Bovis Lend Lease Pty Ltd v Wily

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1318/04 RE NARDELL COAL CORPORATION PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) & ANOR JUDGMENT 1 HIS HONOUR: The second plaintiffs, Mr Turner and Mr Watson, have at various times been administrators, liquidators, and administrators under a deed of company arrangement, of the first plaintiff ("Nardell"). By an originating process filed on 3 February 2004, to which there are no defendants, they and Nardell seek directions or orders designed to establish whether, in the events that have happened, the winding up of Nardell has been or ought to be terminated, and ancillary orders and directions. The case raises, inter alia, an issue that I expressly left undecided in Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70. There I held that if a liquidator in a court-ordered winding up in insolvency initiates a voluntary administration under s 436B of the Corporations Act and consequently the company executes a deed of company arrangement, the winding up is not thereby automatically terminated. The question now arising is whether execution of a deed produces automatic termination of a "deemed" creditors' voluntary winding up that has arisen, after an earlier voluntary administration, under s 446A. The application 2 The originating process seeks, apart from costs, orders expressed in the alternative, generally designed to ascertain whether the liquidation of the company has terminated or should be terminated, and to clarify the liquidators' duties accordingly. 3 First, the application seeks a direction under ss 447D and 479(3) of the Corporations Act that the winding up of Nardell automatically terminated when its creditors resolved that Nardell enter into a certain deed of company arrangement ("the DOCA"), or when Nardell entered into the DOCA. Secondly, in the alternative, it seeks an order that the winding up be terminated under s 482 of the Act or (in the further alternative) that the winding up of Nardell be stayed either indefinitely or until determination of the DOCA. Finally, in the alternative to all of the other orders, it seeks directions under ss 447D and 479(3) in respect of whether, upon determination of the DOCA, clause 10.1 of the DOCA compels Mr Turner and Mr Watson as administrators of the DOCA to return the control of Nardell to its directors, or to retain control as the liquidators of the company. 4 Section 447D(1) permits an administrator of a company or of a deed of company arrangement to apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions or powers, and s 447D(2) permits the administrator of a deed of company arrangement to apply to the Court about a matter arising in connection with the operation of, or giving effect to, the deed. In Mercy v Wanari, at paragraph [12], I doubted whether a determination as to whether the winding up of the company has been terminated by entry into deed of company arrangement is properly characterised as a "direction" under s 447D. I found it unnecessary to resolve that doubt, because I decided to reject the application on substantive grounds. 5 On reflection, however, it appears to me that s 447D may be employed in combination with s 479(3) to clarify the position of persons who were liquidators and have been appointed deed administrators: see, generally, Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674. It seems to me unnecessary to constitute an action inter partes for declaratory or other relief, when there does not appear to be anyone with any interest in or desire to oppose the termination of the winding up, provided that anyone who might have had a real interest in doing so has been properly notified that the application was to be made. 6 The application has been notified to the receivers, the directors of Nardell, the directors of Nardell Holdings, and ASIC. None of them voiced any objection to the application, and none has sought leave to appear. The unsecured creditors of Nardell have voted overwhelmingly in favour of the DOCA, and have therefore, as a group, accepted the distributions for which the DOCA provides in exchange for release of their claims. They no longer have an interest in the termination of the winding up. 7 The secured creditors have relied on their security and have subjected themselves to the provisions of the DOCA. The receivers have been notified of the application, although it has not been proved that they have passed on the information to the secured creditors other than their appointor. There is an issue, discussed below, as to whether their debts have been extinguished by the DOCA. If they have, then the secured creditors are in the same position as the unsecured creditors, and no longer have an interest in the question of termination. If they have not, then for the reasons I shall explain, termination will not be ordered. It therefore seems to me unnecessary formally to notify the secured creditors of the application concerning termination of the winding up. 8 My conclusion is that the proceeding is properly constituted to obtain answers to the questions that have been raised. Facts 9 Nardell was a coal mining company, which operated a coal mine at Ravensworth in the Hunter Valley. It is wholly owned by Nardell Holdings Pty Ltd, which also owns part of the assets of the mine. 10 Mr Turner and Mr Watson were appointed joint voluntary administrators of Nardell by its directors on 20 February 2003. On the same day Andrew Love and Alan Lewis of Ferrier Hodgson were appointed receivers and managers of Nardell, by Bond Street Investments Pty Ltd pursuant to a fixed and floating charge over Nardell's assets and undertaking. Another secured creditor of Nardell is Bond Street Custodians Ltd, as custodian of some Macquarie Investment trusts, securing convertible notes issued by Nardell Holdings to raise $36 million, which was in turn lent on to Nardell for working capital. Bond Street Investments and Bond Street Custodians are related to Macquarie Bank Ltd. Yet another secured creditor, holding a fixed and floating charge over the assets and undertaking of Nardell, is Australian Ventures LLC. 11 In April 2003, after obtaining an extension of the convening period, Mr Turner and Mr Watson circulated a report to creditors ("the first report"), dated 10 April 2003. According to that report, all the assets of Nardell were subject to security. The receivers had obtained a valuation, which was to be kept confidential so as not to prejudice the sale process, but the report said the receivers were of the view that if the assets of Nardell and Nardell Holdings were sold as a going concern, the proceeds would be unlikely to discharge all the claims of the secured creditors, which the report estimated at about $53.1 million. 12 In addition to the secured creditors, there are unsecured creditors who have been grouped into several categories, namely employees, "trade" creditors, "contingent creditors", and related party creditors. 13 Claims of employees were stated in the report at about $1.15 million. It appears that the priority claims of employees were paid before or shortly after the first report, perhaps by the receiver. 