The Evidence Relating to Litigation Funding
103In order to address these submissions, it is necessary to summarise the evidence directly bearing on her Honour's findings. The account which follows concentrates on events occurring in and after October 2008.
104On 22 October 2008, the SPL and Calunius entered into a Due Diligence Agreement. This provided that for a period of eight weeks Calunius would carry out due diligence with a view to organising a syndicate to fund the proceedings on the terms of an annexed draft Funding Agreement.
105As I have already recounted (at [63] above), the draft Funding Agreement contemplated that the proposed syndicate would provide funding for the SPL's costs (including his own fees) incurred in connection with the litigation. The syndicate was to indemnify the SPL and One.Tel against any adverse costs order, up to a limit of $12 million. The syndicate was also to procure Indemnity Shortfall Insurance to cover any adverse costs orders over and above $12 million, to a limit of $40 million (that is, to provide cover of an additional $28 million). The limit of $40 million represented the SPL's estimate of the maximum adverse costs order in the proceedings.
106In his evidence before the primary Judge, the SPL appeared to accept that, although the proposed funding arrangement was subject to due diligence, as a practical matter he had an offer capable of acceptance:
"Q. So, if we were to stop there, you had, effectively, in hand an offer that you could have accepted for the funding of your legal costs, for your non-legal expenses, plus an indemnity of $12 million dollars for adverse costs orders as of October 2008, is that correct?
A. Yes.
...
Q. And there was no difficulty about any of those elements in your discussions with Calunius?
A. That's correct.
Q. And there never was?
A. At various times in 2008 - I don't recall the exact timing, Mr Young, but the global financial crisis was an issue and my recollection is there were some swapping and changing elements of the parties, the external parties, that were going to form part of the syndicate. Beyond that, I think that's correct.
Q. No change to the terms; only discussion about substituting particular syndicate members with other syndicate members?
A. I believe so."
107On 22 October 2008, at the same time as the Third Extension was granted, the Court made an order that the SPL was justified in entering into the Due Diligence Agreement without the prior approval of the COI or One.Tel's creditors.
108The due diligence period was extended by agreement on several occasions. However, the reason for the extensions was the SPL's insistence on obtaining the Indemnity Shortfall Insurance to the level ($40 million) that he considered to be desirable. As the SPL accepted in his evidence before the primary Judge, had he not insisted on coverage to this level, litigation funding could have been arranged in or shortly after October 2008.
109To this point, there had been nothing to indicate that the progress of the funding arrangements was dependent on delivery of the judgment in ASIC v Rich or the opportunity to scrutinise the judgment. The first indication that the ASIC v Rich judgment might be relevant to funding came in a letter from Mr Wells of Calunius to the SPL on 17 April 2009, some six months after execution of the Due Diligence Agreement. Mr Wells attributed slow progress to dislocation in financial markets and to the withdrawal of a "cornerstone investor" in March 2009. However, he informed the SPL that Calunius had identified a potential replacement and that he was "confident that sufficient funding capital will be available".
110Mr Wells recorded in the letter that the preferred insurance provider had made a "broadly acceptable" offer of Indemnity Shortfall Insurance in January 2009. However, the insurance provider had subsequently changed its underwriting policy and proposed terms that were unacceptable. The letter continued as follows:
"We expect there will be further negotiations with the original preferred insurer but are now concentrating our efforts on two alternate providers
● One of these has completed an extensive review of the transaction and is favourably disposed but will not make a firm offer of insurance until judgement has been delivered in the ASIC v Rich proceedings.
● The other is in the process of reviewing the case materials."
111Under the heading "The Prospects for Successful Completion of the Financing", Mr Wells stated his conclusions as follows:
"● the case has now been reviewed by several highly competent, and experienced, assessors of litigation risk for the purposes of both insurance and funding. All of these reviewers have been broadly favourable in their analysis and have found that the case merits capital investment. In the case of the preferred insurer this analysis has been overshadowed by internal policy issues and macro economic developments but their fundamental favourable stance augurs well for securing acceptable insurance from one of the alternate providers.
● The financial markets, whilst still stressed, are displaying signs of relative calm and a shift back to increased risk tolerance with a consequent willingness to commit capital."
He added this comment:
"This is work for which Calunius has not been paid and will likely only receive payment upon a funding agreement being entered with you. At Calunius we are presented with a large variety of litigious investment opportunities and as a result we have no difficulty in fully utilising our time and capital resources. The fact that we continue to invest in this transaction is testament to the fact that we are confident it represents a financially viable claim that will be successfully be funded and insured."
