Australasian Memory Pty Ltd v Brien [2006] NSWSC 1063 | Case summary

5083/06 WILLI KRUGER & ANOR RE KRUGER ENGINEERING PTY LIMITED JUDGMENT 1 The first plaintiff, Mr Kruger, is the sole director and a shareholder of Kruger Engineering Australia Pty Limited. He holds 9,999 of the 10,000 issued shares. His wife holds the other share. 2 The second plaintiff, Mr Woodgate, is named as deed administrator in a purported deed of company arrangement executed by Kruger Engineering. I say "purported deed of company arrangement" because it now appears that the steps necessary for the document to have that character were not duly taken. It is that circumstance that has caused Mr Kruger and Mr Woodgate, as plaintiffs, to make application to the court. They seek orders under s.447A of the Corporations Act 2001 (Cth) which will, in essence, cause the purported deed of company arrangement to be a deed of company arrangement with Mr Woodgate as deed administrator. 3 No person is named as a defendant in the originating process. I shall come back to that matter. 4 The factual background is straightforward. Kruger Engineering was formed in 1985. It is an engineering company. On 16 February 2006, Kruger Engineering became subject to voluntary administration under Part 5.3A of the Corporations Act as a result of a determination of its sole director, Mr Kruger. Mr Louttit became the administrator. On 7 March 2006, Mr Louttit sent a report to creditors pursuant to s.439A of the Corporations Act in connection with the meeting of creditors under that section which was to be held on 15 March 2006. Mr Louttit recommended that creditors accept a deed of company arrangement proposal. A draft deed did not accompany the report and notice of meeting (nor was a draft deed tabled at the meeting). The report summarised the deed terms as follows: "* Willi Kruger will offer his professional services indefinitely to assist in the resolution of outstanding matters such as contract variation negotiations, sale of surplus plant and equipment etc. * The rights of completion of existing and future contracts are to be assigned to a company nominated by Willi Kruger. * The nominated company will agree to purchase plant and equipment from Kruger Engineering at market value, such sum to be paid over a three month period. * The nominated company will pay a Contribution Fee of $5,000 per month (from future earnings), for a period of twelve months, commencing 1 July 2006. * The financial aspects of this DOCA will be conditional upon Willi Kruger's ongoing negotiations with the Westpac Bank. * Willi Kruger will be an Excluded and Non-Participating Creditor in the DOCA, ie, he will not claim for any employee entitlements and any other claim against Kruger Engineering. " 5 At the meeting of creditors held on 15 March 2006, it was resolved that "the company execute the Deed of Company Arrangement pursuant to section 439C of the Corporations Act". Votes in favour were cast by six creditors accounting for $395,446.01. Votes against were cast by five creditors accounting for $138,576.98. 6 At that point, s.444A required that an instrument setting out the terms of the deed be prepared. Mr Louttit, upon whom that task fell pursuant to s.444A(3), caused his solicitors to prepare such an instrument. This was forwarded to Mr Kruger on or about 31 March 2006. By virtue of s.444B, Kruger Engineering was required to execute the deed within 21 days after the end of the meeting held on 15 March 2006, or within such further period as the court might allow within the twenty one day period. On 5 April 2006, the court made, on Mr Kruger's application, an order extending until 26 April 2006 the deadline for execution of the deed of company arrangement. 7 Also on 5 April 2006, Mr Louttit gave notice of a meeting of creditors to be held on 13 April 2006. At that meeting, Mr Louttit tabled the proposed deed which had been drawn up to give effect to the creditors' decision of 15 March 2006. Mr Woodgate, an insolvency practitioner separately consulted by Mr Kruger, was invited to address the meeting and to "explain any potential amendments and variations to the DOCA". Mr Woodgate then proceeded to express an opinion that certain aspects of the deed proposal were unachievable and that a financier had stated that Mr Kruger would not be able to play the funding role envisaged for him. Mr Woodgate then outlined a revised deed of company arrangement proposal involving retention (rather than sale) of the company's equipment and a smaller financial contribution by Mr Kruger. Mr Louttit, as chairman, said that he would circulate any revised deed of company arrangement document upon its being received. 