REASONS FOR JUDGMENT
1 The first plaintiffs (Liquidators) are the joint liquidators of both the second plaintiff (OCV) and the third plaintiff (OA). On 23 February 2011 I made orders pursuant to s 477(2B) of the Corporations Act 2001 (Cth) approving their entry (on behalf of the second and third plaintiffs) into a Litigation Funding Agreement (Funding Agreement) on behalf of OCV and OA: Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (In Liq) [2011] FCA 132 (Earlier Judgment). By application filed on 8 March 2011, they now seek the Court's approval, also under s 477(2B), to enter into an Investigation Funding Agreement (Investigation Agreement) as well as directions under s 479(3). Evidence in support of the application was provided by the affidavit of Katherine Elizabeth Barnet, sworn on 14 March 2011.
2 The application came before me on 14 March 2011 at which time I ordered that the application and Ms Barnet's affidavit be served on Fortress Credit Corporation (Australia) II Pty Limited (Fortress) and Stephen Parbery and Anthony Sims of PPB (as receivers and managers of Octaviar Ltd (in liq)) by 5 pm on that day. I adjourned the hearing of the application until 10:15 am on Wednesday 16 March 2011 to enable Fortress and Messrs Parbery and Sims to seek leave to be heard if they so wished.
3 At the adjourned hearing Mr Walter of counsel sought and was granted leave to appear for Fortress and the Receivers and Managers. Mr Walter advised that Fortress opposed the present application and had applied for leave to appeal from the Earlier Judgment. Mr Walter submitted that the hearing ought be adjourned pending the resolution of that application, and the appeal should leave be given. I refused to adjourn the hearing. In my opinion it was preferable to deal with the application expeditiously and leave it to Fortress to seek leave to appeal should it not succeed in its opposition to the Investigation Agreement. At the conclusion of the hearing I made the orders sought by the plaintiffs and undertook to give reasons at a later date. These are my reasons.
4 Section 477(2B) imposes a limitation on the liquidator of a company entering into certain agreements without approval. It provides:
Except with the approval of the Court, or 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 … 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.
5 The Funding Agreement which was the subject of the Earlier Judgment related to the funding of claims to be brought by the Liquidators against Fortress Credit Corporation (Australia) II Pty Ltd. The background to these claims is outlined in the Earlier Judgment and need not be repeated here. As it happened; the Investigation Agreement which is the subject of the present application was entered into before the Funding Agreement however at that time it was not anticipated that it would extend beyond three months. For that reason, although the approval of the Inspection Committees of OA and OCV was sought and obtained, the approval was not seen to be a necessity. Consequently, the challenge to the validity of that approval discussed below was not seen to be a problem until comparatively recently.
6 Since the Earlier Judgment the claims made against Fortress have been considered by McMurdo J of the Supreme Court of Queensland. On 8 March 2011 McMurdo J extended a freezing order over the assets of Fortress up to a sum of $40 million and the Liquidators were given leave to file a statement of claim against Fortress: Fletcher and Ors v Fortress Credit Corporation (Australia) II Pty Ltd [2011] QSC 30.
7 In her affidavit Ms Barnet explained that in order to investigate the possible claims against Fortress, the Liquidators had decided that it was necessary to carry out public examinations of certain officers of Fortress and to obtain legal advice from counsel in relation to those claims. Attempts to carry out the examination in a public examination held by OA were challenged by Fortress on the basis that the relevant summonses had not been issued for a proper purpose. It was alleged that the matters to be examined related to the examinable affairs of OCV not OA.
8 Ms Barnet states that although the liquidators did not accept this view, in order to avoid further delay it was decided to issue summonses to the Fortress officers to be examined in respect of the examinable affairs of OCV. The difficulty was that for the same reason as OCV was unable to fund litigation against Fortress (see [5]-[6] of the Earlier Judgment) it was unable to fund the public examinations and preparation of advice. The Committees of Inspection of both OA and OCV were approached for their advice and approved the entry into the Investigation Agreement.
