Jarbin Pty Limited v Clutha Limited

CITATION : Jarbin Pty Limited v Clutha Limited (in liq) [2004] NSWSC 28 HEARING DATE(S) : 15 December 2003 JUDGMENT DATE : 25 February 2004 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : No significance in vendors of debt and notes receiving higher percentage return on their debt than the dividend declared in the liquidation. Financier's costs of acquiring debt not treated as an expense for purposes of section 564. Net proceeds divided between financier and other creditors 50/50.

CATCHWORDS : CORPORATIONS - winding up - litigation funder purchases debts and notes of company in liquidation, finances litigation by that company - litigation settles and funder seeks preferential distribution of the proceeds under section 564 Corporations Law - whether any significance in vendors of debts and notes to financier receiving a higher proportion of the face value of those debts and notes than the dividend declared in the winding up - how financier's costs of becoming a creditor ought be treated - consideration of factors relevant to manner of distribution of settlement sum Bankruptcy Acts Amendment Act 1896 (NSW) Bankruptcy Act 1898 (NSW) Bankruptcy Act 1924 (Cth) Bankruptcy Act 1966 (Cth) Bankruptcy Amendment Act 1980 (Cth) LEGISLATION CITED : Bankruptcy Amendment Act 1985 (Cth) Companies Act 1899 Companies Act 1936 Companies Act 1961 Companies Act 1981 Corporations Law Re A and M Myerson (1908) 25 WN (NSW) 136 In the matter of A Shadler, Ltd (1905) 5 SR (NSW) 33 Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (Bendeich as liq, Greatorex and others intervening by leave) (2002) 42 ACSR 296; [2002] NSWSC 578 Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; (1998) 16 ACLC 1320 Re Allied Glass Manufacturers Ltd (1936) 36 SR (NSW) 409 Allquip (WA) Pty Ltd (in liq) v Allan (1997) 25 ACSR 765 Re Bailey (30 May 1946, unreported) Re Bavistock (1946) 14 ABC 30 Re Brierley; ex parte The Official Assignee (1898) 19 NSWLR 25 Brookfield & Anor v Davey Products Pty Ltd & Ors (1996) 14 ACLC 303 Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 Re Cartco Pty Ltd (1994) 14 ACSR 357 Re Clarke; ex parte Deputy Commissioner of Taxation (1981) 51 FLR 220 Deputy Commissioner of Taxation v Currockbilly Pty Ltd (2002) 172 FLR 99 Elfic Ltd v Macks [2001] QCA 219; [2003] 2 Qd R 125; (2001) 181 ALR 1; (2001) 162 FLR 41; (2001) 19 ACLC 1324 Re Farrow [1957] St R Qd 452 Re French Caledonia Travel [2003] NSWSC 1008 Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84 Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 Hypec Electronics Pty Ltd (in liq) v Mead [2003] NSWSC 934; (2003) 202 ALR 688 Re Ivermee; ex parte Official Receiver (1974) 36 FLR 187 CASES CITED : Re Jacka Nominees Ltd (in liq) (1996) 14 ACLC 633 Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 Re Kyra Nominees Pty Ltd (in liq) (1987) 11 ACLR 767 Re Lance; ex parte The Official Assignee (1900) 21 LR (NSW) B&P 29 Manettas v Dylcu Pty Ltd (1995) 13 ACLC 1567 Re Manson; ex parte The Official Assignee (1897) 18 LR (NSW) B&P 45 Re Maywald; ex parte The Official Receiver; Slatters Ltd, (Respondent) (1934) 8 ABC 13 Re Moage Ltd (in liq) (1997) 25 ACSR 53 Re Movitor Pty Ltd (in liquidation) (1996) 64 FCR 380; (1996) 14 ACLC 587 Re Passmore; ex parte Official Receiver in Bankruptcy (1984) 56 ALR 181 Peake (as liquidator of Australian Housewares Pty Ltd (in liq)) [2003] FCA 170 Re Pinnacle Construction Pty Ltd (in liq); re Star [2001] NSWSC 1210; [2002] ACLR 120 NSW 51 Re M L Ried (1946) 13 ABC 287 Re Rosewarne; ex parte The Official Receiver of the Court of Bankruptcy (1932) 4 ABC 192 Re Russell (in his capacity as official liquidator of Parkston Ltd (in liq)) (2000) 35 ACSR 114 Re Sigvart; ex parte Gordon & Gotch (Australasia) Ltd (1932) 4 ABC 240 State Bank of New South Wales v Brown (2001) 38 ACSR 715; [2001] NSWCA 223 Re Tosich Construction Pty Ltd (1997) 73 FCR 219 UTSA Pty Ltd (in liquidation) v Ultra Tune Australia Pty Ltd and others [1997] 1 VR 667; (1996) 132 FLR 363; (1996) 21 ACSR 251; (1996) 14 ACLC 1262 UTSA Pty Ltd (in liq) and others v Ultra Tune Australia Pty Ltd and others (1996) 21 ACSR 457, (1996) 14 ACLC 1610 Re Webb; ex parte Taylor (1987) 75 ALR 139 Re William Felton Co Pty Ltd (1998) 145 FLR 211; (1998) 28 ACSR 228; 16 ACLC 1294 PARTIES : Jarbin Pty Limited - Plaintiff Clutha Limited (in liquidation) - Defendant FILE NUMBER(S) : SC 5716/03 COUNSEL : S G Finch SC; J M Hennessy - Plaintiff V F Kerr - Defendant SOLICITORS : Moloney Lawyers - Plaintiff Piper Alderman Lawyers - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

5716/03 JARBIN PTY LIMITED v CLUTHA LIMITED (IN LIQUIDATION) JUDGMENT HIS HONOUR: Nature of Case 1 This is an application by a creditor under s.564 Corporations Law, seeking favourable treatment in the distribution of the net proceeds of settlement of some litigation which it financed and underwrote. It differs from previous cases under s.564 in that the creditor concerned is a professional financer of litigation, which became a creditor of the company in liquidation by purchasing debts of other creditors after the liquidation had begun. 2 The plaintiff, Jarbin Pty Ltd ("Jarbin") is a wholly owned subsidiary of Australian Litigation Fund Pty Ltd. Mr Patrick Coope is the sole director of Jarbin. Australian Litigation Fund Pty Ltd is a company controlled by the partners of an Adelaide firm specialising in insolvency, Sheahan Coope Lock. 3 Clutha Limited ("Clutha") became the subject of administration on 14 February 1995, and went into a creditors' voluntary winding up in December 1996. Hence its winding up is being conducted under the Corporations Law. Mr Cuming is the liquidator of Clutha. 4 The unsecured creditors of Clutha fall into two categories. One category consists of the ordinary unsecured trade creditors of the company. The other category arises from the fact that Clutha issued, on the terms of a trust deed dated 26 October 1993, unsecured convertible notes of face value $36m. Jarbin's Plan to Fund Liquidator and Acquire Part of Proceeds of an Action 5 Mr Coope first met with Mr Cuming in April 1997 with a view to discussing with him the prospect of Jarbin providing funding to Clutha to support it in pursuing insolvent trading claims against its directors. A period of investigation by Jarbin into Clutha and its potential claims then followed. Mr Cuming and Mr Coope discussed the potential claims, and the terms upon which Jarbin would be prepared to provide any funding. By the end of December 1997 the two men had reached agreement in principle on the key terms of funding. 6 At a meeting of the Committee of Creditors of Clutha held on 19 February 1998 the liquidator discussed the possibility of bringing claims to recover preferential payments. The representative of Shell Company of Australia Limited (ultimately admitted as a creditor for $1.29m) expressed the view "that no further work should be done in relation to preference claims as creditors had suffered enough". The representative of Trust Company of Australia Limited, trustee for the noteholders, concurred with that view, "noting that he believed that trust creditors should not be subjected to additional claims beyond the losses already suffered, unless the preference claim related to a blatant related party transaction." The liquidator then: "… advised that negotiations were well advanced between himself and a third party who was willing to provide funding for a detailed investigation of the affairs of the company in consideration for a substantial interest in any recoveries that may be achieved through any actions that may be taken as a result of the investigations … The [liquidator] noted that with the proposed approach, the third party funder would underwrite the costs of the investigations and as a consequence bear most of the risk."

