Dean-Willcocks v GSA Formwork [1999] NSWSC 166 | Case summary

1 HIS HONOUR: By summons filed on 12 February 1999 the plaintiff seeks an order that a deed of company arrangement entered into between him and GSA Formwork (NSW) Pty Limited ('GSA') dated 10 March 1998 ('the DCA') be terminated pursuant to either s.445D or s.447A of the Corporations Law. 2 The circumstances surrounding the application are as follows. Mr Dean-Willcocks was appointed under s.5.3A of the Corporations Law as the administrator of GSA on 21 January 1998. At that time there were twenty creditors whose debts totalled $639,903.83. A meeting of creditors resolved on 25 January 1998 pursuant to s.439C to enter into the DCA, and as I have mentioned the DCA was entered into on 10 March 1998. The following are some relevant provisions of the DCA: (a) GSA is required to make payments to Mr Dean-Willcocks as administrator which include monthly payments up to 1 August 1999; (b) GSA must provide quarterly accounts to the administrator; (c) participating creditors are those whose payments arose before 21 January 1998; (d) the participating creditors are to receive fifteen cents in the dollar; (e) certain priority creditors including employees have priority over the participating creditors; (f) there is a moratorium on further steps by the participating creditors to recover against GSA and when payment is made to them under the deed they will release all further claims against GSA; (g) GSA is required to grant a charge to the administrator to secure its obligations under the DCA; (h) GSA covenants to remit all group tax and prescribed payments tax; (i) certain 'non-participating creditors' agree to waive their entitlements to participate in dividends; (j) the DCA may be terminated in the circumstances prescribed by the clause 45; (k) upon the adoption of the DCA control of GSA reverts to its directors; (l) if GSA performs its obligations under the deed, it is contemplated that the DCA will be terminated in about October 1999. 3 On 4 February 1999 one of the two directors of GSA received a letter from the Australian Taxation Office dated 2 February 1999, enclosing two penalty notices issued under the Income Tax Assessment Act. The notices informed the director, Mr Falcetta, in compliance with s.222APE, that notices of estimate dated 1 February 1999 had been sent to GSA in respect of deductions for prescribed payments and tax instalments deductions. The unpaid amounts of the estimate were $30,000 for prescribed payments and $210,576.69 for tax instalments deductions. 4 The notices informed Mr Falcetta in accordance with s.222APE that at the end of fourteen days after the notices of estimate were sent to GSA he would, as a director of the company, be liable to pay an amount equal to each estimate. The notices further stated that the estimate would be remitted if, at the end of fourteen days after the notice was given to him, one of a number of stated events had occurred, including that 'the company is being wound up' (see s.222APE(1)(b)(iv)). 5 Mr Falcetta approached Mr Geoff McDonald of Paul Chadwick. Mr McDonald is a registered liquidator. On his advice and with his assistance the directors of GSA subsequently convened a meeting of the company's creditors. He was instructed to compile a report as to GSA's affairs. The meeting of creditors was convened by notice dated 10 February 1999, to be held at 10am tomorrow, 17 February 1999. 6 The agenda includes items to consider special resolutions of members (which are to be voted on by the members later in the day) to wind the company up voluntarily, to appoint Mr McDonald as liquidator and to consider a report on the affairs of the company provided under s.497 of the Corporations Law. If those resolutions are passed by the members the company will be 'being wound up' and presumably Mr Falcetta will avoid personal liability for tax under the s.222APE notices. 7 The notice of meeting includes a list of creditors comprising nine creditors of whom Mr Dean-Willcocks is one. The debts of the listed creditors total $605,000 although some debts of named creditors have not yet been calculated. Mr Dean-Willcocks has said in his affidavit which was in evidence before me that he presumes the debts of the listed creditors (apart from himself and possibly certain directors) were incurred after the date of the DCA. He is therefore treated as representing the creditors affected by the DCA (that is the pre-21 January 1998 creditors). He notes that the listed creditors do not include trade creditors, utility creditors and subcontractors. 