IMF (Australia) Limited v Meadow Springs Fairway Resort Limited

CORPORATIONS - appeal - application of principle that expenses reasonably incurred in care, preservation and realisation of fund may be thrown against that fund, notwithstanding that fund belongs to a secured creditor: Re Universal Distributing Company Limited (in Liquidation) (1933) 48 CLR 171 - whether expenses incurred by liquidator in entering into litigation funding agreement expenses reasonably incurred -circumstances where action held by company in liquidation against third party would have been lost, but for decision by liquidator to enter into funding agreement - whether proportion of fund realised (over and above payments made by funder) payable to funder out of fund in priority to secured creditors

Corporations Act 2001 (Cth), ss 477(2), 477(2B), 511(2), 1322(4)

Associated Alloys (2000) 202 CLR 588 cited Buchler v Talbot[2004] 2 AC 298 cited Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386 cited G & M Aldridge Pty Ltd v Walshe (2001) 203 CLR 662 cited In Re Bank of Credit and Commerce International SA [1998] AC 214 cited Re Universal Distributing Company Limited (in Liquidation) (1933) 48 CLR 171 applied Shirlaw v Taylor (1991) 31 FCR 222 cited

IMF (AUSTRALIA) LIMITED (ACN 067 298 088) v MEADOW SPRINGS FAIRWAY RESORT LIMITED (IN LIQUIDATION) (ACN 084 358 592), BALANCED SECURITIES LTD (ACN 083 514 685), WESTRALIAN CAPITAL HOLDINGS PTY LIMITED (IN LIQUIDATION) (ACN 083 526 630), KNIGHTSBRIDGE MANAGED FUNDS LIMITED (IN LIQUIDATION) (ACN 089 532 169), KNIGHTSBRIDGE FINANCE PTY LIMITED (IN LIQUIDATION) (ACN 008 716 872), HURLY INVESTMENTS PTY LIMITED (ACN 082 972 067), TIMOTHY JOSEPH CASEY and BRIAN MCMASTER in his capacity as liquidator of Meadow Springs Fairway Resort Limited

MEADOW SPRINGS FAIRWAY RESORT LIMITED (IN LIQUIDATION) (ACN 084 358 592) v BALANCED SECURITIES LIMITED (ACN 083 514 685), WESTRALIAN CAPITAL HOLDINGS PTY LIMITED (IN LIQUIDATION) (ACN 083 526 630), KNIGHTSBRIDGE MANAGED FUNDS LIMITED (IN LIQUIDATION) (ACN 089 532 169), KNIGHTSBRIDGE FINANCE PTY LIMITED (IN LIQUIDATION) (ACN 008 716 872), HURLY INVESTMENTS PTY LIMITED (ACN 082 972 067), TIMOTHY JOSEPH CASEY and BRIAN MCMASTER in his capacity as liquidator of Meadow Springs Fairway Resort Limited WAD 134 of 2008

WESTERN AUSTRALIA DISTRICT REGISTRY WAD 124 of 2008

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA,

BRIAN MCMASTER in his capacity as liquidator of Meadow Springs Fairway Resort Limited

THE COURT ORDERS THAT:

1. On or before 20 February 2009, the parties file and serve agreed short minutes of order which they propose be made to give effect to these reasons and, in default of agreement, short minutes of the orders which each party proposes for that purpose.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

WESTERN AUSTRALIA DISTRICT REGISTRY WAD 134 of 2008

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA,

THE COURT ORDERS THAT:

1. On or before 20 February 2009, the parties file and serve agreed short minutes of order which they propose be made to give effect to these reasons and, in default of agreement, short minutes of the orders which each party proposes for that purpose.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA,

BRIAN MCMASTER in his capacity as liquidator of Meadow Springs Fairway Resort Limited

WAD 134 OF 2008 BETWEEN: MEADOW SPRINGS FAIRWAY RESORT LIMITED

THE COURT 1 These two appeals are concerned with the fund resulting from the compromise of a proceeding brought by a company in liquidation. The liquidator arranged for the company's costs and expenses of conducting the proceeding to be funded by a litigation funder. The principal dispute concerns priority between the remuneration payable to the litigation funder and the moneys owing to secured creditors of the company. That dispute involves an agreement made in August 2003 (the IMF Funding Agreement) between Meadow Springs Fairway Resort Limited (in liquidation) (Meadow Springs) and Mr Brian McMaster (the Liquidator), who is the liquidator of Meadow Springs, on the one hand, and IMF (Australia) Limited (IMF), the litigation funder, on the other. In addition, there were subsidiary disputes as to the validity of one of the securities and the amounts secured by the securities. 2 On 3 August 2007, a proceeding was commenced in the Court in the name of Meadow Springs (the s 511 Proceeding). By the s 511 Proceeding, Meadow Springs sought the determination of questions pursuant to s 511(2) of the Corporations Act 2001 (Cth) (the Corporations Act). Section 511(1) provides that, where a company is being wound up, the liquidator or a contributory or creditor of the company may apply to the Court to determine any question arising in the winding up. Under s 511(2), the Court, if satisfied that the determination of the question will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit. 3 Under s 477(2) of the Corporations Act, a liquidator of a company may do various things, including: (a) bring or defend any legal proceeding in the name and on behalf of the company; (b) appoint a solicitor to assist him or her in his or her duties; (c) sell or otherwise dispose of, in any manner, all or any part of the property of the company; … (m) do all such other things as are necessary for winding up the affairs of the company and distributing its property. 4 However, under s 477(2B), a liquidator of a company must not, except with the approval of the Court, the committee of inspection or a resolution of the creditors, enter into an agreement on the company's behalf if the term of the agreement may end, or obligations of a party to the agreement may be discharged by performance, more than three months after the agreement is entered into. In so far as the IMF Funding Agreement was entered into by the Liquidator on behalf of Meadow Springs, s 477(2B) may have prohibited him from doing so without such approval. No such approval was obtained by the Liquidator prior to entering into the IMF Funding Agreement. 5 Accordingly, on 15 October 2007, Meadow Springs filed a notice of motion in the s 511 Proceeding claiming a declaration, pursuant to s 1322(4)(a) of the Corporations Act, that the IMF Funding Agreement is not invalid, an order, pursuant to s 1322(4)(d) of the Corporations Act, that the period for making an application under s 477(2B) of the Corporations Act be extended and an order, pursuant to s 477(2B) of the Corporations Act, that approval be granted, nunc pro tunc, to the Liquidator to enter into the IMF Funding Agreement (the Remedial Motion). 6 No point appears to have been taken before the primary judge about the fact that the s 511 Proceeding and the Remedial Motion were brought in the name of Meadow Springs and not in the name of the Liquidator. However, that matter was raised by the Full Court in the course of the hearing of the appeals and leave was given for the Liquidator to be joined as plaintiff in the s 511 Proceeding and as a respondent to the appeals. 7 Pursuant to directions given by the Court, Meadow Springs filed a statement of facts said to give rise to the questions that it sought to have determined by the Court in the s 511 Proceeding. The other parties to the s 511 Proceeding filed responses indicating the extent to which facts were disputed. In order to explain the questions that Meadow Springs and the Liquidator sought to have determined in the s 511 Proceeding, it is necessary to say something about the facts as found by the primary judge, including the circumstances that gave rise to the IMF Funding Agreement.

