The recent decisions by the Court of Appeal in the matters of Lonnex Pty Ltd (in liq)  VSCA 23 and Lonnex Pty Ltd (in liq)  VSCA 62 highlight the factors courts consider when deciding whether to approve a compromise by a liquidator, and the cost implications for liquidators who unsuccessfully appeal against a Court’s refusal to grant directions.
The appeal arose from an associate judge’s decision to refuse to make orders directing that the liquidators of Lonnex Pty Ltd were justified in compromising a proceeding against Lonnex & Millennium Management Holdings Pty Ltd (LMMH). His Honour held that the liquidators had failed to justify the compromise as “reasonable”, particularly in circumstances where the major creditor, the Commissioner of Taxation, opposed the settlement.
The Court of Appeal dismissed the appeal and held that the liquidators bore the same risk as any unsuccessful litigant and were therefore personally liable for the Commissioner’s costs of the appeal. Significantly, the Court held that the liquidators were not entitled to an indemnity from Lonnex’s assets.
The decision is relevant to all liquidators seeking the Court’s seal of approval on the settlement of litigation and in deciding whether to appeal against a Court’s refusal to grant the requested directions.
- When seeking approval of a proposed settlement, detailed and specific evidence should be advanced as to why it is in the creditors’ interests for the settlement to be approved, particularly if one or more creditors disagree with the proposal.
- A liquidator should be particularly careful when appealing against a court’s decision to reject an application for directions, and not assume an entitlement to an indemnity from company assets. If unsuccessfully appealed, a liquidator must be ready to bear the cost consequences of that appeal personally.
Lonnex Pty Ltd and Millennium Management Pty Ltd were related companies who operated medical practices. On 3 February 2011, Lonnex sold its medical practices to an entity in its consolidated tax group, LMMH, for $22 million payable via an intercompany loan. Millennium similarly sold its medical practices to LMMH. On the same day, Lonnex and Millennium forgave the loans (less some liabilities). The effect of that transaction was that the assets of Lonnex and Millennium were transferred to LMMH, but most of their liabilities remained.
Lonnex and Millennium both went into liquidation. Ross McDermott and John Potts were appointed as liquidators of Lonnex and Andrew Yeo as liquidator of Millennium. Both groups of liquidators separately commenced uncommercial transaction proceedings against LMMH, with the Commissioner funding both actions (Lonnex up to mediation only). LMMH made an offer to settle the Lonnex proceeding for a sum of money, with the liquidators agreeing it was a reasonable compromise.
Proceedings at first instance
The Lonnex liquidators applied under ss 477(2B) and 511 of the Corporations Act 2001 (the Act) for orders directing that they were justified in compromising the Lonnex proceeding and approving entry into terms of settlement accordingly. The Commissioner, who is a creditor for more than $7.7 million, the Commissioner of State Revenue and Mr Yeo all appeared at the hearing and opposed the proposed settlement.
The liquidators tendered a confidential opinion from counsel, which was criticised by the Commissioner on a number of issues, including that it lacked detail on the issue of whether the settlement amount was reasonable. The associate judge held that this was a valid objection and that overall, the advice was insufficient.
The associate judge ultimately refused the application on the basis that the views of the creditors must prevail and none of the major creditors supported the settlement.
Issues on appeal
An appeal was brought by the liquidators. The main issues raised were:
- The significance of the fact that funding of the litigation and the liquidators’ past and future expenses and liabilities had not been secured
- The significance of the creditors’ opposition to the proposed settlement
- The relevance and content of the legal opinion
- Whether the proposed settlement was in the interest of creditors
The Court of Appeal in dismissing the appeal, held that the associate judge was correct to regard the wishes of creditors as a very important consideration, but that he also took account of other matters including the funding position, the commercial decision of the liquidators, the Millennium proceeding and the legal opinion in making his decision and that it was open to him to reach the decision he did.
In relation to the proceeding at first instance, the Court held that the liquidators’ and Commissioner’s costs be paid out of the assets of Lonnex.
In relation to the appeal, the Court held that the liquidators should pay the Commissioner’s costs and that the liquidators have no right of indemnity against the assets of Lonnex in respect of those costs or their own costs. In considering whether or not the liquidators were entitled to an indemnity, the test was whether the costs had been properly, in the sense of reasonably and honestly, incurred. That issue could not be resolved by considering only whether the appellants acted honestly, or upon advice, in bringing the appeal.
The Court found that notwithstanding the liquidators’ views that the compromise was in the best interests of the creditors, entry into the compromise would also have been of benefit to the liquidators as it would have secured payment to them of outstanding liabilities and averted the risk of future adverse costs orders. The fact that such a benefit was sought over the objections of the creditors, by way of an appeal that was wholly unsuccessful, meant that the incurring of costs in respect of the appeal could not be regarded as reasonable.