Rathner v Fopar Nominees Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd

Events leading up to this application 4 The following matters are based on the evidence provided by Mr Rathner by way of affidavit. 5 Reliance was wound up by an order of the Supreme Court of Victoria on 30 May 2018 and the liquidators were appointed as joint and several liquidators of the company. 6 In April 2021 the liquidators and Reliance commenced proceedings in this Court (WAD 88 of 2021) seeking orders that Fopar pay the sum of $6,237,475.55 to the liquidators as a debt due to Reliance pursuant to s 588FF(1)(a) of the Corporations Act, or alternatively as restitution, together with costs and interest (Reliance proceeding). 7 In July 2021 Fopar lodged a proof of debt with the liquidators in the amount of $5,729,847.20. Fopar claims that it is owed this amount under a guarantee and indemnity given by Reliance on or about 20 April 2015. The liquidators have rejected the Fopar proof of debt. 8 In August 2021 Fopar commenced proceedings in this Court (WAD 199 of 2021) seeking orders including that the liquidators' rejection of the Fopar proof of debt be set aside, that the Fopar proof of debt be admitted in its full amount and that the liquidators be removed and replaced as liquidators of the company (Fopar proceeding). 9 Fopar denies that that liquidators and Reliance are entitled to the relief sought in the Reliance proceeding. The liquidators deny that Fopar is entitled to the relief sought in the Fopar proceeding. 10 In July 2021 VHG lodged a proof of debt with the liquidators in the amount of $11,879,595.44 plus interest. VHG claims that this amount is a debt owed to it on account of funds loaned by VHG to Reliance formalised under a loan agreement dated 17 August 2015. The liquidators have not as yet admitted or rejected the VHG proof of debt. 11 Without any admissions of liability or wrongdoing, the parties have come to an agreement as to a settlement of the Reliance proceeding, the Fopar proceeding and the adjudication of the VHG proof of debt, and have recorded those terms in the Deed.

Summary of terms of the Deed 12 The Deed provides, in summary, as follows: (1) Fopar must pay $6,237,475.55 (Settlement Sum) into an interim account; (2) within 30 days of the payment of the Settlement Sum by Fopar into the interim account the liquidators must make an application for court approval to enter into the Deed; (3) these steps are expressly conditions precedent to completion of the Deed; (4) once the conditions precedent are satisfied the liquidators will admit the Fopar proof of debt and VHG proof of debt in full and transfer the Settlement Sum to the liquidators' bank account within seven days of Court approval; (5) the liquidators' solicitors and Fopar's solicitors will file minutes of proposed consent orders with the Court, dismissing the Reliance proceeding and the Fopar proceeding; (6) Reliance, the liquidators, Fopar and VHG release each other from all claims arising out of, incidental to or in connection with the Reliance proceeding, the Fopar proceeding, the Fopar proof of debt and the VHG proof of debt; (7) such releases will not affect the liquidators' rights, powers or obligations conferred under the Corporations Act (except where provided in the Deed), including the liquidators' right to apply to a court for directions in relation to the Deed or any matter which might frustrate the completion of the Deed; and (8) nor will such releases affect the rights, entitlements and powers conferred by the Corporations Act on Fopar and VHG as creditors of Reliance.

Part performance 13 By the time of the hearing, Fopar had complied with its obligation to make the payment into the interim account.

Power under s 477(2A) and s 477(2B) 14 The principles that apply to the exercise of power under s 477(2A) and s 477(2B) of the Corporations Act are well known and were usefully collected by Halley J in Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530. I respectfully adopt the following from his Honour's reasons: [13] Section 477(2A) of the Corporations Act, combined 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. [14] Section 477(2B) of the Corporations Act 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 enter into an agreement on the company's behalf if the term of the agreement may end, or obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement was entered into. [15] 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 ss 477(2A) and 477(2B) of the Corporations Act. As Giles J stated in the much quoted passage in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; 10 ACLC 1742 at 85-86: … the court pays regard to the commercial judgment of the liquidator (re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not 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. [16] Further, the observations of Bathurst CJ in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet (2015) 89 NSWLR 110; [2015] NSWCA 85 at [125] are apposite: Further, it is not generally the function of the court, in granting approval under s 477(2B) of the Act, to review a liquidator's commercial judgment or to second guess its decision. The court will generally not interfere unless there seems to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator's conduct. However, as was pointed out in each of the cases cited, the court does not act as a mere rubber stamp and will confer the power only when it is satisfied that a case for its exercise, in the particular circumstances, has been shown. [footnotes omitted] … [22] A further potential issue arises by reason of the fact that the Deed of Settlement and Release 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 (2013) 97 ACSR 117; [2013] WASC 409 at [34]; 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]; and Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 at [61]-[62]. [23] As noted in those authorities, there is some divergence of opinion as to the precise basis as to how retrospective approval ought to be effected. The divergence of opinion, however, would appear to make clear that, for an abundance of caution, it may be prudent for the Court to order that the approval be granted nunc pro tunc and potentially also make a declaration under s 1322(4)(a) that the settlement agreement is not invalid by reason of it having been entered into without the Court's prior approval. In addition, consideration has been given in those authorities to the making of directions under s 479(3) of the Corporations Act that each plaintiff may rely on the settlement agreement as if it had been entered into with the prior approval of the Court, and that in appropriate circumstances, an extension of time might be required for a plaintiff to bring an application for approval under s 477(2A) or s 277(2B), and in those circumstances, an order may be made that time be extended. Section 479(3) of the Corporations Act has since been repealed, but I note that such a direction could now be made pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), being Sch 2 of the Corporations Act.

