HIS HONOUR: By interlocutory process filed in Court by leave today, the defendant Evelution Pty Limited seeks a review of a decision of Registrar Hedge made yesterday 22 September 2014, that pursuant to (Cth) Corporations Act 2001, s 440A, the amended originating process filed by the plaintiff Deputy Commissioner of Taxation on 3 September 2014 (pursuant to leave granted on 25 August 2014, and an order of that date that the Deputy Commissioner be substituted for the original plaintiff Yatcon Civil Pty Limited, whose original originating process had been filed on 26 May 2014) be adjourned until a date after 26 September 2014, when a creditors' meeting pursuant to Corporations Act, s 439B - to consider whether the creditors should resolve that the company execute a deed of company arrangement, or take one of the other courses envisaged by s 439C - is to be held.
As I have said, the present proceedings were instituted by Yatcon Civil Pty Limited on 26 May 2014. Some settlement was reached between the defendant company and Yatcon prior to 29 July 2014 when directions were made that the Deputy Commissioner, who then appeared as a supporting creditor, file and serve any interlocutory process to be substituted,and the proceedings were adjourned to 25 August, on which date the order for substitution was made.
Prior to that date, however - on 22 August 2014 - the company resolved to appoint an administrator pursuant to s 436. Mr Gavin Moss was the administrator appointed. He convened the first meeting of creditors, and on 25 August agreed not to hold the second meeting before 22 September 2014. When the order for substitution was made, the proceedings were adjourned to 22 September for hearing. As I have said, the Deputy Commissioner duly filed and served the amended originating process, which came before the Court on 22 September.
On that date, the company, by its administrator, applied for an adjournment pursuant to s 440A, and the Registrar refused that adjournment and proceeded to hear the winding up application, at the conclusion of which, but before orders were made, the company requested that the matter be referred to the Corporations Judge to review the registrar's decision. That application has now been formalised by the interlocutory process to which I have referred.
Section 440A(2) provides that the Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. It is apparent that there is a mandatory obligation to adjourn the hearing if the two conditions referred to in that subsection are satisfied. The first condition is that the company is under administration, and that is plainly satisfied. The issue in this case is whether the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.
6 As I have pointed out on earlier occasions, that is a requirement that the Court be satisfied, not that it may be in the interests of the company's creditors, but that it is in the interest of the company's creditors, that it continue under administrators. That emphasises that a substantial degree of persuasion, that administration rather than liquidation is in the interests of the creditors, is required to engage the section [In the matter of Re Offshore & Ocean Engineering Pty Limited [2012] NSWSC 1296; affirmed by Offshore and Ocean Engineering Pty Limited v Greenwich Contractors Pty Limited [2012] NSWCA 371].
As Campbell J, as he then was, said in Deputy Commissioner of Taxation v Bradley Healing Management Pty Limited (2003) 44 ACSR 377; [2003] NSWSC 47:
[18] Ultimately what the Court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the Court. It is common enough, in applications under s440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the Court before it is persuaded, will increase.
The administrator's report to creditors in connection with the second meeting of creditors expresses the opinion that it would be in the creditors' interests for the company to execute a deed of company arrangement as proposed by the director of the company, Mr Poulton, when that report was prepared and circulated, which was said to involve that Mr Poulton would contribute $150,000 to a deed fund, to be paid as to $10,000 upon execution and then $10,000 per month commencing three months after execution of the deed, for fourteen months; that related parties would not participate in the distribution from the deed fund; that the proposal would be secured on properties owned by the company at Nowra; and that control of the company would return to the director upon execution of the deed. (In fact, the deed proposal does not appear to contain a provision for security for the Nowra properties although ultimately it contained a provision that the properties not be sold without the deed administrator's consent.) The administrator's analysis of the deed proposal, after taking into account the likely costs of administration and the exclusion from the deed fund of related creditors, resulted in an anticipated dividend to the unrelated unsecured creditors of about thirty cents in the dollar in twelve to eighteen months time. (Realistically, it must have been closer to eighteen than twelve months, since the contributions would not be completed for fifteen months.) By comparison, liquidation was anticipated to produce between twelve and seventeen cents in the dollar, in between twelve and 24 months time. The essential differences were that related unsecured creditors, whose claims amounted to in excess of $2.1 million, would participate in a liquidation but were prepared to stand outside the deed; and the assets available in the liquidation would be the proceeds of the Nowra properties - estimated to be between $595,000 and $650,000 - rather than the deed fund of $150,000. So far as the evidence discloses, there appear to be no secured creditors. The unsecured creditors are the Commissioner of Taxation for approximately $276,482, and a firm of accountants for about $6,000.
Some discussions ensued between the Commissioner and the administrator, which resulted in Mr Poulton propounding a second deed proposal on 19 September 2014. It provided for him to make contributions of $220,000, $20,000 upon execution and $20,000 per month commencing two months after execution for ten months - meaning that there would be a total deed fund of $220,000 at the end of twelve months. The revised proposal continued to provide that the related unsecured creditors, being companies of which Mr Poulton and/or his wife were the controlling minds, would not participate in the deed fund, but neither it (nor the previous proposal) suggested that their claims would be released, but rather that they would stand outside the deed and their claims would be preserved but deferred.
