Re Timbercorp Limited (in liq) [2011] VSC 189 (23 August 2011)

2 This application was commenced by Originating Process. The liquidators sought an order under s 477(2A) of the Corporations Act 2001 (Cth), authorising them to compromise a debt on the basis of the Terms of Settlement; and directions under s 511 of the Act that they were justified, and acted reasonably, in procuring TL and TSL to enter into the Terms of Settlement, and to distribute their share of proceeds to the seven investors in the 1999 Timbercorp Eucalypts Project.

3 Section 477(2A) of the Act provides:

(2A) 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:

(a) if an amount greater than $20,000 is prescribed--the prescribed amount; or

(b) otherwise--$20,000.

4 Section 511 of the Act provides:

Application to Court to have questions determined or powers exercised

(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

5 Under the policy of insurance, Allianz had agreed to indemnify the insured against the risk of fire causing the destruction of trees at the Branton Tree Farm in the South Grampian Shire. The tree farm was comprised of wood lots forming part of the 1999 Timbercorp Eucalypts Project. On 29 January 2009, the trees were destroyed or substantially damaged by fire, and the sum of $467,434.09 became payable by Allianz under the policy.

6 The policy had been negotiated by the landowner, TL, which was named as the insured, although the placement slip also made reference to investors in various projects to be 'defined and declared' at inception of the policy. TL subleased land to investors. The responsible entity for the scheme was TSL.

7 The policy document made reference to 'Interested Parties: To be advised'. While the lessees of in the various wood lots had reimbursed TSL for their proportional share of the premium, they and TSL were not specified in the policy as interested parties. The nominated 'insured' was TL. A question arose in the proceeding as to whether the sub-lessee/investors were, or were to be treated as, insured under the policy.

8 Payment of the substantial premiums to Allianz had been financed by Macquarie under a premium funding agreement. Under that agreement Macquarie took a mortgage of all right, title and interest in the policy and any proceeds. A question arose in the substantive proceeding as to whether the mortgage to Macquarie was effective, and whether it was entitled to the proceeds.

9 While TL had contracted with Allianz under the policy, and was named as the 'insured', it was TSL that passed on the cost to the seven investors, who paid their proportional share of the repayments to Macquarie, based upon the number of wood lots held by each of them.

10 The Terms of Settlement had been agreed following a court directed mediation, conducted by a court annexed mediator, Associate Justice Efthim, on 8 February 2011. Allianz did not actively participate in the mediation. By the time of the mediation a secured creditor, initially joined as a defendant in the proceeding, was no longer participating. The investors did not participate in the mediation. They were notified of the Terms of Settlement shortly after agreement was reached.

11 The investors were notified of the liquidator's application by letters dated 16 February 2011. The liquidators sought an order that the letters remain confidential. The letters explained the basis of the competing claims on the funds payable under the policy, and the basis upon which TL and TSL proposed to deal with the funds, after the liquidator's costs and expenses had been deducted. They proposed to pay the net amount to the seven investors in proportion to their wood lots.

12 The letters to the seven investors notified each of them that the liquidators anticipated making an application to the Court for approval on 21 February 2011. The investors were also informed that the court documents would be made available on a website. The address of the website was provided. The Court documents were posted on the liquidator's website on 18 February 2011. On the previous day, Anthony Scott Munro, a chartered accountant with the firm Korda Mentha, telephoned each of six investors who then resided in Australia to discuss with them the content of the letter dated 16 February 2011.

13 The remaining investor was resident in Europe. Mr Munro deposed that four of the investors indicated to him their acceptance of the compromise and the liquidator's proposal for distribution of the funds. He said that the remaining two resident investors, when contacted, expressed dissatisfaction with their losses in the scheme and the liquidation process, but did not indicate any opposition to the application. Mr Munro did not speak with the investor who was resident in Europe. He did, however, speak to that person's financial advisor, David Haintz, who told Mr Munro that he had not had a response from his client, but that he (Mr Haintz) accepted the reasonableness of the settlement. The significance of the conversations was to confirm that investors had received notice of the application, and were aware of the Terms of Settlement, and the possible consequences for him. I am satisfied that the investors, whose interests were affected by the Terms of Settlement had notice of this application. No investor appeared to object to the orders sought.

14 The liquidators placed great reliance on the advice of counsel in reaching agreement to compromise the proceeding. Mr Korda deposed that the Terms of Settlement were executed on the basis of counsel's advice, and that written advice, dated 11 February 2011, exhibited to his affidavit as a confidential exhibit, was consistent with the oral advice given during the mediation. The liquidators sought to maintain the confidentiality of the advice, presumably oral and written, as well as the Terms of Settlement.

15 The reliance placed by the liquidators on the oral and written advice to support their execution of the Terms of Settlement, and their production of the advice to the court to support their application, may have the effect of waiving any privilege attaching to the advice. There was no application for disclosure, and no challenge is made to the asserted legal advice privilege. Nor was there any objection to the liquidators' applications for confidentiality.

16 The written advice contains a useful summary of background facts. The author carefully considered the merits and risks associated with the respective claims in the declaration proceeding. Counsel had been asked to express an opinion as to whether it was reasonable for the liquidators to resolve the proceeding on the basis of the Terms of Settlement.

