearing on 30 July 2001 with an estimated duration of four weeks. Mr Zhu had a good case. But he did not have the money needed to pay his solicitors and barristers. Mr Zhu's solicitors estimated that he needed approximately $300,000 to $350,000 to meet his costs of the hearing. 3 Mr Zhu held the benefit of his agreement with TOC, and his cause of action against SOCOG, on trust for Australian Chinese Sports Connections Pty Ltd, ("ACSC"). 4 Litigation Lending Services ("LLS") is a partnership which provides funding for litigation, usually to insolvency practitioners. 5 If LLS were to be involved, they wanted a share of any recoveries. They advised that they would only provide funding in an insolvency context, as the rules of champerty and maintenance prevented a third party funder from entering into an arrangement to fund litigation for a fee, where the funder had no interest in the cause of action. If the creditors of ACSC consented to ACSC being placed into administration, LLS would enter into a funding arrangement with the administrator. It would only do so once ACSC was placed into administration. 6 An administrator, Mr Condon, was appointed to ACSC and it later executed a deed of company arrangement. LLS made a Funding Agreement with ACSC, Mr Condon, and Mr Zhu. LLS provided $300,000 and was entitled to a share of recoveries up to $1,250,000. 7 Mr Zhu succeeded before the trial Judge. On 23 November, 2001, Bergin J entered judgment against SOCOG for $4,234,319 plus costs. SOCOG appealed. Mr Zhu's legal representatives thought that the Funding Agreement might cloud the issues. They asked LLS to agree to its being terminated. 8 On 6 February, 2002, the parties and Walker Hedges & Co, (Mr Zhu's solicitor), made another agreement called the Termination Deed. As its name suggests, the Funding Agreement was terminated. Mr Zhu agreed to pay $100,000 from the first $1,000,000 recovered from the Action and, where the "Final Amount" recovered was between $1,000,000 and $6,000,000, 20% of the difference between the Final Amount and $1,000,000. He also agreed to pay a further $50,000 when any funds were received from SOCOG. Mr Zhu also gave an irrecoverable direction to his solicitors, Walker Hedges & Co, to pay $50,000 in accordance with the provisions of the Deed, and to pay from any other sum otherwise payable to him, $100,000 and 20% of the difference between the amount otherwise payable to him and $1,000,000. This direction was not in terms limited to making payments where the sum received from SOCOG was less than $6,000,000. 9 On 20 December 2002, the NSW Court of Appeal allowed an appeal from the decision of Bergin J (SOCOG v Zhu [2002] NSWCA 380). The damages were reduced to $326,904. Bergin J's costs order was confirmed. No order was made for the costs of the appeal, save that Mr Zhu was to have a certificate under the Suitors' Fund Act 1951 in respect of his own costs of the appeal if otherwise entitled. 10 Mr Zhu obtained special leave to appeal from the judgment of the Court of Appeal. On 17 November 2004, the High Court allowed the appeal and reinstated the judgment of Bergin J. (Zhu v The Treasurer of the State of New South Wales [2004] HCA 56; (2004) 211 ALR 159, 79 ALJR 217). 11 On 28 August 2003 and 25 November 2004, Mr Hedges received two payments of $170,000 and $50,000 respectively, being the balance of the costs which were payable to Mr Zhu in respect of the costs order made in his favour in the Supreme Court proceedings. On 6 December 2004, he received the sum of $4,999,671.29 representing payment of the judgment amount awarded by Bergin J plus interest on that judgment from the date of judgment until the date of payment. Hence the total amount which he had received to the date of the hearing was $6,046,575.29. He anticipated receiving an amount of about $375,000 in respect of the appeal to the Court of Appeal, the application for special leave to the High Court and the hearing of the appeal to the High Court.

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LLS's Claim 12 LLS sued Mr Zhu for the $50,000, and other moneys allegedly payable under the Termination Deed. It also seeks to enforce the irrevocable direction in Schedule 1 of the Termination Deed to require Walker Hedges & Co to pay from the moneys held by that firm $50,000 plus $100,000, plus 20% of the difference between the sum payable to Mr Zhu pursuant to the judgment of Bergin J and $1,000,000. The Issues 13 Mr Zhu's principal answer to this claim is that the Termination Deed is void for champerty. He also says that he is not liable to pay any more than $150,000 under the Termination Deed as the Final Amount is in excess of $6,000,000. He says that the direction in Schedule 1 has to be read conformably with, and is ancillary to, the obligation he assumed under the deed, and if he is not liable for the debt because the final amount exceeds $6,000,000, Walker Hedges & Co cannot be required to pay any sum pursuant to the direction. 14 Walker Hedges & Co have entered a submitting appearance save as to costs. 15 In response to Mr Zhu's claim that the Termination Deed is champertous, LLS contended that it was entitled to $1,250,000 under the Funding Agreement, despite its termination. It contended that by the Funding Agreement, the administrator assigned part of the proceeds of the SOCOG proceedings when in future they should be received. This assignment was said to fall within the well established exception to the rules against maintenance and champerty, where a liquidator or administrator exercises statutory power to sell the company's property. 16 Alternatively, LLS contended that the Termination Deed also fell within the acknowledged statutory exception to the laws against maintenance and champerty because it also was entered into by the deed administrator, Mr Condon, in the exercise of his statutory powers. It is common ground that Mr Zhu held his cause of action against SOCOG on trust for ACSC. Mr Condon consented to the direction that Walker Hedges & Co pay a proportion of the judgment to LLS in accordance with the direction in Schedule 1. That, it was submitted, was a disposition of the company's property for which consideration was received from LLS, inter alia, by its agreeing to the termination of the Funding Agreement. 