FEDERAL COURT OF AUSTRALIA

Krejci, in the matter of Union Standard International Group Pty Limited (No 8) [2023] FCA 1054

THE COURT ORDERS THAT:

1.    Pursuant to section 90-15(1) of Schedule 2 - Insolvency Practice Schedule (Corporations) 2016 (IPS) to the Corporations Act 2001 (Cth), that Peter Paul Krejci and Andrew John Cummins as joint and several Liquidators of Union Standard International Group Pty Ltd (in liquidation) (Company) are justified and acting reasonably in continuing proceedings brought by way of Originating Process on 30 June 2023 in Federal Court of Australia File No. NSD658/2023 against Shay Zakhaim and Gauld Tulloch Bove (ABN 23 350 595 506) (Auditor and Officer Proceedings).

2.    Pursuant to section 90-15(1) of the IPS, that the Liquidators are justified and acting reasonably in continuing proceedings brought by way of Originating Process on 7 July 2023 in Federal Court of Australia File No. NSD683/2023 against LS Capital Holdings Pty Ltd (ACN 164 494 811) (LS Capital Proceedings).

3.    Pursuant to section 90-15(1) of the IPS, that the Liquidators are justified in paying their remuneration (subject to approval by creditors, the Committee of Inspection or the Court), costs and expenses (including legal costs and disbursements) in connection with this application, the Auditor and Officer Proceedings and LS Capital Proceedings out of the funds held by the Company on statutory trust pursuant to section 981H of the Corporations Act.

4.    Pursuant to section 90-15(1) of the IPSC, that the Liquidators are justified in paying the remuneration referred to in order 3 upon the making of a resolution by the Committee of Inspection of the Company or alternatively upon approval by the Court of that remuneration.

5.    Pursuant to sections 37AF and 37AG of the Federal Court of Australia Act 1976 (Cth), on ground that it is necessary to prevent prejudice to the proper administration of justice and until further order of the Court the following parts of the evidence be marked confidential on the Court file, not be published, disclosed or accessed except with the consent of the Liquidators or by order of the Court made on an application in respect of which the Liquidators have been given at least three business days’ notice in writing

(a)    in respect of the affidavit of Peter Paul Krejci sworn and filed on 23 June 2023:

(i)    the last sentence of [13];

(ii)    [15];

(iii)    the words between ‘Company’ and ‘A copy’ in [18];

(iv)    [19] to [26];

(v)    the words between ‘9 June 2023’ in the second sentence and ‘I am informed by’ in [27];

(vi)    [28] to [33];

(vii)    [37] to [40];

(viii)    [46];

(ix)    [47], except for the first sentence;

(x)    [48];

(xi)    the words between ‘Company’ in the first sentence and ‘Mr Zakhaim’ in the second sentence in [51];

(xii)    the first sentence in [53] up to ‘there’ in the first line;

(xiii)    the last sentence in [53];

(xiv)    the last sentence in [54];

(xv)    the last sentence in [55];

(xvi)    the last sentence in [56];

(xvii)    the last sentence in [57];

(xviii)    the words between ‘representative’ and ‘Mr Zakhaim gave’ in [59];

(xix)    the words between ’31 July 2019’ and ‘As further noted’ in [59];

(xx)    the last sentence in [60];

(xxi)    the words between 'Hall & Wilcox’ and ‘A copy of’ in [70];

(xxii)    the first sentence in [71] up to ‘the Liquidators’ in the first line; and

(xxiii)    the first sentence in [73];

(b)    pages 8 to 36; 68 to 189; 284 to 285; and 377 to 386 of confidential exhibit PPK-3 to the affidavit of Peter Paul Krejci sworn and filed on 23 June 2023;

(c)    in respect of the affidavit of Andrew John Cummins sworn on 28 July 2023 and filed on 31 July 2023:

(i)    [14] to [15]; and

(ii)    [18] to [29];

(d)    pages 64 to 70; and 74 to 76 of confidential exhibit AJC-1 to the affidavit of Andrew John Cummins sworn on 28 July 2023 and filed on 31 July 2023;

(e)    the confidential affidavit of Mark Robert Petrucco sworn and filed on 25 August 2023 together with the annexure to that affidavit;

(f)    the Liquidators’ confidential submissions dated 25 August 2023; and

(g)    the confidential affidavit of Peter Paul Krejci sworn and filed on 13 September 2023 together with the annexure to that affidavit.

