New South Wales Supreme Court CITATION : Leigh re King Bros [2006] NSWSC 315 HEARING DATE(S) : 18 April 2006 JUDGMENT DATE : 21 April 2006 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Adjournment to give liquidator the opportunity to provide supplementary evidence CATCHWORDS : CORPORATIONS – liquidation - approval of liquidator's contracts - litigation funding agreement - litigation funder's liability capped at stated amounts - appropriate evidence LEGISLATION CITED : Corporations Act 2001 (Cth), ss 477(2B), 479(3) Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 Re ACN 076 673 875 Ltd (rec'r & mgr apptd) (in liq) (2002) 42 ACSR 296 CASES CITED : Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 Re Imobridge Pty Ltd (in liq) (No 2) (2000) 18 ACLC 29 Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 David John Leigh (P1) A P & P J King Pty Ltd (in liq)(recs & mgrs apptd) (P2) Eurostar Pty Ltd (in liq)(recs & mgrs apptd) (P3) King Bros Bus Service Aldavilla Pty Ltd (in liq)(recs & mgrs apptd) (P4) King Bros Bus Service Bellbrook Pty Ltd (in liq)(recs & mgrs apptd) (P5) King Bros Bus Service Coffs Harbour Pty Ltd (in liq)(recs & mgrs apptd) (P6) King Bros Bus Service Crescent Head Pty Ltd (in liq)(recs & mgrs apptd) (P7) King Bros Bus Service Grafton Pty Ltd (in liq)(recs & mgrs apptd) (P8) King Bros Bus Service Iluka Pty Ltd (in liq)(recs & mgrs apptd) (P9) PARTIES : King Bros Bus Service Kempsey Pty Ltd (in liq)(recs & mgrs apptd) (P10) King Bros Bus Service Nambucca Valley Pty Ltd (in liq)(recs & mgrs apptd) (P11) King Bros Bus Service Port Macquarie Pty Ltd (in liq)(recs & mgrs apptd) (P12) King Bros Bus Service South West Rocks Pty Ltd (in liq)(recs & mgrs apptd) (P13) King Bros Bus Service Great Lakes Pty Ltd (in liq)(recs & mgrs apptd) (P14) King Bros Bus Service Yamba Pty Ltd (in liq)(recs & mgrs apptd) (P15) King Bros Bus Service Taree Pty Ltd (in liq)(recs & mgrs apptd) (P16) King Bros Bus Service Wagga Wagga Pty Ltd (in liq)(recs & mgrs apptd) (P17) M B Sales Australia Pty Ltd (in liq)(recs & mgrs apptd) (P18) A P King Investments Pty Ltd (in liq) (P19) FILE NUMBER(S) : SC 2635/03 COUNSEL : M R Tyson (A) SOLICITORS : Henry Davis York (A) LOWER COURT DATE OF DECISION : 04/18/2006 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J FRIDAY 21 APRIL 2006 2635/03 DAVID JOHN LEIGH & ORS, IN THE MATTER OF AP AND PJ KING PTY LTD (IN LIQ) JUDGMENT 1 HIS HONOUR: David John Leigh, the first plaintiff, is the liquidator of the second to eighteenth plaintiffs, companies in the King Brothers group of companies. This proceeding was commenced by originating process filed on 2 May 2003 for the extension of the convening period for holding concurrent meetings of creditors of the companies, at a time when Mr Leigh was the administrator of the plaintiff companies. Other interlocutory applications have been made in the same proceeding, after the administration ended and the companies went into liquidation. 2 By an interlocutory process filed on 8 March 2006, Mr Leigh seeks: · an order that AP King Investments Pty Ltd (in liq) be joined as the nineteenth plaintiff in the proceeding; · an order, under s 477(2B) of the Corporations Act 2001 (Cth), that the court approve the first to nineteenth plaintiffs entering into two funding agreements with Litigation Lending Services (No 4) Partnership in the form tendered; · a direction under s 479(3) that the first to nineteenth plaintiffs are justified in entering into the two funding agreements; · an order that the costs of the application be costs in the liquidation of the second to nineteenth plaintiffs. Facts 3 The seventeen plaintiff companies, the King Brothers group of companies, conducted business as bus operators in Northern regional New South Wales, in accordance with contracts entered into by companies in the group with New South Wales Government transport agencies for the operation of bus routes. Anthony and Peter King were at all relevant times, and are, the directors of the plaintiff companies. According to the evidence before me, they are now undischarged bankrupts. AP King Investments Pty Ltd (in liq) is a company of which Anthony King was at all relevant times, and is, the sole director and shareholder. 4 All of the plaintiff companies were subject to fixed and floating charges in favour of the National Australia Bank Ltd as chargee. Some of the plaintiff companies were subject to fixed and floating charges in favour of Toyota Finance Australia Ltd and TFA (Wholesale) Pty Ltd ("the Toyota companies") as chargees. 5 On 8 April 2003 the directors of the plaintiff companies passed resolutions that, in their opinion, the respective companies were or were likely to become insolvent, and they resolved that an administrator be appointed. On 8 and 9 April 2003 the National Australia Bank appointed receivers and managers of the property and undertaking of the plaintiff companies. On 16 April 2003 the Toyota companies appointed receivers and managers of the property and undertaking of the companies that had granted charges to them. 6 Mr Leigh was not originally appointed as administrator, but he was appointed to that office at the first meeting of creditors of the plaintiff companies, held on 15 April 2003. 