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[1996] FCA 899
Federal Court of Australia
1996-10-18
Lehane JJ
Original judgment source is linked above.
n each year during which Lam Soon Australia operated it. The North Adelaide supermarket, by contrast, at least by 1994 was profitable. It never, however, produced profits sufficient to outweigh the continuing losses at Central Market. The result was that in each year during which it carried on business, up to and including the 1994 calendar year, Lam Soon Australia suffered substantial losses so that by 31 December 1994 its accumulated losses were $5,584,986 and its total liabilities exceeded its total assets by $4,684,486. The deficiency appears to have been funded by a combination of advances and forbearances by parties (mainly corporations) associated with Lam Soon Australia: the 1994 accounts show current liabilities of $2,951,036, and non current liabilities of $3,913,352, to associated parties. The accounts for each year up to and including 1993 included a note substantially to the effect that the ultimate holding company had given a written undertaking that it would continue to provide financial support such that Lam Soon Australia would be able to pay its debts as and when they fell due. There is in evidence a letter dated 31 March 1994 from Lam Soon Properties Pte Ltd (the holding company of Lam Soon Australia) addressed to the auditor of Lam Soon Australia which reads as follows: LAM SOON AUSTRALIA PTY LTD AND SUBSIDIARY COMPANY In connection with your audits of the above companies for the year ended 31st December 1993, we hereby acknowledge our continuing financial support for these companies and confirm that this support will be extended for the next twelve months. Despite the date of that letter, no doubt "the next twelve months" is to be read as the year ending on 31 December 1994. The relationship between Lam Soon Australia and Molit deteriorated and by 1994 could be described without exaggeration as unhappy. There had apparently been litigation between them. Attempts were made, but without success, to renegotiate the rent payable under the lease. By the closing months of 1994 those who controlled Lam Soon Australia had formed the view that it would not be possible to trade profitably at the Central Market supermarket, at least if the lease could not be renegotiated, that they were not prepared to continue supporting the losses at Central Market beyond that year and that, accordingly, a means should be found of ridding Lam Soon Australia of the continuing drain on its (and its parent's) resources at Central Market while retaining the profitable operation at North Adelaide. In December 1994 the auditor of Lam Soon Australia consulted Mr Peter Macks, a chartered accountant and specialist in insolvency matters. A meeting took place on 14 December between Mr Colin Khor (a director of Lam Soon Australia), the auditor, Mr Macks and an assistant of his. According to a letter of advice subsequently written by Mr Macks, the subject matter of the meeting was:
... the restructure of the Lam Soon Pte group of companies and in particular ... closing of the Central Market Foodland supermarket and finalising all respective lease obligations for that supermarket. After describing the structure of the Lam Soon group, the letter continues: The requirement is to close the Central Market supermarket, which is unprofitable, and finalise all lease obligations for that supermarket, at the same time continuing to operate the North Adelaide supermarket and maximizing the value of all trading losses within the group. I am of the opinion that the simplest and most cost effective way of achieving this requirement is to appoint a Voluntary Administrator over Lam Soon Australia Pty Limited. In brief, the advice which Mr Macks gave was that the stated objective would most conveniently be achieved by the appointment of an administrator under Part 5.3A of the Law followed by the execution of a deed of company arrangement which would provide for the payment in full of debts due by Lam Soon Australia at the commencement of the administration, the payment to Molit of an amount calculated by reference to the dividend it might expect to receive in a winding‑up of Lam Soon Australia and the deferral of the claims of persons associated with it. The advice was accepted. By a resolution purportedly passed on 30 December 1994 (but apparently adopted earlier, a copy of it having been sent to Mr Macks, by fax from Singapore, on 28 December) the directors of Lam Soon Australia resolved in accordance with s 436A of the Law that Mr Macks be appointed as administrator of Lam Soon Australia. Although the evidence is unclear as to precise times, it seems that Mr Macks visited the Central Market supermarket on 30 December, immediately following his appointment, and formed the view in the course of that visit that the supermarket should be closed forthwith. Over the next few days Mr Macks arranged for the removal of stock, plant and equipment belonging to Lam Soon Australia. On 4 January 1995 he gave notice to Molit, under subs 443B(3) of the Law, that he did not propose to exercise rights in relation to the property so that Mr Macks ceased to be personally liable for rent (though Lam Soon Australia itself, of course, remained liable). The trial judge found - the finding is not challenged and is undoubtedly correct - that the company, by the actions of Mr Macks as administrator, repudiated the lease. Molit changed the locks and locked the premises; it informed Mr Macks, however, that keys for the new locks were available to him. Her Honour found, and again the finding is not challenged, that Molit did not accept the repudiation of the lease. The first meeting of creditors, required by s 436E of the Law, took place on 6 January 1995. No proposal was put to the meeting to remove or replace Mr Macks as administrator. A