Mercy v Wanari

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1 HIS HONOUR: This judgment deals with a joint application by a contributory and the administrator of the company for either a direction under s 447D(2) of the Corporations Law that the winding up of the company was terminated by the creditors resolving to enter into a deed of company arrangement, or an order under s 482 or s 447A that the winding up of the company be terminated.

Facts 2 The company, Wanari Pty Ltd, was the developer of a property known as 'Swains Country Manors', a block of 28 home units at 67 Stanhope Road Killara. Its directors were Christopher Collingwood, Magna Nemeth and Katherine Nemeth (to whom I shall refer as 'Dr Nemeth'). If I were to grant the principal relief sought, they would resume their positions, at least until the next annual general meeting. 3 On 27 August 1991 this Court ordered that Wanari be wound up and that Hugh Thomas be appointed liquidator. The liquidation of the company proceeded until this year, although it appears that nothing was recovered for the unsecured creditors. A reason for this may have been the absence of funds to permit the liquidator to conduct inquiries and take action for recovery. On 12 January 2000, at the request of Dr Nemeth, Mr Thomas appointed Ronald Dean-Willcocks to be the administrator of the company, exercising the power to do so conferred upon a liquidator by s 436B of the Corporations Law. At that time Dr Nemeth paid him $14,000 on account of his remuneration and disbursements as liquidator, subject to the approval of creditors which was subsequently given. 4 It appears that the administrator prepared a report to creditors dated 31 January 2000, which is not in evidence. He reported to creditors again on 29 March 2000, with a further supplementary report on 3 April 2000. It is not easy to piece together the elements the administrator's opinion from these documents, which assume (incorrectly, as far as the Court is concerned) that the reader is familiar with the first report. Essentially, however, the administrator put forward to creditors a proposal that the company enter into a deed of company arrangement. At their adjourned meeting on 6 April 2000 the creditors varied the proposed deed and then approved it as varied. The deed was subsequently executed by the company and Mr Dean-Willcocks as deed administrator. 5 The deed provided that moneys paid under it would be held by the deed administrator for the benefit of the administrator and participating creditors only. It contemplated that control of the company would revert to the directors after the deed had been executed and the Court had made an order terminating the winding up of the company. The deed expressly provided that it would cease to operate if the Court refused to terminate or stay indefinitely the winding up of the company. 6 Funds were paid to the administrator, apparently in the sum of $34,500, to cover the administrator's costs and disbursements (including his costs to terminate the winding up) in the sum of $29,500, plus a fixed amount of $5,000 for distribution pari passu amongst participating unsecured creditors. According to a report as to affairs as at 12 January 2000, which was annexed to the administrator's report to creditors dated 29 March 2000, the amount owing to unsecured creditors other than related parties was $158,563.84. However, the administrator's report noted that there were contingent claims on the part of Mercy & Sons and Bourne Constructions amounting to possibly $1,050,000. Under the terms of the deed, the debts of participating unsecured creditors were to be extinguished when the distribution was made. 7 One of the purposes of the deed of company arrangement, according to the administrator's report of 29 March 2000, was to permit the company make use of past tax losses which could have a substantial value, the benefit of which would be likely to be derived only if the company were able to generate income in the future. The administrator's explanation of the proposal to use tax losses, given in his report of 29 March 2000 and his affidavit in these proceedings, is skimpy to say the least. Evidently Dr Nemeth received tax advice which is not in evidence. Be that as it may, the creditors' resolution provided that Dr Nemeth and/or the company would pay the administrator such further moneys as may be recovered directly or indirectly by either of them from the sale or use in any way of the tax losses of the company in the period of 12 months from the date of execution of the deed. Thus, additional money may become available to participating unsecured creditors through the realisation of tax losses, if the deed is implemented. 8 The report as to affairs quantified the company's debts to related parties at $7,701,000. Under the arrangements approved by the creditors on 6 April 2000, certain 'non-participating' creditors, who appear to have been related parties, were not entitled to take part in the distribution to unsecured creditors. It is not clear from the evidence before me whether the non-participating creditors and the related party creditors are identical groups, although there is some evidence to indicate that the total claims by the non-participating creditors were rather higher than $7 million, perhaps because of an assignment by the Commonwealth Bank to one of them (a transaction not adequately explained by the evidence). 9 The non-participating creditors were permitted to defer (but keep alive) or compromise or capitalise their claims. They entered into a separate 'non-participating creditors' deed' by which they promised to act in accordance with deed of company arrangement and not compete with the participating creditors for distributions, while reserving their discretion to deal with their claims against the company by deferring them or capitalising them in any way they saw fit.

