TCS Management Pty Ltd v CTTI Solutions Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3392/01 TCS MANAGEMENT PTY LIMITED v CTTI SOLUTIONS PTY LIMITED

1 HIS HONOUR: This is an application under s 440A(2) of the Corporations Act 2001 (Cth) ("the CA") in respect of an application to wind up the defendant. The application is brought by the defendant through the agency of David Gregory Young, chartered accountant, who is the voluntary administrator. Section 440A(2) provides: "The Court has to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up". 2 The history of the matter is as follows. The plaintiff obtained a judgment against the defendant in a County Court in Victoria on 18 April 2001. A statutory demand based on that judgment was served on the company on 22 May 2001. An originating process for the winding up of the company was taken out on 4 July 2001 returnable on 2 August 2001. The voluntary administrator is a person who, it is said, and this is not disputed, first met one of the directors on 27 and the others on 31 July 2001. His appointment as voluntary administrator took place on 31 July 2001, only two or three days before the first return of the originating process for winding up. 3 Despite the comparatively short time available, the administrator had by 13 August 2001 prepared a preliminary report which contains a useful amount of information concerning the company's position. That information may be summarised as follows. For practical purposes, and subject to what I shall say concerning the proposed deed of company arrangement ("DCA"), the present assets of the company are negligible. The company's liabilities amount to some $425,000. Those liabilities may be divided between creditors related to the directors of the company (referred to as "related party creditors"), which total some $164,000, and third party creditors, which total some $261,000. The preponderance of the third party debt is to two creditors only: the plaintiff in the sum of about $146,000 and a second creditor, namely, WSA On-Line Pty Limited (administrators appointed), in the sum of about $87,000. The situation is thus that the debts of those two creditors total some $230,000-odd out of the third party debts of $261,000, that is, the remaining third party debts total less than $30,000. The two creditors that I mentioned will therefore have the preponderance of the voting power of the related party creditors at creditors' meetings. What is more, if they vote together, they will have a majority of the votes at any creditors' meeting. However, if the second of those creditors votes with the related party creditors, who there is a deal of reason to think will be likely to vote together, they will vote down the plaintiff, which is the largest creditor. 4 The two large independent creditors take quite different views as to what should be done about the proposal for a DCA, to which I shall come in a moment. The plaintiff is implacably opposed to the DCA and the application under s 440A(2) made on behalf of the company through the agency of the voluntary administrator. More will need to be said about the length to which the plaintiff is prepared to go in its opposition to the DCA during the course of this judgment (see [7] below). There is in evidence a letter from the second creditor, which indicates that that creditor was in favour at the time the letter was written of the implementation of the DCA, although the state of its knowledge at the time of writing that letter will also call for some comment at a later stage (see [8] below). 5 The proposal which is the basis of the DCA is attached to the voluntary administrator's report and is as follows. The directors and shareholders of the company would make a payment to the deed administrator of $100,000 and that sum, after the deduction of the administrator's expenses, would be available for distribution among the third party creditors, producing a dividend of 22 or 23 cents in the dollar. The related party creditors would refrain from participation in that dividend. There is also contained in the offer provision for a further payment of $100,000. However, the promise of that payment is some two years down the track, and is hedged about with conditions, which relate to the performance of the company in the meantime. The voluntary administrator says that, because of the distance and uncertainty of that payment, he would regard it as something that ought not be taken into account in considering the present application, and I agree with him that that approach is entirely sensible. 6 The administrator's report also contains the following passage: "2 SUSPECTED OFFENCES I am currently preparing a report pursuant to Section 438D of the Corporations Act 2001. My investigations have led me to suspect that directors may have committed offences concerning: (a) Section [sic] 180, 181, 182 of the Corporations Act 2001 In October 2000 when the funding agreement with MIS was about to expire, I am of the opinion that the Company was insolvent if the MIS funding was not forthcoming. The directors failed to request such funding, and two of the Company's directors were also directors of MIS. (b) Section 588G of the Corporations Act 2001 As I believe the Company was insolvent from at least 14 October 2000, debts continued to be incurred after that time, the directors may have breached their duty to prevent insolvent trading."

