FEDERAL COURT OF AUSTRALIA

Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to ss 37AF(1) of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary to prevent prejudice to the proper administration of justice, the following documents are to be marked “confidential” on the electronic Court file and are not to be published or accessed, except pursuant to an order of the Court, until such time as any litigation (including any appeal) arising out of the winding up and affairs of Community Work Pty Ltd (in liquidation) (“Community Work”) is concluded:

(a)    confidential exhibit 2 to the affidavit of the plaintiff sworn on 14 March 2018 and marked “confidential”; and

(b)    paragraphs 32 to 34 of the affidavit of the plaintiff sworn on 14 March 2018 not marked “confidential”.

2.    Any person demonstrating sufficient interest in order 1 above has liberty to apply on 3 days’ notice.

3.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), approval be granted nunc pro tunc for the plaintiff (in his capacity as liquidator of Community Work) to enter into and cause Community Work to enter into the funding and indemnity agreement dated 13 December 2017 that is confidential exhibit 1 to the affidavit of the plaintiff sworn 25 January 2018 (“funding agreement”).

4.    Pursuant to s 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001 (Cth), the plaintiff is justified in entering into the funding agreement and causing Community Work to enter into it, and in performing the obligations under it.

5.    The costs of the application be costs and expenses in the winding up of Community Work.

6.    The proceeding be stood over to 12 April 2018 at 9:30 am for submissions that any part of the reasons for judgment should be the subject of order 1 above.

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

REASONS FOR JUDGMENT

GLEESON J:

1    This is an application by the plaintiff (“Mr Krejci” or “liquidator”) as liquidator of Community Work Pty Ltd (in liquidation) (“company”) for the Court’s approval of his entry into an agreement on behalf of the company pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (“Act”), and an order that the liquidator is (or was) justified in entering into the agreement.

2    The agreement is a litigation funding agreement (“funding agreement”) to enable the liquidator to conduct public examinations of persons regarding the company’s examinable affairs. The agreement was made on 13 December 2017, but provides that the liquidator “will seek either creditor (including Committee of Inspection) or Court approval” for the funding agreement. The funder under the agreement is the State of New South Wales, represented by and acting through the Department of Family and Community Services (“FACS”).

Background facts

3    The company provided out of home care services to “at risk” youths. It is registered as a charity with the Australian Charities and Not-for-Profits Commission.

4    On 1 July 2008, the company entered into a service agreement with Alpha Support Services Pty Ltd (“Alpha”), a related entity of the company (“service agreement”).

5    On 27 February 2012, the company entered into a funding agreement with FACS (“FACS agreement”).

6    According to Mr Krejci:

(a)    pursuant to the FACS agreement, the company was funded to ensure the placement of up to 27 young people in leased residences, located across greater Sydney;

(b)    pursuant to the service agreement, the company paid management fees to Alpha in return for which Alpha was to meet all costs and deliver all services required under the FACS agreement other than payroll obligations; and

(c)    the company’s books and records show that Alpha received management fees of approximately $19,627,861 between 2012 and 2017.

7    On 1 July 2013, the company entered into a service agreement with Sunergos Support Services Pty Ltd (“Sunergos”), another related entity of the company.

8    In 2014, disputes arose between FACS and the company. The company alleged that FACS refused it access to FACS’ referral system by which youths are placed into care, effectively restricting the company’s revenue streams. This dispute ultimately resulted in a discrimination claim brought by the company against FACS in the New South Wales Civil and Administrative Tribunal (“NCAT”).

9    FACS engaged the professional services firm Deloitte Touche Tohmatsu (“Deloitte”) to prepare an investigative audit report to determine compliance with the FACS agreement. In September 2016, Deloitte issued a report which, amongst other things, reported breaches of the FACS agreement by the company including:

(1)    breach of financial reporting obligations;

(2)    payment of monies to unauthorised subcontractors, being Alpha and Sunergos; and

(3)    breach of an obligation relating to conflicts of interests.

10    The company’s directors dispute the findings of Deloitte’s report and say that the company did not breach the FACS agreement.

11    In early 2017, the company and FACS attempted unsuccessfully to mediate their disputes in the NCAT proceeding, and other claims which the company asserted against FACS including claims for the cost of repairs due to property damage at foster homes and reimbursement of payroll costs.

