MATTER : IN THE MATTER OF PARADOX DIGITAL PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 008 875 714)

BETWEEN : FLEET BROADBAND HOLDINGS PTY LTD (ACN 096 576 377)

PARADOX DIGITAL PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 008 875 714)

DATAFAST TELECOMMUNICATIONS LIMITED (ACN 073 238 178)

Corporations - Application to terminate deed of company arrangement - Section 445D - Relevant principles - Whether unfairly prejudicial or discriminating to exclude related party creditor from participation in distribution under DOCA - Turns on own facts

Corporate Law Reform Bill 1992 (Cth)

Corporations Act 2001 (Cth), s 232, s 286, s 435A, s 436C, s 439A, s 445D, s 445D(1), s 445D(1)(e), s 445D(1)(f), s 445D(1)(f)(i), s 445D(1)(g), s 556(1A), s 556(1B), s 564, s 600A

Bathurst City Council v Event Management Specialist Pty Ltd [2001] NSWSC 34

BGC Contracting Pty Ltd v Kimberly Gold Pty Ltd (2000) 18 ACLC 894

Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 37 ACSR 394

Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453

Emanuele v Australian Securities Commission (1995) 63 FCR 54

Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139

Hamilton v National Australia Bank Limited (1996) 66 FCR 12

JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691

Jenkins v Enterprise Goldmines NL (1992) 6 ACSR 539

Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 16 ACLC 540

Khoury v Zambena (1997) 15 ACLC 620

Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34

Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707

Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1997) 16 ACLC 95

Young v Sherman (2002) 170 FLR 86

1 MASTER NEWNES: This is an application by the plaintiffs under s 445D of the Corporations Act 2001 (Cth) ("the Act") for an order terminating a deed of company arrangement entered into between the defendants on or about 30 June 2004. I heard the matter on 5 April and 15 June 2005 and at the conclusion of the hearing on 15 June 2005 gave leave to the parties to make further submissions in writing. There followed a prolonged exchange of submissions, concluding with submissions in reply filed on behalf of the plaintiffs on 21 September 2005.

2 The fifth defendant ("Simon Ehrenfeld") and his brother, Gabriel Ehrenfeld, had, prior to 2000, been involved together in various businesses relating to the provision of internet services. In about March 2000 they decided to amalgamate their business interests into one company. On 2 May 2000 the fourth defendant ("Eftel") was incorporated for that purpose. The sole director of Eftel was Simon Ehrenfeld and the only shareholder was Eurocom Limited, a company in which Gabriel Ehrenfeld had an interest.

3 The first plaintiff ("Fleet Broadband") was incorporated some 12 months later, on 20 April 2001. The intention was that it would be the holding company for shares to be acquired in the first defendant ("Paradox Digital"). Upon its incorporation, Simon Ehrenfeld was appointed the sole director of Fleet Broadband. The shareholders of Fleet Broadband were Eftel and a number of other entities and individuals. On 28 June 2001, Gabriel Ehrenfeld and a Mr Deacon were appointed to the board.

4 On the same day that Fleet Broadband was incorporated, 20 April 2001, it acquired control of Paradox Digital. At the time, Paradox Digital was under administration and the acquisition by Fleet Broadband was effected by a deed of company arrangement. In effect, Fleet Broadband agreed to pay an amount of some $510,000 to the administrator of Paradox Digital and the administrator agreed to issue sufficient shares to Fleet Broadband to ensure that it owned not less than 99.99 per cent of the issued shares of Paradox Digital. In order to accomplish that it was necessary for some 6,000,000 new shares to be issued. It appears that there was some difficulty in connection with the initial share issue by the administrator, but nothing appears to turn on that.

5 The directors of Paradox Digital after its acquisition were Simon Ehrenfeld, the sixth defendant ("Mr Steinert") and a Mr Philip Wilton, all of whom were also directors of Eftel. According to the records held by ASIC, Gabriel Ehrenfeld and Mr Deacon were appointed to the board on 11 July 2003.

6 Eftel managed the business of Paradox Digital after its acquisition by Fleet Broadband. The circumstances in which Eftel came to do so were a matter of some controversy on the hearing of this application. Gabriel Ehrenfeld says that immediately prior to the acquisition of Paradox Digital, Eftel (apparently in its capacity as a shareholder of Fleet Broadband) was unable to raise its proportion of the funds required to make the acquisition and it was therefore agreed that Eftel would provide management services to the value of its contribution, an amount of some $495,000. Simon Ehrenfeld denies that and says the provision of management services by Eftel to Paradox Digital was simply a normal commercial arrangement. I do not think it is necessary to resolve that dispute. For present purposes it is sufficient to say that it was not in issue that, at all relevant times, Eftel managed the business of Paradox Digital.

7 The second plaintiff ("Fleet Global") was incorporated on 24 April 2002 as a wholly owned subsidiary of Fleet Broadband, for the purpose of establishing a new internet business dealing with the provision of wholesale digital subscriber lines. Simon Ehrenfeld was appointed the sole director of Fleet Global. According to the records held by ASIC, on 13 June 2003, Gabriel Ehrenfeld and Mr Deacon were appointed to the board.

8 In about December 2002, the third defendant ("Datafast") acquired all of the shares in Eftel by a scrip swap in which the shareholders in Eftel exchanged their shares for shares in Datafast. Simon Ehrenfeld became the chief executive officer of Datafast.

9 In early 2003, disagreements arose between the parties involved in the various corporate entities. The disagreements included claims by Gabriel Ehrenfeld and Mr Deacon that Eftel had failed properly to manage the business of Paradox Digital. The failures alleged included a failure by Eftel to set up a proper reporting system to enable accounts to be produced, a failure to produce management accounts, a failure to distinguish properly between the affairs of Paradox Digital and Eftel, and a failure properly to account for services provided in exchange for the payment of management fees. Disputes in relation to the various corporate entities have continued, and it seems expanded, since that time. They appear to be essentially between Gabriel Ehrenfeld and Mr Deacon on the one hand, and Simon Ehrenfeld and Mr Steinert on the other and seem, unfortunately, to have become quite acrimonious.

10 On 3 April 2003, Eftel entered into a loan agreement with each of Fleet Global and Paradox Digital, and a deed of charge by which Fleet Global and Paradox Digital respectively granted a fixed and floating charge over their assets and undertaking to Eftel to secure any money owing to Eftel. The grant of the charge by Paradox Digital appears from board minutes dated 3 April 2003 to have been approved by the board on that day, on the basis that Eftel would provide loan funds in a sum to be negotiated to support the operations of Paradox Digital for at least six months. The board of Paradox Digital at that meeting was constituted by Messrs Wilton, Steinert and Simon Ehrenfeld. On the same day, Fleet Global resolved that Fleet Global grant a charge to Eftel on the same basis.

11 Under the loan agreement with Paradox Digital, Eftel agreed, subject to certain conditions, to advance the sum of $50,000 to Paradox Digital and to consider further advances. Paradox Digital agreed to repay the initial advance, and any further advances, on a date 12 months from the date of the initial advance. The agreement provided that the repayment date could be extended by Eftel in its absolute discretion. In the meantime, Paradox Digital agreed to pay interest on the amount of each advance.

