THE PROCEEDINGS AT FIRST INSTANCE
5 The Claimant is the ultimate holding company of a complex group of companies (the Octaviar Group), within which the Funder performed the treasury functions. On 13 September 2008, the directors of the Claimant resolved to place the Claimant in voluntary administration. On 12 January 2009, the Claimant entered into a Deed of Company Arrangement. On 31 July 2009, the Liquidators were appointed provisionally as liquidators of both the Funder and the Claimant by the Supreme Court of Queensland and, on 9 September 2009, they were appointed as joint liquidators.
6 The Claimant is indebted to Fortress in a sum of approximately $71 million. Fortress claims to be a secured creditor of the Claimant, as the holder of a fixed and floating charge granted on 1 June 2007 over the assets of the Claimant (the Charge). On 15 September 2008, Fortress appointed Messrs Anthony Sims and Stephen Parbery (the Receivers) as receivers and managers of the property of the Claimant under the Charge.
7 The Funder is indebted to the Claimant. That debt is subject to the Charge and is therefore under the control of the Receivers. The Receivers have caused the Claimant to lodge a proof of debt in the liquidation of the Funder in respect of the debt owing by the Funder to the Claimant. The proof of debt was for a sum in excess of $500 million.
8 On and after 15 December 2009, the Liquidators obtained orders in the Supreme Court of New South Wales for the conduct of public examinations in the winding up of the Funder. More than 50 days of examinations have been conducted in respect of a variety of topics. As a result of the information that was obtained from those examinations, the Liquidators formed the view that it was desirable to examine certain officers of Fortress.
9 On 24 November 2010, the Liquidators obtained orders in the Supreme Court of Queensland for the examination of officers of Fortress in the winding up of the Funder. Fortress applied to set the summonses aside. It asserted that they had been issued for an improper purpose. While the Liquidators did not accept those assertions, they formed the view that, to ensure that the examinations of the relevant officers of Fortress were able to proceed, it was appropriate for public examinations to be conducted also in the winding up of the Claimant. Accordingly, on 6 December 2010, the Liquidators obtained orders for the examination of officers of Fortress in relation to the affairs of the Claimant.
10 The Claimant has only nominal assets and does not have the funds to investigate or prosecute the proposed claims against Fortress. On the other hand, the Funder has assets consisting of cash in excess of $120 million. The Liquidators saw no merit in approaching a commercial litigation funder who would be likely to require a right of first refusal to fund any subsequent claims brought against Fortress. That might have resulted in a significant portion of any recoveries being distributed outside the Octaviar Group and not to the creditors of the Funder and the Claimant.
11 None of the creditors associated with the Claimant's committee of inspection, who represent the Claimant's largest creditors, was prepared to provide funding for the proposed examination of officers of Fortress. In the light of the Claimant's lack of assets and the fact that the Funder had funds available that could potentially be used to fund the examinations in respect of the winding up of the Claimant, the Liquidators asked the members of the committees of creditors of both the Funder and the Claimant to support the funding by the Funder of the investigation of potential claims against Fortress. On 7 December 2010, the Investigation Agreement was made. The general terms of the Investigation Agreement are consistent with the terms that would ordinarily be expected to be provided by a commercial litigation funder. When the Investigation Agreement was made, the Liquidators expected that the examinations in question would be completed no later than 7 March 2011, being the date 3 months after 7 December 2010.
12 The Liquidators subsequently formed the opinion that it is in the interests of the creditors of the Claimant to pursue certain claims against Fortress. The claims include impugning the validity of the Charge. In forming the opinion that it is in the interests of the Claimant's creditors to pursue the claims against Fortress, the Liquidators took into account the opinion of senior counsel concerning the prospects of success of the proposed claims against Fortress.
13 The Liquidators have, therefore, formed the opinion that it is in the interests of the creditors of both the Claimant and the Funder that the Funding Agreement be entered into, whereby funds will be lent by the Funder to the Claimant to prosecute the proposed claims against Fortress. Under the Funding Agreement, the Funder must pay all reasonable legal costs and disbursements incurred in prosecuting the claims against Fortress, must provide any security for costs ordered to be provided by the Claimant, and must pay the Liquidators' fees. The Funder also agrees to indemnify the Liquidators and the Claimant in respect of adverse costs orders and any undertaking as to damages given by the Liquidators. In consideration for providing the funding, the Funder will receive a share of any amount received pursuant to the resolution of any proceeding brought by the Claimant against Fortress, whether by way of settlement or under a Court order.
14 The Funding Agreement also provides that, where amounts paid to the Funder are not sufficient to reimburse it for the amounts paid by it under the Funding Agreement, the Liquidators of the Funder may apply any dividend that is otherwise payable to the Claimant in the winding up of the Funder towards reimbursing the Funder for payments that have been made under the Funding Agreement. That provision has the effect of shifting from the Funder to the Claimant part of the risk of prosecuting the proposed claims against Fortress. That is to say, the debt owing by the Funder to the Claimant would be reduced to the extent of any such reimbursement. If the Charge is valid, that would have the effect of diminishing an asset over which the Charge subsists, to the detriment of Fortress.
