40 ACSR 433
- Re Great Southern Managers Australia Ltd (in liq) [2014] WASC 312
- Re Idylic Solutions Pty Ltd [2016] NSWSC 907
Source
Original judgment source is linked above.
Catchwords
(2002) 115 FCR 40940 ACSR 433
- Re Great Southern Managers Australia Ltd (in liq) [2014] WASC 312
- Re Idylic Solutions Pty Ltd [2016] NSWSC 907
Judgment (3 paragraphs)
[1]
Solicitors:
Colin Biggers & Paisley (Plaintiff)
File Number(s): 2017/70987
[2]
Judgment- ex tempore
By Originating Process filed today, 7 March 2017, by leave, Messrs Krejci and Green as liquidators of AE&E Australia Pty Limited (in liq) ("Company") seek a direction under s 511 of the Corporations Act 2001 (Cth) that they would be justified in continuing to prosecute certain appeal proceedings in the Supreme Court of Western Australia between the Company and Sino Iron Pty Limited ("Sino"); utilising funds held in the liquidation of the Company to satisfy an order for security for Sino's costs in the proceedings made by the Supreme Court of Western Australia on 25 October 2016; and otherwise utilising the funds to pay the Company's costs of the proceedings.
The application is made under s 511 of the Corporations Act. That section, which applies in the case of a voluntary liquidation, provides that the liquidator may apply to the Court, inter alia, to exercise all or any of the powers that the Court may exercise if the Company were being wound up by the Court. That section in turn authorises the Court to give a direction to the liquidator, of the same kind that might be given in a winding up by the Court under s 479 of the Corporations Act. I should note one complexity which arises in this application, namely that parts of the Insolvency Law Reform Act 2016 (Cth) have now taken effect, and, on its face, that Act repeals s 511 of the Corporations Act. However, Mr Harris, who appears for the liquidators, points out that the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth) provides, in reg 10.25.02(3) inserted into the Corporations Regulations 2001 (Cth) that specified amendments apply in relation to external administrations from 1 September 2017, and these include the repeal of s 511 of the Corporations Act. Accordingly, that section remains in force for the purposes of this application.
The principles applicable to a direction under s 511 of the Corporations Act are well established and have been referred to, among other matters, by Goldberg J in Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433, where his Honour referred to the function of such directions in providing protection to a liquidator against claims that he or she has acted unreasonably or inappropriately or in breach of duty in making a decision or undertaking particular conduct. His Honour there noted that there must be something more than the making of a business or commercial decision before a court will give directions in an application of this character. As will emerge below, this particular matter involves issues that are significantly more than the making of a business or commercial decision, including issues of legal judgment, significant timing constraints, and issues of equity between creditors, as to which it seems to me the liquidators have a strong case for the Court's making of such a direction.
The scope of the Court's power to give such directions was again considered in Re Great Southern Managers Australia Ltd (in liq) [2014] WASC 312, where Pritchard J observed that the court's focus in determining whether to give such a direction will be on whether to do so will be "just and beneficial (that is, advantageous) in the winding up of the company." His Honour also observed that relevant considerations included the nature of the proposed course of action about which the direction was sought, the relevant circumstances, the reasons for the proposed course of action and the principles relevant to the determination of any legal issue that arose. I also summarised the relevant principles in Re Idylic Solutions Pty Ltd [2016] NSWSC 907; (2016) 114 ACSR 230 at [12]ff, and I will not repeat that summary here. I there observed that there will be a stronger reason for making such a direction where the views taken by a liquidator are likely to be contested, and that case is particularly strong where a decision may involve a balancing of interests of creditors, where those creditors' interests are opposed.
