McGrath & Anor re HIH Insurance Ltd & Ors

On each of 4 August 2005 (see McGrath re HIH Insurance Ltd [2005] NSWSC 787) and 26 October 2005 (see McGrath re HIH Insurance Ltd [2005] NSWSC 1087), I ordered that, until further order, reasons for judgment then delivered to the applicants in the absence of the public be kept confidential, not be posted on the Caselaw New South Wales website and not be accessed by any person.

The reasons for judgment related to applications made by the liquidators of 41 companies in the HIH Group with respect to a number of matters concerning then pending litigation the liquidators had caused to be instituted against other persons. The applications and the reasons for judgment merited confidentiality for reasons explained in McGrath re HIH Insurance Ltd [2005] NSWSC 731.

The litigation in question has now concluded. The liquidators accept that there is accordingly no longer any basis for maintaining confidentiality in relation to the reasons of 4 August 2005 and 26 October 2005 (or in relation to more recent reasons of 27 April 2007), except as to certain isolated passages referring to communications in which legal professional privilege is considered by the liquidators to subsist.

The liquidators have therefore asked that the confidentiality and non-publication regime be terminated, subject only to ongoing protection for the isolated passages I have mentioned.

I therefore order (a) that the orders with respect to confidentiality and non-publication made on 4 August 2005 in relation to reasons for judgment delivered to the applicants in the absence of the public on that day be revoked; (b) that the reasons for judgment so delivered on 4 August 2005 be published as Appendix 1 to reasons for judgment of today’s date; (c) that the orders with respect to confidentiality and non-publication made on 26 October 2005 in relation to reasons for judgment delivered to the applicants in the absence of the public on that day be varied so as to permit publication of and access to the redacted form thereof contained in Appendix 2 to reasons for judgment of today’s date; (d) that the said redacted form of the reasons for judgment so delivered on 26 October 2005 be published as Appendix 2 to reasons for judgment of today’s date; (e) that the orders with respect to confidentiality and non-publication made on 27 April 2007 in relation to reasons for judgment delivered to the applicants in the absence of the public on that day be varied so as to permit publication of and access to the redacted form thereof contained in Appendix 3 to reasons for judgment of today’s date; (f) that the said redacted form of the reasons for judgment so delivered on 27 April 2007 be published as Appendix 3 to reasons for judgment of today’s date.

Under the proposals to be implemented by means of the several proposed agreements, the funding companies will make funds available to assist the prosecution of certain claims by certain claimant companies. The emphasis, in the first instance, will be upon attempts to reach a compromise on what has been termed a “global basis” – that is, with all claimant companies and all parties against whom claims are made participating in attempts to compromise all claims.

If particular litigation assisted by funding is successfully prosecuted and results in an award of damages to a particular claimant company, the net proceeds after costs and the like will, under the proposed arrangement, be applied, first, in repaying amounts provided by the relevant funding company in respect of that litigation, second, in paying interest at court rates to that funding company on the funding provided by it and, third, in providing to the funding company a premium equal to one-half of the balance of the net proceeds, with the remainder of that balance accruing to the benefit of the claimant company. The same procedure will be followed if a one-to-one settlement yielding monetary proceeds is achieved between the particular claimant company and a particular defendant or group of defendants.

If a global settlement (or a partial settlement involving two or more proceedings) is achieved, the resultant net proceeds will be split among the several claims concerned in such manner as the relevant companies agree or, in default of agreement, according to a determination made by an expert panel made up of several lawyers, one representing the interests of each of the claimant companies. The need for this fall-back mechanism arises from the fact that all the claimant companies have the same liquidators – which means, of course, that the respective lawyers will act as experts, according to their own informed assessments, rather than on the instructions of any client. I am told that the lawyers in contemplation have agreed to act in this way. Once a portion of proceeds has been allocated by this process to a particular settled claim, that portion will in turn be allocated among the separate claimant companies in relation to that claim by a similar process.

No funding company is also a claimant company. Each funding company is thus an outsider to the litigation it is intended to fund but does have an interest in the outcome of that litigation as a creditor of the claimant company to which it will provide financial support. It is that creditor status of a funding company as against the claimant company to be financially assisted by it and the interest that the creditor status entails that distinguish the funding company from a mere provider of speculative litigation funding.

