Solicitors:
Johnson Winter & Slattery (Plaintiffs)
File Number(s): 2015/329089
[2]
Judgment - ex tempore
By Originating Process filed on 9 November 2015 the Plaintiffs, Messrs Owen & Leigh as liquidators of QC Resource Investments Pty Ltd (in liq) ("Company") seek an order under s 477(2B) of the Corporations Act 2001 (Cth) approving their entry, as joint and several liquidators of the Company, into a draft funding agreement between the liquidators, the Company and YTC Ventures Pte Ltd ("proposed funding agreement") in the revised form which has been marked Confidential Exhibit A1 in the proceedings. They also seek an order, in a common form, that the costs of the application be costs of the winding up of the Company.
The application is supported by an affidavit of Mr Owen sworn 27 November 2015, which in turn annexes, adopts and updates an earlier affidavit dated 6 November 2015. Mr Owen there sets out the origin of the Company and leads evidence that the value of the proofs of debt lodged in the liquidation is, on any view, substantial, although they have not been formally adjudicated. He gives evidence that there are presently no funds available in the winding up of the Company for distribution to unsecured creditors and that any moneys that would be able to be realised for unsecured creditors would depend upon the commencement of proceedings in respect of the Company. He gives evidence of the view formed by the liquidators that such proceedings would depend upon the availability of external funding from a litigation funder, and it is not surprising that he has formed that view where he has noted that the liquidators are without funds in the liquidation. He gives evidence of contact with one potential third party litigation funder, to which I will refer further below, and of the terms offered by that funder, and of more favourable terms that have now been offered by the proposed funder, which I note is an entity associated with, in a broad sense, substantial creditors in the liquidation. Mr Owen expresses the view that the proposed funding agreement is reasonable and represents better commercial terms for the funding of the proposed claim than that which was offered by the third party funder.
Mr Owen also refers to certain matters which, in his view, mean that it is a preferable for the liquidator's entry into the funding agreement to be a matter for court approval, rather than creditors' approval, to the extent that such approval is required under s 477(2B) of the Corporations Act . It seems to me that Mr Owen is correct in recognising that, in the particular circumstances of a funding agreement, particularly where a potential respondent claims to be a creditor of the Company, there may be difficulties in fairly and fully informing creditors as to the matters relevant to approval of a funding agreement, without prejudicing the Company's position in any proposed liquidation.
The matters which are relevant in an application for approval of a litigation funding agreement under s 477(2B) of the Corporations Act are well established, and are helpfully summarised by Mr Sulan in his submissions on behalf of the liquidators. Section 477(2B) of the Corporations Act provides that, except with the Court's approval or the approval of a committee of inspection or a resolution of creditors, a liquidator must not enter into an agreement on a company's behalf if the term of that agreement may end, or obligations of a party to the agreement may be discharged by performance, more than three months after entering into the agreement. A litigation funding agreement would almost inevitably fall within that category, given the time scales of complex commercial litigation.
The principles relevant to the grant of approval for entry into a funding agreement under that section are well established. The Court is not concerned, in granting such approval, with matters of commercial judgment but is concerned to be satisfied that the entry into an agreement is a proper exercise of power and not ill advised or improper on the part of the liquidator: Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 78 ACSR 405. The Court will generally grant approval for entry into such an agreement if it is satisfied that it is in the interests of the relevant company, the creditors and the community to do so: Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308.
Mr Sulan in turn refers to a list of relevant factors identified by Austin J in Leigh; Re AP & PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25], including the liquidators' prospects of success in the liquidation; the interests of the creditors other than the proposed defendant; any possibility of oppression in bringing the proceedings; the nature and complexity of the cause of action; the extent to which the liquidator had canvassed other funding options; the level of the funder's premium; the liquidator's consultations with creditors; and the risk involved in the claim, including the amount of costs likely to be incurred, the extent to which the funder will contribute to those costs, and the extent to which the funder will contribute to the defendant's costs if the action is not successful and to security for costs. Those factors have been applied in subsequent case law in determining whether to approve such agreements: for example Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257; Re Blue Mountains Helicopters Pty Ltd (in liq) [2013] NSWSC 1630. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (as liquidators of Octaviar Administration Pty Ltd (in liq)) (2015) 105 ACSR 581 at [125], to which Mr Sulan also refers, Bathurst CJ summarised the position in noting that it was not generally the court's function, in granting such approval, to review a liquidator's commercial judgment or second guess its decision, and the court would not interfere unless there appeared to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator's conduct. Equally, however, his Honour noted that the court did not act as a rubber stamp and would exercise the power only where it was satisfied that there was a case for its exercise, in the particular circumstances.