14 The first report estimated the claims of unsecured creditors at about $15 million. It estimated that the component of that amount represented by "trade" creditors was about $8.8 million. The first report suggests that there are other unsecured creditors, neither trade creditors nor contingent creditors, with claims of approximately $6.2 million. It appears from subsequent evidence, however, that in the period up to the third report to creditors, all unsecured creditors (other than related creditors) were treated as either trade creditors or contingent creditors, though the definition of "contingent" appears to have shifted from time to time. By the time of the revised deed proposal and the third report creditors, the expression "contingent creditors" had been dropped in favour of "non-trade creditors", and it had become plain that the two categories of trade and non-trade creditors covered the field of unsecured creditors other than related creditors. In his affidavit made on 12 September 2003, Mr Turner deposed to a summary of estimated creditor claims, made up of $8,691,677.65 of trade creditor claims, and "non-trade" creditors comprising $6,328,242 plus claims by PJ Berriman and BHP Billiton which were still to be quantified, and two other potential claims, no details of which had been provided, by Macquarie Generation and Mauribeni. 15 In addition to the unsecured creditors, the first report identified a category of "contingent" creditors, described as including "claims against Nardell for the supply of coal and agreements to purchase land under a Put and Call Option Agreement", quantified in the report (subject to mitigation) at approximately $34 million. It is convenient to add at this stage that at a meeting of creditors on 8 August, Mr Turner said that there was approximately $15 million worth of claims from contingent creditors, including an amount of $10 million claimed by one, BHP Billiton. 16 The first report identifies two related creditor claims: a claim by Mr Durie, the managing director, for money due under his employment contract of approximately $319,000, and an intercompany loan due to Nardell Holdings of $67 million. 17 The first report said that there were no substantial causes of action available in a liquidation and that a liquidation would have no sources of funding to pursue further investigation. It outlined a proposal by Nardell Holdings for a deed of company arrangement. 18 In essence, by this proposal ("the first deed proposal") Nardell Holdings offered $1.5 million to be shared amongst "trade" creditors (who would thereby receive a dividend of 17 cents in the dollar, $100,000 to "contingent" creditors (who were also to receive any surplus of the proceeds of sale of the company's assets over a stated amount, a surplus that did not eventuate), and nothing for other unsecured creditors or related creditors. The costs of administration would be allocated between the trade and contingent creditors. The secured creditors and Nardell Holdings would agree to "subordinate" their rights to participate in any dividend payments from the deed. 19 The meeting of creditors convened to consider this proposal, and held on 30 April 2003, was subject to a great deal of publicity and interest, apparently due to the significant role Nardell's mine played in the local community, and a perception amongst creditors that Macquarie was the cause of the failure and should be held accountable for losses suffered. The creditors resolved to reject the deed proposal, contrary to the recommendation of Mr Turner and Mr Watson, and therefore Nardell went into liquidation with Mr Turner and Mr Watson as its joint liquidators. 20 Acting as a joint liquidator, Mr Turner had discussions with the Committee of Inspection of creditors with a view to identifying matters for investigation and seeking funding, as Nardell had no substantial assets. Issues were raised respect to a foreign exchange put and call option agreement. Mr Turner subsequently investigated that transaction, obtaining documentation and independent advice, and reported to ASIC. His report as joint liquidator, given under s 533 and dated 5 August 2003, is in evidence. The currency transaction was entered into between Nardell and Macquarie Bank in May 2002, and a premium of $513,000 was paid on behalf of Nardell. Mr Turner found that in December 2002, Nardell decided to allow the options to lapse, because if they had been exercised Nardell would have incurred a loss of $1.1 million. On the evidence before him, Mr Turner rejected a claim that the contract had been renewed in favour of another Macquarie Bank entity. He concluded that it had been appropriate for Nardell to allow the options to lapse. By letter dated 26 August 2003, ASIC confirmed to Mr Turner, after considering the s 533 report, that it had decided to take no further action in relation to the transaction. 21 After some negotiation with the Committee of Inspection, Nardell Holdings gave the liquidators a revised deed proposal in July 2003, under which, in essence, $3.5 million was to be made available to "trade" creditors and "contingent creditors". Mr Turner has given evidence that the improved offer was partly in response to public and political pressure, and partly due to an expectation of what would be required to obtain certain ministerial consents if the business and assets of Nardell were to be sold by the receivers. At that stage, the mine had not been sold and it was costing the receivers at least $50,000 a week to keep it open on limited production. 22 With funding assistance from Nardell Holdings, Mr Turner and Mr Watson reported on the revised proposal to creditors ("the second report"), and convened a meeting to obtain a non-binding indication of their views. The meeting was held on 8 August 2003. Mr Turner and Mr Watson formed the view, on the basis of that meeting, that there was sufficient creditor support to justify an application by them to the Court to seek leave to appoint themselves voluntary administrators, so that they could convene a meeting of creditors to decide on the revised deed proposal. 23 The application by Mr Turner and Mr Watson came before Barrett J on 15 September 2003. In the meantime, on 5 September 2003 Mr Turner and Mr Watson were informed by the board of Nardell Holdings that they and the receivers had agreed to sell the Nardell coal mine to a company called Newpac Pty Ltd (a company established by the former management of Nardell) for $5.671 million. The Minister for Mineral Resources indicated that he would provide the necessary ministerial consents to the assignment of various leases provided that a deed of company arrangement was considered by the unsecured creditors of Nardell. 24 In reasons for judgment delivered on 19 September 2003, Barrett J held that it was appropriate to grant leave to Mr Turner and Mr Watson under s 436B(2), to appoint themselves voluntary administrators, and also to grant them leave to be appointed administrators of any subsequent deed of company arrangement entered into by Nardell. He also made an order under s 447A having the effect that there need be only one meeting of creditors in the new voluntary administration, which could be convened during the convening period, as long as proper notice was given. 25 In their application to Barrett J, Mr Turner and Mr Watson and Nardell had also sought an order under s 482 terminating the winding up of the company. As to that part of the application, Barrett J said (at [3]): "Mr Wood, who appeared for the plaintiffs, made it clear that the claim for the last of the orders is not pressed at this point. Whether or not the winding up should be terminated depends on events that will flow from the first three orders in due course, assuming they are made." 26 Mr Turner and Mr Watson then appointed themselves voluntary administrators, and convened a meeting of creditors to consider the revised deed proposal, attaching the text of the proposed deed of company arrangement and a related deed to their notice of meeting and report ("the third report"). 