Public interest (and commercial morality)
55 The content of the "public interest" invoked under s 445D(1)(g) does not differ from that which is relevant to the exercise of the Court's discretion under s 445D(1) generally, or under s 447A, nor in respect of the power to set aside the casting vote on a DOCA pursuant to s 75-42 of the IPSC. Accordingly, if "public interest" is the basis on which termination is sought under s 445D(1)(g), there will be little to distinguish as between an application brought under s 445D(1)(g) or s 447A. In Midland Hwy, on the matter of "the [broad] ambit of s 447A", Beach J observed, at [69]:
Section 447A can be used to make the orders sought by ASIC, whether or not any element of s 445D could be hypothetically or contingently invoked, although I accept that s 445D(1)(g) is broad and on one view unconstrained, save by its context and s 435A generally, such that this proposition may only be of theoretical interest. But it is correct to say that even if none of the elements of s 445D could be satisfied, the orders sought could still be made under s 447A.
56 In the exercise of the Court's discretion under either s 445D(1) or s 447A, the authorities are agreed that the same factors are relevant to determining the question of "public interest": Bidald at [287]; TiVo Inc v Vivo International Corporation Pty Ltd [2014] FCA 789 at [60]; Midland Hwy at [65]; Adelaide Brighton at [1199], [1231], [1379]; Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 at [72].
57 The authorities do not, however, disaggregate "commercial morality" and "public interest" - rather, "public interest" includes considerations of commercial morality: Bidald at [287]; TiVo at [60]; Midland Hwy at [68] (emphasis added). To the extent that Besanko J referred to matters relevant to "public interest and commercial morality" in Adelaide Brighton at, for example, [1394], his Honour should not be taken to have expressed a view different from that of Gordon J in TiVo at [60], to which he referred in the paragraph immediately preceding his observations, at [1393], acknowledging the interplay between "the public interest and within that concept considerations of commercial morality". It is unhelpful, therefore, to attempt to discern issues of commercial morality distinct from, and not otherwise encompassed within the notion of, public interest.
58 In Re CSR Ltd [2010] FCAFC 34; 183 FCR 358, Finkelstein J said:
[82] There has crept into Australian jurisprudence the view that a court will not confirm a scheme if it is contrary to "public policy" or is not consistent with "commercial morality". A consideration of what is contrary to "public policy" cannot extend beyond considering the interests of members, creditors and persons who in the future might deal with the scheme company or invest in its shares. Their interests are, however, adequately protected by an inquiry whether the scheme is fair or reasonable. So, considerations of public policy seem to add nothing to existing principles.
…
[84] There is a real problem with "commercial morality" being applied to discretionary decision-making. It suggests the existence of a fixed set of standards by which the community assesses conduct to be legitimate or acceptable. Putting to one side the obvious difficulty which confronts a judge in attempting to discover what are the relevant community standards, the fact is that many so-called standards, when they exist, are not fixed. They are constantly changing.
…
[86] In my opinion, notions of commercial morality should be jettisoned from the matters to be considered in approving a scheme. It is dangerous to bring to decision-making an ill-defined and largely subjective set of criteria purporting to represent the view of the community when, in reality, no one can be sure of that.
(Emphasis added.)
59 With respect, I agree. It invites a search for some level of "moral obloquy", in addition to the factors stipulated in s 445D, read in the context, and having regard to the purpose, of Pt 5.3A.
60 The notion of a court having regard to "commercial morality" when concerned with insolvencies appears to have arisen first in the context of a court's jurisdiction to rescind a receiving order in circumstances where all creditors have consented to the rescission. In Ex parte Hester (1889) 22 QBD 632, in dismissing an appeal he described as "based on the idle notion that the Court is bound by the consents of the creditors", albeit not at a meeting of the creditors but nevertheless after full and open discussion of the rights and interests of the parties, Fry LJ said, at 641:
The Court has far larger and more important duties to perform than merely to consider whether the creditors have consented to the rescinding of the order. We are bound in the exercise of our discretion in such a matter, and I think I might almost say in all matters under [the Bankruptcy Act 1883], to take a wider view. We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country.
61 In the subsequent decision of Re Flatau [1893] 2 QB 219 at 223, Lord Esher, who had been a member of the Court in Ex parte Hester, referred to what his Lordship had said in the earlier decision (Ex parte Hester at 693):
The Court has gone still further, and I think rightly so, and has said that under the present Bankruptcy Act it will consider not only the whether what is proposed is for the benefit of the creditors, but also whether it is conducive to or detrimental to commercial morality, and to the interests of the public at large, and they will take into consideration the position of the bankrupt with regard to his creditors, and see whether what is proposed will not place his future creditors, who must come into existence immediately, in a position of imminent danger.
