Kupang Resources Ltd v International Litigation Partners Pte Limited

Affidavit evidence

1. The deed administrator, Mr Hodgkinson, relies on several affidavits in support of the application. He relies on his affidavit affirmed 27 July 2016 ("Hodgkinson 1"), including Exhibit DMH-1 and Confidential Exhibit DMH-2; his affidavit affirmed 26 August 2016 ("Hodgkinson 2"); his confidential affidavit affirmed 31 August 2016 ("Hodgkinson 3"); and his confidential affidavit affirmed 11 November 2016 ("Hodgkinson 4"), including Exhibit DMH-3 and Confidential Exhibit DMH-4. Mr Hodgkinson is a chartered accountant and registered liquidator with substantial experience in complex insolvent administrations in several jurisdictions (Hodgkinson 2, [6]-[10]; Hodgkinson 4, [77]-[91]).
2. Mr Hodgkinson also relies on an affidavit of Mr Brett Gunter sworn 25 August 2016, and the expert report contained in Exhibit BDG-1 to that affidavit which is directed to the valuation of mining assets held by Kupang. He also relies on an expert report of Mr Ben Slade dated 14 November 2016 relating to the likely costs of the conduct of potential proceedings against directors of Kupang. I have had regard to the fact that Mr Slade and the firm with which he is associated have had dealings with ILP, the proponent of the DOCA, and its associated entities, which have funded class actions conducted by that firm. I do not consider that matter undermines Mr Slade's evidence, which he was plainly well qualified to give, and which accords with the experience which a court can itself bring to bear as to the costs of complex commercial litigation. Mr Hodgkinson also relies on an expert report of Mr David Purcell dated 14 November 2016 which relates to the funding fees likely to be charged by a third party funder to fund potential proceedings to which I refer below, if a third party funder was prepared to do so.
3. I have also had regard to helpful written submissions prepared by Mr Withers, who appeared for the deed administrator in the application, and by Mr Izzo who appeared for ASIC, and drawn on those submissions throughout this judgment. Parts of the evidence referred to in the application were commercially confidential, because of the prospect of the potential proceedings and for other reasons. I have not referred to the detail of some confidential evidence in this judgment and some parts of the published judgment are redacted to preserve confidentiality as indicated below.

