FEDERAL COURT OF AUSTRALIA Lombe, in the matter of Babcock & Brown Limited (In Liquidation) [2012] FCA 107 Citation: Lombe, in the matter of Babcock & Brown Limited (In Liquidation) [2012] FCA 107 Parties: DAVID LOMBE IN HIS CAPACITY AS LIQUIDATOR OF BABCOCK & BROWN LIMITED (IN LIQUIDATION) ACN 108 614 955 File number: NSD 2276 of 2011 Judge: EMMETT J Date of judgment: 3 February 2012 Legislation: Corporations Act 2001 (Cth) ss 553, 564 Date of hearing: 3 February 2012 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 53 Counsel for the plaintiff: J Lockhart SC, J King Solicitor for the plaintiff: Blake Dawson IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2276 of 2011 IN THE MATTER OF BABCOCK & BROWN LIMITED (IN LIQUIDATION) ACN 108 614 955 DAVID LOMBE IN HIS CAPACITY AS LIQUIDATOR OF BABCOCK & BROWN LIMITED (IN LIQUIDATION) ACN 108 614 955 Plaintiff JUDGE: EMMETT J DATE OF ORDER: 3 FEBRUARY 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 564 of the Corporations Act 2001 (Cth) (Act): (a) Those creditors of Babcock & Brown Limited (In Liquidation) ACN 108 614 955 (BBL) who indemnified the liquidators of BBL (Liquidators) by contributing funds to the Liquidators in response to the funding request made by the Liquidators on 12 August 2009 (Contributing Creditors) each be entitled to receive: (i) repayment of the amount of their individual contribution (Reimbursement); and (ii) payment of an additional amount being 10 times the amount of their individual contribution (Uplift), but subject to a maximum amount equal to the total amount of that Contributing Creditor's entitlement in the winding up; (b) The Reimbursement and Uplift payable to each Contributing Creditor be paid in priority to the claims of all other unsecured or subordinated creditors of BBL except for those claims which properly fall within s 556(1) of the Act. 2. The payment referred to in order 1(b) be made from the funds derived from the settlement by the Liquidator of certain causes of action of BBL against its former directors and auditor. 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 2276 of 2011 IN THE MATTER OF BABCOCK & BROWN LIMITED (IN LIQUIDATION) ACN 108 614 955 DAVID LOMBE IN HIS CAPACITY AS LIQUIDATOR OF BABCOCK & BROWN LIMITED (IN LIQUIDATION) ACN 108 614 955 Plaintiff JUDGE: EMMETT J DATE: 3 FEBRUARY 2012 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiff, Mr David Lombe (the Liquidator), who is the liquidator of Babcock & Brown Limited (the Company), has applied to the Court for orders under s 564 of the Corporations Act 2001 (Cth) (the Corporations Act). Section 564 relevantly provides that where, in any winding up, property has been recovered under an indemnity for costs of litigation given by certain creditors or has been protected or preserved by the payment of money or the giving of indemnity by creditors, the Court may make such orders as it deems just with respect to the distribution of that property, with a view to giving those creditors an advantage over others, in consideration of the risk assumed by them. The Liquidator has practised in the field of insolvency for over 20 years and has had considerable experience in relation to insolvency matters. 2 A category of unsecured creditors of the Company contributed funds to the Liquidator to enable him to conduct public examinations that led to the acquisition of information that enabled claims to be mounted against former directors and auditors of the Company. Those claims resulted in a substantial recovery of funds by the Liquidator. Those funds will be available for distribution to unsecured creditors. In order to put the present application into perspective, it is necessary to say something more about the nature of the claims and the circumstances in which they arose, together with the capacity in which creditors of the Company contributed funds. 3 The Liquidator was appointed to the Company by a resolution of its creditors under s 439C of the Corporations Act, passed at the second meeting of creditors following the appointment of administrators. The Liquidator and his former partner had previously been appointed as joint and several voluntary administrators of the Company, pursuant to a resolution by its directors. 4 Prior to the appointment of the administrators, the Company and its subsidiaries constituted an international investment and specialised fund and asset management group, which had been founded in 1977 in San Francisco. An office was opened in Sydney in 1982, which largely operated as a corporate advisory firm focused on aircraft and other equipment leasing, until the early 1990s, when the work shifted from advisory work to investment management. 