On Thursday the Federal Court in Perth handed down its decision on an ex parte application by the Liquidators of the Great Southern companies (Great Southern Limited, Great Southern Managers Limited and Great Southern Finance Pty Ltd) for approval under s 477(2B) of the Corporations Act 2001 (Cth) (the Act) to enter into a funding agreement with Riverrock Capital Limited (Riverrock) and into an agreement as to the retaining of a specific firm of solicitors (Lipman Karas Lawyers). The case is Jones, Saker, Weaver and Stewart (Liquidators), In the matter of Great Southern Limited (in liq)(Receivers and Managers Appointed)  FCA 1072. The judgment of Gilmour J may be read in full here.
The judgment is not long, and provides a neat illustration of a s 477(2B) application. These are commonly – but not exclusively – made in the context of funding agreements. (Settlement agreements incorporating long-tail obligations or instalment payment arrangement spreading over longer than 3 months, also commonly give rise to such applications.) This judgment serves as a useful reminder of the legal principles relevant on such applications, and the key factors relevant to the exercise of the Court’s discretion as to whether or not to grant approval. It also serves as a timely reminder for practitioners to ensure that their affidavit material is sufficient to properly address as many of the key factors as are relevant to a particular case. Here, the Liquidators had brought an earlier application seeking the same approval for the same funding agreement, which was refused due to the inadequacy of coverage of some of the material placed before the Court on that occasion (see -).
Section 477(2B) of the Act provides –
“Except with the approval of the Court, of the committee of inspection or of the resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:
(a) without limiting paragraph (b), the term of the agreement may end; or
(b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;
more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.”
In this case, the evidence before the Court identified investigations that the Liquidators had identified as worth pursuing and, subject to the outcome of those investigations, had identified claims worth pursuing, upon which counsel’s advice had been obtained. The Liquidators lacked the funds required to pursue those investigations, and hence had sought funding. They proposed to enter into a funding agreement with Riverrock which they also placed before the Court. As the Liquidators’ investigations and any consequential proceedings were unlikely to be resolved within 3 months of execution of the funding agreement, s 477(2B) approval was required.
Three points of interest to note –
1. Approval was sought prior to entry into the agreement
As it ought to be. Note the prohibitive terms of s 477(2B). However, if an agreement is entered into prior to the seeking of leave, all may not be lost. Leave can be sought – and may be granted, subject to the Court’s view on the proper exercise of its discretion in a particular case – nunc pro tunc. For a good example of this, see a case I was involved in last year – the judgment of Gordon J on an application by the Liquidators of the Westpoint Mezzanine Companies in Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq)  FCA 1028. Note that where leave is sought nunc pro tunc, the orders granting retrospective leave are framed in a particular way, although the practice varies somewhat from judge to judge.
2. Issues of Confidentiality and Waiver of Legal Professional Privilege in Opinions Placed Before the Court
In this case, the application was made ex parte. There was no contradictor. Only the members of the committees of inspection and the secured creditors who had executed confidentiality agreements were put on notice that this application was to be made.
As is usual – but is not a given – confidentiality orders were made here, pursuant to s 50(1) of the Federal Court of Australia Act (1976) (Cth). These included as to the placing of the affidavits, submissions and transcript in a sealed Court envelope bearing an inscription as to confidentiality. If satisfied that it ought to do so, the Courts make these orders in the public interest in the due administration of justice concerning insolvent companies. Indeed while this is not always the case,here an order was sought – and granted – that the application be heard in camera.
For the Court’s discussion of the relevant principles and factors bearing upon the making of confidentiality orders in this case, see -. On the general issue of confidentiality, in the context of applications for approval of compromise agreements, I also refer you to the judgment of Lindgren J in Elderslie Finance Corporation Limited v Newpage Pty Ltd (No 6)  FCA 1030; (2007) 160 FCR 423 at .
Confidentiality – specifically whether confidentiality will later be maintained in the face of challenge and applications for access to the material – is often a concern on these applications. This is particularly so with regards to the placing of counsel’s opinions or other legal opinions before the Court. On the one hand, in broad terms evidence must be placed before the Court to demonstrate why a long term contract (at least, longer than 3 months) is warranted in a particular case, and why on balance it is in the creditors’ interests. On the other hand, this means disclosing, in detail, information that may be either commercially sensitive or sensitive with regards to potential litigation the Liquidators may embark upon. This includes information going to, and the foundation for, the Liquidator’s good faith opinion about the merits of prospective litigation. Typically, the material placed before the Court includes the advice of counsel upon which the Liquidator’s opinion as to merit is based; indeed, the application may be unlikely to succeed without it.
