Marsden v Screenmasters Australia Pty Ltd, in the matter of Cardinal Group Pty Ltd

Legal Framework 9 In its Amended Interlocutory Process, Screenmasters seeks relief pursuant to s 536 of the Act. In his oral submissions, Counsel for Screenmasters clarified that Screenmasters relies on ss 536(1)(b) and (3) in support of the relief it claims. Section 536 relates to the supervision of liquidators and relevantly provides as follows: 536 Supervision of liquidators … (1) Where: (a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing: (i) a requirement of the Court; or (ii) a requirement of this Act, of the regulations or of the rules; or (b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties; the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit. … (3) The Court may at any time require a liquidator to answer any inquiry in relation to the winding up and may examine the liquidator or any other person on oath concerning the winding up and may direct an investigation to be made of the books of the liquidator. 10 Section 536 was considered by the New South Wales Court of Appeal (Court of Appeal) in Hall v Poolman (2009) 75 NSWLR 99 (Hall v Poolman). It is relied on by Screenmasters to make good its case for an inquiry and by the Liquidators to oppose the application. 11 Before the Court of Appeal in Hall v Poolman was the issue of whether the trial judge's reasons for ordering an inquiry under ss 536(1)(a), 536(1)(b) and 536(3) were deficient. The Court of Appeal considered the interpretation of s 536, the principles bearing on the exercise of the discretion under s 536 and whether the exercise of the discretion by the trial judge miscarried. 12 At [58] the Court of Appeal set out with approval, but subject to one qualification, the following passage from Leslie v Hennessy [2001] FCA 371 at [6]: … However, we believe that both Young J [in the Burns Philp Investments (No 2) case] and Drummond J were describing something less formal than a prima facie case according to some evidential burden of proof. Their Honours both meant only that an applicant must show a sufficient basis for making an order, that there is something which requires inquiry. The Court then has a discretion which it must exercise. Many factors will be relevant to that exercise. They include the strength and nature of the allegations, any answers offered by the liquidator, other available remedies, the stage to which the liquidation has progressed, the likely amounts of money involved, the availability of funds to pay for any inquiry, the likely benefit to be derived from it and the legitimate 'interest' of the applicant in the outcome. 13 The Court of Appeal's qualification was that the "sufficient basis" for making the order must "relate to the matters concerning faithful performance of duties or observance of requirements that are stated in subs (1)(a)": at [59]. At [79] the Court of Appeal stated that the fundamental issue to be addressed under each of ss 536(1)(a), 536(1)(b) or 536(3), being the three provisions that the trial judge invoked as sources of jurisdiction to order an inquiry, is "whether there is a sufficient basis for making an order, whether there is something that requires an inquiry". 14 The Court of Appeal considered s 536(1)(b) and a submission by the appellants in that case that the threshold in s 536(1)(a) also applies to s 536(1)(b). The Court of Appeal observed the following at [89]: … This submission receives some support from some remarks of Robson J in Vink v Tuckwell. His Honour said (at 324 [86]; 44 [86]) that "[a] complaint under s 536 (1)(b) with respect to the conduct of the liquidator in connection with the performance of his or her duties should be confined to the liquidator's failure to observe the matters referred to in s 536(1)(a)". If his Honour intended by that observation to import into subs (1)(b), as a matter of construction, the limiting words of subs (1)(a), so that a complaint would not enliven the court's power under subs (1)(b) unless it was a complaint that the liquidator had not faithfully performed or was not faithfully performing his or her duties or had not observed or was not observing the requirements of the court, the Act, the regulations or the rules, then we would respectfully disagree. 15 The Court of Appeal continued at [90]: In its terms subs (1)(b) applies if a complaint is made to the court or ASIC with respect to "the conduct of the liquidator in connection with the performance of his or her duties", wide words which would cover complaints about incompetence or lack of diligence as well as complaints about failure to perform duties faithfully. We see no reason to read down those words by reference to another paragraph expressed as an alternative to subs (1)(b). … 16 In considering whether the trial judge's discretion in ordering an inquiry under ss 536(1)(a), 536(1)(b) and 536(3) miscarried, the Court of Appeal considered the trial judge's assessment of the size of anticipated return to creditors, the position of creditors, proportionality between costs and recovery, failure to apply for directions before commencement of the proceedings and litigation funding. 17 In relation to some of those factors, insofar as they are relevant to the matter now before me, the Court of Appeal made the following observations: (1) in relation to the size of anticipated return to creditors, the Court of Appeal agreed with the appellants' submission that the anticipated dividend rate for creditors, namely, the comparison on a pro rata basis between the amount of the anticipated total recovery and the total amount owed to creditors is not, of itself, relevant to the decision by a liquidator to commence or prosecute recovery proceedings. The Court said at [117]: … It is the anticipated total recovery for creditors and the range of amounts to be distributed to individual creditors that a liquidator should consider in deciding whether to take or continue with proceedings, for these amounts may show that bringing and prosecuting the proceedings will be justified in the interests of creditors as a whole even if creditors who are owed small amounts will receive only a tiny payment by way of dividend. … (2) in relation to the position of creditors, the Court of Appeal said that factors such as the cost of litigation being borne by a funder under a funding agreement so that there was no risk to creditors and