THE SECURITIES GIVEN BY MEADOW SPRINGS 8 Meadow Springs was incorporated for the sole purpose of acquiring a property situated in Oakmont Avenue, Meadow Springs, Western Australia (the Property) and constructing on the Property a number of serviced apartments and related facilities, selling the serviced apartments and distributing the net proceeds of sale to its shareholders (the Project). 9 Before undertaking the Project, Meadow Springs obtained a valuation of the Property from Colliers International Consultancy & Valuation Pty Limited (Colliers). Colliers were requested to undertake a formal valuation as at 1 December 1998, on the following bases: · Gross realisable value of fifty-four strata titled apartments on completion of the Project, anticipated to be January 2000, and · The market value of the Property, on the basis of development approval, fixed price building contract and apartment operator being in place as at the date of valuation. Colliers provided a written valuation dated 25 September 1998 assigning the following values as at 1 December 1998, subject to various assumptions that were set out in the valuation: · Gross realisable value of strata titled units - $13,975,000 · En globo land - $1,000,000. Meadow Springs relied on the valuation in deciding to undertake the Project and to raise capital and borrow funds for the Project. 10 Meadow Springs raised $4,850,000 from its shareholders. In September 1999, Meadow Springs entered into a loan agreement with Westralian Capital Holdings Pty Ltd (Westralian) whereby Westralian agreed to advance the sum of $6,350,000 to Meadow Springs (the Westralian Loan Agreement). On the same day, Meadow Springs executed a first registered mortgage over the Property in favour of Westralian (the Westralian Mortgage) and granted a fixed and floating charge over all of its assets and undertaking in favour of Westralian (the Westralian Charge) as security for the repayment of the proposed advance. 11 For various reasons, which are not presently relevant, Westralian was unable to advance the sum of $6,350,000 pursuant to the Westralian Loan Agreement. Arrangements were therefore put in place by Meadow Springs whereby advances were to be made to Meadow Springs by other lenders. Those arrangements involved assignments or purported assignments by Westralian to Balanced Securities Limited (Balanced) and to Knightsbridge Managed Funds Limited (Knightsbridge) of the securities taken by it from Meadow Springs. 12 Towards the end of 1999, Colliers also provided its written valuation to Balanced in connection with the proposal for Balanced to provide advances to Meadow Springs. Balanced says that it relied on the valuation in deciding to enter into arrangements with Meadow Springs. On 24 May 2000, Balanced and Meadow Springs entered into a facility agreement whereby Balanced granted to Meadow Springs a loan facility for an amount not exceeding the sum of $3,000,000 (the Balanced Facility Agreement). On the same day, Meadow Springs granted a charge to Balanced over the whole of its undertaking and all of its assets and property (the Balanced Charge) as security for the payment to Balanced of all advances to be made by Balanced to Meadow Springs under the Balanced Facility Agreement. By clause 2.4 of the Balanced Facility Agreement, Meadow Springs agreed to procure the execution of priority agreements acceptable to Balanced, whereby the respective priorities of the various secured creditors of Meadow Springs, including Balanced and Knightsbridge, were fixed. 13 Each of the Balanced Charge and the Westralian Charge was to operate as a fixed charge as regards all freehold and leasehold property, fixtures, uncalled capital, unpaid calls, plant, machinery and other chattels other than stock in trade and was to operate as a floating security as regards all other property and assets of Meadow Springs. However, the appointment of administrators to Meadow Springs was an event of default that would result in the crystallisation of each charge, such that it would then be a fixed charge as to all assets. 14 By August 2000, the construction of the apartments was completed and Meadow Springs embarked on attempts to sell the apartments. However, none of the apartments was sold. Accordingly, on 21 February 2001, the Liquidator and his partner, Mr Anthony Smith, of Ernst & Young, were appointed as administrators of Meadow Springs. On 23 January 2002, Meadow Springs went into liquidation and the Liquidator was appointed as liquidator of Meadow Springs. 15 On 23 April 2002, Westralian and Knightsbridge, as mortgagees, sold the Property. The total sale price was $7 million. The cost of the Property, including the cost of constructing the apartments, was significantly greater than $7 million and, accordingly, the Project resulted in very substantial loss to Meadow Springs. Further, the proceeds of sale were insufficient to repay the amounts that had been advanced by and had become owing to Balanced and Knightsbridge and other secured creditors.

