federal court of australia

CORPORATIONS - Application by liquidator for directions under s 479(3) of the Law - circumstances in which direction should be given - liquidator seeking to protect himself from law suits threatened by a creditor - direction opposed by a creditor -  whether directions should be given - liquidator as officer of court entitled to court’s assistance - direction given to liquidator.

CORPORATIONS - Application by liquidator for directions under s 479(3) of the Law - whether liquidator should discontinue action for damages with little chance of success - extent to which liquidator should incur additional expense by making further enquiries of creditors to provide funding - evidence as to prospects of success in action for damages - evidence as to costs of continuing to conduct proceedings - direction given that liquidator acting appropriately to discontinue proceedings.

Corporations Law, s 479(3)

Re G.B. Nathan & Co Pty Ltd (In Liquidation) (1991) 24 NSWLR 674 considered

Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 considered and applied

Re Lemon Tree Passage & Districts RSL and Citizens Club Co-Operative Ltd (1987) 11 ACLR 796 considered and applied

Shiraz Nominees Pty Ltd (In Liquidation) v Collinson (1985) 3 ACLC 706 considered and applied

Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (Receiver and Manager Appointed) (1994) 49 FCR 334 considered

RE:                 CORPORATIONS LAW

AND:              ADDSTONE PTY LTD (ACN 010 764 977)

                        (IN LIQUIDATION) and OTHERS

SG 3080 of 1995

MANSFIELD j

ADELAIDE

3 september 1997

REASONS FOR DECISION

INTRODUCTION

Application for directions under s 479(3) of the Corporations Law (“the Law”) made by Peter Ivan Macks (“the liquidator”) as liquidator of Emanuel Management Pty Ltd (In Liquidation) (“Management”) and of Emanuel Holdings Pty Ltd (In Liquidation) (“Holdings”).

Between 9 January 1995 and 30 August 1995 the liquidator was appointed liquidator of sixty four companies known collectively as the Emanuel Group, including Management and Holdings to each of which he was appointed liquidator on 30 August 1995.

The directions sought relate to how the liquidator should continue to conduct two separate but related proceedings instituted in the Supreme Court of the Australian Capital Territory, in which Management and Holdings were each plaintiffs with Guiseppe Emanuele (“Mr Emanuele”).  Those proceedings were commenced on 4 November 1991 and 16 October 1996 and are numbered Action Nos 796 of 1991 and 994 of 1996 respectively.  I shall call them the first Compensation Claim and the second Compensation Claim and together the “Compensations Claims”.  On 7 March 1997, Higgins J in that court in his discretion dismissed the three plaintiffs’ claims in the two actions on the ground that, as pleaded, they had no prospect of success.

An appeal against Higgins J’s decision in each mater was instituted on 2 April 1997.  Those appeals are in proceedings numbered 23 and 24 of 1997 in this Court in its ACT Registry, and hereafter I shall call them “the appeals”.  As the Compensation Claims now effectively exist only by virtue of the appeals, it will be convenient to include the appeals within the expression Compensation Claims from time to time.

The appeals have not yet been heard.

It is necessary to refer to the Compensation Claims, and to the background to them, in a little detail.

THE COMPENSATION CLAIMS

There was no suggestion during submissions that the reasons for decision of Higgins J do not accurately record relevant matters, and the following relatively brief description (the version of the statement of claim in the first Compensation Claim as finally amended on 16 April 1996 was of 128 pages comprising 289 numbered paragraphs and of the second Compensation Claim was of 113 pages comprising 174 numbered paragraphs) is derived largely from his Honour’s reasons.

In the period of time leading up to November 1985, Mr Emanuele as chairman of directors of the Emanuel Group, and in particular on behalf of holdings, considered tendering for the purchase of a shopping mall complex at Belconnen in the Australian Capital Territory.  In the course of so doing, he had dealings with a Mr Hedley, then First Assistant Secretary, Department of Territories, who was chairing the committee set up to oversee the tender process.  On 28 November 1985 Mr Emanuele handed Mr Hedley $10,000 to facilitate favourable consideration of Holdings’ tender.  He was arrested, and charged in the Australian Capital Territory Magistrates Court with offering a bribe to Mr Hedley (“the Magistrates Court prosecution”).

The hearing of the Magistrates Court prosecution was prolonged.  Ultimately, only on 4 February 1994 was a final decision made.  The learned magistrate convicted Mr Emanuele of the charge, and imposed sentence.  An appeal against the conviction and sentence was duly instituted to the Supreme Court of the Australian Capital Territory, and on 16 March 1995 Higgins J allowed the appeal, and set aside the conviction and sentence.  His Honour did so because the conduct of Mr Hedley amounted to entrapment; his overzealous (to use a neutral word) efforts to procure from Mr Emanuele the bribe went beyond the instructions of the Australian Federal Police officers who had been made aware of earlier discussions between Mr Emanuele and Mr Hedley, and who had arranged for Mr Emanuele to be under visual and audio surveillance on 28 November 1985.  An appeal to the Full Court of this Court from the decision and orders of Higgins J was, on 4 December 1995, dismissed.

In the meantime, on 4 November 1991, Mr Emanuele, Holdings and Management instituted the first Compensation Claim against Mr Hedley and other officers of the Commonwealth.  Those proceedings were then instituted presumably to ensure any claim was brought within six years of the conduct complained of.  The substance of the allegations made by the plaintiffs was that Mr Emanuele was deliberately entrapped by Mr Hedley into offering the bribe in order to exclude him and Holdings from the tender process.

Subsequent to the overturning of the conviction of Mr Emanuele in the Magistrates Court prosecution, on 16 October 1996 the second Compensation Claim was instituted in which again Mr Emanuele, Holdings and Management were plaintiffs.  It raised certain matters which were said not to have arisen when the first Compensation Claim was instituted.

