In the matter of Atlas Construction Group Pty Ltd (in liquidation) - Fitz Jersey Pty Limited v Fraser - [2018] NSWSC 1189 - NSWSC 2018 case summary

Supreme Court of NSW|2018-07-25|Before: Ward CJ

Solicitors: Gillis Delaney Lawyers (Plaintiff) Clayton Utz (First and Second Defendants) Hegarty Legal (Third, Fourth and Fifth Defendants) File Number(s): 2018/192598 Publication restriction: Nil

Judgment

HER HONOUR: By Originating Process filed 21 June 2018, the plaintiff (Fitz Jersey Pty Limited, to which I will refer as Fitz Jersey) seeks orders pursuant to ss 500(2) and 499(3) of the Corporations Act 2001 (Cth) and s 90-15 of the Insolvency Practice Schedule (Corporations) for leave to commence and continue with these proceedings and for (in effect) the removal of the first and second defendants as liquidators of Atlas Construction Group Pty Limited (in liquidation) (the Company) and the appointment of a replacement liquidator (Mr Bruce Gleeson) in their stead or, in the alternative, that Mr Gleeson be appointed a special purpose liquidator of the Company. (I say "in effect" because the relief sought in the Originating Process as filed (see prayer 2) in fact contemplates that the appointment of Mr Gleeson will occur "upon the resignation of the first and second defendants as liquidators …" and the evidence of the incumbent liquidators is that they have not agreed to resign from office. The application thus proceeded as an application to remove the incumbent liquidators.)
The first and second defendants do not object to their replacement as liquidators (though they strongly deny that they have failed to carry out their duties independently) (see [5] of the affidavit sworn 28 June 2018 of the first defendant attesting to the position of both liquidators). Their position in that regard is stated to be in circumstances where Fitz Jersey is willing to fund further investigations but only if Mr Gleeson is appointed as liquidator. Mr Fraser (the first defendant) deposes (at [5]) that: As matters stand, the Liquidators consider it to be in the interests of creditors that they be replaced in circumstances where the liquidation is presently unfunded and Fitz Jersey Pty Ltd will not provide the promised funding while the present Liquidators remain in office.

Background

The background to the present application may explain (at least to some extent) why it is that neither Fitz Jersey, on the one hand, nor the third to fourth defendants, on the other, is or are prepared to accept the appointment of a liquidator nominated by the other (even though both those sets of parties accept that there is no reason to doubt the independence of the four different replacement liquidators that have been proposed at this stage). That background is as follows.

Construction agreement

The Company was registered in 1999. Its directors are the third and fourth defendants (Mr Yazbek and Mr Sweeney). Prior to entry into liquidation, the Company carried on business as a building and construction company.
On 17 December 2010, Fitz Jersey, as owner, and the Company, as builder, entered into a construction agreement for the design and construction by the Company on land owned by Fitz Jersey of a large home unit development at Mascot known as "Mascot Square".
The solicitor acting for the Company and its directors in these proceedings, Mr Peter Hegarty, has deposed in his affidavit sworn 17 July 2018 to instructions received from a consultant for his clients (Mr Matthew Vartuli - who was the company secretary at the relevant time) to the effect that the original scope of works under the construction agreement involved substantial demolition and remediation works and the design and construction of: seven residential towers, comprising 515 apartments, and various common areas, including a pool, electrical substations, carpark, park and other landscaping works (see Mr Hegarty's affidavit sworn 17 July 2018 at [5]). Mr Hegarty has deposed that the amount payable to the Company under the construction agreement was $180 million ([3]); and that Fitz Jersey was obliged to reimburse the Company for all costs incurred in relation to the Company's design obligations ([4(c)]). There was also provision under the construction agreement for an early completion bonus (cl 34.8) ([4(d)]).
Construction of the development occurred between 2010 and 2015. Mr Hegarty has deposed to instructions from Mr Vartuli to the effect that, throughout construction, numerous variations were requested by Fitz Jersey and completed by the Company (Mr Hegarty's affidavit sworn 17 July 2018 at [7]).

Payment claim and adjudication

On 15 November 2016, the Company issued to Fitz Jersey a payment claim pursuant to s 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), claiming the sum of $10,748,466.31 inclusive of GST (Mr Hegarty's affidavit at [9], and p 165 of Exhibit A; affidavit sworn 13 June 2018 by Fitz Jersey's solicitor, Mr Michael Hayter, at [11]). This included a claim for the early completion bonus. The amount paid to date was stated to be $232,998,469.48.
On 29 November 2016, Fitz Jersey issued a payment schedule pursuant to s 14 of the SOP Act in response to the Company's payment claim (Mr Hegarty's affidavit at [10]), under which the scheduled amount was stated to be nil (see Exhibit A at p 214). In that payment schedule, Fitz Jersey specified the final adjusted contract price as $232,998,469.48 (incl GST) (see cl 2.1 of Annexure A at Exhibit A p 216) said to have been part of an agreed "commercial settlement of all claims by the Contractor under the Contract". That settlement amount is said to have included the payment of a lump sum payment of $10 million (excluding GST) payable to the Contractor (see clause 2.2 Exhibit A p 216).
On 13 December 2016, the Company made an adjudication application pursuant s 17(1)(a)(i) of the SOP Act to Australian Solutions Centre, claiming payment of $10,748,466.31 (incl GST) (Exhibit A p 217). On 21 December 2016, Fitz Jersey filed an adjudication response pursuant s 20(1) of the SOP Act (Exhibit A pp 512ff).
The adjudicator published his adjudication application pursuant to s 22 of the SOP Act on 6 January 2017 (Exhibit A p 663). The adjudication determination was in favour of the Company for $10,748,466.31 (incl GST), together with interest and the adjudicator's fees. Demand was made for payment of that amount by letter dated 9 January 2017 (Exhibit A p 712).
When Fitz Jersey failed to pay the Company the adjudicated amount within five business days, the Company obtained an adjudication certificate under s 24 of the SOP Act, which it filed as a judgment debt pursuant to s 25(1) of the SOP Act. On 17 January 2017, judgment was entered in favour of the Company in this Court in the sum of $11,023,799.76 (comprising the adjudication determination amount plus interest) (Exhibit A p 714).

Commencement of proceedings in the Technology and Construction List

Meanwhile, on 13 January 2017, Fitz Jersey had commenced proceedings by way of summons in the Technology and Construction List in this Court (proceedings no 2017/11963) against the Company (to which the adjudicator and the entity which was the Authorised Nominating Authority under the SOP Act were joined) seeking a declaration that the adjudication determination was void and in the alternative a declaration in the nature of certiorari quashing the adjudication determination (to which I will refer as the Technology and Construction List Proceedings) (see summons at Exhibit A p 764; and see the Technology and Construction List Statement at Exhibit A p 766).

Garnishee order

On 27 January 2017, on the application of the Company, a garnishee order for debts was issued by this Court to the National Australia Bank in the sum of the judgment account in respect of all bank accounts held by Fitz Jersey (Mr Hegarty's affidavit at [17]-[18]; Exhibit A pp 716-717).
On 2 February 2017, pursuant to the garnishee order, NAB delivered a cheque to the Company in the full amount of the judgment debt ($11,023,799.76).

Application in Technology and Construction List proceedings for payment of garnisheed amount into Court

On 3 February 2017 the Technology and Construction List Proceedings came before the Court for directions. It was on that occasion that Fitz Jersey became aware that a garnishee order had been issued and the amount garnisheed had been paid. On 6 February 2017, Fitz Jersey made an urgent application to this Court seeking orders in effect for the judgment amount to be paid into Court (Mr Hegarty's affidavit at [19]). That application was heard by McDougall J on 6 February 2017 and was unsuccessful (see Atlas Construction Group Pty Limited v Fitz Jersey Pty Limited [2017] NSWSC 72). Orders were made that Fitz Jersey pay the Company's costs of the application (the first costs order).

Declaration and payment of dividend

On 6 February 2017, the same day as Fitz Jersey's application was unsuccessfully made for the payment of the garnisheed funds into Court, a meeting at 5pm of the directors of the Company resolved: that a payment of $3,957,795.61 be made immediately to the Australian Taxation Office (to "meet GST and Forecast Income Tax Liability"); that funds of $400,000 remain in the company (as an appropriate contingency for any retentions payable when due, further defect rectification works required, funds for further legal action and expenses); and to recommend a payment on that day to ordinary shareholders of an interim dividend from the profits of the company in an amount of $27.13 per share (Exhibit A pp 726-728). Pursuant to that resolution franked dividends totalling $6,781,559 were paid to the shareholders of the Company (Exhibit A pp 729-730).

Court of Appeal proceedings

Fitz Jersey sought leave to appeal from the refusal of McDougall J to set aside the garnishee order and to order repayment of the garnisheed amount to the appellant. On 23 March 2017, the concurrent hearing of the application for leave to appeal and the appeal itself having been heard with a high degree of expedition, the Court of Appeal (Beazley ACJ, Basten and Leeming JJA) granted leave to appeal but proceeded to dismiss the appeal and ordered that Fitz Jersey pay the Company's costs in the Court of Appeal (the second costs order) (Fitz Jersey Pty Ltd v Atlas Construction Group Pty Limited (2017) 94 NSWLR 606 ; [2017] NSWCA 53).

