Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher & Barnet

Court of Appeal (NSW)|2014-12-04|Before: Bathurst CJ, Beazley P, Macfarlan JA, Meagher JA, Barrett JA

Re Siromath (1991) 9 ACLC 1580 Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 Re St Gregory's Armenian School (in Liq) [2012] NSWSC 1215; 92 ACSR 588 Stein v Blake [1996] AC 243 Sydlow Pty Ltd (in Liq) v TG Kotselas Pty Ltd (1996) 65 FCR 234 Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; 169 CLR 332 Weston v Publishing & Broadcasting Ltd [2011] NSWSC 14 Witness v Marsden [2000] NSWCA 52; 49 NSWLR 429 Category: Principal judgment Parties: Fortress Credit Corporation (Australia) II Pty Ltd (Applicant) William John Fletcher and Katherine Elizabeth Barnet (First respondent) Octaviar Administration Pty Limited (In Liquidation) (Second respondent) Representation: Counsel: N C Hutley SC / C N Bova (Applicant) B A J Coles QC / S Aspinall / J K Taylor (First and second respondent)

Solicitors David James Walter (Applicant) Jason Munstermann (First and second respondent) File Number(s): 2014/18668 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Corporations List Citation: [2012] NSWSC 299 Date of Decision: 30 March 2012 Before: Hammerschlag J File Number(s): 2012/89484

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] Both the second respondent, Octaviar Administration Pty Limited (In Liquidation) ("OA"), and OA's ultimate holding company, Octaviar Ltd (Receivers and Managers Appointed) (In Liquidation) ("OL"), had commenced separate proceedings against the applicant, Fortress Credit Corporation (Australia) II Pty Ltd ("Fortress"), in the Supreme Court of Queensland. In OA's proceedings, it alleged, inter alia, that certain transactions entered into by Fortress were uncommercial and insolvent transactions and were thus voidable. In OL's proceedings, it alleged, inter alia, that certain transactions entered into by Fortress amounted to unfair preferences and uncommercial transactions and were thus voidable. It was common ground that OL had insufficient funds to pursue its proceedings in Queensland. However, OA held over $110,000,000 in cash. As such, the first respondents, the liquidators of OA and OL, sought to enter into a Funding Agreement that provided for OA to fund OL's proceedings against Fortress. The liquidators successfully brought an application to the Federal Court under s 477(2B) of the Corporations Act 2001 (Cth) for approval to enter into the Funding Agreement. However, the Full Court of the Federal Court granted Fortress leave to appeal, set aside the orders of the primary judge and remitted the matter to the primary judge. The liquidators subsequently brought an application in the Supreme Court of New South Wales. The primary judge concluded that Fortress had no relevant right or expectation entitling it to be heard on the application and approved entry into the Funding Agreement under s 477(2)(m) of the Corporations Act. The two issues on appeal were first, whether Fortress had standing to seek leave to appeal from the decision of the primary judge to approve entry into the Funding Agreement and second, whether the primary judge erred in concluding that the liquidators' entry into the Funding Agreement was necessary for the winding-up of OA's affairs and the distribution of its property under s 477(2)(m) of the Corporations Act. The Court held (Bathurst CJ, Beazley P, Macfarlan JA and Meagher JA agreeing, Barrett JA writing separately), granting leave to appeal, allowing the appeal and remitting the matter to the primary judge for further consideration: Issue 1: Leave to appeal (i) A non-party to proceedings may be granted leave to appeal from a judgment of the Court if they are aggrieved or sufficiently interested in the proceedings: [77]-[79], [94] (Bathurst CJ); [143] (Beazley P); [144] (Macfarlan JA); [145] (Meagher JA); [146], [149] (Barrett JA). Witness v Marsden [2000] NSWCA 52; 49 NSWLR 429; Commonwealth of Australia v Construction, Forestry, Mining and Engineering Union [2000] FCA 453; 98 FCR 31; Australian Industry Group v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union [2002] FCAFC 386; 125 FCR 529 applied. (ii) Fortress was a person aggrieved or sufficiently interested in the proceedings as it had an interest in any debt due by OA to OL by reason of its fixed charge over OL's assets and the Funding Agreement had the potential to diminish the value of OL's debt to Fortress: [96] (Bathurst CJ); [143] (Beazley P); [144] (Macfarlan JA); [145] (Meagher JA); [149]-[150] (Barrett JA). Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; 281 ALR 38 applied. Deloughery v Weston [2010] NSWCA 148; 79 ACSR 180 distinguished. Issue 2: The decision to approve entry into the Funding Agreement (i) The word 'necessary' in s 477(2)(m) of the Corporations Act should be given a broad meaning and empowers liquidators to do anything expedient, with reference to, or conducive to, the beneficial completion of the winding-up of the affairs of the corporation and the distribution of its assets: [124] (Bathurst CJ); [143] (Beazley P); [144] (Macfarlan JA); [145] (Meagher JA); [146] (Barrett JA). Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; 266 ALR 642 applied. (ii) Litigation funding that is purely for the sake of a commercial return is not 'necessary' for the winding-up of the affairs of a company and thus does not fall within the power granted by s 477(2)(m) of the Corporations Act: [126] (Bathurst CJ); [143] (Beazley P); [144] (Macfarlan JA); [145] (Meagher JA); [146] (Barrett JA). Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; 266 ALR 642; Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; 281 ALR 38 applied. (iii) It is not generally the function of the Court, in granting approval under s 477(2B) of the Corporations Act, to review a liquidator's commercial judgment or to second guess its decision. The Court will generally not interfere unless there seems 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. However, the Court does not act as a mere rubber stamp, and will only confer the power when it is satisfied that a case for its exercise, in the circumstances, has been shown: [125] (Bathurst CJ); [143] (Beazley P); [144] (Macfarlan JA); [145] (Meagher JA); [146] (Barrett JA). Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; Re HIH Insurance Ltd [2004] NSWSC 5; Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; 266 ALR 642 applied. (iv) The primary judge was bound to undertake an analysis of the extent to which OA and OL could both succeed in their respective claims against Fortress and the potential practical benefit to OA in entering into the Funding Agreement. As the primary judge failed to do this, his discretion miscarried and the matter was remitted to the primary judge for further consideration: [128]-[141] (Bathurst CJ); [143] (Beazley P); [144] (Macfarlan JA); [145] (Meagher JA); [146], [152] (Barrett JA).

Judgment

BATHURST CJ: The applicant, Fortress Credit Corporation (Australia) II Pty Ltd ("Fortress"), seeks leave to appeal from orders made by the primary judge on 30 March 2012, granting leave to the first respondents ("the liquidators"), the liquidators of the second respondent, Octaviar Administration Pty Limited (In Liquidation) ("OA"), to enter into an agreement in the terms of a document entitled "Fortress Funding Deed" ("the Funding Agreement").
The Funding Agreement was not before this Court. However, the primary judge pointed out that the agreement provided for OA to provide funding to its ultimate holding company, Octaviar Ltd (Receivers and Managers Appointed) (In Liquidation) ("OL"), to enable OL to pursue proceedings which it had instituted against Fortress and a number of other parties in the Supreme Court of Queensland (the "OL proceedings"). Fortress was not a party to the proceedings before the primary judge.

