Forex Capital Trading Pty Ltd (in liquidation) v Invesus Group Limited

Solicitors: King & Wood Mallesons (Plaintiff) Arnold Bloch Leibler (Defendant) File Number(s): 2022/240883 Publication restriction: None

Introduction

1. In these proceedings, the plaintiff, Forex Capital Trading Pty Ltd (in liq) (FXCT), seeks damages in the amount of $43,645,127.26 for what is said to be a breach by the defendant, Invesus Group Limited (IGL), a public company registered in Gibraltar and FXCT's ultimate parent, of its obligations under a deed poll dated 17 March 2019 (the Letter of Comfort) that IGL executed in favour of FXCT and its directors. The question whether FXCT is entitled to recover the amount claimed turns on the correct construction of the Letter of Comfort.

Background

1. Prior to its liquidation, FXCT carried on a business under an Australian Financial Services licence (AFSL) of issuing to retail customers over the counter derivative products including contracts-for-difference and foreign exchange products. The products offered to customers allowed them to trade on whether the value of an underlying asset (such as a foreign currency or commodity) or financial instrument would increase or decrease over a defined period.
2. In October 2018, the Australian Securities and Investment Commission (ASIC) commenced an investigation into FXCT and its director, Mr Shlomi Yoshai, in relation to alleged contraventions of various provisions of the Corporations Act 2001 (Cth) (the Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) relating principally to misleading and deceptive and unconscionable and dishonest conduct.
3. On 12 March 2019, ASIC commenced proceedings in the Federal Court of Australia (proceeding VID218/2019) against FXCT and Mr Yoshai seeking freezing orders restraining FXCT from transferring overseas sums of money that had been paid to it by customers. It also sought an order appointing a receiver to FXCT.
4. The freezing orders sought by ASIC were made ex parte by Middleton J on the day the proceedings were commenced, at which time the proceedings were made returnable on 18 March 2019.
5. On 17 March 2019, IGL executed the Letter of Comfort, which was in the following terms: Letter of comfort The purpose of this letter is for Invesus Group Limited (registration number 112170) to provide comfort to Forex Capital Trading Pty Limited ACN 119 086 270 (FXCT) and the director(s) of FXCT regarding its financial position. Invesus Group Limited is aware of orders made by the Federal Court of Australia in proceedings VID218/2019, of investigation of FXCT by the Australian Securities and Investments Commission (ASIC) and of allegations that, if proved, will mean that FXCT and its director(s) may have to make consumer redress to certain FXCT customers. Without any admission whatsoever in relation to those allegations, this letter is intended to provide comfort that FXCT and its director(s) will be provided financial support from Invesus Group Limited so that in any event, including without limitation unsuccessful defence of any proceedings, they are able to satisfy any obligations arising from court proceedings or flowing from ASIC's investigation and can pay any settlement amount or judgment sums required to be paid to customers of FXCT. Invesus Group Limited irrevocably undertakes in favour of FXCT and any director of FXCT that with effect from the date of this letter, upon requests from time to time, it will provide to FXCT and its director(s), or procure from external sources, financial support to the extent FXCT or its director(s) require such financial support to meet any debts, including judgment debts, incurred by FXCT or its director(s) prior to or after the date of this letter in respect of FXCT's customers. This undertaking is for the benefit of FXCT and the directors of FXCT. This document and any dispute arising out of or in connection with this document is governed by the laws of the State of New South Wales within the Commonwealth of Australia. Invesus Group Limited submits to the non‑exclusive jurisdiction of the courts exercising jurisdiction in New South Wales in the Commonwealth of Australia, including the Federal Court of Australia, and any court that may hear appeals from any of those courts, for any proceedings in connection with this document, and waives any right it might have to claim that those courts are an inconvenient forum. Invesus Group Limited irrevocably consents to the registration of any judgment obtained in these courts in any proceedings in connection with the ASIC investigation currently underway and Federal Court proceedings VID218/2019 in a court of Gibraltar. This undertaking terminates on 30 June 2022.
6. On 18 March 2019 (the day after the Letter of Comfort was executed), Mr Alistair McKeough, the solicitor for FXCT, swore an affidavit in opposition to a continuation of the orders made by Middleton J. In that affidavit, Mr McKeough refers to the Letter of Comfort and gave evidence of IGL's financial position.
