Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd

REASONS FOR JUDGMENT 1 Rocklea Spinning Mills Pty Ltd (recs & mgrs apptd) (subject to a deed of company arrangement) is owned by the Brand family through Sheralex Nominees Pty Ltd, a trustee company. In the late 1940s Rocklea commenced manufacturing pure cotton and blended yarns from its mills in Victoria and Queensland. It soon became a sizeable operation with an annual turnover in later years of up to $75 million. In excess of 200 employees worked at the mills. Eventually, however, economic conditions changed and the business became unprofitable. During the financial years ending 30 June 2001, 2002 and 2003 it accumulated trading losses exceeding $16 million. Funding for working capital had been provided by GE Capital Finance Pty Ltd under a factoring agreement. By end 2003 GE was owed around $10.4 million the repayment of which was secured by a first ranking debenture charge over Rocklea's assets. The facility was due to expire on 31 October 2003. Early in October, GE indicated that it would not extend the facility. If it were not extended Rocklea would be insolvent. The directors (mostly members of the Brand family) knew that the business could not go on. So on 20 October they appointed the second and third defendants, Mr Lofthouse and Mr Cauchi, to be the company's administrators. On the same day GE appointed receivers and managers to take possession of Rocklea's assets and undertakings. The administration came to an end following the approval of a deed of company arrangement by Rocklea's creditors at a meeting held on 1 February 2005 and the execution of the deed on 4 February 2005. 2 This application concerns the deed. The plaintiff, the Commonwealth of Australia, seeks an order that the deed be terminated under s 445D of the Corporations Act 2001 (Cth) or declared void under s 445G. Section 445D permits the court to terminate a deed in a variety of circumstances including where it is satisfied that the deed cannot be given effect "without injustice" (s 445D(1)(e)); or is "(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more … creditors; or (ii) contrary to the interests of the creditors of the company as a whole" (s 445D(1)(f)); or that "[it] should be terminated for some other reason" (s 445D(1)(g)). The application may be made by a creditor, the company the subject of the deed, or any other "interested person": s 445D(2). When there is doubt whether a deed was entered into in accordance with Pt 5.3A the court may under s 445G declare the deed to be void or not, as the case requires. An application under this section may be made by the administrator of the deed, a member or creditor of the company, or by the Australian Securities and Investments Commission: s 445G(1). The Commonwealth claims standing under each section on the basis that it is a creditor of Rocklea. Alternatively, it says that it is at least an "interested person" for the purposes of claiming relief under s 445D. 3 The manner in which the Commonwealth has come into the picture is important not only to determine whether it has standing but also because it is the plank upon which its case is built. The Commonwealth has established the General Employee Entitlements and Redundancy Scheme, which is commonly referred to by the acronym GEERS. The scheme is not constituted by statute but by an act of the executive government alone. It is administered by the Department of Employment and Workplace Relations. Under the scheme money granted by Parliament is distributed to employees whose employment has been terminated because their employer is insolvent and has insufficient assets to pay their entitlements. The entitlements that are covered by the scheme are unpaid wages, unpaid annual leave, unpaid long service leave, unpaid pay in lieu of notice and up to eight weeks' redundancy pay. An important feature of the scheme is the underlying assumption that, where possible, advances made to employees will be recovered by the Commonwealth out of the realisation of the employer's assets or from other proceedings. 4 It is necessary to explain how GEERS advances might be recovered when the employer is an insolvent company. If the company is wound up the general rule is that all debts must be paid proportionately: s 555. There are many important exceptions to this rule. Some debts are given priority over others. These are listed in s 556. They include (subject to a cap) wages and superannuation contributions payable to employees (s 556(1)(e)), amounts due to employees under an industrial agreement in respect of leave (s 556(1)(g)), and retrenchment entitlements (s 556(1)(h)). Under s 560, where the company in liquidation has paid such debts out of money advanced for that purpose by another person, that person is entitled to the same priority in respect of the payments as the employee would have had. Those claims are also given priority over the rights of a chargee who holds a floating charge over the company's assets: s 433. 