In the matter of Tosich Construction Pty Ltd (ACN 000 709 679) and the Corporations Law [1997] FCA 115 (28 February 1997)

CATCHWORDS

CORPORATIONS - Actions by and against corporations - company in liquidation - application by liquidator to the Court for directions under sub-s 479 (3) of Corporations Law - action brought by company and liquidator for recovery from Bank of money and for other relief in respect of voidable transactions - lack of funds to prosecute the action - proposed agreement by liquidator to dispose of share of moneys expected to be recovered in the action to insurance company in consideration of its provision of funds to prosecute the action - whether proposed agreement infringes rule against champerty and maintenance - "statutory power of sale exception" to the rule against champerty and maintenance - Corporations Law, para 477 (2) (c) - whether agreement to dispose of property of the company - whether interest in recoveries constitutes future property of the company.

CHAMPERTY AND MAINTENANCE - action brought by company in liquidation and liquidator - lack of funds to prosecute the action - proposed agreement by liquidator to dispose of share of moneys expected to be recovered in the action to insurance company in consideration of its provision of funds to prosecute the action - whether proposed agreement infringes rule against champerty and maintenance - "statutory power of sale exception" to the rule against champerty and maintenance - Corporations Law, para 477 (2) (c) - whether agreement to dispose of property of the company - whether interest in recoveries constitutes future property of the company.

Corporations Law ss 9 ("property"), 477 (2) (c)

Grovewood Holdings Plc v James Capel & Co Ltd [1995] 2 WLR 70 (Lightman J)

Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 137 ALR 260 (FCA/Drummond J)

Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd, unreported, FCA/FC, 20 January 1997

Re Movitor Pty Ltd (1996) 14 ACLC 587 (FCA/Drummond J)

Re Oasis Merchandising Services Ltd; Ward v Aitken (1995) 2 BCLC 493 (Robert Walker J)

UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1262 (VIC/Hansen J)

IN THE MATTER OF TOSICH CONSTRUCTION PTY LIMITED (ACN 000 709 679) AND THE CORPORATIONS LAW

Coram: Lindgren J

Place: Sydney

Date: 28 February 1997

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No NG 3453 of 1994

GENERAL DIVISION )

IN THE MATTER OF TOSICH CONSTRUCTION PTY LIMITED

(ACN 000 709 679)

AND THE CORPORATIONS LAW

HUGH JENNER WILY

Applicant

CORAM: Lindgren J

PLACE: Sydney

DATE: 28 February 1997

ORDERS

THE COURT DIRECTS:

1. THAT the applicant, in his capacity as liquidator of Tosich Constructions Pty Limited (Receivers and Managers Appointed) (In Liquidation) has power to enter into a contract with FAI General Insurance Company Limited ("FAI") contained in a pro forma letter from FAI to the applicant and Creditors Recovery Service Facility, copies of which are respectively Annexures "A" and "B" to the Reasons for Judgment of Lindgren J dated 28 February 1997.

Note: Settlement and entry of orders is dealt with the Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No NG 3453 of 1994

GENERAL DIVISION )

IN THE MATTER OF TOSICH CONSTRUCTION PTY LIMITED

(ACN 000 709 679)

AND THE CORPORATIONS LAW

HUGH JENNER WILY

Applicant

CORAM: Lindgren J

PLACE: Sydney

DATE: 28 February 1997

REASONS FOR JUDGMENT

INTRODUCTION

The applicant moves ex parte for a direction as to:

"1. Whether the applicant, in his capacity as Liquidator of Tosich Construction Pty Limited (Receivers and Managers Appointed) (In Liquidation) has power to enter into the insurance agreement with FAI General Insurance Company Limited dated 26 November 1996."

The application in this proceeding for orders winding up Tosich Construction Pty Limited ("Tosich") and appointing a liquidator was filed on 6 September 1994. The Court appointed the present applicant ("the Liquidator") provisional liquidator of Tosich on 8 September 1994 and liquidator of it on 7 October 1994. The power for a court- appointed liquidator to make an application to the court for directions in relation to any particular matter arising under the winding-up is currently found in sub-s 479 (3) of the Corporations Law ("the Law")

BACKGROUND FACTS

On 18 July 1996, Tosich (by then in liquidation) as first applicant and the Liquidator as second applicant filed an application and statement of claim commencing proceeding number NG 3510 in this Court ("the Proceeding") against National Australia Bank Ltd ("the Bank"). An amended application and an amended statement of claim were filed on 10 December 1996. The amended statement of claim makes seven claims under Division 2 (ss 588FA-588FJ) of Part 5.7B of the Law. That Division is headed "Voidable transactions". The seven alleged voidable transactions of Tosich are pleaded in Parts A to G respectively of the amended statement of claim.

Part A (paras 1-10) pleads that throughout the six month period immediately preceding the filing on 6 September 1994 of the application for winding up, the Bank was a creditor of Tosich and its banker; that between 12 April 1994 and 6 September 1994, Tosich paid to the Bank amounts totalling $10,357,910.33 and the Bank made advances totalling $6,691,233.00; that at the time of the payments by Tosich to the Bank, Tosich was insolvent in that it was unable to pay its debts as and when they became due and payable; that at the time of the payments Tosich had creditors other than the Bank; that the effect of the payments was to grant a preference, priority or advantage to the Bank over the other creditors in the sum of $3,666,677.00 (according to the amended application, the amount is $3,666,677.95); and, finally, that the payments are "unfair preferences" under s 588FA of the Law, that they are "insolvent transactions" under s 588FC of the Law, and that, accordingly, they are "voidable transactions" under s 588FE of the Law.

Like the claim pleaded in Part A, those pleaded in Parts C (paras 15- 24), D (paras 25-34), F (paras 40-51) and G (paras 52-61) all depend on ss 588FA, 588FC and 588FE of the Law. Part C relates to the giving of a fixed and floating charge by Tosich to the Bank, Part D to the giving of a real property mortgage by Tosich to the Bank, Part F to amounts received by receivers and managers of Tosich appointed by the Bank pursuant to the fixed and floating charge, and Part G to the giving of a fixed charge over plant and equipment by Tosich to the Bank. It is pleaded that the giving of the charges and the mortgage and the receipts of the receivers and managers constituted "voidable transactions" under s 588FE.

