The company has creditors of approximately $2.9 million. The Salmat cause of action is its only asset of significance. There is no acceptable evidence valuing that cause of action, but Mr Ryan and the company have at various times asserted that it may result in recovery of between $10 million and $15 million. The rationale of the DOCA is that Mr Ryan, through Front Foot, would fund that litigation which, if successful, will generate a deed fund sufficient to pay creditors 100 cents in the dollar.
[2]
The s 439A(4) report
The executive summary in the administrators' s 439A(4) report contained the following:
The DCA proposal includes a number of key terms including:
● The deed fund will comprise of a chose in action that the company was pursuing prior to the appointment of the official liquidator. It is estimated that the likely net return of this action would be around $2.9 million;
● The deed fund will also comprise of a cash contribution of up to $131,000 to be paid into the trust account of the deed administrators on the execution of the DCA; and
● Control of the company will be returned to its director upon execution of the DCA, subject to the making of an order by the Supreme Court of New South Wales to terminate the winding up of the company.
The terms of the deed proposal are explained in more detail in section 9 of this report.
Based on the information presently available to us at the date of this report and creditors' claims received, we estimate a dividend payable to unsecured creditors under the proposed DCA of approximately 100 cents in the dollar. We estimate that there will be insufficient funds available for a dividend to be paid to any class of creditor in the event that the company is wound up.
On the basis of the information presently available to us and from our investigations into the company's affairs and financial circumstances, we are of the opinion that the return to creditors will be greater under a DCA than if the company were to remain in liquidation.
Part 7 of the report, entitled "Administrators' Investigations", included, under the heading "Specific Matters Identified", included the following:
Even though our investigations to date have been limited, we have identified a number of matters that we consider should be brought to the attention of creditors. These matters are as follows:
(i) Damages claim against Fuji Xerox and Salmat
In about October 2010, the company entered into a waste recycling services agreement ("the agreement") with Fuji Xerox and Salmat to provide waste collection, recycling and destructive services.
Disputes surrounding the contract arose between the parties, culminating in the termination of the agreement by Fuji Xerox and Salmat on or around 31 July 2012.
In about October 2012, the company commenced proceedings in the Supreme Court of New South Wales against Fuji Xerox and Salmat for losses suffered by the company as a result of a number of breaches of various exclusivity terms by Fuji Xerox and Salmat under the agreement. We understand that the proceedings are presently on-going, and have provided our consent for the company to continue with same. Fuji Xerox and Salmat have also initiated a counter-claim against the company in relation to other breaches that it believes the company has committed under the agreement.
To avoid prejudicing the on-going legal proceedings in this matter, we do not intend to provide any further commentary concerning the claim. We may provide creditors with an up-date on same at the meeting should any further information come to light.
Part 7(b), entitled "Current Financial Position of the Company", included the following:
Contingent Assets:
The director's statement has identified as a contingent asset the estimated outcome of litigation action that the company was involved in against Fuji Xerox and Salmat prior to the appointment of the liquidator. We refer creditors to section 7B.(i) of this report concerning the company's claim against Fuji Xerox and Salmat. Given that the claim is presently subject to legal proceedings, we are unable to provide any detailed commentary on the claim or the estimated realisable value of same.
Part 9, entitled "Deed of Company Arrangement", summarised the effect of the proposed DOCA, and included the following:
Creditors must take into consideration that there are difficulties with pursuing litigation which may include but not limited to the following:
(i) legal fees could be substantial and the claims may take some time to resolve;
(ii) most claims are normally vigorously defended; and
(iii) Fuji Xerox and Salmat may have a valid defence to claims made against them.
Part 10 annexed a schedule comparing the estimated return under a winding up scenario against the estimated return available under the proposed DOCA. It attributed a value of $2.931 million to the deed fund. It also included the following:
In this instance, a funder has been nominated by the director to provide the necessary indemnities and insurances with regards to the company's claim against Fuji Xerox and Salmat. Our preliminary investigation and inquiries concerning the funder, Front Foot Funding Pty Limited, has revealed that the director, Jason Ryan, is also the director of that company. We have requested the director to provide us with documents and/or assurances that the funder has the capacity to fund the litigation and provide the necessary indemnities and insurances associated with same. As at the date of this report, we have not been provided with any documentary evidence of the funder's capacity to meet such financial obligations. We have however received assurances from the director that the funder has the necessary capacity to do so.
As our ability to investigate the financial capacity of another entity are limited, creditors should factor in the inherent uncertainties that are associated with any kind of litigation proceedings in making their decision whether or not to accept the proposed deed.
Attached to the report was a "Statement by director regarding the deed proposal". That statement contained an outline of the dealings between the company and Salmat, including the emergence of an issue with Salmat that waste material that ought to have been provided to Recycling was delivered to other recyclers, and that after this issue was emphasised in early 2012, "the volumes of materials for recycling in Sydney rebounded and increased by around 300 per cent". The statement continues:
Approximately two weeks after the increase in volumes, Salmat repudiated the contract. The repudiation of the contract by Salmat created a cash flow shortfall for the company as it had invested heavily in infrastructure in circumstances where the term of the contract was a minimum of five years. Without the revenue, the company was force[d] to dramatically reduce overheads and reduce debt which it did by way of the director selling his family home and investing the money into the company in order to continue trading and complete the litigation.
And further:
The company commenced proceedings in the Supreme Court of NSW against Salmat and an associated entity to recover losses caused by the repudiation of the contract and various other claims set out in its Statement of Claim. In circumstances where those proceedings are on-going and Salmat has been admitted as a creditor of the company for the nominal sum of $1 and will thereby receive the report to creditors, it would not be appropriate to comment on those proceedings but to say that the director believes that the company has good prospects of obtaining a judgment in favour of the company for an amount well in excess of all amounts owing to creditors of the company including related party creditors.
[3]
The creditors' meeting of 22 October 2014
On 20 October 2014, the solicitor for Salmat sent to the administrators a letter raising a number of issues, the effect of which was summarised at the creditors' meeting. That letter included the following relevant material:
1. Proceedings
Whilst you have provided a brief overview of the proceedings in your Report at page 13, we note your comments that you do not intend to provide further commentary concerning the proceedings to avoid prejudicing them.
It is our clients' view that the lack of further detail regarding the status of the proceedings may be said to be a material omission in the Report.
Creditors ought be aware, for example, that our clients have in fact filed a defence and that the defence is a valid one (see page 28 of the Report). There is nothing to suggest that it is not.
We do not understand how you are able to come to a view about the return to creditors being greater under a Deed without consideration of the prospects of success of the proceedings being taken by the Company (see page 28/29 of the Report). We observe that on page 5 of your Report you note that the estimated likely net return of the proceedings would be around $2.9 million dollars based on the Deed proposal.
Further, creditors ought be aware that on 5 September 2013 the Company was ordered to pay $210,000 into Court by 3 October 2013 for security for costs (see judgment of Lindsay J enclosed). That amount has not been paid by the Company, hence there have been numerous directions hearings in the proceedings, and an application made by our clients seeking that the proceedings be dismissed.
The Deed proposal provides (at paragraph 7) that the amount of $210,000 will be paid by the "Funder" for security for costs. The proposal does not state the date by which that amount is intended to be paid. This is a matter which is fundamental to the effective implementation of any deed and is a matter which should be put before creditors prior to any vote.
We observe that the order made on 5 September 2013 was made without prejudice to such entitlements as our clients may have to apply for further security. Our clients may do so.
2. Uncertainty as to capacity to fund the Deed
It is wholly uncertain whether the "Funder" of the Deed will be able to meet the payments it says it will under the Deed proposal.
The "Funder", being Front Foot Funding Pty Ltd (Front Foot), is a related entity to the Company given that Jason Ryan is the sole director and shareholder of it.
At page 29 of your Report you state that you have requested that the director provide you with documents or assurances that Front Foot has the capacity to fund the litigation and provide the necessary indemnities and insurances and that you have not been provided with such documents, merely some assurances from Mr Ryan.
In our clients' view there is not only a lack of certainty in the Deed being fully effectuated, it is likely to fail based on the lack of information provided.
3. Material omissions
In our view, the failure to provide the Funding Agreement and the Deed Poll regarding adverse costs, or the precise terms on which funding will be provided, is a material omission from the Report. This is a matter which is material to the creditors' decision to vote in favour of the execution of the proposed Deed.
Whilst the Deed proposal states that the minimum guarantees amount to be distributed as part of the Deed Fund in the event of the Company being successful in the proceedings, this is subject to the terms of the Funding Agreement.
The funding Agreement could, for instance, state that funding is conditional on the Funder receiving 100% of the proceeds of any successful proceedings. To make an informed decision, the creditors of the Company should be fully aware of all risks involved in voting in favour of the execution of the proposed Deed.
There is a material omission because of the failure to provide the Funding Agreement and the Deed Poll regarding adverse costs, nor any documentary evidence supporting the financial position of the Funder and its capacity to:
a. fund the proceedings; and
b. indemnify the company against any adverse costs order.
We again request that you provide us with copies of the Funding Agreement and Deed Poll, whether in draft form or not. Please do so by no later than midday tomorrow (Tuesday 21 October 2014).
4. Misleading information provided in Report
As previously mentioned, the director in his statement at Annexure B to the Report at page 11 states under the heading "what happens if the Company proceeds to liquidation" that:
"In the event of liquidation, the operation of the Company will cease, the litigation could be stultified with no further opportunities for the Company."
This statement is plainly wrong. Not only have the Company operations already ceased (page 5 of the Report), but a liquidator has the power to continue the litigation (with appropriate funding) if the liquidator chooses to do so.
In the premise, the director's statement included in the Report is misleading and can reasonably be expected to be material to creditors in deciding to vote in favour of the resolution that the Company execute such a Deed.
The administrators replied by a letter dated 21 October 2014, which was received by Salmat's solicitor electronically during the creditors' meeting on 22 October. The reply, which was read aloud at the creditors' meeting, included the following:
1. Proceedings
In response to your comments concerning the report's commentary on the ongoing proceedings, you ignore my reporting that I have met with the solicitors concerning the proceedings involving your client to assess the proceedings. I must preserve legal professional privilege in writing this report however.
The liquidator did not obtain any litigation funding in his three months pre voluntary administration time to conduct the proceedings. Now at least litigation funding is promised, even if not secured, with a further promise to pay a minimum net proceeds from it if it is successful.
I also note your comments concerning the order that was made against the Company to pay $210,000. The director and funder have chosen to say they will pay it in their DCA proposal. I will pass on your client's timing comment to the proposers.
2. Uncertainty as to the Capacity to Fund the Deed
With regards to your comments concerning the uncertainty as to the Funder's capacity to fund the deed, I advise that since the issuing of my report, I have received a letter of comfort from the Company's solicitors in the proceedings, Messrs Boyd House & Partners, informing us of their (along with senior and junior counsel's) intention to continue to act in the proceedings. I intend to make this correspondence available to creditors at the forthcoming meeting. Otherwise the lack of certainty of the litigation funding is clearly disclosed in the report for creditors to consider. There is no omission here. The report makes that issue clear. The alleged likelihood of failure is your client's opinions and not supported by any evidence from them.
Material Omissions
In response to your comments concerning the failure to provide the Funding Agreement and the deed Poll regarding adverse costs:
a. these documents are usually prepared/ finalised after the passage of a resolution for the company to execute a Deed of Company Arrangement;
b. As at the date of issuing the report, the documents were in draft stage and therefore not suitable to be presented to creditors, as they had not yet been finally settled in form between the relevant parties; and,
c. It was also my view that it would not be appropriate to provide such documents to your clients, as they are also a party to the proceedings.
