CONSIDeration
28 It is difficult, in this instance, to separate the reason for seeking the relief sought from the relief itself. The DOCA cannot be totally ignored even though, even if approved by creditors, there will be another opportunity for the Court and interested parties to evaluate it on the application, if any, to terminate the liquidation.
29 A key question, however, in this application is the appropriateness of the appointment of the liquidators themselves as voluntary administrators and the need to obtain the leave of the Court in order for that step to be taken. Section 436B of the Act provides as follows:
436B Liquidator may appoint administrator
(1) A liquidator or provisional liquidator of a company may by writing appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time.
(2) A liquidator or provisional liquidator of a company must not appoint any of the following persons under subsection (1):
(a) himself or herself;
(b) if he or she is a partner of a partnership - a partner or employee of the partnership;
(c) if he or she is an employee - his or her employer;
(d) if he or she is an employer - his or her employee;
(e) if he or she is a director, secretary, employee or senior manager of a corporation - a director, secretary, employee or senior manager of the corporation;
unless:
(f) at a meeting of the company's creditors, the company's creditors pass a resolution approving the appointment; or
(g) the appointment is made with the leave of the Court.
30 On this topic, the Liquidators' position is that Diploma would save considerable funds by the task being carried out by them. Mr Hodgson confirms, more specifically, that the Liquidators have gained an in-depth working knowledge of Diploma's business and affairs and have undertaken the following tasks in respect of Diploma:
(a) notifying key stakeholders of the administrators' appointments including all known secured and unsecured creditors, employees, landlords and utility providers;
(b) notifying entities such as the Australian Taxation Office and the Office of State Revenue of the administrators' appointment and ensuring the administrators are registered for GST/PAYG;
(c) assessing the financial position of Diploma;
(d) liaising and meeting with management for Diploma, together with their legal advisors, to understand Diploma's businesses, key assets, operations and financial position;
(e) liaising with creditors including both unsecured and secured creditors;
(f) reviewing the security interests lodged on Diploma's personal property security registers to determine potential title claims by other secured creditors including obtaining security documents;
(g) dealing with default notices served in respect of leased premises;
(h) dealing with various litigation actions commenced prior to the appointment of the administrators;
(i) seeking access to the books and records of Diploma to identify possible creditors of Diploma and for the purposes of undertaking the investigations required of the administrators pursuant to s 439A(5) of the Act;
(j) preparing and distributing the first s 439A report to all known creditors of Diploma;
(k) reviewing proofs of debts and proxies submitted by creditors for the purposes of the first meeting of creditors of Diploma;
(l) convening and holding the first meeting of creditors for Diploma and establishing a committee of creditors for Diploma;
(m) attending to statutory notifications with ASIC;
(n) commencing investigations into the reasons for the failure of Diploma;
(o) having discussions with HopgoodGanim, the legal advisors to the Proponent of the 31 August DOCA Proposal;
(p) convening and holding meetings of the committee of creditors for Diploma;
(q) seeking access to books and records of Diploma from alternate sources including Diploma's former advisors, solicitors and auditors;
(r) attending to creditors' queries;
(s) communications and attending meetings with key stakeholders including ASIC and the Building Commission;
(t) applying to extend the convening period of the administration;
(u) preparation of the 439A report and convening the second meeting of creditors;
(v) preparation of the provisional liquidators' report pursuant to the orders made by me on 22 May 2017.
31 A question has also arisen as to whether there is any conflict in the Liquidators receiving payment for performing professional tasks in connection with putting the DOCA to creditors if leave is granted for them to appoint themselves as administrators. The point has been raised, but not strenuously pressed. Mr Hodgson makes the point that before the Liquidators initial appointment as administrators of Diploma, FPDL advanced the Initial Funding Offer of $200,000 to partially cover remuneration and out of pocket costs for the administration and any subsequent deed administration of Diploma, the Second Defendant and the Third Defendant. There were no conditions imposed on the conduct or outcome of the administration attached to the provision of the Initial Funding Offer. The payment was disclosed in the 'Declaration of Independence, Relevant Relationships and Indemnities' appearing at appendix B of the first s 439A report. There are no conditions imposed on the conduct or outcome of the administration attached to the provision of the funding offer pursuant to the terms of the 31 August DOCA Proposal (the Second Funding Offer). If the leave application is granted, the Liquidators will disclose the terms of the Second Funding Offer to creditors at the s 439A meeting.