For the funding companies, the advantages seen by the liquidators are the opportunity to receive the premium over and above the sum outlaid by way of financial assistance (plus repayment of the assistance and interest thereon) and the opportunity to share, along with all other creditors, in the remainder of any enhanced recoveries flowing from implementation of the proposal. Against that stands, of course, the risk that a funding company may lose altogether the money it outlays.

For the claimant companies needing financial assistance to pursue claims, the advantages identified by the liquidators as advantages to be had from the proposal are obvious enough: they will be able to pursue litigation that their separate financial resources do not allow them to pursue. Each claimant company given financial assistance will grant a charge over its assets generally to the funding company by which the financial assistance is given.

The other group of companies to be considered consists of the claimant companies which do not need and will not be given financial assistance. The only implications of the proposal for them is that they will be parties to the arrangements for the division of proceeds where a global settlement or a settlement of several claims on an undissected basis is achieved. The liquidators see advantages for them in so participating because of the benefits that will come from concerted action in pursuing settlement possibilities rather than allowing matters to be fragmented. Each claimant company pursuing separately its own attempt to settle would, it is considered, be less effective than the combined group. The division of proceeds mechanisms are, in any event, regarded by the liquidators as equitable.

This brings me to the approach that the court is to take in deciding whether to grant approval under s 477(2B). The aim of the provision is clearly enough, to ensure that the court exercises some oversight of a liquidator’s actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court’s assessment must be made in the light of the purposes for which liquidators’ powers exist. One over-riding purpose is to serve “the interests of those concerned in the winding up – here the creditors” ( Re Spedley Securities Ltd (1992) 9 ACSR 83 per Giles J); the other is to do whatever needs to be done “for the proper realisation of the assets of the company” or to assist its winding up ( Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 per Young J). The court generally does not concern itself with the commercial desirability of the transaction. As Giles J said in the Spedley Securities case (above) at pp.85-6: “… the court pays regard to the commercial judgment of the liquidator. That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities (Australia) Ltd [1973] 2 NSWLR 207 at 231–2, the court is necessarily confined in attempting to second guess a liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct.”

Although this was said in relation to s 477(2A), I consider the statement to be equally applicable to s 477(2B), even though that section focuses particular attention on the need to ensure that contractual provisions as to timing do not cut across the general expectation that winding up will proceed in as expeditious a fashion as circumstances allow: Re GA Listings & Maintenance Pty Ltd (above); Re CIC Insurance Ltd (2001) 38 ACSR 181.

Accepting that the court is not concerned, in the s 477(2B) context, with matters of commercial wisdom and merit, the submissions made on behalf of the liquidators show that two questions are seen to arise in relation to the overall proposal, while a third arises in relation to the particular matter of the grant of security by financially assisted claimant companies to the funding companies by which they are assisted. The first question is as to the powers of the liquidators to commit the various companies to the courses of action the agreements contemplate. The second is as to the fact that the same persons are liquidators of all the companies intended to be parties to the relevant agreements. The third question is as to the need for the leave of the court under s 532(2) and the ability of the court to grant leave in the particular circumstances. I shall consider these questions in turn.

The question of powers arises in relation to two classes of companies – funding companies and the financially assisted claimant companies. In relation to the latter, the relevant feature of the arrangement, apart from borrowing and the giving of security (which are clearly within the power conferred on liquidators by s 477(2)(g)), is the assignment to the relevant funding company of any proceeds of settlement of action, to be held upon trust for the recipient and the funding company. In the context of litigation funding arrangements of a kind sufficiently similar to the present to make the situations truly comparable, Campbell J said, in Jarbin Pty Ltd v Clutha Ltd (2004) 180 FLR 393 (at paragraph [107]): “It is now well established that a liquidator’s power of sale of the property of the company, under section 477(2)(c) of the Corporations Law , enables him or her to assign all, or part, of a cause of action of the company in return for a consideration, which might be a fixed payment, a share of any net proceeds of the action, or a consideration arrived at in some other way, and such assignment may be made without infringement of the law concerning maintenance and champerty.”

His Honour cited extensive authority in support of this proposition concerning s 477(2)(c). He then surveyed the arrangements in a number of decided cases. Both the principle and the examples show to my satisfaction that the liquidators of the claimant companies that are to receive financial assistance under the arrangements proposed in this case have the necessary power under s 477(2)(c) and s 477(2)(g) to enter into those arrangements.