7. Mr McKeough also gave evidence that: I am informed by Shlomi Yoshai and believe that, without admission, where not already resolved, the first defendant, under Mr Yoshai's supervision, intends to investigate or further investigate the consumer complaints set out in the Farroukh Affidavit [that is, the affidavit of Emman Farroukh affirmed 12 March 2019] and deal with them on a case by case basis and will defend the claims referred to at paragraph 8 of that affidavit.
8. Despite Mr McKeough's affidavit, on 19 March 2019, Middleton J continued the freezing orders. They were extended further at a number of subsequent hearings. It is unclear whether ASIC continued to press for an appointment of a receiver. In any event, no such order was made.
9. On 15 July 2020, ASIC commenced proceedings in the Federal Court against FXCT and Mr Yoshai (proceeding VID462/2020). Relevantly, it sought declarations that FXCT had contravened certain provisions of the Corporations Act and ASIC Act and orders for the payment by FXCT of a civil penalty that was ultimately agreed at $20 million.
10. Shortly after the proceedings were commenced, on 31 July 2020, FXCT's AFSL was cancelled, with the result that it could no longer carry on business.
11. The declarations and other orders sought by ASIC were made by consent by Middleton J on 29 April 2021. His Honour delivered reasons for making the orders on 28 May 2021: see Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570. In relation to most of the contraventions, FXCT admitted that the contraventions had occurred in specific instances in relation to eight identified customers. FXCT also admitted and Middleton J accepted that it had engaged in a system of conduct or pattern of behaviour that amounted to unconscionable conduct in contravention of s 12CB of the ASIC Act. In relation to that contravention, Middleton J said (at [132]): I am prepared to accept that the unconscionable system put in place by Forex CT was representative of the conduct towards all clients (not just the eight clients that have been identified). But it was never pleaded by ASIC, or put to me in the written submissions, that there were multiple contraventions of or in relation to s 12CB(1) arising out of this system of conduct. The Court was only ever asked to determine the appropriate penalty for a single contravention of s 12CB(1) by Forex CT, and the appropriate penalty for Mr Yoshai's involvement in that contravention. In these circumstances, and having regard to the plain language of the statute, I cannot find any support for the proposition that I am not bound by the statutory maximum penalty for a single contravention in relation to the system case as pleaded. I therefore consider the theoretical maximum penalties set out at [124] above to be the upper limit of the pecuniary penalties that I may order in this proceeding.
12. The day before the orders were made, on 28 April 2021, FXCT and IGL entered into a convertible loan agreement under which IGL agreed to provide funds to enable FXCT "to meet its obligations in respect of the penalty, legal costs and/or any other amounts imposed on it as a result of a settlement" of the proceedings that had been commenced by ASIC. The agreed penalty of $20 million that had been approved by Middleton J was paid by IGL pursuant to that agreement.
13. On 26 June 2021, Mr Yoshai signed a solvency declaration as the sole director of FXCT.
14. On 27 June 2021, Mr Abramo Da Via, the sole director of Forex Capital Trading Limited, a company incorporated in Vanuatu and FXCT's immediate holding company, passed a special resolution of FXCT that FXCT be wound up voluntarily. Mr Daniel Woodhouse and Mr Nathan Thomas of FTI Consulting were appointed as joint and several liquidators of the company.
15. On 24 September 2021, the liquidators sent an email to former customers of FXCT in which they said: We understand you are a former client of Forex CT. As a result of the findings made by the Court about Forex CT, you may potentially have a claim against Forex CT for, among other things, the loss and damage you have suffered as a client due to Forex CT's "unconscionable system". If you traded with Forex CT and suffered a loss, then Forex CT may potentially owe you money - and we are collecting the details of all parties that may be owed money by Forex CT (i.e. the Company's creditors), and the circumstances that may give rise to claims against the Company. The letter went on to invite the former customers to register their claims.
16. Following that email, the liquidators received several claims totalling $948,301.
17. On 20 September 2021, the liquidators wrote to IGL referring to the judgment of Middleton J and the fact that they had received a number of investor claims. The letter concluded: Given the foregoing, we require additional funding to undertake the liquidation on a solvent basis of $2,066,372 (Inc GST), as follows: Claim AUD$ AUD$ (exc GST) (incl GST) Liquidators Remuneration - Incurred 180,465 198,512 Liquidators Remuneration - Forecast 569,535 626,489 Legal Fees - Incurred 66,428 73,071 Legal Fees - Forecast 200,000 220,000 Former Client Claims 948,301 948,301 Total 1,964,729 2,066,372