Section 588FF provides that a company's liquidator may apply for relief in respect of a transaction of the company that is voidable because of s 588FE. However, importantly for present purposes, the orders which s 588FF empowers a Court to make on such an application are in every case orders which enure to the benefit of the company. In the case of orders for payment of money or the transfer of property, it is "to the company" that the Court is empowered to order payment or transfer.

Part B (paras 11-14) of the amended statement of claim pleads that the fixed and floating charge given by Tosich to the Bank, in so far as it constitutes a floating charge, is void against the Liquidator pursuant to s 588FJ of the Law. Section 588FJ relates, in the circumstances of the present case, to the creation of a floating charge by Tosich on its property within six months preceding the filing of the winding up application on 6 September 1994. It is pleaded, in effect, that the floating charge was created on 7 April 1994. Sub-section 588FJ (6) provides for recovery by a liquidator "as a debt due to the company" of certain amounts paid in discharge of a debt secured by such a floating charge.

Part E (paras 35-39) of the amended statement of claim pleads the liquidator's case for recovery of moneys paid to the receivers and managers appointed by the Bank pursuant to the floating charge, and claims that those receipts are recoverable from the Bank pursuant to sub-s 588FJ (6) to which I have just referred.

The amended application seeks declaratory relief, orders discharging various securities, and an order that the Bank pay to Tosich and the Liquidator sums totalling $4,235,471.09, together with the proceeds of sale of certain land the subject of a mortgage from Tosich to the Bank, and the proceeds of the sale of certain plant and equipment the subject of a charge given by Tosich to the Bank. Interest and costs are also claimed.

The Liquidator deposes that he has received advice from his legal advisers, and believes, that there are sound prospects of recovery of the amount claimed. According to an applicant of the Liquidator, if the Proceeding succeeds, there will be a return to the creditors of Tosich and if it fails "there will be no return to creditors".

According to the Liquidator's affidavit, in October 1996 Tosich did not have any funds with which to prosecute the Proceeding. The Liquidator obtained approximately $20,000 from Tosich's creditors to conduct examinations and to commence the Proceeding, but when he sought further funding from the creditors in or about October 1996, the creditors' committee of inspection requested him to seek funding from a third party.

The Liquidator obtained a letter of offer dated 4 November 1996 from FAI General Insurance Company Limited ("FAI"). (Apparently, he also obtained an offer of a financial facility from another source but he advised the committee of inspection that that offer was not satisfactory in the circumstances.) FAI's letter was tabled at a meeting of the committee of inspection on 8 November 1996 and discussed. The terms of the offer were not only those specified in the letter, but also, by reference, certain terms of a "Creditors Recovery Service Facility" provided by FAI to "The Argyle Partnership" (see later). These were set out in a four page document also dated 4 November 1996 ("the Facility document"). The Facility document defined some of the terms used in the letter. The committee of inspection resolved:

"that the Liquidator should enter into a funding arrangement with regard to the prosecution of the case in the forms submitted by FAI and tabled at the meeting."

At the request of the Liquidator, FAI subsequently agreed to amend the standard terms in certain minor respects. It advised the Liquidator of its willingness to do so by a letter dated 14 November 1996. On 26 November 1996, the Liquidator reported to the committee of inspection. As will appear later, in the course of the hearing the terms of the proposed agreement have been further amended.

If the Court gives a direction to the Liquidator that he has the necessary power, he proposes to enter into a contract with FAI, the terms of which are contained in FAI's initial letter dated 4 November, the Facility document also dated 4 November, and FAI's letter dated 14 November, all as amended on the hearing. Such a direction will not, of course, bind the Bank.

The parties to the proposed agreement have referred to themselves in those documents as "FAI" and "the Insured" and they have called the proposed agreement between them an "Insurance Agreement". I will use their terms with their meanings. The structure of the proposed Insurance Agreement is similar to the terms of the "insurance agreement" which were the subject of the decision of Drummond J in Re Movitor Pty Ltd (1996) 14 ACLC 587 ("Movitor"). In that case, there was a standing agreement called a "Debt Retrieval Agreement" between Lumley General Insurance Ltd ("Lumley") and the members of the firm of accountants of which the liquidator of Movitor Pty Ltd ("Movitor") was a member. As in the present case, the standing terms were imported upon the making of a particular agreement between a liquidator and an insurance company, the special terms being expressed in an exchange of letters.

In Movitor, as in the present case, the "Insured" was defined as, in effect, the liquidator and the company in liquidation. In both cases, the liquidator wished to pursue a claim or proceeding for the benefit of creditors of the company; the liquidator had been advised that the claim or proceeding had reasonable prospects of success; the liquidator lacked the means of funding the litigation; an insurance company was prepared to fund it (to the extent of 50% in Movitor as against 100% in the present case) and to indemnify the liquidator against any order for costs which might be made against him, in return for a "premium" which was payable only in the event of success of the litigation. In both cases the premium comprised two components: a reimbursement component and a risk premium, the latter being expressed as a percentage of the amount recovered remaining after reimbursement to the insurer of all amounts expended by it on the litigation. In Movitor, as in the present case, a question was raised as to whether the rules against maintenance and champerty infected the agreement, and the liquidator applied for directions pursuant to sub-s 479 (3) of the Law. Drummond J gave a direction that the liquidator had power to enter into the agreement.

I will shortly give an account of the terms of the proposed Insurance Agreement, reserving until later any question of differences between them and the terms of the insurance in Movitor. Since the terms of the Insurance Agreement have been amended during the course of the hearing, the convenient course to adopt here is to set out FAI's letter and the relevant parts of the Facility document in their amended forms, but with the amendments indicated. In determining the present application and referring to the "Insurance Agreement", I refer to the Insurance Agreement incorporating the amendments.

