Application for approval of funding agreement by Liquidators – s 477(2B) – Confidentiality and Privilege – Great Southern

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) [2012] 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 [1]-[6]).

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) [2011] 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 [8]-[22]. 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) [2007] FCA 1030; (2007) 160 FCR 423 at [43].

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 [2010] VSC 497, Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288 and Weston v Publishing and Broadcasting Ltd [2011] 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 [40]-[49].

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 [2006] 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 [48] identifies those circumstances as being –

  1. the opinion is not provided to the Court by adduction of evidence: see Macedonian Orthodox at [44]-[45]; and
  2. 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 [51].

3. The Principles and Factors Relevant to the Court’s Discretion as to Whether to Approve the Agreement

The Principles

In this case Gilmour J identifies three relevant principles at [29], 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) [2009] WASC 235 at [57];

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 [57]; 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 [30] 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) [2002] NSWSC 578; (2002) 42 ACSR 296 at [16] and Re Imobridge Pty Ltd (in liq) (No 2) [2000] 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 [2007] FCA 1375 and reproduced by her Honour last year in York Street Mezzanine at [26].

The Factors

At [31]-[32] 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 –

  1. The nature and complexity of the matter and the risks involved in pursuing a claim or claims;
  2. The prospects of success of the proposed action;
  3. 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;
  4. 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;
  5. The circumstances surrounding the making of the contract, including the ability of the funder to meet its obligations;
  6. The level of the funder’s premium;
  7. The extent to which the Liquidators have canvassed other funding options and consulted with the creditors of the company;
  8. The interests of creditors and the effect that the funding agreement may have on creditors of the company;
  9. Possible oppression to another party in the proceedings; and
  10. 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) [2002] NSWSC 578; (2002) 42 ACSR 296 at [25] 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.

More on Willmott Forests (VSCA) & Grimaldi (HCA special leave refusal), plus new edition Mortgagee’s Power of Sale out soon

First, further to my post on Wednesday discussing the Victorian Court of Appeal’s recent decision on disclaimer of leases by liquidators in Willmott Forests (link), my friend and colleague Sam Hopper has put an excellent analysis of the case on his blog here.

Secondly, I posted last month that the High Court of Australia had denied special leave to appeal to Mr Grimaldi, from the Full Federal Court’s important decision in Grimaldi v Chameleon Mining. That post can be viewed here and includes links to my article and other previous posts about this case. If you recall, key issues of equity and company law arose in the Full Federal Court’s decision, including de facto directors, Barnes v Addy (both limbs), secret commission/bribes, directors’ fiduciary duties and equitable remedies.

I had promised to return and post an update as to the High Court’s refusal of special leave to Mr Grimaldi. In short, the transcript (link) shows that the special leave application centred on the issue of de facto directors and officers, and that special leave was refused on grounds which included –

1. Even if Mr Grimaldi was not a director or officer, on his own case he acted as a third party consultant. Chameleon Mining had good prospects of demonstrating on the findings made that in that role he would have owed fiduciary duties to the company, and that he knowingly participated in a breach of duty by an appointed director (Mr Barnes) of the company. Thus Chameleon Mining had good prospects of demonstrating that the relief ordered by Jacobson J (and undisturbed on appeal) is supportable, even if Mr Grimaldi were not a director or officer. The contemplated appeal would therefore be futile;

2. Even if Mr Grimaldi were not a director, he was an officer. The Full Court’s reasoning is consistent with the more recent High Court decision in Shafron v ASIC [2012] HCA 18; (2012) 86 ALJR 584 (link );

3. Mr Grimaldi had insufficient prospects of demonstrating that the Full Court erred on the director issue. He had alleged that the Full Court failed to consider the governance structure of Chameleon Mining. As Heydon J observed, in fact it did.

Thirdly and finally, the third edition of Mortgagee’s Power of Sale will be released soon, written by Clyde Croft J and Robert Hay. The previous edition was released in 2004, so the updated edition will be an excellent and current resource for practitioners. For more details, see Robert’s post on his property law blog here.

Application for costs to be paid by liquidators personally – Gusdote PL (A’or apptd) v North Queensland Development PL (In Liq) (No 5)

On Monday this week, 30 July 2012, Emmett J rejected an application by a successful plaintiff for costs to be paid by the liquidators of the defendant personally. The full judgment may be read here – Gusdote Pty Ltd (A’or apptd) v North Queensland Land Development Pty Ltd (in liq) (No 5) [2012] FCA 783.

There had been a run of litigation leading up to this point. By way of background:

In or about 2008, prior to the administration and liquidation of North Queensland, a disputed parcel of land (upon which was situated the Willows Golf Course, Townsville) was transferred by a director of Gusdote to his own company North Queensland without the knowledge of the other directors, in clear breach of his fiduciary duties. So held Cowdroy J of the Federal Court when he made a declaration on 11 June 2010 that North Queensland held legal title to the land upon constructive trust for Gusdote, and ordered that North Queensland must account for all benefits and money received as a result of the transfer to it (link). The Liquidators (Administrators at the time of the hearing) had informed the Court that North Queensland did not oppose the granting of the relief claimed.

Gusdote then asked the Liquidators to transfer the land in question back to Gusdote. The Liquidators refused. They asserted they were under no obligation to do so, and that Gusdote should prove in the liquidation of North Queensland as an unsecured creditor.

Next, Gusdote issued these proceedings, seeking orders that upon demand the land be transferred by North Queensland back to Gusdote. The Liquidators of North Queensland opposed this, and the proceeding ended up spawning multiple judgments along the way. (As well as this judgment (No 5), see Gusdote v North QueenslandGusdote v North Queensland (No 2)Gusdote v North Queensland (No 3)).