112There appears to be no evidence identifying the steps, if any, taken by the SPL between April and September 2009 to secure funding. However, on 15 September 2009, Calunius sent an email to the SPL, apparently in answer to criticisms made by the COI of the litigation funding process. The email asserted that the SPL's claim was "eminently fundable" and stated that Calunius remained confident that the case could be funded. The email also observed that, as delivery of the judgment in ASIC v Rich was presumably imminent, it was clearly reasonable to see the judgment before proceeding.
113On 30 September 2009, Mr Wells of Calunius prepared a document which incorporated for the first time the so-called "Plan B". The document recorded that Calunius had been engaged in discussions with a number of insurance providers in relation to the Indemnity Shortfall Insurance component of Plan A. None of the insurers was prepared to proceed until delivery of the judgment in ASIC v Rich. This was "frustrating", but Plan A still represented the most cost effective solution.
114Mr Wells said that it was possible, if circumstances so required, to arrange funding using only a cash investment. Mr Wells suggested two approaches: "Plan B - Extended Funding Agreement" ("Plan B1") and "Plan B - Existing Funding Agreement Plus Separate Indemnity" ("Plan B2"). Plan B1 contemplated increasing the "Indemnity Amount" to the full extent of adverse risk cover required - that is, $40 million. In this way, the Funding Agreement would cover all capital requirements for the funding of the litigation, but would require an increase in risk capital. Plan B2 contemplated that the draft Funding Agreement would remain in place, but the Indemnity Shortfall Insurance would not be provided by an insurer, but by a separate special purpose indemnity company. Thus there would be two classes of investor: one providing the funding and the other the Indemnity Shortfall Insurance.
115Mr Wells wrote a further letter on behalf of Calunius on 5 November 2009, presumably in anticipation of the application for the Fifth Extension. The letter restated the elements of Plans A, B1 and B2. It recorded that capital for the funding (apparently meaning the funding for Plan A) was to come from One.Tel's funds, Calunius' own resources and from investors associated with or represented by Calunius. The letter reported that the original cornerstone capital partner had a much improved liquidity position and had rejoined the syndicate. Additional capital partners remained committed to the project. Accordingly, Calunius was "highly confident that sufficient Funding Capital will be available".
116The letter of 5 November 2009 noted that efforts in relation to Indemnity Shortfall Insurance had focussed on two providers. Both providers were favourably disposed (particularly the first) but wished to see the ASIC v Rich judgment before committing themselves. The impending judgment therefore represented "an insurmountable obstacle to insuring the adverse cost risk".
117While Plan A would be the best outcome for creditors, Calunius had spent some time considering Plan B1 and Plan B2. Either of these alternatives required a greater amount of cash capital than Plan A. Calunius had had preliminary discussions with its capital partners regarding the possibility of proceeding without Indemnity Shortfall Insurance. It believed that, subject to satisfactory revision of the structure and terms of the Draft Funding Agreement, capital would be available.
118Mr Wells assessed the prospects for successful completion of the financing as follows:
"there is still a high probability that the financing will be successfully completed based on the following:
● The case has now been reviewed by several highly competent, and experienced, assessors of litigation risk for the purposes of both insurance and funding. All of these reviewers have been broadly favourable in their analysis and have found that the case merits capital investment.
● The financial markets, whilst still somewhat stressed, have shifted back to display an increased risk tolerance with a consequent willingness to commit capital."
119Mr Wells attached a chart showing time lines of the best and worst case projections for Plan A, being 11 and 15 weeks respectively. The letter suggested that the SPL allow for completion of the financing for Plan A to take three months after delivery of judgment in ASIC v Rich. The author stated that he had not produced a detailed time line for Plan B, but it would not be less than three months and could be "somewhat longer".
120The SPL explained his preference for Plan A over Plan B in his affidavit of 6 November 2009, prepared in support of his application for the Fifth Extension:
"Because the alternatives involve introducing new capital participants with an interest in and claim on any judgment or settlement, both Calunius and I anticipate that the effective cost to the creditors of this strategy is much higher than obtaining insurance cover for the same risk of a capital requirement. Hence my view remains that if funding can be obtained on the original model consistent with the interests of justice as to when service should be effected, the interests of creditors are best served by the insurance model.
Thus, whilst the delay in the delivery of judgment in ASIC v Rich has caused a delay in the funding process, it has not prevented me pursuing alternative funding, although such alternative funding would be at a greater cost to the creditors of One.Tel.
...
From my discussions with Mr Wells [of Calunius], my understanding is that a funding agreement with the structure envisaged by either version of Calunius' 'Plan B' can be completed within about the same time period as envisaged with Plan A [that is, 11-15 weeks], except that the starting time does not need to await the delivery of judgment in ASIC v Rich."