In the present case, I am satisfied that the liquidators have taken sufficient steps to satisfy themselves as to the prospects of the proceedings, including obtaining advice from their solicitors as to a particular issue in respect of the proceedings, and obtaining a comprehensive advice from counsel, which has been tendered on a confidential basis and subject to the liquidator's claim for legal professional privilege, consistent with the approach which is often and desirably taken in applications for such approval. I am satisfied, for the reason indicated in Mr Owen's affidavit, that the liquidators can properly form the view that it is in the interests of creditors to enter into a litigation funding agreement, so as to bring relevant proceedings. In particular, that view seems to me to be a reasonable one, where there are otherwise no funds available in the winding up of the Company for distribution to unsecured creditors; there will be no prospect of recovery to creditors without recovery in such proceedings; the proceedings at least provide a prospect of recovery to creditors, after the costs of the funder have been paid; the liquidators have obtained appropriate advice in order to assess the level of that prospect; and the liquidators have themselves concluded that it is in the unsecured creditors' best interests that they enter into the funding agreement. I am satisfied that this is not a case where there is any suggestion of oppression in the commencement of the proceedings, where those proceedings would be properly brought in order to vindicate the Company's perceived rights.
I am satisfied that at least some steps have been taken to pursue other funding options, including, first, an approach for a third party funder to which I referred above, and that the terms of the funding that was potentially available from that funder are less favourable, in at least two respects, than the funding which is now available under the proposed funding agreement. The commercial terms of the proposed funding agreement are broadly similar to those which are often seen in funding agreements in this context and do not seem to me to be unreasonable, on their face, in respect of complex proceedings with some practical challenges, which are addressed in the evidence before me, and as to which I need say nothing further.
I have also had regard to the terms of the funding agreement, to identify issues which may be relevant to the Court's approval of such an agreement, from the perspective of its interest in the performance by Court-appointed liquidators of their duties and the protection of the liquidators' interests. The proposed funding agreement, as amended in the course of the application, seems to me to draw an appropriate balance between, on the one hand, the importance of the fact that a liquidator appointed by the Court must have control of proceedings brought by the Company, and the funder's legitimate interest in consultation in respect of the proceedings and its legitimate interest in ensuring that its funding is appropriately used. The proposed funding agreement deals appropriately, in my view, with the events which would occur following a termination, including preserving the rights of the liquidator to payment of costs incurred or awarded, even if they are not payable until after termination. The liquidators' position is also protected, particularly in circumstances that the funder is a company incorporated outside Australia, by appropriate arrangements to address that issue. Importantly, the drafting of the funding agreement has proper regard to the obligations of the liquidators, in respect of their duties to the Court and to other creditors. The provisions to which I have referred also provide, appropriately, in my view, for the control of the proceedings and for the protection of the liquidator against risks which may face him in the commencement of the proceedings.
There has been notice to other creditors of the liquidators' consideration of the commencement of the proceedings and of the fact that funding would potentially be sought. Although, understandably, those notices have not set out the commercial terms of the proposed funding agreement, they have allowed the opportunity for other creditors to indicate any interest in providing funding, if they wished to do so, and have allowed other creditors to appear to oppose this application, if they wished to do so. No such other creditor appeared when the matter was called today.
For these reasons, I am satisfied that this is a proper case in which to make orders approving the proposed funding agreement under s 477(2B) of the Corporations Act. I am also satisfied that this application was appropriately brought in the conduct of the liquidation, so as to advance the interests of the liquidation and its creditors, and it will be proper to make an order that the costs of the application be costs in the liquidation.
Accordingly, I make the following orders:
Pursuant to s 477(2B) of the Corporations Act grant approval for David Leigh and Michael Owen in their capacity as joint and several liquidators of QC Resource Investments Pty Limited (in liquidation) to enter into the proposed Funding Agreement in the form of Confidential Exhibit A1.
The costs of this application be costs in the winding up of QC Resource Investments Pty Limited (in liquidation).
The exhibits other than Confidential Exhibit A1 be returned.
[3]
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Decision last updated: 01 March 2016
Parties
Applicant/Plaintiff:
Fortress Credit Corporation (Australia) II Pty Ltd