12    Also in early 2017, FACS opened its service contract to a public tender process. The company submitted an application as part of the tender process but, in March 2017, was notified by FACS that it had been unsuccessful in its application. FACS subsequently offered a short-term extension of the FACS agreement which was due to expire on 30 June 2017. The extension was not accepted by the directors, leaving the company with no long term contract or source of income.

13    Consequently, Mr Krejci was appointed voluntary administrator of the company on 23 June 2017.

14    As administrator, Mr Krejci prepared a second report to creditors under s 439A of the Act, dated 20 July 2017. In that report, Mr Krejci:

(1)    expressed the view that unsecured creditors may be owed up to $21.7 million of which $19.6 million comprised a claim from FACS, the validity of which was yet to be determined;

(2)    noted that FACS had advised that they were willing to fund an investigation and possible recovery proceedings in a liquidation scenario, although not what amount FACS would fund;

(3)    referred to the possibility of a creditor or creditors contributing funding to a liquidator for additional investigations and litigation; and

(4)    noted that debtor claims against FACS or breach of duty or other claims against the directors and/or related parties would require funding and repeated that FACS had indicated a willingness to provide such funding.

15    Between 21 and 27 July 2017, Mr Krejci received 33 proofs of debt from creditors and eligible employee creditors, including a proof of debt from FACS in the amount of $19,627,861. Mr Krejci was required to adjudicate each proof of debt before the second meeting of creditors, held on 28 July 2017.

16    As the claim made by FACS was a contingent claim, Mr Krecji made a “just estimate” of the value of the claim for the purposes of voting at the second meeting of creditors, without considering whether the claim was valid. Mr Krejci admitted the FACS claim for voting purposes at the second meeting of creditors in the full amount of $19,627,861.

17    On 28 July 2017, Mr Krejci was appointed as liquidator of the company at the second meeting of creditors. Also at that meeting, creditors resolved to form a committee of inspection comprising FACS, the Australian Taxation Office (“ATO”), Mr Sebastian Bull and Ms Louise Lavergne. As Mr Bull and Ms Lavergne are no longer creditors of the company, the committee currently comprises only FACS and the ATO.

Debtors and creditors

18    On 7 July 2017, the directors of the company provided an amended report as to affairs (“RATA”) to Mr Krejci. The RATA identifies total debts owed to the company in an amount of $3,191,209. The alleged debtors are FACS and Alpha.

19    On 10 and 12 July 2017, Mr Krejci issued letters of demand to FACS seeking payment of $221,188 in respect of “exception services”, being additional services delivered by the company at FACS’ request, and $2,106,888.76 in respect of other debts identified in his 25 January 2018 affidavit.

20    The RATA also lists unsecured creditors totalling $1,835,408 (admitted as owing). Of these, Mr Krejci estimates total unsecured creditors at $1,773,708, including $1,559,049 comprising debts to related party creditors.

21    Mr Krejci has identified potential debts owed by the company totalling $21,790,462 comprising:

(1)    Related party creditors    $1,647,359

(2)    Trade creditors    $261,804

(3)    Tax debts     $223,799

(4)    Landlords    $45,000

(5)    FACS    $19,600,000

(6)    Other     $12,500

22    Based on shared directorships, Mr Krejci has identified the following creditors as related party creditors:

(1)    Alpha;

(2)    Burwood Properties Pty Ltd;

(3)    Cynergy Support Services Pty Ltd;

(4)    Guardian Care Properties Pty Ltd;

(5)    Guardian Youth Care Ltd;

(6)    Guardian Foundation; and

(7)    CBC Partners Pty Ltd (“CBC Partners”).

23    Mr Krejci has considered CBC Partners as a related party creditor due to cross directorships over time of Kevin Casey and Paul Clarke. The debts owed to CBC Partners appear to relate to accounting services.

24    Otherwise, the amounts owed to related party creditors related to loans purportedly provided to the company.

Books and records

25    Mr Krejci’s evidence is that, while the directors have provided him with some of the books and records of the company, those books and records do not include necessary information to enable him to consider the FACS claim, other than for voting purposes, nor to investigate the company generally.