62 His Lordship continued, at 223:
The meaning of that is that if the debtor has behaved in an unbusinesslike way, or worse, even although his present creditors may be quite satisfied, and no harm can come to them, yet, if he has so acted in business that it is likely he will do again to other creditors what he has done to his present creditors, the Court will not allow the receiving order to be rescinded. All this has to be considered even though all the present creditors are fully satisfied, and are entirely indemnified.
63 These decisions, of course, pre-date any notion of corporate insolvency law, which goes back no further than 1840, when the Governor of New South Wales passed the Absent Debtors Act (4 Vict No 6). That legislation was designed to deal with joint stock companies and permitted the institution of actions at law against one or more of the members of a co-partnership as representative of all the members. This was followed by the Insolvency Act of 1841 (5 Vict No 17), an early attempt to bring companies within the scope of the law of bankruptcy. The first iteration of what is, today, recognisable as corporate insolvency law was the enactment in the United Kingdom of the Joint Stock Companies Winding-up Act of 1844 (7 & 8 Vict c 111). A materially identical statute was subsequently enacted in New South Wales - the Winding-up Act of 1847 (11 Vict No 19): for the legislative history of insolvency law in Australia, see B H McPherson, The Law of Company Liquidation (2nd ed, The Law Book Company, 1980) at 9-22.
64 The decisions in Ex parte Hester and Re Flatau were relied on by Buckley J in Re Telescriptor Syndicate Limited [1903] 2 Ch 174, albeit in relation to a corporate winding-up, not a personal bankruptcy. Buckley J said, at 181, that in exercising the analogous jurisdiction in respect of the winding-up of a company, he considered it desirable "not to assume a different attitude or act upon a different principle" from that articulated by Fry LJ in Ex parte Hester.
65 Subsequent to that decision, the consideration of public interest, including commercial morality, has been one to which courts have had regard in considering whether a court should terminate a winding up. An example is the decision of Barrett J in Metledge v Bambakit Pty Ltd [2005] NSWSC 160. The opposition to the making of an order to terminate the winding up was based on the proposition that "considerations of public interest and commercial morality indicate that [the company] would be in unsafe hands and subject to genuine jeopardy if control of it at director level were restored to [the sole director]": Metledge at [6].
66 Barrett J identified two factors relevant to commercial morality in this context. First, that as a matter of public policy or commercial morality, the Court "will not countenance the return of an insolvent company to the mainstream of commercial life": Metledge at [31]. Secondly, at [40], in circumstances where the director had made no real attempt to deal conscientiously with his responsibilities that accrued by reason of the making of the winding up order, it would be contrary to commercial morality to restore the management of the company:
… either directly or more remotely to someone who, on his own admission, does not appreciate the difference between his own affairs and interests and those of the company, who has been responsible for a failure to maintain proper corporate books and records and who refused to face up to the responsibilities owed by him to the liquidator even after threatened with prosecution and subsequently convicted.
67 The latter factor, which might best be described as a failure of corporate governance, is important and appears to have been adopted by courts when the analogy was extended beyond applications concerning bankruptcies and windings up to applications under Pt 5.3A of the Corporations Act. An early example is the decision in Emanuele v Australian Securities Commission (1995) 63 FCR 54, where the Full Court said, at 69:
The fate of the deed, and of the company, on an application under s 445D or 445G rests with the Court. The powers of the Court under these sections are discretionary, and are to be exercised having regard both to the interests of the creditors as a whole, and in the public interest. An analogy may be drawn between the powers of the Court arising under these sections and the power of the Court to refuse a stay of a winding-up order considered in Re Data Homes Pty Ltd [1972] 2 NSWLR 22 at 26 where Mason JA (as he then was), in whose judgment Holmes and Hardie JJA agreed, said:
"It has been held here and in the Supreme Court of Victoria that, in considering an application under s 243 of the Companies Act 1961 (Cth), the Court should have regard, not merely to the interests of creditors, but also to the public interest, including the question of whether the granting of a stay would be detrimental to commercial morality: Re Denistone Real Estate Pty Ltd [1970] 3 NSWLR 327; Re Mascot Home Furnishers Pty Ltd [1970] VR 593…"
(Emphasis added.)
68 The case of Re Mascot Home Furnishers concerned applications to stay proceedings in an insolvency and applications for approval of schemes of arrangement. Having accepted the views of Buckley J in Re Telescriptor Syndicate, Gillard J refused to stay the liquidation proceedings or to sanction the schemes in relation to the relevant companies, which his Honour described as being "hopelessly insolvent", and whose business had ceased at least a year prior to the applications, stating, at 597:
Whatever may be said in relation to approving schemes under s 181, the most potent influence, in my view, when considering what should be done under s 243 is that the Court's initial approach should be that hopelessly insolvent companies should be wound up. No countenance should by exercising powers under s 243 be given to any suggestion that the Court was condoning or encouraging persons in our commercial community to carry on business activities in a company which was handicapped by a heavy burden of indebtedness and thereby unable to pay its debts in full at any given period.
