Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed) [2012] FCA 807

REASONS FOR JUDGMENT 1 The plaintiffs are liquidators of three related companies, namely, Great Southern Limited (GSL), Great Southern Finance Pty Ltd (GSF) and Great Southern Managers Australia Limited (GSMAL). 2 The liquidators seek the Court's approval under s 477(2B) of the Corporations Act 2001 (Cth) to enter into a funding agreement with a litigation funder, Riverrock Capital Limited (Riverrock). The liquidators also seek a direction from the Court that they would be justified in entering into this funding agreement. 3 This application is brought ex parte and on an urgent basis because examination summonses have been issued by the liquidators returnable on 30 July and 31 July 2012 in the Supreme Court of Western Australia, for the examination of the auditors of two of the companies, GSL and GSF; and the liquidators say that they are unfunded for the conduct of these examinations. 4 The liquidators relied upon the affidavit evidence of Mr Andrew John Saker, who is one of the liquidators. Mr Saker also gave oral evidence. In his affidavit, Mr Saker deposed that the liquidators seek funding in order to conduct investigations in relation to the pursuit of potential claims which may assist in providing a return to unsecured creditors. Mr Saker has identified four potential claims. Two of the potential claims are in respect of possible breaches of directors' duties in relation to the companies, GSL and GSMAL. There is also a potential claim against the auditors of GSL and GSF; and also a potential claim against unidentified third parties in relation to the exchange of an interest in a managed investment scheme for shares. 5 The liquidators entered into a funding agreement with another litigation funder, Hillcrest Litigation Services Limited (Hillcrest), to fund the investigation into potential claims in respect of the breaches of the directors' duties. Monies advanced to the liquidators under that funding agreement were used to carry out those investigations which, according to the oral evidence of Mr Saker, included the conducting of examinations of directors under the Corporations Act in the Supreme Court of Western Australia. Hillcrest provided the liquidators with funding of $492,161 under that funding agreement, but Hillcrest has since April 2012, declined to provide any further funding in respect of the investigation of those potential claims. 6 The liquidators have also conducted investigations in relation to a potential claim against the auditors, and against the unidentified parties referred to above. 7 The liquidators have issued, but not served, two writs in order to preserve rights which may otherwise be defeated by the expiry of the limitation periods. 8 In addition, Mr Saker has deposed that the liquidators have, in the conduct of the complex administration of these three companies, incurred fees and costs in very substantial sums, which have not been paid. 9 The liquidators have now found another litigation funder that is prepared to enter into a litigation funding agreement with them, subject to the approval of the Court. 10 Counsel for the liquidators took me to a number of significant clauses in the agreement. It is unnecessary to refer to the clauses in detail. The agreement provides that the funder will fund the costs of the liquidators in the conduct of investigations and any subsequent litigation. The agreement also provides that the funder will have the power to approve the steps taken by the liquidators, but there is a dispute resolution provision. Also, of course, the funder will obtain a significant premium. The premium, which is a percentage of the proceeds of any successful litigation, increases depending upon the period of time that it takes for the litigation proceeds to be realised. I will say more about the premium later. There is also a clause which provides for the liquidators to recover from the litigation proceeds, $2.4 million of the costs which the liquidators have already incurred before entry into this agreement. The agreement also provides for the appointment of a specific named law firm to act for the liquidators. 11 The liquidators have obtained the approval of the committees of inspection to enter into the funding agreement with Riverrock. The secured creditors have not pronounced upon the question because they have refused to sign confidentiality undertakings. 12 In Leigh re King Bros [2006] NSWSC 315 (Leigh), Austin J set out the relevant approach to an application of this nature. At [22]-[25], Austin J observed: 22 Mr Leigh has prepared a table identifying transactions involving the Commissioner of Taxation and Toyota Finance Australia Ltd, with a brief explanation for his opinion that the transactions are voidable transactions. He has received legal advice about the prospects of successful recovery actions. A copy of that advice has been tendered on a confidential basis, as mentioned above. It is unnecessary for me to give an account of the advice. I have considered the table and the advice, and I have formed the view that if there is adequate funding, it would be justifiable for Mr Leigh to carry out further investigations and subject to those investigations, it would be justifiable for him, relying on that advice, to proceed with the recovery actions. The law 23 Although the court has the statutory task of giving "approval" to a liquidator's agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete "merits review". As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6: ...the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 24 In Re ACN 076 673 875 Ltd (rec'r & mgr apptd) (in liq) (2002) 42 ACSR 296 the court's approval was sought for a funding agreement to permit the liquidator to conduct public examinations of the company's directors. I had occasion to review the case law and to identify (at [17]-[34]) a number of factors relevant to be taken into account in considering whether there is any lack of good faith or grounds for doubting the prudence of the proposed proceedings. 