The liquidator asked whether the committee wished him to retain sufficient funds, estimated to be between $150,000 and $200,000 to conduct an examination of the directors. The trustee for the noteholders said that he did not want the liquidator to retain any funds for further investigation, and that he wanted as much of the remaining funds as possible to be distributed to creditors. On being asked whether the creditors were happy for the liquidator " to enter an arrangement with the third party funders Sheahans" , various of the creditors replied that they would want an indemnity to protect their companies from litigation. 7 Mr Coope decided he was not willing for Jarbin to give that indemnity. Mr Coope and the liquidator then planned to submit the proposal for obtaining funding to a meeting of creditors. Mr Coope prepared a draft funding agreement, which he sent to the liquidator in September 1998. In broad terms, it made provision for Jarbin to fund the carrying out by the liquidator of examinations under ss.596A and 596B of the Corporations Law, production of documents under s.597 of the Corporations Law, and other investigations of causes of action which Clutha might have. It made provision for the firm of Piper Alderman to act as the principal firm of solicitors for both the liquidator and Clutha in relation to those investigations. 8 The draft agreement also conferred on Jarbin an option, exercisable within two years from the date of the document, to acquire 66.66 percent of the Net Recoveries obtained from any such cause of action. In the event that that option was exercised, a litigation agreement would come into effect concerning it, which, in broad terms, bound Jarbin to pay the costs of the action, indemnify Clutha and the liquidator against any liabilities they might have to other parties to the action, and provide any security for costs which might be recovered in connection with the action. Under the draft litigation agreement Jarbin had the opportunity to discontinue its involvement in funding the action, in certain specified situations. Jarbin was also obliged (by clause 47 of the draft litigation agreement) to provide security for the indemnity which it gave to the liquidator. That draft documentation made the following provision concerning the distribution of proceeds from recoveries: " Distribution of Proceeds from recoveries If the Company or the Liquidator receives any proceeds from any sources in or as a result of any Actions it or he must as soon as reasonably practicable apply and pay those proceeds out as follows in the following order of priority. 29.1 In paying Action Costs incurred in respect of that Action and not yet paid by Funder and which have not been the subject of a Funding Notice (including Action Costs incurred before the date of this agreement in respect of that Action before the date of this agreement); 29.2 To Funder, reimbursement of Action Costs incurred in respect of that Action and paid by Funder; 29.3 To Funder, if Funder funded or caused to be funded an order for security for costs in that Action, the reasonable costs to Funder of doing so; 29.4 To Funder, Funder's costs of securing the indemnity to the Liquidator pursuant to clause 47 of this agreement. 29.5 To Liquidator, an amount not to exceed the sum of $1500 per month from the date of this agreement on account of the costs of his administration of the Company that are not Action Costs. 29.6 To Funder to meet its reasonable costs of investigating the acquisition of the Interest in Asset, to the preparation and entry into this agreement and the Option Agreement, to compliance with the terms of this agreement and its costs of keeping informed and being involved in that Action. Any dispute concerning these costs is to be dealt with in accordance with clause 22 of this agreement. 29.7 Two thirds of the remaining balance representing the Interest in Asset sold to Funder. For the avoidance of doubt the parties acknowledge that any property other than cash recovered in or as a result of an Action will be realised and converted to cash." Jarbin Buys Debts and Notes 9 By March 1999 nothing had happened about convening a meeting of creditors to approve funding. Jarbin then set about acquiring certain of the debts which Clutha owed and notes it had issued. 10 On 12 March 1999 Jarbin wrote to a number of creditors of Clutha, and a number of holders of convertible notes issued by Clutha, offering to acquire their debts and convertible notes respectively. Jarbin wrote on this occasion to the largest creditors, and the largest holders of convertible notes. On 19 April 1999 Jarbin made a further round of offers to unsecured creditors, and convertible noteholders, this time to ones which were the largest ones to which an offer had not previously been made. On 28 June 1999 Jarbin made a further round of offers to certain other unsecured creditors and convertible noteholders, to whom it had not previously made offers. In all Jarbin made offers to 31 creditors, and 33 convertible noteholders. The unsecured creditors to whom it made offers were creditors for a total of approximately $10.7m out of the total unsecured creditors (not including unsecured noteholders) of the company of approximately $15.38m. The offers it made to convertible noteholders were to holders of notes of a total face value of approximately $20.426m out of the total issued note face value of $36m. 11 Not all the offers were accepted. Jarbin has come to be the holder of unsecured debts of face value $2.456m, and of convertible notes of face value $15.063m. The debts were purchased from eight creditors, out of a total of 338 creditors. The convertible notes were purchased from 14 noteholders. The evidence does not disclose the total number of noteholders. 12 The terms on which Jarbin acquired these unsecured debts and convertible notes were not identical. To acquire one unsecured debt of $534,000, Jarbin agreed to pay the holder $500 immediately, plus 20 percent of all money or monies worth received by it from Clutha or any other party in consideration of the settlement, compromise discharge or satisfaction of the debt, less the costs incurred by Jarbin in recovering those monies. To acquire a parcel of convertible notes of face value $3.15m from their holder, Jarbin paid an immediate $2,000, and promised to pay 20 percent of all money or monies worth received by it from Clutha or any other party in consideration of the settlement, compromise, discharge or satisfaction of the Convertible Notes, less the costs incurred by Jarbin in recovering that money. The percentage of recoveries payable to an assignor also differed between assignors. Most assignors were to receive 10 percent of net recoveries, though two unsecured creditors and one unsecured noteholder were to receive 20 percent of recoveries, while one unsecured noteholder was to receive 33 percent of recoveries. The weighted average of its net recoveries which Jarbin agreed to pay, across the entire class of trade creditors' debts acquired and convertible notes acquired, was 12.65 percent. Jarbin Proposes to the Liquidator a New Basis for Funding 13 On 15 March 1999 Jarbin informed the liquidator that its previously made offer of funding was withdrawn. In August 1999 Mr Coope wrote to the liquidator confirming that Jarbin had acquired approximately 30 percent of the outstanding liabilities of Clutha, and offering to fund him "to carry out investigations with a view to bringing proceedings for the benefit of Clutha's creditors." The basis on which that funding was offered was: · Jarbin will pay all liquidator's fees, incurred in respect of investigations carried out by the liquidator at Jarbin's request; · Jarbin will pay all Piper Alderman's fees, in respect of work done on the liquidator's instructions at Jarbin's request; · Invoices should be remitted to Jarbin, by the liquidator, on a monthly basis, together with a detailed analysis of all work performed; · Liquidator's fees will be calculated at the prevailing rates as prescribed by the IPAA; · Photocopying will be charged at the rate of 20 cents per copy. All other disbursements will be at cost; · All monies advanced by Jarbin will be repaid to Jarbin as a priority expense of the administration, pursuant to subsection 556(1) of the Corporations Law; · Jarbin is to be given access to all documentation in the liquidator's possession, unless the liquidator is legally prevented from disclosing same; · The liquidator will not disburse any funds from the resolution of any claim, for a period of 60 days, to enable an application to be made pursuant to section 564 of the Corporations Law; · Jarbin may terminate the provision of funding at any time, subject to meeting all outstanding fees and costs incurred by the liquidator to that date.

