Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd

Introduction 1 These reasons address two applications made in a proceeding in this Court. I described the nature of the proceeding and the relief sought in reasons I delivered in relation to an earlier application by the plaintiff to this proceeding (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) [2018] FCA 315). I will describe the parties in the same way I did in my earlier reasons. The earlier reasons should be read with these reasons. 2 The first application is an application by the Deed Administrators for an order that the Deed of Company Arrangement (DOCA) be varied under s 447A of the Corporations Act 2001 (Cth) (the Act). The second application is an application by the directors for an order which will have the effect that the proceeding proceeds on pleadings.

The Application under s 447A of the Act 3 The Deed Administrators seek an order that clause 8.1(c) of the DOCA executed on 21 December 2017 be varied as follows: The amount of $2,500,000.00 to be paid by the Directors to the company within 18 months of the execution of this Deed by all parties. 4 Clause 8 of the DOCA presently provides as follows: 8. Deed Fund 8.1 A Deed Fund shall be established which shall comprise the following: (a) The Company's cash at bank as at the Commencement Date; and (b) The Debtor's owing to the Company at the Commencement Date; (c) The amount of $2,500,000.00 to be paid by the Directors to the company within 6 months of the execution of this Deed by all parties. 8.2 The Deed Administrators must hold all amounts in the Deed Fund on trust for the benefit of the Deed Administrators and for Creditors in accordance with the terms of this Deed. 8.3 The property that will be available for distribution to Creditors pursuant to this Deed will be the Deed Fund. 8.4 If this Deed terminates then the amount in the Deed Fund will become property of the company in the administration or winding up of the Company. 5 Section 447A of the Act provides as follows: 447A General power to make orders (1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. (3) An order may be made subject to conditions. (4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration - the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or (e) ASIC; or (f) any other interested person. 6 The Act also gives the creditors of the company the power to vary a deed of company arrangement. Section 445A of the Act provides: 445A Variation of deed by creditors A deed of company arrangement may be varied by a resolution passed at a meeting of the company's creditors, but only if the variation is not materially different from a proposed variation set out in the notice of the meeting. 7 Finally, the object of Part 5.3A is relevant. It is set out in s 435A of the Act and is as follows: 435A Object of Part The object of this Part, and Schedule 2 to the extent that it relates to 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. 8 The effect of the variation sought by the Deed Administrators would be to give the directors an additional 12 months within which to pay the amount of $2,500,000 into the Deed Fund. This period has been calculated (approximately) by reference to the likely resolution of this proceeding. The six month period expired on 21 June 2018. The Deed Administrators have extended the period for a short time pursuant to a power they have under the DOCA in order to enable this application to be determined. 9 In the proceeding before the Court, ABCL seeks an order that the DOCA be set aside or, in the alternative, that it be terminated. ABCL seeks an order that Concrete Supply be wound up and that Messrs Martin Lewis and David Kidman be appointed as joint liquidators. The trial of this proceeding is listed for 12 days commencing on 3 December 2018. There are a number of issues and the evidence is substantial. 10 A significant matter which should be noted at this point is that by reason of clause 8.4, if the DOCA is terminated, then the amount in the Deed Fund (as defined in the DOCA), including the amount of $2,500,000 if paid, becomes the property of the company in the administration or winding up of the company. 11 The Court has the power to vary a deed of company arrangement by an order made under s 447A as an alternative to a deed administrator seeking a variation of the deed of company arrangement by a creditors' resolution under s 445A. Specifically, s 447A(1) of the Act gives the Court power to alter the operation of Part 5.3A of the Act as it operates in relation to a particular company. Section 447A has been held to confer wide discretionary power on the Court: see Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 at 280-281 per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ; Re GIGA Investments Pty Ltd (1995) 17 ACSR 547 at 549 per Branson J; Milankov Nominees Pty Ltd v Roycol Ltd [1994] FCA 1276; (1994) 52 FCR 378 at 383 per Lee J. 12 The Court's power to vary a deed of company arrangement pursuant to s 447A(1) is well-established. The power conferred by s 447A(1) is not subject to the limitations found in other sections within Part 5.3A of the Act. Relevantly, s 447A(1) of the Act grants the Court power to alter the operation of s 445A (or any other section in Part 5.3A), thereby empowering the Court itself to vary a deed of company arrangement: Milankov Nominees Pty Ltd v Roycol Ltd [1994] FCA 1276; (1994) 52 FCR 378 at 383 per Lee J; Mulvaney v Rob Wintulich Pty Ltd (1995) 13 ACLC 1649; (1995) 60 FCR 81 at 83 per Branson J; Re Paradox Digital Pty Ltd (subject to Deed of Company Arrangement); Ex parte Smith (in his capacity as Deed Administrator) [2001] WASC 182 at [13]-[15] per Owen J; Re Ansett Australia Ltd (all admins apptd); Korda (as admins) v Ansett Australia Ground Staff Superannuation Plan