Cresvale Far East v Cresvale Securities

M Cashion (P) COUNSEL : Mr J Thomson (CC, D3) Mr R Dubler (D1, CD1, D2, CD2) Mr R Darke (D4, CD3) Minter Ellison (P) SOLICITORS : Blake Dawson Waldron (CC, D3) Henry Davis York (D1, CD1, D2, CD2) John A Glynn & Associates (D4, CD3) CATCHWORDS : CORPORATIONS - voluntary administration - deed of company arrangement delivers control of company to director by issue of shares - administrator's exercise of casting vote where creditor with greater value disagrees with numerical majority of creditors - casting vote held improper where administrator had not made adequate investigations - whether administrator's report false or misleading, and whether material omissions, where investigations were inadequate - whether deed of company arrangement should be set aside for injustice, unfair prejudice and unfair discrimination - whether issue of shares pursuant to deed was valid LEGISLATION CITED : Corporations Law ss 435A, 437A, 437C, 439A, 439C, 444A, 444G, 444H, 445A, 445C, 445D, 445F, 445G, 445H, 447E, 449B, 588FA. 588FC. 588FF, 600B, 600C, 600E Corporations Regulations Reg 5.3A.07, 5.6.21, 5.6.26, Schedule 8A clause 2 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Deputy Commissioner of Taxation v Comcorp Australia (1996) 21 ACSR 590 Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498 Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453 Employers' Mutual Indemnity (Workers' Compensation) Ltd v JST Transport Services Pty Ltd (1997) 23 ACSR 197 Hamilton v National Australia Bank Ltd (1996) 19 ACSR 647 Harcros Timber Australia Pty Ltd v MA Joinery Co Pty Ltd (Supreme Court of New South Wales, Young J, 6 June 1994, unreported) Howard Smith Limited v Ampol Petroleum Ltd [1974] AC 821 Jones v Dunkel (1959) 101 CLR 298 CASES CITED : Kokotovich Pty Ltd v Wallington (1995) 17 ACSR 478 Mulvaney v Wintulich (unreported, FCA, O'Loughlin J, 29 September 1995) Ngurli Ltd v McCann (1953) 90 CLR 425 North Sydney District Rugby League Football Club Limited v Hill [2000] NSW SC 249 R v Bradford Council, ex parte Corris [1989] 3 All ER 156 Re Bartlett Research Securities Pty Ltd (1994) 12 ACSR 707 Re Coaleen Pty Ltd (1999) 30 ACSR 200 Re Depsun Pty Ltd (1994) 13 ACSR 644 Re Martco Engineering Pty Ltd (1999) 32 ACSR 487 White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169 DECISION : Deed and share issue set aside; administrator removed and replaced.

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3672/00 CRESVALE FAR EAST LTD (IN LIQ) V CRESVALE SECURITIES LTD & ORS

The proceedings 1 The plaintiff ('Far East'), who is a creditor of the first defendant ('Securities'), commenced these proceedings on 22 August 2000. By its statement of claim, Far East seeks to attack a deed of company arrangement entered into on 9 August 2000 with respect to Securities ('the DCA'), on three grounds, namely that: · the DCA is invalid because the resolution to approve it was not accordance with s 439C of the Corporations Law; · the DCA should be terminated under s 445D of the Corporations Law because effect cannot be given to it without injustice, and because it was entered into on the basis of misleading information in the report of the voluntary administrator to creditors, and also because the DCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against Far East; and · the resolution to approve the DCA should be set aside under s 600B(3) of the Corporations Law. 2 Under the DCA, shares in Securities were issued to the fourth defendant, Mr Kirwan. Before that time, Far East was indirectly the sole shareholder of Securities (through its wholly owned subsidiary, the third defendant, 'Capital'). The share issue reduced Capital's direct interest and Far East's indirect interest to a minority holding. By its statement of claim, Far East seeks an order that the share issue be set aside and that the share register be rectified accordingly. 3 By its cross-claim, Capital also seeks to attack the DCA and the share issue. In substance, the cross-claim raises the same issues as Far East's statement of claim, and so for some purposes Capital can be regarded as a second plaintiff. The cross-claim seeks relief of the following kinds: · Securities be wound up and a nominated liquidator be appointed; · the DCA be terminated under s 445D; · the DCA be declared void under s 445G(2); · the administrator, Mr Gould, be removed as administrator of the DCA under s 447E(1) or under s 449B; · the DCA be set aside under s 600B; · the allotment of shares to Mr Kirwan be declared void and the share register be rectified accordingly. 4 Before dealing with the contentions placed before me at the hearing, I shall identify the parties and then set out my findings of fact.

The parties 5 Far East is the holding company of Capital which, in turn, was the holding company of Securities prior to 11 August 2000. Far East was incorporated in Hong Kong. It is a wholly-owned subsidiary of Princeton Economics International Inc ('Princeton'), and is in liquidation pursuant to the Companies Ordinance (Hong Kong). Princeton was incorporated in the Turks and Caicos Islands and is in provisional liquidation under orders made by a court in that jurisdiction. 6 Princeton is one of a number of companies (most of which have the word 'Princeton' in their names) in a global group of related companies which traded primarily in stockbroking and the mining industry ('Princeton Group'). The group was the subject of an investigation by the Securities and Exchange Commission of the United States. In consequence of that investigation, on about 3 September 1999 the United States District Court, Southern District of New York, appointed a temporary receiver to the Princeton Group, including Securities ('US receivership'). The order made by the US court may not have been effective in Australia - at any rate, the solicitors for Securities advised their client on 21 January 2000 that it was ineffective in this jurisdiction. 7 Capital is a company formed in Australia. Messrs Kirwan and MacPherson were directors. Voluntary administrators were appointed to the company on 30 September 1999, and it was placed in liquidation as a result of resolutions passed at a meeting of creditors on 8 December 1999. Messrs Greg Hall and Peter Hedge are its liquidators. Capital owned all the shares in Securities until 11 August 2000. They were its most valuable asset. 8 Securities was also formed in Australia. Prior to 23 June 2000 it carried on business as a stockbroker in Sydney. It became subject to voluntary administration on 23 June 2000, and subject to the DCA on 9 August 2000. The deed administrator is the second defendant, Mr Gould, who was also the voluntary administrator. Securities has three directors. Mr Kirwan and Mr Anderson have been directors at all relevant times. 9 There is some uncertainty about the identity of the third director. A company search made on 22 August 2000 shows the third director as Mr MacPherson, but according to the Administrator's Report for Securities, the third director at 26 June 2000 was Mr Sonnemann. Mr Gould asserts that Mr Sonnemann was replaced as a director by Mr MacPherson on 26 June 2000. According to a letter from Messrs Kirwan, Anderson and Sonnemann as directors of Securities to the Australian Stock Exchange dated 27 January 2000, Mr Sonnemann replaced Mr MacPherson as a director on that day. In my view, it is more likely than not, given the confusion in the evidence, that Mr MacPherson has remained a director, although at some stage or other it may have been intended that he be replaced. This conclusion is reinforced by the fact that the minute of the share allotment, made on 11 August 2000 pursuant to the DCA, was signed by him rather than Mr Sonnemann.

The status of Far East and Capital as creditors of Securities 10 Far East claims that Securities owes it $784,186. This is composed of an amount owing on general loan account of $284,186 and $500,000 by way of a subordinated loan. Far East lodged a proof of debt in the administration of Securities by letter dated 29 June 2000. There seems to be no dispute about the admissibility of this proof. Far East is also a creditor of Capital in the sum of $4,361,793. 11 Capital claims to be a creditor of Securities in the sum of $590,144. It did not lodge a proof of debt until 20 July 2000, well after the first meeting of creditors of Securities held on 30 June 2000, and the day before the second meeting of creditors. The proof of debt relates to transactions that occurred on 16 September 1999, described in the next section of these reasons for judgment. It is based upon the proposition that these transactions involved an unfair preference, voidable under s 588FF of the Corporations Law. 12 But for the alleged voidable transactions, Capital would have been a debtor rather than a creditor of Securities. As entities in the same corporate group, they were involved in intercompany lending and other financial transactions. There is some evidence to the effect that Securities accumulated a debt to Capital which stood at $177,047 by March 1999. A working paper prepared by the companies' accountants, Haines Norton, asserts that the impugned transactions of September 1999 were accounted for as increasing the debt of Securities to Capital, and there was a transfer of funds from Securities to Capital by way of intercompany loan. The loan, in the sum of $500,000, was to pay for expenses and to maintain adequate cash flow. In the result (according to this evidence), as at 31 March 2000 Capital owed Securities $131,964. As administrator of Securities, Mr Gould lodged a proof of debt with the liquidators of Capital for that figure, but they have asked for supporting documentation and have not yet admitted the proof. 13 Nor has Mr Gould admitted Capital's proof of debt. He says that according to his understanding, Capital is indebted to Securities in the manner outlined above. He does not accept that the transactions of 16 September 1999 involved any unfair preference. Mr Gould's approach to Capital's proof of debt is a subject of criticism, as I shall explain later. 14 I have described the proof for $590,144 as Capital's proof. The right to apply for orders with respect to an unfair preference is, strictly, a right vested in the liquidators of the company: s 588FF. The significance of this point is that there may be no set off of the claim by the liquidators of Capital against debts owing by Capital to Securities.

Transfer of assets by Capital to Securities 15 On 16 September 1999 Capital transferred all of its listed investments, and furniture and fittings, to Securities. The listed investments transferred to Securities included 6,717,719 shares in Virotec International Ltd (then called TIN Australia NL), which were transferred at their then market value of 3.8 cents per share, and 2,490,058 Virotec options transferred at one cent each. The listed investments were transferred to Securities at a value of $415,534, and the furniture and fittings were transferred at a value of $174, 610. 16 According to reports by Mr Hedge, the joint liquidator of Capital, the transfer was made for the express purpose of repaying Capital's intercompany loan liability to Securities. He says that the intercorporate liability stood at approximately $480,000. That figure appears to be inconsistent with the figures prepared in the working paper by Haines Norton, to which I have referred. It is not clear, on the evidence before me, whether the intercompany loan of $500,000 from Securities to Capital was made before or after the transactions of 16 September 1999. If the loan was made later than the transactions and the loan may be set off against the liquidator's claim, Securities would not have been a creditor of Capital at the time of the transactions and if so, the transactions could not be unfair preferences under s 588FA, though there might be a basis for arguing that they were uncommercial transactions under s 588FB. The liquidators of Capital will need to assess the evidence on such matters before deciding whether to take proceedings to challenge the transactions.

Sale of Virotec shares by Securities to Mr Kirwan 17 On 30 September 1999 the Australian Stock Exchange wrote to a representative of Securities about the holdings by Securities in the listed companies which had been acquired by transfer on 16 September 1999. The Exchange took the view that in light of recent market volumes, these holdings did not have a ready market, for the purpose of calculating Securities' liquid capital position under the ASX Business Rules. The Exchange would require Securities to exclude these assets from its liquid capital calculations, as from 30 September 1999, unless the holdings were liquidated or Securities could demonstrate that they were sufficiently liquid investments that they should not be excluded altogether. 18 Securities responded to the Exchange's demands by selling the Virotec shares on the stock market on about 22 October 1999. Most of the shares were bought by Mr Kirwan as trustee for the GNPK Family Trust. A graph of trading volumes shows very low turnover at that time, implying that the market in the shares of Virotec was relatively illiquid. The market price of Virotec shares rose from under 10 cents in February 2000 to peak at about $1.30 early in March 2000, on vastly increased turnover. The evidence does not disclose the precise number of shares acquired by Mr Kirwan, nor whether he disposed of any shares at the peak of the market. A written submission by counsel for Capital put the gain at $11.3 million, but evidence to that effect in an affidavit by Mr Hedge was rejected. However, it appears that his potential gain was in the order of several million dollars. 19 Mr Gould says he investigated the circumstances surrounding the sale of the Virotec shares to Mr Kirwan, and formed the view that the sale was likely to have been bona fide and for market value. He took into account that: · Securities had a bona fide need to convert the shares into cash to satisfy the Exchange's requirements; · the shares were sold on the market, and not all of them were bought by Mr Kirwan; · the liquidators of Capital were informed of the transaction before it took place, and took no action to prevent the transaction or subsequently to reverse it; · Mr Kirwan made an offer to Mr Hedge to obtain independent advice from senior counsel concerning the transaction, but Mr Hedge declined that proposal; and · Securities was solvent at the time, and was not rendered insolvent by the transaction, and hence avoidance of the transaction under Div 2 of Pt 5.7B of the Corporations Law would have been difficult to make out. 20 I shall return to this reasoning, but it is worth noting immediately that Mr Gould does not seem to have addressed the question whether the transaction was in breach of Mr Kirwan's fiduciary duty as a director, considering only the question of unfair preference.

Negotiations for sale of the Securities shares to Mr Kirwan 21 As I have indicated, by the latter part of 1999 the Australian Stock Exchange had developed some concerns about the ability of Securities to meet the Exchange's capital adequacy and surplus liquid funds requirements. Even though Securities disposed of the listed investments which did not satisfy the Exchange's requirements, the Exchange still required the company to provide additional liquid capital by 31 December 1999. This December deadline affected the negotiations which I am about to describe. 22 The liquidators of Capital attempted to sell the shares in Securities during the last few months of 1999, placing an advertisement in the Australian Financial Review on 13 October 1999, and conducting various discussions. Mr Kirwan made an offer to purchase the shares by letter dated 10 December 1999, as trustee for the GNPK Family Trust. The letter claimed that after the assets of Securities were written down, their realisable value would be approximately $128,000. The offer was to acquire the shares for $140,000. 23 The offer led to the execution of a sale of shares deed dated 24 December 1999. The operative parts of the deed were expressed to be subject to a number of conditions, one of which (clause 2.1 (b)) was that by completion, the liquidators of Capital were to be reasonably satisfied that no objection to the deed had been made by either the provisional liquidators of Princeton in the Turks and Caicos Islands or the US receiver of the Princeton group. The conditions were required by the liquidators of Capital because they did not have time to consult the external administrators of the Princeton group overseas, before entering into the deed. 24 The deed contained four principal operative parts: · First, Capital (in liquidation) agreed to sell its shares in Securities to Mr Kirwan, in his capacity as trustee of the GNPK Family Trust. The purchase price was $140,000, and a deposit of $14,000 was payable upon execution of the deed. · Secondly, Mr Kirwan (both in his capacity as trustee and personally) and Mr MacPherson undertook to contribute to Securities an amount not exceeding $350,000 on or before 31 December 1999, as required by the Australian Stock Exchange, to satisfy its capital adequacy requirements. The contribution was to be on the usual subordination terms required by the Exchange. There was provision for repayment of the deposit payable for purchase, if the deed was terminated, but no provision in the deed for return of the contribution to Securities' liquid capital in the event of termination. · Thirdly, the deed dealt with claims for payment by the service companies of Mr Kirwan and Mr MacPherson (Kamadhenu Management Pty Ltd and Jackred Pty Ltd, respectively). Those companies had agreed with Capital to provide to it consultancy services by their nominated executives, Mr Kirwan and Mr MacPherson respectively. By the deed, Messrs Kirwan and MacPherson, and their respective service companies, agreed to subordinate their claims for payment to the claims of the unsubordinated creditors of Capital. · Fourthly, Securities agreed to subordinate, to the claims of the unsubordinated creditors of Capital, its claim to repayment of the net loan said to have been made by it to Capital (which the deed quantified at $135,689). 25 Associated with the sale of shares deed was a deed of assignment. By that deed, Securities assigned to Capital for two years the benefit of any rights of action it may have against third parties for unlawful conduct in relation to the affairs of the Capital group. The deed of assignment was subject to substantially the same conditions as the sale of shares deed. 26 The solicitors for the liquidators of Capital approached the provisional liquidators of Princeton by e-mail to ascertain whether there was any objection to the transaction, seeking a reply by 22 December 1999 (as it happened, before the date of execution of the sale of shares deed). They also approached the US receiver's representative by e-mail, again seeking a reply by 22 December 1999. In both cases they mentioned the strict deadline imposed by the Exchange's capital adequacy requirements, which had to be met by 31 December 1999. 27 Both e-mails enclosed an analysis by Mr Hedge as liquidator of Capital. Mr Hedge reported that Securities was continuing to trade as at 22 December 1999, and appeared to be solvent on a balance sheet basis. However, its liquidity position was causing significant concern to the Australian Stock Exchange. He reported on attempts to sell the company, and recorded that only one offer had been received after advertisement. This was the offer from Mr Kirwan. He said that the liquidators believed this offer was in the best interests of Capital. 28 The evidence as to what happened next is not entirely clear. It appears that subordinated loans were made to Securities by 31 December 1999 in an amount sufficient to satisfy the Stock Exchange's liquid capital requirements, and that those loans included one by Mr Kirwan of $160,000. However, the US receiver made an objection to the sale of shares deed and the deed of assignment, and the transactions contemplated by them. The nature of the objection is not in evidence, although submissions by counsel assumed that the US receiver wanted to have investigations pursued concerning the sale of the Virotec shares to Mr Kirwan, and it was thought that the transaction would prevent those investigations from going ahead. On 21 January 2000 the solicitors for the liquidators of Capital wrote to the solicitors for Securities stating that 'it is apparent that the Receiver will not withdraw this objection in the short-term'. The letter said that upon the passing of the completion date, without satisfaction of the conditions in clause 2.1 (b) of the respective deeds, the deeds would cease to be effective and the deposit would be returned to Mr Kirwan. Thus, by approximately the end of January 2000 completion of the sale of shares deed had ceased to be a real practical prospect.