It is important to note that those potential actions are carefully expressed by the administrator in terms of suspicion of offences under ss 180 to 182 of the CA and of the possibility of a breach of duty under s 588G of the statute. No doubt it is very early days, but the administrator suggests that the maximum recovery after expenses from those actions, as best as at present can be estimated, is some $177,000-odd, which (bearing in mind that that amount on liquidation would be divisible among the related party creditors as well as among the third party creditors) would produce an estimated dividend of about 34 cents in the dollar. However, that larger recovery, as I say, must in a real sense be speculative. The strength of the $100,000 offer on behalf of the contributories of the company is that it would certainly provide a dividend of, say, 23 per cent for the third party creditors. 7 Not surprisingly, in view of the short time that has elapsed, the proposals both ways were uncertain in various regards. However, they have been refined during the course of the hearing before me in important ways. First of all, when the offer of the $100,000 was brought forward, there was no firm time frame for it, but I have since been informed by Mr Hayter, solicitor for the voluntary administrator, that the scheme that would be put forward would be for the payment of the $100,000 seven days after the execution of the DCA were it adopted at a creditors' meeting. Early in the proceedings, not only was the result of the prospective actions for recovery against the directors speculative, but it was completely speculative as to whether they could even be pursued, as there were no funds to pursue them. However, there was a very important shift in this during the course of the case. Miss Pearman, of counsel for the plaintiff, indicated to the Court that her client was prepared to give an undertaking to the Court, if the application for adjournment were refused and the liquidation proceeded, that funding at least to the extent of $100,000 would be provided to the liquidator to pursue the prospective actions which I have mentioned. 8 That operates importantly in two ways. It gives no more assurance of recovery in the actions under the relevant sections of the CA. Such actions are rarely a lay down misere, and there is no reason to think, on the information available, that that would be so in this case. But it does give an assurance that the wherewithal will be to hand for those actions to be pursued as appropriate. It also acts as an earnest of the seriousness of the plaintiff in its desire and intention to have the directors pursued. Not only is it prepared to forego a dividend of some $30,000 that it would receive under the DCA, but it is prepared to put its money where its mouth is to the tune of some $100,000 or more in pursuit of the actions, and this is on the part of a creditor which has the preponderance of the third party debt. When I mentioned earlier that something further would have to be said about the state of knowledge of the second creditor, what must be said is that at the time that the second creditor wrote the letter I have mentioned favouring the DCA, the plaintiff's offer had not been made, so that the state of mind expressed in that letter was a state of mind expressed at a time when there was no reality at all, to my mind, in the notion that upon a liquidation the recovery actions would be pursued. No evidence has been brought before me as to whether there is any change of mind in that creditor as a result of the offer that has now been made on behalf of the plaintiff or that that creditor knows of the offer. 9 I should say at this stage that the voluntary administrator, whose conduct in bringing the offer before the Court and the manner in which that has been done is responsible and, indeed, entirely exemplary, has indicated his view that if his application for an adjournment is refused, the evidence in support of the plaintiff's application for winding up is in order and that it is inevitable that the company be wound up and a liquidator be appointed forthwith. The complete propriety of the conduct of the voluntary administrator goes further in that, the wish having been expressed on behalf of the plaintiff that he not become the liquidator upon a winding up because of his appointment by those associated with the company, albeit there is no longstanding association between them and no reason to impugn the voluntary administrator's conduct or propriety, he has taken the very proper course of indicating he will be happy in those circumstances to stand aside for a fresh person from the list to be appointed as the liquidator. 10 I need now to turn to the law relating to the determination of applications for adjournment under s 440A(2) of the CA for the purpose of determining the principles upon which this application must be dealt with. There has not been a great deal of detailed examination or consideration of the relevant principles, despite the provision having been in force in one form or another for some years. This no doubt is because the matter generally arises as a matter of urgency and courts have to consider and determine the applications in comparatively short times. A useful overall discussion of the situation appears in an article by Keith Bennetts, "Dealing with Winding Up Applications Following the Appointment of an Administrator" (2000) 18 Companies and Securities LJ 41. 11 The first case in point of time which I have identified that deals with this matter is of some considerable importance because it is the only appellate authority available. It is the decision of the Court of Appeal of Queensland in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456. The judgment of the Court of Appeal was delivered by McPherson JA and his Honour said at 457: "In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors. Far from that being shown in the present case, there is no, or practically no evidence, that the company has any assets whatsoever. It has liabilities that are very large; it owes $1.4m or thereabouts to the Deputy Commissioner for Taxation, who is the applicant for the winding up order; and it owes some lesser, but by no means small, amounts to other creditors, including the State Revenue Office. As against those liabilities, only two items are identified as being assets that the company has, or has a potential to obtain. One is a sum of $40,000, which is described simply as 'retention money'. Its true character and the terms on which it is held by the company do not appear with any degree of particularity from the material; but, whether or not it is to be considered an asset, the sum of $40,000 falls very far short of the amounts that are owed to creditors in this case, and in particular to the principal creditor, the Deputy Commissioner. The other item to which reference has been made in the character of a potential asset of the company is a right of action that has been commenced or is capable of being instituted, so it is said, not by the company itself but by one of its directors Donald John Creevey, who is an appellant in this case. It is said that that action is capable of producing a judgment to an amount of some $1.5m, and that Mr Creevey is prepared to assign to the company his rights in or under that action in order to put into effect a scheme or arrangement which would benefit all the creditors. That scheme or proposal is, of course, only as good as the value of the rights of action which it is proposed should be assigned to the company for the purposes of the scheme."