Pty Ltd (as trustee) [2002] VSC 114; (2002) 41 ACSR 598 at 602 and 604 per Warren J; Pasminco Limited (Subject to Deed of Company Arrangement) (No 2) [2004] FCA 656; (2004) 49 ACSR 470, at 481 per Finkelstein J. 13 It has been said that whilst the Court should be reluctant to exercise its power under s 447A to vary a deed of company arrangement and thereby deprive the creditors of their role under s 445A, it may do so in circumstances that are uncontentious, in the sense that no prejudice to creditors is involved (Re Derwent Howard Media Pty Ltd [2011] NSWSC 1164 at [12] per Barrett J). For the reasons I will explain, that is the conclusion which I have reached in this case. It is not uncommon for the Court to vary the termination date of a deed of company arrangement, provided that that variation would be in the creditors' interests: see Mulvaney v Rob Wintulich Pty Ltd (1995) 13 ACLC 1649; (1995) 60 FCR 81 at 83 per Branson J; Re Paradox Digital Pty Ltd (subject to Deed of Company Arrangement); Ex parte Smith (in his capacity as Deed Administrator) [2001] WASC 182 at [16]-[18] per Owen J; Forrest Nursery Pty Ltd, in the matter of Euco Limited (ACN 102 448 055) (In Liq) v Lopez and Verge as Joint and Several Liquidators of Euco Ltd (In Liq) (ACN 102 448 055) [2006] FCA 935; (2006) 233 ALR 442 at [42] per French J; Banning Holdings Pty Ltd v Holbrook [2009] WASC 178 at [36] per Simmonds J; Re Derwent Howard Media Pty Ltd [2011] NSWSC 1164 at [12]-[13] per Barrett J; Silvia, in the matter of FEA Plantations Ltd (Administrators Appointed) [2013] FCA 469 (Silvia) at [16]-[17] per Kenny J. 14 In Silvia, Kenny J considered a number of factors (at [16(a)-(h)]) relevant to whether the termination dates in the two deeds of company arrangement in issue should be extended by way of an order under s 447A, rather than returning the issue to creditors for a further resolution under s 445A. Those factors included the following: (1) It would be difficult to convene a meeting of creditors prior to the existing termination dates in the deeds. (2) It was likely that the relevant companies would enter into liquidation if the dates were not extended, which would, in turn, be detrimental to the creditors. (3) It would be costly to convene a creditors' meeting prior to the existing termination date in the deeds. (4) It would be a simple variation. (5) A number of creditors' meetings within a short space of time may be confusing to the creditors, and may also inconvenience them by requiring the creditors to travel to Tasmania twice within 22 days if they chose to attend the meeting. (6) The variation would not adversely affect the interests of the creditors and would instead be in their interests because it will allow time for negotiations between the deed administrators and the relevant banks to be finalised. (7) The variation was supported by a number of the creditors. (8) The receivers, as well as the relevant banks, all indicated that they knew of and did not oppose the variation. 15 Ultimately, her Honour found (at [17]) that each of these factors favoured the exercise of the Court's discretion under s 447A(1) to vary the termination date of the deeds of company arrangement. 16 I am satisfied that, in this case, it is appropriate for the Court to exercise the power it has under s 447A of the Act. 17 At the time the Court heard the application, it would have been difficult, if not impossible, for the Deed Administrators to convene a meeting of creditors. In addition, there would have been costs associated with the convening of such a meeting. The Court is managing this proceeding and hearing applications for orders from time to time, including orders for discovery and orders in relation to pleadings. Furthermore, the major reason for this application is the litigation itself. At least on the directors' case, but for ABCL instituting and pursuing this litigation, there would have been no need for this application. A further relevant consideration is that a number of creditors, both employees of Concrete Supply and otherwise, who voted in favour of the DOCA have sworn affidavits in this proceeding explaining the reasons they voted as they did. These matters favour the Court addressing the issue under s 447A, rather than leaving the matter to creditors under s 445A. However, to my mind, the major consideration is as follows. The resolution in favour of the DOCA was only passed because of the casting vote of the Deed Administrators. ABCL is strongly critical of the conduct of the Deed Administrators in that respect and of the work they carried out before the creditors' meeting. The Deed Administrators apprehend, with some reason in my view, that if the issue went to creditors they would again be called upon to consider the exercise of a casting vote. They are apprehensive of that situation because of the strong criticism of their conduct to date. 18 ABCL did not advance any argument of substance to the effect that only the creditors should decide whether the DOCA should be varied. There was a reference in its written submissions to the creditors having the right to determine whether the DOCA should be terminated as a result of what ABCL claimed was a repudiation of the DOCA by the directors, but that argument was not further developed. For the reasons I have given, I am of the opinion that the Court should decide whether the DOCA should be varied under s 447A of the Act. 19 ABCL advanced some arguments against any variation to clause 8.1(c) of the DOCA. It submitted that the directors knew in December 2017 that litigation by ABCL was likely and submitted that they cannot complain that that litigation eventuated and yet they are required to pay the amount they agreed to pay. There is some force in this, but at the same time, it would have been difficult in December 2017 to predict the circumstances in June 2018. Furthermore, ABCL submitted that they were responsible for their own predicament because they had not been willing to progress the litigation as quickly as possible. Neither of these points take the matter very far and, in fact, the second point is not correct. Litigation of this size and complexity was never going to be fully resolved before 21 June 2018. 