32 It is common practice for the proponent of the DOCA proposal to make provision for the payment of administrator's fees on execution of the deed. I do not see this as a difficulty. Messrs Hodgson and Hewitt do not believe that the funding will compromise their independence in making recommendations to creditors as indicated.
33 The offer by FDPL, a secured creditor of Diploma, to provide funding to cover the Liquidators' costs to make the leave application (and if leave were granted) to convene a meeting of creditors, prepare a report and administer a DOCA, if approved by the creditors of Diploma, is not a factor compromising the independence of the Liquidators. The appropriateness of a funding proposal provided to the administrators was considered in Re Nardell Coal Corp Pty Ltd (2003) 47 ACSR 122, where Barrett J said (at [12]-[13]):
12 It may be accepted that. .. [the funding entity] has an interest in seeing the deed of company arrangement progressed. But I do not see that factor as compromising the ability of administrators funded by [the funding entity] to perform their duties in a proper way in relation to the administration in general and the deed proposal in particular.
13 This assumes, of course, that the funding arrangement entails no more than a simple and unconditional undertaking by [the funding entity] to pay the administrators' proper remuneration and expenses, with payment assured regardless of the steps they take, so as to enable them to do no more or less than to perform their duties as they see fit. Austin J commented in Bovis Lend Lease v Wily that it may be material for administrators to disclose funding arrangements to creditors. That comment appears to me to have relevance to this case and to raise at least a strong expectation that the administrators, in order to ensure that such matters cannot be the source of perceptions of unsuitability, should inform creditors, in connection with any deed proposals, or the precise terms of the unconditional and unconstricting funding arrangements they have ...
(emphasis added)
34 I do not consider that the funding by FPDL would place the Liquidators in a position of conflict should they be appointed as administrators because:
(a) it is appropriate that the costs of that application and the costs of convening the creditors' meeting, should be borne by the Proponent of the proposal sought to be put to creditors, and not by Diploma itself. In this respect, it is relevant that the FPDL undertaking to pay those costs is unconditional;
(b) it is usual for the proponent of a DOCA proposal to make provision for the payment of the fees incurred by the insolvency practitioner under the terms of the DOCA;
(c) the Liquidators, who are experienced expert insolvency practitioners whose view the Court should award weight, do not consider the provision of funding by FPDL can reasonably be asserted to compromise their ability to perform their duties as liquidators independently pending the convening of the meeting in approximately a month's time. In this regard it is noted that the provision of funding by FDPL in December 2016 for the initial administrations did not result in the Liquidators recommending acceptance of the DOCA proposal in the s 439A report; and
(d) the terms for the provision of funds to cover the administrators' provisional liquidators'/liquidators' fees will be disclosed by the Liquidators to creditors prior to any creditors' meeting.
35 The Liquidators have not lodged an application with ASIC under the AAF. If a complete application is made under the AAF, that application may be responded to within six weeks of ASIC receiving it.
36 The Liquidators are obliged to continue their investigations in relation to the Second Defendant to the Twenty-First Defendant, even if leave is granted to them to appoint themselves as administrators of Diploma. ASIC says that the Court should not give its imprimatur to any step of a procedure which it does not consider to be in the public interest: Re Depsun Pty Ltd (1994) 13 ACSR 644 per Young J (in the context of whether there should be leave given to the liquidator to become an administrator).
37 The Liquidators intend to convene the s 439A meeting within 20 business days of receipt of funding from FPDL to do so. ASIC says Mr Hodgson does not explain why it is necessary for the second meeting to be convened within this timeframe.
