Federal Court of Australia Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530 File number: NSD 534 of 2020 Judgment of: HALLEY J Date of judgment: 18 May 2021 Date of publication of reasons: 19 May 2021 Catchwords: CORPORATIONS – application by liquidator of company for approval of entry into settlement agreement pursuant to ss 477(2A) and 477(2B) of the Corporations Act 2001 (Cth) – where approval sought nunc pro tunc – application granted PRACTICE AND PROCEDURE – application for suppression orders pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) in relation to the content of a settlement agreement – where liquidator's proceedings ongoing against remaining defendant not party to the settlement agreement – where administration of justice requires proper compromises be facilitated rather than obstructed – whether liquidator entitled to preserve settlement agreement against disclosure to remaining defendant – application granted Legislation: Corporations Act 2001 (Cth) ss 477, 1322 Corporations Act 2001 (Cth) sch 2, Insolvency Practice Schedule (Corporations) s 90-15 Corporations Regulations 2001 (Cth) reg 5.4.02 Federal Court of Australia Act 1976 (Cth) ss 37AF, 37AG Cases cited: Chamberlain v RG & H Investments Pty Limited, in the matter of Hardy Bros (Earthmoving) Pty Limited (in liq) (No 2) (2009) 76 ACSR 415; [2009] FCA 1531 Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No 6) (2007) 160 FCR 423; [2007] FCA 1030 Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet (2015) 89 NSWLR 110; [2015] NSWCA 85 Re Bell Group Ltd (in liq); ex parte Woodings (2013) 97 ACSR 117; [2013] WASC 409 Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 Re HIH Insurance Ltd [2004] NSWSC 5 Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; 10 ACLC 1742 QBE Workers Compensation (NSW) Ltd v GJ Formwork Pty Ltd (2006) 56 ACSR 687; [2006] NSWSC 98 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 27 Date of hearing: 18 May 2021 Counsel for the Plaintiffs: Ms I King Solicitor for the Plaintiffs: CCSG Legal Pty Ltd Counsel for the First, Third, Fourth, Fifth and Sixth Defendants: Mr P Silver Solicitor for the First, Third, Fourth, Fifth and Sixth Defendants: David Landa Stewart Lawyers Counsel for the Second Defendant: The Second Defendant did not appear ORDERS NSD 534 of 2020 IN THE MATTER OF BONDI PIZZA PTY LTD (IN LIQUIDATION) ACN 134 544 317 BETWEEN: DARREN JOHN VARDY IN HIS CAPACITY AS LIQUIDATOR OF BONDI PIZZA PTY LTD (IN LIQUIDATION) ACN 134 544 317 First Plaintiff BONDI PIZZA PTY LTD (IN LIQUIDATION) ACN 134 544 317 Second Plaintiff AND: GARY MICHAEL LINZ First Defendant MARK JEREMY RUCK Second Defendant MICHAELA SAMCIKOVA (and others named in the Schedule) Third Defendant order made by: HALLEY J DATE OF ORDER: 18 MAY 2021 THE COURT ORDERS THAT: 1. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the first plaintiff on behalf of the second plaintiff be authorised nunc pro tunc and to the extent that approval may be required to enter into the Deed of Settlement and Release being Confidential Exhibit "DJV-01" referred to in the affidavit of Darren John Vardy sworn 14 May 2021. 2. Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), until such time as any litigation (including any appeal) arising out of the winding up and affairs of the plaintiffs is concluded or until otherwise ordered, the following documents are to be kept confidential and shall not be published or disclosed to another party: (a) Exhibit "DJV-01" referred to in the affidavit of Darren John Vardy sworn 14 May 2021; and (b) Exhibit "DJV-02" referred to in the affidavit of Darren John Vardy sworn 14 May 2021. 3. In accordance with s 37AG(2) of the Federal Court of Australia Act, Order 2 is necessary to prevent prejudice to the proper administration of justice pursuant to s 37AG(1)(a). THE COURT DECLARES THAT: 4. Pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth), the Deed of Settlement and Release being Exhibit "DJV-01" referred to in the affidavit of Darren John Vardy sworn 14 May 2021, is not invalid by reason of it having been entered into without the Court's prior approval. THE COURT ORDERS THAT: 5. The proceedings be listed for a further case management at 9.30 am on Wednesday, 16 June 2021. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ORDERS NSD 534 of 2020 IN THE MATTER OF BONDI PIZZA PTY LTD (IN LIQUIDATION) ACN 134 544 317 BETWEEN: DARREN JOHN VARDY IN HIS CAPACITY AS LIQUIDATOR OF BONDI PIZZA PTY LTD (IN LIQUIDATION) ACN 134 544 317 First Plaintiff BONDI PIZZA PTY LTD (IN LIQUIDATION) ACN 134 544 317 Second Plaintiff AND: GARY MICHAEL LINZ First Defendant MARK JEREMY RUCK Second Defendant MICHAELA SAMCIKOVA (and others named in the Schedule) Third Defendant order made by: HALLEY J DATE OF ORDER: 19 MAY 2021 THE COURT ORDERS THAT: 1. Pursuant to s 477(2A) of the Corporations Act 2001 (Cth), the first plaintiff on behalf of the second plaintiff be authorised nunc pro tunc and to the extent that approval may be required to enter into the Deed of Settlement and Release being Confidential Exhibit "DJV-01" referred to in the affidavit of Darren John Vardy sworn 14 May 2021. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT HALLEY J: Introduction 1 By interlocutory application filed on 14 May 2021, the first plaintiff, Mr Darren John Vardy, in his capacity as the liquidator of the second plaintiff, Bondi Pizza Pty Ltd (in liquidation), applied under s 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act) for an order that he be authorised to enter into a deed of settlement between the plaintiffs and the first, third, fourth, fifth and sixth defendants. 2 The application is supported by the affidavit of Mr Vardy sworn 14 May 2021. The Deed of Settlement and Release is found at Confidential Exhibit "DJV-01". There is a Second Deed of Settlement and Release concerning related proceedings NSD731/2020 at Confidential Exhibit "DJV-02". The parties also seek suppression orders in relation to the two deeds of settlement and release. Background 3 On 16 May 2014, Mr Vardy and Stephen Naidenov were appointed as joint and several liquidators of Bondi Pizza Pty Ltd (in liquidation), pursuant to a resolution of members of the company that the company be voluntarily wound up in accordance with s 491 of the Corporations Act. On 30 September 2015, Mr Naidenov resigned and Mr Vardy became the sole liquidator of the company. 4 On 20 April 2021, Mr Vardy and Bondi Pizza Pty Ltd entered into the Deed of Settlement and Release with the following parties to these proceedings: (a) Gary Michael Linz (first defendant); (b) Michaela Samcikova (third defendant); (c) Miriam Toro (fourth defendant); (d) Casual Dining Concepts (Holdings) Pty Ltd ACN 142 135 206 (fifth defendant); and (e) Bondi Pizza Parramatta (Holdings) Pty Ltd ACN 605 153 982 (sixth defendant). 5 The Deed of Settlement and Release does not include the second defendant, Mark Jeremy Ruck. The Deed of Settlement and Release is conditional on Court approval being granted. On 21 August 2018, Mr Vardy commenced public examination proceedings in the Supreme Court of New South Wales in relation to the examinable affairs of the company. On 8 August 2019, 13 and 14 June 2019 and 9 April 2020, Mr Vardy conducted public examinations of Ms Samcikova, Ms Toro, Mr Linz and Mr Ruck. 6 Based on his investigations, which included the public examination proceedings, Mr Vardy considered there to be the following potential causes of action available: (a) an insolvent trading claim as against Ms Samcikova, Mr Linz and Mr Ruck as directors, pursuant to ss 588G(2) and 588M(2) of the Corporations Act; (b) an insolvent trading claim as against Ms Toro, as shadow director, pursuant to ss 588G(2) and 588M(2) of the Corporations Act; (c) a claim for breach of their directors' duties pursuant to ss 181, 182, 183 and 184 of the Corporations Act and their fiduciary duties owed to the company by allowing valuable intellectual property assets of the company to be used by Casual Dining Concepts (Holdings) Pty Ltd, trading under the name "Bondi Pizza"; and (d) an account of profits and/or equitable compensation for the use of intellectual property of the company, namely the use of the trading name "Bondi Pizza" by Casual Dining Concepts (Holdings) Pty Ltd, and the transfer and use of the domain name, www.bondipizza.com.au, to Bondi Pizza Parramatta (Holdings) Pty Ltd. 7 The known creditors who proved in the liquidation of the company are as follows: (a) Australian Taxation Office (superannuation) – $140,048.27; (b) Australian Taxation Office (PAYG and GST) – $258,098.10; (c) GIO WorkCover – $16,143.06; (d) Office of State Revenue – $81,834.82; (e) PTE Partners Pty Ltd – $4,400.00; TOTAL – $500,524.25 8 There is no available property in the liquidation at present. 9 The value of the claims with respect to accounts of profit and equitable compensation as against Casual Dining Concepts (Holdings) Pty Ltd and Bondi Pizza Parramatta (Holdings) Pty Ltd is currently unknown, and will require further expensive steps, according to Mr Vardy, in the litigation, including disclosure and forensic accounting evidence. 