A proposal to wind up Securities, and the threat to continued trading 29 On 25 January 2000 the liquidators of Capital convened a member's meeting of Securities (the sole member being Capital in liquidation) to be held on 28 January, for the purpose of passing a special resolution that Securities be wound up under s 461(1)(a) of the Corporations Law. They notified the Stock Exchange that they had done so. On 25 January the Stock Exchange wrote to the directors of Securities expressing the view that Securities should immediately cease taking on new business, in light of the proposed liquidation and concerns about capital adequacy and sources of ongoing funding which the Exchange had developed over the previous months. The letter contained a warning that unless the directors voluntarily ceased taking on new business, the Exchange might exercise its powers under the ASX Business Rules. 30 The directors did not cease trading, but instead they approached the liquidators of Capital to have the general meeting of Securities postponed, pending advice from senior counsel. They wrote to the Exchange on 27 January conveying their decision. The letter contemplated proceedings for relief to establish that the liquidators of Capital should not be swayed to make their decisions upon the basis of any preference expressed by the US receiver. The letter asked for continued forbearance on the part of the Exchange. 31 I infer, though there is no direct evidence, that arrangements must have been made with the Stock Exchange to permit Securities to continue to trade, and with the liquidators of Capital not to proceed with the proposed winding up, since Securities continued in business up until June 2000 when Mr Gould was appointed voluntary administrator in circumstances that I shall describe. The proposed winding up demonstrates, however, that all relevant parties were aware as from January 2000 that a resolution to wind up Securities was an option for the liquidators of Capital, as long as Capital remained the sole shareholder of Securities and Securities stayed out of voluntary administration. 32 After the events of January 2000, Mr Kirwan continued to press Mr Hedge with his offer to buy the shares in Securities. Mr Hedge's attitude during this time is unclear. He had reported on 22 December 1999 that, in the opinion of the liquidators of Capital, sale of the shares in Securities to Mr Kirwan's trust was in the best interests of Capital. The December 1999 sale to Mr Kirwan did not go forward because of the objection of the US receiver, rather than any objection on the part of Mr Hedge or his co-liquidator of Capital. 33 Mr Hedge's attitude appears to have been influenced by his developing assessment of the prospect of recovery of the Virotec shares sold by Securities to Mr Kirwan in October 1999. His attitude appears to have changed in March 2000, when the market price for Virotec shares escalated dramatically. To understand Mr Hedge's attitude, it is necessary to refer to his reports to creditors of Capital.

Mr Hedge's Report of 23 March 2000 34 The liquidators of Capital convened a meeting of creditors which was held on 10 April 2000. The purpose of the meeting was to provide creditors with a report on developments in the liquidation, to obtain their approval of a resolution concerning the remuneration of the liquidators, and to appoint a committee of inspection. 35 Mr Hedge prepared a written report for creditors dated 23 March 2000, covering developments since the date of his appointment on 8 December 1999. He referred to the sale of shares deed of 24 December 1999 and explained that 'the various conditions attached to this sale agreement have not been satisfied to date and I am now in the process of considering how best to move forward as liquidator with the sale of the shares'. He said he would be in a position to discuss the matter in further detail at the meeting. 36 He expressed the view that the transactions of 16 September 1999 appeared to constitute an unfair preference under s 588FA of the Corporations Law, which could be set aside by the liquidators of Capital. He remarked, however, that as Capital owned 100% of the shares in Securities, any benefit in setting this transaction aside would be offset by an equal decrease in the net worth of Securities. Accordingly, he said, there had previously been no financial benefit in endeavouring to do so. However, he noted that a recent development with the Virotec shares had led to the matter being further investigated, and this would be discussed in detail at a meeting of the creditors on 10 April 2000. There is no evidence as to what was said at the meeting. 37 Mr Hedge's reasoning seems to have been that there was no point in taking proceedings against Securities to recover the preference constituted by the transactions of 16 September 1999 as long as Securities was wholly-owned by Capital, and in the event of sale Capital would receive the value of the assets remaining in Securities' hands through the sale price, so it was unnecessary to seek to recover that value in proceedings. To the extent that Securities had disposed of Virotec shares to Mr Kirwan in October 1999, there may have been some prospect of Securities recovering the shares or their value from him. Proceedings against Mr Kirwan could be taken, if Securities was first placed in voluntary liquidation. However, such proceedings became economically worthwhile only when the market value of Virotec shares jumped in March 2000.

Securities' letter to Mr Hedge dated 1 June 2000 38 It appears that Mr Kirwan believed, even after the meeting of the creditors of Capital on 10 April 2000, that there was still a prospect of his negotiating with Mr Hedge for the acquisition of the shareholding in Securities. A letter was written by the company secretary of Securities to Mr Hedge on 1 June 2000, in response to a letter from Mr Hedge dated 24 May 2000, which is not in evidence. 39 The letter of 1 June 2000 noted that in the three-month period ending 31 March 2000, which had covered the major part of the most active trading seen by the Australian Stock Exchange for several years, Securities had been reduced to only six active dealers and, allegedly as a result of this, the company recorded a loss. It said that the directors were conscious of the need to increase substantially the number of investment advisers, but no action could be taken until the future direction of the company had been put in place. The directors did not expect profitability to return until they were able to secure the services of at least 10 more advisers. After reviewing the value of the company's assets, the letter concluded that Securities had little or no value to outside parties, and conveyed the directors' unanimous view that any offer above the level of shareholders' funds should be seriously considered. 40 There is no evidence that any direct reply was given to that letter. It would not have been unreasonable for Mr Hedge to regard it as a self-serving plea on behalf of Mr Kirwan. Whether or not he replied directly to the letter, he addressed the question of sale of the shares in Securities in a further report to the creditors of Capital dated 15 June 2000.

Mr Hedge's report of 15 June 2000 41 Any doubt which may have been harboured by Mr Kirwan as to Mr Hedge's attitude to the sale of the shares in Securities must have been removed by Mr Hedge's report to creditors of Capital dated 15 June 2000. Having discussed the possible preference recovery from Securities, the Report referred to the conditional sale of 24 December 1999 and observed that various conditions attached to the sale agreement had not been satisfied and the contract lapsed. Mr Hedge then said: 'I am now in the process of considering how best to move forward with the realisation of this investment. The possible preference transaction reported above may be relevant to my strategy in this regard.' 42 The directors' report as to affairs had disclosed total creditors of $6,539,367. Mr Hedge's Report showed funds available for distribution of $1,167,430, expected to be reduced in future by $258,758, leaving an estimated net amount of $908,672 for distribution to the creditors of Capital. These figures included payment of the administrator's fees in the sum of $98,386. The estimated future expenses included liquidators' fees of $200,000 and legal fees of $100,000. It is a fair inference that these estimates of fees were intended to cover the cost of pursuing the preference claim against Securities and Mr Kirwan. Mr Gould gave some vague evidence that he had seen invoices already rendered by Mr Hedge's firm, but he evidence was unconvincing in its terms and inconsistent with Mr Hedge's report, and I reject it. 43 The narrative history of events to this point shows that considerable tension, if not animosity, had developed between Mr Kirwan and Mr MacPherson, on the one hand, and Mr Hedge on the other. Mr Kirwan was at all times pushing vigorously to purchase the shares in Securities. Mr Hedge had at first taken the view that a sale of the shares in Securities would be in the best interests of the creditors of Capital, but when there was a dramatic escalation in the market price of Virotec shares in March 2000, it became appropriate for him to investigate the sale of Virotec shares to Mr Kirwan more closely. Mr Kirwan was highly critical of Mr Hedge's action, and threatened legal proceedings on the basis that Mr Hedge had not acted independently of the US receiver. 44 It seems to me immaterial that the investigation of the Virotec transaction may also have been advocated by the US receiver, or even first suggested by him, unless it can be shown that Mr Hedge failed to take into account the interests of the creditors of Capital. But it would be in the interests of the creditors of Capital to augment the value of Capital's shareholding in Securities by causing Securities to recover the Virotec shares or their value. I can see nothing in the evidence to justify the view that Mr Hedge failed to act in good faith for the benefit of the creditors of Capital, or that he followed the directions of the US receiver and failed to exercise any independent discretion. 45 Before turning to the facts surrounding the appointment of Mr Gould as voluntary administrator and the subsequent meetings of creditors of Securities, I shall deal with the status of claims made against Securities by Newland Resources Ltd and Kamadhenu Management Pty Ltd, since their respective positions assumed some significance during the administration of Securities.

Claim by Newland Resources Ltd 46 On 7 March 2000 Securities and a company called London Partners Australia Pty Ltd entered into an agreement with Newland for their underwriting of a renounceable rights issue by Newland to raise $3,509,352. Securities and London Partners were responsible for separate tranches of the issue. In the event of a shortfall, each underwriter was obliged (unless the agreement was validly terminated) to lodge or procure the lodgement of applications for 50% of the shortfall, accompanied by payment of the issue price (clause 8.4). The underwriting agreement contained the usual kinds of representations and warranties, including a representation in somewhat wide terms by Newland to Securities that all information provided to Securities by or on behalf of Newland by any adviser or consultant to the company in relation to the issue was true, complete and accurate (clause 3.2(e)). The representations and warranties were taken to have been repeated immediately before the shortfall application date with respect to the facts and circumstances then existing (clause 3.4). In the event of a representation made on behalf of Newland proving to have been untrue or incorrect in any material respect, Securities had a right of termination of the agreement unless the matter was remedied (clause 10.1(g)). It was provided that the underwriting agreement was the entire agreement between the parties on the subject matter (clause 12.11). 47 As at the date of the underwriting agreement, the sale of shares deed between Capital and Mr Kirwan remained on foot, although it had become clear that the US receiver objected to the transaction and therefore the condition to which the deed was subject was unlikely to be satisfied. In those circumstances, Mr Kirwan as trustee of the GNPK Family Trust made a statutory declaration declaring that he guaranteed performance by Securities, and in turn the various sub-underwriters to the underwriting agreement, to the maximum amount of $1,754,676. It appears that the guarantee was for the benefit of Capital, given to procure Capital's assent to the transaction. 48 Valid acceptances were received in respect of only 72,053 securities, leaving a shortfall of 4,801,038. On 23 May 2000 Newland gave Securities a shortfall notice under the underwriting agreement, requiring Newland to lodge, within five business days, applications for 1,970,346 shares and attaching options accompanied by payment of the issue price of 80 cents per share (a total amount of $ 1,576,277). 49 Securities responded by a notice dated 8 June 2000, which purported to terminate the underwriting agreement. The notice relied on clauses 10.1(g), 3.4 and 3.2(e), which I have described above. It asserted that representations had been made on behalf of Newland by Mr William West, to the effect that: · Newland would be listed on the London Stock Exchange prior to 17 May 2000; · the directors of the company would subscribe to the rights issue for their full entitlements; and · the top ten shareholders of the company would subscribe to the rights issue for their full entitlements and would not sell, but would be active purchasers during the application period. 50 Subsequently there was protracted correspondence between Newland's solicitors and Securities. Essentially Newland denied that Mr West had made any representations, or if he did, he had its authority to do so, and relied on the 'whole agreement' clause of the underwriting agreement. Securities said that it had dealt with Mr West as a representative of Newland previously and naturally assumed he had authority on the present occasion, and relied on his representations. On 7 July 2000 a director of Newland purported to apply for the underwritten shares on behalf of Securities, in order to invoke a provision in the underwriting agreement (clause 8.5) authorising that step to be taken, with the consequence that the sum payable on application would become a debt immediately recoverable by Newland from Securities. Of course, clause 8.5 would be effective only if the purported termination of the agreement by Securities was ineffective. Newland's solicitors informed Securities of this last step by letter dated 10 July 2000, and demanded payment of the sum of $ 1,576,277 said to be owing. 51 On 11 July 2000 Newland's solicitors wrote to Mr Gould, who had by then become the voluntary administrator of Securities, enclosing copies of all relevant correspondence, including the letter of 10 July 2000. Mr Gould replied on 17 July 2000, acknowledging the letter of 11 July and saying that the directors of Securities disputed Newland's claim to be a valid creditor of the company. Mr Gould had given notice convening the second meeting of creditors some three days earlier, but he did not mention that in his letter. 52 Newland's solicitors wrote again to Mr Gould on 18 July 2000, re-capitulating the facts and asking whether the second meeting of creditors had been convened. They pointed out that for relevant purposes 'creditor' includes a person whose claim is contingent. The letter threatened an application to remove Mr Gould as administrator. On 19 July Mr Gould wrote again, saying that the second meeting had been convened for 21 July and that all relevant documents had been sent to Newland. Newland lodged a proof of debt with Mr Gould for $1,576,276.80 on 20 July 2000. 53 Mr Gould was aware, prior to his Report to creditors, that Mr Kirwan had given a personal guarantee in respect of the Newland transaction, but says he did not include this fact in his Report because he did not think it materially relevant. He says he investigated the Newland transaction by discussing the matter with Mr Kirwan, who told him that he had received advice from his solicitor that he did not have any liability because some of the conditions precedent to liability had not materialised. Mr Gould says he formed the view that the guarantee and sub-underwriting arrangements were only a relatively minor matter and were not sufficiently relevant to the position of Securities to be included in the Report. Mr Gould's attitude is surprising and appears to be somewhat cavalier, given that he had all of the correspondence.

