Federal Court of Australia Vardy (liquidator), in the matter of Bondi Pizza Pty Ltd (in liq) v Ruck [2022] FCA 287 File number(s): NSD 534 of 2020 Judgment of: HALLEY J Date of judgment: 23 March 2022 Date of publication of reasons: 25 March 2022 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 suppression orders appropriate to prevent prejudice to the proper administration of justice in circumstances where disclosure of specific terms of the settlement may lead to further claims for contribution – 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 Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530 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: 23 March 2022 Counsel for the Plaintiffs: Ms I King Solicitor for the Plaintiffs: CCSG Legal Solicitor for the Defendant: Mr S Calabretta of Emerson Lewis Lawyers ORDERS NSD 534 of 2020 IN THE MATTER OF BONDI PIZZA PTY LTD (IN LIQ) 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: MARK JEREMY RUCK Defendant order made by: HALLEY J DATE OF ORDER: 23 MARCH 2022 THE COURT ORDERS THAT: 1. Pursuant to ss 477(2A) and (2B) of the Corporations Act 2001 (Cth), the first plaintiff on behalf of the second plaintiff be authorised nunc pro tunc to enter into the Deed of Settlement and Release being Confidential Exhibit "DJV-02" to the affidavit of Darren John Vardy sworn 11 March 2022. 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 second plaintiff is concluded or until otherwise ordered, the following document is to be kept confidential and shall not be published or disclosed to another party on the ground that it is necessary to prevent prejudice to the administration of justice: (a) Exhibit "DJV-02" annexed to the affidavit of Darren John Vardy sworn 11 March 2022. THE COURT DECLARES THAT: 3. Pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth), the Deed of Settlement and Release behind Exhibit "DJV-02" referred to in the affidavit of Darren John Vardy sworn 11 March 2022 is not invalid by reason of it having been entered into without the Court's prior approval. THE COURT ORDERS THAT: 4. The proceedings be dismissed with no order as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. EX TEMPORE REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) HALLEY J: INTRODUCTION 1 By an amended interlocutory application filed on 22 March 2022, the first plaintiff, Mr Darren John Vardy, in his capacity as the liquidator of the second plaintiff, Bondi Pizza Pty Limited (in liquidation) (Company), applies under ss 477(2A) and (2B) of the Corporations Act 2001 (Cth) (Corporations Act) for an order that he be authorised, nunc pro tunc, to enter into a deed of settlement between the plaintiffs and the defendant, Mr Mark Ruck (Deed of Settlement and Release). 2 The plaintiffs have previously settled these proceedings against the other former defendants, Gary Michael Linz, Michaela Samcikova, Miriam Toro, Casual Dining Concepts (Holdings) Pty Ltd (CDC), and Bondi Pizza Parramatta (Holdings) Pty Ltd (Bondi Pizza Paramatta). That settlement was approved by the Court on 18 May 2021: Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530 (Re Bondi Pizza). 3 The approval of the Deed of Settlement and Release with the defendant, Mr Ruck, is required because it anticipates a payment of a settlement sum of $75,000 over two years, and it is a compromise of a claim which exceeded $100,000. The settlement encompasses both the payments of amounts owing as debts and also the payment of equitable compensation and/or an account of profits as an equitable remedy. 4 The application is supported by the affidavit of Mr Vardy, sworn 11 March 2022. The Deed of Settlement and Release is found at Confidential Exhibit "DJV-02". Background 5 The factual background below is taken from the affidavit of Mr Vardy. 6 On 16 May 2014, Mr Vardy and Mr Stephen Naidenov were appointed as joint and several liquidators of the Company, pursuant to a resolution of the members of the Company that the Company be voluntarily wound up in accordance with s 491 of the Corporations Act. 7 On 30 September 2015, Mr Naidenov resigned and Mr Vardy became the sole liquidator of the Company. 8 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. 9 The principal purpose of the public examination proceedings was to assist him in investigating the various matters in connection with the affairs of the Company, including how the Company's assets were utilised, arrangements entered into by the Company with third parties, who was responsible for preparing and maintaining the Company's accounts and financial records and related matters, claims that might be available against directors and former directors of the Company and the prospects of satisfying any judgments that might be made against directors and former directors of the Company. Examinations were conducted of Ms Samcikova, Ms Toro, Mr Linz and Mr Ruck in the period between August 2019 and April 2020. 10 Based on his investigations, including the public examination proceedings, Mr Vardy considers that there may be the following potential courses of action available against Mr Ruck: (a) an insolvent trading claim, pursuant to ss 588G(2) and 588M(2) of the Corporations Act; (b) a breach of his director's duties, pursuant to ss 181, 182, 183 and 184 of the Corporations Act, and his fiduciary duties owed to the Company, by allowing valuable intellectual property assets of the Company to be used by CDC, under the trading name "Bondi Pizza"; and (c) 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 CDC, and the transfer and use of the domain name www.bondipizza.com.au to Bondi Pizza Parramatta. 