Federal Court of Australia

Dudley, in the matter of Freshwater Bay Investments Pty Limited (in liquidation) [2021] FCA 608

ORDERS

THE COURT ORDERS THAT:

1.    The Plaintiff be authorised to enter into a retainer with Stacks/Southern Highlands Pty Ltd trading as Stacks Law Firm in the form exhibited to the Confidential Affidavit of Gregory Bruce Dudley affirmed 31 July 2020.

2.    The period during which the Plaintiff may make any application pursuant to s 588FF(1) of the Corporations Act 2001 (Cth) in relation to the Company against any party be extended until a date that is 9 months from the date of this order.

3.    Costs of and incidental to the application be costs in the winding up.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

1    By an interlocutory process dated 31 July 2020, the Plaintiff, Mr Dudley, in his capacity as liquidator of Freshwater Bay Investments Pty Limited (In Liquidation) ACN 105 274 226 (the Company) applies for various orders relevant to his investigations into the Company’s affairs. While the balance of the orders sought are currently before a registrar of this Court, Mr Dudley’s applications for approval nunc pro tunc to enter into a retainer agreement with a law firm (Stacks Law Firm) and to extend the period in which he may apply under s 588FF(1) of the Corporations Act 2001 (Cth) have been referred to me for consideration. In these reasons I refer to them respectively as the Retainer Application and the Extension Application.

2    In support of the interlocutory process, Mr Dudley relies upon:

(a)    the Second Affidavit of Mr Dudley filed in these proceedings, affirmed on 31 July 2020;

(b)    a Confidential Affidavit of Mr Dudley affirmed on 31 July 2020; and

(c)    an affidavit of Mr Clayton Allen Davis, solicitor, affirmed on 31 July 2020 (the Davis Affidavit).

3    For the reasons that follow, orders will be made in the terms sought.

LEGAL FRAMEWORK

4    Pursuant to s 477(2B) of the Act, approval is required for a liquidator to enter into an agreement if its term, or the performance of its obligations extend beyond three months from the date it is entered into. Such approval may come from a resolution of creditors or the committee of inspection or by order of the Court. In Re Macro Realty Developments Pty Ltd (No 2) [2020] FCA 649, I recently considered the relevant principles and adopted (at [10]) their comprehensive summary 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 (at [22]-[26]).

5    However, Mr Dudley referred on his application to additional statements of the principles which are undoubtedly correct. He relies on the summary given by White J in Lewis (Liquidator), in the matter of Concrete Supply Pty Ltd (In Liq) [2020] FCA 841 (at [16]):

The principles which the Court applies when considering an application for approval are well settled:

(a)    the Court makes its assessment having regard to the purposes for which liquidators’ powers exist, including the serving of the interests of those concerned in the winding up, the achievement of what is necessary for the proper realisation of the assets of the company, and assisting in its winding up: Re HIH Insurance Ltd [2004] NSWSC 5 at [15]; Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26(6)];

(b)    a primary consideration is the impact of the agreement on the duration of the liquidation and whether that is, in all of the circumstances, reasonable in the interests of the liquidation: Re Opel Networks Pty Ltd [2013] NSWSC 1245 at [7]; Re One.Tel Ltd [2014] NSWSC 457, (2014) 99 ACSR 247 at [30];

(c)    the Court’s approval is not an endorsement of the proposed agreement but merely constitutes permission for liquidators to exercise their commercial judgment: Re Bell Group Ltd (in liq); Ex parte Woodings as liquidator of The Bell Group Ltd (in liq) [2009] WASC 235 at [58];

(d)    again, generally, the Court does not refuse an approval unless there can be seen to be some lack of good faith, some error in law or principle or some real and substantial grounds for doubting the prudence of the liquidator’s conduct: Re Spedley Securities Ltd (in liq) (1992) 10 ACLC 1742 at 1745;

(e)    a court may also refuse approval if the terms of the proposed agreement are unclear: Re United Medical Protection (No 4) [2002] NSWSC 516; (2002) 20 ACLC 1647 at [45];

(f)    the role of the Court is to grant or deny approval to the liquidator’s proposal. It is not to develop some alternative proposal which might seems preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1642 at 1649; and

(g)    nevertheless, the Court does not simply “rubber stamp” whatever is put forward by a liquidator: Re Stewart; Newtronics, at [26(1)].

