Deputy Commissioner of Taxation of the Commonwealth of Australia v Pddam Pty Ltd

(iii) whether it would be in the creditors' interests for the company to be wound up; and his or her reasons for those opinions; and (c) if a deed of company arrangement is proposed - a statement setting out details of the proposed deed. The regulations prescribe that the report under s 439A(4)(a) is to be in accordance with Form 507. At the second meeting of creditors the creditors may resolve that the company execute a deed of company arrangement specified in the resolution (even if it differs from any proposed deed details of which accompanied the notice of meeting) or that the administration should end or that the company be wound up (s 439C). No special majority is required. Division 6 provides for protection of a company's property during an administration, including restrictions on winding up and enforcement of charges and beginning or proceeding with proceedings in a court against the company (s 440D(1)). A deed is to contain certain specified requirements including the nature and duration of any moratorium period for which the deed provides and the extent to which a company is to be released from its debts (s 444A(4)). The deed is to be executed by the company within 21 days after the end of the second meeting of creditors or such further period as is allowed by the Court (s 444B(2)). A deed of company arrangement binds all creditors of the company so far as concerns claims (s 444D(1)).

The Court is given power to terminate a deed of company arrangement. Section 445D(1) provides: The Court may make an order terminating a deed of company arrangement if satisfied that: (a) information about the company's business, property, affairs or financial circumstances that: (i) was false or misleading; and (ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed; was given to the administrator of the company or to such creditors; or (b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or (c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or (d) there has been a material contravention of the deed by a person bound by the deed; or (e) effect cannot be given to the deed without injustice or undue delay; or (f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be: (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or (ii) contrary to the interests of the creditors of the company as a whole; or (g) the deed should be terminated for some other reason. Section 445G provides: (1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or the Commission, may apply to the Court for an order under this section. (2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground. (3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that: (a) the provision was substantially complied with; and (b) no injustice will result for anyone bound by the deed if the contravention is disregarded. Pddam and its Business Pddam was incorporated on 26 May 1981. From 1987 it was owned and controlled by Mr Stephen John Collis and his wife Mrs Marian Elizabeth Collis. They were the only directors of the company. Pddam designed and manufactured plastic display stands, its major product being stands for the display of sunglasses. The business was carried on at premises at 1844 Dandenong Road, Clayton, consisting of a factory, showroom and offices owned by a company called Steclamar Pty Ltd which was also owned and controlled by Mr and Mrs Collis. The banker of the business was the National Australia Bank Ltd. On 15 March 1989 the NAB took a debenture charge over the assets of Pddam and Steclamar. The principal debtor was Pddam which had borrowed $600,000 from the NAB and onlent that amount to Steclamar for the acquisition of the Clayton premises. Steclamar was a guarantor of Pddam's debt. From February 1990 Pddam was in arrears with payment of sales tax. There ensued a series of arrangements for payment of arrears and, in May 1991 and January 1992, statutory demands by the Australian Tax Office under the Corporations Law. Tax audits resulted in further demands for fringe benefits tax and group tax.

