Forex Capital Trading Pty Ltd (in liquidation) v Invesus Group Limited

In these proceedings, the plaintiff, Forex Capital Trading Pty Ltd (in liq) (FXCT), seeks damages in the amount of $43,645,127.26 for what is said to be a breach by the defendant, Invesus Group Limited (IGL), a public company registered in Gibraltar and FXCT’s ultimate parent, of its obligations under a deed poll dated 17 March 2019 (the Letter of Comfort) that IGL executed in favour of FXCT and its directors. The question whether FXCT is entitled to recover the amount claimed turns on the correct construction of the Letter of Comfort.

Prior to its liquidation, FXCT carried on a business under an Australian Financial Services licence (AFSL) of issuing to retail customers over the counter derivative products including contracts-for-difference and foreign exchange products. The products offered to customers allowed them to trade on whether the value of an underlying asset (such as a foreign currency or commodity) or financial instrument would increase or decrease over a defined period.

In October 2018, the Australian Securities and Investment Commission (ASIC) commenced an investigation into FXCT and its director, Mr Shlomi Yoshai, in relation to alleged contraventions of various provisions of the Corporations Act 2001 (Cth) (the Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) relating principally to misleading and deceptive and unconscionable and dishonest conduct.

On 12 March 2019, ASIC commenced proceedings in the Federal Court of Australia (proceeding VID218/2019) against FXCT and Mr Yoshai seeking freezing orders restraining FXCT from transferring overseas sums of money that had been paid to it by customers. It also sought an order appointing a receiver to FXCT.

The freezing orders sought by ASIC were made ex parte by Middleton J on the day the proceedings were commenced, at which time the proceedings were made returnable on 18 March 2019.

On 17 March 2019, IGL executed the Letter of Comfort, which was in the following terms:

On 18 March 2019 (the day after the Letter of Comfort was executed), Mr Alistair McKeough, the solicitor for FXCT, swore an affidavit in opposition to a continuation of the orders made by Middleton J. In that affidavit, Mr McKeough refers to the Letter of Comfort and gave evidence of IGL’s financial position.

Mr McKeough also gave evidence that:

Despite Mr McKeough’s affidavit, on 19 March 2019, Middleton J continued the freezing orders. They were extended further at a number of subsequent hearings. It is unclear whether ASIC continued to press for an appointment of a receiver. In any event, no such order was made.

On 15 July 2020, ASIC commenced proceedings in the Federal Court against FXCT and Mr Yoshai (proceeding VID462/2020). Relevantly, it sought declarations that FXCT had contravened certain provisions of the Corporations Act and ASIC Act and orders for the payment by FXCT of a civil penalty that was ultimately agreed at $20 million.

Shortly after the proceedings were commenced, on 31 July 2020, FXCT’s AFSL was cancelled, with the result that it could no longer carry on business.

The declarations and other orders sought by ASIC were made by consent by Middleton J on 29 April 2021. His Honour delivered reasons for making the orders on 28 May 2021: see Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570. In relation to most of the contraventions, FXCT admitted that the contraventions had occurred in specific instances in relation to eight identified customers. FXCT also admitted and Middleton J accepted that it had engaged in a system of conduct or pattern of behaviour that amounted to unconscionable conduct in contravention of s 12CB of the ASIC Act. In relation to that contravention, Middleton J said (at [132]):

The day before the orders were made, on 28 April 2021, FXCT and IGL entered into a convertible loan agreement under which IGL agreed to provide funds to enable FXCT “to meet its obligations in respect of the penalty, legal costs and/or any other amounts imposed on it as a result of a settlement” of the proceedings that had been commenced by ASIC. The agreed penalty of $20 million that had been approved by Middleton J was paid by IGL pursuant to that agreement.

On 26 June 2021, Mr Yoshai signed a solvency declaration as the sole director of FXCT.

On 27 June 2021, Mr Abramo Da Via, the sole director of Forex Capital Trading Limited, a company incorporated in Vanuatu and FXCT’s immediate holding company, passed a special resolution of FXCT that FXCT be wound up voluntarily. Mr Daniel Woodhouse and Mr Nathan Thomas of FTI Consulting were appointed as joint and several liquidators of the company.

