FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd (in liq) (No 3) [2018] FCA 912 File number: NSD 74 of 2017 Judge: GLEESON J Date of judgment: 4 June 2018 Catchwords: BANKRUPTCY AND INSOLVENCY – whether to approve liquidator's entry into funding agreement on behalf of company in liquidation pursuant to s 477(2B) of the Corporations Act 2001 (Cth) – approval granted Legislation: Corporations Act 2001 (Cth) s 477(2B) Cases cited: Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd (in liq) (No 2) [2017] FCA 755 Date of hearing: 4 June 2018 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 21 Solicitor for the Plaintiff: K&L Gates Counsel for the Defendants: Mr R Marshall SC Solicitor for the Defendants: Hammond Nguyen Turnbull ORDERS NSD 74 of 2017 IN THE MATTER OF ACN 154 520 199 PTY LTD (IN LIQUIDATION) BETWEEN: DEPUTY COMMISSIONER OF TAXATION Plaintiff AND: ACN 154 520 199 PTY LTD (IN LIQUIDATION) First Defendant SCHON GREGORY CONDON IN HIS CAPACITY AS LIQUIDATOR OF ACN 154 520 199 PTY LTD (IN LIQUIDATION) Second Defendant JUDGE: GLEESON J DATE OF ORDER: 4 June 2018 THE COURT ORDERS THAT: 1. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the second defendant's entry into the deed of agreement and indemnity with Pallion Group Pty Ltd in the form set out in annexure "SGC8" to the affidavit of Schon Gregory Condon dated 28 May 2018 is approved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (as revised from transcript) GLEESON J: 1 The second defendant ("Mr Condon") seeks an order approving his entry into a proposed funding deed of agreement and indemnity with Pallion Group Pty Ltd ("Pallion") pursuant to s 477(2B) of the Corporations Act 2001 (Cth). His reasons for seeking to enter into the proposed agreement are set out in his affidavit sworn 28 May 2018. 2 The plaintiff ("DCT") did not appear at the hearing of Mr Condon's application. The DCT is the main creditor of the first defendant ("company") pursuant to tax assessments that are disputed in a tax appeal in the Administrative Appeals Tribunal ("AAT"). The tax appeal will determine whether the company owes the DCT over $208 million which, according to Mr Condon, comprises more than 99% of the company's total debts. The tax appeal has been listed for a final hearing commencing on 3 September 2018. The hearing is estimated to take 3.5 weeks. Background 3 Mr Condon was appointed as liquidator of EBS on 22 September 2016 following a creditors' resolution that EBS be voluntarily wound up. 4 On 24 May 2017, I made orders extending the time for Mr Condon to make an application for leave to enter into a funding agreement that he made with ABC Refinery (Australia) Pty Ltd ("ABCRA") dated 18 November 2016 ("first funding agreement"), and made orders, nunc pro tunc, granting Mr Condon leave to enter into that agreement and a proposed variation to that funding agreement: Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd (in liq) (No 2) [2017] FCA 755 ("EBS (No 2)"). 5 The primary purpose of the first funding agreement, as stated in the recitals to the agreement, was to enable Mr Condon to fund investigations into the "legitimacy of the Assessment that places the ATO as a major creditor of the company" (the word "Assessment" referring to assessments dated 8 April 2016, and any other relevant assessments and subsequent objections) and the conduct of an appeal against the "Assessment" to the ("AAT") and/or this Court. The scope of the funding agreement extended to expenses incurred in the course of investigating "any related matter to the liquidation of the Company" capped at an amount of $30,000. 6 After entering into the first funding agreement, Mr Condon formed the view that his costs would probably exceed the $30,000 cap. The proposed variation to the agreement removed the cap. 7 On 10 or 13 November 2017, the ATO issued an assessment in an amount of approximately $28 million to ABCRA. On 15 November 2017, ABCRA was placed into a creditors' voluntary liquidation. By letter dated 29 November 2017, the liquidator of ABCRA, Adam Shepard, disclaimed the first funding agreement. 8 On 18 December 2017, Mr Condon received a letter from Andrew Cochineas and Philip Cochineas indemnifying him as from 15 November 2017 on the same terms as the first funding agreement until such time as a new funding agreement was made and approved pursuant to s 477(2B). 9 By letter dated 19 March 2018, solicitors acting for the DCT, K&L Gates sought information from Mr Condon pursuant to s 70-45(1) of the Insolvency Practice Schedule as to his current funding arrangements. 