Further steps in Technology and Construction List Proceedings

On 5 April 2017, McDougall J heard two applications by Fitz Jersey: an application for discovery of specified documents or classes of documents from the Company and an application for leave to amend its summons and Technology and Construction List statement; as well as an oral application by the Company for summary dismissal of the pleadings. His Honour ordered the discovery sought by Fitz Jersey and granted the leave sought for the amendment of the summons and list statement, indicating that the standard for summary dismissal had not been satisfied, and ordering Fitz Jersey to pay the Company's costs thrown away by reason of the amendments (the third costs order) but that the costs of the motion for leave to amend and of the summary judgment application be Fitz Jersey's costs in the cause and that the costs of the motion for discovery by costs in the cause (see Fitz Jersey Pty Limited v Atlas Construction Group Pty Ltd [2017] NSWSC 340). Fitz Jersey subsequently issued subpoenas to thirty-five of the Company's subcontractors (Mr Hayter's affidavit at [17]).
In its amended summons, filed 6 April 2017, Fitz Jersey sought additional relief to the effect that the Company repay it the sum of $11,023,799.76.
Following production of documents pursuant to the orders for discovery and the issue of the subpoenas, Fitz Jersey filed (by consent) a second further amended summons and further amended list statement on 8 February 2018 (Exhibit A pp 796-800). Fitz Jersey consented to an order that it pay the Company's costs thrown away by reason of the amendments, such costs to be agreed or assessed and payable forthwith (see Exhibit A p 794) (the fourth costs order).
Broadly speaking, in its current iteration of the Court documents, Fitz Jersey has abandoned the claims for relief in relation to its jurisdictional challenge to the adjudication. Instead, it claims as against the Company: liquidated damages in the sum of $2,094,950; restitution in the sum of $1,830,400 (for an early completion bonus to which it is alleged the Company was not entitled); restitution in the sum of $32,673,696 (plus GST) (in respect of amounts paid to the Company for "purported variation claims") and, further and in the alternative, damages pursuant to s 236 of the Australian Consumer Law (for alleged contraventions of s18 of the Australian Consumer Law). As against Mr Yazbek (the second defendant in the Technology and Construction List Proceedings and the third defendant in the proceedings now before me in the Corporations List), Fitz Jersey claims damages pursuant to s 236 of the Australian Consumer Law (for alleged misleading or deceptive conduct contravening s 18 of the Australian Consumer Law). Further and in the alternative, Fitz Jersey seeks a declaration that, for the purpose of s 32 of the SOP Act, the Company is not entitled to retain the sum of $10,748,466.31 received by reason of the adjudication determination and that it is liable to repay that sum to judgment amount to Fitz Jersey.
Insofar as Fitz Jersey claims $32,673,696 (plus GST) on account of variations claimed by and paid to the Company, it is submitted for the third to fifth defendants in the present proceedings that this allegation is "entirely at odds" with Fitz Jersey's position during the adjudication process; in which, by its payment schedule, Fitz Jersey asserted a commercial settlement, which included about $22.5 million in respect of variations. The third to fifth defendants say that no explanation has been advanced in respect of these inconsistent positions.
On 21 March 2018, the defendants to the Technology and Construction List Proceedings filed their list responses (Exhibit A pp 820ff and 830ff). The further progress of those proceedings was, however, interrupted by the entry of the Company into administration (see below). The proceedings remain on foot but are stayed against the Company. Fitz Jersey has not yet served any evidence in the proceedings.
The first and second cost orders made in in favour of the Company have been assessed and satisfied (see Mr Hegarty's affidavit at [28]). Bills of costs have been prepared in relation to the third and fourth costs orders (in an amount of $55,619.15) (Exhibit A pp 846ff) but no step has been taken as yet for those bills to be assessed (see Mr Hegarty's affidavit at [29]-[30]).
The position, in summary, therefore is that: Fitz Jersey has paid $243,746,935 to the Company, including the amount garnisheed; and it now claims: restitution of $34,504,096 as being overpaid; liquidated damages of $2,094,950 under the building contract; and damages of $10,000,000 plus GST for misleading or deceptive conduct, (Mr Hegarty's affidavit at [26] and Exhibit A p 797).
It is relevant here to note that the Company (as also was Mr Yazbek) was represented in the course of the Technology and Construction List Proceedings by Bradbury Legal.

Entry into voluntary administration and directors' DOCA

On 4 April 2018, the Company, by its board, appointed the first and second defendants, of McGrathNicol, as its voluntary administrators pursuant to s 436A of the Corporations Act. The administrators ceased to trade the business effective 4 April 2018 (see Mr Hayter's affidavit at [19]). The directors of the Company agreed jointly and severally to indemnify the administrators for their remuneration costs and expenses of the voluntary administration (see Exhibit A p 901) on terms that included that the total aggregate payable under the indemnity was $100,000 inclusive of GST.
On 16 April 2018, the administrators held the first creditors' meeting pursuant to s 436E of the Corporations Act (see the administrators' first report, at Exhibit A pp 903ff, at [2.4]). On the same day, Fitz Jersey lodged with the administrators a formal proof of debt claiming a total of $39,894,968.86 (Mr Hayter's affidavit at [22]). (The third to fifth defendants submit this is inconsistent with the commercial settlement alleged by Fitz Jersey in its payment schedule lodged in relation to the adjudication process under the SOP Act.)
The first and second defendants appointed Clayton Utz to act on their behalf as voluntary liquidators. Submissions were made to Clayton Utz by the solicitors acting for Fitz Jersey, by letter dated 26 April 2018 (Mr Hayter's affidavit at [24]) as to the matters considered relevant to the administrators' investigations and which it was considered should be disclosed to creditors, including the circumstances in which the dividend was declared and paid in February 2017. Documentation in support of Fitz Jersey's proof of debt was forwarded to the administrators by letter dated 27 April 2018 (Mr Hayter's affidavit at [26]). Further matters were drawn to the attention of the administrators and Clayton Utz by the solicitors acting for Fitz Jersey by letter dated 30 April 2018 (Mr Hayter's affidavit at [31]), including the assertion that the Company's directors and officeholders were likely to have breached their fiduciary and statutory duties, as well as duties owed at common law and in equity in various respects.
On 1 May 2018, the Administrators' Report to Creditors was published (First report) (Exhibit A pp 903ff). The first report noted (at [1.2]) the key findings from their preliminary investigations as being that: The Company was likely to become insolvent from at least 31 March 2018, at which point its assets became insufficient to meet its liabilities which would fall due, which primarily related to legal fees associated with the defence of the Fitz Jersey Amended Summons filed in February 2018. Between 31 March 2018 and 4 April 2018, Atlas engaged in no transactions and as a result there are no potential recoveries from unfair preferences or uncommercial transactions. In February 2017, a year prior to the appointment of the Administrators, the Directors of Atlas declared and paid a dividend of c. $6.8 million. Whilst further investigations may be undertaken by a Liquidator to determine if any recovery actions in relation to this transaction are appropriate and commercially viable, it is the Administrators' preliminary view that any potential recoveries would be strongly contested and challenging to pursue.
The first report recorded that the administrators had received a DOCA proposal from the directors of the Company (the directors' DOCA) that provided for a $400,000 deed fund. The key terms of the directors' DOCA were set out at [1.3] of the first report. Among the comments made by the administrators in relation to the directors' DOCA, were that: liquidators would be unfunded to pursue recoveries through litigation and would therefore be reliant on third party funding to pursue any recovery actions determined to be commercially viable; that the deed fund was likely to be sufficient to result in unsecured creditors receiving "a dividend of 100c/$" based on current proofs of debt (excluding contingent claims (and hence creditors such as Fitz Jersey)) and the deed fund was not contingent on any subsequent events; and that the deed fund would be immediately available and would result in a timely return to creditors.
It was the administrators' stated opinion that the return to creditors under the directors' DOCA results in a better outcome than the predicted outcome of a liquidation and the administrators accordingly recommended that the Company execute the directors' DOCA.

