Corporations Law - Voluntary Administration - construction and interaction of ss.451D and 459R - whether six month period within which application for a company to be wound up in insolvency to be determined extended by period of operation of deed of company arrangement or by period of time between the appointment of administrator and execution of the deed of company arrangement - discussion of provisions of Part 5.3A.

Australian Corporations Law, Principles and Practice, Vol. 2, Butterworths

Corporate Law Reform Act 1992

Corporations Law, Ch.5; Pt.5.3A; ss.9, 436A, 436E, 439A, 444C, 444E, 445C, 445D, 445E, 445F, 447A, 450D, 451D, 459A, 459C, 459E, 459P, 459R, 513A; sub-ss.437C(1), 439A(2), 439A(4), 440A(2), 444A(3), 444C(2), 444E(2), 445C(c), 445G(4), 459P(1), 459R(1), 459R(2); paras.439(C)(b), 444A(4)(e), 444A(4)(f), 444A(4)(g), 451D(a)

Australian Law Reform Commission, General Insolvency Inquiry, (Report No. 45, 1988)

Dal Pont, G. and Gibbs, L. "Realignments of Competing Interests in Periods of Grace: The Business Recovery Law Conundrum", 1 Australian Journal of Corporate Law 117

Lipton, P. "Voluntary Administration: Is There Life After Insolvency for the Unsecured Creditor?", 1 Insolvency Law Journal 89

Solicitors for the Applicant: Mallesons Stephen Jaques

1. The period within which the application is to be determined

under s.459R of the Corporations Law has been extended by

s.451D of the Corporations Law from 22 June 1994 to 11 October

2. The matter be remitted to the Registrar for expedited hearing

of the application to wind up Roycol in insolvency.3.

The Directors of Roycol Ltd., Scott Dickson and Gregory Ray,

pay the costs of this hearing including reserved costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

LEE J On 22 December 1993 the applicant ("Milankov Nominees"), a creditor of the respondent ("Roycol"), applied for an order that Roycol be wound up in insolvency under sub-s.459P(1) of the Corporations Law ("the Law"). The application recited that Roycol had failed to comply with a statutory demand served pursuant to s.459E of the Law. By s.459C of the Law if a company fails to comply with a statutory demand it is to be presumed to be insolvent. The first directions hearing for the application was fixed for 14 February 1994.

2. On 28 January 1994 Roycol appointed an administrator pursuant to s.436A of the Law. On 4 February 1994 a meeting of the creditors of Roycol, convened by the administrator pursuant to s.436E of the Law, confirmed the appointment of the administrator and resolved that "a further meeting of creditors" be held on 25 February 1994.

3. At the directions hearing on 14 February 1994 the application to wind up Roycol was adjourned "by consent" to 28 February 1994. No appearance under the Federal Court Rules ("the Rules") had been entered on behalf of Roycol by 14 February 1994 and, indeed, no appearance was entered thereafter.

4. By s.439A of the Law the administrator was required to convene another meeting of the creditors of Roycol within a period of twenty-one days beginning on the day on which the administration commenced, namely 28 January 1994, ("the convening period"), and to do so by giving written notice of the meeting to creditors. That notice was to be accompanied by a copy of a report by the administrator on Roycol's business, property, affairs and financial circumstances and a copy of a statement which set out the administrator's opinion, and the reasons therefor, in respect of the following:

1. whether it would be in the creditors' interests for Roycol to

execute a deed of company arrangement;

2. whether it would be in the creditors' interest for the

administration to end; and

3. whether it would be in the creditors' interest for Roycol to be

wound up.

If execution of a deed of company arrangement was to be proposed to the meeting, the administrator was required to include with the notice of meeting a statement setting out details of the proposed deed. By sub-s.439A(2) the meeting had to be held "within five business days after the end of the convening period". A business day is defined in s.9 of the Law. In the absence of any evidence to the contrary, I assume the requirements of s.439A were adhered to by the administrator although it may be argued that a meeting held on 25 February 1994 was not a meeting held within five business days after the end of the convening period.

