Hall v Poolman

Constitution of the appeal 7 The parties to the proceedings below have been joined as respondents to the appeal and the application for leave, on the basis that they may have an interest in maintaining his Honour's decision, although none of them is directly affected by it. At a directions hearing on 10 April 2008, Mason P asked whether, in the absence of any appearance by the parties, a natural contradictor should be invited to appear, and he noted that the Australian Securities & Investments Commission was the most likely candidate for that role. Pursuant to his Honour's request, by letter dated 4 August 2008, the appellants' solicitors invited ASIC to intervene in the appeal. On 11 September 2008 ASIC replied, stating without reasons that it did not wish to intervene. 8 It is regrettable that ASIC has not been represented at the hearing of the appeal. Section 536 confers supervisory powers on both ASIC and the court which in our view are an important part of the regulatory system governing corporate liquidation, a matter of vital importance for the Australian economy. As we have said, this case raises important questions about the scope of s 536, and the use by liquidators of litigation funding to pursue litigation that will not produce any significant return for creditors. These are matters upon which the regulator can reasonably be expected to have an informed view. Indeed, with respect to two of the three bases upon which Palmer J ordered an inquiry, ASIC has the same statutory power as the court. In the absence of an appearance by ASIC, not only has the appeal proceeded without any contradictor, but the Court has not had the benefit of the regulator's view on some important matters.

The proceedings below 9 There were three proceedings below, only two of which are relevant now. In proceedings No 2032/04 ("the Main Proceedings") the present appellants were the active plaintiffs, in their capacity as liquidators of the companies. The defendants were two directors of the companies, Mr Poolman (now a bankrupt) and Mr Irving. The plaintiffs sought to recover from those directors damages of approximately $6 million for loss suffered by creditors as a result of the company's trading whilst insolvent, under s 588M of the Corporations Act. The plaintiffs also sought a declaration against Mr Poolman under s 37A of the Conveyancing Act 1919 in respect of a transfer by him of property to his wife. Mr Irving made cross-claims against other directors for equitable contribution, and one of the cross-defendants claimed contribution from another director. Mr Irving also claimed indemnity from Reynolds Wines Ltd pursuant to an indemnity and access deed, and sought to set off the amount to which he would be entitled by way of indemnity against any amount he might be ordered to pay to the liquidators in respect of the claim for insolvent trading. 10 In proceedings No 2685/04 ("the Unfair Preference Proceedings"), which were heard together with the Main Proceedings, the liquidators as plaintiffs claimed recovery, as unfair preferences, of payments made to the Commissioner of Taxation ("ATO"). The ATO claimed an indemnity from various directors for any amounts that it might be ordered to pay the liquidators, under s 588FGA(2). The amount claimed from Mr Irving was $537,100. 11 The hearing lasted for about four weeks, with subsequent written submissions, and Palmer J delivered his principal judgment on 23 November 2007 (Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123; "the Main Judgment"). He held that Mr Poolman and Mr Irving were liable to pay compensation under s 588M(2) with respect to debts incurred by the companies during stated periods and he upheld claims by Mr Irving and other directors for equitable contribution. He also upheld the claim under the Conveyancing Act and made orders accordingly. He directed that the amounts of damages and contribution for which the parties were liable were to be ascertained by reference under r 20.14 of the Uniform Civil Procedure Rules 2005, or by a court-appointed expert. He upheld the liquidators' unfair preference claim against the ATO but declared that Mr Irving and certain other directors were liable to indemnify the ATO. He upheld Mr Irving's claim to be indemnified by Reynolds Wines Ltd and ordered that the amount payable on the indemnity be set off against Mr Irving's liability to Reynolds Wines Ltd for insolvent trading (Main Judgment at [557]). 12 Appeals were lodged against his Honour's orders and, pending resolution of the appeals, no assessment of compensation or contribution was undertaken. At the hearing of the present appeal, the Court was informed that the Main Proceedings had been settled. The precise terms of settlement were not conveyed to the Court but, in broad terms, they involved the ATO paying to the liquidators the amount of the unfair preference and Mr Irving paying the ATO in respect of the indemnity under s 588FGA. Mr Irving also paid the liquidators what was described as "a small amount" that he was able to contribute in addition to his payment under the indemnity. There is no outstanding question of costs to be resolved by the Court.

Mr Irving's defence under s 1317S and s 1318 13 In his Main Judgment, Palmer J found (at [14]-[17]), under the heading "The beneficiaries of this litigation", that: · the collapse of the Reynolds Group resulted in a shortfall of over $30 million to secured creditors; · there were no assets available for unsecured creditors, whose claims amounted to just under $99 million, and insufficient funds even to pay the costs of the voluntary administration and winding up; · the only potential assets to be realised were the recovery of voidable preference payments made to the ATO and the recovery against the directors for insolvent trading; · the liquidators had no funds to pursue those claims and so in 2004 they entered into a funding agreement with a litigation funder; · the total amount that the liquidators sought to recover from the directors and the ATO was approximately $9.6 million including interest and costs; · even if the liquidators were to recover the full amount of their claims, including costs and interest, after payment of the litigation funder's costs and "success fee" and the costs of the liquidators and their solicitors, unsecured creditors would receive no more than a fraction of a cent in the dollar of their claims; · the true beneficiaries of the litigation were the litigation funder, the liquidators and their lawyers, not the creditors. 14 These findings arose by reason of the way in which Mr Irving pursued a claim for relief under s 1317S(2) or s 1318 of the Corporations Act. Those provisions, broadly to similar effect, authorise the court to relieve a defendant director in civil proceedings, including (in the case of s 1317S(2) and perhaps also s 1318) insolvent trading proceedings, from liability where the defendant has acted honestly and having regard to all the circumstances of the case, ought fairly to be excused for the contravention. Mr Irving contended that he had acted honestly and that he ought fairly to be excused having regard to several matters, including the fact that creditors would not derive any significant benefit from the litigation. 15 Palmer J found that Mr Irving had acted honestly for the purposes of the defence (at [339]) but he declined to grant relief in respect of the period after 5 February 2003 because in his view, Mr Irving had not shown that in all the circumstances he ought fairly to be excused from liability. His Honour found that up to the time of a meeting on 5 February 2003, Mr Irving had acted as other reasonable, commercially experienced directors might have acted in the circumstances, and therefore he ought to be excused from any liability up to that time (at [339]). However, after the meeting on that day, he ought to have appreciated that there was no reasonable prospect of the companies being able to realise assets quickly enough to pay their debts as they fell due, and he ought to have immediately recommended to the boards of the companies that administrators be appointed (at [335], [337]). In his Honour's opinion, it could not be said, with respect to the period after 5 February 2003, that in all the circumstances of the case he ought fairly to be excused from contravention of the insolvent trading provisions. 16 Palmer J rejected Mr Irving's submission that the unlikelihood of any dividend to creditors was relevant to his defence under s 1317S and s 1318. His Honour said that the circumstances of the litigation funding in the case and what he called the "derisory return to creditors" afforded no right of complaint to Mr Irving, and that a nil or negligible return to creditors as a result of a successful prosecution of the claim under s 588M was not to be taken into consideration as affording a discretionary defence (at [379]). Palmer J's findings of fact relevant to this issue, and his Honour's reasoning, are considered in the next two sections of this judgment.

Relevant findings of fact by the trial judge 17 Palmer J made the following relevant findings of fact, which are not challenged in this Court. The minutes and report to which he referred are before the Court on the appeal. 18 The appellants became liquidators as a result of decisions taken at the second meetings of creditors of the companies in voluntary administration, held on 25 November 2003. It follows that the liquidations of the companies are creditors' voluntary liquidations by virtue of s 446A. On the same day, Committees of Inspection were appointed comprising a total of five creditors, and the Committees, in a combined meeting, approved an agreement between the liquidators and Insolvency Litigation Fund Pty Ltd, a subsidiary of IMF (Australia) Ltd, to fund the cost of further investigations and public examinations (the litigation funder will be referred to here as "IMF"). 19 In a further combined meeting on 11 March 2004 the Committees approved a funding agreement with IMF for insolvent trading and unfair preference proceedings. In February 2006 IMF offered to provide additional funding in relation to the insolvent trading litigation, and a draft agreement was provided to the Committees for their combined meeting on 23 February 2006. The draft had proposed that IMF would be entitled to a success fee of 60% post-trial or 50% if the proceedings were settled before trial, but the liquidators' staff and the Chairman of the Committees (Mr Hall, the first plaintiff) negotiated a reduction to a success fee of 45% both pre- and post-trial. The Chairman said that to date, the total outstanding costs of the liquidator and his solicitors were approximately $1 million, and that IMF had incurred costs of about $1 million and this was likely to reach about $2 million by the conclusion of the proceedings. 20 The liquidator explained to the meeting that total recoveries could be in the order of $5.9 million plus interest, as well as the unfair preference claim against the ATO. He said that the broad outcomes would be within the following range: · $2 million recovery - IMF's costs covered; · $3 million recovery - IMF's costs and a substantial portion of their success fee covered; · $4 million recovery - IMF's costs and success fee covered, and approximately $400,000 of the liquidators' and their solicitors' costs covered; · $5 million recovery - IMF's costs and success fee covered, and a substantial portion of the liquidators' and their solicitors' costs covered; · $6 million recovery - IMF's costs and success fee covered, liquidators' and their solicitors' costs covered, plus approximately $500,000 available for creditors. 21 One of the creditor representatives at the meeting expressed the opinion that the assets of the directors were unlikely to exceed $2 million, that is, the lowest of the spectrum of outcomes. Another member of the Committees said he thought it was reasonable for the liquidators to continue their action to recover their and their solicitors' costs. The Committees voted to approve the amended litigation funding agreement under s 477(2B) of the Corporations Act. 22 During the cross-examination of Mr Hall at the trial, Palmer J asked some questions about the matters considered at the meeting of the Committees, and he reproduced those questions and Mr Hall's answers in his Main Judgment (at [348]). His Honour inquired as to how many cents in the dollar creditors would receive in the best scenario ($6 million recovery and $500,000 available for the creditors), and Mr Hall said it would be a very, very low dividend, less than one cent in the dollar. Then the following exchange occurred: "Palmer J: Can you tell me what is the purpose of these proceedings? Mr Hall: To recover costs incurred. Palmer J: For what? Mr Hall: Funding creditors in pursuing actions for example your Honour. Palmer J: Costs in, explain that? Mr Hall: A liquidator has incurred costs with a funder seeking recovery and a lot of the costs that have been incurred have been incurred in costs with these proceeding something in the order of $2 million. It is an extraordinary amount of costs. It does not make me feel particularly comfortable about it but that is the position we find ourselves in and I found myself in this position for the last year or so with a funder who is prepared to continue to fund the proceedings. So, those numbers are still fundamentally the same as they were twelve months ago or whenever that exit meeting was held." 23 His Honour established through further questioning that the liquidators had identified the prospect of bringing recovery proceedings for about $6 million soon after their appointment and they made an estimate of the cost of proceedings, which was a very considerable under-estimate as is always the case. And then: "Palmer J: Did you do an exercise to work out what benefit to creditors that could possibly mean and whether it was worthwhile? Mr Hall: Your Honour, we also considered at those early stages there were still potential claims against a variety of people and indeed that is still a possibility following the completion of these proceedings. For example, there are advisors and other parties that were involved in the past with Reynolds Wines where there is potentially good claims. That is complicated by the circumstances we also find ourselves in where there is a receiver. There was the first receiver and then a subsequent receiver who has a first claim to those claims and let's say these matters are dealt with and finalised successfully, IMF may be prepared to fund some other action and some of those things came out of the public examination that we did in '03, '04. Palmer J: I am looking at this claim, insolvent trading claim, and I am wondering did you, at an early stage of the liquidation do an exercise to calculate whether the conduct of this litigation and the incurring of the costs necessarily involved would be worthwhile for the benefit of the creditors? Mr Hall: In the early stages, yes. Palmer J: What decision did you come to as to cents in the dollar that creditors may hope to receive from the successful conclusion of this action? Mr Hall: Again it would be relatively small and if you like one of the early actions we took is to pursue the preference against the ATO and we took that without doing a lot of work on solvency reports and so forth because we thought that may be an early success and there is cash and other options to pursue a return to creditors and the same with the funder and that is what we are really looking into in the event there was a settlement. The funder is prepared to keep funding this and I feel I have a duty on the funder's behalf to keep funding this to try and recover a return where I believe it is a good action. After all, there have been attempts with both the tax office and with the directors to seek some sort of settlement. This could have been settled, well, early. Indeed most of the time for all the reasons we are discussing we resolve those differences and it is very difficult once you start to back off. We either stop or you keep funding it because certainly, as Mr Jackman was raising, I owe the duty to my partner not to incur fees so the ongoing pursuit of this matter is funded by IMF so the exercise, as you are pointing out, clearly in terms of recovery is first for the benefit of the funding creditor." 24 Palmer J referred quite extensively to the liquidators' annual report to creditors and shareholders dated 22 February 2007 ("the Report"). By that time the trial had commenced but had not concluded, and Mr Hall had given evidence (including answering questions from Palmer J). 25 First, his Honour noted that in the Report the liquidators referred to the combined meeting of the Committees of Inspection on 11 March 2004 at which the funding agreement with IMF for insolvent trading and unfair preference proceedings was considered. The Report said: "The likely return to creditors from such actions was discussed. Notwithstanding the prospect of a low or nil return, the Committees of Inspection approved the further funding agreement with IMF, it being recognised that any recovery actions would not require a funding commitment from creditors but that creditors had an opportunity to benefit from any successful outcome." 26 As his Honour observed (at [354]), the statement shows that as early as March 2004 the liquidators had recognised that the proceedings could result in a nil return to creditors, and that the liquidators and the Committees took the view that anything coming to creditors in the proceedings would be a windfall. 27 His Honour referred to the part of the Report that contains details of fees and expenses incurred in the litigation and in the liquidation. The components of fees and expenses according to the Report were:

(i) legal costs and expenses funded by IMF, which had projected that the total amount would be approximately $1.9 million by the time of completion of the trial, assuming there was no appeal;

(ii) additional costs incurred by the liquidators' solicitors outside the funding agreement (including costs of some other recovery actions and costs incurred in connection with the voluntary administration), not recoverable except if sufficient funds became available (the Report did not purport to quantify these costs);

