Court Rejects Proposed Appointment of Special Purpose Liquidators

In its recent judgment in Re Jabiru[1], the Supreme Court of New South Wales applied principles governing the appointment of Special Purpose Liquidators (SPL) in rejecting the Plaintiffs’ application for a SPL to be appointed to pursue claims against secured lenders.

This closely follows the Federal Court of Australia’s decision in  Lewis v Battery Minerals Resources Ltd (in liq)[2], in which JWS acted for the general purpose liquidators.

Key points

• The critical question in any SPL appointment application is whether the appointment will be just and beneficial to creditors.
• The answer to this question is likely to be “no” in the following circumstances:
  • if the proposed funder’s fee disproportionately exceeds market standards;
  • where the substantial majority of proceeds of any recovery would be diverted from unsecured creditors to an entity associated with shareholders who would otherwise have lower priority in the company’s liquidation;
  • if there is an absence of sufficient information regarding the funder’s financial substance and alternative funding options; and
  • the extent of the proposed funder’s control of conduct of the claim. 

Background

NewSat Ltd (NewSat) was a satellite communications provider trading with Jabiru Satellite Ltd (Jabiru) in a group of companies known as the NewSat Group. On 17 April 2015, administrators were appointed to several companies in the NewSat Group, including NewSat and Jabiru (Companies), and the secured creditors appointed receivers. The Companies entered liquidation on 7 August 2015. Mr Livingstone, the current General Purpose Liquidator (GPL), was appointed by Federal Court order on 10 September 2020.

A report published by the GPL on 11 December 2020 indicated that the NewSat Group had assets of $314,350 while there were:

• priority creditors with claims of $1.5 million;
• unsecured creditors with claims against NewSat of $47.7 million and against Jabiru in excess of $109 million; and
• secured lenders with claims of $174.4 million.

Rockgold Holdings Pty Ltd (First Plaintiff) and Ever Tycoon Limited (Second Plaintiff), creditors of Jabiru and NewSat respectively, initiated proceedings in the Companies’ names against eight secured lenders for a breach of an implied duty of good faith or alternatively unconscionable conduct under the Australian Consumer Law. The GPL consented to the proceeding’s commencement, provided that the claim not be served until a funding agreement was negotiated. Those negotiations ultimately failed.   

In response, the Plaintiffs applied to the Court for the appointment of a SPL under s 90-15 of the Insolvency Practice Schedule (IPS), which confers a broad power upon a court to make whatever orders it considers appropriate regarding the conduct of an external administration.

The sole purpose of the proposed SPL appointment was pursuing proceedings under a proposed Funding Deed with NewSat Funder No 2 Pty Ltd (NewSat Funder), a wholly-owned subsidiary of the First Plaintiff. The Funding Deed provided that NewSat Funder would pay legal costs on certain terms and indemnify the SPL and the Companies for all adverse costs. NewSat Funder would receive a “Funding Fee” of 70% of the net resolution sum and any additional amount payable to NewSat Funder in respect of an appeal.

Consideration

The principles governing the appointment of SPLs as summarised by the Court include:

• whether there are matters requiring investigation by a liquidator for the purpose of achieving possible recoveries for creditors;[3]
• whether the GPL has insufficient funds and prospects of obtaining funding for the required investigations;[4]
• whether creditors are prepared to fund investigations solely on condition that a SPL be appointed;[5] and
• if the appointment of a SPL is of “sufficient utility”, just and beneficial to the winding up and creditors as a whole (including by reference to the costs involved and the consequences for likely returns to creditors).[6]

These principles operate in conjunction with the broad terms of s 90-15 of the IPS.

Decision

The Supreme Court dismissed the Plaintiffs’ application. The following matters were decisive:

• The Court rejected the Plaintiffs’ submission that the Funding Deed was beneficial to all creditors, given that the payment of an unusually high Funding Fee would result in priority creditors only receiving a small dividend from the potential recovery while unsecured creditors would receive no dividend;[7]
• The Plaintiffs’ justification for the 70% Funding Fee was “largely unpersuasive”, as the costs of the proceeding were no more than the costs that litigation funders would incur in many substantial representative actions and the Funding Fee was disproportionate to the costs incurred by NewSat Funder;[8]
• The absence of evidence either that other potential funders had been provided with counsel’s advice or estimates of recoveries to permit them to determine the availability of less onerous funding terms or that the proposed SPL had substantially analysed a damages analysis prepared by a person associated with NewSat Funder;[9]
• The absence of evidence of any analysis by the proposed SPL of the appropriateness of entering into the Funding Deed, including when compared with the possibility of negotiating a lower funding fee given Rockgold’s previous expenditure of $3.5 million in funding the proceeding and its resultant exposure to adverse cost risk;[10]
• The insufficient evidence that NewSat Funder had financial substance, given its registration on 1 March 2022 and its $100 in issued capital;[11]
• The Funding Deed’s conferral upon NewSat Funder of an “inappropriate degree of control” over the proceeding, including by compelling the SPL to follow the directions of the Plaintiffs’ solicitors, of which NewSat Funder’s sole director was a partner.[12]

Conclusion

The Jabiru decision is yet another useful distillation of the key considerations applied by courts in determining the appropriateness of a proposed SPL appointment. JWS has considerable experience in this space, both in pursuing and resisting such applications.[13] As referred to in our other article regarding the High Court’s recent decision in Walton confirming a significant enlargement of the use of s 596A examination summonses, the incidence of SPL appointment applications is only expected to increase with a post-COVID19 resurgence in creditor enforcement action.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).