FEDERAL COURT OF AUSTRALIA

Robinson, in the matter of ACN 069 895 585 Pty Ltd (formerly known as Waterman Collections Pty Ltd) (in liq) [2013] FCA 706

IN THE MATTER OF ACN 069 895 585 PTY LTD (FORMERLY KNOWN AS WATERMAN COLLECTIONS PTY LTD) (IN LIQUIDATION)

THE COURT ORDERS THAT:

1.    Pursuant to s 564 of the Corporations Act 2001 (Cth) (the Act), the property of the First Defendant be distributed in the following order of priority:

1.1    $240,542 to the Second Defendant;

1.2    in payment of claims under s 556(1) of the Act which remained unsatisfied;

1.3    $600,000 to the Second Defendant;

1.4    the balance, if any, to other unsecured creditors pari passu.

2.    A copy of these orders be served forthwith on the known creditors of the First Defendant.

3.    These orders not be entered before 9 August 2013.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).

IN THE MATTER OF ACN 069 895 585 PTY LTD (FORMERLY KNOWN AS WATERMAN COLLECTIONS PTY LTD) (IN LIQUIDATION)

REASONS FOR JUDGMENT

Introduction

1    The Plaintiff, Mark Robinson of PPB Advisory (the Liquidator), is the liquidator of the First Defendant, ACN 069 895 585 Pty Ltd (formerly Waterman Collections Pty Ltd) (Waterman). The Liquidator applies for an order under s 564 of the Corporations Act 2001 (Cth) (the Act) in favour of the Second Defendant, Insurance Australia Ltd (IAL).

Material Facts

2    IAL is the largest creditor of Waterman and provided funding to the Liquidator. Waterman operated a debt collection agency and was associated with the law firm Mills Oakley Lawyers Pty Ltd (Mills Oakley Lawyers). By a resolution of creditors in 2006, Waterman was wound up and Glenn Anthony Crisp was appointed as liquidator. IAL was dissatisfied with Mr Crisp and brought an application for his removal. On 7 October 2009, orders were made by consent pursuant to s 502 of the Act removing Mr Crisp as the liquidator of Waterman and appointing the Liquidator.

3    By that time, IAL had carried out examinations into the affairs of Waterman, and based on those examinations, IAL had discovered certain matters that related to the commerciality of certain transactions. The Liquidator had insufficient funds to commence recovery proceedings for uncommercial transactions under ss 588FB and 588FF of the Act. Waterman had less than $1,000 in its bank account.

First funding agreement

4    On 12 November 2009, the Liquidator provided to creditors a report and a notice of proposed meeting. The notice gave details of IAL’s proposed funding agreement for the recovery proceedings and gave an opportunity to all creditors to fund the proceedings. No other funding proposals were received. The creditors’ meeting was ultimately held on 7 December 2009. A resolution was passed approving the entry into a funding agreement with IAL. On that day, the Liquidator and IAL entered into a funding agreement to fund an application under s 588FF(3)(b) of the Act to extend the time to commence recovery proceedings for uncommercial transactions beyond the usual 3-year limit. On 24 February 2010, the Court made an order extending the time to commence proceedings until 30 November 2010. It was not necessary to commence the uncommercial transaction recovery proceedings as settlements were reached with the relevant parties following a mediation on 23 August 2010. The settlements reached were:

1.    Mills Oakley Lawyers agreed to pay $192,430 under the Mills Oakley Deed;

2.    Waterman Receivables Management Pty Ltd, James Tambakis and Grantley Shayne Milsom agreed to pay $100,000 under the First Receivables Deed; and

3.    Waterman Receivables Management, James Tambakis and Grantley Shayne Milsom agreed to pay $25,000 under the Second Receivables Deed.

The total of those settlements was $317,430.

Mr Crisp’s proceeding

5    On 30 July 2010, Mr Crisp commenced a proceeding in the Court for the determination of his remuneration and disbursements. He claimed $241,025 plus GST ($142,232 in fees and $98,793 in disbursements) (Mr Crisp’s proceeding).

Second Funding Agreement

6    By mid 2010, the Liquidator needed further funding in relation to, relevantly:

1.    the mediation with Mills Oakley Lawyers and others;

2.    Mr Crisp’s proceeding;

3.    pursuing a recovery action against Siew Leong, a former employee of Waterman who misappropriated approximately $1 million from Waterman’s trust account.

IAL agreed to provide that funding.

