Re United Medical Protection; application of Lombe [2003] NSWSC 237

The application 1 This is an application by the provisional liquidator of United Medical Protection Ltd (in provisional liquidation) ("UMP"), Mr David Lombe. Mr Lombe was appointed provisional liquidator of UMP by order of the Court on 3 May 2002. UMP is a medical defence organisation, which provides discretionary assistance to members, and provides them with professional indemnity insurance through its associated entity, Australian Medical Insurance Ltd, which is also in provisional liquidation. 2 On 17 November 2000, the board of directors of UMP resolved to make a call on its members, purporting to act pursuant to clause 27 of its constitution, which permits a call to be made in circumstances which the board considers to be urgent or exceptional. The call was payable either in full or by instalments stretching over a period from 2001 to 2005, but the whole of the balance due was to be payable by any member who resigned from membership. It required members to pay an amount equivalent to their annual membership fee to the company - an amount which in some cases was a few thousand dollars, but in the case of certain "high risk" medical specialists well over $20,000. The call was to raise an amount in excess of $100 million. The precise figures are regarded as confidential. The application is principally concerned with the portion of the call, a much smaller but still substantial amount, owed by doctors who are no longer members of UMP. 3 It is fair to say that the making of the call has been a matter of controversy amongst the members of UMP. Dr Michael Levitt and others commenced a proceeding in the Federal Court of Australia in respect of the call. Additionally, for various reasons that I shall indicate, the board of directors decided to exempt certain categories of former members (and, to a more limited degree, members) from payment. Mr Lombe now wishes to clean up and bring to an end the process of collection of the call. He wishes to enter into a compromise with Dr Levitt and his co-plaintiffs. He also wishes to exempt from their liability to pay the call, several categories of former members, and a category of members and former members who satisfy certain guidelines relating to "special considerations". He seeks to take various steps to recover the balance of the outstanding amount of the call from the remainder of the members and former members who have yet to pay it. 4 The application is made under ss 472(3), 477(2A), 477(2B) and 479(3) of the Corporations Act 2001 (Cth) and under the inherent jurisdiction of the Court. The making of the application is rendered necessary by s 477(2A) and 477(2B), in combination with s 472(5). Section 477(2A) has the effect of preventing a provisional liquidator from compromising a debt owing to the company if the amount claimed by the company is more than $20,000, except with the approval of the Court or the committee of inspection or a resolution of creditors. Section 477(2B) has the effect that a provisional liquidator must not (without approval) 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 be discharged by performance, more than three months after the agreement is entered into. The agreements that Mr Lombe wishes to make concerning the call will in some cases compromise debts claimed by the company for amounts in excess of $20,000, and will in some cases be for a term of more than three months or contain obligations to be discharged by performance over a period in excess of three months. 5 The principles governing an application to the Court by liquidator or provisional liquidator for approval of a compromise of a claim by the company in excess of $20,000 were set out by Cooper J in Re Rothwells Ltd (1989) 7 ACLC 545, 550-1. Amongst the principles set out by his Honour were the following: "1. A provisional liquidator ought generally to compromise claims only where it is necessary to preserve the assets of the company and maintain the status quo and where the result of such a compromise is beneficial to the company and the persons interested in it. "2. Where there is litigation as to debts due, it is appropriate that the provisional liquidator should exercise his independent judgment. If, acting with the benefit of independent legal advice, he forms a view that to continue litigation would be simply to pour good money after bad and thus deplete the existing assets, that consideration is a proper one in all the circumstances and the Court should not readily interfere with it. … "3. Neither a provisional liquidator, nor a liquidator, is under any duty to the company or those interested in any liquidation or proposed liquidation, to prosecute claims unless he believes that such prosecution will serve some useful purpose to the benefit of the company. … "4. There must be some real dispute as to the liability of the creditor and some question as to the certainty of recovery of the debt before it is appropriate to compromise the claim. … "5. The transaction proposed ought to be one which a reasonable businessman might carry out bona fide in the course of his business. …" 6 Although the occasion for seeking the Court's approval is different under s 477(2B), the considerations are much the same. The provisional liquidator's primary task is to preserve the assets of the company for the benefit of creditors and contributories, and any proposal for approval must be assessed by the Court having regard to their interests. However, where the provisional liquidator, in the exercise of his or her independent judgment, acting lawfully and in good faith and with appropriate advice, forms the commercial view that a transaction should be entered into in the course of administration of the affairs of the company, the Court will not second-guess the liquidator's judgment unless there are real and substantial grounds for doubting the prudence of it: Re Aslor Pty Ltd (in liq) (1997) 24 ACSR 612; Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83. 