Prior to the recent Bell Group Decision, the case of Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2011) 281 ALR 38 (Fortress) meant that liquidators could face difficulty if they sought for one member of a group of companies being wound up to provide funding for one or all of the other members.
In the Bell Group Decision, the Federal Court of Australia confirmed that in certain circumstances, a member of a group of companies in liquidation can act as a “funder” and it is within the power of the liquidator to enter into a funding agreement to enable it do so.
Background
Pursuant to section 477(2B) of the Corporations Act 2001, a liquidator is required to obtain approval of the Court (or a committee of inspection or a resolution of creditors) if he or she wishes to enter into an agreement on the company’s behalf which will continue for more than three months.
The liquidator (and provisional liquidator) of the Group sought orders allowing each of the relevant companies to enter into and perform a funding and indemnity agreement. Under the agreement, one of the group companies, Maranoa, would assume the funding of 50% of the costs of the winding up of the Group generally.
The Court was asked to decide if the liquidator had the power, and if so, whether it was proper for the liquidator to use that power, to cause the Group to enter into the proposed agreement.
Impetus for the application
Prior to the application being made, 50% of the costs of the winding up of the Group were funded by the parent company, TBGL, which had sufficient assets to meet those costs.
However, a bill was before the State Parliament of Western Australia regarding the Group. That legislation (which was subsequently passed although the High Court has since ruled that the legislation was invalid in its entirety) would give the Western Australian Government the power to decide how to distribute and administer the property of the Group.
In addition, the Commissioner of Taxation had taken certain steps that potentially exposed the liquidator to substantial liability should the liquidator cause TBGL to continue to fund the costs of the Group’s windings up, as, if the transfer of assets required by the Bill took place, TBGL would be unable to meet a significant tax assessment.
Proposed agreement
It was thus proposed for Maranoa to fund the 50% of the costs of the winding up of the Group, as Maranoa was, amongst other things, exempt from the Bill and TBGL was its most significant creditor (97.9%).
The terms of the proposed funding agreement included that it be limited to a period of 18 months (unless extended by Court order), that Maranoa pay the Group’s costs and expenses of the winding up, and that the amount Maranoa paid was accounted for as a reduction against TBGL’s entitlements to distributions it would have received in the winding up of Maranoa.
Distinction from Fortress Credit
A creditor of the Group, who neither objected nor consented to the application, raised its concerns in relation to the application in light of the Full Court’s decision in Fortress, the previous leading decision in relation to such funding arrangements. In that case, one of the companies in liquidation had various claims against Fortress but was without funds to pursue those claims. The other group company had assets that would enable it to fund the claims and accordingly, the two companies entered into a funding agreement. The Full Court in the Fortress matter set aside the orders of the primary judge who approved the entry into the funding agreement, and remitted the matter for further consideration on the question of whether the entry into and performance of the obligations under the agreement was ‘necessary’ for winding up the affairs of the funding company and distributing its property within the meaning of section 477(2)(m) of the Act. The Full Court found that an arrangement whereby the funding entity was receiving no benefit could not be said to be ‘necessary’ for winding up the company and the agreement was therefore outside the scope of the liquidator’s powers.
The decision
Most importantly, unlike in Fortress which focused on section 477(2)(m), the Court found that the liquidator had power to enter into the funding agreement under section 477(1)(c) to make a compromise or arrangement with creditors. As the proposed agreement provided a mechanism to ‘prepay’ part of the distribution that Maranoa would make in due course to TBGL, the liquidator had the power to enter into the funding agreement under that section.
The Court considered that the question for the Court under section 477(1)(c) was not the same as that which arose under section 477(2)(m), which was directed to things done by the liquidator in and for the ordinary progression of the winding up. In any event, unlike had been the case in Fortress, the Court considered that the liquidator also had power under section 477(2)(m) of the Act as Maranoa stood to benefit financially from the funding agreement and its winding up would benefit from the arrangement such that the requirements of section 477(2)(m) were satisfied.
The funding agreement in this instance could not be correctly described as a mere litigation funding agreement (as was the case in Fortress). Whilst the funding under the proposed agreement might have been used for litigation (to challenge the validity of the new legislation), its purpose was not so limited. Rather, the object of the funding was to enable the windings up of the entire Group to continue. The Court found that the principles flowing from Fortress did not prevent the making of the orders sought by the Group’s liquidator in those circumstances.
In all of the above circumstances and as the proposed agreement would facilitate the continued effective and efficient conduct of the windings up of the Group, which would otherwise be at risk, the Court approved the entry into the funding agreement and considered that it was proper for the liquidator to cause the companies to enter the agreement.
This article has been prepared by Andrew O’Halloran, Partner and Jacqui Bullock, Special Counsel.