In the matter of DH International Pty Ltd (in liq) [2017] NSWSC 870

Legal principles

1. The jurisdiction to allow a creditor or member to sue in the name of a company in liquidation was described, by McLelland J, in Aliprandi v Griffith Vintners Pty Ltd (in liq) (1991) 6 ACSR 250, in the following terms at 252: The form in which orders 1 and 2 are expressed is based on a recognition of the power of the court to order that a creditor or contributory of a company in liquidation be authorised to use the company's name as a plaintiff. This is a matter which I discussed in Wenham v General Credits Ltd (16 November 1988, SC(NSW), unreported). Such a procedure is of respectable antiquity and is sanctioned by high authority. Orders of that kind were made in Re Bank of Gibraltar and Malta (1865) LR 1 Ch APP 69; Re Imperial Bank of China India and Japan (1866) LR 1 Ch App 339; Re Dominion Portland Cement Co Ltd (No 2) [1919] NZLR 478 and Lloyd-Owen v Bull (1936) 4 DLR 273 (Privy Council). The legitimacy of the procedure was also recognised in Cape Breton Co v Fenn (1881) 17 Ch D 198 at 207, 208; Ferguson v Wallbridge (1935) 3 DLR 66 at 83 (Privy Council) and Fargro Ltd v Godfroy [1986] 1 WLR 1134 at 1136-8. It was said by Jessel MR in Cape Breton (at 207) to be based on "the same principle on which a man could always have filed a bill in the old Court of Chancery against his trustee to be allowed to use his name to recover the trust property". The proper approach of the court in such an application as this has been described by the Privy Council in Lloyd-Owen at 276 in the following terms: "A judge in winding up is the custodian of the interests of every class affected by the liquidation. It is his duty... to see to it that all assets of the company are brought into the winding up. In authorising proceedings, especially if they may or will involve some drain upon the assets, he must satisfy himself as to their probable success; where... they involve no possible charge on assets, he will nevertheless be careful to see that any action taken in the company's name under his authority is not vexatious or merely oppressive."
2. In Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577; [2008] NSWSC 551 at [34], Barrett J summarised the "three main matters" that the Court will have regard to when asked to exercise its discretion upon an application such as the present: 1. The question whether the proceedings proposed to be pursued have some solid foundation, in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and to present reasonable prospects of success. 2. The attitude of the liquidator to the question whether the proceedings should be pursued. 3. The question whether "practical considerations support the initiation of the proceedings", with particular reference to financial protection of the liquidator and the estate of the company by means of indemnity and, if indicated, security.
3. It has been said in relation to the second of the main matters, that the attitude of the liquidator to the proposed proceedings involves consideration of the liquidator's inability or willingness to enforce the company's rights: Hu v PS Securities Pty Ltd at [37].
4. Of course, the matters identified by Barrett J in Carpenter v Pioneer Park Pty Ltd are not exhaustive. Other matters might be relevant since the grant of leave in the Court's inherent jurisdiction involves the exercise of a discretion having regard to all the circumstances of the case: Re Colorado Products Pty Ltd (in prov liq) at [9].
5. Another point of significance mentioned by Barrett J in Carpenter v Pioneer Park Pty Ltd at [36] is that unlike in a case under s 237 of the Corporations Act where, if all the specified criteria are satisfied, the court must grant leave, in a case such as the present, the court is called upon to exercise general equitable jurisdiction which is discretionary.

Additional background facts

1. DHR is a Chicago-based global executive search firm owned by Mr Hoffmann. Following an approach by Mr Hoffmann to Mr Challis in early 2010, they agreed to set up a jointly owned business for the provision of executive search consulting services in the Australasian market. The company was registered on 4 May 2010 under its former name, DHH Recruiting Pty Ltd and changed its name to DH International Pty Ltd on 26 May 2010.
2. On 20 May 2010, Mr Challis signed a letter dated 18 May 2010 accepting an offer of employment from DHR Asia as "Managing Director, Australia & New Zealand, based in Sydney Australia and board member of DHR International Inc". The employment agreement was terminable by either party giving the other not less than three months' prior written notice. There is a dispute as to the identity of Mr Challis' employer - whether as the defendants contend, his employer was solely DHR Asia, or as Mr Challis contends, his employer was at least also the company.
3. On 24 May 2010, the company and its two shareholders, DHR Australia and HDRN, entered into a shareholders agreement. As at that date, HDRN (of which Mr Challis was the sole director and shareholder until 2012) held 150 shares and DHR Australia (of which Mr Hoffmann was then a director) held 850 shares. A further 173 ordinary shares were later issued, it seems in two tranches, to HDRN. Consequently, HDRN now holds 27.5 percent of the shares in the company.
4. Mr Hoffmann and Mr Brian Thomas were the initial directors of the company from 4 May 2010. Mr Challis was appointed director on 24 June 2010 and Mr Thomas resigned as a director the following day.
5. The company's operations seem to have been relatively successful. By the end of 2011, the company's financial statements recorded that it had accumulated retained earnings of approximately $838,000. Around that time, an issue arose concerning the non-payment of dividends. The shareholders agreement provided that the distribution policy of the company was to "maximise the payment of distributions (including, without limitation, dividends) to shareholders as soon as commercially feasible … with the expectation that the company is to pay distributions of approximately 75 percent of available retained profits": cl 11.
6. After considerable debate between Mr Challis and Mr Hoffmann it was ultimately agreed, in about June 2012, that the company would pay a dividend (in respect of the 2011 financial year) after first paying what Mr Hoffmann described as "overhead fees" of about $88,000 claimed by DHR to be owing by the company for the 2011 year. In July 2012, the company paid a total dividend of $550,000 - HDRN received $151,449.28 and DHR Australia received $398,550.72.
7. On or about 4 September 2012, Mr Hoffmann telephoned Mr Challis and informed him (it seems without prior warning) that he was terminating his employment as managing director without cause. Formal written notification of such termination, giving three months' notice of DHR Asia's intention to terminate Mr Challis' employment, was given by letter dated 5 September 2012 and signed by Mr Hoffmann as chairman of "DHR International". That letter was on the company's letterhead. Mr Challis received that letter on 7 September 2012. Mr Challis was placed on "gardening leave", although he remained the sole Australian resident director of the company.
8. On or about 26 September 2012, Mr Geoffrey Hoffmann, the Chief Operating Officer of DHR, announced in an email to DHR staff that Ms Amanda Bowden had been appointed the new "Managing Director of our Australian & New Zealand operation with immediate effect".
9. Following receipt of certain financial material provided to Mr Challis by the company's lawyers in November 2012, Mr Challis formed the view that DHR was diverting corporate opportunities and profit from the company to entities related to DHR, including DHR Asia. Mr Challis also formed the view that the financial information provided by the company's lawyers for the earlier periods ending on 31 December 2010, 31 December 2011 and 30 September 2012, differed materially from the financial information that had been prepared by the company's external accountants, and/or lodged with the Australian Securities and Investments Commission (ASIC).
10. Mr Challis resigned as a director of the company on 13 November 2012. Later in November, and also in December 2012, Mr Challis caused HDRN to request that the company undertake an audit for the 2011 and 2012 years respectively, in accordance with s 293, Corporations Act. Those requests were ignored by the company.
11. On 4 December 2012, Ms Margaret Dillon was appointed as a director of the company. She later resigned on 24 May 2013 about a month before the company was placed into administration.
12. In about mid-2014, Mr Challis discussed with Mr Vouris the possibility of HDRN and Mr Challis entering into a funding agreement with the liquidators to fund continuing investigations in relation to the company. It was a condition of that funding proposal that an application under s 564, Corporations Act be made to allow Mr Challis and HDRN to access a priority distribution from any recoveries. A further condition of the proposal was that the claims of Mr Challis and HDRN as creditors of the company (for $252,422 and $737,200 respectively) be admitted by the liquidators in full. A meeting of creditors on 19 December 2014 resolved not to approve the proposed funding agreement.
13. In early 2015, the liquidators obtained funding from ASIC to undertake examinations of Ms Dillon and Ms Bowden. Those examinations took place in the Federal Court in September 2015.