6.    Pursuant to section 588FF(3)(b) of the Corporations Act, the time for the making of an application by the Liquidators under section 588FF(1) of the Corporations Act be extended generally to 8 July 2026.

7.    Any party affected by order 6 and not on notice of the Liquidators’ application under section 588FF(3)(b) of the Corporations Act has liberty to apply to set aside order 6 above, such leave to be exercised on three business days’ notice to the Liquidators.

THE COURT NOTES THAT:

8.    The Liquidators undertake, in respect of their appointment as Liquidators of Union Standard International Group Pty Ltd (in liquidation):

(a)    not to pursue an application under section 588FF(1) of the Corporations Act if the amount claimed is less than $50,000; and

(b)    not to bring an application under section 588FF(1) of the Corporations Act against the Commonwealth Bank of Australia.

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

REASONS FOR JUDGMENT

CHEESEMAN J

INTRODUCTION

1    By amended interlocutory process filed on 31 July 2023, the plaintiffs, Peter Paul Krejci and Andrew John Cummins as joint and several Liquidators of Union Standard International Group Pty Ltd (in liquidation) (Company) seek a direction or judicial advice in relation to the continuation of civil proceedings they have commenced and orders that their remuneration, costs and expenses associated with those proceedings be paid out of funds held by the Company pursuant to a Statutory Trust arising by operation of s 981H of the Corporations Act 2001 (Cth) (the Directions Application). The proceedings which the Liquidators have commenced are against Gauld Tulloch Bove (GTB), the former auditors of the Company, Shay Zakhaim the former Chief Executive Officer of the Company, and LS Capital Holdings Pty Ltd, a company of which Mr Zakhaim is the sole director and secretary. The Directions Application is brought pursuant to section 90-15 of Schedule 2 to the Corporations Act (IPS), or, alternatively, s 63 of the Trustee Act 1925 (NSW).

2    The Liquidators also seek an order pursuant to s 588FF(3)(b) of the Corporations Act to extend the time for them to make an application under s 588FF(1) of the Corporations Act to 8 July 2026 (the Shelf Order Application). The Liquidators were appointed as joint and several voluntary administrators of the Company by resolution of its directors pursuant to s 436A of the Corporations Act on 8 July 2020 and subsequently as joint and several liquidators pursuant to a court order made on 3 September 2020. The relation-back day for the purpose of s 91 of the Corporations Act is 8 July 2020. Accordingly, claims pursuant to s 588FF of the Corporations Act were required to have been commenced by 8 July 2023. With the exception of the proceedings commenced against LS Capital, which was filed shortly before the expiration of the three year period, the Liquidators have not commenced voidable transaction claims. The application seeking relief under s 588FF(3)(b) was first filed on 6 July 2023, which was within time being before the three year period expired on 8 July 2023.

3    The application was heard in two parts on 8 and 18 September 2023 because the proceedings were adjourned on 8 September 2023 to afford the Liquidators an opportunity to adduce additional evidence.

CONCLUSION IN SUMMARY FORM

4    For the reasons which follow, I am satisfied that it is appropriate to make orders substantially in the form sought by the Liquidators in relation to the Directions Application and the Shelf Order Application.

NOTICE OF THE APPLICATION AND HEARING

5    The application is effectively made on an ex parte basis with notice being given by the Liquidators to all persons potentially with an interest in the application to the extent the Liquidators had contact details for those persons. At the hearing of the application the matter was called and no person applied to be heard.

6    Mr Krejci deposes to having provided notice of this application to:

(1)    the Australian Securities and Investments Commission;

(2)    the creditors of the Company;

(3)    LS Capital, Mr Zakhaim and Darren Burns (a director of the Company) ;

(4)    GTB; and

(5)    persons who may potentially be affected by the Shelf Order sought.

