FEDERAL COURT OF AUSTRALIA Lion Energy Limited v Tulloch Lodge Limited (in liq), in the matter of Tulloch Lodge Limited (in liq) [2011] FCA 1139 Citation: Lion Energy Limited v Tulloch Lodge Limited (in liq), in the matter of Tulloch Lodge Limited (in liq) [2011] FCA 1139 Parties: LION ENERGY LIMITED (ACN 000 753 640) v TULLOCH LODGE LIMITED (IN LIQUIDATION) (ACN 003 157 533) File number: SAD 272 of 2006 Judge: FINN J Date of judgment: 5 October 2011 Catchwords: CORPORATIONS – power of liquidator to compromise claim – time limit on power to enter into agreement – Corporations Act 2001 (Cth) s 477(2A), s 477(2B) – Confidentiality of litigation funding agreement – no prejudice to administration of justice – Federal Court of Australia Act 1976 (Cth) s 40(1). Legislation: Corporations Act 2001 (Cth) s 477 (2B), s 477 (2A) Federal Court of Australia Act 1976 (Cth) s 50(1) Cases cited: Hogan v Australian Crime Commission (2010) 240 CLR 651 cited Date of hearing: 5 October 2011 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 8 Counsel for the Plaintiff: No appearance for the plaintiff. Solicitor for the Defendant: Mr J M Cudmore of Cosoff Cudmore Knox IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 272 of 2006 IN THE MATTER OF TULLOCH LODGE LIMITED (IN LIQUIDATION) (ACN 003 157 533) BETWEEN: LION ENERGY LIMITED (ACN 000 753 640) Plaintiff AND: TULLOCH LODGE LIMITED (IN LIQUIDATION) (ACN 003 157 533) Defendant JUDGE: FINN J DATE OF ORDER: 5 OCTOBER 2011 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. Mr Nicholas David Cooper as liquidator of Tulloch Lodge Limited (in liquidation) (ACN 003 157 533) ("Tulloch Lodge") is authorised on behalf of Tulloch Lodge to enter into the agreement with LCM Litigation Investment Fund No 2 Pty Limited (ACN 108 300 901) as trustee of the LCM Litigation Investment Fund No 2 ("the agreement"). 2. Mr Nicholas David Cooper as liquidator of Tulloch Lodge is authorised on behalf of Tulloch Lodge to compromise the claim which Tulloch Lodge has against Lion Energy Limited (ACN 000 753 640 ("Lion Energy") in the terms of a deed of settlement and release executed by both Tulloch Lodge and Lion Energy on 27 September 2011. 3. No order as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 272 of 2006 IN THE MATTER OF TULLOCH LODGE LIMITED (IN LIQUIDATION) (ACN 003 157 533) BETWEEN: LION ENERGY LIMITED (ACN 000 753 640) Plaintiff AND: TULLOCH LODGE LIMITED (IN LIQUIDATION) (ACN 003 157 533) Defendant JUDGE: FINN J DATE: 5 OCTOBER 2011 PLACE: ADELAIDE REASONS FOR JUDGMENT 1 This is an application made by the liquidator of Tulloch Lodge Limited (in liquidation) for orders under ss 477 (2B) and 477 (2A) of the Corporations Act 2001 (Cth) for the Court to approve the liquidator (a) entering into a litigation funding agreement; and (b) compromising a claim which Tulloch Lodge has against Lion Energy Limited. The litigation funding agreement with LCM Litigation Investment Fund No 2 Pty Ltd dated 9 September 2011 is in evidence as is a Deed of Settlement and Release executed both by Tulloch Lodge and Lion Energy on 27 September 2011. Additionally, an order is sought to maintain the confidentiality of the litigation funding agreement. To anticipate matters, I consider that in the circumstances the orders sought, save that relating to confidentiality, are proper ones to be made. 2 The circumstances giving rise to the application can be shortly stated. Tulloch Lodge was ordered to be wound up on the just and equitable ground on 22 December 2006. It was one of a number of companies involved in an unregistered scheme, which companies were also wound up. The scheme itself was conducted by a Mr Mercorella who was a director both of Tulloch Lodge and Lion Energy. He was sentenced to five years imprisonment in late 2006 for offences under the Corporations Act. 3 The liquidation of Tulloch Lodge proved to be a difficult one. It nonetheless disclosed a loan agreement between the two companies under which monies were advanced to Lion Energy in the sum of $1,334,388. The liquidator undertook extensive investigations as to the status of the amount which might be outstanding under the loan agreement. Having taken legal advice, and to protect against the possible expiration of the limitation period, the liquidator caused a proceeding to be commenced in the Supreme Court of South Australia against Lion Energy and three former directors of Tulloch Lodge. 