Plaintiff v First Defendant

"In or about August 2004, through my solicitor at the time, Ms Ashe-Lee Jegathesan ("Ashe-Lee"), I decided to inform the Siebels of my desire to exit [the Company] or alternatively to discuss my future with the [Company]. Ashe-Lee, acting on my instructions, informed Michael that I may be exercising my option pursuant to the Put and Call Option and may also require repayment of my loan to [the Company]."

15 In response to this communication, Mr Vijay received a letter from Michael Siebel dated 6 August 2004 containing many assertions, and a number of complaints about Mr Vijay's conduct. Again there is a significant dispute about the truth of the contents of the letter which Mr Vijay characterised as containing numerous half-truths, fabrications or falsehoods.

16 According to Mr Vijay:

"Due to the many untrue allegations in Michael's letter 6 August 2004, I decided to realise my investments in the company. Accordingly I served a notice in writing to Michael and Dianne exercising my option requiring them to repay the company's loan to me, purchase my shares in the company for them to release the security held by the financial company that had procured the mortgage loan."

17 Some unsuccessful negotiations followed as to Mr Vijay's repayment and exit from the Company. In a particularly plaintive letter dated 27 August 2004, Leon Siebel wrote to Mr Vijay. In the letter Leon Siebel said that Global Rags was his "baby", as Mr Vijay knew, and that, while his parents had given him financial support, he had given birth to the business and had nurtured it through the past nine years. He urged Mr Vijay to allow him time to pay off the moneys owed to him and suggested a schedule of repayments. On 17 September 2004 Mr Philip Edelstein ("Mr Edelstein") joined the Company as financial controller. In early October 2004, at the suggestion of Mr Edelstein, someone contacted Mr S. Livadaras ("Mr Livadaras") of Stantons, accountants, and he had a number of meetings with the Siebels. Mr Livadaras in turn asked Mr E.W.J Browne ("Mr Browne"), solicitor, a senior associate of Frenkel Partners, to meet with Michael and Dianne Siebel and advise them concerning insolvent trading. Mr Browne then had a meeting on 8 October 2004 with Michael and Dianne Siebel. On or about 12 October 2004, Leon Siebel had Stantons organise the incorporation of a company, Brands Direct (Aust) Pty Ltd ("Brands Direct").

18 There was then a directors' meeting on 27 October 2004. The minutes of the meeting, which Mr Vijay accepted were accurate, may be summarised as follows. The meeting was attended by the three directors, Leon Siebel, Mr Edelstein (the new financial controller) and Mr Browne. Mr Edelstein reported a loss for July and August 2004 of approximately $196,000. Mr Edelstein further reported that if the management accounts for the year ended 30 June 2004 were adjusted to correctly reflect the value of stock, the Company would incur a loss of approximately $300,000 because the stock was reflected in the management accounts at $1.3M and Leon Siebel had advised Mr Edelstein that he (Leon) estimated the stock value to be about $600,000. Mr Edelstein said that he felt that these losses were unsustainable. Mr Edelstein reported that the schedule of creditors reflected a balance of approximately $500,000, that the Company owed the ATO about $220,000 of PAYG and GST in arrears and that there was a payment due that day amounting to about $25,000 for superannuation. Mr Edelstein said that the Company was unable to pay these liabilities.[2]

19 The minutes record that in the light of Mr Edelstein's report, Michael Siebel proposed that the business be advertised for sale as to which Dianne Siebel agreed and Mr Vijay abstained. The minutes then record a dispute between Mr Vijay and Michael Siebel as to the history of disclosure to Mr Vijay of the Company's losses. Michael Siebel referred to the losses incurred by the Company and the substantial moneys injected by himself and his wife. Mr Vijay expressed concern about insolvent trading. Michael Siebel concurred with that concern but also referred to concerns about protecting their staff and the personal guarantees given by Michael Siebel and Dianne Siebel in relation to leases and the like. The minutes then record a dispute about whether Mr Vijay had performed his obligations under the Shareholders' Agreement.

20 On or about 30 October 2004, the business was advertised for sale in "The Age", although, as Michael Siebel testified "[w]e didn't think that under any circumstances there would be any buyer for the business the way it was and that's the honest truth, and all we were doing was placing an advertisement because we were told that we had to place an advertisement."[3] An internal stocktaking and a valuation of other assets were organised for the purposes of any sale but there was no response to the advertisement.

21 A further directors' meeting was held on 9 November 2004, at the request of Mr Vijay who was very concerned about the risk of insolvent trading. A statement of assets and liabilities was tabled showing a deficiency excluding loans from related persons of about $680,000 (if stock were valued at $650,000), or up to $880,000 (if allowance were made for obsolescence or seasonal stock). The minutes of the meeting, again accepted by Mr Vijay as accurate (or substantially accurate), may be summarised as follows. Present at the meeting, in addition to the directors were Leon Seibel, Mr Edelstein, Mr Hung of the Company's accountants and Mr Livadaras. Mr Vijay again expressed concern about insolvent trading and it was agreed that based on the schedule of assets and liabilities "there was no doubt that the company was insolvent". There followed a discussion about sale of the business. I find that Mr Livadaras said that the best possible solution would be to sell the business and then place the Company into liquidation. Mr Edelstein asked the directors if they were interested in buying the business to which Michael and Dianne Siebel responded in the negative and Mr Vijay said that he would need to discuss this with Michael Siebel and subsequently Leon Siebel. The directors agreed to adjourn the meeting to Friday 12 November.