5 The Company was listed on the Australian Stock Exchange (ASX) in October 2004. It is the parent of a large and complex group of local and offshore companies. Its operations, structure and arrangements with both its subsidiaries and various lenders are complex. The Company itself has no employees as such. 6 The Company's primary asset was its investment in its subsidiary Babcock & Brown International Pty Ltd (Babcock & Brown International), which was owned, as to 99.78 per cent, by the Company. The remaining shareholding of Babcock & Brown International was owned by former directors of the Company. The trading activities of the group were conducted by Babcock & Brown International and its subsidiaries. Babcock & Brown International is not itself in voluntary administration, liquidation or receivership. However, it is under the close supervision of a senior lending syndicate. 7 The shares in the Company were suspended from trading on ASX on 12 January 2009. At that time, its market capitalisation had fallen from its peak in March 2007 of $12 billion to approximately $120 million. In 2005 and 2006, the Company raised approximately $600 million from predominantly retail investors in Australia and New Zealand by issuing subordinated notes, denominated in Australian dollars and quoted on ASX. It separately issued subordinated notes, denominated in New Zealand dollars and quoted on the New Zealand Stock Exchange. I shall refer to both categories of notes as the Notes, and to the holders of Notes as the Noteholders. 8 The Australian Notes are evidenced by Terms of Issue which are set out in the schedule to a trust deed dated 9 November 2005 (the Trust Deed). A deed in similar terms was executed on 1 May 2006 in respect of the New Zealand Notes. The terms of issue of the New Zealand Notes are set out in the schedule to that deed. They are relevantly the same as for the Australian Notes. 9 The parties to the Trust Deed are the Company, Permanent Trustee Company Limited (the Trustee) and Babcock & Brown International. The Trust Deed provides that the Company may issue Notes to any person in accordance with the Trust Deed and the Terms of Issue. Notes are regarded as issued to a person if and when the person's name is recorded in the register to be maintained by the Company under the Trust Deed. Holders are to be regarded as the beneficial owners of the Notes. The Trustee, the Company and the holders are bound by the Trust Deed, including the Terms of Issue. 10 By cl 4 of the Trust Deed, the Company acknowledges its indebtedness to the Trustee in respect of all debts and monetary liabilities of the Company in respect of principal, premium and interest from time to time payable to, or at the direction of, the Trustee, or holders, under or pursuant to the Trust Deed, including the terms of issue. By cl 12 of the Trust Deed, Babcock & Brown International unconditionally and irrevocably guarantees to the Trustee and to the holders the due and punctual payment of those moneys. 11 Under the Terms of Issue, each of the Notes was to have a face value of $100 and was to be issued at an issue price of $100, or such other amount as might be specified in any relevant offer document. Clause 1.1 provided that holders were entitled to the benefit of and were bound by the provisions of the Trust Deed. Clause 2.2 provided that the Company must pay interest accrued on the Notes in arrears on each interest payment date, as defined. Clause 2.5 provided that the Company may pay all or any part of any outstanding interest, as defined, to holders at any time, but may only do so on a date other than an interest payment date, and after giving relevant notice to ASX. Clause 2.9 provided that the Company may deduct from any interest or other amounts payable to a holder the amount of any withholding or other tax, duty or levy which a qualified legal or taxation advisor advises that it is required by law to deduct in respect of such interest or other amount. 12 Clause 2.11 provided that any amount which is payable to holders in respect of Notes will be paid by direct credit into a nominated account at a financial institution offering such a facility for direct credit of amounts denominated in Australian currency. Clauses 4 and 5 provided for early repayment at the request of either a holder or the Company. Clause 7.1 provided that where Notes are to be repaid under clauses 4 or 5, the Company must pay the holder an amount equal to the repayment amount, as defined, for the relevant Notes on the relevant realisation date. Finally, cl 9 provided that the Company must, on the maturity date, which is defined as 15 November 2015, exchange or repay the Notes the subject of a relevant exit notice, and otherwise repay all Notes outstanding at that date in accordance with the Terms of Issue. 13 I have described the Notes in greater detail than might otherwise be necessary because of a question that has been raised as to whether or not the holders of Notes are creditors within the meaning of s 564. 14 All of the funds that were raised by the Company from the issue of Notes were ultimately lent by the Company to Babcock & Brown International. The obligations of the holders of the Notes are subordinated to other creditors of the Company and the loans made by the Company to Babcock & Brown International are also subordinated to the repayment of other debts of Babcock & Brown International. Further, the Company is prevented from exercising what might be termed ordinary creditors' rights against Babcock & Brown International in relation to those loans. 