FEDERAL COURT OF AUSTRALIA Hancock (liquidator), in the matter of South Townsville Developments Pty Limited (in liq) [2019] FCA 71 File number: NSD 105 of 2019 Judge: PERRY J Date of judgment: 25 January 2019 Date of publication of reasons: 5 February 2019 Catchwords: CORPORATIONS – winding up – where creditors' voluntary winding up – application under s 477(2B) of the Corporations Act 2001 (Cth) for the approval of a funding agreement to be entered into by liquidator – application for retroactive approval nunc pro tunc – application granted PRACTICE AND PROCEDURE – where application for a suppression or non-publication order pursuant to ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth) – whether clear public interest in the due and beneficial administration of estates of insolvent companies – where disclosure of reasons for judgment an essential aspect of the principle of open justice Legislation: Corporations Act 2001 (Cth) Federal Court of Australia Act 1976 (Cth) 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 Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 Needham, in the matter of Bruck Textile Technologies Pty Ltd (in liq) [2016] FCA 837 Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 SRD v Australian Securities Commission (1994) 52 FCR 187 Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 Woods, in the matter of Paladin Energy Ltd (Administrators Appointed) [2017] FCA 836 Date of hearing: 25 January 2019 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 Counsel for the First Plaintiff: Mr C Harris SC Solicitor for the First Plaintiff: Eakin McCaffery Cox ORDERS NSD 105 of 2019 IN THE MATTER OF SOUTH TOWNSVILLE DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) GEOFFREY TRENT HANCOCK AS LIQUIDATOR OF SOUTH TOWNSVILLE DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) (ACN 158 621 937) Plaintiff JUDGE: PERRY J DATE OF ORDER: 25 JANUARY 2019 THE COURT ORDERS THAT: 1. The originating process is taken to have been filed in Court and made returnable instanter. 2. Pursuant to sections 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, that: (a) disclosure of the confidential affidavit of Geoffrey Trent Hancock sworn 24 January 2019 and Annexure "A" to that confidential affidavit be prohibited except with the consent of the Plaintiff or by order of the Court made on application of which the Plaintiff has been given at least three business days' notice in writing; and (b) the affidavit and exhibit referred to above be retained in the Court file in an envelope marked "Confidential: to be opened only by Order of the Court". 3. Pursuant to section 37AJ of the Federal Court of Australia Act 1976 (Cth) that the order under sections 37AF and 37AG(1)(a), Order 2 above, is to operate for a period of 3 years from the date of this Order, or such other period as the Court might otherwise order. 4. Pursuant to section 1322(4)(d) of the Corporations Act 2001 (Cth) extending, to the date of filing of this Originating Process, the time for making the application for Order 5 below. 5. Nunc pro tunc pursuant to section 477(2B) of the Corporations Act 2001 (Cth) approving the entry by the Plaintiff as liquidator of South Townsville Developments Pty Ltd (in Liquidation) into the agreement which is at Annexure "A" to the confidential affidavit of Geoffrey Trent Hancock. 6. That the costs of this application be costs in the liquidation. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT PERRY J: 1. INTRODUCTION 1 On 16 October 2015, Geoffrey Trent Hancock was appointed voluntary administrator of South Townsville Developments Pty Limited (In Liquidation) (the Company) by its sole director pursuant to s 436A of the Corporations Act 2001 (Cth) (the Act). The Company had carried out the development, construction, and sale of a block of residential apartments in Townsville called "Allure". On 20 November 2015, pursuant to a resolution of the creditors made under s 439C of the Act, the plaintiff was appointed liquidator of the Company (the Liquidator). 2 There are no funds in the liquidation from which a distribution can be made to creditors but there appeared to the Liquidator to be claims that could be made by him, including under Part 5.7B of the Act, for the recovery of monies from two of the creditors. 3 On 15 October 2018 and the day before the expiration of the 3 year period in s 588FF(3)(a)(i) of the Act, the Liquidator commenced proceeding NSD 1948/2018 (the Proceeding) in this Court against Lauvan Pty Limited (ACN 059 081 579) and Mittabell Pty Limited (ACN 003 110 696) (together the Defendants). In that proceeding, the Liquidator seeks an order pursuant to s 588FF of the Act for repayment by the Defendants of approximately $6.4 million plus interest and declaratory relief. By an order made on 8 November 2018, the Court ordered among other things that the proceeding be continued by way of pleadings. No defence has yet been filed. 4 This matter came before me urgently in my capacity as Duty Judge. Pursuant to orders made by me on 25 January 2019, the originating process in this proceeding was taken to have been filed in Court and made returnable instanter, and the time for making the application extended. I also made final orders nunc pro tunc pursuant to s 477(2B) of the Act approving the entry by the liquidator into a funding agreement with respect to the Proceeding, together with orders made under ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) protecting the confidentiality of the funding agreement. These are my reasons for making those orders. 