FEDERAL COURT OF AUSTRALIA

Sprowles, in the matter of Cornerstone Investment Aust Pty Ltd (in liq) [2022] FCA 1008

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 37AF(1)(b) of the Federal Court of Australia Act 1976 (Cth), and on the ground that it is necessary to prevent prejudice to the proper administration of justice:

(i)    access to the following documents on the Court’s file not be granted; and

(ii)     in the case of the document in (d), the document not otherwise be disclosed or provided,

to any person other than the plaintiffs and their legal representatives, except pursuant to an order of the Court, until such time as proceeding no 2021/150771 in the Supreme Court of New South Wales (including any appeal therefrom) is concluded:

(a)    the affidavit of Michael Hogan sworn on 26 August 2022;

(b)    exhibit MH-4 (Exhibit) to the Affidavit;

(c)    the written submissions filed on 29 August 2022 in support of the Interlocutory Process filed 26 August 2022 (Interlocutory Process); and

(d)    the transcript of the hearing of this application on 29 August 2022.

2.    Cornerstone be joined as the second plaintiff to this proceeding.

3.    Pursuant to ss 477(2B) and 506(1A) of the Corporations Act 2001 (Cth) (Corporations Act), the Plaintiffs be granted leave nunc pro tunc to enter into the funding agreement (Funding Agreement) with the Department of Employment and Workplace Relations, a copy of which appears at pages 235 and 258 of the Exhibit, on behalf of Cornerstone.

4.    Pursuant to s 80-55(5)(b) of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Corporations Act, and to the extent that it might be required, leave be granted to Cornerstone’s committee of inspection to derive a profit or advantage by virtue of Cornerstone entering into the Funding Agreement.

5.    The costs of and incidental to the Interlocutory Process be costs in the liquidation of Cornerstone.

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

REASONS FOR JUDGMENT

YATES J:

INTRODUCTION

1    The plaintiffs are the joint and several liquidators of Cornerstone Investment Aust Pty Ltd (in liquidation) (Cornerstone or the company). They were appointed on 26 April 2017 in a creditors’ voluntary winding up of the company.

2    By an interlocutory process dated 26 August 2022, the plaintiffs seek various orders, including an order that the Court’s approval be given to them, pursuant to s 477(2B) and s 506(1A) of the Corporations Act 2001 (Cth) (the Corporations Act), to enter into a litigation funding agreement (the funding agreement) in respect of proceedings commenced in the Supreme Court of New South Wales by Cornerstone against the partners of PricewaterhouseCoopers (PwC).

BACKGROUND

3    In respect of the financial years ending 30 June 2015 and 30 June 2016, Cornerstone retained PwC to provide audit, accounting, consulting, and taxation services. PwC prepared financial reports (including balance sheets), conducted a statutory audit, and prepared taxation returns. One of the partners also provided Cornerstone, and its sole director and shareholder, Jin Heung Yang, with commercial and strategic advice. Cornerstone alleges that PwC breached their contractual and common law duties to it to act and perform their services professionally and competently, and with reasonable care and skill. It claims damages against them for approximately $46 million together with interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) (the Supreme Court proceedings).

4    The present application is supported by an affidavit made on 26 August 2022 by one of the plaintiffs, Michael Hogan. In his affidavit, Mr Hogan gives an account of the background to the commencement of the Supreme Court proceedings, the course of those proceedings, and the costs likely to be incurred in relation to them. Mr Hogan also explains the funding of those proceedings, including the fact that, on 5 August 2022, the plaintiffs, Cornerstone, and the Department of Employment and Workplace Relations (the Department) entered into the funding agreement conditional on the plaintiffs obtaining approval to do so under s 477(2B) of the Corporations Act. The funding agreement is in evidence.

5    There are four known creditors of the company: (a) the Department (which claims a debt of $56,326,063.82); (b) the Australian Competition and Consumer Commission (the Commission) (which claims a debt of $2,150,827.58); (c) CSG Finance Australia Pty Ltd (which claims a debt of $37,257.89); and (d) the Office of State Revenue for New South Wales (which claims a debt of $22,204.44). At the present time, it is unclear whether Cornerstone has any other material creditors.

