University of Sydney v Australian Photonics Pty Ltd & Ors

CASES CITED : JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691

The University of Sydney - Plaintiff Australian Photonics Pty Ltd (subject to Deed of Co Arrangement) - First Defendant RCW Photonics Management Pty Ltd - Second Defendant

PARTIES : Putative Creditors (Appearance by leave granted by Palmer J on 08.04.05) University of New South Wales Australian National University University of Melbourne RMIT University

F. Gleeson - Plaintiff COUNSEL : C.R.C. Newlinds SC - First Defendant B.J. Coles QC, V. Whittaker - Second Defendant

Blake Dawson Waldron - Plaintiff Truman Hoyle - First Defendant SOLICITORS : Kemp Strang - Second Defendant PricewaterhouseCoopers - Putative Creditors

1 This is an application under s.445D(1) of the Corporations Act 2001 (Cth) whereunder the Plaintiff seeks an order terminating a Deed of Company Arrangement entered into between the First Defendant ("APPL") and the Second Defendant ("RCW"). Also party to the Deed is the administrator of APPL, Mr Palmer. Mr Palmer was appointed administrator of APPL on 15 November 2004. 2 A meeting of creditors of the company was held on 10 December 2004 and was adjourned. At the adjourned meeting of creditors, which was held on 8 February 2005, creditors considered two Deeds of Company Arrangement. One was proposed by the Plaintiff and the other was proposed by three entities which, for the sake of convenient reference, I will include within the description "CVC parties". 3 The Deed of Company Arrangement proposed by the CVC parties was amended at the meeting in accordance with variations proposed by Dr Koch, who was an employee of APPL and claims to be a creditor. A majority of creditors in both number and value voted against the Deed of Company Arrangement proposed by the Plaintiff and voted in favour of the Deed of Company Arrangement proposed by the CVC parties. The Deed was, therefore, executed by the parties to it on 1 March 2005. These proceedings were commenced on 9 March 2005. 4 The application by the Plaintiff is made on three of the grounds provided by s.445D(1), namely, that the Deed is oppressive or unfairly prejudicial to or unfairly discriminatory against unsecured creditors of APPL, including the Plaintiff (s.445D(1)(f)(i)), the Deed is contrary to the interests of creditors as a whole (s.445D(1)(f)(ii)), and effect cannot be given by the Deed without injustice or undue delay (s.445D(1)(e)). 5 Initially there was some debate as to whether the Plaintiff had standing as a creditor to make this application. However, the Plaintiff maintains that it has standing as an "interested person" , within the provisions of s.445D(2)(c). There are good reasons why, if possible, I should not endeavour to determine APPL's status as a creditor: there will, in due course, be a fully contested dispute about the debt. 6 Accordingly, it is sufficient that I proceed with the application on the basis that the Plaintiff and, so far as is relevant, the other institutions which support it, claim to be "interested persons" because they claim to be creditors of APPL in substantial amounts and the Deed deals with their claimed interests either in the fund established under the Deed or in the assets of APPL which would otherwise be available for distribution in a liquidation. At the end of the day I do not think that there was any opposition from Mr Coles QC, who appears with Ms Whittaker for RCW, as to the standing of the Plaintiff and of the others who support it, as "interested persons" .

7 The Plaintiff says that the Deed is unfair or oppressive in that there are assigned to the proponent of the Deed, that is RCW, all of the assets of APPL. The consideration for the assignment is said to be inadequate or, rather, it is said that the consideration may, in certain circumstances, prove to be inadequate. 8 I have to say at the outset that it would not have been an easy task for creditors of APPL to form a view as to what would have been in their commercial interests in terms of accepting the Deed of Company Arrangement which was proposed at the meeting of 8 February this year or, in the alternative, adopting the recommendation of the administrator to place the company in liquidation. The administrator has sent full and careful reports to the creditors in which he analyses a number of possible scenarios, showing outcomes for creditors of various classes either under a liquidation or under the proposed Deed. The position is complicated by the fact that there is not just one possible outcome under the Deed and one possible outcome under a liquidation: there are a number of possible outcomes under each of the alternatives. 9 The parties have not debated in detail whether any one of the scenarios postulated by the administrator is more likely than any of the others. Indeed, it would have been impossible for the Court to form such a view. The investigations of the administrator are, as he himself says in his report, relatively preliminary. He has been hampered by lack of funds in making such full investigation as he would have desired. I have to accept, as no doubt did the creditors, that it is not possible to predict with any degree of assurance which of the number of possibilities, either under the Deed or in the liquidation, is the more probable or even the more likely. I have had, as the creditors have had, to take the possible scenarios presented by the administrator at face value and as equally possible. 10 Under some of those scenarios the assets of the company APPL may have considerable value. Under other possibilities they may have much less value. There is already a dispute as to whether the major asset of APPL, namely, shares in another company, are subject to a valid security or whether the security is void as against a liquidator or administrator. At this stage, I am not able to form a view about the prospects one way or another. No doubt, the creditors were in the same position when they considered whether to approve the Deed. 11 Similarly, it is not possible for me or the creditors to say at this stage that the consideration for the assignment of APPL's assets under the Deed is too low or too high or is appropriate. All that can be said is that the consideration to be paid is a substantial sum. That consideration provides the funds from which a distribution will be made under the Deed.