Liquidator's report to creditors

1. In his report to creditors dated 14 January 2016, Mr Vouris outlined a new proposal that:

• the company will assign to Mr Challis all of its present and future, rights, title, interest and entitlements arising out of or in connection with the Chose in Action (which was defined in the attached Terms Sheet as including any claim which the company may have against identified officers (David Hoffmann, Geoffrey Hoffmann, Margaret Dillon, Christine Greybe, Cathleen Lloyd, Phillipe Tiraut and Amanda Bowden), among others, and any corporation of which any of the defined officers are or were a current or former director, officer or employee, or any corporation or person that received a payment or benefit from such a corporation or the company;
• as consideration for the assignment, Mr Challis would pay to the liquidators $20,000 upon exchange of the executed assignment documents; and from the net proceeds recovered by Mr Challis in relation to the Chose in Action, Mr Challis would pay the sum of $100,000 for employee entitlements (excluding any claim by Mr Challis); and the sum of $80,000;
• if Mr Challis does not recover any amount from the Chose in Action, or the amount of the recovery was less than the associated legal costs and expenses, then no further amount beyond the initial payment of $20,000 would be paid.

1. The report referred to steps taken by the liquidators to obtain litigation funding. Mr Vouris indicated that given he had not received a proposal from a litigation funder he was not in a position to recommend that course of action.
2. Under the heading "Recommendation", Mr Vouris noted that the proposal from Mr Challis only allowed for a partial distribution to be made to priority creditors should he be successful in recovering sufficient funds from the Chose in Action, and that ordinary unsecured creditors would not receive any distribution. Mr Vouris continued: It is my recommendation that creditors approve the proposal at the upcoming meeting of creditors if funding from a litigation funder is not forthcoming and on the basis of the following: - I am without sufficient funds to pursue any potential claims; - Despite previous requests for funding I have not been provided with any funding from creditors; and - The only party who has shown an interest in funding an action is Mr Challis or parties related to Mr Challis. I will provide creditors with a further update on the status of the litigation funding application at the meeting to be held on 2 February 2016. If a proposal is submitted by a litigation funder prior to the meeting, a comparison of the proposal from Mr Challis and the potential outcome from the litigation funding will be provided. In the absence of any other funding proposals or litigation funding being provided to my office and/or creditors voting against the proposal from Mr Challis at the upcoming meeting, the available actions pursuant to Part 5.7B of the Act would not be pursued and there is unlikely to be any distribution to any class of creditor.
3. On 2 February 2016, subject to certain amendments, creditors of the company unanimously approved the liquidators entering into the deed of assignment with Mr Challis. The amendments included reducing the assignment fee from $20,000 to $10,000 and excluding claims against Ms Bowden from the assignment.
4. On 21 June 2016, the liquidators confirmed in a letter to the solicitors for Mr Challis that: 1. any Net Proceeds recovered by the Assignee pursuant to a Chose in Action (whether or not that Chose in Action is capable of being assigned to the Assignee and including any derivative action brought by the Assignee on behalf of the Assignor) are to be treated in accordance with the provisions set out in clause 4 of the Deed of Assignment; 2. the Assignee has been admitted as a creditor in the liquidation of the Assignor for the amount of $9,936.29; and 3. we are comfortably satisfied that the Assignor and the Liquidators have a valuable indemnity from the Assignee under clause 2.4(b) of the Deed of Assignment and that the Assignee is able to discharge any adverse legal costs order made against the Assignor or the Liquidators arising from any step or action taken by the Assignor or the Liquidators in relation to a Chose in Action. Should it be necessary, we will seek for funds to be held in a trust account as security for costs.

Other proceedings involving Mr Challis

1. One further background matter should be mentioned. In October 2015, DHR commenced a proceeding against Mr Challis for the tort of injurious falsehood, and in November 2015, Mr Hoffmann commenced a proceeding against Mr Challis for the tort of defamation. The subject matter of those proceedings is material critical of Mr Hoffmann, which Mr Challis has since admitted was published by him on an anonymous internet blog that he established in December 2014.

Agreed facts

1. The parties agreed the following facts for the purposes of this application (MFI 1): 1. DH International Pty Ltd (in liq) (DHI) had funds of $26,549.71 as at 14 January 2016. 2. Total proofs of debt of $1,526,830.49 have been submitted. 3. Creditors have approved Liquidators' remuneration of $170,900 exclusive of GST for the period from their appointment on 30 July 2013 to 31 December 2015, and for work from 1 January 2016 onwards up to a capped amount of $40,000 exclusive of GST. 4. Commonwealth Fair Entitlements Guarantee claim in liquidation is $89,368.54. 5. Employee claims (excluding by Amanda Bowden) that have been admitted by liquidators for voting purposes total approximately $27,000. 6. Other creditors admitted in the liquidation include: (a) Office of State Revenue - $15,902.02; (b) GIO workers compensation - $9,205.97; (c) Pacnet Internet - $12,282.91. 7. Wollner Pty Ltd is a company owned by Mr Challis' mother-in-law, Regina Jane Feiler, of which she is the sole director and whose home address of 7/1-3 Conway Ave, Rose Bay is Wollner's principal place of business. 8. The witness to Mr Challis and his wife's signature on the mortgage is Jack Feiler, Mr Challis' father-in-law.

The affidavit evidence

1. Mr Challis swore two affidavits in support of the application. His first affidavit annexed a document-styled "Points of Claim" setting out his claims against the defendants in this proceeding.
2. In his second affidavit, Mr Challis deposed to the background circumstances which have been set out above, his investigation into the affairs of the company, and his dealings with the liquidators and the two proceedings in which he is a defendant.
3. Mr Challis acknowledged in his second affidavit that he had published material on an anonymous internet blog which he established in December 2014. He explained that he decided to publish the blog because of concerns he had in relation to DHR's corporate behaviour. He stated that as a member of the executive search profession, he believed those concerns ought to have been made apparent to third parties who might wish to have commercial dealings with DHR in the future, including potential clients and prospective employees.
4. One of the liquidators, Mr Vouris, also swore two affidavits. In his first affidavit, Mr Vouris referred to his investigation into the affairs of the company, including various reports to creditors, reports lodged by Mr Vouris with ASIC in his capacity as joint and several administrator (pursuant to s 438D of the Corporations Act) on 25 July 2013 and reports lodged in his capacity as joint and several liquidator (pursuant to s 533 of the Corporations Act) on 28 August 2013 and 17 April 2015. Mr Vouris also referred to the public examinations of Ms Dillon and Ms Bowden in September 2015.
5. Mr Vouris deposed that he had reviewed the "Points of Claim" in relation to this proceeding and that, based on the investigations he had conducted into the company's affairs, both as liquidator and previously as administrator, he was of the view that the allegations have merit and that the proceeding should be pursued on behalf of the company.
6. Mr Vouris also deposed that he was "comfortably" satisfied that the company has a valuable indemnity from Mr Challis in relation to the proceeding and that Mr Challis is able to discharge any adverse legal costs order made against the company arising out of this proceeding.
7. In his second affidavit sworn 19 April 2017, Mr Vouris confirmed that a proposal by the solicitors for Mr Challis to provide a bank guarantee in favour of the company in the sum of $70,000 in respect of the "first stage" of the proceeding, assuming the company is joined as a plaintiff, was acceptable to him. This was a reference to a bank guarantee issued by Westpac in favour of the company in the sum of $70,000 dated 18 April 2017, together with a letter from the solicitors for Mr Challis undertaking to the liquidators to deliver to the liquidators the original bank guarantee upon the occurrence of the following events: (1) the company is joined to the proceedings as a plaintiff; (2) an adverse costs order is made against the company in the proceedings, and the quantum of that costs order has been either agreed, fixed by the Court or otherwise assessed and determined on a final basis; (3) the liquidators have issued a written demand on Mr Challis to indemnify the company in relation to the costs order; and (4) Mr Challis has not indemnified the company in relation to the costs order within 28 days of the making of such a demand.
8. Mr Vouris also deposed that if he forms the view as the proceeding progresses that further security is necessary to protect the company's costs exposure in the proceeding, then he will request Mr Challis to provide additional security in favour of the company as and when required.

