Federal Court of Australia Kelly, in the matter of Halifax Investment Services Pty Ltd (in liquidation) (No 11) [2020] FCA 1282 File number: NSD 2191 of 2018 Judgment of: GLEESON J Date of judgment: 9 September 2020 Catchwords: BANKRUPTCY AND INSOLVENCY – application by representative defendant for indemnity in respect of costs and legal expenses reasonably incurred – where application sought in respect of costs of expert report – where sufficient likelihood expert report will assist in determination of issues – application granted Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 28 Date of last submission/s: 31 August 2020 Date of hearing: Determined on the papers Counsel for the Plaintiffs: A Leopold SC, E Holmes and C Trahanas Solicitor for the Plaintiffs: K&L Gates Counsel for the First Defendant: E Hyde Solicitor for the First Defendant: Maddocks Solicitor for the Second Defendant: Turks Legal Counsel for the Defendants: V Whittaker SC and C Mitchell Solicitor for the Third Defendant: Murdoch Clarke Counsel for the Fifth Defendant: S Munro and C O'Brien Solicitor for the Fifth Defendant: Anderson Lloyd Counsel for the Sixth and Seventh Defendants: E Smith Solicitor for the Sixth and Seventh Defendants: Tailored Legal Solutions Limited ORDERS NSD 2191 of 2018 IN THE MATTER OF HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) BETWEEN: MORGAN JOHN KELLY AND PHILIP ALEXANDER QUINLAN AS JOINT AND SEVERAL LIQUIDATORS OF HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) First and Second Plaintiffs HALIFAX INVESTMENT SERVICES PTY LTD (IN LIQUIDATION) (ACN 096 980 522) Third Plaintiff AND: CHOO BOON LOO First Defendant ELYSIUM BUSINESS SYSTEMS PTY LTD (ACN 110 669 282) Second Defendant JASON PAUL HINGSTON (and others named in the Schedule) Third Defendant order made by: GLEESON J DATE OF ORDER: 9 september 2020 THE COURT ORDERS THAT: 1. The first defendant be indemnified in respect of his costs and legal expenses including expert advice reasonably incurred, as agreed by the first and second plaintiffs or taxed and to be paid from the funds in the accounts specified in order 1 of the orders of Gleeson J made on 2 July 2020, of instructing Barry Taylor of HLB Mann Judd to prepare an expert report for the purpose of representing all clients of the third plaintiff (Halifax AU) and all clients of Halifax New Zealand Limited (In Liquidation) (Halifax NZ) who seek an in specie distribution from Halifax AU in respect of part or all of their entitlements, in order to propound any proper argument that it is feasible to permit investors to elect to receive their entitlements by way of an in specie distribution. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: Proposed expert report regarding in specie distribution 1 On 31 July 2020, the first defendant (Mr Loo) was appointed to represent all clients of the third plaintiff (Halifax AU) and all clients of Halifax New Zealand Limited (In Liquidation) (Halifax NZ) who seek an in specie distribution from Halifax AU in respect of part or all of their entitlements, in order to propound any proper argument that it is in the interests of those investors that they be entitled to elect to receive their entitlements by way of an in specie distribution. 2 Further, an order was made that Mr Loo be indemnified in respect of his costs and legal expenses including any appropriate expert advice reasonably incurred, as agreed by the first and second plaintiffs (liquidators) or taxed and to be paid from specified accounts in the control of the liquidators, investigating available arguments that it is in the interests of the relevant investors (those who seek an in specie distribution from Halifax AU in respect of part or all of their entitlements) that they be entitled to elect to receive their entitlements by way of an in specie distribution. 3 By interlocutory process filed on 21 August 2020, Mr Loo now seeks an order that he be indemnified by the liquidators for the costs and legal expenses of instructing a chartered accountant and liquidator, Barry Taylor of HLB Mann Judd, to prepare a report for use in the proceeding. 4 The application was supported by an affidavit of Michael Baltins, solicitor affirmed on 21 August 2020. Mr Loo proposes to engage Mr Taylor following his initial opinion to the effect that a process for an in specie distribution could be streamlined and simplified which could mitigate costs to an acceptable level for those investors that wish to receive an in specie distribution. 5 The application was supported by the third defendant (Mr Hingston) and the fifth defendant (Ms McMullin) and was not opposed by the second defendant (Elysium). Elysium contended that Mr Taylor's proposed report could provide benefits to the category of investors that Elysium represents by enabling an earlier distribution than might otherwise occur based on Mr Kelly's evidence. Elysium also submitted that Mr Taylor should be asked to canvas and give an opinion on adjudication dates other than 1 June 2020, including 23 November 2018 which is a possible that on which the Court may determine investors' proportionate entitlements to the mixed deficient fund. 6 The fourth, sixth and seventh defendants made no submissions. 