The Notice of Motion
77 Prior to the entry by Meadow Springs into the IMF Funding Agreement, the liquidator failed to obtain an approval prescribed by s 477(2B) of the Corporations Act 2001 (Cth) (the Act). Accordingly, there is also before the Court an amended notice of motion pursuant to which Meadow Springs seeks relief from the Court to remedy the failure of the liquidator to obtain the approval.
78 Section 477(2B) of the Act provides that, except with the approval of the Court or the committee of inspection or a resolution of the creditors, a liquidator must not enter into an agreement on the company's behalf which is likely to endure for longer than three months. Meadow Springs seeks the approval of the Court because, although the ILF funding agreement was approved by the creditors at the meeting on 19 September 2003, the replacement funding agreement, namely, the IMF Funding Agreement, entered into by the liquidator with IMF in August 2004 was not. Nor did Mr McMaster obtain approval by any of the other means, referred to in s 477(2B) of the Act before entering into the IMF Funding Agreement.
79 Meadow Springs relied upon the affidavit of Mr McMaster sworn 15 October 2007 in support of its motion. Meadow Springs contended that an agreement entered into by a liquidator without compliance with s 477(2B) is not void and that approval may be given by the Court retrospectively. Balanced and the Knightsbridge parties opposed the granting of relief to Meadow Springs on the same grounds as they relied upon in opposition to IMF's contention that the fees and portion of the Resolution Sum claimed by IMF under the IMF Funding Agreement have priority over the monies secured by their respective securities.
80 Because the decision whether to grant relief in terms of the amended notice of motion overlaps with some of the issues pertaining to IMF's claim to priority, I will defer deciding whether to grant the relief, until I consider the priority claim made by IMF.
The issues
81 There are three main issues in this case.
82 First, whether the amounts comprising the assessment fee of $15,000, the management fee of $100,000 and 35% of the Resolution Sum claimed by IMF under the IMF Funding Agreement are to be paid to it in priority to the amounts claimed by the Balanced and the Knightsbridge parties under their respective securities?
83 Secondly, whether Balanced has by reason of the Balanced Charge an enforceable security over the monies in the fund and if so, how much of the amount it claims is subject to the security?
84 Thirdly, whether WCH and Knightsbridge Managed Funds are, by reason of the WCH Charge, the holders of an enforceable security in respect of the fund, and if so, how much of the amount which it claims is subject to the security? Alternatively, whether Meadow Springs is estopped from contending that WCH and Knightsbridge Managed Funds are not by reason of the WCH Charge, the holders of an enforceable security in respect of the fund?
85 There are subsidiary issues which arise in relation to each of these three main issues.
86 The third defendants, Hurly Investments Pty Ltd and Mr Casey, entered an appearance but they did not participate in the trial.
The Witnesses
87 The following persons provided witness statements: Mr Hugh McLernon, an executive director of IMF; Mr Brian Keith McMaster, the liquidator of Meadow Springs; Ms Penny Lynda Searle Hellens, a director of Penlas; Mr David Geer, the managing director of Balanced and Mr Christopher James Daws, a director of the accountancy firm Dickson Carrello. Each of the witnesses was cross‑examined. The evidence did not give rise to any credibility issues. I accept that each of the witnesses gave evidence truthfully. I accept each witness' evidence which is set out in these reasons.
The scope of the matters which are the subject of this decision
88 At the commencement of the trial I made orders which identified the scope of the matters to be determined at this hearing. The need to make the orders arose because the trial was limited to four days and there was not, therefore, sufficient time to deal with all the disputes raised on the pleadings in relation to the quantification of the amount of monies advanced and distributed. The parties, therefore, proposed that the only matters relating to quantification that would be tried at this hearing would be those matters expressly raised in the opening submissions of the parties, and in para 48 of the Knightsbridge parties' cross‑claim. These matters, it was said, raised questions of principle which, if determined, would resolve, or assist in resolving, questions relating to the validity of the claims made in respect of these items. I made orders to that effect.
IMF's claim in respect of priority for fees and a portion of the Resolution Sum.
89 IMF claims that the liquidator is entitled to retain from the fund the amount of $2,199,750 comprising 35% of the Resolution Sum, and $115,000, being fees payable under cl 4.1(b) of the IMF Funding Agreement, and to pay those sums to IMF, in priority to the payment of any monies due to Balanced or the Knightsbridge parties under their respective securities.
90 IMF bases its claim on three grounds. First, it is contended that a sum comprising 35% of the Resolution Sum is held on trust by the liquidator of Meadow Springs for IMF and that IMF has a superior equity in respect of that sum to that of Balanced and the Knightsbridge parties. Secondly, it relies upon the principle in the case of In Re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171 (Universal Distributing). It is said that there is an equitable lien in favour of Mr McMaster, the liquidator which secures the payment of the monies claimed by IMF in priority to the monies claimed by Balanced and the Knightsbridge parties. Thirdly, it is contended that the monies claimed by IMF are payable in priority under the principles of salvage. Meadow Springs does not oppose these contentions.
