Ozem Kassem v Sentinel Properties Limited

DECISION : Determination of questions arising in windings up

CATCHWORDS : CORPORATIONS - winding up - proposal for pooling of assets and liabilities of several companies - no interference with pari passu basis of creditors' participation - whether one dissentient creditor means s.510 resolution of creditors ineffective - requirements for such resolution discussed

Companies Act 1874, s.187 LEGISLATION CITED : Corporations Act 2001 (Cth), ss.510, 511(1) Corporations Regulations 2001 (Cth), 5.6.11(2), 5.6.12 to 5.6.57

Attorney General v Davy (1741) 2 Atk 212; 26 ER 531 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 Re Spedley Securities Ltd (1992) 9 ACSR 83 CASES CITED : Re Switch Telecommunications Pty Ltd (2000) 35 ACSR 172 Re The Farmers' Freehold Land Company Ltd (1892) 3 BC (NSW) 39 Re Trix Ltd [1970] 3 All ER 397

Ozem Kassem - Plaintiff Sentinel Properties Limited (In Liquidation) - First Defendant Sentinel Properties (NSW) Pty Limited (In Liquidation) - Second Defendant PARTIES : Sentinel Realty Holdings Pty Limited (In Liquidation) - Third Defendant Sentinel Properties (Qld) Pty Limited (In Liquidation) - Fourth Defendant Property Compass Recoveries Pty Limited (In Liquidation) - Fifth Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1253/05 - OZEM KASSEM v SENTINEL PROPERTIES LIMITED JUDGMENT 1 The plaintiff is the liquidator of each of Sentinel Properties Pty Limited, Sentinel Properties (NSW) Pty Limited, Sentinel Realty Holdings Pty Limited, Sentinel Properties (Qld) Pty Limited and Property Compass Pty Limited. The winding up is, in each case, a creditors voluntary winding up. By his amended originating process, the plaintiff seeks, in the first instance, determination pursuant to s.511(1) of the Corporations Act 2001 (Cth) of a question arising in the winding up of each of the five companies, namely: "… whether the resolution of creditors of [Sentinel Realty Holdings Pty Limited], recorded in the minutes of meeting at pages 28 to 30 of Exhibit 'OK-2' to the affidavit of Ozem Kassem sworn 14 April 2005, is binding on the creditors of [Sentinel Realty Holdings Pty Limited] for the purposes of s.510(1)(b) of the Corporations Act 2001 (Cth) notwithstanding the dissent of one member as recorded in the said minutes." 2 Although this question concerns the efficacy of certain action in relation to Sentinel Realty Holdings Pty Limited, it is a question pertaining to the winding up of each company and involves an examination of a wider series of actions intended to cause the windings up of the five companies to be conducted and implemented on a consolidated or "pooled" basis. 3 The plaintiff, as liquidator of each of the five companies, took steps to convene a meeting of the creditors of each company and a meeting of the members of each company. There were thus ten meetings in all. All were held on 30 March 2005. The business proposed to be transacted at each meeting, as set out in the notice convening the meeting, was as follows: "1. Consider the report of the liquidator and explanatory memorandum to the pooling of the assets of the company. 2. Consider and resolve to sanction the arrangement, and approve the compromise, constituted by the Pooling Deed to be executed by the Liquidator. 3. Any other matters." 4 Relevant background was stated in an explanatory memorandum forwarded by the plaintiff to the creditors and members of each company with the notice of meeting: "It is apparent that the affairs of the companies have been conducted in such a manner that each company was dependant [sic] upon primarily Realty and to a lesser extent each of the other companies, which has created inter-company loan accounts that distort the net asset backing of each company. Furthermore, the creation of new companies and the transfer of business units from one company to another company was not undertaken in such a manner that the value of the transferred business unit was reflected in the accounts of either company. As Liquidator of SPL, NSW, REALTY, QLD and PCC I propose an arrangement and compromise which would enable the realisations, costs and distributions to creditors of each company to be combined. All of the monies from realisations of the assets of SPL, NSW, REALTY, QLD and PCC will be deposited into a single bank account to form a single fund. That fund will then be distributed to the creditors of those companies in accordance with the statutory order of priorities, but as though all of the creditors were creditors of a single company." 5 The explanatory memorandum went on to say that the arrangement proposed by the plaintiff would be implemented by a pooling deed. It also explained why the plaintiff considered the arrangement to be in the interests of the creditors of the respective companies. 6 The parties to the pooling deed are the plaintiff, in his capacity as liquidator of each of the five companies, and those five companies themselves. After reciting the windings up, the intermingling of the companies' affairs and the opinion of the plaintiff, as liquidator, that a pooled administration will be the most expeditious and cost effective way of proceeding, the deed provides as follows: "1. (a) Subject to (b) below and the provisions of this Deed each of the Companies and the Liquidator in each of his capacities release and discharge each other Company and the Liquidator in each other capacity from all claims either may have or may in the future have against each other but for the provisions of this Deed. (b) the release in (a) above does not apply to any claim which the Liquidator has or may have in the future against each of the Companies on account of his remuneration, costs or expenses incurred in his capacity as liquidator of each of the companies nor on account of remuneration, costs or expenses incurred in his capacity as administration of the companies nor on account of any claim which, but for this Deed, would be accorded priority in the liquidation of any of the Companies under any of the provisions of section 556(1)(a) to (df) of the Act. 2. The Liquidator shall combine into a single bank account all monies presently retained by the Liquidator in his capacity as Liquidator of each of the Companies together with proceeds of any further realisations of the assets of the assets of the Companies ('the Pooling Account'). 3. The Liquidator shall distribute the proceeds of the Account in accordance with the provisions of Part 5.6 Division 6 of the Act, but as though the Companies were a single company in liquidation and the creditors of the Company were creditors of that single company in liquidation. 4. The operation of this Deed is subject to the following conditions precedent:" 7 At each of the ten meetings, with one exception, the outcome, as recorded in the minutes, is that the following motion was carried "unanimously": " To sanction the arrangement, and approve the compromise constituted in the attached Pooling Deed ." 8 The exception is the meeting of creditors of Sentinel Realty Holdings Pty Limited where the minutes record the following: " Motion: 'To sanction the arrangement, and approve the compromise constituted in the attached Pooling Deed.' Moved by: Peter Pilkington Seconded by: Balan Thavapalan Mr Hathway stated that he held a proxy on behalf of Daniela Dela Llana specifically voting against the resolution. The remaining proxies held by him voted in favour of the resolution. The Chairman declared the resolution was carried on the voices. " 9 The final thing to be said about the meetings and the documents despatched in relation to them is that it was made perfectly clear that the proposal put forward by the liquidator was advanced by reference to s.510 of the Corporations Act. That section is in Division 4 of Part 5.5. That division is headed "Voluntary Winding Up Generally". It therefore applies to a case such as the present. Section 510 is as follows: " Arrangement: when binding on creditors (1) An arrangement entered into between a company about to be, or in the course of being, wound up and its creditors is, subject to subsection (4): (a) binding on the company if sanctioned by a special resolution; and (b) binding on the creditors if sanctioned by a resolution of the creditors.

