Pilot Advisory Pty Ltd, in the matter of ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd v ACN 137 806 574 Pty Ltd

THE FACTUAL BACKGROUND 6 The parties submitted an agreed statement of facts and a court book for the trial of this proceeding. The following findings are based on those documents.

Some early history 7 Cloud 9 was registered on 22 June 2009. It was incorporated for the purpose of developing a cloud-based medical software package with a view to selling it to hospitals and medical practices. At the time of its incorporation, Cloud 9's directors were Mr Goldman and Mr Abraham Bisseh. Mr Goldman is still a director of the company, but Mr Bisseh ceased to be so on 16 April 2018. Notwithstanding his retirement, henceforth in these reasons, I will, unless the context does not permit, refer to the "directors" of the company to include Mr Goldman and Mr Bisseh. Cloud 9's shareholders are Mr Goldman and Mr Bisseh, along with Mr Farhad Abar, Mr Peter Crome and Mr Alf Tornatore. 8 From November 2012, Cloud 9 and Monet Technologies Pty Limited became shareholders in a company called eHealth Networks Pty Ltd (eHealth). From time to time thereafter, Messrs Goldman, Bisseh and Crome also served as directors of eHealth. eHealth was originally registered on 24 January 2005.

The sale to Telstra 9 On 11 November 2014, Cloud 9 and eHealth entered into an agreement for the sale of their business assets, including intellectual property and goodwill, to ACN 602 764 438 Pty Ltd, a subsidiary created by Telstra Corporation Limited. Negotiations for that sale commenced in late 2013. The original sale price was to have been approximately $40 million, but this was subsequently reduced to approximately $20 million and ultimately further reduced to $12.5 million. Under the sale agreement, an initial amount of $8,335,935 ($10,500,000 less accrued employee entitlements) was paid to Cloud 9 on 16 December 2014. The balance of the sale price was paid by instalments up to 21 September 2016. 10 The payments received by Cloud 9 during the abovementioned period were as follows: (a) approximately $900,000 in or about February 2015; (b) $557,384 on or about 20 May 2015; (c) $1,000,000 on or about 17 July 2015; and (d) $992,939.98 on or about 21 September 2016. It is unclear on the evidence whether the payment of $557,384 ([10(b)] above) was connected with the sale to Telstra.

The distributions of the sale proceeds 11 Between the receipt of the initial payment of $8,335,935 mentioned above and 28 January 2016, Cloud 9 made a series of payments to its shareholders and other persons, including the following: (a) on 17 December 2014, $100,000 to each of Messrs Abar, Bisseh, Crome, Goldman and Tornatore; (b) on 18 December 2014, $258,345.88 to Mr Crome; (c) on 19 February 2015, $200,000 to each of Messrs Abar, Bisseh, Goldman and Tornatore; (d) on 6 March 2015, $200,000 to each of Messrs Abar, Bisseh, Goldman and Tornatore; (e) on 16 May 2015, $33,739.96 to Mr Crome; (f) on 28 May 2015, $100,000 to Mr Goldman; (g) on 17 August 2015, $25,000 to Mr Goldman; and (h) on 18 September 2015, $185,786 to Mr Bisseh and $24,048 to Mr Tornatore. 12 On 17 June 2015, 17 August 2015 and 28 January 2016, Cloud 9 "confirmed" as dividend payments the following, which were included in those set out above: (a) $500,000 to Mr Bisseh, $600,000 to Mr Goldman, $500,000 to Mr Tornatore, $500,000 to Mr Abar and $100,00 to Mr Crome; an overall total of $2.2 million; (b) the payments to Mr Bisseh of $185,786, Mr Goldman of $45,713 and Mr Tornatore of $24,048; and (c) a payment to Mr Goldman of $20,173. The payments in [11(b)] and [11(c)] above do not appear to have been included in these confirmations. Further, there appears to be a discrepancy between the amounts paid to Mr Goldman and those that were confirmed. 13 In late 2018, the Administrators performed an analysis of the "confirmed payments" set out above, from which they prepared the following table: Meeting Date Recipient Amount ($) Imputation Credit 17/06/2015 Abraham Bisseh 500,000.00 214,286.00 17/06/2015 Marc Goldman 600,000.00 257,143.00 17/06/2015 Alf Tornatore 500,000.00 214,286.00 17/06/2015 Farhard [sic - Farhad] Abar 500,000.00 214,286.00 17/06/2015 Peter Crome 100,000.00 42,857.00 17/08/2015 Abraham Bisseh 185,786.00 79,623.00 17/08/2015 Marc Goldman 45,713.00 Unable to locate this payment 17/08/2015 Alf Tornatore 24,048.00 10,306.00 28/01/2016 Marc Goldman 20,713.00 Unable to locate this payment 2,476,260.00

14 In their supplementary report to creditors dated 3 September 2018, the Administrators expressed the following views about these dividend payments: As detailed in my Second Report, dividend payments totalling $2,409,834 were identified from [Cloud 9's] bank statements. A review of the board minutes and bank statements confirms the following: • A dividend of $2.2 million was declared on 17 June 2015, which was paid in advance in four instalments during the period 17 December 2014 to 28 May 2015. The dividends paid to the shareholders were in accordance with the board minutes on 17 June 2015, however, does not match the dividend proportion of the shareholding disclosed in ASIC's records. • An agreement was in place with shareholders that whilst, not all shareholders will participate in some returns as per their shareholding, they would receive upfront payments in the form of a salary. • Total payments received by all shareholders via dividend and/or salary since 2011 to 2017 is as follows: - Marc Goldman $1,254,926 - Abraham Bissseh [sic - Bisseh] $1,254,926 - Alf Tornatore $1,254,926 - Farhad Abar $1,303,935 - Peter Crome $1,278,974 It is noted imputation credits of $942,858 were paid in respect of the dividend. Although, Peter Crome received less than his shareholding entitled him to receive, we have identified two (2) additional payments of $258,345 and $33,739 on 18 December 2014 and 16 May 2015 respectively, which appear to be for wages. Consideration should be given to whether certain dividend declarations by [Cloud 9] are valid given they were not in accordance with the shareholding of [Cloud 9] in that some shareholders appear to have received less than others and may have therefore been discriminated. However, we have been advised that there is no legal basis that would make a dividend declaration automatically void or invalid merely because it may not have been made evenly in accordance with a company's shareholding. Therefore, whilst the course of conduct may suggest that there has been a contravention by [Cloud 9] of Section 254T(1)(b) of the Act, this does not mean the dividend was prima facie invalid. However, a director who has authorised an improper payment of dividend could be held in contravention of Section 180 of the Act and may be personally liable to repay the amount of dividend to [Cloud 9]. It may also provide a foundation for an action by an aggrieved shareholder for oppression.