6    In Hurst, in the matter of Liquor National Pty Ltd (in liq) [2019] FCA 1581, Gleeson J said (at [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].

7    Further, in Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594, Gleeson J said (at [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].

8    It is well settled that approval under s 477(2B) can be given nunc pro tunc, or under s 1322(4)(d) of the Act which allows the Court generally to extend the period for doing any act, matter or thing. The powers under s 477(2B) are directed to promoting the interests of the liquidation and the creditors, not the exercise of disciplinary functions over liquidators: Re Kevin Jacobsen Pty Ltd (in liq) [2016] NSWSC 538 (at [74]). This being said, the proper course is for approval to be sought in advance, and the Court will be cognisant of the explanation given by the liquidator as to why the approval was not sought prior to entering the agreement. As Markovic J stated in Hayes, in the matter of Denham Constructions Pty Limited (in liq) [2018] FCA 2053 (at [31]):

31    There is no doubt that the Liquidator ought to have sought earlier approval. A liquidator has certain duties and obligations imposed on him or her by the Act and in discharging his or her office should not only be aware of those duties but ensure that he or she acts diligently to fulfil them. That said, in this instance, the Liquidator’s inaction was not a result of dishonesty and is not sufficient in itself to prevent the Court’s exercise of its powers to give the agreements retrospective approval: see also, for example, Hamilton, in the matter of ACN 101 634 146 Pty Ltd (in liq) [2014] FCA 687 at [6]-[7].

CONSIDERATION OF THE RETAINER APPLICATION

9    In support of the Retainer Application, Mr Dudley relies on facts attested to in the Confidential Affidavit.

10    Mr Dudley’s view is that a resolution unanimously passed at a meeting of the Company’s creditors on 6 December 2019 (the Resolution) most likely authorised him to enter into the retainer with Stacks which is annexed to the Confidential Affidavit (the Retainer).

11    However, Mr Dudley acknowledges that the Resolution failed to expressly refer to the Retainer and accordingly there may be some ambiguity regarding Mr Dudley’s authority to enter into it.

12    Out of an abundance of caution, given the possibility that the Resolution may not have the effect of authorising Mr Dudley to enter into the Retainer, Mr Dudley seeks the Court’s approval to enter into the Retainer nunc pro tunc.

13    Having regard to the matters raised at [22]-[26] of the Confidential Affidavit, I am satisfied that it is in the interest of the creditors of the Company for Mr Dudley to enter into the Retainer.

14    It is clear that:

(a)    entry into the Retainer is necessary to allow Mr Dudley to continue his investigations into and to pursue any claims available to him in the winding up of the Company;

(b)    there is no reason to conclude that Mr Dudley’s entry into the Retainer is other than a proper exercise of his power, or to conclude that it is an ill-advised or improper act on the part of Mr Dudley; and

(c)    it is appropriate to make an order under s 477(2B) of the Act nunc pro tunc as any failure to seek approval prior to entry into the Retainer was inadvertent and there is no reason to believe that any prejudice will be suffered by reason of the making of an order in those terms.

EXTENSION APPLICATION

15    Mr Dudley seeks an extension of time in which he may make an application pursuant to s 588FF(1) (voidable transactions) of the Act in relation to the Company against any party.

Legal Framework

16    The matters to be considered for the purpose of determining an application under s 588FF(3) of the Act are well settled and are set out in Carter (Liquidator), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 2076 per Gleeson J (at [13]-[16]), as follows:

13    In exercising the discretion under s 588FF(3)(b), the Court is required to consider what is fair and just in all the circumstances: BP Australia Limited v Brown & Ors [2003] NSWCA 216; (2003) 58 NSWLR 322 (BP Australia) at [187]. The applicant for the extension must satisfy the Court that it should be granted: BP Australia at [183].

