Sycotex Pty Ltd v Baseler

Spargold.21June99 - 24 June, 1999: Re Spargold Enterprises Pty Limited: ex parte Geoffrey David McDonald & Anor 6 REVISED - 24 June, 1999 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY

No. 2756/99 In the matter of SPARGOLD ENTERPRISES PTY LIMITED (subject to Deed of Company Arrangement) ACN 069 345 286 and the Corporations Law GEOFFREY DAVID McDONALD and PETER DAVID RODGERS Plaintiffs

JUDGMENT - ex tempore 21 June 1999 INTRODUCTION 1 The present application is a novel one. It is by the two Administrators under a Deed of Company Arrangement ("DCA") who were previously administrators of the Company Spargold Enterprises Pty Limited which is and remains hopelessly insolvent. The Deed Administrators are concerned that significant indebtedness has been incurred since the company was put under a DCA. It is contended that an administrator of a DCA has a fiduciary responsibility in relation to such creditors as well as to other creditors to act impartially. They apply to terminate the DCA because otherwise there will be a distribution pursuant to the DCA, leaving nothing for the post DCA creditors. The company would then be ordered to pass into liquidation under the two former administrators.

ELABORATION 2 The consequence of not making such an order is brought out by Mr Fordyce in his comprehensive written submissions to which I express my indebtedness. Thus if a distribution were made under the DCA, the immediate effect would be that creditors covered by the Deed would be paid their dividend, whilst creditors whose debts were incurred after the DCA would be paid nothing. It also is inevitable that, with the company being hopelessly insolvent, some creditor will seek then to wind up the company. 3 At that point, it was said that an application would likely be made to retrieve the amount paid under the DCA on the basis that it was either an uncommercial transaction or an unfair preference, each within the meaning of Pt 5.7B of the Corporations Law. However, such an attack would be defeated by the fact that, in relation to such "insolvent transactions", avoidance only applies if they were entered into (or given effect to) on or before the winding-up began (s588FE(2)) and in the case of an administration that is taken to be the date the administration commenced (s513B and s513C). Nonetheless an attack might well be made on the basis that the distribution involved acting contrary to the interests of one group of creditors in a discriminatory fashion, not justified in the interests of creditors and the company as a whole, where the company is insolvent and not expected thereafter to survive. See generally Walker v Wimborne (1976) 137 CLR 1, though otherwise it has been suggested that the duty may be one of imperfect obligation owed to creditors exigible merely by way of a qualification on the shareholders' power to ratify; Sycotex Pty Ltd v Baseler (1994) 122 ALR 531 per Gummow J. 4 It will be appreciated that the validating effect of s451C(a) of the Corporations Law does not apply to transactions by a Deed Administrator but only by an ordinary administrator so that it would afford no protection in such a subsequent liquidation. 5 That squarely poses the question, does a Deed Administrator have a duty cognate with that of a liquidator to act impartially as between pre and post DCA creditors, being for that purpose at least in a fiduciary or quasi-fiduciary position though concededly not as a trustee as I explain below. There appears to be no authority precisely on point though some helpful analogy as well as support for that proposition implicitly to be found in s447E(1) of the Corporations Law. This provides in relation to an administrator including one under a DCA: "447E(1) [Power where management prejudicial to creditors] Where the Court is satisfied that the administrator of a company under administration, or of a deed of company arrangement: (a) has managed, or is managing, the company's business, property or affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members; or (b) has done an act, or made an omission, or proposes to do an act, or to make an omission, that is or would be prejudicial to such interests; the Court may make such order as it thinks just." 6 There is nothing in that subsection to suggest that the Court would only intervene where there is prejudice to pre DCA creditors and would not intervene where the prejudice is to post DCA creditors. To the contrary, if as appears "creditors" include both categories, it would be surprising indeed that the court has this statutory power to intervene by reason of prejudice (here) to post DCA creditors yet the administrator would have no duty of impartiality towards them but rather a duty owed exclusively to pre DCA creditors; a duty leading the DCA administrator to distribute only to them, leaving post DCA creditors lamenting. 7 Drawing on the analogy of a voluntary liquidator, which I consider is apposite also to a DCA Administrator, a voluntary liquidator has a duty to act impartially as between creditors. Thus Roxburgh J in Re Britton & Millard Ltd (1957) 107 LJO 601 at 601. "… this was an unusual case for the voluntary liquidator had come here to take sides. It was most undesirable for a voluntary liquidator to interfere in proceedings such as these except to dispel any ground for attack which may be made on him. The mere fact that a voluntary liquidator opposed a winding-up by the Court was one reason why a compulsory winding up order should be made because liquidator must be impartial as between the creditors." Such a voluntary liquidator is not a trustee but is in a fiduciary position. See for example Thomas Franklin & Sons Ltd v Cameron (1935) 36 SR(NSW) 286 at 296 where Davidson J in the full court reviewed the authorities concerning the position of a liquidator in a voluntary winding up and concluded that he was not a trustee but did have fiduciary duties: "It appears to me then, on the whole, from all these authorities, that the liquidator is principally and really an agent for the company but occupies a position which is fiduciary in some respects and is bound by the statutory duties imposed upon him by the Act."

