Irving v Smith

There are real risks that the valuation amounts may not be achieved in a sale process, the sale process may take significant time (with a resulting erosion of value due to default interest and costs), and there may be litigation involving various parties (including the caveat holders). However, on balance, I recommend that it is in the best interest of creditors that Longreach is wound up." 21 At the meeting Mr Smith produced a list of persons and companies claiming to be creditors. That list included Margaret Sweet, Catherine Gina Byrnes, Andrew Simmons, Trevor Quilky and Consolidated Byrnes Investment Company Pty Limited all of whom were shown on the list as assignees. 22 Shortly prior to the meeting on 5 August 2008, Mr Smith had received a number of documents constituting assignments of debts owed to certain creditors of the Company. At the same time Mr Smith received proofs of debt lodged by the assignees of the debts. Mr Smith was satisfied that each of the debts assigned was a discrete debt owed to the creditor of the Company and was not one debt that had been split amongst a number of assignees. 23 Each Deed of Assignment was dated 4 August 2008 and notice of each assignment was given to the Company pursuant to s 12 of the Conveyancing Act 1919 (NSW). 24 The assignments comprised: (a) an assignment by Kenmore Campus Pty Ltd to Andrew Simmons of a debt arising out of a claim against the Company for damages of $50 million for a consideration of $1.00; (b) an assignment by Kenmore Developments Pty Ltd to Catherine Gina Byrnes of a debt arising out of a claim against the Company for damages of $50 million for a consideration of $1.00; (c) an assignment by Kenmore Campus Pty Ltd to Margaret Sally Sweet of a debt arising out of a court order for a judgment for costs of $19,661.00 for a consideration of $1.00. This was a costs order made in favour of Kenmore Campus Pty Ltd and Kenmore Developments Pty Ltd in the Supreme Court of New South Wales. The Administrator admitted this debt in the sum of $7,000.00 on the basis that it was approximately 70% of the amount claimed to take into account the discount he believed was commonly made concerning assessments of Supreme Court orders for costs; (d) an assignment by Kenmore Campus Pty Ltd to Trevor Quilky of a debt arising out of a judgment for costs of which Kenmore Campus Pty Ltd had a claim for one half for a consideration of $1.00. Mr Smith admitted Mr Quilky to vote for $1,290.60 which was approximately 1/6 of the costs claimed by the solicitor in the proceeding; (e) an assignment by Kenmore Developments (NSW) Pty Ltd to Consolidated Byrnes Investments Corporation of an order for costs in respect of which Kenmore Developments (NSW) Pty Ltd claimed one half. (No point was taken that the name of the assignor in the Deed of Assignment was different from the name of the assignor shown in the Notice of Assignment). 25 The debts claimed by Kenmore Campus Pty Limited and Kenmore Developments Pty Limited arose in the following circumstances. Prior to the appointment of the Administrators the Company had sold part of the Goulburn land to those companies. A deposit of $500,000.00 was paid by the companies but a dispute arose between them and the Company as to whether they were required to settle the contract. The Company asserted that they were obliged to do so but they contended that they were not so obliged. The dispute was resolved by the parties entering into an agreement whereby the Company agreed to pay Kenmore Campus Pty Limited and Kenmore Developments Pty Limited $600,000.00. Prior to the date for settlement of the payment of the $600,000.00 the Administrators were appointed to the Company and the payment was not made. Those two companies gave a proxy to Mr Byrnes for the purposes of voting at the meeting of creditors. 26 At the meeting on 14 August 2008 Mr Smith advised the meeting of the details of each of the proofs of debts, the Deeds of Assignment and proxies received for the meeting and the amounts he had admitted for voting purposes. Mr Smith then took the creditors through the report and summarised the key points from it. Mr Smith highlighted his recommendation to creditors that, on balance, the Company should be wound up and he referred to the considerations relevant to his arriving at that recommendation. There was general discussion regarding the Deed proposed by Mr Byrnes. At the conclusion of this discussion Mr Smith put a resolution to the meeting that the Company execute the Deed of Company Arrangement proposed by Mr Byrnes in accordance with the statements setting out details of the proposed Deed included in the report dated 14 August 2008. Mr Smith called for a poll on the resolution. The creditors admitted to vote resolved by a majority of 22 to 19 in number and $4,348,789.00 to $436,637.00 in value in favour of the resolution 27 Votes cast in favour of the resolution included the votes of Margaret Sweet, Catherine Gina Byrnes, Andrew Simmons, Trevor Quilky and Consolidated Byrnes Investment Company Pty Ltd, as well as Kenmore Campus Pty Ltd and Kenmore Developments Pty Ltd. 28 On 21 August 2008 the Company, the Administrators, Australian Corporate Restructuring Services Pty Limited, Kenmore Property Holdings Pty Limited, Kenmore Developments (NSW) Pty Limited, Kenmore Campus Pty Limited and Consolidated Byrnes Investments Company Pty Limited and Paul Menere executed a Deed of Company Arrangement. On the same day the Company and others executed agreements for the sale of the land for a total sum of $4.395 million.

