Kirk, in the matter of Primebroker Securities Ltd (Receivers and Managers Appointed) (In Liq) [2011] FCA 86

The Bruval Proceeding 5 PSL conducted a securities lending business. Clients lent shares to PSL in exchange for cash collateral. Bruval was one of these clients. In accordance with the agreement between them, when the liquidator was appointed to PSL the lending agreement with Bruval was closed out and the net position of the parties was calculated. It showed that Bruval owed PSL $319,160.87. The plaintiffs made a written demand on Bruval for this amount requiring payment by 4 December 2008. On 20 May 2009, Bruval filed an application in this Court seeking an order that the agreement between it and PSL be declared void. 6 PSL was part of the Chimaera Financial Group of companies which provided various financial products to investors. In the proceedings Bruval made claims against another company in the group, Chimaera Capital Ltd (CCL), for its role in the relationship between PSL and Bruval. It is not necessary to examine the detail of this aspect of Bruval's claim. By a cross claim the first plaintiff and the predecessor of the second plaintiff sought payment from Bruval of the $319,160.87 owing under the agreement. 7 On 1 October 2010, Registrar Pringle conducted a mediation of this proceeding. Bruval made an offer to resolve the litigation with PSL. The plaintiffs sought legal advice and, based on that advice, accepted the offer. The settlement was on the express condition that the plaintiffs would obtain directions from a court of competent jurisdiction that they were justified and / or acting reasonably in entering into the settlement.

Other litigation against the plaintiffs 8 The present application for directions is brought by the plaintiffs, so it is argued, to provide protection for their position against a background of several legal proceedings already instigated against them. 9 SC Capital Pty Ltd (SC Capital) and Cablerand Pty Ltd (Cablerand) traded together as Chimaera Capital Partners (CCP) and were companies in the Chimaera Group. CCP was a client of PSL and lent shares to PSL in return for cash collateral pursuant to a lending agreement. When liquidators were appointed to PSL on 16 October 2008, the agreement was closed out according to its terms. The agreement provided for the calculation of the net position of the parties at that date. On 2 December 2008, PSL issued statutory demands against SC Capital and Cablerand for $35,220,749.59 owing under the agreement. 10 On 24 December 2008, SC Capital and Cablerand issued proceedings in the Supreme Court of Victoria pursuant to s 459G of the Act seeking to set aside the demands. 11 In the course of that proceeding, SC Capital and Cablerand filed affidavits which made allegations of wrongdoing against ANZ, but also against the receivers in the conduct of the receivership. It was alleged that the receivers had acted negligently in the management of PSL's 25 per cent shareholding in a Queensland gas exploration company, Blue Energy Ltd, by failing to join with another major shareholder to sell both holdings together with a control premium, and by failing to appoint a director to the board to represent PSL's interest. It was alleged that the loss to SC Capital and Cablerand could be in excess of $230,000,000, although no obvious basis for this amount was disclosed. It was also alleged that the first plaintiff had agreed that the lending agreement with PSL would not be closed out before the conclusion of certain negotiations concerning the affairs of the companies. Despite that agreement, it was alleged, the statutory demands were served before the negotiations were concluded. 12 On 1 September 2009, Efthim AJ set aside the demands on the ground that the receivers had not been validly appointed by ANZ. 13 On 7 September 2009, the first plaintiff and the predecessor of the second plaintiff, on behalf of PSL, and ANZ filed notices of appeal against the judgement of Efthim AJ. The first plaintiff and the predecessor of the second plaintiff also filed an application under s 418A of the Act seeking orders validating their appointment, and seeking orders that the appeals and the validation application be heard together. 14 Then, on 15 July 2010, PSL, on the instructions of its liquidators, SC Capital, Cablerand and other companies in the Chimaera Group instituted a claim for damages in the Supreme Court of Victoria against, inter alia, ANZ and the plaintiffs. Part of the relief sought was a declaration that ANZ's appointment of the receivers to PSL was invalid, an order removing the plaintiffs, restitution of the monies collected in the receivership, and damages. 15 On 14 April 2010, the liquidators of PSL filed a proceeding in this Court against ANZ seeking, inter alia, a declaration that the charge under which the plaintiffs were appointed is void under s 588FJ of the Act. On 23 July 2010, that application was transferred to the Supreme Court of Victoria.

