Section 445D - termination of a DOCA
112 The Sino Creditors apply for an order pursuant to s 445D of the Act that the DOCA be terminated.
113 Section 445D of the Act provides as follows:
When Court may terminate deed
(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; or
(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 document that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; 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.
114 Section 445D is contained in Pt 5.3A of the Act which was introduced to improve the speed and efficiency of external administrations. In Britax Childcare Pty Ltd v Infa Products Pty Ltd [2016] FCA 848; 115 ACSR 332 (Britax), Burley J observed at [87] and [88]:
When the Corporate Law Reform Bill 1992 (Cth) was introduced, the Explanatory Memorandum (Explanatory Memorandum, Corporate Law Reform Bill (Cth) 1992) stated (at [449]) that the new Part was intended to provide for speed and ease of commencement of administration, minimisation of expensive and time-consuming court involvement and formal meeting procedures, flexibility of action and ease of transition to other insolvency solutions where an administration does not by itself offer all of the answers.
It is with these objectives in mind that section 435A was introduced. The administration process operates in circumstances where those controlling the relevant company have accepted that it is insolvent. It has been accepted that the investigation conducted in the administration process is intended by Parliament to be a swift and practical' one; In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) - Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 (Mustang Marine) at [109]. Consistent with this, the administrator's investigation is necessarily a preliminary investigation which involves the administrator carrying out his or her investigations in a manner which is modified in light of the tight timeframe and associated constraints provided for by Part 5.3A. An administrator, so constrained, cannot carry out a detailed investigation of at [sic] company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him or her; Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178; (2011) 82 ACSR 300 (Mediterranean Olives) at [61] - [62].
115 The Sino Creditors in their originating process rely upon s 445D(1)(f) of the Act. In deciding whether a DOCA is oppressive, unfairly prejudicial and/or unfairly discriminatory, and/or contrary to the interests of the creditors as a whole, the Court has regard to factors including:
(a) the object of Pt 5.3A of the Act;
(b) the interests of other creditors, the Company and the public;
(c) the comparable position of the creditors on a winding-up, compared with their position under the deed; and
(d) other relevant facts such as the relative position of all creditors under the deed (ie whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the deed: TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789 (TiVo) at [54] per Gordon J, citing Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427; appeal dismissed: Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593.
116 In TiVo, Gordon J said at [55]:
Section 435A is important. It describes the object of Pt 5.3A. Here, the relevant object is to ensure that the business, property and affairs of Vivo, as an insolvent company, are administered in a way that results in a better return for Vivo's creditors and members than would result from an immediate winding up of the company. As it has sometimes been said, s 435A effectively places the onus on those who support the DOCA to show positively that it "results in a better return for the company's creditors and members than would result from an immediate winding up of the company" (emphasis added): JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 at [90].
117 As noted by Brereton J in respect of the former s 600A in Re Connections Total Fitness for the Family Pty Ltd [2014] NSWSC 75 (at [42]-[43]), there is significant overlap and parity of consideration between the provisions:
... However, the similarity between s 445D(1)(f) and s 600A(1)(c) means that what is prejudicial to an unreasonable extent under the latter is likely also to be unfairly prejudicial or unfairly discriminatory under the former. Moreover, if one were to conclude that the deed, if executed, would be liable to be terminated under s 445D, that could be very relevant to what consequential orders should be made under s 600(2).
Whether a deed of company arrangement is oppressive or unfairly prejudicial or discriminatory is determined primarily by reference to the general principles underlying Part 5.3A, including, first, the creditor's right to be paid or to have the company wound up or to have the company administered by an administrator in a way that will see creditors paid from the company's property, In Sydney Land Corporation v Kalon, Young J put it in these terms (at 430):
Accordingly when one is looking at what is oppressive or unfairly prejudicial under section 445D, one looks at it in the background of the general right of a creditor to be paid or to wind the company up or to have the company administered by the administrator under the deed in a way which keeps the company's business going and will see the creditor paid something out of the property of the company. If a scheme and a deed deviates from that, then a creditor is more easily able to say that it's operating oppressively than otherwise.
118 Part 5.3A of the Act does not proceed on the basis that the will of the majority creditor necessarily prevails. The authorities support the proposition that the scheme of Pt 5.3A does not permit the individual will of one creditor, even a creditor entitled to claim the most significant sum in the administration, to set aside the DOCA without first establishing that the conditions of one or other of the sub-paragraphs of s 445D(1) have been satisfied: Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 (Decon) at [152].
119 As Burley J observed in Britax at [104] and [105]:
In Mediterranean Olives, Dodds-Streeton J noted (at [192]) that the plaintiffs could not establish viable causes of action or negative the administrators' estimates of the probable nil return to the unsecured creditors on winding up. The plaintiffs submitted, however, that as the administrators' investigations were inadequate and the Deed of Company Arrangement depended on the support of related creditors, the Court should, if outstanding issues reasonably called for further investigation, "readily uphold their bona fide preference, as the major independent creditors, for liquidation", at [192]. Her Honour, at [193], said:
As Network and Portinex make clear, however, unless the outcome of the relevant resolution is contrary to the interests of the creditors as a whole, the defeat of a major creditor's preference by the votes of related creditors is irrelevant.