5 Payments under GEERS are made on the basis that in a liquidation the Commonwealth will obtain priority by virtue of s 560. In an administration followed by a deed of company arrangement, the Commonwealth expects that the deed will incorporate the priority given to employees by s 556 and give the Commonwealth the same priority it would have enjoyed under s 560 in a winding up. However, statute apart, the fact that payments are made on a particular basis does not, without more, create enforceable rights. 6 The former employees of Rocklea received payments under GEERS. The payments were made in the following circumstances. When the receivers were appointed, Rocklea owed approximately $3.8m to its employees. Within a short period the employees were dismissed. They were then "entitled" to payment under GEERS. The receivers supplied the Department with sufficient information to enable it to calculate each employee's entitlement. Before money was advanced the Department sought to impose a number of conditions upon which it would make the advance, including one which dealt with the Commonwealth's position if the creditors of Rocklea approved a deed of company arrangement. The condition that it sought to impose was an assurance from the receivers that the deed would incorporate the priorities conferred by ss 556 and 560. The receivers advised the Department that they could not agree to this condition as they were the "Receivers and Managers of the company, not Administrator". The Department then sought a similar assurance from the administrators. The administrators did not respond in writing, but there is a note of a conversation between a member of their staff and an officer in the Department which records what appears to be the administrators' response, namely that they "could not agree to matters raised". 7 In any event, between 19 December 2003 and 7 August 2004 the Commonwealth advanced $2,612,356.02 to the receivers to meet the claims of former employees. The money was passed on to the former employees in accordance with their respective entitlements. By virtue of the right conferred by s 433, the Commonwealth has been able to recover $884,039.07 from the receivers. It is not known whether the Commonwealth will recover any further amounts. 8 The background to the making of the deed is important. First, there is the financial position of the company at the time of the deed. The amount due to secured creditors (GE and the National Australia Bank) was around $1,262,000. Creditors who would be entitled to priority in a winding up (employees and the Commonwealth) were owed approximately $2 million. Unsecured creditors were owed about $24 million. Of this, a significant sum (then thought to be in the order of $16.8 million) was owed to related parties. All in all it was doubtful whether the secured creditors would be paid in full and unlikely there would be any distribution to the company's ordinary unsecured creditors. 9 Second, in their report to creditors prepared pursuant to s 439A the administrators stated that they had conducted an investigation to determine whether any property or other benefits could be recovered by a liquidator if Rocklea were to be wound up. They identified a number of potential claims that might be brought by a liquidator. One, which was based on their "preliminary investigations to date and subject to access and the provision of further information", was a claim for insolvent trading against the directors (under s 588M) and against Sheralex Nominees (pursuant to s 588V). Another, based on the administrators' "preliminary investigations to date and subject to further review", was against the Australian Taxation Office for preferential payments in excess of $200,000. The report also referred to a possible claim against Bonds Industries Limited worth approximately $600,000. The nature of that claim was not fully explained. Perhaps this was because any money recovered from Bonds Industries would go to the secured creditors. 10 Any creditor reading the administrators' report would have been left with the impression that none of these claims had much prospect of success. This pessimistic picture was confirmed by Mr Cauchi at the second meeting of creditors. He said at trial, and I accept, that the administrators' investigation into the claims had been thorough and they had properly formed the view that the claims were not worth pursuing. In part their view was based on legal advice. 11 Thus, the situation could not have been more favourable for a deed that offered something to the creditors who otherwise stood to get nothing out of the administration or from a liquidation of Rocklea. The proposal for such a deed came from the directors. This was their plan. They would provide $400,000 to the deed administrators. The amount would be distributed in the following way: (a) $100,000 to employees who would in a winding up have priority under s 556 (each employee would receive approximately $500); (b) $30,000 to the Commonwealth as if s 560 were applicable; (c) $170,000 to the unsecured creditors other than four related creditors (each creditor would receive approximately 0.82 cents in the dollar); and (d) $100,000 for the costs and expenses of the administration. The payments were to be in full settlement of all claims against Rocklea other than the claims of related creditors whose debts, which totalled approximately $5 million, would not be extinguished. The deed would also provide for the control of Rocklea to be handed back to the directors. 