Derwinto v Lewis

Supreme Court of NSW|2002-08-05|Before: Austin J

Reported Decision : 42 ACSR 645 (2002) 20 ACLC 1674

CITATION : Derwinto v Lewis [2002] NSWSC 731 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 6032/01 HEARING DATE(S) : 5 August 2002 JUDGMENT DATE : 20 August 2002

COUNSEL : F P Carnovale (P/R) R D Marshall (D/A) SOLICITORS : Gillis Delaney Brown (P/R) Bilbie Dan (D/A) CATCHWORDS : CORPORATIONS - deed of company arrangement - proof of debt against company in administration - proof lodged for voting purposes relied on for purposes of distribution - whether deed can limit statutory right of appeal under s 1321 - considerations relevant to extension of time for appeal under Corporations Rule 14.1 - late submission of proof of debt - whether new proof of debt may be lodged which repeats claim made in a rejected proof - whether varied proof should be treated as a fresh proof - what constitutes rejection of a proof of debt - entitlement of proving creditor to participate in distribution Corporations Act 2001 (Cth) ss 444D, 444G, 447D, 588FB, 588FC, 588FF, 1321 LEGISLATION CITED : Corporations Regulations Regs 5.6.11, 5.6.26, 5.6.47, 5.6.48, 5.6.54, 5.6.55, 5.6.56, 5.6.65 Corporations Rules r 14.1 Supreme Court Rules Pt 31 Jackamarra v Krakouer (1998) 195 CLR 516 Kabushi Kaisha Universal v Aristocrat Leisure Industries Pty Ltd (1998) AIPC para 91-396 Re Deerhurst, ex parte Seaton (1891) 8 Morr 258 Re Estate of Knight (a bankrupt); Rocom International Pty Ltd (in liq) v Prentice [2002] FCA 604 CASES CITED : Re General Rolling Stock Company (1872) LR Ch App 646 Re Lohrey; ex parte Dunlop-Perdriau Co Ltd (1931) 4 ABC 62 Re Magic Australia Pty Ltd (in liq) (1992) 7 ACSR 742 Re McMurdo; Penfield v McMurdo [1902] 2 Ch 684 Re Rhoades; ex parte Rhoades [1891] 1 QB 905 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 DECISION : See paragraphs 55, 58, 64, 67 and 68. The other questions do not arise.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

6032/01 DERWINTO PTY LTD (IN LIQ) V ALAN EDWARD LEWIS & ANOR JUDGMENT 1 HIS HONOUR: The defendants, who are the administrators of Geltrom Pty Ltd under a deed of company arrangement, have applied to the Court for directions under s 447D of the Corporations Act 2001 (Cth) with respect to proofs of debt lodged on behalf of the first plaintiff, Derwinto Pty Ltd (in liq). The second plaintiff, Ronald John Dean-Willcocks, is the present liquidator of Derwinto. He replaced John Edward Star by order of this Court made on 30 May 2002. 2 The application is made in a proceeding where Derwinto and Mr Dean-Willocks seek final relief under s 1321 of the Corporations Act, to reverse the rejection of its proof of debt in the administration of Geltrom. Facts 3 During its corporate life Derwinto carried out coal haulage contracts with the Lemington and Rio Tinto coal mines in the Upper Hunter Valley. Derwinto subcontracted the haulage work on the Lemington Mine contract to Geltrom. The companies were connected by a common director. 4 An order was made by this Court for the winding up of Derwinto on 13 June 2000, and Mr Star was appointed its liquidator. On 29 May 2001 he wrote to the directors of Geltrom as liquidator, claiming $403,650.20 in respect of an alleged uncommercial transaction between the companies. 5 The claim was said to relate to the subcontracting arrangements between Derwinto and Geltrom for haulage work in relation to the Mt Lemington contract. Mr Star alleged in the letter that pursuant to that contract, Derwinto received payments of about $4.647 million from the contractor, and paid Geltrom approximately $3.459 million. The payments were apportioned to wages, overhead, fuel and a profit component for Geltrom. Mr Star alleged that Geltrom's profit component was about $1.618 million, whereas the net amount received by Derwinto was only $415,143.23. He complained that the method of payment and apportionment in favour of Geltrom did not permit Derwinto to recover its direct expenses, overhead or a reasonable profit contribution in respect of the work done under the Mt Lemington contract. He alleged, consequently, that the contract between Derwinto and Geltrom was an uncommercial contract under s 588FB, and under s 588FF he as liquidator of Derwinto was authorised to make an application for an order directing Geltrom to pay Derwinto some of the money it received under the transaction. Mr Star proposed settlement of the claim, on the basis that 25% of the net sum paid to Geltrom of $1.618 million represented an uncommercial transaction. He therefore demanded payment of $403,650.20. 6 The defendants were appointed as voluntary administrators of Geltrom on 13 June 2001. On 29 June 2001 they prepared a report to Geltrom's creditors under s 439A, in which they recommended that the creditors approve a deed of company arrangement ("DCA"). The report made no reference to Derwinto as a creditor or possible creditor of Geltrom. 7 The defendants wrote to Mr Star on 3 July 2001, in their capacity as voluntary administrators of Geltrom, claiming that the books and records of Geltrom showed that Derwinto was a debtor in the sum of $92,825.03, and asking Mr Star to note this claim in the list of creditors of Derwinto. The letter did not refer to Mr Star's claim upon the directors of Geltrom, in Mr Star's letter of 29 May 2001. It is convenient to note here that as a result of subsequent investigations, the defendants have increased Geltrom's claim against Derwinto to $184,441.55. 8 On 6 July 2001 Mr Star, as liquidator of Derwinto, lodged a proof of debt with the defendants as voluntary administrators of Geltrom, claiming the amount of $403,650.20 ("the Original Proof"). On 10 July 2001 the defendants wrote to Mr Star, stating that they did not acknowledge that an uncommercial transaction existed and therefore they did not acknowledge his claim that Derwinto was a creditor of Geltrom. They asked for further information, which they listed, within 14 days, "to be in a position to adjudicate further on your Proof of Debt form". 