Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324

5. An interlocutory application is made now by the liquidator under s.477(2B) of the Corporations Law for approval, nunc pro tunc of entry by the liquidator into a litigation funding agreement.

8. Section 477 of the Corporations Law sets out the powers of a liquidator. Section 477(1) empowers a liquidator to carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business. Section 477(2)(a) empowers a liquidator to bring or defend any legal proceeding in the name and on behalf of the company. Section 477(2)(m) empowers a liquidator to do all such other things as are necessary for winding up the affairs of the company and distributing its property. Section 477(2B) of the Corporations Law imposes constraints upon a liquidator entering into an agreement. The sub-section provides:

"477(2B) [Time limit on power to enter into agreements] Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a charge if:

(a) without limiting paragraph (b), the term of the agreement may end; or

(b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months."

16. Hence, pursuant to s.477(2B) of the Law a liquidator is precluded from entering into an agreement if the term of the agreement ends or the obligations under the agreement may be discharged by performance more than three months after the agreement is entered into unless approval is given to the agreement by the court, the committee of inspection or by a resolution of the creditors. Clearly, s.477(2) contemplates that approval will be obtained prior to a liquidator entering into any agreement on behalf of the company that is otherwise precluded by s.477(2B) of the Law.

19. Prior to the company being wound up it was placed in administration on 15 May 1998. Mr Andrew Dunner was appointed administrator pursuant to s.436A of the Corporations Law. After the company was placed in liquidation on 12 June 1998 the liquidator ascertained that the estimated realisable value of assets was nil and that various preferential and ordinary creditors were owed amounts totalling $229,823.94. Following inspection of the records of the company the liquidator ascertained that an agreement had been entered into by the company with the Australian Tax Office ("ATO") on 3 March 1997 to pay an amount of $67,152.96 by instalments in relation to outstanding group tax liability of the company. Further, the liquidator ascertained that on 3 March 1997 the company entered into a second agreement with the ATO to pay an amount of $70,874.04 by instalments in relation to other outstanding taxes. The liquidator ascertained, also, that on 19 February 1998 a subsequent agreement was entered into between the company and the ATO with respect to the payment of other outstanding taxes by instalments. In light of the proximity of the payments made pursuant to the various agreements of the company with the ATO to the appointment of the administrator on 15 May 1998 the liquidator formed the belief that some or all of the payments made by the company to the ATO may have been voidable under Division 2 of Part 5.7B of the Corporations Law.

22. Upon forming this belief the liquidator commenced negotiations with Walker Law Group as agent for Insolvency Management Fund Pty Ltd ("IMF") in order to secure funding to institute proceedings to set aside all or part of the payments made by the company to the ATO as constituting a preference. The liquidator accepted an offer from IMF to fund the litigation contained in a letter from IMF dated 25 May 1999. The agreement provided that IMF would pay its fees, the costs and disbursements of the liquidator and indemnify the liquidator in respect of any adverse costs order. The agreement provided that if the liquidator received any moneys following the institution of proceedings, referred to as the "resolution sum", the liquidator would reimburse IMF for its fees, the costs and disbursements of the liquidator and such payment was to constitute a priority to be paid from the resolution sum before any other expenses of the liquidation. The terms of the agreement contemplated that the resolution sum may not be obtained for up to more than six months after the letter of offer from IMF, that is, after 25 May 1999. The agreement provided for IMF to receive a portion of any resolution sum, such portion to be determined at varying amounts depending upon when the sum was received. The agreement was accepted by the liquidator on behalf of the company on 15 June 1999.

25. The liquidator entered into the agreement notwithstanding the fact that the agreement required approval under s.477(2B) and had not received prior approval of the court, the committee of inspection or of a resolution of the creditors of the company pursuant to the section. On 4 January 1999 the liquidator forwarded a standard circular letter to the creditors of the company seeking an indemnity for costs for the purpose of investigating insolvent trading claims against directors of the company. No offers of indemnity were forthcoming. As a result, the liquidator formed the belief that the recovery of the payments believed to have been made on a preferential basis to the ATO was the only realisable asset that could be distributed among creditors. The only means of pursuing a preference action against the ATO that did not involve personal funding by the liquidator was the arrangement with IMF. Following the agreement with IMF the liquidator issued proceedings against the ATO on 14 May 2000 claiming that payments totalling $199,000 were made to the ATO by the company and that such payments were voidable transactions pursuant to ss.588FE(2) and (3) of the Corporations Law. The proceedings were settled and orders were made by consent in the Supreme Court on 22 June 2000 that the ATO pay the sum of $70,000 to the liquidator pursuant to s.2588FF of the Law.

28. The liquidator now makes application for retrospective approval of the agreement with IMF pursuant to s.477(2B) of the Corporations Law. The liquidator, Mr Vince, has deposed on affidavit that he was advised after the settlement with the ATO that he should have obtained approval prior to entering into the agreement with IMF. He deposed that he would have made an application to the court for approval had he been aware of the necessity to do so.

31. In the ordinary course of insolvency practice the court would ordinarily expect that an official liquidator would be fully mindful of his or her obligations under the Law when acting as liquidator of a company. If a liquidator is unaware or uncertain of his or her obligations then legal advice should be obtained. The court has an expectation that a liquidator will be aware of the obligations and powers particularly those contained under s.477 of the Law. In order to exercise certain powers such as those under s.477(2B) a liquidator ought be aware of the necessity to obtain leave of the court or approval of creditors or the committee of inspection.

