FEDERAL COURT OF AUSTRALIA

GDK Projects Pty Ltd, in the matter of Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to Pt VAA of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, exhibit “2” in these proceedings be kept confidential and not be disclosed without leave of the Court.

2.    Pursuant to s 90-15 of Div 90 of Sch 2 to the Corporations Act 2001 (Cth), Amanda Young and Sule Arnautovic (special purpose liquidators) be appointed as additional liquidators to the first defendant (the Company) for the following purposes:

(a)    conducting investigations into any of the matters set out in the Schedule to these Orders, including by:

(i)    inspecting the books and records of the Company, excluding any files and working papers of the second defendants;

(ii)    conducting (further) public examinations pursuant to ss 596A or 596B of the Corporations Act or obtaining orders for production pursuant to s 597(9) of the Corporations Act or under the relevant provisions of the Uniform Civil Procedure Rules 2005 (NSW); and/or

(iii)    requiring statements to be provided pursuant to s 475(2) of the Corporations Act;

(b)    pursuing any claim, including commencing legal proceedings, that may be available to the Company or the special purpose liquidators in relation to any of the matters set out in the Schedule, including considering and obtaining legal advice in respect of pursuing any such claim;

(c)    taking any steps in relation to any matters set out in the Schedule, including by commencing legal proceedings, to preserve or to protect the assets of the Company, whether or not in the possession of the Company;

(d)    exercising any powers conferred on the liquidator of the Company by ss 477 and 506(1)(b) of the Corporations Act, including the power to seek relief under s 588FF, 1317E and 1317H of the Corporations Act, in relation to any matters set out in the Schedule, except for the powers contained in s 477(1)(a) of the Corporations Act; and

(e)    considering the offer dated 5 March 2018 from Candelori Nominees Pty Ltd (as offeror) to the Company and the second defendant (as offerees) to take an assignment of one or more of the causes of action set out in the Schedule, together with considering any other offers that may be received.

3.    Pursuant to s 90-15 of Div 90 of Sch 2 of the Corporations Act, the liquidator of the Company from time to time:

(a)    must refrain from exercising any of the powers of the special purpose liquidators in Order 2 above, except with the prior written consent of the special purpose liquidators (such consent not to be unreasonably withheld) or by leave of the Court;

(b)    must use his or her reasonable endeavours to assist the special purpose liquidators to exercise the powers given to them in Order 2 above, including by providing any documents or information previously prepared or obtained by him in investigating or pursuing any claim in relation to any of the matters set out in the Schedule.

4.    Pursuant to s 90-15 of Div 90 of Sch 2 of the Corporations Act, the special purpose liquidators shall, in accordance with the requirements of the Corporations Act, report to creditors of the Company and any liquidator of the Company then in office on the terms of their appointment and subsequently once every six months during the course of their appointment.

5.    The costs of proceedings of the plaintiff and the second defendant be costs in the liquidation of the Company.

SCHEDULE

1.    Any and all claims in respect of the advance of $1.575 million made by the Company on behalf of Rossano Candelori or Gina Candelori, or both, in November 2006.

2.    Any and all claims that the Company may have (or may have had) in connection with the transfer of the restaurant business known as Candelori’s Restaurant, in or around mid-2015, including, but not limited to, claims against the following individuals and or entities:

(i)    Rossano Candelori;

(ii)    Life Investment Pty Ltd (ACN 098 057 919) (Life Investment);

(iii)    Candelori Group Pty Ltd (ACN 159 211 444) (Candelori Group);

(iv)    Gina Candelori; and

(v)    Christian Candelori (Christian)

3.    Any and all claims that the Company may have (or may have had) in connection with a written licence agreement between the Company and Candelori Group, including, but not limited to, claims against Candelori Group, Christian and Rossano Candelori.

4.    The solvency of the Company at any time prior to its entry into liquidation, including any potential breach by any director or former director (including any shadow or de facto director) of the Company of s 588G of the Corporations Act 2001 (Cth).

5.    Any potential breach of duty (whether statutory, at common law or in equity) by any director or former director, and any involvement in those breaches (whether statutory, at common law or in equity) by other individuals and or entities, in respect of any matters specified in items [1] – [4] above.

6.    In the event recoveries are made in connection with the matters set out in 1-5 above, and Life Investment seeks to maintain its claim against the Company by way of a Formal Proof of Debt, to do all things necessary in connection with adjudicating on Life Investment's claim.

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

THE COURT NOTES THAT:

A.    On 14 March 2018, the Court made orders appointing Amanda Young and Sule Arnautovic as additional liquidators of Umberto Pty Limited (in liq) (special purpose liquidators) for the purposes specified in those orders.

B.    On 15 March 2018, the Court accepted for filing an interlocutory application made by the special purpose liquidators for orders granting leave to them under s 477(2B) of the Corporations Act 2001 (Cth) to enter into a litigation funding deed with Nevrast Pty Ltd and GDK Projects Pty Ltd and a costs agreement with ERA Legal.

THE COURT ORDERS THAT:

1    Order 1 made on 14 March 2018 be varied to refer to exhibits “2” to “5” and to apply for a period until 14 March 2021 or further order.

