Overview
98 Before dealing with the detail of the various facts and transactions raised by Decon, I propose setting out some general considerations which are relevant to the approach I have taken to the complaints raised.
99 Having regard to authorities such as Britax and Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178, the key question is whether the Administrators have adequately performed their statutory duty to investigate such that they have a sufficient basis to recommend a DOCA instead of liquidation. The broad canvass of authorities by Dodds-Streeton J in Mediterranean Olives is, with respect, very helpful. In that case, her Honour referred (at [62]) to Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 where Cohen J (at 145-146) said:
As a preliminary matter, it should be noted that Pt 5.3A has its objects as set out in s 435A, namely the provision for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. The intention was, as has been indicated in several cases, to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or of the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Pt 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly.
(Emphasis added.)
100 Dodds-Streeton J then said (at [63]-[67]):
63. In Hagenvale the plaintiffs alleged, inter alia, that the administrator's report failed adequately to examine the relationship between the defendant companies or to quantify the amount of the preferences, and that the company failed to give sufficient information in relation to an action against the directors under s 588G of the Act. Cohen J did not consider that the alleged deficiencies, or alternatively their materiality, were established. His Honour reiterated that the administrator did not have the time or resources for investigation as in liquidation.
64. In Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 ("Pddam"), Heerey J declined to set aside a DOCA under, inter alia, s 445D(1) of the Act. Despite finding some substantial departures from statutory requirements, his Honour did not consider that the administrators' investigation or report was inadequate. His Honour stated (at 510):
I am not satisfied that the administrator failed to carry out the investigation required by s 438A(a). Perhaps more enquiries could have been made. Perhaps what the administrator was told by the directors and the receiver might not have been taken at face value. It is often possible to say of an investigation that, in retrospect, more could have been done. However the case that the applicant seeks to make out is not one of an inadequate or negligent investigation, but of a failure to comply with a statutory requirement, so that there was in truth no investigation at all. The passages already cited from the Harmer Report and the explanatory memorandum indicate that the investigation is intended by Parliament to be a swift and practical one. Part 5.3A assumes that the company in question is either trading while insolvent or likely to be in that position within a predictable period of time: see s 436A(1)(a). It is self-evidently essential that such a state of affairs be brought to an end promptly, either by the execution of a deed or by winding up. The tight time frames set for the convening of the first and second meetings of creditors are consistent with that need.
64. Heerey J also took into account, in the exercise of his discretion, that there was "no basis for concluding that...liquidation would confer any practical benefit on any creditor, including the applicant" (at 512) and that the loss of benefits under the DOCA would impose real hardship on former employees.
66. In Spiteri v Georges [2002] VSC 473, Hansen J reiterated that the administrator must act quickly in relation to both the first and second meeting of creditors, and in investigating and forming an opinion. His Honour dismissed an application by the director of the company to remove the administrator and set aside his decisions allowing a party to vote as a creditor in a particular amount, on grounds including alleged partiality and lack of independence.
67. Hansen J observed that where the director, contrary to the obligations imposed by the statute, had deliberately starved the administrator of information by failing to deliver the books and records, attend the meeting as required or otherwise assist, the administrator necessarily relied on information from creditors, on which the decision to admit the disputed claim was open (at [88]).
101 Dodds-Streeton J then turned to Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 45 ACSR 612, where Austin J described the administrator's duty to investigate as follows (at [339]):
An administrator has a statutory duty under s 438A to investigate the company's business, property, affairs and financial circumstances. It is possible that he or she may fall under an obligation to obtain legal advice in order to discharge that duty properly in the facts of the case. But in assessing whether any such duty has arisen, the court is bound to take into account the limited time available to an administrator to carry out his or her investigations, the extent and complexity of the tasks to be carried out during that time, and the availability of funds for these purposes: see the Pddam and Portinex [Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391] cases, cited above. In some cases it will be open to the court, bearing in mind such considerations, to conclude that something less than an independent legal assessment will be sufficient.
