Creditors - it can pay to fund actions
Justice Black recently directed, pursuant to section 564 of the Corporations Act, that a funding creditor be entitled to preferential payment in the amount of c$50,000 representing the entirety of the net recoveries and the total assets available in the winding up.
The relevant facts were as follows:
- the creditor, Owners Strata Plan 80454 (Funding Creditor), submitted a proof of debt in the amount of $350,000. Other unsecured creditor claims in the winding up included substantial claims by the ATO and Bankwest, each exceeding $2.5 million.
- all creditors were offered the opportunity to fund the liquidator’s examinations and litigation (involving claims of breaches of directors’ duties). Only the Funding Creditor took up the offer.
- the proceedings resulted in substantial recoveries which satisfied the liquidator’s fees and legal costs, leaving a balance of around $50,000 available for distribution to creditors.
- the liquidator could not have conducted the examinations or proceedings which resulted in the recoveries without the indemnity provided by the Funding Creditor.
Justice Black granted orders for the distribution of the entire c$50,000 to the Funding Creditor, in priority to all other creditors, based on the following considerations:
- the fact that a smaller creditor provided the indemnity while larger creditors chose not to;
- the Funding Creditor was exposed to a high degree of risk and uncertainty at the time of providing funding;
- distributions would not have been available but for the indemnity provided by the Funding Creditor; and
- the application was not opposed.
Overall, this is a positive result and the Court sensibly recognised the public interest in securing funding for recovery actions, particularly when the action relates to breaches of directors’ duties. We hope that this decision provides some further comfort about the application of section 564 and encourages more creditors to consider funding arrangements in the future.
Kirsten Farmer, Partner
Manit Oberoi, Solicitor