Before the Court is an application by Simon Cathro, as liquidator of the company Martha Cove Marina Pty Ltd, for approval pursuant to the (CTH) Corporations Act 2001, s 477(2B) to enter into a litigation funding agreement, notwithstanding that its term may end or obligations under it be discharged by performance more than three months after the agreement is entered into.
City Pacific Ltd was wound up by the Federal Court of Australia on 28 August 2009, when Andrew Hugh Jenner Wily and David Anthony Hurst were appointed liquidators. Mr Hurst resigned on 29 June 2012 and thereafter Mr Wily continued as the sole liquidator until 20 April 2017 when he too resigned. Martha Cove Marina is a related company of City Pacific. It was wound up, also by order of the Federal Court of Australia, on 23 October 2009 and the same liquidators were appointed. Similarly, Mr Hurst resigned on 29 June 2012 and Mr Wily thereafter continued as sole liquidator until he resigned on 21 April 2017.
As liquidator of both companies, Mr Wily caused two proceedings in this Court to be instituted by those companies as first and second plaintiffs respectively. The first proceeding, 2013/302393, was brought against the former directors of City Pacific, alleging breaches of their duties as directors in connection with a substantial loan which had been made by City Pacific and which proved irrecoverable. The second proceeding, 2015/251608, was brought against the valuer who had provided valuations of the security relating to that loan. It is convenient to refer to the proceedings respectively as the "directors proceedings" and the "valuer proceedings". The directors proceedings are presently fixed for hearing in the Commercial List, to commence before Ball J on 26 June 2017, that is to say just over one month hence, for five days. The valuer proceedings have not yet been fixed for hearing.
On 30 September 2014, a creditors meeting of City Pacific resolved in the following terms:
Pursuant to s 477(2B) of the Corporations Act the liquidator of City Pacific Ltd (receivers and managers appointed) (in liquidation) be authorised to enter into a litigation funding agreement on behalf of the company so as to permit the prosecution of proceedings 2013/302393 in the NSW Supreme Court and any appeals from these proceedings.
The resolution was carried on the votes of the only two creditors who were present at the meeting, for whom the liquidator, as chair, held proxies. The liquidator was unable to muster a quorum for a creditors meeting of Martha Cove inter alia because there was only one creditor, the receivers of which adopted an ambivalent approach to the proposal. Accordingly, the liquidator made application to this Court, in proceedings 2015/103423, for approval under s 477(2B). Such approval was given by me on 20 April 2015, when an order was made in the following terms: [1]
Pursuant to Corporations Act, s 477(2B), the first plaintiff be granted leave to enter into the litigation funding deed between the plaintiffs and International Litigation Partners (No 6) Pty Limited as annexed and marked confidential annexure AHJW1 to the affidavit of Andrew Hugh Jenner Wily sworn 7 April 2015 and to engage Squire Patton Boggs, solicitors for the plaintiff, as outlined in Squire Patton Boggs' letter dated 15 December 2014 as annexed and marked "confidential annexure AHJW3" to the said affidavit.
By the originating process filed in the present proceedings on 5 May 2017, Mr Cathro sought, first, orders appointing himself as liquidator of City Pacific and Martha Cove (in place of Mr Wily who, as has been recorded, had resigned); and secondly, an order pursuant to Corporations Act s 477(2B) that he be granted leave to enter into a litigation funding agreement between the plaintiff, City Pacific Ltd, Martha Cove Marina Pty Ltd and International Litigation Partners (No 6) Ltd. That originating process came before me in the Corporations List on Monday, 8 May 2017, when I made an order to the effect of the first order sought - appointing Mr Cathro as liquidator of both companies - and adjourned the hearing of the balance of the originating process to 16 May. I directed that "the respondents", as I described Mr Sullivan and his related company, who sought to be heard in opposition to the application, to lodge any submissions in opposition by 12 May, and to serve any evidence upon which they sought to rely by 11 May. That was done.
