Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd

REASONS FOR JUDGMENT 1 The plaintiff, Mr Steven Kugel, is the liquidator of Charben Haulage Pty Ltd (the Company). He has applied for an order under s 564 of the Corporations Act 2001 (Cth) (the Corporations Act) that the net proceeds of the assets available for distribution to the creditors of the Company be paid to Environmental & Earth Sciences Pty Ltd (EES). The basis for the application is that property has been recovered by Mr Kugel under an indemnity for costs given by EES for certain litigation. 2 EES is a creditor of the Company as a consequence of a proceeding commenced by the Company in the Court against EES and Caltex Petroleum Pty Ltd (Caltex). The Company claimed damages said to have been suffered by an alleged contravention of provisions of the Trade Practices Act 1974 (Cth). On 8 April 2004, a judge of the Court ordered that EES and Caltex pay to the Company the sum of $2,147,800 plus costs. On 17 May 2004, the subrogated insurer of EES paid to the Company the sum of $1,400,000 in part satisfaction of that order. On 21 May 2004, EES deposited the sum of $747,800 into the trust account of PricewaterhouseCoopers (PWC), who were then the solicitors for the Company. That sum represented the balance of the money payable under the orders made on 8 April 2004. 3 However, EES and Caltex appealed from the Court's orders, and, on 22 December 2005, the Full Court set aside the orders made on 8 April 2004. As a consequence, the money paid in satisfaction of the orders of 8 April 2004 became repayable. On 6 February 2006, PWC repaid the sum of $747,800 to EES. However, the Company did not repay the sum of $1,400,000 that had been paid on 17 May 2004. 4 On 9 March 2006, a statutory demand was served on the Company claiming payment of the sum of $1,400,000. On 31 March 2006, Mr John Vouris was appointed as administrator of the Company under s 436A of the Corporations Act. EES lodged a proof of debt with Mr Vouris for the sum of $2,014,788, which included legal costs in the sum of $614,788. That proof of debt was admitted in the administration. 5 In his report to the creditors of the Company of 20 April 2006, Mr Vouris recorded that the sum of $1,400,000 paid by EES had been banked by the Company and that he had requested the Company's director and accountant to provide a reconciliation of the application of the sum of $1,400,000. The report also identified 17 possible preferential payments, totalling $717,066, made within the period of 6 months before the commencement of the administration. 6 A meeting of creditors of the company was held on 23 June 2006. At the meeting, Mr Vouris was asked on behalf of EES whether he would investigate further possible preferential payments and voidable transactions. He responded that he would be prepared to investigate insolvent trading and an action against the Company's director for voidable transactions, but would require litigation funding, since there were no funds available to fund any action. Mr Vouris was told that EES would consider funding clawback litigation in respect of such transactions. 7 During the course of the meeting on 23 June 2006, a resolution was passed authorising Mr Vouris to investigate litigation funding in respect of a potential application for leave to appeal to the High Court from the orders of the Federal Court. Since no deed of company arrangement had been proposed, a resolution was also passed that the Company be wound up, and Mr Vouris became the liquidator of the Company. 8 Between August and October 2006, Mr Peter Harkin, a solicitor acting on behalf of EES, wrote to Mr Vouris notifying him of EES's preparedness to consider funding an examination of the director of the Company and an investigation of preferential payments made by the Company. However, on 13 October 2006, Mr Vouris gave notice of a meeting of creditors to be held on 31 October 2006, in which he proposed a resolution authorising him to take no further action in relation to any insolvent trading or voidable transaction claims. In his report of 13 October 2006, Mr Vouris informed creditors that he had been approached on behalf of EES seeking consent for the records of the Company to be reviewed by a forensic accountant for the purposes of determining whether or not there might be merit in funding Mr Vouris in pursuit of preferential payments, examining the director and others and investigating insolvent trading issues. Mr Vouris expressed the view in his report that there was no realistic prospect of recovery proceedings being successful with respect to the various payments made by the Company. He recommended that the creditors authorise him not to take further action in relation to insolvent trading and voidable transactions. Mr Harkin wrote to Mr Vouris expressing concern at the proposed resolution and notified him that EES proposed to file an application seeking his removal as liquidator of the Company. 9 The resolution authorising Mr Vouris to take no further action in relation to insolvent trading and voidable transactions was not put to the creditors on 31 October 2006 and the meeting was adjourned to 3 November 2006. The resolution was not put to the creditors at the adjourned meeting on 3 November 2006. Further, Mr Vouris gave no indication as to what action he would take in respect of potential recoveries for preferences or other clawback claims. 10 On 7 November 2006, EES filed an application to the Court seeking the removal of Mr Vouris as the liquidator of the Company. On 16 February 2007, the Court, by consent, noted the resignation of Mr Vouris as the liquidator of the Company, and Mr Kugel was appointed as liquidator in lieu of Mr Vouris. 