(2015) 110 ACSR 203
- Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235
(2005) 226 ALR 510
- Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883
(2003) 47 ACSR 391
- Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd [2001] NSWSC 89
(2001) 37 ACSR 394
- Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to deed of company arrangement) (No 3) [2011] FCA 1403
Source
Original judgment source is linked above.
Catchwords
(2015) 110 ACSR 203
- Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235(2005) 226 ALR 510
- Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883(2003) 47 ACSR 391
- Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd [2001] NSWSC 89(2001) 37 ACSR 394
- Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to deed of company arrangement) (No 3) [2011] FCA 1403(2011) 289 ALR 69
- Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261(2005) 228 ALR 598
- Guo v SongRe SG Capricorn Investments Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12
- Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402(1999) 217 ALR 527
- Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395(2002) 44 ACSR 21
- Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) [2007] SASC 296(2007) 64 ACSR 91
- Public Trustee (Qld) v Octaviar Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2009] QSC 202(2009) 73 ACSR 139
- Re Hayes Steel Framing Systems Pty Ltd (admins apptd) [2017] NSWSC 385
- Re Pilot Advisory Pty Ltd [2019] FCA 2171(2019) 141 ACSR 458
- Re Recycling Holdings Pty Ltd [2015] NSWSC 1016
By Originating Process filed on 6 November 2019, the Plaintiffs, Action Scaffolding & Rigging Pty Ltd (in liq) ("Action") and its liquidators, Mr Park and Ms Trenfield, sought orders under s 445D(1)(e)-(f) or s 447A of the Corporations Act 2001 (Cth) that a deed of company arrangement ("DOCA") dated 17 April 2019 between the First Defendant, Citadel Financial Corporation Pty Ltd (subject to deed of company arrangement) ("Citadel") and Mr Timothy Cook as its deed administrator (to whom I refer as Mr Cook, by contrast with Mr DL Cook who appears with Mr Rose for Citadel) be terminated and that Citadel be wound up in insolvency. The basis of that application was elaborated by a Statement of Claim, as amended, dated 17 April 2020.
I first set out a brief chronology of events, drawn from the Plaintiffs' chronology, the Statement of Claim and the documents in evidence. It appears that Citadel's business was to provide loans, largely to its related entities and entities related to its sole director, Mr Maiolo (Cook 15.5.20 [8]) and that it ceased operating around 2015 (Cook 15.5.20 [9]). On 13 March 2019, Action and the liquidators obtained judgment against Citadel in proceedings in the Federal Court of Australia. Citadel was then placed into voluntary administration and Mr Cook was appointed as its voluntary administrator, and Citadel's holding company, Gemaveld Pty Ltd ("Gemaveld") paid $50,000 to Mr Cook as a contribution toward the costs of the voluntary administration. On 3 April 2019, Mr Cook entered into an agreement with Gemaveld by which it indemnified him in respect of the costs of an appeal against the judgment of the Federal Court, which was subsequently brought and was unsuccessful.
Gemaveld proposed a DOCA in respect of Citadel and Mr Cook's evidence is that, in negotiating that proposal with Gemaveld, he requested that the proposed DOCA include a "top-up" clause so that the Deed Fund would not fall below the specified amount but Gemaveld rejected this request (Cook 15.5.20 [35]). On 9 April 2019, Mr Cook issued his report under s 439A of the Corporations Act ("s 439A report") to Citadel's creditors. The s 439A report recorded, inter alia, that Citadel was likely insolvent as early as June 2015, that it had ceased trading by June 2015 and that it subsequently wrote off debts of $2,466,589 owed to it in June 2017. That report also noted the possibility that, on a winding up, Citadel's liquidator might have claims for insolvent trading against a director of Citadel, Mr Maiolo, and against Gemaveld, although it also noted uncertainty as to the prospects of that claim in respect of Mr Maiolo's financial position, Gemaveld's financial position and the possibility that any insolvent trading claim would be defended. Mr Cook assessed the then likely return to the three Participating Creditors under the proposed DOCA, namely the Deputy Commissioner of Taxation ("DCT") (with a debt of $1,418,455.59), Action (with a debt of $131,747) and Citadel's solicitors, Bridges Lawyers (with a much smaller debt of $1,457.50) as 1.97 cents in the dollar.
By letter dated 16 April 2019, the solicitors for the Plaintiffs identified concerns as to the s 439A report, including concerns that Mr Cook had undertaken insufficient investigations and had taken the books and records maintained by Citadel at face value despite certain matters which they contended should give rise to concern as to their accuracy. They also referred to the observations of Brereton J in Re Sales Express Pty Ltd (admins apptd) [2014] NSWSC 460, to which I refer below, and contended that the position in respect of the proposed DOCA in this case was analogous to that referred to in Sales Express, and that the only person who would benefit from the proposed DOCA was Mr Maiolo, who, they contended, would avoid examination of his conduct as a director of Citadel; dispose of debts owed to Citadel's unrelated creditors whilst preserving the claims of related and friendly creditors; and regain control of Citadel. That letter foreshadowed that, if the proposed DOCA was adopted, the Plaintiffs would carefully consider an application to terminate the DOCA under s 445D of the Act, which they have now brought.
