Ford Kinter & Associates Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) v Reliance Franchise Partners Pty Ltd

RELEVANT BACKGROUND 7 Ford Kinter operated a general insurance brokerage business. In 2013, Ford Kinter sold Reliance its client book. Ford Kinter and Reliance entered into a deed for this purpose, which provided for Reliance to pay consideration to Ford Kinter in three instalments. Reliance paid the first instalment but not the second or third. Litigation ensued, in which Ford Kinter was wholly successful: (a) on 14 February 2018, the County Court made orders requiring that Reliance pay Ford Kinter $932,397.95 plus interest of $253,169.21 and costs; and (b) following an application for leave to appeal, on 1 May 2018 the Court of Appeal granted Reliance leave to appeal but dismissed that appeal with costs. 8 Ford Kinter sought to enforce the judgment against Reliance. On 24 April 2018, Ford Kinter filed an application to wind up Reliance. On 14 May 2018, Reliance's director, Jonathan Asquith (who was at that time a director of the fifth defendant), appointed voluntary administrators to Reliance. On 30 May 2018, on Ford Kinter's application, the Supreme Court of Victoria made an order winding up Reliance and appointing the Liquidators as liquidators. 9 On 25 June and 20 August 2018, the Liquidators provided reports to creditors in respect of Reliance. Relevantly, the 20 August 2018 report: (a) stated that, following the sale of Reliance's business on 15 January 2016, Reliance had disbursed a total of $7,808,221.99 to Vantage Holdings Group Pty Ltd (Reliance's parent), which the Liquidators considered had the effect that Reliance could not pay the judgment debt owed to Ford Kinter; (b) stated that, at the time of the sale, Mr Asquith, Reliance's sole director, knew or ought to have known of the judgment debt owed to Ford Kinter; (c) recommended that public examinations of Mr Asquith "and the related entities" be undertaken; and (d) stated that Ford Kinter was "likely to be the only unrelated creditor in the winding up" and, therefore, the only party that may fund the further investigations. 10 Mr Ford formed the view that the only chance Ford Kinter had of recovering any of the debt owed by Reliance was for Ford Kinter to provide some funding to the Liquidators. 11 Ford Kinter entered into two funding agreements with the Liquidators. 12 The first was dated 5 February 2019 (Funding Agreement). Ford Kinter advanced the Liquidators $50,000. 13 Under the terms of the Funding Agreement, Ford Kinter was to fund the Liquidators' expenses up to an amount of $50,000 for what was defined as the "Funding Purpose". The Funding Purpose was defined in clause 2.1 of the Funding Agreement to essentially comprise of: (a) making an application to this Court to approve entry into the Funding Agreement; (b) conducting a public examination to obtain documents and oral evidence; (c) advising as to potential claims. 14 The Funding Agreement also defined: (a) "Funded Property" as "any property whatsoever that is recovered, realised or preserved as a result of, or relating to, the work performed and/or action taken pursuant to, or in connection with, the Funding Purpose and/or this Agreement"; and (b) "Funded Expenses" as "only those Expenses arising pursuant to this Agreement, up to the maximum amount specified in clause 5.1 [being $50,000], which are incurred by the Liquidators or [Reliance] in furtherance of the Funding Purpose". 15 Clause 6.1 of the Funding Agreement contains a mechanism by which Ford Kinter can be repaid and can make an application for an alteration of priority in payment under s 564. 16 Between November 2019 and March 2021, the Liquidators conducted public examinations. 17 On 10 February 2021, Mr Ford received a copy of counsel's advice regarding a potential recovery action against Fopar Nominees Pty Ltd. On the basis of that advice, Ford Kinter entered into a deed of variation of the funding agreement (Amendment Deed) that provided for the funding of recovery proceedings against Fopar (which appeared to have received much of the funds the Liquidators initially thought had been transferred for the benefit of VHG). 18 On 22 April 2021, the Liquidators and Reliance commenced proceeding WAD88/2021 in the Federal Court against Fopar (Fopar Proceeding). 19 On 26 April 2021, Ford Kinter, the Liquidators and Reliance entered into the Amendment Deed. 20 There were terms of the Amendment Deed that: (a) Clause 2.1 of the Funding Agreement would be amended to expand "Funding Purpose" to include: (i) making an application to approve the variation to the Funding Agreement; (ii) conducting a final round of public examinations; and (iii) bringing a proceeding against relevant parties for the recovery and realisation of Reliance's property; (b) Clause 4.1 was amended so that Ford Kinter could advance further funds as follows, defined as the "Progressive Payments": (i) $50,000 by 23 April 2021; (ii) $10,000 per calendar month thereafter until a balance of $70,000 is held in the relevant account; and (iii) If the balance of that account fell below $70,000, Ford Kinter would recommence paying monthly instalments of $10,000 until the balance of the account was equal to or greater than $70,000. 21 On 15 July 2021, Fopar commenced proceeding WAD199/2021 in the Federal Court against the Liquidators, following the Liquidators' decision not to admit a proof of debt lodged by Fopar. 22 On 1 August 2022, the Liquidators, Reliance and Fopar entered into a deed of settlement (to which VHG was also a party) (Settlement Deed). The effect of the Settlement Deed was that: (a) Fopar would pay to Reliance the amount of $6,237,475.55 inclusive of interest and costs (reflecting the entire amount sought in the Fopar Proceeding), to be funds in the liquidation of Reliance; and (b) the Liquidators would admit the proofs of debt lodged by Fopar and VHG. 23 On 2 November 2022, this court made orders authorising the Liquidators to enter into the Settlement Deed. Banks-Smith J's reasons for decision are reported as Rathner v Fopar Nominees Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) [2022] FCA 1313. 24 Ford Kinter ultimately provided $240,000 in funding to the Liquidators, plus $35,000 as security for costs. 25 On 22 November 2023, the Supreme Court taxed Ford Kinter's costs of the County Court proceeding and the Court of Appeal proceeding in the total amount of $339,900. 26 On 14 December 2023, the Liquidators admitted Ford Kinter's debt in the total amount of $1,552,289.56 (comprising the relevant judgment debt plus taxed costs). 27 On 17 January 2024, Ford Kinter commenced this proceeding. 28 On 26 March 2024, the fourth to sixth defendants (prior to their joinder), along with two other related parties of Reliance, filed an interlocutory process by which they sought the transfer of this proceeding to the Supreme Court of Victoria. I heard that application on 17 July 2024. I made orders dismissing the application, with costs, on 6 August 2024: Ford Kinter & Associates Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) v Reliance Franchise Partners Pty (in liq) [2024] FCA 868 (Transfer Judgment). 29 On 12 September 2024, the fourth to sixth defendants were joined to this proceeding by consent and ordered to file any evidence opposing the relief sought by Ford Kinter by 4 October 2024. The fourth to sixth defendants failed to file any evidence in accordance with those orders and defaulted again after the date was extended to 1 November 2024. On 20 November 2024, they informed the Court that they no longer opposed Ford Kinter seeking relief in this proceeding. 30 At the hearing of Ford Kinter's application, only counsel for Ford Kinter appeared. The matter was also called outside the courtroom, however there were no other appearances.

