PROFESSIONS AND TRADES – LAWYERS – DUTIES AND LIABILITIES
– SOLICITOR AND CLIENT – OTHER MATTERS – Where
the liquidators
have issued summonses for the public examination of the first and second
Source
Original judgment source is linked above.
Catchwords
PROFESSIONS AND TRADES – LAWYERS – DUTIES AND LIABILITIES– SOLICITOR AND CLIENT – OTHER MATTERS – Wherethe liquidatorshave issued summonses for the public examination of the first and secondrespondents pursuant to ss 596A and 596B of the Corporations Act 2001(Cth) – where, in the absence of funding available otherwise, one ofthe substantial creditors of the company agreed to fundthe public examinations,on the condition that its solicitor be retained to act for the liquidators– where there is a historyof dispute between, in particular, the firstrespondent and the director of the creditor, and corporate entities associatedwith
each of them – where the first and second respondents seek an order
restraining the liquidators from engaging the solicitors
to act in relation to
the public examinations – whether the liquidators’ actual or
apparent independence is prejudiced
in the circumstances – whether the
exceptional power to restrain a solicitor from acting is engaged
Dealer Support Services Pty Ltd v Motor Trades Association of
Australia Ltd [2014] FCA 1065
(2014) 228 FCR 252
Geelong School Supplies Pty Ltd v
Dean [2006] FCA 1404
(2006) 237 ALR 612
Grimwade v Meagher [1995] VicRp 28
[1995] 1 VR
446
In the matter of Bellafountain Pty Ltd [2017] NSWSC
391
Kallinicos v Hunt [2005] NSWSC 1181
(2005) 64 NSWLR 561
Pott v Jones Mitchell
[2004] QSC 48
[2004] 2 Qd R 298
Re Colorado Products Pty Ltd (in liq) [2013]
NSWSC 1613
Re Kala Capital Pty Ltd (in liq) [2012] NSWSC 1073
PROFESSIONS AND TRADES - LAWYERS - DUTIES AND LIABILITIES - SOLICITOR AND CLIENT - OTHER MATTERS - Where the liquidators have issued summonses for the public examination of the first and second respondents pursuant to ss 596A and 596B of the Corporations Act 2001 (Cth) - where, in the absence of funding available otherwise, one of the substantial creditors of the company agreed to fund the public examinations, on the condition that its solicitor be retained to act for the liquidators - where there is a history of dispute between, in particular, the first respondent and the director of the creditor, and corporate entities associated with each of them - where the first and second respondents seek an order restraining the liquidators from engaging the solicitors to act in relation to the public examinations - whether the liquidators' actual or apparent independence is prejudiced in the circumstances - whether the exceptional power to restrain a solicitor from acting is engaged
[1] On 30 October 2020, Mr McLeod and Mr Karageozis (the liquidators) were appointed as liquidators of CGS Constructions (Qld) Pty Ltd (the company). The first respondent, Mr Flint, is the former (sole) director and secretary of the company. The second respondent, Mr Harris, is the former accountant of the company. The liquidators have issued summonses for the public examination of Mr Flint and Mr Harris, as well as the third respondent, Mr McLaughlin. Mr Karageozis explains the purpose of the public examinations as follows:
[17]
"(a) That insufficient records exist, or have been provided to me, which explain the nature and circumstances relating to the Company's transactions, and in particular, the Company's related-party transactions;
[18]
(b) There may exist causes of action for breaches of the Corporations Act 2001 (Cth) by Mr Flint - including the insolvent trading provisions;
(c) There are a number of transactions that may constitute potential voidable transactions which require investigation."[1]
[19]
[2] The liquidators have retained Cornwalls as the solicitors to act for them in relation to the public examinations. Mr Flint has been engaged, personally and through various corporate interests, in a series of disputes with a Mr Cheng, and his various corporate interests. Cornwalls acted for Mr Chen and his interests (including Union Share Pty Ltd, a creditor of the company), in relation to those disputes.
[3] By an amended interlocutory application, filed on 31 January 2022, Mr Flint and Mr Harris seek orders, including:
[20]
(a) by paragraph 1A, that the liquidators be restrained from engaging Cornwalls Lawyers to act in relation to any summons for examination under ss 596A and 596B of the Corporations Act 2001 (Cth) in relation to the examinable affairs of the company; and
>
> (b) by paragraph 1B, that the examination summons served on each of Mr Flint and Mr Harris be set aside.