On 17 April 2019, Citadel's creditors resolved at the second meeting of creditors that Citadel execute the DOCA and that Mr Cook be appointed as deed administrator. That resolution was approved on the voices. Action and the DCT opposed the DOCA resolution (McKnoulty 18.2.20 [29.1]). The DOCA provided, in cl 2.1, for conditions precedent, including the entry into a Deed of Deferral by Deferred Creditors (as defined) and the payment of a Contribution (as defined) to Citadel. The "Deferred Creditors" were 12 named companies and persons, which were largely associated with Citadel, Gemaveld or Mr Maiolo, who would not receive a payment under the DOCA and whose claim would not be extinguished by the DOCA. Clause 5.1 provided that the Deed Fund would comprise the Retained Cash (as defined) and the Contribution (as defined). The amount of the Retained Cash was any amount contained in the administrator's account as at the Commencement Date (as defined). It appears that that amount had been exhausted by the time of the commencement of the DOCA. The "Contribution" was defined as an amount of $65,000.
Clause 6.2 of the DOCA set out the priority in which the Deed Fund would be distributed, namely, first to the payment of the administrator's and deed administrator's disbursements, plus GST; second, to the payment of the administrator's remuneration, plus GST; third, to payment of Priority Creditors and any Subrogating Employee Creditors (as defined); fourth, pro rata to Participating Creditors, with any balance to be refunded to the Company. Since the Deed Fund would not be increased by any top-up arrangement, it followed that, if the amount of the administrator's and the deed administrator's disbursements and remuneration exceeded the amount of the Contribution, namely $65,000, then Participating Creditors would receive no financial benefit from the DOCA. Clause 8.2 of the DOCA further provided that:
"If the Deed Administrator has paid to the Participating Creditors their full entitlements under this Deed, all claims of the Creditors (other than the Deferred Creditors) are released in full and extinguished. Creditors (other than the Deferred Creditors) must accept their entitlements under this Deed in full satisfaction and complete discharge of all Claims."
A Deed of Deferral, which was a condition precedent to the DOCA, in turn provided that Deferred Creditors (as defined) would not make any claim against the Deed Fund in respect of the Deferred Claims (as defined) during the Deferment Period (as defined) and acknowledged that their claims against the Company with respect to the Deed Fund would be barred during the Deferment Period. Deferred Creditors also agreed that, on the expiry of the Deferment Period, they would forebear from seeking repayment of all or some of the unpaid balance of their claims until the Company had capacity to pay any such repayment and forebear from enforcing any securities which they had against the Company. There is no evidence of any activities of the Company, since the DOCA was implemented, which would allow any capacity for repayment of the Deferred Creditors. After the DOCA was signed, the control of Citadel was returned to Mr Maiolo under cl 10.1 of the DOCA and it opposes the termination of the DOCA.
By letter dated 9 July 2019, the solicitors for the Plaintiffs sought an undertaking from Mr Cook that he would not effectuate the DOCA, pending resolution of an application to terminate the DOCA. That undertaking was ultimately given, on the basis of an undertaking as to damages given only by Action (which was, of course, in liquidation) and not by the liquidators personally.
By letter dated 17 March 2020, the solicitors for Mr Cook wrote to the solicitors for Citadel noting that the administrator's and deed administrator's remuneration and disbursements now exceeded the amount of $65,000 that had been contributed to the Deed Fund. They noted that:
"Accordingly, the present position is such that if no further contribution is made to the Deed Fund, the distribution to Participating Creditors will be zero. Such an outcome would ultimately provide no better outcome to creditors than the immediate winding up of the Company and would necessarily favour the setting aside of the DOCA given that the Plaintiff in the Proceeding has indicated a willingness to fund its proposed liquidator to conduct further investigations into the affairs of [Citadel]."
Mr Cook's solicitors there suggested that a further contribution be made by Citadel or a third party to restore the Deed Fund to an amount that would permit the dividend estimated to be paid to Participating Creditors as contemplated by the proposal approved by creditors and that the deed administrator be indemnified for his further costs and expenses of the proceedings. That request was rejected by letter dated 24 March 2020 from Citadel's solicitors. By that date, the Deed Fund established under the DOCA was exhausted by Mr Cook's claims for remuneration (capped at $15,000 plus GST) and disbursements (which were over $68,000, exclusive of GST) although Mr Cook attributes that to the existence of this dispute (Cook 15.5.20 [48]-[50]).
[4]
Affidavit evidence
The Plaintiffs rely on the affidavit dated 3 October 2019 of Ms Trenfield, one of Action's liquidators. Ms Trenfield there criticises the s 439A report on the basis that it did not provide any value of the claims available against Mr Maiolo or Citadel's holding company, Gemaveld, and contended (in evidence admitted as submission only) that Gemaveld had cash at bank or at least had access to funds that allowed it to indemnify the deed administrator in respect of the costs incurred in unsuccessfully prosecuting the appeal against the Federal Court's judgment. Ms Trenfield also addressed the effect of the DOCA, to which I have referred above, and noted that the DOCA would not bring about any return to Participating Creditors if (as is now plainly the case, at least by reason of these proceedings) the costs and disbursements incurred by the deed administrator exceeded $115,000. (In fact, as I noted above, that result arose once those costs and disbursements exceeded $65,000). Ms Trenfield also noted, without further elaboration, that the Australian Taxation Office ("ATO") had agreed to provide financial assistance to her in support of this application in the form of an indemnity for costs.