102 Her Honour also noted that in Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232, Lindgren J concluded (at [198]) that, on the basis of a number of provisions of Pt 5.3A, an administrator was required to act with expedition within a tight timeframe, which should be extended or adjourned only exceptionally. Her Honour continued (at [70]):
His Honour referred to the consistent distinction in relevant authority between the extent and quality of information available and investigations performed in, on the one hand, a voluntary administration and, on the other hand, a liquidation. In the former, the investigation was to be "swift and practical", as stated in Pddam at [226].
103 Next, Dodds-Streeton J referred to Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) [2010] FCA 352, where Finkelstein J ordered the removal of liquidators pursuant to the former s 503 of the Corporations Act because, inter alia, they failed while administrators to adequately investigate and report on potential claims which, if successful, might have led to recoveries which would see the creditors better off than under the DOCA they had recommended, but which was subsequently set aside. In that case Finkelstein J stated (at [14]):
Before dealing with this complaint, it is necessary to say something about the standard of investigation which an administrator is required to undertake. By reason of s 438A of the Corporations Act, an administrator is under a duty to investigate the company's affairs so as to be able to form an opinion about what future course of action is in the creditors' best interests and inform the creditors of that opinion. If the administrator has insufficient time before the second meeting of creditors at which the creditors will consider the administrator's advice to form this opinion, he or she may seek an extension of the convening period for the second meeting. In Bovis Lend Lease Pty Ltd v Wily ... Austin J said that there may be circumstances when the administrator needs to go beyond his statutory duties of investigation. The existence of a duty to make further inquiries would depend on "an assessment of the nature of the question to be investigated, the information in the administrator's hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors' decision": at [325]. Equally, however, an administrator is not required to undertake investigations to the same extent as a liquidator, given the time constraints imposed by Pt 5.3A: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391 ... at [125].
104 In Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395, as Dodds-Streeton J noted, the majority of the Court of Appeal held that the trial judge erred in finding, inter alia, that an administrator's investigation was inadequate. An important factor, as Giles JA (with whom Meagher JA on that issue agreed) stated at [213], was that:
at no time in his cross-examination was it put to [the administrator] that he should have done more by way of preliminary investigation, that he had failed to consider breach of fiduciary or statutory duties as distinct from preference or that his investigation was inadequate to permit him to vote in favour of the [DOCA].
105 Dodds-Streeton J also examined a number of authorities which had considered the relevance of an inadequate investigation by an administrator to the termination of a DOCA pursuant to various potentially overlapping provisions of the Corporations Act. For example as her Honour stated, in Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707, an inadequate investigation by administrators was an important factor in Derrington J's decision to set aside a DOCA pursuant to s 447A of the Corporations Act. The resolution to execute the DOCA was opposed by the major creditor with a claim for over $27 million but carried by the administrator's casting vote. Under the DOCA, the major creditor would receive $80,000 (as opposed to nothing on winding up) but the other unsecured creditors would receive a higher proportion of their respective debts. Derrington J accepted that the DOCA unfairly discriminated against and prejudiced the plaintiff. Despite the plaintiff's real but small advantage under the DOCA, his Honour found that in a number of areas, the administrator's enquiries were insufficient to justify his recommendation and his casting vote in favour of the DOCA. In particular, the administrator did not adequately investigate the sale of certain substantial company assets, the adequacy of the consideration for shares, the value of an asset subject to security or the reasons for, and adequacy of, the director's contribution. Derrington J stated that the administrator, who acknowledged that his investigation was somewhat superficial, gave very unsatisfactory evidence which did not establish that an adequate enquiry had been undertaken. The administrator produced minimal supporting documentary material and did not assist the Court (at 710).
