Michell (Liquidator) v Fowler, in the matter of WITS Holdings Pty Ltd

A. Introduction 1 By an interlocutory process dated 7 September 2023 (interlocutory process), the first plaintiff, Stephen Michell (Liquidator), in his capacity as the liquidator of the second plaintiff, WITS Holdings Pty Ltd (in liquidation) (Company), applies under s 477(2A) of the Corporations Act 2001 (Cth) (Act) for an order approving a deed of settlement. The deed of settlement was entered into by the plaintiffs and the defendant, Grant Fowler, on 18 August 2023 (Deed of Settlement). The plaintiffs further seek an order, pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Sch 2 of the Act, that the Liquidator was justified in entering and causing the second plaintiff to enter into the Deed of Settlement. The plaintiffs also seek a declaration, pursuant to s 1322(4)(a) of the Act, that the Deed of Settlement is not invalid by reason of it having been entered into by the plaintiffs and the defendant prior to obtaining the Court's approval. 2 The interlocutory process is supported by an affidavit of the Liquidator sworn on 7 September 2023 (first affidavit) and an affidavit of Kylie Wright sworn on 27 September 2023. Ms Wright is a principal in the employ of PCI Partners Pty Ltd, had carriage of the liquidation of the Company and acted under the supervision of the Liquidator. Annexure "B" to the Liquidator's first affidavit is a copy of the Deed of Settlement. 3 On 5 October 2023, I heard the interlocutory application brought by the plaintiffs. There was no appearance by the defendant or any creditor of the Company. The absence of the defendant was not a concern as he was a party to the Deed of Settlement. It was, therefore, in his interest that the Court make the orders sought by the plaintiffs. Further, Mr K. Kelly, who appeared for the plaintiffs, advised the Court from the bar table that the Liquidator had been advised by the defendant that he did not oppose the orders sought by the plaintiffs. 4 At the conclusion of the hearing, I gave a direction that the plaintiffs have liberty to file a supplementary affidavit addressing the following issues: (a) further communications with creditors concerning the settlement the subject of the Deed of Settlement, (b) the extent to which legal advice was provided to the Liquidator as to the appropriateness of the plaintiffs entry into the Deed of Settlement, and (c) the extent to which the Liquidator had information concerning the financial position of the defendant prior to entry into the Deed of Settlement. The financial information of the defendant that was provided in the Liquidator's first affidavit was the information included by the defendant in a statutory declaration that he provided to the Liquidator after the plaintiffs entered into the Deed of Settlement. 5 On 11 October 2023, the Liquidator filed a supplementary affidavit pursuant to the direction that I made at the conclusion of the hearing (second affidavit). 6 For the reasons that follow, I am satisfied that the declaration and the orders sought by the Liquidator in the interlocutory process should be made.

B. Relevant Factual Background 7 The following factual background is taken from the Liquidator's first affidavit and Ms Wright's affidavit. 8 On 10 April 2019, the Company was placed into liquidation. 9 On 10 March 2022, the plaintiffs filed an originating process commencing this proceeding. 10 On 16 June 2022, the plaintiffs filed a statement of claim in the proceeding. The plaintiffs allege that the Company incurred debts while insolvent between 26 April 2018 and 10 April 2019 in the amount of $4,313,943. 11 On 25 July 2022, the defendant filed a defence in this proceeding, alleging that the Company had not traded while insolvent between 26 April 2018 and 10 April 2019. 12 On 18 August 2023, the plaintiffs and the defendant entered into the Deed of Settlement. 13 The Deed of Settlement provides for the defendant to pay the settlement sum of $600,000, in cleared funds, and with time being of the essence, to the plaintiffs under the following circumstances (a) if the settlement is approved by the creditors of the Company or the Court, by 12 September 2023, or (b) if the settlement is not approved by the creditors of the Company or the Court by 12 September 2023, within seven days of approval being received in accordance with cl 6 of the Deed of Settlement. 14 Pursuant to cl 4.2 of the Deed of Settlement, the defendant agrees to provide a statutory declaration in relation to his current assets, liabilities, income, and expenses. 15 The statutory declaration provided by the defendant recorded that the defendant (a) has a monthly income of $20,000 and incurs monthly living expenses of $15,000, (b) has contingent liabilities of $6,827,000 and other liabilities of $144,265, far exceeding his total assets of $624,086, and (c) his most significant asset, being a loan of $4,310,287 owed to him by K5 Operations Pty Ltd as trustee for K5 Operations Trust, is unlikely to be recovered due to "the financial situation of the debtor". 16 The Liquidator caused property searches to be undertaken in relation to the defendant that confirmed that the defendant is not the owner of any real property. 17 Ms Wright, on the instructions of the Liquidator, notified the Company's creditors of the interlocutory application by (a) sending letters, as email attachments, to 115 creditors on 12 September 2023, and (b) sending letters via post to 249 creditors on 14 September 2023. 18 The Liquidator has not received any opposition to the interlocutory application from the creditors.

