TGIF March 4, 2022 – Court Approves Liquidator Funding and Maintains Confidentiality – Insolvency/Bankruptcy/Restructuring

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This week’s TGIF considers Thorn (liquidator), in the matter of South Townsville Developments Pty Ltd (in liq) [2022] FCA 143 in which a liquidator sought permission to enter into agreements to pursue litigation and suppression orders to protect the disclosure of commercially sensitive details.

Key points to remember

  • When a liquidator considers that funding is necessary to pursue a legal action, he must determine whether an approval is required under section 477(2B) of the Companies Act (2001) (Cth).

  • The need for approval extends to new agreements when the original funder withdraws, priority arrangements with new funders, and adverse cost policies.

  • If judicial approval is sought, the Court may issue publication bans on commercially sensitive details. If broad deletion is sought, liquidators should be aware of the need to justify non-publication (including where the scope of the order is challenged by an interested party).

What happened?

Thorn (liquidator), in the matter of South Townsville Developments Pty Ltd (in liq)1 involved a request by a liquidator for approval to enter into agreements to fund existing litigation and another request that this material be kept confidential.

The liquidator had been appointed volunteer administrator of the company (Company) and, following a resolution of the creditors, was appointed liquidator to wind up the affairs of the Company.

Prior to being placed in administration, the company had developed a block of flats in Townsville, with all flats being sold within 12 months of completion.

Following investigations into the affairs of the Company, the Liquidator took legal action against the financiers of the project, arguing that the sums paid to the financiers by the purchasers of the apartments had not been credited to the Company as agreed.

After the financiers served their evidence, the liquidator asked the company to file separate proceedings against the financiers and 10 other defendants (including the buyers of the apartments), alleging a loss of $2.5 million. on the total amount due under the sales contracts.

The claim further alleged that the director of the company and officers of one of the financiers were involved in facilitating conduct that led to the shortfall.

Financing modalities

The liquidator had entered into a financing agreement to cover the costs of the litigation. The conclusion of this agreement has been approved by the Court. However, after payment of the fee guarantee, the funder withdrew its support for the application. As a result, the liquidator entered into a new agreement with an alternative funder and a priority agreement to govern the distribution of any recovery from the proceedings.

The liquidator did not seek approval for entering into either agreement (assuming this was not necessary as the terms were less onerous for the company and its creditors).

When the liquidator retired, the replacement liquidator filed an application, ex parte, for court approval of the various settlements reached and suppression orders over sensitive details in the documents.

A right to be heard?

The day before the application was filed, one of the defendants in the Company’s lawsuit filed a motion opposing the applications for approval. In refusing leave to be heard, Judge Stewart noted that:

  • the notice of the type of request submitted by the liquidator was not required; and

  • a defendant in proceedings in which a liquidator requests authorization to enter into a financing agreement does not have the right to be heard by a bailiff.

The app

Section 477(2B) of the Companies Act 2001 (Cth) requires that approval be sought by a liquidator before entering into agreements that extend beyond three months.

The Court recognized that retroactive approval was available in certain circumstances. In this case, Judge Stewart was satisfied that the delay in seeking approval had not delayed the liquidation, the progress of the litigation on the pedestal, or caused any apparent prejudice to the company or its creditors. Accordingly, and given that the delay had been explained, His Honor granted an extension of time to obtain approval.

The Court was further satisfied that the litigation brought had reasonable prospects and that success would benefit the Company and its creditors. Without the funding in place, it was observed that claims would not be processed and the liquidator would not be able to pursue this benefit. Accordingly, and after observing that the financing terms did not appear to be non-commercial, His Honor granted his approval for the conclusion of each of the relevant agreements.

Suppression orders

The liquidator also requested publication bans on parts of the financing agreement, the entire priority arrangement and the materials relied upon in support of the application. Details of the agreement to be removed included:

  • funding limit;

  • funder reimbursement terms and funder success fees; and

  • the conditions for the provision of security for costs in each proceeding.

Although the Court was not convinced that the complete deletion was warranted, it agreed to allow specific redactions (including on the commercial details mentioned above) in order to avoid interfering with the administration of the justice.

In coming to this conclusion, His Honor noted that failure to suppress information of this type could make it more difficult for liquidators to obtain funding and to be full and candid with the Court, as the require such requests.

It was further noted that in the absence of deletion, there was a risk that sensitive details of the financing agreements could unduly favor the defendants to the Company’s claims.

Comment

This decision serves as a useful reminder to insolvency practitioners and their advisers that approval must be sought for agreements that extend beyond three months. This includes new arrangements if alternate funders are needed, priority arrangements that address recoveries, variations, and policies to cover adverse costs.

Unlike ordinary litigants, this approval process often requires the disclosure of commercially sensitive details. A court can make confidentiality orders to protect this material if disclosure would defeat the purpose of doing justice.

However, insolvency practitioners should bear in mind that, if blanket suppression orders are sought (for example, to save time and money in identifying confidential documents), a court may make the order subject to freedom of application. If a person with a sufficient interest seeks to exercise this right, it will be for the liquidator to justify the non-publication.

Footnote

1 [2022] CIF 143

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.





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