The first Compensation Claim as ultimately amended, and the second Compensation Claim, were each against Mr Hedley, six officers of the Australian Federal Police, and the three Directors of Public Prosecutions from time to time whilst the Magistrates Court prosecution was instituted and maintained.  The Commonwealth of Australia, as the employer of each of the other defendants, was also a party.  None of the defendants, other than Mr Hedley, was alleged to have had the improper purpose of excluding Mr Emanuele and Holdings from the tender process.  In particular, the critical allegations that Mr Hedley had fabricated a conversation so as to cast suspicion on Mr Emanuele and then, when he was taped so his conversation with Mr Emanuele was recorded, entrapped Mr Emanuele into making the bribe were not allegations in which the other defendants were alleged to have been knowingly complicit.

The only cause of action alleged in the second Compensation Claim was malicious prosecution.  Higgins J found that there was no defendant against whom that cause of action could arguably be made out, and gave judgment for the defendants.

The history of the first Compensation Claim is a little complicated.  It alleged various causes of action against Mr Hedley and others, and by leave granted on 9 April 1996 the Director of Public prosecutions and the Commonwealth of Australia were added as defendants, and later on 1 August 1996 the successors to the Director of Public prosecutions whilst the Magistrates Court prosecution was conducted were also added as defendants.  On 16 October 1996, the plaintiffs were granted leave to discontinue the proceedings against all but the eleven defendants referred to, and to amend the endorsement on the Writ.  Ultimately that amendment was made on 4 December 1996.  It then alleged six causes of action:

1.         Damages for abuse of process to attain an improper and collateral purpose actuated by malice.

2.         Damages for misfeasance in public office.

3.         Damages for negligent/fraudulent representation on 27 and 28 November 1985, apparently by Mr Hedley falsely representing that he was prepared to accept a bribe.

4.         Damages for negligence and/or breaches of duties of care, including statutory duties.

5.         Damages ‘on the case’ for directing unlawful acts at the plaintiffs so as to cause them damage, and

6.         Damages for the “tort of negligent or intentional infliction of harm” upon the plaintiffs.

Only those causes of action numbered 2, 3 and 6 reflected causes of action originally pleaded and then only as against Mr Hedley.  Accordingly, the causes of action if separately sued upon would have been statute barred against all defendants but Mr Hedley and the causes of action numbered 1, 4 and 5 would also be statute barred against Mr Hedley:  s 11, Limitation Act 1985 (ACT).  After referring to the detailed factual allegations underlying the causes of action initially alleged against the defendants other than Mr Hedley, as they were “totally remote” from the presently alleged causes of action, Higgins J considered that each was statute barred and should not be permitted to be relied upon by the plaintiffs, unless the damage completing the causes of action was not sustained until the conviction was recorded in the Magistrates Court prosecution on 4 February 1994.  But, as his Honour pointed out, damage was alleged to have occurred by the institution of the original proceeding so that the causes of action were then completed; it was not to the point that further damage may have occurred after the conviction was recorded.  Consequently, Higgins J concluded as against each defendant other than Mr Hedley that the causes of action pleaded were out of time when first asserted, and dismissed the claims against those defendants.  He did not consider the problem so confronting the plaintiffs was remediable by amendment.  In any event, no such application has, on the material before me, been made.  His Honour further and separately concluded that any cause of action against those defendants based on negligence was not arguable.

As against Mr Hedley, Higgins J concluded that the new causes of action were based upon previously alleged facts and so were not out of time.  After considering each of the causes of action separately, and the facts alleged in support of them, his Honour concluded that it was not arguable in respect of any of them that the plaintiffs could succeed, and accordingly dismissed the claim.

Thus, in the exercise of his discretion, Higgins J dismissed each action by entering summary judgment for the defendants.  It is trite to note that his Honour could do so only in the clearest of cases:  General Steel Industries v Commissioner for Railways (NSW) (1964) 112 CLR 125.

Finally, I note that Higgins J independently of other considerations, would have dismissed each action on grounds of public policy alone.  The complaint in the proceedings was fundamentally that Mr Hedley did not intend to pervert the tender process in favour of Mr Emanuele and his interests, but to exclude him from it.  He regarded it as a ‘grotesque result’ if the plaintiffs could be permitted recovery of damages because Mr Emanuele’s criminal expectations were frustrated.

Each of Holdings, Management and Mr Emanuele have appealed from the decisions of Higgins J.  The respondents to the appeals sought on motion security for costs.  The liquidator agreed by consent orders made on 12 June 1997, on behalf of Holdings and Management, that they would by 31 July 1997 provide security for costs of the appeals as to $21,000 to Mr Hedley and as to $31,000 to the other respondents, and that in the event of failure to pay those amounts by that date, the appeals would each be dismissed.  The material before me shows that the arrangement so entered into was in the light of legal advice.  To avoid any suggestion that the arrangement so entered into might prejudice Mr Emanuele’s capacity to continue to conduct the appeals, those orders were varied by consent on 31 July 1997 to make it plain that it would only be the appeals of Holdings and Management which would be dismissed if the security agreed was not provided by the due date.  The two security sums totalling $51,000 were paid by the due date.

The conduct of the Compensation Claims up to 7 March 1997 by solicitors for Holdings and Management was on the basis that neither company would have to pay their fees.  That arrangement has ceased.  If Holdings or Management are to continue to prosecute the Compensation Claims including the appeals, the liquidator will have to enter into a fee agreement with solicitors committing him to pay professional fees hereafter.  Moreover, the respondents to the appeals have now applied for orders that the liquidator be personally liable for the costs of the appeals.

