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FILE NO/S: Appeal No 2407 of 2000 / SC No 7360 of 1999

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane

DELIVERED ON: 6 June 2001

DELIVERED AT: Brisbane

HEARING DATES: 13-16 November 2000

JUDGES: McMurdo P, Davies JA and Cullinane J / Separate reasons for judgment of each member of the Court, each concurring as to the order made

ORDER: Appeal dismissed with costs to be assessed

CATCHWORDS: TORTS – MISCELLANEOUS TORTS – CHAMPERTY AND MAINTENANCE – WHAT CONSTITUTES – MAINTENANCE – CHAMPERTY – whether a funding arrangement enabling the liquidator to pursue claims on behalf of companies in liquidation involved maintenance or champerty – whether the arrangement was unenforceable as contrary to public policy – whether s 477(2)(c) of the Corporations Law authorises arrangements that might otherwise constitute maintenance or champerty – whether a disposition of property under s 477(2)(c) of the Corporations Law is an exception to the principles of maintenance and champerty – whether a solicitor's potential conflict of interest and terms of remuneration and disposee’s control over the action resulted in the arrangement becoming an abuse of process / CORPORATIONS – s 477(2)(c) – whether the arrangement provides for a sale or disposition of property within s 477(2)(c) of the Corporations Law – whether a purported disposal of the future proceeds of an action is a disposal within the meaning of s 477(2)(c) – whether s 477(2)(c) authorises a disposal of a share of the future proceeds of litigation on terms which allow significant control of the action to the intended disposee / CORPORATIONS – WINDING UP – GENERALLY - whether proceeds of an action recovered pursuant to s 565, s 588FF and s 588M of the Corporations Law are the ‘property’ of the company for the purposes of s 477(2)(c) / CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF LIQUIDATION - whether the arrangement purports to distribute proceeds of a claim under s 565 of the Companies Code to parties other than creditors / CORPORATIONS – WINDING UP – LIQUIDATORS - RIGHTS AND POWERS – whether the arrangement was entered into in good faith and in the best interests of the creditors as a whole – whether the liquidator acted in the interests of the winding up in entering the arrangement / CORPORATIONS – WINDING UP – LIQUIDATORS – RESIGNATION OR REMOVAL – whether there was an error in failing to order the removal of the liquidator – whether the liquidator deliberately misled the court / CORPORATIONS – WINDING UP – LIQUIDATORS - DUTIES AND LIABLITIES – whether the non-disclosure of material facts in an ex parte application under s 479(3) Corporations Law for directions as to liquidator's power to enter into the arrangement should result in the order being set aside – obligations of a party making such an ex parte application / Bankruptcy Act 1966 (Cth), s 134(1)(a) / Companies Code, s 565, s 565(2) / Corporations Law, s 9, s 473, s 477, s 477(2B), s 477(2)(c), s 477(6), s 479(3), s 503, s 564, s 564(a), s 565, s 588FF, s 588M, s 588M(2) / Federal Courts (State Jurisdiction) Act 1999 (SA), s 10 / Federal Courts (State Jurisdiction) Act 1999 (Qld), s 10 / Legal Practice Act 1996 (Vic), s 99 / Property Law Act 1974 (Qld), s 199 / Queensland Law Society Act 1952 (Qld), s 48D / A H Toy v Registrar of Companies (NT) (1987) 72 ALR 107, referred to / Abraham v Thompson [1997] 4 All ER 362, considered / Addstead Pty Ltd (In Liq) v Liddan Pty Ltd (1997) 70 SASR 21, referred to / Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, applied / Bang & Olufsen (UK) Ltd v Ton Systeme Ltd (unreported, 16 July 1993, Court of Appeal (Civil Division) Transcript No 834 of 1993), considered / Bell Group Ltd (In Liq) v Westpac Banking Corporation (1996-7) 18 WAR 21, considered / Bell Group NV (In Liq) v Aspinall (1998) 19 WAR 561, considered / Buiscex Ltd v Panfida Food Ltd (In Liq) (1998) 28 ACSR 357, referred to / Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996-7) 71 FCR 550, referred to / Clyne v New South Wales Bar Association (1960-1) 104 CLR 186, considered / Commissioner for Corporate Affairs v Harvey [1980] VR 669, referred to / Commissioner of Police v Tanos (1958) 98 CLR 383, distinguished / Corporate Affairs Commission v ASC Timber Pty Ltd & Ors (1998) 29 ACSR 109, considered / Cotterill v Bank of Singapore (Australia) Ltd (1994-5) 37 NSWLR 238, considered / DJL v Central Authority (2000) 74 ALJR 706, considered / Emanuel Management Pty Ltd (In Liq) v Fosters Brewing Group Ltd (1998-9) 73 SASR 303, referred to / Faryab v Smyth [1998] EWCA 3503, considered / Giles v Thompson [1994] 1 AC 142, considered / Glegg v Bromley [1912] 3 KB 474, referred to / Grovewood Holdings Plc v James Capel & Co Ltd [1995] Ch 80, considered / Guy v Churchill [1889] 40 ChD 481, considered / In re Exchange Travel (Holdings) Ltd (In Liq) (No 3) [1997] 2 BCLC 579, considered / In re Park Gate Waggon Works Company [1881] 17 ChD 234, considered / Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996-7) 72 FCR 261, considered / Martell v Consett Iron Co Ltd [1955] Ch 363, considered / N A Kratzmann Pty Ltd (In Liq) v Tucker (No 2) (1970-1) 123 CLR 295, considered / Octavo Investments Pty Ltd v Knight (1979-80) 144 CLR 360, considered / Owners of the SS Kalibia v Wilson (1910) 11 CLR 689, distinguished / Re Addstone Pty Ltd (In Liq) (1998) 83 FCR 583, considered / Re Allebart Pty Ltd (In Liq) and the Companies Act [1971] 1 NSWLR 24, referred to / Re Daniel Efrat Consulting Services Pty Ltd (In Liq); ex parte Hawke (1999) 162 ALR 429, considered / Re Feasty's Family Restaurants Pty Ltd (In Liq) (1996) 14 ACLC 1058, considered / Re Fresjac Pty Ltd (In Liq) (1995-6) 65 SASR 334, considered / Re Gasbourne Pty Ltd [1984] VR 801, distinguished / Re Movitor Pty Ltd (In Liq) (1996) 64 FCR 380, considered / Re Oasis Merchandising Services Limited [1998] Ch 170, considered / Re South Downs Packers Pty Ltd [1984] 2 QdR 559, referred to / Re Starkey [1994] 1 QdR 142, considered / Re Tosich Construction Pty Ltd (1997) 73 FCR 219, considered / Re Wakim; ex parte McNally (1999) 73 ALJR 839, considered / Re William Felton &Co Pty Ltd (1998) 16 ACLC 1294, considered / Re Yagerphone Limited [1935] Ch 392, considered / Roux v Australian Broadcasting Commission [1992] 2 VR 577, referred to / Sa v Latreefers Inc [2000] EWCA 17, considered / Thermax Limited v Schott Industrial Glass Limited [1981] Fleet Street Reports 289, considered / UTSA Pty Ltd (In Liq) v Ultratune Australia Pty Ltd (1996) 14 ACLC 1262, considered

COUNSEL: P A Keane QC, with J C Sheahan SC and J D McKenna for the appellants / E J P F Lennon QC, with R M Derrington for the first to sixty-sixth respondents / A J H Morris QC, with M M Stewart SC for the sixty-seventh respondent / A J Meagher SC with D C Andrews for the sixty-eighth respondent

SOLICITORS: Clayton Utz for the appellants / Bennett & Philp (Brisbane) acting as Town Agents for Ward & Partners (Adelaide) for the first to sixty-sixth respondents / Barwicks Wisewoulds for the sixty-seventh respondent / Ryrie A Bridges for the sixty-eighth respondent

McMURDO P: Some of the appellants, companies in the Elders Group (now under the control of Foster's Brewing Group Limited) lent substantial amounts to some of the respondent companies ("the Emanuel companies"). Before being placed into liquidation for unpaid debts of $304 million, some of the Emanuel companies and their directors, members of the Emanuele family, entered into transactions with some of the appellant companies. The liquidator of the Emanuel companies, the first respondent ("Macks"), questions the legitimacy of these transactions in proceedings against the appellants and Coopers & Lybrand (the Emanuel companies' auditors) to recoup benefits allegedly obtained by some of the appellant companies from some of the Emanuel companies through breaches of the Corporations Law ("the Law") and Companies Code ("the Code"). If Macks were fully successful in these claims ("the main action"), he could recover many millions of dollars on behalf of the Emanuel companies.