(1A) The company must lodge a copy of a special resolution referred to in paragraph (1)(a) with ASIC within 14 days after the resolution is passed.

(2) A creditor must be accounted a creditor for value for such sum as upon an account fairly stated, after allowing the value of security or liens held by the creditor and the amount of any debt or set-off owing by the creditor to the company, appears to be the balance due to the creditor.

(3) A dispute about the value of any such security or lien or the amount of any such debt or set-off may be settled by the Court on the application of the company, the liquidator or the creditor.

(4) A creditor or contributory may, within 3 weeks after the completion of the arrangement, appeal to the Court in respect of the arrangement, and the Court may confirm, set aside or modify the arrangement and make such further order as it thinks just." 10 The explanatory memorandum sent to the members and creditors of a particular company was expressed to be "in connection with a proposed arrangement with creditors pursuant to section 510 of the Corporations Act."

The explanatory memorandum also said: "The arrangement will be implemented through a Pooling Deed, a copy of which is attached. This requires the approval of the members and creditors of each of the companies. If all of the required approvals are given then the Pooling Deed will be binding on each of the companies to which it relates and, under the provisions of section 510 of the Corporations Act 2001, it will also be binding on all creditors."

The intention that the result of the meeting should have force and significance for the purposes of s.510 was thus made plain. 11 The plaintiff seeks the assistance of the court, by way of determination under s.511(1), because of the dissent of one creditor at the meeting of creditors of Sentinel Realty Holdings Pty Limited. As has been noted, the minutes of that meeting record that one creditor voted by proxy against the resolution. This dissent, it is apprehended, may mean that s.510 cannot operate according to its terms to make the particular arrangement between that company and its creditors binding on both the company and the creditors, subject only to the s.510(4) possibility. The doubt or apprehension comes from a passage in the judgment of Young J in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at p.215: "The authorities have held that the court will not confirm an arrangement under s 510 unless it provides that the creditors are to be paid pari passu or unless the unfavoured creditors are sent to it: Re Farmer's Freehold Land Co Ltd (1892) 3 BC (NSW) 39. In the instant case, resolution B does offend against this principle. At the very least the Court could not advise the liquidator to proceed in accordance with it unless the Deputy Commissioner of Taxation who appears to be the only creditor of either company who did not attend the meeting indicated that he had no objection." 12 Later in his judgment, Young J noted that s.510(1)(b), concerning a resolution of creditors, does not deal with the question of the majority required and that the means by which the provisions with respect to meetings in regulations 5.6.11 and following of the Corporations Regulations are made applicable to such a case are not necessarily clear. 13 The gist of the decision in Re The Farmers' Freehold Land Company Ltd (1892) 3 BC (NSW) 39, referred to by Young J in the above extract, is stated in the headnote: "An arrangement entered into between the liquidator of a company and its creditors, such as is contemplated by the provisions of the Companies Act, must, unless all the creditors agree, provide for the distribution of assets pari passu among the creditors generally, or any particular class of creditors." 14 The statutory provision relevant to that case was s.187 of the Companies Act 1874: "Any arrangement entered into between a company … in the course of being wound-up voluntarily, and its creditors, shall be binding on the company if sanctioned by an extraordinary resolution and on the creditors if acceded to by three-fourths in number and value of the creditors, subject to such right of appeal as is hereinafter mentioned." 15 Manning J said (at p.40): "On the face of it this arrangement is one by which a creditor, without her consent being in any way given, is excluded from sharing pari passu with the other creditors. It seems to me that no arrangement can be good within the meaning of the 187th section of the Act unless it is governed by the principle which underlies all laws both of liquidation and bankruptcy - that is, unless it provides that the creditors are to be paid pari passu , or unless the unfavoured creditors assent to it." 16 In Re Switch Telecommunications Pty Ltd (2000) 35 ACSR 172, Santow J traced the history of s.510 and included among principles emerging from case law the following: "(i) to be binding on non-voting or dissentient creditors, they must be paid pari passu with the voting creditors: Farmers' Freehold ; (ii) otherwise the non-voting or dissentient creditors need to consent to the arrangement;" 17 It is understandable that, as a matter of principle, s.510 should be subject to these limitations. Unlike s.411 (and Part 5.1 generally), s.510 contains no mechanism for the recognition