12 It will be evident that the proposed deed provided for a distribution of the $400,000 in a manner different from that which would occur in a winding up. In a winding up, the employees would receive $21,056, the Commonwealth $278,944, and the remaining $100,000 would be available to meet the costs and expenses of the administration and liquidation. There would be nothing for the unsecured creditors. Moreover, if the deed were implemented, Rocklea would have no assets and its liabilities would still exceed $5 million. 13 When the Commonwealth received notice of the proposed deed it informed the administrators that it opposed its adoption as it did not provide for the distribution of the fund in a manner consistent with that in a winding up. It warned the administrators that if the deed were approved the Commonwealth might take action to have it varied or terminated. The creditors were informed of the Commonwealth's position. Nevertheless they voted overwhelmingly to approve the deed. On a poll, ninety-two creditors, whose claims totalled $19,079,556.90, voted in favour and four creditors (including the Commonwealth), who were owed $3,781,648.18 in total, voted against the proposal. One creditor abstained. There can be no doubt that the creditors who voted in favour (or at least the unsecured creditors) were of the view that something was better than nothing. 14 Thus the Commonwealth was provoked into bringing this application to protect the integrity of GEERS. The application does raise some important issues of principle. Before dealing with them there are a few preliminary matters to be addressed. The first concerns the standing of the Commonwealth to bring this application. The Commonwealth considers itself to be, and the administrators accept that it is, a creditor of Rocklea for the purposes of Pt 5.3A. This view is based on two assumptions. The first is that the advances made to the receivers under GEERS are loans to Rocklea which the company is bound to repay. The second assumption is that having made the loans the Commonwealth became a creditor of Rocklea and is therefore a creditor for the purposes of Pt 5.3A. Each assumption is not without its difficulties as I will now explain. 15 As regards the first assumption, it is necessary to consider closely how GEERS operates. The Commonwealth has published a document called General Employee Entitlements and Redundancy Scheme Operational Arrangements. It states how GEERS will be carried out. It refers to the persons entitled to payments under the scheme as "eligible claimants". It states that eligible claimants "may be eligible to receive payments equivalent to [all unpaid wages and all unpaid annual leave]." It provides that an eligible claimant wishing to receive a payment must submit a signed claim form. It says that in most cases the government "will seek to distribute claims forms through the insolvency practitioner". In that event the Commonwealth "arranges payment through the insolvency practitioner [who must] acquit the funds received from [the Commonwealth]". If the payment is made direct to an eligible claimant he or she must assign to the Commonwealth the claimant's right to claim and receive payments from the former employer. The document also states that an important feature of the scheme is that advances made will be recoverable by the Commonwealth "from the realisation of assets up to the amount advanced in respect of the former employee". 16 The scheme is a voluntary scheme. No employee has a right enforceable by action in a court of law to obtain any payment from the money granted by Parliament. I say nothing about whether the scheme is controllable by prerogative writ. When there are assets out of which advances might be recovered, the scheme assumes that the Commonwealth's right to recovery will, in a liquidation, be conferred by statute (for this purpose I assume that the "advance" referred to in s 560 need not be by loan) and, in the case of an administration, by an appropriate provision in a deed of company arrangement. In other cases (such as bankruptcy) the Commonwealth's right to recovery is to arise by an assignment of the employee's priority rights against the former employer. Thus, the scheme is designed to operate effectively and fulfil its aims without the Commonwealth becoming a creditor of an insolvency practitioner or the employer. 