Subject to some presently immaterial variations, those terms were accepted by the liquidator. Jarbin's Proof of Debt 14 In February 2000 Jarbin lodged a proof of debt for some $17.485m, composed of the face value of the unsecured debts, and the convertible notes, which it had acquired. On 27 April 2000 the liquidator admitted the portion of the proof of debt relating to unsecured trade creditors, but rejected the proof of debt relating to the unsecured notes. The liquidator explained his reasons for rejection as follows: "Clutha acknowledges in clause 8 of the Trust Deed that it is indebted to the Trustee in respect of the principal moneys represented by the convertible notes and the interest paid thereon. It is further acknowledged, in clause 8.2, by Clutha that it should pay the principal moneys represented by the convertible notes to the Trustee. It is clear that, in accordance with the terms of the Trust Deed, the company is primarily indebted to the Trustee for the underlying debts of the convertible notes and that the trustee retains the rights of action in respect of the recovery of those underlying debts on behalf of the noteholders. Thus, the Trustee has lodged a proof of debt on behalf of all of the noteholders and is entitled to receive any dividend declared. The Trustee is then obliged to distribute any such dividends received to the various noteholders. As a consequence of the forgoing it is my opinion that Jarbin is not entitled to prove in the liquidation of Clutha as the Trustee has already done so on Jarbin's behalf."

That partial rejection of the proof of debt has not been appealed against. Indeed, it is clearly correct. The Liquidator's Examinations, and How They Were Funded 15 In December 1999 Jarbin provided the liquidator with security, over an interest bearing account for $25,000, for reimbursing any liabilities which the liquidator might incur in connection with examination applications or orders. 16 On 29 February 2000 the liquidator wrote to the creditors of Clutha, informing them of the liquidator's power to examine directors or other persons under ss.596A and 596B of the Corporations Law, stating that he had received and accepted a proposal from a creditor of Clutha to directly fund examinations of directors and other interested parties, that summonses for examination had been served, and saying: "6. Under Section 564 of the Corporations Law, creditors who provide funding may seek an advantage over other unsecured creditors in relation to the distribution of the proceeds of any subsequent and successful claim. The advantage may take a number of forms, including a priority right in relation to pursuing and benefiting from any consequent recovery action; a priority right in relation to reimbursement of the funding provided together with a risk premium, and/or a priority right in relation to any distribution to creditors. … 9. If any of the creditors are interested in joining the funding of these investigations they should submit their proposals to me in writing within the next 14 days."

No creditor expressed interest in joining in the funding of the investigations 17 Examinations took place in June and July 2000. Nine former directors and officers of Clutha, and a further six other individual, were examined over 10 hearing days in June and July 2000. Production of books and records from 17 different companies or individuals was obtained in connection with those examinations. Jarbin met all expenses of those examinations. The 2000 Proceedings 18 On 30 November 2000 proceedings ("the 2000 Proceedings") were issued by Clutha against 11 defendants, who were directors, an alternate director, and persons alleged to be vicariously liable for the actions of directors and the alternate director. Those proceedings made allegations of insolvent trading, and negligence. The initiating process was not served immediately. 19 On 5 February 2001 Jarbin wrote to the liquidator, saying: "As a result of the comprehensive investigations undertaken by you as liquidator of Clutha, Jarbin Pty Ltd ("Jarbin") considers that you have a strong claim as liquidator against the directors of Clutha for insolvent trading pursuant to section 588M of the Corporations Law. Jarbin wishes for you to issue such proceedings and is prepared to meet the costs of the same. The proceedings must be issued by 13 February 2001 in order to be in time for the relevant limitations period. The purpose of this letter is to set out the basis upon which Jarbin will provide funding to you as liquidator to conduct these proceedings. Jarbin also wishes for you to serve the proceedings that have already been issued in the Equity Division of the Supreme Court of NSW by Clutha against its directors for breach of various of their duties. Jarbin understands that it will then be possible to have both sets of proceedings dealt with at the same time by the Court." 20 In the balance of the letter Jarbin clearly undertook to meet all reasonable costs associated with the two sets of legal proceedings, and to indemnify the liquidator against any liability he might have as a result of the proceedings. The letter was, however, silent about the manner of distribution of any proceeds, apart from saying: "In the event that any amounts are recovered from the legal proceedings, Jarbin proposes that those amounts first be applied in payment of any unpaid liquidator's fees and secondly in repaying to Jarbin all amounts provided by it to you to meet the costs of the proceedings including amounts already expended by Jarbin in connection with your investigations into such proceedings. Jarbin seeks your agreement that you will thereafter not seek to distribute any remaining surplus funds until you have made an application to the Court, pursuant to Section 564 of the Corporations Law, for a benefit to be conferred on Jarbin as a funding creditor." 21 The director defendants succeeded in having the 2000 Proceedings struck out, on the ground that the pleaded cause of action was statute barred. They obtained an order for costs in the 2000 Proceedings. Those costs were assessed at around $125,000 (including costs of the assessment itself.) Clutha appealed against the striking out, but did not pursue the appeal. The defendants claimed costs of $27,500 in relation to the abandoned appeal. The 2001 Proceedings 22 In February 2001 the liquidator and Clutha issued proceedings against the same 11 defendants who had been defendants in the 2000 proceedings. Those proceedings included claims of insolvent trading against the directors. 23 On 27 June 2001 the liquidator issued a report to creditors which informed them of the litigation which had been begun against the directors and associated parties. It continued: "There are currently insufficient funds in my administration to enable me to properly fund the legal proceedings being brought by the company for the benefit of creditors. Funding is required to enable payment of professional fees and disbursements associated with the legal proceedings. A company called Jarbin Pty Limited has acquired a significant proportion of the company's debts and is now the largest creditor of Clutha. I have received an offer of funding from Jarbin Pty Limited to conduct the litigation referred to herein. Details of the proposal are summarised on the attached Appendix 1. Before considering the resolution to accept the offer from Jarbin Pty Limited, I request that any creditor of my administration who also wishes to fund the litigation be afforded the opportunity to provide funding. I draw your attention to the effect of section 564 of the Corporations Law in this regard." 24 Appendix 1 to the report summarised the funding terms offered by Jarbin as follows: 1. Funding Terms ¨ Jarbin will meet all reasonable costs, associated with the issuing and conduct of both sets of the proceedings. ¨ Jarbin agrees to indemnify the liquidator personally against any liability that he may incur as a result of the proceedings or related matters except if such liability arises by virtue of the liquidator breaching his duties as liquidator. ¨ Jarbin also agrees to make arrangements for the provision of security for the indemnity, either by way of cash or bank guarantee. ¨ Jarbin is entitled to cease providing funding on 30 days prior notice. If Jarbin elects to cease providing funding, it will immediately provide the liquidator with sufficient funds to discharge any outstanding costs and its indemnity will apply for all liabilities incurred by the liquidator up to the date that it ceases funding. ¨ Jarbin agrees to pay the remuneration of the liquidator for work undertaken in respect of the proceedings. The liquidator agrees to defer settlement of his accounts until resolution of the proceedings. In consideration for the liquidator agreeing to defer payment of his remuneration, Jarbin agrees to pay the liquidator his remuneration at a rate of 1.25 times the normal schedule rates charged by his firm for such work. 2. Payments out of funds recovered from the proceedings ¨ In the event that any amounts are recovered from the legal proceedings, those amounts are first be applied in repaying to Jarbin all amounts provided by it to the liquidator to meet the costs of the proceedings including amounts already expended by Jarbin in connection with the liquidator's investigations into such proceedings. The costs of the proceedings include amounts paid or payable to the liquidator in respect of his remuneration, as set out in section 1. above. ¨ The liquidator agrees that he will thereafter not seek to distribute any remaining surplus funds until he has made an application to the Court, pursuant to Section 564 of the Corporations Law, for a benefit to be conferred on Jarbin as a funding creditor. 3. Goods and Services Tax (GST) ¨ Any amount recovered by the liquidator in regard to GST paid by Jarbin are to be refunded to Jarbin as and when received. 4. Funding from other creditors ¨ The liquidator agrees to approach all of the creditors of Clutha, including individual convertible noteholders, seeking funding for the legal proceedings from such creditors. ¨ In the event that any creditor is prepared to provide funding for the legal proceedings, including participating in indemnity and other arrangements, Jarbin agrees to discuss with the liquidator, an amendment to these proposed arrangements." 25 The liquidator's report to creditors dated 27 June 2001 set out the text of s.564 and continued: "Effectively the Court has discretion to award a significantly disproportionate share of recoveries to any creditor who funds a liquidator to undertake legal action. The decision of what share to award a funding creditor is dependent on a variety of factors, including the level of risk assumed by the funding creditor and whether or not other creditors have been given the opportunity to provide funding."

