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.