Williams v Spautz

THE PARTY DESIRING TO BE HEARD The consideration of that application involved firstly determining whether the persons seeking the right to be heard did in fact have that right, if so, as to the extent of their access to the material relied upon by the applicant, and thirdly if it was appropriate to allow them full participation on the merits of the application. On that hearing, counsel sought to appear for the defendants in the first Supreme Court action, except for two of the sixteen named individual defendants (Thomsons). Those persons sought the right to be heard on the application in two capacities: (1) as defendants in the first Supreme Court action, and (2) as creditors of the Emanuel Group of Companies. Their participation was opposed by the applicant. No direct authority was cited in support of the proposition that Thomsons in their capacity as defendants in the first Supreme Court action should have the right to be heard on the application. No illustration was provided to the Court of circumstances in which such a right has been recognised. Nor, in the course of argument, was anything identified which indicated in fairness that such a status warranted the granting of the right to be heard on the application. I do not see any reason why the question as to whether the applicant is entitled to the directions sought as liquidator of the Emanuel Group of Companies, at least where the real issues are whether the applicant as liquidator is proposing to enter into a transaction which falls under s 477(2)(c) and, if so, whether the exercise of that power is bona fide on the part of the applicant, should entitle Thomsons to be heard. In the present circumstances, the relevant assets proposed to be sold or disposed of include the chose in action, represented by the claim to damages against Thomsons. The fact that the asset proposed to be sold or disposed of is a chose in action against Thomsons does not, in my judgment, give them a proper interest in the question before the Court. I therefore declined to permit Thomsons to be heard on this application in that capacity. The alternative basis of the right to audience claimed was as a creditor of the Emanuel Group of Companies. Evidence indicated that Thomsons had provided legal services to the Emanuel Group of Companies over a period at least from April 1990 to August 1994. On 22 May 1996, a proof of debt with respect to outstanding fees for legal services totalling $117,446.71 was lodged. It has not yet been adjudicated upon. For present purposes, The applicant does not positively assert that there is no such debt. I accordingly accept that Thomsons is a creditor of the Emanuel Group of Companies. Section 477(6) provides: ÒThe exercise by the liquidator of the powers conferred by this section is subject to the control of the Court, and any creditor or contributory, or the Commission, may apply to the Court with respect to any exercise or proposed exercise of any of those powers.Ó In my view, that provision entitles Thomsons as a creditor to apply to be heard on this application. Ultimately, counsel for the applicant did not contest that standing. However, it was argued that the purported exercise of that right by Thomsons should not be permitted in the particular circumstances because it was an abuse of process: Williams v Spautz (1992) 174 CLR 509. The applicant contested that Thomsons genuinely wished to be heard as a creditor, and that in reality they wished to be heard as defendants to the first Supreme Court actions so as to explore frustrating that action, or getting a collateral benefit for use in defending it. It may be the consequence of the proper exercise by a creditor of the right to be heard on such an application as the present is that the direction sought is not given, and a proposed funding arrangement does not proceed. It does not necessarily follow from that possible consequence that the motivation of the creditor in question is not a bona fide one. The fact that Thomsons will, or may, benefit as defendants in the first Supreme Court action if the directions sought are not given is not, in my view, sufficient to conclude by itself that Thomsons do not genuinely wish to exercise their rights as creditors. It was also put that, because Thomsons had on 21 June 1995 voted in support of a proposed deed of company arrangement, the result of which was that each creditor would recover a nominal sum only, which in Thomsons case would be $213.82 only, it had no bona fide interest as a creditor in the proceeding. It was further contended that the submissions themselves indicated that Thomsons in reality wished to be heard as a defendant, but did so under the guise of a creditor. Thomsons did not, by affidavit, identify any particular matter of concern to them in relation to the Funding Arrangement. In circumstances where, at the time, Thomsons had no access to the terms of the Funding Arrangement, that latter point in my view has no real significance. Counsel for Thomsons identified three matters in respect of which, it was said, Thomsons as creditors might be concerned. The first was to examine the Funding Arrangement to ensure that it does not infringe the rules against champerty and maintenance (presumably, to ensure that it involved the sale or disposition of property within s 477(2)(c)), or is not otherwise contrary to the public interest and therefore illegal, or is not otherwise contrary to public policy. It was indicated that it was not proposed to challenge the correctness of the decisions of Movitor or Tosich or my earlier decision on the matter of principle, namely that a funding agreement disposing of the fruits or part of the fruits of a cause of action may constitute a sale or disposition of property under s 477(2)(c) of the Law. The second was to be satisfied that the Funding Arrangement did not put at risk funds otherwise available to the creditors, that is that the funds available to the applicant were not dissipated on pursuing the Supreme Court actions when they might otherwise be more appropriately applied in the conduct of the winding up to benefit the creditors