The report also stated that creditor approval would be required pursuant to s.477(2B) of the Corporations Law for the liquidator to enter into the funding arrangement (because the funding arrangement might involve obligations being undertaken which might be discharged by performance more than three months after the agreement was entered into) and continued: "If there are no other proposals from creditors to fund litigation, creditor approval is sought for the following resolution: "That pursuant to section 477(2B) of the Corporations Law, the creditors approve the liquidator entering into an agreement on the company's behalf for the provision of litigation funding with Jarbin Pty Limited in order to continue legal proceedings against the directors and associated parties in respect of insolvent trading." " 26 On 12 July 2001 a meeting of creditors passed that resolution under s.477(2B). No creditor offered to contribute to the funding. 27 I would infer that, up to 12 July 2001, when the liquidator sent correspondence to creditors it was not sent to individual noteholders. That is because, consistent with the terms on which the notes were issued, the debt owed by Clutha in connection with the notes was owed to the trustee for the noteholders. On 3 September 2001 the liquidator wrote to the noteholders, sending them a copy of the report to creditors which had preceded the meeting of 12 July 2001. The liquidator said, in his letter of 3 September 2001 to the noteholders: "The purpose of the meeting was to inform the creditors of the legal proceedings that are being taken against the directors of Clutha Limited (In Liquidation) and other associated parties. The meeting also considered a litigation funding proposal by Jarbin Pty Limited. The resolution to enter into a litigation funding arrangement with Jarbin Pty Limited was passed. In both the report to the creditors and at the meeting of creditors, I afforded all creditors the opportunity to participate in the funding of the legal proceedings. At the request of [the representative of the trustee for the noteholders], I hereby afford all noteholders of Clutha Limited (In Liquidation) an opportunity to participate in funding the legal proceedings. If you are interested in contributing funds to the legal proceedings or have any other queries, please contact [names and telephone numbers]." 28 That circular to noteholders produced three responses. Mr Leo Chessell, and Western Agricultural Co Pty Ltd, each contributed $100 in January 2002 to the funding of the litigation against the Clutha directors. Mr Coope wrote to each of those contributors in January 2002, offering to provide them with the same quarterly report as it provided to those creditors who had assigned their debts to Jarbin, and saying: "As previously advised, in the event of a favourable outcome of the litigation, the liquidator intends to make an application to the court pursuant to section 564 of the Corporations Law . This section provides that where creditors have provided an indemnity for costs of litigation and recovery is made under that litigation, the court has a discretion to award those creditors a higher share of recoveries than they would otherwise receive. I confirm that the liquidator will also make this application on your behalf and that you will incur no costs in respect of such application." 29 The third response was from a Mr R Morgan, who requested further details of the litigation. Mr Coope replied in January 2002 saying: "To date Jarbin has provided funding of approximately $600,000. The future costs of the litigation which Jarbin will be required to meet will be substantial. Jarbin is not only funding the litigation but is also assisting the liquidator assemble all of the evidence to be used at the trial of the proceedings. Jarbin is a wholly-owned subsidiary of Australian Litigation Fund Pty Ltd ('ALF'). The directors of ALF are also the partners in the Adelaide insolvency practice of Sheahan Coope Lock, a firm specialising in the management of insolvency litigation. … Proceedings against the Clutha directors were issued on 30 November 2000. The claims are an insolvent trading claim pursuant to sections 588G and 588M of the Corporations Law, a claim for breach of statutory duty pursuant to sections 232 and 598 of the Corporations Law and claims for breaches of common law duties including negligence. A claim has also been brought against Nichimen Corporation and Nichimen Australia Ltd in respects of their vicarious liability for the Japanese directors in respect of the directors' breach of duties. The total quantum of the claims is approximately $17 million. The liquidator has obtained the opinions of two barristers in relation to the claim. One barrister, Christopher Brohier, has provided an opinion that Clutha was insolvent at the relevant dates. The other barrister, Robert Newlinds, opined that the liquidator would be more likely than not to be successful in his claim against the directors in regard to insolvent trading. A further advice has been received from Piper Alderman, the liquidator's solicitors, which, in summary, concludes that the liquidator's prospects of establishing the claim and effecting recovery of at least a substantial part of the claim are good. … "Jarbin considers that the claim against the Clutha directors is strong, with good prospects of success. Jarbin provides a quarterly report on the progress of the litigation to those creditors who have assigned their debt and, should you decide to contribute to the funding, will provide you with the same report."

Ultimately, Mr Morgan made no contribution towards the funding. 30 Preparation for the trial of the 2001 Proceedings continued through to the latter part of 2003. In or before September 2002 those proceedings settled against the non-director defendants, apparently on terms which resulted in no recovery to Clutha. After that settlement, the action continued against the director defendants alone. In December 2002 directions were given by the Court concerning provision of discovery, and evidence. The plaintiffs had made the bulk of their discovery by October 2002. The plaintiffs filed all evidence on which they proposed to rely at the trial by April 2003. 31 In the second half of 2003 the proceedings settled. The director defendants have agreed to pay to Clutha the sum of $5.25m, to give up their right to be paid the taxed costs awarded to them as a result of the striking out of the 2000 Proceedings, and to give up any right to claim costs in connection with Clutha's abandoned appeal against the striking out of the 2000 Proceedings. The sum of $3.9m was received by the liquidator on 9 October 2003, and at the time of hearing the present application it was expected that the liquidator would receive the balance of $1.35m on 31 January 2004. 32 The amount which had been claimed in the 2001 Proceedings was approximately $10m, plus interest, which, if allowed at the relevant court rates, would have amounted to a further amount of approximately $8.5m by the time the proceedings settled. Funding Provided 33 The funds expended by Jarbin in funding the liquidator concerning his examinations, investigations and the proceedings were said, in an affidavit sworn by Mr Coope on 11 November 2003, to total $958,278.20 inclusive of GST. That same affidavit gave a detailed breakdown of the funds expended, which totalled $928,906.74. The explanation for the difference is that nearly $30,000 which Jarbin was obliged to pay has been paid from the settlement sum received by the liquidator. In those circumstances, the correct amount to regard as having been expended by Jarbin in funding the litigation is $928,906.74. The timing of those payments breaks down as follows: Period Total Total paid per Net Payment in Calendar Year Progressive Total to End of Calendar Year (to 31 Dec) Received Year inc GST $ $ $ $ 1997 2,157.35 2,157.35 2,157.35 1998 16,204.90 16,204.90 18,362.25 1999 19,841.60 19,841.60 38, 203.85 2000 2,150.00 159,764.59 157,614.59 195,818.44 2001 159,159.86 159,159.86 354,978.30 2002 7,354.60 426,171.23 418,816.63 773,794.93 2003 130,078.83 130,078.83 903,873.76 Un-allocated 25,032.98 25,032.98 928,906.74

34 In addition to that funding, Jarbin had provided funds to the liquidator to post security for costs of the defendants. An amount of $275,000 was placed on deposit on 5 December 2001. Of this amount, $150,000 was returned to Jarbin in September 2002 after settlement with the non-director defendants in relation to the 2000 and 2001 Proceedings. On 5 February 2003 a further $25,000 security was provided (bringing the then total to $150,000.) On 26 May 2003 a further $50,000 security was provided (bringing the total to $200,000). That sum, together with interest, was refunded to Jarbin on 21 October 2003. Jarbin's Assistance in Kind 35 Officers and employees of Jarbin and ALF have spent time and effort in assisting the liquidator in prosecuting the claims. This work has included: · assisting in the assembly of materials and documents for use in examinations and the proceedings and for briefs to counsel; · participating in informal interviews with persons relevant to the investigations and proceedings; · preparing a detailed insolvency analysis of Clutha; · preparation of detailed schedules of all unpaid debts of Clutha incurred in the relevant period and all debts of Clutha paid in that period; · assisting in the preparation of the evidence filed by the liquidator; · preparation of a detailed case analysis for use by the liquidator and his legal advisers in corresponding with the defendants' solicitors; · sending and receiving in excess of 3,200 e-mails.