15 At the date of the appointment of the administrators, the Company's primary assets consisted of the subordinated loans made to Babcock & Brown International, of approximately $600 million, plus interest, the company's shares in the capital of Babcock & Brown International, which had a value in the books of the Company of approximately $2.2 billion, a sum of cash at bank of less than $1.5 million, and a fund located in California (the California Fund) of approximately $9.5 million, the ownership of which later became the subject of a dispute between the Company and Babcock & Brown International. The Company's primary liabilities at the time of the appointment of the administrators were, and still are, its liabilities to the holders of Notes, which exceed $600 million excluding interest. 16 In the Liquidator's report to creditors, the opinion was expressed that the Company's investment in Babcock & Brown International was worthless. That opinion was formed on the basis that, if Babcock & Brown International were to be liquidated, any realisations would be applied to repayment of loans to which the loans from the Company were subordinated. There would be no funds left over for the repayment to the Company of those subordinated loans, let alone any return to the Company in respect of its shareholding in Babcock & Brown International. Thus, at the time of the appointment of the administrators, the Company had very few assets that could be realised in order to fund investigations into the collapse of the group or to provide a return to creditors or shareholders. 17 As at 31 December 2010, Babcock & Brown International still had approximately $3 billion of indebtedness to which the loans from the Company were subordinated. On the basis of the information available to the Liquidator as at 1 December 2011, the position of Babcock & Brown International had not significantly improved since 31 December 2010. The Liquidator is therefore of the opinion that the Company's investment in Babcock & Brown International is worthless, and that there is no likelihood of recovery by the Company of the amounts owing by Babcock & Brown International. 18 Having regard to the minimal funds available to the Liquidator at the commencement of the liquidation, it was not possible to conduct thorough investigations regarding the collapse of the Company. Further, for reasons that are not entirely clear, the records of the overall group were held in the possession of Babcock & Brown International, and the Liquidator considered that it was necessary for Babcock & Brown International to be legally compelled to produce documents required to conduct such investigations. Accordingly, in their report to creditors, the administrators, as they then were, foreshadowed the need for further funding to be raised if there was to be an adequate investigation by any liquidator into the causes of the collapse of the Company. 19 In their report (the Report), the administrators invited creditors, including holders of Notes, to provide cash funding for the purposes of enabling them to continue their investigations into the affairs of the Company, and to determine whether any valuable causes of action exist against any third party that might provide a return that would ultimately benefit holders of Notes and other creditors. The Report stated that the administrators had undertaken preliminary investigations into the affairs of the Company, and had identified some potential causes of action against the directors of the Company and certain third parties. The Report said that the Company presently had insufficient funds to enable a liquidator to continue investigations into any potential cause of action. 20 The two options available, therefore, were to enter into negotiations with a litigation funder, or to raise funding directly from the creditors. The Report referred to the significant costs that would be associated with litigation funding, and, accordingly, creditors of the Company were invited to consider funding any liquidator, when one was appointed, on the basis that contributors, including holders of Notes, employees and other creditors, would be asked to contribute a fixed amount of $400 per contributor, irrespective of the size of their debts. The proposal was that contributors would agree that any such contribution could be used for the purposes of meeting future remuneration expenses of the liquidation, paying legal expenses, and funding the cost of undertaking public examinations and other investigations into the affairs of the Company. 