Was the winding up terminated by the resolution of creditors to approve the deed? 10 For reasons that I shall explain, the application to terminate the winding up is manifestly deficient and must fail. The applicants seek to avoid consequences of such a conclusion by contending that the winding up of the company automatically came to an end, without judicial intervention, when the creditors resolved to approve the deed of company arrangement. Before addressing the substance of this contention, I shall deal with three threshold problems that the application raises. 11 First, the submission seems implausible on its face because the creditors' resolution and the deed made the implementation of the deed conditional upon the Court terminating the winding up. However, the applicants seek to overcome this difficulty by foreshadowing that it will be necessary to amend the deed if the Court agrees with their contention. I am content to proceed on that basis. 12 Secondly, the issue has been raised by means of an application for directions under s 447D, which permits the administrator to apply to the Court for directions 'about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers' (subsection (1)), or 'about a matter arising in connection with the operation of, or giving effect to, the deed' (subsection (2)). I am not sure that a determination of the kind that the applicants seek is properly characterised as a 'direction' under either subsection. Nor am I sure that the Court can make the determination under s 447A, which permits the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. But I need not resolve these doubts, since I have decided to reject the substance of the application. 13 Thirdly, no one has appeared to oppose the application, and therefore the applicants' contention has not been fully tested in argument. I have the benefit of a written submission from the Australian Securities & Investments Commission, which opposes the application, but the Commission has not briefed counsel to appear before me. This circumstance must reduce the weight of my decision. 14 In answering the question posed by the application, I shall examine, in sequence, the structure of Part 5.3A, the legislative policies that it was intended to reflect, and the relevant case law.

The structure of Part 5.3A 15 Part 5.3A deals separately with voluntary administration, and administration under a deed of company arrangement. Voluntary administration commences when an administrator is appointed by the directors of the company under s 436A, or by a liquidator or provisional liquidator under s 436B, or by a chargee under s 436C. However, if the company is already being wound up, only the liquidator can make the appointment (ss 436A (2) and 436C (2)). 16 The liquidator of a company has the power to make an appointment under s 436B only if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time. Thus, the liquidator appointed in a members' voluntary winding up under Part 5.5 Div 2, on the basis that the company was solvent at the time of the appointment, may appoint an administrator if he or she subsequently forms the view that the company has become or is likely to become insolvent. This may also occur where the Court has ordered the winding up of a solvent company under Part 5.4A (for example, on the just and equitable ground). 17 Section 436B is available not only where there has been a deterioration in the company's financial circumstances since the appointment of liquidator, but also where the company has been insolvent throughout the liquidation. This is because s 436B empowers the liquidator to make the appointment whenever the liquidator believes that the company is or is likely to become insolvent and that the appointment of an administrator is desirable. Thus, s 436B is available to the liquidator of company that is being wound up in insolvency pursuant to a court order under Part 5.4, and also to the liquidator of a company that is subject to a creditors' voluntary winding up under Part 5.5 Div 3. 18 The appointment of a voluntary administrator has the effect of suspending the administration of the company by its previous controllers. The administrator assumes control of the company under Part 5.3A Div 3, and remains in control until the administration ends. Thus, under s 437A the administrator acquires control of the company's business and property, and has the power to carry on the business and manage the property. Only the administrator can validly enter into a transaction or dealing affecting the company's property (s 437D). While the company is under administration, no one other than the administrator is permitted to perform a function or exercise a power as an officer of the company, except with the administrator's written approval (s 437C (1)). For this purpose, 'officer' includes a liquidator or provisional liquidator appointed by the Court before the administration began (s 437C (4)). These provisions envisage that although the previous controllers' functions are suspended during the administration, the previous offices continue to exist. 19 The effect of these provisions is confirmed, in the case of a court-ordered liquidation, by s 471A, which states a person cannot during the winding up exercise the powers of an officer of the company, except (relevantly) as an administrator appointed for the purposes of an administration of the company beginning after the winding up order was made. There is no exception for an administrator under a deed of company arrangement. 20 The administrator's principal task is to report to creditors within a strictly limited period of time, so that they can make a decision about the future of the company at their meeting. The creditors may resolve that the company execute a deed of company arrangement, or that the administration should end, or that the company be wound up (s 439C). Those are the three 'normal outcomes' of the administration of the company (s 435C (2)). But the administration of a company may also end for other reasons, listed in s 435C (3). The list includes various procedural defaults, termination by Court order, and termination where the Court appoints a provisional liquidator or orders that the company be wound up. The administration of the company ends on the happening of whichever event of a kind referred to s 435C (2) or (3) happens first (s 435C (1) (b)). Once the administration has been ended in any of these ways, the suspensory provisions of Part 5.3A Div 3 cease to apply. The position of the previous controllers is then governed by other provisions.

