Federal Court of Australia

Ball, in the matter of ACN 605 650 182 Pty Ltd (in liq) [2022] FCA 2

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth) the Plaintiff’s entry into the litigation funding agreement with Premium Litigation Funding Pty Limited ACN 616 167 581 in the form of Confidential Exhibit A, both in his own capacity and as liquidator of ACN 605 650 182 Pty Ltd (In Liquidation) ACN 605 650 182 (formerly known as “ABC Bookkeeping Pty Ltd & Liquidion Bookkeeping Pty Ltd”) (ABC) and ACN 605 522 281 Pty Ltd (In Liquidation) ACN 605 522 281 (formerly known as “TWA Accountants Pty Ltd”) (TWA) be approved.

2.    Pursuant to s 477(2B) of the Act the Plaintiff’s entry into the costs agreement with ACN 128 544 267 Pty Limited trading as Stacks Law Firm in the form exhibited to the Confidential Affidavit of Mitchell Warren Ball affirmed on 22 December 2021 both in his own capacity and as liquidator of ABC and TWA be approved.

3.    Order 1 of the orders made on 26 June 2020 and 23 December 2021 be vacated.

4.    Pursuant to s 37AF 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 as provided in s 37AG(1)(a), the following documents be suppressed and not published to any person other than the Plaintiff and his legal advisers until the conclusion of the liquidation of ABC and TWA or until further order of the Court, whichever is the earlier:

(a)    the Second Affidavit of Mitchell Warren Ball of 21 May 2020 which is marked confidential and exhibit MB-2;

(b)    paragraph 56(e)(ii) of the Third Affidavit of Mitchell Warren Ball of 22 December 2021 and pages 34 - 50 of exhibit MB-3;

(c)    paragraphs 13(a), 15(a), 17 and 18 of the Fourth Affidavit of Mitchell Warren Ball of 5 January 2022 and pages 1 to 12 of exhibit MB-4, being a draft funding agreement; and

(d)    the draft funding agreement comprising Confidential Exhibit A on the interlocutory application determined on 7 January 2022.

5.    Costs of and incidental to this interlocutory process be costs in the winding up of ABC and TWA.

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

REASONS FOR JUDGMENT

(Revised from transcript)

CHEESEMAN J:

overview

1    This is an interlocutory application for orders pursuant to s 477(2B) of the Corporations Act 2001 (Cth) to approve the entry by a liquidator into agreements on behalf of the two companies to which the liquidator has been appointed.

2    Mitchell Warren Ball, the plaintiff, is the liquidator of ACN 605 650 182 Pty Ltd (in liquidation) (formerly known as ABC Bookkeeping Pty Ltd) and ACN 605 522 281 Pty Ltd (formerly known as TWA Accountants Pty Ltd). By interlocutory application dated 22 December 2021 and filed 30 December 2021 the liquidator seeks approval pursuant to section 477(2B) of the Corporations Act 2001 (Cth) to enter into:

(1)    a funding agreement with a litigation funder for the purpose of funding proceedings proposed to be instituted in respect of claims arising from the winding up of ABC and TWA; and

(2)    a costs agreement with ACN 128 544 267 Pty Ltd trading as Stacks Law Firm with respect to the legal work to be undertaken in relation to the said proposed proceedings.

3    The liquidator also seeks confidentiality orders pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) over parts of the evidence on which he relies. That evidence includes, inter alia, various versions of the draft funding agreement, and the costs agreement. Confidentiality orders are sought on the basis that it would not be in the interest of the creditors of ABC and TWA for the terms of those agreements to be disclosed and in particular to prevent the parties against whom the proposed proceedings are to be commenced from gaining a strategic advantage in relation to any potential claims by reason of having access to those parts of the evidence over which confidentiality orders are sought.

4    The application came before me with some urgency, on an ex parte basis, in the Duty List on 7 January 2022. The urgency arises from the liquidator’s concern that a relevant limitation period is due to expire on 17 January 2022.

5    The interlocutory application was first listed before the then duty judge on 23 December 2021 on which occasion the duty judge raised a number of concerns in relation to the way in which the funding agreement was framed. The hearing was adjourned to permit the liquidator the opportunity to reframe the application and to adduce further evidence.

6    The liquidator filed additional material, most recently during the course of the hearing before me today. In support of the application the liquidator now relies on the following evidence: his affidavits of 21 May 2020 (of which there are two), 22 December 2021 and 5 January 2022 and the exhibits thereto and a further amended draft funding agreement marked as Confidential Exhibit A.