21 The Report stated that the risk of loss to a contributor would be limited to the amount of the contribution made. The Report went on to say that, if valuable causes of action were identified by reason of the public examination process, and it was not possible to resolve those claims without litigation, litigation funding would be sought for such proceedings as any liquidator was advised to commence. The Report said, however, that any liquidator would require an indemnity for any adverse costs ordered in such proceedings. The Report also stated that, in addition to returning the contributions made by creditors out of any funds recovered in such proceedings, an application would be made to the Court for an order that entitled the contributors to obtain a preferential return out of any assets recovered as a result of the proceeding. That, of course, foreshadowed of the application presently before the Court. 22 The Report suggested that there were certain advantages that could accrue to creditors of the Company, including holders of Notes and employees, should they decide to make a contribution, as follows: (a) any liquidator would be funded to continue investigations into whether valuable causes of action existed against directors and third parties; (b) in the event of a successful recovery, contributors would, subject to the level of recovery, be repaid their contribution before any creditor received a dividend, and could also receive a preferential recovery out of the net recoveries before any distribution was made to other creditors who did not agree to make a contribution; (c) it could be that, once valuable causes of action were confirmed, the Company's insurers were willing to consider a mediation to resolve all outstanding claims without the need for litigation to be commenced; (d) if valuable causes of action were confirmed, it is likely that any litigation funding arrangement subsequently entered into with a funder would be on more favourable terms to the Company and its creditors than if the litigation funder took on the initial cost and risk of public examinations. The Report warned, however, that there was no guarantee that the contribution to be made would be returned, or that the outcome of any investigations would result in recovery for the benefit of creditors. 23 As a result of the invitation in the Report, the Liquidator received significant contributions from creditors, including holders of Notes. Up to 15 July 2010, the Liquidator received a total of $557,073.50 from 1,209 separate creditors of the Company. The individual contributions ranged from $10 to $100,000. However, most contributions were in the order of $400, as suggested in the request made to creditors in the Report. 24 Between October 2009 and January 2011 the Liquidator used the contributions in paying legal expenses connected with the preparation for, and conduct of, the public examination of three former directors of the Company, three former officers of the Company, and the former auditor of the Company, in addition to expenditure on the Liquidator's expenses of preparing for, and attending, the public examinations, and the legal expenses and other expenses connected with consideration of the information obtained, and formulating causes of action against certain former directors of the Company and the former auditor. 25 Following the conduct of the public examinations and subsequent consideration of the information gleaned, the Liquidator advised the committee of inspection of the Company that the Company had viable claims against former directors and the former auditor in respect of dividends paid by the Company for the financial years 2005, 2006 and 2007 (the Dividend Claims). The proposition was that dividends had been paid in breach of s 254T of the Corporations Act. There were also associated causes of action, such as breaches of directors' duties and breach of the auditor's contractual duties. The Liquidator also advised the committee of inspection that the estimated recovery value of the Dividend Claims, and other claims so identified, was between $85 million and $158 million. 26 It was apparent to the Liquidator, following the conduct of the public examinations, that the total amount contributed would be insufficient to allow the Liquidator to litigate the Dividend Claims, particularly if they were defended, which the Liquidator expected would be likely. Accordingly, in August of 2010, with the approval of the committee of inspection, the Liquidator entered into an agreement with IMF (Australia) Ltd (IMF) to obtain additional funding of up to $1,150,000 with which to pursue the Dividend Claims. The scope of that agreement with IMF permitted the Liquidator to prepare and conduct a voluntary mediation of the Dividend Claims. The Liquidator also obtained a further offer from IMF to fund proceedings, on different terms from those set out in the agreement of August 2010, in the event that it became necessary to institute and prosecute proceedings in relation to the Dividend Claims. In the events that occurred, it was not necessary to take up that offer. 