The Kamadhenu Management claims 54 On 7 April 2000 Kamadhenu Management lodged a proof of debt in the liquidation of Capital in the sum of $687,500. The particulars of the claim referred to a management service contract dated 1 July 1999, saying that the amount claimed was $250,000 per year for three years, less amounts received. 55 Kamadhenu Management also lodged a proof of debt in the administration of Securities, this time for $120,000. The claim was for the provision of services, presumably the services of Mr Kirwan. The validity of the claim has been challenged in these proceedings. Mr Kirwan told the second meeting of creditors of Securities on 21 July 2000 that for an extended period of time Kamadhenu Management had not drawn any management fees from the company, but due to a change in the nature of Securities' business and its uncertain future, he had made a decision to lodge a claim for outstanding fees against Securities. 56 The admission of this proof of debt by Mr Gould is said to be an example of bias in his administration. Far East and Capital say that he should have investigated the claim more rigorously, especially since it was not treated as a liability in reports by Securities to the Australian Stock Exchange prior to July 2000. 57 Mr Gould's evidence is that he accepted Kamadhenu's proof of debt because he understood that Mr Kirwan would be deferring that debt under the proposed DCA, and as Mr Kirwan had been a director of Securities Mr Gould believed he was entitled to be remunerated for the work he had performed, even on a quantum meruit basis. Mr Gould said he was satisfied that the level of remuneration claimed was a reasonable market rate in the securities industry.

The appointment of Mr Gould as voluntary administrator 58 At a meeting on 23 June 2000, the directors of Securities resolved unanimously, pursuant to s 436A of Corporations Law, that in their opinion Securities was likely to become insolvent at some future time, that Mr Gould should be appointed voluntary administrator, and that the company seal be attached to the notice of appointment of Mr Gould as administrator. The notice of appointment was executed. 59 Shortly after his appointment as administrator, Mr Gould met with representatives of the Australian Stock Exchange concerning the affairs of Securities. His evidence is that the Exchange had suspended Securities from trading because of its inability to meet the Exchange's liquidity requirements. It is not clear precisely when the suspension took effect, but presumably it was either just before or just after Mr Gould's appointment as administrator. The representatives of the Exchange told him they saw no impediment to Securities resuming trading once the liquidity requirements were met. 60 Mr Gould then met with the directors of Securities, and Mr Kirwan told him that he wanted to put capital into Securities, to allow it to resume trading and to continue to employ its current staff. The directors told Mr Gould that the staff wanted to continue to work for Securities. Mr Gould said he formed the view that it was desirable to avoid liquidation in order to prevent one of the major assets of Securities, its securities dealers licence for which $250,000 had been paid, from becoming worthless. The directors made him aware of the attempted sale of the shares in Securities to Mr Kirwan in December 1999 and the attitude of the US receiver, and he reviewed the Virotec transaction. I infer that, after these investigations, he was favourably disposed to a proposal which would put the business in the hands of Mr Kirwan so that it could resume trading while retaining its present employees.

First meeting of creditors of Securities 61 Mr Gould convened the first meeting of creditors, by notice given on 26 June 2000. The meeting was held on 30 June 2000. The evidence indicates that notices were given to 20 creditors with recorded debts ranging from $40 to $17,210 and adding up to $86,463, 13 creditors whose debts were unknown, Far East for a recorded debt of $828,675, Mr Kirwan for a recorded debt of $160,000 (presumably his claim for recoupment of the amount paid to satisfy the Stock Exchange's liquid capital requirement in December 1999) and Kamadhenu Management for a recorded debt of $120,000 (presumably for provision of Mr Kirwan's services to Securities). 62 On 29 June 2000 the solicitors for Far East wrote to Mr Gould questioning whether Securities was really insolvent. At the meeting Mr Gould asserted that the company was insolvent because, amongst other things, an asset valued at $250,000, namely its dealers licence, had a current market value of zero as a result of the Stock Exchange suspending the company from trading. He expressed his opinion that the company clearly had more liabilities than recoverable assets. 63 A solicitor attended the meeting on behalf of Capital. However, Mr Gould and Mr Kirwan expressed the view to the meeting that Capital was not a creditor of Securities and on the contrary, Securities was a creditor of Capital. Mr Gould informed the meeting that no proof of debt had been lodged on behalf of Capital. Consequently Capital was not permitted to vote at the meeting. 64 A solicitor was appointed proxy for Far East and he attended the meeting. Sixteen other creditors appointed proxies for the meeting. They included Mr Kirwan in the sum of $160,000 and Kamadhenu Management for the sum of $120,000. 65 Four substantive motions were moved at the meeting. First, Far East moved that Mr Gould be removed as administrator of Securities and be replaced by Messrs Hall and Hedge ('the First Resolution'). Mr Kirwan and Mr MacPherson spoke against the motion. They criticised Mr Hedge, alleging that Mr Hedge's administration of Capital had caused substantial delays which had an adverse effect on business of Securities. Mr Kirwan alleged that Mr Hedge had interests other than the interests of creditors of Securities as his priority, namely interests of the US receiver and the Hong Kong liquidator. Both Mr Kirwan and Mr MacPherson criticised the costs of the administration of Capital. 66 According to the minutes of the meeting, the First Resolution was put to the vote by show of hands. Only one creditor (Far East by its proxy) voted in favour of the resolution, while there were 16 votes against it. The minutes do not say that a poll was demanded, but I was informed by counsel that a poll was demanded for all of the votes. Unless a poll is validly demanded, the chairperson must declare the outcome of the vote on the voices: reg 5.6.19(2). The fact that the chairperson proceeded to exercise the casting vote given by reg 5.6.21(4) is some indication that the meeting proceeded on the basis that a poll had been demanded, notwithstanding the absence of any annotation in the minutes, because reg 5.6.21 applies only to a poll taken at a meeting of creditors. I infer, and find, that a poll was validly demanded for the First and Second Resolutions. 67 Mr Gould stated that the majority in dollar value of creditors were in favour of the resolution, but the majority in number were against it. He exercised his right to a casting vote and voted against the resolution. 68 Secondly, Far East moved that Mr Gould be removed as administrator of Securities and be replaced by Anthony McGrath ('the Second Resolution'). Mr McGrath was put forward by Far East as an insolvency practitioner independent of the Princeton group, and therefore not subject to the objections which had been raised against Messrs Hall and Hedge. But Mr Gould argued against the proposal, saying that Far East had contributed to delays in the sale of business negotiations. The voting on this resolution was the same as on the First Resolution. 69 It was then resolved that Mr Gould remain as voluntary administrator, and that a committee of creditors be formed. A committee comprising Messrs Kirwan and MacPherson and another creditor was appointed.

The Administrator's Report 70 With his letter of 14 July 2000, Mr Gould circulated his Administrator's Report to the creditors, pursuant to s 439A. The Report has been strongly criticised by Far East and Capital. 71 The Report began by giving a history of Securities and expressing Mr Gould's opinions of the reasons for the company's failure. It referred to Mr Hedge's claim that the transfers of assets from Capital to Securities on 16 September 1999 may have been voidable preference transactions. The Report said: 'Senior Counsel has advised that there is no voidable preference and I am also advised he conveyed this opinion directly to the Liquidator [Mr Hedge] and his legal advisers. I am also of the view that Senior Counsel is correct in his opinion based on my understanding of the transaction and note that to date the Liquidator has not formally pursued this matter.' 72 The Report expressed the view that a share sale would provide the best outcome for Capital's shareholders. It claimed that the directors of Securities became 'increasingly frustrated' with Mr Hedge when it appeared that the share sale would not take place, and as a result, the uncertainty surrounding the future of Securities increased, and this directly affected Securities' profitability. The Report gave an account of the decline of Securities' business in terms very similar to the company's letter of 1 June 2000, attributing business difficulties to the lack of certainty about the company's future. 73 The Report gave an explanation and justification of the decision by the directors to resolve to put Securities into voluntary administration, and to appoint Mr Gould as administrator. It said that after Mr Hedge decided not to enter into an agreement for the sale of the shares in Securities, the company was in a difficult position because it could not increase its income structure by employing further advisers due to its uncertain future. It said that the directors became aware that Securities would shortly be in breach of the liquidity requirements of the Stock Exchange regulations and would no longer be able to trade. 74 The Report set out summary balance sheets for Securities as at 26 June and 13 July 2000. The former was stated to be a summary of Mr Gould's understanding of Securities' financial position as at the date of his appointment as administrator, based on his preliminary investigations and the directors' disclosures. The latter was intended to be an estimate by Mr Gould of the financial position of Securities immediately prior to entry into the proposed DCA. It assumed, for example, that some of the receivables had been collected and some of the liabilities to employees and trade creditors had been discharged. 75 The two balance sheets are inconsistent in some ways: · the first gives separate figures for cash on general account and on trust account, while the second gives a figure only for 'cash', which is more than the figure for cash on general account, but less than the sum of the figures for cash on general and trust accounts in the earlier balance sheet; · the first balance sheet shows as an asset 'Cash-ASX Fidelity Account' but this item does not appear at all in the second balance sheet; · the first balance sheet shows the loan to Capital (quantified at $135,689) as a receivable but that asset has a nil value in the second balance sheet. 76 In both balance sheets the claim by Kamadhenu Management for $120,000 for providing the services of Mr Kirwan is described as an account payable and is retained at its full amount, and the claim by Newland under the underwriting agreement for $1,576,277 is described as a 'contingent liability', but corresponding claims by Securities against sub-underwriters are not noted as assets in either balance sheet. 77 The balance sheet as at 26 June 2000 shows net liabilities based on valuation at $1,402,257, and shows net liabilities on the basis of estimated realisable values as $2,018,209. The balance sheet as at 13 July 2000 shows these two figures as having increased to $1,527,817 and $2,179,722 respectively. This enabled Mr Gould to conclude in the Report that Securities is 'clearly insolvent'. 78 The Report estimated and compared the returns to various classes of creditors under the proposed DCA and in a liquidation. Two sets of estimates were given, depending upon whether the 'contingent claim' by Newland was or was not included. If the Newland claim was excluded, all creditors other than subordinated creditors would receive 100 cents in the dollar under both the DCA and in a liquidation, while subordinated creditors (including Mr Kirwan and Far East as lender) would receive 22.2 cents in the dollar under the DCA and 8.6 cents in the dollar upon liquidation. If the Newland claim was included, employees would receive 100 cents in the dollar both under the DCA and upon liquidation, but trade creditors would receive only 27.5 cents in the dollar on liquidation while they would receive 100 cents in the dollar under the DCA. Kamadhenu Management would receive nothing under the DCA and 27.5 cents in the dollar upon liquidation. Far East as a lender would receive 33.8 cents in the dollar under the DCA and 27.5 cents in the dollar on liquidation. 79 These figures led Mr Gould to recommend in the Report that creditors should prefer the DCA, because the costs of liquidation and losses on actual realisations would reduce the dividend payable to all creditors except employees, and would permit previous employees to be reinstated to their former positions. The Report pointed out that in a liquidation the Newland claim might proceed to litigation, which may entail a delay of up to two years before a distribution could be made. Under the DCA Mr Kirwan would provide an indemnity to trade creditors with respect to the Newland claim, and would provide funds to meet the legal costs of defending the claim.

Second meeting of creditors of Securities 80 The second meeting took place on 21 July 2000. Notice was given under s 439A by letter to creditors dated 14 July 2000. 81 A proof of debt was lodged on behalf of Capital on 20 July 2000. It claimed $590,144 in respect of the 'transfer of assets from Cresvale Capital Pty Ltd to Cresvale Securities Ltd' on 16 September 1999. Although the proof of debt did not explain the claim, it was evidently an assertion of entitlement to recover the assets transferred on that day or their value, on the ground that the transaction was voidable under s 588FF. Capital, Far East and Newland appointed their solicitors to attend the meeting as proxies. 82 When the meeting was declared open, there was debate about many aspects of the Report. For example: · In response to a question about possible legal action against the liquidators of Capital, Mr Gould alleged that there had been seven months of inactivity regarding the sale of the shares in Securities, and that the liquidators of Capital were dominated by the US receiver's concerns, and were acting on his instructions. Mr Gould said this was not necessarily in the best interests of the creditors of Securities. · As to the allegation in the Report that moneys contributed by Mr Kirwan to satisfy the Stock Exchange's liquid capital requirements were trust receipts, Mr Gould said he had not sought legal advice but that in his view, the issues were adequately canvassed in his Report. · Mr Gould was pressed as to whether he had obtained any legal advice to support his view that the transaction of September 1999 between Capital and Securities did not generate a voidable preference. Mr Gould said he did not have any written advice. Mr Kirwan said that legal advice had been obtained from Mr Higgs of senior counsel, which had been given at a meeting at which the solicitor for the liquidator was present. The solicitor for the liquidator confirmed that he was present at the relevant meeting but said he did not recall any such advice and would have to consult his notes to confirm whether such advice was or was not given. 83 The solicitor for Capital asked Mr Gould if he had sought any legal advice in respect of the Virotec share transaction. Mr Gould said he had not had time to do so. He attacked Mr Hedge for not pursuing the matter for at least seven months. He claimed that the Virotec shares would still be held by Securities, if it had not been for the Stock Exchange's liquidity requirements and the Exchange's decision to exclude the Virotec shares for the purpose of calculating liquid capital. In Mr Gould's view it was clear that the Stock Exchange requirements had driven the sale, and the fact that Mr Kirwan had ultimately achieved a windfall when the share price later increased substantially was his good fortune. Mr Kirwan said that Mr Gould had been provided with all documents and legal advice surrounding the Virotec transaction, and that the shares had been transferred out of Securities by an on-market transaction at a value which was based on the fact that they were excluded assets for the purposes of calculating liquid capital. 84 After further discussion, Mr Gould put the motion that creditors approve the proposed deed of company arrangement ('the Third Resolution'). A poll was demanded. Mr Gould ruled under reg 5.6.3 that Newland was not entitled to vote at the meeting. Newland's solicitor objected, contending that Mr Gould should act under reg 5.6.26 by marking the proof as objected to and allowing the creditor to vote, subject to the vote being declared invalid if the objection was sustained. On legal advice, Mr Gould affirmed his view that Newland could not vote, on the ground that its claim was a contingent debt and a just estimate of its value had not been made. 85 Mr Gould also ruled that the preference claim by Capital did not entitle it to vote. Far East's solicitor disputed this interpretation on the ground that a proper investigation had not been undertaken and Mr Gould had merely relied on the directors' advice. Mr Gould asserted that he had undertaken his own investigation. 86 The motion was put to the meeting by a show of hands, and 15 creditors voted in favour of it personally or by proxy. Since Capital and Newland had not been permitted to vote, only Far East voted against the motion. Mr Gould then stated that creditors by number were in favour of the motion, but the creditor with the greater dollar value was against it. In this situation, he said, he had the power to cast a deciding vote. 87 Mr Gould asked the solicitor for Far East what his client's objectives were. The solicitor said that his client wanted the company liquidated. He expressed his client's concern that Mr Gould had relied on the advice of the directors and had not made independent inquiries or obtained independent advice on a number of specified matters. He criticised the terms of the proposed deed of company arrangement and said they were disadvantageous to Far East. Mr Gould responded that all of the Cresvale companies should be looked at as a group, and that in his opinion the group had other matters on its agenda which opposed the interests of the creditors of Securities. Mr Gould said that the casting vote allowed the administrator to protect trade creditors and employees from the decisions of majority creditors who wished to pursue non-commercial objectives that were not in the interests of the overwhelming majority of creditors. He therefore voted in favour of the deed, and declared the resolution carried.

