FEDERAL COURT OF AUSTRALIA

Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375

CORPORATIONS – application by liquidator for retrospective approval of agreements under s 477(2B) of the Corporations Act 2001 (Cth) – considerations relevant to exercise of Court’s discretion

Corporations Law 2001 (Cth) ss 477(2B), 1322(4)

Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 cited

Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642 cited

Empire (Aust) Nominees Pty Ltd v Vince (2000) 18 ACLC 738 cited

Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 cited

Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 cited

Re HIH Insurance Group Ltd (2001) 19 ACLC 1,102 cited

Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 cited

Re United Medical Protection (No 4) (2002) 20 ACLC 1,647 cited

Seeley International Pty Ltd v Newtronics Pty Ltd [2001] FCA 1862 cited

Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 cited

In the matter of Newtronics Pty Ltd (ACN 061 493 516) (Receivers and Managers Appointed (in liquidation); James Henry Stewart (in his Capacity as Official Liquidator of Newtronics Pty Ltd (Receivers and Managers Appointed) (in liquidation) (ACN 061 493 516))

VID 751 OF 2007

GORDON J

28 AUGUST 2007

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 751 OF 2007

IN THE MATTER OF NEWTRONICS PTY LTD (ACN 061 493 516) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

JAMES HENRY STEWART (IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF NEWTRONICS PTY LTD) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 061 493 516))

Plaintiff

JUDGE:	GORDON J
DATE OF ORDER:	28 AUGUST 2007
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. Pursuant to s 1322(4)(d) of the Corporations Act 2001 (Cth) (“the Act”), the period for making an application under s 477(2B) of the Act for approval of the entry by the plaintiff into each of the following agreements is extended:

(a) the indemnity agreement between Seeley International Pty Ltd (“Seeley”) and James Stewart dated 22 March 2002;

(b) the Deed of Indemnity made between Seeley and James Stewart dated 27 March 2006;

(d) the deed of variation to the Deed of Indemnity made between Seeley and James Stewart dated 13 December 2006;

(e) the deed of variation to the Deed of Indemnity made between Seeley and James Stewart dated 16 March 2007; and

(f) the deed of variation to the Deed of Indemnity made between Seeley and James Stewart dated 6 June 2007,

(collectively “the Agreements”).

2. Pursuant to s 477(2B) of the Act, approval is given to the plaintiff to enter into each of the Agreements.

3. Pursuant to s 1322(4) of the Act, none of the Agreements is invalid by reason of having been entered into by the plaintiff prior to obtaining the approval of the Court.

4. Exhibits PAP-1, PAP-3, PAP-5, PAP-6, PAP-7 and PAP-8 to the affidavit of Penelope Alice Pengilley sworn on 3 August 2007 and filed herein and the affidavit of Penelope Alice Pengilley sworn on 23 August 2007 and filed herein be sealed up and not be available for inspection by any person unless the Court otherwise orders.

5. The costs of this application be costs in the winding up of Newtronics Pty Ltd (receivers and managers appointed) (in liquidation).

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 751 OF 2007

IN THE MATTER OF NEWTRONICS PTY LTD (ACN 061 493 516) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

JAMES HENRY STEWART (IN HIS CAPACITY AS OFFICIAL LIQUIDATOR OF NEWTRONICS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 061 493 516))

Plaintiff

JUDGE:	GORDON J
DATE:	28 AUGUST 2007
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

INTRODUCTION

1 This proceeding concerns a retrospective application for approval under s 477(2B) of the Corporations Act 2001 (Cth) (“the Act”) by James Henry Stewart (“Mr Stewart”), the liquidator of Newtronics Pty Ltd (Receivers and Managers appointed) (in liquidation) (“Newtronics”) of the following funding agreements entered into by Mr Stewart and Seeley International Pty Ltd (“Seeley”):

(1) the Agreement to Indemnify dated 22 March 2002;

(2) the Deed of Indemnity dated 27 March 2006;

(3) the First Variation Deed dated 10 July 2006;

(4) the Second Variation Deed dated 13 December 2006;

(5) the Third Variation Deed dated 16 March 2007; and

(6) the Fourth Variation Deed dated 6 June 2007,

(“the Agreements”).

2 For the reasons that follow, I would grant Mr Stewart retrospective approval to enter into the Agreements.

BACKGROUND

3 From October 1993, Newtronics carried on business as a designer, manufacturer and vendor of electronic controls. In October 1993, Atco Controls Pty Ltd (“Atco”) acquired 51% of the issued shares in Newtronics. In April 1998, Atco acquired the remaining issued shares. In September 1998, Atco (and therefore Newtronics) became a wholly owned subsidiary of an Austrian Group, the Zumtobel Group.