The better equity point
91 I deal first with IMF's contention that it has a right to be paid 35% of the Resolution Sum in priority to the claims of Balanced and the Knightsbridge parties on the fund, because it has an equitable interest in the fund which is superior to the equitable interests held in the fund by each of Balanced and the Knightsbridge parties.
92 IMF contended that cl 4.3 of the IMF Funding Agreement effected an assignment of future property, namely, the fruits of the claim against Colliers. It was said that an incident of this assignment was that an equitable interest arose in favour of IMF once the Resolution Sum came into the hands of Meadow Springs and not before. IMF contended further that the Balanced Charge and the WCH Charge were floating charges which insofar as the proceeds of the claim against Colliers was concerned, also charged future property. Therefore, said IMF, Balanced and WCH only acquired an equitable interest in the proceeds of the claim by reason of their respective charges on the same basis, and at the same time, as IMF, namely, when the proceeds of the claim were received by Meadow Springs. It followed, contended IMF, that each of the equitable interests of IMF, Balanced and the Knightsbridge parties in the proceeds of the claim, arose at the same time. In other words, the equitable interest held by each of Balanced and the Knightsbridge parties in the fruits of the Colliers claim enjoyed no priority by reason of being earlier in time to IMF's equitable interest. IMF went on to contend that IMF's equity to claim its share of the fund was superior to the equity of each of Balanced and the Knightsbridge parties because IMF had taken the risk of indemnifying the liquidator in respect of the conduct of the litigation, and Balanced and the Knightsbridge parties had acquiesced in this conduct.
93 I do not accept IMF's contention. First, each of Balanced and WCH acquired an equitable interest in the property, the subject of the floating charge, on the crystallisation of the floating charge. For the reasons which follow, I do not accept that the equitable interest which these parties acquired on the crystallisation of the Balanced Charge and the WCH Charge respectively in the Colliers claim, is properly to be characterised as an assignment of future property.
94 A chose in action comprises property of a company and, subject to the laws of champerty and maintenance, may be the subject of a charge in the same way as any other property (South Australian Management Corporation v Sheahan (1995) 16 ACSR 45 at 52‑53). Each of the two floating charges would have crystallised, at the latest on the appointment of Mr McMaster and Mr Smith as administrators of Meadow Springs on 21 February 2001. Any breach of the valuation contract and wrongful conduct by Colliers would have occurred before that date and, thus, the elements of the chose in action against Colliers would have been in existence by the date of the crystallisation of each charge.
95 In the case of Re Oasis Merchandising Services Ltd (in liq) [1997] 1 All ER 1009 (Oasis Merchandising), Peter Gibson LJ distinguished between the types of assignment that may be made in relation to the disposal of litigation rights. At 1014‑1015 he observed:
[The trial judge]…pointed out that there are three routes by which one person may seek to dispose of, and another person may seek to acquire, the prospect of benefiting from current or future litigation against a third party (at 498). The first is the transfer of property carrying with it the right to prosecute any cause of action closely related to that property, such as the assignment of a debt. Such a transfer and any action brought by the transferee to enforce that right are not champertous (see, eg, Camdex International Ltd v Bank of Zambia [1996] 3 All ER 431, [1996] 3 WLR 759). The second is the assignment of a bare cause of action or bare right to litigate. Such assignments offend public policy (see, eg, Trendtex Trading Corp v Crédit Suisse [1981] 3 All ER 520, [1982] AC 679). The third is the assignment of the damages or other monetary compensation that may be awarded in an action in which judgment has not yet been given. Such an assignment, being an agreement to assign future property (damages if and when awarded), operates in equity and if supported by consideration will be valid and no question of unlawful maintenance or champerty will arise, at any rate when the assignee has no right to influence the course of the proceedings (see Glegg v Bromley [1912] 3 KB 474, [1911‑13] All ER Rep 1138).
96 Further, in the case of ANC Ltd v Clark Goldring and Page Ltd [2001] BCC 479, Robert Walker LJ referred to the incidents of the assignment of the fruits of the action. He observed at [485] as follows:
By contrast, an assignment of the fruits of an action is an equitable assignment being an agreement to assign such fruits if and when they are recovered in the future: Tailby v Official Receiver (1888) 13 App Cas 523. Such an agreement does not give the assignee any rights to prosecute or conduct the action and the assignee does not acquire any beneficial interest in the action itself: Glegg v Bromley [1912] 3 KB 474 at p 484.
97 It is apparent from the provisions in each of the Balanced Charge and the WCH Charge, including the provision which permits the appointment of a receiver to conduct litigation on behalf of the company, that the assignment of the Colliers cause of action effected by the crystallisation of each charge, is an assignment of the property in the cause of action carrying with it the right to conduct the litigation. In other words, the assignment falls into the first, and not the third, of the categories referred to by Peter Gibson LJ in Oasis Merchandising.