Criticisms of Mr Gould's views 88 Mr Gould's views emerge from his Report, his remarks at the second meeting of creditors, and his evidence in these proceedings. Far East and Capital have trenchantly criticised them as inadequately researched, biased in favour of Mr Kirwan and unfairly prejudiced against Mr Hedge. I agree with their criticisms. 89 First, the Report claimed that Mr Hedge advised Mr MacPherson, in the week prior to making of the sale of shares deed, that he had no problems with the sale proceeding and that he only insisted on inserting a condition into the sale of shares deed 'as a formality to please [the US receiver]'. According to the Report, there was a possibility that in consequence, Messrs Kirwan and MacPherson, their service companies and Securities could have a cause of action against Mr Hedge. Although the Report speaks only of a 'possibility' of a cause of action, the impression given by the Report is that Mr Hedge behaved irresponsibly or misleadingly. Such statements should not be made in a report to creditors unless there is a clear basis for them. The evidence does not disclose any proper basis for any such view. 90 Secondly, the Report said that Mr Kirwan may have a cause of action against Securities and Mr Hedge arising out of his loan of $160,000 to Securities as a subordinated loan to meet the Stock Exchange's liquid capital requirements, 'as, strictly speaking, the sum is regarded as a type of trust receipt as the proposed contract did not proceed'. Once again, statements of this kind should not be made in a report to creditors unless there is a firm basis for them. Mr Gould's evidence was that the basis for his statement was to be found in the sale of shares deed itself, rather than any collateral representations. However, since the sale of shares deed did not require the return of Mr Kirwan's subordinated loan in the event that a condition was not met, it would be very difficult to argue that the loan moneys were held in trust. Mr Kirwan did not seek legal advice before making his statement, and there is no adequate basis for it. 91 Thirdly, Mr Gould conveyed some scepticism about Newland's claim, which he treated as a 'contingent' claim. He did not permit Newland to vote at the second meeting of creditors. Even in the face of a strong body of evidence supporting the claim, Mr Gould chose to accept Mr Kirwan's account of facts and legal outcomes for the purposes of the meeting, without taking his own advice. 92 Fourthly, Mr Gould failed to scrutinise Kamadhenu Management's proof of debt for $120,000. His account of why he admitted the proof is unconvincing, especially given that the alleged debt did not appear in financial information provided to the Stock Exchange and in the company's financial statements. He says he was influenced by the fact that the claim would be deferred. It is hard to see how that consideration bears on decision to admit the claimant's proof. 93 Fifthly, in various ways Mr Gould criticised Mr Hedge's administration of Capital. He was particularly critical of Mr Hedge's fees and delay. I shall return to this criticism, but I should say at once that in my view there is no substance to it. 94 Sixthly, the financial analysis presented in the Report is unsatisfactory in various ways. I have referred already to inconsistencies between the table as at 26 June 2000 and the table as at 13 July 2000, and some unsatisfactory features of the accounting treatment of claims by Newland and Kamadhenu Management. The figures seem to be directed to establishing the insolvency of Securities. 95 Finally, there are criticisms of Mr Gould's rejection of the proof of debt lodged by the liquidators of Capital, which was based on the alleged unfair preferences in transactions on 16 September 1999, and also some strong criticisms of Mr Gould's exercise of his casting votes at the first and second meeting is of creditors. These are substantial matters which will be explored later. I accept those criticisms, for reasons I shall give. 96 The cumulative effect of all of these matters is to create an impression of strong bias in favour of Mr Kirwan and unfair prejudice against Mr Hedge. That is a matter of significance for the exercise of my discretion to terminate the DCA.

The Deed of Company Arrangement for Securities 97 The DCA was executed on 9 August 2000. It contained the following key points: · Securities was required to issue, and the administrator, the members of Securities and the directors were each required to cause Securities to issue, 20 million ordinary shares to Mr Kirwan or his nominee at one half a cent each, in return for a cash payment by Mr Kirwan of $100,000 (clause 5.1 - the share issue would dilute the shareholding interest of Capital in Securities from 100% to 5.33%); · Mr Kirwan and Kamadhenu Management each agreed to defer the amount of $120,000 behind other trade creditors, but in front of the 'subordinated debt' owing to Far East (clause 5.2.1); · Mr Kirwan agreed to indemnify all other trade creditors except Far East, including employees to the extent necessary, should the Newland claim be successful (clause 5.2.2 - evidently this was thought to be necessary in case payments to trade creditors under the DCA might be held to be unfair preferences); · Mr Kirwan agreed to provide funds to the administrator to meet the legal costs of defending the Newland claim, but those funds would be repayable to him in full in the event that the claim was successfully defended (clause 5.2.3 - it appears from discussion at the second creditors' meeting that this clause was not intended to cover costs found to be payable by Securities to Newland in the event that Newland was successful); · Mr Kirwan would take over all operational matters of the company including leases of machinery and would satisfy the requirements of the Stock Exchange (clause 5.2.4); · the administrator would call for proofs of debt from unsecured creditors and would open and maintain a bank account (clauses 9 and 10); · the administrator would pay unsecured creditors out of the fund in an order of priority which ranked the employees and trade creditors above Kamadhenu Management and Far East, placing Far East at the lowest priority on the ground that it had agreed to subordinate its debt to all other creditors; · there would be a first distribution out of the $100,000 subscribed by Mr Kirwan for shares and also from any money collected by pursuit of the company's collectable debts, and a final distribution at the conclusion of the Newland claim; · the DCA would come to an end 30 days after the final distribution, unless it was otherwise terminated; · distributions under the DCA would discharge the debts of all creditors as at 26 June 2000 (including Far East, Mr Kirwan and Kamadhenu Management); and · the DCA contained other relatively standard provisions for such a deed.

Effects of the DCA on Far East, Capital and Newland 98 The DCA was clearly disadvantageous to Far East, Capital and Newland. Capital was deprived of its control of Securities for no direct consideration, and in Mr Gould's view, it was not a creditor entitled to participate at all in distributions. Far East was disadvantaged indirectly by the unfavourable treatment of Capital, since it was the holding company of Capital and also a substantial creditor of Capital. Newland, if its claim succeeded, would be deferred to employees and trade creditors. Far East and Newland would receive only a proportion of their claims in distributions. The business would be launched again in the hands of the directors, free of their claims and with its assets in tact.

The implementation of the DCA 99 On 11 August 2000, the directors of Securities resolved pursuant to clause 5.1 of the DCA that 20,000,000 ordinary shares be allotted to Kirwan, as trustee for the GNPK Family Trust, for a total consideration of $100,000. The minute of the resolution was signed by Messrs Kirwan, MacPherson and Anderson as directors, and by Mr Gould as administrator. The consideration was paid by Mr Kirwan to Securities on the same day. 100 The DCA has been acted upon in other respects. Mr Gould has made distributions totalling $116,428.68 to creditors pursuant to the terms of the DCA. According to his affidavit made on 26 October 2000, he had at that stage paid the trade creditors, and the amount remaining in the account was $543,216. The remaining steps to be taken by him under the provisions of the DCA were to pay the administration creditors, to pay Far East the sum of $385,000, and to pay the balance remaining to the deferred creditors. His evidence was that once he completed those steps, the administration would be complete and Securities would revert to the directors, who should be in a position to satisfy the Stock Exchange's requirements with an appropriate injection of capital from Mr Kirwan, and then to resume trading. Counsel for the parties were unable to inform me whether, in the meantime, Securities has in fact resumed trading.

The legal issues 101 As I have said, the statement of claim and the cross-claim contend that the DCA is invalid as a result of its failure to comply with s 439C of the Corporations Law, or that it should be terminated or declared void under one or more of ss 445D, 445G(2) or 600B; and that Mr Gould should be removed as administrator of the DCA under s 447E(1) or s 449B; and that the allotment of shares to Mr Kirwan should be declared void and the share register rectified accordingly. 102 The availability of any of these grounds of relief depends upon some more specific issues raised by the facts. The parties have produced an agreed 'Statement of Issues' which lists 13 matters for determination in the proceedings. I shall set out my answers to the 13 issues, and apply those outcomes to the prayers for relief in the statement of claim and the cross-claim.

Issues 1, 2 and 5: whether Mr Gould should have exercised his casting vote to vote in favour of the First and Second Resolutions and to vote against the Third Resolution 103 Mr Gould exercised his casting vote against the wishes of Far East, Capital and Newland on three occasions. At the first meeting of creditors, he voted against a resolution that he be replaced by Messrs Hall and Hedge (the First Resolution), and also against a resolution that he be replaced by Mr McGrath (the Second Resolution). At the second meeting of creditors he voted in favour of a resolution that the creditors approve the proposed DCA (the Third Resolution). On all three occasions the majority of creditors in number voted in the same way as Mr Gould, but the value of the debts owed by Securities to Far East, who voted to the contrary, vastly exceeded the value of the debts of the numerical majority. 104 Capital and Newland lodged their proofs of debt before the second meeting. Had they been permitted to vote, they would have voted against the proposed DCA, but this would not have changed Mr Gould's vote. Therefore the outcome would have been the same, even though the value of the debts against the proposed DCA would have been even higher.

The statutory provisions governing exercise of the casting vote 105 Regulations 5.6.19 to 5.6.21 of the Corporations Regulations apply to meetings of creditors of a company in voluntary administration: reg 5.6.11(2). Where a poll has been demanded, as it was in the case of all three resolutions: · a resolution is carried if a majority of the creditors vote in favour of it, and the value of the debts of those voting in favour is more than half the total debts owed to all creditors voting (reg 5.6.21(2)); · a resolution is not carried if a majority of the creditors voting vote against the resolution, and the value of the debts owed to those voting against the resolution is more than half the total debts owed to all creditors voting (reg 5.6.21 (3)); and · if no result is achieved by the application of those two rules, the person presiding at the meeting may exercise a casting vote in favour of or against the resolution, and the casting vote determines the outcome (reg 5.6.21 (4)). 106 In the present case, the numerical vote was against the First and Second Resolutions and in favour of the Third Resolution, while the majority in value of the creditors' debts was in favour of the First and Second Resolutions and against the Third Resolution. Consequently the person presiding at the meetings, Mr Gould, was entitled to determine the outcome of the proposed resolutions by exercising his casting vote under reg 5.6.21(4). 107 Section 600B gives the Court the power to set aside or vary a resolution passed because the person presiding at the meeting exercises a casting vote. The section applies, relevantly, where a resolution is passed at a meeting of creditors held under Part 5.3A because the person presiding exercises a casting vote: s 600B (1). It applies, therefore, to allow the Court to review the Third Resolution, but not the rejection of the First and Second Resolutions. The rejection of the First and Second Resolutions may be reviewed under s 600C. 108 Section 600B may be invoked only on the application of a person who actually voted against the resolution in some capacity, either personally or by proxy or representative: s 600B(2). Therefore, Far East may apply to set aside the Third Resolution (as it has done), but neither Capital nor Newland is authorised to do so. The Court is empowered, when a proper application has been made, to make orders setting aside or varying the resolution, and if it does so, to make such further orders and give such directions as it thinks necessary: s 600B(3). If an order is made varying the resolution, the resolution has effect as varied by the order on or after the making of the order: s 600B(4). Importantly, an act done pursuant to a resolution as in force before the making of an order under s 600B is as valid and binding on or after the making of the order as if the order had not been made: s 600E.

What should be considered by an administrator before exercise of the casting vote? 109 The drafting of reg 5.6.21 seems to assume that the casting vote will be exercised, because the regulation makes no other provision for the outcome in the event that creditors by value and creditors by number disagree with one another. As Santow J said in Re Martco Engineering Pty Ltd (1999) 32 ACSR 487, 489, the application of the regulation to such circumstances leads to the situation where 'no result is reached' in the absence of a casting vote. It is arguable that in these circumstances, the person presiding at the meeting has a duty to deliver an outcome by exercising the casting vote. Whether or not that is so, a centrally important question is this: what are the proper criteria for a decision to exercise the casting vote for or against a proposed resolution? 110 In the general law of meetings, a casting vote is distinguished from a deliberative vote. Frequently the chairman of a meeting has a vote of both kinds. At one time it was thought that, because the chairman has a duty to maintain impartiality, the casting vote should be used to preserve the status quo, or to keep a proposal alive in order to allow for further discussion. One of the main Australian texts on meetings still says that it is generally preferable for the chairman to exercise the casting vote against the motion, so that the issue will remain open for later consideration, although exceptions are acknowledged: Horsley's Meetings (4th ed by A D Lang, 1998), p 175. However, it is now doubtful that any general proposition of that kind exists: see Shackleton on the Law and Practice of Meetings (8th ed by I Shearman, 1991), p 66. In R v Bradford Council, ex parte Corris [1989] 3 All ER 156, 160, Neill LJ said: 'A person who has a second or casting vote is clearly under a duty to exercise it honestly and in accordance with what he believes to be the best interests of those who may be affected by the vote. Subject to this, however, it seems to me that the person presiding at a meeting is fully entitled to use his vote as he thinks fit. Though counsel for the applicant struggled valiantly to find some sound basis for his principle of impartiality I am afraid that I for my part remain unpersuaded.' 111 In my opinion, the Court's power under s 600B, to set aside or vary a resolution passed because of the exercise of the casting vote, permits it to review the administrator's reasons for the exercise of the casting vote. The Court need not confine itself to the question whether the administrator has acted honestly as chairman, because it is given a specific statutory power to hear an application to set aside or vary the resolution. As Santow J said in Re Martco Engineering , the Court does not automatically accept the (honest) exercise of the casting vote as an appropriate one. The Court's attitude will 'depend on factors such as whether the administrator has properly exercised the casting vote in the interests of creditors as a whole, such as in circumstances where the vote or votes which prevent one of the two conditions being fulfilled [approved by numerical majority and by value of debts] would represent an outcome unfair to the remaining creditors if not reversed by a casting vote' (at 489). 112 Re Coaleen Pty Ltd (1999) 30 ACSR 200 shows that it is relevant to take into account, as factors, matters such as: · opposition to the proposal by the major creditor, especially when there is a large disproportion between the major debt and other debts; · support of the proposal by the directors where the proposal will deliver some advantage to them; · misleading information in the administrator's report; and · whether creditors who voted in favour of the deed will be prejudiced if the Court sets aside the resolution. 113 Additionally, the Court may be influenced by whether the administrator has made adequate investigations before deciding on the use of the casting vote. Failure by the administrator to carry out sufficient investigations into taxation and other matters, before exercising the casting vote, led Derrington J to set aside a deed of company arrangement under s 447A, in Re Bartlett Research Securities Pty Ltd (1994) 12 ACSR 707. His Honour did not refer to s 600B, but his decision was applied by Moynihan J, in the context of s 600B, in Re Coaleen Pty Ltd . 114 The Insolvency Practitioners' Association of Australia has issued guidelines for voluntary administrations, which contain the following statement: 'Where a deadlock exists in the voting after a poll has been demanded, and the Chairman elects to cast his vote, he should have regard to the wishes of creditors with the greatest pecuniary interest (including secured creditors for their gross debts) in the likely outcome of the administration. The casting vote provided to the administrator is a very powerful tool and protecting it by ensuring practitioners do not abuse the use of it, is an essential element to the on-going success of voluntary administrations.' 115 I doubt that there is a general rule that the administrator should exercise the casting vote to prefer the view of the majority in value over the view of the majority in number. Neill LJ rejected the idea that there was a general rule as to the exercise of the casting vote in the law of meetings. He found that the purpose of conferring a casting vote was to permit a decision to be made one way or another . Conferring a casting vote was therefore incompatible with the idea of a general rule preferring one outcome to another. That reasoning is applicable here, notwithstanding the special statutory context of meetings of creditors under Part 5.3A. But in reviewing the administrator's decision, the Court will treat as a factor, to be weighed up with all other relevant factors, any large disproportion between the values of the debts of the numerical minority and the numerical majority. 116 In Commercial Applications of Company Law (CCH Aust, 1st ed, 2000) by P Hanrahan, I Ramsay and G Stapledon, p 440, the authors say: 'The way creditors make their choice is by voting. In practice, voting is usually by poll. On a poll, the creditors' resolution is passed if a majority in number and value of those present and voting vote in favour of the resolution. Where a majority of creditors in number vote one way and a majority of the value of total creditors' claims votes the other way, the administrator has the casting (deciding) vote. An example of when this may occur is where: · there are many unsecured creditors at the meeting (many of whom are employees), and they all vote in favour of a deed of company arrangement believing it will improve their chances of keeping their jobs; · but the total value of their claims is less than the claim of a secured creditor (a bank), and the bank votes against the execution of a deed of company arrangement.' 117 The authors do not express a view as to the direction in which the administrator should exercise the casting vote. The Insolvency Practitioners' guideline would imply that in the example stated by the authors, the bank should be preferred to the employees and trade creditors. But the approach arising out of the case law is to weigh up all relevant factors, including matters not disclosed by the hypothetical example, such as whether any particular class of creditors will be unfairly prejudiced by the proposal, whether the meeting has been given all relevant information, and whether the directors stand to gain an unfair advantage. 118 There are some special factors in the present case which make it distinguishable from the authors' example. This is not the case of a bank with security aligning itself against employees and trade creditors. In the present case, the three dissenting creditors (assuming for present purposes that Newland and Capital as well as Far East were entitled to vote) were unsecured; one claimed in respect of an underwriting agreement from which the company was resiling, and the other two were the direct and indirect shareholders of the company whose interests would be massively diluted by the DCA. These factors are relevant to the Court's exercise of discretion under s 600B. 119 I shall consider the matters which should have influenced Mr Gould's decisions with respect to his casting vote, in light of these general principles. The matters relevant to the Third Resolution were rather different from the matters relevant to the First and Second Resolutions. I shall consider the Third Resolution first.