22 According to Michael Siebel, discussions continued after the meeting closed. Leon Siebel said that he wanted to purchase the business and he asked Mr Vijay if he was interested in an equal partnership. Leon Siebel suggested that Mr Vijay contribute the capital required and that Leon Siebel would run the operations. Mr Vijay showed initial interest but, the next day, told Leon Siebel that his wife would not allow him to go into the business with Leon. From that time, with the assistance and advice of Mr Livadaras, Leon Siebel began working on a proposal for his purchase of the business. Leon Siebel instructed Mr Livadaras to assess a fair and reasonable price for the business that could stand up to scrutiny. Mr Livadaras recommended that there be a provision in the sale agreement as to ratification by an administrator and also advised as to which creditors should be "taken over" by the purchaser.

23 On 10 November 2004, the possibility of a sale of the business to Leon Siebel was mentioned to Mr Browne and he obtained an ASIC search in relation to Brands Direct. On 12 November 2004, around midday, Mr Browne was instructed by Mr Edelstein to commence preparation of a sale of business agreement. The instructions and information supplied to Mr Browne apparently came from Mr Edelstein. Leon Siebel told Michael Siebel of his desire and intent to purchase the business at some time on 11 November 2004 or on 12 November 2004 prior to the commencement of the meeting on that day.

24 There is a dispute as to precisely what happened at the resumed directors' meeting on Friday 12 November 2004 at 5pm. Mr Vijay's version was in substance as follows. After some informal discussion, the meeting commenced. Mr Vijay proposed the appointment of an administrator and Michael and Dianne Siebel voted against it. When Mr Vijay asked Michael and Dianne Siebel why they were not appointing an administrator and why they were not prepared to accept his nominee, they told him that they had fixed a meeting to see Mr Andrew Yeo on Monday. Mr Vijay testified that he knew that the other directors were meeting on the Monday and that he "could have come along as a director". However, Mr Vijay told them that he had no alternative but to report their actions as officers and directors of the Company to the relevant authorities, because he now knew that the Company was continuing to trade whilst insolvent. Mr Vijay deposed that "[t]he meeting was hastily declared closed there being no further business to discuss." Mr Vijay conceded in cross-examination that he may have said: "You do whatever you like then. I don't want to be involved with you lot anymore" but that occurred after the meeting had closed.

25 Michael Siebel's version was in substance as follows. Mr Edelstein told the meeting that there had been no further communication with a possible purchaser. Leon Siebel said that Mr Vijay was no longer interested in purchasing the business with him and said that he was now making a formal offer to purchase the business himself and asked if there were any formal objections to this. Mr Vijay voiced no objection. Michael and Dianne Siebel agreed that it would be satisfactory as there had been no other prospective buyers to date. Leon Siebel suggested that they discuss the details of the sale after all other business had been dealt with and this was agreed to. Michael Siebel raised the matter of appointment of an administrator and told the meeting that an appointment to meet with administrators on Monday 15 November 2004 had been arranged and he invited Mr Vijay to be present at the meeting with the administrators. Mr Vijay said that he did not want to attend a meeting with administrators who had been approached on the recommendation of the Siebels' advisers. Mr Vijay said that he wanted his own administrator to be appointed immediately and that he had spoken to a person who would be able to take an appointment that afternoon. A vote was taken on Mr Vijay's proposal to appoint an administrator then and there and was defeated on the votes of Michael and Dianne Siebel. When Mr Vijay's proposal was defeated he said that he would be reporting the matter to the appropriate authorities. Mr Vijay then left the meeting, saying as he left words to the effect of "you do whatever you like then, I don't want to be involved with you lot anymore". After Mr Vijay left the meeting, Michael Siebel asked Leon Siebel what price he was prepared to offer for the business. Leon Siebel said that, having gone over the figures with Mr Edelstein, he was prepared to offer about $35,000 in cash for the fixed assets, stock and rent deposits and that he would assume liability for the majority of trade creditors, employee entitlements and superannuation obligations. Michael and Dianne Siebel voted on and agreed to Leon Siebel's proposal.

26 The minutes of the meeting signed by Michael Siebel are, as one would expect, reflected in his affidavit. However the minutes also record that, prior to the vote being taken on Mr Vijay's proposal to appoint an administrator, the following occurred:

"Mike and Leon pointed out that the situation had been like this for a long time and that to keep trading for the weekend could do no harm as no additional liabilities would be incurred over the weekend. Mike went on to say that in fact it could potentially save the jobs of nearly 100 staff at Global Rags and this was more important than anything else."

27 Mr Edelstein prepared the minutes of the meeting of 12 November 2004 with the assistance of a digital recording of what had occurred at the meeting. The recording was no longer available but Mr Edelstein said that the minutes were accurate and I accept that evidence.

