Johnson v Hancock re Meditech Nursing Service & Skillforce Agency Pty Ltd [2009] NSWSC 685 | Case summary

2436/09 ANDREW JOHNSON IN HIS CAPACITY AS DEED ADMINISTRATOR OF MEDITECH NURSING SERVICE & SKILLFORCE AGENCY PTY LIMITED v GEOFFREY TRENT HANCOCK & ANOR IN THEIR CAPACITY AS JOINT LIQUIDATORS OF MEDITECH NURSING SERVICE & SKILLFORCE AGENCY PTY LIMITED & ANOR JUDGMENT 1 The question in these proceedings concerns the correct manner of dealing with money constituting a fund created pursuant to a deed of company arrangement. The question arises upon an application for directions made under s 447D of the Corporations Act 2001 (Cth) by the administrator of the deed of company arrangement. 2 Meditech Nursing Service & Skill Force Agency Pty Ltd (which I shall call "Meditech") became subject to voluntary administration under Part 5.3A of the Corporations Act on 4 April 2006 by virtue of a determination of Meditech's then directors. Mr Johnson became the administrator. A deed of company arrangement was executed on 28 July 2006. Mr Johnson became the administrator of the deed of company arrangement. 3 After execution of the deed of company arrangement, Mr Oliva (by then the sole director and sole shareholder of Meditech) resumed control of Meditech's affairs. On 30 March 2009, he was served with a director's penalty notice under s 222AOE of the Income Tax Assessment Act 1936 (Cth). Thereafter, on 9 April 2009, Mr Oliva purported to constitute a meeting at which the following was expressed to be passed as a special resolution: "RESOLVED THAT it has been proved to the satisfaction of this meeting that the company cannot by reason of its liabilities continue in business and it is advisable to wind up the company and accordingly that the same be wound up voluntarily in accordance with the Corporations Act 2001." 4 Also recorded as passed was a resolution that Mr Hancock and Mr Fitzgerald be the liquidators. 5 The supposed minutes of meeting were signed "as a correct record" by Mr Oliva. Although the document so signed purports to be minutes of a meeting, it is not possible that Mr Oliva alone could have constituted a meeting. The document is, however, one by which the sole member recorded the two resolutions. The record is signed by that member. The two resolutions must therefore be taken to have been passed by virtue of s 249B(1) of the Corporations Act. 6 The deemed passing of the resolutions of 9 April 2006, coupled with the absence of any declaration of solvency by the director of Meditech and the absence of any nomination of a different liquidator at a subsequent meeting of creditors, means that the winding up initiated by the sole member by means of the resolutions of 9 April 2006 was a creditors' voluntary winding up: see s 491, s 493, s 494, s 497 and the definitions of "members' voluntary winding up" and "creditors' voluntary winding up" in s 9. 7 A challenge by Mr Johnson to the validity of the winding up and the appointment of Mr Hancock and Mr Fitzgerald as liquidators was not pressed. Section 444E precludes an application to the court for a winding up order after a deed of company arrangement has come into effect and before it is terminated. But there is no prohibition on the initiation of voluntary winding up during that period. 8 At the time of the commencement of the creditors' voluntary winding up on 9 April 2009, the provisions of the deed of company arrangement executed almost three years earlier had not been fully implemented. The deed administrator had received proofs of debt from nine creditors totalling about $2.1 million. Funds of slightly more than $111,000 were held subject to the deed. No dividend payment had been made to the creditors. 9 It is the correct treatment of the fund of some $111,000, following commencement of the creditors' voluntary winding up of Meditech, that arises for consideration on this application. 10 It is relevant, at this point, to refer to several provisions of the deed of company arrangement. The deed provided for the establishment of a fund consisting of moneys held by the administrator under the antecedent Part 5.3A administration and moneys to be provided by four members of the Oliva family. The fund was designated "the Administrator's Fund". Provisions of the deed concerning the Administrator's Fund included the following: "5.7 The Company agrees that any moneys paid into the Administrator's Fund pursuant to this Deed by:- (a) the Company; (b) any third party; or (c) as a consequence of the Deed Proposal are not refundable or payable to the Company under any circumstance and the Company must not make or maintain any Claim in respect of the funds contained in the Administrator's Fund." 5.9 The Company agrees that:- (a) the Administrator holds the Administrator's Fund for the benefit of the Administrator and for those Creditors who became Participating Creditors under this Deed; and (b) the Administrator may retain any moneys held in the Administrator's Fund and apply them towards the Administrator's Costs, the Administrator's Liabilities, the Participating Creditors and any other purpose sanctioned by this Deed." 11 Provision was also made for ascertaining the claims of Meditech's creditors as existing at 4 April 2006 and for distributions out of the Administrator's Fund to those creditors on account of their established claims. Clause 7.3 was as follows: "The Administration's Fund will be distributed by the Administrator in the following order of priority: (a) First , to the extent that the Company has not already made those payments, in payment of the Administrator's Costs and the Administrator's Liabilities. (b) Second , in payment of Priority Claims comprising the claims of any Creditors entitled to priority under the Act or and over the claims of Unsecured Creditors. (c) Third , the balance of the Administrator's Funds will be paid to the Participating Creditors on a pro rata basis dependent upon the admitted amount of their proof of debt Claim. (d) Fourth , to Subordinated Creditors; and (e) Fifth , to the Company." 