2.    Pursuant to s 477(2B) of the Corporations Act, leave is granted to the special purpose liquidators to enter into a funding deed with Nevrast Pty Limited and GDK Projects Pty Limited in substantially the same form as the document of 35 pages entitled “Deed of Funding Agreement and Indemnity” comprised in exhibit “5” in these proceedings.

3.    Pursuant to s 477(2B) of the Corporations Act, leave is granted to the special purpose liquidators to enter into a cost agreement with ERA Legal in substantially the same form as the document of 11 pages comprised in exhibit “5” in these proceedings.

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

THE COURT ORDERS THAT:

1    Orders 1 made on 9 and 14 March 2018 and 9 April 2018 be revoked.

2    Save to the extent of any disclosure in reasons published on 20 April 2018, pursuant to Pt VAA of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, exhibit “NS-2” and exhibits “2” to “5” in these proceedings be kept confidential and not be disclosed in the period until 14 March 2021 or further order.

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

REASONS FOR JUDGMENT

FARRELL J:

1    These are reasons for orders made on 14 March and 9 and 20 April 2018.

Introduction

2    Background information referred to in these reasons is derived primarily from the affidavits of Nikola Simic affirmed on 20 December 2017 and 6 March 2018, exhibits marked “NS-1” and “NS-2” and exhibits “1”-“5” and submissions filed by the plaintiff, GDK Projects Pty Ltd. Mr Simic is the sole director of GDK and Nevrast Pty Ltd.

3    Umberto Pty Ltd (the Company) was incorporated on 25 February 2004. Its sole director and secretary was Rossano Candelori (Mr Candelori).

4    In October 2013, GDK was contracted by the Company to perform building and construction works as part of the fit-out of premises in The Horsley Drive, Smithfield in New South Wales where a restaurant called “Candelori’s” (the restaurant) had operated since 1999. It appears that the premises were owned by Life Investment Pty Ltd (as trustee for the Candelori Family Trust). From December 2013, the premises were subject to a lease to the Company for a period of 3 years to 1 December 2016.

5    On or around 31 October 2014, GDK served a progress claim pursuant to the Building and Construction Industry Security of Payments Act 1999 (NSW) for $419,918.70 (including GST) for works performed at the premises. On 21 January 2015, GDK obtained judgement against the Company for $240,605.23 in respect of the progress claim (the judgement debt).

6    In May 2015, the Company obtained a valuation report from Cardinal Asset Services which is set out at pages 469-493 of exhibit “NS-1”. The valuation report indicates that instructions for it were given on 8 May 2015, inspection occurred on 11 and 12 May 2015 and the effective date of the valuation was 21 May 2015. The Company’s assets broadly fell into the categories of information technology, furniture and catering equipment. Goodwill and computer software were expressly excluded from the valuation. It was noted that “The restaurant is in superb condition and only 18 months old”. The market value on the basis of continuing use was $1,461,145 (including “leasehold improvements” of $1,168,000) and on a forced liquidation basis it was $135,350 (including “leasehold improvements” of $12,200).

7    On 21 May 2015, David Nicholas Iannuzzi of Veritas Advisory Pty Ltd was appointed as the Company’s liquidator pursuant to a resolution of creditors.

8    GDK claims that the Company owes it in excess of $400,000 (including the judgement debt) and it has lodged a proof of debt in the winding up. Included in exhibit “NS-1” is a list of Umberto’s creditors indicating that unsecured creditors are owed $2,872,286.58. Life Investment claims to be owed $2,475,000 of this amount and it appears that Mr Candelori and his wife Gina Candelori (Mrs Candelori) are the sole directors and shareholders of that company. Mr Simic claims that GDK is the largest unrelated unsecured creditor.

9    Mr Simic says that in or about mid-2015, and following completion of the fit-out of the restaurant, he observed that the restaurant appeared to have reopened and continued to trade. He found this unusual as the Company was in liquidation. It appeared that the Candelori family was continuing to conduct the business and still does.

10    Mr Simic and Mr Daren Anderson of ERA Legal had a conversation following Mr Anderson’s attendance (on behalf of GDK) at the first meeting of the Company’s creditors held on 8 June 2015. As a result, Mr Simic came to believe that Mr Iannuzzi was under the impression that the Company was a special purpose vehicle set up solely for the purpose of fitting out the restaurant. Mr Simic understands this impression to have been created by information provided by Mr Candelori.

11    On 12 June 2015, ERA Legal wrote to Mr Iannuzzi enclosing documents which ERA Legal said indicated that the Company was not simply a special purpose vehicle established solely for the purpose of doing the fit-out at the restaurant. The letter gave examples such as:

(a)    Statements said to have been made on oath by Mr Candelori on 6 May 2015 that the Company had gross annual income of $850,000 and assets of $4,120,400;

(b)    The balance sheet prepared by Ms Vanessa Clemente stated that (as at 31 December 2014) the Company had assets of $4,127,644 including goodwill of $1,575,000;

(c)    The Company’s tax return for the financial year 2014 indicated that it had received income in that financial year of $782,986 including $677,879 from rent and leasing activities. This would be unusual for a special purpose vehicle.

(d)    The 2014 income tax return also indicated that the Company received $98,282 as a distribution from a trust.

