Bathurst City Council v Event Management Specialist Pty Ltd & 3 Ors

Supreme Court of NSW|2001-01-31|Before: Santow J

INTRODUCTION 1 What follows are reasons in summary form as to why I am satisfied this Court has the jurisdiction to make the unopposed orders proposed and why the Court should do so. I explain why I am satisfied that the discretion to set aside a creditor approved deed of company arrangement ("DCA") has arisen and why I consider it should be exercised by terminating that deed. Retained in the Court file is a Plaintiff's chronology, initialled by me for identification, cross-referenced to the Plaintiff's bundle of documents (PX3) also retained. I shall refer to that chronology in this judgment as "background chronology". The "B" therein refers to the Plaintiff's bundle of documents forming part of PX3. As between the Plaintiff and Second Defendant that background chronology is essentially undisputed relevantly as regards the events concerning certain alleged preferences and a floating charge caused to be given to Mr and Mrs Eaton (Third and fourth Defendants). This was from the company subject now to the DCA, Event Management Specialist Pty Limited (the First Defendant). The chronology is not agreed as between Plaintiff and Third and Fourth Defendants who forewent the opportunity to dispute it in these proceedings by taking no active participation in them. That background chronology with the source material it cites, provides the basis for a plausible contention justifying further investigation. It is to the effect that a number of preferential payments and transactions there described were made which are potentially capable of recovery from Mr and Mrs Eaton. In the absence of any argument from the Third and Fourth Defendants, who have not participated in the hearing, I make no further finding. 2 That background chronology deals with the earlier mentioned floating charge to the Eatons which the Administrator agrees with the Plaintiff is open to be set aside as against a liquidator. I am satisfied that it provides the basis for a plausible contention to that effect, justifying further investigation. Funding for such litigation and other proceedings is now forthcoming from the Plaintiff, subject to the terms and to the extent set out in the attached undertaking. It was not available at either of the two occasions that the DCA was approved by creditors but emerged after hearings commenced. That background chronology deals with certain events surrounding Mr Miller's investment in the First Defendant (B137-140, B166, B212A-212C of PX3) culminating in a payment to Mr Miller on 1 May 2000, facilitated by the Eatons, which warrants further investigation as to its recovery. Again I make no finding beyond concluding that it provides the basis for a plausible contention to that effect, justifying further investigation. 3 I conclude by making some brief observations of a more general nature. These are not intended to constitute findings in the present case or criticism of anyone involved. Rather they are intended to offer guidance for Administrators in the future. This is when faced with a situation where the cost of recovery of preferences, or for insolvent trading, and the limited funds to pursue them, dictate urgent investigation of the availability of external funding. This is most likely from the larger creditors especially those opposed to a deed of company arrangement, as eventuated here. 4 These proceedings have essentially been conducted between the Plaintiff and the Second Defendant (the Administrator of the First Defendant and now administrator of the Deed of Company Arrangement subsequently entered into). The Third and Fourth Defendants are (or in the case of Mrs Eaton, were) the principals of the First Defendant. They indicated through Counsel on the first day of the trial that:

(a) they would not oppose termination of the DCA, and

(b) did not wish to be heard or otherwise participate in the proceedings, save in the event that if an order for costs were sought to be made against them, they would wish the opportunity to be heard on that matter only. No such order has been sought. 5 Following discussions between the Plaintiff's legal representatives and the Second Defendant's legal representatives after proceedings to set aside the Deed commenced, the Plaintiff proposed that orders be made and undertakings proffered in the terms attached to this judgment. I was asked to note that the Second Defendant as administrator under the DCA did not oppose such orders.