THE APPLICATION

The application for directions originally before the Court, by motion dated 30 July 1997, was for directions as to whether the liquidator should cause Management and Holdings to provide security for costs in the appeals.  As is apparent, that application was brought only at the very last moment.  On 31 July 1997 O’Loughlin J ordered the Registry to remain open to enable payment of the security sums after normal hours.  Those amounts were then paid so that very urgent issue resolved.

The liquidator now seeks directions as to whether he should on behalf of Holdings and Emanuel, continue to prosecute the appeals.  That will be now an expensive and substantial task.  He will need to have available funds to do so.  He is faced with the application that he be personally liable for costs of the appeals if they are unsuccessful, and on an indemnity basis.  Holdings and Management are in any event, if the appeals are unsuccessful, vulnerable to an order for costs against them.  Even if the appeals are successful, the Compensation Claims will each be prolonged and expensive pieces of litigation to conduct.

Sensibly, in my view, the liquidator is confronting all those issues at this point.  There is little point in prosecuting the appeals successfully if then the Compensation Claims are to be lost, although the prospect of a negotiated settlement might then exist.  Both from the point of view of Holdings and Management, and their creditors and members, and from his own point of view, the sooner the final decision is made the better.  A decision made later not to prosecute the appeals, or having succeeded on the appeals, not to prosecute the Compensation Claims will at best have involved considerably greater expense and the dilution of whatever funds are otherwise available to the creditors and members of Holdings and Management.

It is, of course, a separate question whether the Court should give any, and if so what, directions to the liquidator on those matters.

THE RELEVANT PRINCIPLES

The background to and history of s 479(3) of the Law, and of earlier legislative expressions of a liquidator’s entitlement in appropriate circumstances to seek directions from the Court, is set out in Re G.B. Nathan & Co Pty Ltd (In Liquidation) (1991) 24 NSWLR 674.  The circumstances in which such directions have been given are various.  Although it was not contended on behalf of any person that no directions at all should be given on this application, I note that the giving of directions may not be appropriate where substantive rights of third parties are at stake, or where important facts are in dispute:  Re T.T.C. (S.A.) Pty Ltd (In Liquidation) (1983) 1 ACLC 914.  Some judges have observed that the procedure should not be used to excuse a liquidator from taking difficult commercial judgments (eg. Shiraz Nominees Pty Ltd (In Liquidation) v Collinson (1985) 3 ACLC 706) but, even in such circumstances, a liquidator has been given directions when confronted with an accusation of acting unreasonably:  Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, and by way of contrast it has been observed that it is appropriate for a liquidator to seek directions as to whether to institute or continue or to continue to defend proceedings involving questions of law and procedure:  Re Lemon Tree Passage & Districts RSL and Citizens Club Co-Operative Ltd (1987) 11 ACLR 796 at 799; Re Atkinson [1971] VR 612.  In Re Movitor Pty Ltd (In Liquidation); Ex parte Sims (1996) 136 ALR 643 Drummond J gave directions that the liquidator had power to enter into a litigation insurance agreement for the funding of proposed proceedings against the former directors of the company and its holding company.

The suggested dichotomy between a liquidator’s commercial judgments on the one hand and a liquidator’s decision with respect to the conduct of proceedings on the other is, in my view, not a matter of legal significance but only of practical significance.  In Sanderson (above), Young J at 117 noted that the jurisdiction may be exercised to protect a liquidator against accusations of acting unreasonably in instances where, otherwise, the liquidator’s judgment as to what was commercially prudent would not properly be the subject of directions from the Court.  In Shiraz Nominees (above) Franklyn J was asked to give directions as to whether proceedings against a creditor should be instituted.  His Honour (at 711) declined to give directions on an application which he described as one involving asking the Court to exercise the discretion properly to be exercised by the liquidator, being in reality to pronounce on the commercial prudence, viability and wisdom of instituting the proceedings in question.  The liquidator had decided that there was a sound cause of action, and the real issue for the liquidator was as to the practical prospects of enforcing any judgment.  As is commonplace, the decision to institute or maintain proceedings is frequently guided as much by commercial as by legal considerations.  The risk-reward considerations will be relevant to a liquidator, as will those considerations in the context of the particular corporation under administration.  Whilst the Court may be reluctant to give directions when purely commercial considerations are relevant to the liquidator’s decision, even in relation to the conduct of litigation, there will be circumstances where it is or may be appropriate to do so.  One of those circumstances may be where the liquidator’s proposed decision is the subject of criticism by a particular creditor or creditors as being unreasonable or mala fides.  In such a case however, it seems now to be common for the particular creditor concerned about the liquidator’s proposed course of action to be heard.  That took place without opposition on the present application.  Whether, by reason of that involvement of a particular creditor, the case remains one which is properly the subject of directions depends on the particular circumstances.

Although the procedure is not one appropriate for the resolution of disputed significant matters of fact, the mere fact that some creditor or other person appears at the application and opposes it is not per se a reason not to grant directions if they are otherwise appropriate; there are a number of decisions where the application has been pursued with persons other than the liquidator appearing, sometimes adducing material, and presenting opposing submissions:  Shiraz Nominees (above); Re North Queensland Brick and Pottery Co Ltd [1902] QSR 286; MacIntosh v Turner Corporation Ltd (In Liquidation) (1995) 13 ACLC 1314; Bayley v National Australia Bank Ltd (1995) 16 ACSR 38.  Indeed, in Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (Receiver and Manager Appointed) (1994) 49 FCR 334 at 349 - 353 Northrop J made orders in the nature of final binding orders where, in those circumstances, that course seemed appropriate and after a full multi-partite hearing.  See also Wallace-Smith and Mansell v Boland (Federal Court, Northrop J, 8 August 1996, unreported).  I observe that McLelland CJ in Re J W Murphy and P C Allen; Re BPTC (In Liquidation) (1995-1996) 19 ACSR 569 expressed reservations as to whether the making of final orders is within the scope of s 479(3) of the Law.  That question has not arisen in this application.

