The case of Ford Kinter & Associates Pty Ltd v Reliance Franchise Partners Pty Ltd (in liq) [2025] FCA 139 emphasises the important role that creditors can play in facilitating asset recovery during insolvency proceedings. It further examines the broad discretionary powers the courts have under section 564 of the Corporations Act 2001 (Cth) (the Act), which enables courts to reward creditors who take on the financial risks of litigation to be prioritised when recovering company property or expenses in a winding up due to the risk assumed by them. In doing so, the courts consider the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered.
Background
In 2013, Ford Kinter & Associates Pty Ltd (Ford Kinter) sold its client book to Reliance Franchise Partners Pty Ltd (in liquidation) (Reliance) under a deed requiring payment in three instalments. Reliance paid only the first instalment and not the second or third, causing litigation in which Ford Kinter was successful, obtaining judgment for $932,397.95 plus interest of $253,169.21 and costs. Reliance appealed this judgment which was dismissed with costs.
On 24 April 2018, Ford Kinter sought to enforce the judgment and applied to wind up Reliance.
On 30 May 2018, the Supreme Court of Victoria ordered its winding up and appointed Gideon Isaac Rathner and Matthew Brian Sweeny in their capacity as joint and several liquidators of Reliance (Liquidators).
On 25 June and 20 August 2018, the Liquidators provided a report to creditors regarding Reliance. The Liquidators’ reports revealed that, following a 2016 business sale, Reliance had transferred over $7.8 million to its parent company, Vantage Holdings Group (Vantage), leaving it unable to pay back Ford Kinter’s debt. Ford Kinter was identified as the only unrelated party and feasible creditor capable of funding further investigations into possible recoveries.
To pursue these, Ford Kinter entered two funding arrangements with the Liquidators:
The Funding Agreement made on 5 February 2019 which stated that Ford Kinter would pay $50,000 to the Liquidators to conduct investigations and public examinations.
The Amendment Deed made on 26 April 2021 which stated that following legal advice, provided on 10 February 2021, indicating “properly arguable claims” against Fopar Nominees Pty Ltd (Fopar), Ford Kinter agreed to fund litigation, ultimately providing an additional $190,000 (making the total funds equal to $240,000) and $35,000 as security for costs.
On 22 April 2021, the Liquidators and Reliance commenced proceeding WAD88/2021 in the Federal Court against Fopar (Fopar Proceeding).
On 15 July 2021, Fopar commenced proceeding WAD199/2021 in the Federal Court against the Liquidators, following the Liquidators’ decision not to admit a proof of debt lodged by Fopar.
On 1 August 2022, the Liquidators, Reliance and Fopar entered a deed of settlement which stated that Fopar would pay to Reliance $6.2 million and the Liquidators would admit the proofs of debt lodged by Fopar and Vantage. On 2 November 2022, the Court made an order to this effect.
On 22 November 2023, The Supreme Court taxed Ford Kinter’s costs of the Couty Court proceeding and the Court of Appeal proceeding in the total amount of $339,900.
On 14 December 2023, the Liquidators admitted Ford Kinter’s debt in the total amount of $1.55 million.
On 17 January 2024, Ford Kinter commenced this current proceeding under section 564 of the Corporations Act to have its admitted debt of $1.55 million paid in priority over other unsecured creditors.
Legal Principles
Section 564 of the Corporations Act
Power of Court to make orders in favour of certain creditors
Where in any winding up:
property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or
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.
Section 564 of the Act refers to the power of Court to make orders in favour of certain creditors who indemnify liquidators or contribute funds that lead to the recovery, preservation, or protection of company assets during liquidation.
Specifically, it aims to recognise and enable an advantage to those who assume litigation risks that benefit the broader creditor pool.
Key Principles of Section 564
The onus is on the party applying to be given priority to persuade the Court that a disturbance to the usual order of distribution under section 556 of the Corporations Act is warranted.
Once the jurisdictional threshold the Court is given a broad discretion in respect of the distribution of recovered property.
Provided that the circumstances in either subsection 564(a) (where in a winding up property has been recovered under an indemnity for costs litigation given by certain creditors) or section 564(b) (where in a winding up expenses in relation to which a creditor has indemnified a liquidator have been recovered) arise, the Court may determine whether to advantage a creditor, and the sum involved. The Court must exercise that discretion "with a view to giving [the indemnifying creditor] an advantage over others in consideration of the risk assumed by [the indemnifying creditor]"
How the discretion is to be exercised
The Court will consider:
the public interest in encouraging creditors to provide indemnities to liquidators who seek to pursue claims during a company’s winding up;
creditors who take a risk by providing an indemnity for the costs of litigation to be followed through by a liquidator should not “hazard any further money” in relation to the actions taken by the company in liquidation;
that creditors who are prepared to take a risk in funding litigation should have the discretion applied favourably to obtain priority ahead of other unsecured creditors.
