Should the winding up application be adjourned?
20 Subsection 440A(2) of the Act provides:
(2) The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.
21 It was common ground that it fell to those who opposed the hearing of the winding up application to satisfy the Court that it is in the interests of Storm Financial's creditors for it to continue under administration rather than be wound up. If that satisfaction is engendered, the language of s 440A(2) dictates that the Court must adjourn the winding up application. The converse does not automatically follow. The Court would possess a discretion nonetheless to adjourn the winding up application.
22 Of the parties, only Mr and Mrs Cassimatis opposed the winding up application. While the administrators did not resile from the recommendation made in their report, they did not, appropriately in my opinion, actively press for such an order, as opposed to endeavouring to assist the Court as to the present position in relation to Storm Financial's affairs and the construction and application of the Act. The receivers and managers supported the application made by ASIC in separate submissions. They also alternatively contended for the making of remedial orders in respect of the Information Memorandum.
23 Mr and Mrs Cassimatis sought the adjournment of the winding up application either as a matter of obligation on the basis of satisfaction as envisaged by s 440A(2) of the Act or in any event as a matter of discretion. In either case, it was submitted that the winding up application should be adjourned until such time as it could be seen whether or not the DOCA had failed according to its terms, in the event that it was approved at the forthcoming creditors' meeting. The prospect that the DOCA either might not be approved by the creditors or that an extension of the fulfilment of an essential term might not granted in accordance with the terms of the DOCA could doubtless be accommodated by a reservation generally of liberty to apply to relist the winding up application. Of course, if the winding up application were to be adjourned, its relisting might be rendered unnecessary were the creditors to resolve at the meeting that Storm Financial should be wound up.
24 What is entailed under s 440A(2) in satisfying the Court that it is in the interests of the company's creditors for a company to continue under administration rather than to be wound up has been the subject of judicial consideration.
25 In Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457 McPherson JA, with whom Pincus and Davies JJA agreed, observed of s 440A(2):
It is evident from the terms of that subsection that before it applies the court must be satisfied not only that there is an administration but also as the subsection says, that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. …
The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other.
In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.
These are observations made by an intermediate appellate court in respect of Commonwealth legislation adopted, under the co-operative scheme then prevailing, by the various States. The provision concerned has been taken up in the Act in respect of analogue facts and though not, strictly, bound by a decision given in the Court of Appeal Division of the Supreme Court of Queensland, it is incumbent on me not to depart from the interpretation of s 440A(2) of the Act evident in these observations unless convinced that that interpretation is clearly wrong: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485. To be convinced that a judge of the eminence of McPherson JA was clearly wrong in a matter touching upon corporate insolvency is a considerable step, especially when his Honour's observations commanded the concurrence of Pincus and Davies JJA. As it happens, not only do I respectfully agree with the observations but also I did not understand any party to seek to persuade me that those observations were clearly wrong, as opposed to Mr and Mrs Cassimatis urging that they were distinguishable on the facts of this case.
The quoted observations made by McPherson JA in Creevey's Case were not though made in a vacuum, as the following statement made by Philip McMurdo J in Re Octaviar Ltd (formerly MFS Limited) [2008] QSC 216 at [55] serves to remind:
There are two matters to be noted about that passage from Creevey. The first is that read in context, it is referring to the absence of evidence of any assets whatsoever. Secondly, it is not possible to read this passage as a statement of some principle that in every case, for a court to be satisfied in terms of s 440A(2), there must be some detailed comparison of the dividends from one regime or the other. It will often be the case where not enough is known about what is likely to come from one or both regimes for that comparison to be made at this stage. As McDougall J said in SGB Raffia v Gammacon (No 2) [2007] NSWSC 1510, McPherson JA in Creevey
"was not purporting to reframe the statutory test but, rather, to state its application firstly in the case before the court and secondly by reference to more general considerations."
McDougall J there referred to what was said by Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003)44 ACSR 377 at 380 in a passage which I respectfully adopt:
"[18] Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase."
In Re Octaviar Ltd [2008] QSC 216 the occasion for the deciding whether the Court was satisfied that it was in the interests of creditors that the administration proceed was a decision by the directors of the company concerned to appoint administrators (subject to the discharge or expiry of injunctions then in place) after the hearing of an application for the winding up of the company had commenced. Necessarily, the Court did not at that time have the benefit of the considered views of those administrators as to the relative worth of what was offered under the DOCA compared with a liquidation so far as the interests of creditors were concerned. Further, the present is not an adjournment application by Storm Financial's administrators but rather by two of its directors and members, who are also creditors. They wish to promote a known DOCA to a creditors' meeting following an administrators' report which recommends the contrary.
26 Mr and Mrs Cassimatis drew attention to observations concerning s 440A(2) made by Hamilton J in TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830. After noting that Creevey's Case was the only intermediate appellate authority, Hamilton J conducted a critical analysis of later authorities in various original jurisdictions concerning the subsection. His Honour (at [18]) reached this conclusion:
18 What I derive from a consideration of the foregoing authorities … is that it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer.
I respectfully agree with this conclusion as to what is to be derived from the authorities to which he refers. Further, there is nothing in it which is inconsistent with the observations made of s 440A(2) in Creevey's Case. The long and the short of it is that s 440A(2) means what it says; it is for the person seeking the adjournment to satisfy the Court that in the circumstances of the particular case, it is in the interests of the company's creditors for it to continue under administration rather than be wound up. In some cases that may be able to be done by a comparative exercise as between prospective returns to creditors; in others such an exercise may be premature but it may nonetheless be in the interests of creditors for there to be a short adjournment so as to allow the position to be investigated. These are but non-exhaustive examples.