(iii) the liquidators' fees in relation to matters outside the proceedings (including fees in relation to the voluntary administration), and also the liquidators' fees in relation to the proceedings but not covered by the funding agreement. 28 In the course of argument on the appeal the Court invited the appellants to clarify the proportion of costs referable to compulsory examinations and other pre-commencement investigations. By supplementary submissions dated 19 November 2008, the appellants explained that the costs estimated by IMF to be $1.9 million included the cost of compulsory examinations conducted in late 2003 and in early 2004 prior to the commencement of the proceedings. They said the evidence before the trial judge did not disclose the breakdown of the figure of $1.9 million between pre-commencement investigatory costs and the costs of the conduct of the proceedings, but that breakdown was disclosed in a single page annexure to the amended IMF funding agreement entered into in February 2007. The appellants tendered that page, which has been received and marked Exhibit B. It appears from that document that the total amount of legal costs and expenses to be funded by IMF was $1,938,184.22 (including GST). Of that total amount: · $448,571.84 was the amount of liquidators' fees relating to the public examinations and the proceedings that IMF agreed to fund, and $1,489,612.38 was the amount of legal costs of the proceedings that IMF agreed to fund; and · $378,844.22 was the amount of all costs (liquidators' fees and legal costs) incurred prior to the commencement of the proceedings (principally relating to the public examinations) that IMF agreed to fund, and the total costs related to the proceedings (legal costs and liquidators fees) that IMF agreed to fund were $1,559,340. 29 Exhibit B does not tell the whole story because there were, according to the Report as summarised at 27 and (iii) above, other fees incurred by the liquidators' solicitors, who under the funding agreement were reimbursed by IMF only for a portion of their costs of the proceedings. The amount of those additional solicitors' fees is not quantified in the Report but presumably at least part of them would be recoverable in a costs assessment. There were also liquidators' fees in addition to the amounts that IMF agreed to fund. The Report gives some figures concerning the liquidators' fees: the liquidators' time costs up to 31 December 2006 were a total amount of $1,364,596, of which $1,143,346 had been approved by creditors, $604,150 had been paid and $760,446 remained outstanding. According to the Report these figures included the liquidators' fees in relation to the proceedings covered by the funding agreement, and also fees in relation to matters outside the recovery proceedings (such as fees relating to the voluntary administration) and fees in relation to the proceedings but not covered by the funding agreement. It seems likely that the bulk of the fees incurred in 2005 and 2006 was related to the proceedings. Therefore in addition to the total costs funded by IMF in relation to the proceedings, $1,559,340, there was an additional unquantified sum for further solicitors' fees and an additional substantial sum for further liquidators' fees related to the proceedings. The total amount, including these additional fees, may well have been in the order of $2 million. 30 As set out above, in answer to a question by Palmer J, Mr Hall referred to costs "in the order of $2 million". In the Main Judgment, his Honour said that "the Liquidators' costs of the proceedings will be in the order of $2M", and on that basis he expressed concern that the costs were an excessive amount out of proportion to the maximum possible recovery (at [381], [384]). During the hearing of the appeal senior counsel for the appellants submitted that his Honour's criticism of the costs of the proceedings did not have a factual foundation. But the figure of $2 million was given in evidence by Mr Hall and the evidence comprising the Report and Exhibit B, taken together, does not disprove that figure. We therefore reject the submission that the evidence did not support the figure for costs used by Palmer J in his criticism of the costs of the proceedings. 31 The Report referred in some detail to amendments that had been made to the funding agreement. Palmer J extracted the following part of the Report in his Main Judgment (at [356]): "It was intended that outstanding costs be recouped from any proceeds of recovery actions including the Proceedings, after making the payments required under the funding agreement, however any recoupment has now been capped pursuant to an amendment to the funding arrangements as discussed in (a) below. (a) Amendment to Funding Agreement In our previous report to creditors, we advised creditors that recoveries from the Proceedings alone would not be likely to result in any significant returns to creditors. However, it was recognised that such recoveries could fund further actions, the cumulative effect of which may be to the benefit of creditors. Such further actions are mentioned in Section I and VIII of this report. In light of the increased complexity of the case, the longer than anticipated trial and, in particular, the inability to achieve a settlement prior to the significant costs of the trial being incurred, the Liquidators recently approached IMF to negotiate an amendment to the funding agreement regarding the distribution of any successful recovery from the Proceedings. In particular, the Liquidators wished to secure, if possible, a revised agreement which would have the potential to provide a greater return to the unsecured creditors of Wines and Vineyards than would otherwise occur under the pre-existing funding agreement. The amendment which has now been agreed by the Liquidators with IMF reflects, in their view, a more appropriate funding agreement in the current climate of significantly increased costs, a 4-6-week trial and no prior settlement. The Liquidators and IMF have agreed a cascading arrangement whereby any proceeds recovered from the proceedings (Recovery Sum) are to be paid in a priority which differs to that set forth in Section 556 of the Act and elevates the entitlement of unsecured creditors to payment of a dividend of an agreed amount, dependent on the quantum of the Recovery Sum. The amendment which has been agreed is confidential and accordingly, summary details only are provided in this report to creditors, to advise the effect of the amendment and in particular, the manner in which the amendment may benefit creditors. The amended agreement defers: · payment of most of the legal costs and Liquidators' fees which have not been indemnified by IMF; · IMF's entitlement to be paid its success fee and other fees due under the funding agreement. IMF retains its priority entitlement to be reimbursed the costs it has actually paid in the proceedings. Pursuant to the amendment: · 50% of any return which exceeds IMF's costs (which are approximately $1.9 million subject to any appeal) will be set aside for the unsecured creditors of Wines and Vineyards, to be paid to them by way of a dividend, subject however to that pool of funds being at least $500,000; · 50% of any return exceeding IMF's costs will be distributed in satisfaction of the [Liquidators' and the solicitors'] unpaid costs related directly to the Proceedings, capped at $80,000 each, and IMF's success and other fees to which it is entitled. Practically, this arrangement requires a return of $2.9 million or greater for there to be a payment to creditors. The Liquidators note that this threshold is much improved on the pre-existing funding agreement. The threshold of $500,000 has been agreed because, given that the quantum of unsecured creditors in Wines and Vineyards is high (combined over $100 million), any return by way of a dividend distribution of an amount less than $500,000 will approximate zero rendering the distribution futile. The Liquidators' necessary fees and costs associated with dealing with proofs of debt and making payment of dividends will be deducted from the pool of funds available to creditors prior to distribution." 32 In a further passage under the heading "Likelihood of Return to Creditors" extracted by Palmer J, the Report said that if a favourable judgment were to be obtained and recovered in the insolvent trading proceedings, funds might become available for distribution to creditors but as an approximate indication, any dividend would not be likely to exceed three cents in the dollar. Under the heading "Likelihood of Return to Shareholders", the Report raised the possibility of an action against third parties for compensation in respect of losses by shareholders who had invested in the Reynolds Group in a capital raising in June 2002, but the Report said that although IMF had expressed interest in the matter, it had not been taken further. 33 Palmer J sought further clarification of the returns that might be available to creditors under the amended funding agreement, and was provided with a schedule, Appendix A to the Main Judgment, which he summarised and discussed at [357]-[364]. The schedule showed that on the highest return case, which assumed recovery of $5,562,751.17 on the insolvent trading claim and full recovery on the unfair preference claim, the liquidators would recover $9,653,689.28 (including interest and legal costs of the proceedings), and after deducting IMF's costs and success fee and the liquidators' costs, the amount available for distribution to creditors would be $3,726,844.64, giving them a distribution of 2.85 cents in the dollar. The comparable figures on the medium return case were $3,200,000 for recovery on the insolvent trading claim, total recovery of $6,468,475, net received by the liquidators for distribution to creditors of $2,134,237.50, and a distribution of 1.63 cents in the dollar. The comparable figures on the lowest return case were $825,000 for recovery on the insolvent trading claim, total recovery of $3,255,717.88, net received by the liquidators for distribution to creditors of $527,858.94, and a distribution of 0.4 cents in the dollar. Palmer J inferred that the liquidators could readily have calculated the information in the schedule before the proceedings were commenced (at [367]). 34 Although the Court was not supplied with figures for the settlement sum, we were informed at the hearing of the appeal that the amount recovered is insufficient for the payment of any dividend to creditors.

Palmer J's reasoning: (a) were litigation funding and lack of benefit to creditors relevant to Mr Irving's defence? 35 Palmer J considered the relevance of the unlikelihood of a dividend to creditors in his Main Judgment at [367]-[379]. An important question for his Honour was whether it was relevant under s 1317S and s 1318 that the proceedings were financed by a litigation funder who stood to benefit from the plaintiffs' success, in circumstances where those who really suffered loss (the creditors) would receive nothing or a derisory return. That led him to consider the judgment in the High Court in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; (2006) 229 CLR 386. In that case a litigation funder sought to encourage tobacco retailers to claim a refund of tobacco licence fees from wholesalers by persuading them to join in litigation controlled by the funder, and the funder instituted proceedings purportedly brought as a representative action under the Supreme Court Rules 1970. One of the issues raised by the appellants was whether, assuming that the proceedings had been properly constituted as a representative action, they were nevertheless contrary to public policy and an abuse of process because they were champertous and constituted maintenance. Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ found that the proceedings did not constitute an abuse of process by reason of the involvement of the litigation funder, and they were not contrary to public policy. Callinan and Heydon JJ dissented on that issue. 36 Palmer J quoted from the minority judgment and said (at [374]) that several factors indicated to the minority that the litigation in that case was an abuse of process: · the funder's motive was to derive a profit from a speculative investment rather than to assist those who could not afford justice; · the funder sought out the plaintiffs; · but for the funder, the persons who suffered loss would not have thought it financially worthwhile to sue; · on the other hand, the gain to the funder was potentially enormous and the funder had control of the proceedings. 37 His Honour observed that some of those factors (in fact, all but the second) were present in the case before him (at [375]): · IMF's involvement in the proceedings was not due to altruistic concern to vindicate the rights of creditors of the companies but, rather, was an investment driven by a profit motive; · if access to justice for the creditors were a justification for the proceedings, the justification failed in circumstances where the creditors would be lucky to get anything at all or the amounts they would receive would be derisory, and in those circumstances creditors would not think it financially worthwhile to sue; · IMF would, if successful, profit "to the tune of millions of dollars". 38 He said that many judges had voiced strong objection to the notion of claims to justice being treated as investment opportunities (at [376]), and he deplored the prospect of trading in what he described as "litigation derivatives" (at [377]). He said the facts of the case were extreme "in showing how a mammoth piece of litigation can be instigated, perhaps to the ruin of a defendant, with negligible 'access to justice' for those who have suffered a wrong but with lucrative reward for those who make a business of investing in law suits" (at [378]). 39 These parts of the judgment suggest the view that litigation funding is incompatible with the demands of justice. On that view, the very fact that Mr Irving faced claims driven by litigation funding and motivated by profit and not on behalf of those who suffered loss would be a factor suggesting that he ought to be excused from liability. But Palmer J clearly and expressly did not subscribe to that view, however much he may have sympathised with it. He also quoted (at [371]) and summarised (at [372]) the reasoning of Gummow, Hayne and Crennan JJ, with whom Gleeson CJ agreed; acknowledged that their Honours' observations were considered observations that must be accorded obedience (at [372]); and applied their Honours' views (at [379]). 40 In his summary, his Honour derived the following propositions from the majority judgment: · the justification for litigation funding is that it offers access to justice to those who could not otherwise afford to vindicate their legal rights; · the fact that a litigation funder has sought out proceedings in which to invest for profit is not objectionable as a matter of public policy; · the terms upon which litigation is funded may be so onerous and unreasonable as between the litigant and the funder as to be unenforceable between them, but that is no concern of other parties to litigation and does not of itself make the prosecution of the proceeding by the funder an abuse of process; · if the funder, driven by the profit motive, attempts to interfere with or manipulate due process in the litigation, or if the funder's lawyers commit breaches of professional duties, the court has sufficient power to deal with those matters without staying the litigation. 41 His Honour's conclusion was that Mr Irving could not say, merely because of the involvement of a litigation funder and the derisory return to creditors, that the proceedings were an abuse of process or frowned upon by the policy of the law, or that the law would pay any regard to the fact that the proceeds of the judgment against him would not go to those persons whom the legislature intended to be the beneficiaries of the suit (at [379]). 42 Senior counsel for the appellants placed some emphasis on what his Honour had said about the minority judgment in Campbells Cash & Carry at [374]-[378] of his judgment, for the purpose of developing his case that the Court's discretion to order an inquiry under s 536 had miscarried. In our view that involves a misreading of Palmer J's judgment. Palmer J did not adopt and apply that reasoning. Indeed, he expressly rejected it.

Palmer J's reasoning: (b) the liquidators' conduct and the grounds for an inquiry 43 In pars [380]-[397] of his Main Judgment, Palmer J made some critical observations about the conduct of the liquidators with respect to the proceedings. His Honour had received some relevant submissions from senior counsel for Mr Irving, who told the Court "these proceedings are a money making exercise for the litigation funder, the Liquidator and his lawyers, rather than seeking to compensate creditors in any meaningful way" (quoted at [368]). But the submissions were directed to Mr Irving's defence, whereas the issues to which Palmer J turned (at [380]) were whether there had been any abuse of process in fact, and whether the liquidators had failed to discharge their responsibilities, matters that it was open to the Court to consider, according to the majority in Campbells Cash & Carry. 44 Palmer J identified the following matters as considerations going to whether the liquidators had discharged their responsibilities:

(a) the extent and cost of the litigation, which were excessive (at [381]-[383]);

(b) the liquidators were seeking to throw the whole burden of those costs (including the liquidators' costs of the proceedings which, he said, were in the order of $2 million) on to the defendants (at [381];

(c) the liquidators' costs of $2 million were "quite out of proportion" given that the proceedings were brought to recover a possible maximum of $6 million (at [384]);

(d) the liquidators should have approached the Court for directions under s 511(1)(a) as to whether they were justified in commencing the litigation in view of the terms of the proposed funding agreement, the likely return to creditors, and the costs of the proceedings generally (at [385]);

(e) in circumstances where the liquidators' funding arrangements provided no more than a token benefit to the creditors, an issue arose as to whether they were in truth a means for the litigation funder and the liquidator to profit handsomely (at [388]);

(f) the absence of information before the Court as to whether ASIC was willing to prosecute breaches of the insolvent trading laws, information that would have been appropriate to give to the Court in an application for directions (at [390]);

(g) the position of liquidators appointed by the court as officers of the court, with the consequence that the court has the duty to see that all liquidators are performing their responsibilities in a prudent and proper manner (at [394]);

(h) the liquidators' duty to salvage as much is possible for the benefit of creditors, which has the consequence that if a proposed course of action is not likely to produce a worthwhile benefit for creditors, liquidators should not undertake it simply because it will generate enough to pay the liquidator's fees (at [395]);

(i) Mr Hall's feeling of discomfort about the amount of costs, to which he admitted in answer to Palmer J's questions (at [396]). 45 His Honour said that the Court was not powerless to correct what had happened, if it formed the view that the liquidators had acted improperly. He drew attention to the Court's power under s 98(4) of the Civil Procedure Act 2005 to make an order limiting recoverable costs (at [391]). He also noted the Court's power to inquire into the liquidators' conduct under s 536(1)(a), a power that the Court may exercise of its own motion (at [393], [394]). He said that when he came to deal with costs, he would wish to make some further inquiry from Mr Hall under s 536(1)(a), which would include inquiring as to why Mr Hall was uncomfortable about the costs expenditure, why he did not apply to the Court for directions, and why he thought it necessary to spend up to $2 million in costs when a quarter of that sum might well have been sufficient to prosecute the liquidators' case properly (at [396]). He said Mr Hall would be given the fullest opportunity to meet the concerns that he had expressed in his judgment, and he expressly contemplated that the answers he received might show the liquidators' costs to have been reasonable in view of the positions adopted by the defendants, but he warned that if he came to the conclusion that the liquidators' expenditure on costs was unjustified and improper, he would give consideration to whether a costs limiting order should be made under the Civil Procedure Act s 98(4) (at [397]). 46 Importantly, Palmer J envisaged that the inquiry he had in mind would be conducted by him during the costs hearing and would lead, if at all, to a costs limiting order. His Honour did not appear to have in mind any general disciplinary investigation. At the end of the Main Judgment he said: "[560] Pursuant to CA s 536(1)(a), I will enquire into the conduct of the Liquidators in: - entering into a funding agreement and commencing these proceedings when they were aware that there was a substantial risk that the creditors would receive no, or very little, dividend; - permitting costs to amount to approximately $2M; - failing to obtain the directions of the Court before proceeding. [561] I will formulate questions for the Liquidators after submissions from the parties and I will give directions as to how the enquiry is to proceed. [562] Questions of costs will be reserved until my enquiry into the Liquidators' conduct is concluded and the amounts payable as between the parties are ascertained."

