MATTER : PARADOX DIGITAL PTY LTD (Subject to Deed of Company Arrangement) ACN 008 875 714

VINCENT ANTHONY SMITH in his capacity as Deed Administrator

BRYAN KEVIN HUGHES in his capacity as Deed Administrator

Corporation administration - Deed of company arrangement - Variation of deed of company arrangement - Court powers

Variation to the Deed of Company Arrangement approved

1 OWEN J: This is an application under s 447A of the Corporations Law for the court to vary the way in which Pt 5.3A of the Corporations Law applies to the administration of the company Paradox Digital Pty Ltd and in particular to vary the deed of company arrangement.

2 On 13 February 2001 the directors of the company resolved that the company either was or was likely to become insolvent, and that an administrator ought to be appointed and the present applicants were so appointed. On 12 March 2001 the second meeting of creditors was held and a recommendation was put to the creditors that the company should enter into what is called the syndicate contract. On 22 March 2001, in accordance with the resolution of creditors, the company and the administrator entered into the syndicate contract.

3 In broad terms the effect of the contract was to provide for payment of $1,000,000 in instalments over a period of time. The time for settlement of the syndicate contract was 6 April 2001 but extensions were granted as the purchasers were finding difficulty in arranging the necessary finances. On 12 April 2001 the purchasers advised that they could not proceed with the sale. This left the administrators in a position where there was only one interested purchaser. They had no real negotiating power. Over the period from 12 to 17 April 2001 the administrators negotiated with the only remaining interested purchaser, namely EFTel Pty Ltd.

4 An arrangement has been reached between the company, the administrator and EFTel. In effect, it provides for a fixed consideration of $510,000 plus a variable adjustment estimated to be a further $90,000. It also provides for the acquisition of sufficient shares to gain control of the company. The deed administrators will retain the ability to issue proceedings in the name of the company against the initial purchaser for breach of contract, and to seek compensation for the difference between the promised consideration and that received via the contract with EFTel.

5 In short then, the difference between the syndicate contract and the EFTel contract is that the estimated receipt of $1,000,000 is reduced to $700,000. I understand the $700,000 to be arrived at by the fixed consideration payable by EFTel of $510,000, by the variable adjustment of $90,000 and taking into account a non-refundable deposit of $100,000 which was payable under the syndicate contract.

6 In an affidavit sworn on 18 April 2001, Vincent Anthony Smith, one of the joint administrators, has deposed to the steps that were taken after the appointment of the joint administrators to find a purchaser for the undertaking of the company, and to the formation of the syndicate contract, and to its demise, and to the efforts that they have made to find an alternative purchaser.

7 I am satisfied that all reasonable efforts have been made by the administrators to quit the assets and undertaking of the company for the best possible return. In par 18 of the affidavit, Mr Smith deposes as follows, and I quote:

"The DOCA as it presently stands allows for variation by a resolution of creditors. The regulations provide that 14 days notice must be given to creditors of a meeting to consider a resolution. I cannot continue to trade for this period, or even for any period beyond this Friday, 20 April 2001, as I am no longer obliged and in fact cannot continue to incur debts if the EFTel Contract cannot be completed on Friday. I must close the doors this Friday unless the EFTel Contract takes effect. EFTel has indicated it is in a position to settle on Friday, to prevent closure of the business and subsequent irreparable damage to the business of the Company. I am currently incurring daily trading debts of approximately $20,000. A schedule setting out how this amount is made up is annexed hereto and marked VAS8. For as long as I have continued to trade, it has been possible to obtain some revenue and recover some receivables. Obviously, both those sources of cashflow will cease once trading ceases. At no stage have I been obliged to trade on and I have only done so due to the interest displayed in the Company and the fact that the purchase offers (all made on the basis of a going concern) were of amounts sufficient to provide some return to unsecured creditors. I can no longer justify trading on, where, save for the EFTel Contract, there is no willing purchaser and I remain substantially exposed to trade creditors."

