MARTIN BRUCE JONES AS LIQUIDATOR AND CHAIRMAN OF A MEETING OF CREDITORS OF RAVENSWOOD RESORT PTY LTD (IN LIQ) (ACN 064 334 238)

RAVENSWOOD RESORT PTY LTD (IN LIQ) (ACN 064 334 238)

Corporations - Company in liquidation - Power of Chairman to admit or reject proof of debt - Appeal against decision to reject proof of debt - Further application to set aside resolution approving offer of litigation funding - Application of s 600A of Corporations Act 2001 (Cth) - Principles concerning related creditors - Resolution set aside as contrary to interests of complainant creditor

Corporations Act 2001 (Cth), s 588FE, s 588M, s 600A

Corporations Regulations 2001 (Cth), reg 5.6.23, 5.6.26

Property Law Act 1969 (WA), s 20

Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467

Paric v John Holland Constructions Pty Ltd [1985] HCA 58; (1985) 59 ALJR 844

Pownall v Conlan Management Pty Ltd [1995] WAR 370

QPSX Ltd v Ericcson (Australia) Pty Ltd [2005] FCA 933

Ramsay v Watson [1961] HCA 65; (1961) 108 CLR 642

Selim v McGrath [2003] NSWSC 927

Kantafield Pty Ltd v Plastamatic (Australia) Pty Ltd (1994) 14 ACSR 687

Young v Sherman [2001] NSWSC 1020; (2001) 166 FLR 96

1 There are two matters before the Court. In each case the matter in contention arises out of the assertion by Ahmad Khalif Bin Mustapha Kammal that he is a creditor of Ravenswood Resort Pty Ltd (in liquidation) and is entitled to insist that his proof of debt be admitted by the liquidator of the company for the purpose of voting at a meeting of creditors.

2 The first matter, being COR 226 of 2005, is an appeal against a decision to reject the proof of debt. The second matter, being COR 236 of 2005, concerns the validity of a resolution in favour of litigation funding passed at a meeting of creditors. The applicant for relief was unable to vote owing to the prior rejection of his proof of debt.

3 As to the first matter, strictly speaking, the applicant for relief, Mr Kammal, is properly described as an "appellant". However, for ease of reference, bearing in mind that both matters were heard together, I will refer to Mr Kammal as the applicant. I note in passing that in certain of the evidentiary materials Mr Kammal was described as "AK". I will use that appellation where necessary in the course of discussion.

4 It will be convenient to look first at COR 226 of 2005, being an appeal brought pursuant to provisions of the Corporations Regulations 2001 (Cth) concerning admission and rejection of proofs of debt for purposes of voting.

5 Regulation 5.6.23(1) provides that a person is not entitled to vote as a creditor at a meeting of creditors unless his or her debt or claim has been admitted wholly or in part by the liquidator or he or she has lodged with the Chairperson of the meeting particulars of the debt or claim or, if required, a formal proof of the debt or claim.

"(1) The chairperson of a meeting has power to admit or reject a proof of debt or claim for the purposes of voting.

(2) If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.

(3) A decision by the chairperson to admit or reject a proof of debt or claim for the purposes of voting may be appealed against to the Court within 14 days after the decision."

7 The applicant relied principally upon the affidavit of Chelsea Emma Kierath sworn 9 September 2005. He sought to adduce in evidence a further affidavit of Ms Kierath sworn 23 November 2005 to which was exhibited the affidavit of the applicant sworn 18 November 2005 affirming that the subject debt remained outstanding. Counsel for the respondent, that is, the liquidator of Ravenswood Resort objected to the latter affidavit of Ms Kierath. The objection gave rise to an issue of admissibility which I will endeavour to resolve in due course.

8 The respondent relied upon the affidavit of Fei Fei Xue sworn 31 October 2005 and the affidavit of Garry David Cobby sworn 23 November 2005. These affidavits were sworn by legal practitioners associated with the law firm engaged by the respondent.