11 Mr Harkin subsequently had discussions with Mr Kugel concerning possible clawback proceedings against various parties. Mr Harkin informed Mr Kugel that EES was keen for him to look into possible clawback actions. Mr Kugel indicated that Mr Vouris had claimed a lien over the Company's assets in respect of unpaid remuneration and that only limited documents were available to him. Mr Kugel also indicated to Mr Harkin that he had no funds available to him as liquidator. Mr Harkin said that it might be in the Company's interest to conduct an examination of the directors and said that he would get instructions from EES in relation to the funding of such examinations. 12 Ultimately, on 3 June 2008, EES instructed Mr Harkin to discuss the matter with Mr Kugel with the view to indemnifying him in relation to clawback actions under the Corporations Act. By letter of 8 December 2008, Mr Kugel outlined the potential clawback transactions he was considering and sought an indication of EES's preparedness to indemnify him in respect of the examination of the director and associated entities. He said that, because he was without funds, he did not propose to conduct any examination. On 9 February 2009, Mr Harkin informed Mr Kugel that EES was prepared to indemnify him in respect of the costs of conducting examinations of various parties, including the director of the Company. 13 The three year time limit within which to commence clawback proceedings would have ended on 31 March 2009. Accordingly, on 24 March 2009, an application was made on behalf of Mr Kugel as liquidator of the Company for an extension of time within which to commence such proceedings. The application was contested by a number of parties against whom claims were foreshadowed. The application was adjourned on several occasions to allow interested parties to file affidavit evidence. On 8 September 2009, the application was stood over to 11 December 2009, to allow Mr Kugel to conduct public examinations of the director and any other persons he considered appropriate, in order to come to a more considered view of whether there were viable clawback actions available to him under the Corporations Act (see Kugel, in the matter of Charben Haulage Pty Ltd (in Liquidation) [2009] FCA 1039). 14 Examination summonses were then issued by the Court for the examination of various individuals. The examinations were scheduled for 12 and 13 November 2009. In addition to the examination summonses, summonses for production of documents were also issued to various parties. Various legal attendances were required in connection with the summonses and the examination of witnesses. As well accepting responsibility for all disbursements, including filing fees and counsel's fees incurred by Mr Kugel in connection with the extension of time application, EES also accepted responsibility for all disbursements incurred in connection with the summonses and examinations. 15 Following the conclusion of the examinations, the extension of time application was pursued. Further affidavit evidence was served by various parties involved in the application. Ultimately, on 14 May 2010, the Court made orders extending the time for the commencement of proceedings against various parties up to and including 3 June 2010 (see Charben Haulage Pty Ltd (in Liquidation), in the matter of Charben Haulage Pty Ltd (in Liquidation) [2010] FCA 477). In making the orders, specific regard was had to various impugned transactions, including transactions relating to the director, involving sums in the order of $707,000. 16 On 18 May 2010, Mr Kugel sent a circular to the creditors of the Company, reporting on the extension of time. Mr Kugel said that he had determined that there were good prospects of success against the director of the Company and associated entities in respect of claims totalling $714,380.53. Since the Company had only limited funds available to it, Mr Kugel sought funding from a creditor or creditors, saying he was keen to pursue the potential claims. EES agreed to fund the proposed clawback proceedings and instructed Mr Harkin to do what was necessary to commence proceedings by 3 June 2010. 17 On 2 June 2010, originating process was filed in the Court (NSD 623 of 2010) against Mr Jim Janakis, the director of the Company, Mrs Victoria Janakis, his wife, and Tidal Search Pty Ltd, a company associated with Mr and Mrs Janakis. By the originating process, Mr Kugel claimed an order that the named defendants pay various amounts aggregating $722,906.07. Subsequently, pleadings were filed in that proceeding and issue was joined in relation to the claims made by Mr Kugel. 18 On 13 August 2010, the defendants in the proceeding offered to pay the sum of $100,000, inclusive of costs, in full and final settlement of all claims. On the same day, they also offered to pay the sum of $50,000, plus costs as agreed or taxed. On 3 September 2010, Mr Kugel made a counter-offer of compromise to the defendants, involving payment by them of the sum of $600,000, plus costs as agreed or taxed. The counter-offer was not accepted. The parties subsequently agreed to engage in a mediation. A mediation was held 18 October 2010, when a compromise was reached on the basis that the defendants would pay the sum of $300,000 to Mr Kugel on or before 18 January 2011 in full settlement of the clawback claims. On 7 January 2011, the sum of $300,000 was paid to Mr Kugel. 19 The expenses incurred by EES, in connection with the examinations, the application for the extension of time and the clawback proceeding, total $104,430. The total amount now available for distribution to creditors, after the payment of Mr Kugel's remuneration, costs and expenses and reimbursement of legal expenses, is $153,483. 20 Without the funding by EES of the examinations, the extension of time proceeding and the clawback proceeding, Mr Kugel would not have proceeded with the claims. He had read Mr Vouris' report of 13 October 2006 and was not convinced that the potential claims would succeed. 