Considerations which should have caused Mr Gould to vote the other way at the second meeting 120 I accept that as a practical matter, the only real alternatives for the creditors at the second meeting were the proposed DCA or liquidation. Attempts had been made by Mr Hedge to sell the business of Securities to others, but the only offer he received was Mr Kirwan's offer. That implies that no-one other than Mr Kirwan was interested or prepared to inject sufficient capital into Securities to rescue it. Mr Kirwan had made it plain that his objective was to become the owner of Securities, and the proposed DCA stated, in effect, the terms upon which he was prepared to buy the company. Mr Gould's task, therefore, was to weigh up the relative advantages and disadvantages of those two alternatives. 121 The proposal before the second meeting favoured the interests of the employees and trade creditors and prejudiced the interests of Far East, Capital and Newland, in ways that I have explained. When Mr Gould had regard to the interests of the various groups of creditors (as he was required to do), his analysis should have directed him towards voting against the proposed DCA. 122 It was also relevant for him to consider how the interests of the directors would be affected by the exercise of the casting vote. Mr Kirwan had embarked upon a campaign to acquire a controlling interest in Securities, but had been thwarted by the objection of the US receiver and subsequent non-completion of the sale of shares deed. The effect of adoption and implementation of the proposed DCA would be to wrest control of Securities from Capital against the wishes of its liquidators, delivering to Mr Kirwan through Part 5.3A the outcome he could not achieve by negotiation. 123 Mr Gould was aware of all of these matters. In those circumstances it was improper, in my view, for him to exercise his casting vote so as to cause the Third Resolution to be passed, unless there were very strong reasons for doing so. I do not regard the reasons advanced by Mr Gould as strong enough to justify his extraordinary action.

Mr Gould's approach to the Virotec transaction 124 A crucially important aspect of the matter related to the Virotec transaction. The implementation of the DCA made it very unlikely that the Virotec transaction would be challenged. The DCA brought an end to the voluntary administration, and avoided the appointment of a liquidator to Securities. It delivered control of Securities, and therefore of its board of directors, to Mr Kirwan. Once the DCA was executed, there was no-one (apart from ASIC and Mr Hedge) with special powers of investigation of the kind that a liquidator or administrator might use to examine witnesses and documents. 125 It was theoretically possible that ASIC might intervene. But the evidence indicates that the Stock Exchange, the regulator that had the general responsibility for supervising stockbroking companies, was not interested in intervening in the Virotec transaction. It seems reasonable to infer that there was no significant likelihood of ASIC taking a different attitude. As joint liquidator of Capital but with no role in the administration of the affairs of Securities, Mr Hedge was hardly in a position to make direct investigations, unless he was first able to set aside the transactions of 16 September 1999 as unfair preferences in Capital's liquidation. 126 It was also theoretically possible that Far East, which became a minority shareholder under the DCA, might bring derivative proceedings to assert the rights of Securities against Mr Kirwan. However, Far East would find it difficult to take proceedings as long as the DCA remained in place, even if it could overcome the obstacles to a derivative suit, because of both its lack of information and the power to obtain it. 127 In practical terms, therefore, it was likely that the DCA would put an end to direct investigations of the Virotec transaction. It is likely that Mr Gould was aware that this would be so. 128 The Virotec transaction appears to have given Mr Kirwan an unrealised or realised profit of several million dollars. Assume that a liquidator was appointed to Securities, and after investigation the liquidator successfully took proceedings against Mr Kirwan and recovered this profit. In that event the trade creditors and employees (whose total entitlements were not substantial) would be paid in full, and so they would be no worse off than under the DCA (except, perhaps, that they may have had to wait longer for their money). Additionally and importantly, however, recovery from Mr Kirwan would probably permit the liquidator to satisfy the entitlements of Far East, Capital and Newland. Under the DCA they would receive only a rateable distribution, the amount of which would depend on whether the claims of Capital and Newland were recognised. 129 On the other hand, if the liquidator failed to recover from Mr Kirwan, the employees would still receive full payment in a liquidation. But the trade creditors would be decidedly worse off than under the DCA, for they would receive only a rateable distribution rather than payment in full. Far East, Capital and Newland would receive a rateable distribution lower than under the DCA, or nothing, depending upon whether the claims of Capital and Newland were recognised. The assets available for distribution would probably be of lower value than under the DCA, because the company in liquidation would be unable to resume trading and the dealers licence would therefore have no value unless the business could be sold by the liquidator. 130 Mr Gould made an assessment that there was no realistic likelihood that an investigation would reveal any claims with good prospects of success. He therefore concluded, logically enough, that the DCA was a far better option than liquidation. He exercised his casting vote in accordance with his assessment. The critical question is whether his assessment was sound, and that in turn depends upon whether he had sufficient information. 131 It appears from his evidence that his mind was focused upon whether the transaction was voidable as an unfair preference under ss 588FA and 588FF. He says he concluded after investigation that the sale was likely to have been bona fide and for market value, although he did not obtain legal advice. He based this conclusion on the fact that Securities had a bona fide need to sell shares to satisfy the Exchange's liquid capital requirements, and that the shares were sold on the market, not all of them to Mr Kirwan. He also concluded that Securities was solvent at the time of the transaction, and was not rendered insolvent by it. 132 If the last proposition is correct, the transaction could not be an insolvent transaction (s 588FC) and therefore would not be voidable as an unfair preference under s 588FF. But Mr Gould's analysis seems to overlook the possibility that Mr Kirwan might be held accountable in other ways - for example, for breach of his fiduciary duty by wrongfully exploiting a corporate opportunity or preferring his self-interest to his duty to Securities, or for obtaining a financial benefit contrary to what is now Part 2E, or even for insider trading. The fact that the company had a need to dispose of its asset did not necessarily make it permissible for a director to acquire the asset, even for market value. The fact that the sale was for a large volume of Virotec shares in a relatively illiquid market should have raised doubt as to whether the company obtained full value in an arms' length, anonymous market, for the purposes of the general law of fiduciary duties and also the application of Part 2E or its predecessor. 133 Mr Gould supported his view of the Virotec transaction by referring to two additional matters. He said that the liquidators of Capital (then in administration) had been informed of the transaction beforehand but had taken no action as sole shareholder to stop it, and that Mr Kirwan had offered to obtain a legal opinion and supply it to Mr Hedge, but Mr Hedge had declined. 134 It was certainly relevant for Mr Gould to take into account the attitude of the liquidators of Capital to the Virotec transaction. Capital was the sole shareholder of Securities at the time. If Capital had approved the transaction after full disclosure, any risk of challenge based on breach of fiduciary duty or the statutory provisions about related party transactions would have been removed. But the matters relied upon by Mr Gould fell far short of approval of the transaction. If the transaction would otherwise involve a breach of fiduciary or statutory duty by Mr Kirwan, it would be incumbent upon him to obtain a positive act of approval from the sole shareholder of Securities, after making full disclosure of all relevant facts. The mere fact that the sole shareholder knew everything about the proposed transaction and did not object to it, if true, would not save him. Moreover, it cannot be said that the liquidators of Capital knew everything about the Virotec transaction and did not object to it. The evidence shows that Mr Hedge became concerned about the matter at least in March 2000. His concern seems to have related partly to the possibility that Mr Kirwan may have known something about Virotec which he did not disclose in October 1999. He did not take action for recovery while there was a prospect of sale of the shares in Securities to Mr Kirwan, but subsequently he was interested in the possibility of proceedings to set aside the transactions of 16 September 1999 and for recovery from Mr Kirwan. 135 Nor can Mr Gould derive any comfort from the fact, if it be so, that Mr Kirwan offered to obtain a legal opinion on the Virotec transaction for Mr Hedge. The utility of such a legal opinion would depend, of course, on the accuracy and completeness of the facts briefed to counsel.

Mr Gould's duty of inquiry 136 In my opinion, the facts known to Mr Gould, as administrator, about the Virotec transaction put him on inquiry. He knew that Mr Kirwan was at all relevant times a director of Securities, well aware of the need for Securities to sell the Virotec shares, and of its decision to do so. He must have known that the market in Virotec shares in October 1999 was relatively illiquid, so that Mr Kirwan was in a good position to acquire a substantial quantity of shares without unduly raising the market price. He must also have known that the market price of Virotec shares escalated enormously some three months after Mr Kirwan's acquisition. He knew that Mr Kirwan became a director of Virotec and had previously been in contact with that company in his position as a director of a substantial shareholder (first Capital and then Securities). These facts would suggest to a reasonable person the real possibility, worthy of further inquiry, that Mr Kirwan may have breached his fiduciary duties or his statutory duties in respect of related party transactions and insider trading (cf Hamilton v National Australia Bank Ltd (1996) 19 ACSR 647). 137 Given the size of the transaction and therefore the potential recovery to Securities, Mr Gould should have made at least some further inquiries into the circumstances surrounding it. In particular, he should have inquired into the relationship of Mr Kirwan to Virotec at the time of the transaction and subsequently, and Mr Kirwan's state of knowledge about matters material to the price or value of shares in Virotec. In light of those further inquiries, he should have obtained his own legal advice as administrator. 138 In deciding whether an administrator's investigation is sufficient, the Court must take into account the circumstances in which such an investigation is to be undertaken. As Heerey J observed in Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498, 510, the investigation intended by Part 5.3A is to be a swift and practical one. For example, it is often not practicable for the administrator to use the powers of compulsory examination in the Corporations Law, given the limited time available for the administration. As I said in Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453, 481, the balance between speed and accuracy of investigation is a delicate one, and the distinction between an adequate preliminary investigation which concludes that there are grounds for suspecting wrongdoing but goes no further, and inadequate investigation which fails to assemble available information with respect to wrongdoing, is a matter of degree. In my opinion, by failing to make any significant inquiries or obtain his own legal advice on such a major issue as the Virotec transaction, Mr Gould fell far short of making an adequate preliminary investigation. 139 I do not suggest that the known facts establish any breach of duty or statute by Mr Kirwan, or even that they give rise to a prima facie case of breach. The submissions by the defendants, concentrating on the absence of evidence of wrongdoing, rather missed the point. The point is that a reasonable administrator in the shoes of Mr Gould would have been sufficiently suspicious, in view of the known circumstances, that he would have made further inquiries and obtained legal advice, notwithstanding the exigencies of the administration process. In the absence of these steps, and knowing the effect of the DCA on further investigation of the Virotec transaction, Mr Gould was not in a position to prefer the DCA to liquidation. He was therefore not in a position to exercise his casting vote in favour of the DCA. 140 Capital submitted that the facts also suggested a potential action against the directors of Securities for trading whilst insolvent. The complaint against Mr Gould is that he did not investigate, adequately in the circumstances, all matters relevant to assessing whether Securities had become insolvent prior to his appointment in June 2000. The matters which should have been investigated, it is said, were whether assets exceeded liabilities, whether current assets exceeded current liabilities, whether projected cash flows supported a conclusion that the company would be able to meet its future liabilities, and an aged creditors' listing. It is submitted that Mr Gould unduly relied on the assumption that, since the Stock Exchange was concerned about solvency and had allowed the company to continue to trade, there was no need to determine independently whether the company was solvent. 141 I think this is an unduly harsh criticism of Mr Gould. It is not necessary for an administrator to investigate every potential or possible claim for which there is no realistic prospect of recovery: cf Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498, 512. It must be remembered that Mr Hedge expressed the view in December 1999 that Securities was solvent, and just before Mr Gould was appointed, the solicitors for Far East were arguing for the same proposition. The directors' resolution to appoint him was not based on any assessment by them that Securities was already insolvent, but rather that it was likely to become so. That likelihood depended upon whether the Stock Exchange would suspend the company from trading because of its failure to comply with liquid capital requirements. Mr Gould's Report showed that he made some investigations as to the financial state of Securities, and his evidence is that his investigations led him to believe that the company was solvent in September 1999. I do not believe it would be reasonable to have expected Mr Gould to make further inquiries into solvency in the circumstances.