12 The Plaintiff says that the Deed is unfairly discriminatory against the unsecured creditors by reason of the fact that the entitlements of employees are given undue preference. It is clear that one of the employee/ creditors, Dr Koch, has claimed remuneration under her contract of employment which the administrator believes to be substantially in excess of her contractual entitlement. A somewhat abbreviated examination of Dr Koch's contract of employment does suggest quite strongly that her claim for remuneration exceeds the amount of her true entitlement by close to $30,000. 13 Mr Gleeson, who appears for the Plaintiff, suggests that Clause 6 of the Deed itself entitles Dr Koch to receive more by way of distribution from the funds under the Deed than she is entitled to in law or would be entitled to in a liquidation, to the prejudice of other unsecured creditors. That result could flow from one interpretation of Clause 6.1 of the Deed. I do not need to examine this question in great depth. However, it seems to me unlikely that Clause 6.1, taken in conjunction with the other provisions of the Deed as a whole, would receive the construction for which Dr Koch might wish to contend. I would read Clause 6.1 as merely requiring Dr Koch and the other persons listed in Schedule 2 to lodge their claims against the Deed fund in accordance with the provisions of the Deed. 14 However, more importantly, I have to consider whether the existence of such a clause now operates unfairly to such a degree that it is prejudicial or discriminatory within the meaning of s.445D(1)(f)(i) or is contrary to the interests of the creditors of the company as a whole. 15 Mr Newlinds SC, who appears with Mr Silver for APPL, points out that the administrator takes the view that the construction put forward by Mr Gleeson is not the correct construction. Mr Newlinds also points to provision in the Deed for the administrator to bring about either termination of the Deed, if he considers its operation to be prejudicial, or else to bring about the variation of the terms of the Deed. Although Dr Koch has strongly urged a claim for a remuneration to which, prima facie, she does not appear to be entitled, I cannot assume that she will persist in that claim to the point of litigation nor in such a way as will necessarily impede or delay the administration of the Deed. However, as Mr Newlinds points out, if Dr Koch commences some proceeding founded on a construction of Clause 6.1 and that proceeding inhibits the administration of the Deed, it would be open to the administrator to invoke the machinery provisions of Clause 8 to procure either an amendment of the Deed which resolves the ambiguity in construction unfavourably to Dr Koch or else results in a termination of the Deed. 16 I do not, therefore, consider that the possible ambiguity in Clause 6.1 and the possible adverse claim by Dr Koch founded upon that clause together demonstrate that the Deed presently operates unfairly or cannot be given effect to without injustice or undue delay.

