The reasons and orders of the primary judge
59 The primary judge set out the relevant statutory provisions and summarised the relevant principles at [42]-[71] of the Reasons. The appellants do not take issue with his Honour's statement of the relevant principles.
60 The primary judge set out the detailed factual context at [72]-[129], much of which has been reproduced above.
61 The primary judge's core reasoning was at [130]-[160]. In summary, his Honour rejected the appellants' contentions based on s 445D(1)(f)(i) and (ii), and (g). For the purposes of the appeal, the main focus is on his Honour's reasons in relation to s 445D(1)(f)(ii).
62 The primary judge dealt with s 445D(1)(f)(ii) at [134]-[151] of the Reasons. The primary judge noted, at [134], that the appellants relied on two matters. First, they claimed that it was contrary to the interests of the creditors as a whole not to pursue a proceeding to enforce the China Rail Deed of Covenant against China Rail when, on its face, the covenant was expressed in clear terms, the amount of the covenant far exceeded the total amount of the unsecured creditors of the Joint Venture Company, and there appeared to be no dispute that China Rail was a company of substance. Secondly, the appellants claimed that it was contrary to the interests of the creditors as a whole not to pursue investigations against the directors of the Joint Venture Company for insolvent trading. The second contention can be put to one side for present purposes, as it is not pursued by the appellants on the appeal.
63 The primary judge stated, at [135], that the principles discussed in the authorities demonstrated that the appellants bore the onus of establishing that there was a "not unrealistic prospect" (or a "serious case for the recovery" or a "real prospect") of obtaining a better return for the creditors of the Joint Venture Company by pursuing the proceedings and investigations that the appellants had identified.
64 His Honour summarised the appellants' contentions at [136]:
The plaintiffs have claimed that the Administrators have overstated the difficulties and costs associated with obtaining and enforcing a judgment against China Rail and they have therefore underestimated the amount the company's creditors would obtain from pursuing that course in a liquidation. In particular, they have claimed that, with respect to the [Deed of Covenant], there is "nothing to investigate" because China Rail is "prima facie liable" under it. Accordingly, they claim that the real issue is whether a judgment can be successfully enforced against China Rail. On the former, they have contended that China Rail's postulated challenges to the enforceability of the [Deed of Covenant] have little, if any, merit. On the latter, they have contended that, since China Rail intends to continue to conduct business in Australia, the enforcement of any judgment obtained against it should be unproblematic.
65 The primary judge considered the issues raised by these contentions in two stages: first, he considered the issues associated with obtaining a judgment against China Rail; secondly, he considered the issues associated with enforcing any such judgment. His Honour observed, at [137], that the latter issue was the most contentious, as it had the greatest effect on the prospects of recovery against China Rail in a liquidation scenario.
66 In relation to the issue of obtaining a judgment against China Rail, the primary judge stated:
138 The first question to arise with respect to obtaining a judgment against China Rail is the forum for those proceedings. Clause 11 of the [Deed of Covenant] requires the parties to "submit to the non-exclusive jurisdiction of the courts of Queensland" … The plaintiffs have claimed this clause requires that the proceeding be pursued in the Supreme Court of Queensland. While the Administrators did canvass the option of commencing proceedings in China without first obtaining a judgment in Australia, they appear to have rejected that option because of the likelihood of failure and the expense involved … There would therefore appear to be agreement between the parties that a judgment would first need to be obtained against China Rail in the Supreme Court of Queensland.
139 The next question is the costs of obtaining that judgment. On this issue, the parties also appear to be agreed. In his affidavit, Mr Thornton, the sole director of the plaintiffs, accepted the Administrators' estimate of those costs of $275,000 … The only dispute relates to the necessity to obtain a litigation funder and pay the 30% premium associated therewith. On this aspect, Mr Thornton also said in his affidavit that the plaintiffs would fund the costs of the litigation and would not charge any premium for doing so. I accept this evidence. The result is a saving of approximately $80,000 (30% of $275,000). This sum, it should be noted, is relatively minor. It represents approximately 1% of the DOCA fund or between 0.2% and 0.5% of the total value of the Joint Venture Company's creditors. The question whether a 30% premium should be included in the judgment recovery costs is addressed separately below.