38 ASIC considers that it is appropriate for the second meeting to be convened only after an application to ASIC for funding from the AAF has been lodged and determined. Accordingly, ASIC says, proposed order 3(b) should be amended to read as follows:
The convening period for the second meeting of creditors of Diploma pursuant to section 439A of the Act be varied so that the second meeting of creditors may be convened at the earliest convenient date determined by the administrators but only after the administrators, in their capacity as liquidators, have applied to ASIC for funding from the Assetless Administration Fund and that application has been determined.
(emphasis added)
39 This refinement to proposed order 3(b) is in the public interest, ASIC says, for three reasons:
(a) First, whether the Liquidators have funding to investigate and pursue the recovery claims is crucial information for unsecured creditors voting at the second meeting. The liquidation scenario (high and medium) yields a better estimated return to unsecured creditors than the DOCA scenario, if funding to investigate and pursue the recovery claims can be obtained. Conversely, if funding cannot be obtained, the unsecured creditors may view the DOCA proposal more favourably. The importance of securing funding is reinforced in Mr Hodgson's affidavit sworn 11 September 2017 where he deposes (at [15]):
Even if it were to be assumed the proceedings would be successful, if we are unable to obtain funding, then the return to any creditors in a liquidation scenario is likely to be nil.
As matters presently stand, there is uncertainty about whether funding would be obtained. However, the uncertainty is self-imposed. ASIC says, it arises from the Liquidators' own decision not to apply to ASIC for funding to undertake further investigations, or apparently to investigate other sources of funding, before holding the second meeting.
(b) Second, in circumstances where the Proponent has had months upon months to formulate a proposal, and the latest DOCA proposal requires only that the proponents will 'take steps' to have Diploma reinstated to trading on the ASX by 30 June 2018, there is no material difference between holding the second meeting within 20 business days of receipt of funding from FPDL and holding the second meeting after determination of the AAF application, which may be responded to within six weeks from receipt.
(c) Third, the Liquidators' 'self-imposed' timeframe for convening the second meeting may not provide adequate opportunity to enable a thorough investigation of ASIC's concerns about the latest DOCA proposal. ASIC's concerns ought to be investigated by the administrators. The results of such investigation ought to be conveyed to creditors at the second meeting to enable them to make a fully informed decision.
40 The Court is not unduly constrained in the way it exercises the discretion conferred by s 436B(2): Taylor, in the matter of Origin Internet Solutions Pty Ltd (in liquidation) [2004] FCA 382 (at [6]). As to the essential question of whether it is appropriate that the Liquidators be appointed as the administrators of Diploma, in answering this question, it is necessary to consider whether there is any matter such as a conflict of interest, a threat to independence, or anything else offensive to commercial morality in such an appointment: Schwarz, in the matter of Gordon Smith Marketing Pty Ltd (Administrator Appointed) [2016] FCA 1378 (at [11]). Although the cases talk about the test not being a high one or an onerous one, in Re Keldane Pty Ltd (in liq) [2011] VSC 385, Pagone J observed that the granting of leave is not something to be treated as 'a mere formality, or mere procedural obstacle'. His Honour stated (at [13]):
… Section 436B is the expression of a legislative policy designed to keep separate the roles, tasks, duties and privileges of liquidators on the one hand and of administrators of a company on the other. Its terms require compliance and dispensation from its requirements should not be given lightly.
41 ASIC's main concern derives from what it describes as a conflict between the Liquidators' duties as administrator of Diploma and the Liquidators' duties as liquidator of the Second to Twenty-First Defendants. There are two manifestations, ASIC says, of the 'threat to independence'.
42 First, the Liquidators represent the interests of the Fourth, Ninth and Twentieth Defendant as creditors of Diploma. On behalf of those companies, the Liquidators will seek to admit those claims for those companies to vote at the second meeting. The 'threat to independence' is that as administrators, the Liquidators will be tasked with the duty of forming a view as to the validity and amount of claims against Diploma for the purpose of admitting those who claim to be its creditors to vote at meetings: Re Chilia Properties Pty Ltd (1997) 73 FCR 171 where Lehane J stated (at 173) that:
Section 448C quite plainly contemplates that a person who is a liquidator of a creditor of a company may nevertheless be appointed as administrator of the debtor company […] and it is well established that in the absence of any real, as opposed to theoretical, conflict of interest it is generally desirable that the external administration of a group of companies should be placed in the hands of one administrator.