27 TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830has present utility for another reason. I was informed that, even were the DOCA approved at the creditors' meeting, it was "highly likely" that ASIC would seek its termination under s 445D. ASIC is an eligible applicant for such an order: s 445D(2)(ba) of the Act. Of this contingency and its relevance Hamilton J observed (at [19]):
It is no part of the Court's function to decide prospectively a s445D application which has not been made, or to consider whether or not in considering such an application it would require a guarantee to assure the dividend of third party creditors who wished the DCA to proceed before it would grant the application. However, the determination of a party, whose word in the context is not lightly to be doubted, offers yet another complicating factor in the situation in which the interests of the creditors must be assessed. I do not accept Mr Hayter's submission that these considerations are wholly irrelevant. They seem to be yet another factor to be taken into account in determining whether an adjournment is in the interests of the creditors.
Again, I respectfully agree with his Honour. The contingency, in this case the "high likelihood", of an application under s 445D is another factor which it is not irrelevant to take into account in determining whether an adjournment is in the interests of creditors.
28 It was conceded in the written submissions made on behalf of Mr and Mrs Cassimatis that it was "unclear" whether an administration under the DOCA (and I understood this also to be as it was proposed to be presented in amended form) would result in a better return to creditors than an immediate winding up. For their part, the administrators went rather further in their report. They do not see the DOCA as offering the prospect of a better return. Though the further excerpt is lengthy, it is again desirable that their opinion be set out:
8. The Administrators Recommendations
The options available to creditors are:
(a) To accept the proposed deed of company arrangement;
(b) To wind up the company; or
(c) To end the administration and hand the company bank to its directors
Under Section 439A, Administrators must provide a recommendation to creditors based on the information available to them.
Whether to Accept the Proposal for a Deed of Company Arrangement
The Administrators recommend that creditors do not accept the proposal for a Deed of Company Arrangement.
The Administrators reasons for recommending against accepting the proposal for a Deed of Company Arrangement are as follows:
1. The proposal is subject to a condition precedent which, on the basis of legal advice received by them, the Administrators do not expect to be fulfilled. The condition precedent states, in effect, that the sum of $2 million to be paid in under the proposal will only be paid if the current injunction over those funds (which was obtained by the ASIC) expires or is removed and the CBA takes not step to prevent the monies being paid to the Deed Administrators.
2. In the event that the condition precedent is fulfilled (within up to 120 days), that is the injunction expires or is removed and the CBA takes no action, again on the basis of legal advice received the Administrators believe that it is likely that a liquidator of storm would be able to recover the $2 million for the benefit of creditors, and to do so without agreeing to conditions such as are contained in the proposal. The proposal therefore provides no extra benefit in terms of the payment of the $2 million.
3. In the event that the proposal is rejected and Storm is placed into liquidation priority employee entitlements will be paid by the Receivers or through the federal government funded General Employee Entitlement & Redundancy Scheme (GEERS). The proposal therefore provides no additional benefit to employees.
4. Although the Administrators agree that a Public Examination of all relevant parties should be carried out, and agree that any decision to commence or continue litigation should be based primarily on evidence gathered at such Public Examination, they are of the view that such a process can be carried out, at least as efficiently, by a liquidator as a Deed Administrator.
5. In the vent that Storm is placed into liquidation it is likely that the liquidators will be able to seek recovery for the payment of $444,711 paid on the 22 of December 2008 to the Westpac Bank, from Emmanuel and or Julie Cassimatis. That benefit will be lost if the proposal for a Deed of Company Arrangement is accepted.
6. In the event that Storm is placed into liquidation the liquidators will be able to seek compensation from the directors of the company for any debts incurred after the commencement of the insolvency and which remain unpaid. That benefit will be lost if the proposal for a Deed of Company Arrangement is accepted.
7. In the opinion of the Administrators the directors of Storm (defined in the proposal as being Emmanuel and Julie Cassimatis) have an inappropriate level of control. For example:
(a) By clause 11 of the proposal the Deed Administrators must obtain the directors written agreement by the 17 of April 2009 (that is a date before the expiration of the date on which the $2 million is required to be paid in) for a budget for the costs and expenses of the proposal examinations or alternatively accepted the budget contained in that clause. Bearing in mind that the directors will be among the parties to be examined this limitation is, in the opinion of the administrators, inappropriate.
(b) By clause 21 of the proposal any legal action taken by Storm against the CBA will be conducted by the directors, but subject to such assistance and supervision of the Administrators and their independent solicitors as the Administrators think fit. It is not clear to the Administrators what the terms "conducted by" and "supervision" mean for the purposes of the proposed Deed and they are concerned that, in effect the directors will have full control (see below). Further, given that the directors may be joined as a party in any action commenced by Storm (or any action by Storm on behalf of clients of Storm) in the opinion of the Administrators the directors may lack the required level of independent to conduct such proceedings.
(c) The event that a dispute arises between the directors and the Administrators regarding any decision of the Administrators (see clause 31) and that dispute is not settled by the process set out in the clause 34 the directors may by clause 34 replace the Administrators as trustees of the Storm Client Recovery Fund and require the Deed Administrators' to repay the balance of the funds held by them.