The Plaintiffs' concerns 16 The reason for the present application is explained by the first plaintiff in an affidavit sworn on 22 October 2010, as follows: 60. I am aware that as the joint and several receiver and manager of PSL, I have the power to cause PSL to enter into the settlement, both under the terms of the Charge and under section 420(2) of the Act. I am also aware that in this context I am bound to observe the various duties I owe to ANZ as my appointor and to PSL itself. 61. However, given the extant challenges to the validity of our appointment and to the allegations that the Charge under which we were appointed is void, the Receivers are in a difficult position in terms of realising the assets of PSL for the benefit of ANZ as our appointor, and in particular collecting the various debts owed to PSL by its clients upon the close-out of their respective AMSLAs [Australian Master Securities Lending Agreements]. On the one hand, if the Receivers were to "down tools" and not take any active steps to realise assets and collect debts pending resolution of the various legal challenges, we may be criticised for not acting expeditiously to preserve and realise the value of PSL's assets in the interim. The directors of PSL, who are also the directors of the various Chimaera Group companies pursuing the litigation in the Supreme Court of Victoria, have previously made allegations to this effect in respect of other assets of PSL. On the other hand, if positive steps are taken to realise assets while those challenges remain on foot (including, for instance, issuing legal proceedings and reaching settlements with debtors), it may conversely be suggested we are acting improperly or unreasonably. … 64. … I am concerned that PSL's entry into the Settlement may be the subject of criticism, and in particular that in causing PSL to enter into the Settlement it may be suggested that the Receivers have acted negligently or unreasonably.

Consideration 17 Whilst the power given to the Court by s 424 of the Act should be construed liberally (Deputy Commissioner of Taxation v Best & Less Woollongong (1992) 7 ACSR 245 at 247 (Best & Less)), the power to give directions is not unlimited. Certain limitations have been recognised. Thus, the section will not be invoked by the Court to judge the commercial prudence of a transaction entered into by a receiver appointed privately. Sanderson v Classic Care Insurances Pty Ltd (1985) 10 ACLR 115; Best & Less; Re One.Tel Networks Holdings Pty Ltd (2001) 40 ACSR 83 at [27] - [31] (One.Tel). 18 In One.Tel, Austin J declined to act under s 424 to declare that a receiver and manager would be justified in compromising disputes with the liquidator and entering into an agreement to settle the dispute. He said at [32]: To give a direction that the plaintiff would be justified in making an agreement to compromise his disputes with the joint liquidators of the One.Tel companies would be to make or condone a commercial judgment, to that extent supplanting the controller's own primary function. 19 Austin J also said that it was a relevant consideration that there was no opponent to the application. The fact that the plaintiff's evidence was untested reinforced his reluctance to make the proposed order: One.Tel at [34]. 20 Austin J explained one purpose of the Court making directions under s 424: 37 … The section does not permit the court to give directions as to the rights of persons who are not parties to the hearing of the application and indeed, there is some doubt as to whether directions of the court given under a section of this kind can bind anyone, even a party to the application (Best & Less, at 246). However, the significance of the direction is that it provides a measure of protection to the controller, who may call the decision in aid if the reasonableness of his conduct is put in question and may rely upon it in seeking relief under s 1318 of the Corporations Act. 21 In Re Ansett Australia Ltd (No. 3) [2002] FCA 90, (2002) 115 FCR 409 (Ansett) Goldberg J considered whether there were any circumstances in which the Court would make directions under s 447D(1) which might involve the assessment of the commercial prudence of a transaction. This section is the equivalent of s 424 but applicable to administrators of a company under administration. He said: 65 This review of the authorities satisfies me that the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment. 66 The administrators may be correct in their submission that there is no rule of law and no fixed principle that a consideration of commercial issues is precluded, as the jurisdiction of the Court to give directions under provisions such as ss 447D and 479(3) of the Act is discretionary. The exercise of that discretion will vary depending upon the nature and novelty of the matters and issues which are brought before the Court. From time to time, the Court is necessarily drawn into a consideration of commercial issues where there is a matter giving rise not only to the need to make a business or commercial decision, but also to issues of propriety, power, reasonableness of conduct, contested issues of legal principle or procedure or challenges to the decision made by the liquidator or administrator. Such a situation arose, for example, in Re Codisco Pty Ltd; Sanderson v Classic Car Insurances Pty Ltd, and Re Addstone Pty Ltd (In liq). Nevertheless, there is the well-established principle to which I have referred, namely that a court will not give directions approving of a commercial or business decision made by a liquidator or administrator where the decision is within the power of the liquidator or administrator, and there is no challenge to it or other issue arising in relation to it such as propriety or reasonableness, or calling for the exercise of legal judgment. 