[2023] FCAFC 110
- TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (admin apptd) (2012) 91 ACSR 17
[2012] NSWSC 766
- University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) (2005) 53 ACSR 579
[2005] NSWSC 412
- Vero Insurance Ltd v Kassem (2011) 86 ACSR 607
Judgment (13 paragraphs)
[1]
Onwards Up and Gone Pty Ltd [2024] VSC 159
- Re ACN 613 909 596 Pty Ltd (formerly Minle Wine Negociants of Australia Pty Ltd) (subject to Deed of Company Arrangement) [2023] NSWSC 753
- Re Antquip Hire Pty Ltd (subject to deed of company arrangement) (in liq) [2020] NSWSC 487
- Re Citadel Financial Corporation Pty Ltd (subject to Deed of Company Arrangement) (2020) 146 ACSR 220; [2020] NSWSC 886
- Re Eastmark Holdings Pty Ltd (2015) 109 ACSR 116; [2015] NSWSC 1437
- Re Hayes Steel Framing Systems Pty Ltd (admins apptd) [2017] NSWSC 385
- Re Pilot Advisory Pty Ltd (2019) 141 ACSR 458; [2019] FCA 2171
- Re Recycling Holdings Pty Ltd (2015) 107 ACSR 406; [2015] NSWSC 1016
- Re SBL Solutions Pty Ltd (subject to a deed of company arrangement) [2021] NSWSC 1002
- Sino Group International Ltd v Toddler Kindy Gymbaroo Pty Ltd (2023) 168 ACSR 311; [2023] FCAFC 110
- TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (admin apptd) (2012) 91 ACSR 17; [2012] NSWSC 766
- University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) (2005) 53 ACSR 579; [2005] NSWSC 412
- Vero Insurance Ltd v Kassem (2011) 86 ACSR 607; [2011] NSWCA 381
Category: Principal judgment
Parties: The Owners - Strata Plan 90889 (Plaintiff)
Andrew John Spring and Peter John Moore (in their capacity as joint and several deed administrators of Academy Construction & Development Pty Ltd (Under Deed of Company Arrangement) (First Defendants)
Academy Construction & Development Pty Ltd (Under Deed of Company Arrangement) (Second Defendant)
John Michael Beaini (Third Defendant)
Representation: Counsel:
G D McDonald (Plaintiff)
D Krochmalik/APF Ryan (First Defendants)
R Notley (Second and Third Defendants)
[2]
Solicitors:
O'Neill Partners (Plaintiff)
Holman Webb (First Defendants)
Piper Alderman (Second and Third Defendants)
File Number(s): 2023/448311
[3]
Nature of the proceedings and background
By Originating Process filed on 11 December 2023, the Plaintiff, The Owners - Strata Plan 90889 ("Owners Corporation") seeks an order under s 445D of the Corporations Act 2001 (Cth) ("Act") or under s 90-15 of the Insolvency Practice Schedule (Corporations) ("IPSC") that a Deed of Company Arrangement dated 23 October 2023 ("DOCA") entered into by the Second Defendant, Academy Construction & Development Pty Ltd (subject to Deed of Company Arrangement) ("ACD"), be terminated and an order that ACD be wound up. The Owners Corporation is the owners corporation in respect of a strata property situated in Botany in New South Wales, which comprises three separate buildings comprising 104 residential apartments ("Building") that were designed and constructed by ACD under an agreement with a developer, Great Tang Brothers Pty Ltd ("Great Tang"). The relief sought by the Owners Corporation was elaborated, not necessarily for the better, by paragraph 40 of its Amended Statement of Claim filed on 8 February 2024 ("ASC"), which also sought an order that a resolution approving the entry into the DOCA ("Resolution") be set aside and an order that the DOCA be terminated under s 447A of the Act, as an alternative to the relief sought under s 445D of the Act.
The First Defendant in the proceedings are the former voluntary administrators appointed to ACD, Messrs Spring and Moore, who are now the deed administrators under the DOCA; I will refer to them as the "Administrators" in both capacities. Mr Krochmalik, with whom Mr Ryan appears for the Administrators, recognises that they have a limited role in the proceedings. He indicates that they defend the proceedings on the basis that they have a duty to uphold the DOCA, but acknowledge that they are obliged to conduct that defence fairly and in a balanced manner, and refers to the observations of the Full Court of the Federal Court in Sino Group International Ltd v Toddler Kindy Gymbaroo Pty Ltd (2023) 168 ACSR 311; [2023] FCAFC 110 ("Sino Group") at [69]-[70] in that regard. I should note that any such duty of the Administrators to uphold the DOCA was likely here displaced by the fact that, as Mr Krochmalik fairly acknowledged in opening submissions, the DOCA in its present form was not authorised by Pt 5.3A of the Act.
Mr Krochmalik notes that significant aspects of the Administrators' submissions would be directed to defending their conduct, including responding to allegations that there were material errors or omissions in the information provided to creditors and as to the exercise of Mr Spring's casting vote in favour of the DOCA. The significance of those matters was reduced when the parties recognised that the DOCA in its present form was not authorised by Pt 5.3A of the Act, where that deficiency did not depend on any conduct of Mr Spring, beyond his involvement in preparing a DOCA in that form. Mr Krochmalik also noted that the Administrators would assist the Court with the relevant facts and legal principles, and I am grateful for the substantial assistance that the Administrators' legal representatives provided in that respect. Mr Krochmalik also pointed out that the Administrators had invited the Owners Corporation to withdraw its allegations about their conduct, following which the Administrators would take a neutral role in the proceedings, but that invitation was not taken up by the Owners Corporation. At least with hindsight, that was unfortunate where the allegations as to the Administrators' conduct had limited relevance to the determination of the proceedings, and a significant amount of time was spent, in the cross-examination of Mr Spring, in pursuing them.
[4]
Affidavit and other evidence
The Owners Corporation read the affidavit dated 11 December 2023 of its solicitor, Mr O'Neill, who referred to aspects of the chronology of the voluntary administration and execution of the DOCA, which I will address below, and exhibited relevant documents. Mr O'Neill also referred to the nature of the claim brought by the Owners Corporation against, inter alia, ACD in proceedings in the Construction List ("Defects Proceedings"), relating to alleged defects affecting the common property at the Building, in which the Owners Corporation claims damages against ACD and Great Tang in the amount of approximately $7.8 million. The Owners Corporation there alleged that ACD and Great Tang had breached the statutory warranties in s 18B of the Home Building Act 1989 (NSW) ("HBA") and the statutory duty of care in s 37 of the Design and Building Practitioners Act 2020 (NSW) ("DBPA"). By its Amended Technology and Construction List Response dated 30 June 2023, ACD denied that the common property of the Building was affected by the alleged defects and denied that it had breached the statutory warranties in s 18B of the HBA and denied breach of the statutory duty of care in s 37 of the DBPA.
Mr O'Neill also exhibited a proof of debt lodged by the Owners Corporation in the voluntary administration and referred to the provision of the evidence relied on in the proof of debt to the Administrators in support of the Owners Corporation's claim. Mr O'Neill also referred to the conduct of the second meeting of creditors which passed the Resolution and pointed to the differential treatment of Class "A" creditors which were to be paid in full under the DOCA and the Owners Corporation which was to receive (at a maximum) $200,000 against its claim of $7,840,360, being 2.4 cents in the dollar, under the DOCA. He expressed the view, in evidence admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as submission, that:
"The [Owners Corporation] considers that [ACD's] DOCA thus treats its creditor claim differently from all of the other unsecured creditor claims referred as Class A creditors, and is thus oppressive or unfairly prejudicial or unfairly discriminatory against it. Essentially, the DOCA amounts to a mechanism to achieve a settlement of the [Owners Corporation's] claim in the [Defects] [p]roceedings against [ACD] for an amount representing about 2.4 cents in the dollar of the [Owners Corporation's] creditor claim in the [p]roceedings."
[5]
Chronology of events
I now turn to a chronology of events, which I have partly drawn from the common ground in the pleadings and partly from the affidavit evidence and the documents tendered in the proceedings. It appears (ASC [15], ACD Parties' Defence [15]) that the building works in respect of the Building were completed in December 2014 or January 2015 and an interim occupation certificate was issued by City of Botany Bay Council in January 2015. On 5 March 2021, the Owners Corporation commenced proceedings against ACD as First Defendant and Great Tang as Second Defendant in the Technology and Construction List of this Court, alleging that the Common Property (as defined) had defects arising from residential building works performed by ACD when it constructed the Building; and ACD denied those claims and pleaded that they were commenced outside of the relevant statutory warranty period (ASC [18]-[19], Administrators Defence [18]-[19], ACD Parties Amended Defence [18]-[19]). On 9 June 2023, consent orders were made in those proceedings that required ACD to file the lay and expert evidence on which it relied by 17 November 2023.
By an email dated 6 June 2023 (Ex P3, documents 4, 7), sent shortly before those orders were made, an accountant acting for ACD forwarded Mr Spring an email from Ms Mikhael (an inhouse legal adviser to ACD) to the accountant, which requested the accountant to:
"arrange for an insolvency professional to assess the risk for [ACPL], Beaini Concreting Pty Ltd, and any other corporations/trusts held by Beaini family and their directors in the event of liquidation of ACD and provide a brief report. They may need to consider whether any additional ramifications apply to the liquidation of building companies, given the current legal environment."
By an email dated 14 June 2023 (Ex P3, document 4) to ACD's accountant, which was copied to Ms Mikhael and to Mr Ronnie Beaini, Mr Spring advised that:
"I have had an opportunity to review the summary financials you have provided. Prima facie, the company appears solvent. As discussed, the director's concerns involve an alleged defect liability associated with a historical project from some 7+ years ago. The claim asserted by the other side [ie, the Owners Corporation] being as much as $7M. We have briefly discussed options and Ronnie [Beaini] agreed to instruct me to assess the position and provide a summary of potential insolvency options, should the claim be borne out or as a defensive strategy on commercial grounds. …
At this stage, I have a few more information requests before I can finalise my view. However, I will note that my initial view is that both the VA/DOCA or Liquidation strategies discussed appear feasible. I will expand on that further after reviewing the below information." [emphasis added]
[6]
Whether the passage of the Resolution should be set aside
It is common ground that the Resolution was passed at the second meeting of creditors because Mr Spring, as chair of that meeting, exercised a casting vote in favour of that resolution (ASC [32]). The Administrators contend (Administrators Defence [32]) that Mr Spring exercised his casting vote appropriately and conscientiously by reference to several matters, including that the Owners Corporation's claim was disputed; that creditors stood to receive a greater and more timely return under the DOCA as compared to the likely return to creditors in the event that ACD was to be wound up; that the proposed DOCA was consistent with the objects of s 435A of the Act; and that Mr Spring had reference to the interests of creditors as a whole and the ARITA Code of Professional Practice in exercising his casting vote.
The Plaintiffs plead (ASC [34]) that any reasonable insolvency practitioner would have recommended to creditors against voting in favour of the resolution, for numerous reasons, including that:
"The Proposed DOCA works an injustice on [the Owners Corporation] or is otherwise oppressive to [the Owners Corporation] in that the [DOCA] prevents it from pursuing its claim for damages against [ACD] in the Defects Proceedings and instead brings about a settlement of the Defects Proceedings by the payment of only a nominal payment."