(d) The general scheme of the proposal provides for action on behalf of clients to be conducted by the directors but subject to such assistance from and supervision of a Client Committee assisted by an independent legal advisor or advisors. It is not clear to the Administrators what the terms "conducted by" and "supervision" mean for the purposes of the proposed Deed and they are concerned that, in effect that directors will have full control of the proceedings. Further, given that the directors may be joined as a party in any action commenced by Storm (or any action by Storm on behalf of clients of Storm) in the opinion of the Administrators the directors may lack the required level of independent to conduct such proceedings.
Whether to liquidate the Company
It is the Administrators' recommendation that the company then be wound up.
The company is insolvent in that it has insufficient current assets to meet its commitments. Placing the company into liquidation will also provide the Liquidator with powers to conduct further investigations into the affairs of the company; look at the matter of Insolvent Trading; recover any Preferential Payments made to creditors; examine and recover any other Insolvent Transactions and examine the general affairs of the company.
In liquidation the possibility exists that the liquidators may have access to funding to recover assets and prosecute claims from:
· The Assetless Administration Fund administered by the ASIC
· Contributions from creditors
· Litigation Funders
Whether to End the Administration
In the Administrators view it would not be in the interest of the creditors for the Administration to end. Should the company's creditors resolve that the Administration be ended, the control of the company would revert to the directors. The company is insolvent and the affairs of the company should be formally resolved.
It is likely that a creditor would apply to have the company wound up shortly after the Administration is ended as the company is unable to pay its debts.
Other Information
We confirm that pursuant to Section 439A(4)(b) of the Corporations Act, there is no other information that we are aware of at this time that will assist creditors in making the decision as to whether or not they should accept the proposal for a Deed of Company Arrangement that has been put forward.
9 Dividend Possibilities
Priority employee creditors will be paid their entitlements by the Receivers and, to the extent necessary, by GEERS, should the company be placed into liquidation. Should the proposal for a Deed of Company Arrangement be accepted priority employee creditors will be paid their entitlements by the Receivers and by the Deed Administrators.
Storm carried Professional Indemnity Insurance. Clients of Storm who are able to demonstrate that they have incurred losses as a result of negligence by Storm may be paid, or partly paid, by Storms insurers provided the claims lodged are not subject to any of the policies exclusions.
Any dividend to ordinary creditors is dependent upon:
· Any surplus being available from the Receivers
· Whether in liquidation the liquidators are able to recover any void or voidable transaction and whether damages for insolvent trading can be recovered.
· Whether a public examination supports a conclusion that legal is can be sustained against any third party and the eventual success or other wise of any such action. At the date of this report the Administrators cannot say that any such action will be undertaken or speculate about the likelihood of success should such action be taken. The comments apply equally to liquidation and the proposed Deed of Company Arrangement.
29 Read on behalf of Mr and Mrs Cassimatis was an opinion provided by a Mr W J Hamilton, a chartered accountant. Like Messrs Worrell and Kahtri, he is an experienced insolvency practitioner and official liquidator. He offers a critique of their report. Though directed to the subject of the relief sought in the separate application made by Mr and Mrs Cassimatis, its tender on their behalf was not limited to that context. For reasons he sets out in his opinion, he expresses the view that it "is difficult to readily arrive at a decision on reading [the administrators' report] as to creditors' best interests, a winding up or a DOCA. A great deal of homework needs to be done in arriving at the status of all classes of creditors claiming, secured and unsecured, with likely comparative returns, cents in the dollar ($1.00) and over what period in the winding up or DOCA". Mr Hamilton, I note, was not set any such "homework" by Mr and Mrs Cassimatis.
30 An affidavit in reply sworn by Mr Worrell was read on behalf of the administrators. In that Mr Worrell states (para 15):
In considering whether I should attempt a range of estimates, I reached the conclusion that it was not in the interests of creditors to attempt such a comparison. The reasons for that conclusion were:
(a) the outcome in terms of the asset and liability potentials were so broad as to be impossible to determine on almost any scenario;
(b) the range of scenarios was so broad as to mean that there would need to be a very large number of potential alternatives suggested, giving a very large number of possibilities which in itself may be confusing;
(c) in each of the scenarios it was, in any event, impossible to estimate the potential recoveries with any degrees of certainty;
(d) it was impossible to estimate the quantum of creditors with any certainty;
(e) it was impossible to estimate the possible costs of all of the potential pieces of litigation and their outcomes with any certainty.
There is, with respect, much force in this statement. The views expressed in the administrators' report under the heading "Dividend Possibilities" strike me as a fair assessment in the prevailing circumstances, which include a necessarily compressed timeframe for reporting. For just the reasons Mr Worrell expresses in the passage quoted, I doubt, for example, whether, had I had the benefit of Mr Hamilton's opinion at an earlier stage, I should have been disposed further to extend the convening period so as to allow the administrators to undertake the work he describes.
31 One way of highlighting the difficulties faced by the administrators in assessing dividend possibilities under the DOCA and the weight one gives the DOCA proposal when considering whether it is in the interests of creditors to allow the administration to proceed is by a consideration of its centrepiece, "the DOCA sum". As defined, this is a sum of $2 million which is to be advanced by Emmanuel Cassimatis & Associates Pty Ltd (ECA) to the deed administrators (to be the present administrators) from account no 35 - 0685 with Westpac Banking Corporation. ECA is a company controlled by Mr and Mrs Cassimatis.
32 It is common ground that the DOCA sum is the subject of litigation in the Supreme Court of Queensland - originating application No. 1020 of 2009 (See Ex 3). In its present form, it is Storm Financial as applicant, at the behest of the receivers and managers, which seeks relief against Mr Cassimatis as first respondent, Mrs Cassimatis as second respondent and ECA as third respondent. The relief sought by the applicant in those proceedings is as follows:
A. DETAILS OF APPLICATION
The application is made under:
1. section 1324 of the Corporations Act 2001 (Cth) ("the Corporations Act").