2. EVIDENCE 5 The originating application was supported by an affidavit sworn by the Liquidator on 24 January 2019 to which was annexed a copy of the originating process in Proceeding NSD 1948/2018, a copy of the Liquidator's affidavit sworn on 15 October 2018 in that proceeding (the Liquidator's previous affidavit), a copy of the statement of claim filed on 12 December 2018 in that proceeding, and a list of creditors. 6 A second affidavit sworn on 24 January 2019 by the liquidator and the subject of confidentiality orders, as explained below, was also relied upon which gave details of, and annexed, the funding agreement. 3. CONFIDENTIALITY ORDERS 7 Section 37AF of the FCA Act provides that: (1) The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of: (a) information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or (b) information that relates to a proceeding before the Court and is: (i) information that comprises evidence or information about evidence; or (ii) information obtained by the process of discovery; or (iii) information produced under a subpoena; or (iv) information lodged with or filed in the Court. (2) The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1). 8 Section 37AE provides that, in deciding whether to make a suppression or non-publication order, the Court must take into account that a primary objective of the administration of justice is to safeguard the public interest in open justice. As, for example, Hill J observed in SRD v Australian Securities Commission (1994) 52 FCR 187 at 189: It will ordinarily be essential in order to maintain confidence in the integrity and independence of the Court that its proceedings be open to scrutiny by the general public and it will only be in exceptional cases where the interest of justice would override the ordinary requirement of open justice. 9 Consistently with this primary objective, s 37AG provides that the Court may make a suppression or non-publication order on the grounds that the order is "necessary" relevantly to prevent prejudice to the proper administration of justice. As such, the section imposes a high threshold for the making of such an order consistently with the principle that open justice is a fundamental tenet of the rule of the law. As the High Court said in Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 at [30], "'necessary' is a strong word." However, as the Court also said in Hogan at [33], once the court has reached that state of satisfaction, it would be a misreading of s 50 of the FCA Act (and, by analogy, its successor provisions, ss 37AF and 37AG) to then refuse to make the order. Furthermore, under s 37AJ, in deciding the period for which an order is to operate, the Court is to ensure that the order operates for no longer than is reasonably necessary to achieve the purpose for which it is made. 10 As the Liquidator submitted, such orders are commonly made where, as here, a liquidator has obtained litigation funding for proceedings for the recovery of monies. For example, Gleeson J explained in Needham, in the matter of Bruck Textile Technologies Pty Ltd (in liq) [2016] FCA 837: 37 As Barrett J noted in Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498 at [2], the subject matter of an application of this kind is "commercially confidential and sensitive… related to aspects of the litigation that any plaintiff, protecting its own interests and the integrity of the litigation process in which it is engaged, would take particular care to keep from the other party or parties to the litigation. Those aspects relate to the funding of the litigation". 38 The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of s 37AF orders in this case. 39 In Re Octaviar Administration Pty Ltd (in liq) [2014] NSWSC 344 at [20] to [21], Ball J noted that disclosure of reasons for judgments is an essential aspect of the principle of open justice. On the other hand, his Honour observed, when considering a request for access to reasons for orders made pursuant to s 477(2B) of the Corporations Act 2001 (Cth) approving the entry by the liquidators into a litigation funding deed, it is appropriate to give the liquidators an opportunity to make submissions on which parts of the material to which access is sought is confidential and should remain the subject of a suppression order. Ball J stated: Without intending to be exhaustive, that material would include material that would put the Liquidators in a disadvantageous position compared to that of an ordinary litigant. Disclosure of material of that type would not be conducive to the proper administration of justice. See also e.g. 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 (ACN 154) at [40] (Gleeson J); and Woods, in the matter of Paladin Energy Ltd (Administrators Appointed) [2017] FCA 836 at [34] (Barker J). 