7 The second meeting of creditors of the plaintiff companies, held on 4 July 2003, resolved that each of the plaintiff companies be wound up, and Mr Leigh accordingly became the liquidator of those companies under a creditors' voluntary winding up. 8 Mr Leigh is also the liquidator of AP King Investments Pty Ltd (in liq). The sole member of that company (by his trustee in bankruptcy) resolved on 29 August 2003 under s 491 that it be wound up voluntarily, and under s 495(1) that Mr Leigh be appointed liquidator. As liquidator, Mr Leigh formed the opinion that the company would not be able to pay or provide for the payment of its debts in full within twelve months after the commencement of the winding up. Accordingly he convened a meeting of creditors under s 496, at which the creditors did not appoint another person as liquidator, and consequently the winding up has proceeded as a creditors' voluntary winding up. 9 The receivers and managers appointed by National Australia Bank sold the principal assets of the King Brothers group of companies in November 2003 to Busways North Coast Pty Ltd. After that transaction the Bank claims that it is still a substantial creditor. 10 On 10 September 2004 Mr Leigh, as liquidator, reported to the creditors of the plaintiff companies. His report asserted, without giving particulars, that there were potential recovery actions. The report gave creditors notice of his intention to seek funding from creditors for those recovery actions and, failing that, to obtain funding from a litigation funder. 11 Mr Leigh's evidence is that he does not have sufficient funds to pay the estimated legal fees and disbursements for the proposed recovery actions. He has tendered legal advice he has received for the purposes of the present application, informing the court that he "maintains a claim of client legal privilege and/or legal professional privilege in respect of the advice". The court has made confidentiality orders protecting this and certain other evidence. 12 Although he has not received any written submission from any creditor, over a period of 18 months Mr Leigh had some negotiations with two creditors who had expressed an interest in providing funds. Each has informed him separately that they will not provide funds, the second doing so in about October 2005. Mr Leigh has also had some negotiations with the managing director of Litigation Lending Services, who provided Mr Leigh with two draft proposed funding agreements in October 2005. Litigation Lending Services is not a creditor of any of the King Brothers companies. There were negotiations about the form of the agreements and in January 2006 Litigation Lending Services provided proposed funding agreements in the form now placed before me in evidence. They are not materially different from the October drafts. There were no discussions with any other litigation funders. 13 On 22 September 2005 Mr Leigh convened concurrent meetings of creditors under s 508. He sent creditors other than the Commissioner of Taxation and Toyota Finance Australia Ltd an information memorandum about the funding proposal by Litigation Lending Services. 14 The meetings were held on 30 September 2005. They were attended by only three creditors, namely representatives of the Australian Taxation Office and the Toyota companies, and Mr Simon Duke as proxy for Rodd Hood, notwithstanding that there were many creditors of the various companies in the group. At the meetings Mr Leigh identified potential recoveries from the Commissioner of Taxation of $5.8 million and from the Toyota companies of $4.9 million. The representative of the Australian Taxation Office moved that the liquidator enter into a funding proposal with Litigation Lending Services. The proposal was not seconded and it lapsed. 15 On 3 March 2006 the present application was filed. It has been served on Toyota Finance Australia Ltd and on the Commissioner of Taxation. A representative of the Commissioner was in court during the hearing of the application, but he chose not to appear. Counsel for the Toyota companies appeared on another application that I heard just before hearing Mr Leigh's application, and though he was aware that I would then hear Mr Leigh's application, he sought leave to withdraw and that leave was granted. 16 The principal relief sought in the present application is an order approving entry into the funding agreements, under s 477(2B). That section requires the approval of the court, or approval by resolution of creditors or the committee of inspection, for a liquidator to enter into an agreement on the company's behalf if the term of the agreement may end, or the obligation of a party may be discharged by performance, more than three months after the agreement was entered into. Clearly the two litigation funding agreements fall into this category, and so the court's approval is required. 17 The two agreements are in the same form, except that one identifies the Commissioner of Taxation as the proposed defendant and the other identifies Toyota Finance Australia Ltd as the proposed defendant. By clause 2.1, Litigation Lending Services No 4 Partnership ("the funder") agrees to provide funding to Mr Leigh as liquidator of the plaintiff companies for legal costs and his costs as an insolvency practitioner, subject in each case to a capped amount. Funding is also to be provided for enforcement costs and other costs incurred with prior written consent. I have made a confidentiality order with respect to the amount of the capping. 18 By clause 3 Mr Leigh undertakes to repay the funding together with an additional sum, at a specified time after recovery. The additional sum is, in effect, the funder's premium. It is 25% of the Final Amount (essentially, the proceeds of recovery) if recovery is within 6 months, rising to 30% if recovery is within 12 months, and 37% if recovery is more than 12 months after the date of the agreement. The fee is limited to 15% if the proceedings are concluded before any drawdown. 