State Bank of NSW & Anor. v. Brown & Ors. [2001] NSWCA 223

Court of Appeal (NSW)|2001-06-14|Before: Spigelman CJ, Handley JA, Hodgson JA, Santow J

background 48 Parkston was a subsidiary of Linter Group Limited (which I will call Linter). It went into liquidation on 18th June 1990, along with another subsidiary of Linter, namely Roxbury Holdings Limited (which I will call Roxbury). 49 Apart from a possible claim against CIBC (Australia) Limited (which I will call CIBC), Parkston had assets of around $50,000.00, and Roxbury had assets of around $38,000.00 plus some real property in Collingwood, Victoria. ANZ Bank (which I will call ANZ) held a mortgage over Roxbury's real property and a first registered charge over Roxbury's assets, securing a guarantee for $25 million owing to ANZ. Among Roxbury's unsecured creditors was Gibraltar, an unsecured creditor in an amount of about $80 million. 50 Apart from creditors for a total of less than $4,000.00, the creditors of Parkston were four unsecured creditors, who subsequently lodged proofs of debt in approximately the following amounts: Tricontinental, about $27 million; Gibraltar, about $21 million; SBNSW, about $27.5 million; and Bankwest, about $11 million. The claims of the two banks were against Parkston as a guarantor of debts of Linter. SBNSW subsequently recovered about $16.4 million of its $27.5 million from Linter, and, as at the time of the hearing before Santow J, was likely to receive a further $1.9 million in respect of that debt. Bankwest recovered about $7 million of its $11 million debt from Linter, and, as at the time of the hearing before Santow J, was likely to receive a further sum of around $759,000.00. 51 In late 1992, Mr. Sherlock, who was then the liquidator of Parkston and Roxbury, became aware, as a result of a judgment given on 4th May 1992 by Southwell J in the Supreme Court of Victoria in favour of Linter against CIBC, that Parkston and Roxbury had potential claims against CIBC for alleged knowing participation in breaches of fiduciary duty, involving the use of a total of around $47 million from Parkston and Roxbury for acquisition of shares in Brick & Pipe Limited. Mr. Sherlock received advice confirming a prospect of such a claim from Mr. Garrett QC. 52 In November 1992, Mr. Sherlock sought funding of litigation against CIBC from Tricontinental. On 4th December 1992, he gave notice to CIBC of claims to a share in the proceeds of sale of Brick & Pipe Limited shares. 53 On 11th December 1992, CIBC commenced proceedings in the Federal Court seeking a declaration that Parkston and Roxbury had no interest in these proceeds of sale. 54 On 14th December 1992, Mr. Sherlock as liquidator of Parkston and Roxbury approached Gibraltar (of which he was also liquidator) to finance Parkston and Roxbury's involvement in the proceedings, and Gibraltar decided to do this. On 5th February 1993, the Federal Court proceedings were transferred to the Supreme Court of New South Wales; and on 6th April 1993, Parkston and Roxbury filed a cross-claim in those proceedings, alleging breaches of fiduciary duty and claiming interests in the proceeds of sale of the Brick & Pipe shares. 55 From this time until January 1996, there was no funding from Tricontinental, and Gibraltar continued to fund the proceedings. 56 On 18th July 1994, there was a circular letter from the liquidator of Linter to creditors, including SBNSW and Bankwest, enclosing minutes of a meeting of the committee of inspection. The minutes referred to the proceedings brought by Parkston and Roxbury against CIBC, and reported that the liquidator of Linter did not support Gibraltar's funding of that litigation as he "had received advice from Phillips Fox that the action, on balance, would not succeed". 57 In about June 1995, negotiations re-commenced between solicitors for Parkston and Roxbury and solicitors acting for Tricontinental in relation to the funding of this litigation. 58 On 28th November 1995, advice was received from a barrister Michael Garner concerning the prospects of the litigation. 59 On 31st January 1996, the Gibraltar committee of management resolved not to continue funding the litigation beyond a further two months. To that time, it had provided funds amounting to $393,503.00. The liquidator of Parkston and Roxbury approached Tricontinental and ANZ for funding, but not SBNSW and Bankwest, which were recorded as contingent creditors. A letter dated 1st February 1996 from the liquidator to Tricontinental's solicitors recorded advice from Baker & McKenzie that Parkston and Roxbury had a "strong case", and estimated recovery for both at a minimum of $19.4 million. 60 A letter dated 22nd February 1996 from Baker & McKenzie to Tricontinental's solicitors estimated a budget of $1 million costs to complete the matter, sought agreement to indemnify the liquidator in relation to any costs ordered against him and also in relation to security for costs, and estimated the possible recovery by Parkston at $11.4 million. 61 ANZ declined to support the litigation, but Trincontinental agreed to do so and entered into an agreement to provide costs to the liquidator and indemnify the liquidator against costs ordered against him. Pursuant to that agreement, Tricontinental ultimately provided about $770,000.00 towards the costs of the proceedings. Gibraltar provided a further $85,000.00 over and above what had previously been provided, presumably to cover the situation until Tricontinental started providing funds. 62 By memorandum of advice dated 14th April 1997 from Archibald QC and Garner, Parkston and Roxbury were advised that they had quite reasonably good prospects of success. 63 A circular letter dated 27th October 1997 from the liquidator of Parkston and Roxbury invited proof of debt from creditors, including the appellants. Among other things, it advised that there was to be mediation in the dispute with CIBC. 64 On 1st November 1999, the trial of the CIBC litigation commenced in the Supreme Court of New South Wales. It appears that unexpectedly unfavourable evidence was given by one witness, and after some days of hearing, the matter was settled for a gross sum in favour of Parkston and Roxbury of $4.28 million. In part of the decision in this case which is not under challenge, Santow J approved a distribution of this amount, as between Parkston and Roxbury, of $2.48 million to Parkston and $1.8 million to Roxbury. 65 In the hearing before Santow J, this was treated as providing a net recovery of $1,856,000.00 for Parkston, being the $2.48 million less one half of the costs of about $1,248,000.00 provided by Gibraltar and Tricontinental. Applying the other half of those costs to the recovery by Roxbury, this gave a recovery to Roxbury of about $1,176,000.00, or a little less after taking off some expenses of the liquidator. It appears that, pursuant to an agreement between the secured creditor ANZ and Tricontinental, ANZ was to receive the first $1 million of this plus sixty percent of the balance, with Tricontinental to receive the other forty percent of the balance, that is, about $64,000.00.

