Orders
122I propose to that leave to appeal be granted, but that the appeal be dismissed with costs.
123YOUNG JA : This is an appeal from a decision of Barrett J who refused an application to set aside a Deed of Company Arrangement (DOCA).
124There is doubt as to whether the appeal is competent. There is no affidavit indicating more than $100,000 is at stake. It would seem that under the DOCA, the appellant may well receive 6 cents in the dollar, but under the alternative of liquidation, its recovery is very much dependent on proposed challenges to various transactions with directors in which the Company's assets were allegedly disposed of at undervalue and the fact that a substantial dividend was declared and paid in 2007 when the Company made substantial losses in both 2006 and 2008.
125However, when this was pointed out at the commencement of the hearing, it would seem that the second respondent did not wish to take the point, there was the possibility that a late affidavit might cure the problem and the appellant filed an application for leave to appeal as a back up measure. By consent we then proceeded on the same basis as we would have done on a concurrent hearing of a leave application and the actual appeal.
126The first respondents, who have filed a submitting appearance, are the administrators of the DOCA. Under that DOCA, $85,000 was paid into a fund on behalf of Ungal Properties Pty Ltd ("the Company"). That fund was to be used to pay the administrators' and legal expenses of $30,000 plus and the balance of approximately $55,000 to pay a dividend to participating creditors other than those connected with the directors of the Company. Those excepted creditors were given the option in the most probable circumstances to exchange their debt for equity. On consummation of the scheme, the debts were discharged and the Company could resume its activities.
127As is well known, a vital part of the process of putting a DOCA in place is the holding of a meeting of creditors. In order to pass the appropriate resolution, there must be a majority in number and a majority in value of the creditors voting for the resolution. Should the majority of creditors in value approve, but not the majority of creditors by number or vice versa, the chairman of the meeting has a casting vote.
128In the present case, there were seven alleged creditors present at the relevant meeting. Of these, four were associated with the directors, one was the Company's solicitors and one was its accountant. The seventh was the appellant, whose claim to be a creditor was rejected by the chairman, Mr Barnden, who was one of the administrators.
129Having excluded the appellant from voting in respect of being a creditor for $794,012.80, the meeting unanimously approved the DOCA. The creditors voting in favour totalled about $65,000.
130The appellant challenged the resolution and sought, inter alia, that the DOCA be terminated pursuant to s 445D of the Corporations Act 2001 (Cth).
131The application was heard by Barrett J in the Equity Division of this Court. In a reserved judgment published on 30 July 2010 ([2010] NSWSC 838, reported in (2010) 79 ACSR 330), his Honour rejected the application.
132The case before Barrett J also involved the validity of a proxy which the appellant had purportedly given to a Ms Montgomery to represent it at the meeting. The chairman declared that it was invalid and the primary judge upheld that view. There is no appeal on this part of the case.
133There was also debate below as to whether the appellant was a creditor. This came about because the appellant was the insurer of building work performed by the Company and had to pay out slightly more than $800,000 on a claim under the policy. When the administration intervened, it was suing the Company by virtue of its rights of subrogation to the rights of the building proprietor for unliquidated damages.
134The primary judge found that the appellant was a creditor being a person with an unliquidated equitable claim for damages for breach of warranty. The claim was equitable as any action at law to recover had to be in the name of the building proprietor. However, under the definition in the Act, this was sufficient to make the appellant a creditor for the purposes of Part 5.3A of the Act: see Selim v McGrath [2003] NSWSC 927 at [68]; 47 ACSR 537.
135Paragraph [88] of the primary judgment is as follows:
I should formally record, however, that Vero has standing under both s 1321 (as a "person aggrieved") and under s 445D (as, at least, an "interested person"), given the valid claim it had to be recognised as a creditor for the purposes of the meeting, if only for a nominal sum.
136There is no appeal from the findings referred to in the previous two paragraphs.
137The primary judge's decision on the application to set aside the DOCA was contained in [87] and was simply "no reason under any of the paragraphs of s 445D(1) has been shown for the making of an order terminating" the DOCA.
138The appellant in its notice of appeal says a number of times that the primary judge was wrong and should have found that there were grounds for setting aside the DOCA and gave inadequate reasons for taking the opposite view. The notice of appeal does not descend to detail. One has to go to the submissions to find the appellant's substantial grievances.
139The second respondent, Ungul Properties Pty Ltd, actively opposes the appeal.
140Accordingly, with the comment that appellants must pay strict heed to the requirements necessary to be fulfilled before they have a valid appeal, I will pass to the merits of the appeal.
141The appellant's submissions in [25] allege that the primary judge did not make a finding that the appellant was a creditor and did not give any reasons for so doing. I consider this is an overstatement in the light of the findings I have set out earlier in these reasons.
142Paragraphs [56] et seq of the appellant's submissions set out the reasons why the judge should have set aside the DOCA. These can be summarised as follows:
A. Under s 445D(1)(f)(i) of the Act, the DOCA was unfairly discriminatory towards the major creditor;
B. Under s 445D(1)(g):
(1) The largest creditor was not considered when the DOCA was adopted;
(2) The appellant was denied the opportunity of a liquidator investigating the Company's affairs;
(3) The exclusion of certain assets was unfair;
(4) The Company had not traded after June 2007 so that there was no business that needed to be preserved.
143The appeal was heard on 30 August 2011, Mr S D Robb QC and Mr A Lo Surdo of counsel appearing for the appellant and Mr C Harris SC appearing for the second respondent.
144The parties were agreed on the applicable principles of law set out in paragraphs [52]-[55] of the appellant's submissions which I summarise as follows:
A. In considering whether to terminate a deed under s 445D(1)(f) of the Act, the court does not make 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": University of Sydney v Australian Photonics Pty Ltd [2005] NSWSC 412; 53 ACSR 579, 585 at [37] per Palmer J.
