Bamco Villa Pty Ltd v Montedeen Pty Ltd [2002] VSC 184

5. The proceeding before me arises in the context of previous disputes and proceedings in this court between Bamco and Montedeen. I will not repeat the facts and summaries found in the reasons for judgment in the other proceedings and will confine myself as much as possible with those facts necessary for the disposition of this proceeding and to explain my reasons.

8. The factual basis in support of the orders sought under sections 445D and 447A is largely, but not entirely, the same. The particular provisions relied upon for an order that the deed of arrangement be set aside are those in sub-sections 445D(1)(e), (f) and (g) and sub-sections 447A(2)(a), (b) and (c).

11. The court is given a wide discretion to exercise by section 445D. In Deputy Commissioner of Taxation v. Portinex Pty Ltd and Another[2] Austin J. said:

"Several cases have stressed that s 445D gives the court a wide discretion, to be exercised having regard to the interests of the creditors as a whole and to the public interest: Emanuele v ASC (1995) 63 FCR 54; 141 ALR 506; 19 ACSR 1 (an appeal to the High Court on another point was dismissed[1997] HCA 20; , (1997) 188 CLR 114; 144 ALR 359; 23 ACSR 664); Khoury v Zambena Pty Ltd at [67]-[68] per Fitzgerald JA. In Emanuele's case the court drew an analogy between its powers under ss 445D and 445G and the power of the court to refuse a stay of a winding up order, citing dicta to the effect that the court has a duty to have regard to commercial morality as well as the interests of the public at large. Relevant considerations include the overall policy of the law, that insolvent companies should not continue to trade unless it is appropriate for them to be made the subject of an arrangement: DCT v Comcorp Australia Ltd (1996) 21 ACSR 590 at 597 per Sheppard J (dissenting, but not on this point). Relevant considerations also include the need for the administrator to be independent and objective, both as between the directors and creditors and as between the creditors inter se, in preparing his or her report to creditors and in making recommendations to them: Molit's case at 174; M & S Butler Investments Pty Ltd v Granny May's Franchising Pty Ltd (1997) 24 ACSR 695."[3]

The discretion, although wide, is made to depend upon the court being satisfied of one or more of the matters specified in the section. The applicant must show that one or more of the conditions in the section has been satisfied before the court's discretion is enlivened.

16. In this case I am satisfied that the conditions of sub-sections 445D(1)(e), (f) and (g) have been established. On 18 October 2001 Mr R. Cauchi and Mr D. Lofthouse were appointed joint and several administrators of Montedeen. That appointment had been preceded by the service upon Montedeen of a creditor's demand by Bamco. On 7 December 2001 Mr Lofthouse prepared a report to creditors in which he informed them of a number of matters and made certain recommendations. The 7 December 2001 report records that the first meeting of creditors of the company had been held on 25 October 2001 in accordance with section 436E but that a committee of creditors was not formed. The second meeting of creditors was originally convened for 15 November 2001 but was adjourned to permit the formulation of a proposal for a deed of arrangement and for other investigations to be undertaken. The 7 December 2001 report also informs the creditors, on its first page, that many of the relevant records which had been sought had only been provided on 7 December 2001 and that "as such", its author, Mr Lofthouse, had "had little opportunity to review them prior to completing" the report. It is significant that the administrator making recommendations to creditors commences a report to them with an express assertion that information relevant to the recommendations to be considered at the meeting had not been obtained until recently, and that he, as the person whose statutory task it was to make recommendations to them, had had insufficient opportunity to consider the information. In other words that the person charged with important statutory functions for the benefit of those who were due to consider the report was stating that as at 7 December 2001 relevant information had only recently been supplied, that it had not been fully considered, that there was not then a recommendation from the administrators to adopt the proposal and that more time was sought by the administrators to consider, report and recommend.

19. In any event, the report sets out a proposal which had been received on 7 December 2001 (namely the day of the report) proposing that Montedeen enter into a deed of arrangement. The proposal provided (a) that NJL Corporation Pty Ltd ("NJL") would provide the funds equal to 50 percent of proved claims in full and final satisfaction of creditors' claims and (b) that CLA Trading Pty Ltd ("CLA") would waive its rights to prove in the deed of company arrangement. The proposal was stated as being subject to Bamco entering into an agreement whereby it would surrender rights pursuant to a Delta franchise which had been the subject of disputes and claims. In his report to the creditors, Mr Lofthouse included a recommendation that the "creditors should not accept the proposal as put". The report also contained some analysis of the affairs and transactions of Montedeen indicating matters that required further investigation before a fully informed recommendation (or likewise a fully informed decision) could be made.

