Federal Court of Australia J & J Richards Super Pty Ltd ATF the J & J Richards Superannuation Fund v Linchpin Capital Group Ltd (in liq) [2020] FCA 1772 File number: NSD 939 of 2020 Judgment of: DERRINGTON J Date of judgment: 7 December 2020 Catchwords: CORPORATIONS – leave to commence or proceed with action against company in liquidation – third party's claim likely to be indemnified under policy of insurance – relevance of s 562 of the Corporations Act 2001 (Cth) – leave granted nunc pro tunc Legislation: Corporations Act 2001 (Cth) ss 471B, 500, 562 Cases cited: Emanuele v Australian Securities Commission (1997) 188 CLR 114 Hewett Packard Australia Pty Ltd v Siltek Holdings Pty Ltd [2005] NSWSC 672 Rickhuss v Cosmetic Institute Pty Ltd (No 2) [2018] NSWSC 2000 Seeley International Pty Ltd v Millennium Electronics Pty Ltd (in liq) (No 2) [2020] SASC 211 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 23 Date of hearing: 7 December 2020 Counsel for the Applicant: Mr R Pietriche Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the First Respondent: The first respondent did not appear Counsel for the Second Respondent: The second respondent appeared in person Counsel for the Third Respondent: The third respondent appeared in person Counsel for the Fourth Respondent: The fourth respondent appeared in person Counsel for the Fifth Respondent: The fifth respondent appeared in person Counsel for the Sixth Respondent: The sixth respondent did not appear ORDERS NSD 939 of 2020 BETWEEN: J & J RICHARDS SUPER PTY LTD AS TRUSTEE FOR THE J & J RICHARDS SUPERANNUATION FUND Applicant AND: LINCHPIN CAPITAL GROUP LTD (IN LIQUIDATION) ACN 163 992 961 First Respondent PAUL NIELSEN Second Respondent IAN WILLIAMS (and others named in the Schedule) Third Respondent order made by: DERRINGTON J DATE OF ORDER: 7 December 2020 THE COURT ORDERS THAT: The filing of pleadings and evidence 1. The applicant is to file and serve any affidavit evidence upon which it seeks to rely by 4.00 pm on 25 January 2021. 2. The matter is listed for a case management hearing at 9.30 am AEST on 2 February 2021. Application for leave to proceed against the companies 3. Pursuant to section 471B of the Corporations Act 2001 (Cth), the applicant is granted leave nunc pro tunc to commence and proceed with this proceeding against the first and sixth respondents.A Other orders 4. Costs be each party's costs in the cause. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DERRINGTON J: Background 1 The principal proceeding is a class action brought by the group members who were investors in two managed investment schemes. The first was an unregistered managed investment scheme known as "Investport Income Opportunity Fund" (the Unregistered Scheme) of which the first respondent, Linchpin Capital Group Ltd (Linchpin), was the trustee. The second was a registered managed investment scheme also known as "Investport Income Opportunity Fund" (the Registered Scheme) of which the sixth respondent, Endeavour Securities (Australia) Ltd (Endeavour), was the responsible entity. 2 The action was commenced on 21 August 2020, at which time Linchpin and Endeavour were both in liquidation. Leave was sought to commence the proceedings against the companies in the originating application, but has not yet been granted. The other respondents to the proceedings are persons who are directors of either Linchpin or Endeavour or both. 3 As the amended statement of claim discloses, several causes of action are brought against the companies, including claims relating to their entry into loan transactions without any adequate security being obtained, and the funds being applied for purposes not consistent with the product disclosure statements or information memorandums. It is also alleged that one of the companies engaged in misleading or deceptive conduct in relation to the manner in which investments were solicited from the investors. 4 Prior to the commencement of the class action, regulatory proceedings were brought by the Australian Securities and Investments Commission (ASIC) against the companies and the directors. On 7 August 2018, both companies were placed into receivership pursuant to s 1323 of the Corporations Act 2001 (Cth) (Corporations Act) and subsequently, on 15 March 2019, both companies were placed into liquidation. Findings were also made that the companies had contravened the Corporations Act and breached their duty with respect to the management of the schemes and that they had engaged in misleading or deceptive conduct. 5 There is little doubt, given the history of this matter, that the class action members have established the existence of a prima facie cause of action against the corporate respondents, supported by the findings and determinations in that ancillary litigation. 6 The evidence before the Court discloses that the liquidation of the companies is ongoing and, at present, there is doubt that any distribution will be made to creditors or to unitholders. The liquidators have confirmed to the applicants' instructing solicitors that the companies are without funds. 