7    In relation to the last category of persons notified, I note that the Liquidators notified all persons where their investigations have disclosed a potential voidable transaction claim exceeding $50,000 in value and where they had the relevant contact details. The Liquidators did not inform persons in respect of whom potential claims of less than $50,000 in value had been identified because they have undertaken that they will not commence such claims. A notation to that effect is included in the orders sought by the Liquidators on this application. In the event that it transpires that a person affected by the Shelf Order was not notified it would be open to such a person to apply to set aside the order as of right insofar as it applies to the claim against that person: Fletcher and anor as liquidators of Octaviar Administration Pty Ltd v Anderson [2014] NSWCA 450 at [99] (Barrett JA, Beazley P and McColl JA agreeing at [1] and [2] respectively). Although it is not strictly necessary to do so, I consider that it is appropriate to expressly acknowledge that persons in that category may apply to set aside the Shelf Order and will make an order to that effect.

8    Mr Krejci deposes to the responses he has received to the notice he has given. There is only one of note in respect of the Commonwealth Bank of Australia (CBA), a party which potentially may be affected by the Shelf Order. The Liquidators have provided CBA with an undertaking not to pursue the potential claim against CBA and have agreed to include a notation to that effect in the proposed orders.

9    At the resumed hearing on 18 September 2023, the Liquidators adduced additional evidence which included evidence that two communications to persons potentially affected by the Shelf Order had been returned to sender.

PROCEDURAL BACKGROUND

10    The Directions Application is made in circumstances where the Liquidators became aware of a number of claims made against the Company in relation to funds held by it, including a number of claims made by persons to the effect that certain monies held by the Company were held on trust for those persons. Each of those claims was to some extent unique to the relevant claimant, and typically involved claims that the monies were “client monies” within the meaning of the Corporations Act, or alternatively, claims founded on principles of general trust law. These claims were resolved by orders made by the Court (then constituted by Jagot J) on 26 November 2021, to the effect that a number of categories of assets held by the Company were held on trust by it for certain Investors and Trading Clients, pursuant to s 981H of the Corporations Act (Trust Funds): Krejci, in the matter of Union Standard International Group Pty Limited (in liq) [2021] FCA 1483 (Statutory Trust Decision). In these reasons I adopt the nomenclature of Trading Clients and Investors as used by Jagot J in the Statutory Trust Decision.

11    Subsequent to the Statutory Trust Decision, an application similar to the present application was successfully made by the Liquidators for orders and directions to the effect that the Liquidators would be justified in using Trust Funds to conduct public examinations into the affairs of the Company: Krejci, in the matter of Union Standard International Group Pty Limited (in liq) (No 7) [2022] FCA 890 (Union Standard (No 7)). That application was determined in favour of the Liquidators pursuant to s 90-15 of the IPS.

12    The procedural history and factual background relevant to the present proceeding is partly addressed in the two earlier judgments of Jagot J to which I have referred. Familiarity with each of these decisions and the other interlocutory judgments in this proceeding to which I refer within is assumed for the purpose of these Reasons.

13    Upon obtaining the relief sought in Union Standard (No 7), the Liquidators conducted public examinations over a period of seven days. The public examinations have now concluded, although the Liquidators retain the right to call on certain of the summonses for examination.

14    Following the public examinations, the Liquidators commenced the proceedings against GTB, Mr Zakhaim, and LS Capital, referred to above. The claims are being pursued in two separate proceedings, both of which are pending in this Court. I will refer to these proceedings collectively as the Recovery Proceedings. The Recovery Proceedings are both at an early stage and are continuing by way of pleadings. Defences have not been filed and served at this point in time.

15    I have been provided with written submissions which outline the nature of claims in the Recovery Proceedings together with confidential legal advice from senior and junior counsel in respect of the proceedings against GTB and Mr Zakhaim and from the Liquidators’ solicitors in respect of the claim against LS Capital. I have also had regard to the current iteration of the pleadings in each proceeding. For the purpose of these Reasons, it suffices to outline these claims at a general level. The proceeding against Mr Zakhaim and GTB concern, inter alia, allegations of breaches of director’s duties against Mr Zakhaim and allegations of negligence and breach of an audit retainer against GTB. The proceeding against LS Capital involves allegations that certain transactions were uncommercial, voidable or involved an unfair preference when the Company was insolvent.

16    The relief sought in the present application is in part directed to obtaining a direction that the Liquidators are justified in continuing the Recovery Proceedings and should be permitted to access the Trust Funds to pay their remuneration (once approved by creditors, the Committee of Inspection or the Court), costs and expenses associated with the present application and the Recovery Proceedings.

