AMP CAPITAL INVESTMENTS NO. 4 LIMITED V IBS GROUP LIMITED (IN LIQUIDATION) HC AK CIV2007-404-5583

AMP CAPITAL INVESTMENTS NO. 4 LIMITED V IBS GROUP LIMITED (IN LIQUIDATION) HC AK CIV2007-404-5583 12 November 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV2007-404-5583UNDER the Companies Act 1993 BETWEEN AMP CAPITAL INVESTMENTS NO. 4 LIMITED Plaintiff AND IBS GROUP LIMITED (IN LIQUIDATION) Defendant Hearing: 24 and 29 October 2008 Counsel: M O'Brien for liquidators Judgment: 12 November 2008 at 1 pmCHAMBERS JUDGMENT OF ASSOCIATE JUDGE SARGISSONThis judgment was delivered by Associate Judge Sargisson on 12 November 2008 .at 1 pm.pursuant to Rule 540(4) of the High Court Rules Registrar/Deputy Registrar Date ..Solicitors:Bell Gully, PO Box 1291, Wellington 6140Introduction[1] IBS Group Limited was placed into liquidation by orders of the Court on 14 December 2007 on the application of AMP Investments No. 4 Limited. The liquidators, John Fisk and Vivian Fatupaito, have identified claims they believe are meritorious but there are insufficient assets available in the liquiation to enable them to pursue the claims. They have applied for an order under s 284(1) of the Companies Act 1993 for directions approving a Litigation Funding Agreement dated 24 September 2008 made between themselves as the liquidators of IBS and ALF No 9 Pty Ltd as the funder of the proposed liquidation. [2] The agreement makes provision for funding claims the liquidators propose to bring arising out of the secured creditors' sale of IBS's assets. The claims currently proposed are against the secured creditors and directors of IBS. Possible future claims are against other potentially related parties. [3] The claims as currently proposed are company claims in the sense that they are: a) Claims that are assets of the company; and b) Claims that may be distinguished from liquidator claims; that is, claims that liquidators may bring purely by virtue of their statutory powers and which arise only upon and as a consequence of a liquidation (e.g. voidable transactions and transactions at inadequate or excessive consideration under sections 292-298 Companies Act 1993). [4] While the agreement is broad enough to cover liquidator claims, none have been identified and none are anticipated.The Funding Agreement[5] Under the terms of the agreement in return for funding, AFL as funder will receive an assignment of a proportion of the proceeds of the litigation. The entitlement percentage depends upon the total value of funding that is provided and whether an early settlement is achieved. It comprises: a) An unqualified 15% of proceeds; b) A further 20% if the dispute is not settled by 16 February 2009, or if the substantive action is commenced, or if the funding costs exceed $150,000; c) In the unlikely event costs exceed $880,000, additional funding of up to $250,000 at the request of the liquidators in exchange for a further 10% of the proceeds. The relevant clauses and provisions are clauses 2, 19, 20 and schedule A, items 10-12. [6] The Agreement provides at: a) Clause 9 that the liquidators have day to day control of the proceedings, but that the liquidators and the funder must agree to certain things. They must agree to each person to be named as a defendant in the proceedings and any step proposed by the liquidators in the proceedings or any related investigations if that step is likely to have any material effect. In the event agreement cannot be reached, the liquidators shall take the steps proposed by the funder. b) Clause 13 that any decision to make or accept an offer of settlement or to discontinue an action must be agreed by the liquidators, the company and the funder unanimously. In the absence of agreement, the decision is to be made by an independent third party lawyer. [7] Following the hearing which concluded on 29 October Counsel for the applicants filed a memorandum advising that the applicants had completed andsigned a short agreement amending the original funding agreement. The amending agreement is brief. It does two things: a) It makes express what the applicants say was previously implicit, namely that the liquidators are perfectly entitled at any time to apply to the Court for directions and remain subject to the Court's directions; and b) It amends clause 9 so that in the event the liquidators and the funder disagree over steps referred to in clause 9, then the issue can be referred to and decided by a third party lawyer appointed by the parties or if necessary by the President of the Law Society.Grounds/reasons for application[8] The grounds and reasons relied on are: a) The assets currently available in the liquidation are insufficient to enable the liquidators to pursue the claims. Funding is therefore necessary if the claims are to be pursued. The liquidators believe the claims are meritorious claims and should be pursued. b) Liquidators are not generally required to obtain court approval of litigation funding agreements. However, Anderson J in Re Nautilus Developments Ltd [2000] 2 NZLR 505 (HC) at [27] recommended that for company claims: it would be prudent for liquidators