10 Casual Dining Concepts (Holdings) Pty Ltd and Bondi Pizza Parramatta (Holdings) Pty Ltd have indicated to Mr Vardy in "without prejudice" communications that they intend to vigorously resist all further litigation by him in relation to the causes of action identified in paragraph 6 above. 11 On 13 May 2020, Mr Vardy filed an originating process together with a concise statement in these proceedings with respect to the causes of action identified in paragraph 6 above. 12 There is no committee of inspection in this liquidation. Mr Vardy considers that the terms of the Deed of Settlement and Release are commercially reasonable and in the best interests of creditors by reason of the following circumstances: (a) there are minimal to no prospects of recovery as against Ms Samcikova as she does not own any realisable assets and is currently employed in hospitality. In addition, Ms Samcikova was only a director of the company for a period of six months in which her liability for any insolvent trading claim would be minimal; (b) Mr Linz is the sole registered proprietor of a property located at 15/30 Wellington Street, Bondi, New South Wales. The property has a registered mortgage with the Commonwealth Bank of Australia for approximately $752,828.22; (c) Mr Linz is the director of Linz Enterprises Pty Ltd which is a trustee company for the Linz Enterprises Trust, which is a discretionary trust; (d) Mr Linz is also a director of both Bondi Pizza Parramatta (Holdings) Pty Ltd and Casual Dining Concepts (Holdings) Pty Ltd. These entities operate various pizza restaurants in the hospitality industry and have been impacted by the COVID-19 pandemic. To the best of Mr Vardy's knowledge, these companies do not own any real property; (e) Mr Vardy has not been able to obtain any litigation funding in these proceedings; (f) there is very limited to no property in the liquidation; and (g) Mr Vardy intends to continue the current proceedings against the second defendant, Mr Ruck. Relevant Legal Principles 13 Section 477(2A) of the Corporations Act, combined with reg 5.4.02 of the Corporations Regulations 2001 (Cth) provides that, 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 compromise a debt to the company if the amount claimed by the company is more than $100,000. 14 Section 477(2B) of the Corporations Act provides that 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 if the term of the agreement may end, or obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement was entered into. 15 It is well established that the Court does not concern itself with the commercial desirability of the transaction in an application for approval pursuant to ss 477(2A) and 477(2B) of the Corporations Act. As Giles J stated in the much quoted passage in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; 10 ACLC 1742 at 85-86: … the court pays regard to the commercial judgment of the liquidator (re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Minerals Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 16 Further, the observations of Bathurst CJ in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet (2015) 89 NSWLR 110; [2015] NSWCA 85 at [125] are apposite: Further, it is not generally the function of the court, in granting approval under s 477(2B) of the Act, to review a liquidator's commercial judgment or to second guess its decision. The court will generally not interfere unless there seems to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator's conduct. However, as was pointed out in each of the cases cited, the court does not act as a mere rubber stamp and will confer the power only when it is satisfied that a case for its exercise, in the particular circumstances, has been shown. [footnotes omitted] 17 The approval of the Court is required here because the Deed of Settlement and Release anticipates payment over two years and a settlement sum of $180,000. 18 The settlement encompasses both the payment of amounts owing as debts and also the payment of an account of profits as an equitable remedy. If there is room for argument about whether a claim is a debt to the company, the Court should err on the side of treating the claim as a debt rather than declining to grant approval under s 477(2A) on the grounds of lack of jurisdiction: Re HIH Insurance Ltd [2004] NSWSC 5 at [12] and QBE Workers Compensation (NSW) Ltd v GJ Formwork Pty Ltd (2006) 56 ACSR 687; [2006] NSWSC 98 at [4]-[5]. 19 In a doubtful case, the Court can grant approval under s 477(2A) of the Corporations Act to the extent that approval may be required: Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No 6) (2007) 160 FCR 423; [2007] FCA 1030 (Elderslie Finance) at [34]. 