There is next the question of the powers of the funding companies. In a direct and immediate sense, each funding company will simply lend money or grant accommodation in return for the promise of repayment with interest and premium if success is achieved by the assisted claimant company, such promise being supported by the security given by that claimant company. A liquidator is not given by the Corporations Act any explicit power to lend. The head of power said to be applicable for that purpose here is that conferred by s 477(2)(m), being the power to: “do all such other things as are necessary for winding up the affairs of the company and distributing its property.”

It can be said at once that this head of power would not support the provision of litigation funding by a liquidator to some entirely unrelated litigant, purely for the sake of the returns (or prospects of returns) that might be generated by the transaction itself. Such a transaction would be in no sense “necessary for winding up the affairs of the company and distributing its property”. The present case is, however, distinguishable from that hypothetical case. Each funding company is, as I have said, a creditor of the claimant company to which it is proposed that it give financial assistance.

Case law shows that the word “necessary” in s 477(2)(m) is not synonymous with “essential” or “indispensable”. The provision is accordingly not confined to matters without which the winding up of affairs and distribution of property cannot occur. The test is, rather, one of what “may be thought expedient with reference to the assets of the company”: Re Cambrian Mining Co (1882) 48 LT 114 per Kay J. Counsel referred me to the decision of Fullagar J in Re Bairnsdale Food Products Ltd [1948] VLR 264 as providing an example of the scope of the section. That case concerned a company which had a right of first refusal in respect of land occupied by it as lessee. After commencement of the winding up, the lessor offered the company the opportunity to purchase. On the evidence, it would have been advantageous to the winding up for the liquidator to buy the land and re-sell it, thus realising the value of the right of first refusal. It was held that the purchase was justified as an incident of the subsequent sale and was therefore comprehended by the power to sell. There was subsidiary reliance upon the equivalent of s 477(2)(m).

I accept that s 477(2)(m) enables a liquidator to do anything expedient with reference to, or conducive to, the beneficial pursuit towards completion of the winding up of affairs and distribution of property. The question is whether commitment of funds by a particular funding company to the pursuit of a claim by a particular assisted claimant company of which it is a creditor is expedient with reference to, or conducive to, those matters in relation to that funding company.

The parts of Mr McGrath’s affidavit to which I have been directed on this are paragraphs 49, 84 and 85. The last two of these make it clear that Mr McGrath (with whom Mr Honey, by separate affidavit concurs) is of the opinion that the arrangements as a whole are commercially appropriate and in the “best interests” of all participating companies. In paragraph 49, by contrast, he refers specifically to the funding companies and says that the funding arrangements entail benefits for those companies by way of the opportunities to make recoveries of funds outlaid, plus interest and premium, as well as by way of enhanced possibility of recoveries by the funding companies as pre-existing creditors of the assisted claimant companies. To that must be added the benefit that may be expected from concerted action to reach a “global settlement”.

The matter relevant to s 477(2)(m) from the perspective of the funding companies is also dealt with in expert evidence given by Mr L.B. Hunter, an experienced insolvency practitioner not connected with these insolvent administrations. Mr Hunter reviewed the proposed arrangements from the perspective of companies in all relevant classes. His conclusions are based on various assumptions stated by him which I am prepared to think probably reflect assessments objectively made by the liquidators and conveyed to him. Mr Hunter’s overall conclusion is that the arrangements are beneficial to all companies. The benefits he sees for funding companies are stated to be: “The benefits I can see to the Funders are: (a) They obtain a charge over the claims and therefore have security; (b) They are entitled to claim from the proceeds realised from the Claims repayment of costs previously funded, together with interest (though interest on past funding is only calculated from the date of execution of the funding agreements); (c) They are entitled to claim from the proceeds realised from the Claims repayment of ongoing funded costs, together with interest; (d) The interest rate is better than that available from financial institutions; (e) The Funding Arrangements allow for the control of the litigation to remain with the Liquidators which may facilitated joint settlements of the major litigation claims; (f) The proposed return is commercial and commensurate to the risks; (g) It allows an incremental benefit via the flow through dividends which may be paid to the Funders by reason that all the Funders are creditors of some of the Plaintiffs; (h) It allows all of the major claims of the group to be pursued; and (i) Costs to pursue the claims are not fixed and the agreements make provision for further funding to be provided, where necessary and appropriate.”