12 The loan agreement further provided that Paradox Digital would be in default if, among other things, it defaulted in payment of money due to anyone, it was unable to pay its debts when they fell due from its own money or there was a change in its directors. Extensive powers were conferred on Eftel in the event of a default by Paradox Digital, including the power to appoint a receiver, or receiver and manager, to the assets and undertaking of Paradox Digital.

13 Mr Gabriel Ehrenfeld says that he was unaware at the time that the transactions had been entered into and only learned of them when searching an ASIC website in about May or June 2003.

14 At a board meeting of Datafast on 19 December 2003 it was resolved that demands should be issued to Fleet Global and Paradox Digital for the money owing by those companies. The board resolved that if the debts were not satisfied Datafast's charge over each company would be exercised.

15 On about 5 January 2004, Eftel served notices of demand on Fleet Global and Paradox Digital pursuant to the loan agreements. The notice of demand directed to Paradox Digital, and dated 30 December 2003, asserted that Paradox Digital was in default in that it had failed to pay certain moneys to third parties when due, that it was unable to pay its debts when they fell due and that an unauthorised change in directors had occurred. By the notice, Eftel terminated the loan agreement, declared all moneys payable pursuant to it to be immediately due and payable and made demand for the sum of $195,120.06 by 9 January 2004, failing which Eftel would proceed to exercise its powers under the loan agreement or charge or both.

16 The notice of demand directed to Fleet Global, dated 30 June 2003, asserted that it had failed to pay the fourth defendant an amount of $246,116.96 when due, that it was unable to pay its debts when they fell due and that an unauthorised change of directors had taken place. Eftel again terminated the loan agreement and demanded payment of the sum of $246,116.96 by 9 January 2004.

17 On about 8 January 2004, Eftel served a further notice of demand on Fleet Global, apparently in substitution for the earlier notice of demand, asserting a failure by Fleet Global to pay the sum of $221,116.96 and terminating the loan agreement and demanding payment of the outstanding sum by 12 January 2004.

18 On 9 January 2004, solicitors for Fleet Global and Paradox Digital, instructed on their behalf by Messrs Gabriel Ehrenfeld and Deacon, wrote to Eftel's solicitors denying that Fleet Global and Paradox Digital were in default as alleged or that they were insolvent, and contending that the agreements had not been made at arm's length and were not enforceable. They gave notice that their clients would resist any attempt by Eftel to enforce the agreements.

19 On 22 March 2004, Eftel's solicitors replied, denying the allegations made by Fleet Global and Paradox Digital, but advising that the notice of demand sent to Paradox Digital was withdrawn, without prejudice to Eftel's right to assert the defaults referred to in the notice and to claim the money said to be due. It appears that no further steps have been taken in relation to Fleet Global.

20 Two days later, however, on 24 March 2004, the second defendants were appointed by Eftel as administrators of Paradox Digital, pursuant to s 436C of the Act.

21 The first meeting of creditors of Paradox Digital was held on 31 March 2004. The second meeting was scheduled to be held on 28 April 2004.

22 On 19 April 2004, Mr Nilant, on behalf of the administrators, sent a circular to creditors pursuant to s 439A of the Act. In the circular, Mr Nilant said he had carried out a detailed solvency review which had confirmed that Paradox Digital was insolvent at the date of his appointment. Mr Nilant said he believed that the company may have been insolvent as early as 30 June 2002. He said it appeared that the company's records were in disarray and he believed the company had not maintained satisfactory books and records in accordance with s 286 of the Act.

23 Mr Nilant reported that fixed and floating charges over the company's assets were held by the National Australia Bank ("NAB") and Eftel respectively. An amount of approximately $12,000 was secured by the NAB charge and an amount of approximately $235,000 was secured by the Eftel charge. Unsecured creditors claimed debts amounting to approximately $1,076,922, of which an amount of $308,000 was claimed by Fleet Global and $3,434 by Datafast. Mr Nilant said he had prepared financial reports which revealed that, as at 24 March 2004, the company had a net asset deficiency of $868,847 and in the period 1 July 2003 to 24 March 2004 had made a loss of $274,551.

24 In the circular Mr Nilant also reported that the grant of the fixed and floating charge to Eftel might be a voidable transaction, on the ground that Eftel was a related party and, at the time it was granted, Paradox Digital was arguably insolvent. Mr Nilant said it was also arguable that Eftel had received an unfair preference. Mr Nilant noted that these potential claims would require detailed investigation by a liquidator. He also observed that a number of defences to such claims were available and an analysis would also need to be made of the costs and likely prospects of recovery.

25 Mr Nilant also said he had formed a preliminary view that in the event of Paradox Digital being placed into liquidation, "a liquidator may have a strong claim against the directors of the Company for insolvent trading". He went on to say that "further investigations in relation to a potential claim for insolvent trading would need to be undertaken by a Liquidator and I would point out to creditors that such proceedings may often be drawn out and involve significant cost". Mr Nilant also noted that a liquidator would have to consider the directors' ability to satisfy any judgment obtained against them, and said that he did not have any information on the directors' financial position.

26 Mr Nilant reported that he had been in discussion with Eftel regarding the possibility of Eftel proposing a deed of company arrangement but as at the date of the report no acceptable proposals for a deed of company arrangement had been received. Mr Nilant recommended that, in light of the matters set out in his report, at the meeting on 28 April 2004 the creditors vote in favour of a winding up of the company.

27 Three days later, on 22 April 2004, a further circular was sent to creditors by the administrators. In that circular Mr Nilant advised that, on 20 April 2004, he had received an offer from Eftel to purchase the business and equipment of Paradox Digital, together with its current customer list and current debtors. He said negotiations were continuing and he expected that any agreement would be reached well before the meeting of creditors on 28 April 2004.

28 In the circular Mr Nilant said he had also received a proposal from Eftel for a deed of company arrangement. He said that, in summary, the terms of the proposal were that Eftel would waive its priority under its charge, the creditors of Paradox Digital were to release Paradox Digital and its directors and former directors from any debts or any claims which those creditors may have, Paradox Digital and its creditors were to release Eftel and its directors and former directors from any debts or claims which Paradox Digital may have against them, all the shares in Paradox Digital were to be transferred to Eftel, and the existing directors of Paradox Digital were to be removed and Simon Ehrenfeld or other nominees of Eftel appointed as directors. Mr Nilant said he was assessing the proposal but it appeared that it would require refinement before he could make a proper recommendation to creditors.

29 At the second creditors' meeting, held on 28 April 2004, Mr Nilant told the creditors that the business of Paradox Digital (excluding debtors) had been sold to Eftel for $70,000, that having been the only acceptable offer in response to his "expressions of interest campaign" to sell the business as a going concern. He noted there was an amount of $1.1 million owing by Paradox Digital to unsecured creditors, including an amount of $267,000 owing to the largest unsecured creditor, Fleet Global. The secured creditors were NAB, owed an amount of $12,000, and Eftel, owed an amount of $234,000. Employees were owed approximately $26,000. Mr Nilant said he considered that most of the book debts of approximately $1 million were unlikely to be recoverable, although Simon Ehrenfeld said that he thought he could collect up to $100,000 over a period of six months.