In order to fund the litigation, Macks entered into an arrangement ("the funding arrangement") with the 67th respondent, GIO Insurance Limited ("GIO") and the 68th respondent, the Commonwealth Bank of Australia Limited ("CBA").

The main action was commenced in the Supreme Court of South Australia. Macks sought and obtained the approval of Mansfield J in the Federal Court of Australia in South Australia to enter into the funding arrangement under s 479(3) of the Law: see Re Addstone Pty Ltd (In Liq).¹

The main action was then cross-vested by Debelle J to the Supreme Court of Queensland: see Emanuel Management Pty Ltd (In Liq) v Fosters Brewing Group Ltd.²

The appellants contend that the funding arrangement is champertous. They brought an action in the Trial Division of the Supreme Court of Queensland seeking a declaration that the funding arrangement was void, as contrary to public policy, not authorised by s 477(2) of the Law and not entered into by Macks bona fide in the interests of the Emanuel companies or their creditors. They also sought an injunction to restrain the respondents from performing the funding arrangement; an order for the removal of Macks as liquidator of the Emanuel companies and an order setting aside the order of Mansfield J or, alternatively, an order under s 10 Federal Courts (State Jurisdiction) Act 1999 (Qld) and s 10 Federal Courts (State Jurisdiction) Act 1999 (SA) that the rights and liabilities of the parties in respect of the orders of Mansfield J be set aside and revoked to the same extent as if those orders had been set aside.

This appeal is from the dismissal of that action by Williams J (as he then was).

The appellants no longer seek an injunction as a tortious remedy as they accept they have not established special damage: see Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd.³ Their request for an injunction is now based solely on the court's power to prevent an abuse of its process: see Grovewood Holdings Plc v James Capel & Co Ltd;⁴ Abraham v Thompson,⁵ Faryab v Smyth⁶ and Sa v Latreefers Inc.⁷

The facts

Background

The Emanuel companies engaged in property development and in 1987 Emanuel Management Pty Ltd acquired an extensive area of land north of Brisbane ("the APM lands") which was to be financed through one of the appellant companies. In May 1987 Lensworth Properties Pty Ltd offered a $43 million facility to Emanuel Management Pty Ltd to be secured by guarantees from other Emanuel companies, company charges and real property mortgages. The offer was accepted and a Deed of Master Agreement was signed on 12 June 1987 which formalised the loan facility and acknowledged receipt of $43 million. The debt was secured by a mortgage debenture by Emanuel Management Pty Ltd; a mortgage debenture and bill of mortgage over the APM lands by Emanuel (No 14) Pty Ltd and guarantees by Emanuel (No 14) Pty Ltd and some other Emanuel companies. Later, mortgage debentures were given by a further five Emanuel companies. The validity of the $43 million debt and the original securities have not been challenged. The securities have not been enforced or realised. On 11 April 1991, Lensworth Properties Pty Ltd and EFG Finance Limited assigned various interests, including the APM lands, to Elfic Limited.⁸

On 11 March 1993, Emanuel Management Pty Ltd and their guarantors acknowledged their default under this and other facilities. The EFG Group and 27 of the Emanuel companies executed a Deed of Orderly Realisation of Securities in which they acknowledged a debt to the EFG Group of $153,144,910.58. The EFG Group issued a specially endorsed writ of summons seeking recovery of $182,272,193.97 against the 27 Emanuel companies, which entered an appearance and defence to the writ.

On 27 February 1995, Thomas J (as he then was) entered summary judgment in favour of the EFG Group against Guiseppe Emanuele and 27 companies in the Emanuel Group for $186,880,302.71.

On 17 March 1995, 29 companies in the Emanuel group entered into a Deed of Forebearance and Release ("DOFR") with the EFG Group. The DOFR transferred 131 properties to nominees of the appellants for consideration of approximately $47,800,000. It is claimed in the main action that this transfer of property was at an undervalue and that in return the EFG group paid about $6 million to those associated with the Emanuel group.

From June 1995 orders were made for the compulsory winding up of companies in the Emanuel group. Macks was appointed as liquidator of each company.

In September 1995 Macks issued notices to creditors of 16 of the 65 companies in the Emanuel group (but not Emanuel (No 14) Pty Limited), convening meetings and inviting formal proofs of debt. Proofs of debt were executed and lodged in respect of 11 of the 16 Emanuel companies, including Emanuel Management Pty Ltd. These proofs were in identical form and stated the debt owing to the appellant companies as $146,390,078.34, and that no satisfaction or security had been had or received for this sum.

The meeting of creditors of these 16 Emanuel companies was held on 10 October 1995. Macks advised creditors that he had commenced proceedings to recover the payments made by the EFG group to one of the Emanuel companies, Simionato. The largest creditors were the EFG Group ($146 million for each company) and the Australian Taxation Office ("ATO") (sums varying from $1,360 up to $14.7 million). Macks noted that the EFG Group's proofs of debt were objected to and admitted them, for voting purposes only, at a deemed value of $1. Mr Thomas, as proxy for the EFG Group, advised that they were holding no security. Macks asked creditors to advise him within 14 days whether they would indemnify him for the costs of various items, including the conduct of public examinations. A committee of inspection was appointed with a representative from the appellants and the ATO.

On 27 October 1995, the EFG Group attempted to clarify the treatment of their proofs of debt.

On 30 October 1995 Macks wrote to the EFG Group seeking particulars of the assets of the Emanuel group over which security was held. During 1995 and 1996 Macks conducted a series of public examinations over a six month period at an approximate cost of $800,000; he was indemnified for part only of this amount by the ATO.

From about March 1996 Macks attempted to obtain funding from creditors other than the appellants for a proposed action against the appellants. Formal requests were made at meetings of creditors at which the appellants were present. The ATO funded investigations to $1.48 million but declined further funding after April 1997.

On 12 March 1996 Macks issued a notice to the creditors of the 16 Emanuel companies of a further meeting of creditors to be held on 28 March 1996 to consider indemnifying Macks in relation to some recovery proceedings. At the meeting which took place on 28 and 29 March, Macks requested indemnities for various costs, including costs of the claim against the appellants. Mr Byrne, on behalf of the EFG group, described their claim on the 16 Emanuel companies as "unsecured"; no dissent is recorded in the minutes of the meeting which refer to a discussion of the effect of the DOFR as extinguishing the appellants' debt.

During May 1996 public examinations resumed. During an examination of an officer of an appellant company, Macks' counsel stated:

"Can I also indicate for the benefit of my learned friends that whilst at the end of it [this examination] I will be asking for the adjournment of the examinations, if the liquidator should, between now and October, be advised and decides to issue proceedings … of the sort my learned friend indicated there would of course be no attempt to pursue an officer of [the appellants] or their solicitors by further examination."

On 4 and 10 December 1996 Macks issued further notices to creditors requesting an indemnity to pursue recovery actions and foreshadowing an application to the court to give the ATO priority as a creditor for providing an indemnity in some actions.

The solicitors for the EFG group wrote to Macks on 11 December 1996 requesting reasonable notice of any such application to the court as a major creditor of the Emanuel companies who would be affected by such an order. The EFG group repeated that request two days later. On Friday, 20 December 1996 Macks gave the EFG group notice that the application was to be heard the following Monday.

On 24 December 1996 Macks issued proceedings (the 1996 proceedings) against the EFG group and Coopers & Lybrand in the Supreme Court of South Australia. Macks obtained an ex parte order suppressing the existence of those proceedings until 24 March 1997 to allow Macks to confidentially continue investigations and pursue funding. Macks obtained subsequent orders in similar terms extending the suppression until March 1998.

Macks issued a separate action against the appellants on 20 March 1998 (the 1998 proceedings). This was not served until June 1998.

On 15 January 1997, the solicitors for the EFG group wrote to Macks:

"We would also seek your confirmation on one further matter, that is, that you will provide us with reasonable notice (a minimum of seven days) of any further application which the liquidator (or other person) may bring that concerns or may concern the interests of creditors (and in particular, any application pursuant to s 564 of the Corporations Law). It is clear from your material that any such application has the potential to significantly impact upon our client's rights as a creditor. We do not want a recurrence of the position in relation to this application where notwithstanding that the Indemnity Agreement was apparently entered into on 4 December 1996, the application to court was not made until 20 December 1996 on virtually no notice to our client. Could you please confirm that our client will be given reasonable notice of any such application."

Macks responded:

"We note your request for at least seven days notice of any future applications that may concern the creditors of the companies in liquidation. We undertake to give you such notice where possible."