Please provide written confirmation by way of remittance that these amounts have been deposited into the following account by 23 September 2021: …

1. Although there was further correspondence between the liquidators and IGL, the liquidators received no substantive response to their request for further funding. On 12 November 2021, they applied to the Federal Court under s 459P of the Corporations Act to have FXCT wound up in insolvency pursuant to s 459A of the Corporations Act. That order was made on 7 December 2021.
2. On 5 May 2022, the liquidators sent a report to former customers of FXCT setting out the results of an investigation they had undertaken in relation to the affairs of FXCT. The investigation involved the liquidators taking a randomised sample of 58 customers and investigating whether those customers had claims against the company. As part of the investigation, the liquidators' staff reviewed over 680 individual telephone calls between the company's representatives and some (but not all) of the selected former customers. The investigation also included a review of other general information available to the liquidators and the previous findings of Middleton J. The purpose of the review was to determine whether the claims could be made out by each of the selected former customers and so, inferentially, by all former customers. The report concluded: 111 As a result of the Investigations set out in this Investigation Report, the Liquidators are overwhelmingly satisfied that those Former Customers who suffered loss or damage as a resulting [sic] of trading with the Company (i.e. the Net Loss), would have suffered the loss or damage either directly or indirectly as a result of the wrongful and illegal actions of the Company. On that basis, the Liquidators are satisfied every Former Customer has a valid claim against the Company for that loss or damage.
3. On the same day, the liquidators sent a notice to former customers. After recording that they had "completed a detailed investigation into the affairs of the Company", the liquidators said: Based on our investigations, the Liquidators consider: ● Forex CT engaged in conduct between, at least, 1 January 2017 and 1 April 2019 that was: ○ misleading or deceptive, or likely to mislead or deceive former customers; ○ in all the circumstances, unconscionable and against the law; and ● you were likely misled or deceived and were subject to the Company's unconscionable system; and ● if you suffered loss or damage while trading with Forex CT, you may have a valid claim against the Company. [emphasis omitted]
4. On 9 May 2022, the liquidators filed an originating process in the Federal Court pursuant to s 90‑15(1) of Schedule 2 (Insolvency Practice Schedule) Corporations to the Corporations Act. That section gives the court power to "make such orders as it thinks fit in relation to the external administration of a company". The effect of the orders sought by the liquidators was to permit them to send letters to former customers of FXCT inviting them to submit proofs of debt in a form proposed by the liquidators for the net trading losses they suffered during the period 1 January 2017 to 1 April 2019 (the period during which the contravening conduct occurred) and to permit the liquidators to admit those proofs of debt for 85 percent of the amount claimed notwithstanding that the customers had not established the factual basis of their claims. As the letter that the liquidators sought permission to send to customers explained: In a typical liquidation, claims must be adjudicated individually and on their merits. However, given there are more than 8,600 former customers who have claims against the Company, and the Letter of Comfort expires on 30 June 2022, the Liquidators have sought orders in the Federal Court of Australia for an alternative adjudication process. This alternative adjudication process means you are being invited to submit a proof of debt for the amount of your "net loss", without being required to do more. However, recognising that not every claim of former customers can be determined individually, the Liquidators are able to accept claims of former customers by applying a modest discount of 15% to the face value of former customers' claims ("Discounted Adjudication"). Former customers who accept the Discounted Adjudication will not have to provide any further substantiation of their claim. The Federal Court of Australia has endorsed this approach. If your claim is in respect of an AFCA determination or deed of release with the Company, then no discount will be applied. If you believe you are entitled to an amount greater than the value indicated in your proof of debt then you will be invited to submit a claim for this amount later. Completing the Former Customer Claim Form will not affect your ability to make these claims later.
5. The originating process was served on IGL. In response IGL said: Invesus Group Limited ("Invesus") does not accept service has been properly effected on it in accordance with the requirements of the Federal Court Rules 2011. Invesus is not a party to the Proceeding and cannot be bound by any orders sought in your originating process. For the avoidance of doubt, Invesus does not consider the Court has the power to make the orders sought.
6. The orders sought by the liquidators were made by Banks-Smith J on 17 May 2022. Her Honour delivered reasons for making the orders on 23 May 2022: see Woodhouse (Liquidator) in the matter of Forex Capital Trading Pty Ltd (In Liq) [2022] FCA 600.
7. In all, 1729 proofs of debt were lodged with the liquidators in accordance with the orders of the Federal Court. The total amount of those proofs of debt was $51,347,208.38. Again, in accordance with the orders of the Federal Court, the liquidators admitted proofs of debt for 85 percent of the amount claimed, making a total $43,645,127.26.
8. On 22 June 2022, Mr Woodhouse in the name of FXCT, sent a letter of demand to IGL demanding the payment of $43,645,127.26 under the Letter of Comfort.
9. IGL responded to that letter on 29 June 2022. It said: Invesus Group Limited ("Invesus") denies that the Letter of comfort dated 17 March 2019 applies to the claim made in the 22 June 2022 demand. Among other things, and without limitation, Invesus denies the demand discloses any debt to which the letter of comfort would have responded.
10. On 11 August 2022, FXCT commenced these proceedings claiming damages in the amount of $43,645,127.26.

Relevant legal principles

1. The principles applicable to the interpretation of the Letter of Comfort are the same as those that apply to a commercial contract: for discussion, see P Herzfeld and T Prince, Interpretation, 2nd ed, 2020, Law Book Co, para [30.50]. See also Zhu v Treasurer of New South Wales (2004) 218 CLR 530; [2004] HCA 56 at [82]; Intel Corporation v Unwired Group Ltd [2008] FCA 1927 at [32]-[33]. Those principles were explained in these terms by French CJ, Nettle and Gordon JJ in Wright Prospecting Pty Ltd V Mount Bruce Mining Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47]ff: [47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. [48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals. [50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations. [51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties … intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". [footnotes omitted]

The issues

1. The central issue in the case is whether the amount of $43,645,127.26 claimed by FXCT under the Letter of Comfort falls within the description "any debts, including judgment debts, incurred by FXCT … prior to or after the date of this letter in respect of FXCT's customers". Unless that sum (or, more accurately, the various amounts that make up that sum) has that character, the Letter of Comfort imposes no obligation on IGL to provide or to procure from external sources financial support to meet it.