[21]
[4] Only paragraph 1A of the application was before me for hearing on 22 February 2022. The remainder of the application has been adjourned to a date to be fixed. The third respondent, McLaughlin, has already been examined and was not a party to the application before me.
[22]
[5] On 22 December 2020, the liquidators provided a report to creditors, pursuant to section 70-40 of the Insolvency Practice Rules (Corporations) 2016 (Cth).[2] The report noted, among other things, that:
[23]
(a) multiple related entity loan receivable accounts had been identified, totalling just over $746,000 as at June 2019, but reduced, effectively to nil, as at June and October 2020 (save for one loan to the Chloel Finance Trust, which remained on the company's books but which the director, Mr Flint (also a director of the corporate trustee for Chloel Finance Trust) advised the liquidators was not recoverable);[3]
>
> (b) the liquidators had not been provided with adequate books and records to explain a majority of the company's financial transactions including information relating to the company's debtors, business relationship between the company and multiple related entities and material debit transactions made from the company's bank accounts;[4]
>
> (c) the liquidators had identified several potential voidable transactions in the nature of preference payments and unreasonable director related transactions, and they were liaising with Mr Flint in relation to these;[5]
>
> (d) the liquidators' initial analysis of the company's balance sheets as at 30 June 2019, 30 June 2020 and 30 October 2020 indicated the company may have been trading insolvent from at least 30 June 2020;[6]
>
> (e) to date, the liquidators were aware of unrelated unsecured creditors totalling almost $1.8 million (which, according to the creditor listing attached to the report, included Union Share Pty Ltd claiming to be owed just over $1.3 million);[7] and
>
> (f) at that time, it appeared there would be insufficient funds available to pay a dividend to ordinary unsecured creditors.[8]
[24]
"any further investigations regarding the Company's director's personal asset position and insolvent trading and analysis of the Company's financial position and accrual of creditors will require conducting public examination of the relevant parties. At this juncture, we are currently unfunded in this liquidation to conduct a public examination and conducting same will require external funding from creditors of between $30,000.00 and $50,000.00 (estimate only), including our further fees to conduct the examination as well as the associated legal fees..."
[25]
and invited any creditors interested in funding a public examination of the director and/or pursuing an insolvent trading claim to contact the liquidators.[9]
[26]
[7] The liquidators provided a further report to creditors on 16 April 2021.[10] The report noted that there was no further material update in relation to the company's assets and recoveries, nor in relation to potential claims for voidable transactions or insolvent trading. Under the heading "funding and indemnities", the report stated:
[27]
"Due to minimal funds in the liquidation, litigation funding is required to further the recovery of the potential insolvent trading claim against the director... and better identify and recover potential voidable transaction claims, if applicable...
[28]
Our office has been in contact with the solicitors for Union Share Pty Ltd (a proven creditor in the Liquidation) who have expressed interest in potentially providing litigation funding to conduct a public examination of the director and or associated parties. Such an examination is expected to yield additional information and records (ie evidence of a creditor or directors' knowledge of insolvency, evidence of the director preferentially paying related or unrelated entities over creditors of the Company etc) to assist in pursuing the potential claims described above." [emphasis added]
[29]
[8] The "proposed key terms" of the potential funding were outlined, including an amount for the liquidators' remuneration, up to $80,000 plus GST towards associated legal costs and outlays associated with conducting the proposed public examination and an entitlement for the funder to reimbursement of its funding, plus an additional uplift of up to an additional 30%. The first and second respondents emphasise that there was no mention in this report of a particular solicitor being retained.