generally. The third was a concern that there would be a Òmega actionÓ established by consolidating the Supreme Court actions with the two other actions already instituted (the subject of the reasons given on 9 June 1998) and with further proposed actions against other parties. It was said that consolidation of those actions was ÒinexorableÓ, and that the costs and complexity of the mega-proceedings may not be in the interests of the creditors generally. I ruled that, as a creditor, Thomsons did have the right to participate in the hearing. The question then to be considered was the extent to which they should be permitted to participate, including being given access to material relied upon by the applicant and not necessarily confined to the Funding Arrangement. In the first instance, I indicated that the applicants should make available to Thomsons the affidavit material relied upon on the application, and the exhibits to that affidavit material, but masking or removing therefrom information which was regarded as confidential. Such information would clearly include any opinions of counsel as to the prospects of success in, or as to the tactical considerations relating to, the Supreme Court actions, and other material relating to those topics. It was also in contemplation that it would exclude the precise details of the proposed funding arrangement, to the extent that they might provide to Thomsons some insight into the level of funding or the terms of funding which might be of strategic or tactical significance in the conduct of the defence in the Supreme Court actions. That direction did not involve any decision upon the objection raised by the applicant that Thomsons sought to participate for some purpose ulterior to their legitimate interests as creditors, and so were abusing the process of the Court. It seemed to me that, once standing was established, in order to be heard the creditors were entitled to that material in any event. It is the same sort of material as would be recorded in any judgment of the Court. I anticipated that there might then be an issue as to whether further material should be disclosed in the face of the applicantÕs claims as to confidentiality of certain information, which may have needed to be addressed. I also anticipated that, after Thomsons had reviewed that material, and had indicated their further attitude to the application, it would then be appropriate to address the applicantÕs objections. In Buiscex Ltd v Panfida Foods Ltd (In Liquidation) (1998) 28 ACSR 357 Hodgson CJ in Equity permitted creditors of a company in liquidation to appear in opposition to a similar application to the present. There was no argument as to their standing. In that case the liquidator had first sought approval of the creditors to entering into the proposed funding arrangement then under consideration, but those creditors had at that point unanimously resolved to object to the proposal. The proposal then put forward involved, initially, the investigation of the possible causes of action, rather than the specific conduct of proceedings in respect of an identified cause of action which had counselÕs advice in relation to it. Thomsons, having had access to the material to which I have referred, indicated that they did not wish to make any further submissions in opposition to the application. It was not therefore necessary to rule on the applicantÕs objection to them participating in the hearing. In respect of the issue as to the right of Thomsons to be heard on the motion, I then indicated that I would make no order as to costs in favour of Thomsons or in favour of the applicant against Thomsons. THE CAUSES OF ACTION As the respective statements of claim in the Supreme Court actions show, the allegations in each are in essentially the same terms. The background to the allegations in the Supreme Court actions is set out in some detail in my reasons of 9 June 1998 in the earlier matter. Thomsons and Johnson Winter & Slattery are alleged to have been variously involved in an arrangement progressively made in the period November 1994 to March 1995, to resolve a dispute which had by then developed between the Emanuel Group of Companies on the one hand and the EFG Group, effectively its financiers, on the other hand. The scheme involved, according to the allegations, an acknowledgment by the Emanuel Group of Companies of indebtedness to the EFG Group, the transfer of its assets to the EFG Group, and in exchange the execution on 17 March 1998 of a Deed of Forebearance and Release and separately on the same date a deed whereunder certain additional payments were made to interests associated with directors of the Emanuel Group of Companies to defeat or interfere with the rights of the creditors of the Emanuel Group of Companies. It is alleged that the arrangement overall effectively put the interests of the EFG Group ahead of the creditors generally of the Emanuel Group of Companies, and at the same time the Emanuele family effectively advanced its own interests improperly. Those issues overlap with, but are more confined than, the causes of action against EFG and others previously the subject of my order of 9 June 1998. It is alleged that the implementation of that overall arrangement included a consent judgment in favour of EFG for about $182,000,000 to reflect an alleged debt, and to the execution of the Deed of Forebearance and Release and other documents on 17 March 1995. On that date, certain monies were paid totalling some $6,000,000. The alleged roles of Thomsons and Johnson Winter and Slattery are detailed in the Supreme Court actions. It is alleged, in particular, that persons associated with the Emanuel Group of Companies committed breaches of fiduciary and statutory duties by their directors with the support of Thomsons and Johnson Winter and Slattery. It is also alleged that those creditors were in breach of their duty of care owed by virtue of their professional relationship with the Emanuel Group of