12    In response to a query from ERA Legal, by a letter dated 15 September 2015, Mr Iannuzzi informed ERA Legal that he believed an examination of the Company’s director and former accountant would not produce information to support the view of GDK that “the business was recently divested and in fact, on the contrary, will confirm that since 1 July 2012 the Company was utilised purely for a re-fit and refurbishment of a related entity’s real property.”

13    At pages 430-457 of exhibit “NS-1” is a document headed “Licence Agreement” between the Company and Candelori Group Pty Ltd which is said to relate to the operation of the restaurant. The final page in this series is a document entitled “Hire Agreement Schedule” which is said to set out key information, although it does not include all of the items (such as the “Licensed Business Name”) which are meant to be included in the schedule to the Licence Agreement. The Hire Agreement Schedule, taken with the undated Licence Agreement, is taken to mean that the Licence Agreement will be for an initial term of five years from 1 July 2012 with three possible further terms each of five years, a “license fee” equal to 20% of gross turnover plus GST and inclusions of the right to use plant and equipment (including depreciable write off), rent payable to the landlord for the use of the premises, advertising costs and interest payable on the Loan Facility. “Loan Facility” is not a defined term. GDK points out that Recital A and C of the Licence Agreement provide (emphasis altered):

Umberto Pty Ltd is the owner of assets, plant, goodwill and in addition have developed certain business procedures, systems and know-how together with a distinctive and valuable name, image and reputation associated with the business of owning and operating restaurants.

…

The Licensor has agreed to grant to the Licensee the right to conduct a business using the Licensor’s business procedures, systems and know-how together with any assets, plant, goodwill, telephone numbers, name, suppliers, distribution channels and client base to provide the Approved Service [being the operation of a restaurant business and ancillary services].

14    GDK obtained eligible applicant status from the Australian Securities and Investments Commission (ASIC) and public examinations of Mr and Mrs Candelori and their son Christian Candelori and the Company’s external accountant, Gerardo Incollingo were conducted in the Supreme Court of New South Wales. An order for production of documents was also issued to Mr Incollingo’s firm, LCI Partners.

Potential claims

15    Based on information obtained during the public examinations and the documents produced, Mr Simic says that the following potential claims against Rossano, Gina or Christian Candelori and related entities have been identified.

Unpaid loan claim

16    The first potential claim is in respect of an unpaid loan of $1.575 million made by the Company to one or both of Mr and Mrs Candelori in satisfaction of their obligations under a deed of settlement entered into in 2006. Mr Simic believes that the advance by the Company was incorrectly recorded in the Company’s financial accounts as late as 2012 to 2014 as “goodwill”. The claim might be framed as a debt claim (on the basis of the verified financial statements which were acknowledged by Mr Candelori as a director and possibly by LCI Partners) or as a breach of duty by Mr Candelori for continuing to allow the debt to be represented as goodwill or possibly as a compensation claim under s 1317H of the Corporations Act 2001 (Cth) for breach of Pt 2M.3 for failure to ensure that the financial report provided a true and fair view of the Company’s financial position. These are matters in which possibly Mrs Candelori and LCI Partners were involved giving rise to liability by them.

Unpaid licence fees

17    The second potential claim is in respect of unpaid licence fees under the Licence Agreement, the terms of which are summarised above. Based on a search of ASIC’s records conducted in July 2016, Christian Candelori is the sole shareholder, director and secretary of Candelori Group. At his examination, Christian Candelori gave evidence that the Licence Agreement came to an end upon the Company being placed into liquidation. There is no evidence of on what provision of the Licence Agreement that Christian Candelori relies for that view.

18    Based on invoices issued by the Company to Candelori Group, the Company claimed at least $1,719,189 under the Licence Agreement between 30 September 2012 and 31 March 2015 (there are two invoices which were not included in the exhibit). ERA Legal conducted a reconciliation of the Company’s bank statements produced by the National Australia Bank which indicates that approximately $485,889 remains unpaid for the period 1 July 2012 to 21 May 2015. GDK believes that, at a minimum, the Company has a claim against Candelori Group for that amount but says that there should also be recoveries for the quarters following March 2015 until July 2017 (the expiry of the initial five year term).

Undervalue transfer of the Candelori restaurant business

19    The third potential claim is in respect of the transfer of the goodwill in the restaurant, fit-out and plant and equipment to Life Investment or Candelori Group for less than its value. GDK acknowledges that this matter would need to be the subject of expert opinion evidence. However, based on evidence given by the Company’s external accountant, Mr Incollingo, at his public examination, GDK says that the transfer took place shortly before the Company was placed in liquidation, purportedly in consideration for Life Investment undertaking the Company’s obligations under a financing facility with National Australia Bank which had funded the fit-out of the restaurant. The Company’s liability had been about $1.5 million at that time. Mr Simic says that, having conducted the fit-out of the premises, he suspects the value of the items of the fit-out and plant and equipment was more than $1.5 million. Further, GDK says Life Investment already had liability under that facility (as guarantor) and there is no evidence of any other consideration. GDK says that, in any event, this takes no account of the value of the goodwill of the business. The valuation report obtained by the Company in May 2015 also took no account of goodwill, but it is an iconic restaurant which has been running since 1999 and the Licence Agreement indicates that goodwill was one of the assets owned by the Company for which Candelori Group was prepared to pay the licence fee. It appears that Life Investment relies on clause 30 of the Commercial Lease to say that the lease of the premises to the Company was terminated upon resolution to wind up the Company being passed.