Cross-examination of Mr Challis and Mr Vouris

1. Counsel for the defendants sought to cross-examine Mr Challis and Mr Vouris on a large number of topics to which objection was taken by counsel for Mr Challis. Some of those topics were ultimately dealt with by way of the agreed facts referred to at [49] above. Cross-examination of Mr Challis was permitted, over the objection, on two topics: his standing as a creditor; and the contention that the proposed derivative action is sought to be brought for a collateral purpose.
2. With respect to Mr Vouris, cross-examination was permitted, again over objection, on two topics: the proof of debt lodged by Mr Challis; and the liquidators' attitude towards bringing the proceeding against the defendants.
3. Insofar as is relevant, the cross-examination of Mr Challis and Mr Vouris is considered below.

The parties' submissions

1. The parties provided written submissions, which were supplemented by oral argument at the hearing. At the conclusion of the hearing, directions were given that Mr Challis provide supplementary submissions addressing two issues: first, any proposed conditions in relation to the provision of security to support Mr Challis' indemnity given to the company; and second, the disposition by the company of any proceeds of a successful derivative action. Mr Challis provided supplementary submissions dated 1 May 2017 and the defendants responded by supplementary submissions dated 8 May 2017.
2. Pursuant to a further direction given on 9 May 2017, Mr Challis provided further submissions dated 15 May 2017 on the issue of the disposition by the company of any proceeds of a successful derivative action. Although not the subject of the Court's direction, the defendants provided (without subsequent objection by Mr Challis) further submissions in response dated 17 May 2017.
3. The parties' supplementary submissions assisted in clarifying two matters.
4. First, in response to the defendants' criticisms of the arrangement recorded in par (1) of the liquidators' 21 June 2016 letter, concerning the disposition by the company of any proceeds of a successful derivative action (set out at [47] above), counsel for Mr Challis foreshadowed an amended proposal, which was later refined in Mr Challis' further submissions dated 15 May 2015.
5. The amended proposal involved an agreement between Mr Challis, the liquidators and the company (in the exercise of the liquidators' powers under s 477(2)(c) of the Corporations Act) for the disposition by the liquidators to Mr Challis of any proceeds of a successful derivative action in the name of the company on the same terms as the deed of assignment. It was accepted that s 477(2B) of the Corporations Act would apply to such an agreement because its terms could be expected to be performed more than three months after entering into such an agreement. This amended proposal is considered below.
6. Second, Mr Challis accepted most of the conditions of security suggested by the defendants (if leave were granted). These conditions are also considered below.

Whether leave to bring a derivative action should be granted?

1. The following issues arise for consideration: 1. Mr Challis' status as a creditor of the company; 2. Whether the proposed claim has a solid foundation and is not vexatious and oppressive; 3. The attitude of the liquidators to the proposed proceeding; 4. Whether there is adequate financial protection of the liquidators and the company; 5. Whether Mr Challis has attempted to divest and encumber his assets with the intention of avoiding the consequences of the proceeding; 6. Whether the proposed agreement between the liquidators, the company and Mr Challis in relation to the disposition of the fruits of any successful derivative action infringes the priorities in s 556 of the Corporations Act, or the pari passu principle in s 555; 7. Whether Mr Challis is prohibited by s 551 of the Corporations Act from entering into the foreshadowed agreement with the liquidators and the company in relation to the fruits of a successful derivative action.

(1) Status of Mr Challis as a creditor

1. The Corporations Regulations 2001 (Cth) provide that the liquidator is entitled to admit a debt or claim without formal proof: r 5.6.47(2). If the liquidator considers that a proof of debt or claim has been wrongly admitted, the liquidator may revoke the decision to admit the proof and reject all of it or amend the decision to admit the proof by increasing or reducing the amount of the admitted debt or claim: r 5.6.55(1). Dividends are only distributed among those creditors whose proofs have been lodged and admitted: r 5.6.67(1).
2. As mentioned, the liquidators admitted Mr Challis' informal proof of debt, in part, for $9,936.26 on or about 21 June 2016. Nonetheless, the defendants submitted that Mr Challis is not a "bona fide" creditor of the company and does not have standing to bring this application.
3. Mr Challis' proof of debt (Ex 5) claimed an amount of $252,421.75 for "remuneration under the employment agreement, including commissions, superannuation, expenses, medical and extras insurance, salary continuance/disability insurance, annual leave and unspent BD budget". ("BD" is a reference to "business development").
4. Mr Vouris said in cross-examination that his staff prepared a schedule in respect of that claim, and asked for further information from Mr Challis before the liquidators made their decision. Mr Vouris accepted that the further information was provided by Atanaskovic Hartnell (on behalf of Mr Challis) in a letter to the liquidators' solicitors dated 23 July 2013. That letter claimed that Mr Challis was entitled to, among others, both reimbursement of expenses and a business development budget. Mr Vouris agreed that his understanding was that Mr Challis had claimed two separate amounts - reimbursement for expenses; and payment of an unspent budget due to him. Mr Vouris accepted that, in reaching the decision to admit Mr Challis as a creditor for $9,936.29, he relied on the work of his staff and that he did not recall seeing the employment letter issued by DHR Asia dated 18 May 2010.
5. In cross-examination, Mr Challis disagreed with the proposition that his employer was DHR Asia. He referred to the PAYG payment summaries and the payroll advices issued to him by the company, which were tendered in evidence (Exhibit 3). He accepted that the payroll advices did not contain any reference to a business development fund. Mr Challis gave evidence that the business development fund was available for use to develop the business, and also for his own personal account (T25, line 18). In re-examination, Mr Challis explained that he personally paid some business development expenses on his own account, such as membership of professional organisations, and would periodically be reimbursed those amounts by the company.

Submissions

1. The defendants contended that the liquidators had admitted Mr Challis' claim for a "business development budget" with no explanation and no apparent proper consideration of the issues involved, and at the behest of Mr Challis' solicitors. The defendants submitted that Mr Challis was employed by DHR Asia; that there was no evidence that Mr Challis was ever employed by the company; that Mr Challis' claim for his "business development budget" (which the liquidators had accepted) only formed part of the terms of his contract with DHR Asia, not the company; and that the terms of the contract with DHR Asia indicated that the business development budget would be used for the development of the company's business, not as additional remuneration for Mr Challis.
2. Counsel for Mr Challis made two responses. First, that Mr Challis had been admitted in the liquidation as a creditor (for $9,936.26) and accordingly, he had a genuine commercial interest in pursuing the claim under s 1317H in the name of the company. It was emphasised that the defendants had not sought to challenge the liquidators' decision to admit, in part, Mr Challis' proof of debt by an appeal under s 1321 of the Corporations Act.
3. Second, that Mr Challis was in fact a creditor of the company in any event. That contention involved two propositions, both of which were disputed by the defendants. One was that Mr Challis was employed by the company, even if he was also employed by DHR Asia. The other was that the amount claimed in the proof of debt for the business development budget was an amount owed to Mr Challis by the company.