9 It is apparent from the first Kierath affidavit that a Convertible Investment Deed dated 23 November 2000 was entered into between Ravenswood Resort Pty Ltd and the applicant that bears upon the matters in controversy.

10 The Investment Deed recited that Ravenswood Resort was the owner of a 25 per cent individual share in the Ravenswood Sanctuary Joint Venture which was established by a Joint Venture Deed dated 2 October 1996. The Investment Deed then provided for the applicant, described as AK, to advance the sum of $3 million to Ravenswood Resort. The advance was to be repayable either by AK exercising an option granted to him or at the expiry of 3 years. By cl 4(b) provision was made for payment of an additional sum of $630,000 if the advance was repaid within 36 months.

11 It seems that in due course negotiations were undertaken with a view to reconstituting the joint venture and the nature of the proposed development. More particularly, towards the end of 2001 agreements were signed by the interested parties described as a Deed of Revocation Ravenswood Sanctuary Joint Venture and Deed of Reconstruction and Transfer of the Ravenswood Sanctuary Joint Venture. The former document contains a recital to the effect that the joint venture was established for the purpose of creating the Ravenswood Sanctuary Integrated Development situated upon the land known as Murray Locations 13 and 14.

12 The parties to the Deed of Revocation were said to own 100 per cent of the joint venture. The parties included Ravenswood Resort, a Malaysian company known as Rustic Haven, Chew Lan Sim and RRCM. The last-mentioned company was the manager of the joint venture under the Joint Venture Deed.

13 I was informed at the hearing before me that the objective of the reconstruction was to establish Rustic Haven as the proprietor of 70 per cent of the shares in the joint venture. The relevant documents contained a provision that upon reconstruction the joint venture was to be dissolved and the assets and liabilities were to be assumed by Ravenswood Resort and RRCM.

14 I note in passing that by cl 1 of the Deed of Reconstruction the term "Rustic Haven debt" was defined to mean the debt of $3 million due and owing by the joint venture and/or RRPL and/or RRCM to Rustic Haven, being formerly owed to AK and having been assigned to Rustic Haven. Clause 3.4(d) provided that conditional upon implementation of cl 3.1, cl 3.2, cl 3.3 and cl 3.4(b), Rustic Haven was to indemnify RRPL and keep RRPL indemnified against any claims by AK in respect to the Rustic Haven debt.

15 It emerges, then, that there is a suggestion in some of the papers before me that the AK debt of $3 million due by Ravenswood Resort to AK pursuant to the Investment Deed had been or was to be assigned as an element of the proposed reconstruction. However, it is important to understand that AK was apparently not a party or a signatory to these documents. The evidentiary materials before me do not include any written instrument or document signed by the applicant which purports to assign the AK debt or to acknowledge that the AK debt has been assigned or discharged.

16 By s 20 of the Property Law Act 1969 (WA) any absolute assignment by writing under the hand of the assignor of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, is effectual in law (subject to equities having priority over the right of the assignee), to pass and transfer from the date of the notice the legal right to that debt or chose in action, all legal and other remedies for the debt or chose in action and the power to give a good discharge for the debt or chose in action without the concurrence of the assignor.

17 It is clear from this provision that there are three conditions that must be satisfied if an assignment is to derive validity from the statute, namely, the assignment must be absolute, it must be written and signed by the assignor and written notice must be given to the debtor.

18 If an assignment of a chose in action is not absolute, but conditional, the transaction does not hold good as a statutory assignment, but it may still stand as an equitable assignment. An equitable assignment of a legal chose in action generally requires that there is an agreement evidencing the assignor's intention to assign the debt in exchange for valuable consideration: see Cheshire & Fifoot's Law of Contract (8th Aust ed) at pars 8.1 to 8.44.

19 A purported assignment, for value, of legal property, which fails at law, or at contract, to assign legal property, effects an equitable assignment when the consideration is paid or executed; this being a case where equity regards as done that which ought to be done. The effect of a valid equitable assignment is to constitute the assignor a trustee of the property for the benefit of the assignee. Generally, it can be said that the consideration necessary to support an assignment of this kind is consideration sufficient to support a simple contract: Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed) par 6-050.