and protection of classes of creditors and members according to community of interest in relation to the particular proposal. Section 510, according to its terms, would allow a voting majority to dispossess or otherwise prejudice a minority (whether voting or not), leaving it to the minority to resort to positive action under s.510(4) in an attempt to prevent the majority's will becoming binding upon the minority. Such a case should, in the absence of unanimous consent by the members of the minority, be dealt with under Part 5.1 which ensures that an arrangement cannot be binding on a class of creditors or members unless that class, consulting together in its own separate interests, has agreed to the arrangement by the statutory majority and the court has granted its approval: see Re Trix Ltd [1970] 3 All ER 397. 18 Young J's statement in the Soluble Solution Hydroponics case does not mean that s.510 can never cause an arrangement to be binding if there is dissent. What it does mean is that discrimination cannot be imposed through s.510 within the body of creditors or members of a company in the absence of the assent of those against whom the discrimination would operate. For these purposes, discrimination exists where the situation is not one in which, in the words of both Young J and Manning J, "the creditors are to be paid pari passu". 19 Unlike, for example, Re Switch Telecommunications Pty Ltd (above), the present case is not one in which doubt or difficulty attends ascertainment of the separate debts of the several creditors as against the companies of which they are creditors. Each creditor's claim against a particular company is clear. The difficulty which has caused the liquidator to propose a form of pooling relates to determination of the true state of the assets and liabilities (and their values or amounts) as among the several linked companies, in light of inter-company transactions apparently undertaken in such a way as to obscure the true state of relationships. Under the pooling proposal, each creditor of a particular company will maintain his or her appropriate relativity to the other creditors of that company according to the pari passu principle that pays attention to the amounts of the respective debts and claims. But the several groups of creditors, thus constituted and participating, will share in one consolidated fund made up of the totality of the distributable assets of all companies combined. The departure from the ordinary course of administration thus envisaged will not have any impact that upsets the normal relativities, by way of pari passu entitlement, within the body of creditors of any one company. The impact will be as among the several bodies of creditors, in that there may become divisible among the members of any one such body, on the pari passu basis applicable within the body, an aggregate that is greater or less than that which would have been so divisible had the arrangement not been implemented. 20 The arrangement therefore does not exhibit the discriminatory characteristic identified in the Soluble Solution Hydroponics and Switch Telecommunications cases, by reference to Farmers' Freehold Land, which renders the s.510 procedure unavailable. 21 With s.510 in its present form (which, in relation to creditors, no longer requires any special or specified voting majority: compare, for example, s.412(1)(b) of the Companies (New South Wales) Code), the other matters referred to be Young J (see paragraph [13] above) seem to me to be answered in large measure by the definition of "resolution" in s.9. That definition is as follows: "' resolution' , in relation to creditors or contributories, means a resolution passed at a meeting of the creditors or contributories." 22 Section 510(1)(b), concerning creditors, requires "a resolution of the creditors". There is here, in terms of the s.9 definition just quoted, a reference to "resolution" "in relation to creditors". The definition therefore applies to produce the result that there will be no resolution unless there is "a meeting of the creditors" at which it is "passed". And because the resolution plays a part in machinery created by s.510 (which is within Part 5.5 of the Act), the meeting which is the necessary forum for considering whether the resolution should be passed is properly regarded as "a meeting convened under Part … 5.5 … of the Act" as referred to in regulation 5.6.11(2) of the Corporations Regulations 2001 (Cth). It is that provision of the Regulations that brings regulations 5.6.12 to 5.6.57 into operation for the purposes of the meeting in question. 23 The s.9 definition of "resolution" does not identify the number of positive votes required to cause a "resolution" to be passed. In this respect, the definition of "resolution" is to be contrasted with the s.9 definition of "special resolution" which refers to "at least 75% of the votes cast". In the absence of any other specification in the definition of "resolution", the common law rule must prevail. That rule was stated by Lord Hardwicke LC in Attorney General v Davy (1741) 2 Atk 212; 26 ER 531: "Wherever a certain number are incorporated, a major part of them may do any corporate act; so if all are summoned and part appear, a major part of those that appear may do a corporate act."

