GREENWOOD J:
1 These proceedings are concerned with an application made, alternatively, under ss 1321, 445D and/or 447A of the Corporations Act 2001 (Cth) (the "Act") by the Deputy Commissioner of Taxation ("DCOT").
2 For the purposes of s 1321, the DCOT seeks a declaration that a notice lodged with the Australian Securities & Investments Commission ("ASIC") on 12 February 2016 under s 445FA(1)(c) of the Act by Mr William Hamilton bearing the title "Notice that deed wholly effectuated" in his capacity as administrator of BE100 Property Investment Pty Ltd ("BE100") by which Mr Hamilton contended that a Deed of Company Arrangement ("DOCA") dated 22 July 2015 between Mr Hamilton as administrator and BE100 (administrator appointed) was "wholly effectuated by its terms under s 445C(c) of the Act", failed to comply with "section 445F of the [Act]" (which should be a reference to s 445FA(1) of the Act).
3 Alternatively to that declaration, the DCOT seeks a declaration that Mr Hamilton's purported termination of the DOCA on 12 February 2016 failed to comply with the "provisions of the [DOCA]".
4 A further declaration is sought that Mr Hamilton's purported termination of the DOCA on 12 February 2016 is void or otherwise of no effect.
5 Additionally, the DCOT seeks an order that the notice lodged by Mr Hamilton with ASIC on 12 February 2016 which asserts that the DOCA was "wholly effectuated" on or by 12 February 2016 be set aside.
6 As a consequence of one of those alternative declarations and the orders so sought, the DCOT seeks an order that the DOCA is terminated; BE100 be wound up pursuant to the provisions of Pt 5.4B of the Act and that Mr Steve Nicols be appointed liquidator of BE100.
7 For the purposes of ss 445D and/or 447A of the Act, the DCOT seeks orders under those sections that the purported termination of the DOCA has no effect; the provisions of Pt 5.3A of the Act are to operate in relation to BE100 as if the company's DOCA had not been terminated on 12 February 2016; Mr Steve Nicols be appointed administrator of the DOCA; and Mr Steve Nicols call a meeting of BE100's creditors within 28 days for the purposes of those creditors determining BE100's future consistent with s 439C of the Act which contemplates the various resolutions the creditors might pass at such a meeting.
8 Apart from the substantive relief sought by the DCOT, an order is also sought that Mr Hamilton pay the DCOT's costs of the proceeding for the substantive relief. Alternatively to that order, the DCOT seeks an order that its costs of the proceeding be costs in the winding up of BE100 or of the administration of that company and such costs be reimbursed in accordance with s 466(2) or s 556(1)(b) of the Act.
9 The application by the DCOT is supported by an extensive affidavit of Ms Fiona Hill affirmed on 2 March 2016. Ms Hill is an officer employed in the Debt Section of the Australian Taxation Office (the "ATO"). Ms Hill is the ATO Case Officer responsible for the conduct of the proceedings on behalf of the DCOT.
10 Mr Hamilton has sworn an extensive affidavit dated 22 April 2016 in the proceeding. In relation to the relief sought by the DCOT, Mr Hamilton's position is that he does not oppose any of the orders sought by the DCOT on the substantive matters apart from the question of the costs order sought against him personally. To the extent that the DCOT seeks an order against Mr Hamilton for the payment of the costs incurred by the DCOT of and incidental to the proceedings, on any of the grounds advanced by the DCOT in support of that order, Mr Hamilton resists the grounds on the merits and resists any such order for costs being made against him personally.
11 Ultimately, the questions in issue turn upon events which occurred in February 2016. However, those events are informed by other contextual matters which need to be identified both in relation to the question of whether the Court is satisfied that there is a proper basis for the making of any of the declarations or orders sought in relation to the DOCA and BE100 and in relation to the contention that grounds are made good as a matter of fact and law upon which Mr Hamilton ought to be ordered to pay, as a proper exercise of the discretion, the DCOT's costs of the proceeding.
12 Fundamentally, the DCOT contends that Mr Hamilton acted unreasonably and with unreasonable due haste in lodging the notice with ASIC on the morning of 12 February 2016, purportedly in compliance with s 445FA(1) of the Act, which had the effect, first, of removing from a meeting of creditors to be held at 10.00am that morning a consideration of Mr Hamilton's contention that the DOCA had been terminated by reason of the terms of the DOCA having been "wholly effectuated" (when that matter was a matter of serious contention with the DCOT as the major creditor), and second, removing from the meeting a consideration of whether the creditors might elect to consider and, if thought fit, pass a resolution for the winding up of BE100.
13 The DCOT says that by reason of that conduct (in respect of a notice said to be invalid), Mr Hamilton ought to pay the DCOT's costs of and incidental to bringing proceedings to determine the legal effect of the step he took earlier on the morning of 12 February 2016 to lodge the notice (and the legal effect of the notice itself) immediately before the meeting of creditors was to occur.