4 Recognising that the administration did not have sufficient funds to prosecute the proceedings, the liquidator first issued a report to creditors inviting them to fund the costs of his investigations and of the projected litigation. A copy of the report was provided to McGrathNicol who act as receivers of the largest shareholder of Tulloch Lodge. No offers being forthcoming, he undertook negotiations, inter alia, with a representative of LCM Litigation and received a conditional offer on terms that a further opinion be obtained in relation to the merit of the claim. Such an opinion was subsequently obtained. On 5 August 2011 Lion Energy filed and served its defence which pleaded, inter alia, that the full amount of the loan had been discharged by payments made by Lion Energy which were made to Mr Mercorella whom, it was claimed, had implied authority to receive payments on behalf of Tulloch Lodge. Lion Energy subsequently obtained orders for security for costs. The liquidator then obtained conditional approval from LCM Litigation to assist in the funding of the litigation. The terms of this are set out in an interim litigation funding agreement for which the approval of the Court is being sought pursuant to s 477(2B). 5 Arrangements were then made to conduct a mediation of the litigation with Lion Energy which resulted in the execution of the Deed of Settlement and Release which is the subject of the approval sought under s 477(2A). 6 In his affidavit the liquidator explains both the advantages of entering into the agreement and the potential risks that could be encountered if the litigation was not compromised. The effect of the compromise will turn what was potentially an insolvent liquidation into a solvent one. After payment of the costs incurred and the commitments made to LCM Liquidation, the proceeds of the settlement will produce a balance of somewhere in the order of $145,000 - $150,000. The claims of known creditors of Tulloch Lodge total approximately $20,000. In these circumstances the liquidator considers that it is in the best interests of Tulloch Lodge to enter into the litigation funding agreement and to compromise its claim against Lion Energy in terms of the Deed of Settlement. I agree in all of the circumstances and will make orders accordingly. 7 The final order sought is that the terms of the litigation funding agreement (which is annexed to an affidavit which has been read on the application) be kept confidential. I do not consider that in the circumstances of this matter such an order is necessary in order to "prevent prejudice to the administration of justice": Federal Court of Australia Act 1976 (Cth) s 50(1); see also Hogan v Australian Crime Commission (2010) 240 CLR 651. 8 My approval of the Deed of Settlement brings the litigation against Lion Energy to an end. There is no prospect of the liquidator proceeding against the other named parties to that litigation. The litigation funding agreement in turn has run its course. I am unable to discern any prejudice in the disclosure of the terms of the agreement, indeed the agreement itself contemplates that its terms may be disclosed as required by law. No prejudice has been pointed to other, seemingly, than that which flows from an understandable desire to maintain the confidentiality of one's own affairs. When considered in the context of our legal system's commitment to open justice, that prejudice falls far short of that envisaged by s 50 of the Federal Court of Australia Act 1976 (Cth). Accordingly I refuse to make the confidentiality order sought and will make orders in terms of paras 1, 3 and 4 of the Draft Minutes of Order proposed. I certify that the preceding eight (8) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn. Associate: Dated: 6 October 2011