28 Leon Siebel told Mr Browne by telephone on the evening of 12 November 2004 that the sale was to proceed. Over the weekend, Frenkel Partners finalised the preparation of a sale agreement, with the assistance of information and material provided by Mr Edelstein.

29 Early on Monday morning, 15 November 2004, and prior to the Company going into voluntary administration, the Company entered a written sale of business and assets agreement ("the Sale Agreement") with Brands Direct. The agreement was signed at the offices of Frenkel Partners by Michael and Dianne Siebel as directors and on behalf of the Company and by Leon Siebel as director and on behalf of Brands Direct.

30 The assets sold under the Sale Agreement were the business as a going concern including the assets and stock of the business, the goodwill of the business and all trade debtors. The consideration for the sale was provided in para 3, namely that Brands Direct should take over and assume responsibility for the Employee Entitlements of the Transferring employees (as defined) and the Liabilities (as defined) and pay the Company the sum of $30,000.

31 The "Liabilities" thus "taken over" were listed as leases and hire-purchase agreements (details attached) and trade creditors as per an attached list. The attached list of trade creditors was a computer print out of the company's trade creditors dated 14 November 2004 showing a total of $605,084. As will be seen, the list encompassed most but not all of the company's unrelated creditors.

32 Of importance, para 6.6 of the Sale Agreement provided:

"It is a condition subsequent to this Agreement that immediately following completion the Vendor appoints an Administrator pursuant to Section 436(A) of the Corporations Act and the Administrator so appointed ratifies this agreement within 14 days of the date of appointment.

In the event of the Administrator ratifying this Agreement then the administrator shall do all acts and things and execute all Deeds and documents and other writings as shall from time to time be reasonably required for the purposes of or to give effect to the transfer of those Leases which have not been transferred by the Completion Date."

33 There then followed that morning a purported meeting of directors attended by Michael and Dianne Siebel at which it was resolved that in their opinion the Company was likely to become insolvent and that Messrs Rambaldi and Yeo be appointed joint and several administrators of the Company, and they were appointed accordingly.

34 On 15 November 2004 Mr Vijay was informed by Mr Livadaras that the Company had been placed into voluntary administration. Later the same day, Mr Yeo telephoned Mr Vijay and informed him that he and Mr Rambaldi had been appointed administrators and that the business had been sold earlier that same morning. Mr Yeo told Mr Vijay that the Sale Agreement had to be ratified by the administrators. Mr Yeo also told him that he had every opportunity to provide Mr Yeo with grounds to overturn the sale and, if so, he could either purchase the business for himself or identify a party willing to purchase the business for a price greater than that paid by the purchaser. Mr Vijay left Australia that day and did not return until 9 December 2004 but Mr Yeo had a conversation along similar lines with Mr Peter Gountzos, Mr Vijay's adviser, on 17 November 2004.

35 The first meeting of creditors was held on 22 November 2004. The administrators told the meeting, inter alia, that they had until 29 November 2004 to "undo" the Sale Agreement. Various persons spoke and raised issues. Mr Vijay was represented at the meeting by one Peter Jones and by Mr Gountzos who both asked a number of questions and also made some statements on Mr Vijay's behalf. Mr Jones said that while Mr Vijay was happy to have the Company placed into voluntary administration, it was the Company with its assets, not the shell of the Company which he was concerned to see in administration. No resolutions were proposed, no creditors' committee was appointed and the meeting closed.

36 On 29 November 2004 the administrators received a letter from Stamfords, the solicitors for Mr Vijay, setting out their instructions in detail and reserving all of their client's rights pending the administrators' decision whether to avoid the Sale Agreement (and supporting the avoidance thereof).

37 The administrators decided not to avoid the Sale Agreement. By letter dated 29 November 2004, Mr Yeo advised Frenkel Partners that he ratified the Sale Agreement but reserved his right to apply to the Court to void the transaction under s.588FB of the Act, if the creditors resolved to wind up the Company.

38 The administrators' report, made by Mr Yeo, pursuant to s.439A(4) of the Act is dated 1 December 2004. Mr Yeo recommended that the Company should be placed into liquidation at the second creditors' meeting convened for 10 December 2004. At the date of the report, Mr Yeo estimated a return to ordinary unsecured creditors of between 6.5 and 7.9 cents in the dollar, if a DOCA then proposed by Michael and Dianne Siebel were accepted, whereas in a liquidation they estimate a return of between 0 and 10.6 cents in the dollar (depending on recoveries by a liquidator).[4]

39 Mr Yeo reported that he had analysed the commerciality of the Sale Agreement and that the sale amount may have been undervalued in the sum of $35,033. A detailed analysis was set out in the report supporting this conclusion. As to ratification of the Sale Agreement, Mr Yeo said:

"The 14 day period expired on 29 November 2004. I advise that I ratified the Sale Agreement on that day. My reasons for ratifying the Sale Agreement when my analysis indicated that the sale may have been for undervalue and may have been an uncommercial transaction (as advised in Section 11.3 of this report) are as follows:

• The limited time available to make my decision.

• Whilst I have ratified the Sale Agreement, I have reserved my rights to apply to the Court to have the transaction voided in the event that Creditors resolve to wind the Company up. One possible benefit of this approach is that the Court can make a number of different orders in respect to restitution, such as compensation orders directing the payments of money that the Court thinks fairly represent the benefit that Brands Direct have received under the transaction.

• The effect of not ratifying the Sale Agreement would have resulted in the business being returned to ACIB.

My preliminary investigations provided little comfort that the business could be traded profitably and would not further erode the assets of the Company, prior to an alternate contract of sale being settled.

The business has few liquid assets available to provide the necessary funds to continue trading with the majority of stock subject to Retention of Title Clauses ("ROT").

In this regard, I have received the trading terms of the major suppliers and have determined that it is likely that the majority of the major suppliers would have valid ROT clauses. This is estimated to reduce the available stock by $331,832.

• Whilst I consider that the sale may have been for undervalue, my initial enquiries suggest that the quantum of the undervalue is not sufficient to justify incurring the additional costs associated with trading the business, the costs to be incurred, including the Administrator's fees, solicitor's costs and costs associated with selling the business. Further, there also remains the possibility that any alternative sale which may be achieved would result in a significantly reduced result for priority and unsecured creditors.

• No parties approached me during the 14 day period with offers to purchase the business. I advised associated parties on a number of occasions that the opportunity to submit an offer was available. However, such offers needed to be submitted prior to the 14 day ratification deadline.

• Advertising the business for sale was not considered to be an option as the assets that would have been offered for sale were not the property of ACIB due to the existence of the Sale Agreement and therefore it was likely that Brands Direct would have applied for injunctive relief had an advertisement been placed."

40 Mr Yeo advised that the financial position of the Company was estimated to be:

41 The unsecured creditors of $220,162.79 thus not "taken over" by Brands Direct were, according to the report, the ATO ($208,894.97), Cambridge Integrated Services ($3,758.05), and other trade creditors ($7,509.77).

42 The report showed that the related party loans of at least $1,195,108 were mainly from the Siebels, or from persons and entities associated with them, but included Mr Vijay in the sum of $150,000.

43 The report summarised the terms of the proposed DOCA as :

"1. Mr & Mrs Siebel ("the Siebels") will together contribute an amount of $100,000.00 payable in ten monthly instalments of $10,000.00 each commencing on 1 January 2005;

2. The Siebels and all parties related to them will not seek to participate in any distribution made pursuant to the [DOCA] for monies owing to them in respect of loans made to the Company;

3. The Siebels will negotiate the full repayment of the debt owing by the Company to Westpac under account number 033 113 118 356 such that Westpac will not be required to participate in any distribution made pursuant to the [DOCA]."

44 The second meeting of creditors took place on 10 December 2004 and was chaired by Mr Yeo. A number of persons attended, including: Michael and Dianne Siebel and their solicitor, Mr Browne, Mr Livadaras representing a considerable number of creditors, Mr Vijay and his solicitor, Mr Tuan-Mu of Stamfords and also Mr Gountzos. After outlining the history of the matter, Mr Yeo told the meeting, in effect, that there was an amended proposal for a DOCA which he described. After further discussion, a handwritten document was tabled signed by Michael and Dianne Siebel proposing that they contribute $150,000 (payable as to $50,000 within 7 days and as to the balance by monthly instalments of $10,000), that the Siebels and all parties related to them (other than Mr Vijay) would not seek to participate in any distribution made pursuant to the DOCA and that there would be full repayment of the Company's debt to Westpac so that Westpac would not find it necessary to participate in any distribution under the DOCA.

45 After discussion of a number of matters and an explanation of the estimated returns from the revised DOCA, a resolution approving the DOCA was put and passed at the meeting by a majority in number (16-2) and in value of creditors. The value of votes in favour of the resolution was $822,153.92 (comprising in the main related party loans). The value of votes against the resolution was $407,231.22, comprising Mr Vijay and the ATO. Votes in favour of the resolution also included 6 trade or unrelated creditors with small debts whose debts had not been taken over under the Sale Agreement.

46 I note that Firm Finance, a creditor in the sum of $540,000 was not represented at the meeting. It was this debt in respect of which Mr Vijay had provided security, by way of real estate in his wife's name.

47 The DOCA dated 23 December 2004 was executed by the Company and by the administrators as Deed Administrators and by Michael and Dianne Siebel as "Covenantors". The Covenantors agreed to pay the sum of $150,000 to the Deed Administrators. The fund under the DOCA was to comprise that amount together with any net proceeds of the sale of assets of the Company. The Covenantors further agreed to "negotiate, compromise and/or otherwise resolve" the Company's indebtedness to Westpac and to indemnify the Company in respect thereof. The creditors entitled to participate in a distribution from the fund, in full discharge of their debts, were in substance all creditors of the Company[5] other than those specifically excluded (namely, the Siebels and their related entities and other listed persons in the "Siebel camp").

48 The evidence also shows that:

• Michael and Dianne Siebel had from July 2003 to November 2004 advanced substantial sums to the Company;

• On 3 March 2005 payment of the Company's debt to Westpac of $839,627.85 was effected as arranged by Michael and Dianne Siebel;

• Michael and Dianne Siebel have now paid the total sum of $150,000 to the Deed Administrators;

• Brands Direct has paid all the debts payable to those creditors "taken over" under the Sale Agreement that were due at the time of sale;

• Brands Direct has taken assignments of all of the leases of premises from which the business operated;

• Brands Direct has taken over the staff of the business and responsibility for their entitlements;

• Brands Direct now operates 8 stores and employs about 100 people.

Plaintiff's submissions

49 Section 600A of the Act provides, so far as relevant:

"(1) Subsection (2) applies where, on the application of a creditor of a company ... the Court is satisfied:

(a) that a proposed resolution has been voted on at:

(i) in the case of a company--a meeting of creditors of the company held:

(A) under Part 5.3A ...

...

(b) that, if the vote or votes that a particular related creditor, or particular related creditors, of the company ... 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

...

or the question would have had to be decided on a casting vote; and

(c) that the passing of the proposed resolution ... :

(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 ... to an extent that is unreasonable having regard to:

(A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution ... ; and

(B) the nature of the relationship between the related creditor and the company or body, or of the respective relationships between the related creditors and the company or body; and

(C) any other relevant matter.

(2) 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 company ... , 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.

(3) In this section:

related creditor, in relation to a company ... , in relation to a vote, means a person who, when the vote was cast, was a related entity, and a creditor, of the company ..."

50 It was common ground that the resolution that the Company enter into the DOCA fell within s.600A(1)(a)(i)(A) and that, within the meaning of s.600A(1)(b), if the votes of related creditors had been disregarded, the question would have had to be decided on a casting vote. Those prerequisites being satisfied, the plaintiff did not rely on s.600A(1)(c)(i) but did rely on s.600A(1)(c)(ii) to the effect that the resolution had unreasonably prejudiced the interests of the creditors who voted against it (i.e. the plaintiff and the ATO).

51 Mr Williams, who appeared as counsel for the plaintiff, dealt with the matters to which the Court should have regard in determining whether the creditors who voted against the resolution were unreasonably prejudiced.

52 Mr Williams made submissions in relation to the benefits[6] derived by the related creditors from the resolution and the relationship[7] between those related creditors and the Company. He submitted that the major related creditors were, or were related, to the directors, Michael and Dianne Siebel (and to Leon Siebel, possibly a shadow director). The Siebels had benefited from the resolution and the consequent deed by avoiding possible claims in relation to preferences, insolvent trading and uncommercial transactions and from the avoidance of a more searching examination of the Company's affairs by a liquidator. The Siebels had also avoided any risk of disqualification from managing corporations.[8] He referred to M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd[9] in which McLelland CJ in Eq, in setting aside a resolution for a deed of company arrangement, took into account the collateral benefits to the directors derived from the execution of the deed in that they would avoid any prospective liability in respect of insolvent trading, a more penetrating examination of the affairs of the company and the risk of prohibition against managing a corporation. Mr Williams expressly stated that no reliance was placed on "any other relevant matter"[10]. However on the question whether the creditors who voted against the resolution would be better off in a liquidation, Mr Williams conceded that on the best evidence it was marginal either way.

53 The plaintiff next relied upon s.445D of the Act which provides:

"(1) The Court may make an order terminating a deed of company arrangement if satisfied that:

(a) information about the company's business, property, affairs or financial circumstances that:

(i) was false or misleading; and

(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

was given to the administrator of the company or to such creditors; or

(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or

(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or

...

(e) effect cannot be given to the deed without injustice or undue delay; or

(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.

(2) An order may be made on the application of:

(a) a creditor of the company; or

(b) the company; or

(c) any other interested person."

54 The plaintiff relied on s.445D(1)(a), (b) and (c) together. In that regard Mr Williams submitted that there had been a failure to disclose doubts about the accuracy of the Company's stock levels, a failure to disclose that the sale to Brands Direct was in breach of the Shareholders' Agreement and was concealed from the plaintiff, thereby casting doubts on the bona fides of the sale, and a failure to disclose that there were doubts about the bona fides of loans by the related parties. Mr Williams conceded that these were "not my strongest points on the evidence". I will say at once that I agree. In my opinion there is nothing in them. I am not satisfied on the evidence that there are any reasonable doubts about the true value of the Company's stocks[11] or about the bona fides of loans by the related parties. As far as the sale to Brands Direct is concerned, it may well have been in breach of the Shareholders' Agreement and, although the sale plans were concealed from the plaintiff, the fact of the sale was made known to him on the day that the administrators were appointed. As far as the bona fides of the sale are concerned, the commerciality of the sale was analysed in the administrators' report and there is no evidence casting doubt on that analysis. Moreover "non-disclosure" of any of these matters could not "reasonably have been expected to be material"[12] to the Siebel related creditors who voted in favour of the resolution, in deciding to so vote. The resolution would still have been passed, both by number and by value, if the unrelated creditors who voted for the resolution had voted against it.

55 Mr Williams relied upon the ground in s.445D(1)(e) (injustice) by referring to his submissions in relation to s.600A and s.445D(1)(f). In relation to the "unfairly prejudicial" limb of s.445D(1)(f) he referred to his submissions in relation to s.600A.

56 However, Mr Williams made additional submissions in relation to the "unfairly discriminatory" limb of s.445D(1)(f). He submitted that the DOCA was unfairly discriminatory against the plaintiff and the ATO because the creditors who were "taken over" by Brands Direct were paid in full and Westpac was paid in full, and the process of determining which creditors were to be paid in full and which creditors were not to be paid in full was not adequately explained.

57 Lastly under s.445D(1) the plaintiff relied on subsection (g) "the deed should be terminated for some other reason". Mr Williams submitted that this ground enabled the Court to have regard to the "public interest" and to "commercial morality"[13]. The matters relied upon to support this ground were:

• The unsatisfactory circumstances in which the sale agreement was procured;

• The unsatisfactory circumstances in which the administrators were appointed;

• The unexplained leaving out of a small number of creditors from the sale who gave their proxies to Mr Livadaras at the meeting, for reasons never explained;

• The business of the Company went on in identical form as before, leaving its taxation liabilities behind;

• The fact that so many of the creditors were not given proper notice of the meeting at which the deed was approved.

58 The plaintiff next relied on s.445G, which provides, so far as relevant:

"(1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or ASIC, may apply to the Court for an order under this section.

(2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground.

(3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that:

(a) the provision was substantially complied with; and

(b) no injustice will result for anyone bound by the deed if the contravention is disregarded."

59 There were two specific grounds relied upon by the plaintiff as giving rise to doubt whether the DOCA was entered into in accordance with Part 5.3A. The first ground was that the administrators had not been validly appointed, the second ground was that numerous creditors were not given notice of the creditors meeting at which the resolution was passed.

60 As regards the appointment of the administrators, Mr Williams submitted that the administrators were not validly appointed in the morning of 15 November 2004, at the offices of Frenkel Partners, because no meeting of directors had been validly called for that time and place.

61 As regards the failure to notify all creditors of the creditors meeting, it was submitted that the creditors not given proper notice of the meeting included:

• Firm Finance Pty Ltd ($540,000) - notice not sent to its proper address;

• Westpac ($850,000+) - notice sent only on the day of the meeting;

• Trade creditors assumed by Brands Direct (90 in number for debts totalling about $605,000) - none of these creditors were notified at all and there was no evidence that these creditors had been paid by Brands Direct or their debts novated to Brands Direct before the meeting.

62 Finally, the plaintiff invoked the Court's power under s.447A of the Act to make an order as sought, taking into account all of the considerations relied upon by the plaintiff. The plaintiff submitted that the DOCA should be terminated or declared void and the Company wound up.

The position of the Sale Agreement

63 Taking the plaintiff's submissions as a whole, it is clear that the Sale Agreement, and the circumstances surrounding it, are central to the concerns raised by the plaintiff in support of this application. As his representative said at the first creditors' meeting, Mr Vijay was happy to have the Company "with its assets" placed into voluntary administration, but not "the shell" of the Company.

64 The circumstances surrounding the sale raised the plaintiff's legitimate criticism: it was a sale to a related party after a minimal attempt to advertise the business for sale; there was no independent ascertainment of the value or price of the business; the sale was authorised and then contracted after Mr Vijay left the directors' meeting and without his knowledge or approval. The terms of the Sale Agreement were also of valid concern given that the Company's assets passed out of its control, leaving behind selected and substantial liabilities, thereby probably benefiting those selected trade creditors (and employees) who were, in effect, invited to look to the purchaser to satisfy their claims and entitlements.

65 Nevertheless there are significant countervailing considerations. First, I am satisfied, on the evidence, that it was most improbable that the Company could have found any other buyer or that the administrators could have achieved a better financial result or different terms for the Company or the creditors. I accept the evidence both of Mr Yeo and of Mr Edelstein that the business was unlikely to have been saleable to anyone other than Leon Siebel. Mr Edelstein said in effect that the goodwill attached to Leon: the business would collapse without him and there were no formal agreements with suppliers. I further accept Mr Yeo's evidence when he said:

"Q: One of the issues that arose in relation to stock was the retention of title clauses and you make mention of this at page 141 of your report, starting at the bottom of page 140 of the court book actually where you say that the available stock is reduced by some $331,000 by potential availability of valid ROT clauses. Does that really make an impact on the value of the sale though, bearing in mind that presumably the creditors to whom that $331,000 is owed are otherwise taken up as creditors?

A: It makes a big difference to me in terms of whether I would want to potentially overturn the sale. One of the biggest issue I obviously have, particularly in the rag trade, is if I get appointed to a trading business the first thing I am confronted with is a long line of lorries out the front of all my shops from the creditors asking for their stock back under retention of title clauses of various degrees of validity. That obviously greatly impacts on my ability to market and sell a business. I recall - I don't know whether this is the same figures but I recall Mr Pearce did an examination which discovered that about 88 per cent of the stock on hand had an ROT claim of some description at the time of the stocktake."

66 Second, the sale was made subject to the administrators' ratification. Mr Yeo had the opportunity, albeit in a limited time, to assess the commerciality of the Sale Agreement. He found that the sale was at a slight undervalue only. His assessment was not challenged or criticised in this proceeding. No evidence to the contrary of his view was produced at trial and I am satisfied that it is most unlikely that such evidence, of any cogency, could ever be produced, given the nature of the business and its records.

67 Third, it was submitted, on behalf of the second to fourth defendants, that Mr Yeo had authorised the Sale Agreement under s.437A of the Act which provides:

"(1) While a company is under administration, the administrator:

(a) has control of the company's business, property and affairs; and

(b) may carry on that business and manage that property and those affairs; and

(c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and

(d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

(2) Nothing in subsection (1) limits the generality of anything else in it."

68 In my opinion, that submission is correct. I do not think that the administrators had any power to "ratify" the Sale Agreement other than pursuant to the powers granted to them by s.437A of the Act. I consider that by "ratification" Mr Yeo adopted or authorised the Sale Agreement on behalf of the Company. Insofar as there was any defect, as alleged, in the Siebel directors' authority to execute the Sale Agreement, in the absence of notice to Mr Vijay, this was cured by the ratification of the agreement on behalf of the Company by Mr Yeo in his capacity as administrator.[14]

69 Fourth, the plaintiff as director and shareholder chose not to directly attack the Sale Agreement or seek to have it restrained at the time or, later, to have it set aside. He took no action upon being advised of the making of the Sale Agreement. He stood by while the administrators deliberated and the agreement was ratified, and in circumstances where it could be foreseen that employees were about to be and being transferred, trade creditors were to be paid and leases were to be assigned.

70 At best, in a liquidation, there would be, on the evidence, a claim against Brands Direct for so small an amount of compensation as to hardly justify the cost of the litigation. In the end, therefore, the Sale Agreement has limited monetary relevance to the plaintiff's application.

S.600A(1)(c)(ii) of the Act: "prejudice to an unreasonable extent"

71 In Deputy Commissioner of Taxation v Portinex Pty Ltd[15], the Deputy Commissioner of Taxation sought orders terminating or setting aside deeds of company arrangement on the grounds, inter alia, that the administrator was not validly appointed. The Court utilised s.447A of the Act to cure the deficiency in the administrator's appointment. In considering certain cases where an application is made to set aside a deed of company arrangement under s.600A(1)(c)(ii), Austin J said[16]:

"... In such cases, the question of 'unreasonable prejudice' seems to boil down to whether the creditors are better off with the proposed deed or liquidation, as there is no other alternative on the facts. Such an approach would be consistent with other cases dealing with the application of s.600A [cited cases omitted].

In my view it was not feasible for the Deputy Commissioner in the present cases to negotiate a different kind of deed proposal from the one placed before creditors, and it is appropriate, therefore, to compare his position under the deed with his position on a winding up. It is clear on the evidence that the Deputy Commissioner is better off under the deed ... .

...

The Deputy Commissioner lost the potential benefit of any recoveries which a liquidator might make ... for insolvent trading, and from other related creditors for voidable transactions. However, given the cost of proceedings for recovery and the evidence suggesting that the Deputy Commissioner would be reluctant to fund proceedings, it is not only uncertain that proceedings would be successful, but doubtful that they could be taken at all."

72 I am satisfied that the plaintiff and the ATO are in all probability substantially better off under the DOCA than they would be in a liquidation. Once the Westpac debt, or a substantial part of it, (which Mr Yeo overlooked in his report) is factored into the analysis, the likely return under the DOCA is much better than the likely return in a liquidation. It is speculative to suggest that a liquidator would achieve better returns than Mr Yeo estimated in his report. Accordingly, it seems to me that the immunities achieved by the Siebels as a result of the DOCA are justified by the likely return from the DOCA, which return is available now without further litigation and is only possible because of Michael and Dianne Siebel's contribution of $150,000 and their full discharge of the Company's Westpac debt.

73 In my opinion, therefore, the resolution approving the DOCA did not unreasonably prejudice the interests of the creditors who voted against the resolution, within the meaning of s.600A(1)(c)(ii) of the Act.

S.445D(1)(f) of the Act: "unfairly discriminatory"

74 In my view the DOCA was not unfairly discriminatory to the plaintiff, the ATO or the other creditors who are to receive a distribution from the fund under the DOCA.

75 The payment in full of the trade creditors "taken over" by Brands Direct is irrelevant. That payment resulted from the Sale Agreement and the administrators' ratification thereof. It occurred irrespective of the DOCA and whether or not there was a DOCA. The payment of Westpac and the indemnity given to the Company by the Siebels under the DOCA was to the benefit, not the disadvantage, of the plaintiff, the ATO and the other creditors who are to receive a distribution under the DOCA.

S.445D(1)(g) of the Act: "some other reason"

76 In Portinex[17] Austin J said:

"Several cases have stressed that s.445D gives the court a wide discretion, to be exercised having regard to the interests of the creditors as a whole and to the public interest. ..."

77 I do not accept the public interest arguments raised by the plaintiff. In particular, for the reasons stated earlier,[18] the circumstances and terms of the Sale Agreement are not such as to justify termination of the DOCA. In many circumstances it may well be contrary to the public interest that a sale occur in which a business is transferred over with selected trade creditors leaving taxation liabilities behind. In this case, there was probably little alternative, if any sale at all were to be achieved. In any event, the plaintiff did not seek to stop or set aside the Sale Agreement when and if that might have been achievable. Nor did the plaintiff or the ATO seek to have the Company wound up and the administration terminated at the earliest possible date. In my opinion, the public interest arguments do not provide a proper or reasonable basis in the circumstances and at this juncture for now attacking the DOCA.

S.445G of the Act

78 Again, in Portinex, Austin J said:[19]

"The Harmer Committee recommended that the court be empowered to declare that a deed, or a provision of a deed, is void if there is a doubt on a specific ground as to compliance with the legislation containing the administration procedure. Section 445G substantially follows the Harmer Committee's recommendation. An example of a possible contravention, according to the explanatory memorandum to the Corporate Law Reform Bill 1992, is failure to notify creditors of the meeting of creditors which has resolved to enter into the deed of company arrangement.

As with s 445D, s 445G(2) gives the court a wide discretion, to be exercised in the interests of creditors as a whole and in the public interest [cited cases omitted]. Although it is common for the applicant to invoke both sections, the wording of s 445G makes it particularly appropriate where the complaint relates to a serious contravention of Pt 5.3A. Section 445D is available, on the other hand, where there is no allegation of a contravention of Pt 5.3A and the complaint is centred on unfairness rather than a breach of the law."

79 Mr Vijay was not given notice of a directors' meeting on Monday morning 15 November 2004, for the purpose of putting the Company into administration or otherwise. Nevertheless he knew that the Siebel directors were meeting with their proposed administrators at that time and related to that purpose and chose not to attend. In my view, s.1322(2) of the Act applies to this procedural irregularity - the meeting is not invalidated. In any event, I would not in the Court's discretion terminate the DOCA on that account and would, if necessary, validate the administration under s.447A of the Act. All directors favoured administration and Mr Vijay subsequently acquiesced in the administration.

80 As regards notice to creditors of the second creditors' meeting, I am not satisfied on the evidence that either Westpac or Firm Finance Pty Ltd were not notified of the meeting. As regards notice to the trade creditors "taken over" by Brands Direct, they were not notified and they should have been notified, if and insofar as they were unpaid at that time and remained creditors of the Company. In the circumstances, they would hardly have had any interest in attending the meeting. In my view, s.1322(2) applies to any procedural irregularities affecting the giving of notice of this meeting and the meeting is not invalidated. Again, I would not in the Court's discretion terminate the DOCA on that account.

81 In the end the commercial reality is that, despite the attitude of the plaintiff (and of the ATO as evinced in an affidavit filed on its behalf), the creditors are far better off under the DOCA than they would be in a liquidation. For that reason, I would, if necessary validate the DOCA pursuant to s.447A of the Act, but I do not think that it is necessary to do so.

Order

82 For the foregoing reasons, the originating process is dismissed with costs including reserved costs.

[1] This did not in fact occur and Mr Vijay did not attend management meetings.

[2] These matters would suggest that the Company was then insolvent but Michael and Dianne Siebel apparently maintain that the Company had their financial support and was not then insolvent and did not become insolvent until their financial support was withdrawn.

[3] He was so advised by Livadaras, and others.

[4] An appendix to the report provided detailed calculations for these estimates. These calculations omitted to take into account the Westpac loan which would have made the liquidation scenario much worse.

[5] Of course most of the trade creditors had been "taken over" by Brands Direct.

[6] See s.600A(1)(c)(ii)(A) of the Act.

[7] See s.600A(1)(c)(ii)(B) of the Act.

[8] See s.206F of the Act.

[9] (1995) 19 ACSR 27, 32.

[10] See s.600A(1)(c)(ii)(C) of the Act.

[11] And there is never likely to be any better evidence.

[12] This must be proved in order to satisfy subsection (a) or (b) or (c) of s.445D(1) of the Act.

[13] Citing Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266 and Bamco Villa Pty Ltd v Montedeen Pty Ltd [2002] VSC 184 at para [4].

[14] Further, it is possible that the administrators had no power to "reserve" the right of a future liquidator to avoid the Sale Agreement as an uncommercial and insolvent transaction. Rather, the ratification of the Sale Agreement may have precluded that possibility.

[15] [2000] NSWSC 99; (2000) 34 ACSR 391.

[16] [2000] NSWSC 99; (2000) 34 ACSR 391, at [89]-[92]. See too Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687, 694 per Hayne J.

[17] [2000] NSWSC 99; (2000) 34 ACSR 391, [105].

[18] See above paras 63 to 70.

[19] [2000] NSWSC 99; (2000) 34 ACSR 391, [106]-[107].