Federal Court of Australia

Tracy, in the matter of Linchpin Capital Group Limited (in liq) [2022] FCA 739

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth), the plaintiffs’ outline of submissions filed 20 June 2022, the affidavit of Jason Tracy affirmed 25 May 2022 and exhibit ‘JMT-1’ thereto be suppressed and not be provided or disclosed to any person, except with the express consent of the first plaintiffs, until the earlier of:

(a)    the finalisation of:

(i)    the liquidation of Linchpin Capital Group Limited (in Liquidation) ACN 163 992 961;

(ii)    the liquidation of Endeavour Securities (Australia) Limited (in Liquidation) ACN 079 988 819;

(iii)    the winding up of the Investport Income Opportunity Fund (the IIOF Scheme); and

(iv)    the winding up of the Investport Income Opportunity Fund ARSN 121 875 009; or

(b)    further order of the Court.

2.    Pursuant to section 477(2A) of the Corporations Act 2001 (Cth), the Court approves the first plaintiffs’ compromise of the debt owed to the second plaintiff, in its capacity as trustee of the IIOF Scheme, by CPG Research & Advisory Pty Ltd (CPG), the terms of such compromise being set out in the Deed of Settlement and Release between the first plaintiffs, CPG and the second plaintiff that forms part of exhibit JMT-1.

3.    The costs of and incidental to this application be costs and expenses in the liquidation and paid out of the assets of the second plaintiff.

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 application by the first plaintiffs, the joint and several liquidators of Linchpin Capital Group Limited (in liquidation) seeking the Court’s approval under s 477(2A) of the Corporations Act 2001 (Cth) in respect of the compromise of a debt claimed by Linchpin.

2    The liquidators also seek confidentiality orders under s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) in respect of certain materials relating to the application.

3    I am satisfied that it is appropriate to make orders substantially in the form sought by the liquidators for the following reasons.

BACKGROUND

4    The liquidators have previously successfully applied for this Court’s approval under s 477(2A) of the Act in respect of the compromise of a different debt claimed by Linchpin and also for confidentiality orders in respect of that application under s 37AF of the FCA Act. That application was the subject of the decision in Tracy, in the matter of Linchpin Capital Group Limited (in liq) [2022] FCA 104 (Linchpin No 1). Familiarity with the matters of principle and background in relation to the liquidation of Linchpin addressed in Linchpin No 1 is assumed for the purpose of these reasons.

EVIDENCE

5    The liquidators, Mr Tracy and Mr Orr, rely on an affidavit of Mr Tracy sworn 25 May 2022, exhibit JMT-1 to that affidavit and an affidavit of Ms Hatton, solicitor and two exhibits to Ms Hatton’s affidavit. Confidentiality orders are sought in respect of Mr Tracy’s affidavit, exhibit JMT-1 and the written outline of submissions provided by the liquidators.

6    Mr Tracy is a registered liquidator and partner at Deloitte Financial Advisory Pty Ltd and has been practising in the restructuring and insolvency sector for over 20 years. Mr Tracy is also a member of Chartered Accountants Australia New Zealand and Turnaround Management Association (Australia). Mr Orr is also a registered liquidator and a partner at Deloitte. Mr Tracy has for the purpose of his affidavit conferred with Mr Orr and is authorised to make his affidavit jointly on behalf of both liquidators.

THE DEBT IN ISSUE

7    Pursuant to orders of this Court made on the application of the Australian Securities and Investments Commission, the liquidators were appointed as joint and several liquidators of, inter alia, Linchpin, and as the persons responsible for the winding up of an unregistered managed investment scheme, known as the Investport Income Opportunity Fund (the IIOF Scheme) and a registered managed investment scheme of the same name (together, the Liquidation Entities). Linchpin acted as the trustee of the IIOF Scheme.

8    The liquidators have identified that the property of the IIOF Scheme includes a debt owed by CPG Research & Advisory Pty Limited ACN 052 348 026 (the Debtor). The sole director of the Debtor has been served with the Originating Application, Mr Tracy’s affidavit and with the liquidators’ proposed short minutes of order. In evidence on this application is an email in which the director, on behalf of the Debtor, has communicated that the Debtor consents to this application and the proposed short minutes of order.