22. The meeting of the creditors of Montedeen took place on 14 December 2001. Two days before that date, the sole director of Montedeen (Mr Salvo) provided a subsequent proposal to Mr Lofthouse for a deed of arrangement which varied significantly from that considered in the report of 7 December 2001. The revised proposal was that NJL would pay an amount equivalent to 25 cents in the dollar of all proved claims in Montedeen within a period of 21 days after the administrator certified the total of such proved claims. There were no conditions attached to this proposal of the kind which had been placed on the earlier one. Mr Lofthouse prepared a supplementary report pursuant to section 439A for the purposes of the creditors' meeting, and made comments about it at the meeting. Specifically he recommended that the meeting be adjourned to permit him properly to report to creditors pursuant to the provisions of the Corporations Act 2001. Mr Champion, as proxy for Bamco, moved that the meeting be adjourned to 11 January 2002 "in order to reconsider the amended proposal dated 12 December 2001". Bamco accounted for about 25% of the voting value of creditors for the purposes of that meeting, but there was no seconder for the motion. The meeting appears to have been stood down for some 5 minutes and, upon reconvening, the creditors resolved that the meeting should continue.

25. There were 14 creditors present at the meeting by proxy. Six were represented by Mr Stavropoulos. Four, including CLA, were represented by Mr Wunsch. Bamco was represented by Mr Champion. Westminster Finance ("Westminster") was represented by its solicitor Mr Brereton and Mr Duchini represented Brighton Classic Cars and Terry Hogan Prestige Cars Pty Ltd. All but Bamco voted in favour of the deed of arrangement which had been put only two days earlier. A number of those creditors participated in this proceeding to support the deed of arrangement. All of them were represented by Mr Brereton's firm. Significantly, the acceptance of the proposal on 14 December 2001 effectively rejected the entirely reasonable recommendation of Mr Lofthouse to be given a relatively short time for him, as administrator, to consider the proposal and properly to report to the creditors. In other words, the majority of the creditors voted against a clear request from the independent administrator that he as the independent person charged by law to make recommendations be permitted less than one month during the Christmas period to do no more than to consider the proposal so as to discharge his duty to report. Such circumstances might be discounted if it might confidently be said that the majority of the creditors were fully informed about what they were voting upon, but the evidence before me indicates plainly that that was not so. Mr Stavropoulos was a director of one of the creditors and had a proxy for five others. Those creditors were essentially six of the franchisees who had obtained their initial franchise through Montedeen. The nature of their debts was not fully explored, but for present purposes I may assume that each was properly admitted in full. Mr Stavropoulos himself now holds the position of consultant for Europcar which is connected with Montedeen and its director, Mr Salvo, and their related companies. Mr Stavropoulos had a poor recollection of the meeting of 14 December 2001 and could not recall that Mr Lofthouse had asked for an adjournment, and gave evidence that he did not know that only seven days before the meeting there had been a proposal for the payment of fifty cents in the dollar. The direct evidence of Mr Stavropoulos clearly establishes in my mind that the vote of the creditors he represented was not an informed vote or decision. There was also an element of indifference to the debts owed to his company and to the others he represented. A similar attitude was evident in relation to the debt claimed by Mr Duchini's company. His evidence was that he had effectively given up, and written off, the debt. Mr Duchini also could not recall the earlier proposal to pay fifty cents in the dollar.

28. I accept the submission made on behalf of Bamco that effect cannot be given to the deed without injustice within the meaning of sub-section 445D(1)(e). In Cresvale Far East Ltd (in liq) v. Cresvale Securities Ltd[4] Austin J. held that the condition in sub-section 445D(1)(e) had been made out where to prefer a deed of company arrangement was effectively to remove "the possibility of proper investigation" of certain transactions. That is also the case here, as may be seen from the creditors' report and the minutes of the creditors' meeting of 14 December 2001. It is clear from the report to creditors that there are many transactions that should be, but have not been, investigated which may potentially provide a better return to the creditors than under the deed of arrangement. It would be unfair if a significant creditor, which Bamco is on any view, is not given the benefit of proper investigation recommended by an impartial administrator. There are undoubtedly cases where the views of the majority of creditors should be preferred to those of the minority[5] (however large in value or however great in percentage the minority creditors might be) but I do not think that this is one such case.

31. This is not a case where the creditors were each fully or adequately informed of the relevant circumstances that bore upon the difficult decision that needed to be made about whether to accept a lesser sum more quickly than they might obtain with delay. On the contrary, this is a case where the administrator recommended that he be given further time for investigation in circumstances that did not preclude the possibility of an early recommendation to accept the proposal available on 14 December 2001. The decision not to give Mr Lofthouse the limited time he sought of itself indicates a predisposition by some creditors against the adoption, or even consideration of, a measured and considered position that might be of greater benefit to all creditors. A different conclusion might be reached if the creditors had, as between themselves, debated their competing interests and different views over a period of time and had thereby come to be informed about each others' interests and position. In this case, however, there seemed, at best, disinterest on the part of some creditors to consider the position of others, and, at worst, a predisposition to vote against any recommendation other than the proposal put forward two days before the meeting irrespective of good sense, reasonableness or common justice.