By an affidavit dated 28 October 2019, Mr Henry, a solicitor acting for the Plaintiffs, referred to the proceedings between Action and its liquidators on the one hand and Citadel on the other in the Federal Court of Australia, the history of the administration and the deed administration, and correspondence between the Plaintiffs' solicitors and the liquidators' solicitors in respect of the Plaintiffs' concerns as to the DOCA. Mr Henry also exhibited company searches which disclosed the relationships between several of the Deferred Creditors and Mr Maiolo and Gemaveld. Mr Henry also referred to concerns he had expressed as to the DOCA at the second meeting of creditors, in evidence which was admitted as evidence of what was said and not as proof of the asserted facts.
By an affidavit dated 18 February 2020, Mr McKnoulty, who is employed in the Significant Debt Management section in the ATO in Brisbane, referred to the orders sought by the Plaintiffs in the proceedings and gave evidence in support of those orders. Mr McKnoulty referred to a formal proof of debt or claim lodged by the DCT in Citadel's administration, to the s 439A report and to his attendance by telephone at the second meeting of creditors. Mr McKnoulty's evidence was that both the ATO and Action voted against the entry into the DOCA, and he also led evidence of the relationships between the Deferred Creditors and Mr Maiolo and persons associated with him. Mr McKnoulty's evidence, admitted as a submission only, was that the DCT was concerned that, unless the DOCA was set aside, unrelated creditors who did not vote for it would receive a comparatively small distribution whereas parties who voted in favour of it, largely related to Mr Maiolo, would not be bound by it and their debts would continue to exist after the DOCA was finalised. Mr McKnoulty also identified, in evidence also admitted as a submission only, the DCT's concern that Citadel would be insolvent, after the DOCA was effectuated, because it had ceased most of its trading in the year ended 30 June 2015 but would continue to have Deferred Creditors with claims against it of over $9,000,000.
[5]
Applicable principles
I will address the applicable legal principles and the parties' submissions in respect of each of the grounds on which the Plaintiffs relied together, since there was a degree of overlap in the parties' submissions in that regard. I will then turn to further evidence led and submissions made after the hearing, by leave, in respect of the availability of funding to a liquidator appointed to Citadel.
First, the Plaintiffs seek an order terminating the DOCA under s 447A of the Corporations Act. The Court plainly has jurisdiction to make such an order in an appropriate case. In Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527, in a passage quoted with approval by Campbell J in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510, Fitzgerald JA (with whom Beazley JA and Davies AJA agreed) observed that:
"… the Court should not encourage the notion that 'anything goes' provided only that a deed of company arrangement provides some benefit for dis-satisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the Court's refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently."
In Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391, Barrett J terminated a voluntary administration where a company's sole director placed the company in voluntary administration with a view to adopting a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value that would bar particular claims already being litigated against the company. In Public Trustee (Qld) v Octaviar Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2009] QSC 202; (2009) 73 ACSR 139 at [182], McMurdo J noted that a winding up may serve the public interest where investigations and recovery proceedings are likely to be funded and could realistically lead to persons who engaged in suspect transactions being brought to account.
In Re Sales Express Pty Ltd (admins apptd) above, Brereton J reviewed the scope of the Court's power to terminate a voluntary administration under s 447A of the Act and observed (at [19]) that:
"It is clear from s 447A(2)(b) that the Court may make an order that an administration end, if the administration provisions of the Corporations Act are being abused. In Workers Compensation Nominal Insurer v Perfume Empire Proprietary Ltd [2011] NSWSC 379, Barrett J, as his Honour then was, observed (at [22]) that the cases in which the Court had intervened under that provision to terminate a voluntary administration were cases in which there had been what might be termed as some ulterior element or purpose. His Honour referred to cases in which the directors had put the company into administration not for a purpose envisaged by the legislation but with a view to installing an administrator who might be more compliant than the provisional liquidator already in office [Aloridge v Christianos (1994) 13 ACSR 99]; where a secured creditor had imposed an administrator when an appeal by the company was pending against the dismissal of its application for an order setting aside a statutory demand served by that creditor [Spacorp v Australia Pty Ltd v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 1979]; where a sole director imposed voluntary administration with a view to the adoption of a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value, which would bar particular claims already being litigated against the company [Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2007) 47 ACSR 391]; and where an administrator was imposed by the sole director in the face of a pending winding up application, in order to manipulate the relation-back day to his own personal advantage [St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd (2004) 210 ALR 265; (2004) 50 ACSR 443; [2004] NSWSC 851]. His Honour distinguished (at [25]) the case then under consideration from one in which there had been an attempted distortion or manipulation or one where any enhancement of the return to creditors generally would be at the expense of persons who had been innocent bystanders in the event leading to voluntary administration and ultimate winding up."