I should refer also, at this point, to a report provided by Mr Lipman, a solicitor experienced in litigation funding. He refers to a number of matters relevant to the obtaining of finance by liquidators generally to pursue claims. His opinion does not touch directly upon the position of the funding companies, except insofar as it refers to difficulties that can be encountered in obtaining financing on a large scale for complex cases in Australia.

On the material before me, I do not see how I can safely conclude that it will be expedient with reference to, or conducive to, beneficial progress towards completion of the winding up of the affairs of any funding company and the distribution of its property for that funding company to provide financial assistance to the particular claimant company. A funding company could and, in the ordinary course, would deploy surplus funds in the normal types of investment entailing minimal risk: see s 543. For it to depart from that ordinary and expected course and to deploy its surplus funds in some other way would call for some analysis of pros and cons undertaken exclusively from the viewpoint of the funding company itself and having regard solely to its separate interests. That is what seems to me to be lacking here. It has not been suggested or shown that there has been any independent assessment, from the unilateral perspective of each funding company, of where the commercial and financial interests of that funding company lie, so far as the proposals are concerned. It is all very well to say, in the abstract, that by financially supporting the pursuit of particular litigation by a claimant company, a funding company may enhance its prospects of greater returns in its capacity as a creditor of the claimant company, in addition to recouping its funding outlay, plus interest and premium on a secured basis. That is no doubt supportable as a theoretical proposition. Also supportable in an abstract or theoretical sense is the proposition that the funding company faces the prospect of losing its total outlay without any return whatsoever. Before the court could conclude that the matter was within s 477(2)(m), it would have to see that there was some good and solid reason for concluding that the processes of winding up and distribution referred to in that provision would be enhanced by the particular outlay of funds envisaged in the particular circumstances prevailing, with the enhancement being demonstrable by comparison with the situation that would prevail if surplus funds were deployed in the ordinary way pursuant to s 543. The enhancement would have to be demonstrated by some informed and independent assessment of the separate and selfish interests of the funding company alone.

In the Bairnsdale Food case, Fullagar J emphasised that the existence of power must be distinguished from the propriety of its exercise. I do not lose sight of that distinction here. The point is that, when the question is whether a particular step is “necessary for” – in the s 477(2)(m) sense of “expedient with reference to” or “conducive to” – the progress and completion of the winding up process, the consequences or likely consequences of the step must be known (or, at least, reliably predicted, on the basis of known facts and informed assessment of their significance) as an essential ingredient of the formation of the opinion relevant to the existence of the power, quite separately from the wisdom of its exercise.

Lest it be thought that there is undue concentration here on the question whether the proposed actions of the liquidators of the funding companies are within s 477(2)(m), it should be emphasised that, in entertaining a s 477(2B) application, the court necessarily has before it the question whether it should perfect the power of the liquidator. Each of the specific heads of power in s 477(2) is governed by the opening words of s 477(2): “Subject to this section, a liquidator of a company may …”. I would repeat here what I said in relation to the interaction between ss 477(2) and 477(2B) in Re HIH Insurance Ltd [2004] NSWSC 5 at paragraph [12]: “Each of s 477(1) and 477(2) begins with the words ‘Subject to this section’, so that a power conferred by one of those provisions (including the power to compromise debts and claims conferred by s 477(1)(d)) simply does not arise, in a case dealt with by s 477(2A) or s 477(2B), unless court approval is given.”

It follows that, in considering a s 477(2B) application, the court, while not concerned with matters of commercial judgment, is concerned to see that an occasion for the proper exercise of the power it is asked to perfect has arisen.

I turn now to the circumstance that each of the companies involved in the proposed arrangements has the same liquidators. Liquidators, like directors, are fiduciaries. Any liquidator is therefore subject to a duty to act with single-minded regard for the interests of the company of which he or she is liquidator – which, in the case of an insolvent administration, may generally be equated with the interests of the body of creditors. Where the same person is the liquidator of two companies, the position, from a fiduciary standpoint, must be the same as it is where the same persons are the directors of two companies. The plight of directors in such a situation was described by Brennan, Deane, Toohey and Gaudron JJ in Byrnes v R (1995) 183 CLR 501 (at pp. 516-7) as follows: “Each of Byrnes and Hopwood was in a position of conflicting fiduciary duties: they were directors of both Magnacrete and Jeffcott. The interests of those companies did not necessarily coincide. They devised the Vicksburg joint venture and they executed the relevant instruments in order to commit the resources of Magnacrete for the benefit of Jeffcott. Whatever authority Byrnes and Hopwood might otherwise have had to execute instruments under seal so as to bind Magnacrete, it was not an authority to be exercised for the moving purpose of benefiting Jeffcott. A company is entitled to the unbiased and independent judgment of each of its directors. A director of a company who is also a director of another company may owe conflicting fiduciary duties. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company's interests to the first company and obtaining the first company's consent. Nor, of course, can the director exercise those powers for the director's own benefit or gain without clearly disclosing his or her interest and obtaining the company's consent. A fiduciary must not exercise an authority or power for the personal benefit or gain of the fiduciary or a third party to whom a fiduciary duty is owed without the beneficiary's consent.” [citations omitted]

