70 As well though, even in situations where an indemnifying creditor did not receive the full amount of its debt, there have been over the years many cases which resulted in an indemnifying creditor receiving less (and sometimes substantially less) than the full amount recovered, e.g. Re Manson; ex parte The Official Assignee (1897) 18 LR (NSW) B&P 45; Re A and M Myerson (1908) 25 WN (NSW) 136; Re M L Ried (1946) 13 ABC 287; Re Bavistock (1946) 14 ABC 30; Re Farrow [1957] St R Qd 452; Re Ivermee; ex parte Official Receiver (1974) 36 FLR 187; Re Webb; ex parte Taylor (1987) 75 ALR 139; Re Kyra Nominees Pty Ltd (in liq) (1987) 11 ACLR 767; Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610; Manettas v Dylcu Pty Ltd (1995) 13 ACLC 1567; Re Jacka Nominees Ltd (in liq) (1996) 14 ACLC 633; Allquip (WA) Pty Ltd (in liq) v Allan (1997) 25 ACSR 765.
71 There are various judicial statements to the effect that allowing an indemnifying creditor 100 percent of the amount recovered will (or should) be rare: Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 297, per Brownie J; Re Russell (in his capacity as official liquidator of Parkston Ltd (in liq)) (2000) 35 ACSR 114 at 126, per Santow J; State Bank of New South Wales and another v Brown (as liq of Parkston Ltd (in liq)) and others (2001) 38 ACSR 715 at 719 [28], 721 [40]-[43], per Spigelman CJ (dissenting); Re Pinnacle Construction Pty Ltd (in liq); re Star [2001] NSWSC 1210 at [14], per Campbell J. Given that a trial judge's role in an application under s.564 is to apply the appropriate test to the facts of the case before him or her, these statements should not be taken (as an over-literal reading of them might suggest) as being a statement of the statistical frequency with which awards of 100 percent of the amount recovered will be made. Rather, they should be taken as a recognition of the very significant evidentiary and persuasive onus which needs to be discharged before an award of 100 percent of the amount recovered will be appropriate.
72 In my view the statutory power should be exercised by applying s.564 directly to the circumstances of each individual case, not by applying Paine J's gloss on the statute concerning how the Court has "generally acted".
Jurisdictional Limit?
73 I have earlier recorded how, as a result of all its purchases, Jarbin has come to be the holder of unsecured debts of face value $2.456m, and of convertible notes of face value $15.063m. In relation to the convertible notes, it is not a creditor entitled in its own right to receive any distribution in the liquidation. Rather, any distribution in the liquidation will be made to the trustee for noteholders, who will in turn distribute to the noteholders, after deduction of any proper expenses. This raises the question of whether there is a jurisdictional limit on Jarbin recovering more than the face value of the unsecured debts of which it is the actual holder, together with such interest as the Corporations Law allows.
74 An argument against the existence of such a limitation is as follows. Section 564 is enlivened when (relevantly) "property … has been protected or preserved by the payment of moneys or the giving of indemnity by creditors". Jarbin is a creditor of the company for $2.456m, and property has been recovered under an indemnity for costs of litigation given by Jarbin, a creditor. That is enough to enliven the power under s.564. (In saying that, it may be relevant that being a creditor for $2.456m by no means constitutes being a creditor in some nominal or token way.) Once the Court's jurisdiction under s.564 has been enlivened, the power under that section should be exercised taking into account considerations of commercial substance and reality, not matters of legal form. In commercial substance and reality, Jarbin is the holder of $17.519m of the indebtedness of Clutha, even though, as a matter of the strict legal analysis which must be applied when deciding whether the Court has jurisdiction, Jarbin is a creditor for only $2.456m.
