Gothard v Loo

O'CALLAGHAN J 1 By originating process filed on 18 June 2024, the plaintiffs in this proceeding sought relief relating to the liquidator's entry into a deed of settlement on behalf of the company and the liquidator's remuneration. 2 On 2 September 2024, I made orders: (a) granting retrospective approval, pursuant to ss 477(2A) and 477(2B) of the Corporations Act 2001 (Cth), to the first plaintiff (the liquidator), as liquidator of the second plaintiff (the company), to enter into a deed of settlement and release executed on 4 December 2023 by the company and the respondents in a proceeding in the District Court of South Australia (Deed), and thereby compromising a debt owed to the company; (b) that the liquidator was justified in entering into and performing the Deed; (c) that the liquidator be entitled to recover in the liquidation an amount of $40,114.00 as remuneration for necessary work undertaken in the liquidation of the company from 25 November 2023 to the completion of the liquidation. 3 These are my reasons for doing so. 4 In support of their application, the plaintiffs relied upon two affidavits of the liquidator, Mr Jason Glenn Stone, both sworn on 13 June 2024. One is marked "confidential" (the confidential affidavit). The plaintiffs also sought an order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) that the confidential affidavit and its annexures be treated as such. I was satisfied that such an order was necessary to prevent prejudice to the proper administration of justice, and accordingly made an order that publication or other disclosure of the information contained in the confidential affidavit be prohibited until completion of the liquidation. 5 I heard the plaintiffs' application on 2 September 2024. Mr Enzo Belperio of counsel appeared for the plaintiffs, and I was assisted by his written and oral submissions.

Approval of entry into the Deed 6 The plaintiffs relied upon the confidential affidavit of Mr Stone in support of their application for retrospective approval of entry into the Deed. In that affidavit, Mr Stone addressed the terms of, and expressed his view in relation to, the Deed and the legal advice he received about it. Given the order I have made pursuant to s 37AF of the Federal Court Act, I do not propose to set out Mr Stone's evidence in that regard in any detail. 7 On 5 September 2023, the court ordered that the company be wound up in insolvency and that Mr Stone be appointed as liquidator. At that time, the company was the applicant in a proceeding in the District Court of South Australia, in which it asserted that a debt was owing to it. 8 On 15 November 2023 the liquidator reached an in-principle agreement with the respondents to settle the South Australian proceedings. The Deed between the company and the respondents was executed on 4 December 2023. 9 Subsequently, the liquidator realised that the claim made by the company in the South Australian proceeding that had been compromised by entry into the Deed may constitute a "debt" requiring approval pursuant to s 477(2A) of the Corporations Act. He then instructed his solicitors to: (a) prepare a deed of variation to the Deed, the effect of which was broadly to: (i) make the Deed subject to approval of the court; (ii) provide for the settlement sum due under the settlement deed to be held in escrow pending the grant of approval by this court; (iii) provide a mechanism for return of those funds to the respondents if approval is not granted; and (b) prepare this application. 10 A deed of variation was, in fact, never executed. 11 While the Deed was therefore never varied so as to require court approval, at the hearing Mr Belperio informed me that the liquidator had acted as if such a variation had been effected. In other words, the liquidator has proceeded on the basis that he was not to proceed with the settlement unless and until court approval was obtained. The settlement monies were accordingly still held in the solicitors' trust accounts and had not been otherwise used or dispersed. 12 Section 477(2A) of the Corporations Act relevantly provides that: Except with the approval of the Court, of the committee of inspection or of a resolution of creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than: (a) if an amount greater than $20,000 is prescribed - the prescribed amount; or (b) otherwise - $20,000. 13 Regulation 5.4.02 of the Corporations Regulations 2001 (Cth) prescribes the amount of $100,000 for the purposes of sub-s 477(2A)(a). 14 Because entry into the Deed has compromised the company's claimed debt (which is over the prescribed amount), s 477(2A) is engaged. 15 Although it was not sought in the originating process, during the hearing Mr Belperio confirmed that retrospective approval under s 477(2B) of the Corporations Act was also required. Section 477(2B) provides that except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. 16 While approval under ss 477(2A) and 477(2B) should normally be obtained in advance, as the cases make clear, the court can give approval with retrospective effect. See Re One.Tel Ltd (in liq) (2014) 99 ACSR 247; [2014] NSWSC 457 at [67] (Brereton J). 