17 Thirdly, LLS contended that even if the Termination Deed fell outside the statutory exception for champertous agreements made by administrators, when the Termination Deed was entered into, LLS had a sufficient commercial interest in the litigation to justify its involvement which took the agreement outside the principles of maintenance and champerty. (Trendtex Trading Corporation v Credit Suisse [1982] AC 679 at 703). LLS contended that it had such a relevant commercial interest at the time the Termination Deed was entered into as a result of the Funding Agreement, which provided it with enforceable and valuable rights which it surrendered. 18 As to the first contention, Mr Zhu denied that the Funding Agreement provided for any assignment of property to LLS. If it did, he submitted that the Funding Agreement was also void for champerty because of its provisions relating to LLS's rights to control the litigation. In any event, he says that the Funding Agreement was terminated by the Termination Deed of 6 February 2002, and that any promise in the Funding Agreement which might have operated as an assignment of future property was released by the Termination Deed. 19 As to the second contention, Mr Zhu denied that the parties' entering into the Termination Deed involved the exercise by the deed administrator of any statutory power to sell ACSC's property. In any event, he contended that the provisions in the Termination Deed in relation to LLS's rights to control the proceedings made the deed void for champerty, even if it were entered into by the deed administrator in the exercise of his statutory powers. 20 As to the third contention, Mr Zhu denied that the Funding Agreement, if valid, gave LLS a sufficient commercial interest to prevent the rules against maintenance and champerty from applying to the Termination Deed. He also said that the Funding Agreement was itself void for champerty. The Funding Agreement 21 Mr Condon was appointed as voluntary administrator of ACSC on 20 June 2001. On 17 July 2001, the creditors of ACSC resolved pursuant to s 439A of the Corporations Act 2001 (Cth) that it execute a deed of company arrangement. 22 The Funding Agreement was made on 3 August, 2001. The parties to it were Mr Condon, ACSC, and Mr Zhu. Mr Condon was still the administrator of ACSC. He was not yet the deed administrator. LLS agreed to provide funding to Mr Condon to pay the following:

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Such other fees and expenses in respect of which Mr Condon obtained the prior written consent of LLS. 23 The "Final Amount" meant the gross amount received by Mr Condon whether by way of settlement, orders made, or judgment entered, in respect of the Proceedings. 24 The "Proceedings" were defined as the proceedings between Zhu, Mr Condon, and the defendants in Supreme Court of New South Wales Equity Division, Commercial List No. 50167 of 2000. In fact Mr Condon was not a party to those proceedings, but nothing turns on that. 25 Clause 2.6 of the Funding Agreement provided: " The Insolvency Practitioner will pay LLS 10% of any settlement monies received in respect of the Proceedings if settlement occurs after any offer of funding pursuant to this Funding Agreement and before acceptance of that offer. " 26 Clause 5.4 provided: " If, after this Agreement is terminated, the Insolvency Practitioner concludes the Proceedings and a Final Amount is received the Insolvency Practitioner agrees to repay to LLS any amounts paid by LLS under this Agreement from the Final Amount. " 27 Clause 3.1 required Mr Condon to repay the Funding to LLS on the Repayment Date. That meant the date of receipt as cleared funds of the Final Amount. If Mr Zhu was unsuccessful in his claim against SOCOG, the moneys advanced by LLS would have been irrecoverable as no Final Amount would have been received by Mr Condon. 28 Clause 3.2 provided: " In addition to repayment of the Funding the Insolvency Practitioner agrees to pay to LLS an additional sum calculated as follows: 3.2.1 Where the Final Amount is less than $1,000,000 the sum of $100,000; 3.2.2 Where the Final Amount is between $1,000,001 and $6,000,000 an amount equal to $100,000 and 20% of the difference between the Final Amount and $1,000,000; 3.2.3 Where the Final Amount exceeds $6,000,000 the sum of $1,250,000. " 29 By clause 4.2, LLS acknowledged that the "Representatives" were and would continue to be instructed by the Insolvency Practitioner in all matters relating to the proceedings and that the Insolvency Practitioner had the right, subject to clause 4.3, to direct, conduct and conclude the proceedings by way of settlement. 30 Clause 4.3 provided: " Notwithstanding the provisions of clause 4.2 above, the Insolvency Practitioner and Zhu agree that in the event that an offer is received from the Defendants to settle the proceedings for less than $5,000,000 then such offer shall be referred to John Kelly QC for his advice. If Mr. Kelly advises that the offer should be accepted and LLS wishes to accept but Zhu refuses to accept then, LLS shall terminate this funding agreement immediately and Zhu shall be obliged to repay the LLS expenses to the date of termination. "

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Deed of Company Arrangement 31 On 7 August 2001, ACSC and Mr Condon entered into a deed of company arrangement pursuant to the resolution of creditors of 17 July 2001. Clause 6.1 provided that the Creditors must accept their entitlement under the deed in full satisfaction and complete discharge of all debts and claims which they had or claimed to have against the company at the first date on which the company and the deed administrator signed the deed. Clause 6.3 provided that all recoveries in relation to the legal action against the Olympic Club and SOCOG should be payable to the deed administrator for the benefit of participating creditors. "Creditors" was defined to mean all unsecured creditors of the Company whose claims against the company arose prior to the commencement date and would have been admitted to claim as a creditor in liquidation of the Company. Negotiation of the Termination Deed 32 On 23 November 2001, Bergin J granted a temporary stay of execution of the judgment on condition that SOCOG pay an amount of $260,006 plus interest of $66,898. On 3 December 2001, SOCOG paid the amount of $326,904. 33 The Court of Appeal extended the stay of execution of the judgment on condition that SOCOG pay a further amount of $500,000 on account of Mr Zhu's costs. On 21 January 2002, that sum was paid to Mr Zhu's solicitor. Mr Zhu was required to give a mortgage over his house to secure the repayment of that sum in the event that the appeal succeeded. 