27 The Liquidator is of the opinion that the terms of the agreement with IMF were favourable to the Company, in that the rate of return required by IMF was lower than he would consider to be a normal rate of return for a litigation funder. The Liquidator's solicitor is of the same opinion. The Liquidator was in a strong position to negotiate favourable litigation funding arrangements in August 2010, because of the fact that, by that time, he had been able to prepare and conduct successful public examinations and prepare an advanced theory of the potential causes of action available to the Company, and any recovery that might result. He was in that position only because of the funding that had been provided by the contributions to which I have referred. 28 After a considerable interchange of correspondence between the Liquidator's solicitors and solicitors representing potential defendants and their insurers, it was agreed that the former directors and the former auditor of the Company would attend a mediation of the Dividend Claims and other claims that I have described. The mediation commenced on 1 August 2011 and was conducted by the Honourable Roger Gyles QC. The mediation resulted in the successful settlement of all of the Dividend Claims, including the associated claims that I have described. The terms of that settlement and the settlement sum are confidential, and have not been disclosed to the Court. However, for reasons that I shall explain, I do not consider that that is significant. 29 Although accord was reached on 4 August 2011, at the conclusion of the mediation, settlement agreements were not executed until 19 September 2011. Because of the time that it took for all of the parties to commit themselves to the settlement agreement, the Liquidator considered that it was necessary to commence proceedings in relation to the Dividend Claims, in order to protect the Company against possible extinguishment by the operation of limitation legislation. Accordingly, on 17 August 2011, a proceeding was commenced in the Federal Court against the former directors and former auditor of the Company, in respect of the Dividend Claims. That proceeding was discontinued on 22 September 2011, in accordance with the terms of the settlement reached at the mediation. 30 As I have said, an interest in the California Fund was one of the assets of the Company at the time of the appointment of the administrators. In July 2009, the administrators made preliminary inquiries with a view to taking steps to obtain control of the California Fund by way of getting in the Company's assets. After litigation in the United States, the Company ultimately received a sum representing the Company's interest in the California Fund. After deducting fees charged by IMF in connection with those recovery proceedings, the company's total recovery from the California Fund was $2.39 million. 31 The Liquidator now expects that there will be a total sum of $31.6 million available to distribute, by way of interim distribution, to unsecured creditors. That figure is arrived at after the deduction of any moneys owing to IMF and any expenses of the Liquidator approved by the committee of inspection. The Liquidator intends to make an interim distribution to creditors of the Company in March 2012. He is presently of the opinion that there is very little possibility of there being further funds available for distribution. However, it is not possible to say finally whether there will be further distributions until it is known whether anything will be recoverable from Babcock & Brown International in respect of the subordinated loans, or in respect of the Company's shareholding in Babcock & Brown International. As I have said, the Liquidator has formed the view that it is highly unlikely that there will be any recovery in that regard. 32 It is against that background that the Liquidator now seeks the Court's approval under s 564 for a preferential payment to be made to those who contributed sums to enable the Liquidator to effect the recoveries that have been made. The Liquidator seeks approval for the payment to the contributors of a premium equal to ten times the amount of their contributions. 33 The Liquidator made an informal call for proofs of debt to be lodged by creditors no later than 30 November 2011. The Liquidator did not require holders of Notes to lodge individual proofs of debt, as agreement was reached with the Trustee that the Trustee would lodge a proof of debt on behalf of all holders. The claims of unsecured creditors of the Company received by the Liquidator presently total $27,978,277. There are several different categories of such claims, apart from the claims of the holders of Notes. The claims of the holders of Notes, which amount to $607,855,594, are subordinated to the claims of the other unsecured creditors. 