Factual background

1. Kupang was previously known as Chameleon Mining NL and, under that name, pursued complex proceedings against third parties, initially funded by ILP, and subsequently became involved in further, and possibly equally complex, proceedings against ILP. On 6 August 2014, ILP appointed receivers and managers to Kupang. A challenge to the appointment of those receivers and managers failed: Kupang Resources Ltd v International Litigation Partners Pte Limited [2015] WASCA 89. The receivers and managers assumed control of Kupang's business and assets on 28 May 2015 (Ex A1, 9). Mr Hodgkinson was appointed voluntary administrator of Kupang on 29 July 2015, by ILP as a creditor holding security over the whole or substantially the whole of Kupang's assets, pursuant to s 436C of the Corporations Act.
2. A second meeting of the creditors of Kupang was held, pursuant to s 439A of the Corporations Act, on 2 September 2015. The creditors voted in favour of the DOCA (Ex A1, 137-138) and Mr Hodgkinson became the deed administrator. The DOCA was executed by Mr Hodgkinson on behalf of Kupang, on his own behalf as administrator and deed administrator, and by ILP on 9 September 2015. Kupang is presently indebted to ILP for a sum in excess of $4.4 million (Ex A1, 17) and that debt is secured by a general security deed (Confidential Ex A7, 379-424).
3. Clause 4.1 of the DOCA provides for a Deed Fund to be established comprising a contribution of $45,000 from ILP and the "lesser of 5% of any Net Claim Recoveries and $50,000" (Ex A1, 148). The "Net Claim Recoveries" are in turn defined as the net proceeds of prosecution of any claims available to Kupang at the commencement date of the deed, after taking into account the administrator's and deed administrator's costs and remuneration (Ex A1, 144). An amount of $36,000 from the Deed Fund is to be made available to "Pool 1 Admitted Creditors", which are unsecured creditors of Kupang admitted to proof, excluding creditors with claims relating to directors' and consultants' fees charged by directors and their related entities (Ex A1, 144, 153). The balance of the "Deed Fund" of $9,000 is to be made available to "Pool 2 Admitted Creditors", which are directors of and consultants to Kupang in respect of such fees (Ex A1, 144, 153).
4. The DOCA also provides for a transfer of all of the issued shares in Kupang by the existing shareholders to ILP, by way of a partial debt for equity swap. Clause 5 of the DOCA (Ex A1, 148) requires the deed administrator to implement that transfer, subject to the Court's approval of that transfer under s 444GA of the Corporations Act, and subject to ASIC granting relief from Chapter 6 of the Corporations Act pursuant to s 655A of the Corporations Act. Clause 11 of the DOCA in turn provides that, in consideration for the transfer of the shares, ILP releases and discharges Kupang from so much of its debt as exceeds $2 million (Ex A1, 154) and the balance of $2 million remains a secured loan, repayable by Kupang to ILP on demand. This application is, of course, directed to satisfaction of the condition as to the Court's approval of the share transfer under s 444GA of the Corporations Act. Clause 13 of the DOCA in effect provides that, if the transfer of the shares is not effected on or before 8 September 2016 (unless otherwise extended), the DOCA is deemed to have terminated, and the creditors will be deemed to have passed a resolution that Kupang be wound up voluntarily: cll 13.2-13.4 (Ex A1, 156-157). This date has been extended on several occasions, most recently to 30 December 2016, by Court order made under s 447A of the Corporations Act and taking effect under cl 13.2(e)(iii) of the DOCA. I do not need to form a view as to the commercial attractiveness of the terms of the DOCA to creditors, since creditors exercised their own judgment as to that matter at the second creditors' meeting and no application has been made to terminate or set aside the DOCA.
5. The Originating Process seeking an order approving the transfer of the shares, in the absence of shareholder consent to the application, was filed on 28 July 2016 and ASIC was notified of the application on 29 July 2016. Notice of the application was subsequently given to shareholders of Kupang, on 1 August 2016, by sending letters through its share registry service provider. Notice of the application has also been given on the deed administrator's website. No shareholders have objected to the proposed transfer, and no shareholder of Kupang appeared to oppose the application at the hearing. I recognise that 185 envelopes containing the notice were returned to the deed administrator marked "return to sender" (Hodgkinson 2, [31]). However, I accept that no further step could practically have been taken to bring the application to shareholders' attention, and there is no reason to think that the shareholders whose notices were returned would have taken a different view than the shareholders who received notice of the application. Mr Withers submits, and I accept, that the fact that some envelopes containing notices of the application sent to shareholders were returned unread would not, in itself, warrant the Court declining to grant the relief sought: Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 ("Re Mirabela Nickel Ltd") at [36].

