De Vries re TMPL Pty Ltd [2009] NSWSC 818

CATCHWORDS : CORPORATIONS - voluntary administration - deed of company arrangement - requirement that company's public documents and negotiable instruments carry words "subject to deed of company arrangement" after company's name where first appearing - power of court to dispense with requirement - precondition that court be satisfied that dispensation will not result in any significant risk to interests of creditors - need for positive case for dispensation to be made - purpose of court's power may be gathered from Parliamentary and law reform materials - power exercisable for benefit of company - no basis for exercise shown where concern is that of sole director for reputations of himself and related and associated inerests

LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss 447A, 450E(2), 450E(5) Corporations Amendment (Insolvency) Act 2007 (Cth)

CASES CITED : Re Brashs Pty Ltd (1994) 15 ACSR 477 Re Multelink Australia Ltd [2003] NSWSC 836; (2003) 21 ACLC 1661

PARTIES : Antony De Vries and David Solomons (in their capacity as joint deed administrators of TMPL Pty Ltd ) (subject to deed of company arrangement) - Plaintiffs

SOLICITORS : Somerset Ryckmans - Plaintiffs

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4123/09 ANTONY DE VRIES & ANOR (IN THEIR CAPACITY AS JOINT DEED ADMINISTRATORS OF TMPL PTY LTD) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) JUDGMENT 1 The plaintiffs are the administrators of a deed of company arrangement executed by TMPL Pty Ltd ("TMPL"). They seek the leave of the court under s 450E(2) of the Corporations Act 2001 (Cth) by way of what is essentially blanket dispensation from the requirement that the words "subject to deed of company arrangement" be included after the name of TMPL where first appearing in every public document and negotiable instrument of that company. 2 Section 450E(2), in its present form, is as follows: "Except with the leave of the Court, until a deed of company arrangement terminates, the company must set out, in every public document, and in every negotiable instrument, of the company, after the company's name where is first appears, the expression ('administrators appointed')." 3 The express power of the court to moderate the s 450E(2) requirement was created by the Corporations Amendment (Insolvency) Act 2007. Before the commencement of that Act on 31 December 2007, it had been recognised in at least two cases that a like power was available through s 447A: see Re Brashs Pty Ltd (1994) 15 ACSR 477 and Re Multelink Australia Ltd [2003] NSWSC 836; (2003) 21 ACLC 1661. Dispensation was not actually granted in either of those cases. 4 The creation of the court's express exempting power was accompanied by the following specification in a new s 450E(5) added by the amending Act of 2007: "The Court may only grant leave under subsection (2) if it is satisfied that the granting of leave will not result in any significant risk to the interests of the company's creditors (including contingent or prospective creditors) as a whole." 5 By virtue of s 450E(4), leave under s 450E(2) may be granted on the application of the administrator of the deed of company arrangement or "any interested person". As I have said, the present application is made by the deed administrators. 6 The effect of s 450E(5), as I read it, is that dispensation cannot be granted unless the court is satisfied in the way stated in that provision, but the fact that the court is so satisfied does not compel it to grant the dispensation. In other words, a positive finding by the court with respect to the matter referred to in s 450E(5) activates the court's discretion but in no way compels (or even indicates) any particular outcome with respect to the exercise of the discretion. 7 The purpose behind the 2007 amendments to s 450E may be gathered from the following extract from explanatory memorandum circulated by the Parliamentary Secretary to the Treasurer when the Corporations Amendment (Insolvency) Bill was introduced into the House of Representatives: "7.137 Companies subject to a DOCA must indicate that fact on all of their public documents and negotiable instruments after the company's name where it first appears (subsection 450E(2) of the Corporations Act). This serves as an indication to any prospective creditors dealing with the company.

7.138 The notification that a company is subject to a DOCA may have adverse impacts on a company's goodwill and reputation. This will, in turn, affect the company's ability to continue trading and impinge on the rescue of the business, ultimately reducing the amount available to creditors.

7.139 It is acknowledged that there may be circumstances where a deed is still yet to be terminated but there is little risk to prospective creditors. An example of such a situation may be where a deed administrator has received the money to be paid to creditors but cannot pay such money because of unresolved disputes over proofs of debt.

7.140 In Re Brashes Pty Ltd, Hayne J held that the court could exercise its general discretion under section 477A of the Corporations Act to exempt a company from the obligation to include the words `subject to deed of company arrangement' on its public documents.

7.141 To remove any uncertainty, the Corporations Act will be amended to provide the company with an express right to apply to the court for an order that the company be exempt from including the relevant words in its name. This is consistent with recommendation 33 of the CAMAC Report (1998).

7.142 Section 450E will be amended to provide that a company under a deed of company arrangement can apply to the Court for an exemption from the requirement to indicate that fact on all public documents and negotiable instruments after the company's name.

