New South Wales Supreme Court CITATION : Parbery & Anor re Lecan Constructions Pty Ltd (In Liq) [2006] NSWSC 662 HEARING DATE(S) : 05/06/06 JUDGMENT DATE : 4 July 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Liquidators' application adjourned CATCHWORDS : CORPORATIONS - winding up - creditor giving assistance, indemnification or protection by which recoveries made by liquidators - whether it should be ordered that such creditor be afforded advantage over others - whether such order may also require application of proceeds of recovery in ways not entailing advantage to such creditor LEGISLATION CITED : Corporations Act 2001 (Cth), ss.556(1), 564, Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 CASES CITED : Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B&P) 38 State Bank of New South Wales v Brown (2001) 38 ACSR 715 PARTIES : Stephen James Parbery and Mark Julian Robinson in their capacity as joint liquidators of Lecan Constructions Pty Limited (In Liquidation) - Applicants FILE NUMBER(S) : SC 2873/06 COUNSEL : Mr M.J. Cohen - Applicants SOLICITORS : Dibbs Abbott Stillman - Applicants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 4 JULY 2006 2873/06 STEPHEN JAMES PARBERY & ANOR RE LECAN CONSTRUCTIONS PTY LIMITED (IN LIQUIDATION) JUDGMENT 1 Mr Parbery and Mr Robinson are the liquidators of Lecan Constructions Pty Limited ("Lecan") under the form of creditors voluntary winding up that follows on from voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). 2 By their originating process filed on 23 May 2006 expressed to be based on s.564 of the Corporations Act, the liquidators apply for the following order: "1. The liquidators be entitled to distribute property of Lecan Constructions Pty Ltd (In Liquidation) (the ' Company '), being the proceeds of settlement of Proceedings No. 5426 of 2002 commenced in this Honourable Court by the Applicants, as follows: (a) firstly, to Beljen Developments Pty Limited ACN 078 361 510 (' Beljen ') in full payment of any amount advanced or paid by or on behalf of Beljen pursuant to the agreement dated 24 November 2004 between Beljen and the Applicants as liquidators of the Company (the ' Agreement '); (b) secondly, to the solicitors for the Applicants any amount payable by Beljen pursuant to the Agreement but which remains unpaid at the date of distribution; and (c) thirdly, as follows: (i) 35% of the balance, after the payments referred to in orders 1(a) and 1(b) above, in reduction of the Applicants' costs of the voluntary administration and liquidation of the company; (ii) 35% of the balance, after the payments referred to in orders 1(a) and 1(b) above, in reduction of the legal costs incurred by the Applicants in their capacity as liquidators of the Company and in their capacity as voluntary administrators of the company and owed as at the date of the Agreement by the Applicants to the firm known as Henry Davis York; and (iii) 30% of the balance, after the payments referred to in orders 1(a) and 1(b) above, in payment of the whole or any part of any debt admitted by the Applicants as owing by the Company to Beljen." 3 The supporting affidavit was sworn by Mr Robinson. In that affidavit, Mr Robinson gives an account of litigation initiated by Lecan, at the behest of its liquidators, against Jitsu Pty Limited ("Jitsu"). The proceedings were initiated by the liquidators in November 2002. The claim was essentially for recovery of a debt from Jitsu, together with associated claims against one Touma who had been a director of both Lecan and Jitsu. In October 2005, a settlement was reached under which Lecan received $150,001. The proceedings were later dismissed and Lecan recovered a sum of $32,738.38 representing security for costs previously provided. In a commercial sense, therefore, the settlement yielded some $182,739.38. 4 The liquidators' need for funding to pursue the litigation was raised at a meeting of the committee of inspection in April 2004. Thereafter, on 7 May 2004, the liquidators wrote to all known creditors inviting offers of financial support for the litigation. The circular to creditors read in part as follows: "We note that the Corporations Act (Cth) 2001 provides a mechanism for a liquidator to apply to the Court to obtain an order that the funding creditors be given an advantage in the distribution of funds received from the proceedings in consideration of the risks taken to fund the litigation. Upon successful completion of the proceedings we intend to apply to the Court to obtain the following Orders: · That the funding creditors be entitled to receive a priority for the repayment of sums advanced to fund the proceedings; and · That the funding creditors also be entitled to receive 100% of the balance of the remaining proceeds, after satisfying the costs of the liquidation, in priority of all other unsecured creditors. We must inform creditors that it is entirely at the Court's discretion that these Orders be made and therefore there is no guarantee that the orders we intend to seek will be made by the Court." 