8 The directors of GSA met on 12 February 1999 and resolved to support the present application to this Court. As I have mentioned, the plaintiff seeks an order that the DCA be terminated by the Court either under s.445D or s.447A of the Corporations Law. The application will have the result, as I shall explain, that Mr Dean-Willcocks will become the liquidator of GSA in voluntary liquidation as a result of orders of the Court, and tomorrow's meetings of members and creditors will have no decision to make on the subject of winding up GSA. According to Mr Falcetta the company is insolvent. Therefore it is likely that the winding up of GSA, however it maybe inaugurated, will proceed in the absence of a solvency declaration by the directors under s.496 and therefore will be a creditors voluntary winding up. 9 Notice of the plaintiff's application has been given to Mr McDonald and to the Deputy Commissioner of Taxation. I was informed by Mr Fordyce, the plaintiff's solicitor, at today's hearing that he was told by Mr McDonald that Mr McDonald did not intend to appear but may make a written submission by facsimile. No such submission has been received from him. According to Mr Fordyce no response has been received from the Australian Taxation Office. 10 An order terminating the DCA produces a winding up in the following way. Section 446B(1) authorises regulations to be made to prescribe cases where a company that is executing a deed of company arrangement is taken to have passed a special resolution under s 491 that the company be wound up voluntarily. Regulation 5.3A.07(1) of the Corporations Regulations states that for the purposes of s.446B(1) a company that has executed a deed of company arrangement is taken to have passed a special resolution under s.491 that the company be wound up voluntarily if (inter alia) the Court makes an order terminating the deed of company arrangement. Under regulation 5.3A.07(4) the company is taken to have nominated the administrator of the deed of company arrangement as the liquidator in the winding up. 11 Thus if the Court makes an order under s.445D (though not apparently if the order is made under s.447A) the company moves into voluntary liquidation by virtue of the order. In the present circumstances, a consequence is that Mr Dean-Willcocks rather than Mr McDonald becomes the liquidator. 12 Given that an order under s.447A may not be effective to achieve the plaintiff's purpose, and that I have reached the conclusion that an order should be made under s.445D, I should say no more about s.447A, and I now turn to consider s.445D. 13 In the present case there are some grounds for caution about the exercise of relevant judicial discretions. One such ground arises out of the existence of a procedure for termination of the DCA set out in clauses 4 and 5 of that instrument, involving a meeting of creditors and participation by the administrator. However I assume that it is not practicable at this stage to convene a meeting of the twenty creditors who participated under the DCA within the time limit imposed by the Australian Taxation Office's s.222APE notices. Further the only available ground for termination under the deed would appear to be under clause 4(c) which refers to a resolution of creditors under Pt 5.3A Division 11. I assume that the relevant resolution would be under s.445E and again I assume that there is insufficient time to convene a meeting of creditors to proceed in this way if the relevant condition under the s.222APE notices is to be satisfied. Consequently I proceed on the basis that although the deed contains a provision for its termination, that provision is not as a matter of practicality available in the present circumstances. 14 A further ground for caution is that a meeting of creditors, and also (I infer) a meeting of members, has been convened for tomorrow. The effect of my making the orders sought by the plaintiff is to deprive the members and creditors of the opportunity to express their views about whether the company should be placed in voluntary liquidation before that event occurs. 15 However in the present case the fact that those meetings have been convened is not as significant as it might be in other circumstances. Although the decision to place a company in voluntary liquidation is normally a decision of the members, the Corporations Law has the effect of taking that decision out of the hands of the members in certain situations falling within Pt 5.3A: see s.446A(2) and regulation 5.3A.07. In situations which fall within those provisions, the operative decision to place the company in voluntary liquidation is a decision by the creditors or the Court respectively rather than by the members. Further, for reasons which I shall explain, my opinion is that proper notice of tomorrow's meeting of creditors has not been given, and therefore there is at the very least a real doubt as to whether the creditors would be in the position to make any effective decisions at tomorrow's meeting. 