17    The Recovery Proceedings were commenced in the context of a very high number of creditors’ claims against the Company with an estimated value of between $352 million and $617 million. The Liquidators are candid in acknowledging that, given the large number of creditors and the aggregate value of all creditors’ claims, the potential return to individual creditors from a successful prosecution of the Recovery Proceedings will be modest in relative terms. It is fair to say that on a prorated basis, the return could be described as de minimis. Further, that to pursue the Recovery Proceedings will require the Liquidators to utilise the Trust Funds. Against this, the Liquidators note that if the Recovery Proceedings are not continued and the Trust Funds are distributed to creditors the prorated return will in any event be de minimis. It is only when the total likely return of a successful outcome of the Recovery Proceedings is considered that the quantum assumes some substance in monetary terms.

18    It is in this broad context that the Liquidators seek judicial guidance in relation to their being justified to continue the Recovery Proceedings. The effect of guidance being given in the terms sought will protect the liquidators from personal liability. Although there is no evidence to suggest that at this stage the Liquidators have been criticised for commencing the Recovery Proceedings, the potential for the Liquidators to face such criticism, in the particular circumstances addressed below, is obvious.

EVIDENCE AND MATERIALS

19    In support of this application, the Liquidators rely on the open affidavits of Mr Krejci sworn on 22 July 2022, 30 June 2023 and 5 September 2023, together with exhibits PPK-12, PPK-13 and PPK-14 confidential affidavits of Mr Krejci sworn on 23 June 2023 and 13 September 2023, together with Confidential Exhibit PPK-3, a confidential affidavit of Mr Cummins sworn on 28 July 2023 and Confidential Exhibit AJC-1, the open affidavits of the Liquidators’ solicitor, Mark Robert Petrucco, sworn on 13 September 2023 and 18 September 2023 and confidential affidavit of Mark Robert Petrucco, sworn on 25 August 2023. The Liquidators have also obtained a number of advices from senior and junior counsel and their solicitors respectively on the claims the subject of the Recovery Proceedings. The advices form part of the confidential exhibits and annexures before me on this application.

20    I have also been provided with detailed written submissions in effectively four parts. The first part comprises the substantive submissions over which there is no confidentiality. The second part comprises confidential submissions which address the evidence set out in the confidential affidavits and exhibits. The third part comprises supplementary submissions in respect of the notice given to interested parties in respect of this application. The final part was in the form of an email received in advance of the resumption of the hearing. The Liquidators’ junior counsel also made comprehensive oral submissions.

FACTUAL BACKGROUND

21    The factual background of this matter has been partially set out in the Statutory Trust Decision at [5] to [19] and in Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 5) [2020] FCA 1335 (Krejci (No 5)) at [3] to [30] (Yates J) and need not be repeated. The background is also set out in the open affidavit of Mr Krejci sworn on 22 July 2022. In that affidavit the following additional matters not raised in the earlier decisions to which I have referred are addressed:

(1)    in the relevant period, the Company’s sole shareholder was Union Standard Group International Holdings Limited (registered in Samoa) (USG Samoa). As at 8 July 2020, USG Samoa had three directors, being John Carlton Martin, Darren Anthony Burns and Soe Hein Minn. Anya Victoria was a director of the Company between 10 December 2012 and 23 February 2017;

(2)    the Liquidators are unclear about the nature of the product offered to Investor Clients, the means by which that product was promoted to potential clients, how any return on the product was generated and the relationship of that product with the Company’s business and product offering to the Trading Clients pursuant to the Company’s AFSL;

(3)    as part of its operations, the Company used numerous offshore entities as money processors to receive and transmit monies between itself and either or both Trading Clients and Investor Clients. Mr Krejci’s evidence is that the Liquidators’ investigations indicate that USG Samoa or its affiliates may also control the funds recorded as owing to the Company held by these money processors. The money processor holding the greatest amount of the funds is U-Pay, which holds approximately $14.6 million; and

(4)    the Liquidators have conducted public examinations of:

(a)    Shay Zakhaim;

(b)    Darren Burns;

(c)    Joyce Shen, the Operations Manager of the Company;

(d)    Ilyas Ahmed, a former director of Shuriken Consulting Sydney Pty Ltd the Company’s former accountants);

(e)    Andrew Jeffers, a former director of Shuriken Consulting;

(f)    Pedro Sasso, a director of Maxi EFX;

(g)    Su-King Hii, a director of Innoinvest Pty Ltd (the Company’s former solicitor);

(h)    Robert Tulloch, a partner of GTB; and

(i)    Daniel Pienaar, a former employee of GTB

APPLICABLE PRINCIPLES

Direction pursuant to s 90-15 of Schedule

22    The Liquidators seek a direction pursuant to s 90-15 of the IPS which confers a broad power on the Court to make such orders as it thinks fit in relation to the external administration of a company. The Liquidators have standing to apply for an order under s 90-15: s 90-20(1)(d) IPS and definition of “officer” in s 9 of the Corporations Act.