27 The creditors met on 29 September 2003. All those present impersonal by proxy voted in favour of Nardell entering into the DOCA and a related deed, subject to an amendment to include the reimbursement of costs incurred by a group of creditors represented by Mr Terry Porter. On 17 October 2003, Nardell, and Mr Turner and Mr Watson, entered into the DOCA and the related deed. I shall return to the terms of the two deeds later. 28 The receivers of Nardell completed the sale of the business and assets of the company to Newpac on 5 December 2003. The proceeds of sale were paid to the secured creditors, and nothing was available to unsecured creditors. Upon completion of the sale, all conditions of the DOCA were satisfied. On 23 December 2003, pursuant to the terms of the two deeds, Nardell Holdings paid Mr Turner and Mr Watson as deed administrators $3.3 million for trade creditors and $200,000 for contingent creditors. Their only remaining function as deed administrators to make distributions to those classes of creditors, following finalisation of the adjudication of proofs of debt. 29 All that remains of Nardell is its corporate structure. On 1 December 2003 the directors of Nardell told Mr Turner and Mr Watson that they do not presently intend to continue to trade in that company, and it is most likely that they will seek to deregister it in due course. They said that Nardell's tax position has not been established. The receivers have advised Mr Turner and Mr Watson that they have received no expressions of interest for purchase of the company structure. This was confirmed by the directors of Nardell in their letter. 30 On 24 March 2004 Nardell Holdings wrote to Mr Turner and Mr Watson saying that it had no objection to their applying to terminate or stay the winding up of Nardell, "in view of the fact that the debt owed by Nardell to Nardell Holdings has been released and extinguished by operation of the [DOCA] and the Related Deed". 31 Solicitors acting for Mr Turner and Mr Watson have had some substantial correspondence with ASIC, concerning the proposal to terminate the liquidation. I shall return to ASIC's views later. The DOCA and the Related Deed 32 The DOCA is a deed between Nardell, and Mr Turner and Mr Watson (who become the deed administrators). They are also parties to the Related Deed, together with Nardell Holdings, Bond Street Investments, Bond Street Custodians, Australian Ventures, and the responsible entities for Macquarie Investment Trust IIIA and Macquarie Investment Trust IIIB. Both deeds are dated 17 October 2003. 33 The DOCA distinguishes between "Trade Creditors and "Non-Trade Creditors". "Trade Creditors" are defined in clause 1.1 to mean the Creditors listed in Schedule A to the Deed, and any other Creditor with a Claim in respect of services rendered, goods bought, property hired or leased or used or occupied, in the period up to 20 February 2003. The term excludes the Creditors listed in Schedule B and other Claims, including Claims in the nature of damages, fines, penalties, and termination payments arising after 20 February 2003. "Non-Trade Creditors" means the Creditors identified in Schedule B and any Creditor other than the Trade Creditors. 34 The combined effect of the DOCA and the Related Deed is that Nardell Holdings agrees to pay two amounts, namely $3.3 million and $200,000. The payment of $3.3 million establishes Fund A, which is to be distributed to the Trade Creditors after payment of the administrators' costs and expenses, Priority Claims, and certain costs incurred by creditors during the first administration process (called here "Creditor Costs"). Trade Creditors whose Admitted Claims are equal to or less than $5,000 are then to receive payment of their full Admitted Claims, less their share of the Creditor Costs. Trade Creditors whose Admitted Claims greater than $5,000 and equal to or less than $14,000 receive $5,000 each, less their share of the Creditor Costs. Trade Creditors whose Admitted Claims exceed $14,000 receive pari passu distributions of the remainder of Fund A, less their share of the Creditor Costs. 35 The payment of $200,000 establishes Fund B, which is to be distributed pari passu in respect of the Non-Trade Creditor Admitted Claims. 36 Clause 3 of the DOCA states some conditions that must be satisfied within a reasonable time. They relate to various ministerial consents, and execution of the Related Deed. 37 Certain clauses of the DOCA and the Related Deed provide that Nardell Holdings and the Secured Creditors have agreed to be bound by the DOCA and not to prove for or participate in any distribution from the Funds. 38 There are provisions relating to the release of Claims and a moratorium while the Deed remains in force, to which I shall return later, when I consider the effect of the deeds on the position of secured creditors. Clause 5.1 of the Related Deed is a release by the deed administrators and the Company of the Secured Creditors, Nardell Holdings and all present and former directors of Nardell, Nardell Holdings, Macquarie Bank and the two Macquarie responsible entities. 39 By clause 10.1, the deed administrators are required to issue a certificate to ASIC within 28 days after they have completed their distribution of the Funds to Creditors. The clause states that "the execution of this notice terminates this deed and the control and stewardship of the Company returns to its directors". By clause 10.2 the deed administrators are empowered to serve a notice of default on Nardell Holdings if any of the obligations set out in the Related Deed are not satisfied. If the default is not remedied within seven days, the deed administrators may convene a meeting of creditors at which the creditors may elect whether to terminate the deed and place the company into liquidation, or vary the deed or waive the breach. In the event of termination under clause 10.2 or by the Court, the release of Claims does not operate. Submissions on behalf of Mr Turner and Mr Watson 40 Mr Turner and Mr Watson say that, once they finalised proofs of debt and make distributions under the DOCA, they will have no other functions as deed administrators. They say that there is no reason, in the public interest or otherwise, for not returning Nardell to its directors, given that the intention of the directors is not to trade and probably to seek deregistration of the company. 41 On the other hand, they say, if they remain liquidators of Nardell they will have to perform a number of duties in that office, and incur costs in doing so. Those duties include investigating the affairs of Nardell, keeping proper books, opening a bank account for monies received in the course of the liquidation, realising assets of Nardell that remain outside the DOCA and receivership (although present they do not believe there are any such assets), lodging liquidators' accounts, holding meetings of creditors and members under s 508 and providing reports to creditors as required, preparing their final accounts for presentation to creditors and lodging a final return with ASIC, which must then be registered the company after three months. They submit that performance of these duties is unnecessary and costly. 