Known creditors of Reliance 15 Mr Rathner set out in his affidavit the names of the eleven known creditors of Reliance with provable debts. Seven of those creditors are related entities. Four are not. The non-related entity creditors are PA Audit Pty Ltd (unquantified); Catlin Australia Pty Ltd ($69,795); Ford Kinter & Associates Pty Ltd ($1,185,567.16) and the Australian Taxation Office (ATO) ($1,268). The total of all debts quantified is $23,472,938.56.

Consideration of the merits of the claim by Reliance 16 Mr Rathner explained in his affidavit why he considers that entry into the Deed is reasonable, proper and beneficial for the creditors of Reliance and for the administration of the liquidation. He set out eleven reasons, which I paraphrase. 17 First, the amount claimed by the liquidators in the Reliance proceeding is $6,237,475.55. This is the same as the Settlement Sum and so represents the liquidators' maximum claim against Fopar (save for questions of costs and interest). 18 Second, the Deed will realise funds in Reliance's liquidation that may not otherwise be available to creditors (I assume future availability would depend on, for example, the outcome of litigation and the capacity of Fopar to pay in the future). 19 Third, the Deed will avoid the further costs and expenses to the parties of continuing the Reliance proceeding and the Fopar proceeding. 20 Fourth, the uncertainty and risks inherent in litigation are avoided. 21 Fifth, the matters the subject of the Reliance proceeding and the Fopar proceeding overlap only partially. The Fopar proceeding raises separate issues, including an application for removal of the liquidators and an application for determination of the Fopar proof of debt and potentially the VHG proof of debt. Those additional matters in the Fopar proceeding have the capacity to substantially increase the costs, time and expenses of the proceedings; lead to a 'reinvention of the wheel' if the liquidators were removed and new liquidators were required to familiarize themselves with the affairs of Reliance; and reduce any return to creditors of Reliance. 22 Sixth, the releases in the Deed allow the liquidators to perform their proper functions under the Corporations Act, and also preserve the rights conferred on Fopar and VHG as creditors of Reliance. 23 Seventh, aside from the ATO's claim for $1,268, Ford Kinter is the only likely creditor of Reliance that is not related to Reliance. Ford Kinter has funded Reliance and the liquidators in pursuing the Reliance proceeding and defending the Fopar proceeding. At the conclusion of the proceedings and provided there were to be a recovery by the liquidators or the company, Ford Kinter has indicated that it intends to apply to the Court for an order for priority under s 564 of the Corporations Act. Assuming that such application has merit, then the longer the proceedings continue the greater the risk to other creditors of Reliance, in that further funding would be required from Ford Kinter, and so recovery to the plaintiffs and the availability of funds to creditors would be diminished by amounts payable to Ford Kinter in priority to other creditors. 24 Eighth, if the Deed is not approved and the proceedings continue, the liquidators' remuneration between now and the end of the proceedings may be in the order of $100,000 - $200,000. 25 Ninth, if the Deed is not approved and the proceedings continue, the liquidators' solicitors have indicated that the further estimated legal fees and disbursements of Reliance and the liquidators to the end of the proceedings may be in the order of $350,000 - $500,000. 26 Tenth, the liquidators' solicitors have indicated that depending on various factors, including the extent of further interlocutory steps required, the need to obtain expert evidence, the case management of the proceedings and the availability of Court resources, the proceedings might not be heard and determined for another 12 to 24 months. This is significant in the context of transactions which occurred in the period 29 February 2016 - 28 June 2017. 27 Eleventh, the terms of the Deed are not the only terms upon which the parties could conceivably seek to compromise the Reliance proceeding, the Fopar proceeding or both proceedings. However, in comparison to either or both of the proceedings continuing, the Deed is likely to provide a return to creditors which is at an earlier point in time, and in a greater gross amount that is not further reduced by the costs, expenses and remuneration of ongoing litigation.

Disposition 28 As the docket judge for both the Reliance proceeding and the Fopar proceeding, I have the advantage of some familiarity with the matters in issue between the parties. Having considered the pleadings, the evidence in support of this application and noting in particular the opinion of Mr Rathner set out above, I am of the view that entry into the Deed is commercially reasonable and in the best interests of creditors. It provides potential for a return to creditors of some substance; a payment effectively in full by Reliance of the amount claimed from it; and a sensible resolution of matters pertaining to the treatment of significant proofs of debt. Accordingly, I am satisfied that an order should be made authorising entry into the Deed. The operation of the Deed is conditional upon Court approval. However, should it be necessary having regard to the date of execution of the Deed, I will provide that the order shall operate retrospectively. 29 I am also satisfied that the costs of the application should be costs in the liquidation. 30 There will be orders accordingly. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Banks-Smith.