Arguments relying on the surrounding circumstances

1. Apart from the use of the word "debts", the language of the Letter of Comfort and its commercial purpose shed little light on the answer to the question whether an admitted proof of debt had the requisite quality. The undertaking in the third paragraph of the Letter of Comfort is to provide financial support to meet "any debts, including judgment debts". That phrase clearly assumes that there are "debts" for the purposes of the Letter of Comfort other than judgment debts. Moreover, as is apparent from the second paragraph of the Letter of Comfort, the purpose of the letter was to ensure that FXCT and its director(s) "are able to satisfy any obligations arising from court proceedings or flowing from ASIC's investigation". Consequently, the word "debts" is not limited to obligations arising from court proceedings. It is also apparent from the terms of the Letter of Comfort that the undertaking was intended to cover the settlement of claims arising from the ASIC investigation; and that explains why it is drafted in a way that covers debts other than judgment debts and refers to obligations arising otherwise than as a result of court proceedings. But these points leave unresolved the question whether the Letter of Comfort was intended to cover admitted proofs of debt in an insolvency.
2. FXCT appeared to suggest in some of its submissions that "debts" should be interpreted broadly to include claims. For example, in its written submissions FXCT said (at para [48]): To read the expression "any debt" [sic] in paragraph 3 in a restrictive manner so as to exclude Former Customer Claims [defined as claims that had been identified by the liquidators] would be contrary to the commercial purpose of the Letter of Comfort. This is particularly so in circumstances where those Former Customer Claims are now for a liquidated sum by reason of the adjudicative process undertaken by the Liquidators.
3. However, that submission did not appear to be pressed by FXCT; and if it was, it must be rejected. A debt is not the same as a claim. And plainly the purpose of the Letter of Comfort was not to require IGL to pay claims for unascertained amounts for which FXCT had not been found or agreed to be liable. The context of the Letter of Comfort was that FXCT faced potential claims, which, if they resulted in crystallised liabilities, it would not be able to meet. The purpose of the Letter of Comfort was to ensure that FXCT would be able to meet those liabilities if and when they crystallised. It was not to permit FXCT to pay amounts in respect of uncrystallised claims.
4. IGL, on the other hand, submitted that the evident purpose of the Letter of Comfort was to enable FXCT to continue trading notwithstanding that it faced claims or potential claims from former customers. The Letter of Comfort was not designed specifically to provide a mechanism to compensate former customers who had suffered a loss. Consequently, on its correct construction, the Letter of Comfort was not intended to operate once FXCT was placed into liquidation, since on liquidation the purpose of the Letter of Comfort could no longer be achieved. Consistently with that conclusion, IGL submitted that the word "debts" should be construed to mean "debts which are settlement amounts or judgment sums arising in connection with the ASIC investigation underway at the time the freezing orders were sought" (Defendant's Submissions, para [4(b)]). By that, IGL appears to mean that "debts" should be interpreted to mean debts arising from settlements entered into and judgments obtained before FXCT was placed into liquidation.
5. Several other matters are said to support that conclusion. The Letter of Comfort was given in favour of FXCT and its directors, suggesting that it was intended to operate while the directors remained in control of the company. It was for a fixed period, even though a liquidation could continue for a number of years. Any amount paid under the Letter of Comfort would be available for distribution to the creditors as a whole in accordance with the Corporations Act, not simply the creditors whose debts gave rise to the obligation to make the payment, which was not the purpose of the Letter of Comfort.
6. I do not accept IGL's submissions on this point. One difficulty with the interpretation for which it contends is that it requires reading words into the Letter of Comfort that are not there. A Court will only do that to avoid an absurdity and where what is intended is clear: QBT Pty Ltd v Wilson [2024] NSWCA 114. Moreover, it is not entirely correct to say that the purpose of the Letter of Comfort was to ensure that FXCT remained solvent and could therefore continue to trade, at least until the Letter of Comfort expired. IGL did not undertake to provide financial support to meet all FXCT's liabilities. It was at least theoretically possible for FXCT to become insolvent notwithstanding the Letter of Comfort. The timing of the Letter of Comfort and its subject-matter suggest that its primary purpose was to enable FXCT to resist the interlocutory orders sought by ASIC, which included an order for the appointment of a receiver.
7. The fact that the Letter of Comfort is expressed to operate for a fixed period does not support the view that it was not intended to operate if FXCT was placed into liquidation. It simply supports the view that the Letter of Comfort only covered debts that were incurred during a certain period. In addition, it could not have been intended that IGL could avoid its obligations under the Letter of Comfort by causing FXCT to be placed into liquidation, which is what happened in this case.
8. As IGL pointed out, on the liquidation of FXCT, any amount recovered under the Letter of Comfort will be for the benefit of all creditors and not only the creditors whose proofs of debt were accepted. But that anomaly is not sufficient to justify reading into the Letter of Comfort words that are not there.

The ordinary meaning of the word 'debts'

1. The primary position of both parties was that the answer to the central issue in the case turned on the ordinary meaning of the word "debts"; and it is to that issue that most of their submissions were directed. Although the parties took somewhat different approaches to the meaning of that word, ultimately it seemed to be common ground that a debt was a liability to pay an ascertained amount or an amount that could be ascertained by arithmetic calculation or that was "fixed by any scale of charges or other positive data": see Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138 at 142 per Knox CJ and Starke J, quoting WB Odgers, The principles of pleading and practice in civil actions in the High Court of Justice, 5th ed, 1903, Stevens and Sons, Limited at 41. Or, to use the somewhat different language of Olsson J in Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433 at [73], referring to the decision of Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 in the context of the insolvent trading provisions of the then Corporations Law, "a debt is taken to have been incurred when, by its conduct or operations, a company has necessarily subjected itself to a conditional, but unavoidable obligation to pay a sum of money at a future time". Relevantly, a debt involves a liability to pay an amount and the amount must be ascertained or ascertainable. A "liability" in this sense is an existing legal obligation to pay the relevant amount.
2. Accepting that "debts" has its ordinary meaning, FXCT advanced two arguments for why the $43,645,127.26 consisted of debts falling within the third paragraph of the Letter of Comfort, although the two arguments were not always clearly separated in its submissions. The first was that the admission of the proofs of debt itself created debts owed by FXCT to the former customers whose debts were admitted. The second was that the liquidators' conclusions on the existence and the amount of FXCT's liability to former customers were binding on FXCT and IGL and were properly characterised as conclusions that FXCT owed debts to its former customers.