The Plaintiffs also plead, in this respect, that the DOCA involves the use of Pt 5.3A of the Act for an improper purpose, namely to prevent the investigation of ACD's affairs including in relation to potential insolvent trading claims, potential unfair preference claims, potential unreasonable director related transaction claims and other matters. The Administrators deny (Administrators Defence [34]) the contention that any reasonable insolvency practitioner would have recommended to creditors against voting in favour of the Resolution and contest the particular criticisms made by the Owners Corporation. The ACD Parties also deny this contention (ACD Parties Amended Defence ([34]) but do not plead any additional factual basis for that denial.
The Plaintiffs plead (ASC [36]) that the Resolution should be set aside. The Administrators do not admit that the Resolution should be set aside (Administrators Defence [36]) and the ACD Parties deny that a basis to set aside the Resolution is established (ACD Parties Amended Defence ([36]), but do not plead to establish any additional factual basis for that denial.
[7]
Alleged defects in information provided to creditors
The Owners Corporation pleads (ASC [37]) that an order should be made terminating the DOCA because there were significant defects in the information provided to creditors prior to the passage of the Resolution on the Chair's exercise of his casting vote. The Administrators contend (Administrators Defence [37]) that the information provided by them to creditors was sufficient for the creditors to make an informed decision as to ACD's future and whether to vote in favour of the Resolution and that the alleged defects cannot reasonably be expected to have been material to creditors in deciding whether to vote in favour of the Resolution. The ACD Parties deny that this ground for termination of the DOCA is established (ACD Parties Amended Defence ([37]) but do not plead any additional factual basis for that denial. It is also not necessary to determine this claim, given the conclusions that I reach on other grounds below.
For completeness, the Owners Corporation also devoted significant attention in the cross-examination of Mr Spring and in submissions to a claim that the Administrators should have disclosed, in the Report, a restructuring by ACD, prior to the appointment of the Administrators, which appears to have been intended to minimise the potential impacts of the voluntary administration on the builders' licences held by ACD, ACPL and associated companies, and by the Director and Mr Ronnie Beaini. I have referred to correspondence concerning that matter in the chronology above and Mr Spring plainly knew of the steps which were taken in that respect. It is again not necessary to determine any question whether those matters were material, and whether they should have been disclosed in the Report, in order to determine these proceedings.
[8]
Whether the DOCA was oppressive, unfairly prejudicial to, or unfairly discriminatory against the Owners Corporation
The Owners Corporation also pleads (ASC [38]) that the DOCA is oppressive, or unfairly prejudicial to, or unfairly discriminates against, the Owners Corporation. The Administrators take a neutral position as to this claim and do not seek to be heard other than to assist the Court. The ACD Parties deny that this ground for termination of the DOCA is established (ACD Parties Amended Defence ([38]) but do not plead to establish any additional factual basis for that denial.
I summarised the principles applicable in an application to set aside a deed of company arrangement under, inter alia, s 445D the Act in Re Citadel Financial Corporation Pty Ltd (subject to Deed of Company Arrangement) (2020) 146 ACSR 220; [2020] NSWSC 886 ("Citadel") at [16]ff and again in Re ACN 613 909 596 Pty Ltd (formerly Minle Wine Negociants of Australia Pty Ltd) (subject to Deed of Company Arrangement) [2023] NSWSC 753 at [42]ff and [56]ff, on which I have drawn for the summary that appears below.
In Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527; [1999] NSWCA 402, Fitzgerald JA (with whom Beazley JA and Davies AJA agreed) observed (at [80]) that:
"… the Court should not encourage the notion that 'anything goes' provided only that a deed of company arrangement provides some benefit for dis-satisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the Court's refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently." That passage was quoted with approval by Campbell J in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235 ("Bidald Consulting") at [28] and in Re Hayes Steel Framing Systems Pty Ltd (admins apptd) [2017] NSWSC 385 at [30].
In Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391; [2003] NSWSC 883, Barrett J terminated a voluntary administration where a company's sole director placed the company in voluntary administration with a view to adopting a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value that would bar particular claims already being litigated against the company.
[9]
Whether the DOCA should be terminated for some other reason
The Owners Corporation contends (ASC [39]) the DOCA should be terminated because it is against the public interest, and particularises that contention as follows:
"The DOCA creates a dangerous precedent whereby an otherwise solvent building company faced with a significant claim for damages for defective building works, can improperly use the provisions of Part 5.3A to unfairly, oppressively and prejudicially rid a building company of a valid damages claim for defective building works by splitting creditor groups into separate classes for distribution purposes, and isolate [the claimant] into its own special class of creditors receiving only the payment of a nominal dividend on its creditor claim."
The Administrators again take a neutral position (Administrators Defence [39]) and do not seek to be heard as to this claim other than to provide assistance to the Court. The ACD Parties deny that this ground for termination of the DOCA is established (ACD Parties Amended Defence ([39]) but do not plead to establish any additional factual basis for that denial.
An order terminating a deed of company arrangement may be made under s 445D(1)(g) of the Act if the Court is satisfied that the deed should be terminated for some other reason. In Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) 110 ACSR 203; [2015] FCA 1360 at [69]-[74], Beach J noted (and I followed these observations in Citadel at [20]) that:
"… I accept that s 445D(1)(g) is broad and on one view unconstrained, save by its context and s 435A generally, such that this proposition may only be of theoretical interest. …
The Court may set aside a DOCA pursuant to s 445D even where creditors may be better off under the DOCA than with a liquidation: Bidald Consulting at [286]-[291] per Campbell J. It may do so in the public interest.
Where the relevant company is not trading and there is no likelihood of its resuming its former business, the public interest in placing the company in the hands of a liquidator may prevail over the interests of creditors (see Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admin apptd) (2009) 71 ACSR 81; [2009] FCA 269 at [69] and [71] per Logan J).
In QBI Corporation Pty Ltd v Plantation Rise Pty Ltd (admins apptd) (recs and mgrs apptd) (2010) 77 ACSR 573… a DOCA was set aside where there was no continuing business preserved and the structure designed and enshrined in the DOCA was to allow and facilitate the director of the company and third parties who were susceptible to voidable transactions to be protected from relevant action.
Generally, the breadth of s 445D(1)(g) is such that in a particular case the public interest can justify the termination of a DOCA even where it is not established that this would necessarily be in the creditors' interests.
Finally, in any event, the preclusion of an effective investigation by a liquidator into relevant transactions and the opportunity for greater returns may render a DOCA contrary to the creditors' interests overall (see Canadian Solar v ACN 138 535 832 Pty Ltd [2014] FCA 783 at [37] (per Perry J)."
[10]
The Court's discretion whether to terminate the DOCA
Mr Krochmalik also submits, and I accept that the structure of s 445D of the Act involves a two-stage enquiry: first, whether one of the grounds referred to in section 445D(1) is established, as is the case here; and secondly, which arises only if the first is established, whether as a matter of discretion the deed of company arrangement should be terminated: Recycling Holdings at [29]; Britax at [90]; Decon at [144]. He also submits and I accept that the Court has a discretion to terminate (or not to terminate) a deed of company arrangement, where the jurisdictional criteria for doing so are established, and that discretion is exercised on the facts of each case and depends on all the various considerations before the Court, including the interests of the creditors as a whole and the public interest: TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (admin apptd) (2012) 91 ACSR 17 at [27]; [2012] NSWSC 766; Hayes v Doran (No 2) [2012] WASC 486 at [291]; Decon at [111]. I also recognise that the several factors identified in Sino Group at [72] are relevant to the exercise of the Court's discretion. However, it seems to me that where, as here, a deed of company arrangement operates to the advantage of the majority of creditors, and the substantial disadvantage of a single creditor or minority creditors, then the advantage of the deed of company arrangement for creditors generally is of lesser relevance, and issues relate to the proper use of Pt 5.3A of the Act are of greater significance.
Mr Krochmalik raises the possibility that the Court would exercise its discretion not to terminate the DOCA on the basis that creditors other than the Owners Corporation will "definitely" be worse off in a liquidation than under the DOCA and the Owners Corporation will "likely" be worse off under the DOCA, and financial contributions to the deed fund have been made which exceed $500,000. I would not decline to terminate the DOCA on that basis, where it seems to me that the structure of the DOCA involves a high level of oppression and discrimination against the Owners Corporation, even apart from the fact that it is now common ground that the DOCA in its present form is not authorised by Pt 5.3A of the Act. The factual basis of that submission is also undermined by the Administrators' understatement of the prospects of recoveries in a liquidation in the Report, by reason of the error which Mr Spring now acknowledges was made in omitting the substantial preference claim against Academy Parramatta Pty Ltd in assessing the outcome of a liquidation, and their overstatement of the return in a DOCA by their assumption that they would not incur the costs of an adjudication of the Owners Corporation's claim under the DOCA, where such an adjudication was a prerequisite to allowing that claim.
[11]
The invalidity of the DOCA
A further and important issue arose in the course of the hearing. Mr McDonald referred in opening submissions to the third party releases contained in the DOCA and to the decision of the Full Court of the Federal Court of Australia in City of Swan v Lehman Brothers Australia Ltd (2009) 74 ACSR 191; [2009] FCAFC 130 ("Lehman FCAFC"), which was upheld by the High Court of Australia in Lehman Bros Holdings Inc v City of Swan (2010) 240 CLR 509; [2010] HCA 11 ("Lehman HC"). As I noted above, all parties now accept that the DOCA, in its present form, is not authorised by Pt 5.3A of the Act.
Mr Krochmalik acknowledged on behalf of the Administrators that the third party releases contained in cll 6.3 and 13.2 of the DOCA were inconsistent with the operation of Pt 5.3A of the Act and recognised the reasoning of the plurality of the High Court in Lehman HC at [50]-[53] that:
"the critical observation to make is an observation about the text of s 444D(1). That sub‑section identifies who is to be bound by a deed of company arrangement ("all creditors of the company") but at once proceeds (by the "so far as concerns" clause) to limit the extent to which those creditors are to be bound ("so far as concerns" identified claims). Contrary to the submissions of Lehman Holdings and Lehman Asia, there is no textual footing for reading the word "claims", in the "so far as concerns" clause in s 444D(1), as including claims against persons other than the subject company. Even if it were accepted that, as Lehman Asia submitted, it would be sensible to recognise that a creditor of one of a group of companies may have interlocking, even dependent, claims against one or more other companies in the group, Pt 5.3A directs attention only to the particular subject company; it does not deal with groups of companies.
But none of these observations confronts the critical observation that s 444D(1) limits the extent to which a deed of company arrangement binds creditors. Creditors are bound "so far as concerns claims" against the subject company that arose before a specified date. And it is s 444D(1) alone which makes a deed of company arrangement binding on creditors.
Because creditors are bound under s 444D(1) only to the limited extent identified in that provision, the assent of some creditors (even a majority by number and value of those who vote) to giving up claims against another does not bind other creditors to do so. No creditor is bound to give up such claims because the Act does not bind them beyond the limit prescribed by s 444D(1). More particularly, the Act does not bind creditors to give up a claim against a person other than the subject company - here, Lehman Australia. [and accepting that the DOCA ought not be permitted to operate in its present form]
[12]
Orders and costs
For these reasons, the DOCA should be terminated and the Owners Corporation's nominees should be appointed as liquidators of ACD. My preliminary view is that costs should follow the event, as between the Owners Corporation and the ACD Parties, and the ACD Parties should pay the Owners Corporations' costs of the proceedings as agreed or as assessed. My preliminary view is that there should no order for costs in favour of, or against, the Administrators in respect of these proceedings. However, I will allow the parties an opportunity be heard as to costs.