Translated to the present situation, the third last sentence of this extract means that the persons who are the liquidators of a funding company and also the liquidators of the claimant company to which, it is proposed, the funding company will give financial assistance must not exercise their powers as liquidators of the funding company for the benefit or gain of that claimant company without clearly disclosing the claimant company’s interest to the funding company and obtaining the funding company’s consent. In general terms, references in this kind of context to “the company’s consent” is a reference to the consent of the company in general meeting, at least where the company is solvent. But that consent will not be sufficient or alone operative where the company is insolvent: see, for example, Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722.

In written submissions on this aspect, counsel for the liquidators say: “Consent raises the issue of from whom it must come. The Liquidators’ fiduciary duty is owed to the Court, the creditors and the contributories (McPherson 4 th ed pp286-287). Where the winding up is in insolvency, it is submitted that the consent of contributories is unnecessary, unless it becomes apparent that there is likely to be a surplus on the winding up available to them. With the creditors, the Act specifically provides in s 548 for a representative body of the creditors in the form of the committee of inspection and vests in that organ, in s 477, the power to give the Liquidators certain approvals which powers are also vested in the creditors generally. Section 479(1) obliges the Liquidators to have regard to any directions given by the committee of inspection. Where the approval which the Liquidators seek activates one of the heads in s 477, relevantly here s 477(2B), and the obtaining of the approval necessitates disclosure of a potential conflict, consent to the potential conflict is implicit in the approval. Consent takes the form of the approvals given by the committees of inspection (or in one case creditors) of the Funders and the Impecunious Plaintiffs and the Court in the case of all companies. A decision has been taken not to consult the creditors generally (including the creditors of the Pecunious Plaintiffs which do not have committees of inspection) for the reasons set out in para 77 of McGrath’s affidavit.”

I do not accept that a committee of inspection may give a consent amounting, in the terms required by general fiduciary principles, to a consent of the company to which the liquidators’ duties are owed. Such committees are provided for in the legislation and given particular powers and functions. They have no wider or residual role. Their statutory powers do not extend to the giving of consent of the relevant kind. Nor do I think that any function of giving such consent can be seen as some kind of incident of the s 477(2B) function which is concerned solely with the question whether the making of a contract not to be performed within three months is consistent with the due and orderly conduct of the winding up. The same is true, in my opinion, of s 479(1): it simply does not contemplate that the committee of inspection may convey a consent sufficient to authorise what would otherwise be a breach of duty. It is also relevant that, in the present case, the committees of inspection of those of the HIH companies that have such committees, while they have given a form of in principle approval to the proposals under discussion, have not been asked to exercise the s 477(2B) function, so that, even if that function had the added dimension the submissions suggest, it could not be said that it had been activated.

Identification of available avenues of consent in a case where a liquidator seeks dispensation from some aspect of the strictures of the fiduciary duties to which liquidators are subject received attention in Re ACN 003 671 387 Pty Ltd (2004) 49 ACSR 443. That was a case in which a company associated with the firm of a liquidator appointed by the court wished to purchase the shares in two companies of which he was the liquidator and to have each winding up terminated. Austin J, referring to the liquidator’s fiduciary duty, said: “In the case of a court-appointed liquidator, the beneficiary of the duty is, technically speaking, the company, but the company is in no position to make a fully informed decision to enter into or reject the transaction, because the directors and officers of the company are precluded, unless the court approves, from exercising any of their functions or powers: Corporations Act 2001 (Cth), s 471A. Although there appears to be no direct authority in point, it would be logical to say that for the purposes of the purchasing rule, fully informed consent given by the creditors and contributories to a proposed purchase by the liquidator will suffice. Whether, if the winding up is in insolvency, fully informed consent of the creditors alone will be sufficient, and whether the consent must, in either case, be unanimous, are matters I do not have to decide, for here there is only one creditor which is also the sole shareholder, and it fully supports the transaction.”