On 24 September 2021, the liquidators sent an email to former customers of FXCT in which they said:

Following that email, the liquidators received several claims totalling $948,301.

On 20 September 2021, the liquidators wrote to IGL referring to the judgment of Middleton J and the fact that they had received a number of investor claims. The letter concluded:

Although there was further correspondence between the liquidators and IGL, the liquidators received no substantive response to their request for further funding. On 12 November 2021, they applied to the Federal Court under s 459P of the Corporations Act to have FXCT wound up in insolvency pursuant to s 459A of the Corporations Act. That order was made on 7 December 2021.

On 5 May 2022, the liquidators sent a report to former customers of FXCT setting out the results of an investigation they had undertaken in relation to the affairs of FXCT. The investigation involved the liquidators taking a randomised sample of 58 customers and investigating whether those customers had claims against the company. As part of the investigation, the liquidators’ staff reviewed over 680 individual telephone calls between the company’s representatives and some (but not all) of the selected former customers. The investigation also included a review of other general information available to the liquidators and the previous findings of Middleton J. The purpose of the review was to determine whether the claims could be made out by each of the selected former customers and so, inferentially, by all former customers. The report concluded:

On the same day, the liquidators sent a notice to former customers. After recording that they had “completed a detailed investigation into the affairs of the Company”, the liquidators said:

On 9 May 2022, the liquidators filed an originating process in the Federal Court pursuant to s 90‑15(1) of Schedule 2 (Insolvency Practice Schedule) Corporations to the Corporations Act. That section gives the court power to “make such orders as it thinks fit in relation to the external administration of a company”. The effect of the orders sought by the liquidators was to permit them to send letters to former customers of FXCT inviting them to submit proofs of debt in a form proposed by the liquidators for the net trading losses they suffered during the period 1 January 2017 to 1 April 2019 (the period during which the contravening conduct occurred) and to permit the liquidators to admit those proofs of debt for 85 percent of the amount claimed notwithstanding that the customers had not established the factual basis of their claims. As the letter that the liquidators sought permission to send to customers explained:

The originating process was served on IGL. In response IGL said:

The orders sought by the liquidators were made by Banks-Smith J on 17 May 2022. Her Honour delivered reasons for making the orders on 23 May 2022: see Woodhouse (Liquidator) in the matter of Forex Capital Trading Pty Ltd (In Liq) [2022] FCA 600.

In all, 1729 proofs of debt were lodged with the liquidators in accordance with the orders of the Federal Court. The total amount of those proofs of debt was $51,347,208.38. Again, in accordance with the orders of the Federal Court, the liquidators admitted proofs of debt for 85 percent of the amount claimed, making a total $43,645,127.26.

On 22 June 2022, Mr Woodhouse in the name of FXCT, sent a letter of demand to IGL demanding the payment of $43,645,127.26 under the Letter of Comfort.

IGL responded to that letter on 29 June 2022. It said:

On 11 August 2022, FXCT commenced these proceedings claiming damages in the amount of $43,645,127.26.

The principles applicable to the interpretation of the Letter of Comfort are the same as those that apply to a commercial contract: for discussion, see P Herzfeld and T Prince, Interpretation, 2nd ed, 2020, Law Book Co, para [30.50]. See also Zhu v Treasurer of New South Wales (2004) 218 CLR 530; [2004] HCA 56 at [82]; Intel Corporation v Unwired Group Ltd [2008] FCA 1927 at [32]-[33]. Those principles were explained in these terms by French CJ, Nettle and Gordon JJ in Wright Prospecting Pty Ltd V Mount Bruce Mining Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47]ff:

The central issue in the case is whether the amount of $43,645,127.26 claimed by FXCT under the Letter of Comfort falls within the description “any debts, including judgment debts, incurred by FXCT … prior to or after the date of this letter in respect of FXCT’s customers”. Unless that sum (or, more accurately, the various amounts that make up that sum) has that character, the Letter of Comfort imposes no obligation on IGL to provide or to procure from external sources financial support to meet it.