[6]
The parties' submissions
Mr Simpkins, who appears for the Plaintiffs, submits that the DOCA should be terminated under s 447A of the Act on the basis that it benefits Gemaveld and Mr Maiolo by avoiding the winding up of Citadel and the consequent investigation of Citadel's affairs by a liquidator, including in respect of insolvent trading claims; does not materially affect the interests of the Deferred Creditors; was executed despite the objections of the majority of Participating Creditors; and was proposed and would be effected, unless terminated, without a proper investigation into the conduct of Citadel's affairs. The Plaintiffs also contend that Citadel was insolvent; did not continue to trade; and would remain insolvent if the DOCA was effectuated, by reason of the claims of the Deferred Creditors, and that the DOCA was an abuse of the processes of Part 5.3A of the Act.
Mr Simpkins also relies on Australian Securities and Investment Commission v Midland Hwy Pty Ltd (admin apptd) above to submit that the DOCA should be terminated on the basis that it will not restore Citadel to financial health; has the purpose or effect of quarantining Mr Maiolo, Gemaveld and other related creditors of Citadel from investigation and recovery proceedings, and provides no benefit for creditors. The first of these propositions is plainly now correct, and the second is likely correct, where there was no apparent other benefit to be obtained by Deferred Creditors from voting in favour of the DOCA, since there was then no indication that Citadel would recommence its business so as to generate returns for them, and it did not do so.
Mr Simpkins also submits that the DOCA is oppressive and unfairly prejudicial to Participating Creditors because it was carried on the vote of creditors associated with Citadel, Gemaveld or Mr Maiolo and has been imposed upon the majority of Participating Creditors against their will and was then likely to produce no more than a nominal dividend and, in the events that have occurred, produce no dividend for Participating Creditors, and would release Citadel from claims of Participating Creditors but not from claims of Deferred Creditors. Mr Simpkins also submits the DOCA is contrary to the interests of creditors of Citadel as a whole, because the Deferred Creditors who voted in favour of it will receive no benefit from it, the Participating Creditors oppose it and, I would add, they initially stood to receive a minimal financial benefit from it and will now receive no benefit from it. I would be inclined to accept these submissions, if it were necessary to do so in order to determine the matter.
[7]
Further evidence and submissions as to the availability of funding for a liquidator
Mr DL Cook put significant weight at the hearing on the availability of funding arrangements for any liquidator appointed to Citadel. Because of the potential significance of this matter, I made orders at the conclusion of the hearing, for the reasons set out in a separate judgment, that allowed liberty for the Plaintiffs to advise the position as to the funding of a liquidator's investigation and of any consequential proceedings, and allowed the parties an opportunity to be heard further as to the implications of that advice.
The Plaintiffs filed three further affidavits on 26 June 2020 pursuant to that leave. By an affidavit dated 26 June 2020, Mr Thomas, who is Director in the Debt and Lodgement Management Team in the Service Delivery Business Line in the ATO, led evidence that the DCT was prepared to provide initial funding of $30,000 to a registered liquidator nominated by the Plaintiffs who is appointed to Citadel. Mr Thomas referred to the legislative constraints on the expenditure of public funds and indicated that, in his opinion, the DCT was unable responsibly to provide further initial funding until a further report to creditors had been issued, but observed that:
"This does not detract from the DCT's strong view that the affairs of [Citadel] warrant a proper investigation by a liquidator and the DCT will favourably consider any reasonable request from a liquidator of [Citadel] for additional funding."
Mr Thomas also offered an undertaking, on behalf of the DCT, on the basis of his delegation and authority with respect to funding arrangements, that:
"(a) Subject to the DCT entering into a suitable funding agreement with a liquidator appointed to [Citadel] the DCT undertakes to provide initial funding to a liquidator of up to $30,000.
(b) The DCT undertakes to favourably consider any further, reasonable request for funding made by any liquidator appointed to [Citadel]."
The Plaintiffs also read a further affidavit dated 26 June 2020 of Mr Staatz, who is a registered liquidator with substantial experience in insolvency and restructuring, who has consented to appointment as liquidator of Citadel. Mr Staatz referred to the steps that he would take to discharge his statutory and regulatory duties if appointed as liquidator of Citadel, including investigating and reporting to creditors as to its affairs, and indicated that he was prepared to undertake those responsibilities, including the preparation and issue of a statutory report, without funding. He also noted that, in his experience, Court-appointed liquidators would generally not obtain creditor or third party funding until some investigations had been undertaken, and usually after the issue of the statutory report which would allow prospective funders to assess the merits of any request for funding. Mr Staatz also outlined the circumstances in which he would seek funding from creditors or third parties in Citadel's liquidation, and noted that he had pursued successful claims for the benefit of creditors in other litigation without the benefit of funding.
