Supreme Court New South Wales Medium Neutral Citation: In the matter of Vivo International Corporation Pty Limited (in liquidation) [2015] NSWSC 1556 Hearing dates: 25 August 2015 Date of orders: 25 August 2015 Decision date: 25 August 2015 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Judicial advice given to the effect that the first plaintiff, in his capacity as liquidator of the second plaintiff, would not be justified in recovering from the DOCA termination sum his remuneration, costs and expenses incurred in respect of and incidental to his position as liquidator of the second plaintiff or in paying the balance of the DOCA termination sum to the first defendant; but that the liquidator would be justified in retaining his costs of these proceedings on the indemnity basis out of the DOCA termination sum and paying the balance thereof to the second and third defendants in equal shares. Catchwords: CORPORATIONS – winding up – liquidators – recovery of liquidator's remuneration, costs and expenses and payment of balance from moneys paid by defendants to company – where moneys received by liquidator in satisfaction of condition imposed in prior proceedings – whether funds generally of the company in liquidation – Quistclose trust – whether defendant's claim to retrieve funds assigned by settlement deed. Legislation Cited: (CTH) Corporations Act 2001, s 436A, s 439A, s 564, s 747(3) (NSW) Supreme Court Act 1970, s 23 (NSW) Trustee Act 1925, s 63, s 81 Cases Cited: Barclays Bank Limited v Quistclose Investments Limited [1968] UKHL 4; [1970] AC 567 TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789 Category: Principal judgment Parties: Adam Edward Patrick Farnsworth in his capacity as liquidator of Vivo International Corporation Pty Limited (in liquidation) ACN 087 480 171 (first plaintiff) Vivo International Corporation Pty Limited (in liquidation) ACN 087 480 171 (second plaintiff) Confusio Pty Ltd ACN 601 107 635 (first defendant) Tivo, Inc (second defendant) Tivo Brands, LLC (third defendant) Representation: Counsel: D R Stack (plaintiffs) F Assaf (first defendant) Solicitors: Bridges Lawyers (plaintiffs) Bruzzano & Associates (first defendant) Davies Collison Cave Law (second and third defendant) File Number(s): 15/229816 Judgment (ex tempore) 1. HIS HONOUR: By originating process filed on 6 August 2015, the first plaintiff Adam Edward Patrick Farnsworth, in his capacity as liquidator of the second plaintiff company Vivo International Corporation Pty Limited, seeks the advice, opinion and/or direction of the Court pursuant to (CTH) Corporations Act 2001, s 747(3), (NSW) Trustee Act 1925, ss 63 and 81, (NSW) Supreme Court Act 1970, s 23, and/or the inherent and implied jurisdiction of the Court, as to the application of moneys paid by the second and/or third defendants TiVo Inc and TiVo Brands LLC in satisfaction of a condition contained in the judgment given by Gordon J, then of the Federal Court of Australia, on or about 29 July 2014 in proceedings number VID 232/2014 [see TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789]. In particular, the plaintiff seeks a declaration or direction that he is entitled to recover from the sum in question all of his remuneration, costs and expenses incidental to his position as liquidator and/or these proceedings and, subject to those payments, in paying the balance to the first defendant Confusio Pty Limited or alternatively to the second and third defendants. 2. The background is relatively complex, but for present purposes, can be fairly shortly stated. Proceedings were brought by TiVo Inc and TiVo LLC against the company in the Federal Court of Australia alleging infringement by the company of a trademark held by the TiVo companies. The TiVo companies succeeded. The company appealed, unsuccessfully, its appeal being dismissed on 14 November 2012. 3. On 22 November 2013, the directors of the company resolved to appoint a voluntary administrator under Corporations Act, s 436A. At the first meeting of creditors, on 4 December 2013, the present plaintiff Mr Farnsworth replaced Mr Shepherd as administrator. Mr Farnsworth, in his s 439A report, recommended that the creditors resolve that the company be wound up, but contrary to that recommendation, on 14 February 2014, the second meeting of creditors resolved that the company enter into a deed of company arrangement ("DOCA"), which deed was executed on 17 March 2014, whereupon Mr Farnsworth became the deed administrator. The deed provided for the release by a holding company of a claim of about $2 million and the establishment of a deed fund by a lump sum payment of $400,000. That payment was not made when required by the deed, and the deed was subsequently varied to accommodate the belated payment of the deed fund. 4. On 23 April 2014, the TiVo companies commenced proceeding VID 232/2014 in the Victorian Registry of the Federal Court, seeking orders terminating the DOCA and orders that the company be wound up and a liquidator appointed. The company opposed that application. An important question in those proceedings was whether the creditors would be better off under the DOCA than in the event of a liquidation. There were also questions as to whether the DOCA was oppressive or unfair to, or not in the interests of, creditors as a whole. Her Honour was concerned that there were legitimate questions – described in the judgment as "legitimate concerns" – as to the quality and accuracy of material that had been provided to the creditors. 