Applicable legal principles

1. Mr Withers set out the applicable legal principles, in terms that were not controversial in this application, in his submissions for Kupang. Section 444GA(1)(b) of the Corporations Act relevantly provides that the deed administrator of a deed of company arrangement may transfer shares in the company with the leave of the Court. Section 444GA(3) of the Corporations Act provides that the Court may only give such leave if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.
2. Mr Withers refers to the judgment of Martin CJ in Weaver (in their capacity as joint and several deed administrators of Midwest Vandium Pty Ltd) v Noble Resources Ltd (2010) 41 WAR 301("Weaver v Noble Resources Ltd") at [67], [70]-[71] and to my judgment in Re Nexus Energy Ltd (subject to deed of company arrangement) [2014] NSWSC 1910; (2014) 105 ACSR 246. In Weaver v Noble Resources Ltd above, Martin CJ undertook a detailed review of the history of s 444GA of the Corporations Act, which I adopted in Re Mirabela Nickel Ltd above and Re Nexus Energy Ltd (subject to deed of company arrangement) above and which I again gratefully adopt. The section was introduced into the Corporations Act by the Corporations Amendment (Insolvency) Act 2007 (Cth) with effect from 31 December 2007 and adopted a recommendation made in a report of the Legal Committee of the Companies and Securities Advisory Committee ("CAMAC") on Corporate Voluntary Administration (June 1998) that the law should grant deed administrators the ability to compulsorily sell company shares where necessary for the purposes of implementing a deed of company arrangement under which payment of creditors' debts was dependent upon such a transfer occurring (Recommendation 42, para [6.73], noted in Weaver v Noble Resources Ltd above at [65]-[71]). The Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 in turn noted (at [7.54]) that the purpose of the section was to enable a deed administrator to transfer shares in the company without the consent of shareholders where such a transfer was necessary for the success of the deed. The Explanatory Memorandum also noted (at [7.58]) that: "The Court may only grant leave if it is satisfied that the sale would not unfairly prejudice the interests of shareholders. This is intended to direct the Court to consider the impact of a compulsory sale of shareholders [sic] where there may be some residual value in the company."
3. In Weaver v Noble Resources Ltd above, Martin CJ also noted (at [69]-[71]) that the limitation in s 444GA(3) of the Corporations Act that the Court may only grant leave for a transfer of shares under s 444GA(1) if it is satisfied that the transfer would not unfairly prejudice the interests of members reflects the view expressed in the CAMAC report that the possibility of prejudice to a shareholder would arise if there were some residual equity in the company. His Honour also considered (at [78]-[79]) the content of the expression "unfairly prejudicial" and his Honour noted (at [80]) that something more than a mere transfer of shares without compensation would be necessary to establish unfair prejudice.
4. In Lewis, Re; Diverse Barrel Solutions Pty Ltd (subject to deed of company arrangement) [2014] FCA 53, White J noted (at [19]) that the terms of s 444GA(3), in focusing on the concept of "unfair prejudice" to shareholders, contemplated that a transfer of shares may result in some prejudice to the interests of shareholders and that: "Whether or not 'unfair prejudice' will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to the existing shareholders if the leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted." His Honour there held that a transfer of shares involved no unfair prejudice where those shares had no residual value and the shareholders would not receive any return on a winding up. In Re Mirabela Nickel Ltd above at [42], I similarly noted that the question whether shareholders have any residual equity in a relevant sense "has to be determined by comparison with their position on a winding up, at least where that is the likely or necessary consequence of the transfer of shares not being approved".
5. In Re BCD (Operations) NL (subject to deed of company arrangement) [2014] VSC 259; (2014) 100 ACSR 450 at [55]-[57], Digby J observed that: "The words 'unfairly prejudice' clearly requires more that the identification of prejudice consequential upon the proposed transfer, or likely to result from the proposed transfer. The addition of the qualifying adjective "unfairly" in s 444GA(3), makes it clear that prejudice alone will not trigger the prohibition in s 444GA(3). This is consonant with the purpose of the section because it accommodates the practical need for the section to be able to operate notwithstanding a situation where the grant of leave can be said to give to some degree of prejudice to members of the company. The confinement of the required level of satisfaction under s 444GA(3), means that the prejudice which a member would suffer also needs to be in the nature of an unfair prejudice. If there is no prejudice the court will not be constrained by s 444GA(3). If there is prejudice the court will only be constrained if it is satisfied as to the unfairness of that prejudice to a member or members, in the circumstances. The sort of circumstances which may potentially inform the courts as to whether there would be relevant unfair prejudice to the interests of the members of the Company cannot be exhaustively catalogued. However, such circumstances would logically include a comparison of the members' position in the event that the enforced transfer of shares occurred with the members' position in the event the transfer did not occur. Therefore, it will be material to consider the value of the relevant shares and what, if any, loss will result if leave is granted; whether the shares are likely to increase in value, and the factors which are likely to bring about that result including the likely timing of such factors."
6. In Re Nexus Energy Ltd (subject to deed of company arrangement) above at [22], I followed the observation of Martin CJ in Weaver v Noble Resources Ltd above that the possibility of prejudice to a shareholder "would arise if there was some residual equity in the company." Mr Withers submits, and I accept, that it is difficult to see how shareholders could be prejudiced by the transfer of their shares in the absence of any residual value or equity in the company: Weaver v Noble Resources Ltd above at [70]; Re BCD (Operations) NL (subject to deed of company arrangement) above at [11]. Mr Withers also points out that the authorities establish that the fact that shares are to be transferred without compensation is not sufficient, in itself, to establish unfair prejudice: Weaver v Noble Resources Ltd above at [80]; Re Mirabela Nickel Ltd above at [39]. Mr Withers submits, and the case law seems to me to establish that there would not ordinarily be any prejudice, or no prejudice that has the requisite quality of "unfairness", if the shares to be transferred have no value, and there would be no distribution in the event of a liquidation which is the only realistic alternative to the proposed transfer.