they stood only to gain, committees of inspection being aware of the likely return to creditors and approving the funding arrangements, and, after the commencement of the trial in that case, the liquidators re-negotiating the funding arrangements to increase the distribution to unsecured creditors were all relevant to the assessment of the objective propriety of use of a liquidator's position. However, the Court of Appeal noted that those matters needed to be weighed up against other factors which might point to impropriety: at [122]; (3) in relation to the issue of proportionality between costs and recovery, in particular in a scenario where the potential return to creditors would be insufficient to justify the costs of the proceedings and the real beneficiaries of the litigation were the funder, the liquidators and the lawyers, the Court of Appeal noted, among other things, that: (a) there is a public interest in liquidators bringing recovery proceedings including, among other things, proceedings for recovery of unfair preferences and that is a relevant factor to take into account in exercising the discretion to order an inquiry under s 536 of the Act: at [128]; (b) there is no over-arching policy against litigation funding and liquidators cannot fail in the performance of their duties simply by transferring part of the fruits of an action to a funder: at [131]; (c) the creditors' approval of a litigation funding proposal is a factor relevant to the exercise of discretion by a court relating to the assessment of that proposal, including the decision to initiate an inquiry into the liquidators' conduct in making and implementing the agreement. However, the Court of Appeal went on to note that the weight to be given to that factor depends on the circumstances. In many cases, it will not be a significant factor: at [140]; and (d) there is no objection on legal policy grounds to liquidators entering into litigation funding arrangements where the fruits of the litigation will be shared with the funder provided the requisite approval of creditors or the court is obtained and the arrangements are consistent with the liquidator's statutory and other duties. At [149]-[152], the Court of Appeal made the following comments: [149] Generally speaking, liquidators seeking to discharge their duty to collect the assets of the company by recovery proceedings should do so with costs and benefits clearly in view, the relevant benefits primarily being benefits to creditors. The liquidator's statutory powers, including the exercise of statutory powers such as those conferred by s 477(2)(a) and s 506(1)(b), must be exercised bona fide for the purpose for which they were conferred; that is, for the purpose of collecting the assets of the corporation for, relevantly, the benefit of creditors. … [150] However, if: • liquidators have incurred costs in preliminary investigations and in creditors' meetings, and • they consider that the prospective benefits to creditors justify further investigation in which they will incur more costs and expenses, and • there are then no assets, in the absence of litigation, to pay the costs already incurred; then in our view the liquidators may legitimately and in accordance with their duties pursue litigation with the aid of a litigation funder, and they may do so even if there is little or no likelihood of recovery going beyond recovery of their own costs and expenses and the funder's fees. [151] There are some provisos to this proposition: • the pre-litigation costs must have been either necessary or reasonably considered to be justified because of the prospective benefits to creditors; • the litigation costs themselves must have been reasonably incurred and proportionate to the prospective benefits (including not only possible direct benefits to creditors but also the benefits derived through the reimbursement of the liquidator's fees and expenses); and • the litigation funding agreement must not be on manifestly unreasonable terms. [152] Issues of fact and degree, and issues of timing, clearly arise. Nevertheless, we adopt this proposition, subject to these provisos, because in our opinion there is a public interest in liquidators making preliminary investigations into matters that appear to them to warrant investigation, even when there are no assets available to fund their doing so. Liquidators may be discouraged if it were held to be improper per se for liquidators to try to recover the costs of their investigations by legal proceedings that would not directly benefit creditors. (Citations omitted.)

Evidence 18 Screenmasters on the one hand and Cardinal Group and the Liquidators on the other tendered a large volume of evidence at the hearing of the Amended Interlocutory Process. In addition, Mr Stone was cross-examined. I summarise below those aspects of the evidence relied on by the parties which are of particular relevance to the application now before me for consideration. 19 Cardinal Group was the trustee for the Cardinal Group Unit Trust, Reefway Asset Trust and Reefway Environmental Services Trust formerly trading as Reefway Environmental Services, Recycled Resources and Smart Skip. Cardinal Group was part of a group of companies which, in addition to it, comprised: (1) Cardinal Project Services Pty Ltd (CPS); (2) Complete Concrete Cutting Pty Ltd (CCC); (3) Cardinal Logistic Services Pty Ltd (CLS); and (4) Card Services Pty Ltd. 20 On 15 December 2011, Messrs Stone and Marsden were appointed joint and several administrators of Cardinal Group pursuant to s 436A of the Act and on 1 February 2012, pursuant to a resolution of the creditors of Cardinal Group that it be wound up pursuant to s 439C of the Act, they became the liquidators of Cardinal Group. With the exception of Card Services Pty Ltd, which is deregistered, the other companies in the group are also in liquidation and Messrs Stone and Marsden were appointed as liquidators of those companies on 1 February 2012. 21 Over the course of the administration and the liquidation to date, the Liquidators have prepared various reports as required by the Act for creditors of Cardinal Group and the other companies to which they have been appointed as liquidators: CPS, CCC and CLS (the Other Group Companies). Those reports, which have been prepared in each case on a composite basis covering Cardinal Group and the Other Group Companies, disclose various aspects of the conduct of the administration and then liquidation as well as the progress of the administrators' and then the liquidators' investigations. 