17 I come now to the substantial and most important point argued by the parties, that is, whether the Deed, as it operates in the context of the financial results postulated by the administrator, is contrary to the interests of the creditors of the company as a whole or cannot be given effect without injustice. 18 The Plaintiff essentially relies upon the various scenarios provided by the administrator in support of this submission; I will examine the detail of these scenarios a little more closely later. 19 According to the Plaintiff, the unsecured creditors are likely to come off substantially worse under the Deed than under a liquidation. The Plaintiff says that this must have been apparent to the meeting of creditors which voted in favour of the Deed on 8 February 2005. Nevertheless, the creditors, by majority, voted in favour of the Deed. Mr Gleeson explains this by pointing to the fact that the majority of creditors in number who voted in favour of the Deed are creditors who have particular or special interest in seeing the Deed adopted rather than seeing the company go into liquidation. 20 Mr Gleeson says that some of the unsecured creditors who voted in favour of the Deed are creditors representing the interests of directors of the company. He says that the administrator had, in his report, adverted to the possibility that APPL might have claims against its directors for insolvent trading. Those claims would, of course, disappear if the company were removed from administration or liquidation by the operation of the Deed; it would be in the interests of directors facing the possibility of litigation to remove that possibility by voting in favour of the Deed despite the fact that, in terms of dividends to unsecured creditors, they would be worse off. 21 Mr Gleeson also refers to the fact that a significant number of unsecured creditors who voted in favour of the Deed are employees of APPL and under the Deed they would receive substantially more than they would in a liquidation. 22 These matters are certainly to be taken into account in looking at the question of whether the Deed operates unfairly against creditors in the position of the Plaintiff, that is, unsecured creditors who have no special interest in a result one way or another, or operates in such a way as to be contrary to the interests of the creditors of the company as a whole. 23 However, I think the starting point must be to examine what commercial results were possible, and still are possible if one decision is made rather than another. I say that one has to examine what is still possible because the consideration of the court in an application under s.445D to terminate a Deed is not in my opinion confined to the manner in which the Deed would have operated as at the date when the creditors' meeting voted in favour of it. The Court is required to be satisfied that "effect cannot be given to the Deed" or the Deed is an oppressive one, or is unfairly prejudicial or is contrary to the interests of the creditors, and so on. 24 In my opinion, in an application under s.445D(1) the Court is required to consider the operation of the Deed as it appears on the day of hearing and not at some anterior time. Clearly, what the creditors believed to be in their commercial interests when they voted for the Deed will be a very relevant and weighty factor for the Court's consideration. However, it must be borne in mind that it is possible that information may come to hand after the creditors' meeting which throws further light upon how the Deed will operate. That has happened to some extent here because the administrator has prepared information not only as to possible outcomes as they appeared to be at the time of the creditors' meeting, but he has also prepared information which updates the company's position since the meeting. As I have noted earlier, the parties have not endeavoured to quarrel with the assessments made by the administrator or to suggest that any one outcome is more likely than another. 25 When the administrator came to provide information to the creditors' meeting, he took the approach of setting out the results of liquidation as compared with results under the Deed on an optimistic view and a pessimistic view. He calculated that, on an optimistic view, unsecured creditors would receive $0.1088 in the dollar of their claims in the liquidation and they would receive $0.0209 under the Deed. On a pessimistic view, unsecured creditors would receive nil under a liquidation and $0.0142 under the Deed. It can be seen that on this information alone creditors could be divided: optimists would see that they were much better off under a liquidation; pessimists would see that they were better off under the Deed. 26 The administrator has provided further calculations as at 23 March 2005. Scenario One under the Deed shows that employees with priority claims under liquidation would receive $0.9641 in the dollar; unsecured creditors would receive, on one possibility, $0.003 in the dollar, on another possibility $0.0111 in the dollar and, on another possibility, nil. In Scenario One under the Deed, therefore, priority employees creditors would receive close to 100¢ in the dollar, while unsecured creditors would receive practically nothing. 27 In Scenario Two under the Deed, priority employee claims would be paid at $0.9641 in the dollar and unsecured claims, on any view of it, would receive nothing. 28 There are three possible scenarios which the liquidator has envisaged in a liquidation. Scenario One is an optimistic scenario with the priority employee claims being paid 100¢ in the dollar and unsecured claims receiving a little over $0.07 or else a little over $0.12 in the dollar. 29 In Scenario Two under a liquidation, which the liquidator calls the "possible" scenario, priority employee claims would again be paid 100¢ in the dollar and unsecured claims would be paid just over $0.03, or else almost $0.06 in the dollar. In Scenario Three under the liquidation, which the administrator calls the pessimistic scenario, priority employee claims would be paid $0.55 in the dollar and unsecured claims would receive nothing. 30 It is clear that under the Deed there is the possibility that unsecured creditors will receive nothing or very little. It is clear that under the liquidation unsecured creditors will receive at maximum $0.12 in the dollar and otherwise nothing or very close to nothing. 31 Mr Gleeson urges that I should apply in this case the observations of Santow J in JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691, at 715. His Honour was considering a deed of company arrangement which was sought to be terminated on a number of grounds. His Honour found that the deed should be terminated on one particular ground, which is not relevant to the consideration of this case, and then went on to make the following observation: "Importantly, if there is uncertainty on that question of comparative return, and if it be clear, as it is here, that it is "not possible for the company or its business to continue in existence" then s 435A of the Corporations Law effectively places the onus on those who support the deed 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". As emerges below, the first and third defendants cannot discharge that onus. Indeed to the extent this bears on discretion, on balance I would judge the greater likelihood that liquidation will afford the better return." 32 Mr Gleeson urges that, if I am to refrain from terminating the Deed, I should be positively satisfied by its proponents that the interests of creditors as a whole will be better served by the Deed than by a liquidation. Mr Coles urges that I should not apply the observations of Santow J as if they were a proposition of law to the effect that in an application to terminate a deed under s.445D the proponent of the deed bears an onus of satisfying the court that the deed is in the best interests of the company as a whole so that if the proponents do not discharge that onus the deed should be terminated. 33 I do not think that Santow J was intending to lay down a proposition of law to the effect that in an application to terminate a deed under s.445D(1)(f) the proponent of the deed bears the onus of satisfying the court of a negative, i.e., that the deed is not contrary to the interests of creditors and should not be terminated. I think that all his Honour was doing was making an observation as to the practical commercial realities in these cases: where the result to creditors under a deed is not clearly more favourable than the result under a liquidation and where there is no hope that the company will continue to trade, the court would want to know why the interests of the creditors were better served under the deed than a liquidation. His Honour was, as I say, drawing attention to commercial realities, as indicated in his use of the word "effectively", rather than laying down a hard and fast rule about onus of proof in an application under s.455D(1)(f). 34 Setting aside a deed of company arrangement which has been solemnly approved at a meeting of creditors is not a light matter. Generally speaking, the creditors are taken to be the best judges of what is in their commercial interests. If the deed is to be terminated there must be a sufficient reason shown for that termination: that reason exists if those seeking the termination prove one or other of the grounds under s.445D(1) to the Court's satisfaction. However, in the particular circumstances predicated by Santow J in Jonco , the burden of proof may not be particularly heavy. 35 I have earlier adverted to the circumstances relating to voting and to the alleged preferential or discriminatory treatment of employees' claims. I do not think that it has been established to the Court's satisfaction that the Deed manifestly operates prejudicially in favour of the employees. I bear in mind that, according to the most recent figures prepared by the administrator, on the optimistic scenario in a liquidation the employees would have priority and would receive 100¢, and under the Deed they would receive very close to 100¢ in most cases. I have to bear in mind that according to the pessimistic scenario employees having priority would receive as little as $0.55. I have to bear in mind also that under some of the scenarios the unsecured creditors will receive nil whether it be under a liquidation or under the Deed. 36 At this stage it is not possible to say which, if any, of the scenarios postulated by the administrator will come to pass. It may be that matters will proceed in such a way in the course of administration of the Deed that the administrator will perceive with certainty that a poor outcome is inevitable for all concerned. In that case the administrator has power himself to procure termination of the Deed in accordance with its provisions. It may be that matters turn out much more favourably than anyone anticipated. These are all matters of possibility or speculation. 37 In determining whether a deed should be terminated under s.445D(1)(f), the Court does not make a judgment founded upon mere possibility or speculation; it makes a determination on the characteristics of the deed as they are seen to be at the date of hearing. If a deed is to be terminated under s.445D(1)(f), it has to be seen as having operated, or as presently operating, or as highly likely to operate in the future, in a way which is oppressive, unfairly prejudicial, unfairly discriminatory or contrary to the interests of the creditors as a whole. If the future operation of a deed is in question under s.445D(1)(f), the Court should be satisfied that its adverse effect is not a mere possibility or speculation but is, at least, highly likely. In the present case, I do not think that situation has yet been reached. 38 For the reasons which I have given, I do not think that in the present case the Plaintiff has established to the Court's satisfaction that any of the grounds relied upon presently exists or is highly likely to come into existence. 39 For that reason, the Plaintiff's application fails. The Originating Process is dismissed. Costs