The Funding Arrangement

In 1996 following the decision in Re Movitor Pty Ltd (In Liq)⁹ Mr Charles, a member of the firm Phillips Fox, drafted documents to create a scheme for funding liquidators' litigation. Mr Charles approached GIO and encouraged it to become involved in this area of business. Mr Charles developed the precedent documents to be used by GIO in the commercial funding of liquidators' litigation, acted as their legal adviser and also undertook extensive promotion of the litigation insurance scheme. In about February 1997 Mr Charles left Phillips Fox and became a consultant at Ebsworth & Ebsworth. Later he became a member of the firm Charles Fice.

On 27 June 1997 Macks commenced negotiations with GIO through their solicitor, Mr Charles. The precedent documents provided for Mr Charles to receive an additional service fee to the fees charged by others for their legal work. It was elsewhere proposed that Mr Charles, through Liquidators' Expense Insurance Pty Ltd ("LEI"), would receive a copyright licence fee, calculated by reference to a share of the proceeds of the litigation.

Macks, represented by solicitors, Ward & Partners, met and negotiated with Mr Charles, GIO's representative, in November 1997.

At the time the funding arrangement was negotiated, Mr Charles was to receive a licence fee for the copyright documents used in the funding arrangement to be paid out of the brokerage fee paid by GIO to the broker. Macks was unaware of this until he received a facsimile from Mr Charles on 11 March 1998. In that letter, Mr Charles advised Macks that he was a shareholder and director of LEI and the licence or copyright fee, calculated by reference to a share of the proceeds of the litigation, would be paid to LEI; although he would resign his interest his family may retain or acquire a controlling interest; if so, he may have a conflict of interest.

Later Mr Charles' wife became sole director and shareholder of LEI. The copyright claimed on the funding arrangement was in the name of Mr Charles. There is no evidence of any documented sale for proper value of Mr Charles' rights under the licence agreement to LEI.

By 21 December 1998 the terms of the licence agreement between LEI and Mr Charles had been re-negotiated so that, in return for CBA and GIO using Mr Charles' documents, GIO was to pay LEI licence fees of 10 per cent of premiums received by GIO from the claims.

Macks gave evidence at the trial that he believed Mr Charles had divested himself of all interest in LEI before the funding arrangement documents were executed.

Williams J found it was impossible on the evidence to determine what fees would be paid to either LEI or Mr Charles, who did not give evidence before him.

GIO saw the role of Mr Charles and his firm "to promote the product [of litigation insurance], review proposals, provide advice to GIO on the prospects of success, act for the liquidator (providing the liquidator is agreeable) and monitor work done by other firms where [Mr Charles'] firm is not acting for the liquidator." Macks knew that Mr Charles was working for GIO as a major promoter of GIO's litigation insurance. The solicitor-client relationship between Mr Charles and GIO continued after the funding arrangement became operational.

GIO's offer to fund the main action was conditional upon receipt of legal advice that there was no prior ranking charge over the proceeds of the claim against the appellants and Macks' obtaining a court order that the arrangements contemplated in the funding arrangement were lawful.

GIO was concerned about the potential effect on the funding arrangement of the EFG Group's mortgage debentures over the six Emanuel companies (including Emanuel (No 14) Pty Ltd).

On 9 December 1997, two companies in the EFG group submitted proofs of debt and claimed as security a mortgage debenture from Emmanuel (No 14) Pty Ltd, despite the contrary statements made on their behalf at the creditors' meetings on 10 October 1995¹⁰ and 28 and 29 March 1996.¹¹

On 2 February 1998 Macks wrote directly to one of the EFG group (not its lawyers) on behalf of each of the six Emanuel group companies over which the EFG Group had a mortgage debenture, referring to those proofs of debt and requesting completion of Corporations Law form 312¹² to update records of the Australian Securities Commission. Macks knew that the EFG group claimed to be secured creditors of Emanuel (No 14) Pty Ltd. Macks did not disclose to the EFG group that the existence of the securities was a concern to GIO because of its involvement in the funding arrangement. Macks conceded, perhaps with hindsight, that forwarding the proofs of debt direct to the appellant companies instead of their lawyers was "somewhat unwise" but maintained he had acted in good faith. The six Emanuel companies did not execute the forms.

The funding arrangement between Macks, GIO and CBA was executed on 18 March 1998. Macks did not seek the approval of the creditors of the Emanuel companies beforehand.

Terms of the Funding Arrangement

The funding arrangement comprised a loan and guarantee facilities agreement, a deed of charge, an insurance policy, solicitor-client agreement and agency agreement, all of which were copyrighted to Mr Charles.

Loan and guarantee facilities agreement

Under the loan agreement CBA agreed to advance funds to Macks to pursue the main action, to remunerate Macks so that he could pursue the action and defend any applications brought against him and to pay Macks' legal costs and expenses, including those he might be ordered to pay. CBA also agreed to advance Macks the $80,000 premium payable to GIO to insure against the risk that the loan to CBA may not be repaid at the conclusion of the litigation.¹³ Macks was to repay CBA its advance from the proceeds of any successful litigation¹⁴ at commercial rates of interest¹⁵ and in return CBA was given a fixed charge over the claim and was protected by GIO's insurance policy.¹⁶ The loan agreement would end if, inter alia, any provision in the insurance policy was declared void.

Deed of charge

The deed of charge gave CBA security over the claim for all moneys owing to CBA under the loan facility. The security was fixed and rated as a first charge.

Insurance policy

Under the insurance policy GIO insured CBA against the risk of non-payment and Macks against liability for his own legal expenses and any legal expenses ordered against him. In return, GIO was to be paid the initial $80,000 premium by CBA and if the litigation was successful would receive approximately 35 per cent of net recoveries as a risk premium.¹⁷ In addition, Macks was to give GIO a share of the proceeds of the claim sufficient to pay or reimburse GIO for the amounts to which it is entitled under the policy.¹⁸ Macks was required to obtain GIO's approval before applying for a trial date (including filing a certificate of readiness for trial); briefing counsel on trial; settling or discontinuing the claim or the legal proceedings and appealing against a final judgment. Failure by GIO to give written approval within a reasonable time enabled Macks to require GIO to join in choosing an independent senior counsel to advise whether the proposed action should be taken; that advice would be binding on the parties.¹⁹

The insurance policy required Macks to conduct the claim in a proper and responsible way, to obtain professional advice when asked by GIO as to the prospects of success of the claim and whether it should be pursued, compromised or discontinued; to contact GIO immediately upon receiving professional advice to compromise or discontinue the claim or upon becoming aware of anything that significantly affected the risk of not recovering the total amount outstanding and to pay full regard to the professional advice received.²⁰

Solicitor-client agreement

Under the solicitor-client agreement Macks appointed Mr Charles' firm as solicitors in the main action.²¹ The agreement could be terminated if either party committed a serious breach of the agreement.²² Mr Charles' firm, at Macks' expense, was required to give GIO any advice, information or documents it reasonably required on the main action.²³

Agency agreement

Under the agency agreement Mr Charles' firm appointed Ward & Partners (Macks' solicitors) to act in the day to day running of Macks' claims but significant matters, including applying for a trial date, briefing counsel on trial, discontinuance of the claim or appeal against a final judgment or settlement, could not be undertaken without the written instructions of Mr Charles' firm;²⁴ Ward & Partners must not act contrary to any written instruction from Mr Charles' firm; Mr Charles' firm was able to terminate Ward & Partners appointment for any reason on 30 days notice; Ward & Partners could terminate the appointment of Mr Charles' firm only if there was a serious breach of the agreement or if they had a conflict of interest.²⁵ Ward & Partners were required to engage as a consultant Mr Rosenzweig, an erstwhile consultant with Mr Charles' firm.²⁶

Court Approval of the Funding Arrangement

By February 1998 Macks' pursuit of legal action on behalf of the Emanuel companies had resulted in $2.5 million in unpaid fees to him and $1.1 million in legal fees.

On 17 February 1998 in Adelaide Macks applied to Mansfield J in the Federal Court of Australia under s 479(3) of the Law for directions as to whether Macks had power to enter into the funding arrangement. The appellants and other creditors were not given notice of this application. On 20 February 1998, Mansfield J approved Macks' participation in the funding arrangement and ordered that the application be heard ex parte; the affidavits be sealed;²⁷ the notice of motion be heard in camera with the transcript remaining confidential; a true copy verified by affidavit be filed upon execution of the document and the liquidator, creditors and contributories of the companies be given liberty to apply. Mansfield J directed that the affidavits and transcript be sealed and remain confidential.

Macks disclosed to Mansfield J the undertaking given to the appellants²⁸ but submitted that it was not appropriate to give notice because the appellants were the proposed defendants in the action. Mansfield J found there had not been any breach of the undertaking and expressed satisfaction as to the bona fides of the liquidator.