Insolvent trading claim

20    The fourth possible class of claim relates to the insolvency of the Company at any time prior to 21 May 2015 when it was placed into liquidation. This class of claim includes potential breaches of s 588G of the Corporations Act by any director of the Company when the debt was incurred (including any former director and any shadow or de facto director). GDK relied on passages of a letter dated 29 March 2017 from Antunes Lawyers, who appear to be the lawyers for the Candelori interests, addressing and disputing each of the potential claims. GDK relied on the passages, not to prove insolvency, but to demonstrate the possibility of a claim. The passages are as follows:

9.    The position shortly before 21 May 2015 (when Umberto went into liquidation) was that your client’s judgement debt of about $250,000 was well overdue. Umberto did not have the funds on hand to pay it and could not realise assets to pay (as NAB held a charge over the fit-out whose market value was less than the NAB debt). Umberto could not borrow to pay your client because the NAB Facility had reached its limit. Candelori Family Trust, which had financially assisted Umberto in the past with funds and/or mortgage security to allow Umberto to borrow against the Trust’s assets, was no longer willing to do so.

10.    Umberto was, on any view, insolvent and therefore could not continue operating. In addition the time for compliance with your client’s statutory demand of 24 March 2015 had expired. Furthermore, Umberto owed the Trust a large amount which (as is common with related-party loans) had been subject to an arrangement that it would not be called up by the Trust if doing so would render Umberto insolvent. The bar against calling it up was no longer applicable in May 2015 because, as we have explained, Umberto was already insolvent due to its inability to pay the overdue judgement debt owed to your client. Therefore the Trust was entitled to call upon the loan (and would have done so if the Trust and Umberto had not agreed to terminate the Lease).

21    In submissions, counsel for GDK emphasised that it was not asserting that this is an admission that the Company was insolvent when the invoice for the progress claim was issued by GDK but rather that the question of when the Company became insolvent is a live issue. In this regard, GDK also relied on the Company’s balance sheet as at 31 December 2014 which it says demonstrated that the bulk of its liabilities were to Life Investment and bank statements demonstrating relatively low balances.

Claims against officers and others involved in any of the claims previously mentioned

22    The fifth possible class of claim is for breach of duty (whether statutory, at common law or in equity) by any director or former director, and any involvement in those breaches by other individuals or entities, in respect of any of the potential claims above.

Application

23    Mr Iannuzzi has no funding to investigate or pursue those potential claims and GDK and Nevrast are not willing to provide funds to him.

24    By an originating process filed on 22 December 2017 (as amended on 13 March 2018) GDK sought orders appointing Amanda Young and Sule Arnautovic of Jirsch Sutherland (special purpose liquidators) as additional liquidators of the Company under s 90-15 of Div 90 of Sch 2 of the Corporations Act and orders under s 477(2B) approving the special purpose liquidators entering into:

(a)    a Deed of Funding Agreement and Indemnity with GDK and Nevrast (funding agreement); and

(b)    a costs agreement with ERA Legal.

Appointment of special purpose liquidators

25    Under the terms of the proposed orders, the matters in respect of which the special purpose liquidators would be appointed are in summary:

(a)    Investigating any of the potential claims summarised above;

(b)    Pursuing any of the potential claims, including by getting legal advice and commencing claims;

(c)    Taking any steps (including commencing legal proceedings) to preserve or protect the Company’s property, whether or not that property is in its hands;

(d)    Exercising any powers conferred on a liquidator under ss 477 and 506(1)(b) of the Corporations Act, including the power to seek relief under ss 588FF, 1317E and 1317H of the Corporations Act in relation to any of the potential claims, except for the power in s 477(1)(a) of the Corporations Act.

(e)    If recoveries are made in connection with the potential claims and Life Investment seeks to maintain its claim against the Company by way of a formal proof of debt, to do all things necessary in connection with adjudicating on Life Investment’s claim; and

(f)    Considering the offer dated 5 March 2018 from Candelori Nominees Pty Ltd (as offeror) to the Company and Mr Iannuzzi (as offerees) to take an assignment of one or more of the potential claims, together with considering any other offers that may be received.

26    Under the terms of the proposed orders, the special purpose liquidators would exercise the powers given to them to the exclusion of Mr Iannuzzi. By an affidavit sworn on 7 March 2018 by Blake O’Neill, GDK has provided evidence of service of the originating process, both of Mr Simic’s affidavits and an affidavit of Ms Young sworn on 6 March 2018 either directly on Mr Iannuzzi or through his solicitor, Mr Calabretta, on or before 6 March 2018. I am also satisfied that the originating process and Mr Simic’s affidavit affirmed on 20 December 2017 and exhibit “NS-1” were served on ASIC on 1 March 2018. On 13 March 2018, ERA Legal confirmed that no response had yet been received from ASIC.