The amended letter dated 4 November 1996 from FAI to the Liquidator is as follows:

"Dear Sir

I am pleased to confirm that FAI General Insurance Company Limited ('FAI') is prepared to enter into an insurance agreement pursuant to the Creditors Recovery Service Facility No 96/2001 in respect of your Proposal dated 14 August 1996.

The terms of the insurance agreement are as follows:

1. FAI will pay the legal costs and disbursements incurred for the sole purpose of facilitating this Insurance Agreement, and for prosecuting the Claim from 4 November 1996 the date of acceptance of this offer (the 'First Amount').

2. FAI will pay the expenses of the External Controller calculated at the hourly rates recommended by the Insolvency Practitioners' Association of Australia, directly incurred in the conduct of the Proceeding from 4 November 1996 the date of acceptance of this offer, up to a maximum amount of $100,000 (the 'Second Amount'). Before any obligation to pay arises the External Controller must submit to FAI itemised accounts to the satisfaction of FAI.

3. FAI will indemnify the External Controller in respect of any obligation arising from any costs order in respect of costs incurred after 4 November 1996 the date of acceptance of this offer made in the Proceeding the subject of your Proposal dated 14 August, 1996. FAI will provide the External Controller with a Certificate of Indemnity on receipt of this document accepting FAI's offer.

4. FAI is to be paid the Premium In consideration of FAI agreeing to terms 1, 2 and 3 above, the Insured disposes to FAI a share of the Resolution Sum (as the Premium to be remitted to FAI), which share is to be calculated and payable remitted to FAI in the following manner and priority:

4.1 first, the 'First Amount';

4.2 second, the 'Second Amount';

4.3 third, either an amount of $370,000, or if the Resolution Sum, after deducting the First Amount and the Second Amount, is less than ($740,000), then, the amount calculated in accordance with the following formula:

$370,000 x [the Resolution Sum - (the $740,000 First Amount + the Second Amount)];

4.3 fourth, 25% of the Resolution Sum remaining after deducting the First Amount, the Second Amount, the amount as calculated in accordance with clause 4.3 and $370,000.

5. The terms of this offer and the terms of the Creditors Recovery Service Facility No. 96/2001 may be disclosed by the Insured to the creditors of Tosich Construction Pty Limited (In Liquidation) and to the Committee of Inspection for the purpose of obtaining approval to the Insured accepting this offer of insurance.

If you consider this offer to be in the interests of creditors, and the creditors, the Court or a Committee of Inspection approve your entry into this Agreement, please acknowledge your acceptance of these terms by signing and returning a copy of this letter to me.

Yours faithfully

EWEN McKAY

FAI General Insurance Company Limited

I accept the terms of this Agreement.

__________________________________

Hugh Jenner Wily

as liquidator of Tosich Constructions Pty Ltd (in liquidation) and on behalf of Tosich Construction Pty Ltd (in liquidation).

Dated: "

The Facility document defines, on the facts of the present case, "External Controller" to mean, the Liquidator; the "Insured" to mean the External Controller and Tosich; "Resolution" to mean "when the Insured receives all or some of the settlement or judgment proceeds in respect of the Claim that is not subject to a current appeal"; "Resolution Sum" to mean "the amount or amounts received or to be received by way of settlement, judgment or order"; "Premium" to mean "the amount or amounts share of the Resolution Sum agreed in an Insurance Agreement by the parties due to FAI by the Insured at Resolution"; and "Solicitor" to mean The Argyle Partnership. It will be noted that, consistently with the definition of "Insured" to which I have referred, the form of signature provided at the foot of FAI's letter contemplates that the Liquidator will sign both as liquidator and on behalf of Tosich.

The issue of the right to control the conduct of the Proceeding is addressed in cll 4 and 5 of the Facility document which, as amended, are as follows:

"4. THE SOLICITOR'S RETAINER AND INSTRUCTIONS

4.1 The Insured will instruct the Solicitor to conduct the Proceeding the subject of the Insurance Agreement and the Expenses will be paid solely by FAI

4.1 The Solicitor is instructed by the Insured and not by FAI. However, the Expenses will be paid solely by FAI.

4.2 Subject to clause 4.4, FAI will not interfere in the conduct of the Proceeding by the Insured.

4.3 FAI The Insured will instruct the Solicitor to keep FAI informed of the progress of a Proceeding and, in particular, to inform FAI immediately about any matter which would or may:

4.3.1 be relevant to the premium which a reasonable insurer would set;

4.3.2 affect the decision a reasonable insurer may make in deciding whether or not to terminate the insurance; or

4.3.3 lead to a settlement of the Proceeding.

4.4 In recognition of the fact that FAI has a propriety interest in the Resolution Sum, if the Insured wants or FAI wish to settle a Claim for less than the other FAI considers appropriate or, if the Insured does not want to settle a Claim when FAI considers it appropriate, then each party must seek to resolve the difference, without the involvement of the Solicitor by referring the dispute to an independent party, mutually chosen, for advice and if the dispute continues, then the matter in dispute must be referred to a mediator to be nominated by the Australian Commercial Dispute Centre.

4.4 If any dispute arises between FAI and the Insured about the Solicitor's instructions concerning settlement or conduct of a Proceeding, the parties will refer the dispute to an independent party, mutually chosen, for advice and if the dispute continues, then the matter in dispute must be referred to an arbitrator to be nominated by the Australian Commercial Dispute Centre.

4.5 If the difference referred to in clause 4.4 can not be resolved within two weeks of the difference arising the Insured retains an unfettered power to conduct and settle the Claim.

5. DISBURSEMENT OF RESOLUTION SUM

5.1 Subject to clause 5.2, at Resolution, the Insured will pay the Premium from the Resolution Sum in accordance with the Insurance Agreement, unless otherwise agreed in writing by FAI.

5.1 On Resolution the Insured will:

5.1.1 pay the Resolution Sum into a separate account; and

5.1.2 remit the Premium to FAI from that account, immediately.

5.2 If the Claim becomes the subject of an appeal and the Insured does not make any distributions or payments from the Resolution Sum as a result, the Premium is to be paid from the Resolution sum, if any, when the appeal is withdrawn, or otherwise determined."