C. Legal Principles 19 A liquidator is authorised to apply for directions under s 90-15 of the IPS by virtue of s 90-20(1)(d) and paragraph (d) of the definition of "officer" of a corporation in s 9 of the Act: Eagle, in the matter of Australian Institute of Professional Education Pty Ltd (in liquidation) [2023] FCA 941 at [29]. Directions may be given on questions of legal procedure, such as whether a liquidator should settle a legal claim, and if so, on what terms: Sanderson v Classic Car Insurance Pty Ltd (1985) 10 ACLR 115 at 117 (Young J). Whether a liquidator should enter into a settlement deed has been considered to be a legitimate subject for directions because such a question involves a legal assessment as well as a commercial assessment: Wingecarribee Shire Council v Lehman Brothers Australia (In Liq) (No 9) [2013] FCA 1350 at [95] (Jacobson J); Australian Securities and Investments Commission v Letten (No 24) [2014] FCA 1322 at [14] (Gordon J). 20 The Court may give directions under s 90-15 of the IPS in respect of settlement of litigation if (a) there is an element of potential controversy in respect of the compromise, (b) a settlement has a substantial element of compromise about it, or (c) it involves not only the exercise of a commercial judgment by the liquidator, but also the exercise of a legal judgment involving the assessment of merits of the settlement against the prospects of success in the proceeding: In the matter of A.C.N. 004 410 833 Limited (formerly Arrium Limited) (In Liquidation) [2021] NSWSC 799 at [14] (Black J). 21 Section 477(2A) of the Act, read together with reg 5.4.02 of the Corporations Regulations 2001 (Cth) provides that, except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than $100,000: Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530 at [13]. 22 Section 477(2A) applies to debts in the strict sense and there is a question as to whether a claim for compensation for insolvent trading under s 588M of the Act constitutes a "debt" within the meaning of the provision: Arrium at [7] (Black J). In Mustang Marine Australia Services Pty Ltd (in liquidation) [2015] NSWSC 2152, Brereton J found at [5] that: There is a question as to whether a claim of this kind is in respect of a debt, such as to fall within s 477(2A). Observations made by Foster J in Engineered Thermal Systems Pty Ltd [2012] FCA 1159 (at [31]-[32]) provide some reason for thinking that there may be a debt involved. In any event, as Barrett J (as his Honour then was) has said in cases such as Re HIH Insurance Limited [2004] NSWSC 5 (at [12]) and QBE Workers Compensation (NSW) Limited v G J Formwork Pty Ltd (2006) 56 ACSR 687; [2006] NSWNSC 98 (at [4]-[5]), where there is room for argument about whether a claim involves a debt within s 477(2A), the Court should err on the side of treating the claim as a debt rather than declining to grant approval on the ground of lack of jurisdiction. As Lindgren J suggested in Elderslie Finance Corporation Limited v Newpage Pty Ltd (No 6) [2007] FCA 1030; (2007) 160 FCR 423 (at [27], [34]), the advice can be qualified in terms "to the extent that approval may be required". 23 The essential purpose of the requirement of approval under s 477(2A) is to ensure that the interests and wishes of those affected by a compromise, chiefly the creditors, are a major consideration in making such a compromise: In the matter of One.Tel Limited [2014] NSWSC 457 at [28] (Brereton J); Tracy, in the matter of Linchpin Capital Group Limited (in liq) [2022] FCA 739 at [17] (Cheeseman J). 24 It is well established that the Court does not concern itself with the commercial desirability of the transaction in an application for approval pursuant to s 477(2A) and s 477(2B) of the Act: Vardy at [15]; Tracy at [18]; In the matter of Rubix Investments Group Pty Ltd (in liq) [2018] NSWSC 1184 at [27] (Gleeson JA). As Giles J stated in the oft-cited passage in Re Spedley Securities Ltd (in liq) (1992) 9 ASCR 83; 10 ACLC 1742 at 85-86: … the court pays regard to the commercial judgment of the liquidator (ReChase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Minerals Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 25 In One.Tel Limited, Brereton J said at [26]: … Importantly, the Court's approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus the approval confers, or completes, the liquidator's power to enter into the transaction, but does not amount to the court approving the transaction itself. The distinction is material, because it means that - unlike a direction under s 479(3) or s 511 - an approval under s 477(2A) or (2B) alone does not exonerate the liquidator from personal liability. 26 The role of the Court is to grant or deny approval to the liquidator's proposal: One.Tel Limited at [26]. Its role is not to develop some alternative proposal which might seem preferable or to reconsider every issue considered by the liquidator: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26] (Gordon J). A court will not approve a settlement agreement if its terms are unclear: Newtronics at [26]. 27 Although the court does not exhaustively or closely consider the commercial merits or otherwise of the proposal, which is largely entrusted by the Court to the liquidator, some examination of the merits of the proposal cannot be avoided: One.Tel Limited at [29]. However, if the liquidator expresses the opinion that it is an appropriate commercial compromise, and there does not appear to be any such lack of good faith, error in law or principle, or real or substantial ground for doubting the reasonableness of the liquidator's view, the Court will generally give its approval: In the matter of Adscaff Pty Limited [2013] NSWSC 1081 at [5] (Brereton J).