Available litigation claims and their prospects

1. Mr Withers submits that the Court should find, by reference to the evidence to which I will refer below, that the shares in Kupang have no value, and that the proposed transfer of the shares in Kupang to ILP would therefore not give rise to unfair prejudice to Kupang's shareholders. Mr Hodgkinson's evidence is that Kupang has two distinct streams of business, namely litigation claims and mining operations, although I should note that its litigation claims presently exist only in potential rather than in actuality (Ex A1, 15). I turn now to the question of the value of Kupang's assets, an assessment of which is a necessary first step in assessing the value of shareholders' equity in Kupang. In his 26 July Report, Mr Hodgkinson identified five potential claims that might by brought by Kupang against its directors and officers. Subsequent to the 26 July Report, and partly in response to further questions raised by ASIC, Mr Hodgkinson gave further consideration to whether the relevant claims had reasonable prospects of success, to which I will also refer below.
2. The first potential claim identified by Mr Hodgkinson was a claim against the former directors of Kupang as at March 2012, in relation to Kupang's entry into an "Alliance Agreement", and the associated issue of 40 million shares in Kupang to Cape Lambert Resources Limited ("Cape Lambert") in purported repayment of an alleged entitlement to $6.5 million when Cape Lambert allegedly had no entitlement to the funds ("Alliance Agreement Claim") (Ex A1, 19). Mr Hodgkinson initially assessed this claim as having a value of $6.5 million but now gives no value to this claim, at least when brought by Kupang rather than its shareholders (Hodgkinson 4, [26]-[28]).
3. After giving further consideration to this claim, following questions raised by ASIC, Mr Hodgkinson concluded that this claim could not reasonably be brought by Kupang, because any loss was suffered by shareholders whose shareholding has been diluted as a result of the issue of the relevant shares by conduct of the directors: Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 (Hodgkinson 4, [26]). Mr Izzo, who appears for ASIC, draws attention to a qualification to that proposition, namely that a company that is caused to undertake a share issue which ought not to have occurred may have a claim for the consequential effect on its capacity to raise other finance and, if that other finance might have enabled the company to earn profits, for loss of profits: Pilmer v Duke Group Ltd (in liq) above at [56], [64]; Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324; (2014) 101 ACSR 415 at [2], [69]-[72]. While I accept that qualification, there is no apparent reason to consider that Kupang either had or lost an opportunity to raise other finance or lost consequential profits. Mr Izzo also fairly recognises that, given the quantum of recoveries which Mr Hodgkinson indicates would be needed to restore any value to the equity in Kupang (Hodgkinson 4, [92]), it may be that these considerations do not affect the analysis in the present case. It seems to me that proposition is correct. Mr Hodgkinson also identified matters relating to the financial position of Cape Lambert, including a going concern qualification made by its auditors in its most recent financial report, that he considered significantly reduced the prospects of successfully recovering a judgment debt from that company (Hodgkinson 4, [24], [28]). It seems to me that at least the issue as to whether Kupang had suffered any loss, putting aside any question as to Cape Lambert's position, is sufficient to establish that no value should be given to this claim, in assessing the value of equity in Kupang.
4. The second potential claim identified by Mr Hodgkinson was a potential claim against the former directors of Kupang as at March 2014, in relation to their conduct in causing Kupang to execute a Deed of Forgiveness, which it would be alleged was not in the best interests of Kupang and was done in breach of ss 588FB and/or 588FH of the Corporations Act ("Kimberly Claim") (Hodgkinson 26 July Report, [4.1.2]; Ex A1, 19). Mr Hodgkinson has assessed a potential value of $978,000 for this claim (Hodgkinson 26 July Report, [4.2]; Ex A1, 21).