I direct the parties to bring in short minutes of order to give effect to this judgment, including as to costs, within five business days and, if there is no agreement between them, their respective draft orders and submissions as to the differences between them, not exceeding 5 pages in Arial font in one and a half spacing.
[13]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 02 July 2024
Parties
Applicant/Plaintiff:
Adelaide Brighton Cement Ltd, Re Concrete Supply Pty Ltd
Mr Krochmalik also foreshadowed that the Administrators intended to hold the Owners Corporation "precisely to its pleaded case" in the Amended Statement of Claim. I should note that a party to the proceedings does not have an unqualified entitlement to take that course, for the reasons identified by the Full Court of the Federal Court in Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356; [2010] FCAFC 133 at [55] and JR Consulting and Drafting Pty Ltd v Cummings (2016) 329 ALR 625; [2016] FCAFC 20 at [410]. In any event, Mr Krochmalik fairly conceded that it was open to the Owners Corporation to rely on the fact that the DOCA, in its present form, was not authorised under Pt 5.3A of the Act, where that result followed from the application of well-established appellate authority to the uncontested terms of the DOCA. The Administrators do not oppose the appointment of Messrs Weston and Elkerton as liquidators of ACD, as sought by the Owners Corporation (Defence [40]), if the Court makes an order that ACD be wound up.
The Second and Third Defendants in the proceedings are ACD and its current director, Mr John Beaini ("Director") (together, "ACD Parties"). Mr Ronnie Beaini was also a director of ACD until his resignation on 28 July 2023, immediately before ACD was placed in voluntary administration. Academy Constructions Pty Ltd ("ACPL"), which had the same directors as ACD, was the sole shareholder of ACD until about 8 August 2023. By an Amended Defence filed, by leave, on the second day of the hearing, the ACD Parties sought an order under s 447A of the Act that the DOCA be varied by deleting cll 6.2 and 13.3 of the DOCA, which give rise to its invalidity in its present form. I will address that application below.
The Owners Corporation also tendered a consent of Messrs Elkerton and Weston to appointment as liquidators of ACD.
The Administrators read the affidavits dated 11 April 2024 and 6 June 2024 of Mr Andrew Spring, one of the Administrators. In his first affidavit, Mr Spring addresses the circumstances in which he and Mr Moore were appointed jointly and severally as the voluntary administrators of ACD and refers to the first meeting of creditors in respect of the voluntary administration. He addresses the circumstances in which he became aware of the Owners Corporation's claim against ACD, from ACD's books and records and by investigations including discussions with the Director and ACD's former director, Mr Ronnie Beaini and ACD's former solicitors. Mr Spring also outlines the work undertaken by the Administrators in considering the Owners Corporation's claim against ACD, which included discussions with Mr Ronnie Beaini and ACD's solicitor, where Mr Spring was informed that:
"The cost of preparing evidence required expenditure of funds that [ACD] did not have available to it and that this was the immediate catalyst for our appointment as administrators (and I recall that I may also have been told this by the [Director] in a discussion that I had with him immediately prior to my appointment as one of the administrators)."
The ACD Parties did not seek to establish the truth of that proposition by evidence led in these proceedings. Mr Spring also refers to information provided to him that ACD denied that it was liable to the Owners Corporation with respect to the claims in the Defects Proceedings and that the Director and ACD's former solicitor expressed a view that ACD had prospects of success in defending the Defect Proceedings by reference to several matters. Again, the expression of that view does not establish its truth.
Mr Spring also referred to the Administrators' consideration of ACD's financial position and possible claims against third parties, and identified possible insolvent trading claims against both the Director and ACPL, but expressed the view that the Administrators "were unable to state with any confidence whether any such claim was viable or had a good chance of succeeding". Presumably, any claim that was available against the Director would also have been available against Mr Ronnie Beaini, where he had resigned as a director only shortly before ACD was placed in voluntary administration. Mr Spring also noted the possibility of a preference claim against the Commissioner of Taxation. He noted that searches did not disclose any real property owned by the Director or Mr Ronnie Beaini, although that plainly left open the possibility that property was held in trusts or by family members, and that the Administrators had not identified any directors' and officers' liability insurance which may have responded to any claim against the Director or Mr Ronnie Beaini.
Mr Spring's evidence (Spring 11.4.24 [27]) was that "[i]n the course of the administration, I had a number of communications with [the Director] and his in-house solicitor, Ms Mikhael, in relation to a possible proposal for a deed of company arrangement". I will address those communications, and other communications which occurred prior to the commencement of the voluntary administration, in setting out a chronology below. Mr Spring also referred to the proposal ("DOCA Proposal") which Mr John Beaini was prepared to advance in respect of a DOCA. His evidence (Spring 11.4.24 [28]) is that, based on those discussions, he and his staff prepared the DOCA Proposal and provided that to the Director and Ms Mikhael and that, on 27 September 2023, he received the DOCA Proposal (in the form that he and his staff had previously prepared) signed by the Director, to be put to creditors for approval at the second meeting of creditors. Plainly, Mr Spring had a substantial involvement in the development of the DOCA Proposal. Mr Krochmalik pointed to the judgment of the Court of Appeal of the Supreme Court of South Australia in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48-49; (1996) 22 ACSR 169 as accepting a voluntary administrator's involvement in formulating a deed of company arrangement which was then recommended to creditors; however, standards of independence may have become more demanding in the nearly 30 years since that judgment was delivered. It is neither necessary or appropriate to reach a finding as to the Administrators' independence, where it is not necessary to do so to determine these proceedings.
Mr Spring also refers to the assessment that he and Mr Moore formed that all creditors, including the Owners Corporation, would be better off if the DOCA was entered into than on a winding up. There were plainly difficulties with that assessment, including the fact that, as Mr Spring fairly recognised, he and Mr Moore had not had regard to a substantial and apparently straightforward preference claim against an associated entity of ACD, Academy Parramatta Pty Ltd, in undertaking that analysis; the information which was available to them to reach an assessment of the prospects of recoveries in the liquidation was limited; and they had assumed that substantial costs would be incurred to assess the Owners Corporation's claims in a liquidation but not a deed administration, where it is not apparent that a proper assessment of a proof of debt could have been performed more cheaply in the deed administration than in the liquidation. I return to those matters below. Mr Spring also referred to the preparation of a report to creditors for the second meeting of creditors; to steps taken by the Administrators to adjudicate the Owners Corporation's proof of debt for voting purposes at the second meeting of creditors; and to the conduct of the second meeting of creditors. He also outlined (Spring 11.4.24 [52]) the matters to which he had regard in exercising his casting vote in favour of the Resolution at the second meeting of creditors. Mr Spring then referred to the execution of the DOCA and payments into the deed fund, and identified further matters which would be relevant to the assessment of the amount available for distribution to creditors in a liquidation.
By his second affidavit dated 6 June 2024, Mr Spring corrected a minor error in his first affidavit, relating to the description of the accounting software used by ACD. Mr Spring was cross-examined at substantial length. A substantial part of that cross-examination was directed to issues which it will not be necessary to decide, given the conclusions which I reach on other grounds, and it is not necessary to reach any finding as to credit given those conclusions.
As I noted above, the ACD Parties did not lead evidence in the proceedings, including any evidence to support the availability of the defences for which they contended in the Defects Proceedings.
Mr Spring then requested further information in respect of ACD. Unsurprisingly, Mr Spring was cross-examined as to the reference in this email to a "defensive strategy on commercial grounds", and he initially accepted in cross-examination (T57) that he was "undertaking, or considering undertaking, an appointment of an administrator as a defensive strategy, for the benefit of [ACD]", although he then sought to put that proposition in a less direct way, by reference to the interests of all creditors of ACD, in response to questions that followed (T58-59). It seems to me that this reference is plainly to a means which ACD could respond to the Owners Corporation's claim in the Defects Proceedings.
By an email in response to Mr Spring's 14 June 2023 email (Ex P3, document 7(a)), Ms Mikhael advised Mr Spring of the timing for ACD's evidence in the Defect Proceedings, the amount already spent by ACD on legal fees and estimated costs for the defence going forward. By an email dated 15 June 2023, Ms Mikhael, who was then plainly treating Mr Spring as an adviser to ACD, sought further advice from him as follows (Ex P3, document 8(a)):
"Could you please also provide a quick opinion, based on your experience, on the following issues with the current litigations:
1. I understand that the deed administrator would usually decide as to whether the litigation should proceed. Can the creditors insist that the deed administrator allow them to vote on this issue? Would a deed administrator usually allow the litigation to proceed?
2. Would you expect the [Owners Corporation] to apply to the Court for leave to proceed with the litigation? Particularly, the claim could be for a large amount and the [Owners Corporation's] lawyers are aggressive litigators. The [Owners Corporation] will be liable to pay their lawyers' fees if the claim is halted, so I think the [Owners Corporation's] lawyers may be happy to continue chasing the claim!"
Mr Spring responded, by email dated 19 June 2023 (Ex P3, document 9) that:
"I would anticipate that [ACD] would withdraw from participating in the litigation as soon as the Voluntary Administrator is appointed. Whatever the quantum of the claim admitted will be caught by the DOCA (if approved) and compromised."
On 19 June 2023, Mr Spring advised Mr Beaini and Ms Mikhael (Ex P3, document 10) as to the scope of voluntary administration, in uncontroversial terms, referring to the "impending costs of the current litigation and the ongoing project works" and characterising voluntary administration, correctly, as a "[b]usiness rescue procedure - designed to save the company" and rightly also observing that:
"● Creditors control the outcome, by voting to accept the DOCA or to place the company into [l]iquidation. This is by a majority in number voting and a majority in value voting - if there is a majority in one but not the other, then the V[oluntary] A[dministrator] will decide the outcome.
● A successful DOCA proposal will provide for a greater return to unsecured creditors than that expected should the company be placed into [l]iquidation."
By email dated 7 August 2023 (Ex P3, document 11), Ms Mikhael, who likely still understood Mr Spring to be acting as an adviser to ACD, informed him of the content of her discussions with ACD's solicitors regarding the risks to its builder's licence and its directors' licenses on a voluntary administration. She extracted the solicitors' advice, including the following:
"In this case the intention is to appoint administrators and have [ACD] taken through a DOCA process and handed back to the shareholders and directors at the conclusion of that process. It may be the case that the [Department of Fair Trading] will suspend the [ACD] licence upon learning that [ACD] has been placed in administration. However, whether the Secretary will do that automatically is unclear. It may be the case that upon being provided with a notification of the appointment of an administrator the Secretary may ask for further information before making any decision about the [ACD] licence."
