State Bank of New South Wales v Brown [2005] NSWSC 249 | Case summary

6432/04 - JOHN DUNCAN GREEN IN HIS CAPACITY AS LIQUIDATOR OF OZ-US FILM PRODUCTIONS PTY LIMITED (IN LIQUIDATION) JUDGMENT 1 By an originating process filed on 26 November 2004, Mr Green, liquidator of Oz-US Film Productions Pty Limited ("the company"), seeks: "A direction that the Liquidator be entitled, after: (a) payment of all priority debts and claims in the order prescribed by section 556 of the Corporations Act 2001, and (b) payment of all other provable unsecured debts and claims against the Company, to distribute any surplus of funds available in the winding up of the Company ( Surplus ) in the following order and priority: i. first, in payment to Barbara Elisjones (Elisjones) of: A. An amount equal to 40% of the gross proceeds recovered by the Liquidator under an indemnity for costs of litigation given by Elisjones, or B. if the Surplus is less than the amount calculated in A, the entire Surplus, and ii. second, the residual, if any, to the contributories of the Company in accordance with their entitlements as adjusted by the Court pursuant to section 485(2) of the Corporations Act 2001." 2 Mr Aldridge SC made it clear when the matter was heard that an indispensable component of the relief Mr Green seeks is an order under s.564 of the Corporations Act 2001 (Cth) giving Ms Elisjones, as a creditor, an advantage in the winding up such as to cause the surplus funds available in the winding up to be paid in the manner contemplated by the direction set out in the originating process. 3 The company was formed in 1986 to pursue a business of film production. A provisional liquidator was appointed in 1988, a winding up order was subsequently made and the company was dissolved in 1993. Steps were subsequently taken to assert a cause of action regarded as available to the company. The court ordered that its name be restored to the register. Mr Green was appointed provisional liquidator and later liquidator. 4 Mr Green's affidavit sets out details of the litigation in which the company engaged. He describes it as "legally complex". There is no need for the complexities to be addressed here. It is sufficient to note that it involved not only proceedings in Australia (including a High Court appeal) but also several proceedings in the United States and to refer to the result and the way in which the litigation was funded. 5 The proceedings were settled in November 2003 on a basis that saw proceeds of $1,000,000 received by the company. Mr Green subsequently called for proofs of debt. Debts totalling $671,057.27 were admitted and a further $40,000 was set aside for other expected priority distributions. An estimated surplus of $283,942.73 resulted. 6 Ms Elisjones made funds available to enable the liquidator to pursue the proceedings which resulted in the $1,000,000 settlement. She provided $234,079.50 by way of loan for which she subsequently proved and received full payment. Mr Green emphasises, however, that Ms Elisjones took a particular risk in making such a significant sum available in circumstances where there were no prospects of repayment except out of any judgment obtained and the cause of action presented particular difficulties and complexities making it highly problematic. He also says that he and Ms Elisjones were working under an unwritten understanding as follows: "(a) I required indemnity for any adverse costs order and/or any other matter may arise in the future. (b) I explained litigation funding to Elisjones in order to assist her in further promoting that idea. (c) We agreed that on the basis that I and/or BDO Chartered Accountants & Advisers did not have any financial exposure I would be prepared to continue the cause of action. (d) Elisjones undertook the liability together with the tasks in bringing the matter forward and continued so to do despite the fact that she was unable to obtain litigation funding. (e) Elisjones commitment was financially of substance and included numerous defence in the state of California, USA and the Supreme Court of New South Wales." 7 Mr Green also says: "There was never any formal agreement between Elisjones and myself as to the terms of funding provided by her to enable the proceedings to continue. I did however have a discussion with her prior to the preparation of my report to creditors where I advised her that in the event she carried the responsibility of meeting or making arrangements for payment of accounts for which I was responsible, and assisted both the solicitors and barristers in production of vital information in respect of the conduct of the case, she would be entitled to a fee of substance. To the best of my recollection, I did not agree to any specific quantum." 