Mr Gould's reasons for voting 142 In his evidence Mr Gould gave the following nine reasons for exercising his casting votes on the three resolutions: (a) he considered that the Third Resolution represented the most favourable result for Securities, its creditors, members and employees; (b) the Third Resolution prevented the dealers securities licence, worth approximately $250,000, becoming worthless in a liquidation scenario; (c) the business would ultimately be returned to solvency and be able to continue to trade; (d) the employees of Securities would maintain their employment; (e) the resolution had the support of all creditors, other than Far East (this proposition excludes Newland and Capital); (f) the US receiver along with the liquidators of Capital and the liquidators of Far East appeared to want to have a liquidator investigate the affairs of Securities, but in the view of Mr Gould there were no realistic prospects of such an investigation revealing any claims with good prospects of success and which would result in any recovery for the benefit of creditors; (g) Mr Gould did not believe that Mr Hedge had 'clean hands' because he regarded Mr Hedge as having a conflict of interest. Mr Gould said he regarded Mr Hedge's refusal to allow the sale of shares deed of December 1999 to be completed as not being in the best interests of Securities and its creditors and employees, and he alleged that Mr Hedge's inaction, in having investigated Capital's affairs for approximately 7 months and incurring costs of approximately $400,000 without improving the position of creditors, had allowed Securities' position to deteriorate further; (h) he referred to the extract from Commercial Applications of Company Law which is set out above, and said that in his view that passage sets out quite clearly the view of the commentators as to an appropriate situation for an administrator to exercise his casting vote contrary to the express wishes of the majority creditor (in value). Mr Gould said he regarded the situation facing him in relation to the Third Resolution as being a similar case; and (i) Mr Gould considered that his action in exercising his casting vote in favour of the Third Resolution was in accordance with the express intention of Pt 5.3A of the Corporations Law, as outlined in s 435A, as being to maximise the chances of Securities continuing in existence and ensuring, so far as possible, a better return for Securities' creditors than would result from the winding up of Securities. 143 Obviously most of these reasons apply to the Third Resolution, though paragraphs (g), (h) and (i) are relevant to the First and Second Resolutions.

Evaluation of Mr Gould's reasons 144 Paragraphs (a) to (f) of Mr Gould's reasons cannot be sustained unless he was right that there was no real prospect of recovery in respect of the Virotec transaction. Paragraph (g) is directed to the First and Second Resolutions only, and I shall return to it. Paragraph (h) seems to be based on a misreading of the passage from Commercial Applications of Company Law set out above, since Mr Gould treats the authors as saying that, in the hypothetical circumstances to which they referred, trade creditors and employees should be preferred to the bank, whereas in fact the authors express no opinion. 145 Paragraph (i) is simply an appeal to the objectives of Part 5.3A. It is entirely appropriate to bear those objectives steadfastly in mind, but it is quite another matter to exercise a casting vote in favour of a DCA which has the effect of preferring the interests of a director over the interests of one or more substantial creditors, who are seriously prejudiced by it. It is important, where one can, to maximise the chances of the company and its business continuing in existence, and to secure a better return for the company's creditors and members than would flow from the immediate winding up of the company (s 435A). But if the proposal which would achieve these objectives is partial to a director, unfair to major creditors, and will thwart proper investigation as to whether a potentially serious wrongdoing has occurred, the objectives of efficiency and business continuity must yield to the justice of the alternative.

The exercise of the casting vote on the First and Second Resolutions 146 By exercising his casting vote against the First and Second Resolutions, Mr Gould kept himself in office as administrator notwithstanding that the largest creditor by far had twice attempted to remove him. It is not easy to think of circumstances in which it would ever be appropriate for an administrator to take such a step. In my view it was clearly inappropriate for Mr Gould to do so in this case. 147 The evidence does not enable me to find positively that Mr Kirwan had already formulated the proposed DCA at the time of the first creditors meeting, nor (if he had) that Mr Gould knew the plan. If Mr Gould did know the plan, his knowledge of the proposal would be no justification for voting to keep himself in office. I have held that it was improper for him to exercise his casting vote to have the proposed DCA approved, and it would be equally improper for him to exercise his casting vote to keep himself in office so that he could fully formulate and advocate the proposal. 148 Paragraph (g) of Mr Gould's reasons relates specifically to the First Resolution, since it is an attack on the suitability of Mr Hedge. In his oral evidence, Mr Gould said that Mr Hedge and Mr McGrath referred work to one another (they both being partners in large accounting firms), but there was no other evidence of this. In my view, there is no basis for contending that any objection to Mr Hedge could be extended to Mr McGrath because of their relationship. No valid reason has been advanced on behalf of Mr Gould for his exercise of the casting vote against the Second Resolution, other than the general reasons in paragraphs (h) and (i), which I have already rejected. My conclusion is that it was improper for him to do so. 149 I reject Mr Gould's criticisms of Mr Hedge. I have set out the evidence concerning these criticisms at some length. It was appropriate for Mr Hedge to require that the sale of shares deed of December 1999 be made conditional on the US receiver not objecting to the transaction, because the Stock Exchange's liquid capital requirements had made it urgent to enter into the transaction before the US receiver's attitude was known. At that time, Mr Hedge evidently believed that the sale was in the best interests of all concerned, and no doubt would have been confident that the condition would be readily satisfied. He changed his attitude to the desirability of sale when the escalation in the market price of Virotec shares made it worthwhile to pursue further investigations. 150 It appears that nothing concrete has emerged from those investigations, but it is unfair to Mr Hedge for Mr Gould to accuse him of inaction for seven months. During part of the period from December 1999 to June 2000 Mr Hedge was pursuing the sale strategy in the belief that there was no point in further investigating the transfer of assets (including the Virotec shares) from Capital to Securities, and when the sale did not proceed he did make some investigations, which included review of Securities' records over a three-week period. 151 Mr Gould appears to have formed the view that costs of $400,000 had already been incurred by Mr Hedge in the administration of Capital, but the evidence before me indicates that the figures upon which Mr Gould relied for that conclusion include some projections for future costs. These projections encompass future proceedings to challenge the transactions of September 1999. 152 The fact that Mr Hedge was joint liquidator of Capital did not give him any 'conflict of interest' or a lack of 'clean hands' with respect to Securities. Given that Securities was a wholly-owned subsidiary of Capital and part of the Princeton group, it was rational for Far East to seek the appointment of a single Australian insolvency firm for the external administration of both companies. It is true that Securities had separate creditors, including the interests of Mr Kirwan, and no doubt the decisions of Mr Hedge (if he were appointed administrator of Securities) would have been influenced by other creditors of the group and the US receiver. But the law does not require the administrator of a wholly-owned subsidiary to disregard its position in the group and consider only the interests of its separate creditors. And there is nothing in the evidence to support the allegations that Mr Hedge acted or would act solely on the direction of the US receiver without any independent consideration of his responsibilities.

Conclusion as to Mr Gould's exercise of his casting vote on the First, Second, and Third Resolutions 153 It follows, in my view, that it was not proper for Mr Gould to use his casting vote against any of the three resolutions. The question then is whether it is appropriate to grant relief under s 600B. 154 As far as the Third Resolution is concerned, everything I have set out points to the view that it should not be allowed to stand. I have considered whether setting it aside would cause prejudice to the interest of creditors who are entitled to be protected. Under s 600E, an order made under s 600B does not invalidate acts already done pursuant to the resolution to approve a deed of company arrangement. Therefore, an order under s 600B would not require the employees and trade creditors to pay back to the distributions that they have already received, and in those circumstances they would not be unfairly prejudiced by such an order. 155 My conclusion is that an order setting aside the Third Resolution under s 600B would be justified. However, I am inclined to think that a better outcome is achieved if I make an order terminating the DCA under s 445D. I shall return to this point when I deal with Issue 13. 156 Mr Gould's casting vote caused the First and Second Resolutions to fail. If an appropriate application is made, the Court may make an order under s 600C (3) that a proposed resolution which fails in those circumstances is taken to have been passed. No application has been made for the exercise of this power in the present case. Therefore, the improper exercise of Mr Gould's casting vote to defeat the First and Second Resolutions is relevant only as a consideration influencing the exercise of my discretion to terminate or set aside the DCA under other provisions of Part 5.3A.

Alleged non-compliance with s 439C 157 Before leaving Issues 1, 2 and 5, I should note a submission made by Far East that does not appear to have matured into an 'issue' in the agreed Statement of Issues. Far East points out that in its terms, the Third Resolution was a resolution that the creditors 'approve' the proposed DCA. Section 439C envisages a resolution for the company to 'execute' the deed specified in the resolution. The submission is that a resolution to 'approve' the deed does not amount to a resolution to 'execute' it, and as a result the deed is invalid and ineffective. Presumably I am invited to make an order declaring the deed void under s 445G(2). 158 The wording of the resolution was sloppy and unprofessional. No justification for failing to use the statutory language has been offered. However, the submission that failure to follow the statutory language exactly should lead to invalidity is, frankly, absurd. A resolution to approve a deed clearly implies conferral of authority to execute it. If, contrary to my view, the Third Resolution failed to comply technically with s 439C, the failure would be a procedural irregularity cured automatically by s 1322(2): generally, see Employers' Mutual Indemnity (Workers' Compensation) Ltd v JST Transport Services Pty Ltd (1997) 23 ACSR 197.

Issue 3: whether the Administrator's Report contained false or misleading information

The legal principles 159 Section 438A(8) requires the administrator to investigate the company's business, property, affairs and financial circumstances as soon as practicable after the administration of the company begins, and to form an opinion as to whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement, or to be wound up, or for the administration to end. 160 Section 439A (4) requires that the notice to be given to creditors of the second meeting of creditors must be accompanied by a copy of a report by the administrator about the company's 'business, property, affairs and financial circumstances'. The notice must also be accompanied by a statement setting out the administrator's opinion about three matters, with reasons, and a statement setting out the details of any proposed deed of company arrangement. The three matters are whether it would be in the creditors' interests for the company to execute a deed of company arrangement, whether it would be in the creditors' interests for the administration to end, and whether it would be in the creditors' interests for the company to be wound up. 161 Mr Gould's Report of 14 July 2000 set out his relevant opinions in purported compliance with these provisions. The creditors received the Report before voting at the second meeting, and must be taken to have relied upon it in casting their votes. 162 The Court is authorised by s 445D(1)(b) to make an order terminating a deed of company arrangement if it is satisfied that information about the company's business, property, affairs or financial circumstances that (i) was false and 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 contained in a report or statement under s 439A(4) that accompanied a notice of the meeting at which the resolution was passed.

Complaints about the Administrator's Report 163 Far East and Capital criticise the following passage in Mr Gould's Report: 'Creditors will appreciate that it is possible for a liquidator to bring actions against directors that would not be available if creditors approve a Deed of Company Arrangement. In accordance with my responsibilities I have attempted to make appropriate inquiries into the financial affairs of the Company. I have not completed a full investigation of the kind that would be performed should the company be placed into liquidation. Creditors will appreciate that only a liquidator has the power to pursue certain transactions which took place prior to the date of liquidation. Any recovery may provide a return to unsecured creditors. In the matter of [Securities], because of the ASX supervision it is highly unlikely that such offences could be proved. An independent liquidation of [Securities] may also have better prospects of bringing an action against the Liquidators of [Capital] and [Far East] for the losses suffered by their actions.' 164 Far East and Capital contend that this passage is false or misleading. In light of the facts that I have set out, I do not agree with their contention that this is a case where no real investigation has been undertaken at all. The question is whether this is a case of negligent or inadequate investigation; that is, whether the Report fails to meet a standard achievable within the limited time made available to an administrator. 165 I have held that the facts known to Mr Gould put him on inquiry as to whether there were grounds for taking proceedings against Mr Kirwan for breach of his fiduciary duties as a director of Securities, receiving a financial benefit from a related party transaction, and insider trading. I have found that this was an important matter to investigate, even allowing for the limited time and resources made available to an administrator. Mr Gould did not make an adequate investigation of these matters, or take proper legal advice. Indeed, it is doubtful that he even considered the possibility of proceedings on these grounds. 166 Supervision by the Stock Exchange has some relevance to the recovery of unfair preferences, because relief under s 588FF depends upon showing not only that there was an unfair preference under s 588FA, but also that the transaction was an insolvent transaction under s 588FC. Although the question of insolvency for the purposes of s 588FC is not identical with the Stock Exchange's concerns about capital adequacy and adequate liquid capital for stockbrokers, it is not unreasonable to assert (as the Report implies) that if the Exchange did its job properly, Securities was probably solvent while the Exchange permitted it to trade. But solvency is not a defence to an action against Mr Kirwan for breach of equitable or statutory duties. 167 The extracted passage conveys the ideas that: · it is highly unlikely that a liquidator would be able to prove the ingredients of contraventions which could lead to recovery for the benefit of unsecured creditors; · this is because the Stock Exchange supervised Securities; and · these conclusions are supported by 'appropriate inquiries' made by Mr Gould. 168 The third proposition is untrue. Because of his lack of inquiries, Mr Gould did not have an adequate basis for expressing the first proposition. The second proposition is untrue except (arguably) if the claim relates to an unfair preference. That being so, there was no adequate basis for the first proposition. Consequently the extracted passage was, to this extent, false or misleading. 169 There is no doubt that this false or misleading information was highly material to creditors of the company in deciding whether to vote in favour of the resolution to approve the proposed DCA. As I have explained, the prospect of recovery from Mr Kirwan in respect of the Virotec transaction was a centrally important matter to be assessed, because it affected the interests of creditors generally, and was especially significant for the prospects of recovery of Far East, Capital and Newland. 170 It is unnecessary for me to decide whether my conclusion about the extracted passage would of itself justify an order under s 445D (1) (b) setting aside the DCA. There are other deficiencies in the Report and the DCA itself, upon which my decision will be based.

Issue 4: whether there were material omissions from the Administrator's Report

The legal principles 171 Far East and Capital contend that there were material omissions from the Report of two kinds: omission of information that should have been collected by investigation; and omission to comply with the requirement of s 439A(4)(c) to disclose the 'details' of the proposed DCA. 172 The first matter arises under s 445D(1)(c). That provision authorises the Court to make an order terminating a deed of company arrangement, if it is satisfied that there was an omission from the administrator's report, and the omission can reasonably be expected to have been material to the creditors in deciding whether to vote in favour of a resolution that the company execute a deed of company arrangement. 173 The second matter is the contention that the Report does not comply with the requirement of s 439A(4)(c) that the notice of meeting must be accompanied by a statement setting out 'details of the proposed deed'. What this means, as Carr J explained in Deputy Commissioner of Taxation v Comcorp Australia (1996) 21 ACSR 590, 624, is that the Report must set out those 'details' of the deed which can reasonably be expected to be material to creditors in deciding whether to vote in favour of the resolution that the company execute the deed.

Were there material omissions in the present case? 174 As to the first matter, Far East and Capital submit that, in giving his opinion as to whether it would be in the creditors' interests for the company to be wound up (s 439A(4)), Mr Gould failed to indicate the limited and inadequate extent of his investigation into the Virotec transaction. I agree with this submission. As I have explained, the question whether there was any real prospect of recovery of Mr Kirwan's profit on the acquisition of the Virotec shares was of critical importance. If there was none, then Mr Gould's recommendation in favour of the proposed DCA could perhaps be justified. If there was a prospect of recovery justifying further examination, then a step which would effectively prevent further investigation could not be justified. The Report referred to the US receiver's concerns about suspected improprieties of Mr Kirwan, and says that the concerns had never been documented. The Report failed to explain that there may be a basis of recovery for breach of fiduciary and statutory duties, and that this possibility had not been explored. 175 As to the second matter, there are three complaints about the summary of the proposed DCA in the Report. First, it is said that the Report did not tell creditors whether their claims or the claims of other creditors would be extinguished, and if so, to what extent. This is true. In fact the summary of the DCA in the Report was very selective. Nevertheless, a creditor reading the report would probably infer or assume that unsecured debts incurred before the commencement of the voluntary administration would be extinguished when distributions were made under the deed. That, after all, would be one of the commercial objectives of the arrangement. 176 Secondly, it is alleged that the Report did not tell creditors whether their claims and the claims of other creditors would be deferred, and if so, to what extent. This is partly true. The Report explained that Mr Kirwan would defer the amount payable to Kamadhenu Management to the claims of trade creditors, while retaining priority over the 'subordinated debt'. The balance sheets in the report showed subordinated loans of $660,000. Far East was not identified as a subordinated creditor. Disclosure of the position of Newland was quite obscure. However, the level of disclosure was probably sufficient to give the material facts to trade creditors and employees, and the deficiencies so far as Far East, Capital and Newland were concerned were addressed by responses to inquiries from their respective solicitors at the meeting and in correspondence. 177 Thirdly, it is alleged that the Report failed to disclose all of the matters which the deed of company arrangement must specify under s 444A(4). It is true that there was no systematic disclosure of these matters, although some of them are addressed. But the requirement to disclose 'details' of the proposed deed means, as I have explained, only that there must be disclosure of the details that are material to the creditors' decision. This submission does not endeavour to identify matters within s 444A (4) that are material details which should have been disclosed in the present case, and it is therefore misconceived. 178 Overall, while the Report has not fully complied with s 439A(4)(c), I do not regard the failure to do so as having any significance for the exercise of my discretion as to termination of the DCA, other than as an indication of an unprofessional approach to the statutory requirements.