THE LITIGATION FUNDING AGREEMENTS 16 Meadow Springs claimed that it was entitled to damages from Colliers for the loss that it had suffered in undertaking the Project. It claimed that the valuation provided to it by Colliers had been made in breach of the duty of care owed by Colliers, had been made in breach of the contract between Colliers and Meadow Springs and constituted misleading or deceptive conduct in contravention of the Trade Practices Act 1974 (Cth) (the Trade Practices Act) or the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). Following the sale of the Property, the only asset of Meadow Springs of any possible value was that prospective claim against Colliers (the Colliers Cause of Action). 17 The assets of Meadow Springs charged by the Balanced Charge and by the Westralian Charge included the Colliers Cause of Action. That asset was subject to floating charges that crystallised on the appointment of the administrators, when it became subject to fixed charges. However, the Colliers Cause of Action was a wasting asset in the sense that it was liable to become statute barred after the expiration of 6 years from the time when it first arose. On one view, that would have been some time in September 2004. 18 Nevertheless, none of the secured creditors was prepared to take any step to realise the asset consisting of the Colliers Cause of Action. For example, it would have been possible to appoint a receiver to Meadow Springs with power to commence a proceeding in the name of Meadow Springs against Colliers for recovery of damages alleged to have been suffered by Meadow Springs by reason of its reliance on the valuation. 19 At a meeting of the creditors of Meadow Springs convened by the Liquidator, which was held on 19 September 2003, the creditors approved a resolution that the Liquidator may enter into a proposed funding agreement with Insolvency Litigation Fund Pty Limited (ILF), for the purpose of pursuing the claim against Colliers. ILF is a subsidiary of IMF. Although they were invited to attend, none of the secured creditors of Meadow Springs attended the meeting. 20 On 23 September 2003, the Liquidator wrote to each of the secured creditors of Meadow Springs, including Balanced. After referring to the meeting of creditors held on 19 September 2003, the Liquidator said that the unsecured creditors had unanimously resolved to allow the Liquidator to enter into an agreement for litigation funding with ILF to enable the Liquidator to realise the asset consisting of the Colliers Cause of Action. By the letter, the Liquidator also sought the express consent of the secured creditors to proceed with the matter. In particular, the Liquidator sought the consent of the secured creditors on the basis that the proposed funding agreement "would alter the priorities in relation to the floating asset portion of your charge". The letter said that, under the terms of the proposed funding agreement, ILF would be entitled to full payment ahead of the secured creditors. 21 Notwithstanding that Balanced had not given its consent, the Liquidator and Meadow Springs entered into an agreement with ILF on 3 November 2003 (the ILF Funding Agreement). By the ILF Funding Agreement, ILF undertook several obligations. By clause 2.1, ILF agreed to pay: · the legal costs of Solomon Brothers, a firm of solicitors practising in Perth (the First Amount); and · the Liquidator's practitioner's fees (the Second Amount). ILF also agreed to indemnify the Liquidator and Meadow Springs in respect of any costs order made against the Liquidator or Meadow Springs in the Proceeding (as defined). The Proceeding was defined as any causes of action in the Supreme Court of Western Australia against Colliers in relation to the valuation of the Property. In addition, ILF agreed that, if Meadow Springs is ordered to provide any security for costs in the Proceeding, ILF would provide that security in a form that was acceptable to the Supreme Court of Western Australia. 22 Clause 4 of the ILF Funding Agreement dealt with the consideration to be given by the Liquidator for the obligations undertaken by ILF. The consideration was expressed by reference to the Resolution Sum, which is defined as meaning the amount or amounts received by way of settlement, judgment or order (including costs) in respect of the Proceeding. 23 By clause 4.1 of the ILF Funding Agreement, the Liquidator agreed that, when he received any part of the Resolution Sum, or any part coming under his control, he would: · reimburse ILF the First Amount and the Second Amount; and · pay to ILF, from the Resolution Sum, the Fees. The term "Fees" was defined in the ILF Funding Agreement as being an amount of $10,000 per month from the date of commencement of the agreement up to a maximum of $100,000, for Management Services, plus $15,000 for assessing the Proposal and facilitating the agreement. The term "Management Services" was defined as assistance by ILF to Solomon Brothers under the ILF Funding Agreement. The Proposal was defined as the document containing information required by ILF by which the Liquidator sought a funding agreement. 24 Under clause 4.2 of the ILF Funding Agreement, the obligation imposed by clause 4.1 was to be met prior to the payment from the Resolution Sum of any other expenses of the Liquidator, including any other fees or costs. Clause 4.3 then relevantly provided as follows: The [Liquidator] disposes to ILF a share of the Resolution Sum which share is to be calculated and remitted to ILF in the following manner on Resolution: … 4.3.2 If settlement of the Proceeding is reached by six months after mediation by the parties to the Proceeding… 35% of the Resolution Sum. [Emphasis added] 25 Clause 5 of the ILF Funding Agreement provided that Solomon Brothers were to be instructed by the Liquidator and not by ILF and that ILF would not interfere with the conduct of the Proceeding by the Liquidator. Clause 5.4 provided that, in recognition of the fact that ILF "has a proprietary interest in the Resolution Sum", each party agreed that, if the Liquidator did not want to settle the Proceeding when ILF considered it adequate, it would seek to resolve the difference by referring the dispute to senior counsel. However, if senior counsel opined that the settlement offer was adequate but the Liquidator still did not want to settle the Proceeding and ILF wanted to settle, the Liquidator was to retain an unfettered power to conduct and settle the Proceeding. 26 Clearly enough, in the light of clause 5.4 and the language of clause 4.3 of the ILF Funding Agreement, it was contemplated by the drafter that the Resolution Sum was in some sense property at the disposition of the Liquidator. Thus, by clause 4.3, the Liquidator purported to dispose to ILF a share of the Resolution Sum and by clause 5.4 ILF is stated to have a proprietary interest in the Resolution Sum. At the time of the ILF Funding Agreement, of course, there was no Resolution Sum. The Resolution Sum was future property, being an amount or amounts that might be received by way of settlement, judgment or order in respect of the Proceeding, which at that stage, had not been commenced. Indeed, as will appear, there was no proceeding that strictly satisfied the definition of Proceeding in the ILF Funding Agreement. 27 Clause 9 of the ILF Funding Agreement dealt with disbursement of the Resolution Sum. Clause 9.1 relevantly provided as follows: On Resolution the [Liquidator] will pay the Resolution Sum into a separate account and upon clearance will: 9.1.1 Pay to [ILF] from that account any money [ILF] is entitled to be reimbursed and to be paid pursuant to this Agreement and 9.1.2 Remit [ILF's] share of the Resolution Sum to [ILF] from that account. The term "Resolution" was defined as when the Liquidator receives all or some of the settlement or judgment proceeds in respect of the Proceeding. Clearly enough, clause 9.1.1 refers to reimbursement of the First Amount and the Second Amount and payment of the Fees under clause 4.1 and clause 9.1.2 refers to the share of the Resolution Sum that, pursuant to clause 4.3, the Liquidator "disposed" to ILF. 28 On 24 December 2003, Balanced wrote to the Liquidator saying that Balanced was currently reviewing the likely extent of its losses and possible claims against, amongst others, Colliers for a possibly negligent valuation report, which induced Balanced to enter into the loan transaction with Meadow Springs. Balanced said that, until those enquiries had been finalised, Balanced would not agree to any position that compromised its rights in any way. The letter then stated expressly that Balanced would not agree to the priorities sought by the Liquidator's letter to secured creditors of 23 September 2003. Balanced also said that, while there may be advantages in combining any action against Colliers, Balanced would not agree to an arrangement where its rights as mortgagee against Colliers would be compromised and could be settled by a third party litigation funder without the approval of Balanced. On 6 January 2004, the Liquidator sent a copy of Balanced's letter of 24 December 2003 to ILF. 29 On 16 January 2004, Solomon Brothers wrote to the Liquidator saying that, as a result of a decision of the Full Court of the Supreme Court of Western Australia, certain matters concerning the ILF Funding Agreement needed to be remedied. The letter said that the Full Court had limited ILF's ability to enter into a costs agreement with solicitors as agent for a litigant. Solomon Brothers expressed the opinion that they should therefore enter into a retainer directly with the Liquidator. The letter proposed that the standard terms of engagement of Solomon Brothers apply, subject to one variation. The variation was that ILF, and only ILF, would be responsible for paying the accounts of Solomon Brothers. 30 Subsequently, in March 2004, the Liquidator, Meadow Springs and ILF entered into an agreement varying the ILF Funding Agreement (the Amending Agreement). The Amending Agreement recited that the Liquidator and Meadow Springs had decided to commence an action against Colliers, subject to receiving funding from ILF. It also recited that that action was the property of Meadow Springs and that there were two secured creditors of Meadow Springs whose security may include that action. The Amending Agreement then recited that the parties had agreed to vary the ILF Funding Agreement to take into account the risk that one or both of the secured creditors may enter into possession of the action, appoint a receiver to the action, claim the proceeds of the action or otherwise exercise its or their security in relation to the action or the proceeds thereof. Finally, the Amending Agreement recited that the Liquidator and Solomon Brothers, with ILF's knowledge, had entered into a new retainer agreement and that consequential amendments were required to the ILF Funding Agreement. The Amending Agreement inserted several additional clauses and substituted other clauses. 31 First, the Amending Agreement inserted additional parts to clause 4 of the ILF Funding Agreement. Relevantly, the following provisions were inserted: 4.4 If one or more of the secured creditors exercises… any security… in relation to the Proceeding or the Resolution Sum… [ILF]… shall at any time thereafter be entitled to render an account to [the Liquidator] for an amount equal to 200% of the legal costs and disbursements incurred by [ILF] to and including the date of the exercise by the secured creditors of its or their security or securities. 4.5 If one or more of the secured creditors exercises… any security… in relation to the Proceeding or the Resolution Sum… the [the Liquidator]at his sole discretion, shall at any time thereafter be entitled to render an account to [Meadow Springs] for all of the [Liquidator's] fees and all costs, disbursements, or expenses (including the amount of the [ILF] invoice) incurred by [the Liquidator] in pursuing the proceeding… 4.6 The liability of the [Liquidator] to [ILF] and of [Meadow Springs] to [the Liquidator] shall be limited to the Resolution Sum or any other proceeds of the Proceeding received by or receivable by [Meadow Springs] from the Proceeding… and in the case of [the Liquidator] liability is limited to the amount actually received by or receivable by [the Liquidator] from [Meadow Springs]. 32 Secondly, the definition of lawyers' fee agreements in the ILF Funding Agreement was varied to refer expressly to the retainer agreement recorded in the letter from Solomon Brothers to the Liquidator of 16 January 2004. In addition, the reference to the Supreme Court of Western Australia in the ILF Funding Agreement was replaced with a reference to the Supreme Court of Western Australia or the Federal Court of Australia. 33 In August 2004, the Liquidator, Meadow Springs and IMF entered into the IMF Funding Agreement, the terms of which are identical to those of the original ILF Funding Agreement save for references to IMF as a party instead of ILF. Curiously, there does not appear to have been any attempt to reflect the Amending Agreement. Thus, the effect appears to have been to bring into existence, in lieu of the contractual regime that previously existed with ILF, a new regime with IMF with the deficiencies or problems intended to be remedied by the Amending Agreement. Specifically, for example, the IMF Funding Agreement refers to a fee agreement between IMF and Solomon Brothers and refers to the Proceeding as a cause of action in the Supreme Court of Western Australia, notwithstanding that, in June 2004, the proceeding contemplated by the ILF Funding Agreement as amended had been commenced in the Federal Court.

