RELEVANT CASE LAW
61 Relevant authority recognises that the standards required of an administrators' investigation are necessarily modified by the tight timeframe and associated constraints.
62 In Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 ("Hagenvale"), Cohen J stated (at 145-146):
As a preliminary matter, it should be noted that Pt 5.3A has its objects as set out in s 43A, namely the provision for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. The intention was, as has been indicated in several cases, to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or of the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Pt 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly.
63 In Hagenvale the plaintiffs alleged, inter alia, that the administrator's report failed adequately to examine the relationship between the defendant companies or to quantify the amount of the preferences, and that the company failed to give sufficient information in relation to an action against the directors under s 588G of the Act. Cohen J did not consider that the alleged deficiencies, or alternatively their materiality, were established. His Honour reiterated that the administrator did not have the time or resources for investigation as in liquidation.
64 In Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 ("Pddam"), Heerey J declined to set aside a DOCA under, inter alia, s 445D(1) of the Act. Despite finding some substantial departures from statutory requirements, his Honour did not consider that the administrators' investigation or report was inadequate. His Honour stated (at 510):
I am not satisfied that the administrator failed to carry out the investigation required by s 438A(a). Perhaps more enquiries could have been made. Perhaps what the administrator was told by the directors and the receiver might not have been taken at face value. It is often possible to say of an investigation that, in retrospect, more could have been done. However the case that the applicant seeks to make out is not one of an inadequate or negligent investigation, but of a failure to comply with a statutory requirement, so that there was in truth no investigation at all. The passages already cited from the Harmer Report and the explanatory memorandum indicate that the investigation is intended by Parliament to be a swift and practical one. Part 5.3A assumes that the company in question is either trading while insolvent or likely to be in that position within a predictable period of time: see s 436A(1)(a). It is self-evidently essential that such a state of affairs be brought to an end promptly, either by the execution of a deed or by winding up. The tight time frames set for the convening of the first and second meetings of creditors are consistent with that need.
65 Heerey J also took into account, in the exercise of his discretion, that there was "no basis for concluding that…liquidation would confer any practical benefit on any creditor, including the applicant" (at 512) and that the loss of benefits under the DOCA would impose real hardship on former employees.
66 In Spiteri v Georges [2002] VSC 473, Hansen J reiterated that the administrator must act quickly in relation to both the first and second meeting of creditors, and in investigating and forming an opinion. His Honour dismissed an application by the director of the company to remove the administrator and set aside his decisions allowing a party to vote as a creditor in a particular amount, on grounds including alleged partiality and lack of independence.
67 Hansen J observed that where the director, contrary to the obligations imposed by the statute, had deliberately starved the administrator of information by failing to deliver the books and records, attend the meeting as required or otherwise assist, the administrator necessarily relied on information from creditors, on which the decision to admit the disputed claim was open (at [88]).
68 In Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612, Austin J described the administrator's duty to investigate as follows (at [339]):
An administrator has a statutory duty under s 438A to investigate the company's business, property, affairs and financial circumstances. It is possible that he or she may fall under an obligation to obtain legal advice in order to discharge that duty properly in the facts of the case. But in assessing whether any such duty has arisen, the court is bound to take into account the limited time available to an administrator to carry out his or her investigations, the extent and complexity of the tasks to be carried out during that time, and the availability of funds for these purposes: see the Pddam and Portinex [Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391] cases, cited above. In some cases it will be open to the court, bearing in mind such considerations, to conclude that something less than an independent legal assessment will be sufficient.
69 In Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232, Lindgren J concluded (at [198]) that, on the basis of a number of provisions of Part 5.3A, an administrator was required to act with expedition within a tight timeframe, which should be extended or adjourned only exceptionally.
70 His Honour referred to the consistent distinction in relevant authority between the extent and quality of information available and investigations performed in, on the one hand, a voluntary administration and, on the other hand, a liquidation. In the former, the investigation was to be "swift and practical", as stated in Pddam at [226].
71 In Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) (recs and mgrs apptd) (2010) 267 ALR 613; [2010] FCA 352 ("Independent Cement"), Finkelstein J ordered the removal of liquidators pursuant to s 503 of the Act because, inter alia, they failed while administrators adequately to investigate and report on potential claims which, if successful, might lead to recoveries which would see the creditors better off than under the DOCA they had recommended, but which was subsequently set aside.
72 Finkelstein J stated at [14]:
Before dealing with this complaint, it is necessary to say something about the standard of investigation which an administrator is required to undertake. By reason of s 438A of the Corporations Act, an administrator is under a duty to investigate the company's affairs so as to be able to form an opinion about what future course of action is in the creditors' best interests and inform the creditors of that opinion. If the administrator has insufficient time before the second meeting of creditors at which the creditors will consider the administrator's advice to form this opinion, he or she may seek an extension of the convening period for the second meeting. In Bovis Lend Lease Pty Ltd v Wily … Austin J said that there may be circumstances when the administrator needs to go beyond his statutory duties of investigation. The existence of a duty to make further inquiries would depend on "an assessment of the nature of the question to be investigated, the information in the administrator's hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors' decision": at [325]. Equally, however, an administrator is not required to undertake investigations to the same extent as a liquidator, given the time constraints imposed by Pt 5.3A: Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 … at [125].
