THE RELEVANT LEGISLATIVE PROVISIONS AND PRINCIPLES
70 In its originating application, Pilot Advisory sought the following substantive relief:
1. Pursuant to s 415A of the Act, that the resolution passed at the adjourned second meeting of creditors of [Cloud 9] held on 10 September 2018 resolving "that the company execute a Deed of Company Arrangement" ("DOCA Resolution"), and resolutions thereto passed at that meeting be set aside.
2. Pursuant to s 445D and/or s 447A of the Act, that the Deed of Company Arrangement entered into between [Cloud 9] and the [Administrators] pursuant to the DOCA Resolution, be terminated.
3. Pursuant to s 446AA that [Cloud 9] be taken to have passed a special resolution under s 491 of the Act that it be wound up voluntarily under the Act;
4. Further or alternatively, an order under s 447A that the administration end, and upon the making of that order, that [Cloud 9] be wound up under the Act.
5. That PETER ANTHONY LUCAS of P A Lucas & Co, Chartered Accountants, be appointed liquidator to wind up the affairs of [Cloud 9].
(Emphasis in original; errors in original)
71 The various provisions of the Act mentioned above are set out below. First, s 415A of the Act came into effect on 1 March 2017. It relevantly provides:
(1) Subsection (3) applies if, on the application of a creditor of a Part 5.1 body, the Court is satisfied of the following matters:
(a) a proposed resolution has been voted on at a meeting of creditors, or of a class of creditors, of the body held under this Part;
(b) that, if the vote or votes that a particular related creditor, or particular related creditors, of the body cast on the proposed resolution had been disregarded for the purposes of determining whether or not the proposed resolution was passed, the proposed resolution:
(i) if it was in fact passed - would not have been passed; or
(ii) if in fact it was not passed - would have been passed;
or the question would have had to be decided on a casting vote;
(c) that the passing of the proposed resolution, or the failure to pass it, as the case requires:
(i) is contrary to the interests of the creditors as a whole or of that class of creditors as a whole, as the case may be; or
(ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable having regard to the matters in subsection (2).
(2) The matters are:
(a) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution, or from the failure to pass the proposed resolution, as the case may be; and
(b) the nature of the relationship between the related creditor and the body, or of the respective relationships between the related creditors and the body; and
(c) any other relevant matter.
(3) The Court may make one or more of the following:
(a) if the proposed resolution was passed - an order setting aside the resolution;
(b) an order that the proposed resolution be considered and voted on at a meeting of the creditors of the body, or of that class of creditors, as the case may be, convened and held as specified in the order;
(c) an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:
(i) the proposed resolution; or
(ii) a resolution to amend or vary the proposed resolution;
(d) such other orders as the Court thinks necessary.
(4) In this section:
related creditor, in relation to a Part 5.1 body, in relation to a vote, means a person who, when the vote was cast, was a related entity, and a creditor, of the body.
72 Cloud 9 is a Part 5A company. The expression "related entity" referred to in s 415A(4) above is defined in s 9 of the Act in the following terms:
related entity, in relation to a body corporate, means any of the following:
(a) a promoter of the body;
(b) a relative of such a promoter;
(c) a relative of a spouse of such a promoter;
(d) a director or member of the body or of a related body corporate;
(e) a relative of such a director or member;
(f) a relative of a spouse of such a director or member;
(g) a body corporate that is related to the first‑mentioned body;
(h) a beneficiary under a trust of which the first‑mentioned body is or has at any time been a trustee;
(i) a relative of such a beneficiary;
(j) a relative of a spouse of such a beneficiary;
(k) a body corporate one of whose directors is also a director of the first‑mentioned body;
(l) a trustee of a trust under which a person is a beneficiary, where the person is a related entity of the first‑mentioned body because of any other application or applications of this definition.
73 Section 445D(1) of the Act relevantly provides:
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
…
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii) contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
74 Section 447A of the Act provides:
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3) An order may be made subject to conditions.
(4) An order may be made on the application of:
(a) the company; or
(b) a creditor of the company; or
(c) in the case of a company under administration - the administrator of the company; or
(d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or
(e) ASIC; or
(f) any other interested person.