Creditors' resolution that the administration should end 21 Thus, if the creditors resolve that the administration should end, their resolution has the effect of returning the company to its previous controllers. If the company was previously being wound up, the administration will have suspended the winding up but the creditors' resolution removes the suspension and the winding up then continues.

Creditors' resolution that the company be wound up 22 Section 439C (c) envisages that one of the alternatives for the creditors is to resolve that the company be wound up. If they do so, the winding up proceeds under s 446A as a creditors' voluntary winding up, although the Court's power to terminate or stay a court-ordered winding up under s 482 is extended to a winding up under s 446A (see ss 446A (6) and (7)). Section 446A supplants, pro tanto, the general statutory provisions dealing with voluntary winding up: Brown v Carpet Design Group Pty Ltd (1994) 13 ACSR 621. Section 435C (3) (g) envisages that the administration may come to an end because the Court orders that the company be wound up. 23 These provisions may seem to sit oddly with s 436B, which allows the liquidator of a company which is already in the course of being wound up to decide to appoint an administrator. But each of the provisions has a sensible field of operation, once it is remembered that the liquidator may hold office by virtue of an appointment that does not assume the insolvency of the company. Sections 439C (c) and 435C (3) (g) allow a company to proceed, through administration, from winding up other than in insolvent circumstances to a creditors' voluntary or Court-ordered winding up in insolvency. 24 It seems to me that these provisions, though they have a sensible field of operation in such cases, simply do not apply in the case of a company that was being wound up in insolvency under Part 5.4 before the administration commenced. In such a case, the only choices available to the creditors under s 437C are to terminate the administration (with the result that the winding up in insolvency resumes), or to approve a deed of company arrangement. It is not open to the creditors, in my view, to resolve to wind the company up, for that would permit the creditors to superimpose a creditors' voluntary winding up upon the winding up ordered by the Court, without the sanction of a court order. Nor would it make any sense to allow the Court to order a fresh winding up under s 435C (3) (g) when ex hypothesi the company is already under insolvent administration by virtue of an existing order of the Court. 25 The construction which I favour avoids the absurd consequence that there may be two liquidators in office at the same time, in a case where the first liquidator was appointed by the Court under Part 5.4 (compare, in a different but analogous context, the remarks by Branson J in Commonwealth of Australia v Emanuel Projects Pty Ltd (1996) 1 ACSR 36, 40). In the relevant circumstances, in my view, the creditors do not have the power to appoint a second liquidator.

