Dean-Willcocks v ATTT Investments Pty Ltd [1999] NSWSC 642 | Case summary

1 HIS HONOUR : This is an application under section 477(2A) of the Corporations Law seeking that the plaintiff liquidator be entitled to compromise certain claims of the first defendant company as against the third defendant. 2 The first, second and third defendant companies, the first two in liquidation, the third under administration, are all related. The plaintiff, who is a registered liquidator, is the liquidator or administrator of them all. Before they became subject to external administration, the companies were controlled by a Mr Gallagher and a Mr Stotter, the latter appears to be the son of the former. Mr Gallagher was also involved at some stage as a director and evidently still as a shareholder in Project and General Finance Pty Ltd which is a secured creditor of some or all of the first three defendants. 3 I will assume that the first three defendants are insolvent. There are intergroup transactions. There is a secured debt to Project and General Finance Pty Ltd and there are unsecured debts owing to general creditors. 4 The liquidator has obtained statutory declarations from Mr Gallagher and Mr Stotter which suggest that neither of these gentlemen is, to put it colloquially, worth powder and shot. The scheme that has been worked out is that the secured creditor will inject some moneys into the companies. It will take a particular asset. The claims of Mr Gallagher and his associates will be deferred. The independent unsecured creditors will be paid 100 cents in the dollar and the intercompany debts will virtually be wiped out. At least the third defendant will then go back and trade. The first two defendants will remain in liquidation. 5 The liquidator has made an affidavit that he does not believe that the ordinary unsecured creditors of the first and second defendants are disadvantaged by the orders sought in the summons and further, that in his opinion the compromise is a commercial resolution of the relevant debts. 6 The liquidator is given power under s 477(1)(c) of the Corporations Law to make any compromise or arrangement with creditors or persons claiming to be creditors. However, subsection 2A of that section provides that: "Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt ..."