73 In the case before him, Finkelstein J identified a number of serious shortcomings in the administrators' investigations of potential recoveries, particularly of large potential claims. Finkelstein J found that the administrators failed to turn their minds at all to the company's potential constructive trust claims for large payments it made for capital improvements to a leased property, may have failed to consider the extent of trust assets and an equitable lien for liabilities incurred as a trustee, failed properly to investigate whether the directors had assets to meet a potential insolvent trading claim (including their failure to conduct a share search indicated on the facts) and probably failed to form a "considered" opinion that the pursuit of actions for insolvent trading would be uncommercial (at [25]).
74 His Honour found it "troubling" that the administrators had recommended a DOCA with a significant risk of being set aside, appeared unduly deferential to the directors and were "too willing to support the DOCA without having fully explored the potential claims if the company were wound up" (at [49-[50]]).
75 His Honour nevertheless recognised at [49] that:
Doubtless the administrators were required to take into account the time, cost and uncertainty associated with litigating actions. In some cases, a "bird in the hand" logic may justify the recommendation of a DOCA rather than a liquidation. But that decision should only be reached after careful consideration of the claims which can only be brought following a liquidation.
76 In Independent Cement, Finkelstein J acknowledged that it was a finely balanced question whether "the better conduct of the liquidation" required the removal of the liquidators. The company was already in liquidation and the inadequacy of the investigation conducted in administration was, while important, not the sole reason for his Honour's conclusion that the liquidators should be removed. The plaintiffs' offer to fund its nominee's investigations was, in the context of the case, a significant factor.
77 In Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 ("Kirwan"), the majority of the New South Wales Court of Appeal held that the trial judge erred in finding, inter alia, that an administrator's investigation was inadequate. An important factor, as Giles JA (with whom Meagher JA on that issue agreed) stated at [213], was that:
at no time in his cross-examination was it put to [the administrator] that he should have done more by way of preliminary investigation, that he had failed to consider breach of fiduciary or statutory duties as distinct from preference or that his investigation was inadequate to permit him to vote in favour of the [DOCA].
78 Giles JA also referred to the administrator's account of his actions in his affidavit and reiterated (at [225] - [227]):
… I have also earlier identified the cross-examination of [the administrator] as to [a particular] transaction, and said that it did not take up with him that he should have done more to investigate the transaction.
…
The cross-examination [of the administrator] did not suggest in the slightest that the report was false or misleading… The allegations in the pleadings were particularised. The particulars were not that the passage in the report conveyed the three propositions and the propositions were untrue or without adequate basis. They may have sufficiently covered that by alleging … that the report wrongly represented that [the administrator] had reasonable grounds for expressing the opinions that recovery was highly unlikely and that … it was highly unlikely that offences could be proved. But essential to his Honour's conclusion was that [the administrator] had not made appropriate enquiries, what were appropriate enquiries being judged in the circumstances of a swift and practical investigation and the express reference to incomplete investigations.
No doubt [the administrator] could have done more, although even in the proceedings a prima facie case of breach by [the director] of his fiduciary or statutory duties was not found…
79 A number of authorities have considered the relevance of an inadequate investigation by an administrator to the termination of a DOCA pursuant to various potentially overlapping provisions of the Act.
80 In Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707, an inadequate investigation by administrators was an important factor in Derrington J's decision to set aside a DOCA pursuant to s 447A of the Corporations Law. The resolution to execute the DOCA was opposed by the major creditor with a claim for over $27 million but carried by the administrator's casting vote. Under the DOCA, the major creditor would receive $80,000 (as opposed to nothing on winding up) but the other unsecured creditors would receive a higher proportion of their respective debts. Derrington J accepted that the DOCA unfairly discriminated against and prejudiced the plaintiff. Despite the plaintiff's real but small advantage under the DOCA, his Honour found that in a number of areas, the administrator's enquiries were insufficient to justify his recommendation and his casting vote in favour of the DOCA. In particular, the administrator did not adequately investigate the sale of certain substantial company assets, the adequacy of the consideration for shares, the value of an asset subject to security or the reasons for, and adequacy of, the director's contribution.
81 Derrington J stated that the administrator, who acknowledged that his investigation was somewhat superficial, gave very unsatisfactory evidence which did not establish that an adequate enquiry had been undertaken. The administrator produced minimal supporting documentary material and did not assist the court (at 710).
82 His Honour concluded that in the context of the spectacular collapse of the group of debtor companies and the wholesale liquidation of their assets, "a sufficient review" and "profound scrutiny" were reasonably warranted (at 710), particularly in relation to assets "sold well below their apparent value" (especially to the directors' interests) and whether the director's contribution was suitable, given the advantages he obtained from keeping the company out of liquidation.
83 In JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 ("Jonco Holdings"), Santow J terminated, pursuant to, inter alia, ss 445D(1)(a), (b), (c), (e) and (f) of the Act, a DOCA entered by the corporate trustee of a family trading trust, which was narrowly approved by a vote of creditors, contrary to the administrator's recommendation. His Honour found that the company misled the administrator about its entitlement to an indemnity from trust assets, deliberately deprived him of access to essential books and records and dishonestly advanced a scheme to defeat creditors' claims.