20 On 23 June 2003 the Supreme Court of Western Australia ordered Ravenswood Resort be wound up and appointed Martin Bruce Jones as liquidator.

21 On 4 August 2005 the liquidator gave notice to the applicant of a meeting of creditors of Ravenswood Resort to be held on 22 August 2005 to consider amongst other things litigation funding to prosecute a claim against Rustic Haven under s 588FE of the Corporations Act 2001 and to defend a claim by Rustic Haven that it was a secured creditor of the company being entitled to a purchaser's lien over lands of a property.

22 I digress briefly to note that by s 588FE a transaction of a company that is being wound up may be voidable in certain circumstances including if it is an insolvent transaction of the company entered into during the 6 months ending on the relation back day or an insolvent and uncommercial transaction entered into during the 2 years ending on the relation back day. Further, the transaction is voidable if it was an insolvent transaction to which a related entity was a party or an insolvent transaction for the purpose of defeating creditors.

23 Accompanying the notice of meeting was a report dated 4 August 2005 signed by Mr Jones of Ferrier Hodgson as liquidator of Ravenswood Resort, which set out certain litigation funding proposals.

24 I will not traverse the report in its entirety. In essence, as to the Rustic Haven claim, the liquidator noted that on 30 September 2003 Rustic Haven commenced proceedings claiming a purchaser's lien with respect to moneys advanced to the Ravenswood Joint Venture and arguing that the balance of the purchase consideration for the subject land should be paid to Rustic Haven rather than the joint venture. At the heart of the claim is the argument that Rustic Haven made an agreement with the joint venture whereby it was entitled to purchase land at a 40 per cent discount to the usual sale price.

25 The liquidator noted in his report that on 15 October 2003, the Court ordered that the liquidator hold the surplus proceeds from the sale of the so-called "super block" after repayment of the Commonwealth Bank of Australia until such time as Rustic Haven's purchaser's lien claim is determined.

26 The liquidator observed that Ravenswood Resort was thought to have good prospects of successfully defending the claim. He noted also that he had carried out an investigation into the cause of Ravenswood Resort's failure and was seeking advice as to the prospects of recoveries against Ravenswood Resort and its directors and against RRLP and Rustic Haven as there were indications that Ravenswood Resort may have been insolvent as early as October 2001.

27 It was against this background that the liquidator in his report canvassed two scenarios concerning a prospective return to creditors and foreshadowed a resolution from the creditors approving a litigation funding agreement at a meeting to be held on Monday, 22 August 2005 at the liquidator's office. The financial statement concerning scenario 1 reflects an acknowledgement that the AK loan had to be included in the list of unsecured creditors in the sum of $3 million.

28 On 9 August 2005 the applicant's solicitors, Chalmers & Partners, wrote to the liquidator seeking clarification of some aspects of his report. This gave rise to exchanges between the interested parties. In a letter dated 15 August 2005 the liquidator disputed that the applicant was a creditor of Ravenswood Resort in that the Deed of Reconstruction (mentioned earlier) indicated that the debt of $3 million, which was formerly owed to AK, had been assigned to Rustic Haven. He was of the view that the conditions concerning the debt had been satisfied. As the assignment had taken effect there was no debt owed by Ravenswood Resort to the applicant. Importantly, for present purposes, the liquidator did not identify or purport to rely upon any document signed by the applicant or agreement providing for the assignment to which the applicant was a party.

29 By letter dated 19 August 2005 the applicant's solicitors challenged the liquidator's conclusion. Their stance was that the restructure of Ravenswood Resort did not go through with the result that their client (AK) was entitled to provide a proof of debt for the purposes of voting at the forthcoming creditors' meeting. In other words, the solicitors asserted that the assignment of the AK debt envisaged by the proposed reconstruction documents had not been carried into effect.