[9] The report also stated that without funding the liquidators would be unable to pursue an insolvent trading claim against the director and/or conduct a public examination of the director. The liquidators invited any other creditor who may be potentially interested in providing funding for litigation to contact them.[11]
[10] On 30 April 2021, the solicitors for Mr Flint, Delaneys Lawyers, wrote to the liquidators, referring to the report to creditors dated 22 December 2020 and expressing concern "that it seems apparent that you have admitted a proof of debt from Union Share Pty Ltd... in the sum of $1,300,662.66." The solicitors also referred to the fact that they had previously represented the company in relation to District Court proceedings commenced by Union Share against the company (relating to its claim submitted as part of the liquidation) and stated that "the main contributing factor to the Company becoming insolvent was the very drawn out and expensive litigation costs incurred associated with the litigation with Union Share".[12] Delaneys then set out its views in relation to the merits of that litigation, before expressing the view that "there is no material from which you could draw a reasonable conclusion that Union Share's contingent claim [against the company] has any merit alternatively if you give Union Share the benefit of the doubt, it is such a remote chance that it would be successful and as such should only be attributed a nominal value in the winding up of the Company".[13]
[11] The letter from Delaneys also stated that "[w]hat does seem clear to us is that the offer by Union Share to fund an oral examination is an abuse of process and has been offered with an ulterior motive, that ulterior motive being, the fact that there is an existing dispute between companies associated with the director of Union Share, Mr Cheng Chen and our client". This is further described as a shareholders' dispute, in circumstances where Mr Chen effectively controls 50% of the shares and Mr Flint controls the other 50% of the shares in a company called Maxus International Pty Ltd; and Maxus has a claim for damages against Union Share for a substantial sum of money for breach of contract.
[30]
"Prior to the liquidation, both the Company and Union Share were previously involved in an ongoing and complex dispute largely flowing from a dispute relating to construction works. The dispute then involved litigation and both parties have incurred significant legal costs in respect of same. It is clear both Union Share and the director (and others) have irreconcilable views on the debt claimed."[16]
[31]
[14] The minutes outline the components of the claim by Union Share, comprising $566,723.45 for damages for breach of contract plus costs totalling $733,939.21. The arguments against accepting any part of the claim are set out, as well as the response to those arguments. The point is made that the claims were subject to legal proceedings prior to liquidation, but there has been no final determination of either Union Share's claim or the company's counterclaim. The Chairperson is recorded as rejecting Union Share's claim in so far as it comprises legal costs on the basis that the company does not owe a debt to Union Shares for its costs until an order of the court is made to that effect. The Chairperson deducted the amount of the company's counterclaim, as last described in the pleadings ($37,000) from the amount of Union Share's claim, to arrive at a figure of $529,723.45. The minutes record that:
[32]
Significant material has been provided in connection with the dispute and the claim.
There is sufficient basis for the calculation of Union Share's claim.
The basis for Union Share's claim is not otherwise defective in way that it would not be a provable debt of the Company.
The purported counter claim was less than the amount claimed by Union Share.
The purported counterclaim was not supported by evidence or calculation of the amount of its counterclaim, beyond the $37,000.
The director or his adviser did not provide a concise summary on their views on the claim by Union Share as requested.
From the material provided by the director and his adviser and Delaney Lawyers, it is not readily apparent how the purported counterclaim was calculated or determined.
IPR 75-95(3) states that if there is insufficient evidence, before asking for more information, an external administrator must have regard to the expected dividend rate and the materiality of the issue requiring clarification.
The cost and complexity in further considering the claim is to be weighed against the context on possible outcomes from same at today's meeting.
There is currently no dividend to creditors likely.
Admitting the Union Share claim for an amount will allow them to fully participate and vote at the meeting.
The Chairperson noted creditors interests or rights will not be prejudiced from any outcome at today's meeting as a result,
The Chairperson considers no further examination of Union Share's claim is required at this time for the purposes of today's meeting."[17]
[33]
[15] The minutes record a "question and answer" session at the end of the meeting. Mr Delaney from Delaneys Lawyers is recorded as querying whether the proposed litigation funding deed had any unusual terms and whether the funding deed requires the use of Cornwalls. The Chairperson responded that one of the key terms of the deed was that "no uplift or premium is payable in the event of funds recovered - which is better than standard terms from external litigation funding" and that "engagement of Cornwalls is a condition of the agreement and funding".[18]
[16] Mr Harris is recorded as querying the independence and appropriateness of the requirement for Cornwalls to be used and "advised the director / his related entities being frustrated by Cornwalls and Union Share regarding a profit share agreement for a townhouse development project" (which I take to be a reference to the Maxus issue). The Chairperson asked if the company was a party to that profit share agreement, and Mr Harris replied that it was not, but that "if the relevant related entity received the funds / profit due to it, the director could have used those funds to pay all the outstanding debts of the Company".[19]
[17] The Chairperson is recorded as noting that he had previously raised the concerns regarding Cornwalls' independence and the appropriateness of it acting for the liquidators, and "had received assurances from Cornwalls that there were no such issues". The minutes record that the Chairperson also provided "an undertaking to not enter the proposed funding agreement without first offering a reasonable period for the parties to act as they wish (i.e., court action)".[20]
[18] In relation to voting on the resolution to enter into the funding agreement, the minutes record that there was one vote in favour (that being Union Share's vote, having regard to the value ascribed, of $529,723.45); five votes against (representing a value of $147,230.52) and one who abstained. Of the five who voted against, one was Delaneys Lawyers (Mr Flint's lawyers at the time) and two were entities associated with Mr Harris (Mr Flint's accountant at the time).[21] The Chairperson used his casting vote and as a result, a resolution in the following terms was passed:
[34]
"That for the purpose of Section 477(2B) of the Corporations Act 2001, the Liquidators be authorised to enter into agreements including but not limited to agreements under which security interests arise or are created, litigation funding agreements, deeds (or terms) of settlement and retainer agreements with legal practitioners where the terms of any such agreements may end, or the obligations of a party to the agreement may (according to the terms of the agreement) be discharged by performance more than three (3) months after such agreement is entered into."