That passage, and particularly the first paragraph, have, not surprisingly, been quoted repeatedly in the cases that follow. However, whilst it is obviously correct that the question of whether an administration should continue rather than that there be a winding up is related to the question of whether the creditors can hope to get more from one form of administration than from the other, and that one would expect that in general it would be necessary to be seen that what would be produced as a result of the adjournment would be a larger, or at least an accelerated dividend, I think it is important to bear in mind that that was said by his Honour in a context where, in his Honour's words, there was no or practically no evidence of any assets being or becoming available on either basis, that is, the content of what was said by his Honour must be viewed against the factual background with which his Honour was dealing. It has also to be borne in mind that it was an ex tempore judgment delivered on the day of hearing. That in no way detracts from what was said in the Court of Appeal, but it is important, despite the repeated quotation from that judgment, not to be diverted from the fact that there is but one criterion, and that that is the criterion posed by the words of the statute, namely, the question of whether or not it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. The other importance that is to be derived from the judgment in Creevey is that it is emphasised in the judgment that it is the applicant for the adjournment who bears the onus of satisfying the Court that there should be an adjournment, that is, of satisfying the Court that the adjournment is in the interests of the company's creditors. 12 The next authority in point of time was the decision of a Judicial Registrar of the Federal Court of Australia in Fullview Pty Limited v WLW Pty Limited 17 September 1997 unreported. In that case Parkinson JR said: "The question to be determined is whether, having regard to the interests of the creditors, there would result from the continued administration a better return than if the company was wound up ...

However despite the deficiencies in the affidavit material and in view of the continuing concurrent meeting of creditors, I am satisfied that a mere possibility of a return to creditors is sufficient basis for the exercise of the discretion in section 440A(2) at this point in time ... "

It is in my view important that that formula not be elevated into a general criterion. It should be borne in mind that the adjournment which the Judicial Registrar granted on that occasion was an adjournment of less than a month, to 13 October 1997, and that context must be borne in mind in viewing the significance of the words. 13 The matter was further considered by Santow J in this Court in Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1997) 26 ACSR 629. In that case his Honour said at 635 and 637: "There are a number of reasons why I am not satisfied that the present application should be granted. Those reasons were put by the Deputy Commissioner of Taxation or emerged in argument. The overall position is that the defendant has not discharged its onus to satisfy the court that it is in the interest of the company's creditors for the company to continue under administration rather than be wound up. I elaborate below on my reasons. … In all the circumstances the case for adjournment is not made out though fairly put. There is a signal lack of persuasive evidence of the kind Creevey emphasised was required, in circumstances where the principal creditor and at least one other, strongly press for liquidation. I am thus not satisfied for the reasons mentioned that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up."