Consideration

1. It is convenient first to address Mr Challis' status as a creditor based on the admission of his proof of debt. It should be immediately observed, as counsel for Mr Challis correctly submitted, that it was not put to Mr Vouris in cross-examination that the liquidators had admitted Mr Challis' proof of debt for a wrong purpose, or that the proof of debt was a sham.
2. Nor was it put to Mr Vouris in cross-examination that the employment letter of 18 May 2010 was not provided to his staff that had reviewed Mr Challis' proof and recommended admission, in part, by the liquidators. It may be accepted that on the face of that employment letter, Mr Challis' employer was stated to be DHR Asia. However the financial records of the company are consistent with Mr Challis having been, at least, also employed by the company. These records include (Ex 3):

• PAYG payment summaries in respect of Mr Challis for the years ending 30 June 2012 and 30 June 2013, recording the company as having paid amounts to Mr Challis and withheld tax;
• Payroll documents headed "DHR International Pty Ltd - Payroll Advice" for the months of June, July and August 2012, which record Mr Challis' annual salary, on a monthly basis, as $30,644.25, together with gross and net pay for each of those months and a description of how those amounts were made up, including base hourly sick pay, allowance/medical and extras, salary sacrifice (superannuation deductions), PAYG withholding, holiday leave accrual, superannuation guarantee, holiday pay and income protection reimbursement.

1. Importantly, there is no material in the financial accounts of the company or in the report as to affairs for the company provided by Mr Hoffmann, which suggests that there was an arrangement between the company and DHR Asia that the company paid Mr Challis' entitlements as agent for DHR Asia on the basis that the company would be reimbursed those amounts by DHR Asia.
2. The terms of the employment contract may not be determinative as to the identity of the employer and it is permissible to look beyond the employment contract to decide as a matter of fact who the real employer is and to whom obligations are owed: Sturesteps v McGrath [2010] NSWSC 169 (appeal allowed on other grounds), McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) (2011) 81 NSWLR 690; [2011] NSWCA 315; and Pitcher v Langford (1991) 23 NSWLR 142.
3. In the present case, whatever the employment relationship between Mr Challis and DHR Asia, there was contemporaneous material consistent with Mr Challis also being employed by the company. It has not been shown that the liquidators could not rely upon the review of Mr Challis' proof carried out by the liquidators' staff. Nor has it been shown, as the defendants contended, that the liquidators simply acted at the behest of Mr Challis' solicitors in admitting that proof in part.
4. When deciding to admit or reject a proof of debt, a liquidator acts in a quasi-judicial capacity: Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 338-339 (Brennan and Dawson JJ). This description of the liquidator's function reflects his duty to distribute the assets in his hands or under his control among the persons truly entitled. As Santow J explained in Re Galaxy Media Pty Ltd (recs and apptd) (in liq) (2001) 39 ACSR 483; [2001] NSWSC 917 at [32]: The expression 'judicial function' is to be understood not as imposing the full panoply of a judicial function. Rather, it operates by analogy in requiring the liquidator to do more than merely acting prudently or in good faith.
5. A person aggrieved by any act, omission or decision of a liquidator of a company may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and may make such orders and give such directions as it thinks fit: Corporations Act, s 1321(1)(d).
6. In any appeal under s 1321, the applicant bears the onus to demonstrate that the liquidator was wrong in admitting or rejecting the proof, as the case may be. If that onus is not discharged, the Court will not overturn the liquidator's decision. If the Court is unable to conclude either way whether the proof should be admitted, then the liquidator's decision must stand: Tanning Research Laboratories Pty Ltd v O'Brien at 338-341 (Brennan and Dawson JJ); Westpac Banking Corporation Ltd v Totterdell (1998) 20 WAR 150 at 154 (Ipp J) (Pigeon and White JJ agreeing); Re Galaxy Media at [25], [33]-[34]; Lewis v Nortex Pty Ltd (No 2) [2001] NSWSC 610 at [15] (Young CJ in Eq).
7. In the present case, each of the defendants would be an "aggrieved person" for the purposes of an appeal under s 1321 against the liquidators' decision to admit Mr Challis' proof of debt in part. They each have "a real and direct interest in the decision": Denis v McMahon (1989) 7 ACLC 238, because Mr Challis relies upon his status as an admitted creditor to seek leave to bring a derivative action against the defendants.
8. No attempt was made in the defendant's submissions to explain why, in the absence of a successful challenge to the liquidators' decision by an appeal under s 1321 on which the defendants would bear the onus of proof, the defendants should be permitted to challenge Mr Challis' status as an admitted creditor of the company on the present application.
9. In these circumstances, the defendants' contention that Mr Challis is not a "bona fide" creditor of the company should be rejected. Insofar as that submission seeks to cast doubt upon the propriety of the liquidators' decision, it finds no support in the evidence.
10. Insofar as the submission seeks to challenge the merits of the liquidators' decision, the defendants should not be permitted to raise a collateral attack on the liquidators' decision to admit Mr Challis' proof in part, when a right of appeal against that decision under s 1321 has not been exercised by the defendants.
11. For the purposes of the present application, it should be accepted that Mr Challis is a creditor of the company for the amount of his admitted proof of debt.
12. In view of the above conclusion, it is not necessary to address the additional contention by Mr Challis directed to upholding the merits of the liquidators' decision to admit, in part, his proof of debt for $9,936.26.

(2) Whether the proposed claim has a solid foundation and is not vexatious or oppressive

Submissions

1. Counsel for Mr Challis submitted that the Court ought to be satisfied that the proposed proceeding has a solid foundation and is not vexatious or oppressive. Counsel emphasised two matters.
2. First, that the allegations advanced in the points of claim have not been traversed by the defendants for the purpose of this application, nor in the proceeding generally. It was submitted that the material in the tender bundle (Exhibit 2) contains documents supporting each of the paragraphs of the points of claim. The defendants did not suggest otherwise.
3. Second, that the liquidator, Mr Vouris, had expressed his view that the claims have merit. It may be observed that the liquidator's view was not challenged in cross-examination.
4. The defendants made the following submissions. First, that the proposed proceeding does not exhibit a sufficient degree of merit to give rise to reasonable prospects of success. Second, the proposed pleading in the points of claim is inadequate and is liable to be struck out in its present form. Third, that Mr Challis has a collateral purpose, namely, the furtherance of his personal vendetta against Mr Hoffmann for having dismissed him as managing director of the company in September 2012.

The Points of Claim

1. The case theory advanced in the points of claim can be briefly summarised as follows. Mr Hoffmann was a director of the company. He was obliged to exercise his powers and discharge his duties with a reasonable degree of care and diligence (s 180), in good faith, in the best interests of the corporation and for a proper purpose (s 181), and without improperly using his position to gain an advantage or cause the corporation detriment (s 182). Each of ss 180, 181 and 182 of the Corporations Act are civil penalty provisions: Corporations Act, s 1317E. Further, s 1317H(1) provides that a court may order compensation to be paid for "damage suffered by the corporation" if the person has contravened a civil penalty provision and "damage resulted from the contravention". Damage includes "profits made by any person resulting from the contravention: s 1317H(2).
2. The points of claim focus on three contentions. The first relates to the alleged diversion of corporate opportunities and the utilisation of the company's staff and resources for the benefit of other companies in the DHR group, in particular, DHR Asia.
3. The second relates to the payment of $293,264.77 from the company to DHR on 9 November 2012 and the subsequent agreement by the company, it seems between around January and April 2013, to pay "overhead fees" to DHR for which the company had no liability to pay.
4. The third relates to the conduct of DHR Asia on or around 26 April 2013 in removing chattels and computer equipment belonging to the company with a book value of $170,552.34 and the transport of those goods to a subsidiary of DHR in South Korea.
5. The points of claim asserted that Mr Hoffmann breached his statutory and fiduciary duties to the company by taking the steps, or doing or permitting the matters the subject of the three allegations referred to above.
6. With respect to the accessorial liability of DHR and DHR Asia, the points of claim contend that those entities received the benefit of the diversion of the company's goodwill, chattels and business opportunities as a result of breaches of duty by Mr Hoffmann and that those entities had knowledge of, and by virtue of various matters pleaded, participated in and were knowingly concerned in or a party to Mr Hoffmann's breaches of duty. It is contended that DHR and DHR Asia are liable to the company under the first and second limbs of Barnes v Addy (1874) LR 9 Ch App 244 and pursuant to ss 79 and 1317H of the Corporations Act as persons involved in the contraventions by Mr Hoffman. It is alleged that at all material times, Mr Hoffmann was a director of DHR and DHR Asia.
7. The similarity between third party so-called accessorial liability in equity under Barnes v Addy and statutory accessorial liability was recognised by the Full Court of the Federal Court in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Ltd [2017] FCAFC 74 at [94] (Allsop CJ, Middleton and Davies JJ) (Lifeplan).
8. By s 79 of the Corporations Act, a person is involved in a contravention if, and only if, the person was (relevantly here) knowingly concerned in or a party to the contravention. The requirement of being knowingly concerned in a statutory contravention, such as in s 79(c), requires actual knowledge of the essential facts constituting the contravention: Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65 at 660; Giorgianni v The Queen (1985) 156 CLR 473 [1985] HCA 29 at 506-507; and Pereira v Director of Public Prosecutions (1988) 82 ALR 217 at 220; [1988] HCA 57. See also Lifeplan at [104].
9. Whether actual knowledge exists for the purposes of s 79 will be a question of proof and evidence. In this regard, it has been said that "[i]f circumstances are such as to indicate to an ordinary, decent person that the relevant facts exist, that may be open as an evidential conclusion": Lifeplan at [106].
10. In my view, the documentary material tendered on this application supports the conclusion that the proposed claim has a solid foundation and is not vexatious or oppressive. It is sufficient to refer to the following material.