98 I find, therefore, that on the date of the crystallisation of each of the charges each of Balanced and WCH respectively, acquired an equitable interest in the chose in action against Colliers which included its proceeds. It follows that I reject the submission of IMF that the assignment effected by the crystallisation of each charge was no more than an assignment of future property.
99 It follows, also, that I do not accept IMF's contention that each of IMF, Balanced and WCH acquired their respective equitable interests in the fund simultaneously, namely, when the liquidator of Meadow Springs received the Resolution Sum.
100 Accordingly, in my view, each of Balanced and WCH acquired an equitable interest in the Colliers claim and its proceeds, before IMF acquired its equitable interest in the proceeds of the claim.
101 I would mention, in passing, that no point was taken that because the claim against Colliers was founded on tort and a breach of s 52 of the TPA, as well as on breach of contract, the chose in action could not be the subject of an assignment by charge.
102 The next question is whether IMF has a better equity in the proceeds of the claim than either Balanced or WCH, notwithstanding that Balanced and WCH acquired their equitable interests before IMF did, because IMF took the risk associated with the conduct of the Colliers claim, whereas Balanced and WCH and the other Knightsbridge parties did not.
103 As previously mentioned, IMF contended that the disposition of a portion of Meadow Springs' interest in a share of the Resolution Sum in favour of IMF was effected by cl 4.3 of the IMF Funding Agreement.
104 IMF contended that the IMF Funding Agreement was entered into by means of a novation between Meadow Springs, IMF and ILF. By the time that IMF entered into the ILF funding agreement, each of the WCH Charge and the Balanced Charge had been registered. Further, Mr McLernon, on behalf of IMF, had actual knowledge of the WCH Charge and the Balanced Charge, and of the fact that each of Balanced and the Knightsbridge parties claimed, thereby, to have an equitable interest in the Colliers claim by reason of their rights under the respective charges. That Mr McLernon had this knowledge is apparent from his discussion with Mr Carrello on 21 October 2000, about canvassing Balanced and the Knightsbridge parties to agree to give IMF priority in respect of its rewards under the ILF funding agreement (see [57] above). Mr McLernon had this knowledge even before he signed, on behalf of ILF, the ILF funding agreement on 22 October 2003. Mr McLernon said that he signed the ILF funding agreement on the basis of the belief that the Knightsbridge parties and Balanced would grant ILF priority in respect of its claim to the proceeds of the Colliers claim. In my view, this does not assist IMF. In any event, by the time IMF entered into the IMF Funding Agreement in August 2004, Mr McLernon was aware of Balanced's and the Knightsbridge parties' decision not to grant priority.
105 Thus, well before IMF acquired its equitable interest in the fund when the proceeds were received by Mr McMaster, IMF had actual knowledge of the equitable interests of Balanced and the Knightsbridge parties.
106 In the case of Moffett v Dillon [1999] 2 VR 480 (Moffett), the Court of Appeal in Victoria considered the question of the priority of competing equitable interests. Brooking JA (with whom Buchanan JA agreed) observed that a person with a notice of equity takes subject to it. He said that the "rule is…distinct from the rule that where equities are equal the first in time prevails". At 491‑492, at [45]‑[46] he observed:
I now return to the rule that a person taking with notice of an equity takes subject to it. Earlier I deferred consideration of whether circumstances are conceivable in which an equity acquired with notice of a prior equity could nevertheless be held to prevail over it. I made reference to Platzer v Commonwealth Bank of Australia [1997] 1 Qd R 266 at 273, where Davies JA said this (omitting footnotes):
Generally, indeed almost universally, where the holder of an equity acquired it with notice of a prior equity, its claim to priority must fail. There are nonetheless exceptions to this of which the most obvious are an agreement to postpone or waiver of priority. There may also be other conduct on the part of the holder of the prior equity which may estop her from asserting her priority.
I have said that there are two rules or principles at work in cases like the present, the rule that a person taking with notice of an equity takes subject to it and the rule where the equities are equal the first in time prevails. As regards the second rule, I have referred to the wide view taken by Mason and Deane JJ in Heid v Reliance Finance Corp Pty Ltd at 341 that broad principles of right and justice will guide the court in determining whether the equities are equal. As what I have already written should make plain, I do not regard the question whether a person who acquired an equity did so with notice of a prior equity as no more than a consideration to which regard is to be had in determining whether one of the equities is better than the other. I regard the rule about notice as a distinct and fundamental one and I do not consider that Mason and Deane JJ intended to question its existence or to subsume this particular matter of notice under a broad question so as to make it no more than a consideration bearing upon which was the better equity.
107 In my view, because of the "distinct and fundamental" rule referred to by Brooking JA in Moffett, IMF, by reason of Mr McLernon's actual knowledge referred to above, takes its interest in the proceeds of the Colliers claim subject to the prior interest of Balanced and the WCH under the Balanced Charge and the WCH Charge respectively. The question of whether IMF's equity is superior by reason of it having been the party that took the risk in relation to the litigation against Colliers, therefore, does not arise.