The guaranteed minimum amount is not stated to be subject to the funding agreement in the proposal: see points 6 and 7. Your statement to that effect seems to be in error.
3. Misleading Information Provided in the Report
As noted in your correspondence, the statement quoted is attributed to the director and therefore do[es] not reflect the views of the Administrators.
Furthermore, while the Liquidator may have had the power to proceed with litigation prior to the suspension of his powers, he was either unable or unwilling to do so during the three (3) months prior to our appointment.
At the creditors' meeting on 22 October 2014, there were present, in addition to Mr Hosking and his staff and the liquidator and his staff, Mr Ryan's father, Gregory James Ryan, holding proxies for 10 creditors totalling about $1,000,082; Mr Ryan's solicitor, Ms Chris Perry, holding his proxy and proxies for other creditors totalling $530,000; Debbie Singleton, a related creditor, for $9,500; the solicitor acting for the company and Mr Ryan in the Salmat proceedings, Mr Emanuel, for $220,000; the company's accountant, Ross Chapman, for $179,452; an apparently independent creditor, Concept Wire Industries, for $11,264; Joseph Nicholas, representing the company's landlord Lisbon Waste Depot Pty Limited for $371,000; Katherine Jones, solicitor, holding proxies for Fuji Xerox and Salmat totalling $85,000; and an officer of the Australian Taxation Office holding a proxy for it for $44,843.
In respect of the Salmat litigation, the minutes record:
The on-going legal proceedings involving the company and Fuji/Salmat: Mr Hosking invited Ms Chris Perry, the director's solicitor, to comment on the progress of the proceedings. Ms Perry advised the meeting that her client's evidence was ready for filing, following which she estimated that the matter may be finalised as early as mid next year, subject to hearing dates and the actions of the other parties to the proceedings; …
There was some controversy before me as to precisely what was said in this respect. Ms Jones (Salmat's solicitor, who was present at the meeting) at first attributed to Ms Perry the statement:
Recycling's evidence has been finalised and once the defendants have responded, the proceedings will be ready to proceed to hearing. I estimate that the hearing will take place by early to mid next year unless the defendants delay matters.
Ms Perry deposed that she said, in the context of a longer or more detailed outline of the deed proposal:
I am informed that the proceedings are presently stayed by reason of the non-payment of the security for costs which is a matter to be addressed by this deed proposal but otherwise I understand that Recycling Holdings' lay evidence will shortly be finalised and should be ready to be filed as soon as the security for costs is paid and the stay released. No evidence can be filed however until the issue for security for costs has been dealt with. Payment of security for costs by Front Foot Funding of $210,000 is an essential term of the proposal. I am also informed that the estimated hearing will take no more than three days.
…
I understand the hearing is likely to be no more than three days' duration. I have contacted the list clerk of the court and understand that a likely range of hearing will be the middle to latter part of next year possibly as early as 30 June 2015. Obviously this would largely depend on the exigencies of the litigation itself and there is never any certainty in litigation or court availability and timetables as this is a matter for the court and depends on the conduct of the defendants Salmat, Mediaforce and Fuji Xerox. This is also within the scope of my own experience as an accredited specialist in commercial litigation with 20 plus years' experience. Salmat have sought to delay the proceedings at every turn thus far and I wouldn't be surprised if this conduct continued. By way of example, if the defendants seek prolonged timetable or fail to comply with court directions, then the hearing could well take place well after that time or there could be an appeal. Obviously I do not have a crystal ball and I cannot project into the future. Nobody can when it comes to litigation.
I am however instructed that Recycling Holdings is committed to ensuring the earliest available hearing date is achieved. But I cannot give any assurances in this regard.
In a later affidavit, responding to Ms Perry's affidavit, Ms Jones accepted that Ms Perry had made statements generally to the effect of the second paragraph set out above, other than the statement that Salmat had sought to delay the proceedings at every turn. Thus she accepted that Ms Perry had said that she did not have a crystal ball and could not project into the future.
In my view, there is no material inconsistency between what the minutes record and what Ms Perry claims to have said. What was potentially important was when the case would come to hearing, and on either view Ms Perry did not say "early to mid next year", but "as early as mid next year". It would have been plain to any member of the audience - as indeed it was to Ms Jones - that Ms Perry was expressing an opinion or making a prediction, using such knowledge and expertise as she had, but not making any kind of promise, as to when the case would come to hearing.
The minutes later record that having updated creditors on the outstanding matters in his report, Mr Hosking tabled a copy of the letter dated 20 October 2014 received from the solicitors acting for Salmat, and his written response of 21 October 2014, and that he then spoke to those matters as follows:
● Mr Hosking advised the meeting of Fuji/Salmat's concerns as to the adequacy of the administrators' commentary on the on-going proceedings and noted that he was unable to go into any details as the matter was before the court. Moreover, the solicitor acting for the director in relation to the matter had addressed creditors concerning this matter and he did not wish to add anything further to what had already been discussed. Mr Hosking also noted Fuji/Salmat's comments concerning the obtaining of litigation funding to run the matter and informed the meeting that the liquidator had not obtained any funding during the three months prior to the administrators' appointment. While the administrators had also not secured funding, they had obtained an undertaking from a funder to provide funding once the company had executed a deed of company arrangement;
● Mr Hosking then addressed Fuji/Salmat's concerns as to the funder's capacity to fund the deed and noted that this issue had been raised in the report. Creditors had been advised to factor the inherent risk of any litigation matter when making their decision as to whether or not to vote in favour of the deed proposal. Mr Hosking also informed the meeting that he had received a letter of comfort from the company's solicitors in the proceedings advising of their on-going commitment to act in the proceedings in view of the funding arrangements that the company intends to enter into. Mr Hosking tabled the letter of comfort received from Boyd House Lawyers;
● Mr Hosking noted Fuji/Salmat's concerns that copies of the funding agreement and the deed poll regarding adverse costs had not been provided to creditors along with the report and advised that:
● these documents are usually prepared/finalised after the passage of a resolution for the company to execute a deed of company arrangement;
● as at the date of issuing the report, the documents were in draft form and therefore not suitable to be presented to creditors, as they had not yet been finally settled between the relevant parties;
● circularising these documents would have made them available to Fuji/Salmat, which would not be appropriate under current circumstances, as they were also a party to the proceedings.
Under the heading "Questions from Creditors", the following is recorded:
● Ms Katherine Jones, representing Fuji/Salmat, inquired as to whether creditors would vote on the litigation funders' costs in relation to funding the proceedings. Mr Hosking advised the meeting that this was not usually the case, as any costs incurred by the funder would depend on a number of factors though mainly the length of time that the proceedings would take. Mr Hosking also noted that the costs incurred by the funder were not directly borne by the creditors, and would only affect the quantum of the return to creditors were the proceedings to be successful. Ms Chris Perry, representing the director, advised the meeting that it was her client's intention that the net proceeds from the litigation and the sale of the plant and equipment would be sufficient to enable the payment of 100 cents in the dollar to creditors. However, should the net recovery result in a material change to the projected return to creditors, there would be a need to convene a meeting of creditors to vary the deed in order to allow creditors to consider the various matters which resulted in the change;
● Ms Jones then raised the issue concerning the security for costs that had been awarded as part of an earlier judgment involving the company and her clients. Mr Hosking informed Ms Jones that he had addressed her queries concerning security of costs in his correspondence dated 21 October 2014, though noted her concerns and advised that he would refer them to the company's director. Ms Jones then inquired as to whether any amendments could be made to the proposal to deal with her concerns about the timing of the payment of the security for costs. Mr Hosking advised that this was a matter for the director and may very well be a matter to be decided by the court. However, as he had not drafted the proposal, he was unable to;
Then the minutes record, under the heading "Resolution Regarding the Future of the Company":
Mr Hosking spoke to the report and the director's deed proposal and noted a number of amendments to the proposal, mainly in relation to the priorities in which claims against the company would be paid should the deed be fully effectuated. Mr Hosking noted that the amendment would result in the payments in essence being made in accordance with the provisions of s 556 of the Act. Mr James Hamilton and Ms Chris Perry also spoke to the deed proposal and further amendments to same which would be reflected in the DCA.
The meeting was advised that the amendments to the deed proposal and subsequent DCA would reflect the director's intention to ensure that the net proceeds from the litigation action, should it be successful, would result in a payment of 100 cents in the dollar of all admitted claims against the company, and that should the outcome of the proceedings result in a net return that is materially lower than the amount projected to creditors, that creditors be given an opportunity to consider the revised rate of return and vote on whether or not to vary the deed. Furthermore, it was noted that should the company's action fail, the deed would also fail, thereby resulting in the company being wound up.
Mr Hosking then proposed the following resolution in relation to the future of the company:
Pursuant to s 439C of the Corporations Act 2001, the company be required to execute a deed of company arrangement under Part 5.3A of the Corporations Act 2001 in substantially the same form as the proposal statement presented to the meeting (and amended at the meeting) and that David Anthony Hurst and Phillip Raymond Hosking be appointed joint administrators of the deed.
The resolution was moved by the company's accountant and seconded by Mr Ryan's father and carried by majority on the voices. Other evidence establishes that all creditors and proxies present other than Lisbon Waste, the ATO, and Ms Jones on behalf of Fuji and Salmat, voted in favour of the resolution, and there were no abstentions.
[4]
The DOCA
The DOCA recites that the Director (Mr Ryan) had agreed to covenant to use his best endeavours to ensure the obligations of the Company and as otherwise set out in the DOCA are satisfied (recital G). Although it contains no express covenant (as distinct from the recital) to that effect, the covenant is implicit in the recital. It provides for the constitution of a "Deed Fund" (clause 1.1(n)) comprising receivables owing to the company (estimated at $885,810), plant and equipment owned by the company, any GST refunds due to the company, and the "Funding Agreement Asset", being the Company's rights and interests under the Funding Agreement in respect of the Salmat proceedings made on the same date between Front Foot, the company and the company's lawyers, including its right to receive part of the balance, if any, of the proceeds of the proceedings if it is successful, pursuant to the terms of the Funding Agreement (clause 1.1(r), (s)). If the administrators form the view that the company or other parties are unable or unwilling to comply with any of the fundamental provisions of the DOCA and remain so for a period exceeding one month, they may convene a meeting of creditors which may resolve to vary the DOCA or terminate it and wind up the company, or enforce the terms of the DOCA (clause 4.4(b)). Clause 4.4(c) provides that any discretion conferred on the administrators is unfettered:
Administrators' Powers
4.4(c) Where this Deed confers a power or discretion on the Administrators, they may exercise that power or discretion in such manner as they in their absolute discretion consider fit.
The Director is obliged within 14 days to cause an application to be made to the court for termination of the winding up (clause 5.1); however, nothing in the DOCA is conditional upon that application succeeding. If the plant and equipment is not realised by the administrators within eight weeks for $131,000 net, the Director is obliged to pay to the administrators the difference between the net sale price and $131,000, of which $50,000 was paid on account (clause 5.6). Provision is made for the lodgement and determination by the administrators of proofs of debt (clause 6). The Deed Fund is to be distributed first, in payment of the administrators' expenses; secondly, in payment of administrators' remuneration; thirdly, in payment of priority creditors; and fourthly, in payment of "Participating Creditors", pro rata (clause 7.4). Clause 8.4 provides as follows:
Failure to pay sufficient funds from the Funding Agreement or Comply with the terms of this Deed
8.4 If:
(a) FFPF fails to comply with the Funding Agreement, or otherwise comply with the terms of this Deed; or
(b) The Proceedings do not result in a payment to be received by the Company pursuant to the funding Agreement of an amount sufficient to cause an outcome in this Deed by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar;
then the administrator may at his discretion convene a meeting of Creditors to consider variation or termination of this Deed and/or take the steps set out below to enforce the obligations of this Deed.