During the hearing that resulted in judgment No 3 in May 2011, the Liquidators had abandoned their position. Instead, accepting that the land was to be transferred back to Gusdote in due course, they argued they were entitled to a lien over the land for all costs and expenses in holding it. Accounts were then ordered to be taken.

For the purpose of the account-taking before the Registrar, the Liquidators had produced a statement of receipts and payments, said to relate to all benefits received by North Queensland re the land, and all outgoings and expenses incurred by them in connection with the land. The net position – somewhat surprising – was that Gusdote owed them nearly half a million dollars, including a quarter of a million in liquidators’ fees and legal costs. The Liquidators omitted to include in the statement the fact that North Queensland had granted several mortgages over the land in question to secure advances in excess of $3million made to third parties, which remained registered against the land. On the costs application, Gusdote asserted that this statement could not be accepted as an accounting by professional liquidators honestly setting out the sums they claimed were properly incurred in the execution of the trust (on which they held the land), which were the only moneys in respect of which they could claim a lien.

Before the Registrar taking the accounts, the Liquidators had also asserted that the Registrar was not to consider whether the sums claimed as costs and expenses were properly incurred in the execution of the trust, and that there was no occasion to bring into account the moneys advanced on the security of the mortgages over the land. Gusdote subsequently challenged the accounting taken by the Registrar and Emmett J handed down a judgment disagreeing with the approach the Liquidators had taken.

Monday’s judgment concerned Gusdote’s application that the Liquidators pay Gusdote’s costs of and incidental to this litigation personally. Gusdote argued that the Liquidators had conducted this litigation for their own personal financial interests. The Liquidators had no funds available to them in the winding up of North Queensland, or to pay costs orders made against them, but had chosen to contest Gusdote’s claims, unsuccessfully. Gusdote asserted this was not for the benefit of the unsecured creditors of North Queensland. Rather, so Gusdote argued, the Liquidators had done this for their own personal benefit, in order to enable recovery of their fees and expenses in connection with the winding up.

The Liquidators denied this. They pointed out that following the declaration and order made in March 2010 by Cowdroy J, the Liquidators had sought directions from the Queensland Supreme Court under s 96 of the Trusts Act 1973 (Qld), alternatively s 479(3) of the Corporations Act 2001 (Cth), for judicial guidance as to whether North Queensland had a reasonable basis for resisting the relief sought in this proceeding by Gusdote. On 17 November 2010, the Supreme Court of Queensland ordered that North Queensland would be justified in doing all things necessary or incidental to oppose the orders sought by Gusdote in this proceeding [21].

The Supreme Court in its reasons observed that North Queensland contended that the nature of the constructive trust declared in the 2010 proceeding was not proprietary in nature, such as to provide a basis for Gusdote to claim an entitlement to the land. Rather, North Queensland claimed it was a constructive trust that involved holding property, with a personal liability to account. The Supreme Court observed that, to the extent that Gusdote was relying on the declaration of a constructive trust being of a proprietary nature, North Queensland wished to challenge that characterisation. The Liquidators said that on the strength of that judicial advice, they caused North Queensland to defend this proceeding, as originally framed, to deny Gusdote was entitled at any time to terminate the trust and require North Queenslnd to transfer legal title to it.

The Liquidators argued that they had acted in the hope that they might ultimately produce a fund that would yield a dividend for distribution among the creditors of North Queensland. They had acted reasonably and in discharge of their duties. They had specifically declined during the course of the proceeding to take procedural points that might have occasioned unnecessary costs and inconvenience to the parties and the Court. They had done so in order to facilitate resolution of the real issues in dispute at minimal cost and inconvenience. They claimed to have at all times acted properly in discharge of their statutory responsibilities and denied they had acted solely or substantially for their own benefit. They submitted that their conduct, as contradictors, had afforded assistance to the Court.

His Honour observed that there is a recognised public interest against the imposition of personal liability on liquidators, insofar as they have acted on behalf of an insolvent company. He held Gusdote had identified nothing in the Liquidators’ conduct to justify the exceptional order now sought. He was not persuaded that the Liquidators had been motivated by personal interest in their conduct of this proceeding. The positions they had caused North Queensland to adopt were erroneous, nevertheless his Honour did not consider their positions to have been so unreasonable as to suggest they were motivated by self interest rather than the interests of the unsecured creditors.

It is interesting to ponder what the result here might have been, had the Liquidators not obtained the directions they did by way of judicial advice from the Queensland Supreme Court in November 2010.

ASIC releases its first annual report into liquidators and the insolvency industry

Today ASIC released its first annual report into its supervision of the registered liquidators insolvency industry, detailing surveillance and enforcement outcomes in 2011. Issues of competence, independence and inappropriate self gain underpinned ASIC’s supervisory activity.

For the calendar year 2011, ASIC opened eight new formal investigations into registered liquidators, and concluded several others, including that against Stuart Ariff. At years end it had 10 open investigations on foot. ASIC also completed more than 200 reviews examining issues including practitioner independence, competence and remuneration. ASIC also has a program of compliance visits for registered liquidators based on risk assessment and market intelligence.

It is noteworthy that of the 426 complaints ASIC received in 2011 concerning registered liquidators (some about the same external administration), 51% required simple explanations to the complainant as to what is to be expected in an external administration, and what a liquidator is or is not entitled to do.

ASIC’s announcement of the report’s release can be read here, and the report itself can be read here.