Sydney Land Corporation Pty Ltd v Kalon Pty Ltd Matter No 4837/97 [1997] NSWSC 645 (12 December 1997)

Sydney Land Corporation Pty Ltd v Kalon Pty Ltd

(Under Deed of Company Arrangement)

4837/97

12 December 1997

Young J

The Supreme Court of New South Wales Equity Division

4837/97 - SYDNEY LAND CORPORATION PTY LTD v KALON PTY LTD (UNDER DEED OF COMPANY ARRANGEMENT)

JUDGMENT

HIS HONOUR: The plaintiff is a creditor of Kalon Pty Ltd. The evidence shows that there are eight creditors of Kalon Pty Ltd, whose total claims are $6.2 million. Of these, the plaintiff accounts for approximately $2.1 million, Associated Dairies Pty Ltd and K & J Walker account for about $2.3 million and "Others" account for the remaining $1.8 million.

Kalon Pty Ltd is insolvent and the directors appointed Mr Silvia as administrator. Mr Silvia went through the moratorium administration period, and at the end of that period, at an adjourned meeting of creditors on 27 October 1997, the creditors agreed to enter into a deed of company arrangement. That deed of company arrangement is in evidence as PX01. It is quite a bulky document, consisting of 22 pages, plus triple that bulk in annexures. The deed was accepted by six of the eight creditors. One creditor of a relatively small amount did not attend or vote and the plaintiff voted against the deed.

I will endeavour to simplify the purport of the deed so as to focus on essentials. Doubtless, I will oversimplify and exclude some detail which a party might think is relevant, but it is essential to be able to see the wood for the trees. The creditors which I have described as "Others" are all involved in a New Zealand corporation, Australasian Property Holdings Limited, which is called in the documentation, and which I will call, "APH". The 1996 annual report of APH is in evidence. Despite strong criticism from Mr Somerset, the solicitor for the plaintiff, and my own caustic comments, no further financial material was provided. The consolidated statement of financial performance of the group of which APH is the parent showed that it has accumulated losses in New Zealand dollars of 41.5 million. However, the parent company is not in quite such a bad plight, having current assets of $338 and current liabilities of $98,490. Part of those current liabilities involve loans to subsidiaries or associates.

Two of the directors of APH are Mr T J Lake and Mr L J Chartres. They are also directors of Kalon Pty Ltd. Mr Lindsay-Owen, a director of the plaintiff, gave evidence which suggested that Mr Lake held some 44 million shares in APH and that Mr Chartres also held a substantial number of shares. On the figures before the Court, those shares would appear to be worthless.

The deed provides that Kalon Pty Ltd will sell its shares in two subsidiaries to APH and that APH will satisfy the consideration by issuing either shares or notes in APH (at the election of the creditor) for the appropriate amount (see cl 2.2 of the deed) to the administrator on trust for the creditor. The documents show that were the plaintiff to agree to the proposal or be forced to accept it, in lieu of its debt of $2.1 million it would be entitled to $440,000, to be paid no later than 31 December 1998, or alternatively, 40 million shares in APH. It is said that if it is forced to choose, it would choose the cash entitlement.

The other creditors have, since the deed was sealed, made an election to take shares in APH, except for a creditor who was a company within the group to the extent of $1 million, whose debt is to be extinguished. Only the plaintiff, if the deed is not terminated, would remain in a creditor relationship, to the extent of $440,000. The $440,000 seems to be Australian dollars, but that sum is to be paid no later than 31 December 1998 and no interest will accrue in the meantime.

The plaintiff seeks to terminate the deed under

s 445D(1)(f)(i) of the Corporations Law, that is, that the deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, the plaintiff.

The power of the Court to make an order under that section has been considered on a few occasions in recent years. It was considered by the Full Court of the Federal Court of Australia in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 22 ACSR 169. In that case, the administrator considered that the general test of fairness was whether the benefits flowing to the creditors through the deed would be greater than what they would get on a winding up. The Full Court said at 183:

"General propositions are dangerous where, as here, the court is given a discretionary power to exercise, having regard to the statutory criteria and the circumstances of individual cases. Nevertheless, we do not find the benchmark adopted by (the administrator) particularly surprising."

In Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, Cohen J, in this Court, pointed out that under this subparagraph:

"The test is not merely discrimination but unfair discrimination or unfair prejudice. In order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness in the proposal..."

See also Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707.

Accordingly, I must approach the discretion that I am given under s 445D of the Corporations Law untrammeled by any overriding considerations. I must look at the whole of the effect of the deed and assess its unfairness, if any, to the plaintiff, but in doing so, I must bear in mind the scheme of Part 5.3A of the Corporations Law and the interests of the other creditors, the company and the public generally.