84 While those matters alone may have justified setting aside the DOCA, Santow J's decision was fortified by his finding that the return under the DOCA would be likely to be less than on liquidation. That circumstance was relevant both to whether the DOCA operated oppressively or unfairly prejudiced a creditor or creditors, and to the Court's overall discretion to terminate a DOCA.
85 His Honour considered various calculations of returns on both the liquidation and DOCA scenarios. He concluded that liquidation (favoured by the administrator) was likely to afford the better return as, inter alia, the DOCA was based on the false assumption that the trustee had no right of indemnity against trust assets (at [90] [96]).
86 Santow J found that a number of serious improprieties and instances of misconduct were established. The director or his associates furnished a wholly inadequate and false RATA, denied the existence of the indemnity, fraudulently altered the trust deed, arbitrarily distinguished between creditors, acquired sufficient claims to control the statutory meetings, frustrated the administrator's attempts to carry out his statutory duties to investigate the company's affairs and report to creditors, propounded a DOCA which was blatantly oppressive to creditors, prevented the administrator from obtaining access to the Court and used votes to require adoption of the DOCA. The state of production of the books and records was also unsatisfactory.
87 In such circumstances, his Honour concluded that it was important for a liquidator with adequate powers to investigate the transactions identified as potential avenues of recovery. The misfeasance and state of the books impeded a concluded view on those transactions, but there were "sufficient indications in support of it to treat this as an independent basis for setting aside the deed" (at [101]).
88 In Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235 ("Bidald"), Campbell J terminated a DOCA pursuant to s 445D(1)(b), (c) and (g) of the Act, in circumstances where the report to creditors contained materially false and misleading information and omissions, there were material contraventions of, and departures from, the DOCA, and the company would be insolvent when the DOCA came to an end.
89 Campbell J found that the report to creditors contained a materially false and misleading comparison which overestimated the amount likely to be recovered under the DOCA as opposed to winding up. The same misleading information constituted an omission to state the correct position or a reasonable approximation thereof, thus establishing the ground for termination under s 445D(1)(c).
90 Campbell J also held that the DOCA should be terminated under s 445(1)(g), as it was part of a scheme to defeat the legitimate interests of a creditor and permitted an insolvent company to trade.
91 His Honour recognised that even if a statutory ground for termination of a DOCA were made out, the Court retained a discretion whether to make the order, in which, according to some authorities, the primary consideration was the interest of creditors (at [272]).
92 His Honour stated that "[i]n taking into account the interests of the creditors, one factor is whether the creditors would be better off under the deed than in a liquidation: Greek Orthodox Community of Oakleigh & District Inc v Pizzey Noble Pty Ltd (admin apptd) [(1997) 23 ACSR 274] at … 282. In approaching that question, it would be wrong to regard "under the deed" as referring strictly to the benefits which the creditors are entitled to through the operation of the deed according to its terms. … Rather, the court should look at a comparison between the situation that the creditors will be in if the deed is brought to an end, and the situation that they will be in if it is not brought to an end" (at [276]).
93 Campbell J also stated that even where creditors would be better off under a DOCA, the Court might nevertheless, in its discretion, terminate it, having regard to both the interest of the creditors as a whole and the public interest, which included considerations of commercial morality (at [287]).
94 His Honour stated (at [290]) that if a DOCA permitted a director to avoid public examination about the company's affairs and the clawback claims which were possible on winding up, it could be a factor in favour of termination as "[i]t is in a relevant sense 'detrimental to commercial morality' to dispense with the opportunity which the winding up law provides for the investigation of the affairs of a failed company: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 26; Emanuele v Australian Securities Commission [(1995) 63 FCR 54] … at 69."
95 In Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139 ("Octaviar"), McMurdo J ordered the termination of certain DOCAs entered into by companies which had suffered a major group collapse, on grounds including (in relation to one DOCA) the provision of misleading information to creditors and the omission of information about the company's financial circumstances which could reasonably be expected to have been material to the creditors who, by a majority, voted for the DOCA (at [112]).
96 Her Honour observed that in the context of the major corporate collapse (at [175]), there were a number of avenues for potential recovery and, although full investigation and prosecution of the claims would be time consuming and expensive, there was evidence that litigation funding would be readily available. Further, most of the votes for the DOCA were by parties with an interest in avoiding a liquidator's enquiry, which, while it did not justify disregarding their views, detracted from arguments that the DOCAs merely represented a commercial decision (at [176]-[177]).
97 Her Honour also considered that in circumstances where, inter alia, the companies made extensive losses shortly after an appearance of good financial health (at [178]), it was in the public interest to set the deeds aside pursuant to s 445D(1)(g) in order to permit a liquidator's examination (at [179]).
98 Her Honour adopted the observations of Campbell J in Bidald (at [180]). She observed that in the case before her, the dividend to creditors under the DOCAs was small and there were prospects of preference, uncommercial transaction or insolvent trading recoveries. Although the evidence was mostly slight and any actual recoveries would depend on obtaining funding (at [180]), given the size of the corporate collapse, its impact on many institutions and individual investors, and the size of the possible recoveries, investigation of the transactions was likely to be financed by investors in outcomes of the litigation which might follow (at [181]).