75 The alternative argument is that each of the cases referred to in para [69] above, where the whole amount recovered was distributed amongst the indemnifying creditors was one where the effect of the indemnifying creditors receiving the whole of the net proceeds of recovery was not to allow the indemnifying creditors to receive, in total, more than the total of the debts which they were owed. Given that the power under s.564 is one to alter the prima facie equality of unsecured creditors within their various classes, and that the structure within which s.564 operates is one of a regime for distribution of the assets of a company in liquidation among those entitled, it is hard to see how a proper exercise of the power under s.564 could ever result in a creditor receiving more than 100% of the debt owed to him, together with such interest as the Corporations Law allows.
76 The conclusion at which I arrive in the balance of these reasons is that Jarbin ought receive less than $2.456m, for reasons not connected with whether there is a jurisdictional limit of the type I am here considering. Hence it is not necessary to decide whether any such jurisdictional limit exists.
Effect of Vendors of Debts and Notes to Jarbin being Treated Differently to Remaining Creditors and Noteholders
77 If the manner of distribution which Jarbin seeks were to be implemented, those former creditors of Clutha, and former noteholders of Clutha, who had sold their rights to Jarbin, would end up receiving a larger dividend than creditors or noteholders who chose to not sell to Jarbin, or were not given the opportunity of selling to Jarbin. I sought submissions on what, if any, effect this sort of unequal treatment ought have. Jarbin submitted that those former creditors and noteholders who had sold their rights to Jarbin are no longer creditors or noteholders, and hence the fact that they end up receiving a larger dividend than continuing creditors and noteholders does not infringe any principles of insolvency. This seems to me to be right. By selling to Jarbin, the vendors have voluntarily chosen to realise their debt, or note, outside the winding up process.
78 However, it has the consequence that the amount which Jarbin has paid, or will in future pay, to the vendors ought not be regarded as a deduction from Jarbin's return for the purpose of calculating what is just as between Jarbin and the other creditors. The amount which Jarbin is obliged to pay to the vendors is its cost of becoming a creditor. Just as the costs incurred by a trade creditor of Clutha, in becoming a creditor of Clutha, are irrelevant to how that trade creditor should be treated in an insolvency by comparison with any other trade creditor, so Jarbin's costs of becoming a creditor are irrelevant in that respect.
79 Another way of making this same point is that, if those creditors whose debts Jarbin purchased had funded the liquidator, on the same basis as Jarbin funded the liquidator, those creditors would be entitled to a certain preferential treatment under s.564. Jarbin ought not be entitled to any greater extent of preference, to take account of its expenses in buying status as a creditor, than those creditors would have had. It follows from this reasoning that if the former creditors and noteholders who have sold to Jarbin were, in the outcome, to receive a smaller dividend than continuing creditors and noteholders, no principle of insolvency would be infringed.
Factors Relevant to Manner of Distribution of Settlement Sum
Costs of Recovery and Administration
80 The costs of recovering the settlement sum, and future costs of administering it, should be paid from the settlement sum in full. It is just that the proper costs of obtaining and administering a fund are payable from that fund: Hypec Electronics Pty Ltd (in liq) v Mead (2003) 202 ALR 688 at 738-740; [2003] NSWSC 934 at [191]-[192]; Re French Caledonia Travel [2003] NSWSC 1008 at [207]-[212]. Thus, payments of each of the types listed at lines 2 to 7 inclusive of para [38] above should be made from the settlement sum.
81 Because the payment for future expenses of Piper Alderman and the liquidator can only be estimated, and because those amounts, whatever they might be, are a proper first charge on the fund, the order ought permit the liquidator to retain not only the $60,000 which was estimated at the time affidavits in this matter were sworn, but whatever amount appears correct at the time the liquidator makes the appropriation. For the purpose of deciding how the remainder of the settlement sum should be distributed, I will assume that that amount is the $60,000 which Mr Coope has estimated.
82 The figure in line 2 of para [38] is, as I have said, one which is net of GST. As GST is charged at the rate of 10 percent, the figure in line 2 is calculated on the basis of the amount of funding, inclusive of GST, being $(871,162 x 110%) = $958,278.20. As explained in para [33] above, nearly $30,000 of that amount has already been paid from the settlement sum. This should be reflected in the order which is made, so that Jarbin does not receive a double payout.
