FEDERAL COURT OF AUSTRALIA Lo Pilato, in the matter of Pepe's Paperie Group Pty Limited (In Liquidation) [2011] FCA 1034 Citation: Lo Pilato, in the matter of Pepe's Paperie Group Pty Limited (In Liquidation) [2011] FCA 1034 Parties: FRANK LO PILATO IN HIS CAPACITY AS LIQUIDATOR OF PEPE'S PAPERIE GROUP PTY LIMITED (IN LIQUIDATION) ACN 129 870 088 File number(s): NSD 753 of 2011 Judge: EMMETT J Date of judgment: 15 July 2011 Legislation: Corporations Act 2001 (Cth) s 477(2B) Date of hearing: 15 July 2011 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 13 Counsel for the plaintiff: S Golledge Solicitor for the plaintiff: Stacks/The Law Firm IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 753 of 2011 IN THE MATTER OF PEPE'S PAPERIE GROUP PTY LIMITED (IN LIQUIDATION) ACN 129 870 088 FRANK LO PILATO IN HIS CAPACITY AS LIQUIDATOR OF PEPE'S PAPERIE GROUP PTY LIMITED (IN LIQUIDATION) ACN 129 870 088 Plaintiff JUDGE: EMMETT J DATE OF ORDER: 15 JULY 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), approval be granted for the plaintiff, as liquidator of Pepe's Paperie Group Pty Limited, to enter into an agreement in the form, or substantially in the form, of Exhibit 1 in the proceeding. 2. The costs of this application be costs in the winding up of Pepe's Paperie Group Pty Limited. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 753 of 2011 IN THE MATTER OF PEPE'S PAPERIE GROUP PTY LIMITED (IN LIQUIDATION) ACN 129 870 088 FRANK LO PILATO IN HIS CAPACITY AS LIQUIDATOR OF PEPE'S PAPERIE GROUP PTY LIMITED (IN LIQUIDATION) ACN 129 870 088 Plaintiff JUDGE: EMMETT J DATE: 15 JULY 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiff, Mr Frank Lo Pilato, is the liquidator of Pepe's Paperie Group Pty Limited (the Company). Mr Lo Pilato was appointed administrator of the Company on 21 September 2009 under s 436A of the Corporations Act 2001 (Cth) (the Corporations Act). At a meeting of creditors held on 27 October 2009, it was resolved to wind up the Company, and Mr Lo Pilato was appointed liquidator of the Company. 2 Mr Lo Pilato, following his investigations into the affairs of the Company, has identified a number of transactions conducted between 22 March 2009 and 21 September 2009 that may have given rise to unfair preferential payments. However, the Company has limited funds. Accordingly, Mr Lo Pilato proposes to enter into a funding agreement with Pretium Funding Pty Limited (Pretium) for the purposes of funding possible claims by him, as liquidator, against recipients of the payments made by the Company that may constitute unfair preferential payments. 3 Under s 506(1)(b) of the Corporations Act, Mr Lo Pilato may exercise any of the powers that the Corporations Act confers on a liquidator in a winding up in insolvency or by the Court. Under s 477(2)(m), a liquidator of a company may do all such things as are necessary for winding up the affairs of the company and distributing its property. The prosecution of proceedings to recover preferential payments is clearly within that subsection, if not within other subsections of s 477 of the Corporations Act. However, under s 477(2B), the liquidator of a company must not enter into an agreement on the company's behalf if the term of the agreement may end, or obligations of the party to the agreement may, according to its terms, be discharged by performance, more than three months after the agreement is entered into, even if the term may end or the obligations may be discharged within those three months. Neverthless, such an agreement may be entered into with the approval of the Court, with the approval of the committee of inspection, or with the approval of a resolution of the creditors. 4 By s 506(1A)(a) of the Corporations Act, s 477(2B) applies in relation to Mr Lo Pilato as if he were a liquidator in a winding up in insolvency or by the Court. Under the terms of the proposed funding agreement with Pretium, it is clear enough that obligations of a party to the agreement may be discharged by performance more than three months after it is entered into. 5 Arrangements have been made by Mr Lo Pilato for a firm of solicitors to act on his behalf in prosecuting the prospective claims. He has engaged the firm on a speculative basis. That is to say, the firm will only be entitled to payment of its professional fees if any funds are recovered as a result of the proposed claims. The firm has agreed to charge its usual hourly rates for the relevant work and will not be entitled to an uplift or success fee if the claims are successful. For that reason, Mr Lo Pilato is satisfied that the commercial terms of the firm's retainer are appropriate, not unusual and generally in the interests of creditors. He has previously engaged the same firm to act on his behalf in respect of similar claims, and is satisfied that the firm has the relevant expertise to conduct the proposed claims on his behalf. 6 Mr Lo Pilato has indicated the general basis upon which he considers that it is desirable to prosecute the proposed claims. It appears that in February 2009 the Company wrote to its suppliers informing them that it was not in a position to pay its outstanding debts to them in one full amount. It offered to enter into a repayment arrangement. Mr Lo Pilato has identified payments by the Company to suppliers totalling in excess of $400,000, made in the period from February 2009 to the date of his appointment, that appear to him to be prima facie potential unfair preference payments. In addition, he has identified payments totalling in excess of $118,000 to the Commissioner of Taxation that were made by the Company during the relation back period. He is advised that those payments also constitute, prima facie, potential unfair preference payments. Thus, he has identified, at least on a prima facie basis, potential unfair preference claims for payments made by the Company in the relation back period for in excess of $525,000. 