THE PARTIES APPEARING

On 7 August 1997, when the liquidator sought orders in the more general way as to the Compensation Claims, a timetable was set for the filing of answering affidavits.  At that occasion, apart from the Emanuele interests, an appearance was made on behalf of the EFG Group.  It is the largest creditor of the Emanuel Group, and is a creditor of Management for $117,702,874.  In part to give its legal advisers the opportunity to consider the legal opinion of counsel to the liquidator, the application was adjourned.  That creditor subsequently did not seek to appear further and indicated that it has no present interest “in having any further involvement in relation to the issue of the funding of the Compensation Claims including the appeals”.

Mr Emanuele and his sons Mr Linton Emanuele and Mr Rocco Emanuele (collectively, “the Emanueles”) also appeared by counsel.  They did not oppose the Court giving directions to the liquidator, but urged that the appropriate direction should be to require the liquidator to convene meetings of creditors of Holdings and Management, at which meetings the liquidator should fully inform those creditors of matters relating to the Compensation Claims including the prospects of success on those claims and the potential awards of damages in each of them, and that each of those creditors then be given the opportunity to consider whether to provide funds to the liquidator to enable him to continue to conduct the Compensation Claims and as to the terms of doing so.

The material shows that the relationship between the Emanueles and the liquidator is an arms length one.  The Emanueles’ solicitor has recently put the liquidator on notice that any failure on his part to fully prosecute the Compensation Claims including the appeals will result in the Emanueles suing him for breach of duty and negligence.  There is other litigation in which the liquidator for one or more of the Emanuel Group of companies is on one side and the Emanueles’ interests on the other.  At least since April 1997, the Emanueles through their professional advisers have been seeking to have the liquidator support a Scheme of Company Arrangement, the terms of which as identified from time to time are not important save that a linchpin has been the continued prosecution of the Compensation Claims and the manner of application of the proceeds of those claims.  As the liquidator in his responding correspondence pointed out, he had authorised the maintenance of those claims in the names of Holdings and Management whilst he completed getting advice as to the ‘fundamental’ question as to whether those claims have merit.  It was in the course of that process that Higgins J decided that, as formulated, they had no merit.

THE LIQUIDATOR’S CONSIDERATIONS AND DEALINGS WITH THE EMANUELES

The liquidator generally, on the basis of legal advice received, desires not to pursue the Compensation Claims, including the appeals.  He is confronted with the decision of Higgins J that the Compensation Claims have no merit.  They have a tenuous life, only through the appeals.  On 30 July 1997, a lengthy opinion was provided to the liquidator by M F Blue of counsel which expresses the opinion that, for various reasons, each of the causes of action are either unarguable or unlikely to be established.  He concludes:

“In my opinion the overall prospects of success of the merits of this claim are small and do not justify the expense or risks associated with prosecuting the appeal and subsequent trial.”

The liquidator had earlier been advised by counsel that the prospects of success on the appeals were sufficient to “justify the filing of a notice of appeal in light of the quantum of costs” which would follow the dismissal of the proceedings.  Counsel then indicated that an assessment of the prospects of success at trial was necessary to advise whether it would then be warranted once an appeal were instituted, and he pointed out some of the difficulties which would need to be overcome if the action were to be successful.  Counsel’s later opinion highlights those difficulties.  The initial view as to the prospects of success on the appeals was only on the basis that Higgins J had misconceived the proper role of the Court on such an application, rather than that the Compensation Claims themselves had prospects of success.

The liquidator also has concerns that, in any event, it would be difficult to prove that the Magistrates Court prosecution, assuming it to have been brought wrongfully, had caused either Holdings or Management significant losses.  On 16 April 1997 the liquidator indicated to the Emanueles that he had already instructed his solicitors to seek to resolve the Compensation Claims on the basis of them being discontinued, so as to minimise the exposure to costs.  Thereafter, it would be fair to describe correspondence between the liquidator and the Emanueles through their professional adviser as shadow boxing:  the Emanueles speculated that a friend might put up the money necessary to enable the liquidator to continue to conduct the Compensation Claims if otherwise certain other conditions were agreed to by the liquidator (I make no observation as to the reasonableness or otherwise of those terms), and the liquidator declined to further express his views on those suggested terms unless it were made clear that such funds were in fact available.  That standoff led to the liquidator being threatened by letter from the Emanueles’ solicitors of 9 July 1997 that action would be brought against him by the Emanueles and their interests for substantial damages for consequential losses.

Although counsel for the Emanueles was not instructed to, and did not, put anything to the Court as to the prospects of success of the appeals, or of the Compensation Claims, the letter from the Emanueles’ solicitors of 9 July 1997 asserted:

“we are extremely confident that our clients have an excellent chance of success in the claim for damages”

but no more detailed reasoning was provided.  I speculate that detailed advice has been given to the Emanueles on the topic.  If it has been, no such detailed advice was provided to the Court.  It can fairly be observed that the Emanueles, through whatever resources they may have had available to them (as they have asserted), have had both reason and opportunity to put together a proposal for funding the liquidator in the further conduct of the Compensation Claims, including the appeals.  They have chosen not to do so.  Indeed, they have held out an insubstantial suggestion that they might do so if the liquidator, in other respects, agreed to their proposals.  It is described in a little detail below.  It is not for me to comment on whether those proposals were or were not appropriate for the liquidator to consider.  I can however note that the stalemate with respect to them could have been broken by the Emanueles by confirming the source and availability and amount of funds for that purpose.  If, as their advisers suggest, the prospects of the claim were “excellent”, they could also have removed the knot which they had tied between the funding of the ongoing conduct of the Compensation Claims and their proposed Scheme of Company Arrangement.