106 Dodds-Streeton J referred to JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691 where Santow J terminated, pursuant to, inter alia, ss 445D(1)(a), (b), (c), (e) and (f) of the Corporations Act, a DOCA entered by the corporate trustee of a family trading trust, which was narrowly approved by a vote of creditors, contrary to the administrator's recommendation. Santow J found that the company misled the administrator about its entitlement to an indemnity from trust assets, deliberately deprived him of access to essential books and records and dishonestly advanced a scheme to defeat creditors' claims. Dodds-Streeton J continued (at [84]-[87]):
84. While those matters alone may have justified setting aside the DOCA, Santow J's decision was fortified by his finding that the return under the DOCA would be likely to be less than on liquidation. That circumstance was relevant both to whether the DOCA operated oppressively or unfairly prejudiced a creditor or creditors, and to the Court's overall discretion to terminate a DOCA.
85. His Honour considered various calculations of returns on both the liquidation and DOCA scenarios. He concluded that liquidation (favoured by the administrator) was likely to afford the better return as, inter alia, the DOCA was based on the false assumption that the trustee had no right of indemnity against trust assets (at [90] [96]).
86. Santow J found that a number of serious improprieties and instances of misconduct were established. The director or his associates furnished a wholly inadequate and false RATA, denied the existence of the indemnity, fraudulently altered the trust deed, arbitrarily distinguished between creditors, acquired sufficient claims to control the statutory meetings, frustrated the administrator's attempts to carry out his statutory duties to investigate the company's affairs and report to creditors, propounded a DOCA which was blatantly oppressive to creditors, prevented the administrator from obtaining access to the Court and used votes to require adoption of the DOCA. The state of production of the books and records was also unsatisfactory.
87. In such circumstances, his Honour concluded that it was important for a liquidator with adequate powers to investigate the transactions identified as potential avenues of recovery. The misfeasance and state of the books impeded a concluded view on those transactions, but there were "sufficient indications in support of it to treat this as an independent basis for setting aside the deed" (at [101]).
107 As her Honour noted, in Bidald, Campbell J terminated a DOCA pursuant to s 445D(1)(b), (c) and (g) of the Corporations Act, in circumstances where the report to creditors contained materially false and misleading information and omissions, there were material contraventions of, and departures from, the DOCA, and the company would be insolvent when the DOCA came to an end.
108 Referring to Re Octaviar Ltd (No 8) [2009] QSC 202, Dodds-Streeton J noted that McMurdo J ordered the termination of certain DOCAs entered into by companies which had suffered a major group collapse, on grounds including (in relation to one DOCA) the provision of misleading information to creditors and the omission of information about the company's financial circumstances which could reasonably be expected to have been material to the creditors who, by a majority, voted for the DOCA (at [112]). Dodds-Streeton J continued (at [96]-[99]):
96 Her Honour observed that in the context of the major corporate collapse (at [175]), there were a number of avenues for potential recovery and, although full investigation and prosecution of the claims would be time consuming and expensive, there was evidence that litigation funding would be readily available. Further, most of the votes for the DOCA were by parties with an interest in avoiding a liquidator's enquiry, which, while it did not justify disregarding their views, detracted from arguments that the DOCAs merely represented a commercial decision (at [176]-[177]).
97 Her Honour also considered that in circumstances where, inter alia, the companies made extensive losses shortly after an appearance of good financial health (at [178]), it was in the public interest to set the deeds aside pursuant to s 445D(1)(g) in order to permit a liquidator's examination (at [179]).
98 Her Honour adopted the observations of Campbell J in Bidald (at [180]). She observed that in the case before her, the dividend to creditors under the DOCAs was small and there were prospects of preference, uncommercial transaction or insolvent trading recoveries. Although the evidence was mostly slight and any actual recoveries would depend on obtaining funding (at [180]), given the size of the corporate collapse, its impact on many institutions and individual investors, and the size of the possible recoveries, investigation of the transactions was likely to be financed by investors in outcomes of the litigation which might follow (at [181]).
99. McMurdo J concluded at [182]:
Overall, the termination of the DOCAs would be beneficial also for the fact that it would permit some investigation of transactions and conduct which could lead to at least some of the persons responsible for some of the group's demise being brought to account. The public interest is therefore a consideration in favour of terminating the deeds.