(a) Diversion of corporate opportunities

1. There is documentary evidence supporting the contention that at least two corporate opportunities were diverted from the company to DHR Asia, shortly after Mr Challis was terminated as managing director.
2. The first concerns a consultancy arrangement entered into between DHR International and Allens by letter dated 30 October 2012, which replaced an earlier arrangement with the company by letter dated 20 August 2012, that had been "cancelled". The 30 October 2012 letter was signed by Ms Bowden as "Managing Director, Australia & New Zealand". As mentioned, Ms Bowden was appointed the Managing Director of "DH International Pty Ltd, DHR International, Inc's Australia & New Zealand Practice" on or about 26 September 2012.
3. Second, there is evidence that DHR Asia entered into an engagement with Wattyl Australia Group by a letter dated 2 November 2012 to recruit a national trade stores manager for Wattyl. Again, that letter was signed by Ms Bowden on behalf of DHR Asia. There is evidence that DHR Asia procured a successful candidate for Wattyl in 2013 and received payment from Wattyl of $92,074.41 for invoices dated from 5 November 2012 to 13 May 2013.

(b) Transfer of $293,264.77

1. There is evidence of a request for the transfer of $293,264.77 from the company to DHR on 9 November 2012, in an email from Ms Cathleen Lloyd of DHR dated 6 November 2012 at 11.21am. (That would appear to be Chicago time). The recipient of that email, Ms Padmini Dixit, acknowledged that request in an email dated 6 November 2012 at 11.33pm, which email was copied to, among others, Ms Bowden and Mr Hoffmann. Ms Dixit observed that the amount requested for transfer differed substantially from her records which she attached "for your perusal". Ms Dixit noted that according to her records as at 30 September 2012 the net amount owing by the company was $12,451.15. Her email continued: Should we make a payment for the request of an amount of $293,264.77, we will not be able to substantiate the transaction and the amount will appear as a loan to DHR International Inc.
2. In a subsequent email from Ms Dixit to Ms Lloyd on 9 November 2012, also copied to Ms Bowden and Mr Hoffmann, Ms Dixit noted that the bank would require the original TT form to be submitted and requested Ms Bowden to re-sign the attached form and submit the original at any Westpac branch.
3. There is an available inference that Mr Hoffman breached his duty by either causing or permitting this transfer to DHR, in circumstances where to Mr Hoffman's knowledge and also to the knowledge of DHR, advice had been given that the transfer could not be justified, at least in an amount greater than $12,451.15.

(c) Conversion of property

1. It seems not to be in dispute that DHR Asia was involved in the transfer of the company's furniture and computer equipment to a subsidiary of DHR in South Korea. The points of claim contend that DHR Asia is liable for the conversion of property of the company.
2. In response to enquiries by the liquidators concerning this transfer of property, the American attorneys representing Mr Hoffmann asserted in a letter dated 9 September 2013, that the company reached agreement with DHR Asia for DHR Korea to purchase the equipment and furniture at a price equal to 40 percent of the book value shown in the company's records. The letter also stated that it was the understanding of the American attorneys that DHR Korea was ready, willing and able to pay the company upon receiving appropriate instructions. At the time of the alleged agreement in about April 2013, Mr Hoffmann was a director of both of the company and DHR Asia.
3. It was not suggested by the defendants that either DHR Asia or DHR Korea has paid the company the alleged "agreed" purchase price for the transfer of the company's property. On any view, property of the company was disposed of by DHR Asia shortly prior to the appointment of the administrators, for which no payment has been made by DHR Asia or any other DHR entity.
4. The defendants did not attempt to address the substance of the allegations in the points of claim. Rather, they pointed to two matters. First, the decision of ASIC not to take any action in response to the liquidators' reports pursuant to Corporations Act, s 533(2). The defendants submitted that the Court should infer from ASIC's decision that the proposed proceeding does not exhibit a sufficient degree of merit as to present reasonable prospects of success. I do not agree.
5. The liquidators' report dated 14 January 2016 (Exhibit 1, p 399) discloses that, following a supplementary report submitted by the liquidators to ASIC, ASIC advised that it did not intend to take any further action into the issues raised in the report. However, the fact that ASIC decided not to take any further action in relation to the issues identified by the liquidators (and there no evidence as to what those issues were), says nothing about the merits of the proposed civil recovery proceedings in the name of the company against the defendants.
6. Second, the defendants referred to the fact that the liquidators had not received any proposals from commercial litigation funders. It was submitted that this "presumably" indicated that such funders considered the prospects of success were not sufficient. Again, I do not agree.
7. There was no evidence of the criteria applied by commercial litigation funders either generally or by those approached by the liquidators in the present case, in making decisions on whether or not to offer litigation funding. No doubt, the prospects of success would be one important criterion.
8. Other relevant factors could be expected to include the likely quantum of any successful claim and whether anticipated legal costs are proportionate to any likely recovery from the perspective of the commercial litigation funder. There is no evidence that the commercial litigation funders approached by the liquidators would ordinarily be prepared to fund litigation involving a claim in an amount which, on the face of the points of claim, would seem to be well less than $1 million.

Whether Points of Claim inadequate

1. While there are aspects of the points of claim which, if the matter were viewed strictly as a pleading, could be better expressed and further particularised, in my view, the thrust of the complaints against the defendants are tolerably clear.
2. Any complaint by the defendants regarding the adequacy of the points of claim or any lack of particulars is best dealt with in the usual way by an appropriate application by the defendants, following the determination of the present application, if leave is granted.

Whether Mr Challis has a collateral purpose

1. In written submissions, the defendants contended that the proposed proceeding was vexatious because it was brought for a collateral purpose. It was submitted that Mr Challis was motivated by his hatred of Mr Hoffmann who he blamed for what he considered to be his unfair dismissal from the company.
2. The defendants further submitted that Mr Challis' "obsession with his vendetta" against Mr Hoffmann was evident from the fact that, although the deed of assignment purported to assign the right to pursue six named individuals, Mr Challis now seeks only to pursue Mr Hoffmann and has ignored Ms Dillon, who was the other director of the company (from 4 December 2014 to 24 May 2016), and Ms Christine Greybe, the other director of DHR Asia. I reject this contention.
3. First, as a general proposition the selection of particular defendants will be influenced by many matters, including forensic and strategic considerations.
4. Second, I accept the evidence of Mr Challis in cross-examination that he has chosen Mr Hoffmann as a defendant because of what he considers to be the breaches of directors' duties set out in the points of claim. I also accept Mr Challis' rejection of the cross-examiner's proposition that the reason he had chosen to pursue only Mr Hoffmann was that he did not have any real desire to see funds recovered, but because he wanted to do damage to Mr Hoffmann.
5. The defendants made a somewhat extravagant submission in writing that since his dismissal in September 2012, Mr Challis has "demonstrated a visceral hatred of Mr Hoffmann, which at times has bordered on an obsessive pursuit of vengeance". In support of this submission, reference was made to Mr Challis' confidential submission to administrators dated 19 July 2013 which set out a number of allegations of breach of duty by Mr Hoffmann, Ms Dillon and Ms Bowden. However, it was not put to Mr Challis in cross-examination that any allegation in that document was motivated by hatred of Mr Hoffmann or a pursuit of vengeance.
6. Next, reference was made by the defendants to the anonymous blog on the internet which the defendants described as a "hate blog". The tender of this blog was objected to by counsel for Mr Challis on the grounds of relevance and was rejected. It is sufficient to note that Mr Challis is defending the injurious falsehood and defamation proceedings brought against him. I proceed upon the basis that Mr Challis published the material on the blog which Mr Hoffmann and DHR have taken to be highly critical of them. That does not establish that the proposed proceeding is being brought for a collateral purpose.