DECISION OF PRIMARY JUDGE 66 In his judgment, Santow J set out s.450 of the Companies (NSW) Code 1981, which is in the following terms: 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 monies or the giving of indemnity by the 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. 67 He noted that the purpose behind that section and its successor section, namely s.564 of the Corporations Law, was to give the courts "a broad and general discretion and one that is to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies" (per Hayne J in Re Ken Godfrey Pty. Limited (1994) 12 ACLC 1071 at 1072-3); and he referred also to Re Glenisia Investments Pty. Limited (1996) 14 ACLC 237, Allquip (WA) Pty. Limited v. Allan (1998) 16 ACLC 43 and Power Demolitions Pty. Limited v. Tosich Constructions Pty. Limited (1998) 16 ACLC 410. 68 Santow J noted some cases in which 100 per cent priority had been given to indemnifying creditors, including Household Financial Services Pty. Limited v. Chase Medical Centre Pty. Limited (1995) 13 ACLC 1569. He noted a useful summary by Brownie J in that case concerning appropriate discretionary factors in such applications, including the sum recovered, the failure by other creditors to provide the indemnity, the proportion between the debts of indemnifiers and others, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and generally the totality of the circumstances, noting that there has been a tendency in recent times to adopt a more liberal approach in favour of indemnifying creditors. 69 Santow J took into account the risk taken, the amount spent, and the result. He noted that the claim was large and complex, and that it was risky, being perceived as having a sixty per cent chance of success and a forty per cent chance of failure. He noted that Tricontinental had initially refused to support the litigation, that Gibraltar had withdrawn from supporting the litigation, and that ANZ had refused to support it. He took into account the prospect of recovery of $19.4 million by both Parkston and Roxbury. He noted that, in addition to the costs incurred by Parkston and Roxbury, estimated at a further $1 million when Tricontinental began to fund and turning out in the result to be about $1.25 million in all, there was also potential liability for having to bear, in the event of failure, the costs of CIBC estimated at about $1.5 million. His Honour considered that there was a substantial risk that this might happen. 70 Santow J then dealt with the contentions of SBNSW and Bankwest: first, the contention that, since Gibraltar had abandoned the support of the proceedings, it should be given no advantage; and second, that because the banks were not asked to provide funding and, had they been asked, they would have considered the request on its merits, they should not be deprived of their rights to a distribution from Parkston's assets. 71 In relation to the first contention, Santow J held that, although Gibraltar did not give a commitment to provide an indemnity and did withdraw from funding, it had, within s.450(a), paid moneys whereby property had been protected or preserved. Santow J also held that those payments involved a risk of loss assumed by Gibraltar, and had kept the proceedings alive at a time when funds were not forthcoming from anyone else. 72 In relation to the second contention, Santow J gave it little if any weight, as he formed the view that there was never a realistic possibility that the banks would have made any contribution to the proceedings. 73 In all the circumstances, his Honour concluded that less than 100 per cent of the modest recovery would not be adequate consideration for the risk assumed by Gibraltar and Tricontinental.