25 In summary (rearranging the order of presentation adopted in the ACN case), the relevant factors include the following: (i) the liquidator's prospects of success in the litigation; (ii) the interests of creditors other than the proposed defendant; (iii) possible oppression in the bringing of the proceedings; (iv) the nature and complexity of the cause of action; (v) the extent to which the liquidator has canvassed other funding options; (vi) the level of the funder's premium; (vii) the liquidator's consultations with creditors; (viii) the risks involved in the claim (including the amount of costs likely [to] be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the costs of the defendant in the event that the action is not successful, or towards any order for security for costs). 13 Of significance to the resolution of this application are the following factors referred to by Austin J: the liquidators' prospects of success in the potential litigation; the interests of the creditors and the level of the funder's premium. It is in respect of the interrelationship between these three factors, that the evidence adduced by the liquidators is deficient to the extent that I am not able to grant the liquidators' application. 14 As to the liquidators' prospects of success in the potential litigation, the liquidators have not adduced any evidence which demonstrates that there is any prospect of success in the potential litigation. The liquidators contend that the investigations have not yet advanced to a stage where that kind of assessment can be made. However, the difficulty with that contention is that the liquidators have been in office for three years, have already had the benefit of litigation funding and have expended in excess of $400,000 under that funding agreement in investigating the potential claims based on possible breaches of directors' duties, which investigations have included the conducting of examinations of the directors under the Corporations Act. Further, the liquidators have also during their three years in office, carried out investigations into the conduct of the auditors and the unidentified third parties, in relation to the claims that may exist against those persons. 15 Thus, the liquidators have had an opportunity to make some assessment in respect of the prospects of success of the potential claims against the directors, and also the potential claims against the auditors and the unidentified third parties. However, the liquidators have not adduced any evidence as to the conclusions reached by their lawyers in relation to the prospects of success of the potential claims against the directors; nor any evidence which details the further avenues of investigation which have not yet been pursued and which still need to be pursued in respect of each of those potential claims. 16 In relation to the potential claim against the auditors, the affidavit evidence of Mr Saker discloses that following the investigations that have been undertaken in respect of that potential claim, legal advice was in fact obtained. Confidentiality restrictions preclude me from saying more about that legal advice. However, the evidence does not assist the liquidators in addressing this aspect of their application. 17 Further, there is no evidence, notwithstanding the amount of time and money spent by the liquidators to date on the investigations, of the estimated value of the potential claims. This is significant because of the size of the litigation funder's proposed premium, and the substantial amount of the liquidators' costs and legal costs which are projected to be incurred by the liquidators in conducting further investigations and any subsequent litigation. This consideration is relevant to the important question of whether by entering into the funding agreement, the liquidators will, thereby, enhance the prospects of the liquidators returning a dividend to the creditors by the conduct of the potential litigation. 18 The liquidators have produced a document which projects the potential costs that would be incurred in pursuing the potential litigation. This projection was sent to the committees of inspection prior to their approval of the entry into the funding agreement. 19 The liquidators' projection is founded on the assumption that there will be no proceeds from any litigation for 48 months - on the basis that it will take six more months to conduct further investigations, and 42 months, thereafter, to bring the conduct of the proceedings to finality. Bearing in mind that this 48 month period contemplates finality, after the outcome of any appeals, that estimate would seem to be not unrealistic. The liquidators' projection also anticipates that over that four year period, the liquidators' fees and charges will be a further $11 million, and that their legal costs will be $31 million; and that those amounts, as well as the amount of $2.4 million for the costs already incurred by the liquidators, and the funder's substantial percentage premium, would have to be deducted from any amount recovered from the litigation. The projection demonstrates that if the total amount recovered from the defendants in any potential litigation was to amount to $50 million, that recovery would, after the deduction of the costs referred to above, produce a nil return to the creditors. The projection shows that a total recovery of $75 million from the defendants in the litigation, would produce some net return for the creditors. 20 It follows that the value of the potential claim or claims is of crucial significance in determining whether there would be any prospect of the liquidators' entry into the funding agreement producing a benefit for the creditors. However, there is no evidence before the Court which permits me to make any assessment at all as to the potential value of any of the potential claims. 21 In those circumstances, I am not able to approve the entry into the funding agreement, because the evidence before the Court has not sufficiently addressed, and not satisfied me, in respect of a number of the significant factors referred to by Austin J in Leigh. 22 That is not to say that the liquidators might not on some other occasion, be able to produce evidence which satisfies the concerns I have expressed above, but on the basis of the evidence which is before me, I am unable to approve the entry into the agreement. 23 The application is dismissed. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.