14 The creditors (and others) met that morning as a discussion and information session only. Mr Hamilton opened the meeting convened for 10.00am by making it plain that the meeting was "incompetent to act" as the DOCA had been "wholly effectuated" and was at an end. Reliance was placed upon s 445FA(1)(c) of the Act in that regard. The minutes as signed by Mr Hamilton at pp 391 to 394 of Ms Hill's affidavit reveal that those present decided that there was "some value in the meeting being continued so that the discussion could be noted" as to the views of the participants and particularly those participants representing the creditors. The only two creditors of BE100 were the DCOT as the substantial creditor and Baser Business Services Pty Ltd ("Baser"). Both creditors attended the meeting.
15 Baser's claim (and accepted proof of debt) is $11,000.
16 I will return to the amount of the DCOT's claim later in these reasons.
17 Mr Hamilton does not accept the contentions of the DCOT that he acted unreasonably. He says that even if the notice of 12 February 2016 is invalid, he says, through counsel, that he simply made a commercial judgment on a matter about which minds might differ and in any event, he acted on legal advice given to him in a letter dated 11 February 2016 (pp 335 to 337 of Ms Hill's affidavit) which advised him that the "DOCA has terminated and this must be notified to ASIC".
18 Section 445FA(1) provides that certification to ASIC of the relevant matter must be in writing and lodged with ASIC within 28 days (of the relevant event(s) having occurred). The DCOT says that there was no urgency to act on the legal advice of 11 February 2016 prior to the creditors considering all relevant matters the next morning at the meeting convened for 10.00am. The DCOT says it had only received notice of Mr Hamilton's proposal to lodge a notice that the DOCA was fully effectuated (attaching the legal advice) at 3.18pm on 11 February 2016 by email. The DCOT says it objected in writing on 11 February 2016 to Mr Hamilton taking any step under s 445FA(1) to so act as no grounds subsisted for doing so, in the DCOT's view. The DCOT says the notice was lodged with ASIC for the purpose of preventing the DCOT from moving a motion and, in consequence, securing a resolution to wind up BE100.
19 I will return later in these reasons to the considerations to be taken into account in the exercise of the discretion as to costs when considering whether the conduct of the administrator, in all the relevant circumstances, warrants the making of an order that Mr Hamilton pay the costs of the DCOT of and incidental to obtaining the substantive relief.
20 The background facts are these.
21 Mr Hamilton was appointed administrator of BE100 on 18 March 2015. The instrument is signed by Mr Feng Dong, the company's sole director. Mr Dong became the company's sole director on the same day that it entered into administration. Before 18 March 2015, Mr Shumiao Zhu was the company's sole director. Prior to its administration, BE100 in its role as trustee of the BE100 Property Investment Trust was one of three partners in a property development partnership. The other partners were GSP Group Pty Ltd ("GSP") and Guangyu International Holding Pty Ltd ("Guangyu"). Prior to 18 March 2015, BE100 together with GSP and Guangyu conducted the business of property development. The partnership undertaking involved a residential development of 38 townhouses at Homebush in New South Wales. Liquidators were appointed to GSP on 5 August 2015. Liquidators were appointed to Guangyu on 13 October 2014.
22 At 18 March 2015, BE100 had two creditors. Baser was BE100's former accounting services firm. It was admitted to proof for $11,000. At 18 March 2015, the DCOT contended that BE100 had incurred the following taxation liabilities: a running balance account deficit in respect of "BAS" in an amount of $412,173.10; a running balance account deficit in respect of BAS as a partner of the partnership in an amount of $3,946,131.25. However, the partnership BAS debt was reduced to $1,449,564.87 as a result of objection decisions which issued on 2 July 2015 and 17 September 2015.
23 On 27 March 2013, a loan was made by the partnership to NR Wolli Creek Pty Ltd ("Wolli") to enable properties to be purchased by that entity. At 18 March 2015, Wolli was apparently indebted to the partnership in an amount of $2,156,668.00 (the "Wolli debt"). It seems that the loan was made by BE100 to Wolli on behalf of the partnership. Until 18 March 2015, Mr Zhu was a director of both BE100 and Wolli although by 18 March 2015, Mr Dong had replaced Mr Zhu as a director of BE100.
24 On the day following Mr Hamilton's appointment as administrator of BE100, he provided a document to creditors entitled "Initial Advice to Creditors". In that advice, Mr Hamilton noted that BE100 as a member of the partnership was not engaged in any further trading activity and nor was it trading in its own right. Mr Hamilton expressed the view that appointing an administrator to BE100 provided a means of enabling the company to obtain legal advice and prosecute an objection to ATO assessments.