30 The applicant (by his solicitor Darryl Keith Barker) lodged a proof of debt of $3,630,000 for the purposes of voting against the proposed litigation funding. The applicant's determination to vote against the proposed litigation funding is reflected on a proxy form dated 19 August 2005.

31 The subject proof of debt form asserted that as at 23 June 2003 Ravenswood Resort was and still is justly and truly indebted to AK in the sum of $3 million as to a loan and $630,000 as to interest pursuant to a Convertible Investment Deed dated 23 November 2000. AK asserted in par 2 that to his knowledge or belief the creditor has not, nor has any person by the creditor's order, had or received any manner of satisfaction or security for the sum or any part of it save for a Security Deed that was executed on 23 November 2000 in conjunction with the Investment Deed.

32 The minutes of the meetings of creditors of Ravenswood Resort held on Monday, 22 August 2004 are exhibited to the affidavit of Ms Xue. They establish that the liquidator, Mr Jones, acted as Chairman. The purpose of the meeting was to receive a report on the conduct of the winding up and to consider and if thought fit, pass a resolution for the approval of a litigation funding proposal.

33 The Chairman admitted certain named creditors to vote at the meeting. He noted that AK had lodged a proof of debt at the meeting in the sum of $3,630,000. This amount was not being admitted for the purpose of the meeting "based on legal advice received that indicates that AK Mustapha is not a creditor". Mr Barker objected to the adjudication and questioned the inclusion of Dr Teo and Peggy Sim as creditors.

34 The liquidator informed the meeting that the proposed funding from Peggy Sim, a director of Ravenswood Resort, was now to come from Megacity Pty Ltd. The meeting was then adjourned to 30 August 2005 to allow the liquidator to further report on the litigation funding.

35 On 23 August 2005 the liquidator forwarded to the applicant's law firm a further report on the litigation funding including reference to an offer by Megacity Pty Ltd to provide funding. The proposal included a condition that the companies and the liquidator must covenant not to sue Peggy Sim.

36 The liquidator acted as Chairman at the further meeting of creditors held on 30 August 2005. It appears from the minutes of the meeting that AK had lodged a proof of debt at the meeting as before and this was not admitted for the purpose of the meeting upon the basis previously indicated. The creditors admitted were Braig Pty Ltd ($876.70), Dr Nam Teo ($626,272), Dr Teo/Peggy Sim ($6009.02), Richard Yeap & Associates ($4735.50), RRCM (in liquidation) ($2,919,275.88), Peggy Sim ($1,900,429.59) and Rustic Haven ($1,917,396).

37 The Chairman advised that the previous meeting held on 22 August 2005 had been adjourned to allow creditors sufficient time to consider a funding proposal put forward by the Megacity Trust as the previous joint funding offer from Australian Litigation Fund and Peggy Sim had been withdrawn. It was then resolved that the litigation funding agreement put forward by Megacity be approved. The motion was carried unanimously but with Rustic Haven abstaining. The Chairman noted that he was exercising a vote on behalf of RRCM (in liquidation) and noted that if the debts of Peggy Sim and Dr Teo had not been allowed to vote, the resolution would still have been passed.

38 On 9 September 2005 the applicant commenced an appeal pursuant to reg 5.6.26(3) of the Corporate Regulations challenging the rejection of his proof of debt for the purposes of voting.

39 Counsel for the liquidator contended at the hearing before me that the appeal was invalid in that the time limit of 14 days commenced as from the initial rejection on 22 August 2005. I am not persuaded to this point of view. To my mind, the reference in the regulation to an appeal "within 14 days after the decision" refers to 14 days as from the decision in respect of which the proof of debt was sought to be adduced. In the circumstances of the present case, given that the initial meeting was adjourned, and that an entirely new funding proposal was brought before the second meeting on 30 August 2005, I consider that the operative decision concerning admission or rejection of the proof of debt was the decision taken at the second meeting.