23    In Union Standard (No 7), Jagot J identified the relevant principles as including the following (at [4]):

(1)    it is appropriate that liquidators be able to seek the making of an order in the terms as currently sought in order to ensure that they are protected against claims that they have acted unreasonably or inappropriately or in breach of any duty in undertaking the proposed conduct … provided they make full and fair disclosure of all the relevant facts and circumstances to the Court: Re Ansett Australia Limited (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [44] per Goldberg J;

(2)    this principle is subject to the requirement that the order sought does not merely relate to the making of some business or commercial decision which is specifically a matter for the liquidators within the exercise of their discretion and without there being any particular legal issue raised for consideration or other circumstance relevant to the propriety or reasonableness of the decision: see in particular, Re Ansett at [65] per Goldberg J;

(3)    as observed by Mansfield J in Re Addstone Pty Ltd (In Liq) [1997] FCA 1043; (1997) 25 ACSR 357 at 363, consistently with the observations above:

While the court is reluctant to give directions when purely commercial considerations are relevant to the liquidator’s decision … there will be circumstances where it is or may be appropriate to do so. One of those circumstances may be where the liquidator’s proposed decision is the subject of criticism by a particular creditor or creditors.

(4)    to the same effect, Brereton J in Re One.Tel [2014] NSWSC 457; (2014) 99 ACSR 247 at [35] said that:

the court should not make a direction the effect of which is to exonerate the liquidator from personal liability in respect of a commercial judgment … unless it is satisfied that the liquidator’s decision is, in all the circumstances, a proper one.

(5)    in Re KSK Holdings (Australia) Pty Ltd (In Liq) [2019] NSWSC 1463 at [18], Rees J made observations to the same effect, noting that it was not necessary that there in fact be a current attack on the proprietary or reasonableness of the liquidator’s decision for the Court to make such a direction, but the Court may choose to do so where there is the prospect of such an attack.

24    In relation to the second principle identified by Jagot J, the “something more” than the making of a business or commercial decision that is generally required before a Court will give guidance in relation to such a decision may be that it involves a legal issue of substance or procedure, or an issue of power, propriety or reasonableness or where there is or is a prospect of an attack on the propriety or reasonableness of the liquidator’s decision: Re Ansett Australia Limited (No 3) [2002] FCA 90; 115 FCR 409 at [65]; Re KSK Holdings (Australia) Pty Ltd (in liquidation) [2019] NSWSC 1463 at [18] (Rees J).

25    In exercising the discretion under s 90-15 of the IPS, a consideration for the court is that the effect of the direction, unlike an approval under s 477(2A) or (2B) of the Corporations Act, serves to exonerate the liquidator from personal liability, and therefore warrants a closer scrutiny than is required under s 477 of the Corporations Act. In giving a direction of the kind sought in the present proceeding, the court should be satisfied that the liquidator’s decision is, in all the circumstances, a proper one before issuing the direction sought: Re One.Tel Ltd and Ors [2014] NSWSC 457; 99 ACSR 247 at [35] (Brereton J).

Judicial Advice pursuant to s 63 of the Trustee Act

26    As an alternative basis for their application for directions in relation to the continuation of the Recovery Proceedings, the Liquidators relied on s 63 of the Trustee Act. The principles applicable to an application under s 63 of the Trustee Act are well established and were summarised in the written submissions. In view of the conclusion I have reached on the Liquidators’ primary relief under s 90-15 of the IPS, it is not necessary to address the Liquidators’ reliance on s 63 of the Trustee Act as an alternate source of power.