27    Mr Calabretta appeared at the hearing on 9 March 2018 and confirmed that Mr Iannuzzi neither supported nor opposed the orders being made. Mr Calabretta drew to the attention of the Court the fact that Mr Iannuzzi had received the offer dated 5 March 2018 from Candelori Nominees. Mr Iannuzzi had no objection to consideration of that offer (and any other similar offers) being included in the matters to be considered by the proposed special purpose liquidators if orders were made appointing them as additional liquidators.

28    At the hearing, counsel for GDK drew the Court’s attention to the decision in In the matter of 77738930144 Pty Limited (in liq) (formerly Commercial Indemnity Pty Ltd) [2017] NSWSC 452 at [20]-[28] in which Gleeson JA considered the question of whether a contributory of the company had standing to seek approval of a funding deed and costs agreement under s 477(2B) of the Corporations Act at a time before a special purpose liquidator had been appointed. His Honour agreed with Black J in In the matter of AT Air Group Pty Limited (in liq) [2012] NSWSC 1508 at [22] that the grant of approval should only occur when an additional liquidator had been appointed and sought to enter into the agreement that required that approval.

29    Ms Young has sworn an affidavit dated 6 March 2018 in support of the orders sought by GDK. Having regard to that fact, I adopted the approach that I would hear the application and determine the question of whether the special purpose liquidators should be appointed having regard to the submissions and evidence. If I determined that the special purpose liquidators should be appointed, orders would be made in chambers and GDK and Mr Iannuzzi would be advised accordingly. It would be necessary for the special purpose liquidators to file an interlocutory application seeking approval to enter into the funding agreement and costs agreement if they wished to do so. A draft of that interlocutory application had been tendered at the hearing. I would then deal with the question of whether approval should be given to the funding agreement and costs agreement and whether it was necessary to hear further from the special purpose liquidators concerning its terms.

30    Among other matters, Ms Young deposed to the following:

(1)    She has read the transcripts of the public examinations conducted in August 2016 and March 2017 contained in exhibit “NS-1”.

(2)    She has considered the proposed claims, their complexity, some of the possible risks associated with them and she has discussed recoverability (if any) if the potential claims were successfully prosecuted. While there are currently no pleadings against which to assess critically the prospects of the potential claims, she is satisfied on the information before her that those claims appear to have some merit. Prior to commencing any proceedings, she will obtain legal advice and satisfy herself as to the claims.

(3)    Based on the Creditor Listing and Summary of Affairs annexed to the First Report to Creditors dated 1 June 2015 included in exhibit “NS-1”, it appears that there is a significant asset deficiency of $2,865,027. As a result, save for any recoveries made in respect of the potential claims, it is unlikely that creditors will receive a return in the winding up of the Company. Ms Young also noted the proposal that, if there are recoveries, the special purpose liquidators would be tasked with investigating and ruling on the proof of debt lodged by Life Investment and that if any part of that proof of debt should be rejected, subject to any successful appeal, the amount of the deficiency would be reduced.

(4)    Based on her review of Mr Simic’s affidavits, Ms Young understands that the quantum of the recoveries from the potential claims is estimated to be upward of $1.5 million and may reach $5 million, subject to expert opinion evidence. Having also reviewed the title searches referred to in Mr Simic’s affidavit, on their face there are reasonable prospects of recovery if the potential claims succeed.

(5)    Having read the funding agreement, Ms Young has “considered at length” some of its key terms. Ms Young states that, otherwise, based on her discussions with Mr Arnautovic, enquiries they have made and past experience, nothing in the funding agreement appeared out of the ordinary with agreements of this nature.

(6)    She considers it in the best interests of the general body of creditors that the special purpose liquidators be appointed and the potential claims be pursued and for that purpose that the funding agreement and costs agreement be entered into.

31    Ms Young provided an undertaking to the Court that the special purpose liquidators would not seek to recover fees and expenses out of the funds or property of the Company other than in accordance with the terms of the funding agreement and out of assets they recover (if any) during the course of their appointment as special purpose liquidators (fruits). ERA Legal has informed Ms Young that GDK has undertaken not to make any application under s 564 of the Corporations Act to seek a position of a superior claim against the Company in respect of its proof of debt. As a consequence of this, there is no potential difficulty in the allocation of financial resources between Mr Iannuzzi’s administration and the administration by the special purpose liquidators because they will be separate. Each of Ms Young and Mr Arnautovic provided copies of their consents to be appointed.

32    Section 90-15(1) of Sch 2 of the Corporations Act confers power on the Court to “make such orders as it thinks fit in relation to the external administration of a company”. A company is taken to be under “external administration” if a liquidator has been appointed: s 5-15(c) of Sch 2. This provision largely tracks s 511 of the Corporations Act as enacted immediately before its repeal took effect on 1 March 2017. As noted by Gleeson JA in Commercial Indemnity at [17], the Court’s powers conferred by s 511 include the power to appoint an additional liquidator.