20 The real point of difference between ABCL and the other parties seemed to be whether the directors should be required to pay the money on the basis that it would be held in escrow pending the outcome of the proceeding. ABCL submitted that this would achieve two important purposes. First, it would mean that interest could be earned on the monies for the benefit of creditors. Secondly, it would remove any doubt and, on ABCL's case it is a substantial doubt, about the directors' ability to raise the funds. The proceeding might prove futile if, although ABCL was ultimately unsuccessful, the DOCA did not proceed because the directors could not make the payment required of them under the DOCA. 21 As to the first matter, the directors have undertaken to pay into Court a monthly amount representing interest that might otherwise have been earned on the monies. 22 There was some evidence before the Court as to how the directors propose to fund their contribution of $2,500,000 to the Deed Fund. An affidavit of one of the directors dealing with that issue was filed, but it was not relied on by the directors at the hearing of the application. The evidence consists of part of the minutes of the meeting of creditors held on 19 December 2017. The minutes record that the administrators had spoken to two directors of Concrete Supply about their personal financial circumstances and the financial circumstances of the third director. They had discussed their properties and associated mortgages and the advice given by the directors matched the searches previously conducted by the administrators. One of the administrators said that the cumulative value of the equity in the property of the directors was in the range of $1,500,000 to $1,700,000. The administrator noted that this was significantly less than the contribution under the proposed DOCA. The minutes record that the solicitor for ABCL asked if searches had been undertaken to identify the value of any shareholdings of the directors. The administrators said that they had considered the information on shareholdings from publicly available information, but had not commissioned valuations of those shareholdings. 23 Having regard to that evidence, I proceed on the basis that the directors will have to borrow an amount, perhaps a substantial part of, or even all of, the $2,500,000, to be paid under the DOCA. The directors do not wish to pay that amount to the Deed Fund even if it is held in escrow because, by reason of clause 8.4, it will become Concrete Supply's money even if the DOCA is subsequently set aside or terminated. I am prepared to proceed on the basis that it is likely to be difficult to obtain finance to do that for the obvious reason that the financier will know that the money may not be recovered. 24 I am of the opinion that it is not appropriate for me to form any view of the merits of ABCL's claims at this stage. Not only am I not in a position to do that, but it would be unfair to the parties for me to do that. It seems to me that an order that the money be paid and held in escrow is unlikely to be complied with and that non-compliance is likely to lead to the termination of the DOCA (see ss 445C and 445D of the Act). Even if the money could be raised, the directors' view that they should not be required to pay the money because of the operation of clause 8.4 is not an unreasonable one. It seems to me that either way, it will be the fact of the litigation, not the result of the litigation, that is the determining factor and that that is not appropriate. None of what I have said is to focus impermissibly on the interests of the directors as distinct from the creditors. As ABCL correctly submitted, the power to vary is not to be exercised solely for the benefit of third parties. However, the fact is that irrespective of how the vote was reached, the creditors have voted in favour of the DOCA and that intention should not be defeated by the fact of pending litigation. 25 It perhaps goes without saying that ABCL may ultimately succeed and the DOCA is set aside or terminated. However, as I have said, it is not for me to assess the merits of the claims at this stage. It is also possible that even if the DOCA is not set aside or terminated, the directors will not be able to raise the necessary funds. However, the fact of the litigation means that I am not able to assess fairly that possibility at this stage. 26 In my opinion, it is appropriate to make an order varying the DOCA without requiring the payment of $2,500,000 into an account to be held in escrow. However, the order should be subject to a condition or undertaking as to the payment of a monthly amount in lieu of interest along the lines suggested by counsel for the directors. I will hear the parties as to the precise terms of such condition or undertaking. 27 The possibility was not raised by the parties, but I would be disposed to extend the time for six months rather than for 12 months in case something other than the result of the trial emerges which makes it clear that the DOCA would or could not proceed. This would be to a date shortly after the conclusion of the trial. That something would emerge is perhaps unlikely, but I am not sure that it can be ruled out. I will not do this without hearing from the parties as to whether I have the power to extend the period for a second time and whether I have power to subsequently abridge time.