Empire (Aust) Nominees Pty Ltd v Vince

background 2 The Originating Process, filed 6 July 2021, was supported by two affidavits of Barry Frederic Kogan, one of the jointly appointed liquidators to the Company. Mr Kogan and Ms Sozou were appointed by the Court on 24 December 2018. 3 Mr Kogan is a chartered accountant and registered liquidator. He has over 20 years of insolvency and restructuring experience. In the course of his career, he has negotiated litigation funding in respect of potential claims against trustees, directors and other persons based on a broad array of both statutory claims and claims at general law. His areas of expertise include financial analysis, business investigations, liquidations, receiverships and other forms of external administration. 4 The Company was incorporated on 4 February 2013. The Company's former sole director and secretary was Mr Nenad Rogulj. At all times, Mr Rogulj has been the Company's sole shareholder. 5 On 18 September 2018, following a special resolution passed by Mr Rogulj, as the Company's sole member, the Company was wound up and Steven Naidenov was appointed liquidator (the first liquidator). Mr Naidenov was replaced by the liquidators by order of the Court on 24 December 2018 on the application of Tasman Development Holdings Pty Ltd, a creditor of the Company. 6 The Company had held a number of shares in corporate entities and units in unit trusts which held substantial property interests. Those shares and units were not disclosed in Mr Rogulj's Report as to Affairs (RATA). The shares and some of the units appear to have been transferred out of the Company's control in the period leading up to the appointment of the first liquidator. The liquidators' investigations into the circumstances surrounding the Company's transfer of the shares and units, and the value of the units in five of the unit trusts still held by the Company, are continuing. 7 The Company is without available cash, having $77 at bank. The only other property of the Company identified by the liquidators comprises the units in five of the unit trusts. As at 24 December 2018, the Company reportedly owed creditors $31,816,670. Tasman is the major creditor with a proof of debt in the sum of $29,800,044. Of the remaining six creditors, two are related parties of the Company. The remaining four creditors are owed less than $30,000 each. 8 With the assistance of solicitors, the liquidators have identified a number of potential claims that may be available to the Company and its liquidators. The solicitors' detailed analysis of the potential claims based on the information presently available is in evidence as part of the confidential exhibit to Mr Kogan's first affidavit. The potential defendants include three of the Company's seven creditors, notably, the related party creditors and another minor creditor. The potential claims include claims of the type in respect of which Mr Kogan is experienced in securing funding. The liquidators are of the view that if successful, these claims may result in a not insubstantial return to creditors. Further, that conducting examinations is necessary to assess the viability of the claims. Without funding, the Company cannot conduct examination proceedings under ss 596A and 596B of the Corporations Act. 9 There is a degree of urgency in relation to the application because the limitation period in respect of some of the identified claims is approaching. Subject to approval of the funding agreement, the liquidators intend to undertake the examinations, and depending on the outcome of the examinations, commence any viable claims prior to the expiration of the limitation period. 10 The liquidator has negotiated and entered into a funding agreement with a litigation funder. The funding agreement was in evidence before me as an annexure to a confidential affidavit of Mr Kogan dated 21 July 2021. The funding agreement was entered into by the liquidators on 6 July 2021 in advance of obtaining Court approval in order to secure the terms on offer in that agreement. The funding agreement is, however, expressly subject to a condition precedent that relevantly requires the liquidators to obtain the approval of the Court. 11 Tasman, the Company's largest creditor, has confirmed it does not oppose the liquidators' entry into the funding agreement and similarly, does not oppose the present application. 12 Mr Kogan's assessment, unsurprisingly, is that in the absence of funding there is no prospect of the potential claims being pursued. Mr Kogan has deposed to the efforts made by his office which ultimately resulted in securing the funding agreement. In summary, the liquidators initially sought to secure funding from Tasman but an agreement could not be reached; between about January 2019 and April 2021, the liquidators liaised with approximately 10 potential funders; the final negotiations came down to two potential funders; an agreement has now been entered with the successful funder which is, relevantly, conditional on the Court's approval. 13 Mr Kogan's view, based on a comparative analysis of the commercial terms of the final two competing funding proposals, is that creditors enjoy the prospect of a better outcome under the funding agreement that has been executed. Based on his experience, including in negotiating numerous funding arrangements, Mr Kogan's opinion is that the terms of the funding agreement are typical of those included in litigation funding agreements of this type and are "reasonable in the circumstances". Mr Kogan specifically addresses the commission proposed to be paid to the funder and states that he considers it to be in the expected range. 14 Mr Kogan also deposes to other factors which informed his choice of funder, including the availability of, and terms, including as to quantum, on which, staged funding between the examination proceedings and any substantive proceedings was offered, and that in his assessment the chosen funder was more actively engaged with the liquidators in respect of the pursuit of the potential claims compared to the other funder.

