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Ex tempore
Introduction
1 This is an application under s.445D(1) of the
Corporations Act 2001 (Cth) whereunder the Plaintiff seeks an
order terminating a Deed of Company Arrangement entered into between the First
Defendant (“APPL”)
and the Second Defendant (“RCW”).
Also party to the Deed is the administrator of APPL, Mr Palmer. Mr Palmer was
appointed
administrator of APPL on 15 November 2004.
2
A meeting of creditors of the company was held on 10 December 2004 and was
adjourned. At the adjourned meeting of creditors,
which was held on 8 February
2005, creditors considered two Deeds of Company Arrangement. One was proposed by
the Plaintiff and the
other was proposed by three entities which, for the sake
of convenient reference, I will include within the description “CVC
parties”.
3 The Deed of Company Arrangement
proposed by the CVC parties was amended at the meeting in accordance with
variations proposed
by Dr Koch, who was an employee of APPL and claims to be a
creditor. A majority of creditors in both number and value voted against
the
Deed of Company Arrangement proposed by the Plaintiff and voted in favour of the
Deed of Company Arrangement proposed by the
CVC parties. The Deed was,
therefore, executed by the parties to it on 1 March 2005. These proceedings were
commenced on 9 March
2005.
4 The application by the
Plaintiff is made on three of the grounds provided by s.445D(1), namely, that
the Deed is oppressive or unfairly prejudicial to or unfairly discriminatory
against unsecured creditors of APPL, including
the Plaintiff (s.445D(1)(f)(i)),
the Deed is contrary to the interests of creditors as a whole
(s.445D(1)(f)(ii)), and effect cannot be given by the Deed without injustice or
undue delay (s.445D(1)(e)).
5 Initially there was some
debate as to whether the Plaintiff had standing as a creditor to make this
application. However, the
Plaintiff maintains that it has standing as an
“interested person”, within the provisions of s.445D(2)(c).
There are good reasons why, if possible, I should not endeavour to determine
APPL’s status as a creditor: there will, in due
course, be a fully
contested dispute about the debt.
6 Accordingly, it is
sufficient that I proceed with the application on the basis that the Plaintiff
and, so far as is relevant,
the other institutions which support it, claim to be
“interested persons” because they claim to be creditors of APPL
in
substantial amounts and the Deed deals with their claimed interests either in
the fund established under the Deed or in the assets
of APPL which would
otherwise be available for distribution in a liquidation. At the end of the day
I do not think that there was
any opposition from Mr Coles QC, who appears with
Ms Whittaker for RCW, as to the standing of the Plaintiff and of the others who
support it, as “interested persons”.
Whether consideration for Deed inadequate
7 The Plaintiff says that the Deed is unfair or oppressive
in that there are assigned to the proponent of the Deed, that is RCW,
all of the
assets of APPL. The consideration for the assignment is said to be inadequate
or, rather, it is said that the consideration
may, in certain circumstances,
prove to be inadequate.
8 I have to say at the outset
that it would not have been an easy task for creditors of APPL to form a view as
to what would have
been in their commercial interests in terms of accepting the
Deed of Company Arrangement which was proposed at the meeting of 8 February
this
year or, in the alternative, adopting the recommendation of the administrator to
place the company in liquidation. The administrator
has sent full and careful
reports to the creditors in which he analyses a number of possible scenarios,
showing outcomes for creditors
of various classes either under a liquidation or
under the proposed Deed. The position is complicated by the fact that there is
not
just one possible outcome under the Deed and one possible outcome under a
liquidation: there are a number of possible outcomes under
each of the
alternatives.