(3) Attitude of the liquidators

1. Mr Vouris' affidavit evidence concerning his attitude to the proposed proceeding has been referred to at [54]-[57] above.
2. In cross-examination, Mr Vouris accepted that he would be content for the company to bring the proceeding, if it were adequately funded to do so. He stated that his firm was not willing to fund the litigation themselves explaining that PKF Lawler "is not in the business to fund legal cases" (T45, lines 45-46). Mr Vouris rejected the proposition that his firm was not willing to fund the proceeding because it did not have sufficient prospects of success to warrant the expenditure. He said that, if the liquidators were put in funds by somebody, he would be prepared to run the proceeding. I accept his evidence.

(4) The financial protection for the liquidators and the company

1. The defendants contended that the security proffered by Mr Challis by way of bank guarantee in favour of the company in the amount of $70,000 for the "first stage" of the proceeding is inadequate because there are no appropriate mechanisms or protections in place to ensure that it can be increased or called on by the liquidators if necessary.
2. Two issues arise. First, the terms upon which the liquidators may resort to the bank guarantee provided to the Company in the amount of $70,000. Second, the mechanisms by which the security may be increased.

Conditions of security

1. The conditions on which the liquidators could access the security was ventilated by the parties in their supplementary submissions. Ultimately, the position reached was as follows.
2. Mr Challis and the liquidators agreed to modify the terms of the arrangement with respect to security (set out at [56] above) as follows: … the liquidators' solicitors are to hold the Bank Guarantee upon a solicitor's undertaking to the plaintiff's solicitors not to release the Bank Guarantee to the liquidators until the following conditions are met: (a) the liquidators have issued a formal written demand to the plaintiff to indemnify the Company in relation to either: (i) a costs order made against the Company in the proceedings, the quantum of which has been either agreed, fixed by the Court or otherwise assessed and determined on a final basis; or (ii) the Company's reasonable costs and expenses pursuant to clause 2.4(a) of the Deed of Assignment or in connection with the derivative action; and (b) the plaintiff has not satisfied such demand within 28 days.
3. The deleted word and underlined words referred to in the previous paragraph reflect suggestions raised by the defendants, which were accepted by Mr Challis as appropriate.
4. The only matter in contention is the reference in par (a)(i) above to costs being "otherwise assessed and determined on a final basis". The defendants submitted that this language created ambiguity.
5. The defendants pointed to the possibility that a determination of a Review Panel costs assessment under Div 5 of Pt 7 of the Legal Profession Uniform Law Application Act 2014 (NSW) (Legal Profession Act) might be appealed by Mr Challis on behalf of the company to the District Court or the Supreme Court under Div 6 of Pt 7 of that Act, but if Mr Challis was unsuccessful in obtaining a suspension of the Review Panel's determination under s 90(1) of the Act, the bank guarantee would arguably not be available to meet the company's immediate obligations to pay the amount of the determined costs. The defendants submitted that the bank guarantee should be available to satisfy any costs order that is "otherwise assessed and payable by the company".
6. Section 90(1) of the Legal Profession Act provides: If an appeal against a decision of a review panel under section 89 or an application for leave under that section in relation to a determination by a costs assessor is pending in the District Court, either the review panel or the District Court may suspend the operation of the determination or the decision.
7. In my view, there is no ambiguity in par (a)(i). Absent a "suspension" of the operation of a decision of a Review Panel, by either the Review Panel or the District Court, the decision of the Review Panel on a costs assessment would be final.

Adequacy of security

1. In my view, it is appropriate in litigation of the size contemplated that Mr Challis provide security to the liquidators in tranches. In this regard, there is no reason to doubt the evidence of Mr Vouris, which I accept, that he will request Mr Challis provide additional security in favour of the Company as and when required.
2. It can be expected that both the liquidators and the defendants will monitor the legal costs of the proceeding and the defendants will request the liquidators to seek additional security once their legal costs exceed the amount of the bank guarantee provided to the company.
3. To guard against the possibility that Mr Challis might fail to provide further security to the company when reasonably requested by the liquidators to do so, it would be appropriate to impose a condition of the grant of leave to bring a derivative action that the defendants have liberty to apply to revoke the grant of leave if Mr Challis fails to provide additional security to the company upon request by the liquidators, acting reasonably.

(5) Whether Mr Challis has attempted to divest and encumber his assets

1. Related to the issue of adequate security, the defendants contended that Mr Challis had attempted to divest and encumber his assets with the intention of avoiding the consequences of an adverse costs order in the proceeding. Two matters were referred to in support of this submission.
2. First, that on 13 November 2012, Mr Challis resigned as a director of HDRN, appointed his mother, Mrs Anna Challis, as HDRN's sole director and secretary and transferred all his shares in HDRN to his mother. The defendants referred to part of Mr Challis' confidential submission to the administrators dated 19 July 2013 where Mr Challis stated that he had done so "to protect the assets of the Challis Family Trust, which includes Anna Challis's grandchildren among its beneficiaries".
3. However, this selective quotation by the defendants omitted the full reasons given by Mr Challis in his confidential submission to administrators. Those reasons were to provide a change of face for HDRN with the hope that Anna Challis, as an individual with no pre-existing relationship with the company or the DHR entities, may be able to negotiate DHR Australia an appropriate resolution of the issues between the parties. That evidence was not challenged.
4. I do not agree that an inference should be drawn that the change of control of HDRN in November 2012 was done with the intention of avoiding the possible consequences of an adverse costs order in the proceeding subsequently commenced by Mr Challis in July 2015.
5. Second, the defendants pointed to a mortgage granted over the family home on 23 December 2015 by Mr Challis and his wife to HDRN and Wollner Pty Limited (Wollner), a company owned by his mother-in-law, Ms Regina Feiler. That mortgage secures monies advanced by HDRN or Wollner under a loan agreement dated on or about 23 December 2015 or otherwise in connection with the mortgage. There is no evidence of whether any amount is presently secured by that mortgage.
6. The defendants submitted that the mortgage was a "device" which allows Mr Challis to structure his financial affairs so that his only real asset is shielded by his family trust and his mother-in-law's company against potential exposure to adverse costs orders in the proceeding. That shield, it was said, allowed Mr Challis to set up "loans" to fund his present litigation and two other proceedings which he is currently engaged in before the Supreme Court. Complaint was made that the repayment of such loans would take priority over any attempt by the defendants to satisfy a judgment debt in their favour from a sale of Mr Challis' only real asset.
7. This submission overlooks that a party is entitled to structure his or her affairs, including borrowing money for the purposes of conducting litigation (assuming that be the purpose of any borrowings in the present case) on terms which include granting security over the party's assets. There is no suggestion, let alone evidence, that the mortgage granted by Mr Challis and his wife is a sham. I reject the defendants' characterisation of the mortgage granted to HDRN and Wollner as a "device" to shield Mr Challis' assets from his creditors, including future creditors.
8. Further and importantly, since any grant of leave to Mr Challis to bring a derivative action in the name of the company should be on terms that Mr Challis provide security to the company in tranches to support his indemnity, the company will be sufficiently protected as to costs for the reasons explained above (see [137] to [139]). As to the costs exposure of the defendants, they may apply for security for costs in the ordinary way. I express no view on whether security for costs should be awarded to the defendants.