17 Nevertheless, the Commonwealth asserts that the advances passed to the receivers were loans to Rocklea. It makes this claim because on 10 December 2003 Mr Connolly, an officer in the Department, sent an email to the receivers advising them about the operation of GEERS, requesting assistance in processing the GEERS' claims of former Rocklea employees and stating that "payments made under GEERS are by way of a loan". If there was to be a loan there must be a borrower, but the borrower was not identified in the email. In theory there are at least three possible borrowers: the receivers, Rocklea and, treating them as a group, the former employees. The receivers and the employees can be put to one side. There is no evidence the receivers intended personally to take a loan from the Commonwealth and likewise there is no evidence that loans were made to the former employees. This leaves Rocklea as the potential borrower. But there are large hurdles to be overcome before the company can be found to be a borrower. If there was a loan to Rocklea it must have been negotiated by the receivers. More often than not when one deals with a receiver it is usually in his or her capacity as agent of the company. But there are limits. The debenture provides (by cl 17.4) that the receivers "may do anything the law allows a receiver to do" (subject to the terms of appointment). It also provides (in cls 17.4 and 16.2(c)) that they are entitled to do "anything an owner of the charged property could do, including selling it or conducting the chargor's business". Wide though these powers may be, they are circumscribed by the requirement that the powers must be exercised for the purposes of the receivership: Expo International Pty Ltd v Chant (No 2) [1979] 2 NSWLR 820, 834; Bank of New Zealand v Essington Developments Pty Ltd (1991) 5 ACSR 86. The receivers also have the power conferred by the Corporations Act. By s 420(1) the receiver can, in his or her capacity as agent, do "all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed". Those things can, in an appropriate case, include the power to borrow money: s 420(2)(d). But just like a receiver's powers under the common law a receiver's statutory power can only be exercised for the purposes of the receivership. These restrictions on the common law and statutory powers can create a problem when a receiver wishes to borrow money. In most cases it will only be necessary to borrow money if the company in receivership is continuing to trade: In re Patent File Co; Ex parte Birmingham Banking Co (1870) LR 6 Ch App 83, 86, 88; General Auction Estate and Monetary Co v Smith [1891] 3 Ch 432, 441-443. If the receiver purports as agent to borrow money for some other purpose (such as to pay a past employee his arrears of wages) the act is likely to be beyond his power as agent. 18 This brings me to the second assumption, which is that having lent money to Rocklea (if that is what happened) the Commonwealth became a creditor of the company for the purposes of Pt 5.3A. This assumption is false. The structure of Pt 5.3A requires different treatment of debts that have arisen before the commencement of the administration (as to the commencement and ending of an administration, see s 435C) from those which arise during the period of the administration. Upon appointment an administrator takes control of the company's affairs (s 437A) to the exclusion of the directors (s 437C). While the administrator is the agent of the company under administration (s 437B) he is personally responsible for most debts he incurs (s 443A) and has a right to be indemnified out of the company's property for those debts (s 443D). In other words, the debts incurred by an administrator are part of the costs and expenses of the administration. They are different in character from pre-administration debts. That creditors whose debts are incurred during an administration are not to be treated as creditors of the company for the purposes of Pt 5.3A is confirmed by authority. In Brash Holdings Ltd (admr appointed) v Katile Pty Ltd (1994) 13 ACSR 504 the Full Court of the Supreme Court of Victoria was required to decide who were the "creditors" referred to in s 444D. The Full Court held (at 513) that they were the same as the other "creditors" referred to throughout Pt 5.3A. They were persons with a claim against the company the circumstances giving rise to which occurred before the beginning of the administration. 19 The line that is to be drawn between pre- and post- administration debts mirrors the position in a liquidation. There the general rule is that creditors can only prove for debts incurred before the commencement of the liquidation: Re H & S Credits Ltd (in liq) and the Companies Act (1969) 90 WN (Pt 1) NSW 495. Post-liquidation debts are part of the costs of the winding up for which the liquidator is liable. 