26    Mr Krejci believes that he has not received all of the books and records of the company and, as at 25 January 2018, he was continuing to attempt to recover those books and records.

Attempts to source documents from Alpha

27    Mr Krejci gave the following evidence:

36.    On 28 June 2017, Roy Bijkerk on behalf of Alpha, offered to provide me with access to inspect the financial records of Alpha as a means of accounting for the “management fees” paid by the Company to Alpha pursuant to the Alpha Service Agreement.

37.    Throughout the course of the voluntary administration, I have requested on numerous occasions that Alpha provide documents in support of the “management fees” it invoiced the Company for services it provided pursuant to the Alpha Service Agreement.

38.    I have requested this information because:

(a)    the invoices provided by Alpha to the Company merely refer to “management fees” or “services provided as required in accordance with the Service Agreement”. It is impossible from these descriptions to determine what services Alpha provided to the Company under the Alpha Service Agreement.

(b)    FACS has asserted that the Company paid approximately $19,389,225 to Alpha and this information is necessary to consider and respond to the FACS Claim; and

(c)    I considered it would assist in responding to the FACS Claim, and also in considering whether there are any voidable or breach of director duty claims available to the Company.

39.    Despite my numerous requests and Alpha previously indicating that such information would be forthcoming, Alpha has now asserted it is not obliged to provide an acquittal of funds disbursed to the Company under the Alpha Service Agreement.

40.    As at the date of swearing this affidavit, Alpha has not provided me with sufficient information and/or documents in support of its invoices for “management fees” to enable me to determine whether the amounts claimed have been properly incurred or the services provided by Alpha to the Company pursuant to the Alpha Services Agreement.

Proposed public examinations and funding

28    Mr Krejci believes that it is prudent to conduct public examinations in order to investigate properly:

(a)    the debts said to be owed by Alpha and FACS to the company;

(b)    the debt allegedly owed by the company to FACS as a result of the company paying money it received from FACS to Alpha and Sunergos for services allegedly provided by those companies in breach of the FACS agreement;

(c)    whether the directors of the company have breached their fiduciary and statutory obligations to the company; and

(d)    whether there are other claims available under Pt 5.7B of the Act, or otherwise, against the company’s related entities.

29    Mr Krejci also wishes to investigate loans purportedly provided by related party creditors to the company. Mr Krejci stated relevantly:

Given that Alpha was required to meet all operating costs of the Company, other than payroll, and that Alpha has been paid in excess of $19M in management fees since 2012 it is unclear to me why the Company needed the loans in the first place and I intend to investigate this further during the course of the proposed public examinations.

30    On 27 October 2017, Mr Krejci issued a report to creditors in which he notified them, among other things:

(1)    of his intention to hold public examinations and that he had entered into confidential discussions with representatives of FACS about providing funding for those examinations;

(2)    that he had reached an in principle agreement with FACS for it to provide funding and the terms of the funding arrangements were being finalised and documented;

(3)    the funding was intended to meet the agreed estimated costs of aspects of the public examination process set out in the report to creditors;

(4)    FACS had indicated that it did not seek any “premium” on recovery of the funds it would advance under the proposed funding agreement;

(5)    the basic funding terms foreshadowed by FACS appeared to reflect an improved prospect of a return to creditors and, in this regard, was in the interests of the creditors as a whole;

(6)    FACS had been granted “eligible applicant” status by ASIC, entitling FACS to participate in the public examinations in its own right. Mr Krejci noted that FACS’ participation as an eligible applicant was independent of his role and/or control as liquidator of the company; and

(7)    in the event that the funding agreement was entered into, Mr Krejci was required to seek either Court or creditor approval of the agreement and Mr Krejci intended to seek that approval in the coming weeks.

31    Mr Krejci’s evidence was that, since the October 2017 report to creditors was issued, he has not received any communication from creditors:

(a)    questioning the terms of any funding agreement being negotiated with FACS;

(b)    to offer alternative funding to FACS to conduct investigations into the company or to conduct public examinations; or

(c)    raising any issues regarding entry into the funding agreement with FACS, or the receipt of funding from FACS.

32    Mr Krejci has been informed that FACS will seek leave of the Court to participate in the proposed public examinations and he has received draft documents, on a confidential basis, relevant to the proposed application for leave.

