Empire (Aust) Nominees Pty Ltd v Vince

GLEESON J: 1 On 26 April 2018, I made orders approving the entry by the plaintiff ("Mr Hird" or "liquidator") as liquidator of Allmine Group Limited (in liquidation) ("company") into an agreement on behalf of the company pursuant to s 477(2B) of the Corporations Act 2001 (Cth) ("Act"), and ancillary orders. 2 The agreement is a litigation funding agreement ("funding agreement") with Slater and Gordon Ltd ("Slater + Gordon") to enable the liquidator to conduct public examinations of the company's directors and auditor regarding the company's examinable affairs. A copy of the unsigned agreement is in evidence. It is expressed to apply from and including 22 April 2016.

Background facts 3 The company is the ultimate holding company for the Allmine group of companies, which consists of at least 17 wholly and partly owned subsidiaries incorporated variously in Australia, Fiji, New Zealand, South Africa, Hong Kong and Liberia. 4 The company is a mining services company that operates three divisions: (1) engineering, procurement and construction via its wholly owned subsidiary, Arccon (WA) Pty Limited; (2) constructions services via its wholly owned subsidiary, Construction Industries Australia Limited; and (3) fixed and mobile plant maintenance and associated consumable sales via its wholly owned subsidiary, Allmine Maintenance Division Pty Limited. 5 The company undertakes engineering procurement and constructions projects across the globe and its maintenance division operates service centres in Perth, Leinster, Karratha and Darwin. In addition, the company provides on-site labour hire and field service operations and sales of after-market earthmoving components across Australia and Fiji.

2013 6 On 20 June 2013, Kimberley Andrew Strickland and David Ashley Hurt of WA Insolvency Solutions ("former administrators") were appointed as joint and several voluntary administrators of the company pursuant to s 436A of the Act. 7 On 21 June 2013, Cliff Rocke and Scott Langdon of Korda Mentha ("receivers") were appointed receivers and managers of the company pursuant to a registered security interest held by Westpac Banking Corporation ("Westpac"). 8 In June 2013, 333 Advisory prepared a draft report entitled "Limited strategic and financial review" concerning the company. The report is highly critical of the financial management of the company, stating: The Group's accounting and finance functions are barely functional, lack ownership and accountability and are under resourced. 9 Mr Hird has relied on the draft report to identify the following issues in relation to the management of the Allmine group: (1) poor divisional management and limited board oversight; (2) annual budget setting process driven by individual divisions, with no preparation of integrated financial forecasts; (3) inability to provide (to 333 Advisory) substantial information to support actual performance to date and evidence for key forecast assumptions; (4) possible fraud; (5) major liquidity concerns; (6) systemic subsidiary based losses; and (7) unidentified and unquantified contingent liabilities; (8) management systems and international controls not appropriate for a business of its complexity, size and scale; (9) overstatement of position and profits to market in financial year ending 2012; (10) overstatement of position and profits to market in financial year ending 2013; and (11) overstatement of position and profits to in internal projections for financial year ending 2014. 10 On 1 July 2013, at the first meeting of the company's creditors, Mr Hird and Geoffrey Hancock were appointed as the company's administrators, replacing Ms Strickland and Mr Hurt. 11 On 18 July 2013, the time for convening the second meeting of creditors pursuant to s 439A(6) of the Act was extended to 11 October 2013: Hird, in the matter of Allmine Group Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 748. At [8], Farrell J set out the then available evidence concerning the financial position of the company, which was said to require investigation. At [15], her Honour referred to cconvertible note holders who were said to be owed in the order of $5 million. 12 On 17 September 2013, Mr Hird and Mr Hancock conducted a meeting of the convertible note holders of the company. 13 On 10 October 2013, Mr Hird and Mr Hancock published a report to creditors pursuant to s 439A of the Act. Their opinion, stated on the front of the report, was that "the company be wound up or, alternatively, creditors may wish to adjourn the meeting for up to 45 business days". The report does not identify any particular transactions in relation to which there may be recoveries by a liquidator. 14 On 18 October 2013, the company was wound up by creditors' voluntary resolution, with Mr Hird and Mr Hancock appointed as its liquidators. 15 On 15 November 2013, Mr Hird sent a proposal to creditors of the company for funding for the purposes of enabling the liquidators to continue investigations into the affairs of the company and to determine whether any recovery action exists against the directors of the company and any third party that might provide a return which would ultimately benefit noteholders and other creditors. 16 Funding was not forthcoming in response to that proposal. Mr Hird's evidence was that he has sought alternative funding from a variety of sources without success, until now.