Macks did not disclose to Mansfield J Mr Charles' relationship as solicitor for both GIO and Macks or that Mr Charles was to receive, through LEI, a percentage of the proceeds of the action against the appellants.²⁹

On 11 March 1998, Macks sought a variation of the funding arrangement to extend the limitation period for actions brought under s 588FF of the Law. Mansfield J granted the orders sought and additionally gave liberty to apply to the liquidator, creditors and contributories and any party against which proceedings are brought under s 588FF at any time within two months after service upon it of such proceedings.

Macks sought legal advice about the matters raised by Mr Charles in his facsimile of 11 March 1998.³⁰ On 17 March 1998 Macks was advised by senior counsel that "ultimately it is not a matter of concern to you how GIO choose to distribute the premium they make from this facility. In the circumstances we believe that you need take no further action in relation to the arrangement Mr Charles has". Macks did not inform Mansfield J of Mr Charles' fee arrangements or potential for conflict of interest; by 11 March 1998 the varied order had not been taken out and Mansfield J's final judgment had not been entered.

The funding arrangement documents were exhibited to an affidavit filed in the Federal Court on 29 May 1998, pursuant to Mansfield J's earlier directions. Mansfield J's judgment approving the funding arrangement was delivered on 9 June 1998: see Re Addstone Pty Ltd (In Liq).³¹

Subsequent Events

Macks served EFG Finance with the 1996 preference share action on 23 March 1998 after the funding arrangement had been executed. On 9 April 1998 the solicitors for EFG Finance wrote to Macks' solicitors advising they were acting in those proceedings and were arranging for an appearance to be filed; they served a request for documents referred to in the pleading.

At the end of May 1998 CBA commenced funding under the agreement, after receipt of satisfactory legal advice.

On 4 June 1998 Macks wrote to the solicitors for Mr O'Grady and Mr Crosby asking whether they had instructions to accept service in the 1998 proceedings against the appellant companies. On 10 June 1998 the solicitors advised that they had instructions to accept service on behalf of Mr O'Grady and Mr Crosby. On 12 June 1998 The Financial Review published an article about Mansfield J's approval of the funding arrangement, quoting Macks' statement that it was "probably the largest litigation funding approved by a court in Australia". On 15 June 1998 Macks wrote to the appellants' solicitors advising that the appellants Mr O'Grady and Mr Crosby had already been served with the 1998 proceedings. On 29 June 1998, without giving prior notice, Macks caused judgment in default of appearance to be entered against the appellants in the 1998 proceedings. Macks informed the appellants' solicitors of this on 30 June 1998 and on 1 July 1998 the appellants applied for an urgent stay of the judgment. The default judgment was set aside on 3 July 1999 with a costs order in favour of the appellants.

On 26 February 1999 Debelle J ordered the consolidated main action be transferred to the Supreme Court of Queensland.³²

In March 1999 Macks applied ex parte for orders to publicly examine individuals associated with the appellants.

On 7 July 1999 two of the appellant companies applied in the Federal Court to set aside inter alia the orders of Mansfield J approving the funding arrangement; the application was served on Macks on 9 July 1999.

The decision of the High Court in Re Wakim; ex parte McNally³³ which held invalid Commonwealth legislation purporting to confer State jurisdiction on federal courts, was delivered on 17 June 1999. The Federal Court application to set aside the funding arrangement was adjourned by consent to 20 August 1999. On 13 August 1999 the appellants filed the claim in this action.

By 12 October 1999 CBA had advanced over $3.3 million under the funding arrangement.

Maintenance and champerty

This funding arrangement was to conduct civil litigation through the provision of financial assistance by GIO to Macks in return for the receipt by GIO of a proportion of the proceeds. Such an arrangement is prima facie maintenance and champerty.

The essence of the civil tort of maintenance is "… the officious intermeddling in and supporting litigation in which the maintainer has no legitimate interest, the invasion of a person's right not to be harried in courts of justice by litigation".³⁴

Any person who without lawful justification assists a litigant in civil proceedings to which that person is not a party, resulting in damage to the plaintiff, commits the tort of maintenance.³⁵ Champerty is a particular form of maintenance in which a share of the proceeds is the consideration for the assistance given.³⁶

The historical reasons for the development of the crime and civil wrong of maintenance and champerty³⁷ in medieval times have little relevance today but the courts must remain vigilant to ensure in the interests of public policy that there is no trafficking in litigation or speculating in causes of action for improper gain.³⁸ On the other hand, the courts also recognise the need for innovative but responsible ways of increasing access to justice for the impecunious: see the comments of Danckwerts J in Martell v Consett Iron Co Ltd.³⁹

If a funding arrangement involves maintenance or champerty it will ordinarily be illegal as contrary to public policy even in those jurisdictions, like Victoria,⁴⁰ where the criminal offence and civil tort of maintenance and champerty have been abolished.⁴¹ The fact that an action is illegally maintained and against public policy may make the agreement void and unenforceable as between the parties, but it is no defence to the action which has been commenced: Skelton v Baxter.⁴² However, the court has the power to stay proceedings if satisfied they constitute an abuse of process: Grovewood Holdings Plc v James Capel & Co Ltd.⁴³

The mere fact that proceedings are financed by third parties with no interest in the outcome other than repayment and profit from the litigation is not itself sufficient to invoke the jurisdiction of the court. Courts should be careful not to use that power to deny access to justice to a party who has sought to fund bona fide proceedings in a way which may be contrary to public policy unless that which has been done amounts to an abuse of the court's own process: Abraham v Thompson,⁴⁴ Faryab v Smyth⁴⁵ and most recently in Sa v Latreefers Inc⁴⁶ where the Court of Appeal of England and Wales noted:⁴⁷

"There are many commonplace and unobjectionable circumstances in which modern litigation is funded by those who are not the nominal parties to it. Obvious examples of this are funding by insurers, trade unions or lawyers engaged on legitimate conditional fee arrangements. If an agreement of this general kind is held to be contrary to public policy, it may be unenforceable. That may have a variety of consequences. A claim which depends on the assignment of a bare right of action may fail because the assignment is ineffective. A person who has funded an action champertously may fail to enforce recovery of the agreed proportion of the spoils. A person who has secured a champertous agreement to fund his litigation may be unable to enforce payment of the agreed funds. But the fact that a funding agreement may be against public policy and therefore unenforceable as between the parties to it is by itself no reason for regarding the proceedings to which it relates or their conduct as an abuse.

… the question whether the courts' process is affected or threatened by an agreement for the division of spoils is one to be considered in the light of the facts in each case.

…

Abuse of the courts' process can take many forms and may include a combination of two or more strands of abuse which might not individually result in a stay. Trafficking in litigation is, by the very use of the word "trafficking", something which is objectionable and may amount to or contribute to an abuse of the process. We think that it is undesirable to try to define in different words what would constitute trafficking in litigation. It seems to us to connote unjustified buying and selling of rights to litigation where the purchaser has no proper reason to be concerned with the litigation. 'Wanton and officious intermeddling with the disputes of others in which they [the funders] have no interest and where that assistance is without justification or excuse' may be a form of trafficking in litigation. … A large mathematical disproportion between any pre-existing financial interest and the potential profit of funders may in particular cases contribute to a finding of abuse but is not bound to do so."

In concluding that there was no abuse of process, the court in Sa took into account that the funders had undertaken responsibility for the costs of what had already become very expensive litigation and that the conduct of all legal proceedings and settlement negotiations were in the hands of experienced lawyers; the funders therefore had no opportunity to abusively influence the conduct of any proceedings.

The appellants have not sought a stay of these proceedings but have sought an injunction to restrain the respondents from performing the funding arrangement claiming the funding arrangement constitutes an abuse of process.

The trial judge refused to grant this injunction or any other relief sought.

1.Does s 477(2)(c) of the Law authorise arrangements which might otherwise constitute maintenance or champerty?

Section 199 of the Property Law Act 1974 (Qld) and its earlier equivalents permit the statutory assignment of choses in action including assignments which would have been enforced in equity.⁴⁸ The present position is that an assignment may not ordinarily be made of a bare right of action to someone with no genuine pre-existing commercial interest in that right who assists or encourages the litigation (maintenance) in return for a share in the proceeds of the action (champerty).⁴⁹

Mansfield J, in approving the funding arrangement, concluded that it was not champertous because it came within a long established exception based on the power of a trustee in bankruptcy or liquidator to dispose of property pursuant either to s 134(1)(a) of the Bankruptcy Act 1966 (Cth) or s 477(2)(c) of the Law. Williams J also accepted that proposition.⁵⁰

Provisions such as s 134(1)(a) Bankruptcy Act 1966 provide a statutory exception to the law of maintenance authorising the trustee in bankruptcy to sell a cause of action: Seear v Lawson; ⁵¹Citicorp Australia Ltd v Official Trustee in Bankruptcy.⁵²

The appellants claim that the reasoning in bankruptcy cases does not apply to company liquidations; under the bankruptcy scheme title to all property of the bankrupt vests in the trustee in bankruptcy who has power to sell this property; by contrast, the statutory regime for company liquidations gives the liquidator the right to control the assets of the corporation, including the power of sale but does not automatically divest the company of its property without a specific order.