committee of creditors was formed, which included a representative of Molit. On 25 January 1995 Mr Macks sent a report to creditors under s 439A of the Law. The report includes the following statement about the circumstances and purpose of Mr Mack's appointment and its outcome: The directors have attributed the insolvent position of the company to the poor trading of the Central Market Foodland combined with that supermarket's high overheads. The purpose of my appointment was to review the trading position of that supermarket and, if necessary, close the supermarket and settle all claims in relation to it. I have since closed that supermarket. As part of my appointment I have also reviewed the operation of the North Adelaide Foodland. That supermarket is currently trading profitably and, accordingly, I have continued its operation. The directors have prepared a proposal to be put to all the company's creditors to settle their claims ... After describing the assets of the company, Mr Macks says that, having considered "whether or not there have been any transactions or actions that may be able to be pursued by a Liquidator", he has formed the view that no additional recoveries would be available in a winding‑up. He then sets out the directors' proposal. Substantially, the proposal was in accordance with the advice which Mr Macks had given. It divided creditors into three classes described as follows: (i) Non associated creditors as at the date of my appointment. (ii) Future non associated creditors as at the date of my appointment. (iii) Associated creditors. The only substantial creditor intended to be included in the second of those categories was Molit: there was a suggestion, during the hearing of the appeal, that the class also included a sub‑lessee, referred to during argument as the "kebab man". The proposal then was that creditors in class (i) should be paid in full, the holding company providing funds to the extent necessary to ensure that that could be done. The claims of creditors in class (iii) would be deferred, that is to say not paid, in whole or in part, during the term of the proposed deed of company arrangement. Creditors in class (ii) would receive a dividend calculated by dividing by the total claims of all three classes of creditors the total assets of the company less the costs of the administration. The value of the Central Market assets was to be taken to be the amount realised by their sale; the North Adelaide assets were to be valued. Mr Macks informed creditors that in his opinion it would be in their interests for Lam Soon Australia to execute a deed of company arrangement giving effect to the proposal: this was because creditors in class (i) would be paid in full and immediately (whereas that would not happen in a liquidation) and creditors in class (ii) would receive more, and would receive it more quickly, than in a liquidation (the report gave a reason for this which was incorrect, but it was subsequently corrected and nothing turns on the mistake). The meeting of creditors called to consider the administrator's report was twice adjourned so that issues raised by Molit might be considered. The issues related principally to a claim that Lam Soon Australia had been insolvent from the time it commenced trading and that, therefore, if it were wound up its holding company might be liable under s 588W of Law, and its directors under s 588M, for debts which it had incurred. At the adjourned meeting on 3 March 1995 Mr Macks announced that he had received Senior Counsel's opinion that claims of that kind would not be sustainable. Senior Counsel had also advised that the associated creditors (whose claims were far larger than the combined claims of creditors falling within classes (i) and (ii)) were entitled to vote on the proposal that a deed of company arrangement be executed. That proposal was put to the meeting and adopted, Molit being the only creditor voting against it. The deed was executed on 23 March 1995. On that day Molit gave notice to Mr Macks of its intention to file an application under s 445G of the Law for an order declaring the deed to be void. On 7 April 1995 Molit commenced the proceedings against Lam Soon Australia which have led to this appeal. The proceedings By its application dated 7 April 1995 Molit sought principally the following relief:
(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 act 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. 445D(2) [Application for order] 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. In seeking an order under that section, Molit relied on five grounds summarised by the trial judge as follows:
I find that the DOCA is unfairly prejudicial to the applicant in that it binds the applicant in respect of claims for future rent under the lease when such lease was repudiated during the administration of the Company without notice to, or consultation with, the applicant. I further find that the DOCA is unfairly discriminatory against the applicant in that no reasonable grounds, in the sense discussed above, for the strikingly differential treatment thereunder of the different classes of creditors have been demonstrated. In relation to reasonable grounds for discrimination between creditors, her Honour had said this: It appears that Mr Macks may have received and accepted legal advice to the effect that provided the applicant did not receive under the DOCA less than it would receive on a winding up of the Company, it would have no ground of legal complaint. In my view, particularly having regard to s 445D of the Corporations Law, the position is not so simple. A deed of company arrangement may in certain circumstances be valid notwithstanding that there is differentiation between the treatment of different classes of creditors. Reasonable grounds for such differentiation, consistent with the object and spirit of Pt 5.3A of the Corporations