MOLIT (NO. 55) PTY LTD v LAM SOON AUSTRALIA PTY LTD

My initial reasons for judgment in this matter are reported in 63 FCR 391. On 15 March 1996 in accordance with such reasons I ordered that the deed of company arrangement ("DOCA") be terminated. An appeal to the Full Court against that order succeeded. The reasons for judgment of the Full Court are reported in 22 ACSR 169. The Full Court remitted the matter to me for further hearing and determination having regard to the reasons of the Full Court. The reasons for judgment of the Full Court at 185 explain the basis of the remittal as follows: "We think the matter should be remitted to the trial judge. First, in the light of her conclusions about unfair prejudice or discrimination, her Honour found it unnecessary to consider other grounds on which Molit submitted that the deed should be terminated. It is implicit in what we have already said that in our view the first ground - that the deed is not for a purpose authorized by s435A - is not made out. There remains, however, the claims that the s439A report was deficient and that the administrator's inquiry and investigation were not sufficient to justify a recommendation that the deed be executed. It does not follow from the conclusion that her Honour's decision should not stand that the deed necessarily should not be terminated on the ground of unfair prejudice or discrimination; particularly her Honour explicitly refused to make findings as to the likelihood of recoveries,in a liquidation, from the holding company or from directors. The complaint that the deed was an attempt to ride roughshod over Molit's rights had at its core the allegation that the deed would provide a lower monetary return to Molit than would occur in a liquidation. Questions concerning the adequacy of the administrator's investigation as to the likelihood of recovery are central to that allegation." On 20 February 1997 I heard further submissions. I turn first to the issue of the s439A report. Section 439A of the Corporations Law requires the administrator of a company under administration to convene a meeting of the company's creditors within the "convening period". Such meeting is required to be convened by the giving of written notice to as many of the company's creditors as is practicable and by the publication of notice of the meeting in an appropriate newspaper. Section 439A(4), so far as is here relevant, provides as follows: "The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of: (a) a report by the administrator about the company's business, property, affairs and financial circumstances; and (b) a statement setting out the administrator's opinion about each of the following matters: (i) whether it would be in the creditors' interests for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors' interests for the administration to end; (iii) whether it would be in the creditors' interests for the company to be wound up; and his or her reason for those opinions; and (c) ..." Regulation 5.3A.02 of the Corporations Regulations provides as follows: "The administrator of a company under administration, in setting out his or her opinions in a statement referred to in paragraph 439A(4)(b) of the Corporations Law, must specify whether there are any transactions that appear to the administrator to be voidable transactions in respect of which money, property or other benefits may be recoverable by a liquidator under Part 5.7B of the Corporations Law." The nearest that the administrator, Mr Macks, came to complying with r5.3A.02 of the Corporations Regulations was in the following paragraphs of his s439A(4) report and statement: "B. GENERAL INVESTIGATION I have considered whether or not there have been any transactions or actions that may be able to be pursued by a Liquidator, should one be appointed. The result of my investigation is as follows:- I have formed an opinion that a Liquidator, if appointed, would not be able to recover any further amounts, than those currently available in the proposal, pursuant to the powers contained in Part 5.7B of the Corporations Law." and "G. WINDING UP In my opinion it would not be in the interests of the company's creditors for the company to be wound up for the following reasons:- (a) A Liquidator, if appointed, would not be able to recover any further funds, pursuant to Part 5.7B of the Corporations Law, than are available in the proposal. (b) The reasons favouring the execution of a deed of company arrangement are also reasons against winding up the company." The above paragraphs are ambiguous as to whether Mr Macks was intending to specify that there were no transactions that appeared to him to be voidable transactions, or alternatively, that there were transactions that appeared to him to be voidable transactions but he was not satisfied in respect of such transactions that money, property or other benefits may be recoverable by a liquidator. The actual position was somewhat clarified at the adjourned second meeting of creditors held on 3 March 1995. The minutes of this meeting record the following: "The Administrator reiterated the reasons for the adjournment of the previous meetings and advised that he had received advice from Mr John Sulan QC which supported the Administrator's opinion that it would be in the interests of the company's creditors for the company to execute a deed of company arrangement. His advice in general was that in the event of liquidation he did not recommend that the liquidator pursue a claim against the holding or associated companies pursuant to section 588V. It was his view that a claim would not be sustainable. In addition he was not of the opinion that the directors in the circumstances relating to the manner in which the debt owed to the various companies was accumulated arose were liable pursuant to the provisions of the Corporations Law." The applicant relied upon the deficiency in the report of Mr Macks as a ground upon which DOCA should be terminated pursuant to s445D of the Corporations Law. The terms of s445D are set out in my reasons for judgment of 16 February 1996. I will not repeat them here. The section gives the Court a discretion to make an order terminating a deed of company arrangement if it is satisfied of any one of a series of specified circumstances. The circumstances on which the applicant presumably places reliance here is that specified by par(c) of s445D(1), namely "that there was an omission from ... a report or statement [under s439A(4)] and the omission can reasonably be expected to have been material" to creditors of the company in deciding whether to vote in favour of the resolution to execute the DOCA. Having regard to the information revealed by the minutes of the adjourned second meeting of creditors to have been provided to those present at the meeting as to the advice received by Mr Macks from Mr Sulan QC, I do not consider that the omission from the s439A(4) report and statement of Mr Macks of the information required by r5.3A.02 of the Corporations Regulations can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution to execute the DOCA. To the extent, if any, that the applicant places reliance on par(g) of s445D of the