Factual background

OL was the ultimate holding company of a complex group of companies known as the Octaviar Group. OA performed treasury functions in that group.
On 31 May 2007, Fortress entered into a loan facility agreement with a subsidiary of OL, Young Village Estates Pty Ltd ("Young Village"), in Young Village's personal capacity and in its capacity as trustee of the Young Village Estates Trust (the "Young Village facility"). Pursuant to the facility, Fortress advanced $53,500,000 to Young Village. OL guaranteed the obligations of Young Village under the facility.
On 1 June 2007, Fortress entered into another loan facility agreement with a company then known as MFS Investment Holdings No 17 Pty Ltd, which subsequently changed its name to Octaviar Castle Pty Ltd ("Castle") (the "Castle facility"). Pursuant to the Castle facility, Fortress advanced a sum of $250,000,000 to Castle, repayable three months from the date of the agreement.
OL guaranteed the obligations of Castle under the Castle facility. The facility was secured by a fixed and floating charge over the whole of OL's assets in favour of Fortress (the "Fortress charge").
On 17 August 2007, a deed amending the Castle facility extended the time of repayment to six months from the date of the agreement.
On 30 November 2007, the Castle facility was further amended. By the deed of amendment executed on that day, Castle agreed to repay $100,000,000 of the amount advanced under the facility on 30 November 2007 and the balance on 29 February 2008.
Part of OL's business was a travel and tourism related business, carried on through a group of companies (the "Stella Group"). The holding company of that group was MFS Stella Holdings Pty Ltd ("Stella Holdings"), itself a subsidiary of OL. In proceedings brought by OA against Fortress and certain other defendants, it is alleged that as a result of a restructure in 2007, a new company, Stella Group Holdings Pty Ltd ("SGH"), became the ultimate holding company of the Stella Group. It was alleged by OA that, as a result of that restructure, OA was the only company in the Octaviar Group which had any, or any substantial, loans to companies in the Stella Group.
On 18 January 2008, OL announced to the market its intention to separate the Stella Group business from the other businesses conducted by the Octaviar Group and to raise $550,000,000 in equity. Following the announcement, the market price of shares in OL fell from $3.18 to 99c.
The fall in the share price constituted an "Event of Default" under the Castle facility.
On 22 January 2008, OL, Castle and Fortress entered into what was described as a letter agreement, although it was executed as a deed (the "Fortress charge extension"). That agreement contained an acknowledgement by OL and Castle that OL's guarantee of the Young Village facility constituted a transaction document under the Castle facility. If it was such a transaction document, the effect would be that the advance by Fortress to Young Village in the Young Village facility would be secured under the Fortress charge. The High Court held that the addition of the Young Village facility as a transaction document and its consequent effect did not amount to a variation in the terms of the Fortress charge for the purpose of s 268(2) of the Corporations Act 2001 (Cth) (the "Act") at the time. [1] Thus, subject to the matters pleaded in the OL proceedings, the Fortress charge extension was effective to secure the obligation of OL as guarantor of the Young Village facility.
On 3 February 2008, an agreement was entered into by SGH to sell its shares in a company, Stella Holdings No 1 Pty Ltd, for consideration of $400,000,000 (the "Stella Sale Agreement"). Under the agreement, SGH was required to procure that any inter-company loans from any member of the Octaviar Group to any company in the Stella Group would be extinguished. The effect of the transaction was to dispose of 65% of the Stella Group.
On 18 February 2008, an agreement described as a Funding Participation Agreement (the "Participation Agreement") was entered into between Fortress and Castle. The agreement obliged Castle to pay Fortress an amount of $15,000,000. Without dealing with the terms of the agreement in unnecessary detail, Fortress, in consideration of this payment, agreed to repay Castle $15,000,000 after the money advanced under the Young Village facility had been paid in full. The amount of $15,000,000 was to be deducted from the $50,000,000 said to be advanced to Castle pursuant to the third deed of amendment of the Castle facility, to which I refer in par [15] below.
On the same day, 18 February 2008, the Castle facility was amended by a third deed of amendment. The facility limit was increased from $150,000,000 to $200,000,000 and repayment was required to be made by the earlier of the 31 March 2008, the date of completion of the sale of the Stella business, or the termination of the Stella Sale Agreement.
On 29 February 2008, a deed (the "Stella Proceeds Deed") was executed. It recited that a company, MFS Leisure Resorts Holdings Pty Limited ("LRH"), owed $818,620,211.13 to OL, $517,604,366.50 to OA and $43,309,973 to another subsidiary of SGH, Sunleisure Group Limited.
The Stella Proceeds Deed also recited that another company in the group, Stella Travel Services Pty Limited, was indebted to OA in the sum of $18,684,052.45. The deed provided for the purchase price from the sale of the Stella business to be applied, in part, in payment of the amount owing under the Castle facility. Pursuant to that agreement, $189,897,919 was paid by the purchaser directly to Fortress. This amount was sufficient to discharge the Castle facility. The $15,000,000 payable under the Participation Agreement formed part of this amount.
On 13 September 2008, OL was placed into voluntary administration and on 15 September 2008, Fortress appointed receivers and managers to OL.
On 3 October 2008, OA was placed into voluntary administration.
The balance of the proceeds of sale of the Stella business was held by OA. On 23 December 2008 and 4 February 2009, the administrators of OA transferred amounts of $19,746,713.63 and $304,331.05, respectively, to the receivers and managers of OL, on the basis that the money was held by OA on trust for OL. The receivers of OL paid these amounts to Fortress, who placed them into an account with the National Australia Bank (the "escrow account"), where they remain. Fortress was said to be entitled to those funds on the basis that the Fortress charge extension effectively secured OL's guarantee of the Young Village facility.
On 31 July 2009, the deeds of company arrangements which had been entered into by OL and OA were set aside. On that day, OL and OA were placed into provisional liquidation. On 9 September 2009, the liquidators were appointed liquidators of OL and OA.
On 14 February 2011, pursuant to a request from the liquidators, OL lodged a proof of debt in the liquidation of OA, claiming an amount of $514,685,948.12 (the "OL proof of debt"). At the time of the proceedings before the primary judge, the liquidators had neither accepted nor rejected the OL proof of debt.
However, on 11 April 2014, the OL proof of debt was wholly rejected by the liquidators. The basis for the rejection was that OA had offsetting claims against OL, totalling $830,096,384. Of this amount, $604,372,925 was said to represent liability arising from OA's role in the sale of the Stella Group. On 30 September 2014, OL, by its receivers, commenced proceedings in the court below, challenging that rejection.
Each of OA and OL has commenced separate proceedings in the Supreme Court of Queensland arising out of the transactions to which I have referred above. I will now briefly outline these proceedings.

The OL proceedings

OL, in its proceedings, has challenged both the payment of $15,000,000 to Fortress under the Participation Agreement and the December 2008 and February 2009 payments of approximately $20,000,000 now held in the escrow account.
By an amended statement of claim, OL pleaded that it did not give security for its guarantee of the Young Village facility until the execution of the Fortress charge extension. It is pleaded that, but for the Fortress charge extension, the monies in the escrow account would not have been transferred to Fortress.
The amended statement of claim pleaded that the Fortress charge extension was a "transaction" within the meaning of s 588FA(1) of the Act and that the December 2008 and February 2009 payments were made for the purpose of giving effect to the transaction. It pleaded that the Fortress charge extension, together with the payments, was an unfair preference and an uncommercial transaction and that OL was insolvent at the time that the Fortress charge extension was entered into and at the time the payments were made. As a consequence, it pleaded that the transaction was voidable under s 588FE of the Act.
The amended statement of claim also pleaded that the payment of the $15,000,000 pursuant to the Participation Agreement (which formed part of the $189,897,919.43 paid to Fortress on 29 February 2008) had the effect of reducing the exposure of Fortress under the Young Village facility by $15,000,000. It pleaded that the third deed of amendment, the Participation Agreement and the payment of $15,000,000 were together a "transaction" for the purpose of s 588FA(1) of the Act. It pleaded that if the Fortress charge extension was void, then the transaction constituted an unfair preference and an insolvent transaction. As a consequence, it pleaded that the transaction was voidable under s 588FE of the Act.