Shelf Order under s 588FF(3)

27    Pursuant to s 588FF(3), the Court has power to make a ‘shelf order’ extending the time for making an application under s 588FF(1) of the Corporations Act. The power is discretionary. The relevant principles include:

(1)    The court will have regard to:

(a)    the adequacy of the liquidator’s explanation for the delay in commencing proceedings;

(b)    (subject to (2) below) a preliminary view of the merits of the proposed proceedings; and

(c)    a balancing of the case for granting the extension against any actual prejudice to the respondents that is likely to arise from granting the extension;

Cussen, in the matter of Monarch Tower Pty Ltd (in liquidation) [2023] FCA 192 at [16] (O’Callaghan J) citing with approval Re Cohalan & Mitchell Roofing (in liq) [2020] VSC 222 at [30] to [33] (Sifris J).

(2)    where the liquidator’s purpose in seeking the extension of time is simply to put himself into a position where he can properly decide whether or not to bring proceedings, a preliminary inquiry into the merits of any consequent proceedings may not always be necessary: In the matter of Jehovah Jireh Enterprises Pty Ltd (in liq) [2020] NSWSC 1784 at [8] (Gleeson J); Langdon (Liquidator), in the matter of Phoenix Institute of Australia Pty Ltd (in liq) [2021] FCA 180 at [29] (Markovic J);

(3)    the onus is on the liquidator to show why the general rule established by s 588FF(3)(a) should not apply: Jehovah Jireh at [7];

(4)    if the application is made ex parte the Court must afford procedural fairness to potentially affected persons: BP Australia Ltd v Brown [2003] NSWCA 216; 58 NSWLR 322 at [133] to [136] (Spigelman CJ, Mason P, Handley JA). It is relevant to consider whether clearly identified persons with a substantial interest in the question to be determined have been given notice of the application.

(5)    the court has power make a shelf order extending time without specifying the particular transaction or transactions to which the order will apply: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; 254 CLR 489 at [3];

(6)    the following considerations may inform the exercise of the Court’s discretion in the case of a shelf order (Fortress Credit at [25]):

(a)    disadvantage to potential defendants not identified in a shelf order;

(b)    the encouragement to liquidators not to identify potential defendants, thereby reducing the prospect of opposition at initial application;

(c)    the risk of a multiplicity of litigation by successive defendants applying to reagitate extension applications of which they had not been given initial notice;

(d)    the risk of inconsistent outcomes on applications to set aside extension orders by respective defendants;

(e)    no finality, as claims by defendants that they were identifiable, but not identified, might cause ongoing challenges to any extension granted;

(f)    want of certainty for liquidators and prospective defendants who might seek to have leave revoked after it had been granted and after proceedings had commenced;

(g)    the potential for wasted costs to be incurred contrary to the interests of creditors; and

(h)    the determination of applications by reference only to evidence that the liquidator elected to put before the court;

(7)    the discretion is to be exercised having regard to the scope and purposes of Pt 5.7B with questions of what is reasonable or an unreasonable prolongation of uncertainty and the scope of such uncertainty to be decided on a case by case basis: Fortress Credit at [24]; and

(8)    provided the application is made within time, the Court may grant an order extending time notwithstanding the three year time limit has passed: Onefone Australia Pty Limited v One.Tel Limited [2007] NSWSC 268; 61 ACSR 429 at [36] (Barrett J).

Confidentiality

28    Section 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) allows the Court to make a suppression order in appropriate circumstances to prohibit the disclosure of evidence in a proceeding. Section 37AG of the FCA Act permits the Court to make such an order where the order is necessary to prevent prejudice to the proper administration of justice.

29    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] to [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; 240 CLR 651 at [38] to [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];

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

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

30    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] to [22] (Abraham J).

31    Similarly, it is recognised that 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 making an order under s 37AF: see Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 at [60] (Gleeson J). Another relevant consideration is whether disclosure would confer an unfair forensic advantage on an opposing party and in this way prejudice the proper administration of justice: Krejci, in the matter of Greatcell Solar Limited (in liq) [2022] FCA 67 at [28].

CONSIDERATION

Confidentiality

32    Having reviewed the affidavits and exhibits over which a confidentiality order is sought and after requiring the Liquidators to refine the extent of the material covered by the order, I am satisfied that it is both appropriate and necessary to make orders substantially as sought for the purposes of preventing prejudice to the proper administration of justice. Information of the kind which the Liquidators now seek to keep confidential is routinely the subject of a court ordered confidentiality regime. If the information is disclosed, the potential for an unfair advantage to be conferred upon those with interests in the litigation (and any future litigation in relation to the Company) contrary to the interests of the Company and the Liquidators is clear. Accordingly, I will make confidentiality orders as sought.