The argument that the admission of the proofs of debts created debts of FXCT

1. There is a suggestion in some of the submissions made by IGL that even if the admission of a proof of debt created a liability, it did not establish a liability for an ascertained or ascertainable amount. That was said to be so for two reasons. One was that the procedure adopted by the liquidators permitted customers to lodge a further proof of debt at a later stage, with the result that admission of the proof of debt did not establish the amount of the liability to the customer. The other was that admission of a proof of debt did not establish a liability to pay the amount admitted or any specific amount. At most, it created a liability to pay an amount that could only be ascertained once all proofs of debt had been lodged and admitted and the amount available for distribution was known.
2. I do not accept the first of these arguments. The fact that former customers may have been entitled to lodge proofs of debt in respect of other amounts does not alter the fact that, on admission of a proof of debt lodged by a former customer in accordance with the procedure approved by the Federal Court, there was an ascertained amount to which that customer was entitled.
3. The second argument is tied up with the nature of any liability arising from the admission of the proof of debt, which is addressed below.
4. It is FXCT's submission that admission of 85 percent of the amount claimed established a liability to pay that amount in much the same way as a judgment or a settlement for that amount would have established a liability to pay that amount. The fact that the process for establishing the liability was different in the context of a liquidation made no difference.
5. I cannot accept FXCT's submission, largely for the reasons advanced by IGL. FXCT's submission fails to give sufficient weight to the principles relating to proofs of debt under the Corporations Act.
6. The primary task of a liquidator is to get in the assets of the company and to distribute them in accordance with the scheme set out in Division 6 of Part 5.6 of the Corporations Act. Under that scheme "all debts payable by, and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company": s 553(1). Relevantly, a creditor is entitled to prove not just for debts but for all other types of claim.
7. The scheme proceeds on the basis that "recognition of a creditor (as distinct from a mere claimant to creditor status) will be determined by the adjudication of a proof of debt": McMillan Investment Holdings Pty Ltd v Morgan [2023] FCAFC 9 at [100]. In adjudicating a proof of debt, the liquidator acts in a quasi-judicial capacity "according to standards no less than the standards of a court or judge": ibid, referring to Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 (Tanning (HCA)) at 338-9 per Brennan and Dawson JJ. In accepting or rejecting a proof of debt, the liquidator is not acting as an agent of the company, but rather is undertaking a statutory task as an officer of the Court: Tanning (HCA) at 340-1.
8. In administering the scheme, the liquidator is not determining the liabilities of the company. Rather, the liquidator is determining the rights of creditors or persons who claim to be creditors to participate in the scheme. As Barrett J explained in Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; 215 ALR 562 at [119]: The process is one of administration of assets according to a statutory scheme, not one in which rights against the company itself are pursued or enforced. If that process is terminated, the creditors revert to their original rights. See also Tanning Research Laboratories Inc v O'Brien (1987) 11 ACLR 778 at 791 per Cohen J (reversed on other grounds in O'Brien v Tanning Research Laboratories Inc (1988) 14 NSWLR 601; appeal dismissed in Tanning (HCA)); Hoath v Connect Internet Services Pty Ltd [2006] NSWSC 158; 229 ALR 566 at [157] per White J (dealing with the position of a deed administrator).
9. The Corporations Act gives a creditor a right of appeal to the Court against a decision of a liquidator to reject a proof of debt: see also Corporations Regulations 2001 (Cth) reg 5.6.54. But in that case, it is the liquidator and not the company that is the respondent to the appeal: see Re Jay-O-Bees Pty Ltd (in liq); Rosseau Pty Ltd (in liq) v Jay-O-Bees Pty Ltd (in liq) (2004) 50 ACSR 565 at [52-53] citing Jones v Brien (1994) 13 ACLC 99 per McLelland CJ in Eq at [99]. And if successful, the order of the Court is an order directing that the liquidator admit the proof of debt, not an order that the company is liable to pay a certain sum of money: Sturesteps v AG McGrath [2010] NSWSC 896 at [54] per Brereton J.
10. Accordingly, when a liquidator admits a proof of debt, he or she is not creating a new liability of the company in substitution for an existing liability. Rather, he or she is deciding who is entitled to participate in the distribution of the assets of the company in accordance with the scheme set out in the Corporations Act. The underlying liabilities of the company remain unaffected by the decision, although no action can be taken in respect of them without the leave of the Court. And even if it could be said that admission of a proof of debt creates some form of liability, it is not a liability of the company and it is not a liability to pay the amount admitted. Rather, it is a liability of the liquidators to pay the creditor his or her share of the funds realised by the liquidators. That amount is not ascertained at the time the proof of debt is admitted and cannot be ascertained until all proofs are dealt with and all assets realised. It is certainly not necessarily the amount of the proof of debt.
11. It follows that the admission of the proofs of debt cannot create debts that fall within the meaning of the Letter of Comfort. The amount admitted to proof is not a liability of the company and any liability to pay an ascertained amount does not arise until all of the assets of the company are realised and all proofs of debt are determined.

