Ford Kinter & Associates Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) v Reliance Franchise Partners Pty Ltd (in liq) (No 2)

This Federal Court decision is about insolvency recoveries and creditor priority. It is not a franchising law case, even though the insolvent company was called Reliance Franchise Partners Pty Ltd. The real issue was whether an unsecured creditor that funded the liquidators should be paid ahead of other unsecured creditors under s 564 of the Corporations Act.

Ford Kinter had sold its client book to Reliance on instalment terms, was left unpaid for part of the price, obtained judgment, and then saw Reliance go into liquidation. The liquidators identified possible recoveries but needed money to investigate and pursue them. Ford Kinter provided that funding. The funded work ultimately led to a settlement payment of $6,237,475.55 into the liquidation. Ford Kinter then asked the Court to alter the usual order of distribution so that, after any remaining s 556(1) claims, its admitted debt of $1,552,289.56 would be paid before other unsecured creditors. The Court granted that order.

The commercial dispute began with a business sale. Ford Kinter operated a general insurance brokerage business and in 2013 sold its client book to Reliance. The deed provided for the price to be paid in three instalments. Reliance paid the first instalment but not the second and third. Ford Kinter sued and succeeded completely. The County Court ordered Reliance to pay the unpaid amount, interest and costs, and the Court of Appeal later dismissed Reliance's appeal with costs.

That judgment still did not produce payment. Ford Kinter moved to wind up Reliance. Before the winding up application was determined, Reliance's director appointed voluntary administrators. The Supreme Court of Victoria then wound up Reliance and appointed liquidators.

Once in office, the liquidators investigated Reliance's affairs and reported to creditors. Their August 2018 report said that after Reliance sold its business on 15 January 2016, it had disbursed more than $7.8 million to its parent company, Vantage Holdings Group Pty Ltd. The liquidators considered those dealings had the effect that Reliance could not pay Ford Kinter's judgment debt. They recommended public examinations of the director and related entities. They also said Ford Kinter was likely to be the only unrelated creditor in the winding up and therefore the only realistic source of funding for further work.

That point mattered commercially. A liquidator may identify a potentially valuable claim, but without funding the claim may never be investigated properly or brought at all. Ford Kinter's director formed the view that funding the liquidators was the only chance of recovering any of the debt owed to Ford Kinter.

Ford Kinter first entered into a funding agreement dated 5 February 2019 and advanced $50,000. The funded purpose covered an application to approve entry into the agreement, public examinations to obtain documents and oral evidence, and advice on potential claims. The agreement also defined funded property broadly and included a mechanism dealing with repayment and a possible later application under s 564.

Public examinations were conducted between November 2019 and March 2021. On 10 February 2021, Ford Kinter received counsel's advice about a potential recovery action against Fopar Nominees Pty Ltd. On the basis of that advice, Ford Kinter entered into a deed of variation that expanded the funding purpose to include approval of the variation, a final round of public examinations and recovery proceedings against relevant parties. The variation also required further progressive payments, including an initial $50,000 and then monthly top-ups if the relevant account balance fell below a set level.

The liquidators and Reliance commenced the Fopar proceeding in April 2021. Fopar later brought separate proof-of-debt litigation after the liquidators decided not to admit a proof of debt lodged by Fopar. Those disputes eventually resolved by settlement. Under a deed dated 1 August 2022, Fopar agreed to pay $6,237,475.55 into the liquidation, inclusive of interest and costs, and the liquidators agreed to admit proofs of debt lodged by Fopar and VHG. The Court later authorised the liquidators to enter into that settlement.

By the end of the process, Ford Kinter had provided $240,000 in funding plus $35,000 as security for costs. Its own debt was later admitted in the liquidation at $1,552,289.56, which included the judgment debt and taxed costs from the earlier County Court and Court of Appeal proceedings. Ford Kinter then applied to the Federal Court for priority under s 564.

The legal issue was whether the Court should exercise its power under s 564 of the Corporations Act to alter the usual order of distribution in Reliance's liquidation. Ordinarily, after higher-ranking claims are dealt with, unsecured creditors share pari passu. Section 564 allows the Court to make a different order where property has been recovered, protected or preserved because certain creditors paid money or gave an indemnity for litigation or related expenses.