43 The directors of Diploma say that the Fourth Defendant is owed the amount of $2,651,866. However, the CHEOPS system records the amount owed to the Fourth Defendant as $3,453,026.05. On this topic I note that, if appointed as administrators, the Liquidators have undertaken not to submit a proof of debt on behalf of any entity that they have been appointed as administrators or liquidators for voting purposes at the meeting of creditors.
44 Secondly, there is an inherent tension, ASIC says, between the Liquidators performing the role of 'surgeon' for Diploma and 'undertaker' for the Second to Twenty-First Defendants. As the liquidator of the Second to Twenty-First Defendants, the Liquidators may well be investigating the alleged misconduct of officers of the Proponent. Simultaneously, the Liquidators will be working collaboratively with officers of the Proponent to save Diploma in circumstances where:
(a) the Liquidators will be receiving money from the Proponent apparently upon the completion of milestones such as the execution of the DOCA; and
(b) the Liquidators will not be investigating the alleged misconduct of officers of Diploma during the attempt to resuscitate Diploma.
45 A liquidator, or provisional liquidator, is at liberty under s 436B(1) of the Act to appoint another person as administrator without the necessity of leave. Therefore, whether leave should be granted in an application pursuant to s 436B(2) depends on the whether the person or persons seeking to be appointed are appropriate to be appointed to that office: John R Turk & Sons (Artarmon) Pty Ltd v Newmont Television Pty Ltd [1999] NSWSC 622 per Austin J (at [14]).
46 As noted, the test for leave is not a high one, and an important part of its context is that the Court does not control the decision whether or not there is to be an administrator, and is asked for leave only on the subsidiary question of who that is to be: Re Cobar Mines Pty Ltd (in liq) (1998) 30 ACSR 125 per Bryson J (at 126).
47 In Parkes Leagues Club Co-Op Limited [2004] NSWSC 16 (at [5]), Hamilton J cited the desirability of continuity of those in charge of the management of the company and the implementation of a DOCA proposal as a reason why a liquidator should generally be given leave to appoint himself as administrator, unless there is some distinct reason as to why that person should not be deemed a suitable person in the circumstances.
48 The granting of leave pursuant to s 436B(2) of the Act requires consideration by the Court as to the appropriateness of a party: Deputy Commissioner of Taxation (Cth) v Foodcorp Pty Ltd (1994) 13 ACSR 796. In Turk v Newmont, Austin J held (at [14]):
Given that [the liquidator] has had no association with the company and its directors before being appointed liquidator by this Court and that on his evidence he has not built up any personal relationship with directors after the appointment and that he has accumulated understanding of and information about the company in the performance of his duties as liquidator, I am persuaded that he is an appropriate person for the appointment.
49 The guiding principle in relation to the qualification and removal of an external administrator is that they must be both independent and seen to be independent of any matter requiring investigation: Flynn v Theobald [2008] WASC 263 (at [105]), citing Re National Safety Council of Australia [1990] VR 29 (at 34-35).
50 As noted, in Re Chilia (at 173), Lehane J held:
... it is well established that in the absence of any real, as opposed to theoretical, conflict of interest it is generally desirable that the external administration of a group of companies should be placed in the hands of one administrator.
51 The Liquidators have previously been administrators and are willing to be appointed as administrators of Diploma. The Liquidators say that they are able to perform the role of administrators and would be able to avoid the costs and expenses involved in the repetition of work already undertaken during the previous period of appointment as administrators of Diploma.
