Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (In Liq) and Octaviar Administration Pty Ltd (In Liq) [2011] FCA 132 (23 February 2011)

Last Updated: 21 March 2011

FEDERAL COURT OF AUSTRALIA

Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (In Liq) and Octaviar Administration Pty Ltd (In Liq) [2011] FCA 132

Citation:		Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (In Liq) and Octaviar Administration Pty Ltd (In Liq) [ 2011] FCA 132
Parties:		WILLIAM JOHN FLETCHER AND KATHERINE ELIZABETH BARNET, OCTAVIAR LIMITED (ACN 107 863 436) (RECEIVERS AND MANAGERS APPOINTED)(IN LIQ) and OCTAVIAR ADMINISTRATION PTY LTD (ACN 101 069 390)(IN LIQ)
File number:		NSD 149 of 2011
Judge:		STONE J
Date of judgment:		23 February 2011
Catchwords:		CORPORATIONS – Joint liquidators - application pursuant to s 477(2B) Corporations Act 2001 (Cth) for approval to enter into litigation funding agreement - both parties to proposed agreement in liquidation – factors relevant to approval – whether agreement in the interests of funding company – application under s 50 Federal Court of Australia Act 1976 (Cth) for confidentiality orders – orders must be necessary to prevent prejudice to administration of justice
Legislation:		Corporations Act 2001 (Cth) s 477(2B), s 479(3) Federal Court of Australia Act 1976 (Cth) ss 17,  50(1)
Cases cited:		HIH Insurance Ltd [2007] NSWSC 498 Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 208 ALR 242 Leigh re King Bros [2006] NSWSC 315 Re Spedley Securities Limited (in liq) (1992) 9 ACSR 83 Re McGrath [2010] NSWSC 404; (2010) 266 ALR 642
Date of hearing:	18 February 2011
Place:	Sydney
Division:	GENERAL DIVISION
Number of paragraphs:	26
Counsel for the Plaintiffs:	B Coles QC with S Aspinall
Solicitor for the Plaintiffs:	Henry Davis York

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 149 OF 2011

IN THE MATTER OF OCTAVIAR LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQ) AND OCTAVIAR ADMINISTRATION PTY LTD (IN LIQ)

WILLIAM JOHN FLETCHER AND KATHERINE ELIZABETH BARNET First Plaintiffs OCTAVIAR LIMITED (ACN 107 863 436) (RECEIVERS AND MANAGERS APPOINTED)(IN LIQ) Second Plaintiff OCTAVIAR ADMINISTRATION PTY LTD (ACN 101 069 390) (IN LIQ) Third Plaintiff

JUDGE:	STONE J
DATE OF ORDER:	23 FEBRUARY 2011
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth) the Court approves the entry of the first plaintiffs, in their capacity as the liquidators of the second and third plaintiffs, into a funding and indemnity agreement in the form, or substantially in the form, exhibited to the affidavit of Katherine Elizabeth Barnet sworn on 17 February 2011 at tab 3 of “KEB-2”.
2. The costs of this application be costs in the liquidation of the second and third plaintiffs.
3. The plaintiffs have liberty to apply for orders in respect of any claim for confidentiality in respect of these reasons for judgment and in respect of the transcript of the hearing on 18 February 2011 by 4 pm on Friday 25 February 2011.
4. Pending the determination of any claim for confidentiality made in accordance with Order 3, or further order of this Court, the reasons for judgment not be published and the transcript not be provided to any non-party to this proceeding.