Directions Application

33    I am satisfied that I have power under s 90-15 of the IPS to grant the relief sought by the Liquidators in the Directions Application. The Liquidators’ position was that s 63 of the Trustee Act was relied on only in the alternative to s 90-15 of the IPS. As foreshadowed above, it is unnecessary to consider whether I have power under s 63 of the Trustee Act and if so, whether it is appropriate to provide judicial advice relying on that power.

34    In this case, the evidence and the submissions (including the confidential evidence and submissions) identify the relevant circumstances which cause me to be satisfied that it is appropriate for the Court to make the orders as sought.

35    Without rehearsing the detail of the whole of the background to which I have had regard, I am satisfied that the following factors favour granting the relief sought:

(1)    the Liquidators have appropriately sought and received the approval of the Committee of Inspection in respect of the substantive steps taken and the forensic direction contemplated. In the course of the hearing, counsel for the Liquidators properly drew to my attention that since the provision of information to the Committee of Inspection, the Liquidators’ evidence on an aspect of that information has changed. The Liquidators submit and I accept that the change in the information provided to creditors compared to the information relied on in this application is not material. The confidential evidence and submissions demonstrate that the Committee of Inspection has, on an informed basis, approved the Liquidators’ conduct and proposed course of action in respect of the Recovery Proceedings including that the Trust Funds be utilised in respect of the prosecution of those proceedings. This is a factor to which I afford significant weight. The Committee of Inspection is well placed to weigh the relative pros and cons of the course proposed by the Liquidators in the context of the competing projected returns on an aggregated basis, and on a prorated basis;

(2)    reasonable efforts have been made by the Liquidators to notify potentially interested parties being ASIC, creditors, LS Capital, GTB, Mr Zakhaim and Mr Burns and parties potentially affected by the Shelf Order and, following notice being given, no substantive opposition to the relief sought by the Liquidators has been forthcoming;

(3)    there is a public interest in permitting experienced Liquidators, acting in a diligent and proper fashion, to expose, by way of investigation, the true state of a company’s affairs in order to discharge their duties in what they have assessed to be in the company’s interest. I note that the circumstances disclosed in the evidence on this application, including the confidential evidence, demonstrates a particularly strong case in this regard;

(4)    based on my review of the confidential evidence on this application and taking into account that appropriate disclosures have been made in relation to potential defences and other matters going to the commercial viability of the claims made in the Recovery Proceedings in accordance with the duty on an ex parte application and indeed, as a condition of attracting the prophylactic effect of the judicial guidance sought, I am satisfied that on balance the Liquidators have established that the prospects of success are sufficient to favour giving guidance in the terms sought;

(5)    a practical consequence of the Statutory Trust Decision is that the fund from which it is necessary to draw in order to prosecute the Recovery Proceedings are the subject of the Statutory Trust; and

(6)    the quantum of any payments from the Trust Funds in respect of the Liquidators’ remuneration in connection with this application and the Recovery Proceedings is subject to further oversight in the form of being approved by a resolution of creditors, or the Committee of Inspection or by the Court.

36    I recognise that even if the Liquidators succeed in the Recovery Proceedings, any dividends to creditors are likely to be modest in comparison to the debts owed to creditors. That is a function of the very large aggregate amount of debts owed by the Company and the high volume of individual creditors. For this reason, notwithstanding the de minimis prorated return, I am satisfied it is appropriate to make a direction in the terms sought. In reaching this conclusion I have taken into account the anticipated total recovery for creditors and the range of amounts to be distributed to creditors as the relevant factor and not focussed merely on the anticipated dividend to individual creditors: Hall v Poolman [2009] NSWCA 64; 75 NSWLR 99 at [117]. In any event, even if after costs, the Recovery Proceedings do not result in any return to creditors, it does not necessarily follow that the proceedings are improperly brought considering all the circumstances in the present case: Hall v Poolman at [153] to [156].