[35]
"The Chairperson advised the meeting of the reasons the casting vote was exercised as follows:
[36]
The Chairperson has genuine reasons to believe passing this resolution will better enable him to perform his role as Liquidator.
The Chairperson noted that if the funding agreement was unable to be entered into [incomplete]
The complaints and issues raised to date against the passing [of] the resolution do not directly relate to the resolution or section 477.
For example, no one has objected to the duration of the proposed funding agreement to be executed as being too long.
The complaints raised regarding the independence or appropriateness of Cornwalls to be engaged to assist in conducting the proposed public examination is not relevant to section 477.
The complaints raised on the validity of the Union Share's debt again, are not related to this resolution or section 477, and are better addressed outside the meeting.
If the resolution were not passed at the meeting, the only recourse to the Liquidators would [be to] apply to the Court for such approval. The Chairperson considers such an application, if made, would likely succeed and the costs of applying for same would be significant and therefore, not in creditors interest in the liquidation.
Passing the resolution would save costs to the liquidation in further time, remuneration and outlays in having to otherwise apply to Court.
Passing the resolution would not compromise the rights or interests of creditors who are not in favour of the resolution."[22]
[37]
[20] Mr Karageozis says that he did not take advice from any creditor or their lawyers, including Cornwalls, in relation to any proof of debt, although did ask creditors to make submissions. He made his own independent determination regarding each proof of debt. He says he cast his vote in favour of the funding deed as he considered it to be in the interests of the creditors.[23]
[21] On 10 May 2021, Mr Karageozis caused an email to be sent to all creditors, providing a copy of the draft funding deed, under cover of a letter which included the statement that:
[38]
"[w]hilst having approval to enter into the funding agreement, we give note [sic] that we will not do so before Tuesday 25 May 2021. On or after this date we intend to execute the funding deed as we note it is the only offer of funding we have received that will allow us to continue our investigations into the affairs of the Company."
[39]
[22] The letter invited any creditors who have an objection to the liquidators entering into the deed to "apply to the relevant Court and/or provide written notice to us informing us of your reasons for your objection by no later than 24 May 2021".[24]
[23] Mr Harris, as a creditor on his own account, and Wockner Partners, solicitors, on behalf of Harris Group Accountants (of which Mr Harris is a director) and Ash Trust (the trustee of which is Mr Harris) wrote to the liquidators objecting to the appointment of Cornwalls as the lawyers to act for the liquidators.[25] Delaneys Lawyers, who were Mr Flint's lawyers but also a creditor of the company also objected, in their capacity as a creditor. No application to any court was made to prevent the funding deed being entered into.
[24] After giving objecting parties two extra weeks to take action if they wished, Mr Karageozis signed the funding deed on 14 June 2021.[26] The parties to the deed are Union Share Pty Ltd (the funder), the liquidators and the company.