5 A few creditors initially expressed interest in providing financial assistance to the liquidator. By August 2004, however, Beljen Developments Pty Limited ("Beljen") alone remained interested. On 24 November 2004, a formal agreement was entered into between the liquidators and Beljen. At that point, the balance of funds held by the liquidators was $906.62. By the agreement, Beljen agreed to indemnify the liquidators for all legal costs related to the proceedings, limited to a maximum of $90,000. There was then provision for the timing of disbursement of funds. The liquidators, for their part, promised to distribute any proceeds of the litigation as follows, subject to obtaining the court's approval: "(a) Firstly, in full payment of any amount advanced or paid by or on behalf of Beljen pursuant to this agreement; (b) Secondly, in the proportions specified in paragraph 3(c) below in payment of: (i) The Liquidators' costs of the voluntary administration and liquidation of Lecan such costs to be calculated at the date of distribution (' Liquidators Fees '); (ii) Legal costs incurred by the Liquidators in their capacity as liquidators of Lecan and in their capacity as voluntary administrations of Lecan and owed as at the date of this agreement by the Liquidators in those capacities to the firm known as Henry Davis York ('HDY's Fees'); and (iii) In payment of the whole or any part of any debt admitted by the Liquidators as owing by Lecan to Beljen as at the date of the court approval (' Beljen Debt '); (c) The Proceeds are to be distributed as to: (i) 35% in reduction of the Liquidator's Fees; (ii) 35% in reduction of HDY's Fees; and (iii) 30% in reduction of the Beljen Debt." 6 It is with a view to performing this part of the agreement that the liquidators have made the present application. 7 There is, however, a discrepancy between what the liquidators now seek from the court and what the agreement contemplates. The agreement proceeded on the footing that Beljen would pay all the legal expenses. It appears that, as at 17 May 2006, Beljen had paid $57,340.84 out of a total of $68,426.65 rendered by Dibbs Abbot Stillman, the solicitors in the litigation. The balance of $11,085,81 is acknowledged to be the responsibility of Beljen under the agreement and is intended to be dealt with by paragraph (b) of the order. Otherwise, the order sought accords with the contractual provision. 8 It is necessary to refer to one other aspect of the factual background relevant to an understanding of the order sought. Dibbs Abbott Stillman were the solicitors acting in the litigation at the time the agreement with Beljen was made. The agreement was entirely prospective in its operation. It therefore dealt only with legal costs still to be incurred as of 24 November 2004. At an earlier stage, Henry Davis York had acted for the liquidators in the litigation and more generally in the liquidation and the earlier voluntary administration. They ceased acting in August 2004. At that point, Henry Davis York had rendered fees totalling $62,364.05. No part of those fees has been paid and the intention reflected by the funding agreement (and the application now before me) is that Henry Davis York should have 35% of the balance of the settlement proceedings after Beljen is made whole for its funding, with that 35% going towards reduction of the fees owed by the liquidators to Henry Davis York. The balance to which I have referred would be split so that Henry Davis York received 35% in the way I have just described, another 35% went to the liquidators on account of their remuneration as both administrators and liquidators (respectively $12,451.66 plus GST and $190,189.15 plus GST, all of which has been approved by creditors but remains unpaid) and the remaining 30% went to Beljen by way of preferred dividend in respect of its debt admitted to proof. 9 As I have said, the application is advanced under s.564 of the Corporations Act. That section is as follows: " Power of Court to make orders in favour of certain creditors Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them. " 10 This provision will support so much of the order sought as would cause Beljen to receive, out of the settlement proceeds, the aggregate amount that it has paid for legal costs under the agreement of 24 November 2004 (paragraph (a) of the order) and the 30% additional factor (paragraph (c)(iii) of the order). I am prepared to think that it will also support the element contemplated by paragraph (b) of the order, provided that that paragraph is slightly re-cast to make it clear that the payment is a payment to the solicitors for the benefit of Beljen by way of discharge of the balance of Beljen's funding obligations under the agreement of 24 November 2004. 11 I shall come back to the question whether the court should, in the exercise of its discretion, make an order that gives Beljen the contemplated advantage. First, I consider paragraphs (c)(i) and (c)(ii) of the form of order sought and the question whether the court has the power to make orders to that effect. 