Law, need to be able to be demonstrated. In my view, the grounds here relied upon are not sufficient to justify the disparity between the treatment under the DOCA of the claims of the applicant and the claims of all other creditors. The contentions of the respondent are summarised in a phrase which counsel repeated in argument on appeal: that the arrangement represented by the deed was an attempt to "ride roughshod over our rights". Mr Macks had been asked to advise Lam Soon Australia and its parent and his brief had been to consider means by which the company could retain its profitable North Adelaide supermarket but be freed from the burden of Central Market, which the parent company was no longer willing to support. Mr Macks advised that this could be done by the appointment of an administrator followed by the execution of a deed of company arrangement. Having given that advice, he was appointed as administrator and took the steps necessary to carry his advice into effect. He was thus neither independent nor objective, particularly in his dealings with Molit and in relation to the Central Market supermarket and especially the removal of stock and plant with the intention of depriving Molit of a possible right of distraint. His lack of independence and objectivity was, it was submitted, evidenced further by his continuing reports and advice to the parent company after the commencement of the administration. Counsel pointed also to a number of other matters as indicating unfair discrimination or oppression: for instance, the fact that the arrangement enabled the company to maintain large prior trading losses as a potential taxation benefit; and that associated creditors, in whose interests it was to retain North Adelaide and the benefit of the losses, were permitted to vote in favour of the deed with non‑associated creditors who could, of course, be expected to favour it also as they were to be paid in full, thus ensuring that the deed would be approved whatever the attitude of Molit might be. Counsel relied particularly on what was claimed to be a prospect that in a winding‑up a liquidator might make substantial recoveries on the basis of preferences and insolvent trading; in that respect Molit relied on expert evidence of a Mr Swan to the effect that Lam Soon Australia had, from the time it commenced trading, been insolvent. In all those circumstances, counsel submitted that a deed which did not offer Molit "a proper sum" was unfairly prejudicial to it, or unfairly discriminatory against it: a proper sum was said to be one substantially greater than that which the deed offered.
Lam Soon Australia contended that there is nothing unfair in the degree of discrimination for which the deed provides. It was said that the debts claimed by the "non‑associated creditors as at the Appointment Date" were, by contrast with the future rent under the lease, payable in full at the time Mr Macks was appointed as administrator; they had the benefit of a "guarantee" of the parent company whereas, at least after the end of 1994, that "guarantee" was not available to Molit; and all the non‑associated creditors, other than Molit, were suppliers or other persons whose continued support was necessary for the continuation of the North Adelaide operations. It was submitted also that the trial judge had, in effect, reversed the onus of proof: that whereas the section permits the Court to make an order terminating a deed (only) if it is satisfied that certain circumstances exist, her Honour appeared to require fairness to be positively demonstrated. Counsel contended that discrimination as between creditors is not of itself necessarily unfair; that criticisms of the conduct of Mr Macks were unjustified; that, particularly, a decision as to the continuation or closure of the business at Central Market had to be made within a very short time, and the interests of the company and its creditors generally properly protected on its closure and that, by the time when the deed came to be considered by the creditors, closure was a fait accompli; and that, if Mr Macks for good reason had not seen fit to negotiate with Molit before closing the supermarket, equally Molit had seen fit not to canvass with Mr Macks the possibility that the deed might provide it with a greater dividend. In any event, counsel submitted, the question whether a deed is unfair is to be judged by reference to the terms of the deed and their effect, not by reference to things done before the deed was entered into. It is, of course, true that the occasion for the deed was the desire on the part of Lam Soon Australia and its parent to "deal with" the "problem" at Central Market in the sense of enabling Lam Soon Australia to discharge its obligations to Molit as cheaply as possible while continuing to trade at North Adelaide. There is nothing necessarily wrong with the use of the mechanism provided by Pt 5.3A to bring about that result. The business of Lam Soon Australia could not continue in existence, as it stood before 30 December 1994, without the continuing support of its parent company: without that support Lam Soon Australia would certainly have been insolvent. The parent company had decided that it would not continue its support beyond the end of 1994 unless Central Market could be closed on terms satisfactory to it. In those circumstances a deed which facilitated the closure of Central Market while maintaining North Adelaide could be justified: the object stated by s 435A is, in part, "to provide for the business, property and affairs of an insolvent company to be administered in a way that ... maximises the chances of ... as much as possible of [the company's] business, continuing in existence". Where the basis of a deed of company arrangement is a proposal that an unprofitable part of a company's business will be closed and a profitable part continued, it would be surprising to find that