SHOULD THE PROOFS OF DEBT LODGED BY THE ASSIGNEES OF DEBTS DUE BY THE COMPANY BE DISALLOWED? 29 The plaintiff's initial submission in relation to her appeal against the decision of Mr Smith to admit the proofs of debt for the purposes of voting by the five assignees referred to in par [24] above was that each assignment arose out of the splitting of a debt due to Kenmore Campus Pty Limited and Kenmore Developments (NSW) Pty Limited. The plaintiff submitted that a specific debt could not be split or divided up so as to allow more than one vote or claim to be allowed or made in respect of a specific debt. It was submitted that the scheme found in ss 439A, 439B and 439C of the Act did not allow or admit the splitting of a debt in this fashion. In the course of oral argument, counsel for the plaintiff accepted that discrete debts could be assigned with the result that the assignee would be entitled to claim the debt resulting from the assignment and obtain an entitlement to vote in respect of that assigned debt, but submitted that what was not effective was to divide a specific debt into individual debts and then assign those individual debts. 30 That submission did not advance the plaintiff's case having regard to the form and content of the Deeds of Assignment which were submitted to the Administrators and upon which Mr Smith relied in determining who was entitled to vote at the meeting. The Deeds of Assignment produced by Mr Smith and upon which he relied are assignments of specific debts incurred in favour of each of the assignees. Each of the assignments is an assignment of the whole of a debt and not part of a debt. 31 The Administrators accepted that it was not proper or appropriate for a creditor of a company to divide up a debt by way of assigning part of the debt to one person and part of the debt to another so as to create more votes available to be cast at a meeting of creditors. That is not the situation which applies in relation to the five Deeds of Assignment in issue in this proceeding. None of them is a partial assignment of debt or an assignment of part of a debt. In each case there is an assignment of the totality of a particular debt in existence. 32 As the argument developed, counsel for the plaintiff embraced the proposition that determination of who were the relevant creditors entitled to vote at the second creditors' meeting convened pursuant to s 439A of the Act was to be made at the time that notices of the meeting were sent to creditors. It followed from this submission that an assignment of a debt due to a creditor after the notices were sent to creditors pursuant to s 439A of the Act was ineffective to carry with it an entitlement of the assignee of the debt to lodge a proof of debt and vote at the meeting. Counsel for the plaintiff qualified this proposition by submitting that an assignment of a debt after the date upon which notices were sent out convening the meeting pursuant to s 439A of the Act would be effective to carry with it a right in the assignee to lodge a proof of debt and vote at the meeting so long as the assignment was bona fide and not effected for the purpose of manipulating the voting at the meeting. Counsel for the plaintiff submitted that the assignments in issue in this proceeding were not bona fide. 33 I can find nothing in the scheme of Pt 5.3A of the Act or, in particular, in s 439A of the Act which supports the plaintiff's submission that there is a cut off time at the point where notices convening the meeting pursuant to s 439A are sent to creditors and published in newspapers which limits the entitlement of a creditor of a company to assign a debt due by the Company to the creditor and which carries with it a right to lodge a proof of debt and vote at the meeting. 34 It was not clear what counsel for the plaintiff meant when he submitted that the assignments were not bona fide. When I questioned what he meant by "not bona fide" he responded that the assignments were a sham and were executed for the purpose of obtaining voting power to enable the resolution that the Company enter into the Deed of Company Arrangement proposed by Mr Byrnes to be passed. I questioned counsel as to what he meant by this submission as I had earlier understood him to say that the plaintiff was not challenging the validity of the Deeds of Assignment. Counsel said that he was not challenging the validity of the Deeds of Assignment at all and that they were perfectly valid Deeds. Nevertheless, counsel continued to submit that the assignments were not bona fide, apparently on the basis that the assignors assigned either a number of different debts, or parts of debts, to more than one person and that the assignments were made for the purpose of manipulating the voting at the meeting. 