In DCT v Portinex/Silindale/Dalvale … ACSR 391 Austin J at [137] summarised the position as follows:
This is a case where by far the most substantial unrelated creditor has been outvoted by related creditors and now finds himself bound to arrangements to which he objects. He objects broadly on the grounds that the arrangement unduly benefit the director of the companies and that the administrator has made inadequate investigations. If there were nothing more to the case than this, the creditor may have at least a sound moral case for assistance. But Pt 5.3A clearly contemplates that the wishes of an individual creditor may be overridden, and permits related creditors to take part in the decision to do so, subject to s 600A: Decon [104]-[105].
120 The essence of the Sino Creditors' claims is an assessment of whether the Deed Administrators adequately performed their statutory duty to investigate the Company's financial circumstances and whether the Deed Administrators had a sufficient basis to recommend to creditors a DOCA instead of liquidating the Company.
121 The authorities recognise that the standards required of an administrator's investigation are necessarily modified by the tight timeframe and associated constraints: Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) (2011) 82 ACSR 300 (Mediterranean Olives); [2011] FCA 178 at [61]; Decon at [99]-[114].
122 In Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139, Cohen J at [145] and [146] stated:
As a preliminary matter, it should be noted that Pt 5.3A has its objects as set out in s 435A, namely the provision for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. The intention was, as has been indicated in several cases, to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or of the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Pt 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly.
[emphasis added]
123 In Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612, Austin J at [339] described the administrator's duty to investigate as follows:
An administrator has a statutory duty under s 438A to investigate the company's business, property, affairs and financial circumstances. It is possible that he or she may fall under an obligation to obtain legal advice in order to discharge that duty properly in the facts of the case. But in assessing whether any such duty has arisen, the court is bound to take into account the limited time available to an administrator to carry out his or her investigations, the extent and complexity of the tasks to be carried out during that time, and the availability of funds for these purposes: see the Pddam [Deputy Cmr of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498] and Portinex [Deputy Cmr of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACST 391] cases, cited above. In some cases it will be open to the court, bearing in mind such considerations, to conclude that something less than an independent legal assessment will be sufficient: [2003] NSWSC 467; 45 ACSR 612, [339].
124 Relevant authorities were reviewed by Dodds-Streeton J in Mediterranean Olives. In the course of that review, her Honour observed at [66] and [69]-[70] as follows:
In Spiteri v Georges [2002] VSC 473, Hansen J reiterated that the administrator must act quickly in relation to both the first and second meeting of creditors, and in investigating and forming an opinion. His Honour dismissed an application by the director of the company to remove the administrator and set aside his decisions allowing a party to vote as a creditor in a particular amount, on grounds including alleged partiality and lack of independence.
…
In Deputy Cmr of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232, Lindgren J concluded (at [198]) that, on the basis of a number of provisions of Pt 5.3A, an administrator was required to act with expedition within a tight timeframe, which should be extended or adjourned only exceptionally.
His Honour referred to the consistent distinction in relevant authority between the extent and quality of information available and investigations performed in, on the one hand, a voluntary administration and, on the other hand, a liquidation. In the former, the investigation was to be "swift and practical", as stated in Pddam at [226].
125 Dodds-Streeton J also examined a number of authorities which had considered the relevance of an inadequate investigation by an administrator to the termination of a DOCA pursuant to various potentially overlapping provisions of the Act: Mediterranean Olives at [79]-[145]. Those authorities indicate that the Court's discretion is wide but should be exercised having regard to the interests of creditors and also the public interest.
126 In Decon, McKerracher J, after surveying relevant authorities, summarised the position at [112]-[114] and [121] as follows:
As the authorities make a clear, there is a wide range of evaluative, discretionary decisions that administrators are required to make with the benefit of appropriate expertise about what information should be verified and what can be followed up in the constraints of the limited time and resources available.
The authorities note that what has to be done is to be carried out within a three week period as determined by statute. Although it may be open to administrators to apply to the Court for an extension of time in an exceptional case, this also is very much a matter of their judgement as to the likely utility in doing so. … The statute does not contemplate that an administrator will be able to conduct a speedier, but just as effective, version of a liquidator's investigation.
The statute of course is not prescriptive about what particular inquiries or investigations an administrator must make. It is clear that this also is to be a question of judgement for the qualified professional.
…
This is intended to be a practical insolvency regime. It is often of course disappointing to creditors as is the case in the present circumstances. That is more to do with an absence of available funds for creditors, rather than who should get them. But the statutory object is to achieve the formation of a relatively prompt independent expert view as to what course to recommend to the creditors in all the circumstances. Sometimes this is more of a rough and ready process as the authorities acknowledge and not an exact science, but of course qualified administrators are suitably trained to perform that task. The availability of an administration as an insolvency tool is to provide a trade-off for what would otherwise be a far more time-consuming and usually expensive process in liquidation.