The importance of this decision is to emphasise again that it is the applicant for the adjournment which bears the onus. 14 The section was again considered by Santow J in Waste Recycling and Processing Services of New South Wales (t/as Waste Service New South Wales) v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194. In that case his Honour at [15] and [16] quoted from the passages in Creevey and Fullview cited above. His Honour concluded in that matter at [18] and [19]: "[18] While the plaintiff has made a powerful case for there being no further deferral of consideration of its winding up application and while it is clear that the defendant is either insolvent or may shortly be insolvent, with even Mr Star putting no opposition to the contention that the first proposition was correct, I have concluded that the proper course in all the circumstances is to allow a very brief adjournment. That adjournment is until next Tuesday 1 June 1999 by 12 noon when the administrator has indicated that for the modest expenditure of up to $15,000 he could give the court the benefit of a preliminary view as to the prospects of the defendant being able to continue to trade and, relevantly for present purposes, whether in a practical sense such continued trading coupled with any realisation of assets on a going concern basis or otherwise, would produce a larger dividend or at least an accelerated dividend for creditors as against an immediate winding up. I should add in that context that the appointment of either a provisional liquidator or liquidator would still permit, if circumstances justify that course, the liquidator to retire in favour of an administrator, pursuant to s 436B(1) of the Corporations Law and, with the leave of the court, such liquidator may appoint himself. However, the prospects of sale on a going concern basis may well by then have been lost. [19] I reiterate that in considering whether 'it is in the interests of the company's creditors for the company to continue under administration rather than be wound up' and recognising that the onus lies on the administrator, a court may, in appropriate circumstances such as these, conclude that for the brief period envisaged, and to allow a more informed appraisal for the longer term though subject to what may then transpire, such an adjournment should be allowed. SMS at this point has decided to remain neutral, so that further information will, it can be inferred assist it, as well as other creditors, even if the plaintiff at this point feels it already knows enough. It is clear enough from the evidence before me that liquidation would immediately destroy any real hope for realisation of the assets on the higher going concern basis and thus preclude any prospect of a higher or quicker dividend. Whereas it cannot yet be concluded that there is no real possibility of finding the necessary on-going finance, having regard to the support hitherto forthcoming from the Environmental Protection Agency (EPA) from the same or another financier than the National Australia Bank. That alternative had not yet been investigated. All of this can be pursued by the administrator, on a preliminary basis, at least."

His Honour in that case granted a short adjournment to permit further investigation. 15 The matter received the attention in this Court of Young J (as his Honour then was) in Deputy Commissioner of Taxation v Choice Design Homes Pty Limited [1999] NSWSC 589. In that case his Honour said at [6] - [13] and [18] - [23]: "6 As a rule of thumb, in these sort of matters, I have been applying a fourfold guideline. As I indicated in the converse situation to the present in Re Intag International Ltd & The Corporations Law [1999] NSWSC 571, the court should ask itself four questions in order, viz: (1) Is the company insolvent? (2) Is the company salvageable? (3) Is the proposed salvation in the interests of creditors? and (4) Is the proposed salvation in the public interest?

7 I indicated to counsel I would be applying those guidelines in this case, but questions arose as to whether that was legitimate.

8 Section 440A(2) focuses on the 'interests of the company's creditors'. What does that mean? Mr Aldridge, who appeared for the plaintiff, said that the interests of the creditors meant not only the creditors' financial interests in this particular winding up, but also the interests of all decent traders, including creditors. He put that good business principles should be observed, so that it was not in the interests of creditors that a company should go back into the marketplace and trade whilst insolvent or, indeed, that a director of rogue capacity, as the plaintiff would have me infer is the situation in this case, should continue to trade in the same cavalier fashion as he has heretofore.

9 It is difficult to see how the interests of creditors do extend that far. In Re Data Homes Pty Ltd [1972] 2 NSWLR 22, the Court of Appeal indicated that when considering schemes of arrangement the court need look at two matters; viz (a) the interests of creditors; and (b) the public interest.