140 The third question with respect to obtaining a judgment against China Rail concerns the challenges China Rail has made against the enforceability of the [Deed of Covenant]. Those challenges fall into three groups as follows:
(a) the claim that it was misled into signing the [Deed of Covenant] by the statements made by Mr Cain of Rimfire …;
(b) the claim that Mr Zhao had no authority to sign the [Deed of Covenant] under the Power of Attorney provided to him …; and
(c) the claim that the solicitor's certificate signed in conjunction with the [Deed of Covenant] was false because Ms Yi was not its solicitor at the time ...
141 The factual background to those three grounds of challenge have been outlined in some detail above, as follows:
(a) Mr Cain's alleged misleading conduct at [107]-[109];
(b) Mr Zhao's lack of authority at [85]-[88]; and
(c) the alleged falsehoods in the solicitor's statement at [93]-[96].
142 It is neither necessary, nor appropriate, for the purposes of determining this application, to make an assessment of China Rail's prospects of success in any of these three grounds of challenge. It suffices to say that each, to varying degrees, appears to have a foundation in fact and to be arguable, at least on a prima facie basis. The stark contrast between the defined amount in Rimfire's [Deed of Covenant] of $460,000 and that stated in China Rail's [Deed of Covenant] of approximately $1.095 billion provides one illustration of this. Whether the responses raised by the plaintiffs above will defeat some, or all, of these challenges is a matter that will ultimately be determined at trial. But the important point is that, given China Rail's stated intention to pursue these challenges, it is reasonable to conclude that there will be some risk associated with any proceedings to obtain a judgment against China Rail and that those proceedings will take some time to conclude.
143 In their Report to creditors, the Administrators appear to have assessed the former at 75%, that is, that proportion of the amount claimed is likely to be recovered on a "high recovery" basis …. As for the latter, in his affidavit Mr McCann provided an estimated finalisation date of November 2021, not including any appeals that may ensue …
144 The plaintiffs have claimed the former does not "take into account that the full $1b is recovered and then a refund is made to [China Rail] after payment of all unsecured creditors". This is an apparent reference to cl 3(a) of the [Deed of Covenant] … I reject this contention. It assumes a 100% recovery in those proceedings and, therefore, does not take any account of the risk associated with pursuing them. In the absence of any evidence from the plaintiffs bearing on this question, I consider it is reasonable to accept the Administrators' estimate. The plaintiffs have not made any challenge to the latter estimate. In all the circumstances, I consider it is also reasonable to accept that estimate.
145 Finally on this issue, given the fact that China Rail intends to continue to conduct business in Australia, the suggested difficulty with serving the proceedings on it in Australia would appear to have little merit …
146 To sum up on this issue, it appears to be agreed that any proceeding to obtain judgment against China Rail will be conducted in the Supreme Court of Queensland and will cost approximately $275,000, not including any litigation funding premium. Furthermore, the risk associated with recovery in that proceeding is approximately 25% and it is not likely to be finalised, to first instance stage, until approximately November 2021.
(Emphasis added.)
67 The primary judge then considered the issue of the enforceability of any judgment obtained against China Rail:
147 I turn, then, to the second issue mentioned above: the plaintiffs' claim that the Administrators have overstated the difficulties associated with enforcing a judgment against China Rail. As mentioned above, this matter is at the heart of their claims that there is a "not unrealistic prospect" of obtaining a better return for the creditors of the Joint Venture Company by terminating the DOCA and pursuing the liquidation scenario.
148 The first question that arises under this issue is whether any such enforcement action is likely to be undertaken in Australia, or in China, or somewhere else. On this question, the Administrators' inquiries have revealed China Rail does not have any significant assets in Australia, or anywhere else outside China, excluding Hong Kong … Beyond pointing to China Rail's intention to continue conducting business in Australia and its statement to the Foreign Investment Review Board in connection therewith …, the plaintiffs have not adduced any evidence which would counter the accuracy of these statements. The fact that China Rail intends to continue to conduct business in Australia and will abide by Australia's laws does not, in my view, bear on this question. That intention and commitment does not require China Rail to retain any assets in Australia to meet any judgments that may be obtained against it, much less bring assets from China to Australia for that purpose. Accordingly, I accept the Administrators' opinion that it will be necessary to attempt to enforce any judgment obtained against China Rail, in China.
