Correa v The Spanish Club Ltd

Australian Pipeline Ltd [2006] NSWSC 1316, (2006) 60 ACSR 625 Correa v The Spanish Club Ltd [2009] NSWSC 1225 Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 Humphries (as administrator of Hazelton Air Charter Pty Ltd v Mentha (2002) 41 ACSR 472 CASES CITED : Re Ansett Australia Ltd (No 3) (2002) 40 ACSR 433 Re Gilchrist (1867) 6 SCR (NSW) Eq 74 Re Sinnamon [1940] QWN 41 Re Union Trustee Co of Australia Ltd [1936] QWN 6 Surber v Lean (2000) 36 ACSR 176

Kenneth Michael Whittingham (Applicant) PARTIES : Delores Correa (Intervener) G & J Drivas Pty Ltd (Intervener)

Mr S Robb QC (Applicant) COUNSEL : Ms J Shepard (Intervener: Ms Correa) Mr P Silver (Intervener: G & J Drivas Pty Ltd)

Deacons (Applicant) SOLICITORS : Somerset Ryckmans (Intervener: Ms Correa) HWL Ebsworth (Intervener: G & J Drivas Pty Ltd)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5486/09 Application of Kenneth Michael Whittingham; re The Spanish Club Limited (Subject to Deed of Company Arrangement) ACN 001 059 187 JUDGMENT 1 HIS HONOUR: The plaintiff Kenneth Michael Whittingham is the deed administrator under a deed of company arrangement (DoCA) entered into on 16 March 2009 in respect of the Spanish Club Limited (the Club) which, at all material times, has carried on business under that name as a registered club under the (NSW) Registered Clubs Act 1976. The Club is insolvent in the sense it is unable to pay its current debts as and when they fall due, but it is asset rich; having regard to the contract price for its real property its assets must exceed $10,000,000, and its liabilities appear to total about $4,000,000. The Deed Administrator seeks directions pursuant to (CTH) Corporations Act 2001, s 447D, to the effect that he be permitted to hold a meeting of creditors to consider varying the DoCA, or alternatively terminating and placing the Club into liquidation. The DoCA 2 Relevantly, the DoCA includes the following provisions. Clause 1.1(7) defines "core property" in the following terms: (7) "Core Property" means the real property located at 88 Liverpool Street, Sydney NSW 2000 being the land described in Certificate of Title Folio Identifier Lot 1 in Deposited Plan 67498. 3 Clause 1.1(14) defines "non-core property" as follows: (14) "Non-Core Property" means the real property located at 86 Liverpool Street, Sydney NSW 2000 being the land described in Certificate of Title Folio Identifier Lot 1 in Deposited Plan 185797; 4 Clause 4.1 describes the property available to pay creditors' claims under the deed as including the core property, the non-core property, and property other than real property of the company, as follows: 4.1 The property that is available to pay Creditors' Claims under this Deed, and forms the Available Property, is the whole of the Company's assets and undertakings and the proceeds of realising the Company's assets and undertaking including: (1) the Core Property; (2) the Non-Core Property; (3) the property (other than the real property) of the Company; (4) the Company's cash; (5) its trade debtors; (6) amounts owing to the Company on loan accounts; and (7) proceeds from the sale of the assets and business of Company as a going concern or otherwise (if any), including proceeds from the sale of: (a) the poker machines; (b) the poker machine entitlements; (c) the liquor license; (d) the stock; and (e) the plant and equipment. 5 Clause 4.1 provides that the deed administrator is to open and conduct bank accounts in the name of the company, and clause 4.3 provides that all amounts received from the realisation of the Available Property be paid into such accounts, to be applied in accordance with the DoCA. Clause 5 regulates the sale of core property and non-core property: 5.1 A Sale of the Company's Core Property will be subject to the approval of members as required by the Registered Clubs Act 1976 (NSW) of the Company's Constitution.

5.2 A sale of the Company's Non-Core Property will not be subject to the approval of members under the Registered Clubs Act 1976 (NSW). However, prior to selling the Company's Non-Core Property, the Deed Administrator will seek member approval to sell the Company's Non-Core Property (but will not be bound by the failure of that resolution or even a resolution to the contrary).

5.3 The Deed Administrator will seek expressions of interest in relation to the sale of the Core Property and the Non-core Property.