2. section 1317H of the Corporations Act;
3. section 47 of the Supreme Court Act 1995.
1. The Applicant seeks the following injunctive relief:
(a) Until further order an interlocutory injunction restraining the Respondents from paying, transferring or otherwise dealing in any way with, or causing any other person to pay, transfer or deal in any way with the sum of $2,000,000 paid into Account Number 35-0685 with Westpac Banking Corporation, BSB No 034-222 by the Applicant pursuant to an email instruction to Westpac from Laruen Davies on behalf of the Applicant on or about 15 December 2008 from Westpac Bank Account No 27-0383 in the name of the Applicant.
(b) A permanent injunction restraining the Respondents from paying, transferring or otherwise dealing in any way with, or causing any other person to pay, transfer or deal in any way with the said sum of $2,000,000 otherwise than by paying the said sum to the Applicant.
2. The Applicant seeks to the following further relief:
(a) A declaration that on 15 December 2008 the Applicant had no profits from which a dividend of $2,000,000 could be paid.
(b) A declaration that the payment on 15 December 2008 of $2,000,000 from the Westpac Cash Management Account BSB 034-111 account number 27-0383 held in the name of the Applicant to the Third Respondent was ultra vires.
(c) A declaration that the resolutions purported to be made on 23 December 2008 by the First Respondent, the Second Respondent and Ms Dawn Collett as directions of the Applicant were void.
(d) A declaration that the Third Respondent hold the $2,000,000 paid into Account Number 35-0685 with Westpac Banking Corporation, BSB No 034-222 on or about 15 December 2008 as trustee for the Applicant.
(e) An order requiring the Third Respondent to repay or cause to be rapid to the Applicant the amount of $2,000,000 held by or on behalf of the Third Respondent in bank account number 35-0685 BSB No 034-222 with Westpac Banking Corporation.
(f) Alternatively as against the Third Respondent, the amount of $2,000,000 as money had and received.
(g) Alternatively as against the Third Respondent, the amount of $2,000,000 as money paid under a mistake.
(h) An order requiring the First Respondent, the Second Respondent and the Third Respondent pay to the Applicant the amount of $2,000,000 being the amount of its loss and damage suffered by reason of the breaches of duty by the First Respondent and the Second Respondent as directors of the Applicant.
(i) Pursuant to s 1317H of the Corporations Act, an order that each of the First Respondent, the Second Respondent and the Third Respondent compensate the Applicant for the damage suffered in consequence of the payment of $2,000,000 to the Third Respondent.
(j) Damages.
(k) Interest on the amount of $2,000,000 pursuant to Section 47 of the Supreme Court Act 1995.
(l) Costs on a full indemnity basis; and
(m) Such other order as the Court deems appropriate.
The underlining is referable to amendments made to the Supreme Court application. At the time when the administrators made their report, ASIC was the applicant in those proceedings. The receivers and managers have recently caused Storm Financial to assume that role.
33 Mr and Mrs Cassimatis and ECA are presently subject to interlocutory injunctive restraint in terms of para 1(a) of the Supreme Court application in respect of the DOCA sum. That restraint was initially granted on an interim basis by the Supreme Court on the application of ASIC. It has to date been consensually extended. That has occurred without, it seems, any concession by the respondents as to the merits of an entitlement to such interlocutory relief. The present term of the interlocutory injunction will expire on 8 April 2009. At that time, at least according to their present disposition, Mr and Mrs Cassimatis and ECA propose to contest its continuance. In that regard, it was conceded before me on their behalf that there exists a serious question to be tried in originating application No. 1020 of 2009. It seems that the contest on 8 April 2009 will be whether or not the balance of convenience favours the further continuance of the interlocutory injunctive relief.
34 The DOCA makes the following provision in respect of the obligation of ECA to advance the DOCA sum and the sequel in the event that it is not advanced:
2. The obligation of ECA to advance the DOCA Sum to the Administrators is subject to and conditional upon the happening of the following events:
(a) The expiry or dissolution of the injunction in the ASIC Proceedings granted on 30 January 2009; and
(b) The CBA takes no step that prevents ECA from advancing the DOCA Sum;
(c) No event beyond the control of ECA occurs which prevents it from advancing the DOCA Sum.
3. If ECA does not advance the DOCA Sum to the Administrators within 60 days after the creditors vote for this DOCA, ECA may give notice to the Administrators either extending such period for a further 60 days, or terminating this Deed.
4. If, at the expiry of such further period of 60 days, ECA has not advanced the DOCA Sum to the Administrators, this Deed will be terminated.
5. If this Deed is terminated in that manner:
(a) Storm will be wound up under a creditors voluntary winding up; and
(b) the Administrators will become its liquidators.
The expression "the ASIC proceedings" is defined in the DOCA to be Supreme Court proceeding No 1020 of 2009.
35 The obligation of ECA to advance the DOCA sum at all is contingent upon the events described in cl 2. This aside, the maximum period for the advancing of the DOCA sum is 120 days after any vote of the creditors in favour of the DOCA. Any extension of the payment period beyond 60 days to that maximum requires a positive decision by ECA: cl 3.