The OA proceedings

At the time of the proceedings before the primary judge, OA had not commenced its proceedings against Fortress in Queensland (the "OA proceedings"). However, it is common ground that a draft statement of claim was supplied to the primary judge in the course of the application before him. Although that draft was not before this Court, this Court was supplied with a copy of the statement of claim as originally filed. It was not suggested there was any difference between the draft before the primary judge and that statement of claim.
The present version of the statement of claim (the second further amended statement of claim) has been significantly amended. It is convenient to deal first with the claim as presented to the primary judge and then to consider the effect of certain amendments.
The statement of claim named as defendants Fortress, a related company, Fortress Investment Group (Australia) Pty Ltd ("Fortress Investment") and two former directors of the company (the "directors").
The statement of claim referred to the entry into the Castle facility and the restructure of the Stella Group, to which I have referred above. It pleaded that following the restructure, OA was the only company in the Octaviar Group that had loans to companies in the Stella Group.
In that context, the statement of claim pleaded that the recitals to the Stella Proceeds Deed, in particular, the recital that LRH owed $818,620,211.13 to OL, were incorrect.
The statement of claim pleaded that after execution of the Stella Proceeds Deed, a deed of release was entered into under which OA released LRH, SGH and another company in the Stella Group, Stella MLR Group Pty Ltd, from their obligations under loan agreements which OA had entered into as part of the restructure (the "Deed of Release").
The statement of claim pleaded that the $189,897,919 paid to Fortress on 29 February 2008 and the payment of the monies deposited in the escrow account were part of the proceeds of the Stella sale.
It was then pleaded that entry into the Stella Proceeds Deed, the execution of the Deed of Release referred to in par [34] above and the allocation of the Stella proceeds, including the payment to Fortress, constituted an uncommercial transaction within the meaning of s 588FB of the Act. These transactions were said to be both insolvent transactions and uncommercial transactions and as a consequence, voidable under s 588FE(3) and s 588FE(4) of the Act.
In addition, the statement of claim pleaded that in causing the entry into the agreement and the making of the payments referred to in par [35] above, the directors breached their statutory and fiduciary duties to OA. It pleaded that Fortress and/or Fortress Investment were involved in the contravention of the statutory duties and knowingly participated in the directors' breaches of fiduciary duty and/or were party to a dishonest and fraudulent design and liable to account to OA under the second limb of Barnes v Addy. OA pleaded that it was entitled to recover from Fortress and/or Fortress Investments the money received by Fortress from the Stella sale, either pursuant to s 1317H of the Act or by way of equitable compensation.
Finally, the statement of claim pleaded that the monies paid into the escrow account were paid under a mistaken belief that OA held the money on trust for OL and Fortress was entitled to the money as a secured creditor of OL. It was pleaded that Fortress was liable to make restitution of that money as money had and received.
The second further amended statement of claim added a number of parties and made some significant amendments to what appeared in the original version. It is only necessary to refer to those amendments which are said to have significance to the outcome of these proceedings.
It is still pleaded in the second further amended statement of claim that after the Stella restructure, OA was the only company in the Octaviar Group which had any, or any substantial, outstanding loans to companies in the Stella Group and that following the restructure, no company within the Stella Group had any substantial indebtedness to OL. However, it is now pleaded in the alternative, that OA had very substantial loans to companies in the Stella Group.
Correspondingly, it is pleaded, in respect of the uncommercial transaction claim, that the Stella proceeds should have flowed to OA in return for its release of liabilities that were owing from the Stella Group to OA, "in such amounts as the Court may determine".
The claims for breach of directors' duties and knowing involvement against Fortress and/or Fortress Investment were also amended to allege, as an alternative, that the directors knew or ought to have known that OA had substantial loans to the Stella Group and failed to take steps to determine what would be an equitable share of the proceeds of the Stella sale to be paid to OA. The statement of claim was also amended to make corresponding claims for compensation in an amount "representing the proper allocation of the Stella Proceeds".

The funding arrangements

It is common ground that the liquidators of OL have insufficient funds to pursue the OL proceedings. However, OA holds in excess of $110,000,000 cash. In these circumstances, it was proposed that OA and OL enter into a funding agreement, whereby OA would fund the litigation brought by the liquidators of OL against Fortress in the Supreme Court of Queensland. The Funding Agreement, at least as originally entered into, provided for OA to pay all reasonable legal costs incurred in prosecuting OL's claim against Fortress, provide security for any costs ordered by the Court and indemnify OL and its liquidators against any adverse costs orders. In consideration for providing funding, OA was entitled to a share of any amount received from the successful prosecution of the litigation. Further, if the amounts paid to OA were insufficient to reimburse it, OA's liquidators could apply any dividend OL would have received in the liquidation of OA towards reimbursing OA for the funds provided by OA under the Funding Agreement. [2]
The liquidators made an application to the Federal Court of Australia under s 477(2B) of the Act for approval to enter into the Funding Agreement, claiming that they should be empowered to do so as it was necessary for the winding-up of the affairs of the company pursuant to s 477(2)(m) of the Act. Fortress was not a party to the proceedings at first instance.
The primary judge in the Federal Court made the orders sought. [3] Fortress, becoming aware of the orders, sought leave to appeal. In the Full Court decision, the Full Court granted Fortress leave, set aside the orders made by the primary judge and remitted the matter to the primary judge.
There are a number of aspects of the Full Court decision which are of relevance to the present proceedings. First, the Court stated that a person who, although not a party, is aggrieved by an order, or prejudicially affected by it, can appeal from the order, but only with leave. [4] In making that statement, the Court was dealing with the appeal provisions in s 24 of the Federal Court Act 1976 (Cth).
The Full Court, in holding that Fortress was a person aggrieved by the orders of the primary judge of the Federal Court, made the following comments: "[34] Fortress's claim that it was aggrieved or sufficiently interested, for the purposes of the grant of leave, is that Fortress is a creditor of the claimant, for approximately $71 million. The funder is not a creditor of the claimant. A major asset of the claimant is the debt that the funder owes to the claimant. The charge, if it is effective, covers that debt. By approving the funding agreement, and thereby permitting the funder to fund the proposed claims against Fortress, the assets that would otherwise be available for distribution in the liquidation of the funder would be reduced. That reduction would include a reduction in the value of the debt owing to the claimant by the Funder, being an asset over which the charge subsists. Thus, Fortress contends, the approval of the funding agreement has the result that the value of Fortress's security would or could be diminished."
In considering whether leave should be granted, the Full Court stated that the fact that Fortress did not fall within the class of persons entitled to apply to the Court under s 477(6) of the Act in respect of the exercise by a liquidator of its powers, was not conclusive. Rather, the Court stated that it should be satisfied, as a matter of law, that the agreement was within the liquidators' powers. [5] It also stated that it was not conclusive that Fortress was not a person entitled under s 1321 of the Act to appeal against the decision of OA to enter into the agreement. [6] The Court also rejected the argument that Fortress required leave under s 471B of the Act to bring the proceedings. [7]
In considering the substantive issue, the Court made the following remarks: "[44] Section 477(2)(m) would not support the provision of litigation funding by a liquidator to an entirely unrelated litigant, simply on the prospect of obtaining the return that might be generated by the arrangements. Such arrangements would not, without something more, be necessary for the winding up of the affairs of the company and distributing its property. There would need to be something over and above the possibility of a commercial return from arrangements such as are proposed. For example, where the funding company is a creditor of the accommodated company, the possibility of augmenting the distribution from the accommodated company to the funder might well make it expedient for the liquidator of the funding company to enter into a funding arrangement. Further, if the funding company were also a prospective claimant, such that claims by the funding company and the accommodated company would be heard together, it might be expedient, for the purposes of winding up the affairs of the funding company and distributing its property, for funding to be made available to the other company: see Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) (2010) 266 ALR 642; 78 ACSR 405; [2010] NSWSC 404 at Appendix 1, [18]-[21]."
The Court concluded that the primary judge did not make a finding that there was a benefit to the creditors of OA from entering into the Funding Agreement. [8] As a consequence, the matter was remitted to the primary judge for further consideration.