12 Paragraph (c)(i) contemplates an order of the court that certain funds in the liquidators' hands be applied towards satisfaction of the remuneration and expenses of the liquidators (both as liquidators and as administrators). If and to the extent that s.564 is relied upon as the basis for this, I am of the opinion that that section does not empower the court to make such an order. The order is not one that would afford an assisting, indemnifying or protecting "creditor" of the kind contemplated by s.564 "an advantage over others". The remuneration of a liquidator as such forms part of "deferred expenses" dealt with in s.556(1)(de). An administrator's remuneration fixed under s.449E is the subject of the indemnity created by s.443D and, in a winding up, comes within s.556(1)(c). Remuneration items of these two kinds thus occupy the respective positions of priority in the winding up allocated to them by s.556(1). The fact that a creditor (here, Beljen) has, by arrangement with a liquidator (who was formerly a Part 5.3A administrator) given assistance, indemnification or protection of a s.564 kind does not represent any basis for an order under that section with respect to the liquidator (whether as liquidator or as administrator). This is because, as I have said, any such order would not be an order made "with a view to" giving the assisting, indemnifying or protecting creditor "an advantage over others". 13 Paragraphs (c)(ii) of the order sought stands in similar light. The legal expenses incurred by the liquidators, both as liquidators and, at the earlier stage, as administrators, will presumably be within s.556(1)(a) and will, as to the whole amount, rank ahead of remuneration items within ss.556(1)(c) and 556(1)(de). And, for the reasons already stated, an order under s.564 based on assistance, indemnification or protection given by a creditor cannot be the occasion for granting an advantage to the liquidators which has the effect of varying to their advantage the operation of the s.556(1) provisions. 14 I am accordingly in the position, I think, where I can entertain only so much of the application under s.564 as contemplates that Beljen will be given, out of the proceeds of the litigation, three sums: first (and directly), a sum equal to the total paid by it to Dibbs Abbott Stillman pursuant to the agreement of 24 November 2004; second (and in a less direct way), so much as is necessary to discharge the remaining obligation of Beljen under the agreement in respect of legal expenses (that is, the unpaid balance of the Dibbs Abbot Stillman fees); and, third, 30% of so much of the proceeds of the litigation as remains after the first two sums just mentioned have been provided for. Any such order under s.564 would appropriately be to the effect that Beljen should receive the aggregate sum in priority to all unsecured debts and claims, including those enumerated in s.556(1). The order would also incorporate the feature mentioned at paragraph [10] above. 15 If such an order were made, the 70% of the balance of the litigation proceeds not affected by the s.564 order would fall to be dealt with in accordance with the general provisions concerning priorities in the winding up. 16 It remains to consider whether, as a matter of discretion, the kind of order I have outlined would appropriately be made so as to confer the envisaged advantage on Beljen. 17 The approach to be taken in s.564 cases remains as stated a decade ago by Brownie J in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 in the following passage at pp.296-7 (approved by the Court of Appeal in State Bank of New South Wales v Brown (2001) 38 ACSR 715): "The last words s 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors. See Re Bavistock (1946) 14 ABC 30; Re Ivermee; Ex parte Official Receiver (1974) 36 FLR 187; Re Passmore; ; Ex parte Official Receiver (in liq) (1984) 56 ALR 181 at 186; Re Kyra Nominees Pty Ltd (in liq) (1987) 11 ACLR 767; 5 ACLC 811 at 819; Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610; 12 ACLC 1071." 18 The comprehensive nature of the relevant inquiry has long been recognised. The task of the court under a forerunner provision of New South Wales bankruptcy legislation was said by Simpson J in Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B&P) 38 to be that of "weighing all the circumstances, the amount of risk run, the amount recovered, the proportion between the debts of indemnifying creditors, and those of non-indemnifying creditors and all other matters". 19 In the present case, Beljen alone was prepared to hazard funds in response to the liquidators' request for financial assistance. It did so in circumstances where it ran the risk of loss. The result was a recovery significantly in excess of the amount hazarded. The result would not have been achieved but for Beljen's funding. Beljen must be seen to have provided an essential element in achieving that success. It is therefore appropriate that it should recover its actual outlays (and the unsatisfied commitment) plus an element of reward or, as s.564 calls it, "consideration". The bonus the liquidators propose, being 30% of the balance of the litigation proceeds, is, in my opinion, appropriate. The total – that is, the reimbursement plus the 30% element – should be paid out of the litigation proceeds and in priority to all unsecured debts and claims, including those referred to in s.556(1). 20 An order of the kind I have outlined will not, for reasons stated, deal with all the matters contemplated by the liquidators' application. I shall therefore defer making any order at this point. Rather, I shall stand the application over for a short time so that the liquidators may further consider the position with a view to amending their application. ********** 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.