5. On 25 February 1994 the meeting of the creditors of Roycol resolved that Roycol

"enter into a deed of company arrangement, such deed

to provide for the following terms:-

1. The lump sum payment of

$20,000;

2. ...

3. ..."

6. The adjourned directions hearing in the winding up application resumed before the Registrar on 28 February 1994 and was further adjourned to 7 June 1994. Solicitors instructed by the directors of Roycol made submissions to the Registrar in respect of the application. Pursuant to sub-s.437C(1) of the Law, while a company is under administration, a person (other than the administrator) cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except with the administrator's written approval. The directors had not obtained, nor sought, the written approval of the administrator to instruct solicitors to appear for Roycol.

7. On 18 March 1994 Roycol and the administrator executed a deed of company arrangement.

8. The deed of company arrangement was an instrument prepared by the administrator pursuant to sub-s.444A(3) of the Law. As prepared, the instrument specified that the deed was subject to, and conditional upon, inter alia, "the Directors paying the sum of $20,000.00 to the Administrator upon the execution of this deed of company arrangement by the Directors." The parties to the deed were Roycol, the administrator and the directors of Roycol. Upon the execution of the instrument the above condition was altered by replacing the words "upon the" with the words "within 90 days of the". The reports and statements prepared by the administrator and distributed to creditors pursuant to sub-s.439A(4) of the Law were not before the Court and it is unknown whether the deed, as executed, met the terms of the creditors' resolution construed in the context of the reports and statements.

9. Clause 6.1 of the deed stated that the property of Roycol available to pay creditors' claims was, inter alios, "the sum of $20,000.00 in cash to be paid to the Administrator by the Directors".

10. As set out above, the continued operation of the deed was subject to a condition that a sum of $20,000 be paid to the administrator by the directors within ninety days of the execution of the deed, namely by 16 June 1994. The deed did not contain a covenant by the directors to pay the sum of $20,000. The "sum of $20,000 in cash" was not paid to the administrator by 16 June 1994.

11. In a facsimile-transmitted document, purporting to be a copy of an affidavit sworn by one of the directors and filed with the Court, it was stated that part of the sum of $20,000 payable under the deed, namely $2,000, had been paid to the administrator on 25 February 1994. How that payment was dealt with in the administrator's report and statement to creditors at the meeting of creditors held on 25 February 1994, to consider whether Roycol should execute a deed of company arrangement, is unknown.

12. According to that copy affidavit the director deposed that a cheque in the sum of $18,000, payable to the administrator, had been delivered to the administrator on 16 June 1994 on behalf of the directors and it was contended by the deponent that the relevant condition in the deed had been performed. However, according to advice received from the administrator by solicitors for Milankov Nominees, the cheque was dishonoured. The solicitors were advised by the administrator that he intended to take steps "to have the deed set aside" and to convene a meeting of creditors for that purpose "within the foreseeable future". The cheque had been drawn by a corporation and made payable to "Roycol Ltd (Administrator Apptd)" or bearer. However, it did not bear the signatures of the parties authorized to sign cheques drawn by the drawer and was not met when presented to the drawer's bank by the administrator. The cheque, duly signed, was presented again for payment in June/July 1994 and dishonoured. There is sufficient ground to conclude that the condition on which continued operation of the deed depended was not performed as required, by 16 June 1994.

13. Paragraphs (e) and (f) of sub-s.444A(4) of the Law, which applied once the meeting of creditors resolved that Roycol execute a deed of company arrangement, contemplate that the operation of a deed of company arrangement may be subject to conditions precedent, or subsequent, expressed in the deed. A deed which has ceased to continue in operation as the result of the non-performance of a condition subsequent may be contrasted with a deed which has been terminated by the occurrence of circumstances specified in the deed pursuant to para.444A(4)(g) of the Law. A deed which has ceased to continue to operate would not be a deed to which ss.445C, 445D, 445E and 445F of the Law would apply. It may be noted that whereas the Law requires an administrator to give notice of the termination of a deed of company arrangement (s.450D), there is no requirement that the administrator give notice of a deed failing to come into effect after execution, or ceasing to continue to operate after execution, by reason of non-performance of a condition to which the deed was expressed to be subject.