The proceedings at first instance

The liquidators unsuccessfully sought special leave to appeal to the High Court from the Full Court decision. [9] On 9 March 2012, the Federal Court granted leave to the liquidators to discontinue the proceedings for approval. The liquidators subsequently brought an application in the Court below.
The primary judge, relying on the decision of this Court in Deloughery v Weston, [10] concluded that Fortress had no relevant right or expectation entitling it to be heard on the application.
The primary judge briefly summarised the respective claims of OA and OL in their proceedings. He noted that it would not be possible for OA and OL to succeed in full. As an example, he noted that the repayment of the $15,000,000 participation fee, claimed in the OL proceedings, formed part of the $189,897,919 claimed by OA in the OA proceedings.
The primary judge noted that at the time of the application before him, OA had formed the view that it was a creditor of OL and would seek to prove its claims against OL in OL's liquidation as an unsecured creditor. The draft proof of debt by OA to be lodged in OL's liquidation, which was before his Honour, was not before this Court. However, it was accepted that the setoff asserted in OA's rejection of the OL proof of debt was a proper reflection of the material which the primary judge had before him on this issue.
The primary judge stated that circumstances had changed since the Full Court decision. First, OA would now bring proceedings in its own right against Fortress, in which there was a substantial factual and legal overlap with the OL proceedings. Second, OA now claimed to be a substantial creditor of OL. The primary judge concluded that, in light of these factors, the Funding Agreement provided OA with actual practical and commercial advantages beyond the potential upside of a beneficial commercial return. In these circumstances, he also concluded, that the entry into the Funding Agreement may properly be thought to have been expedient, with reference to the assets of OA and thus, was within the liquidator's power.

A The parties' submissions

Fortress submitted that it was entitled to seek leave to appeal as it was a person aggrieved or sufficiently interested in the orders made by the primary judge, in the sense explained in cases such as Witness v Marsden. [11] It stated that the debt due to it from OL was approximately $71,000,000, which, if unsecured, would represent approximately 3.27% of the total claims asserted in the winding-up of OL.
Fortress pointed to the receivable which was the subject of the proof of debt lodged by OL in the liquidation of OA, which it said was subject to its charge over the assets of OL. Thus, Fortress submitted that it was a substantial secured creditor of a substantial unsecured creditor of OA.
Fortress submitted that by approving the Funding Agreement, the Court endorsed a reduction of assets which would otherwise be available for distribution by the liquidators of OA to creditors of OL, including a reduction in the return of OL's claims against OA. It pointed to the fact that the Full Court of the Federal Court concluded that Fortress was aggrieved or sufficiently interested in the proceedings to justify it seeking leave to appeal.
Fortress also submitted that it was aggrieved or sufficiently interested as it was the target of the Funding Agreement.
Fortress submitted that the fact that the liquidators of OA rejected the proof of debt lodged by OL was immaterial to the question of whether it was aggrieved or sufficiently interested. It submitted that the Full Court decision that it was aggrieved or sufficiently interested was made on the basis that OL claimed to be a creditor of OA.
Fortress submitted that its claim to be a person aggrieved was not precluded by the decision of this Court in Deloughery. It submitted that the issue in that case was whether individual members of a committee of inspection were necessary parties to proceedings at first instance. It submitted that leave was not sought in that case on the basis that the members were aggrieved by the decision to approve the liquidator's entry into a funding agreement. It submitted that in Deloughery, the Court held that the application to access the funding agreement was misconceived because the basis for it was that the orders of the primary judge were vitiated as the applicants had been denied the right to be heard at first instance.
Fortress also submitted that there was no analogy between s 477(2B) of the Act and s 63 of the Trustee Act 1925 (NSW). It submitted that s 477(2B), unlike s 63, was not a facility for giving private advice, nor did it provide the liquidators with personal protection.
Fortress also submitted that leave should not be refused on the basis that confidentiality considerations prevented the liquidators from fully exploring the benefits of the Funding Agreement. It submitted that the Court should proceed on the presumption that funding was on a commercial basis.
Relying on the Full Court decision, Fortress contended that leave was not required pursuant to s 471B of the Act to commence the proceedings. [12]
Fortress also submitted that whether or not it had rights under s 1321 of the Act to commence proceedings was irrelevant to the question of whether it should be granted leave. It also submitted that any delay in bringing the application was only due to the fact that the orders made by the primary judge were kept confidential from it.
The liquidators submitted that Fortress should not be granted leave as it did not have any legitimate interest in the conduct of OA's liquidation. They submitted that OL was not a creditor of OA, its proof of debt having been rejected. They submitted that the decision to reject OL's proof of debt was a quasi-judicial one and, unless and until set aside, was determinative of OL's rights. They submitted that this was the critical distinction between the present circumstances and the circumstances as they existed at the time of the Full Court decision. They submitted that the fact that Fortress was a target of the litigation did not give it a right or interest in OA's liquidation or the actions of its liquidators in regard to its funds.
The liquidators submitted that an application under s 477(2B) of the Act is analogous to a trustee seeking judicial advice and, by its very nature, is private. They submitted that the submission by Fortress to the contrary was inconsistent with the judgment of Barrett J (as his Honour then was) in Weston v Publishing & Broadcasting Ltd. [13]
The liquidators also submitted that Fortress was incorrect to state that an application under s 477(2B) was not in the nature of private advice and did not give the liquidators personal protection. They submitted that in such an application, the Court's role is not to evaluate the liquidator's commercial decisions, but rather to ensure that the liquidator's powers are not exercised based on an error of law or in bad faith. They also submitted that Fortress's submission ignored the fact that the liquidators also sought, and were granted, a direction under s 479(3) of the Act.
The liquidators submitted that the decision of this Court in Deloughery established that Fortress had no right to be heard in the Court below. They submitted that it followed that Fortress could not have a better right, interest or expectation on appeal. At the hearing, senior counsel for the liquidators submitted that Fortress was neither a necessary nor a proper party to the proceedings below.
The liquidators submitted that the cases relied on by Fortress, particularly Marsden, Commonwealth of Australia v Construction, Forestry, Mining and Engineering Union, [14] and Australian Industry Group v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union, [15] were cases where the party concerned had a direct interest in the outcome. For example, in the latter case, an application for leave to intervene in the proceedings could have been brought by the appellant under the Workplace Relations Act 1996 (Cth).
The liquidators also submitted that the recent decision of the Federal Court in Letten v Templeton, [16] where leave was granted to a person who was the target of proposed litigation to appeal against judicial advice granted to receivers, could be distinguished, as the applicant had appeared at first instance and the application did not relate to the approval of a litigation funding agreement. Senior counsel for the liquidators repeated the submission that the fact that a person is a target of litigation does not, of itself, make the target a person adversely affected. He submitted that it was not enough to show that a person was adversely affected by an order, rather, it was necessary to take into account the sufficiency of their interest and any relevant policy considerations.
The liquidators further submitted that leave should be refused as, if it were granted, Fortress would need to explain the benefit of the Funding Agreement and divulge information which had been ordered to be kept confidential. They emphasised that it was Fortress, in particular, who they were concerned to keep from having knowledge of the material. Senior counsel for the liquidators emphasised, in this context, the difficulty of conducting a rehearing envisaged by s 75A of the Supreme Court Act 1970 (NSW) where all the materials were not available to the Court.
The liquidators also submitted that leave to bring the proceedings was required by s 471B of the Act. They submitted that leave should not be given, first, because the putative appeal is futile, second, because Fortress has "no legitimate interest in the funds of OA" and has another avenue available to it, namely, challenging the entry by the liquidators of OL into the Funding Agreement under s 1321 of the Act. In that context, senior counsel for the liquidators pointed to what was said by Brereton J in Re St Gregory's Armenian School (in Liq), [17] that a liquidator cannot be sued without leave of the Court. However, senior counsel also accepted that there was no statutory basis for that principle.
Further, the liquidators submitted that Fortress did not fall within the categories of persons in s 477(6) of the Act entitled to challenge the order. In that context, they referred to their submission that Fortress had rights under s 1321 of the Act. They contended that the propriety of OL's liquidators entering into the Funding Agreement could be determined at first instance, without the need to involve the resources of an appellate court.