Control and stewardship of the company reverts to Mr Ryan (clause 9.1). The DOCA binds all creditors, who must accept its terms in full satisfaction of their claims on the company (clause 10).
[5]
The Funding Agreement
Also on 27 October 2014, contemporaneously with the DOCA, the company entered into the Funding Agreement with Front Foot, under which Front Foot is obliged to pay "Project Costs" (defined to include the company's legal costs and disbursements of conducting the Salmat proceedings, any security for costs obligations, and any adverse costs orders) (clause 4.1); any adverse costs order in the proceedings (clause 4.5); and provide any security for costs that might be ordered in the proceedings (clause 4.6). Under clause 8.1, upon receipt of an amount pursuant to a settlement or judgment in the proceedings, Front Foot is entitled to recoup all Project Costs, a "Project Management Fee", being 25% of the Project Costs, an amount for GST in respect of any supply made by Front Foot under the Funding Agreement, and between 35% and 45% (depending on the time-frame) of the fruits of the litigation, provided that the balance of the resolution sum (after Project Costs, the Project Management Fee, and GST) - to a maximum sufficient to ensure payment in full of costs and expenses of the administration and liquidator, petitioning creditors' costs, and payment in full of creditors - must first be paid to the administrator. There was some debate as to whether this was the proper construction of clause 8.1 and 8.2 of the Funding Agreement. In my view, the proviso to clause 8.1.4, in referring to "the above payments", refers to the payments in 8.1.1, 8.1.2 and 8.1.3, so that the requirement to pay sufficient to the administrator to enable (inter alia) payment of creditors in full prevails over the funder's entitlement to its percentage of the resolution sum. Otherwise, the proviso would do no work, but would simply indicate the next level of priority. That construction is fortified by clause 8.2.1, which makes clear that the amount payable under clause 8.1.4 to the deed administrator was not assigned to the funder. In any event, an amended funding agreement was signed and tendered in the course of the hearing to put beyond doubt that that was the intent. Thus Front Foot is entitled to its success fee (as distinct from the Project Management Fee) only after creditors are paid in full.
[6]
Should the DOCA be terminated under s 445D?
Corporations Act, s 445D, relevantly provides as follows:
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company's business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii) contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
An inquiry under s 445D involves two stages, though they are not unrelated. The first is whether one of the grounds referred to in s 445D(1) is established. The second, which arises only if the first is established, is whether as a matter of discretion the DOCA should be terminated. That establishment of one of the grounds enlivens a discretion but does not of itself require that the DOCA be terminated has been recognised in many authorities [Emanuele v Australian Securities Commission (1995) 63 FCR 54; 19 ACSR 1; 141 ALR 506; 14 ACLC 244; appeal dismissed [1997] HCA 20; (1997) 144 ALR 359; 23 ACSR 664; 188 CLR 114, 139; Deputy Commissioner of Taxation v Portinex Pty Limited (subject to a deed of company arrangement) [2000] NSWSC 99; (2000) 156 FLR 453; 34 ASCR 391; Fleet Broadband Holdings v Paradox Digital (subject to a deed of company arrangement) [2005] WASC 261; (2005) 228 ALR 598, [105]; Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (subject to a deed of company arrangement) [2013] QCA 405; (2013) 97 ACSR 390]. In due course it will be necessary to elaborate what informs the exercise of that discretion.
[7]
Misleading information and omissions
The plaintiffs contend that there were material omissions from or misstatements in the information provided to creditors in the s 439A(4) report and at the second creditors' meeting (which resolved to require the company to enter into the DOCA) in the following respects:
1. No or inadequate information was provided as to the nature and merits of the Salmat cause of action;
2. Misleading information was provided as to the progress and status of the Salmat litigation;
3. The personal interest of Mr Ryan and his consequent conflict of interest was not disclosed;
4. The capacity of Front Foot to fund the Salmat litigation and its interest under the funding agreement (including the priority to which it was entitled against the company) was not disclosed;
5. The administrators' statement that the plant and equipment would likely be sold to an unrelated entity was misleading; and
6. The availability of viable claims against Mr Ryan for unfair preferences or uncommercial transactions in the order of $500,000 was not disclosed.
Section 445D(1)(a) speaks of information which was false or misleading and "can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed", and s 445D(1)(c) speaks of an omission that "can reasonably be expected to have been material to such creditors in so deciding". The reference to "reasonably be expected" and to "creditors" as distinct from "all creditors" or "the creditors", contemplates consideration of the position of the hypothetical reasonable creditor, as distinct from particular creditors; thus, the test of materiality is an objective one, and involves something which could potentially rationally influence the decision of the hypothetical reasonable creditor [cf Deputy Commissioner of Taxation v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616; 21 ACSR 590, 618-619 (Carr J); Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510, [165]-[166] (Campbell J)]. The notion of a material omission thus depends on the objective quality and potential of the information, and not whether anyone was in fact misled [Bidald Consulting v Miles Special Builders, [147]-[166]; Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to a deed of company arrangement) (no 3) [2011] FCA 1403; (2011) 289 ALR 69, [62] (Perram J)], though its actual subjective impact may be relevant once one reaches the second, discretionary, stage of the inquiry.
It is to be observed that s 445D(1)(a) is concerned with the provision of false or misleading information to the administrator or to creditors (without limitation as to the context in which it is provided), while s 445D(1)(b) is concerned with the inclusion of such information in the context of a s 439A(4) report. The only reference to omissions (as distinct from the provision of false or misleading information) is in s 445D(1)(c), which is concerned only with a s 439A(4) report: s 445D(1)(c) speaks of an omission "from such a report or statement", which in turn is a reference to "a report or statement under subsection 439A(4)" referred to in s 445D(1)(b). Whether there is an omission from such a report is necessarily influenced by what such a report is required to include, as specified in s 439A(4); namely:
(a) a report by the administrator about the company's business, property, affairs and financial circumstances; and
(b) a statement setting out the administrator's opinion about each of the following matters:
(i) whether it would be in the creditors' interests for the company to execute a deed of company arrangement;
(ii) whether it would be in the creditors' interests for the administration to end;
(iii) whether it would be in the creditors' interests for the company to be wound up;
and also setting out:
(iv) his or her reasons for those opinions; and
(v) such other information known to the administrator as will enable the creditors to make an informed decision about each matter covered by subparagraph (i), (ii) or (iii); and
(c) if a deed of company arrangement is proposed - a statement setting out details of the proposed deed.
But while a material omission may be established by the omission of a matter referred to in s 439A(4), one may also be established by the omission of "a matter of significance which should have been included in the report or statement and which would be highly material in the decision to be made by the creditors" [Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885; 17 ACSR 139, 148 (Cohen J)]. Thus an administrator may need to make inquiries to obtain relevant information beyond the duty to investigate under s 438A, depending on "an assessment of the nature of the question to be investigated, the information in the administrator's hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors' decision", and a DOCA may be set aside if failure to make such inquiries results in a material omission [Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 21 ACLC 1737; 45 ACSR 612, [325] (Austin J)]. However, in assessing the adequacy of the information contained in a report, the court must recognise that the administrator's investigation has to be conducted in a short timeframe, and with limited resources and limited powers of compulsion. Together with the reference in s 439A(4)(b)(v) to "such other information known to the administrator" as will enable the creditors to make an informed decision, this is indicative that, at least generally speaking, there will not be an omission if the information in question is not known, or reasonably capable of being ascertained, by the administrator.
[8]
The Salmat litigation
The plaintiffs complain that the creditors were not told the basis or nature of the cause of action, any explanation as to how the claim was quantified, any assessment of its merits, or any information as to the capacity of the funder, and were given misleading information as to its status and likely hearing time. In circumstances where the creditors were effectively being asked to vote for the DOCA proposal in order to enable the cause of action to be prosecuted, its prospects and value were highly relevant to the creditors' informed decision. In Bovis Lend Lease v Wily, Austin J discussed the extent to which it was necessary to disclose in a s 439A(4) report the nature and merits of a cause of action that was central to a decision whether or not to accept a DOCA:
[334] Third, Bovis submitted that the report provided almost no information about the claim against it. There is a delicate question as to how much disclosure should be made in an administrator's report, when the subject of the disclosure is litigation in existence or in contemplation against the creditor who will have access to the report, and the administrator has obtained or has access to legal advice on the prospects of success. In Young v Sherman (2002) 170 FLR 86 at 106; 20 ACLC 1559 at 1576, Hodgson JA made the following remarks (at 1576):
[75] Where creditors are asked to vote on the entry into a deed of company arrangement, particularly where this would be to the detriment of one or more creditors, it is important that matters relevant to the decision of creditors be put fairly to the meeting. Where, as in this case, the administrator has legal advice that the company has good grounds for taking legal proceedings against one creditor, there may be a question whether it is fair to advise the meeting of this but withhold the legal advice on the ground of legal professional privilege. It is possible that to do so may amount to the disclosure of the substance of the legal advice, so as to make the advice admissible in evidence pursuant to s 122(2) of the Evidence Act 1995 (see Ampolex Ltd v Perpetual Trustee Co (Canberra) Ltd (1996) 14 ACLC 977; (1996) 4 NSWLR 12), and possibly to lose legal professional privilege at general law.
[76] It might be contended that such disclosure is under compulsion of law, because the administrator is bound to disclose material matters to the meeting, so that s 122(2)(c) applies. However, the disclosure of material matters must be fair to the creditors, and it may be that an administrator proposing to take proceedings against one creditor has the alternatives of either disclosing the factual circumstances and legal propositions said to give a reasonable cause of action, but not the legal advice, or else disclosing the whole of the legal advice, subject if appropriate to undertakings ensuring that the disclosure is treated as confidential so as to avoid wider loss of privilege. In either case, the creditor facing a disadvantageous vote could then make an informed the submission as to the merits of the proposal, which it could not do if all that is disclosed is that there is legal advice that there are good grounds for legal proceedings.
[335] These observations envisage a substantial degree of disclosure, which would give the reader a clear idea of the facts and legal propositions said to give rise to the cause of action, as well as the nature of the cause of action, either by description or by disclosure of the contents of legal advice. There may still be some room for contention as to how detailed the disclosure must be, but by any standard the report fell well short of adequate disclosure. The basis of the company's claim was not disclosed, the damages components were not separated and identified, and the report did not even disclose the nature of the cause or causes of action.
[336] This omission was of a highly material matter. The company's claim against Bovis was shown in the report to be its only substantial asset. Moreover, the point of putting forward the deed proposal was to provide a mechanism for realising that asset by the bringing of proceedings. It is striking that so little information was given in the report about such an important matter.
