Papua New Guinea Dockyard Limited v Adams

REASONS FOR JUDGMENT 1 Last year the fifth defendant, Challenger Charter Pty Ltd, found itself in financial difficulty. Believing that the company was insolvent, its sole director, Mr Goldschlager, appointed an accountant to be its administrator under s 436A of the Corporations Act 2001 (Cth). At the first meeting of the company's creditors they resolved to remove the accountant from office and to appoint the first and second defendants, Mr Adams and Mr Fitzgerald, to be the administrators in his place. At the second meeting of the company's creditors it was decided that Challenge Charter should, and it thereafter did, execute a deed of company arrangement. The effect of the deed is to extinguish the claims of all unsecured creditors, apart from those associated with Mr Goldschlager, upon payment to them parri passu of the sum of $85,000 plus 20% of the net proceeds of an action in the Supreme Court of Victoria between Challenge Charter and the plaintiff (being action no 8384 of 2001), less the costs and expenses of the administration. The sum of $85,000 was paid to the administrators by the third defendant, Mortim (Australia) Pty Ltd, a company that holds a floating charge over the assets and undertaking of Challenge Charter. 2 The plaintiff is an unsecured creditor of Challenge Charter by reason of it having obtained a judgment on its counter claim in the Supreme Court action. Having obtained its judgment, the plaintiff now wishes to be rid of the deed of company arrangement and the charge and then to put Challenge Charter into liquidation. To achieve these purposes it seeks to have the resolution approving the deed set aside under s 600A of the Corporations Act or alternatively to have the deed terminated under s 445D. Neither order is opposed by any defendant. If a termination order is made, the effect of reg 5.3A.07 of the Corporations Regulations 2001 (Cth) is that Challenge Charter will be deemed to have passed a special resolution that the company be wound up and it will be taken to have nominated the administrators to be the liquidators for the purposes of the winding up. 3 To complete its objectives the plaintiff also seeks an order that the charge granted to Mortim be declared void pursuant to s 267. According to that section when a company creates a charge in favour of a person who is a "relevant person" (see definition in s 267(7)) and purports to take a step in the enforcement of the charge within six months of its creation, the charge is void unless an order of the court is obtained to enforce it. 4 At the present time the charge in favour of Mortim secures a debt of $169,770. If Challenge Charter goes into liquidation the charge will only stand as security for $43,898, as a result of the operation of s 588FJ. That section provides, in effect, that a floating charge created by a company is void as against the liquidator if granted within six months before the commencement of the winding up or, in the case of a company in administration, within six months before the date upon which the administration began (see ss 513B and 513C), except to the extent of any cash actually advanced at, or subsequent to, the creation of the charge. Accordingly, if the charge is void because of the operation of s 267, only $43,898 will be added to the pool of funds available to the liquidator. That the parties have spent two days arguing over $43,893 is regrettable. Their collective costs will be well in excess of that sum. Whether that is a matter to be taken into account when awarding the costs of this action is something to which I will return. 5 The facts giving rise to the dispute can be stated briefly. The plaintiff is an unsecured creditor of Challenge Charter because on 11 February 2004 it recovered a judgment for $US 213,520 on its counterclaim: Challenge Charter Pty Ltd v Curtain Bros (Qld) Pty Ltd [2004] VSC 1. The judgment has been appealed but the appeal is still pending. On 12 March the plaintiff served on Challenge Charter a statutory demand calling for payment of the judgment debt within 21 days. Before the expiry of the period, namely on 31 March 2004, Challenge Charter granted the charge to Mortim. When the charge was created Challenge Charter was indebted to Mortim in the sum of $125,872. The charge secured that debt. It also secured any further advances that might be made. Thereafter $43,898 was advanced to Challenge Charter. The two companies, chargor and chargee are, in a sense, connected. Mr Goldschlager is a director of each company; in the case of Mortim both he and his wife, Dina, are directors. Mr Goldschlager also owns all the issued shares in Mortim and, through other companies, has a substantial interest in Challenge Charter. Shortly after the creation of the charge, namely on 6 May 2004, Mr Goldschlager appointed the administrator to Challenge Charter and six days later, that is on 12 May 2004, Mortim appointed the fourth defendant, Mr Lindholm, to be the receiver of Challenge Charter's assets. 