10 The judgment of Mason JA tends to compartmentalize these two interests. It is hard then to see how the public interest actually comes into the phrase 'the interests of creditors', and it is also noteworthy that s 440A(2) is expressed in mandatory language; that is the court is to adjourn the hearing if satisfied that the administration is in the interests of creditors and presumably no other interests are relevant.

11 However, it does seem to me that Mr Aldridge is correct up to the point that it cannot be in the interests of creditors that there be a scheme propounded which is unlikely to fulfil its promise, or that the company spend considerable sums in legal and accounting fees in defending the scheme against attacks by dissentients, which attacks may have a very good chance of succeeding because this further depletes the pool of assets that is to be available for the payment of the unsecured creditors.

12 Accordingly, my fourfold guideline I believe is a legitimate way of approaching the matter. There are guidelines and there will be cases where the facts will show some other method of approach will be preferable.

13 The other problem about s 440A(2) is the enquiry whether the administration generally is in the interests of creditors, or the administration for the period of the adjournment is in the interests of creditors. I think it is the second and Santow J seems to have proceeded in that direction in Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative [1999] NSWSC 507 at para 6, and indeed I probably subconsciously followed the second principle last week in the present case.

'There must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors.' 19 The way in which Santow J approached the matter in both those cases was to consider the pros and the cons.

20 The points in favour of continuing the administration are that the creditors are likely to get more money than otherwise. The proposal set out in Mr Tolcher's affidavit of 2 June 1999 is that related parties, by which I assume was meant the director and his relatives, would defer all their claims, that other creditors would in due course be paid fifty cents in the dollar, that the company would continue to trade and contribute $10,000 per month to pay former creditors, which contribution would be 'underwritten and personally guaranteed' by the company's director.

21 The administrator considers that on a liquidation the optimistic return to creditors would be about eleven cents in the dollar and on the pessimistic view nil.

22 It is notable that in the light of additional facts that have been found, mainly by the efforts of the plaintiff, the optimistic forecast has been reduced down from twenty-six cents in the dollar to eleven cents in the dollar over the last week or so.

23 As against this the following matters should be considered: (a) there appear to be preferences in the period 22 April to 12 May of $58,000 and as prior records are 'missing' there may well be more. These would be caught up if the company was put into liquidation; (b) there are some aspects of the behaviour of the director which might in the public interest be inquired into and may even produce some more moneys into the pool available to the creditors; (c) the figures which were supplied to the administrator by the director appear to be very questionable, both from material found from the plaintiff's auditors and from other creditors whom the plaintiff has contacted; (d) the date of commencement of the winding up generally may be very significant in this case; and (e) the proposal would seem to involve a company going back into the marketplace while it was insolvent and trading whilst it was insolvent because even if there was a complete release of all the outside claims, the related parties' claim would probably make it insolvent. This is both against the public interest, see the Data Homes case, and conduct that is prohibited by the statute." In the result, his Honour refused the adjournment and wound the company up. The significance of this case is that his Honour emphasised that, whatever the authorities show about how the matter should be approached, it is the question posed in the statute itself that must be answered, and gives consideration to some of the matters in addition to a simple comparison of the quantum of recovery that may be taken into account in deciding what is or is not in the interests of the creditors. That is of some importance in this case, where is no great clarity as to which process would produce a better financial result. The amount recoverable in the actions is not hugely greater than what would be provided by the $100,000 payment. The actions are much less certain and much slower. It is difficult to answer the question on a comparison of quantum alone. I have already indicated that I did not take the dictum in Creevey as limiting the relevant considerations to quantum only. The sole consideration is the interests of the creditors, and the interests of the creditors is a concept wider than an arithmetical comparison of the amounts available. 16 The most recent authorities available to me are two further decisions of Santow J in the same matter: Deputy Commissioner of Taxation: In the matter of First Netcom Pty Limited [2000] NSWSC 989 and Re First Netcom Pty Ltd: Deputy Commissioner of Taxation v First Netcom Pty Ltd (2000) 35 ACSR 615. In the first of those judgments Santow J said at [2] - [3] and [8] - [11]: "2 The present application under s440A(2) of the Corporations Law brought by the Administrator against opposition by the Deputy Commissioner of Taxation essentially involves a choice at a point where a company's affairs make difficult any reliable conclusion. The choice is between the prospect of a Deed of Company Arrangement yet to be promulgated but very broadly outlined and immediate winding-up of the First Defendant. The First Defendant is a company which for the last three years has had no business but simply some twelve employees. It is said of them that they will, under the proposed Deed of Company Arrangement, be more successful than a liquidator in pursuing the receivables owed to the First Defendant, estimated for recovery purposes at $2,800,000. Further, that their services would be unlikely to be available to the liquidator on the same incentive basis.

