Australasian Memory Pty Ltd v Brien - [2000] NSWSC 794 - NSWSC 2000 case summary — Zoe

NSWNSWSC

Australasian Memory Pty Ltd v Brien

[2000] NSWSC 794

Supreme Court of NSW|2000-08-10|Before: Santow J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2000-08-10

Before

Santow J

Catchwords

(1998) 45 NSWLR 111

Source

Original judgment source is linked above.

Catchwords

(1998) 45 NSWLR 111

Judgment (46 paragraphs)

[1]

INTRODUCTION 1 What happens when two companies, no longer in administration, are to be wound up, whose affairs are so intertwined, that it is not possible reliably to identify which creditors belong to which nor which assets or liabilities? Can a valid arrangement be made binding all such creditors, present or not, to participate in a combined pool of assets and liabilities, with realisations, costs and distributions shared in an equitable manner? All that is known reliably is that the creditors belong to one or other of the two companies as do the assets and liabilities. 2 The answers are not without complexity. But in the end I am satisfied that s510 of the Corporations Law with appropriate remedial orders under s1322(4) does provide such a means, and without the cost and complexity of a formal creditors' scheme of arrangement under s411 of the Corporations Law. This is at least so where, as here, those creditors who turn up vote unanimously in favour of the arrangement. This is because the same result would follow - a special resolution unanimously in favour of the arrangement - had those creditors been able to vote separately, as creditors for the particular company. But if the level of dissent were minor, it may well be open to the Court to allow validation under s1322(4). However, that is a question I do not need to determine on this occasion. Because this is a not uncommon situation not fully explored by the cases, I have set out in some depth the basis for that favourable conclusion. In so doing, I have had the advantage of the extensive researches of Counsel for the Applicant, Mr Oakes, SC, to which I acknowledge my indebtedness. 3 These questions underlie an uncontested application by the liquidators of Switch Telecommunications Pty Ltd (In Liq) ("TEL") and Switch Operations Pty Ltd (In Liq) ("OPS") for such orders as may be necessary to combine the realisations, costs and distributions to creditors of both companies. This is a process known as "pooling the liquidations". Both companies have passed into liquidation following the appointment of the liquidators as administrators under Part 5.3A of the Corporations Law. Thus, by operation of Corporations Law s446A(2) they are to be treated as having been wound up voluntarily.

[14]

The s447A/477 alternative 10 In Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 213 and 216, Young J held that pooling could be effected in exceptional circumstances by recourse to Corporations Law s447A calling in aid court directions to the liquidator under s511 (s479 not being available save for a court winding up where the liquidator is amenable to such direction as a court appointee). But this was because, without dissent, the relevant resolution was passed whilst the companies were still under administration at the same time as the resolution to wind up, so that Pt 5.3A and thus s447A were still applicable. The company having passed from administration to liquidation is deemed by s439A and s439C to be under a voluntary winding up. Young J did not attempt to use s447A to have s439C operate as if the winding up were court-approved. This he would have had to do if he had sought to rely on a court-approved liquidator's compromise under s477(1)(c) and s477(2A). He pointed out that a scheme of arrangement under Corporations Law s411 could have been safely utilised, but would involve not inconsiderable costs, in calling two meetings of creditors and making a two-stage application to the Court. He reviewed other alternatives but left for another day whether a liquidator's compromise or arrangement could be utilised under Corporations Law s510. 11 Later in Re Charter Travel Co Ltd (1997) 25 ACSR 337 Young J held that pooling could be effected where there were court appointed liquidators to the companies. In the exceptional circumstance where no creditor objected and it is impracticable to keep the assets and liabilities of the two companies separate, the Court could make a direction under Corporations Law s479(3) that the liquidators were justified in pooling. What was being proposed in Soluble Solution was a pooling resolution passed at the same meeting as the earlier resolution to wind up, with the judgment proceeding on the basis that the company was still under administration at the time of the pooling resolution. As I have already observed, such liquidations arising from the termination of an administration are by operation of Corporations Law s446A(2) treated as voluntary liquidations, not court ordered liquidations. But the disadvantage in such a course is uncertainty as to whether all creditors are bound and the possibility one creditor may object. 12 Young J noted in Soluble Solution that the type of direction which a liquidator could obtain from the Court was wider under Corporations Law s479(3) with Court ordered liquidations than under Corporations Law s511(1) with voluntary liquidations. In particular, he was of the view (at 212D) that Corporations Law s511(1) was not wide enough to ground an order that a liquidator would be justified in dispensing with pari passu distribution under Corporations Law s555. 13 The compromise power in the Corporations Law is set out in Corporations Law s477 in the following terms: "(1) Subject to this section, a liquidator of a company may: ….. (c) make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding in damages) against the company or whereby the company may be rendered liable; and (d) compromise any calls, liabilities to calls, debts, liabilities capable of resulting in debts and any claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the property or the winding up of the company, on such terms as are agreed, and take any security for the discharge of, and give a complete discharge in respect of, any such call, debt, liability or claim. ..... (2A) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than...$20,000. ..... (6) The exercise by the liquidator of the powers conferred by this section is subject to the control of the Court and any creditor or contributory, or the Commission, may apply to the Court with respect to any exercise or proposed exercise of any of those powers."