9 The second meeting of creditors in the administration of Geltrom was held on 10 July 2001, the same day as the defendants' letter refusing to acknowledge Mr Star's claim. Mr Star's representative attempted to attend the meeting but he was refused entry by the defendants. The meeting resolved that the company execute a DCA. 10 On 30 July 2001 Geltrom executed the DCA and the defendants became the administrators under the deed. Under the DCA Glenys Thompson, then the sole director of Geltrom, and a company called RS and GH Thompson Haulage Pty Ltd, acquired certain assets and took over certain debts of Geltrom and thereby provided a cash injection to the company, which was to be distributed to Geltrom's creditors, excluding certain related parties. Clause 7.1 made provision for dealing with creditors' "claims made under this Deed" by applying to such claims the provisions of "Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Law [the Corporations Law] and Regulations 5.6.11 to 5.6.57 inclusive and 5.6.63 to 5.6.70 inclusive of the Corporations Regulations". 11 During July and August 2001 Mr Star and the defendants corresponded concerning Derwinto's proof of debt. I must say that the correspondence is an unedifying example of protagonists seeking to score points rather than to progress the matters in issue in a practical and commercial way. An injection of common sense on both sides would have saved time and money. 12 A summary of the correspondence is as follows: · by letter dated 2 August 2001, the defendants wrote to Mr Star, noting that the information they required had not been supplied within the 14 day period specified in their letter of 10 July, and threatening to reject the proof of debt in full unless the required information was supplied within seven days; · Mr Star wrote to the defendants on the same day, complaining that the director of Geltrom had not informed the defendants of Derwinto's claim and that the defendants had not made proper investigations into the matter before propounding the DCA; Mr Star asserted that if the defendants made proper investigations they would discover the answers to the questions they had raised; he asked a number of questions relating to the administration of Geltrom and requested copies of various documents; · the defendants replied on 8 August 2001, asserting that it is the obligation of a party claiming to be a creditor to supply information in support of the claim; they said that if Mr Star did not provide information in support of Derwinto's claim by 9 August 2001, they would reject the claim in full; they said that information had been supplied to Mr Star in response to his request; · on 9 August 2002 Mr Star wrote again, asserting that it was unreasonable for the defendants to require a response within one day and saying he would endeavour to provide requested information within 14 days; · on 29 August 2001 Mr Star wrote to the defendants enclosing a copy of his letter of demand dated 29 May 2001 (summarised above) together with two schedules showing cartage payments and calculations; · on the same day Mr Star wrote another letter to the defendants disputing their claim that it was his obligation to supply information in support of the proof of debt and denying that adequate information had been supplied in response to his earlier request. 13 On 2 October 2001 the defendants, as deed administrators, issued a "Notice Inviting Formal Proof of Debt or Claim", purportedly under reg 5.6.48 (3). The evidence of the defendants is that the notice was sent to those creditors who had not as yet submitted a proof of debt. It was not sent to Mr Star or Derwinto. The defendants treated the proofs of debt lodged and admitted during the voluntary administration as proofs of debt for the purposes of the DCA. 14 In October 2001 the defendants, as deed administrators, placed an advertisement in the Gazette, purportedly under reg 5.6.65 (1), notifying their intention to declare a "first and final dividend" on 16 November 2001 and requiring creditors, whose debts or claims had not already been admitted, formally to prove their debts or claims "on or before the 26th day of October 2001", in default of which they would be excluded from the benefit of the dividend. The notice was dated 2 October 2001 but the advertisement was placed in the Gazette on 16 October 2001. 15 The defendants sent Mr Star a Notice of Rejection of Formal Proof of Debt or Claim on 19 October 2001, requiring any appeal against the rejection of the proof of debt to be lodged within 14 days after service. Mr Star received the Notice of Rejection on 24 October 2001, and on that day he instructed his solicitors in writing to lodge an appeal. The time limit for an appeal, set by the Notice of Rejection, expired on 7 November 2001. On 8 November 2001 Mr Star's solicitors wrote to the defendants referring to the Notice of Rejection. They stated that they had instructions to apply to the Court to appeal against the defendants' determination, and that they expected to file that process within the ensuing seven days. 16 On 16 November 2001 the defendants as deed administrators declared a "first interim dividend" of 20 cents in the dollar to the admitted creditors of Geltrom. They retained approximately $84,000, which they calculated to be sufficient to pay an equivalent dividend to Mr Star if it was later found that Mr Star's claim should be admitted. Dividend cheques were despatched to creditors whose debts had been admitted, on 7 December 2001. 17 On 19 November 2001 the defendants wrote to Mr Star's lawyers asserting that until they received a judgment of the Court confirming that there was in fact an uncommercial transaction, Derwinto had no claim against Geltrom. The letter asserted that Mr Star was outside the permitted time for appealing from the rejection of the Original Proof without the consent of the Court, and asked whether Mr Star intended to seek the Court's leave to appeal out of time. On 28 November 2001 they wrote again, foreshadowing the declaration and distribution of a further dividend which would absorb the balance of the funds in their possession, and requiring written confirmation as to whether Mr Star intended to seek the Court's consent to appeal against the decision. 