149 It is then necessary to consider what difficulties may be associated with pursuing that course of action. In summary, the Administrators' views on this question are that it will be difficult and quite expensive … It is important to note that those views are based upon advice the Administrators have obtained from their Australian lawyers and from the Chinese law firm, Zhong Lun Law Firm …
150 In contrast, the plaintiffs have not sought to put forward any differing legal advice, or any countering evidence. Instead, apart from relying on China Rail's intention to continue conducting business in Australia, which I have rejected as irrelevant to this issue above, it has made a number of contentions about the inaccuracy of the Administrators' costs estimates. The fallacy with this approach is that, even if all of those contentions were to be accepted, that will not mean that they have discharged their onus to show that there is a realistic prospect of a better recovery for creditors from obtaining and enforcing a judgment against China Rail.
151 In summary on this issue, having regard, on the one hand, to the reasonableness of the Administrators' opinions concerning the risks and delays that are likely to be associated with obtaining a judgment against China Rail in Australia, and the difficulties and expense that are likely to be encountered in enforcing that judgment in China, and, on the other, the dearth of evidence or other materials from the plaintiffs on these questions, I do not consider that the plaintiffs have discharged their onus to show that there is a realistic prospect of obtaining a better recovery for the creditors of the Joint Venture Company by pursuing that course in a liquidation scenario. It follows that I do not consider that the plaintiffs have established the ground contained in s 445D(1)(f)(ii). That being so, for the purposes of this ground, it is also unnecessary to consider whether the DOCA should be terminated as a matter of discretion (but, again, see further at [156] below).
(Emphasis added.)
68 The primary judge dealt with the appellants' contentions based on s 445D(1)(g) at [152]-[157]. It is not necessary to set out this part of his Honour's reasons in full for present purposes. However, it is relevant to note the following observations, at [156], in relation to the exercise of discretion:
Alternatively, if this ground were to be approached as a matter of discretion, for the following reasons, I would not have exercised my discretion to terminate the DOCA. First, I would have taken account of the caution that is urged when a court is considering whether to terminate a DOCA that has been supported by a majority of the creditors of a company (see at [62] above). Secondly, I would have taken account of the fact that the period of insolvent trading concerned is relatively short (seven weeks) and the amount involved is relatively small (approximately $800,000). The latter is demonstrated by the fact that it represents approximately 2%-5% of the total creditors of the company of between $15,200,000 and $41,300,000. Thirdly, I would have had regard to the fact that there is no evidence of any unlawful activity on the part of the company or its officers. Fourthly, it is common ground that the Joint Venture Company is presently solvent. Fifthly, and perhaps most importantly, the evidence shows that the DOCA is supported by the largest creditor by value (Linton Developments (QLD) Pty Ltd) and by the largest public creditor, the Australian Taxation Office. The latter is, in my view, of particular significance when one is considering the public interest.
69 After considering, and rejecting, the specific grounds raised by the appellants, the primary judge dealt with a number of miscellaneous matters at [158]-[160]. The first of these was the appellants' delay in bringing the application. The primary judge noted that the delay from the vote at the meeting where the DOCA was adopted (7 March 2018) to the issuing of the proceeding (18 September 2018) was approximately six months, and that there then followed a further delay of approximately six weeks (until 31 October 2018) until the appellants included an application seeking to terminate the DOCA. His Honour stated that none of that delay was explained and that, accordingly, if it had been necessary to consider the issue, he would have concluded that the delay would, of itself, have provided a further reason why he would not have exercised his discretion to terminate the DOCA.
70 His Honour concluded, at [161], that the appellants had not established any of the grounds relied upon for termination of the DOCA. His Honour also stated that, even if the appellants had established one of these grounds, in the circumstances outlined above, he would not have exercised his discretion to terminate the DOCA.
71 On 9 September 2019, the primary judge made orders to give effect to his reasons. These orders were subsequently varied on 3 October 2019. The orders made on 9 September 2019, as varied on 3 October 2019, were as follows:
1. Paragraphs 1 to 8 and 10 of the Second Further Amended Originating Application filed on 2 April 2019 are dismissed.
2. The Plaintiffs pay the First, Second, Third and Fourth Defendants' costs of the proceeding to date to be taxed, if not agreed.
3. The First, Second and Third Plaintiffs be jointly and severally liable for the costs of the First, Second, Third and Fourth Defendants in Order 2.
4. The matter be listed for a case management hearing at 9.30 am on 3 October 2019 in respect of paragraphs 1 to 3 inclusive of the Second Further Amended Originating Application filed on 2 April 2019.
72 Although paragraph 1 of the orders refers to paragraphs "1 to 8 and 10" of the second further amended originating application, at the hearing of the appeal it was common ground that the reference should be to paragraphs "5 to 8 and 10". We will proceed on that basis.