Commonwealth Bank of Australia v C2C Developments Pty Limited

Judgment 1HIS HONOUR: The plaintiff seeks an order under the Corporations Act 2001 (Cth) terminating the deed of company arrangement (DOCA) with respect to the first defendant as varied from time to time. 2The plaintiff bank is a creditor of the company in the sum of at least $593,009, that being the amount of a consent judgment which was obtained in 2010 less repayments subsequently made by the company. 3On 4 December 2008, creditors of the company resolved to require it to execute a DOCA pursuant to pt 5.3A of the Corporations Act. On 23 December 2008, the company did so. Mr Raymond Tolcher and another person were appointed deed administrators. The DOCA required the company to pay to the deed administrators $690,000 by 31 December 2011 or earlier if possible. It also imposed various other obligations on the company. 4The $690,000 and other sums were to be paid into a fund, which would be dealt with in accordance with cl 13 of the deed. That clause contained a rather odd provision with respect of the priority of distributions. It provided that an admitted creditor who released Mr Shannon (the third defendant and sole director of the defendant company) from a personal guarantee, would be entitled to a pro rata distribution for an amount equal to twice the admitted debt. 5The company did not pay the $690,000 by the required date and on 21 February 2012, the company, Mr Shannon, and Mr Tolcher (the deed administrator), entered into a variation deed to amend the payment date to 30 September 2012. 6On 11 October 2012, the deed administrator Mr Tolcher wrote to the creditors of the company telling them that the company was in breach of its obligation to pay $690,000 into the fund by 30 September 2012. Mr Tolcher reported that Mr Shannon had requested a further variation of the DOCA extending the term of the deed to 31 December 2013 and increasing the amount the company was obliged to pay into the fund. 7The deed administrator did not favour the variation on the basis that there was insufficient evidence to show that there was a real likelihood of the monies becoming available during 2013. However, a meeting of creditors was convened and held on 10 December 2012. A resolution was passed "[t]hat the Company vary its deed of company arrangement to allow an extension of the timeframe for compliance with the deed of company arrangement to 31 December 2013 and that the deed of company arrangement be amended to provide that the minimum required contribution to the Deed Fund be $1.2 million." 8The minutes of the creditor's meeting show that 29 creditors were involved in the meeting with debts totalling $4.897 million. Fourteen non-related creditors with a total value of $493,339 and five related creditors with a value of $3.306 million voted in favour of the variation; nine creditors whose debts total $1.098 million voted against; and there was one obstention. It can be seen that the resolution was only carried by the votes of creditors who were related in a business sense to Mr Shannon. 9A draft deed of variation was prepared by the administrator of the deed and sent to Mr Shannon. Although it was suspected (during the hearing) that the deed had never been signed, at the heal of the hunt the document was tendered and marked DX2. The deed is said to have been signed, sealed and delivered by both the company and Mr Shannon by virtue of Mr Shannon signing it. However, it was never signed by the administrator of the deed, Mr Tolcher. 10The deed of variation provided that the obligations of the company would be increased from $690,000 to $1.2 million and that the release date extended to 31 December 2013. Clause 6 provided "[t]his deed may be executed in any number of counterparts each of which will be an original but such counterparts together will constitute one and the same instrument and the date of the deed will be the date on which it is executed by the last party." 11The application came on for hearing before me on 21 May 2013. Mr N M Bender of Counsel, appeared for the bank and Mr Tang, a solicitor, appeared for the defendants. There was also a brief appearance by Mr D M Crompton for a creditor supporting both the termination of the DOCA and the winding up of the company. The bank did not press its application to have the company wound up because this would automatically occur upon termination of the DOCA under regulation 5.3A.07(1)(a) of the Corporations Regulations 2001 (Cth). 12Section 445D(1) of the Corporations Act empowers the court to make an order terminating a DOCA if it is satisfied of one or more of the matters set out in paragraphs (a) to (g) of that subsection. 13The plaintiff bank argues that the court should exercise its power to terminate the deed of company arrangement on any of the following alternative basis: (i) there has been a material contravention of the deed by a party bound by it (s 445D(1)(d)); or (ii) the administrators and creditors have been given false and misleading information about the company's business, which could reasonably be expected to have been materially relevant to the creditor's decision to execute the deed (s 445D(1)(a)); or (iii) the deed can not be given effect without injustice or undue delay (s445D(1)(e)); or (iv) the deed, or an act or omission done or proposed to be done under its provisions, would be oppressive, unfairly prejudicial, or unfairly discriminatory against a creditor or the interests of the creditors of the company as a whole (s 445D(1)(f)); or (v) under the discretion afforded the court to terminate for "some other reason" under paragraph (g). 14So far as the ground under s 445D(1)(d) is concerned, Mr Bender says that the DOCA (as varied) required payment of the $690,000 by 30 September 2012. That did not occur. He then puts that the so called variation of December 2012 did not take effect. Accordingly, the company is still in breach of a major term of the DOCA. 15Section 445A of the Corporations Act provides that a DOCA may be varied by a resolution passed at a meeting of creditors. Section 444A states that a company's creditors may resolve to execute a DOCA, in which case the company must (under s 444B(2)) execute the DOCA within 15 days. In the event that the company fails to do so, s 45OC provides that the deed's administrator must, inter alia, inform the company's creditors. If however, the DOCA is executed, s 450B requires the deed's administrator, inter alia, to lodge a copy of the DOCA as soon as practicable. 