3 The other benefit said to result from the Deed of Company Arrangement is that related creditors to the First Defendant totalling approximately $2.6 million and associated with a Mr Macdonald, the Managing Director and Principal of the First Defendant, will agree not to prove under the Deed of Company Administration in competition with all other creditors. Both Telstra and the Deputy Commissioner of taxation [sic] say the position of the First Defendant is hopelessly insolvent, that any benefits from a Deed of Company Arrangement are intrinsically speculative, and adjournment of the winding up application has not been shown to be in the interests of creditors.

8 The authorities on s440A(2) require, in my view, more than a mere speculative possibility of a higher return to creditors if a winding-up application is to be adjourned, here in favour of the prospect of the Deed of Company Arrangement. I say 'prospect' because the Administrator may yet determine on closer examination that the case for it is not sufficiently strong when the matters that I have earlier identified are probed more stringently with the additional time I contemplate his now having to do so.

9 In my view there must be a real prospect of benefit from the adjournment. But it is too simplistic to say that that prospect must necessarily be, at this point, a comfortable satisfaction that a Deed of Company Arrangement will yield a greater amount than winding-up. Of course in some cases that may already be safely apparent whilst in others the company is so evidently a basket case that further delay of the inevitable would simply add to costs; see, for examples, Yates v Deputy Commissioner of Taxation (1998) 26 ACSR 629.

10 However, there is an intermediate case of which Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194 is an example. This is where it is in the interests of the company's creditors for there to be a sufficient time by way of brief adjournment of the winding-up application for the possible prospect of greater benefit to creditors to be investigated, usually involving a Deed of Company Arrangement. The result may be either that this prospect proves fruitless or that this prospect becomes sufficiently probable that the matter should be left finally to creditors to decide usually by voting on a Deed of Company Arrangement. I am satisfied that this is such a case both because of the very great potential comparative benefits if the Administrator's recommendation turns out to be well-founded when he has opportunity to investigate further its necessary underpinning and because the adjournment needed to do this is relatively modest.

11 Against that course is the prospect of yet further costs and it has led me to hesitate before inflicting that upon the parties. But in the end I am influenced by the fact that these costs are not likely to be excessive, and by the good sense of letting the Administrator check urgently each of the matters which I have noted earlier require substantiation. This entails a short adjournment to the point of time when it is estimated that the Administrator will have prepared his report to the second meeting of creditors containing that substantiation and a properly drafted Deed of Company Arrangement. It may be that the Administrator will decide to abandon the Deed of Company Arrangement with no criticism of the Administrator being justified for that, either because the voting result will see it inevitably fail or because substantiation leads the Administrator to feel that he can no longer recommend that course. Or the Administrator may recommend proceeding and putting the matter to creditors to decide." 17 The second judgment dealt with the situation when the matter came back to Court on the adjourned day and application was made for a further adjournment on more ample material. His Honour at [11] and [12] referred to the Creevey formula. His Honour continued to say at [21] - [22] and [25] - [27]: "[21] While the difference between return upon liquidation as against the more favourable return estimated under a deed of company arrangement is likely to vary according to critical matters such as the cost of recovery and the percentage recovered, when one compares 4c in the dollar on liquidation to 51c in the dollar under the deed of company arrangement, the administrator certainly identifies a substantial advantage even on his worst case.

[22] That said, again creditors may form a different view. They will, if I grant the adjournment sought, have the opportunity to make as informed a decision as is feasible in the circumstances and certainly not a decision where there has been no reasonable level of scrutiny on the underlying facts and assumptions.