34 There are three classes of employee claims. First of all, there is a claim in respect of "Fund Appreciation Rights", being a type of short-term incentive issued to senior executives of the Babcock & Brown group in April 2010. Those claims amount to $8,283,385. Secondly, there are claims described as "Fund Bonus Deferral Rights", being a type of short-term incentive issued to senior executives of the Babcock & Brown group from time to time. Those claims amount to $2,581,965. Finally, there are other miscellaneous or unspecified claims from employees of the Babcock & Brown group amounting to $1,708,578. There is also a claim by the Trustee for the sum of $361,868. All of those prospective claimants were notified of the Liquidator's invitation to contribute to the funding of public examinations. 35 There are three other classes of unsecured creditors who have lodged proofs of debt. First there is a claim for $43,290, in respect of dividend cheques that have not been presented. Secondly, there are unspecified claims totalling $20,000. Thirdly, there are claims totalling $14,979,191, notified on behalf of shareholders of the Company in respect of alleged misleading and deceptive conduct by the Company that is said to have induced the shareholders to buy shares in the Company. It was not until November 2011 that the Liquidator first received notification of such claims from Thomas Booler and Co, Lawyers, who submitted formal proofs of debt on behalf of those shareholders. The Liquidator has had no opportunity at this stage to investigate or adjudicate on those claims. Having regard to the timing of the receipt of the claims, those shareholders were not notified of, or given the opportunity to participate in, the possibility of funding the public examinations. 36 The proposal presently before the Court is that those who contributed funds for the purpose of conducting the public examinations be paid a total of $6,127,809, to be shared amongst them in proportion to their contributions. That sum is calculated as being a reimbursement of the total amount contributed, of $557,074, together with what is described as an uplift of ten times that amount, namely of $5,570,735. 37 If the contributors receive no more than reimbursement of their contribution, all unsecured creditors, other than the holders of Notes, would be paid in full and there would be an amount of $3,064,649 available to satisfy claims of $607,855,594 in respect of the Notes. On the other hand, if the uplift proposed were to be approved, the unsecured creditors would receive 91 cents in the dollar and there would be nothing available for the holders of the Notes. Those figures, of course, are calculated on the assumption that the shareholders' claims, and all other unsecured creditors' claims that have been notified to date, are ultimately accepted by the Liquidator. Therefore, the position I have just described might be regarded as the worst-case scenario from the point of view of the liquidation. 38 The questions that now arise for determination might be summarised as follows: whether the recoveries from former directors and the auditors of the Company constitute property within the meaning of s 564; whether it can be said that that property has been protected or preserved; whether that protection or preservation was achieved by the payment of money or the giving of indemnity; whether the payment of money or giving of indemnity was by creditors; and whether the proposed distribution is to be deemed just by the Court. 39 Section 564 must be considered in the context of the statutory scheme of the Corporations Act. Under s 555 of the Corporations Act, all debts proved in the winding up of a company rank equally except to the extent that the Corporations Act provides otherwise. If the property of the Company in question is insufficient to meet the debts in full, they are paid proportionately. Under s 556, however, certain classes of payment are given priority. Debts within those classes rank equally amongst themselves and are paid in full unless the property of the company is insufficient to meet them, in which case they are paid proportionately. Section 564, therefore, must be considered as creating an exception to the prima facie equality of treatment of all unsecured creditors within the respective classes recognised by s 556. 40 The fund that has been recovered as a result of the mediation might be thought of as the proceeds of a chose in action consisting of the Dividend Claim against the directors and auditors. A chose in action is clearly property. The fact that a very substantial sum of money has been paid to the Company by way of compromise of the prospective causes of action must be good evidence of the existence of a chose in action. If it can be shown that that chose in action has been recovered, or protected, or preserved, then jurisdiction under s 564 has been enlivened. I have no doubt that the prospective causes of action constitute property within the meaning of s 564. 