14    The matters that ordinarily inform the exercise of the Court’s discretion are:

(1)    the liquidator’s explanation for the delay in taking action within the three year period provided for by the statute;

(2)    the merits of the foreshadowed proceeding, assessed by a “preliminary review”; and

(3)    any likely prejudice that would be suffered if the extension of time is granted: Parker, in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq) [2017] FCA 687 at [15]-[16]; Walker and Moloney v CBA Corporate Services (NSW) Pty Limited [2012] FCA 328; (2012) 88 ACSR 153 (Walker) at [43].

15    In Marsden (liquidator) v CVS Lane PV Pty Limited, in the matter of Pentridge Village Pty Limited (in liq) (receiver and manager appointed) (controller appointed) [2018] FCA 102 at [60]-[61], I noted:

[60]    Concerning merits, what is required is “an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit”: Walker at [44] citing Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 at [15]. However, a review of the merits may be unnecessary if the purpose of the application for an extension of time is to allow the liquidator time in which to properly decide whether or not to bring the proposed proceedings: Walker at [44].

[61]    In Taylor v Woden Constructions Pty Ltd [1998] FCA 1228, Finn J said:

Where the liquidator is not in a position to consider the merits but has proper grounds for inquiring into the matter because of suspicion it invites (or that is cast on it) or of the explanation it requires, then provided he can satisfactorily explain his delay in inquiring sufficiently into the matter, he should not be closed out from an extension because he is unable to say he has a meritorious claim. In some instances ... it will be sufficient if he can say “I do not know if I do, but there is reason to inquire”.

16    The principles of natural justice require that, if potential defendants to a s 588FF(1) application have been identified by the liquidator, they ought to be given an opportunity to be heard on the application for an extension of time under s 588FF(3): ASIC v Karl Suleman Enterprizes Pty Ltd (In Liq) [2004] NSWSC 1244; (2004) 52 ACSR 103 at [7].

(Emphasis in original.)

Application of the principles to the Extension Application

17    In support of the Extension Application, Mr Dudley sets out relevant matters in the timeline deposed to in the Second Affidavit, summarised as follows:

(a)    Mr Dudley was appointed as liquidator of the Company on 10 October 2017;

(b)    Mr Dudley conducted investigations into the affairs of the Company;

(c)    in October 2019, Mr Dudley approached Stacks and a litigation funder to enable him to investigate and pursue potential claims available to him;

(d)    the originating process in this proceeding was filed by Mr Dudley on 6 December 2019;

(e)    the examination summons addressed to a director of the Company in this proceeding was listed for hearing on 7 May 2020 (the Examination);

(f)    by email from a legal case manager of this Court dated 20 March 2020, Mr Dudley’s solicitors were informed that to reduce health risks to court users and court staff from in-person attendances, the Court would be vacating all examination hearings.

18    As a result of the Court’s appropriate response to the COVID-19 pandemic, Mr Dudley has been unable to conclude the Examination prior to the expiry of the relevant limitation period.

19    But for the adjournment of the Examination, Mr Dudley would have been able to complete his investigations and determine whether to commence proceedings by 2 August 2020, being the statutory deadline to commence proceedings pursuant to s 588FF(1) of the Act.

20    Mr Dudley has undertaken a detailed analysis of the insolvency of the Company as well as the various payments that may give rise to voidable transactions in relation to the Company. Based on these investigations, it is clear that those potential voidable transaction claims have sufficient merit to justify an extension of the statutory deadline. In the alternative, they have sufficient merit to warrant the further investigation that is proposed by way of the Examination currently on foot.

21    With regards to the timing of the extension, Mr Dudley relies on the assessment of his solicitor in the Davis Affidavit; namely, that nine months will be sufficient time to allow for completion of the Examination, consideration of the strength of any potential claims and the commencing of any relevant proceedings.