7    For the reasons that follow, having read and considered the evidence advanced by the liquidator and with regard to principles relevant to the Court’s approach to applications under s 477(2B) of the Act, I am satisfied that it is appropriate to make orders under s 477(2B) of the Act. I am also satisfied that it is appropriate to make confidentiality orders over discrete parts of the evidence on the grounds that it is necessary to prevent prejudice to the proper administration of justice.

BACKGROUND

8    ABC and TWA were each placed into liquidation by a resolution of members pursuant to s 491(1) of the Act on 19 July 2016 and 25 May 2017 respectively.

9    ABC carried on a business providing administrative and / or bookkeeping services. TWA carried on a business providing accounting services. TWA was originally set up for a business that Wayne Fraser, a registered tax agent and accountant, intended to operate with two other accountants. ABC was established for Tamar Fraser, Mr Fraser’s wife, to provide administrative and bookkeeping services. Both companies appear to have ceased their operations prior to the liquidator’s appointment.

10    Company searches for ABC and TWA obtained by the liquidator are in evidence and demonstrate that:

(1)    ABC was incorporated on 5 May 2015. Maddy George became a director of ABC on 20 November 2015 and holds all of the issued shares in ABC. Ms Fraser was a director of ABC for one day, being the date of its incorporation.

(2)    TWA was incorporated on 28 April 2015. Mr Fraser was a director from the date of TWA’s incorporation until 2 September 2015 and subsequently for one day on 1 January 2016. Melville John Toms became a director of TWA on 21 April 2017. Mr Toms holds all of the issued shares in TWA.

11    These proceedings were commenced by originating process filed on 21 May 2020 seeking, amongst other things, the issue of summonses for the examination of various individuals including the Frasers and an extension of the time to make any application pursuant to s 588FF(1) of the Act in relation to claims ABC or TWA may have against any party.

12    The Australian Securities and Investment Commission (ASIC) agreed to fund the costs of the examinations and, following Court approval being obtained on 18 June 2020, the liquidator retained Stacks Law Firm to prepare the application and to conduct examinations. The purpose of the examinations was to determine the strength of any voidable transactions claims that may be available in respect of ABC and TWA. Public examinations were conducted during the course of 2021. Stacks Law Firm, on behalf of the liquidator, also obtained production of documents from various individuals and companies in the period from May 2020 to March 2021.

13    The liquidator deposes to the fact that he has been a registered liquidator since 2005 and otherwise has over 20 years’ experience in corporate insolvency and restructuring. He gives evidence of his experience in dealing with and negotiating agreements with litigation funders in his capacity as a liquidator.

14    Based on his investigation into the affairs of ABC and TWA the liquidator formed the view that Mr Fraser and Ms Fraser were likely de facto and / or shadow directors of the companies. The liquidator deposes that Ms George and Mr Toms took no active role in the management of the affairs of the companies and / or were accustomed to act in accordance with Mr Fraser and Ms Fraser’s instructions. Interviews conducted by the liquidator with the Frasers suggested that each of ABC and TWA appear to have been operated by, or for the benefit of, Mr Fraser, Ms Fraser or their family members and companies that the liquidator believes are related to them. The books and records obtained by the liquidator reveal that Mr Fraser and Ms Fraser were signatories of ABC and TWA’s bank accounts.

15    The liquidator has formed the view that Mr McKlaren, his wife Sonja McKlaren and McKlaren Retail Pty Ltd (the McKlaren Parties) and the Frasers were involved in a sham arrangement whereby ABC and TWA were engaged to provide services that were never in fact rendered and that payments made by Mr McKlaren or McKlaren Retail to ABC or TWA in respect of such invoices issued were later withdrawn in cash and returned to Mr McKlaren and / or Mrs McKlaren. The amount involved is alleged to be in excess of $1 million. As a result of the arrangement between the McKlaren Parties and ABC and TWA, ABC and TWA incurred debts to the ATO which they were unable to pay. Neither ABC nor TWA lodged any business activity statements or income tax returns during the period in which they operated nor did the companies make any payments to the ATO in respect of their tax liabilities at any time.

16    In his affidavits of 21 May 2020 the liquidator deposes to various transfers made to and from the companies’ accounts as well as cash withdrawals that occurred during the relation-back period. For present purposes it is sufficient to note that the amount of transfers and withdrawals in question exceeds $1 million. Those transfers appear to have been made to and from Mr Fraser and other entities the liquidator believes are associated with the Frasers as well as with McKlaren Retail.

17    The liquidator deposes to his view that the companies are insolvent on two bases; first, ABC and TWA are presumed insolvent by reason of their failure to comply with s 286 of the Act and secondly, that the transfers and cash withdrawals described above, caused the companies to become insolvent.

18    The liquidator considers there are potential claims available against Mr Fraser and Ms Fraser for breaches of director’s duties under ss 180, 181 and 182 of the Act and claims against the McKlaren Parties, including a claim against Mr McKlaren and McKlaren Retail under s 79 of the Act for being knowingly involved in the Frasers’ breaches of their duties as directors.