When the proceedings came on for hearing on 16 May, the liquidator Mr Cathro did not press for an order under s 477(2B) in respect of City Pacific Ltd, taking the view that the approval granted by the 30 September 2014 creditors meeting, enured for his benefit as the replacement liquidator, and thus sought the Court's approval only in respect of Martha Cove. Because Mr Sullivan and his related company were respectively a creditor and contributory only of City Pacific, and not of Martha Cove, their standing in respect of the application pertaining to Martha Cove was less clear, and objection was taken to it.
For reasons I gave at the time, I held that they should be allowed to appear and oppose the application. One of the authorities to which I referred was the judgment of the Court of Appeal in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher & Barnet & Ors [2015] NSWCA 85; (2015) 105 ACSR 581. On further consideration of that judgment - and in particular the additional judgment of Barrett JA, with whom at least the majority of the other Judges of Appeal expressed agreement - I do not think that it is clear at least in New South Wales that the mere fact that one is the "target" of a funding agreement is sufficient to attract standing. While that may be the position in the Federal Court, under Letten v Templeton [2014] FCAFC 131, it was not wholly embraced by the Court of Appeal.
Nonetheless, I do not shrink from the view I took that, in the particular context of this case, it was appropriate to permit Mr Sullivan and his company to be heard. Even if being the "target" of the funding agreement were not enough, their status as creditor and contributory, respectively, of the holding company of Martha Cove would be sufficient, because their interests in those companies would be liable to affected by the course of the liquidation of the subsidiary, and thus by the funding agreement. Moreover, the circumstance that it was only at the eleventh hour that the application in respect of City Pacific was not pursued when they would plainly have had standing under Corporations Act, s 477(6), in respect of it was an additional discretionary reason for permitting them to be heard. In that way they brought to the Court's attention matters which it was proper that the Court be aware of when asked, on an ex parte application, to give an approval under s 477(2B).
[3]
Section 477(2B) principles
The purpose of s 477(2B) is to ensure that the Court exercises some oversight of the liquidator's actions and completes the relevant power of the liquidator only where it sees that a case for exercise of the power in the particular circumstances has sufficiently been shown. [2] The role of the Court is to grant or deny approval of the liquidator's proposal and not to develop some alternative proposal. But the main consideration, in determining whether to give approval under s 477(2B), is the impact of an agreement on the duration of the liquidation and whether it is, in all the circumstances, reasonable in the interests of the administration. [3]
In Re One.Tel Ltd (2014) 99 ACSR 247; [2014] NSWSC 457 at [26], I referred, with approval, to the summary of the relevant principles by Gordon J in Re Stewart Newtronics Pty Ltd [2007] FCA 1375 and by Hasluck J in Re Bell Group Ltd [2009] WASC 235, in the following terms:
In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up ... the Court's approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus, the approval confers or completes liquidator's power to enter into the transaction but does not amount to the court approving the transaction itself.
Unlike a direction under Corporations Act, s 479(3), an "approval" under s 477(2B) affords no protection or immunity to a liquidator in respect of complaint or criticism about the liquidator's commercial judgment in entering into the transaction once given the power to do so. Although it is doubtful that litigation funding agreements were contemplated by those who drafted the original section, application for approval under s 477(2B) of litigation funding agreements has become commonplace, because typically the litigation to which those agreements relate and thus the funding agreements themselves, extend for periods well over three months. Agreements of this type are thus considered to fall within the terms of the section. [4]
It has been said that relevant considerations, when application is made under s 477(2B) for approval of a litigation funding agreement, include, first, the liquidator's prospects of success in the proceedings; secondly, the interests of creditors other than the proposed defendant; thirdly, any possible oppression in bringing the proceedings; fourthly, the nature and complexity of the cause of action; fifthly, the extent to which the liquidator has canvassed other funding options; sixthly, the extent of the funder's premium, which should not be disproportionate to the risk; seventhly, the liquidator's consultations with creditors; and eighthly, the risks involved in the claim. While it is true that those considerations can be identified from the authorities, they are, in my view, much more relevant where a direction is sought that the liquidator would be justified in entering into such an agreement. That is because those considerations are relevant to an evaluation of the propriety of the liquidator's judgment, and whether it should receive the protection that flows from a s 479 direction. Although it cannot be said they are irrelevant in an application under s 477(2B), they are, in my view, of significantly less moment in that context. The real issue for the Court on an application under s 477(2B) is whether any prolongation of the liquidation that would be occasioned by the relevant agreement, is warranted by the offsetting benefits that would flow from it.