22    The extension of nine months proposed in the Davis Affidavit was specified to take effect from the date the Court made orders issuing the amended summons and orders for production to the individual. However, given there has not been any listing yet of the substantive Examination, it is appropriate instead for the nine month extension to run from the date of the orders made on this Extension Application.

NOTICE TO THE DIRECTOR OF THE COMPANY

23    It is apparent from the steps taken including having the examination summons orders granted, that Mr Dudley has identified a former director of the Company as a person against whom a voidable transactions claim is being considered. To his credit, Mr Dudley informed the Court that he had not given the individual concerned notice of this Extension Application.

24    Although there is some difference in the approaches taken in different courts, the weight of the authorities suggest that the principles of natural justice require that notice of an application under s 588FF(3) be given to the potential defendant: Carter per Gleeson J (at [16]); ASIC v Karl Suleman Enterprizes Pty Ltd (in liq) [2004] NSWSC 1244; (2004) 52 ACSR 103 per Barrett J and Greig v Stramit Corporation Pty Ltd [2003] QCA 298. In particular, in BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 Spigelman CJ (with whom Mason P agreed at [215] and Handley JA agreed at [216]) said the following (at [133]-[134]):

133    The power to make orders, and the power to extend time under s 588FF(1) and s 588FF(3) are conferred on a court. There can be no doubt that such a body must obey the rules of procedural fairness. An order of a superior court is not a nullity even if made in breach of this obligation. Nevertheless, a person affected is entitled as of right to have any such order which affects that person set aside. (See, eg, Cameron v Cole (1944) 68 CLR 571 at 589 and 590–591.) The basic principle has been affirmed many times, including with respect to powers conferred upon the court by corporations legislation. (See, eg, Re Great Eastern Cleaning Services Pty Ltd (No 2) [1978] 2 NSWLR 278 especially at 281; Dahozo Pty Ltd v Oz-US Film Productions Pty Ltd (1997) 24 ACSR 739 especially at 741–742 and 743; 15 ACLC 1423 especially at 1425–1426).

134    The obligation to comply with procedural fairness imports a higher level of content when imposed on a court than in decision-making processes conducted by administrators or tribunals. It requires, in my opinion, that a person likely to be adversely affected by the order of the court is given an opportunity of making submissions to the court before any such order is made or if, exceptionally, an order is made without such an opportunity being given that, upon application, the person must be put in the same position as he or she would have been prior to the order being made. It is the inherent difficulty of achieving the latter that makes an ex parte order a course to be followed only in the case of necessity or other strong reason.

25    In contrast, in Wallman v Milestone Enterprises Pty Ltd [2006] WASC 260; (2006) 205 FLR 68, Master Newnes refused to set aside extension orders made ex parte under s 588FF(3) because the order made expressly reserved the defendant’s right to apply for variation or discharge. His Honour considered (at [4]) that on any such application by the defendant, the matter would proceed effectively as a hearing de novo with the onus on the plaintiff to establish that it was entitled to the extension order. His Honour held (at [32]-[34]) that such an approach placed the defendant in materially the same position as if they had been present at the original ex parte application.

26    The divergence in these two approaches rests on whether a defendant who is not given notice of an extension application under s 588FF(3) is entitled to apply to have an ex parte extension order set aside as of right or whether a party’s position is adequately protected by the reservation of its right to apply for discharge: see BP Australia (at [136]) and Wallman (at [43]). Although I consider there to be much practical merit in the approach adopted in Wallman, on the weight of the authorities referred to above, Mr Dudley, after conceding that there was no good reason why the application should proceed ex parte, was directed to give notice to the former director. After seeking an extension of time within which to file submissions with the Court, the former director informed Mr Dudley that he would not be making any submissions.

CONCLUSION

27    In circumstances where there has been adequate explanation of the reasons why the Retainer and Extension Applications are now made, and where the orders sought are in the interests of the liquidation, I consider it appropriate to make orders as sought. The potential defendant has been given notice of the Extension Application and has elected not to be heard. There is therefore no substantial injustice or prejudice likely to be caused if an extension of time is granted.

Associate:

Dated:    4 June 2021