By Originating Process filed on 10 March 2016, the Plaintiff, Mr Crisp, in his capacity as liquidator of Waterfront Investments Group Pty Limited (in liq) ("Company") applies under s 564 of the Corporations Act 2001 (Cth) for a direction that Owners Strata Plan 80454 are entitled to a preferential payment of all of the net proceeds received by the liquidator in regard to certain proceedings, and presently available in the winding up, being an amount of $50,750.98. Mr Dale, who appears for the liquidator in respect of the application, has properly drawn attention to the fact that an order that a particular funding creditor obtain the entirety of the recoveries in proceedings is the exception, and not the rule, and referred to authorities in that respect. I will return to that question below.
Section 564 of the Corporations Act relevantly provides that where, in a winding up, property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors, or expenses in relation to which a creditor has indemnified a liquidator have been recovered, the Court may make such orders as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risks assumed by them. Mr Dale points out, and I accept, that property in that section refers to all the property that a liquidator can obtain for the purpose of the winding up, both by way of actions maintainable by the liquidator, in his own right, including, for example, by a claim under s 588FF of the Corporations Act, and moneys recoverable by a claim by the company: Tolcher v National Australia Bank Limited [2004] NSWSC 6; (2004) 182 FLR 419; M Murray and J Harris, Keay's Insolvency: Personal and Corporate Law and Practice, (9th ed 2016, Lawbook Co) at [15.405]. In the present case, the relevant proceedings involved claims in respect of voidable transactions by the liquidator of the Company and by the Company for breach of director's duties.
The application is supported by affidavit evidence of a principal of the liquidator's firm, Ms Di Carlo, who has had primary involvement in the liquidation. She sets out the history of the winding up of the Company, of public examinations undertaken in the course of the liquidation to identify causes of action that might be available to the liquidator and to the Company, and of complex proceedings that were subsequently brought by the liquidator and the Company against several parties, which were successful in substantial respects, although not in all aspects of the relief claimed. Those proceedings involved claims, inter alia, that certain transactions constituted uncommercial transactions and for consequential orders under s 588FF of the Corporations Act, and also claims, which were in part successful, for breach of director's duties. Although a substantial claim by the Company against one party was unsuccessful, other claims against other parties in amounts up to $658,885 were successful.
Ms Di Carlo in turn refers to subsequent steps which were taken by the liquidator by way of enforcement action, in order to seek to enforce the judgment which the liquidator and the Company had obtained, and the fact that an agreement was ultimately reached with the Defendants which has resulted in payment of a substantial amount to the liquidator, the Defendants abandoning their claims in the liquidation, and a compromise as to the position as to costs in the proceedings. The receipt of that payment has in turn allowed payments of the fees of the solicitors who acted in respect of the proceedings, amounts advanced by Owners Strata Plan 80454 to fund liquidator's examinations and aspects of the proceedings in the substantial amount of $160,710 and the liquidator's remuneration. That amount has also partly been funded, as Ms Di Carlo notes in her affidavit and Mr Dale fairly points out, by a GST recovery made from the Australian Taxation Office, but that in turn relates largely to amounts incurred in respect of legal fees and associated remuneration and disbursements of the liquidator in relation to the proceedings.
Ms Di Carlo also points out that, although the liquidator has not formally adjudicated the proofs of debt, creditor claims in the winding up include substantial claims by the Australian Taxation Office and Bankwest, each exceeding $2,500,000, and a smaller claim by Owners Strata Plan 80454 in the amount of $350,000, and smaller claims by two other entities. Each of the creditors of the Company have been given notice of this application. None have appeared to seek to oppose it or otherwise to be heard in respect of it. It is important to note, in particular, that all creditors were offered the opportunity to fund the litigation, but the two largest creditors did not take up that opportunity, and only Owners Strata Plan 80454 took up the opportunity to do so. Ms Di Carlo's affidavit also makes clear that, but for the funding provided by Owners Strata Plan 80454, the liquidator could not in fact have conducted the liquidator's examinations, or the proceedings which resulted in the recoveries which have now been obtained. There is evidence, in a further affidavit of Ms Di Carlo dated 24 March 2016, of the invitation to those other creditors to fund the proceedings, and of a minute of creditors' meetings which approved the entry into the funding arrangements which were subsequently entered into with Owners Strata Plan 80454.
There is also evidence of the form of circular which was sent to creditors in respect of this application. Mr Dale has fairly drawn attention to the fact that there was a slight difference between the form of that circular and the draft of that circular which had previously been put before Brereton J before the matter was allocated a hearing date. There is no difficulty arising from that difference, which involved a minor amendment made to correctly record the fact that the liquidator had not adjudicated proofs of debt, but to indicate that he would do so if the Court did not make an order under s 564 of the Corporations Act. The amendment also provided an estimate of the creditors' dividend, if an order under s 564 of the Corporations Act was not made, consistent with the approach that had been adopted in the draft circular previously put before Brereton J. In my view, that amendment was properly made in order to ensure the accuracy of the information provided to creditors.