PRINCIPLES 31 Ford Kinter's application is made under s 564, which provides: Power of Court to make orders in favour of certain creditors Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them. 32 The onus is on the plaintiff to persuade the Court that a disturbance to the usual order of distribution under s 556 is warranted: Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 208 ALR 242; [2004] NSWSC 28 at [68] (Campbell J). 33 Once the jurisdictional threshold contained in subs 564(a) or (b) is met, the Court is given a broad discretion in respect of the distribution of recovered property: Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612 (Hayne J); Robinson, in the matter of ACN 069 895 585 Pty Ltd (formerly known as Waterman Collections Pty Ltd) (in liq) [2013] FCA 706 at [14] (Gordon J). 34 Provided that the circumstances in either subsection 564(a) or (b) arise, the Court may determine whether to advantage a creditor, and the sum involved: see Tolcher v National Australia Bank (2004) 182 FLR 419; [2004] NSWSC 6 at [35]-[36] (Barrett J). As made clear by the statutory text, the Court must exercise that discretion "with a view to giving [the indemnifying creditor] an advantage over others in consideration of the risk assumed by [the indemnifying creditor]": see, in the context of the equivalent provision in the Bankruptcy Act 1966 (Cth), Low v Barnet (2017) 250 FCR 562; [2017] FCAFC 60 at [40] (Flick, Jagot and Gleeson JJ). 35 The discretion is to be exercised: (a) "having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies": Ken Godfrey at 612; (b) on the basis that "creditors who put their own credit at risk by providing an indemnity for costs of litigation to be pursued by a liquidator should receive more from the fruits of any successful action than those who, for whatever reason, choose not to hazard any further money in connection with the activities of the company that has gone into liquidation": Ken Godfrey at 612; and (c) "liberally in favour of creditors who are prepared to take the risk of funding or providing an indemnity for the costs of litigation that ultimately yield a successful outcome": Deputy Commissioner of Taxation v BJ Marron & Son Pty Ltd [1999] VSC 124 at [16] (Warren J). 36 It is in that context, that the Court typically takes into account the following factors: (a) the risk taken by the indemnifying creditor; (b) the sum recovered; (c) the extent to which other creditors failed to provide an indemnity; (d) the proportion between the debt of the indemnifying creditor and the debts owed to other creditors of equal rank; (e) the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered; and (f) the totality of the circumstances: Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296-297 (Brownie J). 37 As I noted in the Transfer Judgment at [55], the expression "totality of the circumstances", properly understood in the context of the discretion in s 564 of the Act, does not mean each and every aspect of the totality of the circumstances of the liquidation.