The term of the facility is until 30 June 1997 unless otherwise extended (in writing) by FAI or terminated by either party by one month's notice in writing to the other.

FAI informed the Argyle Partnership that it had received advice from its (FAI's) Solicitor that it was not certain that the Insurance Agreement would be valid and enforceable. I will discuss later the issues which arise.

The Argyle Partnership forwarded copies of the Liquidator's notice of motion and affidavit in support to the Australian Securities Commission ("ASC") which advised that it was of the view that the matter was not an appropriate one for intervention by the ASC. The ASC's letter also advised:

"In general terms, however, the ASC does not object to liquidators of insolvent companies entering into insurance agreements to enable them to obtain funds to initiate proceedings."

The Argyle Partnership also served on the Australian Competition and Consumer Commission ("the ACCC") an "exclusive dealing notification" in respect of its "Creditors Asset Recovery Service" pursuant to sub-s 93 (1) of the Trade Practices Act 1974 . Notwithstanding the minor difference in title, the terms of the document forwarded to the ACCC were identical with those of the Facility document in its present form prior to its being amended during the course of the present hearing. In the Argyle Partnership's covering letter, it advised the ACCC:

"The Creditors Asset Recovery Service is an innovative service developed as a result of a recent Federal Court decision."

This was a reference to Movitor. On 5 December 1996, the ACCC wrote to the Argyle Partnership advising that on 5 December 1996 it had "decided to allow Notification of Exclusive Dealing ('Third Line Forcing' conduct) N 30736 to stand."

I am prepared to determine the present application on the assumption that the amendments to the terms of the Insurance Agreement which have been made in the course of the present hearing and which are indicated in the material quoted earlier, are not of a kind likely to be of interest to the ASC or the ACCC.

ISSUE

There is evidence from which I infer that the creditors' committee of inspection desires that the Liquidator enter into the proposed Insurance Agreement, that the ASC and the ACCC have been notified and raise no objection, and that it is in the interests of creditors that the Liquidator pursue the Proceeding. The only issue for decision is whether the proposed Insurance Agreement infringes the rules against maintenance and champerty.

REASONING

Introduction

In Halsbury's Laws of Australia, Vol 6, para 110-7135, "maintenance" is defined as:

"Assistance or encouragement, by a person who has neither an interest in the litigation nor any other motive recognised as justifying the interference, to a party to the litigation."

"Champerty" is defined in the same work at para 110-7140 as:

"A particular form of maintenance, namely maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject matter of the action."

Under the proposed Insurance Agreement, FAI will give financial assistance and encouragement to the Liquidator and Tosich as applicants in the Proceeding in consideration of a share in the recoveries.

Two exceptions to the maintenance and champerty rules have featured in recent cases; the "genuine commercial interest" exception and the "statutory power of sale" exception. The former was recognised in, for example, Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (HL), and is to the effect that there is no infringement where the maintainer has a genuine and substantial interest in the success of the litigation (see, too, "the discussion in" Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd, unreported, FCA/FC, 20 January 1997, QG 73/1996 at 11ff). That exception is directed to an interest which exists independently of the allegedly infringing contract or conduct. In the present case, FAI has no interest in the success of the Proceeding independently of the proposed Insurance Agreement itself.

The second exception is founded on the statutory powers of trustees in bankruptcy and liquidators of companies to sell "the property of the bankrupt" and "the property of the company" respectively. This exception was discussed on 19 July 1994 by Lightman J in Grovewood Holdings Plc v James Capel & Co Ltd [1995] 2 WLR 70 ("Grovewood"); on 7 June 1995 by Robert Walker J in Re Oasis Merchandising Services Ltd; Ward v Aitken (1995) 2 BCLC 493 ("Oasis"); on 15 March 1996 by Drummond J in Movitor on 8 May 1996; and on 21 June 1996 by Hansen J in UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1262 ("UTSA"). In the next section, I will discuss these four cases in chronological order, concentrating, in particular, on Movitor.

Four recent cases

1. Grovewood Holdings Plc v James Capel & Co Ltd [1995] 2 WLR 70 (Lightman J) ("Grovewood")

Grovewood, like Oasis, Movitor, UTSA, and the present case, concerned a company in liquidation, but it differed from them in that:

(a) the action in question (an action for damages against the company's stockbroker and adviser for damages alleging negligence and misrepresentation) was one capable of being brought by the company prior to liquidation; and

(b) the company had in fact commenced the action prior to liquidation.

The Liquidator vainly sought support from the company's creditors and shareholders in order to continue to prosecute the action. The liquidation committee authorised the liquidator to enter into agreements with third parties to fund the action.

The liquidator entered into two "sponsorship agreements" with third parties under which he agreed that in return for funding the action, they should receive one half of the recoveries. It is necessary to refer only to the first agreement. There were three parties: the liquidator, the sponsor and the liquidator's solicitors. Lightman J said that it was agreed that:

"(1) the sponsor shall at his own cost in the name of Grovewood diligently pursue the litigation 'without being subject to the control or interference of the liquidator;' (2) the liquidator shall give the sponsor, so far as the rules and practice of the court permit, all assistance and information requested by the sponsor; (3) the solicitors agree to defer charging the sponsor their reasonable profit costs until determination of the litigation; (4) all recoveries in the action shall be paid into the solicitor's client account and be held on trust to pay (a) all costs, (b) the costs due to the solicitors in respect of the action for the period prior to liquidation, namely [sterling]225,000, and (c) as to the balance, 50 per cent. to the liquidator and 50 per cent. to the sponsor; and (5) any insufficiency in the recoveries to meet costs incurred or liability for costs ordered to be paid to Capel is to be made good by the sponsor." (at 73)

The defendant ("Capel") applied for a stay on the ground that the sponsorship agreement was champertous. It was common ground that it was prima facie champertous. His Lordship referred to authorities which recognised an exception to the general prohibition of champerty, in favour of trustees in bankruptcy and company liquidators, even to the extent of allowing them to sell a bare cause of action of the bankrupt or company in return for a share of recoveries. But the liquidator did not submit that the sponsorship agreement effected a sale of the cause of action. His Lordship thought that the sale, if there was one, was of a one half beneficial interest in the net recoveries.