18 On 3 December 2001 Mr Star's lawyers informed the defendants' lawyers that Mr Star would be seeking the Court's leave to appeal out of time from rejection of the Original Proof. On 5 December 2001 the defendants' lawyers informed Mr Star's lawyers that the defendants intended to distribute the balance of funds on 14 December 2001, and required Mr Star to serve any originating process and supporting affidavits in relation to any appeal from the rejection of the Original Proof within that time. The 14 day time period was altered to seven days by a letter sent later on the same day. 19 On 13 December 2001 Mr Star's lawyers sent the defendants' lawyers what their covering letter described as an "executed amended proof of debt", an unexecuted draft of which had been sent on the previous day ("the Varied Proof"). It named the debtor as Derwinto and was signed by Mr Star in his capacity as liquidator of that company. Annexure A to the document stated that Derwinto was applying "to vary the proof of debt dated 6 July 2001, by claiming the sum of $1,453,876.11, on the grounds set out below". Three alternative grounds or claims were then set out, based respectively on breach of fiduciary duty, unfair preferences and uncommercial transactions. Annexure B to the document was a schedule of payments allegedly made by Derwinto to Geltrom totalling $1,443,876.11. (The heading of the schedule is "Payments made by Geltrom to Derwinto", but it is clear that the schedule was in fact intended to be a schedule of payments made by Derwinto to Geltrom.) 20 The alleged breach of fiduciary duty was that Geltrom had received payments set out in Annexure B, knowing that they were made in breach of the fiduciary duty owed to Derwinto by Mr Rodney Thompson, a director of Derwinto at the time. The Varied Proof made an alternative claim that the same payments resulted in Geltrom receiving unfair preferences while the company was insolvent. Finally, it claimed in the alternative that Geltrom was liable to account to Derwinto for 25% of the payments set out in Annexure B by reason of the fact that the payments constituted uncommercial transactions and insolvent transactions, under ss 588FB and 588FC, essentially because (it was alleged) the haulage arrangements allowed Geltrom to make a significant profit while not providing Derwinto with sufficient funds to cover its costs. 21 The sum of $1,453,876.11 claimed in the Varied Proof was dramatically greater than the amount of $403,650.20 claimed in the letter of demand dated 29 May 2001. It will be recalled that the amount claimed on 29 May 2001 was 25% of Geltrom's alleged haulage profit of approximately $1.618 million, claimed solely on the uncommercial transaction ground. In the Varied Proof the latter figure was recalculated and reduced to $1,443,876.11, but the whole of that amount was claimed on the grounds of breach of fiduciary duty and unfair preferences. The claim based on the uncommercial transaction ground was retained for 25% of the recalculated figure, namely $360,969.03. 22 The defendants declined to accept the Varied Proof. Their reasons for doing so were set out in their letter of 13 December 2001. Essentially they gave four reasons, namely that · the Varied Proof was a new proof "submitted well out of time"; · the power under reg 5.6.56 to consent to a variation of a proof arises only in respect of a proof that has been admitted, not a proof that has been rejected, and consequently there was no power to consent to a variation of the Original Proof because it had been rejected; · the Varied Proof suffered from the same defect as the Original Proof, particularly in that Mr Star had not established the proposition that the payments amounted to uncommercial transactions or preferences; and · if the Varied Proof was a variation in respect of which there existed a power to consent, the defendants as deed administrators declined to consent. 23 The Originating Process for the present proceeding was filed on 19 December 2001. The plaintiffs seek orders under s 1321 to reverse the rejection of the Varied Proof, and in the alternative, orders to reverse the rejection of the Original Proof. This reflects a degree of uncertainty, legitimate in my view, as to whether the operative proof should be regarded as the Original Proof or the Varied Proof, and provides justification for dealing with the difficulties raised by the facts by way of separate questions in the manner proposed below. 24 The defendants have retained part of the dividend pending determination of the proceeding. As at 15 May 2002 the amount retained was $64,042.54, and by 12 July 2002 the figure was $49,599.06, less unbilled costs of approximately $6000. It appears that the amount retained was calculated on the basis of an estimate of what would be needed to make a distribution in favour of Derwinto of the amount claimed in the Original Proof, less the debt alleged by the defendants to be owed by Derwinto, at the same rate as the distribution already made to other creditors. 25 The originating process was supported by an affidavit made by the office manager of Derwinto, Brian Gould, dated 18 December 2001, to which was exhibited a substantial bundle of documents. Mr Gould made another affidavit on 23 April 2002. His affidavits explain the bundle of documents. There is also an affidavit by Barry Finney, a director of Derwinto, made on 22 April 2002, to which another substantial bundle of documents was exhibited. Mr Finney also deposes to some discussions between himself and Mr Thompson. It is unnecessary and inappropriate for me to deal with the substantial matters of fact raised by the affidavits, which go to the resolution of the proceeding on a final basis. It is plain, however, that the plaintiffs have raised a serious question to be tried on the ultimate issue. The present application 26 As I have said, the present judgment arises out of the defendants' application for directions under section 447D concerning ten questions regarding the Original and Varied Proofs. The defendants' solicitors have written to the principal admitted creditors of Geltrom informing them that the defendants would seek these directions, so that the creditors could seek to be heard. No creditors have taken up the invitation. 27 At an earlier stage when the matters sought to be raised by the defendants were less clearly developed, the defendants' application was for the determination of separate questions under Part 31 of the Supreme Court Rules. The matter came before Palmer J in the Corporations List. His Honour took the view, on the materials before him at that stage, that the issues were not appropriate for determination under Part 31 and that directions under s 447D may be more appropriate. 