7    On 21 February 2011, the Liquidator provided creditors with a further report and notice of proposed meeting which gave details of IAL’s proposed second funding agreement. The meeting was held on 8 March 2011. A resolution was passed approving entry into the second funding agreement. On that day, the Liquidator and IAL entered into a second funding agreement, effective retrospectively from 30 July 2010, to fund the legal costs and the costs of the Liquidator, associated with various proceedings and claims, including Mr Crisp’s proceeding and claims against Mills Oakley Lawyers, Watermans Receivables Management, Peter Neville White, Roger Alexander Jepson, Mr Milsom, Mr Tambakis and Ms Leong.

8    In 2013, further settlements were reached with:

1.    Ms Leong, agreed to pay $258,000 by instalments;

2.    Mr Crisp, in relation to his claim for remuneration and disbursements, which was fixed in the sum of $100,000.

Funding and property received

9    The total funding received from IAL under the first and second funding agreements was $240,542. The funding provided by IAL assisted Waterman and the Liquidator in increasing Waterman’s assets by $716,455 which comprised:

1.    $192,430, received from Mills Oakley Lawyers, Mr White and Mr Jepson;

2.    $125,000 received from Waterman Receivables Management, Mr Tambakis and Mr Milsom;

3.    $258,000 received from Ms Leong;

4.    $141,025, being the difference between the amount paid to Mr Crisp and the amount he claimed on account of remuneration and disbursements.

10    Before turning to the relevant legislation and authorities, it is necessary to address one of the identified aims of the second funding agreement. It related to an insurance proceeding in the Supreme Court of Victoria. Virtually none of the funding received from IAL related to that proceeding. The evidence disclosed that a generally endorsed writ was issued on 23 September 2010 to avoid the expiration of a limitation period but that the proceeding had not progressed and been effectively abandoned. The Liquidator submitted (and I accept) that as the amount spent on that proceeding was negligible, that proceeding should not otherwise detract from IAL’s claim for reimbursement.

11    Against that background, I turn to consider the legislation and the relevant authorities.

Legislation and Authorities

12    Section 564 of the Act provides:

Where in any winding up:

(a)    property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

(b)    expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

13    Section 564 provides an incentive to creditors to indemnify a liquidator to undertake litigation, public examinations and other steps towards the recovery of property. The aim is to advance the public interest in encouraging creditors to assist the liquidator in pursuing valid and proper claims in a winding up.

14    Section 564 is “cast in terms giving the court a complete discretion regarding positioning of the whole or any part of the debts of the assisting or indemnifying creditors on the scale of priorities in the winding up”: Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd (2006) 224 ALR 490 at [9]. The section creates an exception to the prima facie equality of treatment of all unsecured creditors: Lombe, Re Babcock & Brown Limited (in liq) [2012] FCA 107 at [39]. The discretion under s 564 has been described as a very broad and general one and it is to be exercised having regard to the desirability of having creditors indemnify liquidators: Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296-7; State Bank of New South Wales v Brown (as liq of Parkston Ltd (in liq)) (2001) 38 ACSR 715 and TJF EBC at [12]. Section 564 orders have been made in relation to litigation funding arrangements: see, by way of example, Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 22 ACLC 550.

Analysis

15    The question which then arises is whether or not the proposed reimbursement to IAL should be deemed just. For the reasons that follow, the answer to that question is “yes”.

16    First, all creditors were given the opportunity of funding, but only IAL agreed to provide funding.

17    Second, in providing that funding IAL took a risk (as reasonably perceived at the time of funding) that the claims would not yield any results and the funding sums would be lost. The claims were complex and involved uncommercial transactions, misappropriation of property, and defending a claim by a former liquidator for remuneration and disbursements. The outcome of each claim was uncertain.

18    Third, as is well established, actual outcomes are relevant to assessing what risk would reasonably have been perceived when payments were actually made, and this may entail comparisons between the amounts spent and the amounts actually recovered: Lombe, Re Babcock & Brown at [48]. Here, the amounts actually recovered are higher than the amounts actually contributed. The total value of the property recovered or protected is $716,455 compared with the amount of funding of $240,542; the amount recovered is reasonable having regard to the expenditure incurred.

19    The Liquidator submitted (and I accept) that each sum in [9] above comprises “property” recovered by the Liquidator on the basis that:

1.    each sum in sub-paragraphs 1, 2 and 3 was received under a settlement deed (the settlement amounts) and proceeds of settlement (like proceeds of litigation) are “property” for the purpose of s 564 of the Act: Lombe, Re Babcock & Brown at [40];

2.    the sum identified in sub-paragraph 4 ($141,025) is property which Mr Crisp sought to have paid to him but which Waterman succeeded in avoiding in paying;

3.    each sum was property that had been “protected or preserved by the payment of money or the giving of indemnity by creditors”, namely the funding by IAL under the two funding agreements.