5.4 Expressions of interest commenced on 16 February 2009 and will close on 2 April 2008 [sic]. 5.5 The Company has the option to lease interim premises if feasible. For example, if the Core Property is sold, the Company has the option to lease the existing premises in the core property which it currently operates, from the new owners for a period until the refurbishment is completed or the new premises located or the new owners require possession. 5.6 The intention is that the Company be free of debt on completion of the property rationalisation. 6 Clause 8 provides that the deed binds the secured creditor and that, until the deed terminates, the secured creditor (Perpetual Nominees) must not enforce, realise or otherwise deal with the secured creditor's security: 8. Secured Creditor

8.2 The Secured Creditor acknowledges that it attended the second meeting of creditors and voted in favour of the Deed.

8.3 Until this Deed terminates, the Secured Creditor must not enforce, realise or otherwise deal with the Secured Creditor's Security.

8.4 In the event the Secured Creditor's debt is paid out by another financial institution or a third party, the rights of the Secured Creditor would be subrogated to the party who has paid out the Secured Creditor's debt. 7 Clause 13 provides for the deed administrator to convene a meeting of creditors and consider a resolution under (CTH) Corporations Act 2001, s 445C(b), terminating the DoCA if he considers it no longer practical or desirable to implement the administration of the deed, including if the members of the company do not approve the sale of the company's core property and the deed administrator considers it essential to sell the property in order to implement the terms of the deed: 13. Meeting to consider termination

13.1 Without limiting the operation of section 445C, section 445E or section 445F of the Corporations Act 2001 , if the Deed Administrator considers that it is no longer practicable or desirable to carry on the business of the Company or to implement the administration of this Deed, the Deed Administrator: (1) may cease to carry on the business of the Company except so far as is necessary for the beneficial winding up of the Company; (2) may convene a meeting of the Company's Creditors to consider a resolution under s 445C(b) of the Corporations Act 2001 terminating the Deed; and (3) at the same time as giving the Company's Creditors notice in writing of that meeting, must give the Company's Creditors: (a) a current report of the position of the Company accompanied by such financial statements as the Deed Administrator considers fit; and (b) a statement that the Deed Administrator considers that it is no longer practicable or desirable to carry on the business of the Company or to continue this Deed and that the Deed will be terminated if the Company's Creditors so resolve.

13.2 Without limiting the operation of clause 13.1, the Deed Administrator may consider that it is no longer practicable to implement the administration of the Deed if the members of the Company do not approve the sale of the Company's Core Property and the Deed Administrator considers it essential to sell this property in order to implement the terms of this Deed.

13.3 In the circumstances of clause 13.2, the Deed Administrator may apply to the Court with all the powers set out in Division 13 of Part 5.3A of the Corporations Act 2001. 8 The deed administrator called for expressions of interest in accordance with the DoCA and received 110 expressions of interest and 14 subsequent offers. No offer was for the core property alone, so it was necessary to sell both properties. Eleven formal expressions of interest to purchase both properties in one line were received, for prices ranging from $4.3 million to $10 million. The deed administrator accepted an offer made by G & J Drivas Pty Limited, because it was the highest offer received from a purchaser prepared to allow the Club to remain in the properties. The deed administrator entered into a contract for sale with G & J Drivas on 1 July 2009, in respect of the core and non-core property of the Club - that is to say 86 and 88 Liverpool Street - for a price of $9,250,000. However, on 31 July 2009, at a meeting of members of the company convened for the purpose of obtaining members' approval of the contract, the members resolved overwhelmingly not to approve that sale. 9 The deed administrator took the view that he was entitled to proceed with the sale notwithstanding the absence of member approval, but on the application of one of the members, Ms Correa, on 30 September 2009 I granted an interlocutory injunction restraining the deed administrator until further order from completing the contract [Correa v The Spanish Club Ltd [2009] NSWSC 1225]. In essence, Ms Correa's case was that, by entering or purporting to enter into and proposing to complete the contract for sale in the absence of approval of members of the club, the administrator was acting to the prejudice of members within the meaning of s 447E, which provides as follows: Supervision of administrator of company or deed (1) Where the Court is satisfied that the administrator of a company under administration, or of a deed of company arrangement: (a) has managed, or is managing, the company's business, property or affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members; or (b) has done an act, or made an omission, or proposes to do an act, or to make an omission, that is or would be prejudicial to such interests; the Court may make such order as it thinks just. 10 I concluded that it was at least seriously arguable that the sale of the core property, without the approval of the members as envisaged by clause 5.1, would be an act prejudicial to the interests of some or all of the company's members, on the following bases: 18 The purposes of this deed of company arrangement were not limited to advancing the interests of creditors, but extended also to preserving the ability of the company, and the club, to remain in existence, to return to profitability and to carry on business and thus to promote the interests of the members as well as the creditors. That is evidenced by reference to those concepts in the reports of the administrator which preceded the approval of the deed, and in observations made at meetings prior to the approval of the deed. It is reflected by the inclusion in the deed of a provision that the members would have a right of veto over a proposed sale of the core property, albeit subject to the administrator's entitlement to form the view this would make continuation of the deed impractical or undesirable and thus entitle him to convene a meeting to consider termination of the deed. That this was the purpose of clause 5.1, and not merely to reflect an assumption that s 41J applied so as to require compliance with it were it applicable, is supported by the following matters.