69 In respect of a similar application in Re Denistone, Street J referred to Lord Esher's affirmation in Re Flatau that the Court will consider whether what is proposed is "conducive or detrimental to commercial morality", "the interests of the public at large", "the position of the bankrupt with regard to his creditors", and "whether what is proposed will not place his future creditors … in a position of imminent danger": Re Denistone at 330. His Honour continued:
Speaking generally, the staying of proceedings in a winding-up in a situation where a company is clearly insolvent is not consistent with the due preservation of the policy of the legislation and of the law that, in the public interest, an insolvent company ought to be wound up.
70 No invocation of commercial morality, as distinct from the public interest in having the law applied in accordance with legislative policy, was thought necessary by his Honour, presciently pre-empting the decision in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355.
71 The relevance of Project Blue Sky to invocations of commercial morality was made clear by the Full Court in Re CSR, that case being concerned with a proposal by the applicant, CSR Ltd, to demerge its various businesses in order to create two new companies. The demerger involved a reduction in the capital of the company and a scheme of arrangement between the company and its existing shareholders. At first instance, the primary judge dismissed the application for orders pursuant to s 411(1) of the Corporations Act for the convening of a meeting of shareholders to consider a scheme of arrangement, on the basis that she could not be satisfied that the scheme was consistent with "commercial morality": CSR Limited, in the matter of CSR Limited [2010] FCA 33 at [4].
72 One of the grounds upon which the decision was appealed at first instance was that the "primary judge acted on a broad view of 'public policy' or 'commercial morality' without articulating the particular aspects of public policy or commercial morality relevant to the discretion in s 411(1)": Re CSR at [33]. In allowing the appeal, Keane CJ and Jacobson JJ observed, at [51], that "the particular content of 'public policy' or 'commercial morality' relevant to the exercise of the discretion in s 411(1) of the [Corporations] Act is to be discerned from the text and subject matter of the Act", citing Project Blue Sky at [69]-[70] and Attorney-General (Cth) v Alinta Ltd [2008] HCA 2; 233 CLR 542 at [147]. Whilst observing that the broad policy of the Corporations Act is that a company must use its capital for business purposes, and not simply return it to shareholders, their Honours observed that the policy is not pursued single-mindedly and, rather, expressly contemplates that reductions of capital may occur for the benefit of shareholders in certain circumstances. Consequently, their Honours framed the issue in the following way, at [54]:
For the purposes of the present case, the terms of s 256B(1)(b), 1324 and (1B) of the Act provide clear guidance as to how far the Act goes in its insistence upon the policy that the capital of a company must be preserved. The "public policy" or "commercial morality" which informs s 256B and its analogues is concerned with the interests of shareholders and creditors. This was explained by Professor Ford: "So long as the reduction will not prejudice creditors or shareholder the court is not concerned with any ulterior purpose for which the reduction is being made …" (Ford, Company Law (1974) p 159).
73 None of the foregoing should be taken to suggest that there is never cause for a court to search for and have regard to underlying societal norms and values, but when the Parliament has spoken and when, as in this case, the process is one of statutory interpretation, the words of the statute "must be read with a recognition of their social context": James Allsop, "Conscience, Fair-dealing and Commerce - Parliaments and the Courts" in Tim Bonyhady (ed), Finn's Law (The Federation Press, 2016) 92 at 99-100.
74 The intersection between statutory language and the fundamental values and norms that underpin commercial transactions was squarely before the High Court in Australian Securities and Investments Commission v Kobelt [2019] HCA 18; 267 CLR 1. The Court in that case was concerned with the statutory standard of unconscionability in s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), which "gives statutory expression to the equitable concept of unconscionable conduct" within the meaning of the unwritten law but, by reason of s 12CB, does not confine that concept to conduct that is remediable on that basis by a court exercising jurisdiction in equity: Kobelt at [82]-[83], per Gageler J.
75 Although Gageler J regretted his prior use of the "arcane terminology" of "moral obloquy" in Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28; 258 CLR 525 at [188] (Kobelt at [91]), his Honour nevertheless said that what he meant to convey by the reference was, at [92]:
that conduct proscribed [by 12CB of the ASIC Act] as unconscionable is conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience.
(Emphasis added.)
76 In Kobelt, Keane J also observed, at [119]:
The legislative choice of "unconscionability" as the key statutory concept, rather than less morally freighted terms such as "unjust", "unfair" or "unreasonable", confirms that the moral obloquy involved in the exploitation or victimisation that is characteristic of unconscionable conduct [as understood in equity] is also required for a finding of unconscionability under s 12CB.