His Honour went on to refer to the special position of a court-appointed liquidator. After referring to legislative provisions bearing on the question whether it is technically correct to regard such a liquidator as an officer of the court, he noted (at paragraph 41) that there is no express requirement that such a liquidator obtain the court’s leave in order to purchase assets from the company or to enter into any other transactions with the company or with respect to it, for the liquidator’s own benefit. The same is, of course, true in relation to transactions involving another company of which the liquidator is also liquidator. Austin J continued (at paragraphs 43 to 46): “While there appears to be no direct authority, it seems that a court-appointed liquidator, like a solicitor acting in litigation, owes a duty to the court, in addition to his or her fiduciary duty to the principal, to avoid any undisclosed conflict of interest. In the case of a solicitor, the duty to the court arises from the court’s concern that it should have the assistance of independent legal representation for the litigating parties: see D Ipp, “Lawyers’ Duties to the Court”, (1998) 114 LQR 63 at 93. By parity of reasoning, a court-appointed liquidator has a general duty to the court to avoid anything that would or might compromise his or her impartiality, which implies a duty not to deal with the company’s assets for his or her own benefit, or otherwise place himself or herself in a position of actual or possible conflict between personal interest and the duties of office. The court-appointed liquidator’s duty is at least as strong as the lawyer’s, and might be even stronger, having regard to the quasi-judicial functions that a liquidator is expected to perform: see, for example, Re Chevron Furnishers Pty Ltd (in liq); Qld Amalgamated Industries Pty Ltd v Harris [1995] 1 QdR 125; (1994) 12 ACSR 565. Presumably the court, as the beneficiary of this duty, has an inherent power to exonerate the liquidator from performance of the duty, and the exoneration might conveniently take the form of granting leave to the liquidator to enter into the transaction. It is unnecessary to decide whether that leave, if granted in a case where the liquidator has also breached the fiduciary duty, would also absolve the liquidator from breach of fiduciary duty, because in this case the liquidator is protected from breach of fiduciary duty by the consent of his principal. Though the power to exonerate therefore exists, it seems to me that it will only rarely be exercised. The court will be very careful to preserve the integrity of the winding-up procedure.”

In my opinion, these principles apply here. I am prepared to accept that the court has an inherent power (likely to be exercised only rarely) to authorise a court-appointed liquidator to cause the company in liquidation to undertake a transaction that would otherwise entail breach of fiduciary duty by that liquidator. The court does not, of course, have power to absolve the liquidator in advance or in retrospect from breaches of the statutory duties arising from Division 1 of Part 2D.1, to the extent that they are applicable: see generally Angas Law Services Pty Ltd v Carabelas (2005) 79 ALJR 993; Forge v Australian Securities and Investments Commission (2004) 52 ACSR 1. But exoneration by the court, if granted, might re-shape the content of the statutory duties.

It is submitted on behalf of the applicant liquidators that it is not necessary to pursue a separate application for the court’s authorisation by reference to a perceived need to obtain dispensation from fiduciary constraints. This, according to the submission, is because it would be “surplusage on a s 477(2B) order”. I understand this to be a submission that an order under s 477(2B) carries within it authorisation to commit any breach of fiduciary duty that is involved in the making of the relevant contract. That cannot be so, when one has regard to the limited purpose of s 477(2B) which is to provide a mechanism whereby proposals that might unduly prolong a winding up may be screened. In the ordinary course, scrutiny by the court of the propriety or appropriateness of the proposed contract on some wider front would not be expected as merely some incident or by-product of a s 477(2B) application.

If the court, in the exercise of its inherent jurisdiction, is to grant authorisation by reference to fiduciary considerations in the present case, it will only do so directly and upon proper application, and not as some form of implied side-wind from s 477(2B) approval. In saying this, I do not mean to suggest that there must be some adherence to procedural form merely for the sake of it. What I do mean is that the matter must be put before the court as an explicit application for dispensation from fiduciary duties, with appropriate evidence showing how and why circumstances exist warranting dispensation. As is demonstrated by the decision of the Court of Appeal in Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, the task of explanation inherent in a request to be excused from a fiduciary requirement is an onerous and exacting one.