Section 477(2)(c) of the Law relevantly provides:

"… a liquidator of a company may:

…(c)sell or otherwise dispose of, in any manner, all or any part of the property of the company."

The appellants argue that without clear words authorising conduct which would otherwise be unlawful, the Law does not authorise a liquidator to be a party to champerty and maintenance; s 564 of the Law, which permits the court to give priority to a creditor who has been given an indemnity for the costs of litigation, supports a narrow construction of the words in s 477(2)(c) as not permitting champerty and maintenance.

There is a substantial body of authority which accepts that the statutory power of a liquidator of a company under s 477(2)(c) of the Law to "sell or otherwise dispose of … all or any part of the property of the company" empowers the liquidator to enter into funding arrangements which might otherwise offend the rules against maintenance and champerty: see, for example, In re Park Gate Waggon Works Company;⁵³ Re Movitor Pty Ltd (In Liq);⁵⁴ UTSA Pty Ltd (In Liq) v Ultratune Australia Pty Ltd;⁵⁵ Re Tosich Construction Pty Ltd⁵⁶ and Re Daniel Efrat Consulting Services Pty Ltd (In Liq); ex parte Hawke.⁵⁷

The funding arrangement here does not assign the causes of action as in UTSA but requires Macks to dispose to GIO "a share of the proceeds of the claim … sufficient to pay or reimburse [GIO] for all amounts to which [GIO] is entitled" under the insurance policy.⁵⁸ This disposition is subject to the rights of CBA and Mr Charles' firm to payment. In return, GIO insured CBA against its risk of nonpayment by Macks; Macks and the respondent companies for their legal costs; and Macks for his personal liability for the appellants' or third party costs.

The appellants rely on Templeman J's comments in Bell Group Ltd (In Liq) v Westpac Banking Corporation.⁵⁹

"The word 'property' is defined in s 9 of the Corporations Law to mean:

'Any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action.'

It is to be noted that the words 'present or future' qualify the words 'estate or interest': not 'property'. The section therefore relates only to property which is presently in existence."

Bell involved an application under s 564 of the Law by creditors funding litigation on behalf of the company in liquidation to receive priority over other creditors in relation to property or expenses to be recovered in the future. Templeman J understandably distinguished the line of cases I have mentioned in [77] as not directly relevant to applications under s 564 of the Law.⁶⁰

Whilst the words in parentheses in s 9 relate to "estate or interest", the "estate or interest" is "in real and personal property"; the words in parentheses therefore relate to "Any legal or equitable estate or interest … in real and personal property". This definition of "property" is broad and encompasses an interest in a cause of action and the fruits of such an action. By contrast, s 564 applies only where "… property has been recovered" (my emphasis). Templeman J's comments on s 9 must be read as applying to the meaning of "property" as qualified by the words of s 564; in s 477(2)(c) "property" retains its broad meaning.

Bell does not throw doubt on the well-established acceptance by the courts⁶¹ that s 477(2)(c) of the Law confers power upon a liquidator to enter into transactions on behalf of the company which might otherwise be contrary to public policy and illegal as involving maintenance. As Hayne JA (as he then was) said in UTSA:

"In my view there is no warrant for reading down the general words of the law. The reference to sale or disposal "in any manner" makes plain that it is the intention of the legislature that the powers of the liquidator are to be ample. If a liquidator is to realise the assets of the company in liquidation to the best advantage, it would be surprising indeed if the liquidator were able to sell a particular form of the company's assets (its rights of action) to only a limited class of persons – those who are already interested in the outcome of the action concerned. Especially is this so when it is to be assumed that the provisions about realisation of the company's assets are to be read in light of the long established rule in relation to bankruptcy which permits the trustee in bankruptcy to sell the bankrupt's rights of action to a third party: see Seear v Lawson (1880) 15 ChD 426; Guy v Churchill (1889) 40 ChD 481; Ramsay v Hartley [1977] 2 All ER 673; 1 WLR 686; Stone v Angus [1994] 2 NZLR 202; Cotterill v Bank of Singapore (Australia) Ltd (1995) 37 NSWLR 238. In my view nothing turns on the different treatment of property of the bankrupt and a company in liquidation in the bankruptcy and companies legislation. In the former case, the property vests in the trustee but in the latter does not, without special order, vest in the liquidator.

I do not accept that section 477 is to be read, as counsel for the appellant contended, as doing no more than identifying the circumstances in which a liquidator can exercise powers which otherwise would rest in the company. Such a construction wholly ignores that the liquidator is to wind up the affairs of the company and distribute its property: cf s 477(2)(m). The liquidator is not appointed simply as a particular agent or controller of the company who is to set about carrying on the business and affairs of the company as if winding up had not intervened. The liquidator is there to wind up the company's affairs."⁶²

Section 477(2)(c) of the Law authorises a liquidator to enter into transactions which would have otherwise constituted maintenance or champerty, to sell or dispose of all or part of the property of the company.

2.Do the terms of this funding arrangement provide for a sale or disposition of property within s 477(2)(c) of the Law?

The appellants submit that a promise to share the proceeds which may be realised through pending litigation cannot properly be characterised as a sale or other disposition of property of the company within s 477(2)(c); even if the definition of "property" in s 9 of the Law includes the disposition of a cause of action or the entire fruits of the action, the funding arrangement does not purport to do this; it gives GIO only a share of the future proceeds of the action.

As has been noted,⁶³ bankruptcy statutes give the trustee in bankruptcy the statutory power to assign a bare right of action: see Seear v Lawson.⁶⁴ Companies legislation also permits the assignment of the company's choses in action by the liquidator: see In re Park Gate Waggon Works Company,⁶⁵ Grovewood Holdings Plc⁶⁶ and UTSA Pty Ltd (In Liq) v Ultratune Australia Pty Ltd.⁶⁷

This principle has been extended to allow the trustee in bankruptcy to assign the cause of action on terms that the assignee will account to the liquidator or trustee for a share of the fruits of the action: see Guy v Churchill;⁶⁸ Cotterill v Bank of Singapore (Australia) Ltd.⁶⁹ In other cases, the liquidator's power to assign to a third party a share of the proceeds recovered in the action in return for assistance with litigation has been recognised: Re Movitor Pty Ltd (In Liq),⁷⁰ Re Tosich Construction Pty Ltd,⁷¹ Re William Felton & Co Pty Ltd⁷² and Re Oasis Merchandising Services Limited.⁷³

Lightman J, in Grovewood Holdings Plc,⁷⁴ concluded that the provisions of the English Insolvency Act did not extend the statutory exemption for sales of bare causes of action to sales of the fruits of litigation with provision for the purchaser to fund the litigation. Grovewood was considered but not followed in Australia in Re Movitor, Re Tosich and Re William Felton. It was also considered and doubted by the English Court of Appeal in In Re Oasis Merchandising Services Limited;⁷⁵ whether the stautory exemption extends to sales of part of the future fruits of litigation with provision for the purchaser to fund the litigation must always be a question of construction of the statutory power of sale.

Here s 477(2)(c) of the Law allows a liquidator to "dispose of, in any manner, all or any part of the property of the company"; under s 9 property means "any legal or equitable estate or interest … (whether present or future …) in real or personal property of any description and includes a thing in action". The plain meaning of those words authorises the liquidator to assign to a third party a share of the future proceeds of the companies' cause of action in return for funding litigation.

3.Are proceeds from causes of action under s 565 of the Law "property" under s 477(2)(c) of the Law?

Section 565 of the Law makes preference payments by a company void as against the liquidator. The main action includes claims under s 565 of the Law.

There is some judicial support for the proposition that when such payments are recovered they do not become part of the property of the company but are held by the liquidator in trust for the creditors. In Re Yagerphone Limited⁷⁶ Bennett J said:

"The right to recover a sum of money from a creditor who has been preferred is conferred for the purpose of benefiting the general body of creditors, … the sum of money, when recovered by the liquidators … did not become part of the general assets of Yagerphone, Ld., but was a sum of money received by the liquidators impressed in their hands with a trust for those creditors amongst whom they had to distribute the assets of the company."