25 Mr Hamilton provided a report to creditors by a document which bears the date 22 May 2014 (see pp 144 to 166 of Ms Hill's affidavit). Plainly, that date is incorrect at least as to the year. It ought to be 2015. In Ms Hill's affidavit at para 30, she asserts that Mr Hamilton issued this report to creditors on 22 April 2015. That seems to be the likely date because the meeting of creditors was to occur on 29 April 2015. In the report, total proprietor's funds are said to include an asset described as the "NR Wollis Project" in an amount of $2,156,667.71. Mr Hamilton says (and it seems to be common ground) that BE100 had an 80% entitlement or interest in that debt. At cl 7.1 of the report, Mr Hamilton says this (among other things):
… The only partnership asset is that of [Wolli] in the sum of about $2.1M which will be discussed hereinafter. The asset was the subject of garnishee proceedings by the ATO. I have legal advice that the garnishee is ineffective as it [is] based on a presumption that a debt is due to [BE100] which is incorrect. The debt is due to the Partnership. The ATO have been notified of the advice. They may not be concerned as the Partnership for all practical purposes has external administrators appointed to each partner … I am informed by the director at [the] time of [Wolli] Shumiao Zhu, that there is no shortage of cash to pay the amount ($2.1M) but the directors are in a state of deadlock and until that dispute is dissolved, it is likely that the debt will remain or failing that, an application may [be made] under Section 459 of the [Act] and subsequent proceedings to wind up may be necessary. In my view, it is better to resolve the payment of the debt on a commercial basis at a future time. …
[emphasis added]
26 At para 2.2 of the report, Mr Hamilton says that no proposal is possible at 22 April 2015 due to the uncertainty of the amount of the ATO's claim and due to the uncertainty concerning the realisation of the loan made to Wolli. As a result, Mr Hamilton considered that the creditors at their meeting to be held on 29 April 2015 ought to agree to adjourn the meeting for a further 45 business days. At that meeting, the creditors resolved to adjourn the meeting to 2 July 2015.
27 On 4 June 2015, receivers and managers were appointed to Wolli by its secured creditor.
28 Mr Hamilton provided a further report to the creditors of BE100 on 24 June 2015 (although the date above Mr Hamilton's signature is 15 May 2015): pp 105 to 179 of Mr Hamilton's affidavit. At para 1.6 of that report, Mr Hamilton says that the only known asset of the partnership "is the land at Wolli Creek held by [Wolli]". Mr Hamilton observes that a debt is "allegedly" due by Wolli to the partnership and having regard to the appointment of the receiver/manager, it may be "considerable time" before an assessment of the amount and collectability of the debt can be determined. Mr Hamilton says that he believes that it is in the best interest of the major creditor, the ATO, to allow a "holding DOCA" to be put in place so that an assessment of "that debt can be undertaken" including receipt of any payment by the partnership and any consequential distribution.
29 At cl 1.8, Mr Hamilton describes a number of things including: the proposal to enter into the proposed DOCA as a "Holding Deed" so as to enable a challenge to aspects of the decisions of the ATO; ascertainment of steps necessary to enable the partnership to realise the Wolli debt of $2.1M; providing flexibility so as to enable Mr Zhu to modify the Holding Deed and provide for a lump sum payment in full satisfaction of the ATO debt and Baser's debt.
30 At cl 5.1, Mr Hamilton expresses the opinion that it is in the best interests of the two creditors of BE100 to execute the proposed DOCA.
31 The adjourned meeting was held on 2 July 2015.
32 At that meeting, the DCOT moved a resolution to the effect that BE100 not execute the proposed DOCA. The DCOT opposed BE100 entering into that deed. The Minutes reveal that since there was no clear majority in number and value after a poll having been taken, the chairman, Mr Hamilton, exercised a casting vote against the motion on the basis that it was apparent to Mr Hamilton that "the deadlock in [Wolli] will be resolved in the immediate future and the asset representing $2.1M will be available to satisfy the debts of the creditors and the cost of the administration". A second reason identified by Mr Hamilton was that steps taken by BE100 to object to aspects of the decision of the ATO might result in a situation where BE100 "is truly solvent and it would be unjust in so far as the second stakeholder, Shumiao Zhu who holds all of the issued capital that the company be wound up". Baser then moved that the company execute the proposed DOCA. The ATO voted against the motion. The motion was carried on the casting vote of the chairman for the same reasons described above.
33 On 22 July 2015, Mr Hamilton entered into the DOCA signed for BE100 (administrator appointed) by the director, Mr Dong.
34 The DOCA commenced on 22 July 2015. The end date is defined to mean 30 June 2016 or any earlier date determined by creditors at a creditors' meeting held after 2 July 2015. The continuation period runs from 22 July 2015 to 30 June 2016 "or if it is otherwise validly terminated". The "Deed Property" means the property of BE100 "which is available for the purposes of this deed, being all the assets of the Company as at [18 March 2015]" [emphasis added]. The Deed Property must be collected or realised by the administrator and applied in accordance with the DOCA: cl 6. Once the Deed Property has been "realised by the Administrators" and "paid out of the Administration Account" in the order of priority provided for in the DOCA, the participating creditors "release and forever quit [BE100] from all Claims and those Claims are thereby extinguished": cl 8.3.
35 Clause 10 provides that the DOCA "also terminates" in two circumstances. The reference to "also terminates" seems to recognise that the DOCA will terminate on the end date of 30 June 2016 or alternatively, the DOCA might end at an earlier date determined by the creditors at the relevant meeting. Clause 10 reflects additional ways in which the DOCA might terminate. Clause 10(i) says that the DOCA also terminates on completion of the distribution of the whole of the Deed Property in accordance with the DOCA, in which case the DOCA "will have been fully effectuated". Clause 10(ii) says that the DOCA also terminates "if it is terminated by the operation of section 445C of the [Act]".