6 That is the background to the dispute. It is convenient now to deal with the attack on the deed. On this aspect I will put to one side the application under s 600A and confine my attention to the application under s 445D. Here the first point to note is that other than the plaintiff, none of the unsecured creditors of the company who are bound by the deed have been made parties to this proceeding, yet the orders sought are intended to affect them in their right or interest. When I raised this with counsel I was referred to Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126 where Gillard J, following certain observations of Santow J in Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1997) 142 FLR 188, said at [24] that in applications of this type it was usually only necessary for the company the subject of the deed of company arrangement to be the defendant. In Sydney Land Corporation Santow J held that the administrator of a deed was the proper contradictor to a proceeding under s 445D. It is by no means clear whether, in deciding which parties should be before the court on an application to terminate a deed, the answer is to be found by identifying a proper contradictor. Ordinarily the court will try to settle the rights of all persons interested in the subject of the action to prevent future litigation. For this reason all persons interested in the subject should generally be made parties, even if only by a representative order. However that may be, in this case the unsecured creditors are few in number, each of them has been given notice of the application and each has decided not to intervene. By standing by and allowing the case to be conducted by others they will be deemed to be parties and bound in the result: Nana Ofori Atta II v Nana Abu Bonsra II [1958] AC 95, 101-4; Osborne v Smith (1960) 105 CLR 153, 158-9; In the Estate of Langton, Deceased [1964] P 163, 169; Administration of the Territory of Papua New Guinea v Daera Guba (1973)130 CLR 353, 403, 456. 7 Moving then to the merits of the application, the plaintiff makes the following complaint. It says that the administrators did not carry out a sufficiently detailed investigation into several potentially unfair or uncommercial transactions which may have resulted in the recovery by Challenge Charter of significant sums, with the consequence that the creditors decision to adopt the deed was not a fully informed decision. That there were potential claims for unfair or uncommercial transactions was mentioned in the administrators' report to creditors, but the claims were not considered in any detail. The reason is that the administrators had neither the time nor the funds to carry out a proper investigation. In one sense the administrators cannot be criticised too much. They were under pressure to complete their report quickly and wanted to conserve the funds available for creditors. On the other hand the failure to carry out a sufficiently detailed investigation on matters which could easily affect the views of creditors does leave the deed vulnerable to challenge: McVeith v Linen House Pty Ltd (No 2) (2000) 1 VR 31; Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612. In this case, there being no opposition to the course proposed by the plaintiff, it is best that the deed be terminated. 8 The effect of this order will be to put Challenge Charter into liquidation. However, the administrators have indicated that they do not want to become the company's liquidators. I can understand their attitude in this respect. Two options are available. The first is to treat the creditors as having resigned from office and allow the vacancy to be filled by the creditors pursuant to s 495(3). That will require a meeting which will occasion extra expense. The alternative and perhaps the better way of proceeding is to make an order under s 447A giving power to the court to fill the vacancy. Provided there is no objection, that is how I will proceed. 9 This brings me to the validity of the charge. To bring s 267 into operation two conditions must be satisfied. First, the company must create a charge in favour of "a relevant person": s 267(1)(a). "Relevant person" is defined in s 267(7) to mean a person who was an officer of the company in the six months preceding the creation of the charge or "a person associated, in relation to the creation of the charge, with [the officer]". The second condition is that within six months after the creation of the charge the chargee purports to take a step in its enforcement without leave of the court: s 267(1)(b). 10 Here the second condition was satisfied with the appointment of the receiver. Section 440B, which prohibits a person from enforcing a charge without the administrator's consent or the leave of the court, does not apply during the "decision period" (as to which see s 441A) which is when the appointment was made. 11 Was the first condition satisfied? In this case Mortim will only be "a relevant person" if it is "associated with" Mr Goldschlager, he being an officer (a director) of Challenge Charter when the charge was created. What is meant by the expression "associated with"? There are two possibilities. One is that the word "associated" picks up the definition of "associate" in s 9. According to s 9, "associate" has the meaning given in ss 10-17. The other possibility is to treat only the word that has been defined in s 9 (the word is "associate") as bearing the defined meaning with the consequence that the word "associated" should be given its ordinary meaning. 