Mr Harris draws attention to the chronology of events, to which I should briefly refer before turning to the affidavit evidence and other evidence led in support of the application. The Company entered into a substantial contract to design, construct and commission a power station for Sino in March 2008; that contract was terminated in October 2010 by Sino; the Company went into administration in November 2010; and after agreement had been reached between the Company and Sino for an arbitration, the Company was placed in liquidation. The arbitrator was appointed in December 2011, an arbitration hearing took place in late 2013, and an interim award was made in February 2016, which resulted in a balance payable to Sino, and a final arbitration award in June 2016. The Company brought an appeal in the Supreme Court of Western Australia in February 2016, after the interim award had been delivered, and an order for security for costs was made in that appeal in October 2016. That order is in the nature of a guillotine order such that, unless security for costs is provided by the Company by the end of this week, or an extension of time to provide that security is available, which may or may not be the case, the Company's prospect of pursuing the appeal will be lost.
Mr Krejci in turn leads detailed evidence in support of the application, which refers, inter alia, to efforts which have been made to obtain litigation funding, which are still under way. Mr Krejci also sets out the history of the Company's involvement with Sino, the commencement of the appeal from the interim arbitration award, and the outcome of the security for costs application. He also outlines the Company's present financial position, which indicates that sufficient funds are available to it to fund the payment of security for costs, and the conduct of the appeal, with the likelihood that at least some funds would remain even after an unsuccessful appeal.
Mr Krejci refers to the substantial amount of claims made by creditors of the Company in the liquidation, which total in excess of $874 million, and notes that additional claims may be made by persons who have not yet lodged proofs of debt. Mr Krejci also rightly acknowledges that a particular creditor is, under s 556(1)(e) of the Corporations Act, entitled to priority for repayment of an amount that it advanced, in excess of $2,860,000. Mr Krejci identifies a matter which is of particular difficulty, in the balancing of interests involved in this application, namely that a successful appeal will be for the benefit of all creditors, including the creditor which has a priority claim under s 556(1)(e) of the Act. However, an unsuccessful appeal will put the amounts that might otherwise be available to pay that priority creditor at risk, at least in part, so that it would bear the burden of an unsuccessful appeal, where all creditors would benefit from the result.
Mr Krejci also refers to matters that indicate that the potential recoveries arising from a successful appeal are substantial, although not sufficient to discharge creditors' claims as a whole. The potential recoveries are at least sufficient to bring about a result that, on a successful appeal, creditors who may presently receive no return in a liquidation might at least receive some return in a liquidation.
Mr Krejci refers to the fact that the position as to litigation funding is unlikely to be resolved in sufficient time to make a payment for security for costs into court. He also refers to the fact that a committee of inspection meeting is scheduled on Wednesday 8 March 2017, but identifies a concern, which seems to me to be well founded, that the quorum of four members for that committee may not be satisfied, in circumstances that some members of the committee do not attend and one of them is presently on leave. He also refers to views expressed by members of the committee of inspection in respect of the question of the costs of the appeal, and the payment of security for costs, and notes that a number of representatives of creditors, other than the representative of the priority creditor, support both the payment of security for costs and the pursuit of the appeal from the Company's funds, consistent, no doubt, with the fact that those creditors would benefit from a successful outcome without being at risk as to costs. The representative of the priority creditor has indicated he would support the payment of security for costs into Court, but with a proviso which may not be achievable, that the amount would be refundable if the appeal does not proceed, and would not support the use of Company funds to prosecute the proceedings. Again, that position is consistent with the fact that the priority creditor's return would be adversely affected by any unsuccessful appeal.
Mr Krejci has formed, and clearly expresses, the view, based on advice which he has received, including his review of the arbitrators' award and Senior Counsel's advice, that it would be of advantage to the liquidation if the liquidators were to pay the amount of security for costs for the appeal into Court from the funds they continue to hold, and then continue to explore the option of litigation funding. Mr Krejci also clearly expresses the opinion that, irrespective of the view of members of the committee of inspection, it would be in the interests of creditors if, should litigation funding not be obtainable or not be obtainable on terms which the liquidators consider are in the Company's best interests, the Company uses available funds to prosecute the appeal.