Although, as it happens, Salmat was represented at the meeting by Ms Jones, who was an active participant, and she could if so minded have pointed out any shortcomings in the cause of action, that is not a substitute for the administrators providing sufficient information for the creditors to make an informed decision. But in judging whether there was a material omission in this respect, it is unhelpful to speak in terms of generality. In particular, that creditors were given insufficient information to form a sound judgment as to the prospects and value of the litigation, and how the administrators attributed to it the value they did, does not necessarily mean that there was an omission from the report, particularly if the creditors were given the best information available, even if more would have been desirable. The administrators' task is a difficult one, given the limited time available for investigation, their limited resources, their inability to compel provision of information, and the constraint of not jeopardising the cause of action by excessive disclosure. Creditors should be enabled to make as informed a judgment as possible, but it is not sufficient to allege that insufficient information was provided to enable creditors to make an informed decision; it is necessary to identify what additional information could and should have been, but was not, included in the report.
In this case, the creditors were informed (1) of the nature of the cause of action, in general terms (namely, that it arose out of the recycling contract and an alleged repudiation by Salmat); (2) that the director believed that it enjoyed good prospects; (3) that the administrators estimated that there would be a likely net return of $2.9 million; (4) at least in the course of the meeting, that the proceedings were presently the subject of a stay because of the security for costs order; and (5) that the matter could come to hearing in the latter half of 2015 - which has not been shown to be other than a genuine or reasonable prediction.
Moreover, the administrators' report included caveats:
Creditors must take into consideration that there are difficulties with pursuing litigation which may include but limited to the following:
(i) legal fees could be substantial and the claims may take some time to resolve;
(ii) most claims are normally vigorously defended; and
(iii) Fuji Xerox and Salmat may have a valid defence to claims made against them.
And:
Creditors should note that due to time constraints, our investigation into the affairs of the company and the conduct of its officers are limited in their nature. In addition, our opinion as detailed in this report is based on the investigations we have been able to undertake to date …
And:
The information contained in this report is based upon our preliminary investigations that have been conducted into the affairs of the company and advice from relevant parties. Creditors should appreciate the limitations in the information provided and the limited amount of time available to the administrators. The timetable set out in the Act necessitates the completion of this report in a relatively short period of time.
In those circumstances, what more should the administrators have reported? It was, on the authorities to which I have referred, permissible not to disclose the effect of counsel's advice as to the prospects, as doing so would have risked waiving privilege. It was also reasonable not to canvass the strengths and weaknesses of the litigation, in circumstances where the defendants in that very litigation would have access to the discussion. Information that suggested that the cause of action was unlikely to succeed would plainly have been material and ought to have been included; but the evidence does not establish that there was any such information, let alone that it was known or reasonably ought to have been known by the administrators. Likewise, information that the Salmat litigation was not likely to generate a return sufficient to pay creditors 100 cents in the dollar would have been material and ought to have been included; but it is not established that any such information existed, or was or ought reasonably to have been known to the administrators.
In short, information, other than privileged communications, which adversely impacted on the potential of the cause of action and was not otherwise known to creditors ought, if known to the administrators, to have been included in their report. But there is no evidence that there was any such information. Thus in my view, it has not been established that there was a material omission from the report in respect of the nature, prospects and status of the Salmat litigation. Nor has it been established that such information as was provided, particularly with respect to the status of the litigation (that is to say, its readiness and likely hearing dates) was materially misleading.
[9]
Mr Ryan and Front Foot
It is apparent from the evidence in the proceedings that Front Foot is a creature of Mr Ryan, has no assets of its own, and is entirely dependent on Mr Ryan for its capacity to fund the proceedings. It would have been relevant to creditors to know, if it were the case, that Front Foot did not have the capacity to fund the proceedings, as that could have affected their decision whether to prefer allowing the Salmat litigation to proceed over an immediate winding up.
The administrators disclosed that Mr Ryan was also the director of the funder and that (despite their requests) he had not provided evidence of the funder's capacity to meet its obligations, though he had given assurances that the funder had the capacity to do so. In the course of the creditors' meeting, Ms Perry made very clear - in answer to questions from Ms Jones - that Mr Ryan would not disclose the terms of the funding agreement. The creditors were therefore informed that this was not an arm's length external litigation funder, and that Mr Ryan was not prepared to provide further information. The administrator advised creditors to factor in the inherent uncertainties in making their decision.
The administrators disclosed all the information they had been able to obtain about Front Foot. In any event, I do not consider that omission of information that Front Foot was dependent upon Mr Ryan for its capacity was material; once creditors had been informed that Front Foot was a related company of Mr Ryan, and that he had had given assurances of its capacity to fund the proceedings but declined to provide documentary proof, hypothetical reasonable creditors would have assumed that its capacity was likely to be dependent on him.
The funding agreement provided a substantial reward for Front Foot: it was entitled to a "Project Management Fee" equivalent to 25% of the legal costs it had to pay, and to between 35% and 45% (depending on when resolution occurred) of the amount recovered - provided that the balance of the resolution sum (after Project Costs, Project Management Fee, and GST) to a maximum sufficient to ensure payment in full of costs and expenses of the administration and liquidator, petitioning creditors' costs, and payment of creditors in full, is first paid to the administrator.
As the administrators did not have and were not able to obtain this information, it cannot be said that it amounted to an omission from their report. In any event, the terms of the funding agreement did not impact upon the entitlement of the creditors, who would be paid in full before any success fee. Moreover, in circumstances where Mr Ryan was the sole shareholder in the company and the funding agreement provided for payment of creditors in full in priority to Front Foot's entitlement to a share of the proceeds, that Front Foot had a stake in the litigation under the funding agreement was not material because it did not significantly change the position - otherwise, Mr Ryan personally had a stake, as a shareholder in the company, who would benefit from any recovery over the amount necessary to pay costs and creditors. And the existence of such a stake would incentivise Front Foot to prosecute the litigation, as much for the benefit of the creditors as for itself.
The report did not explain that Mr Ryan was personally a cross-defendant in the Salmat proceedings, along with the company, both of which were sued (Mr Ryan as a guarantor) for moneys said to be due and owing to Salmat. In many ways, Mr Ryan's personal interest in the proceedings - not only through Front Foot, but also as a cross-defendant - would incentivise him to prosecute the proceedings. His position as a cross-defendant would be enhanced by the company's success on the main claim.
But it is true that there are some circumstances in which his exposure to the cross-claim might act as an incentive to compromise the company's claim on a less favourable basis, in order to be freed of the cross-claim. I cannot say that a hypothetical reasonable creditor could not have been influenced by knowledge that Mr Ryan had a potential conflict in the context of his exposure as a cross-defendant. As that was a matter known to or reasonably discoverable by the administrators, there was, in that respect, a material omission.
[10]
Sale of plant and equipment
The minutes record that in the course of the creditors' meeting, Ms Sheikh (for the ATO) asked whether the plant and equipment would be sold to any related entities, and Mr Hosking advised the meeting "that while the identities of any prospective purchasers were unknown at present, it was more likely that the assets would be sold to unrelated entities that operated in the industry, given their nature". In fact, the plant and equipment was ultimately sold to a related entity of Mr Ryan. While a range of values was attributed to the plant and equipment, the independent valuation obtained by the administrators (from Grays) was in the order of $67,850. The DOCA proposal involved the proceeds of sale being used essentially to fund liquidation and administration costs, and Mr Ryan being responsible to top up the proceeds to $131,000 if they were less than that. He eventually negotiated a sale to a related entity for $125,500 inclusive of GST.
The administrator deposed that when he made the statement at the meeting, it reflected his honest belief, based on the information then available to him. It was, at the highest, an expression of opinion as to what the "more likely" course was. The plaintiffs criticised this on the basis that it was reckless, insufficient steps having been taken to exclude the possibility of a sale to a related entity. However, I see no reason to doubt that it was the administrator's genuine opinion when offered, and such an expression of opinion is not rendered misleading merely by reason that the contrary, less likely, outcome ensued. In any event, given that the impact of any sale was to relieve (to the extent of the proceeds of sale) Mr Ryan from the personal obligation to provide a fund of $131,000, it could have made no difference to the hypothetical reasonable creditor whether the purchaser was related to Mr Ryan or not.
The administrator's statement that it was more likely that the assets would be sold to unrelated entities was neither misleading, nor material.
[11]
Voidable transactions
The s 439A(4) report included standard general information about unfair preferences, uncommercial transactions, uncommercial related party transactions, insolvent transactions, unfair loans, and insolvent trading. In addition, as to unfair preferences, the report stated:
We have reviewed the company's accounts and at this stage have identified a number of transactions whose recipients we have been unable to identify. While it is our view that some of these payments may constitute unfair preference payments, we are currently unable to verify the recipients or quantum of these claims and have requested further information from the St George Bank concerning them. We will provide creditors with an update concerning this matter at the forthcoming meeting.
The report stated that to date no specific uncommercial transaction, insolvent transaction, or unfair loan had been identified. As to insolvent trading, the report stated:
We have formed the preliminary view that the director may have allowed the company to trade whilst insolvent.
Reasons for that conclusion were provided, and in addition it was stated:
Our initial inquiries into the director's capacity to satisfy an insolvent trading claim against him indicates that he may be in a position to meet an adverse judgment against him.
Although in the comparison of a liquidation scenario with a DOCA scenario, voidable preferences and insolvent trading recovery was shown as "unknown", at the creditors' meeting the administrator advised that his preliminary investigations into whether any unfair preferences had been paid by the company within the relation-back period had revealed a number of transactions totalling $86,600 which required further investigation, and as to the director's capacity to satisfy a claim said that he had become aware that the director had sold his property and that settlement was imminent, with the proceeds to be applied towards the costs of the Salmat litigation.
However, at his first (pre-appointment) meeting with Mr Ryan on 24 June 2014, Mr Hosking had been advised that the company had received proceeds of an insurance claim on a policy with Dual Insurance in respect of theft of material in December 2013 for $400,000 and defence costs of $100,000. Evidence at the hearing established that $420,726.43 was paid into the company's solicitors' trust account on 17 December 2013 (within the relation-back period), and thereafter disbursed, in part on legal costs and disbursements and counsel's fees, but in part to Mr Ryan. $71,000 appears to have been paid to the Deputy Commissioner of Taxation on account of a superannuation guarantee debt. $80,000 was transferred to the solicitors' office account, apparently on account of security for costs ordered in the Salmat proceedings; it was not however actually applied to that purpose until many months later.
All those funds, though assets of the company, never passed through its accounts. This payment away of the company's moneys in December 2014 was plainly a potential unfair preference or uncommercial transaction. The administrators did not investigate it - apparently because they did not realise that it was in the six month relation-back period. There is no evidence that the liquidator investigated it. It was not referred to in the s 439A(4) report, nor otherwise in information provided to creditors. Even disregarding the superannuation guarantee debt (which is likely not to be recoverable as a preference), there was a potential claim in the order of $350,000. It cannot be said that the reasonable hypothetical creditor could not have been influenced by knowledge of the availability of such a claim, notwithstanding the difficulties that it might encounter.
In this respect, there was a material omission from the administrators' report.
[12]
Unfairly prejudicial
The plaintiffs also contended that the DOCA is unfairly prejudicial to creditors or contrary to the interests of the creditors as a whole, within s 445D(1)(f).