REASONS FOR DECISION TO TERMINATE DEED 6 In the present case, creditors voted, twice, in favour of the deed of company arrangement. On the second time this was with notice of these proceedings and their basis (though not with any offer as has now been made by the Plaintiff embodied in the orders and undertaking). That would ordinarily militate against termination, though not necessarily decisive. However, in assessing the significance of that positive vote for a decision to terminate, it is here relevant to ascertain the extent to which it could be said that vote in favour was influenced by, if not dependant upon, the votes of those having an interest in resisting any potential proceedings for recovery of preferences or setting aside the floating charge, or insolvent trading. Such actions would be precluded if the DCA were to proceed. It is true there is nothing in the Corporations Law which precludes an interested creditor from voting and no requirement for separate classes of creditor in such a vote. Concededly all creditors are interested. The question is one of degree; to what extent and in what way do the interests of those voting diverge? The situation in that respect is analogous to a vote under a scheme of arrangement where there is commercial divergence among the groups voting; compare Re Chevron (Sydney) Ltd [1963] VR 249 and Re Credit Reference Association of Australia Ltd (1998) 16 ACLC 491 at 494 where I said "… it poses the issue that members of a relevant class, though not so differentiated as to make it impossible for them to consult together as a single class with a view to their common interest, may yet have divergent commercial interests extrinsic to their share membership; a reality which the court approving the scheme should take into account in looking at the size and composition of the approving majority over and above 75 per cent."

7 Even if the divergence is not such as to require a separate class, the Court will closely examine an apparently favourable vote to ascertain its make-up, especially if close. The analogy is of course not complete; creditors' meetings for administrations do not permit of separate classes. 8 Compare two examples. In the first, assume some creditors have an interest in promoting the DCA because they need money immediately. Whereas, others can more easily wait and would do so if this were more likely to produce a larger percentage in the dollar. That is a difference in interest. But it is ordinarily not of such degree as to cause the court to scrutinise the voting result more sceptically. The second case is where one group favours a DCA for truly extraneous reason - it wishes for example to resist recovery of preferential payments, or insolvent trading or, as is sometimes overlooked, breach of directorial duty where any criminal sanctions are not avoidable by a DCA. The other creditors are not potential defendants to recovery actions. They stand to benefit from such actions, if they are successful and there are assets to meet any judgment. Meantime those actions must be funded. The Administrator will often know less about the legal case against those potential defendants than they do. Yet it is the Administrator who must report to the meeting of creditors under tight time tables on the scope for successful recovery, at a meeting which may be stacked with such potential defendants who also claim as creditors. A good example was JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691. 9 In the present case, there is material before me to indicate that the vote was significantly influenced by a group of creditors with just such an extraneous interest. This was first when the DCA was originally put to the vote and then when it was put again following institution of these proceedings. The vote appears to have been influenced by the votes of those potentially vulnerable to such recovery actions. On the Plaintiff's calculation, if their votes were excluded (notionally as there is no warrant in the Corporations Law otherwise to do so) there would no longer be a majority of creditors in dollar amount in favour of the DCA. There would however still be a majority in number of creditors, many of whom had no such extraneous interest. That factor necessarily reduces the weight to be given to an affirmative vote in deciding how the Court's discretion should be exercised, though not by itself decisive. 10 Section 445D of the Corporations Law provides a number of alternative jurisdictional bases enlivening the Court's discretion to terminate a DCA. While other provisions might also have been relied upon, the effect of the orders that I have made, in the case of the Plaintiff by consent and in the case of the Administrator as Second Defendant without opposition, is that the DCA is terminated under s445D(1)(f)(ii) of the Corporations Law. I am satisfied, for jurisdictional purposes and relevantly to my discretion that the DCA, if not terminated, would in the circumstances now prevailing operate oppressively or with unfair prejudice. This is because creditors would not otherwise be able to avail themselves, via a liquidator, to the now available funding for proceedings to recover preferences and set aside the floating charge; see 16 below. 11 I set out the whole of s445D the wide scope for the discretion to terminate can be appreciated " 445D (1) The Court may make an order terminating a deed of company arrangement if satisfied that: (a) information about the company's business, property, affairs or financial circumstances that: (i) was false or misleading; and (ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed; was given to the administrator of the company or to such creditors; or (b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or (c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or (d) there has been a material contravention of the deed by a person bound by the deed; or (e) effect cannot be given to the deed without injustice or undue delay; or (f) the deed or a provision of it is, an action or omission done or made under the deed was, or an act or omission proposed to be so done or made would be: (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or (ii) contrary to the interests of the creditors of the company as a whole; or (g) the deed should be terminated for some other reason. (2) An order may be made on the application of: (a) a creditor of the company; or (b) the company; or (c) any other interested person."