I read that the "intention" referred to in that email was that of the ACD Parties, and do not find that Mr Spring necessarily shared it, where he plainly recognised that creditors would decide the outcome of the voluntary administration. The solicitors there also identified the grounds for disqualification of the Director and Mr Ronnie Beaini from holding directors' licences, and raised the possibility of removal of the Director and Mr Ronnie Beaini as directors of ACD, plainly in order to seek to avoid the application of the statutory disqualification provisions, and recommended speaking with ACD's "insolvency adviser" as to the consequences of administration or any other insolvency mechanisms under the HBA. It is striking that, when invited to refer those matters to ACD's insolvency adviser, Ms Mikhael referred them to Mr Spring, and Mr Spring did not, so far as the evidence goes, take issue with her apparent assumption that he occupied that role.
On 31 August 2023, the Administrators were appointed to ACD under s 436A of the Act. On 11 September 2023, the Owners Corporation lodged a proof of debt in the voluntary administration, quantified as at 31 August 2023, in the amount of $7,127,600 plus GST plus legal and expert costs, with expert's costs estimated as $500,000 plus GST, on a basis which the Owners Corporation contends reflected the evidence filed in the Defects Proceedings (ASC [24]).
By an exchange of emails on 25 and 26 September 2023, Mr Ronnie Beaini, Ms Mikhael and legal representatives of ACD on the one hand, and Mr Spring on the other, discussed the treatment of the Australian Taxation Office's claim against ACD under the DOCA Proposal, the treatment of the Owners Corporation's claim, and the desirability of including releases in favour of at least the Director and Mr Ronnie Beaini in the DOCA Proposal and the DOCA. By an email dated 25 September 2023, (Ex J1, 278), Ms Mikhael advised Mr Spring and others that:
"In your proposed arrangement, it is likely that all creditors will be paid and the Botany claim will be settled for a lump sum.
Will you also include a release for the past and present directors concerning the Botany claim, either within the DOCA or in an attached deed of release?"
It is striking that, at least at this point, Ms Mikhael understood the Proposed DOCA to constitute the Administrators' "proposed arrangement" rather than as one that was originating from the ACD Parties. It is also plain that any "settle[ment]" for a lump sum of the Owners Corporation's claim arising from a DOCA, particularly in the form then contemplated, would likely not be consensual, so far as the Owners Corporation was concerned.
Mr Spring responded to whether the DOCA would release the Director and former director as follows (Ex J1, 276):
"Generally, no. On what basis might there be a claim against the directors personally?"
Ms Mikhael then advised Mr Spring (Ex J1, 276) that:
"The claim by the Owners Corporation (OC) includes a cause of action against ACD under the Design and Building Practitioners Act 2020 (NSW) (DBP Act). Section 37 of the DBP Act mandates a duty of care for those involved in construction work. Initially, it was unclear whether this duty applied solely to the contracting entity, such as the builder, or if it extended to other participants like directors, supervisors, and project managers. Recent case law suggests that any individual, from directors to subcontractors, could possibly be held liable under the DBP Act if they potentially exerted control over the construction. This broadens the potential liability beyond just the main contracting party.
Should the O[wners] C[orporation] decide to proceed with its action against other parties post-DOCA, it might contemplate adding individuals, such as directors, to the suit. While this scenario seems unlikely, it's worthwhile considering the incorporation of a release clause within the terms of the DOCA."
Mr Spring then responded, on 26 September 2023 (Ex J1, 276) that:
"We can include this [third party release] in the DOCA terms, but I am not sure how binding it will be if the O[wners] C[orporation] don't vote for it.
In any event, I spoke with [ACD's solicitors] yesterday afternoon and we discussed the option of a settlement approach to the O[wners] C[orporation] once the report is issued in the hope of avoiding the need for a DOCA. If successful, a full release can be a condition.
We will send through the DOCA [P]roposal later this morning for consideration. Please note, that we will need the proposal terms finalised today. Are there any further thoughts on timing of contributions?"
On 26 September 2023, Ms Mikhael responded to Mr Spring (Ex J1, 275) that:
"A settlement deed would be ideal. Trying to include a binding release in a DOCA is challenging and would require additional processes."
On 26 September 2023 (Ex J1, 274), Mr Spring emailed a draft of the DOCA Proposal to Ms Mikhael, with a copy to Mr Ronnie Beaini, for consideration by the Director. He referred to the proposed treatment of the Australian Taxation Office's claims in the DOCA Proposal and observed that:
"As requested, I have also included a release for all related parties to [ACD] in relation to the [Owners Corporation] claim for the Botany project. As discussed below, I am not sure how useful this will be if the [Owners Corporation] do not support the DOCA."
The DOCA Proposal dated 26 September 2023 (Ex J1, 243) provided for a deed fund to be established including:
(ii) An amount sufficient to discharge all Class "A" creditors in full; plus
(iii) An amount sufficient to make available $200,000 to Class B creditors following costs and expenses of the Administration and the payment to Class A creditors.
(iv) The payments listed at (ii) and (iii) are to be paid by 30 November 2023. However, a contribution of $500,000 towards [ACD's] obligation at (ii) and (iii) will be paid within 7 days of the approval of the DOCA."
The Class "A" creditors were identified in a schedule to the DOCA Proposal by a list of ACD's creditors other than the Owners Corporation, being the Australian Taxation Office, trade suppliers and a company associated with ACD. The Owners Corporation was there identified as the only creditor falling within Class "B".
Clause 8 of the DOCA Proposal provided that all monies paid under the DOCA would not be refundable to the deed proponent or a third party and they were to be held on trust by the Administrators as property of ACD. No party contended that, on a termination of the DOCA, monies contributed to the deed fund would be repayable to the deed proponents. The DOCA Proposal in turn provided for payment of amounts in a specified order of priority, such that the Class "A" participating creditors were to be paid in full before any payment was made to the Owners Corporation; the priority schedule was maintained in the DOCA and had the consequence that, if the amount paid into the deed fund by the Director (as quantified by 30 November 2023 when it was to be paid) was ultimately insufficient to meet the Administrators' remuneration and disbursements, including by reason of costs incurred after the date that payment was made, then the Owners Corporation rather than other creditors of ACD would likely bear that shortfall.
Clause 12 of the DOCA Proposal provided that:
"The Class "B" creditor [ie the Owners Corporation] must accept their entitlement under the Deed in full settlement of any and all claims against any party related to the Company, in respect to the development at … Botany." [emphasis added]
The DOCA Proposal therefore contemplated that third party releases would be given only by the Owners Corporation, and not by other creditors of ACD, as an element of the DOCA. I will return to the significance of that matter below. The DOCA Proposal also provided that several parties associated with the Company would not participate in the deed fund and would defer their claims against the Company; and that, if ACD executed the deed, the Administrators would not pursue ACD's directors for any claims and could not pursue any voidable transactions.
The Administrators issued a report to creditors ("Report") under s 439A of the Act on 27 September 2023 (ASC [25]; Ex J1, 200). The Owners Corporation pleads (ASC [26]) the contents of the Report, and the Administrators largely admit (Administrators Defence [26]) the pleaded content of the Report, but deny that they relied solely on the advice of the Director as to the value of the Owners Corporation's claim in the Defects Proceedings and contend, inter alia, that, in the limited time available, they reviewed and considered the pleadings and other supporting documents in assessing the value of that claim; they obtained legal advice (which was tendered) as to the steps taken to arrive at a just estimate of the value of the Owners Corporation's claim in the administration; and that ACD did not comply with the orders made in the Defects Proceedings to file evidence by reason of its "inability to pay legal costs associated with defending the claim in the Defects Proceedings". The ACD Parties do not admit this paragraph of the pleading (ACD Parties Amended Defence [26]).
Paragraph 4.5 of the Report stated:
"Our appointment as Administrators of the Company, was ultimately due to the ongoing litigation in the Supreme Court of NSW ("the Court") filed by the Owners against the Company, case number 2021/00016128. …
The Director has advised us that based on the limited access provided to the Company, its position is that the value of any defects is much less and that no major defect exists that would make the building uninhabitable. The Director has also advised that the Company's legal advice identified the claim as legally compromised due to time constraints and legal merit.
On 9 June 2023, we understand that the Court made orders requiring the Company to serve its evidence by 17 November 2023. Upon receiving fee estimates to comply with the Court timetable, the Director has advised us that it became increasingly apparent that the Company was not going to be able to meet the defence costs. As detailed in our DIRRI, the Former Director and his accountant made initial contact with our office to discuss the possibility of placing the Company into administration.
Accordingly, we were appointed Administrators on 31 August 2023."
Obviously enough, the fact that the Director advised the Administrators of these matters does not establish their truth, and, as I noted above, the ACD Parties did not seek to establish their truth of these matters by evidence in these proceedings.
Section 9 of the Report summarised the DOCA terms and set out suggested advantages and disadvantages of the DOCA. That summary did not refer to the differential treatment of the Owners Corporation and other creditors of the DOCA, but the Owners Corporation was plainly not misled by that omission. Paragraph 10.3 of the Report set out the Administrators' reasons for recommending that ACD's creditors resolve to enter into the DOCA including that, under a DOCA, priority creditors were expected to receive a dividend of one hundred cents in the dollar and employment would continue and entitlements would be paid in the ordinary course of business (although, I interpolate, it appears that ACD then had no employees); under a DOCA scenario, Class "A" ordinary unsecured creditors were expected to receive a dividend of one hundred cents in the dollar, and in liquidation it was unlikely that the return to creditors would exceed zero cents in the dollar; under a DOCA, Class "B" ordinary unsecured creditors were expected to receive a dividend of 2.4 cents in the dollar, whereas in liquidation it was unlikely that the return to creditors would exceed zero cents in the dollar; under a DOCA, ACD would be able to continue trading and all current taxes would be brought up to date; there would be continuity of business, which fulfilled the purpose of the voluntary administration process; there would be preservation of ACD's employees (although, as I noted above, it appears it did not have any) and subcontractors; there would be continued business for the landlord of ACD (although, I interpolate, it appears that ACD did not lease premises); there would be continued business for the finance creditors of ACD; trade creditors of ACD would be able to continue to trade with it; and ACD would be able to continue as a taxpayer. I will refer below to difficulties with aspects of this analysis, including the comparison between the likely result of a DOCA and a liquidation, generally and for the Owners Corporation particularly. There would be every reason for all creditors other than the Owners Corporation to accept the Administrators' recommendation to enter into the DOCA where they, but not the Owners Corporation, were likely to be paid in full under it.
The Report annexed a copy of the DOCA Proposal as Annexure "D" and annexed a comparison of the position on the DOCA and on a liquidation as Annexure "D". That comparison allowed a recovery of nil on a low case and $100,000 on a high case, referable to a preference claim against the Commissioner of Taxation; that figure substantially understated the likely preference recoveries on a liquidation. As I noted above, Mr Spring now concedes that it omitted a substantial preference claim available against an associated entity of ACD, Academy Parramatta Pty Ltd, and a preference claim that was potentially available against ACPL, subject to a debate between the parties as to whether a running account defence would have been available, which it is not necessary to resolve. That comparison allowed no return for an insolvent trading claim on a low case in a liquidation and recorded the return on a high case as "TBC"; there was further discussion of that potential return at the second creditor's meeting, although Mr Spring reduced the maximum recovery he there indicated in his evidence at this hearing. It is not necessary to determine the ultimate position as to these matters in order to determine this application, beyond noting that, on any view, this schedule significantly understated the potential recoveries of a liquidation and overstated the advantage in a DOCA in consequence.