9 One member of the Committee of Inspection for OA, Mr Brett Lord, was not advised of the meeting at which the question of the Investigation Agreement was to be put to the Committee. Mr Lord is a partner of PPB and manages the day to day affairs of the receivership of OCV. Ms Barnet deposed that he was excluded from the meeting because:
Mr Lord's relationship to the Receivers and to Fortress, his participation in certain meeting would give rise to a conflict of interest on his part, particularly in respect of the provision of funding to OCV to examine Fortress' officers and obtain advice in relation to claims to be brought against Fortress.
10 On 7 December 2010 the Committees of Inspection for OA and OCV approved the Liquidators entering into the Investigation Agreement. Subsequently Fortress, by letter from its solicitors alleged that the resolution of 7 December was invalid because of Mr Lord's exclusion. At the time the Liquidators expected that the examinations would be completed within 3 months of 7 December 2010 and for that reason no further steps were taken in relation to approval of the Investigation Agreement. However it now appears that the Investigation Agreement will be in operation for longer than 3 months. The reasons are given in Ms Barnet's affidavit. In brief they relate to a much greater number of documents than expected needing to be reviewed before the examinations can be completed and claims of privilege that must be resolved. Accordingly Ms Barnet says:
Given the allegations made by Fortress that the Investigation Agreement has not been validly approved, and the fact that it is now clear that obligations will extends (sic) beyond 3 months, the Liquidators request that the Court approve nunc pro tunc their entry into the Investigation Agreement.
11 This application raises the same issues of principle as the application considered in the Earlier Judgment in relation to the Funding Agreement. The funding company, OA, is itself in liquidation, a fact which raises special considerations but which is not an insuperable obstacle to the Court's approval. The examinations to be funded under the Investigation Agreement are preliminary to the litigation to be funded under the Funding Agreement. As such the considerations relevant to the present application are, in general terms, the same as those relevant to the Funding Agreement. Those considerations are set out in the Earlier Judgment at [15]-[20] and it is not necessary to repeat them here.
12 Given the above, it is not surprising that the factors which supported the approval of the Funding Agreement also support approval of the present application. Logically the Investigation Agreement precedes the Funding Agreement. The Liquidators have concluded that the examinations to be funded by the Investigation Agreement are desirable for the conduct of the litigation. In support of this conclusion, Ms Barnet states that the examinations conducted since 7 December 2010, in her view, "have benefited and been in the interests of the creditors of OA and OCV" in that the information obtained during these examinations has assisted in:
(a) the preparation of an advice by counsel in relation to claims to be brought against Fortress, including assessing the merits of potential defences available to Fortress;
(b) the preparation of a statement of claim to be filed against Fortress;
(c) obtaining interlocutory orders against Fortress … including by identifying the nature of Fortress' business in Australia and the value of the assets which Fortress has within the jurisdiction.
The interlocutory orders to which Ms Barnet refers are those mentioned above at [6] above.
13 Central to that approval was the expert evidence provided by the plaintiffs which is summarised at [10]-[14] of the Earlier Judgment. No such evidence has been presented in support of the present application. The plaintiffs have addressed this deficit in their written submissions:
In the present application the risks and benefits have not been the subject of expert analysis ... since the risks and benefits are fairly clear. The risk to OA is that it will [be] liable for the costs of conducting the public examinations. In the event that the claims against Fortress fail, it will have received no benefit because the option to enter the Litigation Funding Agreement will, in all likelihood mean it has to indemnify OCV for its costs and any damages. On the other hand, if the claims against Fortress succeed, then the benefit to OA of the current agreement is that it will have the benefit of an entitlement to a portion of the proceeds of any judgment under the Litigation Funding Agreement, and under Clause 3.2 of the Investigation Agreement is further entitled to be reimbursed from the Resolution Sum for any amounts paid under this Agreement (so long as the Resolution Sum will cover that amount).
14 In my view this is a fair summary of the risks and benefits although it is necessary to consider the specific terms of the Investigation Agreement. In doing so I am conscious of the comment of Giles J in Re Spedley Securities Limited (in liq) (1992) 9 ACSR 83 at 86 that I quoted at [16] in the Earlier Judgment. In that case Giles J was considering an application pursuant to ss 377(1) and 379(3) of the Companies (NSW) Code which concerned compromises with creditors in the case of the former and other issues in winding up in the case of the latter section.