of the current magnitude. 7 There is a dichotomy in the section between a compromise and an arrangement. A compromise usually means a situation where there is some doubt about a claim and a lesser sum is taken so that the X factor will vanish. Ordinarily there must be a bona fide dispute existing before there can be a compromise resolving that dispute; see Mercantile Investment and General Trust Co v International Co of Mexico [1893] 1 Ch 484n, 489 and 491. An arrangement deals with every other commercial transaction that a reasonable business person might carry out bona fide in the course of running a business: Re E D White Ltd (1929) 29 SR (NSW) 389. 8 Subsection 2A, which was introduced by one of the Corporations Law Reforms Acts following the Harmer Report, only applies to compromises. It does not apply to arrangements. Just what the Court is supposed to do when considering such applications is not made clear by the Law. 9 Mr Cussen, the solicitor for the plaintiff, says that the Court's role is limited to seeing whether the compromise is flawed, certainly not to reappraise the compromise commercially. He says the main concern of the Court is the interest of creditors. Whether compromise is commercially sound is a matter for the creditors and the liquidator rather than the Court. 10 What, then, is the Court to do? 11 I think some guidance is given by what the Court has to do in cases where it approves of the commencement or settlement of litigation. Such provisions were inserted in the legislation so that the Court, which is experienced in the vicissitudes of litigation, could advise the liquidator in the light of that knowledge as to whether the litigation contemplated or being settled is proper; see Waisbrod v Potgieter [1953] 4 South African Law Reports 502 at 507. The same thought extends to compromises. 12 There has in recent years been some analysis by the Court of its role under s 477(2A) and similar sections. 13 First, it is clear that the controlling notion is the interests of creditors; Re Spedley Securities Ltd (1992) 9 ACSR 83, 85. In that case, Giles J said at pp 85-6, (omitting authorities), "...the court pays regard to the commercial judgment of the liquidator. That is not to say that it rubber stamps whatever is put forward by the liquidator but... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the liquidator's conduct." 14 I considered the history of the allied jurisdiction of the Court contained in s 477(2B) of the Corporations Law in Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308. Austin J further considered that subsection in Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 and reached the view at p 118 that the Court does not decide the relevant question, but permits the liquidator to decide it. 15 I do not really consider that the present arrangement between the company in liquidation and the other parties is a compromise within the meaning of s 477(2A) because there is no dispute about the moneys owing. The problem is that the persons who could be proceeded against by the liquidator to get money in for the benefit of creditors appear not to be worth powder and shot. 16 Accordingly, the liquidator is prepared to agree to an arrangement whereby the creditors will get 100 cents in the dollar in any event. I think that is an arrangement, not a compromise, which he can do without my authority. 17 If however I did have to become involved, then I would not be prepared to give the liquidator my imprimatur at this stage. There are a number of very disturbing aspects of this case. 18 The Court, when it is asked to give an approval, cannot ignore the general public interests involved. It must, of course, keep predominantly in mind the interests of the creditors but there is always a public interest that persons who have caused the downfall of a company should not be allowed to escape from any consequences of those actions by coming to a deal with the creditors even if those creditors get some money that they otherwise would not obtain. There is also the public interest that insolvent companies should not go back into the market place to trade. 19 The matter was commenced by summons filed this morning. I was told it was an urgent matter in which a decision really had to be made today or tomorrow. I was given papers to digest which are about ten centimetres thick and it may be that in the hour that I have had to look at them I have not obtained every nuance. However, people who ask for a quick decision with a bulk of papers take that risk. The Court can only act on the material it has in the time it is given to digest it and on the submissions of solicitors or counsel for the plaintiff. 20 I have previously drawn attention to the problems that this approach to the present sort of case causes; see Re Lemon Tree Passage & Districts RSL & Citizens Club Co-operative Ltd (1987) 6 ACLC 24 as has Mandie J in Re Aslor Pty Ltd (1997) 24 ACSR 612. The Court requires that it be presented with the relevant material in a clear way with appropriate assistance to consider the material in the available time. If the Court is not satisfied that it can do its duty on the material submitted, it has the obligation to ask for further material and to dismiss the application if that further material is not made available. 21 I have a number of problems with the material presented in the instant case. These include the fact that the secured creditor seems to be in the same camp as the directors. The secured creditor and the directors put in the liquidator or the administrator to the first, second and third defendants. There is no independent thought being given to this particular compromise. Despite the fact that the plaintiff is a well-known experienced liquidator, and I am not saying a thing against his integrity or competency, the Court is extremely reluctant to act where there is no proper contradictor. 22 Accordingly, I would not have been prepared to act unless another highly experienced liquidator had at least perused the papers and given his or her independent view that the matter was in the interests of the creditors. Secondly, I would have needed to be assured in accordance with authorities such as Re The Federal Bank of Australia Ltd; Re McConnell (1893) 15 ALT 126 (even though that decision is on a differently worded Companies Act) by a positive statement that the compromise would be beneficial to the company and its creditors and briefly why. A statement such as in the present affidavit that the liquidator does not believe that the ordinary unsecured creditors will be disadvantaged is insufficient. Thirdly, the statutory declaration received from Mr Gallagher makes no mention at all of the apparent fact that during the last 12 months over five million dollars was extracted from these companies for the benefit of key employees as "incentives" and that the key employees appear to include Mr Gallagher and his son. The moneys were supposed to be "an incentive to the future performance of these employees". There is not a word said in the statutory declaration or otherwise as to where this five million dollars has gone. It would appear that it has been on lent to some other body connected with Mr Gallagher, but there are just no details at all. The Court would have thought that an independent person would have made enquiries as to that and given the Court and the creditors some indication where the money had gone. 23 If this were a matter within jurisdiction then the Court would not have dismissed the summons at this stage but deferred the matter until further evidence was obtained. However, as it is not a compromise it seems to me I should just dismiss the summons, unless invited to do otherwise. However, for the reasons that I have stated, the liquidator should think very seriously as to whether his professional reputation is worth going ahead with this arrangement. At the very least, the liquidator should consider whether he should investigate further and then amend the summons to seek directions under s 479(3) of the Corporations Law; cf Re Tietyens Investments Pty Ltd (1999) 17 ACLC 697. 24 I will stand the matter over to 9.30am in my list on Tuesday 29 June 1999 with liberty to apply.

Dean-Willcocks v ATTT Investments Pty Ltd

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