21 Mr Kugel only became convinced of the merits of pursuing the clawback claims as a consequence of the information acquired in the examinations funded by EES. Mr Kugel would not have pursued any of the claims on a speculative basis and he believes that he would not have been able to obtain litigation funding. The creditors of the Company include the Australian Taxation Office, Caltex, and the Company's former solicitors, all of whom would have been capable of funding the potential claim and who might be regarded as having sufficient sophistication to be able to make an informed judgment in relation to those matters. However, none of them was prepared to fund any of the proceedings. In the circumstances, Mr Kugel considers that it is appropriate that the whole of the sum now presently available for distribution be distributed to EES in priority to any of the other unsecured creditors. 22 The total proofs of debt accepted by Mr Kugel in the liquidation of the Company amount to $3,387,834. EES's proof of debt is for the sum of $2,014,788, representing some 59 per cent of the total. Without any order for priority of payment to EES, the dividend to EES would be $89,545.49. The question is whether some part, if any, of the remaining portion should be distributed to EES to reflect the risk incurred in advancing to Mr Kugel approximately $104,000 for the costs of the recovery process. 23 On 22 June 2011, Mr Kugel wrote to all of the creditors reminding them of his report of 18 January 2011, in which he outlined the basis upon which EES had agreed to fund the legal proceedings, including the clawback proceeding. He informed creditors that the present application had been filed seeking orders under s 564 of the Corporations Act for payment of the available funds to be made to EES. Mr Kugel said that he would support the application, and notified creditors that the application was to be heard on 8 July 2011. He said that, if a creditor wished to oppose the application under s 564, the creditor should ensure that representations were made on its behalf at the hearing on that day. When the matter was called on for hearing on 8 July 2011, there was no appearance, except on behalf of Mr Kugel. 24 Section 564 of the Corporations Act relevantly provides that where, in any winding up, property has been recovered under an indemnity for costs of litigation given by a creditor, the Court may make such orders as it deems just with respect to the distribution of the property so recovered with a view to giving that creditor an advantage over others, in consideration of the risk assumed by it. The power to make such an order involves the exercise of a broad and general discretion and one that has to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies (see Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612). However, a person seeking an order under s 564 has the onus of demonstrating that a departure from the usual pari passu distribution is warranted. 25 While the circumstances in which a funding creditor will receive the whole of the available funds might be rare (see State Bank of NSW v Brown (2001) 38 ACSR 715 at [40]-[41]), circumstances may be such as to justify such a result. It is appropriate to look at the sum recovered, the failure of other creditors to provide an indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnity so as to enable assets to be recovered and, generally, the totality of the circumstances (see Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296-7). 26 The hurdles that needed to be overcome for Mr Kugel to be able to undertake the clawback proceeding, which ultimately produced a return, were substantial. Mr Vouris was disinclined to undertake the proceeding and was, in effect, removed as a consequence. The extension of time for the commencement of the proceeding was sought and obtained over vigorous opposition. It is significant that, in the extension of time application, Mr Vouris swore an affidavit in which he stated that, in his view, no successful claim could be made. Nevertheless, examinations were conducted and the clawback proceeding was ultimately commenced. There was uncertainty not only as to the outcome of that proceeding, but also as to the capacity of the defendants to meet any judgment. The identified claims were by no means clear cut or straightforward. 27 The proceeding that was brought ultimately involved an allegation that the Company was insolvent at the time the subject payments were made. That was a controversial issue, given the evidence obtained during the examinations that the directors believed, based on counsel's advice, that the Company would be successful in defending the appeal to the Full Court by EES and Caltex and, subsequently, that the Company had good prospects of succeeding in an appeal to the High Court. Despite invitations by Mr Kugel to all creditors to provide funding, only EES agreed to provide any funding. The amount paid by EES in respect of legal costs for the various proceedings that were undertaken was not insubstantial, amounting to some $104,000. 28 It is arguable that other creditors have benefited indirectly from that expenditure by EES, in that the funds have been partly used to meet some of the costs incurred in the general duties of Mr Kugel in the winding up, thus lessening the charge against other funds available in the winding up. There is no suggestion that any other creditor was not in a position to provide funding. Among the other creditors are substantial commercial entities that might be expected to have available resources that could have been committed to Mr Kugel's action had they chosen to bear the same risks that EES undertook. 29 I am satisfied that the present case is one where the appropriate order is to direct that the whole of the balance available should be distributed to EES in consideration of the risk it undertook. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.