36 Section 445C of the Act provides that a deed of company arrangement terminates "when" one of four possible events occurs (whichever happens first). The first event is that the Court makes an order terminating the deed under s 445D. The second event is that the company's creditors pass a resolution terminating the deed at a meeting convened under s 445F by a notice setting out the proposed resolution. The third event is that the deed itself specifies "circumstances" in which it is to terminate and those circumstances "exist". The fourth event is that the administrator of the deed executes a notice of termination of the deed in accordance with s 445FA of the Act.
37 Clause 10(i) engages s 445C(c) of the Act. Clause 10(ii) contemplates termination by operation of any one of the four events recited in s 445C.
38 Mr Hamilton, on 11 February 2016 and certainly on 12 February 2016, had formed the view that the integers of cl 10(i) were satisfied on the footing that "completion" of the "distribution" (zero cents in the dollar) of the "whole of the Deed Property" in accordance with the DOCA had occurred, "in which case" the DOCA had been "fully effectuated". Mr Hamilton took the view that completion of the distribution of the whole of the Deed Property had occurred because the position was that the creditors would receive no distribution at all having regard to what he described as the practical realities of the recoverability of the relevant debts. Since, in Mr Hamilton's view, the circumstances specified in the DOCA upon which it would terminate, existed, Mr Hamilton believed that the DOCA had terminated under cl 10(i) of the deed taken in conjunction with s 445C(c). At the meeting of creditors which was rendered "incompetent to act" by Mr Hamilton lodging the notice with ASIC, Mr Hamilton advised the meeting that because the DOCA was "wholly effectuated" the notice was lodged under s 445FA(1)(c) of the Act. That provision contemplates that if a company is subject to a DOCA and all of three circumstances are satisfied, the administrator of the DOCA must certify to that effect in writing and within 28 days lodge with ASIC a notice of termination of the DOCA. The three circumstances are these: the company's obligations under the deed have been fulfilled; the obligations of any other party to the deed have been fulfilled; and the creditors' claims under the deed have been dealt with in accordance with the deed.
39 Mr Hamilton therefore relies upon the deed itself taken in conjunction with s 445C(c) as effecting termination and relies upon s 445FA(1)(c) as casting a mandatory obligation upon him to so certify and lodge with ASIC a notice of termination of the DOCA.
40 Other aspects of the DOCA are relevant to these proceedings. I will return to cls 11.3, 12 and 15 later in these reasons.
41 The DCOT says that a number of important events occurred between 22 July 2015 and 5 February 2016. They were these.
42 First, the partnership BAS debt was reduced, by reason of credits and other amendments made as at 5 November 2015, by $2,496,566.38 to an amount of $1,449,564.87.
43 Second, Mr Hamilton provided an updated estimated dividend on 16 October 2015 which estimated a return to creditors of $0.92 for every $1.00.
44 Third, due to public examinations carried out by Mr Hamilton, a further creditors' meeting which had been set down for late October 2015 was adjourned to 12 February 2016.
45 Fourth, the DCOT on 6 November 2015 submitted an amended proof of debt to the administrator in an amount of $1,861,736.97 which represented a partnership BAS debt of $1,449,564.87 (for which BE100 was liable as a partner) and a BAS debt on the part of BE100 in its own right of $412,173.10: pp 283 to 286, Ms Hill's affidavit (FH-23).
46 As to the DCOT amended proof of debt dated 6 November 2015 (FH-23), Ms Hill says that the proof was lodged at $1,861,736.97 on the footing that the security in the form of the garnishee notice issued to Wolli was valued at only $1.00. Ms Hill says that that valuation was adopted on the basis that Mr Hamilton had formed the opinion that the notice was "ineffective".
47 Fifth, Mr Hamilton provided five further reports to creditors in which variations to the DOCA were proposed. Those proposals were to be dealt with at a meeting of creditors adjourned to 12 February 2016.
48 In Mr Hamilton's report to creditors of 19 October 2015, Mr Hamilton identified these new circumstances. The Wolli deadlock between its two directors, Mr Fayad and Mr Zhu, remained unresolved. Mr Hamilton reported that no substantive movement had occurred in the development of the property and moreover the "Report as to Affairs [("RATA")] lodged by the Receiver by the two directors differ in that Sam Fayad does not recognise the claim of $2.1(M) at all as being a debt by [Wolli]" [emphasis added]. Mr Hamilton observes, however, that Mr Zhu in the "RATA certified by him admits the debt …". Mr Hamilton also reported that the debt due to the DCOT was now $1.4M with penalties. Mr Hamilton also expressed comments upon the RATA formulated by Mr Fayad and that formulated by Mr Zhu. Mr Fayad's formulation contemplated a surplus subject to the costs of administration of $5,172,148.00. Mr Zhu contemplated a surplus of $12,172,148.00. In commenting on those formulations, Mr Hamilton said this:
… the realisation of the debt of the Partnership in the sum of $2.1(M) against [Wolli] is not capable of being calculated as to the amount likely to be received or the timing of receipt. It would appear from the RATAs of the two directors … that there will be an equity which will satisfy the debt at some time depending upon the decision made by the Receivers, whether to sell now in its present undeveloped state, rescinding the contracts of purchasers or whether or not to develop the property where the unit sales will be of a much greater value but the timing would be extended for a further eighteen (18) months in my view.