28 Now that the matters in issue have been more precisely defined and the Court has heard full argument, it seems to me that the determination of separate questions under Part 31 is a better way forward than the giving of directions under s 447D. The ten questions raise quite succinct issues, principally of law with only limited and uncontroversial facts (and no oral testimony) to be determined. The answers to the questions are likely to resolve, pro tanto, the matters in issue between the parties, and contribute to the final resolution of the dispute, in circumstances where the proceeding can hereafter be case managed within the Corporations List. The parties have been represented and have fully argued the issues. They should have the benefit of a binding determination inter parties, rather than merely a form of judicial advice to the administrators. As McLelland J observed as regards an application by a liquidator, an application for directions "is not an appropriate vehicle for the determination of substantive issues': Re Magic Australia Pty Ltd (in liq) (1992) 7 ACSR 742, 745. 29 In my opinion this is an appropriate case for the determination of separate questions under Part 31. In reaching this view, I take into account the often-repeated warnings by the High Court and other appellate courts concerning the danger of attempting to determine part of a complex factual dispute by proceeding under Part 31 (for example, Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514). In the present case, however, in addition to the considerations mentioned in the previous paragraph, it is noteworthy that the issues for determination arise out of the administration of a company under a deed of company arrangement. In my view, it is very desirable that such issues be determined expeditiously and cheaply, and in a manner that will enable the administrators to get about their business of accounting for the assets of the company and making a final distribution to creditors. In this kind of case, it seems to me that the general undesirability of severing for separate consideration some of the bundle of issues that arise for final determination will often be outweighed by the convenience of making separate determinations of crisp questions and thereby allowing the administrators to get on with their work. 30 During the course of the hearing of the application I expressed concern as to whether it should proceed as an application for directions or as an application for the separate determination of questions under Part 31. Counsel for the defendants informed me that if I formed the view that the application should proceed under Part 31, then he would seek to amend accordingly. Counsel for the plaintiffs indicated that his clients would have no objection to such an amendment. I shall therefore deal with the application on the basis that it is an application for the determination of separate questions under Part 31. This is subject to the exception that question 1(a) is essentially, and should be treated as, an application for an extension of time to appeal to the Court against rejection of the Original Proof. 31 Accordingly I shall set out each of the ten questions raised in the defendants' application, and my answers to them. 1(a) Whether the plaintiffs should be granted leave pursuant to s 1322 (4) or Regulation 5.6.54 to appeal the Defendants' rejection of the Original Proof 32 This question strictly does not need to be answered, because Derwinto and its liquidator were entitled, in my view, to submit the Varied Proof and have it dealt with by the defendants on its merits. I shall indicate my reasons for this view in my answer to question 1(c). However, some issues were contested in respect of question 1(a), which are relevant to the separate questions generally, and therefore should be dealt with.

Proper claimant 33 First, a question arises as to the identity of the proper claimant. The Original Proof was a claim based on the entitlement of the liquidator to apply to the Court for orders under s 588FF in relation to a transaction alleged to be an uncommercial and insolvent transaction (ss 588FB and 588FC). It is plain on the face of s 588FF that the liquidator rather than the company in liquidation is the proper applicant for orders. Therefore the proper claimant upon the Original Proof was Mr Star rather than Derwinto in liquidation. 34 This point also has significance for the Varied Proof. To the extent that the Varied Proof relied upon knowing participation in a breach of fiduciary duty, the proper claimant was Derwinto rather than Mr Star. To the extent that the Varied Proof was based on an asserted entitlement to orders under s 588FF in respect of unfair preferences, as well as an uncommercial transaction, the proper claimant was Mr Star. Those considerations suggest either that the Varied Proof should have been lodged jointly by Derwinto and Mr Star, or that Derwinto and Mr Star should have lodged separate proofs. 35 Since the times of lodgement of the Original Proof and the Varied Proof there has been a change of liquidator, which occurred on 30 May 2002 by order of this Court in proceeding No 1105 of 2000. Ronald Dean-Willcocks has replaced Mr Star as liquidator of Derwinto. At the hearing of the defendants' application for directions, counsel for Derwinto made an application for the joinder of Mr Dean-Willcocks as a co-plaintiff in his capacity as liquidator of Derwinto. The application was not opposed and I made an order accordingly. 36 The Original Proof was lodged in the name of Derwinto rather than in the name of Mr Star. However, the document was signed by Mr Star and it was clear from the letter of demand dated 29 May 2001 that the basis of the claim was an asserted entitlement to orders in respect of an uncommercial transaction. The defendants were aware that this was so, no later than 10 July 2001, when they wrote to Mr Star acknowledging that this was the basis for the claim. 37 The Varied Proof was also made in the name of Derwinto but once again, it was signed by Mr Star. On this occasion, the annexure to the instrument gave reasonably full particulars of the grounds for the claim, in such manner that it was clear that the claim was in part based on the liquidator's alleged entitlement to seek orders under s 588FF, and in part based on a breach of duty owed to the company. In the special circumstances where one claimant is the company in liquidation and the other is the liquidator, and the claims (though formally by separate persons) arise out of the same facts, I see no reason for holding that a single proof of debt submitted by the liquidator in that capacity and on behalf of the company must be treated as ineffective because some of the claims made in it are strictly the company's claims and others are the liquidator's. 38 In all of those circumstances, the technical failure to designate the correct claimant was in both cases immaterial, so far as the question of validity of the proofs of debt was concerned.

