FEDERAL COURT OF AUSTRALIA

Vickers, in the matter of J M Kelly Builders Pty Ltd (in liquidation) [2019] FCA 918

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 477(2B) of the Corporations Act 2001 (Cth), the second to thirteenth applicants be granted approval on behalf of the companies in respect of which they are appointed joint and several liquidators to enter into the agreement at annexure “DCV-1” to the Affidavit of Derrick Craig Vickers sworn on 15 May 2019, between the Commonwealth of Australia (acting through the Department of Jobs and Small Business ABN 54 201 218 474), the applicants, and the companies in respect of which they are appointed joint and several liquidators.

2.    Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth), until further order:

(a)    the information comprising the following documents be kept confidential and not be provided or disclosed to any person other than the applicants and their solicitors:

(i)    the Affidavit of Derrick Craig Vickers sworn on 15 May 2019;

(ii)    each of the annexures to the Affidavit of Derrick Craig Vickers sworn on 15 May 2019;

(iii)    the written submissions on behalf of the applicants in support of this interlocutory process;

(iv)    any transcript of the hearing of this interlocutory process; and

(b)    the documents at (a)(i) to (iii) (inclusive) above be marked “confidential” on the electronic court file, not to be published or accessed by any party other than the applicants and their solicitors except pursuant to an order of the Court.

3.    Any person demonstrating sufficient interest in order 2 above have liberty to apply on 7 days’ notice.

4.    The second to thirteenth applicants’ costs of this interlocutory process be costs in the liquidation of the companies in respect of which the second to thirteenth applicants are appointed joint and several liquidators.

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

REASONS FOR JUDGMENT

REEVES J:

1    Relying on s 477(2B) of the Corporations Act 2001 (Cth), the joint and several liquidators of 12 of the 13 companies in the J M Kelly group of companies have applied ex parte for approval to enter into a funding agreement with the Commonwealth of Australia. The companies concerned were variously placed in liquidation in October and November 2018 and in March 2019. The committee of inspection of the remaining company has already given its approval in respect of the agreement, so this application does not apply to that company.

2    Section 477(2B) 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 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.

3    The principles applicable to gaining the Court’s approval under this provision are well settled. They were conveniently outlined by Edelman J in Hughes, in the matter of Sales Express Pty Ltd (in Liq) (Hughes) [2016] FCA 423 at [20], as follows:

(1)    the role of the Court is to grant or refuse approval. It is not to develop an alternative proposal;

(2)    the notion of necessity in the power of the liquidator to do “things as are necessary” has a broad meaning and empowers a liquidator to do anything expedient in relation to the beneficial completion of the winding-up of the affairs of the corporation and the distribution of its assets;

(3)    however, notwithstanding this breadth, the Court must be satisfied that there is a good and solid reason for concluding that the processes of winding up and distribution would be enhanced by the funding agreement, compared with the ordinary deployment of surplus funds. The enhancement must be demonstrated by some informed and independent assessment of the separate and selfish interests of the funding company;

(4)    although the Court must be satisfied that it is appropriate for the exercise of power under s 477(2B), the Court will not generally review a liquidator’s commercial judgment or second guess its decision;

(5)    circumstances in which the Court will scrutinise a liquidator’s decision closely include where there appears to be a lack of good faith, an error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator’s conduct;

(6)    the Court will rarely approve an agreement which has important terms that are unclear;

(7)    in considering whether the Court’s power under s 477(2B) should be exercised, any relevant matter can be considered. Matters that are commonly relevant include:

(a)    the manner in which the funding or indemnity will be provided under the agreement;

(b)    the extent to which the liquidator has considered other funding options;

(c)    the interests of creditors other than the proposed or potential respondents and the extent to which the liquidator has consulted them;

(d)    the liquidator’s prospects of success in the litigation although this factor will rarely be able to be assessed at anything other than a high level of abstraction;

(e)    possible oppression in bringing the proceedings;

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

(g)    the risks involved in the claim (including the amount of costs likely to be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the costs of the defendant in the event that the action is not successful, or towards any order for security for costs);

(h)    any particular premium or benefit which is promised in consideration of the provision of the funding or indemnity including whether that benefit is proportionate to the risk undertaken by the funder;

(i)    whether the liquidator is subject to any control over the conduct of the litigation, other than the usual obligation to keep the funder fully informed of all matters relating to the action; and

(j)    whether the agreement provides for a clear mechanism for resolving any dispute between the funder and the liquidator about the compromise of the litigation which is funded …

4    In support of their application, the liquidators have relied upon an affidavit of Mr Derrick Vickers, one of their number, filed 16 May 2019. Annexed to that affidavit is a copy of the funding agreement concerned and, in the body of the affidavit, Mr Vickers explains why the liquidators have sought the Court’s approval to enter into that agreement. Because that affidavit discloses information that the liquidators’ claim is sensitive and may be adverse to the conduct of the liquidation, orders will be made under s 37AF of the Federal Court of Australia Act 1976 (Cth) for it, and its attachments, together with the written submissions filed in support of this application and any transcript of the hearing of this interlocutory process, to be treated as confidential.