Appointment of Receiver and Sale of Business On 2 March 1994 the NAB appointed Mr Ian Carson receiver and manager of Pddam and on 9 March a like appointment was made in respect of Steclamar. Mr Carson had been informally monitoring the business on behalf of the NAB since about October 1993. At the time of his appointment the debt due by Pddam to the NAB was $618,914. Mr Carson thereafter carried on the business with a view to its sale. Also on 2 March the ATO served a statutory demand requiring payment of $248,282 outstanding sales tax, additional tax and penalty. On 7 March Mr Collis made an offer to Mr Carson to buy the business for $60,000 plus work in progress at cost. Mr Carson then prepared an information memorandum about the business and sought expressions of interest. He advertised in the Australian Financial Review and the Age and also wrote to firms appearing in the Yellow Pages as engaged in similar manufacturing work. Mr Carson received a number of responses but only two that he regarded as genuine, one from a consortium of management personnel at Pddam and the other from a company called Posam Pty Ltd which was controlled by Mr and Mrs Collis. By a fax dated 31 March Posam offered to buy plant, equipment, office furniture, old stock, work in progress and goodwill for $107,000. Mr Carson accepted that offer on the same day. From the beginning of April Posam carried on the business. About 16 former employees of Pddam continued to work for Posam. About two or three did not. On 28 April Mr Carson wrote to a Mr Mazzeo accepting his offer to buy the Clayton premises for $460,000 subject to contract. On the same day a petition by the ATO to wind up Pddam was served on the company. Appointment of Administrator Towards the end of May Mr Collis approached the second respondent Mr Graeme Lloyd Smith and sought his advice as to a possible voluntary administration of Pddam. He told Mr Smith that a winding up petition had recently been served on the company. On 26 May Mr Donald Wilson, a chartered accountant employed by Mr Smith, wrote confirming the discussions and giving as an "upper limit" an estimate of costs as follows:

1. Preparation and strategy prior to the appointment of an administrator $1,000
2. Costs to the first meeting, which would include the circulars to creditors, dealing with queries and conducting the meeting $1,500
3. Preparation of the proposed deed in conjunction with your lawyers, dealing with the petition, liaising and meeting with the Committee of Creditors appointed [by] the first meeting of creditors dealing with queries of creditors and calling and conducting the second meeting of creditors $7,500 $10,000 On 27 May Mr Collis told Mr Wilson that he wished to proceed with the appointment of an administrator and paid the $10,000. On 30 May Mr Smith signed the required consent and was appointed administrator by a resolution of the directors of Pddam. At some time in early June Mr Collis told Mr Smith that Posam would provide approximately $70,000 towards payment of Pddam's creditors but on the basis that employee creditors were to be paid in full. Mr Collis also mentioned a possible dividend of 2 cents in the dollar for other unsecured creditors. On 31 May Mr Smith gave notice of the first meeting of creditors. The meeting was held on Monday 6 June. A committee of creditors was elected and the meeting was adjourned to 10 June. Administrator's Investigation On 8 June Mr Smith swore an affidavit which was filed in the Supreme Court in support of an application for the adjournment of the winding up petition. He deposed that Mr Collis had informed him that Posam would make available for distribution amongst all of Pddam's creditors approximately $70,000 "if at all possible" to save the company from liquidation. He also deposed that he had not had a proper opportunity to have full and complete discussions with the receiver nor properly investigate and examine the company's books and records for the purpose of forming an opinion as to whether it would be in the creditors' interests for the company to execute a deed of company arrangement or for the administration to end or for the company to be wound up. He also exhibited a hand-written list received from Mr Collis detailing categories of creditors of the company totalling $1,486,976 as at 30 March 1994. The list included the NAB at $659,397, "staff liabilities" $60,000, trade creditors $247,216 and sales, group and fringe benefit tax liabilities totalling $516,885. Mr Collis told Mr Smith that the fringe benefits tax liability was likely to be approximately $300,000 rather than $259,823 which appeared in the list. The winding up petition was adjourned to 24 June. On 9 June Mr Wilson went with another accountant employee of Mr Smith to the Clayton premises. Mr Wilson met Mr Collis and inspected records made available by him, namely the company's accounts payable files for 1993 and 1994, bank statements and payment journals in relation to bank accounts operated by the company, alphabetical listing of trade creditors over the previous 12 months, cash payments and receipts journal, invoices from creditors, general correspondence including notices of legal complaints or judgments against the company and other accounts and financial statements. Mr Wilson