5. Whether the creditors would be better off under a DOCA than in liquidation would be markedly influenced by the ability of a liquidator to conduct public examinations and then recovery proceedings in respect of voidable transactions. Mr Farnsworth gave evidence in the DOCA proceedings that if he were appointed liquidator it was to complete certain investigations. He estimated the likely cost of those investigations, including liquidator's fees and legal costs, to be: 1. conducting public examinations, including issuing orders for production: $50,000 to $100,000; 2. liaising with funders and/or creditors regarding potential actions and further investigations: $20,000 to $100,000; and 3. commencement of litigation: $50,000 to $300,000. 1. Her Honour summarised (at [45]) that the total funding required was between $123,000 and $500,000. 2. Upon the hearing of the DOCA proceedings, the TiVo companies proffered an undertaking: to fund public examinations by the liquidator in the estimated sum of $5,000 on terms acceptable to the liquidator. The plaintiffs expect that, as a term of the funding, the liquidator will consider favourably an arrangement for the plaintiffs to receive priority and section 564 of the Corporations Act. 1. Her Honour recorded (at [47]) that the company submitted that such an undertaking was unsatisfactory and should not be accepted, as it was limited to $50,000, the scope of the funding was too narrow, there was no evidence of the financial capacity of the plaintiffs to meet the undertaking, and it was too late. 2. The day following the hearing, the TiVo companies increased the sum proffered by way of undertaking to $100,000 on the same terms, and then undertook within 7 days of 22 July to transfer $100,000 to the trust account of their Australian solicitors and provide an irrevocable direction to that firm to transfer the sum to the liquidator appointed by the Court "for the purpose of funding public examinations as described above, within 21 days of the Court making any order to terminate the DOCA and appointing a liquidator...". They also provided a copy of information about TiVo Inc's financial position. 3. In recording the respective positions of the parties, her Honour observed (at [65]) that while the company did not submit that a winding up would be inutile on the basis that the prospective defendant in recovery proceedings did not have resources available to meet those proceedings, "instead, Vivo's submission was that there was no evidence whatsoever that the liquidator [was] going to have any money to pursue the legitimate concerns". In other words, Vivo's contention was that it was not established that the liquidator would be in funds to pursue the examinations and recovery proceedings contemplated and, absent that, there would be no advantage in liquidation. 4. Having addressed other grounds of opposition to the application, her Honour observed that, as it was, subject to the question of funding, it could not be said that the creditors would be better off under the DOCA "because we simply do not know" (at [72]). As it seems to me, that observation involved that, if funding was available the position was equivocal, whereas if funding was not available, there was no prospect of creditors being better off in liquidation. Then, her Honour said (at [73]): Vivo's opposition to the application to terminate the DOCA also relied on the delay in, and limited scope of, the funding to be provided by the Plaintiffs. The timing of the funding offered by the Plaintiffs is addressed at [47] to [48] above. The offer of funding was late. However, that delay must be considered in context. The amount and scope of funding is limited: see [48] above. However, subject to the outcome of the public examinations, the Plaintiffs have informed the Court that they would consider funding recovery proceedings. 1. In a passage which is of critical importance for the present application, in response to the company's submission that the plaintiffs were acting out of self-interest and vengeance, her Honour observed (at [74]): There is no doubt that the Plaintiffs seek to recover from Vivo and that fact is a reason, probably the substantial reason, for the funding offer. However, the funding provided is the maximum amount said to be necessary to conduct the examinations and possibly double the amount necessary. In the circumstances, it is appropriate that termination of the DOCA be conditional. Within seven days of these orders the Plaintiffs will need to deposit $100,000 in their Australian solicitors' trust account together with an irrevocable direction to that firm to transfer that sum to Vivo's liquidator at the request of the liquidator. That funding will be available by the liquidator to primarily fund examinations and, to the extent possible, any recovery actions. It will not be limited to funding the examinations. Of course, that would not prevent the liquidator seeking alternative funding from the liquidation or other third parties. 1. Her Honour returned to the matter in a conclusionary manner, saying (at [78]): In the particular circumstances of this case and for the reasons set out above, the DOCA should be terminated by the Court pursuant to s 445D and Vivo should be wound up. As a condition of those Orders, within seven days of these orders the Plaintiffs must deposit $100,000 in their Australian solicitors' trust account together with an irrevocable direction to that firm to transfer that sum to Vivo's liquidator at the request of the liquidator. 1. At [79], her Honour thought it neither appropriate nor necessary to impose a further condition that the plaintiffs pay the remaining creditors the amount they would have received under the DOCA. 2. Those reasons were delivered on 29 July 2014, when the proceedings were adjourned to 31 July with directions for short submissions, in the meantime, as to who should be appointed liquidator, the question of costs and draft orders. It is not apparent what happened on 31 July, but it seems likely that the proceedings were adjourned to 6 August. 