9 The parties have not debated in detail
whether any one of the scenarios postulated by the administrator is more likely
than any
of the others. Indeed, it would have been impossible for the Court to
form such a view. The investigations of the administrator are,
as he himself
says in his report, relatively preliminary. He has been hampered by lack of
funds in making such full investigation
as he would have desired. I have to
accept, as no doubt did the creditors, that it is not possible to predict with
any degree of
assurance which of the number of possibilities, either under the
Deed or in the liquidation, is the more probable or even the more
likely. I have
had, as the creditors have had, to take the possible scenarios presented by the
administrator at face value and as
equally possible.
10 Under some of those scenarios the assets of the
company APPL may have considerable value. Under other possibilities they may
have much less value. There is already a dispute as to whether the major asset
of APPL, namely, shares in another company, are subject
to a valid security or
whether the security is void as against a liquidator or administrator. At this
stage, I am not able to form
a view about the prospects one way or another. No
doubt, the creditors were in the same position when they considered whether to
approve the Deed.
11 Similarly, it is not possible for
me or the creditors to say at this stage that the consideration for the
assignment of APPL’s
assets under the Deed is too low or too high or is
appropriate. All that can be said is that the consideration to be paid is a
substantial
sum. That consideration provides the funds from which a distribution
will be made under the Deed.
Whether Deed ambiguous
12 The Plaintiff says that the Deed is unfairly
discriminatory against the unsecured creditors by reason of the fact that the
entitlements
of employees are given undue preference. It is clear that one of
the employee/ creditors, Dr Koch, has claimed remuneration under
her contract of
employment which the administrator believes to be substantially in excess of her
contractual entitlement. A somewhat
abbreviated examination of Dr Koch’s
contract of employment does suggest quite strongly that her claim for
remuneration exceeds
the amount of her true entitlement by close to $30,000.
13 Mr Gleeson, who appears for the Plaintiff, suggests
that Clause 6 of the Deed itself entitles Dr Koch to receive more by way
of
distribution from the funds under the Deed than she is entitled to in law or
would be entitled to in a liquidation, to the prejudice
of other unsecured
creditors. That result could flow from one interpretation of Clause 6.1 of the
Deed. I do not need to examine
this question in great depth. However, it seems
to me unlikely that Clause 6.1, taken in conjunction with the other provisions
of
the Deed as a whole, would receive the construction for which Dr Koch might
wish to contend. I would read Clause 6.1 as merely requiring
Dr Koch and the
other persons listed in Schedule 2 to lodge their claims against the Deed fund
in accordance with the provisions
of the Deed.
14
However, more importantly, I have to consider whether the existence of such a
clause now operates unfairly to such a degree
that it is prejudicial or
discriminatory within the meaning of s.445D(1)(f)(i) or is contrary to the
interests of the creditors of the company as a whole.
15 Mr Newlinds SC, who appears with Mr Silver for
APPL, points out that the administrator takes the view that the construction
put
forward by Mr Gleeson is not the correct construction. Mr Newlinds also points
to provision in the Deed for the administrator
to bring about either termination
of the Deed, if he considers its operation to be prejudicial, or else to bring
about the variation
of the terms of the Deed. Although Dr Koch has strongly
urged a claim for a remuneration to which, prima facie, she does not appear
to
be entitled, I cannot assume that she will persist in that claim to the point of
litigation nor in such a way as will necessarily
impede or delay the
administration of the Deed. However, as Mr Newlinds points out, if Dr Koch
commences some proceeding founded
on a construction of Clause 6.1 and that
proceeding inhibits the administration of the Deed, it would be open to the
administrator
to invoke the machinery provisions of Clause 8 to procure either
an amendment of the Deed which resolves the ambiguity in construction
unfavourably to Dr Koch or else results in a termination of the Deed.
16 I do not, therefore, consider that the possible
ambiguity in Clause 6.1 and the possible adverse claim by Dr Koch founded upon
that clause together demonstrate that the Deed presently operates unfairly or
cannot be given effect to without injustice or undue
delay.
Whether liquidation more beneficial
17 I come now to the substantial and most important point
argued by the parties, that is, whether the Deed, as it operates in the
context
of the financial results postulated by the administrator, is contrary to the
interests of the creditors of the company as
a whole or cannot be given effect
without injustice.