109 Dodds-Streeton J referred to Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1997) 24 ACSR 47, where Branson J rejected an application to terminate a DOCA under s 445D(1) of the Corporations Act, based on the alleged inadequacy of the administrator's investigation of the likelihood of recovery from the holding company or the directors in liquidation. The applicant creditor alleged that the DOCA would provide a lower return than a liquidation and constituted an attempt to 'ride roughshod' over the creditor's rights. Her Honour continued (at [110]-[115]):
110. Branson J found that although the administrator's report was deficient in failing to specify whether voidable transactions were apparent, the omission was not material, as the administrator advised the creditors' meeting of legal advice that actions against the holding or associated companies and the directors in a liquidation were not sustainable. Her Honour also found that the statement in the administrator's report that property had been valued as a going concern was false but not material in the relevant sense.
111. The applicant also alleged that the administrator failed properly to consider potential claims against the directors and the holding company under various statutory provisions in a liquidation. Branson J noted "obvious difficulties with, and limitations on, inquiries as to the reasonableness of conclusions reached by administrators on the question of the likelihood of recoveries by a liquidator should one be appointed" (at 51). Her Honour recognised that she could not reach a final conclusion as to the results of claims which might be made under Part 5.7B of the Corporations Law should a liquidator be appointed.
112. Her Honour (at 51) referred to Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 at 34, where Lehane J stated:
In my view the task of the Court in a case such as this is to form a view, on all the material before it, as to whether there is a real prospect that in a liquidation claims in which (or in the fruits of which) the second secured creditor has an interest could and would be pursued so as to afford to the second secured creditor recovery of more of the debt owed to it than it would obtain under the proposed deed of company arrangement.
113. Branson J stated (at 53):
I am not satisfied on the evidence before me that there is a real prospect that a liquidation claim in which the applicant has an interest could and would be pursued were the company to go into liquidation so as to afford the applicant recovery of more of the debt owed to it than it would obtain under the DOCA.
114. Branson J rejected the allegation that an asset was inaccurately valued. Her Honour accepted the administrator's evidence about the information he provided to the independent valuer. Her Honour found that the applicant had not queried the valuation and, had it done so, the administrator would not have opposed obtaining a further valuation.
115. Branson J declined to terminate the DOCA under s 445D of the Act.
110 Dodds-Streeton J also discussed Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453 per Austin J, where the Commissioner, sought to terminate or set aside DOCAs entered into by several companies, alleging inter alia, that the administrator was invalidly appointed, had wrongly admitted a party to vote as a creditor, and failed to investigate the companies' affairs diligently. Her Honour continued (at [122]-[130]):
122. In particular, the plaintiff alleged that the administrator's investigations of possible preferences and insolvent trading by the directors were inadequate. The DOCAs were thus approved on the basis of a misleading report, which failed to give a true and fair view of the relevant affairs of the companies and "the effect of each deed [was] to forestall a proper investigation of the affairs of each of the companies and the conduct of their directors, former directors and advisers" (at [6]), so that the public interest required their termination. The plaintiffs sought declarations that the DOCAs were void under s 445G(2) of the Act based on the same allegation.
123. In the case of one company, the related creditor abstained from voting on the resolution to enter a DOCA and all creditors save the plaintiff voted in its favour, including a creditor the value of whose debt exceeded that of the plaintiff's debt. The resolutions for the other two companies to enter a DOCA were supported by all creditors save the plaintiff.
124. Under the DOCAs, a deed fund was established for distribution to creditors save for the related parties.
125. Austin J refused to terminate the DOCAs due to a combination of factors, including the risk of prejudice occasioned by unexplained delay in bringing the application (at [78]).
126. Austin J considered relevant authority, including Khoury. His Honour observed at [86] that s 600A(1)(c)(i) of the Act appeared to direct attention to the interests of the company's creditors as a whole, rather than the interests of a class of creditors such as the dissenting creditors.