9    The principal amount of the debt, together with interest (Outstanding Debt), is identified in Mr Tracy’s affidavit.

THE COMPROMISE 

10    The liquidators entered into a deed of settlement and release (Settlement Deed) on or about 11 May 2022 with Linchpin, as trustee of the IIOF Scheme, and the Debtor which provides, inter alia, for the payment by the Debtor of a Settlement Sum to the liquidators in compromise of the Outstanding Debt.

11    The Settlement Deed became binding upon execution. However, the entitlement to the Settlement Sum and the operation of the mutual releases is contingent upon the liquidators obtaining the Court’s approval, which is the subject of the present application. A portion of the Settlement Sum has been paid into the liquidators’ trust account. Pursuant to the Settlement Deed, if this Court does not approve this application, that portion of the Settlement Sum that has been paid into the liquidators’ trust account is to be applied to the liquidators’ costs of this application, and the Debtor is not obliged to pay the remaining balance of the Settlement Sum. If, however, approval is given by the court that portion of the Settlement Sum that is already paid will form part of the Settlement Sum applied to the Outstanding Debt.

12    I note that the Settlement Deed includes provision for the liquidators to, in effect, take steps to void the releases if specified information provided by the Debtor to the liquidators is false or misleading.

13    Mr Tracy deposes to the detail of the liquidators’ investigations into the financial position of the Debtor and the negotiations between the liquidators and the Debtor regarding the payment of the Outstanding Debt, the detail of which it is not necessary to recite in light of the application for confidentiality orders. It is sufficient to say that the liquidators have satisfied themselves, having made appropriate inquiries as to the financial position of the Debtor, that the compromise is in the best interests of the creditors of the Liquidation Entities for the following reasons:

(1)    it is unlikely that pursuing the Debtor in formal recovery proceedings will result in a higher settlement or payment of the Outstanding Debt in full, given the Debtor’s financial position;

(2)    there is a risk that the Debtor may become insolvent or may otherwise be wound up itself, in which case a distribution to the IIOF Scheme would be unlikely or otherwise, very minimal; and

(3)    the costs to pursue the Debtor for recovery of the whole of the Outstanding Debt would not, in the liquidator’s opinion, be commercially justified.

LEGAL PRINCIPLES

14    The following summary of the applicable legal principles is taken from Linchpin No 1 and is incorporated for ease of reference.

Section 477(2A)

15    Section 477(2A) of the Act provides that, except with the approval of the court, the committee of inspection or a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than, relevantly, the prescribed amount. Approval is required in this instance as the Outstanding Debt exceeds the current prescribed amount of $100,000: regulation 5.4.02 of the Corporations Regulations 2001 (Cth).

16    The principles which the court applies when considering an application for approval are well settled. Section 477(2A) is concerned to ensure that the court exercises some oversight of the liquidator’s actions, and the court’s assessment must be made in light of the purposes for which liquidator’s powers exist: Re HIH Insurance Ltd (in liquidation) [2004] NSWSC 5 at [15] (Barrett J); Peter Hillig in his capacity as liquidator of ACN 092 745 330 Pty Ltd (in Liquidation) v Battaglia [2020] NSWSC 1617 at [18] (Gleeson J); Re Rubix Investments Group Pty Ltd (in liq) [2018] NSWSC 1184 at [26] (Gleeson J).

17    The essential purpose of the requirement for approval under s 477(2A) is to ensure that the interests and wishes of those affected by a compromise, chiefly the creditors, are a major consideration in making such a compromise: In the matter of One.Tel Limited [2014] NSWSC 457; 99 ACSR 247 at 254 [28] (Brereton J as his Honour then was).

18    The court does not concern itself with the commercial desirability of the transaction. As Giles J explained in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85:

… [T]he court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator, but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, 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 in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.

19    Similarly, in One.Tel Limited, Brereton J said at 253 [26]:

The role of the court is to grant or deny approval to the liquidator's proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up.

20    Thus, in deciding whether to approve a settlement, it is not necessary for the court to consider the commerciality of the settlement that has been struck by the liquidator or to ‘second guess’ his or her judgement. Rather, the court will be concerned to ensure that the proposed settlement is in the interests of creditors and there is no absence of good faith, error in law or principle or any real or substantial ground for doubting the prudence of the liquidator’s conduct.