42 Additionally, they say that as liquidators they would be required to engage in some conduct which would be inconsistent with their role as deed administrators. An example is investigation of the affairs of Nardell as liquidators, which would be contrary to the wishes of Nardell's creditors, who voted in favour of the DOCA. Another example is that clause 10.1 of the DOCA requires that upon the termination of the DOCA, the company be returned to the control of its directors, whereas if the company were to remain in liquidation, the liquidators would be required to take steps ultimately leading to the deregistration of the company. ASIC's views 43 ASIC chose not to appear at the hearing of the application for termination, but it provided a letter dated 24 March 2004, in which it said "it is not clear from [Mr Turner's affidavits and the originating process] that the interests of unsecured creditors are safeguarded", and then made the comments set out below. It is unfortunate that ASIC was not represented at the hearing, given its concern. To a degree, its observations are unhelpful, especially to the extent that it suggests the general lines of substantial inquiry for the liquidators without addressing how the inquiries might be funded. 44 At the hearing, counsel for the plaintiffs quite properly purported to refute ASIC's comments, paragraph by paragraph, and the Court did not have the benefit of any response from ASIC. All I can do is to make an assessment of whether ASIC's letter identifies any reason for declining the relief sought in the originating process, after taking into account the plaintiffs' refutation. 45 ASIC's comments were as follows: "1. A resolution by creditors to enter into a deed of company arrangement or entry into a deed of company arrangement would not of itself terminate a pre-existing voluntary winding up (see section 439C, 446A, 436B(2) Corporations Act 2001, cf Mercy & Sons Pty Ltd v Wanari Pty Ltd (2000) 35 ACSR 70 at 75, 77-79). Section 446A(6) applies the Court's power to stay or terminate a winding up in section 482 to such cases. 2. In considering whether or not to order the stay or termination of a winding up of the company ('Nardell') it is relevant to take into account, inter alia , the interests of creditors, existing and future, and 'the public interest, including matters of commercial morality' (see Mercy & Sons Pty Ltd v Wanari Pty Ltd (supra) at 79-80). The latter would include fulfilment by the liquidators of statutory reporting obligations under section 533 of the Corporations Act 2001. 3. The deed of company arrangement is funded by the Receivers and Managers' sale of Nardell's business, the Nardell Coal Mine, to Newpac Pty Ltd ('Newpac'), a company established by Nardell's former management to continue the business of that mine. Furthermore, the major secured creditor, Bond Street Custodians Ltd ('BSC') is a majority shareholder of Nardell's parent, Nardell Holdings Pty Ltd ('Nardell Holdings'). In light of these matters, it may be relevant to note: a. the reasons behind the deed of company arrangement proposal; b. why the secured creditors have agreed to allow some of the proceeds of the sale of the Nardell coal mine, over which they had priority, to be distributed under the deed of company arrangement to unsecured creditors; c. why the holding company, Nardell Holdings Pty Ltd, is not proving for its debt under the deed of company arrangement; d. the terms of the agreement for sale of the Nardell coal mine including the distribution of the proceeds of sale; e. the sources of funding for Newpac's purchase of the Nardell coal mine; f. whether or not the mine was sold at market value; g. whether or not there are any other agreements (apart from the Related Deed) in relation to debts owed by Nardell to secured creditors; h. whether any of Nardell's debts have been transferred to Newpac. 4. The deed of company arrangement and the Related Deed do not clearly extinguish Nardell's remaining liabilities to secured creditors (approximately $50 million). Clause 5.1.1 of the deed of company arrangement provides inter alia that 'nothing in this deed: … affects in any way the liabilities of the Company to the Secured Creditors.' If liabilities to secured creditors are not extinguished an issue as to the company's solvency would arise. 5. Nardell's directors have not given any definite undertaking or time frame to have the company deregistered when it is returned to their control. There is no information provided as to Nardell's current financial and taxation position. 6. The termination of the winding up would absolve the liquidators from any further obligation to report under section 533 of the Corporations Act 2001. Although a preliminary section 533 report was lodged in August 2003, it is not clear whether the liquidators have any additional matters to report. In particular, it is unclear whether there are any matters to report arising from inquiries after the creditors meeting of 30 April 2003 in which Mr Turner stated that Nardell may have been insolvent for about two weeks prior to the administrators' appointment. Given the circumstances, it may be preferable that the liquidation not be terminated until liquidators' investigations are completed and reporting obligations are fulfilled." 46 As to paragraph 1, I have decided, for reasons set out below, that entry into a deed of company arrangement does not automatically terminate a pre-existing creditors' voluntary winding up, where the creditors' voluntary winding up arose in consequence of voluntary administration. That being so, the Court has a discretion to exercise as to whether to terminate the winding up after execution of the deed, under s 482. 47 As to paragraph 2, the statement of principle is correct, and will be elaborated below. Paragraphs 2 and 6 raise the question whether there are any additional matters to report under s 533, particularly with respect to insolvent trading. 48 In their first report to creditors, dated 10 April 2003, Mr Turner and Mr Watson reviewed possible recoveries by a liquidator, and concluded that there was no realistic source of recovery in the event of liquidation. They reported that receivers and administrators had been appointed the day after Macquarie Investment Trust III decided not to continue to provide further funding (a fact suggesting that would be difficult to make any recovery in respect of insolvent trading). They said that after preliminary investigations, they were unable to conclude that there had been a breach by the directors of their duty to prevent insolvent trading, but they were continuing with further inquiries, the outcome of which would be provided to creditors. 49 However, at the meeting of creditors which considered the first report, held on 30 April 2003, Mr Turner said "it may emerge that subject to certain circumstances existing, Nardell may have arguably been insolvent for about two weeks prior to the appointment". He added that the directors might be able to demonstrate an expectation that funding would be available, as it had previously been provided over a significant period of time. He said that the total amount of orders during this two-week period was approximately $570,000. 50 Mr Turner met with the Committee of the Inspection on 13 May 2003 and explained the examination process, and there was a discussion about funding examinations, after which the committee members decided that examinations should be undertaken, and Mr Turner said he would circularise creditors to determine whether they would be prepared to contribute to a fund of approximately $100,000 for examinations. There was also a discussion about creditors instituting proceedings individually, including proceedings for insolvent trading. 