Issue 6: whether Mr Gould wrongfully refused to allow Capital and Newland to vote at the second meeting 179 The claim by Capital's liquidators to be a creditor of Securities depended upon whether the transactions of 16 September 1999 involved any unfair preference under s 588FA, in circumstances making any of those transactions an insolvent transaction under s 588FC, so that the Court could make an order in favour of Capital under s 588FF. Mr Gould's evidence is that Securities was solvent both before and after the transactions, and consequently there could be no order in favour of the liquidators of Capital under s 588FF. Additionally, he took the view that Securities was not a creditor of Capital at the time of the transactions. It seems reasonably clear, on the evidence, that in the absence of a claim for an order under s 588FF, Capital was a creditor to Securities rather than a debtor. Arguably, this position would be unaffected by a claim under s 588FF, since that claim is made by the liquidator rather than the company in liquidation, and is therefore not to be set off against the company's debts. 180 There is very little evidence before me as to the state of solvency of Securities in September 1999. It appears that the Stock Exchange had some concerns about Securities' compliance with its liquid capital requirements in that month, but this does not necessarily mean that the company was, or was approaching, insolvency. Mr Hedge expressed the view in December 1999 that Securities was solvent, and the resolution of the directors of Securities on 23 June 2000 was not that the company was insolvent, but that it was likely to become insolvent - depending, in effect, on whether the Stock Exchange found that the Company was not complying with its liquid capital requirements. These matters point to the likelihood that the company was solvent in September 1999, and I have held that it was unnecessary for Mr Gould to make further inquiries as to solvency before presenting his Report to the creditors. Nevertheless, it seems to me very unlikely that Mr Gould, making an assessment in July 2000 of the state of solvency of Securities in September 1999, could have been satisfied beyond any doubt that the company was solvent at that time. 181 As I have explained, the question whether Securities was a creditor or debtor of Capital on 16 September 1999 seems to depend upon the sequence of the asset transactions and an intercompany loan of $500,000. It is not clear to me, on the evidence, which transaction came first. 182 Regulation 5.6.26 gives the chairperson of a meeting of creditors the power to admit or reject a proof of debt for the purposes of voting. However, that discretion is qualified by reg 5.6.26 (2), which provides as follows: 'If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.' 183 Mr Gould was presented with a proof of debt by Capital shortly before the day of the second meeting of creditors. In my view, there was room for doubt as to whether Capital's proof should have been rejected, because there was a measure of uncertainty as to whether Securities was solvent in September 1999. Mr Gould was entitled to take the view that Securities was probably solvent at that time, but he was not entitled on the evidence to rule out the possibility of insolvency. There should have been doubt in his mind on that subject. If the only evidence before Mr Gould was the evidence presented to me, there must also have been some doubt as to whether Securities was a creditor of Capital on 16 September 1999. 184 I have explained my view that Mr Gould acted in a way that was biased towards Mr Kirwan and against Mr Hedge. If his rejection of Capital's proof of debt was considered in isolation, it might be plausible to contend in his favour that there was insufficient real doubt about Capital's counterclaim to require him to proceed under reg 5.6.26 (2). But when his rejection of Capital's proof is considered in context, the conclusion which emerges is that his rejection of the proof was part of his biased conduct, rather than a genuine determination that there was no doubt that the claim should be rejected. He should have admitted Capital's proof under reg 5.6.26 (2), marking it as objected to and allowing Capital to vote. But his doing so would not have made any difference to the outcome, which was determined by the exercise of his own casting vote. 185 I reach the same conclusion with respect to Newland's proof of debt. However, it would be harder for Mr Gould to maintain the position that at the second creditors' meeting he was in no doubt that Newland's proof should be rejected. He treated Newland as having a contingent debt in his Report. He was well aware of the correspondence about Newland's claim, from which it emerged that Newland was entitled to recover the amount claimed unless Securities could show that there had been misrepresentations falling within the underwriting agreement and entitling it to terminate the agreement. While Newland's entitlement was not beyond doubt, the correspondence showed that Newland had a reasonably strong case. 186 I regard Mr Gould's failure to admit the proofs of Capital and Newland for the purposes of voting at the second creditors' meeting as improper conduct, to be taken into account in the exercise of my discretion to terminate the DCA under s 445D.

Issue 7: whether effect can be given to the DCA without injustice 187 Section 445D(1)(e) authorises the Court to make an order terminating a deed of company arrangement if it is satisfied that 'effect cannot be given to the deed without injustice ... '. The case law does not provide any significant assistance as to the meaning of this provision. Far East and Capital say that this provision authorises the termination of the DCA on three grounds. 188 The first ground, they assert, is that the DCA provides for the issue of shares for an improper purpose, the purpose being to benefit Mr Kirwan and other directors of Securities by wresting control of Securities from Capital to Mr Kirwan. In my view, s 445D(1)(e) draws attention to the effect of the deed rather than the purpose of the deed or any of its provisions, or the purpose of those who implement the deed. Therefore, reliance on an asserted improper purpose is misplaced. 189 Their second ground relates to the diluting effect of implementation of the deed. The issue of shares to Mr Kirwan under the deed had the effect of reducing Capital's shareholding interest in Securities from 100% to 5.33%. The submission seems to be that this dilution of Capital's shareholding interest is unjust per se . To accept this submission, I would have to take the view that a deed of company arrangement can never authorise a placement of shares which dilutes the shareholding interests of the existing shareholders. That is too broad a proposition. A placement of shares by the directors of a solvent company is normally unobjectionable notwithstanding its diluting effect, and I see no reason why, in principle, a placement cannot occur under the terms of a deed of company arrangement. 190 Their third ground is that the DCA denied creditors of Capital the opportunity to cause Securities to be wound up and have voidable transactions (in particular, the sale of Virotec shares by Securities to Mr Kirwan) investigated and pursued. A deed of company arrangement binds, amongst others, creditors as regards debts incurred before the applicable date (s 444D(1)), and the members of the company (s 444G). While a deed of company arrangement is in force, a person bound by the deed cannot make an application for an order to wind up the company: s 444E(2). Effectively, therefore, execution of the DCA prevented the liquidators of Capital from passing a resolution or making an application for the winding up of Securities. Therefore the DCA prevented them from having the sale of Virotec shares to Mr Kirwan investigated by a liquidator of Securities. In that sense, this ground has been made out. 191 In my view, the central defect of the decision to prefer the DCA to liquidation is that it effectively removed the possibility of proper investigation of the Virotec transaction. That being so, effect cannot be given to the deed without injustice, and the Court is authorised by s 445D(1)(e) to make an order terminating the DCA.

Issue 8: whether the DCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against, Far East and Capital

The legal principles 192 The Court may make an order terminating a deed of company arrangement if it is satisfied that: '(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 ... '. 193 I analysed the case law on this provision in Deputy Commissioner of Taxation v Portinex Pty Ltd, 156 FLR at 475ff.

Criticism of the DCA 194 Far East and Capital submit that the DCA is oppressive, unfairly prejudicial and unfairly discriminatory against both of them, upon two grounds. They say that Capital is unfairly treated both as a creditor and as the sole shareholder of Securities, and that Far East is unfairly treated as the holding company and a creditor of Capital. 195 The first ground is that the effect of the deed is to dilute the shareholding of Capital in Securities from 100% to 5.33%, and to increase Mr Kirwan's shareholding interest from zero to 94.67%. Clearly this discriminates against Capital and also indirectly against Far East. In my view, it also prejudices them because it causes them disadvantage, and the DCA as a whole does not give them compensating benefits sufficient to cure the disadvantage. My analysis of the effects of the DCA on Capital, and also on Far East, is set out above. 196 The question is whether the discrimination and prejudice are unfair. My strong opinion is that they are. The effect of the DCA on control of Securities must be seen in the context of Mr Kirwan's attempts to achieve control by negotiation. He failed to do so precisely because Capital was not prepared, as sole shareholder, to sell its shares so as to give him control. The fact that Capital's decision was influenced by the wishes of the US receiver is neither here nor there. Capital was entitled to exercise dominion over its controlling shareholding, for whatever reason. The DCA deprived Capital of its controlling position for no benefit. Mr Gould refused to recognise Capital as a creditor, so it had no prospect of receiving any distribution under the deed. Far East's entitlement to a distribution under the deed was deferred to other creditors. 197 The second ground is that the DCA denied creditors of Capital the opportunity to cause Securities to be wound up and have voidable transactions (particularly the Virotec transaction) investigated and pursued. I have already accepted this ground as establishing that effect cannot be given to the deed without injustice, for the purposes of s 445D(1)(e). On the same reasoning, this effect of the DCA is unfairly prejudicial to, and unfairly discriminatory against, Far East and Capital as creditors. Recovery from Mr Kirwan would permit their debts to be discharged, but under the DCA a substantial part of their debts will be unpaid.

Issue 9: whether the DCA has the effect of making Securities solvent, and whether it is contrary to the interests of the creditors as a whole 198 The Court may also make an order terminating a deed of company arrangement if it is satisfied that: '(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: ... (ii) contrary to the interests of the creditors of the company as a whole.' 199 It is unnecessary to explore the meaning accorded to these words by decided cases. Far East and Capital made a very limited submission on this ground. They say that the implementation of the DCA will not make Securities solvent within the meaning of s 95A of the Corporations Law. Therefore, they say, the deed and its implementation are contrary to the interests of the creditors of the company as a whole. They seek to draw an analogy with cases concerning the exercise of the Court's discretion under s 436B to permit a liquidator to appoint himself or herself as the administrator: see, for example, Re Depsun Pty Ltd (1994) 13 ACSR 644; Harcros Timber Australia Pty Ltd v MA Joinery Co Pty Ltd (Supreme Court of New South Wales, Young J, 6 June 1994, unreported). In the cases it is said that the public interest requires the Court not to permit an insolvent company to go back out into the world to trade. Similarly, it is said, the Court should positively intervene (rather than merely refusing to grant leave) by setting aside a deed of company arrangement if the company may still be insolvent after the implementation of the deed. 200 I disagree with this submission. Clause 14 of the DCA obliges the creditors to accept their entitlements under the deed in full satisfaction and complete discharge of their debts and claims against the company as at the date when the administration began. Such a clause is authorised by s 444H. Under the DCA the creditors are entitled to a first distribution and a final distribution out of limited categories of property. The effect appears to be that upon the making of these distributions, the debts and claims of all 'creditors' are extinguished. The word 'creditor' is defined in the DCA to mean a person who has a claim against the company arising because of anything which occurred or failed to occur before 26 June 2000. 'Claims' extends to liquidated and unliquidated claims and contingent claims. 201 In my opinion, Far East, Capital and Newland were 'creditors' for the purposes of the DCA. The position of Far East is straightforward. In the case of Newland, its entitlement crystallised when it served a shortfall notice on 23 May 2000. The fact that it converted its claim to a money claim by taking steps after 26 June 2000 does not prevent it from falling within the definition of 'creditor'. The events relating to the claim of Capital occurred in September 1999, so if it had a claim at all, its claim would be as a 'creditor' within the definition. 202 It follows that, upon the implementation and termination of the DCA in accordance with its terms, Securities would be relieved of its debts incurred before 26 June 2000 and it would be solvent, provided that it had not become insolvent through trading after 26 June 2000. Consequently this ground for setting aside the DCA under s 445D(f)(ii) has not been made out.

Issue 10: whether the issue of shares in Securities to Mr Kirwan under the DCA was valid and effective 203 Far East and Capital say that the issue of shares made under the DCA is invalid for two reasons. First, it was made without power (Issue 11). Secondly, it was made for an improper purpose (Issue 12). 204 The consequences of either of those submissions being correct have not been fully developed in argument. To the extent that there was no power to issue the shares, the purported share issue would be void and Capital would remain the sole shareholder of Securities. In that event, the problem would be whether the DCA had automatically been brought to an end on the ground of frustration or in some other way, and if not, whether the invalidity of the share issue was itself a ground for terminating the DCA under s 445D(1)(g) (termination for 'some other reason'). 205 To the extent that there was power to issue the shares but the issue was vitiated by an improper purpose, it may be that Mr Kirwan would remain a shareholder unless the Court were to intervene positively, in the exercise of its discretion, to rectify the share register. If it did so, then once again the question would be what to do about the deed. Arguably its further operation would be frustrated automatically or, perhaps, the invalidity of the share issue would itself justify or require an order terminating the deed. 206 I have decided that the share issue was made within power but for an improper purpose. My reasoning is set out under the next two headings. It is not necessary for me to decide whether the DCA is automatically frustrated or terminated by the invalidity of the share issue, because I have decided that there are independent grounds for terminating the deed under s 445D (see Issue 13).

Issue 11: whether Mr Gould or the directors of Securities had the power to issue the shares 207 In the absence of an administration under Part 5.3A, a company has the legal capacity and power to issue shares in itself: s 124(1)(a). Clause 3.1 of the constitution of Securities authorises the directors to exercise this power. However, when the company is in administration under a deed of company arrangement, the deed binds the officers and members of the company (s 444G), and unless it contains a contrary provision, the administrator has the power to carry on the business of the company for the purpose of administering the deed (s 444A(5) and Schedule 8A, clause 2 (z)). In this case, clause 5.1 of the DCA provided that 'the Company shall issue, and the Administrator, the Company's members and directors shall each cause the Company to issue' the shares to Mr Kirwan. 208 The minute of the resolution to allot shares to Mr Kirwan noted that the resolution was expressed be in accordance with clause 5.1. The minute was headed 'Resolution of Directors', but it was signed by Mr Gould as well as the directors. I shall therefore consider, first, whether Mr Gould as deed administrator had the power to allot and issue shares in Securities, and then whether the directors had the power to do so. The directors and Mr Gould acting together would have no more power than they possessed separately.