15 Section 377(1) required the liquidator to be authorised to make compromises with creditors either by the creditors, the Committee of Inspection or the Court. The similarities between that section and s 477(2B) are apparent and the principles guiding Giles J in Spedley are equally applicable here. His Honour said, at 85-6:
In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator … That is not to say that it rubber stamps whatever is put forward by the liquidator but … 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 in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis.
16 The terms of the Investigation Agreement itself are, as the plaintiffs submit, "generally unremarkable". Under the Agreement OA agrees to fund and indemnify OCV and its liquidators in return for the first option to fund any litigation arising as a result of the investigations. Clause 3.4 of the Agreement provides that to the extent that payments to OA are insufficient to reimburse it for amounts paid under the Agreement, OA may apply any dividend it would otherwise pay to OCV to that deficit. The clause shifts part of the risk under the Agreement to OCV in the same way as does cl 7.4 of the Funding Agreement: see [9] of the Earlier Judgment. It is an appropriate partial protection for OA.
17 In assessing the appropriateness of the Investigation Agreement, Ms Barnet relies on her experience as a liquidator and her familiarity with terms and conditions that commercial litigation funders ordinarily impose in circumstances such as these. She states in her affidavit:
I am of the view that in general terms the Investigation Funding Agreement is consistent with the terms which I would ordinarily expect, if not better terms, than that provided by a commercial litigation funder. Based on my experience I did not see any merit in approaching a commercial litigation funder because a litigation funder was likely to require a right of first refusal to fund any subsequent claims bought (sic) against Fortress, which would result in a significant portion of any recoveries being distributed outside the Octaviar Group and not to the creditors of OCV and OA.
18 Mr Walter conceded that the Court has the power to make the orders sought by the plaintiffs. He submitted that approval for the Investigation Agreement should have been sought before the Funding Agreement but did not suggest there was any bad faith on the part of the plaintiffs. In substance, most of his arguments expressed opposition to the Funding Agreement. Given that on 16 March 2011 when the present application was heard, there was an extant approval of the Funding Agreement, those submissions were of little assistance.
19 Mr Walter submitted that the approval of the Committees of Inspection could not be determinative. I accept that submission however the plaintiffs' submissions in relation to that approval did not go so far but were limited to the comment that the Court could find some comfort in the fact that, with the exception of Mr Lord who was not consulted for reasons given above at [9], the proposal was put to all members of both committees and was approved by both committees. In my view, as the plaintiffs submitted, the relevance was limited to the question whether the Court should exercise its discretion under s 477(2B).
20 Clearly the better path would have been for the plaintiffs to obtain the Court's approval for the Investigation Agreement before the Funding Agreement however, given that the Funding Agreement has been approved, this makes little difference. For the reasons given in relation to the Funding Agreement and in view of the matters discussed above I concluded that the orders sought by the plaintiffs should be made. It would be contrary to handicap the liquidators in the conduct of litigation for which funding has already been approved by denying them the resources necessary to conduct that litigation in the most appropriate manner.
21 At the hearing there was some discussion about whether it was necessary for the Court's approval to be granted nunc pro tunc so as to address any concerns about the validity of actions already taken under it. It is not necessary to discuss this issue as I am satisfied that any doubt on the issue of validity should be resolved by making the order in the form requested by the plaintiffs.
22 The plaintiffs also sought a confidentiality order in respect of the Investigation Agreement, similar in terms to the orders sought in their previous application. As set out in the Earlier Judgment at [24], the power to make such an order is to be found in s 50(1) of the Federal Court of Australia Act 1976 (Cth). It is not sufficient for disclosure to be prejudicial to the interests of the plaintiffs; the Court must be satisfied that disclosure would be prejudicial to the administration of justice (see [22]-[23] of the Earlier Judgment). For the same reasons as those set out at [23]-[25] of the Earlier Judgment, I was satisfied that in this instance, a confidentiality order in the terms sought by the plaintiffs was necessary to prevent prejudice to the administration of justice.
I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.