Second creditors' meeting and Fitz Jersey's DOCA

A second creditors' meeting was convened for 9.30am on 8 May 2018, at which it was proposed that creditors be asked to vote on the options available: i.e., that the Company execute the directors' DOCA; that the Company be placed into liquidation; or that the administration end and control of the Company be returned to the directors. The administrators did not recommend either of the last two options.
(Pausing here, the third to fifth defendants in the present proceedings note that the first report further recorded, amongst other matters, the historical financial position of the Company and that the directors regularly distributed retained earnings; and that the administrators therein expressed a view about the utility of investigations into the payment of the dividends, specifically factors which would be relevant to any such investigation; for example, the fact that the dividend was paid one year prior to the insolvency of the Company and that at the time the dividend was declared the directors had received legal advice that the prospects of Fitz Jersey "overturning the Garnishee" were "low" (see Exhibit A p 928).)
The administrators expressed the opinion that any recovery action in relation to the dividend would likely be disputed and would be likely to involve costly litigation which would need to be funded; that further investigations and legal advice would be required; and that the prospects of recovery in relation to that potential claim "appear very uncertain" (Exhibit A p 928).
At [6.8] of the first report, the administrators stated that any creditor with an interest in funding ongoing investigations and potential litigation in the liquidation of the Company should contact the administrators/liquidators at the earliest opportunity. (The third to fifth defendants note that there is no evidence that Fitz Jersey took up this invitation.)
On 3 May 2018, Fitz Jersey proposed an alternate DOCA (Exhibit A pp 96-97) which, in substance, provided for the payment of $100,000 within 14 days of acceptance of the proposal towards a deed fund and, additional to that payment, for Fitz Jersey to fund a liquidator of the Company to the extent of up to $300,000 or such amount as agreed for the purpose: first, of the liquidator conducting public examinations to investigate claims which could be pursued on the company's behalf against directors, their related entities and their advisers and to identify possible offences which might have been committed; and, second, to fund any proceedings as recommended by Counsel on behalf of the Company or its liquidator to pursue recoveries in the liquidation. Mr Bruce Gleeson, of Jones Partners Insolvency & Business Recovery, was nominated as the deed administrator and signed a consent so to act (Exhibit A p 98); as well as a consent to act as liquidator if so appointed (Exhibit A p 99). He signed a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) on 3 May 2018 (Exhibit A pp 100-101).
On 8 May 2018, the second creditors' meeting was convened pursuant to s 439A of the Corporations Act (see minutes at Exhibit A p 977, which incorrectly refer to this as the first meeting of creditors). The minutes of meeting record the terms of the alternate DOCA proposed by Fitz Jersey as including that the deed administrator distribute a 100c/$ return to admitted unsecured creditors; that the contingent creditors (Fitz Jersey and Ausgrid) agree not to prove as creditors or receive a dividend from the deed fund; as well as that the proposed liquidator (Mr Gleeson) be provided with $300,000 in funding to investigate claims, identify possible offences, and fund any proceedings in this regard. The minute recorded the chairperson (Mr Fraser) as noting that several objections had been raised in relation to the terms of the alternate DOCA proposed by Fitz Jersey and that there had not been time subsequent to the receipt of the alternate DOCA to consider issues raised in relation to it, to form an opinion as to whether it provided a better return to creditors, or to issue a supplementary report to creditors (see Exhibit A p 978).
At the second meeting, Mr Fraser confirmed, in response to requests from Fitz Jersey's solicitor, that: Fitz Jersey's claim was admitted for $1 for the purposes of voting at the second meeting of creditors and that the administrators had been provided with advice by Bradbury Legal "and that advice was one of many pieces of information taken into account in the adjudication of Fitz Jersey's claim" (see Exhibit A p 978). Fitz Jersey's solicitor noted for the minutes his objection to the use of any advice from Bradbury Legal in adjudicating on Fitz Jersey's claim on the basis that Bradbury Legal had a conflict of interest. The second creditors' meeting was adjourned to 18 May 2018.
A revised DOCA proposal was submitted by Fitz Jersey on 10 May 2018 (Exhibit A pp 104-105). Its key terms were summarised in a supplementary report to creditors issued by the administrators on 14 May 2018 (Exhibit A pp 979ff). The relevant funding terms remained as set out in the 3 May 2018 proposal. It provided for payment of $100,000 towards a deed fund (to be administered by Mr Gleeson) and $300,000 for the purpose of Mr Gleeson (as nominated liquidator post-administration) conducting public examinations, identifying offences which may have been committed, funding proceedings recommended by post-administration counsel for the Company and for paying the deed administrator's fees. (The third to fifth defendants submit that Fitz Jersey, as the proponent of the alternate DOCA, "appears to have assumed" that Mr Gleeson as liquidator will "necessarily wish" publicly to examine "the directors, their related entities and advisers" (pointing to cl 9 of the proposed funding agreement).)
In the administrators' supplementary report to creditors of 14 May 2018, to which I have just referred, the administrators compared the estimated returns to creditors under the alternatives of liquidation, directors' DOCA and the alternate DOCA. They noted, among other things, that: for a surplus to become available in a liquidation a liquidator would need to succeed in recovery claims "that are yet to be fully explored, are highly contingent and would likely involve litigation, which would be defended"; that administrators' fees were capped in this analysis to the assets available for the purpose of the estimated outcome from the estate and that payment of additional administrator fees approved would be subject to the indemnity provided by the directors at the time of appointment, specific terms of the alternate DOCA and/or by any additional recoveries in a liquidation; and that the variance between the deed administrators' costs under the directors' DOCA vis-à-vis the alternate DOCA was due to the costs being funded within the deed fund under the former and outside of the deed fund under the latter (Exhibit A p 985, at [3.1] of the supplementary report). It was also noted that the terms of the alternate DOCA provided for the Company to enter liquidation, with liquidator costs funded by the contingent creditor outside of the deed fund.
In the supplementary report, the administrators stated their opinion that the return to creditors under the alternate DOCA resulted in a better outcome than the outcome under the directors' DOCA or from an immediate winding up of the Company (see Exhibit A p 986, at [3.2]). The administrators noted in this regard that the alternate DOCA provided for the potential for a return to contingent creditors (depending on the outcome of any recovery actions) as their claims were not released in the alternate DOCA. It was also noted (when comparing the alternate DOCA with immediate liquidation) that the liquidators would be unfunded under the alternate DOCA in the first instance and reliant on third party funding to pursue any recovery actions determined to be commercially viable.
The administrators noted at [3.1G] that the estimated returns to all creditors in the "low" scenarios for liquidation and the directors' DOCA assumed that contingent creditors were admitted for indicative purposes only, and noted that the actual value of the claims admitted for dividend purposes would depend on the outcome of the adjudicated process, whereas, conversely, under Fitz Jersey's DOCA, the contingent creditors agreed not to participate as creditors and therefore guaranteed the return to unsecured creditors of 100 cents in the dollar (assuming admitted claims remained below $100,000) (Exhibit A p 986).
The administrators ultimately recommended that the alternate DOCA (i.e., that proposed by Fitz Jersey) be executed (see Exhibit A p 988).

Reconvened second creditors' meeting and resolution to wind up Company

On 18 May 2018, the second creditors' meeting was reconvened (see minutes at Exhibit A pp 1021ff). At that meeting, the chairperson, Mr Fraser, noted that the administrators had undertaken a further review of the proofs of debt of the directors and had determined that the claims were not adequately substantiated and that those proofs of debt had been rejected; confirmed that Ausgrid's claim had been rejected for voting purposes (as no substantiation of that claim had been received); that Fitz Jersey had been admitted to vote for $1 (see Exhibit A p 1025). Also at that meeting, proofs of debt from Bradbury Legal and the Company secretary's company (Vartuli Consulting Pty Ltd) were admitted for voting purposes as were proofs from Atlas Construction Group (NSW) Pty Ltd and a contractor, Electromaster Holdings (NSW) Pty Ltd. (Fitz Jersey raised an issue at the meeting as to those last two proofs being for defect rectifications outside the rectification period but accepted in oral submissions at the hearing before me that if work was done at the request of the Company then the proofs of debt were probably in order.)
At the meeting, Mr Fraser noted that it was the administrators' view that no conflict of interest existed in relation to seeking and receiving Bradbury Legal's advice "as the company's lawyers, in relation to the Fitz Jersey Proceedings" and noted that various information in addition to advice from Bradbury Legal had been taken into account in the adjudication of Fitz Jersey's claim for voting purposes (see Exhibit A p 1026).
The administrators' recommendation to the meeting was that the Company execute Fitz Jersey's DOCA. Put to a vote of creditors at the meeting the resolution that it do so failed: Fitz Jersey voting in favour but there being 5 votes against (a value of $28,634) and one abstention (Bradbury Legal, whose proof was for $22,482) (see Exhibit A p 1027). Instead, a resolution was passed that the Company be wound up and the administrators be appointed joint and several liquidators (see Exhibit A pp 1027-1028). (The third to fifth defendants submit that from this it can be seen that the creditors did not wish Mr Gleeson to be appointed liquidator. Fitz Jersey attributes more sinister motives to the refusal of creditors to accept the administrators' recommendation to accept a proposal whereby they would receive 100 cents in the dollar - in essence, suggesting that this was an attempt to avoid investigation into the matters of concern that it has raised.)

Commencement of the present proceedings

On the same day, Fitz Jersey, by its solicitors, foreshadowed to the administrators and Clayton Utz its intention to make an application to the Court for the liquidators to be removed and for Mr Gleeson to be appointed as liquidator, confirming that Fitz Jersey would be offering to fund the liquidator's investigations. In that letter (Exhibit A pp 149-150), the assertion was made that Bradbury Legal had at all times been acting on behalf of the directors, "whose interests, as well as the interests of Bradbury Legal, are diametrically opposed to [Fitz Jersey]'s interests in being admitted as a creditor in the administration"; and complaint was made as to the fact that the administrators (now liquidators) had considered it appropriate to rely upon the advice of Bradbury Legal and not inform Fitz Jersey of their intention to instruct that firm, and rely upon its advice, in circumstances where they were aware of the allegations made by Fitz Jersey concerning the conduct of the directors and their advisers and the necessity for the liquidators to investigate such conduct.
By email on 6 June 2018, the third and fourth defendants offered to indemnify the liquidators in the sum of $55,000 for their remuneration, costs and expenses incurred in progressing with the liquidation of the Company (Exhibit A p 1031). That offer does not appear to have been accepted by the liquidators.
On 8 June 2018, Mr Gleeson provided Fitz Jersey's solicitors with his formal consent to act as liquidator of the Company, together with his DIRRI, rate sheet and a CV (Exhibit A pp 151-157).
In an affidavit sworn by Mr Hayter, Fitz Jersey's solicitor, on 13 June 2018, he deposed at ([48]) that: Fitz Jersey agrees to fund the liquidator initially in the sum of $100,000 to conduct public examinations and is prepared to consider and provide further funding if the liquidator identifies causes of action which can be pursued and which have reasonable prospects of success.
On 21 June 2018, Fitz Jersey commenced these proceedings.