Creditors' resolution to approve a deed of company arrangement 26 If the creditors resolve to approve a deed of company arrangement, Divisions 10 and 11 of Part 5.3A are then applicable. Essentially, the suspensory effect of the administration has then passed, and legal relationships are governed by the terms of the deed, once it has been executed, as reinforced by Divisions 10 and 11. The deed is required to stipulate, inter alia, to what extent the company is to be released from its debts, the circumstances in which the deed terminates, and the order in which the proceeds of realisation of property are to be distributed amongst creditors bound by the deed (s 444A (4)). 27 The deed terminates when the Court makes an order terminating it (under broad powers conferred by ss 445D, 445G and 447A), or the creditors pass a resolution terminating it, or the deed specifies the circumstances in which it is to terminate and those circumstances occur, whichever happens first (s 445C). Section 445F makes provisions for the convening of meetings of creditors when the company is subject to a deed of company arrangement. Creditors may resolve to terminate the deed and if proper notice has been given, they may also resolve that the company be wound up (s 445E). If they do, the winding up proceeds as a creditors' voluntary winding up under s 446A. 28 The reasoning which led me to conclude that ss 439C (c) and 435C (3) (g) do not apply if the company was originally being wound up in insolvency under Part 5.4, also entails that s 445E does not apply in these circumstances. Nothing in Part 5.3A Divisions 10 and 11 states that the winding up of the company, which was only suspended during the administration, is extinguished when the company becomes subject to a deed of company arrangement. In effect, the winding up may continue to be suspended, because of the superior rights created by the deed and those divisions, but it remains in the background, absent any court order to terminate the winding up. If that is correct, then it would make no sense to authorise the creditors to superimpose a voluntary winding up after termination of the deed. Section 445E has a field of operation in other circumstances, but not where the company was originally being wound up in insolvency. 29 The applicants place reliance on s 444B (3), which empowers the board of directors of the company, by resolution, to authorise the deed of company arrangement to be executed by or on behalf of company. The applicants submit that there is no provision authorising the liquidator to do so, and therefore by implication the liquidator has no continuing role to play. I agree that s 444B (3) is a curious provision. At the time of execution of the deed of company arrangement on behalf of the company, the company is still under administration (s 435C (1) (b) and (2) (a)). That being so, the powers of the officers of the company are suspended by s 437C. But s 444B (3) is expressed to have effect despite s 437C. The result appears to be that, where the company was in liquidation when the administration began, the directors of the company are empowered to execute the deed, while the liquidator's powers remain suspended by s 437C and so the liquidator is not empowered to execute it. However, in my view this does not imply that the liquidator is functus officio. On the contrary, the clear effect of s 437C is that the liquidator is an officer whose functions are merely suspended during the administration.