16However, as s 450C only applies to s 444B defaults and as there can only be a s 444B default if the deed is prepared in accordance with s 444A (a provision which regulates the execution of the original DOCA only), s 450C cannot apply to variations. That conclusion indicates that s 450B probably does not apply to deeds of variation either. Accordingly, it would seem that the effectiveness of a variation does not depend on the varied deed being lodged with ASIC. 17The next question is whether the creditor's resolution itself takes effect or whether it would only take effect when consummated by the coming into existence of the deed which is referred to in the resolution. 18In this regard the decision of the full court of the Western Australian Supreme Court in Surber v Lean [2000] WASCA 380; (2000) 36 ACSR 176; 159 FLR 380 is of significance. In that case, the full court consisted of Malcolm CJ, Kennedy and Pidgeon JJ. The Chief Justice and Pidgeon J held that whilst no deed is needed to vary a DOCA under s 445A, on a true construction of the Corporations Act there can be no variation unless the deed administrator consents. Kennedy J dissented on this latter point saying that if this was so then the deed administrator would have the power to veto any variation. In His Honour's view, that could not be what the Act meant. 19In accordance with the rules of precedent, I am bound by an interstate full court decision unless it is obviously wrong. I cannot come to the conclusion that it is obviously wrong despite what Kennedy J says. 20In the instant case, not only has the deed administrator not signed the deed that was created pursuant to the resolution, he has also indicated that he does not oppose the termination. 21It follows that the variation never came into effect. Accordingly, the failure to pay $690,000 before the end of September 2012 continues to be a breach of the DOCA. Thus, the ground under paragraph (d) of s 445D1 is made out. 22If I am wrong in following the Western Australian decision, it seems to me that the same result is reached by a different route. Accepting that one can vary a DOCA under s 445A informally, what the creditors actually resolved was that the DOCA be amended by a particular method. Their resolution was to be carried out by some writing which amended the deed. The writing was created. Mr Shannon does not dispute that it was the document that is now DX2, which he has signed. Clause 6 of that document indicated that it was to be effective from the date the last person signed it. The last person was to be Mr Tolcher. However, Mr Tolcher never signed the document, and thus it never came into effect, and accordingly, the resolution was never consummated. 23Accordingly, in my view there is a valid reason for terminating the deed under paragraph (d). 24There is also a valid reason for terminating the deed under paragraph (e). The original DOCA was made in December 2008. Four and a half years have now gone by and the company has not provided the $690,000 it promised to pay by 30 September 2011. Almost two years have gone by since that original deadline. There is no firm evidence to make one confident that even if the DOCA was permitted to continue to December 2013, that the $1.2 million would be available for scheme creditors. The company has realised all of its assets and it would seem that it depends on the success of an associated company of Mr Shannon's, 33 Electra Pty Ltd, in its action against the Commonwealth Bank for any real possibility that funds will be available. The company itself appears to be insolvent. There are real questions as to Mr Shannon's solvency. Further, the court has not been provided with sufficient details for me to come to the conclusion that the action involving 33 Electra Pty Ltd has a real chance of being the source of $1 million or so, and even if it were, whether that $1 million would be able to flow into this particular company. 25The delay in consummating the DOCA, including the problems of it being consummated within a reasonable time in the future, mean that ground (e) to my mind is made out. 26Under ground (f) there are two matters which point strongly to the ground being made out. The first is that if the company went into liquidation there appears to be claims that could be made against the director or others for uncommercial transactions or preferences. These are not available under the DOCA. 27The second reason is that there are discriminatory provisions in the deed so that creditors who have obtained guarantees from Mr Shannon are paid double their debt and creditors that do not have such guarantees will effectively be rebated because of the preference given to the other creditors. 28If necessary I would find that (f) has also been made out. 29If necessary I would also consider that there were statements made by the deed administrator that, whilst doubtlessly made innocently, were based on misleading information received by the administrator. This would probably permit the termination of the DOCA on ground (a). 30Accordingly, to my mind it is proper to make an order terminating the DOCA. Under s 5.3A.07(1)(a) of the Corporations Regulations, this order terminating the DOCA has the effect that the company is deemed to have passed a special resolution under s 491 of the Corporations Act that the company be wound up voluntarily. 31Although the originating process sought that the first defendant company pay its costs, the bank seeks an order that Mr Shannon pay the costs of this application. Although there has not been argument on this matter, it seems to me that it must follow, as Mr Shannon was the true opponent to it. However, leave must be given to Mr Shannon to move to adjust this if he feels so inclined, of course, at his own risk as to costs. 32Thus I order: (1) That the Deed of Company Arrangement of 23 December 2008 with respect to C2C Developments Pty Ltd be terminated. (2) Order that the Third Defendant pay the plaintiffs costs of the proceedings. (3) Liberty to apply with respect to order 2 by motion filed no later than 14 days after the date of these reasons.