108 It follows that I do not accept IMF's contention that it is entitled to priority in respect of 35% of the Resolution Sum by reason of it having a superior equity to the proceeds of the Colliers claim to that of each of Balanced and the Knightsbridge parties.
The Universal Distributing point
109 I now deal with IMF's contention founded on the Universal Distributing case and the existence of a liquidator's equitable lien in respect of costs and expenses reasonably incurred in creating the fund. As previously mentioned, IMF contended that the obligation to pay the fees of $115,000 and 35% of the Resolution Sum, were expenses reasonably incurred by the liquidator in realising the Resolution Sum and were, therefore, payable in priority.
110 Mr McLernon deposed that he is, and was in 2003, when the ILF and IMF funding agreements were entered into, an executive director of IMF. IMF is, and was in 2003, a public company which carried on business of litigation funding. Mr McLernon said that IMF was at that time the largest company in Australia providing litigation funding. It was also the only public company engaged in that business.
111 Mr McLernon said that he had executive responsibility for litigation funding through various entities since the 1990s and was well acquainted with the market for litigation funding in Australia. Mr McLernon said that in 2003, at the time that the IMF Funding Agreement was entered into, the status of litigation funding agreements in Australian law had not been decisively determined and, therefore, there was always a risk that there would be a challenge made to the lawfulness of the funding agreement. That factor increased the risk that the litigation funder undertook, and in 2003 the percentage of the resolution sum which was provided for in funding agreements was higher than would be the position today.
112 Mr McLernon said that he had in the last six years considered and approved about 150 funding agreements. He said he had considered and rejected about three times that number of funding proposals. Mr McLernon said that "rewards" provided for in the ILF and IMF funding agreements were representative of those being sought and paid in 2003.
113 As to the management fees, Mr McLernon deposed that he had been personally involved in the conduct of the proceeding against Colliers. He had dealt directly with the firm of solicitors, Solomon Brothers, who had been acting for Meadow Springs. One of Mr McLernon's functions was to review the reasonableness of the solicitor's fees. Another function was to monitor the progress of the litigation which IMF had funded. There was attached to his witness statement a schedule of work undertaken by Mr McLernon personally. The schedule shows Mr McLernon liaising with the solicitors and taking a keen and detailed interest in the conduct of the proceedings.
114 Mr McMaster's evidence was that he did not make inquires from any other litigation funder before agreeing to enter into the agreements with ILF and IMF. He dealt with IMF because he wanted to deal with a "company of substance which appeared able to meet its liability under an indemnity for costs". Further, he said that he had not considered whether the management fees were a reasonable reward to IMF for the services it would provide for those fees. He said that he regarded the management fees as part of the overall consideration to be paid to procure the funding.
115 Mr Geer deposed that Balanced had no need for litigation funding, and that Balanced's preference was to pursue its own claim for its losses against Colliers. Mr Geer said that he received the circular letter from Mr McMaster dated 16 June 2003 and the circular letter from Mr McMaster dated 23 September 2003.
116 The Universal Distributing case involved the fixing of the remuneration of an official liquidator. The official liquidator had left at the Court his accounts of receipts and payments up to the end of 1932. The insolvent company had granted a debenture creating a floating charge over the assets of the company. The liquidator had realised the assets and had created a fund over which the debenture‑holder had security. The debenture‑holder contended that the liquidator's remuneration and certain disbursements contained in the accounts ought not be allowed out of the fund in priority to the amount the subject of the debenture‑holder's security. Dixon J observed at 174‑175:
If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets (In re Marine Mansions Co). The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (In re Oriental Hotels Co; Perry v Oriental Hotels Co). The debenture‑holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf In re Regent's Canal Ironworks Co; Ex parte Grissell; and see Batten v Wedgwood Coal and Iron Co).
In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture‑holders which have been reasonably incurred in the care, preservation and realization of the property. In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture‑holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed or work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it. (Footnotes omitted.)
117 Dixon J observed further at 175 that:
I shall also decide what portion of the remuneration and which of those items of expenditure would take priority of the debenture holder's debt notwithstanding that the debenture be valid and the assets be insufficient to meet it. (Emphasis added.)
118 Dixon J went on to determine that the liquidator's remuneration should be fixed as a lump sum. His Honour fixed a lump sum of 250 guineas together with an amount for travelling expenses. Dixon J determined further that of the total sum of 250 guineas, 30 guineas comprised remuneration for work done in realising or collecting assets claimed by the debenture‑holder and should, therefore, be given priority to the debenture‑holder's debt.