121The submissions made to Barrett J on the SPL's behalf in connection with the Fifth Extension application contained this statement:
"[The SPL] has had regard to the interests of creditors in not implementing Plan B to this point because of the additional effective cost to the creditors of having a larger 'equity' pool claiming on any fund generated. However, if the requirements of justice are for service sooner than ASIC v Rich, [the SPL] must implement Plan B for funding."
122In the SPL's cross-examination at the hearing before the primary Judge of the respondents' discharge application, he gave the following evidence:
"Q. The position was this, wasn't it, that at this time, April of 2009, you didn't take the view that it was in the interests of creditors to await for the decision of ASIC v Rich but rather you were concerned because that seemed to be a condition of the funding?
A. That's correct.
Q. Your position then was, as I think you said it was before, that you weren't prepared to go ahead without funding?
A. That's correct.
...
Q. ... The only impediment as you saw it was the obtaining of funding, the making of certain minor amendments and the obtaining of leave of the court?
A. Yes.
Q. In paragraph 23 and following of this affidavit [of 20 April 2009] you set out what you describe in the affidavit as free cash available in the liquidation of One.Tel. See that?
A. Yes, I do.
Q. That amount was 7.5 million to 8 million with an estimate from Mr Sherman [the General Purpose Liquidator] that another 8 to 9 million would come in, is that right?
A. Yes, I believe the 8 to 9 million was expected to come in at some future date.
Q. So when Mr Sherman was referring to 'free cash', as you understood it what he was referring to was cash that would be available to prosecute the One.Tel litigation?
A. Yes, that's correct.
Q. And that was 7.5 to 8 million immediately and the balance, 8 to 9 million, becoming available in the next 12 months?
A. That was the expected timeframe of Mr Sherman.
Q. That, I want to suggest to you, was ample funds to commence these proceedings?
A. No, it was not.
...
Q. You weren't prepared to use the free cash available to commence the proceedings without obtaining external funding?
A. The funds themselves were the 7.5 to 8 million that was available at that time was, as I recall, proposed to be included in the funding, but it was not enough in terms of the cash required and the cover needed for adverse costs, the second layer of adverse costs.
Q. You believed, at that stage - that is, in April 2009 - you'd be able to get funding, didn't you?
A. Yes, I did.
Q. And you certainly had enough money to commence the proceedings?
A. No, I did not.
Q. You had $7.5 million, didn't you?
A. Yes, I did.
Q. And that would have been enough to commence the proceedings, correct?
A. Whilst it may have been enough to commence proceedings per se, it was not enough to see out the proceedings and provide the necessary cover for potential adverse costs if the case was lost.
Q. And you weren't prepared to take any risks until you had a Funding Agreement in place?
A. That's correct.
Q. Even though you knew, by 2009, that the incidents which had occurred and which gave rise to the proceedings took place some eight years or thereabouts earlier?
A. That's correct.
Q. And even though your advice was that there was a high probability that you would obtain funding?
A. Yes.
Q. And that is what you say in paragraph 44 of your affidavit of [20 April 2009]. And, once again, would you agree with me that the sole reason that you weren't prepared to serve and sought an extension - this is in April 2009 - was that you did not have funding locked in?
A. That's correct."
123On a date not disclosed in the evidence, but before 14 May 2010, the SPL entered into a Funding Agreement with litigation funders. The SPL's report to creditors dated 5 August 2010, which was before the Court on the SPL's Sixth Extension application, recorded that the SPL had obtained court orders on 14 May 2010 preserving the confidentiality of the Funding Agreement. The reasons for the confidentiality orders were themselves subject to confidentiality orders: Onefone Australia Pty Ltd v One.Tel Ltd [2010] NSWSC 498, at [5], per Barrett J.
124On 20 May 2010, Barrett J approved the SPL's entry into the final Funding Agreement. The SPL has maintained confidentiality in the terms of the Funding Agreement. Accordingly, they have not been revealed to the respondents or, for that matter, to the primary Judge or this Court.
125The SPL did not adduce evidence as to the date the Funding Agreement was executed. Mr Karkar invited this Court to infer that the agreement must have been finalised a considerable time before 14 May 2010. However, there is no evidentiary basis for such an inference to be drawn. Indeed, given that this is quintessentially a matter within the knowledge of the SPL, I think it appropriate to infer the evidence is that the final funding agreement was entered into shortly before 14 May 2010, nearly six months after the Fifth Extension was granted: Armory v Delamirie (1722) 1 Stra 505l 93 ER 664.