In the matter of DH International Pty Ltd (in liq) (No 2) [2017] NSWSC 871

Background

1. The background to the deed of assignment and the proceeding brought by Mr Challis relying upon the deed is set out in my earlier judgment in this proceeding: In the matter of DH International Pty Ltd (in liq) [2017] NSWSC 870. An understanding of the issues raised by the present application is assisted by a reference to that background.
2. From May 2010 to June 2013, the company operated as an executive search firm providing consulting services to clients seeking to recruit senior executives and non-executive directors in the Australasian market. Mr Challis is a former director of the company. His family company, HDRN Pty Ltd as trustee for the Challis Family Trust (HDRN), holds 27.5 percent of the shares in the company. The balance of the shares in the company is held by DHR Australia LLC (DHR Australia) (registered in Illinois), which is controlled by Mr David Hoffmann through entities owned by him. Mr Hoffmann is a director of the company and a former director of DHR Australia.
3. Mr Vouris and Mr Tonks were appointed administrators of the company under Pt 5.3A of the Corporations Act by Mr Hoffmann as the sole director on 25 June 2013. Subsequently, at a meeting of creditors convened on 30 July 2013, the creditors resolved that the company be wound up. Under s 439C of the Corporations Act, the administrators thereby became the liquidators of the company. A winding up in these circumstances is deemed to be a creditors' voluntary winding up: s 446A(2).
4. The creditors also resolved on 30 July 2013 that a committee of inspection should be appointed. Mr Challis and two other persons, Mr Andrew Valentine and Ms Elizabeth Hay (both employees of the company) were appointed to the committee of inspection. Although for a time a committee of inspection was available only in a compulsory winding up, that facility is now also available in a voluntary winding up: Corporations Act, s 548.

Deed of assignment

1. The proposed deed of assignment was put to the creditors by the liquidators in a report to creditors dated 14 January 2016. Subject to certain amendments made at the meeting of creditors on 2 February 2016, the deed was unanimously approved by the creditors at that meeting.
2. Recital C to the deed provides: The Assignor has agreed, in so far as it is able, to assign the Chose in Action.
3. "Chose in Action" is defined in the Definitions section of the deed to include any claim which the company has against any current or former director, officer, employee or agent, of the company (except Ms Amanda Bowden).
4. By cl 2.1 of the deed, the company assigned and transferred to Mr Challis all and any of its present and future right, title, interest and entitlements, arising out of or in connection with the Chose in Action.
5. Claims against Ms Bowden were excluded from the assignment, following the acceptance by the liquidators (on 2 February 2016) of Ms Bowden's offer of $25,000 in final settlement of any claim against her and her undertaking not to prove in the liquidation as a creditor.
6. By cl 2.4 of the deed, Mr Challis agreed to indemnify the company and the liquidators against any adverse legal costs order made against the company and/or the liquidators arising from his pursuit of the company's claims assigned to him.
7. In consideration of the assignment, Mr Challis agreed by cl 3 of the deed to pay the company an "assignment fee" of $10,000 (including GST) upon exchange of the deed, and an "assignment consideration" of $180,000 from the net proceeds received by Mr Challis from the company's claims assigned to him.
8. By cl 4.2 of the deed, the parties agreed that any amount paid as the assignment consideration will be paid by the liquidators in priority as to the sum of $100,000 (including GST) for employee entitlements owing by the company to its previous employees (excluding any claim from Mr Challis or Ms Bowden). By cl 4.3 it was agreed that if Mr Challis does not recover any sum or the amount recovered is less than the legal costs and expenses, then no further amount beyond the assignment fee of $10,000 is payable by Mr Challis. By cl 4.4 it was agreed that if Mr Challis recovers a sum, after deducting legal costs, less than $180,000 then the assignment consideration payable by Mr Challis is equal to the amount by which the amount recovered exceeds the legal costs and expenses.
9. Clause 10 provides: Severability If any of the provisions of this Deed are invalid or unenforceable the invalidity or unenforceability will not, unless the decision would substantially alter the intention of the Parties hereto expressed or implied, effect the operation construction or interpretation of any provision of this Deed, with the intent that the invalid or unenforceable provisions will be treated for all purposes as severed from this Deed.
10. Relying upon the deed of assignment, Mr Challis commenced this proceeding on 5 July 2016 against Mr Hoffmann, DHR International, Inc (DHR) (registered in Illinois), and DHR International Asia Limited (DHR Asia) (registered in Hong Kong) (together, the defendants).