8 Also to the point is that those post DCA creditors whose provision of credit has presumably allowed the company to continue to trade for the benefit of the pre DCA creditors should not be left to incur additional expense in funding such a challenge. No-one will in future trade with a company under a DCA if that were the result, thus preventing salvage of such companies. Such a challenge, if so forced on post DCA creditors, would be to recapture money that the Court, if aware of the situation, would most likely have prevented from being distributed, by ordering to the contrary under s447E. Terminating the DCA will of course prevent such distribution and there is no further point to the DCA, nor need for order under s447E. 9 The only other issue is whether under s445D, an order terminating the deed could be made on the application of the DCA administrator, on the basis that that administrator comes within sub-para (c) of s445D(2) as "any other interested person". Clearly paras (a) and (b) permit such an application by a creditor or the company. Here I should add the Company supports the application of the DCA administrator but has no funds to make the application itself. 10 I am satisfied that were the matter to have come to me as an application under s447E of the Corporations Law to restrain the distribution, I would have so ordered. 11 That would indubitably have made the DCA administrator an interested person able to apply for termination of the Deed to avoid that outcome. It should follow where such an order would have been made, but for the application to terminate the Deed, that the DCA administrator is no less a person interested. It is thus capable of making the application. 12 It follows that I am satisfied that:

(i) the DCA administrator owes a duty of impartiality to all creditors pre and post DCA,

(ii) to permit the distribution under the DCA would unfairly prejudice post DCA creditors,

(iii) this would be in circumstances where the incurrence of such debt by a non DCA administrator would have led to the administrator being liable for the debt but be covered by the indemnity in favour of such an administrator so as to give priority to that indemnity claim (see ss443A, D and E), and

(iv) the consequence of the foregoing and where the DCA has no further purpose, is that the proper course is to terminate the DCA on the application of the Deed Administrators so as to prevent that distribution and have the Company wound up and the Deed Administrators appointed its Liquidators. 13 However, as the pre DCA creditors have not been formally notified of this application, I consider the appropriate course to make any orders operative only after a reasonable period and for the DCA Administrators formally to notify those creditors as well as post DCA creditors to give any of these the opportunity, if they wish, in the meantime to put any submissions to the Court either in person or in writing prior to the matter coming back before me at 10 am in the Company List on 12 July 1999.

ORDERS 14 Accordingly I make the following orders which will come into effect on the expiration of 12 July 1999 subject to further order:

1. I order in terms of paragraph 1 of the Summons of 17 June 1999 pursuant to s445D(1)(g) of the Corporations Law and pursuant to all other powers thereunto enabling that the Deed of Company Arrangement applicable to Spargold Enterprises Pty Limited be terminated and the company be wound up and the Deed Administrators appointed its Liquidators, such order not to come into effect until the expiry of 12 July 1999 after all creditors have been notified of the application and this judgment and have had the opportunity to put any submissions.

2. I advise that the Deed Administrators were justified in making the application contained in the Summons.

   ---

Last Modified: 06/24/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.