[16]

15 The Court in BCCI No 3 was of the view (Nicholls V-C at [1993] BCLC 111f, and Dillon LJ (with whom the other members of the Court agreed) at [1993] BCLC 1509-1510) that a pooling compromise or arrangement under this power could with the Court's sanction be used to bind all creditors and depart from the pari passu rule. The Court recognised there needed to be "special circumstances" to avoid seeking the views of creditors and found that there were such special circumstances. That conclusion, however convenient, with the greatest of respect, does seem at odds with earlier authority and a legislative history in the United Kingdom to which I make reference later; see para 20 below. 16 In Taylor v Morris [1993] BCLC 1343 the Court of Session held that where the liabilities of companies and a director could not be disentangled, the compromise power in s245(1)(f) of the UK Companies Act 1948 (similar to Corporations Law s477(1)(c)) could be used to enter into an arrangement that each would pay a proportion of the total liabilities. 17 Australasian Memory Pty Ltd v Brien [2000] HCA 30 held that Corporations Law s447A orders could be made in certain circumstances even though a company had passed from administration into liquidation: see 26. However, it was evident from Australasian Memory at 18 and 24 that any Corporations Law s447A order needed to be framed so that it was clear how it was to operate in relation to a particular company. Mr Oakes, SC on behalf of the Plaintiffs, submitted the following order might be made. This was in order to satisfy the statutory conditions of winding up or by a court, but not voluntarily, being the necessary precursor to a liquidator making a compromise within s477(1)(c): "Order pursuant to section 447A of the Corporations Law , that Part 5.3A of the Corporations Law operate in relation to each of the defendant companies as if the effect of: (a) subsection 446A(2) of the Corporations Law were that, as at the time referred to in paragraph 446(1)(a), each defendant company had been wound up in insolvency by order of the court; and (b) subsection 446A(4) of the Corporations Law were that the administrators had consented in writing to act as liquidators of each defendant company for the purposes of subsection 532(9) of the Corporations Law."

[17]

18 Mr Oakes submitted that a court direction might then be made under s479 of the Corporations Law that the liquidators were justified in acting upon a resolution of a combined meeting of all known creditors of the defendant companies in these terms. "That the recoveries, costs and distribution to creditors of Switch Telecommunications Pty Ltd and Switch Operations Pty Ltd be combined." This was provided such resolution was passed unanimously (which was expected and occurred) by those attending the meeting and approved by the Court. The form of the resolution would have been in substance that passed in Soluble Solution: see 211D-E. 19 The effect of these steps, it was submitted, was that Corporations Law Pt 5.3A would be made to operate in relation to each company as if the liquidation of each company were a court ordered winding up. The pooling proposal could then be endorsed by court direction under Corporations Law s479(3) (not available in the case of a members voluntary winding up as it requires recourse rather to s511). This would essentially trace what was done in the Charter Travel case where the compromise was then approved under Corporations Law s477(2A). 20 There are at least three matters which would require determination for this approach to be made good. As the Corporations Law s447A approach was ultimately not taken, I merely note them. The first of these is the limitation on the scope of the compromise power in Corporations Law s477(1) to bind dissentients, adverted to in In re Albert Life Assurance Company (1871) LR 6 Ch App 381. James LJ, at 386, held that ss159 and 160 of the English Companies Act 1862, the forbear of Corporations Law s477(1), only operated between the company and those creditors who chose to accept it, and did not bind creditors to accept a compromise against their will. So too as stated in Stiebel "Company Law and Precedents" (Sweet & Maxwell, 1929) Vol. 2 at 940-1. This inability to bind all creditors ultimately led to the passing of the arrangement and reconstruction legislation which in the United Kingdom commenced with the Joint Stock Companies Arrangement Act 1870. Section 2 is readily recognisable as the progenitor of the modern scheme of arrangement provisions in the United Kingdom and Australia binding all creditors, once the necessary majorities were obtained and court approval. The current Australian counterpart appears in Corporations Law s411 in Pt 5.1. But Australian progenitors are of long standing dating back to the NSW Companies Act 1899, s160 and the earlier Joint Stock Companies Arrangement Act 1891 of New South Wales. 21 The second matter is whether the Corporations Law s447A order proposed is within the ambit of the admittedly wide power to make orders under Corporations Law s447A. That point was adverted to in the Court of Appeal judgment in Australasian Memory at (1998) 45 NSWLR 111 at 148-150. It and my earlier judgment ((1997) 149 ALR 393 at 433-4) point to a possible limitation. Here there is not merely the conventional dispensation from particular provisions such as time limits. Rather there is an attempt in the liquidation to have a pooling regime apply. It is wholly dependent upon the attempted use of s447A to preclude the deemed voluntary winding up which s446A(2) would otherwise deem to have occurred when an administration passes into liquidation. Is this a mandatory requirement beyond the scope of the power to vary under s447A? Compare the reasoning of Handley JA in MYT Engineering Pty Ltd v Mulcon Pty Limited (1997) 25 ACSR 78 at 80 concerning the requirement to execute a deed of arrangement within a prescribed time where he questioned whether a s447A order could be made having the consequence of affecting status, namely the transition from voluntary administration to deemed voluntary liquidation. In the present case the company would remain in liquidation, having so passed from administration, but the s447A order would purport to change its character to a court appointed liquidator rather than voluntary. Moreover Brien in the High Court (paras 27-32) is authority for the proposition that s447A is capable of authorising an order which does affect status. That is to say, an order may be made under s447A which would reinstate an administration that would otherwise have ended, though subject to a possible absolute or discretionary bar by reason of the intervening rights of third parties whose dealings may have taken place on a premise which would be altered by that order if made. That is, however, a question for another day. 22 The third matter is that there is existing Australian authority against use of the compromise power in the way contemplated, in preference to a scheme of arrangement capable of binding dissentients: Re Austcorp Tiles Pty Ltd (1992) 10 ACLC 62 following Plowman J in Re Trix Ltd [1970] 3 All ER 397. That case would need to be considered in the light of BCCI No 3, and against the backdrop of the comity principle espoused by the High Court in ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492. 23 Albert Life was considered in BCCI No 3 at 1509 in the Court of Appeal judgment. These are the propositions which I consider emerge from BCCI No 3, decided in circumstances of overwhelming chaos that the Court was under enormous pressure to avert, via the pragmatic solution before it:

