400 Lonsdale Pty Limited v Southern Cross Airlines Limited 10 ACSR 739

1 The Plaintiff ("AIL") seeks declarations under s.447C of the Corporations Act as to the validity of the appointment of the First Defendants as joint administrators of the Second Defendant ("PGPL"). The Third Defendant ("CMC") is a creditor of PGPL. The Fourth Defendant ("PGI") is the parent company of PGPL. 2 The administrators were appointed on 13 November 2001 by AIL, purportedly pursuant to s.436C(1) of the Corporations Act which provides that a person who is entitled to enforce a charge on the whole or substantially the whole of a company's property may, by writing, appoint administrators of a company if the charge has become, and still is, enforceable. 3 AIL says that as at 13 November 2001 it was the chargee of the whole of PGPL's property pursuant to a Deed of Charge dated 3 August 2001, that an Event of Default, as defined in the Deed, had occurred and that it was therefore entitled to enforce the Charge within the meaning of s.436C(1) of the Corporations Act . 4 CMC challenges the appointment of the administrators on two grounds: first, it says that as at 13 November 2001 no Event of Default had occurred under the Deed of Charge so that the Charge was not enforceable and AIL was not entitled to appoint the administrators under s.436C(1). Second, CMC says that the Charge is void by virtue of s.267 of the Corporations Act . The legislation

5 Section 267 relevantly provides: " (1) [Charge in favour of 'relevant person' void] Where:

(a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and

(b) within 6 moneys after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced;

the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and are taken always to have been, void.

(2) [A step in enforcement of the charge] Without limiting the generality of subsection (1), a person who:

(a) appoints a receiver of property of a company under powers conferred by an instrument creating or evidencing a charge created by the company; or

(b) whether directly or by an agent, enters into possession or assumes control of property of a company for the purposes of enforcing a charge created by the company;

is taken, for the purposes of subsection (1), to take a step in the enforcement of the charge.

(3) [When charge may be enforced] On application by the chargee under a charge, the Court may, if it is satisfied that:

(a) immediately after the creation of the charge, the company that created the charge was solvent; and

(b) in all the circumstances of the case, it is just and equitable for the Court to do so;

(a) in any case - the holder, or all or any of the holders, of the charge; or

(b) in the case of a charge that is an agreement to give or execute a charge in favour of a person or persons, whether upon demand or otherwise - that person, or all or any of those persons;

'officer' , in relation to a company, includes, in the case of a registered foreign company, a local agent of the foreign company;

'relevant person' , in relation to a charge created by a company, means:

(a) a person who is at the time when the charge is created, or who has been at any time during the period of 6 months ending at that time, an officer of the company; or

(b) a person associated, in relation to the creation of the charge, with a person of a kind referred to in paragraph (a)."

6 CMC says that AIL is a "relevant person" in relation to the Charge because Mr Geoffrey Lucas is a director both of AIL and of PGPL. It says that AIL is, therefore, a "relevant person" as defined by subsection (7)(b) because it is a person associated in relation to the creation of the Charge, with Mr Lucas, who is an officer of PGPL within the meaning of subsection (7)(a). 7 CMC says that the Charge, being within the scope of s.267(1)(a), is rendered void because AIL has, within six months of its creation, purported to take a step in the enforcement of the Charge without leave of the Court under s.267(3). The purported step in enforcement of the Charge is, according to CMC, the appointment by AIL of the administrators under s.436C(1). 8 AIL says that the Charge does not fall within s.267(1) at all because it is not a "relevant person" as defined. Further, it says that even if it is a "relevant person", appointment of administrators under s.436C is not taking a step to enforce the Charge. It concedes that if, contrary to all of its submissions, the leave of the Court to enforce the Charge is required under s.267(3) then it cannot satisfy the conditions of the subsection for the granting of leave.