14. The directions hearing in the application to wind up Roycol resumed before the Registrar on 7 June 1994, and after several further adjournments the application was referred by the Registrar to the Court for hearing and determination pursuant to O.71 r.8. of the Rules.

15. On the hearing of the referred application solicitors instructed by the directors, sought to appear for Roycol although, as noted above, it appeared to be the fact that the administrator, and the directors, still considered the administrator to be the administrator of the deed. Leave was granted to the solicitors instructed by the directors of Roycol to make submissions to the Court. (See: O.71 r.10 of the Rules.)

16. As noted earlier in these reasons, no appearance had then been filed on behalf of Roycol.

17. The argument addressed to the Court on the hearing of the application was restricted to the proper construction of ss.459R and 451D of the Law. Section 459R provides as follows:

"459R(1) An application for a company to be wound up

in insolvency is to be determined within 6 months

after it is made.

459R(2) The Court may by order extend the period

within which an application must be determined, but

only if:

(a) the Court is satisfied that

special circumstances justify

the extension; and

(b) the order is made within that

period as prescribed by

subsection (1), or as last

extended under this

subsection, as the case

requires.

459R(3) An application is, because of this

subsection, dismissed if it is not determined as

required by this section.

459R(4) An order under subsection (2) may be made

subject to conditions."

18. Counsel for Milankov Nominees submitted that the period of six months referred to in sub-s.459R(1) was a period to which s.451D of the Law applied.

"451D Where:

(a) for any purpose (for example,

the purposes of a law,

agreement or instrument) an

act must or may be done within

a particular period or before

a particular time; and

(b) this Part prevents the act

from being done within that

period or before that time;

the period is extended, or the time is deferred,

because of this section, according to how long this

Part prevented the act from being done."

20. Counsel for Milankov Nominees submitted that the period of six months referred to in sub-s.459R(1) had been extended by s.451D by the period in which the deed of company arrangement operated, namely ninety days from 18 March 1994, the date on which the deed of company arrangement was executed, or by the period of forty-nine days which elapsed between the appointment of the administrator on 28 January 1994 and execution of the deed of company arrangement on 18 March 1994.

21. Counsel instructed by the directors of Roycol submitted that s.459R was a self-contained code which was not to be overriden by any other provisions of the Law and that if the appointment of administrator, or the execution of a deed of company arrangement, prevented a creditor from proceeding with an application to wind up a company, the creditor could, by reason of that restriction, and pursuant to sub-s.459R(2), seek an extension of the period within which the application must be determined. It was further submitted that the "act" to which s.451D referred did not extend to the judicial determination of an application to be carried out under sub-s.459R(1) of the Law. Furthermore, if, as Milankov Nominees contended, the deed ceased to operate on 16 June 1994, Milankov Nominees was not prevented between 16 June 1994 and 22 June 1994, when the period of six months within which the application should have been determined expired, from seeking an order to wind up Roycol or, alternatively, an order extending the period provided by sub-s.459R(1).

22. Under s.9 of the Law, and unless the contrary intention appears, the word "act" includes "thing". No contrary intention is made apparent in s.451D of the Law and it is appropriate to conclude that the requirement under s.459R, that an application to wind up a company in insolvency be determined within six months after it is made ,is a thing that must be done within a particular period within the meaning of s.451D. Being a thing required to be done for the purposes of the Law it would also be a thing required to be done "for any purpose" within the meaning of para.451D(a) of the Law.