22 In the report to creditors dated 23 January 2012 prepared pursuant to s 439A of the Act, Messrs Marsden and Stone, in their capacity as administrators, note that: (1) since their appointment as administrators on 15 December 2011, they have undertaken investigations which comprise: • Meetings and communications with the directors and their advisers as well as other parties regarding the Companies' affairs; • Liaise with the secured creditor and the Receivers and Managers; and • Collected and reviewed the available books and records of the Companies and made demands for the provision of further information regarding the Companies. (2) due to the time constraints imposed on them under the voluntary administration regime, their investigations were only at a preliminary stage; (3) they had undertaken investigations in order to identify voidable transactions. Those investigations were of a preliminary nature, given time constraints. Notwithstanding that, the administrators informed creditors that as at that date, they had identified possible unfair preference payments across all companies. If they were appointed as liquidators they would conduct further investigations and undertake recovery proceedings against creditors who had received a preference; (4) should the company be wound up the administrators would, in the first instance, write directly to the parties involved seeking to recover amounts in relation to voidable transactions. Should that not result in any recovery the administrators may be forced to commence legal action. However, as there were insufficient funds to mount any substantial recovery actions, the administrators noted that they would consider approaching creditors or a litigation funder for the funding of further actions. Similarly, the administrators pointed out that if they were to conduct any public examinations, they would require creditors or another party to provide the requisite funding. The administrators invited creditors wishing to provide funding for their investigations and/or public examinations to approach them; and (5) as at the date of the report, as they were still in the preliminary stage of their investigations, it was difficult to quantify the estimated return from the winding up of the companies. 23 By letter dated 9 June 2012 addressed to Screenmasters, the Liquidators noted that, based on their review of the books, payments totalling $49,600 had been identified as being paid to Screenmasters in the six months prior to the commencement of the administration of Cardinal Group which, in the opinion of the Liquidators, resulted in Screenmasters receiving an unfair preference. A request was made for payment of the amount of $49,600 within 14 days of the date of the letter. On 18 June 2012, the solicitors for Screenmasters responded to that request denying any liability for payment and noting their client's defence based on s 588FG(2) of the Act. 24 The Liquidators prepared a report to creditors of Cardinal Group and the Other Group Companies pursuant to s 508 of the Act dated 30 April 2013. In that report the Liquidators: (1) provided a summary of the steps taken by them in the winding up of the companies including continuing to investigate the affairs of the companies and the conduct of the directors as well as liaising with the Liquidators' solicitors about potential recovery actions to be taken for the benefit of unsecured creditors; (2) informed creditors that a dividend was unlikely to be paid to any class of creditors of any of the companies but that view was subject to a number of matters including any moneys recovered as a result of any unfair preference payment actions or any other actions pursued by the Liquidators; (3) provided an update of the investigations concerning the identification and recovery of potential voidable transactions and insolvent trading actions. In relation to unfair preference claims, the creditors were told that letters of demand had been issued to 106 unsecured trade creditors across the companies with a total face value of approximately $13.9m. At that stage the Liquidators were unable to accurately estimate the expected recoveries to be made but they did not anticipate recovery of all claims; and (4) set out the outstanding matters to be resolved prior to finalisation of the liquidations including preference payment recovery actions and insolvent trading investigations and possible recovery actions. 25 The Liquidators prepared a report to creditors of Cardinal Group and the Other Group Companies dated 15 January 2014. In that report the Liquidators: (1) provided a summary of the "pertinent" aspects of the winding up including that the Liquidators had lodged their preliminary report with Australian Securities and Investments Commissioner (ASIC) regarding possible offences committed by the directors, that ASIC sought a supplementary report in relation to which the Liquidators had lodged a funding request with the ASIC AA Fund, that the Liquidators were continuing to liaise with their solicitors regarding potential recovery actions to be undertaken for the benefit of unsecured creditors and that the Liquidators were in discussion with a litigation funder; (2) gave notice of the calling of a meeting of creditors on 31 January 2014 "to vote on whether a litigation funding agreement can be entered into", among other things; (3) provided a summary of the value of the preference payment claims. As at that date, the Liquidators had instructed their solicitors to commence proceedings for the recovery of preference payments made by Cardinal Group to the value of $1,115,686 and had identified preference payments made by Cardinal Group in the amount of $6,955,309 which would be pursued if creditors resolved in favour of entering into a litigation funding agreement; (4) noted that their investigations suggested that the directors may be liable for insolvent trading and that investigations were continuing; (5) noted that the time to complete recovery proceedings will depend on the level of co-operation received and could take anywhere from a few months to a number of years; (6) noted that any proceeds from preference payment and insolvent trading recovery actions would not be subject to the security interest held by the secured creditor but would be available for the benefit of unsecured creditors; and (7) noted that realisations were currently insufficient to meet all of the costs of the winding up, including the Liquidators' remuneration, and that any return would be subject to the success of recovery actions. 