Apart from the use of the word “debts”, the language of the Letter of Comfort and its commercial purpose shed little light on the answer to the question whether an admitted proof of debt had the requisite quality. The undertaking in the third paragraph of the Letter of Comfort is to provide financial support to meet “any debts, including judgment debts”. That phrase clearly assumes that there are “debts” for the purposes of the Letter of Comfort other than judgment debts. Moreover, as is apparent from the second paragraph of the Letter of Comfort, the purpose of the letter was to ensure that FXCT and its director(s) “are able to satisfy any obligations arising from court proceedings or flowing from ASIC’s investigation”. Consequently, the word “debts” is not limited to obligations arising from court proceedings. It is also apparent from the terms of the Letter of Comfort that the undertaking was intended to cover the settlement of claims arising from the ASIC investigation; and that explains why it is drafted in a way that covers debts other than judgment debts and refers to obligations arising otherwise than as a result of court proceedings. But these points leave unresolved the question whether the Letter of Comfort was intended to cover admitted proofs of debt in an insolvency.

FXCT appeared to suggest in some of its submissions that “debts” should be interpreted broadly to include claims. For example, in its written submissions FXCT said (at para [48]):

However, that submission did not appear to be pressed by FXCT; and if it was, it must be rejected. A debt is not the same as a claim. And plainly the purpose of the Letter of Comfort was not to require IGL to pay claims for unascertained amounts for which FXCT had not been found or agreed to be liable. The context of the Letter of Comfort was that FXCT faced potential claims, which, if they resulted in crystallised liabilities, it would not be able to meet. The purpose of the Letter of Comfort was to ensure that FXCT would be able to meet those liabilities if and when they crystallised. It was not to permit FXCT to pay amounts in respect of uncrystallised claims.

IGL, on the other hand, submitted that the evident purpose of the Letter of Comfort was to enable FXCT to continue trading notwithstanding that it faced claims or potential claims from former customers. The Letter of Comfort was not designed specifically to provide a mechanism to compensate former customers who had suffered a loss. Consequently, on its correct construction, the Letter of Comfort was not intended to operate once FXCT was placed into liquidation, since on liquidation the purpose of the Letter of Comfort could no longer be achieved. Consistently with that conclusion, IGL submitted that the word “debts” should be construed to mean “debts which are settlement amounts or judgment sums arising in connection with the ASIC investigation underway at the time the freezing orders were sought” (Defendant’s Submissions, para [4(b)]). By that, IGL appears to mean that “debts” should be interpreted to mean debts arising from settlements entered into and judgments obtained before FXCT was placed into liquidation.

Several other matters are said to support that conclusion. The Letter of Comfort was given in favour of FXCT and its directors, suggesting that it was intended to operate while the directors remained in control of the company. It was for a fixed period, even though a liquidation could continue for a number of years. Any amount paid under the Letter of Comfort would be available for distribution to the creditors as a whole in accordance with the Corporations Act, not simply the creditors whose debts gave rise to the obligation to make the payment, which was not the purpose of the Letter of Comfort.

I do not accept IGL’s submissions on this point. One difficulty with the interpretation for which it contends is that it requires reading words into the Letter of Comfort that are not there. A Court will only do that to avoid an absurdity and where what is intended is clear: QBT Pty Ltd v Wilson [2024] NSWCA 114. Moreover, it is not entirely correct to say that the purpose of the Letter of Comfort was to ensure that FXCT remained solvent and could therefore continue to trade, at least until the Letter of Comfort expired. IGL did not undertake to provide financial support to meet all FXCT’s liabilities. It was at least theoretically possible for FXCT to become insolvent notwithstanding the Letter of Comfort. The timing of the Letter of Comfort and its subject-matter suggest that its primary purpose was to enable FXCT to resist the interlocutory orders sought by ASIC, which included an order for the appointment of a receiver.

The fact that the Letter of Comfort is expressed to operate for a fixed period does not support the view that it was not intended to operate if FXCT was placed into liquidation. It simply supports the view that the Letter of Comfort only covered debts that were incurred during a certain period. In addition, it could not have been intended that IGL could avoid its obligations under the Letter of Comfort by causing FXCT to be placed into liquidation, which is what happened in this case.

As IGL pointed out, on the liquidation of FXCT, any amount recovered under the Letter of Comfort will be for the benefit of all creditors and not only the creditors whose proofs of debt were accepted. But that anomaly is not sufficient to justify reading into the Letter of Comfort words that are not there.

