Elfic Limited v Macks

REASONS FOR JUDGMENT 1 The application before the Court is for access to certain documents produced by a liquidator in support of his application to the Court pursuant to s 477(2B) or alternatively s 479(3) of the Corporations Act 2001 (Cth) ("the Act"). The liquidator has brought an application seeking approval from the Court of him entering into a litigation funding agreement whereby obligations may be discharged more than three months after the agreement is entered into. The application for access to documents is made by persons served with the liquidator's application, some of whom are creditors of the company in liquidation. 2 The application arises in the following circumstances. Kingsheath Club of the Clubs Limited ("Kingsheath") was wound up by order of the Supreme Court of Victoria on 15 August 2001 and Mr Keith Sutherland was appointed liquidator. Kingsheath had been incorporated pursuant to a joint venture agreement dated 4 August 1999 which was known as the"KingsheathCluboftheClubsSyndicatedJointVenture"("the joint venture"). Kingsheath was incorporated on 24 August 1999. At the date of liquidation the directors of Kingsheath included Mr Harry Stamoulis and Mr Chris Shannon. The participants in the joint venture included King Network Group Pty Ltd and Arts Investments Pty Ltd. The joint venture agreement provided for a company to be incorporated, which turned out to be Kingsheath, which would hold the interest of the joint venturers in certain land known as the Kingscliff land. 3 Ultimately, through a series of transactions not relevant for present purposes, the contract for the purchase of the land to be developed was rescinded by the vendor and the joint venturers lost their interest in the land. Thereafter, according to the liquidator, King Network Group Pty Ltd entered into a contract for the purchase of the Kingscliff land. The liquidator obtained orders for the examination of various persons pursuant to the provisions of s 596A and s 596B of the Act. Those persons included Mr Shannon and Mr Stamoulis who were directors of Kingsheath at the date of the winding up order and Mr Mancuso who was a director of Arts Investments Pty Ltd. The examinations were conducted by the liquidator and certain documents were produced to the court during such examinations. An order was made that the documents not be made available to any party other than the liquidator and his solicitors. 4 The principal allegation made by Kingsheath is that Mr Stamoulis and King Network Group Pty Ltd, in breach of their fiduciary duties to Kingsheath and/or Club of the Clubs Pty Ltd, caused the Kingscliff land to be transferred to King Network Group Pty Ltd, and subsequently to King Development Group Pty Ltd, at an undervalue. The consequence was that Kingsheath was not able to develop the Kingscliff land and sell it at a profit. 5 Subsequently the liquidator sought a variation of the order restricting the availability of documents produced during the examinations to enable him to show the documents to third parties who were considering whether to enter into a funding or litigation agreement with the liquidator in relation to proceedings the liquidator was contemplating commencing in relation to matters arising out of the joint venture and the Kingscliff land. Orders to that effect were made. 6 On 23 July 2003 the liquidator applied to the Court seeking an order for the approval of the Court pursuant to s 477(2B), or alternatively s 479(3), of the Act to him entering into a funding agreement with IMF (Australia) Ltd. The liquidator also sought an order that certain documents produced to the Court during the examination of Mr Stamoulis in January 2002 might be used by Kingsheath for the purpose of advising on, commencing and prosecuting proposed proceedings against a number of persons including Mr Stamoulis, King Network Group Pty Ltd and King Development Group Pty Ltd. 7 The application for approval for the liquidator to enter into the funding agreement was effectively made nunc pro tunc as on 18 June 2003 the liquidator had entered into a Distribution Deed with IMF (Australia) Ltd and others and an associated Funding Agreement with IMF (Australia) Ltd. The Distribution Deed and the Funding Agreement were exhibited as confidential exhibits to an affidavit sworn by the liquidator on 22 July 2003 filed in support of the application for approval of the Court to enter into the Funding Agreement. By the Funding Agreement the liquidator assigned 50% (this figure was set out in the liquidator's affidavit) of the amount received by way of settlement, judgment or order in respect of the proposed proceeding to IMF (Australia) Ltd who agreed to fund a number of causes of action of Kingsheath against Mr Stamoulis and King Network Group Pty Ltd. The relevant causes of action are: (a) all causes of action of Kingsheath against Mr Stamoulis and King Network Group Pty Ltd and any other entity or person who has benefited from, assisted in, or been knowingly concerned in, a breach of fiduciary duty or other duty or obligation owed by those proposed defendants to Kingsheath; (b) all causes of action of Kingsheath against King Network Group Pty Ltd and/or Arts Investments Pty Ltd arising under or pursuant to an indemnity agreement; (c) all causes of action against Mr Stamoulis and Mr Mancuso arising under or pursuant to s 588G of the Act. 8 In his affidavit sworn in support of the application for approval, the liquidator has set out the background to the joint venture and the circumstances under which the Kingscliff land, over which the joint venturers had an option to purchase, was subsequently acquired by King Network Group Pty Ltd. The liquidator also set out investigations he had made in the course of the liquidation of Kingsheath and the results of those investigations in which he identified a number of potential causes of action. The affidavit included the following material: "52 I have received legal advice from my solicitors, Messrs Gadens Lawyers, as