Read, in the matter of Forestview Nominees Pty Ltd; Australian Securities & Investments Commission v Forestview Nominees Pty Ltd ACN 063 440 102

YATES J: 1 The plaintiff, Bradley John Tonks, is the liquidator of Ambient Rail Pty Ltd (in liquidation) (the company). He was appointed on 18 July 2014 pursuant to a resolution of the company's creditors. He seeks the Court's approval, pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Act), to enter into a Litigation Funding Deed with Premier Litigation Funding Pty Ltd (PLF). 2 In an affidavit made on 6 September 2019, Mr Tonks has deposed that, based on his investigations to date, he understands that there are potentially significant claims available to him and/or the company which warrant investigation, including by means of an examination of the company's director, Mark Robert Fishwick. However, in order to investigate those claims (the general nature of which are disclosed in Mr Tonks affidavit), he requires funding - hence the purpose of the present application. The company has an estimated asset deficiency of $803,183 and, save for the recoveries that might be available as a result of Mr Tonks' intended investigations, it is unlikely that the company's creditors will receive any return in the winding up. 3 To date, Mr Tonks' ability to pursue his intended investigations has been limited by a lack of funding. There is evidence before me that funding sources were consulted by Mr Tonks in 2016 and 2017 with the assistance of Litigation Funding Solutions (Australia) Pty Ltd (LFS) acting as a litigation funding broker. LFS is associated with PLF. At the time, three funders undertook various levels of due diligence in respect of the company's potential claims but, as events transpired, none of them were prepared to provide funding. This appears to have been due to a number of factors including, importantly, the fact that the claims were too small and did not fit within the funders' mandates. No other funders were approached because it was LFS's assessment that there was no prospect that other funders would consider providing funds. In March 2019, LFS established its own fund through PLF, whose mandate was to pursue "smaller" claims not dealt with by larger funders. This explains why Mr Tonks has not been able to obtain funding until very recently. 4 On 16 August 2019, Mr Tonks and PLF entered into the Litigation Funding Deed. The Deed was amended on 13 September 2019. On the evidence before me, it represents the only source of potential funding available to Mr Tonks. Without that funding, he will be unable to proceed to conduct his examination of Mr Fishwick or institute the substantive proceedings foreshadowed in his affidavit. 5 In consideration of the funding provided to Mr Tonks, PLF will receive priority payment from any recoveries made as a result of Mr Tonks' investigations. PLF will be repaid the funds it has advanced. It will then be entitled to an additional amount representing, in effect, 45% of the recoveries made after deducting the amount of the funds advanced. On its face, this percentage figure is high. However, Mr Tonks has deposed that, in light of the absence of other funding sources, and given the risks associated with litigation of the kind he might pursue, the amount potentially payable to PLF is, in his view, reasonable. As to the other terms of the Litigation Funding Deed, Mr Tonks has deposed that they are, in his experience, typical, reasonable and competitive. 6 In Hall v Poolman [2009] NSWCA 64; 71 ACSR 19, the Court of Appeal considered the question of whether a proposal to enter into a litigation funding agreement should be treated as a commercial proposal of a kind with respect to which a liquidator would usually be left to exercise his own judgment without judicial interference, or as a matter raising other considerations rendering the court less reluctant to give directions. Their Honours said (at [171]): 171 There is an analogy with an application to the court for the approval of an agreement of more than three months' duration under s 477(2B)/506(1A). In that context, if the subject matter of the agreement is purely commercial, the court will usually respect the liquidators' commercial judgment in favour of the proposal, and will generally not interfere (and therefore will grant approval) in the absence of evidence of bad faith, error of law or principle, or some real or substantive ground for doubting the prudence of the proposal: State Bank of New South Wales v Turner Corporation Ltd (1994) 14 ACSR 480 at 483 per Tamberlin J; Re Spedley Securities Ltd (in liq), at 85 per Giles J. Where, however, the proposed agreement is a litigation funding agreement, the decision to enter into it is not treated as a purely commercial decision because it affects the administration of justice and the efficient winding up of companies, and so the court may be less likely to defer to the liquidators' judgment. … 7 In Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375, (Newtronics) Gordon J identified (at [26]) a number of principles relevant to the exercise of the Court's power under s 477(2B): 26 There are a number of principles relevant to the exercise of the Court's power under s 477(2B) which are worth restating: (1) the court does not simply "rubber stamp" whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims: "[T]he 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. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors." (2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647; (3) the role of the Court is to grant or deny approval to the liquidator's proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642; (4) in reviewing the liquidator's proposal, the task of the Court is: "[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in....a hearing de novo [but]... simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the "expeditious and beneficial administration" of the winding up." See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 at [60]. 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; (5) further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a "grossly excessive profit": Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 at [28]; (6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein. 8 I am satisfied that the approval that Mr Tonks seeks is for the proper purpose of assisting the winding up of the company. The entitlements of PLF under the Litigation Funding Deed are significant, but I accept that the arrangements into which Mr Tonks has entered represent the only source of funding available to him and that, without that funding, he will not be able to pursue his investigations, with the likely consequence that there will be no return to creditors in the winding up. At least the funding to be provided by PLF holds out the prospect that there might be some return to creditors. In the particular circumstances of this case, I can see no reason to interfere with Mr Tonks' exercise of commercial judgment as to the desirability, in the creditors' interests, of entering into the Litigation Funding Deed. Although the potential benefit to PLF is large, I am not persuaded that, in the circumstances, it is disproportionate to the risk it will undertake or yield a grossly excessive profit. 9 In submissions, counsel for Mr Tonks argued that there was a "suspensory condition" in the letter of offer that accompanied the (then proposed) Litigation Funding Deed which meant that "the active agreement with which s 477(2B) is concerned, should be regarded as not having occurred". I am not persuaded that the Litigation Funding Deed, as executed, is subject to a "suspensory condition". However, this is not fatal to the present application. There is clear authority that retrospective approval can be granted: Read, in the matter of Forestview Nominees Pty Ltd; Australian Securities & Investments Commission v Forestview Nominees Pty Ltd ACN 063 440 102 (Receivers and Managers Appointed) (In Liquidation) [2007] FCA 1985 at [2] - [4]; Newtronics at [29] - [30]. 10 I am satisfied that the approval that Mr Tonks seeks should be granted. Orders will be made accordingly. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.