5    Having regard to those confidentiality orders, the explanation set out in Mr Vickers’ affidavit is, in brief summary, as follows:

(a)    following extensive initial investigations into the affairs of the companies, the liquidators consider it is in the interests of the unsecured creditors to undertake a public examination in respect of the affairs of the companies;

(b)    the liquidators lack sufficient funds to undertake a public examination absent the provision of funding under the proposed funding agreement; and

(c)    the judgment of the liquidators is that the terms of the proposed funding agreement are appropriate for this purpose and this judgment is not infected by any evident lack of good faith, error of law or principle or real and substantial ground for doubting the prudence of the liquidators’ conduct.

6    Some context is necessary. The core business of the J M Kelly group of companies concerned a broad range of construction work and included business units encompassing building services, manufacturing and building supplies. Each company in the Group had a distinct purpose. The business was a significant one, employing approximately 230 employees in total.

7    The financial structure of the Group involved all receipts and payments on behalf of the Group being processed through the account of one of the companies in the Group: J.M. Kelly Management Pty Ltd (in liq) (J.M. Kelly Management). Thereafter, journal entries were made in the accounts of the other companies in the Group which gave rise to inter-company loans. The investigation of the resulting inter-company indebtedness has proved to be a significant and time-consuming exercise. For example, more than 43,000 transactions have been identified in J.M. Kelly Management’s inter-company loan accounts over a 12 month period prior to the liquidation. As a result of this inter-company indebtedness, the liquidators are concerned that it may cause a conflict between the interests of the unsecured creditors of the different companies within the Group. This reason, together with the costs involved in making multiple applications, have caused the liquidators to bring the present single application, rather than approach each group of creditors for approval to enter into the funding agreement.

8    In view of the sensitivity of the information, as mentioned before, I do not propose to go into detail, but it suffices to say I am satisfied on the materials before me, and having regard to the principles outlined in Hughes, that it is appropriate to give the approval sought. In particular, and without being exhaustive, I have had regard to the following matters, in addition to those already mentioned above:

(a)    that the terms of the proposed funding agreement are clear;

(b)    that control of the agreed work under the funding agreement is reserved to the liquidators;

(c)    that the committee of inspection of J M Kelly Builders Pty Ltd (in liq) has already approved the liquidators entering into the proposed funding agreement;

(d)    it is the considered judgment of the liquidators that the proposed funding agreement is appropriate and would aid the just and beneficial winding-up of the companies;

(e)    there is nothing to suggest that there is any lack of good faith, error of law or principle or lack of prudence affecting the approval sought; and

(f)    there are solid reasons for concluding that the process of winding-up and distribution of the assets of the companies will be enhanced by them entering into the proposed funding agreement.

9    For these reasons, I will make orders in the form of the draft orders submitted to the Court. The orders will be:

1.    Pursuant to section 477(2B) of the Corporations Act 2001 (Cth), the second to thirteenth applicants be granted approval on behalf of the companies in respect of which they are appointed joint and several liquidators to enter into the agreement at annexure “DCV-1” to the Affidavit of Derrick Craig Vickers sworn on 15 May 2019, between the Commonwealth of Australia (acting through the Department of Jobs and Small Business ABN 54 201 218 474), the applicants, and the companies in respect of which they are appointed joint and several liquidators.

2.    Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth), until further order:

(a)    the information comprising the following documents be kept confidential and not be provided or disclosed to any person other than the applicants and their solicitors:

(i)    the Affidavit of Derrick Craig Vickers sworn on 15 May 2019;

(ii)    each of the annexures to the Affidavit of Derrick Craig Vickers sworn on 15 May 2019;

(iii)    the written submissions on behalf of the applicants in support of this interlocutory process;

(iv)    any transcript of the hearing of this interlocutory process; and

(b)    the documents at (a)(i) to (iii) (inclusive) above be marked “confidential” on the electronic court file, not to be published or accessed by any party other than the applicants and their solicitors except pursuant to an order of the Court.

3.    Any person demonstrating sufficient interest in order 2 above have liberty to apply on 7 days’ notice.

4.    The second to thirteenth applicants’ costs of this interlocutory process be costs in the liquidation of the companies in respect of which the second to thirteenth applicants are appointed joint and several liquidators.

Associate:    

Dated:    14 June 2019

SCHEDULE OF PARTIES