36 In the circumstances prevailing, that the DOCA sum is not presently freely available is clear on the face of the DOCA (cl 2(a)). In their report and with the benefit of legal advice the administrators opine that it is likely that ASIC will be successful in its application for the return of the $2 million, the DOCA sum, to Storm Financial. If so, they further opine that it will constitute property of the company which will be subject to the charge in favour of the Commonwealth Bank under which the receivers and managers have been appointed. Since then, as noted, Storm Financial has become the applicant in those proceedings, but one might apprehend that event is unlikely materially to diminish the administrators' assessment of prospects.
37 Thus, the first difficulty in assessing what dividend might flow under the DOCA is that it requires the assessment of a contingency as to the prospect of the DOCA sum being available for ECA to pay at all, having regard to the forensic controversy in the Supreme Court. A further contingency is that that controversy must be resolved within, at most, 120 days.
38 These contingencies aside, upon the assumption that the DOCA sum is paid, the amount of any dividend under the DOCA is inherently bound up with the claims which may come to be made under its terms. Very large questions not only as to liability but also quantum with respect to such claims would have to be answered in any such dividend assessment. It is quite impossible to answer them with any precision at present. Mr and Mrs Cassimatis made no serious attempt so to do.
39 Mr and Mrs Cassimatis did point to an interlocutory judgement given by Greenwood J in Storm Financial Limited ABN 11 064 804 691 v Commonwealth Bank of Australia ABN 48 123 123 124 [2008] FCA 1991in which, at a time before the appointment of the administrators, Storm Financial had sought injunctive relief against the bank in respect of alleged misstatements made by the bank concerning Storm Financial's role in the management of client margin loan facilities. His Honour had stated:
43 For present purposes, I am satisfied by the weight of the applicant's material that had the financial adviser assumed a management responsibility for the margin loan transaction in each case and more particularly a "sole" responsibility for the management of the margin loan account through the period, the documents as between the Bank and Storm and in particular the letter of 18 May 2007 would have said so in clear and transparent terms. Secondly, the documents as between the financial adviser and the client would have reflected that position. Mr Cassimatis says it was not so as a matter of practice. Mr Johnston says it was not so in his experience although his experience concluded in 2003. Mr McCullough also gives evidence consistent with Mr Cassimatis. I am satisfied that solely for interlocutory purposes, Storm has demonstrated a sufficient likelihood of success in terms of Australian Broadcasting Corporation v O'Neill demonstrating that the statement as to sole management of the margin loan accounts and instructions allegedly given in the meeting on 4 December 2008 are capable of being misleading or deceptive or likely to mislead or deceive. Of course, the ultimate position must be tested at trial where the evidence will be closely examined and findings reached on all aspects of the controversy.
Later in that judgement (at [49]), his Honour observed in relation to the question of what, if any, were the respective managerial responsibilities for the management of client margin loan accounts as between Storm Financial and the bank that, "The boundaries of that relationship are the core matter in issue in these proceedings". Just what might be the quantum of damages in that proceeding, if such relief were alternatively sought, was a question left unanswered by Mr and Mrs Cassimatis.
40 The point of all this is that there is something of an understatement in the concession by Mr and Mrs Cassimatis that it is "unclear" that Storm Financial's creditors would be any better off under the DOCA than they would be if the company were ordered to be wound up. Put bluntly and to borrow from language which commended itself to Hamilton J in TCS Management, there is no good case that there will be a greater or more accelerated return from the course contended for on behalf of Mr and Mrs Cassimatis than there would be if Storm Financial were liquidated.
41 In voicing that conclusion it is neither necessary and nor would it be appropriate to reach a conclusion about whether the DOCA sum is in law available to ECA for it to pay it in accordance with the terms of the DOCA. The fate of the $2 million is a matter for the Supreme Court of Queensland. It is enough to note the conceded serious question to be tried and that it is by no means certain either that the interlocutory injunction will not be continued or that the substantive proceeding will be heard and determined in that court within 120 days, to say nothing of the fate or likelihood of disposal within that time frame of any appeal.
42 Both Mr Russell and Mrs Cassimatis were cross-examined on their affidavits. To the extent that their evidence was relevant to the likelihood that ECA would come within the time allowed by the DOCA to be able to pay the DOCA sum and the question of adjournment, I consider that it is neither necessary nor desirable to do anything other than observe that their evidence underscored in my mind the prudence of the concession made on behalf of Mr and Mrs Cassimatis in this Court that, at the behest of the receiver and manager, Storm Financial has raised a serious question to be tried in the Supreme Court about ECA's entitlement to retain the $2 million. Their evidence certainly did not persuade me that the trial in the Supreme Court would be anything other than lengthy and complex and hence correspondingly difficult to hear and determine within the maximum permissible time for the payment of the DOCA sum.
43 It is likewise neither necessary nor desirable to reach any conclusion as to when, if at all, prior to its being placed in administration, Storm Financial became insolvent or, for that matter, whether the actions of the then directors in resolving and in confirming the resolution to pay the $2 million to ECA were honest, reasonable or lawful. Such issues are at large in the Supreme Court proceeding. The concession made goes to there being serious questions to be tried in respect of these issues, as does my observation as to the prudence of that concession. That an interrogative note is sounded on these issues is relevant to the adjournment question.
44 That is not the end of the matter so far as an assessment of the interests of creditors is concerned. Mr and Mrs Cassimatis point to the imminence of the creditors' meeting. Why not grant a short adjournment so as to let the creditors decide they ask? After all, they submit, is this not giving practical content to the reform to the Act found in Pt 5.3A?
45 One answer to these questions is that I am not persuaded that an adjournment would serve either of the objects of Pt 5.3A. It is no part of the intendment of the DOCA that it will preserve Storm Financial's business or, other than after highly conjectural recoveries, the company itself. As already noted, the creditors are not shown to be better off.