In N A Kratzmann Pty Ltd (In Liq) v Tucker (No 2),⁷⁷ McTiernan, Taylor and Menzies JJ said, considering Yagerphone, that where one company in liquidation was recovering preferences against another company in liquidation:⁷⁸

"… although the moneys paid as a preference were at the time of payment subject to the charge, the moneys recovered by the trustee are not the same moneys and that they do not, by virtue of payment to the trustee, become moneys of the bankrupt or in any way subject to the charge; when recovered they become the moneys of the trustee and his title to them does not depend upon his succession to any title which the bankrupt had. It was, we think, in this sense that Bennett J meant …" [his words quoted in [90]]

In Re Starkey⁷⁹ McPherson JA, with whom Pincus JA agreed, said Bennett J's use of the word "trust" does not have its full legal meaning. In Re Fresjac Pty Ltd (In Liq),⁸⁰ Doyle CJ, with whom Matheson J agreed, adopted those comments of McPherson JA.

McPherson JA in Re Starkey added:

"… while proceeds of payments recovered as preferences in winding up do not become the property of the company, nor the property of unsecured creditors they do form part of the general assets of the company under the administration and control of the liquidator that are available for payment of the costs and expenses of winding up and the claims of unsecured creditors…".

I do not understand McPherson JA's statement, that recovered preference payments do not become part of the property of the company, in context, to mean that such payments are not property within s 477 of the Law. There is nothing in the provisions of the Law to suggest that moneys recovered under s 565 of the Law are to be held by a liquidator on terms different to those on which the liquidator holds the general assets of the company. To decide otherwise would be to leave a liquidator with no power to dispose of property other than money recovered by way of a s 565 action. Such a conclusion is also supported by the terms of the order made by the High Court in Octavo Investments Pty Ltd v Knight⁸¹ which required that the moneys recovered on a voidable preference claim be paid to the company not the liquidators. See also Re Fresjac.⁸²

Williams J rightly concluded that proceeds from actions brought under s 565 of the Law constitute property within s 477(2)(c) Law.

4.The status of proceeds from claims under ss 558FF and 588M of the Law

Similarly, the appellants contend that proceeds received from claims under ss 588FF and 588M of the Law belong to the company, even though the causes of action are vested in the liquidator.

In Re Movitor, Drummond J found that the expected proceeds of an action under s 588M are part of the property of the company for the purposes of s 477(2)(c).⁸³ This conclusion is consistent with the plain meaning of the words used in s 588M(2): "a debt due to the company". Re Movitor has been followed in subsequent Australian cases.

In Re Tosich Construction Pty Ltd⁸⁴ Lindgren J applied similar reasoning to the proceeds of an action under s 588FF. Again, the conclusion that proceeds from claims under s 588FF are property of the company under s 477(2)(c) is supported by the plain words of the section which enable an order to be made directing payments or transfer of property "to the company".

Since those decisions, the English Court of Appeal has considered a similar issue in In Re Oasis Merchandising Services Ltd,⁸⁵ deciding that 'the company's property' in the English companies legislation did not include the fruits of litigation brought by the liquidator arising from rights of action accruing after the liquidation. The court in Oasis noted the distinction between s 214 of the English companies legislation and s 588M of the Law. The latter allows the liquidator to recover "as a debt due to the company an amount equal to the amount of the loss or damage" [my emphasis] resulting from insolvency. That is not the language used in s 214 which provides:

"… the court, on the application of the liquidator may declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper". [my emphasis]

The different words are significant and plainly justify the different decisions in the two jurisdictions.

The primary judge correctly concluded that any proceeds from claims under ss 588FF and 588M of the Law become part of the property of the company for the purposes of s 477(2)(c) of the Law.

5.Does the funding arrangement purport to distribute proceeds of claims under s 565 of the Companies Code to persons other than creditors?

Under s 565(2) of the Companies Code ("the Code") a director who wilfully pays or permits to be paid any dividend out of what he knows are not profits is liable to the creditors of the company for that amount which may be recovered by the creditors or the liquidator suing on behalf of the creditors. The proceeds recovered are the property of the creditors, not the company and therefore cannot be disposed of by the liquidator under s 477(2)(c) of the Law. Proceeds of claims under s 565 of the Code must be excluded from any disposition to GIO under the funding arrangement but part of GIO's premium is to be calculated by reference to a percentage of all sums recovered in the action by the liquidator, including claims under s 565 of the Code.

The insurance policy refers to s 565 claims "for the purpose of calculating … the premium"; it does not and cannot require that proceeds recovered under s 565 of the Code be used to pay the premium.

Counsel for the appellants, Mr Keane QC, points out that a difficulty could arise if 65 per cent or more of the total proceeds of the main action resulted from claims under s 565 of the Code.

This potential difficulty is resolvable: the insurance policy then has the effect that GIO would only receive an amount up to its entitlement under the insurance policy, always exclusive of recoveries under s 565. The funding arrangement does not purport to distribute proceeds of claims under s 565 of the Code to persons other than creditors. The calculation of GIO's premium by reference to s 565 does not make the funding arrangement invalid, against public policy or an abuse of process.

6.Is the funding arrangement an abuse of process or against public policy because it confers significant control of the main action on GIO?

A transaction under s 477(2)(c) should not be approved if it is against public policy. A court has the power to stay the proceedings to which the funding arrangement relates if the funding arrangement constitutes an abuse of process, although here the appellants ask for an injunction not a stay. The appellants submit the terms of the funding arrangement confer too much control on GIO and diminish the important role of the liquidator as an officer of the court.

This funding arrangement gives GIO some significant rights to interfere in the conduct of the litigation by subjecting the liquidator to its decisions in matters which the law contemplates would ordinarily be dealt with solely by the liquidator: see Glegg v Bromley;⁸⁶ In Re Oasis Services Merchandising Ltd⁸⁷ and Re Tosich Construction Pty Ltd.⁸⁸ Whilst there are often good reasons to allow funding arrangements, for example, to provide access to justice for companies in liquidation and their creditors, it is not in the interests of public policy to encourage such insurers to actively or aggressively participate in the litigation because of the potential for abuse.

The cause of action was not sold to GIO and Macks remains responsible under the Law for its conduct. The role of liquidator carries onerous legal responsibilities and is one which must be exercised by the liquidator personally and independently; it must be unfettered and is largely non-delegable but for the exceptions under the Law: A H Toy v Registrar of Companies (NT);⁸⁹ Commissioner for Corporate Affairs v Harvey⁹⁰ and Re Allebart Pty Ltd (In Liq) and the Companies Act.⁹¹

On the other hand, in funding such expensive and complex litigation it is not unreasonable that GIO would want some input into its conduct: Buiscex Ltd v Panfida Food Ltd (In Liq).⁹² Loss of some control does not necessarily make the transaction an abuse of process: see Re Movitor.⁹³

In this case, the conduct of all proceedings and settlement negotiations is in the hands of experienced lawyers who can be expected not to act improperly or abusively: see Sa.⁹⁴ This funding arrangement was in many ways similar to that approved by Drummond J in Re Movitor. Regardless of the funding arrangement, Macks can apply to the court for directions at any time.⁹⁵ Under the Law any substantial compromise requires approval of the court, committee of inspection or resolution of the creditors.⁹⁶ Under the funding arrangement, any dispute between Macks and GIO is to be resolved by an independent senior counsel.⁹⁷ Mansfield J was satisfied that ultimate control of the litigation under the funding arrangement remained with the liquidator.⁹⁸

A funding arrangement which leaves greater control of the action with Macks would have been preferable, but I am not persuaded that GIO's potential for limited control of the action under this funding arrangement is against public policy; on the established facts it is not an abuse of process. The learned judge correctly refused the relief sought.

7.Should non-disclosure in an ex parte application for directions under s 479(3) of the Law of Mr Charles' pecuniary interest in the outcome of litigation and his potential for conflict of interest have caused Williams J to set aside the order of Mansfield J?

The appellants submit that non-disclosure of Mr Charles' percentage pecuniary interest in the outcome of the litigation in an ex parte application for directions unders s 479(3) of the Law has the result that Mansfield J's order should be set aside. Macks knew of Mr Charles' interest on 11 March 1998, before Mansfield J entered the varied order approving the funding arrangement and long before the delivery of Mansfield J's final judgment approving it on 9 June 1998. The appellants claim this non-disclosure should be treated in the same way as non-disclosure on any other ex parte application and the order should be set aside.

There is an obligation on a liquidator as an officer of the court applying for orders under s 479(3) of the Law to give full and frank disclosure.

The primary judge rightly noted that the application by Macks under s 479(3) of the Law was not strictly an ex parte application in the traditional sense. The appellants were not a party to the application; nor was any order made against them; they had no right to be heard as prospective defendants to the main action; the application did not determine substantive rights: see Bank of Melbourne Ltd v HPM Pty Ltd.⁹⁹ On the other hand, as creditors they had a real interest in the outcome of the application. Mansfield J attempted to protect the interests of creditors by giving liberty to apply, but this was of limited use because the appellants were not made aware of the order for four months.