noted there was a large number of COD transactions over the period from October 1993 when the NAB was monitoring the company's performance. There was evidence of creditors applying pressure for payment during that period. In an affidavit filed in the present proceedings Mr Wilson deposed: I was able to identify one potential preference payment to Amcor in the sum of $8,845. However given the small amount involved and my prior knowledge of Amcor's attitude to preferences, I concluded that an action to recover this amount would probably not be successful in the event that the company was wound up and a liquidator chose to pursue it. Mr Smith spoke to Mr Carson and the latter's assistant Mr Mark Bailey. The receiver said that former employees of Pddam would not be paid out of assets realised from the receivership, there was no possibility that monies would be available to ordinary unsecured creditors, and that when the control of the company was returned to its directors it would be devoid of any assets. Mr Bailey told Mr Wilson that the receiver had sold the plant, stock and equipment of the company to Posam, that it had been on the market for sale for a period of one month and that the Posam offer was the best offer received. Mr Bailey said that the receiver had prepared a report to the ASC as required by the Corporations Law but was not prepared to provide the report to the administrator claiming it was confidential. Mr Bailey also mentioned action by the company against the directors of a debtor company for trading whilst insolvent as a possible contingent asset but said he thought that such an action was unlikely to result in recovery. A balance sheet of the company as at 28 February 1994 showed current assets of $1,346,179, liabilities $1,489,242 and a net deficiency of $143,063. On 9 June the receiver faxed to Mr Smith a copy of his Form 507 report. Deed of Company Arrangement On 10 June Mr Collis wrote on behalf of the directors of Pddam to Mr Smith proposing a deed of company arrangement incorporating a compromise of two cents in the dollar to all creditors except his wife and himself and those creditors whose debts arose as a result of employee entitlements. Mr and Mrs Collis would receive no payment. As to employee entitlements, annual leave entitlements and long service leave entitlement of former employees would be paid in full as and when they were incurred and superannuation entitlements would be paid a dividend of fifty cents in the dollar due and payable as at the date of the appointment of the receiver and manager. The letter stated: The funds required to meet the above mentioned payments will be put forward by a third party associated with the directors, with the sum of $10,000 lodged with Madgwicks or the Administrator on or before 20 June 1994 and the balance on or before 20 July 1994. The proposal was discussed at the adjourned first meeting of the committee of creditors which was held on the same day. Mr Smith said that the approval of the creditors would be sought at the second meeting of creditors which would be held on 21 June. Acceptance of Deed On 14 June Mr Smith convened the second meeting of creditors by sending a notice in accordance with Form 429A together with a letter to creditors. The letter was in these terms: Dear Sir/Madam, Re: Pddam Pty. Ltd. ("Pddam") (Receiver & Manager Appointed) (Administrator Appointed) I refer to my letter to you dated the 31st May, 1993 in which I advised my appointment as Administrator of Pddam and enclosed the Notice calling the first Meeting of Creditors. That meeting was held and those creditors attending received preliminary reports from Mr. Stephen Collis and myself as Administrator and also a broad outline of a possible Deed of Company Arrangement (a Deed). Creditors present were also made aware that the Company's principal banker appointed a Receiver and Manager on the 2nd March, 1994. An application to wind up the Company was to be heard on the 8th June, 1994. At the hearing on that date the application was adjourned by the Court to the 24th June, 1994 and will be dismissed if a Deed is agreed. A Committee of Creditors comprising Ms. K Dennett from Markwood Craft Pty. Ltd., Mr. P. Spencer representing the former staff of Pddam and Mr. K. Hatten representing the Labour Union Co-Operative Retirement Fund. The Committee has met on two occasions and has considered the proposed Deed. Review of the Company's Affairs I am required, as Administrator, to form an opinion whether a Deed would be in the interest of all the Company's creditors.

I have had the opportunity to undertake a review of the affairs of the Company both in respect to the period before and since the appointment of the Receiver and Manager. That review which included an assessment of the recoverability of potential preferences has satisfied me that if the Company was placed in liquidation there would be no dividend available to any class of creditor. In addition, the Receiver and Manager has confirmed that when control of the Company is returned to its directors it will be devoid of any assets. Deed of Company Arrangement (Deed) The Directors are proposing that a Deed with the following principal terms be considered by the creditors at the Second Meeting to be held on the 21st June, 1994.