submissions on appeal 74 Mr. Walton SC for the appellants submitted that Santow J had erred in four broad respects: firstly in his approach to the question of the possible funding of the litigation by the appellants; secondly in his assessment of the risks assumed by Gibraltar and Tricontinental; thirdly in his appreciation of the object of the statutory provision; and fourthly in finding that Gibraltar was entitled to receive an advantage. 75 On the first matter, Mr. Walton submitted that Santow J erred in assuming that it was for the appellants to demonstrate, not only that they had not been asked to fund the litigation, but also that if asked they would have done so. This, he submitted, was incorrect: the creditors of a company have a right to equal distribution of the proceeds, and it was unfair that a creditor should be deprived of that right without an opportunity to avoid that result by participating in funding the litigation in question. Thus, the failure to ask the creditors to fund was itself relevant to the exercise of discretion, at least unless it could be affirmatively demonstrated that the creditors would not have funded even if asked. Santow J, he submitted, wrongly treated the appellants as having an onus of proving that if asked, they would have provided funds, and wrongly drew adverse inferences against the appellants from perceived gaps in their evidence. 76 In so far as Santow J relied on the circumstance that neither appellant took the initiative in seeking to become involved in the litigation, Mr. Walton submitted that Santow J wrongly ignored the circumstance that they had not been provided with any material concerning the prospects of success or the quantum of recovery in the event of success. The proper finding was that, had the appellants been asked, they would have given serious consideration to providing funding and there was a real possibility that they would have done so. If it was necessary to go further, the proper conclusion was that, had they been given the information that Tricontinental was given, they would more likely than not have contributed as Tricontinental did. 77 Turning to the second matter, Mr. Walton submitted that Santow J incorrectly assessed the risk, in four respects: firstly, in failing to take into account the possibility of settlement as reducing the risks of the litigation; secondly, in assessing the risk in the light of how the litigation actually turned out, that is, with hindsight; thirdly, in misapprehending the actual figures involved in the result; and fourthly, in proceeding on the basis that the funding creditors were at risk in relation to the costs of CIBC. 78 On the first of these matters, Santow J referred to the assessment of the liquidator, conveyed to Tricontinental, that the prospects of success were no higher than sixty per cent; and Mr. Walton submitted that this did not take account of the prospect of settlement. On the second matter, Mr. Walton submitted that the actual result was relevant to discretion, but not relevant to the risk undertaken, which had to be assessed at the time when obligations were undertaken or funds provided; and that at that time, the claim was one with a good prospect of recovering for Parkston $11.4 million plus interest. 79 On the third matter, Mr. Walton submitted that, in two places, Santow J referred to the net amount recovered as $856,000.00 rather than $1,856,000.00; and associated this with the incurring of over $1.2 million in costs, whereas in fact only a little over $600,000.00 in costs was incurred in relation to Parkston. 80 On the fourth matter, Mr. Walton referred to Pt.52A r.4, which is in the following terms: 4(1) The powers and discretions of the Court under section 76 of the Act (which relates to costs generally) shall be exercised subject to and in accordance with this Part. cf. R.S.C. (Rev.) 1965, O. 62, r. 2 (4). (2) Subject to subrule (5), the Court shall not, in the exercise of its powers and discretions under section 76 of the Act, make any order for costs against a person who is not a party. (3) Subject to subrule (4), Part 4 rule 4A and Part 11 rule 1A, a person shall not be made a party for the purpose of making an application for costs against the person. (4) Subrule (3) shall not apply: (a) where the person is otherwise a proper party; or (b) to a claim for relief against the person under section 78 of the Act. (5) Subrule (2) shall not limit the power of the Court to make any order: (a) under rule 43 or Part 42 rule 7 (f); (b) for payment by a relator in proceedings of the whole or any part of the costs of a party to the proceedings; (c) for payment by a person who: (i) is bound by an order made, or judgment given, by the Court in proceedings or is bound by an undertaking given to the Court in proceedings; and (ii) fails to comply with the order or the judgment or breaches the undertaking, of the whole or any part of the costs of a party to the proceedings occasioned by the failure or the breach; (d) for payment by a person who has committed contempt of court or an abuse of process of the Court of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process; (e) in exercise of its supervisory jurisdiction over its own officers; (f) against a person who purports without authority to conduct proceedings in the name of another person; or (g) against a person who commences, carries on, enters an appearance in, or defends proceedings as the authorised director of a corporation, or purports to do so. (6) Save as mentioned in subrules (1) to (5), this Part has effect subject to the Act and to the rules and subject to any other Act.

That rule came into effect on 1st July 1994, but, as from 25th June 1993, Pt.52 r.4 made a similar provision. Although Tricontinental indemnified the liquidator against any liability for costs the liquidator might incur, the liquidator was not a party to the CIBC proceedings, and there was no possibility that a costs order could have been made against him, in the light of Pt.52A r.4. That rule in fact displaced the decision of the High Court in Knight v. FP Special Assets Limited (1992) 174 CLR 178. 81 Turning to the third principal area of error relied on, Mr. Walton submitted that Santow J wrongly assumed that the purpose behind the section was to fund claims in the winding up of companies simpliciter, whereas the true purpose was to fund such litigation for the benefit of all creditors. 82 On the final general area of error relied on, Mr. Walton submitted that the purpose was not advanced by giving a benefit to a creditor who abandoned the support of the litigation, rather than ensuring that it was pursued to finality. At best, such a creditor should be reimbursed the funding provided, possibly with interest. 83 Mr. Riordan for Tricontinental submitted that Tricontinental and Gibraltar had not been at fault in any respect in the failure to request funding from the banks. In any event, this failure could only be relevant if it affected the situation, that is if the banks would have provided funding had they been requested. The appellants' case was initially, as stated in their original submissions, that "there is every reason to believe they would have contributed to the funding required". In final submissions, the appellants retreated to a submission that a request for funding would have been considered on its merits, because the appellants appreciated that their evidence fell far short of establishing the stronger proposition. 84 On the question of assessment of risk, Mr. Riordan submitted that the liquidator was not cross-examined on his evidence that "Parkston and Roxbury always rated their prospects of success in the proceedings at no higher than sixty per cent and this rating was communicated to Tricontinental"; and there was no basis for a submission that this assessment did not take into account the possibility of settlement. Mr. Riordan submitted that it was relevant to consider the actual outcome in relation to the risk, as throwing some light on what the true risk was at the time it was undertaken. Mr. Riordan submitted that Santow J was correct in having regard to the total expenditure of over $1.2 million on costs, because the recovery for the funding creditors from the Roxbury proceedings was minimal. As regards the liability for CIBC's costs, Mr. Riordan submitted that it had been submitted before Santow J that there was potential liability for CIBC's costs, and the appellants responded by merely asserting that the liquidator was not a party to the proceedings, without reference to Pt.52A r.4. 85 As regards the purpose of the legislation, Mr. Riordan submitted that the purpose of encouraging litigation was not merely to support recovery for the benefit of creditors and possibly shareholders generally, but also to ensure that wrong-doers not keep the benefits of their wrong-doing, and thereby to help to deter wrong-doing. 86 Mr. Coles QC for Gibraltar adopted Mr. Riordan's submissions. He also submitted that Gibraltar did not abandon the cause of action, but gave notice of its intention and co-operated in ensuring that the action was sustained until a new supporter was found. 87 Mr. Coles submitted that the appeal was from a discretionary decision, with all the limitations that entailed. He submitted that, even if the Court was satisfied that there was an error, for example in relation to risk of liability for CIBC's costs, it did not follow that there had to be a full new exercise of discretion.