30 At the meeting there was considerable discussion of the proposed DOCA. In the course of the meeting the representative of the Australian Taxation Office, a major creditor, asked whether associated entities would be prepared to defer their debts. Simon Ehrenfeld said they would as part of a DOCA proposal. That drew the response from the plaintiffs' solicitor that, having regard to the statement in the administrators' report of 19 April 2004 that Eftel's security may be a preference, Eftel may be giving nothing away. The solicitor for Eftel informed the creditors that acceptance of the DOCA would release the directors of Paradox Digital and Eftel from any claims against them.

31 Several creditors and Mr Nilant expressed the view that Eftel would have to offer a substantial cash payment to make the DOCA proposal acceptable. Ultimately, the meeting was adjourned to 26 May 2004 to enable Eftel to consider an amended DOCA proposal involving payment of a sum of not less than $100,000.

32 On the evening of 25 May 2004, a fresh DOCA proposal was made to the administrators by Datafast, the parent of Eftel. At the creditors' meeting the following day the DOCA was still in a handwritten form and Mr Nilant described it as "need[ing] some refinement". The proposal, in essence, was that Datafast pay an amount of $100,000 over five months and none of the related entities be eligible to participate in the distribution to creditors under the DOCA. All of the assets of Paradox Digital were to remain with it. After discussion, the meeting was further adjourned to 9 June 2004 to allow the DOCA to be properly drafted and then considered by creditors.

33 In a circular to creditors dated 31 May 2004, Mr Nilant said that a draft DOCA had now been completed and he summarised the main features of it. According to the summary, the DOCA provided for payment by Datafast of an amount of $125,000 over four months with an initial payment of $25,000 and then four instalments of $25,000, Datafast was to contribute a further $10,000 toward the deed administrators' remuneration and the cost of the DOCA. Paradox Digital was to retain its assets excluding administration trade debtors and the deed administrators were to retain the funds held in the company's bank account, debtor collections to date and the proceeds from the sale of the business as part of the DOCA fund. Datafast was to provide certain indemnities, including in relation to the preparation and implementation of the DOCA. The appointment of the current directors of Paradox Digital was to be terminated and nominees of Datafast were to be appointed as directors, and Datafast was to be issued sufficient shares in Paradox Digital to give it "a dominant majority in the company". According to the summary, a number of entities, including Datafast, Eftel and Fleet Global were not to participate in any distribution to creditors under the DOCA.

34 In the circular, Mr Nilant set out an analysis of the likely returns to creditors under the proposed DOCA and on an immediate liquidation respectively. He concluded that on an immediate liquidation the entitlements of employees of Paradox Digital would be paid in full but no funds would be available to unsecured creditors. Under the proposed DOCA an amount of at least $100,000, or 15.8 cents in the dollar, would be available for distribution to unsecured creditors.

35 Mr Nilant noted that he had previously referred to the liquidator having a possible claim against Eftel to set aside its charge and observed that, if that claim were successful, Eftel would nevertheless remain an unsecured creditor so, in the event of a liquidation, the position of unsecured creditors would remain unchanged. He said he expected any claim to be defended and noted there were several defences available to Eftel.

36 Mr Nilant said that Eftel may also have received a preference payment of $60,000 and commented that, from his experience, obtaining litigation funding to pursue the claim would be difficult, given the amount and the risks involved. Mr Nilant commented that there were also defences available to Eftel and that the outcome of such litigation could not be regarded as certain.

37 Mr Nilant also referred to his previous comments regarding possible insolvent trading claims against the former directors of Paradox Digital and to the initial investigations which had indicated that a claim of approximately $630,000 might be available. Mr Nilant noted that there were various defences available to such a claim and that further independent legal advice would be necessary before any recovery actions were taken. He said Paradox Digital had insufficient funds to pursue such a claim but that a creditor or a litigation funder might be prepared to provide the funds.

38 Mr Nilant pointed out that the DOCA provided that related party creditors were excluded from participating in any distribution under the DOCA. He observed that in an immediate liquidation those related party creditors would be entitled to prove, subject to further consideration of their claims. If the related parties were admitted for their existing claims, an amount of approximately $375,000 would have to be recovered from the preference and insolvent trading claims to provide a comparable return to that likely to be available under the DOCA.

39 Mr Nilant went on to say that acceptance of the DOCA would prevent any further claims being made against Eftel or the directors of Paradox Digital in relation to those claims. The latter is a matter I will come back to, as on this application counsel for Eftel and Messrs Simon Ehrenfeld and Steinert indicated that neither Simon Ehrenfeld nor Mr Steinert, who ultimately executed the DOCA on behalf of Eftel, thought that was the intention or effect of the DOCA and counsel for the administrators argued that it was not in fact the effect of the DOCA.

40 In the circular, the administrators concluded by observing that the DOCA avoided the need for any recovery actions, which, while they might ultimately provide a higher return to creditors, were not without risk, uncertainty and the need for expensive legal action. The administrators recommended that the creditors vote in favour of Datafast's DOCA proposal.

41 On 3 June 2004, a draft deed of company arrangement was provided to the plaintiffs' solicitors. The deed was essentially to the same effect as set out in the circular of 31 April 2004. The funds available for distribution to participating creditors under the DOCA comprised the amounts payable by Datafast under the DOCA, cash at bank and trade debtors during the administration of Paradox Digital. The deed provided that the shares in Paradox Digital to be allotted and issued to Datafast were to be sufficient to constitute 99.9 per cent of the issued capital of Paradox Digital, a number agreed at 51,995,519,928 shares.

42 Under the deed, the creditors of Paradox Digital whose claims would not be admissible to proof included Datafast, Eftel, Simon and Gabriel Ehrenfeld, Mr Deacon and Fleet Global. The draft deed also included a release by Paradox Digital of any claims it might have against Eftel or the past or present directors of Eftel. The release was set out in cl 12 which provided, so far as relevant, that Paradox Digital "irrevocably and unconditionally releases Eftel and all directors of Eftel (including, for the avoidance of any doubt, any former directors of Eftel) from all Claims which, but for this Deed, [Paradox Digital] could have maintained against one or more of Eftel or any director of Eftel (including, for the avoidance of any doubt, any former directors of Eftel)". In the deed, "Claim", as defined, "includes a claim, demand, debt, action, proceeding, suit, cost, charge, expense, damage, loss and other liability."

43 The plaintiffs' solicitors wrote to the solicitors for the administrators on 4 June 2004 enclosing a letter that they asked be circulated to creditors before the creditors' meeting of 9 June 2004. In the covering letter to the administrators' solicitors, the plaintiffs' solicitors said that no alternate DOCA proposal would be coming from their clients as their clients believed it was in the best interests of the creditors for Paradox Digital to be wound up and claims pursued against Eftel and the former directors of Paradox Digital. They said their clients were prepared to fund such litigation and "[t]hey are happy to speak with your client to formalise the same. Please let us know if your clients would like to avail themselves of the opportunity."

44 In the letter for circulation to creditors, the plaintiffs' solicitors said, among other things, that their clients believed it was in the best interests of the creditors for Paradox Digital to be wound up and claims pursued against Eftel and the former directors of Paradox Digital, saying that "if any such action is successful the return to all creditors is likely to exceed (possibly substantially) the proposed return to creditors under the DOCA". They said their clients were prepared to fund that litigation and they were writing separately to the administrators in that regard. The plaintiffs' solicitors also said that the existing members of Paradox Digital did not agree to the transfer of control to Datafast. They said they had instructions to apply to the Court to have the deed of company arrangement set aside if it were entered into.

