In the matter of BBY Limited (receivers and managers appointed) (in liquidation)

1. [1]

   HER HONOUR: This is an application by the liquidators of BBY Ltd (receivers and managers appointed) (in liquidation) for directions under the repealed sections 479 and 511 of the Corporations Act 2001 (Cth), as preserved by the transitional provisions in Part 10.25 of the Act. The liquidators were appointed in May 2015, initially as administrators but, in June 2015 as liquidators. These proceedings were commenced in August 2015 and the liquidators have sought a series of directions since then.

2. [2]

   BBY was the operating company of a group of companies referred to as the BBY Group which provided a range of financial services including stockbroking, dealing in financial products, asset management, financial management and research. Put shortly, the liquidation revealed that client monies held in over a hundred bank accounts (Client Segregated Accounts or CSAs) had been intermingled, records were incomplete and there was a substantial deficiency in client monies of some $12 million. The directions sought over the course of these proceedings concern how the liquidators should deal with these monies and “Recoveries”, being monies received, or to be received, by BBY since the appointment of administrators including under arrangements with clearing houses, hedge counterparties and other financial service providers.

3. [3]

   Somewhat unusually in these proceedings, the defendants, by and large, are representatives of groups or classes of BBY’s clients. Specifically:

4. [4]

   An application by a liquidator for directions “is not the occasion for the making of order affecting the rights of outsiders … its effect … is merely to sanction a 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: Re Anglican Insurance Limited (2008) 26 ACLC 147; [2008] NSWSC 41 at [38] per Barrett J. A court confines itself, in giving directions, to administrative matters and has no authority to resolve substantive matters in dispute between the liquidator and a third party: ibid. It is ordinarily inappropriate for a direction to be given which will adversely affect identifiable legal rights or interests of other persons or will entitle the liquidator to do so with impunity: Re Southern Cross Airlines Holdings Limited (in liq.) [2000] 1 Qd R 84 at 93; (1998) 16 ACLC 1,393 at 1,400 per Fitzgerald P, with whom McPherson JA and Thomas J agreed. As Goldberg J explained in Re Ansett Australia Limited and Korda (2002) 115 FCR 409; [2002] FCA 90 at [44]:

5. [5]

   The Court may give directions where it will be “of advantage in the liquidation”: Dean-Wilcox v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79 at 81. The Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision or when no legal issue is raised or there is no attack on the propriety or reasonableness of the liquidator’s decision, but may do so where there is such an attack is in prospect: In the matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) [2013] NSWSC 669 at [20] per Black J; In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [17].

6. [6]

   These proceedings have, since inception, been complex and hard fought as demonstrated by three judgments of Brereton J thus far: In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (2016) 116 ACSR 154; [2016] NSWSC 1366; In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (No 2) (2018) 363 ALR 492; [2018] NSWSC 346 and In the matter of BBY Limited (receivers and managers appointed) (in liquidation) (No 3) [2018] NSWSC 1718. In the balance of these reasons, I will refer to these decisions as “BBY (No 1)”, “BBY (No 2)” and “BBY (No 3)” respectively. The directions which the liquidators have sought on this and previous occasions have the potential to affect a large number of clients of BBY. It is appropriate that the Court give directions in this case as it will be of advantage in the liquidation, in particular, to enable the liquidators to progress the distribution of the assets of BBY amongst its many clients.

7. [7]

   The company in liquidation is a trustee. The liquidators, thus, also seek advice under section 63(1) of the Trustee Act 1925 (NSW), which provides:

8. [8]

   As Kiefel J observed in Macedonian Orthodox Community Church St Petka Inc. v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [196]:

9. [9]

   As Lindsay J expressed it in Re Estate Late Chow Cho-Poon; Application for judicial advice (2013) 10 ASTLR 251; [2013] NSWSC 844 at [182]:

10. [10]

    Essentially for the same reasons as already stated in respect of the application for a direction to the liquidators, I consider it appropriate to give directions to the liquidators as trustees.

Non-appearance and non-service of some defendants

1. [11]

   It is common for such proceedings to be brought with notice to the parties affected by the direction, although there is no invariable rule that such an application cannot be brought on an ex parte basis, for example, in Onefone Australia Pty Limited v One.Tel Pty Ltd (2010) 78 ACSR 163; [2010] NSWSC 498, upheld by the Court of Appeal in Deloughery v Weston (2010) 79 ACSR 180; [2010] NSWCA 148.

2. [12]

   A potential difficulty has presented itself as the legal representatives for the second and fifth defendants apparently consider themselves to have ceased to act for their clients but have not filed a notice of ceasing to act. Given the representative quality of the second and fifth defendants, their non-appearance at the hearing of this application meant that not only one but potentially many clients of BBY were not heard on this application.