10 By letter dated 27 March 2018, Mr Condon's solicitors ("HNT") informed K&L Gates that Mr Condon had entered into a deed of agreement and indemnity with Pallion dated 2 February 2018 "along the same terms as" the first funding agreement. At that stage, Mr Condon was proposing to make an application for approval of the entry into the 2 February 2018 agreement nunc pro tunc. 11 By letter dated 17 April 2018, K&L Gates raised concerns about Mr Condon's independence from Pallion. K&L Gates sought an explanation from Mr Condon as to: (1) why he considered it appropriate to receive funding for his professional fees and disbursements from Pallion; (2) why creditors were not informed of the 2 February 2018 funding agreement; and (3) why approval to enter into the 2 February 2018 funding agreement was not, and still had not been, sought pursuant to s 477(2B) of the Act. 12 By letter dated 24 April 2018, HNT asserted Mr Condon's independence and argued that the concerns raised on behalf of the DCT were the same concerns raised in relation to the previous funder, ABCRA. The letter also stated that creditors were informed of the 2 February 2018 funding agreement by a report to creditors on 5 February 2018. 13 By letter dated 30 May 2018, K&L Gates indicated that they were not satisfied with Mr Condon's various responses. 14 On 25 May 2018, Mr Condon and Pallion agreed to terminate the 2 February 2018 funding agreement. 15 The proposed agreement appears to be substantially identical to the first funding agreement. On behalf of Mr Condon, it was submitted that the reasons for approving the first funding agreement, set out in EBS (No 2) at [28] to [32], equally apply to the proposed agreement. Legal framework concerning approval of liquidators' funding agreements 16 Section 477(2B) of the Act provides: 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. 17 The relevant principles are set out in EBS (No 2) at [22] to [26]. Submissions 18 The following submissions were made in support of Mr Condon's application: (1) By cl 6, the proposed agreement makes it clear Mr Condon retains his independence and has complete control of the tax appeal and associated processes. (2) Mr Condon has considered all funding options. No creditor would fund the liquidator in the tax appeal. No commercial litigation funder would be interested in funding the proceedings, as no costs order would be made. No other source of funding is available. (3) There is no funder's premium. (4) The position of the company is protected by the indemnity under the proposed agreement (e.g. against any adverse costs order, if ever could be made), and the company's assets will not be depleted. (5) The scope of the proposed agreement is limited to the investigation of the tax assessments and the related tax appeal. (6) Mr Condon has received advice from experienced tax counsel that there are good prospects of success in the tax appeal. Those proceedings are not frivolous or vexatious. The proceedings have been pursued in a diligent and timely manner, and are listed for hearing in September 2018. (7) Mr Condon has considered the position of all creditors of the company in deciding to enter the proposed agreement; (8) There is no oppression in Mr Condon continuing to pursue the tax appeal. The DCT is the other party in those proceedings. The DCT's general position is also protected by the ongoing appointment of the special purpose liquidators to the company. (9) The tax appeal is one of the two means in Part IVC of the Taxation Administration Act 1953 (Cth) for contesting tax objection decisions. The proceedings are no more complex than is required having regard to the GST legislation, the bases on which the DCT has made the tax assessments and objection decisions, the large size of the tax-related debts claimed and the factual circumstances of the taxpayer company. 19 I have previously accepted that Mr Condon's decision to bring the tax appeal was properly based on advice that the proceeding is not frivolous or vexatious. Mr Condon's evidence is that he has now received advice that the company has good prospects of success. Mr Condon also gave evidence that all statements of fact, issues and contentions and all evidence has been filed in the tax appeal. It is plainly a substantial appeal, given that it is expected to run for over three weeks. 20 I have also previously found that, in a relation to a materially similar agreement with a related company that there is no identifiable oppression in pursuing the tax appeal, the liquidator is not subject to any unusual control by ABC in pursuing the tax appeal and the liquidator will be fully indemnified. 21 Taking these matters into account, I am satisfied, on the basis of the evidence of Mr Condon, my review of the funding agreement and my consideration of the correspondence between HNT and K&L Gates, that there is no reason to conclude that the liquidator's entry into the funding agreement would be other than a proper exercise of his power, or that it would be an ill-advised or improper act on the part of the liquidator. Accordingly, I will grant the approval sought under s 477(2B). I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 14 June 2018