Counsel submit that the court has before it now enough to enable it to deal with the matter. My comments about the s 477(2)(m) aspect will make it clear that I do not share that view. The court has not been given any separate assessment of where the funding companies’ separate interests lie, so far as the proposed transactions are concerned. Opinions expressed by Mr McGrath (with whom Mr Honey concurs), Mr Hunter and Mr Lipman are opinions about the positions and interests of all the companies. To the extent that they speak of the interests of funding companies, the statements of those witnesses are necessarily coloured by the fact that they speak also of the interests of the assisting companies – indeed, the interests of all the companies affected by the proposals. As I have already said in the s 477(2)(m) context, someone qualified to do so needs to come to a fully informed and independent conclusion as to whether and, if so, how the separate interests of the funding companies (being, in the final analysis, the interests of the creditors who stand to receive distributions in the funding companies’ windings up) will be promoted by having them commit their funds in the ways envisaged, when the alternative is for those funds to be husbanded in the normal way. Any application for fiduciary dispensation must necessarily proceed by reference to a comparison of that kind.

I have concentrated, in the fiduciary context, on the position of the funding companies because the fiduciary considerations are particularly pronounced there. That is not to say that they do not also arise in relation to companies within the other categories or that the liquidators do not need to consider applications for like dispensations in those connections. It is axiomatic that, in the context of a group of companies, the propriety of the exercise of powers by directors (or liquidators) of a particular company is to be judged by reference to the interests of that company rather than some perceived transcending interest of the group: Walker v Wimborne (1976) 137 CLR 1.

It remains to deal with the third question. That question also arises because the liquidators are the liquidators of multiple companies. It arises under s 532(2)(c)(ii): “Subject to this section, a person must not, except with the leave of the Court, seek to be appointed, or act, as liquidator of a company: … (c) if: … (ii) the person is an officer of any body corporate that is a mortgagee of property of the company …”

This provision is relevant because, under the proposal, each claimant company afforded financial assistance by a funding company will grant security over its assets to that funding company. Each of Mr McGrath and Mr Honey, being a liquidator of each claimant company to be given financial assistance, is, under paragraph (f) of the s 9 definition, an “officer” of each such claimant company, with the result that the circumstance that the funding company giving the assistance (of which the same persons are liquidators) becomes a mortgagee of property of the relevant claimant company brings into play the s 532(2)(c) prohibition upon his acting as a liquidator of the funding company.

The first issue here is one of construction, namely, whether the provision for the granting of leave by the court applies not only to the prohibition upon seeking appointment but also to the prohibition upon acting. In other words, is the prohibition upon acting absolute in that, unlike the prohibition upon seeking appointment, it cannot be overcome by the leave of the court?

I was referred, in that connection to a number of decided cases. None of them is directly in point. The most recent is the decision of Simmonds J in Low v Performance Finance Ltd (2004) 28 WAR 512. The s 532(2) issue there related to appointment, so that the point before me did not arise. There was an additional issue under s 418(1) (which begins, “A person is not qualified to be appointed, and must not act, as receiver …”) but the different wording means that no real guidance is provided for present purposes. The other cases to which counsel referred all arose under s 277A(1A) of the Uniform Companies Acts of 1961-2 which was inserted in 1976: Re Splinta Holdings Pty Ltd (1976) 2 ACLR 103, Re Perseus Mining NL (1976) 2 ACLR 105, Re Antard Pty Ltd (1976) 2 ACLR 108. There are, in fact several other similar cases in the same volume of the reports: Re Rochelle Flats Pty Ltd (1976) 2 ACLR 104, Re Ausminco Ltd (1976) 2 ACLR 114, Re Photo Holdings Pty Ltd (1976) 2 ACLR 117. These cases are not of any direct help in the present context because the wording of s 277A(1A) was: “Subject to this section, a person shall not, without the leave of the Court, consent to be appointed, and shall not act, as liquidator …”

Under this formulation, the leave of the court was obviously available only in relation to consenting to appointment, as distinct from acting. The prohibition upon consenting could be overcome by the leave of the court, but the prohibition upon acting could not. But, as some of the decided cases recognised, someone who was granted leave to consent to appointment and was then appointed could thereafter act in pursuance of the appointment. The prohibition upon acting only applied to someone who became subject to one of the disqualifying factors after accepting an appointment which the person was free to take without the leave of the court.