15 In forming the opinion that it is in the interests of the creditors of both the Claimant and the Funder to prosecute the proposed claims against Fortress, the Liquidators had regard to the significant overlap in the proofs of debts that had been lodged in the winding up of the Funder and in the voluntary administration of the Claimant. Although proofs have not yet been called for in the winding up of the Claimant, 29 proofs have been lodged in the voluntary administration of the Claimant, with an aggregate value of $2,176,401,756.91, and 82 proofs have been lodged in the winding up of the Funder, with an aggregate value of $2,456,286,361.51. Eleven creditors have lodged proofs in both the winding up of the Funder and the voluntary administration of the Claimant. Of the proofs lodged in respect of the Funder, the common creditors represent 71% of the total proofs lodged and of the proofs lodged in respect of the Claimant, the common creditors represent 80% of the total proofs lodged.
16 The Liquidators commissioned a report from Mr John Williams, a chartered accountant, as to the following issues:
Whether it is in the interests of the creditors who stand to receive distributions in the respective windings up of the Funder and the Claimant to enter into and proceed with the Funding Agreement.
Whether the interests of the creditors of the Funder are promoted by the Funder committing its funds on the terms set out in the Funding Agreement.
Whether the interests of the creditors of the Claimant are promoted by the Claimant committing to pay to the Funder, on the terms of the Funding Agreement, a portion of any sum received by the Claimant on the resolution of proceedings against Fortress.
Whether the process of winding up the Funder and the Claimant is likely to be enhanced by the Funder and the Claimant participating in the Funding Agreement.
17 Mr Williams provided to the Liquidators a comprehensive report (the Williams Report) in which he considered the likely outcome and implications for creditors of the Funder and creditors of the Claimant under five different scenarios. The five scenarios encompass every likely outcome of the Funder and the Claimant entering through the Liquidators into the Funding Agreement and commencing proceedings against Fortress, and of their not doing so. The Williams Report shows that, if the Funding Agreement were entered into and the proposed claims against Fortress were to succeed, there would be an improved return for creditors of both the Funder and the Claimant. For that reason, Mr Williams concluded that it was in the interests of the creditors of both the Funder and the Claimant, other than Fortress, that the Claimant prosecute the proposed claims against Fortress and that the Funder provide funding for that purpose.
18 Under s 477(1) of the Corporations Act 2001 (Cth) (the Corporations Act), a liquidator of a company may:
carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business;
subject to certain other provisions of the Corporations Act, pay any class of creditors in full;
make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or whereby the company may be rendered liable; and
compromise any calls, liabilities to calls, debts, liabilities capable of resulting in debts and any claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the property or the winding up of the company, on such terms as are agreed, and take any security for the discharge of, and give a complete discharge in respect of, any such call, debt, liability or claim.
Under s 477(2)(m), a liquidator of a company may do all such other things as are necessary for winding up the affairs of the company and distributing its property.
19 However, under s 477(2B), except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf if the term of the agreement may end, or 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.
20 Under s 477(6), the exercise by the liquidator of the powers conferred by s 477 is subject to the control of the Court. Any creditor or contributory or the Australian Securities and Investments Commission may apply to the Court with respect to any exercise or proposed exercise of any of those powers. Further, under s 479(3), the liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.
21 The obligations of the parties under the Funding Agreement will extend beyond three months from its commencement and, accordingly, s 477(2B) of the Corporations Act would apply to it. Hence, on 17 February 2011, the Liquidators, the Funder and the Claimant made an application to the Court under s 477(2B) for approval to enter into the Funding Agreement, and for directions from the Court under s 479(3). As indicated above, Fortress was not a party to and did not appear in the proceeding.
22 Since the Funder is itself in liquidation, an issue arose as to whether the Liquidators, in their capacity as liquidators of the Funder, had power to cause the Funder to enter into the arrangements contemplated by the Funding Agreement. The primary judge had regard to the Williams Report and, in particular, its consideration of the likely outcome and implications for creditors of the Funder and the Claimant if they entered into the Funding Agreement, and its conclusion that, if the claims against Fortress should succeed, there would be an improved return for creditors of both the Claimant and the Funder.
23 The primary judge observed that it is not unusual for a company in liquidation to seek litigation funding in order to proceed against a third party, often a creditor, and that the power of liquidators to enter into such arrangements is well accepted. Her Honour said that, in considering an application for approval to enter into such an agreement, it is not necessary for the Court to be convinced that the company is likely to succeed in the litigation or for the Court to form its own view as to the commercial merits of the agreement. The Court will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct.
24 The primary judge referred to a comprehensive list of factors (see Leigh re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25]) that her Honour considered should be taken into account in determining whether there are grounds for doubting the good faith or prudence of a proposed proceeding by a liquidator, as follows:
the prospects of success;
the interests of creditors other than the proposed defendant;
possible oppression;
the nature and complexity of the cause of action;
the extent to which the liquidator has canvassed other funding options;
the level of the funder's premium;
consultations with creditors; and
the risks involved in the claim.