It was the inter-solicitor flurry of correspondence on those matters which thereafter led to the application of 30 July 1997.

Other than as noted above, and in this paragraph, the Emanueles have not otherwise sought on this application to adduce evidence , or any material, and none which cogently suggests, that Holdings and Management, have prospects of success either on the appeals or upon the merits of the Compensation Claims.  The only additional material is a letter dated 19 August 1997 from counsel previously acting in the matter which (other than as to quantum) says simply:

“In my opinion, the above actions and appeals have a reasonable prospect of success in that they have merit and are arguable.”

No foundation for that view is expressed.  Nor is any foundation for the view that the likely range of damages is “between tens of millions of dollars to hundreds of millions of dollars” except that the figure is based on instructions from solicitors for Mr Emanuele.  Other than reinforcing my observations that the Emanueles have had both the opportunity and the motivation to procure a funding arrangement for the liquidator to continue to conduct the Compensation Claims including the appeals but have not done so, I do not regard that letter as of any real help in the present circumstances.  It is a little surprising that parties conducting litigation with that perceived potential outcome since 1991, or perhaps from 1995 when the conviction of Mr Emanuele was set aside, have not, or have not produced to the Court in opposition to the directions sought, more than an assertive and unexplained proposition on the topic.

I have also considered the grounds of appeal in each instance.  They simply enumerate a litany of observations by Higgins J which are said to constitute error.  They do not add to an informed appreciation of the prospects of success on the appeals.

The Emanueles have urged the liquidator to agree to support to the creditors of the Emanuel Group the Scheme of Company Arrangement referred to, but before providing to the liquidator any evidence to show any capacity to provide the resources which the scheme contemplates.  He has not accepted that invitation.  I note that the proposed scheme, if approved, aimed to restore control of the Emanuel Group to the Emanueles, in consideration of Mr Emanuele procuring payment of $4,000,000 to be applied to pay all costs relating to the scheme and of the liquidator, then in repayment of any amount advanced by Mr Emanuele to finance the conduct of the Compensation Claims including the appeals, then to pay an unspecified dividend to creditors of the Emanuel Group, and thereafter to make certain other payments effectively of other costs and then of the balance to the Emanuel Group.  Apart from the $4,000,000 the only other identified source of funds into the scheme is the proceeds of the Compensation Claims.  The liquidator is not obliged to commit himself to that proposal on the terms or in the manner proposed by the Emanueles.  It was not put that his declining to do so was itself relevant to whether the Court should presently give directions as sought or otherwise.  The Emanueles’ proposal does imply a capacity on the part of Mr Emanuele on some terms to procure funds to indemnify the liquidator in respect of his conduct of the Compensation Claims, but Mr Emanuele has chosen not to put any other more specific or refined funding proposal to the liquidator with respect either to the appeals or to the Compensation Claims generally.

The liquidator has taken into account information available to him as to the potential recovery in the Compensation Claims, assuming they were successfully prosecuted.  His investigations have led him to the view that the asserted loss of opportunity to sell certain land will not be established, and that on the wider issue, namely the causes of the failure of the Emanuel Group including Holdings and Management, that they are unrelated to the Magistrates Court prosecution.  His affidavits explain his reasons for that conclusion.

Mr Emanuele’s affidavit of 19 August 1997 disputes a number of matters deposed to by the liquidator.  On the merits of the Compensation Claims he does not advance the matter, as he relies only on the advice of the counsel previously acting in the matter.  On the quantum of the Compensation Claims, he disputes the adequacy of the liquidator’s investigations and asserts the Claims have a much greater potential.  Some substantial details are provided as to the lost commercial opportunities of Holdings or Management by reason of the Magistrates Court prosecution and as to the causes of the failure of the Emanuel Group.  It is inappropriate in a matter such as the present to resolve disputed matters of fact which are relevant to whether the directions sought should be given.  In my conclusions, I deal with the conflicting material.

I note Mr Emanuele’s assertion that, if the liquidator does not pursue the Compensation Claims on behalf of Holdings and Management, his ability to prosecute those claims on his own behalf will be adversely affected.  It was not explained why.  I presently do not see how his claim on liability is affected by the presence or absence of Holdings and Management as parties, nor how admissible evidence on his claims might be excluded by their removal as parties.  The issue of the damages suffered by Mr Emanuele personally would still be capable of proof, although it might be more complex or refined if the two companies were no longer parties.  In those circumstances, I am not satisfied that that bold assertion carries much weight in the scales of whether or how I should give directions.

I also note the allegation that the liquidator, in consenting to the security for costs order with respect to the appeals, acted in conflict of interest because the Commonwealth has, through the Deputy Commissioner of Taxation, provided some funds for certain purposes of the liquidation of the Emanuel Group and at the same time in its own right is a defendant to the Compensation Claims.  I do not accept that contention.  It was not the subject of oral submission as to how that alleged conflict, even if made out, would affect the entitlement of the liquidator to apply for the directions sought.  In any event, I accept that the liquidator made the decision to agree to provide security for costs on the terms set out above in accordance with legal advice provided to him, and acted sensibly in so doing.

Neither Holdings nor Management has funds presently available to fund either the costs of further conducting the appeals or more generally the Compensation Claims if the appeals were successful and the Compensation Claims were to go to trial.  That is not, of itself, necessarily a very significant fact if otherwise the Compensation Claims potentially were meritorious or worthwhile pursuing; in that event, there would be some options for the funding of those actions which the liquidator might explore.