Much of this work has been used by the liquidator and his advisors to assist in conducting the examinations and investigations, preparing and prosecuting the proceedings and ultimately settling the claims. 36 Prior to 31 January 2002 officers and employees of Jarbin spent a total of 1,665 hours working on the Clutha matter. Since 31 January 2002 Mr Coope has been the sole person working on the Clutha matter. He gives evidence that he has spent well in excess of 500 hours working on it since that date, including at least 15 to 20 trips to Sydney in relation to Clutha for which Jarbin has met the costs and not sought reimbursement from Clutha. 37 There was no attempt in the evidence to explain the qualifications and experience of Mr Coope (save to the extent that Mr Coope did so in his letter to Mr Morgan set out at para [29] above). For the period prior to 31 January 2002 there has been no attempt to explain how the work was divided between the various officers and employees of Jarbin, or what the qualifications and experience of those officers and employees are. There has been no attempt to put a dollar value on the considerable time which officers and employees of Jarbin spent in connection with the Clutha matter. Jarbin's Proposed Orders 38 Jarbin seeks the payment to it of 85 percent of the net recoveries. From that 85 percent, Jarbin would be obliged to pay part to the vendors of the debts and notes which Jarbin purchased. Mr Coope has provided a schedule which calculates the return to all interested parties on the basis that the orders sought by Jarbin are made. That schedule is (with the addition of line numbering) as follows: 1 Settlement sum 5,250,000

2 Repay ALF funding 871,162 3 Outstanding Piper Alderman fees 470,000 4 Future Piper Alderman fees 30,000 5 Costs assessor 9,762 6 Liquidator's fees 287,828 7 Future liquidator's fees 30,000 1,698,752 9 Available for creditors 3,551,248

10 Total creditors' claims 51,807,000 11 Jarbin's claim as a creditor 17,480,619 12 Creditors excluding Jarbin 34,326,381

13 Section 564 benefit for Jarbin 85.00%

14 Distribution to Jarbin 3,018,561 15 Payment to vendors 381,848 16 Cents in the dollar to vendors 0.0218

17 Net return to Jarbin 2,636,713

18 Distribution to other creditors 532,687 19 Cents in the dollar 0.0103 20 Distribution to Jarbin 179,738 21 Payment to vendors 22,737 22 Cents in the dollar to vendors 0.0013

23 Net received by Jarbin 2,793,714 24 Net received by vendors - cents in the dollar 0.0231

39 He explained that line 2 is the amount of funding provided, net of GST. For the purpose of calculating the return to creditors, it is, in principle, correct to take an amount net of GST, as Clutha will receive an input credit for the GST paid to Jarbin and that refund of GST will then be available for distribution among the creditors. 40 The outstanding Piper Alderman fees on line 3 are an amount which is exclusive of GST, on the same principle as the repayment of Jarbin's funding is exclusive of GST. 41 The future Piper Alderman fees on line 4 is Mr Coope's estimate of the likely fees to be incurred by the liquidator in respect of this present application. Mr Coope says that this is a very conservative estimate. 42 The amount shown for liquidator's fees on line 6 is exclusive of GST. 43 The amount for future liquidator's fees shown on line 7 is Mr Coope's estimate of the likely fees to the liquidator incurred in respect of this application. Mr Coope says that this is also a very conservative estimate. He does not explain, in relation to this or the future Piper Alderman fees, whether a "conservative estimate" is one likely to be on the low side, or on the high side. Given the size of the figures involved, this lack of clarity is not likely to be material. Outcome of Liquidation if a Financier had Not Funded 44 The only dividend to unsecured creditors which the liquidator of Clutha has declared is a dividend declared on 28 March 1998, at the rate of 1.5924 cents in the dollar. After paying this dividend, he had funds on hand of approximately $100,000. If the proceedings funded by Jarbin had not been commenced, this amount is likely to have been fully expended on the costs of finalising the liquidation of Clutha. In that circumstance, no further dividend to unsecured creditors was likely. The Liquidator's Notification to Creditors of this Application 45 On 4 December 2003 the liquidator sent a report to creditors reporting on settlement of the litigation, notifying creditors of Jarbin's intention to make an application on 15 December 2003 pursuant to s.564 Corporations Law, notifying creditors that Jarbin would be asking the Court to approve that it receive 85 percent of the settlement sum after payment of all costs, and explaining the basis of Jarbin's application. The liquidator said that he intended to support the application. He told creditors that they could make submissions to him in relation to the application by Jarbin on or before 5.00pm 12 December 2003, and said that he would, on 15 December 2003, bring any such submissions to the attention of the Court. He told creditors that they could also seek to appear and make submissions themselves at the hearing, if they wished. While the evidence does not make this particularly clear, it may be the case (because a noteholder apparently responded to that report) that the report was sent to each of the noteholders, as well as to creditors strictly so called. 46 The time allowed to creditors to absorb that information and respond to it was, it seems to me, unreasonably short. However, one noteholder, Shane Clarke, communicated with the liquidator by telephone, then by email. His email said: "As I said I am NOT HAPPY that Jarbin is trying to claim most of the $5.25 M directors settlement. I have no problem with Jarbin being reimbursed for: (i) genuine expenses and (ii) a FAIR bonus/profit fee or time spent fee for funding court action - before splitting the remainder distribution. However 85% is greedy + excessive. As a guide Investment Fund Managers get a bonus fee of 10 to 25% of EXCESS return. Most public companies have a profit margin well below 25% either funds invested or cost of sales. Method 1 Unsubstantiated expenses $ 1.69 M 25% profit after expenses = .25 x (5.25-1.69) = $ .76 m Therefore (5.25-1.69-.76) /51.385 = 4.4 cents to all unsecured creditors. Method 2 Unsubstantial time by Jarbin 2165 Hrs at $250 per hour = $ .54 M NO EXTRA PROFIT IF PAID BY TIME FEE Therefore (5.25-1.69-.54)/51.385 = 5.9 cents in $ to all unsecured creditors. Total avail for distrib after expenses only (5.25-1.69)/51.385 = 6.9 cents Comments: - Jarbin didn't make an offer to ALL unsecured creditors to buy their Clutha interest. (I did not receive an offer!) - Based on newspaper reports Jarbin only bought interests in unsecured creditors for a few cents in the Dollar At 3 cents in dollar Jarbin's interest in unsecured creditors cost .524 M 85% of (5.25 - 1.69) = $ 3.03 M JARBIN GETS A RETURN OF OVER $5.5 FOR EVERY $1 OF CAPITAL OUTLAY PLUS REIMBURSED EXPENSES. OTHER UNSECURED CREDITORS GET 1 CENT IN DOLLAR. - Expenses of $1.69 M and Jarbin's 2165 man hours are not substantiated and not independently audited. Summary: WHY ARE UNSECURED CREDITORS RECEIVING LESS THAN 4.4 cents in dollar? Unfortunately I have had less than 1 day to respond to Price Waterhouse Coopers letter of 4 December 2003. I point out I am a qualified Actuary who is no longer practising and this in no way should be regarded as actuarial advice." The Statutory Basis for the Order 47 Section 564 of the Corporations Law provides: "Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of moneys or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them." 48 In construing s.564, the definition of "property" in s.9 Corporations Law applies: " "property" means any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action." Previous legislative provisions

49 There have been provisions somewhat analogous to s.564 Corporations Law in Australian insolvency law since 1896. However the precise form of the section has changed with time. Broadly, the pattern of the changes has been to widen the circumstances in which the court's power to make an order can be exercised, but to leave the same both what the Court is empowered to do in exercise of its power, and the "consideration" relevant to the exercise of that power. Care needs to be exercised in placing reliance on cases concerning the earlier versions of the provision, because some are influenced by limitations in the then current form of the provision, which do not appear in s.564 Corporations Law. 50 I will trace first how the provision has applied from time to time in bankruptcy legislation. The first predecessor of s.564 was s.10 Bankruptcy Acts Amendment Act 1896 (NSW). It said: "In cases where assets in any estate have been recovered by means of an indemnity for costs of litigation given by certain creditors, the Judge may make such order as he may deem just with reference to the distribution of such assets, with a view to giving the indemnifying creditors an advantage over others in consideration of the risk run by them in giving such indemnity."