The evidence

1. Mr Challis deposed in his affidavit of 17 May 2017 (par 8) that during the course of negotiations leading to execution of the deed of assignment and at the time he executed that deed, he was not aware of any prohibition under s 551 of the Corporations Act or otherwise in relation to his entry into that deed whilst he was a member of the committee of inspection. That evidence is unchallenged and I accept it. Counsel for the defendants pointed to a letter sent by the liquidator to members of the committee of inspection dated 31 July 2013 outlining in summary terms the statutory powers and obligations of the committee of inspection. On page 2 of that letter, under the heading "Limitations of Committee Members' Actions", reference was made to the substance of s 551, without expressly mentioning the provision itself, as follows: A member of the Committee of Inspection cannot, without leave of the Court, either directly or indirectly purchase any of the assets of the company in liquidation. Furthermore, he or she cannot derive any profit from any other transaction arising out of the winding up or receive out of the assets any payment for services rendered by him or her to the Liquidator without leave of the Court. These statutory provisions have been strictly enforced by the Courts over the years (Ex DCG-1, p 236).
2. I infer from Mr Challis' evidence that when negotiating the terms of the proposed deed of assignment in late 2015 and early 2016, he did not recall the reference in the liquidators' letter some 2.5 years earlier to limitations on the actions of committee members.
3. Mr Challis also deposed in his affidavit (par 6) that no meeting of the committee of inspection has ever been convened, and the only report he received from the liquidators in his capacity as a committee member was a report dated 3 October 2013. That report provided an update on earlier reports to creditors generally concerning: investigations by the liquidator, demands made against certain persons in respect of insolvent trading, and enquiries by the liquidator in relation to funding from a litigation funder. This evidence, which was objected to by counsel for the defendants, was only relied upon by Mr Challis for the purpose of establishing that the deed of assignment had not been put before the committee of inspection. That may be accepted.

The committee of inspection and s 551, Corporations Act

1. Section 551(1) of the Corporations Act 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. The failure to obtain leave under s 551(1) is procedural and does not render the proscribed transaction void. So much is clear from the terms of s 551(2), which provides that the transaction is voidable (not void), on an application made to the Court by a creditor or member of the company.
3. It is well established that the Court may grant leave nunc pro tunc, if it is satisfied that it is only doing now what it would have done then, that is, if leave had been sought, relevantly, prior to entering into the proscribed transaction: Emanuele v Australian Securities Commission (1997) 188 CLR 114 at 125; [1997] HCA 20. See also Empire (Aust) Nominees Pty Ltd (in liq) v Vince (as liquidator of Empire (Aust) Nominees Pty Ltd (in liq)) (2000) 35 ACSR 167; [2000] VSC 324 at [10] (Warren J) in relation to retrospective sanction of the exercise of powers of a liquidator under s 477(2B) of the then Corporations Law.
4. In McPherson's Law of Company Liquidation (5th Ed., 2006) (at [9.500]), the view is expressed that the prohibition in 551(1) is consistent with the idea that members of committees of inspection are regarded as occupying fiduciary positions relative to the creditors, which prevents them from deriving a profit from their office or from allowing their private interest to conflict with their duty as committee members.
5. Support for that view can be seen in the New Zealand case of Re Standard Insurance Co Ltd (in liq) [1962] NZLR 762, where Henry J remarked at 763 that a committee of inspection is in a fiduciary relationship vis-à-vis those who are entitled to participate in the assets on a winding up, citing Re FT Hawkins & Co Ltd [1952] Ch 881 at 884. See also Re Graziers Butchering Co (1897) 8 QLJ 125 at 128-129; Re Geiger [1915] 1 KB 439 at 447 and Re Bulmer [1937] Ch 499 at 502.