The Second Judgment and the order for an inquiry 47 The observations at the end of the Main Judgment were a statement of intention, and no order for an inquiry was made at that stage. Senior counsel and solicitors were instructed to appear for the liquidators solely with respect to the proposed inquiry under s 536. Submissions were received, and his Honour delivered a further judgment that addressed, amongst other things, the issue under s 536 (Hall v Poolman (No 2) [2007] NSWSC 1494, 20 December 2007; "the Second Judgment"). There was a further hearing at the request of the liquidators for the purpose of settling the orders, which were made on 15 February 2008 (Hall v Poolman, Supreme Court of New South Wales, Palmer J, 15 February 2008, unreported; "the Third Judgment"). 48 In the Second Judgment Palmer J dealt with s 536 as follows: "[12] The Liquidators submit that I should not order any further investigation into their conduct, as foreshadowed in paragraph 396 of my judgment. Mr Bathurst QC, who appears for the Liquidators on this issue alone, submits that there is no foundation for an enquiry under CA s 536(1)(a) because I cannot yet be satisfied that the Liquidators have not faithfully performed, or are not faithfully performing, their duties. [13] I do not think that CA s 536(1)(a) requires that the Court be satisfied to some particular degree of certainty of improper conduct by a liquidator before it enters into an enquiry under the section. The power may be exercised where it ' appears ' that the liquidator has not performed his or her duties faithfully - i.e. there must be some factual basis to suggest improper conduct and the circumstances generally must be sufficiently serious to justify putting the liquidator to the expense and trouble of an enquiry. [14] In the present case, I have indicated at some length in the judgment the factual basis which suggests improper conduct by the Liquidators. As I have said in the judgment, the enquiry may dispel the appearance of improper conduct. However, as matters presently stand, I would not be prepared to ignore what has happened. As I have noted in the judgment, it seems to me that the Court should know more about how the Liquidators could have let costs of the proceedings run up to some $2M, although feeling some disquiet about it and not seeking directions. In my view, a sufficient basis is made out for an enquiry under CA s 536(1)(a). [15] The Court is not circumscribed in its supervisory power over liquidators. An inquiry under CA s 536(1)(b) could be conducted where a complaint has been made. A complaint is not required to be in any particular format. In my opinion, the submissions of Mr Irving as to the Liquidators' conduct, as I have summarised in my reasons for judgment, amount to a complaint for the purposes of s 536(1)(b). [16] I should add that the Court has a general power to require answers by a liquidator under s 536(3) and that power does not depend upon the existence of circumstances falling within s 536(1) or (2). I would exercise the power under s 536(3) in the present case. [17] I have made it clear to the parties that I do not propose myself to conduct the inquiry under s 536. In view of the comments which I have made in the judgment, I think it is wiser that the enquiry proceed before another Judge, and that I consider that Judge's report when making final costs orders in these proceedings." 49 Palmer J's principal order was as follows: "1. Pursuant to sections 536(1)(a), 536(1)(b) and 536(3) of the Corporations Act, there be an inquiry by the Court into whether Mr Gregory Winfred Hall and Mr Phillip Patrick Carter ( Liquidators ) failed faithfully or properly to perform their duties or a requirement of the Corporations Act 2001 (Cth), regulations or rules by: (a) Entering into funding agreements with Insolvency Litigation Fund Pty Limited in relation to Reynolds Wines Limited ( Wines ) and Reynolds Vineyards Pty Limited ( Vineyards ); (b) Commencing and prosecuting proceedings No 2032 of 2004 ( Insolvent Trading Proceedings ) having regard to the potential return to creditors of Wines and Vineyards; (c) Commencing the Insolvent Trading Proceedings without first seeking directions from the Court that they were justified in doing so; and (d) Incurring costs in the Insolvent Trading Proceedings and related proceedings (No 2685 of 2004 and No 4870 of 2005) in the amounts incurred in prosecuting those proceedings." 50 There was no order specifying with more particularity the issues or questions to which the inquiry would be directed, or the procedure for conducting it. These matters were left for determination by the judge who would conduct the inquiry. His Honour stayed the operation of his order pending the plaintiffs' foreshadowed application for leave to appeal, with liberty to apply following judgment in the appeal. 51 At the hearing of the appeal it was submitted that subpar (d) of the order was limited to legal costs and disbursements and did not encompass the liquidators' own fees. Palmer J's central concern was about the lack of any significant return to creditors from the proceedings. The liquidators' fees, as well as legal costs and disbursements, would reduce the amount of any verdict available for distribution to creditors. Moreover, as we have explained, a component of the "Liquidators' costs of the proceedings … in the order of $2 million" (Main Judgment at [381]) was the liquidators' own fees. Nevertheless, it appears to us that the order for an inquiry, on its proper construction, was limited to costs of the proceedings and did not include the liquidators' own fees. This is because in the Main Judgment, Palmer J made it plain that he would deal with the question of ordering an inquiry when dealing with the question of costs of the proceedings. The outcome that he envisaged in the event that further inquiry showed that the liquidators' expenditure on costs was unjustified and improper was the making of a limiting order on the costs of the proceedings under s 98(4) of the Civil Procedure Act, not an order about the liquidators' own fees (Main Judgment at [391], [397]).

The interpretation of 536 52 Section 536 of the Corporations Act is in the following terms: " Supervision of liquidators 536 (1A) In this section: liquidator includes a provisional liquidator. (1) Where: (a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing: (i) a requirement of the Court; or (ii) a requirement of this Act, or the regulations or of the rules; or (b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties; the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit. (2) ASIC may report to the Court any matter that in its opinion is a misfeasance, neglect or omission on the part of the liquidator and the Court may order the liquidator to make good any loss that the estate of the company has sustained thereby and may make such other order or orders as it thinks fit. (3) The Court may at any time require a liquidator to answer any inquiry in relation to the winding up and may examine the liquidator or any other person on oath concerning the winding up and may direct an investigation to be made of the books of the liquidator." 53 The court must bear in mind the place of s 536 in the regulatory system established under Australia's corporations legislation when construing the section. It must be recognised that this section, together with the virtually identical provision applicable to controllers of the property of a corporation in s 423, is a broadly expressed supervisory jurisdiction over the conduct of persons in control of the affairs of a corporation, in circumstances where normal market forces and the exercise by shareholders of their rights to control are attenuated or non-existent. These powers are one part of a range of regulatory powers conferred on the court and/or ASIC to ensure the lawful, orderly and efficient conduct of the affairs of corporations during such a period. The detailed regulatory scheme found in the Corporations Act manifests in this, as in so many other respects, the central significance of corporate conduct for the economic and social life of the nation. 54 Powers that can be characterised in this way are not to be narrowly construed, nor confined by fine distinctions. Where a statute grants a power to a superior court to deploy as the circumstances of the case necessitate, it is a basic rule of statutory interpretation that the grant should not be narrowly construed or cut back unless there are very clear reasons for doing so: PMT Partners Pty Ltd (in liq) v Australian National Parks & Wildlife Service (1995) 184 CLR 301 at 313 per Brennan CJ, Gaudron and McHugh JJ, 316 per Toohey and Gummow JJ; Andjelic v Marsland (1996) 186 CLR 20 at 39 per McHugh and Gummow JJ; Wong v Silkfield Pty Ltd [1999] HCA 48; (1999) 199 CLR 255 at [11] per Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ; Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd [2008] HCA 9; (2008) 232 CLR 314 at [41], per Kirby J. A fortiori, where the powers in question are an important component of a regulatory scheme of fundamental economic and social significance. 55 Notwithstanding the plenary nature of the powers conferred by s 536, the case law has developed a number of principles bearing on the exercise of the court's discretion to order an inquiry. It is pertinent to mention four matters in the present context, which we shall address under the headings: · the "prima facie case" submission; · the court's supervisory role over the conduct of liquidators; · the relevance of alternative remedies; · the analogy with inquiries into the conduct of trustees in bankruptcy.

The "prima facie case" submission 56 In Burns Philp Investments Pty Ltd v Dickens (1993) 11 ACLC 272, upon which the appellants relied in their written submissions, Young J said (at 273) that "the court must be given some material to suggest that it would be in the public interest to conduct an inquiry", and this meant that the party seeking an inquiry "must put forward material which prima facie satisfies the court of that matter". These observations were applied by Burchett AJ in Re Glowbind Pty Ltd (in liq); Takchi v Parbery [2003] NSWSC 1190; (2003) 48 ACSR 456, the other case relied upon by the appellants. The appellants contended that the precondition is not met unless the court is satisfied that there is a prima facie case of failure to perform duties or observe requirements, suggesting some relatively onerous evidentiary burden for the person seeking an inquiry under subpar (1)(a). 57 However, Young J did not say that there must be a case of failure faithfully to perform duties or observe requirements proven to a prima facie evidentiary standard. That is plain from Burns Philp Investments Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280, where his Honour accepted a submission to the effect that the barrier over which the plaintiffs would have to pass to have an inquiry mounted was not a very high one, and that "all that was necessary for his clients to show was that there was a prima facie case that something needed to be investigated" (at 287). 58 The Full Court of the Federal Court dealt with a similar submission in Leslie v Hennessy [2001] FCA 371 at [6]. In a joint judgment, on appeal from Drummond J, Ryan, Dowsett and Hely JJ said: "[6] … [W]e believe that both Young J [in the Burns Philp Investments (No 2) case] and Drummond J were describing something less formal than a prima facie case according to some evidential burden of proof. Their Honours both meant only that an applicant must show a sufficient basis for making an order, that there is something which requires inquiry . The Court then has a discretion which it must exercise. Many factors will be relevant to that exercise. They include the strength and nature of the allegations, any answers offered by the liquidator, other available remedies, the stage to which the liquidation has progressed, the likely amounts of money involved, the availability of funds to pay for any inquiry, the likely benefit to be derived from it and the legitimate 'interest' of the applicant in the outcome." [Emphasis added] (See also Magarditch v Australia and New Zealand Banking Group Ltd [1999] FCA 35; (1999) 30 ACSR 265 at 287 per Einfeld J; Re Fox Home Loans Pty Ltd (in liq) [2005] NSWSC 1050 at [8] per Barrett J; Vink v Tuckwell [2008] VSC 100; (2008) 66 ACSR 30 at [76]-[77] per Robson J; application for leave to appeal dismissed: [2008] VSCA 204; (2008) 68 ACSR 265.) 59 We agree with these observations, subject to a qualification that we take to be implied in their Honours' remarks, namely that the "sufficient basis" for making the order must relate to the matters concerning faithful performance of duties or observance of requirements that are stated in subpar (1)(a). Of course, the list of relevant factors set out in this passage does not purport to be comprehensive. 60 In Re Timberland Ltd (in liq); Commissioner for Corporate Affairs v Harvey [1980] VR 669 at 683, Marks J expressed concern that if subsection (1)(a) were construed to mean that the court only had jurisdiction if the matters stated in the subparagraph were first shown to exist, such a construction would "produce the curious result that the subject of the inquiry would be something that has happened rather than whether and to what extent it has happened". The answer to that conundrum is that under subpar (1)(a) the court is empowered to inquire as to whether and to what extent something has happened or is happening of the kind described in the subparagraph, provided only that there is a sufficient basis for ordering an inquiry in the sense articulated by the Full Federal Court in Leslie v Hennessy.