7 In granting approval under either s 477(2A) or s 477(2B), the Court does not make an assessment that the proposed transaction is fair, either absolutely or as regards creditors or contributories or the other party to the transaction. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter: Re G & A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308. 8 In addition to approvals under ss 477(2A) and 477(2B), Mr Lombe seeks directions under s 479(3) and the inherent jurisdiction of the Court that he would be justified in taking the steps that he proposes. I have already held that the Court has the power to give a provisional liquidator in the position of Mr Lombe directions in the nature of judicial advice, equivalent to the directions that it can give to a liquidator under s 479(3): Re United Medical Protection Ltd (2002) 41 ACSR 623. In my view relief of this kind is appropriate given the magnitude of the amount of the call debt, the complexity of the varying positions of the different doctors for whom exemptions may be available, and the need to take legal advice in respect of those matters. Mr Lombe is attempting to propound an overall solution to the problem of outstanding call debts, which seems to me to be rational. He is entitled, in my view, to the protection of the directions that he seeks: cf Re Ansett Australia Ltd and Korda (No 3) (2002) 115 FCR 409. Parties 9 The application proceeded ex parte. However, notice of the application was given to the Australian Securities and Investments Commission. An officer of the Commission wrote to Mr Lombe's solicitors, saying that he had reviewed the application and supporting material and had conferred with counsel, and that the Commission did not propose to appear at the hearing, because the application did not "appear to raise any contentious issues of policy or construction of the Corporations Act". The Commission has appeared on other applications by Mr Lombe as provisional liquidator of UMP, and has given the Court substantial assistance. On this occasion the Commission's letter contained an offer that the Commission would appear as amicus if the Court were to seek the Commission's view on any issue. It has not been necessary to take up that offer. 10 None of the creditors of UMP was represented at the hearing of the application, and the application was not advertised. I have taken the view that, in the special circumstances in this application, no such steps are needed, even though the effect of the application will be to authorise the release of certain former (and some present) members from the obligation to pay amounts to the company which are large in the aggregate. The application is essentially a technical application by a provisional liquidator charged with the responsibility to manage the company taking into account the interests of its creditors. Mr Lombe has made commercial assessments for which there are powerful supporting reasons. The Commission has been notified and has no objection. The application has an element of urgency. 11 It is unnecessary for Dr Levitt or his co-plaintiffs, or other groups of former members who will benefit from the proposed exemptions, to be represented, since Mr Lombe comes before the Court to advocate the adoption of arrangements to grant the exemptions that they seek. Exemptions from the call prior to Mr Lombe's appointment 12 After the board took its decision to make the call, UMP set about communicating with its members with a view to making arrangements for payment. A member who did not pay the call was treated by UMP as an "unfinancial member". UMP developed the practice of not providing an unfinancial member with discretionary assistance under clauses 72 and 73 of its constitution. The result of this was that a member who refused to pay the call was not recognised by UMP as having "tail cover". Tail cover is cover for claims notified after a doctor's resignation from UMP (for example, because of retirement), arising from incidents that occurred while the doctor was a member. Tail cover for incidents occurring before the later of 1 January 2001 and the commencement of the doctor's 2001 membership year (if, for that doctor, the year commenced after 1 January) was only available from UMP by way of discretionary assistance. 13 On several occasions the board of directors of UMP re-affirmed its determination to collect the call. However, the board decided to release certain doctors from their liability. Two categories of doctors were recognised, namely those to whom "special considerations" applied, and those who resigned from UMP by no later than 17 February 2001 and took tail cover with another medical defence organisation or insurer. Special considerations 14 From the outset, certain categories of members of UMP were exempted from the call, including dental members and certain overseas members, members who at the date of the call were employed by public hospitals or other institutions where they were fully indemnified by the employer and had no private practice, and members who joined UMP after 30 June 1999. After the call was made, UMP received applications for exemptions or discounting from other categories of members. The board decided that it would be appropriate to grant some relief where the member was in a category similar to an exempted category of membership, or where on discretionary grounds the imposition of the call would be unjust. 