33    By a report to the committee of inspection dated 28 February 2018, Mr Krejci informed the committee that the funding agreement had been negotiated and settled and that the liquidator expected that FACS would participate in the public examination process as an eligible applicant, subject to the leave of the Court.

34    The ATO has not raised any issue with Mr Krejci concerning his entry into the funding agreement.

Mr Krejci’s evidence concerning funding agreement

35    Mr Krejci’s belief is that it would be in the best interests of the company and its creditors that FACS provide funding to the company to conduct the proposed public examinations, in accordance with the funding agreement, because:

(1)    Mr Krejci is without sufficient funds to conduct extensive investigations or conduct the proposed public examinations;

(2)    no other creditor has offered to provide funding; in particular, the ATO, which is the other member of the committee of inspection, has not indicated a willingness to provide funding to Mr Krejci;

(3)    the pursuance of any claim against the directors of the company or its related entities is dependent on the liquidator being able to conduct public examinations due to the lack of cooperation of the related entities and the lack of books and records of the company;

(4)    unless the liquidator is able to investigate potential claims against the directors of the company or the related entities and advisors, the prospects of successfully pursuing claims against those individuals or entities and recovering monies for the benefit of creditors are greatly diminished; and

(5)    the funding agreement does not seek an uplift/premium and therefore is an economical source of essential funding for this purpose.

36    Mr Krejci also identified, and addressed, the following concerns in respect of the agreement:

(1)    The possible perception of a conflict in circumstances where FACS is a potential creditor whose debt has not been formally adjudicated but may also be a debtor of the company. Mr Krejci states that he is satisfied that the terms of the funding agreement sufficiently protect his independence such that there is no actual conflict.

(2)    Due to their concern over the conduct of the directors of the company, FACS sought more involvement in the public examinations than would ordinarily be the case in a commercial funding agreement, and the negotiated agreement reflects that position by providing for significant active involvement by FACS in the public examinations, including as an eligible applicant, and active cooperation by the liquidator. Mr Krejci stated that, in his experience, it is not uncommon for funders to require consultation and active cooperation and he is comfortable that his independence is preserved.

(3)    The funding agreement gives substantial rights of termination to the funder. Mr Krejci noted that, in his experience, it is not uncommon for funding agreements to give substantial rights of termination to the funder.

(4)    The funding agreement seems to provide that any costs incurred in examining FACS’ claim as a creditor of the company are discretionary. Mr Krejci’s view is that this is unlikely to have a practical effect because the circumstances of FACS’ claim as a creditor of the company appear to be intertwined with the other examinable affairs of the company.

37    Mr Krejci’s ultimate opinion is therefore that:

[E]ntering into the funding agreement is in the best interests of creditors. I am satisfied that it is the only mechanism available to me by which potential recoveries from the directors of the Company and the related entities can be investigated and possibly, pursued. In circumstances where I am otherwise without funds to conduct investigations or the proposed examinations, I do not have the full books and records of the Company available to me and no other creditor has offered to provide me with funding, I am comfortable that it is appropriate to enter into the funding agreement. The fact that a not for profit company has potentially used funds provided by FACS to subcontract with its related entities in potential breach of the FACS Agreement adds a public interest element that requires investigation.

38    Mr Krejci added:

The circumstances of this liquidation are unusual and I am conscious of the public scrutiny surrounding the liquidation of this company, as well as the involvement of the State Government through its representative FACS. For this reason, in addition to the order pursuant [to] section 477(2B) of the Corporations Act 2001, I seek a justification order pursuant to section 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act 2001. In my view, in the circumstances outlined above entering into the funding agreement is not purely a commercial decision and I seek to be protected from criticism as to the reasonableness or propriety to cause the Company to enter into the funding agreement.

Legal framework

Section 477(2B)

39    Section 477(2B) of the Act provides:

(2B)    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 … an agreement under which a security interest arises or is created) 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.

40    In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 at [33] to [37], I set out the following relevant principles:

[33]    In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 (“Fortress”) at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors: McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]; Pascoe; re Brentwood Village Ltd (in liq) [2014] FCA 1295, [44].

[34]    The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 (“Cassegrain”) at [11] per Black J citing Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 266 ALR 642.