The court's supervisory role over the conduct of liquidators 61 The powers conferred by s 536 have a common element, namely that they are powers of a regulatory nature concerned with the supervision of liquidators of all kinds. The court has a long-established role in the supervision of court-appointed liquidators, and s 536 confers a statutory supervisory jurisdiction in respect of liquidators of all kinds. 62 In a compulsory winding up by the court, the liquidator's office stems from the appointment by the court. The winding up is conducted by the court and the decisions the liquidator makes from time to time are in effect made under the authority of the court by the liquidator as an officer of the court: Re Timberland Ltd (in liq); Commissioner for Corporate Affairs v Harvey, supra at 696 per Marks J. On the other hand, voluntary winding up is a statutory process and the liquidator is not an officer of the court carrying out tasks on the court's behalf: Clutha Ltd (in liq) v Millar (No 5) [2002] NSWSC 833; (2002) 43 ACSR 295 at [13]-[18], per Austin J; Australian Security Estates Pty Ltd v Bluecrest Holdings Pty Ltd (in liq) [2002] NSWSC 491; (2002) 169 FLR 111 at [60] per Bergin J. The distinction is reflected in r 42.3(2)(g) of the Uniform Civil Procedure Rules, which permits the court to make an order for costs in the exercise of its supervisory jurisdiction over its own officers, including court-appointed liquidators but not liquidators appointed in a voluntary winding up. 63 The liquidators in the present case hold office under a deemed creditors' voluntary winding up, consequent upon termination of the administration of the companies: s 446A. They are not liquidators in a compulsory winding up. They are therefore not officers of the court. Nevertheless they are subject to the applicable provisions of the Corporations Act, which include not only the statutory duties of officers of corporations (liquidators of all kinds being within the definition of "officer" in s 9; see also s 179(2)), but also statutory provisions of a supervisory kind where those provisions extend to liquidators generally. Importantly, s 536 is one of those provisions. 64 Although in some respects the court has a greater supervisory role over the conduct of a court-appointed liquidator, in our view there is no proper basis for exercising a lesser degree of supervision over liquidators in a creditors' voluntary winding up under a statutory authority that extends to those liquidators. As Palmer J remarked (Main Judgment at [394]), "all liquidators act in the public interest; accordingly the court has not only the power, but also the duty, to see that liquidators are performing their duties in a prudent and proper manner". 65 Nowadays liquidation preceded by a voluntary administration is the most common form of liquidation, and it is treated under the Act as a creditors' voluntary winding up, as in the present case. If the court were to adopt a less active approach to its statutory supervisory role in the case of a creditors' voluntary winding up than in the case of a compulsory winding up, it would be stepping back from the role in the most common case, notwithstanding the legislature's conferral of the supervisory role on the court for all liquidations. Therefore, when it comes to exercising powers under s 536, our view is that there should be no reduction of supervision by virtue of the fact that the appellants are not court-appointed liquidators; conversely, if an inquiry under the section would have been appropriate had the appellants been court-appointed liquidators, such an inquiry is likely to be appropriate to them in their current status. 66 It is pertinent to recognise that the powers conferred by s 536(1) are vested in both the court and the regulator, and therefore that the court is performing a regulatory role, in the sense that its function under s 536, like the function of ASIC under the section, is supervisory. Although the power conferred by s 536(3) is conferred on the court alone, it is of the same supervisory nature. As predecessors to s 536(1) said expressly, the court is to "take cognizance of the conduct of liquidators …": Companies Act 1896 (Vict) (60 Vict No 1482), s 146; Companies Act 1936 (NSW), s 235; Uniform Companies Act 1961, s 278; see O'Toole v Mitcham (1977) 2 ACLR 471 at 473, per Young CJ (Gillard and McGarvie JJ agreeing); nothing in the explanatory memorandum to the Companies Bill 1981 suggests that the change of wording introduced in the Companies Code was intended to alter the court's role. 67 The court's supervisory role is recognised in the frequently cited observations of McLelland J in Northbourne Developments (supra, at 438), where his Honour said of the predecessor to s 536 that it: " … is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control for what might broadly be described as disciplinary reasons."

(For subsequent applications of this approach, see eg, Re Glowbind , supra at [217], per Burchett AJ; Australian Securities and Investments Commission v Forestview Nominees Pty Ltd (recrs & mgrs apptd) [2006] FCA 1530; (2006) 236 ALR 652 at [15]; Leslie v Hennessy , supra at [4]; Australian Securities and Investments Commission v Edge [2007] VSC 170; (2007) 211 FLR 137 at [48] per Dodds-Streeton J; Vink v Tuckwell, supra (Robson J).) 68 The characterisation of the basis for intervention as "disciplinary reasons" is, as McLelland J said, "broadly" apt. Particularly with respect to the unfettered power in s 536(3), it is not appropriate to limit the power to a concept of impropriety. It extends at least to the full range of "duties" referred to in s 536(1)(a). Questions of skill and diligence, as well as questions of improper conduct or improper purpose, can give rise to "disciplinary reasons" in the sense that McLelland J was applying the concept (see eg the duties in ss 180, 181, 182 and 183 of the Act).

The relevance of alternative remedies 69 One of the considerations relevant to the exercise the discretion under each of the powers in s 536 is whether or not there is another appropriate remedy: see Leslie v Hennessy, supra at [6]. Accordingly, where an issue is raised as to whether a decision made by a liquidator should be reversed or modified, the appropriate procedure is under s 1321: see Belvista Pty Ltd v Murphy, supra at 630, per McLelland J; Re Glowbind, supra at 465 [21], per Burchett AJ. Section 536 should not be used to assist a person engaged in litigation with a liquidator akin to discovery, at any rate where the litigation does not involve the kind of supervisory issues characterised by McLelland J as "disciplinary reasons": see Re Bauhaus Pyrmont Pty Ltd (in liq) [2006] NSWSC 742 per Barrett J.

The analogy with inquiries into the conduct of trustees in bankruptcy 70 By reason of the historical origins of statutory regulation of corporate insolvency in general bankruptcy legislation, it has always been the case that the development of case law with respect to the supervision of liquidators has drawn upon the parallel case law arising in the courts' supervision of trustees in bankruptcy. Thus, the exercise of the powers in ss 536 and 423 of the Corporations Act can be informed by the case law for s 179 of the Bankruptcy Act 1966 (Cth). 71 That section relevantly provides: "179(1) The Court may, on the application of the Inspector-General, a creditor or the bankrupt, inquire into the conduct of a trustee in relation to a bankruptcy …" 72 The s 179 case law sets out a broadly equivalent set of principles to that authoritatively established for s 536 by the Federal Court decision in Leslie v Hennessy as quoted above. One of the most frequently cited statements in this regard is that of Riley J in Re Alafaci, Registrar in Bankruptcy v Hardwick (1976) 9 ALR 262, where his Honour said at 268: " … [T]here is a preliminary question to be decided by the court - namely on the grounds and facts before it, has a case been made for inquiry into the trustee's conduct? If the answer to that question is 'yes', the next question is - what is to be the scope of the inquiry? It may be that the material already before the court sufficiently defines the scope of the inquiry; on the other hand, the court may find it necessary to define the subjects for inquiry - eg in the form: 'Did the trustee do (or fail to do) so and so?' - and to give directions before proceeding to inquire. In any event, the court will seek to inquire into specific matters, and to ensure that the trustee is given proper opportunity to prepare and present his case on those matters …" 73 Subsequently, in Re Gault; Gault v Law (1981) 57 FLR 165, Ellicott J, after referring to Re Alafaci, said at 173: " … the court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the court considers that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example, in an action for breach of trust." 74 These passages have been applied on numerous occasions: see, eg, Registrar in Bankruptcy v Bradley (1983) 72 FLR 231 at 232; Turner v Official Trustee in Bankruptcy (Federal Court of Australia, Burchett, Drummond and Sackville JJ, 27 November 1998, unreported); Wilson v Commonwealth of Australia [1999] FCA 219 at [44]; Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101 at [48]. Their similarity with the law governing s 536, especially as stated authoritatively by Full Federal Court in Leslie v Hennessy (supra at [6]), is striking. 75 One example of how the s 179 case law can inform s 536 is Wilson, supra. The Court refused to order an inquiry under s 179 in circumstances where there had been a judicial determination by a court of the matters sought to be opened by means of the inquiry. The principle of finality in litigation was applied to refuse an inquiry in such circumstances (see at [169]). 76 In Macchia, supra, French J, as his Honour then was, discussed the statutory history of s 179 back to the Bankruptcy Act 1914 (UK). His Honour referred to the earlier case law and said in a passage which is generally applicable to s 536: "[50] Section 179 operates in aid of the Court's supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s 178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee's powers continue in the various ways referred to by Merkel J at first instance in Cheesman . It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way. As is the case with s 178, it is not a vehicle for pressing claims for common law damages under the general law. That is a matter for a court of appropriate jurisdiction. In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For 'although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt's estate': Re Challen (a Bankrupt); Ex parte Brown v Bendeich (unreported, Federal Court, Beaumont J, No QB 1548 of 1993, 23 April 1996) cited with approval by Merkel in Cheesman at first instance, at [(1997) 143 ALR 78] 114." (See also Moore v Macks [2007] FCA 10 at [29]-[30].)

The Appellants' jurisdictional contentions 77 The appellants' central submission was that the matters relied upon by Palmer J to justify ordering an inquiry under s 536 of the Corporations Act are not capable, as a matter of law, of providing a foundation for such an order. That was in part a claim that his Honour misconstrued s 536, and in part a claim that the exercise of the Court's discretion under that section miscarried. We shall consider those two elements in this and the next parts, respectively. 78 In his order and in the reasoning in the Second Judgment, Palmer J invoked ss 536(1)(a), 536(1)(b) and 536(3) as sources of jurisdiction to order an inquiry. The appellants submitted in writing that the threshold articulated in s 536(1) also applies where the court proceeds under s 536(1)(b) or s 536(3): that is, the power to order an inquiry under any of those provisions is conditional upon the court being satisfied that there is a prima facie case that the liquidator has not faithfully performed his duties or has failed to observe a requirement of the court, the Act, regulations or rules (citing Burns Philp Investments Pty Ltd v Dickens, supra per Young J, and Re Glowbind, supra at 55 ([21]), per Burchett AJ). 79 Contrary to the appellants' contention in their written submissions, we have decided at [56]-[60] above that none of the powers conferred by s 536 depends upon there being a prima facie evidentiary case of failure faithfully to perform or to observe legal requirements. The fundamental issue to be addressed under each of the three provisions upon which his Honour relied is, as stated in Leslie v Hennessy, supra, whether there is a sufficient basis for making an order, whether there is something which requires an inquiry. 80 The other part of the appellants' written submission, namely that the limiting words of s 536(1)(a) should also be applied to s 536(1)(b) and s 536(3), was partly withdrawn in oral submissions, when the appellants conceded that s 536(3) has always been a separate power not governed or limited by the wording of s 536(1)(a). The remaining question is whether the limiting words of s 536(1)(a) should be extended to s 536(1)(b). We shall consider that question below, along with the other issues raised by the appellants with respect to subpar (b). 81 The appellants' principal contention of a jurisdictional character, namely that the matters relied upon by Palmer J were not capable, as a matter of law, of justifying an order for an inquiry under any limb of s 536, must be assessed in light of our analysis of the content and the scope of s 536 and the application of the test in Leslie v Hennessy, supra. 82 We have set out at [44] above the findings of fact upon which Palmer J relied. With respect to (g), we have considered (at [62]-[65]) the position of liquidators who are not officers of the court. With respect to (d) we will consider below (at [165ff]) the proposition that the appellants should have approached the Court for directions. Setting aside these matters, the other findings upon which Palmer J relied were, in our opinion, capable of supporting the conclusion that his Honour reached. In particular, in our opinion the following matters were, taken together, a foundation for the Court to decide that there should be further inquiry: · the extent and costs of litigation (Main Judgment at [381]-[383]); · the lack of balance or proportionality between the liquidators' costs of $2 million and a possible maximum recovery of $6 million (at [384]); · the fact that the proceedings would produce, at best, only a token benefit to creditors, and the possibility that the proceedings may have been commenced and prosecuted for the benefit of the liquidators and the funder rather than for the benefit of creditors (at [388]); and · the fact that one of the liquidators gave evidence expressing discomfort about the amount of costs (at [396]). 83 There were some additional submissions made, to the effect that his Honour gave weight to extraneous matters and failed to give weight or sufficient weight to material matters. These submissions will be addressed below, in the context of dealing with the appellants' alternative submission that the exercise of each discretion miscarried. We first proceed to consider the appellants' other jurisdictional submissions.

Subsection 536(1)(a) 84 The power conferred by s 536(1)(a) contains specific preconditions to the exercise of the power, which are capable of giving rise to jurisdictional issues, namely that it appears to the court that a liquidator: · "has not faithfully performed or is not faithfully performing his or her duties"; or · "has not observed or is not observing" requirements of the court, the Act, the regulations or the rules.

We have explained that in our view, these words do not require that there be a prima facie evidentiary case of lack of faithful performance or observance of requirements before subpar (a) is available (see [56]-[60]). 85 In contrast with subpar (1)(b), subpar (1)(a) does not require that a complaint be made to the court or to ASIC. The court may, if the jurisdictional requirements are met, act of its own motion to initiate an inquiry, although more usually it will respond to an application by the Commission or an interested person. 86 As noted above, in his Second Judgment at [13] Palmer J took the approach that subpar (a) does not require the court to be satisfied of improper conduct by a liquidator before it enters into an inquiry, since the power may be exercised where it "appears" that the liquidator has not performed his or her duties faithfully (or, one would add, that the liquidator has not observed or is not observing a requirement of the court, the Act, the regulations or rules). His Honour interpreted the word "appears" to mean that there must be "some factual basis to suggest improper conduct and the circumstances generally must be sufficiently serious to justify putting the liquidator to the expense and trouble of an inquiry". When his attention was drawn to that statement in the Second Judgment, senior counsel for the appellants said he did not disagree with it, except that the second part of it (relating to the expense and trouble of inquiry) went to discretion rather than jurisdiction. 87 Section 536(1)(a) was available to support Palmer J's order for an inquiry provided that the test articulated in Leslie v Hennessy was satisfied on the facts. For the reasons given at [82] above, our view is that Palmer J made findings that were capable of supporting his decision to order an inquiry under, inter alia, s 536(1)(a).