(6) Whether proposed new arrangement infringes ss 556 or 555 Corporations Act

1. Counsel for Mr Challis acknowledged in his supplementary submissions dated 1 May 2017 that prima facie, as was pointed out by the defendants' argument at the hearing, the arrangement recorded in the liquidators' letter of 21 June 2016 calls for the distribution of the assets of the company otherwise then in accordance with the statutory priorities in s 556(1) of the Corporations Act. (I would add that the arrangement in that letter also infringes the pari passu principle in s 555 of the Corporations Act.) This is because that arrangement provides for Mr Challis to retain the proceeds of litigation (in excess of $180,000) brought in the name of the company, when there are other potential claims of priority creditors under s 556(1) and the claims of unsecured creditors.
2. Nonetheless, it was submitted by counsel for Mr Challis that the proposed arrangement is within the power of the liquidators pursuant to s 477(2)(c) of the Corporations Act to "sell or otherwise dispose of, in any manner, all or any part of the property of the company" - in this case, the proceeds of the derivative action.
3. Counsel for Mr Challis accepted that such an (amended) arrangement to dispose of the proceeds of the derivative action requires compliance with s 477(2B) of the Corporations Act because it would call for performance of its obligations more than three months after entry into the proposed agreement.
4. Counsel for Mr Challis submitted that it would be appropriate that the grant of leave to bring the proposed derivative proceeding be conditional on Mr Challis filing an affidavit demonstrating that the liquidators had obtained approval under s 477(2B) from either the Court, the committee of inspection, or by resolution of creditors to an agreement with Mr Challis for him to conduct the derivative proceeding on the same terms as those contained in the deed of assignment.
5. Counsel for Mr Challis further submitted that it was anticipated that the liquidators would recommend to creditors that such an agreement is in the best interests of the company for the same reasons that applied in relation to the deed of assignment, namely: that no other funding proposals or options are available, and if the proposed agreement is rejected there will be no return to creditors in respect of any possible derivative action, whereas if approved, and the derivative proceeding is successful, there will be some return for creditors, in particular, the former employees of the company.
6. In their supplementary submissions in response dated 8 May 2017, the defendants reiterated their earlier submission that any proceeds of the derivative action belong to the company, not Mr Challis, and accordingly, must be dealt with by the liquidators in accordance with the requirements of the Corporations Act, in particular, the priority set out in s 556(1).
7. The defendants further submitted that the contention by Mr Challis that the liquidators can choose to dispose of property of the company in any manner, in this case, relevantly the proceeds of any derivative action, using their powers under s 477(2)(c) would subvert the operation of Corporations Act, ss 555 and 556. Reference was made to a Warne v GDK Financial Solutions Pty Ltd (2006) 233 ALR 181 at [67].
8. Mr Challis responded in his further submissions dated 15 May 2017 that the liquidators may agree with Mr Challis to dispose of the net proceeds of the proposed derivative action in accordance with the mechanisms contained in the deed of assignment, provided approval is obtained under s 477(2B) for the disposal of that property of the Company. Reference was made to the following authorities for the proposition that, pursuant to s 477(2)(c) of the Corporations Act, the liquidators have power to assign a share of the proceeds recovered in an action in return for assistance with litigation: Re Movitor (1996) 136 ALR 643 at 653-4; Re Tosich Constructions (1997) 143 ALR 18 at 32-33; Re William Felton Co (1998) 28 ACSR 228 at 234-7; Elfic Ltd v Macks [2003] 2 Qd R 125 at [86] (McMurdo P), at [189] (Davies JA) and [260] (Cullinane J).
9. Counsel for Mr Challis accepted that to come within the power given to liquidators under s 477(2)(c), an arrangement with the company and liquidators should be in the form that provides for the sale or disposition to Mr Challis of the property of the company, relevantly, the proceeds (that is, the fruits) of any successful derivative action.
10. Counsel for Mr Challis outlined the terms of the proposed (new) agreement between Mr Challis, the company and the liquidators as follows: Accordingly, it is submitted that it would be appropriate that a further condition on the granting of leave to bring the proposed derivative proceeding be that the plaintiff provides evidence that he, the Company and the liquidators have entered into an agreement containing in substance the following terms: 1. To the extent that the right to recover proceeds under section 1317H of the Corporations Act 2001 (Cth) remains with the Company, the plaintiff, the Company and the Liquidators of the Company hereby agree that the Company disposes of any such proceeds to the plaintiff. 2. In consideration for the agreement in clause 1 herein, the plaintiff promises to pay from the proceeds (after payment of legal costs and expenses incurred in recovering the proceeds) the sum of $180,000 in accordance with the clause 4 of the Deed of Assignment entered into between the parties on 5 April 2016. 3. The plaintiff agrees to indemnify the Company and the Liquidators for: (a) any fees costs and expenses of the Company and Liquidators in taking any step or action under this agreement; and (b) any adverse legal costs order made against the Company and Liquidators in proceedings to recover the proceeds.
11. Counsel for Mr Challis contended that such an agreement does not offend or circumvent the Corporations Act, s 556(1), as suggested in the defendants' supplementary submissions, because it is the future proceeds of the action that are disposed of at the time of the agreement with Mr Challis in the exercise of the liquidators' powers under s 477(2)(c), and that s 556(1) would only be engaged at the time when the liquidators came to make a distribution of the company's assets.
12. In their further submissions dated 17 May 2017, the defendants correctly accepted the force of Mr Challis' further submissions relying upon s 477(2)(c) for the liquidators' power to dispose of the future proceeds of a derivative action. The defendants also acknowledged that "technically" Mr Challis does not require Court approval of the proposed new agreement pursuant to s 477(2B), and that approval by a resolution of creditors would be sufficient for s 477(2B).
13. The defendants complained however that what is now proposed is that the liquidators obtain approval of the proposed new agreement under s 477(2B) by resolution of creditors, rather than approval by the Court. The defendants suggested that the liquidators might not properly perform their duties in relation to any meeting of creditors convened for the purpose of obtaining approval pursuant to s 477(2B). I reject that suggestion. There is no reason for thinking that the liquidators would not provide creditors with all relevant and material information to consider whether to approve the proposed new agreement.
14. In my view, the new agreement proposed to be entered into between Mr Challis, the liquidators and the company concerning the disposition of the future proceeds of a successful derivative action is within the liquidators' powers under s 477(2)(c) to dispose of property of the company, which includes the fruits of a derivative action.
15. However, since the proposed agreement can be expected to call for performance of its obligations more than three months after the date of the agreement, the liquidators will require approval under s 477(2B). Whether the liquidators seek such approval from the Court or by a resolution of creditors is a matter for the liquidators to decide. The imposition of a condition of the grant of leave as suggested by counsel for Mr Challis in terms set out in [157] above would be appropriate, together with a further condition that the liquidators also obtain approval under s 477(2B) prior to entry into such an agreement.

