Federal Court of Australia

Yeo (liquidator), in the matter of Tuftex Carpets Pty Ltd (in liquidation) [2025] FCA 1200

ORDERS

THE COURT NOTES THAT:

In these Orders:

(a)    “the summons” means the summons for examination addressed to Karen Tracey Scott dated 4 February 2025;

(b)    “the production order” means the orders for production of documents by N.A.M.R.S. Pty Ltd, KMR Creation Pty Ltd, Karbridge Superannuation Pty Ltd, Scott Investments No. 1 Pty Ltd, A A & G Pty Ltd, Salisbury Plant Holdings Pty Ltd, and Balston Holdings Pty Ltd made by the Registrar on 4 February 2025; and

(c)    “litigation representative” means Mrs Cary Judith Rossetti in her capacity as litigation representative of Mrs Karen Tracey Scott.

THE COURT ORDERS THAT:

1.    Pursuant to s 37AF(1)(b)(iv) of the Federal Court of Australia Act 1974 (Cth) and on the grounds set out in s 37AG(1)(a) and (c) of that Act, the confidential affidavit of the litigation representative made 3 September 2025 and annexure “C-ARY-03” of the affidavit of Andrew Reginald Yeo made on 4 September 2025 (the documents), be kept confidential and not be provided or disclosed to any person until further order of the Court.

2.    Order 1 does not prevent the applicants, Mrs Scott, the litigation representative or their legal representatives (together, the permitted recipients), from disclosing to other permitted recipients or otherwise accessing the documents on terms as agreed to between the permitted recipients and subject to the conditions agreed between them.

3.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the entry into by the applicants of the terms of settlement dated 15 July 2025 (Terms of Settlement) annexed to the documents is approved, nunc pro tunc.

4.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), the applicants are justified in entering into and causing Tuftex Carpets Pty Ltd (in liquidation) and Tuftmaster Carpets Pty Ltd (in liquidation) to enter into and giving effect to the Terms of Settlement.

5.    Pursuant to rules 9.70 and 9.71 of the Federal Court Rules 2011 (Cth), the litigation representative’s entry into of the Terms of Settlement is approved.

6.    The examination of Mrs Scott pursuant to the summons be concluded.

7.    The proceeding be otherwise dismissed.

8.    The applicants’ costs of the proceeding be costs in the liquidations of Tuftex Carpets Pty Ltd (in liquidation) and Tuftmaster Carpets Pty Ltd (in liquidation).

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

REASONS FOR JUDGMENT

BEACH J:

1    This is yet another application for approval under s 477(2B) of the Corporations Act 2001 (Cth) of a settlement reached by the liquidators of Tuftex Carpets Pty Ltd (in liquidation) and Tuftmaster Carpets Pty Ltd (in liquidation) (collectively, the companies) in terms of claims made against a former director under ss 588G and 588M and against the relevant holding company under ss 588V and 588W. The litigation representative of the former director also separately seeks such approval.

2    It is not necessary to set out the background to the claims or the present approval application, which background is adequately detailed in an affidavit sworn on 3 September 2025 by one of the liquidators.

3    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.

4    As to the relevant principles to be applied, these have been efficiently identified by Jackman J in Lombe (liquidator), in the matter of Babcock & Brown Limited (in liq) [2025] FCA 1180 at [40] to [43].

5    Moreover, to state the obvious in the present context, s 477(2A) has no application.

6    Further, it is necessary to give a direction under s 90-15 of the Insolvency Practice Schedule (Corporations) that the liquidators are justified in entering into and causing the companies to enter into and to give effect to the terms of settlement.

7    In terms of the Court’s powers to give directions to liquidators or other types of external administrators such as voluntary administrators, one can do no better than refer to the exposition of the relevant principles by Goldberg J in the Ansett administration, which I have some familiarity with in another life, in Re Ansett Australia Ltd [2001] FCA 1439; (2001) 39 ACSR 355 at [58] to [68] and in Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [42] to [67], which dealt with a statutory analogue to the one I am considering.