[25] The funding deed includes the following provisions:
[40]
(a) an acknowledgment that nothing in the deed shall be taken to prevent the liquidators acting independently, including by engaging other lawyers or seeking alternative legal and other advice (cl 3.1(c));
>
> (b) agreement by Union Share to pay the Liquidators Fees, defined to mean the professional fees of the liquidators in relation to any one or more of the public examinations, up to $15,000 plus GST and the legal costs in relation to any one or more of the public examinations, up to $80,000 plus GST (cl 4.1);
>
> (c) agreement by the liquidators that they will retain Cornwalls and Mr Turnbull of that firm as the lawyers to act for the liquidators in relation to "each and every Examination", unless there is an "actual conflict" (cl 7.1);
>
> (d) that the liquidator is at liberty to engage other lawyers in relation to the public examinations, but Union Share is not liable to pay their fees, unless it agrees, in writing, to do so (cl 7.2);
>
> (e) Cornwalls and Mr Turnbull are authorised and directed to provide updates, material and conference with either or both the liquidators and Union Share in relation to the conduct of each and every examination (cl 7.3);
>
> (f) a dispute resolution process, in the event a conflict of interest arises (cl 8.1);
>
> (g) an obligation on the part of the liquidators to repay all of the funding to Union Share from the proceeds of any legal proceedings issued by the liquidator or the company (cl 14.1).
[41]
[26] As already noted, the liquidators have served summonses on Mr Flint and Mr Harris. The first and second respondents comment that the liquidators have not issued any summons directed to Mr Chen or Union Share. Given the explanation given by Mr Karageozis in his affidavit as to the purpose of the proposed examinations (see paragraph [1] above), that does not seem surprising. Further, Mr Karageozis says that he has not identified any financial transactions to date between the company and Union Share or Mr Chen that would necessitate a formal e[27]mination.27
[42]
[27] The court has an inherent jurisdiction to ensure the due administration of justice and to protect the integrity of the judicial process and, as part of that jurisdiction, in an appropriate case, to restrain a solicitor from acting in a particular case.[28]
[28] The test to be applied is "whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice required that [the solicitor] be so prevented from acting, at all times giving due weight to the public interest that a litigant should not be deprived of his or her choice of [solicitor] without good cause".[29]
[29] The power to restrain a solicitor from acting is regarded as exceptional and to be exercised with caution.[30]
[30] In the context of this case, the first and second respondents rely upon the statement by Black J in Re Kala Capital Pty Ltd (in liq)[2012] NSWSC 1073 at [29] that it is generally undesirable for a liquidator to engage solicitors who act for a substantial creditor; although his Honour noted this is "not an absolute rule" and, indeed, in that case, the practical utility of that course was accepted.[31]
[31] In the matter of Bellafountain Pty Ltd[2017] NSWSC 391 at [38], Gleeson JA noted that "[b]oth counsel correctly accepted that there is no absolute or universal rule that prevents a liquidator from retaining solicitors who also acted for a creditor. Statements in the authorities as to the undesirability of a liquidator (or administrator) engaging the solicitor for a creditor of the company need to be read in context".[32]
[32] One context in which it has been held that the conclusion that it might be perceived by a reasonable observer that the liquidator has manifested a tendency to favour certain interests at the expense of others can be readily drawn is where a liquidator retains the lawyers for a creditor. As Gleeson JA said, in the case, this is because secured creditors' interests in an administration or liquidation are most likely to be divergent to the interests of unsecured creditors (at [39]). That is not this case.
[43]
[34] The retainer in this case is for the conduct of the public examinations, which are essentially an information-gathering process for the liquidators.[36] On the evidence, it is clear the liquidators had already formed the view that it was necessary to conduct such examinations, before Cornwalls was retained.[37] Given the matters outlined in the reports to creditors, I do not consider it could be inferred the examination of Mr Flint and Mr Harris was sought for an improper purpose.[38] Cornwalls are instructed in respect of the preparation for and conduct of the public examinations only. They are not engaged to conduct any litigation after the public examination. Mr Karageozis says that is a matter he "will consider once all investigations have been completed (including my investigations in relation to the funding creditor - which have not been the subject of any summons as that creditor has co-operated and provided all material sought by me to date)".[39]
[35] The circumstances which are relied upon by the first and second respondents to submit that a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that Cornwalls, and Mr Turnbull, be prevented from acting for the liquidators in relation to the public examinations are:
[44]
(a) that Cornwalls, and Mr Turnbull, acted for Union Share in the District Court proceedings between Union Share and the company, in relation to the debt claimed by Union Share which has been admitted, in part at least, by the liquidators;
>
> (b) the circumstances of an earlier dispute between Mr Chen (the director of Union Share) and Mr Flint in relation to the affairs of Maxus International Pty Ltd, which ultimately lead to Maxus being wound up on the application of Mr Chen; and the fact that Cornwalls acted for Mr Chen in relation to this dispute also; and
>
> (c) the manner in which the funding agreement came to be approved.