The liquidator submitted that the Insolvency Act 1986 (UK) Schedule 4 para 6 (which gave "power to sell any of the company's property by public auction or private contract ...") authorised such a sale, which was, therefore, like a sale of the cause of action itself, exempt from the application of the law of maintenance and champerty. Importantly, for present purposes, his Lordship said:

"That the Act authorises a sale of such an interest, being property of the company, cannot be disputed; what is in issue is (1) whether the 1994 agreement constitutes a sale and (2) if so, whether such a sale enjoys exemption from the law of maintenance and champerty." (at 76C)

When addressing the first of the two questions mentioned, his Lordship did not discuss the relevant terms of the sponsorship agreement, his summary of which was quoted earlier. His Lordship reasoned (1) that although generally the word "sale" in a statute denotes "an exchange of property for cash", the general rule could be displaced by a "special context"; (2) that a special context existed in the Insolvency Act 1986 and its statutory predecessors because a "transfer of a cause of action in return for financing an action and a share of recoveries has been treated uniformly by the courts since 1880 as a sale"; and (3) that "[i]f a transfer of a cause of action in return for financing an action and a share of recoveries is a 'sale' for the purposes of paragraph 6, so must a transfer of a half beneficial interest in recoveries in return for financing the action" (at 76D,E).

Notwithstanding his answer to the first question favourably to the liquidator, his Lordship thought that the sale did not enjoy exemption from the law of maintenance and champerty. The reasoning which led to this conclusion is, with respect, not entirely clear. It is best that I set out the passage in which it is expressed:

"The insuperable difficulty, as I see it, in the way of Mr. Jackson's submission of the existence of such an exemption is that, in the absence of any agreement by the purchaser to finance the action, a sale of the recoveries in an action, as distinct from the cause of action, has long been regarded as valid and unobjectionable on grounds of maintenance: see Glegg v Bromley [1912] 3 K.B. 474. No special statutory exemption from the law of maintenance is required to enable a trustee in bankruptcy or liquidator to dispose of such property. In this respect there is a critical distinction between a sale of the recoveries, or an interest in the recoveries, and a sale of a bare cause of action. The statutory power of sale of a bare cause of action would be empty of effect if it did not at the same time confer on such a sale immunity from the (otherwise) applicable law of maintenance and this immunity has by judicial decision been recognised as extending to sales on terms providing for a division of recoveries.

I can see no basis in principle or authority for extending the statutory exemption applicable in case of sales of bare causes of action to sales of the fruits of litigation which include provision for the purchaser to finance the litigation. The references in the judgments of Megaw and Balcombe L.JJ. to not bringing into the law of the bankruptcy doctrines applicable in other fields in Ramsay v Hartley [1977] 1 W.L.R. 686, 694 and Bang & Olufsen U.K. Ltd. v Ton Systeme Ltd., 16 July 1993, can only be intended to apply to doctrines expressly or by implication inconsistent with the provisions or scheme of the bankruptcy code. So far as the Act of 1986 confers powers on liquidators and trustees other than the power to sell bare causes of action, the law of maintenance has full force and effect. I therefore reach the firm conclusion that the 1994 agreement is champertous since the consideration for the assignment of a share of the fruits is the purchaser's obligation to finance the action, the Act confers no relevant exemption from the law of champerty and accordingly the proceedings are being maintained champertously." (at 76G-77D)

In the result, his Lordship granted a stay. It will be necessary to return to this case later.

2. Re Oasis Merchandising Services Ltd; Ward v Aitken (1995) 2 BCLC 497 (Robert Walker J) ("Oasis")

Oasis was decided by Robert Walker J on 7 June 1995, just under a year after Lightman J's decision in Grovewood. The liquidator of a company had claimed relief against five individuals who had been directors or "shadow directors" (together, "the directors") of the company, under s 214 of the Insolvency Act 1986 (UK). The directors applied for a stay on the ground that the proceeding was being funded by a third party under a champertous agreement and constituted an abuse of process. The parties to the agreement were the liquidator, the company and the third party. It was recited that due to the statutory basis of the liquidator's action (called in the agreement, the "Section 214 Action"), the action had to be brought by the liquidator rather than by the company itself. The agreement also recited that the liquidator considered it desirable that he and/or the company should sell and assign to the third party all the "Fruits" of the Section 214 Action. The agreement was expressed to be conditional on the Companies Court's giving the liquidator liberty to enter into it. By cl 2, the company, acting by the liquidator, and also the liquidator himself, made an assignment to the third party, which was clearly expressed as an equitable assignment by way of sale. The words of assignment were as follows:

"[The company] acting by the Liquidator and the Liquidator himself in respect of his rights in respect of the Fruits of the Section 214 Action hereby sells and assigns to [the third party] absolutely all the rights of himself and [the company] respectively (i) in the Section 214 Action to be brought by the Liquidator on behalf of [the company] against the [directors] or any one or more of them ..." (at 496)

There followed a reference to other possible legal proceedings. Clauses 4, 5, 6 and 11 related to the conduct of the Section 214 Action. Their general effect was described by his Lordship as placing the third party in control and obliging the liquidator to concur and cooperate so far as he properly could. The agreement provided for the third party to finance the Section 214 Action and for the division of the fruits of success after reimbursement of the third party's expenditure on the litigation. There was provision for the third party to take over the litigation in certain circumstances.

It was common ground that the assignment was an agreement for the assignment of the fruits of the Section 214 Action if and when they should come into existence, rather than an assignment, legal or equitable, of a cause of action itself.