Relevant Factors the Court considers
The risk taken by the indemnifying creditor;
The sum recovered;
The extent to which other creditors failed to provide and indemnity;
The proportion between the debt of the indemnifying creditor and the debts owed to other creditors of equal rank;
The public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered; and,
the totality of the circumstances.
Court’s Finding’s and Reasoning
The Court held that the Court’s jurisdiction to make an order under section 564 of the Corporations Act was enlivened. It was found that Ford Kinter’s funding under the Funding Agreement and Amendment Deed, and the recoveries under the Settlement Deed, meet the requirements of section 564(a).
Ford Kinter made the following submissions as to why it should be granted priority:
The Risk taken by the indemnifying creditor
The initial $50,000 under the Funding Agreement was given to the Liquidators without any legal advice. A further $190,000 plus $35,000 was provided by Ford Kinter for costs under the Amendment Deed and there was a substantial risk that Ford Kinter would never see a return.
It was held that the risk taken by Ford Kinter was substantial as Ford Kinter entered into the Funding Agreement and the Amendment Deed without any guarantee as to the prospect of making a recovery.
The sum recovered
The sum recovered in the Fopar Proceeding was 100% of the amount sought meaning that the Liquidators recovered the full amount they were seeking. The funding provided by Ford Kinter supported the Liquidator’s efforts in pursing the Fopar Proceeding which directly led to the full recovery of the funds. Therefore, the risk taken by Ford Kinter in providing financial support in the Fopar Proceeding was justified due to the successful outcome.
The extent to which other creditors failed to provide an indemnity
When considering whether there were other creditors to provide funding for the litigation, Ford Kinter was the only plausible creditor given that the other creditors were related parties of Reliance.
Mr Rathner, the Liquidator, affirmed that without Ford Kinter’s support, no funding would have been available, and no recoveries would have been successfully made.
Mr Rathner’s affidavit evidence was accepted that third-party litigation funders were considered impractical due to:
Ford Kinter being the only substantial creditor and therefore only plausible source of funding
Commission expectations (typically 25–30%),
Caps on funding,
Possible reluctance to fund defensive litigation (example, Fopar’s proceeding against the Liquidators).
Therefore, the Court found that these factors weighed in favour of the Court exercising its discretion favourably to Ford Kinter.
The proportion between the debt of the indemnifying creditor and the debts owed to other creditors of equal rank
Ford Kinter’s debt ($1.55 million) made up only 7% of the total unsecured creditor claims. The impact of giving it priority would reduce dividends from 20 cents to 14 cents per dollar for other creditors. Given the minor impact and the benefit Ford Kinter’s funding delivered, this supported its case.
Additionally, the Court noted most other unsecured creditors were related parties of Reliance, meaning the practical consequence of awarding priority to Ford Kinter was limited.
The public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered
The Court emphasised the importance of incentivising creditors to fund costly litigation. Without Ford Kinter, the litigation against Fopar likely would not have occurred, leaving creditors with no recovery of assets. Allowing an advantage for funding creditors who submit such contribution promotes future funding and indemnification.
The totality of the circumstances
If Ford Kinter had not advanced funds, creditors would likely not have received any return.
Ford Kinter submits that having regard to:
The significant risk it took when providing funds
The fact there was a 100% recovery on the amounts sought
the limited financial impact on other unsecured creditors, the vast bulk of whom are related entities of Reliance;
the absence of any other creditor or other suitable funder to provide funding; and
the absence of any objection by any creditor to Ford Kinter's application,
That the Court should make orders granting that Ford Kinter should be given priority over the whole of its debt over other unsecured creditors.
Given these factors, the Court considered the application an appropriate use of its discretion under section 564 of the Corporations Act. It specifically distinguished the case from a "100% order" (where the indemnifying creditor receives the entire proceeds), noting that unsecured creditors would still receive dividends.
Key Take Aways
The discretion in section 564 of the Act is broad and protective of risk-taking creditors. Courts are prepared to reward creditors who fund litigation during liquidation despite it being risky to do so.
The creditors contribution must be directly linked to the asset recovery
Exclusive funding is a strong factor if there is an absence of alternative funders
The court emphasises the importance of incentivising creditor support in complex liquidations through providing an advantage over others in consideration of the risk assumed by them
This judgement reinforces public interest of encouraging creditors to fund liquidators in complex and risky litigation
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Principal
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