4 On 12 February 1998, Seeley commenced proceedings in the Federal Court against Newtronics seeking damages arising from the supply of faulty products by Newtronics to Seeley. On 21 December 2001, the Honourable Justice O’Loughlin ordered Newtronics to pay Seeley $8.9 million together with interest and costs: Seeley International Pty Ltd v Newtronics Pty Ltd [2001] FCA 1862. Interest was later fixed at $5 million.

5 On 8 January 2002, Atco served a demand upon Newtronics pursuant to a mortgage debenture and appointed receivers to Newtronics. On 26 February 2002, Mr Stewart was appointed the liquidator of Newtronics by an order of this Court on the application of Seeley. At the time of his appointment, Newtronics had no tangible assets and its creditors included Atco (in the sum of approximately $20 million but which was apparently secured), Seeley (in the sum of $19 to $20 million and which was unsecured) and other unsecured creditors (for approximately $60,000). Newtronics’ assets position and principal creditors have not changed. Seeley is Newtronics’ judgement creditor and remains Newtronics’ largest unsecured creditor.

6 From the time of his appointment, Mr Stewart retained legal advisers to act on his behalf in relation to the liquidation of Newtronics. Initially, Mr Stewart retained Mr Rydon of Thomson Playford. That retainer was terminated on or about 22 October 2002. On the same day, Mr Stewart retained Mr Jonathon Kramersh, then a partner of Holding Redlich and from 1 February 2003, a partner of Corrs Chambers Westgarth.

7 After Mr Stewart’s appointment as liquidator of Newtronics, Mr Stewart was approached by Seeley and it was agreed that Seeley would provide him with funding to carry out certain investigations. In Mr Stewart’s first report to creditors dated 17 February 2003, Mr Stewart advised the creditors that he had obtained an indemnity from Seeley in relation to his investigations to date. The report went on to state that “in the absence of funding from Seeley or other creditors, [Mr Stewart had] no other means of funding the cost of any investigation into Newtronics’ affairs.” Three other creditors agreed to offer Mr Stewart an indemnity to the extent of $6,600 although there was real doubt about the availability of those indemnities except to the extent of $1,000.

8 On 22 March 2002, an Agreement to Indemnify was executed by Mr Stewart and Frank Seeley on behalf of Seeley by which Seeley agreed to indemnify Mr Stewart “to investigate, and if [Mr Stewart] considers appropriate, recover assets and property of Newtronics or damages owed to Newtronics by exercising powers available to [Mr Stewart] under the Corporations Act 2001 and otherwise available pursuant to statute, at common law or in equity” (Recital C) (“the Agreement to Indemnify”).

9 Preliminary investigations into the affairs of Newtronics were carried out by Mr Stewart including:

(1) requesting officers of Newtronics to meet with him in accordance with s 530A(2) of the Act. No such meetings were ever held; and

(2) seeking to have the books and records of Newtronics delivered to him pursuant to s 530B(4) of the Act.

10 On 16 May 2003, Mr Stewart made application to the Federal Court to examine 17 persons pursuant to ss 596A and 596B of the Act. Examinations of 16 persons were conducted by Mr Stewart in August and September 2003. On 15 June 2004, Mr Stewart made a further application to the Federal Court to examine 9 persons pursuant to ss 596A and 596B of the Act. Examinations of those 9 persons were conducted by Mr Stewart in July, August and September 2004. The costs of these examinations were funded pursuant to the Agreement to Indemnify.

11 From about September 2004 and following the investigations, a draft statement of claim was prepared and Mr Stewart’s then legal adviser (Mr Kramersh of Corrs Chambers Westgarth) commenced discussions with Seeley seeking an indemnity to pursue various causes of action. On 11 May 2005, Mr Stewart engaged Ms Penelope Pengilley, a partner of Holding Redlich and the legal file was transferred to her.

12 On 1 December 2005 and in the absence of an indemnity to issue proceedings, Mr Stewart commenced proceedings in the Supreme Court of Victoria by way of Writ and General Indorsement (Proceeding No 9670 of 2005) against Giorgio Gjergja and Gary Tescher to preserve certain causes of action in case of limitation issues (“the Directors’ Action”). The general indorsement alleged that Mr Gjergja and Mr Tescher were both directors of Newtronics during specified periods and that each of them had, during those specified periods, breached his duties as a director of Newtronics.