CONSIDERATION 38 I am satisfied the Court's jurisdiction to make an order under s 564 is enlivened. Ford Kinter's funding under the Funding Agreement and Amendment Deed, and the recoveries under the Settlement Deed, meet the requirements of s 564(a). 39 As to the exercise of discretion, Ford Kinter makes the following submissions as to the factors identified in Household Financial Services.

The risk taken by the indemnifying creditor 40 The risk taken by Ford Kinter was substantial. Ford Kinter entered into the Funding Agreement without any guarantee as to the prospect of making a recovery - rather, the funds were directed towards the Liquidators' investigations and examinations. The funds were advanced in circumstances where Ford Kinter was the only plausible creditor to provide those funds. The initial tranche of $50,000 was advanced under the Funding Agreement without the benefit of any legal advice. There was a substantial risk of Ford Kinter never seeing a return. 41 As to the Amendment Deed, which provided for further funding to be advanced, Ford Kinter entered into it after its director, Mr Ford, considered a detailed prospects advice prepared by counsel. At its highest, that prospects advice stated that Reliance and the Liquidators had "properly arguable claims" against Fopar. The advice was also described as being "subject to resolution of the question of when [Reliance] became insolvent" - a material qualification in an advice concerning potential recoveries under Part 5.7B of the Corporations Act. 42 Ford Kinter proceeded to advance significant further funds - an additional $190,000, plus $35,000 as security for Fopar's costs - in accordance with the terms of the Amendment Deed. Further, it did so under the terms of the Amendment Deed that would have continued to require Ford Kinter to "top up" the funds available to the Liquidators. 43 I accept that Ford Kinter took a substantial risk in advancing those funds. Even if counsel's advice had been more conclusively favourable, it is still appropriate to have regard to the "normal hazards of any litigation": Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84 at 87 (Carr J). 44 In Re Glenisia, Carr J said: "It is clear that the whole of the financial risk of the proceedings at first instance and on appeal [that is, the funded proceedings in that case] was carried by the contributing creditors. The contributing creditors took on a substantial risk of losing a great deal of money". In that case, Carr J considered the substantial risk taken on by the contributing creditors, coupled with the lack of opposition to the order sought under s 564, justified a return to the contributing creditors of 100% of their debt in priority to other unsecured creditors.

The sum recovered 45 The sum recovered was 100% of the amount sought. That is, the funded Fopar Proceeding recovered the whole of the amount pursued by the Liquidators in that proceeding.

The extent to which other creditors failed to provide an indemnity 46 Ford Kinter was the only plausible creditor to provide funding to the Liquidators, given that the other major creditors were related parties of Reliance. 47 At [34] of his affidavit, Mr Rathner deposes: "Had the Liquidators not received funding to conduct investigations and examinations, and then brought the proceeding against Fopar, I do not consider there would have been any recoveries for the benefit of creditors of Reliance". 48 Mr Rathner also deposes, at [37] of his affidavit, that, in his opinion and based on his experience, Ford Kinter's funding was a "suitable and appropriate funding agreement for creditors", because: (a) Ford Kinter was itself the only substantial creditor that was not a related entity of Reliance and the only plausible source of funding among the creditors of Reliance; (b) in his experience as a liquidator, third party commercial funders typically seek commissions on any successful recovery in the range of 25% - 30% of any recovery made which would have significantly diluted any realisation for creditors; (c) commercial third-party litigation funders typically also apply a cap on funding which can be problematic and impractical when litigation becomes complex and protracted; and (d) it is possible that a litigation funder would not have agreed to fund the Liquidators' defence of the Fopar Proceeding. 49 I accept that these factors all strongly weigh in favour of the Court exercising its discretion favourably to Ford Kinter.