9 AIL is a substantial shareholder of PGPL's parent company, PGI. PGI is apparently merely a holding company, the assets in the group of companies being held by its trading subsidiaries. 10 By mid-2001, AIL had invested substantial sums in PGI. PGI and its group of subsidiaries were in financial difficulties and required the injection of further funds. In consultation with AIL, PGI and PGPL decided to raise further funds by the issue of convertible notes in PGI, the security for the issue being provided by the Deed of Charge to be given by PGPL. 11 The document pursuant to which the convertible notes were issued is an agreement between certain parties named in a schedule to the agreement, being the noteholders, PGI and PGPL. The agreement is dated 25 September 2001. The Charge which is given by PGPL in support of the convertible note issue is, as I have noted, dated 3 August 2001. Nothing turns on the fact that the Deed of Charge is dated earlier than the Convertible Note Facility Agreement. 12 The parties to the Deed of Charge were originally PGI and AIL but, by two Amending Deeds, other chargees, being the convertible noteholders, were added. The Charge is given as continuing security for the payment of the secured monies which are defined as: "All money which [PGPL] or [PGI] is or at any time may become actually or contingently liable to pay to or for the account of the Chargee or Borrower under or in connection with the Convertible Note Facility Agreement including, without limitation, money which the Charger would be liable to pay but for an Insolvency Event." 13 Clause 12.1 of the Charge provides that: "At any time following the occurrence of any Event of Default that is subsidising, the Chargee may enforce this Charge and exercise all its rights arising consequent upon default, whether conferred pursuant to this Charge or otherwise." Chargee is defined as: "The parties named in Schedule 2." 14 As I have noted, by virtue of Amending Deeds, as at early November 2001 some thirty-three parties had become chargees under the Deed of Charge. Despite the fact that AIL is but one of the number of chargees, by virtue of clause 2.3 of the Convertible Note Facility Agreement any chargee alone is entitled to enforce the Charge against PGPL if an Event of Default occurs. 15 Clause 1.1 of the Charge defines an Event of Default as having the same meaning as in the Convertible Note Facilities Agreement. Clause 1.1 of the Convertible Note Facilities Agreement provides: " Event of Default means the happening of any of these events:

(a) (non-payment) any Company fails to pay any amount which becomes payable by it in the way and in the currency required: (i) when due; or (ii) where the sole reason for the failure is a technical or administrative difficulty within the banking system being used by the Company to effect payment, within 14 days after the due date for payment;

(b) (other material obligation not implied with) subject to paragraph (a) the Company fails to comply with any material obligation under a Transaction Document and, if the failure is capable of remedy, it continues unremedied for 21 days after the failure;

(c) (incorrect warranty) a Warranty, made by or on behalf of the Company in a Transaction Document, is untrue, incorrect or misleading in a Material Adverse Respect when made or repeated;

(d) [cross default - Transaction Document) an event of default (however described) occurs under any Transaction Document and is not capable of remedy within the grace period set out in the Transaction Document;

(e) (insolvency) an Insolvency Event occurs in relation to a Company". 16 Insolvency Event is defined in the Convertible Note Facilities Agreement as: " Insolvency Event means the happening of any of these events:

(i) is insolvent within the meaning of section 95A of the Corporations Law ;

(ii) is taken to have failed to have complied with a statutory demand under section 459F of the Corporations Law ; or

(iii) must be presumed by a court to be insolvent under section 459C of the Corporations Law ;

(b) (grounds for Winding Up) a circumstance specified in section 461 of the Corporations Law occurs with respect to any Company;

(i) an order is made for the Winding Up of any Company;

(ii) proceedings are commenced or an application is made for the Winding Up of any Company (which are not vexatious or frivolous in nature) and are not withdrawn or dismissed within 10 Business Days; or

(iii) an effective resolution is passed or a meeting is summoned or convened to consider a resolution for the Winding Up of any Company,

except with the consent of the Lender such consent not to be unreasonably withheld;

(d) (External Administrator) an External Administrator is appointed to any Company or any of its assets or any step is taken to do so or any Company requests such appointment;

(e) (enforcement proceedings) execution or distress takes place or an order to execute a judgment (however described) is made against any Company or any of its assets;

(f) (creditors) any Company stops or suspends payment to creditors generally or enters into an arrangement, assignment or composition with or for the benefit of its creditors generally or any class of them or proposes to do so;

(g) (deregistration) a step is taken under section 601AA, 601AB or 601AC of the Corporations Law to cancel the registration of any Company;

(h) (analogous event) anything analogous or having a similar effect to an event listed in paragraphs (a) to (g) above occurs; That definition is also incorporated into the Deed of Charge.