127. His Honour stated that some judicial approaches to s 600A(1)(c)(ii) appeared to require a comparison between the position of the dissenting creditors under the DOCA with their position if that DOCA had not been executed and the company had been liquidated (at [87]). In contrast, other approaches apparently contemplated a comparison between the existing DOCA and a different or amended DOCA. Austin J observed that where no "third" option was available, the dissenting creditor's position under the DOCA should be compared with its position under winding up (at [90]). If it were not feasible to negotiate a different kind of DOCA, the question of prejudice boiled down to whether the creditors were better off with the proposed DOCA or liquidation, as there would be no alternative on the facts (at [89]). Nevertheless, a difference between the treatment of one group of creditors and other creditors did not, in itself, constitute unreasonable prejudice within the meaning of s 600A(1)(c)(ii), as creditors could agree openly and in good faith on other than equality of treatment.
128. In Portinex, Austin J concluded that the plaintiff was better off under the DOCA, as it received a small distribution and payments of tax from two companies, which, in winding up, might constitute preferences. Further, the DOCAs kept the two principal operating companies afloat, offering creditors distributions better than they would receive on winding up, supported by a guarantee. His Honour also took into account that entry in the DOCAs was part of a package of benefits (including some payments for arrears of tax) for which the plaintiff had negotiated and received (at [94]).
129. Austin J recognised that the plaintiff lost the potential benefit of any recoveries a liquidator might obtain from directors for insolvent trading or from other related creditors for voidable transactions, but in refusing to grant relief under s 600A of the Act, concluded (at [92]):
However, given the cost of proceedings for recovery and the evidence suggesting that the Deputy Commissioner would be reluctant to fund proceedings, it is not only uncertain that proceedings would be successful, but doubtful that they could be taken at all.
130. His Honour also refused to terminate the DOCA under s 445D of the Act.
111 As the authorities surveyed by Dodds-Streeton J demonstrate, the Court's discretion is wide but should be exercised having regard to the interests of creditors and also the public interest. Additional support for the proposition is found in Bidald (at [287]) and TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (Administrators Appointed) [2012] NSWSC 766 per Black J (at [27]), citing Emanuele v Australian Securities Commission (1995) 63 FCR 54 and Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261, where Master Newnes (as his Honour then was) said (at [57]-[65]):
57 When considering whether to terminate a deed under s 445D, the Court must approach the discretion provided under s 445D(1) by looking at the whole of the effect of the deed and assessing its unfairness, if any, to the plaintiff, but in doing so, must bear in mind the scheme of Pt 5.3A of the Act and the interests of other creditors, the company and the public generally: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1997) 16 ACLC 95; Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 16 ACLC 540 at 544; Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48. The mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed; the mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement: Lam Soon Australia (supra); Khoury v Zambena (1997) 15 ACLC 620 at 627.
58 In deciding whether effect cannot be given to a DOCA without injustice within the meaning of s 445D(1)(e), the Court must examine the effect of the DOCA and not its purpose; alleged improper purpose is irrelevant: Cresvale Far East v Cresvale Securities (2001) 37 ACSR 394 at [189]. In that case it was held that the fact that the purpose of a provision in a DOCA, and even its effect, was to dilute existing shareholdings was not, of itself, a reason to terminate the DOCA.
59 In considering whether a deed is oppressive or unfairly prejudicial or discriminatory under s 445D(1)(f), it is necessary to consider the effect of the deed against the background of the general principles underlying Pt 5.3A, which establish the basic right of a creditor to be paid or to wind a company up, or to have the company administered by the administrator in a way that keeps the company's business going and will see the creditor paid something out of the property of the company. If a deed departs from that, a creditor is more easily able to say that it is operating oppressively: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at 99.