Companies. Consequently, it is alleged that the Emanuel Group of Companies is entitled as against Thomsons and against Johnson Winter and Slattery to recover by way of damages the amounts paid under the Deed of Forebearance and Release dated 17 March 1998 and other monies. Those payments include $3.3 million paid to Simionato Holdings Pty Ltd (In Liquidation), $700,000 to Johnson Winter and Slattery, $400,000 to Thomsons, and certain other payments. In respect of the money paid direct to the respective solicitors, it is also alleged that each payment constitutes a voidable transaction by virtue of s 588FB, and an unfair preference by virtue of ss 588FA and 588FE of the Law and is recoverable under s 588FF of the Law. That brief description is sufficient to identify the nature of the causes of action alleged against Thomsons and against Johnson Winter and Slattery in the Supreme Court actions. It is, in my view, clear that the Funding Arrangement does constitute a dealing in property of the Emanuel Group of Companies by the liquidator under s 477(2)(c) of the Law. See per Drummond J in Movitor at 391-393, and per Lindgren J in Tosich 235. THE FUNDING ARRANGEMENT The Funding Arrangement comprises the following documents: A. Loan Facility Agreement; B. Deed of Charge/Insurance Policy; C. Solicitor/Client Agreement; and D. Agency Agreement. The Funding Arrangement can briefly be described as follows: The loan facility is to be provided by a bank to pay the applicantÕs expenses and his legal expenses incurred in conducting the Supreme Court actions. Under the Insurance Policy, an insurer will insure the repayment of that loan facility in the event that the Supreme Court actions are unsuccessful. The insurer will charge a premium, which depending upon the way in which the Supreme Court actions ultimately proceed, will be either 30 or 35 per cent of the net recoveries made in those actions, subject to certain adjustments, which for present purposes, are not of moment. There is no obligation under the Funding Arrangement to transfer or assign the causes of action. What is being assigned is, in effect, part of the proceeds of the Supreme Court actions. There are some features of the Funding Arrangment to which more detailed reference is appropriate. Under the Loan Facility Agreement the bank is to make available to the applicant and to the Emanuel Group of Companies a loan facility, up to a specified sum, together with a guarantee facility in relation to the Supreme Court actions. The loan facility is also to be used to pay an insurance premium for the Insurance Policy as well as the applicantÕs legal and related expenses in the conduct of the Supreme Court actions which are payable under the Solicitor/Client Agreement, any legal costs which the applicant personally is ordered to pay, any legal costs which the Emanuel Group of Companies is ordered to pay into Court as security for costs, and the applicantÕs remuneration and expenses in the conduct of the Supreme Court actions. The guarantee facility is available only to comply with any Court order requiring the provision of a bank guarantee as security for costs which might be ordered in relation to the Supreme Court actions. The applicant has obtained advice as to the estimates of costs likely to be incurred in the conduct of the Supreme Court actions, including his potential exposure to costs in the event of an adverse outcome, and further including provision in relation to a possible order that he provide security for costs. The amount of the facility available is, on the material before me, likely to be adequate for the conduct of the Supreme Court actions and to meet any liabilities incurred in the course of the conduct of those actions. The bank is to be repaid in full in the event from monies recovered in the Supreme Court proceedings, or if the outcome does not enable that to be done, through the insurance arrangements. The Insurance Policy is between an insurer and the applicant. It insures the applicant and the Emanuel Group of Companies, and the bank nominated in the Loan Facility Agreement, in relation to the obligations under the Loan Facility Agreement. It also insures the bank in relation to the obligations of the applicant and the Emanuel Group of Companies towards it. It also insures the applicant and the Emanuel Group of Companies against liability for legal and related expenses under the Solicitor/Client Agreement in the event that there are such expenses that are not discharged when the loan agreement comes to an end, and also against any personal liability for costs in the Supreme Court proceedings which are not discharged when the loan agreement comes to an end. The premium is the percentage of the net recovery in the Supreme Court actions referred to above. There is nothing to indicate that the

premium specified in the policy, even reflecting the alternate positions to which it refers, is other than a realistic one. That risk premium is only payable after expenses of conducting the Supreme Court actions have been paid, and to the extent that they have been paid from funds advanced by the bank, after the bank has been repaid. The risk premium is such that, if the Supreme Court actions succeed, a considerable sum will thereafter become available to the creditors of the Emanuel Group. The Insurance Policy specifically provides that the applicant and the Emanuel Group of Companies must obtain the approval of the insurer in relation to critical decisions concerning the conduct of proceedings: applying for a trial date, briefing counsel on trial, settling or discontinuing the Supreme Court actions, or appealing against any final judgment. There is also an obligation to provide certain information to the insurer in the course of conducting those proceedings. There is nothing of significance in the Solicitor/Client Agreement, or the Agency Agreement of particular moment to consideration of the application. OTHER MATTERS There has been no collective consultation with the body of creditors in relation to the Funding Arrangement. Certain other litigation conducted by the applicant has been funded in part at least by indemnity provided by the Australian Taxation Office, a major creditor. That creditor is not prepared to continue to indemnify