119 Dixon J also considered the question of disbursements. He declined to allow a disbursement in respect of the premium paid by the liquidator to a guarantee company to obtain the security which was required by the winding up order appointing him. Dixon J, otherwise, allowed the liquidator's disbursements. However, of the disbursements allowed, Dixon J (at 176) identified three disbursements which were to rank "behind the debenture holder's debt". Dixon J then declared that the liquidator was entitled to retain from monies comprising the fund, 30 guineas ‑ being his remuneration ‑ and an amount for the disbursements allowed, other than the three disbursements identified, in priority to the claim of the debenture‑holder.
120 IMF contended that the fees and the liability in respect of 35% of the Resolution Sum comprised expenses reasonably incurred by the liquidator in producing the fund. Therefore, in accordance with the principle in the Universal Distributing case, the liquidator was entitled to retain from the fund, monies to discharge those expenses in priority to the secured creditors. Further, it was contended that the liquidator was entitled to rely upon an equitable lien to protect that right (Shirlaw v Taylor (1991) 31 FCR 222).
121 In my view, a distinction is to be drawn between the fees and the liquidator's obligation to account under cl 9.1.2 of the IMF Funding Agreement in respect of a portion of the Resolution Sum. I deal, first, with the claim made in relation to the obligation in respect of the Resolution Sum.
122 Clause 9.1.2 of the IMF Funding Agreement imposes an obligation to "remit IMF's share of the Resolution Sum to IMF". It is apparent from the IMF Funding Agreement that it was the parties' intention that IMF's share of the Resolution Sum is to be held on trust for IMF. Clause 4.3 of the IMF Funding Agreement provides for the disposal by Meadow Springs to IMF of a share in the Resolution Sum. Further, cl 5.4 of the IMF Funding Agreement provides specifically that IMF is to have a "propriety interest" in the Resolution Sum. As I have already mentioned, IMF has contended that the disposal effected by cl 4.3 was the assignment of future property and so, it was said, IMF's share of the Resolution Sum "never vested in Meadow Springs absolutely".
123 In my view, the obligation which arose under the IMF Funding Agreement on the liquidator on receipt of the proceeds from the settlement of the Colliers claim, was to account as trustee to IMF for such amount of the fund as IMF was beneficially entitled pursuant to the disposal under cl 4.3 of the IMF Funding Agreement (Palette Shoes Pty Ltd (In Liquidation) v Krohn (1937) 58 CLR 1 (Palette Shoes). In my view, this obligation on the liquidator to account as trustee to his or her beneficiary was not an obligation of the character contemplated by Dixon J under the Universal Distributing principle.
124 In Palette Shoes, Latham J distinguished between the nature of the obligation to account as trustee attendant upon the assignment of future property and the liability incurred under ordinary contractual rights. At 14, Latham J observed as follows:
This view of the facts, however, makes it necessary to consider whether the liability of the company to the plaintiffs is merely a contractual liability creating a debt for which the plaintiffs have a right to prove in the liquidation, or whether, on the other hand, it constitutes the company a trustee of the moneys received by the company from the customers so that the plaintiffs became entitled to claim such moneys as against the liquidator, not being bound to prove for a mere debt in competition with other creditors.
125 In my view, the liabilities referred to by Dixon J in Universal Distributing were the liabilities creating "mere debts" in the language of Latham J. In other words, if the services provided did not fall within the protection of the liquidator's lien by reason of being incurred in the production of the fund, then the priority accorded to those contractual debts would fall to be considered within the ordinary priority provisions in the Act
126 In the Universal Distributing case and the other cases which have applied it, the Court was concerned to identify which of the expenses of otherwise unsecured creditors were incurred by the liquidator in the course of realising the assets. The cases are not concerned with determining the priorities of creditors who by their own resources have secured a beneficial interest in the property of the company.
127 Accordingly, in my view, the liability of the liquidator to account to IMF for its portion of the Resolution Sum, is not a liability which comprises an "expense" of the nature contemplated by Dixon J in Universal Distributing. The fund cannot, therefore, be charged with that liability under the principle in that case.
128 Balanced advanced an alternative argument. It contended that on a proper understanding of the observations of Dixon J referred to at [116] above, the amount of the liquidator's fees and disbursements expended in realising the fund that could take priority to a secured creditor was limited to the amount of the fees and disbursements that the secured creditor would have incurred had it realised the fund. Senior counsel for Balanced relied strongly upon the following two sentences and, in particular, the emphasised portion thereof, in the observations of Dixon J at 174:
The debenture‑holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit. (Emphasis added.)
129 Balanced went on to say that it was in a position financially to carry on a proceeding against Colliers itself without having to enter into a litigation funding arrangement. Accordingly, so it was contended, the amount of the liquidator's fees and disbursements which would take priority to Balanced's claim to the fund, would be limited to the costs which Balanced would have incurred had it appointed a receiver and conducted the proceeding against Colliers without litigation funding. The amount Balanced says it would have incurred is $642,000 - being the receiver's remuneration of $200,000 and legal costs of $442,000. Those figures are derived from an estimate of the receiver's remuneration, and the legal costs incurred by IMF in conducting the proceeding against Colliers. It says that it would not have expended any more than that amount. Accordingly, the fees and the 35% share of the Resolution Sum did not have priority.