[35]    In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 (“Pascoe”) at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]:

Although the court has the statutory task [under s 477(2B)] of giving “approval” to a liquidator’s agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete “merits review”. As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6:

... the 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 of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.

[36]    The Court’s task is to satisfy itself, having regard to the liquidator’s commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, re Newtronics Pty Ltd [2007] FCA 1375.

[37]    In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors (identified by Austin J in Leigh re AP& PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25] and Re ACN 076 673 875 Ltd (rec’r & mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]-[34]) relevant to the Court’s assessment of a proposed litigation funding agreement:

(1)    the prospects of success of the proposed litigation;

(2)    the interests of creditors other than the proposed defendant;

(3)    possible oppression;

(4)    the nature and complexity of the cause of action;

(5)    the extent to which the liquidator has canvassed other funding options;

(6)    the level of the funder’s premium;

(7)    consultations with creditors; and

(8)    the risks involved in the claim.

…

41    The court does not simply “rubber stamp” whatever is put forward by a liquidator: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26] (“Newtronics”).

42    The public interest may be a relevant consideration in deciding whether to grant approval of a litigation funding agreement: Buiscex Ltd v Panfida Food Ltd (1998) 28 ACSR 357 at 364; Hall v Poolman [2009] NSWCA 64; (2009) 254 ALR 333; (2009) 71 ACSR 139 at [125] and [126].

Retrospective approval of funding agreement

43    The Court may give retrospective approval (approval nunc pro tunc) to an agreement under s 477(2B) in appropriate circumstances: see e.g., Hamilton as liquidator of ACN 101 634 146 Pty Ltd (in liq) [2014] FCA 687; Newtronics at [25]; Re HIH Insurance Group Ltd [2001] NSWSC 308; (2001) 19 ACLC 1102; Empire (Aust) Nominees Pty Ltd v Vince [2000] VSC 324; (2000) 35 ACSR 167 (“Empire”).

44    Courts expect that a liquidator will be aware of their legal obligations and powers, particularly those contained in s 477: Empire at [9]. The policy underlying the requirements of s 477(2B) is to afford some protection to the company’s creditors against ill-advised or improper actions on the part of a liquidator: Empire at [12].

Section 90-15 of Insolvency Practice Schedule (Corporations)

45    Section 90-20(1) of the Insolvency Practice Schedule (Corporations) (“Insolvency Practice Schedule”), being Sch 2 to the Act, permits a range of interested persons to apply to the Court for orders under s 90-15(1) of the Insolvency Practice Schedule. By s 90-15(1), the Court may make such orders as it thinks fit in relation to the external administration of a company. Such orders may include an order determining any question arising in the external administration: s 90-15(3)(a).

46    The principles applicable to the exercise of the Court’s power under s 90-15 of the Insolvency Practice Schedule are, in effect, the same as those that applied to the exercise of the Court’s power under ss 479(3) and 511 of the Act: Walley, in the matter of Poles & Underground Pty Ltd [2017] FCA 486 at [41]; Re Glengrant Civil Pty Ltd (in liq) [2017] NSWSC 843 at [11] and Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 (“Re Octaviar”) at [5].

47    The relevant principles were recently set out by Black J in Re Octaviar, where his Honour observed as follows:

[7]    I summarised the scope of the Court’s power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) (2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows:

Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator’s application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114; Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [46]. The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: Sanderson v Classic Car Insurances Pty Ltd above at 117; Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-7; 5 ACSR 673; 9 ACLC 1291; Re Ansett Australia Ltd above at [65]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 at (32].

[8]    I also referred to the scope of the Court’s powers under s 511 of the Corporations Act in that decision and observed (at (8)) that:

Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 ... Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be ‘just and beneficial’ to give the relevant direction. The court may give such a direction where it will be ‘of advantage in the liquidation’: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty: Handberg v MIG Property Services Pty Ltd at [7].

[9]    I also recognise that the Court’s powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator’s functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83; Re One. Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [32]; Re Octaviar Ltd (in liq) and Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1005.

48    A litigation funding proposal has some special elements that distinguish it from other commercial arrangements: Hall v Poolman at [134]. The decision to enter into a litigation funding agreement is not treated as a purely commercial decision because it affects the administration of justice and the efficient winding up of companies: Hall v Poolman at [171].