22 These principles are equally applicable to s 424 of the Act. 23 Two examples may be given where the Court has given directions which in effect endorse a liquidator's commercial judgment. In Re Addstone Pty Ltd (In liq) (1997) 25 ACSR 357, a liquidator of two companies sought directions as to how he should continue to conduct two proceedings. They had been dismissed as having no prospect of success. Appeals had been instituted. The liquidator was concerned whether to continue the appeals and provide the necessary security for costs for the purpose. Persons associated with the companies asked the liquidator to continue the appeals. They told him that if he failed to pursue the appeals they would sue him for negligence and breach of duty. Mansfield J gave a direction that the liquidator would be acting appropriately in discontinuing the appeals. His Honour said at 363: While the court may be reluctant to give directions when purely commercial considerations are relevant to the liquidator's decision, even in relation to the conduct of litigation, there will be circumstances where it is or may be appropriate to do so. One of those circumstances may be where the liquidator's proposed decision is the subject of criticism by a particular creditor or creditors as being unreasonable or mala fides. 24 In Handberg (in his capacity as liquidator of S & D International Pty Ltd) (in liq) v MIG Property Services Pty Ltd (2010) 79 ACSR 373, Warren CJ applied these observations of Mansfield J in an application by a liquidator for directions under s 511 of the Act that he was justified in entering into a compromise of litigation. Warren CJ said at [19] : [T]he courts are restrained when approving the compromise of litigation pursuant to s 511, and that such approval will not be given absent a degree of personal risk attached to a particular liquidator that could negatively affect the winding up process. It is not the role of the court to make what are regarded as commercial decisions for liquidators absent special circumstance. 25 The proceedings were complex and the liquidator was the second liquidator to be appointed to the company. Further, the original administrators had been successfully challenged by one of the defendants. The controversies involved difficult interfamily disputes. The liquidator was, as her Honour found, rightly sensitive to the challenge over any step taken in the litigation. She held: 22 … the first plaintiff is not seeking commercial advice from the court. He has already made what he regards as the appropriate and reasonable commercial decision. It is contained in the settlement deed. Having made that decision, he now asks the court to protect him from the potentially unreasonable behaviour of other parties involved in these proceedings. He is seeking the protection which the court is able to provide him in light of the difficult and litigious circumstances in which he finds himself, and the risk that they pose to his continuing ability to effectively and equitably wind up the second plaintiff. … 24 … The circumstances are unusual enough to warrant that protection being granted. 26 The question then in the present case is whether the plaintiffs are simply seeking the Courts imprimatur for the commercial decision to settle with Bruval, or whether there is something more in the nature of a real and practical threat that they will be challenged over their commercial judgment to compromise this claim. 27 Evidence of the possibility of challenge comes from the fact that various proceedings have been instituted seeking to invalidate the appointment of the plaintiffs, and alleging negligence and breach of duty in relation to the conduct of the receivership. However, the major moving force in much of that litigation are the liquidators of PSL. They were served with the present application and the affidavits in support. Their solicitor responded by letter dated 10 November 2010 as follows: We refer to your letter dated 29 October 2010 in relation to the Receivers' application that they have acted reasonably in causing PSL to enter into the terms of settlement in connection with Federal Court Proceeding No. 377 of 2009 (Bruval Proceeding). The Liquidators do not support or oppose the Receivers' application. The Liquidators have not actively participated in the Bruval Proceeding. They are not in a position to comment on the reasonableness or otherwise of the actions of the Receivers in entering into any settlement. We confirm that our clients will not attend the hearing listed on 16 November 2010. For the record the Liquidators maintain that the appointment of the Receivers was invalid. The fact that the Liquidators have not responded to the Receivers' application is not to be construed as any acceptance of the validity of the Receivers' appointment. The Liquidators expressly reserve their position on the validity of the Receivers' appointment. 28 This letter does not suggest that the plaintiffs are at risk of challenge from the liquidators in relation to the settlement with Bruval. Although, the liquidators assert that they are not in a position to comment on the reasonableness or otherwise of the plaintiffs' action in entering into the settlement, they were placed in a position to make an assessment of the affidavits which included the terms of settlement and the advice of the solicitors for the plaintiffs. The liquidators would be hard pressed to mount a credible challenge to the plaintiffs' action in the future in relation to this transaction. The evidence therefore does not establish that the plaintiffs are in need of any protection from the Court. 