Williams J noted it was not possible on the evidence to determine what fees would be paid to either LEI or Mr Charles, who did not give evidence before him. There is, however, evidence which suggests that Mr Charles, a solicitor, was to be remunerated through LEI, which was controlled by his wife, by reference to the calculation of a percentage of the proceeds of the fruits of the action received by GIO. Whilst the exact position remains unclear, there is a danger that such a scheme could amount to maintenance or offend professional practice rules: see Clyne v New South Wales Bar Association;¹⁰⁰ s 48D Queensland Law Society Act 1952 (Qld) and s 99 Legal Practice Act 1996 (Vic).¹⁰¹

In addition, the appellants emphasise that Mr Charles has a potential conflict of interest between the maintenance of his commercial relationship with GIO, and his role assisting Macks under the funding arrangement and that this was not plainly disclosed to Mansfield J.

Senior counsel for Macks acknowledged before Mansfield J that GIO's solicitor, Mr Charles, would provide a member of staff to Macks' instructing solicitors so that the insurer was kept informed as to how the proceedings were conducted and have an opportunity to participate.

Williams J considered both issues which were not fully disclosed to Mansfield J. His Honour noted that had those matters originally been raised before Mansfield J, modifications could have been made to the funding arrangement; the liquidator's failure to place these matters before Mansfield J caused him concern. Williams J decided that there should be no interference with Mansfield J's order because a very substantial sum of money has already been expended under the funding arrangement; the true position of Mr Charles had by then been fully exposed so that all parties were aware of the potential for conflict; and Mr Charles' will be subject to the scrutiny of Macks and the appellants who can use the Law to invoke the court's supervisory role.

Portions of this funding arrangement were not ideal. Although it is not possible on the evidence to ascertain the terms of Mr Charles' remuneration, I, too, am concerned that Mr Charles, a solicitor, may be remunerated, even indirectly, by reference to a percentage of the proceeds of the main action. Depending on the precise terms of the remuneration, it is possible that such conduct may amount to maintenance and may offend professional conduct rules. It may be against public policy if it brings the justice system into disrepute through congesting the courts with an unjustified proliferation of cases; or increases the risk that practitioners will place their desire to win litigation and make profits above their professional duties to their client, the court and other practitioners; or is likely to reduce public confidence in the administration of justice. But it is impossible to reach a firm view on the propriety of Mr Charles' remuneration on the evidence here.

The funding arrangement does raise the risk that because of Mr Charles' personal interest in the outcome of the litigation which is linked with those of GIO, then, for reasons which may arise during the litigation, these interests may not always be the same as the interests of Macks or the respondent companies. On the other hand, both Mr Charles and Macks are officers of the court who are now aware of the potential for conflict under the funding arrangement. In the absence of any evidence to the contrary, the Court is entitled to presume they are acting ethically. It seems certain the appellants will be vigilant in this and other respects and will not be slow in seeking the intervention of the court where they believe it is warranted.

This appeal is not an appeal from the decision of Mansfield J but from Williams J's refusal to go behind Mansfield J's perfected order. The circumstances in which a court will re-open its orders are very limited and were recently considered by the High Court in DJL v Central Authority.¹⁰² They include cases where an order obtained in the absence of an interested party will be set aside for material non-disclosure: see, for example, Re South Downs Packers Pty Ltd¹⁰³ and Garrard v Email Furniture Pty Ltd.¹⁰⁴ It is by no means clear that this is such a case. The directions given by Mansfield J do not bind or substantively affect the rights of the appellants; they protect the liquidator who has made full and fair disclosure to the court of the material facts, from liability for any alleged breach of duty as liquidator to a creditor, a contributory or the company in respect of anything done in accordance with the directions: see Re G B Nathan & Co Pty Ltd (In Liq);¹⁰⁵ Re Movitor¹⁰⁶and Re Efrat.¹⁰⁷ Mansfield J's order has provided protection to the liquidator whilst acting in accordance with the approved directions. There may be cases where the liquidator's failure to make full and fair disclosure of material facts at the application for directions warrants the liquidator losing that protection. On the established facts, this case is not one of them.

In these circumstances, Williams J was right to refuse to set aside Mansfield J's order.

8.Was Mansfield J deliberately misled by Macks so as to conclude that Thomas J's judgment was a consent order

The appellants also claim that Macks deliberately misled Mansfield J into concluding that Thomas J's order for summary judgment was a consent order. The transcript and counsel's submissions before Mansfield J do not support that contention which was rightly rejected by the primary judge.

9.Does Mr Charles' interest in the outcome of litigation, his potential conflict of interest and GIO's control over the main action collectively result in the funding arrangement becoming an abuse of process?

If the funding arrangement constitutes an abuse of process, the proceedings may be stayed pending the parties entering into an amended or new acceptable funding arrangement which does not raise potential conflicts of interest; risk a solicitor being remunerated by a percentage share of the proceeds of the litigation or give the funder too much control of the main action. The appellants have not sought a stay but seek an injunction on that basis to restrain the respondents from performing the funding arrangement. I have already dealt separately with Mr Charles' pecuniary interest in the outcome of the litigation, his potential conflict of interest and GIO's control over the main action.

The unattractive aspects of the funding arrangement raised by the appellants do not, alone or collectively, persuade me that the funding arrangement was contrary to public policy, let alone an abuse of process. It is significant that the appellants are protected by this costs insurance if Macks' action against them is unsuccessful. Williams J correctly refused to grant the injunctive relief sought.

10.Was the funding arrangement in the interests of creditors?

The appellants submit that the exercise of power under s 477(2)(c) of the Law must be in the interests of creditors.

The liquidator must exercise his powers in the interests of the winding up which include the interests of creditors. The appellants submit the liquidator did not consult with creditors prior to seeking approval to enter into the funding arrangement; did not disclose to the creditors his intention to apply to the court for approval and did not inform the creditors of the offer of funding from GIO so that the creditors could consider whether they wished to indemnify the liquidator on comparable terms.

Drummond J in Re Movitor¹⁰⁸ regarded informed consultation with creditors an essential prerequisite before entering into a funding arrangement. Hansen J in UTSA¹⁰⁹ observed that generally speaking a liquidator should seek the informed consent of creditors and that whilst it may have been preferable for the liquidators to have convened a meeting of all creditors to consider the proposal, the omission did not constitute a reason to refuse approval of the proposed funding scheme.

Both Mansfield J and Williams J recognised the difficulty for a liquidator in a case such as this where the largest creditor is also the potential defendant in the action sought to be funded. Young J in Re Feasty's Family Restaurants Pty Ltd (In Liq)¹¹⁰ commented in a comparable case:

"… some significant creditors are the defendants in the litigation so that, commercially speaking, it is not feasible to obtain the consent of the creditors.

…

… where there is a good reason for creditors not to be approached, the court should make an order under s 477(2B) with insured litigation finance agreements almost as of course."

Ordinarily, consultation with the creditors is preferable, even when some creditors are the target of the litigation sought to be pursued.

In the circumstances here, it was understandable that the liquidator did not formally seek the approval of creditors before entering into the funding arrangement. As the learned primary judge noted, the creditors were aware of Mack's wish to prosecute these issues; he had discussions with a number of the major creditors with a view to obtaining funding to commence the main action. No creditor at the meeting on 28 and 29 March 1996 was prepared to become an indemnifying creditor; all creditors, including the appellants, knew of the liquidator's interest in pursuing the claims in the main action and none sought to dissuade Macks from commencing the proceedings or suggested that the claims could not be substantiated. Macks was in a difficult position and acted on the advice of senior counsel.

But the fact that a funding arrangement may not be in the interests of creditors who will be defendants in the action the subject of the funding arrangement is not, in itself, a sufficient ground to limit the liquidator's power of disposition under s 477(2)(c) of the Law; nor does it provide a basis for concluding the funding arrangement was an abuse of process.

11.The failure to set aside Thomas J's judgment before commencing the main action

The appellants also contend that the failure to explain to Mansfield J that the main action would proceed without first setting aside Thomas J's order for summary judgment was an abuse of process. The pleadings in the main action did not originally seek relief to set aside Thomas J's judgment. It is apparent that this is an issue which should be addressed in the main action. The pleadings in the main action have recently been amended and now claim that the judgment entered by Thomas J was "obtained and entered by fraud" or "by collusion" and should be set aside or declared to be a nullity: see Emanuel Management Pty Ltd & Ors v Foster's Brewing Group Limited & Ors.¹¹¹ At the time of the application before Mansfield J, there was no statement of claim. I am far from persuaded that, in all the circumstances, the omission to tell Mansfield J that the main action would proceed before setting aside Thomas J's order for summary judgment was an abuse of process or that it would otherwise warrant going behind Mansfield J's order.