40 It follows that, in my view, the appeal in the present case was lodged within the prescribed time.

41 The evidentiary materials before me contain evidence bearing upon the question of whether the proposed reconstruction of the joint venture was implemented in the manner envisaged by the relevant document. However, as will become apparent in due course, I do not consider that it is necessary for me to resolve this issue. The matter in controversy can properly be resolved upon other grounds.

42 However, it will now be useful to determine whether, in dealing with the applicant's appeal, I am at liberty to take account of the second Kierath affidavit to which objection was taken, bearing in mind that it was relied upon to place before the Court the applicant's affidavit sworn 18 November 2005 concerning his status as a debtor.

43 The applicant says at par 2 of his affidavit that on 23 November 2000 he entered into the Investment Deed by which he advanced the sum of $3 million to Ravenswood Resort. In par 3 he refers to an agreement in principle whereby Rustic Haven was to have transferred to it a 70 per cent interest in the joint venture known as Ravenswood Sanctuary Joint Venture and the possibility of an assignment to Rustic Haven of the subject debt. Objection is taken to this latter passage on the ground that it amounts to an expression of opinion about the effect of certain legal arrangements. I will return to this point shortly.

44 The applicant goes on to say at par 4 that he was never called upon by Rustic Haven to assign the subject debt to it or any of his rights under the Investment Deed. He says in par 5 that he never made any such assignment.

45 The applicant asserts in par 6 that he has never given notice to Ravenswood Resort that the subject debt was assigned to Rustic Haven. He says in par 7 that Ravenswood Resort is indebted to him in the amount in question plus accretions thereto in accordance with cl 4 (that is, the amount claimed in respect of interest).

46 Objection was taken to the AK evidence in that the subject affidavits came late and were not filed and served in accordance with the prescribed procedure. Moreover, certain portions of the AK affidavit, and especially par 3, were objectionable in that evidence of opinion is generally excluded.

47 I note in passing, the opinion of witnesses possessing expertise is admissible in respect of matters lying within their field of expertise. However, even so, the general rule is that an expert opinion is of no value unless the facts upon which it is based are proved by admissible evidence: Ramsay v Watson [1961] HCA 65; (1961) 108 CLR 642; Paric v John Holland Constructions Pty Ltd [1985] HCA 58; (1985) 59 ALJR 844.

48 In Pownall v Conlan Management Pty Ltd [1995] WAR 370 the Full Court held that it is open to the Court to admit those parts of an expert's opinion that are not based on hearsay evidence. However, where the evidence that is sought to be admitted is so clearly intertwined with evidence that is inadmissible then the entire body of that evidence must be excluded and the discretion will not operate.

49 To my mind, it is quite clear in the circumstances of the present case that par 3 of the applicant's affidavit infringes the rule whereby evidence of opinion is excluded and that part of the affidavit should therefore not be admitted. It cannot be said that the applicant is qualified as an expert in respect of the matters being referred to and, in any event, the facts and matters ostensibly referred to in the disputed passage have not been sufficiently established by other evidence. Accordingly, I uphold the objection as to the disputed passage.

50 However, I am of the view that subject to the issue concerning time constraints, the other assertions in the affidavit are admissible. They are essentially assertions of fact based upon the personal knowledge of the applicant being assertions to the effect that documents have not been signed effecting an assignment of the debt and the debt in question has not been discharged by payment or otherwise.

51 If I had been inclined to dismiss the objection to the disputed passage in par 3 of the affidavit, then the liquidator's objection based on time constraints would have had greater force in that he was not afforded a sufficient opportunity to file and serve any responsive affidavit. However, now that the disputed passage has been excluded, I consider that the element of supposed prejudice is considerably reduced.

52 The AK affidavit in its reduced form is being used essentially to underpin that which can be inferred from the first Kierath affidavit and related documents, namely, that on the applicant's case the subject debt has not been assigned or discharged. In the circumstances of the present case, I am prepared to receive in evidence the second Kierath affidavit and the AK affidavit exhibited to it (less the disputed passage in par 3 of the affidavit).