51 Nothing in the evidence indicates that any such fund was established, or that any further investigatory steps were undertaken. Nardell Holdings made its offer for a revised deed proposal on 8 July, and further revised its proposal after negotiations with the Committee of Inspection, and then Mr Turner and Mr Watson prepared their second report to creditors and convened the meeting of creditors that was held on 8 August. Their second report, dated 25 July 2003, deals principally with the revised proposal, but it also reports on investigations. It says that no additional information had been received which would change the view expressed in the first report, that recoveries were unlikely. While examinations might obtain further information, funding would be required and, to the date of the second report, sufficient funding had not been forthcoming. $56,900 had been offered by 27 creditors, while $100,000 was needed. The evidence indicates that subsequently, some of the offers of contribution to this fund were withdrawn. 52 In answer to question at the meeting of creditors on 8 August, Mr Turner said that his initial findings about insolvent trading had not been conclusive, but he had not received any additional information to substantiate a case against the directors. He added that an examination process might assist in obtaining further information, and then there was a discussion about funding examinations. 53 On 13 August 2003 Mr Turner sent a circular to the Committee of Inspection, confirming that no information had come to him to change his views on likely recoveries. He observed that, given limited funding, implementation of an examination process would be hindered, there would be lengthy delays even if funds were provided, and further funds would be needed to commence possible recovery actions if further information were obtained. He considered it more beneficial to seek the Court's leave to put the company back into voluntary administration and proceed with the revised deed proposal. 54 In his affidavit made on 12 September 2003, Mr Turner reaffirmed these views, and the unavailability of sufficient funding. He said that in his investigations, he had been "unable to identify any causes of action where recoveries may be made, let alone which deserve further investigation". 55 In his third report dated 19 September 2003, Mr Turner began in expressed his opinion that it was unlikely that any funds would be available to unsecured creditors in liquidation, repeating the views he had expressed in the circular to creditors dated 13 August. 56 On the basis of all the evidence on recoveries, I am persuaded that ASIC's concern on the subject is misplaced. ASIC's letter does not seem to take into account the whole of the evidence with respect to recoveries. 57 In paragraph 3 of its letter, ASIC says that the DOCA is funded by the receivers' sale of Nardell's business to the company's former management, and draws attention to the fact that BSC is a majority shareholder in Nardell's parent, Nardell Holdings, and then asks a number of questions which explore these relationships. In part, ASIC's assertion is not supported by the evidence before me - the evidence does not indicate that the DOCA funds come from the proceeds of sale of the business. Additionally, the issues raised in paragraph 3 are, for the most part, not relevant to the determination I must make on the present application. The question is whether, given that the DOCA has been executed and is in place, the liquidation of Nardell should be terminated. It is not relevant to explore whether the DOCA is open to challenge or might be terminated, or whether the creditors should have decided to enter into it. 58 Paragraph 4 of ASIC's letter raises an important question of construction of the DOCA and the Related Deed, which I shall consider below. The question is whether, if the liquidation is terminated, the company will be handed back to its directors burdened by some existing debts, or whether, conversely, all of the company's remaining liabilities to secure than unsecured creditors are extinguished by the DOCA. 59 Paragraph 5 of ASIC's letter records a concern, which I share, that there is no information provided as to Nardell's taxation position. I shall discuss this question under a separate heading later. I'm less concerned about absence of information about Nardell's current financial position, since the evidence provides the basis for an inference that all of its realisable assets have been sold, the proceeds had been applied to reduce its debt to a secured creditor, and it is not trading. The question of "automatic termination" of the winding up 60 Before Mr Turner and Mr Watson exercised their power under s 439B, after obtaining Barrett J's leave, to appoint themselves as administrators, they were in office as liquidators under a creditors' voluntary winding up. The winding up arose when the creditors rejected the first deed proposal and resolved that the company be wound up. Section 446A(2) then applied, operating to deem Nardell to have passed a special resolution under s 491 that the company be wound up voluntarily, without the directors' declaration of solvency contemplated by s 494. Subsection 446A(6) applied to that winding up, so as to authorise the Court to terminate it as if it were a winding up in insolvency. It is clearly the case that if the winding up has continued notwithstanding execution of the DOCA, the Court has the power to terminate it by the combined operation of s 446A(6) and s 482. 61 Some provisions of the DOCA assume that during its administration under the Deed, Nardell is not also in liquidation. Thus, clause 10.1 contemplates the return of the company to its directors after termination of the Deed, and clause 10.2 envisages the creditors deciding to place the company in liquidation in the event in default. However, the company was in a creditors' voluntary winding up prior to the resolution of creditors that the company should enter into the DOCA, and there has as yet been no order of the Court terminating the winding up under s 482. The question whether the winding up has been automatically terminated is a question of law, not dependent on the construction of the DOCA. 62 The availability of voluntary administration for a company already in liquidation, whether pursuant to a court order or otherwise, is expressly contemplated by s 436B(1). That subsection authorises a liquidator to appoint an administrator if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time. 63 Once the liquidator has made the appointment and thereby caused a voluntary administration to begin, the administrator takes control of the company's business, property and affairs, and may perform the functions exercise the powers of the company and any of its officers, under s 437A(1). The officers are prohibited by s 437C(1) from exercising any of their functions or powers, but according to s 437C(2) they remain in office. Section 437C relies upon the general definition of "officer" in s 9, which includes a liquidator of the company, but s 437C(4) supplements the general definition by providing that "officer" in that section includes certain persons, including a liquidator appointed by the court before the administration began. In my opinion the special definition in subsection (4) does not oust the general definition, but merely clarifies its application to special cases. On that basis, s 437C operates to suspend the powers of a liquidator in a creditors' voluntary winding up, once the liquidator has appointed an administrator under s 436B, but the liquidator remains in office as such. 64 Voluntary administration leads to a meeting of creditors, at which they consider the three alternatives set out in s 439C. The first choice is to resolve that the company execute a deed of company arrangement. Once the deed is executed, the administration of the company ends under s 435C(2)(a). The deed binds the company's creditors (s 444D), and also the company, its officers and members, and the deed's administrator (s 444G). Since the liquidator is an officer of the company, he or she is bound by the deed. But subject to the provisions of the deed (see Emanuele v Australian Securities Commission (1996) 14 ACLC 244), the suspension of the functions and powers of the liquidator as an officer, imposed during the administration by s 437C, comes to an end when the administration ends. It would be consistent with these provisions to hold that the pre-existing liquidation revives upon the execution of the deed, subject to any contrary provisions in the deed itself. 