Proposed funding agreement by Fitz Jersey

In an affidavit affirmed 21 June 2018, Ms Linda Holland, a solicitor in the employ of Fitz Jersey's solicitors, deposes to instructions received from a director of Fitz Jersey (Mr Kie Chie Wong) to the effect that Fitz Jersey is prepared to enter into a Funding Agreement "largely in terms of" the draft annexed to her affidavit, "but only if": the Funding Agreement is with Mr Bruce Gleeson and Mr Gleeson is appointed as the liquidator of the Company.
The draft Funding Agreement annexed to Ms Holland's affidavit (drafted obviously on the assumption that Mr Gleeson is appointed liquidator and will agree to its terms) includes the following recitals: B. The Liquidator has been requested by Fitz Jersey Pty Limited ("the Funder") to conduct Public Examinations into the affairs of the Company. C. The Funder has agreed to pay for the legal costs and remuneration of the Liquidator to conduct the liquidation including an investigation of the Examinable Matters and the conduct of public examinations in respect of the Examinable Matters[.] D. The Liquidator will obtain approval to enter into this Agreement in compliance with clause 477(2B) [sic] of the [Corporations] Act.
Clause 2 of the draft Funding Agreement provides, among other things, that: 2.1 The Funder has agreed to provide funding for the Liquidator to conduct the Public Examinations on the terms set out in this Deed. 2.2 The parties acknowledge and agree that the Liquidator will instruct Solicitors and Counsel to conduct the Public Examinations and the other work specified in the Scope of Works. … 2.5 The provision of funding for the Liquidator's Fees and the Liquidator's Legal Costs and the obligation to pay such fees shall be capped at the Funding Limit for Liquidator's Fees specified in Item 2 of Schedule 1, or such higher amount as the parties agree in writing[,] but it is envisaged that further funding will be provided if the Liquidator obtains legal advice that claims against third parties have reasonable prospects of success. 2.6 If following the conduct of the Public Examinations the liquidator receives advice from counsel of no less than seven years' standing that reasonable grounds exist for the institution and maintenance of legal proceedings against any party or parties then the Funder will give consideration to the provision of further funding to meet the costs of any such proceedings.
The term "Scope of Works" is defined as meaning work carried out by Mr Gleeson and his staff and his lawyers in the conduct of the liquidation including the Public Examinations and investigative work relating thereto.
The term "Proceedings" is defined as meaning any proceedings commenced by Mr Gleeson after conducting the Public Examinations.
I note that the third to fifth defendants suggested that the draft Funding Agreement arguably seeks to restrain Mr Gleeson from discharging his statutory duties independently - see T 23.11 - in that it imposes a requirement that he carry out public examinations. I consider this issue in due course.
Clause 3 provides for the Funder to agree to consider indemnifying Mr Gleeson and to pay him in respect of certain amounts (including adverse costs orders and security for costs) should he obtain legal advice that claims against third parties have reasonable prospects of success and elect to pursue such claims.
Clause 4.3. provides that if, after conducting the Public Examinations, Mr Gleeson receives legal advice that no claims against third parties have reasonable prospects of success, he will account to the Funder for any funds provided less payment of his legal costs and liquidator's fees to date.
Clause 5 contains an acknowledgement and agreement by the Funder that Mr Gleeson has the right to direct, conduct and conclude the Public Examinations and any consequential proceedings as he considers appropriate.
On 29 June 2018, Fitz Jersey paid $100,000 into its lawyers' trust account as "funding for the liquidator" (see Ms Holland's affidavit affirmed 3 July 2018 at annexure A).

Incumbent liquidators' position

Meanwhile, on 28 June 2018, the first defendant swore his affidavit in these proceedings in which he deposes, inter alia, that he and the second defendant do not object to being replaced by Mr Gleeson.

Request for meeting to be convened to consider directors' proposal for an alternative replacement liquidator

On 6 July 2018, on behalf of the third to fifth defendants, Mr Hegarty wrote to the first and second defendants' lawyers (Clayton Utz), to request that a meeting of the Company's creditors be convened to consider replacing the first and second defendants with Mr Graeme Beattie. Mr Hegarty attached letters from Bradbury Legal, Vartuli Consulting Pty Ltd and another creditor (AMA (Aust) Pty Ltd) supporting that request (Exhibit A pp 1036-1037).
The first and second defendants' position, as communicated to Mr Hegarty on 11 July 2018, was that as the liquidators were presently unfunded and a hearing date had been fixed for 25 July 2018 to consider the replacement of the liquidators, they did not consider that a creditors' meeting to consider the same issue with an alternate proposed liquidator was in the best interests of creditors (Exhibit A pp 1091-1092).
On 13 July 2018 Mr Hegarty wrote to Fitz Jersey's lawyers (Exhibit A pp 1094-1095), at least implicitly suggesting that Mr Gleeson was not someone "who is independent and appears so to all creditors"; and stating that Mr Beattie "was selected by us as someone who was sufficiently distant so as to not give rise to any suggestion of there being a lack of independence on his part". Mr Hegarty in that letter also stated that: Our clients contend that it is inappropriate for any one creditor, let alone one with a claim as speculative as that of your clients (who may not be a creditor to any extent) to determine who ought to be appointed liquidator of the Company.
Mr Hegarty confirmed that his clients accepted that "any subsequently appointed liquidator may wish to examine the Company's affairs in greater detail" and asserted that, to that end, they had provided their full co-operation to the liquidators at McGrathNicol and would continue to do so with any subsequently appointed liquidator.

Further proposed directors' DOCA

On 17 July 2018, Mr Hegarty wrote to the liquidators conveying his clients' agreement that the notices issuing the meeting they had requisitioned should await the outcome of the hearing of the application on 25 July 2018; raising issues in relation to the payment of amounts claimed under the indemnity they had given in April 2018; and enclosing another deed proposal (Exhibit A p 1104) in the context of the comments made by him as to the funding arrangements; alternatively proposing that his clients advance a further $120,000 in addition to any amounts payable under the current indemnity - "on the basis that the monies ae [sic] used exclusively for payment of the liquidator's current outstanding costs and disbursements and reviewing in detail the claim of Fitz Jersey Pty limited including obtaining an advice from independent counsel and determining the claim on behalf of Fitz Jersey Pty Limited" (the letter stated that the money could also be used for the recovery of the costs the subject of the bill of costs prepared at the request of the Company's former solicitors, Bradbury Legal - i.e., in relation to the third and fourth costs orders).
The letter notes Mr Hegarty's clients' acceptance that any liquidator ought to be funded and their recognition that any liquidator may wish to review the Company's affairs in greater detail but goes on to say: Having said that, our clients are of the view that in the first instance a proper analysis needs to be undertaken by the liquidator in office of the claim lodged by Fitz Jersey Pty Limited. If that does not occur, it would invariably mean that inordinate costs may be incurred in reviewing the Company's affairs in circumstances where there is only a limited creditor pool of approximately $65,000, for [sic] whom our clients are prepared to pay out by means of a Deed of Company Arrangement. At some point that review needs to occur. If for instance a liquidator was able to recover monies following further investigations, they would then call upon final proofs of debt and have to deal with the proof of debt from Fitz Jersey Pty Limited. If it then emerged that the claim is, as our clients contend, a claim which ought be rejected in its entirety, vast amounts of legal fees and liquidator fees would have been incurred to get things to that point.
Under their latest DOCA proposal (Exhibit A pp 1104-1005 ), the third and fourth defendants contemplate a payment of $250,000 of which $110,000 is to be made available immediately to the deed administrators in satisfaction of the third and fourth defendants' liability under the letter of indemnity of 4 April 2018, with the balance of $140,000 to comprise two amounts payable to the administrators of $25,000 and $50,000 (on the happening of certain events or satisfaction of certain conditions) and a payment of $65,000 to the company's creditors. The second payment of $50,000 to the administrator would be conditional upon, among other things, an order terminating the winding up of the Company and the claim of Fitz Jersey being admitted for less than $100,000 (including following any appeal from any decision of the deed administrators). The DOCA is automatically to terminate in the event that the claim of Fitz Jersey or that of Ausgrid is admitted for more than $100,000 in which event the Second Administrator Payment and the Creditor Payment will be reimbursed to the third and fourth defendants. The DOCA proposes that the third and fourth defendants will fund the defence of any proceedings resumed against the Company "pursuant to paragraph 5" (which does not in terms refer to any such proceedings) up to the sum of $150,000, and that in the event that proceedings are resumed against the Company, Bradbury Legal will resume acting for the Company.
This proposal was rejected by the first defendant for the reasons set out in his second affidavit sworn 20 July 2018. In that affidavit, Mr Fraser deposes that the liquidators have some concerns that the $120,000 advance offered under the director proposal is inadequate to cover the intended purpose of the funds, given the liquidators' current costs and disbursements and the liquidators' view that the adjudication process in respect of the Fitz Jersey proof of debt will require, at a minimum, an expert opinion and a detailed opinion of Counsel (see at [7]).
He deposes (at [8]) that the liquidators are also concerned that even if the funding offered under the director proposal was sufficient to cover its intended purpose, the only asset that would be recoverable for creditors would be any costs recovered pursuant to the Bill of Costs. He deposes that given the liquidators' concerns that the funding will not be sufficient, they are concerned that regardless of the outcome of the adjudication of Fitz Jersey's proof of debt, the funding proposal will not produce an asset or recovery for the benefit of creditors. He deposes that it is the liquidators' view that there is utility in establishing whether there are assets available for distribution to creditors.
At [9] he deposes that, in contrast, under the Fitz Jersey proposal $100,000 will be made available to fund investigations and to determine potential causes of action that "may give rise to recoveries in the liquidation of the Company".
In the circumstances to which Mr Fraser has deposed in that affidavit, he deposes (at [10]) that the liquidators do not oppose being replaced.