The InforMedix payment 15 On 23 December 2014, about a week after it received the initial payment of the sale price mentioned above, Cloud 9 paid $3,635,125.88 to a company called InforMedix FZ LLC (InforMedix - referred to by the Administrators as InfoMedix or Infomedix in various quotes below) of Dubai, in the United Arab Emirates. There is an invoice dated 23 December 2014 under InforMedix's name describing this amount as: First Tranche Payment: Commission for the sale of Software & asset of Idea Object related to Cloud 9 Software. As per agreed Price Payment 16 Unsurprisingly, the rationale for this payment was examined by the Administrators. They questioned Mr Goldman and/or Mr Joseph Pizzolato (Cloud 9's company accountant) and/or Mr Bisseh about it on at least three occasions. The first occasion was on 22 June 2018 when Mr Naidenov (SN) interviewed Mr Pizzolato (JP) and Mr Goldman (MG-present by telephone). The notes of the part of that interview that concerned the InforMedix payment were as follows: SN: $3,635,125 paid on 23/12/14 with the description commission to InfoMedix. Was this part of the agreement with Telstra? JP: No but InfoMedix was instrumental to the sale to Telstra and would not have been possible without their assistance. I have provided a copy of the invoice and TT, which was approved by the directors. SN: was there any formal agreements with InfoMedix? What is their relation? JP: no formal agreements. MG advised that this commission was based on the original offer of approx. $40M by Telstra. However dividend was not adjusted upon final sale price of $12.5M. SN: Related Co or director somehow related to any of the shareholders? MG: Wael Khalil is the owner, who is not related to Cloud 9 or any director or shareholder of Cloud 9.. (Errors in original; emphasis added) 17 The second interview occurred on 6 July 2018. It also involved Mr Naidenov and Mr Pizzolato. The notes of the part of that interview concerning the InforMedix payment were as follows: SN: the $3.6m paid to Dubai. MG: Instrumental to sale. SN: How? I need to see specifics MG: there was no formal agreement. (Errors in original; emphasis added) 18 The third interview was conducted on 27 July 2018. Mr Naidenov, Mr Goldman and Mr Bisseh were present during that interview. It should be noted that Mr Bisseh had resigned as a director of the company by the time of this interview. The notes of the part of that interview concerning the InforMedix payment were as follows: SN: the $3.6 million transaction is a major concern to creditors and needs to be clarified. - Why was the sale price reduced from $45m to $12.5m. - Why use and how did Infomedix come into the picture. - Why was the commission not reduced in line with this reduction. - What contractual agreement was there in place for his services.. MG: The sale to Telstra kept on reducing as we continued to negotiate and Telstra kept on finding issues with respect to various liabilities outstanding by [Cloud 9]. AB the sale had then changed from an share sale to only an asset sale. MG in addition the sale price also incorporated an earn out at 2 different stages. As the projected revenue was not achieved no funds were applicable or received as per the sale agreement. The sale agreement consisted as follows:- 1. $10,500,000 Cash upfront 2. 1st Retention of $1,000,000 3. 2nd Retention of $1,000,000 4. 1st Earn Out - based on certain reviews being made. 5. 2nd Earn Out - based on certain reviews being made. 6. Less Employee Leave adjustments MG stated that the overall completed sale was $12,500,000.AB stated that once again Telstra reduced the sale. The upfront payment was approx. $8.8M. MG The sale incorporated Cloud 9, EHN and a Company called Idea Objects. (Primary Care, Platform Intergration and Hospital Business). Idea Objects was the Indian based operation. MG stated that Infomedix was instrumental to the sale. SN How.. Infomedix was introduced by the Indian branch and they were close with the people there and Infomedix persuaded them to accept the final Telstra offer.SN is Infomedix anyway related to Cloud 9, EHN and or Idea Objects and he replied no. SN: how was this commission earnt? MG stated that commission was based on original offer of $40M. The Telstra offers kept on reducing to $30M, $12.5M and finally $10.8M. MGthe commission charged in theory should have been reduced but this amount was paid in good faith as we did not know what kind of revenues would be generated and ultimately getting more from the earn out. The payment was a mutual agreement. Once the sale was completed and no earnouts could be earned why not request for a refund from Infomedix . MG no payment was going to be returned, but we should have pushed this harder. SN asked as to what was the Indian side agreement that was referred in the examinations and raised by Pilot [Advisory]. MG stated that there was no side agreement as this was going to be a breach of the sale. Even though one was possibly contemplated, this was never finalised or agreed upon. … SN - Pilot [Advisory] partners had mentioned a company called Idea Objects and we talked about this previously. Tell me what it did. AB - This company was based in India and also provided medical software. SN - What is the relationship or how did you guys meet with this Indian Company.. AB - Both MG and l have come across the owners previously and the Indian Company was interested in expanding to outside of India. So we agreed that it would be worthwhile for both companies to join together and try into the Australian markets. (Errors in original; emphasis added) 19 It should also be noted that Mr Goldman was cross-examined about this payment during the District Court trial connected with Pilot Advisory's claims against Cloud 9 (see at [29] below). The relevant part of Mr Goldman's cross-examination was recorded in the Court transcript as follows: Can you explain to the court what was that Indian side agreement?---Originally, it was the Indian - one of the Indian shareholders wanted to be paid in Dubai, and we had agreed originally with them to do that, and we wanted a side agreement that allowed for that payment to go through. We originally contemplated it. It never happened. And was this an agreement that was made with the intention of withholding the existence of that agreement, that is, not telling Telstra that this agreement existed?---That wasn't the reason why we did it. Well, I'm not asking you - is - the agreement - this Indian side agreement, was it an agreement that was made - sorry, I'll take it back one step. Did you reveal the existence of this agreement to Telstra during the negotiations leading up to the final contract that was signed by Telstra?---We did not. All right. And is it not the case that this - the existence of this side agreement was contrary to one of the terms of the ultimate contract you had with Telstra which effectively said that you were - pursuant to the contract with Telstra, there were no side deals in existence that you hadn't revealed to Telstra?---I don't remember the actual agreement with Telstra, what it said about it. We had agreed not to do any side agreements in principle. So - - - You had agreed with Telstra not to do any side deals - - - ?---At the end. - - - in principle?---In the end. Yes, and this deal that you did, this side deal, was in breach of that agreement, wasn't it?---We didn't do it, so yes. It would have been in breach of the agreement. And are you saying that there, in fact, was no side deal done?---We did not sign and execute on the side agreement. We realised, in the end, we didn't want to do that. When you say you didn't sign, did you make an oral side agreement?---No. (Emphasis added) 20 I interpose to make two observations about these interviews and Mr Goldman's evidence. First, none of the answers given provides any rational explanation as to why the directors of Cloud 9 caused the company to pay such a significant proportion of the Telstra sale price to InforMedix. Secondly, the clear import of the statements highlighted at [16]-[19] above is that there was no agreement under which the company was obliged to make this payment. 21 In their second report to creditors, the Administrators expressed the following views about the uncommercial nature of this transaction: We have identified a payment of $3,635,125 that was paid to a company named InfoMedix FZ LLC in Dubai on 23 December 2014. We have sighted a copy of the invoice and telegraphic transfer which indicates that the payment was for commission charged for the sale of the Company's business and assets. … As the sale only completed for an adjusted amount of $12.5 million, the commission charged (i.e. 29%) appears unreasonable and excessive. However, as this payment was made more than two years prior to the relation-back date, it cannot be challenged as an uncommercial transaction under section 588FB of the Act. On the information presently before us, we cannot say whether InfoMedix FZ LLC is a related entity of [Cloud 9]. If it was, the payment might be able to be challenged as a voidable transaction under section 588FE(4) of the Act, however even if this is the case the payment was made almost four years prior to the relation back day. The costs of bringing of investigations and the prosecution of this claim (assuming it is viable) would cost in the range of $500,000 to $700,000. We are also unable to express a view at this time as to whether the transaction might be able to be challenged as a voidable transaction under section 588FE(5) of the Act on the basis that [Cloud 9] became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company. However, even if the payment falls within either section 588FE(4) or 588FE(5) of the Act, there would be real practical difficulties in enforcing any judgment against a company based in the United Arab Emirates. If a Liquidator were appointed to [Cloud 9], these payments would be further investigated and a Liquidator would consider all circumstances before initiating any recovery actions. (Errors in original) 22 The Administrators returned to this issue in their supplementary report to creditors dated 3 September 2018 by which time they had obtained legal advice on the prospects of recovery action in respect of this payment. That part of their supplementary report to creditors proceeded as follows: As detailed in our Second Report, a payment of $3,635,125 was identified, which was paid to a company named InfoMedix in Dubai on 23 December 2014. A review of [Cloud 9's] record indicates that that the payment was for commission charged for the sale of [Cloud 9's] business and assets which represented 43.6% of the consideration received by [Cloud 9] for the sale. I have not sighted an agreement in respect to same even though a draft agreement was circulated at the beginning of negotiations. Given the quantum of the payment, I have obtained legal advice on the prospects of a claim against InfoMedix or its officer, Mr Wael Khalil, which noted the following: • Given that the transaction occurred almost 4 years prior to the "relation-back day" of 1 June 2018, the time to commence any claim has lapsed. • Even if the claim could still be made, it will still be necessary to prove that the transaction occurred at a time when [Cloud 9] was insolvent or that the Transaction itself caused [Cloud 9] to become insolvent. Given the likelihood that [Cloud 9] was solvent at the time of the transaction, the prospects of satisfying this element appear to be difficult. • Even if it can be established that [Cloud 9] was insolvent at the time of the transaction or became insolvent by reason of the transaction, a liquidator will need to prove that a reasonable person in [Cloud 9's] circumstances would not have entered into the transaction taking into account the benefits for and detriment to [Cloud 9], the respective benefits to the other parties to the transaction and any other relevant matters. • The costs of bringing of investigations and the prosecution of this claim (assuming it is viable) would cost in the range of $500,000 to $700,000 in legal costs alone. • Even if it can be shown that the Transaction was an "uncommercial transaction" within the meaning of s 588FB of the Corporations Act, a liquidator may face difficulties in seeking to enforce any judgment obtained under s 588FF, noting that the target of such an action is based in Dubai. We have also requested our solicitors to undertake the relevant searches and investigations to confirm whether InfoMedix was a related party of [Cloud 9] or its officers. A review of the searches received indicates InfoMedix is an unrelated entity. Further, we have requested our solicitors to undertake more detailed searches on InfoMedix and Wael Khalil. However, if no other more detailed personal information be provided, it is unlikely that the additional searches will reveal anything of substance. Notwithstanding the above, it is important to highlight the Directors may have breached statutory or fiduciary duties in approving such a payment to InfoMedix without a proper agreement in place. [Cloud 9's] major creditor highlighted that during the proceedings, the Director acknowledged a draft agreement which was never formalised or executed, as this was going to be in breach of the sale agreement. 23 Further to the last paragraph above, in the first of his affidavits filed in this proceeding, Mr Naidenov expressed the following views about Cloud 9's directors' liabilities with respect to this InforMedix payment: I formed the view that [Mr Goldman] and Mr Bisseh of [Cloud 9] may have breached their duties as directors in making the payment to InforMedix given its proportionate size to the sale price. However, if this is the case any recovery against [Mr Goldman] and Mr Bisseh of [Cloud 9] is limited to the assets they have to satisfy any potential judgment - this is dealt with at paragraphs 78 to 87 below. Since the last sentence is crucial to Mr Naidenov's views on this issue, I will return to that matter later in these reasons.