The effect of increasing the deed fund by approximately 50 per cent was commensurately to increase the likely return to participating creditors in the event of the deed proceeding.
The administrator assessed that under the revised deed proposal, participating creditors would receive a return of 55 cents in the dollar in about 12 months, as against the proposed anticipated returns from a liquidation to which I have referred.
The Commissioner did not agree to a request to consent to an adjournment to enable the second meeting to proceed, and it was that proposal that the Registrar considered yesterday.
Since the Registrar's decision, a further deed proposal has been developed and put before the court, and provided to the commissioner albeit only minutes before the hearing commenced this morning. Under it, Mr Poulton would contribute, within four months of execution, sufficient funds to enable unrelated unsecured creditors to be paid 100 cents in the dollar after payment of the administrator's and deed administrator's reasonable remuneration and expenses, including legal fees and other disbursements. This would seem to require a fund in the order of $310,000 to $320,000. In the course of submissions, it emerged that it appeared to be intended that this be raised on the security of the company's land. The third proposal is otherwise relevantly identical to the second proposal.
The Commissioner continues to propose that the company be wound up, rather than that the creditors' meeting proceed to enable consideration to be given to the deed proposal.
The current deed proposal offers the prospect of all unrelated unsecured creditors being paid 100 cents in the dollar within four months.
It seems to me that that is very likely - to the point of almost certainty - a better outcome for those creditors than would be achieved in a liquidation scenario. While it is theoretically possible that the related creditors might not be admitted, at least for the amounts that they have claimed; that the properties could be sold within four months by a liquidator; and that some preference payments might be recovered by a liquidator; realistically, the prospect of those matters eventuating within a four month period are so slight as to be fantastic, particularly given the evidence that the land will probably be slow to sell, and the circumstance that, if preference proceedings were completed within four months, it would probably be the most expeditious resolution that such proceedings have ever received. So, if the deed does come to fruition, it is almost certainly going to provide the unrelated unsecured creditors a better commercial outcome than a liquidation.
That said, the Commissioner has formed a commercial judgment that a winding up is preferable to the deed proposal. Coupled with that, the other creditors whose votes would dominate the creditors' meeting are related, in the relevant sense, to the company. In those circumstances, it is relevant to have regard to the fact that, were the creditors' meeting to proceed, and were it to resolve that the company execute a DOCA to the effect of the third proposal, the Commissioner would be entitled, pursuant to Corporations Act, s 600A, to apply to the Court for a review of the resolution.
That section relevantly provides that where, on the application of a creditor, the Court is satisfied that a proposed resolution has been voted on at a creditors meeting, and that if the votes of related creditors were disregarded the resolution would not have been passed, and that the passing of the resolution was contrary to the interests of creditors as a whole or had prejudiced the interests of the creditors who voted against it to an unreasonable extent, the court can set aside the resolution and make such other orders as it thinks necessary.
While I am not on this hearing considering an application under s 600A, and while I should not predetermine the outcome of one, it seems to me that, if I were satisfied that an application by the Commissioner under 600A must succeed, there would be no utility in granting the adjournment sought.
That really directs attention to what seems to me the relevant considerations in this case, which are those referred to in 600A(c)(ii), namely, whether a resolution that the company execute a deed in the form of the third proposal would be to the prejudice of the unrelated unsecured creditors to an extent that was unreasonable, having regard to the benefits to the related creditors, the nature of the relationship between the related creditors and the company, and any other relevant matter.
In a number of cases, courts have indicated that, where a deed proposal is supported even overwhelmingly by related creditors but the only unrelated creditors oppose it, and if there appears to be no commercial rationale for the attitude of the related creditors who typically offer to subordinate or release their debts, then great weight is to be given to the views of the unrelated creditors. I summarised this approach in In the matter of Sales Express Proprietary Limited [2014] NSWSC 460 (at [21]), that was a case where, even if one looked at the interest of creditors generally, there was nothing in the proposed deed of company arrangement for the benefit of the related creditors who proposed to vote in favour of the deed, whereas the only apparent benefit in the deed was for the unrelated creditor, who did not support it [see also Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd (admin apptd) [2006] FCA 400, [8]- [9]].
In Sales Express, I also referred to the relevance of related creditors (at [28]):
The provisions of Pt 5.3A were not intended to enable directors, through their control of the majority of creditors, to avoid having their conduct of the affairs of the company scrutinised, at least where the unrelated creditors desire that to happen. That is not to say that the interests of related creditors are necessarily to be disregarded: they may have as valid and proper an interest in the outcome of an insolvency as an unrelated creditor. But as in Alternative Business Solutions and in this case, where they wish to vote in favour of a deed of company arrangement which offers no benefit for them and which the unrelated creditors do not wish to have imposed on them, generally speaking the interests of the unrelated creditors will prevail.