18 The Plaintiff essentially relies
upon the various scenarios provided by the administrator in support of this
submission; I will
examine the detail of these scenarios a little more closely
later.
19 According to the Plaintiff, the unsecured
creditors are likely to come off substantially worse under the Deed than under a
liquidation.
The Plaintiff says that this must have been apparent to the meeting
of creditors which voted in favour of the Deed on 8 February
2005. Nevertheless,
the creditors, by majority, voted in favour of the Deed. Mr Gleeson explains
this by pointing to the fact that
the majority of creditors in number who voted
in favour of the Deed are creditors who have particular or special interest in
seeing
the Deed adopted rather than seeing the company go into liquidation.
20 Mr Gleeson says that some of the unsecured
creditors who voted in favour of the Deed are creditors representing the
interests
of directors of the company. He says that the administrator had, in
his report, adverted to the possibility that APPL might have
claims against its
directors for insolvent trading. Those claims would, of course, disappear if the
company were removed from administration
or liquidation by the operation of the
Deed; it would be in the interests of directors facing the possibility of
litigation to remove
that possibility by voting in favour of the Deed despite
the fact that, in terms of dividends to unsecured creditors, they would
be worse
off.
21 Mr Gleeson also refers to the fact that a
significant number of unsecured creditors who voted in favour of the Deed are
employees
of APPL and under the Deed they would receive substantially more than
they would in a liquidation.
22 These matters are
certainly to be taken into account in looking at the question of whether the
Deed operates unfairly against
creditors in the position of the Plaintiff, that
is, unsecured creditors who have no special interest in a result one way or
another,
or operates in such a way as to be contrary to the interests of the
creditors of the company as a whole.
23 However, I
think the starting point must be to examine what commercial results were
possible, and still are possible if one
decision is made rather than another. I
say that one has to examine what is still possible because the consideration of
the court
in an application under s.445D to terminate a Deed is not in my
opinion confined to the manner in which the Deed would have operated as at the
date when the creditors’
meeting voted in favour of it. The Court is
required to be satisfied that “effect cannot be given to the
Deed” or the Deed is an oppressive one, or is unfairly
prejudicial or is contrary to the interests of the creditors, and so on.
24 In my opinion, in an application under s.445D(1)
the Court is required to consider the operation of the Deed as it appears on the
day of hearing and not at some anterior time. Clearly,
what the creditors
believed to be in their commercial interests when they voted for the Deed will
be a very relevant and weighty
factor for the Court’s consideration.
However, it must be borne in mind that it is possible that information may come
to hand
after the creditors’ meeting which throws further light upon how
the Deed will operate. That has happened to some extent here
because the
administrator has prepared information not only as to possible outcomes as they
appeared to be at the time of the creditors’
meeting, but he has also
prepared information which updates the company's position since the meeting. As
I have noted earlier, the
parties have not endeavoured to quarrel with the
assessments made by the administrator or to suggest that any one outcome is more
likely than another.
25 When the administrator came to
provide information to the creditors’ meeting, he took the approach of
setting out the
results of liquidation as compared with results under the Deed
on an optimistic view and a pessimistic view. He calculated that,
on an
optimistic view, unsecured creditors would receive $0.1088 in the dollar of
their claims in the liquidation and they would
receive $0.0209 under the Deed.
On a pessimistic view, unsecured creditors would receive nil under a liquidation
and $0.0142 under
the Deed. It can be seen that on this information alone
creditors could be divided: optimists would see that they were much better
off
under a liquidation; pessimists would see that they were better off under the
Deed.