GIBRALTAR 88 I will deal with the points raised by Mr. Walton in reverse order. 89 In relation to Gibraltar, it was not contended that Gibraltar did not fall within the provisions of s.450: plainly, this was a case where property had been "protected or preserved by the payment of moneys" by Gibraltar, so as to make Gibraltar a possible beneficiary of the exercise of discretion. Furthermore, plainly Gibraltar had assumed a risk of losing the moneys it paid for this purpose, and thus had given consideration of the type contemplated by s.450. As pointed out by Santow J, Gibraltar provided funds at a time when no funds were forthcoming from any other source, and in the absence of which the benefit of the claim could have been lost. Furthermore, there was no sudden abandonment of the support, but rather notice of intention to stop funding was given in such a way as to enable the alternative funding by Tricontinental to be arranged. 90 Accordingly, in my opinion, there is no substance in the submission that Gibraltar should have been excluded from any exercise of discretion under s.450.

object of section 91 I accept that it is not the object of the section to encourage litigation for the sake of litigation, or for the private benefit of creditors who provide the indemnity or the funds. In my opinion, there are two public purposes involved in the encouragement of pursuit of claims by liquidators, namely to benefit creditors and shareholders generally, and to recover property from wrong-doers and thus discourage misconduct in relation to corporations. 92 In my opinion, both purposes may be advanced by the grant of an advantage of 100 per cent of the recovered funds to supporting creditors in appropriate cases. Plainly, such a benefit can support the objective of recovering property from wrong-doers. In my opinion also, the grant of a 100 per cent advantage in cases where recovery turns out to be relatively small can also support the objective of benefiting creditors generally, by encouraging the support of litigation in cases where there is a prospect of a large recovery which would inure for the benefit of all creditors, but which may in certain eventualities result only in a small recovery. Of course, if a 100 per cent advantage is too readily granted in such cases, this could unduly encourage the settling of claims for less than their reasonable value; but this risk can be taken into account when settlements are approved, as well as in applications by supporting creditors to be given an advantage.

alleged incorrect assessment of risk 93 In my opinion, it is not shown by the appellants that the liquidator's assessment of prospects of success at no higher than sixty per cent was an assessment of the prospects of success in the event of the case being fought through to conclusion. It might possibly have been such an assessment, but alternatively it might possibly have been an assessment of the prospects of a successful outcome whether by way of judgment after a fully contested hearing or by way of settlement. In circumstances where that issue was not taken up at the hearing before Santow J, in my opinion it is too late to attack a discretionary judgment on the basis that it did not specifically refer to the prospects of settlement when dealing with the estimate of a prospect of success of no higher than sixty per cent. 94 In relation to Santow J's use of hindsight, in my opinion no error is shown in this respect. In my opinion, the words "risk assumed" in s.450 refer primarily to the risk as reasonably perceived by the funding or indemnifying creditors at the time of making payments or giving indemnity. However, in my opinion actual outcomes are relevant to assessing what risk would reasonably have been perceived at the earlier times when payments were actually made or indemnities given. In my opinion, that is essentially the way in which hindsight was used by Santow J in this case. Furthermore, plainly actual outcomes, including comparisons as to amounts spent and amounts actually recovered, are relevant to the exercise of discretion. 95 In relation to alleged confusion as to figures, it is correct that in two places Santow J referred to the net recovery as $856,000.00 rather than $1,856,000.00. However, in many other places, he correctly referred to the correct net outcome, and it does not appear that the erroneous references had any impact on the exercise of his discretion. In the second place where the error appeared, the lower figure was used in a calculation of an advantage to the banks of ten per cent of the net figure, but that matter appears to have had minimal impact on the exercise of discretion. 96 The more serious allegation of confusion was the association of something over $1.2 million in costs incurred with a recovery of a little over $1.8 million, in circumstances where $1.2 million in costs were incurred in proceedings by Parkston and Roxbury, and the $1.8 million recovery was in the Parkston proceedings only. However, as submitted by Mr. Riordan, the only benefit to Tricontinental and Gibraltar from the Roxbury proceedings was in a sum of around $64,000.00 to Tricontinental; so that, at worst, the error was to associate $1.2 million or thereabouts of costs with $1.8 million or thereabouts of recovery, whereas it should have been with about $1.9 million of recovery. In my opinion, that error is immaterial. There was no error in taking a broad view of the risk and recovery having regard to the Roxbury claim as well as the Parkston claim. 97 Finally, there is the question of liability for the costs of CIBC, in the event that the proceedings failed. I do not think the appellants are precluded from raising this point: it appears that the submission that there was such a potential liability was first made by the respondents in written submissions after the hearing, and the appellants' response that the liquidator was not a party to the proceedings was not the subject of any further debate. I think it is open to the appellants to rely on Pt.52A r.4, although that was not explicitly drawn to the attention of Santow J. I accept the appellants' submission that that rule makes it unlikely in the extreme that Tricontinental or Gibraltar would have been made liable for the costs of CIBC by means of a costs order made at the end of the proceedings, in the event that the proceedings were won by CIBC. I think it is extremely unlikely that the Court would have regarded it as appropriate to have made a costs order against the liquidator as an officer of the court, in reliance of Pt.52A r.4(5)(e). The loss of proceedings brought by companies in liquidation in reliance on Senior Counsel's advice would not to me appear to be an occasion for the exercise of "supervisory jurisdiction", so as to justify an order for costs against the liquidator personally, unless there were some unusual circumstances. 98 On the other hand, there was a possibility, decreasing as time went on, that security for costs might have been ordered. It appears that no application for security was brought by CIBC, perhaps for the reason that CIBC was the nominal plaintiff in the proceedings. Although this matter has not been explored in detail, I am inclined to think that Parkston and Roxbury could have been regarded as substantive plaintiffs, and ordered to provide security for costs. Had that happened, the funding creditors would have faced the alternative of abandoning the proceedings and abandoning whatever money had been devoted to the proceedings, or putting themselves at risk for additional amounts to cover CIBC's costs. 99 Accordingly, in my opinion there was some error in this respect in the assessment of risk, which is to some extent ameliorated by the fact that there was a real but progressively diminishing risk of an order for security for costs. I will return to consider the significance of this error later.