65 The second alternative for creditors at their meeting is to decide that the administration should end: s 439C(b). The administration of the company ends immediately upon the creditors so resolving: s 435C(2)(b). The above analysis suggests that if the creditors make such a decision, the company is returned to the liquidator, in a case where the liquidator has initiated the administration of s 436B. 66 The third alternative for creditors, according to s 439C(c), is to resolve that the company be wound up, and if they do so, the administration immediately comes to an end under s 435C(2)(c). In Mercy v Wanari (at [24]) I expressed the opinion, to which I adhere, that this choice is not available to the creditors if the company was being wound up in insolvency under Part 5.4 (that is, by order of the Court) before the administration commenced. I said it was not open to the creditors to superimpose a creditors' voluntary winding up upon the winding up ordered by the court, without the sanction of the court order, and that it would be absurd to have two liquidators in office at the same time. I said that s 439C(c) has a sensible field of operation in cases where there is no liquidation in process when the voluntary administration begins, or where there is a liquidation in process which does not assume the insolvency of the company. 67 Where there is a liquidation in process at the time of commencement of the voluntary administration, but it is a creditors' voluntary winding up under Part 5.5 rather than a court-ordered winding up in insolvency, it is also true, in my opinion, that the choice given to creditors by s 439C(c) is not available, but for different reasons. If the creditors were authorised to decide, at the meeting of creditors of the company in administration, that the company be wound up, s 446A would apply (s 446A(1)(a)). The company would be taken to have passed, at that time, a special resolution under s 491 that the company be wound up voluntarily, and to have done so without the directors' declaration of solvency under s 494 (s 446A(2)). The company would be taken to have nominated the administrator as liquidator. The effect of these provisions would be to superimpose a new creditors' voluntary winding up on the existing creditors' voluntary winding up, and a new liquidator would be taken to have been appointed. That seems to me to be unnecessarily complex, and sufficiently absurd to justify the conclusion that the legislature did not intend such consequences. If, in the circumstances envisaged, the creditors wish to have the company pass into liquidation, they are able to achieve that outcome much more clearly by resolving in terms of the second alternative (s 439C(b)) that the administration should end. 68 If the creditors choose the first alternative in s 439(a) and the company executes a deed of company arrangement in accordance with their resolution, s 445C authorises the company's creditors to resolve to terminate the deed, and s 445E permits the creditors to resolve, additionally, that the company be wound up. If they do so, s 446A applies and the company is taken to have resolved upon a creditors' voluntary winding up. 69 The reasoning that has led me to the view that the choice given to creditors by s 439C(c) is not available when the company is in administration, also leads me to the view that it is inappropriate for the creditors of a company under a deed of company arrangement, who have decided to terminate the deed, to resolve as well that the company be wound up. Upon the termination of the deed of company arrangement, any limitation upon the pre-existing liquidator's powers imposed by the terms of the deed comes to an end, and the pre-existing liquidation then continues. There's no need for the creditors to resolve to wonder company up, in such circumstances, and it would be confusing to contemplate that they might create an additional winding up with a new liquidator. 70 Nothing in Part 5.3A states or implies that, where a company in liquidation under a creditors' voluntary winding up becomes subject to administration, the winding up is extinguished if the company executes a deed of company arrangement. Section 444B(3), which empowers the board of directors of a company to authorise the execution of the deed, is not such a provision, for the reasons that I gave in Mercy v Wanari (at [29]). 71 As far as I am aware, there are no cases dealing with whether a "deemed" creditors' voluntary winding up is automatically terminated if a subsequent process of voluntary administration leads to the execution of a deed of company arrangement. In Mercy v Wanari (at [42]-[46]) I noted some judicial observations made incidentally in the course of deciding other points, and concluded that those authorities contained obiter dicta supporting the view that the execution of a deed of company arrangement does not automatically terminate a pre-existing court-ordered winding up. It seems to me that those authorities also support the view that a process of voluntary administration leading to the execution of a deed of company arrangement does not automatically terminate a creditors' voluntary winding up. One of them, Re Depsun Pty Ltd (1994) 13 ACSR 644, was a case where the liquidator had been appointed in a "real" creditors' voluntary winding up. 72 Further cases have been decided since Mercy v Wanari. In Sutherland v Rahme Enterprises Pty Ltd [2003] NSWSC 673 a court-appointed liquidator initiated a voluntary administration under s 436B which led to the execution of a deed of company arrangement, and then applied to Barrett J for an order for termination of the winding up under s 482. The application was refused, obviously on the basis that the winding up had not already been terminated by the execution of the deed. His Honour referred to Mercy v Wanari for other reasons, but did not think it necessary to explore the issue of automatic termination. In Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612, at [374]-[382], I held again that liquidation by order of the Court is not automatically terminated if the liquidator initiates a voluntary administration under s 436B and a deed of company arrangement is executed, applying my reasoning in Mercy v Wanari without further elaboration. 