33    The power to make orders conferred by s 90-15(1) contains no equivalent of s 511(2) which permitted the Court to accede to an application “if satisfied that … the exercise of power will be just and beneficial”. The power is, in its terms, unconstrained. Section 90-15(4) lists some matters the Court is entitled to take into account but that list is expressed to be “[w]ithout limiting the matters which the Court may take into account when making orders”. In Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486, Gleeson J observed at [41] that the question of whether to exercise the power under s 90-15 of Sch 2 can be answered by reference to principles that applied to the exercise of the discretion under the provisions previously contained in ss 479(3) and 511. I agree that those cases can be a useful guide. Despite the breadth of the power conferred by s 90-15(1), it is difficult to envisage circumstances where the power would be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration.

34    The power in s 90-15(1) may be exercised on the Court’s own initiative during proceedings before the Court or upon application by a person referred to in s 90-20, including a person with a “financial interest in the external administration of the company”: s 90-20(1)(a). As a creditor of the Company, GDK has a “financial interest”: s 5-30(a)(ii) of Sch 2.

35    Both Ms Young and Mr Arnautovic are official liquidators and are therefore eligible to be appointed as additional liquidators. They say that they are not aware of any conflict of interest or duty which would make it improper for them to act as additional liquidators.

36    Although there may be explanations which address the issues raised by the potential claims, it is neither necessary nor appropriate to make findings on the potential claims in determining this application. In my view they do point to a need for investigation and that it is likely to be open to the special purpose liquidators to at least consider pursuing the potential claims in the interests of the Company’s creditors: Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407.

37    Nevrast is willing to fund the investigation of the potential claims and their prosecution (if appropriate) but Mr Simic, the controlling mind of both GDK and Nevrast, is not willing to fund Mr Iannuzzi and he is not comfortable with Mr Iannuzzi adjudicating on Life Investment’s proof of debt if sufficient recoveries are made to require that to be done. Mr Simic says that, while he does not take any direct criticism of Mr Iannuzzi, he is not satisfied with his investigations to date in relation to related party claims and he does not have confidence in Mr Iannuzzi moving forward. The special purpose liquidators have satisfied themselves that there is reason to investigate the potential claims and have stated that they will seek legal advice before prosecuting any of them. Having regard to the looming expiration of the limitation period in s 588FF, it is likely that unless the special purpose liquidators are appointed and Nevrast funds them, the potential claims will not be able to be pursued for the benefit of the Company’s creditors, particularly its external creditors.

38    GDK has obtained a judgment debt against the Company for a substantial sum and it remains unpaid. Many of the other creditors are relatives of the Company’s director/shareholder and related entities who are likely to be defendants if the proposed claims are prosecuted. On an available interpretation of the materials in exhibit “NS-1”, the members of the Candelori family have structured their affairs and the affairs of companies they control in such a way as to maximise their chance of keeping control of the restaurant (and the benefit of the fit-out installed by GDK) whether or not debts incurred by the Company are paid.

39    Ms Young correctly points out that as a result of the undertaking given by the special purpose liquidators and having regard to the terms of the draft funding agreement (then in the form of exhibit “NS-2”), the administration by the special purpose liquidators would be separate from Mr Iannuzzi’s administration and it will not divert funding or effort from it. I note that GDK has not provided to the Court the undertaking concerning whether it would make a claim under s 564 of the Corporations Act, however, in making the orders I relied on Ms Young’s evidence that GDK’s lawyers have given that undertaking to her and I would therefore expect it to be observed.

40    As to the question of whether it is appropriate that the special purpose liquidators be given the tasks (to the exclusion of Mr Iannuzzi) of determining whether the offer made by Candelori Nominees to acquire the potential claims or any other offer of that kind made by someone else, I have no reason to think that the special purpose liquidators will exercise their functions inappropriately or without regard to their duties to the Court. I have formed the same view in relation to the task of ruling on Life Investment’s proof of debt in the event that there are recoveries made from prosecuting the potential claims. Mr Iannuzzi did not oppose those orders being made.

41    I was satisfied that it would be just and there would be utility in the Court making orders appointing the special purpose liquidators for the purposes set out at [25] above and accordingly orders were made on 14 March 2018 to that effect.

42    To that point, GDK had been the proponent of the proposed funding agreement and costs agreement. The special purpose liquidators then made an interlocutory application seeking approval of those agreements.

Funding agreement and costs agreement

43    The statute law and principles relevant to an application under s 477(2B) of the Corporations Act were conveniently summarised by Gleeson J in Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd (in liq) (No 2) [2017] FCA 755 (DCT and ACN 154 520 199 Pty Ltd) at [21]-[26] as follows:

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

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.

22    The Court’s role in considering an application under s 477(2B) is to determine whether it is a proper or bona fide exercise of the liquidator’s powers. In Re 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 669; (2013) 31 ACLC 13-021 at [17], Black J said:

The Court is not concerned, in granting an approval under s 477(2B) of the Corporations Act, with matters of commercial judgment but is concerned to be satisfied that the entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator … In Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 at [14], Jacobsen J [sic] noted that the question for the Court in such an application was whether the liquidator’s judgment had been infected by a lack of good faith, or an error of law or principle, and whether there was a real or substantial ground for doubting the prudence of the Liquidator’s conduct in seeking to enter into the funding arrangement. That question arises, in the context of s 477(2B), in the context of entry into a longer term agreement, the performance of which might otherwise delay the completion of the winding-up.

