Liquidator dodges creditors to obtain funding to prosecute a sham

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Ball, in the matter of ACN 605 650 182 Pty Ltd (in liq) [2022] FCA 2 (7 January 2022)

Cheeseman J made orders approving the liquidator’s entry into a funding agreement and costs agreement with a law firm to pursue claims against shadow directors and related parties.

This case demonstrates the prudence of obtaining court approval to enter into a funding arrangement where there is a risk that creditors will not pass such a resolution.

Two companies provided bookkeeping and accounting services. They were placed into liquidation by a resolution of members in May 2017.

The liquidator formed the view that:

a husband and wife were each de facto / shadow directors of the two companies;
the couple were involved in a sham where the two companies were engaged by other parties to provide services that were never in fact rendered. Those other parties paid for those services, but the payments – allegedly in excess of $1 million – were later withdrawn in cash and returned. As a result of the transactions, the companies incurred debts to the ATO which they were unable to pay;
the companies each have potential claims against each of the husband and wife for breaches of directors duties under ss 180, 181 and 182 of the Corporations Act 2001 (the Act), and against the other parties, under s 79, for being knowingly involved in those breaches.

The liquidator wanted to enter into a funding agreement with a litigation funder to pursue those claims and also a costs agreement with a law firm to work on those claims. But given that, aside from the ATO, the creditors were related parties, or likely to be named as parties in proposed proceedings, he decided not to call a creditors’ meeting to approve entry into those agreements, thinking that a quorum or successful resolution was unlikely.

Instead the liquidator applied under s 477(2B) of the Act obtain the Court’s approval to enter into those agreements – he did so urgently, on an ex parte basis, for fear that the relevant limitation period for the claims would expire in January 2022.

Cheeseman J affirmed the principle that the standard imposed under s 477(2B) concerns an assessment by the court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than the court itself being involved in the exercise of a commercial judgment.

Her Honour reasoned that without funding, there would be no proceedings, and no potential recovery for creditors and so approved entry into the agreements.

Her Honour emphasised that approval under s 477(2B) does not operate as approval of the underlying agreement itself, such that the approval does not exonerate the liquidator from any liability that he or she may have in respect of the transaction.

The liquidator also applied for confidentiality orders under 37AF of the Federal Court of Australia Act 1976 to maintain confidentiality over parts of versions of the draft funding agreement and the costs agreement to prevent the parties against whom proceedings are proposed gaining a strategic advantage by seeing those parts over which confidentiality orders are sought. Her Honour agreed that these orders were necessary to prevent prejudice to the proper administration of justice.