17 In Re BCI Finances Pty Ltd (in liq) [2018] FCA 1499, at [16], White J said that the principles relating to approval under s 477(2A) are the same as those in relation to s 477(2B) (citing Gordon J in Re Newtronics Pty Ltd [2007] FCA 1375 at [26]). The relevant principles are as follows: (a) While the court does not simply "rubber stamp" what is put forward by a liquidator, it will generally not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct; (b) A liquidator will be expected to have obtained legal advice regarding the agreement and compromise of the debt, as a prudent person would in the conduct of their affairs; (c) The court will not approve an agreement if its terms are unclear; (d) The role of the court is to grant or deny approval to the liquidator's proposal, not to develop an alternative proposal that the court may consider preferable. The task of the court is accordingly not to exercise its own determination de novo but to pay due regard to the commercial judgment and knowledge of the liquidator. The court's approval is thus not an endorsement of the proposed agreement but merely a permission for the liquidator to exercise his or her own commercial judgment in the matter; (e) The agreement should facilitate the proper realisation of the assets of the company and assist in the winding up of the company. 18 The liquidator deposed that he considered entry into the Deed to be in the best interest of the creditors, in summary, because: (a) pursuing the South Australian proceeding would likely have costed between $100,000 to $200,000, and would have taken longer than 12 months; (b) the respondents to the proceeding were likely to make a security for costs application; (c) the settlement offer was for an upfront payment, which was preferable to an offer made by the director of company to take an assignment of the claim in exchange for a payment paid in three tranches. The offer from the director also carried with it the risk that the director did not have the financial capacity to make the proposed payments. 19 The liquidator further deposed that without court approval, in his view it was unlikely that creditors would approve the settlement because, aside from the Australian Taxation Office, all are related to or associated with a director of the company. There is also no committee of inspection to approve entry into the deed. 20 The plaintiffs submitted that, in the circumstances, the liquidator had properly exercised his commercial judgment, with the benefit of legal advice, in forming the view that the compromise of the debt was in the best interest of the company's creditors. 21 In those circumstances, after reviewing the evidence and the terms of the Deed, and having regard to the principles set out in paragraph [17], I was satisfied that orders should be made granting retrospective approval to the liquidator to compromise the debt and enter into the Deed. That approval does not constitute an endorsement of the Deed, but rather gave permission to the liquidator to exercise his own commercial judgment in the matter.

Direction that liquidator was justified in entering into the Deed 22 The plaintiffs also sought a declaration that the liquidator was justified and acting reasonably in compromising the debt the subject of the Deed, and otherwise entering into it. 23 At the hearing, Mr Belperio confirmed that this declaration was sought pursuant to s 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act (IPS). Section 90-15(1) of the IPS provides that the court may make such orders "as it thinks fit" in relation to the external administration of a company. Section 90-15(3) provides that, without limiting subsection (1), the orders that may be made pursuant to that section include an order determining "any question arising in the external administration of a company". 24 Consistent with its predecessor provisions, and as the authorities make clear, s 90-15 encompasses the making of judicial directions about a matter arising in connection with the performance or exercise of a liquidator's functions or powers. It has also been found to enable the court to make declarations. In Re CuDeco Ltd (Receivers and Managers Appointed) (in liq) (2020) 14 ARLR 239; [2020] FCA 1661, Banks-Smith J said the following about the power conferred by s 90-15, at [93]-[99]: The terms of this provision are broader than its two partial predecessor provisions, being ss 479(3) and 511(1)(a) of the Corporations Act. This feature of s 90-15(1) … has been the subject of some consideration. In Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355, Gleeson JA observed that "The ambit of s 90-15 has not yet been fully considered in the authorities" (at [7]). His Honour went on to observe that the power granted to the Court under s 90-15 is wider than under s 479(3) and accommodates the determination of substantive rights, stating: [8] In Walley (as administrators of Poles & Underground Pty Ltd (admins apptd) and Icon Plant Pty Ltd (admins apptd)) [2017] FCA 486 at [41], Gleeson J remarked that the question of whether to exercise the power in s 90-15 was "to be answered by reference to the principles applied to the exercise of the discretions previously contained in ss 479(3) and 511 of the Act". That may be accepted insofar as the external administrator seek the directions of the Court, but the power under s 90-15 to "make such orders as it thinks fit in relation to the external administration of a company" (s 90-15(1)) including "an order determining any question arising in the external administration of a company" (s 90-15(3)(a)), is wider and accommodates the determination of substantive rights. Of course, the Court would not do so without affording potentially affected parties an opportunity to be heard: Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd [2007] FCA 1443 at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (rec and mgr apptd) (1994) 49 FCR 334; 121 ALR 626 at 352, at 643 (Northrop J)); Re Willmott Forests Ltd (recs and mgrs apptd) (in liq) (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [45]-[46] (Davies J); Re ICS Real Estate Pty Ltd (in liq) [2014] NSWSC 479 at [25] (Brereton J). This Court has held that s 90-15 provides the jurisdiction and power to make declarations. In Ross v Manpak Holdings Pty Ltd (2018) 131 ACSR 1, McKerracher J observed: [9] There is no jurisdictional impediment which would