FAILURE TO SEEK FUNDING FROM APPELLANTS 100 In this case, neither the liquidator nor the funding creditors sought to suggest that the appellants' rights to an equal distribution of assets should weigh any less against the claim for preferential treatment by the funding creditors because the appellants had refrained from funding the litigation. Rather, the appellants sought to make out a positive case that it would be unjust to prefer the funding creditors, or at least unjust to do so to the extent of 100 per cent, because the banks had not been given an opportunity to provide funding. As part of this case, the appellants claimed that, had a request for funding been made, they would have considered it on its merits, and (initially at least) that there was every reason to believe that the appellants would have contributed. As noted earlier, the contention that there was every reason to believe that the appellants would have contributed was not pursued in final submissions before Santow J. 101 There is in this case no suggestion that the failure to ask the appellants for contribution, or even to notify them of the proceedings and inform them of the risks involved, involved any fault in Gibraltar or Tricontinental. It did not reduce the merits of their claim, but at best could have some impact on the merits of the appellants' position, to be weighed against the merits of the claims of Gibraltar and Tricontinental. 102 In my opinion, it could certainly have been a matter highly favourable to the appellants had they made out a case that they had not been asked to fund the proceedings, and that they would have funded if asked, especially if the proceedings had appeared to involve little risk. However, merely to show that they would have considered such a request on its merits is marginal, at best. If it had been shown that there was a not insignificant chance that funding would have been provided, then that would have indicated some detriment arising to the appellants through the failure to make a request; but apparently it was not ultimately contended before Santow J that even that much was shown. 103 Santow J drew the conclusion that there was in fact no realistic possibility that the appellants would have provided funding. 104 I agree with the view expressed by Spigelman CJ in his judgment in this case that Jones v. Dunkel (1959) 101 CLR 298 did not justify such a positive finding. However, in my opinion, although Jones v. Dunkel itself applies only to circumstances where a party fails to call evidence to rebut an inference that otherwise might be drawn against that party, a similar principle applies to a party who bears an ultimate or evidentiary onus to prove something. If such a party, without explanation, fails to call evidence which the party would be expected to have and to call in order to discharge that onus, a court is justified in approaching the matter on the basis that such evidence would not have assisted the party's case: see Ho v. Powell [2001] NSWCA 168. 105 In this case, the appellants sought to say that their interests should be given greater weight because of the failure to notify, and they set out to prove that this failure to notify did make some difference. At the outset, they undertook to prove that there was "every reason to believe that they would have contributed", and this was never expressly abandoned. In those circumstances, in my opinion Santow J was entitled to compare the evidence which the appellants could have led with the evidence which they actually did lead, and to conclude, as he did, that further evidence would not have helped their case. In those circumstances, in my opinion he would certainly have been justified in deciding that the appellants had not demonstrated that there was any realistic chance that they would have contributed, and thus that the failure to notify made any difference. 106 In my opinion, as a general rule all significant creditors, including contingent creditors, should be given an opportunity to join in funding recovery claims. But, in circumstances where all that the appellants established was that they were not asked, and that they would have considered a request on its merits, and where they did not establish that there was any realistic chance that they would in fact have contributed, I do not think any error Santow J may have made in making the positive finding vitiated the exercise of his discretion. Particularly this is so where the appellants were advised of the existence of the proceedings and of the funding by other creditors, but did not make any enquiries with a view to deciding whether or not to offer to join in supporting them.

DISCRETION 107 Section 450 empowers the Court to make such orders as it deems just. In my opinion, there is a spectrum within which just orders could be made, and the Court has a discretion within that spectrum. Accordingly, an appellate court should intervene only on the basis of the principles set out in House v. The King (1936) 55 CLR 499 at 504-5, per Dixon, Evatt and McTiernan JJ, and in Australian Shale Employees Federation v. The Commonwealth (1955-6) 94 CLR 621 at 627, per Kitto J. The two passages in question are as follows: The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