23. On its face, therefore, unless the proper construction of s.459R excluded the operation of s.451D, s.451D would apply to the period referred to in sub-s.459R(1) if Pt.5.3A of Ch.5 of the Law ("Pt.5.3A") prevented the application from being determined within that period.

24. Although sub-s.459R(1) mandated that the application be determined within the period specified, the manner of determination was an act to be performed judicially. On an application for a company to be wound up in insolvency pursuant to s.459P of the Law, the Court, by s.459A of the Law, may make such an order in the exercise of its discretion, although, as stated earlier, pursuant to s.459C of the Law the Court must presume that a company is insolvent if, inter alia, the company has failed to comply with a statutory demand. If a company is under administration the discretion of the Court to make an order under s.459A of the Law is curtailed by sub-s.440A(2) of the Law which requires the Court to adjourn the hearing of an application for an order to wind up a company if the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than being wound up. It may be said that in such a case determination of an application to wind up under s.459P of the Law would be restricted rather than prevented.

25. The powers of the Court are further circumscribed, albeit indirectly, if a company moves from a company under administration to a company administered under the terms of a deed of company arrangement. Pursuant to s.444C of the Law upon a resolution by creditors that a company execute a deed of company arrangement a creditor is bound by s.444E of the Law and cannot make, or proceed with, an application to wind up the company. The creditor may apply to the Court pursuant to s.445D of the Law for an order terminating the deed of company arrangement on one of the grounds specified in that section, or may apply to the Court under s.447A of the Law for any order that is appropriate in the circumstances. Under the latter provision such an order may include an order restraining the company and administrator from executing the deed, or an order varying the terms of the deed of company arrangement if it appears to the Court that it is in the interests of creditors to do so. In the exercise of the unfettered power provided by s.447A an order that the deed be varied would not be subject to the limitation imposed by sub-s.445G(4) of the Law where an order to vary the deed may only be made with the consent of the administrator of the deed.

26. But unless such an order was made by the Court directing how Pt.5.3A was to operate, determination of an application to wind up a company in insolvency made under s.459R could not be effected in any real sense whilst the applicant was restrained by sub-ss.444C(2) and 444E(2) of that Part from prosecuting the application.

27. By reason of the operation of sub-s.444E(2) which prevented Milankov Nominees from moving the Court to make an order under s.459A of the Law between 25 February 1994 and 16 June 1994, the Court, in turn, was prevented from exercising the discretion vested in it by that section. Exercise of the discretion to make an order under s.459A of the Law in a proceeding instituted under s.459R was fundamental to the determination of the application and was also an "act" which may be done within a particular period, namely, the period specified in sub-s.459R(1), for the purpose of the Law and was a circumstance to which s.451D of the Law applied.

28. I am unable to discern any intention in the Law that s.459R is to be construed as a provision to which s.451D does not apply. Part 5.3A was introduced as an express modification of the winding up in insolvency provisions in Pt.5.4 in which s.459R appears.

29. The General Insolvency Inquiry ("Harmer Report") recognized the need for, and recommended, the establishment of a new voluntary procedure under which an administrator could be appointed to a company in financial difficulties. (See: Australian Law Reform Commission, General Insolvency Inquiry (Report No. 45, 1988), Ch 3.) The recommendations were made in the context of existing voluntary procedures such as schemes of arrangement and official management which were rarely used, or were cumbersome, and, as a corollary, established a legislative use which was directed to the winding up of companies without regard to the potential for rehabilitation of the company. (See: Lipton, P. "Voluntary Administration: Is There Life After Insolvency for the Unsecured Creditor?", 1 Insolvency Law Journal 89.)

30. The recommendations of the Harmer Report were adopted in the form of the Corporate Law Reform Act 1992. The enactment of that legislation to proivde for the rehabilitation of companies in financial difficulties brought the Australian law in this regard into line with American and English law. (See: Dal Pont, G. and Giggs, L. "Realignments of Competing Interests in Periods of Grace: The Business Recovery Law Conundrum", 1 Australian Journal of Corporate Law 117.)