2014 and 2015 17 During 2014 and 2015, Mr Hird was involved in unsuccessful negotiations to re-capitalise the company through a deed of company arrangement. 18 On 21 January 2015, Mr Hird lodged a report with the Australian Securities and Investments Commission ("ASIC") under s 533 of the Act, in relation to the company. 19 On 9 July 2015, Mr Hird lodged a funding request with ASIC in connection with a proposed disqualification of Robert Wilde, a director of the company, under s 206F of the Act. 20 On 27 August 2015, Mr Hird lodged another funding request with ASIC in relation to Mr Wilde.

2016 21 By letter dated 31 May 2016, Slater + Gordon provided Mr Hird with advice concerning s 477(2B) of the Act. The letter stated that, at that stage, Slater + Gordon was offering to act for Mr Hird "on a conditional fee basis pursuant to the terms of our no-win no-fee retainer." The letter noted that the duration of the retainer would almost certainly exceed three months, and that Slater + Gordon was proposing to act without the input of a third party litigation funder. 22 The letter estimated the "total upper legal costs" at $145,000 inclusive of GST for fees and disbursements in relation to the following tasks: initial investigation into claims; examination of agreed directors; investigation of director and auditor claims; and any application for leave to proceed with claim. 23 On 6 June 2016, Mr Hird signed the "Agreement and Costs Disclosure" document that accompanied Slater + Gordon's 31 May 2016 letter. 24 On 22 August 2016, Mr Hird finalised supplementary reports to ASIC pursuant to s 533(2) of the Act concerning former directors of the company, John Darling, Scott Walken and Robert Wilde. The reports state that Mr Hird had obtained funding from a litigation funder that would put him in funds to facilitate undertaking further investigations including conducting public examinations of various parties. 25 The receivers ceased acting on 30 September 2016. Prior to the receivers' retirement, they had full control of the company's assets and operations and were seeking to realise sufficient funds to meet Westpac's secured debt. After their retirement, in mid-December 2016, Mr Hird received 95 boxes of books and records to review. In July 2017, Mr Hird took steps to prepare for digital copying pertinent files for further investigation and Public Examination of former directors and other parties. The digital copying of the relevant documents was completed on 21 September 2017 and the relevant documents were unloaded onto a document management database.

Current position 26 Mr Hird believes that there are various claims that may be made against the directors of the company, including: (1) for trading while insolvent as early as March 2012; (2) for breaches of directors' duties; and (3) for recovery of unfair preferences. 27 Mr Hird also believes that there are possible claims against the company's auditors. 28 However, there are no assets currently available to him to conduct examinations or any recovery actions that may arise from the examinations. 29 The evidence about the financial position of the company is very limited. It includes a statement of assets and liabilities of the former administrators provided to Mr Hird upon his appointment, that is, in either July or October 2013.

Section 477(2B) 30 Section 477(2B) of the Act provides: (2B) 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 … an agreement under which a security interest arises or is created) 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. 31 In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 at [33] to [37], I set out the following relevant principles: [33] In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 ("Fortress") at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors: McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]; Pascoe; re Brentwood Village Ltd (in liq) [2014] FCA 1295, [44]. [34] The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 ("Cassegrain") at [11] per Black J citing Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 266 ALR 642. [35] In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 ("Pascoe") at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]: Although the court has the statutory task [under s 477(2B)] of giving "approval" to a liquidator's agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete "merits review". As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6: ... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. [36] The Court's task is to satisfy itself, having regard to the liquidator's commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, re Newtronics Pty Ltd [2007] FCA 1375. [37] In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors (identified by Austin J in Leigh re AP& PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25] and Re ACN 076 673 875 Ltd (rec'r & mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]-[34]) relevant to the Court's assessment of a proposed litigation funding agreement: (1) the prospects of success of the proposed litigation; (2) the interests of creditors other than the proposed defendant; (3) possible oppression; (4) the nature and complexity of the cause of action; (5) the extent to which the liquidator has canvassed other funding options; (6) the level of the funder's premium; (7) consultations with creditors; and (8) the risks involved in the claim. … 32 The Court does not simply "rubber stamp" whatever a liquidator puts forward: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26] ("Newtronics").

Retrospective approval of funding agreement 33 The Court may give retrospective approval (approval nunc pro tunc) to an agreement under s 477(2B) in appropriate circumstances: see e.g., Hamilton as liquidator of ACN 101 634 146 Pty Ltd (in liq) [2014] FCA 687; Newtronics at [25]; Re HIH Insurance Group Ltd [2001] NSWSC 308; (2001) 19 ACLC 1102; Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167 ("Empire"). 34 Courts expect that liquidators will be aware of their legal obligations and powers, particularly those contained in s 477: Empire at [9]. The policy underlying the requirements of s 477(2B) is to afford some protection to the company's creditors against ill-advised or improper actions on the part of a liquidator: Empire at [12].