5. The third potential claim identified by Mr Hodgkinson was a claim that Kupang's directors acted in breach of duty in terminating a funding agreement with ILP in October 2012 ("Termination Claim") (Hodgkinson 26 July Report, [4.1.3]; Ex A1, 19-20). Mr Hodgkinson initially assessed that claim as having a value of $8,381,144 (Hodgkinson 26 July Report, [4.2]; Ex A1, 21). After giving further consideration to this claim, following questions raised by ASIC, Mr Hodgkinson concluded that that the Termination Claim had no reasonable prospects of success, because the actions of Kupang's directors in terminating the ILP Funding Agreement did not cause Kupang to suffer loss, and saved Kupang approximately $5.9 million, which Kupang would otherwise have been obliged to pay ILP (Hodgkinson 4, [51]-[54]). This analysis is compelling and no value should be attributed to this claim in assessing the value of equity in Kupang.
6. The fourth potential claim identified by Mr Hodgkinson was a claim for breach of directors' duties in conducting insufficient due diligence surrounding the acquisition of an interest in the "Kupang JV" which is a manganese project in Indonesia ("Kupang JV Claim") (Hodgkinson 26 July Report, [4.1.4]; Ex A1, 20). Mr Hodgkinson also refers to a potential claim concerning non-disclosure of an outstanding liability arising from a land purchase related to the joint venture and has assessed these claims as having a potential value of $12 million (Hodgkinson 26 July Report, [4.2]; Ex A1, 21).
7. The fifth potential claim identified by Mr Hodgkinson involved claims against directors and officers of Kupang for misleading and deceptive conduct in relation to statements and representations concerning the several matters described above (Hodgkinson 26 July Report, [4.1.5]; Ex A1, 20-21). Mr Hodgkinson expressed the view that the value of these claims was difficult to assess, and it has not been quantified (Hodgkinson 26 July Report, [4.2]; Ex A1, 21). ASIC points out, and Mr Hodgkinson accepts, that this claim can be ignored for the purposes of this application because it is a claim available to shareholders, not Kupang.
8. Mr Hodgkinson's 26 July Report assumed that the several claims noted above had reasonable prospects of success, and concluded that the total quantum of the potential claims was in excess of $27 million (Hodgkinson 26 July Report, [4.2]; Ex A1, 21). Mr Hodgkinson also estimated that, net of costs and a litigation funding fee, a range of $530,000 to approximately $3 million would be available to meet creditors' claims, if Kupang's claims settled at a relatively early stage (Hodgkinson 26 July Report, [4.2], [4.4]; Ex A1, 21; Confidential Ex A5, [1.4]). It is not necessary to pause on that analysis, which has been largely displaced by further evidence now led by Mr Hodgkinson. Mr Hodgkinson also gave consideration to Kupang's prospects of recovery under the litigation claims against a directors' and officers' insurance policy held by Kupang (Hodgkinson 26 July Report; Confidential Ex A5). It is not clear whether that analysis took account of whether that policy would respond to claims made by one insured, the Company, against other insured, its directors. If the policy would not respond to such claims, then there is less rather than more likelihood that shares in Kupang have any residual value.
9. After giving further consideration to the claims, following questions raised by ASIC, Mr Hodgkinson now considers that the claims available to Kupang are limited to the Kimberly Claim and the Kupang JV Claim, totalling $12,978,000 (Hodgkinson 4, [56]). Mr Hodgkinson also rightly recognises that these claims have litigation risks (Ex A1, 21; Confidential Exhibit A5). Any estimate of the proceeds of litigation has a degree of uncertainty about it, but nothing in the evidence before me suggests that this estimate understates the potential value of these claims, so as to understate the value of the equity in Kupang. ASIC initially identified uncertainty about the maximum amounts that would be recoverable in respect of the claims identified by Mr Hodgkinson and also questioned Mr Hodgkinson's initial assumption that the only realistic source of funds against which a judgment might be enforced are Kupang's directors' and officers' liability policy and Cape Lambert, and noted the possibility that recoveries could be made against former and current directors of Kupang. Mr Hodgkinson subsequently made further inquiries as to the asset position of the potential individual defendants in respect of the remaining two potential claims and has expressed the opinion, based upon those inquiries, that the potential recovery amount from prospective director defendants, after deducting enforcement costs, would be $617,429 (Hodgkinson 4, [59]-[65]). There is no reason not to accept that evidence.