26 On 31 January 2014 a meeting of the creditors of Cardinal Group and the Other Group Companies was held. The minutes of that meeting show that: (1) there was discussion about the investigations into the companies' affairs and the Liquidators' discussions with the litigation funder about potential recoveries; (2) after the chairperson explained the reasons for seeking approval for a litigation funding agreement and sought questions from creditors, resolutions were passed by the creditors of each of Cardinal Group and the Other Group Companies authorising the Liquidators pursuant to s 477(2B) of the Act to execute a funding agreement where the term of that agreement was likely to be greater than three months; (3) resolutions were passed by the creditors of Cardinal Group, CPS and CLS fixing and approving the Liquidators' remuneration for the period 1 February 2012 to 31 October 2013 in a specified amount and resolutions were passed by the creditors of Cardinal Group and the Other Group Companies fixing and approving the Liquidators' future remuneration from 1 November 2013 to the conclusion of the administration in a specified amount. 27 The Liquidators prepared a report to creditors of Cardinal Group and the Other Group Companies pursuant to s 508 of the Act dated 5 March 2014. In that report: (1) once again the Liquidators provided an update of the steps they had taken in the winding up of the company since their report dated 15 January 2014. That included the execution of a funding agreement with Pretium Funding, the commencement of recovery proceedings by issuing letters of demand and undertaking public examinations; (2) creditors were notified that realisations were currently insufficient to meet all the costs of the winding up, including the Liquidators' remuneration and that any return would be dependent upon the success of recovery actions undertaken pursuant to the litigation funding agreement; (3) an update was provided of the investigations undertaken which resulted in the identification of potential recoveries to be made including preference payment recovery actions and insolvent trading investigations and possible recovery action. 28 The Liquidators have retained two different law firms to deal with the preference payment recovery actions. The firms were chosen based on their respective charge-out rates, the complexity of the matter and the amount in dispute. In relation to the subject proceedings, Stacks Law Firm has been engaged to act for the Liquidators. An email dated 11 September 2014 from Clayton Davis, principal lawyer, Stacks, to Mr Stone, includes the following: Thank you for your instructions in this matter. We have opened files for all of the claims we reviewed yesterday and have begun preparing letters of demand for issue as soon as possible. I confirm that we are prepared to act on a speculative basis for our usual hourly rates without a contingency success fee uplift … I look forward to working with you and your team to maximize the recoveries from these claims as quickly and cost effectively as possible. Mr Davis' email also sets out the firm's applicable hourly rates. 29 On 3 October 2014, the Liquidators' solicitors wrote to Screenmasters' solicitors responding to their letter of 18 June 2012, setting out the basis for the claim of $49,600 and seeking payment of that sum from Screenmasters by 17 October 2014. 30 On 20 November 2014, the Liquidators offered to settle the proceedings by accepting the sum of $19,000. No substantive response was received to that offer. 31 These proceedings were commenced on 12 December 2014. They were filed in this Court together with other proceedings seeking the recovery of unfair preferences. Mr Stone has provided evidence that there were common issues in all of the proceedings filed in this Court and that when the proceedings were filed it was anticipated that, if there was a common issue amongst some of those proceedings, such as the question of solvency, the proceedings would be grouped together and the issue determined as a joint preliminary issue. The purpose of proceeding in this way was to decrease the overall costs of all of the proceedings. According to Mr Stone, since Stacks Law Firm filed the ten proceedings, eight have settled. In Mr Stone's opinion, there are no common issues in the remaining two proceedings. 32 On 22 December 2014, Cardinal Group, the Other Group Companies and the Liquidators entered into a litigation funding agreement with Pretium Funding, the commencement date of which was 11 December 2014 (the Funding Agreement). According to evidence given by Mr Stone in cross-examination this was the second funding agreement entered into by the Liquidators, Cardinal Group and the Other Group Companies with Pretium Funding. As far as Mr Stone could recall, the only difference between the two agreements is the identity of the Legal Practitioners. Mr Stone gave evidence that there was only one resolution passed for approval pursuant to s 477(2B) of the Act to enter into the funding agreements. Mr Stone agreed that at the time of the creditors meeting at which the resolution was passed the first funding agreement was in contemplation. However, a range of claims had been identified as at the date of that meeting and it was probably envisaged that, given the number of claims and the capacity of the Liquidators' legal advisors, there would be a subsequent document in the same form. 33 The reference schedule to the Funding Agreement includes: (1) "Legal Proceeding - Federal Court of Australia" is public examinations pursuant to ss 596A and 596B of the Act and "Multiple claims including, but not limited to, pursuant to Sections 180, 181, 182, 588FA, 588FF and Pt 5.7B of the Act"; and (2) the "Legal Practitioners" are Stacks Law Firm. 34 The Funding Agreement provides for a facility to satisfy any adverse costs orders made against Cardinal Group, the Other Group Companies or the Liquidators and relevantly provides at cl 6 under the heading "Legal Proceeding" as follows: 6.6 Prior to any Legal Proceeding being commenced Pretium Funding must deliver to the trust account of the of the [sic] Legal Practitioner sufficient funds to cover the court filing fee for that Legal Proceeding. … 6.10 The Legal Costs of the Legal Practitioners shall be calculated by aggregating: (a) professional costs in accordance with the Legal Practitioners' Retainer; (b) all costs and expenses properly incurred by the Legal Practitioners in the Legal Proceeding but excluding the Fees & Disbursements. 