Australia: Insolvency Update – March 2007

Last Updated: 29 March 2007


  • Funding by Creditors in Liquidations
  • Bowesco Pty Ltd (Receiver and Manager Appointed) v Zohar [2007] FCAFC 1

Funding by Creditors in Liquidations

Creditor funding of liquidator recovery actions has become increasingly popular, and was recently considered by Austin J of the New South Wales Supreme Court in Welded Mesh v APS Group Pty Ltd (2006) 59 ACSR 602; [2006] NSWSC 1080.

The Section

Section 564 provides:

Where in any winding up:

  1. property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment or the giving of indemnity by creditors; or
  2. expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them." [emphasis added]

The section only relates to the distribution of specific property recovered as a result of the indemnity or payment. It does not relate to all property in a liquidation.

The Decision

In Welded Mesh v APS Group Pty Ltd (2006) 59 ACSR 602; [2006] NSWSC 1080, a creditor called Welded Mesh indemnified the liquidator for costs of preference recovery proceedings against Onesteel Reinforcing Pty Ltd (Onesteel). Eventually, the liquidator settled the preference recovery proceedings against Onesteel. The liquidator was also successful in a preference recovery proceeding against BASF Australia Pty Ltd (BASF).

Welded Mesh only provided an indemnity in relation to the Onesteel proceedings, but nevertheless applied to Court under Section 564 of the Corporations Act 2001 (Cth) for a priority payment from both preference recovery actions.

Welded Mesh argued that the giving of the indemnity in the Onesteel proceedings essentially bolstered the liquidator’s coffers and facilitated a settlement of the BASF proceedings. Austin J easily rejected this argument on the facts as the indemnity did not extend to the BASF proceedings.

Austin J considered the risk assumed by Welded Mesh in granting the indemnity in the Onesteel proceedings to be miniscule, because the liquidator had already received a very significant offer from Onesteel by the time a legally binding indemnity agreement was entered into. The probability of settlement was found to be reasonably high at the time of granting the indemnity, and so no order was made under Section 564 of the Corporations Act 2001 (Cth) in favour of Welded Mesh.

Austin J also considered the following points in support of his refusal of Welded Mesh’s application for priority funding:

  • the legal costs in the Onesteel proceedings were not significant;
  • Welded Mesh had only paid part of the liquidator’s legal fees, despite repeated requests made by the liquidator. The fees were legitimately due and owing under the indemnity;
  • the liquidator had tendered payment of the amount already paid by Welded Mesh;
  • Welded Mesh allowed the liquidator to expect that there would be an indemnity in the BASF proceedings, but failed to grant the indemnity despite the liquidator incurring legal costs;
  • there was no evidence that an invitation to provide an indemnity was extended to other creditors, and so it would be unfair on them to allow Welded Mesh to enjoy a priority.

Although unnecessary for the determination of the application, Austin J endorsed earlier views of Barrett J in Australia and New Zealand Banking Group Limited v TJF EBC Pty Ltd (2006) 224 ALR 490; 56 ACSR 570; [2006] NSWSC 25 that Section 564 of the Corporations Act 2001 (Cth) may allow a funding creditor to obtain priority over employee entitlements (enshrined in Section 556) where it is just to do so.


Detailed advice should always be obtained by liquidators and creditors alike when entering into liquidation funding arrangements, especially where litigation is funded. Litigation is a costly exercise, and in many cases is inherently difficult to predict an outcome.

Bowesco Pty Ltd (Receiver and Manager Appointed) v Zohar [2007] FCAFC 1

The facts were relatively simple. A secured creditor of Westpoint Corporation Pty Ltd (Westpoint Corporation) appointed receivers and managers to all of its property under powers conferred by a fixed and floating charge. The receivers and managers were subsequently appointed over a specific item of contentious "property", being a call option granted to Westpoint Corporation to purchase land (Option). The Option had been granted in favour of Westpoint Corporation by Westpoint Management Pty Ltd, the responsible entity and owner of the Warnbro Fair Shopping Centre in Perth, and adjacent land.

Bowesco Pty Ltd (Bowesco), a related entity of Westpoint Corporation, claimed that the receivers and managers had no right to deal with the Option because it was not within the ambit of the fixed charge, and Westpoint Corporation had already assigned the Option to it in the ordinary course of its development business. The assignment occurred after Westpoint Corporation granted the fixed and floating charge to the secured creditor, and without the consent of the secured creditor.

Bowesco’s central argument was that upon the proper construction of the charge, the intention of the parties was for the Option to comprise part of the floating charge charge component.¹ It argued that the conduct of Westpoint Corporation and its related entities subsequent to the creation of the charge showed an intention to treat the Option as a floating charge asset. This would allow Westpoint Corporation to dispose of the Option as if it was "stock in trade", because Westpoint Corporation regularly sold or dealt in real property.

The Full Federal Court rejected Bowesco’s arguments for several reasons. Firstly, the terms of the charge were clear and based upon normal principles applied to construing commercial agreements, the charge was fixed over the Option. Secondly, the conduct of the parties after the creation of the charge was inadmissible for the purposes of construing the charge.

The Court also upheld the trial judge’s finding that the assignment of the Option was not in the ordinary course of business. That is, for the assignment to be consistent with a permitted dealing under the floating charge, it must have been made in the ordinary course of business. In this case, the assignment was made for consideration of $100, when there was evidence that the Option was worth at least $1m. Transfers at undervalue are not made in the ordinary course of business.


1. Bowesco relied upon the decision of the New South Wales Court of Appeal in Boambee Bay Resort Pty Ltd (in liq) v Equus Financial Services Ltd (1991) 26 NSWLR 284. There, a company that engaged in a time share scheme had given a guarantee and a charge in support of its guaranteed obligations to a financier. The New South Wales Court of Appeal construed the charge as a floating charge based upon the intention of the parties.


Dan Pennicott

t (07) 3114 0102


Matthew Broderick

t (07) 3114 0106



Martin Hirst

t (02) 9931 4871


Justin Bates

t (02) 9931 4763


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.