45 That letter was sent to creditors of Paradox Digital by the administrators on 4 June 2004. In the accompanying circular Mr Nilant commented that the plaintiffs had not offered any alternative DOCA proposal and their contention that if action against Eftel and the former directors was successful the return to creditors would exceed that under the DOCA was not substantiated. The administrators referred to their earlier comparison of the likely return to creditors under the DOCA proposal and an immediate liquidation respectively, and confirmed their recommendation that creditors vote in favour of the deed of company arrangement.

46 At approximately 10 am on 8 June 2004, the administrators' solicitors, having received no further communication from the plaintiffs' solicitors in respect of the funding of the proposed litigation, wrote to the plaintiffs' solicitors by facsimile requesting that Gabriel Ehrenfeld telephone Mr Nilant as soon as possible to discuss the offer to fund litigation in the event of a liquidation of Paradox Digital. They said that, in particular, Mr Nilant wanted to discuss what litigation the plaintiffs would be prepared to fund, the resources they had to fund it, providing evidence as to those resources, and the terms attached to any funding. They said that Mr Nilant wanted to report Gabriel Ehrenfeld's response to the creditors at the meeting the following day.

47 Gabriel Ehrenfeld did not contact Mr Nilant before the creditors' meeting on 9 June 2004, nor did anyone do so on his behalf.

48 At that meeting, the solicitors for the plaintiffs reiterated that their clients believed it was in the best interests of creditors to wind up the company and that recoveries under the preference and insolvent trading claims, previously referred to by the administrators, would provide a better return than the proposed DOCA. They said there were also possible claims against Eftel arising out of its management of Paradox Digital which would be released under the proposed DOCA. The plaintiffs' solicitors said the release of Eftel was not acceptable to their clients and their clients did not agree to be non-participating creditors, nor did their clients who were shareholders of Paradox Digital consent to the issue of shares to Datafast.

49 The plaintiffs' solicitors told the creditors that their clients would not purchase the causes of action from a liquidator but it was likely they would seek orders under s 564 in relation to priority of distribution of the funds recovered. They said that details of litigation funding for a liquidator were not available and it would be necessary to discuss litigation funding with the liquidator as matters progressed.

50 In the course of the discussion, Simon Ehrenfeld was asked what was proposed would happen with Paradox Digital. He said that it would remain inactive and eventually be deregistered.

51 Mr Nilant reiterated his recommendation that the creditors enter into the DOCA and ultimately the resolution to do so was passed by an overwhelming majority by both number and amount. A total of 14 creditors with debts amounting to $819,691.89 voted in favour of the resolution. Four creditors with debts of $316,301.71 (of which Fleet Global's debt constituted $308,000) voted against the resolution. The only creditors to vote against it were Fleet Global and interests associated with the plaintiffs. The creditors voting in favour included all the independent major creditors, being the Australian Taxation Office (owed $219,179.61), Comindico Australia Pty Ltd ($223,588.00), Connect Internet Solutions Pty Ltd ($90,214.19), all independent smaller creditors and the employees of Paradox Digital.

52 On 24 June 2004, the plaintiffs' solicitors wrote to the administrators' solicitors advising that the plaintiffs intended to commence proceedings to set aside the DOCA on the ground that it was "oppressive or unfairly prejudicial to, or unfairly discriminatory against" their clients as non-participating creditors or, alternatively, because it had effectively de-franchised the shareholders of Paradox Digital by the issue of the shares to Datafast for, in effect, no consideration and solely to give Datafast control of Paradox Digital to avoid action being taken against the former directors, who were now associated with Eftel.

53 On 30 June 2004, the deed of company arrangement was executed and Gabriel Ehrenfeld and Mr Deacon were removed as directors of Paradox Digital by the administrators.

54 These proceedings were commenced on 8 July 2004. The plaintiffs seek to have the deed of company arrangement terminated under s 445D of the Act.

55 Section 445D(1) provides, so far as relevant:

"The Court may make an order terminating a deed of company arrangement if satisfied that:

...

(e) effect cannot be given to the deed without injustice or undue delay; or

(f) the deed or a provision of it is, an act or omission done by or made under the deed was, or an act or omission proposed to be done or made would be:

(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii) contrary to the interests of the creditors as a whole; or

(g) the deed should be terminated for some other reason."

56 Section 445D is contained in Pt 5.3 of the Act. Section 435A provides that:

"The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company."

57 When considering whether to terminate a deed under s 445D, the Court must approach the discretion provided under s 445D(1) by looking at the whole of the effect of the deed and assessing its unfairness, if any, to the plaintiff, but in doing so, must bear in mind the scheme of Pt 5.3A of the Act and the interests of other creditors, the company and the public generally: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1997) 16 ACLC 95; Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 16 ACLC 540 at 544; Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48. The mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed; the mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement: Lam Soon Australia (supra); Khoury v Zambena (1997) 15 ACLC 620 at 627.

58 In deciding whether effect cannot be given to a DOCA without injustice within the meaning of s 445D(1)(e), the Court must examine the effect of the DOCA and not its purpose; alleged improper purpose is irrelevant: Cresvale Far East v Cresvale Securities [2001] NSWSC 89; (2001) 37 ACSR 394 at [189]. In that case it was held that the fact that the purpose of a provision in a DOCA, and even its effect, was to dilute existing shareholdings was not, of itself, a reason to terminate the DOCA.

59 In considering whether a deed is oppressive or unfairly prejudicial or discriminatory under s 445D(1)(f), it is necessary to consider the effect of the deed against the background of the general principles underlying Pt 5.3A, which establish the basic right of a creditor to be paid or to wind a company up, or to have the company administered by the administrator in a way that keeps the company's business going and will see the creditor paid something out of the property of the company. If a deed departs from that, a creditor is more easily able to say that it is operating oppressively: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at 99.

60 Where s 445D(1)(f)(i) is relied upon, the Court looks at the whole of the effect of the DOCA and assesses its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Pt 5.3A, the interests of the other creditors, the company and the public generally: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at 98. In order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness: Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 at 151; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000_)_ [2000] NSWSC 99; 156 FLR 453. The criteria that guide the Court are fairness and practicality of the scheme as a whole: Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 710.

61 It is for the Court to decide whether, in balancing the interests of the creditors as a whole against minority creditor interests, the DOCA acts so as to unfairly prejudice the interests of the minority. The Court decides this "according to ordinary standards of reasonableness and fair dealing". Whether the conduct is unfairly discriminatory will be judged on standards which reasonable commercial persons acting bona fide would think to be fair: Jenkins v Enterprise Goldmines NL (1992) 6 ACSR 539 at 550. That case was concerned with an application of oppression of members but the expression "oppressive or unfairly prejudicial to, or unfairly discriminatory against" in s 445D(1)(f) is in the same terms as s 232 and, so long as it is borne in mind that in the former the oppression may be of creditors by other creditors rather than of members by directors or other members, the case law dealing with oppression under s 232 is of assistance: Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [100].