12 It is important to give the context in which the funding has become available. What has happened is that since the last meeting of creditors of 24 October 2000 two new events have occurred which are highly significant for creditors. The first is the Plaintiff's agreement to make a payment of 5.5 cents per dollar to creditors, excluding the Eatons and the Miller interests. The second is the Plaintiff's willingness to undertake to fund the earlier-mentioned recovery proceedings on the terms and to the extent set out. Those proceedings are in respect of prospective preferences, claims for insolvent trading and possibly other causes of action arising in the circumstances outlined in the background chronology. These proceedings have the potential to offer considerably more than the DCA, if successful. 13 One may grant that creditors voting on a DCA and properly informed of the relevant circumstances, are generally in the best position to decide how their own interests are best served. They can decide for themselves whether they should forego prospective recovery claims in return for whatever benefits are offered by a DCA. But new, highly relevant circumstances have since arisen. I am satisfied that this Court, without substituting its commercial judgment for that of creditors, may properly conclude, on sufficient evidence, that the DCA can and should be terminated, even against the earlier positive vote of creditors which preceded two crucial events. These are the subsequently offered payment of 5.5 cents in the dollar and the litigation funding on terms. I am satisfied these events, if they had preceded the vote, would have had the potential to reverse it, though more likely only if the group with the extraneous interest (being potential defendants) were notionally excluded. Had a vote in favour of a DCA then occurred which wholly depended on the affirmative votes of creditors who were potential defendants, there would be strong grounds for terminating a DCA which released those claims. Otherwise the DCA would be an instrument of oppression, contrary to the stricture consistently applied; see for example Davies AJA in Khoury v Zambena Pty Ltd [1999] NSWCA 402 at [105]: "Part 5.3A ought not to be used as an instrument of oppression against one or more creditors. An arrangement under Pt 5.3A may discriminate between creditors or classes of creditors; but nevertheless it ought deal fairly with the interests of creditors of an insolvent company … To be valid, a deed of arrangement must be fairly reached in the interests of creditors."

14 The DCA Administrator puts nothing in opposition to the proposition that the DCA be now terminated and the Plaintiff presses it. 15 I conclude that in these circumstances, the further benefits offered by the Plaintiff are sufficient to constitute an event or circumstance justifying termination of the DCA. These benefits are to be compared to the much lower prospective DCA return, now roughly half of 5.5 cents in the dollar after expenditure of deed funds on the present proceedings to date. Ignoring the blue sky potential under the DCA from sharing in any financial return from future events promoted by the First Defendant, the prospective return under the Deed appears to be about half of 5.5 cents in the dollar. Even if that were a little higher, I do not consider this alters my conclusion. 16 The proposed orders and the associated undertaking guarantee 5.5 cents in the dollar to other than the Third and Fourth Defendants and Mr Miller and his associated company. I have indicated earlier that each of these have received payments which are now likely to be challenged, along with the floating charge, based on plausible claims justifying further investigation; see background chronology. It is significant that no new monies appear ever to have been advanced under the floating charge by the Eatons to the First Defendant. Further it is significant that the charge was taken some seventeen days before an administrator was appointed (28 April 2000). Moreover, this appointment was, in suspicious circumstances, deferred at the last moment to 5 May 2000. During that seven days, a number of potentially challengeable payments were caused to be made by or on behalf of the First Defendant in circumstances where the evidence points to its hopeless insolvency, as detailed in the background chronology. These matters all bear upon the basis for making my orders and in particular order 4.

FINAL COMMENT 17 By way of general observation I add this. There is inevitably a tension between foregoing potential claims such as for preferences, as against the relative certainty of what is proffered under a DCA. What can have a crucial bearing on how that choice is exercised is whether funding for such recovery litigation is likely to be forthcoming. The obvious source for such funding is the larger creditors. The present litigation before me has yielded such a funding proposal from the principal creditor, though only at the hearing, well after the last creditors' meeting on 24 October 2000. That later factor, with the 5.5 cents offered in the dollar, forms the basis for my decision to terminate. 18 What lessons can be drawn? Where proceeds to litigate are in short supply, it behoves administrators to ascertain as early as possible, and if practicable before any vote is taken, the feasibility of such funding from likely candidates amongst the creditors. If appropriate funding is likely to be available for a strong enough case, that may well influence creditors in deciding how to vote. Similarly, it behoves major creditors not to sit on their hands, especially if they are opposed to the DCA. They should take the initiative by approaching the administrator with any willingness to fund. 19 I readily acknowledge that in many cases, an expression of willingness to fund may not fructify before the creditors' meeting, or indeed even at all. For example, insufficient may be known of the prospects of litigation or scope for recovery if successful, though the Administrator should be vigilant to obtain as much information as possible on this. And in any event, this is not inevitably so. In some cases a funding proposal may be forthcoming, at least in principle and subject to reasonable conditions such as funding an initial investigation. The salient facts even at an early stage may indicate good prospects of recovery and that there are assets available to satisfy a judgment. 20 In the present case, the possibility of that litigation funding appears to have emerged for the first time at trial, after substantial funds had been expended on the current litigation to set aside the DCA. That possibility, which may or may not have been discernible earlier if concentrated attention had been focussed on it, has proved important in avoiding expenditure of yet further scarce funds over three days of court hearing. 21 The foregoing observations are not to be understood as in any way critical of this administrator. He operated as administrators do, under very tight time constraints. Moreover this was in circumstances where the relevant information may have only emerged gradually, so ascertainment of the feasibility of funding at least before the first vote might not have been practicable.