Steps necessary to pursue litigation claims and their funding

1. Mr Hodgkinson also outlined the steps that would be necessary to pursue the litigation claims in his 26 July Report, including ascertaining the availability of funding, either from a litigation funder or by raising funds from shareholders and/or creditors; properly assessing the merits of each cause of action; assessing the validity and reliability of the relevant directors' and officers' insurance policy; considering the ability of each defendant to meet a judgment if the claims were successful; and assessing the return to each class of claimant and the likely recovery after settlement of costs and expenses (Hodgkinson 26 July Report; Confidential Exhibit A5, 4).
2. ASIC initially identified a concern that Mr Hodgkinson had not explained material assumptions that he made in assessing the costs of the litigation claims. That matter was addressed by a further report of Mr Slade, who addressed the likely costs of bringing the Kupang JV Claim and the Kimberly Claim, which are the two claims which Mr Hodgkinson now considers could reasonably be pursued. Mr Slade expressed the view that Kupang's costs and disbursements in respect of those claims would be approximately $[redacted] including GST (Slade [12]) and the defendants' total costs and disbursements would be a lesser amount (Slade, [15]). These amounts are substantial, particularly by comparison with the amounts in issue in the claims. However, Mr Slade is well qualified to make that assessment and, even if the litigation could ultimately be conducted at a lesser cost, there is little realistic prospect on the evidence that the recoveries estimated by Mr Hodgkinson could be achieved by Kupang without incurring litigation costs exceeding at least $1.465 million, the point at which Mr Hodgkinson assesses the residual value of Kupang's shares as nil, even after such recoveries.
3. In his report to creditors dated 25 August 2015, Mr Hodgkinson invited shareholders and creditors to contribute funding for the purposes of investigating and pursuing the potential litigation claims (Ex A1, 70, 78). Mr Hodgkinson did not receive any offers of funding from shareholders or creditors of Kupang (Hodgkinson 4, [15]) and reasonably assumes, in his evidence in this application, that litigation funding is a necessary prerequisite to the conduct of the Kupang JV Claim and the Kimberly Claim. His assessment of the value of the claims therefore has to take into account the likelihood of obtaining and the likely cost of such funding. ASIC initially, and fairly, raised a concern as to whether efforts should have been undertaken by Mr Hodgkinson to ascertain whether, and on what terms, litigation funders would be prepared to fund the contemplated causes of action. That was an important matter because the amount of a funding fee charged by a litigation funder has a significant impact on the potential recoveries from the potential litigation claims. This matter has now been addressed by further evidence of Mr Hodgkinson, Mr Slade and Mr Purcell.
4. Mr Hodgkinson initially assumed that Kupang would be required to pay a litigation funder a funding fee of 40% of the proceeds of litigation, which is, perhaps, at the higher end of funding fees which this Court sees in litigation funding agreements with liquidators. Mr Slade, who is well qualified to give evidence as to these matters, expressed the view that funding fees ordinarily applicable to claims of this sort would be between 35% and 42% of the claim value (Slade [18]) and Mr Hodgkinson's assumed fee is in that range. Mr Hodgkinson also assessed the likely realisable value of the litigation claims, adopting funding fees of 25%, 30% and 40% (Hodgkinson 4, [76]). The lower end of that range was perhaps optimistic and, in any event, the application of lower funding fees did not allow a return to unsecured creditors or shareholders, on the anticipated results of the proceedings.
5. Mr Withers also points out that there is a real question whether a litigation funder would be prepared to fund the claims in any event. Mr Slade identifies risks to which litigation funders typically have regard in deciding whether to fund a claim, including the value of the claim, the defendant's capacity to pay, the likely duration of the proceedings, the merits or prospects of success, and the risk of adverse costs orders (Slade [19]). Mr Slade's evidence is that, in his experience, litigation funders are unlikely to commit to funding complex and substantial commercial litigation unless they are reasonably confident that a successful result would achieve a recovery of three times their outlay on funding (Slade [21]). Mr Withers notes that a funder would need to anticipate a recovery in excess of $[redacted] on the claims to achieve that return, on Mr Slade's estimate of approximately $[redacted] for the costs and disbursements in respect of the proceedings. Mr Slade's analysis is that, consistent with his estimates, a litigation funder would be exposed to the risk of an overall payment that was short of its required return in respect of Kupang's claims (Slade [31]) and Mr Slade expresses the opinion that (Slade [34]): "The real issue for a Funder considering the Litigation Claims is that the risks identified … make the Litigation Claims too much of a risk to fund even if the Litigation Claims have good prospects. Any dilution in confidence of success would, in my experience, make it even more likely that a Funder would refuse to fund the Litigation Claims."
6. I accept that there is a real possibility that a third party litigation funder would not be prepared to fund Kupang's proposed claims, and it is plain that a liquidator that may be appointed to Kupang could not be expected to fund those claims from his or her own resources and ILP is not likely to do so unless the DOCA is implemented. There is no likelihood of a return to creditors if the litigation claims could not be funded and could not be brought.
7. Mr Hodgkinson also relies, in this respect, on the evidence of Mr Purcell, who is Special Counsel at Litigation Funding Solutions, an arranger or broker of funding for litigation recovery claims. Mr Purcell's evidence is that there are examples of courts approving litigation funding agreements, under s 477(2A) of the Corporations Act, on the basis of funding fees of up to 75% (Purcell [26]), although I have not personally had experience of funding fees of that size in funding agreements approved by the Court. Mr Purcell also refers to six examples of funded claims with some similarity to Kupang's proposed claims (Purcell [27]), and identifies funding fees from 25% of net proceeds (for a recovery within 6 months) to 60% of net proceeds (for a recovery over 18 months after funding approval). Mr Purcell expresses the opinion (Purcell [31]) that a funder of Kupang's potential claims would: "be well positioned to negotiate terms of funding in the higher funding bracket up to seventy percent of any recoveries made by Kupang from the proposed proceedings".
8. Mr Purcell also expresses the view that a funder would expect to receive a funding fee based upon a formula involving 30% of net recovery received within 12 months, 50% of net recovery received between 12-24 months and 70% of net recovery received after 24 months (Purcell [33]). There is an obvious question whether fees of this magnitude are reasonable or whether they would be approved by a court. However, Mr Slade's and Mr Purcell's evidence at least establishes that there is little reason to think that a liquidator that may be appointed to Kupang could secure litigation funding of the proceedings for a lesser fee than the 25%, 30% and 40% figures to which Mr Hodgkinson has had regard in assessing the likely proceeds of the claims and the value of Kupang's equity.
9. Mr Hodgkinson initially estimated that the net proceeds to creditors of the potential claims would range between $532,000 to $3,063,250 (Hodgkinson 26 July Report; Confidential Ex A5, 4). After the further analysis to which I referred above, and after excluding the Alliance Agreement Claim and the Termination Claim, Mr Hodgkinson estimated a "high range recovery" on an early settlement of $2,331,250 (Hodgkinson 4, [72]) and a "high range recovery" on success in a fully contested hearing, and assuming a 25% litigation funding fee, of $3,119,322 (Hodgkinson 4, [76]). It seems to me that those estimates are reasonably made. Mr Withers submits, and I accept, that these recoveries would be insufficient to allow any return to shareholders in a liquidation, where Kupang is presently indebted to ILP as a secured creditor for an amount in excess of $4.4 million (Hodgkinson 4, [14.2], [92]).