41 There is, in a sense, a curious disconformity within s 564. Section 564 refers to property that has been either recovered under an indemnity for costs of litigation given by certain creditors or has been protected or preserved by the payment of money or the giving of indemnity by creditors. There is no doubt that the choses in action have been realised and property has been recovered, in the sense that a claim has been made against the directors and the auditors and a payment has been made in satisfaction of that claim. Similarly, it can be seen that that property has been protected and preserved. Had no claim been made, the Dividend Claim would, in the fullness of time, have been extinguished by the operation of limitation legislation. 42 Clearly enough, the property would not have been recovered, protected or preserved if the Liquidator had not been funded by the contributions to which I have referred. It may be arguable that the property was not protected or preserved by the payment of money. However, I consider that it is certainly equally arguable that the contributions to which I have referred consisted of the giving of indemnity to the Liquidator. In other words, the contributors indemnified the Liquidator for his costs of the actions he took, to the extent of their respective contributions. Accordingly, I am satisfied that the first requirement of s 564 has been satisfied. That is to say, property has been recovered under an indemnity for costs of litigation or has been protected or preserved by the payment of money or the giving of indemnity. 43 The term creditor is not defined for the purposes of s 564. However, it must be understood as embracing all persons with claims that would be entitled to be admitted to proof if the Company were wound up. Part of the statutory context in which s 564 appears is Division 6 of Part 5.6 of the Corporations Act, which deals with proof and ranking of claims. Subdivision A of Division 6 deals with the admission to proof of debts and claims, subdivision B with the computation of debts and claims, and subdivision D with priorities. Clearly enough, creditors must refer to those entities for whom the admission to proof of debts and claims is prescribed by subdivision A, the computation of whose debts and claims is governed by subdivision B, and the priority of whose debts and claims are determined by subdivision D. 44 Section 553, which is at the beginning of subdivision A, provides that an entity may prove in a winding-up for all debts payable by, and all claims against, the relevant company, being debts or claims the circumstances giving rise to which occurred before the relevant date. In the present case the Trustee lodged the proof of debt on behalf of all holders of Notes. However, having regard to the structure of the Trust Deed and the Terms of Issue, as I have described them, I consider that the holders of Notes must themselves be regarded as creditors of the Company. It may well be that the Company has a liability at law both to the holders of Notes as well as to the Trustee. Each could enforce the relevant obligation, although the satisfaction of the obligation to one would, of course, discharge the obligation to the other. 45 Each holder of Notes is the person entitled to the benefit of the relevant Notes and that holder is entitled to repayment, either on maturity or earlier, in the circumstances contemplated by the Trust Deed or in a winding-up. The obligation to pay interest is an obligation owed by the Company to the holder of Notes, as is the obligation to pay the principal, in ordinary circumstances. The scheme of the Trust Deed, which is, of course, a common one found in relation to debentures and unsecured notes issued by a company, is that, in order to facilitate the enforcement of the covenants given to the holders of Notes, the Trustee receives the benefit of the covenant on trust for the holders, so that the Trustee can enforce the rights on behalf of the holders. That, however, does not, in my view, preclude the conclusion that the holders of Notes are creditors of the Company. 46 That leaves the final question, namely the exercise of discretion by the Court as to whether or not the proposed reimbursement to the contributors should be deemed just. I have already indicated that the total fund available for distribution to unsecured creditors is in the order of $31.6 million. That sum is made up of the funds received from the mediation of the Dividend Claims against the directors and auditor, the recovery of the interest in the California Fund and the cash at bank. Assuming that no part of the recovery in respect of the California Fund and the cash at bank has been expended, it would follow that the amount that has been recovered from the mediation is at the very least $27.71 million. The only other sources of available funds were the $2.39 million recovered from the California Fund, and the $1.5 million in cash. 47 Therefore, the property that has been recovered by reason of the funding provided by the contributors is at least $27.71 million. The proposed payment of $6,127,809 represents approximately 22 per cent of that sum. It represents approximately 19.3 per cent of the total sum of $31.6 million. There were contributions from 1,209 of the total number of 7,862 persons whose names appear in the register of holders of Notes. That represents about 15 per cent of all holders. All holders were, of course, given the opportunity of contributing. There were also several contributions other than from holders of Notes. Approximately 8,000 holders of Notes were provided with an equal opportunity to contribute. The minimum subscription amount for the Notes was $5,000. It might be assumed, therefore, that holders would be likely to have available resources from which to contribute the modest amount requested of $400. Nevertheless, only 1,209 holders actually contributed. 