99 McMurdo J concluded at [182]:
Overall, the termination of the DOCAs would be beneficial also for the fact that it would permit some investigation of transactions and conduct which could lead to at least some of the persons responsible for some of the group's demise being brought to account. The public interest is therefore a consideration in favour of terminating the deeds.
100 In Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) [2007] SASC 296 ("Mondello"), Layton J terminated a DOCA under s 445D of the Act for a number of reasons "taken together", including a failure to investigate adequately and to provide full information about whether further funds would be available to creditors (at [117]).
101 The plaintiff claimed to be a creditor of the defendant company (subject to a DOCA) in respect of costs orders made in certain litigation and to be a contingent creditor in respect of a damages claim.
102 After the litigation with the plaintiff had been in progress for several years, the defendant company's director resolved to place it into voluntary administration. The director did not inform the administrator of the litigation or the plaintiff's claim to be a creditor. The administrator became aware of the litigation only four days before the second meeting of creditors, at which he recommended the DOCA. The plaintiff was not advised of, and did not attend, the creditors' meeting.
103 The administrator had not investigated the status of the litigation and did not disclose its existence at the meeting at which the creditors resolved to enter a DOCA. The director, who held proxies for two related parties with substantial debts, voted for the DOCA. Two external creditors voted against the DOCA. The plaintiff asserted that, had it attended, it would also have voted against the DOCA and, but for the votes of the related entities, the resolution would not have been carried.
104 The DOCA was based on an estimated contribution from the director to pay specified proportions of the claims of preferred creditors, unsecured creditors and the administrator's fees. The related creditors agreed not to claim under the DOCA. Due to the director's subsequent bankruptcy, it was unlikely that he could fulfil his obligations under the DOCA, which were assumed by his son.
105 The plaintiffs alleged that the administrator failed to investigate the litigation and include it as a creditor, that the DOCA was contravened because the bankrupt director did not make the specified payment, and that the DOCA was oppressive to those who did not vote for it. If there were a breach of s 445D of the Act, the discretion to terminate the DOCA should be exercised in order to allow the proper investigation of the company's affairs. The plaintiff indicated that it would provide reasonable funding to the liquidator for that purpose.
106 Layton J found that concerns about the director's status, the creditor status of the related parties and possible insolvent trading, which were not referred to in the s 439A report, required further investigation. Further, the failure to inform creditors of the litigation and the director's impending bankruptcy, which were material matters, was misleading.
107 Layton J stated at [117]:
In my view, the preceding discussion and the breaches of s 445D which I have found, together, gives rise to the desirability of the termination of the Deed and the liquidation of Annatom. Many questions have been raised which suggest that the creditors did not have complete and candid information before them. In particular, whether further funds may be available for distribution to creditors after a full investigation. I consider that these matters taken together satisfy me that it would be appropriate to terminate the Deed pursuant to s 445D(1)(g).
108 Layton J concluded:
[124] Having considered these arguments, I conclude that the need for appropriate investigation into the financial position of the company and the creditor status of a company are important in the public interest. In my view it is not in the public interest for the continuation of the implementation of the Deed for reasons that I have discussed. The non-related companies do not wish to proceed with the Deed and there is therefore no unfairness to those creditors to terminate the Deed.
[125] As far as the interests of particular creditors are concerned, I do not consider there would be any financial unfairness to the related creditors (Mr Thomas Tigani, Stix and Tomdan), given that at the present time, the related creditors have indicated they intend to forego any dividend. To the extent that an investigation by a liquidator may verify their creditor status, the related creditors would be entitled to a distribution. The related creditors would financially be no worse off by reason of liquidation.
[126] In such circumstances I consider that the public interest and the interests of the creditors as a whole favours the termination of the Deed, which will enable an investigation upon the appointment of a liquidator.
109 In Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (admin apptd) (1997) 24 ACSR 47, Branson J rejected an application to terminate a DOCA under s 445D(1) of the Act, based on the alleged inadequacy of the administrator's investigation of the likelihood of recovery from the holding company or the directors in liquidation. The applicant creditor alleged that the DOCA would provide a lower return than a liquidation and constituted an attempt to "ride roughshod" over the creditor's rights.
110 Branson J found that although the administrator's report was deficient in failing to specify whether voidable transactions were apparent, the omission was not material, as the administrator advised the creditors' meeting of legal advice that actions against the holding or associated companies and the directors in a liquidation were not sustainable. Her Honour also found that the statement in the administrator's report that property had been valued as a going concern was false but not material in the relevant sense.
111 The applicant also alleged that the administrator failed properly to consider potential claims against the directors and the holding company under various statutory provisions in a liquidation. Branson J noted "obvious difficulties with, and limitations on, inquiries as to the reasonableness of conclusions reached by administrators on the question of the likelihood of recoveries by a liquidator should one be appointed" (at 51). Her Honour recognised that she could not reach a final conclusion as to the results of claims which might be made under Part 5.7B of the Corporations Law should a liquidator be appointed.