Mr Krejci fairly recognises that the consequence of the latter position is that funds which would otherwise almost certainly be paid to the priority creditor would not be paid at this stage, and, if the proceedings were not successful, it may lead to no funds being paid to the priority creditor, although no other creditors would be affected. Mr Krejci also undertook a further calculation in that respect, at the Court's request, to address the possibility that, on the figures before the Court, an adverse result in the appeal would affect part, but not all, of the return to the priority creditor. It is necessarily implicit in Mr Krejci's conclusions, although he does not further elaborate on that matter, that he has formed the view that the interests of creditors will be served by taking this course, and that the benefit to creditors as a whole, and the potential benefit to the priority creditor in increasing its return on a successful appeal, is such that the priority creditor can reasonably be put to the risk of loss of all or some of its return on an unsuccessful appeal.
I have also been taken, appropriately, to the points which are or would be raised on the appeal, although it has fairly been drawn to my attention that one of those points has not yet been raised and would require an amendment to the Notice of Originating Motion by which the appeal was brought. I have also been provided, subject to a confidentiality and non-publication order, with Senior Counsel's advice in respect of the appeal, provided by a Western Australian Senior Counsel, and Mr Harris has taken me to the key aspects of that advice in the course of submissions. It seems to me preferable that I not set out the detail of the analysis of the issues, which is plainly confidential and subject to a claim for legal professional privilege, in this judgment. I have, however, had regard to that analysis, and have been taken both to aspects of the arbitrator's decision, and to aspects of the advice which the liquidators have received in that respect.
The first issue to be raised on appeal broadly relates to the treatment of certain bank guarantees lodged by the Company and subsequently claimed by Sino, which would require an amendment of the Notice of Originating Motion as noted above. That issue involves a question whether amounts recovered by Sino against those bank guarantees should be treated as an offset against its losses. It seems to me that the liquidators could reasonably and justifiably form the view, having regard to the advice which they have received and the logic of the position that this point is at least seriously arguable, and might well succeed. The issue involves a relatively simple analysis, albeit in the context of complex dealings and a complex contract, as to which it is possible that an appellate court may simply take a different view from that which was taken by the arbitrator. The result in the arbitration that security provided for a contracting party's loss, when called, need not be treated as reducing the amount of that loss, is, on one view, counter-intuitive, although no doubt much turns on the detail of the contract. The recovery involved on a success on this issue on appeal is substantial, and success on this issue would also have a potential impact in the Company's favour in respect of the question of costs.
A second issue appears to relate to the question of the extent of an exclusion for "consequential losses" under a term of the contract, and the interaction of that exclusion with other specific rights of the Company under the contract. Again, it seems to me that the liquidators could reasonably and justifiably take the view, having regard to the advice they have received and the logic of the position, that the Company's claims in this regard are at least seriously arguable, and might well succeed. The amounts involved are within a relatively wide range, but are again substantial.
Mr Harris has drawn attention to a third ground of appeal, which involves some complexities, on which he did not elaborate. It did not seem to me that it was necessary for him to do so, since the appeal points to which I had already been taken identified the critical issue, namely whether the prospect of substantial recoveries, on seriously arguable grounds of appeal that might well succeed, warranted the liquidators taking the course that they have formed the view they ought to take, albeit that course may, if unsuccessful, disadvantage the priority creditor.
It seems to me the steps in the relevant analysis are such that the liquidators could reasonably form the view, as matters stand, that they would be justified in applying funds of the Company to pay security for costs. The members of the committee of inspection to whom they have spoken take that view, albeit one imposes a qualification on it which may not be capable of being met. It seems to me that the analysis that supports that conclusion is relatively straightforward. A successful appeal plainly has significant benefits for creditors as a whole; the liquidators could reasonably form the view that the prospects of a successful appeal are real; and a rational person in the Company's position would likely take the view that the resources which would be invested in providing security for costs, and in pursuing the appeal as a whole, were a prudent and reasonable investment, when compared with the potential recovery from such an appeal. To put that proposition another way, the prospects of substantial success would reasonably be understood as sufficient to warrant the relatively small investments which would be involved in pursuit of the appeal, by comparison with the costs which have no doubt been incurred in the arbitration. Where the liquidators could reasonably and properly take that view as to the costs of the appeal as a whole, they could also reasonably and properly take the view that the payment for security for costs should be made from the Company's assets, in circumstances of urgency, where the prospect of pursuit of the appeal would otherwise be lost.