The costs required for the further conduct of the appeals, and if successful of the trial of the Compensation Claims, will be substantial.  The material available to the liquidator is limited, but in part it includes costs estimates made by the previous solicitors for Holdings and Management and costs claims made by solicitors for the respondents to the appeals.  The estimates provided were not challenged on the hearing of the application.  In broad terms, the liquidator is now confronted with the situation that solicitors previously involved in the Compensation Claims including the appeals for Holdings or Management are no longer prepared to act on instructions from the liquidator without an acceptable costs agreement.  Those costs for the further conduct of the appeals are estimated at $100,000 and then for the investigation and conduct of the Compensation Claims if the appeals are successful at some hundreds of thousands of dollars.

I also received evidence that in April and May 1997, and more recently, the liquidator has endeavoured, with solicitors for the defendants in the Compensation Claims, to explore the prospects of negotiating some form of settlement of them, both generally and in limited respects including as to the costs of the proceedings awarded in favour of the defendants when the claims were dismissed by Higgins J.  Those endeavours have proved pointless.  The material suggests that the defendants are unwilling to compromise at all, simply as they see their position as a strong one.  There is nothing to suggest that, even if the appeals were allowed, that perception would change, although it might do so, or that in that event those defendants might be ready to negotiate a settlement of the claims overall.  It is, I think, very unlikely that they would do so for any amount which bears any relationship to what Mr Emanuele would regard as appropriate.  Thus, whilst it is not absolutely certain, the decision I make on this application will be made in the context that there will be no substantial chance of successfully settling the claims overall even if the appeals are successful.  If the application that the liquidator be personally liable for costs succeeds, whatever chance there might have been of that happening simply because Holdings and Management might not be able to meet any costs order becomes even less likely.

DEALINGS WITH CREDITORS

There are ten unsecured creditors of Holdings, plus a group of minor creditors totalling $1099.  The total unsecured creditors are $4,417,796.  The two major creditors are Lorelle Joy Tomkinson to the extent of $3,172,174 and Management itself for $771,241.  The unsecured creditors of management, as disclosed in the Report of Affairs dated 25 October 1995 provided pursuant to the Law by Mr Rocco Emanuele as secretary of Management, discloses the same creditors as Holdings and in the same amounts, but numerous other creditors totalling $268,383,170 as claimed and $264,710,302 as allowed.  There are six creditors each of whose debt exceeds $5 million, by far the largest of which is the “Elders Group” called above the EFG Group for $117,702,874, which include also Challenge Bank Ltd, Kleinwort Benson Australia (Holdings) Ltd, Emanuel (No.14) Pty Ltd, Paterson & Co Pty Ltd and Villa Cairns Pty Ltd.

On 28 March 1996 the liquidator convened a meeting of the creditors of Management and on 29 March 1996 he convened a meeting of the creditors of Holdings.  The purpose of those meetings included considering indemnifying the liquidator with respect to certain actions.  At each of those meetings he distributed a document entitled “Indemnity Proposal Put to the Creditors Meeting” which, after referring to the dismissal of the charge in the Magistrates Court prosecution on which the Compensation Claims are brought, included the following laconic information:

“I have been told by Giuseppe Emanuele that because of this charge persons were unwilling to do business with the group accordingly the group suffered financial harm.  At this time I am considering whether action should be brought to recover compensation for the damage suffered by the group from this unsuccessful prosecution.  Accordingly I require an indemnity from creditors to obtain an opinion on these matters and if necessary undertake these proceedings.”

He invited discussion as to indemnifying funds being made available, to be treated as an expense of the liquidation under s 556 of the Law, and to be the subject of an application under s 564 of the Law that the indemnifying creditor be given a priority with respect to monies recovered as a result.  The liquidator offered to provide any further information available to any interested creditor, including an estimate of his costs and disbursement to take those steps.  On the material, with respect to the Compensation Claims, only Mr Rocco Emanuele seems to have taken the matter further.  Mr Rocco Emanuele, by letter dated 4 April 1996 expressed an interest in providing an indemnity in respect of the Compensation Claims and sought information as to the prospects of success, the costs involved, copies of legal advice obtained, the terms of any proposed indemnity and the disposition of monies recovered by reason of proceedings conducted with funds so provided (as to which the liquidator had indicated he would support an application for priority under s 564 of the Law).  The liquidator responded by letter of 25 October 1996 explaining his judgment on providing information to creditors whilst protecting the companies’ commercial interests.  He thought, on the basis of information available to him, which he identified, that Mr Rocco Emanuele had no resources from which to offer any indemnity funds.  He invited information as to his capacity to provide such funds.  On the material available, Mr Rocco Emanuele did not further respond.

It may be that, from the Emanueles’ viewpoint, their focus on having the liquidator commit to supporting their proposed Scheme of Arrangement, into which was packaged the further financing and conduct of the Compensation Claims, took priority.

The liquidator, by notice to the creditors of Management and of Holdings of 4 and 10 December 1996 respectively, informed the creditors generally about the progress of various actions.  He identified the claims he was actively pursuing.  They did not include the Compensation Claims.  He told creditors that, other than the claims being actively pursued, it was likely no other actions would be pursued.  Again, that apparently prompted no creditor response.

On 8 July 1997, the liquidator wrote to all creditors of Holdings and Management reporting on the summary judgment entered on 7 March 1997, the appeals having been instituted, the orders by consent for security for costs to be paid by 31 July 1997 otherwise the appeals will be dismissed, and the inability of Holdings or Management to put up cash for the security.  He invited any creditor to discuss the provision of funds to meet the security for costs ordered, totalling $52,000, or the funding of the prosecution of the appeals or the Compensation Claims.  It does not appear that creditors have been notified formally as to the prospects of success on the appeals or of the Compensation Claims, as to the potential of the Compensation Claims if they are successful, or as to the costs likely to be required to conduct them.  Six creditors, including EFG Australia Ltd and Mr Rocco Emanuele, then had discussion with him regarding funding various possible actions.  Four of those creditors, including EFG Australia Ltd, then indicated that they would provide no indemnity funds.  One creditor, the Deputy Commissioner of Taxation by letter dated 24 July 1997, specifically declined to provide indemnity for the Compensation Claims, and expressed the view that it is not in the creditors interest for the “scant resources available to be expended in pursuit” of those claims.