D. Consideration 28 I am satisfied that the settlement the subject of the Deed of Settlement is in the best interests of the Company and orders should therefore be made under s 477(2A) of the Act approving the entry by the plaintiffs into the Deed of Settlement and pursuant to s 90-15 of the IPS that the Liquidator was justified in entering and causing the Company to enter into the Deed of Settlement, for the following reasons. 29 First, prior to entry into the Deed of Settlement, the Liquidator explained in his second affidavit that he had obtained detailed financial information in relation to the financial position of the defendant, including information provided by the defendant's solicitors in the course of settlement discussions and real and personal property searches of the defendant. That financial information, together with the Liquidator's knowledge of (a) a $450,000 insolvent trading claim brought by the liquidator of Clarinda Pty Ltd against the defendant in his capacity as a director of that company, (b) personal guarantees given by the defendant of rental obligations of the Company in an amount of approximately $322,000, and (c) a potential personal liability to the Australian Taxation Office for unpaid superannuation in the amount of approximately $615,000, caused the Liquidator to conclude that the defendant was very likely impecunious and would be unable to satisfy a judgment entered against him for the amount claimed or potentially any judgment that might be obtained against him. 30 The financial information subsequently obtained by the Liquidator in the defendant's statutory declaration after entry into the Deed of Settlement, as summarised at [15] above, corroborated the information as to the defendant's financial position that the Liquidator had obtained prior to entry into the Deed of Settlement. 31 Second, the Deed of Settlement provides for a payment of $600,000 from a person who, given the detailed financial information obtained by the Liquidator prior to entry into the deed, otherwise has no material assets, significant potential liabilities and limited income. 32 Third, there is no evidence of any lack of good faith, error of law or any reason to doubt the prudence of the compromise negotiated by the Liquidator with the defendant. 33 Fourth, the creditors have been notified, at least in general terms, of this application and creditors requesting more specific information have been provided with that information. In addition, no creditor appeared at the hearing to oppose the orders sought by the plaintiffs, or have otherwise informed the plaintiffs that they opposed the orders being made or wished to appear at the hearing. 34 Fifth, the Liquidator has confirmed in his second affidavit that throughout the settlement negotiations culminating in the entry into the Deed of Settlement, the Liquidator sought and obtained legal advice in relation to the appropriateness of entering into the Deed of Settlement, including the compromise of the claims the subject of these proceedings and the likely risks and costs of pursuing the proceedings to trial. 35 A further potential issue arises by reason of the fact that the Deed of Settlement has already been entered into, albeit that it is subject to the approval of the Court. While approval should normally be obtained in advance of the exercise of the power in question, there appears to be no doubt that the Court has the power to give approval that operates from an earlier time: Re Bell Group Ltd (in liq); Ex parte Woodings (as liquidator of the Bell Group Ltd (in liq)) (2013) 97 ACSR 117; [2013] WASC 409 at [34] (Allanson J); Chamberlain v RG&H Investments Pty Limited, in the matter of Hardy Bros (Earthmoving) Pty Limited (in liq) (No 2) (2009) 76 ACSR 415; [2009] FCA 1531 at [22]-[24] (Lindgren J); Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 at [61]-[62] (Hill J). 36 I have previously dealt with the issue of retrospective approval of a Deed of Settlement in Vardy at [22]-[23]. The Court can retrospectively approve a settlement agreement by ordering that the approval be granted, nunc pro tunc, and making a declaration under s 1322(4)(a) of the Act that the agreement is not invalid by reason of it having been entered into without the Court's prior approval.

E. Disposition 37 A declaration and orders will be made substantially in the terms sought by the plaintiffs in their interlocutory process. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.