34 On 6 December 2001, Mr Zhu's solicitors, Walker Hedges & Co, wrote to LLS about the existing funding arrangement. Mr Hedges expressed concerns held by him and by Mr Kelly SC, who acted for Mr Zhu, that if SOCOG obtained a copy of the Funding Agreement they might rely on it as a ground in support of their appeal to allege that the losses which Mr Zhu claimed were not his losses, but belonged to ACSC, and that therefore he could not prove any entitlement to an award of damages. Whilst it was thought that this argument was incorrect, Mr Hedges said it might confuse and cloud the issues to such an extent that the Court of Appeal might believe that the matter should be remitted to the Supreme Court for further hearing. He therefore proposed that ACSC should be brought out of external administration and the Funding Agreement should be terminated. Mr Hedges said that this would require the full amount of LLS's claim and entitlement pursuant to the Funding Agreement to be paid and the administrator's costs to be paid. He proposed that the $500,000 to be received on account of the costs award should be used in the following manner:

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The Termination Deed 36 The Termination Deed was entered into on 6 February, 2002. The parties were LLS, ACSC, Mr Condon, Mr Zhu and Walker Hedges & Co. Clause 3.1 dealt with the distribution of the preliminary payment of $500,000 made by SOCOG pursuant to orders of the Court of Appeal made on 10 December 2001. $253,000 was to be paid to LLS, $147,000 was to be paid to Mr Zhu, and $100,000 was to be paid to Mr Hedges to be applied to fund the prosecution of the "Action". "Action" was defined to mean the proceedings in the Equity Division of the Supreme Court, the Court of Appeal proceedings, and any proceedings by way of appeal from the Court of Appeal proceedings, or any re-hearing of the whole or any part of those proceedings. LLS was to apply the sum of $253,000 (called "the LLS Amount") towards satisfaction of the obligations of Mr Zhu and ACSC under the Funding Agreement of 3 August 2001. Clause 3.3 provided that Mr Zhu would apply the amount of $147,000 towards satisfaction of all debts and liabilities of ACSC and the Deed Administrator to permit the deed of company arrangement to be terminated. Clause 3.4 provided that Mr Zhu and Walker Hedges & Co would apply the sum of $100,000 to fund the prosecution of the Action. 37 Clause 5.1 provided that if LLS was paid the LLS amount (that is, the sum of $253,000) in accordance with clause 3.1(a), then forthwith upon payment of the LLS amount, LLS released the Deed Administrator from all Claims it had against the Deed Administrator arising from or in connection with the Funding Agreement. 38 By clause 4.1, LLS, Hedges, Zhu, and ACSC, acknowledged that: " … (d) by their entry into this deed: (i) The Contingent Debt will become due and payable by Zhu to LLS; and (ii) Zhu must repay the Contingent Debt on the Repayment Date; and (iii) Zhu acknowledges that in addition to any sum payable under (ii), he must also pay to LLS the amount of $50,000 upon the earlier of; (A) the receipt by Zhu of the Final Amount; or (B) the receipt by Zhu of any funds whatsoever from SOCOG in the Action; and (iv) The obligations of Zhu and the Company to LLS under this deed shall prevail over and be observed and performed before and in priority to any arrangement or agreement or rights or obligations that may exist between Zhu and the Company. " 39 The expression "Contingent Debt" was defined as follows: " 'Contingent Debt' means the obligation under the Funding Agreement to pay LLS the sum of: (a) $100,000 from the first $1,000,000 recovered from the Action; and (b) where the Final Amount is between $1,000,000 and $6,000,000, 20% of the difference between the Final Amount and $1,000,000. " 40 The "Repayment Date" meant the date of receipt of the Final Amount. "Final Amount" meant "the gross amount received by Zhu or the Company by way of settlement of or orders or judgment entered in respect of the Action". 41 It will be observed that the definition of "Contingent Debt" dealt with the Insolvency Practitioner's obligation under the Funding Agreement to pay an additional sum where the Final Amount was less than or equal to $6,000,000. Mr Zhu assumed the liability to pay an amount which was the same as the amount which Mr Condon had been obliged to pay under the Funding Agreement. However, the definition of Contingent Debt did not deal with the circumstance where the Final Amount exceeded $6,000,000. Under the Funding Agreement, Mr Condon had agreed to pay LLS the additional sum of $1,250,000 where the Final Amount exceeded $6,000,000. The definition of "Contingent Debt" in the Termination Deed did not deal with that eventuality. 42 Clause 4.3 provided: " LLS, Hedges, Zhu and the Company agree that: (a) on the date of this deed Zhu will execute and provide the Direction to LLS. (b) the Direction is unconditional and irrevocable, and shall be held by LLS for as long as it in its absolute and uncontrolled discretion determines. (c) as security for the performance of their obligations under this deed, Zhu (and to the extent required) the Company upon execution of this Deed hereby grants to LLS a first ranking charge over the Final Amount. (d) notwithstanding the termination of the Funding Agreement in accordance with clause 6, Zhu, the Company and Hedges will: (i) keep LLS informed about the conduct of the Action, and (ii) will not settle or conclude the Action without the prior consent of LLS. " 43 By clause 4.3(a), the Company agreed to Mr Zhu providing the Direction in the terms set out in Schedule 1. The deed administrator, Mr Condon, was also a party to the deed. The direction in Schedule 1 was addressed to Walker Hedges & Co and signed by Mr Zhu. It stated: " You are hereby irrevocably directed to pay to LLS: 1. The sum of $50,000 in accordance with clause 4.1(d)(iii) of this Deed; and 2. from any other sum otherwise payable to me pursuant to any judgement, order or settlement in or of the Action the sum calculated in accordance with the following formula, where X is the amount otherwise payable to me, and P, is the amount to be paid to LLS pursuant to this direction to pay. P = $100,000 + 20% [X - $1,000,000] " 44 Accordingly, the direction covered the situation where the amount payable pursuant to a judgment exceeded $6,000,000. Rather than LLS being entitled to a fixed amount of $1,250,000, it was to be entitled to $100,000 plus 20% of the difference between the amount payable under the judgment and $1,000,000. Where the judgment was more than $6,000,000, this might be more or less than $1,250,000.