The proportion between the debt of the indemnifying creditor and the debts owed to other creditors of equal rank 50 Ford Kinter's admitted debt is $1,552,289.56. On 27 November 2024, the Liquidators provided a circular to creditors that (among other things) set out the likely return to creditors in two scenarios - if the Court orders that Ford Kinter's debt is given priority under s 564, and if Ford Kinter's debt is not given any priority. The circular states that: (a) if Ford Kinter is not granted any priority under s 564 in respect of its debt, the total funds available for unsecured creditors will be $4,370,878. This produces a dividend to all unsecured creditors of up to 20 cents on the dollar; and (b) if Ford Kinter is granted priority under s 564 in respect of its debt, the total remaining funds available to unsecured creditors is $2,840,383. This produces a dividend to all other unsecured creditors of about 14 cents on the dollar. 51 Three things should be noted about the Liquidators' analysis: (a) it assumes a distribution to Australian Reliance Group Pty Ltd, Australian Reliance Pty Ltd and Catlin Australia Pty Ltd - companies that have not provided proofs of debt to the Liquidators. If that state of affairs remains, the return to unsecured creditors will increase; (b) there appears to be an error in the calculations contained in the Liquidators' circular regarding the total amount of unsecured creditor claims. The totals in each scenario are $20,024,020 and $21,506,514, relating to where the court grants Ford Kinter priority in respect of its entire debt and where the court does not grant Ford Kinter priority respectively. However, the amounts they purport to comprise actually add up to $19,933,796 and $21,416,290, respectively. The error means there is a slight increase in the per dollar return to unsecured creditors in each scenario; and (c) the orders sought by Ford Kinter in this proceeding include an order that its costs be paid out of the liquidation fund with the same priority as Ford Kinter's debt. That order is likely to have a small impact on distribution. 52 Subject to those matters, the table reveals that Ford Kinter's debt is modest compared to other creditors. $1,552,289 makes up approximately 7% of the total unsecured creditor pool (of which the vast bulk comprise related companies of Reliance). If Ford Kinter's debt takes priority over other unsecured creditors, the impact on other unsecured creditors will be small - it means a "best case" return of 20 cents on the dollar is reduced to about 14 cents on the dollar. Given the limited impact of awarding Ford Kinter priority and given that, if it were not for Ford Kinter, there would likely have been a nil return, this factor weighs strongly in favour of making the orders sought by Ford Kinter.

The public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered 53 The public interest in encouraging creditors weighs in favour of a liberal exercise of discretion. In this case, if Ford Kinter had not provided funding, it appears unlikely there would have been any recovery for the benefit of creditors as a whole. There is an obvious public interest in encouraging creditors to provide funding or indemnification. "[T]he public interest in encouraging assistance to liquidators in funding difficult and expensive litigation should be vindicated by giving [a funding creditor] an advantage over other creditors which is just in consideration of the magnitude of risk assumed": Re Parkston Ltd (in liq) (2000) 35 ACSR 114; [2000] NSWSC 764 at [66] (Santow J).

The totality of the circumstances 54 The circumstances of this case involved the substantial assets of the company in liquidation being transferred, apparently without proper consideration, to a related company or companies. If Ford Kinter had not advanced funds, creditors would likely not have received any return. In similar circumstances, it has been held that it is appropriate for the indemnifying creditor to receive 100% of its debt in priority to other unsecured creditors: See Re Glenisia at 87 (Carr J); BJ Marron at [16] (Warren J); Carson, in the matter of Trollope Property Holdings Pty Ltd (in liq) [2009] FCA 118 at [15] (Gordon J); Re Shepherds Producers Co-Operative Ltd (in liq) [2012] NSWSC 390 at [13] (Black J). 55 Ford Kinter submits that, having regard to: (a) the significant risk it undertook in advancing funds; (b) the fact there was a 100% recovery of the amounts sought; (c) the limited financial impact on other unsecured creditors, the vast bulk of whom are related entities of Reliance; (d) the absence of any other creditor or other suitable funder to provide funding; and (e) the absence of any objection by any creditor to Ford Kinter's application, the Court should make orders granting the whole of Ford Kinter's debt priority over other unsecured creditors. 56 Finally, in Waterman Collections, Gordon J considered the circumstances where it was appropriate for the Court to make a so-called "100% order" - where the whole of the recovered funds would be paid to an indemnifying creditor, leaving nothing for payment to other creditors. This is not such a case. The large sum recovered in the Fopar Proceeding means that, in any scenario, there will be a dividend to unsecured creditors. In any case, the factors her Honour considered at [31] are instructive, and are consistent with the factors identified, above, in support of Ford Kinter receiving priority in respect of the whole of its debt. 57 I accept, in the circumstances identified above, that it is appropriate to exercise the discretion under s 564 in favour of Ford Kinter and make the orders sought in the amended originating process.

DISPOSITION 58 I have made the orders sought in the amended originating process. I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson.

SCHEDULE OF PARTIES VID 25 of 2024 Fourth Defendant FOPAR NOMINEES PTY LTD (ACN 009 472 084) Fifth Defendant VANTAGE HOLDINGS GROUP PTY LTD (ACN 126 324 927) Sixth Defendant CAVIAR PTY LTD (ACN 634 107 967) (AS ABSOLUTE ASSIGNEE OF THE DEBT OF AR PORTFOLIO (NSW) PTY LTD (ACN 165 707 479))