7 This application, filed on 30 October 2020, is for leave to commence and proceed against Linchpin and Endeavour under s 471B of the Corporations Act. Relevant principles 8 The principles on which a court will grant leave under s 471B are well established and are substantially the same as those which apply to an application under s 500(2) of the Corporations Act. For present purposes, it is sufficient to observe the following matters: (a) The broad purpose of s 471B is to prevent an insolvent company's assets being dissipated by unnecessary litigation and it enables the Court to effectively supervise the claims brought against the company. The section prevents circumstances arising in which the company in liquidation is subject to a multiplicity of actions which would be expensive, time consuming and, most likely, unnecessary. (b) An applicant for leave will be required to show why it should not be left to prove its debt in the winding up and, in the absence of establishing any such reason, it ought ordinarily be left to pursue that process. (c) In seeking leave, an applicant must generally establish that it has a good claim with a solid foundation which gives rise to a serious question to be tried. It is perhaps not necessary to establish a prima facie case. Relevant to the exercise of the Court's discretion are factors such as the amount and seriousness of the claim, the degree of complexity of legal and factual issues, the prospect that a proof of debt will be rejected and the stage at which the proceedings, if already commenced, have progressed. (d) It must be recognised that the power to grant leave is discretionary and depends upon the particular circumstances of the case and there are many other factors which may be relevant to the power's exercise. (e) Special circumstances exist where a policy of insurance may exist for the purposes of indemnifying a claim made against the company. 9 It is widely accepted that the power under s 471B may be exercised by the Court by granting leave nunc pro tunc: Emanuele v Australian Securities Commission (1997) 188 CLR 114, 132 per Toohey J; Seeley International Pty Ltd v Millennium Electronics Pty Ltd (in liq) (No 2) [2020] SASC 211, [44] – [47] per Livesey J. That is not an irregular occurrence and there is nothing in the circumstances of the present case which would prevent the making of such an order, if, otherwise, the circumstances justify it. In that latter respect, these proceedings are in their infancy, having been commenced in August of this year, and none of the respondents have filed pleadings. The relief now claimed was also sought in the originating application and no party can be taken by surprise by the present application. Whether leave should be granted 10 The applicant identified a number of grounds on which it relies in support of its application. It is appropriate to deal with them per seriatim. That the class action members may not prove in the winding up 11 The applicant's main contention was that the group members in these proceedings must pursue the class action as being the only avenue by which they might recover their losses. Reference was made to the information provided by the liquidators on 26 June 2019 alleging that the unitholders in the schemes are classified as having rights equivalent to members or shareholders of the companies, and that they are not regarded as creditors of the schemes for the purposes of the liquidation. It was said, therefore, that the conventional alternative to pursuing legal proceedings against the company in liquidation, being the lodgement of a proof of debt in the winding up, is not available to the applicant or the class members. So the submission goes, a departure from the proof of debt procedure is plainly warranted to avoid the prejudice to the group members which would inure if they were not permitted to prosecute their claims. 12 This submission must be rejected. 13 The claims of the class members as articulated in the amended statement of claim, or some of them, are personal claims against the companies and their directors, not merely claims in respect of any amount which they might, as unitholders, recover upon the winding up of the scheme. As unitholders in the scheme, they will be entitled to any surplus in the same way as a shareholder in a company. However, not all of the actions which are the subject of the present proceedings are advanced by the class members as unitholders. Some of the causes are made by the group members in their capacity as potential investors in the schemes. In particular, it is said that the misleading and deceptive conduct of the companies induced them to invest in the schemes, resulting in loss. Other claims are advanced on the basis that the corporate entities breached duties owed to the unitholders and it is unclear that the result of those claims will be orders to replenish the trust funds. If that were to be the result, it might be correct to treat the unitholders similarly to shareholders in an ordinary company winding up. However, at present, it is far from clear that this will be the result of the action. 14 I am not satisfied that the claims as unitholders as advanced in the class action proceedings ought be treated merely as an entitlement or a claimed entitlement to obtain and participate in any surplus based on the winding up. The claims, or some of them, give rise to causes of action which would render the unitholders as "creditors" or "contingent creditors". It follows that I reject the first ground as being a substantial reason for the supporting of the making of the orders sought. The merits of the class action 15 Secondly, the applicants rely upon the apparent merits of the claims being advanced in the class action. They submit that the causes of action are based upon the same subject matter and conduct as was before the Court in the ASIC proceedings in which Endeavour and Linchpin were both found to have contravened several provisions of the Corporations Act by failing to comply with information memoranda and product disclosure statements issued in relation to investments, failing to exercise ordinary care, skill and diligence and engaging in misleading or deceptive conduct with respect to representations made to potential investors. 