60 Where s 445D(1)(f)(i) is relied upon, the Court looks at the whole of the effect of the DOCA and assesses its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Pt 5.3A, the interests of the other creditors, the company and the public generally: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at 98. In order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness: Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 at 151; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453. The criteria that guide the Court are fairness and practicality of the scheme as a whole: Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 710.
61 It is for the Court to decide whether, in balancing the interests of the creditors as a whole against minority creditor interests, the DOCA acts so as to unfairly prejudice the interests of the minority. The Court decides this "according to ordinary standards of reasonableness and fair dealing". Whether the conduct is unfairly discriminatory will be judged on standards which reasonable commercial persons acting bona fide would think to be fair: Jenkins v Enterprise Goldmines NL (1992) 6 ACSR 539 at 550. That case was concerned with an application of oppression of members but the expression "oppressive or unfairly prejudicial to, or unfairly discriminatory against" in s 445D(1)(f) is in the same terms as s 232 and, so long as it is borne in mind that in the former the oppression may be of creditors by other creditors rather than of members by directors or other members, the case law dealing with oppression under s 232 is of assistance: Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [100].
62 The fact that the deed discriminates between creditors will not of itself establish that it is unfairly discriminatory or prejudicial: Khoury v Zambena Pty Ltd (supra) at 627; Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (supra). The test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice: Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [102]. Some degree of discrimination is not necessarily unfair. Thus it is clear that a DOCA may provide the differential dividends among creditors: Hamilton v National Australia Bank Limited (1996) 66 FCR 12 at 38. Part 5.3A does not require a pari passu distribution. What is required is a better return to creditors than an immediate winding up: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (supra). That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up.
…
65 Even if the Court is satisfied that one of the grounds under s 445D(1) has been made out, it retains a discretion as to whether or not to terminate the DOCA. The discretion is a wide one. It is to be exercised having regard to the interests of the creditors as a whole and to the public interest: Emanuele v Australian Securities Commission (1995) 63 FCR 54; Khoury v Zambena Pty Ltd (supra); Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [105].
(Emphasis removed from case names.)
112 As the authorities make a clear, there is a wide range of evaluative, discretionary decisions that administrators are required to make with the benefit of appropriate expertise about what information should be verified and what can be followed up in the constraints of the limited time and resources available.
113 The authorities note that what has to be done is to be carried out within a three week period as determined by statute. Although it may be open to administrators to apply to the Court for an extension of time in an exceptional case, this also is very much a matter of their judgement as to the likely utility in doing so. I do not regard that as being a pertinent factor in this case as it was not put to Mr Melluish in cross-examination that he should have sought an extension of time from the Court. The statute does not contemplate that an administrator will be able to conduct a speedier, but just as effective, version of a liquidator's investigation.
114 The statute of course is not prescriptive about what particular inquiries or investigations an administrator must make. It is clear that this also is to be a question of judgement for the qualified professional.
115 Decon has not gone so far as to suggest that the Administrators have breached the statutory duty. Decon's case is that the Court should be satisfied that there are aspects of the underlying facts which render the DOCAs unsatisfactory such that the Court should intervene to set aside them and order consequential relief.
116 But to illustrate these points, Mr Melluish was asked a series of questions about what matters he had examined and why he hadn't examined others. These inquiries were entirely appropriate but it was not squarely put to him, nor is it Decon's case, that he acted negligently or in breach of the statutory duty. It is certainly not a finding I would make on the evidence. At a general level, I consider that Mr Melluish, an independent and experienced insolvency professional, gave evidence frankly as to decisions taken, errors or omissions made, and matters not pursued, explaining in each instance why that was so and as to his evaluative approach.
117 I accept the Administrators' submission that the failure to recognise the judgment debts at the first meeting of creditors is something of a distraction now because it has no bearing on the outcome of the ultimate decision to adopt the DOCAs. The debts were recognised at the second creditors meeting. The explanation given by Mr Melluish for not recognising the judgment debts at the first meeting by reason of the existing cross-claim was in my view plausible and falls within the discretionary range of decision-making which is appropriate for an administrator. I do not consider that the decision reflected any bias against Decon, and it is difficult to see how any material prejudice arises given that Decon was admitted for the full amount of its Judgment Debt at the second meeting.