That comparison also significantly overstated the savings of costs in a DOCA, because it allowed for the costs of adjudication of the Owners Corporation's claim in the liquidation but not in the DOCA. As I will note below, I can see no basis for that approach, where the Administrators would need to undertake a proper adjudication of the Owners Corporation's claim under the DOCA, where that was required by the DOCA to admit that claim, and could not fail to do so merely because the amount that would ultimately be payable to the Owners Corporation would be so heavily discounted by the DOCA.
On 5 October 2023 (Ex J1, 296) the Administrators took comprehensive advice from their solicitors, Holman Webb, as to the admission of the Owners Corporation's claim for voting purposes at the second meeting of creditors. Holman Webb there referred to their discussions with ACD's former solicitor in respect of the prospects of the Defects Proceedings and noted the views expressed by ACD's former solicitor that "the defence to the claims is a good one and that [ACD] may well have no liability at all" (Ex J1, 299). That advice also noted that, by reason of the timeframes in a voluntary administration, the volume of documents produced and the nature of the issues in dispute, it was not possible to determine the likely outcome of the dispute with any certainty and that it would be necessary to obtain Counsel's advice and undertake a thorough review of the expert evidence filed by the Owners Corporation in order to do so. Understandably, in the context of the limited timeframe for a voluntary administration, that was not done. That letter also noted that it was arguable that ACD had acknowledged that some amount was payable to the Owners Corporation and noted that a settlement offer had been conveyed by a third party in advance of the second meeting of creditors to the Owners Corporation.
Holman Webb there recognised the likely practical effect of the DOCA Proposal, so far as it provided for all creditors other than the Owners Corporation to be paid in full, since they went on to advise the Administrators (Ex J1, 302-303) that:
"● The treatment of the proof of debt is unlikely to affect the outcome of the meeting in circumstances where a casting vote is exercised in accordance with the report to creditors and assuming that all other creditors vote in favour of the DOCA being entered into;
● The [Owners Corporation] may apply to the Court to set aside the DOCA on the basis that it is oppressive or unfairly prejudicial to the Owners Corporation given its differential treatment and/or contrary to the interests of the creditors as a whole. In this regard, we note that on the analysis in the report, the proposed DOCA is more beneficial to the [Owners Corporation] than a winding up, and that differential treatment does not necessarily equate to unfair prejudice …
● The matters set out in the report to creditors as to the availability of claims in a liquidation do not reveal that the DOCA is for some improper purpose [ACD] or its directors."
Plainly, the outcome assumed by Holman Webb reflected the likelihood that all of ACD's creditors other than the Owners Corporation would vote in favour of the DOCA Proposal at the second meeting of creditors, where it provided for them to be paid in full, and that the DOCA Proposal could then be adopted (over the Owners Corporation's likely opposition) on the casting vote of Mr Spring as chair of the second meeting of creditors.
At the second meeting of creditors of ACD held on 6 October 2023 (minutes, Ex J1, 304; recorded transcript, Ex J1, 319 with minor corrections, Ex J2), six creditors voted in favour of the Resolution, one of which, Variz Beaini Nominees Pty Ltd, was a related creditor of ACD, and the Owners Corporation voted against the Resolution. The Resolution was passed by a majority of creditors by number and not by value, since the Owners Corporation's claim represented nearly 90% of the total value of admitted creditor claims, and Mr Spring as chair then exercised his casting vote in favour of the Resolution.
On 23 October 2023, ACD and the Administrators entered into the DOCA which was largely consistent with the DOCA Proposal (ASC [35]; Ex J1, 345) and they became the Administrators. After the DOCA was executed, the control of ACD was returned to the Director pursuant to cl 4 of the DOCA. Clause 6.1 limited the steps to be taken by creditors while the DOCA was in force and cl 6.2 provided that:
"Without limiting clause 6.1, the [Owners Corporation] may not at any time while this deed is in force bring or take any further step in legal proceedings (including the [Defect Proceedings], arbitration or other legal process (formal or informal) against any Related Party or Associated Entity of [ACD] in relation to the subject matter of the dispute in the Proceedings."
Clauses 7 and 8 dealt with the deed fund and contributions to the deed fund; cl 10.1 established a proof of debt process in respect of claims under the DOCA; cl 10.5 established an order for priority as to distributions from the deed fund, consistent with the DOCA Proposal, which again had the effect that the Owners Corporation would be paid only after all other expenses, remuneration, priority employee claims and claims of other creditors of ACD had been paid, and exposed the Owners Corporation to the risk that its claim would not be met if the deed funds were eroded by the Administrators' claim for remuneration or costs (including by reason of the costs of proceedings challenging the DOCA) after the date of the amount of the Director's contribution to the deed fund was determined and made.
Clause 13.2 provided for Participating Claims (as defined) to be released and discharged on effectuation of the arrangement provided in the DOCA, even if no distribution was received by the creditor; that provision would operate, for example, even if no payment was made to the Owners Corporation by reason of the priority provision to which I referred above; and that clause also required that creditors, including the Owners Corporation, "execute and deliver to [ACD] such forms of release of any "Claim" as the [Deed] Administrators may require". Clause 13.3 went further to provide that:
"Without limiting clause 13.2, any claim which the [Owners Corporation] has against any Related Party or Associated Entity of the Company arising out of the same subject matter in the [Defect] Proceedings is released and discharged forthwith, automatically, upon effectuation of the arrangement in this deed in accordance with clause 13.1."
It appears that the Owners Corporation's application to set aside the Resolution is brought under s 75-42 of the IPSC, and possibly also under s 447A of the Act. Both Mr McDonald, who appears for the Owners Corporation, and Mr Krochmalik recognise that the principles applicable to the exercise of a voluntary administrator's casting vote identified by Besanko J in Adelaide Brighton Cement Ltd, Re Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (subject to deed of company arrangement) (No 4) [2019] FCA 1846 ("Adelaide Brighton Cement") at [1224]-[1231]. Mr McDonald accepted that it would not be necessary to determine this claim if the Court found that the DOCA should be set aside on other grounds. Mr Krochmalik also submitted that, if there is other reason to terminate the DOCA - a matter that I address below - then little is added by whether the Resolution should be set aside; and that, in any event, Mr Spring has given a thorough and comprehensive explanation of the reasons why he voted in favour of the proposed DOCA, in a manner consistent with what was said at the second meeting of creditors. The ACD Parties adopted the Administrators' submission as to whether the Resolution should be set aside and whether the DOCA should be terminated pursuant to s 445D(1)(a)-(c) of the Act. As Counsel accepted, it is not necessary to determine this claim given the conclusions that I reach on other grounds below.
An order terminating a deed of company arrangement may be made under s 445D(1)(f) of the Act if that deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the company's creditors or is contrary to the interests of the creditors of the company as a whole. In JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147 at [90], Santow J observed that, where it is clear that it is not possible for the company or its business to continue in existence, then those who support a deed of company arrangement bear an onus to show that it would result in a better return for the company's creditors and members than would result from an immediate winding up. In University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) (2005) 53 ACSR 579; [2005] NSWSC 412 at [37], Palmer J observed that:
"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."
That passage was treated as common ground between the parties in Vero Insurance Ltd v Kassem (2011) 86 ACSR 607; [2011] NSWCA 381, where Campbell JA (at [83]) (with whom Meagher JA agreed) and Young JA (at [144]) expressed no disagreement with it, and was also approved in Re Pilot Advisory Pty Ltd (2019) 141 ACSR 458; [2019] FCA 2171 at [82].
Whether a deed of company arrangement should be set aside on this basis will be determined by reference to the general principles underlying Pt 5.3A, including a creditor's right to be paid or wind up a company or have the company administered by the administrator in a way which will see the creditor paid from the company's property: Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (2005) 228 ALR 598; [2005] WASC 261 ("Fleet Broadband") at [59]-[60]; Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) (2007) 64 ACSR 91; [2007] SASC 296 at [114]; Re Recycling Holdings Pty Ltd (2015) 107 ACSR 406; [2015] NSWSC 1016 ("Recycling Holdings") at [60]-[61]; Guo v Song; Re SG Capricorn Investments Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12 at [148]; Citadel at [21]; Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (subject to a Deed of Company Arrangement) [2024] FCA 112 ("Canstruct") at [207]-[208].
In Britax Childcare Pty Ltd (ACN 006 773 600) v Infa Products Pty Ltd (ACN 092 222 994) (admins apptd) (2016) 115 ACSR 322; [2016] FCA 848 ("Britax") at [115], Burley J identified matters relevant to determining whether a deed of company arrangement is oppressive or unfairly prejudicial, including the objects of Pt 5.3A; the interests of other creditors, the company and the public; the comparable position of the creditor on a winding up compared with their position under the DOCA; and other relevant facts such as the relative position of all creditors under the DOCA (that is, whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the DOCA.
In Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 ("Decon") at [202]-[203] (approved in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54 at [168], Sino Group at [64]-[65] and Canstruct at [205]ff), McKerracher J observed that:
"In respect of s 445D(1)(f)(i) of the Corporations Act, and whether the DOCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more creditors, the following propositions of law are applicable to the current circumstances:
(a) Part 5.3A of the Corporations Act assumes that the creditors are best placed to judge their interests so a setting-aside will not be ordered lightly: University of Sydney v Australian Photonics Pty Ltd [2005] NSWSC 412; (2005) 53 ACSR 579 at [34];
(b) the mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed. The mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement: Fleet Broadband (at [57] and the authorities cited therein);
(c) the test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice. Some degree of discrimination is not necessarily unfair. Thus, it is clear that a DOCA may provide for differential dividends among creditors: Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 (at 38E). Part 5.3A does not require a pari passu distribution. What is required is a better return to creditors than an immediate winding up. That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up: Fleet Broadband (at [62]); and
(d) when deciding whether a deed unfairly prejudices or discriminates against a creditor or group of creditors, consideration must be given to what those purportedly prejudiced creditors would receive, or would be likely to receive, on a winding up, and the reasonableness of any conclusions reached by the administrator on that question: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 (at 50); TNT Building [Trades Pty Ltd v Benelong Developments Pty Ltd (admin apptd)] (at [43]).
In respect of determining what is unfairly discriminatory:
(a) there must be reasonable grounds for differentiation between creditors of an equal class (for example, ordinary unsecured creditors) that accord with the object and spirit of Pt 5.3A: Lam Soon (at 46-48). Circumstances may exist where certain creditors must be paid in full to ensure their continued support for the company to allow it to continue to trade: Employers' Mutual Indemnity (Workers' Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450 per Branson J (at 464-465 applying Lam Soon);
(b) there will be circumstances when ordinary commercial common sense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination: Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 per Finkelstein J (at [25]);
(c) where a deed proposes to preserve the company to achieve the objects of Pt 5.3A of the Corporations Act, there should be no expectation of equal treatment of unsecured creditors where such treatment would defeat that purpose: Rocklea per Finkelstein J (at [30]);
(d) ultimately, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination, and the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation, and indirect or collateral benefits from the survival of the company's business; and no worthwhile avenues for further recovery in liquidation are identified, a major creditor's curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole: Mediterranean Olives (at [195])."