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Did the Funding Agreement Assign Future Property to LLS? 45 I will deal first with LLS's submissions that by the Funding Agreement, Mr Condon assigned part of the proceeds of the SOCOG proceedings when they became available in the future. This claim was not articulated in the Summons. But no objection was taken by Mr Zhu on that score. 46 The relevant promise by Mr Condon in the Funding Agreement was contained in clause 3.2. He agreed to pay to LLS an additional sum calculated in different amounts according to whether the Final Amount was less than $1,000,000, was between $1,000,001 and $6,000,000 or exceeded $6,000,000. Clause 3.2 is set out at para [28] above. It contained no term that the payment should be made out of the proceeds of the judgment which the company might receive. 47 Clause 2.6 provided that Mr Condon would pay LLS "10% of any settlement moneys received in respect of the Proceedings if settlement occurs after any offer of funding pursuant to this Funding Agreement and before acceptance of that offer." However, the offer of funding was accepted and the funding was advanced. Accordingly, clause 2.6 did not operate. 48 Clause 5.4 of the Funding Agreement contained a promise by Mr Condon that if, after the Funding Agreement was terminated, a Final Amount was received, he would repay to LLS any amounts paid by LLS under the agreement from the Final Amount. 49 This clause only dealt with the repayment to LLS of amounts which LLS paid under the Funding Agreement. In other words, the repayment of amounts paid by LLS for the Insolvency Practitioner's Costs, and $300,000 for legal costs. 50 No clause in the Funding Agreement used words of assignment in respect of part of the Final Amount to be used to pay the additional sum under clause 3.2. 51 LLS referred to the definition of "Contingent Debt" in the Termination Deed which referred to an obligation under the Funding Agreement for LLS to be paid the sum of $100,000 "from the first $1,000,000 received from the Action". Even that does not deal with the moneys due under clauses 3.2.2 and 3.2.3 of the Funding Agreement. In any event, the Funding Agreement cannot be construed by reference to the Termination Deed. 52 In Rodick v Gandell (1852) 1 DM&G 763 at 777, 778; 42 ER 749 at 754, Lord Truro said that: " An agreement between a debtor and a creditor that the debt owing shall be paid out of the specific fund coming to the debtor, … will create a valid equitable charge upon such funds; in other words will operate as an equitable assignment of the … fund … "

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In Perpetual Trustee Co Ltd v Smith (1938) 39 SR (NSW) 19 Jordan CJ said (at 38): " An agreement to pay a debt from payments as and when received falls within this principle, and if the agreement is for value it is unimportant that the fund is not in existence but is to arise in the future: … An agreement for value to arrange for identifiable moneys in the hands or to come into the hands of an attorney for the promissor are to be paid to a third party, is just as effectual to bind the moneys as a direct agreement that the money shall be paid ." 53 There was no likely source of money to come to ACSC which Mr Condon might use to discharge his debt under clause 3.2 of the Funding Agreement, except any recoveries from SOCOG. But that does not mean that he assigned any part of the proceeds of the judgment if and when they were received. There are no words of assignment. The Funding Agreement contained no promise that Mr Condon or ACSC would keep the proceeds of the judgment separate from any other assets of ACSC. Such an agreement is necessary. Otherwise there is no "specific fund", to use the language in Rodick v Gandell, from which the debt owing is to be paid. (Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584, per Buckley LJ at 595; Moseley v Cressey's Co (1865) LR1Eq 405 at 409; Jackson v Richards [2005] NSWSC 630 at paras [17]-[19]). In my view, the Funding Agreement did not operate as an equitable assignment of the proceeds of the judgment as and when received. 54 It is therefore unnecessary to consider what would have been the effect upon such an assignment, of the termination of the Funding Agreement, before the property came into existence. Was the Termination Deed within the Statutory Exception to Champerty as an Exercise of the Deed Administrator's Power of Sale? 55 LLS did not dispute that the Termination Deed, and the Funding Agreement which preceded it, were champertous. It accepted that under each agreement LLS provided financial assistance to Mr Zhu for the conduct of the litigation against SOCOG on the basis that its reward would reflect Mr Zhu's success in the action. I will return later to the question whether the Termination Deed should be so characterised. For present purposes, I will assume that it should. 56 The Maintenance and Champerty Abolition Act 1993 (NSW) abolished the crime and also the tort of maintenance, which includes champerty. However, the abolition of the tort of maintenance will not save an agreement which savours of maintenance from the consequences of illegality. (Maintenance and Champerty Abolition Act 1993 (NSW), s 6). 57 There is, however, a long established exception which allows trustees in bankruptcy, liquidators, administrators, and deed administrators, to exercise their statutory powers of sale by selling a cause of action, or the proceeds of a suit. (See the review of authorities in Cotterill v Bank of Singapore (Aust) Ltd (1995) 37 NSWLR 238; Re Movitor Pty Ltd (1996) 64 FCR 380; Re Tosich Construction Pty Ltd (ex parte Wily) (1997) 73 FCR 219; and Re William Felton & Co Pty Ltd (1998) 28 ACSR 228). 58 LLS contends that in entering into the Termination Deed, Mr Condon, who at the time was the deed administrator under the deed of company arrangement, was exercising his powers under clauses 2(za), (zf) and (zg) of Schedule 8A to the Corporations Regulations. These provisions are taken to be included in the deed of company arrangement, pursuant to s 444A(5) of the Corporations Act and Regulation 5.3A.06. They include the power to sell any property of the company. It is clear from Re William Felton & Co Pty Ltd at 236 that Mr Condon, as deed administrator exercising powers under the deed of company arrangement provided for by s 444A(5), stands in the same position in relation to the law of maintenance as would a liquidator exercising statutory power to dispose of the company's property pursuant to s 477(2)(c), or an administrator, acting under s 437A(1)(c). It is also clear that the power given to a deed administrator to sell the company's property authorised him to assign a share of the future proceeds of the cause of action which Mr Zhu had against SOCOG. (Elfic Ltd v Macks [2003] 2 Qd R 125 at 142, [88]; 162-163, [180]-[184]). 