112 Her Honour (at 51) referred to Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 at 34, where Lehane J stated:
In my view the task of the Court in a case such as this is to form a view, on all the material before it, as to whether there is a real prospect that in a liquidation claims in which (or in the fruits of which) the second secured creditor has an interest could and would be pursued so as to afford to the second secured creditor recovery of more of the debt owed to it than it would obtain under the proposed deed of company arrangement.
113 Branson J stated (at 53):
I am not satisfied on the evidence before me that there is a real prospect that a liquidation claim in which the applicant has an interest could and would be pursued were the company to go into liquidation so as to afford the applicant recovery of more of the debt owed to it than it would obtain under the DOCA.
114 Branson J rejected the allegation that an asset was inaccurately valued. Her Honour accepted the administrator's evidence about the information he provided to the independent valuer. Her Honour found that the applicant had not queried the valuation and, had it done so, the administrator would not have opposed obtaining a further valuation.
115 Branson J declined to terminate the DOCA under s 445D of the Act.
116 In Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527; [1999] NSWCA 402 ("Khoury"), the New South Wales Court of Appeal, by a majority, upheld the primary judge's refusal to set aside resolutions under s 600A(1)(a) and to terminate a DOCA which discriminated against the appellant creditors. The appellants were not notified of the meeting of creditors, for which the administrator's preparation and information were inadequate (at [36]). The appellants claimed that they would have voted against the resolution to enter a DOCA, which would not have passed if the votes of related creditors were disregarded (at [56]). The primary judge declined relief principally due to the appellants' delay in issuing proceedings, but also observed that there was no evidence that they would be better off if the DOCA were set aside .
117 On appeal, Fitzgerald JA, with whose disposition Davies AJA agreed, stated (at [57]) in relation to s 600A(1)(c)(i) that:
The appellants submitted that, in determining whether s 600A(1)(c)(i) was satisfied, the question is whether the resolution that the respondent execute the deed of company arrangement was contrary to their interests, as "a class of creditors as a whole". That is incorrect. When a resolution has been passed at a meeting of creditors within s 600A(1)(a)(i)(A), the question under s 600A(1)(c)(i) is whether the passing of the resolution … was "contrary to the interests of the creditors as a whole": cf Kantfield Pty Ltd v Plastomatic (Aust) Pty Ltd (1994) 14 ACSR 687 at 692. Plainly, the resolution that the respondent execute the deed of company arrangement was not "contrary to the interests of [its] creditors as a whole".
118 In relation to s 600A(1)(c)(ii), Fitzgerald JA stated at [61]:
In the present case, the appellants have not satisfied s 600A(1)(c)(ii). They would have received nothing but for the deed of company arrangement, whereas, under it, they are entitled to participate in the distribution of the fund. It is not permissible, in my opinion, to compare the appellants' position under the deed of the company arrangement which was executed with some conjectural position which would have ensued if some different, fairer, deed of company arrangement which was never proposed had been executed.
119 Fitzgerald JA acknowledged that the DOCA's discrimination and the company's grossly unsatisfactory conduct in relation to the meeting favoured the grant of relief. His Honour considered that due to the misuse of the statutory process, absent the considerable delay, relief would have been justified, even if the appellants would not have benefited from the failure of the resolution (at [78]).
120 Fitzgerald JA (at [68]) adopted the opinion of the Full Federal Court in Emanuele v Australian Securities Commission (1995) 63 FCR 54, which held that the Court's discretionary powers under ss 445D and 445G(2) are "to be exercised having regard to both the interests of the creditors as a whole and the public interest", which could include considerations of commercial morality. Fitzgerald JA noted that other matters could also be material to the discretion, including, for example, unexplained delay, other disentitling conduct by an applicant for relief, or the exclusion of or unfairness to a creditor or group of creditors.
121 In Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to deed of company arrangement) (2000) 34 ACSR 391 ("Portinex"), the plaintiff creditor, the Deputy Commissioner of Taxation, sought to terminate or set aside DOCAs entered into by several companies, alleging, inter alia, that the administrator was invalidly appointed, wrongly admitted a party to vote as a creditor and failed to investigate the companies' affairs diligently.
122 In particular, the plaintiff alleged that the administrator's investigations of possible preferences and insolvent trading by the directors were inadequate. The DOCAs were thus approved on the basis of a misleading report, which failed to give a true and fair view of the relevant affairs of the companies and "the effect of each deed [was] to forestall a proper investigation of the affairs of each of the companies and the conduct of their directors, former directors and advisers" (at [6]), so that the public interest required their termination. The plaintiffs sought declarations that the DOCAs were void under s 445G(2) of the Act based on the same allegation.
123 In the case of one company, the related creditor abstained from voting on the resolution to enter a DOCA and all creditors save the plaintiff voted in its favour, including a creditor the value of whose debt exceeded that of the plaintiff's debt. The resolutions for the other two companies to enter a DOCA were supported by all creditors save the plaintiff.
124 Under the DOCAs, a deed fund was established for distribution to creditors save for the related parties.
125 Austin J refused to terminate the DOCAs due to a combination of factors, including the risk of prejudice occasioned by unexplained delay in bringing the application (at [78]).