34. It was also submitted on behalf of Bamco that another instance of injustice might be seen from the fact that the release of Montedeen's debts would also operate, in part, as a release of the debts owed by the co-plaintiffs to the proceedings against Bamco, namely Delta Car Rentals (Australia) Pty Ltd and CLA Operations Pty Ltd. The correctness of the contention urged upon me on behalf of Bamco depended upon the legal effect of the deed of arrangement being that it would operate as a release from debt of both Montedeen and the co-debtors. Interesting though it may be to consider the legal effect of the deed, it is both unnecessary and, more importantly undesirable, that I should express a view on this issue because, as all counsel correctly conceded in argument, any view I may express on the topic is unlikely to bind the joint debtors who are not parties to the present proceeding. I also have doubt about whether any view I might express about that matter would be binding upon Montedeen and Bamco as it might not relevantly be an issue falling for determination in this proceeding.

37. I do, however, accept the submissions on behalf of Bamco that the deed of arrangement would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, Bamco, or contrary to the interests of the creditors of Montedeen as a whole. The oppression, unfair prejudice, unfair discrimination, or the act or omission contrary to the interests of the creditors of Montedeen as a whole, is not in the circumstance that Bamco may not receive full satisfaction of its debt, nor that it might receive payment of only 25% of its debt. Rather, in this case, it lies in the adoption of a deed of arrangement without what in my view amounts to a proper consideration by the creditors of all that should properly and fairly be considered both in their own interests and in the interests of each other. Mr Lofthouse's task was to make recommendations and he reasonably and properly asked for time to give consideration to the proposal so that he could reasonably and fairly advise all creditors about what should be adopted. The adoption of a proposal in the circumstances in which it was adopted is in my view to adopt a deed of arrangement other than for the purposes that the statutory provisions were designed to achieve.

40. I reach the same conclusions in respect of Bamco's case under sub-section 445D(1)(g). A relevant reason to terminate a deed of arrangement under sub-section 445D(1)(g) which may not fall under the preceding provisions in the section, is where the deed of arrangement is being entered into to effect a purpose contrary to the purposes which the statutory provisions are designed to achieve through deeds of arrangement. The scheme adopted by the legislature permits a majority of creditors to impose their will upon a minority, but they might not always be allowed to do so. This is a case where the majority should not be permitted to prevail in the circumstances which have occurred. The deed of arrangement should be terminated because its soundness and reasonableness is so fundamentally impaired and flawed by poorly considered decisions in disregard of the reasonable and sound recommendations from the impartial administrator.

43. Bamco also relies upon section 447A for the orders it seeks. It may be undesirable for me to express concluded views about some of the matters relied upon in this context because some are matters which were not fully explored in the evidence before me and, in any event, are matters properly for the administrator or liquidator to consider after full and proper investigation. In that regard I have in mind the contention that Montedeen is insolvent, as well as the arguments concerning the debt due to Montedeen from Grovedew Pty Ltd and concerning the debt due by Montedeen to Westminster. In relation to the debt due to Westminster it may be sufficient to note, first, that the administrator's report to creditors of 7 December 2001 identified it as one which required further investigations. Secondly, I should express my doubt about the view expressed in evidence by Mr Brereton concerning the legal effect of certain contractual provisions upon which the debt to Westminster depends. Little turns upon whether the legal effect of certain provisions are accurately described by such labels as "non-recourse loans". However, my preliminary view of the obligations assumed by Westminster was that it was to procure and maintain a performance bond or other undertaking sufficient to secure the advance during the entire term of the loan. This obligation was one which Westminster seemed to have assumed at the outset of the arrangement and from which it may not have been relieved. It was an express term of the agreement between Montedeen, through a partnership, and Westminster, that the failure to maintain the performance bond gave Montedeen a right of set off against Westminster. Westminster's debt may, therefore, be reduced to nil or to a lot less than the claim. These are all matters to be investigated in the future and the denial of time to investigate them points to another reason for the need to terminate the deed of arrangement. It is possible that a full examination of the matters which the administrator wished to examine would lead to the conclusion that some of the debts admitted for the purposes of the meeting of creditors are not owing, or not owing in the amounts claimed; if that is so, Bamco may have been unfairly prejudiced at the creditors meeting because its vote carried a smaller percentage of the total votes than it should have had.

46. It was submitted on behalf of Montedeen that the deed of arrangement should not be terminated because Bamco is not in a position to fund a liquidator to conduct investigations into potentially voidable transactions. This fact, and the course of litigation between the parties, are both matters which are relevant to whether the deed of arrangement should be terminated. Against them, however, are such facts as the commercial determination by Bamco to pursue its entitlements and the existence of a large debt payable to Montedeen in 2004 and 2005. Such speculation as I may make from these facts encourages the termination of the deed of arrangement.

49. In this proceeding I propose therefore to order that the deed of arrangement be terminated and I will hear counsel on the question of costs.

[1] Corporations Regulations 2001, Part 5.3A, Regulation 5.3A.07(1)

[2] [2000] NSWSC 99; (2000) 34 ACSR 391

[4] [2001] NSWSC 89; (2001) 37 ACSR 394

[5] Emanuele v ASC (1995) 19 ACSR 1 at 15.