20 I see no reason why the principles referred to above would not apply equally to an application for approval under s 477(2B) of the Corporations Act. 21 The settlement contemplates payment over two years due to the cash flow issues of the defendants who are party to the Deed of Settlement and Release. 22 A further potential issue arises by reason of the fact that the Deed of Settlement and Release has already been entered into, albeit that it is subject to the approval of the Court. While approval should normally be obtained in advance of the exercise of the power in question, there appears to be no doubt that the Court has the power to give approval that operates from an earlier time: Re Bell Group Ltd (in liq); ex parte Woodings (2013) 97 ACSR 117; [2013] WASC 409 at [34]; Chamberlain v RG & H Investments Pty Limited, in the matter of Hardy Bros (Earthmoving) Pty Limited (in liq) (No 2) (2009) 76 ACSR 415; [2009] FCA 1531 at [22]-[24]; and Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 at [61]-[62]. 23 As noted in those authorities, there is some divergence of opinion as to the precise basis as to how retrospective approval ought to be effected. The divergence of opinion, however, would appear to make clear that, for an abundance of caution, it may be prudent for the Court to order that the approval be granted nunc pro tunc and potentially also make a declaration under s 1322(4)(a) that the settlement agreement is not invalid by reason of it having been entered into without the Court's prior approval. In addition, consideration has been given in those authorities to the making of directions under s 479(3) of the Corporations Act that each plaintiff may rely on the settlement agreement as if it had been entered into with the prior approval of the Court, and that in appropriate circumstances, an extension of time might be required for a plaintiff to bring an application for approval under s 477(2A) or s 277(2B), and in those circumstances, an order may be made that time be extended. Section 479(3) of the Corporations Act has since been repealed, but I note that such a direction could now be made pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), being Sch 2 of the Corporations Act. Disposition 24 In the circumstances outlined above, and particularly having regard to the explanation and considerations of Mr Vardy outlined in paragraph 12 above that the Deed of Settlement and Release is commercially reasonable and in the best interests of creditors, I am satisfied that it is appropriate for an order to be made largely in the form sought by the plaintiffs pursuant to s 477(2B) of the Corporations Act authorising Mr Vardy to enter into the Deed of Settlement and Release. Confidentiality 25 The parties also seek suppression orders in relation to the deeds of settlement and release, being Confidential Exhibits "DJV-01" and "DJV-02". Given that no settlement has yet been reached with Mr Ruck and that the administration of justice, including the just and efficient winding up of the company, requires that proper compromises be facilitated rather than obstructed (Elderslie Finance at [43]), I am satisfied in the present circumstances that Mr Vardy is entitled to preserve the Deed of Settlement and Release and the Second Deed of Settlement and Release against disclosure to Mr Ruck. It is therefore appropriate to make the suppression orders sought under s 37AF of the Federal Court of Australia Act 1976 (Cth) as a necessary measure to prevent prejudice to the proper administration of justice pursuant to s 37AG(1)(a). FURTHER ORDER 26 The interlocutory application dated 14 May 2021 was heard and determined on 18 May 2021. In their outline of written submissions, the plaintiffs had foreshadowed the need for approval also under s 477(2A) of the Corporations Act. The plaintiffs and the first, third, fourth, fifth and sixth defendants have since confirmed after the hearing that they also, by consent, seek an order pursuant to s 477(2A). 27 I am satisfied for the same reasons that I made an order pursuant to s 477(2B) of the Corporations Act that an order should be made pursuant to s 477(2A) of the Corporations Act authorising Mr Vardy to enter into the Deed of Settlement and Release. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley. Associate: Dated: 18 May 2021 SCHEDULE OF PARTIES NSD 534 of 2020 Defendants Fourth Defendant: MIRIAM TORO Fifth Defendant: CASUAL DINING CONCEPTS (HOLDINGS) PTY LTD ACN 142 135 206 Sixth Defendant: BONDI PIZZA PARRAMATTA (HOLDINGS) PTY LTD ACN 605 153 982