127 The Sino Creditors' application also needs to be evaluated by reference to its claim and the assessment of its claim at the second creditors' meeting.
128 Meetings in external administrations are governed by Division 75 of the IPR. The following provisions are relevant to ruling on the entitlement of creditors to vote at a meeting of creditors:
(a) First, s 75-50 of the IPR provides that, if a meeting is convened by an external administrator under s 439A of the Act, the external administrator must preside at the meeting.
(b) Second, s 75-85(2) of the IPR provides that, subject to subsections (3) to (5), each creditor is entitled to one vote and has one vote. Section 75-85(3) of the IPR (which is the equivalent of previous reg 5.6.23(1)) provides:
A person is not entitled to vote as a creditor at a meeting of creditors unless:
(a) his or her debt or claim has been admitted wholly or in part by the external administrator; or
(b) he or she has lodged, with the person presiding at the meeting or the person named in the notice convening the meeting as the person who may receive particulars of the debt or claim:
(i) those particulars; or
(ii) if required, a formal proof of debt or claim.
(c) Third, s 75-85(4) of the IPR (which is the equivalent of previous reg 5.6.23(2)) provides:
A creditor must not vote in respect of:
(a) an unliquidated debt;
(b) a contingent debt;
(c) an unliquidated or contingent claim;
(d) a debt that the value of which is not established -
unless a just estimate of its value has been made.
(d) Fourth, s 75-95 of the IPR, which is headed "Evidence of liability for debt", provides:
(1) If necessary, an external administrator must ask a creditor to give evidence in writing in relation to a debt claimed by the creditor to establish the liability of the company for the debt.
(2) If the external administrator considers that the evidence is insufficient for the purpose of subsection (1), the administrator, before asking for further information, must have regard to the expected dividend rate and the materiality of the issue requiring clarification.
(3) An external administrator must keep a copy of any evidence or information relied upon in deciding, for the purpose of voting or distributing dividends, whether to accept or reject a creditor's claim.
(e) Fifth, s 75-100 of the IPR is headed "Decisions in relation to entitlement to vote at creditors' meeting". Section 75-100(1) (which is equivalent of previous reg 5.6.26(1)) provides that the person presiding at a meeting may determine any question that arises as to the entitlement of a person to vote.
(f) Sixth, s 75-100(2) of the IPR provides that, in deciding whether a person is entitled to vote at a meeting of creditors, the person presiding must have regard to "…the merits of the person's claim" and act "impartially and independently".
(g) Seventh, s 75-100(3) of the IPR (which is the equivalent of previous reg 5.6.26(2)) provides that, if the person presiding is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark the proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.
129 The Administrators' submissions conveniently summarise the relevant principles as follows:
(a) First, authorities such as Selim v McGrath (2003) 47 ACSR 537; 177 FLR 85; [2003] NSWSC 927 (Selim) and El-Saafin & Anor v Franek & Ors (No 3) (2019) 143 ACSR 452 (El-Saafin) make a distinction between ruling on the entitlement to vote at meetings and ruling on proofs of debt for dividend purposes. The obligation to seek further information from a creditor "if necessary" is imposed on the "external administrator" and not on "the person presiding at the meeting".
(b) Second, the decision-making of the person presiding over the meeting is by reference to documents persons claiming to be creditors choose to present. It is also undertaken against the background of all relevant contextual matters of which the decision-maker is aware.
(c) Third, it is "no part of the function of an administrator or the chairperson of a s 439A meeting to promote or advance the claims of certain persons to be creditors".
(d) Fourth, if the debt or claim is for an unliquidated amount, or it is contingent, or it is a debt the value of which is not established, a just estimate of the value of the debt or claim must be made by the chairman of the meeting acting reasonably before the creditor is permitted to vote.
(e) Fifth, if the claim cannot be quantified by a just estimate, but it appears that the creditor is a creditor for at least some amount (for example, where a debt is subject to an uncertain contingency), it is appropriate to admit the creditor for voting purposes at a nominal value of $1.
(f) Sixth, the decision of whether to admit or reject the debt and the decision to estimate the just value of a debt or claim to be taken at the meeting will "of necessity, be of somewhat summary nature". The process of evaluation will take place shortly before the meeting without much time for consideration and it is not contemplated that the person evaluating will undertake any detailed inquiry. He or she will be expected do the best they can in the light of their pre-existing knowledge and the particulars supplied by the claimant. Accordingly, the situation is not one in which extensive debate or deliberation or detailed consideration will be possible. As Austin J observed in Selim at [103]:
He or she will do the best that can be done by reference to the factual material the claimant furnishes, viewed in the total context with which the decision-maker is dealing. If that material provides reasonable grounds, within that context, for ascribing a particular figure to the particular claim, the chairperson or administrator is no doubt expected to accept that position. If, on the other hand, there is little or no material from which a conclusion as to value can be drawn, a just estimate may be zero or perhaps the nominal amount of $1 assuming that admission is warranted.