11 The known creditors who have proved in the liquidation of the Company are as follows: (a) Australian Taxation Office superannuation – $227,291.72; (b) Australian Taxation Office PAYG – $133,660.39; (c) Supagas – $1,191.35; (d) Gary Michael Linz – $16,000; and (e) Spotless Facility Service – $6,812; The total amount is $384,955.46. 12 The only available property in the liquidation, at present, are the funds received pursuant to the settlement that was approved by the Court on 18 May 2021. 13 The value of the claims with respect to the account of profits and equitable compensation as against Mr Ruck are currently unknown, and will require further expensive steps in the litigation, including disclosure and forensic accounting evidence. 14 Mr Ruck has indicated to Mr Vardy in without prejudice communications that he intends to vigorously resist all further litigation against him in relation to the causes of action outlined above. Mr Ruck has foreshadowed to Mr Vardy a number of legal and factual challenges in the proceedings. 15 There is no committee of inspection in the liquidation. 16 On 4 March 2022, Mr Vardy entered into the Deed of Settlement and Release with Mr Ruck. 17 Mr Vardy has come to the view that the terms of the Deed of Settlement and Release are, in his opinion, commercially reasonable and in the best interests of the creditors of the Company in the following circumstances: (a) Mr Ruck is the sole registered proprietor of a property located at 2 Hillcrest Street, Tempe; (b) the property has a registered mortgage with the Australian and New Zealand Banking Group Limited for approximately $1.36 million; (c) Mr Ruck is the director of Mark Ruck Business Investments Pty Ltd, the trustee company for the Mark Ruck Business Investments Discretionary Trust; (d) the trust is a discretionary trust in which Mr Ruck is not the sole beneficiary; (e) the trust owns real property in a strata plan at 27 Hobart Street, Oxley Park; (f) the balance sheet as at 7 September 2022, in relation to the financial position of the trust, records that the trust as at that date had no cash at bank or other current assets. The balance sheet for the trust reveals that the value of the Oxley Park property is recorded as an at cost figure of $2,015,561 and a current estimated value of $2,580,000. The balance sheet otherwise indicates that there are total liabilities comprising a bank loan of $2,135,858, leaving net assets of only $261,942 but, as indicated above, no current assets; (g) Mr Ruck's primary profession is in the hospitality industry, which has been impacted by the COVID-19 pandemic; (h) Mr Ruck is also a shareholder of CDC. CDC operates in the hospital industry, operating various pizza restaurants which have been impacted by the COVID-19 pandemic; (i) Mr Vardy has been provided with various documents as to Mr Ruck's financial position on a without prejudice basis. The content of those documents indicates to Mr Vardy that Mr Ruck is currently generating an income from Airbnb and residential property management from a company in which he is a director, namely, Ruksta Pty Limited. From the review of the documents provided to him by Mr Ruck, however, Mr Vardy has formed the view that Mr Ruck has limited ability to meet a judgment against him from his taxable income; and (j) Mr Vardy has not been able to obtain any litigation funding in the proceedings, there is very limited property in the liquidation and he has been advised that the cost of pursuing the litigation against Mr Ruck will be increased by the cost of meeting the defences raised by Mr Ruck. Relevant Principles 18 I set out in my judgment in Re Bondi Pizza the relevant legal principles, which are equally applicable to the application for approval of the settlement with Mr Ruck. I reproduce those paragraphs below for convenience. 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.] 19 The settlement with Mr Ruck encompasses both the payment of amounts owing as debts and also the payment of an account of profits as an equitable remedy. As I stated in Re Bondi Pizza: 18 … 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. 20 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. 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] (Allanson J); 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] (Lindgren J); and Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 at [61]-[62] (Hill J). 21 As I explained in Re Bondi Pizza at [23], 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 that a declaration be made 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. Disposition 22 In the circumstances outlined above, and particularly having regard to Mr Vardy's explanation 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 in the form sought by the plaintiffs, pursuant to ss 477(2A) and (2B) of the Corporations Act, authorising Mr Vardy to enter into the Deed of Settlement and Release nunc pro tunc, and for a declaration to be made pursuant to s 1322(4)(a) of the Corporations Act that the Deed of Settlement and Release is not invalid by reason of it having been entered into without the Court's prior approval. Confidentiality 23 The plaintiffs and Mr Ruck also seek confidentiality orders in relation to the Deed of Settlement and Release. Both Ms King, counsel for the plaintiffs, and Mr Calabretta, who appeared on 23 March 2022 for Mr Ruck, submit that an order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) is necessary to prevent prejudice to the proper administration of justice, because of the potential for claims for contribution to be made against Mr Ruck by the other former defendants, Mr Linz, Ms Samcikova, Ms Toro, CDC, and Bondi Pizza Parramatta, particularly if the specific terms of the settlement are disclosed. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley. Associate: Dated: 23 March 2022