8 On 18 April 2006, Mr Louttit, as administrator, called a further meeting of creditors to be held on 26 April 2006. The notice of meeting outlined the terms of a revised deed of company arrangement but was not accompanied by any instrument embodying the precise and complete terms. Such an instrument (consistent with the description in the notice of meeting) was, however, tabled at the meeting on 26 April 2006. It was resolved that the company "execute the revised the varied Deed of Company Arrangement pursuant to section 439C of the Corporations Act". Votes in favour were cast by twenty creditors accounting for $887,216.18. Votes against were cast by seven creditors accounting for $478,636.24. The instrument was then executed on that day, 26 April 2006. Mr Woodgate was the deed administrator. He commenced immediately to carry out the terms of what he believed to be a deed of company arrangement and has done so ever since. 9 On 15 September 2006, a further meeting of creditors was held. It was purportedly convened pursuant to s.445F and purported to make a minor variation to the deed pursuant to s.445A. Creditors voted by a large majority in favour of the variation. 10 Mr Kruger and Mr Woodgate have developed doubts about the procedure followed which have caused them to make the present application. The doubts are well founded. The meeting held on 26 April 2006 was not a meeting convened under s.439A. The meeting convened under that section had proceeded to business and concluded on 15 March 2006. That meeting had, as envisaged by s.439C(a), resolved that the company execute a deed of company arrangement. But the deed executed on 26 April 2006 was not executed in conformity with the resolution. It was in different terms. Failure of the company to execute, within the period specified in s.444B(2) (that is, in the particular circumstances, the period ending on 26 April 2006), the deed the subject of the resolution of creditors passed on 15 March 2006 caused s.446A(1)(b) to operate at the expiration of that period. The effect of s.446A(1)(b) was to cause the company to enter the particular form of creditors voluntary winding up imposed by s.446A, with Mr Louttit as liquidator. The resolution of 26 April 2006 that the company execute the revised deed of company arrangement "pursuant to section 439C of the Corporations Act" was not effective for the purposes of Part 5.3A since, having regard to s.439C, a resolution that the company execute a deed of company arrangement can be passed only at a meeting convened under s.439A. The meeting held on 26 April 2006 was not such a meeting. 11 Mr Kruger and Mr Woodgate point, however, to matters of substance which they say deserve precedence over matters of form in such a way as to merit the remedial intervention of the court. The present situation is, they say, precisely the same as if a course somewhat different as to procedure, but identical as to substance, had been followed. An instrument incorporating the terms accepted by creditors at the meeting of 15 March 2006 could have been executed promptly after that meeting. Thereafter, when difficulties in implementing that deed were foreseen, a meeting of creditors might have been convened under s.445F with a view to the passing of a resolution of creditors under s.445A varying the already executed deed. In the events which happened, it is argued, this is, in substance, what occurred, save for the step of execution of a deed in the original form and formal resort to ss.445F and 445A as the mechanism by which creditors approved the revised proposal and expressed their willingness for it to supersede the proposal approved on 15 March 2006. 12 An alternative characterisation of the substance would regard the meetings of 18 and 26 April 2006 as adjournments of the meeting of 15 March 2006 which was itself clearly a meeting convened in accordance with s.439A. According to that characterisation, creditors considered (and approved), in several stages, a deed proposal that took its eventual shape on 26 April 2006; and this was done in the "spirit", as it were, of s.436C(a). 13 Having regard to the realities of substance, it is said, the court should, by means of orders under s.447A, validate the situation in such a way that the result is the same as if one of the procedures just outlined had in fact been followed - in other words, so that the purported deed of company arrangement is regarded as having been executed in conformity with a resolution of creditors passed pursuant to s.439C(a) at a meeting convened in accordance with s.439A. Before addressing the question whether s.447A would support such orders (and, if so, whether the court should exercise its power in the manner sought), I should say something about the way in which the proceedings are constituted. 