The Original Proof as a Proof in relation to the DCA 39 The Original Proof was lodged prior to the second meeting of creditors, together with a form of appointment of proxy. Regulation 5.6.11 (2) and regs 5.6.12 to 5.6.36A contain directly-applicable provisions which deal with proof of claims for the purpose of voting at a meeting of creditors. The Original Proof was, clearly enough, a proof for the purposes of voting at the meeting. Since there was no deed of company arrangement in place at the time of lodgement of the Original Proof, it cannot have been directly a proof of debt for the purposes of distribution under the DCA. 40 However, once the DCA was executed, it was open to the defendants to admit claims lodged for the purpose of voting at the second meeting of creditors as claims admitted for the purpose of distributions, having regard to reg 5.6.47, which was made applicable to the DCA by clause 7.1 of the deed. Therefore, had the defendants chosen, after execution of the DCA on 30 July 2001, to admit Derwinto's claim (or, more precisely, Mr Star's claim), it would have been open to them to do so. The fact that the 14 day time limit for appeal prescribed by reg 5.6.26 (3) had by that time well and truly expired would have been irrelevant, for two reasons. First, that time limit in its own terms applies only to the admission or rejection of a proof of debt or claim for the purposes of voting, not for the subsequent purpose of distribution. Secondly, no process of appeal would have been necessary to authorise the defendants to make a primary decision that a proof of debt be admitted for the purposes of distribution, regardless of the status of that proof of debt for the purposes of voting at a meeting previously held.

Correct time limit for appeal 41 Section 1321 states that a person aggrieved by any decision of a liquidator of a company may apply to the Court, which may confirm, reverse or modify the decision. Rule 14.1 of the Corporations Rules imposes a time limit of 21 days for an application under s 1321, and allows the Court to extend that time, unless the Act or the Regulations otherwise provide. Regulation 5.6.54 (1) requires a liquidator who has rejected a proof of debt to notify the creditor that the creditor may appeal to the Court against the rejection within a specified time not less than 14 days after service of the notice. It appears that the right of appeal to which the regulation refers is the right of the creditor as a person aggrieved to appeal to the Court under s 1321 against the decision of a liquidator to reject the creditor's proof of debt or claim. The Court has the power under reg 5.6.54 (3) to extend the time for filing an appeal. However, subject to any such extension of the time limit for an appeal, the Regulation overrides the Corporations Rule (which expressly allows it to do so) by permitting the liquidator to limit the time for appeal to 14 days. 42 The application of these provisions to the present case, a case of administration under a deed of company arrangement, is complicated. Regulation 5.6.54 applies in its terms only to liquidators. However, clause 7.1 of the DCA provides that claims made under it are subject to various provisions that are directly applicable only to liquidators, including reg 5.6.54. That covenant binds creditors, the company and the administrators in contract, to the extent that they are parties to it, and by statutory extensions of the contract under ss 444D and 444G. 43 Section 1321 expressly applies to an appeal against a decision of administrators under a deed of company arrangement. Therefore a creditor aggrieved by the administrators' decision has a direct statutory right of appeal. The time limit for lodging such an appeal is 21 days, as set by Corporations Rule 14.1, and the Court has the power under that rule to extend the time. The Rule is expressed to be subject to any contrary provision in the Act or the Regulations. There is no contrary provision in the Regulations as far as appeals against the decisions of administrators are concerned. The question is whether the creditor's statutory right can be restricted by provisions in the deed of company arrangement, binding on the creditor under s 444D. 44 In my view the correct construction of these provisions is that the statutory right of appeal under s 1321 cannot be restricted by a provision of the deed. Section 444D, according to which creditors are bound by the deed, must be read subject to other provisions of the Act. The Court ought not to adopt a construction that would permit a right of appeal to be restricted, unless the relevant provisions are clearly intended to have that effect. Although the relevant provisions of the Regulations are in their terms not expressed to apply to the appeal rights of a creditor dealing with administrators under a deed of company arrangement, the Act and Regulations contemplate that a deed of company arrangement may adopt those provisions: s 444A (5), reg 5.3A.06 and Schedule 8A, para 8. However, where one section in an Act makes allowance for the consensual adoption of regulations that do not directly apply, the consensual adoption of such regulations should not be construed so as to override or qualify an independent statutory right under the same Act. Were it otherwise, the same process of reasoning would permit consensual abrogation of the creditor's right of appeal, even though under Part 5.3A the "consensus" leading to the adoption of the deed of company arrangement may be one in which the individual creditor has not participated. 45 In my opinion, therefore, the correct time limit for Derwinto and Mr Star to appeal under s 1321 against the Notice of Rejection was the 21 day time limit in Corporations Rule 14.1, which that Rule allows the Court to extend, rather than the 14 day time limit set by the Notice of Rejection pursuant to reg 5.6.54.