[8]
Determination, orders and costs
I have concluded that the DOCA should be set aside under s 447A of the Act and Citadel should be wound up. I have largely addressed the reasons for that result in dealing with the parties' submissions above. In summary, the only significant creditors of Citadel who would benefit in a minimal way from the DOCA, at the point it was executed, opposed it and they will now not benefit from it in any event. The only creditors of Citadel who voted in favour of the DOCA were associated with Citadel, Gemaveld or Mr Maiolo which would receive no apparent benefit from it, other than any collateral advantage obtained by Mr Maiolo or Gemaveld of deferring or avoiding any claims against them. The DOCA did nothing to promote the continued operation of Citadel's business, which had ceased, or the welfare of its employees, since there is no evidence that it had any. The entry into the DOCA was an abuse of the process of Pt 5.3A of the Act and it should now be set aside. It does not matter, for that purpose, whether the ATO will fund further investigations or proceedings brought by a liquidator of Citadel, since this order can and should be made to preserve the integrity of Pt 5.3A of the Act. It is not necessary to decide whether an order terminating the DOCA would be made under s 445D(1)(e) or s 445D(1)(f) of the Act, where I have held above that the DOCA should be terminated under s 447A of the Act.
Costs should follow the event and Citadel should pay the Plaintiffs' and Mr Cook's costs of the proceedings. I have not neglected Mr DL Cook's and Mr Rose's further submission that, if the Court concludes that the further evidence as to the funding of a liquidator discloses sufficient benefit for creditors to justify a termination of the DOCA, then the Plaintiffs should pay Citadel's costs in the proceedings by reason of the lateness of that evidence. I do not accept that submission, where the Plaintiffs' application would have succeeded in any event, for the reasons noted above, and without regard to that further evidence.
I make the following orders:
1. The DOCA dated 17 April 2019 between the First Defendant, Citadel Financial Corporation Pty Ltd (subject to deed of company arrangement) and the Second Defendant, Mr Timothy James Cook, be terminated.
2. The First Defendant be wound up in insolvency.
3. Mr Steven Staatz be appointed as liquidator of the First Defendant.
4. The First Defendant pay the Plaintiffs' and the Second Defendant's costs of the proceedings.
[9]
Amendments
21 July 2020 - Amendment to Representation.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 21 July 2020
Parties
Applicant/Plaintiff:
- Australian Securities and Investments Commission
The First Defendant, Citadel, did not lead evidence. The Second Defendant, Mr Cook as its deed administrator, relied on his affidavit dated 15 May 2020 which referred to the nature of Citadel's business and again expressed the view that it had ceased its trading operations in or about 2015. He referred to his appointment, initially as voluntary administrator to Citadel, to the conduct of the voluntary administration and the issue of the s 439A report and the second meeting of creditors, at which he did not exercise a casting vote with respect to the resolution that Citadel execute the DOCA, which passed on the voices based on both the number of creditors and the value of creditors resolving in favour of the resolution. Mr Cook also referred to the circumstances in which the Deed Fund established under cl 5.1 of the DOCA had been exhausted by his disbursements and remuneration, and to the fact that Citadel had declined his request to restore the Deed Fund to an amount that would permit the dividend estimated to be paid to Participating Creditors as set out in the s 439A report, or to indemnify him for his further expenses in relation to these proceedings so as to avoid any further dissipation of the Deed Fund. Mr Cook noted that there will be no return to the Participating Creditors from the Deed Fund and the DOCA no longer provides a better return to creditors than a winding up in these circumstances, and also noted that the DCT, Action and the liquidators support the termination of the DOCA and the winding up of Citadel. Mr Cook expressed the view that the DOCA is therefore no longer in the interests of creditors as it provides no additional benefit to creditors in comparison to a winding up of Citadel, and on that basis the DOCA should be set aside and Citadel should be wound up.
His Honour emphasised the significance, in that case, of the facts that the only unrelated creditor was opposed to the administration continuing and that, if one looked at the interest of creditors generally, there was nothing in the proposed deed of company arrangement for the benefit of the related creditors who proposed to vote in favour of the deed, and the only apparent benefit in the deed is for the unrelated creditor, who did not support it. Each of these elements is also present in this case, although here the DOCA has been executed. His Honour also observed (at [27]-[29]) that:
"That review of the position reveals that the only person who will benefit from the deed of company arrangement is in substance Mr Gerard, who will avoid the prospect of companies in which he has a very substantial interest from being pursued for debts owed to Sales Express; he will also avoid examination of his conduct in connection with the transfers of the trademarks; and he will avoid any investigation of the solvency of the company and when in truth it became insolvent. It can only be to procure substantially those benefits for him that the related creditors under his control would endeavour to foist the deed of company arrangement on the unrelated creditor Rank Arena.
The provisions of Pt 5.3A were not intended to enable directors, through their control of the majority of creditors, to avoid having their conduct of the affairs of the company scrutinised, at least where the unrelated creditors desire that to happen. That is not to say that the interests of related creditors are necessarily to be disregarded: they may have as valid and proper an interest in the outcome of an insolvency as an unrelated creditor. But as in Alternative Business Solutions and in this case, where they wish to vote in favour of a deed of company arrangement which offers no benefit for them and which the unrelated creditors do not wish to have imposed on them, generally speaking the interests of the unrelated creditors will prevail.