29 In support of the application for a direction that the entry into the settlement was justified, the plaintiffs also relied on their concern that they may not have the full records of PSL, and hence their decision to settle may not be based on complete information. In One.Tel, Austin J did not make the direction that the settlement was justified, but did make a narrower order that the liquidator was justified in relying on the limited information which he had obtained. As in One.Tel the circumstances of the present case do not justify the wider form of order. The narrower form of order was not sought. But, in any event, the evidence does not support the narrower form of order. 30 In his affidavit the first plaintiff explains that PSL did not keep its own separate books of account. The books of the companies in the Chimaera Group were intermingled. However, the plaintiffs entered into an agreement with the Chimaera Group concerning the custody of the hard drives which contained records of the Chimaera Group including PSL. After the agreement was concluded the plaintiffs sought further information from the directors of PSL and from other companies in the group. The response was cooperative and discussions are continuing. Whilst some requests are still outstanding the circumstances do not call for the intervention of the Court. The situation may be contrasted to that in One.Tel where: 39 … the plaintiff has been engaged for some time in a dispute with the joint liquidators as to the ownership of certain assets and as to access to documents and information. This has prevented the plaintiff from concluding his investigations as to the ownership of assets and their value, and as to his prospects of success in litigation, and as to the risk that the joint liquidators might succeed in challenging certain transactions as unfair preferences. 31 In these circumstances the case is governed by the approach that the Court should not give directions which involve the assessment of the commercial merits of the proposed agreement. 32 The foregoing discussion has dealt with the plaintiffs' concerns that they may have acted negligently or unreasonably as referred to in [64] of the first plaintiff's affidavit set out in [16] of these reasons. This has been treated as a concern that the plaintiffs may be sued later on the basis that the settlement was not reasonable in a commercial sense. The concern arose, it was argued, because of the hostile atmosphere in which the plaintiffs actions are being scruitinized. 33 It may be that [61] of the first plaintiff's affidavit set out in [16] of these reasons articulates a different concern, namely, a concern that the plaintiffs may be sued for entering into any agreement whilst a challenge to their appointment is on foot. If this were raised as the relevant concern, in order to give the directions sought, the Court would need to be satisfied that the plaintiffs had an arguable case that their appointment was valid. The present application has not been conducted on that basis. The plaintiffs have not contended that they needed protection from a challenge that they should not have entered into the settlement simply because the validity of their appointment was being questioned. Consequently, the application has not been considered on that basis.

Confidentiality 34 Finally, the first plaintiff exhibited to his affidavit in support of the application the terms of settlement between PSL and Bruval (confidential exhibit 26), the terms of settlement between PSL and CCL (confidential exhibit 27) and the legal advice obtained by the plaintiffs concerning the merits of the proposed settlement (confidential exhibit 28). The plaintiffs seek orders under s 50 of the Federal Court of Australia Act 1976 (Cth) that these exhibits remain confidential. 35 Each of the documents concern the confidential settlement reached between the parties. It was necessary to place these documents before the Court to allow the Court to consider the application. However, it is desirable that the original confidentiality of the documents be preserved. In that way the Court would recognise the importance of encouraging parties to litigation to resolve their differences by agreement. Such an order is necessary to prevent prejudice to the administration of justice. Further, the exhibits were provided to the liquidators of PSL after they agreed to keep the exhibits confidential. That is to say, a party with an important interest in the events has agreed that the documents should be kept confidential.

Conclusion 36 In the result, the application will be refused but the confidentiality orders will be made. This means that the condition precedent to the settlement between PSL and Bruval will not be satisfied. The parties should resume discussions with a view to renegotiating a settlement. Whilst the directions under s 424 have not been made, there is nothing in the material to suggest that the plaintiffs have acted negligently or in breach of duty in compromising the proceeding on the terms agreed, even absent the direction sought from the Court. Bringing the application demonstrates a diligent, albeit over cautious approach, by the plaintiffs. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North.