46 Putting this to one side, why nonetheless not let the creditors decide whether or not they might be better off? After all, even if I were not disposed to grant any of the relief that Mr and Mrs Cassimatis seek in their application in respect of the administrators' report, that does not mean that the merits of the opinions expressed therein are immune from debate, even robust debate, at the creditors' meeting. Parliament must be taken to have contemplated as much by consigning by s 439C of the Act to the creditors' meeting, not to the opinion of the administrators, these choices:
(a) that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or
(b) that the administration should end; or
(c) that the company be wound up
47 In this regard, it is relevant in my opinion, in assessing the interests of creditors for the purposes of s 440A(2) of the Act, to take into account the terms of the Information Memorandum. It is a remarkable document. It deserves to be set out in full.
RUSSELL AND COMPANY SOLICITORS
Storm Financial Limited - The Simple Solution
This Information Memorandum summaries the essential terms of the proposal by Emmanuel and Julie Cassimatis for the Deed of Company Arrangement on which all creditors will shortly vote.
We sincerely believe that the proposal is:
· simple
· generous; and
· on balance, the best solution for all stakeholders - staff, ex-ARs, clients and all other creditors.
This document is not a substitution for the detailed terms of the proposal, which all creditors should read, along with the Report of the Administrators. The elements of the proposal are as follows.
Directors Pay $2 million
The directors will pay $2 million to the Administrators. This is intended to stop all further argument about the dividend payment of 15 December 2008, without one cent in legal fees.
ASIC will need to consent to releasing the injunction on the funds. We asked ASIC for its comments on this proposal on 9 February. For reasons best known to itself, it has made no comments as yet.
The Commonwealth Bank may try to frustrate this payment too.
We will have to wait and see. We intend to pay the money if we can.
Administrators To Pay Priority Employees
After the $2 million is paid, all priority employees (ie not us) will be paid in full.
The CBA's receivers have been claiming that only liquidation will see employees paid. The fact is that the receivers should have paid the employees by now.
We won't mess around. Under our deal, all priority employees are paid immediately. We will pursue the receivers for any shortfall they should have paid you - at no cost to you.
Public Examinations
We will fund public examinations of everyone (ourselves included) who can shed light on the circumstances of Storm's collapse. We welcome the opportunity to have our say - we hope the bank (and the receivers) feel the same way.
If the administrators decide there are claims to pursue, that will happen.
Client Claims Against Storm
Storm Clients can join the Storm Clients Recovery Group.
This will streamline their claims against Storm, and Storm's claims against insurers. The Administrators (not us) will be able to negotiate a deal with the insurers.
The Administrators will consult the Directors and the Creditors Committee before entering into any Insurance Settlement.
Client Claims Against CBA and the Storm Clients Recovery Fund
Storm Clients who do not join the Storm Clients Recovery Group are not entitled to participate, or receive any payments from the Storm Clients Recovery Fund.
In essence, if you do not join the Storm Clients Recovery Group you will be on your own, funding your own claim against Storm and the bank, and paying your own lawyers (sooner or later). The benefits of joining the Storm Clients Recovery Group are obvious:
· No legal fees to pay
· No success fee, no "care and consideration" or "spec" uplifts to pay to lawyers
· Co-ordinated action
· The strength of the group
· Our assistance and knowledge available to all
· Input and updates available through a Client Committee
· Strict guidelines on settlement.
Compare those to any individual legal action you may be considering.
Also, members of the Storm Clients Recovery Group will qualify for a bonus 50% of any surplus from Storm's own Claims against the bank (after certain other payments). This is in addition to any proceeds of the Client Claims against the bank.
Storm's Own Claims Against the CBA
The Deed will provide funding for Storm's claims against the bank. Again, there are strict controls on any settlement of these claims, with a unanimous decision with the Administrators, or a resolution of the creditors or order of the court.
Most importantly, the proceeds of Storm's claims against the bank will be applied as follows:
· firstly, to repay litigation costs
· secondly, to pay all creditors;
· thirdly, 50% of any balance to the Storm Clients Recovery Group in addition to any proceeds of the individual Client Claims against the bank;
· last, the balance (if any) to Storm (ie the shareholders).
If We Disagree with the Administrators?
If this happens, there is a form consultation process. If we still disagree, we can pull the balance of our funding, BUT we are then exposed to a claim by Storm for the unspent balance of the $2 million dividend. We are putting our money where our mouth is.
E G Cassimatis and J G Cassimatis
9 March 2008
48 Quite why it is that the Information Memorandum bears the entitlement of Mr Russell's firm is something of a mystery. The concluding subscription as to authorship evidences that its statements are those of Mr and Mrs Cassimatis. There is no evidence that either of them work for Mr Russell's firm; rather the reverse. In their web page which links to the Information Memorandum Mr and Mrs Cassimatis do not proffer the Information Memorandum as the considered opinion of a solicitor.
49 Be this as it may, it is not correct to describe the DOCA as a "simple solution". Mr and Mrs Cassimatis may believe that but, objectively, that seriously misdescribes not only the contingencies that attend the payment of the DOCA sum either within the maximum time allowed under the DOCA or at all but also the difficulties that will attend recovering monies for the benefit of creditors. There is, in truth, no "simple solution" for the creditors be it by way of acceptance of the DOCA or an immediate winding up. Yet this is the entitlement made in bold type so as to emphasise it to the reader and "simple" is immediately thereunder again emphasised in bold type: cf National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369 at 381, [53] per Jacobson and Bennett JJ.