130 Because of the view to which I have already come, it is unnecessary, to consider this argument, at least in relation to the share of the Resolution Sum. However, in deference to the time and care that was devoted to this argument, I will express my view.
131 In my view, contrary to Balanced's submissions, the observations of Dixon J in Universal Distributing do not comprise binding authority for the proposition Balanced advanced. The highlighted words of Dixon J at [128] above are, in my view, intended to do no more than provide a rationale for giving priority to the costs, charges and expenses incurred by the liquidator in realising or creating the fund in which the secured creditor has an interest. Those words are not to be construed as imposing a limitation upon the amount in respect of which priority would be accorded, by reference to the hypothetical amount that would have been expended by the secured creditor in realising or creating the fund, had it done so itself.
132 First, in the Universal Distributing case, Dixon J made no reference in his judgment to the hypothetical steps that the secured creditor would have undertaken in realising or creating the fund, nor the expenses that the secured creditor would have incurred had it appointed a receiver who had created the fund. If Balanced was correct in its submission that the highlighted words were intended by Dixon J to impose the limitation contended for, then Dixon J would have been required to have regard to the hypothetical action that the secured creditor would have taken to realise or create the fund and the expenses that the secured creditor would have incurred in carrying out of that action. This he did not do.
133 Secondly, Dixon J referred to Batten v Wedgwood Coal and Iron Co (No 1) (1884) 28 Ch D 317 (Batten). In that case there had been an abortive attempt to sell the property before the party realising the assets finally sold the property. At 325, Pearson J observed:
With regard to the costs of the realization of the assets, I think Mr Cozens‑Hardy is right in contending that these costs stand in a different position from any of the other claims. The property must be realized by some‑one in order that it may be distributed, and whoever has realized it and brought the proceeds under the control of the Court, has really constituted the fund which has to be distributed for the benefit of the receiver and everyone else who is entitled. These costs must therefore be paid in priority to the receiver.
134 The report then records the following exchange at 325:
Cookson, QC:‑ The costs of realization ought not to include the costs of the abortive attempt to sell; that attempt did not produce the fund. The principle is that the man who has actually produced the fund for distribution is to have his costs of producing it paid in priority.
Pearson, J:‑ The abortive sale appears to me to have been one step towards the realization of the property; I cannot distinguish the costs of it from the other costs of realization.
135 The observations of Pearson J in Batten show that those expenses in respect of which the priority is to be accorded are assessed by reference to actual events and the actual costs of the person who realises the fund and not the notional costs of the debenture‑holder if the debenture‑holder had elected to realise or create the fund. The limitation on whether the actual expenses incurred are to be given priority, is whether they were reasonably incurred.
136 Balanced also referred to the case of Moodemere Pty Ltd (in liq) v Waters [1988] VR 215. In that case, it was the receiver and manager who had been appointed under a floating charge after the company had gone into liquidation, who had realised the property and created the fund. The Victorian Full Court applied the Universal Distributing principle and held that the receivers and managers were entitled to retain from the fund the costs, expenses and remuneration incurred in realising the assets of the company. There was no consideration by the Full Court of the contention advanced by Balanced.
137 I now deal with the claim in respect of fees in the amount of $115,000. As previously mentioned, there were two elements of the fees, namely, an assessment fee of $15,000 and a management fee of $100,000.
138 In my view, the obligation on the liquidator to pay the fees is an obligation of such a nature as to comprise "an expense" of the kind referred to by Dixon J in the Universal Distributing case. The question is whether the obligation to pay the fees was reasonably incurred.
139 The issues raised by this question overlap with the issues raised by Meadow Springs' notice of motion to approve the IMF Funding Agreement retrospectively. It is appropriate, therefore, that I deal also with the notice of motion at this stage.
The amended notice of motion
140 In its notice of motion Meadow Springs sought orders that the Court, under s 1322(4)(d) of the Act, extend the period within which to seek approval of the IMF Funding Agreement, and that the Court approve the IMF Funding Agreement. The notice of motion was amended after the decision in Australian Securities and Investments Commission v Forestview Nominees Pty Ltd [2007] FCA 1985 (Forestview) was handed down in December 2007. In that case at [2] to [4], French J observed:
The liquidators now apply to the Court for an extension of the period within which to seek approval of the Agreement from the Court and also ask for an order that the Court approve the Agreement. The extension application is sought under s 1322(4)(d) of the Act.
In my opinion s 1322(4)(d) does not authorise the Court to extend time under s 477(2B). That is because s 1322(4)(d) provides for extension of periods within which certain things have to be done under the Act. Section 477(2B) defines no such period. It merely requires prior approval of the class of agreement to which it applies.