15 In about April 2001 the board established a "board call committee" and adopted "Guidelines for Special Consideration". The guidelines allowed for exemptions for doctors at the end or beginning of their practice, and for partial exemptions in various cases - for example, in the case of overseas transfers, or where the member had an unusually higher level of earnings in 2000 than in other years, or where a doctor changed to a higher subscription category in the 2000 year and reverted to a lower subscription category in 2001. Doctors who had special financial hardship could apply for a full or partial exemption. A full or partial exemption could also be granted in cases of administrative error - for example, where UMP had mistakenly failed to acknowledge a resignation. 16 As from July 2001, Mr Ron Ford, General Manager of Membership and Marketing for UMP, would review applications and make recommendations to the board call committee on the basis of the guidelines, having regard to the committee's previous determinations. He discussed his proposed recommendations with Mr Allan Hunter, General Manager, Professional Services for UMP, who had previously been responsible for processing applications. The board usually, though not always, accepted Mr Ford's recommendation. An amount less than 1% of the total amount of the call had been released through the special consideration process up to the time of Mr Lombe's appointment. Former members claiming to have been misled 17 A number of doctors who were members of UMP in the year 2000 chose to resign rather than to pay their 2001 membership renewal fees, after being notified of the decision to make the call. They claimed that they had been misled, by information supplied to them by UMP, into believing that if they resigned and arranged to take tail cover (frequently referred to during this debate as "retro cover") from another medical defence organisation or insurer, they would be able to avoid liability to pay the call. 18 The board's resolution of 17 November 2000 unambiguously stated that members who resigned would be liable to pay the call in full. Subsequently, however, other statements were made that were, according to these doctors, ambiguous. For example, the following statements appeared in the 2001 membership handbook: "Can a member refuse to pay the call? "All applicable members are required to pay the call, in the matter prescribed by the Board. If the call applies to you and you do not pay the call, you will forfeit your membership and all membership benefits, including any entitlement to request discretionary assistance." 19 In a memorandum to the board dated 9 August 2001, Mr Hunter summarised the position as follows: "There has been some confusion about whether United will seek to recover the unpaid call from resigned members as well as imposing the 'forfeiting the resigned membership benefits' [sic]. The initial statement that members are required to pay the call and if they do not, they forfeit membership and/or membership benefits including discretionary assistance has been interpreted by some resigned members to mean that they can elect not to pay the call upon the basis they obtain retro cover elsewhere. … "It is clear that in the early days of the call some resigned members were given advice to the effect that: - 1. They were required to pay the call 2. If they do not pay the call they are not entitled to discretionary assistance. It was not until after the February Board meeting [that it was] stated clearly that the Board would insist upon payment where a member took retro cover elsewhere." 20 At its meeting on 17 August 2001, the board considered Mr Hunter's memorandum, and decided that former members who had resigned prior to 17 February 2001 and obtained tail cover elsewhere would be exempted from payment of the call, provided that they released UMP from any obligation to provide them with discretionary assistance after the date of resignation. 17 February 2001 was selected as the cut-off date because, after the board meeting of 16 February 2001, communications between UMP and its members through the UMP call centre made it clear that if the member chose to resign, he or she would be required to pay the call regardless of whether tail cover was arranged elsewhere. 21 Most of the doctors identified by UMP as falling within this category of exemption were sent a deed of release for signature and return to the company. Two forms of letter were sent to resigned members, one for those who, according to UMP's information, had obtained tail cover elsewhere, and the other for those who were not known to have done so. In the former case the letter offered a deed of release, and in the latter case the letter offered a deed of release if the former member had taken retrospective cover elsewhere. A draft deed was enclosed with each form of letter. Additionally, when a former member who appeared to satisfy the criteria for exemption set out in the board's resolution of 17 August 2001 contacted UMP, an offer of exemption on the same terms would be made, and where appropriate, the draft deed would be sent to the former member. 22 The draft deed provided for the doctor to release UMP from claims for discretionary assistance, and for the doctor to acknowledge that he or she would be responsible for any claims not notified to UMP up to the time of resignation, and for UMP to release the doctor from liability to pay the call. The deed made provision that if the doctor applied to re-join UMP, the call would become payable. This latter requirement was not contained in the board resolution of 17 August 2001 and appears to have been added by the executive management of the company. 