118 Speaking generally again, in relation to the various errors or omissions in reports to creditors, taken individually or indeed cumulatively, I am not satisfied that they are, objectively viewed, sufficiently 'material' in the sense used in the legislation to the vote of the creditors. I was not persuaded that objectively viewed there were errors or omissions which might realistically have affected the outcome on the DOCA vote: Bidald (at [292]-[294]).
119 At all times for these single purpose companies, the fundamental issue for the Administrators was the likely comparative return to creditors by entry into the DOCA on the one hand or liquidation on the other. There was no prospect of a return to trade. In my assessment, the Administrators have conducted that exercise sensibly and have applied their skill and expertise to the evaluation of the comparative prospects of recovery by creditors in the two situations.
120 Another way to approach the analysis is to ask the question whether, if hypothetically voting came down to a casting vote of the Administrators, it would have been appropriate for the Administrators to support the DOCAs. That is to be answered in this case at least, by reference to the question of whether there is a realistic prospect of a better return under a liquidation such that entry into the DOCA would be unfairly prejudicial to Decon. I consider that in that hypothetical scenario it would be appropriate for the Administrators to support the DOCA with a casting vote. Indeed, the Administrators have deposed to the fact that, even in light of errors identified by Decon which they have accepted, they are still of the view that the DOCAs will provide a better prospect of return than under a liquidation and would have exercised any casting vote accordingly.
121 This is intended to be a practical insolvency regime. It is often of course disappointing to creditors as is the case in the present circumstances. That is more to do with an absence of available funds for creditors, rather than who should get them. But the statutory object is to achieve the formation of a relatively prompt independent expert view as to what course to recommend to the creditors in all the circumstances. Sometimes this is more of a rough and ready process as the authorities acknowledge and not an exact science, but of course qualified administrators are suitably trained to perform that task. The availability of an administration as an insolvency tool is to provide a trade-off for what would otherwise be a far more time-consuming and usually expensive process in liquidation.
122 Decon has also raised a question about the actual date of insolvency as assessed by the Administrators. Decon's argument relies on statements made by the companies' then senior counsel to the Supreme Court and the Court of Appeal to the effect that, absent a stay of Decon's Judgment Debt obtained in 2019, the companies were insolvent. When read together with statements recorded by Stevenson J that the companies had acknowledged their debt to Decon 'as long ago as 11 October 2018', Decon says it is reasonably arguable that the companies were indeed insolvent from at least October 2018. In their reports, the Administrators' view, on the basis of the investigations carried out, was that the companies were insolvent from at least June 2019. Decon has led no further evidence to support its asserted date of insolvency and while it may be an arguable position, I do not see this as being a fertile field of complaint.
123 Another argument advanced for Decon is that the Administrators failed to recognise the importance of different creditors for different companies within the group such that treating TDH, KRI and TFM as though they are all part of one group entity fails to distinguish between the financial consequences attaching to the separate entities in their own right. The approach taken by the Administrators was essentially that although securities were given over the real property of both KRI and TFM, those companies derived the benefit of the Epping Development. In relation to the Administrators' effectively proceeding on a group basis, the rationale of that decision was that the benefit of the purchase of the land accrued to KRI and TFM. The Administrators considered it was therefore appropriate for those companies to bear some burden in exchange for the benefit. I will come to the detail of these transactions in due course.
124 I am not persuaded that the Administrators relevantly erred in this regard. Other than some relatively minor errors in the amounts involved, the two companies shared the same creditors as might be expected because they were engaged in what would typically be understood as a joint enterprise. It has not been shown that this gloss, if it be fairly so described, resulted in any adverse or incorrect outcome for creditors as a whole, or even Decon specifically.