Her Honour considered that, insofar as they were relevant, the Liquidators had considered those factors. Her Honour observed that the proposed proceeding would not be in the interest of Fortress. However, her Honour considered that that was an inevitable result of the Liquidators discharging their obligations to the creditors of the Claimant generally and could not be regarded as oppressive or as a reason for withholding the approval sought.
25 On the basis of the evidence presented at the hearing, much of which her Honour concluded should remain confidential, her Honour was satisfied that the Court should approve the entry of the Liquidators into the Funding Agreement. Accordingly, on 23 February 2011, her Honour:
approved, pursuant to s 477(2B) of the Corporations Act, the entry of the Liquidators, in their capacity as the liquidators of the Claimant and the Funder, into the Funding Agreement; and
directed that the Liquidators, in their capacity as the liquidators of the Claimant and the Funder, were justified in entering into the Funding Agreement.
Fortress was served with the orders, but not until after they had been entered. It applied for leave to appeal soon after the orders were served.
26 It subsequently became apparent that, for various reasons, the Investigation Agreement would be in operation for a period of longer than 3 months. Hence, on 8 March 2011, the Liquidators, the Funder and the Claimant made a second application to the Court under s 477(2B) and s 479(3), as well as under s 1322(4)(a) of the Corporations Act, for approval, nunc pro tunc, to enter into the Investigation Agreement, for directions by the Court, and for a declaration that the Investigation Agreement was not invalid by reason of its having been entered into without prior approval under s 477(2B).
27 On 14 March 2011, the primary judge directed that the application and the accompanying affidavit be served on Fortress and the Receivers, and adjourned the hearing to enable Fortress and the Receivers to seek leave to be heard, if they so wished. At the adjourned hearing, Fortress and the Receivers sought and were granted leave to appear. Fortress opposed the application and applied for an adjournment pending the resolution of its application for leave to appeal from the earlier orders of 23 February 2011. Her Honour refused to adjourn the hearing. In her Honour's view, it was preferable to deal with the proceeding expeditiously and leave it to Fortress to seek leave to appeal should it not succeed in opposing the application for approval of the entry into the Investigation Agreement.
28 The Liquidators requested that the Court approve their entry into the Investigation Agreement, nunc pro tunc, given the allegations made by Fortress that the Investigation Agreement had not been validly approved, and the fact that it was then clear that obligations under it would extend beyond 3 months. The primary judge considered that the application raised the same issues of principle as were considered in the earlier proceeding in relation to the Funding Agreement. The examinations to be funded under the Investigation Funding Agreement were preliminary to the proposed claims to be funded under the Funding Agreement. As a result, her Honour said, the considerations relevant to the Investigation Agreement were, in general terms, the same as those relevant to the Funding Agreement.
29 No separate expert evidence was presented in the second proceeding. The Liquidators, in written submissions to the primary judge, asserted that the risks and benefits of the Investigation Agreement had not been the subject of expert analysis since the risks and benefits are fairly clear. The risk to the Funder is that it will be liable for the costs of conducting the public examinations. In the event that the proposed claims against Fortress fail, the Funder will have received no benefit because, under the Funding Agreement, in all likelihood, it will have to indemnify the Claimant for its costs and any damages. On the other hand, if the proposed claims against Fortress succeed, then the benefit to the Funder of the Investigation Agreement is that it will have the benefit of an entitlement to a proportion of the proceeds of any judgment under the Funding Agreement and, under the Investigation Agreement, will be further entitled to be reimbursed, from the amount recovered, for any amounts paid under the Investigation Agreement, so long as the amount recovered is sufficient.
30 The primary judge considered that that was a fair summary of the risks and benefits, although it was necessary to consider the specific terms of the Investigation Agreement. Her Honour took into account the submissions made on behalf of Fortress and the Receivers but concluded that most of the submissions expressed opposition to the Funding Agreement, in respect of which there was an extant approval. On 16 March 2011, her Honour:
ordered, pursuant to s 1322(4)(d) of the Corporations Act, that the period for the making by the Liquidators of an application for the Court's approval under s 477(2B) of the Corporations Act, in respect of the Investigation Agreement, be extended to 16 March 2011;
approved nunc pro tunc, pursuant to s 477(2B) of the Corporations Act, the Liquidators' entry into the Investigation Agreement;
directed, pursuant to s 479(3) of the Corporations Act, that the Liquidators, in their capacity as the liquidators of the Claimant and the Funder, could act on the Investigation Agreement as though they had entered into it with the prior approval of the Court under s 477(2B) of the Corporations Act; and
declared, pursuant to s 1322(4)(a) of the Corporations Act, that the Liquidators' entry, in their capacity as liquidators of the Claimant and the Funder, into the Investigation Agreement was not invalid by reason of the Liquidators' having entered into it without the Court's prior approval under s 477(2B).