In Canstruct, Derrington J would have terminated a deed of company arrangement under this paragraph (had she not terminated it under s 445D(1)(g) which I address below) where it allowed an insolvent company to avoid a third party's claim against it under an adjudication award, while maintaining its relationships with other arm's length creditors which were paid in full. The similarity with the structure adopted in the DOCA in this case is obvious, although I recognise that ACD was here placed in voluntary administration before the Owners Corporation had the opportunity to have its claim in the Defects Proceeding determined on the merits.
Turning now to the parties' submissions, Mr McDonald submits that:
:… if the total amount of funds available on a best-case scenario under a DOCA, after remuneration and priority creditors, of $1,018,123.65 had been distributed pari passu amongst the creditors and the claim of the plaintiff was admitted for 90.4% or 89.98% of the creditor pool (say 90%), then the [Owners Corporation] would receive $916,311.28, rather than a maximum of $200,000."
Mr McDonald also submits and I accept that, at least after the adjudication of the Owners Corporation's claim under the DOCA or in a liquidation, the Owners Corporation would be an "ordinary unsecured creditor and in no different class to that of the A[ustralian] T[axation] O[ffice] or trade suppliers" as a matter of commercial substance, as distinct from under the approach adopted by the DOCA.
Mr McDonald also submits, in opening, that:
"In respect of the [Owners Corporation's] claim that the DOCA is oppressive, prejudicial or unfairly discriminatory, the [Owners Corporation] submits, inter alia, that:
a. The [Owners Corporation] is singled out for differential treatment in the distribution of funds under the DOCA.
b. There is no basis under the law for such differential treatment.
c. The return to the [Owners Corporation] from such differential treatment is significantly less under the DOCA if compared to all creditors of the unsecured class being treated equally.
d. The [Owners Corporation] is singled out for differential treatment in the releases it must give under the DOCA, being releases of claims against "related parties".
e. The terms of the DOCA then expand on the release contained in the [DOCA] [P]roposal to include "Associated Entities" and
f. The [Owners Corporation] is capable of forming its own opinion about the benefits to it of pursuing these proceedings and having the DOCA set aside."
I recognise the amount of the Owners Corporation's claim would potentially have been admitted for a lesser amount than the face value of that claim, on the adjudication of that claim for the purposes of the DOCA. However, the Administrators and the ACD Parties made no attempt to establish that a pari passu distribution as between other creditors and the Owners Corporation, after the Owners Corporation's claim was properly assessed, would result in a distribution of $200,000 or less to the Owners Corporation. The Administrators and the ACD Parties also did not establish any rational distinction between the position of Class A creditors whose claims were allowed in full, and the position of the Owners Corporation, where any uncertainty in the amount recoverable by the Owners Corporation would necessarily have been addressed in the valuation of that claim in the proof of debt process. There is here no suggestion that there was any proper commercial imperatives in respect of any future trading by ACD to prefer all creditors other than the Owners Corporation, by paying their claims in full, to the Owners Corporation, although that approach no doubt encouraged other creditors to vote in favour of the Resolution.
As I noted above, the Administrators do not join issue with the Owners Corporation's contention that the DOCA is unfairly prejudicial to the Owners Corporation, and leave that matter for the Court to determine, while addressing the facts and the applicable legal principles. Mr Krochmalik submits, and I accept, the fact that the DOCA is not supported by the Owners Corporation as the majority creditor is not in itself sufficient basis to set it aside, and Mr McDonald did not contend to the contrary. Mr Krochmalik refers to Britax [107], where Burley J observed that:
"… there is no basis for Britax's argument to apply such that the dominant position of one creditor, if thwarted, would necessarily prevail for the reason only that it is the only party likely to suffer prejudice if the Deed is set aside. I agree that the authorities cited support the proposition that the scheme of Part 5.3A of the [Act] does not permit the individual will of one creditor, even a creditor entitled to claim a most significant sum in the administration, to set aside the Deed without first establishing that the conditions of one or other of the sub-paragraphs of subsection 445D(1) have been satisfied."
I also have regard to the observations of McKerracher J in Decon at [152], referring to Britax, that:
"… Pt 5.3A does not proceed on the basis that the will of the majority creditor necessarily prevails. The authorities support the proposition that the scheme of Pt 5.3A of the Corporations Act does not permit the individual will of one creditor, even a creditor entitled to claim the most significant sum in the administration, to set aside the DOCA without first establishing that the conditions of one or other of the sub-paragraphs of s 445D(1) have been satisfied. It is convenient to refer again to the reasoning of Burley J in Britax where his Honour said (at [104]-[105]):
[104] In Mediterranean Olives, Dodds-Streeton J noted (at [192]) that the plaintiffs could not establish viable causes of action or negative the administrators' estimates of the probable nil return to the unsecured creditors on winding up. The plaintiffs submitted, however, that as the administrators' investigations were inadequate and the Deed of Company Arrangement depended on the support of related creditors, the Court should, if outstanding issues reasonably called for further investigation, "readily uphold their bona fide preference, as the major independent creditors, for liquidation", at [192]. Her Honour, at [193], said:
As Network and Portinex make clear, however, unless the outcome of the relevant resolution is contrary to the interests of the creditors as a whole, the defeat of a major creditor's preference by the votes of related creditors is irrelevant.
[105] In DCT v Portinex/Silindale/Dalvale [2000] NSWSC 99; (2000) 34 ACSR 391 (Portinex) Austin J at [137] summarised the position as follows:
This is a case where by far the most substantial unrelated creditor has been outvoted by related creditors and now finds himself bound to arrangements to which he objects. He objects broadly on the grounds that the arrangement unduly benefit the director of the companies and that the administrator has made inadequate investigations. If there were nothing more to the case than this, the creditor may have at least a sound moral case for assistance. But Pt 5.3A clearly contemplates that the wishes of an individual creditor may be overridden, and permits related creditors to take part in the decision to do so, subject to s 600A."
However, I do not read these decisions as establishing, conversely, that a deed proponent is free to determine, without any proper commercial basis, that one creditor should receive a minimal return so that other creditors may be paid in full, and that the other creditors are then free to approve that result at the second meeting of creditors. That approach is potentially oppressive, irrespective of whether it is directed to a majority or minority creditor.
Mr Krochmalik submits, and I accept, that differential treatment of creditors is not necessarily unfairly prejudicial or unfairly discriminatory to a particular creditor, although it may be prejudicial and discriminatory in the particular case: Fleet Broadband at [59]ff; Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd (2020) 149 ACSR 1; [2020] FCA 1395 at [408] ("Habrok"); Decon at [202]-[203]; Sino Group at [64]-[65]. Again, it seems to me that there is a greater likelihood that a deed of company arrangement will be found to be unfairly prejudicial to, or unfairly discriminatory against, a particular creditor where the relevant prejudice or discrimination has no commercial or principled justification.
Mr Krochmalik also submits that:
"It might be said that there were at least two reasons for treating the claim of the Owners Corporation in a manner different from the claims of other creditors:
(a) first, as noted above, the Owners Corporation's proof was in the nature of a damages claim (not a debt), which was vigorously disputed and where there were, on the face of things, a number of challenges associated with that claim; and
(b) secondly, the allocation of a set amount of money under the D[O]CA for that claim (in this case, $200,000) may be seen as a way of avoiding further cost and disputation associated with the need to adjudicate the Owners Corporation's proof for dividend purposes.
With respect to the second of those matters, there cannot be any real doubt that a deed administrator or liquidator would need to incur substantial costs (and associated remuneration) in properly evaluating the Owners Corporation's claim, with the likely need to obtain advice from building experts and Counsel specialist in this area. It can be readily accepted that the costs of doing so are likely to be substantial. The payment of a fixed amount of $200,000 to the Owners Corporation under the D[O]CA regardless of the amount of its claim avoids the need to incur the considerable costs in adjudicating on the proof of debt in a liquidation and the possibility of an appeal from any adjudication (whether by the Owners Corporation or some other party)."
Mr Krochmalik also seeks to distinguish the position here from the position in Canstruct and submits that:
"this case is very different from [Canstruct]. In that case:
(a) the single creditor, Canstruct, which was singled out for different treatment to the other creditors, had a statutory debt arising from an adjudication determination in its favour pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT) - unlike in this case, there was no real possibility that Canstruct's debt would be adjudicated for anything other than its full amount; and
(b) the Seafarms group of companies (of which Project Sea Dragon was a subsidiary) was a large corporate enterprise and was in a position to pay the debt to Canstruct; however, it chose not to and sought to took advantage of its corporate structure (being the limited liability company of its subsidiary, which had no assets) to avoid paying the debt - in this case, there is nothing to suggest that [ACD] (or even any of its related entities) could meet the claim of the Owners Corporation (indeed, it could not even pay the ongoing legal costs of defending the claim); and
(c) the Court found that the external administration was a deliberate and improper abuse of Part 5.3A of the [Act] designed to avoid paying the debt owed to Canstruct.
As against those matters, the [Administrators] acknowledge that the extent of differential treatment of the Owners Corporation's claim is particularly stark in this case (it receiving a very small cents in the dollar return on the full amount of its claim, as opposed to the other creditors receiving ostensibly 100 cents in the dollar on their claims)."
I do not accept this submission. First, while there was a dispute as to the Owners Corporation's claim in the Defects Proceedings, the DOCA required that the Owners Corporation's proof of debt be adjudicated and admitted before it could receive any payment under the DOCA. That process was an essential step under the DOCA and, whether it was expensive or not, it would have resulted in the admission of the Owners Corporation's proof of debt for a specified amount, resolving any previous uncertainty as to the amount for which it should be allowed. Mr Krochmalik's submission that the DOCA would bring about a saving in the costs of adjudication, and the Administrators' corresponding assumption in comparing the return in a liquidation and under the DOCA in the Report, both turn on the false premise (to which I referred above) that the Administrators would not need to undertake a proper adjudication of the Owners Corporation's claim under the DOCA, implicitly because the amount that would ultimately be payable to the Owners' Corporation had been so heavily discounted by the DOCA. I do not accept that premise. Both the Administrators and a liquidator would and could seek to minimise the costs of an adjudication, so that they were proportionate to the amount of the Owners Corporation's claim and the amount of assets available for distribution to creditors. However, the fact that a creditor's claim is large and complex, and may be relatively costly to adjudicate, provides no basis for arbitrarily capping it to a figure chosen by a deed proponent to avoid or minimise the need for a proper adjudication of the claim; and such a cap does not avoid then need for an adjudication of that claim which is required to admit it under the DOCA. This submission is also substantially undermined by the lack of any objective justification for the $200,000 cap, which was no more and no less than the amount chosen by the ACD Parties as the basis on which the Owners Corporation's claim would be extinguished.
Mr Notley, who appears for the ACD Parties, submits that:
"… as the authorities summarised by McKerracher J in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (supra) make plain, a DOCA may provide for differential dividends among creditors and Part 5.3A does not require a pari passu distribution. Further, there was plainly a reasonable basis for such differential treatment given that:
a. the debts of the unsecured creditors in Class A were not disputed; and
b. the alleged amount owing by [ACD] to the plaintiff in damages was disputed and vastly exceeded the total of the undisputed debts of the unsecured creditors in Class A."
I have not accepted the latter submissions above, where the amount that should be allowed for the Owners Corporation's claim would be determined in the proof of debt process, so that its claim and claims of other unsecured creditors would then have the same character; and the fact that a claim is large does not, without more, justify capping it in an arbitrary amount, even if that will have the consequence that other creditors can be paid in full.