Section 477(2B) 15 A liquidator of a company may bring or defend any legal proceedings in the name of and on behalf of the company (s 477(2)(a)) and may appoint a solicitor to assist him in his or her duties (s 477(2)(b)). 16 Section 477(2B) provides: 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. 17 The object of the approval process under s 477(2B) is to ensure that contractual provisions as to timing do not cut across the general expectation that the winding up will proceed in as expeditious fashion as the circumstances allow: Re HIH Insurance Ltd [2004] NSWSC 5 (Barrett J) at [15]; Re Golden Sands Hospitality Pty Ltd (In Liq) (No 2) [2017] NSWSC 450 (Gleeson JA) at [17]. 18 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 (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167 at [12]. The Court does not simply "rubber stamp" whatever a liquidator puts forward: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 (Gordon J) at [26], cited by Gleeson J in Hird (Liquidator), in the matter of Allmine Group Limited (in liq) [2018] FCA 781 at [32]. The approval process requires 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. Courts expect that liquidators will be aware of their legal obligations and powers, particularly those contained in s 477: Empire at [9]. 19 In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 at [33] - [36], Gleeson J set out the principles relevant to an application under s 477(2B) as follows: [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.

Retrospective approval of funding agreement 20 The Court may give retrospective approval under s 477(2B) in appropriate circumstances: Hutchison v Hillcrest Litigation Services Limited [2010] NSWSC 934 (White J) at [25]; Vickers, Re York St Mezzanine Pty Ltd [2011] FCA 1028; (2011) 196 FCR 479 (Gordon J) at 484 - 485 [27]; Allmine Group (Gleeson J) at [41] citing a number of cases as examples of retrospective approval.

Approval 21 The operation of the funding agreement may exceed three months after the date on which it was entered and approval under s 477(2B) is therefore necessary. 22 The evidence established a clear basis for the Court to approve the liquidators' entry into the funding agreement. I was satisfied that the grant of approval should take effect retrospectively, as at the date of the liquidators' entry into the funding agreement. 23 The proposal under the funding agreement is directed at advancing the interests of creditors insofar as the funding will enable the liquidators to investigate and prosecute claims which may result in recoveries for creditors. There is no other prospect of the potential claims being investigated. 24 Potential claims which may be available to the Company and its liquidators have been identified in a relatively detailed way by the liquidators' solicitors. Taking into account the limited information presently available to the liquidators, a number of those claims appear to at least warrant further investigation. The funding agreement enables that investigation to take place and facilitates an assessment of the viability of pursuing any of the presently identified potential claims. The potential claims, if successful, may result in a significant return to creditors. 25 Mr Kogan is a qualified liquidator with experience in negotiating funding agreements in the context of claims of the type identified as potential claims in this matter. Mr Kogan has appropriately tested the market for available funding, including in relation to obtaining potential funding from Tasman, the major creditor of the Company in liquidation. Mr Kogan has specifically opined, based on his knowledge and experience as a liquidator, including negotiating numerous other funding agreements, that the terms of the funding agreement are typical of those included in litigation funding arrangements of this type and are reasonable in the circumstances. Further, that the commission proposed to be paid to the funder is in the expected range. Mr Kogan has negotiated a position which he regards as the most favourable outcome available and he has exposed his reasons for forming that opinion in his evidence. The liquidators have liaised with the major creditor of the Company in respect of the funding agreement and this application. Tasman does not oppose the present application. There was no suggestion in the evidence that the liquidators could have obtained funding on better terms. Having regard to the composition of the body of creditors, there was no reason to believe that any person will suffer relevant prejudice as a result of the liquidators' entry into the funding agreement. 26 There was nothing in the evidence to demonstrate any lack of good faith or error of law or principle on the liquidators' part in entering into the funding agreement, or grounds for doubting Mr Kogan's prudence in doing so. It is in the interests of creditors that the examinable affairs of the Company be investigated with the aim of improving the liquidators' prospects of recovering funds for the benefit of creditors. Accordingly, I was satisfied that there was no reason to conclude that the liquidators' entry into the funding agreement was other than a proper exercise of power, and was not an ill-advised or improper act on the part of the liquidators. 27 It is a condition precedent to the operation of the funding agreement that approval be obtained under s 477(2B). The liquidators have explained the commercial imperative that led to the funding agreement being executed shortly before the application for approval being determined. I was satisfied that in the circumstances the order should be made nunc pro tunc.

