Liquidator granted approval to enter into funding agreements and confidentiality orders from the Federal Court

Thorn (liquidator), in the matter of South Townsville Developments Pty Ltd (in liq)[1] (Company) involved an ex parte application by a liquidator seeking approval under section 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act) to enter into agreements to fund existing litigation and a request for the suppression and non-publication of certain details in those agreements.

Background

In October 2015, a Mr Hancock was appointed voluntary administrator of the Company, before subsequently being appointed as liquidator in November 2015 when the Company was wound up by a resolution of creditors.

Prior to being placed into voluntary administration, the Company developed a block of apartments in Townsville, with all apartments selling within 12 months of construction being completed.

The Liquidator commenced proceedings against the financiers of the development alleging that amounts paid to the financiers by purchasers of the apartments had not been credited to the loan as agreed.

Following service of the financiers’ evidence in 2018, the Liquidator caused the Company to commence a separate proceeding against the financiers and a further 10 parties (including purchasers of the apartments), claiming a shortfall amount of $2.5 million owed under the sale contracts. It was also asserted that director of the company and one financier and its officers had been involved in and facilitated conduct resulting in the shortfall.

With the approval of the Court, the Liquidator entered into a funding agreement to cover the costs of the above litigation. However, after the funder had paid its security for costs into court, it withdrew from the agreement as it was no longer in a position to provide the necessary level of funding in support of the claim.

As a result, the Liquidator entered into a new litigation funding agreement with an alternate funder plus a priority undertaking regarding the distribution of payment from any recoveries from the litigation.

The Liquidator did not seek approval from the court for the new agreement on the basis that he considered the agreement to be less burdensome on the Company and its creditors than the original funding agreement, which had already been approved and was being replaced.

The Liquidator then retired and the replacement Liquidator (Mr Thorn) brought an application seeking retrospective and prospective approval for various funding agreements, as well as suppression orders over certain material in those agreements.

Section 477(2B) approval

Section 477(2B) of the Corporations Act requires a liquidator to obtain court approval before entering into agreements (on the company’s behalf) that have a term of longer than 3 months.

The relevant principles concerning section 477(2B) are summarised in Stewart, in the matter of Newtronics Pty Ltd[2] and include:

1. the court does not simply ‘rubber stamp’ whatever is put forward by the liquidator;
2. the court will not approve an agreement if the terms are unclear;
3. it is not the role of the court to develop an alternative proposal; it is to simply grant or deny approval to the liquidator’s request; and
4. the court will generally only grant approval when the transaction assists in the winding up of the company or relates to the realisation of assets.

Although section 477(2B) assumes that approval will be obtained prior to entering into an agreement, the Court noted that retroactive approval may be permitted in certain circumstances.[3]

In this matter, the Court was satisfied that the delay in seeking approval had not delayed the administration of the Company and had caused no apparent prejudice to any party (whether that be the Company, its creditors, the parties to the proceedings above or the counterparties to the agreements). The delay had been adequately explained and, in these circumstances, Justice Stewart allowed an extension of time for approval to be sought.

Without making any findings on the merits of the claims being asserted in the proceedings, his Honour considered there to be a reasonable prospect of success. If the Liquidator was successful, that would be to the benefit of the Company and its creditors. Therefore, his Honour held that the agreements were necessary to achieve that benefit, as without the third-party funding, the Liquidator could not pursue the claims. It was also noted that the terms of the relevant agreements did not appear uncommercial.

For the above reasons, his Honour granted approval (retrospective and prospective) to the Liquidator to enter into the agreements.

Suppression and non-publication orders  

While the Court recognised that there is a definite need and public interest in open justice, it noted that confidentiality and non-publication orders may be made if the release of information is likely to defeat the paramount object of doing justice according to law.

With reference to McGrath & Anor re HIH Insurance Ltd,[4] the Court explained that unlike ordinary litigants, justice will be best served for liquidators by an atmosphere that allows liquidators to raise matters in a full and frank manner without any concern of prejudice.

Justice Stewart was not satisfied that a complete suppression was justified in this instance. However, he was satisfied that the redaction of certain details within the agreements (including the limit of funding, the terms of repayment and the total sum of legal costs) was necessary to prevent prejudice to the proper administration of justice.

To fail to suppress that information, his Honour contemplated, would potentially prejudice the Liquidator’s fair and proper pursuit of litigation in the interest of the creditors in the winding up. It may also make it more difficult for liquidators to enter into agreements for litigation funding and to comply with their obligations of full and frank disclosure in such applications.

It is noted that the orders for redaction were also subject to a further order for leave to apply, so that if an individual with sufficient interest wished to persuade the Court that the redactions went further than necessary, they could do so.

Key takeaway

This case serves as a reminder for insolvency practitioners and their advisors that court approval must be obtained before entering into agreements that extend beyond three months.

Given that the approval process for liquidators generally involves the disclosure of commercially sensitive information, the Court can grant orders for non-publication provided it is necessary to prevent prejudice to the proper administration of justice. However, it is important to be aware that the Court may also grant leave to apply to challenge the non-publication.

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Authored by:

Fidelis McGarrigan, Partner
Hannah Tsavalas, Solicitor

[1] [2022] FCA 143.

[2] [2007] FCA 1375, [26].

[3] Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375, [25].

[4] [2005] NSWSC 731, [13].