Consideration

Section 101 of the Supreme Court Act confers a right of appeal to the Court of Appeal from any judgment or order of the Court in a Division. However, it is well established that a non-party requires leave.
In Cuthbertson v The Mayor, Aldermen and Citizens of the City of Hobart, [18] Knox CJ and Starke J, dealing with an appeal to the High Court, referred to the position in England that a person who was not a party to proceedings could not appeal from an order or judgment except by leave of the court. Adopting the English position, they stated that "Leave to appeal is given as a rule if the person applying though not a party to the proceedings might properly have been one." [19]
In Marsden, a witness sought leave to appeal from an order refusing an application that compliance with a subpoena be subject to a pseudonym order. Heydon JA (as his Honour then was), whose reasons Mason P agreed with, pointed out that s 101 of the Supreme Court Act did not expressly limit who may appeal or obtain leave to appeal. In that context, his Honour made the following remarks: "[81] The plaintiff referred to Cuthbertson v Mayor, Aldermen and Citizens of the City of Hobart (1921) 30 CLR 16 at 25 where Knox CJ and Starke J said: 'Under the practice which exists in England 'parties to' an action and all persons served with matters of judgment may appeal without leave. But a person not a party to the proceedings cannot appeal from an order or judgment except by leave of the Court ... Leave to appeal is given as a rule if the person applying though not a party to the proceedings might properly have been one. 'The test is, could or could not the applicant possibly be made a party to the action by service'. … The appellate jurisdiction of the High Court is not identical with that of the Court of Appeal in England, but we see no reason to doubt the jurisdiction of this Court to act in accordance with that practice, or the expediency of doing so, in relation to appeals from the Supreme Courts of the States.' Their Honours do not appear to have been propounding an exhaustive test for leave to appeal. The test propounded, in any event, must give way to the structure of legislation and rules within which the Court in question works: rights of appeal depend on statute, not common law. The Supreme Court of New South Wales is in part controlled by Pt 37, r 8, as expounded by authority since the time of Cuthbertson's case. Section 101 of the Supreme Court Act and equivalent provisions in other jurisdictions are construed in the light of more generous standing tests such as whether persons are 'aggrieved' or 'sufficiently interested'.
The approach of Heydon JA was followed by the Full Court of the Federal Court in CFMEU, [20] where the Commonwealth, a non-party to the proceedings, was granted leave to appeal against the decision of a judge who had refused to apply public interest immunity to a letter discovered during the course of the proceedings.
Marsden was followed by a majority of the Full Court of the Federal Court in Australian Industry Group, where the applicant sought to appeal a decision refusing an injunction restraining what was said to be illegal industrial action. The original applicant for the injunction who decided not to appeal was a member of the appellant's organisation. [21]
These cases were followed in the Full Court decision. [22] I have set out the reason that the Full Court held that Fortress was aggrieved in par [47] above.
The Full Court decision concerned the same provisions in the Act as are in question here. Further, there is no relevant difference in the appeal provisions in s 24 of the Federal Court Act and s 101 of the Supreme Court Act. In those circumstances, the decision should be followed unless circumstances have changed such that Fortress is no longer an aggrieved party or the decision is plainly wrong. [23]
The Full Court decision was followed by the Full Court of the Federal Court in Letten. [24] That case involved an application for leave to appeal against a direction given to court-appointed receivers that they would be justified in deploying funds in a common fund to pursue civil proceedings against the applicant. It was held that the applicant was a person aggrieved. However, leave to appeal was refused on the ground that the primary judge's decision was not attended with sufficient doubt to warrant the grant of leave.
The liquidators submitted that the position had changed since the Full Court decision because OL's proof of debt had been rejected. They submitted that in those circumstances, there were no monies owed by OL to OA and that that would remain the position unless the decision of OA's liquidators was set aside.
I do not think that the rejection of the OL proof of debt is sufficient to deny Fortress standing to appeal. It is correct that a liquidator, in considering whether to accept a proof of debt, is acting in a quasi-judicial capacity. [25] Further, there is no right to lodge a similar proof following a rejection. [26] However, the fact remains that there is a mechanism for appeal by way of a hearing de novo in which the liquidator is cast in the role of an adversary. [27] In that context, it is relevant to note that reg 5.6.54(1)(b)(ii) of the Corporations Regulations 2001 (Cth) provides that unless a creditor appeals in accordance with the regulations, the amount of a claim will be assessed in accordance with the liquidator's endorsement on the creditor's proof.
I do not think that the position is affected by the fact that the rejection is based on an offsetting claim. The setoff provisions in s 553C of the Act are self-executing, in the sense that they produce a balance which is all that can be claimed in bankruptcy. [28] However, the balance remains to be worked out in litigation between the parties. The position was explained by Lord Hoffmann in Stein v Blake [29] in the following terms: "The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continued to exist. So, for example, the liquidator or trustee will commence an action in which he pleads a claim for money due under a contract and the defendant will counterclaim for damages under the same or a different contract. This may suggest that the respective claims actually do continue to exist until the court has decided the amounts to which each party is entitled and ascertained the balance due one way or the other in accordance with section 323. But the litigation is merely part of the process of retrospective calculation, from which it will appear that from the date of bankruptcy, the only chose in action which continued to exist as an assignable item of property was the claim to a net balance." [30]
In these circumstances, it seems to me that the position has not changed in a material respect since the Full Court decision.
It remains to consider whether the Full Court decision was plainly wrong, as was, at least implicitly, submitted by the liquidators.
It was submitted by the liquidators that the decision in Deloughery compelled the conclusion that Fortress had no standing to seek leave. The central issue in Deloughery was described by Giles JA and Handley AJA in the following terms, by reference to the judgment of the primary judge, Barrett J: "[33] The central issue at the hearing concerned para [15] of his Honour's reasons: '[15]… members of the committee of inspection and individual creditors [do] not occupy any position attracting the protection of the principles of procedural fairness associated with Cameron v Cole [1944] HCA 5 ; 68 CLR 571 and BP Australia Ltd v Browne [2003] NSWCA 216 ; 58 NSWLR 322. They were not, in the context of the liquidator's application for section 477(2B) approval and related guidance, persons against whom 'a claim or charge is made' (to use the language of Rich J in the former case) or 'likely to be adversely affected by the order of the Court' (in the words of Spigelman CJ in the latter case) so as to attract a right to be heard.'
It can thus be seen that the basis of the complaint was that the committee of inspection was denied the right to be heard by the primary judge.
In that context, the Court in Deloughery stated that the individual applicants were, presumably, representatives of major creditors, but were not creditors themselves. The Court described their status as members of the public lacking any right, interest or expectation. [31]
One creditor was a party to the application. In relation to that creditor, the Court made the following remarks: "[55] Barrett J's finding recorded in para [33] above that the COI and individual creditors were not likely to be affected by the orders covered the remaining matters relied on by Mr Newlinds. After this Court reserved judgment on 11 June the envelopes sealed under the orders of Barrett J were opened by the Judges in private and they read the confidential documents. [56] The SPL has not made or foreshadowed claims against the Optus subsidiaries. They are subject to the SPL's conduct of his allotted functions. The substantive orders made by Barrett J are protective of the SPL, and could affect the Optus subsidiaries (and all other creditors) to that extent, but that does not give them a right to be heard. Whether the orders affect the 'free cash' or the continuation of the SPL in office, and if so whether these matters required the Optus subsidiaries to be heard, involve findings of fact based on the terms of the Agreement. [57] Barrett J found that the Optus subsidiaries were not likely to be adversely affected by the substantive orders. He was aware of the existence of the 'free cash' and the removal proceedings. He must have been satisfied that entry into the Agreement would not generate claims on the 'free cash', or affect the outcome in the removal proceedings. These are factual assessments. [58] Having read the confidential documents, we are satisfied that Barrett J's finding was correct, and that he was entitled to determine the application by the SPL without hearing SingTel Optus or the Optus subsidiaries."
Thus, the effect of the decision in Deloughery was that, in the circumstances of that particular case, the applicants were not persons aggrieved. The decision does not affect the status of persons who are in fact aggrieved.
The liquidators placed reliance on what was said by Barrett J in Weston at [21] in submitting that the proceedings were analogous to that of a trustee seeking judicial advice. In that case, the remarks were made by his Honour in the context of an application to release a funding agreement from confidentiality orders, where the content of the agreement was said to be subject to legal professional privilege. The privilege was said to have been waived by its deployment in an ex parte application by the liquidators for approval to enter into the agreement. His Honour, in declining to hold that privilege had been waived, drew the analogy between s 477(2B) of the Act and an application by a trustee for judicial advice.
What his Honour said, with respect, may be accepted. However, in this case, leave is sought to appeal from a particular order. It seems to me that regardless of the manner in which the proceedings leading to the order are categorised, the question remains as to whether Fortress was aggrieved by the order.
The submission made by the liquidators that leave under s 471B of the Act was required is contrary to the conclusion reached in the Full Court decision. [32] The conclusion of the Full Court was not inconsistent with the principle that leave of the Court is required to sue a court-appointed liquidator personally. The cases which establish that principle dealt with situations where it was alleged that a liquidator was personally liable and did not deal with a challenge to a court order obtained by a liquidator. [33]
In these circumstances, consistently with the Full Court decision, Fortress is a person aggrieved. In concluding that it is sufficient that Fortress, as the target of the Funding Agreement, is a person aggrieved, it is not necessary to go so far as the Full Court in Letten. In the present case, Fortress has an interest in any debt due by OA to OL by reason of its charge. Having regard to the default of OA under the Castle facility, the charge is now a fixed charge over that debt. [34] As the Full Court pointed out, the Funding Agreement has the potential to diminish the value of that debt.
In these circumstances, Fortress has standing to seek leave to appeal.