So the question was not whether Ford Kinter was a creditor. That was already established. The question was whether Ford Kinter's funding brought the case within s 564 and, if so, whether it was just to give Ford Kinter an advantage over other unsecured creditors in light of the risk it had assumed.

The Court also referred to established discretionary factors from earlier cases. These included the risk taken by the indemnifying creditor, the sum recovered, the extent to which other creditors failed to provide an indemnity, the proportion between the funding creditor's debt and the debts of other creditors of equal rank, the public interest in encouraging creditors to support liquidators, and the totality of the circumstances. Importantly, the Court said the onus was on Ford Kinter to persuade it that a disturbance to the usual order of distribution was warranted.

Anderson J held that the Court's jurisdiction under s 564 was enlivened. Ford Kinter's funding under the original funding agreement and the later variation, together with the recoveries under the settlement deed, met the requirements of s 564(a). That meant the Court had power to consider altering the distribution of the liquidation property.

The harder question was whether the discretion should be exercised in Ford Kinter's favour. The Court said yes. A central reason was the level of risk Ford Kinter had taken. The initial $50,000 was advanced before there was any guarantee of recovery and without legal advice confirming a strong claim. Later, even after counsel's advice was obtained, the advice only said there were "properly arguable claims" and was subject to a material qualification about when Reliance became insolvent. Ford Kinter still advanced significant further funds and provided security for costs.

The Court also accepted that Ford Kinter was the only plausible creditor to provide funding because the other major creditors were related parties of Reliance. One of the liquidators gave evidence that without Ford Kinter's funding there likely would have been no recoveries for creditors at all. The Court accepted that evidence. It also noted that the funded Fopar proceeding recovered 100 per cent of the amount sought.

Another relevant factor was the effect on other unsecured creditors. The liquidators had circulated an analysis showing that if Ford Kinter did not get priority, unsecured creditors might receive up to 20 cents in the dollar, whereas if Ford Kinter did get priority, other unsecured creditors might receive about 14 cents in the dollar. The Court noted some issues in the liquidators' calculations and assumptions, but accepted the broad point that Ford Kinter's debt was modest compared with the overall unsecured creditor pool, making up about 7 per cent of it, and that the practical impact of granting priority was limited. The Court also considered it significant that the bulk of the other unsecured claims were from related entities.

The Court emphasised the public interest in encouraging creditors to fund liquidators where recoveries would otherwise not occur. It referred to earlier authority supporting a liberal exercise of discretion in favour of creditors who take the risk of funding successful litigation. Looking at the totality of the circumstances, including the apparent transfer of substantial company assets to related companies and the likelihood of a nil return without Ford Kinter's funding, the Court concluded that Ford Kinter should receive priority for the whole of its admitted debt.

The final orders required the liquidation property to be distributed first to satisfy any remaining claims under s 556(1), then to Ford Kinter in the amount of $1,552,289.56, and then any balance to other unsecured creditors on a pari passu basis. The Court also ordered that Ford Kinter's costs of the application be paid out of the liquidation property with the same priority.

This case is useful for businesses that become unsecured creditors after a customer, buyer or group company collapses. It shows that creditor funding can be commercially powerful where there is a realistic recovery path but no money in the liquidation to pursue it. If the liquidator identifies possible claims against related parties, recipients of company funds or others involved in pre-liquidation transactions, the real question may become who is willing to fund the work needed to turn that possibility into an actual recovery.

But the case should not be read too broadly. It does not mean every creditor who contributes money will get priority. The Court's power under s 564 is discretionary and fact-sensitive. Ford Kinter succeeded because several factors lined up strongly in its favour: it was effectively the only plausible unrelated funding creditor, it funded the process before any recovery was assured, the funded action recovered the full amount sought, there likely would have been no recovery without its funding, and the practical prejudice to other unsecured creditors was limited.