1. All debts owing by Pddam to creditors will be compromised by an offer to pay a dividend of two cents in the dollar to all creditors except:- (a) those creditors whose debt arises as a result of employee entitlements. (b) Stephen Collis and/or Marion Collis.
2. Those creditors, whose debts arises as a result of employee entitlements, will be paid as follows:- (a) Annual leave entitlements of former employees of Pddam be paid in full as and when they are incurred. (b) Long service leave entitlements of former employees of Pddam be paid in full as and when they are incurred. (c) Superannuation entitlements of former employees of Pddam to be paid a dividend of fifty cents in the dollar due and payable as at the date of appointment of the Receiver and Manager.
3. The funds required to meet the abovementioned payments will be advanced by a third-party associated with the directors, with the sum of $10,000.00 being lodged with Madgwicks, Solicitors, or the Administrator on or before 20th June, 1994 and the balance on or before 20th July, 1994. Second Meeting of Creditors Creditors proposing to attend the Second Meeting to vote on the Deed or who wish to have their vote recorded will be required to again complete the attached Proxy and Statement of Claim Form. I also enclose for your information a circular entitled "Information for Creditors". This has been prepared by the Insolvency Practitioners Association of Australia and supported by the Australian Securities Commission. I trust it will assist your understanding of the role of an Administrator under Part 5.3 of the Corporations Law. Should you wish to discuss the contents of this letter, please call me or Mr. Wilson from my office. Yours faithfully Graeme L. Smith Administrator Pddam Pty. Ltd. (Receiver & Manager Appointed) (Administrator Appointed)

Mr Smith intended that letter to be the discharge of his obligations under s 439A(4) of the Corporations Law. On 21 June the second meeting of creditors took place under the chairmanship of Mr Smith but was adjourned to the following day. The minutes recorded the following: The chairman notified the meeting that he had been advised that the proposal that was submitted with the notice of meeting dated 14 June 1994 required some technical matters to be addressed and that they would be rectified within the next 24 hours. As a result of that advice, received just prior to this meeting commencing, it was proposed that a motion be put to the creditors that the meeting be adjourned. The "technical matters", the details of which were not disclosed to the meeting, concerned the proposed execution of a deed between the NAB, Mr and Mrs Collis, Pddam and Steclamar. The deed as subsequently executed bears date 22 June 1994. Its existence only emerged at a late stage in the present proceedings. The deed recited the proposed deed of company arrangement proposals, the fact that the bank was a creditor of Pddam and had, "on the basis of certain statutory declarations which have been provided to the bank by Mr and Mrs Collis", agreed to vote in favour of the proposed deed of company arrangement and to release Mr and Mrs Collis, Pddam and Steclamar. The operative parts of the deed provided in substance that Mr and Mrs Collis would pay $30,000 to the NAB when it executed the deed and the sum of $10,000 on 21 August 1994. If the NAB received before 20 August 1994 a dividend from Pddam pursuant to the proposed deed of company arrangement of not less than $10,000 it would waive its entitlement to the $10,000 from Mr and Mrs Collis. The NAB covenanted to vote in favour of the proposed deed and further covenanted that upon receiving a dividend of not less than $10,000 or the payment of $10,000 from Mr and Mrs Collis it would release Pddam, Steclamar and Mr and Mrs Collis from all claims subject to its right to realise any assets secured by its mortgage and guarantee. In the event of the dividend or payment of $10,000 not being received by the NAB, Mr and Mrs Collis acknowledged their obligations to the NAB pursuant to their guarantee "without set-off or counterclaim or any other limitation whatsoever". At the adjourned meeting on 22 June all creditors except the ATO resolved that Pddam execute the deed of company arrangement outlined by the chairman subject to an amendment that the deed should not affect the NAB's ability to continue to collect the assets which were subject to its charge. The creditors voting in favour by person or by proxy totalled 23 in number and $1,089,316.67 in value. The ATO voted in respect of $616,581.32 and the NAB in respect of $663,914.35. Prior to the reconvening of the adjourned meeting a document which Mr Smith described in an affidavit as "the summary of affairs of the company" was made available to creditors. This document was a Form 509, as opposed to a Form 507. It was made up as at 30 May 1994 and appeared to be signed by Mr Collis on 20 June. The document consisted of one page. It conveyed the following information: $ Assets nil