49    A court would not be likely to decline to give directions concerning a litigation funding agreement solely on the ground that it should not make the liquidator’s commercial decisions for them: Hall v Poolman at [173]. Rather, the question whether to give directions or decline to given them will depend upon the nature of the directions sought and the facts of the instance case, and in particular the extent to which the funding agreement and the contemplated recovery proceedings raise issues capable of affecting the administration of justice: Hall v Poolman at [173]. It may be appropriate to exercise the power to give directions (now the power to make orders) where a liquidator apprehends being accused of acting unreasonably: cf. Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117.

Consideration

Approval of funding agreement

50    The liquidator identified the following matters in favour of the Court approving the funding agreement:

(1)    the company has insufficient funds to conduct investigations without funding;

(2)    potential claims have been identified, including potential claims against the directors of the company and related entities arising from allegations made by FACS monies may have been misappropriated in breach of the FACS agreement;

(3)    the scope and purpose of the funding is clear, that is, for the specific purpose of enabling a view to be formed about the prospects of recovery from the potential claims;

(4)    Mr Krejci’s belief that he has not received all of the books and records of the Company and that books and records will be obtained through activities funded under the funding agreement;

(5)    there is no uplift or interest under the funding agreement; although the liquidator has not canvassed other funding options, no other creditor has offered to provide funding and, in Mr Krejci’s experience, commercial litigation funders will seek an uplift or premium on recoveries;

(6)    Mr Krejci’s independence is preserved under the funding agreement as he will have an active role in the conduct and control of the public examinations; although the funding agreement provides for consultation and cooperation with FACS, the liquidator retains the right to direct, control and conduct the Public Examinations consistent with his obligations as a liquidator; and

(7)    Mr Krejci’s belief that it would be in the best interests of the company, and its creditors, to obtain funding from FACS under the funding agreement.

51    I am satisfied that I should approve the liquidator’s entry into the funding agreement, having regard to the matters identified by him.

52    I see no evidence of any lack of good faith or error of law or principle on Mr Krejci’s part in entering into the agreement, or grounds for doubting his prudence in doing so (except to the extent that he entered into the agreement prior to seeking the Court’s approval). It is in the interests of creditors generally that the examinable affairs of the company be investigated with the aim of improving the liquidator’s prospects of recovering funds for the benefit of creditors. Further, there is a strong public interest in the investigation of possible breaches of directors’ fiduciary and statutory duties in connection with the use of State Government funds.

53    The absence of a funder’s premium means that the proposed funding agreement is on materially better terms than can be expected to have been available from a commercial funder. There is no reason to believe that Mr Krejci could have obtained funding on better terms. There is no reason to believe that any person will suffer relevant prejudice as a result of Mr Krejci’s entry into the funding agreement.

54    I am satisfied that there is no reason to conclude that Mr Krejci’s entry into the funding agreement was other than a proper exercise of his power, or that it was an ill-advised or improper act on the part of the liquidator (except with respect to the timing of his entry into it).

55    By s 477(2B), Mr Krejci was obliged not to enter into the funding agreement except with the approval of the Court. Mr Krejci has not explained why he did not first seek the Court’s approval. It appears from the terms of the funding agreement, as well as the 27 October 2017 report to creditors, that he was aware of the requirement for approval if not the requirement for approval prior to entry into the agreement. In the ordinary course, a liquidator should provide an explanation for entering into an agreement that requires approval under s 477(2B) without such approval. Mr Krejci sought approval within a reasonably short time after entering into the agreement. I infer that the failure to seek approval prior to entry into the funding agreement was inadvertent. In those circumstances, and in the absence of any indication of prejudice to third parties, I will approve the liquidator’s entry into the funding agreement nunc pro tunc.

Justification order

56    Mr Krejci submits that in circumstances where FACS is also a potential debtor to the company and the outcome of the proposed examinations is unknown, the matters detailed above justify an order pursuant to s 90-15(1).