13 On 27 March 2006, Seeley and Mr Stewart executed a Deed of Indemnity (“the Deed of Indemnity”). By that Deed, Seeley agreed to provide Mr Stewart with a further indemnity to commence proceedings on behalf of Newtronics against Atco seeking to enforce an agreement between Newtronics and Atco allegedly recorded, inter alia, in a letter of support dated 21 July 2001 from Atco to Newtronics (“the Promise of Support Action”). On 3 April 2006, Mr Stewart commenced the Promise of Support Action against Atco in the Supreme Court of Victoria, Proceeding No 2015 of 2006, Folio 5947. Atco was served on the same day.

14 On 13 April 2006, administrators were appointed to Atco and the Promise of Support Action was stayed in accordance with s 440D of the Act.

15 On 10 July 2006, Seeley and Mr Stewart entered into a deed to vary the terms of the Deed of Indemnity (“the First Variation Deed”). By the First Variation Deed, Mr Stewart and Seeley agreed to vary the Deed of Indemnity to provide a further indemnity to Mr Stewart to pursue on behalf of Newtronics:

(1) a further action for claims against directors of Newtronics for negligence and breach of directors’ duties in relation to the design, supply and failure to warn about the supply of defective controllers to Seeley being the Directors’ Action; and

(2) proof of the Promise of Support Action in the administration, deed administration or liquidation of Atco.

16 Also on 10 July 2006, a statement of claim was filed and served in the Directors’ Action. On 28 June 2007, orders were made for the provision of security for the benefit of one of the directors, Mr Gjergja.

17 On 1 December 2006, Mr Stewart filed an application in the Promise of Support Action seeking leave to proceed against Atco (a company then in liquidation) and seeking leave to add Newtronics’ receivers as defendants to the proceeding. On 8 December 2006, Hargrave J granted Mr Stewart leave to proceed against Atco and added Newtronics’ receivers as second defendants to the proceeding. The Promise of Support Action was served on the Newtronics’ receivers on 14 December 2006.

18 On 13 December 2006, Seeley and Mr Stewart entered into a further deed (“the Second Variation Deed”). By the Second Variation Deed, Mr Stewart and Seeley agreed to vary the Deed of Indemnity (as varied by the First Variation Deed) to provide a further indemnity to Mr Stewart:

(1) to seek leave to proceed against Atco in the Promise of Support Action;

(2) to amend the Writ and Statement of Claim in the Promise of Support Action to add a claim that a mortgage debenture dated 13 April 1995 purportedly given by Newtronics in favour of Atco (“the Mortgage Debenture”) and the Deed of Affirmation and Rectification dated 21 August 2000 were both void;

(3) to seek declarations to the effect that Atco stood behind other unsecured creditors in the liquidation of Newtronics in relation to any moneys recovered in the Promise of Support Action;

(4) to seek leave to add Stephen Andrew Hawke and Colin Nicol (“the Receivers”) as second defendants to the Promise of Support Action;

(5) to pursue a claim against the Receivers in the Promise of Support Action that their appointment was invalid as a result of the invalidity of the Mortgage Debenture and further or alternatively, breach of the Promise of Support referred to at [13] above.

19 On 16 March 2007, Seeley and Mr Stewart entered into a further deed (“the Third Variation Deed”). By the Third Variation Deed, Mr Stewart and Seeley agreed to vary the Deed of Indemnity (as varied by the First and Second Variation Deeds) to provide that Seeley would provide certain bank guarantees by way of security for costs in favour of the defendants in the Promise of Support Action. The bank guarantees were provided on 22 and 23 March 2007.

20 On 6 June 2007, Seeley and Mr Stewart entered into a further deed (“the Fourth Variation Deed”). By the Fourth Variation Deed, Mr Stewart and Seeley agreed to vary the Deed of Indemnity (as varied by the First, Second and Third Variation Deeds) to provide that Seeley would provide a further indemnity to Mr Stewart to pursue on behalf of Newtronics a further action for damages against Mr Gjergja, Russell Kenery, David Brice and Russell Kennedy in the Supreme Court of Victoria, Proceeding No 6897 of 2006 issued by way of Writ and General Indorsement on 9 June 2006 (“the Conduct of Litigation Action”). The defendants have all been served.

21 Since the execution of the Deed of Indemnity and in reliance upon the financial support provided by Seeley under the Agreements, Newtronics has:

(1) examined some 25 persons pursuant to ss 596A and 596B of the Act;

(2) in the Directors’ Action, served the proceedings, made application to examine one of the directors, completed a number of interlocutory steps and taken steps to provide security for costs;

(3) in the Promise of Support Action, obtained leave to proceed against Atco, joined the receivers, continued to prosecute the claim and provided security for costs;

(4) in the Conduct of Litigation Action, sought an extension of time for validity of the Writ and served the proceedings. A request for security for costs by one of the defendants is currently being considered.