[emphasis added]
49 On 28 October 2015, Mr Hamilton issued a further report to creditors in which he said this at cl 1.6:
The property [for the purposes of the DOCA] which is no longer to be available includes the potential claim in [respect of the] [Wolli] (Receiver and Manager appointed) loan account in the sum of about $2.1(M). The report of 19 October 2015 sets out all of the comments that I have to make on the potential realisation of that amount and over what period of time. The period of time is not capable of being determined for reasons set out in that report. I do not wish to traverse all of the reasons other than to say that it is most likely that should the debt be admitted, (which it is not at the moment), by one of the directors Sam Fayad, and should the project be either completed or sold as it presently stands, the length of time could be between 6-8 months and 2 years. What is offered in effect is a Proposal that replaces the asset available in a winding up to all classes of creditors namely a share in a partnership debt and in turn that partnership having a claim in the sum of $2.1(M) against [Wolli]. Should that amount be received in full, the capital account of [BE100] in the partnership books and records would show $1.6(M) [which represents 76.19% of the debt due to the partnership] as being an amount recoverable from that source, instead of that expectation to have available the sum of $660,000 cash in hand paid within 8 weeks.
[emphasis added]
50 The proposal referred to in that passage is explained in the report. A meeting of creditors had been convened for 28 October 2015 to consider whether a resolution should be passed to wind up BE100. The meeting was adjourned to 6 November 2015 to consider a proposal by Mr Zhu. The proposal involved compromising the costs of the administration as at 16 October 2015 (a sum at that point of approximately $300,000) by the administrator accepting $100,000 in full satisfaction of those costs. A further sum of $560,000 would be paid within eight weeks for distribution to the creditors. The sum of $560,000 would be divisible amongst the unsecured creditors. The claim of the ATO was approximately $1.8M. The claim of Baser was $11,000. Mr Hamilton estimated the dividend to be paid to unsecured creditors, on that footing, at 31 cents in the dollar.
51 Mr Hamilton issued another report to creditors on 27 November 2015. That report attached a document called "Statement of Facts and Observations". In it, Mr Hamilton sets out extracts from the General Ledger of the partnership as prepared by Yuk Wong. Mr Hamilton undertook an analysis of entries in the accounts of Wolli where "set off" journal entries are "unravelled". Mr Hamilton expresses (at p 9 of the report to creditors; p 315 of Ms Hill's affidavit), this concern:
… I am concerned that the manufacture of fees on this account of [Guangyu] may be an Uncommercial Transaction voidable in a winding up if it can be shown the effect of the payments to [the relevant] entities was to render the partnership to be insolvent. It was unable to pay its debts as they fell due (the ATO).
52 In the notes (at p 315 of Ms Hill's affidavit), Mr Hamilton observes that a bank cheque of $4.4M was paid by BE100 to Ambiance International as the vendor of the land sold to Wolli effecting a return of capital to BE100 of $2,717,104.00 with the balance shown by journal entries as a loan to Wolli and a debt to BE100 of $1,682,896.00. Mr Hamilton said (at Note 1) that the transaction:
… effectively transferred the interest in the capital of the partnership to a like interest by [BE100] in the Wolli Creek development. The balance of the cheque is shown in a debt due by [Wolli] $1,682,896.00 in the General Ledger by journal entries.
53 At p 10 of the report (point 17; p 316), Mr Hamilton sets out the reconciliations and says that the total money receivable from the NR Wolli Project as $2,156,577.71.
54 In Mr Hamilton's report to creditors on 29 January 2016, Mr Hamilton identified these new circumstances. A meeting of unsecured creditors was held on 19 January 2016 (the creditors being DCOT at $1,861,736.97 and Baser at $11,000.00) to consider whether a resolution should be passed to wind up BE100. The creditors resolved to adjourn the meeting to 12 February 2016 to consider a proposal by Yun Li, the wife of Mr Zhu. Ms Li would provide a "Deed Fund" of $660,000.00 to be paid as to $400,000.00 by the last day of a two month period from the date of execution of a deed and $260,000.00 two months thereafter. A sum of $560,000.00 would be distributed to the unsecured creditors producing a dividend of 30c in each dollar.
55 Ms Li's proposal incorporated a "request" for a release by the DCOT of actions, claims or suits which had arisen or might arise in the future in respect of Yun Li and Mr Zhu concerning BE100, GSP and Guangyu: cl 1.4; cl 6 of Annexure 1 (found at p 286 of Mr Hamilton's affidavit).
56 Mr Hamilton said that he understood this element of the proposal to be simply a request. It seems clear enough, however, that by cl 6 of Annexure 1 it was a term of Ms Li's proposal. Mr Hamilton also accepted that it would be very unlikely that the DCOT would accede to such a request or accept such a term.
57 On 8 February 2016, the DCOT lodged with Mr Hamilton an amended proof of debt replacing the proof of 6 November 2015.
58 In the amended proof, the DCOT recognises that the liability of BE100 as a partner in respect of the partnership BAS deficit of $1,449,564.87 as at 18 March 2015 was secured by a notice dated 1 September 2014 issued to Wolli with the result that its claim as an unsecured creditor was confined to BE100's liability in respect of its own individual BAS deficit amount of $412,173.10.