Section 536(1)(b) 88 Like subs (1)(a), subs (1)(b) contains a precondition to the exercise of power. Section 536(1)(b) requires that there be a "complaint … with respect to the conduct of a liquidator in connection with the performance of his or her duties". 89 The appellants submitted that the threshold in s 536(1)(a) also applies to s 536(1)(b). This submission receives some support from some remarks of Robson J in Vink v Tuckwell. His Honour said (at [86]) that "[a] complaint under s 536(1)(b) with respect to the conduct of the liquidator in connection with the performance of his or her duties should be confined to the liquidator's failure to observe the matters referred to in s 536(1)(a) …". If his Honour intended by that observation to import into subpar (1)(b), as a matter of construction, the limiting words of subpar (1)(a), so that a complaint would not enliven the court's power under subpar (1)(b) unless it was a complaint that the liquidator had not faithfully performed or was not faithfully performing his or her duties or had not observed or was not observing the requirements of the court, the Act, the regulations or the rules, then we would respectfully disagree. 90 In its terms subpar (1)(b) applies if a complaint is made to the court or ASIC with respect to "the conduct of the liquidator in connection with the performance of his or her duties", wide words which would cover complaints about incompetence or lack of diligence as well as complaints about failure to perform duties faithfully. We see no reason to read down those words by reference to another subparagraph expressed as an alternative to subpar (1)(b). His Honour's construction may well have had force if s 536(1) had retained the structure and language of s 278(1) of the Uniform Companies Act 1961, for in the latter provision the power to order an inquiry when a complaint was made was not in a separate subparagraph and it applied to a complaint made by any creditor or contributory or by the Board "in regard thereto". But when the Companies Code was introduced in 1981, the provision was widened to allow "any person" to make the complaint, and there is nothing in the Explanatory Memorandum for the Bill, or otherwise, to justify the belief that the power to act if a complaint was made was intended to be constrained by the language of subpar (1)(a) (see, especially, Explanatory Memorandum to the Companies Bill 1981, at [973]). 91 In the present case a submission was made to Palmer J by senior counsel for Mr Irving that the proceedings were a moneymaking exercise for the litigation funder, the liquidators and the lawyers, rather than seeking to compensate creditors in any meaningful way (Main Judgment at [368]). The full text of the submissions made on behalf of Mr Irving is not before the Court on the appeal, but it is plain that the submission was critical of the liquidators' conduct in the litigation, in connection with the performance of their duties. The submission was made for the purposes of the discretionary defence under s 1317S and s 1318, and was not couched as, or intended by counsel to be, a complaint for the purposes of s 536(1)(b). At the time of the Main Judgment, his Honour's attention was focused only on s 536(1)(a), which he invoked of his own motion (see at [393], [394], [396]), and s 536(1)(b) came into play only in the course of the further consideration that led to the Second Judgment. 92 Palmer J held that senior counsel's submission constituted a complaint for the purposes of s 536(1)(b), observing that a complaint under the subparagraph "is not required to be in any particular format" (Second Judgment at [15]). The appellants submitted that there needs to be a formal complaint about a matter identified in s 536, which we understand to mean (according to the appellants' submission) that there must be some form of communication requesting the court or ASIC (as the case may be) to take some step to rectify or respond to the liquidator's conduct. Plainly a submission to the court made for the purpose of excusing a defendant from liability for breach of duty is not a "complaint" in the sense advocated by the appellants, because it does not invite the court to take any steps to rectify or respond to the liquidator's conduct. 93 In the opinion of Hodgson JA and Austin J, Spigelman CJ disagreeing on this point, Palmer J was right in finding that a complaint had been made for the purposes of s 536(1)(b), for three reasons. 94 First, in terms s 536(1)(b) requires only that there be a "complaint" made to the court or ASIC by a person, and that the complaint be "with respect to the conduct of a liquidator in connection with the performance of his or her duties", and then the court or ASIC may inquire into "the matter". The statutory language conveys the idea that there must be some form of communication to the court or ASIC critical of a liquidator's conduct in connection with performance of his or her duties, but it does not require that the complaint be directed to the initiation of an inquiry under s 536 or, indeed, that it should urge or request the court or ASIC to respond to the liquidator's conduct. The word "complaint" does not of itself, in its primary and general meaning, include the notion of requesting that steps be taken in response. The Macquarie Dictionary (Revised Third Edition) defines the word as "an expression of grief, regret, pain, censure, resentment or discontent; lament; fault-finding" or "a cause of grief, discontent, lamentation, etc". According to the Macquarie Dictionary, it is only in the law that "complaint" can mean "information in written form giving details of an alleged criminal offence" or "(in certain jurisdictions) the means by which various civil matters are initiated", implying in that special context that the complainant requires that something be done about the matters complained of. There is no persuasive reason for giving the word "complaint" its narrow technical legal meaning, in a context where the word is used to provide a basis for the initiation of an inquiry on broadly disciplinary grounds. That being so, the statutory language is wide enough to apply to submissions to the court critical of the conduct of liquidators in the performance of their duties with respect to commencement and prosecution of recovery proceedings (and hence constituting a "complaint"), even though the submissions are made for the purpose of excusing a defendant in the liquidators' litigation from liability, rather than for the purpose of any action or inquiry being taken in respect of the liquidators' conduct. 95 That conclusion is supported by the fact that under s 536(1)(b), "any person" may make a complaint. In the Northbourne Developments case (supra at 438-9) McLelland J noted that those words should be taken to have their literal meaning. That question was left open by the Court of Appeal of the Supreme Court of Victoria in Vink v Tuckwell (supra at [45]), but in our view McLelland J's construction is correct having regard to the statutory language and legislative history. McLelland J proceeded to observe that "the legislature may well have taken the view that it is not in the public interest to limit the class of persons who might bring a complaint to the court of misconduct by liquidator". If the class of persons who might bring a complaint to the court is not to be limited, then for the same policy reasons there should be no restriction on the manner in which or the purposes for which a complaint is made. 96 Secondly, s 536(1)(b) confers jurisdiction on ASIC when a "complaint" is made to it, as well as the court where a complaint is made to the court, and so the word "complaint" must be given a meaning that fits both occasions. If a complaint is made to ASIC about the conduct of a liquidator, there is every prospect that the complaint will be at large and not directed to acting under s 536(1)(b). ASIC has a large armoury of powers to deal with liquidators in response to complaints, including (without attempting to be comprehensive) its powers to conduct investigations under Pt 3 of the Australian Securities and Investments Commission Act 2001 (Cth), or to initiate an examination under Pt 5.9 Div 1 of the Corporations Act, or to bring misfeasance provisions under Pt 5.9 Div 2, or to bring a complaint before the Companies Auditors and Liquidators Disciplinary Board under Pt 9.2. In those circumstances it is unlikely that the legislature intended to limit the word "complaint" in s 536(1)(b) to a complaint directed to one of ASIC's many powers, namely the power of inquiry under subpar (b). Further, it is unlikely that the legislature intended to prevent ASIC from inquiring into a communication critical of the conduct of a liquidator simply because the communication was made incidentally to some other purpose and the person making it did not ask ASIC to take some steps to respond to the liquidator's conduct. Therefore the court should not read into s 536(1)(b) a limitation that would confine "complaints" to "formal" complaints requesting the court or ASIC to respond to the liquidator's conduct. 97 Thirdly, just as it is unlikely that the legislature would have intended to restrict ASIC's use of the inquiry power, so also it is unlikely that any equivalent restriction would have been intended in the case of the court. Such a restriction would tend to fetter the discharge of the court's supervisory role. If the court receives a complaint about the conduct of a liquidator in connection with performance of the liquidator's duties, by "any person" and (one adds) whatever that person's purpose and the context and circumstances of the complaint, it should be open to the court to take the matter further forthwith in the public interest. All that is needed, on this construction, is that there be criticism expressed to the court, in any context, with respect to the conduct of a liquidator connected to performance of the liquidator's duties. 98 Senior counsel for the appellants drew the Court's attention to r 7.11(1) of the Supreme Court (Corporations) Rules 1999. According to that rule, a complaint under s 536(1)(b) must be by interlocutory process seeking an inquiry if the winding up is by the court, or by originating process seeking an inquiry in the case of a voluntary winding up (as in the present case). In our view the rule does not support the argument that a complaint under s 536(1)(b) must in all cases be a complaint directed towards enlivening that subparagraph or requesting the court to respond to the liquidator's conduct. Rule 7.11 simply informs the complainant of the correct procedure in the event that he or she wishes to bring a complaint before the court in circumstances where there is no existing application before the court. It does not preclude the complainant from voicing a complaint if he or she is already before the court. In any event, r 7.11 may be waived in an appropriate case: Civil Procedure Act, s 14. 99 Paragraphs [93]-[98] represent the views on this issue of Hodgson JA and Austin J. The immediately succeeding pars [100]-[103] represent the dissenting views of Spigelman CJ. 100 Section 536 constitutes part of the armoury of the supervisory jurisdiction of the court with respect to liquidators. The approach identified by McLelland J in Northbourne Developments, supra, to the effect that such supervision is in a general sense, "disciplinary" is applicable. In my opinion, a complaint under s 536(1)(b) requires some form of communication requesting the court to take steps to rectify or review something that had been done by a liquidator. A plea to exercise a statutory power to excuse default on the part of a former officer of the company, by reason of the conduct of the liquidator in pursuing litigation against him or her, is not such a request. 101 In my opinion, the submissions made to Palmer J on behalf of the defendants before him did constitute a "complaint" in a colloquial sense of that term, but did not constitute a "complaint" within the meaning of s 536(1)(b). The appellants' submission that what is required is some kind of "formal complaint" should be upheld. 102 Alternatively, I would independently apply the express words of r 7.11 of the Supreme Court (Corporations) Rules, which were relied upon in this Court but which were not referred to before Palmer J. That rule states expressly that a complaint "must be made … in the case of a voluntary winding up - by an originating process seeking an inquiry". In my opinion this mandatory provision requires the formality of the specified character. 103 As the joint judgment of Hodgson JA and Austin J notes, s 14 of the Civil Procedure Act empowers the court to dispense with the requirement of a rule, but to do so "by order". There has been no such order, not least because the rule was not drawn to the attention of Palmer J. In my opinion the mandatory words of the rule are applicable. 104 In the result, the majority opinion of this Court is that Palmer J had jurisdiction to make an order for an inquiry under s 536(1)(b) because a complaint had been made to the Court by a person with respect to the conduct of the liquidators in connection with performance of their duties. There being jurisdiction, the issues for the Court to address were explained in Leslie v Hennessy, supra, the general question being whether there is a sufficient basis for making an order, that is, something which requires inquiry.

Section 536(3) 105 The power conferred by s 536(3) does not contain any precondition of a jurisdictional character. However, jurisdictional issues are capable of arising in the light of the scope, purpose and subject matter of the legislative scheme as a whole. As explained below, it is a general limitation upon the powers of the court and ASIC under s 536 that they are supervisory powers over the conduct of liquidators. Although the wide-ranging and relevantly unfettered power in s 536(3) is conferred only on the court, and not on ASIC, the court is still performing a supervisory role when acting under that subsection. 106 Subsections (1) and (3) are separate sources of power, and consequently neither is to be construed by reference to the statutory language employed in the other. Historically subse (3) evolved separately from subsection (1): as a separate subsection in the Companies (Winding Up) Act 1890 (UK), s 25, and in the Companies Act 1896 (Vict) (60 Vict No 1482), s 146, and as a separate section in the Companies Act 1936, s 235. The present wording and structure of the section indicate that the powers are separate from one another and therefore to be separately construed. 107 As far as case law is concerned, in O'Toole v Mitcham, supra at 473, per Young CJ (with Gillard and McGarvie JJ agreed) observed that s 278(3) (predecessor of s 536(3)) was not in terms dependent in any way upon subs (1); see also Re Fermoyle Pty Ltd (in liq); Commonwealth v Brown (1992) 6 ACLR 640 at 650, per Crockett J; Australian Securities & Investments Commission v Edge, supra at 160 [89], per Dodds-Streeton J. 108 Palmer J said in his Second Judgment (at [16]) that the power under subs (3) is a general power to require answers by a liquidator, not depending upon the existence of circumstances falling within subs (1) or (2), and that he would exercise that power in the present case. In our view his description of the subsection is accurate. 109 Given that the appellants have abandoned their contention that the introductory words of s 536(1)(a) apply to s 536(3), the only jurisdictional submission relevant to the latter subsection is the contention that, as a matter of law, the factors relied upon by Palmer J were not capable of justifying an order for an inquiry. We have rejected that submission above. Nevertheless, a number of the specific submissions made in that regard are pertinent to the alternative contention that the exercise of the discretion miscarried. We deal with them in that context below.

Did the exercise of the jurisdiction to order an inquiry miscarry? 110 Where what is at stake is the exercise of discretionary powers by a trial judge, the grounds for appellate intervention are found in a well-known passage in the judgment of Dixon, Evatt and McTiernan JJ in House v The King (1936) 55 CLR 499, at 504-5: "It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred." 111 The circumstances in which an appellate court will infer that a discretion has been improperly exercised on the ground that the result is unreasonable or plainly unjust have been explained in later cases: especially Lovell v Lovell (1950) 81 CLR 513 at 532, per Kitto J; Australian Coal & Shale Employees' Federation v Commonwealth (1953) 94 CLR 621 at 627, per Kitto J; Vines v Australian Securities and Investments Commission [2007] NSWCA 126; (2007) 63 ACSR 505 at [10]-[13], per Spigelman CJ. 112 The propositions that emerge from these cases include the following: · An appellate court is not justified in substituting its own judgment for that of the primary judge unless it is clearly satisfied that the judgment of the primary judge was erroneous, as there is a strong presumption in favour of the correctness of the decision appealed from, so that the decision should be affirmed unless the court is satisfied that it is clearly wrong; · An appellate court may reach the requisite degree of satisfaction that the discretion has been exercised wrongfully if there has been an error which consists of acting on a wrong principle, or giving weight to extraneous or irrelevant matters, or failing to give weight or sufficient weight to relevant considerations, or making a mistake as to the facts. 113 In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 82 ALJR 1425 at [157], Gummow ACJ, Kirby, Hayne and Heydon JJ emphasised that according to the majority judgment in the House case, appellate interference with discretionary judgments on the ground that a consideration was left out of account depends on establishing that the judge did not take into account some material consideration. 114 The question to be considered is whether Palmer J's reasons for ordering an inquiry under ss 536(1)(a), 536(1)(b) and 536(3) were deficient in any of these ways: that is, whether he acted on a wrong principle, took into account extraneous or irrelevant matters, mistook the facts, failed to take into account a material matter, or his decision was unreasonable or plainly unjust. 115 The appellants' submissions may be organised in five groups under the following headings: · size of anticipated return to creditors; · the position of creditors; · proportionality between cost and recovery; · failure to apply for directions before commencement of the proceedings; · litigation funding.