the applicant in respect of the Supreme Court actions. The applicant has also dealt with the other major creditors of the Emanuel Group of Companies with a view to obtaining funding both to pursue the Supreme Court actions and generally. He has been unsuccessful. In particular, a substantial creditor Kleinwort Benson Australia, a merchant bank which is owed some $30 million, has declined to provide any costs indemnity. The applicant has also endeavoured to obtain alternative funding arrangements from commercial organisations engaged in that business. It is not necessary to refer to those approaches in detail. It is apparent that he has made conscientious efforts to obtain a funding proposal from other sources and that, in the light of those efforts, he regards the Funding Arrangement as that which is the most reasonable one in the interests of the creditors of the Emanuel Group of Companies. At no time have any of the creditors sought to discourage the applicant from pursuing the Supreme Court actions. The causes of action are complex. The applicant has identified the costs likely to be incurred in the conduct of those actions. He has been unable to obtain funding from creditors to maintain those actions despite efforts to do so. Under the Funding Arrangement, the applicant will be able to proceed with the conduct of the Supreme Court actions, to meet any order for costs made against him or against the Emanuel Group of Companies, and to accommodate any order for security for costs by the Court before which the action is proposed to be brought. The applicant has obtained advice from senior counsel in relation to the proposed Supreme Court actions. The amounts involved in those actions, if successful, are large and the costs of pursuing them will be substantial. The costs, even if incurred, will not operate to the detriment of any of the creditors of the Emanuel Group of Companies. They will not be financially worse off by reason of the conduct of the Supreme Court actions and may be considerably better off. The creditors of the Emanuel Group of Companies appear to have been aware generally of the investigations and line of approach of the applicant, and of the actions already taken by him. He has conducted examinations of a number of persons pursuant to Pt 5.9 of the Law concerning various members of the Emanuel Group of Companies, during 1995 and 1996. The information obtained from his investigations, has been the subject of the legal advice identifying, inter alia, the causes of action the subject of the Supreme Court actions. There is nothing to indicate that any of the creditors do not support the applicant in his endeavours up to now. It is also plain that, but for the CourtÕs direction that the applicant may enter into the Funding Agreement, the Supreme Court actions will not proceed. The funds available in the winding up of the Emanuel Group of Companies are limited. I am satisfied that they are insufficient to support funding of the Supreme Court actions. There is a public interest in the conduct of such claims, at least provided there are no real disadvantages to creditors or other proper interests, in the circumstances. CONCLUSION I propose to give the direction which is sought. There is nothing which, in my judgment, suggests other than that the Supreme Court actions reflect a desire on the part of the applicant to pursue properly the claims against Thomsons and against Johnson Winter and Slattery in accordance with the best interests of the creditors of the Emanuel Group of Companies. In my view, there is nothing to indicate that the applicant is acting other than bona fide in entering into the Funding Arrangement. An affidavit of Graham Walter Dart filed on 24 August 1998 contains the copy of the affidavits of the applicant sworn on 17 February 1998 and on 10 August 1998 relied upon on this application. They are masked only to the extent which the applicant considers necessary to eliminate what is regarded as confidential material. Copies of the Loan Facilities Agreement and of the Insurance Policy are annexures to that affidavit of Mr Dart, again masked to eliminate confidential material. The material to which I have had regard is therefore largely available on the record. In those circumstances, I make an order that the affidavit of Peter Ivan Macks sworn on 10 August 1998 and the annexures to that affidavit be confidential and not be available to any person except by leave of the Court or a Judge. Inspection of the affidavit of Mr Dart sworn on 24 August 1998 and its annexures will readily disclose the nature of the material that has been masked from that affidavit of the applicant and its annexures. In the event of any party wishing to apply, they have leave to do so. To reflect the provisions of s 477(6) I give liberty to the applicant, the creditors and contributories of the Emanuel Group to apply. Subject to those directions, I order that Peter Ivan Macks as liquidator of each and all of the companies in the Emanuel Group of Companies, being the list of companies referred to in the proceedings, has power under the Corporations Law to enter into the proposed arrangements and transactions in the terms contained in the documents comprising annexure 5 to the affidavit of Peter Ivan Macks sworn 10 August 1998 and the same shall have the approval of the Court. To accommodate any minor drafting alterations, that order is subject to any minor corrections being made to those documents. I also direct that the applicant file an affidavit annexing the copies of the Funding Arrangement documents as ultimately executed so that there can be no misunderstanding as to the documents in respect of which the direction has been given. I direct that that affidavit be and remain confidential, and not be available for the inspection of any person without the leave of the Court or a Judge. I certify that this and the preceding twelve (12) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield

Associate: Dated: 8 December 1998 Counsel for the Applicant: Mr RWhitington QC with him Mr G Dart

Counsel for Certain Creditors: Mr M Abbott QC with him Mr M Selley