62 The fact that the deed discriminates between creditors will not of itself establish that it is unfairly discriminatory or prejudicial: Khoury v Zambena Pty Ltd (supra) at 627; Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (supra). The test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice: Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [102]. Some degree of discrimination is not necessarily unfair. Thus it is clear that a DOCA may provide the differential dividends among creditors: Hamilton v National Australia Bank Limited (1996) 66 FCR 12 at 38. Part 5.3A does not require a pari passu distribution. What is required is a better return to creditors than an immediate winding up: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (supra). That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up.

63 There is little assistance to be gained on the application of s 445D(1)(g) from the Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth). It was there observed that "having regard to the width of the previous paragraphs in proposed subsection (1), it is anticipated that the Court's power under proposed paragraph (1)(g) would be exercised at most very rarely". The provision may be available where the proposal for the DOCA has a fraudulent or wrongful purpose: Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [99] or the DOCA offers an unconscionable premium, contrary to public policy, as a bribe to creditors to support an arrangement under which the conduct of the directors will not be investigated: Young v Sherman (2002) 170 FLR 86 at [67]. But the possibility or even the probability that abuse may occur is not itself sufficient to deny creditors the opportunity to approve arrangements including a premium distribution in a case where the facts do not point to any such impropriety: Young v Sherman (supra).

64 There is no obligation on creditors to pursue winding up rather than a deed of company arrangement when both are available. That is a matter to be left to their commercial judgment. The fact that under the DOCA there is likely to be less scrutiny of the directors' conduct or proper investigations of voidable transactions is a weighty consideration, but under the scheme of Pt 5.3A this is primarily a matter to be taken into account by the creditors in the exercise of their commercial judgment in considering whether to authorise the deed proposal: Young v Sherman (supra). But if the DOCA resolution is passed with the votes of those parties vulnerable to recovery action, in circumstances where the resolution would not otherwise have been passed, that will reduce the weight to be given to an affirmative vote: Bathurst City Council v Event Management Specialist Pty Ltd [2001] NSWSC 34 at [9].

65 Even if the Court is satisfied that one of the grounds under s 445D(1) has been made out, it retains a discretion as to whether or not to terminate the DOCA. The discretion is a wide one. It is to be exercised having regard to the interests of the creditors as a whole and to the public interest: Emanuele v Australian Securities Commission (1995) 63 FCR 54; Khoury v Zambena Pty Ltd (supra); Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [105].

66 The plaintiffs' claim was put primarily on the basis that the DOCA was unjust to, or unfairly prejudicial to or discriminatory against, Fleet Global as the largest unsecured creditor of Paradox Digital, by excluding it from participation in the deed of company arrangement and in precluding the immediate winding up of Paradox Digital, thereby preventing Fleet Global from any recovery to which it might be entitled on a winding up.

67 On behalf of Fleet Broadband, it was submitted that the DOCA was unjust, or unfairly prejudicial to or discriminatory against Fleet Broadband, because the effect was compulsorily to divest Fleet Broadband of its 99.99 per cent shareholding in Paradox Digital for no proper commercial purpose.

68 Turning first to the position of Fleet Global, it was submitted that it was no answer to say that, because Paradox Digital was insolvent, Fleet Global would be no worse off as a non-participating creditor under the DOCA than it would be if Paradox Digital was wound up, and there was therefore no injustice or unfairness. It was submitted that the proper question is whether the different treatment of the non-related creditors and Fleet Global respectively is based on reasonable grounds consistent with the spirit and object of Pt 5.3A of the Act.

69 In this case, it was argued, Fleet Global had been excluded from participation simply on the basis that it is a "related party" to Paradox Digital. While it might be common for related party creditors to agree to be treated differently to other creditors, Fleet Global did not consent to different treatment. Moreover, there was no suggestion that Fleet Global had brought about or contributed to the financial difficulties of Paradox Digital. It was submitted there was no basis for a contention that a creditor can properly be discriminated against solely because it is related to the company in administration, or to the proponents of the DOCA, particularly where there is no suggestion that the related party creditor has brought about or contributed to the financial difficulties of the company in administration.

70 It was further submitted on behalf of the plaintiffs that there was no evidence the DOCA would not have been approved by the other creditors had Fleet Global been included. In any event, the participating creditors were aware that Fleet Global was being excluded against its wishes. Accordingly, even if it had been established that they would not have voted in favour of the DOCA except on the basis that Fleet Global was excluded, such an insistence would, in itself, have been unfairly discriminatory.

71 It was submitted that it was therefore of little weight that the DOCA had been approved by the overwhelming majority of creditors by number and value, in circumstances where that majority comprised the participating creditors. It was submitted that if a non-participating creditor had voted in favour that would have been a matter of significant weight. In the present case, the participating creditors did so in the knowledge that they would receive a dividend in circumstances where the largest creditor, Fleet Global, would be excluded against its will from any participation, and where the assets available for distribution under the DOCA included, in addition to the amount paid by Datafast under the DOCA, existing assets of Paradox Digital, namely the trade debtors from the administration period and the cash at bank.

72 It was also submitted that it was not the case that Fleet Global was no worse off than in an immediate winding up. The claims for insolvent trading and an unfair preference had been expressly released by the DOCA. They would not be alive when the DOCA came to an end. The release of those claims was therefore relevant in assessing whether the effect of the deed is to discriminate unfairly against Fleet Global, and in considering the purpose of the deed proponents. The effect, therefore, of the deed was not only that Fleet Global was given differential treatment by being excluded from any dividend, but that assets of the company, being the potential claims, had been released and so would not be available to Fleet Global on a liquidation of Paradox Digital after the DOCA had come to an end.

73 It was submitted that no weight could be placed on the failure of the plaintiffs to provide the requested information as to the funding of the litigation they proposed. The information was only requested the day before the creditors' meeting. At the creditors' meeting the plaintiffs' solicitor had said that the legal proceedings would involve an action against the former directors for insolvent trading, litigation to set aside the Eftel charge, recovery of priority payments made to Eftel and claims against Eftel pursuant to the management agreement, and that it was likely an application would be made under s 564 of the Act.

74 The plaintiffs further submitted that the DOCA had been used for an improper purpose. The plaintiffs submitted that the question of purpose is relevant for the purposes of s 445D where a deed of company arrangement is part of conduct undertaken inconsistent with the object of Pt 5.3A. An improper purpose is a ground for terminating a deed of company arrangement. Counsel referred to Deputy Commissioner of Taxation v Portinex Pty Ltd (supra) at [99].

75 The improper purpose of the DOCA and its proponents was said by the plaintiffs, in essence, to be two-fold; first, to release the former directors of Paradox Digital who are also directors of Eftel from any insolvent trading claims and to release Eftel from any unfair preference claim, and secondly, to obtain control of Paradox Digital to avoid any claims being made against those parties in the future. It was submitted that where a deed of company arrangement had been procured for an improper purpose it was no answer for the defendants to say that the plaintiffs were no worse off under the deed of company arrangement than they would be on an immediate winding up.