77 Turning, then, to the text, context, and purpose of Pt 5.3A of the Corporations Act.
78 Parts 5.3A and 5.7B of the Corporations Act, which established the voluntary administration and insolvent trading regimes, respectively, were introduced by the Corporate Law Reform Act 1992 (Cth), subsequent to the General Insolvency Inquiry (ALRC Report No 45, 1988) (the Harmer Report). The Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) (EM) said, at [14]:
The reforms to be effected in implementing recommendations of the Harmer Report (Part 4) are many and varied. Their overall aim, however, is to make Australia's corporate insolvency laws operate more efficiently and effectively than they have done in recent years.
79 Pt 5.3A was described in the EM as being "[o]f particular importance". The EM stated, at [15]:
The aim of that scheme is to save companies and businesses which are experiencing solvency difficulties, rather than destroy them in the way the current law all too often does.
80 The key elements of the proposed procedure for voluntary administration of insolvent companies under Pt 5.3A were said to be, at [22]:
• allowing directors to appoint an independent administrator;
• allowing the administrator up to 35 days to develop a proposed scheme of arrangement for consideration by the company and its creditors;
• giving force to the arrangement if the creditors and the company support it;
• giving protection to the rights of creditors by:
o enabling a committee of creditors to require information from the administrator;
o enabling creditors to vote to replace an administrator;
o allowing a creditor secured over the whole or substantially the whole of the company's assets a short period during which the creditor may elect to enforce the security, notwithstanding the appointment of an administrator;
o requiring the court to ensure the adequate protection of any creditors in certain situations;
o providing that a secured creditor who considers that a scheme is oppressive to challenge the scheme in court;
• where the administrator or the meeting of creditors concludes that the company should be wound up, providing for a smooth and efficient transition to a winding up process.
81 The Full Court of the Court of Appeal in Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 26 ACSR 593 at 596 noted that s 445D "must be read together" with s 435A. That provision sets out the Object of Pt 5.3A, as follows:
435A Object of Part
The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
82 In describing the Object of the Part, the EM explained, at [448]:
The insertion of the new Part is primarily designed to redress concerns that Australia's current corporate insolvency laws are inflexible and that they too easily and too often lead to the liquidation of companies, when some such companies could have been saved.
83 The EM also identified, at [538], "an important theme of the proposed new Pt 5.3A" that "directors are to be encouraged, in a variety of ways, to take the earliest possible action to tackle solvency difficulties".
84 Division 11 of Pt 5.3A deals with the variation, termination, and avoidance of a DOCA. Section 445D(1) provides:
445D When Court may terminate deed
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company's business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a document 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 as a whole; or
(g) the deed should be terminated for some other reason.
85 Section 447A is found in Division 13, and confers powers on the Court to make orders as to how Pt 5.3A is to operate. It relevantly provides:
447A General power to make orders
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
86 The EM described the power in s 447A as "a very general power to make orders about how proposed Pt 5.3A is to operate in relation to a particular company": at [620]. By contrast, in relation to the 'catch-all' provision that is s 445D(1)(g), the EM stated, at [602]:
Proposed paragraph (1)(g) will allow termination where the Court considers the deed should be terminated for some other reason. It would not be appropriate to try to circumscribe more precisely the Court's powers to terminate a deed in exceptional circumstances but, having regard to the width of the previous paragraphs in proposed subsection (1), it is anticipated that the Court's power under proposed paragraph (1)(g) would be exercised at most very rarely.
87 The examples proffered in the Harmer Report of public policy reasons which may lead a court to terminate a deed were, at [123]:
• the proposal has a fraudulent or wrongful purpose
• the terms of an arrangement do not comply with the companies legislation generally (for example, the deed of company arrangement must not contain a provision indemnifying an insolvency administrator for wrongful action in administering the deed)
• the deed contemplates that the company would, after the arrangements set out in the deed had been carried out, continue commerce in an insolvent financial condition.
88 Contrary to the proscription of unconscionable conduct in the ASIC Act, nothing in s 445D or s 447A can be construed as requiring an inquiry into any higher standard of commercial behaviour than that which is already identified as falling outside relevant norms of conduct and, therefore, contrary to the public interest: material falsity or material omission, material contravention of the deed, injustice or undue delay in enforcing the deed, oppression, unfair prejudice, unfair discrimination, or contrariness to the wishes of the creditors as a whole. To the extent that "some other reason" is relied upon to set aside a deed, the reason will be assessed in the context of the statutory language used in s 445D and by reference to the purpose of the provision, being to preserve businesses, subject to any deed of arrangement's not being contrary to the interests of the creditors as a whole. A deed that evidences a fraudulent, wrongful, or illegal purpose, consistent with the types of behaviour identified in s 445D, will obviously fall outside the relevant norms of conduct identified in that section as being reasons for termination of such a deed.