35 Counsel for the plaintiff also submitted that there was no logical reason for the assignees to take assignments of the debts because if they voted in favour of the resolution that the Company enter into the proposed deed of company arrangement they would not, as unsecured creditors, obtain any return under the Deed. However, if the liquidation of the Company proceeded they were likely to obtain a greater return than they would under the Deed. 36 The expression "creditors" is not defined in the Act. In particular, it is not given a limited temporal aspect. It is therefore necessary to consider the content of that expression by reference to the context in which it appears in the Act - in particular in Pt 5.3A of the Act and, more particularly, in ss 439A and 439C. I do not consider that there is any warrant for limiting the expression "creditors" in s 439A and s 439C to those persons to whom the Company was indebted as at, or on, the date notice was given by the Administrators to creditors in accordance with s 439A(3)(a) of the Act or the publication of the notice of the meeting required by s 439A(3)(b) of the Act. I cannot find in any provision or context in the Act or, in particular, any provision in Pt 5.3A of the Act any warrant for such a limitation. Nor is any such limitation to be found in reg 5.6.23 of the Corporations Regulations which provides for the manner in which a creditor is entitled to vote at a meeting of creditors of the Company. There is nothing in that regulation which identifies a creditor as being a person who is identified in the books of account of the Company as being a creditor at any particular point of time prior to the meeting at which the right of that creditor to vote is called in question. 37 The submission that the expression "creditors" should be limited to persons to whom the Company was indebted as at the date the notices were sent out or published under s 439A(3) is also inconsistent with the reasoning of the Appeal Division of the Supreme Court of Victoria in Brash Holdings Limited (Administrator appointed) v Katile Pty Ltd [1996] 1 VR 24. In that case the Court had before it for consideration the provisions of Pt 5.3A of the Corporations Law, the predecessor of the present Pt 5.3A of the Act which, for all relevant purposes, was in the same form as the current Pt 5.3A. The administrators of a group of companies had sought declarations as to which creditors of a company were bound by the deed of company arrangement. The relevant enquiry focused on s 444D of the Corporations Law. The Court said at 31‑32: "In our opinion, the reference to 'all creditors' in s.444D(1) must be read and understood in the context of all other references to "creditors" in Pt.5.3A. What has so far been described is sufficient to show that the general scheme of the Part is to involve the company's creditors, without further limitation or description. The word "creditors" should, in the absence of any good reason otherwise, be read as used in the same sense throughout Pt.5.3A, and it is difficult to suppose that sections, drawn so widely as, for instance, s.435A (describing the object of the Part) had in mind anything less than all of the creditors for the time being of the company." The Court said further at 33: "Once it is decided, for the reasons we have given, that the expression 'all creditors' in s.444D(1) should not be confined to those having claims for money sums due and payable on or before the day specified in the deed, we see no alternative but to treat the creditors of the company for the purposes of Pt.5.3A as those who would have been creditors had the company gone into liquidation and the relevant date for the purposes of s.553 been the day specified in the deed." 38 The reasoning in Brash Holdings Limited (Administrator appointed) v Katile Pty Ltd (supra) was adopted and followed in Selim v McGrath (2003) 177 FLR 85. Barrett J considered that for the purposes of s 439A creditors in a voluntary administration under Pt 5.3A of the Act were all persons who had debts or claims against a company provable in its winding up and said, at 105: "The boundaries are therefore those set by s 553(1) which refers to 'all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages) …". 39 It follows that I reject the plaintiff's submission that the determination of who was entitled to lodge a proof of debt for the purpose of voting at the second creditors' meeting was to be made as at the time notices of the meeting were sent out or published in accordance with s 439A(3) of the Act. 40 I also reject the plaintiff's submission that the Deeds of Assignment were not bona fide, or were a sham or should not otherwise have been accepted by the Administrators as supporting the proofs of debt lodged with them. The plaintiff's submission in this respect was confused. The plaintiff's acceptance that the Deeds were valid and the statement by counsel that the plaintiff was not challenging the validity of the Deeds was inconsistent with the submission that the Deeds were a sham. Further, there was no evidentiary basis for the assertion that they were executed for the purposes, presumably improper, of obtaining voting power to enable the resolution that the Company enter into the deed of company arrangement to be passed. No party to any of the Deeds of Assignment was called to give evidence. The fact that the assignees voted in favour of the resolution is not, of itself, proof of any such improper purpose, notwithstanding that they might, if the Company went into liquidation, obtain a better return. 41 In short, the plaintiff's case impugning the efficacy of the Deeds of Assignment for the purpose of supporting the assignees' proofs of debt was based on conjecture and suspicion and was not grounded in any admissible evidence.