Kupang's mining operations

1. Kupang also has an interest in a manganese project in Indonesia owned by PT Kupang Resources, an Indonesian company ("Kupang Joint Venture"). The parties to the Kupang Joint Venture own a tenement known as "PT Tamjung Mas", from which manganese ore can be produced and sold; "PT Mangan Kupang Industri MKI", which is an exploration tenement under application; and a stockpile near the Port of Kupang, and port assets located there (Ex A1, 180). Mr Hodgkinson relied on an expert report of Mr Brett Gunter, prepared in accordance with the VALMIN Code, in respect of the valuation of these assets. Mr Gunter's opinion, which there is no reason to doubt, is that the fair market value of PT Kupang Resources is between $775,000 and $1,015,000, with a preferred valuation of $890,000. On the basis of that valuation, Mr Hodgkinson prepared a pro forma balance sheet as at 31 December 2015 (Ex A1, 24) which indicated that the net assets of the Kupang Joint Venture at this date, after taking account of substantial liabilities, were of negative value between $(14,915,537) and $(14,227,863).
2. Kupang's interest in the Kupang Joint Venture is held through a subsidiary, NTT Manganese Pty Ltd ("NTT") (Hodgkinson 26 July Report, [4.1.4]; Ex A1, 20). Mr Hodgkinson concluded that a return to unsecured creditors of NTT, after the costs of liquidation, might range from a low of nil to a high of $0.04 in the dollar (Hodgkinson 26 July Report, [5.7]; Ex A1, 26). Mr Withers submits, and I accept, that there are insufficient assets in Kupang's mining operations to satisfy its obligations to creditors, and therefore the return to shareholders from those assets would likely be nil.