... the true principle limiting the manner in which appellate jurisdiction is exercised in respect of decisions involving discretionary judgment is that there is a strong presumption in favour of the correctness of the decision appealed from, and that that decision should therefore be affirmed unless the Court of Appeal is satisfied that it is clearly wrong. A degree of satisfaction sufficient to overcome the strength of the presumption may exist where there has been error which consists in acting upon a wrong principle, or giving weight to extraneous or irrelevant matters, or failing to give weight or sufficient weight to relevant considerations, or making a mistake as to the facts. Again, the nature of the error may not be discoverable, but even so it is sufficient that the result is so unreasonable or plainly unjust that the appellate court may infer that there has been a failure to properly exercise the discretion ... 108 It is to be noted that, even if some error is discerned, the appeal court need not interfere unless it is satisfied that the decision is wrong. It is appropriate for the appeal court first to determine whether the error had a material impact on the original exercise of discretion; and even if it may have had such an impact, the appeal court may still not be satisfied that the decision is wrong or that intervention is appropriate. 109 In this case, in my opinion such errors as have been shown did not materially affect the primary judge's decision. In any event, I am not satisfied that they are such as to require this Court to embark on a fresh exercise of discretion. In my opinion, the result has not been shown to be in any respect erroneous or unreasonable. Indeed, in my opinion, the result reached was a reasonable and proper result. 110 The effect of the decision was that Tricontinental (having risked $770,000.00) got the benefit of about $1.15 million from the two proceedings, being about four per cent of its debt; while Gibraltar (having risked $480,000.00) got the benefit of about $720,000.00 from the two proceedings, being about 3.4 per cent of its debt owing by Parkston, while it recovered nothing of the $80 million debt owing by Roxbury. This is even without taking into account an additional factor which in my view is relevant, namely that no real advantage is given in consideration of risk assumed by funding creditors until they have recovered, not merely the amounts which they provided, but also a fair allowance for interest on those amounts. In the case of Gibraltar, for example, such an allowance, in respect of over $480,000.00 provided between about December 1992 and March 1996, and outstanding until December 1999, could well have been in the general vicinity of $240,000.00 (in ball-park terms, five years at ten per cent). 111 I note finally that the appellants in fact received about seventy percent of their debts from Linter itself. Santow J treated this as immaterial to his decision, and I do likewise. 112 For those reasons, in my opinion the appeal should be dismissed with costs.

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CITATION : State Bank of NSW & Anor. v. Brown & Ors. [2001] NSWCA 223 FILE NUMBER(S) : CA 40758/00 HEARING DATE(S) : 14 June 2001 JUDGMENT DATE : 10 July 2001

1 SPIGELMAN CJ: The facts, issues and submissions are summarised in the judgment of Hodgson JA which I have read in draft. I agree with Hodgson JA that the ground of appeal challenging the recovery by Gibraltar should be dismissed. For the following reasons I would allow the appeal. 2 Santow J took into account exposure to liability to pay CIBC's costs in his assessment of the "risk assumed" by the Second and First Respondents. No submission was made to his Honour that such exposure did not exist by reason of Pt 52A r4 of the Supreme Court Rules, set out by Hodgson JA. 3 The exposure to costs in the order of $900,000 was described by his Honour as "a substantial risk". This was a consideration which was, in my opinion, regarded by his Honour as material and which, by reason of Pt 52A r4, was not entitled to weight. 4 This factor was of sufficient significance to his Honour's reasoning, to justify this Court re-exercising the discretion if it were otherwise minded to do so. 5 A second basis for concluding that the exercise of the statutory power miscarried is based on the finding of fact made by Santow J that: [62] … there was never a realistic possibility that the two banks would have funded so risky and expensive a piece of litigation. 6 This finding was given prominence in his Honour's ultimate conclusion: [65] Given my earlier conclusion that only those two funding creditors would likely have funded, even had the two banks been given the relevant information and invited to fund, and given the high risks for this expensive litigation as earlier set out, I conclude that the two funding creditors should get 100% of the proceeds. 7 The factual issue arose because it was submitted to his Honour, as to this Court, that it was material to a determination of what a "just" order under s450 would be, that the banks had not been asked to support the litigation. Usually all creditors would be approached. His Honour indicated that this would only be a material consideration in certain circumstances, i.e. if "had they been given that opportunity to fund, would they have exercised the opportunity so to do" [44]. After finding that "there was never a realistic possibility" that they would have done so, his Honour concluded: "I can disregard that basis of objection to giving 100% of the recovery" [64]. 8 His Honour's reasoning was to the effect that, in the circumstances of the case, the fact that other unsecured creditors were not given an opportunity to fund the litigation was an entirely irrelevant consideration. One way in which his Honour expressed this conclusion was what he said when rejecting the idea that the banks had lost the chance to participate: This factor - would the banks have lent if asked - calls for an all or nothing approach where there is no realistic chance they would rather than the forensic equivalent of a dimmer switch. [61] 9 His Honour's finding that "there was never a realistic possibility" of the banks funding was the basis of his refusal to give any weight to the fact that the banks were not asked to contribute. 10 The evidence adduced on the part of the banks was directed to establishing the proposition that any request for funding would have received serious consideration on its merits in accordance with the usual procedures of each bank. In his assessment of the evidence his Honour drew adverse inferences from the failure of the banks to establish whether they had, in the past, acceded to funding requests, to call a particular officer, or to call evidence from the credit committee which makes such decisions ([48], [51], [46]). In each such case his Honour inferred that such evidence would not have assisted the banks, invoking Jones v Dunkel (1959) 101 CLR 298. 11 It appears that his Honour relied on this absence of evidence as the basis for his conclusion that there was never a "realistic possibility" that the banks would have provided funding. In my opinion, this inference was not available on that basis. 12 The primary submission of the appellants in this regard was that his Honour inappropriately imposed on the banks an onus of proof as to what would have happened if they had been afforded an opportunity to fund the litigation. It is relevant to note that the test his Honour actually applied was at a very low level: the banks only needed to prove that there was a "realistic possibility" that they would have acceded to a request. 13 The authors of Cross on Evidence (6th Aust Ed 2000) said at [1215], in a passage quoted with approval by Gleeson CJ and McHugh J in Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18 at [51]: [T]he rule [in Jones v Dunkel ] only applies where a party is 'required to explain or contradict' something. What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts 'requiring an answer'. 14 In RPS v The Queen (2000) 199 CLR 620 at [25] the joint judgment said that: … the mode of reasoning … proceeds from the premise that the person who has not given evidence not only could shed light on the subject but also would ordinarily be expected to do so. 15 As the Appellants submitted, these proceedings were not formally inter partes with a formal joinder of issues. I do not, however, find the terminology of 'onus of proof' advanced on behalf of the Appellants to be pertinent. An issue had arisen as to what weight should be given to the fact that the banks had not received a request to fund. That weight could be affected by what the banks would have done if such a request had been received. The banks were able to adduce evidence in this regard. In my opinion his Honour was entitled to find that that evidence would not have assisted the case propounded by the banks. 16 The issue turns on the next step. Was his Honour entitled to infer that there was no "realistic possibility" that the banks would have funded the litigation? A Jones v Dunkel conclusion that evidence not called would not have assisted a party, entitles the Court to more readily draw such an inference. However, that can only be done where other evidence establishes a proper basis for such an inference. 17 As expressed in Cross on Evidence supra at [1215]: … the rule in Jones v Dunkel permits an inference that the untendered evidence would not have helped the party who failed to tender it, and entitles the trier of fact to take that into account in deciding whether to accept any particular evidence which relates to a matter on which the absent witness could have spoken, and the more readily to draw an inference fairly to be drawn from the other evidence by reason of the opponent being able to prove the contrary had the party chosen to give or call evidence …[Emphasis added] 18 The formulation "fairly to be drawn from the other evidence" reflects the terminology of Windeyer J in Jones v Dunkel at 312, (most recently quoted with approval by the joint judgment in RPS supra at [26]): … where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstance that the defendant disputing it might have proved the contrary had he chosen to give evidence is properly to be taken into account as a circumstance in favour of drawing the inference.[Emphasis added]

