Supreme Court New South Wales Medium Neutral Citation: In the matter of Shepherds Producers Co-Operative Ltd (in liq) [2012] NSWSC 390 Hearing dates: 19 March 2012 Decision date: 19 March 2012 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Orders made declaring entitlement of certain creditors to preferential payment of net settlement proceeds of specified property and that the liquidators pay those creditors. Costs of the application to be costs in the winding up. Catchwords: CORPORATIONS - Winding up - Application under s 564 of the Corporations Act 2001 (Cth) permitting preferential payment to certain creditors of property recovered under an indemnity for costs of litigation provided by those creditors. Legislation Cited: - Corporations Act 2001 (Cth) Pt 5.6, ss 564, 588M - Corporations (Ancillary Provisions) Act 2001 (NSW) s 14 - Co-operatives Act 1992 (NSW) s 325 Cases Cited: - Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 - Lombe, In the matter of Babcock and Brown Ltd (in liq) [2012] FCA 107 - Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 - State Bank of New South Wales v Brown [2001] NSWCA 223; (2001) 38 ACSR 715 Category: Interlocutory applications Parties: David John Kerr (First Plaintiff) Peter William Marsden (Second Plaintiff) Shepherds Producers Co-Operative Limited (in liquidation) (Third Plaintiff) Representation: Counsel: S. Golledge (Plaintiffs) Solicitor: HWL Ebsworth Lawyers (Plaintiffs) File Number(s): 2011/411999 Judgment - Ex tempore 1This application is brought by Messrs D J Kerr and P W Marsden as liquidators of Shepherds Producers Co-Operative Limited (in liquidation) ("Co-Operative"). The application seeks an order under s 564 of the Corporations Act, 2001 (Cth) (as applied to the Co-Operative in the manner noted below) permitting preferential payment to 24 creditors of the Co-Operative who provided funding to the liquidators to conduct examinations of officers of the Co-Operative, which were a precursor to insolvent trading proceedings later brought by the liquidators in this Court. 2By way of the background, Mr Kerr and Mr Marsden were initially appointed as voluntary administrators of the Co-Operative and subsequently as its liquidators. The liquidators have admitted 216 claims of creditors with a total value in excess of $9.25 million, excluding the amount owed to the secured creditor, Westpac Banking Corporation ("Westpac"). A receiver and manager was appointed by Westpac to the Co-Operative's assets prior to the appointment of Messrs Kerr and Marsden as liquidators and their initial investigation was hampered by lack of available funds in the winding up. The liquidators determined that they wished to conduct public examinations of several persons, which were estimated to cost $90,000 which could not be funded from the assets of the winding up. 3In February 2004, the liquidators sent notice to creditors inviting contributions from creditors to meet the costs of the examination process, fairly noting that the contribution to such costs was speculative in nature, and noting the possibility that an application could later be made to the Court granting those creditors who provided funding priority over other creditors in respect of monies subsequently recovered. 4Some 24 creditors initially provided funding to the liquidators of $94,075.82 in response to that circular. Those creditors were owed debts in the order of $8 million (including about $4 million owed to Westpac) and amounted to about 44 percent of the total of creditors' claims in the winding up. That funding was utilised by the liquidators for the examination of several directors and the auditor of the Co-Operative in June 2004 and there is evidence that those examinations could not have been conducted without that funding being provided by those creditors. 5The liquidator was subsequently able to obtain litigation funding for further examinations and ultimately to bring proceedings for insolvent trading which were resolved by a settlement by which the liquidators received $3.45 million under s 588M of the Corporations Act. There is evidence before me which indicates that the outcome of the initial examinations was a significant factor in obtaining litigation funding and, in particular, the managing director of the litigation funder has given evidence that his review of the transcripts of the examinations was a significant factor in his decision to provide funding for further examinations and ultimately for the proceedings. 6After the payment of the funder's entitlement under the funding agreement, the costs of the insolvent trading proceedings and costs and expenses in the winding up, an amount of $606,041.52 remains available in the winding up from the recoveries in the insolvent trading proceedings. 7As I noted above, the liquidators seek orders permitting the distribution of the whole of the amount available in the winding up to creditors who provided funding for the initial round of examinations. After returning the original amount which they had advanced for the costs of those examinations, in the order of $94,075, and paying final costs for the winding up, the amount which is sought to be distributed to those creditors to the exclusion of other creditors is $470,000. If that approach is applied, then, on a pari passu distribution by reference to admitted proofs, those creditors would receive a dividend of 7.59 cents in the dollar and other creditors would not receive a distribution. By contrast, if those creditors were provided only with the amount which they have provided to fund the examinations and without interest, and the balance was distributed to creditors pari passu, those creditors and other creditors would receive a dividend of approximately 5.5 cents in the dollar. 8Part 5.6 of the Corporations Act, including s 564, applies to the winding up of the Co-Operative by reason of s 14 of the Corporations (Ancillary Provisions) Act 2001 (NSW) and s 325 of the Co-operatives Act 1992. Section 564 relevantly provides that where, in a winding up, 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 an indemnity by creditors, then the Court may make such orders as it thinks just with respect to the distribution of that money with a view to giving those creditors an advantage over other creditors in consideration of the risk assumed by them. The case law indicates that matters relevant to the Court's discretion under this section include the fact that creditors should be encouraged to indemnify liquidators seeking to pursue claims in a winding up; the risk run by the indemnifying creditors; the sum recovered or value of the property recovered; the failure of other creditors to provide the indemnity; the proportion between the debts of the indemnifying creditors and other debts and the public interest in encouraging creditors to provide indemnities for funding so as to enable assets to be recovered: Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612; Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296 - 297; State Bank of New South Wales v Brown [2001] NSWCA 223; (2001) 38 ACSR 715. 