26 The administrator has provided further
calculations as at 23 March 2005. Scenario One under the Deed shows that
employees with
priority claims under liquidation would receive $0.9641 in the
dollar; unsecured creditors would receive, on one possibility, $0.003
in the
dollar, on another possibility $0.0111 in the dollar and, on another
possibility, nil. In Scenario One under the Deed, therefore,
priority employees
creditors would receive close to 100¢ in the dollar, while unsecured
creditors would receive practically
nothing.
27 In
Scenario Two under the Deed, priority employee claims would be paid at $0.9641
in the dollar and unsecured claims, on any
view of it, would receive nothing.
28 There are three possible scenarios which the
liquidator has envisaged in a liquidation. Scenario One is an optimistic
scenario
with the priority employee claims being paid 100¢ in the dollar
and unsecured claims receiving a little over $0.07 or else a
little over $0.12
in the dollar.
29 In Scenario Two under a liquidation,
which the liquidator calls the “possible” scenario, priority
employee claims
would again be paid 100¢ in the dollar and unsecured claims
would be paid just over $0.03, or else almost $0.06 in the dollar.
In Scenario
Three under the liquidation, which the administrator calls the pessimistic
scenario, priority employee claims would be
paid $0.55 in the dollar and
unsecured claims would receive nothing.
30 It is clear
that under the Deed there is the possibility that unsecured creditors will
receive nothing or very little. It is
clear that under the liquidation unsecured
creditors will receive at maximum $0.12 in the dollar and otherwise nothing or
very close
to nothing.
31 Mr Gleeson urges that I
should apply in this case the observations of Santow J in JA Pty Ltd v Jonco
Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691, at 715. His Honour was considering a
deed of company arrangement which was sought to be terminated on a number of
grounds. His Honour
found that the deed should be terminated on one particular
ground, which is not relevant to the consideration of this case, and then
went
on to make the following observation:
“Importantly, if there is
uncertainty on that question of comparative return, and if it be clear, as it is
here, that it is
“not possible for the company or its business to continue
in existence” then s 435A of the Corporations Law effectively places the
onus on those who support the deed to show positively that it “results in
a
better return for the company’s creditors and members than would result
from an immediate winding up of the company”.
As emerges below, the first
and third defendants cannot discharge that onus. Indeed to the extent this bears
on discretion, on balance
I would judge the greater likelihood that liquidation
will afford the better return.”
32 Mr Gleeson
urges that, if I am to refrain from terminating the Deed, I should be positively
satisfied by its proponents that
the interests of creditors as a whole will be
better served by the Deed than by a liquidation. Mr Coles urges that I should
not apply
the observations of Santow J as if they were a proposition of law to
the effect that in an application to terminate a deed under
s.445D the proponent
of the deed bears an onus of satisfying the court that the deed is in the best
interests of the company as a whole
so that if the proponents do not discharge
that onus the deed should be terminated.
33 I do not
think that Santow J was intending to lay down a proposition of law to the effect
that in an application to terminate
a deed under s.445D(1)(f) the proponent of
the deed bears the onus of satisfying the court of a negative, i.e., that the
deed is not contrary to the interests
of creditors and should not be terminated.
I think that all his Honour was doing was making an observation as to the
practical commercial
realities in these cases: where the result to creditors
under a deed is not clearly more favourable than the result under a liquidation
and where there is no hope that the company will continue to trade, the court
would want to know why the interests of the creditors
were better served under
the deed than a liquidation. His Honour was, as I say, drawing attention to
commercial realities, as indicated
in his use of the word
“effectively”, rather than laying down a hard and fast rule about
onus of proof in an application
under s.455D(1)(f).
34
Setting aside a deed of company arrangement which has been solemnly approved at
a meeting of creditors is not a light matter.
Generally speaking, the creditors
are taken to be the best judges of what is in their commercial interests. If the
deed is to be
terminated there must be a sufficient reason shown for that
termination: that reason exists if those seeking the termination prove
one or
other of the grounds under s.445D(1) to the Court’s satisfaction. However,
in the particular circumstances predicated by Santow J in Jonco, the
burden of proof may not be particularly heavy.