Translated to the present context, this means that the due passing of a resolution of the kind contemplated by s.510(1)(b) requires no more than that a simple majority of the votes cast in relation to it, according to voting strength under s.510(2), be positive votes. 24 The minutes of the meeting of creditors of Sentinel Realty Holdings Pty Limited record, as I have said, that the resolution was "carried on the voices", at the same time referring to the negative proxy vote of Ms Llana and the positive proxy votes of all other creditors for whom Mr Hathway was proxy. The minutes show that twelve creditors in all were present in person or by proxy. They also make it clear that Mr Hathway (a nominee of the liquidator), as chairman, was aware of the need to proceed in accordance with regulations 5.6.12 to 5.6.67 and that he accordingly called for a vote on the voices (regulation 5.6.19(1)). Regulation 5.6.19(2) also applied. It requires that, unless a poll is demanded, the chairperson must declare that, on the voices, a resolution has been carried, or carried unanimously or carried by a particular majority or lost. Regulation 5.6.19(3) then says: "A declaration is conclusive evidence of the result to which it refers, without proof of the number or proportion of the votes recorded in favour of or against the resolution, unless a poll is demanded." 25 There is no suggestion that a poll was demanded. Nor, in view of what I have said about the meaning of "resolution", was there any requirement for unanimity or any particular majority. The chairman's declaration, recorded in the minutes, that "the resolution was carried on the voices" is therefore conclusive evidence that the sanction referred to in s.510(1)(b) was forthcoming. 26 The question for determination under s.511(1), as set out in paragraph [1] above, should be answered "yes". 27 It remains to consider briefly the further relief sought in the amended originating process. The plaintiff seeks determination pursuant to s.511(1) of a related question arising in the winding up of each company, namely, whether he, as liquidator in each case, is justified in entering into the pooling deed the operative provisions of which have already been quoted. Allied with that is a claim for an order under s.477(2A), as applied to a voluntary winding up by s.506(1A), approving the compromise of debts of each company pursuant to the pooling deed. 28 The conclusion that s.510 has been effectively brought into play in relation to the pooling arrangement means that little need be said about these additional elements of the relief sought. The results under s.510 are such that the arrangement has been adopted by both members and creditors within each company and that they have thereby manifested their views as to where their interests lie. There is no apparent reason to question those views. Because the overriding consideration upon a s.477(2A) application is in the interests of those concerned in the winding up (see Re Spedley Securities Ltd (1992) 9 ACSR 83 per Giles J) and there has been, in this case, the expression of the views of those persons to which I have referred, the matter may be regarded as uncontroversial. 29 The orders of the court are as follows: 1. The court determines pursuant to ss.511(1) and 1322 of the Corporations Act that the resolution of creditors of Sentinel Realty Holdings Pty Limited recorded in the minutes of meeting at pages 28 to 30 of Exhibit "OK-2" to the affidavit of Ozem Kassem sworn 14 April 2005, is binding on the creditors of Sentinel Realty Holdings Pty Limited for the purposes of s.510(1)(b) of the Corporations Act notwithstanding the dissent of one member as recorded in the said minutes. 2. The court determines pursuant to s.511(1) of the Corporations Act that the plaintiff is justified in entering into the pooling deed in the form of the proposed deed which is pages 4 to 9 of Exhibit "OK-2" to the affidavit of Ozem Kassem sworn 14 April 2005. 3. The court orders pursuant to ss.477(2A) and 506(1A) of the Corporations Act that the compromise of debts constituted by the pooling deed be approved. 4. The court orders that the plaintiff's costs be costs in the liquidation of each defendant. **********

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