14 As I have mentioned, Mr Kruger (the sole director and major shareholder of Kruger Engineering) and Mr Woodgate (the administration under the purported deed of company arrangement) are the plaintiffs. There are no defendants. All creditors were, however, given notice of the application. By circular of 27 September 2006, Mr Woodgate informed creditors of doubts that had arisen as to the effectiveness of the deed of company arrangement and that voluntary administration may have turned into a creditors voluntary winding up on 27 April 2006. The circular continued: "Mr Kruger and I have today filed in the Supreme Court of New South Wales an application for relief pursuant to Sections 447A and 1322 of the Corporations Act. In this regard, I attach a copy of the application. The application is returnable before the Corporations Judge on Tuesday, 3 October 2006, at 10.00am. If you would like to be heard by the Court, you should attend at the hearing. Should you wish to read my affidavit and Mr Kruger's affidavit in support of the application, please visit the Woodgate & Co. website www.woodgateco.com.au and the page dealing with creditor information. Should you have any queries, please do not hesitate to contact Mr David Keenan, of my office."

A copy of the originating process filed on 27 September 2006 accompanied this circular. 15 Upon the return of the originating process before me as Corporations Judge on 3 October 2006, Mr Pritchard of counsel appeared for the plaintiffs. Mr Locke of counsel foreshadowed to the court an application by Vjolia Pty Ltd, a creditor, for leave to be joined or heard. Vjolia was, at that point, still considering its position and needed further time to do so. Mr Pritchard indicated that the doubts which had prompted the application had arisen from correspondence with Orica Ltd, another creditor. It was Orica that had pointed out the defect and had made the point that no deed of company arrangement was in place, so that Kruger Engineering had passed into creditors voluntary winding up. I directed that the proceedings stand over to 9 October 2006. I also made directions as follows: "2. The plaintiffs give notice of the adjourned hearing date to creditors, ASIC, Mr Louttit and Orica by letters to be sent by no later than 5 pm today, together with a copy of these orders." "5. The solicitors for the plaintiffs communicate with the solicitors for Orica prior to 6 October 2006 to ascertain, if possible, whether Orica will attend on 9 October 2006 and, if so, its attitude to this application and the solicitors for the plaintiffs are to inform his Honour's associate of the outcome of these communications by letter prior to 5 pm on 6 October 2006." 16 By the time the matter came back before the court on 9 October 2006, it had become clear that Vjolia did not wish to take part. Orica, by its solicitors, had, on 6 October 2006, faxed a long letter to not only the plaintiffs' solicitors but also to Vjolia's solicitors and my associate. Mr Pritchard, on behalf of the plaintiffs, tendered a copy of the letter. As well as making a number of points that could be regarded as going to the substance of the application, Orica, through its solicitors, said, first, that it was appropriate that there be a contradictor in the proceedings and, second, that, if no one else came forward, Orica was willing to play the part of the contradictor but only on the basis that it was assured in advance that its costs, assessed on the indemnity basis, would be paid by the plaintiffs. 17 The plaintiffs were not willing to seek orders directed towards participation by Orica on the basis stated. Nor did Orica see fit to appear on 9 October 2006 to make any application of its own for such orders. Ms Dorman of the plaintiffs' solicitors deposes that she made telephone contact with Ms Calder of Orica's solicitors on the morning of 9 October and that a conversation as follows occurred: "Dorman: 'I am at the Supreme Court for the hearing of the Kruger Engineering matter. I am calling as a matter of courtesy to see whether you have arranged anyone to attend.' Calder: 'No, we have not arranged for anyone to attend. We are going to leave it up to his Honour about what he wants to do regarding the costs.' Dorman: 'Ok, I will let the Court know.'" 18 In the absence of any application by Orica (or the plaintiffs), no order concerning Orica's participation or the financial basis of any such participation was made. All creditors, including Orica, were sufficiently put on notice of this application. Any of them was free to appear. Vjolia foreshadowed an intention of doing so but ultimately decided otherwise. To the extent that Orica sought, by a solicitors' letter, to negotiate a financial basis for its participation as contradictor, it adopted an inappropriate approach to communication with the court - although an appropriate one from the perspective of negotiation with the plaintiffs. 