34. Such approval should be obtained in advance of the exercise of the power in question, although the court has the power to give a retrospective sanction in a proper case to action taken without the requisite approval: see Re Associated Travel, Leisure & Services Limited (1978) 1 WLR 547; also, McPherson, The Law of Company Liquidation (4th ed.) 349.

37. In Re Associated Travel, Leisure & Services Limited (in liq) Templeman J was concerned with circumstances where a liquidator gave instructions to solicitors who successfully recovered a debt owed to the company. Subsequently, the solicitors' costs were disallowed on the ground that the liquidator did not obtain prior approval of the court before instructing the solicitors. The English statute[1] precluded a liquidator from, inter alia, appointing a solicitor to assist in the winding up of the company without approval of the court or the committee of inspection. Templeman J held that in a proper case such as that before the court where the appointment of solicitors resulted in benefit to the creditors, the court had power to allow the liquidator to retain out of the assets of the company sums to indemnify him against the solicitors' costs. Templeman J (at 549) considered that under the English statute[2] the liquidator could apply to the court for directions in relation to any particular matter arising under the winding up and that either under that section or under its inherent powers the court may authorise the liquidator to make a variety of payments (see also in Re Banque des Marchands de Moscou Koupetschesky (1953) 1 WLR 171).

40. There is an obvious policy underlying the requirements of s.477(2B) of the Law namely that it is intended to afford some protection against ill advised or improper actions on the part of a liquidator. Ultimately, the absence of the required sanction is a matter that effects only the relationship between the liquidator and the company or its creditors and cannot be made the subject of objection by a third party: see Re Home Counties Life Insurance Co (1862) 6 LT 374; Re English & Scottish Marine Insurance Co (1870) 23 LT 685; Ali v Premier Timber Co (1952) (1) SA 689; also, McPherson, The Law of Company Liquidation (4th ed.) 349. It seems that a facilitative approach has prevailed largely in relation to the institution of legal proceedings by the liquidator for which it was formerly necessary to obtain leave or approval: see Dublin City Distillery Limited v Doherty (1914) AC 823; Waisbrod v Potgieter (1953) (4) SA 502; Re WA Holiday Resorts Limited (1961) WAR 152.

43. Ultimately in the matter before me the creditors of the company received a benefit if not a windfall in that as a result of the agreement entered into by the liquidator with IMF the sum of $70,000 was recovered from the ATO that would otherwise not have been available. Obviously, therefore, the creditors of the company have enjoyed the type of benefit contemplated by Templeman J in Re Associated Travel. I am satisfied in the circumstances of this matter that if the application had been made to the court pursuant to s.477(2B) of the Law prior to the liquidator entering into the agreement with IMF approval would have been granted pursuant to that section. I am satisfied that the nature of the arrangement between the liquidator and IMF was a perfectly proper arrangement and it provided an opportunity to the company where the company faced minimal risk, the liquidator did not have personal liability and the arrangement was perfectly proper for the liquidator to otherwise enter into. In all the circumstances, therefore, I consider it appropriate that approval be given to the agreement: see Re Feastys Family Restaurants Pty Ltd (in liq) (1996) 14 ACLC 1058, 1059.

46. Section 479 of the Corporations Law is concerned with the exercise and control of liquidators' powers. Section 479(3) empowers a liquidator to apply to the court for directions in relation to any particular matter arising under the winding up. The provision is comparable to the provision in the English statute contemplated by Templeman J. Section 536 of the Corporations Law sets out the supervisory powers of the court in relation to liquidators. Section 536(3) of the Law empowers the court at any time to require a liquidator to answer any enquiry in relation to the winding up. I am satisfied in the present matter that the liquidator omitted to obtain prior approval of the court pursuant to s.477(2B) as a result of sheer ignorance and oversight on his part of his statutory obligations as a court appointed liquidator. I adopt a similar view to that expressed by Templeman J in Re Associated Travel that either under the statute, in this case s.479(3) of the Law or pursuant to the inherent jurisdiction of the court approval may be granted as sought by the liquidator in the present matter.

49. I make the further observation that s.1322(4)(a) of the Corporations Law empowers the court to make an order declaring that any act, matter or thing purporting to have been done under the Law or in relation to a corporation is not invalid by reason of any contravention of a provision of the Law. I note, further, that s.1322(4)(d) of the Law empowers the court to order an extension of the period for doing any act, matter or thing under the Law, including an order extending a period where the period concerned ended before the application for the order was made and that the court may make such consequential or ancillary orders as it thinks fit.

52. In my view this is a proper matter in light of the benefit to the creditors of the company that the court should exercise its powers under s.437(3) and s.1322(4)(a) and (d) of the Law. Declarations and orders will be made to the effect:

(1) That pursuant to s.1322(4) of the Law the agreement effected between the liquidator and IMF on 15 June 1999 is not invalid.

(2) That pursuant to s.1322(4)(d) of the Law the period for the making of an application under s.477(2B) of the Law for approval of the agreement is extended.

(3) That pursuant to s.477(2B) of the Law approval is granted to the liquidator to enter into the agreement.

I certify that this and the 6 preceding pages are a true copy of the reasons for judgment of Warren J of the Supreme Court of Victoria delivered on 18 August 2000.