THE RESOLUTION SUM 34 On 16 June 2004, a proceeding with Meadow Springs as applicant was commenced against Colliers in the Western Australian Registry of the Federal Court by the filing of an application and statement of claim (the Colliers Proceeding). Solomon Brothers were named as the solicitors for Meadow Springs. The application stated that Meadow Springs' claim was for damages or compensation pursuant to s 82 or s 87 of the Trade Practices Actor s 12GF or s 12GM of the ASIC Act, for damages in tort or for damages for breach of contract. The application stated that the claim arose out of Colliers' performance of an engagement by Meadow Springs to prepare various valuations of the Property. Meadow Springs alleged that, in providing valuations of the property and the Project to Meadow Springs, Colliers had acted in breach of a contractual term to exercise reasonable care, had acted negligently and had engaged in misleading or deceptive conduct. 35 Shortly prior to the trial in the Colliers Proceeding, Meadow Springs and Colliers reached a compromise and on 29 June 2007, a deed of settlement was entered into. The parties to the deed of settlement included Meadow Springs and its shareholders, as well as Colliers, the Liquidator and IMF. 36 The deed of settlement recited that: · Meadow Springs purchased the Property; · Colliers was engaged to prepare and did valuations of the Property and the Project; · Meadow Springs constructed the proposed development on the Property but was placed into administration and liquidation and the Liquidator was acting as liquidator of Meadow Springs; · Meadow Springs alleged that the valuations prepared by Colliers had caused it losses; · Meadow Springs had sued Colliers in the Colliers Proceeding to recover its losses; · The litigation costs of Meadow Springs and the shareholders were funded by IMF; and · Colliers denied any liability or wrongdoing. 37 By clause 3.1 of the deed of settlement, Meadow Springs and its shareholders acknowledged receipt of the sum of $8,600,000 from Colliers, paid as follows: · To the shareholders of Meadow Springs, the sum of $1,650,000. · To Meadow Springs, the sum of $6,950,000. Clause 4 contained releases of Colliers by Meadow Springs and its shareholders. 38 By clause 5.1 of the deed of release, the Liquidator undertook to Colliers that he would deal with the sum of $6,950,000 as follows: · Hold $200,000 on trust on account of his remuneration and expenses to date. · Pay $350,000 to IMF to reimburse it for Meadow Springs' litigation costs that had been paid by IMF. · Distribute the balance of the $6,950,000, being $6,400,000, only pursuant to orders of the Court. 39 The Liquidator agreed that, for the purposes of such orders of the Court, he would submit that secured creditors of Meadow Springs have a priority entitlement to the extent of their security, subject to deduction of his remuneration and expenses, including the amount payable by Meadow Springs to IMF pursuant to the IMF Funding Agreement, other than reimbursement of Meadow Springs' litigation costs paid by IMF. By clause 5.2, the Liquidator undertook to Colliers to inform its solicitors in writing of any amount paid by Meadow Springs to Balanced pursuant to the distribution described above.

THE PROCEEDING AT FiRST INSTANCE 40 IMF, Balanced, Westralian and Knightsbridge, as well as other parties not presently relevant, were joined as defendants in the s 511 Proceeding. Each of IMF, Balanced, Westralian and Knightsbridge filed cross-claims against other parties in the s 511 Proceeding. The Liquidator was a respondent to IMF's cross-claim. 41 The primary judge identified several groups of issues for determination in the s 511 Proceeding. A number of the issues identified by his Honour are no longer relevant for the purposes of the appeals. Two issues are presently relevant. The first was concerned with the priorities between the consideration payable to IMF under the IMF Funding Agreement, on the one hand, and the amounts payable to the secured creditors under their charges, on the other hand. The second issue was concerned with the validity of the Balanced Charge and, assuming that the Balanced Charge is valid, whether Meadow Springs is entitled to a set off against the amount secured by the Balanced Charge. 42 On 9 April 2008, the primary judge published reasons for the conclusions reached by him after hearing all of the evidence and submissions in relation to the questions raised in the s 511 Proceeding, the Remedial Motion and the cross-claims. On 29 May 2008, his Honour made orders that: · the IMF Funding Agreement be approved; · the Liquidator be directed that he may act on the IMF Funding Agreement as if it had been approved by the Court pursuant to s 477(2B) of the Corporations Act; and · the entry by the Liquidator into the IMF Funding Agreement was not invalid by reason of the failure of the Liquidator to obtain any prior approval required by s 477(2B) of the Corporations Act. There has been no appeal from those orders. 43 On 29 May 2008, the primary judge also declared that the Balanced Charge is valid and enforceable in accordance with its terms and that moneys advanced by Balanced to Meadow Springs were advanced pursuant to the terms of the Balanced Facility Agreement. His Honour also made a declaration as to the amount secured by the Balanced Charge. 44 On 10 June 2008, after hearing further argument in respect of matters arising out of the reasons published on 9 April 2008, the primary judge published further reasons and made orders concerning the parties' respective claims on the sums held by the Liquidator representing the balance of the Resolution Sum. His Honour relevantly made declarations that the claims ranked in the following priority: · First, the Fees of $115,000 payable to IMF under clause 4.1 of the IMF Funding Agreement; · Second, the amount payable to Balanced under the Balanced Charge; · Third, the sum representing the 35% of the Resolution Sum payable to IMF under clause 4.3 of the IMF Funding Agreement. 45 It is common ground that the legal costs incurred in commencing, prosecuting and settling the Colliers proceeding, which were paid by IMF, are to be reimbursed to IMF out of the Resolution Sum in priority to any amount owing to the secured creditors. The priority issue was whether IMF is also entitled to be paid the amount of the Fees of $115,000 and the 35% share of the Resolution Sum in priority to the payment of the balance of the amounts claimed to be secured by the Balanced Charge. 46 Before the primary judge, IMF contended that the obligation to pay the Fees of $115,000 and the 35% of the Resolution Sum were expenses reasonably incurred by the Liquidator in realising the Resolution Sum and were, therefore, to be charged against the Resolution Sum in accordance with the principle that expenses reasonably incurred in the care, preservation and realisation of a fund may be thrown against that fund, notwithstanding that the fund belongs to a secured creditor (the Universal Distributing Principle: see Re Universal Distributing Company Limited (in Liquidation) (1933) 48 CLR 171). IMF contended that, since the Fees of $115,000 and the 35% of the Resolution Sum comprised expenses reasonably incurred by the Liquidator in producing the Resolution Fund, the Liquidator was entitled to retain sufficient of the Resolution Sum to discharge those expenses and was entitled to an equitable lien to protect his right to be reimbursed (Judgment [120]). 47 His Honour considered that the issues raised by the question whether the obligation to pay the Fees of $115,000 was reasonably incurred overlapped with the issues raised by the Remedial Motion. His Honour concluded that the Liquidator acted reasonably in entering into the IMF Funding Agreement. The factors that his Honour took into account were as follows: · First, the claim against Colliers was the only substantial asset of Meadow Springs at that stage, there was clearly a viable cause of action against Colliers, which had the potential to bring extraneous benefits to all creditors, and the Liquidator was unable to obtain funding from the creditors to pursue the cause of action. · Secondly, the Liquidator chose to enter into the Funding Agreement with IMF because IMF was well known and was a public company with the financial resources to fulfil the obligations that it had undertaken; IMF was, at the time, the pre-eminent litigation funder in the market and the terms of the Funding Agreement were usual in the market at that time. 48 His Honour accepted that some criticism could be made of the Liquidator in so far as he did not have regard to whether the consideration payable to IMF was a reasonable reward to IMF for the services IMF would provide. However, his Honour did not consider that incurring the obligation to provide that consideration should be characterised as unreasonable. The obligation was incurred as part of a wider funding agreement in a limited market in circumstances where it was reasonable for the Liquidator to enter into such an agreement. His Honour concluded that, since the Liquidator acted reasonably in entering into the IMF Funding Agreement, the liability to pay the Fees of $115,000 under the IMF Funding Agreement was an expense that was reasonably incurred by the Liquidator in establishing the Resolution Sum and was therefore, under the Universal Distributing Principle, an expense that should be charged against the Resolution Sum in priority to the claims of the secured creditors. 49 However, the primary judge drew a distinction between the Fees of $115,000 and the 35% of the Resolution Sum. His Honour concluded that the obligation to pay the 35% of the Resolution Sum was not one of the character contemplated by the Universal Distributing Principle. His Honour held that only liabilities creating mere debts fell within the Universal Distributing Principle whereas the disputed amount involved a disposal to IMF of a share of the Resolution Sum. His Honour did not consider that the obligation in relation to that share was one incurred in the production of the Resolution Sum (Judgment [124]). His Honour therefore concluded that the obligation in relation to the 35% share of the Resolution Fund was not an expense incurred by the Liquidator in the course of realising the Resolution Fund and was therefore not a liability that comprised an expense that should be charged against the Resolution Fund under the Universal Distributing Principle. 50 The primary judge also considered an alternative contention advanced on behalf of Balanced, which his Honour rejected. Balanced contended that the fees and disbursements of the Liquidator that could be thrown against the Resolution Sum should be limited to the amount of the fees and disbursements that Balanced would have incurred had it realised the Resolution Sum itself, by appointing a receiver to prosecute the cause of action. Balanced asserted that it was financially in a position itself to prosecute a proceeding against Colliers, in the name of Meadow Springs, without having to enter into a litigation funding agreement. Balanced said that it would have incurred expenses totalling $642,000, being receivers' remuneration of $200,000 and legal costs of $442,000 and would not have expended any more than that sum. 51 The primary judge held that the Universal Distributing Principle does not involve imposing a limitation upon the amount that could be thrown against the fund by reference to a hypothetical amount that would have been expended by a secured creditor in realising or creating the fund, had it done so itself. His Honour considered that the expenses that could be thrown against a fund realised by a liquidator were to be assessed by reference to the actual events and the actual costs of the person who realises the fund and not to the notional costs of the secured creditor that might have been incurred, if the secured creditor had elected to realise or create the fund. His Honour considered that the only relevant limitation on whether the actual expenses incurred could be thrown against the Resolution Sum was whether they were reasonably incurred. Thus, it is clear enough that his Honour concluded that the expense in relation to the 35% share of the Resolution Sum, if it was properly to be characterised as an expense within the Universal Distributing Principle, was reasonably incurred by the Liquidator.