8    In Re Ansett Australia Ltd (2001) Goldberg J said at [58] to [68]:

The applications are made by way of directions pursuant to s 447D of the Act which is, in substance, in similar terms to s 479(3) of the Act which allows a liquidator of a company to apply to the Court for directions “in relation to any particular matter arising under the winding up”. In Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141, a company subject to a deed of company arrangement applied to the Court pursuant to s 447D of the Corporations Law seeking directions permitting it to sell goods the title to which were disputed between the company and another party. Lindgren J observed at 149:

“I see no distinction in the present respect between an application by administrators under s 447D and an application by a liquidator under s 479(3). …The procedure afforded by s 447D to administrators under a deed of company arrangement is clearly drawn from, and is in substance the same as, that afforded to liquidators by s 479(3).”

Accordingly, authorities relevant to the construction and application of s 479(3) are also relevant to the present applications. There are a number of authorities which consider the consequences of an order upon the rights of third parties made upon an application by a liquidator for directions under s 479(3) of the Corporations Law. In Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, McLelland J considered the genesis and legislative history of s 479(3) of the Corporations Law (the predecessor of the Corporations Act) and observed at 679-680:

“Modern Australian authority confirms the view that s 479(3) ‘does not enable the court to make binding orders in the nature of judgments’ and that the function of a liquidator’s application for directions ‘is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation’: [cases cited omitted].”

This position has been adopted in a number of subsequent cases: Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745; Re J W Murphy & P C Allen; Re BPTC (in liq) (1996) 19 ACSR 569 at 570; Re New Cap Reinsurance Corporation (Burmuda) Ltd (prov liq apptd) v Chase Manhattan Bank (199) 32 ACSR 470 at 478-479; Re Heron Abbey Pty Ltd (in liq) (1999) 32 ACSR 490 at 492; Bastion v Gideon Investments Pty Ltd (2000) 18 ACLC 854 at 862. The same position has been expressed in relation to directions given pursuant to s 447D of the Corporations Law: Editions Tom Thompson Pty Ltd v Pilley (supra).

However, there is no issue in the present applications that the orders sought by the administrators and the Hazelton administrator bind third parties. The directions sought are effectively advisory and only have effect in relation to the administrators and the Hazelton administrator and the companies under administration: s 437B of the Act.

The nature of the type of directions commonly sought under s 479(3) of the Corporations Law and its predecessors were considered by Young J in Sanderson v Classic Car Insurances (1985) 10 ACLR 115 at 117 as involving:

“(a)    guidance to the liquidator on matters of law …

(b)    questions involving legal procedure …

(c)    whether a liquidator should act on his commercial judgment to postpone a sale because he recognises his legal duty ordinarily requires him to reduce the company’s assets into cash as soon as possible and to distribute …or

(d)    where there are two or more competing purchasers for the company’s property and the liquidator can see that it may be alleged that the liquidator has acted mala fide or in an absurd or unreasonable or illegal way …”

Essentially what a court is doing when giving directions under provisions such as s 447D and s 479(3) in relation to a question whether an administrator or liquidator should enter into an agreement, or whether an administrator or liquidator should give effect to an agreement, is to provide the administrator or liquidator with protection against claims that he or she acted inappropriately or unreasonably in entering into, and performing, the agreement.

This consequence was identified by McLelland J in Re G B Nathan & Co Pty Ltd (in liq) (supra) at 679:

“The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator’s application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitrary form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.”

(see also Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 10 ACSR 626; Re Dallhold Investments Pty Ltd (in liq) (1994) 130 ALR 287; Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357; Re Heron Abbey Pty Ltd (in liq) (supra)).

In the present applications the administrators have agreed to accept a substantial sum in exchange for releases to Air New Zealand and the Directors in respect of claims which the Ansett group (including the Hazelton companies) might have had against Air New Zealand and the Directors and the waiver of certain claims. In deciding to compromise those claims and give the releases, the administrators have exercised a commercial judgment by considering and weighing the benefits and advantages to the Ansett group and its creditors in agreeing to that course as against the disadvantages of not giving the releases, not receiving immediately the sum of $150 million but keeping open the opportunity to take proceedings against Air New Zealand under the Letter of Comfort and against the Directors in respect of various causes of action.

In a number of authorities, the courts have made it clear that courts should pay regard to the commercial judgment of liquidators when considering compromises of claims or causes of action made by liquidators in respect of which compromises the approval of the court is sought. The Act and its predecessors, entrust to liquidators and administrators the conduct of liquidations and administrations, albeit subject to the ultimate supervision of the court. The Court will generally defer to the commercial judgment of liquidators and administrators. In Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83, Giles J said at 85-86:

“In any application pursuant to s 377(1) [equivalent to Corporations Act s 477(2A)] the 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.