That section had no analogue in the English bankruptcy legislation. 51 The next predecessor of s.564 was s.77 Bankruptcy Act 1898 (NSW), which was in substance identical to s.10 of the 1896 Act. The next of s.564's predecessors, s.84(2) Bankruptcy Act 1924 (Cth), was also in substance identical to s.10 of the 1896 Act.

52 Section 109 (6) Bankruptcy Act 1966 (Cth), as initially enacted, expanded the circumstances where an order could be made. It said: "Where property has been recovered or preserved by means of an indemnity for costs of litigation given by any creditor or creditors, the Court may, upon the application of the trustee or a creditor, make such order as it thinks just and equitable with respect to the distribution of the proceeds of that property with a view to giving the indemnifying creditor or creditors an advantage over other creditors in consideration of the risk run by him or them in giving the indemnity." (Emphasis added)

The addition of the words "or preserved" has been attributed to remarks made by Clyne J in Re Bailey (30 May 1946, unreported, but noted in 20 ALJ 155): Re Passmore; ex parte Official Receiver in Bankruptcy (1984) 56 ALR 181 at 184 per Northrop J.

53 The provision was further amended, and renumbered to become s.109(10), by the Bankruptcy Amendment Act 1980 (Cth). The 1980 legislation stated the condition for operation of the subsection as being: "Where property has been recovered, realised or preserved by means of an indemnity for costs of litigation given by…. creditors …". (Emphasis added)

54 The Bankruptcy Amendment Act 1985 (Cth) replaced s.109(10) with a provision reading: "Where in any bankruptcy -- (a) property has been recovered, realised or preserved under an indemnity for costs of litigation given by a creditor or creditors; or (b) expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered, the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors."

That is the present form of s.109 (10) Bankruptcy Act 1966 (Cth). 55 I turn next to how the provision has applied from time to time in the law governing the winding up of corporations. Section 77 of the 1898 Bankruptcy Act was made applicable to the winding up of companies by s.264(1) Companies Act 1899, an omnibus provision making the rules of bankruptcy applicable in the winding up of companies (In the matter of A Shadler, Ltd (1905) 5 SR (NSW) 33). The Companies Act 1936 contained a s.297(7), which was in substance identical to s.77 of the 1898 Bankruptcy Act. 56 Section 292(10) Companies Act 1961 said: "Where in any winding up assets have been recovered under an indemnity for costs of litigation given by a certain creditors, or have been protected or preserved by the payment of moneys or the giving of indemnity by creditors, or where expenses in relation to which a creditor has indemnified a liquidator, have been recovered the Court may make such order as it deems just with respect to the distribution of those assets and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk run by them in so doing." (Emphasis added) 57 Section 450 Companies Act 1981 clarified the grammatical structure of s.292(10) by breaking the "where" phrase which states the circumstances of application of the section into two paragraphs, and made it apply to "property" rather than "assets". The result was that s.450 Companies Act 1981 was in identical wording to s.564 Corporations Law. Preconditions for Application of Section 564(a)

58 Section 564(a) is attracted where "property has been recovered … or has been protected or preserved". There is no requirement that the property concerned be property of the company. To come within the intended scope of the section, all that is needed is that the property which has been recovered, protected or preserved be property which is ultimately distributable in the liquidation of the company. Thus, property which is recoverable by a liquidator as an undue preference under s.565 Corporations Law, or property recoverable by a liquidator from a director under s.588M Corporations Law as compensation for loss or damage suffered by the company in consequence of the company engaging in insolvent trading can fall within the scope of s.564(a).

59 Under previous versions of the provision, it had been held that an indemnity to cover the costs of an examination is not an indemnity for costs of litigation, and hence did not entitle the indemnifying creditors to any priority: In the matter of A Shadler, Ltd (1905) 5 SR (NSW) 33; Re Allied Glass Manufacturers Ltd (1936) 36 SR (NSW) 409 at 424. It had also been held, however, that, provided indemnifying creditors had given an indemnity for costs of litigation, they may be preferred under the provision even though legal proceedings had not actually been resorted to: Re A and M Myerson (1908) 25 WN (NSW) 136; Re Farrow [1957] St R Qd 452. These fine distinctions sometimes do not matter under s.564, because property can sometimes be "protected or preserved by … the giving of indemnity by creditors" even if that indemnity is not one which relates to "costs of litigation".

60 The decisions in A Shadler, Ltd and Allied Glass Manufacturers Ltd were not cited to Macready A-J in Deputy Commissioner of Taxation v Currockbilly Pty Ltd (2002) 172 FLR 99, and his Honour held at 107-109 that "litigation", when used in s.564(a), could comprehend examination proceedings. If A Shadler, Ltd and Allied Glass Manufacturers Ltd had not been decided, the reasons of Macready A-J for reaching that conclusion would have been very persuasive ones. 61 In the present case, I am satisfied that property (namely the settlement sum of $5.25m) has been recovered by means of an indemnity for costs of litigation given by Jarbin. The indemnity given on 5 February 2001 (para [19] above) is clearly such an indemnity, and was causally efficacious in bringing about the recovery of the $5.25m. Jarbin is a creditor of Clutha. That is sufficient to establish that the Court has jurisdiction under s.564(a). It is not necessary to decide whether Jarbin's offer of funding of 15 March 1999 (para [13] above), which was also causally efficacious in bringing about the recovery of the $5.25m, provides an additional basis for jurisdiction. Nor is it necessary to decide on the correctness of an argument that there are other bases for jurisdiction arising because, (1) things in action the proceeds of which are distributable in Clutha's liquidation, namely the rights of Clutha and its liquidator against its former directors, have been protected by the giving of an indemnity by Jarbin, or (2) those things in action have been protected or preserved by the payment of money by Jarbin. Nature of the Court's Power under Section 564

62 Since the introduction of s.10 Bankruptcy Amendment Act 1896 (NSW), s.564's earliest predecessor, it has been recognised that such provisions confer a broad power on the relevant Court. In Re Manson; ex parte The Official Assignee (1897) 18 LR (NSW) B&P 45, AL Simpson J said at 45-46 (in a passage quoted with approval by Clyne J in Re M L Ried (1946) 13 ABC 287 at 289, and by Paine J in Re Bavistock (1946) 14 ABC 30 at 32): "The section itself leaves the matter entirely in the discretion of the Judge, and does not indicate in any way what the extent of the advantage given to the indemnifying creditors should be. Each case must, therefore, stand on its own footing, and the Judge must arrive at the best conclusion he can after weighing all the circumstances, the amount of risk run, the amount recovered, the proportion between the debts of indemnifying creditors, and these non-indemnifying creditors and all other matters." 63 In Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612, Hayne J said that: "… the discretion covered by s 450 is a broad and general discretion and one that is to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies." 64 In Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294, Brownie J, at 296-297, said: "The last words of s 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors."