Size of anticipated return to creditors 116 The appellants submitted that Palmer J erred in assessing the propriety of the liquidators' decision because he drew attention to the size of the recovery relative to the total value of the claims on the estate (Summary of Argument at [13]). The appellants' argument was that it should be irrelevant to the liquidator's decision to pursue a claim that the amount to be recovered was equivalent to, say one cent in the dollar of creditors' claims rather than 50 cents. Were it otherwise, the appellants claimed, a liquidator would be prevented from pursuing available recovery actions in any large insolvent winding up, where the total value of creditors' claims was very high; and therefore most preference claims in large insolvencies would be excluded on Palmer J's approach. 117 We agree that the anticipated dividend rate for creditors (that is, the comparison on a pro-rata basis between the amount of the anticipated total recovery and the amount owed to creditors) is not, of itself, relevant to the decision of a liquidator to commence or prosecute recovery proceedings. It is the anticipated total recovery for creditors and the range of amounts to be distributed to individual creditors that a liquidator should consider in deciding whether to take or continue with proceedings, for these amounts may show that bringing and prosecuting the proceedings will be justified in the interests of creditors as a whole even if creditors who are owed small amounts will receive only a tiny payment by way of dividend. It may be proper for liquidators to pursue a recovery action that will bring in a significant amount for distribution to creditors, even if the total value of creditor claims is so high that the dividend in cents per dollar will be very low. Recovery of, say, $10 million for creditors is likely to be worthwhile and proper even if total creditor claims amount to $1 billion and so the dividend will be no more than one cent in the dollar. 118 In his reasoning on the question whether to order an inquiry, his Honour did not specifically refer to the value of the claims on the estate (Main Judgment at [380]-[397]; Second Judgment at [13]-[16]). Clearly he was influenced by the prospect of little or no return to creditors (at [393], [395]), and he dealt in some detail with the schedule that set out the figures for the highest, medium and lowest returns, but it was principally in his questions to Mr Hall that he focused on the "cents in the dollar" that creditors would receive. 119 His Honour gave consideration to the overall adequacy of return at [343] of the Main Judgment, where he referred to the possibility that the whole or the vast majority of the fruits of the insolvent trading claim would go not to those who had suffered, namely the creditors, but rather to those who had made an investment in conducting the litigation. His Honour drew attention to the total recoveries anticipated in the lowest, medium and highest return cases (at [359]-[360]). While he noted the amount per dollar that the lowest, medium and highest returns would bring, he expressed the returns in total amounts and gave the total amount of recovery for the largest creditor as well as that creditor's debt (at [361]-[363]), and he noted that the creditors would receive nothing if the insolvent trading claim were to result in a judgment of less than $825,000 (at [364]). His Honour said that one of the factors that indicated to the minority judges in Campbells Cash & Carry that the proceedings in that case were an abuse of process was that in the absence of litigation funding, the persons who suffered loss would not have thought it financially worthwhile to sue at all, and he commented that in the present case creditors would be lucky to get anything or the amounts they would receive would in most cases be derisory (at [374]-[375]). He referred to the "derisory return" and the "nil or negligible return" to creditors (at [379]). 120 In our opinion, his Honour did not allow the extraneous matter of the dividend rate, as such, to guide or affect him in exercising his discretion. His Honour referred to the dividend rate as a way of expressing the paucity of the anticipated return. It was not a separate criterion.

The position of creditors 121 The appellants submitted that in determining the propriety of their conduct it was relevant that under the funding agreement the costs were borne by the funder, there was no risk to the creditors so that they stood only to gain, the Committees of Inspection were aware of the likely return to creditors and approved the funding arrangements, and after the commencement of the trial the liquidators renegotiated the funding arrangements to increase the distribution to unsecured creditors. 122 We agree that all of these factors are relevant to the assessment of the objective propriety of use of the liquidators' position. All those matters are reflected in the findings of fact in his Honour's judgment. There is nothing to indicate that Palmer J disregarded them or failed to give them due weight. But those matters are to be weighed up in the assessment against other factors that might point to impropriety, including the factors listed at [82] above. The central issue to be addressed by his Honour was not whether there was a prima facie case of impropriety but whether there was a sufficient basis for making an order, something that required inquiry.

Proportionality between costs and recovery 123 An important component of Palmer J's reasoning was that the potential return to creditors would, on any scenario, be insufficient to justify the cost of the proceedings, in circumstances where the real beneficiaries of litigation were the funder, the liquidators and their lawyers. The appellants made six points in response.

(a) Public interest 124 First, the appellants referred to the public interest in bringing directors to account for allowing the company to trade whilst insolvent. They submitted, and we accept, that in the absence of litigation funding the liquidators could not have conducted public examinations and could not have pursued the Main Proceedings. 125 The appellants relied on some cases dealing with approval of a liquidator's funding agreement of more than three months' duration under s 477(2B) or s 506(1A). In Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357, for example, the issue was whether the court should approve a funding agreement that would permit the liquidators to investigate the affairs of the company, with the possibility of subsequent proceedings concerning a large loan by the company to its majority shareholder and perhaps alleging breach of directors' fiduciary duties. One of the considerations that persuaded Hodgson CJ in Eq (as he then was) to grant approval, notwithstanding opposition from the majority of creditors, was that it was in the public interest that possible breaches of duty involving losses of great magnitude be investigated, even though the funder would have the option of taking 75% of any return (at 364). 126 The public interest was also taken into account in Re ACN 076 673 875 Ltd (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [33] and [39]. In that case, although the premium for the funder was 15% in the first phase of the investigation rising to 40% if proceedings were taken, the court took the view that the public interest in bringing directors to account for allowing the company to trade while insolvent, along with other factors including the potential benefit for unaligned creditors and the creditor's own view, provided grounds for approval of the funding arrangements. 127 Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 addressed the public interest in liquidators' recovery proceedings in a different context. There a magistrate made an order under s 588FF(1) for the recovery of an unfair preference payment even though the repayment would be absorbed by the liquidator's costs and other expenses of the liquidation and would confer no benefit on creditors. It was argued on appeal to Doyle CJ (sitting as a single judge of the Supreme Court of South Australia) that the magistrate should have exercised his discretion to deny relief in those circumstances. But Doyle CJ rejected the argument, saying that the benefit to creditors was the benefit of having the affairs of an insolvent company properly investigated and administered (at 659). That appears to imply a finding that, for the purposes of the exercise of the relevant discretion, the public interest in proper investigation and administration of the affairs of the insolvent company was sufficient to outweigh the circumstance that any amount recovered in the proceedings would be absorbed by costs and expenses and would not benefit creditors. 128 These cases confirm the general proposition that there is a public interest in liquidators bringing recovery proceedings, such as proceedings against directors for breach of duty or insolvent trading and proceedings for recovery of unfair preferences. The public interest in the liquidators in the present case taking the Main Proceedings and the Unfair Preference Proceedings was consequently a relevant factor for Palmer J to take into account in exercising his discretion to order an inquiry under s 536. 129 The public interest in the prosecution of insolvent trading and unfair preference proceedings is one important factor to be considered in the exercise of the court's discretion under s 536, along with the other matters identified by the Full Federal Court in Leslie v Hennessey, supra, and in the present reasons for judgment. However, the public interest is not so overwhelming as to extinguish all other considerations. 130 We have reached the conclusion that Palmer J did not give weight to the question of public interest and, on this ground, his order for an inquiry should be set aside. His Honour referred to the main cases upon which the appellants relied on the question of public interest, the Buiscex and Re ACN 076 673 875 cases (Main Judgment at [385]), as part of a list of cases to support the proposition that applications to the court by liquidators for directions as to whether funded litigation should be commenced are frequent. But he did not make any point about the observations in those cases on the question of public interest. He noted the court's interest, on an application for directions, in assessing whether the proposed litigation would be conducted in a manner consistent with justice to all concerned (at [386]) and in that regard, he listed the factors that the court may take into account in determining whether the liquidator is justified in proceeding. But he did not mention the public interest, even though one of the cases he cited was the Re ACN 076 673 875 case. He expressly referred to the need for all liquidators to act in the public interest (at [394]), evidently to support the proposition that the court has not only the power but also the duty to see that all liquidators (not only court-appointed liquidators who are officers of the court) are performing their duties in a prudent and proper manner. But he did not refer to the fact that recovery proceedings may serve the public interest.

(b) Palmer J's analysis of Campbells Cash & Carry 131 Secondly, the appellants attacked Palmer J's reasoning on the ground that it misapprehended the effect of Campbells Cash & Carry, supra. They submitted that the state of the law at present is that there is no over-arching policy against litigation funding. That is true, and it is also a matter expressly acknowledged by Palmer J (at [372], [379]). The submissions continued: "The Applicants cannot fail in the faithful performance of their duties by entering into a funding agreement simply because it transfers part of the fruits of the action to the funder".

That is also true, but at no stage did Palmer J suggest that the mere fact that the funding agreement transferred part of the fruits of the litigation to the funder was the basis for objection. 132 The appellants submitted that none of the matters relied upon by his Honour would make the funding agreement in the present case more objectionable than the agreement considered and approved in Campbells Cash & Carry. That may be true but the point is irrelevant. The main issue addressed by his Honour in the Main Judgment, when he came to consider the need for an inquiry, was whether there was a factual basis for inquiry into the faithful performance by the liquidators of their duties. The issue was not about the intrinsic acceptability of the funding agreement, but rather the circumstances in which the agreement was entered into and the proceedings were commenced and prosecuted.

(c) The commercial judgment of creditors 133 Thirdly, the appellants submitted that the question whether the potential return to the creditors was sufficient to justify the proceedings was a matter best left to the commercial judgment of the creditors, on the ground (citing the Buiscex case at 359) that the courts recognise that creditors are better judges than courts of their own commercial interests. This submission is based on the approval given by the meeting of the Committees of Inspection to the continuation of the proceedings after disclosure to them of the probabilities of success and further disclosure, after this issue had been raised by Palmer J during the course of the proceedings, of the amended litigation funding agreement. In our view a proper assessment of this submission requires some dissection of the commercial judgments involved in a litigation funding proposal. 134 The statutory scheme of supervision of liquidators includes a requirement that they should not enter into certain kinds of agreements without approval (see especially ss 477(2A) and 477(2B) for court-appointed liquidators and ss 506(1A) and 511 liquidators in a voluntary winding up). The approval in question can be given by the court, by a committee of inspection or by resolution of the creditors. In exercising their power to approve the liquidators entering into an agreement of more than three months' duration, the creditors (unlike a court) can be expected to take into account their own economic interests, and also (since for the most part creditors have some commercial experience) to make a commercial assessment of the terms of the proposed transaction. If, for example, the proposal is for the realisation of assets of the company, the creditors will give consideration to the commercial terms of the proposal as regards such matters as sale price and the terms of payment, and they will assess how these matters will affect the quantum and timing of distributions in the winding up. Generally equivalent considerations arise where the proposal relates to some other purely commercial agreement, such as a lease by or to the company or an agreement for the conduct of some business activity. A proposal by liquidators for a litigation funding agreement for the purpose of recovery proceedings is similar to such purely commercial proposals in that the creditors can be expected to evaluate the proposal by considering whether it is in their economic interests and also by making a commercial assessment of the terms of the proposed agreement; but a litigation funding proposal has some special elements that distinguish it from other commercial arrangements. 135 Where the creditors or the committee of inspection have approved the liquidators' proposed transaction under s 477(2B)/506(1A), there is of course no occasion to seek the approval of the court under that provision. However in the Buiscex case the converse occurred: the creditors unanimously passed a resolution rejecting a proposal by the liquidator to enter into a litigation funding agreement, and subsequently an application was made for the court's approval under s 477(2B). Hodgson CJ in Eq referred to the observation of Lindley LJ in Re English Scottish & Australian Chartered Bank [1893] 3 Ch 385 at 409, that "if the creditors are acting on sufficient information and with time to consider what they are about and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the court can be". That passage was quoted with approval by Giles J in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83. However, notwithstanding his support for that proposition, Hodgson CJ in Eq concluded on balance that the court's approval should be granted, having regard to various factors including the public interest. That decision suggests that, while the opinion of creditors is a relevant factor to be taken into account under s 477(2B)/506(1A), and also when the court exercises other discretions concerning matters addressed by creditors, the creditors' opinion is by no means determinative. 136 Lindley LJ's observation was about the creditors' judgment of their own interests, rather than their commercial assessment of the terms of the proposal. Where the issue before the court relates to a commercial transaction such as the realisation of assets or the conduct of a business, the court is likely to be influenced, though not necessarily conclusively, by the creditors' commercial judgment and also by their judgment of their own economic interests. However, if the issue before the court relates to a litigation funding agreement, the creditors' approval of the agreement may be of little or no significance for the court, for the following reasons. 137 As regards the creditors' own economic interests, the agreement may have the effect (as in this case) that the creditors' downside risk is removed and they have the possibility of an enhanced distribution if the litigation is successful. In those circumstances the creditors' favourable opinion is almost inevitable. The statutory scheme and the case law deferring to the commercial judgments of creditors is based on the assumption that the creditors have something to lose: ie that they have made a judgment that involves an assessment as to whether the prospective return to them is worth the costs and delay involved in the transaction. Where they are not responsible for the downside of litigation, their approval of the arrangement lacks the weight that their decision would bear if they had something at stake, both as to their judgment of their own economic interests and as to the commercial assessment of the proposal. 138 In a sense, under such arrangements the creditors' commercial function is assigned to the funder and in particular, it will often be the funder rather than the creditors who will thereafter make decisions about the commencement and prosecution of the proceedings contemplated by the agreement. In our view, the opinion of a litigation funder about the prospects of success of the recovery proceedings contemplated by its funding agreement is unlikely to have significant weight before a court that is asked to make a discretionary decision under s 536. Nothing in Campbells Cash & Carry, supra, requires the court, in the context of the nature, scope and purpose of the statutory scheme as a whole, to accept or give way to the litigation funder's opinion in such a context. 139 It may be that in some respects the position of a litigation funder is similar to the position that can and does arise when a creditor decides to take upon itself the risks of litigation, under an arrangement for a share in the proceeds and priority for its costs and expenses in the legal proceedings. But the position of a creditor who has taken an additional risk in pursuing recovery is given express recognition in the statutory scheme in s 564. That section empowers the court to make an order giving creditors who have given an indemnity for litigation or with respect to the protection or preservation of property or of expenses, an advantage over other creditors "in consideration of the risk assumed by them". This express statutory provision recognises the particular role of such creditors. A litigation funder has no such recognised statutory position. 140 In summary, the creditors' approval of a litigation funding proposal is a factor relevant to a discretionary decision by a court relating to the assessment of that proposal (including a decision to initiate an inquiry into the liquidators' conduct in making and implementing the agreement). However, the weight to be given to that factor depends on the circumstances and in many cases it will not be a significant factor. The litigation funder's commercial assessment of the proposal and the prospects of success in the litigation is not, in our opinion, a factor entitled to weight.