3. On 6 August, the TiVo companies, Mr Grazier and various others entered into a settlement deed of that date. By clause 4, TiVo agreed to pay the sum of $100,000, to be paid in accordance with TiVo's undertaking to the Court set out in note 1 to minutes of proposed consent orders sworn on 22 July 2014 in accordance with that undertaking. That proposed undertaking was in the following terms: The plaintiffs undertake to the Court to fund public examinations by the liquidator in the estimated sum of $100,000 on terms acceptable to the liquidator. The plaintiffs expect, as the term of funding, the liquidator will consider favourably an arrangement for the plaintiffs to receive priority under section 564 of the Corporations Act. 1. By clause 5.1, TiVo assigned to the other parties or their nominee all of its rights, title and interest in, inter alia, "any claims TiVo has or might have against Vivo in the trial proceedings and the DOCA proceedings, including the account of profits claimed". The DOCA proceedings were defined as proceedings 232/2014 in the Federal Court, being the proceedings before Gordon J to which I have referred. 2. By clause 6.4, subject to the other parties' compliance with clause 2 and the Federal Court making, inter alia, the DOCA consent orders, TiVo undertook not to make any application in, inter alia, the DOCA proceeding. The DOCA consent orders were set out in schedule 2 to that deed, and provided for the termination of the DOCA and the appointment of Mr Farnsworth as liquidator, and included various provisions concerning Mr Farnsworth's remuneration. They also included an order that the first defendant pay the plaintiff's costs of the DOCA proceeding. On 6 August 2014, Gordon J, apparently by consent, made orders in those terms. 3. The notice of assignment attached to the settlement deed identified the assignee as Confusio, the present first defendant. Although Confusio does not appear itself to have been a party to the settlement deed, it was presumably the nominee of the other parties referred to in clause 5.1 of that deed. In any event, I proceed on the basis that it has the requisite standing as nominated assignee. The assignment included any claims that the assignor has or might have against Vivo in the DOCA proceeding. 4. As a result of the deed of assignment to which I have referred and various other assignments, and the release of one other debt, Confusio is now the only creditor of the company. Confusio has indicated to the liquidator that it does not wish the liquidator to proceed with examinations or recovery proceedings. Similarly, the holding company of Vivo has indicated that it does not wish the liquidator to proceed in that way. Accordingly, all those with a potential interest in the company in liquidation have instructed the liquidator that they do not wish there to be examinations or recovery proceedings. It follows that the $100,000 will not be applied for that purpose. 5. In that context, the first question which arises is the characterisation of the moneys received, ultimately by the liquidator, and paid into the liquidator's general account, being the $100,000 provided by TiVo in satisfaction of the condition imposed by Gordon J. Essentially, the question reduces to whether those moneys, having been transferred at the request of the liquidator from TiVo's solicitor's trust account to the liquidator's general account, are funds generally of the company in liquidation or – to the extent that they are not used for the purposes of funding examinations and recovery proceedings – result to TiVo. 6. I accept that where funds are advanced for a purpose and that purpose fails, that does not necessarily mean that the funds revert to the person making the advance. Whether they do so depends on the nature of the transaction. Many loans are made by financial institutions nominally for a purpose. The fact that the funds are not applied to that purpose is, generally speaking, beside the point. On the other hand, cases such as Barclays Bank Limited v Quistclose Investments Limited [1968] UKHL 4; [1970] AC 567 recognise that there are circumstances in which, where there is an agreement that funds provided by one party to another will be used exclusively for a particular purpose, a trust may result to the provider of the funds if that purpose fails. I also accept that whether a Quistclose trust arises or not is judged not according to the subjective intention of the provider of the funds, but according to the mutual intention of the parties objectively ascertained. 7. In this case, where the funds were provided not entirely voluntarily but to satisfy a condition imposed by the Court, the best objective indicia is to be derived from her Honour's reasons which inform the imposition of the condition, and of which the parties should be taken to have been aware when the funds were advanced. The relevant context can be summarised as being that the TiVo parties offered an undertaking to fund the liquidator to undertake examinations and recovery proceedings. Then, the value of that undertaking was disputed on the basis that the TiVo companies' wherewithal to satisfy it was not established. Her Honour was, at least to some extent, concerned that that might be right and, accordingly, imposed a condition, the practical effect of which was to require that the undertaking be secured by the actual deposit of funds. 