and litigation funders who may be contemplating a funding arrangement to obtain a Court's assessment of a proposed arrangement by way of an application by the liquidator for directions. . On any such application the Court would want to be satisfied that litigation was justified by reference to the merits of the claim and the prospects of recovery. c) Reflecting this recommendation, the liquidators accept that the agreement is conditional upon and subject to court approval. This is reflected in clause 2.4 and 2.8 of the agreement.d) Having reviewed the matter, and with advice, the liquidators and the funder believe that the merits of the claims and the prospects of recovery justify proceedings in respect of the claims. They also believe that the proposed defendants have assets in New Zealand against which any judgment could be enforced. Also there is the prospect of enforcement outside the jurisdiction (for example, against Ellis, one of the proposed defendants, in the United States where he currently resides).DiscussionCommon law prohibitions of maintenance and champerty:[9] Maintenance occurs where one person provides the funds to enable another to undertake litigation. Where the fund provider is also entitled to a share in the proceeds in the event that there is a successful outcome to the litigation the agreement is said to be champertous. The reason the common law prohibits champetry is one of public policy. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses: Giles v Thompson [1993] 3 All ER 321. [10] An assignment of the damages or other monetary compensation that may be awarded in an action where judgment has not yet been given is not champertous provided that the assignee does not interfere with the conduct of the cause of action:Gregg v Bromley [1912] 3 KB 474. It is also accepted law that an official assignee's or liquidator' s power of sale of a cause of action, conferred under the relevant companies and insolvency legislation, overrides the prohibition of maintenance and champerty: Re Parkgate Waggon Works Co (1881) 17 Ch D 234 and Re Oasis Merchandising Services Ltd 1 All ER 1009 (CA)1 . Re Oasis involved an agreement in which the liquidator assigned to the funder all the fruits of an action for wrongful1 Under the New Zealand Companies Act 1993, the power of sale is found in section 253, 260 and schedule 6 .trading under section 214 of the Insolvency Act 1986 (UK) on the basis that a share of the fruits would be handed back to the liquidator and the company. The agreement was held to be void because an action under section 214 constitutes a liquidator claim falling outside the property of the company and thus may not be sold by the liquidator in the exercise of the statutory power of sale. At 1022, the Court said, however: As a matter of policy we think that there is much to be said for allowing a liquidator to sell the fruits of an actionprovided that it does not give the purchaser the right to influence the course of, or interfere with the liquidator's conduct of, the proceedings. The liquidator as an officer of the court exercising a statutory power in pursuing the proceedings must be free to behave accordingly.[Emphasis added] [11] In Re Nautilus Developments Ltd (In liquidation) [2000] 2 NZLR 505 (HC) Anderson J perceived Re Oasis to be authority for the proposition that where a cause of action is a company claim, a liquidator may assign all or some of the fruits of the action, even in consideration for the funding of the action by the assignee, provided that the assignee may not and does not interfere with the conduct of the litigation and impede the liquidator's recourse and amenability to directions of the Court. InNautilus his Honour permitted a funding agreement between the liquidator and assignee of a company claim as it did not inhibit the litigation's conduct by the liquidator. Although the agreement specified that the liquidator had to consult with the funder on any issues arising out of the conduct/ progress of the liquidation, it acknowledged that the liquidator had "the right to direct, conduct and conclude by way of settlement the proceedings". [12] The applicants submit that the decision in Nautilus misconstrues Re Oasisand is inconsistent with policy and earlier case law. The inconsistency that the applicants raise is that in the liquidation context, concerns regarding control only apply in relation to the assignment of the fruits of liquidator claims. I disagree. I am satisfied Nautilis was correctly decided as Glazebrook J was in Re Gellert Developments Ltd (in liq) (2001) 9 NZCLC 262, 714 (HC) at [19] (which involved an almost identical agreement to that in Nautilus). The court's concern is that the liquidator in pursuing a claim in his or her name is exercising a statutory powerexpressly vested in the liquidator. Ancillary to that power are special investigatory powers such as the power to obtain documents and information under s 261 Companies Act 1993. In my opinion, to enable a third party who has no interest in the proceedings to harness and control those powers would contravene Parliament's intent. Although I