(d) Whether liquidators may bring and pursue recovery proceedings where the return to creditors is negligible and only the professionals and the funder will benefit 141 Fourthly, the appellants relied on the Re Imobridge Pty Ltd (in liq) (No 2) [1999] QSC 342; [2000] 2 Qd R 280 for the proposition that even if the potential return to creditors is negligible and the most likely outcome of litigation will benefit only the professionals and the funder involved in the winding up, it cannot be said that the proceedings are improper. 142 This submission in effect invites the Court to identify the relevant duty of liquidators who bring recovery proceedings, particularly where litigation funding is used. 143 Palmer J's general concern was whether, by their conduct in and about the proceedings and the litigation funding, the liquidators had discharged and were discharging their duties in that office. A specific duty to which he referred was the duty "to salvage as much as possible for the benefit of creditors" (Main Judgment at [395]). 144 The liquidator's duty to salvage the company's property for the benefit of creditors is an aspect of the broader duty to collect the assets of the company: A Keay, McPherson's Law of Company Liquidation, 4th ed (1999) LBC Information Services, at 5. Wide powers are available to the liquidator to discharge this duty, including the power to bring any legal proceeding in the name of and on behalf of the company: ss 477(2)(a) and 506(1)(b); see Bacich v Australian Broadcasting Corporation (1992) 29 NSWLR 1 at 10. As Brownie J pointed out in that case (at 11), citing Gray v Bridgestone Australia Ltd (1986) 10 ACLR 677, a liquidator is not obliged to seek the authority of the court or creditors before instituting proceedings on behalf of the company, even though the proceedings will be, in effect, at the creditors' expense; but the liquidator is obliged to make the relevant decisions with the skill and care appropriate to his or her office, and the negligent exercise of the power to bring proceedings may lead to the liquidator being deprived of costs (see also Ford's Principles of Corporations Law (LexisNexis, looseleaf) at [27.171]-[27.172]). 145 The author of McPherson's Law of Company Liquidation says (supra at 365), while "the liquidator is bound to do all that can be done to augment the disposable assets of the company", nevertheless: "Legal proceedings should only be commenced after careful thought. Risks should not be taken by the liquidator with funds of the company by engaging in costly litigation where there is no real prospect of success."

The cases cited in support of these propositions ( Re Tavistock Ironworks Co (1871) 24 LT 605; Re Silver Valley Mines (1882) 21 Ch D 381; Montreal Trust Co v Abitibi Power Co [1937] 4 DLR 369; Re Day & Dent Constructions Pty Ltd (1984) 32 NRE 13; 9 ACLR 319, affirmed in Re Ah Toy (1986) 10 FCR 356; 10 ACLR 630 do not give clear support to them, but it seems to us that the author's statements are correct as an application of the duty of care of liquidators to their assessment of whether to bring and prosecute legal proceedings. 146 For the most part, the law concerning the duty of liquidators to collect assets by taking recovery proceedings was developed before commercial litigation funding became widely available in Australia. But courts have had occasion to consider the impact of the availability of litigation funding in various contexts, most notably in applications for judicial approval of funding agreements of more than three months' duration under s 477(2B) or s 506(1A) and in applications for judicial directions under s 479(3) or 511. Some cases that have countenanced liquidators commencing proceedings with litigation funding were listed by Palmer J (Main Judgment at [385]): Re Tosich Construction Pty Ltd (1997) 73 FCR 219; Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; Buiscex supra; Imobridge supra; Re ACN 076 673 875 Ltd supra; Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466; (2003) 21 ACLC 1347; Leigh, re King Bros [2006] NSWSC 315; Stewart, re Newtronics Pty Ltd [2007] FCA 1375. We would add to the list UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (No 2) [1997] 1 VR 667; (1996) 21 ACSR 251; Re Feasty's Family Restaurant Pty Ltd (1996) 14 ACLC 1058; Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd [2008] FCA 471; (2008) 245 ALR 726 at [140]-[152], reversed on other grounds sub nom IMF (Australia) Ltd v Meadow Springs Fairway Resort Ltd (in liq) [2009] FCAFC 9. 147 The overall effect of the cases, especially when read in the light of Campbells Cash & Carry, is that there is no per se objection in terms of legal policy to liquidators entering into litigation funding arrangements that will share the fruits of litigation with the funder, provided that any necessary approval of creditors or of the court is obtained under s 477(2B)/506(1A), and provided that the arrangements in fact made are consistent with the liquidator's statutory and other duties. By those cases the courts are developing criteria to distinguish funding arrangements which they will accept from funding arrangements that they will regard as unacceptable, although the approach in the cases which preceded Campbells Cash & Carry must be treated with care. 148 It is not necessary to deal comprehensively with the criteria emerging from the cases, and it is probably unwise to do so given that the present appeal was without a contradictor. But there is one issue that should be addressed, namely whether it is ever permissible for liquidators to commence or continue with proceedings where there is no prospect that a successful outcome will permit a substantial distribution to creditors. 149 Generally speaking, liquidators seeking to discharge their duty to collect the assets of the company by recovery proceedings should do so with costs and benefits clearly in view, the relevant benefits primarily being benefits to creditors. The liquidator's statutory powers (including the exercise of statutory powers such as those conferred by s 477(2)(a) and s 506(1)(b)) must be exercised bona fide for the purpose for which they were conferred; i.e. for the purpose of collecting the assets of the corporation for, relevantly, the benefit of creditors. This is a principle of private law deriving from the doctrine of fraud on a power, which has a close analogy in public law (see, eg General Assembly of The Free Church of Scotland v Lord Overtoun; Macalister v Young [1904] AC 515 at 695; Duke of Portland v Topham (1864) 11 HL Cas 32; 11 ER 1242 at 1251; Galloway v London Corporation (1866) LR 1 HL 34 at 43; Arthur Yates & Co Pty Ltd v Vegetable Seeds Committee (1945) 72 CLR 37 at 67-68, 82-83; The Queen v Toohey; ex parte Northern Land Council (1982) 151 CLR 170 at 186-187; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 288-294). 150 However, if: · liquidators have incurred costs in preliminary investigations and in creditors' meetings, and · they consider that the prospective benefits to creditors justify further investigation in which they will incur more costs and expenses, and · there are then no assets, in the absence of litigation, to pay the costs already incurred;

then in our view the liquidators may legitimately and in accordance with their duties pursue litigation with the aid of a litigation funder, and they may do so even if there is little or no likelihood of recovery going beyond recovery of their own costs and expenses and the funder's fees. 151 There are some provisos to this proposition: · the pre-litigation costs must have been either necessary or reasonably considered to be justified because of the prospective benefits to creditors; · the litigation costs themselves must have been reasonably incurred and proportionate to the prospective benefits (including not only possible direct benefits to creditors but also the benefits derived through the reimbursement of the liquidator's fees and expenses); and · the litigation funding agreement must not be on manifestly unreasonable terms. 152 Issues of fact and degree, and issues of timing, clearly arise. Nevertheless, we adopt this proposition, subject to these provisos, because in our opinion there is a public interest in liquidators making preliminary investigations into matters that appear to them to warrant investigation, even when there are no assets available to fund their doing so. Liquidators may be discouraged if it were held to be improper per se for liquidators to try to recover the costs of their investigations by legal proceedings that would not directly benefit creditors. 153 Our approach is consistent with the decision of Doyle CJ in the Pegulan Floor Covering case, supra. It is also consistent with the Imobridge case, supra. There, in an application for approval to enter into a funding agreement under s 477(2B) of the Corporations Law, the most likely outcome of litigation was that it would benefit only the professionals involved in the winding up. Fryberg J (at 296-7) observed that this was not necessarily a reason to stifle the litigation, and he continued: "If costs have been properly incurred in the winding up and a preference is available to be recovered, it is not unreasonable that proceedings should be brought to recover it and so fund those costs. That there is also some chance of a benefit for the unsecured creditors without any detriment to them to some degree reinforces the case for bringing the proceedings." 154 On the other hand, one can readily envisage cases where the conditions we have articulated are not met and consequently a question arises as to whether the pursuit of litigation is in proper discharge of the liquidators' duty, or represents a bona fide exercise of the liquidators' powers for the purpose of which they were conferred. An extreme case would be where the liquidators have embarked upon "churn and burn" tactics, to use Palmer J's language. A complete assessment of the propriety of the liquidators' conduct will often depend on matters going beyond the simple fact that the litigation, if successful, will recoup the liquidators' costs and expenses already incurred. 155 In the present case Palmer J took the view, having regard to a variety of circumstances and in particular matters listed at [44] above, that it was appropriate to conduct an inquiry. That did not imply that in his Honour's view the appellants had failed to perform their duty, but only that there was a sufficient basis for making an order for an inquiry; that is, there was something about the matter requiring further investigation. In our view, to the extent that it reflected the matters we have identified at [82] above, this aspect of Palmer J's reasoning did not disclose any error warranting appellate intervention. 156 In his Main Judgment at [395] Palmer J said: "If a proposed course of action - whether it be a legal proceeding or a commercial transaction - is not likely to produce a worthwhile benefit for creditors, the liquidator should not undertake it simply because it will generate enough to pay the liquidator's fees in undertaking that very transaction or litigation - a practice which is familiarly known in the market place as 'churning and burning'." 157 While it is plain that liquidators should not "churn and burn", in the sense of pursuing litigation simply in order to generate fees without any view to the interests of creditors or the public interest, we disagree with this passage if and to the extent that it is intended to convey that liquidators are never entitled to bring proceedings where the only prospect of recovery is reimbursement of the liquidators' own fees and expenses. The position, as we understand it, is set out above. However, on balance we think it would be wrong to read Palmer J's observations as conveying this incorrect proposition, having regard to his Honour's general approach to the factors relevant to his decision. His quoted observation appears to be directed to a case of "churning and burning" and his Honour made no finding, even at the level of "appearance", that that may have occurred in the present case.

(e) The possibility of further claims 158 Fifthly, the appellants contended that the proceedings had the potential to identify further claims against third parties that might benefit creditors, as identified by Mr Hall in his evidence (Main Judgment at [348]). There is only limited evidence before the Court on the appeal as to the prospect of identifying further claims, and it may well have been that no better evidence was available to Palmer J. This is just the kind of issue that can be clarified by the conduct of an inquiry under s 536. The mere suggestion that there could be potential further claims was not enough to prevent Palmer J from exercising the Court's jurisdiction under the section to order that any inquiry take place.

(f) The extent and costs of the proceedings 159 Sixthly, the appellants submitted that Palmer J had made a material error of fact in regarding the liquidators' costs of the proceedings as in the order of $2 million when in truth part of that figure included pre-commencement examinations and the correct cost of the proceedings was $1,559,340. We have concluded that the appellants' submission is not supported by the facts (see [27]-[30] above). 160 The appellants objected to Palmer J's "general concerns" about the cost of the proceedings and his view that they could have been conducted for significantly lower cost. They said that such general concerns could not provide a foundation for the view that the appellants had not faithfully performed their duties. That may be so, but a prima facie view by an experienced judge that the costs of the proceedings were disproportionate to the maximum possible recovery and that the proceedings could have been conducted for a significantly lower cost is, in our opinion, an adequate foundation, along with other matters upon which his Honour relied, for ordering and inquiry on the ground that there is something warranting further investigation. 161 The appellants complained that no particular conduct on their part had been identified that unreasonably contributed to the length or cost of the proceedings, and they said there are many reasons why litigation can end up costing more than one might expect, not the least of which is the attitude of one's opponents. They contended that the proceedings were conducted on their behalf by reputable solicitors and experienced and highly regarded counsel, and they noted that his Honour thanked counsel at the conclusion of the hearing for the efficient conduct of the proceedings (on 28 February 2007). 162 We do not regard his Honour's expression of appreciation to be a matter of significance to the threshold issue of whether an inquiry should be ordered: the fact that the proceedings were conducted efficiently by counsel and solicitors for the liquidators in court is not incompatible with the proposition that the case was unduly lengthy and costly. His Honour's lack of specificity about any particular conduct on the part of the appellants does not remove the foundation for an inquiry, an exercise that can fairly be expected to determine whether there was any conduct of which criticism could be made. 163 Additionally, the appellants contended that the question whether costs were reasonably incurred is a question for a costs assessor, and in the absence of a prima facie case of misconduct, the Court should not embark on what is effectively a costs assessment. But the issue that Palmer J thought worthy of investigation, in his Main Judgment, was an issue about the faithful discharge of the liquidators' duties. That is not the same as the question whether the costs that were incurred were fair and reasonable and is not a matter for a costs assessor. 164 This submission misapprehends the test to be applied in determining whether an inquiry should be ordered. An inquiry might reveal that the appellants had done nothing unreasonable to contribute to the length or cost of the proceedings, but the facts found by his Honour entitled him to form the view that there was enough to warrant further investigation.

Failure to apply for directions before commencement of the proceedings 165 In their written submissions the appellants criticised Palmer J for taking the view that they should have applied to the court for directions as to whether they were justified in commencing the proceedings (Main Judgment at [385], [388]). They submitted that: "Entry into a funding agreement without first seeking the direction of the court could only constitute a lack of faithful performance of a liquidator's duties if a liquidator is under an obligation in all cases to make such an application." 166 On the construction of s 536 we have taken, it was not necessary for Palmer J to identify a prima facie case of lack of faithful performance of duties. The question to be addressed is whether there was a basis for ordering an inquiry; that is something requiring further investigation. In any event, the reference to "lack of faithful performance of a liquidator's duties" refers only to s 536(1)(a), not to s 536(1)(b) or s 536(3). 167 The appellants further submitted that the right to seek directions is a right to be availed of as the liquidator sees fit, and that a failure to do so cannot constitute a prima facie case of misconduct (a submission which, on the view we take of the appropriate test, should be understood as a submission that the failure was not a relevant consideration, or not a consideration entitled to weight, when determining whether there was a basis for ordering an inquiry). They further submitted that it is not obvious that any such application would have been granted, because of the policy of the court not to make a liquidator's commercial decisions where the liquidator has full power to act. Reference was made to Re Spedley Securities Ltd (in liq), supra at 85, per Giles J. 168 There is a well-established proposition that courts will not generally interfere with the bona fide exercise of powers by a liquidator, including those involving commercial decisions. It reflects a similar principle of restraint applied by courts with respect to trustees in bankruptcy. The approach is evident in numerous judgments. 169 It is sufficient for present purposes to refer to the analysis by McLelland J in Northbourne Developments supra at 439-440 and specifically his Honour's citation with approval of the judgment of Young J in Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117 where his Honour said: " … [T]hough there is wide jurisdiction given to the court under s 379(3) of the Code [a predecessor of s 479(3)], it is usually only proper to exercise that power where the matter involves guidance to the liquidator on matters of law or principle or to protect him against accusations of acting unreasonably. The court does not usually consider it proper to intervene and make the liquidator's commercial decision for him."