Robert Walker J noted that an application under s 214 could be made only by the liquidator. His Lordship concluded, in view of this, that the fruits of the Section 214 Action were not "property of the company" and were therefore not capable of assignment under the statutory powers of sale conferred on liquidators. For his Lordship this was decisive of the case: the agreement was champertous because the statutory power of sale exception did not apply to the recoveries of the proceeding. He also expressed the view that an application under s 214 was not to be regarded as ordinary civil litigation but was litigation in which there was, at least potentially, a public or penal element. His Lordship referred to the facts that the Court had a discretion to order payment of a larger sum than the amount due to creditors who had suffered as a result of the fraudulent trading, and that it could make an order under the Company Directors Disqualification Act 1986 (UK). He added that in such litigation, the Court was entitled to expect the assistance of the liquidator "who, as an authorised insolvency practitioner, will be aware of his statutory responsibilities" (at 503). His Lordship concluded that Parliament could not have intended that a liquidator should have power to transfer the liquidator's right of application under s 214 to an assignee whom the court could not control.

3. Movitor

Drummond J gave an account of Lumley's "Debt Retrieval Agreement" which, as noted earlier, was generally similar to FAI's Facility document. In Movitor the liquidator of Movitor wished to commence a proceeding pursuant to ss 588M and 588W of the Law against former directors of Movitor and Movitor's holding company respectively, for contraventions of the Law in respect of insolvent trading by Movitor. The liquidator had had legal advice that he had good prospects of recovering substantial damages, but Movitor had no funds, and inadequate assistance was available from creditors.

Section 588M refers to contravention by a director of the obligation imposed by s 588G to prevent a company from incurring debts while insolvent. In the circumstances referred to in sub-s 588M (1), sub-s 588M (2) provides as follows:

"The company's liquidator may, by proceedings in a court of competent jurisdiction, recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage [suffered by the creditor to whom the debt is owed, because of the company's insolvency]". (underlining supplied)

Section 588W refers to contravention of s 588V, which provides that in certain circumstances a corporation which is the holding company of a company which incurs a debt when insolvent, contravenes s 588V. Sub- section 588W (1) provides that where such a corporation has contravened s 588V in relation to the incurring of a debt by a company and the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency (and other circumstances are satisfied):

"... the company's liquidator may, by proceedings in a court of competent jurisdiction, recover from the corporation, as a debt due to the company, an amount equal to the amount of the loss or damage." (underlining supplied)

It will be noted that under both ss 588M and 558W, it is only the liquidator who is entitled to institute the proceeding in question, but that he or she recovers the amount of the loss of damage, "as a debt due to the company".

In Movitor, the parties to the proposed insurance agreement were Lumley and the "Insured". The expression "Insured" was defined to mean, relevantly, the liquidator and to include the company in question, Movitor. The agreement contained, relevantly, the following provisions in relation to the appointment and instructing of the solicitor:

"7. Solicitor's appointment and instructions

7.1 The Solicitor shall be appointed jointly as the solicitor for both the Insured and Lumley. Subject to the following provisions in this paragraph, the Insured shall be responsible for giving instructions to the Solicitor in respect of a Proceeding. However, the Insured shall ensure that the Solicitor keeps Lumley apprised of the progress of the proceeding and, without limiting the generality of the foregoing, the Insured shall ensure that the Solicitor notifies Lumley immediately he becomes aware of any matter which would or may:

7.1.1 affect the premium which would be set by a reasonable insurer when assessing the Insurance; or,

7.1.2 affect a reasonable insurer in making a decision whether or not to terminate the Insurance; or,

7.1.3 lead to a settlement of the Proceeding.

7.2 ...

7.3 Lumley may at any time instruct the Solicitor to attempt to reach a settlement of a claim provided that [the company or individual the subject of the insolvency administration] is in no worse position than it would have been had the proceeding been ultimately successful. If such a settlement is reached, the premium will be reduced to the surplus remaining after the subject entity receives what it would have received had the Proceeding been ultimately successful.

7.4 In the event that any dispute arises between the Insured and Lumley as to the instructions which should be given to the Solicitor in relation to the settlement or conduct of a Proceeding, the Parties may refer the matter in dispute for advice from an independent third party to be mutually agreed ... failing which the matter in dispute shall be referred to an Arbitrator to be nominated by the President for the time being of the Law Institute of Victoria.

7.5 ..." (at 589-590)

Drummond J's summary of the effect of these provisions was as follows:

"Control of the funded litigation is thus vested jointly in Lumley and the Insured; neither is given power to override the other's instructions to the solicitor." (at 590)

Clause 9 of Lumley's Debt Retrieval Agreement was as follows:

"9. Premium Payment

9.1 At Recovery [defined to mean 'the point in time or points in time when the Insured receives into his control and possession all or part of the moneys to be received by him in relation to a claim whether by way of enforcement of a judgment debt, settlement or otherwise'] the Insured will pay any funds received into a credit bank account and remit the Premiums to Lumley immediately." (at 590, underlining supplied)

His Honour noted that Lumley had had no commercial interest in the success of the liquidator's claims under ss 588M and 588W, and that the agreement was "void and contrary to public policy unless it falls within one of the recognised exceptions which accept that certain kinds of champertous arrangements are lawful" (at 593). His Honour then examined the statutory power of sale exception. He referred to para 477 (2) (c) of the Law which empowers a liquidator of a company to "sell or otherwise dispose of, in any manner, all or any part of the property of the company."

His Honour referred to cases in which the view had been taken that the statutory power of a trustee in bankruptcy and of a liquidator of a company to sell or otherwise dispose of "property of the bankrupt" and "property of the company" respectively, extended to a bare right of action, and that an agreement to do so in return for a share of recoveries was an exception to the rules against maintenance and champerty.

Like Lightman J in Grovewood, Drummond J in Movitor treated the agreement as one for the sale of a share of the recoveries. However, while his Honour agreed (at 595) with his Lordship that the recoveries are property distinct from the right of action itself, he thought that for the purpose of para 477 (2) (c) of the Law, they constituted "property of the company". His Honour referred, in particular, to the words "as a debt due to the company" in ss 588M and 588W. His conclusion on the issue was as follows:

"The subject matter of the litigation the subject of the funding arrangement between the applicant and Lumley is the statutory causes of action created by ss. 588M and 588W the Corporations Law. In Re M.C. Bacon Ltd. (No. 2) [1990] B.C.L.C. 607, it was held that the liquidator's right to seek an order under the insolvent trading provisions of s. 214 the Insolvency Act 1986 (U.K.) against a director for such contributions to the company's assets as the Court considered to be proper was not itself an 'asset of the company' (i.e., property of the company) within certain of the rules under that insolvency legislation. Millett J said, at 613:

'I do not see how an application for such an order under the section can properly be described as an attempt to realise or get in an asset of the company. This must, in my view, mean an existing asset and, until the order has been made and complied with, there is no such asset.'