That is, in each case the protection or preservation was achieved by the payment of money or the giving of indemnity under the funding agreements. It was the funding agreements that enabled the Liquidators to make the claims which resulted in the payments comprising the settlement amounts, and to resist, in part, Mr Crisp’s proceeding which resulted in the saving of $141,025. In the absence of the funding from IAL, the Liquidator was unable to make the claims. The property would not have been recovered, protected or preserved if the Liquidator had not been funded by IAL: Lombe, Re Babcock & Brown at [42].

20    Fourth, although the second funding deed was executed after March 2011, there was an in principle agreement to provide further funding from about July 2010, before the mediation referred to in [6] above commenced.

21    Fifth, IAL, as the contributing creditor, provided great assistance to the Liquidator. Apart from providing the funding, IAL was the trigger for the replacement of Mr Crisp who had taken no steps towards recovering the property of Waterman. In fact, it was IAL that had undertaken examinations which led to the claims against Mills Oakley Lawyers: see [3] above.

22    Sixth, IAL is owed $600,000, which is about 89% of the total creditor pool. Unsurprisingly, IAL consents to the application.

23    Seventh, IAL has been “out of its money” for many years. Waterman went into administration in 2006, and the defalcations of Waterman’s property, which included amounts held by Waterman on trust for IAL, occurred as long ago as 2001 to 2004.

24    Eighth, but for the assistance given, it is likely there would have been no assets for distribution to creditors, because the Liquidator had no funds to pursue the claims.

25    Ninth, there is a public interest in encouraging creditors to provide indemnities and funding so as to enable a liquidator to pursue remedies that would result in recovery of the property of a company.

26    Tenth, there is no adverse response to the proposed distribution from any of the unsecured creditors. The other known creditors of Waterman are the Australian Taxation Office ($66,843) and Cridlands Lawyers Pty Ltd ($7,627). These creditors were not served with the application but have been on notice for some time through reports from the Liquidator on 19 November 2009, 21 February 2011, 30 April 2012, and 26 February 2013, that a s 564 application in favour of IAL would be made and the implications of it.

27    The most recent report to creditors stated:

IAL have provided $240,254 of funding throughout the course of the liquidation. IAL would receive this money back as a cost of the liquidation before any amount would be available to other creditors. In the worst case scenario there are no funds available to repay the funding provided.

With respect to any surplus, subject to a s 564 application to the Court IAL may be awarded priority over other unsecured creditors for their pre-appointment unsecured debt.

28    No creditor has voiced concern or opposition to that approach being adopted. I accept that a lack of adverse response from any creditor is a relevant factor in favour of making the orders sought. However, in order to provide them with a final opportunity to object, I will direct that a copy of the Orders be served on the other creditors and direct that the orders not be entered for 21 days. If in that period, a creditor wishes to object to the course proposed in these reasons for decision, that creditor can make the necessary application within the period specified.

29    Finally, it is necessary to address the form of the orders sought. Those orders are that pursuant to s 564 of the Act, the property of Waterman be distributed in the following order of priority:

(1)    $240,542 to IAL (the sum it contributed under the funding agreements);

(2)    in payment of claims under s 556(1) of the Act which remained unsatisfied (the Liquidator’s claim for remuneration and expenses);

(3)    $600,000 to IAL (the sum admitted to proof);

(4)    the balance, if any, to other unsecured creditors pari passu.

30    Paragraph (3) of those orders would effectively give IAL 100% of the ‘net’ recovery. What are described as “100% orders” have been made by Courts: see, by way of example, Re Glenisia Investments Pty Ltd (in liq) (1995) 19 ACSR 84; Carson, Re Trollope Property Holdings Pty Ltd (in liq) [2009] FCA 118; Re Shepherds Producers Co-Operative Ltd (in liq) [2012] NSWSC 390. However, as observed in Re Trollope (at [15]) cases in which an assisting creditor is awarded 100% of the net recovery are “rare”. What then are the factors or matters justifying paragraph (3) of the Orders?

31    Having regard to the matters identified in Kugel, Re Charben Haulage Pty Ltd (in liq) [2011] FCA 834 at [25], the following factors support the appropriateness in the present case of a “100% order”:

1.    the sum recovered or protected is $716,455;

2.    other creditors failed to provide an indemnity;

3.    IAL, the funding creditor, is owed $600,000 comprising 89% of the total debts;

4.    there is a public interest in encouraging creditors to provide funding and indemnities so as to enable assets to be recovered; and

5.    IAL took a very active role in the liquidation beyond the funding of the Liquidator.

32    For those reasons, subject to the matters identified in [28] above, orders will be made in the terms sought by the Liquidator.

Associate:

Dated:    19 July 2013