53 The legal principles bearing upon the proper approach to be adopted by the Chairman of a meeting of creditors were reviewed and adverted to at some length by Barrett J in Selim v McGrath [2003] NSWSC 927. His Honour indicated that there are significant differences between proofs of debt and claims for voting purposes and proofs of debt and claims for the purposes of entitlement upon a distribution in a winding up.

54 He indicated further that the only relevant decision-making, so far as creditor eligibility for voting goes, is that called for by reg 5.6.23 and reg 5.6.26 which is undertaken by reference to documents that persons claiming to be creditors choose to present. A proof of debt must be viewed in the whole of its context and is commonly supplemented by further information provided by the submitting parties. It is not important whether such information is physically appended to the proof, but depends essentially upon whether the decision-maker has reliable and credible information about it.

55 His Honour observed at par 103 that any decision to admit or to reject for voting purposes will, of necessity, be of a somewhat summary nature. A decision can only be taken by the Chairperson, which means that the meeting will either have started or be about to start. The same will be true of any reg 5.6.23(2) estimate, being a function to be performed by the Chairperson. The situation is accordingly not one in which extensive debate and deliberation will be possible.

56 The Chairperson will have do the best that can be done by reference to the factual material the claimant furnishes, viewed in the total context with which the decision-maker is dealing. If that material provides reasonable grounds, within that context, for ascribing a particular figure to the particular claim, the Chairperson is no doubt expected to accept that position.

57 His Honour went on to say that the reference to "particulars" in the regulations is a reference to particulars sufficient to show, at least at a prima facie level, the existence of the asserted debt or claim. The person asserting creditor status must at least go to the extent of setting out facts or alleged facts which, viewed within the context of pre-existing knowledge of the person making a decision about the proof, are sufficient to warrant a finding that at least a claim exists in more than mere assertion.

58 His Honour emphasised at par 105 that assessment of particulars in any given case will inevitably be undertaken in context. The decision-maker will come to the task with certain existing knowledge. His Honour said further at par 106 that pre-existing knowledge may, in the same way, contribute to confidence in particulars which, viewed entirely in isolation, may appear to be insufficient.

59 I note also that in McPherson: "The Law of Company Liquidation" (4th ed) the learned author observed at 535 that as regards proof in winding up the general rule is that any debt is provable which might have been enforced against the company immediately prior to the winding up.

60 It is apparent from the decided cases that a person asserting creditor status must provide particulars sufficient to show at least at a prima facie level the existence of the asserted debt or claim. However, this must be viewed within the context of the pre-existing knowledge of the decision-maker.

61 In the present case, the proof of debt form submitted on behalf of the applicant contained particulars sufficient to identify the Investment Deed dated 23 November 2000 as the source of the subject claim. The Chairperson, being the liquidator, had access to the books and records of the company in the period leading up to the meeting and therefore can be presumed to have had a broadly based background knowledge as to the circumstances of the company. This knowledge obviously extended to the presence of the AK debt because, as I noted in earlier discussion, the liquidator's report contained a financial statement in which the AK debt is included in a list of unsecured creditors.

62 In addition, the exchange of correspondence between the interested parties clearly establishes that the liquidator was aware of the subject debt and seemed to agree that the debt in question was outstanding. The only issue raised by the liquidator in the period prior to the meeting of creditors was the question of whether the AK debt had been assigned to Rustic Haven with the result that the applicant could no longer be regarded as the proprietor of the debt or as a person in a position to enforce a claim against Ravenswood Resort.

63 However, it will be apparent from the narrative that the liquidator could not identify any document or notice signed by the applicant capable of effecting an assignment of the debt to Rustic Haven at law in the manner allowed for by s 20 of the Property Law Act. Accordingly, the only question was whether the AK debt was the subject of an equitable assignment to Rustic Haven, although, even then, AK, as trustee on behalf of the supposed assignee, would probably be in a position to enforce a claim against the debtor company at law. More importantly, however, the liquidator could not and did not identify any agreement to which AK was a party amounting to an equitable assignment. The only material before him suggesting that there might be an assignment was the reference to such an arrangement in the reconstruction documents, but AK was not a party to those documents. The liquidator seems to have given inordinate and inappropriate weight to a passing reference to a proposed assignment, and thereby erroneously concluded that there was sufficient evidence before him to reject the subject proof of debt upon the basis that the AK debt had been assigned.