FXCT's alternative argument

1. FXCT's alternative argument is that the conclusion of the liquidators on the existence and amount of FXCT's liability to its former customers is binding on FXCT and is therefore sufficient to create a debt for the purposes of the Letter of Comfort.
2. In support of that submission, FXCT relied on two English authorities and on an extract from KR Handley, Spencer Bower and Handley: res judicata, 5th ed, 2019, LexisNexis (Spencer Bower and Handley).
3. The first authority was Craven v Blackpool Greyhound Stadium & Racecourse, Ltd [1936] 3 All ER Rep 513 (Craven). In that case, a director of a company, which had gone into voluntary liquidation, lodged a proof of debt for arrears in salary and damages for wrongful dismissal. The liquidator allowed the proof but for an amount with which the director was dissatisfied. The director then commenced court proceedings against the company for damages. All members of the Court of Appeal agreed that the proceedings should be stayed. Greer LJ gave the following reason (at 515-6): It seems to me, on general principles, that a person who selects one method of having his claim adjudicated upon, if he is dissatisfied with the way in which that adjudication has been decided, should not be allowed to select another method of having it adjudicated. It is common knowledge in these matters that the court does not allow two sets of proceedings to go on at the same time in the same matter; it will stay either one or the other in order that there may not be a waste of costs in asking two tribunals to decide the same question.
4. Scott LJ went further and said that "If [the creditor] proves in the winding up, in my view he loses his right of action": at 516. Eve J gave the following explanation for the result (at 517): As a creditor, his debt accruing immediately before the winding up order was made or upon the winding up order being made, he had the opportunity of determining his course of action. He might treat himself as outside the administration of the affairs of the debtor company, in which case, subject to any attempt that might be made to get an order to stop him doing so, he might have presented a writ and endeavoured to have his true position ascertained by trial before a judge or judge and jury, or he might prove in the winding up, but he cannot have both at the same time, and, so far as his proof which he has put it, and which he has insisted upon and which the liquidator has in part accepted, is concerned, that, the court does not interfere with unless one of the parties dissatisfied with the result comes to the court and asks that the matter be reviewed.
5. The second authority relied on by FXCT is Bank of Credit and Commerce International (Overseas) Ltd (in liquidation) v Habib Bank Ltd [1998] 4 All ER 753 (Habib Bank). In that case, the plaintiff company, which was in liquidation, obtained default judgment against the defendant. The defendant applied to have the default judgment set aside relying on a set-off for which it had sought to prove in the winding-up of the company, but which had been rejected by the liquidator. The court rejected the application. In doing so, Park J gave the following explanation (at 760-1): My first proposition is that if a person who claims to be a creditor has his proof rejected but does not exercise his right to apply to the court, he cannot have a second bite of the cherry by submitting another proof to the liquidator for the same debt. The insolvency rules do not expressly enact this, but it must be the case, otherwise the process might never end. My second proposition is that, given that he cannot have a second go against the liquidator by submitting a second proof, he cannot have a second go by some other procedure instead. One such other procedure would be precisely what Habib Bank is seeking to do here. Having attempted to recover its alleged debts from BCCI (O) by the statutory route of proving for them in the liquidation, but having not succeeded under that route, it now wants to recover them by the different route of setting them off against the debts which it owes to BCCI (O). In my judgment, it cannot do that. This conclusion could be justified on the basis that there is an issue estoppel between Habib Bank and BCCI (O). Alternatively, it might be said to be a necessarily implied corollary of the Insolvency Rules. Either way, as it appears to me, the law must be that a creditor who (correctly so far as it goes) uses the statutory route to try to recover his debt but fails cannot then say that his debt is still alive and capable of being enforced by him by the use of other non-statutory routes.
6. Spencer Bower and Handley (at [2.20]) stated the position in these terms: If a proof of debt is rejected and there is no appeal the decision of the trustee or liquidator becomes binding for all purposes. Under earlier bankruptcy legislation an adjudication in bankruptcy established conclusively against third parties that the debtor was bankrupt and had committed the act of bankruptcy referred to in the order. [footnotes omitted]
7. In support of the proposition stated in the first sentence, Spencer Bower and Handley relied on Habib Bank and the earlier authority of Brandon v McHenry [1981] 1 QB 538 (Brandon). In that case, the appellant had obtained a judgment debt by consent against the respondent, who was subsequently made bankrupt. The appellant lodged a proof of debt with the trustee in bankruptcy, which was rejected on the ground (that was available to the trustee) that there was no underlying debt on which the judgment was based. The bankruptcy was subsequently annulled and the appellant sought to enforce the judgment debt. The Court of Appeal held that he was not entitled to do so, since he was bound by the decision of the trustee in bankruptcy.
8. IGL submits that one difficulty with the FXCT's argument is that even assuming that the conclusions of the liquidators are binding on IGL, they are not conclusions that can alter the underlying nature of the liability. Here, the relevant liabilities are liabilities for unliquidated amounts arising from breaches of various statutory obligations. The fact that the liquidators have quantified those amounts does not change what are unliquidated liabilities to liquidated ones; and unliquidated liabilities are not "debts": see Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358; [2008] VSCA 26 at [81] per Nettle JA (with whom Ashley and Dodds-Streeton JJA agreed); Arnold v Forsythe [2012] NSWCA 18 at [48] per Sackville AJA (with whom McColl and Young JJA agreed).