the deed did not discriminate between those creditors who were likely to have a continuing relationship with the company and those who, because their connection was only with the part of the business to be closed, were unlikely to do so. There is authority which supports the proposition, which seems to us clearly correct, that some degree of discrimination in such circumstances is not necessarily unfair: Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, 152; Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 709, 710. General propositions are dangerous where, as here, the Court is given a discretionary power to exercise, having regard to the statutory criteria and the circumstances of individual cases. Nevertheless, we do not find the benchmark adopted by Mr Macks in this case particularly surprising. In circumstances where a deed of company arrangement involves the closure of part of a business and the continuation of another part, and a consequent discrimination between groups of creditors, it may be expected that the creditors whose connection is with the continuing business will receive, if not all that they are owed, then at least more than they would receive in a winding‑up. The alternative to a deed being liquidation, it is likely that the creditors whose connection is solely with the business to be closed will justifiably claim to be unfairly discriminated against, or unfairly prejudiced, if the scheme gives them less than they would have in a winding‑up. But if the continuing creditors are to be paid more than they would have in a winding‑up, it is likely that funding from some external source - perhaps, as here, a parent with adequate resources - will be required in order to enable the others to be dealt with in a way that does not involve unfair prejudice or discrimination. We cannot see why fairness necessarily demands that significantly more be contributed than the amount necessary to ensure that all creditors receive benefits of a value at least equal to those which they would receive if the deed were not executed. The use of the word "necessarily" is deliberate: the judgment in each case is discretionary and will be made in the light of particular circumstances; including no doubt the circumstance (if it is the case) that a contributor of funds will itself benefit substantially from that proposal, perhaps through a likelihood of the availability of tax benefits. It is necessary to consider the circumstances of this case against that background. First, there is the question of objectivity and independence. In Bartlett Derrington J said, at 711, that it is "necessary that an administrator be independent and objective" and the trial judge applied that observation in this case. We do not doubt that that is true, in the sense particularly that, in reporting to creditors and making a recommendation as to which of the alternative causes of actions they should pursue, the administrator must act objectively and having regard to creditors' interests. We do not, however, at all think it follows that an insolvency practitioner who has given a company, or its parent, advice of the kind which Mr Macks gave is disqualified from acting as administrator or that such a practitioner cannot properly recommend to creditors, if he or she honestly believes it is proper to do so having regard to their interests, a deed which will substantially give effect to the advice. Nor can we see anything necessarily wrong with what we understand to be a reasonably common practice whereby an insolvency practitioner who has been, or who it is contemplated will be, appointed as administrator of a company works with the company, and persons associated with it, in formulating a deed which is then recommended to creditors. The essential requirement in every case is that the insolvency practitioner at all times before appointment as administrator, and after the appointment, act objectively in a manner which gives due regard and balance to the interests of all creditors, including different classes of creditors where different classes exist. Secondly, there are the questions arising out of the way in which Mr Macks dealt with the lease of the Central Market supermarket and with Molit. Given the attitude of Molit as found by the trial judge, there is no obvious reason, we think, to criticise Mr Macks for failing to approach Molit during the relatively brief period when he acted as an adviser, before his appointment as administrator. Once he had been appointed administrator, the evidence is clear that he very quickly concluded (and with the benefit of background information he already had from Lam Soon Australia) that the supermarket must be closed. That being so, he had to take prompt action to avoid personal liability under s 443B. It may be - but it was not established - that Molit might, had it been aware of what was happening and taken action in time, have been able to distrain against property which Mr Macks removed from the supermarket. In any event, at the first meeting of creditors a representative of Molit was appointed a member of the committee of creditors. The evidence makes it clear that there followed discussions and correspondence between Mr Macks and those acting for Molit. The meeting called to consider the administrator's report, and the deed, was adjourned twice so that matters raised by Molit might be considered. There is no evidence that Molit proposed what its counsel now asserts would solve the problem, that is that a greater dividend be paid to it then it would receive in a liquidation. In sum, we do not find the criticisms of Mr Macks, in relation to his dealings with Molit, by any means convincing. Nor, with respect, do we think it adds anything of substance to point out that the deed was necessary to deal only with the position of Molit and not with that of other non‑associated creditors who were to be paid one hundred cents