126 Austin J considered relevant authority, including Khoury. His Honour observed at [86] that s 600A(1)(c)(i) of the Act appeared to direct attention to the interests of the company's creditors as a whole, rather than the interests of a class of creditors such as the dissenting creditors.
127 His Honour stated that some judicial approaches to s 600A(1)(c)(ii) appeared to require a comparison between the position of the dissenting creditors under the DOCA with their position if that DOCA had not been executed and the company had been liquidated (at [87]). In contrast, other approaches apparently contemplated a comparison between the existing DOCA and a different or amended DOCA. Austin J observed that where no "third" option was available, the dissenting creditor's position under the DOCA should be compared with its position under winding up (at [90]). If it were not feasible to negotiate a different kind of DOCA, the question of prejudice boiled down to whether the creditors were better off with the proposed DOCA or liquidation, as there would be no alternative on the facts (at [89]). Nevertheless, a difference between the treatment of one group of creditors and other creditors did not, in itself, constitute unreasonable prejudice within the meaning of s 600A(1)(c)(ii), as creditors could agree openly and in good faith on other than equality of treatment.
128 In Portinex, Austin J concluded that the plaintiff was better off under the DOCA, as it received a small distribution and payments of tax from two companies, which, in winding up, might constitute preferences. Further, the DOCAs kept the two principal operating companies afloat, offering creditors distributions better than they would receive on winding up, supported by a guarantee. His Honour also took into account that entry in the DOCAs was part of a package of benefits (including some payments for arrears of tax) for which the plaintiff had negotiated and received (at [94]).
129 Austin J recognised that the plaintiff lost the potential benefit of any recoveries a liquidator might obtain from directors for insolvent trading or from other related creditors for voidable transactions, but in refusing to grant relief under s 600A of the Act, concluded (at [92]):
However, given the cost of proceedings for recovery and the evidence suggesting that the Deputy Commissioner would be reluctant to fund proceedings, it is not only uncertain that proceedings would be successful, but doubtful that they could be taken at all.
130 His Honour also refused to terminate the DOCA under s 445D of the Act.
131 In Portinex, the plaintiff alleged that the administrator failed to conduct any proper investigation of the affairs of each company and to verify materials supplied to him. The s 439A reports contained assessments which assumed the accuracy of the financial information supplied by the external accountant, who in turn obtained it from the director, yet neither the administrator nor the external accountant adequately investigated or verified the information supplied.
132 Austin J noted that the administration was handled by a manager employed by and reporting to the administrator, who gave evidence that they relied on books and records of the company and information provided by the director and the external accountant.
133 The administrator's manager and the external accountant gave evidence that they would have followed up on any apparent discrepancies. The manager also testified that he had ensured that the intercompany loan accounts balanced, and reviewed the director's questionnaire, source documents and correspondence to which he had access. He also attempted to investigate the extent of employees' debts.
134 Austin J concluded that, although very limited, there was a degree of critical review by the external accountant and the manager (at [112]).
135 The s 439A reports stated that the administrator was unable to form an opinion on whether the books and records were kept in accordance with s 289 of the Corporations Law, as he had received only limited source documents and data was corrupted or lost.
136 The reports recognised that the company may have traded insolvently but investigation of that issue would necessitate the examination of directors at an estimated cost.
137 The reports stated that the administrator had requested statutory declarations from the directors as to their assets and liabilities. Austin J found that as the administrator had not requested a statutory declaration from one of the directors, to that extent the statement was false but the inaccuracy could not reasonably be expected to have been material to creditors (at [127]). Further, his Honour stated (at [117]):
The Deputy Commissioner complains of Mr Star's [the administrator's] failure to obtain the statutory declaration, after having raised an expectation that it would be forthcoming in the reports. However, while an administrator has the power to conduct an examination, there is no power for an administrator to demand a statutory declaration of assets from a director. The possibility of embarking upon an examination, and the cost of doing so, were set out in the reports. The lack of funds in the administration to pursue the directors was specifically noted in the reports. It would have been open to the Deputy Commissioner, as the principal external creditor of the companies, to offer to fund the examination process, but he did not do so. While it was unsatisfactory for Mr Star not to approach Ms Zaharia [a director] for a statutory declaration, and while he may not have been insistent or persuasive in seeking to obtain one for Mr Nolasco [a director], my opinion is that his failings in these respects fall well short of a basis for curial intervention.
138 The s 439A report regarding one company noted evidence of potential preference payments, which required further clarification. Austin J stated at [121]:
[T]he need for further investigation was specifically noted in Mr Star's report, and it was open to any creditor to pursue the matter with Mr Star at the meeting of creditors. Obviously the problem was the lack of funds in the administration for further investigations to be undertaken. It was open to the Deputy Commissioner, as the principal external creditor, to make arrangements to provide funding for further investigations, but he did not do so. At the hearing the Deputy Commissioner failed to identify any specific additional steps which Mr Star should have taken at his own expense in order to clarify the position. It is hard to see how the position could have been satisfactorily clarified by Mr Star in the absence of examinations under the Corporations Law. In any event, recovery proceedings could be taken only if the company was placed in liquidation, but the creditors validly resolved to enter into a deed of company arrangement instead.