12 The legislative history of s 267 clearly shows that Parliament intended the word "associated" to be governed by the definition. Section 267 was first enacted as s 205A of the Companies Code. It was introduced by the Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth). The explanatory memorandum which accompanied the Bill provided, in para 263, that "[t]he definition of 'relevant person' in proposed s-sec 205A(7) makes it clear for the purposes of the [Companies Code] paras 9(1)(c) and (d) that the matter to which the reference to an associated person under proposed s 205A relates is the creation of the charge (proposed para 205A(7)(b))". At the time s 9 of the Companies Code contained a definition of associate that is the predecessor of the current definition, but with this difference: the word defined was "associated" and not "associate". While the language of the definition section has changed slightly (the word now defined is "associate") that change could not alter the meaning to be given to the word "associated" in s 267. 13 The plaintiff says that there was an association between Mr Goldschlager and Mortim because they were "acting in concert" in relation to the creation of the charge, relying upon s 12(2)(c). Many of the important cases that discuss the meaning of "acting in concert" are helpfully collected by Barrett J in Bateman v Newhaven Park Stud Ltd (2004) 49 ACSR 597. These cases show that a person, A, will be acting in concert with another person, B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both. It is not as is sometimes suggested necessary to show that the common objective or purpose "has some pejorative element [such as] to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement": for the contrary view see IPT Systems Ltd v Mtic Corporate Pty Ltd (2000) 36 ACSR 454. 14 To make out its case on this aspect the plaintiff was forced to call Mrs Goldschlager. Her evidence was to the following effect. Mortim is a family company. It is in the timber business. Its day to day operations are controlled by Mr Goldschlager, perhaps with some assistance from his father who used to operate the business. Mrs Goldschlager attends board meetings infrequently, usually not more than once or twice a year. Prior to 31 March 2004, (the date of the charge) Mortim had made loans to Challenge Charter but Mrs Goldschlager could not remember the amounts. (It will be recalled that to that point the loans totalled $125,872.) Around this time Challenge Charter needed funds to prosecute the appeal. Mrs Goldschlager was told by her husband that Challenge Charter wanted to borrow the money from Mortim. The amount involved was in the order of $43,000. Mrs Goldschlager was keen for the appeal to go ahead because she believes it will be successful. However, she wanted to ensure that the loan was repaid. So, Mrs Goldschlager spoke to her solicitor, Mr Lurie, and sought his advice. Mr Lurie suggested that the loan be secured by a floating charge. He was then instructed to prepare the charge. According to Mrs Goldschlager: "Once I'd signed the paper [the charge] as I said I can - you know, we can lend the money". 15 This evidence does not establish that Mr Goldschlager and Mortim were "acting in concert" in relation to the creation of the charge. To the contrary, it shows that Mrs Goldschlager was the driving force behind the creation of the charge without which there would be no loan. In the transaction Mortim was acting in its own interests and for its own individual purpose. It had no purpose or objective in common with Mr Goldschlager. He merely bowed to his wife's wishes. 16 As an alternative the plaintiff, perhaps somewhat faintly, submitted that there was an association between Mr Goldschlager and Mortim simply because Mr Goldshlager was an officer of the company. Reference was made to Jesserson Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455. A narrow reading of that case supports the submission. But, of course, such a result would be wrong as the definition of "associate" does not permit that conclusion and, in any event, "a person is not an associate … except as provided in [ss 11 to 15]": s 10(2). The explanation for the decision in Jesserson Holdings must be, I think, that there was in fact an association between the directors of the company, an association that was conceded and therefore did not require explanation by the judge. 17 It follows that the challenge to the charge must fail. As to the costs, those of Mortim should be paid by the plaintiff. However the plaintiff should be entitled to its costs for having succeeded on its application to terminate the deed. An appropriate order in that regard will be for the plaintiff to have 20 per centum of the costs of the action, such costs to be costs in the administration. 18 The plaintiff should within seven days bring in short minutes of orders to give effect to these reasons. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.