THE COURT DIRECTS THAT:

5. The first plaintiffs, in their capacity as the liquidators of the second and third plaintiffs are justified in entering into a funding and indemnity agreement in the form, or substantially in the form, exhibited to the affidavit of Katherine Elizabeth Barnet sworn on 17 February 2011 at tab 3 of “KEB-2”.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 149 OF 2011

IN THE MATTER OF OCTAVIAR LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQ) AND OCTAVIAR ADMINISTRATION PTY LTD (IN LIQ)

WILLIAM JOHN FLETCHER AND KATHERINE ELIZABETH BARNET First Plaintiffs OCTAVIAR LIMITED (ACN 107 863 436) (RECEIVERS AND MANAGERS APPOINTED)(IN LIQ) Second Plaintiff OCTAVIAR ADMINISTRATION PTY LTD (ACN 101 069 390) (IN LIQ) Third Plaintiff

JUDGE:	STONE J
DATE:	23 FEBRUARY 2011
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. The first plaintiffs are the joint liquidators of both the second plaintiff (OCV) and the third plaintiff (OA). Pursuant to s 477(2B) of the Corporations Act 2001 (Cth) they seek the Court’s approval to enter into a litigation funding agreement on behalf of OCV and OA as well as directions under s 479(3). Evidence in support of the application was provided by evidence as to the affairs of both companies in two affidavits of Katherine Elizabeth Barnet, both sworn on 17 February 2011. The other liquidator, William John Fletcher provided a short affidavit confirming that he shared the views expressed by Ms Barnet. There was also an expert report exhibited to the affidavit of John Henry Williams, Managing Director of Lumina, Chartered Accountants sworn on 18 February 2011.
2. OCV is the ultimate holding company of a complex group of companies within which OA performed the group’s treasury functions. On 13 September 2008, the directors of OCV resolved to place the company in voluntary administration. They appointed Mr John Greig and Mr Nicholas Harwood, both of Deloitte Touche Tohmatsu as Administrators and then, on 12 January 2009, as Deed Administrators pursuant to a Deed of Company Arrangement. Ms Barnet and Mr Fletcher were appointed as provisional liquidators and then as joint liquidators pursuant to orders made respectively by the Supreme Court of Queensland on 31 July and 9 September 2009.
3. The liquidators have formed the opinion that it is in the interest of its creditors to pursue certain claims against Fortress Credit Corporation (Australia) II Pty Limited (Fortress). Fortress is a secured creditor of OCV holding a fixed and floating charge granted on 1 June 2007, over assets of OCV. On 15 September 2008, Fortress appointed Messrs Anthony Sims and Stephen Parbery of PPB as receivers and managers. In reaching the opinion that proceedings against Fortress would be in the interests of creditors of OCV and OA, the liquidators took into account the significant overlap in the proofs of debts that have been lodged in the winding up of OA and the voluntary administration of OCV. Noting that, at the time of swearing her affidavit proofs had not yet been called for in the winding up of OCV, Ms Barnet summarised the position as follows:

(a) in the winding up of OA: 82 proofs have been lodged with an aggregate value of $2,456,286,361.51;
(b) in the voluntary administration of OCV: 29 proofs have been lodged with an aggregate value of $2,176,401,756.91;
(c) 11 creditors have lodged proofs in both OA and OCV. I note that this may change once proofs are called for in the winding up of OCV. However of those lodged in OA, the common creditors represent 71% of the total proofs lodged and of the proofs lodged in OCV, common creditors represent 80% of the total proofs lodged.

4. The liquidators also took into account the opinion of senior counsel concerning the prospect of success in the proposed litigation. That advice is subject to legal professional privilege however I am satisfied that it is comprehensive and addresses the relevant issues.
5. Ms Barnet gave evidence that OCV has only nominal assets and does not have the funds to pursue its claims. In contrast, her evidence is that OA holds about $120,791,012 in cash held in various bank accounts. In the opinion of the liquidators it is in the interests of the creditors of both companies for OCV and OA to enter into a funding and indemnity agreement (Funding Agreement) whereby the necessary funds will be lent by OA. It is contemplated that the obligations under the Funding Agreement will extend beyond 3 months from its commencement and therefore the liquidators must not enter into it unless approved by the Court, the Committee of Inspection or by a resolution of creditors; s 477(2B).
6. Ms Barnet also deposed to the fact that the liquidators had considered other options for funding. She stated that none of the creditors associated with OCV’s Committee of Inspection (being, to the knowledge of the liquidators, its largest creditors) is prepared to provide funding. The liquidators had rejected the option of an external funder because of the cost to creditors.