"If the company enters into liquidation there will be no return to unsecured creditors including employees. I should be in a position to recover some receivables and an amount for the sale of plant and equipment. Having investigated the possibility of recoveries via the antecedent transaction provisions of the Corporations Law, I have formed the view that it is unlikely that there would be any recovery above the sum of $100,000, and even this is conditional upon the ability to fund proceedings and recover on any judgments in the Company's favour. The estimated return to creditors in a liquidation scenario is set out in the Second Report at page 9. It indicates a shortfall, such that it would not be possible to meet all administration debts, all my costs and expenses, and, as stated above, nor would there be any payment to employees."

"It is clear that the amount that would be available to unsecured creditors under the proposed amended DOCA will be less than if the Syndicate Contract had proceeded. However, the alternative, being a liquidation scenario, is no return at all to employees or unsecured creditors, and in addition Mr Hughes and myself will be exposed for personal liability for trading debts incurred which cannot be met out of the realisation of assets of the Company."

"If the only offer available as at 26 March 2001 was the EFTel Contract, I would have recommended to creditors that they vote in favour of a deed of company arrangement reflecting that contract, as in my opinion it would have been preferable and in their interests that the creditors agree to such a deed rather than vote in favour of the Company going into liquidation."

11 The material before me indicates that the unsecured creditors of the company amount to somewhere in the region of $9,000,000.

12 There is insufficient time for the administrators to convene a meeting of the creditors of the company to consider the proposed variation because settlement must take place tomorrow. However, the major creditors of the company have been approached. The information available to me suggests that creditors having debts of approximately $7,500,000 of the $9,000,000 have indicated either support for the variation or at least non-opposition to it.

13 The first question is whether the court has power to make the variation. I am satisfied that it does have power. There are at least two decisions to that effect. The first is Mulvaney v Rob Wintulich Pty Ltd (1995) 18 ACSR 384, where, at 386, Branson J said:

"I'm satisfied that section 447A of the Corporations Law empowers the court to alter the operation of Division 11 of part 5.3A of the Corporations Law so as to allow in appropriate circumstances a deed of company arrangement to be varied not be resolution passed at a meeting of the company's creditors convened under section 445F of Corporations Law but by orders of the court."

14 There is dicta to similar effect in Milankov Nominees Pty Ltd v Roycol Ltd [1994] FCA 1276; (1994) 14 ACSR 296, at 301. The difficulty is that the Corporations Law itself deals with the way in which a deed of company arrangement is to be varied. Section 445A refers to a creditors' resolution to vary a deed and empowers the court to cancel a variation on the application of a disaffected creditor.

15 It is also the case that the deed itself envisages a variation by reason of the deed of resolution. However, I take the view that I as a single judge should follow the decision of single judge in a court of competent jurisdiction on the proper interpretation of the Corporations Law unless I am of the positive view that the decision is wrong. While there is some doubt on the matter, I cannot say that either Milankov Nominees or Mulvaney is positively wrong. I propose to follow them. I hold that there is power in the court to make the variation or to approve the variation.

16 The next question is whether the discretion should be exercised in that way. In my view, it should. In Mulvaney, there was no effect on the creditors. That is not the case here. There will be an effect on creditors because the return which was estimated for creditors was based on receipts of approximately $1,000,000. This will now be reduced to $700,000. Nonetheless, I accept that the prudent and appropriate course for the administrators to take if the undertaking cannot be sold would be to close the doors. I accept also the commercial reality that this would destroy the goodwill of the company and therefore, to a significant extent, the realisable value of the assets. It would not be feasible to convene a meeting of the creditors of the company to consider the variation.

17 This problem did not arise until 12 April 2001. Easter then intervened and it was not until 17 April that the negotiations with EFTel were concluded. The difficulty which the administrator would face to convene a meeting of creditors is entirely understandable. I have not overlooked the fact (which appears from the comprehensive minutes of the meeting of creditors of 12 and 26 March 2001) that the creditors were not unanimously in favour of the deed of company arrangement in its initial form. Nonetheless, the appropriate majority approved it.

18 I think the appropriate exercise of the discretion is to approve the variation to the deed of company arrangement. The alternative would be for the company to go into liquidation. If that were to occur, the likely return to creditors would be significantly less than that under the varied deed of company arrangement, albeit that even under those arrangements the return will not be great. For those reasons I accede to the application.