23 In administering the board's decision to grant exemptions, UMP continued to accept duly executed deeds of release up to the time of Mr Lombe's appointment. Up to that time, deeds of release were executed by UMP and 27 doctors who claimed to have tail cover with another medical defence organisation or insurer. The company did not offer to refund any call payments that had been made, but it did not require the doctor to provide evidence of alternative tail cover, in effect accepting the doctor's word that alternative tail cover had been or would be arranged. The recitals to the deed of release contained a representation that arrangements for retro cover with another provider had been made. The Levitt litigation 24 By an application and statement of claim filed on 30 October 2001, Dr Levitt and a number of other doctors took proceedings against UMP in the Federal Court of Australia on two grounds. First, they alleged that in 1999 and 2000 UMP made misleading representations about its financial position, to the effect that (inter alia) it did not plan to make a call on its members during 2000 or 2001 and no circumstances existed which made it necessary for the company to levy a call on its members to fund current claim liabilities and future claims with respect to IBNR ("incurred but not reported") incidents. They claimed that but for UMP's misleading conduct, either they would not have paid their membership subscription fees for the year 2000 or they would have resigned before the call was made on 17 November 2000. Secondly, they alleged that at the time of making the call, no circumstances existed that the board could reasonably have considered to be urgent or exceptional, and therefore the call was not authorised by the company's constitution. They sought declarations that they were not liable to pay the call, refunds of instalments paid, and damages. 25 Note that these claims are different from the claims that led to the board's decision on 17 August 2001 to grant an exemption. The Levitt litigation does not assert that the plaintiffs were misled into believing that if they resigned and arranged tail cover elsewhere, they would not be liable to pay the call. 26 Additional plaintiffs have been joined since the filing of the application and statement of claim, so that now there are about 140 plaintiffs. In the case of some of the plaintiffs the amount of the call is in excess of $20,000. The proceeding has not been constituted as a representative proceeding, but there is an application, still undetermined, for leave to amend for that purpose. 27 In the period from December 2000 until February 2003, UMP incurred nearly $200,000 in defending and seeking to resolve the Levitt group's claim. The proceeding has been stayed since Mr Lombe's appointment, by the operation of s 471B of the Corporations Act. 28 On 22 April 2002, less than two weeks before Mr Lombe's appointment as provisional liquidator, the dispute was mediated. A short "settlement proposal", typed but with handwritten additions, was signed at the mediation. That document contemplated the execution of formal deeds of release, but the deeds were not negotiated and executed prior to Mr Lombe's appointment. 29 From shortly after his appointment and throughout the balance of 2002, Mr Lombe and his staff had a number of "without prejudice" meetings with Dr Levitt, and "without prejudice" correspondence passed between UMP, the Levitt group and Mr Lombe, directed at resolving the claim. The Levitt group maintained during those negotiations that the settlement proposal evidenced a binding agreement, but Mr Lombe said he was not able to consider whether that was so and that he would need to obtain legal advice. 30 On about 17 January 2003, Mr Lombe sent a letter to former members who had not paid their call. The letter was sent to members of the Levitt group and to the group's solicitor. 31 On 28 January 2003 the Australian Financial Review published an article entitled "Doctors to sue liquidator in UMP bail-out", quoting a number of statements by Dr Levitt, including a statement to the effect that the Levitt group's claim had been settled and that in consequence, more than 100 members did not have to pay the call. There was another article in the Australian Financial Review on 29 January 2003. 32 Mr Lombe has given evidence in his application to this Court to the effect that, in his opinion, the publicity generated by the Levitt group's claim is having a detrimental effect on his ability to collect the call from members and former members of UMP who have not yet paid it. He gives as an example the fact that, after the publication of the articles in the Australian Financial Review, a number of doctors who received his letter of 17 January 2003 have refused to pay the call, indicating that they would await the outcome of the Levitt group's claim before reaching any decision on the matter. Further, when UMP has commenced recovery action against former members, as it has in some cases, defendants have sometimes raised similar issues to those pleaded by the Levitt group. 33 Mr Lombe has received advice from his solicitors in respect of the Federal Court proceeding, which he has summarised in confidential evidence supporting his application to this Court. After considering that advice, and taking into account that the litigation is likely to be lengthy, complex and costly, he has proposed to this Court a compromise of the Levitt group's claim in terms of a draft settlement agreement that has been placed in evidence. 