THE APPEALS 52 IMF has appealed from the orders made by the primary judge in so far as they gave priority to Balanced over IMF in relation to the 35% share of the Resolution Sum. Balanced filed a cross-appeal in so far as the orders give priority to the Fees of $115,000 over the amounts payable to Balanced. The Liquidator and Meadow Springs also appealed from the orders declaring the Balanced Charge valid and from the orders relating to the priority of the secured creditors. 53 While Westralian and Knightsbridge were parties to the appeals, a compromise was reached between Westralian and Knightsbridge, on the one hand, and the Liquidator and IMF, on the other, during the course of the hearing of the appeals. Accordingly, it has not been necessary for the Full Court to deal with any issues relating to Westralian and Knightsbridge.

The Priority Question 54 Much of the argument at first instance and on appeal was directed to the proprietary nature of that part of the consideration to be given to IMF under the IMF Funding Agreement that consisted of the disposal of 35% of the Resolution Sum. The question as to whether IMF is entitled to be paid the 35% of the Resolution Sum in priority to the claims of the secured creditors was said to involve competing equitable interests. Thus, the primary judge observed that the charges created by the Balanced Charge and the Knightsbridge Charge had crystallised, at the latest, on the appointment of administrators to Meadow Springs on 21 February 2001. The Colliers Cause of Action existed at that time and, accordingly, was an asset of Meadow Springs at the time of crystallisation. 55 The primary judge found that, on the date of crystallisation, Balanced acquired an equitable interest in the chose in action consisting of the Colliers Cause of Action and that that chose in action included the proceeds of the Colliers Proceeding. Clearly, both IMF and ILF had knowledge of the Balanced Charge at the times when the ILF Funding Agreement and the IMF Funding Agreement were respectively entered into. His Honour observed that Balanced's equitable interest was prior in time to any equitable interest that IMF acquired in the Resolution Sum under the IMF Funding Agreement. His Honour considered that there was no reason for disturbing the ordinary priorities of equitable interests in property. 56 Accordingly, his Honour held that the prior equitable interest of Balanced took priority over the subsequent equitable interest of IMF pursuant to the disposition contained in the IMF Funding Agreement on the basis of the principle qui prior est tempore potior est iure, that is, he who is earlier in time is preferred in law. For the reasons set out below, the reasoning of the primary judge was erroneous in so far as it was based on priorities between competing equitable interests and failed to apply the Universal Distributing Principle.

Competing Equitable Interests 57 A charge is a hypothecation creating a security interest in respect of property without transfer of either title or possession. Such a security interest is a proprietary interest, conferring rights in rem. Such rights in rem will be binding upon third parties and will be unaffected by the insolvency of the owner of the property in question, subject of course to any questions of registration and the doctrine of the bona fide purchaser of the legal estate for value without notice. There are also circumstances, which are not of present relevance, where such an interest might be postponed by reason of disentitling conduct on the part of the holder of the interest. 58 The proprietary interest created by a charge entitles the holder to resort to the property only for the purpose of satisfying the liability actually secured by the charge. The owner of the property remains as owner and retains the entitlement to have the property restored to it when the secured liability has been discharged or performed. Ordinarily, the holder of the charge will have no right to the property in question other than to sell it upon default in the performance of the secured obligation (see In Re Bank of Credit and Commerce International SA [1998] AC 214 at 226 and Associated Alloys (2000) 202 CLR 588 at 595-596 [6]). The proceeds of sale must be applied first in satisfaction of the expenses of sale, second in satisfaction of the secured obligation and third by return of any surplus to the owner of the property. 59 A charge may be fixed or floating. One of the primary objectives of a floating charge is to enable a debtor company to carry on its business as a going concern and dispose of certain of its trading assets in the ordinary course of business free of any security interest, notwithstanding the existence of the charge. However, the instrument creating a floating security will normally provide for its crystallisation upon the occurrence of specified events. Upon such occurrence, the floating security becomes fixed and the company can no longer dispose of any of its assets free of the security interest. The crystallisation does not, of itself, operate as an assignment of property or give possession of it to the holder of the charge. The property interest is created upon creation of the charge. 60 However, when a floating charge crystallises, it becomes a fixed charge attaching to all of the assets of the company that fall within its terms. Thereafter, the assets subject to the charge form a separate fund, in which the secured creditor has a proprietary interest, for the purposes of satisfying the secured liability. The right of the company to any surplus after the fund has been applied in satisfying the secured liabilities is part of the fund available for the company's unsecured creditors. That may have the consequence that a company in liquidation that has given a charge over its assets will have two quite separate funds: a fund that is subject to the charge and a fund, if any, that is not subject to the charge. Such a duality will not arise, of course, if the charge relates to the whole of the company's property, assets and undertaking. However, where there are two funds, each fund will bear its own costs. The expenses of preserving, getting and administering the fund belonging to the secured creditors will be borne by that fund. The general expenses of winding up will be borne by the other fund (see Buchler v Torbett [2004] 2 AC at [28] - [31]). 61 A provision for automatic crystallisation of a floating charge, which may occur some time before a secured creditor intervenes in the debtor's affairs by, for example, appointing a receiver and manager, may give rise to competing equities. It may be that, as a general rule, where a charge has become fixed and the subject assets have been realised, the proceeds of realisation will be unavailable to the general body of unsecured creditors in an insolvency. However, it does not necessarily follow that, upon the crystallisation of a floating charge, regardless of what the holder of the charge does or fails to do thereafter, the assets that are subject of the charge cannot be dealt with in a manner that may benefit some or all of the unsecured creditors (G & M Aldridge Pty Ltd v Walshe (2001) 203 CLR 662 at [26]). 62 It is only where the liquidator of a company realises or preserves an asset or administers a fund that is subject to a security that questions of appropriation of expenses will arise. Where the secured fund is realised, preserved or administered by a receiver appointed by the secured creditors, the expenses of the receiver will be borne by the secured fund. Where, as in the present case, there is no separate fund available for unsecured creditors, because there will be no surplus available for unsecured creditors, it is necessary to determine what expenses, if any, have been reasonably incurred by the liquidator in realising, preserving and administering the secured fund. Those expenses are to be borne by the secured fund, but only to the extent that they were reasonably incurred for the purposes of preserving, realising and administering that fund. In the present case, the fund in question consisted of the proceeds of the Colliers Cause of Action.