The Deed of Company Arrangement between the First and Second Defendants dated 18 July 2000 be terminated pursuant to s.445D of the Corporations Law.

The First Defendant be wound up in insolvency and that John Vouris of Vouris & Bell, be appointed liquidator of the First Defendant.

Plaintiff's costs of these proceedings to be costs in the liquidation of the First Defendant.

THE COURT NOTES THAT:- 4. As a condition of these orders the Plaintiff agrees to pay those creditors who voted in favour of confirming the Deed of Company Arrangement at the meeting of creditors on 24 October 2000 (except for Mr. and Mrs. Eaton, Mr. Peter Miller and P A Miller & Associates Pty. Limited), an amount of 5.5 cents in the dollar for the amount of their proofs, as adjudicated and accepted by the liquidator, within a reasonable time of such adjudication.

THE COURT FURTHER ORDERS THAT:- 5. Upon any distribution to unsecured creditors in the liquidation of the First Defendant, the liquidator shall pay the first 5.5 cents in the dollar of any distribution or distributions (up to a maximum of 5.5 cents in the dollar) to the Plaintiff in respect of all such claims as have been the subject of a payment by the Council referred to in paragraph 4.

THE COURT FURTHER NOTES:- 6. The Plaintiff's undertaking to the Court in the terms set out in Annexure "A" hereto.

The above orders do not preclude any other person from contributing to the costs and expenses of any recovery proceedings in the liquidation, and do not preclude any person including the Plaintiff making any application he, she or it may in the future see fit to make under s564 of the Corporations Law .

Reserve liberty to the Plaintiff and the Second Defendant to make an application for an order for costs against the Third and Fourth Defendants at a time and date to be appointed by arrangement with my associate.

Reserve liberty to the Second Defendant to apply in respect of any application relating to the operation of s556 in respect of his costs of these proceedings. Otherwise, no order as to costs is made against the Second Defendant.

No order as to costs as between Plaintiff and Second Defendant.

Last Modified: 02/14/2001 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.

CITATION : Bathurst City Council v Event Management Specialist Pty Ltd & 3 Ors [2001] NSWSC 34 revised - 13/02/2001 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3223/00 HEARING DATE(S) : 30/01/01, 31/01/01 JUDGMENT DATE : 31 January 2001

COUNSEL : J E Thomson/D S Weinberger (Plaintiff) C R C Newlinds (Second Defendant) SOLICITORS : McIntosh, McPhillamy & Co (Plaintiff) The Argyle Partnership (Second Defendant) CATCHWORDS : CORPORATIONS - Deed of company arrangement ("DCA") - application to set aside DCA under s445D of Corporations Law - Relevance of later events such as subsequent availability of funding for litigation and payment to creditors well in excess of that offered under DCA - Weight to be given to creditors vote in favour of DCA and significance of voting when influenced by votes of those potentially subject to recovery proceedings for preferences etc - General observations on administrator pursuing litigation funding possibilities. LEGISLATION CITED : Corporations Law s445D Re Chevron (Sydney) Ltd [1963] VR 249 CASES CITED : Re Credit Reference Association of Australia Ltd (1998) 16 ACLC 491 JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 Khoury v Zambena Pty Ltd [1999] NSWCA 402 DECISION : Approve setting aside DCA on terms.

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