34 The key features of the compromise are as follows: (a) the Levitt group will release UMP in respect of the claims that are the subject of the Federal Court proceeding, and will discontinue that proceeding with the Federal Court's leave; (b) for members of the Levitt group who, as at 31 January 2003 had, and continue to have, tail cover with another medical defence organisation or insurer, UMP will offer to release them from the call, and the doctor will release UMP from any obligation to consider granting discretionary assistance to the doctor under UMP's constitution; (c) for members of the Levitt group who do not have tail cover, UMP will offer them a deed under which the doctor must pay an amount equivalent to the call, but may do so by instalments, the last of which is to be paid in December 2005 (the instalment arrangements being similar to, though not identical with, instalment arrangements made between UMP and doctors who have co-operated in payment of the call); (d) Dr Levitt and Mr Lombe will issue a joint press release (the text of which has been provided to the Court) explaining and supporting the settlement. 35 This compromise differs from the settlement proposal signed at the mediation in April 2002 in two ways. First, the doctors who have obtained alternative tail cover but have already paid the whole or part of the call will not receive any refund of the amount they have paid under the compromise. Some 34 doctors in the Levitt group fall into this category. 36 Secondly, the compromise does not oblige a former member who is part of the Levitt group to pay the call if he or she seeks to rejoin UMP in the future. That requirement was an element of the settlement proposal at the mediation, and it was also an element of the deeds of release entered into between UMP and former members pursuant to the board's resolution of 17 August 2001. Mr Lombe has decided to abandon the requirement of a promise to pay the call upon re-application for membership because he has formed the opinion that it is not in UMP's commercial interest to impose such a condition, bearing in mind that UMP is operating in a business environment where cover is provided on a "claims made" basis. Application to approve Mr Lombe entering into the compromise with the Levitt group 37 Mr Lombe seeks the Court's approval, under s 477(2A), to his compromising, upon the above basis, UMP's claim to recover the call from the members of the Levitt group, in circumstances where the claim against some of those members is for an amount greater than $20,000 each. He submits that the proposed compromise is in the best interests of UMP, its creditors and members for the following reasons: (a) if the Levitt group's claim is resolved amicably, it should no longer generate adverse publicity that may encourage other members and former members of UMP to continue to refuse to pay the call; (b) viewed in its entirety and balancing its various components, the compromise is more favourable to UMP than the settlement proposal signed at the mediation in April 2002; (c) in Mr Lombe's opinion, formed with the benefit of legal advice after negotiations with representatives of the Levitt group, the compromise is the most favourable UMP could reasonably expect to reach with them; (d) under the terms of the compromise, a significant number of the members of the Levitt group (those who do not have alternative tail cover) will agree to pay the full call by instalments; (e) lengthy, complex, uncertain and expensive litigation, the cost of which is likely to exceed $1 million and may be significantly higher, according to advice received by Mr Lombe, will be avoided; (f) in relation to members of the Levitt group who have alternative tail cover, UMP is being released from any obligation to provide discretionary assistance in the future. 38 The last point requires further elaboration. From the point of view of UMP and its creditors, the benefit of the release from any obligation to provide future discretionary assistance may be limited, given that UMP would have been indemnified by the Commonwealth of Australia in respect of future grants of discretionary assistance pursuant to the IBNR indemnities being established under the Medical Indemnity Act 2002 (Cth). However, it is possible that some administration costs will be saved as a consequence of UMP not having to manage the discretionary claims. Further, there is a potential financial benefit to the majority of UMP members because the levy they must pay under the Medical Indemnity (IBNR Indemnity) Contribution Act 2002 (Cth) may be less than it otherwise would be. The levy must be paid by medical practitioners who were members of UMP on 30 June 2000, and the amount of the levy depends upon actuarial assessments of UMP's IBNR exposure - an exposure that is reduced when members abandon their right to seek discretionary assistance. 39 I am persuaded by these submissions that this is an appropriate case for the Court to grant approval to the compromise under s 477(2A). Application to grant relief upon special considerations 40 At the time of Mr Lombe's appointment, there were 67 pending applications, 14 of which involved call debts exceeding $20,000. Mr Ford has made recommendations in respect of these applications. Mr Lombe has given evidence that he has reviewed each of the applications and has considered Mr Ford's recommendations, and that he is satisfied that the recommendations had been made by reference to the guidelines and consistently with past determinations, except in some cases where he proposes a variation. Subject to those variations, and to the Court's approval where the call debts exceed $20,000, he proposes to accept Mr Ford's recommendations. He intends to require the applicant members to sign a deed which will provide, in cases of payment of the call or a reduced portion of it by instalments, that if default is made in payment of any instalment the total balance will become immediately due and payable. 