8. It is of some significance in this respect that the condition did not require the payment of $100,000 to the liquidator or the company in liquidation but to the TiVo company's solicitor, with provision for it to be drawn down from them at the liquidator's request. That strengthens the impression that what was required was a secured source of funds which could be drawn on for the purposes of the contemplated examinations and recovery proceedings, without being a contribution to the funds of the company in liquidation generally. The purpose of the condition was to secure the undertaking to fund examinations, not to enhance the funds of the company generally. 9. Where a party provides security for an obligation and that obligation is satisfied or discharged, at least generally speaking, the security provider is entitled to have the security back, except to the extent it was required to satisfy the obligation. 10. It was submitted that the reference in the undertaking proffered to Corporations Act, s 564, suggested that the fund was intended to be a contribution to the company's property generally. That section provides 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. 1. However, as it seems to me, s 564 deals not with what, if anything, is contributed by a funding creditor to the liquidator or the company, but with the property that is recovered as a result of any such contribution. The very fact that it applies in a case where only an indemnity of costs for litigation is given, as well as one where there has been the payment of money, tends to support that view. While it authorises the adjustment of the rights in respect of property recovered as a result of funding or indemnity provided by a creditor, so as to give them an advantage over others in consideration of the risk assumed by them, it does not mean that where a funder pays the costs of litigation – which, in many circumstances, is done in a manner which does not involve the funder becoming a creditor of the company in liquidation at all – that its contribution is to be treated as an asset of the company. 2. It was also fairly emphasised that Gordon J had expressly stated that the funding was not limited to examinations (at [74]). But in the context in which it appears, particularly that provided by the preceding sentence, it seems to me that what her Honour was saying was that, to the extent that funds permitted, they would be available for recovery actions as well as examinations. In that respect, her Honour was indicating that the terms of the undertaking proffered, which was limited to public examinations, were not acceptable and her Honour required that the funds also be available for recovery actions. 3. For those reasons, in my view, the proper characterisation of the $100,000 was that it was to secure the undertaking of the TiVo companies to provide that amount of money for the exclusive purpose of funding public examinations and, to the extent that the funds permitted, recovery actions. That purpose having failed, the funds are held by the company upon trust for TiVo, unless that conclusion is effected by the settlement deed. 4. On that question, the real question is whether a claim by TiVo to retrieve from the company the $100,000 in the circumstances that have arisen has been assigned by the settlement deed to Confusio, which in turn depends on whether such a claim is one that TiVo "has or might have against Vivo in the DOCA proceedings", in the light of TiVo's undertaking not to make any application in the DOCA proceeding. I have already referred to the definition of the DOCA proceedings, which defines them merely by a file number, but, in the context, should be construed as a reference to the application brought by TiVo to set aside the deed and any consequential orders – including, in particular, the costs order that was made in favour of TiVo after the deed of settlement was executed. 5. An application by TiVo to recover the moneys which prima facie are held on trust for it, for the reasons I have given, would not necessarily be made in the same file as the DOCA proceeding or, indeed, even in the same court. More to the point, it seems to me that such an application would not be an application in the DOCA proceeding but a new proceeding brought by TiVo against the company to retrieve moneys advanced to the company for a specific purpose. Although the question is arguable, on balance, and bearing in mind that releases such as clause 6.4 are narrowly construed, the better view is that TiVo's claim to recover this money would not be a claim in the DOCA proceedings, and has not been assigned by the settlement deed. 6. I am not unconscious in reaching those conclusions that TiVo has declined the opportunity to participate in these proceedings. That notwithstanding, I am of the view that the liquidator would not be justified in acting in the manner in respect of which they seek directions and will give advice to that effect. If desired, I would give advice to the effect that the liquidator would be justified in repaying the $100,000 to TiVo. 7. The liquidator has acted reasonably and properly in making this application and, indeed, has done so in part due to the urging of TiVo. In those circumstances, it seems appropriate that the liquidator should have his costs out of the fund in question. 8. The Court orders that: 1. The first plaintiff, in his capacity as liquidator of the second plaintiff, would not be justified in recovering from the DOCA termination sum his remuneration, costs and expenses incurred in respect of and incidental to his position as liquidator of the second plaintiff and paying the balance of the DOCA termination sum to the first defendant. 2. The liquidator would be justified in retaining his costs of these proceedings on the indemnity basis out of the DOCA termination sum and paying the balance thereof to the second and third defendants in equal shares. ********** 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: 21 October 2015