59 As to the Deed Proposal of Ms Li to replace the existing DOCA (earlier described as a "holding deed") with her proposed deed, the DCOT made its position plain (as Mr Hamilton had expected it would) by letter on 9 February 2016. No such deed of release would be provided by the DCOT. Also, the letter made plain that the DCOT would vote against acceptance of the Deed Proposal by Ms Li.
60 On 11 February 2016 at 3.18pm, Mr Hamilton sent an email to the DCOT referring to the upcoming meeting of unsecured creditors for the following morning at 10.00am (being a continuation of an earlier adjourned meeting) and told the DCOT that having regard to the "changed position" of the DCOT in removing $1,449,564.87 from its proof and thus reducing its claim to $412,173.10, Mr Hamilton had taken advice from Surry Partners as to whether these events "have caused, or may cause, the DOCA to be terminated".
61 Mr Hamilton attached a copy of the advice to his email and told the DCOT that he would be "following that advice forthwith". He also said that the advice "will be effective upon my filing with ASIC the notice of the [DOCA] being fully effectuated under s 445FA of the [Act]".
62 The legal advice relied upon by Mr Hamilton is at pp 335 to 337 of Ms Hill's affidavit. The advice was given by Mr Hamilton's son, Mr James Hamilton. Mr James Hamilton is a partner in the firm Surry Partners and has been an insolvency practitioner for in excess of 20 years. The DCOT urges the Court to treat the advice as other than arms-length as it was obtained, metaphorically, at "five minutes to midnight" and operates to provide a foundation upon which Mr Hamilton could act immediately to bring the meeting the next morning to an end and render that forum "incompetent" to exercise a judgement about whether BE100 ought to be wound up.
63 In the letter of advice, Mr James Hamilton observes that Mr Hamilton's "best case" assessment was that BE100's interest in the Wolli debt "may possibly have been worth about net $1.6m … if the DCT had not exercised their security over it". BE100's 80% interest in a debt of $2.1M to the partnership is $1.68M. Mr James Hamilton also observes what must have been his instructions that the claim was "uncertain" and was "disputed" by the Receiver of Wolli and one of Wolli's directors. Mr James Hamilton notes that the other partners are also claimants. Mr James Hamilton observes that the DOCA "had lost its control of this possible asset now subject only to any excess recovery [DCOT] receives from [Wolli] after meeting its secured debt [$1.449M]". That excess would be available to the partnership. BE100 would enjoy an interest in 80% of the excess. If the Wolli debt is $2,156,577.71 and the secured sum is $1,449,564.87, a theoretical surplus on recovery of the full debt would be $707,012.84. 80% of that theoretical excess is $565,610.27.
64 As to other possible claims, Mr James Hamilton notes his instructions that Mr Hamilton had conducted an oral examination funded by a director (of a company related to BE100). One such possible claim might have been a claim against a tax agent, Mr Nicolas Karam. In the letter, Mr James Hamilton says that the funding has been fully utilised. He says that no funding is left to obtain counsel's advice or advice from Surry Partners about the claim or other "possible available claims" BE100 might have or the possible debt due by Wolli. The letter of advice also observes that the DCOT has refused to fund BE100 or the administrator.
65 The DCOT says that this instruction to Mr James Hamilton is not correct as no request had ever been made of the DCOT to fund steps related to pursuing aspects of the Wolli debt. In the course of cross-examination, Mr Hamilton gave evidence that the possible claim against Karam had been assigned to the funder (who I understand to be Ms Li) as a term of the funding arrangement. Mr James Hamilton also notes his instructions from Mr Hamilton that in view of the change in position of the DCOT, Mr Hamilton is not confident in obtaining further funding elsewhere to investigate claims that might be available to him or BE100.
66 Again, the DCOT is critical of this position as no request was made of it to fund questions concerning the Wolli debt. Mr James Hamilton also notes Mr Hamilton's position that "there are no other [BE100] assets remaining" and Mr Hamilton's view that even if the DCOT takes action to establish the Wolli debt to the partnership and the operation of its security, no "excess" will be liberated to BE100. Moreover, Mr James Hamilton notes that the administrator is owed "substantial DOCA administration fees" which (if approved) would be paid out of the "Deed Property" greatly lessening the prospect of any excess being available.
67 Mr James Hamilton expresses the opinion that in light of: the above facts; cl 10(i) of the DOCA; the definition of "Deed Property"; and, Mr Hamilton's "view" that there will be "no assets of [BE100] remaining", it follows that the DOCA "has terminated". Mr James Hamilton says that the DOCA has been "fully effectuated" and there is "no more Deed Property left to distribute". Mr James Hamilton sets out in his letter of advice s 445FA(1)(a) and (c) and concludes that, in his view, in light of the "instructed facts" recited in his letter of advice and s 445FA(1)(a) and (c), the DOCA "has terminated" and this circumstance "must be notified to ASIC".