52 The Liquidators believe there may be the possibility for a greater return to unsecured creditors of Diploma.
53 Significantly, the Liquidators consider that it is appropriate to provide the creditors of Diploma with the opportunity (only) to determine whether to accept the DOCA proposal. That is, while they consider that there remain uncertainties as to whether the DOCA conditions will be satisfied, if they were resolved, then the DOCA may provide a better return for creditors than would be received in a winding up given that the Liquidators are currently without any funding to pursue recovery proceedings in the liquidation.
54 It is important to recognise that neither the appointment of the Liquidators as administrators by leave pursuant to s 436B(2)(g), nor the resolution of the creditors to approve a DOCA, would automatically terminate the winding up of Diploma: see Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70; Re Nardell Coal Corporation Pty Ltd [2004] NSWSC 281 per Austin J (at [74]) and s 482 of the Act. The Proponent acknowledges this in the concluding words to para 1(c)(iv) of the 31 August DOCA proposal. Indeed, one of the matters the Court must expressly take into account on an application to terminate the winding up is the content of the DOCA. In Mercy v Wanari Austin J said (at [47]-[53]):
Termination of the winding up by Court order
47 In considering an application to stay or terminate a court-ordered winding up under s 482, the Court has regard to various categories of interests. First, the Court considers the interests of creditors, taking into account whether they object to the proposed termination. But even if all the existing creditors agree, the Court may take the view that the proposed termination puts at risk the interests of future creditors. For example, the Court is likely to be concerned where the proposal preserves the existing debts but defers their payment, particularly if the deferment has no enforceable status: see the remarks of Street J at first instance in Re Data Homes Pty Ltd [1971] 1 NSWLR 338, 341. Similarly, if the proposal is that the principal shareholder/creditor will pay out all the other creditors and seek recovery of his debt by instalments, the Court is unlikely to permit the company to start trading again and thereby incur additional debts, since if the company fails again, recovery by the new creditors may be prejudiced by the existing debt. However, if the principal shareholder/creditor capitalises his debt, the Court may well take a different view: Collins v G Collins & Sons Pty Ltd (1984) 9 ACLR 58.
48 The cases concerning the interests of creditors do not, in my opinion, establish inflexible rules. Specifically, I do not believe that there is any absolute rule that a winding up cannot be terminated as long as one or more debts remains undischarged. Instead, the cases identify the range of concerns which the Court is likely to have in exercising its discretion when an application is made, and therefore give guidance as to the matters upon which the Court will need to be satisfied.
49 Second, the Court considers the interests of the liquidator, particularly with respect to costs. That is not an issue on the facts of the present case.
50 Third, the Court considers the interests of contributories. Generally a stay or termination will not be granted unless each member of the company either consents or is otherwise bound not to object to it, or his or her rights are properly secured: Re Calgary and Edmonton Land Co Ltd [1975] 1 All ER 1046. In the present case there are two contributories, and they have both consented to resuming office as directors if the application succeeds. In my opinion this implies that they have consented as contributories as well.
51 Finally, the Court considers the public interest, including matters of commercial morality, taking the initial approach that insolvent companies should be wound up: Re Data Homes Pty Ltd [1972] 2 NSWLR 22. It is unnecessary to elaborate further in this case.
52 The applicants submit that if the approach outlined in the cases were to be taken in the present circumstances, the objects of Part 5.3A would be likely to be thwarted. They say that if a company in winding up is placed in administration and a deed of company arrangement is worked out, the Court should take an approach that maximises the chances of the company continuing in existence - or, if that proves not to be possible through failure of the deed, an approach that results in a better return for creditors than dissolution in winding up. They say that the case law stands in the way of these outcomes, because it prevents the Court from countenancing an arrangement under which debts are released without full payment, and some 'non-participating' creditors remain as such after the company resumes trading.
53 I have already expressed the view that the cases should not be seen as standing for any such absolute rules. They identify the range of discretionary concerns which the Court will need to address. If the company applies for an order terminating the winding up after its creditors have approved a deed of company arrangement, the objects of Part 5.3A are relevant matters, and in many cases they will be matters of great importance. Young J acknowledged their importance in Re Depsun, for example. Section 435A cannot be disregarded where the question of termination of a winding up arises in an administration context, whether the issue is presented under s 482 or under some provision of Part 5.3A, such as s 447A. The concerns reflected in the case law, including the pre-1993 case law which was mainly decided in the context of creditors' schemes of arrangement, will remain, but the Court will evaluate the application for termination in light of all the facts, including the terms and effect of the deed.