Mr Notley also relies on the Administrators' estimate of returns under the DOCA and the liquidation to submit that, under the DOCA, the Owners Corporation was expected to receive a dividend of 2.4 cents in the dollar, and it was unlikely to receive any return in a liquidation. Both aspects of that calculation are uncertain, where the former did not take account of the fact the return to the Owners Corporation would be eroded by further costs and expenses in the deed administration or the costs that would properly be incurred in adjudicating the Owners Corporation's proof of debt and the latter did not take account of the available preference claim against Academy Parramatta Pty Ltd and there were real uncertainties in assessing the prospect of preference claims and claims for insolvent trading to which I have referred above.
I am comfortably satisfied here that a basis for termination of the DOCA under s 445D(1)(f) of the Act is established, on the ground that it is oppressive and unfairly prejudicial to or unfairly discriminatory against the Owners Corporation, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below. It is not necessary to address all of the criticisms of the DOCA advanced by the Plaintiffs or the detail of Mr Spring's cross-examination in order to reach that conclusion. It is sufficient, for that basis, that, first, that no party was able to point to any objective basis for the DOCA to impose a cap of $200,000 on the recovery by the Owners Corporation, which appears to have been chosen for not better reason than that the ACD Parties wished to extinguish the Owner's Corporation's claim for that amount.
Second, as I noted above, the DOCA defers the Owners Corporation's claim to rank in priority behind the claims of all other creditors, so that the Owners Corporation would not recover the amount of $200,000 which was purportedly to be made available to it if that amount was eroded by further costs or expenses of the voluntary administration or these proceedings after the contribution made by the ACD Parties. There was a real risk that that would occur; at least the Administrators and their solicitors had recognised the risk that an application would be made by the Owners Corporation to set aside the DOCA as oppressive; and the Administrators would likely incur further work and further costs in respect of such an application. Neither the Administrators nor the ACD Parties contended that the ACD Parties were under any continuing top-up obligation, under the terms of the DOCA, so as to require them to make further contributions to avoid the erosion of any amount available to the Owners Corporation by the Administrators' further costs and expenses, and the terms of the DOCA do not provide for any top-up after the point at which the Director's contribution was to be made. No party identified any objective basis on which the Owners Corporation and not other unsecured creditors should bear that risk. It seems to me that it is plainly oppressive, unfairly prejudicial to and unfairly discriminatory against the Owners Corporation to require it, to the exclusion of other creditors, to bear the risk of erosion of any return under the DOCA, where its claim (for the amount admitted in accordance with the terms of the DOCA) would be no less certain than that of other unsecured creditors of ACD.
It also seems to me that oppression, unfair prejudice or unfair discrimination is here established by reason of the lack of a rational basis for the different treatment of the Owners Corporation and other unsecured creditors, even if (which has not been established) that there would be a better return to other creditors or the Owners Corporation under the DOCA by comparison with a liquidation. I will address the Court's discretion whether to terminate the DOCA on this ground below.
In Habrok, Beach J observed (at [410]) that:
"… generally speaking, one should not terminate a DOCA and order a company to be wound up if the DOCA will restore the company to financial health and the DOCA does not have the purpose or effect of unjustifiably quarantining third parties from investigation. If the company is trading and it is likely that its business will continue, then unless there are real public interest concerns, termination of a DOCA and causing a company to be wound up are inappropriate outcomes. The interests of creditors should be the primary consideration, but they may be outweighed if the DOCA has a fraudulent or wrongful purpose."
His Honour also there observed (at [412]) that, even if any of the criteria in s 445D are satisfied, the Court retains a discretion whether to terminate a DOCA, having regard to the creditors' interests and the public interest; see also Re SBL Solutions Pty Ltd (subject to a deed of company arrangement) [2021] NSWSC 1002 at [81]ff. In Canstruct, Derrington J terminated a deed of company arrangement, under s 445D(1)(g) of the Act as an abuse of Pt 5.3A of the Act, in the circumstances noted above. As I also noted above, the similarity with the structure adopted in this case is obvious, although ACD was here placed in voluntary administration before the Owners Corporation had the opportunity to have its claim in the Defects Proceeding determined on the merits.
Turning now to the parties' submissions, Mr McDonald submits in opening, inter alia, that the DOCA is against the public interest because "[t]here is no explanation of why the DOCA was structured with two classes of creditors and for the plaintiff to be the sole member of one class." Mr McDonald also addresses several other matters which it is not necessary to determine given the conclusions which I reach below.
As I noted above, the Administrators do not join issue with the Owners Corporation's contention that the DOCA is an abuse of Part 5.3A of the Act, or is contrary to the public interest and leave that matter for the Court's determination. Mr Notley refers to the Owners Corporation's submission that the DOCA is against the public interest because there is no explanation why the DOCA was structured with two classes of creditors and with the Owners Corporation as the sole member of one class. He submits and I accept that, as I noted above, a deed of company arrangement may, in principle, provide for differential dividends amongst creditors and that Pt 5.3A does not require a pari passu distribution, although it does not follow that any differentiation between creditors on any basis will be permitted. He also submits that the debts of unsecured creditors in Class "A" were not disputed, and the amount owing by ACD to the Owners Corporation was disputed and "vastly exceeded" the total of the undisputed debts to the unsecured creditors in Class "A". As I noted above, it seems to me that the former does not provide a proper basis for the differential treatment of the Owners Corporation, which could only recover the amount for which it was admitted to proof under the DOCA, in an amount that would necessarily reflect any uncertainties in its claim; and the latter does not support a differentiation, because the fact that a claim is large does not, without more, provide a rational basis to cap it to an arbitrary amount and pay smaller claims in full.
I am also comfortably satisfied that a basis for termination of the DOCA under s 445D(1)(g) of the Act is established, given the lack of rational basis for the differential treatment of the Owners Corporation under the DOCA, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below, and has the consequence that the DOCA is an abuse of Pt 5.3A of the Act of a similar character to that considered in Canstruct.
I recognise that recoveries in a liquidation would require that the liquidator be funded to make them and that the ACD Parties or their related parties have sufficient assets to meet a judgment against them. However, that matter has less weight, as matters stand, where it is now common ground that ACD would be entitled to retain monies paid into the deed fund under the DOCA, even if the DOCA is now terminated, and those funds would be available to a liquidator to pursue investigations and commence any recovery action. I also recognise that the Director has made a contribution to the deed fund, but the DOCA parties elected to adopt the differential treatment of the Owners Corporation in the DOCA; had plainly recognised difficulties with the third parties releases, although not the consequential invalidity of the DOCA in its present form; and they took upon themselves the risk that the DOCA would later be set aside. It also seems to me that it would substantially undermine the public purpose served by Pt 5.3A and s 445D of the Act if the Court were to give substantial weight to the fact of a contribution to a deed fund as immunising a deed of company arrangement against being set aside for oppression, discrimination or abuse of Pt 5.3A of the Act.
Mr Notley also submits that the Court would not exercise a discretion to terminate the DOCA if one of the grounds referred to in s 445D was established, and he submits, inter alia, that creditors other than the Owners Corporation voted to enter into the DOCA, only one of them was a related party creditor, and the continuation of the DOCA would not have the effect of eroding commercial morality or public confidence or permit an insolvent company to continue to trade. I give little weight to the former matter, where the majority's support for the DOCA is the likely consequence of the advantage which they obtained at the cost of the Owners Corporation under its terms, and it seems to me that the differential treatment of the Owners Corporation would here erode commercial morality or public confidence, at least so far as it is inconsistent with the proper use of Pt 5.3A of the Act for all the reasons I have noted above.
For completeness, I recognise that criticisms are also made by the Owners Corporation of the Administrators' investigations into possible recovery claims against the Director and the former director, Mr Ronnie Beaini, and ACPL. The Administrators in turn respond to those criticisms in evidence and, at length, in Mr Krochmalik's submissions. Those criticisms raise complex issues as to the extent of information available to the Administrators; the impact of the limited time that was available for them to conduct such investigations; whether ACD was insolvent, where it had previously received financial support from ACPL but had no entitlement to such support; and whether the dealings between ACPL and ACD could properly be characterised as a running account, for the purposes of a defence to a preference claim against ACPL. I recognise that Mr Spring was cross-examined at considerable length as to these matters, and the parties have obviously devoted substantial thought to them. However, it is preferable that I do not address those matters, where they will likely be in issue at any proceedings which may ultimately be brought by a liquidator appointed to ACD against the Director, Mr Ronnie Beaini, ACPL, or their related parties. A determination of those matters is not necessary to determine these proceedings given the conclusions that I have reached, where a finding that the Administrators' investigations were adequate would not avoid the DOCA being terminated, and a finding that they were not would only provide a further basis for the orders that will be made in any event; all parties now accept that the DOCA is not authorised by Pt 5.3A in its present form; and a basis for severance or an order under s 447A to sever the third party releases is not established for the reasons set out below.
I am comfortably satisfied that the matters noted above, which here provide grounds for termination of the DOCA under s 445D(1)(f) and 445D(1)(g) of the Act, also warrant the exercise of the Court's discretion to terminate the DOCA, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below.
In supplementary submissions, Mr Notley also accepted that the third party releases contained in cll 6.2 and 13.3 of the DOCA are not permitted or authorised by Pt 5.3A of the Act and the DOCA was invalid in its present form.
Mr Krochmalik identified a question whether or not the third party releases contained in cll 6.3 and 13.2 of the DOCA could be excised or severed from the DOCA with the balance of the DOCA remaining in effect, although he emphasised that the Administrators did not propound that course, and only drew relevant authorities to the Court's attention. Mr Krochmalik rightly recognised that:
"The question of excision, or severance, was considered by the Full Court of the Federal Court in [Lehman FCA]. Perram J, at [154]-[155] (in a passage with which Stone J, at [41], agreed), did not accept that the deed of company arrangement, in that case, could survive the excision of the clauses seeking to give effect to the third-party releases (of certain entities related to the company under administration, Lehman Brothers Australia Ltd). Importantly, the reasons of Perram J did not suggest that severance was not available to the Court; rather, his Honour's reasons turned on the essential nature of the offending clauses to the overall arrangement and scheme of the deed of company arrangement in that case (for example, his Honour referred to establishment of the litigation fund, on the one hand, and the moratorium and releases, on the other, as "inextricably interconnected" and also referred to the supportable elements of the deed as being "inextricably bound up with invalid provisions").
The reasons of the remaining member of the Court, Rares J, also appeared to reach the view that the offending provisions were so bound up in the deed that there was no alternative other than to set it aside. At [123], his Honour remarked that, "Those provisions were integral to the overall proposal put to the creditors, and, to adopt Lehman Asia's argument, were a part of the "package deal"" and, at [124], observed that, "The benefits of those clauses to the Lehman entities and third parties were a vital part of the creditors' resolution that generated the deed of company arrangement". Rares J otherwise appeared to agree with the reasons of Perram J as to the inability to utilise other provisions of Part 5.3A to save the deed of company arrangement."