Discretionary arguments

1. Finally, the defendants submitted that as a matter of discretion the Court should refuse leave. The defendants complained that the proposed arrangement between the liquidators and Mr Challis would give Mr Challis an advantage over other creditors beyond a 100% dividend on his admitted debt of $9,936.29.
2. The defendants drew a comparison between the entitlement of Mr Challis under the deed and the proposed new agreement (see [157] above) and the entitlements of a creditor who enters into a funding arrangement with a liquidator, to obtain a preferential dividend under s 564 of the Corporations Act.
3. Section 564 of the Corporations Act relevantly provides that where property has been recovered under an indemnity for costs of litigation given by certain creditors the Court may make such orders as it deems just, with respect to the distribution of that property with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.
4. The defendants submitted that if the liquidators were funded by Mr Challis to bring the claims the subject of the deed (or the proposed new agreement), and property was recovered by the liquidators on behalf of the company, then Mr Challis would be entitled to a preferential dividend under s 564 of the Corporations Act by reason of having funded the litigation; however the most that Mr Challis could recover for his own benefit would be a return of his outlay for costs and a 100 percent dividend on his proved debt (which has been admitted by the liquidators in the sum of $9,936.26). Reference was made to the remarks of Campbell JA in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 at [83(e)] that: Even when the liquidator is being funded by a creditor, in circumstances where the creditor is entitled to a preferential dividend under s 564 Corporations Act by reason of having funded the litigation, the most that the creditor can recover for its own benefit is a return of its outlay for costs, and a 100 percent dividend on its proved debt. A creditor who funds the litigation in those circumstances is thus doing nothing more than protecting its own legal right to be paid its debt by the company.
5. The context of those remarks was that courts had developed a policy of usually not requiring liquidators to provide security for costs when suing in their own name.
6. Importantly however, Campbell JA continued in Green by explaining at [84]: That background is departed from if the liquidator is being funded by a creditor who is in commercial substance a funder who has taken assignments of debts for a fraction of the face value, as happened in Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 180 FLR 393; (2004) 22 ACLC 550; (2004) 208 ALR 242. It is likewise departed from when the liquidator is being funded by a commercial funder who stands to receive a proportion of the proceeds of the litigation. In those situations, there is not the same reason that there is in the ordinary situation of a liquidator suing to regard the inherent power of the court to order security as not being enlivened.
7. Here as mentioned above, the liquidators report to creditors dated 14 January 2016 made plain that the liquidators are without funds to pursue any potential actions, no creditors have responded to requests for funding, and no proposal from a litigation funder has been received.
8. If the liquidators and Mr Challis enter into the proposed new agreement, the entitlement of Mr Challis to the proceeds of a successful derivative action in the name of the company would arise qua assignee of the fruits of such an action (after paying to the company an amount of up to $180,000), not qua creditor of the company. The comparison drawn by the defendants relying upon s 564 of the Corporations Act is inapt.

(7) Whether breach of s 551 Corporations Act

1. The defendants pointed to the terms of s 551 of the Corporations Act, which provides: (1) A member of a committee of inspection must not, while acting as such a member, except as provided by this Act or with the leave of the Court: (a) make an arrangement for receiving, or accept, from the company or any other person, in connection with the winding up, a gift, remuneration or pecuniary or other consideration or benefit; or (b) directly or indirectly derive any profit or advantage from a transaction, sale or purchase for or on account of the company or any gift, profit or advantage from a creditor; or (c) directly or indirectly become the purchaser of any property of the company. (2) A transaction entered into in contravention of subsection (1) may be set aside by the Court on the application of a creditor or member of the company.
2. As Mr Challis is a member of the committee of inspection, the defendants submitted that leave should not be granted to Mr Challis to bring a derivative action without Mr Challis first obtaining the leave of the Court under s 551, to enter into the proposed new arrangement with the liquidators and the company for the disposition of the proceeds of a derivative action. It was also submitted that absent a grant of leave under s 551, the proposed new arrangement was unlawful.
3. This submission conflates two matters. The subject matter of the present application is an application for leave to bring a derivative action in the name of the company. The prohibition in Corporations Act, s 551 on a member of the committee of inspection entering into a proscribed transaction, including directly or indirectly purchasing any property of the company, is not engaged by such application.
4. However, the proposed new agreement between Mr Challis, the liquidators and the company, that the liquidators dispose of the proceeds of derivative action to Mr Challis in the exercise of their powers under s 477(2)(c) of the Corporations Act (on the same terms as contained in the deed of assignment) would engage the prohibition in s 551(1)(c), if Mr Challis remains a member of the committee of inspection.
5. Accordingly, a grant of leave to Mr Challis to bring a derivative action should be subject to a condition that Mr Challis also obtain the leave of the Court under s 551(1)(c) to enter into the proposed new agreement with the company and the liquidators. That condition assumes that Mr Challis remains a member of the committee of inspection.

Conclusion and orders

1. For the above reasons, I am satisfied that Mr Challis should be granted leave, subject to certain conditions, to bring a derivative claim in the name of the company against the defendants under s 1317H of the Corporations Act in relation to the facts and circumstances referred to in the points of claim.
2. The grant of leave should be subject to the conditions set out in the orders below concerning: formalising the terms of the proposed new agreement between Mr Challis, the liquidators and the company; the approval of such an agreement under s 477(2B) of the Corporations Act; that Mr Challis obtain the leave of the Court under s 551(1) of the Corporations Act to enter into such an agreement; and formalising the conditions of the provision of security by Mr Challis by way of bank guarantee in favour of the company.
3. Accordingly, I make the following orders: 1. Pursuant to s 511 of the Corporations Act 2001 (Cth) and the inherent jurisdiction of the Court, and subject to the conditions stated in (2) below, grant the plaintiff leave and authority to initiate and continue proceedings in the name of DH International Pty Ltd (in liq) (the Company) against the defendants in relation to the facts and circumstances referred to in the draft points of claim annexed to the affidavit of Darren George Challis sworn 4 July 2016. 2. The conditions of the grant of leave referred to in order 1 above are: 1. that the plaintiff file and serve an affidavit deposing that he, the Company and the liquidators of the Company have entered into an agreement containing terms in or substantially to the effect set out in the Schedule below (the Agreement); 2. that the entry by the liquidators of the Company into the Agreement is approved by either the Court or by a resolution of creditors of the company pursuant to s 477(2B) of the Corporations Act; 3. that the entry by the plaintiff into the Agreement is approved by the Court pursuant to s 551(1)(c) of the Corporations Act, or alternatively the plaintiff file and serve an affidavit confirming that he is no longer a member of the committee of inspection of the Company; 4. that the plaintiff file and serve an affidavit confirming that the plaintiff and the liquidators of the Company have entered into an agreement with respect to the provision of security by the plaintiff by way of bank guarantee in favour of the Company on the terms set out at [131] of the reasons above; 5. that within 28 days of any request by the liquidators of the Company to provide further security for the plaintiff's obligation to indemnify the Company, the plaintiff shall provide such security by way of bank guarantee in favour of the Company for such amounts as may be requested by the liquidators (acting reasonably), and in the event of default by the plaintiff in complying with this condition, the defendants shall have liberty to apply to revoke the grant of leave the subject of order 1. 1. Upon compliance with each of the conditions specified in order 2(a), (b), (c) and (d), the plaintiff be authorised, at his own expense and risk as to costs, to use the name of the company as co-plaintiff in this proceeding. 2. Direct the plaintiff to file and serve an amended originating process within 14 days of satisfaction of all of the conditions specified in order 2(a), (b), (c) and (d). 3. Grant liberty to apply to the plaintiff and the defendants on 3 days' notice. 4. Note that the proceeding is next listed for directions before the Corporations Registrar on 20 July 2017. SCHEDULE (Terms of proposed agreement between the plaintiff, the Company and the liquidators of the Company) (1) To the extent that the right to recover proceeds under section 1317H of the Corporations Act 2001 (Cth) remains with the Company, the plaintiff, the Company and the liquidators of the Company hereby agree that the Company disposes of any such proceeds to the plaintiff; (2) In consideration for the agreement in (1) above, the plaintiff promises to pay from the proceeds (after payment of legal costs and expenses incurred in recovering the proceeds) the sum of $180,000 in accordance with clause 4 of the Deed of Assignment entered into between the parties on 5 April 2016; (3) The plaintiff agrees to indemnify the Company and the liquidators for: (a) any fees, costs and expenses of the Company and liquidators in taking any step or action under this agreement; and, (b) any adverse legal costs order made against the Company and liquidators in proceedings to recover the proceeds.

Amendments 03 July 2017 - [137] - word "security" added after "Mr Challis provide" 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 July 2017