Despite the difficulty associated with the application of s 1322(4)(d) to approvals under s 477(2B), retrospective approval can be effected in other ways and a declaration made that the Agreement was not invalid notwithstanding the absence of prior approval. The liquidator may be directed, under s 479(3) of the Act, to act as though the Agreement had been approved. The Court may in the exercise of its implied incidental power and its power under s 23 of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act), approve the Agreement. It may also, in the exercise of its power under s 1322(4)(a) of the Act, declare the entry into the Agreement and the Agreement not to have been invalid for want of prior approval. For the reasons that follow I am prepared to make orders approving the Agreement, directing that the liquidators may act on the Agreement as though it had been approved prior to execution and declaring that their entry into the Agreement and the Agreement itself are not invalid.
141 The notice of motion was amended to include relief of the nature, and in the form, referred to by French J in Forestview.
142 In determining whether a liquidator has acted reasonably in entering into a litigation funding agreement, the Court is mindful that it is possible that the pursuit of litigation with the assistance of a litigation funding agreement will result in the liquidator and the litigation funder earning substantial fees without the creditors obtaining any tangible benefit from the conduct of the litigation. (See, Palmer J in Hall v Poolman (2007) NSWSC 1330 at [368]‑[379].) A relevant consideration, therefore, in determining this question, is whether there is a reasonable prospect that there will be extraneous benefits, particularly to creditors, from the liquidator entering into the funding agreement and the subsequent pursuit of the litigation.
143 In my view, the Court should, for the following reasons, exercise its power to grant the relief sought by Meadow Springs.
144 First, the claim against Colliers was Meadow Springs' only substantial asset. There was clearly a viable cause of action against Colliers, which had the potential to bring extraneous benefits to creditors, and the liquidator was unable to obtain funding from the creditors to pursue the cause of action. By the dates of entry into the ILF and IMF funding agreements, none of the secured creditors had appointed a receiver to pursue the litigation against Colliers. Litigation funding was the only source of funding available for the liquidator to pursue the litigation. As it has transpired, however, the settlement of the claim has not produced sufficient funds to result in a dividend to unsecured creditors who were at the time of entry into the ILF funding agreement, owed a total of approximately $450,000.
145 Secondly, it was not unreasonable for Mr McMaster not to have approached any other litigation funders before entering into the ILF funding agreement. Mr McMaster explained that he chose to enter into a funding agreement with ILF, and later with IMF, because IMF was well‑known and a public company which had the financial resources to fulfil the obligations which it had undertaken. On the evidence of Mr McLernon, which was not contradicted, IMF was at the time the pre‑eminent litigation funder in the market, and the terms of the IMF Funding Agreement were usual in the market at that time. In my view, the liquidator's approach and reasons for not approaching any other litigation funders, was, in the circumstances that prevailed in the litigation funding market in 2003, not unreasonable.
146 The evidence of Mr McLernon that the terms of the IMF Funding Agreement were usual in the marketplace at the time, is supported by the fact that in his letter to the Scheme investors dated 9 December 2003, Mr Carrello, an experienced liquidator, said that he regarded the terms of the ILF funding agreement to be reasonable. Further, the cases in which the Court has considered whether to approve the entry into a funding agreement by a liquidator, demonstrate that the courts have approved litigation funding agreements which contain clauses providing for the payment of a share in the proceeds of, depending on the circumstances, between 12% to 75%. (See, Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 208 ALR 242 at 269, at [108]).
147 Balanced said that because Mr McMaster did not have regard to whether the fees were a reasonable reward to IMF for the services IMF would provide, the incurring of this obligation was unreasonable. Whilst some criticism may be made of the liquidator's approach in this regard, this does not have the consequence that incurring the obligation to pay the fees is to be characterised as unreasonable. The obligation was incurred as part of a wider litigation funding agreement in a limited market, in circumstances when it was reasonable for the liquidator to enter into such an agreement.
148 In its written opening submissions Balanced claimed that it was not reasonable for the liquidator to enter into the IMF Funding Agreement because this was an attempt to subordinate legitimate and lawful claims of Balanced to the interests of the unsecured creditors and IMF's self interest. The gravamen of this submission was directed to IMF's contention that the obligation to account for the Resolution Sum would take priority over the claims on the fund by the secured creditors. During the course of oral closing submissions, Balanced accepted that dehors this consideration, the liquidator had, in the circumstances confronting him, acted reasonably in entering into the IMF Funding Agreement. It was, in the words, of senior counsel for Balanced a "win‑win" situation.
149 In my view, the liquidator acted reasonably in entering into the IMF Funding Agreement.
150 In any event, the entry into the IMF Funding Agreement was not open to be impugned on the grounds set out in Balanced's written opening submissions because Balanced was always able to protect its own interest in respect of Meadow Springs' claim against Colliers by appointing a receiver to take control of Meadow Springs' property under the Balanced Charge and to pursue the litigation. However, it chose not to do so.