20 The result is that even if the GEERS advances were a loan to Rocklea making the Commonwealth a creditor of the company, it did not become a creditor for the purposes of s 445D or s 445G. As it turns out, this is not fatal to the Commonwealth's case. If the Commonwealth is an "interested person" it can maintain its application under s 445D. The Commonwealth says that it is an "interested person" because its material rights or economic interests are or may be affected by the deed, relying upon Allatech Pty Ltd v Construction Management Group Pty Ltd (2002) 41 ACSR 587, where Austin J applied that test saying (at 591) the words "interested person" should be given wide scope. I agree. The Commonwealth is an "interested person" as its pecuniary rights are potentially adversely affected by the deed. 21 Having disposed of the preliminary points I can now deal with the merits. As I have explained, the Commonwealth bases its case under s 445D(1) principally on the ground specified in paragraph (f), namely that the deed is oppressive or unfairly prejudicial to the Commonwealth as a creditor or is contrary to the interests of the creditors as a whole. Here again the argument assumes that "creditors" in s 445D(1)(f) includes a post-administration creditor. For reasons which should by now be clear, I do not think this is the correct construction of the section. However that may be, the Commonwealth's case can just as easily be considered under s 445D(1)(e) or (g). 22 The Commonwealth's argument is a relatively straightforward one. In the winding up of an insolvent company, where there is not enough money to go around certain debts are given priority over others. That is the function of s 556, according to which priority is given to several classes of debt, including debts due to employees. The rationale for the special treatment afforded to employees is that they are in a vulnerable position if their employer becomes insolvent: Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) vol 1, 294. The Commonwealth contends that it would be contrary to the policy established by the Corporations Act if a deed of company arrangement were to distribute the assets of an insolvent company otherwise than in accordance with the rules that apply in a winding up. 23 There are cases that lend support to this argument. In Re Ansett Australia Limited and Mentha (2002) 40 ACSR 389 Goldberg J said (at 403): "The Corporations Act enshrines the principle that priority is to be given to the payment of employee entitlements and to the repayment of advances made for that purpose: ss 556(1) and 560. It is unlikely that a meeting of creditors would resolve to dislodge that priority. If such a resolution was passed and the provision relating to the relegation of that priority was included in a deed of company arrangement, I consider that it is probable that a court would terminate the deed pursuant to s 445C, on the ground that the provision was oppressive or unfairly prejudicial to, or unfairly discriminatory against the Commonwealth: s 445D(1)(f)." In Expile Pty Limited v Jabb's Excavations Pty Ltd (2004) 22 ACLC 667, Palmer J said (at 677): "The authorities discussed below establish, in my opinion, that where a creditor would have particular priority under the Corporations Act or other legislation if a company were to be wound up in insolvency, the Court, as a general rule, does not approve or permit any other regime of distribution of the company's assets which would disturb that priority. Essentially, this is so because the legislature has indicated, in the statutory priorities for distribution in a winding up, which claims should be preferred where there is insufficient for all creditors to be satisfied." 24 There is a related point made in other cases. In a winding up unsecured creditors whose claims are not given priority must be treated equally. They are entitled to a pro rata distribution of the uncharged assets. So it has been said that a deed of company arrangement should likewise not discriminate between unsecured creditors. That is, the deed should be "no less beneficial to all creditors than [a] liquidation is likely to be": Lam Soon Australia Pty Ltd (adm apptd) v Molit (No. 55) Pty Ltd (1996) 22 ACSR 169. 25 There can be no objection to the application of these principles in an appropriate case. The danger is to suppose that they are applicable to all, or almost all, deeds of company arrangement that establish a regime for the distribution of a company's assets. In fact, one size does not fit all. There will be circumstances when ordinary commercial commonsense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination. This much is evident from the structure of Pt 5.3A. 26 Part 5.3A has two distinct (but not inconsistent) objects. They are set out in s 435A. The first object is to provide a mechanism that will enable an ailing business to be resuscitated. The second object if the first is not achievable is to provide a means by which the assets of a company will be realised more efficiently than in a winding up. The mechanism for the attainment of each object is a deed of company arrangement. 