7.143 The Court may grant such an exemption if it is satisfied that the granting of leave will not result in any significant risk to the interests of the company's creditors as a whole. The Court must also consider the interests of prospective (post-deed) creditors, who are at the most risk. Pre-deed creditors have had the benefit of notification so their interests are unlikely to be at risk in this context." 8 The Parliamentary Secretary made it clear that the amendments were based on a recommendation of the Legal Committee of the Companies Securities Advisory Committee (now Corporations and Markets Advisory Committee) in its report of June 1998 entitled "Corporate Voluntary Administration". Recommendation 33 in that report was as follows: "A company should have an express right to apply to the court for an order that the company need not include the words 'subject to deed of company arrangement' on its public documents. 9 That recommendation appeared at the end of the following section of the Legal Committee's report: ""5.48 Companies that are subject to a deed of company arrangement must indicate that fact on their public documents. This notification may have an adverse impact on the company's goodwill and reputation, and therefore its ability to continue trading and the amount which may ultimately be available for creditors. 5.49 The Legal Committee in its Discussion Paper proposed that the notification requirement should not apply to companies that have entered into pure composition deeds of arrangement (as defined in para 5.66 of this Report). Those companies are no longer insolvent, as their creditors have accepted payments in full satisfaction of their claims. By contrast, a company that has entered into a moratorium or mixed deed of arrangement (also defined in para 5.66) remains insolvent until it pays its debts in accordance with the deed. Companies under pure composition deeds of arrangement may even be under new management . 5.50 Only one respondent supported the Discussion Paper proposal, subject to there being no likelihood of a default under the compromise. 5.51 Many submissions opposed this proposal, for the following reasons. • A deed of company arrangement may be set aside before it is fulfilled. • If the deed is terminated, unpaid post-deed creditors will have to share the unsecured assets with pre-administration creditors. • There would be unnecessary difficulties and complexities in classifying the various types of deeds. This could result in more restrictive forms of deeds. 5.52 The Legal Committee no longer supports the proposal it made in its Discussion Paper exempting pure composition deeds from this notification requirement. It notes that most pure composition deeds do not release the debts until the distributions to creditors have been completed, in which case the deed should terminate soon after. Until that time, creditors should generally be entitled to have notice that the company is under a deed of company arrangement. 5.53 Some respondents suggested an alternative approach, namely that when a company's obligations are fully met under the deed, the deed administrator could thereafter issue a compliance certificate that could be the basis upon which notification is no longer required. 5.54 Another respondent suggested that: • a deed administrator who believes that the publication of the company's status would be prejudicial to creditors' interests should be able to convene a combined meeting of pre-administration and post-deed creditors to consider a resolution to allow the company to be exempted from the notification requirement • all creditors should have equal voting status on the basis of numbers and value • the meeting should not be convened before the expiry of six months after the deed has been executed, to allow for a reasonable period for the company to prove itself and a reasonable representation of post-deed creditors to be incorporated into the voting. 5.55 The Legal Committee has reservations about granting creditors any discretion in this regard. The purpose of the notification is to advise prospective creditors. Existing creditors have had the benefit of this notification, but their decision to remove the notification requirement could prejudice prospective creditors. 5.56 The Committee considers that there may be circumstances where a continuing requirement for a company to put the words 'subject to deed of company arrangement' on its public documents is inappropriate. The Committee recommends that, rather than leaving this matter to the discretion of the deed administrator or creditors, the company should have an express right to apply to the court for an order that these words need no longer appear on the company's public documents. An appropriate ground for a court application might be where, for instance, the deed administrator has received the money to be paid to creditors but it is necessary to resolve disputes about proofs of debt before the money can be distributed and the deed terminates." 10 The concern of Parliament may thus be taken to have been to provide a means of alleviating adverse effects for the company subject to the deed of company arrangement, the relevant adverse effects being those caused by the need to include the words "subject to deed of company arrangement" in public documents and negotiable instruments of the company in the way required by the legislation. Harm to the company's goodwill and reputation, with consequential detriments to the ability to trade and therefore to creditors, are expressly mentioned. These, one might accept, are examples of the kind of detriment to the company itself with which the amendments were concerned. 11 It is, I think, clear that it was in order to provide a means of alleviating these and like disadvantages to the company subject to deed of company arrangement (and therefore no doubt to its creditors - particularly future creditors - and its members), that the power of dispensation was given by Parliament to the court. 12 It follows that if the court is satisfied in the way specified in s 450E(5) so that the discretion to grant dispensation is activated, the decision whether to exercise that discretion must pay attention to the interests of the company itself and to the question whether those interests will be positively served in some identifiable and relevant way by the granting of the dispensation. Some positive case must be made out by reference to those interests. 13 Against that background, I turn to the circumstances of this case. The evidence comes from an affidavit of one of the deed administrators (Mr Solomons) and an affidavit of the sole director of TMPL. 14 TMPL is an investment and service company. It has, it appears, engaged in isolated transactions, each of some magnitude, and also has investments in both listed companies and long-term convertible notes of an associated entity. 15 The Part 5.3A voluntary administration of TMPL, which became the foundation for the adoption of the deed of company arrangement, commenced on 1 July 2009 when the sole director of TMPL resolved to appoint administrators. This followed the issue of a very large and apparently unexpected income tax assessment by the Australian Taxation Office and disallowance of an objection against that assessment (I say that it was unexpected because the understanding within TMPL was apparently that the relevant gains were not of such a nature as to be included in assessable income). 16 It appears that before the advent of the tax liability, TMPL had been in a position where it could comfortably meet its debts as they fell due. The effect of the assessment was to cause the sole director to form an opinion that the company was insolvent, or likely to become so. The deed administrators are of the opinion that the company would be solvent if it were not for the tax liability and there appear to be good grounds for that opinion. 17 TMPL intends to appeal against disallowance of the objection to the tax assessment. When the present application was heard yesterday, 13 August 2009, the appeal was about to be lodged. 18 As to the activities of TMPL at present and into the future, I quote from Mr Solomons' affidavit: "18. Under the DOCA, the day to day control and management of the company reverts to the Director subject to the deed administrators' rights, remedies and powers conferred by the DOCA to the exclusion of TMPL and its Director. 18.[sic] Apart from conducting the appeal, TMPL otherwise does not trade. The Director has confirmed to me that until the DOCA is effectuated in accordance with its terms, the Company will only operate as a non-trading investment and service vehicle. 19. I am informed by the Director and verily believe that apart from incurring liabilities to: (a) related entities associated with the Director; (b) the legal advisers referred to in paragraph 7(a) hereof retained by TMPL to act in respect of the Part IVC appeal (which liabilities are to be met by the Director on behalf of TMPL); (c) pre-existing creditors referred to in paragraphs 7(b), (c) and (d) (all of whom are aware that the company is subject to a deed of company arrangement), TMPL will not incur any debts or liabilities to third party creditors during the period of the DOCA."