7 The application was opposed by the first plaintiffs (liquidators), who argue that the question of whether the costs of the proposed report should be met from investor funds should be determined at the end of the proceeding. The liquidators note that I took this approach in relation to the costs of an expert report of Craig Stephens of BDO, proposed to be filed by Mr Hingston 8 The liquidators are concerned that the proposed report may not advance matters beyond affidavit evidence of the first named first plaintiff (Mr Kelly), already filed. They also express concern that the report may not provide any useful or precise guidance on how an in specie distribution is practically feasible which, the liquidators argue, is the only real issue. The liquidators contend that investor funds should not be used to pay for a report which is very likely to prove ultimately to be an exercise in futility. Any such utility can be assessed at the end of the proceeding. 9 The liquidators noted that the following matters are not in dispute: (1) There are potential benefits to investors of an in specie distribution. (2) On any view an in specie distribution would maximise the possibility that investors receiving such a distribution may avoid incurring Australian capital gains tax. (3) Neither they nor any party to the proceeding has ever expressed the view that, despite the potential benefits, there should not be any in specie distribution. (4) If the Courts are prepared (given the pragmatic and robust nature of the jurisdiction they are exercising) to abide imprecision in the process of valuing the interest of each investor, or the vastly increased costs of a succession of valuation exercises, then an in specie distribution can occur. 10 The liquidators submit that Mr Taylor should not be engaged to comment on the relative prejudice of having or not having an in specie distribution, as that is not a matter for expert evidence. Further, they submit that Mr Taylor is in no position to express an opinion about issues of delay or cost that might be weighed in any assessment of the merits of an in specie distribution. 11 The liquidators state that they have strived to find a way to have an in specie distribution, and have not been able to identify a feasible method for reasons explained in Mr Kelly's affidavit evidence. The main identified obstacle is that an in specie distribution would be complicated by inevitable movements in the market immediately after any value of the deficient mixed fund is struck. The liquidators contend that the proposal that Mr Taylor proposes to explore has been considered by the liquidators and produces a risk that money may need to be clawed back from those to whom an in specie distribution is made, in the event of a downturn in the markets. 12 Mr Loo submitted that the liquidators have misunderstood the scope of Mr Taylor's proposed report. Mr Loo clarified that Mr Taylor does not intend to attempt an assessment of the costs and benefits of an in specie distribution across the entirety of the investor funds. Instead, he proposes to quantify anticipated costs to investors of electing for an in specie distribution with a view to enabling investors to make elections as to whether such a distribution is in their own interests. 13 Mr Loo expects that Mr Taylor's evidence would challenge the liquidators' current view that movements in the market after any value is struck pose a practically insuperable obstacle to an in specie distribution. Mr Loo also expects that Mr Taylor may be able to provide evidence that the risk of needing to claw back money can be avoided. 14 Mr Loo submitted that the evidence filed by the liquidators to date does not sufficiently address the practical feasibility of an in specie distribution and, in order to represent those investors who seek an in specie distribution effectively, ought to be able to adduce relevant evidence. 15 Mr Loo also submitted that the estimated costs of the proposed expert report ($50,000.00-70,000.00 excluding GST and disbursements) are not disproportionate where: (1) Mr Kelly has estimated that in specie distributions could take at least 13 to 14 months, thereby incurring operating costs of over $1.5 million. (2) Mr Taylor considers that processes may be able to be formulated that would substantially shorten this timeframe and may halve the costs of in specie distributions. (3) The potential capital gains tax liabilities that may be avoided can be assumed to be very substantial. (4) The breakdown of cost per investor of in specie distributions may be as little as $50.00 per investor. Consideration 16 By order 9 of orders made on 19 February 2020, Mr Loo is indemnified in respect of his legal expenses reasonably incurred in acting as a representative defendant, such expenses to be paid out of specified accounts within the control of the liquidators. 