Application of the Universal Distributing Principle 63 Where, as in this case, a party has, by its efforts, brought into Court a fund in the administration of which it and other parties are interested, the costs and expenses of that party in preservation and realisation of the fund will be a first claim upon that fund (Shirlaw v Taylor (1991) 31 FCR 222 at 228). Thus, a receiver, who may be working for the benefit of all who have legitimate interests in particular assets, is entitled to look to the assets of which he is receiver to meet his remuneration and the liabilities and outgoings incurred in realising and preserving those assets. Further, where a person seeks to enforce a claim to an equitable interest in property, the Court will require, as a condition of giving effect to that equitable interest, that an allowance be made for costs incurred and for skill and labour expended in connection with the preservation, realisation and administration of the property (Shirlaw 31 FCR at 230-231). 64 Further, a secured creditor of a company who elects to have its rights decided in the winding up of the company is entitled to be paid principal and interest out of the fund produced from realisation of the assets encumbered by its debt, but only after deduction of the costs, charges and expenses incidental to the realisation of such assets. While the security is paramount over the general costs and expenses of the liquidation, the expenses attendant upon realisation of the assets affected by the security must be borne by the secured creditors. A secured creditor has a specific right to the assets over which its debt is secured, for the purpose of paying the debt. However, if the assets are realised in the winding up, and the secured creditor is a party to the winding up, the proceeds must bear the costs of the realisation just as if the secured creditor itself had begun a suit for the realisation of the assets or had realised the assets without suit. However, only those expenses that have been reasonably incurred in the care, preservation and realisation of the property are payable out of the fund belonging to the holder of the charge (see Re Universal Distributing Company Limited (in Liquidation) (1933) 48 CLR 171 at 174). 65 The language of the IMF Funding Agreement draws a distinction between the First Amount, the Second Amount and the Fees on the one hand, and the share of the Resolution Sum, on the other hand. That is to say, the obligation of the Liquidator in relation to the First Amount, the Second Amount and the Fees is to pay sums of money whereas the obligation of the Liquidator in relation to the share of the Resolution Sum is to transfer an interest in an identified fund. Nevertheless, the disposition of a share of the Resolution Sum to IMF is no less part of the consideration to be given to IMF for the performance of its obligations under the IMF Funding Agreement than the payment of amounts equal to the First Amount, the Second Amount and the Fees. There is no justification for distinguishing between the latter and the former on the basis that the latter creates a debt whereas the former does not. 66 It is clear, under clause 4 of the IMF Funding Agreement, that nothing was to be paid or given to IMF unless and until the Resolution Sum or any part of it came under the control of the Liquidator. That is reinforced by clause 9. The Liquidator was required by clause 9.1 to pay the Resolution Sum into a separate account and, only upon clearance, to pay to IMF, from that account, any money that IMF is entitled to be reimbursed for legal costs and liquidators' fees and any money that IMF is entitled to be paid by way of Fees. Clause 9.1 also required the Liquidator to remit IMF's share of the Resolution Sum from that account. Thus, although the language differs, the whole of the consideration to be given to IMF was to come only from the Resolution Sum if and when received. That consideration was an expense of getting in the Resolution Sum, within the Universal Distributing Principle. 67 The consideration passing from IMF was the promise to provide funding for the whole of the litigation. That included IMF's obligation to assume a liability to pay any adverse costs orders and to provide security for costs because Meadow Springs was in liquidation. If the proceedings were lost or did not result in recovery of sufficient monies in any settlement to extinguish payments that IMF had made under its obligation to provide funding, it would suffer a commercial loss. It is unreal to consider that IMF was prepared to provide funding simply on the basis that it was to be entitled to the reimbursement of what it had paid, together with the $115,000 in fees, while leaving the entitlement to receive a share of the Resolution Sum to be treated as being different from the price it was charging for the provision of its financial support. Had IMF charged a substantial interest rate on the monies it had expended, there is no doubt that that would have been regarded as an expense or cost of, or incidental to, the realisation of the Resolution Sum. 68 Balanced contended that, because IMF was to be paid that sum from a trust fund held by the liquidator and the sum had been assigned to it under the IMF Funding Agreement, that was not a cost incurred in realising the Resolution Sum, but should be characterised, as the primary judge held, as an assignment of the monies in the trust fund, after the Resolution Sum had been received. Balanced argued that the share of the Resolution Sum referred to in clause 4.3 of the IMF Funding Agreement was not the property of Meadow Springs and was therefore not available to be disposed of to IMF. That characterisation is erroneous. 69 The IMF Funding Agreement must be read as a whole, having regard to the objective circumstances in which it had been made. One of the circumstances was that the Liquidator had no funds with which to pursue and preserve the benefit of the Colliers Cause of Action and the secured creditors were not willing to provide funds, hence the Colliers Cause of Action would be lost without some outside funding. IMF was only prepared to provide funding on the terms of the IMF Funding Agreement, as the recitals to it showed. 70 While clause 4.1 of the IMF Funding Agreement is framed in terms that the Liquidator disposed to IMF its share of the Resolution Sum, it is clear that he could not have done so in his personal capacity alone, since the right to receive it was vested in Meadow Springs. Thus clause 4.3, must be read in the context that the Resolution Sum could only come into existence from the assertion of the right by Meadow Springs to recover damages against Colliers, which would never pass directly to the Liquidator in his capacity as liquidator of Meadow Springs. 71 That is to say, clause 4.3 must be read as an undertaking by the Liquidator, in that capacity, to cause Meadow Springs to pay to IMF the proportion of the Resolution Sum provided by clause 4.3. As liquidator of a company being wound up in insolvency or by the Court, the Liquidator was bound, by s 474(1) of the Act, to take into his custody or under his control all of the property to which Meadow Springs was or appeared to be entitled. The price for IMF's funding obviously could not be paid earlier, since all parties knew that Meadow Springs had no funds. The fact that Meadow Springs could not pay either the costs of litigation, or provide security for the costs prior to receiving the Resolution Sum, is another indication that the structure of the IMF Funding Agreement was based on the acceptance by the Liquidator, on behalf of Meadow Springs, of obligations to pay to IMF, in the event of a Resolution Sum being received in the future, whatever it was that IMF was entitled to be paid from that Resolution Sum. 72 The mere fact that the IMF Funding Agreement was expressed with a view to creating a "proprietary interest" in the 35% of the Resolution Sum, as clause 5.4 provided, does not require that interest to be characterised as anything other than part of the price for which IMF stipulated as a condition of its giving support in order to enable the recovery of the whole of the Resolution Sum from Colliers. IMF, after all, was funding the litigation not merely to achieve return of the monies it had advanced, but to obtain part of the proceeds as its commercial return for its involvement. The way in which it sought to structure the payment of its reward, by providing that the substantive part of 35% of the Resolution Sum would be assigned to it out of the proceeds received, does not affect the commonsense and commercial characterisation of what that stipulation clearly was; namely, part of the price or cost of IMF's funding. 73 Unless the Liquidator and Meadow Springs agreed to pay that, together with the reimbursement of the legal expenses incurred by IMF and the fees of $115,000, there would have been no funding provided by IMF with which to pursue the Colliers Cause of Action. It follows that the realisation of the Resolution Sum in the winding-up, through the efforts of the Liquidator funded by IMF, was achieved because the Liquidator and Meadow Springs agreed to incur obligations to IMF to pay to it all the amounts due under the IMF Funding Agreement. The payment of liabilities created by the Liquidator in achieving the realisation of the fund that was constituted by the Resolution Sum must be borne by that fund in accordance with the Universal Distributing Principle.