64 When I draw together all these considerations, I am of the view that, properly advised, the liquidator as Chairperson was provided with sufficient particulars, having regard to his detailed background knowledge of the situation, to make a summary appraisal as to whether AK was the proprietor of the debt in question and to determine that the debt was still outstanding and had not been assigned to Rustic Haven in an effective manner. He ought to have admitted the proof of debt in the absence of any sufficient evidence that the debt had been assigned.

65 This conclusion makes it unnecessary for me to enquire into the further question of whether the debt had actually been assigned as a consequence of the proposed reconstruction being carried into effect. Accordingly, I consider that the applicant's appeal should be upheld.

66 The applicant's plea for relief in COR 236 of 2005 is set out in his originating process under s 600A of the Corporations Act dated 23 September 2005. In essence, the applicant seeks an order that setting aside the resolution in favour of litigation funding purportedly passed at the second meeting of creditors on 30 August 2005 and an order declaring litigation funding that is capable of rewarding Peggy Sim for contravening s 588G(2) or (3) of the Corporations Act is void for being contrary to public policy.

67 Section 600A falls within Div 3 of the Corporations Act and allows for relief where the outcome of voting at a creditors meeting is determined by a related entity or entities.

68 It appears from McPherson: "The Law of Company Liquidation" (supra) at 322 that this Division was introduced in relation to liquidation by the Corporate Law Reform Act 1992 in order to combat the fact that voting by creditors is vulnerable to the influence of insider and related creditors. Under s 600A a creditor may apply to the Court to have the vote in relation to a proposed resolution at a meeting overturned.

69 The application may be made where a resolution has been voted on and if the votes of a related creditor or related creditors of the company were disregarded, either the resolution which was passed would not have been passed or the resolution which was not passed would have been passed or the issue would have been decided on a casting vote, and the result is contrary to the interests of the creditors as a whole or is reasonably likely to prejudice creditors.

70 "Related creditor" is defined in s 600A(3) to mean a person who, when the vote was cast, was a related entity and a creditor of the company. The term "related entity" is defined in s 9 to include a director or member of the body or of a related body corporate, a relative, or de facto spouse of such a director or member, a relative of a spouse, or a de facto spouse of such a director or member.

71 Counsel for the applicant submitted at the hearing before me that when the voting pattern at the subject meeting mentioned earlier is analysed it emerges that all the persons voting for the subject resolution save for Richard Yeap & Associates were related creditors. Peggy Sim was a director of RRCM and Ravenswood Resort and Dr Teo was her husband. RRCM was a related company. Rustic Haven abstained from voting.

72 There was some controversy at the hearing as to whether RRCM was a related creditor. However, a written submission placed before me after the hearing, counsel for the liquidator conceded that RRCM was a related creditor.

73 Counsel for the applicant submitted that had the votes of Dr Teo and Peggy Sim been disregarded and had the applicant's proof of debt for voting purposes not been rejected by the liquidator as Chairman of the relevant meeting of creditors, then the resolution for litigation funding would not have been passed, having regard to the size of the AK debt.

74 Counsel for the applicant submitted further that the litigation funding was sought to prosecute a claim against Rustic Haven that the transfer of 33 land lots be set aside as an uncommercial insolvent transaction, the consideration for those lots having been paid whilst Peggy Sim and Dr Teo were the only directors of Ravenswood Resort. It was sought also to defend proceedings by Rustic Haven that it is entitled to a purchaser's lien in respect of the requisition of land lots for which title was not received, thereby making Rustic Haven a secured creditor of Ravenswood Resort.