SHOULD THE DEED OF COMPANY ARRANGEMENT BE TERMINATED? 42 In support of her submission that the Court should order the termination of the Deed of Company Arrangement entered into on 21 August 2008, the plaintiff relied upon subpars (e), (f) and (g) of s 445D(1) of the Act. Section 445D(1) relevantly provides: "The Court may make an order terminating a deed of company arrangement if satisfied that: (a) … … (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." If an order is made under s 445D terminating a deed of company arrangement, the company is taken to have passed a special resolution under s 491 that the company be wound up voluntarily: s 446B(1) and Corporations Regulation 5.3A.07. 43 The plaintiff submitted that effect could not be given to the Deed without injustice and that the Deed was oppressive or unfairly prejudicial to creditors or contrary to the interests of the creditors of the Company as a whole. The plaintiff relied upon the fact that, under the Deed, the unsecured creditors will achieve little or no return whereas under a liquidation, depending upon whether there was a high, medium or low scenario, there is a prospect of the unsecured creditors obtaining a return: see par [17]above. The plaintiff relied in particular upon the fact that the Deed proposes a sale price of $4.4 million for the land whereas there is available to the Administrators an independent valuation of $5.93 million. Put shortly, the plaintiff submitted that there is no benefit for the unsecured creditors at all in the Deed which has been executed. 44 The plaintiff also submitted that the Deed should be terminated pursuant to subpar (g) of s 445D(1) of the Act because the Administrators counted the votes cast by the five assignees of the debts due by the Company. Counsel for the plaintiff invited the Court to infer that the debts were assigned for the purpose of supporting the interests of Mr Byrnes who was proposing the deed of company arrangement. Counsel for the plaintiff acknowledged that there was no direct evidence to this effect and that he had not examined or cross‑examined the assignees on that issue. 45 In support of the submission that the Deed of Company Arrangement was unjust or unfairly prejudicial or unfairly discriminatory of one or more of the creditors or contrary to their interests, the plaintiff relied upon the Administrators' statement that the Deed did not clearly provide a better return for all classes of creditors, that Mr Smith could not recommend it and that his estimates indicated that liquidation would result in dividends to unsecured creditors of between 76.24 cents, 35.24 cents and no dividend and on that basis, he recommended liquidation. 46 The submission that the Deed should be terminated because the chair of the meeting counted the votes of the assignees of the debts due to the Company is rejected having regard to my conclusion that the chair was entitled to count those votes because the Deeds of Assignment were effective. 47 It does not follow simply because the Administrators said: · they could not recommend Mr Byrnes's proposed Deed to creditors, · that they considered that the return to creditors under that proposed Deed was not clearly superior to that under a liquidation, and · that they recommended that it was in the best interests of creditors that the Company was wound up, that effect cannot be given to the Deed without injustice or that the Deed will be oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the Company's creditors. 48 The context in which those statements were made by the Administrators and the assumptions and analysis made by the Administrators in reaching their conclusions must be considered and evaluated. The creditors were presented by the Administrators with a number of factors which, according to the Administrators, made "the comparison [between a return under the Deed proposed by Mr Byrnes and the return under a liquidation] difficult and subjective". 49 The creditors were presented with a clear choice based on a reasoned report and analysis by the Administrators. That report and analysis demonstrated that there were a number of assumptions and variable factors which bore upon the extent to which a liquidation would bring a better return for unsecured creditors than entry by the Company into the Deed proposed by Mr Byrnes. The report made it clear that it was not inevitable that liquidation would bring a better return for unsecured creditors than if the Company entered into the Deed proposed by Mr Byrnes. For example, the return to unsecured creditors on a liquidation was critically dependent on the sale price of the land in respect of which there were a number of factors which could impact on the ability of the liquidator to achieve a price sufficiently high to result in a return to unsecured creditors. 