6.11 The Resolution Sum in relation to the Legal Proceeding must be paid, without any deduction whatsoever, to the trust account of the Legal Practitioners, who in turn shall distribute the Resolution Sum as follows: (a) firstly, to Pretium Funding by way of reimbursement of the Fees & Disbursements paid for the Legal Proceeding; (b) secondly, in payment of the Legal Costs of the Legal Practitioners in relation to the Legal Proceeding calculated in accordance with Clause 6.10; (c) thirdly, to Pretium Funding, 35% of the balance of the Resolution Sum remaining after the deduction of the total of the amounts identified in Clauses 6.11(a) and 6.11(b); and (d) finally, the entire remaining Resolution Sum balance to the Liquidators. 35 The Liquidators prepared a report to creditors of Cardinal Group and the Other Group Companies pursuant to s 508 of the Act dated 29 April 2015. In that report the Liquidators: (1) set out the steps taken in the winding up since their last report dated 5 March 2014. They note that a funding agreement was entered into to allow them to pursue a number of preference payment actions, that those recovery actions were ongoing, as at that date net recoveries of $82,734 had been achieved across the group, no further assets had been identified and no further asset realisations were anticipated and any further recoveries were contingent upon the success of the ongoing recovery proceedings; (2) total creditor claims received across all companies were approximately $41.5m based on the reports as to affairs provided to the Liquidators and approximately $20.4m based on proofs of debt received up until the date of the report. For Cardinal Group the creditor claims were approximately $32.5m based on the report as to affairs and $12.2m based on proofs of debt received. In cross-examination, Mr Stone clarified that the figures for total proofs of debt do not include the shortfall to the secured creditor, which was estimated at $10m, and that as the secured creditor's facility was cross collateralised, it would prove for its shortfall in all companies; (3) noted that their realisations are currently insufficient to meet all costs of the winding up including the Liquidators' remuneration and that, as a result, it is unlikely that there will be any material distribution to any unsecured creditors. In cross- examination Mr Stone, in response to a line of questioning about whether this was still the position, said that the outcome was dependent on the finalisation of a number of things, that the term "material" may mean different things to different people but that in this case it will be difficult to achieve a return to creditors of more than $0.10 in the dollar. 36 In his affidavit sworn on 20 October 2015, Mr Stone sets out a summary of the investigations undertaken by him first in his capacity as administrator and then as liquidator of Cardinal Group which include: (1) reviewing Cardinal Group's MYOB accounting records including the bank register; (2) reviewing and analysing each of the audited financial statements and management accounts; (3) using the bank register, supply ledgers and supply transaction listings to determine potential preference payments; (4) corresponding with directors, advisers, the company's accountants and creditors, debtors and employees; (5) corresponding with each creditor who received a potential preference payment and demanding repayment; (6) ongoing correspondence with these creditors and/or their representatives; (7) reviewing over 60,000 emails from Cardinal Group's files; (8) reviewing books and records to collate supporting documentation; (9) reporting and liaising with solicitors regarding the claims and the prospects of recovery; (10) reviewing further supporting documentation as and when located; (11) corresponding with banks to obtain bank statements; (12) preparing and issuing reports to creditors; (13) undertaking public examinations and arranging for the issue of orders for production in connection with those examinations; (14) following the public examinations reviewing the transcript of each examination and documents produced in answer to the orders for production, obtaining legal advice, issuing 25 letters of demand and commencing 20 sets of proceedings for the recovery of unfair preference payments made by various companies in the group, which all shared a common and inter-related issue being the group's solvency; (15) lodging supplementary reports with the ASIC pursuant to s 533(2) of the Act in relation to offences committed by the directors of Cardinal Group. 37 There is evidence before me of further attempts by the parties to settle these proceedings. On 27 April 2015, the plaintiffs served a Notice to Compromise on Screenmasters offering to settle the proceedings by accepting payment of the sum of $17,500 in full and final settlement. On 17 July 2015, Screenmasters, through their solicitors, made an "open offer of compromise" which was, in effect, an offer to walk away from the proceedings on the basis that each party would pay its own costs (Screenmasters' Offer). 38 Upon receipt of Screenmasters' Offer, Mr Stone reviewed the evidence and the Statement of Claim, obtained advice from his lawyers in relation to the merits of the claim and the time and costs to be expended should the matter go to trial and considered the quantum of costs that had been incurred, the future costs and the likely amount to be recovered. Having done that, Mr Stone says that he believes the prosecution of the unfair preference claim against Screenmasters has a reasonable chance of success. Mr Stone says that at no time did the fact litigation funding had been obtained influence his decision to reject Screenmasters' Offer. Rather, the offer was rejected because Mr Stone did not believe it was in the best interests of the creditors in light of the strength of the case and costs of the proceedings. 