27 When the purpose of a deed is to provide for the orderly realisation of a company's assets followed by the distribution of the proceeds between creditors, the deed puts in place what can fairly be described as a de facto winding up. In such a case there is usually no reason to depart from the manner of distribution that would apply in an actual winding up. A departure from the winding up model is likely to be unjust or unfair. 28 I should say that I am here speaking of a deed under which it is the property of the company that is to be distributed between the creditors. However, the company is not always the source of the funds that will go to creditors. There are instances where a third party will provide those funds. The most obvious examples are a parent company that wishes to avoid the liquidation of a subsidiary, a director who wishes to avoid disqualification under s 206D, and a third party that wishes to acquire the company in administration provided the claims of creditors are discharged. 29 It is by no means evident to me that in these, and other instances, funds provided by a third party should be distributed in the same way as in a winding up. I incline to the view that it would be difficult for creditors (or others) to insist that third party funds should be distributed in that way. The reason why that position should be different is that, at least in the examples I have chosen, the third party funds would not be available to creditors in a winding up and there is no good reason why all creditors should be better off under a deed. The true position is that whether or not such a deed is open to attack will depend upon a whole host of factors and it is simply not possible to lay down any general rule. 30 The situation is, in any event, different when the purpose of the deed is to keep the company afloat. I can put to one side a deed whose sole object is to impose a moratorium on claims. There the issue now under consideration will not arise. When the object of the deed is to preserve the company's business, the legislation does not assume that the creditors will be paid in full. To the contrary Pt 5.3A assumes that it might often be necessary to extinguish by composition or bar certain claims. And it makes no assumption that the creditors will be treated equally or that they will be given the same priority as in a winding up. The reason it makes no such assumption is that the equal treatment of creditors or the maintenance of priorities when there is not enough money for everyone can easily thwart the attempt to revive an ailing company. A few simple examples taken from common experience will make the point. Assume that a company is trading from leased premises that are particularly attractive. The premises may be purpose-built or in an ideal location. A rational businessperson wishing to save the business may think it necessary to pay all arrears of rent to prevent a forfeiture of the lease and pay other creditors a proportion of their claim. If the creditors also believe this to be necessary, and so provide in a deed, their decision should not be "second guessed" by a judge. Another example that comes to mind is of a business that engages both skilled and unskilled workers. The skilled workers may be difficult to replace. A businessperson wishing to keep the skilled workers without whom the business may not survive is likely to find the money to pay out their arrears of wages but let the others go. If the creditors of an insolvent company decide that the same approach should be taken through the medium of a deed, why should that decision be overturned? A judge is hardly the appropriate person to say whether or not the decision is sound. 31 Turning to the specific circumstances of this case, the main point to note is that the principal purpose of the deed is not to save the company (the business has been sold by the receivers) but to bring about a compromise of the claims of creditors by establishing a fund ($400,000) to be distributed between them in full settlement of their claims. The first question this raises is whether that fund should be treated as money that belongs to Rocklea. This point has caused some controversy, in part because the authorities that bear on the issue appear to be in conflict. Mr Randall referred me to FCT v All Suburbs Car Repairs Pty Ltd (1994) 14 ACSR 753, a case which is against his clients' interests. There Davies J ordered the termination of a deed of company arrangement because it established a system for the distribution of funds provided by directors and shareholders which did not recognise the priority given to the Commissioner of Taxation by the former s 221P of the Income Tax Assessment Act 1936 (Cth). Section 221P gave the Commissioner a priority for unremitted group tax. The priority was enforceable against a trustee in whom the property of the employer had vested. By s 6(1) of the Tax Act "trustee" was defined to include an administrator. In Commissioner of Taxation v B & G Plant Hire Pty Ltd (1994) 14 ACSR 283 it had been held that a deed made under Pt 5.3A could not override s 221P. The respondent sought to get around this decision by contending that