75 Section 446AA of the Act provides:
Scope
(1) This section applies if a company has executed a deed of company arrangement and:
(a) the Court, at a particular time, makes an order under section 445D terminating the deed of company arrangement; or
(b) both:
(i) the deed of company arrangement specifies circumstances in which the deed is to terminate and the company is to be wound up; and
(ii) those circumstances exist at a particular time.
Resolution that company be wound up voluntarily
(2) The company is taken:
(a) to have passed, at the time referred to in paragraph (1)(a) or subparagraph (1)(b)(ii), as the case may be, a special resolution under section 491 that the company be wound up voluntarily; and
(b) to have done so without a declaration having been made and lodged under section 494.
Information about company's affairs
(3) Section 497 is taken to have been complied with in relation to the winding up.
Notice of resolution
(4) The liquidator must:
(a) within 5 business days after the day on which the company is taken to have passed the resolution, lodge with ASIC a written notice in the prescribed form:
(i) stating that the company is taken because of this section to have passed such a resolution; and
(ii) specifying that day; and
(b) cause the notice to be published, within 5 business days after that day, in the prescribed manner.
Power to stay or terminate winding up
(5) Section 482 applies in relation to the winding up as if it were a winding up in insolvency or by the Court.
Note: Section 482 empowers the Court to stay or terminate a winding up and give consequential directions.
(6) An application under section 482 as applying because of subsection (5) may be made:
(a) despite section 198G (exercise of directors' powers while company under external administration), by the company pursuant to a resolution of the board; or
(b) by the liquidator; or
(c) by a creditor; or
(d) by a contributory.
Note: See also section 499 (appointment of liquidator).
76 In reviewing the principles bearing on the operation of the above provisions, it is convenient to begin with Part 5.3A of the Act upon which the defendants placed particular reliance in their submissions. The object of that Part is defined in s 435A of the Act as follows:
The object of this Part, and Schedule 2 to the extent that it relates to this Part, 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 an immediate winding up of the company.
Note: Schedule 2 contains additional rules about companies under external administration.
77 The circumstances in which Part 5.3A was introduced to the Act and the efficiency, avoidance of expense and delay, and flexibility that it was intended to achieve, was outlined by Burley J in Britax as follows (at [86]-[87]):
86 Part 5.3A of the Act was introduced into the Corporations Law in 1992 as a result of the recommendation of the Harmer Committee in 1988 (Australian Law Reform Commission, General Insolvency Inquiry, Report No 45 (Canberra, 1988) (Harmer Report)). The Harmer Report reviewed the existing processes for dealing with company insolvencies on a voluntary basis and noted, at 26 [46], that:
The procedure for a scheme of arrangement is cumbersome, slow and costly and is particularly unsuited to the average private company which is in financial difficulty. The time taken to implement a scheme varies but in general is at least two to three months. The legal and accountancy costs of even a relatively straightforward scheme are substantial.
87 When the Corporate Law Reform Bill 1992 (Cth) was introduced, the Explanatory Memorandum (Explanatory Memorandum, Corporate Law Reform Bill (Cth) 1992) stated (at [449]) that the new Part was intended to provide for speed and ease of commencement of administration, minimisation of expensive and time-consuming court involvement and formal meeting procedures, flexibility of action and ease of transition to other insolvency solutions where an administration does not by itself offer all of the answers.
78 In Britax, Burley J went on to describe how the new administration process in Part 5.3A was intended to operate as follows (at [88]):
It is with these objectives in mind that s 435A was introduced. The administration process operates in circumstances where those controlling the relevant company have accepted that it is insolvent. It has been accepted that the investigation conducted in the administration process is intended by Parliament to be a "swift and practical" one; Perpetual Trustee Co Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 (Mustang Marine) at [109]. Consistent with this, the administrator's investigation is necessarily a preliminary investigation which involves the administrator carrying out his or her investigations in a manner which is modified in light of the tight timeframe and associated constraints provided for by Pt 5.3A. An administrator, so constrained, cannot carry out a detailed investigation of at company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him or her; Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (ACN 069 549 042) (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300; [2011] FCA 178 (Mediterranean Olives) at [61]-[62].