Preferential creditors entitled to priority over the holders of debentures under a floating charge 123,862 Awards owing and secured by debenture or floating charge over company assets to NAB 659,357 Preferential creditors 783,219 Creditors (unsecured) amounts claimed 1,096,658 Estimated deficiency 1,879,877 On 29 June the deed of company arrangement was executed. Employees' Entitlements Of about 18 employees of Pddam at the time of the sale of its business to Posam about 14 or 15 continued to work in the business. As at the date of the transfer of the business to Posam the estimated liability of Pddam for annual leave, as and when incurred, was $110,148.62. The corresponding figure for long service leave was $22,290. The estimated superannuation entitlements were $18,476. I turn now to the complaints of the applicant as to non-compliance with the Corporations Law. Investigation 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. While it might be theoretically possible, as counsel for the applicant submitted, for an administrator to use the powers of compulsory examination by the Court (ss 596A and 596B) that would involve giving notice of an application, waiting for the Court to deal with the application for an order and then if an order were made, waiting for an appointment for the examination, conducting the examination and reviewing the transcript thereof. With respect, the suggestion seems to me to be somewhat unrealistic. In the present case the investigation concerned a business with about 18 employees operating from the one premises. On the spectrum of manufacturing enterprises, it would be small rather than medium or large. The company had already been in receivership for over three months and under the informal supervision of its bankers for some five months prior to that. The nature of the investigation and the time spent and cost seem to me to be within the limits of practical proportionality in the circumstances. Report by Administrator However I think the administrator did not comply with s 439A(4)(a) and provide a report about the company's business, property, affairs and financial circumstances. The regulations make it clear that that report is to follow Form 507 with the detailed information therein contained. At most the administrator provided the attenuated form of report in Form 509. This was not sent out with the notice of meeting as required by s 439A(4), at most it was "made available" on the day and some short time before the meeting was convened. In any event it was signed by Mr Collis and not by the administrator. I think all this was a substantial breach of the requirements of the Law. Creditors are entitled to receive with their notice the detailed information about the company provided by a Form 507 report so that, before the meeting, they can properly consider their position, and if necessary take legal, accounting or commercial advice or make contact with other creditors. The Administrator's Opinion The notice of the meeting did not set out the administrator's opinions as to the matters set out in s 439A(4)(b) nor his reasons for those opinions. It is not enough, in my opinion, that creditors might have inferred that the administrator thought a deed of company arrangement was preferable to winding-up. A creditor provided with the facts stated in the letter of 14 June 1994 might have formed an opinion that a deed of company arrangement was preferable to winding-up, but the whole point of the provision is that creditors are to have the opinion of an independent expert as to each of the matters referred to in s 439A(4)(b)(i), (ii) and (iii), together with the reasons for those opinions. Directors' Report The directors did not give the report required by s 438B(2). The NAB Deed The negotiations about the proposed deed should have been disclosed to the creditors. It was quite misleading to describe these as "technical matters", an expression which would ordinarily convey that there were some minor procedural problems. Any arrangement that the company and its shareholders made with the only secured creditor of the company was plainly information which was material to any decision by the other creditors. Miscellaneous Matters The applicant referred to a number of matters, the non-disclosure of which were said to show inadequate investigation and report. They were also relied on as matters weighing against the exercise of any discretion in favour of upholding the deed. (i) Remuneration of Administrator The administrator's remuneration of $10,000 was approved at the adjourned second meeting of creditors, it being resolved that "the remuneration of the administrator and his staff be no more than $10,000 payable by the directors of Pddam or by a third party associated with the directors". The applicant complained that, this fee having been agreed on prior to 30 May, the agreement of creditors was "no more than a formality". I do not agree. The remuneration was something for the creditors to approve or not, like