31. Parts 5.3A and 5.4 of the Law are intended to operate in an interlocking manner and it is not intended that the provisions of one Part operate to the exclusion of the other.

32. Certainly, s.459R is concerned to see that applications to wind up a company in insolvency are disposed of promptly, but it also recognizes that the need for promptitude may be modified by special circumstances. On the other hand, s.451D acknowledges that the provisions in Pt.5.3A, which have the effect of imposing a moratorium on the exercise of rights by creditors, the purpose of that moratorium being to maximize any prospect of rehabilitation of a company, may prejudice the interests of creditors on some occasions. To minimize the prospect of prejudice, the terms of s.451D provide, effectively, for time not to run where an act or thing must be done within a period of time that has been affected by any restraint on action imposed by Pt.5.3A.

33. I do not see any disharmony between the provisions of ss.459R and 451D in that regard. Section 451D is directed to returning a person to the position that person would have been in but for other provisions of Pt.5.3A and to restoring the full value of periods of limitation that would otherwise be compressed, or rendered nugatory, by Pt.5.3A. In other words, in respect of s.459R, s.451D ensures that the period available to the creditor to prosecute an application, and have it determined, is restored to six months.

34. As the facts of this matter illustrate there may be cases where administration of a company is unsuccessful but termination of the administration does not take place until a significant period of time has elapsed. For example, if a company comes out of administration under para.439(C)(b), or where a deed of company arrangement under which an administrator has been appointed has ceased to operate after execution of the deed, either by termination of the deed by order of the Court under s.445D, or by the terms of the deed under para.444A(4)(g) and sub-s.445C(c), or by failure of the deed under the terms of a condition precedent, or subsequent, under paras.444A(4)(e) and (f), the interests of creditors may be best served by reviving an application to wind up, which, until that time, has been stayed by Pt.5.3A of the Law. The purpose of the Law would be met by restoring to the period of limitation provided by s.459R, any period in which the application could not be proceeded with by reason of the provisions of Pt.5.3A.

35. I am satisfied that Pt.5.3A prevented an order being made to wind up Roycol in insolvency on an application made under s.459R, and accordingly the period of six months referred to in sub-s.459R(1) was extended by s.451D of the Law for the period which passed between 25 February 1994 and 16 June 1994, namely, 111 days.

36. I note that in the commentary Australian Corporations Law, Principles and Practice, Vol. 2, Butterworths, 53,109 it is stated:

"If the creditors resolve for a deed of company

arrangement and that is given effect, the winding

up application should be dismissed when it next

comes before the Court. Although there is no

express provision to this effect in the statute,

the position could not be otherwise".

37. With respect to learned authors of the commentary it does not follow that an application to wind up a company in insolvency will, or should, be dismissed if the creditors resolve that a deed of company arrangement be executed. A deed of company arrangement, as executed, may be subject to conditions precedent, or subsequent, and it may be in the interests of creditors to allow the application to stand notwithstanding that the applicant is unable to proceed with the application by reason of the restraint imposed by s.444E of the Law. In addition, a creditor may seek an order under s.445D of the Law that a deed of company arrangement be terminated and it may be appropriate that the application to wind up the company remain extant whilst the application to terminate the deed is determined.

38. Furthermore, s.513A of the Law contemplates that an order for winding up in insolvency may be made notwithstanding that a deed of company arrangement is operative immediately before the order is made. To dismiss an application and require a creditor to bring a fresh application after an executed deed has ceased to operate, or has been terminated, may be an order that prejudices the interest of creditors having regard to the definition of "relation-back day" contained in s.9 of the Law and it may be in the creditors' interest to allow a pending application to stand and await the outcome of the operation of the deed.

39. The matter will be returned to the Registrar with a direction that there be an expedited hearing of the application to wind up Roycol in insolvency.

40. The costs of this hearing and reserved costs of directions hearings are to be paid by the directors of Roycol.