The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis.”

Put shortly, it is not the role of the Court to make a commercial judgment for the liquidators or administrators or to substitute its judgment for their judgment. The Court is not qualified to do so and it is not part of the judicial function to do so. Street CJ made this point in Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 at 232:

“When the court is required to pronounce upon the commercial prudence of a transaction, it enters upon a slippery and uncertain field. Apart from the lawyer’s disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence restrict the available material to far less than is necessary for the making of a commercial decision.”

As I have pointed out earlier, although courts will not pronounce upon the commercial prudence of a particular transaction, they will act in an appropriate case to protect liquidators and administrators from claims that they have acted unreasonably in entering into particular transactions. That protection will remain so long as the liquidators or administrators have made a full and fair disclosure to the Court of all facts material to the subject-matter under consideration: Re G B Nathan & Co Pty Ltd (in liq) (supra) at 679; Mentha v G E Capital Ltd (1997) 27 ACSR 696 at 702.

In this consideration of relevant principles, I have considered the relevant principles as applying equally to court appointed liquidators and administrators appointed pursuant to Pt 5.3A of the Act.

There is a difference between court appointed liquidators and administrators appointed pursuant to the provisions of Pt 5.3A of the Act. Administrators are not officers of the court in the same way as court appointed liquidators are officers of the court. Part 5.3A of the Act enables an administrator of a company to be appointed by the company (s 436A), by a liquidator of a company (s 436B), by a person entitled to enforce a charge on the whole of the company’s property (s 436C) and by the court where a company is under administration but no administrator is acting (s 449C(6)). There is a suggestion in some authorities that a voluntary liquidator not appointed by the Court is not an officer of the Court: Re London County Commercial Reinsurance Office [1922] 2 Ch 67 at 84; Re David A Hamilton & Co Ltd (in liquidation) (1928) NZLR 419 at 422, but see Re T H Knitwear (Wholesale) Ltd [1987] 1 WLR 371 at 377.

9    It would involve me in an act of both supererogation and superfluity to superimpose my own observations on this synthesis.

10    Now I will not discuss the merits of the various claims, but it would seem that insolvency of the companies during all or a substantial part of the relevant period was going to be a contestable issue. In this respect the following propositions are not in doubt.

11    First, insolvency is a question of fact to be ascertained from a consideration of the relevant company’s financial position taken as a whole.

12    Second, it is necessary to have regard to the commercial realities which will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security and when such realisations are achievable.

13    Third, insolvency can be considered to involve an endemic shortage of working capital as distinct from a temporary lack of liquidity. It is not uncommon for companies to lack liquidity from time to time but still fall short of being insolvent. In this sense, insolvency has at times been described as a state of affairs, rather than an event at a single point of time.

14    Fourth, the cash flow test is the primary test for insolvency; see also s 95A. This test focuses on the assets of the company that can be realised within time to pay down the company’s indebtedness. It also requires an analysis of the due dates for payment of debts, including contingent claims.

15    Fifth, whilst not the primary method for assessing a company’s insolvency, balance sheet analysis is relevant to obtaining a holistic overview of a company’s financial position.

16    But whether and when a company became insolvent is not straightforward. The tests for insolvency just described include a complex and multifaceted analysis of a company’s trading terms, commercial realities, liabilities, assets and cash flow. And the larger the business, the more complicated this process can be. I do not need to say anything further on the topic.

17    Further, it is unnecessary for me in the present context to traverse questions such as whether, first, there was reliance on competent and reasonable persons to provide adequate information concerning solvency (ss 588H(3) and 588X(3)), second, whether there was a lack of reason to suspect that the companies were insolvent or, putting it in the positive, reasonable grounds to expect solvency (ss 588H(2) and 588X(2)) and third, whether there is any entitlement to relief from liability (s 1317S).

18    Generally, I am satisfied that the terms of settlement are commercial and constitute a reasonable compromise of the relevant claims under ss 588G, 588M, 588V and 588W.

19    I will make the orders sought.

Associate:    

Dated:    29 September 2025