Nikitins (Liquidator) v EncoreFX

A. The proprietary claims of the Interested Defendants are to be assessed as at the date of appointment of the administrators. B. Subject to the orders of the Court, the liquidators intend to pay from the amount deposited pursuant to these orders any proprietary claim in respect of funds held by EncoreFX as at the date of appointment of the administrators that is established by an Interested Defendant with such claims being fixed in the sum of $AUD165,975.10 as to Verbatim (Australia) Pty Ltd, $AUD697,554 as to Zeal Experiential Pty Ltd ATF Zeal Experiential Unit Trust (being the $AUD equivalent of JPY46,171,125 as at 30 March 2020) and $AUD840,576.36 as to Next Athleisure Pty Ltd, being the total amounts of the proprietary claims asserted by the Interested Defendants.

In these orders, the following words have the following meanings: EncoreFX means EncoreFX (Australia) Pty Ltd (in liq) (ACN 607 244 879); Interested Defendants means and is limited to each of Verbatim (Australia) Pty Ltd, Zeal Experiential Pty Ltd ATF Zeal Experiential Unit Trust and Next Athleisure Pty Ltd. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

COLVIN J 1 EncoreFX (Australia) Pty Ltd, now in liquidation, was in the business of providing services to hedge foreign exchange risks. Under terms agreed with its customers it could make margin calls requiring the customer to pay a margin deposit to cover instances where a foreign exchange position was out-of-the-money. It appears that in mid-March 2020 following a significant fall in the Australian dollar relative to other currencies, the position of two customers of EncoreFX were significantly out-of-the-money. Margin calls were made but not met and EncoreFX faced a liquidity crisis. The company was placed in administration. 2 No deed of company arrangement was proposed and Mr Adam Nikitins and Mr Stewart McCallum were appointed as joint and several liquidators of EncoreFX on 13 May 2020. 3 Investigations by the liquidators are claimed to have revealed that EncoreFX maintained a register which recorded funds attributed to individual customers but those records did not correspond to funds on deposit in the bank accounts of EncoreFX. The company's records also identified funds in transit accounts that appear to have been received by EncoreFX or a related entity pending settlement of foreign exchange transactions. 4 EncoreFX operated four bank accounts which hold total funds of $AUD5,321,783 and a bank account with funds of $USD202 (Bank Accounts). 5 As at June 2020, the liquidators were dealing with some 33 different customers of EncoreFX each of whom claimed an entitlement to funds that they had paid to the company. Nine of those customers were legally represented. 6 Mr Nikitins has deposed that each of the customers 'advanced complicated factual scenarios and supporting legal claims which typically involve [claims to money paid to EncoreFX which was the subject of contractual and regulatory obligations] and/or general trust law claims and various factual assertions'. It is said that significant fees and costs would be incurred in adjudicating all the claims which, in some cases, would exceed the value of the claim and cumulatively would be likely to erode funds presently available to meet the admitted claims of creditors. Further, the only account of EncoreFX that appeared to have been maintained as a trust account held $65,412, though it is possible those funds might be supplemented by other funds held by EncoreFX that had not been properly dealt with as trust funds. 7 The liquidators have asserted a claim on behalf of EncoreFX to a substantial amount against a related entity EncoreFX Inc on the basis that it had swept funds from the accounts of EncoreFX and the funds it held as a result were assets of EncoreFX. They need access to funds to pursue that significant claim. 8 Therefore, so the liquidators have claimed, the due and proper administration of the affairs of EncoreFX in the interests of all creditors may be prejudiced if the proprietary claims by customers were adjudicated by the usual proof of debt process or by proceedings commenced with leave within applicable limitation periods. The liquidators proposed a procedure to bring forth those claims which were to be pursued by customers and have them efficiently adjudicated in the course of proceedings that would also establish a pool of funds that were not the subject of proprietary claims and were therefore available to the liquidation. 9 In those circumstances, the liquidators commenced proceedings seeking final relief pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth) (Schedule). The final relief sought is to the effect that the liquidators are justified in pooling certain identified funds held by them and any funds recovered from EncoreFX Inc and that they are also justified in treating and distributing those pooled funds as assets of EncoreFX that are not subject to any proprietary claim. They also seek to be appointed as receivers and managers of the pooled funds to the extent that any proprietary claim to them is disputed. 10 In order to deal with the proprietary claims that have been notified to the liquidators by customers (and any other proprietary claims to the funds), the liquidators sought interlocutory orders notifying interested parties who had or might be expected to lodge proprietary claims against any of the funds to be pooled. The proposed orders provided for notification to those parties that they are required to apply to the Court for orders that they be joined in the proceedings for directions as an interested party, that they be granted leave to commence a proceeding against EncoreFX and that they be permitted to proceed by way of points of claim within the proceedings for directions commenced by the liquidators. 11 Accordingly, what was proposed was a process by which any person who might have a proprietary claim against the funds proposed to be pooled was required to bring forth that claim so that it could be considered at the same time that the Court was to be invited to make orders establishing the pooled fund (and the extent to which it might thereafter be applied to meet the costs of the administration of EncoreFX and claims by unsecured creditors). Any such persons were also to be informed of the directions sought by the liquidators that they are justified in treating funds that exceed the quantum of any proprietary claims made as funds available to the administration. 12 On 18 June 2020, Gleeson J made interlocutory orders in the terms appended to these reasons. Steps were taken by the liquidators as required by those orders. Three proprietary claims were forthcoming. On 2 July 2020, her Honour made orders joining each of Zeal Experiential Pty Ltd as trustee for the Zeal Experiential Unit Trust (Zeal), Next Athleisure Pty Ltd (Next) and Verbatim (Australia) Pty Ltd (Verbatim) as defendants, granted each of those parties leave to commence proceedings against EncoreFX and ordered that they be permitted to proceed with those claims by way of points of claim in these proceedings. 13 In my view, the effect of those orders was twofold. First, it was to join those three parties as parties to an application by the liquidators for directions. Second, it was to formulate a procedure by which their substantive proprietary claims might be determined because the question of how those claims should be treated by the liquidators had the potential to adversely affect the efficient administration of the winding up as a whole. Therefore, those claims were not to be dealt with as part of the application for directions. Rather, they were each to be dealt with substantively as giving rise to questions arising in the administration that needed to be determined. The evident purpose of the orders was to put in place a procedure by which any proprietary claims may be resolved practically and efficiently before making final orders on the application for directions pursuant to s 90-15 of the Schedule. 14 No other parties have made or sought to make proprietary claims against EncoreFX in these proceedings pursuant to the orders made by Gleeson J. Mr Nikitins has provided an affidavit to that effect and has deposed to the steps taken to notify interested parties. 15 The liquidators now seek orders that would allow them to pool and utilise funds from the Bank Accounts to the extent that those funds are surplus to any claim that has been made by any customer. Draft orders have been proposed which have been consented to by Next and Verbatim and have not been objected to by Zeal. The further proposed orders do not deal with any funds that may be recovered from EncoreFX Inc. Presumably that issue is to be separately addressed at a later stage. 16 The orders proposed by the liquidators would do two things. First, they would put aside sufficient funds to pay any claim of a proprietary nature by the three claimants (if upheld). It is to be noted that the liquidators do not intend by the orders to create or bring into existence a fund from which any proprietary claim could be met in circumstances where the fund did not exist at the date the administration of EncoreFX commenced. Rather, the orders will provide a form of security in the form of a fund from which any proprietary claim might be met if it is determined that the claim is valid. Whether that is so will be a question to be determined when adjudicating each of the three claims on the facts as they existed at the time when the administration commenced. 17 Second, they would provide advice to the liquidators that they are justified in treating all remaining funds as funds available in the liquidation on the basis that they are not the subject of a proprietary claim.