19 In the result, no one sought to be heard upon the hearing of the plaintiffs' application. A member of Mr Woodgate's staff gave evidence that, leaving Vjolia and Orica out of account, no creditor indicated any interest in response to the circulars. Mr Louttit had informed the plaintiffs that he regarded the orders sought as "sensible". ASIC indicated that it did not wish to be heard on the matter. The hearing of the application proceeded on an ex parte basis. 20 It is now necessary to consider the question whether s.447A will support orders to the effect that Part 5.3A is to operate in relation to Kruger Engineering as if the resolution with respect to the deed of company arrangement in fact passed at the meeting of 26 April 2006 had been passed at a meeting convened and held in accordance with s.439A. The creation of such deemed character for the meeting of 26 April 2006 would make it, in terms of s.439C, a meeting at which it was open to creditors to resolve that the company execute a deed of company arrangement in the form of the instrument in fact executed. 21 Section 447A empowers the court to "make such an order as it thinks appropriate about how the Part is to operate in relation to a particular company". The scope and effect of the section were the subject of extensive analysis in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. As the joint judgment in that case emphasised (at p.281), s.447A does not create a general power standing apart from Part 5.3A. Rather, it is "an integral part of the legislative scheme provided for by Part 5.3A". Because of the inclusion of s.447A, Part 5.3A carries within itself the means of its modification, with the result that its own modification in relation to a particular company is part of the scheme created by Part 5.3A. 22 Australasian Memory itself was described in these terms by Mandie J in Re Centaur Mining & Exploration Ltd (2005) 55 ACSR 293 (at p.302): " Australasian Memory was a case where the administration had terminated at a time and in a manner other than that which was intended as a result of failure to comply with a provision of Pt 5.3A and in which s 447A was utilised to alter the relevant provision (that is the time fixed by such provision) so as to "cure the irregularity" and to achieve what was originally intended and "rescue" the intermediate transactions ." 23 The essence of Australasian Memory has recently been stated by Austin J in Brandrill v Newmont Yandal Operations Pty Ltd [2006] NSWSC 974 (at [48]): "The breadth of the court's power under s 447A(1) was confirmed by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. The particular question before the court in that case was whether s 447A(1) confers on the court the power to make an order altering the time fixed by s 439A within which the second meeting of creditors must be held. The High Court found that the section was wide enough to permit such an order to be made, and their Honours (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ) made some more general observations about the scope of s 447A and the limitations inherent in it. They held that there was nothing on the face of s 447A suggesting that should be read down (at 279). They recognised that the scope of the section was limited by the words "how this Part is to operate", an expression looking to the future, not the past. But those words are satisfied if the order has effect only from the time of its making, although the order relates to past matters or events (at 282)." 24 The present case is one in which creditors have, by a significant majority (twenty to seven by number and $888,216.18 to $478,636.24 by value) expressed concurrence in the proposition that the instrument tabled on 26 April 2006 should be executed by Kruger Engineering so as to have effect as a deed of company arrangement under Part 5.3A. They did so, so far as the evidence shows, on the understanding that their actions would have such a legal significance and effect that the rights of the company and the creditors would become those created by a deed of company arrangement in that form. Furthermore, the evidence contains no basis for thinking that creditors made their decision otherwise than on the basis of appropriate disclosure and explanation. Intervention pursuant to s.447A would, as in Australasian Memory, be by way of "rescue" of the result of a clear expression of creditors' wishes from the consequences of non-compliance with Part 5.3A. The purpose of that aspect of Part 5.3A which contemplates its own modification by way of remediation would thereby be served. And the remedial order would be one having effect from the time of its making, although relating to past events. 