19 First, if it be the case that s 41J does not apply to a sale by an administrator (because of the primacy of the Commonwealth legislation giving the administrator powers of sale), then its inclusion in the deed of company arrangement served no purpose at all. The provision has work to do if, and only if, it applies regardless of whether s 41J applies also of its own force.

20 Secondly, in answer to the proposition that it is unlikely that the creditors intended to place themselves at the mercy of the members in respect of a sale of the property of the corporation, it is clear enough from the context of clause 5.2 that, in respect of non-core property (as to sale of which, on no view, could the Registered Clubs Act have required the approval of members), nonetheless a stipulation was included that the administrator would place any proposed sale of non-core property before members, although he would not be bound by their refusal to approve it; which stands in contradistinction to clause 5.1, where there is no equivalent provision to the effect that the administrator would not be bound by non approval.

21 Moreover, clause 13.2 plainly envisages that there might be a conflict between the administrator's desire to sell the core property and the members' refusal to approve a sale.

22 Those matters tell very strongly against the proposition that the creditors could not have intended to subject their interests to those of the members in this way. Ultimately the power remains in the hands of the creditors: in any event, if the administrator decides that his ability to sell has been impeded, he could convene a creditors' meeting and the creditors can resolve to terminate the deed if so minded.

23 In my view, therefore, it is at least seriously arguable that the application of clause 5.1 is not limited to circumstances in which the law requires prior compliance with s 41J. On that view, any "dispensation" on the part of the Director-General under reg 19(1)(h) is beside the point.