accept that there has been a liberalisation of the court's approach in New Zealand towards third party funding (for example see Auckland City Council as Assignee of Body Corporate 16113 v Auckland City Council [2008] 1 NZLR 838) different considerations apply here due to the unique statutory context. [13] Counsel submitted that, if as a matter of policy it is accepted that: a) liquidators may assign company claims in their entirety (and this clearly is the law), and b) such an assignment would necessarily entail a transfer of all control (which clearly it would), it would be perverse if liquidators could assign the fruits of such a claim only if they retain control. I disagree. With the latter, the claim is still being brought under the name of the liquidator and pursuant to a statutory power vested in the liquidator which carries with it special ancillary powers as detailed above. The fact that the claim is the liquidator's claim rules out the assumption of control by the funder, as there is no statutory authority for others to exercise or interfere with the liquidator's statutory powers. In contrast, the former is brought solely by or on behalf of the assignee. The distinction is fundamental.Does the agreement enable the liquidators to maintain a sufficient level of control?[14] The applicants argued the specifics of the agreement are sufficient to take its application outside the constraints referred to in Re Oasis and Nautilus. They cited a number of New Zealand and Australian authorities to indicate that the level of control afforded to the liquidators under this agreement is acceptable. I refer to each authority in turn.[15] In Re Motiver Pty Ltd (1995) 19 ACSR 440 (AFC) the liquidator sought approval of an agreement which, in exchange for funding of a company claim for insolvent trading, assigned the fruits of the action to a funder. The funder would pay the costs and disbursements of the jointly appointed solicitors and indemnify the liquidator for any costs and damages if the defendant were successful. However, the agreement also specified that it was the liquidator who was responsible for giving the instructions to the solicitor in respect of the proceeding, although the funder could at any time instruct the solicitor to settle. The right to require settlement was subject to the proviso that the company that was the subject of the insolvency was in no worse position that it would have been in had the proceeding been successful. Given the luquidator's general right to instruct the solicitor and the nature of the limits on the funder's right to instruct the solicitor as to settlement, I consider that the liquidator's control in Motiver was greater than the control permitted to the liquidators under the agreement in this case. [16] In Campbells Cash and Carry Pty Ltd v Fosif Pty Ltd (2006) 229 ALR 58 a funder offered to fund class action litigation (not involving liquidation) and protect the plaintiffs from adverse costs in the event they lost the claim in exchange for 33.3 % of any recovery and costs awarded. But for a contractual term that the funder could not settle the litigation for less than 75% of the principal claimed, it retained absolute control. The High Court of Australia, by a 5:2 majority, rejected the argument that the arrangement amounted to a champertous abuse of process (the action was framed this way as tortious champerty had been abolished in New South Wales). I consider this case is distinguishable as the subject proceeding did not aarise in a liquidation context and therefore did not involve abuse of a liquidator's statutory powers. [17] An almost identical arrangement to that in Campbells was approved recently by French J in the New Zealand decision of Houghton v Saunders HC Christchurch CIV-2008-409-348, 7 October 2008. However, although a company claim, that case is distinguishable as the funding agreement was between a funder and a group of approximately 800 shareholders, not a liquidator. Different considerations therefore applied.[18] In Kings Wharf Coldstore (in rec and in liq) v Wilson HC Wellington CIV- 2001-485-954 24 November 2005 the liquidator entered into a funding agreement with the principal secured creditor to pursue claims against the director and shareholder. The creditor agreed to pay the liquidator's costs, indemnify the liquidator in the case of adverse costs award and recover with the receiver two-thirds of the proceeds of the litigation after payment of costs. The remaining one-third was to go to the liquidator, to be applied in accordance with the provisions of the Companies Act. The agreement provided that proceedings were to be conducted by the creditor's solicitors. Miller J rejected the argument that the agreement was champertous. At [138] his Honour said: The agreement in this case concerns three parties with claims against the defendants and a close and proper interest in the litigation. It involves an assignment of part of the fruits of the liquidator's claims, in return for an assignment of part of the fruits of the other plaintiff's claims. It contains no provision fettering the liquidator's access to