[21]

(d) examples of special circumstances include the impossibility of determining the true debtors of each company and the impossibility, going beyond mere inconvenience, of going through the scheme meeting procedure under the UK equivalent to Corporations Law Pt 5.1. 24 It is, however, open under Corporations Law in Australia to make remedial orders under s1322. This may make it possible in Australia to go through the scheme meeting procedure so aided, notwithstanding these practical difficulties which proved insuperable in the UK and which were relied on by the court to open the way to use of the compromise power. However, that does not in my judgment mean that only a conventional scheme of arrangement is available and cannot be bypassed for reasons of cost and convenience. 25 The assumption made in the BCCI No. 3 case is that the approval of the court suffices to make the compromise binding on dissentients. But in Australia other Corporations Law sections explicitly render a compromise or arrangement binding on dissentients: thus the scheme provision Corporations Law s411(4); the liquidator's reconstruction and amalgamation provision in Corporations Law s507(3); and the voluntary liquidation arrangement provision in Corporations Law s510(1). That provides a powerful reason based on the expressio unius maxim not to rely on the Australian counterpart provision (s477) as providing a means to bind dissentients, when that section, in contrast, has no express provision that dissentients are to be so bound. 26 Furthermore, the BCCI liquidation was a Court ordered liquidation, not a voluntary liquidation as is the case with the defendant companies. There is likewise no equivalent to Corporations Law s510 in the UK Insolvency Act 1986. It is significant that, as I explain below, it is possible in Australia to go through the fast track simplified scheme procedure under Corporations Law s510 if orders are made under Corporations Law s1322(4) so as to permit the combined meeting of creditors as occurred. Finally, I do not have the text of the BCCI pooling deed which might have enabled me to consider whether the actual mechanics of the pooling would make a difference. One example of different mechanics to those in the present case appears in Mentha v G E Capital Ltd (1997) 27 ACSR 696 at 699.