9. I doubt that this point is fatal to FXCT's claim. If it is accepted that the decision of the liquidators concerning the existence and amount of FXCT's liability is binding on IGL, then it seems to me that that is sufficient to amount to a debt for the purposes of the Letter of Comfort, even if the liability is not a liability for a liquidated amount. The Letter of Comfort was given to enable FXCT to meet ascertained liabilities, whatever their precise legal character. Consequently, "debts" should be interpreted to cover any liability that has that quality.
10. There are, however, other difficulties with FXCT's argument.
11. First, it is not correct to say that in admitting a proof of debt, the liquidators are making a decision concerning the amount of the underlying liabilities of the company. Although the amount for which a proof of debt is admitted will normally correspond to the amount for which the company is liable, as the facts of this case demonstrate, that will not always be so. The amounts for which the customers were entitled to prove in this case did not correspond to any liability the company might have had. Rather, they were amounts determined in accordance with orders made by the Federal Court to avoid the necessity of having to make any determination in relation to the company's actual liabilities.
12. Conversely, there are some liabilities that may be enforceable against the company which are not provable in a liquidation. as Brennan and Dawson JJ explained in Tanning (HCA) at 339): The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability. Those principles include the law relating to the barring of actions by time: see, for example, Motor Terms Co Pty Ltd v Liberty Insurance Ltd (1967) 116 CLR 177. But this general rule is qualified. As the parties whose interests are affected by admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors and contributories may be unjustly affected. A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution.
13. Secondly, it is not clear how the decision of the liquidators became binding on FXCT, let alone IGL. The authorities relied on by FXCT do not assist its case.
14. It is apparent from the decision in Craven that the creditor in that case had a choice whether to commence proceedings or to seek to prove in the liquidation the amount he claimed. Having chosen the latter course, he was bound by that decision. The precise reason for that does not emerge clearly from the judgments of the court. But the decision might be explained on the basis of an election: see O'Connor v S P Bray Ltd (1936) 36 SR (NSW) 248, referred to with approval on the point in the joint judgment of Kiefel CJ, Edelman, Steward and Gleeson JJ (Gageler J dissenting) in Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 [2022] HCA 38; (2022) 406 ALR 632 at [62]. In any event, the decision has no application in the present case. The legislative regime in that case was different and the outcome did not depend on whether the admitted proof of debt was properly characterised as a determination concerning the liabilities of the company.
15. In Habib Bank, Park J gave two reasons for his conclusion. The first was that an issue estoppel arose between Habib Bank and BCCI (O). The second was that his conclusion was an implied corollary of the applicable insolvency rules.
16. The second of these reasons can be put to one side, since it depends on the particular (unidentified) insolvency rules applicable in that case.
17. As to the first of Park J's reasons, that reason depended on a conclusion that the decision of the liquidator on the proof of debt was a binding decision concerning BCCI (O)'s liability to Habib Bank. However, the only authority Park J cites in support of that decision is Brandon. As I explain below, the decision in Brandon turned on the application of a provision of the Bankruptcy Act 1869 (UK), not on the application of any general principle that might apply in this case. In any event, as I have sought to demonstrate, whatever the position may be in England, it is not possible to say that the admission of a proof of debt under the Corporations Act involves a finding of liability on the part of the company that is binding between the company and the creditor, let alone between the company and a third party.
18. As I have said, the commentary in Spencer Bower and Handley and the decision in Hadid Bank rest principally on the decision of the English Court of Appeal in Brandon. However, as the judgments of Esher MR and Fry LJ make clear, that decision turned on s 81 of the Bankruptcy Act 1869 (UK) which relevantly provided that: … whenever any adjudication in bankruptcy is annulled, all sales and dispositions of property and payments duly made, and all acts therefore done by the trustee or any person acting under his authority, or by the Court, shall be valid; but the property of the debtor who was adjudged a bankrupt shall in such case vest in such person as the Court may appoint, or, in default of any such appointment, revert to the bankrupt for all his estate and interest therein upon such terms and subject to such conditions, if any, as the Court may declare by order.
19. The question in that case was whether the rejection of the proof of debt was an "act" of the trustee within the meaning of the section. The Court of Appeal held that it was. But there is no equivalent to s 81 in the Corporations Act, and consequently the reasoning of the Court of Appeal has no application in this context.
