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Adjudicating bulk claims? Forex it!

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Faced with thousands of complex potential claims from creditors, and a soon-to-expire letter of comfort, the liquidators of Forex Capital Trading Pty Ltd (in liq) sought creative and efficient relief in the Federal Court of Australia to implement an expedited adjudication process to adjudicate and admit these claims without creditors having to individually establish causation for their loss or damage: Woodhouse (liquidator), in the matter of Forex Capital Trading Pty Ltd (in liq) [2022] FCA 600.

Forex Capital Trading Pty Ltd (in liq) (Forex) offered customers the opportunity to trade in high risk over the counter financial products such as contracts for difference and margin foreign currency contracts. However, following an investigation into Forex’s business practices, ASIC commenced proceedings in the Federal Court of Australia, alleging contraventions of both the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). Ultimately, Justice Middleton made declarations as to those contraventions, and imposed pecuniary penalties of $20 million and $400,000 on the Company and its former director on 29 April 2021.[1] Shortly after the penalty was paid, Forex entered into a members’ voluntary winding up process, and Daniel Woodhouse and Nathan Stubing of FTI Consulting were appointed joint and several liquidators.

Following their preliminary investigations, the liquidators formed the view that the Company would not be able to pay all of its debts, and brought an application to have the Company wound up in insolvency.[2] Mr Woodhouse, Mr Stubing, and Ross Blakeley were appointed as joint and several liquidators of the Company (Liquidators) on 7 December 2021.

As a result of the egregious conduct of the Company and its sales representatives identified during their investigations, the Liquidators realised that approximately 8,600 former customers of the Company, who traded with the Company between
1 January 2017 and 1 April 2019, may have claims against the Company for its wrongful conduct. The potential claims included claims for misleading or deceptive conduct and / or unconscionable conduct, contrary to the provisions of both the Corporations Act and the ASIC Act.[3] In particular, the wrongful conduct of the Company included highly aggressive sales tactics, misleading representations as to the risks of trading in the products, and highly conflicted remuneration for employees that rewarded those sales representatives who secured the largest deposits, regardless of the financial situation of the customer.[4]

The loss or damage suffered by these former customers as a result of this wrongful conduct is estimated to be between $69.5 million and $88 million.[5]

Although the Company is being wound up in insolvency, and would appear to not have any assets capable of meeting such claims, Forex’s ultimate parent company, Invesus Group Limited (a company incorporated in Gibraltar), provided an irrevocable undertaking to pay the debts of former customers. However, the letter of comfort expires on 30 June 2022.

Faced with thousands of complex claims against the Company by the former customers, and with a letter of comfort that was expiring imminently, it would not have been possible to formally adjudicate all claims in the usual way and so the Liquidators had to come up with an alternative means of adjudicating as many claims of former customers as efficiently as possible, to allow a claim to be made against Invesus under the letter of comfort for the benefit of the creditors.[6]

With the assistance of KWM, the Liquidators sought external funding to undertake detailed investigations into the conduct of the Company to ascertain the viability of the former customers’ claims,[7] with a view to seeking orders pursuant to s 90-15 of the Insolvency Practice Rules (Corporations) that would allow the Liquidators to utilise an expedited process to adjudicate on, and admit, the claims of former customers at 85% of their face value, without the former customers needing to individually establish causation for their claim.[8] Ultimately, Banks-Smith J granted the relief sought by the Liquidators and observed:

The Expedited Process is a creative and efficient proposal, tailored to the particular circumstances which are faced by the former customers and the Liquidators, notably the pending 30 June 2022 deadline and the extraordinary costs that would be incurred if adjudication of claims proceeded in the usual way.  The Liquidators also propose the discount on claims as a matter of fairness:  in their view it provides a fair price for the ease of saving the former customers the need to collate evidence and formally prove their individual claims.  On the evidence before me, it is apparent that considerable care and effort has been employed by the Liquidators in assessing the veracity of the Selected Former Customers' claims, the former customers' claims generally and the net losses.  The orders sought are within the scope of the relief contemplated by s 90-15 and in my view it is open to the Liquidators to proceed in accordance with the Expedited Process.  To do so is consistent with their obligations as liquidators.[9]

This decision is important for a number of reasons as it confirms a number of practical issues for liquidators who are faced with a large number of complex claims that derive from systemic misconduct of an insolvent company:

  • it is permissible to draw inferences from a sample of potential creditors, provided the methodology adopted establishes a basis for inferences as opposed to mere conjecture (see [67]-[71]);
  • it is permissible to pre-populate a claim form when there is a basis for the calculation of the amount claimed and it can be applied consistently to the creditors (see [72]-[74]); and
  • discounts can be offered as a quid pro-quo for customers establishing causation for legal claims, provided there is a proper basis (see [75], [85] and [90]).

The decision is also significant as it confirms the scope of the Court’s power, and the flexible nature of the relief that can be granted by the Court under s 90-15 IPS when a considered and principled approach is taken to the nature of the relief sought: (see [79]-[83]).

Sam Dundas and Patrick Mackenzie acted for the Liquidators.

References

[1] Australian Securities and Investments Commission v Forex Capital Trading Pty Ltd [2021] FCA 570.
[2] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [15].
[3] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [31]-[42].
[4] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [44].
[5] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [47].
[6] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [21].
[7] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [26].
[8] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [6]-[7].
[9] Woodhouse, in the matter of Forex Capital Trading Pty Ltd [2022] FCA 600, [85].

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