Resolution by Fitz Jersey board

Meanwhile, on 19 July 2018, the Fitz Jersey board met and resolved unanimously that (see Annexure B to the affidavit of Ann Pin Lim, also known as Ann Wong, sworn 20 July 2018): 1. The Company requires a proper investigation of the affairs of the builder of its development at … Mascot, being Atlas Construction Group Pty Limited (in Liquidation); 2. The Company confirms its nomination of Bruce Gleeson of Jones Partners to the Supreme Court of New South Wales to be the liquidator of Atlas Construction Group Pty Limited (in Liquidation); 3. The Company oppose the appointment of any liquidator proposed by any of the following people to be appointed to Atlas Construction Group Pty Limited (in Liquidation): (a) Robert Lewis Yazbek; (b) Scott Sweeney; (c) Matthew Vartuli; (d) Atlas Construction Group (NSW) Pty Ltd; 4. The Company shall not fund the present liquidators of Atlas Construction Group Pty Limited, Shaun Fraser and Kathy Sozou, nor any liquidator appointed who is proposed by Robert Lewis Yazbek, Scott Sweeney, Matthew Vartuli or Atlas Construction Group (NSW) Pty Ltd; 5. Upon the appointment of Bruce Gleeson to Atlas Construction Group Pty Limited (in Liquidation) the Company shall enter into an initial funding agreement with Mr Gleeson on the basis of that draft agreement annexed to the affidavit of Linda Marie Holland sworn on 21 June 2018 in Supreme Court of New South Wales proceedings number 2018/192598, at the same time the Company shall instruct Gillis Delaney to pay to Mr Gleeson $100,000 from funds deposited in its trust account by the Company in the two stages provided for in that initial funding agreement; 6. The Company consider any further application for funding by Mr Gleeson for Atlas Construction Group Pty Limited (in Liquidation) at the expiry of the Initial Funding Agreement and shall provide up to $300,000 for that purpose.

Legal principles

As the Company first entered into voluntary administration after 1 September 2017, the provisions of s 90-15(1) and (3)(b) and (c) to the Insolvency Practice Schedule (Corporations) (Schedule 2 to the Corporations Act 2001) apply in place of the former s 503 of the Act to empower the Court to order the relief Fitz Jersey seeks ( see In the matter of Glengrant Civil Pty Ltd (In Liq) [2017] NSWSC 843).
The relevant principles on an application to remove and replace a liquidator are not in dispute: the question is whether it is in the best interests of creditors of the company to accede to the application (see Advance Housing Pty Ltd (In Liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 234, In the matter of ACN 159 605 188 Pty Ltd (in liq) (Formerly Securimax Pty Ltd) [2018] NSWSC 356 per Black J at [26] (Securimax).
In Securimax (at [26]), Black J noted the competing issues on an application of this kind, namely that there is a balance to be struck between the appointment of a liquidator who can bring a fresh mind to the company's issues without any difficulty arising from the adversarial relationship with the major creditor, on the one hand, and, on the other hand, the time required for a new appointee to become familiarised with the affairs of the company, which may cause detriment to the ongoing investigations. His Honour was there satisfied that there was no significant risk that the new liquidator would be frustrated in the pursuit of investigations because there would be funds available to pay his remuneration and expenses. (Fitz Jersey refers to this decision as highlighting the importance of adequate funding and properly conducted investigations into the affairs of the company.)
Similarly, in In the matter of Iris Diversified Property Pty Ltd (in liq) [2018] NSWSC 834 (Iris Diversified), where the strata body corporate refused to fund the incumbent liquidator at all but was prepared to fund the replacement it had nominated (including to investigate issues raised by the body corporate) and where the incumbent liquidator gave evidence of his frustration at not being funded to carry out proper investigations, Black J considered that the unwillingness of a creditor to fund the incumbent was relevant to the assessment of what is in the best interests of creditors (see [28]). His Honour there accepted that the strata body corporate lacked confidence in the incumbent because he was appointed by the company (and, in reality, by the ultimate shareholder in its group) (see [24], [27]) and considered that it was "not irrational" for an unrelated creditor to prefer a liquidator not selected by those behind the company (see [27], citing Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd [1999] NSWSC 137; 17 ACLC 642 at [6]-[7] (Unifor) and Redowood Pty Ltd v Goldstein Technology Pty Ltd [2004] NSWSC 317 (Redowood)). At [29], Black J said: The benefit to IGM [the related party] from the failure of the resolution [to replace the incumbent] is the reduction in the practical likelihood that proceedings that would be bought against its associated entities, as a result of the Owners Corporation's lack of confidence in Mr McKenna [the incumbent] and its unwillingness to fund his further investigations, and the absence of alternative funding available to Mr McKenna. It is apparent that IGM believes that benefit exists, because it provided an indemnity to Mr McKenna against any adverse costs order made against him by reason of his opposition to this application, and there is no commercial explanation for that course other than a perception that IGM is advantaged by Mr McKenna remaining in office, by comparison with the position if another liquidator were appointed The conclusion that the failure to pass the resolution has unreasonably prejudiced, or is likely to prejudice, the interest of the Owners Corporation as the creditor which voted against the proposal is reinforced by the nature of the relationship between IGM and the Company, since IGM is a relatively small creditor of the Company, at least in proportionate terms, which exercised its vote to preserve its associates' choice of liquidator, against the objection of a creditor to whom a substantial part of the debt owed by the Company was due I am satisfied that prejudice is unreasonable in the relevant circumstances.
In In the matter of ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801, Black J (at [36]) said that the matters relevant in considering an application for removal of a liquidator include whether that course would be for the benefit of the liquidation and the persons interested in it; as well as the need for confidence in the integrity, objectivity and impartiality of winding-up. His Honour cited authority for the proposition that "rancour" between the parties would not be sufficient to require removal of a liquidator as removal on that basis "would provide a creditor with an opportunity to manipulate the liquidation of the company". At [37], Black J cited authority for the proposition that the Court must think carefully before deciding to remove a liquidator and it should not be seen to be easy to remove a liquidator even if his or her conduct has fallen short of what might be considered ideal.
There is no dispute as to the proposition that liquidators must be independent and seen to be independent (see Re Club Superstores Australia Pty Ltd (in liq) (1993) 10 ACSR 730 at 735 per Thomas J, Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd at 232-233 per Santow J (as his Honour then was)). Nor, ultimately, was there any dispute as to the independence of the liquidator nominated by Fitz Jersey to be the replacement liquidator. Where the parties are in conflict is as to the identity of the replacement liquidator (in the event that the incumbent liquidators are to be replaced - albeit that being not the preferred position of the third to fourth defendants, who maintain that the incumbent liquidators should not be replaced).
Fitz Jersey has pointed to the recognition in the authorities that, as a general principle, liquidators should not be chosen by directors or other principals of the company, referring to Unifor at [6]; [7], where Hodgson CJ in Eq (as his Honour then was) was concerned to ensure that investigations into the company's affairs should be undertaken by someone completely independent of the directors. It is emphasised by Fitz Jersey that the opposition by a creditor to an incumbent who was appointed by the directors is a relevant matter for the Court to consider, as is that creditor's unwillingness to fund the incumbent (see Redowood at [58], per Campbell J, as his Honour then was).
The third to fourth defendants (the directors) have pointed to statements in the authorities to the effect that the Court should not accede to a party's preference for a particular liquidator where to do so would amount to an abdication of the Court's responsibility to select an appropriate liquidator. in particular, it is said, those statements have been made in circumstances where the provision of funding by a creditor is made conditional on the liquidator being of that creditor's choice.
In Emerton Pty Ltd v Referral Marketing Services Pty Ltd [2009] NSWSC 738 (Emerton), Brereton J considered an application (under the now repealed s 502 of the Corporations Act) to appoint a liquidator of the plaintiff's choice which liquidator it was prepared to fund. The plaintiff, Emerton Pty Ltd, was not prepared to fund the existing liquidators. At [24], Brereton J cited with approval Citrix Systems Inc v Telesystems Learning Pty Ltd (in liq) [1998] FCA 1050; 28 ACSR 529 (Citrix Systems), where Moore J (at 28 ACSR 538) held that the liquidator should be appointed from the list of official liquidators and said (at 538-539): … Proceedings such as these should not become a vehicle for disgruntled creditors to endeavour to secure the appointment of a preferred liquidator when a company is in voluntary liquidation. Appointing the nominated liquidator may tend to encourage such an approach. If it emerges that other applications are made for that purpose then it may be appropriate to appoint a liquidator who is not the nominated person. However it is not necessary in the present case.
In Emerton, Brereton J said at [25]; and [27]: ... [T]he purpose of appointing a liquidator is that there be an independent and impartial person to make those inquiries, primarily in the interests of the creditors. ... However, a liquidator making such inquiries does not do so as an agent of an aggrieved creditor. … The Court should not be forced to accede to a party's selection of a liquidator by a statement that a creditor is prepared to fund only a particular liquidator. In my view, having regard to the course of the proceedings to this point, if the Court were to accede to Emerton's application in this respect, there would be an appearance of acceding to Emerton's sustained attempts to have the liquidator of its choice appointed. This would do precisely what Moore J said should be discouraged, namely, to allow the proceedings to become a vehicle for the plaintiff to secure the appointment, not of an appropriate liquidator, but of the plaintiffs preferred liquidator.
In In the matter of Evcorp Grains Pty Ltd (No 2) [2014] NSWSC 155 (Evcorp), Brereton J (at [21]) reiterated the importance of those considerations, saying that: ... [T]he Court should not accede to a party's preference for a particular liquidator on account of its threat or promise to fund that liquidator but no other. To do so would encourage parties to be selective in their funding of liquidators for an irrelevant reason, and effectively abdicate the Court's responsibility to select an appropriate, rather than a party's preferred, liquidator ...
Again, in Re Plutus Payroll Australia Pty Ltd [2017] NSWSC 1041, Brereton J at [22] said that it was not appropriate for the Court to take into account any suggestion by a plaintiff that it would be prepared to fund only the liquidator of its choice.
As to the alternative application to appoint Mr Gleeson (pursuant to s 90-15(1) of the Insolvency Practice Schedule (Corporations)) as a special purpose liquidator, the authorities make clear that on such an application it is necessary to identify with specificity the "special purposes" (or powers) for which the appointment of the special purpose liquidator is sought (see, for example, In the matter of Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079 at [13] (Ambient Advertising); In the matter of 77738930144 Pty Limited (in liq) (formerly Commercial Indemnity Pty Ltd) [2017] NSWSC 452 at [23] and [82(2)] (Commercial Indemnity); GDK Projects Pty Ltd v Umberto Pty Ltd (in liq) [2018] FCA 541 at [2] (GDK Projects); In the matter of ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002 at [22] (Hemisphere Technologies)).
Again, a special purpose liquidator will not be appointed unless it would be just and beneficial to creditors. In GDK Projects, Farrell J (at [33]) considered that the power should not be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration. Similarly, in Hemisphere Technologies, Gleeson JA at [21] determined the question by asking whether an additional liquidator was necessary (having regard to the special purposes identified in the amended originating process).
Finally, it is relevant to note that , it will be necessary for court approval to be obtained in relation to any funding agreement (see s 477(2B) of the Corporations Act). The third to fifth defendants argue that, although there is no present application seeking such approval before the Court, the principles relevant to such an application are relevant to the present application.
In that regard, in In the matter of 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs. apptd) [2013] NSWSC 669; 31 ACLC 13-021, Black J (at [17]) said that the court's role in considering an application under s 477(2B) is to determine whether the entry into the agreement is a proper or bona fide exercise of the liquidator's powers, and not ill-advised or improper on the part of the liquidator. In Commercial Indemnity, Gleeson JA, in granting approval to enter into a funding deed said (at [54]-[55]): The following propositions can be derived from the authorities, when deciding whether to grant approval under s 477(2B): (1) the controlling consideration is the interests of creditors concerned in the winding up; (2) the court pays regard to the commercial judgment of the liquidator; (3) although the court is not a rubber stamp for whatever the liquidator puts forward, it is not the role of the court to independently appraise the commercial desirability and commercial terms of the transaction, (4) the court will generally not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or some real and substantial ground for doubting the prudence of the liquidator's proposal. ... [Here] [t]he funder agrees to pay Mr Hancock's costs and disbursements of the investigations, including public examinations, and any subsequent proceedings; any costs order made against Mr Hancock; any security for costs order made against Mr Hancock; and to indemnify Mr Hancock in respect of any adverse costs order made against him in any proceedings ...