20. Third, FXCT's submission is inconsistent with the decision of the Full Court of the Supreme Court of South Australia in Duke Group Ltd (in liq) v Arthur Young (Reg) (No 2) (1991) 4 ACSR 355 (Duke Group). In that case, the plaintiff, formerly known as Kia Ora Gold Corporation NL (Kia Ora), entered into a transaction, commonly referred to as a "reverse takeover", with the Duke Group of companies by which it issued shares to certain members of the Duke Group and received other payments in exchange for assets of the Duke Group, with the result that the Duke Group of companies obtained control of Kia Ora. The defendant, Arthur Young, prepared an expert report in connection with the transaction. The transaction was not a success and Kia Ora, which had been placed in liquidation, sued Arthur Young for breaches of duty they were said to owe in connection with the preparation of their report. As part of its damages, Kia Ora claimed an amount of $42,572,296 "being the approximate excess of liabilities over assets upon the liquidation of Kia Ora". The liabilities it identified in the statement of claim were "no more or less than a list of the proofs of debt lodged in the liquidation" (to quote from the judgment of Perry J at first instance in Duke Group Ltd (in liq) v Arthur Young (Reg) (No 4) (1991) 55 SASR 24 at 28). During the hearing, Arthur Young sought to amend their defence to dispute the liabilities identified in the statement of claim on the basis that some of the amounts that had been admitted to proof by the liquidator were manifestly incorrect. The question whether leave to make the amendments should be granted turned on whether the admission of the proofs of debt conclusively established the existence and quantum of the relevant liabilities. It was agreed that Perry J should resolve that question on a final basis, which he did in favour of Arthur Young.
21. The Full Court upheld Perry J's judgment on that point. As Olsson J (with whom Matheson J at 369 and Duggan J at 407 agreed on the point) explained (at 397): … there can be little doubt that Perry J was correct in his conclusion that a winding up order does not cause a common law liability to be extinguished and merged in the liquidation in any relevant sense. It continues to exist in its own right; and, in proper cases, leave may be given to pursue common law litigation in relation to it. As between the creditor in question and a liquidator, the question of the method of determination of a disputed liability is … essentially a procedural consideration. It follows as a matter of logic that, merely because a liquidator has admitted a proof of debt from a claimant's creditor for the purposes of ratable distribution within the winding up administration, such action can scarcely foreclose a question arising in litigation as between a company in liquidation at the instance of the official liquidator and a third party (who may well not directly be involved in the winding up in any sense) whereby the existence or extent of any liability of the plaintiff company to the creditor in question is challenged; and which is relied upon for the purposes of assessment of damages. It would, indeed, be a strange situation if it were otherwise; and that the liquidator could, by his admission of proofs of debt, automatically quantify damages which he himself seeks to recover, via the company in liquidation, from a third party.
22. FXCT sought to distinguish Duke Group on several grounds. In the alternative, it submitted that Duke Group was plainly wrong and should not be followed. I do not accept either of those submissions.
23. The first ground of distinction relied on by FXCT is that Duke Group was concerned with the question whether Kia Ora had incurred liabilities for the purposes of assessing its claim for damages whereas the present case concerns the meaning of the word "debts" in the Letter of Comfort. The second was that in Duke Group, it was Arthur Young's contention that the admitted proofs of debt contained manifest errors which raised the potential for double recovery. No such suggestion was made in this case. It was ultimately common ground that the proofs of debt had been properly admitted in accordance with the orders of the Federal Court, and the liquidators had been astute in preventing the possibility of double recovery. The third was that in this case the company was the wrongdoer and was in a position to settle claims against it whereas in Duke Group the alleged wrongdoer was the third party said to be bound by the admission of the proof of debt.
24. In my opinion, none of these points of distinction is relevant. The question in Duke Group was whether the admission of a proof of debt by the liquidator of Kia Ora established a liability on the part of Kia Ora for the amount admitted. The Full Court held that it did not, principally because an order for the winding up of the company and inferentially the decision of the liquidator did not extinguish the underlying liability (in contrast to a judgment or settlement agreement). Consequently, if in proceedings outside the liquidation a question arose concerning the existence or amount of the liability, that question could not be regarded as resolved by the decision of the liquidator on that question in the liquidation. That is particularly so where the liquidator claims the benefit of that decision. That reasoning did not depend on whether the liquidator had made a manifest error in admitting the proof of debt or on the possibility of double recovery. Nor did it depend on the meaning of the word "debt" and the context in which the question arose. Rather, it depended on whether in truth the determination of the liquidator operated as a determination of the existence of a liability of the company for all purposes or only for the purpose of determining who was entitled to participate in the distribution of the assets of the company by the liquidator.
25. In my opinion, the conclusion in Duke Group was not plainly wrong. It was entirely consistent with the nature of a winding up and the character of proofs of debt described earlier in this judgment.

Did the liquidators reach a settlement of the claims made by former customers?

1. An alternative argument advanced by FXCT was that the process by which the liquidators allowed customers to submit proofs with a 15 percent discount for the value of the claim which the liquidators then accepted amounted to a settlement for the purposes of the Letter of Comfort.
2. I cannot accept that submission. There was no settlement of the claims by the former customers against FXCT. At most, there was a settlement between the liquidators and the former customers of the amounts for which the former customers were entitled to prove without having to establish an underlying liability of FXCT. For the reasons already given, that does not establish a liability on the part of FXCT to pay each of the former customers an ascertained or ascertainable amount.

Orders

1. It follows that the proceedings must be dismissed with costs.

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