68 The DCOT responded to Mr Hamilton's email of 3.18pm (attaching the legal advice), on the same day. The DCOT contended that the DOCA subsists until 30 June 2016 or an earlier termination as determined by the creditors. As to the asset position, the DCOT contended that leaving aside the secured component of the Wolli debt, $650,000.00 remained and of that amount, BE100 had an interest of $520,000.00 (80%). Thus, an asset remained falling within the description "all the assets of the Company at the Fixed Date [18 March 2015]" with the result that there remained "Deed Property" to be addressed by the administrator which "must be collected or realised by the administrator and applied in accordance with the deed".
69 The DCOT asserted that Mr Hamilton was "not able to give notice of termination of the DOCA under s 445FA of the Act, as the company's obligations under the DOCA have not been fulfilled" and Mr Hamilton had "failed to realise and distribute the assets available to creditors under the DOCA".
70 At the discussion meeting that took place on the morning of 12 February 2016 in place of the formal actual adjourned creditors' meeting, Mr Hamilton explained that neither counsel nor James Hamilton had given advice about recoverability (because no funding for it was available) and also because Mr Hamilton knew, in his view, that recoverability was going to be "a very hard road". Mr Hamilton said that because of those things he could terminate the DOCA. He told the creditors that he did not want to "sit here for three years".
71 Mr Hamilton elected to act on the legal advice he was given. Although the DCOT says that the legal advice was not at arms-length, the advice was given by a qualified insolvency practitioner of some experience. Objectively viewed, it would have been much more desirable for Mr Hamilton to have taken advice from someone entirely unrelated to him by blood especially in taking a contentious step, against the express interests and direction of the major creditor, and in circumstances where Mr Hamilton had a level of "grumpiness" (about which he gave very frank oral evidence) concerning the conduct of the DCOT in the matter, at least as he saw it (including the trouble he had been put to in addressing the objections to the assessments). Nevertheless, it would not be appropriate in the absence of more compelling evidence to conclude that the advice was simply a construct or contrivance to enable a step to be taken by Mr Hamilton. It certainly enabled the step Mr Hamilton took as plainly he felt he needed legal advice to act the way he did but I cannot conclude that it was anything other than a genuinely held view by Mr James Hamilton expressed to, as it turned out, his father.
72 The precise basis upon which Mr Hamilton acted is not entirely clear. The legal advice was that on the "instructed facts", cl 10(i) of the DOCA was engaged. Thus, the DOCA had terminated because completion of the distribution of the whole of the Deed Property in accordance with the DOCA had occurred, in which case, taken in conjunction with Mr Hamilton's opinion that there were "no assets of BE remaining", the DOCA was, by 11 February 2016, fully effectuated.
73 It was said to be at an end, for those reasons.
74 As to when a DOCA terminates, s 445C(c) provides that it terminates when the circumstances of termination specified in the DOCA exist. When Mr Hamilton gave notice on 12 February 2016 to ASIC he seemed to be giving notice that the DOCA was fully effectuated under cl 10(i) because those circumstances "existed". However, the meeting was told that Mr Hamilton gave notice under s 445FA(1)(c) and if that was its basis for so acting, the DOCA terminated, by operation of s 445C(d) when Mr Hamilton "executed" the notice of termination of the DOCA. Mr James Hamilton and Mr Hamilton seemed to have acted on the basis that cl 10(i) set out the circumstances of termination; those circumstances existed; the DOCA was fully effectuated; it came to an end when those circumstances existed (s 445C(c)); and s 445FA(1)(c), because of those matters, was engaged and a notice to ASIC was required.
75 The question of whether those circumstances existed, rendering the DOCA fully effectuated is a question of fact.
76 Mr Hamilton held an opinion about those matters. He made a commercial judgment about them. He instructed Mr James Hamilton as to certain factual matters (best case as to recoverability, no other assets etc) upon which Mr James Hamilton relied in concluding that cl 10(i) was satisfied. The advice was given on 11 February 2016. The DCOT was advised by Mr Hamilton of his view at 3.18pm that day. Plainly enough, Mr Hamilton ought to have put that view to the unsecured creditors at the meeting for their views and ultimately their decision-making. They were due to meet at 10.00am on the following morning. They ought to have been given the opportunity to vote on the course to be adopted.
77 An asset remains to be addressed in the administration. It may well have been thought to be unrecoverable. Mr Hamilton regarded recovery of any excess of the Wolli debt as "purely theoretical". It was not recoverable in any practical sense, in his view. Nevertheless, that was a matter to be put before the meeting of unsecured creditors. The Act vests the judgement to be made about whether to bring the DOCA to an end or place the company in liquidation in the hands of the meeting. It ought not to have been removed from the primary decision-making forum of the meeting of unsecured creditors. Mr Hamilton had formed the view that circumstances existed fully effectuating the DOCA thus effecting termination. However, that matter was expressly contested by the major creditor. I have taken into account the matters described by Mr Hamilton in his affidavit and particularly those matters set out at paras 15 to 19 of his affidavit on this issue.
78 I am satisfied that the notice ought not to have issued in reliance upon cl 10(i) of the DOCA, s 445C(c) of the Act and s 445FA(1)(c) of the Act, on 12 February 2016.