Reasonableness of the Consideration to be Received by IMF 74 Balanced contended that a distinction should be drawn between the question of whether it was reasonable for the Liquidator to enter into the IMF Funding Agreement, on the one hand, and the question of whether the amounts payable under the Funding Agreement were expenses reasonably incurred in the care, preservation and realisation of the Resolution Fund, on the other hand, within the Universal Distributing Principle. While such a distinction may fairly be drawn, it is clear that the primary judge treated the reasonableness of the decision to enter into the IMF Funding Agreement as leading to the conclusion that expenses incurred under the IMF Funding Agreement were expenses reasonably incurred in the care, preservation and realisation of the Resolution Sum. 75 Balanced also contended that the total consideration to be given to IMF under the IMF Funding Agreement, in so far as it included the Fees of $115,000 and the 35% of the Resolution Sum, exceeded what would constitute reasonable expenses incurred in the care, preservation and realisation of the property of Meadow Springs consisting of the Colliers Cause of Action. Balanced relied on evidence given by Mr Hugh McLernon, the managing director of ILF and IMF. Mr McLernon said that the amendment to the ILF Funding Agreement was made in case a receiver was appointed by the secured creditors and took control of the Colliers Cause of Action. Mr McLernon agreed that, if the secured creditors effectively took everything there was to take in the way of the fruits of the Colliers Cause of Action, IMF would, under clause 4.4 inserted by the Amending Agreement, still have a claim against the Liquidator for 200% of the legal costs as well as the claim under the IMF Funding Agreement, although he accepted that the Liquidator would not be personally liable. He accepted, further, that 200% of the legal expenses was a reasonable rate of return on the risk and associated contractual obligations of funding the proposed litigation. 76 Against that contention, the following factors must be considered: · Balanced had declined to provide funding to the Liquidator for the purposes of commencing and prosecuting the Colliers cause of Action. · Balanced was aware that the Liquidator had entered into the ILF Funding Agreement, but took no steps to challenge the Liquidator's decision to do so. · On one view, the Colliers Cause of Action would have become statute barred by late September 2004. · Balanced had taken no steps to enforce the security constituted by the Balanced Charge, for example, by appointing a receiver. Thus, having accepted no part of the risk of funding litigation against Colliers, Balanced now seeks to claim the full benefit of the fruits of the Colliers Proceeding, without accepting the entitlement of IMF to its reward for having undertaken the risk of funding the Colliers Proceeding. 77 But for the action of the Liquidator in entering into the arrangements with ILF, and then IMF, and prosecuting the Colliers Proceeding, Meadow Springs' asset consisting of the Colliers Cause of Action is likely to have been lost entirely. Balanced, on the other hand, commenced its own proceeding against Colliers in November 2005, claiming damages for loss occasioned by its reliance upon Colliers' valuation. Of course, any amounts recovered by Balanced from the Resolution Sum would go in mitigation of the damages that it could recover in its own proceeding against Colliers. That is not a relevant matter in the appeals, although it was a matter in contemplation of the parties to the deed of release. 78 While an arrangement with a litigation funder and the associated cost incurred in a case such as this was almost certainly not in contemplation of the High Court when the Universal Distributing Principle was propounded, no argument was advanced in the appeals that the remuneration to be received by IMF under the IMF Funding Agreement is outside the Universal Distributing Principle, by reason of its being tainted by champerty or maintenance. That is to say, no argument was advanced that the consideration that a liquidator agrees to pay to a litigation funder in realising a cause of action is unreasonable by reason of the doctrines of champerty and maintenance or some public policy against them. Such an argument, if it were advanced, would have little prospect of success in the present day (see Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386 at [1], [88], [92] and [137]). 79 The conclusions of the primary judge in connection with the Remedial Motion were that it was reasonable for the Liquidator to enter into the IMF Funding Agreement. There has been no appeal from those orders granting approval nunc pro tunc for the Liquidator to enter into the IMF Funding Agreement. The fact that Balanced may have been able to fund the Colliers Proceeding at a cost that was significantly less than the reward payable to IMF for providing funding is not to the point. That of itself fails to take account of the risk assumed by IMF under the IMF Funding Agreement in realising the Resolution Sum, namely, the possibility of losing the proceeding and suffering an adverse order for costs. Moreover, IMF assumed that risk and funded the pursuit of the Colliers Cause of Action in circumstances where Balanced was not prepared to take any action to realise its security interest until after the resolution of the proceedings. 80 The considerations just outlined lead to the conclusion that the consideration to be given by the Liquidator to IMF for IMF's funding of the Colliers Proceeding was an expense reasonably incurred by the Liquidator in order to preserve the Colliers Cause of Action and to realise that asset of Meadow Springs.

Conclusion on the Priority Question 81 All of the consideration to be given to IMF under the IMF Funding Agreement constituted an expense reasonably incurred by the Liquidator in the care, preservation and realisation of the asset of Meadow Springs consisting of the Colliers Cause of Action. As such, the whole of that consideration, including not only the Fees of $115,000 but also the 35% of the Resolution Sum, is an expense that is properly to be charged against the fund realised by the Liquidator, consisting of the Resolution Sum. The primary judge made no error in relation to the Fees of $115,000. However, his Honour erred in concluding that the 35% of the Resolution Sum was not a proper charge against the Resolution Sum.