The primary position of both parties was that the answer to the central issue in the case turned on the ordinary meaning of the word “debts”; and it is to that issue that most of their submissions were directed. Although the parties took somewhat different approaches to the meaning of that word, ultimately it seemed to be common ground that a debt was a liability to pay an ascertained amount or an amount that could be ascertained by arithmetic calculation or that was “fixed by any scale of charges or other positive data”: see Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138 at 142 per Knox CJ and Starke J, quoting WB Odgers, The principles of pleading and practice in civil actions in the High Court of Justice, 5th ed, 1903, Stevens and Sons, Limited at 41. Or, to use the somewhat different language of Olsson J in Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433 at [73], referring to the decision of Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 in the context of the insolvent trading provisions of the then Corporations Law, “a debt is taken to have been incurred when, by its conduct or operations, a company has necessarily subjected itself to a conditional, but unavoidable obligation to pay a sum of money at a future time”. Relevantly, a debt involves a liability to pay an amount and the amount must be ascertained or ascertainable. A “liability” in this sense is an existing legal obligation to pay the relevant amount.

Accepting that “debts” has its ordinary meaning, FXCT advanced two arguments for why the $43,645,127.26 consisted of debts falling within the third paragraph of the Letter of Comfort, although the two arguments were not always clearly separated in its submissions. The first was that the admission of the proofs of debt itself created debts owed by FXCT to the former customers whose debts were admitted. The second was that the liquidators’ conclusions on the existence and the amount of FXCT’s liability to former customers were binding on FXCT and IGL and were properly characterised as conclusions that FXCT owed debts to its former customers.

There is a suggestion in some of the submissions made by IGL that even if the admission of a proof of debt created a liability, it did not establish a liability for an ascertained or ascertainable amount. That was said to be so for two reasons. One was that the procedure adopted by the liquidators permitted customers to lodge a further proof of debt at a later stage, with the result that admission of the proof of debt did not establish the amount of the liability to the customer. The other was that admission of a proof of debt did not establish a liability to pay the amount admitted or any specific amount. At most, it created a liability to pay an amount that could only be ascertained once all proofs of debt had been lodged and admitted and the amount available for distribution was known.

I do not accept the first of these arguments. The fact that former customers may have been entitled to lodge proofs of debt in respect of other amounts does not alter the fact that, on admission of a proof of debt lodged by a former customer in accordance with the procedure approved by the Federal Court, there was an ascertained amount to which that customer was entitled.

The second argument is tied up with the nature of any liability arising from the admission of the proof of debt, which is addressed below.

It is FXCT’s submission that admission of 85 percent of the amount claimed established a liability to pay that amount in much the same way as a judgment or a settlement for that amount would have established a liability to pay that amount. The fact that the process for establishing the liability was different in the context of a liquidation made no difference.

I cannot accept FXCT’s submission, largely for the reasons advanced by IGL. FXCT’s submission fails to give sufficient weight to the principles relating to proofs of debt under the Corporations Act.

The primary task of a liquidator is to get in the assets of the company and to distribute them in accordance with the scheme set out in Division 6 of Part 5.6 of the Corporations Act. Under that scheme “all debts payable by, and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company”: s 553(1). Relevantly, a creditor is entitled to prove not just for debts but for all other types of claim.

The scheme proceeds on the basis that “recognition of a creditor (as distinct from a mere claimant to creditor status) will be determined by the adjudication of a proof of debt”: McMillan Investment Holdings Pty Ltd v Morgan [2023] FCAFC 9 at [100]. In adjudicating a proof of debt, the liquidator acts in a quasi-judicial capacity “according to standards no less than the standards of a court or judge”: ibid, referring to Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 (Tanning (HCA)) at 338-9 per Brennan and Dawson JJ. In accepting or rejecting a proof of debt, the liquidator is not acting as an agent of the company, but rather is undertaking a statutory task as an officer of the Court: Tanning (HCA) at 340-1.