39 On 2 October 2015, the Liquidators made an "open offer" to settle the matter by payment by Screenmasters of $15,000 inclusive of interest and costs with the proceedings to be discontinued on the basis that each party pay its own costs. 40 In cross-examination Mr Stone gave evidence that he was unwilling to commence proceedings for the recovery of preference claims in the absence of a litigation funding agreement, that the Funding Agreement mitigates the risk inherent in commencing proceedings and that it provides some comfort to the Liquidators. Mr Stone agreed that the comfort provided by the Funding Agreement allows the proceedings to continue and that, in the absence of any commercial offers to settle, the Liquidators' intention is to continue the proceedings. 41 Mr Stone says that if these proceedings continue they are likely to take one to two days and that the plaintiffs' total legal fees to the end of trial are likely to be between $20,000 and $25,000. In cross-examination Mr Stone clarified that this estimate covered solicitors' fees and counsels' fees from the commencement of the matter to its conclusion. 42 Mr Nichols, the solicitor for Screenmasters, says that that the costs already incurred by Screenmasters exceed the amounts reasonably in dispute between the parties and that the likely costs to be incurred by Screenmasters in the further preparation of its defence may "be calculated in many multiples of the amounts reasonably in dispute in the proceedings". 43 Mr McGinley, the director of Screenmasters, has set out the prejudice he says the proceedings are causing to Screenmasters: (1) Screenmasters is a creditor of Cardinal Group and does not expect to receive any dividend in that capacity; (2) while the plaintiffs' claim is for $49,600 or, in the alternative, $25,994.21 or $20,000, Mr McGinley calculates the indebtedness of Screenmasters to be $2,917.06; (3) Screenmasters has incurred legal fees in excess of $50,000 in defending the proceedings and, if the matter proceeds to hearing, his understanding from his solicitors is that the hearing will take 3 days with likely legal fees of $50,000 to $60,000 plus the additional cost of retaining an expert to review Mr Stone's affidavits which Mr McGinley understands will be in the range of $40,000 to $60,000; (4) defending the proceedings has involved a substantial amount of his time which he would otherwise devote to running the Screenmasters business. The cost and time of the proceedings is an unfair burden on Screenmasters in the current economic environment. 44 Mr Stone says that if the plaintiffs are successful at trial, the sum of $49,600 plus interest and costs will be recoverable which would increase the pool of assets which would, in turn, be used to pay unsecured creditors. In cross-examination, Mr Stone clarified that the intention is that recoveries from these proceedings and other proceedings currently being pursued will be added to the pool to pay unsecured creditors. Mr Stone said that as liquidator he is endeavouring "to bring funds back in to be able to pay unsecured creditors". 45 As at 20 October 2015, Mr Stone is unable to say what return the unsecured creditors will receive as it will depend on: (1) the success of the current recovery action; (2) the success of further potential recovery; and (3) the work required by the liquidators to finalise the winding up.

Consideration 46 Screenmasters' application for an inquiry into the conduct of the Liquidators is made pursuant to s 536(1)(b) or s 536(3) of the Act. In either case, before an order can be made, in the exercise of my discretion I must be satisfied that there is a sufficient basis for making an order for inquiry. 47 In the case of s 536(1)(b) a complaint has been made to the Court by Screenmasters as set out in the Amended Interlocutory Process. That complaint must relate to the conduct of the Liquidators with respect to the performance of their duties. The conduct which is the subject of the complaint is twofold: (1) first, that the Liquidators are pursuing these proceedings without any reasonable prospect that any amount recovered will benefit the creditors of Cardinal Group or otherwise benefit the liquidation; and (2) second, that the Liquidators were influenced to reject Screenmasters' Offer because, having negotiated terms with a litigation funder, the plaintiffs' costs of the proceedings were not a material concern for the plaintiffs in resolving them. 48 Counsel for Cardinal Group and the Liquidators submitted that no particular duties that the Liquidators are said to have breached as a result of this conduct are identified by Screenmasters and that on that basis alone the application should fail. However, as the Court of Appeal observed in Hall v Poolman, s 536(1)(b) should not be read down. The section is enlivened by complaints about incompetence, lack of diligence or failure to perform duties faithfully: at [90]. In my view the complaint meets that description. No further specificity is required. 49 Section 536(3) of the Act is not dependent upon the existence of circumstances falling within s (1) or s (2): see Hall v Poolman at [108]. It enables the court to act of its own motion but before doing so it must, as noted, be satisfied that there is a sufficient basis for making an order for inquiry. 50 Screenmasters identifies the quantum of the claim, relative to the cost of running the proceedings, including the use of court resources to adjudicate the dispute and the Liquidators' own time, as a "key issue" and one that makes the continuation of the proceedings a misuse of the Liquidators' powers and makes them oppressive. It is the case that the quantum of the claim is low, Screenmasters' evidence is that it will likely incur costs in excess of the maximum recoverable amount in defending the proceedings and that, subject to the success of the defences raised by Screenmasters, the Liquidators' costs may exceed the amount that it can recover. This analysis of course ignores the impact of any costs orders. However, in my opinion, the commencement and continuation of these proceedings cannot be viewed in isolation and must be considered in the context of the conduct of the liquidation of Cardinal Group and the Other Group Companies to date. 51 In that respect, as the evidence shows, Cardinal Group is part of a group of companies that entered administration and then liquidation at the same time. Since that time, the Liquidators