25 I am satisfied, therefore, that this is a case in which resort to s.447A is possible in order to validate the defective determination of creditors that the company should execute a deed of company arrangement in the form tabled on 26 April 2006. In addition and having regard to the clear expression of creditors' wishes and the circumstance that all relevant persons have, for more than five months, conducted themselves as if a deed of company arrangement were in place accordingly, I am satisfied that the court should exercise the remedial jurisdiction. It is significant that, notwithstanding notice of the application (given on two occasions to all creditors), no creditor ultimately saw fit to seek to make submissions to the court. 26 I should also mention another aspect. Approval of the supposed deed of company arrangement was not the only matter dealt with at the meeting of 26 April 2006. There were also resolutions regarding the remuneration of Mr Louttit as administrator and the election of a committee of creditors, being resolutions that would appropriately have been passed at a s.439A meeting. Those resolutions, like the resolution concerning the deed of company arrangement, were passed at the 26 April 2006 meeting on the mistaken footing that the voluntary administration was then still in progress. The 26 April 2006 meeting was thus treated as if it were an adjournment (or further adjournment) of the s.439A meeting held on 15 March 2006. This is consistent with what I have called the "alternative characterisation of the substance" at [12] above. Again, I am of the opinion that s.447A can and should be applied to validate the position. 27 In the result, therefore, there will be orders in terms of paragraphs 1 to 4 of the originating process as follows: 1. Order, pursuant to s.447A of the Corporations Act 2001 (Cth) ("the Act"), that Part 5.3A of the Act is to operate in relation to Kruger Engineering Pty Limited (ACN 002 990 089) ("Kruger") as if the meeting of creditors of Kruger held on 26 April 2006 at Level 5, 37 York Street, Sydney was a valid meeting of creditors convened under s.439A of the Act. 2. Order, pursuant to s.447A of the Act, that Part 5.3A of the Act is to operate in relation to Kruger as if the resolutions of the creditors of Kruger passed at the meeting of creditors held on 26 April 2006 that: (a) Kruger execute the revised and varied deed of company arrangement tabled at the meeting pursuant to s.439C of the Act and Giles Woodgate be appointed deed administrator; (b) the remuneration of the voluntary administrator, his partners and/or staff be approved and fixed for the period from 12 April 2006 to 25 April 2006 in the sum of $8,434.50 (excluding GST) on a time basis at the rates of Jamison Louttit & Associates from time to time; (c) the remuneration of the voluntary administrator, his partners and/or staff be approved and fixed for the period from 26 April 2006 to the completion of the administration to a limit of $2,000 (including GST) on a time basis at the rates of Jamison Louttit & Associates from time to time and/or as subsequently agreed, and the voluntary administrator be authorised to make periodic payments on account of such accruing; and (d) a committee of inspection of creditors be formed and that the nominations be accepted and that members be Greg Hose, Joe Abdullah, Susan Kruger and Ron Thompson, were valid resolutions of the creditors of Kruger at the meeting convened under s.439A of the Act. 3. Order, pursuant to s.447A of the Act, that Part 5.3A of the Act is to operate in relation to Kruger as if the deed of company arrangement executed by Kruger on 26 April 2006 and as varied on 15 September 2006 is a valid deed of company arrangement under Division 10 of Part 5.3A of the Act. 4. Order, pursuant to s.447A of the Act, that Part 5.3A of the Act is to operate in relation to Kruger as if the resolutions of the creditors at the meeting of creditors of Kruger on 15 March 2006 were varied by the resolutions of the creditors at the meeting of creditors of Kruger on 26 April 2006. 28 It is also appropriate to make order 7, that is, an order that the costs of the plaintiffs be paid from the assets of the company. **********

Australasian Memory Pty Ltd v Brien

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