Extension of time for appeal 46 The plaintiffs submitted that the Court should use its power under Corporations Rule 14.1 to extend the time for appealing against the Notice of Rejection to 19 December 2001, the day on which the present proceeding was commenced. In Re Estate of Knight (a bankrupt); Rocom International Pty Ltd (in liq) v Prentice [2002] FCA 604 (17 May 2002), Tamberlin J granted an extension of time to a creditor to file an application for review of a decision by a trustee in bankruptcy to reject a proof of debt. The case was cited to me as a useful illustration of the factors relevant to applications of this kind. 47 Tamberlin J referred to the judgment of Kirby J in Jackamarra v Krakouer (1998) 195 CLR 516 at 539-543 (see also, by analogy, Kabushi Kaisha Universal v Aristocrat Leisure Industries Pty Ltd (1998) AIPC para 91-396 (Branson J; affirmed BC9801192)), and said that the factors relevant to an application for an extension of time include the following: · that the discretion to grant an extension is broad and flexible; · whether it is just in all the circumstances to grant an extension; · whether the time limits are of a substantive or procedural nature; · whether the case is arguable; · respective prejudice to the parties; · length of delay; · responsibility and reasons for the delay; · whether the delay was intentional or the result of a bona fide mistake; and · whether the delay was caused by the litigant or legal advisers. 48 Counsel for the plaintiffs submitted that the principal factors might usefully be grouped under the headings: (a) delay - including the length and nature of the delay, and the responsibility and reasons for it; (b) prejudice to the respective parties; and (c) whether the claim is arguable. I am content to adopt this approach. 49 As to delay, the Notice of Rejection was received by Mr Star on 24 October 2001, and the proceeding challenging the defendants' decision was commenced 56 days later on 19 December 2001, 35 days after the expiration of the 21 day period allowed by Rule 14.1. 50 I shall set out a brief summary of the events relevant to that period of delay. On the same day as receiving the Notice of Rejection, Mr Star instructed his lawyers to file an appeal. Mr Star's lawyers notified the defendants that they expected to file an appeal within the next seven days, by their letter of 8 November 2001. Although the letter was written one day after the expiration of the time limit purportedly set in the Notice of Rejection, it was sent and received within the 21 day time limit set by the Corporations Rules. Between 13 and 16 November 2001 (the date of declaration of the first interim dividend) Mr Star's lawyers briefed counsel and conferred with Mr Star's employees and a proposed witness in preparation for the appeal. From 19 November (when the defendants wrote to Mr Star's lawyers asking whether Mr Star intended to seek leave to appeal out of time) to 28 November 2001 (when the defendants wrote again foreshadowing declaration of a further dividend) Mr Star's lawyers finalised a draft statement of a proposed witness, and obtained further instructions and further advice from counsel, including advice concerning a possible variation of the Original Proof. On 7 December 2001 Mr Star's lawyers again contacted the proposed witness and received further advice from counsel, including a draft of the amended proof of debt. On 12 December 2001 they sent the draft to the defendants' lawyers. They sent the defendants' lawyers a draft originating process and draft affidavits by Mr Gould (to which a substantial bundle of documents was exhibited) and another witness on 17 December 2001, and they finalised these documents in the ensuing two days, before filing them on 19 December 2001. 51 It appears that Mr Star's lawyers were concerned to prepare the evidentiary case quite thoroughly before commencing any proceeding. Mr Gould's first affidavit is quite a detailed affidavit. As they had Mr Star's instructions to appeal, it is not easy to see why they found it necessary to have so much preparation before filing the initiating process. It should have been possible to file the originating process and a shorter affidavit within the 21 day time period, and file further evidence later. However, given what appears to have been the lawyers' decision to engage in fairly thorough preparation before commencing, it cannot be said that they were dilatory in their preparation. The fact that the delay was attributable principally to the lawyers rather than Mr Star is a factor operating in favour of granting the extension: Jackamarra v Krakouer at 543 per Kirby J. 52 I shall assess prejudice on the assumption, contrary to my findings below, that the Varied Proof cannot be relied upon. On that assumption, the denial of an extension of time would remove the opportunity for Derwinto and Mr Dean-Willcocks to establish their entitlement to participate in a distribution of the amount retained by the defendants, to the prejudice of the creditors of Derwinto. That is substantial prejudice. 53 On the other hand, it seems to me that the prejudice to the defendants and the creditors of Geltrom, though significant, is less substantial. I accept that, the DCA being a "single transaction" deed as opposed to a "trade on" deed, the creditors would have expected to receive a distribution quickly, but they have already received an interim distribution. Funds have been retained to make a distribution in favour of Derwinto, should the defendants be required to do so. It is true that the retained funds will be eroded through defence of the present proceeding, unless the defendants succeed and obtain an order for indemnity costs. The creditors' receipt of the final distribution, if the defendants succeed, will have been delayed. Though that prejudice is significant, it is clearly outweighed, in my view, by the prejudice to Derwinto and Mr Dean-Willcocks if they are shut out by refusal of an extension of time. I do not accept the defendants' contention that those who contributed to the Administrators' Fund have been prejudiced. They contributed at a time before Derwinto's proof of debt was rejected and the dispute between Mr Star and the defendants crystallised. 54 As to whether there is an arguable case, I have already expressed my conclusion, after reviewing the affidavits filed and read on behalf of the plaintiffs, that there is a serious question to be tried. The defendants had not submitted to the contrary.