73 In my opinion the legislative policy underlying Part 5.3A does not prefer automatic termination to termination by the court under s 482. I considered the legislative policy, and reached that conclusion in a case of a court-ordered winding up in insolvency, in Mercy v Wanari (at [30]-[37]). I noted that different policy considerations may arise in the case of a creditors' or members' voluntary winding up: Mercy v Wanari, at [38]-[40]. My observations in those paragraphs of my earlier judgment were directed towards a "real" voluntary winding up. Where, however, the creditors' voluntary winding up is artificially deemed to have arisen under s 446A after a process of voluntary administration, the legislature has ordained that the winding up may be terminated under s 482 (see s 446A(6)). This is a strong indication that there is no legislative policy to the effect that it would be inappropriate for the Court to become involved in the process of termination of the winding up. 74 It appears, in summary, that if a liquidator in a "deemed" creditors' voluntary winding up under s 446A initiates a further voluntary administration under s 436B, which leads to the execution of a deed of company arrangement: · the winding up is only suspended, and not automatically terminated, during the administration; · the choice of creditors in the administration is either to approve a deed of company arrangement or return the company to its liquidator; · if they opt for a deed of company arrangement, the winding up is revived except to the extent that it continues to be suppressed by the provisions of the deed; · if the deed of company arrangement is terminated, the winding up continues thereafter without inhibition; · the winding up may be terminated by the Court at any time, under s 482. 75 Therefore the winding up in the present case has survived the execution of the DOCA, and the question now presented is whether the Court should terminate it (or order that it be stayed indefinitely) under s 482. Discretionary considerations with respect to termination of the winding up 76 There is now rich body of case law dealing with the matters to be taken into account in an application to terminate a winding up. The Court considers the interests of creditors, the liquidator, and contributories, and the public interest: see Re Data Homes Pty Ltd [1972] 2 NSWLR 22 (Court of Appeal of New South Wales); Re Nature Springs Pty Ltd (1994) 13 ACSR 50 (McLelland CJ in Eq); Re Intag International Ltd [1999] NSWSC 645 (Santow J); Mercy v Wanari, supra; GIO Workers Compensation (NSW) Ltd v Advance International (Australia) Pty Ltd [2002] NSWSC 261 (Barrett J); El Fahkri v Elfah Pty Ltd [2002] FCA 1469 (Finkelstein J); Sutherland v Rahme Enterprises Pty Ltd, supra; Dean-Willcocks re Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 1252 (Barrett J); Parkes Leagues Club Co-op Ltd [2004] NSWSC 16 (Hamilton J). 77 As far as the interests of the creditors (both the Trade Creditors and the Non-Trade Creditors) are concerned, they have chosen to participate in the DOCA and to receive distributions under it, upon terms that their debts are to be released. The doctor, a draft of which was circulated to them, expressly provides that upon termination of the company will be returned to its directors. Only one creditor voted against the revised deed proposal, and there is no evidence that this creditor has subsequently sought to resist the implementation of the proposal or the termination of the winding up. 78 The case law indicates that the Court should have regard to the interests of future creditors, and is likely to be concerned if the proposal for termination of winding up preserves existing debts. In that event, the Court will inquire as to whether there are satisfactory, binding arrangements for subordination of payment of those debts to newly incurred debts, and whether there is any proposal to capitalise debts. The attitude of the Court was explained in the judgment of Street J at first instance in the Data Homes case ([1971] 1 NSWLR 338), and his view has been re-affirmed in more recent times: see, for example, Re Nature Springs and Sutherland v Rahme Enterprises. 79 It is therefore important for the Court to determine whether the DOCA has extinguished all the debts of the existing creditors, including the residual debts of the Secured Creditors and the intercorporate debt owing to Nardell Holdings. If those debts have been extinguished, there is relevantly no obstacle to termination. I have decided, for reasons set out below, that the DOCA has extinguished those debts. 80 It appears to be quite strongly in the interests of Mr Turner and Mr Watson as joint liquidators that the winding up be terminated. As Mr Turner says in his affidavit, if the winding up is not terminated the liquidators will be obliged to undertake substantial and costly work without any obvious source of payment. 81 As to the interests of contributories, in this case there is only one, Nardell Holdings, and it has consented to termination of the winding up. There is, however, an aspect of the position of Nardell Holdings which is not clear to me on the evidence at the present time. This is the question of the availability of tax losses. I shall consider it more fully below. 82 It does not seem to me that the application to terminate in the present case raises any issues of commercial morality of the kind referred to by the Court of Appeal in the Data Homes case. 83 I would therefore be inclined to make an order for termination of the winding up, provided I can be satisfied that no issues arise out of the question of tax losses. The effect of the DOCA and Related Deed on secured creditors 84 Section 444D(1) states that a deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under s 444(4)(i) (in this case, 20 February 2003). By s 444D(2), subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security, except so far as (a) the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the Deed, or (b) the Court orders. Here the Secured Creditors did not vote in favour of the resolution to execute the Deed, but they have undertaken contractually to be bound by it (Related Deed, clause 4.1). The DOCA does not prevent the Secured Creditors from realising or otherwise dealing with their security. 85 The question is whether provisions of the DOCA, to which the secured creditors have agreed contractually to be bound, operate to release Nardell from its debts to the Secured Creditors once distributions have been made in accordance with the DOCA and the deed administrators so certify. There are no statutory provisions that are of assistance. Section 444A(4)(d) requires that a deed of company arrangement must specify to what extent the company is to be released from its debts. It does not require that the deed should release the company from all its debts. The answer to the question depends on the proper construction of provisions of the DOCA. 86 The following provisions of the DOCA are relevant: "4. EFFECT OF ARRANGEMENT ON CLAIMS OF CREDITORS AND MORATORIUM Effect of Deed on Claims 4.1 Creditors must accept their rights and entitlements specified in this deed in full satisfaction of all Claims that they have or claim to have against the Company."