125 There is an important question of onus. It seems clear from Britax (at [91]), Mediterranean Olives (at [179]) and Bidald (at [138]) that the onus rests upon the plaintiff to establish that s 445D(1) has been engaged. There is some suggestion by Besanko J in Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846 (at [1384]) that while the plaintiff has the onus to show the section applies, it may be within the discretion of the Court to treat that onus as shifting. Either way, in this case the consideration for the Court is whether or not there are realistic prospects of a greater recovery under liquidation (and that the Administrators were in error in concluding otherwise) and whether Decon has discharged its onus of establishing that fact. I am not satisfied that it has. Generally speaking but importantly, there is some prospect of establishing some possible breaches, but there is little to no evidence as to the likely benefits of doing so in a recovery sense. That matter must be approached in a practical way guided by suitable expertise based on experience and qualifications. I am satisfied that the Administrators have approached the question in this manner. Relevant to the Administrators' recovery assessment was the understanding that the former director, Mr Eric Zhang, owns only one real property with an estimated value of between $1.6 million and $2.2 million however during cross-examination Mr Melluish conceded that the Administrators were not aware of the exact financial positions of Mr Eric Zhang or TDH. The current director, Mr Guoqiang Zhang was only appointed in April 2020 and would not be of interest in relation to transactions occurring prior to that time. In any event, he does not own real property in Australia. The former director does own shares in TDH. The value of those shares is quite unclear. Although Mr Melluish did ask for that information, he was not provided with it. He had no power of compulsion to obtain the information.
126 Similarly, on the topic of practical recovery, I note that Decon has expressed a willingness and ability to fund litigation which may be brought by a liquidator in respect of arguably voidable transactions, but in terms of substantial information relevant to capacity to fund such litigation, there are a few concrete details.
127 It is somewhat unusual that the DOCA proponent has not participated in the proceedings before the Court. Nonetheless, I do not consider there is an appropriate basis to draw an inference one way or another by reference to that fact. There is more than enough material before the Court on which to form a view on the key questions. Amongst the numerous possible explanations for non-participation is the obvious one of saving further cost especially when the Administrators have been able to provide detailed information and explanation to the Court.
128 Dealing again, at a general level at this stage, the security granted to Shanghai Yilian arose in 27 November 2018 when KRI and TFM guaranteed TFM's debt to Shanghai Yilian. It does not appear to be challenged that TFM provided part of the purchase price for the Epping land through a loan from United Investment Australia Holdings Ltd and in turn from Shanghai Yilian. The Administrators proceeded on the basis that it was appropriate in the circumstances for TFM and KRI to assume obligations to Shanghai Yilian because TFM's obligations arose from that purchase in which TFM and KRI derived a direct and material financial interest. In a liquidation perhaps there might be some scope for challenging an approach on this basis but there may also be weaknesses in the challenge and certainly there would be a danger of spending good money in a somewhat speculative pursuit.
129 In any event, as disclosed in the creditors' report for TFM, the assessment of the Administrators was that there would be difficulty in pursuing or further investigating the dealings with Shanghai Yilian because they appear to have arisen in November 2018 when the Administrators regarded the insolvency date as being between June and September 2019. Similar considerations apply to the other impugned transactions which I examine in more detail below.
130 There seems little doubt that the plaintiff has correctly established that there were inadequacies in the book keeping and recording of those advances. The Administrators have been alive to this and have conducted investigations on this topic and concluded that despite these deficiencies, they are satisfied that monies have been advanced for the benefit of the companies rather than any other persons. They have justified those conclusions in a way which I also explain more fully below. I am not satisfied that there has been any error in the approach taken to the evaluation.
131 As to oppression or prejudice, Decon would need to establish that any oppression or prejudice was unreasonable. It points to the terms of the DOCAs which provide for pursuit of the cross-claim against Decon. This does not constitute material prejudice in the sense explained by the authorities. There is no suggestion that this course could not be pursued under a liquidation. Decon has not been treated as a separate class of creditor against which adverse considerations would be applied.