41 In addition to the 67 pending applications, there were at the commencement of the provisional liquidation four outstanding deeds of release that had been offered to successful applicants for special consideration. In each case the call debt does not exceed $20,000, but Mr Lombe proposes to enter into arrangements for performance over a period of more than three months, and so he seeks approval to do so under s 477(2B). 42 Mr Ford has informed Mr Lombe that UMP is continuing to receive applications under the guidelines, although the frequency and number of applications is decreasing with the passage of time. Most of the new applications are on the ground of financial hardship. Mr Lombe proposes, subject to the Court's approval, to continue to process applications on the basis that Mr Ford will review each application by reference to the guidelines and past determinations, and Mr Lombe will make a determination after considering Mr Ford's recommendation. 43 By his application to this Court, Mr Lombe seeks approval, under either or both of ss 477(2A) and 477(2B), for his proposed arrangements regarding the 67 pending applications, the four applications that have been determined and not processed, and new applications. He submits that the following considerations justify his commercial decision to implement the proposed arrangements: (a) he believes there is a real risk that if UMP were to insist on payment of the call from applicants for special consideration, it would encounter significant resistance which may promote further adverse publicity and hamper collection efforts; (b) the decision will maintain the status quo because it will continue the practices employed before the company went into provisional liquidation; (c) most of the members seeking exemption would face difficulty paying the call, so that proceedings for recovery would be unlikely to be wholly successful; (d) in cases of administrative error the applicant is likely to have good grounds for avoiding the call; (e) enforcing the call against applicants would be perceived as unfair because people in a similar situation received exemptions or discounts prior to Mr Lombe's appointment; (f) enforcing the call against the applicant members would risk further alienating sections of UMP's membership, hindering attempts to maintain and re-establish the membership base; (g) exempting members who meet the requirements of the guidelines would be consistent with the nature of UMP as a mutual body of professional members, and would accord with UMP's objects, and is an action clearly contemplated (in Mr Lombe's view) by the provisions of UMP's constitution which provide for calls to be made on members (referring to clause 27 (2)); (h) as to the four applicants whose applications have been determined but not processed, an offer has already been made to them and should be followed through. 44 In my opinion these are reasonable grounds for Mr Lombe's commercial decision. It is appropriate, therefore, that the Court should grant approval under ss 477(2A) and 477(2B). Application to extend the category of exemption recognised by the board's resolution of 17 August 2001 45 As I have said, before Mr Lombe was appointed, UMP had sent draft deeds of release to resigned members who satisfied, or might have satisfied, the criteria for exemption established by the board's resolution of 17 August 2001. When Mr Lombe took up his position as provisional liquidator, he discovered that arrangements for the execution of the deeds of release had not been completed in the case of some doctors in the exempted category. 46 He has identified the following sub-groups whose positions remain unclear: A. seven former members who returned signed deeds of release to UMP prior to Mr Lombe's appointment, but whose deeds had not been executed by UMP up to that time; B. four former members who returned their signed deeds of release after Mr Lombe's appointment; C. one recipient of the draft deed who claims to have returned it, duly signed, but the document cannot be located in UMP's files; D. 45 former members to whom draft deeds of release had been sent before Mr Lombe's appointment, but who had not returned the deeds at the time of appointment and have not done so since that time; E. 29 former members who resigned prior to 17 February 2001 and have arranged alternative tail cover, but did not receive a draft deed of release, and now claim an entitlement to be released; F. 13 former members who resigned prior to 17 February 2001 and have arranged alternative tail cover, who are refusing to pay the call and have not asked for deeds of release. 