These concerns were heightened by three decisions handed down in 2010-2011, two of them arising as part of the One.Tel litigation. They called into question the extent to which privilege in such legal opinions may be maintained once they are used in an application before the Court. Those decisions were: Australian Power Steering Pty Ltd v Exego Pty Ltd  VSC 497, Weston v Publishing and Broadcasting Ltd  NSWSC 1288 and Weston v Publishing and Broadcasting Ltd  NSWSC 14. I will not delve into those decisions in detail here, but I refer you to Gordon J’s judgment in York Street Mezzanine referred to above, in the passages addressing these matters at -.
I recommend practitioners take particular note of her Honour’s discussion of the leading authority of Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar; the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand  NSWCA 160; (2006) 66 NSWLR 112. Especially in a case where this may be a particular concern, I commend you to have regard to the circumstances which bring a case squarely within the ambit of Macedonian Orthodox, and so best protect the Liquidators’ privilege in the legal opinion from later challenge and argument that the privilege has been waived by its use in the application for approval. Gordon J in York Street Mezzanine at  identifies those circumstances as being –
- the opinion is not provided to the Court by adduction of evidence: see Macedonian Orthodox at -; and
- the opinion is provided to the Court only after the Court has indicated that doing so is necessary before it can be in a proper position to give the judicial advice or directions sought: see Macedonian Orthodox at .
3. The Principles and Factors Relevant to the Court’s Discretion as to Whether to Approve the Agreement
In this case Gilmour J identifies three relevant principles at , those being –
1. The role of the Court is to grant or deny approval to the Liquidator’s proposal: Re The Bell Group Ltd (in liq)  WASC 235 at ;
2. The task of the Court is not to reconsider all of the issues which have been weighed up by the Liquidators or to second guess the Liquidators’ judgment. Thus the Court’s role is not to determine if the Liquidators’ proposal is the best available option, to develop some alternative proposal which might seem preferable or to substitute its own views for those of the Liquidators: Re The Bell Group Ltd (in liq) at ; Re Addstone Pty Ltd (In Liquidation) (1998) 83 FCR 583 at 593-594; and
3. Rather, the Court must review the Liquidators’ proposal to “be satisfied that the liquidator is acting in good faith in the making of the commercial judgment in respect of which the Court is being asked to make an order”: Re Addstone Pty Ltd (In Liquidation) at 594. The Court’s approval of the proposal is thus not an endorsement of the proposed agreement. It is merely a permission to the Liquidators to exercise their own commercial judgment in the matter.
His Honour also observed at  that if the Court is satisfied that in entering into the Funding Agreement, the Liquidators have acted in good faith and for proper purposes the Court will give the Liquidators considerable latitude in exercising their commercial judgment: Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (Bendeich as liq)  NSWSC 578; (2002) 42 ACSR 296 at  and Re Imobridge Pty Ltd (in liq) (No 2)  2 Qd R 280; see also Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86 per Giles J.
I refer you also to the six principles distilled by Gordon J in Re Stewart; Newtronics Pty Ltd  FCA 1375 and reproduced by her Honour last year in York Street Mezzanine at .
At - his Honour observed that in reviewing a Liquidator’s proposal to enter into a funding agreement the authorities have identified a non-exhaustive list of factors relevant to the exercise of the Court’s discretion. Not all of these factors will be relevant in all cases. None are determinative. These factors include –
- The nature and complexity of the matter and the risks involved in pursuing a claim or claims;
- The prospects of success of the proposed action;
- The amount of costs likely to be incurred in the conduct of the action and the extent to which the funder is to contribute to those costs;
- The extent to which the funder will contribute towards the opponent’s costs in the event that the action is not successful or towards any order for security for costs;
- The circumstances surrounding the making of the contract, including the ability of the funder to meet its obligations;
- The level of the funder’s premium;
- The extent to which the Liquidators have canvassed other funding options and consulted with the creditors of the company;
- The interests of creditors and the effect that the funding agreement may have on creditors of the company;
- Possible oppression to another party in the proceedings; and
- The extent to which the Liquidators maintain control over the proceedings.
Two remarks to make about those factors. First, you can see as you read through these factors how they shed light upon different ways in which a proposed agreement may be to the advantage or to the disadvantage of creditors. Secondly. in relation to factor 9, this contemplates prejudice of specific types, not the general “oppression” of a party facing the unpleasant prospect of litigation should the agreement be approved. In this regard, see the judgment of Austin J in Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq)  NSWSC 578; (2002) 42 ACSR 296 at  and the passages immediately thereafter.
In preparing affidavit material in support of a s 477(2B) application, and evaluating what to include and as to how much detail to descend, close regard should be had to these principles and factors. This judgment may be found to be instructive on the issue of the adequacy of material on such applications.