In administering the scheme, the liquidator is not determining the liabilities of the company. Rather, the liquidator is determining the rights of creditors or persons who claim to be creditors to participate in the scheme. As Barrett J explained in Re HIH Casualty and General Insurance Ltd [2005] NSWSC 240; 215 ALR 562 at [119]:

The Corporations Act gives a creditor a right of appeal to the Court against a decision of a liquidator to reject a proof of debt: see also Corporations Regulations 2001 (Cth) reg 5.6.54. But in that case, it is the liquidator and not the company that is the respondent to the appeal: see Re Jay-O-Bees Pty Ltd (in liq); Rosseau Pty Ltd (in liq) v Jay-O-Bees Pty Ltd (in liq) (2004) 50 ACSR 565 at [52-53] citing Jones v Brien (1994) 13 ACLC 99 per McLelland CJ in Eq at [99]. And if successful, the order of the Court is an order directing that the liquidator admit the proof of debt, not an order that the company is liable to pay a certain sum of money: Sturesteps v AG McGrath [2010] NSWSC 896 at [54] per Brereton J.

Accordingly, when a liquidator admits a proof of debt, he or she is not creating a new liability of the company in substitution for an existing liability. Rather, he or she is deciding who is entitled to participate in the distribution of the assets of the company in accordance with the scheme set out in the Corporations Act. The underlying liabilities of the company remain unaffected by the decision, although no action can be taken in respect of them without the leave of the Court. And even if it could be said that admission of a proof of debt creates some form of liability, it is not a liability of the company and it is not a liability to pay the amount admitted. Rather, it is a liability of the liquidators to pay the creditor his or her share of the funds realised by the liquidators. That amount is not ascertained at the time the proof of debt is admitted and cannot be ascertained until all proofs are dealt with and all assets realised. It is certainly not necessarily the amount of the proof of debt.

It follows that the admission of the proofs of debt cannot create debts that fall within the meaning of the Letter of Comfort. The amount admitted to proof is not a liability of the company and any liability to pay an ascertained amount does not arise until all of the assets of the company are realised and all proofs of debt are determined.

FXCT’s alternative argument is that the conclusion of the liquidators on the existence and amount of FXCT’s liability to its former customers is binding on FXCT and is therefore sufficient to create a debt for the purposes of the Letter of Comfort.

In support of that submission, FXCT relied on two English authorities and on an extract from KR Handley, Spencer Bower and Handley: res judicata, 5th ed, 2019, LexisNexis (Spencer Bower and Handley).

The first authority was Craven v Blackpool Greyhound Stadium & Racecourse, Ltd [1936] 3 All ER Rep 513 (Craven). In that case, a director of a company, which had gone into voluntary liquidation, lodged a proof of debt for arrears in salary and damages for wrongful dismissal. The liquidator allowed the proof but for an amount with which the director was dissatisfied. The director then commenced court proceedings against the company for damages. All members of the Court of Appeal agreed that the proceedings should be stayed. Greer LJ gave the following reason (at 515-6):

Scott LJ went further and said that “If [the creditor] proves in the winding up, in my view he loses his right of action”: at 516. Eve J gave the following explanation for the result (at 517):

The second authority relied on by FXCT is Bank of Credit and Commerce International (Overseas) Ltd (in liquidation) v Habib Bank Ltd [1998] 4 All ER 753 (Habib Bank). In that case, the plaintiff company, which was in liquidation, obtained default judgment against the defendant. The defendant applied to have the default judgment set aside relying on a set-off for which it had sought to prove in the winding-up of the company, but which had been rejected by the liquidator. The court rejected the application. In doing so, Park J gave the following explanation (at 760-1):

Spencer Bower and Handley (at [2.20]) stated the position in these terms:

In support of the proposition stated in the first sentence, Spencer Bower and Handley relied on Habib Bank and the earlier authority of Brandon v McHenry [1981] 1 QB 538 (Brandon). In that case, the appellant had obtained a judgment debt by consent against the respondent, who was subsequently made bankrupt. The appellant lodged a proof of debt with the trustee in bankruptcy, which was rejected on the ground (that was available to the trustee) that there was no underlying debt on which the judgment was based. The bankruptcy was subsequently annulled and the appellant sought to enforce the judgment debt. The Court of Appeal held that he was not entitled to do so, since he was bound by the decision of the trustee in bankruptcy.