have worked to identify potential assets and recoveries for the benefit of unsecured creditors. In particular I note the following: (1) there is evidence that since their appointment, first as administrators and then as liquidators, the Liquidators have carried out extensive investigations into the affairs of Cardinal Group and the Other Group Companies with the purpose of realising funds for the benefit of the creditors; (2) the Liquidators have conducted creditor meetings and have disclosed the position of the companies in the group in their reports and the fact that any recovery by unsecured creditors would be contingent on a number of things including the outcome of recovery proceedings; (3) the Liquidators have disclosed in their reports to creditors that there were insufficient funds to commence recovery actions and, in the absence of funding from any of the creditors, the Liquidators sought the approval of creditors to enter into a litigation funding agreement for the purpose of pursuing potential claims; (4) prior to commencing proceedings, in an effort to minimise legal costs, the Liquidators sought legal advice and issued letters of demand to prospective defendants; (5) the Liquidators have issued 20 unfair preference claims. In doing so they have adopted a proportionate approach to the litigation by engaging two law firms based on their charge out rates, the relative complexities of the matters and the amount in dispute and by filing all of the proceedings in the same jurisdiction on the expectation that there would be a commonality of issues which could be determined as a preliminary matter. 52 The Liquidators have been thorough in their investigations and have provided regular and fulsome reporting to the creditors. They have sought to insulate the estate from the cost of pursuing the preference recovery actions and other investigations by procuring litigation funding and engaging solicitors on terms that best promote the ability to recover funds for the benefit of creditors. Viewed in this context it is difficult to see how continuation of the proceedings is a misuse of the Liquidators' powers. 53 Screenmasters has raised the Funding Agreement as an issue that goes to its complaint. It submits that its existence and the insulation from costs that it provides to the Liquidators are the primary reason why the proceedings are being continued. Related to that, it submits that the impact of the Funding Agreement and the contingency costs agreement with Stacks is that the Liquidators have not properly considered Screenmasters' Offer. Mr Stone's evidence is to the contrary. Mr Stone has set out the steps he took in assessing Screenmasters' Offer. I accept Mr Stone's evidence on this issue. Mr Stone has said that the Funding Agreement mitigates the risk inherent in commencing proceedings and gives the Liquidators comfort in continuing the proceedings. However, there is no evidence that it is the sole reason for continuing the proceedings. Mr Stone's evidence is that in the absence of what he considers to be a commercial offer to settle, his intention is to continue the proceedings. 54 Screenmasters also submits that, to the extent the Liquidators have obtained legal advice on the merits of the Screenmasters' Offer, that advice is either wrong, given Screenmasters' grounds of defence and evidence in support, or the solicitors providing the advice have a conflict, given their contingency fee arrangement. I do not accept those submissions for a number of reasons. Firstly, there is no evidence about the content of the advice. No findings can be made as to its correctness. Minds may differ about the strength of a case. Screenmasters' view that its defence is strong has been formed in the absence of the filing by the Liquidators of their evidence in reply. Further, there is nothing to suggest that the solicitors acted other than properly in providing their advice. The inference as to conflict cannot be drawn. 55 It is important to note here that, as the Court of Appeal observed in Hall v Poolman, there is no per se objection to liquidators entering into litigation funding agreements. Indeed, as was recognised by the Court of Appeal, in certain circumstances, and with some provisos, liquidators may legitimately enter into such agreements in accordance with their duties to pursue litigation. They may do so even where there is little or no prospect of recovery beyond their own costs and expenses and those of the funder: Hall v Poolman at [150]-[151]. The circumstances identified by the Court of Appeal exist here: (1) the Liquidators have incurred costs in preliminary investigations and creditors' meetings; (2) the Liquidators consider that the prospective benefits to creditors justify further investigation in which they will incur further cost; (3) there are no assets, in the absence of funding, to pay the costs already incurred. 56 The provisos identified by the Court of Appeal, which again seem to be apparent here, are: (1) the pre-litigation costs must have been either necessary or reasonably considered to be justified because of the prospective benefits to creditors; (2) the litigation costs themselves must have been reasonably incurred and proportionate to the prospective benefits (including not only direct benefits to creditors but the benefit derived from the reimbursement of a liquidator's fees and expenses); and (3) the litigation funding agreement must not be on manifestly unreasonable terms. 57 In the course of cross-examination and argument, an issue arose as to whether the creditor approval obtained pursuant to s 477(2B) of the Act at the creditors meeting which took place on 31 January 2014 was sufficient for the purpose of entry into the Funding Agreement. The Liquidators formed the view that the resolution was sufficient to cover entry into the Funding Agreement and an earlier funding agreement. I do not think that issue needs to be considered or determined as part of this application. 58 Screenmasters submits that there will be negligible or no recovery from the proceedings and that Mr Stone's evidence that recovery from the proceedings will add to the pool of assets available for creditors is wrong. Mr Stone's evidence, which was clarified in cross-examination, is that any recovery from these proceedings will add to the overall pool of assets available for creditors. I accept that evidence. It states the Liquidators' intention that all recoveries will be pooled together. It follows from it that the greater the recoveries, the greater the pool and the more likely the prospect of a return to unsecured creditors after payment of expenses. 