17 AIL says that an Insolvency Event, as defined in the Convertible Note Facilities Agreement and in the Deed of Charge, occurred on 13 November 2001 when PGPL wrote to AIL advising that PGPL was "no longer able to meet its obligations to creditors and continue to operate without further funding for which facilities do not exist" . AIL says that this is an admission of insolvency on the part of PGPL. CMC concedes that the letter does constitute such an admission and that there is no evidence which would suggest that PGPL was solvent as at 13 November 2001. 18 AIL says, therefore, that as at 13 November 2001 an Event of Default had occurred entitling it under Clause 12.1 of the Charge to exercise its rights to appoint a receiver under Clause 13 of the Charge. However, CMC points out that the word "company" wherever appearing in the definitions of Event of Default and Insolvency Event has an upper case initial "C" and that "Company" is defined in the Convertible Note Facility Agreement as PGI. Accordingly, it says, reference to "Company" throughout the definitions of Event of Default and Insolvency Event is a reference only to PGI. The solvency of PGI is not in issue and there is no evidence that at any relevant time PGI itself was insolvent. Consequently, CMC says, as at November 2001 no Event of Default under the Charge had occurred. The Charge was not enforceable under Clause 12.1 and AIL was not entitled to appoint the administrator under s.436C(1). 19 I am unable to accept this submission. It is clear that there is an inconsistency in usage in the definitions of Event of Default and Insolvency Event between the reference to "Company" which, strictly defined, means only PGI, and the words "any Company" or "a Company", which are appropriate only if more than one corporation can be the subject of the relevant provision. I am unable to read "any Company" or "a Company" as a typographical error for "the Company". The definition clauses make too many distinctions between circumstances which apply to "the Company" - clearly meaning PGI alone - and circumstances which apply to "any" or "a" company, to admit of the likelihood that the words "the Company" were intended to be used throughout the definitions but that some typographical or other error led to "any" or "a" company being used in certain places but not others. 20 Further, if one disregards the upper case "C" in "Company" wherever that word is preceded by "any" or "a", the definitions make good commercial sense. There are two companies which may possibly be the subject of an Event of Default: PGI and PGPL. It makes commercial sense that the security for the convertible notes provided by the Charge be realisable not only when the parent company, which is apparently insubstantial in its own right, is unable to redeem the notes but also when the parent's guarantor, which holds the substantial assets, becomes insolvent. 21 I think it probable that the inconsistency in usage in the definitions of Event of Default and Insolvency Event has arisen because insufficient attention was paid in engrossing the document to when the word "company" was intended to refer only to PGI, in which case it required an upper case "C", and when "company" was intended to apply to both PGI and PGPL. 22 In my opinion, "any company" and "a company" wherever used in the definitions of Event of Default or Insolvency Event refer to either PGI or PGPL, as the circumstances require. Accordingly, it follows that PGPL, having become insolvent by 13 November 2001, an Event of Default under the Convertible Note Facility Agreement occurred at least by that date. An Event of Default under that agreement is an Event of Default under the Charge. Under clause 12.1 of the Charge, the Charge was enforceable as at 13 November 2001 so, subject to the question of the validity of the Charge, AIL was entitled to appoint administrators under s.436C(1) of the Corporations Act .