But given the differences between the insolvent trading provisions of s. 214 of the English legislation and those of ss. 588M and 588W the Corporations Law, this decision provides no authority, in my opinion, for contending that the property of the company does not include the expected fruits of an action brought under ss. 588M or under 588W. The right of the liquidator to recover damages created by each of these sections is described as a right to recover form the director and the holding company an amount equal to the loss or damage suffered as a result of the company's insolvent trading in which the director and the holding company were implicated 'as a debt due to the company'. That 'debt' arises once the conditions of liability have been fulfilled, something that must occur prior to commencement of any action for recovery under either section. Such a 'debt' can properly be regarded as part of the property of the company which the liquidator is empowered to sell. Even if the rights to compensation created by ss. 588M and 588W are not regarded as true debts but rights sui generis, Magor & St. Mellons Rural District Council v Newport Corporation [1950] 2 All E.R. 1226 at 1230-1231 is authority for holding that they are still well capable of falling within the definition of 'property of a company' in the relevant provisions of the Corporations Law.

For these reasons, I am not prepared to draw the distinction that was drawn in Grovewood Holdings Plc v James Capel & Co. Ltd., supra, between a sale of the cause of action by a liquidator under the statutory power and a sale by him of the fruits of that cause of action under the same power.

Since a share in the fruits of an action belonging to an insolvent company is 'property of the company' for the purposes of s. 477(2)(c) the Corporations Law, that section authorises the liquidator to make an agreement to pay a percentage of such recoveries in return for assistance in running the action, because the section empowers the liquidator not only to sell, but to 'otherwise dispose of, in any manner' any part of the property of the company." (at 595-596)

His Honour assumed, without discussion, that the Insured's promise, in consideration of Lumley's promise to fund the litigation, to pay any funds received into a credit bank account and to remit the Premiums to Lumley immediately, constituted a disposition of an interest in the proceeds.

4. UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1262 (Vic/Hansen J) ("UTSA")

As the Abolition of Obsolete Offences Act 1969 (Vic) was for Hansen J, so the Maintenance and Champerty Abolition Act 1993 (NSW) is for me, irrelevant to the issue posed for decision. While those Acts abolish criminal and civil liability for maintenance (including champerty), they are expressed not to affect any rule of law in which a contract is to be treated as contrary to public policy or otherwise illegal.

Hansen J referred to Drummond J's review of the authorities in Movitor and addressed them himself in respects relevant to the submissions which were put to him. The facts in UTSA were somewhat complex. The liquidators of UTSA claimed that a sale of UTSA's business to Ultra Tune Pty Ltd ("Ultra Tune") had caused loss to UTSA. They contended that in connection with the sale, directors of UTSA had contravened sub-ss 232 (2) and (4)-(6) of the Law and that Ultra Tune had aided, abetted, counselled or procured the contraventions or were directly or indirectly, knowingly concerned in or a party to the contraventions within the meaning of s 1324 of the Law. It was also alleged that the sale was an "uncommercial transaction" as defined in s 588FB of the Law, or an "insolvent transaction" as defined in s 588FC of the Law, and was a "voidable transaction, within s 588FE.

Titan Corporation Limited ("Titan") offered to purchase UTSA's causes of action against the directors and Ultra Tune. A form of deed of assignment was prepared. It was in respect of this proposed deed that UTSA's liquidators applied for:

"an order under s 511 of the Corporations Law [UTSA was being wound up voluntarily, not by the Court] that they be authorised to enter into a deed of assignment with Titan Corporation Limited ('Titan') whereby UTSA's causes of action in the proceeding be assigned to Titan, alternatively ... a declaration that the liquidators may cause UTSA to so assign its causes of action." (at 1265)

Under the proposed deed, on completion of the proceedings, Titan was to pay to UTSA $300,000 plus 20% of recoveries. By cl 2, UTSA would assign to Titan its causes of action in the relevant proceeding. Performance by Titan of its own obligations was to be secured by a registrable charge over the causes of action. By cl 3, the liquidators would agree to cooperate with Titan in prosecuting the proceeding which was to continue to be carried on in the name of UTSA if Titan so requested. In fact, a proceeding was already on foot against Ultra Tune which applied for a stay on the ground that the arrangement was, by virtue of some funding which had already occurred, tainted by maintenance and champerty. Accordingly, as in Grovewood, and Oasis, but in contrast to the situation in Movitor and the present case, the issues of maintenance and champerty were the subject of contest.

The background referred to above enables me to set out Hansen J's treatment of a particular submission by Ultra Tune which is of relevance to the present case:

"3 Claims under the Corporations Law

The third submission is that the claim by the liquidator under s. 588FF can only be brought by the liquidators, and that the proposed assignment 'leads to the consequence of the plaintiffs abandoning the benefit of' the cause of action, indeed all the Corporations Law claims. If, as seemed to be agreed, and I think is correct, certain of the claims (those under ss. 588FB, 588FC and 588FF) lie in the liquidators and are non-assignable, the proposed assignment can not operate as an assignment by UTSA or its liquidators of these claims. However, the deed does not seek to assign such claims. Rather, UTSA will assign 'its' causes of action. The Corporations Law claims remain in the hands of the liquidators. Neither on the terms of the deed nor as a matter of law would the deed operate as an abandonment by the liquidators of any such claim. In my view, the submission provides no reason for refusing the application. I might add that for these reasons it is not necessary to consider or reconcile what has being [sic] said in this area in Movitor (at ACLC 595; ACSR 450) and Re Oasis Merchandising Services Ltd.: Ward v. Aitken (1995) 2 B.C.L.C. 493." (at 1288)

Synthesis

It is convenient to address the issues raised in the cases by reference to three topics:

1. The exclusion of a sale or other disposition by a liquidator of a share of recoveries from the prohibition against maintenance or champerty.