12 Clause 6.1 provided: "Creditors must accept their rights and entitlements specified in this Deed in full satisfaction of all Claims which they have or claim to have against the Company." 13 By clause 6.24, it was provided that the deed might be pleaded in bar of any debt or claim that arose before 4 April 2006. 14 Clause 8.3 was in these terms: "In exercising his functions and powers and in carrying out his duties under this Deed the Administrator is deemed to be the Company's agent." 15 Then followed clauses 8.4: "Except as otherwise provided for in this Deed, the Administrator will not control, be responsible for, or participate in the management or affairs of the Company except to get in the Property of the Company and distribute the monies required to be paid under this Deed." 16 I have found no definition of "the Property of the Company". I take it to refer to the property to be dealt with in accordance with the deed. 17 Upon the commencement of the creditors' voluntary winding up, s 501 of the Corporations Act came into operation in relation to Meditech: "Subject to the provisions of this Act as to preferential payments, the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company's constitution otherwise provides, be distributed among the members according to their rights and interests in the company." 18 That section raises the question central to this application, that is, whether the fund of some $111,000 previously created under the deed of company arrangement was, at the commencement of the winding up, part of "the property of" Meditech. There are subsidiary questions whether the fund was, because of the existence and provisions of the deed of company arrangement, vested in the deed administrator as distinct from Meditech and, if vested in Meditech, whether it was subject to a trust in favour of the deed administrator and the creditors of Meditech. 19 If the fund was vested in the deed administrator as a trustee for himself and the creditors as at 4 April 2006, then clearly it does not fall to be dealt with under s 501. If the deed fund was held by the company upon trust for the deed administrator and the creditors, the long vexed questions arising from Re Suco Gold Pty Ltd (1983) 33 SASR 99 and Re Enhill Pty Ltd [1983] 1 VR 561, recently discussed by the Full Federal Court in Commissioner of Taxation v Bruton Holdings Pty Ltd [2008] FCAFC 184; (2008) 173 FCR 472 will arise in relation to the operation of s 501. But if there is no trust affecting the deed fund in the hands of the company, the conclusion will be that the fund is, without qualification, "property of" the company within s 501 and must be dealt with accordingly. 20 It must, I think, be accepted that a deed of company arrangement can bring about the creation of a trust in respect of identified property. An example of such creation is found in Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186; (2009) 71 ACSR 65. Essential to the creation of a trust, however, is vesting of the relevant property in the designated trustee to be held upon trust for and exclusively for the benefit of identified beneficiaries. 21 It has now been recognised in a number of cases (of which the latest are Parker; Re Strongest Link Pty Ltd [2008] FCA 1007; (2008) 169 FCR 559 and Re Jick Holdings Pty Ltd [2009] NSWSC 574 (19 June 2009)) that a trust is not created just because a deed of company arrangement identifies particular property and designates it a fund applicable, under the deed terms, by a deed administrator towards the proved claims of certain creditors; and that this is so even if part of the fund comes into the hands of the deed administrator from sources outside the company. Because the deed administrator is an "officer" of the company (as defined by s 9) and particularly where, as here, the deed administrator is stated in the deed to be an agent of the company, receipts of and dealings with property by the deed administrator are receipts and dealings by the company as the administrator's principal. This approach taken by Davies J in Commissioner of Taxation v All Suburbs Car Repairs Pty Ltd [1994] FCA 1393; (1994) 14 ACSR 753 was approved in Lombe v Wagga Leagues Club Ltd [2006] NSWSC 3; (2006) 53 ACSR 387 and has now been adopted in several later cases. The important point is that, unless the deed itself brings about some specific vesting of property and the creation of equitable interests in that property, the deed administrator is simply a company functionary who, like a liquidator, administers company property according to a particular statutory regime. 22 In the present case, there is no vesting of property in the deed administrator. There is no language of trust. The deed of company arrangement provides, in the usual way, for an agent of the company (who is also an "officer") to administer a particular fund towards satisfaction of the debts of the company as at 4 April 2006 (as well as the deed administrator's costs and expenses), with the company itself being precluded from enjoyment of the fund unless and until a balance remains after full satisfaction of the particular debts, costs and expenses, whereupon the company retains that balance for itself. 23 The structure and effect of the deed of company arrangement are such that no creditor can lay claim to any equitable or beneficial interest in the fund. Rather, there exist, through s 444D and s 444G of the Corporations Act, obligations of the company, the deed administrator and the creditors to submit to and give effect to the deed's provisions so that, to the extent that the effectuation of any provision entails a payment to any of those persons, there is a concomitant right to that payment and the part of the company's property from which the payment is to be made is applicable accordingly in effectuation of the statutorily binding deed provisions. An individual creditor might well, by action, restrain application of the deed fund except in accordance with the deed provisions. But that right would not be an aspect of any equitable interest. It would come from the statutory force of the deed provisions. 24 The scheme of administration presided over by the deed administrator in this case is conceptually similar to a winding up presided over by a liquidator. Just as the specific form of administration of company property that arises upon winding up does not cause the company's property to become trust property (see, in particular, Commissioner of Taxation v Linter Textiles Australia Ltd [2005] HCA 20; (2005) 220 CLR 592), so property subjected to the specific form of administration created by a deed of company arrangement of the kind now before me does not thereby become trust property. 25 I am accordingly of the opinion that the sum of about $110,000 now held by Mr Johnson as administrator of Meditech's deed of company arrangement is, in the creditors' voluntary winding up of Meditech, part of the "property of" Meditech referred to in s 501 of the Corporations Act. It is therefore applicable in satisfaction of the company's liabilities equally, subject to "the provisions of this Act as to preferential payments" (a qualification designed to accommodate and preserve the operation of s 556: Uther v Federal Commissioner of Taxation [1947] HCA 45; (1947) 74 CLR 508 at 513 per Latham J). 26 Section 501, by directing a particular mode of application of the fund of $111,000 (along with the balance of Meditech's property), has the effect of removing the deed fund from the deed administrator's control and thereby making the deed of company arrangement unworkable. Despite the absence of any equivalent of s 474 in relation to voluntary winding up, the liquidator in such a winding up "must necessarily have power to take possession of the company's property": Commissioner of Taxation v Bruton Holdings Pty Ltd (above) at [42]. That right of possession is superior to any pre-existing right, including a right arising from a deed of company arrangement. 27 In Parker; Re Strongest Link Pty Ltd (above), the unworkability of a deed of company arrangement derived from the intervention of a winding up by the court. In that context, s 478(1)(a) operated upon the company's property in the same way as s 501. In addition, the "officers" of the company were, by s 471A, denied the ability to perform their functions and exercise their powers. The deed administrator, being within the s 9 definition of "officer", was subjected to that disability and was therefore precluded from acting further in the effectuation of the deed. 28 There is no counterpart of s 471A in relation to voluntary winding up. Section 499(4) causes the powers of the directors to cease upon winding up but says nothing about the powers of other "officers". But pertinent provision is made by s 500(3): "The Court may require any contributory, trustee, receiver, banker, agent, officer or employee of the company to pay, deliver, convey, surrender or transfer forthwith or within such time as the Court directs to the liquidator any money, property or books in his, her or its hands to which the company is prima facie entitled." 29 There is, in s 500(3), an express reference to an "officer" and an "agent" who has in his or her hands property to which the company is prima facie entitled. Given my findings about the unexpended deed fund in the present case, it must be accepted that the deed administrator, as an officer and agent of Meditech, is susceptible to the control and direction of the court under s 500(3) with respect to that fund. The section evidences an intention that the deed administrator should deliver that asset to the liquidator and that the court should assist in achieving that result if called upon to do so. The deed administrator must therefore be regarded as not authorised to deal further with the asset towards any effectuation of the deed. 30 In International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 2; (2008) 234 CLR 151, Gummow J, Hayne J, Heydon J, Crennan J and Kiefel J referred, at [78], to "the elementary proposition that insolvency law is statutory and primacy must be given to the relevant statutory text". In the present case, specific statutory provisions that came into operation upon the advent of winding up place all of the company's property under the control of a liquidator for the purposes of the winding up and require that all such property be put into the liquidator's possession accordingly. Those provisions, once they begin to operate, leave no room for the continued operation of previously activated statutory provisions by which some inconsistent mode of dealing with that property is required. 31 In both Parker; Re Strongest Link Pty Ltd (above) and Re Jick Holdings Pty Ltd (above), the conclusion that subsequent winding up had superseded a deed of company arrangement and made it unworkable or otiose caused the court to make an order under s 444(1)(g) terminating the deed. 32 Mr Johnson seeks, by his originating process, directions as to the application of the administration fund created pursuant to the deed of company arrangement of Meditech dated 28 July 2006. The direction will be to the effect that the fund must be put into the possession of Mr Hancock and Mr Fitzgerald as the liquidators of Meditech. 33 There is, however, a question that may arise and has not been argued as to Mr Johnson's entitlement to a lien: compare, in the case of a voluntary administrator, the recent decisions in Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68; (2009) 71 ACSR 250 and Re Wings-Aus Holdings Pty Ltd [2009] NSWSC 667 (16 July 2009). It is preferable that I defer the making of any direction until there has been an opportunity to address that question and, if necessary, the related question whether delivery of the fund to the liquidators might prejudice any such lien. 34 There is also a question whether there should be an order under s 445D(1)(g) terminating the deed of company arrangement (see paragraph [31] above) and whether any application advanced consistently with s 445D(2) can be said to be before the court. 35 I shall arrange for the matter to be listed for mention so that the question of an appropriate form of direction can be considered. **********

Johnson v Hancock re Meditech Nursing Service & Skillforce Agency Pty Ltd

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