Whether a deed of company arrangement is oppressive or unfairly prejudicial is determined primarily by reference to the general principles underlying Part 5.3A, including first, the creditors' right to be paid or to have the company wound up or to have the company administered by an administrator in a way that will see creditors paid from the company's property [Re Bartlett Researched Securities Pty Limited (admin apptd) (1994) 12 ACSR 707, 710 (Derrington J); Hagenvale v Depela, 151; Molit (No 55) Pty Limited v Lam Soon Australia Pty Limited (Administrator Appointed) (1996) 19 ACSR 160; 63 FCR 391; 185 ALR 280; 14 ACLC 366; [1996] ANZ ConvR 475; Winterton Constructions Pty Limited v M A Coleman Joinery Co Pty Limited (1996) 20 ACSR 671; 132 FLR 247; 14 ACLC 1168; Fleet Broadband Holdings v Paradox Digital; Sydney Land Corp Pty Limited v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427; 16 ACLC 95; affirmed (1998) 26 ACSR 593; 16 ACLC 540]. In Sydney Land Corporation v Kalon, Young J (as he then was) put it in these terms (at 430):
Accordingly, when one is looking at what is oppressive or unfairly prejudicial under s 445D, one looks at it in the background of the general right of a creditor to be paid or to wind the company up, or to have the company administered by the administrator under the deed in a way which keeps the company's business going and will see the creditor paid something out of the property of the company. If a scheme in a deed deviates from that, then the creditor is more easily able to say that it is operating oppressively, than otherwise.
Relevant considerations include a comparison between the likely return to creditors under the deed and in a winding up, and comparative prejudice suffered by differing groups of creditors. While there are no doubt benefits for Mr Ryan in a DOCA - in particular, in that he is not exposed to claims for unfair preferences or insolvent trading, and while he assumes the burden of funding, through Front Foot, the Salmat litigation, there is no obligation personally enforceable against him to do so - the inquiry focuses not on his interests, but on those of the creditors.
In any event, these grounds necessitate a comparison of the position of creditors in a liquidation and their position under the DOCA. (The present is not a case in which the deed deals differently with different classes of creditors).
In a liquidation, it would be open to a liquidator to pursue Mr Ryan for any preference claims, and for insolvent trading. The preference claims - combining the $86,000 referred to at the creditors' meeting and the $350,000 from the Dual Insurance claim - might amount to $435,000, although it is unlikely that the whole amount would be recovered in full, and there are reasons for thinking that at least some aspects might be the subject of valid defences. However, a liquidator would first have to secure funding to advance those claims. There is no present indication of a willing funder. Having obtained funding and prosecuted the claims, the liquidator would then have to enforce any judgment against Mr Ryan. The extent to which Mr Ryan would be able to satisfy any such judgment is unknown. From any successful recovery, the liquidator would have to pay the costs of the proceedings, his remuneration and expenses, and the funder's fee, and then the balance would be available for dividend, or to fund the Salmat litigation. It is difficult to think that more than about $100,000 would remain available for that purpose.
It would also be open to a liquidator to seek funding from other sources for the Salmat litigation. However, prior to the appointment of the administrators, the liquidator had not secured any such funding, and there is no evidence that he endeavoured to do so. The only potential funder who has so far emerged is Mr Ryan, via Front Foot. There would be no obligation on him to fund the liquidator, and while - given his position as sole shareholder and his exposure as a cross-defendant - he would have some incentive to do so, he has not to date shown any inclination to do so if the company remains in the hands of an external administrator.
Under the DOCA, there is no potential to recover preferences, nor compensation, for insolvent trading. There is, however, the potential to recover, from pursuit of the Salmat litigation at no cost to the company or creditors, sufficient to fund a dividend of 100 cents in the dollar. While there is no guarantee that that will be the outcome - and the deed as presently drawn does not appear to reflect the intention of the creditors' meeting that in the event that the litigation does not generate sufficient to fund a dividend of 100 cents in the dollar, the matter be returned to creditors for further consideration, including of the option of liquidation (a matter which I further consider below) - Mr Ryan has undertaken (by Recital G in the DOCA) to use his best endeavours to ensure the obligations of the company as otherwise set out in the deed are satisfied. He has already demonstrated a commitment to the litigation by selling assets to fund the security for costs, and by ensuring the payment of $131,000 in respect of plant and equipment.
I do not accept that the comparison is so stark as was advanced on behalf of Mr Ryan: it is not a case of "certainty of nothing" from a liquidation against the prospect of a substantial dividend at no cost to the creditors from a DOCA. This is because, even if it might have appeared at the time of the creditors' meeting that there was a practical certainty of nothing from a liquidation, exposure of the Dual Insurance claim indicates that there is now a prospect of something, if not very much, from a liquidation - unless that something enables funding of the Salmat litigation. The evidence before me does not enable a view to be formed as to the prospects of the Salmat litigation beyond a conclusion that it is neither doomed to fail nor assured of success. On the other hand, the prospects of securing funding for relatively small preference claims against a director are not prima facie strong. While the views of individual creditors could readily differ as to whether the DOCA was to be preferred to liquidation, the view that they would be better off by waiting to allow the Salmat litigation to be prosecuted at no cost to them with some prospect of recovering the whole of their debts, rather than by proceeding immediately with a liquidation in which they might well receive a much smaller if any dividend, was a reasonable one.
It is an important consideration that (at least as intended by the creditors) the DOCA preserves to them the right to terminate it and place the company in liquidation in the event that the Salmat litigation does not generate sufficient to fund a dividend of 100 cents in the dollar. In that event, the combined effect of s 513B(c), (d), s 513C(a) and s 513A, and the definition of "relation-back day" in s 9, is that the relation-back day would be the same day as would be the case if the present liquidation remained on foot. Once that is recognised, the effect of the DOCA, at least as intended, is to preserve the ability of the creditors to pursue a winding up with all of the liquidator's remedies, in the event that the DOCA does not generate a 100 per cent dividend.
In that context, I am unable to see - even knowing, which the creditors did not know, of the availability of additional preference claims of up to $350,000 - how the creditors can be worse off under the DOCA than otherwise. Their remedies in a liquidation are preserved in the event that the DOCA does not generate a 100 per cent dividend.
Accordingly, I do not accept that the DOCA is unfairly prejudicial to creditors or contrary to the interests of the creditors as a whole within s 445D(1)(f).
[13]
Discretion
I have therefore concluded that, for the purposes of s 445D(1)(c), there were material omissions from the s 439A(4) report, in that the report did not disclose (a) that Mr Ryan personally was a cross-defendant in the Salmat litigation and as such had a potential conflict of interest, and (b) that the company had received some $500,000 proceeds of the Dual Insurance claim within the relation-back period, which had been disbursed and might be recoverable in a liquidation. No other ground under s 445D(1) has been established.
Once one or more of the grounds referred to in s 445D(1) is established, the discretion to make an order terminating a DOCA is enlivened. The exercise of that discretion is informed by two principal considerations; namely the interest of the creditors and the public interest. The relationship between establishment of one of the grounds and the exercise of the discretion varies between the grounds. Thus, for example, if it were established that the deed was oppressive or unfairly prejudicial or contrary to the interests of the creditors as a whole under s 445D(1)(f), it may be anticipated that the court would ordinarily make an order terminating the deed - although if there had been delay, or persons had acted in reliance on the deed, or third party interests had intervened, it might decline as a matter of discretion to do so. If the court were satisfied that the deed should be terminated "for some other reason" under s 445D(1)(g), it may be thought that little role would remain for the exercise of the discretion. On the other hand, if it were established that there had been a material contravention of the deed under s 445D(1)(d), it would not follow that there would be a predisposition in favour of terminating the deed.
Similarly, and relevantly, where it is established that material misleading information has been provided or that there has been a material omission under s 445D(1)(a), (b) or (c), it does not follow that the court would be predisposed in favour of termination. Relevant considerations include the importance of the information in question to the creditors' decision, whether the creditors were actually mislead (a conclusion which does not follow from a finding that the information or omission was material), and the present attitude of the creditors once disclosure is made. That information can be material without being decisive was explained by Campbell J in Bidald Consulting v Miles Special Builders:
[292] Even if there has been false or misleading information included in a report, or if material information has been omitted from the report, it does not follow that, if the creditors had full and accurate information, they would have voted against the deed: Commissioner of Taxation v Comcorp Australia Ltd at FCR 400; ACSR 632; ACLC 1652 per Carr J (with whom Lockhart J agreed). It is possible for false or misleading information given to creditors to be material, but still not of sufficient importance to justify terminating the deed. What matters is how important that information is likely to have been in arriving at a decision how to vote: Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) at ACSR 282.
It follows from my conclusion that the omissions in question were material that it must be accepted that the information could potentially have rationally influenced creditors in deciding whether or not to prefer a DOCA to liquidation. Viewed objectively, knowledge that in circumstances where the proposed funder would have to rely on Mr Ryan to resource the litigation, his status as a cross-defendant meant that his interest could in some circumstances differ from that of the company and the creditors, could affect a creditor's judgment as to whether the most attractive course of action was to support the DOCA. Likewise, knowledge that there were potential recoveries from voidable transactions in the order of $450,000 might have made a liquidation more attractive than it appeared from the s 439A(4) report. Taken together, those matters logically and rationally might have reduced the attraction of the DOCA and increased the attraction of liquidation.
However, those matters now have to be viewed in a wider context in order to evaluate their importance to the creditors' decision. First, it is a conspicuous feature of this case that the protagonists are not the notional reasonable arm's length creditor, but creditors who have a distinct interest in a different capacity. The resolution that the company execute a DOCA was carried on the votes of creditors related to Mr Ryan. While that would often diminish the weight to be given to their judgment, this is not one of those cases in which related creditors carry a DOCA, notwithstanding that it provides no benefit for them, over the opposition of unrelated creditors who oppose it, notwithstanding that it provides some slight benefit for them. There is nothing to suggest that the related creditors in this case do not have a real interest in the outcome, and the cause of action against Salmat provides a prospective means of obtaining repayment of their debts.
On the other hand, the resolution that the company execute the DOCA was opposed by unrelated creditors, but predominantly by Salmat. Salmat, of course, has a very great interest in opposing the DOCA, not because of its interest qua creditor, but because it is the defendant in the Salmat proceedings, which are unlikely to proceed if the DOCA is terminated.
Secondly, under the DOCA, at least as it was intended to operate, the creditors retained the ability to decide that the company should return to liquidation in the event that they did not receive a 100 cent dividend. In that event, the ability of the liquidator to recover the proceeds of the voidable transactions was preserved. Thus it is not as if those rights were surrendered by the DOCA, nor Mr Ryan immunised from recovery proceedings - unless the intent of realising 100 cents in the dollar for creditors was achieved.
The potential conflict arising from Mr Ryan's status as a cross-defendant is that he might cause Front Foot to accept a relatively cheap settlement in order to escape personal liability as a cross-defendant. While this is theoretically possible, Mr Ryan has demonstrated a significant commitment to prosecuting the Salmat litigation that extends beyond merely resisting any personal exposure. More significantly, if he were to settle the litigation for a sum that did not produce 100 cents in the dollar for creditors, the DOCA and such benefits as it gives Mr Ryan would be jeopardised. For those reasons, viewed objectively, the omission of Mr Ryan's position as a cross-defendant in the Salmat litigation, though it cannot be said to be immaterial, would not likely have affected the votes of the related creditors who supported the DOCA and carried the meeting. And in a context where the creditors, whose claims amounted in all to some $2.9 million, had found the possibility of recovery of voidable transactions of up to $86,600 (of which they had been informed) less attractive than the prospect of recovering $2.9 million from Salmat, it is improbable that the possibility of recovering up to an additional $350,000 (before deducting costs and remuneration) from voidable transactions would have affected the votes of the related creditors who carried the meeting, or at least sufficient of them to change the outcome - not merely because of their relationship with Mr Ryan, but because there appeared to be better prospects of ultimate recovery through pursuit of the Salmat litigation than through action to recover the proceeds of voidable transactions. The weightier factors were that the DOCA offered creditors the prospect of full recovery; the Salmat litigation would be funded by Mr Ryan through Front Foot, at no cost to the company or its creditors; Mr Ryan had a personal incentive (as a shareholder and through Front Foot's interest) to prosecute the litigation; and the ability of the creditors to revert to a liquidation was preserved in the event that enough to generate a 100% dividend was not recovered. Even properly informed, creditors would have been faced with the prospect of choosing between the possibility of recovering 100 cents in the dollar from the successful prosecution of the Salmat litigation at no cost to themselves, against the possibility of a dividend if the liquidator were able to obtain funding to bring proceedings to recover the proceeds of the voidable transactions, succeed in those proceedings, and realise a surplus after payment of his costs, remuneration, and the return to the funder. While any such surplus might be available to fund the Salmat proceedings, that would be a far more complicated and precarious route to recovery from Salmat than reliance on Front Foot, at no cost to the company or the creditors. Moreover, the liquidator had given no indication up to the time when the administrators were appointed of any intention to pursue that course of action, and whether the Salmat proceedings could be sustained without a funder during pursuit of recovery proceedings against Mr Ryan must be doubted. In that context, the probabilities are that that disclosure of the matters omitted from the s 439A(4) report would not have influenced sufficient of those creditors who supported the DOCA to change their vote as to produce a different outcome.