3. [13]

   Their non-appearance appears to have occurred in the following circumstances. On 2 May 2019, the solicitors for the fifth defendant sent an email to the liquidators:

4. [14]

   However, neither Arnold Bloch Leibler nor Mills Oakley have filed a notice of ceasing to act under rule 7.29 of the Uniform Civil Procedure Rules 2005 (NSW). Failure to do so has the consequence prescribed by rule 7.30:

5. [15]

   As Reeves J noted in QGC Pty Limited v Bygrave (2010) 186 FCR 376; [2010] FCA 659, the solicitor on the record represents an essential component of the court’s ability to maintain control over the litigation before it; the role of the solicitor on the record is critical to the court’s ability to ensure that the cases before it are managed efficiently, promptly and inexpensively: at [53], [57]. In a busy Corporations List, the ability of the court to get through its volume of work in a timely manner is heavily dependent on the legal representatives of the parties promptly filing notices of ceasing to act. Whether this has been done affects whether notice of the application has been brought, or is deemed to have been brought, to the attention of the party in question and thus whether the Court can proceed to determine the application in the event of non-appearance of that party, being a common occurrence in this and all other lists in this Court.

6. [16]

   The problem is compounded because the liquidators have not taken step of serving the Interlocutory Process on the solicitors for the second and fifth defendants, notwithstanding their emails. The liquidator has advised the second defendant’s solicitor of the substance of their proposal. The fifth defendant has not had the benefit of such and advice, although Stephen Vaughan, one of the liquidators, says that the fifth defendant “is the least affected by the proposal as there will be no transfers from the IB product line assets until IB product line tracing claims have been ascertained”. That may be so, but in circumstances where two classes of BBY clients do not appear to be aware of this application, it leaves the Court with some disquiet.

7. [17]

   I am not prepared to make the directions sought in the absence of service of the Interlocutory Process and supporting affidavits on the legal representatives for the second and fifth defendants. Further, although the liquidators’ counsel did not seek such an order, pursuant to the inherent supervisory jurisdiction of the Court over its officers, I require the solicitors on the record for those defendants to provide an affidavit explaining their apparent non-compliance with rule 7.29 of the Uniform Civil Procedure Rules.

Directions sought

1. [18]

   In the interests of making use of the time already taken to hear the application, I propose to set out the directions sought and whether they appear appropriate, but subject to hearing from the second and fifth defendants. As already mentioned, on 13 August 2015, the liquidators commenced these proceedings seeking directions as to how to deal with client monies and Recoveries and how to distribute those monies and Recoveries amongst the various groups or classes of BBY clients. On 21 October 2015, Brereton J made orders by consent establishing an interim regime in respect of the allocation of the liquidators and BBY’s costs amongst the classes of BBY clients including:

2. [19]

   The orders of 21 October 2015 were amended on 23 February 2016 after the fifth defendant had been joined to the proceedings. As later explained by Brereton J in BBY (No 3) at [33]:

3. [20]

   One consequence of the interim regime was that costs were borne according to the cash balances in the various CSAs from time to time. As some classes of customers had cash balances, whilst other classes of customers (such as the fifth defendant) had Recoveries, the former class of BBY clients bore a disproportionate share of the costs.

4. [21]

   On 27 September 2016, Brereton J delivered his first judgment in these proceedings which, inter alia, determined the rights of the fifth defendant. On 5 December 2016, his Honour made orders giving effect to his first judgment, including, in relation to the fifth defendant:

5. [22]

   The liquidators then sought approval of a process to enable the liquidators to verify, adjudicate and process client claims to CSAs and Recoveries in accordance with BBY (No 1) and BBY (No 2), so that distributions could be made to clients. The proposed process would utilise a bespoke online portal specifically designed, constructed and managed by Link Market Services (Link). Link’s estimated fees for attending to this task were some $420,000 plus GST. Unsurprisingly, Link was not prepared to undertake the work unless assured of payment of its fees nor were the liquidators prepared to fund these fees. In BBY (No 3), delivered in November 2018, Brereton J approved the proposed distribution process. At [79]:

6. [23]

   In BBY (No 3), his Honour also considered a range of submissions from the defendants to vary the interim regime for allocation of costs amongst the defendants. His Honour also noted on that occasion that the liquidators were yet to hear from clients in the class represented by the fifth defendant as to whether they wished to pursue an in specie distribution. At [101]:

7. [24]

   On 26 November 2018, Brereton J made orders to give effect to his reasons in BBY (No 3), including reallocating the liquidators’ remuneration costs and expenses among product lines as follows:

8. [25]

   On 25 April 2019, the liquidators apparently wrote to the parties (I say apparently because I do not have the letter) proposing a temporary payment method which would enable partial payment of approved costs going forward so that costs approved would be paid out of the product lines in accordance with Orders 4 and 5 of 26 November 2018, save that the amount that would otherwise be payable out of the IB product line be held back until that payment could be made. It may have been this letter, or a follow-up of it, which prompted the email from the fifth defendant’s solicitor of 2 May 2019.