[25] However, as the applicant fairly put, while an established circumstance of a foregone recovery for a preference or insolvent trading is a factor to be weighed in the balance, the mere fact that there will be the consequence that no recovery will occur in relation to insolvent trading or preferences, could not of itself preclude the exercise of discretion in favour of an adjournment.

[26] The whole frame of the legislation is that, in a rather rough and ready fashion, creditors are invited if they adopt a deed of company arrangement to trade that kind of recovery for the usually relatively greater certainty of what is offered under the DCA or, as sometimes occurs, as here.

[27] Again that is a decision open to the creditors to make and one which I am satisfied that they should be able to make rather than the court to pre-empt that possibility." 18 What I derive from a consideration of the foregoing authorities, as perhaps appears from my reflections during their recitation, is that it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer. 19 There is one consideration that has been put forward as material in these proceedings that I have not yet adverted to. That is the possible relevance or lack of relevance of the jurisdiction possessed by the Court under s 445D of the CA and the possibility or likelihood of its exercise if the matter is left to the creditors for them to vote upon, and they vote for entry into a DCA. Section 445D(1), so far as is material, provides as follows: "445D 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; and (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 report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or (c) there was an omission from such a report or statement 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."

Here it is suggested that, if this DCA is voted in, over what would appear to be the rooted and continuing objection of the plaintiff, it will only be voted in by a conjunction of the votes of the related party creditors and of the second independent creditor. The related party creditors, because of their closeness to the directors, have a clear interest, whatever else they may be seeking to do, in avoiding, at least for the present time, by the payment of a sum certain of $100,000, the pursuit of remedies in larger sums by a liquidator funded by the plaintiff against the directors. It may be that in such a case an application to terminate the deed would be successful through the establishment of the ground in s 445D(1)(f) or even (g). That result was procured in circumstances not entirely dissimilar from this case in Bathurst City Council v Event Management Specialist Pty Limited (admin apptd) (2001) 36 ACSR 732, another decision of Santow J. In coming to that decision, his Honour said at [6] - [9]: "6 In the present case, creditors voted, twice, in favour of the deed of company arrangement. On the second time this was with notice of these proceedings and their basis (though not with any offer as has now been made by the Plaintiff embodied in the orders and undertaking). That would ordinarily militate against termination, though not necessarily decisive. However, in assessing the significance of that positive vote for a decision to terminate, it is here relevant to ascertain the extent to which it could be said that vote in favour was influenced by, if not dependant upon, the votes of those having an interest in resisting any potential proceedings for recovery of preferences or setting aside the floating charge, or insolvent trading. Such actions would be precluded if the DCA were to proceed. It is true there is nothing in the Corporations Law which precludes an interested creditor from voting and no requirement for separate classes of creditor in such a vote. Concededly all creditors are interested. The question is one of degree; to what extent and in what way do the interests of those voting diverge? The situation in that respect is analogous to a vote under a scheme of arrangement where there is commercial divergence among the groups voting; compare Re Chevron (Sydney) Ltd [1963] VR 249 and Re Credit Reference Association of Australia Ltd (1998) 16 ACLC 491 at 494 where I said '… it poses the issue that members of a relevant class, though not so differentiated as to make it impossible for them to consult together as a single class with a view to their common interest, may yet have divergent commercial interests extrinsic to their share membership; a reality which the court approving the scheme should take into account in looking at the size and composition of the approving majority over and above 75 per cent.'

7 Even if the divergence is not such as to require a separate class, the Court will closely examine an apparently favourable vote to ascertain its make-up, especially if close. The analogy is of course not complete; creditors' meetings for administrations do not permit of separate classes.