23    In Stewart, re Newtronics Pty Ltd [2007] FCA 1375 (Newtronics), Gordon J, at [26(4)], cited with approval Austin J’s statement in Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118 that, 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 rather the task of the Court is:

… 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 …

24    The standard imposed under s 477(2B) concerns an assessment by the Court as to whether 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 at [11] per Black J citing McGrath re HIH Insurance Ltd [2010] NSWSC 404; (2010) 266 ALR 642.

25    In Pascoe; Re Matrix Group Ltd (in liq) [2011] FCA 1117 at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh Re King Bros [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.

26    In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher; (2011) 85 ACSR 38 at [24], the Full Court endorsed the following list of factors (identified by Austin J in Leigh Re King Bros at [25] and Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]–[34]) relevant to the Court’s assessment of a 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.

44    Unsurprisingly, this case law proceeds on the basis that the liquidator is the proponent of the funding agreement. However, in this case, the proponent was initially a creditor of the company in liquidation which was also related to the proposed funder. Despite Ms Young’s evidence in relation to the draft funding agreement and cost agreement, there are a number of features of the funding agreement as originally proposed which caused the Court concern about whether the special purpose liquidators would be free to act independently.

45    ERA Legal had drafted the funding agreement and acted for GDK, a creditor of the company in liquidation. It was a term of the funding agreement that ERA Legal must be appointed as the lawyers and their costs agreement could not be varied or terminated without the consent of the funder which, like GDK, is controlled by Mr Simic. It was not clear that the special purpose liquidators would have control of the legal costs which, once paid, the funder would be entitled to recoup out of the “fruits” of the potential claims. This was because it was not clear that the lawyers’ invoices must first be approved by the special purpose liquidators as having been reasonably and properly incurred before they were paid by the funder. The lawyers would have significant power to control proceedings commenced in relation to the potential claims since the special purpose liquidators would be required to act on their reasonable legal advice and their position was entrenched by the requirement to get the funder’s consent to vary the costs agreement or remove the lawyers. It was not clear whether the clause which required the special purpose liquidator to follow the lawyer’s reasonable legal advice applied to the special purpose liquidators’ decision whether or not to commence proceedings. While it was express that the funder acknowledged that the lawyers had no obligation to act in the funder’s interest, there was no such express provision in relation to GDK for whom the lawyers have acted to date.

46    Put succinctly, the concern was that the lawyers would (for all practical purposes) be the decision maker and the primary beneficiary of the agreement with an entrenched position and Nevrast had an unacceptable degree of control in relation to the identity of the special purpose liquidators’ legal advisors and the termination of proceedings commenced by the special purpose liquidators.

47    Further, the special purpose liquidators were not in a position to obtain legal advice from other lawyers of their choice concerning whether an offer to acquire the potential claims could be accepted or in relation to ruling on Life Investment’s proof of debt, matters which might well concern the other creditors of the Company given that ERA Legal had acted for GDK on the public examinations.

48    Following the appointment of the special purpose liquidators and the filing of their interlocutory application, these concerns were raised with GDK and the special purpose liquidators in correspondence and at a further hearing. Ms Young was called to give evidence.

49    The concerns identified above are addressed in the draft funding agreement in exhibit “5”. I am satisfied that the special purpose liquidators would be in a position to exercise their powers independently if they enter into a funding agreement in the form included in that exhibit. I have some concern that the issues were not identified by the special purpose liquidators themselves, but having regard to the stress placed on the importance of their capacity to act independently in this process and the imminent end of the limitation period, that issue should not prevent approval being given to the funding agreement and cost agreement if it is otherwise appropriate.

50    Ms Young’s evidence addressed some particular features of the funding agreement which have not changed. One of those matters is that GDK’s costs of the public examinations would be recoverable out of the fruits of the potential claims before the amount payable to the funder for its premium and the amount payable to the special purpose liquidators on account of all creditors is determined. Ms Young considered that it was appropriate that this should occur. Based on Ms Young’s reading of Mr Iannuzzi’s report to creditors and her understanding of the winding up to date, but for costs incurred by GDK in conducting the public examinations, it would be highly likely that the potential claims might not have been identified. Ms Young noted that she has been informed by ERA Legal of the amount of the costs incurred by GDK (including in communicating with Mr Iannuzzi since his appointment) which seem to her to be within the normal range. That amount has been disclosed to the Court and Ms Young’s view appears to be reasonable. Accordingly, I do not consider that this feature would be a basis for refusing approval of the funding agreement.

51    Based on Ms Young’s experience and enquiries, the proposed premium payable to Nevrast out of the fruits is at the higher end of the usual range of premiums paid to private litigation funders. She says, and I accept, that this is usually a reflection of the risks involved in the claims and the prospects of recovery. Ms Young’s evidence is that there are risks involved in the claims and it is commercial and in the best interests of creditors in the circumstances of this case that the special purpose liquidators enter into the funding agreement with that premium. This is because there are otherwise limited (if any) prospects of a return to unsecured creditors if the claims are not pursued and no other creditor has come forward to fund the claims. In the circumstances, Ms Young has not attempted to approach other possible litigation funders. Further Mr Simic, the controlling mind of Nevrast and GDK, has information in respect of a number of the matters which are the subject of the potential claims, including the fit-out of the restaurant. His knowledge will in all likelihood assist the prosecution of the claims. In addition, Ms Young has weighed the risk of prejudicing the current funding offered by Nevrast and potential claims having regard to the impending end to the limitation period for the claims under s 588FF. In her experience, it often takes third-party funders months to consider a fresh matter and it might be that no funding offer was received either at all or which was more favourable than that proffered by Nevrast.