In this case, Mr Martin has argued for the administrator that there is in fact commercial benefit in the deed for the related creditors, and that their attitude is not to be passed off as merely endeavouring to enable the company and its director to escape scrutiny. In particular, it is said that there is benefit for the related creditors in that, although they will not participate in the deed fund, their debts will be preserved, and ultimately they will be entitled to recover 100 cents in the dollar from the assets of the company after the deed has been performed.
There seems to me to be considerable force in this argument. I do not think it is an answer to it to say that it relates to their interests as interests as investors rather than as creditors. Their interest is in recovering the moneys that they have advanced to the company.
If those unrelated creditors who wish to be paid can be paid off in the short term 100 cents in the dollar, then there may well be a rational basis for the related creditors taking the view that they will wait for conditions to improve, potentially for the land to be developed or sold, and to recover their debt as a result. In a sense, what they say is that the deed produces a so-called win-win situation 100 cents in the dollar for the unrelated creditors in the short term, and the potential of 100 cents in the dollar for the related creditors in the longer term, they being prepared to wait.
In the state in which this case was until 28 minutes past 10 this morning, I would not have thought the matter one in which an adjournment under s 440A was warranted. That is because it seemed to me - on the second deed proposal, and a fortiori on the first proposal - that the company was effectively buying off the Commissioner at a discount for early payment, when it had already caused the initial petitioning creditor to be paid out, and while the related creditors maintained their debts with a view to being fully paid out in the future. That would have been a situation which operated to the prejudice of the Commissioner to an unreasonable extent, having regard to the benefits to the related creditors from the resolution. But now that what is proposed is a deed fund that will enable satisfaction of the unrelated creditors to the extent of 100 cents in the dollar, that element of unreasonable prejudice seems to me to be removed.
What really remains in issue is whether this deed proposal is anything more than optimistic speculation, or whether it is sufficiently realistic that I can be satisfied that it is in the interests of the company that creditors be given an opportunity to consider it.
There are undoubtedly some unsatisfactory aspects about the proposal and, for that matter, about the administrator's report. First, I have to say that I regard it as somewhat extraordinary that the prospect of recovering unfair preferences is discounted in the report to the extent it is, when the original plaintiff Yatcon has apparently been paid out and the administrator does not refer to the circumstances surrounding that in the report. When questions were asked on the topic in court today, its administrator's counsel was unable to give any explanation as to how Yatcon was paid out. It would seem to me that that was a potential unfair preference that warranted much closer investigation than it has yet received. This would have been a much weightier consideration had the deed proposal involved anything less than 100 cents in the dollar. But where the proposal is now 100 cents in the dollar, the significance of the ability to recover unfair preferences in the event of a liquidation is diminished.
Secondly, there is every reason to share the Commissioner's lack of confidence that Mr Poulton will in fact put up the funds required to create the deed fund. As the Commissioner submits, he has not caused the company to meet its obligations to date, and the Commissioner understandably has reservations about whether he will do so in the future - reservations that are fortified by the circumstance that he has apparently not complied with his obligation to provide a report as to affairs.
Against that, the Court is informed that it is proposed to borrow on the security of the company's land. The evidence appears to establish that the land is unencumbered and is worth in the order of $600,000 to $650,000 - which should be ample to secure a borrowing of around about $320,000. Perhaps more significantly, the term of the deed is now a short one of four months, and if not performed, the Commissioner will then be in a position to ask the Court to terminate the deed pursuant to s 445D(1)(d) and to make a winding up order.
It seems to me that, while there must be doubt as to whether the deed fund will be constituted, there is at least a substantial prospect - going beyond mere optimistic speculation - that it will be. I say that because there is a clear deed proposal put forward, and there is a known asset in the form of the company's land which seems ample to secure a loan for the amount in question. In that situation, the four month period provides the best assurance that there will either be performance, or if not, a winding up will be deferred by a period of only four months or so, in circumstances in which the relation back date would not be affected.
I bear in mind that the object of Part 5.3A is to provide for the business property and affairs of an insolvent company to be administered in a way that maximises the chance 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. It seems to me that there is a realistic prospect that the deed proposal would result at least in a better return for the unrelated and related creditors than a winding up, and may also permit the company's business to continue.
Given that it is a realistic prospect, it seems to me that the condition that it is in the interests of the company's creditors for the administration to continue so that they can consider the deed proposal, rather than that it be wound up, is satisfied.
The Court orders that:
1. The decision of the Registrar refusing the application for an adjournment pursuant Corporations Act, s 440A(2), made on 22 September 2014, be set aside.
2. Pursuant to Corporations Act, s 440A(2), the hearing of the Originating Process (as amended) for the winding up of the company be adjourned to Wednesday, 1 October 2014 at 9.15 before the Registrar.
[3]
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Decision last updated: 11 February 2015