(See also Insurance Commissioner v Joyce (1948) 77 CLR 39 at 49). 19 In the present case, I am unable to detect any evidence which can properly sustain an inference that there was no "realistic possibility" of the banks funding the litigation. Santow J did not use the absence of evidence from the banks to more confidently draw an otherwise available inference. It appears to me that his Honour used the absence of such evidence as the basis for such an inference. 20 In my opinion, the finding of fact that there was no "realistic possibility" of funding by the banks was not open. Accordingly, his Honour's failure to take into consideration the fact that the banks had received no request for funding was in error. His Honour failed to take into account a relevant consideration. It was, of course, open to his Honour to give limited weight to this matter, because the banks did not establish that a request would probably have made a difference. That is not, however, what his Honour did. 21 For either of two reasons, in my opinion, his Honour's exercise of the statutory power miscarried. It is open to this Court to make the statutory judgment. The two errors I have identified were matters to which his Honour attached significant weight in determining that this was, what his Honour described as, one of those "rare" cases in which an award of 100% of recovery was appropriate. The judgment of Santow J does extend the boundaries of what is a sufficiently "rare" constellation of circumstances for the purposes of the exercise of the statutory power. This is not a case in which this Court should exercise its residual discretion not to intervene. 22 There is a public interest dimension in proceedings by a liquidator. As the Full Court of the Federal Court said in Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301 at 306: A liquidator, when engaged in litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant. The liquidator comes to the company as an officer of the court under a duty and responsibility to get in and maximise the assets of the company for distribution for the benefit of creditors. 23 With respect to s450 of the Code, Hayne J said in Re Ken Godfrey Pty Ltd (In liq) (1994) 14 ACSR 610 at 612: … the discretion covered by s450 is a broad and general discretion and one that is to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies. 24 It is in the public interest that all of the assets of a company are available for creditors. This extends to assets which can only be collected by litigation. Encouragement of liquidators to realise all of the assets of a company, if necessary by litigation, is intended to redound to the advantage of all creditors. 25 The primary rule, is found in s440 of the Companies Code: 440 Except as otherwise provided by this Code, all debts proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they shall be paid proportionately. 26 Section 450, relevantly, 'otherwise provides'. 27 The Respondents submitted that a further public interest was served by s450, over and above the interests of the body of creditors. They submitted that litigation by liquidators enforces the law and there is a public interest in such enforcement, relevantly, in the present case, to ensure that directors perform their duties. In my opinion, a power to make an order which is "just", for a purpose expressed in terms of giving creditors "an advantage over others in consideration of the risk assumed by them" is not designed to serve a public interest of that character. The litigation which may have resulted in the recovery, protection or preservation of property, within s450, could be of any character and will not necessarily involve any kind of public interest. 28 The thrust of the Appellant's primary submission was the fact of incongruity in the exercise of a power which was intended to encourage conduct to serve the interests of all creditors, in such a way that some creditors receive no benefit in fact. There is an element of incongruity in such a result. That is why the exercise of the power in such a way as to give 100% of the proceeds to funding creditors should be rare. 29 However, the incongruity is not a contradiction. There is a difference in the information available at the different points of time that the two considerations arise. When the discretion comes to be exercised, the court knows the outcome of the proceedings. At the time the incentive to support such proceedings must be assessed, that outcome is, by definition, uncertain. The hazards of litigation are well illustrated by what actually happened in the present case, as summarised by Hodgson JA. 30 The submissions to this Court were put in terms of the exercise of a discretion. This is, in my opinion, a misnomer. Section 450 confers power to make a judgment as to what is "just". Judgment and discretion are distinct (see Bennion, "Distinguishing Judgment and Discretion" 2000 PL 368). A wide range of considerations are relevant in making the judgment for which s450 provides. (See the summary by Brownie J in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296-297). 31 Whether or not all creditors were given an opportunity to contribute is a relevant consideration when making the statutory judgment (see Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84 at 87; Allquip (WA) Pty Ltd v Allan (1998) 16 ACLC 34 at 36). In this case the banks were not given the opportunity. There is no reason to doubt the evidence that each bank would have considered any request on its merits in accordance with its usual procedure. There is no basis for determining the probable outcome of a hypothetical request. The fact that the banks were not given an opportunity to contribute is entitled to some weight. 