Confidentiality Orders 28 Section 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) 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). 29 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. 30 The liquidators seek a confidentiality order in relation to Exhibit BK-2 and the second affidavit of Mr Kogan. The materials the subject of the claim for confidentiality include the funding agreement and other sensitive information relating to the liquidators' attempts to secure the funding as well as information concerning the proposed claims and the terms to which the funding is subject. Mr Kogan has deposed to a concern that disclosure of such information may prejudice the ability of the liquidators and the Company to successfully pursue claims. 31 Information of the kind which the liquidators seek to keep confidential is routinely the subject of a court ordered confidentiality regime: Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079; Victoria v Goulburn Administration Services (in liq) [2016] VSC 654; (2016) 51 VR 685; Victoria v CTM Training Solutions Pty Ltd (in liq) [2017] VSC 47; Re Reed Constructions at [57]ff. The subject matter of a proposed funding agreement is inherently of a "commercially confidential and sensitive kind, related to aspects of the [potential] litigation that any plaintiff … would take particular care to keep from the other party or parties": Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; (2010) 78 ACSR 163 at [2]. It is conventional to make a confidentiality order to protect the terms of funding arrangements between liquidators and funders: cf. Onefone at [2]. 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]. 32 I am satisfied that the clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors weighs in favour of an order being made under s 37AF of the FCA Act in the present proceedings, as does the potential for disclosure to compromise the liquidators' pursuit of the potential future claims. Further, that an order pursuant to s 37AF should be made to protect the commercially confidential information provided by the liquidators in support of the application. 33 Accordingly, I considered the confidentiality orders to be appropriate and necessary in the circumstances.

Notice of Application 34 In the present application I considered whether the liquidators should be required to notify all creditors of the application. Having regard to the composition of the creditor body, the nature of the potential claims including the identity of the potential defendants to any future proceedings, and the stance taken by Tasman, the major creditor and the only creditor with a substantial debt that is not related to the Company, I was satisfied that it was appropriate to hear the application without such notice being given. 35 Although a creditor can make an application to be heard under r 2.13(1) of the Federal Court (Corporations) Rules 2000 (Cth), a defendant in proceedings which are to be funded pursuant to a litigation funding agreement does not have standing to be heard by reason of the fact only that they are a proposed defendant: Onefone which was upheld on appeal in Deloughery & Ors v Weston [2017] NSWCA 148; (2010) 79 ACSR 180 at [36] (Giles JA and Handley AJA). In Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed) [2012] FCA 1072, Gilmour J held that it was not necessary for the liquidators to give notice of an application for approval of entry into an agreement under s 477(2B) to any party. Gilmour J referred to Hasluck J's remarks in Re The Bell Group Ltd (in liq) ACN 008 666 993 [2009] WASC 235 at [58] in which his Honour said: It was said further in that case [Re Newtronics Pty Ltd; Ex parte Stewart [2007] FCA 1375] that the court's approval [under s 477(2B)] is not an endorsement of the proposed agreement but is merely a permission of the liquidator to exercise his or own commercial judgment in the matter. It follows from these precepts that, in my view, as indicated by the reasoning in Brown v DML Resources Pty Ltd (in liq) (No 7) [2002] NSWSC 162, it is not necessary for notice of the present ex parte application to be given to the defendant banks or other actual or prospective creditors, with a view to affording them an opportunity to be heard, because the directions and orders applied for do not purport to determine the matters in issue.]

Conclusion 36 Accordingly, I made orders, substantially in the form sought by the liquidators. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.