8 Mr Green further deposes that he approached a number of commercial sources of litigation funding, but without success and that Ms Elisjones' financial support represented the only means by which he was able to pursue the claim. 9 At about the time Ms Elisjones agreed to provide financial support and Mr Green assured her of his intention that she should have a "fee of substance", Mr Green and Ms Elisjones together met with a representative of a litigation funding organisation, Dexta Corporation. At that meeting, the representative of Dexta Corporation quoted a fee for litigation funding in the range of 35% to 40%. Mr Green told Ms Elisjones that this was "within the normal range you expect to pay for this kind of funding". At about the same time, Mr Green confirmed with one of the lawyers acting for the company that 40% was a reasonable cost of litigation funding in the circumstances of the particular case and, while he has no specific recollection of having communicated this to Ms Elisjones, he thinks it likely that he did so. 10 Mr Green has also put into evidence published information from other litigation funders quoting indicative rates of 20% to 45% in one case and 35% to 50% in another. These are percentages of recoveries that the funder would expect as a reward for taking on the claim on the basis of full reimbursement of the funder's expenses. 11 Section 564 of the Corporations Act 2001 (Cth) is as follows: "Power of Court to make orders in favour of certain creditors Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them." 12 In State Bank of New South Wales v Brown (2001) 38 ACSR 715, the Court of Appeal made it clear that a consideration, in relation to a proposal that one creditor be preferred in this way, is whether other creditors were given an opportunity to render the support that the particular creditor provided. That does not appear to be a consideration here, as the only other creditors appear to have relatively small claims. 13 The policy behind s.564 is at least twofold: first, to encourage creditors to indemnify liquidators who wish to pursue claims but are otherwise unable to do so (Re Ken Godfrey Pty Ltd (1984) 12 ACLC 1071); and, second, to reward creditors who bear the burden and take the risks of litigation (Re Glenista Investments Pty Ltd (1996) 14 ACLC 237). 14 In the present case, it is clear that Ms Elisjones made a contribution to the events resulting in receipt of the settlement proceeds of $1,000,000 by the liquidator. The contribution was, moreover, pivotal, in that the liquidator would otherwise have been unable to pursue the claim at all. It is not clear that the liquidator would have been able to obtain litigation funding from ordinary commercial sources but the extreme complexity of the litigation and its cross-border aspects would no doubt have militated strongly against any such possibility. Had commercial funding proved available, it would in all probability have attracted a percentage fee towards the top end of the indicated scales, having regard to these factors. 15 I am therefore of the opinion that Ms Elisjones should be accorded such an advantage under s.564 as will see her receive 40% of the settlement proceeds, that is, $400,000 out of the total of $1,000,000. I have already referred to Ms Elisjones' admitted claim of $234,079.50, representing funds outlaid by her in relation to the litigation. Had a commercial litigation funder been involved, those outlays would, in the event of a successful outcome, have been recouped by it out of the funds available in the winding up. That recovery by Ms Elisjones should therefore not reduce her s.564 amount. 16 I have not so far mentioned that Ms Elisjones had a preferred claim for salary of $2,000 in the winding up and that this too has been met in full. That pre-liquidation claim is sufficient to give her the status of creditor so as to activate s.564. 17 In the result, the order of the court is that, in the winding up of Oz-US Film Productions Pty Limited, an advantage be given to Barbara Elisjones in consideration of risk assumed by her as referred to in s.564 of the Corporations Act 2001 (Cth), such advantage being payment to her, out of surplus funds remaining after payment of all priority debts and claims in the order prescribed by s.556 of the Corporations Act and payment of all other provable unsecured debts and claims against the company, of $400,000 or, if that surplus is less than $400,000, the entire surplus. 18 I also make the direction sought by the liquidator as set out at paragraph [1] above. **********

State Bank of New South Wales v Brown

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