[4]
Submissions
The burden of the plaintiff's submission was that there had been an approval given in 2015, that there had been no relevant or material change of circumstances since then; and that, in those circumstances, the replacement liquidator should be given the approval that his predecessor had had.
The respondents raised a number of arguments to the contrary, pointing out that it was for the plaintiff in any event to discharge the forensic burden of persuading the Court to give the discretionary relief sought, and arguing:
1. first, that the Court should not do so in the absence of a sufficiently specific proposal, as the liquidator did not place any draft agreement or its terms before the Court;
2. secondly, that in any event the existing agreement as approved did not cover the valuer proceedings but only the director proceedings;
3. thirdly, that there was an absence of any commercial judgment by the liquidator, or any evaluation of the prospects of success or viability of the claims;
4. fourthly, that there were questionable aspects of the proposed agreement, in particular that the funder would obtain a premium of at least 50 per cent and exercise significant influence over the conduct of the proceedings; and
5. finally, that the funder had engaged in conduct that was questionable, if not improper, from which it might be concluded that the proceedings were not brought or being prosecuted for a proper purpose.
[5]
Consideration
As to the first of those submissions, it is correct that the liquidator did not put before the Court a draft agreement, or even in any direct way evidence of the terms of the agreement into which he proposes to enter. This is less than satisfactory, and on applications of this kind, as with application for judicial advice, ordinarily the Court expects to see, at least in draft, the agreement in respect of which it is asked to give its approval. However, it emerged sufficiently that what the liquidator was seeking was an approval to enter into an agreement on substantially the same terms as the existing agreement into which Mr Wily had entered. The terms of that existing agreement were before the Court and in that way the Court is able to know the scope of the approval sought and make orders in terms which significantly define it. Accordingly, I do not think that this argument provides any reason not to grant the approval sought.
As to the second objection - that the agreement, if in the terms of the existing agreement, would not extend to the valuer proceeds as distinct from the proceeds - the operation of the definitions of "claim", "proceedings" and "respondents" in the agreement provide sufficient room for the agreement to cover the valuer proceedings as well as the directors proceedings.
I was at first impressed by the third argument, that there had been no independent evaluation by this liquidator of the proceedings and the risks and benefits associated with them, and that there was no evidence before the Court as to the merits or prospects of success. However, as I have said, these proceedings do not involve the giving of judicial advice that the liquidator would be justified in instituting or prosecuting the proceedings (in which case such evidence would be practically essential); rather the present question is whether the liquidator should be given the power to exercise his own commercial judgment to enter into a funding agreement.
In that respect, it is important to appreciate what is involved on both sides of the equation. If the liquidation were brought to a speedy conclusion, rather than being protracted, inter alia by pendency of the proposed funding agreement, then the consequence would be, it appears not to be in doubt, that creditors would receive absolutely nothing. There is some prospect - and it is not possible to say on the evidence presently before me how great a prospect - that if the litigation is funded to an end, it may result in a judgment or settlement pursuant to which the company receives something.
Even if the funder receives more than 50 per cent of any judgment, 40 per cent of such if any judgment as might be obtained is a better result for the company's creditors than nothing. Because of the terms of the funding agreement, there is no downside for creditors in the prosecution of the litigation in question. There is no risk of the liquidators or creditors having to bear an adverse costs order, as it will be borne by the funder. In those circumstances, it does not take extensive reasoning or explanation to realise that there is benefit for the company in funding this litigation to an end.
That benefit - of an agreeing to an arrangement that will permit the litigation to be funded to an end - is that the company may get 50 (or some lesser percentage) of something, for distribution amongst creditors; against the position that there will plainly be nothing if the litigation is not funded and does not proceed. Against that potential benefit, no downside or detriment to the company from protracting an administration that would otherwise generate nothing for creditors has been identified.
So, in those circumstances, and especially given the imminence of a final hearing of the director proceeding, it would not have required much to persuade a liquidator to see that it was plainly in the interests of the company to agree to a regime for the ongoing funding of the litigation which had already been carried to that point.