The Insolvency Law Reform Act 2016 and the repeal of s 551, Corporations Act

1. Brief mention should be made at this point concerning the effect of the Insolvency Law Reform Act 2016 (Cth) on s 551 of the Corporations Act. Item 178, Pt 2, Sch 2 of the Insolvency Law Reform Act repeals the Division which includes s 551 of the Corporations Act (Div 5, Part 5.6, Ch 5, Corporations Act). In place of s 551 is enacted ss 80-55 and 80-60, Sch 2, Corporations Act. Those sections maintain the prohibition on a member of the committee of inspection deriving profit or advantage from the company or becoming a purchaser of its property without leave of the Court. Both sections also relax the prohibition if the creditors resolve to do so: ss 80-55(3), 80-60(3).
2. Counsel for Mr Challis submitted that the commencement date of the relevant provisions of the Insolvency Law Reform Act was 1 March 2017 and that s 551 had been repealed by force of that Act. Nevertheless, counsel for Mr Challis accepted that the repeal of s 551 did not affect the operation of that prohibition at the time that Mr Challis entered into the deed of assignment (on 5 April 2016). The latter may be accepted, but not the former submission.
3. That submission overlooked the effect of the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth) (the 2016 Regulation), which deferred the commencement of the relevant amendments introduced by the Insolvency Law Reform Act.
4. Specifically, reg 10.25.02(3)(i) of the 2016 Regulation defers the commencement of Item 178, Pt 2, Sch 2 of the Insolvency Law Reform Act, and therefore the repeal of s 551, until 1 September 2017. Consistently with reg 10.25.02(3)(i), the references to the "commencement day" in the transitional provisions in Div 3, Pt 10.25, Corporations Act, relevantly ss 1607 and 1614 of the Corporations Act (relating to committees of inspection), are affected by reg 10.25.01(1), which provides: (1) For the purposes of subsection 1634(1) of the Act, Part 10.25 of Chapter 10 of the Act applies as if the references in Divisions 3 and 5 of that Part to the commencement day were a reference to 1 September 2017.
5. The combined effect of the provisions in the 2016 Regulation mentioned above is that s 551 of the Corporations Act continues to apply to members of the committee of inspection until 1 September 2017.

Argument in favour of grant of leave

1. Counsel for Mr Challis submitted that four factors support the grant of leave in the present case.
2. First and importantly, the transaction has the support of the creditors who unanimously voted in favour of the resolution at the creditors' meeting on 2 February 2016. I accept that is a weighty consideration in favour of leave.
3. Second, the committee of inspection did not consider the transaction. Accordingly, Mr Challis' position on the committee of inspection is wholly incidental to his entry into the transaction. That also may be accepted.
4. Third, the transaction has the support of the liquidators who recommended the deed of assignment for approval by creditors on the basis that no other offers had been received for the purchase of the company's claims, if any, against the defendants, among others, and no other litigation funding options were available. Again, that is a weighty consideration.
5. Fourth, there is nothing which suggests that the consideration offered by Mr Challis for the assignment, and accepted by the liquidators with the approval of the creditors, is anything other than "proper consideration", and it was in the wider interests of creditors to accept the proposal.
6. The last submission was controversial. It is considered below in the context of the competing contention of counsel for the defendants that the transaction is a "bad deal" for creditors.

Argument against grant of leave

1. Counsel for the defendants raised various objections to the grant of leave, one substantive and the other discretionary considerations.

Whether the claim under s 1317H is capable of assignment

1. Relying upon the proposition that the statutory claim under s 1317H of the Corporations Act is incapable of assignment, the defendants contended that the Court should not approve something that is legally invalid, which, it was submitted, it would do, if leave were granted under s551(1) for Mr Challis to enter into the deed. Reference was made to the considerations relevant to an application under Corporations Act, s 477(2B), to approve a liquidator entering into a contract for a term longer than three months: see generally, In the matter of Golden Sands Hospitality Pty Ltd (in liq) (No 2) [2017] NSWSC 450 at [18] and the cases there cited. The defendants submitted that leave should be refused under s 551 if there is some substantial ground for doubting the prudence of the liquidators' proposal.
2. Contrary to the submissions of the defendants, I do not consider that it is necessary to determine on the present application whether a claim under s 1317H is capable of assignment.
3. First, the effect of a grant of leave under s 551(1) is to sanction a committee member entering into a transaction with the company which is otherwise proscribed because of his or her position as a committee member. The grant of leave says nothing about the legal validity or effectiveness of the transaction to which the committee member is or intends to become a party.
4. Second, as counsel for Mr Challis correctly pointed out, the possibility of invalidity in the purported assignment of the claim under s 1317H can only operate to the advantage of the company and to the disadvantage of Mr Challis, who might have got less than he bargained for under the deed. The consequence of invalidity would be that the claim under s 1317H remains with the company.
5. Third, for the reasons given below, even if the claim under s 1317H is incapable of assignment, this would not be an impediment to the absolute nature of the assignment of the other causes of action under the deed.
6. It follows that I reject the defendants' contention that there is some substantial ground for doubting the prudence of the liquidators' proposal.

