Solicitors:
Ashurst Australia (applicants)
File Number(s): 2003/83562; 2004/182172
[2]
Judgment (ex tempore)
HIS HONOUR: In each of these applications the plaintiffs are the liquidators of one of the companies in the HIH Group, respectively FAI Films Pty Limited and FAI Films Distribution Pty Limited.
FAI Films is the owner of rights in relation to two children's animated motion pictures respectively titled "Fern Gully: The Last Rain Forest" and "Fern Gully 2: The Magical Rescue". FAI Distribution owns the distribution rights in relation to the Last Rain Forest, which is the more successful of the two pictures. By a distribution and other rights acquisition agreement of 1 February 1991, FAI Distribution granted the distribution rights in respect of that film to 20th Century Fox. Under that agreement, FAI Distribution's capacity to assign its rights is constrained.
The liquidators have for some years been endeavouring to sell the rights held by the two companies in respect of the Fern Gully motion pictures, in order to generate funds - ultimately for the benefit of creditors. In the meantime, FAI Distribution has been receiving royalties and other payments under the distribution agreement with 20th Century Fox.
The evidence establishes that advertisements were placed in a number of industry-relevant media in December 2010, and again in June 2012, to elicit expressions of interest in acquiring the pictures. On each occasion, some interest was expressed at a price in the range of $1.2 million to $1.5 million from one interested party, with the next highest offers being very much lower.
Recently, the liquidators have negotiated a sale to a special purpose United States corporation called GernFully LLC for a price of $1.4 million, less reasonable costs of acquisition capped at $150,000. The result is that at least $1.25 million should be realised for the benefit of the liquidation.
The agreement is contained in two documents: an agreement for sale between FAI Films, FAI Distribution, and GernFully as purchaser; and a deed of assignment of the distribution rights between FAI Distribution, 20th Century Fox, and GernFully. The deed of assignment contains a condition precedent as follows:
2. Except for this clause, this agreement is of no effect and no party has any obligation under this agreement unless and until the liquidators of FAI Distribution obtain the approval of the Supreme Court of New South Wales or the creditors of FAI Distribution to enter into this agreement on behalf of FAI Distribution.
Clause 4 of the deed contains indemnities by FAI Distribution in favour of 20th Century Fox from and against liabilities incurred by Fox as a result of actions or claims against Fox under the distribution agreement relating to any act or omission of FAI Distribution prior to the effective date, any failure by FAI Distribution to comply with the provisions of the distribution agreement prior to the effective date, and any of the representations or warranties given by FAI Distribution under the distribution agreement or the deed being untrue. There are also indemnities by GernFully in favour of Fox in respect of similar liabilities arising after the effective date, and further indemnities in favour of FAI Distribution by GernFully in respect of liabilities arising after the effective date. By clause 4.4, those indemnities are expressed to continue in full force and effect after the expiry or earlier termination of the deed. Otherwise, clause 5 contains a release by Fox of FAI Distribution from all obligations, and from all actions, claims and proceedings that Fox may have against it under or in respect of the distribution agreement, on or after the effective date.
The agreement for sale is subject to a condition precedent as follows:
2A. Except for this clause, this Agreement is of no effect, and no party has any obligation under this Agreement, unless and until the liquidators of FAI Distribution obtain the approval of the Supreme Court of New South Wales or the creditors of FAI Distribution to enter into the Deed of Assignment and Novation on behalf of FAI Distribution.
By clause 5.1, GernFully is expressed to be liable for, and undertakes to assume all obligations and liabilities in relation to, its acts and omissions in respect of the assets due or arising on and from completion. By clause 6.1, GernFully agrees to bear all expenses and outgoings incurred after completion, and is expressed to be entitled to all income derived from the exploitation of the pictures after completion.
Clause 11.1 provides that a party shall not, without prior written approval of the other, disclose the other party's confidential information.
By interlocutory processes filed in each matter on 1 August 2014, the liquidators seek the approval of the court pursuant to (Cth) Corporations Act, s 477(2B), of the agreement and the deed.
Section 477(2B) provides that, except with the approval of the court, of the committee of inspection, or a resolution of creditors, a liquidator must not enter into an agreement on the company's behalf if, inter alia, the term of the agreement may end or obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement is entered into.
The deed contains (in clause 4, to which I have referred), an indemnity of perpetual operation. The agreement contains (in clause 11) an obligation to maintain confidentiality of perpetual operation. In addition, cls 5 and 6 in the agreement at least arguably create indemnities in favour of the FAI companies and an obligation on the FAI companies to account to the purchaser for income that they may receive from the pictures after completion.
It is at least arguable that clause 11 of the agreement for sale, imposing the perpetual obligation of confidentiality, and clause 4 of the deed of assignment imposing the perpetual indemnity, fall within the categories of agreement that would require approval under s 477(2B).
As Barrett J, as his Honour then was, explained in Re HIH Insurance Limited and related matters [2004] NSWSC 5 (at [15]):
Although the two provisions [referring to s 477(2A) and 477(2B)] deal with different aspects of a liquidator's powers, both are concerned to ensure that the court exercises some oversight of the liquidator's actions and in effect confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court's assessment must be made in the light of the purposes for which the liquidator's powers exist. One overriding purpose is to serve "the interests of those concerned in the winding up - here the creditors" (Re Spedley Securities Limited (1992) 9 ACSR 83 per Giles J); the other is to do whatever needs to be done "for the proper realisation of the assets of the company" or to assist its winding up (Re GA Listing and Maintenance Pty Limited (1994) 15 ACSR 308 per Young J).