7 On the basis of his preliminary investigations of the books and records of the Company that are presently available, Mr Lo Pilato has formed the view that the Company may have been insolvent from February 2009 at the latest, and potentially from as early as July 2008. On the basis of those preliminary investigations, he has estimated the potential quantum of insolvent trading claims that could be brought against the directors at between $400,000 and $1 million. 8 In his report to creditors of 16 October 2009, Mr Lo Pilato indicated that the Company had operated five retail stores selling stationery and art supplies from leased premises. The Company's head office operated from leased premises in the Australian Capital Territory. In his report, Mr Lo Pilato said that the estimated realisable value of the Company's assets was no greater than $376,000, and that its total liabilities exceeded $1,345,000. Thus there is an estimated deficiency of at least $969,400. 9 The prosecution of the prospective claims is therefore, on its face, worth pursuing. However, there have been some slightly unusual circumstances concerning the proposal to enter into the funding agreement with Pretium. In his report to creditors of 7 March 2011 Mr Lo Pilato informed the Company's creditors that the administration did not have sufficient funds to investigate any further the possibility of claims or to bring proceedings for recovery of the preference payments. He recommended to the creditors that they consider providing funding to enable him to commence the proposed proceedings, and sought funding from the creditors for that purpose. He informed the creditors that, if he did not receive any interest from the creditors in funding him in the proposed proceedings, he would seek litigation funding from Pretium. 10 The meeting convened by notice of 7 March 2011, which enclosed the report of that date, was held on 23 March 2011. The only persons physically present were two directors, who each held proxies for creditors. Each director had a potential exposure in respect of claims that Mr Lo Pilato could potentially bring. A shareholder also attended by proxy. Accordingly, the only parties present at the meeting were related entities within the meaning of the Corporations Act. Mr Lo Pilato proposed a resolution concerning the obtaining of funds to pursue claims against related parties and any other party, and authorising him to enter into funding agreements with litigation funding organisations for an indefinite duration. The resolutions were unanimously defeated on the voices by those creditors who attended the meeting. Since no parties who were unrelated to the Company attended the meeting, Mr Lo Pilato has formed the view that the rejection of the proposal should not stand in the way of his prosecution of the claims in respect of possible preferential payments. Neither at the meeting nor subsequently has any creditor communicated with him in relation to his request for funding. 11 It is in that context that Mr Lo Pilato proposes to enter into the arrangement with Pretium. The proposed agreement with Pretium is in a fairly common form. Under it, Pretium will provide a facility in a fixed sum to cover disbursements associated with the proposed proceedings, including Court filing fees and the fees of counsel, will provide any security for costs ordered by the Court or otherwise agreed, will indemnify Mr Lo Pilato in respect of any adverse costs orders and will give security for its obligations in relation to costs, orders and security by providing a bank guarantee. In consideration for providing the litigation funding, Pretium will receive 35 per cent of the share of the net amount recovered following resolution of the claims. That proportion is within the normal range of arrangements of that type. If the funding agreement is entered into, and the proposed proceedings are successful, there is every prospect that the return to creditors would be improved significantly. At present the prospective dividend to priority and unsecured creditors is nil. Mr Lo Pilato therefore considers that it is in the interests of the creditors for him and the Company to enter into the proposed funding agreement with Pretium. 12 Mr Lo Pilato's solicitors have notified all known creditors of his intention to make this application. Unfortunately, the notification indicated that the matter would be listed in the Registrar's list. The Registrar does not have the power to make an order under s 477(2)(b). The matter was, accordingly, listed before me today as Corporations Judge. However, inquiries made of the Registrar have satisfied me that there was no attendance in the Registrar's Court by any creditor seeking to be heard in relation to this application. The application was correctly recorded in both the published list and the Court list within the building as being before me in Court No. 1. When the matter was called today, there was no appearance for anybody other than counsel for Mr Lo Pilato. 13 In the circumstances, I am satisfied that the creditors have been given an appropriate opportunity to appear and be heard in relation to the application. Since there is no opposition, I am satisfied that it is appropriate to make the order sought in the originating process filed on 27 May 2011. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 2 September 2011