151 A further consideration in deciding whether to grant retrospective approval to the IMF Funding Agreement is the explanation for the failure to obtain approval prior to entry into the agreement. Mr McMaster explained that he did not believe he needed approval to enter into the IMF Funding Agreement having already obtained approval to enter into the ILF funding agreement. The failure of the liquidator to obtain the requisite approval under s 477(2B) of the Act for the novation by which the parties thereto entered into the IMF Funding Agreement, was, in my view, an honest and understandable mistake. It is understandable that a liquidator may take the view that the novated agreement on essentially the same terms and with a new party that is the parent of the existing party to the agreement, would not require a renewed approval by the creditors.
152 Accordingly, in accordance with the approach of French J in Forestview, I grant the relief sought in para 4 of the amended notice of motion.
153 It, also, follows that I find that the liability to pay the management and assessment fees of $115,000 under the IMF Funding Agreement is an expense which was reasonably incurred by the liquidator in establishing the fund, and that expense falls to be charged against the fund in priority to the claims of Balanced and the Knightsbridge parties.
The salvage point
154 IMF also contended that the claim for priority could be supported on the principles of "salvage". In support of this contention, IMF said that IMF had through the implementation of the IMF Funding Agreement produced a fund which had conferred an "incontrovertible benefit" on Balanced and the Knightsbridge parties. The fund should, therefore, be charged with the amounts due to IMF under the IMF Funding Agreement as expenses incurred in producing the fund.
155 In the case of Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311, the New South Wales Court of Appeal addressed the question of the so‑called principle of "salvage" in the context of the principle in Universal Distributing. In that case both Spigelman CJ and Beazley JA observed that the so‑called principle of "salvage" does not, on proper analysis, comprise a separate basis upon which to support the claim made by IMF, but rather provides a rationale for the principle adopted and applied by Dixon J in Universal Distributing.
156 At [101], Beazley JA observed:
It is apparent, in my opinion…that the principle…discussed in Re Universal Distributing Co was the principle of salvage. In that regard, it must be recognised that "salvage" is merely a convenient expression to describe the basis upon which a receiver is entitled to be reimbursed for costs and to be paid remuneration before other persons entitled to the funds.
157 At [2], Spigelman CJ observed:
As Beazley JA suggests, when it comes to determining the basis upon which equity will intervene by way of enforcing an equitable lien, it is not helpful to talk in terms of a "principle of salvage". This is, in my opinion, more of a metaphor than a legal principle.
158 In any event, IMF's contention that the obligation on the liquidator to account for IMF's share of the Resolution Sum is to be regarded as an "expense" which can be charged against the fund in priority to secured creditors, runs into the same difficulty as that encountered in respect of the contention based upon the Universal Distributing case. It follows that I do not accept IMF's contention based on the so‑called "salvage" principle.
The Balanced claim
159 In its cross‑claim, Balanced claims a declaration that the Balanced Charge is enforceable against the property of Meadow Springs. Balanced claims that its rights as a secured creditor are founded upon the fact that it made advances to Meadow Springs under the Facility Agreement, and that those advances, interest payable thereon and other costs and expenses, are monies secured under the Balanced Charge.
160 Balanced also seeks an order that Meadow Springs pay to Balanced all monies (and any interest accrued thereon) presently held by or on behalf of Meadow Springs. Balanced claims that after having received the benefit of the monies disbursed to it by Mr Carrello from the proceeds of the sale of the Meadow Springs property, it was still owed $2,054,742.57. Balanced claims that that amount has increased by reason of the accrual of interest under the Facility Agreement. Balanced pleads that on 16 August 2007, it demanded (pursuant to the Balanced Charge) that Meadow Springs pay it $3,876,578.81 and that Meadow Springs has failed and refused to pay that amount.
161 Balanced also pleads that the Balanced Charge ranks pari passu with the WCH Charge but otherwise it has priority over all other claims against the assets of Meadow Springs, save for the reasonable expenses of the liquidator in establishing the fund.
162 Meadow Springs raised a number of defences to Balanced's claims.
163 First, it was contended that the monies had not been advanced to Meadow Springs under the Facility Agreement, but under the WCH Loan Agreement.
164 Secondly, Meadow Springs contended that the Facility Agreement is void and unenforceable because in entering into the Facility Agreement, Balanced acted in contravention of s 26 of the Stamp Act 1921 (WA) (the Stamp Act).
165 Thirdly, it is claimed that, in any event, Balanced has substantially overstated its claim. This is because it has charged interest pursuant to cl 5 of the Facility Agreement when that provision is unenforceable as a penalty because it provides for the payment of "interest on interest on interest".
166 Fourthly, it is alleged that, on its proper construction, the "Monies Hereby Secured" under the Balanced Charge does not include compound interest, and is confined to simple interest.
167 In addition, each of Meadow Springs and IMF claimed that a number of items of expenditure Balanced claimed as being within the ambit of "Monies Hereby Secured" by the Balanced Charge, were not so included.