The Funding Agreement

7. The Funding Agreement obliges OA to pay reasonable legal costs and disbursements; provide security for costs as ordered by the Court; and pay the liquidators’ fees. OA also indemnifies the liquidators and OCV in respect of adverse costs orders and any undertaking as to damages given by the liquidators of OCV in favour of Fortress.
8. In consideration of providing the funding OA will receive a share of any amount received pursuant to the resolution of any proceeding brought by OCV in respect of its claim against Fortress, whether by way of settlement or order of the court. That share is calculated with respect to the period between the date of the Funding Agreement and resolution of the proceedings. This arrangement is similar to the time based recovery structure approved by Austin J in Leigh re King Bros [2006] NSWSC 315. As the plaintiffs submitted, the benefit of this approach to recovery is that it encourages timely resolution.
9. Clause 7.4 of the Funding Agreement applies where amounts paid to OA are not sufficient to reimburse it for the amounts paid under the Funding Agreement and under the Investigation Funding Agreement pursuant to which OA provided funding to the liquidators and OCV in order to conduct examinations of current and former officers of Fortress. In that event, cl 7.4 of the Agreement provides that, subject to any enforceable priority, OA may apply any dividend that is otherwise payable by OA to OCV, towards reimbursing OA for the payments it has made under the Funding Agreement. The clause shifts part of the risk of the proceeding from OA to OCV which is appropriate given that OA is a related funder, also in liquidation.

The expert report

10. Mr Williams is a chartered accountant with extensive experience in business and corporate advice, forensic accounting and litigation support. He was instructed to prepare a confidential report for the purposes of the s 477(2B) application and to express his opinion as to whether it is in the interests of each of OA and OCV to enter into the Funding Agreement. The report was exhibited to his affidavit sworn on 18 February 2011 and was identified as Exhibit “JHW-1”.
11. In preparing his report, Mr Williams was asked to address the following issues:

(a) Whether it is in the interests of the creditors who stand to receive distributions in the respective companies’ windings up for OA and [OCV] to enter into and proceed with the proposed funding agreement;
(b) Whether the interests of the creditors of OA are promoted by OA committing its funds on the terms set out in the proposed funding agreement;
(c) Whether the interests of the creditors of [OCV] are promoted by [OCV] committing to pay a portion of any resolution sum received to OA on the terms set out in the proposed funding agreement; and
(d) Whether the process of winding up the respective estates is likely to be enhanced by OA and [OCV] participating in the proposed funding agreement.

12. Mr Williams’ opinion was premised on the facts as summarised above. In addition Mr Williams was given confidential details of OCV’s claims against Fortress. Mr Williams reviewed the Funding Agreement and summarised its key terms in his report.
13. Mr Williams was also instructed to make certain assumptions concerning: the likelihood of proceedings against Fortress being successful; the ability of Fortress to meet a judgment against it; about the Funding Agreement; the funds available from both OA and OCV; creditor claims; liquidators’ fees and the disposition of any resolution amount.
14. Mr Williams’ report is comprehensive. He has considered the likely outcome and implications for creditors of OA and OCV entering into the Agreement under five scenarios which, together, encompass every likely outcome of entering into the Funding Agreement and commencing proceedings or of not doing so. Mr Williams’ report shows that if the proceeding against Fortress were to succeed there would be an improved return for creditors of OA and OCV. For that reason he concluded that it was in the interests of the creditors of both OA and OCV (other than Fortress) that the latter pursue its claims and the former provide funding.