Further Questions Raised in the Liquidator's Appeal 82 Apart from supporting the contentions advanced on behalf of IMF, the Liquidator advanced further contentions in support of priority for the Fees of $115,000 and the 35% of the Resolution Sum. The contentions were based on ss 512 and 477 of the Corporations Act. Section 512 relevantly provided that all proper costs, charges and expenses of and incidental to a winding up, including the remuneration of the liquidator, are payable out of the property of the company in liquidation, in priority to all other claims. Sections 477(2)(a) and 477(2)(c) relevantly provide that a liquidator of a company in liquidation may bring any legal proceeding in the name and on behalf of the company and may sell or otherwise dispose of, in any manner, any part of the property of the company. 83 Section 512 of the Corporations Act has been repealed, with effect from 1 January 2008. However, the transitional provisions provide that rights of priority accrued prior to the repeal are not effected (see Corporations Amendment (Insolvency) Act 2007 (Cth)). The Liquidator contended that the effect of s 512 was to create rights in the Liquidator to have the property of Meadow Springs applied so as to discharge his contractual obligations to make payments to IMF under the IMF Funding Agreement because those obligations are expenses of and incidental to the winding up of Meadow Springs. However, subject to the application of the Universal Distributing Principle, the rights conferred by s 512 cannot defeat the proprietary interests of a secured creditor. That is to say, a liquidator has no claim over property of a company in liquidation that is the subject of an enforceable security, except to the extent that the secured creditor elects to have its rights decided in the winding up. 84 The Liquidator's contentions based on s 477 are equally groundless. The Liquidator contends that ss 477(2)(a) and 477(2)(c) should be construed so as to permit a liquidator to sell to a litigation funder a share of the potential proceeds of a cause of action of the company on the basis that the share acquired by the litigation funder is not then subject to an otherwise applicable charge, if the secured creditor, with reasonable notice of the intention of the liquidator, has not acted by exercising its security, by appointing a receiver, or otherwise taking control of the cause of action and prosecuting the cause of action in the name of the company. However, assuming the purported purchaser has notice, a liquidator cannot give to a purported purchaser of any property of the company any greater right or interest than the company itself had prior to the winding up. The interest acquired by such a purchaser will not take priority over the interest of a secured creditor. It is axiomatic that a liquidator has no greater power to dispose of the property of the company freed from any security granted by the company than the company has. 85 Next, the Liquidator also contended that the Balanced Charge was void and unenforceable by reason of illegality, because Meadow Springs acted in contravention of a provision of the Stamp Act 1921 (WA) (the Stamp Act). The Balanced Charge was stamped as collateral to the Westralian Loan Agreement. The Liquidator argued that Meadow Springs failed to disclose that, because it secured moneys other than the moneys to be advanced under the Westralian Loan Agreement, the Balanced Charge was collateral to the Westralian Loan Agreement. 86 Section 87 of the Stamp Act relevantly provided for a reduction of duty where one instrument of security is duly stamped and a second instrument is security for some or all of the same moneys. The Balanced Facility Agreement and the Balanced Charge were entitled to a reduction of duty if they were security for some or all of the same monies as the Westralian Loan Agreement. To satisfy that requirement, it would be necessary to demonstrate that the Balanced Facility Agreement and the Balanced Charge secured a right already secured by the Westralian Loan Agreement. The stamping notations on the Balanced Facility Agreement and the Balanced Charge indicate that s 87 was availed of and that the duty was reduced to nil on the basis that they were security for the same moneys as the Westralian Loan Agreement, which was stamped ad valorem. 87 Section 26(1) of the Stamp Act relevantly provided that every person who, with intent to defraud the Crown, executes any instrument in which all the facts and circumstances affecting the liability of any instrument to duty are not fully and truly set forth or, being employed or concerned in or about the preparation of any instrument, neglects or omits fully and truly to set forth therein all such facts and circumstances, commits an offence against the Stamp Act. Under s 26(1A), the suppression from an instrument of any facts or circumstance or the inclusion therein of any matter that is known to be false in a material particular is prima facie evidence of intent to defraud the Crown. 88 The Liquidator contended that the only relevant right already secured by the Westralian Loan Agreement was the right of Westralian to advance $6,350,000 on the terms and conditions of the Westralian Loan Agreement. He argued that, if that right were extinguished to the extent of $3,000,000 and replaced by a new right and obligation of Balanced to advance $3,000,000 to Meadow Springs on terms that were different from those of the Westralian Loan Agreement, the Balanced Facility Agreement would not secure some or all of the same monies as the Westralian Loan Agreement. The Liquidator said that, if, on the other hand, the intention of the parties was that the effect of the Balanced Facility Agreement was to extinguish, to the extent of $3,000,000, the obligation of Westralian to make the total advance to Meadow Springs and to substitute a new obligation by Balanced under the Balanced Facility Agreement to advance $3,000,000 to Meadow Springs on different terms, the Balanced Facility Agreement and the Balanced Charge were not security for some or all of the same monies as the Westralian Facility Agreement. 89 The Liquidator contended that, if the effect of the instruments is as just stated, they did not fully and truly set forth all the facts and circumstances affecting the liability of the Balanced Facility Agreement and the Balanced Charge to duty. He contended that an inference should be drawn that the Balanced Facility Agreement was entered into despite the fact that it incorrectly described the nature of the transaction and incorrectly recited an assignment of the securities granted to Westralian where none of them was assigned to Balanced. The Liquidator also contended that an inference should be drawn, from the fact that all issues concerning stamp duty were left to Messrs Murie & Edward, solicitors, who acted for Balanced, that Balanced had notice of all matters known by Murie & Edward or which would have been known had proper enquiries been made. The Liquidator contended that an inference should be drawn that incorrect statements in the recitals to the Balanced Facility Agreement were made to enable the Balanced Facility Agreement and the Balanced Charge to be stamped collateral to the Westralian Loan Agreement. 90 The Liquidator pointed out that Balanced did not call evidence from Murie & Edward, despite the fact that illegality had been raised as an issue in the Liquidator's defence to Balanced's cross-claim. Accordingly, so the Liquidator contended, a finding should be made that the parties to the instruments and the solicitors who acted for them committed an offence against the Stamp Act such that the instruments are void for illegality. Alternatively, the Liquidator contended, s 26 of the Stamp Act precludes Balanced from relying on the Balanced Facility Agreement or the Balanced Charge. He contended that the public interest in upholding the Stamp Act, by invalidating the Balanced Facility Agreement and the Balanced Charge by reason of the contravention of s 26, outweighs any prejudice to any of the parties in depriving them of the benefit they contracted for under instruments entered into for an illegal purpose. The Liquidator went so far as to suggest that the doctrine of fiscal nullity would be applied such that the steps that resulted in avoidance of Stamp Duty should be disregarded by the Court. 91 The primary judge rejected that contention and was correct in so doing. The Liquidator has failed to establish, with the requisite degree of probability, that there was fraudulent conduct on the part of any of the parties to the arrangements between Meadow Springs and Balanced. The Liquidator called no witnesses in relation to the circumstances surrounding the submission of the Balanced Charge for stamping, but invited the Court to draw inferences that criminal offences were committed by those responsible. The contention is the more remarkable in so far as it was also advanced on behalf of Meadow Springs itself, as well as the Liquidator. It is curious that Meadow Springs and the Liquidator, as liquidator of Meadow Springs, relied on the proposition that Meadow Springs participated in a criminal offence in connection with the stamping of the Balanced Charge. 92 Additionally, as the primary judge found, the revenue authorities were able to read the terms of the asserted collateral agreements comprising the underlying transactions. His Honour found that it was a matter for them to assess, in the context of the determination they had to make, whether those documents as a whole gave effect to the alleged incorrect recital and the consequences for the assessment if they did not. Although he did not expressly refer to s 26(4) of the Stamp Act, his Honour clearly had it in mind when he made that finding. The effect of s 26(4) was that any facts and circumstances set forth in a document accompanying an instrument (such as the Balanced Charge) at the time it was presented to the revenue authorities for stamping, were to be treated as being facts and circumstances in the instrument itself for the purposes of s 26(1). 93 In any event, it is doubtful whether, even if there were a contravention of the relevant provision of the Stamp Act, the consequences would be invalidity or unenforceability of the instruments that were under-stamped. The instruments were not entered into for an illegal purpose. They were entered into for the purpose of creating obligation and security interests in relation to the proposed advance. If they were under stamped, there may have been the consequence that they could not be tendered in evidence until stamp duty had been paid. That, however, does not invalidate the instruments. 94 Alternatively, the Liquidator contended that, in so far as the Balanced Facility Agreement secured the same moneys as the Westralian Loan Agreement, Balanced was bound by the terms of the Westralian Loan Agreement. The Liquidator says that Balanced failed to provide advances on the terms of the Westralian Loan Agreement and that Balanced was thereby in breach of the Westralian Loan Agreement. He says that the amount payable to Balanced under the Balanced Facility should therefore be reduced by the interest charged by Balanced over that which would have been payable under the Westralian Loan Agreement. The proposition that Balanced was in breach of an agreement made between Meadow Springs and Westralian, in circumstances where Meadow Springs had solemnly entered into the Balanced Facility Agreement, only needs to be stated to be seen to be completely baseless.

CONCLUSION 95 It follows from the conclusions reached above that the appeal by IMF should be upheld as against Balanced. The orders made by the primary judge on 10 June 2008 concerning priority of disbursement of the Resolution Sum should be set aside. In lieu of those orders, there should be declarations that there should be paid out of the balance of the Resolution Sum the Fees of $115,000 and the 35% of the Resolution Sum to IMF in priority to the amounts payable to Balanced under the Balanced Charge. The orders for costs made against IMF should also be set aside. IMF has been wholly successful in the appeals and Balanced should pay its costs of the appeals. Balanced should also pay IMF's costs of the proceeding at first instance. 96 The Liquidator adopted IMF's submissions in relation to the question of priority as between IMF and the secured creditors. The Liquidator also advanced additional arguments in support of IMF's priority which had no substance. The Liquidator was a party to the IMF appeal. While it was appropriate for the Liquidator to be represented in relation to the question of priority, it is difficult to see why the same question should have been raised in a separate appeal. Further, the Liquidator raised additional questions in his appeal concerning the validity of the Balanced Charge and the question of damages against Balanced for breach of the Westralian Facility Agreement, in respect of which he has been unsuccessful. In all of the circumstances, the appropriate course in relation to the Liquidator's appeal is to make no order as the costs of that appeal. As between the Liquidator and Meadow Springs, on the one hand, and Balanced, on the other hand, each is entitled to the costs of the issues in the proceedings before the primary judge on which each succeeded. Those costs should be set off. 97 The parties should bring in short minutes of order to give effect to these reasons. I certify that the preceding ninety-seven (97) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices North, Emmett & Rares.

Counsel for IMF Mr JT Gleeson SC with Mr DM Stone Solicitors for IMF Williams & Hughes

Counsel for the Liquidator and for Meadow Springs Mr DH Solomon Solicitors for the Liquidator and for Meadow Springs Solomon Brothers Counsel for Balanced Mr GT Bigmore with Ms F Vernon

Solicitors for Balanced Herbert Geer & Rundles

Counsel for Westralian and Knightsbridge Mr A Harris QC with Mr GD Cobby

Solicitors for Westralian and Knightsbridge Christensen Vaughan