Federal Court of Australia sets out the principles relevant for an application by a liquidator for approval to enter into a costs agreement and a funding agreement under s 477(2B) of the Corporations Act (Cth)

11 March 2022
Liam Hennessy, Partner, Brisbane

Litigation funding can play an important role in allowing liquidators to recover debts on behalf of liquidated companies, where there may be a real prospect of success in recovery proceedings but where obstacles such as funding or security for costs may present themselves.

Pursuant to section 477(2B) of the Corporations Act 2001 (Cth) (the Act), for the purpose of entering into any litigation funding agreement a liquidator will usually be required to seek the Court’s approval or a resolution of the creditors of the company, as the terms of such an agreement will almost always exceed three months (thereby requiring approval).

Whilst orders approving funding arrangements between liquidators, lawyers and third party funding providers are not new, Cheeseman J in Ball, in the matter of ACN 605 650 182 Pty Ltd (in liq) [2022] FCA 2 considered, and in this case approved, entry into such agreements pursuant to s 477(2B) of the Act, where entry into such arrangements was necessary to prosecuting claims for the purpose of advancing creditor recoveries.

On 7 January 2022, Cheeseman J made an order approving the liquidator’s entry, as liquidator of two liquidated companies, into a litigation funding agreement and costs agreement pursuant to s 477(2B) of the Act in order to prosecute claims against individuals connected with the liquidated companies (the Order).

The Order followed an interlocutory application to approve entry by the liquidator, Michael Warren Ball, into the following agreements on behalf of the two liquidated companies (ACN 605 650 182 PTY LTD (in liquidation) (formerly known as ABC Bookkeeping Pty Ltd) (ABC) and ACN 605 522 281 PTY LTD (formerly known as TWA Accountants Pty Ltd) (TWA) to which the liquidator had been appointed:

  1. a funding agreement with a litigation funder for the purpose of funding proceedings to be issued in respect of claims arising from the winding up of ABC and TWA; and
  2. a costs agreement with ACN 128 544 267 PTY LTY trading as Stacks Law Firm with respect to legal work to be undertaken in relation to the proposed proceedings.

The liquidator also sought confidentiality orders pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) over parts of the evidence on which he sought to rely contained in the draft funding agreement and the costs agreement.

Background

ABC and TWA were placed into liquidation by resolution of members in July 2016 and May 2017 respectively.

The application was issued following investigations into parties associated with the liquidated companies, which revealed:

  • in the liquidator’s view, that the companies were being operated by or for the benefit of shadow directors or their families and related companies; and
  • a series of sham arrangements, whereby ABC and TWA were engaged to provide services that were never rendered and that payments made by associated parties to ABC or TWA in respect of such invoices issued were later withdrawn in cash and returned to payor. The amount involved was alleged to be in excess of $1million and contributed to ABC/TWA incurring debts to the ATO which they were unable to pay.

Upon the liquidator’s solicitors issuing demand for the debt from parties associated with ABC/TWA, the solicitors for the associated parties threatened to strike out any proceedings and/or seek a security for costs order against the liquidator and/or funders.

Approval of entry into an agreement under s 477(2B) of the Act

Cheeseman J considered the principles relevant to the Court’s approach to applications under s 477(2B) of the Act, including that before the Court could make an order, it must:

  1. be satisfied that entry into the agreement is a proper exercise of power and not ill-advised or improper on behalf of the liquidator; that is, that the proposed agreement terms did not give rise to an error of law or reason to suspect lack of good faith or other impropriety on part of the liquidator of the company;
  2. be satisfied that, with respect to the liquidator’s commercial judgment, there is no error of law or ground for suspecting bad faith or any other good reason to intervene; and
  3. assess the litigation funding agreement itself, to determine:
    1. the liquidator’s prospects of success in the liquidation;
    2. the nature and complexity of the cause of action;
    3. the extent to which the liquidator has canvassed other funding options;
    4. the level of the funder’s premium, the liquidator’s consultation with creditors; and
    5. the risk involved in the claim.

Liquidator’s evidence

The liquidator in his evidence set out why the agreements were the interests of creditors of ABC and TWA, including:

  1. the funding agreement is such that control of the conduct and potential settlement of the proposed proceedings lies with the liquidator and not the funder;
  2. the terms of the costs agreement with Stacks Law Firm (specialising in insolvency related litigation) and the funding agreement were “typical, reasonable and competitive” and that the proposed premium in the funding agreement was reasonable, commercial and in the interests of creditors;
  3. the funding agreement was necessary to prosecute any claim, defend any strike out claim and to provide security for costs;
  4. that without the agreements being put in place, there was no prospect of a return to creditors, and that the prospects of a return would improve significantly if the proposed claims were litigated; and
  5. that entry into the agreements was in the best interests of ABC and TWA.

Decision

Cheeseman J was satisfied, having regard to the matters addressed in his judgment, that approval under s 477(2B) of the Act and entry into the agreements should be granted, on the basis that:

  1. the funding agreement was directed to advancing the interests of creditors insofar as the funding will enable the liquidator to institute and prosecute claims which may result in recoveries for creditors;
  2. in the absence of a funding agreement there would be no proceedings instituted and no potential recovery for creditors;
  3. there was no suggestion that the liquidator’s entry into the agreements was not a proper exercise of the liquidator’s powers or was otherwise ill-advised; and
  4. in any event, approval under s 477(2B) of the Act did not operate as approval of the underlying agreement itself, such that the approval did not exonerate the liquidator from any liability he may have in respect of the transaction.

Cheeseman J was also satisfied with the confidentiality orders sought pursuant to s 37AF of the FCA Act in relation to the contents of the agreements, on the basis that the order was necessary to prevent prejudice to plaintiffs.

Conclusion

The Court is amenable to approving a liquidator’s entry into litigation funding agreements and costs agreements, provided it is satisfied that such arrangements are: (a) necessary to advancing the creditors’ claims, and that absent them, there will be no potential recovery for creditors; (b) the agreements are a proper exercise of the liquidator’s powers; and (c) the liquidators remain liable in respect of such transactions.


Authored by:

Liam Hennessy, Partner
Freda Zacharia, Senior Associate

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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