The substantive issue

The conclusion which I have reached that Fortress is entitled to seek leave to appeal does not resolve the question of whether leave should be granted. Having regard to the order for a concurrent hearing, it is now convenient to deal with the substantive issue.

The parties' submissions

Each party accepted that the relevant question was whether the primary judge erred in concluding that the entry into the Funding Agreement was "necessary for winding up the affairs of the company and distributing its property" under s 477(2)(m) of the Act.
Each party also accepted that the word "necessary" in s 477(2)(m) is not synonymous with 'essential' or 'indispensable' and is thus not confined to matters without which winding-up and distribution cannot occur. [35]
Fortress submitted that the decision to make an order under s 477(2B) must be made in light of the purposes for which the liquidators' powers exist, namely, in the case of a winding-up in insolvency, to serve the interests of creditors and to do whatever is necessary for a proper realisation of assets. Fortress submitted that for it to be necessary for the liquidators of OA to enter into the Funding Agreement, there must be a benefit to OA beyond the return of a premium above the sum outlaid to fund the litigation. [36] This is consistent with what was said by the Full Court in the passage of their judgment cited in par [49] above.
Fortress submitted that the fact that OA brought proceedings in its own right against it and claimed to be a substantial creditor of OL was insufficient to justify the Funding Agreement. It submitted that the primary judge erred in concluding that these factors provided OA with practical commercial advantages beyond the potential upside of a beneficial commercial return.
Fortress submitted that the claims of OA against Fortress were in competition with those of OL. It submitted that the claims gave rise to binary financial outcomes. It submitted that if OA were to succeed in its proceedings, OL would fail in its proceedings and vice versa.
Fortress submitted that it was clear from the notice of rejection of OL's proof of debt that OA would only become a creditor of OL if it succeeded in the OA proceedings. It submitted that in the circumstances, if OL succeeded in the OL proceedings, OA would not have any opportunity to share in any distribution from OL.
Fortress pointed out that there was no finding that OA's claims to be a creditor entitled to prove in the winding-up of OL were the subject of proof at the time of the hearing before the primary judge. It pointed out that there was a finding by the primary judge that the claims were not the subject of a proof of debt at that time. In particular, it pointed out that there was no finding that after the determination of OA's claims against OL and the application of any setoff under s 553C of the Act, OA would be a creditor entitled to receive dividends in the winding-up of OL.
Fortress contended that the primary judge erred in the exercise of his discretion by failing to take these matters into account. It submitted that the primary judge also erred by failing to take into account that the entry into the Funding Agreement would diminish the debt owed by OA to OL, over which Fortress had security.
Senior counsel for Fortress submitted that the central proposition on which the OA proceedings were based was that the $400,000,000 which came from the sale of Stella was required to be paid to OA, because OA was the only creditor of the Stella Group. He submitted that, in that context, the claims brought by OA and OL were in competition with each other and that only a binary financial outcome was possible.
Senior counsel for Fortress also submitted that it had to be recognised that the requirement in s 477(2)(m) had an objective content. He submitted that the formulation of its content was set out by Barrett J in Re McGrath. However, he submitted that nothing was said in that case which would support the powers of a liquidator extending to funding a suit in competition with the liquidated company's own claim.
Senior counsel for Fortress also submitted that the primary judge erred in the exercise of his discretion as he failed to undertake an analysis of the relationship between the claims made in the respective proceedings or evaluate whether there was a material benefit to OA in entering into the Funding Agreement. He submitted that if OL's claim was in total competition with OA's, the fact that OA claimed to be a substantial creditor of OL was irrelevant and the fact that there was a substantial factual overlay between the two claims did not justify entry into the Funding Agreement.
Senior counsel for Fortress, referring to the setoff claim in the rejection of OL's proof of debt, submitted that it would be necessary for OA to succeed in the Queensland proceedings for it to be a creditor of OL. He said that if it did not succeed, there would be no point in funding OL.
Senior counsel for Fortress, referring to the submission by the liquidators that a possible outcome of the OA proceedings was success against the directors but failure against Fortress, pointed out that the central case in the OA proceedings was based on a transaction in which OA was a party, alleged to be an uncommercial transaction under s 588FB of the Act. [37] He accepted that Fortress could have a defence under s 588FG(2) of the Act, but stated that if Fortress could not establish in the OL proceedings that it had reasonable grounds for suspecting that the holding company was insolvent, it would be difficult to establish reasonable grounds in respect of the subsidiary.
To the extent that reliance was placed on the amended statement of claim, as distinct from the draft before the primary judge, Fortress submitted that, first, the amended statement of claim was irrelevant as it was not before the primary judge and, second, it made no difference to the outcome.
In that context, Fortress pointed out that the primary case remained the same. It submitted that the alternative was based on the proposition that OA was a very substantial creditor of companies in the Stella Group. [38] It submitted that the reference to "such amounts as the Court may determine" in the amended claim must be read in that context, particularly in circumstances where OA did not plead, as part of its alternative case, that OL was also a substantial creditor of the Stella Group.
Fortress also pointed out that if OA recovered a lesser portion of the Stella proceeds from Fortress, it was difficult to see how it could be a net creditor of OL. It pointed out that the offsetting claim against OL in the rejection of OL's proof of debt was premised on OA being the only company in the Octaviar Group that was a net creditor of the companies in the Stella Group.
Fortress accepted that the challenge to the Fortress charge extension was not part of OA's proceedings, but submitted that success in that matter would not assist OA unless it was a net creditor. Further, it submitted that even if the charge was set aside in the OL proceedings, Fortress would remain an unsecured creditor in respect of the monies allegedly secured by the Fortress charge extension.
The liquidators submitted that the primary judge applied the correct principles in determining the issues before him.
The liquidators pointed out that the OA & OL proceedings in Queensland had been listed for hearing together and submitted that the primary judge did not err in taking that matter into account. They pointed out there may be strategic and tactical advantages in having the matters presented together, including in relation to settlement, referring to Re McGrath at Appendix 1 par (11). They also submitted there was a potential saving in cost to both administrations.
The liquidators submitted that it was incorrect to say that the claims were in competition with each other and the primary judge was justified in concluding that it would only not be possible for OA and OL to recover in full from Fortress. They referred to the possibility of Fortress successfully raising defences under s 588FG of the Act in the OA proceedings but failing in these defences in the OL proceedings. They also pointed out that the Fortress charge extension claim could succeed and OL could receive the payments made pursuant to that extension even if it was effectively OA's money that was used to make the payment.
In very helpful submissions, junior counsel for the liquidators, Ms Taylor, submitted that, as demonstrated in the pleadings, Fortress received a very large amount of information concerning OL's financial position, but not on OA's. She also pointed out that Fortress had served an insolvency report in the OL proceedings but not in the OA proceedings.
The liquidators submitted that it was possible that both parties would have some measure of success. They relied on what was described as "the fall back claim", namely, the claim which I have outlined in pars [40]-[42] above. They submitted that even if OL recovered in full, OA could succeed in an amount of $174,000,000, plus interest.
In her submissions, Ms Taylor adverted to the possibility that Fortress did not know the intra-company loan position and thus was not knowingly involved in the breach by the directors of their duties. In those circumstances, she submitted that the claim against Fortress in the OA proceedings could fail but OA might still be a creditor of OL in respect of the funds.
Ms Taylor also submitted that the primary claim brought by OA in relation to the funds held in the escrow account was that the money was paid over by mistake. She said that if that claim failed, OL could still assert that the payment was a preferential transaction.
The liquidators pointed out that courts have acknowledged that creditors are better judges than courts of their own commercial interests. They pointed out that, in that context, the committee of inspection passed a resolution expressing support for the proposal to enter into the Funding Agreement. In those circumstances, they submitted that the Court should not interfere.