17 By order 2 of orders made on 31 July 2020, Mr Loo was further indemnified for the costs of investigating arguments that it is in the interests of the relevant investors that they be entitled to elect to receive their entitlements by way of an in specie distribution. The limited scope of this indemnity was intended to ensure that investors' funds would not be dissipated by expenditure on an issue that the liquidators consider has been sufficiently addressed by them. 18 I do not accept that there is any real likelihood that Mr Loo, who has retained experienced legal advisers, will engage Mr Taylor, himself an experienced liquidator, to address issues that are not genuinely in dispute. Further, based on Mr Baltins' evidence and contrary to the liquidators' concerns, I consider that there is a sufficient likelihood that Mr Taylor's proposed report will assist the Court in assessing the feasibility of in specie distributions to justify the payment of its cost from investor funds. Although the liquidators consider that they have given comprehensive consideration to the possibility of in specie distribution, Mr Baltins holds out the prospect that Mr Taylor's evidence may make a significant and constructive contribution to the cost effective and timely completion of the liquidation. The issue is of sufficient magnitude that I consider it reasonable and appropriate for Mr Loo to address it by expert evidence. 19 Where there is also no issue about Mr Loo's bona fides, I do not accept that it is reasonable to require him to bear the costs of obtaining expert evidence to represent the category of investors who seek an in specie distribution until after its utility may be assessed at the conclusion of the proceeding. 20 The position is different in the case of Mr Hingston's BDO report, where the liquidators had raised significant doubt about the potential utility of that report, because it was directed to Mr Hingston's own potential capital gains tax liability without an in specie distribution and where the liquidator considers that it is reasonable to assume significant capital gains tax liabilities will be incurred by investors if there is no in specie distribution. 21 Accordingly, I will make an order to the effect sought by Mr Loo. Other matters 22 The liquidators also proposed a regime for addressing issues expected to be raised by the eighth and ninth defendants (Worboys parties), with the stated aim of avoiding duplication of costs. That regime essentially involves the first to seven defendants having an opportunity to contribute to the liquidators' submissions in answer to arguments put by the Worboys parties. 23 Mr Hingston and the fifth defendant (Ms McMullin) do not consent to this constraint. 24 Mr Hingston has been joined as a defendant to represent all clients of Halifax AU and Halifax NZ that transferred shares into the Trader Workstation (also known as Halifax AU's IB Platform or Halifax NZ's IB Platform) from another stockbroker and have not traded in those shares. 25 The liquidators responded to Mr Hingston by contending that the category of investors that Mr Hingston represents have no interest in the issues raised by the Worboys parties because that category comprises investors who acquired shares that were later transferred to Halifax AU (or perhaps Halifax NZ) after which they were never again traded. This proposition is not self-evident. No doubt, Mr Hingston's legal advisers will give it due consideration. 26 Each of the defendants is legally represented. They can be in no doubt that the liquidators are watching the defendants' conduct carefully, in the interests of all creditors, with an eye to ensuring that investor funds are not depleted by unnecessary legal costs and expenses. There is no need to make any order in relation to this issue. 27 The liquidators also made submissions casting doubt on the manner in which Ms McMullin proposes to represent the relevant category of investors. By order made on 3 April 2020, Ms McMullin was appointed to represent "all clients of [Halifax AU] and all clients of [Halifax NZ] who invested before 1 January 2016 in order to propound the argument that investments made before there was a deficient mixed fund are traceable". 28 In the absence of any application, I do not propose to address the liquidators' submissions. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Gleeson. Associate: Dated: 9 September 2020 SCHEDULE OF PARTIES NSD 2191 of 2018 Defendants Fourth Defendant: ATLAS ASSET MANAGEMENT PTY LTD (ACN 607 442 679) AS TRUSTEES FOR THE ATLAS ASSET MANAGEMENT TRUST Fifth Defendant: FIONA MCMULLIN Sixth Defendant: ANDREW PHILLIP WHITEHEAD AND MARLENE WHITEHEAD IN THEIR CAPACITY AS TRUSTEES OF THE BEELINE TRUST Seventh Defendant: ANDREW PHILLIP WHITEHEAD Eighth Defendant: JEFFREY JOHN WORBOYS Ninth Defendant: HONG KONG CAPITAL HOLDINGS PTY LIMITED