50 Mr Smith's estimate of the potential dividend to unsecured creditors under what he called his high and medium scenario depended upon the amount received on the sale of the land. The Administrators' high scenario was based on a valuation of the land obtained net of required remedial works. The estimate of a medium scenario was based on a value of the land which was 10% less than the valuation which the Administrators had received. The low scenario was based upon the highest unconditional offer for the land which was $4.5 million and 10% less than the market value of the adjacent properties. The difference between the value of the land in the high scenario and the low scenario was $800,000.00. As noted above (par [15]) the Administrators acknowledged that there was a risk that if the sale of the assets under liquidation was delayed for an extended period or failed to achieve sufficient proceeds then creditors might receive less under a liquidation scenario. It is important to note that the Administrators had significant concerns that the land could be sold for the valuation. The Administrators' concerns included the history of the land which involved issues of contamination, heritage issues and costs of remediation and also the history of past sale efforts. 51 Further, as noted above, the Administrators had identified in their report significant disadvantages of liquidation. 52 All these factors were matters which the creditors were entitled to take into account in determining whether to vote for the Deed proposed by Mr Byrnes or have the Company go into liquidation. A resolution in favour of the Deed rather than liquidation, of itself, does not demonstrate consequential injustice to any creditor or oppression, unfair prejudice or unfair discrimination or a situation contrary to the interests of creditors when regard is had to the range of outcomes or scenarios which might occur under liquidation. 53 The expression "injustice" in s 445D(1)(e) is of wide import. As Austin J pointed out in Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (subject to Deed of Company Arrangement) (2001) 37 ACSR 394 at 430: "The case law does not provide any significant assistance as to the meaning of this provision [subpar (e) of s 445D(1)]." What is important to recognise is that it is the "effect" of the deed rather than the purpose of the deed which is to be considered and taken into account: Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (supra) at 430; Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to Deed of Company Arrangement) [2007] SASC 296 at [112]. In the context of s 445D(1)(e) I consider that I should ask whether the effect of the Deed is unfair or inequitable in the impact it has upon one or more of the creditors bound by it. 54 Similar considerations apply when considering the application of s 445D(1)(f). In Mondello Farms Pty Ltd v Annatom Pty Ltd (supra), Layton J said at [114]: "In determining whether a deed is oppressive or unfairly prejudicial or unfairly discriminatory, the background of the general principles underlying Pt 5.3A of the Act must be considered. A creditor has the basic right to payment, to the winding up of a company, or to the administration of the company in a manner that keeps the business of the company going which ultimately resulting [sic] in the creditor receiving payment out of the property of the company. The court will look at the whole of the effect of the deed and assess 'its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Pt 5.3A, the interests of the other creditors, the company and the public generally'. It is necessary to consider the total circumstances of the case so as to determine whether there is overall unfairness." [footnotes omitted]. In the circumstances of the present case, the last sentence of this quotation is critical. 55 The plaintiff's case, in essence, was that effect could not be given to the Deed without injustice and that the Deed was oppressive, prejudicial to and discriminatory against creditors because of the amount for which the land is to be sold pursuant to the Deed of Company Arrangement. Although the Administrators had received an independent valuation of the land which provided a valuation of $5.93 million net of rectification costs, the Administrators had set out in their report factors which made it problematic whether such a value could be received on the sale of the land. Having regard to the circumstances and factors set out in the Administrators' report, I do not consider that effect cannot be given to the Deed without injustice. It is the plaintiff who is complaining about the injustice but I do not consider that there is any injustice to the plaintiff in circumstances where in a context and with the background to which I referred, the creditors, by a majority of number and value, have decided to go the route of deed of company arrangement rather than liquidation. 56 The assumptions and factors identified by the Administrators required the creditors to make a choice. The choice they made did not result in a Deed which was oppressive to, or prejudicial to, or discriminatory against the general body of creditors, and the plaintiff in particular, having regard to the factors which had to be taken into account in determining whether what the Administrators called either a high scenario, a medium scenario or a low scenario in terms of return to creditors might be achieved. 57 For all these reasons I am not satisfied that any ground has been made out which warrants the Court making an order terminating the deed of company arrangement executed by the Company on 21 August 2008. 58 The Originating Process will be dismissed with costs.

I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.

Associate: Dated: 12 September 2008 Counsel for the Plaintiff: R Cook