50 Neither, objectively, is it correct to describe the DOCA proposal as "generous". The worth of what is offered under the DOCA is not quantifiable, either relatively or absolutely, for the reasons given by the administrators in their report and by Mr Worrell in his affidavit. That necessarily includes the worth, if any, of the "bonus" for which the DOCA nominally provides. If there is a reasonable basis for Mr and Mrs Cassimatis' "sincere belief" as to the generosity of the DOCA it is not evident to me from the evidence tendered by them.
51 Is it, objectively, on balance, "the best solution for all stakeholders"? Save for two "stakeholders", who are at least arguably omitted from the list of the same in the Information Memorandum, that is a matter which it is not possible objectively to determine. Those two "stakeholders" are Mr and Mrs Cassimatis, each in the capacity of a director of Storm Financial. Acceptance of the DOCA would grant to Mr and Mrs Cassimatis (and to ECA) releases and discharges "from all and any claims, actions, suits, or demands arising out of the dividend payment on 15 December 2008" (cl 29), i.e. the very sum put forward as the DOCA sum. Further, those creditors who join the "Storm Clients Recovery Group", subject to clause 16A, "release and discharge any employee or officer of Storm, unless such person is insured under [any policy of professional indemnity or other insurance]" and agree "collectively to limit such claims to the amount available to such persons under such policies of insurance, or any Insurance Settlement" (cl 16(c)). Directors are not offered such releases by the Act in the event of a liquidation.
52 The Information Memorandum states that, after the public examinations contemplated by the DOCA, "If the administrators decide there are claims to pursue, that will happen". If those public examinations were to expose claims against Mr and Mrs Cassimatis in their capacity as directors of Storm Financial then, to the extent applicable, the releases would dictate that those claims didn't happen. So viewed, one can see a basis for a sincere belief by Mr and Mrs Cassimatis that the DOCA is the "best solution" for each of them, but whether and why such a belief is open more generally is elusive. Of course, as was submitted on behalf of Mr and Mrs Cassimatis, there is nothing unusual about provision in a DOCA for releases of one sort or another. That though is quite a separate issue from the absence of reference to the same in the Information Memorandum.
53 The Information Memorandum in bold type states "Directors will pay $2 million". That is not who will make the payment under the DOCA. Further, the Information Memorandum does not at all make it clear that there is a serious question to be tried as to whether that sum is in law Storm Financial's property. The following statement in the Information Memorandum is hardly an adequate substitute:
ASIC will need to consent to releasing the injunction on the funds. We asked ASIC for its comments on this proposal on 9 February. For reasons best known to itself it has made no comments as yet. The Commonwealth Bank may try to frustrate the payment too. We shall have to wait and see.
54 ASIC also criticised the Information Memorandum for an absence of reference to the fact that if Storm Financial were wound up priority employee entitlements would be paid either by the receivers and managers or via the Commonwealth's General Employee Entailments and Redundancy Scheme (GEERS). What the Information Memorandum states in bold type is "Administrators To Pay Priority Employees". That is literally a feature of the DOCA. It is not though, in light of GEERS, a feature which makes the DOCA "generous". In that sense, ASIC's criticism is the omission is not misplaced.
55 As to the foregoing identified features of the Information Memorandum, and as was submitted on behalf of ASIC, the following passage from the joint judgement of Jacobson and Bennett JJ in National Exchange (2004) 49 ACSR 369 at 381-382, [55] to [58] is relevant by analogy:
55 Where the disparity between the primary statement and the true position is great it is necessary for the maker of the statement to draw the attention of the reader to the true position in the clearest possible way.
56 An analogy is to be found in cases dealing with exemption clauses. In Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 at 809, Denning LJ said:
"When one party puts forward a printed form for signature, failure by him to draw attention to the existence or extent of the exemption clause may in some circumstances convey the impression that there is no exemption at all, or at any rate not so wide an exemption as that which is in fact contained in the document."
57 His Lordship's remarks in J Spurling Ltd v Bradshaw [1956] 1 WLR 461 were even more pointed. His Honour said at 466:-
"... the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient."
58 A similar approach is justified by the remarks of Stone J in one of the "asterisk cases", ACCC v Signature Security Group Pty Ltd (2003) ATPR 41-908. Her Honour observed at [27] that the degree of prominence which must be given to a qualifying statement may well vary with the potential of the primary statement to be misleading and deceptive.
[Emphasis added]
56 I am not here deciding a misleading or deceptive conduct claim, only whether I am satisfied that it is in the interests of creditors that Storm Financial continue under administration rather than be wound up. Mr and Mrs Cassimatis have not persuaded me that their Information Memorandum has had and could not have had any material effect on creditors or that it has not and will not yield proxies in favour of their solicitor. That is material in deciding whether the administration should continue.
57 It does not inexorably follow from the features of the Information Memorandum which I have identified that it is not in the interests of creditors for the company to continue in administration rather than be wound up. Subsection 447B(2) would, in my opinion, permit the Court to direct the removal of the Information Memorandum and reference to it from the web site of Mrs Cassimatis and the publication on that web site that the Court had ordered the removal with a link to the Court's judgement. It would also permit the making of an order revoking or directing the administrators not to accept any proxy directed to Mr Russell on or after 16 March 2009 and before the publication of remedial advertising (or perhaps out of an abundance of caution, given the date of the Information Memorandum, after 9 March 2009). As with s 447A(1) of the Act, it would require cogent reasons to read down the generality of the power conferred by s 447B(2) so as to preclude the making of such orders and none are apparent: cf Australasian Memory Pty Limited v Brien (2000) 200 CLR 270 at 279-280, [17] to [10]. It was submitted on behalf of Mr and Mrs Cassimatis that the making of any such orders would disenfranchise creditors. It may, and a concern is that, having sent off a proxy in favour of Mr Russell, the corrective advertising and the chance of a fresh proxy or attendance in person at the creditors' meeting may not come to the attention of a creditor. With respect it would be odd to allow an administration to continue so as to allow a trained proxy to be utilised.