Whether the assignment of other causes of action is ineffective if the claim under s 1317H is not assignable

1. The defendants submitted that if the claim under s 1317H of the Corporations Act is not capable of assignment then the deed is ineffective to effect the assignment of any other cause of action within the definition of Chose in Action. No authority was cited in support of this submission. There are at least three difficulties with this argument.
2. First, the wide definition of "Chose in Action" in the deed encompasses the multitude of claims which the company has against the persons or entities answering the description of "Officer" and associated corporations, either under the general law (including claims in debt or for restitution), in equity (including claims for compensation for breach of fiduciary duty) or under statute (such as a claim under s 1317H of the Corporations Act). It is not in dispute that such causes of action are capable of assignment, except the claim under s 1317H. As a matter of construction of the deed, the assignment of the other causes of action which the company has at law, or in equity, or otherwise against the identified class of persons and entities falling within the definition of "Chose in Action" is not dependent on the effectiveness of the purported assignment of the statutory claim under s 1317H.
3. Second, there is authority against the broad proposition for which the defendants contend. Park & Ors v Allied Mortgage Corporation Limited & Ors (1993) ATPR 53,467, involved a claim for misleading and deceptive conduct by four applicants against solicitors who arranged for a loan of moneys (by the applicants) on a mortgage as part of their practice. Davies J accepted that an assignment of all of the first and second applicants' (Mr and Mrs Park) interests in those proceedings to the third applicant (Mrs Regan) was ineffective to assign a right to claim damages under ss 82 and 87 of the Trade Practices Act 1974 (Cth), while noting (at 53,469) that: The assignment has effect, however, insofar as it assigns Mrs Regan all the entitlement of Mr and Mrs Park under the mortgage into which all the applicants had entered as mortgagees.
4. Third, and in any event, if the assignment of the claim under s 1317H is ineffective, then the purported assignment is severable by reason of cl 10 of the deed (the terms of which are set out at [16] above).

Whether the deed of assignment subverts the policy of the Corporations Act that unsecured creditors are to be treated equally

1. The defendants further submitted that the deed of assignment subverted the general policy of Pt 5.6 of the Corporations Act that unsecured creditors are to be treated equally. A comparison was drawn between the entitlement of Mr Challis under the deed 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. Related to this was the submission that the proposed distribution of any net proceeds of litigation under the deed is unjust and inequitable.
2. 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.
3. The defendants submitted that if the liquidators were funded by Mr Challis to bring the claims the subject of the deed, 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).
4. In support of this analysis, reference was made to Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 where Campbell JA stated at [83(e)], in the context of courts having developed a policy of usually not requiring liquidators to provide security for costs when suing in their own name: 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.

Other matters

1. In written submissions, the defendants contended that there is serious doubt as to the propriety of Mr Vouris' conduct as liquidator, in concert with Mr Challis, at the meeting of creditors held on 2 February 2016 for the purpose of approving the deed of assignment. That contention was not mentioned in oral argument and may be taken to have been abandoned. Any contention that Mr Vouris had acted improperly could not have been advanced without calling Mr Vouris to give evidence and putting that proposition squarely to him. That did not occur.

Conclusion and Orders

1. For the above reasons, I am satisfied that it is appropriate to grant leave nunc pro tunc to Mr Challis entering into the deed of assignment dated 5 April 2016, notwithstanding that at the time of entering into the transaction, Mr Challis was a member of the committee of inspection of the company.
2. Accordingly, I make the following order: 1. Pursuant to s 551(1) of the Corporations Act 2001 (Cth), grant leave nunc pro tunc to the plaintiff, Mr Darren Challis, to enter into the deed of assignment dated 5 April 2016 between DH International Pty Ltd (in liq) (the company), Mr John Vouris and Mr Bradley Tonks in their capacity as liquidators of the company and Mr Darren Challis, notwithstanding that Mr Challis was a member of the committee of inspection of the company at the time of entering into that transaction.

Amendments 03 July 2017 - Coversheet Decision: Bradley Thomas amended to Bradley Tonks. [79(1)]: Same amendment. 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