17 Issues in the proceeding that were compromised included the entitlement of the investors to the proceeds payable and the efficacy of the mortgage to Macquarie of the policy and proceeds. There was a question as to whether the amount claimed by TS and TSL was to be properly characterised as 'a debt to the company'. While the seven investors had paid a proportional share of the costs associated with the policy, designed to protect their interest in the trees growing on their wood lots, they were not named as insured parties. The named insured was the landowner, TL, who had mortgaged the policy and proceeds to Macquarie. In Re HIH Insurance Ltd,[1] Barrett J said,

Case law emphasises that s 477(2A) applies only in relation to a "debt" strictly so called. In some cases where the claim in question has not been a "debt" as such, courts have declined to grant approval under the section because such approval is unnecessary: see, for example, Re Luxtrend Pty Ltd [1997] 2 Qd R 86; Re Tietyens Investments Pty Ltd [1999] FCA 206; (1999) 31 ACSR 1. In other cases, it appears that a strict approach of that kind has not been taken: see, for example, Re Oliver Davey (Pacific) Pty Ltd [1999] VSC 241. I have no doubt that, if the relevant claim is unquestionably not a "debt" as such, the correct approach is to dismiss any application under s 477(2A) as unnecessary. But that approach should be taken only in a clear-cut case. This is because s 477(2A) goes to the existence of a liquidator's power. Each of s 477(1) and 477(2) begins with the words "Subject to this section", so that a power conferred by one of those provisions (including the power to compromise debts and claims conferred by s 477(1)(d)) simply does not arise, in a case dealt with by s 477(2A) or s 477(2B), unless court approval is given. It should follow, in my view, that the course of dismissing a s 477(2A) application on the basis that the particular claim is not, strictly speaking, a "debt" should be followed only in the clearest of cases.

18 I would adopt that approach as appropriate in this case. While there is some doubt as to the existence of the debt due to TS or TSL, the cautious approach is to avoid the risk of invalidity if the circumstances of the case otherwise justifies court approval. Approval of a compromise under s 477(2A) does not involve the court substituting its commercial judgment for that of the liquidators. The liquidators have reached an agreement which in their opinion is reasonable and appropriate. They appear to have relied substantially upon the advice of counsel. I have reviewed that advice and am satisfied that the liquidators were entitled to rely upon the advice as a basis to reach the agreement reflected in the Terms of Settlement. Of the total sum of $467,434.09 paid by Allianz, $257,088 was paid to Macquarie and $210,345.35 paid to TL and TSL.

19 The liquidators also sought approval under s 511 of the Act for their proposed distribution of funds to the seven investors. The alternative course would have been to place the proceeds in a fund for allocation between all members of the 1999 scheme. In their role as liquidators of the companies, the liquidators were undertaking or participating in an informal liquidation of the scheme. As such, they assumed obligations to company creditors and scheme investors. When dealing with scheme property they had conflicting duties.

20 An informal liquidation of the schemes. Such as occurred in this case, is often more efficient and less costly for secured creditors, unsecured creditors and investors, than a formal winding up the schemes under the Act and Constitution. Great care must, however, be exercised by liquidators to ensure that investors' rights and interests are not sacrificed to efficiency and the convenience for creditors.

21 In the circumstances of this liquidation, the liquidators had an additional conflict; the interest of the scheme members as a whole against the interest of the seven members with insured wood lots. I am of the opinion that the liquidators were prudent in seeking court approval of the settlement and the proposed distribution. I am also satisfied that the liquidators were entitled to act as they did, relying upon the advice of counsel to assist their own commercial judgment to compromise the proceeding on the basis for the Terms of Settlement.

22 The liquidators' proposal to distribute the proceeds paid to TL and TSL to the seven investors, after deducting their costs and expenses, is supported by logic and equity. The proceeds flow from a contractual arrangement made in respect of only seven investors, to protect the value of their trees at Branton tree farm in which only they had a relevant interest as investors. In that sense, the protection, and thus the proceeds from the policy of insurance, was personal to them. The investors reimbursed TSL for the premium repayments. To pay the proceeds into a common fund, for the benefit of all scheme members, most of whom paid no part of the premiums would, in my opinion, give to the non contributors an unjust windfall.

23 Once the substantive proceeding is finally disposed under the Terms of Settlement, there would seem little utility in maintaining the confidentiality of that document, or the advice or the letters dated 16 February 2001. Confidentiality orders may be justified if disclosure of the content of the documents might prejudice the liquidators' position if, for example, court approval was not forthcoming and they were obliged to prosecute their case in the substantive proceeding. During the course of the hearing, I expressed concern about the prospect of maintaining the confidentiality of the Terms of Settlement. That application was not pressed.

24 In Re Environinvest Ltd (No 4),[2] I expressed a similar concern about maintaining the confidentiality of Terms of Settlement. In that case the liquidator of Environinvest Ltd and certain schemes, and receivers and managers of secured property, had agreed at mediation on the distribution of funds between claimants and the sum of the liquidator's remuneration.

25 I am of the opinion that when liquidators, in the position of the applicants in this proceeding with apparently conflicting duties, negotiate in private to reach agreement, the terms of any compromise should not remain confidential once the substantive proceeding is finally disposed.

26 I propose to accede to the liquidators' application for confidentiality of the advice and letter, although I should not be taken as endorsing a practice of protecting such documents from disclosure in the future. Some reliance was placed on the fact that similar orders had been made in the past. While each case will depend upon its own facts, I have reservations as to the propriety, let alone utility, of maintaining the confidentiality of such documents, particularly where they have been relied upon by liquidators to justify their decision, as in this case, to compromise a proceeding.

27 On 21 February 2011, orders were made to the following effect:

1. The letter dated 16 February 2011 from the liquidators to the investors and the advice of counsel dated 11 February 2011 be kept confidential.

2. The terms of settlement be kept confidential until the final determination of proceeding 4280 of 2010.

3. The liquidators are authorised to enter into the Terms of Settlement and disburse the proceeds from the insurance policy in the manner proposed.

[1] [2004] NSWSC 5.

[2] [2010] VSC 549.