Legislative policy regarding 'automatic' termination of winding up 30 The applicants rely on what they describe as one of the 'essential ingredients' of the voluntary administration process, as recommended by the Australian Law Reform Commission's Report No 45, General Insolvency Inquiry 1988 ('Harmer Report'), namely that the involvement of the courts was to be kept to a minimum. I agree that this was part of the policy underlying the Harmer Report's recommendations, and in my opinion the same policy is reflected in the provisions of Part 5.3A as enacted. 31 The Commission criticised the scheme of arrangement procedure for a compromise or composition of a company's debts as 'cumbersome, slow and costly', partly because of the necessity to make two applications to the Court (para 46). In recommending the new procedure, the Commission said that the Court should have a general supervisory power, but there should be no requirement for any part of the procedure to be sanctioned by the Court (para 56). In the Commission's view, the procedure should be 'primarily designed to enable a company to deal with its insolvency on its own initiative', by a procedure which would generally produce either an arrangement or a winding up (at para 58). 32 Relying on those observations, the applicants submit that it would be contrary to the policy underlying Part 5.3A for the Court to hold that if the company is being wound up in insolvency before commencement of the administration, and the administration leads to a deed of company arrangement approved by creditors, there must nonetheless be an application to the Court in order to terminate the winding up. I disagree. The passages from the Harmer Report upon which the applicants rely were directed towards the common case of a company that is under the control of its directors before the administration commences. It is clear that the common case dominated the thinking of the legislative policymakers (see, for example, para 511 of the Explanatory Memorandum for the Corporate Law Reform Bill 1992, which enacted Part 5.3A, where the possibility that the company may have been in liquidation before the administration began is disregarded). 33 If a company is being wound up in insolvency pursuant to a court order under Part 5.4, the Court is necessarily involved, because its winding up order has put in place a process which requires an element of judicial supervision and a judicial decision for termination (under s 482). In such a case, the question is not whether the legislature intended to add a requirement of court approval to the Part 5.3A procedure, but whether the legislature intended in enacting Part 5.3A to create an exception from the normal level of judicial review. 34 If the Court has made an order that a company be wound up in insolvency, it thereby initiates a process in which the public interest (encompassing matters of commercial morality) and the interests of creditors are paramount. That process is governed by Part 5.4B, which is quite different from Part 5.3A, not least because the Court, which has initiated the process, retains a more prominent role in the adjudication of applications made during the process and to terminate it. In my opinion nothing in the Harmer Report implies that the Court's important supervisory role should be jettisoned as soon as the creditors approve an arrangement under Part 5.3A. On the contrary, because the Court has previously adjudicated that the company should be wound up in insolvency, I would expect the policymakers to recognise that the creditors' decision should be subject to review. 35 Section 435A states that: 'The object of Part 5.3A 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 immediate winding up of the company.' 36 The applicants submit that there is a tension or inconsistency between the view that I have taken and s 435A. That would be true if, in considering an application to terminate the winding up, the Court could not take into account the objects set out in s 435A. For reasons which I shall explain later, it is permissible and appropriate for the Court to take into account those objects when an application is made to terminate a winding up in order to facilitate the implementation of a deed of company arrangement. The mere requirement that an application be made to the Court does not, in my view, stand in the way of fulfilment of the objects of Part 5.3A. 37 Indeed, it is possible to contend that because the company is already being wound up, judicial review is justified on two grounds. First, the purpose of the arrangement approved by creditors is likely in such a case to be more complex than merely to secure the continuation of the existing business of the company, or a realise a more advantageous return than through dissolution (cf Harmer Report, para 59). Secondly, there is an important element of public interest involved in the process of winding up pursuant to a court order, which judicial review will keep at centre stage. 38 The views expressed in this judgment are directed towards a case where the company is being wound up in insolvency pursuant to a court order under Part 5.4. No doubt different policy considerations arise in the case of creditors' or members' voluntary winding up (cf Harmer Report paras 63, 117). The applicants submit that there is no rational basis for distinguishing between a prior voluntary liquidation and a prior court-ordered liquidation, by requiring a court order to terminate the liquidation in the latter but not in the former case, once a deed of company arrangement has been approved. 39 I do not wish to decide now that a voluntary winding up is or is not automatically terminated when the creditors subsequently approve a deed of company arrangement, as the matter has not been fully argued. I merely remark that if automatic termination occurs in that case, the outcome is far from irrational. Although the Court may under s 511 exercise the powers that it has in a court-ordered winding up, voluntary winding up is a procedure less subject to judicial supervision and considerations of the public interest than court-ordered winding up. This is why a voluntary winding up typically comes to an end, under s 509, without any application to the Court of the kinds contemplated in a court-ordered winding up by ss 480-482. 40 Additionally, it is notable that in a voluntary winding up the creditors may authorise the directors to continue to exercise powers (s 499 (4)), whereas in a court-ordered winding up the creditors have no equivalent power (s 471A). Thus, creditors in a voluntary winding up have the power to authorise the directors to manage the business of the company under a deed of company arrangement, but in a court-ordered winding up only the Court or the liquidator could do so. 41 The applicants submit that if the winding up of the company were to continue notwithstanding the execution of a deed of company arrangement, the conduct of the winding up would be impossible. For example, the applicants submit that since the deed operates to bind the creditors (s 444D), a creditor could not lodge a proof of debt. It seems to me that in some cases, the deed will have the effect of continuing the suspension of the liquidator's functions, at least as a practical matter, although in other cases this may not be so. For example, the liquidator may be able to receive proofs of debt from non-participating creditors, if the deed recognises such a category, even if there are no funds in the liquidator's hands to make any distributions until the deed comes to an end. Further, the liquidator may continue to have a role, concurrently with the deed administrator, in investigating possible contraventions and taking proceedings for recovery - again, depending on the scope and terms of the deed. The point of requiring an application to the Court before the winding up be terminated is to ensure that issues such as these are properly reviewed.