Prior to the enactment of Part 5.3A, apart from schemes of arrangement under s 411 (which required approval by a three-quarter majority in number and value to bind minorities) the rule was that a creditor was entitled to wind up a company ex debito justitiae. The 1992 amendments to the Corporations Law went part way to meet the criticisms that had been made that corporate insolvency law in Australia was too heavily in favour of creditors being able to put businesses out of operation, involving large legal and accountancy costs, when there may be other avenues that could be explored relatively simply, relatively cheaply and relatively quickly, which would produce a better result for the community generally.

Following the Harmer report, the Part was introduced into the Law and was prefaced with s 435A, which stated its object. The explanatory memorandum for the 1992 Corporate Law Reform Bill in paragraph 444 indicated the broad aim, namely that an administrator would take over the affairs of an insolvent company, with a view to developing a deed of company arrangement under which the company might be restored to financial health.

Paragraph 448 of the memorandum then made it clear that s 435A was to emphasise that the primary object of the Part was to maximise the chance of a company emerging from administration with as much as possible of its business continuing in existence. When it was enacted, s 435A of the Law provided:

"The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company."

It would be wrong to pare down each of the words and analyse them, as a broad brush approach is needed with respect to s 435A, as stating an aim. However, it is significant that the 1992 amendments did not generally repeal the rule that the creditor was entitled to a winding up, but it focused upon the company - or the company's business. One of the reasons for this was undoubtedly because the company's business was employing Australians and it was in the interests of Australia that as much employment as possible be maintained. Thus, things were to be structured so as to maximise that chance. It is only if that is not possible that the secondary consideration of the best return to creditors comes about.

Before the enactment of Part 5.3A, under s 411 or its predecessors, there was available to companies the scheme of arrangement procedure. Under that procedure it was not uncommon for companies to be "saved" either by a scheme involving a moratorium period, so that the company could trade its way out of some temporary difficulty, or alternatively, someone would inject new capital into the company, its debts would be barred and it would have a fresh start. There were other forms of schemes of arrangement, but those were the most common ones.

This is picked up in the explanatory notes in paragraph 577. These indicate that, probably, most deeds of arrangement will be of the two types which I have specified, but also indicate that the legislature is to leave as flexible as possible the types of arrangements that could be put in such a deed. However, s 444A(4) shows that, despite that flexibility, the deed is to specify certain things, including:

"(a) The administrator of the deed;

(b) the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors' claims;

(c) the nature and duration of any moratorium period for which the deed provides;

(d) to what extent the company is to be released from its debts..."

These provisions again focus on what might be called the ordinary form of deed, that is, either a moratorium or an injection of funds with a barring of claims, though again it is not limited to those situations.

Accordingly, when one is looking at what is oppressive or unfairly prejudicial under s 445D, one looks at it in the background of the general right of a creditor to be paid or to wind the company up, or to have the company administered by the administrator under the deed in a way which keeps the company's business going and will see the creditor paid something out of the property of the company. If a scheme in a deed deviates from that, then the creditor is more easily able to say that it is operating oppressively, than otherwise.

It is a little difficult to apply these aims to a holding company, or to a company that is to transfer its business offshore, but it seems to me one applies the aims cy pres.

I turn now to the details of the present deed. The administrator, Mr Silvia, is to be the administrator under the deed. However, Mr Silvia's role is a relatively minor one. He is, to a great degree, a conduit. This is because where a creditor elects to take shares in APH, the shares will pass through to the administrator, but will be held on bare trust for the creditor. Likewise if the creditor is to get a note in APH. Although called a note, the second alternative really is just a certificate that APH owes the creditor an amount of money which is payable, interest-free, no later than 31 December 1998 on an unsecured basis.

Although there is some flexibility in s 444A(4)(b), see, for instance, Federal Commissioner of Taxation v All Suburbs Car Repairs Pty Ltd [1994] FCA 1393; (1994) 14 ACSR 753, 756, it does not seem to me that where one has an administrator as a bare trustee for creditors, that one is involved in a scheme where the administrator is administrator of the deed in the true sense and is dealing with the property of the company for the benefit of the creditors under the deed.

The point is significant because as Mr Somerset pointed out, experienced company trustees such as Mr Silvia have great skills and have a record for integrity. A creditor may very well trust such a person with administration, even if there were various X factors involved.

