FEDERAL COURT OF AUSTRALIA

Elkerton (Liquidator) v IBN Global Pty Ltd, in the matter of Ji Woo International Education Centre Pty Ltd (in liq) [2019] FCA 2098

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (Act), the second plaintiff, on behalf of the first plaintiff, be authorised to enter into the funding agreement, being Confidential Exhibit A.

2.    Pursuant to s 477(2B) of the Act, the second plaintiff, on behalf of the first plaintiff, be authorised to enter into an agreement retaining Neville Hourn & Borg Legal Pty Ltd to act and continue acting as the legal representatives for the plaintiffs upon the terms of, or substantially the terms of, the Funding Agreement.

3.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), until such time as any litigation (including any appeal) arising out of the winding up and affairs of the first plaintiff is concluded or until otherwise ordered, the following documents or parts thereof are to be kept confidential and shall not be published or disclosed to another party on the ground that it is necessary to prevent prejudice to the administration of justice:

(a)    Confidential Exhibit A;

(b)    Confidential Exhibit AE-2 to the affidavit of Anthony Elkerton sworn 28 November 2019 and comprising 31 paragraphs; and

(c)    paragraphs 20 to 23 of Mr Elkerton’s affidavit referred to above.

4.    Direct the second plaintiff to file within 7 days of these orders a redacted version of Mr Elkerton’s affidavit referred to in order 3(c) above, redacting the material that is the subject of the confidentiality order.

5.    The second plaintiff be paid out of the property of the first plaintiff his costs of this application.

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

REASONS FOR JUDGMENT

GLEESON J:

1    On 2 December 2019, on the liquidator’s ex parte application, I made two orders pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (Act) approving the entry of the second plaintiff (liquidator) on behalf of the first plaintiff company (Ji Woo) into a litigation funding agreement (funding agreement) with Court House Capital Pty Ltd (funder) and Neville Hourn & Borg Legal Pty Ltd (solicitors) and a retainer with the solicitors in accordance with relevant terms in the funding agreement, as well as ancillary orders.

2    The form of the funding agreement is contained in “Confidential Exhibit A”. The funding agreement is substantially similar to an agreement made between the liquidator, the funder and the solicitors dated 22 November 2019, except for the amount of the funder’s premium.

3    The purpose of the funding agreement is to provide funding to the liquidator to prosecute claims made in this proceeding.

Background facts

4    The liquidator was appointed on 3 September 2018 by order of this Court, replacing Guy Baxendale who had been appointed liquidator on the reinstatement of registration of Ji Woo on 8 December 2017: see Yeo v Australian Securities and Investments Commission, in the matter of Ji Woo International Education Centre Pty Ltd (deregistered) [2017] FCA 1480 (reinstatement judgment).

5    The circumstances leading to the appointment of the liquidator are set out at [97]-[141] of the reinstatement judgment.

6    In summary, the liquidator alleges that:

(1)    During a period from about July 2003, when it was registered as a company, Ji Woo carried on an educational consulting business which provided referral services for overseas students who wished to study in Australia, deriving income from commission and fees from the educational institutions to which it referred students.

(2)    In around December 2013 or January 2014 (relevant time) the business was transferred to the first respondent (IBN Global), for no consideration.

(3)    In November 2016, Ji Woo was deregistered pursuant to an application for voluntary deregistration.

(4)    At the relevant time, the third respondent (Mr Choi), was the sole director of Ji Woo and was one of two directors of IBN Global. The other director of IBN Global at the relevant time was the fourth respondent (Ms Han), who is the wife of the second respondent (Mr Lee).

(5)    Mr Lee was formerly a director of Ji Woo from 7 June 2003 to 26 September 2013, when he was replaced by Mr Choi as sole director. He was also formerly the beneficial owner of 50% of the issued capital in Ji Woo. However, at the relevant time the shareholders in Ji Woo were Mr Choi as to 40%, Ms Han as to 30% and Myounghwa Yeo as to the remaining 30%.

(6)    The shareholders in IBN Global at the relevant time were Mr Lee as to 80%, Mr Choi as to 10% and Ms Han as to 10%.

(7)    The liquidator alleges that notwithstanding Mr Lee’s resignation as a director of Ji Woo on 26 September 2013 and his divesting himself of his shareholding in Ji Woo, he remained as a shadow or de facto director of Ji Woo at the relevant time.

Nature of claims to be funded

7    On 28 November 2019, the liquidator filed an originating application seeking declarations that the transfer of Ji Woo’s business to IBN Global was an unreasonable director-related transaction within the meaning of s 588FDA(1) of the Act, and is void; orders that the transfer of the business be set aside and, pursuant to s 588F(1)(b), that IBN Global transfer the business to the liquidator or alternatively pay the liquidator an amount representing the benefits received by IBN Global by reason of the transfer to it of the business.

8    The originating application also seeks declarations that Mr Lee and Mr Choi acted in breach of various duties to Ji Woo, that IBN Global and Ms Han assisted with knowledge and were involved in the breaches of duty committed by Mr Lee and Mr Choi and that IBN Global received the business with notice of those breaches of duty and holds the business on trust for Ji Woo.

9    The originating application was filed at that time in order to prevent any potential limitation period from expiring, and had not yet been served at the time that approval of the funding agreement was sought.

10    The liquidator’s evidence indicated that the claims are of substantial value.

11    The liquidator submitted, and I accepted, that the claims appear to have significant merit.

Legal principles

12    In Hurst, in the matter of Liquor National Pty Ltd (in liq) [2019] FCA 1581 at [15]-[20], I set out the relevant principles as follows:

[15]    Section 477(2B) of the Act qualifies the general power of liquidators under s 477(2)(m) to “do all such things as are necessary for the winding up the affairs of the company and distributing its property”.

[16]    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 McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13].

[17]    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 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.

[18]    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.

[19]    In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24], the Full Court endorsed the following comprehensive list of factors relevant to the Court’s assessment of a proposed litigation funding agreement:

(1)    the liquidator’s prospects of success in the litigation;

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

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

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

(5)    the liquidator’s consultation with creditors; and

(6)    the risk 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 defendant’s costs if the action is not successful, or towards any order for security for costs).

Consideration and conclusion

Approval to enter into funding agreement

13    I accepted that the order approving the liquidator’s entry into the funding agreement should be made for the following reasons:

(1)    The funding agreement will permit the liquidator to pursue claims of substantial value and which appear to have real merit. In this regard, I note that at [133] of the reinstatement judgment, I concluded that the circumstances in which Ji Woo ceased to trade were worthy of investigation because, on the face of it, it appeared that Ji Woo had given up a valuable business for no consideration. At [136], I accepted that, on the then available evidence, there appeared to be a real question about whether Ms Yeo’s rights as a shareholder had been defeated by the manner in which Ji Woo’s business ceased and was taken over by IBN Global.

(2)    The funding agreement does not have any unusual or onerous terms. I accept the liquidator’s evidence that the funder’s premium in the agreement is reasonable, as are the rates proposed to be charged by the solicitors and by counsel.

(3)    There is no evidence of a lack of good faith or error of law on the part of the liquidator in proposing to enter into the funding agreement. There is nothing to suggest that entry into the funding agreement would be outside of the proper exercise of the liquidator’s powers.

Confidentiality

14    I accepted that the information contained in the funding agreement is confidential and commercially sensitive and made an order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) in the terms sought.

Associate:

Dated:    12 December 2019

SCHEDULE OF PARTIES