IGL submits that one difficulty with the FXCT’s argument is that even assuming that the conclusions of the liquidators are binding on IGL, they are not conclusions that can alter the underlying nature of the liability. Here, the relevant liabilities are liabilities for unliquidated amounts arising from breaches of various statutory obligations. The fact that the liquidators have quantified those amounts does not change what are unliquidated liabilities to liquidated ones; and unliquidated liabilities are not “debts”: see Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358; [2008] VSCA 26 at [81] per Nettle JA (with whom Ashley and Dodds-Streeton JJA agreed); Arnold v Forsythe [2012] NSWCA 18 at [48] per Sackville AJA (with whom McColl and Young JJA agreed).

I doubt that this point is fatal to FXCT’s claim. If it is accepted that the decision of the liquidators concerning the existence and amount of FXCT’s liability is binding on IGL, then it seems to me that that is sufficient to amount to a debt for the purposes of the Letter of Comfort, even if the liability is not a liability for a liquidated amount. The Letter of Comfort was given to enable FXCT to meet ascertained liabilities, whatever their precise legal character. Consequently, “debts” should be interpreted to cover any liability that has that quality.

There are, however, other difficulties with FXCT’s argument.

First, it is not correct to say that in admitting a proof of debt, the liquidators are making a decision concerning the amount of the underlying liabilities of the company. Although the amount for which a proof of debt is admitted will normally correspond to the amount for which the company is liable, as the facts of this case demonstrate, that will not always be so. The amounts for which the customers were entitled to prove in this case did not correspond to any liability the company might have had. Rather, they were amounts determined in accordance with orders made by the Federal Court to avoid the necessity of having to make any determination in relation to the company’s actual liabilities.

Conversely, there are some liabilities that may be enforceable against the company which are not provable in a liquidation. as Brennan and Dawson JJ explained in Tanning (HCA) at 339):

Secondly, it is not clear how the decision of the liquidators became binding on FXCT, let alone IGL. The authorities relied on by FXCT do not assist its case.

It is apparent from the decision in Craven that the creditor in that case had a choice whether to commence proceedings or to seek to prove in the liquidation the amount he claimed. Having chosen the latter course, he was bound by that decision. The precise reason for that does not emerge clearly from the judgments of the court. But the decision might be explained on the basis of an election: see O’Connor v S P Bray Ltd (1936) 36 SR (NSW) 248, referred to with approval on the point in the joint judgment of Kiefel CJ, Edelman, Steward and Gleeson JJ (Gageler J dissenting) in Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 [2022] HCA 38; (2022) 406 ALR 632 at [62]. In any event, the decision has no application in the present case. The legislative regime in that case was different and the outcome did not depend on whether the admitted proof of debt was properly characterised as a determination concerning the liabilities of the company.

In Habib Bank, Park J gave two reasons for his conclusion. The first was that an issue estoppel arose between Habib Bank and BCCI (O). The second was that his conclusion was an implied corollary of the applicable insolvency rules.

The second of these reasons can be put to one side, since it depends on the particular (unidentified) insolvency rules applicable in that case.

As to the first of Park J’s reasons, that reason depended on a conclusion that the decision of the liquidator on the proof of debt was a binding decision concerning BCCI (O)’s liability to Habib Bank. However, the only authority Park J cites in support of that decision is Brandon. As I explain below, the decision in Brandon turned on the application of a provision of the Bankruptcy Act 1869 (UK), not on the application of any general principle that might apply in this case. In any event, as I have sought to demonstrate, whatever the position may be in England, it is not possible to say that the admission of a proof of debt under the Corporations Act involves a finding of liability on the part of the company that is binding between the company and the creditor, let alone between the company and a third party.

As I have said, the commentary in Spencer Bower and Handley and the decision in Hadid Bank rest principally on the decision of the English Court of Appeal in Brandon. However, as the judgments of Esher MR and Fry LJ make clear, that decision turned on s 81 of the Bankruptcy Act 1869 (UK) which relevantly provided that:

The question in that case was whether the rejection of the proof of debt was an “act” of the trustee within the meaning of the section. The Court of Appeal held that it was. But there is no equivalent to s 81 in the Corporations Act, and consequently the reasoning of the Court of Appeal has no application in this context.