19    A summary of the creditors of each of the companies is set out in the liquidator’s evidence. It is not necessary to include the detail of the creditors save to note that the liquidator has not been able to substantiate the claims of some creditors and that the ATO appears to be the major, and perhaps the only substantial, third party creditor. Some of the creditors are related parties and / or are likely to be named as parties in the proposed proceedings. The liquidator has not made any decision as yet as to the acceptance or rejection of these proofs that have been lodged in respect of the two companies. In these circumstances, the liquidator has decided not to call a creditors’ meeting to approve entry into the funding agreement and costs agreement because he doubts a quorum will be achieved and also that there is a significant risk that the resolutions would not pass even if a quorum was achieved.

20    On 13 September 2021, the liquidator, through his solicitors, issued a letter of demand to Mr McKlaren’s solicitors, Russell Law. The liquidator’s letter of demand was met with a strident response in which Russell Law asserted that if proceedings were commenced, they held instructions to apply to strike out or permanently stay the proceedings, seek orders for security for costs and for indemnity costs against the liquidator and the funder, amongst others, on the basis that “no litigant, properly advised, would think the claims have any prospects of success”. The liquidator responded with equal vigour. There was further correspondence including without prejudice correspondence which caused the liquidator to form the view that there is no prospect of settlement without commencing proceedings.

21    In November 2021 the liquidator commenced discussions with a number of litigation funders including the prospective litigation funder who provided a positive response in early December 2021. The liquidator did not approach ASIC to fund the proposed litigation because he was concerned that in the short time available before the expiration of the limitation period and taking into account the Christmas and New Year break it was unlikely that ASIC would respond in time for counsel to be briefed to prepare an originating process for filing. Shortly thereafter the liquidator filed the present application which now comes before the Court for a second time.

legal principles

Approval of entry into an agreement under s 477(2B)

22    Section 477(2B) provides:

(2B)  Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

(a)  without limiting paragraph (b), the term of the agreement may end; or

(b)  obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.

23    The principles relevant to the Court’s approach to applications under s 477(2B) of the Act were summarised by Gleeson J (when her Honour was in this Court) in Hurst, in the matter of Liquor National Pty Ltd (in liq) [2019] FCA 1581 at [15] - [19]:

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).

24    The role of the court is to grant or deny approval of the liquidator’s proposal, not to develop some alternative proposal, and the main consideration in determining whether to give approval under s 477(2B) is the impact of an agreement on the duration of the liquidation and whether it is, in all the circumstances, reasonable in the interests of the administration: Re Opel Networks Pty Ltd [2013] NSWSC 1245 at [7] (Brereton J); In the matter of One.Tel Limited [2014] NSWSC 457; (2014) 99 ACSR 247 at 254 – 255 [30] (Brereton J); Lindholm (liquidator), in the matter of Aviation 3030 Pty Ltd (in liq) [2021] FCA 1244 at [44(b)] (Anderson J).

25    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 the court itself being involved in the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 at [11] (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] (Barrett J).

Confidentiality orders

26    Section 37AF of the FCA Act allows the Court to make a suppression order in appropriate circumstances to prohibit the disclosure of evidence in a proceeding. Section 37AG permits the Court to make such an order where the order is necessary to prevent prejudice to the proper administration of justice.

27    The approach to be adopted when considering whether to make a suppression or non-publication order was summarised by Perram J in Chief Executive Officer of Australian Transaction Reports and Analysis Centre v TAB Limited (No 4) [2017] FCA 1532 at [9] - [12]. It is not necessary to set out that passage in full save to note the following principles:

(1)    such an order is not lightly to be made. It must be necessary to prevent prejudice to the proper administration of justice and not merely desirable: see Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 at 666 [38] - [39] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ); Australian Competition and Consumer Commission v Valve Corporation (No 5) [2016] FCA 741 at [8] (Edelman J).

(2)    the Court must take into account that a primary objective of the administration of justice is to safeguard the public interest in open justice (s 37AE) but no balancing exercise need be carried out between the utility of the order and the interest which open justice assumes: TAB Limited (No 4) at [20] (Perram J).

(3)    the Court may make any other order necessary to give effect to the primary order: FCA Act, s 37AF(2).

(4)    the order, once made, must remain in place no longer than is reasonably necessary to achieve its purpose: FCA Act, s 37AJ(2).