in the dollar or with associated creditors who were in any event willing to defer their claims. It would, we think, be an odd conclusion that a deed which gave the non‑associated creditors, say, ninety cents in the dollar and Molit a little more than it would receive in a liquidation was in some sense fairer than one which paid the non‑associated creditors the full amount owing to them but nevertheless gave Molit little more than it would receive in a winding‑up. However, where as in this case a deed which is proposed will discriminate between creditors and there is no community of interest between the groups, it is important that an administrator examine the proposal carefully and critically in order to ensure that the less advantaged group is not unfairly prejudiced. That must involve at least that the administrator take steps to ensure, so far as it is possible, that the deed is no less beneficial to all creditors than liquidation is likely to be. For completeness, we should perhaps mention two other matters. One of the justifications offered by Lam Soon Australia for the discrimination in favour of creditors whose debts were due for payment at the commencement of the administration was that those creditors had the benefit of the equivalent of a guarantee by its parent company: the parent company's obligation said to arise from the notes, to which we have referred, in Lam Soon Australia's annual accounts. We do not think it is by any means established that the note gave rise to any such obligation as a matter of law, but, given the views we have expressed, it is unnecessary to pursue that question further. Secondly, counsel for Molit referred in argument to the position of the lessor of the North Adelaide premises and asked was the position of that lessor not, on the face of the deed, precisely the same as that of Molit? Again, we do not think that the answer to that question, or any arrangement which may have been made for the payment of rent for the North Adelaide property, is relevant to the issue of unfair prejudice to, or discrimination against, Molit. For the reasons we have given, we do not think, with respect, that what we have referred to as the two crucial findings of the trial judge can stand. It follows in our view that the appeal should be allowed. The question then arises whether it is appropriate simply to substitute for the orders made by her Honour an order that the application be dismissed or whether, on the other hand, it is necessary or appropriate to remit the matter to her Honour for further consideration of outstanding matters. Counsel for Lam Soon Australia urged us to take the former course; counsel for Molit contended for the latter. We think the matter should be remitted to the trial judge. First, in the light of her conclusions about unfair prejudice or discrimination, her Honour found it unnecessary to consider other grounds on which Molit submitted that the deed should be terminated. It is implicit in what we have already said that in our view the first ground - that the deed is not for a purpose authorised by s 435A - is not made out. There remain, however, the claims that the s 439A report was deficient and that the administrator's inquiry and investigation were not sufficient to justify a recommendation that the deed be executed. It does not follow from the conclusion that her Honour's decision should not stand that the deed necessarily should not be terminated on the ground of unfair prejudice or discrimination; particularly, her Honour explicitly refused to make findings as to the likelihood of recoveries, in a liquidation, from the holding company or from directors. The complaint that the deed was an attempt to ride roughshod over Molit's rights had at its core the allegation that the deed would provide a lower monetary return to Molit than would occur in a liquidation. Questions concerning the adequacy of the administrator's investigation as to the likelihood of recovery are central to that allegation. The reasons for her Honour's refusal to deal with those questions were that interested parties were not represented before the Court and that the issues might arise for determination in future proceedings. The difficulty with that approach is that it is impossible to form a view as to whether what is proposed unfairly prejudices, or discriminates against, Molit without reaching a conclusion as to what it is likely to receive in a liquidation and, particularly, as to the reasonableness of the conclusions reached by the administrator on that subject. There are obvious difficulties with, and limitations on, inquiries of that sort particularly when parties against whom rights of recovery are asserted to exist by opponents to the deed are not before the Court, but we do not think that in a case such as this such inquiries can be avoided entirely: see Hagenvale at 150; Hamilton v National Australia Bank Ltd at 253. Other matters It will be recalled that the trial judge declined to make an order under s 445G or under s 447A of Law declaring the deed of company arrangement void in whole or in part. Those decisions of her Honour were not attacked and were in our opinion correct. Conclusion The appeal should be allowed. The orders made by the trial judge should be set aside and the matter should be remitted to her Honour for further hearing and determination having regard to these reasons. The respondent should pay the appellant's costs of the appeal. I certify that this and the preceding 32 pages are a true copy of the Reasons for Judgment of the Court. Associate: Dated: 18 October 1996 Heard: 8 May 1996 Place: Adelaide Decision: 18 October 1996 Appearances:Messrs D E Clayton QC and P A Britten‑Jones of counsel instructed by Barratt Lindquist appeared for the appellant. Mr J M Wilkinson of counsel instructed by Patel & Co appeared for the respondent.
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