Conclusion as to Question 1(a) 55 In all the circumstances, therefore, I shall exercise my discretion under Rule 14.1 by extending the time for making an application to appeal against rejection of the proof, nunc pro tunc, to 19 December 2001. 1(b) Whether the Plaintiffs can vary the Original Proof pursuant to Corporations Regulation 5.6.56, as provided by the Varied Proof 56 The Original Proof was never admitted by the defendants for the purpose of voting or the purpose of making distributions. Mr Star's representative was not permitted to attend the second meeting of creditors, and since the meeting voted to approve the DCA and it was executed, thereafter there was no occasion for the creditors to meet and for the voting rights of Derwinto and Mr Star to be considered. 57 It is clear, from their correspondence in August 2001 and subsequently, that both Mr Star and the defendants treated the Original Proof as a claim purporting to be a proof of debt for the purpose of distributions, after the second meeting of creditors had been held. Regulation 5.6.56 says that a proof of debt or claim may be withdrawn, reduced or varied by a creditor with the consent of the liquidator. There is no right of amendment standing outside this regulation, since generally speaking, once a determination of proof of debt is made by a liquidator, the liquidator has no power to permit an amendment and the proper recourse of an aggrieved party is to appeal under s 1321: see Re Magic Australia Pty Ltd (in liq) at 745. Its location in the Regulations suggests that reg 5.6.56 might be confined to proofs of debt that have been admitted by the liquidator, but I shall assume for present purposes that it also applies where a proof of debt has been submitted and not yet adjudicated upon. Even so, reg 5.6.56 can have no application to a proof of debt that has been rejected. Subject only to the possibility of appeal, a rejected proof of debt has no status for the purposes of the winding up and therefore there is no operative or potentially operative instrument to be varied. 58 It follows, in my view, that the answer to question 1 (b) is: "On 13 December 2001 the plaintiffs were not able to vary the Original Proof under reg 5.6.56". 1(c) If the answer to (b) is no, whether the Varied Proof can be taken to have been submitted in the administration of Geltrom as a fresh proof of debt 59 In its terms, Annexure A to the Varied Proof purports to make an application to vary the Original Proof under reg 5.6.56. Since the Original Proof had been rejected, and no appeal had been made against the decision, variation of the Proof was not available, as I have said. Nevertheless the Varied Proof made a claim against Geltrom, and the defendants were obliged to consider it having regard to reg 5.6.53, made applicable under clause 7.1. 60 Since the Original Proof was rejected by the defendants on 19 October 2001, it was not open to Derwinto or Mr Star in December 2001 to submit a new proof of debt which merely repeated the claim made in the Original Proof. Once a proof of debt has been rejected on its merits, the creditor is not entitled to repeat the claim in a fresh proof: Re Deerhurst, ex parte Seaton (1891) 8 Morr 258; referred to with approval in Re Rhoades; ex parte Rhoades [1891] 1 QB 905, 909 (affirmed on appeal [1899] 2QB 847), and also referred to with approval (though incorrectly described as a case concerning a secured creditor) in Re Lohrey; ex parte Dunlop-Perdriau Co Ltd (1931) 4 ABC 62, 66. 61 In my opinion, this rule does not prevent a creditor from making a fresh claim for a different amount on grounds not included in the original claim, merely because one of the grounds in the fresh proof is substantially the same as a claim (or the only claim) in the rejected proof. The reason for the rule is to prevent the repetition of claims already determined. If the substance of the new claim is significantly different from the claim that has been determined, the rule should not apply. 62 There is no bar to the late lodgement of proofs of debt or claims. The late submission of a proof may preclude the creditor from participating in distributions made before the proof is admitted (reg 5.6.48) or participating in a distribution to which a particular notice relates (reg 5.6.65), but participation in future dividends is allowed after the claim has been admitted (reg 5.6.68; see Re General Rolling Stock Company (1872) LR Ch App 646, 649; Re McMurdo; Penfield v McMurdo [1902] 2 Ch 684, 699 and 706). 63 Nothing happened before 13 December 2001 to shut out Derwinto from making such a claim. The fact that the claim was wrongly expressed to be an application for variation did not exonerate the defendants from considering the substance of the claim on its merits. 64 Therefore my answer to question 1 (c) is: "The Varied Proof was a proof of debt submitted in the administration of Geltrom under the deed of company arrangement." 1(d) If the answer to (c) is yes, whether the Defendants have rejected the fresh proof of debt constituted by the Varied Proof 65 In their letter of 13 December 2001, the defendants' solicitors said that "the administrators do not accept the proof", and gave various reasons summarised above. Those reasons rejected the Varied Proof on its merits as well as asserting that it was a purported variation not falling within reg 5.6.56 and was out of time. Given that the letter expressed categorical conclusions and did not invite further submissions or information, it amounted to rejection of the Proof on the defendant's behalf. It was a decision of the defendants as administrators of the DCA for the purposes of s 1321, appealable under Corporations Rule 14.1. 66 I agree with the submission by counsel for the defendants that the Corporations Regulations distinguish between a proof of debt that has merely not been admitted and one that has been rejected (see reg 5.6.65 (1) (b)). However, in my view there is no sensible distinction between a decision by a liquidator or administrator not to accept a proof, where there is no suggestion of deferral, and a decision to reject it. The letter of 13 December 2001 conveyed a decision not to accept the proof in this sense. 67 My answer to question 1 (d) is: "By their solicitors' letter dated 13 December 2001, the defendants rejected the Varied Proof as a proof of debt for the purposes of the administration." 1(e) If the answer to (d) is yes, whether the Defendants may revoke that decision to reject the fresh proof constituted by the Varied Proof and make a fresh determination in respect of the fresh proof as constituted by the Varied Proof 68 Regulation 5.6.55 (2) states that if the liquidator considers that all of a proof of debt or claim has been wrongly rejected, the liquidator may revoke the decision to reject the proof of debt or claim, and admit all or part of it. Therefore my answer to question 1 (e) is: "The defendants may revoke the decision to reject the Varied Proof, and may admit it wholly or in part under reg 5.6.55 (2)." 1(f) If the answer to (c) is yes and (d) is no, and it is admitted in full or in part, whether the Plaintiffs are entitled to participate in any distribution from the Administrators' Fund (as defined in the DCA) 69 This question does not arise, since I have answered question 1(d) in the affirmative. 