59 Mr Zhu denies that in entering into the Termination Deed, Mr Condon exercised that power. The obligation to pay the sum of $50,000 and the Contingent Debt was imposed on Mr Zhu. 60 Mr Zhu held the benefit of the Agency Agreement with TOC on trust for ACSC. This was common ground. In the Funding Agreement, Mr Zhu acknowledged that he held the benefit of the Agency Agreement with SOCOG, clearly a mistake for TOC, for and on behalf of ACSC. In other proceedings between Mr Zhu and a Mr Zhang, who claimed to be an owner of shares in ACSC, Mr Zhu admitted that to the extent that any damages were received by him in relation to the claim for damages for tortious interference with the Agency Agreement, he would hold those damages on trust for or as agent for the company. The damages awarded to Mr Zhu included $95,000 aggravated damages for the mental distress he suffered from his treatment at the hands of SOCOG. The right to these damages was also held on trust for ACSC. Indeed, it was common ground that right to damages against SOCOG for unlawful interference with the contract with TOC was held on trust for ACSC. 61 Mr Zhu retained his office of trustee. Mr Condon as deed administrator consented to the direction given by Mr Zhu in Schedule 1 to the Termination Deed for Walker Hedges & Co to pay the moneys provided for in that Schedule from the moneys to be obtained by them pursuant to any judgment, order or settlement. This was a disposition of future property, namely the proceeds of the judgment, which the company would beneficially own immediately on their being received. The disposition was given for consideration, namely, the release by LLS of the deed administrator's obligations under the Funding Agreement, and LLS's agreeing to receive only $253,000 at the time, and allowing $100,000 of the moneys received from SOCOG to be used to fund the prosecution of the Action. Accordingly, Mr Condon's consent as deed administrator to the direction in clause 4.3 of the Termination Deed was an exercise by him of his statutory power to sell property of the company. The fact that the direction was given by Mr Zhu, who was the plaintiff in the action but was acting as trustee for ACSC, does not make the direction under clause 4.3 any the less a sale of the company's property. 62 Recital G to the Termination Deed recited that Mr Zhu had paid to all of the creditors of the Company bound by the Deed of Company Arrangement, all amounts owed by them to the Company, and was, as such, then the only creditor of the Company to whom the Deed of Company Arrangement applied. This does not mean that Mr Condon was not exercising his powers as deed administrator in entering into the Termination Deed. To the contrary, the Deed of Company Arrangement was still on foot. Mr Zhu was a creditor of the Company. Mr Condon entered into the Termination Deed in his capacity as deed administrator. 63 It was submitted on behalf of Mr Zhu that the "statutory exception" to the rule against champerty where a liquidator or administrator is exercising powers under the Corporations Act, is only available where an issue as to the lawfulness of the agreement arises as against the company or the administrator. It was submitted that LLS could not rely upon that exception against Mr Zhu. 64 However, insofar as the Termination Deed involved a disposition of the company's property, Mr Zhu's standing is that of the trustee in whom the company's property is vested. I see no reason why the same principles do not apply to the sale by the deed administrator of property beneficially owned by the company as they do to property legally owned by the company. Are the "Control Provisions" Relevant? 65 It was submitted for Mr Zhu that even agreements entered into by liquidators, administrators, or trustees in bankruptcy under their statutory powers to dispose of the property of an insolvent person or company are void if the agreements provide for the assignee to have an impermissible degree of control over the conduct of the litigation. In support of this submission, counsel drew on various authorities which considered, in different contexts, whether the degree of control of litigation provided to a litigation funder, or an assignee of a cause of action, were such that the Court should not approve of an agreement proposed to be entered into by a liquidator or administrator, or were such as amounted to an abuse of the Court's process. 66 Applications by a liquidator or administrator for directions as to the propriety of a proposed funding arrangement, or for the stay proceedings as an abuse of process, raise different questions from those in the present case. The question in the present case is whether the agreement is void or unenforceable as being champertous. The only question is as to the validity of the agreement. Decisions as to whether a court should approve a liquidator's entering into a litigation funding agreement are not directly relevant as to whether such an agreement, if entered into without approval, is binding. The proceedings against SOCOG are concluded. The consideration given in other contexts to what degree of control a litigation funder should be allowed to have, is irrelevant to the present question, in so far as the agreement can be supported as being within the exercise of the deed administrator's power of sale. 67 The powers of liquidators and administrators to sell property of a company, which have been relied on to uphold champertous contracts, contain no restrictions on the terms on which the property may be sold. In Re Movitor Pty Ltd (1996) 64 FCR 380 Drummond J said (at 391): " … it is because the power of sale of the property of the insolvent is conferred by statute for this purpose that the transaction is immune from any rule of law otherwise applicable that would make the sale unlawful and open to challenge. Whether he sells a bare right of action or the fruits of the action, the only authority a liquidator has to make any such sale is this statutory power. It has long been accepted that a trustee in bankruptcy can lawfully sell a bare right of action owned by the insolvent to a stranger with no interest in it, although that would involve maintenance or champerty but for the fact that he sells under the statutory authority. A liquidator has the same power. In my opinion, there is no reason why this statutory authority should not make lawful any other sale of the insolvent company's property by a liquidator, including the sale of a share in the proceeds of an action belonging to the company to a person with no interest in the litigation on terms that that person is to have control of the litigation, although that would involve champerty but for the transaction being made under that authority. This will be the position, provided only that the subject matter of the sale is 'property of the company' within the statutory power. " 68 Contrary to the submissions of Mr Zhu, this passage cannot be read as if it applied only to the upholding of the sale of a share in the proceeds of an action by a liquidator under statutory authority where the assignee was to have an acceptable degree of control of the litigation. In the seminal case of Seear v Lawson (1880) 15 Ch D 426, the trustee in bankruptcy assigned the whole cause of action. In Guy v Churchill (1884) 40 Ch D 481 the trustee in bankruptcy assigned the right of action on terms that the assignee would continue the action at his own expense, free from control by the assignor, who would give the assignee all permitted assistance to carry on the action at the assignee's expense. One quarter of the money which might be recovered or received on a compromise was to be paid to the trustee in bankruptcy. In both cases, the validity of the assignment was upheld. 