Corporations Laws, for the reason above mentioned, I am not satisfied that it would be an appropriate exercise of the Court's discretion under s445D(1) to terminate the DOCA by reason only of the failure of the s439A(4) report and statement to comply with r5.3A.02 of the Corporations Regulations. The other complaint made by the applicant with respect to the s439A report and statement was that Mr Macks in preparing the report did not give proper consideration to claims which might be made against the directors and the holding company under ss588J, 588K, 588M, 588V and 588W in a liquidation of the company. The applicant contends that in a liquidation of the company, the liquidator could recover the sum of $593,000 pursuant to the provisions of Part 5.7B of the Corporations Law. The sum of $593,000 represents the increase in the loan to the company from its holding company between 23 June 1993, when Part 5.7B was introduced into the Corporations Law, and 30 December 1994, the date of the appointment of Mr Macks as administrator of the company. This contention was advanced on the basis that the company was insolvent from at least 23 June 1993. As the Full Court decision in this matter points out at 186, there are 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. I am not in a position in this proceeding to come to any final conclusion as to the results of claims which might be made under Part 5.7B of the Corporations Law should a liquidator of the company be appointed. In analogous circumstances in Hamilton v National Australia Bank Ltd (1996) 137 ALR 231 at 253, Lehane J expressed the position as follows: "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 [sic] a liquidation claim 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." The applicant did not press the argument that s588G of the Corporations Law had any application in respect of the debt incurred by the company as a result of its entering into the lease agreement with the applicant dated 10 September 1990. There is nothing before me upon which I could be satisfied that there is a real prospect that it could be established in a liquidation claim that the company was insolvent in September 1990. Moreover, s588G has no application in respect of debts incurred before 23 June 1993. No reliance was placed by the applicant on the predecessor provision of s588G and the following provisions of the Corporations Law. As is mentioned above, the applicant based its case in this regard on the increase in the loan to the company from its holding company between 23 June 1993 and 30 December 1994. Any liquidation claim in respect of this increase would need to be based on either s588G(1) or s588V(1) of the Corporations Law. Section 588G(1) provides as follows: "(1)This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Part." Section 95A(1) of the Corporations Law provides that"[a] person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable", and that "[a] person who is not solvent is insolvent". By reason of the terms of s85A of the Corporations Law, the reference to "person" in s95A includes a body corporate. As is set out in my earlier judgment in this matter, the company's holding company until 30 December 1994 undertook to provide financial support to the company to enable it to meet its financial commitments as and when they fell due. It complied with these undertakings. The company's accounts for the year ending 31 December 1994 included a note that the holdings company "has agreed to provide sufficient support so as to enable the Administrator to pay creditors in accordance with the Deed of Arrangement". In effect the holding company acted as a banker to the company. Although the applicant sought to show that the company's indebtedness to its holding company was appropriately categorised as a "current liability" in accounting terms, there being no definite date fixed for its repayment, I do not accept that such indebtedness either had to be, or was expected to be, extinguished within 12 months. In my view, the only reasonable understanding of the financial arrangement between the company and its holding company was that the holding company had no intention of requiring the company, whilst it continued to trade, to repay the loans made to it by the holding company until it was in a financial position to do so. Consistently with this understanding, the holding company's debts were deferred under the DOCA. I accept the appropriateness of the approach adopted by Ipp J in Re Bond Corporation Holdings Ltd (1990) 1 ACSR 350 at 358 where, in the course of determining the solvency of Bond Corporation Holdings Ltd ("BCH"), his Honour said: "I have to determine whether BCH is able to meet its current liabilities as they fall due. It is not part of my task to determine now whether the probabilities are that circumstances will arise at some future time which will then cause BCH to be in a position whereby it will not be able to meet its liabilities which will then exist." Adopting that approach there seems to be real difficulty in the way of a determination that the company was or became insolvent at any time earlier than the date upon which it ceased to be objectively reasonable for the undertaking of the holding company to provide financial support to the company to enable it to meet its financial commitments to be relied upon. Not only is there difficulty in the way of a determination that the company was insolvent at any relevant time for the purposes of s588G of the Corporations Law, but, so far as directors of the company are concerned, the evidence before me suggests that, assuming a finding that the company was at a relevant time insolvent, there is a reasonable prospect that they would be able to invoke the defence provisions of s588H. It is further arguable in the circumstances of this case, in my view, that, even if the insolvency of the company at the relevant time could be established, it could not be established for the purposes of the recovery provisions of Part 5.7B of the Corporations Law that the holding company suffered loss or damage in relation to its debt "because of the company's insolvency". The loss or damage, if any, suffered by the holding company would, in my view, flow from its decisions concerning the provision of financial support to its subsidiary company, the financial circumstances of which were well known to it, rather than from the insolvency of the company. Section 588V(1) of the Corporations Law provides as follows: "A corporation contravenes this section if: (a) the corporation is the holding company of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) one or both of the following subparagraphs applies: (i) the corporation, or one or more of its directors, is or are aware at that time that there are such grounds for so suspecting; (ii)having regard to the nature and extent of the corporation's control over the company's affairs and to any other relevant circumstances, it is reasonable to expect that: (A) a holding company in the corporation's circumstances would be so aware; or (B) one or more of such a holding company's directors would be so aware; and (e) that time is at or after the commencement of this Part."