Mr Dale has provided written submissions and made oral submissions in respect of the application, and draws attention both to the factual history to which I have referred, and to the authorities as to s 564 of the Corporations Act. He draws attention, rightly, to the decision of Brownie J in Household Financial Services Pty Limited v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294, which was subsequently cited with approval by the Court of Appeal in State Bank of NSW v Brown [2001] NSWCA 223; (2001) 38 ACSR 715. In that case, his Honour identified factors which are relevant in such an application, including the amount recovered, the failure by other creditors to provide an indemnity, the proportion between the debts of the indemnifying creditor and others, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and the totality of the circumstances. His Honour also noted that the courts had tended to adopt a more liberal approach toward indemnifying creditors.
Several of those factors suggest that at least some preference should be allowed to Owners Strata Plan 80454 in order to recognise the funding which it provided to the liquidator. A significant sum has been recovered by the litigation, although a significant part of it has had to be applied, understandably, to meet the cost of complex proceedings, the liquidator's remuneration, which is properly paid given the public interest in liquidators providing their services, and only a relatively smaller amount is now available for distribution to creditors. The absence of an indemnity by other creditors in this matter is of particular significance, since the other creditors had substantially more at stake than Owners Strata Plan 80454 and, correspondingly, it assumed a proportionately larger burden by reference to its stake in providing the relevant indemnity. The public interest in encouraging such an indemnity is significant, particularly where, as here, the proceedings involved successful claims for breach of directors' duties in respect of a company in liquidation. The relevant circumstances include the fact that the proceedings were complex; the amount of funding provided was, as I will note below, substantial; and the risk assumed by Owners Strata Plan 80454 was correspondingly substantial, whether measured against the amount originally claimed or the amount ultimately recovered, and, particularly, the amount which it would ultimately receive on a distribution after costs of the proceedings and the liquidator's remuneration.
Mr Dale also fairly refers to the decision of the Court of Appeal in State Bank of NSW v Brown above, where Spigelman CJ again noted the desirability in the public interest of encouraging creditors to indemnify liquidators to pursue claims in a winding up, and the fact that the discretion exercised under this section should be exercised with that in mind; recognised that it would be unusual to exercise the power under this section to give all of the proceeds of litigation to a funding creditor; but also noted relevant considerations to such a decision, including the uncertainty in the proceedings at the time the funding was provided and the risk that had been assumed by the funding creditor. The Chief Justice there referred to decisions in which a funding creditor had been allowed all of the available funds, and noted that a significant matter was the high proportion of the amount recovered represented by the funds put at risk by the creditor concerned. That is a relevant matter in this case, where the amount ultimately available for distribution will be significantly less than the amount put at risk by Owners Strata Plan 80454 in providing funding.
Mr Dale also draws attention to my decision in Re Shepherds Producers Co-Operative Ltd (in liq) [2012] NSWSC 390, where I had noted, by reference to authority, that funding of liquidators' examinations could be taken into account in respect of such an application, on the basis that they protected and preserved relevant property, namely the chose in action of the company in liquidation, and where I had also noted several matters which supported, in that case, an order that the entirety of the remaining funds in the winding up after costs and expenses be made available to funding creditors. Those factors included (at [11]) several factors which are also present in this case, namely that funding was provided at a stage where success of the liquidators' investigation and subsequent proceedings was by no means assured; that it had been provided at a time when it was critical, in the sense that the liquidators could not have proceeded with examinations or the proceedings without it; that all creditors had the opportunity to provide such funding, and, in that case as here, some smaller creditors chose to do so while larger creditors chose not to do so; and, as is also the case here, the amount that the funding creditors would receive as a distribution on the winding up, even if the entirety of the amount remaining was paid to them, was proportionate to the risk which they took in advancing the funding. I there also noted the significance of the fact that, as in Household Financial Services Pty Ltd v Chase Medical Centre above and also in this case, the funds to be distributed would not have been available to the winding up but for the funding provided by the funding creditor, and that that weighed against requiring the party which had brought those funds into the liquidation to share them with those who did not take the risk which led to their recovery.
Mr Dale points out, in summary, that the factors involving the amount recovered, the fact that other creditors did not provide the indemnity, the fact that a smaller creditor provided such an indemnity while larger creditors did not, and the totality of the circumstances, including the complexity of the proceedings and the risk to which the funding creditor was exposed, all support the order sought. I accept that submission.
For these reasons, I am satisfied that this is a case in which the orders sought should properly be made. Accordingly, I make orders in accordance with the form of order initialled by me and placed in the file. I will also make a further order that the exhibits be returned.
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Decision last updated: 10 June 2016