For those reasons, I am satisfied that the provisions of Pt 5.3A are being abused in the relevant sense, and accordingly that the administration should end."
In Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) [2015] FCA 1360; 110 ACSR 203, Beach J considered the circumstances in which an order could be made under s 447A of the Corporations Act to set aside a resolution of creditors before a deed of company arrangement was executed, and noted the relevance of the factors under s 445D of the Corporations Act in those circumstances. His Honour held that such an order could be made where it was in the public interest that the company's administration come to an end and that it be wound up. His Honour observed (at [67]-[68]) that the Court's power under that section is to be exercised having regard to, inter alia, the interests of creditors as a whole and the public interest, but the public interest may override the creditors' interests and favour liquidation, and that the public interest included considerations of commercial morality and the interests of the public at large. His Honour also observed (at [69]) that the Court could apply by analogy the principles applicable under s 445D in exercising a power under s 447A to set aside a resolution to enter into a deed of company arrangement and order a winding up. His Honour noted that that power extended to the situation where creditors may be better off under the deed of company arrangement than a liquidation, although the Court would no doubt have regard to that matter as tending against such an order. His Honour also noted (at [74]) that the fact that the entry into a deed of company arrangement may prevent an effective investigation by a liquidator into relevant transactions and the opportunity for greater returns may render it contrary to creditors' interests. I also reviewed the relevant case law in Re Hayes Steel Framing Systems Pty Ltd (admins apptd) [2017] NSWSC 385 and again in Guo v Song; Re SG Capricorn Investments Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12 and I have drawn upon that review in outlining the applicable legal principles above.
Alternatively, the Plaintiffs contended that the DOCA should be terminated under s 445D(1)(e) or s 445D(1)(f) of the Corporations Act. An order terminating a deed of company arrangement may be made under s 445D(1)(e) of the Corporations Act if effect cannot be given to that deed without injustice; the element of injustice may be established if the effect of the deed would be to avoid a proper investigation of relevant transactions; and this paragraph is directed to the effect rather than the purpose of a deed of company arrangement: Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd [2001] NSWSC 89; (2001) 37 ACSR 394 at 431, varied on appeal Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21; Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to deed of company arrangement) (No 3) [2011] FCA 1403; (2011) 289 ALR 69 at [96]; Guo v Song above at [146].
An order terminating a deed of company arrangement may also be made under s 445D(1)(f) of the Corporations Act, on which the Plaintiffs alternatively rely, if that deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the company's creditors or is contrary to the interests of the creditors of the company as a whole. Whether that is the case will be determined by reference to the general principles underlying Pt 5.3A, including a creditor's right to be paid or wind up a company or have the company administered by the administrator in a way which will see the creditor paid from the company's property: Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598 at [59]-[60]; Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) [2007] SASC 296; (2007) 64 ACSR 91 at [114]; Re Recycling Holdings Pty Ltd [2015] NSWSC 1016; (2015) 107 ACSR 406 at [60]-[61]; Guo v Song above at [148].
Mr Krochmalik and Mr Zhao, who appears for Mr Cook, also refer to University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) [2005] NSWSC 412; (2005) 53 ACSR 579 at [37], where Palmer J observed, in respect of s 445D(1)(f), that:
"In determining whether a deed should be terminated under s 445D(1)(f), the Court does not make a judgment founded upon mere possibility or speculation; it makes a determination on the characteristics of the deed as they are seen to be at the date of hearing. If a deed is to be terminated under s 445D(1)(f), it has to be seen as having operated, or as presently operating, or as highly likely to operate in the future, in a way which is oppressive, unfairly prejudicial, unfairly discriminatory or contrary to the interests of the creditors as a whole. If the future operation of a deed is in question under s 445D(1)(f), the Court should be satisfied that its adverse effect is not a mere possibility or speculation but is, at least, highly likely."
That passage was treated as common ground between the parties in Vero Insurance Ltd v Kassem [2011] NSWCA 381, where Campbell JA (at [83]) (with whom Meagher JA agreed) and Young JA (at [144]) expressed no disagreement with it, and has been approved in several subsequent decisions to which Mr Krochmalik and Mr Zhao refer, including most recently Re Pilot Advisory Pty Ltd [2019] FCA 2171 at [82]; (2019) 141 ACSR 458 at [82].
Mr Krochmalik and Mr Zhao for Mr Cook in turn submit that Mr Cook's position is that, as matters presently stand, the DOCA provides no return to creditors and no additional benefit to creditors compared with a winding up, and he supports the Plaintiffs' position that the DOCA should be terminated and Citadel should be wound up. Mr Krochmalik and Mr Zhao also point out that, whereas the DOCA would provide no proposed return to Participating Creditors, a winding up offers the potential for creditors to receive some return and, as they put it, "the potential for something is better than the assurance of nothing". I recognise that, as Mr DL Cook and Mr Rose point out, the extent of such a return from a winding up will likely depend upon the extent to which a liquidator is funded to pursue investigations and any litigation and the extent of any assets available to Mr Maiolo and other potential targets of any litigation.