Reasoning and conclusion

15. It is not unusual for a company in liquidation to seek litigation funding in order to proceed against a third party, often a creditor. The power of liquidators to enter into such arrangements is well accepted; Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 208 ALR 242 at [107] per Campbell J. In Re McGrath [2010] NSWSC 404; (2010) 266 ALR 642 at [16], Barrett J stated that in relation to a borrowing company,

... [T]he relevant feature of the arrangement, apart from borrowing and the giving of security (which are clearly within the power conferred on liquidators by s 477(2)(g)), is the assignment to the relevant funding company of any proceeds of settlement of action, to be held upon trust for the recipient and the funding company.

16. In considering an application for approval to enter into such an agreement it is not necessary for the Court to be convinced that the company is likely to succeed in the litigation or to form its own view as to the commercial merits of the agreement. As Giles J commented in Re Spedley Securities Limited (in liq) (1992) 9 ACSR 83 at 86, the Court will not interfere:

...unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.

17. In Leigh at [25] Austin J set out a comprehensive list of factors that should be taken into account in determining whether there are grounds for doubting the good faith or prudence of the proposed proceedings. The list is as follows:

(i) the liquidator’s prospects of success in the litigation;
(ii) the interests of creditors other than the proposed defendant;
(iii) possible oppression in the bringing of the proceedings;
(iv) the nature and complexity of the cause of action;
(v) the extent to which the liquidator has canvassed other funding options;
(vi) the level of the funder’s premium;
(vii) the liquidator’s consultations with creditors;
(viii) the risks involved in the claim (including the amount of costs likely to be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the costs of the defendant in the event that the action is not successful, or towards any order for security for costs).

18. As the discussion above indicates, in so far as they are relevant to the present circumstances, the liquidators of OA and OCV have considered the factors listed by Austin J. Undoubtedly, the proposed proceedings would not be in the interests of Fortress however this is an inevitable result of the liquidators discharging their obligations to the creditors generally and cannot be regarded as oppressive or as a reason for withholding approval.
19. One aspect of the present application that is unusual is that the funding company, OA, is itself in liquidation. An issue arises whether, in their capacity as liquidators of OA, the plaintiffs have power to cause the company to make the loan contemplated by the Funding Agreement. This question was considered by Barrett J in Re McGrath [2010] NSWSC 404; (2010) 266 ALR 642 in relation to a similar application involving a number of funding companies. His Honour said at [18]-[21]:

In a direct and immediate sense, each funding company will simply lend money or grant accommodation in return for the promise of repayment with interest and premium if success is achieved by the assisted claimant company, such promise being supported by the security given by that claimant company. A liquidator is not given by the Corporations Act any explicit power to lend. The head of power said to be applicable for that purpose here is that conferred by s 477(2)(m), being the power to:

... do all such other things as are necessary for winding up the affairs of the company and distributing its property.

It can be said at once that this head of power would not support the provision of litigation funding by a liquidator to some entirely unrelated litigant, purely for the sake of the returns (or prospects of returns) that might be generated by the transaction itself. Such a transaction would be in no sense “necessary for winding up the affairs of the company and distributing its property”. The present case is, however, distinguishable from that hypothetical case. Each funding company is, as I have said, a creditor of the claimant company to which it is proposed that it give financial assistance.
Case law shows that the word “necessary” in s 477(2)(m) is not synonymous with “essential” or “indispensable”. The provision is accordingly not confined to matters without which the winding up of affairs and distribution of property cannot occur. The test is, rather, one of what “may be thought expedient with reference to the assets of the company”: Re Cambrian Mining Co (1882) 42 LT 114 per Kay J. Counsel referred me to the decision of Fullagar J in Re Bairnsdale Food Products Ltd (in liq) [1948] VLR 264; [1948] 2 ALR 315 (Bairnsdale Food) as providing an example of the scope of the section. That case concerned a company which had a right of first refusal in respect of land occupied by it as lessee. After commencement of the winding up, the lessor offered the company the opportunity to purchase. On the evidence, it would have been advantageous to the winding up for the liquidator to buy the land and re-sell it, thus realising the value of the right of first refusal. It was held that the purchase was justified as an incident of the subsequent sale and was therefore comprehended by the power to sell. There was subsidiary reliance upon the equivalent of s477(2)(m).
I accept that s 477(2)(m) enables a liquidator to do anything expedient with reference to, or conducive to, the beneficial pursuit towards completion of the winding up of affairs and distribution of property. The question is whether commitment of funds by a particular funding company to the pursuit of a claim by a particular assisted claimant company of which it is a creditor is expedient with reference to, or conducive to, those matters in relation to that funding company.