6    On 5 May 2017, Cornerstone’s creditors resolved that a committee of inspection, comprising representatives of three creditors, be appointed. Representatives of the Department and the Commission are members of that committee. The third representative on the committee retired from office on or about 15 February 2018.

7    A related aspect of the present application is whether s 80-55(1) of Sch 2 to the Corporations Act (the Insolvency Practice Schedule (Corporations)) (the IPS(C)) applies because of the Department’s and the Commission’s representation on the committee of inspection.

CONSIDERATION

Approval

8    Section 477(2B) of the Corporations Act 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.

9    This provision applies to a creditors’ winding up by operation of s 506(1A) of the Corporations Act.

10    In considering whether to grant approval under s 477(2B) of the Corporations Act, it is not for the Court to supplant the exercise of a liquidator’s judgment as to the commercial desirability of the agreement itself. Rather, the Court is concerned to determine whether entry into the agreement, on behalf of the company concerned, is a proper, bona fide exercise of the liquidator’s powers. Generally speaking, the Court will not interfere unless it discerns 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: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85 – 86; Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26].

11    In Leigh re King Bros [2006] NSWSC 315 (Leigh), Austin J (at [25]) listed the following factors as relevant to whether approval under s 477(2B) should be given to a litigation funding agreement:

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

(b)    the interests of creditors, other than the proposed defendant;

(c)    possible oppression in the bringing of the proceedings;

(d)    the nature and complexity of the cause(s) of action;

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

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

(g)    the liquidator’s consultations with creditors; and

(h)    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).

12    In an appropriate case, approval can be granted by an order made nunc pro tunc: White, in the matter of Macro Realty Developments Pty Ltd (No 2) [2020] FCA 649; 144 ACSR 336 at [13] – [16]. As I have noted, in the present case, the funding agreement has been entered into conditionally on approval being given.

13    Mr Hogan’s affidavit addresses the factors listed in Leigh. These factors are also discussed in written submissions filed in support of the approval application.

14    I am satisfied that approval should be given to enter into the funding agreement.

A conflict of interest?

15    Section 80-55(1) IPS(C) provides that a member of a committee of inspection must not directly or indirectly derive any profit or advantage from the external administration of the company. However, this provision does not apply if the Court gives leave to the member of the committee to derive the profit or advantage: s 80-55(5).

16    The plaintiffs are concerned that certain provisions of the funding agreement might be understood as providing an advantage to the Department (and, by extension, to the Commission by virtue of it being part of the Commonwealth) that would not otherwise be available to Cornerstone’s other creditors. If there be such an advantage, it is certainly one for which leave should be granted under s 80-55(5), having regard to the circumstances attending, and the need for, the funding agreement, as explained in Mr Hogan’s affidavit. I will therefore grant leave under s 80-55(5), to the extent that leave is necessary.

Non-publication order

17    The plaintiffs seek an order under s 37AF(1)(b) of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) in respect of access to the Court’s file in so far as it comprises Mr Hogan’s affidavit; Exhibit MH – 4 to that affidavit; the written submissions that have been filed in respect of the present application; and the transcript of the hearing of this application.

18    This order is sought because, in substantial part, these documents disclose the confidential agreement reached between the plaintiffs and the Department, as well as the reasoning process of the plaintiffs in agreeing to enter into that agreement. These documents also disclose information concerning the likely costs of, and prospects of success of, the Supreme Court proceedings against PwC. This information is obviously commercially sensitive information. I am satisfied of the need to keep it confidential. But for the need to comply with the requirement of s 477(2B) of the Corporations Act, the occasion for disclosing this information would not have arisen, and the information would not have been disclosed to the Court. I am satisfied that it is appropriate that an order be made limiting access to these documents, pending the conclusion of the Supreme Court proceedings, including any appeal therefrom.

DISPOSITION

19    Orders will be made accordingly.

Associate:

Dated:    29 August 2022