37    In these proceedings there is a strong public interest in the Liquidators bringing the Recovery Proceedings against Mr Zakhaim as an officer for breach of duty or insolvent trading and proceedings for recovery of unfair preferences. The claim is analogous with a claim against a director in this respect: Hall v Poolman at [128]; Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; 93 NSWLR 459 at [58]; and Macks v Viscariello [2017] SASCFC 172; 130 SASR 1 at [509]. The Recovery Proceedings are otherwise directed to exposing the role of the Company’s auditors, which may also serve the public interest given the public purpose served by company auditors and also by AFSL auditors. That there may be a public interest in litigation about matters of significance such as the alleged negligence of auditors was recognised in EDIS Service Logistics Pty Ltd v PKF East Coast Practice & ors; Kleenmaid Customer Solutions Pty Ltd v PKF East Coast Practice & ors; Kleenmaid Corporate Pty Ltd v PKF East Coast Practice & ors [2018] QSC 262 at [16].

38    Another factor that informs my conclusion that it is appropriate to make a direction substantially as sought, is that it is apparent that the Liquidators may be criticised at some later stage for having continued the proceedings in light of the likely de minimis dividend rate to individual creditors. In those circumstances, I am satisfied that it is appropriate for the Liquidators to have sought judicial guidance and that providing a direction as sought will be in the interests of the beneficiaries of the Statutory Trust as well as serving to exonerate the Liquidators from personal liability: Re KSK Holdings at [18] to [20].

39    The final matter that I have taken into account is that if the Trust Funds are not utilised to pursue the proceedings, there would, in any event, be a de minimis dividend to individual creditors resulting from the distribution of the Trust Funds, subject to any other recoveries the Liquidators are able to make. For this reason, individual creditors are unlikely to be impacted in a material way by the grant of the relief sought. I have weighed that against the public interest in the proceedings being continued.

Shelf Order

40    The Liquidators have concluded based on their investigations to date that up to about three hundred million dollars in Investor and Trading Clients’ funds are not accounted after allowing for the relatively small balance held in the Company’s client trust accounts as at the date of the Liquidators’ appointment.

41    The Liquidators have in the confidential material before me on this application provided an outline of significant payments to identified categories of recipients that may be recoverable under s 588FF of the Corporations Act if an extension of time is granted. On the basis of the confidential evidence before me I am satisfied that a preliminary view of the merits of those potential claims tends in favour of extending the time, particularly when viewed in the context of the complexity of the Company’s affairs and the difficulties the Liquidators have faced in terms of logistics but also in facing obstruction in undertaking their investigations to date.

42    I am satisfied that the Liquidators’ explanation for the delay is both detailed and adequate in the circumstances. The investigations undertaken by the Liquidators to date have been substantial and time consuming. The affairs of the Company are complex, with significant overseas connections. The Liquidators have spent considerable time identifying and getting in the assets of the Company. They have faced obstruction in their attempts to access the Company’s records and unravel the detail of the Company’s operations. This has resulted in repeated applications to the Court: Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 1) [2020] FCA 1110; Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 1111; Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 3) [2020] FCA 1109; Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 4) [2020] FCA 1252; Krejci (No 5) [2020] FCA 1335. The claims in respect of which the Liquidators seek to extend the limitation period were only identified after the public examinations were conducted. The conduct of the examinations was itself time consuming and also required an application to be made to the Court to enable the Liquidators to fund the examinations using the Trust Funds. I am satisfied that in all of the circumstances the Liquidators have provided a proper explanation for the delay in seeking to commence proceedings.

43    The length of the extension of time sought is justified having regards to the further investigative steps outlined in the confidential evidence and submissions. Having regard to the confidential nature of the evidence in respect of the further investigative steps that are likely to be taken, I do not propose to say more about those steps. I am satisfied having regard to: the nature of the further investigative steps; the confidential evidence before me; and the fraught procedural history to date (including the active obstruction the Liquidators have faced) that even though the extension sought is lengthy, it is warranted in the particular circumstances of this case.

44    As set out at paragraph 5 above, none of the notified parties have appeared to oppose the Shelf Order. It follows that none of the parties notified have identified or sought to demonstrate to the Court any specific prejudice which may arise by reason of the Shelf Orders sought. Parties who have not been notified, and who may at a future point in time be prejudiced, will have liberty to apply to set aside the Shelf Order after providing three days’ notice to the Liquidator.

CONCLUSION

45    For these reasons, I made orders substantially in the form sought by the Liquidators when the hearing resumed on 18 September 2023.

Associate:

Dated:    18 September 2023