Approval under s 477(2A), (2B)
10The settlement of a preference claim, or voidable transaction claim, is not the compromise of a debt, and if that were all the terms of settlement did, the approval of the court would not be required. That has implications for the approach of the court to the present application. In particular, it indicates that the court should focus on the compromise of the debt, and whether, having regard to all the circumstances, it is a reasonable step for the liquidator to take; rather than on the compromise of the Recovery Proceedings.
11Approval of the court is required, pursuant to s 477(2A), because the effect of the proposed settlement is to compromise debts that exceed $20,000. Approval under s 477(2B) is also required, because the second and third instalment payments are to be made more than three months after the date of the agreement.
12As Barrett J explained in Re HIH Insurance Limited [2004] NSWSC 5 (at [15]):
Although the two provisions deal with different aspects of a liquidator's powers, both are concerned to ensure that the court exercises some oversight of the liquidator's actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court's assessment must be made in light of the purposes for which liquidators' powers exist.
13The court does not exhaustively or closely consider the commercial merits or otherwise of the transaction [Re CIC Insurance Limited (2001) 38 ACSR 181].
14But while the court does not exhaustively judge the commercial merits of the liquidator's decision, which it largely entrusts to the liquidator, some examination of the merits cannot be avoided. If the liquidator were to amend the proceedings and sue for recovery of the two loans to which I have referred, then, given that those loans are admitted by the directors in the report as to affairs, it would seem very likely that summary judgment could be obtained for them in a very short time, and at little additional cost. The issue then becomes one of recoverability. The directors have provided statements of the assets and liabilities of the two trusts. The TH Higgins Family Trust owns a property said to be worth $1.85 million, and by way of liabilities owes land tax of $44,000, implying net assets of about $1.8 million. The CL Higgins Family Trust owns a real property said to be worth $1.4 million subject to a land tax debt of $44,000 and a mortgage apparently to a related company, which might be impugnable, of $900,000. However, the Commissioner has asserted that the CL Higgins Family Trust, at least, has significant taxation liabilities, to the extent that it would appear reasonable to suspect that it is insolvent. Accordingly, the precise amount that could actually be recovered from the trusts remains somewhat uncertain. However, it can be predicted with a reasonable amount of confidence that the starting point, for the purpose of proving in any insolvency, would be a judgment of $3.9 million in total.
15So far as concerns the preference claims in the Recovery Proceedings, the position is much less clear. First, the chronology to which I have referred indicates that the relevant transactions took place 18 months before the Commissioner issued the notice of assessment that established the relevant indebtedness. Secondly, it is far from clear that the transactions were without consideration, because the ultimate effect was that they were intertwined with the creation of the loans, so that, while the property was transferred away from the company, in return it received indebtedness of $3.9 million, which exceeds the value of the property, and which is owed by companies that apparently hold real property. Thirdly, counsel for the liquidator has, in a confidential advice, drawn attention to a potential defence not yet pleaded, which the relevant defendants properly advised would plead, and if pleaded would almost certainly defeat the preference claim, though not the s 37A claim. Accordingly, it seems to me that the prospects of the s 37A claim succeeding are less than those of a claim on the loan accounts, and those of the preference claim still less. That is not to say that the s 37A claim does not retain prospects of success.
16The court is required to consider in particular whether the power is being exercised, or would be exercised, lawfully and properly and free of inappropriate influences. One consideration that has caused me to approach this application with care, is the potential for there to be a conflict between the interests of the liquidator in securing a sufficient fund to enable his substantial outstanding remuneration and costs to be paid, and his duty to pursue diligently the interests of the creditor.
17Against approval of the proposed compromise of the debt is the prima facie strong case that the liquidator has to obtain a judgment for the whole of the loans of $3.9 million, which, even if the borrowers are insolvent, would provide a significantly stronger starting position than the settlement is for less than half that amount. Also against approval is the circumstance that the sole creditor, the Commissioner, does not support it. There is no doubt that the interests of creditors is the guiding light for the court in deciding whether or not approval should be given. But it is important to understand the basis of the Commissioner's opposition: it is not that the amount of the settlement is insufficient, but is referable to the source of the funds. The Commissioner claims to be a creditor of entities in the Higgins Group other than the Company, including some of those who will be contributing to the settlement. The Commissioner's concern is that the effect of the settlement is to remove from the Company an asset (namely the Property) that would otherwise be available for satisfaction of the Commissioner's claim against it, and at the same time remove assets from other group entities, which would otherwise be available to satisfy the Commissioner's claims against them.
18It needs to be borne in mind that if the compromise were not approved, and if the liquidator were to sue on and recover the loan accounts, rather than pursue the preference claim, the Property would still not be brought back into the company, and the Commissioner's claim would be satisfied out of whatever could be recovered from the debtor companies, at least one of which the Commissioner asserts is insolvent. The effect of the settlement is to bring into the assets of the Company some funds from third parties, not currently available to the Company. This has the effect of improving the Company's position and, therefore, objectively, also of improving the creditor's position, at least qua creditor of the Company. Subjectively, the Commissioner as a creditor has other interests extraneous to the Company. While it is true that one must look at the creditor's interests, that means the creditor's interests qua creditor of the company, and not in some extraneous capacity (such as creditor of another company). On that basis, it seems to me that the proposed settlement enhances the Company's position, by introducing into the company's resources assets from third parties, which would otherwise not be available to it.
19Also favouring approval is, first, the liquidator's commercial judgment; secondly, the circumstance that the liquidator has senior counsel's advice to the effect that this is a reasonable settlement in all the circumstances; and, thirdly, that the liquidator is not funded to continue the Recovery Proceeding.
20Although it has been said on behalf of the Commissioner that there is no reason why, if all requirements were met and all conditions satisfied, funding would not be forthcoming, there simply has not been any distinct offer of funding to the liquidator to pursue the Recovery Proceeding, and there can be no confidence that such an offer would be forthcoming, and thus that it will be practically impossible to prosecute those proceedings to finality. I have already referred to some of the potential difficulties that might affect the s 37A claim, and more likely would affect the preference claims.
21In the absence of a distinct offer to fund the liquidator to prosecute the Recovery Proceedings, and having regard to the basis of the Commissioner's opposition being essentially not qua creditor of the company but in a capacity that is relevantly extraneous to this company, and that that opposition is concerned more with the settlement of the preference claim than the release of the debt (because pursuit of the debt would involve greater resort to the CL Higgins Family Trust than that proposed in the settlement) it has not been shown that the liquidator's commercial judgment in this case is inappropriately influenced by his own interests, or otherwise so uncommercial as not to warrant approval.