58 Were I persuaded that the DOCA did offer the prospect of a better return to creditors than a liquidation even though false or misleading statements had been made concerning it, this alternative would carry greater weight. However, the more I reflect upon this DOCA, the more it seems to me that it is a chimera; creative, but hardly constructive insolvency. For its unquantified and unquantifiable benefits, the creditors are being asked to decide to wait 60 days or perhaps 120 days to see whether the DOCA sum will emerge as available for ECA to pay from litigation closely contested for reasons good enough to constitute a serious question to be tried.
59 I have a further concern in relation to it being in the interests of creditors for the administration to continue. The DOCA requires Mr and Mrs Cassimatis to co-operate with the administrators in respect of all matters done under it (cl 28). The DOCA consigns to Mr and Mrs Cassimatis a role in relation to litigation other than as witnesses. It is not, it must be said, an unfettered role. It is intended that the administrators will also play a part. Further, the DOCA contains an elaborate dispute resolution process that may see Storm being wound up under a creditors' voluntary winding up (see cl 30 to cl 36).
60 In my opinion, the present proceedings, including the separate application made by Mr and Mrs Cassimatis, are eloquent as to the prospects of their co-operation and dispute in relation to litigation decisions in the DOCA. The administrators have made a considered value judgement, which includes taking legal advice about the prospects of success in the Supreme Court in respect of the DOCA sum, that it is in the interests of creditors that Storm be wound up. Mr and Mrs Cassimatis concede there is a serious issue to be tried in those Supreme Court proceedings but offer no proof of a better return to creditors that creditors might factor in to an assessment as to whether it is nonetheless in their interests to approve the DOCA. It is inherently likely that many of the claims contemplated for prosecution under the DOCA will require either or each of Mr and Mrs Cassimatis to give evidence. It is likewise inherently likely that difficult issues will arise concerning prospects, which will include an assessment of the credibility of their evidence and the strength of competing evidence offered, for example, by the Commonwealth Bank. Of course, self critical decisions fall to be made by any client who prosecutes a cause of action for his benefit. Under the DOCA Mr and Mrs Cassimatis would be called upon to make such decisions not just for their own benefit or that of companies they control but also for the benefit of a potentially very wide class of creditors. When regard is also had to the tone of such of their web site as has been reproduced in evidence, and with all due respect, I doubt whether they would bring to decision-making under the DOCA the same clinical detachment that creditors are entitled to expect from a court appointed liquidator alone. For example, on the web page (Exhibit MRR8 to Mr Ryan's affidavit, p 214) that links to the Information Memorandum one see this statement apparently authored by them, "We have owned and operated Storm (in its various forms) over the years and feel strongly that we will be more passionate about the pursuit of justice in this matter than anyone else."; on another web page (Exhibit MRR8 to Mr Ryan's affidavit, p 218), an apparent "mission statement" by Mr Cassimatis, "My crusade is to find justice for all affected Storm Financial clients. I will not rest in this." Passion is one thing, sober, perhaps self critical, assessment of the prospects of litigation is quite another. If there is to be litigation which might yield benefits for creditors I am not persuaded for this further reason that it is in the interests of creditors for the administration to continue so as to permit this DOCA to be considered either at a creditors' meeting on 30 March 2009 or even perhaps shortly after the fate of the Supreme Court proceedings on 8 April 2009 is known.
61 ASIC has brought its application at a late stage. That it did so after having not taken up an earlier opportunity does not thereby convert disadvantages for creditors inherent in the DOCA into advantages or even render them neutral. It just means that they fall for assessment against the background of the publicising of the Information Memorandum.
62 For all of these reasons I am not, in terms of s 440A(2) of the Act, satisfied that it is in the interests of Storm Financial's creditors for the company to continue under administration rather than be wound up. In reaching that conclusion, I have taken into account but do not regard as decisive the statement by ASIC as to the likelihood of its seeking the termination of the DOCA by the Court pursuant to s 445D, presumably in reliance on s 445D(1)(f). That would necessarily be after the DOCA had been approved at a creditors' meeting; perhaps after the DOCA sum had been paid. There are more than enough reasons, absent the contingency of a s 445D application, not to be satisfied it is in the interests of creditors for the administration to continue, as opposed to allowing the company to be wound up.
63 Part 5.3A does not mandate that the second meeting of creditors must occur after the appointment of administrators so as to allow the consideration by them of a DOCA, even where there is a winding up application. The presence of s 440A(2) attests to that. So, too, does the presence of s 435C(3)(g), which contemplates that an administration may end because the Court orders the company to be wound up. Rather, the position is no more than that the normal outcome of an administration is stated by s 435C(2):
(2) The normal outcome of the administration of a company is that:
(a) a deed of company arrangement is executed by both the company and the deed's administrator; or
(b) the company's creditors resolve under paragraph 439C(b) that the administration should end; or
(c) the company's creditors resolve under paragraph 439C(c) that the company be wound up.