76 The plaintiffs argued that it was clear that Eftel could have exercised its powers under its charge by becoming a mortgagee in possession or by appointing a receiver, but in fact its intention from the outset was to appoint an administrator. It did so with no intention of Paradox Digital continuing to trade but with the sole objective of obtaining the release of claims against Eftel and the directors of Paradox Digital associated with Eftel. The acquisition of all of the issued shares in Paradox Digital was to ensure that no claims could be brought in the future against those parties. In order to achieve that, when it became clear after the second meeting of creditors on 28 April 2004 that a deed of company arrangement dealing essentially only with the release and the acquisition of the shares would be unacceptable to the unsecured creditors, Datafast had agreed to pay an amount that was greater than Datafast considered the remaining assets of the company were worth.

77 That improper purpose, it was submitted by counsel for the plaintiffs, was also evidenced by the conduct of Eftel which, as a secured creditor, instead of realising under its security, appointed administrators to Paradox Digital and then proposed a DOCA by which it agreed to relinquish its security. In the circumstances, the only reasonable inference is that at all times the real purpose of Eftel, by itself or through its parent Datafast, was not to obtain payment of the money owing to it but simply to achieve its release and the release of those associated with it from any claims that might be available to Paradox Digital.

78 It was submitted on behalf of Fleet Broadband that as the purpose of the DOCA was improper, it was not to the point that, because its shares in Paradox Digital were of no value whether there was a DOCA or an immediate winding up, it had lost nothing.

79 The defendants submitted that there was no commercial unfairness and nothing oppressive, unfairly prejudicial or discriminatory in a DOCA which provides for the introduction of a fund not previously available to the company, on the proviso that only non-related creditors will share in it. Normally a related party creditor cannot prove under a DOCA. It was submitted that related entity creditors stand in a different position to normal unsecured creditors. Counsel referred to s 600A, s 556(1A) and (1B) of the Act and submitted that these provisions provide statutory recognition that the votes and interests of related entity creditors have a different quality to ordinary unsecured creditors. The statutory recognition is no more than a reflection of commercial reality and morality. Counsel referred to JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691 at [106].

80 It was submitted on behalf of the defendants that, in any event, in the present case Fleet Global is no worse off than it would be on an immediate winding up. In fact, it is better off if the DOCA runs its course in that the participating creditors' claims will be released so that if, once the DOCA is at an end, Paradox Digital is wound up and proceedings in respect of insolvent trading claims are taken, as proposed by the plaintiffs, any funds recovered will be distributed to a substantially reduced creditor base.

81 Counsel for Paradox Digital and the administrators submitted that it was not the case that under the DOCA any insolvent trading or unfair preference claims had been released. Such claims could only arise upon a winding up of Paradox Digital. There were therefore no such extant claims at the time the DOCA was executed. The DOCA did not release any future claims that might arise upon a future winding up of Paradox Digital. Counsel for Datafast, Eftel, and Messrs Simon Ehrenfeld and Steinert submitted that that was correct, although adding that it was ultimately a matter for judicial determination on the proper construction of the DOCA.

82 Notwithstanding the latter defendants' added qualification, it was not, therefore, contended by any of the defendants that the effect of the DOCA is to release any claims of that nature. In particular, it was not suggested that any of the parties to the DOCA contemplated or intended that that would be the effect of the DOCA; rather, to the contrary.

83 The defendants submitted that, in any event, there was no cogent evidence of any viable insolvent trading or unfair preference claims. The statements in the administrators' reports were, and were expressed to be, simply preliminary findings and, in addition, Paradox Digital had no means of funding any litigation to prosecute such claims. No firm, workable, proposal for litigation funding had ever been advanced on behalf of the plaintiffs.

84 The defendants submitted that there was no evidence of any improper purpose by the proponents of the DOCA and rejected the proposition that there had been throughout a strategy on the part of Eftel to appoint an administrator and then take control of Paradox Digital through a deed of company arrangement. The undisputed fact was that at the time of the appointment of the administrators Paradox Digital was insolvent. Appropriate steps had to be taken in the light of that. While under the DOCA control of Paradox Digital vested in Datafast, that did not prevent any non-participating creditor from making an application to wind up the company once the DOCA came to an end. Control of Paradox Digital was therefore irrelevant to whether or not, following the termination of the DOCA, the company was wound up and claims pursued by a liquidator.

85 It was submitted on behalf of the defendants that the plaintiffs had not made out a basis for terminating the DOCA under s 445D.

86 It was submitted, in the alternative, that even if a ground were established, in the exercise of its discretion the Court ought not to terminate the DOCA. The plaintiffs would be no better off if the DOCA was terminated and, as was then inevitable, Paradox Digital was wound up. On the other hand, the creditors generally would be far worse off. On the evidence, employees would be paid, at best, 48 cents in the dollar in respect of their entitlements and unsecured creditors would receive nothing. The independent unsecured creditors would thereby lose a certain dividend of 15.8 cents in the dollar. The clear wishes of a majority in number and value of the creditors, including all the independent creditors, would be ignored.

87 That would occur in circumstances where the plaintiffs and the DOCA opponents had failed to put forward any firm proposal for litigation funding before the creditors' meeting, where they had not suggested any alternative DOCA proposals, and where they had not offered any undertaking that on an immediate winding up the participating creditors would receive a dividend of not less than that which would ensue under the DOCA. Counsel referred to BGC Contracting Pty Ltd v Kimberly Gold Pty Ltd (2000) 18 ACLC 894.

88 There is annexed to the affidavit of Mr Nilant sworn on 8 October 2004, a more recent comparison of the likely return to creditors under the DOCA and an immediate winding up of Paradox Digital. According to that comparison, it is likely there would be no return to creditors in an immediate winding up, but there would be a return of 15.8 cents in the dollar under the DOCA.

89 In that affidavit, Mr Nilant says he recommended the DOCA to creditors for a number of reasons, in particular that outstanding employee entitlements of approximately $25,000 would be paid in full in a relatively short period of time, the DOCA ought to produce an amount of approximately $100,000 for distribution to participating unsecured creditors whereas in an immediate winding up they were likely to recover nothing, the DOCA was simple and certain and could be completed in a relatively short period of time at minimal cost, the major trade creditors and employees supported the proposal, and there was no firm proposal as to the level and source of funding which may have been provided to a liquidator of the company to pursue any litigation as to possible unfair preference claims, insolvent trading claims or any other action.

90 Mr Nilant says that he could not conclude that there were necessarily claims available to Paradox Digital and he could not conclude that the claims, if brought, would be successful or that the defendants would have funds to meet any judgment obtained against them.

91 I did not understand it to be in issue, and on the evidence it is the case, that on an immediate winding up Fleet Global would not recover any of the money owing to it by Paradox Digital. Nor would the priority creditors (principally employees) or the other unsecured creditors receive anything. Any return to the unsecured creditors would be dependent upon the successful prosecution of, at least, the insolvent trading claim, and the recovery of a substantial amount from the defendants.

92 It must, I think, be accepted that creditors voting on a DOCA who are reasonably informed of the relevant circumstances are generally in the best position to decide how their own interests are best served. In a situation where the choice for creditors is between a DOCA, where the funds for distribution are limited but are certain and will be readily available, and a winding up, where a possibly larger distribution is dependent upon the successful prosecution of potentially complicated, time-consuming and expensive claims against former directors and creditors of possibly uncertain financial capacity, the creditors will be faced with difficult, and possibly finely balanced, commercial judgments. They are judgments with which, in normal circumstances, a Court should be slow to interfere.