Case law as to 'automatic' termination of winding up 42 It appears that there is no authority dealing directly with the question whether the approval of a deed of company arrangement automatically extinguishes a pre-existing winding up. In Re Depsun Pty Ltd (1994) 13 ACSR 644, 648, Young J dealt with an application brought by a liquidator under s 436B (2) for leave to appoint himself administrator. He expressed the opinion that if leave were granted, it would be necessary at some stage to bring the company out of liquidation. He reasoned that if the Court would be unlikely to terminate the winding up having regard to the considerations of public interest and commercial morality identified in Re Data Homes Pty Ltd [1972] 2 NSWLR 22, it ought not to approve the first step in the procedure by granting leave . His Honour assumed that judicial intervention would be needed to bring the company out of liquidation notwithstanding approval of a deed of company arrangement. 43 The exercise of the Court's discretion under s 436B (2) was also the issue for determination in Deputy Commissioner of Taxation v Foodcorp Pty Ltd (1994) 13 ACSR 796. Having carefully set out the pertinent provisions of Part 5.3A, and having then noted (at 798) that the administration terminates upon the execution of a deed, Hodgson J observed that at that time 'the suspension of the powers of officers by s 437C comes to an end; so if the company was in provisional liquidation or liquidation, the powers of provisional liquidator or liquidator would revive. Accordingly, if a deed is executed and if it is to prevent provisional liquidation or liquidation proceeding, there would need to be an order of the Court having that effect.' 44 The applicants place some reliance upon observations by Santow J in Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1997) 26 ACSR 629, 636. The issue in that case was whether the Court should make a winding up order where the company was in voluntary administration and might proceed to a deed of company arrangement. His Honour considered whether the creditors would be in a better position in winding up or under a deed of company arrangement. He pointed out that if an order were to be made for the winding up of the company and subsequently, an opportunity emerged to improve the position of creditors through voluntary administration, the opportunity could be pursued by the liquidator appointing an administrator under s 436B. He observed: 'This would require the leave of the Court only if Mr Green [the liquidator] were to seek to appoint himself. Thus if a fundraising by the defendant's holding company depended upon the defendant coming out of liquidation and into administration, the means are to hand.' 45 I do not regard Santow J's observations as inconsistent with the reasoning of Hodgson J. Santow J merely concluded that means were available for bringing a company out of liquidation and into administration. Hodgson J accepted that this could be done, the relevant means being the appointment of an administrator under s 436B, entry into a deed of company arrangement, and the making of an order of the Court terminating the winding up under s 482. 46 My conclusion is that the authorities support the view that approval of a deed of company arrangement does not automatically terminate a pre-existing court-ordered winding up, although the authorities are only by way of obiter dicta.

Termination of the winding up by Court order 47 In considering an application to stay or terminate a court-ordered winding up under s 482, the Court has regard to various categories of interests. First, the Court considers the interests of creditors, taking into account whether they object to the proposed termination. But even if all the existing creditors agree, the Court may take the view that the proposed termination puts at risk the interests of future creditors. For example, the Court is likely to be concerned where the proposal preserves the existing debts but defers their payment, particularly if the deferment has no enforceable status: see the remarks of Street J at first instance in Re Data Homes Pty Ltd [1971] 1 NSWLR 338, 341. Similarly, if the proposal is that the principal shareholder/creditor will pay out all the other creditors and seek recovery of his debt by instalments, the Court is unlikely to permit the company to start trading again and thereby incur additional debts, since if the company fails again, recovery by the new creditors may be prejudiced by the existing debt. However, if the principal shareholder/creditor capitalises his debt, the Court may well take a different view: Collins v G Collins & Sons Pty Ltd (1984) 9 ACLR 58. 48 The cases concerning the interests of creditors do not, in my opinion, establish inflexible rules. Specifically, I do not believe that there is any absolute rule that a winding up cannot be terminated as long as one or more debts remains undischarged. Instead, the cases identify the range of concerns which the Court is likely to have in exercising its discretion when an application is made, and therefore give guidance as to the matters upon which the Court will need to be satisfied. 49 Secondly, the Court considers the interests of the liquidator, particularly with respect to costs. That is not an issue on the facts of the present case. 50 Thirdly, the Court considers the interests of contributories. Generally a stay or termination will not be granted unless each member of the company either consents or is otherwise bound not to object to it, or his or her rights are properly secured: Re Calgary and Edmonton Land Co Ltd [1975] 1 All ER 1046. In the present case there are two contributories, and they have both consented to resuming office as directors if the application succeeds. In my opinion this implies that they have consented as contributories as well. 51 Finally, the Court considers the public interest, including matters of commercial morality, taking the initial approach that insolvent companies should be wound up: Re Data Homes Pty Ltd [1972] 2 NSWLR 22. It is unnecessary to elaborate further in this case. 52 The applicants submit that if the approach outlined in the cases were to be taken in the present circumstances, the objects of Part 5.3A would be likely to be thwarted. They say that if a company in winding up is placed in administration and a deed of company arrangement is worked out, the Court should take an approach that maximises the chances of the company continuing in existence - or, if that proves not to be possible through failure of the deed, an approach that results in a better return for creditors than dissolution in winding up. They say that the case law stands in the way of these outcomes, because it prevents the Court from countenancing an arrangement under which debts are released without full payment, and some 'non-participating' creditors remain as such after the company resumes trading. 53 I have already expressed the view that the cases should not be seen as standing for any such absolute rules. They identify the range of discretionary concerns which the Court will need to address. If the company applies for an order terminating the winding up after its creditors have approved a deed of company arrangement, the objects of Part 5.3A are relevant matters, and in many cases they will be matters of great importance. Young J acknowledged their importance in Re Depsun , for example. Section 435A cannot be disregarded where the question of termination of a winding up arises in an administration context, whether the issue is presented under s 482 or under some provision of Part 5.3A, such as s 447A. The concerns reflected in the case law, including the pre-1993 case law which was mainly decided in the context of creditors' schemes of arrangement, will remain, but the Court will evaluate the application for termination in light of all the facts, including the terms and effect of the deed. 54 The present case does not raise issues of any great difficulty. Here the company is insolvent and (as Mr Thomas points out in his affidavit) will continue to be insolvent after implementation of the deed, since the debts of the non-participating creditors will not be extinguished. More significantly, the non-participating creditors' debts are very large and will represent a significant burden on any trading activity of the company, unless they are capitalised. It appears that the company will resume trading of some kind so as to utilise its tax losses. The problem is that in so doing, it will incur new debts to creditors who may well be prejudiced in future by the very large non-participating debt. The non-participating creditors have retained the discretion to decide whether to defer debts or capitalise them, so it is impossible for the Court to predict what is likely to happen. It appears that a decision to 'defer' the debts does not necessarily entail subordinating them to the claims of new creditors. These matters are probably themselves sufficient to prevent the Court from exercising its discretion to terminate the winding up in this case. But there are other problems. 55 The applicants' evidence falls far short of demonstrating that considerations of commercial morality and the public interest support the application. So many questions are left unexplained by the evidence that I find it impossible to assess the effect that the arrangements will have on the interests of Dr Nemeth and other contributories, and on the interests of non-participating creditors. One possible view that the scheme legitimately delivers to the company's unsecured creditors the benefit of tax losses which would not otherwise be available, but there is an alternative view that most of the benefits are obtained by Dr Nemeth and the non-participating creditors. The applicants have failed to discharge the onus of showing the Court that the winding up should be terminated. 56 In addition to the deficiencies in evidence to which I have already referred, I note the following (without seeking to be comprehensive):