Kupang's overall financial position

1. Mr Withers also draws attention to Mr Hodgkinson's evidence as to Kupang's overall financial position, as set out in section 8 of his 26 July Report (Ex A1, 35-40). Mr Hodgkinson's evidence is that Kupang has made losses since the financial year ending 30 June 2013 (Hodgkinson 26 July Report, [6.1]; Ex A1, 29); it had no income between 30 June 2013 and 31 December 2014, and incurred significant expenses in that period (Hodgkinson 26 July Report, [6.1]; Ex A1, 31); it had accumulated losses of $32,193,937 as at 30 June 2014, and had available carry forward tax losses of $3,174,310 that had a maximum realisable value of $952,293, which could only be utilised if the company made a profit of at least $3,000,000 and did not go into liquidation (Hodgkinson 26 July Report, [6.2]; Ex A1, 31); and its shares had last traded at $0.04, and it was delisted from the ASX on 29 August 2015 (Hodgkinson 26 July Report, [6.2]; Ex A1, 31).
2. Mr Hodgkinson expressed the opinion in his 26 July Report that the only alternative to the DOCA is the liquidation of Kupang, by reason that no alternative proposals could be accepted without the approval of ILP as the secured creditor, there is no realisable value in Kupang's corporate shell where the company has been delisted, there is no other source of funds to pay outstanding claims, and Kupang is no longer trading as a going concern (Hodgkinson 26 July Report, [9.1]; Ex A1, 41). I can see no reason to doubt this opinion. A pro forma balance sheet for Kupang prepared by Mr Hodgkinson as at 26 July 2016 (Ex A1, 37), which includes potential recoveries in an insolvent administration (as Mr Hodgkinson then assessed them) and allows for the costs of an insolvent administration, indicates that there is little possibility of any return to unsecured creditors, and, consequentially, no return for shareholders. Mr Hodgkinson concludes (Ex A1, [8.4]) that Kupang's secured debt, estimated at $4.42 million, materially exceeds the enterprise value of its assets, with an estimated shortfall of between $849,155 and $4,266,336. Mr Withers submits, and I accept, that the evidence indicates that the shortfall to ILP as secured creditor and unsecured creditors, indicates that there could be no recovery for shareholders in a liquidation. This conclusion is also supported by Mr Hodgkinson's conclusion, in his third affidavit, that the residual value of Kupang's shares is nil, so long as litigation costs exceed $1.465 million, which seems inevitable in the circumstances. That result arises even if litigation was prosecuted to finality, recoveries were at the high end of the range, and all claims were successful with costs orders being made in Kupang's favour (Hodgkinson 3, [30]-[31], [33]).
3. By a further submission made, by leave, on 6 December 2016, following the completion of the hearing, Mr Hodgkinson provided an updated analysis estimating distributions to shareholders and unsecured creditors of Kupang on several scenarios and assumptions. The first of those scenarios alternatively assumed the lowest and highest levels of recoveries to Kupang under the DOCA. That analysis indicated that, across the range of assumptions as to Kupang's recoveries under the DOCA, unsecured creditors should achieve a modest return under the DOCA. The second scenario addressed the position in a liquidation, assuming the highest level of estimated recoveries to Kupang and applying a range of litigation funding fees from a minimum percentage of 25% of the estimated proceeds from litigation. That calculation indicated, consistent with the evidence to which I have referred above, that there would be no return to unsecured creditors or shareholders of Kupang in a liquidation, even assuming the highest level of estimated recoveries and the lowest litigation funding fee. Mr Hodgkinson also points out that the assumption as to litigation funding fees has the significant qualification that he has not identified a litigation funder who has indicated a willingness to fund the claims, and I have addressed the risk attached to the availability of litigation funding for the relevant claims above. The position in the DOCA is therefore more favourable to unsecured creditors than the position in liquidation and neutral so far as shareholders are concerned, since shareholders would not receive a return under either a liquidation or the DOCA. This additional analysis, which was made available to ASIC for comment and as to which ASIC had no comment, supports the views that I have set out above.
4. In summary, the evidence to which I have referred above establishes that there is no prospect of the shares in Kupang gaining any value capable of being realised within a reasonable time and, if the transfer of shares is not approved, the DOCA will be terminated, Kupang will be wound up and neither unsecured creditors nor shareholders will receive any return. On the other hand, the DOCA will deliver unsecured creditors a modest return which has been sufficiently attractive to them that they have voted in favour of its execution. Although shareholders would receive nothing under the DOCA or a winding up, no shareholder has objected to the proposed transfer of shares in Kupang, or otherwise sought to be heard in relation to this application. I am satisfied that, in these circumstances, there is no prejudice to shareholders in the proposed share transfer, and (if I were incorrect in that view) any relevant prejudice would not be "unfair" in the relevant sense.
5. Accordingly, I order that:
6. Pursuant to section 444GA(1)(b) of the Corporations Act, the Plaintiff, Damien Mark Hodgkinson (as Deed Administrator of Kupang Resources Limited (Subject to Deed of Company Arrangement) ("Kupang")) be granted leave to transfer all of the shares in Kupang to International Litigation Partners Pte Limited pursuant to the Deed of Company Arrangement executed on 9 September 2015.
7. The costs of this application be the costs of the Plaintiff in the course of the Deed of Company Arrangement of Kupang.

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