Fitz Jersey's submissions

Fitz Jersey submits that the Company's affairs require independent investigation, referring to the following matters:

the payment of the dividend of $7.1 million on 6 February 2017 (and any prior dividend) and consideration of the co-incidence of possible breaches of directors' duties and s 254T(1)(c) of the Corporations Act in declaring the dividend (see Exhibit A p 1057);
the claim made by Fitz Jersey for $39,894,968.86 (as to which it is noted that Mr Fraser has considered that, at a minimum, this will require expert opinion and detailed opinion of counsel); and
the allegation of misleading conduct by the Company's directors (see Exhibit A pp 1007-1016, 1026-1030);
the claim made by Ausgrid (now called Blue Op Partner Pty Ltd) for $1,695,217.07 (see Exhibit A p 1049);
related party claims; and
assessment of costs orders made against Fitz Jersey.

It is noted that, unlike the position in Iris Diversified (to which I have referred above at [81]), here the incumbent liquidators do not object to being replaced.
Fitz Jersey submits that its proposal gives Mr Gleeson the freedom to select his own lawyers to run company examinations as he considers appropriate; and that it is envisaged that Mr Gleeson would engage lawyers who have nothing to do with any of the parties to these proceedings. It is submitted that this is to the advantage of creditors in that investigations can proceed on a fully funded basis (thus satisfying the concerns expressed by Black J in Securimax).
It is submitted that the inference to be drawn is that the third to fifth defendants do not want to relinquish control of the appointment process. It is submitted that the Court should infer that the motivation (of those defendants) is to restrict proper investigations into the affairs of the Company.
It is further submitted for Fitz Jersey that it is not irrational for Fitz Jersey to prefer none of the directors' nominees, noting that the choice of an appointee made by the very people who may be the subject of an investigation (and possible recovery action) by that appointee was the issue discussed by Black J in Iris Diversified, Hodgson CJ in Eq in Unifor, and Campbell J in Redowood.

Incumbent liquidators' submissions

The incumbent liquidators (who do not oppose an order for their replacement in the present circumstances) say that unless a liquidator succeeds in recovering claims that are yet to be fully explored there will not be any surplus available in the liquidation; and that, not only do they not presently have funding available to pursue any such recoveries, they have insufficient funds even to meet outstanding costs and expenses of the administration and the liquidation (see Mr Fraser's affidavit sworn 20 July 2018).
Significantly, in my opinion, the incumbent liquidators' position (as noted above) is that, in circumstances where they are presently unfunded, and the $100,000 in funding proffered by Fitz Jersey for the purpose of undertaking public examinations will not be provided so long as the liquidators remain in office, it is in the interests of creditors that they be replaced (see Mr Fraser's affidavit sworn 28 June 2018 at [5]).
The liquidators say that the fact that there is now a proposal (from the third to fifth defendants) to provide funding in the sum of $120,000 to be applied as stated in Mr Hegarty's 17 July 2018 letter (see Exhibit A p 1338) does not alter that position, because: the liquidators are concerned that that funding will not be sufficient to cover the purposes there set out (noting that the liquidators' outstanding costs and expenses alone are now approximately $112,719); and the proposal would preclude the liquidators from pursuing recoveries before adjudicating Fitz Jersey's proof of debt, which may not be in the interests of all creditors.
The liquidators accept that the third to fifth defendants have proposed other alternatives (having sought to call a meeting of creditors to consider their proposed nominee as and having also proposed a further Deed of Company arrangement). It is submitted that there is no obstacle to these matters being considered by a meeting of creditors, irrespective of whether Order 2 in the Originating Process is made; but that it is difficult to be confident that these measures can be pursued without further intervention from the Court because there is likely to be a dispute as to whether Fitz Jersey's proof of debt should be admitted for voting purposes and the resolution of that dispute is likely to affect the outcome at any creditors' meeting given that the other claims in the liquidation "pale into insignificance" beside Fitz Jersey's proof of debt.