28    It is well established that commercial sensitivity can be an appropriate basis for making a suppression or non-publication order: Clark v Digital Wallet Pty Ltd [2020] FCA 877 at [21] – [22] (Abraham J); see also Australian Competition and Consumer Commission v Origin Energy Electricity Ltd [2015] FCA 278 at [148] (Katzmann J); ASE16 v Australian Securities and Investments Commission [2016] FCA 321; (2016) 112 ACSR 36 at 61 [81] and 63 [93] (Markovic J).

CONSIDERATION

Section 477(2B) Approval

29    Both agreements fall within the ambit of s 477(2B) of the Act given that the term of the agreements may end or obligations of a party to the agreements may be discharged by performance more than three months after the agreements are entered into. For this reason, in the circumstances of the present case, approval under s 477(2B) is necessary.

30    The object of the approval process under s 477(2B) is to ensure that the contractual terms of the proposed agreement do not give rise to an error of law or reason to suspect lack of good faith or other impropriety on the part of the liquidator of the company: Pascoe, re Matrix Group Ltd (in liq) [2011] FCA 1117 at [7] (Jacobson J) citing Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23] (Austin J). In considering whether approval ought to be granted, the Court does not simply “rubber stamp” whatever the liquidator puts forward: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 (Gordon J) at [26], cited by Gleeson J in Hird (Liquidator), in the matter of Allmine Group Limited (in liq) [2018] FCA 781 at [32]. However, it is important to note that the role of the Court does not involve exhaustively or closely considering the commercial merits or otherwise of the proposed agreement: Re CIC Insurance Ltd [2001] NSWSC 438; (2001) 38 ACSR 181 at 183 [9] (Barrett J).

31    The liquidator has made the commercial judgment that entry into the funding agreement is in the interests of creditors of ABC and TWA and addressed in his evidence why that is so by reference to the funding agreement in its amended form. The funding agreement is such that control of the conduct and potential settlement of the proposed proceedings lies with the liquidator and not the funder. The liquidator’s view, based on his experience, is that the terms of the funding agreement are “typical, reasonable and competitive”. The liquidator specifically deposes to the fact that based on his experience and his awareness of current premiums in the funding market, the proposed premium in the funding agreement is reasonable, commercial and in the interests of creditors. The liquidator draws further comfort in this regard from the fact that the funding agreement is addressed to the particular circumstances at hand where the indication is that the proposed proceedings will be strongly defended and may require the funder to provide security for costs and to fund defence of a foreshadowed strike out application at an early stage of the proceedings. Further, that there is presently no prospect of a return to creditors, and that the prospects of a return will improve significantly if the proposed claims are litigated and that that will only be possible if entry into the funding agreement is approved.

32    The liquidator has instructed Stacks Law Firm to act in conducting the proposed proceedings. He seeks approval to enter into a costs agreement for that purpose. He is satisfied that the rates to be charged by Stacks Law Firm are commensurate with the rates of other solicitors with similar expertise in insolvency-related litigation and that the terms are “typical, reasonable and competitive”. The liquidator has previously engaged the firm to act on his behalf in other claims of a similar nature and is satisfied that the firm has the relevant expertise. Accordingly, it is the liquidator’s view that entry into the costs agreement is generally in the interest of creditors.

33    I am satisfied, having regard to the matters addressed immediately above and having reviewed the agreements, that approval under s 477(2B) of the Act should be granted.

34    The liquidator, who is a registered liquidator with over 20 years of experience in insolvency and restructuring, has deposed to his view that the entry into the agreements are in the companies’ interest. In my view, the funding agreement is directed to advancing the interests of creditors insofar as the funding will enable the liquidator to institute and prosecute claims which may result in recoveries for creditors. That the proceedings appear likely to be vigorously defended does not detract from that proposition. In the absence of a funding agreement there will be no proceedings instituted and no potential recovery for creditors.

35    There is no suggestion that the liquidator’s entry into the agreements is not a proper exercise of the liquidator’s powers or is otherwise ill-advised. In any event, approval under s 477(2B) of the Act does not operate as approval of the underlying agreement itself, such that the approval does not exonerate the liquidator from any liability he or she may have in respect of the transaction: In the matter of One.Tel Limited [2014] NSWSC 457; (2014) 99 ACSR 247 at 254 [26] (Brereton J).

36    Accordingly, I will make orders approving entry into the agreements under s 477(2B) of the Act.

Confidentiality

37    I am satisfied that the discrete and targeted confidentiality orders sought should be made under s 37AF of the FCA Act on the ground set out in s 37AG(1)(a) that the order is necessary to prevent prejudice to the proper administration of justice because disclosure of the agreements may provide the other parties to the proposed litigation with an unfair advantage to the detriment of the companies and their creditors. 

38    Accordingly, I will make confidentiality orders which will remain in place until the conclusion of the liquidation of ABC and TWA or until further order of the Court, whichever is the earlier.

Associate:

Dated:    7 January 2022