The payments to eHealth 24 Subsequent to 30 June 2015, Cloud 9 reduced its debt to eHealth by $882,048, that is from $2,703,553 to $1,821,505. This debt reduction was the subject of some questioning by Mr Naidenov earlier in the first interview on 22 June 2018 referred to above (see at [16]). Furthermore, Cloud 9's relationship with eHealth was also raised during the third interview on 27 July 2018 referred to above (see at [18]). The notes of those parts of those interviews concerning that topic are as follows: [22 June 2018 interview] SN: another $174,554 was paid on 18/12/14 with the description super for CH9/ [eHealth], why was [Cloud 9] paying [eHealth] super. JP: [eHealth] is a related entity. Cloud 9 which owed money to [eHealth]. Sometimes repayments were made to meet [eHealth's] liabilities. [eHealth] was also responsible for the payroll obligations. … [27 July 2018 interview] SN Lets talk about the structure and roles of related companies so we don't have any misunderstanding. SN - What did Cloud 9 do ? AB - Develop medical software to doctors and speacilist… SN - What was [eHealth] and how is this related to [Cloud 9]… AB - [eHealth] was a subsidiary of Cloud 9, which provided support and implementation of services to its clients for the Cloud 9 software.eg training, installation ongoing queries. (Errors in original) 25 On 18 May 2016, eHealth was deregistered on the application of Mr Goldman. 26 In their second report to creditors, the Administrators expressed the following views on the uncommercial nature of this payment: Our preliminary review of [Cloud 9's] accounts for the financial years ended 30 June 2015 to 30 June 2017 discloses that a loan by [Cloud 9] to eHealth was reduced by $882,048. It appears that the payments made in reduction of this loan within the two years prior to the relation back day may be uncommercial. However, there are difficulties with commencing such an action against eHealth, which are detailed below: • eHealth was deregistered on 18 May 2016 and would need to be reinstated for [Cloud 9] to commence an action; • A review of eHealth's financial statements as at 30 June 2015 indicates that apart from related party loans, which have been offset, there are no visible assets; and • Even if eHealth is reinstated, the ability of eHealth to satisfy any claim is unknown. In this regard, eHealth sold its business and assets under the business purchase agreement. In the event of a liquidation of [Cloud 9], we will consider our options and further investigations may be warranted. The Administrators reiterated these views in their supplementary report to creditors dated 3 September 2018.

The loan to Mr Abar 27 On 17 September 2015, Cloud 9 made a payment of $317,412 to Mr Abar. This payment was recorded in the company's books as a loan. In their supplementary report to creditors, the Administrators set out the following details of their investigations concerning this payment: As detailed in our Second Report, [Cloud 9's] draft accounts as at 31 December 2017 recorded a loan to a shareholder in the amount of $317,412. Given the shareholder failed to respond to our initial correspondence on 27 June 2018, I issued subsequent correspondence demanding repayment of the loan or an explanation of same. A response has not been received from the shareholder. Notwithstanding this, further investigations have revealed that Farhad Abar was the recipient of these funds and was paid the amount of $317,412 on 17 September 2015. Investigations indicate that this was an advance payment as a dividend distribution; in order for a dividend catch up to be in line with the other shareholders that received approximately $1.26 million each, A review of [Cloud 9's] board minutes indicates Farhad Abar was entitled to receive a dividend in the amount of $500,000. The bank statements indicate that the dividend was received in three (3) instalments on 17 December 2014, 19 February 2015 and 6 March 2015. The external accountant and Directors have advised that the loan payment was paid in advance of a dividend in addition to the three (3) instalments. In this regard, it appears that Farhad Abar has received the amount of $317,412 as he was entitle to this dividend. (Errors in original) 28 In respect of this loan, the statement of agreed facts record that the Administrators concluded that: (a) they had not been able to ascertain whether Mr Abar had the capacity to repay the loan. (b) they lacked funds to engage lawyers in the United States of America to pursue Mr Abar for the loan. (c) any proceedings against Mr Abar would be protracted and costly, given Mr Abar was domiciled in the United States of America, and uncommercial to pursue relative to the loan amount.

Pilot Advisory's involvement 29 In December 2013, Cloud 9 appointed Pilot Advisory to assist it in the sale of its business assets. On 21 January 2015, following the sale to the Telstra subsidiary mentioned above, Pilot Advisory invoiced Cloud 9 for its services in the amount of $811,214.84. A dispute ensued, the details of which are set out below (see at [31]). By June 2015, when Pilot Advisory's invoice remained unpaid, it filed a claim in the District Court at Brisbane seeking to recover the invoiced amount. On 18 July 2015, Cloud 9 paid Pilot Advisory $137,500 towards that amount and, in March 2017, it paid Pilot Advisory a further amount of $6,413. 30 On 14 May 2018, after a four day trial, Cloud 9 consented to judgment in Pilot Advisory's favour in the amount of $804,133.43 (including interest) plus costs on an indemnity basis. As is already mentioned above, on 16 May 2018, Pilot Advisory served a statutory demand on Cloud 9 under s 459E of the Act for the amount of this judgment debt. 31 In their second report to creditors the Administrators reviewed the dispute that arose between Pilot Advisory and Cloud 9 and made a number of critical observations about the attitude Cloud 9's directors adopted to it as follows: In December 2013, Pilot [Advisory] was engaged by [Cloud 9] to assist in the sale of its business assets to the Purchaser which was to be completed by February 2014. However, [Cloud 9] failed due diligence and Purchaser did not proceed with its intended purchase of the assets at this time due to significant unpaid liabilities including PAYG, superannuation and rent. Offers and counter-offers subsequently were exchanged until an agreement was reached in December 2014. From the time of the initial engagement of Pilot [Advisory] in December 2013 to the sale of [Cloud 9's] business and assets a year later, Pilot [Advisory] undertook five separate engagements for work on behalf of [Cloud 9] including due diligence and taxation issues. Pilot [Advisory] claimed fees for work completed in the period from December 2013 to December 2014 which significantly exceeded the initial quote of $125,000 which was agreed on its engagement. This initial amount was paid by [Cloud 9]. The total additional amount invoiced totalled $667,385. However, the Directors have advised me that the terms of the subsequent engagements were not agreed on. [Cloud 9] was aware of the claim lodged by Pilot [Advisory] from at least April 2015. Several attempts to mediate and resolve the outstanding claim failed, which subsequently led to the proceedings commenced by Pilot [Advisory] against [Cloud 9] in the Queensland District Court. On 14 May 2018, [Cloud 9] made a settlement proposal to Pilot [Advisory] of $150,000 upfront with the balance of $700,000 to be paid by 14 November 2018. This offer was rejected by Pilot [Advisory]. On the same date, [Cloud 9] consented to Pilot [Advisory] obtaining a judgement against it of $804,133.43, inclusive of $136,828.59 for interest up to judgment, plus costs on the indemnity basis. … As advised above, the Directors stated that [Cloud 9] was placed into Administration as a result of its dispute with Pilot [Advisory]. [Cloud 9] failed to address and update the terms of the engagement of Pilot [Advisory] in 2014 and consequently failed to deal with and settle the debt with Pilot [Advisory] in a timely manner. Given the significant amount of work conducted by Pilot [Advisory], we are of the view that [Cloud 9] could have taken direct steps to settle the amount outstanding and come to a commercial resolution prior to the litigation. … [Cloud 9] distributed dividends to its shareholders of $2.2 million and $209,834 in the financial years ended 30 June 2015 and 30 June 2016 respectively. As a result of this high cash use, [Cloud 9] was unable to satisfy its creditors as and when they fell due. This raises an issue as to whether the Directors breached their duties to [Cloud 9] at this time by making the payments rather than retaining the funds to meet the claims of creditors and in particular the claim from Pilot [Advisory]. (Errors in original)

The financial position of the Company 32 According to the analysis of the company's balance sheets contained in the Administrators' second report to creditors dated 2 July 2018, the company had an excess of liabilities over assets as shown in its annual financial accounts from June 2014 to December 2017 (draft financial account for December 2017), in the following amounts, as at the following dates: 30 June 2014 30 June 2015 30 June 2016 30 June 2017 31 December 2017 ($) ($) ($) ($) ($) (2,156,925) (2,162,314) (1,952,068) (1,525,738) (1,637,289)