65 In State Bank of New South Wales and another v Brown (as liq of Parkston Ltd (in liq)) and others (2001) 38 ACSR 715 at 728, Hodgson JA (with whom Handley JA agreed) said: "I accept that it is not the object of the section to encourage litigation for the sake of litigation, or for the private benefit of creditors who provide the indemnity or the funds. In my opinion, there are two public purposes involved in the encouragement of pursuit of claims by liquidators, namely to benefit creditors and shareholders generally, and to recover property from wrong-doers and thus discourage misconduct in relation to corporations." 66 His Honour also said, at 731: "Section 450 empowers the Court to make such orders as it deems just. In my opinion, there is a spectrum within which just orders could be made, and the Court has a discretion within that spectrum." 67 In the same case, however, Spigelman CJ (dissenting as to the result) said, at 720, that the power under s.450 was not, properly, regarded as a discretion. "Section 450 confers power to make a judgment as to what is "just". Judgment and discretion are distinct: see Bennion, "Distinguishing Judgment and Discretion" 2000 PL 368. A wide range of considerations are relevant in making the judgment for which s 450 provides: see the summary by Brownie J in [ Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd ] (1995) 18 ACSR 294 at 296-297."

In the present case, whether the power under s.564 should be regarded as a judgment, or a discretion, will not affect the outcome. Role of Section 564 in the Statutory Scheme

68 The exercise of the power under s.564 needs to be conducted bearing in mind the statutory scheme of which s.564 is part. Under that statutory scheme, except to the extent that the Corporations Law provides otherwise, all debts proved in the winding up rank equally, and if the property of the company is insufficient to meet them in full, they are paid proportionately (s.555 Corporations Law). Certain classes of payment are given priority under s.556(1) and, pursuant to s.559, debts of any of the classes created by s.556(1) rank equally between themselves and are paid in full, unless the property of the company is insufficient to meet them, in which case they are paid proportionately. Section 564 operates as an exception to the prima facie equality of treatment of all unsecured creditors within the respective classes which s.556 recognises. The onus of proving the facts which ground any departure from equal treatment of the creditors, and of persuading the Court of the extent to which any such departure is just, lies on the creditor who seeks the exercise of the power under s.564. Historical Trends in Application of the Provision, and Statements about how it Generally Applies 69 I respectfully doubt that there is any proper basis for concluding that there has been a tendency in recent times to adopt a more liberal approach in favour of indemnifying creditors. There are many cases, dating from the earliest days of the section, where the power conferred by the section has been exercised so as to give the indemnifying creditors the whole of the net proceeds of recovery: Re Brierley; ex parte The Official Assignee (1898) 19 NSWLR 25; Re Lance; ex parte The Official Assignee (1900) 21 LR (NSW) B&P 29; Re Rosewarne; ex parte The Official Receiver of the Court of Bankruptcy (1932) 4 ABC 192; Re Sigvart; ex parte Gordon & Gotch (Australasia) Ltd (1932) 4 ABC 240; Re Maywald; ex parte The Official Receiver; Slatters Ltd, (Respondent) (1934) 8 ABC 13; Re Clarke; ex parte Deputy Commissioner of Taxation (1981) 51 FLR 220; Re Cartco Pty Ltd (1994) 14 ACSR 357; Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84; Re Russell (in his capacity as official liquidator of Parkston Ltd (in liq)) (2000) 35 ACSR 114; (upheld on appeal under the name of State Bank of NSW and another v Brown (as liq of Parkston Ltd (in liq)) and others (2001) 38 ACSR 715); Re Pinnacle Construction Pty Ltd (in liq); re Star [2001] NSWSC 1210; Deputy Commissioner of Taxation v Currockbilly Pty Ltd (2002) 172 FLR 99; Peake, (as liquidator of Australian Housewares Pty Ltd (in liq) [2003] FCA 170. Indeed, in Re Maywald; ex parte The Official Receiver; Slatters Ltd, (Respondent) (1934) 8 ABC 13 Paine J said, at 15: "I think that the principle upon which the Court has generally acted in all these cases is that where it can clearly be shown that a certain nett result followed from an indemnity, the indemnifying creditors have a strong claim to be benefited to that extent."

(It should be noted that that remark was made in a context where the indemnifying creditors, although granted the net proceeds of recovery, did not recover their entire debt.) When there are so many cases, over the entire time the provision has existed, where indemnifying creditors have received the whole amount recovered, willingness of the courts to make such an order is no recent phenomenon.

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.

All these additional risk factors, apart from the possibility of the directors obtaining relief under s.1318, are ones which, if they came home, would reduce the amount for which the claim succeeded, but would not result in failure of the entire claim. The only evidence which gives any feel for how realistic the prospect was that the directors might succeed under s.1318 is Jarbin's assessment that, overall, the claim was a strong one with good prospects of success. 97 Mr Coope also gave evidence that there were two matters which showed there was a risk concerning the recoverability of a verdict, even if one were to be obtained. The first is that the directors provided details of their personal financial resources to the liquidator in confidence, in consequence of which he formed the view that if judgment was entered for the full amount of the claim, that judgment sum would not have been recoverable in full from the personal financial resources of the directors. Given that the claim as a whole was in the order of $18.5m inclusive of interest, and was settled for $5.25m plus the release of some claims for costs, it is difficult to place much weight on this factor. The evidence does not contain any indication of at what point, short of $18.5m, the personal financial resources of the directors would have proved inadequate to meet the full claim. 98 The second matter raised by Mr Coope regarding the risk of recovery of any verdict is that while the directors potentially held the benefit of a $5m directors and officers insurance policy, it was a costs inclusive policy, so that the amount that might ultimately be recovered would be reduced by the amount expended on defence costs. In August 2001 the solicitors for the director defendants informed the liquidator that the whole of the amount of the policy might be spent on defence costs. By the time the claim settled, something of the order of $1m in costs had already been expended, and deducted from the $5m limit of the policy. It is likewise difficult to place much weight on this factor, when evidence of the extent of the ability of the director defendants to meet any judgment from their personal resources has not been placed before the Court. 99 There is another difficulty in placing much reliance on the risk factors identified in paras [97] and [98]. Those risk factors are ones that, now, are known to have existed. But there has been no attempt to prove what was known, or believed, by Jarbin about the financial resources of the directors, at the time investigations were first undertaken, when the litigation started, or from time to time as the litigation progressed. For all the evidence shows, that risk factor might be one which came as an unpleasant surprise to Jarbin when the litigation was well advanced. And the extent of risk arising from the liquidator finding out in August 2001 about the terms of the insurance policy, cannot be evaluated without knowing what was understood to be the ability of the directors to meet a verdict from their own resources. Further, the risk Jarbin undertook was controlled to some extent by its ability to cease funding whenever it so chose. Time Value of Money 100 In deciding what degree of preferential treatment should be given to a litigation funder, who has been instrumental in a company in liquidation recovering money, account should be taken of the time during which the funder has been out of its money. A rough indication of the size of the allowance for this factor can be obtained by taking the total amount advanced at the end of each calendar year, set out in para [33] above, and allocating interest at 6 percent on the year-end balance. That produces the following table:

Period Progressive Total to End of Calendar Year Interest @ 6% (to 31 Dec) $ $ 1997 2,157.35 129.00 1998 18,362.25 1,101.00 1999 38,203.85 2,292.00 2000 195,818.44 11,749.00 2001 354,978.30 21,298.00 2002 773,794.93 46,427.00 2003 903,873.76 54,232.00 TOTAL 137,228.00