57    Having regard to the concerns of the liquidator as identified above, I am persuaded that it is appropriate to make an order to the effect that the liquidator was justified in entering into the funding agreement (albeit not without seeking the Court’s approval in advance of that entry), and in causing the company to enter into the funding agreement, and is justified in performing his obligations under that agreement. Although those concerns have not prevented approval of the funding agreement, it is appropriate to confirm that I am satisfied (for the reasons that I approved the funding agreement) as to the reasonableness of the liquidator’s decision to enter into the agreement where that decision may be criticised by reference to the subject matter of those concerns.

Confidentiality

58    Section 37AF of the Federal Court of Australia Act 1976 (Cth) provides:

(1)    The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of:

(a)    information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or

(b)    information that relates to a proceeding before the Court and is:

(i)    information that comprises evidence or information about evidence; or

(ii)    information obtained by the process of discovery; or

(iii)    information produced under a subpoena; or

(iv)    information lodged with or filed in the Court.

(2)    The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).

59    By s 37AG(1)(a), the Court may make a suppression order or non-publication order on the ground that the order is necessary to prevent prejudice to the proper administration of justice. By s 37AG(2), a suppression order or non-publication order must specify the ground or grounds on which the order is made.

60    At the hearing of the liquidator’s application, I made the following confidentiality order:

(1)    Pursuant to ss 37AF(1)(b), 37AG(1)(a) and 37AJ of the Federal Court Act 1976 (Cth), the following documents are to be marked “confidential” on the electronic Court file and are not to be published or accessed, except pursuant to an order of the Court, until such time as any litigation (including any appeal) arising out of the winding up and affairs of Community Work Pty Ltd (in Liquidation) is concluded:

(i)    confidential exhibit 1 [being the funding agreement];

(ii)    the supporting outline of submissions dated 6 March 2018 to the extent that the document discloses confidential exhibit 1 not disclosed by the affidavit of Mr Krejci sworn on 25 March 2018;

(iii)    any transcript of the hearing of the application on 7 March 2018 to the extent that the transcript discloses the content of confidential exhibit 1 not disclosed by the affidavit of Mr Krejci sworn on 25 March 2018.

61    An application for approval of a funding agreement of this kind, which will permit the liquidator to decide whether or not to commence litigation, is not relevantly different from an agreement which provides for the funding of litigation. Similar protection of information concerning the funding arrangements the subject of this proceeding is warranted: cf. Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; (2010) 8 ACSR 163at [2] (“Onefone”).

62    The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of s 37AF orders in this case: see Onefone at [3].

63    In written submissions made after the hearing on 7 March 2018, the liquidator sought a confidentiality order covering:

(a)    the confidential affidavit of Mr Krejci sworn 14 March 2018 and confidential exhibit 2 thereto; and

(b)    paras 32 to 34 of the affidavit of Mr Krejci sworn on 14 March 2018.

64    In my respectful view, the approach taken by Black J in Re Octaviar Administration Pty Ltd (in liq) [2014] NSWSC 344 at [14]–[21] is a useful guide in cases of this kind. That is, in my view, it would not serve the interests of justice to require the liquidator to expend time and money in identifying particular material within his affidavits that should be redacted because it is confidential, recognising that this may be necessary in the event that an application is made by a person with sufficient interest for access to materials presently within the scope of the s 37AF order.

65    Thus, I accept that it is appropriate to make the confidentiality order sought in (a) above in respect of “confidential exhibit 2”, which is a copy of the report to the committee of inspection dated 28 February 2018 that includes a costs agreement between Mr Krejci’s firm (BRI Ferrier) and his lawyers (Colin Biggers & Paisley). In contrast, I am not satisfied that the body of the “confidential affidavit of Mr Krejci sworn 14 March 2018” contains any confidential information and therefore make no order with respect to that document.

66    As to (b), I am satisfied that it is appropriate to make the order where paras 32 to 34 refer to particular provisions of the funding agreement. I have referred to the evidence in para 32 to 34 at a high level of generality in [36] above. Disclosure of reasons for judgments is an essential aspect of the principle of open justice and my preliminary view is that the reasons are expressed in a way that does not prejudice the proper administration of justice. However, I propose to give the liquidator an opportunity to make submissions on whether any part of these reasons should be the subject of the s 37AF order. I will stand the proceeding over for a further hearing of any submissions on this point and publish either these reasons or a redacted version.

Associate:

Dated:    11 April 2018