TGIF 4 March 2022 - Court approves liquidator’s funding and preserves confidentiality

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 approval to enter agreements to pursue litigation and suppression orders to protect the disclosure of commercially sensitive details.

Key Takeaways

• When a liquidator considers funding is required to pursue litigation, regard must be had to whether approval is required under section 477(2B) of the Corporations Act (2001) (Cth).
  
  
• The need for approval extends to new agreements when the original funder withdraws, priority arrangements with new funders and policies in respect of adverse costs.
  
  
• If judicial approval is sought, the Court may make non-publication orders over commercially sensitive details. If broad suppression is sought, liquidators must be mindful of the need to justify non-publication (including when 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 an application by a liquidator for approval to enter agreements to fund existing litigation and a further request for that material to remain confidential.  

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

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

Following investigations into the affairs of the Company, the Liquidator commenced proceedings against the project financiers asserting that amounts paid to the financiers by the apartment purchasers had not been credited to the Company as agreed.

After the financiers served their evidence, the Liquidator caused the Company to commence separate proceedings against the financiers, and 10 further defendants (including purchasers of the apartments), alleging a shortfall in the total amount due under the sale contracts of $2.5 million.  

The claim further alleged that the Company’s director and officers of one of the financiers had been involved in facilitating conduct which resulted in the shortfall.

Funding arrangements

The Liquidator had entered into a funding agreement to cover the costs of the litigation. Entry into that agreement was approved by the Court. However, after security for costs were paid, the funder withdrew its support for the claim. As a result, the Liquidator entered into a new agreement with an alternative funder and a priority arrangement to govern the distribution of any recoveries from the proceedings.

The Liquidator did not seek approval for entry into either agreement (on the assumption this was not required as the terms were less burdensome on the Company and its creditors).

When the Liquidator retired, the replacement Liquidator filed an application, ex parte, for approval by the Court of the various agreements entered into and for suppression orders over sensitive details in the documents.   

A right to be heard?

The day before the application was listed, one of the defendants to the Company’s proceedings filed a motion to oppose the claims for approval. In refusing a grant of leave to be heard, Justice Stewart observed that:

• notice of the kind of application brought by the Liquidator was not required; and
  
  
• a defendant to a proceeding where a liquidator seeks approval to enter into a funding agreement had no right to be heard by a judicial officer.   

The application

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

The Court acknowledged that retroactive approval was available in certain circumstances. In this instance, Justice Stewart was satisfied that the delay in seeking approval had not delayed the winding up, the progress of litigation on-foot or caused any apparent prejudice to the Company or its creditors. As a consequence, and given the delay had been explained, his Honour allowed an extension of time for approval to be sought.

The Court was further satisfied the litigation commenced had reasonable prospects and that success would benefit the Company and its creditors. Without the funding in place, it was observed the claims would not proceed and the Liquidator would be unable to pursue that benefit. As a result, and after observing that the funding terms did not appear un-commercial, his Honour granted approval for entry into each of the relevant agreements.

Suppression orders

The Liquidator also sought non-publication orders over parts of the funding agreement, the entirety of the priority arrangement and the material relied on in support of the application. The details of the agreement to be suppressed included:

• the limit of funding;
  
  
• the terms of repayment to the funder and the funder’s success fee; and
  
  
• the terms of the provision of security for costs in each proceeding.

While the Court was not persuaded that complete suppression was justified, it agreed to allow specific redactions (including over the commercial details noted above) in order to prevent prejudice to the administration of justice.

In reaching this conclusion, his Honour observed that a failure to supress information of that kind could make it more difficult for liquidators to obtain funding and be full and frank with the Court as required in such applications.  

It was further noted that, absent suppression, there was a risk that sensitive details of the funding arrangements may unduly favour the defendants to the Company’s claims.

Comment

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

Unlike the case for ordinary litigants, that approval process often requires commercially sensitive details to be disclosed. A court can make confidentiality orders to protect that material if disclosure could defeat the object of doing justice.

However, insolvency practitioners should be mindful that, if broad suppression orders are sought (for example, to save time and expense in identifying confidential material), a court may make the order subject to a grant of liberty to apply. If a person with sufficient interest seeks to exercise that entitlement, the onus will be on the liquidator to justify non-publication.