(i) the liquidator reported that his investigation was limited due to the lack of books and records at his disposal, but there is no explanation for this, even though one of the applicants (Dr Nemeth) is a director who seeks to regain control the company; (ii) the liquidator gave ASIC a report under s 533 (under which the liquidator is required to prepare a report if he suspects offences, and may prepare a report if he thinks it is desirable to bring a matter to the notice of the Commission) and ASIC indicated that it does not propose to conduct an investigation, but the content and even the nature of the report have not been disclosed to the Court; (iii) the liquidator referred to a property transaction between Dr Nemeth, one of the applicants, and the company, but no further information about this has been provided to the Court; (iv) the contingent claims by Mercy & Sons and Bourne Contractors are mentioned in the evidence but not explained; (v) the evidence refers to an assignment of a debt by the Commonwealth Bank to the one of the non-participating creditors, but there is no explanation of that transaction; (vi) nor is there any adequate explanation of a list of discrepancies between two reports as to affairs, which was attached to the administrator's report of 29 March 2000; (vii) in his report of 29 March 2000 the administrator supported the deed of company arrangement subject to some important 'qualifications and assumptions', but there is no adequate evidence satisfy the Court that those assumptions are valid, or that they have been or will be satisfied; (viii) the arrangements are that participating creditors will have the benefit of tax losses in the period of 12 months from the date of execution of the deed, but there is nothing to indicate whether the benefit of the contemplated tax losses will be fully realised within 12 months, nor anything to justify the shareholders having the benefit of any subsequent tax losses at the expense of creditors; (ix) the creditors' resolution acknowledged that the arrangement contemplated for using tax losses may require payment to National Australia Bank of $3 million and the assignment of an asset, but there is no evidence to explain the significance of this or why it is so; (x) the creditors' resolution also acknowledged without further explanation that Dr Nemeth has other assets and liabilities which are not available to the administrator.

Conclusions 57 The applicants have not established that the winding up came to an end by virtue of the approval of the deed of company arrangement. The application for termination of the winding up is clearly deficient and must fail. I shall stand the notice of motion over for a week to give the applicants time to amend their proposal, should they wish to do so. Unless they do, I shall then dismiss the application. * * * * * * * * *

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