Action apparently taken recently by the professional adviser to the liquidator has led to a number of creditors corresponding with the liquidator, even though they had not chosen to do so following the liquidators circular of 8 July 1997.  Letters from two legal firms, as creditors of the Emanuel Group, responded to those advisers seeking either further consultation or the maintenance of the Compensation Claims in any event; only one responded to the liquidators then contact, and since being provided by the liquidator with copies of his various affidavits, has sought to play no further role in this application.  There were also seven or so creditors who wrote to the liquidator direct, apparently prompted by correspondence from the Emanueles’ advisers.  They have each been informed of this hearing and have not sought in any way to participate in it.  The liquidator, through his staff, has sought to contact each of them.  No offer of funds to indemnify the liquidator in the conduct of the Compensation Claims was made through those contacts, other than a tentative expression of interest of $50,000 from Mr Egidio Emanuele.  One other creditor, Mr Cosimo Leonardis, has written to the liquidator offering an “indemnity”, but in reality simply a deduction from the dividend to which he may become entitled, of $5,000.  That is offered on the assumption that the Compensation Claims succeed, otherwise no indemnity is offered.  It expresses the view that:

“if the probability in obtaining a judgment against the Commonwealth of Australia and others is certain”

then the liquidator should continue to prosecute the Compensation Claims.  In the circumstances, and having regard to its terms, it is of no significance to the matter now before me.

Consequently, subject to any considerations relevant to the adequacy of information made available to creditors, the position is that the Emanueles have not put to the liquidator any proposal for the funding of the Compensation Claims (except tied to a proposal that the liquidator support a Scheme of Arrangement).  Most other creditors have simply ignored correspondence from the liquidator on the topic.  The largest creditor has elected not to put any proposal to the liquidator.  There is no other meaningful proposal presently before him for the funding of the appeals or the Compensation Claims.

CONCLUSIONS

In Re Lemon Tree (above, at 798) Young J remarked upon the fact that the status of a liquidator is a very special one, as the liquidator:

“does administratively what, in earlier ages, was done by officers of the court within the court system.  Accordingly, it seems to me that, apart from the very rare cases, ... the court should not take the view that it can just leave one of its officers floundering, and that if the liquidator asks for advice, then some advice and directions should be given.”

In the present circumstances, the liquidator is at a critical point in the conduct of the Compensation Claims.  No funding indemnity apparently exists with respect to the costs of the defendants.  Summary judgment has been entered.  Appeals have been instituted, as a protective measure.  The liquidator must now effectively decide whether to proceed with the Compensation Claims, but he must also now do so with such funds of Holdings and Management as are available.  The previous arrangement which did not involve them paying the costs of their own solicitors has come to an end.  He recognises that the longer the appeals progress the greater will be the exposure of the funds available to the two companies to being dissipated on the costs, both of himself and of the defendants if the Compensation Claims are unsuccessful.  He does not have the resources to make those funds available.  He has no basis for thinking that spending more now by pursuing the appeals will or might result in a saving or net benefit later by some form of compromise.  He is also confronted with the defendants’ application that costs be awarded on an indemnity basis, and be payable by him personally.  He has been advised that the Compensation Claims have little chance of success.  There is no cogent opinion to the contrary.  It seems that the liquidator himself shares that view, even though he was told there was a sufficient chance that the appeals only might be successful to warrant the relatively small cost of instituting the appeals.  He has no resources to get funds, or an indemnity, elsewhere.  The creditors, including the EFG Group as the major creditor, have either explicitly declined to provide funding or an indemnity, or have simply not taken up the question of whether they should do so.

In those circumstances, I think the Court should endeavour to assist the liquidator by giving him directions unless there are particular reasons why it should not do so.

One such question may be as to the potential outcome of the appeals and of the Compensation Claims generally.  In one sense, that may involve the making of a commercial decision about whether the proceedings are worthwhile, that is, whether the chances of success and the expense involved make it worthwhile for the liquidator to pursue the Compensation Claims.  The Court’s role on an application such as this will generally not involve conducting an investigation into the evidence and resolving questions of fact, or of mixed fact and law, as to whether or not ultimately those claims will or will not succeed or, if they succeed, the potential judgment.  That would involve a trial of the issues themselves.  The Court’s functions, in my view, are limited to being satisfied that the material before it is sufficient to determine whether the prospects of success lie in the general range of high, reasonable or minimal, and having regard to the potential benefits, and those prospects, and to the resources available to the liquidator either from the companies resources or from other funding options, whether it is appropriate to now bring the proceedings to an end.  Of course, in that process there will be many potential factors, which will vary in significance from one set of circumstances to another.

As to the prospects of success or otherwise, on the basis of counsel’s opinion and in the light of the decision of Higgins J and the material referred to, I am satisfied that it is appropriate for the liquidator now to elect not to continue to conduct the Compensation Claims.

One matter which has caused me concern is that there is a substantial dispute of fact relevant to the potential of claims if they were to succeed.  Where there is a significant factual dispute, there will often be reason not to give the directions sought:  Harrison v Mills [1976] 1 NSWLR 42, 45 - 46.  That dispute is potentially significant.  Expenditure of a sum for the chance of recovering that sum may be less warranted than expenditure of that sum to recover many many times that sum.  I have referred above to the nature of the dispute, and the alternative outcomes as to the potential of the Compensation Claims contended for.  I am proposing to give directions to the liquidator despite that conflict, but in doing so I assume the general view of the Emanueles that the potential award of damages is many millions of dollars.  I do so simply because, even on that assessment, the nature of the direction which should be given is evident.  Were the potential award of damages significant, in the sense that the differing assessments would produce different directions, then the case would probably be one in which no direction should be given.