Submissions of third to fifth defendants

The third to fifth defendants argue that the present application should be dismissed on its face: first, because prayer 2 proceeds on the false premise that the liquidators have agreed to resign; and because of the established authority which strongly cautions against a creditor endeavouring to secure the appointment of a preferred liquidator (in this case Mr Gleeson) - i.e., that the liquidator should not be seen as an agent of an aggrieved creditor; and that the appearance of acceding to Fitz Jersey's choice of liquidator rather than appointment of an impartial or an appropriate liquidator should not be given the Court's imprimatur (citing Emerton); and, second, because it is said that prayer 3 is "hollow" - in that it is not for the Court to determine the "special purposes" to be conferred upon any special purpose liquidator (and in any event prayer 3 is unnecessary).
It is submitted that if a replacement liquidator is to be appointed, that liquidator should be entirely independent (from the list of official liquidators). (In this regard, the third to fifth defendants ultimately disavowed any suggestion that Mr Gleeson is not independent - see T 25.49. Their real complaint, other than as to the terms of the draft funding agreement, seems simply to be that he has been nominated by Fitz Jersey.)
The third to fifth defendants emphasise that the level of funding which Fitz Jersey is now prepared to commit to providing (only if the liquidator of its choice, Mr Gleeson, is appointed) is $100,000. It is further said that the terms of the draft Funding Agreement are unusual and would not be countenanced by a reasonably prudent liquidator for the following reasons.
First, that it assumes that Mr Gleeson will relinquish his statutory responsibilities and "kowtow" to the request by Fitz Jersey to conduct public examinations (referring to Recitals B and C and cll 2.1 and 2.2) in circumstances where Mr Gleeson, on the evidence, knows nothing about the underlying facts. Second, that it assumes that Mr Gleeson will admit Fitz Jersey's proof of debt for a substantial amount (it being submitted that, if not, there can be little, if any benefit in conducting public examinations). Third, that it does not provide Mr Gleeson (or the Company) with an indemnity for any adverse cost order (see cl 3). Fourth, that it does not provide Mr Gleeson (or the Company) with an indemnity for any order to provide security for costs (an application for which it is said will inevitably be made if claims are pursued; and which it is submitted is likely to succeed). Fifth, that it assumes that Mr Gleeson is prepared to enter into the funding agreement when there is no evidence that Mr Gleeson has even seen the funding agreement. Finally, that it assumes the Court is (or the creditors are) likely to approve the funding agreement pursuant to s 477(2B) of the Corporations Act.
In summary, the third to fifth defendants submit that the application should be dismissed with costs for the following reasons: that the liquidators have not agreed to resign; there is no evidence that the liquidators have failed to carry out their duties independently or are affected by a conflict of interest; it is contrary to principle to appoint a liquidator nominated by a creditor (i.e., Fitz Jersey) in circumstances where a statement has been made that that creditor is only prepared to fund a particular liquidator, and that to do so would be to abdicate the Court's responsibility to select an appropriate liquidator; and that it would not be for the benefit of the liquidation, and the need for impartiality in the winding-up, to accede to the application (and to do so would provide Fitz Jersey with an opportunity to "manipulate" the liquidation of the Company). They say that their concerns are magnified by the fact that Fitz Jersey has failed to respond to the third to fifth defendants' proposal that an "entirely independent" liquidator be appointed. They argue that: a liquidator should not be easily removed; that there is no utility in granting the application given the terms of the funding agreement (pointing out that, unlike the decision in Ambient Advertising, there is no evidence that Mr Gleeson has seen, let alone agreed to, the terms of the funding agreement and that, in any event, no reasonably prudent liquidator would enter into the funding agreement. (Pausing there, the complaint as to lack of utility because Mr Gleeson has not seen or agreed to the terms of the draft funding agreement ultimately seemed no more than a complaint based on the assertion by the third to fifth defendants that no reasonably prudent liquidator would agree to those terms - see the debate at T 40 in this regard.)
It is submitted that, given the "unexplained inconsistent" positions taken by Fitz Jersey concerning the settlement on the one hand, by which it claims it agreed to pay about $22.5 million on account of variations, and the claims made in the Technology and Construction List Proceedings, on the other, it is likely that if Mr Gleeson is to conduct any function conferred upon him impartially and in the interest of the liquidation as a whole he (or any other liquidator) will wish publicly to examine officers of Fitz Jersey.
Further, it is submitted that there is no utility in granting the application because the Court is unlikely to approve the funding agreement pursuant to s 477(2B), even if Mr Gleeson is prepared to execute the funding agreement, for the reason (already adverted to) that there is doubt as to the prudence of the terms of the funding agreement and a concern as to whether Mr Gleeson will be free to act independently. It is submitted that if Mr Gleeson is appointed "there is a reasonable chance that a meeting of creditors will be convened" pursuant to s 75-15 of the Insolvency Practice Schedule (Corporations) to consider removing him and there would be a reasonable prospect of Mr Gleeson being removed given the resolutions of 18 May 2018 which failed.
As to the appointment of a special purposes liquidator, in addition to the matters noted above, it is submitted that the Originating Process fails at the first hurdle because it does not identify the "special purposes" for which Mr Gleeson (or any other liquidator) is to be appointed. Further, it is submitted that, given the status of the liquidation, it is difficult to see how any function performed by such a liquidator might readily be distinguished from the remaining functions to be performed by the current (general purpose) liquidators. Hence it is said that there is no utility in, and no need for, the appointment of a special purpose liquidator.
Ultimately, though the third to fifth defendants put before the Court consents to act from other potential liquidators, it was submitted that if any liquidator is to be appointed by the Court, he or she should be "entirely independent" and taken from the list of official liquidators maintained by the Court Registry.