59 That matter aside, the fact that any recovery from these proceedings may not add to the pool of funds available to unsecured creditors or may only add a negligible amount is not of itself a sufficient reason to order an inquiry. In Hall v Poolman the Court of Appeal, while noting that liquidators should not pursue litigation simply in order to generate fees without any regard for the interests of creditors or the public interest, went on to say it is not the case that liquidators are never entitled to bring proceedings where the only prospect of recovery is their own fees. There is no evidence that these proceedings are only brought to generate fees without any regard to the creditors' interest or the public interest. To the contrary, the Liquidators are attempting to add to the pool of assets for the benefit of unsecured creditors. The Liquidators have at all times been frank in their assessment of returns to creditors and whether, in fact, the pursuit of these and other recovery proceedings will result in a material or any return. 60 Further it is the total recovery for creditors that is relevant to a liquidator's decision to commence or continue with proceedings and not the anticipated dividend rate, which may be small in light of the total value of creditor claims. There is evidence before me that the Liquidators identified in excess of $8m in value of preference claims available to Cardinal Group. There is no evidence as to how those claims are made up. Pursuit of the totality of those claims is in my view proper. The fact that some of the claims may be for smaller amounts is not, of itself, a reason to abandon those claims. 61 For the reasons set out above, I reject Screenmasters' submission that in circumstances where there appears to be no indication of any return to creditors and no other explanation of the Liquidators' stance, the inference to be drawn is that the proceedings are a "make work scheme" for the benefit of the Liquidators and his lawyers with the costs underwritten by the litigation funder. 62 Screenmasters has also sought to distinguish Hall v Poolman from the present case in the following ways: (1) the public interest in investigating and obtaining recovery against directors of insolvent companies is not present here; (2) there is utility in undertaking an inquiry in this case where questions of liability and costs remain unresolved. If the inquiry is successful it will result in the proceedings no longer being pursued; (3) avoiding waste and utility favours granting the relief sought by Screenmasters. The defendant, who is the "current victim" of the Liquidators' "misconceived approach" to the litigation is entitled to have its interests vindicated; (4) the finding that pursuing litigation against directors for insolvent trading without prospect of meaningful return to unsecured creditors was not in itself a sufficient reason for ordering an inquiry may be accepted where the public interest in exposing directors who have permitted the company to trade whilst insolvent is a relevant consideration. It is otherwise where there are no similar countervailing public interest considerations. 63 Contrary to Screenmasters' submission, there is a public interest in pursuing these proceedings. In Hall v Poolman the Court of Appeal confirmed there was a public interest in a liquidator pursuing recovery proceedings including proceedings for recovery of unfair preferences: at [128]. The public interest of having the affairs of a company in liquidation properly investigated, administered and by pursuing recovery proceedings, is not limited to proceedings against directors for insolvent trading. The Liquidators carried out investigations and identified a significant total amount of preference payments which they have sought to recover. These proceedings are a part of that. 64 I do not find Screenmasters' submission that there is utility in ordering the inquiry because, if it proceeds and is successful, it will result in the proceedings no longer being pursued and, that factor together with the avoiding of "waste" favours the granting of relief, to be persuasive nor a sufficient basis on which to distinguish Hall v Poolman. The "waste" that would be avoided is Screenmasters' costs and presumably executive time, the Court's resources and the Liquidators' resources. True that is, but it is not enough to provide a sufficient basis for ordering the inquiry. Further, such "waste" would only be avoided if, upon undertaking the inquiry, the Court granted the ultimate relief sought by Screenmasters in order 4 of the Amended Interlocutory Process. That may or may not occur. In the meantime the Liquidators would be required to spend resources on answering any inquiry. 65 The Liquidators have considered the commencement of the proceedings and their continuation. As I have already observed, the commencement and continuation of the proceedings needs to be viewed in the context of the whole of the litigation strategy adopted by the Liquidators and in the context of the whole of the administration. The litigation strategy adopted saw the commencement of ten sets of proceedings, with one firm of solicitors acting, commenced in one jurisdiction to achieve efficiencies and to minimise costs in the running of the suite of proceedings. Where the parties find themselves now is that those efficiency gains have disappeared through nobody's fault but because eight of the ten proceedings have settled and the two remaining have no common issues. While both parties have attempted to settle the proceedings, on the evidence before me, with the exception of Screenmasters' Offer, there has been no attempt on Screenmasters' part to engage with subsequent decreasing settlement offers made by the Liquidators.

Conclusion 66 Having considered the evidence and the submissions of the parties I am not satisfied that there is a sufficient basis to order an inquiry into the conduct of the Liquidators of the Cardinal Group either pursuant to s 536(1)(b) or s 536(3) of the Act. Screenmasters' Amended Interlocutory Process should be dismissed with costs. I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.