32 The banks filed an outline of their case before the commencement of the trial which stated that there was "every reason to believe that they would have contributed". This was never withdrawn but the evidence adduced before, and the final submissions made to, Santow J did not propound any such case. The weight to be given to the failure to give the banks an opportunity to participate would have been greater if they had established some degree of probability that the failure would have made a difference, rather than that it might have done so. They did not. 33 In Re Cartco Pty Ltd (1994) 14 ACSR 357 at 358, Young J gave determinative weight, in the circumstances of that case, to the high proportion of the amount actually recovered which was represented by the funds put at risk by the supporting creditors. Although a very small amount was involved in Cartco, this proportion is, in my opinion, also a significant consideration in the present case. 34 One of the objects of s450 is to reward creditors who have borne the burden, and assumed the risks, of litigation. This has been identified in cases on s450 (and its successor, s564 of the Corporations Law 1991) and in cases on the parallel provision in s109(10) of the Bankruptcy Act 1966 (see Kyra Nominees Pty Ltd (In liq) (1987) 5 ACLC 811 at 819; Bell Group Pty Ltd (In liq) v Westpac Banking Corporation (1997) 18 WAR 21 at 33; Re Jane Vida Corke; Ex parte Official Trustee in Bankruptcy (FCA, Sackville J, 15 March 1996, unreported); Re the Estate of Lawrence Robert Connell (Deceased) [2001] FCA 51 at [24]). 35 The prospect of reward is, of course, the incentive to give the indemnity which, potentially, will result in benefits to all creditors. 36 The computation of the balance between the funds advanced and the return achieved has complications in the present case. Substantially identical proceedings were taken against CIBC by two subsidiaries of the Linter Group: Parkston Ltd and Roxbury Holdings Pty Ltd. Parkston is the company that is relevant for the present proceedings. In the case of Roxbury the ANZ Bank was a secured creditor but agreed to subordinate its interest to some degree. By arrangement it would receive the first $1 million and 60% of the balance of any judgment or settlement, with Tricontinental receiving 40% of that balance. 37 By arrangement amongst the relevant parties, not including the banks, the settlement sum of $4,280,000 was apportioned as to $2,480,000 to Parkston and $1,800,000 to Roxbury. Total costs were divided equally i.e. $624,256 to each proceedings. After liquidator's fees the net amount attributed to Parkston was $1,830,744, distributed in accordance with their arrangement as to 60% to Tricontinental and 40% to Gibraltar. The net amount of $1,160,744 to Roxbury was distributed as to $1,096,446 to the ANZ Bank and $64,297 to Tricontinental. 38 One way of approaching the computation of the proportion between moneys risked and recovered in the present case is to compare expenditure of, in rounded terms, $1.2 million with a gross recovery of Parkston and Roxbury of $3.2 million and net of $1.9 million (in each case after deducting the ANZ Bank share of $1.1 million). The other approach is to compare an advance of $600,000 with a gross return of about $2.4 million to Parkston i.e. a net return of $1.8 million. 39 The litigation supported was complex and turned on issues of fact, inherently susceptible to the unpredictable hazards of litigation. The risk was, in my opinion, substantial. The proportionate return was, in the event, low in relation to the risk. 40 Santow J said that the exercise of the statutory power to give funding creditors 100% of recovery will be rare. I agree. (Little is added by adding an adjective, e.g. "extremely rare" cf Household Financial Services supra at 297 per Brownie J). 41 The cases in which 100% has been awarded have had particular features. In Cartco the amounts were very small. Creditors had advanced $4000 and were permitted to retain the net recovery of $7000. In Glenisia Investments the amounts were also small: $36,000 expended for a net return of $114,000. Furthermore, no unsecured creditor opposed the distribution of costs to the funding creditors. That was also the position in Household Financial Services but, in view of the absence of explicit disclosure in the liquidator's letter to shareholders about the proposal to seek a 100% order under s450, Brownie J gave leave to any creditor to apply to vary the order. In that case some $65,000 had been advanced for a net return of $215,000. 42 The amounts involved in the present case are of a different order of magnitude. Furthermore, other creditors, who were not asked to contribute, object to the allocation of 100%. 43 Tricontinental and Gibraltar are entitled to a substantial advantage in view of the risks they assumed. I do not, however, believe that this is the rare case in which a 100% award is just. The funding creditors have received back the amount they advanced. Tricontinental has received a small amount from its arrangement in relation to Roxbury. A substantial preferential amount should be awarded as a reward for the risks assumed. By reason of the size of the recovery, the funding creditors can be given a large reward without allocating the whole amount. 44 In my opinion, Tricontinental and Gibraltar should share, on their agreed 60%-40% basis, the first $1 million of the total amount available for distribution from the settlement. The balance should be distributed rateably to all creditors, including the Appellants and the second and third Respondents. On the basis of figures accepted by Santow J, Tricontinental and Gibraltar are jointly entitled to 55.54% of that balance on a pro-rata basis. The distribution between them should be in accordance with their arrangements, if applicable. 45 HANDLEY JA: I agree with the reasons of Hodgson JA as set out below. 46 HODGSON JA: In December 1999, the liquidator of Parkston Limited (which I will call Parkston) applied pursuant to s.450 of the Companies (NSW) Code for orders to the effect that two creditors of Parkston, namely Tricontinental Corporation Limited (which I will call Tricontinental) and Gibraltar Factors Pty. Limited (which I will call Gibraltar) together receive 100 per cent of funds available to unsecured creditors of Parkston. The application was opposed by the State Bank of New South Wales (which I will call SBNSW) and the Bank of Western Australia Limited (which I will call Bankwest) who were also major unsecured creditors of Parkston. 47 On 31st October 2000, Santow J made orders substantially as sought, and SBNSW and Bankwest have appealed from those orders.

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