The nature of the power conferred by s 90-15 of the Schedule 18 As I explained in Preston, in the matter of Sandalwood Properties Ltd [2018] FCA 547 at [21]-[40], the statutory jurisdiction of the Courts to give judicial advice may be traced back to Lord St Leonards' Act. However, the current expression of the jurisdiction is to be found in statutory provisions that are variously expressed and apply in different contexts. The High Court considered the jurisdiction in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66. For reasons that I gave in Sandalwood Properties at [40] three matters are germane when considering the nature and extent of the powers conferred by a particular statutory provision: First, as a jurisdictional provision it should not be construed as being subject to any implied limitation. Second, when a court exercises jurisdiction of the kind conferred by such a provision it is giving private advice and is not determining the rights of parties. Third, the circumstances in which the advice may be given are indicated by the language in the particular provision. 19 The power to make directions does not empower the Court to determine any question. Rather, it affords an opportunity for certain parties responsible for administering property in the interests of others to approach the Court, make full and fair disclosure and obtain a form of protection against claims that they have acted in breach of their duty in following a particular course of action. 20 However, s 90-15 of the Schedule goes beyond a power to make directions. The current statutory provision is expressed in the widest of terms and states that the Court may make such orders as it thinks fit in relation to the external administration of a company: s 90-15(1). The provision has been construed as including a wide power to give judicial advice by way of direction: In the matter of Go Energy Group Ltd [2019] NSWSC 558 at [16] (Black J). However, it also expressly includes a power to determine an issue. 21 The statutory power is conferred for the purpose of facilitating the administrator's functions. The nature and extent of the power was recently considered by Middleton J in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 6) [2020] FCA 1172. In that case, his Honour made orders as to a procedure to be followed for ascertaining creditors and admitting debts or claims by using software to facilitate electronic lodgement of claims and for their determination based upon the books and records of the companies and the information lodged electronically using the platform created by the software. The effect was to vary the statutory procedure that would otherwise be required to be followed.