16 The plaintiff submits that I should make an order under s.445D(1)(d) or s.445D(1)(g). Section 445D(1)(d) allows the Court to make an order terminating a deed of company arrangement if it is satisfied that there has been a material contravention of the deed by a person bound by the deed. The plaintiff's submission is that the decision by the directors to convene meetings of members and creditors to consider the voluntary winding up of GSA amounts to anticipatory breach of the DCA by the company, because that conduct makes it clear that the company is not proposing to comply with the terms of the deed. I do not accept the major premise of this contention, namely that the convening of the meeting is sufficient evidence of anticipatory breach by the company. There is no evidence before me as to the identity of the members nor as to their likely decision if the meeting is held. I am not in the position to make any inference as to the likely outcome of the meeting. Therefore even if the decision of the members to wind the company up, if it is taken, constitutes anticipatory breach, I do not believe that a case is made out at the present time. Having reached that conclusion it is not necessary for me to decide certain other questions which I regard as open to further argument: namely whether s 445D(1)(d) has any application in a case of anticipatory breach, whether a resolution by members constitutes anticipatory breach by their company, and whether the DCA has prohibited and can validly prohibit steps being taken to wind up the company voluntarily under the Corporations Law. 17 The remaining ground upon which the plaintiff relies is in s.445D(1)(g). That provision empowers the Court to make an order terminating a deed of company arrangement if it is satisfied that the deed should be terminated for some other reason. It is clear from the circumstances surrounding its enactment that this provision was intended to give the Court a very wide discretion. The explanatory memorandum to the Corporate Law Reform Bill 1992 which led to the enactment of Pt 5.3A makes the following comment on this provision (paragraph 602): '[The provision] will allow termination where the court considers the deed should be terminated for some other reason. It would not be appropriate to try to circumscribe more precisely the court's powers to terminate a deed in exceptional circumstances but, having regard to the width of previous paragraphs in proposed subsection (1)(g) it is anticipated that the court's powers under subs.(1)(g) would be exercised at most very rarely.' 18 Although the exercise of the power may be rare, I am satisfied that it is an available power and that it is appropriate to exercise it in the circumstances of the present case. 19 In reaching this conclusion, I have taken into account a number of factors. First it is relevant that according to the evidence before me, the company is now insolvent. In those circumstances proceeding with the DCA may not be an appropriate course of action, having regard to the interests of the creditors as a whole. The evidence indicates that substantial additional debts have been incurred since the DCA was entered into. The DCA does not make appropriate provision to protect the interests of the new creditors. 20 Secondly it is relevant that the pre-21 January 1998 creditors have chosen to proceed by means of the DCA and no decision was taken at that time for the winding up of the company either by the Court or voluntarily. Having embarked on the course of action established by 5.3A it is appropriate for the procedures of that Part to be followed through. One of those procedures is to deal with the fate of the DCA in the circumstances which have now occurred. If I were not to intervene and leave the meetings of members and creditors to occur tomorrow, there would be some doubt as the effect of the decision taken at those meetings on the DCA and the position of the pre-21 January 1998 creditors under that instrument. By making the orders which are sought, I can avoid that doubt. 21 Thirdly, and most importantly, I am concerned that if the meeting of creditors which has been convened for tomorrow goes ahead, there will be scope for serious argument as to the validity of the convening of the meeting and any decision which the creditors may take at that meeting. In the first place it appears from the evidence before me that no notice has been given to certain creditors. Section 497 of the Corporations Law, which envisages the convening of a meeting of creditors in connection with the voluntary winding up of the company, obliges the company to give notice to the creditors - that is, all of them. As the plaintiff points out, it appears from the notice which is in evidence before me that only nine creditors are listed. No reference is made to trade creditors or utility creditors or subcontractors, even though the company continues to trade. Further it appears that notice has not been given to any of the pre-21 January 1998 creditors, except to the extent