The principles applied to applications for approval under s 477(2B) were helpfully summarised by Gordon J in Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 (at 26) and by Hasluck J in Re The Bell Group Limited (in liquidation) [2009] WASC 235 (at 57-58). The role of the court is to grant or deny approval to the liquidator's proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances for the liquidation, but satisfies itself that there is no error of law or grounds for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up.
Importantly, the court's approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus the approval completes the liquidator's power to enter into the transaction, but does not amount to the court approving the transaction itself [In the matter of One.Tel Limited [2014] NSWSC 457, at [26]].
Section 477(2B) is concerned with long term agreements which might protract the liquidation and has the effect that the liquidator cannot enter such agreements without the approval of the committee of inspection, the creditors, or of the court. Its rationale is that the interests and wishes of those affected, particularly creditors, should be highly influential in determining whether the liquidator should assume a contractual obligation which would interfere with the expeditious completion of the winding up [Re GA Listing and Maintenance Pty Limited (1994) 15 ACSR 308; Re CIC Insurance Ltd (provisional liquidator appointed) [2001] NSWSC 438; Re HIH Insurance Limited, [15]]. Thus in considering giving approval under s 477(2B), the main consideration is the impact of the agreement on the duration of the liquidation and whether that is in all the circumstances reasonable in the interests of the administration [Re Opel Networks Pty Ltd [2013] NSWSC 1245; In the Matter of One.Tel Limited, [30]].
If clause 5 amounts to an indemnity in favour of the FAI companies, then it is beneficial to them and its subsistence would not in any way protract the winding up. So far as clause 6 is concerned, the subsistence of any obligation to account again does not seem likely to protract the winding up. The obligation of confidentiality is one expected to be seen in an agreement of this kind, and again its subsistence does not appear to have the potential to protract, indefinitely or at all, the winding up. Finally, the indemnity in clause 4 of the deed appears to impose on the FAI companies no obligation that they would not already have under the distribution agreement. Thus, it is unlikely that it will have the practical effect of incurring any additional liability for the companies, and the evidence establishes that it will not protract the winding up as it is anticipated that proofs of debt, which would include any proofs under the indemnity, will be called for later this year.
As it is the potential for clauses of the kind that require approval under 477(2B) unreasonably to protract the winding up that is central to consideration of an application for approval under that section, and as it seems to me that in the context of this already lengthy and complex liquidation these provisions are most unlikely to have that result, the financial benefit of the agreements for creditors vastly outweighs any potential risk of protracting the winding up.
Accordingly, subject to the matter to which I will now come, the agreements should be approved pursuant to s 477(2B).
That remaining matter is the circumstance that the agreements have already been executed by the liquidators and might therefore be taken to have been made in contravention of s 477(2B).
In my view that is not so, because of the conditions precedent to which I have referred. As I observed in One.Tel Limited (at [67]), approval under ss 477(2A) and (2B) should normally be obtained in advance of the exercise of the power in question. However, it is now settled that the Court can give an approval that has retrospective effect. Moreover, where the operation of the relevant agreement is subject to conditions precedent of the kind contained in the sale agreement and the assignment deed, then that pending the satisfaction or waiver of those conditions the substantive agreement with which s 477(2B) is concerned should be regarded as not having occurred [see Re HIH Casualty; Re FAI Traders Insurance Co Pty Ltd [2002] NSWSC 1080; Re HIH Insurance Ltd at 3; In the Matter of One.Tel Limited, at [67]]. Accordingly, for the purposes of s 477(2B), the agreement is taken not yet to have been made.
Further, I have said, even if it had already been made, that would be no obstacle to retrospective approval in the circumstances of this case, where the time which it had taken to find a purchaser for the motion pictures and the benefits of the agreement well justified the liquidators in seizing and securing the opportunity while they could rather than first approaching the Court and risking losing the transaction.
In proceedings 2003/0083562, the Court orders that pursuant to Corporations Act, s 477(2B), the applicants Anthony Gregory McGrath and Christopher John Honey, as liquidators for and on behalf of FAI Films Distribution Pty Ltd (In Liquidation) ACN 003 843 963 ("the company"), have the approval of the Court to enter into:
1. the agreement for sale between the company, FAI Films Pty Ltd (In Liquidation) and GernFully LLC, a copy of which is at tab 6 of exhibit CJH1 of the affidavit of Christopher John Honey sworn 31 July 2014 in proceedings 2003/0083562 ("the affidavit");
2. the deed between the company, Twentieth Century Fox and GernFully LLC, a copy of which is at tab 7 of exhibit CJH1 of the affidavit;
3. Notwithstanding that obligations of a party to the agreement and to the deed may according to the terms of the agreement and of the deed respectively be discharged by performance more than three months after the deed is entered into.
In proceedings 2004/00182172, the Court orders that pursuant to Corporations Act, s 477(2B), the applicants Anthony Gregory McGrath and Christopher John Honey, as liquidators for and on behalf of FAI Films Pty Ltd (In Liquidation) ACN 003 628 337 ("the company"), have the approval of the Court to enter into the agreement for sale between the company, FAI Film Distribution Pty Ltd (In Liquidation) and GernFully LLC, a copy of which is at tab 6 of exhibit CJH1 to the affidavit of Christopher John Honey sworn 31 July 2014 in these proceedings, notwithstanding that obligations of a party to the agreement may according to the terms of the agreement be discharged by performance more than three months after the agreement is entered into.
These orders are to be entered forthwith. The exhibits may be returned.
[3]
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Decision last updated: 04 February 2015