19 By clause 5.1, the funder indemnifies Mr Leigh as liquidator and the plaintiff companies in respect of costs orders. By clause 5.2 the funder agrees to provide a bank guarantee of a substantial amount (the amount being protected by a confidentiality order) to support the indemnity in clause 5.1. There are provisions, of a kind now normal in such agreements, dealing with appeals and the conduct of the relationship between the liquidator, legal representatives and the funder. By clause 8.2, Mr Leigh as liquidator represents that in his opinion the commencement or continuation of the contemplated recovery proceedings is in the best interests of the creditors of the plaintiff companies. 20 At present the agreements do not extend to AP King investments Pty Ltd, but it is proposed that the agreements will be amended to do so. 21 According to Mr Leigh's evidence, the chance of the creditors receiving any dividends in the absence of successful recovery proceedings under Part 5.7B of the Act is so remote as to be almost hopeless. He has reached this conclusion on the basis of his investigations, and taking into account the securities over the group property and the unlikelihood of the National Australia Bank being able to discharge its debt fully out of its security. 22 Mr Leigh has prepared a table identifying transactions involving the Commissioner of Taxation and Toyota Finance Australia Ltd, with a brief explanation for his opinion that the transactions are voidable transactions. He has received legal advice about the prospects of successful recovery actions. A copy of that advice has been tendered on a confidential basis, as mentioned above. It is unnecessary for me to give an account of the advice. I have considered the table and the advice, and I have formed the view that if there is adequate funding, it would be justifiable for Mr Leigh to carry out further investigations and subject to those investigations, it would be justifiable for him, relying on that advice, to proceed with the recovery actions. The law 23 Although the court has the statutory task of giving "approval" to a liquidator's agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete "merits review". As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6: "… 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 of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct." 24 In Re ACN 076 673 875 Ltd (rec'r & mgr apptd) (in liq) (2002) 42 ACSR 296 the court's approval was sought for a funding agreement to permit the liquidator to conduct public examinations of the company's directors. I had occasion to review the case law and to identify (at [17]-[34]) a number of factors relevant to be taken into account in considering whether there is any lack of good faith or grounds for doubting the prudence of the proposed proceedings. 25 In summary (rearranging the order of presentation adopted in the ACN case), the relevant factors include the following: (i) the liquidator's prospects of success in the litigation; (ii) the interests of creditors other than the proposed defendant; (iii) possible oppression in the bringing of the proceedings; (iv) the nature and complexity of the cause of action; (v) the extent to which the liquidator has canvassed other funding options; (vi) the level of the funder's premium; (vii) the liquidator's consultations with creditors; (viii) the risks involved in the claim (including the amount of costs likely be incurred in the proposed litigation, the extent to which the funder is to contribute to those costs, and the extent to which the funder is to contribute to the costs of the defendant in the event that the action is not successful, or towards any order for security for costs). Application to the present case 26 In my opinion, in the present case consideration of all of those factors, other than the last, points to the conclusion that approval should be granted. Consideration of factor (viii) highlights a deficiency in the evidence presented in support of the application, which might be overcome by supplementation. 27 As to the liquidator's prospects of success in the litigation (item (i)), in the present case the liquidator has received legal advice and conducted some analysis of his own, of which I have received confidential evidence. On the basis of the evidence before me, as a whole, there appear to be reasonable prospects of success. 28 As to the interests of creditors (item (ii)), in some cases the court may be led to believe that only the professionals involved in the winding up will benefit (see Re Imobridge Pty Ltd (in liq) (No 2) (2000) 18 ACLC 29, at 41 per Fryberg J). In the present case the funding arrangements will benefit the liquidator and the lawyers who act for him, and also the funder. But there is also the prospect of substantial recovery for the benefit of creditors. Moreover, the potential recovery of funds is to some extent protected by virtue of the funder's indemnity in respect of costs orders, supported (if requested) by a bank guarantee. 29 As to possible oppression of the other party to the litigation (item (iii)), it appears that the contemplated proceedings have recently been initiated, so as to comply with the time limit in s 588FF(3). There is no suggestion that there has been delay of the kind that would prejudice the defendants in the recovery actions, and the funding agreements make provision for payment of any costs orders made against the plaintiffs. There is no suggestion of any improper relationship between the funder and the liquidator. 