Consideration

There was little dispute as to the principles which grounded the exercise by liquidators of the powers conferred under s 477(2)(m). Both parties accepted that the word "necessary" was to be given a broad meaning and empowered the liquidators to do anything expedient, with reference to, or conducive to, the beneficial completion of the winding-up of the affairs of the corporation and the distribution of its assets. [39]
Further, it is not generally the function of the Court, in granting approval under s 477(2B) of the Act, to review a liquidator's commercial judgment or to second guess its decision. The Court will generally not interfere unless there seems 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. [40] However, as was pointed out in each of the cases cited, the Court does not act as a mere rubber stamp and will confer the power only when it is satisfied that a case for its exercise, in the particular circumstances, has been shown.
The liquidators also accepted that the power conferred by s 477(2)(m) would not support litigation funding purely for the sake of a return which might be generated by the funding itself. They accepted that such a transaction was in no sense necessary for the winding-up of the affairs of the company or the distribution of its property. [41]
In the context of approval to enter into a funding agreement, the remarks of Barrett J in Re McGrath at Appendix 1 pars (25)-(26) are apposite: "(25) … Before the court could conclude that the matter was within s 477(2)(m), it would have to see that there was some good and solid reason for concluding that the processes of winding up and distribution referred to in that provision would be enhanced by the particular outlay of funds envisaged in the particular circumstances prevailing, with the enhancement being demonstrable by comparison with the situation that would prevail if surplus funds were deployed in the ordinary way pursuant to s 543. The enhancement would have to be demonstrated by some informed and independent assessment of the separate and selfish interests of the funding company alone. (26) In the Bairnsdale Food case, Fullagar J emphasised that the existence of power must be distinguished from the propriety of its exercise. I do not lose sight of that distinction here. The point is that, when the question is whether a particular step is 'necessary for' - in the s 477(2)(m) sense of 'expedient with reference to' or 'conducive to' - the progress and completion of the winding up process, the consequences or likely consequences of the step must be known (or, at least, reliably predicted, on the basis of known facts and informed assessment of their significance) as an essential ingredient of the formation of the opinion relevant to the existence of the power, quite separately from the wisdom of its exercise."
In the present case, the primary judge stated that it would not be possible for OA and OL to both succeed in full. In reaching this conclusion, he noted in particular that it would not be possible for OL and OA to both succeed in relation to the $15,000,000 participation fee, as it formed part of the Stella proceeds claimed in the OA proceedings. He also noted that it would not be possible for both to succeed in relation to the money in the escrow account.
As the money in the escrow account and the participation fee form the totality of what is claimed in the OL proceedings and as both sets of funds were said to have come out of the proceeds of the Stella sale, it is difficult to avoid the conclusion asserted by Fortress that only a binary outcome, at least in a financial sense, is possible. If that is so, there seems to be no practical benefit in OA outlaying funds in support of the OL litigation.
The primary judge identified two factors which led him to the conclusion that there were actual commercial advantages beyond the potential upside of a beneficial commercial return.
The first of these factors was a substantial factual and legal overlap between the OA and OL proceedings. That is undoubtedly correct having regard to the competing claims made. It provides good reason for the actions to be heard together. However, it does not justify OA funding OL's competing claim.
The second reason given by the primary judge was that OA claims to be a substantial creditor of OL. Whilst that may commonly provide justification for funding, it is necessary in the present case to take account of the nature of OA's claim and the various outcomes in the Queensland proceedings which could affect it.
As I indicated, the nature of OA's claim, as it appears from the rejection of OL's proof of debt, involves improper use of its funds for the benefit of OL. The total amount of the offset in claims is $830,096,384. Of this amount, $604,372,925 was said to arise from the wrongful release of funds owed to OA by companies in the Stella Group. Of that amount, $209,948,963 was said to represent the payments made to Fortress.
OA's claim is that the entry into the Deed of Release, referred to in par [34] above, and the entry into the Stella Proceeds Deed, constituted an uncommercial insolvent transaction or a breach of duty by the directors, in which Fortress participated. The basis of the claim was that OA was entitled to the proceeds of the Stella sale and the loans which were released.
Although only the payments made to Fortress are claimed in the Queensland proceedings, the liability of OL for the whole of the $604,372,925 referred to in the rejection of the proof of debt, said to arise from OA's role in the sale of the Stella Group, arises out of the same transaction involving, in particular, the execution of the Deed of Release and the Stella Proceeds Deed.
In this context, if OA's claims against Fortress fail, it is difficult to see how any part of OA's claim arising out of the transactions in February 2008, in particular the execution of the Deed of Release and the Stella Proceeds Deed, could succeed. In those circumstances, OA would not be a creditor of OL.
The liquidators adverted to the possibility that Fortress may succeed in the litigation by successfully raising defences under s 588FG(2) of the Act in the OA proceedings, but may still fail to succeed in those defences in the OL proceedings. However, it must be remembered that the Fortress charge extension and the Stella Proceeds Deed were executed within one month of each other. It is difficult to envisage a hypothetical scenario in which Fortress had reasonable grounds to believe that OA, the treasury company in the group, was solvent but did not have reasonable grounds for a belief that its holding company, OL, was solvent.
It is possible that both OA could be successful in its proceedings and OL could succeed in having the Fortress charge extension set aside. The end result could be, assuming OA's success in all its offsetting claims against OL, that OA would be a creditor of OL in an amount of $105,461,472.88, being the amount of $830,096,384, the total of the offsetting claim, less the sum of the amount claimed by OL to be due from OA, $514,685,948.12, and the amount alleged to be recoverable from Fortress in the OA proceedings, $209,948,963. However, in that scenario, OA would have received the funds paid by Fortress under the Participation Agreement and the Fortress charge extension, whilst OL would be liable to Fortress in respect of monies due as guarantor of the Young Village facility and the Castle facility, the latter facility remaining unpaid as a result of the setting aside of the transaction. Fortress would be a secured creditor in respect of the latter amount. It is far from clear, in those circumstances, that OA would receive any benefit from being able to prove as a creditor in the winding-up of OL.
It seems to me that this analysis was necessary for the primary judge to undertake in order to form a view as to whether it was appropriate to make the orders sought. He does not appear to have done so and, to that extent, his discretion miscarried.
There remains the question of what relief should be granted. In their submissions, the liquidators stated that they were hampered in the conduct of their application in this appeal because of confidentiality issues. However, they rejected the suggestion made by Fortress in its written submissions that the material be made available to independent counsel retained by it and did not ask the Court itself to consider any of that confidential material.
These circumstances, coupled with the fact that the amended statement of claim has made claims described as a "fall-back", lead me to conclude that the most appropriate course of action is to set aside the orders made by the primary judge and remit the matter back to him for his further consideration.
As a result, I would make the following orders: 1. Grant the applicant leave to appeal. 2. Appeal allowed. 3. Set aside orders (a) and (e) made by the primary judge on 30 March 2012. 4. Remit the matter to the primary judge for further consideration. 5. Order the respondents pay the applicant's costs of the application for leave to appeal and the appeal.
BEAZLEY P: I have had the advantage of reading in draft the reasons of the Chief Justice. I agree with this Honour's reasons and the orders he proposes.
MACFARLAN JA: I agree with Bathurst CJ and also with the additional observations of Barrett JA.
MEAGHER JA: I have had the benefit of reading in draft the judgments of the Chief Justice and of Barrett JA. I agree for the reasons each gives that the orders proposed by the Chief Justice should be made.
BARRETT JA: I agree with the Chief Justice and add the following short observations.
Both OL and its subsidiary OA are subject to winding up by the court. The respondents are the liquidators of both companies. In order to finance preference recovery proceedings brought by them as liquidators of OL against Fortress, the respondents propose that OL borrow money from OA. The respondents, as liquidators of OA, take the view that two preliminaries should be attended to before OA provides any litigation funding to OL. First, they regard approval of the court under s 477(2B) of the Corporations Act 2001 (Cth) as necessary. Secondly (and no doubt acutely mindful of their position as liquidators of both the proposed borrower and the proposed lender), they regard a direction of the court under s 479(3) as desirable. The ex parte application the respondents made as liquidators of OA for both forms of relief was determined by the primary judge.
Two circumstances are of particular relevance. First, Fortress is said to be a substantial creditor of OL. Secondly, OL claims to be a substantial creditor of OA. A proof of debt lodged by OL (at the instigation of receivers, as distinct from the respondents as liquidators) in the winding up of OA had not been adjudicated when the primary judge made his decision but was later rejected by the respondents as liquidators of OA. It was rejected on the basis that the debt claimed by OL as against OA is exceeded by indebtedness of OL to OA. The view that OA is therefore not indebted to OL is a product of the self-executing set-off that s 553C of the Corporations Act effects upon commencement of a winding up. Rejection of OL's proof of debt by the respondents (as liquidators of OA) is not, of course, a final or conclusive determination of the question whether OL is in truth a creditor of OA.
If, as OL apparently contends, the true position is that OL is a substantial creditor of OA, outlay of OA's money on the financing of preference recovery proceedings against Fortress brought by the respondents as the liquidators of OL will diminish (possibly without any compensatory return or benefit) the resources available to meet claims cognisable in the winding up of OA, including any claim maintainable by OL as a creditor of OA. Because Fortress is said to be a creditor of OL and OL may ultimately be found to be a substantial creditor of OA, that potential adverse effect on returns to creditors of OA is, in my opinion, sufficient to give Fortress an interest in the outcome of the applications by OA's liquidators under s 477(2B) and s 479(3) that causes it to be aggrieved for the purposes of the tests applicable to a non-party's claim for leave to appeal.
It is for that reason that Fortress is entitled to seek leave to appeal. In addition and for the reasons the Chief Justice states, such leave should be granted.
In holding that Fortress is entitled to seek leave to appeal and that such leave should be granted, I do not intend to imply that a person who is the target of funded litigation proposed to be brought by a liquidator has, merely because of that target status, any right or claim to be heard upon any application made by the liquidator for an order that is a necessary or desirable preliminary to the making of the litigation funding agreement. In a winding up by the court such as the present, such applications turn very much upon considerations of what is beneficial (or, in s 477(2)(m) terms, "necessary") for the due prosecution and administration of the winding up for which the liquidator is responsible under the supervision and direction of the court. Those considerations are matters in which creditors and contributories have an interest as, no doubt, do persons with fairly arguable claims to be creditors or contributories. There is no such interest on the part of persons who do not occupy any such position and are merely persons against whom the liquidator proposes to bring funded litigation. Given the particular statutory context (and whatever may be the position in other contexts), I do not think that matters referred to in Letten v Templeton [2014] FCAFC 131; 102 ACSR 425 at [14] require any conclusion that Fortress was entitled to participate in the hearing before the primary judge just because it was the intended defendant in the litigation proposed to be funded by OA. Such an intended defendant has no legitimate expectation of influencing decisions about how the winding up should be conducted and what the liquidators should or should not do in order to progress it.
As to the disposition of this appeal, argument in this Court showed that there were numerous considerations relevant to the evaluative judgment required of the primary judge that were not appropriately ventilated upon the ex parte hearing before him. Those considerations are referred to in the reasons of the Chief Justice. The material available to this Court does not allow them to be addressed satisfactorily here. The matter should therefore be remitted for further consideration as the Chief Justice proposes.