9. [26]

   On 17 June 2019, the liquidators wrote to the defendants, apart from the fifth defendant, with the following proposal:

10. [27]

    The first, third and fourth defendants consent to a temporary return to the interim regime of 21 October 2015 whilst the second and fifth defendants are silent and, as far as I can tell, unaware of this application.

11. [28]

    In support of the application, Mr Vaughan explained that the practical outcome of the ability of the fifth defendant to opt to trace their entitlement into assets held in the IB product line is that, until the IB product line clients have gone through the claim, proving and adjudication process and elected to make a tracing claim (or not) and have it determined (possibly with an appeal to the Court), not all assets in the IB product line can be liquidated. This means it is not practically possible to make payments of the parties’ remuneration, costs and expenses as the 26 November 2018 orders require those costs to be borne in a roughly pro rata basis from the CSAs and Recoveries of each product line. That is, there would be a payment shortfall equivalent to the IB product line share until sufficient IB product line assets can safely be liquidated.

12. [29]

    Accordingly, Mr Vaughan says it is not practically possible for the liquidators to make payments strictly in accordance with the orders made on 26 November 2018 as there are certain assets, predominantly those in the IB product line, that are not in the form of funds in a bank account. The difficulty for the liquidators is that the distribution process cannot commence in any substantive way until Link Market Services has been paid. For the same reasons, Mr Vaughan says it is not practically possible to transfer funds from the IB product line in accordance with Order 6 made on 26 November 2018. Those orders do not permit the liquidators to pay Link Market Services in full or on time and a practical solution to progress the Distribution Process and to pay Link Market Services is required.

13. [30]

    The liquidators propose, on a temporary basis, to revert to the interim regime of 19 October 2015 in respect of the payment of the costs and expenses of Link in order to continue the Distribution Process. Once the Distribution Process is complete and all remaining assets of the product lines are converted to liquid funds within the control of the liquidators, the liquidators will carry out Orders 2, 4 and 5 made on 26 November 2018 with transfers of funds between CSAs being made to reflect the appropriate sharing of remuneration, costs and expenses as required by those orders. That is to say, it is only the timing of the application of the 26 November 2018 orders which is affected, not the ultimate effect. Mr Vaughan says that there remain assets of sufficient value in each product line to make any necessary transfers between product line CSAs as soon as reasonably practicable. For the IB product line, this will require some assets to be liquidated. On this basis, the liquidators seek the following directions:

14. [31]

    It seems to me that the directions sought by the liquidators are appropriate, as proceeding in this manner will enable the liquidators to progress the approved Distribution Process now, which is in the interests of all clients of BBY, in whatever class. This is an administrative matter. It appears to me to be of advantage in the liquidation to endorse the liquidators reverting to the interim regime of 19 October 2015 on a temporary basis, and then make the necessary adjustments so that the orders made by Brereton J on 26 November 2018 are, in the final result, adhered to. However, for the reasons already given, I am not prepared to make these directions until the second and fifth defendants have been properly served and, if they wish, have been heard.

ORDERS

1. [32]

   For these reasons, I made the following orders:

   1. (1)

      Order the plaintiff to serve the Amended Interlocutory Process and affidavits in support together with a copy of this judgment on the solicitors for the second and fifth defendants by 5.00pm on Friday, 9 August 2019.

   2. (2)

      Pursuant to the supervisory jurisdiction of the Court, order the solicitors for the second and fifth defendants to file and serve an affidavit explaining their apparent non-compliance with rule 7.29 of the Uniform Civil Procedure Rules 2005 (NSW) by 5.00pm on Friday, 16 August 2019, the cost of which is not to be charged to their clients without further order of the Court.

   3. (3)

      Vacate the listing of the Interlocutory Process and the Amended Interlocutory Process on 12 August 2019.

   4. (4)

      Stand the matter over to 2.00pm before Rees J on 19 August 2019.

   5. (5)

      Grant liberty to the parties to apply on one day’s notice exercisable by email to the chambers of Rees J, copied to all other parties.

2. [33]

   On 19 August 2019, this matter came before the Court for the making of final orders on the plaintiffs’ Amended Interlocutory Process. I was satisfied, having read the further evidence filed in accordance with the directions made on 7 Augusts 2019, that the second and fifth defendants had been properly served and did not wish to be heard on this application. I therefore made orders in the form sought by the plaintiffs, as set out in [30] above.

3. [34]

   Also on that occasion, counsel for the plaintiffs informed the Court that the Amended Interlocutory Process moved upon had cited the incorrect power for giving directions to the liquidators in these proceedings commenced in 2015, in light of the transitional provisions in Part 10.25 of the Corporations Act enacted in conjunction with the Insolvency Practice Schedule. I am satisfied, however, in light of the authorities cited in the judgment that the result of the judgment would be identical under either the repealed sections 479 and 511 or the Schedule: see, for example, In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [16]. I have amended [1] and [4] of these reasons accordingly.