the Court or amenability to direction. The most Mr Toebes could point to is the requirement that [the creditor's] solicitors act and the fact that, in practice, the liquidator has played little part in the conduct of the litigation. These matters in no way establish that he has surrendered his responsibilities or his right to instruct counsel with respect to his claims. The defence fails. [Emphasis added] [19] Although the agreement in Kings Wharf specified that the creditor was to appoint the solicitors, it is evident that the legal arrangement was such that the solicitors were to act primarily for the liquidator. It is immaterial that this did not in fact occur; legally it was provided for under the terms of the agreement that gave overriding control to the liquidator. Under the funding agreement in this case however, it is clear that, legally, both the liquidator and the funder have equal or shared control over the solicitors and their instructions. [20] In Elfic Ltd v Macks (2001) 181 ALR the funder was to receive $80,000 and 35% of any litigation proceeds plus repayment of amounts paid out as costs under the funding policy. The liquidator was required to obtain the funder's approval before applying for a trial date, briefing counsel on trial, settling or discontinuing the claim or the legal proceedings and appealing against a final judgment. Failure by the funder to give written approval within a reasonable time enabled the liquidator to require the funder to join in selecting an independent senior counsel to advise whataction should be taken and that advice would be binding upon the parties. Regardless of the funding arrangement the liquidator could also apply to the court for directions at any time. It was alleged that the arrangement was an abuse of process or against public policy due to the funder's level of control (the action was framed in this way as tortious champerty had been abolished in Queensland). McMurdo P held that although the funding arrangement gave the funder some significant rights to interfere in the conduct of the litigation that ultimate control of the litigation under the funding agreement remained with the liquidator. Davies JA agreed. It is clear that a deciding factor was that the liquidator could apply to the court for directions at any time. [21] As Elfic Ltd v Macks is Australian authority I am not obliged to follow it. I disagree with the outcome in that case. In my opinion too much control did lie with the funder. Although the liquidator could have applied for directions at any time during the litigation regardless of the agreement, conceptually that is wrong. No agreement should force the liquidator to seek directions in order to counter the control the funder would otherwise have or in order to "unlock" a dispute between funder and liquidator. The obligation to seek directions would in itself be a fettering of the liquidator's discretion. [22] In Shiraz Nominees (in liq.) v Collinson & Anor (1985) 3 ACLC 706 an ex parte application was made by the liquidators under the relevant company legislation for an order that they be at liberty to begin an action for the recovery of a debt and that they be advised as to which persons should be named as defendants in the proposed action. The Supreme Court of Western Australia held that the application was inappropriate as the Court was being asked to exercise for the liquidators the discretion conferred upon them by the legislation as to whether or not they should bring the legal proceedings. Similarly here, the liquidators would be asking the Court to exercise for the liquidators the discretion conferred upon them by the Companies Act 1993 as to how they should conduct the legal proceedings. This is inappropriate.Result[23] The net result is that I am not satisfied that the specifics of this agreement are sufficient to take the application outside the constraints referred to in Re Oasis andNautilus. In my view the fact that the funder must agree to every action in the litigation goes against the rule that the assignee of the fruits of a company claim may not interfere with the conduct of the litigation. Furthermore, although the liquidator has a right to seek directions from this Court I am satisfied that is insufficient to overcome the conflict between the agreement and the rule. [24] I therefore decline this application. I do so however without prejudice to the liquidators' right to file a further application. A further application may be appropriate if they consider they can amend the terms of the existing agreement so that it does not fall foul of the rule. The agreement in Nautilus may provide a suitable model.A final matter[25] The applicants have raised their wish to retain the privilege attaching to the legal advice referred to by Mr Fisk in his supporting affidavit and exhibited to his affidavit. [26] I accept the applicants have not and do not wish to waive or lose that privilege. I therefore order that Mr Fisk's affidavit be sealed and not be inspected by anyone other than the applicants, without the leave of the Court. ___________________________ Associate Judge Sargisson