40 The question of costs has been argued briefly. There is no dispute that the Plaintiff, having been unsuccessful, must pay the Defendants' costs. There is no dispute that the costs order, as far as the Second Defendant is concerned, will be on the party/party basis. However, both Mr Coles QC and Mr Newlinds SC urge that the Plaintiff should pay the administrator's costs on an indemnity basis, the reason urged being that it should not be the fund established under the Deed of Company Arrangement which should bear any part of the costs of this litigation. 41 There is certainly force in what Mr Coles and Mr Newlinds say. However, I think that this is one of those cases which are analogous to cases involving a trustee of a fund who is a necessary party to proceedings. The trustee is always indemnified out of the fund to the extent that it is not otherwise able to recoup costs from the unsuccessful party. I think that this is a case in which an indemnity costs order against the Plaintiff should be made only if the Plaintiff has been guilty of some conduct meriting the disapprobation of the Court. That has not been the case here. 42 The result will be that the Plaintiff will pay the administrator's legal costs on the party/party basis. Unfortunately, the fund established under the Deed of Company Arrangement will, of necessity, bear some of the administrator's costs. That result seems to me to be endemic to this sort of litigation and the difficulties which are likely to arise in constituting such a fund. 43 However, I should observe that when assessing the costs payable by the Plaintiff to the administrator, the assessor will need to bear in mind that the administrator did not take a position in the proceedings and was here only as a necessary party. With all due respect to Mr Newlinds SC, I do not see that the possibility that the administrator himself might have been cross examined in order to elucidate matters in his reports warranted the attendance of Senior Counsel. As I say, that is a matter that I think needs to be addressed further in assessment of costs. ~ oOo ~

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