16 I do not doubt that the circumstances of this case are sufficient to satisfy any question of whether the class members have a cause of action which they should be able to make. However, the submissions so made necessarily reinforce that their claims are in the nature of personal actions against the companies. The claims made will be covered by insurance 17 There is a strong possibility that the liability of the companies in respect of the claims made by the members in the class action will be covered by policies of insurance held by the company in respect of its conduct and/or the conduct of its directors and officers. At present there is some opacity around this issue, but the evidence before the Court suggests that the companies' insurers are in the process of investigating whether the policies will respond to the relief sought. That is a significant matter. If the companies' policies respond to the group members' claims, s 562 of the Corporations Act would permit the flow of any indemnity granted by the insurer directly to those group members. That section provides: 562 Application of proceeds of contracts of insurance (1) Where a company is, under a contract of insurance (not being a contract of reinsurance) entered into before the relevant date, insured against liability to third parties, then, if such a liability is incurred by the company (whether before or after the relevant date) and an amount in respect of that liability has been or is received by the company or the liquidator from the insurer, the amount must, after deducting any expenses of or incidental to getting in that amount, be paid by the liquidator to the third party in respect of whom the liability was incurred to the extent necessary to discharge that liability, or any part of that liability remaining undischarged, in priority to all payments in respect of the debts mentioned in section 556. (2) If the liability of the insurer to the company is less than the liability of the company to the third party, subsection (1) does not limit the rights of the third party in respect of the balance. (3) This section has effect notwithstanding any agreement to the contrary. 18 The operation of this section to the circumstances of the group members' claim renders it somewhat akin to a claim directly against the property of the company. That is, the members' claim, if successful, will not, or will not necessarily, dilute the assets available for distribution amongst other creditors. Indeed, if the policy responds, other creditors will have the advantage of the group members' claims being met by a different source of funds. This circumstance weighs heavily in favour of granting the leave sought. No objection to the relief sought 19 A further significant factor is that neither the companies by the liquidators nor any other parties to these proceedings have objected to the relief sought. As Counsel for the group members submitted, the seeking of relief in the nature of leave to proceed against a company in liquidation was first raised in the originating application filed on 21 August 2020, and no party has, to date, objected to it. Moreover, none of the parties have filed any evidence in response to the interlocutory application despite case management directions being made that any such material be filed by 13 November 2020. The absence of such opposition weighs strongly in favour of granting the relief sought: Rickhuss v Cosmetic Institute Pty Ltd (No 2) [2018] NSWSC 2000 [13] (Garling J); Hewett Packard Australia Pty Ltd v Siltek Holdings Pty Ltd [2005] NSWSC 672 [9] (Barrett J); and gives the Court comfort that it may rely upon the evidence adduced. Adjournment application 20 I hasten to mention that when the matter was called on today, the directors queried whether or not the matter ought be adjourned for a period of time to allow the companies' insurers further time in which to consider their position in relation to the polices. Whilst I have a deal of sympathy for the directors, who are caught in the unfortunate situation of not being able to afford legal representation themselves and reliant upon insurers who have not yet made a decision as to whether the policy will respond, no adjournment should occur in this case. That is largely because the interests of the directors will not be directly adversely affected by the making of the orders sought. In fact, on one view, it might actually improve their position personally. 21 I also note that on 9 October 2020, the Court had granted the directors an extended period for the filing of their defences to allow them time in which to obtain legal representation. It appears that to date they have not been successful in doing so, but from what I am told, that is a consequence upon the inability of the insurers to respond to their request that the policy indemnify them. 22 In any event, in the circumstances it is appropriate to grant the relief sought. The making of the order will not unduly impact upon the liquidation, and nor is it likely to interfere with the application of the proceeds of the assets of the company. Conclusion 23 On the basis of the foregoing the applicant is granted leave, pursuant to s 471B of the Corporations Act, nunc pro tunc to commence and proceed with this proceeding against the first and sixth respondents. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington. Associate: Dated: 7 December 2020 SCHEDULE OF PARTIES NSD 939 of 2020 Respondents Fourth Respondent: PAUL ANTHONY RAFTERY Fifth Respondent: PETER DALY Sixth Respondent: ENDEAVOUR SECURITIES (AUSTRALIA) LTD (IN LIQUIDATION) ACN 079 988 819