The other significant consideration possibly pointing to not giving directions, or at least not in the terms sought by the liquidator, is his dealings with creditors.  The Emanueles sought directions that he convene meetings of the creditors of Holdings and Management, and provide much more detailed information to the creditors on the Compensation Claims.  There is evidence that that would sometimes, or even normally, be done.  I invited the Emanueles to provide minutes of a form of directions they suggested, but as I pointed out in the course of submissions those minutes imposed impractical requirements upon the liquidator, and requirements which the Emanueles own evidence asserted to be unachievable in any sensible time frame.  The minutes later provided suggested that meetings of all the creditors of all the sixty four members of the Emanuel Group of which he is the liquidator be convened, with the liquidator providing information as to “his view” of the Compensation Claims, the costs of conducting them, and how any damages recovered in them might be dispersed, with a summary of the legal advice.  I can see little point in that process, in the light of the material referred to above.  More importantly, in my view the creditors of Holdings and Management have had sufficient opportunity to consider whether they should provide indemnity or otherwise fund the liquidator in the conduct of the Compensation Claims, and none has offered to do so.  Specifically, the Emanueles have not done so, despite the assertion that they may have access to substantial funds, and even though Mr Emanuele as a co-plaintiff and co-appellant clearly wants Holdings and Management to continue to conduct the Compensation Claims despite their particular position.  It would not be appropriate to direct such meetings for the wider purpose of having the creditors consider, or giving the Emanueles the opportunity of promoting to the creditors, the Emanueles suggested scheme of arrangement.  Indeed, counsel for the Emanueles did not suggest that.  The minutes ultimately produced on behalf of the Emanueles did include proposed directions that the Emanueles not merely have the right to participate in the meetings but have the right to put written submissions to the liquidator or to creditors directly, and that oblige the liquidator to serve the creditors with any such submissions in conjunction with the information which the liquidator sends to creditors.  The liquidator is to have no control.  No particular warrant for seeking those particular directions was identified.  It is apparent that the Emanueles have taken the opportunity of recent times to liaise with some creditors directly.  I do not see any special reason why those additional directions are either necessary or desirable.  As to the quantum of the Compensation Claims, I have assumed above for the purposes of deciding whether to give a direction that the Compensation Claims have a very significant potential.  Nothing in the material provided to creditors from time to time by the liquidator suggests an amount for the potential damages, if those claims were successful; in particular, there is nothing from which a creditor could assume that the potential was small so as not to warrant exploring funding those claims.  Despite that, save as noted above, no creditors have responded.  There is, on the other hand, nothing which suggests the Compensation Claims have a huge potential.  The liquidator does not believe that they do.  He is entitled, if not obliged, to tell the creditors that.  The affidavit of Mr Emanuele, even though it joins issue with him and expresses reasons for the contrary view, also acknowledges that it would take many months and a great deal of expense and work to determine whether his views are arguably correct.  The liquidator does not have that time.  His views are not apparently inappropriate, and there is no particular reason why he should take an unreasonably pessimistic view of the potential of the claims.  The lack of a clear indication to the creditors of either his, or others, views as to the potential of the Compensation Claims if they were to succeed on the merits does not, in my judgment, in the circumstances tilt the scales against giving directions on the terms which I propose.  As to the merits of the Compensation Claims, other than the mere assertions of solicitors and counsel, there is no material reflecting a considered opinion by reference to the facts which provides any basis for a positive perspective.  As I noted, the Emanueles did not put on this application anything other than those assertive remarks.  Ultimately, I note that the only cogent material on the merits shows that the Compensation Claims have little or no ultimate merit, a position reflected by their tenuous status at present.  The attitude of the creditors is an important consideration.  In exercising my discretion, in the circumstances I do not see any potential benefit to Holdings or to Management in directing the liquidator to convene meetings of creditors to further consider the conduct of the Compensation Claims.  As it is suggested by the Emanueles that each creditor of each of the Emanuel Group of companies should be given the opportunity to provide an indemnity for costs because of inter-company shareholdings and debts, the Emanueles ultimately suggested by an affidavit that one appropriate course was the liquidator entering ‘an appropriate’ Scheme of Arrangement.  I have observed above that their counsel did not suggest that, and I do not consider that this application should be a strategic vehicle for that purpose.  It must stand or fall on its own merits.

For the reasons given, I think I should give directions to the liquidator.  In my view the direction should be that, in carrying out his functions, he would act appropriately in the absence of any opportunity in the immediate future to negotiate some other resolution, in discontinuing the Compensation Claims now alive only through the appeals.  I so direct.  It is a circumstance where the liquidator is confronted with a serious problem, and having reached his own commercial decision on how to further conduct the Compensation Claims, he seeks the Court’s protection in circumstances where the Emanueles threaten him with claims for damages if he so proceeds.  That is the sort of case in which the Court should give its direction.

I certify that this and the preceding twenty two (22) pages are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield.

Associate:

Date:                5 September 1997

Counsel for the Liquidator:                                Mr  M F Blue

                                                                        with him

                                                                        Mr J R Marsh

Solicitors for the Liquidator:                              Fisher Jeffries

Counsel for Mr Guiseppe Emanuele,                 Mr D E Clayton QC

            Mr Linton Emanuele and                       with him

            Mr Rocco Emanuele:                            Mr A Ardalich 

Solicitors for Mr Guiseppe Emanuele,   Wakefields

            Mr Linton Emanuele and

            Mr Rocco Emanuele:

Date of Hearing:                                               27 August 1997

Date of Decision:                                              3 September 1997