any other matter. The applicant also complained that the amount was inadequate to allow investigation. It would not allow "applications to be made for the examination of directors and others, far less the conducting of such examinations". Keeping in mind the paramount need for flexibility, informality and speed in Part 5.3A investigations and arrangements, I would not accede to the suggestion that $10,000 was, for a company the size of Pddam, manifestly inadequate. Since there is likely to be a shortage of money when companies are trading insolvently, the Court should be slow to encourage the erection of a large financial barrier to those seeking to avail themselves of the beneficial procedures of Part 5.3A. (ii)Sale of Business The business was sold for $111,881. The business was admittedly sold speedily, but if it was to be sold as a going concern that was inevitable. The evidence does not satisfy me that the receiver did not make genuine attempts to advertise the business amongst likely potential buyers. The sale was completed on 30 March and I do not think the administrator can be criticised for not making any further investigation than he did concerning the sale. Jurisdiction to Void or Validate The terms of s 445G have already been set out. It is not sufficient for the applicant to show there is a doubt. The existence of a doubt merely confers jurisdiction. The Court must then apply the law (including the exercise of any discretion conferred by the law) to the facts as found. The position is analogous to that of a Court asked to resolve doubts as to the construction of a will or other instrument. Discretion It was accepted that the Court has a discretion as to whether to set aside the deed of arrangement, quite apart from the establishment of grounds under s 445G(3). I have found that there were some substantial departures from the requirements of the Law. However there is no basis for concluding that setting aside the deed and consequent liquidation would confer any practical benefit on any creditor, including the applicant. The company has no assets and no realistic prospect for the recovery of assets has been shown. In any case, there remains a shortfall of some $116,000 on the debt owed to NAB. Any recovery would only be of value to unsecured creditors if and to the extent it exceeded that amount. The loss of benefits under the deed would moreover pose a real hardship on the former employees. The winding-up provisions of companies legislation have given special priority to claims of employees for over a century (see for example Companies' Wages Act 1885 (Vic) s 3). In that spirit I think I should be reluctant to make an order which would interfere with the benefits conferred on employees by the deed. The applicant argued that the employees could recover their entitlements from the receiver or from Posam. I am not persuaded that is so. In any case, any attempt at such recovery would in all probability be resisted and result in more litigation and further delay and cost. The benefits provided by the deed to the employees had to be considered by the creditors (including the employees) in a practical commercial way at the time the deed was proposed. I also take into account that the deed was not opposed by any creditor other than the applicant and was positively supported in the present proceeding by some creditors who swore affidavits. Of course the Court is not bound by the opinions of creditors, but they are entitled to be given at least some weight. After all it is the creditors who have suffered loss as a result of Pddam's insolvency. By the same token, a creditor whose debt has not been paid has to accept that his or her desire for a winding-up may now be defeated by a bare majority of creditors who support a deed of company arrangement. In this regard it is significant that, in contrast to a scheme of arrangement (s 411(4)) and analogous arrangements under Part X of the Bankruptcy Act 1966 (Cth), no special majority of creditors is required. The maxim that an unpaid creditor is entitled ex debito justiciae to a winding-up order is now subject to the substantial qualification that the law provides for the possibility of a deed of company arrangement being imposed against the will of creditors holding as much as 49 per cent of the company's debt. Orders The application therefore will be dismissed. But in view of the deficiencies which I have found established I think it was reasonable for the applicant to bring this application. Accordingly there will be no order as to costs.

I certify that this and the preceding twenty-five (25) pages are a true copy of the reasons for judgment of his Honour Justice Heerey. Dated: Associate Appearances Counsel for the applicant: Mr D Meagher QC with Ms J Davies Solicitor for the applicant: Australian Government Solicitor Counsel for the respondent: Mr J Beach Solicitor for the respondent: Madgwicks Dates of hearing: 27 and 28 February, 1 March, 27, 28, 29 and 30 November and 1 December, 1995