Miss Mitchell, the solicitor for the administrator, points out that under the deed the administrator is not a bare trustee of all the assets, because there are some debts owing by a subsidiary which the administrator is to endeavour to collect and to distribute to the creditors. I take that point, but I do not think that it affects the basal point that the great bulk of what is to pass to the creditors is not to be administered under the deed, but is to pass beneficially to the creditors direct.

What will happen under the deed is that the assets of the company, which is virtually a holding company operating through subsidiaries, will pass to APH. The indication is - though this is not necessarily how the figures will fall out - that the assets are worth approximately $1.1 million. The subsidiaries operate retirement villages and the evidence suggests that a valuation based on the cash flow that will be generated by these retirement villages, appropriately discounted, less the secured liabilities, will be about $1.1 million. This $1.1 million is not written in concrete, as it is based on various intangible assumptions, such as the occupancy rate of the retirement villages.

However, if that is the amount involved, the assets of APH are increased by $1.1 million and it becomes solvent. The only claim against it, seeing that all the other creditors have either released their debts or are taking equity in APH, would be the $440,000 owed to the plaintiff, payable on 31 December 1998. However, it should be pointed out that what the $1.1 million represents is not cash, but the market valuation of the subsidiaries based on a valuation of their cash flow. However, the directors of APH appear to consider that at least $290,000 would be available to be released from APH to the plaintiff, because an open offer was made in Court that that sum could be paid to the plaintiff in cash in nine months in lieu of its entitlement under the deed, if it wished to accept that offer, which it did not.

Accordingly, the effect of the scheme is that APH becomes solvent and its shares have some worth, though perhaps not much worth, but certainly the shareholders are in a better position than they are at the moment. Furthermore, the creditors or perhaps just the plaintiff as the sole remaining creditor, are dependent upon APH having $440,000 in cash available as at 31 December 1998. If that money is not available, it would seem - no one has said anything different in argument - that the plaintiff would need to sue APH in New Zealand for that $440,000. In the meantime, the affairs of APH would be controlled by its directors, including Mr Lake and Mr Chartres, in whom the person behind the plaintiff says he has no confidence.

Accordingly, the plaintiff says that it is oppressed and unfairly treated because instead of having a certain sum of probably $400,000, if the $1.1 million valuation is correct, or at least something like $250,000 if it is not, in six months time, it instead becomes a creditor of a New Zealand corporation, run by people in whom it has no confidence, with an unsecured debt payable in twelve months time, free of interest.

The answer that is given to this is that it is the same for everybody. The riposte is that the creditors whom I have called "Others" do get a collateral advantage, because their shares in APH start to have some value. The rejoinder is that the creditors, Associated Dairies Pty Ltd and K & J Walker, neither of whom have shares in APH, have agreed to take shares. All the plaintiff can really say to that is that it does not agree that Associated Dairies Pty Ltd is a creditor in any event, but there was no evidence on that matter and I think I have to accept that Mr Silvia has already looked at the matter and thought it is better to admit Associated Dairies Pty Ltd as a creditor than not.

Certainly the fact that Associated Dairies Pty Ltd and K & J Walker have accepted the proposal is a matter which goes against the plaintiff. Were it not for the factors that involve forcing on the plaintiff a regime completely contrary to the regime under which it presently sits as a creditor, I would have thought that the Associated Dairies factor would have operated conclusively against the plaintiff. It is very difficult for one creditor to say that it has been unfairly prejudiced, when another independent creditor of substantial amount freely and voluntarily accepts the proposal.

I then do have to consider, because all the authorities say that it is a relevant matter, the comparable position of the plaintiff on a winding up, compared with its position under the deed. I do not think, on the balance of probabilities, that the plaintiff has shown that it is worse off under the scheme than it would have been in a winding up. I think the evidence really only goes to show that it is fairly close to line ball one way or the other. In each case there are various imponderables.

However, it seems to me that one must add in other facts, namely:

(a) that the plaintiff, and indeed the other creditors, are not likely to be better off under the deed;

(b) that there is a collateral benefit to the shareholders in APH;

(c) that the plaintiff has to continue to have a commercial relationship with people in whom it has no confidence;

(d) that the assets are shares and the subsidiaries are effectively removed from the control of the administrator; and

(e) that the claim of the creditor is really not against the administrator any more, but against APH direct.

When I look at all these factors, I reach the conclusion that the deed is oppressive with respect to the plaintiff. Accordingly I should make orders 2 and 5 in the summons.

I will stay that order up to and including Tuesday 16 December 1997 and list the matter at two o'clock Tuesday 16 December 1997. I do not have to make any other orders as to costs.