(The references in paragraphs 7(a), (b), (c) and (d) are to the small number of employees and the external advisers involved in the tax matter). 19 The director says in his affidavit: "4. I have read the affidavit of David Solomons sworn 12 August 2009 and state that where Mr Solomons deposes to matters on information and belief which were told to him by me, they are true and correct. 5. I am concerned to avoid adverse publicity arising from the external administration of my company, TMPL. TMPL does not trade and will not trade or incur any liabilities to third parties during the period of the DOCA other than to those related parties and pre-existing creditors identified in Mr Solomons' affidavit." 20 The only creditors of TMPL, apart from the Australian Taxation Office, are associated entities, employees and professional advisors retained in connection with the tax assessment and the planned tax appeal. 21 The unmistakable message from the evidence is that, during the currency of the deed of company arrangement, TMPL will not engage in business transactions and, in particular, will not incur debts except in the pursuit of the tax appeal; and that the pursuit of the appeal will be the only real activity that is undertaken. 22 In those circumstances, it may well be possible to conclude that relief from the s 450E(2) publication requirement will not result in any significant risk of the kind referred to in s 450E(5). Ability to reach that conclusion might be enhanced by the sole director's proffered undertaking to restrict the incurring of liabilities in the way outlined while the deed of company arrangement remains on foot. 23 But even if the s 450E(5) conclusion is reached, there is nothing at all to suggest that dispensation is necessary or desirable from the viewpoint of TMPL. It is not said that TMPL's goodwill or reputation will be adversely impacted if its public documents and negotiable instruments have to carry the "subject to deed of company arrangement" notation. On the evidence, dealings pending termination of the deed of company arrangement will be minimal and will be exclusively with persons who are already aware that the company is subject to a deed of company arrangement. No curtailment of the ability to trade is indicated since there will be no real trading. Nor is it shown that grant of the dispensation will be conducive to any rescue of the business, or putting this the other way, that absence of the dispensation will be inimical to any rescue of the business. 24 A point of particular significance, in my view, is that, if and when the tax appeal is successful, the deed will, according to its terms, come to an end. The duration of the deed of company arrangement will thus correspond with the period for which the sole director will cause the company to remain in its current semi-dormant state. On that basis, any moves to re-launch the company into the mainstream of commercial life will occur only after the requirement to include the "subject to deed of company arrangement" notation no longer applies. 25 The reason why the sole director wishes TMPL to have dispensation from the publication requirement is stated in both his own affidavit and that of the deed administrator. He is concerned about negative impacts on his own reputation and those of members of his family and other companies and bodies with which he and they are associated. 26 That, it seems to me, is a consideration foreign to the principled exercise of the discretion given to the court by s 450E(2) as it relates to the deed of company arrangement executed by TMPL. The personal interests of a director of the company subject to the deed of company arrangement (and those of his family and associated interests), divorced from the welfare of the company itself, play no part in the assessment called for upon an application such as the present. 27 Nor, as I see it, are those interests a matter with which the administrators of the TMPL deed of company arrangement should properly be concerned. 28 No positive case for the grant of the relief sought has been shown. The originating process is dismissed. **********

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