55 As the Liquidators do not now seek an order staying or terminating the winding up as part of the application, considerations such as 'the public interest, including matters of commercial morality' if the DOCA were to be approved are not presently relevant for the purposes of the leave application: Re Nardell Coal (at [60]-[75]).
56 The only issue on an application under s 436B(2)(g) of the Act is whether the Liquidators are appropriate persons to be administrators: Foodcorp; Re Cobar.
57 The most important consideration is independence, and specifically to ensure that there is no conflict of duty or interest if the liquidator is appointed as administrator: Taylor, in the matter of Origin Internet Solutions (at [5]); Peter Ngan, re JKB Constructions Pty Ltd [2006] NSWSC 1040 (at [5]).
58 Provided there is no potential for conflict, where considerable work has already been undertaken, it would be in the interests of creditors to grant leave as it would save considerable time, trouble and expense in the administration: Taylor, in the matter of Origin Internet Solutions (at [7]); Re Delsana Holdings Pty Ltd (in liq) [2013] FCA 500 (at [4]). The Liquidators have been in control of Diploma since 22 December 2016, having been originally appointed as administrators of Diploma on that date, and provisional liquidators of Diploma on 22 May 2017. During that period, the Liquidators and their staff have undertaken significant work, and gained an in-depth knowledge of Diploma's business and affairs, with the effect that their appointment as administrators would be more cost-effective than if any other person was appointed. Appointing the Liquidators as administrators of Diploma would reduce duplication and the costs associated with further steps being taken which would need to be borne by Diploma if a third party was appointed.
59 It is significant that the Liquidators consider that creditors should have at least an opportunity to vote on a DOCA, even if the Liquidators remain of the view that the creditors should vote against it. Secondly, even if that vote is in favour of the DOCA, it will be on an application to terminate the liquidation, that the appointment of the DOCA receives attention. The two stage process makes it clear that the constraints about any DOCA require consideration at the second stage, rather than at this application. In relation to investigations, I accept the Liquidators' contention that they have an obligation to undertake statutory investigations and to submit a report under s 533, but they do not have any money to undertake further investigations than that. In a comprehensive s 439A report, they have already (for the first administration) undertaken investigations.
60 The Liquidators have disclosed in the first s 439A report that they consider that offences may have been committed by officers of Diploma. They have already advised creditors that recovery actions are available, however, they have also pointed out to creditors, as they are obliged to do, that the prospect of recovery in any liquidation depends upon the usual litigation factors. First, they have to obtain funding for that litigation. Secondly, they have to obtain a judgment and, if they obtain a judgment, whether there is going to be any dividend available to creditors which will depend upon whether or not the Defendants have sufficient assets to satisfy any judgment.
61 All of those issues will be repeated in the s 439A report by the Liquidators on administration, if leave is given.
62 Although ASIC appears to criticise the Liquidators for failure to apply the AAF, they have not been in any position to do so prior to being appointed which was less than seven days prior to the criticism being raised. The other criticism about convening the meeting within 20 days seems to overlook the legislative requirement as contained in s 439A(5)(b) of the Act, which suggests 20 days.
63 Finally, to revisit issues that may arise as to the appropriateness of Liquidators' voting on behalf of certain creditors within the group in light of disputes as to the quantum, if any, of various intercompany loans. As noted, an undertaking was offered during the course of the hearing that the administrators of Diploma would not submit a proof of debt on behalf of any entity that they have been appointed as administrators or liquidators for voting purposes at the meeting of creditors. Rather than hold the Liquidators to that specific undertaking, I am satisfied that the Liquidators will exercise their own professional judgement as to the correct course to take depending on the circumstances as they arise.