The Position of the Two Small Contributors
83 Mr Chessell and Western Agricultural Co Pty Ltd provided $100 each, in January 2002, (para [28] above) but did not provide any indemnity. Each of those contributors has agreed to a proposal which Mr Coope put to them, that they be paid from the net settlement proceeds a sum of $500 each, and that they prove as normal for their debts in Clutha. I will implement that proposal, but only for two reasons. The first is that, even though being given an advantage of five times the amount which they contributed involves an extraordinarily large percentage profit on their investment, the actual number of dollars involved is extremely small. The second is that they would inevitably have been put to some trouble in coming to the decision to contribute.
Factors Relevant to Jarbin's Share of Net Proceeds
84 According to Mr Coope's calculations at para [38] above, after the payments listed at lines 2 to 7 of para [38] are made, and $1,000 has been distributed to the two small contributors, some $3.55m will remain to be distributed between Jarbin and the other creditors.
85 If the method of distribution for which Jarbin contends were then to be followed, that remaining sum, of $3.55m, would be divided so that Jarbin would receive approximately $3.02m as its preferential distribution, and a further $0.18m in distributions in its capacity as creditor and noteholder, while the remaining creditors and noteholders would receive approximately $0.35m. Another way of putting this is that, out of the total settlement sum of $5.25m, the financier, lawyers and liquidator would receive $4.89m, while the creditors and noteholders other than Jarbin would receive $0.35m. In rough terms, that amounts to the financier, lawyers and liquidator receiving over 93 percent of the settlement sum, while the creditors other than the financier receive a little under 7 percent. This would produce the result that the litigation had largely been run for the benefit of the financiers, lawyers and liquidator, not for the benefit of the creditors other than the financier.
86 When the fees of the lawyers and the liquidator are calculated on a fee-for-service basis, and have been consented to by Jarbin, and are actual costs rather than a share in the net spoils of the action, no reason is shown not to allow them in full. It is the proposal that Jarbin should receive 85 percent of the net recovery, after repayment of all expenses including its own money advanced, and in addition to distributions it receives by virtue of being a creditor and noteholder, which troubles me.
87 It is indisputable that without someone in the position of Jarbin funding the action, there would have been no recovery at all. However, this type of "but for" reasoning cannot be taken too far. It can equally be said that without Clutha, and the liquidator, having the causes of action which they had, there would have been no recovery at all. The causes of action, held for the benefit of the creditors generally, were a necessary causal precondition of the recovery being made, and so was the provision of funding for the litigation. Neither should be regarded as the causally dominant factor.
88 Even though the provision of funding was necessary for the recovery to be made, no evidence was presented about how the share of the net proceeds which Jarbin proposes it should receive compares with the terms on which other litigation funders might have been willing to fund this litigation. There is no evidence of the liquidator having tested the litigation funding market before entering his arrangement with Jarbin. Jarbin's offer of funding of 5 February 2001 (para [19] above was made just before expiry of the limitation period, but the time from Mr Coope's first contact with Mr Cuming in April 1997 ought have been ample to enable that market to be tested.
89 While it is true that the Committee of Creditors refused to agree to the expenditure of one cent of funds in investigating claims like that which ultimately succeeded, there were only four creditors on that Committee. The Committee of Creditors could have been circumvented if the majority of creditors had been in favour of some particular funding proposal. The reason for the funding proposal which Jarbin had developed in September 1998 (para [7] above) not being put to the whole body of creditors does not emerge from the evidence. At the time of that funding proposal, Jarbin was willing to provide funding on the basis that it received 66.66 percent of Net Recoveries. No reason has been presented to the Court why the risk which Jarbin undertook increased in the period from September 1998.
90 While the creditors approved of the liquidator entering into a funding arrangement, by passing a resolution under s.477(2B) of the Corporations Law (para [25]-[26] above) the creditors were not informed what proportion of the net recoveries Jarbin would seek to obtain from the Court.