[45]
[36] Counsel for the first and second respondents also made reference to the fact of a complaint having been made by Mr Flint to the Legal Services Commission about Mr Turnbull and Cornwalls in relation to those matters.[40] However, I do not place any weight on that fact for the purposes of this application.[41]
[37] The first and second respondents contend "that it might be perceived by a reasonable observer in the circumstances of this case that by engaging Mr Turnbull and Cornwalls to act for them in their examination of, in particular Mr Flint, but also Mr Harris, the liquidators have manifested a tendency to favour certain interests at the expense of others. The evidentiary basis for that belief by the reasonable observer arises principally from the degree of connection between Mr Turnbull and Mr Chen and his associated entities, and those parties' long history of dispute with Mr Flint and his associated entities".[42] They submit that the combined effect of the matters relied upon by the first and second respondents is to give the reasonable observer the impression that the liquidators are "firmly in Union Share's camp" in the course of their examinations of Mr Flint and Mr Harris.[43]
[38] It is clear there is a history of antagonism between the director, Mr Flint, and Mr Chen. However, I am unable to see how the fair-minded, reasonably informed observer would conclude that the solicitor, Mr Turnbull's (and Cornwall's) prior involvement in acting for Mr Chen, compromises the liquidators' "appearance of independence to an unacceptable degree";[44] nor that the fair-minded, and reasonably informed, member of the public would conclude that the proper administration of justice requires that the liquidators be prevented from retaining Cornwalls to act for them in relation to the public examinations, in the circumstances of this case.
[39] The purpose of a public examination is to gather information, which may be of assistance to the liquidators in determining whether there are any avenues open to them to recover something to repay the company's creditors. The process is for the potential benefit of all creditors - not merely the funding creditor. The interest of Union Share, as a creditor, is the same as the interests of the other creditors; not in conflict. No doubt Union Share's preparedness to fund the public examination is because it hopes that information will be gained which will assist it in recovering the debt which it claims to be owed by the company. But that is not inconsistent with the interests of other creditors. It may be inconsistent with Mr Flint's interests; but that is not the point.
[46]
"It does not follow that, because the motive of Macquarie Print in funding the examination is to advance its own interests, the liquidator is seeking to conduct the examination solely in the interests of that company and not in the interests of other creditors or not in the interests of finding out what were the circumstances which led the company into its financial difficulties and liquidation which circumstances might reveal breaches of the Corporations Law."
[47]
[41] In so far as the Maxus issue is concerned, the evidence is that Mr Flint and Mr Chen were directors of Maxus International Pty Ltd until a liquidator, Mr Hussain, was appointed on 15 July 2021. Any claim that Maxus had against Mr Chen or Union Share was resolved in January 2022.[45] The company had no involvement in the project in which Maxus was involved. The only relevance of this, it seems, is the contention that if things had worked out differently, Mr Flint would have had funds from Maxus which he could have used to pay the company's debts (which seems purely speculative) and that it is another source of Mr Flint's antagonism towards Mr Chen (and his lawyers, Cornwalls). In the context of the present application, complaints are made about the circumstances in which Maxus came to be wound up,[46] but it is not suggested the order ought not have been made. Rather, it is submitted that the dispute between Mr Chen and Mr Flint in relation to Maxus "is part of the tapestry by which a reasonable lay observer would come to the conclusion that Mr Turnbull is so enmeshed with Mr Chen's interests, including in relation to disputes with Union Share, that it would cause them to have the necessary apprehension about the independence of the liquidators".[47] I am not persuaded that the fair-minded, reasonably informed observer would form any such conclusion.
[42] In so far as complaint is made about the admission of Union Share's proof of debt, in part, the liquidators' reasons are set out clearly in the minutes, confirmed as accurate by Mr Karageozis in his affidavit. He also confirms he did not act on advice from any creditor, or their lawyers, including Cornwalls, in relation to that.[48] And no step has been taken to challenge that decision.[49] I am not persuaded that there is any basis to call into question the liquidator's decision making process in this regard.