30 As to the nature and complexity of the causes of action (item (iv)), as far as one can see at this stage the proceedings are of a well-recognised kind, but there is some real factual complexity and perhaps some issues with respect of the categorisation of transactions and other matters. This consideration does not strongly favour the granting of approval but it does not suggest that approval should be denied. 31 As to the extent that the liquidator has canvassed other funding options (item (v)), the evidence shows that creditors were invited to put forward funding proposals and there were negotiations with two creditors. No approach was made to an alternative litigation funder. However, the creditors have had the opportunity to consider the proposal developed by the liquidator, summarised in quite a detailed confidential information memorandum, and there has been no resolution to oppose the proposal (indeed, for some curious reason the representative of the Australian Taxation Office moved that the liquidator enter into a funding proposal with Litigation Lending Services, but the motion was not seconded and lapsed). The absence of alternative quotations for litigation funding is not fatal (see ACN case at [32]), as the court is able to make its own assessment of the reasonableness of the funder's premium. 32 As to the level of the funder's premium (item (vi)), this case is consistent with the level of funding fees charged in other cases such as in the ACN case (see also Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357, from which it appears that a premium as high as 75% may be justifiable in certain cases). 33 As to consultation with creditors (item (vii)), the evidence shows that creditors other than the proposed defendants have been given the opportunity to make funding proposals and to express their views on the proposed arrangements with Litigation Lending Services. They were invited to come forward at the meeting of creditors on 27 September 2004, and they were given the chance to comment on the liquidator's proposal at the meeting on 30 September 2005. In relation to AP King Investments Pty Ltd, it appears that it was only recently realised that this company may have a claim in respect of one payment to Toyota Finance Australia Ltd, and so the proposal as it affects that company has not been put creditors. But in the circumstances that does not seem to me to present a problem. 34 As to the risks involved in the claim (item (viii)), I have summarised the provisions in the proposed funding agreements regarding the funder's obligation to meet funding costs, to indemnify the liquidator in respect of any order for costs made against him in the proceedings, and to support that indemnity by a bank guarantee if required. 35 The provisions which have the effect of capping recoverable costs deserve careful attention. It seems to me that a funding agreement under which the costs recoverable from the funder were capped at unrealistically low amounts would be unlikely to be approved. This is because creditors would suffer detriment if, having embarked on costly litigation in reliance on a funding agreement, the liquidator were to run out of money early and then have no option but to use up assets available in the liquidation to pursue the litigation, with no certainty of recovery. Here, the capped amounts appear to be reasonably high, but I have no evidence as to whether the liquidator is relying on any estimates that the capped figures will be adequate to bring the proceedings to conclusion. 36 The absence of such evidence gives rise to a difficulty. Although the court does not, in applications such as this, override the liquidator's commercial judgment, there must be evidence that a commercial judgment has been made, on the basis of appropriate advice. If the liquidator is able to provide evidence that, on the basis of plausible advice, he has formed the opinion that reasonable preliminary estimates of the costs of the recovery proceedings fall within the capped amounts recoverable from the funder, I would conclude that grounds for approval have been made out. Conclusion 37 If evidence of the kind that I have identified is supplied, I shall make an order approving the making of funding agreements in accordance with the form proposed, subject to the addition of AP King Investments Pty Ltd as a plaintiff. 38 A direction under s 479(3) has the effect, described in Re GB Nathan & Co Pty Ltd (in liq), (1991) 24 NSWLR 674 of protecting a liquidator, who proceeds in accordance with the direction, from liability for breach of his duty of care, provided full disclosure of the material facts has been made to the court before the direction is made. But such protection is normally only afforded to a liquidator if there is some reason for doing so, because of a particular risk that the proposed course of action is likely to involve. In the present case the liquidator will, upon completion of the necessary evidence, obtain approval under s 477(2B). I see no need to make a direction under s 479(3) as well. 39 Although AP King Investments Pty Ltd's passage to liquidation was somewhat different from those of the plaintiff companies, Mr Leigh is its liquidator, and the view has been reached that it has a voidable transaction claim against Toyota Finance Australia Ltd within the matrix of facts affecting the plaintiff companies' claims. It is therefore appropriate, in my view, to make an order joining that company as the nineteenth plaintiff, as sought. 40 The proposed order that the costs of the application be costs in the liquidations of the second to nineteenth plaintiffs seems to me to be appropriate. 41 I shall adjourn the application, so as to give Mr Leigh the opportunity to file some supplementary evidence, if he wishes to do so. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.