Approval of funding agreement 35 The following matters are in favour of the Court approving the funding agreement: (1) the company has no assets available to conduct the activities the subject of the funding agreement without funding; (2) Mr Hird has identified potential claims against the directors of the company and its auditors; (3) the scope and purpose of the funding is clear, being to conduct investigations that will enable Mr Hird to decide whether to commence proceedings for relief based on the potential claims that he has identified; (4) the terms of the funding agreement appear to be unremarkable. They include an uplift fee that is apparently compliant with the Legal Profession Act 2004 (Vic); and (5) it is Mr Hird's belief that it is in the best interests of the company and its creditors to progress the liquidation on the basis set out in the funding agreement. 36 I was satisfied that I should approve the liquidator's entry into the funding agreement, having regard to the matters identified above. 37 I saw no evidence of any lack of good faith or error of law or principle on Mr Hird's part in entering into the agreement, or grounds for doubting his prudence in doing so (except to the extent that he entered into the agreement prior to seeking the Court's approval). Generally, it is in the interests of creditors that the examinable affairs of the company be investigated with the aim of improving the liquidator's prospects of recovering funds for the benefit of creditors. 38 There was no reason to believe that Mr Hird could have obtained funding on better terms. There was no reason to believe that any person will suffer relevant prejudice as a result of Mr Hird's entry into the funding agreement. 39 I was satisfied that there was no reason to conclude that Mr Hird's entry into the funding agreement was other than a proper exercise of his power, or that it was an ill-advised or improper act on the part of the liquidator (except with respect to the timing of his entry into it). 40 By s 477(2B), Mr Hird was obliged not to enter into the funding agreement except with the approval of the Court. Mr Hird's explanation his failure to seek that approval before now was not satisfactory. The reasons Mr Hird gave were, firstly, that it took several months for the company's receivers to provide him with the company's documents which comprised 95 boxes of materials. Mr Hird reviewed the documents and, in July 2017, prepared the relevant files for digital copying which was completed by September 2017. Mr Hird also had two computer hard drives containing data related to the company. He arranged for access to this data through a forensic assessment process, it being made available to him on 2 October 2017. Secondly, there was a short handover period and delay as a result of the departure of the solicitor at Slater + Gordon who previously had the carriage of the matter. Finally, Mr Hird suffered from ill health over the course of 2017 including a short period of hospitalisation. 41 Slater + Gordon's 31 May 2016 letter specifically recommended that Mr Hird seek approval of the funding agreement. The letter added: "In our view, any application should be made before substantive work is conducted in this matter". Mr Hird's evidence was that his preliminary investigations would not be substantially advanced until if and when the approval of the Court was granted. 42 At the hearing of the application, Mr Hird's counsel, Mr McKay, confirmed that Mr Hird was aware of the requirement for approval prior to entry into the agreement. 43 However, in the light of the evidence that no substantive work has been undertaken pursuant to the funding agreement and in the absence of any apparent prejudice to interested parties, I was satisfied that it was expedient and not inappropriate to approve the liquidator's entry into the funding agreement nunc pro tunc. 44 I declined to make an order under s 90-15 of the Insolvency Practice Schedule (Sch 2 to the Act) that the liquidator was justified in entering into the funding agreement where there was no evidence that entry into the agreement was likely to be contentious: cf. Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99 at [172] and [173].

Confidentiality 45 Section 37AF of the Federal Court of Australia Act 1976 (Cth) provides: (1) The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of: (a) information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or (b) information that relates to a proceeding before the Court and is: (i) information that comprises evidence or information about evidence; or (ii) information obtained by the process of discovery; or (iii) information produced under a subpoena; or (iv) information lodged with or filed in the Court. (2) The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1). 46 By s 37AG(1)(a), the Court may make a suppression order or non-publication order on the ground that the order is necessary to prevent prejudice to the proper administration of justice. By s 37AG(2), a suppression order or non-publication order must specify the ground or grounds on which the order is made. 47 It is conventional to make a confidentiality order to protect the terms of funding arrangements between liquidators and funders: cf. Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; (2010) 8 ACSR 163 at [2] ("Onefone"). 48 The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of granting an order under s 37AF in this case: see Onefone at [3]. 49 Accordingly, I made a confidentiality order in relation to two copies of the funding agreement, contained behind tab 10 of exhibit MCH1 to Mr Hird's 8 March 2018 affidavit and in exhibit MCH2 to Mr Hird's affidavit sworn on 24 April 2018. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.