(Errors in original; emphasis added)
79 The main focus of this proceeding is s 445D of the Act. It has often been said that that section must be construed to promote the object of Part 5.3A above (see, for example, Shaoyong (David) Guo & Anor v Xinwei Song & Ors; In the matter of SG Capricorn Investments Pty Ltd (subject to deed of company arrangement); Dameng Developments Pty Ltd (subject to deed of company arrangement); and New Mangrove Pty Ltd (subject to a deed of company arrangement) [2018] NSWSC 12 at [148] per Black J).
80 In respect of the role of that section, I made the following observations in Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann [2019] FCA 1426 (at [50]):
Divisions 10 and 11 of Part 5.3A set out various provisions relating to, as appears from their headings, the "Execution and effect of deed of company arrangement" and the "Variation, termination and avoidance of deed", respectively. Section 445D falls within the latter Division. That section prescribes the circumstances in which a court may make an order terminating a DOCA. This scheme of Part 5.3A of the Act, it is to be noted, is different from its predecessors. It allows the Court to terminate a DOCA after it is made rather than approve it beforehand (see Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509; [2010] HCA 11 (Lehman Brothers) at [32]). As the plurality (French CJ, Gummow, Hayne and Kiefel JJ) observed in Lehman Brothers, Part 5.3A is intended to vest the commercial judgment about whether to enter into a DOCA in the majority of the creditors of a company. In particular, their Honours said (at [39]):
… Prima facie, it is for the majority of creditors to decide what terms are an acceptable price for compromising their claims. That is, whether compromising debts or claims on particular terms and conditions is commercially more desirable than the company going into liquidation is, according to the structure and content of Pt 5.3A, a question for creditors. It is for them to make their own commercial judgment. That being so, the evident scheme of the Act is that the will of the requisite statutory majority is imposed on all creditors. Neither considerations of the speed with which such an arrangement must be proposed, agreed in and concluded, nor the observation that dissenting creditors are bound by the decision of a majority in number and value, require any narrow or confined reading of those provisions that govern the making and content of a [DOCA].
Nonetheless, as their Honours pointed out earlier in Lehman Brothers, individual creditors, or groups of creditors, are protected by the provisions of s 445D of the Act, particularly s 445D(1)(f) (see at [30]).
81 The defendants correctly contended that an inquiry relating to the termination of a DOCA under s 445D(1) involves two stages. As Burley J observed in Britax, the first is directed to establishing one of the grounds set out in subsection (1) and the second, assuming such a ground is established, involves the exercise of a discretion whether to terminate the DOCA in question (see at [90] and [107]).
82 The particular subsections of s 445D(1) that fall for consideration in this matter are (f) and (g). The principles relevant to an inquiry under those subsections were outlined by Campbell JA (with whom Meagher JA agreed) in Vero. At [83] of Vero, Campbell JA summarised those principles in the following terms:
In considering whether to terminate a [DOCA] under s 445D(1)(f) of the Act, the court does not make a judgment "… founded upon mere possibility or speculation; it makes a determination on the characteristics of the [DOCA] as they are seen to be at the date of hearing."
The discretion given by s 445D must be "untrammelled by any overriding considerations. [One] must look at the whole of the effect of the [DOCA] and assess its unfairness, if any, to the plaintiff, but in doing so … bear in mind the scheme of Pt 5.3A … and the interests of the other creditors, the company and the public generally."
A [DOCA] may be set aside under s 445D(1)(f)(ii) where it precludes creditors from receiving the benefit of recovering voidable transactions. It is material "that most of the votes in support of the DOCAs were by parties having an interest in avoiding an enquiry by a liquidator."
A [DOCA] may be set aside under s 445D(1)(g) where there is a public interest in the affairs of a company being examined by a liquidator. It may be considered to be "detrimental to commercial morality" to dispense with the opportunity for the investigation of the affairs of a failed company.
(Citations omitted)
83 Furthermore, as the defendants correctly observed in their submissions, the plaintiff bears an onus to show there is a "sufficient reason to put to one side the decision of the majority of creditors to adopt [a] DOCA" and that setting aside such a decision is not a "light matter" (see Vero at [114], University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) (2005) 53 ACSR 579; [2005] NSWSC 412 at [34] and Britax at [91]).
84 In reviewing the comparative benefits to the creditors of a DOCA, as opposed to those that may be gained by pursuing investigations and proceedings in a liquidation, Burley J observed in Britax that an applicant did not need to make out its proposed course of action on the balance of probabilities, but rather that it was sufficient if it satisfied the Court that, by adopting that course, there is a "not unrealistic prospect that there may be a return to creditors on a winding up that is better than under the [DOCA]" (emphasis removed), or that there is a "serious case for the recovery of assets in a liquidation" (emphasis removed), or that there is a "real prospect" (emphasis removed) of a greater recovery in a liquidation than under a DOCA (see at [93]-[94]).
85 With respect to the expressions "unfairly prejudicial" and "unfairly discriminatory" in s 445D(1)(f)(i), in In the matter of Connections Total Fitness for the Family Pty Limited (administrator appointed) [2014] NSWSC 75, Brereton J observed (at [44]) that they required:
… a comparison between the return to creditors under the [DOCA] and that likely on a winding up, and comparative prejudice suffered by differing groups of creditors. The differential treatment of creditors does not necessarily equate to unfair discrimination or prejudice … But while a [DOCA] may discriminate between creditors or class of creditors, it nevertheless ought to deal fairly with the interests of creditors of an insolvent company and its validity depends on its being reached fairly in the interests of creditors …
See also Britax at [115].
86 To similar effect, Cohen J pointed out earlier in Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 (Hagenvale) at 151, that "the test is not merely discrimination but unfair discrimination or unfair prejudice" and that "[i]n order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness in the proposal". See also Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427 at 429 per Young J.
87 As for the expression in s 445D(1)(f)(ii), "the interests of the creditors of the company as a whole", in Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (ACN 069 549 042) (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300; [2011] FCA 178 (Mediterranean Olives), Dodds-Streeton J observed (at [195]-[197]):
195 The interests of creditors as a whole in the relevant context do not, as the plaintiffs submitted, necessarily require certainty of greater material benefit on winding up. Nevertheless, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination; the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation and indirect or collateral benefits from the survival of the company's business; and no worthwhile avenues for further recovery on liquidation are identified, a major creditor's curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole.
196 In contrast, where, for example, the dividend or other benefits to creditors under, or as a result of, a DOCA are small; there are potential claims which, on a preliminary view, warrant further investigation because they afford reasonable prospects of greater returns on winding up; funding is probably available for an investigation; there are reasonable prospects that litigation or other necessary steps to prosecute the claims can be funded; and the defendants appear capable of satisfying their liability; termination of the DOCA may be in the interests of the creditors as a whole.
197 Each case will depend upon its own facts and combination of circumstances, which must be mutually balanced.
88 With respect to the expression "some other reason" in s 445D(1)(g), the Explanatory Memorandum for the Bill which introduced Part 5.3A to the Act (Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth)) expressed the view that, having regard to the width of the other termination categories in s 445D(1), the "some other reason" category in (g) would be "exercised at most very rarely" (see at [602]). However, in Australian Securities and Investments Commission v Midland Hwy Pty Ltd (ACN 153 096 069) (admin apptd) (2015) 110 ACSR 203; [2015] FCA 1360 (Midland Hwy), Beach J observed, in respect of an application under s 447A of the Act, that s 445D(1)(g) "is broad and on one view unconstrained, save by its context" (see at [69]).
89 Accordingly, there are authorities, too numerous to mention, that clearly establish that the expression is sufficiently broad, in context, to include the public interest. As Beach J observed in Midland Hwy (at [68]), the expression includes:
… considerations of commercial morality and the interests of the public at large (Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235 at [287] (Bidald Consulting) per Campbell J). Where there has been misconduct in the affairs of a company requiring appropriate investigation by a liquidator and appropriate recovery proceedings being considered and undertaken, it is detrimental to commercial morality to prevent or hinder such steps through the device of a DOCA propounded by entities and individuals who ought be the subject of investigation and the target of such proceedings. A winding up will be beneficial from a public interest perspective where investigations and recovery proceedings are likely to be funded and the investigations and appropriate recovery proceedings could realistically lead to the relevant persons who have engaged in the suspect transactions being brought to account: Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139; [2009] QSC 202 at [182] per McMurdo J.
90 His Honour went on to observe that public interest considerations may prevail even where creditors may be better off under a DOCA. In particular, he said (at [70]-[71] and [74]):
70 The Court may set aside a DOCA pursuant to s 445D even where creditors may be better off under the DOCA than with a liquidation: Bidald Consulting at [286]-[291] per Campbell J. It may do so in the public interest.
71 Where the relevant company is not trading and there is no likelihood of its resuming its former business, the public interest in placing the company in the hands of a liquidator may prevail over the interests of creditors (see Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admin apptd) (2009) 71 ACSR 81; [2009] FCA 269 at [69] and [71] per Logan J).
…
74 Finally, in any event, the preclusion of an effective investigation by a liquidator into relevant transactions and the opportunity for greater returns may render a DOCA contrary to the creditors' interests overall (see Canadian Solar v ACN 138 535 832 Pty Ltd [2014] FCA 783 at [37] per Perry J).
91 An administrator appointed under Part 5.3A of the Act is given numerous responsibilities, including to promptly investigate the company's affairs (s 438A), to report possible offences and other misconduct to ASIC (s 438D) and to report to the creditors of the company regarding the company's "business, property, affairs and financial circumstances" (s 439A(4), since repealed by the Insolvency Law Reform Act 2016 (Cth)). On this topic, in Mediterranean Olives, Dodds-Streeton J made the following more general observations about an administrator's role and responsibilities (at [213]):
He or she must independently evaluate information by reference to an examination of books, records and other evidence, and must identify and follow up contradictions, inconsistencies or unresolved issues. Nevertheless, the administrator may properly accept a director's information and assessments if, in the light of the administrator's expertise and experience, and the surrounding circumstances, it is reasonable to do so. In the absence of circumstances which should provoke further inquiry, an administrator is not obliged to conduct forensic investigations, accept only independently verified information, routinely commission independent valuations, engage experts or implement external processes to test the veracity of manifestly credible information.
92 As for the weight the Court should give to the opinions of an administrator, in Mentha, In the matter of Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 764, Gilmour J stated, in the context of an application under s 447A, that "[i]n deciding whether it should exercise its discretion to make the orders sought the Court will give weight to an administrator's opinion that what is sought is in the best interests of the company as well as to the consistency of the administrator's objectives with the operation of Pt 5.3A of the Act …" (at [24]). See also Vouris and Tonks as Deed Administrators Of Good Impressions Offset Printers Pty Limited (ACN 002 306 587) [2012] NSWSC 603 per Brereton J (at [9]) and Richard Albarran, Brent Kijurina and Cameron Shaw as Joint and Several Administrators of Cooper & Oxley Builders Pty Ltd (Administrators Appointed) [2018] WASC 161 per Vaughan J (at [54]).
93 On this issue, in Hagenvale, Cohen J made the following pertinent observations about the time constraints in which an administrator is required to operate (at 145):
The intention [under Pt 5.3A] was … to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or of the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him.
See also Britax at [88] (set out at [78] above).
94 Furthermore, as the Administrators pointed out in their submissions, one matter that the Court will usually have regard to is whether there is evidence before it that makes it "in any significant way, better informed than the administrators had been at the time of the meeting of creditors" (see Vero at [113], noting that the issue in contention in that matter was whether there had been insolvent trading in the company).
95 Finally on this issue, in Helenic Pty Ltd as trustee of the Mastrantonis Family Trust v Retail Adventures Pty Ltd (Administrators Appointed) [2013] NSWSC 1973 (in the context of an application under s 600A), Robb J said (at [81]):
The circumstances in which the court may be asked to act upon an administrator's report are likely to be extremely varied. I doubt that it is possible to formulate any rules that would be found to be adequate in all possible situations. The forensic problem is such that the issue should probably be left to the individual judgment of the court in each case.