prevent the Court making the orders sought. Under s 90-15(1) of the Insolvency Practice Schedule, the Court has the jurisdiction and power to make orders "as it thinks fit" in relation to the external administration of a company, encompassing the declarations sought in the plaintiffs' application. In Ross, the declarations related to the realisation by deed administrators of trust assets and included a declaration that the sale proceeds formed part of the fund for distribution under the deed of company arrangement. In Re Polat Enterprises Pty Ltd (in liq) [2020] VSC 485 (Hetyey AsJ) the Court observed that s 90-15 is "broad in its scope and contemplates not only the exercise of judicial discretion but also the determination of substantive rights"(at [31]). The Court made declarations "pursuant to ss 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations)". The declarations included declarations to the effect that certain resolutions and share transfers were invalid and ineffective. Although the power conferred by s 90-15 is broader than that conferred by its predecessor provisions, courts have nonetheless been guided by the matters relevant to the exercise of the predecessor provisions: Re Walley [2017] FCA 486 at [41] (Gleeson J). These notions include that the power should be exercised where it is just and beneficial to do so: Federal Commissioner of Taxation v ACN 154 520 199 Pty Ltd (in liq) [2017] FCA 444 at [64](Gleeson J). Whilst a court generally refrains from making directions relating to a liquidator's or administrator's business or commercial decisions, it may give directions relating to issues such as a legal issue of substance or procedure, or an issue of power, propriety or reasonableness: Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at [44] (Goldberg J). Therefore, in exercising powers under s 90-15 the court will be guided by similar principles to those that governed the exercise of powers under former ss 479(3) and 511 of the Corporations Act, although the relief that the court may grant under s 90-15 appears broader and extends to the making of declarations where appropriate. See also Re Forex Capital Trading Pty Ltd (in liq) (2022) 159 ACSR 669; [2022] FCA 600 at [51]-[54] (Banks-Smith J) and Re Traditional Values Management Ltd (in liq) [2024] FCA 74 at [26]-[29] (Button J). 25 While the power under s 90-15 is therefore broad, and extends to the making of declarations, during the hearing, I expressed a concern that declaring that the liquidator was "acting reasonably" by comprising the debt and entering into the Deed would not be appropriate, in light of what Brereton J said in Re One.Tel Ltd (in liq) (2014) 99 ACSR 247; [2014] NSWSC 457 at [54]-[62]. In that case, the liquidators sought directions pursuant to the predecessor provision, s 511 of the Corporations Act, that they had "acted properly and reasonably" in causing the company to enter into a deed of settlement. At [61], Brereton J said that: [i]t would not, however, be consistent with the principles and practice to which I have referred, to make direction (b) in terms "that the SPL and GPLs otherwise acted properly and reasonably in entering into the deed and in procuring the One.Tel to enter into the deed". What the court does is to provide advice as to whether the liquidator is justified in taking a particular course of action (that is entry into the deed), not declaring that he has otherwise generally acted properly in doing so. To make the direction sought would necessarily involve a much wider inquiry into the whole of the liquidator's conduct in and about the negotiation and procuring of the deed, and would be quite unsuited to a s 511 inquiry, such that it would not (in the terms of s 511(3)) be just and beneficial to determine that question. (emphasis added) 26 In light of that concern, Mr Belperio told me that he had instructions to limit the order sought to one that the liquidator is justified in entering into and performing the Deed. 27 In the recent decision of Gothard v Loo [2024] FCA 323, Markovic J made a similar order pursuant to s 90-15 that liquidators were justified in causing the company to settle recovery proceedings against the former auditors and lawyers of the company in accordance with the terms of a deed of settlement entered into on 22 December 2023. 28 In determining that it was appropriate for the court to give such a direction, her Honour had regard (at [11] and [13]) to the observation of Black J in Re A.C.N 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2021] NSWSC 799 at [14] that the court may give directions in relation to settlement of litigation where: there is an element of potential controversy in respect of the compromise; a settlement has a substantial element of compromise about it; or it involves not only the exercise of a commercial judgment by the liquidator but also the exercise of a legal judgment as to the assessment of the merits of the settlement against the prospects of success in the proceeding. 29 Having regard to those matters, I considered that it was appropriate to give a direction as sought by the plaintiffs, because the settlement reached involved a substantial element of controversy and compromise, and an exercise of both commercial and legal judgment. 30 I was satisfied that the liquidator was justified in entering into and performing the Deed. The evidence makes apparent that the compromise reached in the South Australian proceeding would avoid the uncertainty, risk and costs associated with continuing with the litigation. The evidence also discloses that the liquidator sought legal advice regarding the compromise and after weighing the options available to him, formed the view that entry into the Deed would be in the best interest of the creditors.