52    There is no evidence that the special purpose liquidators have consulted other creditors. The evidence before the court is that many of those creditors are the likely defendants of the potential claims, so that it might be expected that that consultation would not occur, especially given the timeframe.

53    Turning to the costs agreement, Ms Young considers that it is appropriate to engage ERA Legal to act on the potential claims. Mr Daren Anderson, the managing director of ERA Legal, conducted the public examinations and Mr O’Neill, a lawyer employed at ERA Legal assisted in reviewing the materials produced under orders in those proceedings. They therefore have an intimate knowledge of the available materials and employing those lawyers will almost certainly reduce the costs associated with conducting any further investigations and commencing proceedings as compared to the costs which would necessarily be incurred if another firm were to be engaged. It may also be that their knowledge of the material is critical to the capacity to bring any proceeding before the limitation period expires in May 2018. Ms Young and Mr Arnautovic have no reason to believe that ERA Legal will act in any way other than in their interests so the fact that GDK is a creditor of the Company should not be an impediment to retaining that law firm. Accordingly, Ms Young and Mr Arnautovic are of the view that entering into the costs agreement is in the best interests of the general body of creditors.

54    As noted by Gleeson JA in Commercial Indemnity at [68]-[72], there is no universal rule that a liquidator may not retain lawyers who previously acted for a substantial creditor but it is regarded as “generally undesirable” and the guiding principle is whether such an arrangement offends the requirement for independence of the liquidator having regard to the circumstances. Like Gleeson JA at [73], the Court emphasises that it expects the special purpose liquidators, as officers of the Court, to maintain continued alertness as to whether it is necessary to seek advice from another lawyer, either in relation to the potential claims generally or on any matter in particular.

55    Here, the circumstances are that:

(1)    The Court has been provided with evidence of the nature and extent to which ERA Legal has acted for GDK in relation to the Company and on other matters. ERA Legal has not acted for GDK or its related entities to any great extent. I am satisfied that the relationship between GDK and ERA Legal would not provide any significant commercial incentive for ERA Legal to prefer (consciously or unconsciously) the interests of GDK or Nevrast.

(2)    The Court’s concerns in relation to the independence of the special purpose liquidators arising out of early drafts of the funding agreement have been addressed.

(3)    There is a looming expiration of a limitation period and ERA Lawyers are well placed to provide advice concerning the potential claims arising out of their participation in the public examinations. It would now be difficult for other lawyers to be put in the same position within the time period and that would involve greater expense in what is quite a small liquidation.

56    Having regard to the special purpose liquidators’ opinions, the terms of the draft funding agreement and costs agreement in exhibit “5” and the circumstances referred to above, I am satisfied that it would be a proper or bona fide exercise of the special purpose liquidators’ powers to enter into those agreements. This is so even though not all of the factors listed by Austin J in In the matter of ACN 076 673 875 Ltd (2002) 42 ACSR 296; NSWSC 578 at [17]-[34] can be accurately assessed at this time in this case.

Confidentiality orders

57    In DCT and ACN 154 520 199 Pty Ltd at [37]-[42], Gleeson J took into account that confidentially orders are of a “commercially confidential and sensitive kind, related to aspects of the [potential] litigation that any plaintiff … would take particular care to keep from the other party or parties” (citations omitted), that such orders had been made in other similar cases, and that there is a clear public interest in the due and beneficial administration of the estates of solvent companies for the benefit of creditors which justifies orders being made under s 37AF of the Federal Court of Australia Act 1976 (Cth). Section 37AF appears in Pt VAA of that Act. As noted by Gleeson J, it may be that not all parts of the funding agreement and costs agreement are commercially confidential and sensitive. I agree with Gleeson J that it would not serve the interests of justice to require parties to expend time and money in identifying in detail which particular portions of the material should be subject to a confidentiality order.

58    Having said that, it has been necessary to discuss in these reasons aspects of earlier drafts of the funding agreement which touched on the independence of the special purpose liquidators and to refer to the fact that GDK’s costs of the public examinations will be recovered out of the fruits of potential claims, as well as the fact that the funder’s premium is at the higher end of the range and that ERA Legal will be appointed as the lawyers to the special purpose liquidators. I do not consider that the interests of the administration of justice would be served by suppressing those facts. Accordingly, I will order that the orders made under Pt VAA of the Federal Court of Australia Act 1976 (Cth) on 9 and 14 March and 9 April 2018 be revoked to the extent that those matters are touched on in these reasons.

Costs

59    For the reasons given by Gleeson J in DCT and ACN 154 520 199 Pty Ltd at [43]-[46], I considered it appropriate to order that GDK’s costs and Mr Iannuzzi’s costs of this application be costs in the liquidation of the Company.

Associate

Dated:    20 April 2018