(See also Naumoski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332 at [14] and Star v Silvia (1994) 12 ACLC 600 at 604.) 170 The question in the present case is whether a proposal to enter into a litigation funding agreement should be treated as a commercial proposal of a kind with respect to which the liquidators would usually be left to exercise their own judgment without judicial interference, or as a matter raising other considerations rendering the court less reluctant to give directions. 171 There is an analogy with an application to the court for the approval of an agreement of more than three months' duration under s 477(2B)/506(1A). In that context, if the subject matter of the agreement is purely commercial, the court will usually respect the liquidators' commercial judgment in favour of the proposal, and will generally not interfere (and therefore will grant approval) in the absence of evidence of bad faith, error of law or principle, or some real or substantive ground for doubting the prudence of the proposal: State Bank of New South Wales v Turner Corporation Ltd (1994) 14 ACSR 480 at 483 per Tamberlin J; Re Spedley Securities Ltd (in liq), at 85 per Giles J. Where, however, the proposed agreement is a litigation funding agreement, the decision to enter into it is not treated as a purely commercial decision because it affects the administration of justice and the efficient winding up of companies, and so the court may be less likely to defer to the liquidators' judgment. The factors that may influence the court's decision on an application for approval of a litigation funding agreement under s 477(2B)/506(1A) or in an application for directions under s 479(3)/511 can be seen in the cases listed at [146] above. 172 The matters taken into account in an application for approval of a funding agreement under s 477(2B)/506(1A) and in an application for judicial directions under s 479(3)/511 are essentially the same, although additional questions will arise in an application for judicial directions concerning the appropriateness of the court acceding to the application (a question comprehensively explored by the High Court in the Macedonian Church case supra). The common criteria were set out by Palmer J (Main Judgment at [386]), and in the Buiscex case and Re ACN 076 673 875. We agree with that reasoning. 173 That being so, we do not agree with the proposition that the court would be likely to decline to give directions to liquidators concerning a litigation funding agreement on the ground that it is not appropriate for the court to make a liquidator's commercial decisions for him or her. The question whether to give directions or decline to give them will depend upon the nature of the directions sought and the facts of the instant case, and in particular the extent to which the funding agreement and the contemplated recovery proceedings raise issues capable of affecting the administration of justice. 174 In our view there were some matters of fact in this case upon which his Honour could form the conclusion that further inquiry by the Court was appropriate and, therefore, that there was a basis for making an order under s 536. Those matters are listed at [82] above. It is relevant to the exercise of the discretion that the liquidators did not obtain or seek the Court's directions. If they had done so and had acted in accordance with those directions it is difficult to conceive that the Court would have seen any reason to order an inquiry. To the extent that Palmer J merely took into account the absence of an application for directions as a factor to be weighed in the exercise of the judicial discretion conferred by s 536, we do not detect any error justifying intervention on appeal. 175 However, Palmer J attributed significance to the lack of an application for directions that we regard as undue. He said that a liquidator proposing to enter into a litigation funding agreement should apply to the court for directions "as a matter of course" (Main Judgment at [388]). The appellants submitted that this statement is incorrect. As we have said, they contended that the right of liquidators to seek directions is one to be availed of as they see fit. 176 In our opinion, there is no obligation upon liquidators to apply to the court for directions as a matter of course before entering into a litigation funding agreement. The decision to do so is not, however, solely a matter for the liquidators' discretion, because they have a duty of skill, care and diligence and on some occasions (identified in the cases cited by Palmer J at [385]-[386]) and in these reasons for judgment at [146], obtaining the court's directions will be a prudent course. 177 As the appellants emphasised, this is not a case where the liquidators were required to obtain the court's approval under s 477(2B)/506(1A), because here the approval requirement was satisfied by the alternative means of creditor approval. A duty to approach the court "as a matter of course" cannot be derived from or by analogy with that section. His Honour's reasoning suggests that liquidators should routinely approach the court for directions under s 479(3)/511 before entering into a litigation funding agreement that has been already approved by creditors. In our opinion, his Honour erred in this regard. 178 When considering the duty of liquidators to collect the company's assets we referred to Bacich v Australian Broadcasting Commission, supra at 11, where Brownie J, citing Gray v Bridgestone Australia Ltd, supra, said that liquidators are not obliged to seek the authority of the court or creditors before instituting proceedings on behalf of the company, even if the proceedings will be at the creditors' expense. Numerous analogous authorities could be referred to. 179 By parity of reasoning, a liquidator is not obliged on every occasion to seek the court's directions before entering into a litigation funding agreement that will lead to the institution of proceedings without expense to the company or the creditors. But as Brownie J observed, the liquidator is obliged to make the relevant decisions with the skill, care and diligence appropriate to his or her office. In some but not all circumstances the proper discharge of the liquidators' duty may involve an application to the court for directions. It is likely to be prudent to seek the court's directions in a case where, if the court's approval were required under s 477(2B)/506(1A), there would be substantial uncertainty as to whether approval would be granted. 180 It does appear that his Honour, taking the general view that an application for directions should be made as a matter of course, approached the exercise of the Court's discretion under s 536 on the basis that the liquidator ought to have approached the Court for directions with respect to the proposed funding agreement prior to the institution and/or the further conduct of the proceedings. The matter that he took into account was not the mere absence of an application for directions but a perceived duty to seek directions as a matter of course. In this regard, in our opinion, his Honour took into account a factor that was extraneous to the exercise of the discretion to order the inquiry. That leads to the question whether the erroneous matter was material to his Honour's decision. 181 Arguably the central issue in the present case was not that there was a litigation funder, but that the proceedings continued at a time when the prospect of any return to creditors was regarded as low and, perhaps, non-existent. The material before the Court does not enable a judgment to be made as to the point of time that the disproportionate nature of the cost of the litigation, against the possible return, could or should have become apparent. There does not appear to be any basis for stating that it should have been apparent at the commencement of the proceedings. Indeed it is this difficulty that led his Honour to prefer that an inquiry be held, rather than an immediate further hearing on the issue of costs. Nevertheless an inquiry would need to investigate the whole process of engaging a litigation funder and commencing and then continuing the proceedings. It seems to us that his Honour's reference to the absence of judicial directions was material to the making of an order for inquiry into all of those matters. That is sufficient for this Court to uphold the challenge by the appellants and re-exercise each of the three discretions that his Honour did exercise.

Litigation funding 182 There are some other aspects of the submissions on the subject of litigation funding, which the Court should consider. 183 In their written submissions, the appellants challenged the opinion expressed by Palmer J that the law only countenances litigation funding because it provides access to justice (Main Judgment at [388]). They submitted that this proposition imports a restriction on litigation funding which is not consistent with the reasoning of the High Court in Campbells Cash & Carry, supra (citing the judgment of Gummow, Hayne and Crennan JJ at [91]). 184 Palmer J's statement does appear to be an unnecessarily restrictive approach in one respect. In the Campbells Cash & Carry case Gummow, Hayne and Crennan JJ referred to two kinds of consideration that had been proffered as founding a rule of public policy, namely fears about adverse effects on the processes of litigation and fears about the "fairness" of the bargain struck between the funder and the intended litigant (at 434 [90]). Their Honours continued (at 434 [91]): "Neither of these considerations, whatever may be their specific application in a particular case, warrants formulation of an overarching rule of public policy that either would, in effect, bar the prosecution of an action where any agreement has been made to provide money to a party to institute or prosecute the litigation in return for a share of the proceeds of the litigation, or would bar the prosecution of some actions according to whether the funding agreement met some standards fixing the nature or degree of control or reward the funder may have under the agreement. To meet these fears by adopting a rule in either form would take too broad an axe to the problems that may be seen to lie behind the fears." 185 Palmer J did not assert a proposition of the kind identified and rejected in this passage. His proposition was that litigation funding is permitted because it facilitates access to justice (see Main Judgment at [372], as well as [388]). That proposition does not emerge from the passage just cited but it was identified by their Honours at 425 [65], evidently with support, and seems to underlie their observations at 435 [95]. But for the use of the word "only", his Honour's interpretation of the joint judgment would be open on a fair reading of the joint judgment. It is not, however, apparent that the word "only", which is too restrictive, provides a basis for intervention on the principles in House v The King, supra. 186 The appellants were critical of Palmer J's statement (at [388]) that if the liquidators' funding arrangements provide no more than a token benefit to the creditors and are in truth a means for the litigation funder and the liquidator to profit handsomely, the liquidator should be directed not to proceed. We do not detect error in that proposition, since his Honour seems to have in mind a case where the purpose of the liquidator and litigation funder is to generate profit for themselves without any substantial benefit to creditors. That should be distinguished from a case where, though creditors are unlikely to obtain any substantial benefit from the litigation, a successful outcome will recoup properly and reasonably incurred costs and expenses of the liquidator (see at [150]-[151]). The statement by his Honour to which objection was taken did not purport to be a finding of fact in the case before the Court. There is no basis for interfering with the exercise of the discretion in this respect.

Conclusions 187 We have concluded that, while many of the challenges to Palmer J's order under s 536 are unsuccessful, the appellants' submissions identified two grounds for appellate intervention. His Honour failed to take into account or give sufficient weight to a material matter, namely the public interest in the bringing and prosecution of recovery proceedings, and he took into account an extraneous matter that he regarded as material, namely his view that the liquidators should have sought judicial directions as a matter of course before entering into the litigation funding agreement. In our view, these grounds constitute a sufficient basis for this Court to set aside Palmer J's order and re-exercise the discretion under s 536. 188 The matters relied upon by Palmer J as justifying an order for an inquiry were, on the whole, concerns that should support an order for further investigation. We have found that his Honour erred in two respects but he may well have reached the same conclusion had those matters been correctly addressed. Our findings on appeal have not undermined the major part of his Honour's reasoning. 189 This Court is not in a position to determine that the precondition to the exercise of the power in s 536(1)(a) is made out: i.e. that "it appears to the that a liquidator has not faithfully performed … his or her duties …". We have not been addressed on this issue. In this respect, the refusal of ASIC to intervene makes any further analysis problematic, given the Court's obligation to accord procedural fairness to the appellants. 190 We note that in his judgment, Palmer J did not identify with precision the duty or duties that appeared to him not to have been performed. There was no suggestion that the second limb of s 536(1)(a), namely failure to observe a pertinent requirement, was engaged. It may be that what his Honour had in mind was the liquidator's duty of skill, care and diligence, reflected in part in s 180, in the latter case requiring attention to the business judgment rule. It may be that he had in mind the liquidator's duty to the court only to instigate or continue proceedings for proper purposes. It may be that he had in mind the liquidator's general law duty to exercise a power for the purpose for which it was conferred, reflected in s 181(1)(b). It may be that he had in mind the general law duty of a liquidator as fiduciary not to improperly use his or her position to gain advantage, reflected in s 182. 191 His Honour's failure to identify the duty or duties involved was not one of the grounds of appeal. Nevertheless, as a general rule, some specification of the jurisdictional precondition to the exercise of the power in s 536(1)(a) appears to us to be necessary and, in any event, desirable. Absent any submissions on the matter, in a hearing at which only the applicants/appellants appeared, this Court could not exercise the discretion and would be obliged to remit. 192 With respect to s 536(1)(b), Hodgson JA and Austin J, as noted, are of the view that this power is available. There does not appear to be the same difficulty of identifying the relevant "conduct of the liquidator" with respect to this power. 193 With respect to s 536(3), the power is not relevantly confined. However, the power is not expressed in the same way as the power in s 536(1). It is not a power to "inquire". It is a power to "require" an "answer" to "any inquiry". Although this is not a ground of appeal, it may well be that s 536(3) requires a degree of specificity in the formulation of issues and/or questions in the order itself. It is not necessary or appropriate to decide this issue in the present case. 194 The inquiry that Palmer J had in mind responded to what he called the "fait accompli" of the liquidators' expenditure in the proceedings (Main Judgment at [391]). He said that the Court was not powerless to correct what had happened, because s 98 of the Civil Procedure Act 2005 (NSW) gave it a wide discretion with respect to the costs of proceedings (Main Judgment at [391]; see [45] above). He warned that if he came to the conclusion that the liquidators' expenditure on costs was unjustified and improper, he would give consideration to whether a costs limiting order should be made under s 98(4) (at [397]). Nothing in his Honour's reasons for judgment suggests that he contemplated the possibility of some other remedy such as a remedy for breach of any statutory duty under the Corporations Act or a disciplinary proceeding. 195 In those circumstances this Court should not, in deciding whether to re-exercise the discretion under s 536, or to remit the matter, do so with a view to an outcome of a different kind, except to the extent that such a different outcome was contemplated in submissions. Procedural fairness requires no less. There were no such written submissions, although as noted below, the oral submissions made on behalf of the appellants adverted to some other possible outcomes. 196 The proceedings that were before Palmer J were settled after he made an order under s 536 and before the hearing of the appeal against that order. The appellants did not provide this Court with the full terms of settlement but we were informed, relevantly to the present question, that under the terms of settlement payments have been made in settlement of the costs of proceedings and the liquidators' own fees. Senior counsel for the appellants told the Court that in light of the terms of settlement there were no longer any outstanding costs orders to be made by the Court and therefore no prospect of the Court making a costs limiting order under the Civil Procedure Act. We accept that submission, which has the consequence that the purpose of the inquiry envisaged by Palmer J has gone. 197 In oral submissions there was some discussion contemplating the possibility of an inquiry directed to reviewing the liquidators' own fees. As we have said at [51] above, on its proper construction Palmer J's order for an inquiry did not extend to the liquidators' own fees, but only to costs of the proceedings. While it is conceivable that upon the re-exercise of discretion under s 536 the Court could order an inquiry directed towards reviewing the amount of the liquidators' fees recovered under the terms of settlement, that is not a course we would favour, for several reasons. 198 First, review of the liquidators' fees was not an outcome envisaged by Palmer J when he made the order for an inquiry and the order did not cover the liquidators' fees, as we have noted. Secondly, the possibility of such an inquiry was not fully addressed in submissions. Thirdly, the Corporations Act contains statutory provisions for the fixing and review of the remuneration of a liquidator in a creditors' voluntary winding up. The fixing of the remuneration is a matter for the creditors or the committee of inspection (s 499). While the Court has the power to review the amount of the remuneration (s 504), and may do so even after the remuneration has been paid to the liquidators, the exercise of that power depends upon an application by a member or creditor or the liquidator, and there is no such application here. Assuming (without deciding) that the Court has some residual power of review, it is unlikely that such a power would be exercised in view of the availability of review under the statutory scheme. 199 Senior counsel for the appellants conceded that, notwithstanding the settlement, an inquiry could possibly lead to a reference of some matter to the regulator, ASIC. But there is nothing to indicate any interest in this matter on the part of ASIC, which (as we noted at [7]-[8] above) has chosen not to appear on the appeal. In the absence of any appearance or other interest on the part of ASIC, the Court is entitled to infer that ASIC would not participate actively in any inquiry ordered for the purpose of considering whether to refer any matter to it. There is no basis for this Court to conclude that it is at all likely that ASIC would take up any reference to it in consequence of an inquiry. 200 In these circumstances there does not appear to be any utility in ordering an inquiry. 201 The consequence is that we shall make orders setting aside the order for an inquiry made on 15 February 2008 by Palmer J under ss 536(1)(a), 536(1)(b) and 536(3) of the Corporations Act, and upon our re-exercise of the Court's discretion under those provisions no order will be made.

2 Orders 1(a)-(d) made by his Honour Justice Palmer on 15 February 2008 set aside. *********

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