Endnotes

Public Trustee (Qld) v Fortress Credit Corporation (Australia) II Pty Ltd [2010] HCA 29; 241 CLR 286 at [23]-[26].
See Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; 281 ALR 38 ("Full Court decision") at [13]-[14].
Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (In Liq) and Octaviar Administration Pty Ltd (In Liq) (No 2) [2011] FCA 315.
Full Court decision at [32].
Full Court decision at [36].
Full Court decision at [37].
Full Court decision at [38].
Full Court decision at [49].
[2012] HCATrans 033.
[2010] NSWCA 148; 79 ACSR 180 ("Deloughery").
[2000] NSWCA 52; 49 NSWLR 429 ("Marsden") at [81].
See Full Court decision at [38].
[2011] NSWSC 14 at [21] ("Weston").
[2000] FCA 453; 98 FCR 31 ("CFMEU").
[2002] FCAFC 386; 125 FCR 529 ("Australian Industry Group").
[2014] FCAFC 131 ("Letten").
[2012] NSWSC 1215; 92 ACSR 588.
(1921) 30 CLR 16 ("Cuthbertson")
Cuthbertson at 25.
See CFMEU at [18].
See also Ashby v Slipper [2014] FCAFC 15; 219 FCR 322 at [312]-[324]
Full Court decision at [31]-[33].
Australian Securities Commission v Marlborough Gold Mines Limited [1993] HCA 15; 177 CLR 485 at 492; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 at [135].
Letten at [13].
Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; 169 CLR 332 ("Tanning Research Laboratories") at 338-339.
Derwinto Pty Ltd (In liq) v Lewis [2002] NSWSC 731; 42 ACSR 645 at [60].
Tanning Research Laboratories at 340-341.
Gye v McIntyre [1991] HCA 60; 171 CLR 609 at 622; Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 567.
[1996] AC 243.
Stein v Blake at 255.
Deloughery at [42].
See par [48] above.
Re Siromath (1991) 9 ACLC 1580 at 1582; Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 746; Mamone v Pantzer [2001] NSWSC 26; 36 ACSR 743 at [4]; Sydlow Pty Ltd (in Liq) v TG Kotselas Pty Ltd (1996) 65 FCR 234 at 240-241.
See Fortress charge par 2.6.
Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; 266 ALR 642 ("Re McGrath") at Appendix 1 par (20); Full Court decision at [39].
Re McGrath at Appendix 1 par (19).
See par [36] above.
See par [40] above.
See Re McGrath at Appendix 1 par (20); Re McGrath (as liquidators of HIH Insurance Ltd) [2009] NSWSC 1244 at [22].
Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86; Re HIH Insurance Ltd [2004] NSWSC 5 at [15]; Re McGrath at Appendix 1 par (13).
Re McGrath at Appendix 1 par (19). See also Full Court decision at [44], cited above at par [49].

Amendments 21 May 2015 - Added to title "(as liquidators of Octaviar Administration Pty Ltd (in Liq) & Ors" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 May 2015

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