69 In Elfic Ltd v Macks [2003] 2 Qd R 125 it was contended that the power of a liquidator under s 477(2)(c) of the Corporations Act did not extend to a purported disposal of a share in the future proceeds of litigation on terms which permitted the intended disponee to interfere in the conduct of the litigation. Davies JA, with whom Cullinane J agreed, concluded (at 164, [188]): " Looked at as a question of construction of s 477(2)(c) and the definition of 'property' in s 9 there is, in my opinion, no material difference, with regard to champerty, between, on the one hand, an assignment of a cause of action and with it complete control of the conduct of that action and, on the other, assignment of the whole or part of the proceeds of a cause of action and with it some right to interfere in the conduct of that action. "

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This is on all fours with the views of Drummond J in Re Movitor Pty Ltd at 391. In my view, it is correct. 70 In the light of these authorities, the agreement for the disposition of ACSC's beneficial interest in the proceeds of the judgment is binding on ACSC and Mr Zhu notwithstanding what is alleged to be the impermissible degree of control retained by LLS. If Relevant, The "Control Provisions" would not Invalidate the Agreement 71 Had this been a case where the degree of control conferred upon the funder was relevant, the extent of the control given to LLS of the litigation did not give rise to an unacceptable potential for abuse. Mr Zhu relied upon the observations of Steyn LJ in Giles v Thompson [1993] 3 All ER 321 at 333 that: " The correct approach is not to ask whether, in accordance with contemporary public policy, the agreement has in fact caused the corruption of public justice. The court must consider the tendency of the agreement. The question is whether the agreement has the tendency to corrupt public justice. " 72 This passage was cited with approval by the Full Court of the Supreme Court of Western Australia in Clairs Keeley v Treacy & Ors (No. 2) (2004) 29 war 479; [2004] WASCA 277 at [71]-[72]. Mr Zhu submitted that the Termination Deed had the tendency and potential for abuse and it was this that rendered it void for champerty. Hence, it was submitted, it was irrelevant that, after the event, it could be seen that there had been no such abuse. 73 The clause of the Termination Deed with which Mr Zhu took issue was clause 4.3(d). Mr Zhu could not settle or conclude the Action without LLS's prior consent. There is no suggestion that Mr Zhu ever wanted to settle the Action, or that he sought LLS's consent to doing so, or that if he had sought such consent it would have been refused. 74 I do not consider that that provision created an unacceptable tendency for abuse. The proceedings at first instance had been concluded when the Termination Deed had been entered into. Unless the appeal succeeded, LLS was entitled under the Funding Agreement to a substantial sum of money. The Termination Deed was prompted by a number of considerations. Included in them was the consideration that it was thought desirable to terminate the deed of company arrangement and the Funding Agreement to avoid or reduce the risk of the proceedings being delayed by a false issue. LLS agreed to Mr Zhu's request to restructure the funding arrangements. It was reasonable for LLS to retain some measure of control in relation to any settlement. There was no evidence to suggest that LLS was likely to exercise such rights improperly or unreasonably. Whenever a third party has a say in how litigation is to be compromised, there is a possibility of abuse. That is true even of litigants and their insurers. But the possibility of abuse is not the same as there being an unacceptable tendency for abuse. (See Project 28 Pty Ltd v Barr [2005] NSWCA 240 at [68]-[69], [77]). 75 Senior counsel for Mr Zhu relied on the decisions of the Full Court of the Supreme Court of Western Australia in Clairs Keeley (a firm) v Treacy (2004) 28 WAR 139 and particularly at 163-164 and Clairs Keeley (a firm) v Treacy (No. 2) (2004) 29 WAR 479. I do not find these decisions helpful. They concerned a different issue. Moreover, in a significant respect, the observations in Clairs Keeley (No. 2) about allowable control provisions were not followed by the NSW Court of Appeal in Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd (2005) 218 ALR 166 at 189, [113]-[114]. 76 Comparisons with other "control provisions" of funding arrangements considered by courts in other contexts are of little assistance. Some have attracted critical comment, as in Clairs Keeley. Many have passed muster. (eg Elfic Limited v Macks [2003] 2 Qd R 125 at 134, [43]; Buiscex v Panfida Foods Ltd (1998) 28 ACSR 357; Fostif v Campbells Cash & Carry Pty Ltd (2005) 218 ALR 166 at 195, [137]; Project 28 Pty Ltd v Barr [2005] NSWCA 240 at [68]-[77]). In the last cited case Ipp JA with whom Hodgson JA and Campbell AJA agreed, said, at [77]: " [77] In appropriate circumstances, therefore, the law countenances complete or absolute control of litigation by a person who prosecutes litigation in the name of another party. In my view, without intending any disrespect to the opinions of others who have held to the contrary, the mere existence of such control in the hands of a person not formally a party to the litigation does not, on its own, constitute an abuse of the process of the Court. It is, however, a relevant factor when regard is had to the whole picture, which is required when considering whether or not to grant a stay on the grounds of abuse of process." 77 I would not conclude from the control given to LLS to veto a proposed settlement that the agreement had a tendency to corrupt the processes of the Court, even if that were a relevant consideration on the present issues. 