9In the present case, a question arises as to whether s 564 is applicable where the funding provided by the funding creditors was for the conduct of the liquidators' examinations which were a precursor to the insolvent trading proceedings brought by the liquidators, and those proceedings were ultimately funded by a litigation funder. I respectfully adopt the reasoning of Emmett J in Lombe, In the matter of Babcock and Brown Ltd (in liq) [2012] FCA 107 at [38]-[42], which seems to me to be both correct as a matter of logic and appropriate in giving effect to the policy of the section. In my view, it can be said in this manner that the property consisting of a chose in action, being the right to bring a claim against officers of the Co-Operative under s 588M of the Corporations Act, was protected and preserved by the funding provided by funding creditors, where it would otherwise have been extinguished by the expiry of the limitation period in due course. In that situation, the prerequisite to the making of an order under s 564 of the Corporations Act is satisfied. The factors to which I have referred above indicate that there is a strong basis for providing an advantage to the funding creditors in that situation. 10The remaining question is whether that advantage should extend to all or only part of the amount which is now available in the winding up. The liquidators have, properly, put several calculations before me as to different scenarios, which extend from returning only the amount of funding to the funding creditors, through allowing a multiple of the funding to the funding creditors, to allowing the entirety of the available funds to the funding creditors. Mr Golledge, who appears for the liquidators, has drawn my attention to several cases in which the Court has allowed an advantage to funding creditors to the entire amount of recoveries which remains available in the winding up, for example Household Financial Services v Chase Medical Centre above. 11In my view, several factors to which Mr Golledge has drawn attention warrant the preferred order sought by the liquidators, namely that the entirety of the remaining funds available in the winding up after payment of costs and expenses be made available to the funding creditors. First, the funding was provided by funding creditors at an early stage where success of the liquidators' investigation and subsequent proceedings was by no means assured and they had properly been put on notice that the funding provided to the liquidators would be at risk. Second, the funding was provided at a time when it was critical, in that the liquidators could not have proceeded with examinations without it. Third, all creditors had the opportunity to provide such funding, and it appears from the liquidators' evidence that some smaller creditors chose to do so and some larger creditors chose not to do so. Fourth, the amount that the funding creditors will receive as a distribution on the winding up, even after being allowed the entirety of the amount remaining in the winding up, is modest and, in my view, proportionate to the risk they took in advancing the funding. It is a significant factor in this case, as in Household Financial Services v Chase Medical Centre, that the funds now distributed would not have been available to the winding up but for the funding previously provided by the funding creditors, and this weighs against any approach which would require them to share the funds now available with those who did not take the risk which lead to the recovery of those funds. 12I have had regard to the fact that the liquidators have given notice of this application to other creditors and none have appeared in opposition to the orders sought. I should note that one matter arose in respect of that notification, namely that the liquidators had there indicated that their preferred position reflected the fact that, if funding creditors were simply reimbursed the amount they had advanced and the balance distributed to all creditors pari passu, then the distribution to the funding creditors would be close to zero. The characterisation of "close to zero" perhaps overstates the position. It would have been preferable if that notification had referred to the amount which would actually be distributed to funding creditors in that situation, namely 5.5 cents in the dollar, although the schedules provided to the creditors with that notice disclosed that amount. However, the amount to be distributed to the funding creditors is relatively small, particularly in circumstances where their funds have been at risk for a lengthy period and where they are not being separately paid interest on those funds. I do not consider that this matter should lead to a refusal of an order which would otherwise be granted in these circumstances and I do not consider that it warrants the issue of a corrective circular to creditors, given that the amount which is ultimately distributed to funding creditors is relatively small in any event. 13In these circumstances, I am satisfied that the whole of the amount now available in the winding up and sourced from recoveries which were possible by reason of the contribution made by the funding creditors should be allowed to the funded creditors. Accordingly, I make the orders sought in the originating process, namely: 1. A declaration that each of the creditors listed in Schedule "A" to the Originating Process is entitled to a preferential payment of all the net settlement proceeds received by the liquidator in regard to the proceedings in the Supreme Court of New South Wales, number 3505/2006, and presently available in the winding up, being the amounts shown in Schedule "A". 2. An order that the liquidators of the Third Plaintiff pay each of those creditors the amounts listed within Schedule "A" to the Originating Process. 3. Costs of the application be paid as part of the costs of the winding up. ********** 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. Decision last updated: 27 April 2012