47 In some cases in categories A, B, D, E and F the amount of the call is in excess of $20,000, and to that extent Mr Lombe requires the approval of the Court, or a committee of inspection or meeting of creditors, before exempting the former members from payment of the call. 48 Mr Lombe has received confidential legal advice to the effect that the deeds in categories A and B are binding on UMP, although the company has not executed them. That being so, he wishes to exempt the former members in these two categories, and the former member in category C, upon the same basis as the company did prior to his appointment, except in one respect. The one difference is that if two conditions are met, Mr Lombe will not require them to agree that they will pay the call if they are re-admitted to membership. The conditions are, first, they must acknowledge that they have released UMP from any obligation to provide them with discretionary assistance, and secondly, they must provide acceptable documentation to show that they have alternative tail cover as at 31 January 2003, and continue to have that cover at the time of seeking to re-join. 49 The removal of the requirement to pay the call upon re-admission to membership, and the conditions for that removal, are intended to treat these categories in the same fashion as the Levitt group. In the interests of consistency, Mr Lombe will not insist that any of the 27 doctors who executed deeds of release prior to his appointment must pay the call if they apply to re-join, even though they have promised in their deeds to do so. However, these doctors, like the doctors in categories A, B and C, must satisfy the two conditions that I have set out. 50 In relation to categories D, E and F, Mr Lombe proposes to grant exemptions provided that (1) the former member gave notice of resignation by no later than 17 February 2001 or did not renew membership on 1 January 2001 (this is, in effect, the first condition required under the board resolution of 17 August 2001); (2) the former member had alternative tail cover as at 31 January 2003 and continues to have that cover at the time of making the request for a deed of release, and provides acceptable documentation to show that he or she has such alternative tail cover. 51 Once again, these conditions are intended to treat these doctors in the same fashion as the doctors in the Levitt group. Mr Lombe justifies the conditions on the grounds that it is desirable to be consistent with the terms of settlement offered to the members of the Levitt group who have tail cover, and that it is desirable to give some finality and certainty to the number of cases where releases will be offered. 52 The conditions do not apply to the doctors in categories A and B because Mr Lombe's legal advice is to the effect that he is bound to treat them in the same fashion as the 27 doctors whose deeds of release had been executed. The executed deeds of release contain a representation that alternative tail cover has been arranged, but not as at a particular date or on a continuing basis, and supporting evidence has not been required. Mr Lombe points out, in his evidence, that the contract between UMP and the doctor could be rescinded for misrepresentation if the doctor did not actually have tail cover, and therefore in his opinion the absence of a requirement for substantiation in categories A and B is not significant. 53 There is an obvious difference between what is proposed for all six of these categories and the proposed compromise for the Levitt group, namely that in the case of these doctors, entitlement to the exemption depends upon establishing resignation (or non-renewal) by no later than 17 February 2001, whereas the arrangements for the Levitt group are extended to all members of the group regardless of when they resigned or, indeed, whether they have resigned. Mr Lombe claims that a condition of resignation by no later than 17 February 2001 would not be acceptable to the Levitt group, and in the circumstances he has made the commercial decision not to impose a condition on the Levitt group in order to resolve the Federal Court proceeding. 54 I should note that, both in relation to members of the Levitt group who must substantiate their tail cover, and in relation to those members who resigned by no later than 17 February 2001 who must substantiate their tail cover under the above arrangements, Mr Lombe will reject claims from doctors that they have tail cover from a company called St Paul Insurance Australia, unless they can demonstrate that the cover is for an unlimited duration not limited to seven years. This is because, according to Mr Hunter's evidence, St Paul ceased writing medical indemnity cover in late 2001, although it maintained tail cover for a period of seven years. Tail cover for only seven years is regarded by both Mr Lombe and Mr Hunter as insufficient to attract the exemption. 55 Mr Lombe says that in making his commercial decision to release the former members in categories A-F, he has taken into account the following matters, which he regards as justifying his decision: (a) he believes there is a real risk that if UMP were to insist on payment of the call from these categories of former members, it would encounter significant resistance, which might promote further adverse publicity and hamper his efforts to collect the call from doctors who do not have alternative tail cover; (b) UMP will be released from any obligation to provide discretionary assistance in the future (an outcome having the same significance as the release given by members of the Levitt group, in terms of the Medical Indemnity Act); (c) the decision would maintain the status quo by continuing to conduct business substantially in accordance with practices employed before Mr Lombe was appointed provisional liquidator; (d) enforcing the call against these former members may be seen to be unfair, given that other former members in similar situations have already been released; (e) in Mr Lombe's opinion, enforcing the call against these members might alienate sections of UMP's membership, and so hinder attempts to maintain and re-establish the membership base; (f) enforcing the call in these cases might lead to the incurring of legal costs out of proportion to the amount to be recovered, given the prospect that defences may be raised. 