2. Whether there is a sale or disposition of the recoveries or a share of them in the present case.

3. The question of intervention in the conduct of the litigation.

1. The exclusion of a sale or other disposition of a share of recoveries from the prohibition against maintenance or champerty.

In Movitor, Drummond J held that the prospective recoveries in that case constituted "property of the company" for the purposes of para 477 (2) (c) of the Law; that a sale or disposition of them, or of an interest in them, by the liquidator was excluded from the prohibitions against maintenance or champerty; and that it was not to the point that only the liquidator had standing to apply for the remedy which would give rise to those recoveries. I would hold otherwise only if I thought that his Honour was clearly wrong. I do not think this. On the contrary, and with respect, I think that he was correct.

The word "property" is defined in s 9 of the Law to mean:

"any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action;"

It will be recalled that the "Resolution Sum" in the Insurance Agreement is defined to mean "the amount or amounts received or to be received by way of settlement, judgment or order" in the Proceeding. The sections relied on by the Liquidator in the Proceeding make it clear that recoveries will be property of the company. Paragraphs 588FF (1) (a) and (c) which are the paragraphs within s 588FF that empower the Court to order payment of money, empower it to direct the relevant person "to pay to the company" the amounts in question. Similarly, sub-s 588FJ (6) on which the Liquidator relies in the Proceeding entitles him to recover from a chargee "as a debt due to the company" the amount referred to in that sub-section. I respectfully agree with Drummond J that since the power which a liquidator has to sell or otherwise dispose of future recoveries, like his or her power to sell or otherwise dispose of the company's cause of action itself, is found solely in para 477 (2) (c) of the Law, this court should not follow Lightman J in Grovewood in refusing to extend the statutory exemption applicable to dispositions of bare causes of action to dispositions of recoveries.

2. Whether there is a sale or disposition of the recoveries or a share of them in the present case.

In Grovewood and in Movitor, Lightman J and Drummond J respectively treated the contractual arrangement in question as a "sale" by the liquidator. There was, however, no analysis of the relevant terms of the contractual arrangement by reference to the concept of a sale. Prior to the amendment made in the course of the hearing in the present case, FAI and the Insured proposed to agree that FAI be paid the Premium "from the Resolution Sum on resolution" (para 4 of FAI's letter), and that at Resolution the Insured instruct the Argyle Partnership to distribute the Resolution Sum in accordance with the Insurance Agreement (cl 5.1 of the unamended Facility document). In my opinion, those provisions did not provide for a sale or other disposition of recoveries. They were a contractual promise by the Liquidator to FAI that the Liquidator would give a direction to the Solicitor. It was not plain to me that what was intended was a sale or other disposition of future property; cf Meagher, Gummow and Lehane, Equity: Doctrines and Remedies (3rd ed, 1992) at [683], [684], pp 197-198, and cases there referred to. But the amendments made during the hearing have overcome this difficulty. Paragraph 4 of the amended letter will provide in terms that the Insured "disposes to FAI a share of the Resolution Sum (as the Premium to be remitted to FAI) ...". In my view, this amounts to a disposal by the Liquidator of future property of Tosich in exercise of the power given to a liquidator by para 477 (2) (c) of the Law, and, as such, is excepted from the rules against maintenance and champerty.

3. The question of intervention in the conduct of the litigation.

In Movitor, Drummond J said this in relation to Grovewood:

"Lightman J held that, because there was no sale of a cause of action belonging to the company by the liquidator which would have been within the exemption from maintenance and champerty, the fact that the purchaser from the liquidator of a share in the fruits of the litigation was to be involved in the conduct of the litigation made it champertous." (at 594)

Similarly, in Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1996) 137 ALR 260 (appeal dismissed on 20 January 1997, unreported), the "genuine commercial interest" exception, which was said to be within the "statutory power of sale exception", his Honour observed that:

"... if the purchaser of a share of the fruits of litigation between others is also entitled, under the purchase arrangements, to involve himself in the litigation, that will be sufficient to turn an otherwise lawful transaction into one that involves both unlawful maintenance and champerty." (at 272)

Where a bare cause of action is effectively transferred, the litigation to enforce it is conducted by the transferee. Where only recoveries are transferred, the transferee will not have a right to intervene in the conduct of the litigation, unless, and to the extent that, such a right is given by agreement.

I do not need to discuss the circumstances in which giving a disponee a right of intervention in the conduct of the litigation may deprive a disposition of recoveries of the benefit of the exemption from the rules against maintenance and champerty. Nor need I discuss any distinction to be drawn in this respect between a disposition by a trustee in bankruptcy or company liquidator in exercise of the statutory power on the one hand, and a similar disposition by any ordinary litigant on the other. The reason is that, on any view, the amended cll 4.1 to 4.5 inclusive of the Facility document eliminate any cause for concern. Under them, FAI has no more than a right to be kept informed and to invoke the advice and mediation procedures described in those clauses, while leaving ultimate control of the Proceeding with the Insured.

CONCLUSION

Annexures "A" and "B" to these Reasons for Judgment are, respectively, copies of FAI's letter and the Facility documents incorporating all amendments. There will be a direction that the applicant, in his capacity as liquidator of Tosich Constructions Pty Limited (Receivers and Managers Appointed) (In Liquidation) has power to enter into a contract with FAI General Insurance Company Limited ("FAI") contained in pro forma letter from FAI to the applicant and Creditors Recovery Service Facility, copies of which are respectively Annexures "A" and "B" to these Reasons for Judgment.

I certify that this and the preceding 35 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

Associate:

Dated: 28 February 1997

Heard: 7, 25 February 1997

Place: Sydney

Decision: 28 February 1997

Appearances: Mr B A Coles QC of counsel instructed by Ross Koffel, solicitors, appeared for the applicant.