78 There is even less reason to find on grounds of public policy that the agreement is void, when it can be seen that no public policy was in fact infringed. The proper complainant of an abuse of process is the party to the litigation who has a genuine interest in the way the litigation is conducted. It sits ill in the mouth of Mr Zhu to submit that the agreement could have given rise to an abuse of process. The processes of the court were not abused. The funding arrangement in the Termination Deed assisted Mr Zhu in ultimately establishing a meritorious claim. 79 In summary therefore, I am of the view that clause 4.3 and Schedule 1 of the Termination Deed involved a sale by the deed administrator of the company's property pursuant to the powers conferred on him by s 444A(5) and Schedule 8 to the Corporations Regulations. That disposition was made under a well-established exception to the law of maintenance and champerty. It is irrelevant that the assignment is of part of the proceeds of a cause of action on terms which gave LLS a right to veto a settlement of the Action. Even had such a consideration been relevant, the extent of the control given to LLS in respect of the litigation did not lead to, or have an unacceptable tendency to lead to, an abuse of process of the Court, and did not make the agreement invalid. 80 Had I arrived at a different conclusion, it would nonetheless have been open to sever the offending "control provision". Clause 9.4 provided that if part or all of any provision was illegal or unenforceable, it could be severed and the remaining provisions would continue in force. In my view, under that clause, clause 4.3(d) could have been severed if it gave rise to an abuse of process. 81 This is sufficient to dispose of the challenge to clause 4.3 of the Termination Deed. However, I would not characterise the promise by Mr Zhu in clause 4.1(d) to pay the sum of $50,000 and the Contingent Debt pursuant to clause 4.1(d) as a sale of property of ACSC. That is so notwithstanding that ACSC would be obliged to indemnify Mr Zhu against that liability. He assumed a personal obligation under clause 4.1(d) which went beyond a sale of the company's property. I do not consider that the personal obligations assumed by Mr Zhu under clause 4.1(d) can, if otherwise illegal, be supported by the statutory exception to the rule against champerty. LLS's Legitimate Interest 82 In Giles v Thompson [1994] AC 142, Lord Mustill said (at 163-164): " I accept that, as Steyn L.J. expressed it in the course of his valuable historical analysis, there have evolved crystallised policies in relation to solicitors' contingent fees and the assignment of bare rights of action for tortious wrongs. I also accept that in relation to these aspects of the law of champerty it is necessary first to consider whether the transaction bears the marks of unlawful champerty and then to inquire whether it is validated by the existence of a legitimate interest in the person supporting the action distinct from the benefit which he seeks to derive from it. … It is possible, although I believe rather unlikely, that new areas of law will crystallise, with their own fixed rules which are invariably to be applied to any case falling within them. Meanwhile, I believe that the law on maintenance and champerty can best be kept in forward motion by looking to its origins as a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants. For this purpose the issue should not be broken down into steps. Rather, all the aspects of the transaction should be taken together for the purpose of considering the single question whether, in the terms expressed by Fletcher Moulton L.J. in the passage already quoted from in British Cash and Parcel Conveyors Ltd v Lamson Store Service Co. Ltd. [1908] 1 K.B. 1006, 1014, there is wanton and officious intermeddling with the disputes of others in where [sic] the meddler has no interest whatever, and where the assistance he renders to one or the other party is without justification or excuse. " 83 Whether the issue is approached in stages or as a single question, one must ask whether LLS had a legitimate interest distinct from the benefit which it sought to derive from the impugned transaction. If not, its entry into the Termination Deed might be characterised as officious intermeddling in Mr Zhu's dispute with SOCOG, without justification or excuse. In the Court of Appeal in Giles v Thompson [1993] 3 All ER 321, Steyn LJ stressed (at 333) that for an interest to qualify as justification or excuse, it must arise independently of the alleged champertous agreement. 84 The focus of the inquiry is on the Termination Deed, not the Funding Agreement. But the validity of the Funding Agreement is critical to LLS' legitimate interest in the Termination Deed. Mr Zhu attacked the validity of the Funding Agreement on the ground that it too gave rights to LLS to control the litigation which, it was said, had a tendency to lead to an abuse of process. For the reasons I have previously given, I do not consider that that consideration, if otherwise made good, would affect the validity of the Funding Agreement. It can clearly be supported as an exercise of the administrator's powers under s 437A of the Corporations Act. 85 In any event, I do not accept that the provisions referred to had that tendency. Clause 4.3 of the Funding Agreement obliged both LLS and Mr Zhu to accept a settlement offer of $5,000,000 or more if senior counsel engaged in the proceedings recommended its acceptance. If a settlement offer were received for less than $5,000,000 and senior counsel advised that it should be accepted, clause 4.3 provided that if LLS wished to accept the offer, but Mr Zhu refused, then LLS could terminate the Funding Agreement and Mr Zhu would be obliged to repay the LLS expenses to the date of termination. Subject to these provisions, the control of the litigation was to be vested in Mr Condon. In my view, there is nothing in those clauses which could have a tendency to lead to an abuse of process. 86 LLS advanced funds to support the action under the Funding Agreement, not under the Termination Deed. As LLS had the right under the Funding Agreement to recover an additional sum of up to $1,250,000 if the action was successful, one asks, in what respects did the Termination Deed amount to an officious intermeddling in the action without justification or excuse? The principal reason for the Termination Deed was to ensure no false issue was raised by SOCOG. LLS advanced no further moneys. It agreed to accept only $253,000 at that stage, which was less than it was entitled to be paid under the Funding Agreement. It agreed to $100,000 of the moneys paid by SOCOG being used to fund legal representation on the appeal and any further appeal. It had the right to veto a settlement. There was a change to the method of calculating the additional moneys to be payable to LLS if the recoveries exceeded $6,000,000. Given that the judgment obtained was for just under $5,000,000, inclusive of interest to 6 December, 2004, it might have been thought unlikely that recoveries would exceed $6,000,000. 