money provided by a third party to a deed administrator was not the property of the employer. Davies J rejected this argument. He said (at 758): "[W]hen the directors and shareholders agreed to pay the sums to [the administrator] in his capacity as administrator, they agree to pay those sums to him in his capacity as agent for [the company] and, consequently, that the sums when paid would be received by him on behalf of the company. It necessarily follows that the sums when received would be property of [the company]." And later (at 759): "[W]hen s 444A(4)(b) provides that the deed must specify 'the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors' claims', it contemplates that sums may be paid by third parties for distribution to creditors and that those sums will be the property of the company available to pay creditors' claims." 32 Mr Randall said this case was wrongly decided and urged me not to follow it. He referred me instead to the decision of Austin J in Dean-Willcocks v ACG Engineering Pty Ltd (in liq) (2003) 45 ACSR 290 which he said was to the opposite effect. Certainly the case produced a different result. Money had been provided to the deed administrators by the company subject to the deed and its directors for distribution to the unsecured creditors. Subsequent to the execution of the deed but before the fund had been distributed the company was wound up. The question which arose was whether the liquidator was entitled to the fund as part of the property of the company. Austin J found that the fund was not the property of the company but was held on trust for the unsecured creditors. He said that this was the effect of the deed itself and (at 294) that there was "very little in the Corporations Act" that would assist in the construction of the deed. He did not refer to All Suburbs Car Repairs or to the provisions to which Davies J had referred which might have led to a different result. 33 It is not necessary for me to determine which of these decisions is correct or whether they can be reconciled. For the purposes of the present application the question whether the administrators are dealing with the property of the company is to be answered in the way a businessperson applying commercial realities rather than legal forms would consider the matter. Here the commercial realities are these. The administrators had identified two causes of action that might have been maintained against the directors. The administrators did not think much of the claims, but the directors were not aware of the administrators' doubts. The directors agreed to hand over $400,000 to dispose of the external creditors and regain control of Rocklea. Although the directors did not obtain a release from the claims, by taking control of Rocklea they ensured that no action would be brought against them. Looked at from their perspective, for a payment of $400,000 the directors have blocked these causes of action. The resultant loss is suffered by Rocklea, the party to bring the claims or through which the claims would have been brought. So the payment should be treated as compensation to Rocklea for its loss. 34 What we are dealing with here then is a deed that has put in place a de facto liquidation in which the property of the company is being distributed between its creditors. Fairness requires that the property be distributed as in an actual winding up. The radically different scheme adopted by the creditors is not an acceptable alternative and for that reason the deed should be terminated. 35 I accept that the effect of such an order, which will result in the winding up of Rocklea (see s 446B and reg 5.3A.07 of the Corporations Regulations 2001), will cause prejudice to the former employees. I am afraid that cannot be helped. I note that if GEERS breaks down because parties have found a way to get around the Commonwealth's priority in a winding up there is a real risk that the scheme will be scaled back or itself terminated to the detriment of many employees of insolvent companies. The unsecured creditors also stand to lose, but their return under the deed is so small ($0.082 in the dollar) that they are of no real concern. 36 There is one final point I should mention. The Commonwealth has pointed out that in the report to creditors the administrators did not in terms express their opinion about whether it was in the creditors' interests for the company to execute the deed, to end the administration or to wind up Rocklea. This contravention of s 439A(4) can in an appropriate case lead to the termination or invalidity of a deed: Deputy Commissioner of Taxation (Cth) v Comcorp Australia (1996) 70 FCR 356; M & S Butler Investments Pty Ltd v Granny May's Franchising Pty Ltd (1997) 24 ASCR 695. Nevertheless, on a fair reading of the administrators' report it would have been clear to the creditors that the administrators favoured the adoption of the deed. I would not, on this ground alone, terminate the deed. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.