"4.2 Release and extinguishment If this deed terminates in accordance with clause 10.1, all Claims are released in full and extinguished upon termination of this deed (whether or not they have been proved or accepted to participate in a distribution under this deed), and this deed may be pleaded against any Creditor in bar of its Claim. …." " 4.3 Moratorium Subject to clause 4.5 [not presently relevant] and whilst this deed remains in force Creditors must not, in relation to their respective Claims: 4.3.1 begin, support to continue with any action seeking an order that the Company be wound up; 4.3.2 begin, take any further steps in, or continue with, any legal proceedings or arbitration in relation to their respective Claims; or 4.3.3 begin or continue with a proceeding against the Company in relation to any of its property, or begin or proceed with any Enforcement Process in relation to property used or occupied by, or in the possession of, the Company except with the leave of the Court and in accordance with such terms (if any) as the Court imposes." "5. EFFECT OF DEED ON SECURED CREDITORS 5.1 Position of Secured Creditors Subject to clause 5.2, nothing in this deed: 5.1.1 affects in any way the liabilities of the Company to the Secured Creditors or the contractual relations between them in respect of the security; or 5.1.2 prevents or precludes the Secured Creditors from taking action for the purpose of realising or otherwise dealing with its securities, including action for this purpose of the types referred to in clauses 3.3.2 and 3.3.3 [ semble , typegraphical errors which should refer to causes 4.3.2 and 4.3.3]. 5.2 The Secured Creditors have agreed to be bound by the terms of this deed and agreed not to prove for, and participate in, a distribution from the Funds in respect of any Residual Debt." "1.1 Definitions "'Claims' means all actions, claims, suits, causes of action, arbitrations, debts, costs, demands, verdicts and judgments at law or in equity or under any statute against the Company, whether certain or contingent, present or future, ascertained or sounding only in damages, the circumstances giving rise to which occurred on or before 20 February 2003 …" "'Creditor' means any person with a Claim." "'Residual Debt' means the Claims of the Secured Creditors that remain unsatisfied following realisation of the securities held by the Secured Creditors over property of the Company." "'Secured Creditors' has the same meaning as in the Related Deed [which defines the term to mean Australian Ventures, Bond Street Custodians and Bond Street Investments]." 87 Were it not for clause 5, it would be clear that the DOCA would operate to release the debts owed to the Secured Creditors upon termination of the deed under clause 10.1. This is because the claims of Secured Creditors to be paid their debts are "Claims" as defined in clause 1.1, and therefore the Secured Creditors are "Creditors" as defined. By clause 4.2, therefore, their debts would be released in full and extinguished upon termination of the deed. 88 Clause 5, which purports to deal with the effect of the DOCA on Secured Creditors, is a specific provision which prevails, in respect of the Secured Creditors, over the more general provisions of clause 4, on normal cannons of construction. Clause 5.1.1 says that the DOCA does not affect in any way the liabilities of the Company to the Secured Creditors. It is not clear, on the face of our clause, whether the words "in respect of the security" at the end of the subclause qualify that part of the clause that precedes the word "or". But clause 5.1 is expressed to be subject to clause 5.2, which provides some assistance in resolving this ambiguity. 89 By clause 5.2 (read in conjunction with the substantially identical language of clause 4.1 of the Related Deed) the Secured Creditors have agreed to be "bound by the terms of" the DOCA. This is the same language as is used in s 44 4D(1) and s 444H(b). The statutory concept of being "bound by" a deed encompasses being bound by the release of debts for which the deed provides. When particular entities undertake to be "bound by" a deed of company arrangement, it is appropriate to infer that the use of these words conforms to the statutory use, and therefore extends to being "bound by" the release of Claims for which the deed provides. 90 If clause 5.1.1 were read so as to preserve the liabilities of the company to the Secured Creditors without qualification, it would be odd to make that provision subject to an undertaking to be bound by the release of Claims. In my view it is preferable to read clause 5.1.1 so that the words "in respect of the security" qualify the words "the liability of the Company to the Secured Creditors". On this approach the whole of subclause 5.1 is directed to preserving the legal relationship of the parties with respect to the security but not otherwise, and subclause 5.2 commits the Secured Creditors to the release of their Claims for payment of the Residual Debt (as well as to the moratorium and other relevant provisions of the deed). 91 My conclusion is that amount is that is a matter of construction, the DOCA will release the Claims of Secured Creditors upon termination under clause 10.1. The effect of the DOCA and the Related Deed on Nardell Holdings 92 The company's debt to Nardell Holdings is a "Claim" as defined in the DOCA, and therefore Nardell Holdings is a Creditor and a Non-Trade Creditor as defined. As such, its Claim (that is, the company's debt to it) is released in full and extinguished upon termination of the DOCA, by virtue of clause 4.2. 93 Nardell Holdings would be entitled to prove and receive a distribution out of Fund B but for clause 6.1 of the DOCA and the substantially identical clause 4.2 of the Related Deed. By those provisions Nardell Holdings agrees to be bound by the terms of the DOCA, and agrees not to prove for, and participate in, a distribution from the Funds respect of its Claim against the Company. 94 There is nothing in clause 6.1 or the Related Deed comparable to clause 5.1 in the case of the Secured Creditors, or any other provision that might qualify the application of clause 4.2 to Nardell Holdings. Its promise to be "bound by" the terms of the DOCA reinforces the applicability of the release clause. Potential tax losses 95 Although the evidence is that no-one has expressed interest in buying the corporate structure, that evidence is on the basis that the company's tax position has not been calculated. Now that the company's assets have been sold, it should be possible to complete the calculation of its tax position and make an assessment as to whether there are any tax losses that might be used, and whether the corporate structure containing those losses might be sold. 96 I have no evidence on these matters. If there are tax losses that create a value in the corporate structure after termination of the winding up, presumably the ensuing benefit will be enjoyed by Nardell Holdings, either because it will be able to use the tax losses on a group basis or because, if the corporate structure is sold, it will benefit from the realisation has Nardell's shareholder. Either way, it is relevant to the Court to know the position, and sufficiently important that the Court's decision as to termination of the winding up should be deferred until the position is established by evidence. If there were a very substantial benefits accruing to Nardell Holdings that had not been disclosed to the creditors, the Court might require that the creditors be notified before the deed is terminated, in case they might wish to exercise any rights under Division 11 of Part 5.3A, or even that a meeting of creditors be convened, before the application for termination of the winding up is finally addressed. Conclusions 97 I had decided that I should give the plaintiffs the opportunity to provide some supplementary evidence indicating whether any usable tax losses have been identified and if so, whether there is any proposal to use them. I shall also receive supplementary submissions dealing with this question. I shall adjourn the application into the Corporations List to give the plaintiffs time to respond.

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