Another case could come out differently. For example, the result may be less favourable if the funding did not clearly cause the recovery, if several creditors were willing to contribute but one chose to act alone, if the proposed priority would heavily prejudice unrelated creditors, or if the funded claim had only a weak connection to the property ultimately recovered. The fact that this application ultimately proceeded unopposed is also relevant context. A contested application with active evidence from objecting creditors may involve a more difficult discretionary assessment.

For businesses selling assets or goodwill on instalment terms, the case also underlines a more basic lesson. The best protection is still transaction design at the start. If payment is deferred, think carefully about security, guarantees, default rights, information rights and what happens if the buyer is part of a wider corporate group. Once insolvency arrives, the focus shifts from contract enforcement to recovery strategy, and that can be slower, more expensive and more uncertain.

Several documents and steps were important to the outcome. First, the original sale deed created the deferred payment obligation that later became the judgment debt. Second, the County Court judgment and the failed appeal established Ford Kinter's status as a substantial creditor. Third, the liquidators' reports identified the suspected disbursements to the parent company and the need for public examinations. Those reports helped explain why funding was needed and why Ford Kinter was the only realistic source of it.

Fourth, the funding agreement and the deed of variation were central. They showed what work Ford Kinter agreed to fund, how the funding purpose expanded over time, and that the arrangement contemplated a possible later application under s 564. Fifth, the public examinations and counsel's advice showed that the liquidators' recovery strategy developed through investigation rather than appearing fully formed from the start. That supported the Court's view that Ford Kinter took real risk at an early stage.

Finally, the settlement deed mattered because it produced the actual recovery into the liquidation. The Court treated the settlement amount as the product of the funded process. The admitted proof of debt for Ford Kinter then fixed the amount for which priority was sought. In practical terms, this sequence shows why businesses considering creditor funding should keep careful records of the funding purpose, the steps taken with the money, the advice received, the recoveries achieved and the amount of their own admitted debt.

Creditors often ask whether funding a liquidator is simply another form of debt recovery. This case shows it is more than that. It is a strategic insolvency step that may improve your position, but it also exposes you to real risk. You may fund investigations, examinations or litigation and still recover nothing. The Court will not reward funding for its own sake. It will look at whether the funding actually enabled a recovery and whether giving you priority is just in the circumstances.

Another common question is whether a commercial litigation funder could do the same job. The evidence in this case was that third-party funders often seek commissions in the range of 25 to 30 per cent of recoveries, may impose funding caps, and may not fund all parts of a dispute, including defensive proceedings. That evidence helped explain why Ford Kinter's funding was suitable here. But each liquidation is different, and businesses should compare the likely economics and control issues before deciding how a claim should be funded.

Creditors also ask whether they should expect a full priority order. The answer is no. The Court can decide whether to advantage a creditor and by how much. In this case Ford Kinter obtained priority for the whole of its admitted debt, but the judgment makes clear that the outcome depends on the facts. The discretion is broad, and the Court will weigh the risk assumed, the recovery achieved, the creditor mix and the overall fairness of the proposed distribution.

The judgment was delivered on 20 February 2025 and the reasons were published on 28 February 2025. The application was brought in the Federal Court of Australia and ultimately proceeded unopposed. The Court made the orders sought by Ford Kinter at the hearing and later published reasons explaining why.

For readers using this case as guidance, the key status point is that it is a first instance Federal Court decision applying established principles under s 564 to a particular set of facts. It is a useful authority on creditor-funded liquidator recoveries, but it does not create a universal rule that funding creditors always rank ahead of other unsecured creditors.

This page is based on the Federal Court of Australia decision in Ford Kinter & Associates Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) v Reliance Franchise Partners Pty Ltd (in liq) (No 2) [2025] FCA 139. The reasons identify the statutory issue, the factual background, the funding arrangements, the settlement recovery and the factors the Court considered relevant to the exercise of discretion under s 564.

The decision should be read as an insolvency priority case. The names of the parties may suggest a franchising dispute, but the Court's reasoning is about liquidation recoveries, creditor funding and distribution priorities. The result turned on the specific facts, including Ford Kinter's role as the only plausible funding creditor, the substantial risk it assumed, the full recovery achieved in the funded proceeding, and the limited practical impact on the rest of the unsecured creditor pool.