75 The litigation, if successful, would, as a consequence of the litigation funding, reward Peggy Sim who is both a shareholder and director of the funding company. To succeed in the caveat claim, the liquidator must prove that when moneys were paid by Rustic Haven for the caveated lands, Ravenswood Resort was trading whilst insolvent or the transaction led to insolvency. Significantly, the litigation funding is conditional upon Peggy Sim not being sued if it be found that Ravenswood Resort was trading whilst insolvent.

76 The passing of the resolution for litigation funding was said to be contrary to the interests of those creditors of Ravenswood Resort who are not related creditors of Dr Teo or Peggy Sim as the litigation funding is conditional upon no recovery action being taken against Peggy Sim. This is prejudicial or reasonably likely to prejudice the interests of the applicant as a major creditor in that if the resolution is carried into effect the liquidator will have forsaken the right to take recovery action against Peggy Sim pursuant to s 588M of the Corporations Act.

77 Further, it is unreasonable having regard to the role of Megacity of which Peggy Sim and Dr Teo are directors and Peggy Sim is a shareholder in that the funding company will receive the benefit of a prescribed percentage of the fruits of the litigation in circumstances where liability might otherwise have attached to Peggy Sim.

78 Counsel for the applicant supported his case by referring to the judgment of Austin J in Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467. His Honour observed in that case at par 310 that the effect of the resolution in question deprived the creditors of the benefit of further investigations into the prospect of recoveries for insolvent trading, unfair preferences and uncommercial transactions, and it deprived them of the prospect of recovery under such claims. In his opinion the resolution in that case to execute the so-called DOCA document which had that effect prejudiced the creditors who voted against it to an extent that was unreasonable having regard to the consideration just mentioned. He was of the view that the Court had a discretion to make an order under s 600A(2) setting aside the resolution. Further, in view of his findings, it was "clearly appropriate" that such an order be made.

79 There is evidence before me sufficient to establish that the creditors voting in favour of the subject resolution were related creditors save for Richard Yeap & Associates. There is evidence also that if the applicant's proof of debt had been admitted (as it ought to have been on my earlier finding) then the applicant by his representative and proxy would have voted against the resolution. This is borne out by the appointment of proxy form dated 19 August 2005 which is Exhibit CEK13 to the affidavit of Chelsea Emma Kierath sworn 23 September 2005 in respect of COR 236 of 2005. The proxy was under instruction to vote against the funding resolution.

80 Having regard to the reasoning of Austin J in Bovis v Wily (supra) I am of the view, within the meaning of s 600A(1)(c)(ii), that the passing of the subject resolution has prejudiced, or is reasonably likely to prejudice, the interests of AK as a creditor who was minded to vote against the proposed resolution to an extent that is unreasonable having regard to the benefits resulting to some or all of the related creditors from the resolution and the nature of the respective relationships between the related creditors and the company. The vote of AK would have been of sufficient value to ensure that the resolution failed.

81 This conclusion is reinforced by the fact that the litigation funding comes from a company whose directors were directors of Ravenswood Resort when Rustic Haven paid moneys which led to transfers of land being held in escrow and those lands being subject of the caveat proceedings for which the litigation funding is sought. The integrity of the Court's function is arguably compromised as the funding agreement is not at arms length in that the liquidator relies upon the testimony of the directors of Ravenswood Resort in the caveat proceedings based on s 588FE of the Corporations Act: QPSX Ltd v Ericcson (Australia) Pty Ltd [2005] FCA 933 at par 51.

82 It follows that I am prepared to make an order setting aside the subject resolution in favour of litigation funding. To my mind, this relief having been provided, it is not necessary to make an order declaring litigation funding that is capable of rewarding Peggy Sim be held void for being contrary to public policy.

83 As to COR 226 of 2005 the applicant's appeal will be allowed upon the basis that the liquidator as Chairman ought to have admitted the AK proof of debt for voting purposes at the meeting of 30 August 2002. As to COR 236 of 2005 I will order that the subject resolution in favour of litigation funding be set aside pursuant to s 600A(2) of the Corporations Act. I will hear from the parties as to whether any further orders or directions are required.