91 It is hard to place much reliance on the fact that all bar one of the creditors and noteholders failed to object, when told of this application to the Court (para [45]-[46]), when the time allowed for making any objections known was unreasonably short.
92 The size of the investment made by Jarbin is relevant. While its out of pocket investment was around $929,000, as well the terms on which it funded the liquidator (para [13] above) were such that it also had liability to pay the fees of the liquidator, and of Piper Alderman. According to Mr Coope's schedule set out in para [38] above, that extra liability is of the order of $817,000 plus GST. It would, however, not be appropriate to treat this liability, which in the event Jarbin has not had to discharge, as standing on the same footing as money actually paid out. Rather, the prospect that it might have had to pay that $817,000 odd plus GST, if the litigation was unsuccessful (and possibly considerably more if the litigation had not settled at the time it did) was one of the risks which Jarbin undertook.
93 It is a relevant matter that all creditors and noteholders were invited to contribute, and (apart from two token contributions from Mr Chessell and Western Agricultural Co Pty Ltd) that they chose not to do so. The relevance of this is not so much that all creditors had a real opportunity to contribute to the funding of the litigation - it is hard to see how a trustee for noteholders would ever be justified in venturing trust money on such a speculative enterprise, and many of the ordinary trade creditors (who included Camden Council, a newsagency and a courier company) do not seem promising candidates for actually making a contribution. Rather, it is that no one from amongst the class of creditors and noteholders has been arbitrarily excluded from joining in the funding, and that the unwillingness of the other creditors to contribute, except on a token basis, provides some small practical indication of how real the risk was.
Risk Factors
94 Insofar as there was evidence placed before the Court as to the extent of risk which Jarbin perceived, it is that set out in paras [19] and [29] above. This is in effect that the claim was regarded by Jarbin as a strong one with good prospects of success. Even so, I recognise that even strong cases have real risk associated with them.
95 The time at which the extent of the risk undertaken should be assessed is "at the time a commitment is first made to fund that litigation and thereafter throughout the funding period": Re Russell (in his capacity as official liquidator of Parkston Ltd (in liq)) (2000) 35 ACSR 114 at 123; [2000] NSWSC 764 at [30], per Santow J. In the present case, there is no evidence that the perceived risk involved in funding the litigation changed over time.
96 Mr Coope gave evidence, with which the liquidator agreed, that there were a number of risks relating to the litigation in addition to the risk inherent in all litigation. Those risks included:
· The claim was for insolvent trading for the period 1 December 1994 to 14 February 1995, but there was a risk that the defendants would establish a defence of reasonable expectation that Clutha was able to pay its debts as and when payable for part of that period, say December and possibly the first half of January, to allow for the Christmas/New Year period. If that defence was established the effect would have been to reduce the amount claimable against the directors by about $3.5m. The reasons why there was a real risk that such a defence as to part of the period might be established was because:
(a) Clutha raised $30m in equity on 29 November 1994 (being a capital raising underwritten by Macquarie Bank);
(b) Clutha's mines were shut from 25 November to early December 1994 because of difficulties with excessive gas, and then a lightning strike on an extraction fan, and when they re-opened there were restrictions on mining activities, such that a court might have considered that the directors were reasonably entitled to a few weeks to assess the consequences of these matters; and
(c) because Clutha's 30 June 1994 financial statements were given an unqualified audit report on 29 November 1994.
· Interest may not have been awarded for the whole period claimed because proceedings were issued six years after the appointment of the voluntary administrator, on the day before the expiry of the relevant limitation period.
· As against one of the defendants, who was an alternate director, the claim was limited to the last 10 days that Clutha traded because it was in this period only that he acted in his capacity as an alternate director.
· All the directors had claims for relief under s.1318 Corporations Law.
· A large amount of debts to a few of the largest trade creditors of Clutha were arguably incurred by subsidiaries of Clutha which would not then have been recoverable on behalf of Clutha as the parent. This had the potential to reduce the amount of the claim by more than $3.5m.