139 In Portinex, the plaintiff also alleged that payments to NAB to reduce secured liabilities were unexplained and that there was no proper inquiry into recoverability of a debt to a related company. Austin J found that the payments related to a very small amount which was immaterial and that although the administrator did not comprehensively investigate the recoverability of the debt, his treatment was not misleading.
140 Austin J stated:
[124] Do these various matters, considered in isolation or together, provide grounds for orders under s 445D or 445G?
[125] If an insolvent company is to be saved and restored to health, the commercial reality is that decisions about its future must be taken speedily after its insolvency has been identified. Additionally, speed is required because rights of enforcement against the company are suspended during the period of administration, and it would be unfair to extend the period of suspension for longer than is absolutely necessary. Therefore Pt 5.3A sets a very short timetable for the creditors' decision about the future of the company. It is an unfortunate but unavoidable consequence of the scheme established by Pt 5.3A that the creditors must make their decision on the basis of information that is likely to be imperfect.
141 His Honour referred to Cohen J's statement in Hagenvale. He emphasised that in the context of an administration, there was a delicate balance between speed and accuracy (at [126]) and noted that the distinction "between an adequate preliminary investigation, … suspecting insolvent trading and unfair preferences but going no further, and an inadequate preliminary investigation…is a matter of degree" (at [127]). His Honour stated (at [128]):
That is the context in which the court must assess what Mr Star and Mr Malanos did and did not do. In my opinion, the reports and investigations in the present case were sufficient, though perhaps only barely so, to satisfy the requirements set out by Cohen J in the Hagenvale case.
142 Austin J observed that "the [plaintiff] was the principal external creditor of all three companies" but stated (at [131]):
If:
• the principal external creditor, presented with a report which reflects an adequate though preliminary investigation, wishes to have further investigations made;
• the administrator is willing to conduct an additional investigation if costs and expenses are met; and
• no arrangements are made for costs and expenses to be covered, there is no adequate basis for the creditor to criticise the administrator for not undertaking those investigations.
143 His Honour observed at [134]:
In the present cases it is probable that on the winding up of the Nolasco companies, there would have been either no dividend or a very small dividend to creditors, unless the liquidator of A Nolasco Pty Ltd were able to find funds to pursue successfully the litigation to which the deeds refer, or any liquidator were to pursue recoveries for insolvent trading and unfair preferences and to do so successfully. Under the deeds of company arrangement the minimum anticipated dividend was likely to be 10c in the dollar, with the possibility of a higher payment. While the deeds forestall further steps for recovery for insolvent trading and unfair preferences, they produce real benefits to the creditors (including the Deputy Commissioner) and it would be reasonable for the creditors to prefer those benefits to the uncertainty and cost of third party litigation and recovery proceedings.
144 Austin J also noted (at [135]) that the deeds were in the interest of the companies' employees, as they had been transferred to other companies in the group which would probably also fail if the companies were wound up.
145 Austin J concluded (at [137] - [138]):
This is a case where by far the most substantial unrelated creditor has been outvoted by related creditors and now finds himself bound to arrangements to which he objects. He objects broadly on the grounds that the arrangements unduly benefit the director of the companies and that the administrator has made inadequate investigations. If there were nothing more to the case than this, the creditor may have at least a sound moral case for assistance. But Pt 5.3A clearly contemplates that the wishes of an individual creditor may be overridden, and permits related creditors to take part in the decision to do so, subject to s 600A. Moreover, this is not a simple case of a substantial creditor's reasonable objections going unheeded. The arrangements which have been put in place confer benefits on the creditors generally, and employees have been catered for collaterally. The arrangements keep some Nolasco companies on foot and therefore keep some employees in employment. The Deputy Commissioner was made aware of the administrator's lack of funds to engage in more substantial investigations but did not offer to provide funds for that purpose.
In my opinion, the Deputy Commissioner has failed to make out adequate grounds for orders setting aside the resolutions to enter into the deeds, or orders terminating or setting aside the deeds of company arrangement for the three companies. Consequently in each case the summons will be dismissed.
146 In Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 ("Network"), Hayne J refused the application pursuant to s 600A(1)(c)(i) of the Act by a major creditor of a company subject to a DOCA to remove the administrator. His Honour held, inter alia, that an applicant for relief under s 600A of the Act must satisfy the Court that the outcome of the resolution passed at the meeting is contrary to the interests of the creditors as a whole. The fact that the resolution thwarted the preference of a major creditor did not, without more, suffice. In Network, the plaintiff, the major creditor of the company, sought an order under s 600A of the Act that a resolution to remove the administrator should be considered and voted on. The plaintiff had previously attempted to remove the administrator, but was outvoted by the majority of creditors in number (but not value), some of whom were related creditors.
147 The plaintiff submitted that there was prejudice to creditors arising out of the inability of the biggest bona fide creditor of the company to seek appointment of its own choice as administrator to preserve the undertaking of the company.