Mr Notley also refers to the severance of third party releases in Re Eastmark Holdings Pty Ltd (2015) 109 ACSR 116; [2015] NSWSC 1437. However, that decision is plainly distinguishable where Brereton J there severed those releases on the basis that that they were not referred to in the relevant DOCA proposal, were not discussed at the second creditors meeting, and did not reflect the intent of the relevant deed of company arrangement. The position here is entirely different, where the third party releases were included in the DOCA Proposal and the DOCA, although both Mr Spring and the ACD Parties' had recognised difficulties with them, although not that they were not authorised by Pt 5.3A of the Act by reason of the matters noted in the Lehman Bros cases. Here, the third party releases plainly reflected the subjective intent of the ACD parties and the objective intent of the DOCA Proposal and the DOCA.
Mr Krochmalik and Mr Notley also rightly recognised that a deed of company arrangement is not merely a contract, and drew attention to the consideration of principles of severance by Rees J in Re Antquip Hire Pty Ltd (subject to deed of company arrangement) (in liq) [2020] NSWSC 487 at [66]-[71] ("Antquip"), where her Honour observed that:
"DOCAs have statutory force by reason of sections 444B, 444D, 444G and 444H of the Corporations Act and not by its own force: Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483 at [40] per Barrett J; Correa v Whittingham (No 2) [2013] NSWCA 471 at [75] to [76] per Gleeson JA with whom Barrett JA and Tobias AJA agreed. In Correa v Whittingham (No 2), Gleeson JA at [76] adopted the explanation of Barrett J in Reed Constructions Australia Ltd v DM Fabrications Pty Ltd [2007] NSWSC 1190; 25 ACLC 1,463 at [20]: (emphasis that of Gleeson JA)
… A deed of company arrangement derives its operative force from statute. … Sections 444D and 444G identify persons who are bound by the deed of company arrangement. Those persons are not parties bound together by contract. They are persons whose rights and obligations are created by law by virtue of the execution of the relevant instrument. They are akin, in that respect, to persons bound by a scheme of arrangement under Part 5.1 of the Corporations Act.
Thus, Gleeson JA concluded that there was "simply no room for the argument that independently of the Corporations Act a company may be bound by contract" as the binding force of a DOCA only arises by reason of section 444G: at [79]. If the DOCA never came into force for failure to comply with the requirements of the Corporations Act, its provisions would never become the source of any obligation: at [78].
As Barrett J further explained in Reed Constructions at [23]:
The main statutory impact is upon creditors. By force of s.444D(1), the deed binds them in relation to claims arising on or before the day specified in the deed under s.444A(4)(i). … Section 444B(6) causes the instrument to become a deed of company arrangement when executed by the specified persons. The provisions in the instrument then have statutory force. …
Perhaps of most assistance, in [Lehman FCAFC], Stone J concluded that DOCAs should be construed as statutes rather than contracts as a DOCA derives its operative force from statute: at [5]-[9]. A similar approach was taken by Perram J and Rares J, albeit Rares J did so without deciding whether that approach was correct: at [63]. The construction of the DOCA was not contested on appeal, where the High Court otherwise affirmed the Full Court's decision: [Lehman HC]. The DOCA contained inconsistencies and errors. Stone J construed the relevant clause as purporting to give effect to other clauses in the deed, consistent with the principles of construction articulated by Dixon CJ and Fullagar J in Fitzgerald v Masters (1956) 95 CLR 420 at 426 -427, where their Honours observed in respect of inconsistencies, "Words may generally be supplied, omitted or corrected in an instrument where it is clearly necessary in order to avoid absurdity or inconsistency."
As the DOCA in [Lehman FCAFC] purported to impose restrictions on creditors that went beyond what was contemplated by Part 5.3A, Stone J concluded that the DOCA lacked the necessary statutory force to bind creditors and, as the offending provisions were not severable, the DOCA must be declared void: at [41]. Notwithstanding the respondents' reliance on the commercial realities behind the arrangements made in the DOCA, Stone J observed at [44]:
In my view Pt 5.3A has a more limited scope than these submissions recognise. The language of Pt 5.3A does not lend itself to a wholesale adjustment of the rights and obligations of a company's creditors. Whether a wider scope would lead to a better commercial outcome and whether it would be appropriate to provide for that expansion of Pt 5.3A is a question for the legislature not for the Court.
Consistent with these authorities, it seems to me that DOCAs should be construed as statutes or, more precisely, as subordinate legislation. Construing DOCAs in this matter is perhaps unfortunate as, to my observation, DOCAs are often drafted in urgent circumstances where the proponent of the DOCA is experiencing financial stress such that DOCAs are frequently ill-drafted and certainly fall short of the standards of excellence of statutory draftspersons. Also, generally DOCAs appear to be prepared by accountants and insolvency practitioners rather than lawyers.
As to rules of statutory construction which may assist, and drawing heavily on Perry Herzfeld and Thomas Prince, Interpretation (2nd ed, 2020, Thomson Reuters (Professional) Australia), the general principles of statutory construction apply equally to the interpretation of subordinate legislation although the context in which the subordinate legislation is to be construed includes the legislation under which it is enacted: [14.10]. The validity of subordinate legislation may be challenged if it deals with a subject outside the scope of the empowering provision upon the authority of which it was purportedly made: at [10.10]-[13.40]. When subordinate legislation is open to two constructions, on one of which it would be within the empowering provision and on the other ultra vires, the first should be adopted: [14.60]. Where a provision of subordinate legislation is not authorised by the empowering legislation, the provision may in some circumstances be severed or read down so as to preserve the validity of the balance of the subordinate legislation, including by textual surgery using the "blue pencil" rule so that the valid portion operates independently of the invalid portion or, failing that, by treating the text as modified so as to achieve severance where in so doing there is no change to the substantial purpose and effect of the impugned provision, in particular, there is not left substantially a different law from what it would otherwise be: at [13.210] citing Harrington v Lowe (1996) 190 CLR 311 at 328." [emphasis added]
I recognise that, as Mr Notley points out, these observations were approved by Colvin J in Goldus Pty Ltd (Subject to Deed of Company Arrangement) v Cummins (No 4) (2021) 157 ACSR 118; [2021] FCA 1095 at [183], with which the Full Court of the Federal Court agreed, in dismissing the appeal, in Goldus Pty Ltd (subject to deed of company arrangement) v Australian Mining Pty Ltd (recs and mgrs apptd) [2023] FCAFC 27 at [82]. Mr Notley also fairly acknowledges that these decisions did not relate to questions of severance of third party releases contained in a deed of company arrangement.
Mr Krochmalik also referred to PK Riddell Investments Pty Ltd v Onwards Up and Gone Pty Ltd [2024] VSC 159 and submitted that:
"That case concerned whether a release in a deed of company arrangement (clause 12.3.1) was broad enough to extend to cover non-monetary claims of a creditor and claims arising after the relevant date (being the appointment of the administrators) and, if so, whether that would be contrary to the ambit of subsection 444D(1). There was a separate release clause (clause 12.3.2) that was expressed in more orthodox terms. Waller J, at [82], found that, by reason of its breadth and the absence of a temporal connection to claims arising on or before the date on which the administrators were appointed, the offending clause (clause 12.3.1) did not comply with Pt 5.3A of the Act. His Honour went onto refer to the above extract from Antquip, as well as the existence of a severance clause in the particular deed in the case before the Court, and then expressed the following conclusion:
[90] While some of the difficulties identified in respect of cl 12.3.1 might be remedied by adding the words 'subject to the Corporations Act' at the commencement of the clause, I do not consider that cl 12.3.1 can be effectively read down to the extent necessary to ensure that it is not illegal, invalid or unenforceable. While the word 'claim' is referred to in ss 444D and 553 and may be read down by adding the words 'subject to the Corporations Act', the words 'actions … suits, causes of action, demands, proceedings and costs of whatsoever kind' are not referred to in s 444D and s 553 and therefore would continue to subsist in the clause without temporal limitation.
[91] Clause 16.7.1.2 provides that where a provision cannot be effectively read down, that provision must be deemed to be void and severable and the remaining provisions of the DOCA shall not in any way be affected or impaired and shall continue notwithstanding that illegality, invalidity or unenforceability.
[92] In the circumstances cl 12.3.1 is deemed to be void and severable from the remaining provisions of the DOCA.
It is plain that, in P K Riddell, the Court relied on the existence of a particular severance clause in the term of the particular deed of company arrangement. However, it is not clear one way or the other whether the Court found it necessary to rely on such a provision in the deed (or whether it was open as a matter of construction in accordance with principles that apply to construction of legislative instruments)."
Mr Krochmalik summarised the Administrators' position in respect of severance as follows:
"In summary then, the position of the [Administrators] is that it may be open to the Court essentially to treat clauses 6.3 and 13.2 as capable of being excised from the D[O]CA, but only if those clauses are not inextricably bound up with the whole of the D[O]CA. The [Administrators] do not advocate in favour (or against) the severing of these clauses but provide the above submissions by way of assistance in order for the Court to determine whether that course is open to it." [emphasis added]
Mr Notley in turn contended for severance of these clauses from the DOCA so as to preserve its operation.
I am satisfied that the Court cannot or at least should not sever cll 6.3 and 13.2 of the DOCA. First, the position here seems to me to be analogous with that considered by the Full Court of the Federal Court in Lehman Bros FCAFC, because the third party releases were an essential aspect of the DOCA, included to address an identified risk that, if the Owners Corporation could not pursue its claim against ACD, it would pursue that claim against its Director, former director and associated entities involved in the construction of the Building. The DOCA was structured to release all of those parties, and not only ACD. The severance of those provisions would, objectively, leave "substantially a different [DOCA] from what it would otherwise be" (using the language quoted in Antquip), bringing about a substantial change to the arrangement contained in the DOCA to exclude a real benefit to the ACD Parties and a real detriment to the Owners Corporation. The position here is plainly distinguishable from that considered by Brereton J in Eastmark, where the exclusion of the third party releases would not here restore any earlier intent of the DOCA that they not be included, but alter the intended operation of the DOCA, which was to include those releases at least in respect of the Directors and later the related parties of ACD. Moreover, while the absence of a severance clause in the DOCA does not prevent severance, it provides no support for a finding that the parties' objective intention was to permit the exclusion of particular clauses (including the third party releases) rather than maintain the DOCA in the form in which it was executed.
As I noted above, in an Amended Defence filed the second day of the hearing, the ACD Parties alternatively sought an order under s 447A of the Act that the DOCA be varied by deleting cll 6.2 and 13.3 of the DOCA. Mr Notley there referred to the observations of Besanko J in Adelaide Brighton Cement at [11]-[13] as to the scope of that section, as follows:
"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 …
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 …
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 …"
Mr Notley submitted that:
"In circumstances where the releases are not authorised or permitted by Part 5.3A of the [Act], and there is no prejudice to the creditors, the [ACD Parties] submit that the Court would exercise its discretionary power to vary the DOCA by deleting the two (2) clauses containing those releases."
I can deal with that submission briefly. It seems to me that, first, the Court should not make an order under s 447A of the Act to delete those clauses, where the objective intent of the DOCA and the subjective intent of the Director and the ACD Parties was to include them, for the same reasons that those clauses would not be severed. Second, the severance of those clauses would not promote the objectives of Pt 5.3A of the Act, where the DOCA would still be oppressive of the Owners Corporation and contrary to the public interest for the reasons noted above. Third, there would be no utility in an order under s 447A of the Act to delete those clauses, where I would terminate the DOCA, irrespective of its invalidity by reason of those clauses, for the reasons set out above.