FEDERAL COURT OF AUSTRALIA Walker and Moloney, in the matter of ZYX Developmental Learning Centres Pty Limited (in liq) (Receivers and Managers Appointed) [2011] FCA 1110 Citation: Walker and Moloney, in the matter of ZYX Developmental Learning Centres Pty Limited (in liq) (Receivers and Managers Appointed) [2011] FCA 1110 Parties: PETER WALKER AND GREGORY MOLONEY (IN THEIR CAPACITY AS LIQUIDATORS OF ZYX DEVELOPMENTAL LEARNING CENTRES PTY LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502) and ZYX DEVELOPMENTAL LEARNING CENTRES PTY LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502 File number(s): NSD 1823 of 2011 Judge: JAGOT J Date of judgment: 20 October 2011 Corrigendum: 26 October 2011 Catchwords: CORPORATIONS – application for Court's approval for liquidators to enter into litigation funding agreement on behalf of company Legislation: Corporations Act 2001 (Cth) ss 477, 511 Cases cited: ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No 9) [2009] FCA 1462 ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No 10) [2011] FCA 517 Date of hearing: 20 October 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 13 Counsel for the Plaintiffs: Mr J Baird Solicitor for the Plaintiffs: Kemp Strang FEDERAL COURT OF AUSTRALIA Walker and Moloney, in the matter of ZYX Developmental Learning Centres Pty Limited (in liq) (Receivers and Managers Appointed) [2011] FCA 1110 CORRIGENDUM 1. The date of the judgment, hearing and orders in this matter, which is presently recorded as "20 October 2011", should in each case read "21 October 2011". I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 26 October 2011 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1823 of 2011 IN THE MATTER OF ZYX DEVELOPMENTAL LEARNING CENTRES (IN LIQ) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502 PETER WALKER AND GREGORY MOLONEY (IN THEIR CAPACITY AS LIQUIDATORS OF ZYX DEVELOPMENTAL LEARNING CENTRES PTY LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502) First Plaintiff ZYX DEVELOPMENTAL LEARNING CENTRES PTY LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502 Second Plaintiff JUDGE: JAGOT J DATE OF ORDER: 20 OCTOBER 2011 WHERE MADE: SYDNEY THE COURT: 1. DIRECTS pursuant to section 511(1) of the Corporations Act 2001 (the Act) that the First Plaintiffs are justified in entering into the funding agreement with Litigation Lending Services Limited in the form set out in Confidential Exhibit "GMM3" to the affidavit of Gregory Michael Moloney sworn on 20 October 2011 and filed in these proceedings (the Funding Agreement). 2. ORDERS pursuant to section 477(2B) of the Act that the making by the First Plaintiffs as Liquidators of the Second Plaintiff, for and on behalf of the Second Plaintiff, of an agreement which is in, or substantially to the effect of, the document that is Confidential Exhibit GMM3 is approved. 3. ORDERS pursuant to section 477(2B) of the Act as applicable by section 511 that the First Plaintiffs may enter into fee agreements with Kemp Strang Lawyers and such counsel as the liquidators deem necessary to retain for the purposes of the litigation referred to in the Funding Agreement. 4. ORDERS that confidential exhibits "GMM2" and "GMM3" to the affidavit of Mr Gregory Michael Moloney sworn on 20 October 2009 be kept in the court file in this proceeding in a sealed envelope marked "Confidential – Not to be opened by any person without further order of a Judge of this Court and giving the First Plaintiffs, care of their Solicitors, Kemp Strang, at least 48 hours' prior notice of any application seeking an order". 5. ORDERS that the First Plaintiffs' costs and expenses of the application be costs and expenses of the liquidation of the Second Plaintiff. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1823 of 2011 IN THE MATTER OF ZYX DEVELOPMENTAL LEARNING CENTRES (IN LIQ) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502 PETER WALKER AND GREGORY MOLONEY (IN THEIR CAPACITY AS LIQUIDATORS OF ZYX DEVELOPMENTAL LEARNING CENTRES PTY LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502) First Plaintiff ZYX DEVELOPMENTAL LEARNING CENTRES PTY LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 010 788 502 Second Plaintiff JUDGE: JAGOT J DATE: 20 OCTOBER 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 By this application, filed on 20 October 2011, the first plaintiffs as liquidators of the second plaintiff seek a direction pursuant to s 511 of the Corporations Act 2001 (Cth) (the Act) to the effect that they are justified in entering into a funding agreement with Litigation Lending Services Limited (LLS) and consequential orders pursuant to s 477(2B) of the Act. Section 477(2B) provides that: (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 a charge) if: (a) … (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. 2 A litigation funding agreement, almost by definition, is an agreement which potentially falls within s 477(2B). 3 Section 511 of the Act provides, insofar as relevant, that a liquidator may apply to the Court to determine any question arising in the winding-up of a company or to exercise any of the powers the Court might exercise if the company were being wound up by the Court, and that (under s 511(2)) the Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just. 4 This is not the first application by the liquidators of the second plaintiff for the Court's approval to enter into a litigation funding agreement. In ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No 9) [2009] FCA 1462, Emmett J considered an application by the administrators of the company for approval to enter into a litigation funding agreement in order to provide funding for the conduct of public examinations. In his reasons for judgment at [1]-[7], Emmett J set out the background to the application. His Honour approved entry into the litigation funding agreement. In ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No 10) [2011] FCA 517, Emmett J considered an application for approval to enter into another funding agreement. Again, his Honour set out the background to the application at [1]-[5] and determined in that matter also that the application should be approved. 