Insolvency Practitioners often need to
reply on creditors with deep pockets to fund recovery actions
which otherwise would not be pursued. A litigation funder may
not always be the answer or available.
Section 564 Corporations Act is a statutory recognition that
creditors, who put their hands in their pockets, ought to be
entitled to a greater share of the spoils than other creditors,
because of the financial risks they assume in doing so.
In Tolcher v National Australia Bank [2004] NSW SC
6, Barrett
J was called upon to consider the application of section 564.
Tolcher was appointed the Administrator of Lloyd Scott Enterprises
Pty Ltd (LSE) and subsequently became its Liquidator. A secured
creditor, Creditor B, appointed a receiver. The receiver arranged
for certain persons connected with the affairs of LSE to be
examined. Following the examinations and a mediation, Tolcher
achieved a $2.5 million recovery from a company which he had
asserted had received an unfair preference and had engaged
in insolvent trading (on the ground that it was a "shadow
director").
Tolcher received financial support from Creditors A, B and
C, which enabled him to achieve the $2.5 million recovery.
Creditors A, B and C contributed $8,800 each to Tolcher's costs
and expenses of the mediation. Creditors A and C contributed
$10,000 each to Tolcher's expenses incurred in another proceeding
which determined the extent of Creditor B's security over the
assets of LSE. Creditor A provided $103,700 to enable the business
of LSE to be continued whilst in administration, $35,407.79
for legal costs for a solicitor's attendance at the examinations
and $21,818.18 for the preparation of a solvency report. Creditor
B provided $150,000 for the receiver to conduct the examinations.
Tolcher sought orders under section 564 affording each of
Creditors A, B and C an advantage over other creditors in the
distribution of LSE's property to the extent of $1,000,000
(some 3 times their combined contributions).
Barrett J determined that he had to decide two preliminary
issues before he could address whether section 564 should be
applied:
First, whether sums outlaid by creditors to enable an administrator
to carry on the business of a company in administration fell
within the contemplation of section 564.
His Honour held that they did not. Section 564's use of the
words "Where in any winding up" and use of the term "liquidator" in
sub-paragraph (b), as well as its historical antecedents, required
a conclusion that its scope was confined to liquidations.
Secondly, whether the liquidator's claims which resulted in
the $2.5 million recovery, were of a kind that may be regarded
as "property" within the meaning of the section.
His Honour held that they were of that kind. Since the purpose
of section 564 was to assist a Liquidator in "obtaining
and securing resources for the benefit of creditors generally",
the section should be understood as referring to all property,
including rights of action given to a Liquidator to recover
unfair preferences and to pursue insolvent trading claims,
that the Liquidator has or can obtain for the purposes of the
winding up.
Barrett J then turned his attention to the quantum of the
contributions of the three creditors. His Honour held that:
no part of the $103,700 provided by Creditor A, whilst Tolcher
was the Administrator of LSE, would be taken into account;
Tolcher obtained useful information from the examinations
which he used for the purposes of the winding up. Seventy five
per cent of the time spent in Court on the examinations was
referable to the recovery obtained by Tolcher. It was therefore
appropriate to allow $112,500 of the $150,000 provided by Creditor
B for the examinations;
all other contributions made by the three creditors should
be allowed.
The allowable contributions were therefore set at $76,025.97
for Creditor A, $121,300 for Creditor B and $18,800 for Creditor
C.
His Honour was satisfied that the allowable contributions
should be recognised under section 564. His Honour found it
instructive that none of the creditors, including a creditor
which had not provided funding and which appeared as a contradictor
in the proceeding, opposed the general proposition that the
contributions made by the creditors warranted recognition under
section 564 (although the contradictor did not agree to the
amounts claimed by Creditors A and B) and that Creditor C deserved
its claimed priority dividend of $60,000.
Since the (agreed) priority for Creditor C was 3.1915 times
its contribution, this was an appropriate multiplier to use
for all the Creditors. This meant that Creditor A was entitled
to receive $242,635.88, Creditor B was entitled to receive
$387,128.95 and Creditor C was entitled to receive $60,000.
The Court accordingly ordered that the Liquidator of LSE distribute
by way of interim dividend to creditors, an aggregate sum of
$689,765.85 (to be paid as set out above) such distribution
to be to the exclusion of any like payment to any other creditor
and without prejudice to the right and ability of each payee
to participate rateably with other creditors in the winding
up in respect of the balance of its debt.