Mr DL Cook and Mr Rose respond that the complaint as to the level of dividend payable under the DOCA may be put aside on the basis that the original dividend, although minimal, was recognised by the Mr Cook and the "majority of creditors" as representing a better outcome than would be achieved in a winding up. That does not seem to me to be an answer to the complaint where, first, the persons who formed that view were largely or entirely Deferred Creditors who would not receive that dividend and, second, the substantial majority by value of persons who would receive that dividend did not take that view. Mr DL Cook and Mr Rose also respond to the submission that the DOCA quarantines Mr Maiolo and related parties from an investigation and potential liability by observing, possibly correctly, that the Plaintiffs and the ATO do not hold Mr Maiolo in high regard, and the power to terminate a DOCA is not to be used to mark a particular creditor's disapproval of a director of an insolvent company. It seems to me that that is a false issue, because the DOCA would be terminated, in this case, because it is not consistent with the purposes of Pt 5.3A of the Act, not because of any disapproval of Mr Maiolo.
Mr DL Cook and Mr Rose also submit that there is no evidence that any pursuit of Mr Maiolo is likely to result in recoveries that will enlarge the funds available for creditors. That proposition may be correct, given the limits to the funding that would be available to a liquidator of Citadel, which I address further below, but it is not a sufficient response to a claim that a DOCA should be set aside for inconsistency with Pt 5.3A of the Act. Mr DL Cook and Mr Rose also characterise the Plaintiffs' present application as involving a "scorched earth approach" which would not result in any benefit to creditors but has potentially depleted the limited fund created by the DOCA. I do not accept that submission. It seems to me that the criticisms made of the DOCA in this case have real substance; the Plaintiffs had fairly put Mr Cook on notice of them, before the second meeting of creditors; and there can be no criticism of substantial creditors who invoke their statutory right to seek to set aside a DOCA, a fortiori where they do so with substantial basis, even where the DOCA is structured so as to erode creditors' returns in that event.
Mr DL Cook and Mr Rose also submit that the DOCA maximised the chances that Citadel would continue to exist, or if that was not possible, ensured a better return for its creditors than an immediate winding up would return. It seems to me that the first proposition is not correct, as a matter of substance, where there was and is no indication that Citadel would recommence the business it had ceased in 2015. It also seems to me that, where Deferred Creditors receive no financial benefit under the DOCA and participating Creditors would at best have received a minimal financial benefit, any return to creditors as a whole was so small that the second proposition is also not correct in substance. It is not necessary to address the further question whether the effect of cl 3.4 of the Deed of Deferral would have been sufficient to preserve the Company's solvency once the DOCA was effected, given the findings that I reach on other grounds.
I should also address several other matters raised by Mr DL Cook and Mr Rose. They point out that the DOCA was executed in April 2019 and the proceedings were not commenced until 6 November 2019, a delay which appears to have largely resulted from Action's liquidators' need for financial assistance from the ATO to bring the application; and they submit that the proceedings should be dismissed because of that "inordinate and unjustified" delay. They also refer to the observations of Young J in Khoury v Zambena Pty Ltd (1997) 23 ACSR 344 at 353 as to the effect on creditors' positions by activity under a DOCA during a period of delay, and note that an appeal from that judgment was dismissed at [1999] NSWCA 402. I do not accept that submission. Here, Mr Cook was on notice of the issues concerning the DOCA before it was executed; the Plaintiffs sought, and obtained, an undertaking that it would not be effectuated while the application was in prospect; and the delay itself has had little impact, where the DOCA was structured in a way that any challenge to it would likely extinguish a return to creditors under it, by reason of the deed administrator's costs and remuneration in addressing such a challenge, irrespective of whether that application was brought promptly.
Mr DL Cook and Mr Rose also submit that:
"Plainly, a disaffected creditor who wishes to defeat a DOCA that the majority of creditors voted in favour of, consistent with the administrator's recommendation, should not be allowed to run litigation long enough to exhaust the deed fund, and then to come to Court to say that the DOCA ought to be set aside as the deed fund is exhausted. Plainly, that is not the intention of Part 5.3A. To the contrary, the clear intent is that the views of creditors as a whole ought be respected."
I also do not accept that submission. First, this was a proper challenge to the DOCA which, as I have noted, had substantial merit. Second, as I have noted above, the Deed Fund was so small that any challenge to it, whether brought promptly or delayed, would likely exhaust the Deed Fund because of the deed administrator's costs. It seems to me that a creditor can properly point to that effect of the structure of the DOCA and, in this case, Citadel also chose to decline the deed administrator's request to top up the fund to avoid a nil return to Participating Creditors. It is not necessary to address Citadel's further submission that the Deed Fund can be restored by Citadel or Mr Cook calling upon an undertaking as to damages offered by the Plaintiffs on 10 July 2019, because there is no basis for a call on that undertaking where the Plaintiffs will succeed in the proceedings for the reasons noted below.