Determination

As became only too apparent in the course of argument before me on the present application, there is no real argument against the proposition that the incumbent liquidators should be replaced given the lack of funding available to them. The liquidators have made very clear their position in that regard - that, in their view, it is in the best interests of the creditors (in the present circumstances) for them to be replaced as liquidators. They do not consider the funding proposal put forward by the directors to be satisfactory for the reasons outlined earlier.
The nub of the present dispute, it seems to me, is that Fitz Jersey will not repose trust in anyone put forward as a replacement liquidator by the directors (and related or associated creditors, such as Mr Vartuli's company) and the directors either do not repose trust in Mr Gleeson (or, I would infer, anyone put forward by Fitz Jersey) or are otherwise not prepared to accept a liquidator nominated by Fitz Jersey.
While both sides profess their willingness to co-operate in, or at least an acceptance of the need for, investigation to be carried out in relation to matters concerning them (in the directors' case, of potential claims against them, such as in relation to the declaration and payment of the dividend in February 2017; in the case of Fitz Jersey, in relation to the adjudication of its proof of debt), there is seemingly a difference of opinion as to the order in which those matters should be investigated. The directors maintain, as I understand the correspondence issued on their behalf, that Fitz Jersey's proof of debt should be adjudicated or investigated first, since if it is not accepted then the costs of investigating other matters concerning the company may not be necessary. Fitz Jersey maintains that it is necessary for there to be an investigation of potential third party claims. The incumbent liquidators also appear to accept that there are matters into which investigation would be warranted (and which might provide potential for recoveries) but say they have not been able to carry out those investigations due to a lack of funding. They consider that there is utility in establishing whether there are assets available for distribution to creditors (beyond any costs recoverable pursuant to the Bill of Costs - see [74] and [101] above).
The unwillingness of Fitz Jersey to fund the incumbent liquidators was ultimately not put on the basis of any complaint as to their independence (and there was an express disavowal of any allegation of impropriety on their part). Rather, it is put on the basis of a perception that they have, or may have, been in some way tainted by receipt of advice from Bradbury Legal (which firm is said to have had a conflict of interest at the relevant time) as to the acceptance for voting purposes of Fitz Jersey's proof of debt.
Whether Bradbury Legal was in a position of conflict is not to the point for present purposes. (The third to fourth defendants say it was not, on the basis apparently that the advice from Bradbury Legal was to the effect that the prospect of overturning the garnishee was low and that that advice was proven to be correct by the outcome of the proceedings in that regard - see T 31. However, without reference to the actual advice (which unsurprisingly has not been produced) the scope of the matters it dealt with cannot be determined and the fact that the advice might have proven correct says nothing as to whether there was a conflict of interest at the time it was given.) What is relevant is that there is a not irrational basis on which Fitz Jersey (which has not been privy to whatever advice the incumbent liquidators were in fact given by Bradbury Legal or the communications between them) has a concern that the incumbent liquidators have relied on advice from solicitors who were acting for the directors at the relevant time, bearing in mind that Fitz Jersey's proof of debt relates to matters in respect of which there is an adversarial position between it and the Company (and one of its directors); and this is a matter which it is relevant to take into account (see, for example Iris Diversified).
Particularly in light of the recognition of the incumbent liquidators that their removal would be in the interests of creditors, I consider an order for their removal and replacement by another liquidator is appropriate.
The question then is whether, in light of the stance adopted by Fitz Jersey as to the basis on which it is prepared to provide funding, an order should be made for the appointment of Mr Gleeson or for some other suitably qualified person as the replacement liquidator.
In this regard, it is relevant to note that (despite the implicit suggestion in the third to fifth defendants' submissions that he is not "entirely independent" or "sufficiently distant"), there is no basis for any submission that Mr Gleeson is not an independent liquidator. His DIRRI makes that clear. If it were to be suggested that a willingness by a creditor to fund a liquidator necessarily rendered that liquidator independent, then by the same token none of the proposed liquidators put forward by the third to fifth defendants could be said to be independent.
The suggestion that under the draft funding agreement Mr Gleeson would be required to retain Fitz Jersey's current solicitors seems to have been based on a misreading of the draft agreement and has in any event been met by the undertaking proffered to the Court that Gillis Delaney would not accept such a retainer (see T 22.55).
Nor am I persuaded that the draft funding agreement seeks to fetter the independence of the liquidator by obliging him to make certain decisions as to the conduct of public examinations into the affairs of the Company. Rather, the funding agreement records that Fitz Jersey requested the conduct of such examinations (recital B); and that Fitz Jersey has agreed to pay for the legal costs and remuneration "to conduct the liquidation" including (but not in terms limited to) an investigation and the conduct of public examinations (recital C). In my view the acknowledgement and agreement in draft cl 2.2 that the liquidator will instruct solicitors and counsel to conduct the public examinations and other work specified in the "Scope of Works" should be read as an agreement that legal representatives will be instructed to conduct the public examinations and the other work specified in the event that the liquidator (properly advised no doubt) determines that such public examinations or work should be carried out. Senior Counsel for Fitz Jersey readily accepted that a replacement liquidator would need to consider what other investigations should be made (in particular, investigations into the claim(s) the subject of Fitz Jersey's proof of debt for the purpose of determining whether that proof should be admitted for more than $1).
I do not consider that the terms of the draft funding agreement require Mr Gleeson in any way to relinquish his statutory responsibilities or to kowtow to Fitz Jersey's request to conduct public examinations, as the third to fifth defendants submit. If there were any doubt about that, an amendment to the draft funding agreement could readily remove such a doubt (Senior Counsel for Fitz Jersey informing me that an amendment to provide for the conduct of investigations "which may include" public examinations would be acceptable to his client).
As to the submission that no reasonably prudent liquidator would enter into the funding agreement because it does not provide the liquidator with an indemnity for adverse costs orders or any security for costs order in relation to any proceedings the liquidator might commence after conducting public examinations, it may well be that a reasonably prudent liquidator would require such an indemnity before commencing proceedings but it is not immediately apparent that this would be necessary before the time at which a decision was made to commence such proceedings and, in any event, it would be open to Mr Gleeson to seek amendment to the terms of the draft funding agreement before accepting funding on that basis. If Fitz Jersey is as anxious as the directors seem to consider it is for public examinations to be conducted then one might expect that Fitz Jersey would be prepared to amend the draft funding agreement to make clear its position on such matters.
In any event, the terms of the funding agreement are not being presented for Court approval at this stage and I am not persuaded on the face of the draft agreement that it is the case that no reasonably prudent liquidator would refuse to enter into it. (The incumbent liquidators, while not expressing a view in this regard, have not pointed to any inherent imprudence in the terms of the draft funding agreement as an obstacle to the appointment of Mr Gleeson.)
As to the submission that there is no utility in granting the application because the creditors might simply proceed to resolve at a subsequent meeting of creditors to remove him, that submission seems to me to suffer from the same failing from which submissions based on what might or might not happen at a subsequent meeting generally suffer. There is certainly a basis on which one might infer that some, if not all, of the creditors have concerns that go beyond recovering 100 cents in the dollar (since they have rejected a proposal which would give them just that). Counsel for the third to fifth defendants explained this as being that there might be other commercial interests at play (see T 34.12). That, no doubt, is the basis for Fitz Jersey's suspicion as to the motivation of those creditors. However, it is not necessary here to delve into the underlying motivation of the creditors who voted against Fitz Jersey's DOCA and for the winding up of the Company. The position at this stage is that there are insufficient funds to meet the liquidators' existing costs and expenses, let alone to fund the cost of any investigations by the liquidators, however extensive those investigations might be and whatever their subject matter (and the incumbent liquidators consider it to be in the interests of creditors to ascertain the assets available for distribution, as noted earlier).
The incumbent liquidators have considered the respective funding proposals and have formed the view that the proposals put forward by the directors do not address the present concerns as to funding. They have recommended execution of the Fitz Jersey DOCA as being in the interests of the creditors, from which I can only infer that they do not consider it inevitable that a reasonably prudent liquidator would not be prepared to enter into a draft funding agreement in or substantially to the effect of that proposed. Whether the creditors will approve such an arrangement is not known but I do not consider that the fact that some of the creditors might have their own reasons for voting against arrangements that might give rise to further recoveries (or that might later cause them to seek to remove a replacement liquidator appointed by this Court) should influence the position to be taken at this stage. As to the prospect of the latter, there are other applications that might be made in that event (see s 90-35 of the Insolvency Practice Schedule (Corporations)).
That brings me to the concern raised by Brereton J in the decisions to which I have referred above - namely, as to whether the appointment of the liquidator put forward by Fitz Jersey would effectively abdicate the Court's responsibility to select an appropriate liquidator.
In this regard, I note that there is some disconformity between the evidence from Ms Ann Pin Lim, one of the two directors of Fitz Jersey, and that of Ms Holland. Ms Lim has deposed in her affidavit of 20 July 2018 (at [3]) that she "would not be comfortable with anybody [the directors] proposed to be the liquidator of [the Company]", there having been a falling out between Fitz Jersey and both Company and its directors. The resolutions passed at the meeting of directors of Fitz Jersey on 19 July 2018 (Exhibit A p 37) are consistent with this - in essence to oppose the appointment of any liquidator appointed by the directors (or associated persons or entities) and not to fund the present liquidators (who I interpose to note were put forward as administrators by the directors of the Company) or any liquidator appointed by the directors or associated persons or entities. She does not in terms say, nor did the directors in terms resolve, that Fitz Jersey will only fund Mr Gleeson and no other liquidator. Rather, the resolutions passed by the directors of Fitz Jersey proceed on the assumption that Mr Gleeson will be appointed and go on to resolve to enter into the draft funding agreement with him.
Ms Holland on the other hand deposes in her affidavit affirmed 21 June 2018 at [2] to instructions from Mr Kie Chie Wong (Ms Wong's husband) that Fitz Jersey is prepared to enter into a funding agreement "largely in terms of" the draft funding agreement "but only if" the funding agreement is with Mr Gleeson and he is appointed as liquidator.
There is no explanation as to the disconformity between those two stated positions. All that can be said is that if those were in fact Mr Wong's instructions they pre-date, and are not reflected in or consistent with the terms of, the resolutions passed by the directors on 19 July 2018.
In oral submissions, Senior Counsel for Fitz Jersey informed me that Mr Gleeson had been recommended by a "reliable source" and maintained that he was an appropriate liquidator by reference to the size of his firm (a "second tier" firm) and the likely cost of his services (noting that, by comparison, the proposed liquidators put forward by the directors charge at a larger hourly rate) and his expertise in building or construction matters (see T 45-46). There is no evidence from Fitz Jersey or its lawyers that this was the basis on which Mr Gleeson was selected as the preferred liquidator. However, by reference to what is in evidence (his DIRRI, information as to his charges, and his abridged CV) it can certainly be concluded that he is an appropriate liquidator.
I note this because the passages to which the directors refer in the decisions of Brereton J speak in terms which contrast the choice of a party's preferred liquidator, on the one hand, with the appointment of an impartial or an appropriate liquidator, on the other. I accept the force of the observation by Moore J in Citrix Systems to the effect that proceedings such as these should not become a "vehicle for disgruntled creditors to endeavour to secure the appointment of a preferred liquidator" and Brereton J's concern that the Court should not accede to a party's preference for a particular liquidator "on account of its threat or promise to fund that liquidator but no other". However, I am not persuaded that the thrust of Ms Wong's evidence (coupled with the text of the resolutions passed by the directors of Fitz Jersey) amounts to a threat or promise of that kind. I accept that Ms Holland's affidavit does lend itself to such a construction but, balancing Ms Wong's later evidence (and the later directors' resolutions) against Ms Holland's account of her instructions with Mr Wong (bearing in mind that neither was cross-examined to elucidate the reason for the apparent disconformity) and having regard to the conclusion I have reached that Mr Gleeson would be an impartial, independent and appropriate liquidator, I have concluded that the appointment of Mr Gleeson would not "encourage parties to be selective in their funding of liquidators for an irrelevant reason" (to adopt Brereton J's words in Evcorp); nor, having had regard to all the circumstances (and the view expressed by the incumbent liquidators) do I accept that to make such an appointment involves any abdication of the Court's responsibility to select an appropriate and impartial liquidator.
Since I consider it appropriate to make an order for the replacement of the incumbent liquidators it is not necessary for me to consider the alternative application for the appointment of Mr Gleeson as an additional special purpose liquidator. In that regard, I simply note that there is a difficulty in that the "special purposes" have not been articulated as such and that I otherwise would accept the submission for the incumbent liquidators as to there being no utility in appointing a special purposes liquidator in the circumstances of this case.
I therefore propose to make the orders sought by Fitz Jersey. I emphasise that in reaching such a conclusion I do not make any finding of impropriety on the part of the incumbent liquidators nor would the evidence before me support any such finding.

Orders

For the above reasons, I make the following orders: 1. Pursuant to s 500(2) of the Corporations Act 2001 (Cth), grant leave to the plaintiff to commence and continue with these proceedings. 2. Order that the first and second defendants be removed as liquidators of Atlas Construction Group Pty Limited (in liquidation) and that Mr Bruce Gleeson be appointed as liquidator of the said company in their stead.
I will make directions for the matter to be relisted before the Corporations List Judge for further directions and will make directions for any submissions from the parties as to costs to be dealt with on the papers.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 August 2018

In the matter of Atlas Construction Group Pty Ltd (in liquidation) - Fitz Jersey Pty Limited v Fraser

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