Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd

INTRODUCTION 1 The appellants, Sino Group International Limited and Beijing Yingqidi Education and Technology Corporation Ltd (together, the Sino Creditors), appeal from that part of the judgment below in which their application, challenging a deed of company arrangement executed on 28 March 2022 by the Administrators of the first respondent, Toddler Kindy Gymbaroo Pty Ltd (the DOCA), was dismissed. The second and third respondents, Gideon Rathner and Matthew Sweeny respectively, were appointed as the Administrators of Gymbaroo on 22 November 2021 pursuant to a resolution of directors under s 436A of the Corporations Act 2001 (Cth) (Act). The fourth respondent, Dr Janet Williams, was the DOCA proponent and is a director, shareholder and creditor of Gymbaroo. The Administrators are also the Deed Administrators. 2 On this appeal, Gymbaroo and the Administrators had the same legal representation. Dr Williams was separately represented. Her counsel wholly adopted and relied on the submissions made by Gymbaroo and the Administrators and otherwise made short submissions in relation to certain Deeds of Subordination and Forbearance that were entered into on the first day of the hearing below (the Subordination Deeds). 3 Relevantly, the primary judge dismissed the Sino Creditors' application: (a) To terminate the DOCA pursuant to s 445D of the Act; and (b) To set aside the resolutions passed at the second creditors' meeting in relation to the execution of the DOCA pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations) 2016 (Cth) (IPS), being Schedule 2 to the Act. See Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2022] FCA 630 (PJ) at [137] to [154] and [158] respectively. References by the primary judge to the "Insolvency Practice Rules (Corporations) 2016 (Cth)" or the "IPR" are to be read as references to the IPS, with the exception to the reference to "s 75-115" at PJ [109], which is a reference to the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPR). 4 The appellant raises five grounds of appeal. 5 The first two grounds in substance allege that the primary judge erred in assessing the Sino Creditors' application to set aside the DOCA by reference to the Administrators' assessment of the Sino Creditors' proof of debt for voting purposes at the second creditors' meeting. They say that the primary judge should, instead, have considered how the Sino Creditors' claim may be assessed for dividend purposes in the competing scenarios of the proposed DOCA or a winding up under s 554 of the Act. The appellants contend that the primary judge thereby ignored and overlooked the ultimate task on which the estimated return to creditors under the DOCA depended, which was to estimate the value of each element of the Sino Creditors' damages claim in accordance with s 554A of the Act. 6 The third ground in substance alleges that the primary judge erred in not finding that information provided to creditors for the purpose of voting on the DOCA proposal was materially misleading. They say that, contrary to that information, the estimated return to Participating Creditors under the DOCA would not be 100 cents in the dollar once the Administrators and Deed Administrators' costs were taken into account, amongst other things. Accordingly, the Sino Creditors contend the power to terminate the DOCA under s 445D(1)(a) and / or s 445D(1)(c) of the Act was enlivened and the primary judge erred in failing to consider whether to exercise the discretion to terminate the DOCA. 7 The fourth ground alleges that the primary judge erred: (a) In failing to apply the correct test under s 445D(1) of the Act in respect of the interests of creditors, namely whether there would likely be a return to creditors on a winding up that is better than under the DOCA; (b) By failing to draw the proper inference, namely that creditors would receive a better return on a winding up, from undisputed facts in relation to (1) an arms-length, non-binding offer to purchase the business received in response to an expression of interest campaign undertaken by the Administrators; and (2) the effect of the Subordination Deeds. (c) By not finding that the grounds in s 445D(1)(f)(i) or (ii) of the Act were made out; and (d) By not exercising the discretion under s 445D(1) to terminate the DOCA. 8 The fifth ground is directed to the primary judge's alleged error in failing to exercise the discretion to set aside the DOCA under ss 75-41(3)(c) and 75-41(3)(d) of the IPS. In the proceedings below (at PJ [156]) and on the appeal, the parties accepted that this ground stands or falls with the fourth ground, there being a significant overlap and parity of consideration with s 445D(1)(f)(i) of the Act. 9 For the reasons which follow, we have concluded that the Sino Creditors have established error of the type identified in House v R (1936) 55 CLR 499 in relation to both grounds 3 and 4. Further, we consider it appropriate for this Court, being satisfied that the discretion under s 445D(1) was relevantly enlivened, to exercise that discretion to terminate the DOCA. In these circumstances, it is not necessary to determine grounds 1, 2 and 5. 10 The Sino Creditors also bring an application to lead further evidence on this appeal - that evidence is directly relevant to ground 3 of the appeal. For the reasons which follow, we are satisfied that the application to admit the further evidence should be allowed in part.