93 In the present case, a final view as to the prospects of success of the postulated claims was still some way off. Mr Nilant had made it clear that his view that such claims might exist was a preliminary view and it would be necessary to conduct further investigations, and further legal advice would have to be obtained, before any definite decision could be reached as to the merits of pursuing the claims. Mr Nilant had pointed out that actions of that nature had no assurance of success and there was also no assurance that the directors would be in a position to satisfy any judgment that might be obtained against them. Mr Nilant had also pointed out to creditors that it would be necessary to have funds to meet the costs of the litigation. There is no reason to doubt Mr Nilant's assessment that such claims were likely to be strongly defended.

94 I should say that the plaintiffs did not criticise the administrators in relation to the state of their enquiries into the merits of the claims and, in particular, it was not suggested that those enquiries should have been further advanced than they were at the time the creditors voted on the DOCA. The constraints of time and resources faced by administrators are, of course, well recognised.

95 The result, however, was that the creditors were faced with the certainty offered by the DOCA, as compared with the real uncertainty of the outcome if Paradox Digital were to be wound up. It still remains impossible to make any proper assessment of whether, were Paradox Digital to be wound up and the proposed claims to be pursued, that would provide creditors with a better return than they would obtain under the DOCA. But as Mr Nilant has pointed out, on a winding up if the debts of the related parties were admitted for the amount of their claims, a liquidator would need to obtain a judgment for, and actually recover, an amount of some $375,000 before there would be a return comparable to that available under the DOCA. In that connection, in his affidavit of 8 October 2004, Mr Nilant says that he has reviewed Eftel's proof of debt against the accounting records of Paradox Digital and considers that Paradox Digital is indebted to Eftel in the claimed sum of $235,606.62.

96 In addition there was, and there remains, uncertainty as to the financial capacity of a liquidator to pursue the claims, assuming further enquiries justified that course. Although the plaintiffs have said they are prepared to fund the litigation, despite the passage of time the plaintiffs have not adequately clarified the basis upon which they would fund it, nor have they produced anything to establish that they have the financial capacity to do so. The position is no further advanced now than it was on 30 June 2004.

97 I should add that I do not consider there is any substance in the plaintiffs' complaint that the administrators only requested details of the basis of that funding, and the plaintiffs' capacity to provide it, on the day before the creditors' meeting of 9 June 2004. The offer of funding was made through the plaintiffs' solicitors on 4 June 2004. The plaintiffs had had considerable time before that to consider those matters. It might reasonably be expected, then, that by 8 June 2004 that information would have been readily available. Indeed, on 4 June 2004 the plaintiffs' solicitors said they were writing separately to the administrators about the funding. At the meeting on 9 June 2004, however, the plaintiffs' solicitors were still unable to provide the requested information beyond some generalities that fell well short of what was reasonably required. There is still no satisfactory evidence that on a winding up there would be funds, or sufficient funds, available to pursue the claims to finality or on what terms any funds would be provided.

98 I do not consider that in the present circumstances it is unfairly discriminatory or prejudicial for Fleet Global, as a related party creditor, to be excluded from participation in the distribution of the funds available under the DOCA. Normally, for obvious commercial reasons, related party creditors do not participate. Indeed, as counsel for Paradox Digital and the administrators observed in the course of argument, this is an unusual case because the common complaint in such applications is that a related party has derived an unfair benefit from a DOCA, not that a related party has been unable to benefit equally with the independent creditors. I should also note in passing that I do not accept that there was no evidence that the DOCA would not have been approved even if Fleet Global had participated. For instance, the notes made by the plaintiffs' solicitors of the meeting of 9 June 2004 record that the ATO representative "pointed out that under the DOCA no related entity should prove."

99 The position might have been different if Fleet Global's debt had been extinguished by the DOCA, rather than deferred, but that is plainly not the case. Fleet Global will remain a creditor after the DOCA comes to an end.

100 I should also say that, to the extent that the funds for distribution to participating creditors under the DOCA included assets of Paradox Digital in the form of cash at bank and trade debtors during the administration, it appears from Mr Nilant's evidence that there are in fact no funds available for distribution to creditors from those sources. The result is that Fleet Global is excluded only from participation in the distribution of the funds provided by Datafast under the DOCA.

101 The requirement of Datafast that it obtain a 99.9 per cent shareholding in Paradox Digital was, in effect, part of the price of obtaining the funds for distribution to participating creditors. There is no doubt, however, that at that stage Paradox Digital was hopelessly insolvent. The shares had no value, whether there was a winding up or a DOCA. Fleet Broadband cannot therefore be said to have lost anything by the dilution of its shareholding.

102 As I have said, the plaintiffs argued that that was not to the point because the DOCA was procured for the improper purpose first, of releasing the former directors of Paradox Digital who are also directors of Eftel from any insolvent trading claims and of releasing Eftel from any unfair preference claim, and secondly, of obtaining control of Paradox Digital to avoid any claims being made against those parties in the future.

103 A difficulty with the latter contention is that, as Fleet Global remains a creditor of Paradox Digital, it will be open to Fleet Global, in its capacity as a creditor, to apply to wind up Paradox Digital, if grounds exist, after the DOCA is terminated and for a liquidator then to take action in respect of any claims that the liquidator considers warranted. Control of Paradox Digital is irrelevant to that.

104 The question then is whether the purpose and effect of the DOCA is to release the relevant parties from any future claims that might be made following a winding up.

105 As I have mentioned, on the hearing of this application none of the defendants contended that it was the intention of the parties to the DOCA that it would release any claims that might arise on a winding up of Paradox Digital nor did they accept that the DOCA had that effect. On the contrary, the defendants argued that the DOCA did not release such claims.

106 The intention that the DOCA would not release such claims appears to me to be consistent with the terms of the release in cl 12 of the DOCA. Clause 12 releases Eftel and the directors and former directors of Eftel "from any Claims which, but for this Deed [Paradox Digital] could have maintained" against them. It does not in terms release claims that might arise at some time in the future in the event of a winding up of Paradox Digital, and it is expressed to be a release of Eftel and the directors and former directors of Eftel, not the directors or former directors of Paradox Digital. That is to say, it is in terms a release of the directors and former directors of Eftel in their capacity as such, and not in any other capacity.

107 Accordingly, if the objective of the proponents of the DOCA was to obtain a release of such claims, that does not appear to have been accomplished.

108 I am not, in any event, prepared to draw the inference that I was invited by the plaintiffs' counsel to draw, that the appointment of the administrator and the DOCA were brought about for the improper purpose of procuring the release from liability of Eftel and the directors of Paradox Digital who are associated with Eftel. In my view the evidence falls well short of establishing that there was such a purpose.

109 In the first place, those by whom, and for whose benefit, the release was said to have been procured say that the DOCA was not intended to, and does not have, that effect.