70 However, the issue of Derwinto's entitlement, and the entitlement of its liquidator, to participate in any distribution from the Administrators' Fund arises in light of the findings I have made. I have held that the Original Proof was treated as a proof for the purposes of distributions but it was rejected by the defendants on 19 October 2001. Therefore, by the time they made their partial distribution on about 7 December 2001, there was no extant proof of debt by Derwinto or Mr Star. The Varied Proof, which is to be regarded as a fresh proof of debt, was lodged on 13 December 2001, after the partial distribution had been paid out. An amount was retained by the defendants after the partial distribution, which (after deduction of costs) might be made available for a distribution to Derwinto or its liquidator, or to the other creditors, depending upon the outcome of the dispute over Derwinto's claim. 71 The question that arises is this: if the defendants were to revoke their decision to reject the Varied Proof and make a fresh determination admitting it in whole or part, or their decision were to be overruled under s 1321, would Derwinto and its liquidator be able to participate in a distribution of the whole or part of the amount retained? 72 The entitlement of creditors to participate in distributions under a deed of company arrangement is governed principally by the terms of the deed. In the present case clause 7.1 of the deed leads us to the Corporations Regulations. 73 There is nothing in the Regulations to prohibit Derwinto and its liquidator from participating in any new distribution. Regulation 5.6.48 prevents a creditor from participating in a distribution made before his or her debt is admitted, and prevents a creditor from objecting to the earlier distribution in the event that the creditor has failed to lodge a proper proof of debt within the time fixed in accordance with the regulation. Regulation 5.6.65 prevents a creditor from participating in a distribution of which notice has been given in accordance with the regulation, if the creditor has not submitted a formal proof before the date specified in the notice. 74 The defendants purported to comply with reg 5.6.65 by publishing a notice in the Gazette. As I have said, notice was dated 2 October 2001 but it was published on 16 October 2001. It gave notice that a "first and final dividend" was to be declared on 16 November 2001. The notice also required creditors whose debts or claims had not already been admitted formally to prove their claims on or before 26 October 2001. It did not purport to be, and was not, a notice for the purposes of reg 5.6.48, because it appeared in the Gazette rather than in a daily newspaper circulating in New South Wales. No notice was given by the defendants under reg 5.6.48. 75 There is a dispute between the parties as to whether the defendants gave valid notice under reg 5.6.65. The plaintiffs contend that the notice published in the Gazette on 16 October 2001 was not effective for the purposes of the regulation because it did not give at least 21 days notice for the lodgement of proof of debt, measured from the date of publication rather than the date of the notice. They also submit that the defendants failed to give Mr Star the notice in writing required by reg 5.6.65 (1) (b) (iv). 76 It is unnecessary for me to decide these matters, and I shall not do so. If reg 5.6.65 was complied with, its only relevant effect would have been to exclude Derwinto and Mr Star from participating in the distribution to which the notice related. Although the notice referred to payment of a "first and final dividend", what was in fact distributed on 7 December 2001 was described as a "first interim dividend". The covering letter sent to admitted creditors with their cheques explained that the defendants were unable to pay a final dividend at that time, due to their dispute with Derwinto and Mr Star. Regulation 5.6.65 (3) would have excluded Derwinto and Mr Star from participating in a "first and final dividend", if one had been paid pursuant to the notice and the regulation had been complied with in all respects. But the occasion for paying such a dividend has now passed in light of payment of the interim dividend, and so the Gazette notice has no relevant effect. 77 I conclude, therefore, that reg 5.6.65 is no obstacle to Derwinto or its liquidator participating in a distribution of the whole or part of the net balance of the funds retained by the defendants. 1(g) If the answer to (c) is no, whether the Plaintiffs can in the future submit a fresh proof of debt making the same claim in whole or in part as (i) the Original Proof; (ii) the Varied Proof; or (iii) those parts of the Varied Proof not included in the Original Proof

78 This question does not arise, since I have answered question 1 (c) in the affirmative. 1(h) If the answer to (g)(i) is yes, and such fresh proof of debt is admitted in whole or in part, whether either of the Plaintiffs is entitled to participate in any distribution from the Administrators' Fund 79 This question does not arise, because question 1(g)(i) does not arise. 1(i) If the answer to (g)(ii) is yes, and such fresh proof of debt is admitted in whole or in part, whether either of the Plaintiffs is entitled to participate in any distribution from the Administrators' Fund 80 This question does not arise, because question 1(g)(ii) does not arise. 1(j) If the answer to (g)(iii) is yes, and such fresh proof of debt is admitted in whole or in part, whether either of the Plaintiffs is entitled to participate in any distribution from the Administrators' Fund 81 This question does not arise, because question 1(g)(iii) does not arise. Conclusions 82 I shall make orders for the determination of separate questions under Part 31, and I shall answer the separate questions in the manner stated above. The parties have agreed that there should be no order as to costs. 83 My intention in answering the separate questions is to clear the way for the parties to move on to consideration of the defendants' rejection of the Varied Proof on its merits. To guard against the possibility that some additional procedural or other obstacles to that path might be discovered, I shall grant each party liberty to apply to me on 48 hours notice. To the extent that it remains necessary, I shall make some directions for preparation of the case for final hearing, and case manage the proceeding in the Corporations List for the time being. 84 I should put the parties on notice that in view of the limited funds remaining in the hands of the defendants, and the probability that a fully contested final hearing would be lengthy and expensive, I believe it is highly desirable for a negotiated settlement to be achieved. If settlement is not achieved within a reasonable time, I shall consider whether to make an order under s 110K of the Supreme Court Act 1970 (NSW) requiring the parties to mediate. **********

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Corporations Act 2001(Cth)ss 444D, 444G, 447D, 588FB, 588FC, 588FF, 1321

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