79 Accordingly, a declaration will be made that the circumstances contemplated by cl 10(i) of the DOCA did not exist at 11 February 2016 or 12 February 2016, with the result that the DOCA did not terminate on either of those dates pursuant to the terms of the DOCA or s 445C(c) of the Act. The Court will order that the notice lodged (or filed) by Mr Hamilton with ASIC on 12 February 2016 is set aside and of no legal effect. The Court will make further orders in terms of para 1(e) of the originating application filed on 2 March 2016.
80 The remaining question concerns the order sought by the DCOT that Mr Hamilton pay the costs of the application. The DCOT has found it necessary to commence and prosecute proceedings to seek remedies in relation to the assertion that the DOCA by 11 February 2016 or 12 February 2016 had terminated on the ground that it was fully effectuated. The DCOT also seeks relief in relation to the notice. These proceedings would not have been necessary had the relevant matters been put before the meeting of unsecured creditors so as to enable the meeting to decide the future of the DOCA and/or the company.
81 In the ordinary course, an order for costs would be made against Mr Hamilton, the DCOT having been successful in the proceeding, and he would be entitled to be indemnified out of the assets of the administration (or the Deed Property) as a first charge before distribution of Deed Property to creditors: Kirwan v Cresvale Far East Ltd (in liq) ("Kirwan") (2002) 44 ACSR 21 at [434], Young CJ (in Eq). An administrator is entitled to an indemnity for costs reasonably and honestly incurred: Kirwan at [259], Giles JA. Provided the step of acting on the legal advice given to him was reasonably and honestly taken although shown to be in error, Mr Hamilton would be entitled to an indemnity out of the assets of the administration for those costs incurred by him as a result of a costs order in the proceeding. In this case, there is no fund out of which Mr Hamilton can be indemnified. In those circumstances, Mr Hamilton would then bear the burden of a costs order personally. In those cases where there is no prospect of the administrator receiving indemnification of the burden of a costs order arising out of a successful challenge to a step taken by him (or her) in the course of an administration, the question that arises is whether the exercise of the discretion to order costs against the administrator is informed by other considerations.
82 If there are no assets of the administration (converted or convertible into money) out of which the administrator can be indemnified, the principles informing the exercise of the discretion are these. In Re Biposo Pty Ltd; Condon v Rodgers (1995) 17 ACSR 730 (a case concerning the conduct of liquidators which led to their removal), Young J in that part of the reasons for decision dealing with costs under the heading "Re Biposo Pty Ltd: Condon v Rodgers (No 3)" (pp 739-740), observed that although the liquidators were to be removed, his Honour did not consider that "the conduct was sufficiently 'odious', to use Mr Boyd's word, to take it out of the general rule that where a liquidator is removed primarily to protect the administration because of perceived problems with impartiality his costs and the plaintiffs' costs should come out of the assets". Young J further observed that his Honour would reserve further consideration as to costs should the assets prove insufficient.
83 In Kirwan, Young J accepted at [426] that his own reasoning in Re Biposo set a "guideline for the exercise of discretion" although his Honour did not accept a formulation of Austin J that an unlimited costs order should only be made (as against a liquidator) in "extreme circumstances". In addition, his Honour did not accept (in the circumstances of the case before his Honour) that the conduct of contesting the proceedings meant that costs were unreasonably incurred. In Kirwan at [422], Young CJ observed that as a general guideline for the exercise of the discretion as to costs, a liquidator or administrator "acting appropriately" is entitled, if unsuccessful, for an order that the costs be paid by the company and not by the liquidator or administrator personally.
84 The proposition seems to be that a liquidator or an administrator will be susceptible of an order for the payment of the costs personally (without any limitation such as "to the extent of the available assets of the company or the administration") in circumstances where the administrator has not acted appropriately and the taxonomic measure of that description, as a guideline, is whether the conduct of the administrator can be described as "odious". Notwithstanding the deep well of equity's conscience, it is not clear to me what the content of the taxonomic term "odious" means. The phrase "acting appropriately" seems to me to mean acting reasonably and honestly. If the administrator acted reasonably and honestly, he or she ought not to be the subject of an order for costs personally, that is to say, an unlimited costs order. In this case, Mr Hamilton fell into error by removing from the meeting a decision about whether the DOCA should be brought to an end and whether BE100 ought to be placed into liquidation and wound up. He was in error in taking that course. I accept that he acted honestly in procuring legal advice notwithstanding that the advice was given to him by his own son. I accept that having regard to the sequence of considerations that informed his decision-making, he acted on the footing that having analysed the source of assets that might be available in the administration to unsecured creditors, there was no likelihood in any practical sense of a recovery of funds in excess of the secured Wolli debt. In that sense, Mr Hamilton acted reasonably according to that frame of reference although he acted in error in removing the matter from the plenary decision-making forum of the unsecured creditors.
85 Accordingly, an order for costs of and incidental to the proceeding will be made against Mr Hamilton limited to the available assets of the administration. That may well mean that the costs order is, in practical terms, of no particular value to the DCOT but it nevertheless reflects a principled approach to the exercise of the discretion in the circumstances of the case.
I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.