that notice to the plaintiff as administrator could be regarded as sufficient notice to them. 22 Under clause 19(A) of the DCA the creditors who are bound by that covenant agree 'not to take or agree in the taking of any steps to wind up the company'. The passing of the resolution which the notice of the meeting of creditors proposes, while it would not be an operative step in the winding up of the company, would in my opinion constitute 'agreeing' in the taking of that step. Therefore the pre-21 January 1998 creditors would be prevented by their covenant from voting at the creditors meeting. Nevertheless they remain creditors of the company. Although clauses 21 and 22 of the DCA provide for the extinguishment of their debts, this is to occur only after they have received the distributions contemplated by the DCA. It has not occurred this time. Since they therefore remain creditors, under s.497 they are entitled to receive notice and should have received notice of the meeting. 23 Further it is appears from the annexure to the notice of meeting that no allowance has been made for the full value of the debts of the pre-21 January 1998 creditors although, as I have mentioned, those debts still remain outstanding notwithstanding the moratorium under the DCA. 24 It is true that under s.1322 of the Corporations Law, a proceeding is not invalidated because of a procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by order of the Court and by order declares the meeting to be invalid; and further, a meeting held for the purposes of the Corporations Law is not invalidated only because of an accidental omission to give notice of the meeting unless the Court declares the proceedings to be void. 25 In the present circumstances I regard failure to give notice to the pre-21 January 1998 creditors as a matter which may cause substantial injustice that cannot be remedied by an order of the Court and something which goes beyond the mere accidental omission: see, in particular, Royal Mutual Benefit Building Society v. Sharma [1963] 1 WLR 58; Myer Queenstown Garden Plaza Pty Limited Corporation v. City of Port Adelaide (1975) 11 SASR 504. 26 Be that as it may, the deficiencies of notice to which I have referred are matters which it is appropriate for me to take into account in the exercise of my discretion to intervene under s.445D(1)(g) rather than to leave the decision as to the winding up of the company to tomorrow's meeting. Even if the deficiencies could be cured under s.1322, the interests of certainty would suggest that it is appropriate to deal with the matter by orders today. 27 Next I take into account the fact that the directors have by resolution supported the plaintiff's application to the Court, notwithstanding that they authorised Mr McDonald at an earlier stage to convene tomorrow's meeting of creditors. This change of heart is far from determinative but is nevertheless a relevant indication of the company's attitude. 28 Finally, I have given some consideration to the effect of the order which I propose to make on the recoverability of tax under the provisions of s.222APE of the Income Tax Assessment Act. It might be said that by exercising its discretion in the way proposed, the Court is in effect aiding and abetting the directors to avoid what would otherwise be a personal liability on their part to pay the estimated tax which has been assessed against GSA. However in my opinion that reasoning would be faulty. Section 222APE of the Act in terms contemplates that the tax otherwise recoverable from the directors is to be remitted in certain circumstances. Section 222APE(1)(b)(iv) specifies as one of those circumstances that the company is being wound up. In other words, there is a statutory gateway to the remission of tax which might otherwise be paid by directors and it is available to be used if the winding up of the company has commenced in any appropriate way. One way in which the winding up of the company may commence is if I am satisfied in the exercise of my discretion that the DCA should be terminated. In that event the provisions of the Corporations Law and Corporations Regulations take over and cause a creditors voluntary winding up to occur. 29 Weighing up as best I can all of the above circumstances, I have reached the conclusion that in the special facts of this case an order should be made under s.445D(1)(g) for the termination of the DCA. The plaintiff seeks an order for costs and it appears to me clear that order should also be made. Therefore I propose to make the orders which the plaintiff seeks. 30 The plaintiff has handed up a draft order to reflect the reasons for judgment which I have just given. I initial and date that document for the purposes of identification and I make orders 1 and 2 in that document.

Dean-Willcocks v GSA Formwork

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