20. In McGrath Barrett J required the liquidators to provide expert evidence in support of their submission that the funding arrangements would be in the interests of the funding companies. In the present application such evidence has been provided by Mr Williams and his report and conclusions are summarised above at [10] - [14]. Evidence presented at the hearing establishes that the committees of inspection for both OA and OCV have been consulted and have approved entry into the Funding Agreement, subject to the Court’s approval.
21. On the basis of the evidence presented at the hearing of the application, much of which must remain confidential for the present, I am satisfied that the Court should approve the entry of the liquidators into the Funding Agreement in the form, or substantially in the form, exhibited to Ms Barnet’s second affidavit sworn on 17 February 2011.

Confidentiality

22. The plaintiffs also seek orders that certain parts of the plaintiffs’ evidence and certain parts of the transcript of the hearing not be disclosed. It is not difficult to see that it would be prejudicial to the interests of the plaintiffs for much of the material to be disclosed. For instance details of the proposed proceedings and the assumptions that Mr Williams was asked to make in preparing his expert report all have the potential to compromise the proposed proceedings if disclosed. In relation to some of the material there would be a strong claim for legal professional privilege. Even where this is not so, the fact is that the plaintiffs must seek the leave of the Court before taking an essential step preliminary to commencing proceedings. It is not, however, sufficient for disclosure to be prejudicial to the interests of the plaintiffs. As explained below, the Court must be satisfied that disclosure would be prejudicial to the administration of justice.
23. In HIH Insurance Ltd [2007] NSWSC 498 Barrett J had before him an application that a hearing be held in a closed court. The applicants, liquidators of companies that may be described as HIH companies, submitted that if the evidence to be adduced by them were to be made public the ability of the liquidators to pursue certain claims for the benefit of creditors would be likely to be severely prejudiced. His Honour stated, at [6] that:

There is a clear public interest in the due administration of justice, in that in litigation in the normal course an ordinary litigant would keep close to the chest, as it were, the matters that the liquidators, because of their position see fit to bring to court. The liquidators, because of their position, should not be set aside from other litigants and be placed to a disadvantage when, as I say, they are acting for the benefit of many thousands of creditors whose interests are very much to the fore.

These observations apply equally to the present circumstances.

24. In Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 the High Court had occasion to consider the power of this Court to make nondisclosure orders. That power is to be found in s 50(1) of the Federal Court of Australia Act 1976 (Cth) which provides:

The Court may at any time during or after the hearing of a proceeding in the Court, make such order forbidding or restricting the publication of particular evidence ... as appears to the Court to be necessary in order to prevent prejudice to the administration of justice ...

25. The High Court emphasised the importance of open justice as mandated by s 17 of the Federal Court Act and stated, at [31], that an order under s 50 is not to be made merely because it appears to the Federal Court to be,

convenient, reasonable or sensible, or to serve some notion of the public interest, still less that, as the result of some “balancing exercise” the order appears to have one or more of those characteristics.

26. Such an order must be ‘necessary’ before the power under s 50 is enlivened. In this case I am satisfied, for the reasons given above, that it is necessary to prevent prejudice to the administration of justice that some such orders be made. It is, however, important that attention be given to the ambit of the proposed orders. They must be formulated conservatively so that their protection extends only to the extent necessary to prevent such prejudice. For these reasons I am allowing the plaintiffs a short period within which to make such claims and during this period I shall order that the evidence and the transcript not be disclosed.

I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Associate:

Dated: 23 February 2011