35 I
have earlier adverted to the circumstances relating to voting and to the alleged
preferential or discriminatory treatment
of employees’ claims. I do not
think that it has been established to the Court’s satisfaction that the
Deed manifestly
operates prejudicially in favour of the employees. I bear in
mind that, according to the most recent figures prepared by the administrator,
on the optimistic scenario in a liquidation the employees would have priority
and would receive 100¢, and under the Deed they
would receive very close to
100¢ in most cases. I have to bear in mind that according to the
pessimistic scenario employees
having priority would receive as little as $0.55.
I have to bear in mind also that under some of the scenarios the unsecured
creditors
will receive nil whether it be under a liquidation or under the Deed.
36 At this stage it is not possible to say which, if
any, of the scenarios postulated by the administrator will come to pass. It
may
be that matters will proceed in such a way in the course of administration of
the Deed that the administrator will perceive with
certainty that a poor outcome
is inevitable for all concerned. In that case the administrator has power
himself to procure termination
of the Deed in accordance with its provisions. It
may be that matters turn out much more favourably than anyone anticipated. These
are all matters of possibility or speculation.
37 In
determining whether a deed should be terminated under s.445D(1)(f), the Court
does not make a judgment founded upon mere possibility or speculation; it makes
a determination on the characteristics
of the deed as they are seen to be at the
date of hearing. If a deed is to be terminated under s.445D(1)(f), it has to be
seen as having operated, or as presently operating, or as highly likely to
operate in the future, in a way which is
oppressive, unfairly prejudicial,
unfairly discriminatory or contrary to the interests of the creditors as a
whole. If the future
operation of a deed is in question under s.445D(1)(f), the
Court should be satisfied that its adverse effect is not a mere possibility or
speculation but is, at least, highly likely.
In the present case, I do not think
that situation has yet been reached.
38 For the
reasons which I have given, I do not think that in the present case the
Plaintiff has established to the Court’s
satisfaction that any of the
grounds relied upon presently exists or is highly likely to come into existence.
39 For that reason, the Plaintiff’s application
fails. The Originating Process is dismissed.
Costs
40 The question of costs has been argued briefly. There is
no dispute that the Plaintiff, having been unsuccessful, must pay the
Defendants' costs. There is no dispute that the costs order, as far as the
Second Defendant is concerned, will be on the party/party
basis. However, both
Mr Coles QC and Mr Newlinds SC urge that the Plaintiff should pay the
administrator's costs on an indemnity
basis, the reason urged being that it
should not be the fund established under the Deed of Company Arrangement which
should bear
any part of the costs of this litigation.
41 There is certainly force in what Mr Coles and Mr
Newlinds say. However, I think that this is one of those cases which are
analogous
to cases involving a trustee of a fund who is a necessary party to
proceedings. The trustee is always indemnified out of the fund
to the extent
that it is not otherwise able to recoup costs from the unsuccessful party. I
think that this is a case in which an
indemnity costs order against the
Plaintiff should be made only if the Plaintiff has been guilty of some conduct
meriting the disapprobation
of the Court. That has not been the case here.
42 The result will be that the Plaintiff will pay the
administrator's legal costs on the party/party basis. Unfortunately, the
fund
established under the Deed of Company Arrangement will, of necessity, bear some
of the administrator's costs. That result seems
to me to be endemic to this sort
of litigation and the difficulties which are likely to arise in constituting
such a fund.
43 However, I should observe that when
assessing the costs payable by the Plaintiff to the administrator, the assessor
will need
to bear in mind that the administrator did not take a position in the
proceedings and was here only as a necessary party. With all
due respect to Mr
Newlinds SC, I do not see that the possibility that the administrator himself
might have been cross examined in
order to elucidate matters in his reports
warranted the attendance of Senior Counsel. As I say, that is a matter that I
think needs
to be addressed further in assessment of costs.
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