87 In the absence of argument to the contrary, I assume that this may be sufficient to amount to an intermeddling or interference in the dispute between Mr Zhu and SOCOG. However, I accept that LLS, by virtue of the Funding Agreement, had enforceable and valuable rights in relation to the outcome of the litigation prior to entering into the Termination Deed. It dealt with these rights by entering into the Termination Deed. They were sufficient to give it a legitimate and genuine commercial interest in the payment provisions of the Termination Deed. (Trendtex Trading Corporation v Credit Suisse [1982] AC 679 at 703). That existing interest was such that it cannot be said that the Termination Deed involved its "wanton and officious intermeddling with the disputes of other in where [sic] the meddler has no interest whatever, and where the assistance he renders … is without justification or excuse" (Giles v Thompson [1994] 1 AC 142 at 164). 88 Normally, to constitute such a "legitimate interest" the interest "must be distinct from the benefit that the person supporting the action seeks to derive from the litigation: … It must be something beyond a mere personal interest in profiting from the outcome of the proceedings: …" (Project 28 Pty Ltd v Barr [2005] NSWCA 240 at [41]). 89 However, that was not said in the context of a person already having an enforceable interest in the outcome of litigation under an agreement which was enforceable through an exception to the rule against champerty. In my view, because LLS had enforceable rights under the Funding Agreement prior to entering into the Termination Deed, it had a legitimate interest in obtaining the benefits to which it is entitled under the Termination Deed. 90 Accordingly, I consider that the whole of the Termination Deed is valid. I turn to the remaining question of LLS's rights under the Termination Deed. Construction of the Termination Deed 91 The Termination Deed should not be construed by reference to the correspondence which led up to it, except insofar as that correspondence establishes objective facts known to the parties. There are statements in the correspondence as to what the parties subjectively intended to be achieved by the Termination Deed. It would not be legitimate to use those statements to construe the deed.

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93 When clause 4.1(d) is read with clause 4.3 in Schedule 1, I do not think it absurd that Mr Zhu should not have a personal liability to pay the Contingent Debt if the Final Amount was in excess of $6,000,000. That is because by clause 4.3 he gave an irrevocable direction to Walker Hedges & Co to pay moneys calculated in accordance with that schedule from the proceeds of the judgment or order in the Action. I see no reason to read the Direction or any part of it, as being inapplicable if the Contingent Debt exceeded $6,000,000. To do so would lead to an absurdity. 94 In my view, clause 4.1(d), the Direction, and the definition of Contingent Debt, should be given their literal meaning. The definition of Contingent Debt refers to the aggregate sum recovered from the litigation up to $6,000,000. The direction in Schedule 1 is on-going, and applies whenever a relevant sum of money comes into the hands of Walker Hedges & Co. Under clause 4.2(a) ACSC guarantees Mr Zhu's obligation to repay the Contingent Debt, but does not do so with respect to the direction. There is nothing remarkable in Mr Zhu's and ACSC's personal liability being limited to the case where recoveries do not exceed $6,000,000. On the other hand, Schedule 1 operates separately from and is not qualified by the definition of Contingent Debt. 95 It follows, that Walker Hedges & Co are bound by the Direction given by Mr Zhu to pay the sum of $50,000 upon the receipt by him of any funds from SOCOG in the Action. The first such payment received after the direction was given was an amount of $170,000 received by Mr Hedges on 28 August 2003. Mr Zhu has a personal liability to pay the sum of $50,000 in accordance with clause 4.1(d)(iii). Walker Hedges & Co is also required to account for that sum in accordance with paragraph 1 of Schedule 1. LLS is entitled to interest pursuant to s 100 of the Civil Procedure Act at the prescribed rates on the sum of $50,000 from 28 August 2003. 96 Mr Zhu is also liable to pay the sum of $100,000 pursuant to paragraph (a) in the definition of Contingent Debt from the first $1,000,000 recovered from the Action. That amount is also payable by Walker Hedges & Co from the moneys otherwise payable to Mr Zhu obtained pursuant to the judgment. In the events which have happened, the liability of both Mr Zhu and Walker Hedges & Co to pay that sum arose when Mr Hedges received a further payment of $50,000 on 25 November 2004. That was another sum otherwise payable to Mr Zhu referred to in paragraph 2 of Schedule 1. It also took the moneys recovered from the Action to above $1,000,000. LLS is entitled to recover that amount from either Mr Zhu or from Walker Hedges & Co together with interest pursuant to s 100 of the Civil Procedure Act from 25 November 2004. 97 I do not consider that LLS is entitled to any payment from Mr Zhu pursuant to paragraph (b) of the definition of Contingent Debt. It is however, entitled pursuant to paragraph 2 of the Direction in Schedule 1 to 20% of the further moneys in excess of $1,000,000 payable to Mr Zhu pursuant to the judgment and orders in the Action. At the date of the hearing, Mr Hedges had received $6,046,575.29. LLS is also entitled to be paid 20% of $5,046,575.29, or $1,009,315.06. It is entitled to interest on that sum from 6 December 2004. It is also entitled to a declaration that the second defendant is required to pay to it 20% of the further moneys received by him and payable to Mr Zhu pursuant to orders for costs made in the Action. These include the orders for costs made in respect of the appeal to the Court of Appeal, the application for special leave to the High Court, and the appeal to the High Court. 98 I direct counsel for the plaintiffs to bring in short minutes of order accordingly. 99 The second defendant is entitled to his costs as a submitting defendant. The plaintiff is entitled to be paid its costs, including costs payable by it to the second defendant, from the first defendant. The orders should make provision for the return of exhibits after 28 days.

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