Confidentiality

21    Section 37AF of the FCA Act provides:

(1) The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of:

(a) information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or

(b) information that relates to a proceeding before the Court and is:

(i) information that comprises evidence or information about evidence; or

(ii) information obtained by the process of discovery; or

(iii) information produced under a subpoena; or

(iv) information lodged with or filed in the Court.

(2) The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).

22    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 Air New Zealand Limited (No 3) [2012] FCA 1430 at [35] (Perram J); Australian Competition and Consumer Commission v Origin Energy Electricity Ltd [2015] FCA 278 at [148] (Katzmann J). Further the clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of granting an order under s 37AF: see Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; 78 ACSR 163 at 164 [2] - [5] (Barrett J as his Honour then was).

CONSIDERATION

Approval under s 477(2A)

23    The Settlement Deed falls within the ambit of s 477(2A) of the Act given that the Outstanding Debt sought to be compromised exceeds $100,000 (as prescribed by the Regulations). The sole question for this Court to determine therefore is whether to exercise its discretion to approve the liquidators’ entry into the compromise as set out in the Settlement Deed.

24    The evidence relied on by the liquidators sets out the investigations undertaken by the liquidators in respect of the Debtor’s financial position and which inform the opinion that they have formed as to the appropriateness of the settlement in the specific context of the circumstances pertaining to the Debtor. In this respect, I note that the investigations undertaken by the liquidators in relation to the financial position of the Debtor includes investigations with respect to the potential recapitalisation or alternatively sale of the Debtor’s business.

25    Based on their investigations, and on the basis of their respective experience, the liquidators have formed the view that the compromise the subject of the present application is in the best interests of creditors. Mr Tracy has deposed to his three reasons for forming that view, which are detailed above.

26    Against this background, I am satisfied that there is no suggestion that the liquidators’ entry into the Settlement Deed is not a proper exercise of the liquidators’ powers or is otherwise ill-advised. In any event, approval under s 477(2A) of the Act does not operate as an endorsement of the proposed agreement, but merely as permission for the liquidators to exercise their commercial judgment in the matter. Importantly, any such approval does not exonerate the liquidators from any liability they may have in respect of the transaction: One.Tel Limited at 254 [26].

27    Accordingly, I will make an order under s 477(2A) of the Act approving the liquidators’ entry into the Settlement Deed.

Confidentiality orders

28    The liquidators also seek confidentiality orders pursuant to s 37AF of the FCA Act as described above. The basis for the order is the liquidators’ concerns about the disclosure of sensitive and commercial information regarding, inter alia, the position of the Debtor and the course of the negotiations, including the factors which informed the liquidators’ decision to accept the compromise and execute the Settlement Deed.

29    Mr Tracy’s evidence is that the liquidations of various companies and schemes is ongoing, including investigations directed to securing assets and recovery for the benefit of the creditors of Linchpin. His concern is that disclosure of information regarding the liquidators’ negotiations and compromise of this particular debt may provide an unfair advantage to other debtors of Linchpin in current and/or future negotiations. The liquidators submit that Linchpin’s creditors (and, indeed, creditors of the entities in the broader Linchpin group of companies) may be prejudiced in two ways. First, by the potential reduction of value of the recoveries the liquidators are able to negotiate with other creditors. Secondly, by the risk of increased costs associated with additional steps that may be required by the liquidators to recover assets if commercial settlements cannot be achieved.

30    The liquidators also submit that the public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors weighs in favour of an order being made under s 37AF of the FCA Act as sought. Further, that making a suppression order in these circumstances is also consistent with the proposition that the Court will aid the proper efforts of liquidators to negotiate settlements of claims in the interests of creditors.

31    Accordingly, I am satisfied on the evidence and the submissions made by the liquidators that it is appropriate to make confidentiality orders substantially in the form of prayer 1 of the Originating Application.

CONCLUSION

32    For these reasons, I am satisfied that it is appropriate to make orders substantially in the form sought by the liquidators. The orders will include a costs order in the form sought by the liquidators, namely that the costs of and incidental to this application be costs and expenses in the liquidation and paid out of the assets of the second plaintiff.

Associate:

Dated:    29 June 2022