to the merits of the Cause of Action against the Joint Venture parties pursuant to the Indemnity Agreement. I am of the opinion on the basis of the legal advice that I have received in this regard, that Kingsheath has very good prospects of success in prosecuting the Cause of Action based upon the failure of the Joint Venture Parties to indemnify Kingsheath with respect to liabilities it has incurred. I have further received legal advice from my solicitors that I have a strong claim under Section 588G to be conducted either concurrently with or in the alternative to an application for enforcement of the Indemnity Agreement and that such application has good prospects of success. I note that I would be required to complete further investigations in relation to this claim in relation to the quantification of it. 53 Due to an absence of funds in the administration I have not obtained formal advice as to the merits and prospects of success of the Cause of Action of Kingsheath against Harry Stamoulis and/or KNG [King Network Group Pty Ltd] arising out of KNG's acquisition of the Kingscliff land. I have however received advice from my solicitors, and from Mr G Bigmore QC, that on the basis of my investigations to date Kingsheath does have a bona fide claim against Mr Stamoulis and/or KNG for breach of duties owed to Kingsheath." 9 The liquidator's application for approval has not yet come on for hearing. 10 On 15 August 2003 King Network Group Pty Ltd, Mr Stamoulis, Arts Investments Pty Ltd and Mr Mancuso ("the applicants") applied for an order that the liquidator produce to them: (a) a copy of confidential exhibit "KLS 15" to the affidavit of the liquidator sworn 22 July 2003 which contains the Distribution Deed and annexure A thereto, the Funding Agreement, and annexure B; (b) a copy of any documents containing or recording the legal advice referred to in pars 52 and 53 of the liquidator's affidavit sworn 22 July 2003; ("the confidential material"). 11 The material before the Court, in particular the affidavit of the liquidator, comes before the Court because the liquidator is precluded, without the approval of the committee of inspection or a resolution of the creditors, from entering into the Funding Agreement without the approval of the Court pursuant to s 477(2B). The liquidator is therefore compelled to place the Funding Agreement before the Court and, by reason of the need to establish reasonable prospects of success, he is compelled to rely upon the legal advice he has obtained. He has little or no choice in this respect. 12 The liquidator says that by virtue of cl 9 of the Funding Agreement he is not permitted to disclose the existence or terms of the Funding Agreement to any party other than is required by law or is permitted by cl 9.2 or cl 9.3 of the Funding Agreement or with the consent of IMF (Australia) Ltd. Clause 9.2 provides that the terms of the Funding Agreement may be disclosed by the liquidator to creditors of the company, to the Court, or to the committee of inspection, if any, for the sole purpose of the liquidator obtaining approval to enter into the Funding Agreement. Clause 9.3 provides that the terms of the Funding Agreement will be disclosed by IMF (Australia) Ltd to King Network Group Pty Ltd on the proceedings being commenced. IMF (Australia) Ltd has not consented to the disclosure of the terms of the Distribution Deed or its annexures except on terms that any numerical values disclosed, including the amounts of funding provided or the return to IMF (Australia) Ltd, would be masked or not disclosed. 13 The liquidator contends that cl 2.1.3 and cl 2.1.4 of the Funding Agreement are of a potentially sensitive, commercial nature as they disclose the quantum of fees payable under the Funding Agreement in two respects in the conduct of the litigation. The liquidator contends that if the interests associated with the applicants, against whom the foreshadowed proceedings are proposed to be brought, become aware of those amounts they might use that knowledge to obtain a strategic advantage in the prosecution of the litigation. In particular, they might adopt a litigation strategy that will see the funds exhausted before the conclusion of the proceedings. 14 Mr Stamoulis is a director of King Network Group Pty Ltd. He has sworn an affidavit in which he claims that King Network Group Pty Ltd is a creditor of Kingsheath in the sum of $250,000. Mr Stamoulis says that to enable King Network Group Pty Ltd and himself to consider properly the application for the Court to approve the liquidator's entry into the Funding Agreement with IMF (Australia) Ltd, it is necessary for King Network Group Pty Ltd and himself to have access to the confidential material. 15 Mr Mancuso, a director of Arts Investments Pty Ltd, has sworn an affidavit in which he claims that Arts Investments Pty Ltd is a creditor of Kingsheath in the sum of $117,515.48 and he makes the same application as Mr Stamoulis. 16 The applicants seek access to the Distribution Deed and the annexed Funding Agreement in order for them to be in a position to consider whether they should oppose the liquidator's application for approval of the Court to him entering into the Funding Agreement. They also contend that, as the Court takes into account prospects of success in determining whether to approve of such agreements, they should have access to the legal advice received by the liquidator as the liquidator would be using it to show that there were good causes of action and that he had obtained legal advice to that effect. 17 The liquidator objected to access to the confidential material being given to the applicants as they were the proposed defendants in the proposed litigation. The liquidator has offered to provide the applicants with a copy of confidential exhibit "KLS 15" with the monetary amounts blanked out or deleted but that offer has been rejected. He claimed legal professional privilege in relation to the legal advice, which the applicants contend had been waived.