This view derives some support from the circumstance that no other creditor has appeared to support the relief claimed by Salmat. Further, since the institution of the present proceedings, the solicitors for Mr Ryan have circularised creditors with the Points of Claim and Points of Defence and sought an indication as to whether they would now vote any differently. While the petitioning creditor Remondis - whose proxy was not voted at the original creditors' meeting - has indicated that it would oppose the DOCA, and while the responses are far from complete, there is no indication of any substantial shift in the attitude of creditors, particularly on the part of the related creditors whose vote carried the DOCA. As I have observed, this is not a case in which the weight to be attributed to the interest of the related creditors is to be discounted because they do not have a real interest in the outcome, while the interest of Salmat needs to be viewed in the light of its status as defendant in the Salmat litigation.
It is no doubt in the interest of creditors that they be properly informed and receive accurate information. There is also undoubtedly a significant public interest in the provision of accurate information to creditors and in creditors being enabled to make an informed judgment, as there is in the proper investigation of voidable transactions and their recovery for the benefit of creditors. Mr Henskens SC, for the plaintiffs, emphasised the importance of considerations of commercial morality, and the facility of a liquidator (but not an administrator) to take legal action to undo certain transactions. In Bidald Consulting v Miles Special Builders, Campbell J (as his Honour then was) said (at [286]) (in a passage that was approved by the Court of Appeal in Vero Insurance Limited v Kassem (as joint administrators of Ungul Properties Pty Ltd) [2011] NSWCA 381; (2011) 86 ACSR 607 (at [82])):
[286] It by no means follows that if the creditors would be better off under the deed than with a liquidation, the deed will be allowed to stand. As Fitzgerald JA (with whom Beazley JA and Davies AJA agreed on this point) said in Joseph Khoury & Sons v Zambena Pty Ltd (at [80]):
[80] … the Court should not encourage the notion that "anything goes" provided only that a deed of company arrangement provides some benefit for dissatisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the court's refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently.
While that principle applies "especially" when different groups are treated differently, its application is not restricted to that situation.
[287] There are decisions of both the Full Federal Court and the New South Wales Court of Appeal, which are hard to reconcile with the notion that there is any "primary consideration" - rather, the discretionary power is to be exercised having regard to both the interest of the creditors as a whole and in the public interest, which latter expression includes considerations of commercial morality and the interests of the public at large: Emanuele v Australian Securities Commission at FCR 69; ALR 520; ACSR 15; Joseph Khoury & Sons v Zambena Pty Ltd at [68] per Fitzgerald JA. To the same effect is Sydney Land Corp Pty Ltd v Kalon Pty Ltd (Young J). In my view, the discretion is to be exercised in accordance with these decisions of appellate courts, and not with any concept of there being any "primary consideration".
[288] The "interests of the public" which the court can take into account include applying public policy. Just as a termination of the winding up which is agreed to by all creditors can be refused by the court if it is contrary to public policy (Re Denistone Real Estate Pty Ltd and Companies Act), so the court can apply public policy in deciding whether to bring an administration to an end: Deputy Commissioner of Taxation v Woodings at WAR 199-200; ACSR 275 (Wallwork J). Likewise, public policy can be applied in deciding to bring a deed of company arrangement to an end.
[289] One public policy which can be applied is the policy against allowing an insolvent company to continue to be in a position to trade ([260]ff above). That policy applies in the circumstances of this case.
[290] For a director to avoid public examination about the affairs of the corporation, and the possibility of the type of clawback litigation which is possible in a winding up, by making a payment to creditors, can also be a factor in favour of termination: cf Paton v Campbell Capital Ltd at 32. It is in a relevant sense "detrimental to commercial morality" to dispense with the opportunity which the winding up law provides for the investigation of the affairs of a failed company: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 26, Emanuele v Australian Securities Commission at FCR 69; ALR 520; ACSR 15.
[291] How much weight is given to the fact that the affairs of the company will not be investigated depends upon whether there are circumstances which suggest that investigation is called for. Sometimes, the fact that only a small dividend will be paid to creditors is itself such a circumstance: Lancaster v NZI Capital Corporation Ltd (Sheppard J, Federal Court of Australia, 3 September 1991 unreported, but quoted and approved in Paton v Campbell Capital Ltd at 32). Sometimes, the fact that it appears that there may be prospects of preference or uncommercial transaction or insolvent trading recoveries can be such a circumstance. In the present case, it is clear that only a small dividend will be paid to creditors, if any dividend at all. There is some basis for believing that insolvent trading recoveries might be possible, but the evidence concerning that topic is fairly slight, and any actual recoveries would depend on a liquidator obtaining the funding to sue.
The decisive consideration is that under this DOCA, at least as it was intended to operate, the creditors retain the ability to decide that the company should return to liquidation in the event that they did not receive a 100 cent dividend, in which case the ability of the liquidator to recover the proceeds of the voidable transactions is preserved. In those circumstances, the only party whose position is prejudiced by the DOCA is Salmat, and the prejudice to it is not qua creditor, but qua defendant in the Salmat proceedings. As the DOCA is not unfair or contrary to the interests of the creditors as a whole, it is not in the interests of creditors generally that it be terminated. The public interest in full and accurate disclosure to creditors does not, in those circumstances, dictate that it must be, especially where on balance disclosure of the omitted matters would not have affected the outcome. The public interest in the investigation and recovery of voidable transactions is not compromised because, if creditors are not paid in full, they retain the ability to return the company to liquidation and have those transactions investigated.
Accordingly, notwithstanding that there were material omissions from the s 439A(4) report, as a matter of discretion I would not terminate the DOCA.
[14]
Should the DOCA be declared void under s 445G?
The plaintiffs also invoked s 445G, which provides as follows:
When Court may void or validate deed
(1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or ASIC, may apply to the Court for an order under this section.
(2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground.
(3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that:
(a) the provision was substantially complied with; and
(b) no injustice will result for anyone bound by the deed if the contravention is disregarded.
(4) Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator.
Section 445G is the appropriate source of jurisdiction where there is a complaint relating to some contravention of, or non-compliance with, Part 5.3A, whereas s 445D is appropriate where there is no allegation of such a contravention, but the complaint is centred on unfairness, rather than on non-compliance with the law [Deputy Commissioner of Taxation v Portinex Pty Ltd, [107]].
It was faintly suggested that the matters relied on under s 445D amounted to non-compliances with Part 5.3A; in particular, the requirements of a report to creditors under s 439A(4). However, although there may have been omissions from the report, it did not fail to meet the basic requirements of s 439A(4). It was also faintly suggested that the administrator did not adequately investigate the company's affairs under s 438A, but having regard to the confined timeframes within which an administrator must operate, and the circumstance that these administrators were appointed by a liquidator who had already presumably conducted some investigation himself, I do not think it can be said that the administrator conducted no investigation under s 438A. None of the matters relied on by the plaintiffs raise doubt as to whether the DOCA was entered into in accordance with, or complies with, Part 5.3A, and s 445 is not engaged.
However, s 445G is relevant for another reason. I have observed that, at least as the DOCA was intended to operate, creditors reserved the right to return the company to liquidation if they did not receive 100 cents in the dollar under the deed. That follows from the question asked, and answered by Ms Perry, at the meeting:
Ms Chris Perry, representing the director, advised the meeting that it was her client's intention that the net proceeds from the litigation and the sale of the plant and equipment would be sufficient to enable the payment of 100 cents in the dollar to creditors. However, should the net recovery result in a material change to the projected return to creditors, there would be a need to convene a meeting of creditors to vary the Deed in order to allow creditors to consider the various matter which resulted in the change.
It also and more specifically follows from the terms of the resolution of the creditors' meeting:
The meeting was advised that the amendments to the Deed proposal and subsequent DCA would reflect the director's intention to ensure that the net proceeds from the litigation action, should it be successful, would result in a payment of 100 cents in the dollar of all admitted claims against the Company, and that should the outcome of the proceedings result in a net return that is materially lower than the amount projected to creditors, that creditors be given the operation to consider the revised rate of return and vote on whether or not to vary the Deed. Furthermore, it was noted that should the Company's action fail, the Deed would also fail, thereby resulting in the Company being wound up.
Mr Hosking then proposed the following resolution relation to the future of the Company:
Pursuant to s 439C of the Corporations Act 2001, the company be required to execute a Deed of Company Arrangement under Part 5.3A of the Corporations Act 2001 in substantially the same form as the proposal statement presented to the meeting (and amended at the meeting) and that David Anthony Hurst and Philip Raymond Hosking be appointed Joint Administrators of the Deed.
However, what ultimately appeared in the deed, relevantly, did not reflect that: clause 8.4 provided that if the Salmat proceedings do not result in a payment to be received by the Company of an amount sufficient to cause an outcome by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar, then the administrators may at their discretion convene a meeting of creditors to consider variation or termination of this Deed and/or take steps to enforce the obligations of this Deed. That does not preserve to creditors the right contemplated by the resolution, but instead confers on the administrators a discretion to call a creditors' meeting in that event. As has been observed, clause 4.4(c) of the DOCA provides that any discretion conferred on the administrators is unfettered. That does not give creditors the type of assurance that the resolution envisaged.
Section 439C provides that at a s 439A meeting, the creditors may resolve, inter alia, "that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting)". Section 444A(4) provides that where the creditors resolve that the company execute a DOCA, "The administrator of the company must prepare an instrument setting out the terms of the deed". "The deed" referred to in s 444A(3) must mean the deed "specified in the resolution" as mentioned in s 439C. A deed that did not accord with the resolution would not be "the deed". Section 444B provides that where an instrument is prepared under s 444A, the company and the deed administrator must execute it and when so executed, it becomes a deed of company arrangement. Accordingly, a deed that does not accord with the terms of the creditors' resolution at the s 439A meeting is not entered into in accordance with or compliance with Part 5.3A.
Clause 8.4 of the DOCA does not reflect the terms of the resolution. If it were possible to declare that provision void and vary the deed to include a provision that reflects the resolution, that would bring the deed into conformity with what the creditors' meeting intended and meet the justice of the case while avoiding the consequence of declaring the deed wholly void - which would not accord with that intention. The court can bring about that result under s 445G(4), but only with the consent of the deed's administrator. I understand, from the submissions made, that such consent would be forthcoming.