148 Hayne J stated that s 600A(1) of the Act required the Court to be satisfied of three matters before it could make any order under subs (2) of s 600A of the Act. First, that a proposed resolution had been voted on at a meeting of creditors of the company held under Pt 5.3A of the Corporations Law. Secondly, that if the vote or votes of a particular related creditor or creditors had been disregarded, the proposed resolution would not have been passed, or would have been passed, or the question would have had to be decided on a casting vote. Thirdly (at 548), that:
the outcome of the proposed resolution in fact achieved at the meeting either is contrary to the interests of the creditors as a whole or has prejudiced or is reasonably likely to prejudice the interests of the creditors who voted in the contrary sense, having regard to, amongst other things, the benefits resulting to the related creditors from the decision made at the meeting and the nature of the relationship between the related creditors and the company concerned.
149 Hayne J found that the plaintiff had not discharged its onus of proving that the failure to remove and replace the administrator was contrary to the interests of the creditors as a whole or relevantly prejudicial to the plaintiff. There was no suggestion that the administrator lacked integrity or competence or was incapable of adequately performing the relevant tasks for the benefit of all creditors and to preserve the undertaking of the company. The plaintiff, as the major creditor, had established only that its decided preference for its own nominee was not satisfied.
150 In the present case, the plaintiffs relied on Re Mills, ex parte Lloyd's v Prentice & Mills (1997) 73 FCR 551 ("Re Mills") and Augustyn v Putnin (1988) 83 ALR 514 ("Augustyn"), two cases decided under Part X of the Bankruptcy Act, as authority for the proposition that certainty of benefit on winding up was not a prerequisite for setting aside a resolution to enter a DOCA under s 600A(1)(c)(i). In Re Mills, the applicant Lloyd's, the major creditor (with an estimated claim of over $1.2 million), applied under s 222 of the Bankruptcy Act 1966 (Cth) for a declaration that a debtor's composition with creditors was void and an order for sequestration. Apart from Lloyd's and related or family creditors, the debtor had only two independent trade creditors for a very small amount.
151 The debtor incurred liabilities to Lloyd's in her capacity as an underwriting member known as a Lloyd's name. The debtor's husband provided $10,000 to pay unsecured creditors pursuant to a composition under Part X of the Bankruptcy Act.
152 Although Lloyd's opposed the composition, it was unable to vote, as the trustee insisted on the return of its original proxy document from overseas, which Lloyd's could not achieve in time for the meeting.
153 Merkel J found that the trustee's report on his investigation of the debtor's financial affairs was misleading and deficient in a number of material aspects. It gave the false overall impression that a reasonably thorough investigation had been competently carried out with due care and diligence, assuring creditors that the composition was the best result they could achieve because the debtor had no divisible or other property available to a trustee in bankruptcy.
154 The evidence established, however, that the trustee had accepted without inquiry that advances made to the bankrupt by her husband and family entities were secured loans, despite a serious question or suspicion that the advances were gifts. Further, if they were loans, the evidence suggested that the security (which was given some years after the advances) was invalid.
155 Merkel J was satisfied that the trustee's investigations of these matters for the purpose of his report were unsatisfactory and, at best, perfunctory. The investigations did not warrant or justify the confident conclusions conveyed to creditors in the trustee's report. His Honour stated (at 556):
The report proffered an opinion, purportedly based on reasonable grounds after a proper investigation by a competent chartered accountant, when the fact was that the grounds relied upon were not, in my view, reasonable nor was the investigation properly or competently carried out.
156 The evidence did not permit conclusions on the suspicions of those opposing the composition (raised in the course of the crossexamination of the trustee) but established that they were not "unworthy of consideration" (at 556-7, citing Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384 at 390 per Gibbs J).
157 Further, as the debtor appealed to the Court's discretion in opposing the bankruptcy petition, and given the difficulty faced by petitioning creditors in proving preferences and like matters, Merkel J took into account that neither the debtor nor her husband gave evidence to rebut the opposing creditor's suggestions.
158 In Augustyn, the Full Federal Court dismissed a bankrupt's appeal from the primary judge's decision declaring void a deed of assignment he had executed under Part X of the Bankruptcy Act and making a sequestration order against his estate. The primary judge found that the bankrupt had not disclosed his substantial beneficial interest in a property in his statement of affairs or to the meeting of creditors. The primary judge concluded that the bankrupt's concealment of his interest until confronted by the trustee suggested the existence of other undisclosed interests and could justify sequestration to permit further examination of the debtor (at 517 to 518).
159 The Full Federal Court upheld his Honour's holding that it was in the interests of creditors, within the meaning of s 225(5) of the Bankruptcy Act, to declare the deed of assignment void "to provide the creditors with the opportunity of probing the [appellant's] affairs and of assessing his ability to make contribution to his estate from his income" (at 520).
160 French J (with whose reasons Spender J agreed and Jenkinson J substantially agreed) observed that "the conflicting and untested material" before the primary judge did not "enable him to form any concluded view as to what, if any, financial return the creditors would receive in the event of the sequestration", but the "evidence in the case" suggested that a public examination of the bankrupt concerning his assets and an assessment of his ability to make contributions "might result in the creditors being better off" (at 520).
161 French J stated (at 520):
Where the court is able to form the clear view that no financial benefit will accrue, that may be a basis upon which the court will fail to be satisfied that avoidance is in the interests of the creditors.
162 His Honour concluded, on the basis of relevant authorities, that it was unnecessary to show a positive financial benefit to creditors in order to satisfy the requirements of s 222(5).