Federal Court of Australia

Endeavour Securities Australia Ltd (in liq) v Moore Stephens Audit (Vic) [2023] FCA 841

ORDERS

THE COURT ORDERS THAT:    

1.    Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and on the ground that it is necessary to prevent prejudice to the proper administration of justice for the purposes of section 37AG(1)(a) of the FCA Act, until the conclusion of the proceeding by the applicants which is the subject of the application for judicial advice or further order of the Court, the following material is not to be disclosed or made available for inspection by any person other than the docket judge, a member of the docket judge’s staff, any officer of the Court authorised by the docket judge, the applicants, their staff and their legal representatives:

(a)    the affidavit of David Michael Orr sworn 31 May 2023 and 20 July 2023;

(b)    the confidential opinion of counsel dated 18 July 2023;

(c)    the written submissions provided by the applicants in support of this application; and

(d)    the transcript of the hearing on 21 July 2023.

2.    Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Corporations Act 2001 (Cth), the applicants were justified and are justified in prosecuting the proceedings filed on 28 September 2022 against the respondents.

3.    The applicants’ costs of the application be paid out of scheme property on the indemnity basis.

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

REASONS FOR JUDGMENT

(Revised from transcript)

SARAH C DERRINGTON J:

Background

1    In this matter, the liquidators of the plaintiffs, Mr David Michael Orr and Mr Jason Mark Tracy, seek judicial guidance with respect to the bringing of this proceeding pursuant to s 90-15 of the Insolvency Practice Schedule Corporations, being schedule 2 to the Corporations Act 2001 (Cth) and/or s 63 of the Trustee Act 1925 (NSW). The applicants also seek orders pursuant to s 37F of the Federal Court of Australia Act 1976 (Cth) for non-disclosure of particular material relied upon in this application, being the confidential opinion of counsel and the affidavits of David Michael Orr sworn on 16 June 2023 and 20 July 2023.

2    The proceeding arises because following the appointment of the liquidators, they and their staff carried out investigations into the affairs of the plaintiffs, and with respect to the discharge of the duties of the defendants as, inter alia, financial statement and compliance plan auditors. The process of investigation culminated with the preparation of a statement of claim and the filing of this proceeding on an urgent basis on 28 September 2022 due to the expiration of a potential limitation period. The liquidators seek judicial guidance, as I have mentioned, pursuant to the insolvency practice schedule or, alternatively, s 63 of the Trustee Act, the latter for the principal reason that the constitution of the registered fund is governed by the law in force in New South Wales.

Statutory Framework

3    Pursuant to s 601FC(2) of the Corporations Act, the first plaintiff holds the scheme property on trust and is a trustee and is required to act in the best interests of its members. Section 63 of the Trustee Act provides a trustee may apply to the Court for an opinion, advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument. In respect of s 63, there is broad power to the court to give advice about the prosecution of a proceeding. As was said in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; 237 CLR 66 at [71]-[72]:

In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that the trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee’s duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expense of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected, the interests of the trust will not be subordinated to the trustee’s fear of personal liability of the costs.

It is, therefore, not right to see a trustee’s application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust.

4    As has been stated on numerous occasions, it is not necessary that a trustee seek judicial guidance, but it is prudent to do so and should do so in circumstances such as commencing major litigation, which this proceeding is likely to be. There is also a public interest in liquidators bringing actions to recover funds for creditors. The Court has jurisdiction to grant relief of this kind under s 90-15 and s 63. The relevant principles are equally applicable to both provisions. Given this is a proceeding to be prosecuted by the liquidators for the plaintiff companies, it is more appropriate that relief be granted under s 90-15, being the federal legislation.

Application

5    The liquidators have acted appropriately in seeking the advice of senior counsel, which I have considered. I have also had the benefit of additional oral submissions which have elucidated the evidence adduced in the two confidential affidavits of Mr Orr, on which I rely.

6    The evidence before the Court in this application establishes, on a prima facie basis, the essential allegations of the plaintiffs as set out in the draft amended statement of claim. In particular, the evidence establishes the necessary relationships in contract and in tort, the financial positions and operations of the plaintiffs, the conduct of the defendants in carrying out their duties and a basis for findings as to their alleged failings and the losses that were caused. Quite properly, senior counsel has also alerted me to the likely defences that will be available in the proceedings.

7    I am satisfied on the evidence before the Court, together with the confidential opinion of counsel, that there is a basis for the required finding that the proceeding has sufficient prospects of success. The existence of the insolvency funding agreement provides the defendants with additional cost protections if the proceedings against the defendants is unsuccessful.

Disposition

8    There was utility in the seeking of this judicial guidance at this particular time where the draft amended statement of claim has not yet been filed or served and the pleadings have not closed. It is appropriate, therefore, that I make orders in terms of the draft.

Associate:

Dated:    24 July 2023