Attention liquidators: when not to seek directions under section 511

In the matter of One. Tel Limited [2014] NSWSC 457

Background

One. Tel Limited (In Liquidation) (One. Tel) was a telecommunications company which commenced operations in the mid-1990s.  In or about 1999 News Limited (News) and Publishing and Broadcasting Limited (PBL) (now Consolidated Media Holdings Limited) (CMH) became major shareholders of One. Tel, with James Packer and Lachlan Murdoch (among others) becoming directors of One. Tel.

One. Tel started experiencing cash flow difficulties from April 2011.  On 17 May 2011 the directors of One. Tel resolved to implement a one-for-one renounceable rights issue at five cents per share to raise $132 million (Rights Issue).  The Rights Issue was to be fully and unconditionally underwritten by CMH, Consolidated Press Holdings Pty Ltd (CPH), News and their subsidiaries.  However, no written underwriting agreement was ever prepared or executed by the parties. 

On 24 July 2001, the creditors of One. Tel resolved that One. Tel be wound up and that general purpose liquidators (GPLs) be appointed.  On 23 December 2003, on the application of certain creditors of One. Tel, the Court appointed a special purpose liquidator (First SPL).

Various proceedings were commenced by One. Tel against (among others) Mr Packer, Mr Murdoch, PBL, CPH and News.  In May 2012 the First SPL commenced proceedings against Mr Packer, Mr Murdoch, CMH, CPH, Robbdoc Pty Ltd, Toranaga Pty Ltd, Cavalane Holdings Pty Ltd and Leteno Pty Ltd (CMH/News Parties) (Equitable Proceedings).  The issues arising in the Equitable Proceedings included (among other things):

• whether there was a binding underwriting agreement;
• if so, whether it could be rescinded because One. Tel misled the underwriters as to its true financial position; and
• whether Mr Packer and Mr Murdoch breached their fiduciary duties to One. Tel. 

On 19 June 2012 the special purpose liquidator (SPL) was appointed to replace the First SPL.  Meanwhile, the Equitable Proceedings was set down for a trial to commence in October 2014 for ten weeks and to resume in March 2015 for a further two weeks.

The settlement

On or around 14 February 2014 the SPL formed a view that there were significant risks in continuing to prosecute the Equitable Proceedings and that a settlement would likely produce a more favourable outcome for One. Tel’s creditors, than proceeding with the Equitable Proceedings to finality.  As a result of the negotiations which ensued, on 9 April 2014 the parties executed the Deed of Settlement (Deed).

The Deed provided (among other things) that:

• the settlement and consequential dismissal of the Equitable Proceedings be wholly conditional upon certain approvals being obtained from the Court within a prescribed time frame of 30 days, or waiver of that condition by the SPL;
• the settlement resolves all matters between One. Tel and the CMH/News Parties arising from or related to the circumstances giving rise to the Rights Issue, with no admissions as to liability;
• One. Tel and the CMH/News Parties release each other and other named persons from any claims arising from the settled matters;
• One. Tel and the GPLs release the SPL and his advisers from any Claims One. Tel may have against them arising from the SPL’s role as a special purpose liquidator of One. Tel generally, and in entering into the Deed in particular;
• the CMH/News Parties will pay the settlement sum of $40 million to One. Tel; and
• the Equitable Proceedings to be dismissed, by consent, with no orders as to costs.

The application

The liquidators brought an application pursuant to section 511 of the Corporations Act 2001 (Cth) (Act) seeking orders to the following effect:

• that the SPL and GPLs were justified in entering into and in procuring that One.Tel enter into and perform the Deed;
• that the SPL and GPLs otherwise acted properly and reasonably in entering into the Deed and in procuring the One. Tel to enter into the Deed;
• approving the Deed; and
• that the terms of clause 2.1 of the Deed (which provides that the settlement of all Claims, and the dismissal of the Proceeding, in the terms provided for in the Deed), is wholly conditional upon the Court Approvals being obtained or the requirement to obtain the Court Approvals being waived are satisfied.

The decision

The Court held that a direction that the liquidator was justified in entering into and implementing the Deed, and procuring One. Tel to do so was all that was necessary.  The Court found that the balance of the orders sought by the liquidator were inappropriate and did not conform to the principles and practice applicable to section 511 of the Act.

In particular, Brereton J emphasised that the Court’s role under section 511 is to provide advice as to whether the liquidator is justified in taking a particular course of action (i.e whether to enter into the Deed), not declaring that he has otherwise generally acted properly in doing so.  Brereton J said that to make the direction sought would necessarily involve a much wider enquiry into the whole of the liquidator’s conduct in and about the negotiation and procuring of the Deed.

In addition, in His Honour’s judgment, Brereton J provided reminders to liquidators when seeking a declaration under section 511.  They are as follows:

• The effect of a direction under section 511 is to sanction the course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty.
• While the ability of a liquidator to approach the Court for directions is intended to facilitate the liquidator’s functions and should be interpreted widely to give effect that intention, it is insufficient to justify giving such directions that the liquidator wants reassurance about commercial decisions.
• Directions under section 511 may properly be given in relation to:
• guidance on matters of law;
• guidance on questions of legal procedure;
  • whether a liquidator should postpone a sale in order to achieve a better price; and
  • where there are two competing offers or assets and a liquidator wishes to gain court directions in order to avoid subsequent allegations that he or she has acted improperly in choosing one or the other.
• The Court should not make directions, the effect of which is to exonerate the liquidator from personal liability in respect of a commercial judgment that the liquidator is concerned may prove contentious, unless satisfied that the liquidator’s decision is, in all the circumstances, a proper one.

Lavan Legal comment

Practitioners need to be mindful of this decision when seeking direction from the Courts.  The decision of Brereton J is a warning to liquidators that an application for directions under section 511 of the Act should not be used as a means of seeking the Court’s imprimatur regarding the detail of commercial decisions made by the liquidator.