110 Secondly, and in any event, I do not consider there is any proper foundation in the evidence for such a conclusion to be drawn. Simon Ehrenfeld was cross-examined on his affidavit at some length by counsel for the plaintiffs. Mr Ehrenfeld gave evidence that, although the appointment of an administrator was one of the possibilities that had been considered in January 2004, Eftel had not from the outset decided to appoint an administrator. He said that Eftel decided to do so only shortly before the administrators were appointed, based on the advice of KordaMentha that Paradox Digital was insolvent. Mr Ehrenfeld said that Eftel had sought control of Paradox Digital essentially to bring to an end the conflict and dysfunction in the group and that under the DOCA Datafast wanted complete control of Paradox Digital so that it could recover the assets without internal interference or conflict.

111 The plaintiffs' counsel submitted that Simon Ehrenfeld was an unreliable witness and, in certain respects, was not a witness of truth. In particular, counsel submitted that Mr Ehrenfeld's evidence that Eftel had not decided to appoint an administrator until shortly before that appointment was made should be rejected. Similarly he submitted that no credence could be given to Mr Ehrenfeld's evidence as to the reasons that Eftel had sought control of Paradox Digital. Counsel argued that Mr Ehrenfeld's evidence was contradicted by the contemporaneous documents which made it clear that Eftel had from the outset, and certainly by January 2004, decided to appoint an administrator to Paradox Digital with the object of preventing claims being brought against Eftel and the common directors of Paradox Digital and Eftel.

112 I do not accept those submissions. I do not consider that the contemporaneous documents make out such a case. They are, in my view, not inconsistent with Mr Ehrenfeld's evidence as to the decision to appoint an administrator or with the reasons Mr Ehrenfeld gave as to why control was sought of Paradox Digital. I accept Mr Ehrenfeld's evidence that Eftel decided to appoint administrators only shortly before they were in fact appointed, based on the advice of KordaMentha that Paradox Digital was then insolvent. In relation to control of Paradox Digital, in view of the continuing hostility between the directors of Paradox Digital, and in particular between Simon Ehrenfeld and Gabriel Ehrenfeld, it was clear that the current position could not continue and I accept that control was not sought simply in order to preclude any future claims against Eftel and the directors. Moreover, for the reasons I have given, if that had been the purpose, the DOCA was an ineffectual means of achieving it, at least so far as any claims by a future liquidator of Paradox Digital are concerned.

113 The course of events after the appointment of the administrators is also rather at odds with an intention from the outset by Eftel to secure its alleged objectives by a DOCA. The first, somewhat rudimentary, proposal for a DOCA by Eftel was not advanced until approximately 20 April 2004, one month after the appointment of the administrators and only shortly before the second creditors' meeting. It was discussed at the second creditors' meeting on 28 April 2004. It then fell away and as at the time of the administrators' report of 18 May 2004 there was no current proposal, leading the administrators to recommend a winding up. It was not until the evening before the reconvened second creditors' meeting of 26 May 2004 that the Datafast proposal was advanced. At the time of the creditors' meeting the following day it was still handwritten and, from the comments made by Mr Nilant at the time, clearly at a fairly early stage.

114 That does not seem to me to reflect a pre-existing design by those associated with Eftel and Datafast to procure a DOCA to obtain their release from any liability to Paradox Digital.

115 I also do not accept the plaintiffs' contention that the improper purpose is to be inferred from the fact that the conduct of the proponents of the DOCA was commercially inexplicable, in that Datafast agreed to pay under the DOCA more than the assets of Paradox Digital were worth.

116 Apart from anything else, I do not accept that their conduct was necessarily commercially inexplicable. In the first place, it is by no means clear that Datafast did agree to pay more than the assets of Paradox Digital were worth. In that respect, I accept Mr Ehrenfeld's evidence that he expected Datafast to obtain financial benefits in excess of the $100,000 he had said at the second creditors' meeting that he expected to be able to recover from trade debtors within six months. In evidence, Mr Ehrenfeld estimated that over time the total financial benefits to Datafast could amount to a figure of at least $172,000. Whether or not that is a realistic estimate is not the question. I am satisfied that Datafast believed that benefits of such a magnitude were possible and that is to be measured against the substantially smaller amount that Datafast was likely to incur under the DOCA. I also accept that Datafast required 99.9 per cent of the issued shares in Paradox Digital so as to ensure that it received substantially all of the benefit of the money recovered in order to make the deal commercially attractive.

117 In addition, commercial considerations cannot necessarily be reduced to monetary calculations. In that respect, in evidence Mr Ehrenfeld referred to the need to resolve the difficulties arising out of the conflict between the parties involved in Paradox Digital, as those difficulties were affecting customers of the business and its suppliers, many of whom were also suppliers to Eftel.

118 There are, I think, strong reasons why, in any event, in the exercise of the discretion conferred by s 445D, an order setting aside the DOCA should not be made.

119 It was not in issue that the only alternative, if the DOCA were now terminated, would be an immediate winding up, Paradox Digital being clearly insolvent. As I have said, on an immediate winding up the plaintiffs would be no better off. The participating creditors, including the employees who are to receive 100 cents in the dollar under the DOCA, would be substantially worse off. Those consequences would change only if proceedings against the former directors of Paradox Digital for insolvent trading were prosecuted by a liquidator and a substantial judgment obtained, and the amount of it actually recovered from the directors.

120 At present such outcomes are purely speculative. On the material currently available there is no basis upon which any proper assessment could be made as to whether such an action would have any reasonable prospect of success, whether Paradox Digital would be put in a financial position to take any such action and whether the directors would be capable of satisfying any judgment obtained against them. I think there is substance in the comment by counsel for the first and second defendants that, in proceeding to an immediate winding up, the creditors would be proceeding "on a hope and a prayer".

121 There are two further matters which, although not necessary to the conclusion I have reached, would also weigh against terminating the DOCA.

122 There were courses open to the plaintiffs that would have avoided putting the employees at risk of forgoing payment in full of their entitlements and the other creditors at risk of forgoing 15.8 cents in the dollar. The plaintiffs could, for instance, either by means of their own DOCA or by an undertaking to the other creditors, have ensured a return to the other creditors of the amount they would receive under the DOCA, while leaving it open to wind up Paradox Digital so that a liquidator might pursue claims against Eftel and the former directors. They chose not to do so. Of course, there was no obligation on them to propose an alternative course. But I consider their decision not to do so should not be overlooked when the course they urge on the Court puts all the independent creditors at a real risk of forgoing some return for none at all and the employees of Paradox Digital at risk of a substantially reduced payment.

123 In that connection, it is also relevant that Fleet Global has commenced separate proceedings against Eftel to recover the same sum of $308,612.33 which it claims against Paradox Digital. It therefore appears to be in the fortunate position that it has potentially two strings to its bow.

124 Those matters would not, of course, of themselves be reasons for refusing Fleet Global's application for the DOCA to be terminated if proper grounds existed. But, in my view, in the present circumstances they are additional matters which weigh against the plaintiffs in the exercise of the discretion. Indeed, in the circumstances the independent creditors might have been forgiven if they had considered that in pressing for an immediate winding up the plaintiffs were rather too anxious to embroil them in what might be thought to be a continuation of the internecine conflict that had apparently afflicted Paradox Digital prior to the appointment of the administrators.

125 In the end, I am not satisfied that grounds have been made out to justify the DOCA being terminated and I would therefore dismiss the application.