The orders sought in the present case 22 The orders that have been made by Gleeson J contemplate the determination of proprietary claims to the funds available to the liquidators where those claims are brought forward in these proceedings, in particular whether they have a proprietary claim as against the funds held by the liquidators or against the funds that might be recovered from EncoreFX Inc. The orders contemplate that otherwise, outside that procedure, the claims that have been made will not be adjudicated according to the usual processes of a proof of debt or a proprietary claim brought with leave of the Court. 23 The orders were made on the basis of evidence to the effect that given the size of possible proprietary claims and the costs of their investigation, it was appropriate to make them. In that respect, the orders are made for similar reasons to those which pertained when Perram J made orders for a particular procedure to be followed in the Mossgreen administration: see White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 3) [2018] FCA 711; White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 5) [2018] FCA 1847; and White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 6) [2019] FCA 17 at [4]. 24 The orders by Gleeson J in these proceedings were also made because the liquidators seek advice to the effect that the funds that they hold can be used to conduct the administration (save to the extent that the Court determines that there is a proprietary claim). 25 The orders that are presently proposed are not orders that determine any question. Rather, they take the form of directions by way of judicial advice. They would also set aside funds that would be sufficient to meet the claims of Zeal, Next and Verbatim, but otherwise direct that the liquidators are justified in treating the other funds held by them as being available for the purposes of the liquidation. 26 There is no suggestion that the liquidators have not made full and fair disclosure of all relevant factual matters. The affidavit material does not disclose any basis known to the liquidators upon which they ought to accept any particular proprietary claim. It is reasonable in all the circumstances for any proprietary claims that are to be maintained by any customer to be pressed according to the procedure required by the orders made by Gleeson J. The orders as proposed are sought to enable the administration to proceed. In particular, Mr Nikitins has deposed that the liquidators wish to take steps to further investigate and recover monies owing to the company by third parties, including two debtors against whom there are claims of almost $US17 million. It is submitted for the liquidators that if those debts are recovered the prospects of which are said to be presently unclear it may enable the creditors to be paid 100 cents in the dollar. Plainly, the ability of the liquidators to promptly pursue those claims is of importance to the administration and the liquidators need to have certainty as to the position in relation to the funds held by them so they can pursue those claims. 27 Other than Zeal, Next and Verbatim, no party has brought a claim in the present proceedings despite the orders made by Gleeson J. No party has sought to vary or set aside the orders made by Gleeson J. No party has sought to be heard on the question whether the directions are appropriate. None of the defendants oppose the directions being made by way of judicial advice. 28 In all the circumstances, I am satisfied that it is appropriate to make orders substantially in terms of the interlocutory orders sought. 29 The first aspect of the orders is a usual type of order by which the Court may preserve the subject matter of a disputed claim or provide security pending its determination. In the circumstances I have explained, I am satisfied that it is appropriate to make the orders that would set aside funds pending the resolution of the claims by each of Zeal, Next and Verbatim. 30 The second aspect of the orders would involve the making of a direction in the exercise of the statutory power conferred by s 90-15. It would not involve the determination of any rights. It would provide judicial advice pursuant to a statutory power to do so. The power conferred is wide. I am satisfied that given the course that the liquidators have followed in bringing these proceedings and seeking orders that make provision for proprietary claims to be brought forward in these proceedings and notifying those orders to all potential interested parties it is appropriate to make the directions sought. 31 The effect will be that the three claims by Zeal, Next and Verbatim will remain for substantive determination. Whether that is to be undertaken on the basis that it involves the determination of an issue in the administration in the exercise of the power conferred by s 90-15 or a substantive determination of a dispute in the exercise of the Court's jurisdiction to determine a lis as between each of the three claimants and the liquidators (albeit according to the procedure directed by Gleeson J rather than the commencement of separate proceedings by each of those parties) is a matter that need not be determined at this point. The distinction may have significance if an issue arises as to the nature and extent of the power conferred by s 90-15 to determine an issue.

Order for appointment as receiver and manager 32 The liquidators also seek an order that they be appointed as receivers and managers of the funds the subject of the directions to be made. The basis upon which such an appointment is sought is not explained in the liquidator's submissions. It appears that the order was originally sought because the liquidators may have been pooling funds and holding them pending the identification of parties bringing proprietary claims to the funds. In those circumstances, it may be that the liquidators were handling funds on behalf of third parties that did not form part of the property administered in the liquidation. However, the orders now to be made provide for the liquidators to hold a nominated amount pending the determination of the claims by the three defendants. There is no need for orders as to receivership and management in respect of that amount which is to be held pursuant to court orders. Otherwise, the direction is sought that the liquidators are justified in treating the funds as part of the administration. Therefore, it would be inconsistent with the direction for those funds to be treated as if they required some form of order for their management. If the liquidators still seek some form of order for appointment as receiver and manager then they should make further application with submissions supporting the application.

Liberty to apply 33 I will provide for liberty for any interested party to apply to vary or set aside the interlocutory orders on three days' notice. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.