5 The present application is supported by an affidavit of Gregory Michael Moloney sworn 20 October 2011. In that affidavit, Mr Moloney deposes to the fact that he is one of the joint liquidators of the company formerly known as ABC Developmental Learning Centres Pty Limited and now known as ZYX Developmental Learning Centres Pty Limited. Mr Moloney's affidavit records that, with his partner Mr Peter Walker, he was appointed as an administrator of the ABC group of companies (the ABC Group) on 6 November 2008. At the same time, receivers and managers were appointed to and took control of the assets of the ABC Group. On 2 June 2010, there was a resolution passed at the second meeting of creditors for each of the companies within the ABC Group that the companies should be wound up and placed into liquidation. At that time, Mr Moloney and Mr Walker were appointed as the liquidators of the companies in the ABC Group, including the second plaintiff. 6 According to Mr Moloney, since their appointment the receivers have been carrying on the business of the ABC Group in their capacity as receivers and (since 2 June 2010) as agents for that group. Mr Moloney also deposes to the fact that, other than certain funding made available by the receivers or third parties for specific tasks and the proceeds of a preference action which was recently settled, the liquidators have had and now have no funds available to them in the administration and liquidation, as all assets of the ABC Group are controlled by the receivers. 7 Mr Moloney has conducted investigations into various issues in relation to the companies within the ABC Group since his appointment as liquidator. It appears from Mr Moloney's affidavit that part of his investigations involved certain dealings between the second plaintiff and another entity known as Queensland Maintenance Services Pty Limited (QMS). According to Mr Moloney's inquiries, QMS had (until the appointment of Mr Moloney and Mr Walker as administrators on 6 November 2008) provided the ABC Group with maintenance and compliance services for the childcare centres operated by that group. As part of those services, QMS rendered accounts on a monthly basis. Through his investigations it has come to Mr Moloney's attention that, amongst various payments made by the second plaintiff to QMS during the six months prior to the administrators' appointment, a payment was made to QMS of $3 million on 31 October 2008 (as disclosed in a customer ledger which QMS supplied to the liquidators). 8 Mr Moloney deposes to the fact that, based upon his investigations and legal advice he has received, he is of the view that the amount of $3 million paid to QMS on 31 October 2008 may be an unfair preference within the meaning of s 588FA of the Act. As Mr Moloney's affidavit discloses, the liquidators sought funding for a potential claim against QMS from IMF Limited (IMF), which had provided funding pursuant to the earlier funding agreements. However, as the potential amount in dispute ($3 million) was less than the amount IMF's general policy embraces, IMF declined to provide funding for the potential claim. As a result, the liquidators made an application to another litigation funder, LLS. 9 LLS has agreed to fund the proceeding against QMS. A draft funding agreement has been prepared, many provisions of which are confidential because, as set out in Mr Moloney's affidavit, it would be disadvantageous to the liquidators in any litigation in respect of the proposed claim if QMS were to have access to the details of the agreement. Mr Moloney's affidavit also discloses that LLS requires that both the second plaintiff and ABC Learning Centres Limited (now known as ZYX Learning Centres Limited) – both in liquidation and with receivers and managers appointed – be parties to the funding agreement, as it may be arguable that the relevant payments were made by one or other of those entities. 10 Although two meetings of the committee of inspection of the second plaintiff have been held seeking approval to enter into the litigation funding agreement, the minutes of those meetings (which are in evidence) disclose that approval was not obtained at the first meeting and that, insofar as it was obtained at the second meeting, this occurred by the exercise of Mr Moloney's casting vote as Chairman. Mr Moloney has taken the view that he should not place reliance on any such approval and instead should seek approval of the Court for entry into the funding agreement. In the circumstances, this is a prudent and proper course of action for the liquidators to take. 11 Mr Moloney has given evidence that, in his view and based on the advice which he has received, it is appropriate to commence proceedings against QMS as it appears that QMS is still a trading company with assets and hence should be able to satisfy a judgment (at least on the information available to Mr Moloney). 12 Mr Moloney is also satisfied, based on his experience as a liquidator, that the proposed funding agreement is on the normal commercial terms that one would expect from a litigation funder. I note that, having reviewed the terms of the proposed funding agreement, this characterisation appears to be correct. 13 I have been provided with short minutes of order setting out the directions and orders sought by the first plaintiffs, including the relevant confidentiality orders in respect of the legal advice obtained by the liquidators and the proposed funding agreement. The orders also, as a matter of prudence, include an order approving entry into fee agreements with such lawyers and counsel as the liquidators may deem necessary for the purpose of the litigation referred to in the funding agreement. I am satisfied that these orders should be made. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 25 October 2011