There seem to be two cases in which judges have made relevant passing comment about the present section. In Pongrass Group Operations Pty Ltd v Lowerpinems Pty Ltd (1994) 15 ACSR 341, Sackville J said (at p.342): “Except with the leave of the court and in certain other circumstances, a person is not to be appointed or to act as liquidator of a company, inter alia [in specified circumstances].”

In Energy and Resource Conservation Co Ltd v Abigroup Contractors Pty Ltd (1997) 41 NSWLR 169, McLelland CJ in Eq said (at p.172): “It is also to be noted that an administrator, being an officer of the company (see s 82A), is one of the classes of persons which s 532(2) purports to prohibit from seeking appointment, or acting, as liquidator without the leave of the Court or a resolution of creditors after the formalities in s 532(5) have been observed.”

In both these passages, it is obviously assumed that the court’s power to grant leave extends not only to allow appointment (or, more precisely, the seeking of appointment) but also to allow acting, in the sense of ongoing exercise of the office. That, it seems to me, is entirely consistent with the present form of the section. The prohibition is imposed by the words, “must not … seek to be appointed, or act”. The “except with the leave of the Court” qualification comes immediately after “must not” and therefore applies to both seeking appointment and acting. In the 1976 version, the words “shall not act” were, because of their positioning, obviously not subject to the “without the leave of the Court” qualification. Under the present legislation, the court may grant leave so as to allow a person not yet appointed both to seek appointment and to act once appointed; and it may, as a separate matter, grant leave to act to a person who, being already in office, is, by subsequent events, brought within one of the categories that attract the prohibition on acting.

I should say, before leaving this subject, that I do not think the effect of the current legislation is accurately captured at page 281 of the fourth edition (1999) of “McPherson The Law of Company Liquidation” by A.R. Keay. It is there said that s.532 ”is not to be read as requiring or enabling leave to be given to acting as liquidator as distinct from consenting to be appointed as such”. That statement is supported by reference to some of the cases on the 1976 provision which, as I have said, was significantly different in its wording.

My conclusion on this aspect is that the court has power to grant leave to Mr McGrath and Mr Honey under s 532(2) to act as liquidators of claimant companies which give security to funding companies and thereby to forestall the prohibition on continuing to act as liquidators of those claimant companies that would otherwise arise by reason of the creation of a mortgagee relationship comprehended by s 532(2)(c)(ii).

Whether the court should grant such leave is another question. On that, the guiding consideration is the legislative intention that a liquidator should be free from the potentially conflicting allegiance unless the court sees that independent judgment will nevertheless still be available. The factors to be taken into account in relation to that matter correspond, in large measure, with those to which I have referred in discussing the fiduciary question. Because, at this point, the court is not in a position to address the fiduciary matter, it should, for the time being, also not make a decision on the question of the grant of leave under s 532(2).

Before concluding, I should refer to the fact (mentioned in submissions) that appointment of the same liquidators to a number of the HIH companies was something that was canvassed before Bergin J on 15 March 2001 when her Honour first appointed Mr McGrath and Mr Macintosh (Mr Honey’s predecessor) as provisional liquidators of those companies. On that occasion, a creditor submitted that there should be separate provisional liquidators for certain of the companies. Bergin J said: “Mr Ryan in response submits that Mr McGrath and Mr Macintosh who have consented to act as provisional liquidators and if to either of those men there appears to be a conflict then one would, of course, expect either of those two men or both of them to immediately approach the Court to indicate such a position. I do not require an undertaking from either Mr McGrath or Mr Macintosh, whom I intend to appoint, to approach the Court should there be a conflict. I take the view it goes without saying and it is part of their obligation.”

This, of course, did not purport to absolve the common liquidators from any of the consequences of the multiple appointments. It merely reflected the reality, first, that it often makes good practical sense for the same liquidators to be appointed to companies in a group (as is recognised in a passage at page 285 of the fourth edition of McPherson to which I have been referred) but, second, that the need to be alive to the possibility of conflicts is thereby sharpened.

I decline at this point to grant the approvals under s 477(2B) sought by the applicant liquidators. I also decline at this point to grant leave under s 532(2).

The interlocutory process in each proceeding will be stood over to a date to be fixed for directions as to the filing of such further evidence as the applicants may wish to adduce.