The reasoning which indicates that the liquidators could reasonably and justifiably have formed a view that security for costs should be paid from the Company's assets also has the consequence, it seems to me, that the liquidators could reasonably and justifiably form the view that the costs of conduct of the appeal should be paid from the Company's assets, at least if litigation funding cannot be obtained on terms that the liquidators consider are reasonably acceptable. It will be a question for the liquidators at some future point as to whether they consider that that is a matter as to which they can reach their own commercial judgment, in circumstances that the liquidators no doubt have substantial experience in that respect, or whether it is a matter that would require a further direction of the Court. If there were no issue of potentially disproportionate outcomes amongst creditors, that would be sufficient to support the further direction which is sought in respect of the application of the Company's funds to prosecute the appeal, at least if litigation funding is ultimately not an acceptable or available alternative.
It seems to me the additional complexity which needs to be addressed, to which I referred above, is the fact that creditors would generally benefit from a successful appeal; creditors other than the priority creditor have little to lose, or nothing to lose, from the pursuit of an appeal since their return in a liquidation will be increased by success and not diminished by failure of an appeal; and the priority creditor would bear the significant part of the burden of any failure of an appeal. It appears that the priority creditor's assessment of that matter is reflected in the view expressed by its representative on the committee of inspection that the appeal should not be pursued unless litigation funding is available.
Mr Krejci has prepared a further calculation, which necessarily involves a degree of uncertainty, as to the likely outcome for the priority creditor if the appeal is pursued or not pursued. If the appeal is not pursued, the priority creditor will recover a significant amount, but not all, of its debt. If the appeal is pursued, and is unsuccessful, the priority creditor will still recover a substantial amount, although that amount would be about half of the amount that it would otherwise recover, and the reduction in its recovery would also be a substantial amount.
Plainly, a weighing of the interests of the many and the one always involves issues of particular difficulty, and one can understand the priority creditor may consider that it ought not be required to put its return at risk, even if that course will benefit itself, if successful, by increasing its recovery in the liquidation, and will benefit creditors as a whole to a substantial extent if successful. However, it seems to me that the question for the liquidators, as they have properly understood, is the outcome of the particular courses for the benefit of the liquidation as a whole, which will involve regard to the interests of a priority creditor, but is not limited to those interests. It seems to me that the liquidators can reasonably and justifiably form the view that, in the particular circumstances, the significant benefits to all of the creditors of a successful pursuit of the appeal, which include a benefit to the priority creditor in likely achieving a full recovery for it, outweigh the risk to the priority creditor's interests in the pursuit of the appeal. It seems to me that that is also a situation where the liquidators are properly entitled to directions from the Court, since a decision of that nature involves both difficulty, and a risk that it will be contested, where any decision may be unable to satisfy both creditors as a whole on the one hand and the priority creditor on the other.
For these reasons, I am satisfied that the Court should also make a direction to the liquidators to the effect that they would be justified in otherwise utilising funds to pay the Company's costs of the proceedings, at least if litigation funding is not available, or is not available on terms that they reasonably regard as appropriate.
I have not addressed a further direction sought by the liquidators that they would be justified in continuing to prosecute the appeal proceeding. It seems to me that that direction raises somewhat different issues from the issues that I have addressed, as to which the liquidators may well be properly entitled to rely on the advice of Senior Counsel and their legal advisers. I will reserve the ability to the liquidators to pursue that direction, if they consider that they need to do so.
It seems to me the costs of this application should properly be costs in the liquidation, where the application has been brought to advance the interests of the liquidation generally.
I direct that the liquidators bring in orders to give effect to this judgment, which may be submitted to my Associate in chambers. If any difficulty arises in respect of the form of those orders, the matter will be able to be relisted.
[3]
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Decision last updated: 18 July 2017
Legislation Cited (4)
Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016(Cth)