I turn then to the terms of the litigation funding agreement, about which the principal complaint was that the funder would be entitled to a premium of at least 50 per cent (and in some circumstances more), on top of return of its costs, and was in a position to exercise considerable influence over the litigation. I accept that these are matter that call for scrutiny. However, where the alternative is that there is no funding for the litigation at all, sometimes a liquidator will have to accept a premium of 50 per cent, perhaps even more.
Because a litigation funder is funding litigation at its risk, it is unavoidable that it will have some influence over the manner in which the litigation is conducted. No sane litigation funder would agree to fund proceedings without some measure giving it some influence.
Moreover, the litigation funding agreement here provides a number of control measures to ensure that the liquidator retains ultimate control and decision-making over the course of the litigation. Ultimately it provides that the liquidator's direction will prevail over the funder's in the case of a conflict, but it also provides for the resolution of disputes between them by independent senior counsel. That to me seems a perfectly reasonable mechanism for resolving disputes between funder and liquidator, in a way which provides some comfort that an unreasonable position adopted by either would not prevail.
The final issue raised pertains to the fitness of the funder and the purpose for which the proceedings are being prosecuted. The troubling aspect of this arises from a settlement conference in which Mr Sullivan and his lawyer participated, along with lawyers for the liquidator and a representative of the funder. The evidence before me, which stands unchallenged and uncontradicted, is that the funder's representative asked Mr Sullivan to have a private conversation with him, in the course of which the funder's representative proposed that Mr Sullivan consent to judgment against him on the basis that it would not be enforced but merely used for the purpose of claims against third parties - presumably insurers - in return for which Mr Sullivan would be paid 50 percent of the outcome; whether that was a reference to 50 percent of a judgment or 50 percent of what the funder ultimately received was not entirely clear, but does not really matter.
In substance the proposal was one for a collusive judgment which, it seems to me, would have been a form of abuse of the court's process. I am not a little troubled by that evidence. However, the then liquidator, Mr Wily, does not appear to be implicated in it; and certainly the present liquidator Mr Cathro is not implicated in it. It was not suggested for Mr Cathro, who was cross-examined, that he did not intend to prosecute the proceedings for the purpose for which they were overtly brought and there is no reason to suspect that he does not intend to do so. The terms of the funding agreement provide sufficient assurance and protection that the liquidator will either be able to determine the terms of any settlement or, if not, have any dispute about them, between him and the funder, resolved by senior counsel.
The imminence of the final hearing means that it is not realistic to expect the liquidator to find an alternate funder at this stage; nor is the present application really the appropriate vehicle for considering whether the main proceedings are or are not an abuse of process. It must be borne in mind that the function of the present proceedings is simply to decide whether the liquidator should be empowered to make a commercial judgment, which the liquidator would then be able to make, but shall at his own risk.
[6]
Conclusion
I return to the key points. Expeditious finalisation of this liquidation will produce nothing for creditors. There is some prospect that the litigation funding agreement may result in a benefit for creditors and, even if that prospect be a faint one, there is no detriment to the administration in pursuing that prospect. In those circumstances, as it seems to me, the liquidator should be allowed to exercise the commercial judgment that he wishes, to make to enter into the litigation funding agreement.
The Court orders that:
1. pursuant to Corporations Act, s 477(2B), the entry by the plaintiff as liquidator of Martha Cove Marina Pty Ltd into a litigation funding agreement with International Litigation Partners No 6 Ltd, substantially on the same terms as the document contained in exhibit PX04 herein, be approved, notwithstanding that the term of the agreement may end or obligations of a party to such agreement may according to its terms be discharged by performance, more than three months after the date on which the agreement is entered into.
[7]
Endnotes
Re Martha Cove Marina Pty Ltd [2015] NSWSC 2049 at [6].
Re HIH Insurance Ltd [2004] NSWSC 5 at [15] (Barrett J).
See Re Opel Networks Pty Ltd [2013] NSWSC 1245 at [9]-[10] (Brereton J).
See Re Martha Cove Marina Pty Ltd [2015] NSWSC 2049 at [2].
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Decision last updated: 16 June 2017
Parties
Applicant/Plaintiff:
Fortress Credit Corporation (Australia) II Pty Ltd