11 It also seemed to me at least seriously arguable that such a sale was beyond the authority and capacity of the deed administrator, since clause 5.1 imposes limitations on the administrator's powers of sale, and that the purchaser would be on notice of any such want of authority - since it is plain on the face of the contract, that the company was subject to a company arrangement, so that the purchaser would be on notice of the contents of the deed of company arrangement and the restrictions it places on the administrator's powers: 27 I conclude, therefore, that the plaintiff has made out a seriously arguable case that the sale, or proposed completion of the sale, would be an act prejudicial to the interests of some or all of the company's members, and/or unauthorised and beyond authority of the deed administrator, of which lack of authority the purchaser had notice. On either of those bases, it is at least conceivable that the court might ultimately avoid the contract or at least permanently restrain the administrator from completing it. If that were to leave the company liable under the contract in circumstances where it had been entered into by the administrator outside and beyond the scope of his proper authority it would be possible to grant a remedy which would indemnify the company from the consequences. None of this is to suggest that such would necessarily, or even probably, be the outcome; but it is an answer to the suggestion that granting the relief sought would be futile. 12 The deed administrator proposes to convene a meeting of creditors under Corporations Act, s 445F, to consider alternative resolutions. The first would be one to vary the DoCA, in substance by deleting the requirement for member approval for a sale of the core property, and permitting the Deed Administrator to cause the Club to enter into and complete a new contract of sale with G & J Drivas on substantially the same terms as the existing contract, after consensual rescission of the existing contract. The alternative resolution would be to terminate the DoCA and place the Club into liquidation. Ms Correa having intimated that this course would be inappropriate in the light of the interlocutory injunction, the deed administrator seeks directions pursuant to s 447D to the effect that he be permitted to take the course proposed. Ms Correa appeared by counsel, by leave, without becoming a party, to oppose the application for directions. 13 Section 447D is as follows: (1) [Directions as to functions and powers] The administrator of a company under administration, or of a deed of company arrangement, may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. (2) [Directions as to operation or effect of deed] The administrator of a deed of company arrangement may apply to the Court for directions about a matter arising in connection with the operation of, or giving effect to, the deed. 14 Section 447D provides for what is analogous to judicial advice to an administrator or deed administrator. It is apt for clarifying and resolving doubts as to the extent of the administrator's powers or functions or the propriety or reasonableness of the manner in which it is proposed that they might be exercised, but something more must be in issue than the making of a business or commercial decision [Re Ansett Australia Ltd (No 3) (2002) 40 ACSR 433, [65]]. As with applications for judicial advice under Trustee Act, s 63, the procedure is inapt for the resolution of controversial questions of legal right [cf Re Gilchrist (1867) 6 SCR (NSW) Eq 74; Re Union Trustee Co of Australia Ltd [1936] QWN 6; Re Sinnamon [1940] QWN 41; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 440; Humphries (as administrator of Hazelton Air Charter Pty Ltd v Mentha (2002) 41 ACSR 472; Australian Pipeline Ltd [2006] NSWSC 1316]. 15 Ms Correa submits that the advice sought should not be given, because (a) termination of the DoCA is not authorised in the circumstances, and (b) the proposed variation ought not properly be the subject of directions. Conditions for a termination resolution are not satisfied 16 Section 445F(1)(a) empowers a deed administrator to convene a meeting of creditors at any time. Under s 445C(b), a DoCA terminates when the company's creditors pass a resolution at an s 445F meeting terminating the Deed. However, by reason of s 445CA, the creditors can pass a resolution under s 445C(b) only if there has been a breach of the DoCA which has not been rectified before the resolution is passed. 17 No breach of the DoCA such as to fulfil the requirement of s 445CA has been identified. The deed administrator argues that that requirement need not be satisfied in the case of a resolution contemplated by clause 13.1(2) of the DoCA, and that if the members refuse to approve a sale of the core property the creditors may resolve, pursuant to cl 13.1(2), to terminate the DoCA, whereupon it will be terminated not pursuant to s 445C(b), but pursuant to s 445C(c), which provides that a DoCA terminates if the deed specifies circumstances in which it is to terminate and those circumstances exist. 18 In my view this argument is not sustainable. Clause 13.1 does not specify circumstances in which the DoCA shall terminate. Nor does it even specify circumstance in which creditors may resolve to terminate the DoCA. At the highest, it specifies circumstances in which the deed administrator may convene a meeting of creditors to consider a resolution under s 445C(b) - not a resolution generally to terminate the Deed, but a resolution specifically under s 445C(b). And, because of s 445CA, a resolution under s 445C(b) can be passed only if there is a continuing breach. 19 Moreover, I am unpersuaded that the conditions precedent to a proper decision by the deed administrator to convene a meeting under cl 13.1 are satisfied, even putting aside the question of a breach. In my view, the situation has not yet been reached where a deed administrator, acting honestly and reasonably, would conclude that it is no longer practicable to implement the administration of the DoCA in accordance with its current terms. 