48 Section 564 draws attention to the fact that the assessment that is to be made is whether the proposed preferential distribution is just, in consideration of the risk assumed by those who made the contribution. Those words refer primarily to the risk as reasonably perceived by the funding creditors at the time of making payments or giving indemnity. On the other hand, actual outcomes are relevant to assessing what risk would reasonably have been perceived when payments were actually made or when indemnities were given. That may entail comparisons between the amounts spent and the amounts actually recovered. In the present case, the amounts actually recovered are very substantial in relation to the amounts actually contributed. 49 The risk assumed by each creditor was that the amount contributed would be lost. For the most part, that risk was limited to $400. In some cases, it was less. In one case, it was very much greater, namely, $100,000. The total amount contributed to recover something in excess of $27 million was $557,074. There was a real risk for creditors that the amounts that they ventured would not be recovered. The Liquidator had no information to support any of the potential claims that were discussed in the Report. Creditors who contributed therefore knew almost nothing about the Company's case or its prospects of success. The fact that only 1,209 out of 7,862 holders of Notes contributed is perhaps an indication of the level of risk that was perceived by holders generally. 50 The purpose of the funding was to enable examinations to be conducted to obtain information to determine whether or not there were valuable causes of action. Even if claims were identified as a result of the examinations, it was expected that further funding would be required from a litigation funder. The contributions of the contributors, albeit with subsequent assistance from IMF, the litigation funder, realised a very substantial return. If the contributions had not been made, and the claims had not been mounted that resulted in the realisation of in excess of $27 million, it is clear that the unsecured creditors would have received very little. 51 The vast bulk of the funds now available comes from the realisation of the Dividend Claims. But for the contributions, no claims would have been identified or realised. In considering whether the proposal now before the Court is just, it is necessary to consider, in addition to the risk run by the indemnifying creditors, other factors, such as: the sum recovered; the failure of other creditors to provide an indemnity; the proportion between the debts of the indemnifying creditors and the other debts; and the public interest in encouraging creditors to provide indemnities. 52 In assessing whether or not a reimbursement to contributing creditors is just, there are at least two possible approaches. One is to consider what proportion of the recovery is to be paid by way of preferential payment. The other is to determine what return is provided to the contributor on the amount contributed. I have already indicated those proportions. That is to say, the proposed reimbursement will constitute no more than 22 per cent of the amount recovered and is under 20 per cent of the total amount available for distribution to unsecured creditors. On the other hand, the amount proposed will give a return to those who contributed of some 10 times their contribution. That might be thought to be high. However, for the most part, the holders of the Notes were retail subscribers, and the result for the other unsecured creditors has been very favourable. Further, no contributor will receive more than that contributor would receive in a winding-up. That is to say, no holder of Notes will receive more than the amount of the indebtedness of the Company to that holder. 53 All creditors of the Company known to the Liquidator were notified of this application. When the matter was called on for hearing there was no appearance for any person other than the Liquidator. Thus, no one has expressed opposition to the proposed orders. In all of the circumstances, I consider that it is appropriate to accede to the Liquidator's application and to make an order accordingly under s 564 of the Corporations Act. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 20 February 2012