8 Compare two examples. In the first, assume some creditors have an interest in promoting the DCA because they need money immediately. Whereas, others can more easily wait and would do so if this were more likely to produce a larger percentage in the dollar. That is a difference in interest. But it is ordinarily not of such degree as to cause the court to scrutinise the voting result more sceptically. The second case is where one group favours a DCA for truly extraneous reason - it wishes for example to resist recovery of preferential payments, or insolvent trading or, as is sometimes overlooked, breach of directorial duty where any criminal sanctions are not avoidable by a DCA. The other creditors are not potential defendants to recovery actions. They stand to benefit from such actions, if they are successful and there are assets to meet any judgment. Meantime those actions must be funded. The Administrator will often know less about the legal case against those potential defendants than they do. Yet it is the Administrator who must report to the meeting of creditors under tight time tables on the scope for successful recovery, at a meeting which may be stacked with such potential defendants who also claim as creditors. A good example was JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691.

9 In the present case, there is material before me to indicate that the vote was significantly influenced by a group of creditors with just such an extraneous interest. This was first when the DCA was originally put to the vote and then when it was put again following institution of these proceedings. The vote appears to have been influenced by the votes of those potentially vulnerable to such recovery actions. On the Plaintiff's calculation, if their votes were excluded (notionally as there is no warrant in the Corporations Law otherwise to do so) there would no longer be a majority of creditors in dollar amount in favour of the DCA. There would however still be a majority in number of creditors, many of whom had no such extraneous interest. That factor necessarily reduces the weight to be given to an affirmative vote in deciding how the Court's discretion should be exercised, though not by itself decisive."

In those circumstances his Honour decided to terminate the DCA. It is a feature of that decision that the applicant was obliged to, or certainly did, guarantee the payment of the minimum dividend, which other creditors lost by the non-implementation of the DCA. In this case, during one of the adjournments in the hearing, the defendant, acting through the voluntary administrator, asked the plaintiff whether it was prepared to amplify its profferred undertaking to the Court by an undertaking to guarantee the payment of the minimum dividend to the third party creditors, other than itself, whose debts totalled some $110,000 or $120,000, so that the sum guaranteed would have been about $25,000. The plaintiff refused to do this. 20 Mr Hayter submitted to me that the possibility of an application under s 445D was something that was entirely beyond the considerations that might properly be taken into account in deciding the question under s 440A(2), although I think he perhaps would have been prepared to concede there was a case for proceeding down that track had a guarantee been given. I do note that Ms Pearman has advised the Court that, if the DCA came into force through a vote of the related party creditors, her instructions were that her client would make an application for the termination of the DCA pursuant to s 445D. On the one hand words are cheap. On the other hand, this is a submission made on behalf of a client which, as I have said, has a rooted and continuing objection to the DCA being put into force and, more importantly, has marked its seriousness, not only by its willingness to forego its dividend of $30,000 odd, but by its willingness to give to the Court an undertaking to furnish funds of at least $100,000 for the pursuit of the actions. It is no part of the Court's function to decide prospectively a s 445D application which has not been made, or to consider whether or not in considering such an application it would require a guarantee to assure the dividend of third party creditors who wished the DCA to proceed before it would grant the application. However, the determination of a party, whose word in the context is not lightly to be doubted, offers yet another complicating factor in the situation in which the interests of the creditors must be assessed. I do not accept Mr Hayter's submission that these considerations are wholly irrelevant. They seem to be yet another factor to be taken into account in determining whether an adjournment is in the interests of the creditors. 21 The situation which the Court faces is therefore one in which there is a probable dividend of 23 cents available to third party creditors, if the DCA be voted in upon an opportunity being given to do so. The time tolerance for the making of the payment is short and, if the payment of $100,000 were not made within seven days of the execution of the DCA, then the DCA would be at an end and liquidation could take place at that stage, not very far down the track. On the other hand, if there be a liquidation, there appears to be a certainty that funds would be available to pursue actions against the directors which are speculative in their result, and at least on present estimates do not produce a hugely greater benefit to the third party creditors than would be produced under the DCA. However, the creditor, which alone represents a preponderant majority of the third party creditors, desires this course to be followed and is prepared to pay for it. It is likely to bring and may succeed in a s 445D application if the DCA be voted in against its wishes. 22 The situation is a complex and unclear one. The conclusion I have come to in this complex and unclear situation is that it is not established to the Court's satisfaction that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. For these reasons, the application under s 440A(2) is refused. I make orders in accordance with the short minutes initialled by me and placed with the papers.

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