Approval of remuneration 31 A statutory report to creditors was issued by the liquidator on 5 December 2023 seeking (among other things) prospective remuneration approval of $40,114. 32 The tasks and costs that the liquidator expected to be required for completion of the liquidation were set out in the Remuneration Approval Report annexed to Mr Stone's open affidavit. Broadly it included: (a) $10,024 for creditor enquiries, creditor reports, dealing with proofs of debt, and proposal without meetings; (b) $23,639 for conducting investigations, dealing with the Blue Ocean claim, assessing insolvent trading, conducting examinations, dealing with litigation and recoveries, and ASIC reporting; and (c) $6,451 for correspondence, document maintenance, insurance, bank account administration, ASIC, ATO and other statutory reporting, finalising the liquidation, and arranging for storage of books and records. 33 The Deputy Commission of the ATO voted in favour of approving the prospective remuneration and two other creditors, Shaowen Yuan and Hui Wang voted against it. 34 The plaintiff sought an order that approval be granted to the liquidator to recover in the liquidation an amount of $40,114.00 on account of remuneration for work undertaken in the liquidation from 25 November 2023 to its completion, in addition to other amounts previously approved by creditors of the company, pursuant to s 60-10, or alternatively s 90-15, of the IPS. 35 Section 60-10(1) provides that: (1) A determination, specifying remuneration that an external administrator of a company (other than an external administrator in a members' voluntary winding up) is entitled to receive for necessary work properly performed by the external administrator in relation to the external administration, may be made: (a) by resolution of the creditors; or (b) if there is a committee of inspection and a determination is not made under paragraph (a) - by the committee of inspection; or (c) if a determination is not made under paragraph (a) or (b) - by the Court. 36 In making a remuneration determination, the court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters set out in s 60-12: (a) the extent to which the work by the external administrator was necessary and properly performed; (b) the extent to which the work likely to be performed by the external administrator is likely to be necessary and properly performed; (c) the period during which the work was, or is likely to be, performed by the external administrator; (d) the quality of the work performed, or likely to be performed, by the external administrator; (e) the complexity (or otherwise) of the work performed, or likely to be performed, by the external administrator; (f) the extent (if any) to which the external administrator was, or is likely to be, required to deal with extraordinary issues; (g) the extent (if any) to which the external administrator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case; (h) the value and nature of any property dealt with, or likely to be dealt with, by the external administrator; (i) the number, attributes and conduct, or the likely number, attributes and conduct, of the creditors; and (j) if the remuneration is worked out wholly or partly on a time‐cost basis - the time properly taken, or likely to be properly taken, by the external administrator in performing the work. 37 The plaintiffs contended that the remuneration sought is not excessive and is necessary for the proper performance of the liquidator's functions. They submitted that the remuneration was fair and reasonable in the circumstances because the liquidator is managing a company that had: (a) at the time of being wound up, ongoing court litigation; and (b) creditors understood to be related to or associated to the director of the company voting against proposals by the liquidator. 38 It was submitted that this necessarily results in more complexity in ensuring that the winding up is conducted in the best interests for all creditors, including the ATO. 39 I agreed with those submissions. Having regard to the matters set out in s 60-12, I was satisfied that remuneration of approximately $40,000 was fair and reasonable in the circumstances, and made orders substantially in the form sought.

Other orders 40 As noted above, the plaintiff sought a suppression order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) prohibiting publication of, or other disclosure of the information contained in, the liquidator's confidential affidavit. 41 At the hearing, Mr Belperio submitted that because the confidential affidavit disclosed the substance of legal advice obtained by the liquidator in relation to settling the South Australian proceeding and compromising the debt, suppression of the affidavit was "desirable" in circumstances where the liquidator intended to maintain legal privilege in that advice. 42 Furthermore, Mr Belperio submitted that the liquidator was concerned that, in circumstances where some creditors, particularly the director and related parties, "seem to be at odds with the approach that the liquidator has taken in certain matters", the information disclosed in the affidavit about the liquidator's decision to compromise the debt "might be used by the director and related parties". 43 In those circumstances, I was satisfied that it was necessary to prevent prejudice to the proper administration of justice, including the just and efficient winding up of the company, to make an order prohibiting publication or other disclosure of the information contained in the confidential affidavit of Mr Stone until the completion of the liquidation. 44 The plaintiff also sought an order that costs of this application be costs in the liquidation, which I considered to be appropriate in this case. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.