[23]

28 The section is located in Corporations Law Pt 5.5 on "Voluntary Winding Up", within Division 4 entitled "Voluntary Winding Up Generally". The defendant companies are voluntarily wound up by operation of Corporations Law s446A(2). Corporations Law s510 is applicable to both creditors' and members' voluntary liquidations. 29 Use of Corporations Law s510 had the advantage that if the appropriate resolutions are passed, the arrangement becomes "binding" on non voting and minority dissentient creditors and contributories. But it poses two potential problems. First, when it is not possible, as here, to isolate the creditors of each company though the Court could rely on them being creditors of one company or the other. I indicated that if a resolution of a combined meeting of creditors were passed, subject to hearing any objections, I would be minded to make a remedial order under Corporations Law s1322(4) that the combined meeting of creditors of both companies be treated as a meeting of each company, thus allowing satisfaction of Corporations Law s510(1)(b). 30 Secondly, the section had been drafted to cover both creditors' voluntary liquidations and members' voluntary liquidations. In the latter case there would ordinarily be a surplus for contributories, thus giving them the interest recognised in Corporations Law s510(1)(a). But the presence of Corporations Law s510(1)(a) operated to give the member contributories an anomalous power of veto over the creditors' arrangement (via the requirement for a special resolution) as might be exercised where there was no surplus for contributories. That was the case with the defendant companies here, but they did pass the necessary special resolutions. Each company has a sole shareholder and resolutions have been passed utilising Corporations Law s249B. 31 If contributories had voted against the arrangement in a situation where they had no economic interest as contributories in a creditors' arrangement, it would have been necessary to consider whether both paragraphs (a) and (b) needed to be satisfied for Corporations Law s510(1) to become operative; that is to say to have both a creditors and shareholders' resolution. Alternatively, whether it would be sufficient for a liquidator to bind a company utilising the powers under Corporations Law s477(1), obtained via Corporations Law s506, where there is no surplus available to contributories, thus only requiring a resolution of creditors for Corporations Law s510(1) to become operative. It is not necessary to decide this matter in this application. I note the decision in Bank of Upper India v Arif Husain AIR 1931 Allahabad 59(2) drawn to my attention by Counsel, on a section of the Indian Companies Act 1913, similar to s510, which held that the provisions of the section were mandatory in that context.

Parties

Applicant/Plaintiff:

Australasian Memory Pty Ltd

Respondent/Defendant:

Brien

Cases Cited (6)

CITATION : Switch Telecommunications Pty Limited (in liq) & 1 Ors; ex parte Steven John Sherman and Peter Murray Walker [2000] NSWSC 794 revised - 15/08/2000 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2506/00 HEARING DATE(S) : 29/05/00, 31/05/00, 05/06/00, 10/07/00 JUDGMENT DATE : 10 August 2000

COUNSEL : M Oakes, SC (Plaintiffs) SOLICITORS : Kemp Strang (Plaintiffs) CATCHWORDS : CORPORATIONS - Means of binding creditors to a pooling of assets and liabilities in a liquidation of two companies where affairs so intertwined they could not be separated and where creditors of each company could not be identified save that they were creditors of one or other - How may dissentients and non voting creditors be bound in absence of s411 scheme where this uneconomic - Use of s510 of Corporations Law and s1322 remedial orders - Alternative of s447A in combination with a compromise approved under s477(1)(c) and s477(2A) of Corporations Law - scope of s447A - are dissentients bound. LEGISLATION CITED : Corporations Law Pt 5.1, Pt 5.3A, Pt 5.5, s249, s411, s446A, s447A, s477, s479, s506, s507; s510, s511, s555, s1322 In re Albert Life Assurance Company (1871) LR 6 Ch App 381 Re Arrowfield Group Ltd (1995) 13 ACLC 1187 Australasian Memory Pty Ltd v Brien (1997) 149 ALR 393; (1998) 45 NSWLR 111; [2000] HCA 30 Re Austcorp Tiles Pty Ltd (1992) 10 ACLC 62 ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Re Bank of Credit & Commerce International SA (No 3) [1993] BCLC 106 and on appeal [1993] BCLC 1490 Bank of Upper India v Arif Husain AIR 1931 Allahabad 59(2) Bulfin v Bebarfald's Limited (1938) 38 SR(NSW) 423 Re Charter Travel Co Ltd (1997) 25 ACSR 337 CASES CITED : Re Contal Radio Ltd [1932] 2 Ch 66 Dean-Willcocks v Soluble Solution Pty Ltd (1997) 42 NSWLR 209 Re E D White Ltd (1929) 29 SR(NSW) 389 Re Farmers' Freehold Land Co Ltd (1892) 3 BC(NSW) 39 Re Marra Developments Ltd (1976) 1 ACLR 470 Mentha v G E Capital Ltd (1997) 27 ACSR 696 MYT Engineering Pty Ltd v Mulcon Pty Limited (1997) 25 ACSR 78 Re Robinson & the Trustee Act 1925 [1983] 1 NSWLR 154 Setco Manufacturing Pty Ltd v Sifa Pty Ltd (1982) 7 ACLR 327 Taylor v Morris [1993] BCLC 1343 Re Trix Ltd [1970] 3 All ER 397 DECISION : Compromise approved with pooling arrangement.

(1997) 149 ALR 393

(1998) 45 NSWLR 111

(1993) 177 CLR 485

(1997) 42 NSWLR 209