12.Was the liquidator acting in the interest of the winding up in entering into the funding arrangement?

One of the appellant companies (Lensworth Properties Pty Ltd) advanced $43 million in 1987 to Emanuel Management Pty Ltd; Emanuel (No 14) Pty Ltd and some other Emanuel companies gave Lensworth Properties Pty Ltd (later part of the EFG group), security for that advance. If that security is valid and the main action is successful against the appellants, the appellants would have first claim to the proceeds as secured creditors. The appellants contend this makes the merits of the main action and its funding questionable.

The worth of that security is an issue in the main action. In bringing the main action, Macks acted on legal advice from experienced senior counsel, copies of which were shown to Mansfield J. Approval of a funding arrangement under the Law is not the place for a trial of the substantive issues in the litigation sought to be funded: Martell v Consett Iron Co Ltd.¹¹²

The appellants raise a number of matters to suggest the claims in the main action were overstated before Mansfield J. For example, they submit that Mansfield J was wrongly told that the DOFR involved a transfer of property valued internally by the appellants at $100 million when in fact the value may have been $53 million. Although the precise amount of the relief sought by the appellants was not clear before this Court, if the main action is fully successful, Macks will enter judgment against the appellants for many millions of dollars. A preliminary application such as this is no place to determine the strengths and weaknesses of the main action. The proof of that claim is a matter for determination at trial. It is sufficient that the potential claim is one which appears to justify the conduct of Macks in bringing the main action. The funding arrangement limits any further risk to creditors and if it has significant success, the creditors, with the possible exception of the appellants, will benefit. If the main action is completely unsuccessful, the appellants in the ordinary course will be likely to have a costs order in their favour; this will be met under the funding arrangement.

It is evident that Macks has a personal interest in pursuing the main action in that this seems to be his best prospect of recovering his past fees of over $2.5 million; the funding arrangement additionally provides for him to earn fees well into the future. Those matters alone are no reason not to approve the funding arrangement in a complex liquidation like this which will inevitably involve substantial liquidator's fees. The primary judge concluded that the material available to Macks was sufficient to induce a reasonable belief in his mind that there were good prospects of success in bringing the action which would benefit the companies in liquidation. I agree with that assessment, which was plainly open based on the legal advice Macks received and the favourable impression the judge formed of Macks, who was cross-examined before him over two days.

The appellants complain that Williams J, in justifying Macks' decision to pursue the claim in the interests of the winding up, wrongly relied upon judicial findings in Addstead Pty Ltd (In Liq) v Liddan Pty Ltd,¹¹³ namely, that a number of the transactions relating to the main action involved fraud against the unsecured creditors of the Emanuel Group by the directors of the Emanuel companies in their dealings with representatives of the appellants. It is correct that the appellants were not parties to that action; the findings of fraud and breach of fiduciary duty were made against the directors of the Emanuel group companies, not the appellants, and related to only a small part of the claims in the main action. Nevertheless, the decision was capable of giving encouragement in a general way to the liquidator in pursuing the main action.

Williams J was entitled to conclude that Macks acted in the interests of the winding up in entering into the funding arrangement.

Application to remove the liquidator

The appellants claim the liquidator has not acted impartially, fairly and independently and should be removed. This, they submit, was demonstrated by Macks' substantial personal interest in pursuing the litigation which has no realistic prospects of success; failing to seek the approval of creditors for the funding arrangement; failing to disclose to the court the true role of Mr Charles and his interest in the outcome of the proceedings; failing to give other creditors of substance the opportunity to enter into comparable funding arrangements with GIO and CBA and making the application before Mansfield J ex parte without making full and frank disclosure.

To succeed in an application for removal of the liquidator under ss 473 or 503 of the Law the applicant is required to show that removal is for the general advantage of persons interested in the winding up.¹¹⁴

Each complaint has been dealt with earlier in these reasons. It is sufficient to say the evidence before Williams J on these matters did not support the order sought by the appellants.

The appellants also complain of Macks' conduct in entering a default judgment against the appellants in circumstances where it was obviously inappropriate. Macks did so on legal advice. Williams J concluded that whilst Macks acted robustly in entering judgment, the decision was not taken lightly and the conduct did not amount to a ground necessitating Macks' removal. His Honour's conclusion was plainly open on the evidence.

The appellants also complain of Macks' conduct in attempting to trick them into releasing a security (a debenture given by Emanuel (No 14) Pty Ltd) by requesting the appellants sign releases to "update the records of the Australian Securities Commission" when this was untrue.¹¹⁵ The appellants submit Macks' true purpose was to remove an obstacle to the funding arrangement he was then negotiating; GIO and CBA were concerned that any securities held by the appellants not take priority over payments to be made to CBA under the funding arrangement; Macks sent the letter to the appellant companies' directly rather than to their solicitors.

Williams J found that the liquidator had good reason for believing the appellants had surrendered the security and that the records of the Australian Securities Commission should be brought up to date to reflect that fact; the conduct of the liquidator was not unreasonable and even if "somewhat unwise" was not evidence of want of good faith.

On the evidence, there was room for some confusion as to whether or not the EFG group was relying on their mortgage debenture over Emanuel (No 14) Pty Ltd. Macks accepted during cross-examination, however, that he appreciated that the EFG group still maintained their rights as a secured creditor over Emanuel (No 14) Pty Ltd. It is far from clear whether the appellants were in fact entitled to the benefit of the rights under the mortgage debenture and the validity of that security may be determined in the main action. Williams J formed a favourable view of Macks, finding him an impressive and honest witness who as liquidator was in an extremely difficult situation.¹¹⁶ There is some evidence from which it could be inferred that Macks' true purpose in writing to the appellants requesting completion of the release to update the records of the Australian Securities Commission was to remove an obstacle to the funding arrangement. The learned primary judge did not draw this inference and was not prepared on the material before him to make any finding of misconduct on the part of Macks. His Honour was entitled to reach that conclusion on the evidence.

A further complaint made was that Macks breached an undertaking to the court in pursuing public examination of those connected with the appellants after commencing the main action.¹¹⁷

The learned primary judge doubted whether this amounted to an undertaking to the court which could be the subject of contempt proceedings but in any case was not satisfied there was any subsequent breach of the undertaking when Macks applied for orders for the examination of the 10th appellant and former employees of the appellants. These findings were plainly open on the evidence.

Williams J, who formed a favourable view of Macks after seeing him cross-examined over two days, was entitled to conclude that the appellants' complaints against Macks, alone or collectively, did not demonstrate cause for his removal under the Law.

The appellants have not demonstrated in the myriad of complaints raised by them, alone or collectively, that Williams J erred in dismissing the action. I would dismiss the appeal with costs to be assessed. It is therefore unnecessary to deal with the respondents' notices of contention.

Summary

Section 477(2)(c) of the Law authorises a liquidator to enter into champerty, to sell or dispose of all or part of the property of the company.

Section 477(2)(c) of the Law authorises the sharing of proceeds of future litigation under this funding arrangement.

Proceeds from actions brought under s 565 of the Law constitute property within s 477(2)(c) of the Law.

Proceeds from claims under ss 588FF and 588M of the Law become part of the property of the company for the purposes of s 477(2)(c) of the Law.

The funding arrangement does not purport to distribute proceeds of the claims under s 565 Companies Code to persons other than creditors; the calculation of GIO’s premium by reference to s 565 does not make the funding arrangement invalid, against public policy or an abuse of process.

The funding arrangement in conferring significant control of the main action on GIO does not become an abuse of process.

Williams J was entitled to refuse to set aside Mansfield J’s order, despite non-disclosure of Mr Charles’ interest in the outcome of litigation and his potential conflict of interest in an ex parte application for directions under s 479(3) of the Law to enable the liquidator to enter into the funding arrangement.

Macks did not deliberately mislead Mansfield J into concluding that Thomas J’s order for summary judgment was a consent order.

Mr Charles’ interest in the outcome of the litigation, his potential conflict of interest and GIO’s control over the main action do not alone or collectively render the funding arrangement contrary to public policy or an abuse of process.

The fact that a funding arrangement may not be in the interests of creditors who will be defendants in the action the subject of the funding arrangement, is not in itself sufficient ground to limit the liquidator's power of disposition under s 477(2)(c).

The omission to inform Mansfield J that the main action would proceed without first setting aside Thomas J’s order for summary judgment was not an abuse of process.

Williams J was entitled to conclude that Macks was acting in the interests of the winding up in entering into the funding arrangement.

ORDER:

Appeal dismissed with costs to be assessed.

DAVIES JA: