Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126

19. The notice of motion was issued on 1 April 1999 and at the directions' hearing I raised the question of the joinder of other parties. No application was made to join other parties but I ordered that a copy of the order made and all court documents filed including later documents be served on the said administrators.

22. The hearing commenced on Thursday 13 May. At the outset I raised the question of the administrators participating in the proceeding with counsel for the parties. Respondent's counsel stated that he did not appear for the administrators. It was common ground that a copy of the order I made and all court documents had been served on the two administrators. Nobody sought to appear for the administrators.

25. During the course of the applicant's submissions I informed counsel that I was concerned about some of the acts and omissions of the administrators. I requested counsel for the respondent through his instructing solicitor to make contact with the administrators and inform them of my concerns. I was subsequently told that they were interstate. The proceeding did not conclude on 13 May and at the end of the day's hearing I requested respondent's counsel, again through his instructing solicitor, to make contact with the administrators and ask them whether they wished to be heard in relation to matters which may adversely reflect on their conduct. I listed some of the matters of concern.

31. On the following day, 14 May 1999, when the proceeding resumed after the luncheon adjournment I outlined some of the matters relating to the administrators' conduct which I viewed with concern. Mr Peter Hayes, QC informed the court that he was briefed to appear on behalf of the administrators and wished the opportunity to consider the evidence and the matters I raised. He stated he wished to obtain instructions from his clients as there was some difficulty contacting them.

34. I informed all counsel that I would complete the hearing and give the administrators an opportunity to address me on any matters that may adversely reflect on their conduct as administrators.

37. The administrators filed affidavit material and Mr Hayes, QC addressed the court on 21 May 1999.

40. Although two administrators were appointed Mr McDonald played very little part in the administration and the evidence clearly shows that Mr McVeigh had the carriage of the administration.

43. The respondent to the proceeding is the company. After the meeting of creditors on 16 March 1999 resolved that the company execute a deed of company arrangement, on 22 March 1999 the administrator, Mr McVeigh removed the only director, Mr Dowson and appointed Messrs Harry Lagas, Peter Economou and Patrick Bourke. These three men are directors of Pindos International Imports Pty Ltd ("Pindos") the company which put forward the proposal the subject matter of the deed of company arrangement. The shares in Pindos are owned by a company called Pindos Trading Pty Ltd and the three men are also directors of that company. Messrs Lagas and Economou own 95% of the latter company and Mr Bourke through a company owns 5%.

46. Pindos has a floating charge over the assets of the respondent.

49. Another company, Real Enterprises Pty Ltd ("Real Enterprises") is a $2 company owned by Shane Patrick O'Brien who is partner of Mr Bourke in their accountancy practice. Mr O'Brien is the only director of Real Enterprises which also had a charge over the assets of the respondent. The company is the trustee of "The Real Enterprises Unit Trust". Mr O'Brien did not enlighten the court as to who are the unit holders. It is suffice to say at this stage that there is a close connection between the two Pindos companies, Real Enterprises, the accountancy firm of Bourke O'Brien and Co and Messrs Lagas, Economou, Bourke and O'Brien.

55. On 26 March 1999 Messrs Bourke, O'Brien and Co, Accountants lodged a Form 207 with the Australian Securities and Investments Commission. This document revealed that on 9 December 1997 some 16 months previously, the respondent had allotted 80 shares to Real Enterprises Pty Ltd and 18 shares to Habatron Pty Ltd, the private company of Mr Dowson. For reasons which have not been explained it took 15 months for the fact that the respondent company had different shareholders to be made public.

58. It will be necessary to trace the history of the respondent hereafter.

61. Clause 7.6 of the deed executed on 26 March 1999 provided that as from that date "the management and control of the company and its affairs will be in the hands of the directors of the company."

64. The accountancy firm of Messrs Bourke, O'Brien & Co are the accountants for the two Pindos companies and Real Enterprises. The parties who stand to gain from the deed being implemented are Pindos and Real Enterprises.

67. I am satisfied that the interests of those who will benefit most from this deed of company arrangement continuing and therefore may suffer if the deed is set aside are represented by the three directors of the respondent company. In those circumstances I am satisfied that the proper party to the proceeding is the respondent. In other words, it is the proper contradictor. If the deed is not terminated those involved in the respondent will gain any benefit that ensues.

70. In Sydney Land Corporation Pty Ltd v. Kalon Pty Ltd (1998) 16 ACLC 93, Santow J considered the question as to who was entitled to defend proceedings brought under s.445D of the Law to terminate the deed. In fact, the company was joined as the respondent. However, the argument centred on who was entitled to have the carriage of the defence of the proceedings, the administrator or the board of directors. His Honour held that the proper contradictor was the administrator and accordingly he had the right to defend the proceeding on behalf of the respondent rather than the board of directors. However, his Honour gave leave to a legal representative to appear on behalf of the two directors and other interested parties.

73. Clearly, the company has to be a respondent to the proceeding. Who actually has the carriage of the defence of the proceeding will depend upon in the last resort the terms of the deed. If the deed is silent as to who is managing the company then it would appear that the administrator should be the person who conducts the defence. That is not to say that other interested parties may not apply to protect their interest. Clearly, in a suitable case other parties may have an interest.

76. In the present proceeding the administrators did have notice that an attack was made upon their conduct during the period up to the date of execution of the deed.

79. The former director of the respondent, Mr Geoffrey Alan Dowson, swore an affidavit on 21 April 1999 in support of the application. Paragraph 24 states -

"RGA had an annual turnover of approximately $8M. Its assets were, and are saleable on a going concern basis. Several persons in the rug trade in Australia had privately expressed interest in acquiring the assets of RGA on a going concern basis. The administrator did not, however, advertise the assets for sale nor at any stage indicate the assets were available to be sold on a going concern basis to any person. It was clear to me that the sole intention of the administrators was to ensure that the assets of RGA ended up in the sole control of Pindos. I have had 18 years' experience in the rug trade in Australia and substantial retail outlets. It is my opinion that the valuation of the assets of RGA on an auction realisation basis as detailed in

the administrators' report is misleading as the business could

have been sold on a going concern basis for a substantially

higher figure from the relatively small sum which Pindos now proposes to contribute under the deed of company arrangement."

[Emphasis added]

83. To understand the thrust of what Mr Dowson is saying it would be necessary to read that paragraph in context. However, for present purposes it is clear that there are serious allegations being made against the administrators.

86. Mr McVeigh who swore an affidavit on 30 April 1999 on behalf of the respondent after stating that the turnover was closer to $7M than $8M and that the respondent had made trading losses for the 12 month period leading up to the administration said -

"I deny it was the intention of the administrator to ensure the assets of the respondent ended up in the control of Pindos or anyone else. My role as administrator was to investigate into the affairs of the respondent and prepare a report to creditors with recommendations as to which proposal is in the best interest of the creditors."

90. He then opined the view for the reasons set out in his affidavit he considered the deed of company arrangement was the best alternative for the creditors.

93. The administrators did not seek to be joined as parties, nor did they seek to be heard in relation to these matters. It was not only the matter raised by Mr Dowson but also other matters which caused me on the first morning of the hearing to raise the question of the administrators' conduct.

96. Mr McVeigh filed another affidavit and I heard Mr Hayes, QC on his behalf.

99. In my opinion it is essential that the applicant join as the respondent the company and any other entity which is the true contradictor. Who is the true contradictor will depend upon the circumstances of each case. It is unnecessary to join the administrators personally, although if it is envisaged that an application will be made that the administrators pay costs then it would be necessary to join the administrators. On the other hand, if an attack is made upon the administrators' conduct then they should be served with the documents, given an opportunity to be joined if they wish and if necessary, to be heard.

102. Because of the allegations made by Mr Dowson and other facts it was appropriate for the court to inform the administrators that a finding may be made which may reflect adversely on their conduct and reputation. However, it is incumbent upon administrators to protect their own interests and make a decision whether or not they wish to be heard on any application. They chose not to be involved but as a result of the concerns raised by the court they were given the opportunity which they took to file affidavit material and address the court in respect of their conduct in particular the conduct of Mr McVeigh.

107. The respondent was registered on 23 January 1997 and changed its name to the present one on 6 February 1997. Its business conducted through some 13 retail outlets in Melbourne, Sydney and Geelong is selling rugs and associated products. Its sole director from shortly after its registration, namely, 11 February 1997, was Geoffrey Alan Dowson. He ceased to be a director on 22 March 1999. He was removed by Mr McVeigh who on the same day appointed Messrs Lagas, Economou and Bourke. By taking this step Mr McVeigh assisted the three men to achieve their appointment in clear breach of clause 2 of the Heads of Agreement dated 9 December 1997. It will be necessary to refer to the agreement hereafter.

110. The administrator does have power to remove and appoint directors. There is more than one version in the evidence as to what power the administrator was purporting to exercise when he removed Mr Dowson and appointed the three men. As a result of his conduct the Pindos and Real Enterprises interests effectively gained complete control of the respondent.

113. The respondent operates a business which it acquired from the company Rugs Galore Pty Ltd (RG). This company was registered on 8 December 1989 and was known as Bondmoor Pty Ltd. It changed its name to Rugs Galore Pty Ltd on 14 October 1996. On 26 May 1997 it executed a deed of company arrangement with Mr David Lofthouse as administrator. The company was insolvent. Its only director was the said Geoffrey Alan Dowson who had been a director since February 1990.

116. Under the terms of the deed the company RG agreed to pay to the administrator the sum of $200,000 over three years for distribution amongst its unsecured creditors. It is noted that two of the secured creditors holding a charge over its assets were the National Australia Bank Ltd and Pindos. The proposal in the deed did not affect the rights of the chargees.

119. On 14 March 1997 and prior to the execution of the deed of company arrangement the company RG sold its business to the respondent for $491,503 which comprised $76,000 for good will and the balance for plant and stock. In fact the sale was agreed in principle on 6 February 1997.

122. The respondent assumed the liability of RG to the Bank and Pindos under their charges.

125. At all times the respondent has traded at a loss according to the evidence of Mr McVeigh.

128. During the last six months of 1998 the applicant sold goods to the respondent and the respondent failed to pay the sum of $139,119.91.

131. As at 5 March 1999 the respondent owed $121,064.43 for wages, holiday pay and long service leave to its employees, the sum of $1,536,871.53 to 97 unsecured creditors and $1,851,919 to three secured creditors.

139. As at 17 February 1999 the respondent was hopelessly insolvent.

142. On 17 February 1999, Pindos appointed the administrators pursuant to s.436C of the law pursuant to the charge it had over the assets of the respondent.

145. In their letter dated 17 February 1999 the administrators informed the creditors that they had been appointed pursuant to s.436A of the Law which gives directors of a company the right to appoint an administrator, and in the body of the report it is said that they were appointed pursuant to s.436C of the Law. The sworn evidence is that they were appointed pursuant to s.436C.

148. The first meeting of creditors was held on 22 February 1999. On 5 March 1999 notice was given of a proposed second meeting together with a report of the administrators to the creditors expressing the opinion that a deed of company arrangement be executed. On 11 March 1999 the administrators sent a supplementary circular which set out a proposal from Pindos which provided, inter alia, for an injection of money to pay the unsecured creditors and release of all provable debts against the respondent. The rights of secured creditors were to be unaffected by the deed.

151. The meeting was held on 16 March 1999 and the applicant opposed the motion that the respondent execute a deed of company arrangement. The motion was carried and on 26 March 1999 the deed of company arrangement was executed.

154. The applicant issued its motion on 1 April 1999.

159. The applicant relies upon ss.445D(1) and 445G(2) of the Law, and 447A which is a general power provision.

162. At the hearing the applicant sought orders that the deed of company arrangement be terminated and that a winding up order be made pursuant to s.459A on the ground that the respondent is unable to pay its debts.

165. Section 445D gives power to the court to terminate a deed on the application of, inter alia, a creditor of the company. Section 445G empowers the court to declare the deed or a provision of it void or not to be void as the case may require. In the end the applicant did not rely upon this section.

168. Section 447A empowers a court to make general orders as it thinks appropriate.

173. Part 5.3A of the Law came into operation on 23 June 1993. It is headed - "ADMINISTRATION OF A COMPANY'S AFFAIRS WITH A VIEW TO EXECUTING A DEED OF COMPANY ARRANGEMENT."

176. The new procedure was introduced to provide an alternative to the other four procedures available for dealing with insolvent companies. It provides a means whereby a company which is in financial trouble can be taken over by an administrator who, excluding the officers of the company for a limited period investigates the affairs of the company to consider and determine which of three courses of action should be adopted for the company, namely, the execution of a deed of company arrangement, winding up or bringing the administration to an end.

179. The object of the new procedure is set out in s.435A of the Law. It provides -

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

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

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

186. It is noted that the object of the Part is divided into two discrete parts. First, to maximise the chances of the company or its business continuing in existence. Alternatively, if the company or its business is not to continue in existence then the object is to obtain a better return for the creditors and members than would result from "an immediate winding up of the company".

189. The new procedure commences with the appointment of an administrator. Once appointed the period of administration is from that date until a particular event occurs as defined in s.435C, namely, a deed of company arrangement is executed, the creditors resolve to terminate the administration or the company is to be wound up. The court may bring the administration to an end and a failure to follow certain statutory procedures may result in a termination of the administration.

192. Once the administrator is appointed he must proceed with expedition. His first step within five days of appointment is to convene a meeting of creditors to determine whether a committee be appointed. A creditor may resolve to remove the administrator and appoint another.

195. The administrator must as soon as practicable after appointment investigate the company's business, property, affairs and financial circumstances and must form an opinion with respect to the following matters -

"(i) whether it would be in the interests of the company's creditors 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."

202. His next step is to call a second meeting. The next meeting must be called within five business days after the end of a period known as the convening period which is either 21 days or 28 days after the administration commences - see s.439A. It is noted that the court may extend the convening period.

205. The administrator must give written notice of the meeting, and accompany the notice with a copy of the report by him about the company's business, property, affairs and financial circumstances and importantly, a statement "setting out the administrators' opinion" whether it would be in the creditors' interests for the company to execute a deed of company arrangement, bring the administration to an end or have the company wound up. He is also obliged to give reasons for his opinions. In addition, the report must set out if an arrangement is proposed - a "statement setting out details of the proposed deed."

208. At the second meeting the administrator presides and there is power to adjourn that meeting from time to time but for a period not more than 60 days after the first day on which the meeting was held.

211. Section 439C makes provision for what the creditors may decide at the meeting. The three alternatives are open to them, namely, that the company execute a deed of company arrangement or the administration should end or the company be wound up.

214. The provisions of Part 5.3A leave the fate of the company in the hands of the creditors and no-one else. The fate of the company is not left to the administrator, nor is it left to the court. The decision is the decision of the creditors at the second meeting.

217. Like all decision makers the creditors must have information which is relevant and accurate. They must have all information that "can reasonably be expected to have been material" to them deciding whether to vote in favour of the resolution that the company execute the deed - see s.445D(1)(a).

220. The decision is not that of the administrator. An administrator appointed to give effect to the provisions of Part 5.3A must be honest, independent, impartial and careful.

223. He exercises extensive powers which must in the end be exercised in the interests of the creditors. He must not favour any creditor or any other party at the expense of the creditors as a whole.

226. Like a liquidator he must be independent and must be seen to be independent - see Re National Safety Council of Australia [1990] VicRp 2; (1990) VR 29.

229. Amongst his extensive powers are his right to control the company's business, property and affairs, the right to carry on the business and manage the property and affairs, dispose of property and "may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration." See s.437A.

232. The extent of his powers is underlined and reinforced by the provisions of s.437C which removes the powers and function of any officer of the company except with the administrator's written approval.

235. Whilst his appointment does not remove an officer from the company, he has the power to remove a director and appoint other directors. See s.442A.

238. Once appointed the administrator fulfils a very important task, namely, the investigation of the affairs of the company. A director is obliged to assist the administrator. As part of his investigation the administrator should consider the conduct of, inter alia, a director of the company, whether he has been guilty of an offence in relation to the company, and whether any person involved in the administration of the company may be liable to the company. If appropriate he is obliged to lodge a report with the Australian Securities and Investment Commission concerning, inter alia, any conduct of a director which may contravene the Law - see s.438D.

241. In addition, the administrator is bound to investigate whether there have been any unfair preferences, and whether any officer of the company is personally liable to the company for any damage it may have suffered.

244. The extent of the investigation is in the end a matter for the administrator. Hence the importance of his impartiality, independence and requirement to act carefully in the interests of the creditors.

247. Whilst there are strict time limits and the administration is intended to proceed speedily there is no excuse for failing to carry out a full and proper investigation. What is a full and proper investigation will depend on all the circumstances but matters of concern to creditors are preferences, possible directors' breach of duty, possibility of recovering compensation from directors who conduct the company's business knowing it is insolvent, and recovery of compensation from de facto directors. Another matter of importance is the recovery of any of the corporation's property which has been unlawfully transferred.

250. In my opinion it is no excuse to limit a full and careful investigation by reference to the time limits set out in the Law. Time limits require expedition, and a full investigation may require further resources being used and if necessary the second meeting be adjourned or an application for extension of time be made. Further resources would include the employment of enough personnel to adequately perform the task. The fact that the second meeting can be adjourned from time to time supports the view that the administrator should not refuse to investigate fully a matter because of time constraints. In the end result the creditors must know. They are entitled to a thorough investigation. They rely on the administrator performing his task. Failure to properly investigate puts at risk the whole object of Part 5.3A which ultimately leaves the decision to the creditors making an informed decision. If the administrator is unable to make a proper investigation in respect of matters of importance to the creditors' decision he should tell them. He should alert them that there are matters relevant to their interests which should be further investigated. Much can be gained by shareholders, directors and others from a deed of company arrangement "wiping the debts" and putting beyond the reach of the law the delinquencies of directors and others involved with the company's business. It behoves an administrator to properly fulfil his duty.

253. There are dicta in the cases suggesting that the time limits imposed for the convening of the second meeting can affect the amount of information that should be provided to the creditors. An administrator should not take those observations as being an excuse for failing to properly, adequately and carefully investigate matters which are material to the decision of the creditors or failing to inform the creditors on material matters.

256. The administrator has extensive powers and it is no excuse not to fully, carefully and adequately investigate a matter which would bear on the decision of the creditors. There is a tendency to assume that if any money is available to a creditor pursuant to a deed of company arrangement which is in excess of any amount that would be recovered on a liquidation, that is a proper basis for opining the view that company arrangement is the best alternative. Therefore there is no necessity to concern the creditors about other issues. The argument is the bottom line is money, and irrespective of how much, a receipt of something is better than nothing. But there are other factors which may influence creditors. They should have the benefit of a proper investigation.

259. In this regard it is important to emphasise the main object of Part 5.3A, namely, minimising the chances of the company or its business continuing in existence. That is a company which is not hopelessly insolvent and there is the possibility that it can trade profitably thereafter. The history of the business and the company are important to this objective.

262. In the present matter the administrator has used time restrictions to limit his investigations in relation to voidable transactions, insolvent trading and whether other persons were de facto directors.

265. These are matters of some importance to the decision to be made by the creditors at the second meeting.

268. The decision whether or not a company should execute a deed of company arrangement does not rest with the court. This is an important matter when considering the scope of the discretion available to the court on an application to terminate the deed. Indeed, in most cases the court is not in a position to make an informed decision for the creditors.

272. The applicant relied upon paragraphs (a), (b), (c), (f)(i) and (ii) and (g) of s.455D(1). The sub-section relevantly provides -

"SECT 445D When Court may terminate deed 445D(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) ... (e) ... (f) the deed or a provision of it is, an act or omission done or

made 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." [Emphasis added]

276. The applicant is a creditor. It has the burden of establishing the necessary facts to enliven the jurisdiction of the court to terminate the deed of company arrangement.

279. Sub-section (1) addresses a number of different concepts.

282. First, the applicant may prove that information about the company's business, property, affairs or financial circumstances was false or misleading and the information can reasonably be expected to have been material to the creditors deciding whether to vote in favour of the company arrangement.

285. The false or misleading information can be given to the administrator or creditors. In this case we are concerned with alleged false or misleading material information given to the creditors.

288. In my opinion it is not incumbent upon the applicant to prove fault on the part of any person before the jurisdiction may be enlivened.

291. The second concept concerns the failure to include in a report or statement information which could reasonably be expected to be material to the creditors' decision.

294. Again, in my opinion, it is not necessary to prove fault on the part of any person.

297. The third concept is the question of oppressive or unfairly prejudicial conduct to the creditors.

300. Finally, so far as is relevant to the present application the applicant relies upon the fact that the deed should be terminated for some other reason.

303. Once the jurisdiction is enlivened it is still a matter for the discretion of the court whether the court should order the deed be terminated. There is some controversy in the authorities as to the extent of the discretionary aspect of the jurisdiction. See observations of Shepherd J in D.F.C. of Tv. Comcorp Australia Ltd (1996) 14 ACLC 1616 at 1631.

306. I agree with the Full Court of the Federal Court that the fact that the jurisdiction is enlivened under s.445D does not result in the inevitable consequence that the deed is terminated. See D.F.C. of T v. Comcorp Australia Ltd, supra, at 1652.

309. The legislature has not seen fit to list the matters relevant to the exercise of the discretion, and the court should not seek to do what the legislature has seen fit not to do. The discretionary power is expressed in uncontrolled terms but it is a discretion which has to be exercised judicially, that is effecting justice as between the competing interests after weighing all relevant matters.

312. It would be wrong to proceed on the basis of a pre-disposition to termination once jurisdiction is enlivened because this would impermissibly fetter the discretion. However, the fact that the jurisdiction has been enlivened is a significant factor in the exercise of the discretion which would normally lead to the termination of the deed.

315. Issues of delay and third party rights no doubt would be relevant to the exercise of discretion. Further, the fact if proven that the creditors even if properly apprised of the material information would have resolved in favour of the deed is also a relevant factor in the exercise of the discretion. But this would be a difficult matter to prove. The scheme of Part 5.3A leaves the decision to the creditors. The court should not speculate on the outcome and would require credible evidence before being satisfied that if all material information had been before the creditors they would have resolved in the same way.

318. The fact that the proposal results in the creditors receiving something which would be more than they would receive on a liquidation is a relevant factor. The weight to be attached to such a factor will depend on all the circumstances.

321. In evaluating the various factors it must not be overlooked that creditors may be influenced by factors other than the return of a small amount of money.

324. I have difficulty with the notion that irrespective of the extent of the failure to properly inform the creditors or the extent to which they have been misled the fact that the creditors will get something under the arrangement but nothing under a liquidation is a factor of substance which swings the balance against terminating the deed. See observations of Heerey, J in D.F.C. of T v. Pddam Pty Ltd (1996) 14 ACLC 659 and Young, J in Khoury v. Zambena Pty Ltd (1997) 15 ACLC 620 at 627-8.

327. However, in both cases there was considerable delay in bringing the application to a conclusion which coupled with the better return resulted in the discretion being exercised against termination.

330. In Emanuele v. ASC (1995) 63 FCR 54, the Full Court of the Federal Court at p.69 said -

"The powers of the court under these sections are discretionary, and are to be exercised having regard both to the interests of the creditors as a whole, and in the public interest. An analogy may be drawn between the powers of the court arising under these sections, and the power of the court to refuse a stay of a winding up order."

334. Their Honours referred to Re Data Holmes Pty Ltd (1972) 2 NSWLR 22 at 26 where Mason, JA considered what was meant by public interest and it was noted that it included commercial morality and the interests of the public at large.

337. In D.F.C. of T v. Comcorp Australia Ltd, supra, Carr, J (Lockhart, J agreeing), agreed with the judge at first instance that the primary consideration "in determining whether the discretion should be exercised was the interests of the creditors."

340. In my opinion there is a discretion. The weight to be attached to the relevant factors will depend upon the circumstances in each case. However, the starting point is that it is a significant fact in the exercise of the discretion that the jurisdiction has been enlivened.

343. The complaint made by the applicant is that material information was not provided to the creditors in the report dated 5 March 1999 as supplemented by the circular to creditors which set out the proposal dated 11 March 1999. In addition it is said that some information that was given was false or misleading.

346. By reason of s.439A(4) of the Law a statement setting out the details of the proposed deed was required to be served on the creditors with a copy of the report concerning the company's business, property, affairs and financial circumstances. No point was taken that the details of the proposed deed were not sent until six days after the date of the report and five days prior to the meeting.

349. Before identifying the information which was false or misleading or which was omitted from the report that accompanied the notice of the second meeting, it is necessary to set out the facts concerning the respondent and the involvement of Pindos and Real Enterprises and the accountancy firm of Bourke, O'Brien & Associates.

352. It is necessary to go back to the former company, Rugs Galore Pty Ltd ("RG") It was registered in 1989 was known as Bondmoor Pty Ltd and carried on the business of selling rugs and associated products. It changed its name to Rugs Galore Pty Ltd on 14 October 1996.

355. It was a business operated by Geoffrey Dowson. By the beginning of 1997 the business was insolvent.

358. On 6 February 1997 RG agreed in principle to sell the business to the respondent. On 14 March 1997 it sold its business to the respondent. On 27 March 1997 the respondent gave a charge in favour of the National Australia Bank. On 1 April 1997 the respondent gave a charge in favour to Pindos. On 26 May 1997 a deed of company arrangement was entered into by the old company, RG which was obliged to pay a sum of money to the administrator.

361. According to the evidence of Mr McVeigh the respondent has consistently traded at a loss. In September 1997 Mr Dowson approached Pindos for assistance. Pindos is a major supplier of goods to the respondent.

364. On 9 December 1997 the respondent executed a charge in favour of Real Enterprises.

367. The directors of Pindos are Messrs Lagas, Economou and Bourke. Real Enterprises, which holds a third ranking debenture over the assets of the respondent, has as its director and shareholder one Shane Patrick O'Brien who is in partnership with Mr Bourke in the accounting practice of Bourke, O'Brien & Co. They are the accountants for the respondent Pindos, Pindos Trading and Real Enterprises.

370. On 9 December 1997 the respondent, Habatron Pty Ltd, Real Enterprises Pty Ltd as trustee for the Real Enterprises Unit Trust, and Geoffrey Dowson executed Heads of Agreement.

373. Habatron Pty Ltd is a private company of Mr Dowson and was the only shareholder in the respondent. The evidence did not reveal who held the units in the Real Enterprises Unit Trust, except it is noted that it had its registered office at the offices of Bourke, O'Brien & Co.

376. The Heads of Agreement made provision for the restructuring of the share capital of the respondent and provided that the respondent would issue 80 B-class shares to Real Enterprises and 18 A-class shares to Habatron to add to the two it already owned.. The effect of this would be that Real Enterprises would own 80% of the respondent. It was also provided that no further shares should be issued without the unanimous resolution of all shareholders and no shares would be transferred during a period of five years without the unanimous resolution of all shareholders. The agreement provided that Real Enterprises was entitled to appoint a single director if it so chose. The agreement went on to provide what Mr Dowson was to receive by way of remuneration for his employment.

379. Clause 4.9 provided that Mr Dowson would not have authority to enter into contracts for the supply of any goods or services exceeding $1,000 "without the prior approval of Real Enterprises representatives, which approval will not be unreasonably withheld."

382. The agreement also provided for the establishment of a purchasing committee compromising a representative from Habatron and two advisors representing Real Enterprises. This committee was to meet regularly for the purposes of determining and authorising purchases. In addition, the administration was to be assisted by representatives of Real Enterprises and the office of Messrs Bourke, O'Brien & Co. Mr Dowson was not entitled to sign cheques over $500 and clause 7.2 provided -

"All other RGA cheques and negotiable instruments will require the joint signatures of HA's representative and one of XYZ's representatives."

386. XYZ referred to Real Enterprises. Further, it was agreed that the representatives of Habatron and Real Enterprises must approve all contracts to be entered into by the respondent other than any contracts entered into on a bona fide basis in the ordinary course of business but subject to clause 4.9 which restricted Mr Dowson's authority to contracts not exceeding $1,000.

389. Clause 14 made it quite clear that in respect of many business decisions involving the respondent the prior approval in writing of the representatives of both Habatron and Real Enterprises had to be obtained. Finally, there was a confidentiality clause which provided, inter alia -

"The parties must maintain absolute confidentiality concerning the existence and terms of this heads of agreement".

393. Mr Dowson asserts and Messrs Bourke and O'Brien deny that the respondent was in reality operated and controlled by Messrs Bourke and O'Brien. The Heads of Agreement provide some support for that view.

396. By 10 February 1999 the respondent was hopelessly insolvent.

399. On 10 February 1999 Mr McVeigh met with Messrs Bourke and Lagas and their solicitor, Mr Axup, a partner of Wisewoulds with respect to the question of administration of the company.

402. At that moment in time the records at the Australian Securities and Investment Commission ("ASIC") revealed that Habatron owned two shares and Mr Dowson was the sole director.

405. Mr McVeigh was shown a copy of the Heads of Agreement which he was told had been executed but not enforced. According to his later affidavit which was filed after the court had raised concerns about his conduct Mr McVeigh said -

"Messrs Axup and Bourke explained to me that the effect of the agreement, should it have been enforced, was that Pindos and Real Enterprises had shares in the company and an option to take up the remaining shares if certain requirements were not met. I was informed that those requirements had been met and the deed (and the charge) were enforceable. I did not enquire further about events of default. I absolutely deny that there was any attempt to hide the existence of the agreement from creditors, nor did Messrs Axup or Bourke ask me to. With the benefit of hindsight I consider that it may have been better if I had provided some details in my reports to creditors, but only for the sake of completeness or out of abundance of caution, and not because it was material or relevant to the unsecured creditors."

409. The evidence before the court was by affidavits. No deponent was cross-examined.

412. A consideration of the affidavit material up to the end of the hearing gave substance to the inference that the object of the exercise in appointing the administrators and the execution of the deed of company arrangement was to achieve the object of enabling Pindos, Real Enterprises, Messrs Lagas, Economou, Bourke and O'Brien to effectively take over the respondent and exclude Mr Dowson from the business. The evidence further supported the view that Mr McVeigh by his conduct assisted the said interests to achieve their goal. The disturbing feature was that much of the information concerning this objective was not revealed to the creditors and indeed the creditors were labouring under a misapprehension as to who was the true owner of the respondent.

415. The administrator's role in this campaign was a matter which caused me considerable concern as to his impartiality and independence, two attributes which are essential to the integrity of a Part 5.3A administration.

418. In the affidavit sworn by Mr McVeigh on 19 May 1999 which was filed to meet the concerns raised by the court, he confirmed that the object of the exercise was a change in ownership of the respondent.

421. He deposed to the fact that on the day after his appointment he met a representative of the National Australia Bank with Mr Bourke who was there on behalf of Pindos. He then went on to say this -

"During the meeting with NAB I said that the company was going to continue trading in the short term and I satisfied them that this was the appropriate course to take. I said that I was expecting a proposal for a deed of company arrangement to be provided by interests associated with Pindos, which if satisfactory would ultimately be put to the creditors. I assured the NAB that their security would not be disturbed in the meantime.

28. The NAB was told that the proposal would contemplate a change in ownership of the company and Pindos or interests associated with it would take over the day to day management and control of the company. The NAB's representative said that they had supported the RG deed and now found their position unsatisfactory once more. The NAB demanded from Pindos an undertaking to underwrite the company's debt, and indicated that they required Pindos to provide a bank guarantee. Mr Bourke on behalf of Pindos initially resisted that position, however I believe that in subsequent negotiations (which I was not involved in) Pindos agreed to provide some additional security."

425. I interpolate here to note that none of that information was made available to the creditors. Taken in context with the fact that at that point in time Mr McVeigh knew of the terms of the Heads of Agreement, I find it hard to accept his statement also made in that affidavit that "with the benefit of hindsight I consider that it may have been better if I had provided some details in my reports to creditors, but only for the sake of completeness or out of abundance of caution, and not because it (the agreement) was material or relevant to the unsecured creditors."

428. In my opinion, for reasons which will become apparent, the agreement, the true ownership, the purpose of the administration and the side agreement with the National Australia Bank were all matters which were material to the creditors' decision.

431. To this day the creditors do not know who owns the units in the trust of which Real Enterprises the owner of 80% of the shares in the respondent, is the trustee.

434. On 17 February 1999 the administrators were appointed and sent a circular to creditors. The first meeting was to be held on 22 February 1999. At that meeting no committee of inspection was formed and no other person was nominated as administrator.

437. On 4 March 1999 Mr Axup, acting on behalf of Mr McVeigh, sent a letter to Mr Dowson's solicitors demanding that Mr Dowson cease interfering with certain aspects of the business. Mr Dowson's employment was terminated soon after the administrators were appointed. However, he continued to be a director. The question of Mr McVeigh being in a position of conflict was raised by Mr Dowson's solicitors on 4 March because of his use of Mr Axup as his solicitor. Mr Axup was acting for Pindos. Mr McVeigh later stated that he saw nothing wrong with the engagement. In early March Mr McVeigh was made aware that there were questions about the heads of agreement and whether Messrs Bourke and O'Brien were de facto directors of the respondent. Mr Dowson alleged that they were.

440. On 5 March 1999 Mr McVeigh sent the notice for the second meeting together with, inter alia, a report to creditors.

443. It should be noted that the report did not set out the details of a proposal concerning the deed of company arrangement. This was supplied by a circular to creditors from Mr McVeigh dated 11 March 1999.

446. Despite not having the details of the proposal, nevertheless Mr McVeigh in his report of 5 March 1999 stated his opinion "that creditors consider passing the resolution that the company execute a deed of company arrangement. It is not my recommendation that creditors resolve that the company be wound up or that the administration should end."

449. Under the heading "Statutory Information". Mr McVeigh stated that as recorded in the Australia Securities and Investment Commission's records the only director was Mr Dowson and the share structure was one shareholder, Habatron Pty Ltd, who held two shares.

452. In the light of the Heads of Agreement this statement was potentially misleading and on one view was carefully drawn. Later facts establish beyond doubt that the statement created a false position and conveyed false and misleading information to the creditors.

455. According to the affidavit of Mr O'Brien a meeting of the director of the respondent was held on 9 December 1997 at which Mr Dowson resolved that 18 A-class shares be issued to Habatron Pty Ltd and 80 B-class shares issued to Real Enterprises Pty Ltd. In addition, at a meeting of the shareholder held on the same day the memorandum of articles were amended to provide for an authorised capital of $1m divided into 500,000 A-class shares and 500,000 B-class shares. In addition, share certificates were sealed by the respondent showing 20 A-class shares to Habatron and 80 B-class shares to Real Enterprises Pty Ltd. The notification of allotment of shares was lodged by Messrs Bourke and O'Brien & Co on 26 March 1999 with ASIC even though the details of the allotment were dated 9 December 1997 and Mr Dowson signed the document on 9 December 1997. This is a delay, unexplained, of some 15 months.

458. The fact was that prior to the creditors' meeting, commencing on 16 March 1999 the creditors were told that the only shareholder of the respondent was Habatron. This was false and misleading.

461. Under the heading of "Company Business and Background" Mr McVeigh wrote that the business was purchased from the old company RG in April 1997 and operated as a retailer of rugs. No other information is given to the creditors.

464. One matter which was of importance was the fact that the old company executed a deed of company arrangement that the old company conducted the same business through the same shareholder and was managed by the same director as the respondent. This, in my view, was an important omission. But in addition the Heads of Agreement provided that the respondent agreed to assume "in favour of Bondmoor Pty Ltd (i.e. RG)" to pay to it moneys it had to pay under the deed of company arrangement. The amount is in excess of $100,000. This meant that the respondent agreed to pay the old company RG's obligations pursuant to the deed of company arrangement executed in May 1997. No mention is made of this agreement in the administrators' report. The liability is not referred to in the list of unsecured creditors. Mr McVeigh had a copy of the agreement according to Mr O'Brien.

467. The report went on to state that Mr McVeigh had not received an explanation from the director as to the reasons for the company's failure. He then says -

"My limited involvement with the company precludes me being able to make meaningful comment on the reasons for failure."

471. This is a matter of considerable concern and constitutes a substantial omission in the report. Evidence reveals that the respondent traded at a loss from the day it acquired the business from the old company. Debts were increased over a two year period and it is clear that the company always traded whilst insolvent. I do not believe that it was impossible for Mr McVeigh to make any reasonable comment on the reasons for failure. He knew about the heads of agreement, he knew about the prior deed of company arrangement and he had access to the books of the respondent. He also had access to Messrs Bourke and O'Brien who on the evidence were intimately involved in the company's business. Mr O'Brien deposed to the fact that he spent two days per week at the company's office.

474. After referring to the secured and unsecured creditors Mr McVeigh provided the following summary -

"The report as to Affairs discloses the total estimated auction realisable value of assets at $330,000, liabilities to priorities, secured and unsecured creditors totalling $3,797,105 which leaves the company with an estimated deficiency of $3,467,105."

478. The report does not refer to the close involvement of Pindos in the respondent's affairs, the fact that it sold substantial quantities of goods to the respondent, that it appeared to be a favoured creditor when payments were made and the close relationship of the company to Messrs Bourke, O'Brien & Co who were arguably involved in the administration of the respondent. No mention is made of Real Enterprises. This company apparently owns 80% of the shares which it holds on trust for unit holders who are not identified.

481. In reference to voidable transactions no mention is made of Pindos but the creditors are informed what the difficulties are with recovering payments made which are unfair preferences.

484. Further, in respect of the investigation involving insolvent trading Mr McVeigh opined the view that the company had been trading whilst insolvent. He then states -

"In the event that insolvent trading can be established there may be claims against the director of the company. Creditors must weigh up the likelihood of recovery of assets from personal sources if the matter of insolvent trading was to be pursued."

488. According to the record Mr Dowson was the only director. However, no information is given to the creditors as to the likelihood of recovering anything from Mr Dowson. This again in my view is an important omission.

491. But more importantly is the question of whether or not there were de facto directors. Mr Dowson, through his solicitor and at a meeting with Mr McVeigh asserted that Messrs Bourke and O'Brien were the true controllers of the company. Whilst Mr McVeigh accepts that certain people may be defined as directors he goes on to state that due to time restrictions imposed by the law "such investigations have not been fully conducted. The accountant denies the allegations and some aspects of the director's allegation are disputed by independent third parties."

494. On the evidence before me which was in the form of affidavit only and which was not subject to cross-examination there is an arguable inference that Messrs Bourke and O'Brien were involved in the day to day management of the company. A reference to the Heads of Agreement corroborates that arguable case. In my view these facts should have been revealed to the creditors to enable them to make their own assessment.

497. Under the heading of "Proposal" Mr McVeigh notes that the company has not put forward a proposal but a proposal was being put forward "by Pindos International Pty Ltd which provides moneys for unsecured creditors. The proposal is not yet to hand but will be forwarded to creditors within the next few days."

500. Mr McVeigh then goes on to give his opinion which is couched in these terms -

"On the condition that it provides for payments of employee entitlements, satisfies the requirements of secured creditors and makes provision for return to unsecured creditors, it is my opinion that it will be in the interests of creditors to favourably consider it."

504. The extraordinary fact is that he is opining the view that it would be in the interests of creditors to favourably consider it even though he does not know what the proposal is with respect to the return to unsecured creditors.

507. His view seems to be that provided there is money irrespective of what amount made available to the unsecured creditors they should resolve that the company execute the deed.

510. Despite the tentative observation made, in paragraph eight of his report Mr McVeigh says -

"(a) In regard to the execution of a deed of company arrangement, I

advise that it is my opinion that it should be in the interests of

creditors for the company to execute a deed of company

arrangement. My reason for this opinion is that such a proposal

would provide a greater return to unsecured creditors. It would

also provide for the continued trading of the business which

would provide for continued employment to employees and

continued trading for suppliers. Further, such trading would

enable the continued servicing of lease payments to landlords

and finance companies in respect of fixtures and fittings and as

such, alleviating any shortfall in this regard."

514. By a circular dated 11 March 1999 Mr McVeigh informed the creditors that the proposal had come from Pindos to the effect that payments would be made in respect of the employee entitlements, that the rights of all secured creditors would be undisturbed and an amount of $150,000 would be paid within 60 days to the administrator for distribution to unsecured creditors. It was noted that the cost of the administrators was to be paid first from the moneys held in the administrators' bank account and secondly, by Pindos if the moneys were insufficient. It was noted that upon compliance with the terms of the deed the company would be released from all provable debts. Mr McVeigh then went on to expand on his reasons why it would be in the best interests of the creditors that the company execute a deed of company arrangement.

517. As stated above there were 97 unsecured creditors owed $1,536,871.53 and an amount in excess of $1.8M owed to three secured creditors.

520. At the time when each creditor other than Mr Dowson and his interests and the applicant considered the information available to the creditor to make a decision whether to support a deed of company arrangement and to attend a meeting, that creditor would be of the belief that the proposal put forward by Pindos was put forward by a secured creditor. The true position was that Pindos was putting forward a proposal which would have the beneficial effect of not only protecting its interest as a secured creditor but also protecting the interests of Real Enterprises as the trustee of the real owner of the respondent, a company closely allied with the interests of Pindos and Messrs Lagas, Economou, Bourke and O'Brien.

523. In my opinion the failure to inform the creditors as to the true shareholding in the respondent company, the failure to provide information to the creditors as to the prior history of the business when in the hands of the old company and the acquisition by the respondent, the failure to reveal the Heads of Agreement and its effect, the plan for the take over by Real Enterprises and its allies, the omission to refer to the assumption of liability by the respondent of RG's obligation under the previous arrangement, the fact that the respondent always traded at a loss, the fact that there was no reference to Pindos, Real Enterprises, Messrs Bourke and O'Brien's involvement in the business of the respondent, the fact that the administrator had not investigated whether Mr Dowson could provide any compensation if sued as the sole director and the failure to set out clearly the position of the possible de facto directors was all information that in my opinion was reasonably expected to be material to the creditors' decision whether to vote in favour of the resolution that the company execute the deed.

526. In my opinion the creditors were deprived of the information which was necessary, they were led to believe in a state of affairs which were incorrect and in my view both the misleading and false information and the information which was omitted were reasonably expected to be material to the creditors' decision.

529. The court's task on this application is "to evaluate whether in all the circumstances of the particular matter the information which is said to be false or misleading or which has been omitted can reasonably be expected to have been material to the creditors'" decision - per Carr, J in D.F.C. of T v. Comcorp Australia Ltd [1996] FCA 1789; (1996) 14 ACLC 1,616 at 1,637.

535. In my opinion the applicant has established the necessary facts to enliven the jurisdiction of the court to make an order to terminate the deed of company arrangement.

540. Whether the court should exercise its discretion to terminate the deed requires the court to consider a number of factors, the primary one being the interests of the creditors.

543. There is no suggestion that the applicant has delayed bringing the application. The deed was executed on 26 March 1999 and the applicant issued its motion on 1 April 1999.

546. There is no evidence of any prejudice that would be suffered by any person or entity if the deed was terminated, prejudice in the sense that some person or entity has relied upon the deed.

549. In my opinion the provision of false and misleading material information and the omission of material information were serious and grave breaches of the obligations to provide full and accurate information to creditors. The gravity and seriousness constitute significant factors in deciding whether the court should exercise the discretion and terminate the deed.

552. Mr Crutchfield referred the court to D.F.C. of T. v. Pddam Pty Ltd (1996) 14 ACLC 659 and submitted that there were many factors in the present case which moved Heerey, J in that case to refuse to terminate the deed even though there were substantial breaches of the requirements for a proper creditors' meeting. However, as Young, J pointed out in Khoury's case, supra at p.627-8, there was substantial delay in bringing the application to a conclusion in the Pddam case.

558. Mr Crutchfield listed the following factors which he submitted should preclude the court terminating the deed -

* no basis for concluding that liquidation would confer any practical benefit on unsecured creditors;

* the company had insufficient assets to meet the claims of secured creditors;

* terminating the deed would pose a real hardship on the employees;

* attempts at recovery from any alleged de factor director is likely to be vigorously resisted with delay and costs;

* the deed was not opposed by any material creditor other than the applicant;

* the deed positively supported by three major unsecured creditors who are owed some $830,000 in aggregate of the $1.5M of unsecured creditors;

* no evidence that applicant prepared to fund any litigation;

* no evidence that any better deal could be achieved through the sale of the business.

570. He also relied upon the fact that at the meeting of creditors the fact that Real Enterprises was an 80% owner was revealed.

573. Under persistent questioning of Mr McVeigh who chaired the meeting it was revealed that Pindos and/or Real Enterprises owned 80% of the respondent. However, the revelation is vague and confusing and seems to run together the interests of Pindos and Real Enterprises. Given the circumstances I am not persuaded that the creditors who were in fact present would have understood what the correct position was. In any event the information was only part of the omitted information and was told to a handful of creditors. All told there were some 40 proxies given to a number of individuals many associated with Pindos, Real Enterprise and the three directors. Too little information was given, it was too late and, in my opinion, those creditors present who did not know about the heads of agreement would not have understood what the true position was.

576. As against the factors relied upon one must weigh up the facts that there were substantial breaches of the requirements for the provision of the material information to the creditors and false and misleading information was given to the creditors.

579. The legislature has left the decision to the creditors. If the creditors are deprived of making an informed decision on the true material facts then a court is faced with a difficult question if it is sought that the deed of company arrangement should continue despite the failure to comply with the legislation. In my opinion the court should be slow to exercise its discretion against terminating the deed when there have been serious and grave failures to comply with the legislative requirements concerning material information.

582. In exercising the jurisdiction the court should not overlook the objectives of Part 5.3A.

585. Looking at the twin objectives in the present matter, even if the deed of company arrangement is fully implemented the company is still insolvent. The amount owed to secured creditors exceeds on any view the assets of the company. The trading in the past does not lead one to any degree of confidence that the company is able to trade profitably in the future. The past includes the trading of the old company. Two different companies controlled by the same person over many years operated a business which failed twice. In other words, even if the deed was fully implemented there is still the risk that the company could not trade profitably.

588. Further, with respect to the chances of the business continuing to exist, there are interests who intimately know the business who are prepared to continue it. This suggests a degree of confidence in its value as a going concern. A liquidator would be expected to explore at an early stage the prospect of selling the business as a going concern.

591. In my opinion it does not follow that if the deed of company arrangement is not implemented that the business will cease.

594. Turning to the matters relied upon by Mr Crutchfield, I do not accept that there is no basis for concluding that a liquidation would confer any practical benefit on unsecured creditors. That conclusion could only be supported if a liquidator was unable in any way to recover property or funds of the company or fail to obtain compensation. The inadequacy of the investigations concerning unfair preferences, insolvent trading and the question of de facto directors leaves the recovery in the area of the unknown. I do not accept Mr Crutchfield's assertion that there is no basis for concluding that a liquidation could not confer some benefit on unsecured creditors.

597. The second factor is correct but even if the deed of company arrangement is put in place the same observation can be made. There is insufficient assets at present to meet the claims of secured creditors.

600. The third factor, namely, terminating the deed would pose a real hardship on employees, is also in the area of the unknown. If the liquidator continues with the business and sells it as a going concern then it cannot be said that there would be a real hardship on employees. The Pindos interests and their allies seen to think that the business has a value. This suggests a liquidator would have some success in selling the business as a going concern.

603. I leave to another day the question whether employee's rights is a relevant factor to the exercise of the discretion.

606. The fourth point, namely, attempts to recover from an alleged de facto director is likely to be vigorously resisted may be correct, but the fact is that if there is a basis for making the claim, which is arguable, the facts of delay and cost are no sound basis for not pursuing the de facto director.

609. The next factor is that the deed was not opposed by any material creditor other than the applicant. That begs the question. The fact is that the creditors were not given all the material information.

612. The next factor that the deed is positively supported by three major creditors owed some $830,000 of the $1.5M of unsecured creditors again has to be closely looked at. An affidavit from each of the three creditors was filed. Each affidavit is in the same terms. The affidavits do not show that when the creditor swore the affidavit it had the full material information in any event. The affidavits do not persuade me that the creditors, if they knew all the facts, would have come to the same conclusion. I am not persuaded these three creditors knew all the material facts.

615. The next factor that there is no evidence that the applicant is prepared to fund any litigation in my view is not to the point. A liquidator will have to make up his own mind and seek such support from creditors and others as to funding any litigation. One cannot say at this stage as to what course the liquidator may take. But that factor, in my view, is of little importance when it comes to the question of deciding whether or not to exercise the discretion.

618. The fact that a secured creditor is likely to appoint a receiver again does not, in my opinion, bear on the question of the exercise of discretion.

621. Finally, it is asserted that there is no evidence that any better deal could be achieved through the sale of a business.

624. The parties seeking the exercise of the discretion have the evidentiary burden of establishing the necessary facts to support the exercise of the discretion in favour of not terminating the deed. It would be upon the respondent to show the fact that no better deal could be achieved through the sale of the business. I am by no means persuaded that that is so. Real Enterprises and its allies seem to be fully confident that the business has value. Indeed on the contrary the liquidator may sell the business as a going concern.

627. If all the creditors were given the correct material information in the report sent to them would they have come to the same conclusion? Mr Crutchfield seemed to submit that 10 cents in the dollar to unsecured creditors is better than nothing and therefore they would have resolved to support the deed if given all the information. Given the matters which I have identified as being omitted and/or creating a false and misleading situation, I do not accept that the creditors would have been prepared to give the respondent a second opportunity to operate the business which had been operated by it and its predecessor without profit for a number of years. This factor is underlined by the fact that the business when operated by the old company ran up large debts which were forgiven and the business operated by the respondent also traded at a loss from day one. Some creditors may have been of the opinion that enough is enough.

630. In the end it is a matter of weighing up all the factors but I am not persuaded that if the creditors had been given all material information they would have come to the same decision to resolve that the respondent execute the deed in the terms of the proposal put forward by Pindos. A matter which I view as carrying some weight is that in the end most creditors are influenced by the commercial reality of their position. The later evidence revealed that the Pindos interests when pressured by a secured creditor, namely, the National Australia Bank were prepared to provide a guarantee. If the creditors had been informed what the true position was then it was open to them to seek to bring commercial pressure upon Pindos and Real Enterprises to obtain a better deal than the one proposed. They were denied this opportunity.

633. As I have already said, there are any number of reasons why a creditor may vote against a deed of company arrangement and even though commercial reality points towards supporting it if there is a financial outcome the fact is that the court could not say that the creditors would have, if given all information, come to the same conclusion to support the arrangement. Commercial morality cannot be overlooked. Insolvent trading for a period of nearly two years is the type of matter which would make a creditor think a liquidator should investigate. One company arrangement followed by another is also a factor which would be of substance to a creditor concerned with commercial morality.

636. Accordingly, I propose to exercise the discretion and terminate the deed.

641. I raised with counsel for the respondent, Mr Crutchfield, the question whether the court should give the creditors another opportunity to consider the matter based on correct and accurate information before any order was made for liquidation. I raised the matter in the course of the hearing and at the end of the hearing indicated to Mr Crutchfield that if his client, the respondent, wished to go down that path it could inform the court. The respondent has not sought to defer the liquidation for that purpose. As Mr Crutchfield pointed out there is the question of the cost of the present administration and if it was proposed to go through the procedure again there would be an extra cost.

644. I also note the observations of the Full Court of the Federal Court in Emanuele v. ASC supra at pp.69-70.

647. What I had in mind was the adjournment of the applicant's motion to wind up the respondent to enable another administrator to be appointed pursuant to Part 5.3A.

650. The respondent has not indicated a preference for that course and accordingly, I do not consider it.

653. It follows that in my opinion the applicant is entitled to the relief it seeks and an order should be made to wind up the respondent.

656. In my opinion neither Mr McVeigh nor Mr McDonald should be the liquidator in the winding up. I will hear counsel as to how to achieve this.

659. Subject to any submissions from counsel I propose to make the following orders -

(i) that the deed of company arrangement executed by Rugs Galore Australia Pty Ltd on 26 March 1999 be terminated;

(ii) that the company Rugs Galore Australia Pty Ltd be wound up in insolvency.

665. I will hear the parties on the question of the appointment of the liquidator and the question of costs

I certify that this and the 36 preceding pages are a true copy of the reasons for judgment of Gillard, J of the Supreme Court of Victoria delivered on 2 June 1999.