11 In the present case, the Liquidator submitted that the confidentiality orders were sought so as to further the interests of the creditors of the Company and to prevent the Defendants to the Proceeding from obtaining an unfair advantage not available to ordinary litigators by learning the terms and conditions under which the plaintiff is able to pay the legal costs and expenses of the proceeding. I accept that that information is information which, if disclosed, would confer an unfair advantage on the Defendants and that its disclosure would be contrary to the public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors. Furthermore, the confidentiality orders were sought for a period of 3 years or such other period as the Court might otherwise order. I am satisfied that, having regard to the nature of the issues raised in the Proceeding, the order sought did not operate for longer than was reasonably necessary to achieve the purpose for which it was made and therefore that the requirements of s 37AJ of the FCA Act were satisfied. It follows for these reasons that I considered that the confidentiality orders sought were appropriate. 4. SECTION 477(2B) AND 1322(4)(d) OF THE CORPORATIONS ACT 12 Section 477(2)(m) of the Corporations Act provides for a liquidator's general power to "do all such other things as are necessary for winding up the affairs of the company and distributing its property". That power is relevantly subject to s 477(2B) of the Corporations Act. Section 477(2B) operates as a bar to the entry by a liquidator into an agreement on a company's behalf where that agreement may endure for more than 3 months after entry into the agreement save with the approval of the Court, the committee of inspection, or a resolution of the creditors. However the Court may grant retrospective approval to an agreement under s 477(2B) and s 1322(4)(a) and (d) in appropriate circumstances: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 (Newtronics) at [28]-[30] (Gordon J) and ACN 154 at [27] (Gleeson J) and the authorities there cited. 13 The Court's task is not to "rubber-stamp" the entry into agreement; nor is it to "second-guess" the liquidator in the exercise of her or his powers. The correct approach was summarised by Gleeson J in Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 in the following passages: 33 In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 ("Fortress") at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors… 34 The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment… … 36 The Court's task is to satisfy itself, having regard to the liquidator's commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene… 37 In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors … relevant to the Court's assessment of a proposed litigation funding agreement: (1) the prospects of success of the proposed litigation; (2) the interests of creditors other than the proposed defendant; (3) possible oppression; (4) the nature and complexity of the cause of action; (5) the extent to which the liquidator has canvassed other funding options; (6) the level of the funder's premium; (7) consultations with creditors; and (8) the risks involved in the claim. (Citations omitted) 14 I am satisfied that that there is no error of law, lack of good faith or other good reason for the Court to intervene. 15 First, I have read the funding agreement and having regard to the principles summarised above, I am satisfied that it does not prejudice the creditor's rights. In this regard, among other matters, I do not consider that the entity or person providing the funding is given a benefit disproportionate to the risk assumed in light of the promised funding or a grossly excessive profit: Newtronics at [26(5)] (Gordon J) and authorities there cited. 16 Secondly, the liquidator has received proofs of debt from unsecured creditors in the sum of approximately $6.3 million from unrelated parties, $6.9 million from related parties, and approximately $596,000 from the Defendants to the Proceeding as secured creditors. None of these debts were paid in the administration. 17 Thirdly, the Company has no assets and there are presently no funds in the liquidation from which payment can be made to any creditors or to pay the legal costs necessary in order to pursue the Proceeding. 18 In the fourth place, while there is no detailed evidence regarding the prospects of success of the Proceeding, the statement of claim and the facts set out in the liquidator's affidavit sworn on 15 October 2018 in the Proceeding identify a reasonable prima facie case for the relief sought. 19 Fifthly, the Proceeding is the only likely source of funds to distribute to creditors and, if the company is successful in that litigation, the unsecured creditors will receive a dividend rather than a nil return. Save, therefore, perhaps for the Defendants to the Proceeding who are also creditors, it is in the interests of all creditors for that proceeding to continue. 20 Finally, while there has been no consultation with the creditors, that is in order to prevent the Defendants from learning the details of the funding agreement and thereby acquiring an unfair advantage. 21 It follows, for these reasons, that I approved the liquidator's entry into the funding agreement nunc pro tunc. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perry. Associate: Dated: 5 February 2019