(Extracted from the Balance Sheet Analysis table) 33 In that report, the Administrators went on to express the following views in respect of this analysis: • The net asset position consistently increases from the financial year ended 30 June 2015 to 31 December 2017 in the amount of $525,025 (i.e. increase of 24%), which is mainly due to [Cloud 9's] receipt of proceeds from the sale of its business and assets and reduced payment of trading expenses. A condition of the sale agreement was the payment of employment related expenses and entitlements by the Purchaser and therefore for the financial year ended 20 June 2016, [Cloud 9] did not record wages. • [Cloud 9's] current ratio (current assets/current liabilities) for the financial year ended 30 June 2014 to 31 December 2017 was 0.01, 0.25, 0.14, 0.30 and 0.17 respectively. Often if a current ratio below 1 is recorded, it indicates that there are insufficient current assets to meet current liabilities and that [Cloud 9] is insolvent. I note that the ratios may be misleading due to the timing of the proceeds received from the sale. • The working capital of a company is calculated by deducting current liabilities from current assets. [Cloud 9] has a working capital deficiency for the financial years ended 30 June 2014 to 30 June 2017 and for the year ended 31 December 2017 in the amount of ($2,156,925), ($2,162,314), ($1,952,068), ($1,525,738) and ($1,637,289) respectively. • The working capital analysis for the above indicates that, during the above periods, there may have been insufficient assets available to discharge [Cloud 9's] debts as and when they fell due. 34 As to the effect that the distribution of dividends to the company's shareholders had on the company's capacity to satisfy its creditors, the Administrators expressed the following views: [Cloud 9] distributed dividends to its shareholders of $2.2 million and $209,834 in the financial years ended 30 June 2015 and 30 June 2016 respectively. As a result of this high cash use, [Cloud 9] was unable to satisfy its creditors as and when they fell due. This raises an issue as to whether the Directors breached their duties to [Cloud 9] at this time by making the payments rather than retaining the funds to meet the claims of creditors and in particular the claim from Pilot [Advisory]. 35 The Administrators returned to this issue in their supplementary report to creditors dated 3 September 2018. In that report they expressed the following views: As detailed in our Second Report, we were of the opinion that [Cloud 9] based on the financial history of [Cloud 9], it is likely that a Liquidator could successfully argue that the Directors may have traded [Cloud 9] whilst insolvent and could potentially be liable for an insolvent trading claim, however, there were a number of factors to consider, which are highlighted below for creditors ease of reference: • When [Cloud 9's] business and assets were sold, [Cloud 9] had sufficient funds to pay its creditors, given that the cash receipts from the sale totalled approximately $10.8 million; • [Cloud 9] ceased trading following the sale in December 2014 of its business and assets; • Attempts were made by the Directors of [Cloud 9] to negotiate a settlement with Pilot [Advisory] to address the amount due to Pilot [Advisory]; and • [Cloud 9] did not pay the debt owed to Pilot [Advisory] due to the ongoing dispute in respect of works completed until a judgement was obtained in May 2018. • The amount of an insolvent trading claim may not be particularly large as the debt owing to Pilot [Advisory], which is the largest creditor, all appears to have been incurred prior to [Cloud 9] selling its business and assets. [Cloud 9] therefore likely was solvent when it incurred these debts. • Furthermore, in quantifying an insolvent trading claim against the Directors, a Liquidator is required to take into account recoveries from any other legal actions prosecuted by him. Thus, if the Liquidator is successful in recovering monies for the benefit of creditors from voidable transactions, then the claim against the Directors for any insolvent trading claim would be reduced by the amount recovered. Creditors should note that any recovery of a trading whilst insolvent claim will attract substantial accounting and legal fees. This would require substantial third-party funding and any Liquidator would be unlikely to commence any action based on the defences without an indemnity for costs. 36 Finally, in the same report, the Administrators expressed the view that there had not been any unfair preference payments made to any unsecured creditors of the company such as to constitute voidable transactions under s 588FA of the Act. Their views about whether the payments to InforMedix and eHealth constituted uncommercial transactions under s 588FB of the Act are already set out above (see at [21]-[22] and [26] above respectively).

The voluntary administration 37 As is mentioned at the outset of these reasons, the Administrators were appointed to Cloud 9 on 1 June 2018 by resolution of its sole director (Mr Goldman) acting under s 436A of the Act. At that time, Mr Goldman provided an indemnity of $110,000 to the company to cover the costs connected with the voluntary administration. 38 The following is a chronology of the more significant steps that have been taken in the administration process: (a) 5 June 2018 - the Administrators provided their first report to creditors; (b) 14 June 2018 - the first meeting of creditors was held under s 436E of the Act; (c) 2 July 2018 - the Administrators provided their second report to creditors; (d) 9 July 2018 - the second meeting of creditors was held under s 439A of the Act. That meeting was adjourned for 45 days; (e) 3 September 2018 - the Administrators provided a supplementary report to creditors; (f) 10 September 2018 - the adjourned second meeting of creditors was held. At that meeting, the resolution was passed to execute the DOCA. 39 Two other matters of significance should be noted. First, early in the administration process, Pilot Advisory raised an issue with respect to the company's tax liability. Initially it did that in a letter to the Administrators on 25 June 2018 where it expressed the opinion that, if its debt were recorded in the financial statements and taxation returns for Cloud 9 for the year ended 30 June 2015, there would be a taxation refund due to the company. In a further letter to the Administrators on 27 June 2018, Pilot Advisory repeated its view that, if an amended taxation return were to be lodged, there would be a taxation refund due to Cloud 9 of approximately $295,000. It claimed this amount could then be offset against the current debt owing to the Deputy Commissioner of Taxation. 40 With respect to this taxation issue, in his second affidavit filed in this proceeding, Mr Naidenov deposed to having received advice from Mr John Kritikos of Kamper Chartered Accountants to the following effect: (a) if we amended the tax return and BAS of [Cloud 9] for the financial year ending 30 June 2015, we would need to amend all subsequent tax returns and BAS. (b) amending [Cloud 9's] tax returns and BAS would involve changing accounting methods from cash to accruals. Historically, [Cloud 9] utilised the cash method of accounting when it lodged its Business Activity Statements. If [Cloud 9] were to amend its tax return for the year 2015, it would need to change its accounting method from cash to accruals. (c) it was appropriate for [Cloud 9] to account on a cash basis because: i. of the simplicity of the transactions to which [Cloud 9] was a party; ii. [Cloud 9] was not trading at the time; and iii. [Cloud 9] generated no income apart of the from receipt of the sale proceeds. (d) amending all of [Cloud 9's] tax returns and BAS since 30 June 2015 would likely trigger an audit of [Cloud 9] by the ATO. (e) an audit of [Cloud 9] would result in [Cloud 9] incurring significant costs, including accounting fees of approximately $15,000 per year and remuneration payable to the deed administrators. (f) there was a risk that the ATO would dispute the amended tax returns and BAS because amending all of [Cloud 9's] tax returns and BAS since 30 June 2015 is an unusual thing to do and may appear suspicious. (g) the administrators would need to authorise and sign off on all of the amended tax returns and BAS and would be personally liable for costs associated with the amended tax returns and BAS, and subsequent costs of an audit. (h) the amendment of [Cloud 9's] tax return and BAS for 30 June 2015 would likely result in a GST refund of approximately $240,000, which would reduce the Deputy Commissioner of Taxation's claim to nil and provide a net refund of approximately $80,000 to [Cloud 9]. Given that the amendment of [Cloud 9's] tax returns and BAS would likely incur significant costs of approximately $50,000 to $80,000, the deed fund may increase by approximately 2 cents in the dollar, which in effect reduces the Deputy Commissioner of Taxation's claim to nil. (Errors in original) 41 Accordingly, Mr Naidenov went on to express these views: (a) it was not in the interests of the creditors for [Cloud 9] to incur the costs of an audit if the administrators amended the tax returns and BAS. (b) in the absence of an indemnity, the administrators were not prepared to incur personal liability for the costs associated with the amended tax return by authorising and signing off on those returns. (c) the benefit to creditors in undertaking the amendment to the tax returns and BAS, which was approximately an increase of 2 cents in the dollar, could still be obtained by including a term in the DOCA requiring the director of [Cloud 9] to lodge the amended tax return and include any refund as part of the Deed Fund. 42 The second matter of significance was contained in Pilot Advisory's further letter to the Administrators on 27 June 2018 mentioned above. In that letter, it expressed its willingness to fund litigation against the directors of the company, as follows: In the event the Liquidator considered recovery action was unlikely to be successful we … would propose to either fund the liquidator to take action against the directors personally under sections 180-183 of the Act, or with the Court's approval, take an assignment (on appropriate terms) of such rights of action against the directors personally.

The directors' assets 43 It can be seen from Mr Naidenov's views set out above (at [23]) that he formed the view that the utility of any recovery proceedings against the directors of Cloud 9 was affected by the assets they may have available to meet a judgment if those proceedings were successful. On that topic, in his first affidavit filed in this proceeding, Mr Naidenov deposed to holding the following view: I formed the view that based on the available equity and potential sale of shares (taking into consideration the selling costs associated) that the maximum amount recoverable from [Mr Goldman] and Mr Bisseh would be approximately $470,000 to $480,000. 44 The process by which Mr Naidenov came to this view was as follows. On 26 June 2018, Mr Bisseh declared in a statutory declaration that he had real property worth $2,767,000, motor vehicles worth $50,000, held cash totalling $8,000, held shares to the value of $110,000, owned jewellery, artworks and antiques to the value of $15,000 and owned household effects valued at $40,000. He claimed that his only liability was a real property encumbrance of $2,240,000. 45 As for Mr Goldman, in a statutory declaration he made on 24 July 2018, he declared that he had $1,800,000 in real property, motor vehicles worth $42,000, held cash totalling $50,100, owned jewellery, artworks and antiques to the value of $1,000 and owned household effects valued at $5,000. He also claimed that he had a real property encumbrance of $1,386,500, secured creditors of $32,000 and credit card liabilities of $14,000. 46 Based on the calculations undertaken by a member of his staff, Mr Naidenov said in his affidavit that he estimated Mr Bisseh and Mr Goldman had the following net equities in real property: (a) Mr Bisseh - $263,000; and (b) Mr Goldman - $206,750. 47 Mr Naidenov went on to say that, shortly prior to the adjourned second meeting of creditors, he arranged to obtain an updated asset and liability statement from Mr Bisseh. Based upon discounting the realisable value of household effects and motor vehicles, he then summarised his views as to the net asset positions of Mr Bisseh and Mr Goldman as set out above (at [43]).

The second creditors' meeting 48 As is mentioned a number of times above, the adjourned second creditors' meeting was held on 10 September 2018. The creditors and the value of their debts admitted by the Administrators for voting purposes at that meeting were as follows: Creditor Value Deputy Commissioner of Taxation $162,243.88 Alf Tornatore $18,339.38 Kazi Portolesi Lawyers $17,363.63 Lighthouse Australia Pty Ltd $14,080.00 Vincent M Aboud & Associates $11,152.18 Abraham Bisseh $5,076.04 Mark [sic - Marc] Goldman $1,570.00 Pilot Advisory $1,100,000.00 [TOTAL $1,329,825.11]

49 Of the above, Kazi Portolesi Lawyers were Cloud 9's lawyers, Vincent M Aboud & Associates were its external accountants and Messrs Tornatore, Bisseh and Goldman were shareholders of the company. 50 At that meeting, in his capacity as its chairperson, Mr Naidenov held proxies for the Australian Taxation Office (ATO), Mr Tornatore, Lighthouse Australia Pty Ltd, Mr Bisseh and Mr Goldman. With the exception of Pilot Advisory, all of the other creditors (including those voting by proxy) voted in favour of the resolution to execute the DOCA. The total value of the debts owed to those creditors was $229,825.11. 51 In the end result, with a majority of the creditors by number voting in favour of the resolution and a majority of the creditors by value voting against it, the vote was tied. As is already mentioned above, Mr Naidenov then exercised his casting vote (under r 75-115(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth)) in favour of the resolution. In his first affidavit filed in this proceeding, Mr Naidenov explained why he took that course. He said: (a) The return under the DOCA was far greater than liquidation given the difficulties which I have expressed above in paragraphs 88 to 91, in relation to recovering any funds through claims against [Mr Goldman] and Mr Bisseh or voidable transaction claims. (b) If [Cloud 9] was placed in liquidation, there was a significant risk of long protracted litigation which would deplete the personal financial resources of [Mr Goldman] and Mr Bisseh and any potential recovery. (c) I had no assessment of the merits of the causes of actions that may be pursued in a liquidation. (d) The majority of creditors, including the Deputy Commissioner of Taxation, voted in favour of the DOCA. (e) The return under the DOCA would provide a more accelerated return to creditors (within three months) as opposed to liquidation which may be protracted and uncertain. (f) Some of the claims by [Cloud 9] would have to be made in foreign jurisdictions which would add an extra layer of costs and delay. 52 The "difficulties" expressed at [88]-[91] of that affidavit (see at [51(a)] above) essentially revolved around Mr Goldman's and Mr Bisseh's net asset positions as follows: 88. In the Supplementary Report, I formed the view and made the recommendation that the creditors of [Cloud 9] resolve that [Cloud 9] enter into a DOCA as proposed by [Mr Goldman]. My reasoning for that recommendation was as follows: (a) The DOCA provided certainty of a dividend of 20 cents in the dollar to participating unsecured creditors compared with a possible 10 cents in the dollar in an optimistic liquidation scenario. (b) The DOCA allowed for a quicker return to creditors as the contribution to the DOCA fund was payable within three months of executions. This was in contrast to a liquidation scenario which was likely to involve protracted litigation against [Mr Goldman] and/or Mr Bisseh and other persons with an estimated return to creditors not for a period of at least 12 to 24 months. (c) The personal assets of [Mr Goldman] and Mr Bisseh was likely to be insufficient to meet the quantum of any claim against them and would likely be eroded away as a consequence of [Mr Goldman] and Mr Bisseh defending any claims. (d) The insolvent trading claim against [Mr Goldman] and Mr Bisseh was defensible. (e) Any potential claims against InfoMedix and Mr Abar were likely to be difficulty to pursue and ensure a recovery given jurisdictional issues. Likewise, any claim against eHealth was not possible given the deregistration of that entity. 89. In making my recommendation in favour of the DOCA, I also had regard to the fact that [Cloud 9] lacked the funds to prosecute the various potential claims identified in the Report and the Supplementary Report. 90. In making my recommendation in favour of the DOCA, I also had regard to the position of [Pilot Advisory] who was willing to either fund or take an assignment of the following potential claims: (a) against [Mr Goldman] and Mr Bisseh of [Cloud 9] in respect of payments made to InfoMedix; (b) against [Mr Goldman] and Mr Bisseh for payment of dividends; and (c) against Mr Abar in respect of the loan owed to [Cloud 9]. 91. I did not consider an assignment to [Pilot Advisory] of the above claims would be in the interest of creditors because: (a) The claims (other than perhaps the action for recovery of loan from Mr Abar) are not, in my experience, simple claims and would take a significant amount of time to prosecute and thus any benefit to creditors would not be as immediate as the return under the DOCA; (b) [Mr Goldman] and Mr Bisseh lacked sufficient assets to satisfy judgment and some of those assets would be expended in defence of the action; and (c) The longer the external administration of [Cloud 9] continues, the more fees would be incurred in respect of liquidator remuneration and internal disbursements. (Errors in original)

The execution and performance of the DOCA 53 The DOCA was executed on 26 September 2018. For present purposes, it contained the following salient features: (a) the Administrators were appointed as Administrators of the Deed under cl 3(a); (b) the obligations of the directors of the company under the Deed, including their obligations to pay $420,000 to the Administrators, were set out in cll 6(b) - (g) inclusive as follows: (b) The Directors' must pay the Directors Payments. (c) The Directors' Payments are: i. $100,000 immediately upon execution of the Deed (which it is acknowledged is currently being held by the Administrators; and ii. $320,000 within three (3) months of execution of the Deed; (d) [Cloud 9], by separate deed poll, conditionally releases the Deferred Creditor of any Claims it may have against them. (e) Such release in clause 6(d) above will not apply if the Deed is terminated pursuant to clause 18(a). (f) The Administrators are hereby authorised to treat the $100,000 payment contemplated by clause 6(c)(i) above. (g) [Cloud 9] guarantees the payment of the Directors Payments and the performance of the Directors in respect thereto and hereby grants to the Administrators a PPSA Security Interest over all PPSA Personal Property to secure the payment of the secured money and the performance of the Directors obligations to make the Directors Payments. (Errors in original) The expression "Deferred Creditor" (see at 6(d) above) was defined elsewhere in the Deed to mean "either or both of the current and former Directors". (c) Clause 18(a), which is referred to in cl 6(e) above provided that: This Deed terminates: (i) upon resolution according to section 445E of the Act: or (ii) upon the making of an order by the Court under section 445D of the Act in respect of this Deed. (Emphasis in original) (d) under cll 6(a) and 8, extracted below, the assets and control of the company reverted to the directors once the Deed was executed: 6 Directors' obligations (a) Upon this Deed commencing to operate, the assets of the Company revert to the Directors. The Directors must collect all money representing any realisation of assets owed by the Company and all money outstanding to the Company prior to the Relevant Date by debtors, which include all retentions held by third parties with respect to works performed by the Company. Such money will revert to the Company for working capital purposes. … 8 Control and business of the Company (a) Upon the execution of this Deed, control of the Company will return to the Directors. (b) The Directors must ensure that all documents in relation to the business of the Company or the Company itself bear the notation "Subject to deed of company arrangement". (c) The Directors will take all reasonable steps to procure the compliance by [Cloud 9] with its reporting obligations to the Australian Taxation Office as at the Relevant Date; (d) The Directors will take all reasonable steps to procure the lodgment by [Cloud 9] of the Amended tax lodgments; (e) The Directors will attend on the Administrators and give the Administrators such information as the Administrators reasonably require, from time to time in respect of the Deed. (Emphasis in original) (e) cl 10 of the Deed prevented the company's creditors proceeding with an application to wind up the company as follows: 10 Moratorium (a) This Deed commences on the date it is signed by all parties and continues until all the obligations of the parties under this Deed are fulfilled. (b) During the period of this Deed, each Creditor, must not: (i) make or proceed with any application for an order to wind up the Company; and (ii) without the leave of the Court, and then, only in accordance with terms as the Court imposes: (A) begin or proceed with a proceeding against the Company or in relation to any of the Company's property or property used or occupied by, or in the possession of, the Company, either in a court or in an arbitration; and (B) begin or proceed with any enforcement process in relation to any of the Company's property, or property used or occupied by, or in the possession of, the Company (iii) exercise any right of set off to which the Creditor would not have been entitled had the Company been wound up with the Relevant Date being the day on which the winding up was taken to have begun. (c) During the period of this Deed, the Company, including its members and its officers, must not make or proceed with any application for an order to wind up the Company and the Company must take steps to ensure this. (d) If any of the Directors' Payments is not made within the time provided for in cl 6(c) then the Administrators may serve the Directors a notice specifying the default and requiring the Directors to rectify the default within twenty (21) days of the date of service of the notice.; (e) If the Directors fail to comply with a notice issued under the above clause, the Administrators may, in their absolute discretion, convene a meeting of Creditors of the Company in order that the Creditors may consider whether to vary or terminate this Deed. (f) Nothing in this clause limits the operation of section 444D(2) or section 444D(3) of the Act. (g) This clause has effect in addition to, and not in derogation of section 444E of the Act. (Emphasis in original; errors in original) (f) cl 7 of the Deed described the rights and obligations of deferred creditors, including the current and former directors of the company, as follows: (a) While this Deed remains in operation, each Deferred Creditor will defer his, her or its claim against the company and will not participate, or seek to participate, in any distribution by the administrators. (b) Nothing in this clause affects or alters the entitlement of a Deferred Creditor to recover from the company any amount properly owing to him, her or by the company after the termination of this Deed. (c) Any Deferred Creditor may have assigned to him or her or it any Claim save that they will remain a Deferred Creditor. (Emphasis in original) (g) the Deed did not determine what payments were to be made to creditors, but it required the Administrators to apply the funds in the stated order of priority set out in cl 17, as follows: (a) The Administrators are to apply the Fund in the following order of priority: (i) first, payment of the Administrators' expenses, costs and remuneration for acting as Administrators of the Company; (ii) second, payment of the Administrators' expenses, costs and remuneration for acting as Administrators under this Deed; (iii) third, payment of Priority Creditors' Claims (other than those Priority Creditors who have waived their rights to receive priority payment); and (iv) last, in payment of the Claims of remaining Creditors on a pari passu basis according to the amount for which each respectively shall be admitted to proof; (b) For the purposes of application by the administrators of the fund, any eligible employee creditors are entitled to a priority equal to what they would have been entitled to if the fund were applied in accordance with sections 556, 560 and 561 of the Act; (c) The Administrators may make interim distributions out of the Fund at their discretion; (d) The Administrators will make a final distribution out of the Fund within two (2) months of receipt of the final payment or at such further time as deemed appropriate by the Administrators (Emphasis original; errors in original) (h) under cll 19 and 20 of the Deed, extracted below, the company's creditors were prevented from pursuing winding up proceedings against the company and they were required to accept their entitlements under the Deed in full satisfaction and complete discharge of their debts: 19 Discharge of debts The Creditors must accept their entitlements under this Deed in full satisfaction and complete discharge of all debts or any Claim which they have or claim to have against the Company as at the Relevant Date and each of them will, if called upon to do so, execute and deliver to the Company forms of release of any Claim as the Administrators require. 20 Release of Creditors' Claims (a) If the Administrators have paid to Creditors their full entitlements under this Deed and this Deed terminates in accordance with clause 18(a) all Claims are released in full and extinguished. (b) Upon termination of this Deed for whatever reason, other than according to clause 18(a), the Company is forever released and discharged by each Creditor who has received payment in partial satisfaction of a claim to the extent of that payment and each Creditor will, If called upon do so, execute and deliver to the Company form of release of any claim as the Administrators require. (c) This Deed may be pleaded in set off or in answer to any action suit claim demand or other proceeding as fully and effectively as if the Creditor has executed a binding covenant under seal not to sue for payment of the amounts referred to in clause 20(a) or 20(b), nor to appeal from, challenge or review the decision of the Administrators. (Emphasis in original) 54 On 20 September 2018, 21 September 2018 and 25 September 2018, Mr Goldman made payments totalling $100,000 into the trust account established by the Administrators for the purposes of the DOCA. On 8 November 2018, 9 November 2018 and 12 November 2018, further payments totalling $320,000 were paid by Cloud 9 into that trust account.

Pilot Advisory 55 As appears in [70] below, Pilot Advisory placed particular reliance on a number of sections of the Act, including s 445D to terminate the DOCA; s 415A to set aside the resolution to enter into the DOCA; and s 447A to make a number of further orders. Citing Emanuele v Australian Securities Commission (1995) 63 FCR 54, it claimed that this Court has the power under those sections to act in "the interests of the creditors as a whole, and in the public interest". It placed particular emphasis on the latter, claiming that it was in the public interest to investigate "misconduct in the affairs of the company". It claimed that the resolution to enter into the DOCA, and the DOCA itself, could not be justified by: (a) a concern about the personal asset positions and depletion of the financial resources of the director and former director; given the large amounts of dividends paid to them recently by the company; (b) the views of the Deputy Commissioner of Taxation given there was not truly a debt owed to it; (c) the views of the other creditors all of whom were or probably were in some way related to or had acted for the company. It acknowledged that it bore the onus to establish one of the grounds in s 445D(1). 56 Pilot Advisory claimed that "the motive behind the deed being put forward by the director[s] and effect of the deed is to allow the director[s] to escape examination of the payments made to [them] … and their fellow shareholders and related entities and to an entity whose role must be at least described as suspect [namely InforMedix]". It further claimed that the DOCA "severely" prejudiced it as the major creditor of the company. It also claimed that the effect of the DOCA was to discharge the directors of any claim that might be brought against them and, at the same time, allowed "them to use and control the company and, indeed, to reclaim any debt due by the company to them after termination of the deed". 57 It contended that it was in the public interest for the former and current directors of the company to be orally examined about the payments made to InforMedix, Mr Abar, eHealth and its shareholders, citing, in particular, the judgments in TiVo, Inc v Vivo International Corporation Pty Ltd (2014) 9 BFRA 583; [2014] FCA 789 (TiVo) and Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) & Ors [2018] VSC 156 (Eco Heat).

The Administrators 58 As is mentioned at the outset of these reasons, the Administrators opposed the orders sought by Pilot Advisory. Their position on the specific matters raised by it is outlined in some detail in the factual background section above (see, in particular, at [52]). Consequently, it is unnecessary to repeat those matters here. In their written submissions, the Administrators claimed that the reasons why Mr Naidenov voted in favour of the DOCA were summarised in the minutes of the second creditors' meeting as follows: (a) the return [to creditors] under the DOCA is far greater than liquidation; (b) the return under the DOCA is certain whereas under liquidation, significant legal action is required and there is no certainty as to any recoveries; (c) in the event of liquidation, significant risk that the long protracted litigation will deplete the director's personal financial resources given that at least approximately $500,000 in legal costs by each party has been incurred previously; (d) the Chairperson has considered the benefits of all creditors and their preferences for [Cloud 9] to execute the DOCA; and (e) the return under the DOCA versus liquidation was analysed objectively and based on a commercial basis with an immediate return within three months. 59 The Administrators claimed that Pilot Advisory had not challenged this reasoning process. They also contended that four of the seven creditors who voted for the DOCA were unrelated to the company, namely the Deputy Commissioner of Taxation, Kazi Portolesi Lawyers, Vincent M Aboud & Associates and Lighthouse Australia Pty Ltd. In response to Pilot Advisory's claim about the motive and effect of the DOCA, they strongly rejected the suggestion that they had an improper motive in voting for the DOCA and they contended that Pilot Advisory's complaint about the effect of the DOCA was "simply a complaint as to the operation of … Part 5.3 … in the Act". They contended that the object of that Part, as set out in s 435A(b) of the Act, was to obtain "a better return for the company's creditors and members than would result from an immediate winding up of the company". 60 Citing Britax Childcare Pty Ltd (ACN 006 773 600) v Infa Products Pty Ltd (ACN 092 222 994) (admins apptd) (2016) 115 ACSR 322; [2016] FCA 848 (Britax), they contended that, to succeed in this application, Pilot Advisory had to follow a two step process; first, to make out one of the grounds outlined in s 445D(1); and secondly, to persuade the Court to exercise its discretion to terminate the DOCA. They claimed that the former step applied equally to "a creditor entitled to claim a most significant sum in the administration". As for the ground under s 445D(1)(f), they emphasised the need for Pilot Advisory to establish that the prejudice concerned is unfair. In this respect, they pointed to their estimates that the creditors "would receive a 10% return in a liquidation scenario and could very well receive nothing as opposed to an estimated 20% return under the DOCA". They emphasised that Pilot Advisory had not contended, nor led any evidence to challenge these estimates. They also highlighted the fact that they had made these estimates, rather than the company or one of its creditors. To the extent that their opinion relied on estimates of the personal asset position of the directors of the company, they contended that such a consideration was "always relevant, particularly in the context of s 435A". Further, they contended that "[e]ven if it were abundantly clear that directors had committed breach of duty, there would be no practical utility in pursuing claims against the directors if they would not yield a return to creditors because the directors could not satisfy a judgment". Citing Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783 (Canadian Solar), they also contended that, as a minimum, Pilot Advisory needed to establish that "the opportunity for a greater return has been lost by entering into a DOCA". 61 As for the public interest ground raised under s 445D(1)(g), they contended that, by comparison to the circumstances in a number of other cases, in this matter there was no allegation of a fraudulent or wrongful purpose, no "unconscionable premium" involved in the DOCA and there was no suggestion that any "secret deals" had been done by those involved. Finally, they raised a number of concerns with respect to the further investigations or proceedings proposed by Pilot Advisory. Citing Vero Insurance Ltd v Kassem (as joint administrators of Ungul Properties Pty Ltd) and Another (2011) 86 ACSR 607; [2011] NSWCA 381 (Vero), they claimed that Pilot Advisory needed to show that there was a "practical purpose" to any proposed further investigations. As to the proceedings proposed by Pilot Advisory, they referred to its letter of 27 June 2018 (see at [39] above) and raised a number of specific queries about it, including the following: (a) on what terms it proposed to fund all or any of the actions (most obviously what percentage it would charge on account of its risk and what priority it would require for payment of its debt prior to any funds being available for the balance of the creditors); (b) whether all or any of the proposals would include an indemnity to the relevant liquidator who would run such an action; (c) what the value of such an indemnity would be; (d) whether any limit would be placed on the legal costs to be expended in any of the proposed proceedings; and (e) should all or any of the proposed proceedings be commenced and ultimately finalised in favour of a liquidator, whether the creditors as a whole would receive any return greater than that to be received through the DOCA or, indeed, at all. 62 On this aspect, they also pointed out that, under s 545 of the Act, a liquidator is not obliged to incur any personal liability in a liquidation. Further, they contended that Pilot Advisory's letter contained no commitment that any resulting proceedings could, or would, be funded by it such that the creditors and the administrators could properly assess whether, if those proceedings were to be successfully prosecuted, the creditors as a whole would be in a better position than under the DOCA.

Cloud 9 63 The company also opposed Pilot Advisory's application. In doing so, it raised many similar contentions to those raised by the Administrators. Without repeating the detail of those submissions, its contentions may be summarised as follows. First, it relied upon the structure and object of Part 5.3A of the Act and the free commercial choice it conferred on the creditors of an insolvent company. Secondly, it emphasised the importance of the Administrators' views, pointing out that they were "experienced, independent, arms' length officer[s] of the Court and … registered liquidator[s]". In this respect, it pointed out that the Administrators' views had not been challenged by cross-examination or by adducing contrary evidence. Further, while it accepted that the estimates of assets prepared by Mr Goldman and Mr Bisseh were self-serving, it claimed that Pilot Advisory had done nothing to test those estimates. Thirdly, and relatedly, it pointed to the scope and detail of the Administrators' investigations, as evidenced by their reports, leading to the vote of creditors to adopt the DOCA. Fourthly, it relied upon the fact that the ATO had supported the vote for the DOCA and contended that it was a "credible and independent substantive creditor". 64 Fifthly, it claimed that the DOCA provided "material benefit to all creditors and [did] not discriminate between creditors or classes of them". Sixthly, it relied upon the fact that both the Administrators and the company opposed the application and, conversely, no other creditor supported it. Seventhly, it contended that there was no apparent benefit to the company, or its creditors, in the company now being placed in liquidation. Eighthly, in respect of the further investigations proposed by Pilot Advisory, it contended that there had already been a number of examinations of its directors, including the three interviews conducted by the Administrators (see at [16]-[18] above) and the cross-examination of Mr Goldman during the District Court proceeding (see at [19] above). It also contended that Pilot Advisory could have already applied to conduct public examinations under Part 5.9, Division 1 of the Act. With respect to the InforMedix payment, it claimed that Pilot Advisory had not even tendered a copy of the Telstra agreement which was critical to that issue. 65 Ninthly, it contended that motive was irrelevant and that there was no issue of "commercial morality" in the relevant sense. In this respect, it cited TiVo to contend that "the commercial failure of a corporation does not, per se, raise issues of commercial morality". Tenthly, it sought to distinguish Pilot Advisory's reliance on Canadian Solar, Cresvale Far East v Cresvale Securities (2001) 37 ACSR 394; [2001] NSWSC 89, Eco Heat and TiVo. In particular, it highlighted the observations of Sifris J in Eco Heat (at [57]) that: As a general proposition if the return under the DOCA is not insubstantial or token and the public interest and commercial morality issues are unlikely to translate into a cause of action realistically worth investigating and pursuing, the scale may tip in favour of retaining the DOCA … It also highlighted the fact that, in TiVo, Gordon J (at [58]) was speaking about a DOCA that: "ha[d] a fraudulent or wrongful purpose or … offer[ed] an unconscionable premium, contrary to public policy, as a bribe to creditors to support an arrangement under which the conduct of the directors will not be investigated". Finally, it raised similar queries to those raised by the Administrators about Pilot Advisory's proposals to fund the public examinations and/or the legal fees associated with any proceedings that may ensue.

Pilot Advisory's reply 66 In its submissions in reply, Pilot Advisory agreed that, if it were successful in its application, the Court's orders should include an order under s 447A of the Act that the $420,000 that has been paid into the DOCA fund be repaid to those who had advanced those monies. In response to the Administrators' concerns about the treatment of the $60,000 it proposed to provide to fund the public examinations (see at [61] above), it stated they should not be treated as a cost of the liquidation, but rather should be added to the debt it would prove in the liquidation. It conceded that this would increase the total creditors' figure and therefore marginally affect (about one-fifth of a cent) the rateable proportion each creditor would receive in a liquidation scenario. It should be noted that the Administrators queried whether this approach was consistent with the provisions of the Act. 67 In addition, it made various responses to the defendants' contentions. First, it submitted that there was no need for it to cross-examine the Administrators because the facts were not in issue and it was not seeking to have the Administrators' reports critiqued. Instead, it submitted the application was primarily based on "commercial morality" of the situation. Secondly, and relatedly, it submitted that the directors were not parties to this application and had not filed any affidavits in opposition to it so there was, therefore, no opportunity for it to cross-examine them to test the estimates they had provided of their assets and liabilities. This deficiency was significant, so it claimed, because the company's sole current director could have instructed it to file such affidavit evidence in this application to, among other things, explain the various questionable transactions in issue. Finally on this aspect, it submitted that, since it was not a party to the Telstra agreement, it was not obligated to tender that agreement. 68 Thirdly, citing Eco Heat, it submitted that the DOCA could be set aside in the public interest even if the company's creditors would stand to gain more from the DOCA compared to a liquidation, in support. Fourthly, in response to the company's submission with respect to the examinations that it claimed have already been conducted, it submitted that those examinations were unsatisfactory and that a public examination would be more able to test the vagaries of the directors' answers. It also contended that, in a public examination, it would be possible to examine the directors about their financial resources, claiming that the estimates that the directors provided to the Administrators were self-serving. On that aspect, it submitted that the Court should be "very loath to accept on face value the [asset] statements that they made" and that those statements were "very simple assets and liability statement[s]"]. It also claimed that the latter line of inquiry would examine what the directors did with the "large dividends" they had received from the company. 69 Fifthly, in respect of the funding of the public examination, it stated that it would be funded up to $60,000 and it would then assess whether to pursue any proceedings for any claims that may be revealed. In this respect, it claimed that it was reasonable to rely upon its commercial judgment and that of the liquidator about whether or not to pursue such proceedings. Further, it claimed that the legal fees to pursue any proceedings could be obtained from a range of different sources, including a professional funder or from the Australian Securities and Investments Commission (ASIC). In this regard, it accepted the Administrators' estimates of $100,000 to $150,000 for those legal fees and it also accepted the estimate that any litigation funder would add a premium of approximately 20%. It further accepted that paying this premium would reduce the liquidation scenario return of approximately 10 cents in the dollar by approximately one cent in the dollar. Finally, it accepted that the tax debt issue was largely immaterial because any additional funds gained would be added to both the DOCA scenario and the liquidation scenario and that would, therefore, not affect the overall comparison between the two. This was, in my view, a concession well made.

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.

CONSIDERATION 96 The first question in the two stage inquiry under s 445D(1) (see at [81] above) is whether Pilot Advisory has made out one of the grounds under s 445D(1)(f)(i) or (g)? On that question, Pilot Advisory focused primarily on the public interest ground under (g). Nonetheless, it also made submissions directed to the unfairly prejudicial ground in (f). It is convenient to deal with those contentions first. 97 It can be seen from the terms of s 445D(1)(f) above (see at [73]) that "the deed or a provision of it" is pivotal to the operation of that subsection. In its submissions, Pilot Advisory contended that the director's motive in putting forward the DOCA and the effect of various of its provisions caused it to be "severely" prejudiced as the major creditor of the company. I take this to mean "unfairly prejudicial" in the terms of subsection (f)(i). In Patrick Stevedores Operations No 2 Proprietary Limited v Maritime Union of Australia (1998) 195 CLR 1; [1998] HCA 30 (Patrick Stevedores) at [4], Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ said of the word "prejudice" in a similar, albeit industrial, context, that it covered "not only legal injury but any adverse affection of, or deterioration in, the advantages enjoyed by the employee". In a similar context in Auimatagi v Australian Building and Construction Commissioner (2018) 363 ALR 246; [2018] FCAFC 191 at [109], the Full Court (Allsop CJ, Collier and Rangiah JJ), after citing Patrick Stevedores above, referred to the dictionary definitions of the expression in the following terms: … Meanings given by dictionaries are equally broad: Macquarie (1985) - "disadvantage remitting from some judgment or action of another; resulting injury or detriment"; the Shorter Oxford Dictionary on historical principles (1973) - "injury, detriment or damage caused to a person by judgement or action in which his rights are disregarded". 98 Having regard to these observations, it is not difficult to conclude that the provisions of the DOCA that require Pilot Advisory to accept approximately 20% of its debt in full satisfaction are prejudicial to it (cll 19 and 20: see at [53(g)] above). On the other hand, since that approximate level of return is applied to all of the creditors of Cloud 9 without distinction, those provisions of the DOCA could not, without more, be characterised as discriminatory. This provides a likely explanation why Pilot Advisory has not relied on the expression "unfairly discriminatory" in subsection (f)(i). The critical question then is: whether some feature or provision of the DOCA is "unfairly" prejudicial to Pilot Advisory? 99 To answer that question, it is convenient to begin with the object or purpose of Part 5.3A of the Act. In brief summary, that object or purpose as stated in s 435A (see at [76] above) is to allow an insolvent company to either continue in business or, if it is not possible for the company, or its business, to continue in existence, to provide for a better return to its creditors than if it were to be liquidated. In this matter, Cloud 9 has sold its business so the first part of that object does not arise. In that event, the object or purpose of Part 5.3A necessarily becomes directed to the remaining part of that object, the continuing existence of the company. This, therefore, sets the broader statutory context for the assessment whether the DOCA in this matter is "unfairly" prejudicial to Pilot Advisory. I will return to this aspect later in these reasons. 100 Turning then to the text of s 445D(1)(f)(i), the word "unfairly" plainly requires an assessment of all of the relevant circumstances to determine whether that unfairness exists. In this respect, the defendants have contended that the directors' subjective motives, or purposes, are irrelevant. It is true that there is, in this matter, little direct evidence of their motives and because they are not parties to this proceeding, and have not filed any affidavits in opposition to the orders sought, there has been no opportunity to cross-examine them on that issue. However, I do not consider that excludes the drawing of inferences about their motives, nor does it exclude this Court from taking account of the effect their conduct has produced. I therefore reject the defendants' contentions on this aspect. Furthermore, aside from the guiding principles that they reveal, I do not consider much, if any, assistance is to be gained in this assessment from comparing the facts of this case with those of other similar cases. As has been reiterated in the authorities reviewed above, each case depends on its own facts and circumstances. I therefore consider the defendants' reliance on the absence of misfeasance, concealment, fraud or similar in this case is misplaced. Nonetheless, when one has regard to all of the relevant facts and circumstances of this matter outlined below, I consider it provides a different, but no less compelling, reason for concluding that the provisions of the DOCA in this matter are unfairly prejudicial to Pilot Advisory. 101 In the first place, during the three and a half year period prior to it being placed in voluntary administration in June 2018 the directors caused Cloud 9 to pay out $7.31 million of the $8.8 million proceeds of its asset sale to a Telstra subsidiary, in the following manner: (a) $2,476,260 to the shareholders of the company as dividends (see at [13] above); (b) $3,635,125.88 to InforMedix; a payment for which no rational explanation has yet been given (see at [15] above); (c) $882,048 to partially repay a loan to its related company, eHealth (see at [24] above); and (d) $317,412 as a loan to Mr Abar, a shareholder in the company (see at [27] above). 102 Importantly, the Administrators concluded that the first two of these transactions, or series of transactions, may have involved a breach of the directors' duties to Cloud 9: the payment of dividends (see at [14] above); and the InforMedix payment (see at [22]-[23] above). Furthermore, they concluded that the last two payments may have constituted uncommercial transactions: the eHealth payment (see at [26] above); and the loan to Mr Abar (see at [27] above). In my view, the former conclusions are well-founded. Indeed, having regard to the circumstances of these payments reviewed above, I consider they disclose a prima facie case that, in causing Cloud 9 to make those payments, the directors have breached their duties to it. 103 Secondly, throughout the same period, the directors caused Cloud 9 to defend Pilot Advisory's claim. That ultimately resulted in a trial in the District Court at Brisbane at which they then caused the company to completely capitulate and consent to judgment for the full amount of that claim, plus interest, plus costs. Again, importantly, the Administrators concluded that this course of conduct may also have involved a breach of the directors' duties to the company (see at [31] above). Again, I agree with that conclusion and consider there is, similarly, a prima facie case for such a breach. 104 Thirdly, despite the fact that they had, throughout that three and a half year period, maintained a situation where Cloud 9 had an excess of liabilities over assets of between $1,525,738 and $2,156,925 (see at [32] above) the directors chose the receipt of Pilot Advisory's statutory demand for its judgment debt under s 459E of the Act to opportunistically declare that Cloud 9 had become insolvent, thereby justifying it being placed in voluntary administration under s 436A of the Act. 105 Fourthly, the directors then voted with the other creditors of the company, the majority of whom were either shareholders in the company, or its financial and legal advisers (see at [49] above), to execute the DOCA. Finally, and most importantly of all, the DOCA, which was the ultimate result of the directors' course of conduct as outlined above, contains the following provisions. First, clauses which act to shield the directors from the scrutiny that would otherwise occur in a liquidation in respect of their prima facie breaches of duty mentioned above (see at [53(e)] above). Secondly, and to compound the above, a clause which conditionally discharges the directors from liability for those breaches of duty (see at [53(d)] above). And finally, a provision which returns the company to the control of the directors and anticipates it will continue in existence (see [53(d)] above). 106 When these provisions of the DOCA are assessed against the background of all of the surrounding facts and circumstances outlined above, I consider they operate in a manner that is unfairly prejudicial to Pilot Advisory. That is so because they require Pilot Advisory to forego approximately $880,000 of its judgment debt and yet preclude it from procuring any scrutiny of the prima facie breaches of the directors' duties mentioned above in circumstances where those breaches have, in large part, been directly responsible for the DOCA coming into existence. For these reasons, I consider that Pilot Advisory has established its nominated ground under s 445D(1)(f)(i) above. 107 Additionally, in the particular facts and circumstances of this matter outlined above, I also consider that Pilot Advisory has established its "for some other reason" ground under s 445D(1)(g) of the Act. That is to say, having regard to the chain of events that led to the DOCA coming into existence, I consider the provisions of it outlined above offend commercial morality in the sense explained in my review of the authorities above (see particularly at [82] and [89]) and is therefore contrary to the public interest in that it acts to shield the directors from scrutiny with respect to their prima facie breaches of duty to the company and, at the same time, conditionally discharges them from liability for those breaches. 108 For these reasons, I consider Pilot Advisory has made out both of the grounds for which it contended under s 445D(1). 109 These conclusions lead to the second stage of the inquiry under s 445D(1): should I exercise my discretion to terminate the DOCA? There are, in my view, a number of factors that dictate a positive answer to that question. First, while I accept the Administrators' opinions that the company's creditors are likely to receive a larger proportion of their debt more quickly under the DOCA, in the peculiar set of circumstances outlined above, I do not consider this is a matter that falls to be resolved by reference to the commercial judgment of the company's creditors. To the contrary, I consider it is an instance where the public interest prevails (see the discussion at [90] above). That is so, even though one of those creditors holds an important public office, namely the Deputy Commissioner of Taxation. Since the Commissioner is most unlikely to have been aware of the chain of events outlined above that led to the resolution to execute the DOCA, his support for that resolution cannot be taken to reflect the public interest. Nor do I consider the Administrators' opinions about the preferable commercial outcome for the creditors of the company had due regard to that matter. This is unsurprising because a determination as to what serves, or offends, the public interest is ultimately a matter for this Court. On this aspect, it is also worth adding that, given my conclusions about the directors' prima facie breaches of duty and the commercial morality (or lack thereof) associated with the provisions of the DOCA mentioned above, I consider it would be perverse to allow those directors to significantly affect the outcome in this matter by means of their self-serving statements of assets and liabilities. In this respect, I accept Pilot Advisory's contentions at [68] above concerning the reliability of those estimates. 110 Secondly, while acknowledging the limitations that commonly affect the Administrators' inquiries, and without implying any criticisms of them, I consider the scrutiny that has occurred to date of the directors' conduct has been particularly ineffective in obtaining any sensible rationale for the payments they caused the company to make. That is particularly so with the payment they caused it to make to InforMedix (see at [15]-[23] above). Similarly ineffective was the cross-examination of Mr Goldman in the District Court proceedings about that matter. The central issue in that proceeding was whether or not the company was liable to pay Pilot Advisory its debt, not why it was that the company made the payment that it did to InforMedix. 111 While I am dealing with these aspects, and acknowledging some duplication with matters I have already addressed above, for the reasons advanced by Pilot Advisory in its submissions in reply (see at [67]-[68] above), I reject the defendants' contentions concerning: the need for Pilot Advisory to challenge the Administrators' views; its opportunity to cross-examine the directors to test their estimates of assets and liabilities; and its obligation to tender the Telstra agreement. I also accept Pilot Advisory's contentions concerning: the likelihood that the public examinations will be more effective than the Administrators' inquiries to date; and that those examinations will be able to test the directors' estimates of assets and liabilities. 112 Finally, in deciding to exercise my discretion to terminate the DOCA, I have also had regard to the fact that the company sold its business and ceased to trade some years ago and there is no evidence of any particular reason, public or private, why it needs to continue in existence. In such circumstances, it is difficult to see how the object of Part 5.3A, discussed above (at [99]), is served by the DOCA in this matter. The provisions of that Part were intended by the Legislature to make the administration of genuinely insolvent companies more efficient and less costly (see at [77]-[80] above). They were not intended to be used as a device to escape the payment of a company's debts much less to protect directors from their misconduct in the affairs of a company.

CONCLUSION 113 For these reasons, I consider an order should be made under s 445D(1) of the Act to terminate the DOCA in this matter. In reaching this conclusion, I have borne in mind the fact that Pilot Advisory bears the onus in this application and setting aside the commercial judgment of the creditors as reflected in the DOCA is not a step to be taken lightly. Since Pilot Advisory has succeeded under s 445D(1), it is unnecessary to consider its alternative applications under various other provisions of the Act (see at [70] above). However, the final orders will need to reflect the provisions of s 446AA of the Act (see at [75] above) and, among other things, provide for the appointment of a liquidator. 114 Finally, it is necessary to deal with the complaints the defendants have made about the commitment Pilot Advisory has made to support the company in a liquidation scenario. In my view, none of those complaints is valid. In other words, I accept the thrust of Pilot Advisory's contentions on those matters at [66] and [69] above. Specifically, I consider Pilot Advisory has made a sufficiently firm commitment to fund the public examinations up to an amount of $60,000. Furthermore, in oral submissions, it stated, through its counsel, that it was content for that sum to be added to its debt with the company rather than treating it as a cost of the liquidation. Providing that commitment is duly reflected in the final orders, I consider it is sufficient to ensure that the public interest is served and the directors are examined with respect to their conduct of the affairs of this company. 115 As to the question whether Pilot Advisory should be required to make a commitment to fund any legal proceedings that may ensue as a result of the public examinations, I agree with it that this is a matter that should be left to its commercial judgment and to that of the liquidator once the public examinations are completed. Finally, it has been agreed between the parties that the $420,000 paid into the DOCA fund should be repaid to those who paid that sum. That matter also needs to be reflected in the final orders. 116 Accordingly, the only order necessary at this stage is that, by the close of business on 17 January 2020, the parties are to consult, prepare and submit to my chambers a set of draft orders to reflect the contents of these reasons. I certify that the preceding one hundred and sixteen (116) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.