The power of the deed administrator 209 The powers of a deed administrator derive from the Corporations Law and the deed of company arrangement. The deed must specify the matters listed in s 444A(4), but the list does not include the powers of the administrator. The deed is also taken to include the prescribed provisions, except so far as it provides otherwise: s 444A(5). The prescribed provisions are set out in Schedule 8A, clause 2 of which is a long list of administrators' powers. Clause 2 is not excluded by the DCA. The list in clause 2 does not include the power to allot and issue shares, although there is a power 'to enter into and complete any contract for the sale of shares in the company' (clause 2 (zc)). 210 In my opinion, a power to allot and issue shares cannot be extracted from clause 2 (zc). The clause does not purport to give the administrator authority to perform the corporate act of issuing shares, but only to enter into and complete a contract. The contract is for the sale of shares rather than for the creation of new shares by allotment and issue. Thus, clause 2 (zc) permits the administrator to dispose of any shares forfeited to the company under its constitution, for the purpose of administering the deed. Literally, it also authorises the administrator to sell and dispose of shares belonging to a shareholder, in which the company has no proprietary interest. If, therefore, shareholders consent to the disposal of their shares in accordance with the terms of a deed, the administrator has the power to enter into and complete the contracts by which the shares are disposed of. It may be much more convenient for the administrator to do so, than to have a separate contract made by each shareholder. 211 It seems, however, that the administrator cannot rely on clause 2(zc) to bind a shareholder to the sale of his or her shares, if the shareholder disagrees or is absent. In Mulvaney v Wintulich (unreported, Federal Court of Australia, O'Loughlin J, 29 September 1995; for later proceedings before Branson J, see BC9507148), a provision of a deed of company arrangement required certain shareholders to transfer their shares for a nominal consideration. It was contended that dissenting shareholders were bound by this provision under s 444G, according to which a deed of company arrangement binds, inter alios, the members. O'Loughlin J rejected that submission, saying that s 444G had a more limited operation, and could not be used to force a dissenting shareholder to do something to his or her detriment, such as confiscation of his or her shares for no adequate consideration. 212 Thus, clause 2(zc) has quite a restricted field of operation. It certainly does not authorise a deed administrator to allot and issue new shares against the wishes of the existing shareholders. The administrator has no other power to do so. It is not necessary for me to consider whether, if the administrator had the power to allot and issue shares to Mr Kirwan, either under clause 2(zc) or otherwise, Capital would not be bound by the new issue because of the limited operation of s 444G.

The power of the directors 213 When a company is in voluntary administration, the administrator not only has the power to carry on the company's business, but also has control of the business, property and affairs of the company, and may exercise any power that the company or any of its officers could exercise if the company were not under administration: s 437A(1). The officers of the company remain in office and their functions and powers are not extinguished by the administration, but they are prohibited from performing or exercising them except with the administrator's written approval: s 437C(1). 214 There are no equivalent provisions when the company is in administration under a deed of company arrangement. Generally speaking, the directors' powers are revived once a deed of company arrangement has been executed, because the administration terminates at that point: ss 437A and 435C; J O'Donovan, Company Receivers & Administrators , para 17.780; A Keay, 'Corporate Governance During Administration and Reconstruction under Part 5.3A of the Corporations Law' (1997) 15 Co & Sec LJ 145, 154. The deed may contain provisions about the management of the company's business and the exercise of the powers of its officers, binding the officers and members under s 444G, and subject to any such provisions, the administrator will have the power to carry on the company's business under clause 2(z) of Schedule 8A. Since the creditors have the power to bring the deed to an end or vary it (ss 445C, 445D and 445F), they have a measure of practical control over the officers of the company. However, subject to such matters, the officers remain in place with the functions and powers given to them by the Corporations Law and the constitution of the company. 215 In my opinion, the power of the company to allot and issue shares, and the authority of the directors to exercise that power under typical provisions of the constitution of the company, are not necessarily extinguished or suspended when the company is subject to a deed of company arrangement. The power is still there, but the company and its officers are bound by the deed under s 444G. The directors are bound not to use the power inconsistently with the terms of the deed and the arrangement which it reflects, and a use of the power which undermines the arrangement approved by creditors might amount to an exercise of the power for an improper purpose. But at least on some occasions, the power can be used to allot and issue shares validly. 216 I have not been referred to any authorities which directly support my analysis of this point, but there is some indirect support in North Sydney District Rugby League Football Club Limited v Hill [2000] NSW SC 249. In that case Santow J was dealing with a deed of company arrangement which gave the administrator the power to appoint and remove directors. He observed that, while in theory it might have been possible for the deed in its terms totally to supersede and abrogate the power of members to elect the board, the deed before him did not purport to do so. In other words, the general power of the members to elect a board remained notwithstanding the deed, except to the extent that the deed clearly overrode it. 217 In the present case, the allotment and issue of shares of 11 August 2000 was not in any way inconsistent with the DCA, but rather was expressly required by it. Clause 5.1 of the DCA obliged the directors, inter alios, to use their power under the constitution of Securities to cause the shares to be issued. My conclusion is that the directors had the power to allot and issue the shares, and they were bound by the deed and s 444G to do so.

Issue 12: if there was power to issue the shares, whether the power was exercised for an improper purpose 218 Far East and Capital contend that the issue of shares to Mr Kirwan was made for an improper purpose, and is therefore invalid. Therefore, they say, the Court should rectify the share register of Securities. In developing their submission, they invoke the familiar principles governing the issue of shares by company directors for an improper purpose, such as the purpose of perpetuating their own control: Howard Smith Limited v Ampol Petroleum Ltd [1974] AC 821; Ngurli Ltd v McCann (1953) 90 CLR 425, at 439-440. They say that here the power to issue shares (if it existed) was used to wrest control of the company from Capital, and to make the proprietary right of Capital valueless without any demonstrable benefit to Securities: Kokotovich Pty Ltd v Wallington (1995) 17 ACSR 478. I agree with this submission. 219 A contrary argument is that in resolving to allot and issue the shares, the directors were merely discharging their duties having regard to the terms of clause 5.1 of the DCA and s 445G. I disagree. It is unnecessary to decide whether, by causing the company to execute the DCA, the directors placed an invalid fetter upon the future exercise of their discretion: see Ford's Principles of Corporations Law (looseleaf), para [8.300]. This is because the resolution to allot and issue the shares should not be assessed in isolation from the directors' activities leading up to that event. The evidence shows that Mr Kirwan and Mr MacPherson, two of the three directors, were engaged in a course of conduct directed towards acquiring a controlling shareholding in Securities for many months before the creditors approved the DCA. It would be misleading to focus on a single step in that course of conduct, namely the allotment and issue of the shares, and to investigate in isolation the directors' purpose in taking that single step. Regardless of whether they had placed themselves under an obligation to allot and issue the shares, the directors were motivated by their overall purpose in embarking on the course of conduct which led to the share issue. 220 When their attempts at a negotiated acquisition failed early in the year 2000, Mr Kirwan and Mr MacPherson developed the proposed DCA as an alternative strategy. Their purpose was to wrest control of Securities from Capital by using Part 5.3A when negotiation failed. That purpose, clearly an improper one, infected their operative decision to allot and issue the shares. Their purpose emerges from the chain of events that I have described. Mr Kirwan persuaded Mr Gould that Mr Hedge had treated him unjustly various ways, and that the proposed DCA would be fair notwithstanding its effect on the control of Securities. Mr Gould was willing to be persuaded without making adequate investigations. 221 Under the DCA fresh capital was subscribed for shares in a manner that would deliver a controlling interest to Mr Kirwan. There is no evidence to show that alternative forms of capital injection, which would not have diluted the control of the existing shareholder, were explored. The proposed DCA required Mr Kirwan to subscribe enough fresh capital to permit Mr Gould to pay employees and trade creditors. The support of those creditors for the proposed DCA was therefore assured. The obstacle posed by the inevitable opposition of Far East, a creditor for a much greater debt than all of the employees and trade creditors, was handled by Mr Gould exercising his casting vote in favour of the proposed DCA. The new shares were issued at half a cent each, with the same rights as the existing shares, ensuring that Capital's existing shareholding would be swamped. 222 I have reached my conclusion as to the directors' purpose by inference from the chain of events that I have described, and the terms of the DCA itself. Mr Kirwan did not give evidence to rebut the inference of improper purpose that arises from this chain of events. Nor did any other director. Although one must be careful to avoid indiscriminate application of the principle in Jones v Dunkel (1959) 101 CLR 298 (see Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389; White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169) in my view this is a proper case for inferring from the directors' lack of evidence that they had no evidence to give that would assist their position. 223 I reject the contention that the directors' purpose was to obtain the best deal for the creditors as a whole, including employees and trade creditors. That submission is untenable because the essential feature of the DCA was an allotment of shares that swamped the controlling shareholder's interest. An issue of shares was not a necessary ingredient of a scheme for the benefit of employees and trade creditors. 224 It is also contended that the resolution of the directors to allot and issue the shares was vitiated because of mistaken beliefs by the directors, including the belief that the allotment required the participation of the deed administrator. I disagree. The evidence does not enable me to say that the directors believed the deed administrator's participation was needed. Moreover, such a belief would not prevent the Court from treating the resolution as a valid exercise of the power of the directors, whatever else it may have purported to be.

Issue 13: whether it is appropriate, in the exercise of the Court's discretion, to terminate the deed in all the circumstances 225 I have found that a passage in the Report by Mr Gould was false or misleading, and that there was a material omission from the Report with respect to the possibility of recovery Mr Kirwan's profit in the Virotec transaction. It is also appropriate for me to consider the general tone of the Report. It is evident from my summary of it that I regard the Report as a biased document, demonstrating an uncritical acceptance by Mr Gould of the information and opinions supplied to him by Mr Kirwan, and an unjustified hostility towards Mr Hedge. 226 I have also found that effect cannot be given to the deed without injustice, and that the deed is unfairly prejudicial to and unfairly discriminatory against Far East and Capital, in the specific ways set out above. And I have found that it was improper for Mr Gould to use his casting vote to defeat the First and Second Resolutions and to support the Third Resolution. 227 I have had to subdivide the facts, so that I can deal with the submissions of the parties. However, as Wordsworth said, 'we murder to dissect'. Here the whole is greater than the sum of the parts. By the mechanism of Part 5.3A and the DCA, control of a company has been wrested away against the wishes of its direct and indirect holding companies, whose shareholding interest has been reduced from 100% to 5.33%. Control has been delivered into the hands of a man who failed to achieve that outcome through negotiation. That man derived an enormous profit from dealing with the company while he was a director of it, and the adoption of the DCA effectively prevented further investigation of that transaction. He has produced just enough money to pay employees and trade creditors and thereby secure their support. The numerical majority of creditors who supported the DCA represented debts which were a small fraction of the debts of the creditors who opposed it. Two major claimants were not allowed to vote on the proposal. The chairman, who accepted uncritically the information supplied to him by the director and did not make adequate independent investigations, and consequently misled creditors, exercised his casting vote to ensure that the DCA was approved. The end result is so unfair that the Court cannot allow it to stand. 228 While there is, therefore, a compelling case for terminating the DCA and setting aside the allotment and transfer of shares, I must consider the disadvantages and prejudice that may flow from my taking those steps. An order to terminate the DCA under s 445D would not require employees and trade creditors to return the distributions which have already been made by Mr Gould under the DCA: ss 445H and 451C. They will therefore not be prejudiced. Mr Kirwan and Kamadhenu Management are deferred creditors who may not have received any distributions yet. An order terminating the DCA would prejudice them because it would prevent any further distributions from being made under the DCA. However, they would be able to prove in the liquidation of Securities. If the liquidator was satisfied of their entitlements, they would be entitled to receive a distribution in the winding up of the company. That outcome, including as it does an independent assessment of the validity of their claims, is a just result. 229 A disadvantage of terminating the DCA is that, in all probability, Securities will be prevented from trading by the Stock Exchange. There is a high risk that the value of the dealers licence will be lost to Securities and its creditors. The evidence suggests that the dealers licence has a value substantially less than the $250,000 referred to by Mr Gould, especially when one considers the difficulty encountered by Mr Hedge when he endeavoured to sell the business of Securities. But even if it retained its full value, my view would be that the loss of this asset would be well and truly outweighed by the advantages of terminating the DCA. 230 I am therefore persuaded that this is a proper case for the Court to terminate the deed of company arrangement under s 445D. The defendants argued that I should not do so because the plaintiff was guilty of delay in bringing the present proceedings. Even a small delay in the commencement of proceedings to set aside or terminate a deed of company arrangement can be fatal to the claim for relief: see Deputy Commissioner of Taxation v Portinex Pty Ltd , 156 FLR at 468-471, and cases there cited. But in this case the deed was executed on 9 August 2000 and the proceedings began on 22 August 2000. It must have been plain to all concerned, having regard to the conduct of the first and second creditors' meetings, that proceedings to challenge the DCA were likely. It was reasonable for Far East not to commence proceedings until the DCA was executed, since the principal statutory relief relates to the termination or avoidance of an existing deed. I do not regard the delay in commencing the proceedings as disentitling the plaintiff to relief in this case. 231 In some cases justice may require the Court not only to terminate or set aside the deed for the future, but also to reverse the wrongful implementation of the deed in the past. This is such a case, since justice requires that the allotment and issue of shares pursuant to the DCA be set aside. If, in the circumstances of the case, the only source of judicial power is in Pt 5.3A, the Court will not be able to achieve its objective, because ss 445H and 451C have the effect that the Court's order terminating the deed does not affect things done under it. In the present case, however, I have found that the allotment and issue of shares by the directors of Securities pursuant to the DCA was for an improper purpose. I have equitable jurisdiction to set aside the allotment and issue, and statutory jurisdiction under s 175 to make an order correcting the register of members. I shall do so. I am inclined to make these orders conditional upon Securities repaying allotment money actually paid by Mr Kirwan to it, but I shall hear any submissions which the parties may wish to make on that point. 232 I shall also hear any submissions the parties may make as to orders governing the destination of the fund which is currently held under the control of Mr Gould as deed administrator. His evidence is that there was $543,216 in the account in October 2000. That fund will pass into the hands of the liquidator once the DCA has been set aside. Mr Gould should not deal with the fund in any way in the meantime. If necessary, orders should be made to achieve that outcome. 233 At the time of my making an order under s 445D, Securities will be taken to have passed a special resolution under s 491 that the company be wound up voluntarily, and to have nominated the deed administrator to be liquidator: reg 5.3A .07. Given my findings against him, I regard it as inappropriate for Mr Gould to remain in control of the external administration of Securities. There is an application before me to remove him from the office of deed administrator and appoint Mr McGrath or some other fit and proper person to replace him. There is power for me to make such orders under s 447E(1) or s 449B, although s 449B maybe the better provision to use as it is specifically directed to such orders. I believe that such an order is an appropriate first step, so that the 'automatic' winding up that will flow from my order terminating the DCA will be a winding up under the control of the new appointee. 234 I should add that although I see no objection to the appointment of Mr McGrath, in my opinion there is also no valid objection to the appointment of Mr Hedge. Mr Hedge has the advantage of already having substantial knowledge about Securities and the Princeton group. 235 I have found that the grounds exist for me to set aside, under s 600B(3), the resolution of the second meeting of creditors to approve the proposed DCA. Subject to any submissions that may be made by the parties, I see no point in making an order under that section. As I have mentioned, acts already done are preserved by s 600E notwithstanding the making of an order under s 600B. That seems to be to be in substance the same outcome as flows from s 445H where an order is made under s 445D. The principal difference is that if the order is made under 445D, the company passes 'automatically' into liquidation. That is an outcome which seems to be desirable.

Conclusion 236 Therefore, I believe (subject to any further submissions by the parties) that the principal orders I should make are an order removing and replacing Mr Gould under s 449B, an order terminating the DCA under s 445D, an order setting aside the allotment and issue of shares in Securities on 11 August 2000, an order under s 175 rectifying the register of members of Securities accordingly, and an order for costs. 237 I shall direct the plaintiff to bring in draft short minutes of orders, and stand a matter over to a time when submissions can be made with respect to the form of the orders, and with respect to costs.

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