[43] And in relation to the way in which the funding agreement came to be approved, upon careful consideration of the material I am not persuaded that this calls into question the liquidators' independence either. The liquidator, Mr Karageozis, swears to his belief that entering into the funding deed was in the best interests of creditors.[50] That is supported by the fact that, without the funding offered by Union Share, the liquidators would not have been funded otherwise to conduct public examinations to investigate the matters highlighted in the report to creditors. Creditors were given a reasonable opportunity to object, and to take action to prevent the deed being entered into, if they wished to do so.
[37] See the report to creditors dated 22 December 2020, referred to in paragraph [5] above.
[68]
[38] See Re Laurie Cottier Productions Pty Ltd (in liq)(1992) 9 ACSR 513 at 517-518.
[69]
[40] First and second respondents' submissions at [50(c)].
[70]
[41] Reference to this earlier in the first and second respondents' submissions has been struck through (in the amended version handed up at the time of the hearing) (paragraph 39), and so it may be that the inclusion of this at paragraph 50(c) was inadvertent.
[71]
[44] First and second respondents' submissions at [49].
[46] First and second respnodents' submissions at [34]-[38].
[74]
[48] Karageozis (CFI 19) at [62]-[64]; Karageozis (CFI 32) at [20].
[75]
[49] An option which was available: see Selim v McGrath[2003] NSWSC 927; (2003) 177 FLR 85 at [82] and rule 75-100(4) of the Insolvency Practice Rules (Corporations) 2016 (Cth).
[12] The letter alludes to the fact that the funding offer made by Union Share is contingent upon Union Share's solicitors undertaking the legal work on behalf of the liquidators and the company and describes this as "clearly inappropriate due to Union Share's ulterior motives and the very clear and obvious conflict of interest Union Share's solicitors would find themselves in".[15]
[13] On 6 May 2021, a meeting of creditors was held. Mr Karageozis was the Chairperson for the meeting. The matter of Union Share's debt was addressed at this meeting. The minutes record the following in relation to this:
[33] In Re Lewis, White J described the critical question concerning the appropriateness of a liquidator retaining the solicitors who act for a creditor as turning on the prejudice to the liquidator's independence.[34] Ultimately, whether such an arrangement offends the requirement for independence of the liquidator will depend upon the circumstances.[35]
[40] As Waddell CJ in Eq said, in Re Laurie Cottier Productions Pty Ltd (in liq)(1992) 9 ACSR 513 at 517:
[44] There is clearly a practical benefit to enabling the liquidators to retain Cornwalls to act in relation to the public examinations.[51] There was no funding available otherwise for the public examinations. Union Share was the only creditor willing to provide funding for the process. The fact that Union Share required, as a condition of funding the process, that its solicitor be retained, is a matter it was entitled to insist upon. That firm has already undertaken significant work, and the public examination is ready to proceed. It was to be undertaken on 4 February 2022, but was adjourned due to the present application. If new lawyers were required to be retained now, Mr Karageozis estimates there would be an additional cost of $40,000 plus GST, for those new solicitors to get on top of the material. And the fact remains that there is no funding available, other than that offered by Union Share under the terms of the funding deed.
[45] In the absence of any apparent conflict, between the duty owed by the solicitor to the liquidators, and any duty owed to the funding creditor, or any apparent conflict between the interests of particular creditors, the exceptional power to restrain the lawyers from acting for the liquidators is not engaged. As I have said, the circumstances relied upon by the first and second respondents do not, in my view, give rise to any such conflict. The interest of the funding creditor and the liquidator is the same, in terms of investigating claims and potential action that could be taken to provide any return, or increase the potential return, to all creditors.
[46] I accept that the liquidators, as officers of the court, can be assumed to be alert to their responsibilities in terms of maintaining the integrity of their role.[52] Mr Karageozis has expressly addressed this in his affidavit.[53] I am not persuaded that the retainer of Cornwalls, and Mr Turnbull, to act for the liquidators, prejudices the liquidators' apparent or actual independence.
[47] Accordingly, paragraph 1A of the application filed 31 January 2022 is dismissed.
[48] I will hear the parties as to the costs of paragraph 1A of the application and also as to the costs of the application filed on 17 February 2022 (seeking to set aside a subpoena for production issued at the request of the liquidators, which was dealt with in the course of the hearing on 22 February 2022).