56 Mr Lombe has given confidential evidence estimating the amount of call debt likely to be released if his plans are implemented for categories A-F. He has taken this information into account in reaching his decision. 57 I am persuaded that Mr Lombe has reached a reasonable commercial decision with respect to categories A-F, and that I should therefore approve the arrangements under ss 477(2A) and (2B). Application with respect to call recovery action 58 Mr Lombe proposes to give a directive to UMP management to pursue the recovery of all call debts due and payable by former members of UMP, except for the Levitt group and the doctors who may be eligible for a deed of release in categories A-F above (and also, no doubt, former members who apply successfully under the Guidelines for Special Consideration). 59 Mr Lombe proposes to offer former members a deed with UMP providing for payment of the call by instalments. The deed will contain an acknowledgement by the former member of his or her indebtedness to UMP. It will provide that in default of payment of any instalment, the balance will become due and payable. The instalment program to be offered to former members will differ depending upon the amount of the call debt. For larger amounts, the instalments will be comparable to those offered to members of the Levitt group who do not have alternative tail cover. 60 If a former member does not accept UMP's offer of a deed providing for payment by instalments, debt recovery action will then be instituted. If the doctor defends a call recovery proceeding, Mr Lombe will consider the matters raised by way of defence and obtain appropriate legal advice, determine whether to pursue or seek to compromise the proceeding, and make an application to the Court for approval of any compromise where necessary or appropriate. 61 The instalment arrangements require approval under s 477(2B) and possibly (depending on the amount) s 477(2A). Mr Lombe submits that the settlement of call disputes on the basis of these instalment arrangements will be in the best interests of UMP and its creditors, because it will avoid the uncertainty, delay and expense of debt recovery proceedings, and recovery of the call debt will be made easier in the event of default because the doctor will have acknowledged his or her indebtedness. 62 In my view Mr Lombe has made out a satisfactory case for the Court to give approval for him to enter into arrangements of the kind outlined in his affidavits. General considerations 63 In his evidence Mr Lombe has given figures to show the overall effect of the various arrangements proposed in the application. I was persuaded to protect the evidence of the precise amounts by a confidentiality order, because of their commercial sensitivity in a highly competitive environment. Suffice it to say that the combined effect of the various categories of exemption or concession is estimated to be the release of about 3% to 3.6% of the total amount of the call. 64 Various advantages can be identified when the arrangements are viewed as a whole. They should lead to large savings in legal costs. Negotiated resolution of disputes over the call should reduce UMP's exposure to further adverse publicity, which might have discouraged payment by members and former members who have not paid the call. Because the arrangements continue, to a degree, practices employed before the company went into provisional liquidation, there is a reasonable prospect that members and former members will regard them as fair. This should reduce the risk of alienating sections of UMP's membership, who might otherwise have hindered attempts to maintain and re-establish the membership base. 65 During the course of the hearing, I expressed concern as to whether it was fair to deny an exemption to a doctor who resigned from UMP after 17 February 2001 and obtained alternative tail cover, when a doctor who resigned by no later than 17 February 2001 with alternative tail cover would obtain an exemption under Mr Lombe's proposals. Mr Lombe has provided a supplementary affidavit in which he says that he gave careful consideration to this question before making the application, and formed the opinion that he should continue with the requirement of resignation by no later than 17 February 2001. 66 His reasons are that, except in respect of the members of the Levitt group, this condition was consistently applied by UMP prior to his appointment. Moreover, it is not possible, in his view, to identify the additional doctors who would be eligible for a deed of release, or to quantify the amount of the call that may need to be written off if those doctors were to execute deeds of release. Mr Lombe's evidence is that UMP does not have sufficient reliable information to permit it to estimate the number of former members who have secured alternative tail cover since the call. 67 In my opinion these considerations constitute reasonable grounds for Mr Lombe to form the commercial view that the exemption should not be extended to former members with alternative tail cover who resigned after 17 February 2001. Conclusion 68 For the reasons I have given, I have decided that it is appropriate to make orders granting the Court's approval to the compromises and transactions proposed by Mr Lombe, under ss 477(2A) and 477(2B), and to give a direction that he would be justified in dealing with the call debt owed by members and former members in the manner set out in specified paragraphs of his affidavits, under s 479(3) of the Corporations Act and the Court's inherent jurisdiction. **********