20 First and foremost, investigation of alternative sale possibilities has not been exhausted, and there remains sufficient equity that the interests of creditors will not be jeopardised by taking some further time to explore those possibilities, of which the SRG proposal is plainly one. The deed administrator argues that the DoCA makes no provision for any alternative sale. This apparently involves a view that, the expressions of interest process referred to in clause 5.3 and 5.4 having been exhausted, only a sale to the purchaser selected as a result can proceed, at least without a further expressions of interest process - although the deed administrator's position seemed somewhat flexible in this respect. In any event, I do not accept that the deed administrator is limited to purchasers from whom expressions of interest were elicited during that process and period. Clause 4 creates a fund of Available Property to satisfy creditors' claims. Clause 5 imposes some limitations on the sale process. The requirement to seek expressions of interest during a specified period is, at best, directory, in order to expedite, but not to limit, the process. It does not mean that if no acceptable expression of interest is elicited during that period, a sale cannot subsequently take place. Nor does it mean that if expressions of interest are elicited during that period, a later expression of interest must be disregarded. The expressions of interest process was not a formal competitive tender process, and there is no obligation on the deed administrator to accept the highest, or any, offer that emanates from an expression of interest during the specified period. 21 Secondly, the DoCA contemplates that some weight will be given to the views and wishes of members in respect of a sale of the Core Property. The deed administrator has expressed the view that the Drivas offer is superior, and that the present alternative proposed by members (a preliminary offer by Sydney Realty Group) does not in the circumstances warrant serious consideration. In circumstances where the DoCA contemplated the continuation of the Club, if possible in the premises, and confers certain rights of veto on the members, it is not apparent why the deed administrator's view that the Drivas offer is superior should be regarded as decisive, nor why the circumstance that an offeror may have a connection with the membership (as it is suggested the SRG offer has) should attract suspicion. The members' right of veto is a powerful indication that it was intended that they would have some say in the sale process. In those circumstances, while the deed administrator's expressed preference for a certain sale to Drivas rather than the possibility of an alternative sale is commercially understandable, it does not give sufficient consideration to the significance of the members' rights under this particular DoCA. It is important to note that the members do not oppose a sale per se; in accordance with the right of veto given them by the DoCA in respect of a sale of the Core Property, they have not consented to a particular sale; but they have proposed an alternative sale, which the deed administrator has shown little inclination to pursue. The deed administrator's role is not merely to serve the interests of the creditors, but to implement and give effect to the DoCA, which in this case reflects at least to some extent the interests of members as well as of creditors. Where the members have, in respect of one proposed sale, exercised a right of veto that the DoCA explicitly gives them, while proposing an alternative, it is difficult to see how that can justify a conclusion that the DoCA is no longer capable of implementation. 22 That is all the more so where, for reasons explained in my judgment on the interlocutory injunction application [Correa v The Spanish Club Ltd, [27]], there may be a powerful personal incentive for the deed administrator to adhere to the Drivas sale and not risk incurring the personal exposure to Drivas which might result if he were not to complete the Drivas contract. This circumstance on its own would make it inappropriate to inoculate the deed administrator with judicial advice in this respect. 23 In my view, the conditions for a termination resolution under s 445C(b) have not been met, and the deed administrator would not be justified in convening a meeting for the purpose of considering such a resolution. It is inappropriate to give advice in respect of the proposed variation 24 Section 445A permits the creditors to vary the DoCA by resolution passed at such a s 445F meeting, so long as the variation is not materially different from that proposed in the notice of meeting. However, by s 445B, the Court can cancel any such variation. Moreover, the DoCA cannot be varied in any manner to which the deed administrator does not consent [Surber v Lean (2001) 36 ACSR 176]. The significance of this is that the creditors do not have an absolute and unfettered power of variation; they can vary the DoCA only with the deed administrator's concurrence. And, under s 447E, the Court may make such order as it thinks just where the Court is satisfied that the administrator of a deed of company arrangement has managed, or is managing, the company's business, property or affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members; or has done an act, or made an omission, or proposes to do an act, or to make an omission, that is or would be prejudicial to such interests. 25 The proposed variation would involve a radical change to the balance of interests currently reflected in the DoCA between the members and the creditors, by removing the members' veto in respect of a sale of the Core Property. Where the members do not oppose a sale per se, but in accordance with the right of veto given them by the DoCA in respect of a sale of the Core Property have not consented to a particular sale, and have proposed an alternative sale which the deed administrator has shown little inclination to pursue, it is difficult to see justification for a radical variation of the DoCA such as to remove their right of veto, in the absence of circumstances such as would justify termination. It is at least arguable that such a variation might be cancelled under s 445B, or that the deed administrator's proposed concurrence in it might be held to be prejudicial to the interests of members within s 447E. Those possibilities, which should be examined if at all in ordinary adversarial litigation, ought not be pre-empted by judicial advice to the deed administrator. Conclusion 26 In my view, the conditions which would justify a resolution under s 445C(b) are not satisfied, and convening a creditors' meeting to consider such a resolution would not be justified. A variation to remove the members' right of veto would be amenable to challenge under s 445B and s 447E, which ought not be pre-empted by judicial advice. This is not an appropriate case in which to give the judicial advice sought. 27 I order that the summons be dismissed.

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