This issue was not raised by the plaintiffs, but emerged in the course of the hearing, although it was the plaintiffs who referred in their application to s 445G. In order to address it, I propose to grant leave to Mr Ryan (a member and creditor of the company) to apply under s 445G for a declaration that clause 8.4 of the deed is void, and an order pursuant to s 445G(4) varying the deed by substituting a new clause 8.4 in the following form:
Failure to pay sufficient funds from the Funding Agreement or Comply with the terms of this Deed
8.4 If:
(a) FFPF fails to comply with the Funding Agreement, or otherwise comply with the terms of this Deed; or
(b) The Proceedings do not result in a payment to be received by the Company pursuant to the funding Agreement of an amount sufficient to cause an outcome in this Deed by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar;
then the administrators must convene a meeting of Creditors to consider variation or termination of this Deed and may at their discretion take the steps set out below to enforce the obligations of this Deed.
On that application, subject to the administrators confirming their consent, I would make the orders sought.
[15]
Should the administrators be removed?
Further, and alternatively, the plaintiffs contended that the administrators should be removed under s 449B, which provides as follows:
Court may remove administrator
On the application of ASIC or of a creditor, liquidator or provisional liquidator of the company concerned, the Court may:
(a) remove from office the administrator of a company under administration or of a deed of company arrangement; and
(b) appoint someone else as administrator of the company or deed.
Lest I reach that conclusion, the consent dated 25 March 2015 of Neil Robert Cussen of Deloitte Touche Tohmatsu to act as deed administrator in place of the administrators was tendered.
It is not in doubt that, like liquidators, administrators and deed administrators are expected to be free of actual or potential conflicts of interest and actual or apparent bias [Commonwealth of Australia v John Irving (1996) 65 FCR 291; 144 ALR 172; 14 ACLC 645; 19 ACSR 459, 462 (Branson J); Bovis Lend Lease v Wily, [133]-[141]; Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104, 106 (Burchett J); Re Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201, [15]]. Apprehended bias will be established if a fair minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of questions they may be called upon to decide [ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204; 101 ACSR 87, [58]-[64] (White J)]. That said, the court will remove and replace an administrator only if satisfied that to do so would be "for the better conduct of the administration" [Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 12 ACLC 594; 13 ACSR 544, 549-551 (Hayne J); Re Central Spring Works Australia Pty Ltd (admin appointed); Tubemakers of Australia Ltd v McLennan (as admin of the company) [2000] VSC 145; (2000) 34 ACSR 169; Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga In Australia Inc (admins apptd) [2012] NSWSC 214; (2012) 260 FLR 348; 87 ACSR 658, [45] (Black J)]. That requires that attention be given to the stage of the administration, and the remaining functions of the administrator or deed administrator. In the present case, now that a DOCA is in place, the main remaining functions of the deed administrators are receiving and adjudicating proofs, distributing the deed fund, and exercising such discretions as they have under the DOCA. The essential question is whether the reasonable bystander would, in the context of the DOCA, apprehend that the administrators might not bring to those functions an impartial mind.
There is nothing to suggest that, before they were approached to act as administrators, the administrators had any prior association with or commitment to the company or the Ryan interests. However, the plaintiffs contend that a reasonable apprehension that they are biased in favour of the Ryan interests and against the Salmat interests arises from pre-appointment discussions between the administrators and Mr Ryan; the apparent alignment of the administrators with Mr Ryan in endeavouring to persuade the liquidator to appoint administrators; the failure to investigate the proceeds of the Dual Insurance claim notwithstanding that Mr Ryan had informed Mr Hosking of their receipt in the course of the pre-appointment meeting on 24 June 2014; the practically inexorable progress of the administration towards a recommendation in favour of a DOCA, secure in the knowledge that it would be supported by the majority of (related) creditors; the absence of rational analysis of the Salmat cause of action and its prospects in the s 439A report; and the subsequent conduct of the administrators in drawing to the attention of the solicitors acting for the company in the Salmat proceedings matters adverse to the Salmat interests with the intention of advancing the interests of the company and Mr Ryan.
Although the plaintiffs submitted that the matters discussed in the pre-appointment meetings held on 24 June, 25 June and 9 September went beyond explaining the process of voluntary administration, the procedure for appointment of administrators by a liquidator and general advice in relation to a DOCA proposal as indicated in the DIRRI, the question is not whether what took place was fully described in the DIRRI, but whether what took place manifests a want of independence. The pre-appointment process involves administrators considering whether or not they will consent to an appointment. Administrators are entitled, before consenting to appointment, to have some idea of what it is that they are being asked to take on. It is to be expected, and it is unexceptionable, that the matters addressed will include the assets and liabilities of the company. And as one of the potential outcomes is a DOCA - particularly where the appointment is to be made by a liquidator under s 436B - pre-appointment discussions will not unreasonably involve a discussion of the potential terms of a DOCA with the proponent. It is to be expected that in the course of considering whether or not to accept an appointment, administrators will think about and perhaps form some preliminary views in respect of a DOCA. Essentially, in this case - as in many - the most important issue for the administrators was their recommendation to the creditors meeting. Predisposition towards a DOCA - particularly in the context of an appointment by a liquidator under s 436B - does not indicate disqualifying bias in favour of one interest or against another.
It is true that discussions went somewhat further than this. It is clear enough that Mr Ryan wanted to remove the company from liquidation, with a view to prosecuting the Salmat litigation. He informed Mr Hosking that he controlled the majority of the creditors. They discussed that if the liquidator did not agree to appoint administrators, Mr Ryan could use that voting power at a creditors' meeting to remove the liquidator. But I do not accept that a fair minded lay observer would form the view that the administrators were effectively making common cause with the Ryan interests to achieve the appointment of administrators and the approval of the DOCA. Indeed, although when first approached by Mr Hosking and Mr Ryan, the liquidator did not agree to appoint administrators, indicating that he would do so only if persuaded that to do so would be in the interests of creditors, it does not appear that any such threat of removal was ever conveyed to him. Thereafter, it took from July to September for him to be persuaded, during which period Mr Hosking had no further contact with Mr Ryan or anyone on his behalf, or the liquidator. Ultimately, the appointment was made by the liquidator under s 436B. The fact that the possibility was discussed does not provide ground for a reasonable apprehension that the deed administrators will not discharge their remaining functions impartially.
Nor do I accept that such an observer would conclude that the oversight in respect of investigation of the Dual Insurance transaction was attributable to alignment with the Ryan interests. While unfortunate, the administrator's explanation that it did not occur to him that it was within the six month relation-back period from the date of the application for a winding up order is plausible; moreover, in the context of a s 436B appointment, an administrator may not unreasonably assume that the liquidator will already have carried out appropriate investigations of potential voidable transactions.
Where the effect of a DOCA is that litigation is to be pursued by the company against a person who happens to be a creditor, it is inevitable that the deed administrator will be perceived to be adverse to the interests of that creditor. Although the appropriateness of proposing the use of extraneous information potentially adverse to the Salmat interests to the company's solicitor in the Salmat proceedings might be questioned, any administrator of this deed responsible for oversight of its implementation (which necessarily includes that litigation, albeit that Mr Ryan has control of the litigation), would appear adverse to the interests of Salmat, and it is positively in the interests of the due administration of the deed that they take such steps as may be calculated to advance the company's interests in that litigation. The circumstance that this gives the appearance of alignment against Salmat is in this context no ground for a reasonable apprehension of bias in the relevant sense.
Nor does the administrators' predisposition in favour of a DOCA, in a context where that was the rationale for their appointment by the liquidator, reasonably found an apprehension that they would be other than impartial in dealing with proofs of debt, or that they would exercise such discretions as they are given under the DOCA other than genuinely and honestly in the interests of the creditors as a whole. And although it is not in this case a major consideration, their removal and replacement would inevitably incur some duplication of work and additional cost. I am therefore unpersuaded that a fair minded lay observer might reasonably apprehend that the deed administrators might not bring an impartial mind to the resolution of the questions they may in the future be called upon to decide in that capacity, or that their removal would be for the better administration of the DOCA.
[16]
Should the winding up be terminated?
By his interlocutory process, Mr Ryan seeks an order that the winding up be terminated, pursuant to Corporations Act, s 482. That application is made pursuant to and in discharge of his obligation to do so under clause 5.1 of the DOCA. However, as has been mentioned, nothing in the DOCA is conditional upon that application succeeding.
If the winding up is not terminated, it remains on foot, notwithstanding the subsequent execution of a DOCA, but the liquidator is bound by the DOCA by operation of s 444G [Mercy & Sons Pty Ltd v Wanari Pty Ltd (subject to a deed of company arrangement) (in liq) [2000] NSWSC 756; (2000) 157 FLR 107; 35 ACSR 70; Re Nardell Coal Corp (rec and mgrs apptd) (in liq) (subject to deed of company arrangement) [2004] NSWSC 281; (2004) 182 FLR 290; 22 ACLC 652; 49 ACSR 110, [75] (Austin J)]. In the event that the creditors resolve to terminate the deed, it is unnecessary and inappropriate for them also to resolve that the company be wound up; upon termination of the deed the pre-existing winding up continues, no longer subject to or constrained by the DOCA, as Austin J explained in Re Nardell Coal Corp:
[69] The reasoning that has led me to the view that the choice given to creditors by s 439C(c) is not available when the company is in administration, also leads me to the view that it is inappropriate for the creditors of a company under a deed of company arrangement, who have decided to terminate the deed, to resolve as well that the company be wound up. Upon the termination of the deed of company arrangement, any limitation upon the pre-existing liquidator's powers imposed by the terms of the deed comes to an end, and the pre-existing liquidation then continues. There's no need for the creditors to resolve to wind the company up, in such circumstances, and it would be confusing to contemplate that they might create an additional winding up with a new liquidator.
…
[74] It appears, in summary, that if a liquidator in a "deemed" creditors' voluntary winding up under s 446A initiates a further voluntary administration under s 436B, which leads to the execution of a deed of company arrangement:
• the winding up is only suspended, and not automatically terminated, during the administration;
• the choice of creditors in the administration is either to approve a deed of company arrangement or return the company to its liquidator;
• if they opt for a deed of company arrangement, the winding up is revived except to the extent that it continues to be suppressed by the provisions of the deed;
• if the deed of company arrangement is terminated, the winding up continues thereafter without inhibition;
• the winding up may be terminated by the court at any time, under s 482.
[75] Therefore the winding up in the present case has survived the execution of the DOCA, and the question now presented is whether the court should terminate it (or order that it be stayed indefinitely) under s 482.
Corporations Act, s 482(2A), specifies a list of matters which the court must consider in determining an application for a stay or termination of a winding up in relation to a company that is subject to a deed of company arrangement:
(2A) If such an application is made in relation to a company subject to a deed of company arrangement, then, in determining the application, the Court must have regard to all of the following matters:
(a) any report that has been given to the Court by:
(i) the administrator, or a former administrator, of the company; or
(ii) the liquidator, or a former liquidator, of the company; or
(iii) ASIC;
and that contains an allegation that an officer of the company has engaged in misconduct;
(b) any report that has been lodged with ASIC by:
(i) the administrator, or a former administrator, of the company; or
(ii) the liquidator, or a former liquidator, of the company;
and that contains an allegation that an officer of the company has engaged in misconduct;
(c) the decision of the company's creditors to resolve that the company execute a deed of company arrangement;
(d) the statement that was given under paragraph 439A(4)(b) when the company was under administration;
(e) whether the deed of company arrangement is likely to result in the company becoming or remaining insolvent;
(f) any other relevant matters.