If Seeley had not provided that financial support, Mr Stewart informed the court that none of those steps would have been completed.

22 In 2002, Mr Stewart sought advice about whether the Indemnity Agreement fell under s 477(2B) of the Act. On 27 May 2002, his solictor advised him that it did not. Subsequently, in July 2007, Mr Stewart raised again whether s 477(2B) of the Act applied to each of the Agreements. Coincidently, his legal adviser independently turned her mind to the same issue, concluding that it did apply and an application for retrospective approval was therefore necessary.

23 Subsequently, Mr Stewart instructed his legal adviser to make immediate application to the Court seeking approval, retrospectively, pursuant to s 477(2B) of the Act in respect of each of the Agreements. It is that application which is now before the Court.

SECTION 477(2B) OF THE ACT

24 Section 477 of the Act sets out the powers of a liquidator. Section 477(2B) is commonly described as the “long-term agreements” provision. It imposes constraints upon a liquidator by providing that:

“Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or a charge) if:

(a) without limiting paragraph (b), the term of the agreement may end; or

(b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.”

25 As the express words of s 477(2B) make clear and consistent with the policy underlying the section, a liquidator should seek the Court’s approval before entering into a long term agreement: Empire (Aust) Nominees Pty Ltd v Vince (2000) 18 ACLC 738 at 741, [9]. In certain circumstances, retrospective approval may be given by the court: Re HIH Insurance Group Ltd (2001) 19 ACLC 1,102 and Empire (Aust) Nominees at 741, [10] and the authorities cited.

26 There are a number of principles relevant to the exercise of the Court’s power under s 477(2B) which are worth restating:

(1) the court does not simply “rubber stamp” whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims:

“[T]he Court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.”

(2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647;

(3) the role of the Court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642;

(4) in reviewing the liquidator’s proposal, the task of the Court is:

“[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in….a hearing de novo [but]… simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the "expeditious and beneficial administration" of the winding up.”

See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 at [60]. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter;

(5) further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a “grossly excessive profit”: Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 at [28];

(6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein.

27 In the present case, Mr Stewart wishes to keep confidential the terms of the Agreements. For that reason, I do not intend to outline the details of each of them. It is sufficient to refer to Mr Stewart’s own description of the arrangements:

“In funding the litigation, Seeley is not seeking to obtain a proportion of any monies recovered. Rather, it has simply been agreed that I will approach the Court pursuant to section 564 of the …. Act to seek orders that the Court afford Seeley priority. Accordingly, the effect of the indemnity arrangements on the other creditors of the company is neutral at worst, even with the priority contemplated for Seeley. In entering the funding arrangements with Seeley, I also noted that in the event that Newtronics did have good claims against any party and a recovery or recoveries took place, it would have the effect of ensuring that a judgment of this Honourable Court would be satisfied either in whole or in part.

In the circumstances, both at the time of entering into the various indemnity arrangements with Seeley and now, I was and am of the view that the arrangement entered into with Seeley was the best available source of funding. Moreover, I was of the view that the arrangement with Seeley, which enabled the various actions to be brought, had commercial merit in the context of a beneficial and expeditious winding up of the affairs of Newtronics.”

28 There is no basis for concluding that any of the Agreements confer any benefit on Seeley disproportionate to the advantages given to Mr Stewart for the better prosecution of the liquidation to the advantage of all creditors and others interested in that liquidation. Having reviewed the terms of each of the Agreements in light of the principles referred to at [26] above and the affidavit material summarising the merits of the various pieces of litigation being funded by the Agreements, I consider that it is appropriate that the liquidator be granted approval, retrospectively, to enter into each of them.

29 Section 1322(4)(a) of the Act empowers the Court to make an order declaring that any act, matter or thing purporting to have been done under the Act or in relation to a corporation is not invalid by reason of any contravention of a provision of the Act. Moreover, s 1322(4)(d) of the Act empowers the Court to order an extension of the period for doing any act, matter or thing under the Act, including an order extending a period where the period concerned ended before the application for the order was made. In those circumstances, the Court may make such consequential or ancillary orders as its thinks fit.

30 For those reasons, this is an appropriate matter for the Court to exercise its powers under ss 1322(4)(a) and (d) and 477(2B) of the Act. Declarations and Orders will be made as follows: