Rathner v Global Communications Technologies Pty Ltd [2003] VSC 390

Supreme Court of Victoria|2003-10-15|Before: Hansen J

Corporations - Deed of company arrangement - Deed Administrator - Proposed litigation funding agreement - Directions - Corporations Act 2001 s 447D.

ACTA has been involved in much disputation and litigation over the last year or so. I have managed and tried some of the litigation.

On 15 July 2002 the Deputy Commissioner of Taxation ("the Commissioner") filed an originating process in proceeding 6378 of 2002 for the winding up of ACTA in insolvency based on the failure to comply with a statutory demand served on 8 May 2002. The amount demanded was $1,568,853.32 for tax related liabilities.

In the afternoon on 15 July 2002, I heard counsel for the Commissioner who, urgently and without notice, sought interim injunctions to restrain ACTA from dealing in or disposing of its assets, and a company called Spectrucell SDR Pty Ltd ("Spectrucell") from dealing in or disposing of assets which Spectrucell may have acquired from ACTA since 8 May 2002. The Commissioner had not had time to commence a proceeding. Being satisfied that a threatened dealing made it appropriate to do so, and on the basis that a writ would be filed the next day, I granted injunctions which restrained ACTA and Spectrucell respectively to the extent sought.

On 16 July 2002 the Commissioner filed a writ in proceeding 6401 of 2002 against ACTA and Spectrucell seeking ongoing injunctions.

On 18 July 2002 the directors of ACTA appointed Rathner as administrator of the company pursuant to s 436A(1) of the Act.

On 29 July 2002 Global, acting pursuant to the charge granted by ACTA, appointed David Neil Lockwood and Kenneth Stewart Sellers as receivers and managers of ACTA.

A deal of interlocutory activity ensued on 1 August 2002. The Commissioner filed a summons in proceeding 6401 of 2002 for an order, among others, that Global, Lockwood and Sellers be joined as defendants and seeking a declaration that the Global charge was invalid or void ab initio, with consequential orders as to the invalidity of the appointment of the receivers and managers. On 16 August 2002 I made orders adding Global and the receivers and managers as defendants, and for the amendment of the writ. I also gave leave to the plaintiff under s 440D(1) of the Act to begin and continue with the proceeding.

Subsequently, on 21 August 2002 I fixed the trial of the winding up application and proceeding 6401 of 2002 before myself on 9 September 2002.

In the meantime, the original injunctions restraining dealing in ACTA's assets were continued, although with some exceptions. For instance, on 2 August 2002 I ordered that the receivers and managers be at liberty to advertise, seek expressions of interest in the purchase of, and enter into negotiations for the sale of, assets of ACTA. I also granted liberty to apply for directions with respect to any proposed sale of ACTA's assets and the distribution of the proceeds thereof. ACTA's assets included a holding of 57.5% of the issued shares in a company called Australon Enterprises Pty Ltd ("Australon") which owned 1,150 or 55% of the issued shares in a publicly listed company called Intermoco Ltd ("Intermoco"). In an affidavit which Lockwood swore in support of an application by the receivers and managers for authority to sell ACTA's shareholding in Australon to a company called Asia Infotech Pte Ltd ("Asia Infotech") for $6M, he stated that ACTA's shares in Australon were ACTA's only substantial liquid asset.[1] In his affidavit Lockwood deposed to having signed heads of agreement on 14 August 2002 and stated that any contract for the sale of the shares was to be subject to four conditions precedent, one of which would require that the Supreme Court approve the sale.

On 30 August 2002 the injunctions were further varied. I ordered that the receivers and managers be at liberty to sell ACTA's shareholding in Australon to Asia Infotech for $6M pursuant to an agreement contained in a sale deed dated 27 August 2002. The sale deed was annexed to the order. I further ordered that the receivers and managers retain the proceeds of sale in an interest bearing account but with power to apply the proceeds in payment of expenses incurred by them in the ordinary course of their receivership and management of ACTA, as set out in the affidavit, together with pay as you go tax and withholding tax to the Commissioner.

The parties to the sale deed were Asia Infotech as purchaser, ACTA as vendor, and Global. Global, of course, held a charge over the assets of ACTA. The sale deed recited that Global was also a party to an agreement made on 9 January 2001 between Australon, ACTA, Roger May, Australon Technologies Pty Ltd and Global, which restricted their ability to dispose of or create security interests over their interests or shares in Intermoco. The sale deed also referred to a shareholder's agreement made on 3 December 2001 between Australon, ACTA, Newpage and Springwell, which restricted the sale of their shares in Australon. Clause 4 of the sale deed provided that the price of $6M for ACTA's shares was payable as follows:

(a) As to $100,000 by deposit on the date of the deed;

(b) As to $1.4M within 10 days of satisfaction of conditions precedent 1 and 3 (whichever occurs later);

(c) As to $1.5M within 45 days of satisfaction of conditions precedent 1 and 3 (whichever occurs later);

(d) $3M at completion.

Condition precedent 1 was the requirement of approval of the Supreme Court. That was satisfied by my order on 11 September 2002. Condition precedent 3 required an exemption or approval by the ASX. I note that in subsequent proceedings before me it was accepted that completion had been due on 31 January 2003.

The trial of the proceedings commenced on 9 September and concluded, following settlement discussions, with consent orders on 11 September 2002. A deed of settlement of the proceedings, dated 12 September 2003, was attached to the order in proceeding 6401 of 2002. Final orders disposing of the proceedings could not be made as certain matters, including payments, had to take place. Each proceeding was adjourned to 7 February 2003. In the winding up proceeding it was further ordered that the time within which the Commissioner might apply for a winding up order be extended to the adjourned date.[2] Further, in proceeding 6401 of 2002 I ordered that the receivers and managers were authorised to enter into an agreement to sell ACTA's shareholding in Australon to Asia Infotech, pursuant to the agreement contained in the sale deed dated 27 August 2002 annexed to the order made on 30 August 2002, but without the inclusion of condition precedent 3. I also ordered that the receivers and managers were authorised to make such other changes to the deed that did not change the substance of the agreement as may be agreed by the receivers and managers and the purchaser. In the Other Matters section of the order it was stated that the parties, including the Commissioner, were of the opinion that the sale was on fair and reasonable commercial terms.

Some provisions of the deed of settlement should be noted for the purpose of better understanding the position. Global agreed to pay a sum of money ("the settlement sum") to the Commissioner by instalments on certain dates in consideration for which the Commissioner would discontinue proceeding 6401 of 2002. It was provided that Global would pay the settlement sum upon receipt by ACTA of proceeds of the sale of shares in Australon (being the sale the subject of the orders made on 30 August 2003) by instalments. The instalments were tied to the amounts payable under the sale deed in that each instalment payable to the Commissioner was of a lesser sum and payable two days after clearance of Asia Infotech's payment. Another clause provided that the liability of ACTA for a specified sum on account of the superannuation guarantee charge shall comprise an ordinary priority claim in ACTA's proposed voluntary administration. By a further provision the parties agreed that the administrator be at liberty to convene the second meeting of creditors within 14 days. For dividend purposes the Commissioner would prove in the administration of the proposed deed of company arrangement only for the superannuation guarantee sum. Global and all related parties (including Roger May, Jason May and May & Sons Pty Ltd) agreed not to prove for dividend purposes except as provided under the proposed deed.

The second meeting of creditors of ACTA was held on 26 September 2002. The creditors resolved that the company execute a deed of company arrangement and a deed was duly prepared, and executed by Rathner, ACTA, Global and Roger and Jason May. The deed is dated 17 October 2002.

The deed was proposed by the directors of ACTA, Roger and Jason May, who were also the directors of the secured creditor Global. In his report to creditors, dated 19 September 2002, for the purpose of the second meeting, Rathner (as administrator) had set out the directors' proposal, and attached for the creditors' attention a document called "Summary of Proposed Terms of Deed of Company Arrangement". At the meeting, held on 26 September 2002, the creditors resolved that ACTA execute a deed of company arrangement in accordance with the summary. The minutes of the meeting record that the following persons confirmed that they had voted in favour of the resolution: Roger and Jason May, May and Sons Pty Ltd and Global - both confirmed by Roger May and the Australian Taxation Office.

The creditors also passed resolutions dealing with Rathner's remuneration. They first resolved that his remuneration as administrator to 13 September 2002 be approved at $168,117 plus GST subject to review and confirmation by the committee of inspection. They then resolved that the future remuneration of the administrator and deed administrator from 14 September 2002 be calculated on an hourly scale adopted by Rathner's firm, Lowe Lippmann, from time to time for insolvency work, subject to review and confirmation by the committee of inspection. Earlier in the meeting the creditors had resolved to appoint a committee of inspection.

The administrator and his solicitors then set about preparing the deed. In that regard it is convenient at this point to note paras 1, 2 and 7 of the summary. They stated:

"It is proposed that ACT execute a Deed of Company Arrangement that will provide for the payment in full of approved creditors' claims 1. Pursuant to Orders of Hansen J made on 11 September 2002 the Receivers and Managers are authorised to enter into an agreement to sell ACT's shareholding in Australon Enterprises Pty Ltd. Documentation of the transaction has been completed and the initial deposit was paid to the Receivers & Managers on the 17th September 2002. 2. The Administrator will create a fund ("Fund") for the payment of participating creditors claims up to 100 cents in the dollar. The Fund shall comprise of:

(a) $3.25 million with a minimum of $2.45 million from the sale of the company's equity in Australon Enterprises Pty Ltd.

(b) 65% of all royalty or licence fee income received by the company from the sale, licensing or exploitation by the company of its intellectual property; and

(c) 50% of the net proceeds after legal costs of any successful litigation by the company against:

(i) Advanced Communications Technologies Inc. (a United States based entity) pursuant to its claim of US$320 million in the California Supreme Court;

(ii) Current claim relating to use of intellectual property of the company.

7.1 The directors, related parties and Global shall be non-participating creditors in respect of the Fund, but shall in all other respects preserve their claims and rights. 7.2 The ATO is to be a non-participating creditor in respect of the Fund but shall in all other respects preserve their rights set out in the Deed of Settlement dated 13 September 2002."

Having been duly prepared, the deed of company arrangement was executed by the parties thereto, who were Rathner, ACTA, Global and Roger and Jason May. The deed is dated 17 October 2002. Rathner executed the deed as deed administrator. There were three annexures to the deed. Annexure A was the summary of proposed terms. Annexure B was the sale deed dated 27 October 2002. Annexure C was the deed of settlement dated 13 September 2002.[3]

It is necessary to refer to some of the provisions of the deed. Clause 2.1 stated that the purpose of the deed was to maintain the ongoing IP development and business of ACTA via ACTA or another entity, and to achieve the maximum return to creditors of ACTA participating under the deed. "IP" was defined to mean all intellectual property owned by ACTA, including but not limited to the SpectruCell technology. Clause 2.3 provided that, subject to the receivership, control and management of ACTA would revert back to the directors upon execution of the deed, and cl 3 provided that in exercising his powers and carrying out his duties under the deed the deed administrator would be taken to act as the agent of ACTA. Clause 4.1 expressly provided that the deed administrator had the powers given to an administrator under Part 5.3A, and certain other powers.

Clause 5 provided that Roger and Jason May, as directors of ACTA and Global, and the Commissioner, were bound by the deed. Clause 5 further stated that the rights, entitlements and claims of the directors, Global and the Commissioner against ACTA were otherwise reserved pursuant to the deed of settlement.

Clause 6.2 provided that the deed would be administered by the deed administrator.

Clause 7 provided for the establishment of a fund in these terms:

"7. ESTABLISHMENT OF FUND The Fund will be established by the Deed Administrator and will comprise the following amounts from the following sources:

(a) the Directors and Global must cause to be paid to the Deed Administrator $3.25 million on or before 28 February 2003, of which a minimum of $2.45 million must be received from the proceeds of the Sale of Shares;

(b) the Directors and Global must cause ACTA to and ACTA must pay to the Deed Administrator 65% of all IP Income as and when such income is received by ACTA until all creditor claims are paid in full; and

(c) the Directors and Global who have been authorised by the Administrator to pursue such litigation, must cause ACTA to and ACTA must pay to the Deed Administrator 50% of the Litigation Proceeds as and when those proceeds are received by ACTA.

The Directors, ACTA and Global must to provide to the Deed Administrator, within 7 days of receiving a written request from the Deed Administrator, access to the books and records of ACTA to verify the amounts to be paid by ACTA under sub-paragraphs (b) and (c) above."

The expression "Sale of Shares" in cl 7(a) was defined in cl 1 to mean the sale of ACTA's right, title and interest in Australon, including all of the shares or rights to shares that ACTA held in Australon, pursuant to the sale deed. The effect of the order referred to above at [16](b)(i) was that the sale was not required to be pursuant to the sale deed.

It was the fund thus to be created that would constitute the property available for distribution to creditors under the deed. Clause 9.3 stated the order of application of that property as follows: first, in respect of the administrator's remuneration and expenses; secondly, in respect of the deed administrator's remuneration and expenses, including his costs in preparing the deed; thirdly, to priority creditors; fourthly, to unsecured creditors; fifthly, any balance to ACTA. For this purpose "creditor" was defined in cl 1 to mean any priority creditor (which expression was defined) or unsecured creditor but not a related party or the Commissioner save as permitted under the deed of settlement. The expression "related party" was defined to mean Global, the directors of ACTA and any related entity as defined in s 9 of the Act or a related body corporate as defined in s 50 of the Act.

Clause 10.1 related to meetings of deed creditors, and provided:

"10.1 When Meeting may be Convened The Deed Administrator:

(a) may at any time convene a meeting of the Creditors; and

(b) will convene a meeting of Creditors if so requested in writing by the Creditors the value of whose Debts is not less than ten percent (10%) of the value of all Debts."

Clause 12.1 provided that the deed administrator may at any time apply to the Court for directions in relation to any matter arising under the deed.

Clause 13 provided for variation of the deed, as follows:

"The provisions of this Deed may be varied by resolution passed at a meeting of Creditors convened under Section 445F of the Act, but only if the variation is not materially different from a proposed variation set out in the notice of meeting."

Termination of the deed was dealt with in cl 14. Under cl 14.1 the deed administrator could file a notice of termination with the Australian Securities and Investments Commission if he was of the opinion that he had complied with all of the terms of the deed. Subject to that, cl 14.2 provided that the deed would end immediately on the third anniversary of the date of execution of the deed or such later date as the creditors may resolve upon unless prior to that date:

"(a) the provision of Clause 14.1 apply; (b) the Deed Administrator determines that it is no longer practicable or desirable either to implement this Deed, and in that case the Deed Administrator must:

(i) firstly, prepare the Report and convene a meeting of the Committee of Inspection to consider the Report;

(ii) secondly, summon a meeting of the Creditors for the purposes of considering and if thought fit passing a resolution under Section 445C(b) of the Act;

(iii) thirdly, forward the Report to each of the Creditors not less than fourteen (14) days prior to the meeting.

14.3 Other Termination This Deed will terminate upon the occurrence of an event specified in Section 445C of the Act."

Finally, I note the following. Clause 15.2 required that each officer and member of ACTA do all things reasonably required by the deed administrator to implement the deed. Clause 17.1 was an entire agreement provision, cl 17.11 contained a warranty by each party that the deed created legal, valid and binding obligations, and cl 17.13 required each party to act in good faith towards all of the other parties and to use best endeavours to comply with the spirit and intention of the deed.

Events subsequent to the deed of company arrangement

When the date for completion under the sale deed passed, Asia Infotech had paid the first $3M only. On 1 February 2003 the receivers and managers served a notice of termination of the sale deed on the basis that Asia Infotech had failed to procure the satisfaction of condition precedent 2 to the deed. That condition required the approval of the shareholders of Intermoco to the sale of the shares. On 6 February 2003 the receivers and mangers filed a summons for directions in proceeding 6401 of 2002 directed to Asia Infotech to establish that they had validly terminated the sale deed and were at liberty to resell the shares. This led to a flurry of activity. There were urgent interlocutory hearings, the summons for directions was amended, and on 18 February 2003 Asia Infotech filed a writ in proceeding 4542 of 2003, seeking a variety of orders including specific performance of the sale deed and the return of the $3M. The claim for specific performance was abandoned, Asia Infotech accepting that the agreement had been validly terminated. I fixed the amended summons, and certain issues only in proceeding 4542 of 2000, for hearing before myself on 3 March 2003.

On 4 and 5 March 2003 I heard counsel, including counsel for the Commissioner and the deed administrator, on several applications. In summary:

(a) The trial of the application by the amended summons for directions and of certain issues in proceeding 4542 of 2003 was adjourned to 6 March 2003.[4]

(b) On the application of the deed administrator, I ordered that Part 5.3A of the Act operate in relation to ACTA so that the deed of company arrangement was varied as follows:

(i) in the definition of "Sale of Shares" in cl 1.1, the words "pursuant to the Sale Deed" are deleted;

(ii) in cl 7(a), the words "28 February 2003" are replaced with "30 April 2003 or within 14 days after the hearing and determination by this Court at first instance of both this proceeding and proceeding number 4542 of 2003, whichever first occurs".

(c) On the application of the receivers and managers for a variation of the injunctions in proceeding 6401 of 2002, which restrained dealings in, or the disposal of, ACTA's assets, to permit the receivers and managers to enter into a litigation funding agreement on the terms set out in an agreement exhibited to an affidavit sworn by Lockwood, I ordered, after hearing argument, that the injunctions be dissolved[5]. That left the receivers and managers free to enter into the litigation funding agreement. Lockwood explained[6] that the purpose of the funding was to provide funds for the costs of proceeding 4542 of 2003, any further litigation arising in respect of the Australon shares and any potential liability of ACTA to disgorge the $3M paid by Asia Infotech under the sale deed. Lockwood deposed as to the then market price of shares in Intermoco and stated there was an available market in which to sell sufficient of ACTA's shares in Australon at a sum that would enable ACTA to meet its obligations under the deed of settlement and the deed of company arrangement. Also, money could be borrowed against the shares to enable those obligations to be met.

After dealing with arguments concerning documents and the pleadings (and giving leave to amend the pleadings), the trial commenced in the afternoon on 6 March 2003 and concluded on 13 March 2003. The issue raised for determination at that trial was whether a provision in the sale deed which provided for the retention by ACTA of the $3M paid by Asia Infotech was a penalty and, being such, whether the amount should be repaid to Asia Infotech. While the pleadings raised other issues, that is the only issue which I tried. I reserved my decision. I note that the remaining issues in proceeding 4542 of 2003 were settled by the parties at a trial before Habersberger J in May 2003.

On 2 May 2003 I made a further order in relation to the operation of Part 5.3A of the Act in relation to ACTA, namely that cl 7(a) of the deed of company arrangement is varied by deleting "30 April 2003" and substituting "4 July 2003".

On 25 June 2003 the deed administrator's solicitors wrote to the solicitors for the receivers and managers seeking advice as to when the fund would be established. On 3 July 2003 the latter solicitors provided an unsworn affidavit of Lockwood in support of an application to further extend the date for establishment of the fund to 30 November 2003.

The payment required by cl 7(a) was not made by 4 July 2003. More than eight months had then passed since the execution of the deed of company arrangement and no amount had been paid to the deed administrator to establish the fund under cl 7. In the circumstances, the deed administrator was uncertain as to the appropriate course of action. Was it in the best interests of the creditors to agree to an extension of the date for payment or, perhaps, that the deed be terminated? He needed information as to the progress on the sale of ACTA's shares and, in the event of a sale, the amount, if any, that he was likely to receive under cl 7(a). As matters stood, and stand now, the deed administrator had no funds with which to recoup his fees and expenses as administrator and as deed administrator, let alone make a payment to creditors under the deed. Hence, if the deed was terminated, creditors would not receive a payment in the liquidation.

On 15 July 2003 the deed administrator's solicitors wrote to the receivers and managers' solicitor asking various questions about the current ownership of ACTA's shares, and any sale, and when and how the fund would be established under cl 7(a). The letter stated that the information was required to assist the deed administrator in determining whether the extension of the date for payment was in the best interests of ACTA. The letter concluded with an expression of the following concern. The deed administrator had no funds with which to make an application to the Court, and he was not prepared to incur further costs unless he received funding. The second point was the suggestion that the $3.25M be paid by instalments, as to which a payment schedule was requested.

On 23 and 29 July 2003 the deed administrator's solicitors wrote to the solicitors for the receivers and managers requesting a response to their letter of 23 July.

On 5 August 2003 the solicitors for the receivers and managers wrote to the deed administrator's solicitor. It was advised that proceeding 4542 of 2003 had been settled by a deed of settlement entered into by ACTA, Newpage, Springwell and Australon on or about 22 May 2003. The deed was confidential which prevented disclosure of the precise details of how the settlement would operate. It was said, however, that the settlement had established a structure that would ultimately enable ACTA to access its proportionate entitlement to the underlying Intermoco shares owned by Australon. The letter indicated the steps involved in this. There was to be a capital reconstruction and return in specie by Australon to ACTA of its net entitlement to Intermoco shares, presently thought to be 144.5 million. A number of Intermoco shares would be retained to fund capital gains tax payable on the reconstruction, and the parties' legal costs of proceeding 4542 of 2003; to the extent the shares were not required for those purposes the shares would be distributed to ACTA. It was expected that a sale of shares to fund the legal costs would be settled shortly. At present, the capital reconstruction has not been implemented. When it is, ACTA will be required to transfer a portion of its Intermoco shares to the receivers and managers' litigation funder in proceeding 4542 of 2003, the number having been agreed at not exceeding 26 million. Further, after implementation of the capital reconstruction, the receivers and managers will be in a position to commence selling Intermoco shares for the purpose of funding settlement of the proceedings with the Australian Taxation Office, making contributions under the deed of company arrangement, and paying outstanding receivership costs and expenses. It was not possible to state precisely when Global/ACTA would be in a position to make funds available to the deed administrator, hopefully that position might be reached by the end of November 2003. The market would determine when to sell the available shares, and the sale price. It was also noted that the outstanding receivership costs were currently in the vicinity of $1.5M. Finally, the deed administrator was asked to consider varying the deed to allow ACTA/Global to transfer Intermoco shares to the deed administrator in lieu of money.

Subsequently, in August, the deed administrator continued to seek information from the receivers and managers for the purpose of enabling him to make an informed decision as to how to act in the best interests of creditors. To this end, and generally to seek to better handle the situation for the benefit of creditors, the deed administrator took the following action.

On 12 August 2003 he filed a summons in proceeding 6401 of 2002 seeking a direction pursuant to s 447D of the Act concerning the actions which he should take in response to actual and threatened breaches of the deed of company arrangement. That was followed, on 14 August 2003, by a notice to produce which requested the production of a number of documents referred to in the letter dated 5 August 2003, commencing with the confidential terms of settlement in proceeding 4542 of 2003.

If the fund of $3.25M was established, the deed administrator anticipated that it would be sufficient to pay his costs and expenses as administrator and deed administrator of approximately $600,000, to pay priority creditors in full (approximately $1M), and return 9.7 cents in the dollar to non-priority participating creditors (subject to finalising claims of approximately $14M out of total claims of approximately $17M).

On 19 August 2003 the deed administrator instructed his solicitors to make demand on Global, Roger May and Jason May to pay the amount of $3.25M under cl 7(a) of the deed. The solicitors made the demand on 19 August 2003.

The deed administrator also sought and obtained advice from counsel in relation to the prospects of success of an action against Global, Roger May and Jason May for payment of the $3.25M pursuant to cl 7(a). Based on the advice he decided to bring the proposed action, in respect of which he believes there is no defence to a claim that the money is now due and owing by them. He maintained privilege in respect of counsel's advice. I have not seen that advice.

To enable him to commence the proceeding he needs funding, and he proposes to obtain it from a litigation funder with whom he has agreed to terms. I have seen the proposed agreement (which is not yet executed), but it is otherwise confidential and has not been seen by the defendants. As may be expected, the agreement provides for a return from the fund above the reimbursement of amounts paid for costs. The deed administrator states that without the funding he could not prosecute the proceeding, and given the long standing and continuing insolvent status of ACTA, he believes that it is in the best interests of the creditors of ACTA that he commence and prosecute the proceeding. He produced a confidential schedule which calculates the potential return to creditors.

On 10 September 2003, the deed administrator filed a summons seeking a direction pursuant to s 447D in relation to a proposal that he enter into a litigation funding agreement. The summons also sought the production of documents pursuant to two notices to produce directed to the receivers and managers. The matter came before Mandie J on 12 September 2003. Mandie J set aside the notices to produce and adjourned the further hearing of the proceeding and the summonses to 19 September 2003.

That brings the chronology to 17 September 2003 on which day the deed administrator filed the originating process now before me for determination. The originating process was returnable on 19 September 2003. On that day the originating process and proceeding 6401 of 2002, including the summonses in that proceeding, were adjourned by consent to 26 September 2002.

At this point it is convenient to explain that the deed administrator filed the originating process in the present application (proceeding 7687 of 2003) on the basis that the directions sought should properly be obtained in a separate proceeding brought for that purpose. Having taken that course, the summonses in proceeding 6401 of 2002 have effectively been abandoned. Consequently, on 26 September 2003 when I adjourned the further hearing of that proceeding to 24 October 2003, no order was made concerning the summonses.

I commenced hearing the application for a direction as to entry into a litigation funding agreement on 26 September. After some argument, the hearing was adjourned to 29 September to allow the deed administrator time in which to provide an affidavit dealing with proposed amendments to the deed of company arrangement which had been provided to the deed administrator that morning by the defendants' solicitors, Madgwicks. A further affidavit of the deed administrator was filed, as was an affidavit by Lockwood. After a short hearing on 29 September the hearing resumed on 1 October and concluded on the following day.

In his initial affidavit in support of the application the deed administrator referred to the possible course of convening a meeting of creditors to consider whether to terminate or vary the deed, or to seek funding from creditors or their approval to enter into a funding agreement. He considered that course to be inappropriate as the defendants and their related entities are substantial creditors of ACTA.

On 26 September, the adjourned date of the present application, an affidavit was filed sworn by the defendants' solicitor, Peter Robert Kennedy. It is necessary to refer to what he said.

(a) He first referred to an affidavit he had sworn in proceeding 6041 of 2002 on 12 September 2003. In that affidavit he referred to the settlement in proceeding 4542 of 2002. He said that the Australon board had not yet been able to agree on the final form of the share structure. He also said that the matter is complicated from a commercial, accounting and legal point of view, and he referred to certain people disagreeing with the interests of ACTA and Roger May. He said that the market price of Intermoco shares had fallen from about 22 cents at the time of settlement to about 7 cents.

(b) Mr Kennedy produced a letter he had written to the deed administrator's solicitor on 17 September 2003 in which he stated, among other things, that the defendants did not have the financial ability to make any proposal as their assets were tied up in ACTA. Any proposal would have to come from Lockwood. Further, the deed of company arrangement was inconsistent with the summary of proposed terms in that the latter did not impose a financial obligation on the defendants as distinct from ACTA. The directors, Roger and Jason May, intended that they would use their best endeavours to make ACTA pay, but that was all. Further, he understood that Roger and Jason May were preparing a revised deed of company arrangement. The matter should return to a meeting of creditors. Finally, he repeated an offer made on 15 September to provide information.[7]

(c) Mr Kennedy said that on the instructions of Roger May he had drawn proposed amendments to the deed of company arrangement. He had forwarded the amendments to the deed administrator's solicitors that morning (26 September). The proposed amendments are:

"1. That Clause 7(a) of the Deed be varied to include the words "will use their best endeavours to cause ACTA to pay" in place of the words "must cause to be paid" where appearing in line one of 7(a). 2. That Clause 7(b) of the Deed be varied to include the words "will use their best endeavours to" in place of the word "must" where first appearing in line one of 7(b). 3. The time for payment of the sum of $800,000 (being part of the sum of $3,250,000) be extended until 30/6/2004. 4. The time for payment of the balance, namely $2,450,000 be extended to 31/10/2004. 5. The sum of $3,250,000 will be paid earlier upon the sale or transfer of surplus shares by ACTA following the distribution of Intermoco Shares from Australon Enterprises Pty Ltd ("AEPL") to ACTA provided always that the following liabilities have first been satisfied namely:

(a) the fees and expenses owed by and payable to Mr D Lockwood in his capacity as Receiver and Manager of ACTA (including any liability of Mr Lockwood personally or under section 419 of the Corporations Act 2001 to AIPL in the AIPL proceedings) and;

(b) the sum of $1,200,000 agreed to be repaid to the ATO.

6. As security for payment of the sum of $3,250,000 as aforesaid the following shares will be delivered to the Deed Administrator (to be dealt with in the terms hereafter appearing) namely:

(a) up to 30 Million shares in Intermoco Limited registered in the name of ACTA;

(b) 1 Million shares of Reg 144 common stock of Military Communications Technologies Inc. (USA OTC BB "MLTA").

7. (a) Should the Administrator have not received the sum of $800,000 by 30/6/2004 then he will be entitled to forthwith realize sufficient of the above securities to ensure receipt of the said sum of $800,000.

(b) Should the further sum of $2,450,000 not have been received by 31/10/2004 then the Administrator will be forthwith entitled to realize sufficient securities to ensure payment of the said sum of $2,450,000."

(d) A without prejudice meeting was held on 25 September 2003 to discuss the provision of information by the receivers and managers. He believed that Roger May had undertaken to provide all relevant non-privileged, non-confidential documents to Rathner that he held. As to this, I note that Roger May (and Jason May) did not swear an affidavit on this application and that in cross-examination Rather did not accept that Roger May had given that undertaking. I accept Rathner's evidence.

As mentioned, I adjourned the hearing on 26 September to enable the deed administrator to consider and provide a response to the proposed amendments to the deed of company arrangement. He did that by an affidavit sworn on 29 September. He considered that it was not in the best interests of creditors of ACTA for the deed of company arrangement to be amended as proposed. He dealt with each element of the proposal, stating his view in relation to each. I note only the following. The changes to cl 7(a) and (b) would remove the personal liability of the defendants and oblige them only to use their best endeavours. There was no explanation as to why the payment of $800,000 should be extended to 30 June 2004, or why the payment of $2.45M should be extended to 31 October 2004, and it was not said who would make the payment and from what funds. Based on the calculation of ACTA's entitlement to shares in Intermoco, as estimated in a facsimile from the receivers and managers' solicitors dated 4 September 2003, and based on the current share price of Intermoco of 6 cents per share, it is highly unlikely that any substantial funds, or any amount at all, will be paid to the deed administrator under the deed of company arrangement. He set out a calculation to establish that proposition. Further, as a party to the deed of settlement dated 13 September 2002, he had not agreed to any further sum being paid to the Commissioner, nor had he agreed to the Commissioner having any priority in payment over the priority creditors under the deed of company arrangement. As to item 6(a), he said that no fixed allocation of shares in Intermoco is proposed to be registered in the name of ACTA. As to item 6(b), he provided information concerning MLTA and raised several substantial reasons as to why the MLTA common stock was not acceptable as security. As to item 7, there was no explanation as to why the security could not be realised earlier than the proposed date.

The deed administrator concluded his affidavit with an expression of concern that if any resolution is put to a meeting of creditors of ACTA to vary the deed in accordance with the proposal, the defendants and their related parties and associates will have sufficient voting power to ensure that the resolution is passed. Accordingly, it would be inappropriate to put the proposal to creditors.

I note that Rathner was cross-examined on this last point, as to the number of related parties. He was not certain as to the number, or was unable to be, without checking. I note too that in an affidavit Lockwood swore on 30 September 2003, he said that only Global and Jason May were related, and that the majority of creditors were present or former employees or consultants of ACTA. This part of Lockwood's evidence, and other parts of Lockwood's affidavit were objected to as hearsay. I ruled on the objections in the course of argument.

I should note some of the matters stated by Lockwood in his affidavit. He had not understood that it was the intention in the proposal for a deed of company arrangement that Global and Roger and Jason May would undertake a personal obligation to pay as provided in cl 7(a) of the deed. He said that he had explained to Rathner why the time for making payment under the deed should be deferred, which was related to complications under the deed of settlement in proceeding 4542 of 2003, and to an existing and ongoing breakdown of the relationship between the parties to that deed of settlement. In para 7 he deposed to a view Roger May had expressed as to the number of Intermoco shares to which ACTA might be entitled; upon objection, counsel did not press this paragraph. In para 8 he said that he did not yet know the number of shares he would have to transfer to his litigation funder, the actual number being subject to the Intermoco share price. As to Rathner's fees, the creditors have not approved $600,000, merely the amounts resolved upon at the second meeting. He concluded with the opinion that the proposed variation protected the position of the deed administrator and the creditors under the deed. This is a sufficient reference to the matters stated in the affidavit. Subject to my rulings, I have regard to all of the affidavit.

Counsel for the deed administrator relied on the statement of principle of Goldberg J in Re Ansett Australia Limited and Korda[8] as to the circumstances in which it is appropriate for a court to give directions to an administrator. It is plain enough, as his Honour said, that it is not appropriate

" ... where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must been an issue calling for the exercise of legal judgment".

Is the present a case in which the deed administrator merely seeks comfort in making "a business or commercial decision"? Counsel for the defendants submitted that it was, that there was no issue to resolve in determining the application, and that the deed administrator's appropriate course was to place the matter before the creditors at a meeting convened by him for that purpose. The primary submission of counsel was that the application for directions was premature, and should be refused accordingly.

Counsel for the deed administrator countered that the direction sought was appropriate, regarding the circumstances overall. A legal issue of substance was raised concerning the interpretation of cl 7(a) and, in particular, whether it should be rectified in a way that would fundamentally alter, and reduce, the obligation to pay. There was an issue as to the appropriateness of the deed administrator seeking the direction without first bringing the matter to a meeting of creditors. There was also the difficult situation in which the deed administrator was placed. Having agreed to act as administrator, and deed administrator, at the request of ACTA and the Mays, he had done much work, in respect of which he had not received a single cent for his fees and expenses. Notwithstanding this, he had sought information to aid his consideration and had not received a satisfactory explanation as to performance under cl 7(a) of the deed of company arrangement. And now, having made a difficult decision as to how to proceed in the best interests of creditors under the deed, those persons attacked his judgment. In these circumstances, in terms of the passage quoted above, there is a dispute as to legal issues, and there is an attack on the propriety, reasonableness and good sense of the deed administrator. Regarded overall, it is appropriate that the deed administrator have the comfort of a direction. It was recognised that, even if the direction sought is given, it is for the deed administrator to determine for himself whether to enter into the litigation funding agreement, that he might do so without a direction, and that he must bear the burden of a decision to do so.

As mentioned, the defendants' primary point is that the application is premature. The deed administrator should first have convened a meeting of creditors to ascertain their views on the matter. The deed administrator had power, under cl 10.1(a) of the deed and s 445F(1)(a) of the Act, to convene a meeting of creditors. At such a meeting he could have asked creditors to consider how he should proceed, or even to resolve that the deed be terminated. Further, the deed administrator had been requested to convene a meeting of creditors but he had not done so.

The first such request was given by Global, the Mays and some other people, by a notice dated 11 September 2003, they being persons who were owed more than 10 percent of ACTA's provable debts. The second such request, dated 30 September 2003, was given by Global only, as a creditor owed in excess of 10 per cent of ACTA's provable debts.

The first notice stated that it was given pursuant to cl 13 of the deed and requested a meeting "so that the opinions of the creditors can be canvassed in relation to the default by ACTA under the terms of the" deed of company arrangement. The deed administrator treated the request as defective because the wrong clause was referred to, and because a resolution was not proposed as required by s 445F(1)(b) read with sub-section (3)(b). Accordingly, he did not convene a meeting pursuant to the request.

Regarding the request as defective, it would seem, Global gave the second request, dated 30 September 2003. That was during the course of the hearing. It was in fact received by Rathner on 1 October 2003. The request was that a meeting be convened to consider the proposed amendments to the deed of company arrangement forwarded by the defendants' solicitors to the deed administrator's solicitor on 26 September 2003. These are the amendments referred to at [51]. Rathner said in evidence that he would consider the request. He did not preclude convening a meeting, indeed the tenor of his evidence was that he would take advice and convene a meeting if that was the requirement of the law.

Counsel for the defendants submitted that the deed administrator wanted to by-pass the creditors. There are statements in the deed administrator's evidence that indicate his preferred course is to avoid such a meeting. The basis for his approach is an apparent concern that the Mays and their interests will have their way, to the disadvantage of the creditors. That may not necessarily be the case. Moreover, if the creditors resolved to vary the deed as proposed by the defendants, the deed administrator could apply to the Court for an order, for instance, that the deed be terminated. I do not say that such an order would be made, but mention the possibility to indicate that the Court retains relevant powers.

In the end counsel for the deed administrator submitted, as a reason for giving the direction sought, that it would, in effect, balance the scales between the deed administrator on the one hand and the defendants and their interest's on the other hand. The direction would indicate to the creditors that the course of action that the deed administrator proposed to take was one that the Court regarded as being open to be taken, subject to the deed administrator exercising his own judgment that it was appropriate to do so in the circumstances. That would be information relevant to the creditors, and information that would assist them in considering the defendants' proposal that the deed of company arrangement be amended.

The next main point taken by the defendants against giving the direction sought was that the proposed litigation would be defended. On the basis that the summary of proposed terms of the deed of company arrangement did not refer to Global and Roger and Jason May undertaking a personal liability to make payment of the fund, they would seek an order for the rectification of the deed to exclude such liability. The intention of those proposing the deed, as reflected in the summary, was that ACTA alone be liable to make payment of the fund. That, it was said, is an issue which clearly arises on a comparison of the summary and the deed. This discrepancy between the deed and the summary is a circumstance, taken together with the insolvent state of ACTA, and the proposal to amend the deed of company arrangement, which indicates that the Court should refuse to give the direction, at least until the creditors have an opportunity to meet and consider the proposal.

As against this position of the defendants, the summary may be said to be silent as to who was to be personally obliged to make payment of the fund, and that in that sense the obligation was identified and given content by cl 7 of the deed, which the defendants executed as their agreement and undertaking. At present the agreement stands and is enforceable according to its terms. In the present circumstances, which include an absence of admissible evidence on the point, and the fact that no litigation exists in which the issues have been identified, I cannot hazard a view that the deed should not be regarded as enforceable according to its terms.

I should mention that in reply, counsel for the defendants submitted that the issues that may arise in the foreshadowed litigation are irrelevant. He made that statement to emphasise the submission that no direction ought to be given as there is no present issue affecting the deed administrator which requires determination. I should also mention, lest it be misunderstood, that it was counsel for the defendants, and before him, the defendants' solicitor, who had first suggested that the deed did not reflect the intention of the parties.

In the course of his submissions counsel for the deed administrator reflected upon the proposed variation to cl 7 of the deed of company arrangement to convert the obligation of Global and Roger and Jason May to one of best endeavours. The extent of the obligation imposed by a best endeavours clause was stated by Mason J in Transfield Pty Ltd v Arlo International Ltd[9] as an obligation to do that which is reasonable in the circumstances. Counsel said that if the deed is so amended, it is reasonable to anticipate that the creditors will get nothing. The point was, I think, intended as a reflection on the veracity of the defendants' position regarded in the entirety of the circumstances, and also to emphasise an apparent ever increasing risk of futility in the already prolonged administration. Counsel's submission indicated the appropriateness of the deed administrator's proposed course of action.

In my view, having considered all that was submitted, and having regard to all of the relevant circumstances, including the complex and difficult situation confronting the deed administrator, who has acted honestly and reasonably in the performance of his duties and responsibilities, it is appropriate to give the direction sought. As I have said, the deed administrator must still exercise his own judgment as to whether to enter into the litigation funding agreement and commence a proceeding against the defendants. I regard the complex of issues and circumstances, and the challenges confronting him, as warranting the direction sought.

[1] The other shareholders in Australon were Newpage Pty Ltd as to 500 shares, Springwell Australia as to 100 shares and Asia Infotech as to 200 shares.

[2] That date has now been extended to 24 October 2003, and each proceeding has been adjourned to that date.

[3] This is the deed of settlement referred to at [13].

[4] The trial commenced on 7 March 2003, when counsel for the plaintiff in 4542 of 2003 opened the case.

[5] See Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd [2003] VSC 67.

[6] In an affidavit sworn on 28 February 2003.

[7] The letter containing the offer is Exhibit H.

At a glance

Court

Decision date

Before

Source

Judgment (104 paragraphs)

Parties

Cases Cited (1)