"Any other relevant matters" will typically include those established by authority to be relevant on such an application generally, including whether the conditions or circumstances that required that the company be wound up no longer exist and whether the company can safely be entrusted to the control of the directors. The court will also have regard to the terms of the DOCA and the extent to which termination of the winding up will facilitate achievement of its objects and those of Pt 5.3A [Mercy & Sons v Wanari, [53] (Austin J)].
It may be said that, in requiring that Mr Ryan apply for the termination of the winding up, the DOCA contemplates that the winding up would be terminated. However, termination of the winding up is not necessary to permit implementation of the DOCA. I cannot at present be satisfied that the condition that required that the company be wound up, namely its insolvency, will no longer exist. It is quite uncertain at present whether the company will no longer be insolvent upon implementation of the DOCA, that question being largely dependent on the outcome of the Salmat litigation: if the company succeeds in that litigation it may well be solvent; but if it does not it is likely to remain insolvent. While termination of the winding up is unlikely to prejudice the position of current creditors - as, in the event they were to decide to terminate the DOCA, the relation-back provisions to which I have referred would have the result that in the winding up that ensued, the relation-back day would be the same as in the present court-ordered winding up - the solvency of the company is of concern from the perspective of the public interest and potential future creditors as well as current creditors, and the apparent protection of the position of current creditors does not relieve the court from the need to be satisfied that the company would no longer be insolvent if the winding up were terminated. At this stage, I cannot be so satisfied, although it is quite possible that the Court could be so satisfied once the DOCA has been fully implemented.
Save that two concurrent administrations would remain on foot, there does not appear to be any disadvantage in not at this stage terminating the liquidation, leaving the issue to be revisited when the result of the DOCA is known. The persistence of the winding up will not interfere with the implementation of the DOCA, as the liquidator is bound by the DOCA. Moreover, it will secure the interests of the creditors, in the event that the DOCA is later terminated.
However, it seems undesirable and unnecessary to inflict the costs of parallel insolvency administrations on the company and its creditors in the meantime. The preferable course is to stay (but not terminate) the winding up while the DOCA remains on foot. If the DOCA produces the desired result, the application for termination of the winding up can then be renewed. If the DOCA is terminated, or any other sufficient reason for doing so appears, the stay can be lifted.
[17]
Conclusion
My conclusions may be summarised as follows.
The DOCA has not been entered into in accordance with Part 5.3A, because it does not conform with the deed as specified in the resolution of the s 439A meeting, in that clause 8.4 merely confers on the administrators a discretion to convene a meeting of creditors if the Salmat litigation does not generate a dividend of 100 cents in the dollar, whereas the resolution specified that in such event there be a creditors' meeting to consider termination or variation of the DOCA and the winding up of the company. Leave should be granted to Mr Ryan to apply for relief under s 449G. Clause 8.4 of the DOCA should be declared void and, with the consent of the administrator, the DOCA should be varied by substituting clause 8.4 in the following form:
Failure to pay sufficient funds from the Funding Agreement or Comply with the terms of this Deed
8.4 If:
(a) FFPF fails to comply with the Funding Agreement, or otherwise comply with the terms of this Deed; or
(b) The Proceedings do not result in a payment to be received by the Company pursuant to the funding Agreement of an amount sufficient to cause an outcome in this Deed by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar;
then the administrators must convene a meeting of Creditors to consider variation or termination of this Deed and may at their discretion take the steps set out below to enforce the obligations of this Deed.
There were material omissions from the s 439A(4) report, in that the report did not disclose (a) that Mr Ryan personally was a cross-defendant in the Salmat litigation and as such had a potential conflict of interest, and (b) that the company had received the proceeds of an insurance claim within the relation-back period, which had been disbursed, and might be recoverable in a liquidation.
It has not been established that the DOCA is oppressive or unfairly prejudicial to or unfairly discriminatory against one or more creditors, or contrary to the interests of the creditors as a whole.
Although there were material omissions, disclosure of the matters omitted would not have produced a different outcome at the creditors meeting. Moreover, a fundamental feature of the DOCA, as intended and as varied, is that creditors retain the right to revert to liquidation in the event that they do not receive a dividend of one hundred cents in the dollar as a result of the Salmat litigation, in which event the liquidator's ability to recover voidable transactions is preserved. Essentially for that reason, the general interest of creditors is better served by not terminating the deed, and the public interest in the investigation and recovery of voidable transactions is not compromised as those remedies will remain available in the event that the DOCA does not produce the intended result. Accordingly, as a matter of discretion, the DOCA should not be terminated.
I am unpersuaded that a fair minded lay observer might reasonably apprehend that the deed administrators might not bring an impartial mind to the resolution of the questions they may in the future be called upon to decide, or that their removal would be for the better conduct of the administration. Apparent bias against Salmat as the defendant in the Salmat litigation is not relevant bias.
As it cannot be predicted at this stage whether or not the company will as a result of the DOCA be solvent, it would be premature to terminate the winding up; and as the liquidator will be bound by the DOCA, which is not conditional upon termination of the winding up, there is no difficulty in the winding up remaining on foot while the DOCA is implemented. However, in order to avoid incurring the costs of concurrent insolvency administrations, the preferable course is to stay the winding up while the DOCA remains on foot.
Accordingly I propose to make orders to the effect that:
1. The third defendant (Mr Ryan) have leave to apply to the Court under Corporations Act, s 445G, for an order declaring void clause 8.4 of the deed of company arrangement upon the ground that it is not in accordance with the deed specified in the resolution of the s 439A meeting, and that the deed be varied by substituting for it the following:
Failure to pay sufficient funds from the Funding Agreement or Comply with the terms of this Deed
8.4 If:
(a) FFPF fails to comply with the Funding Agreement, or otherwise comply with the terms of this Deed; or
(b) The Proceedings do not result in a payment to be received by the Company pursuant to the funding Agreement of an amount sufficient to cause an outcome in this Deed by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar;
then the administrators must convene a meeting of Creditors to consider variation or termination of this Deed and may at their discretion take the steps set out below to enforce the obligations of this Deed.
1. It be declared pursuant to s 445G(2) that clause 8.4 of the deed is void.
2. Pursuant to s 445G(4), and subject to the consent of the deed administrator, the deed be varied by substituting for clause 8.4 the following:
Failure to pay sufficient funds from the Funding Agreement or Comply with the terms of this Deed
8.4 If:
(a) FFPF fails to comply with the Funding Agreement, or otherwise comply with the terms of this Deed; or
(b) The Proceedings do not result in a payment to be received by the Company pursuant to the funding Agreement of an amount sufficient to cause an outcome in this Deed by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar;
then the administrators must convene a meeting of Creditors to consider variation or termination of this Deed and may at their discretion take the steps set out below to enforce the obligations of this Deed.
1. The originating process be otherwise dismissed.
2. Pursuant to Corporations Act, s 482, the winding up of Recycling Holdings Pty Limited by order of the Court made on 18 June 2014 be stayed until the termination of the Deed of Company Arrangement dated 27 October 2014 or further order.
3. There be liberty to renew the application for an order terminating the winding up when the DOCA has been implemented.
Before formally making those orders, I will allow the parties an opportunity to consider the form of the proposed orders, for the administrators to confirm their consent to the amendment of the DOCA, and to address on the question of costs.
[18]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 27 July 2015
Cases Cited (28)
CORPORATIONS - winding up - winding up in insolvency - application to terminate winding up - where company under DOCA - where termination of winding up not necessary for implementation of DOCA - where unknown whether company will return to solvency under DOCA - importance of protecting creditors' interests - where no disadvantage in refusing termination of liquidation - held, stay of winding up pending implementation of DOCA preferable.
Legislation Cited: (Cth) Corporations Act 2001, s 436B, s 439A(4), s 445D, s 445G, s 449B, s 482, s 513A, s 513B, S 513C.
Cases Cited: ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204; 101 ACSR 87
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510
Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 21 ACLC 1737; 45 ACSR 612
Commonwealth of Australia v John Irving (1996) 65 FCR 291; 144 ALR 172; 14 ACLC 645; 19 ACSR 459
Deputy Commissioner of Taxation v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616; 21 ACSR 590
Deputy Commissioner of Taxation v Portinex Pty Limited (subject to a deed of company arrangement) [2000] NSWSC 99; (2000) 156 FLR 453; 34 ASCR 391
Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to a deed of company arrangement) (no 3) [2011] FCA 1403; (2011) 289 ALR 69
Emanuele v Australian Securities Commission (1995) 63 FCR 54; 19 ACSR 1; 141 ALR 506; 14 ACLC 244; appeal dismissed [1997] HCA 20; (1997) 144 ALR 359; 23 ACSR 664; 188 CLR 114
Fleet Broadband Holdings v Paradox Digital (subject to a deed of company arrangement) [2005] WASC 261; (2005) 228 ALR 598
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885; 17 ACSR 139
Mercy & Sons Pty Ltd v Wanari Pty Ltd (subject to a deed of company arrangement) (in liq) [2000] NSWSC 756; (2000) 157 FLR 107; 35 ACSR 70
Molit (No 55) Pty Limited v Lam Soon Australia Pty Limited (Administrator Appointed) (1996) 19 ACSR 160; 63 FCR 391; 185 ALR 280; 14 ACLC 366; [1996] ANZ ConvR 475
Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 12 ACLC 594; 13 ACSR 544
Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga In Australia Inc (admins apptd) [2012] NSWSC 214; (2012) 260 FLR 348; 87 ACSR 658
Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (subject to a deed of company arrangement) [2013] QCA 405; (2013) 97 ACSR 390
Re Bartlett Researched Securities Pty Limited (admin apptd) (1994) 12 ACSR 707
Re Central Spring Works Australia Pty Ltd (admin appointed); Tubemakers of Australia Ltd v McLennan (as admin of the company) [2000] VSC 145; (2000) 34 ACSR 169
Re Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201
Re Nardell Coal Corp (rec and mgrs apptd) (in liq) (subject to deed of company arrangement) [2004] NSWSC 281; (2004) 182 FLR 290; 22 ACLC 652; 49 ACSR 110
Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104
Sydney Land Corp Pty Limited v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427; 16 ACLC 95; affirmed (1998) 26 ACSR 593; 16 ACLC 540
Vero Insurance Limited v Kassem (as joint administrators of Ungul Properties Pty Ltd) [2011] NSWCA 381; (2011) 86 ACSR 607
Winterton Constructions Pty Limited v M A Coleman Joinery Co Pty Limited (1996) 20 ACSR 671; 132 FLR 247; 14 ACLC 1168
Category: Principal judgment
Parties: Salmat Limited (first plaintiff)
Salmat Mediaforce Pty Ltd (second plaintiff)
Fuji Xerox Businessforce Pty Ltd (third plaintiff)
Recycling Holdings Pty Limited (first defendant)
Philip Raymond Hosking & David Anthony Hurst (in their capacities as Deed Administrators of Recycling Holdings Pty Ltd (in liq) (Deed Administrator Apptd) ACN 123 236 573 (second defendants)
Jason Kenneth Ryan (third defendant)
Front Foot Project Funding Pty Limited ACN 601 976 346 (fourth defendant)
Representation: Counsel:
A Henskens SC w SA Wells (plaintiffs)
S Golledge (second defendants)
D L Cook (third defendant)
Mr Downey (solicitor) (liquidator)