I have used a rate of 6 percent because that is an appropriate rate for a low risk enterprise. It would be double counting to adopt the rate appropriate to a risky lending enterprise, and to also allow an extra premium for that same risk. By allowing interest for the whole year on the year-end balance, the calculation is one which is favourable to Jarbin, in a way which more than compensates for the fact that I have not allowed interest on the unallocated amount of $25,032.98, set out in the final line of the table in para [33]. I have not allowed interest on the amounts provided for security for costs, because it appears that Jarbin has already received interest on those deposits. 101 The way in which this factor should be allowed for, it seems to me, is by ensuring that, whatever amount is given to a funding creditor in excess of a return of its contribution, it is not less than the amount which would be paid if a low notional rate of interest had been charged on those contributions. Mr Clarke's Methodologies 102 I do not regard either of the methodologies espoused by Mr Clarke (para [46] above) as providing an adequate basis for recognising the risks which Jarbin undertook in financing this litigation. The reward of an investment fund manager who receives a percentage of the excess return which the fund achieves is a reward in a situation where the investment fund manager has no risk of loss if the base level above which the excess is calculated is not met, and where the investment fund manager does not have its own capital at risk in the fund. Nor does the profit margin of "most public companies" provide a criterion - it is the risk involved in this particular funding of litigation which needs to be looked to. 103 Mr Clarke's second method involves allowing Jarbin only recompense for the work done in kind. It makes no allowance for the money invested and put at risk of being lost, the risk of Jarbin being required to pay the liabilities it incurred but had not discharged at the time the settlement was achieved, the risk of Jarbin having to pay further legal and liquidator's fees if the action had not settled when it did, nor the risk of Jarbin having to pay the other side's costs. Each of those risks undertaken should be taken into consideration. Result 104 While there are some applications under s.564 where the appropriate structure for an order is to award the indemnifying creditor a percentage of the net amount recovered, that is not the only possible structure. Another possible structure is to give the indemnifying creditors an advantage calculated as a percentage of the investment which they made in funding the litigation. In assessing that percentage, one would need to take into account that the indemnifying creditors had not only a risk of losing the investment which they made, but also a risk of becoming liable to pay other expenses of the liquidator and his solicitors, and possibly the costs of the other side. The correctness of an order made on one of these bases can be checked by considering whether the result seems inappropriate when considered on another basis. 105 In all the circumstances I have set out, the appropriate result is that, after payment of expenses of the types listed in lines 2 to 7 inclusive of para [38] above, and payment of $500 each to Mr Chessell and Western Agricultural Co Pty Ltd, the remaining amount be divided so that Jarbin receives 50 percent, and the other creditors receive 50 percent. 106 This order, structured on a "percentage of net recoveries" basis, can be checked against the "percentage of investment" approach mentioned above. Allowing Jarbin 50 percent of the net recoveries would result in Jarbin receiving approximately $1.775m, after reimbursement of its expenses in running the litigation. Jarbin's actual out of pocket expenditure was around $929,000, it was out of its money for a period of time, and in addition it performed the very substantial work identified at paras [35]-[37] above. While no precise value can be put on Jarbin's work, the relationship between the value of the total contribution which it made, both financially and in kind, to $1.775m does not seem disproportionate. 107 Another rough check can be obtained by comparing the sort of returns a litigation funder can receive from funding a liquidator's litigation through a different mechanism to that which Jarbin used. It is now well established that a liquidator's power of sale of the property of the company, under section 477(2)(c) Corporations Law, enables him or her to assign all, or part, of a cause of action of the company in return for a consideration, which might be a fixed payment, a share of any net proceeds of the action, or a consideration arrived at in some other way, and such assignment may be made without infringement of the law concerning maintenance and champerty: Brookfield & Anor v Davey Products Pty Ltd & Ors (1996) 14 ACLC 303; Re Movitor Pty Ltd (in liquidation) (1996) 64 FCR 380; (1996) 14 ACLC 587; UTSA Pty Ltd (in liquidation) v Ultra Tune Australia Pty Ltd and others [1997] 1 VR 667; (1996) 132 FLR 363; (1996) 21 ACSR 251; (1996) 14 ACLC 1262; affirmed by the Victorian Court of Appeal UTSA Pty Ltd (in liq) and others v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 457; (1996) 14 ACLC 1610; Re Tosich Construction Pty Ltd (1997) 73 FCR 219; Re Moage Ltd (in liq) (1997) 25 ACSR 53 at 76; Re Addstone Pty Ltd (in liquidation) (1998) 83 FCR 583 at 592; (1998) 16 ACLC 1320; Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357; Re William Felton Co Pty Ltd (1998) 145 FLR 211; (1998) 28 ACSR 228; 16 ACLC 1294; Elfic Ltd v Macks [2001] QCA 219; [2003] 2 Qd R 125; (2001) 181 ALR 1; (2001) 162 FLR 41; (2001) 19 ACLC 1324 (Queensland Court of Appeal) at [82]-[83], [175]-[176]; Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (Bendeich as liq, Greatorex and Others intervening by leave) (2002) 42 ACSR 296; [2002] NSWSC 578; Meagher, Gummow and Lehane, Equity Doctrines & Remedies, 4th ed. (2002) para [6-470]. 108 The case law concerning approval of such assignments by liquidators gives some feel for the type of rewards which commercial funders of litigation obtain. In the cases set out in the following table the financiers of all except the first case financed 100% of the costs, and there appears to have been no, or no significant, risk to creditors in pursuing the litigation. Re Movitor Pty Limited Financier agreed to fund 50% of the costs of bringing litigation, and bear 50% of the risks of an unfavourable costs order, in return for (in the event the litigation was successful) recovery of the amount it had funded, plus 12% of the net recovery. UTSA Pty Ltd (in liquidation) v Ultra Tune Australia Pty Ltd and others Liquidator to receive 20% of net proceeds plus $300,000. Re Addstone Pty Ltd (in liq); Elfic Ltd v Macks Financier to receive $80,000 plus about 35% of net recoveries. Buiscex Ltd v Panfida Foods Ltd (in liq) Financier to receive 75% of net recoveries, in a case where there were modest chances of recovery and substantial costs of investigation, and the liquidator indicated that he had negotiated and believed the deal was reasonable. Re William Felton & Co Pty Ltd Financier to receive 30% of net recoveries. Re Tosich Construction Pty Ltd Financier to receive 50% of net recoveries until it had received $370,000, then 25% of what remained. Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (Bendeich as liq, Greatorex and Others intervening by leave) Financier to receive 15% of net recoveries if early recovery was effected, rising to 40% if proceedings were taken.

109 This table fails to take into account all of the factors which are relevant to assessing whether a return to a litigation funder is a proper one, and so can only be used to provide a very rough check on whether the result I have arrived at is out of line with the return obtainable by a litigation funder who takes an assignment of a cause of action. To make the percentages of net returns obtained by litigation funders who take an assignment of a cause of action comparable to the percentage of net returns received by Jarbin, it would be necessary to allow Jarbin, for the purpose only of making this particular comparison, a deduction of the amount it is obliged to pay to the vendors of debts and notes. That deduction, at a weighted average of 12.65% of Jarbin's recoveries, would amount to 6.325% of the liquidator's net recoveries, and would reduce Jarbin's return to 43.675% of the liquidator's net recoveries. When this is a case where Jarbin did substantial work, as well as providing funding, and the cost of performing that work would need to be met from that 43.675%, the result does not seem out of line with the net returns obtained by litigation funders who take an assignment of a cause of action. 110 The fact that I have performed this exercise at all should not be taken as an indication that it is the preferable way of comparing Jarbin's return with the price at which other litigation funders might have financed the action. Evidence of the liquidator having actually tested the market, in relation to funding this particular piece of litigation, would have been significantly more weighty. Order 111 Order that the sum of $5.25m recovered by the liquidator of Clutha Limited (in liquidation), and any refunds of GST received by the liquidator in consequence of making the distributions authorised by this order, be distributed:

(a) by ratifying the payments already made by the liquidator from the settlement sum of expenses totalling $29,371.46;

(i) funding provided by Jarbin Pty Ltd in the sum of $928,906.74;

(v) $500 each to Mr Chessell and Western Agricultural Co Pty Ltd;

(c) by appropriating a fund of $60,000, or such other amount as seems to the liquidator to be fit, for the purpose of paying such fees as might in future be properly payable to Piper Alderman and the liquidator concerning the liquidation of the Company;

(d) by distributing the remaining balance equally between:

(ii) other creditors of the Company. **********

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