In oral submissions, Mr DL Cook also addressed the prospects of an action for insolvent trading against Mr Maiolo and the question whether a damages claim could be established in respect of creditors who had suffered a loss by reason of insolvent trading. It does not seem to me that it is necessary to assess the prospects of that claim to determine this matter, where creditors have the prospect of benefiting from a liquidator's investigation to identify prospective claims (including, for example, claims for breach of director's statutory or general law duties) and the range of such claims cannot be determined prior to such an investigation. I bear in mind that there is evidence that, although it is suggested that the Company stopped trading in 2015, it appears to have incurred significant debts since that time. Mr DL Cook also points to the lack of evidence as to the extent of Mr Maiolo's personal assets, but that is also a matter where creditors may benefit from investigations, even if it is not apparent before they commence that they will bear fruit.
The Plaintiffs also relied on a further affidavit of Ms Trenfield dated 25 June 2020, which noted that she was without funds in Action's liquidation, apart from the financial assistance from the ATO to which she had referred in her first affidavit. She noted that the liquidators and Action had the benefit of a costs order against Citadel in the appeal in the Federal of Australia, and there was an amount of $30,000 held by the Federal Court as security for the costs of that appeal, and that she had taken steps to prepare a bill of costs; a Registrar of the Federal Court had estimated that, on taxation of the bill of costs, the certificate of taxation would likely be issued for $74,400; but Citadel had nonetheless objected to that estimate. Ms Trenfield expressed confidence, which seems to me entirely justifiable, that the costs recovered by the Plaintiffs would exceed the amount of the security for costs available of $30,000 in any event. She also offered an undertaking to provide a liquidator with up to $30,000 (including GST) of funding for specified purposes, and in certain circumstances, contingent upon the recovery of the amount held as security for costs by the Federal Court.
I subsequently made further directions that allowed the Defendants and Plaintiffs respectively to make written submissions as to the Plaintiffs' position in this respect. Mr DL Cook and Mr Rose submitted that no leave had been given for the Plaintiffs to lead further evidence in this respect and that the Court made an order on 26 May 2020 that, without leave, no party may rely on evidence filed and served on or after 18 May 2020. I had, of course, granted leave to the Plaintiffs to advise other parties of their position as to funding, and I will grant leave, nunc pro tunc, for them to do so by affidavit. It seems to me that, where the Plaintiffs were permitted to advise other parties of that position, there can be no basis for complaint that they did not merely assert it by submission, but considered that they should confirm it by evidence.
Mr DL Cook and Mr Rose also submit that the amount of funding offered by the DCT for a liquidator's investigations was less than the amount of costs that the Plaintiffs would have had to pay if their application to terminate the DOCA had been dismissed, and less than any amount that would be payable on the Plaintiffs' undertaking as to damages. Nothing turns on that submission where, for the reasons I indicate below, their application to terminate the DOCA would have succeeded even if no further offer of funding for a liquidator appointed to Citadel had been made. Mr DL Cook and Mr Rose also recognise, uncontroversially, that the funding is offered for further investigations and is not a commitment to the availability of funding beyond that point.
Mr DL Cook and Mr Rose also advance a further submission as to Citadel's position if a costs order had been made against the Plaintiff in the proceedings. Again, it is not necessary to address that submission, where the conclusions I have reached on other grounds are such that such an order would not have been made in any event. Mr DL Cook and Mr Rose also repeat their submission in chief that there is no evidence that Mr Maiolo or Gemaveld have any assets, which I have addressed in dealing with their submissions in chief above. Mr DL Cook and Mr Rose also submit that:
"Consistently with the position adopted in [Citadel's] previous written submissions, it appears that the investigation is intended to pursue some type of retribution against Mr Maiolo for sleights in earlier litigation or pursuant to a 'scorched earth' policy in so far as Mr Maiolo's company is concerned."
I did not accept a less strident version of that submission which was put in chief, and I also do not accept this more strident submission put in reply.
Mr DL Cook and Mr Rose otherwise largely address matters that I have addressed in dealing with Citadel's submissions in chief, and again submit that there is no utility in the making of the orders sought by the Plaintiffs. I have concluded that the orders should be made under s 447A of the Act, and it seems to me that there is utility in maintaining the integrity of Pt 5.3A of the Act, which is not to be measured in merely economic terms.
It seems to me that the further evidence led by the Plaintiffs indicates that some funding will likely be available to a liquidator of Citadel to conduct initial inquiries in respect of potential claims, although I recognise a degree of uncertainty in the commitment to "favourably consider" offered in Mr Thomas' evidence in respect of any further funding proposal. It seems to me that the prospect of further investigation of the affairs of Citadel, funded as referred to in that evidence, is more favourable to creditors than the present certainty of no return under the DOCA, adopting the language of Mr Krochmalik's and Mr Zhao's submissions. However, given my conclusions in respect of s 447A of the Act, the DOCA would be terminated irrespective of the extent of further funding available to a liquidator of Citadel. It was not necessary for me to receive or address the Plaintiffs' submissions in reply as to these matters given these conclusions.