23 The next question which arises is whether AIL was a "relevant person" for the purposes of s.267. This issue involves a number of contested facts and there are some diverse answers in the authorities as to the proper approach to be taken. 24 Were it not that this case is being heard on the last hearing day of the year and has been brought on as a matter of urgency, and were it not that I have had very limited time to consider the question, I would have devoted some attention to this interesting legal point. However, whether or not AIL was a "relevant person" is not decisive of the fate of this case, and in those circumstances I do not need to consider the question. I shall assume, for the purpose of discussion, that AIL was a "relevant person" so that the Charge was one to which s.267 applied.

Whether appointment of administrators a step in enforcement of Charge

25 It is appropriate to pass to what I regard as the decisive point as to the validity or otherwise of the Charge under s.267. That question depends upon whether or not the appointment of administrators under s.436C constituted a step in the enforcement of the Charge. 26 In my opinion, the authorities make it clear that a chargee does not purport to take a step in the enforcement of a Charge within the meaning of s.267(1)(b), and its predecessor s.205A(1) of the Companies Code , merely by threatening to exercise its rights as a secured creditor or by taking a step preparatory to the exercise of such rights: what is required is that the creditor actually exercise, or attempt to exercise, a right which it has under the Charge in aid of the realisation of its security: see, for example, Salcedo v Mawarie Mining Co Pty Limited (1991) 6 ACSR 197 at 201; 400 Lonsdale Pty Limited v Southern Cross Airlines Limited 10 ACSR 739 at 744. 27 The rights conferred on AIL as a secured creditor under the Charge are contained in Clause 13: they are, in essence, confined to the appointment of receivers. On the other hand, the power conferred on a chargee by s.436C(1) of the Corporations Act to appoint administrators is not conferred in furtherance of the chargee's security under the charge and in aid of the realisation of that security. 28 Section 436C is part of a scheme embodied in Part 5.3A of the Corporations Act , the purpose of which is to provide a moratorium on the enforcement of a creditor's rights, including a secured creditor's rights, in order to enable the company and its creditors to determine whether the company can trade out of its difficulties and continue in existence, or else whether it may be able to realise its assets in some way which is more beneficial to creditors than a winding-up. So, for example, s.435A states that the object of Part 5.3A is to maximize the chances of the company continuing in existence. 29 Section 435C anticipates three possible results of an administration. First, a deed of company arrangement may be entered into; second, the administration may simply come to an end; or third, the company may be placed in liquidation. 30 Section 440B provides that during the administration of a company a person cannot enforce a charge over its property without the administrator's consent or the leave of the Court. 31 Section 440F provides that no enforcement proceedings can be taken against a company's property during the administration without the Court's leave. 32 Sections 441A and 441B allow chargees, in certain circumstances, to enforce their charges where steps are taken to do so either before the appointment of an administrator or within ten days after such appointment. 33 The legislature has conferred on a chargee, as well as upon the company itself and its liquidator, the power to invoke the potentially beneficial provisions of an administration because a chargee may otherwise be compelled to rely only upon its strict rights as a secured creditor when a less drastic remedy would be to the benefit of all concerned. The invocation by a chargee of a right to appoint an administrator conferred by statute is not, in my opinion, a purported step in the enforcement of the chargee's rights conferred by the charge in aid of the realisation of the chargee's security. On the contrary, appointment of an administrator by a chargee is a step which may often result in the chargee's rights under the charge never being enforced at all. 34 For these reasons, I am of the view that CMC's challenge to the validity of the administrators' appointment fails. I declare, pursuant to s.447C(1) of the Corporations Act that the appointment of Ronald John Dean-Willcocks and Ian James Purchas as Joint Administrators of Powerline GES Pty Limited on 13 November 2001 was valid under s.436C(1) of the Corporations Act . 35 In my opinion costs should follow the event. The First Defendant, the Second Defendant and the Fourth Defendant all supported the position of the Plaintiff. The only real adversary was CMC. In those circumstances the Third Defendant, CMC, should pay the costs of the other parties to the proceedings. 36 Exhibits may be returned.

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