Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liquidation) (receivers and managers appointed) [2012] FCA 807 (Great Southern)

With litigation funding in vogue and the practise becoming increasingly prevalent, particularly in the insolvency arena, recent applications before the courts have once again highlighted that when approaching the court for approval to enter such agreements, liquidators must be aware that the interests of creditors are of “crucial significance”.

Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liquidation) (receivers and managers appointed) [2012] FCA 807 (Great Southern)

The plaintiffs in the proceedings are the liquidators (Liquidators) of three related companies, namely, Great Southern Limited (GSL), Great Southern Finance Company Pty Ltd (GSF) and Great Southern Managers Australia Limited (GSMAL).

The Liquidators brought an ex parte application under section 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act) to seek the Court’s approval to enter into a litigation funding agreement with Riverrock Capital Limited (Application).

The Liquidators sought funding to investigate potential claims against (amongst others):

• the directors of GSL and GSMAL;
  
  
• the auditors of GSL and GSF; and
  
  
• unidentified third parties.

The decision

Justice Siopis approved the settled law with respect to an application under section 477(2B) of the Corporations Act (see the judgment of Austin J in Leigh re King Bros [2006] NSWSC 315; 22-25 (Leigh)) but held that only the:

• liquidators’ prospect of success in the potential litigation;
  
  
• interests of the creditors; and
  
  
• level of the funder’s premium,
  
  
• were relevant to the determination of the Application.

Prospects of success

With respect to the prospect of success in any potential litigation, the Liquidators contended that it was too early in their investigations to make any such assessment. Siopis J disagreed and set out that the Liquidators have had “an opportunity to make some assessment in respect of the prospect of success” because they:

• had been in office for three years; and
  
  
• already had the benefit of litigation funding and had spent over $400,000 under that funding agreement in investigating the potential claims.

He further noted, with respect to the above factors, that the Liquidators had failed to “adduce any evidence as to any conclusions reached by their lawyers in relation to the prospects of success of the potential claims, nor any evidence which details the further avenues of investigation…”

Interests of the creditors

Siopis J found that the Liquidators had failed to adduce any evidence, “notwithstanding the amount of time and money spent by the liquidators to date on the investigations”, of the estimated value of the potential claims. He set out the importance of such evidence to the interests of creditors because:

…of the size of the litigation funder’s proposed premium, and the substantial amount of the liquidators’ costs and legal costs which are projected to be incurred by the liquidators in conducting further investigations and any subsequent litigation. This consideration is relevant to the important question of whether by entering into the funding agreement, the liquidators will, thereby, enhance the prospects of the liquidators returning a dividend to the creditors by the conduct of the potential litigation.

He continued in finding that consideration to any potential benefit to the creditors from entering into a litigation funding agreement was of “crucial significance” given that the Liquidators had produced documentation which, amongst other things, set out that a recovery of $50 million from any potential claims would result in no return to creditors.

Funder’s premium

No indication of the funder’s premium was given other than that it was “substantial”. Siopis J noted that the funder’s premium goes directly to the issue of whether the litigation funding agreement would ultimately lead to a benefit to the creditors.

As a result of the above deficiencies, and the lack of conformity with the factors outlined in Leigh, the Application was dismissed.

Lavan Legal comment

The decision of the Court in Great Southern once again underlines the importance the court places on the interests of creditors. Siopis J went to great lengths to highlight and approve the factors in Leigh and as a consequence, potential applicants should ensure that they have adequately addressed those factors in any application before the court.

In preparing an application under section 477(2B) of the Corporations Act, liquidators need to ensure, at a minimum, that they:

• make an assessment on the prospects of success of any potential litigation;
  
  
• make an assessment of the potential value of that litigation; and
  
  
• answer the key question of, “is this in the best interests of the creditors?”