Third, FXCT’s submission is inconsistent with the decision of the Full Court of the Supreme Court of South Australia in Duke Group Ltd (in liq) v Arthur Young (Reg) (No 2) (1991) 4 ACSR 355 (Duke Group). In that case, the plaintiff, formerly known as Kia Ora Gold Corporation NL (Kia Ora), entered into a transaction, commonly referred to as a “reverse takeover”, with the Duke Group of companies by which it issued shares to certain members of the Duke Group and received other payments in exchange for assets of the Duke Group, with the result that the Duke Group of companies obtained control of Kia Ora. The defendant, Arthur Young, prepared an expert report in connection with the transaction. The transaction was not a success and Kia Ora, which had been placed in liquidation, sued Arthur Young for breaches of duty they were said to owe in connection with the preparation of their report. As part of its damages, Kia Ora claimed an amount of $42,572,296 “being the approximate excess of liabilities over assets upon the liquidation of Kia Ora”. The liabilities it identified in the statement of claim were “no more or less than a list of the proofs of debt lodged in the liquidation” (to quote from the judgment of Perry J at first instance in Duke Group Ltd (in liq) v Arthur Young (Reg) (No 4) (1991) 55 SASR 24 at 28). During the hearing, Arthur Young sought to amend their defence to dispute the liabilities identified in the statement of claim on the basis that some of the amounts that had been admitted to proof by the liquidator were manifestly incorrect. The question whether leave to make the amendments should be granted turned on whether the admission of the proofs of debt conclusively established the existence and quantum of the relevant liabilities. It was agreed that Perry J should resolve that question on a final basis, which he did in favour of Arthur Young.

The Full Court upheld Perry J’s judgment on that point. As Olsson J (with whom Matheson J at 369 and Duggan J at 407 agreed on the point) explained (at 397):

FXCT sought to distinguish Duke Group on several grounds. In the alternative, it submitted that Duke Group was plainly wrong and should not be followed. I do not accept either of those submissions.

The first ground of distinction relied on by FXCT is that Duke Group was concerned with the question whether Kia Ora had incurred liabilities for the purposes of assessing its claim for damages whereas the present case concerns the meaning of the word “debts” in the Letter of Comfort. The second was that in Duke Group, it was Arthur Young’s contention that the admitted proofs of debt contained manifest errors which raised the potential for double recovery. No such suggestion was made in this case. It was ultimately common ground that the proofs of debt had been properly admitted in accordance with the orders of the Federal Court, and the liquidators had been astute in preventing the possibility of double recovery. The third was that in this case the company was the wrongdoer and was in a position to settle claims against it whereas in Duke Group the alleged wrongdoer was the third party said to be bound by the admission of the proof of debt.

In my opinion, none of these points of distinction is relevant. The question in Duke Group was whether the admission of a proof of debt by the liquidator of Kia Ora established a liability on the part of Kia Ora for the amount admitted. The Full Court held that it did not, principally because an order for the winding up of the company and inferentially the decision of the liquidator did not extinguish the underlying liability (in contrast to a judgment or settlement agreement). Consequently, if in proceedings outside the liquidation a question arose concerning the existence or amount of the liability, that question could not be regarded as resolved by the decision of the liquidator on that question in the liquidation. That is particularly so where the liquidator claims the benefit of that decision. That reasoning did not depend on whether the liquidator had made a manifest error in admitting the proof of debt or on the possibility of double recovery. Nor did it depend on the meaning of the word “debt” and the context in which the question arose. Rather, it depended on whether in truth the determination of the liquidator operated as a determination of the existence of a liability of the company for all purposes or only for the purpose of determining who was entitled to participate in the distribution of the assets of the company by the liquidator.

In my opinion, the conclusion in Duke Group was not plainly wrong. It was entirely consistent with the nature of a winding up and the character of proofs of debt described earlier in this judgment.

An alternative argument advanced by FXCT was that the process by which the liquidators allowed customers to submit proofs with a 15 percent discount for the value of the claim which the liquidators then accepted amounted to a settlement for the purposes of the Letter of Comfort.

I cannot accept that submission. There was no settlement of the claims by the former customers against FXCT. At most, there was a settlement between the liquidators and the former customers of the amounts for which the former customers were entitled to prove without having to establish an underlying liability of FXCT. For the reasons already given, that does not establish a liability on the part of FXCT to pay each of the former customers an ascertained or ascertainable amount.

It follows that the proceedings must be dismissed with costs.