B. As to the discretion given by s 445D, there was quoted back to me what I said in Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427, 429, "I must approach the discretion I am given under s 445D of the Corporations Law untrammelled by any overriding considerations. I must look at the whole of the effect of the deed and assess its unfairness, if any, to the plaintiff, but in doing so, I must bear in mind the scheme of Pt 5.3A of the Corporations Law and the interests of the other creditors, the company and the public generally". That decision was affirmed by the Court of Appeal, see (1998) 26 ACSR 593.
C. A deed may be set aside under s 445D(1)(f)(ii) where it precludes creditors from receiving the benefit of recovering voidable transactions: Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612, 659. It is material "that most of the votes in support of the DOCAs were by parties having an interest in avoiding an enquiry by a liquidator": Public Trustee (Qld) v Octaviar Ltd ("Octaviar") [2009] QSC 202; 73 ACSR 139, 192 at [177] per McMurdo J.
D. A deed may be set aside under s 445D(1)(g) where there is a public interest in the affairs of a company being examined by a liquidator. It may be considered to be "detrimental to commercial morality" to dispense with the opportunity for the investigation of the affairs of a failed company: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22, 26 per A Mason JA; Emanuele v Australian Securities Commission (1995) 63 FCR 54, 69 (Full Court) ; Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; 226 ALR 510, 566 at [290]-[291] per Campbell J; Octaviar at 192-3 .
145To point D should be added that, although s 600A of the Corporations Act does not literally apply to the present situation, its flavour is that, generally, the court is justified in the public interest in looking very intently at documents which come into being as a result of the votes of associates of the directors and where other interests have been excluded.
146Mr Robb put that the principal ground of the appeal was Ground 3 that the primary judge had erred in finding that the appellant had failed to establish grounds for terminating the DOCA.
147As noted above, the determination of this issue was in a single paragraph which merely said that there were no grounds shown for making the order.
148This is unusual as, ordinarily, a judge says that the plaintiff urged a, b, c, etc, I reject these and thus find no grounds for doing what the plaintiff seeks.
149The explanation of the brevity is probably that the focus of the litigation at first instance was on the validity of the proxy and voting rights, rather than the question before this Court.
150Mr Robb started with s 435A of the Corporations Act which sets out the objects of Part 5.3A; viz: (a) to maximise the chances of the company's business continuing; or (b) if that is not possible, to achieve a better return for creditors than would occur in a winding up.
151Mr Robb said that as the Company has not traded for some time (a) is irrelevant.
152As to (b), independent creditors will receive 6.76 cents in the dollar under the scheme. It is thus necessary to compare this with what they might receive under a winding up.
153It is clear that, if the only asset of the Company was what it actually possessed at the date of the resolution, there would be no dividend at all on a winding up. However, the appellant says that there are three transactions which occurred in the years prior to the resolution which a liquidator might unravel and which might produce good money to the Company. The appellant offered to the primary judge and offers to us a statement that it is willing to put a liquidator in funds to investigate these transactions. The offer was not put in the form of an undertaking to the Court.
154The Company was a single venture company established to develop a parcel of land by erecting home units on it.
155In answer to a question at the meeting, the chairman said that Units 6 and 7 (he meant 5 and 6) were sold in early 2007 to associates of the directors. Unit 5 was sold for $1,050,000 (transfer dated 1 November 2006), Unit 6 for $500,000 (transfer dated 15 November 2006). The $500,000 purchase price was paid into the bank account of a related company, YACF Pty Ltd, as the Company did not have a bank account. The $1,050,000 price was not paid in cash, but there was a book entry made to offset the purchase price over construction and interest costs which had been borne by YACF. The balance of the Company's funds, $634,000, was used to pay income tax, something called the Blueseas investment/debt and a dividend.
156The dividend was of $541,111 paid to shareholders on 22 February 2007. The administrators noted that of that sum $247,753 related to the distribution of pre-GST capital reserves.
157There was no evidence as to what the true value of the units was at the date of their disposal.
158There is no material to show what profits the Company had made in the financial year 1 July 2006 - 30 June 2007, nor was the resolution declaring the dividend in evidence.
159The administrators' section 439 report contained a table as to applicable limitation periods which the parties accept as accurate (Blue 261).
160We need to determine whether, if we set side the DOCA at the date of this judgment and thus a resolution for creditors' winding up is deemed to have been passed, there would be advantage in a winding up.
161Under s 513A any winding up order now made will be taken to have begun on 6 May 2009. This means that no transaction before 6 May 2005 may be upset.
162The transactions referred to in [155]-[156] are within the period for a liquidator to review if he or she consider it appropriate. This would be possible in view of the appellant's undertaking to fund the liquidator.
163The transactions which the appellant seeks to challenge have some indicia that they are worthy of investigation. However, at present, there is only sketchy material about them and no firm view as to their invalidity can be made.
164The appellant says that there is real value in having these transactions fully investigated by an independent liquidator and that if this occurs, there is a reasonable prospect of a creditors' recovery in excess of 6.76 cents in the dollar.
165On the evidence before us, there is little to support the view that an investigation many years after the suspect transactions would produce a better result for creditors. The prospects of attaining that result are no more than speculative.
166Furthermore the liquidator's costs of investigation might be heavy and even though in the first instance they would be borne by the appellant, they may well be deducted from the proceeds of any recovery. Whether this be so or not, there is insufficient merit in this point to hold that there would be an advantage in a winding up.
167There is little point in examining the remaining issues, but I will briefly do so.
168As to s 445D(1)(f)(i), there is no doubt that the resolution operated specifically to deprive the appellant of a right to sue for a large debt and to wind up the Company if the debt was not paid.
169There is also no doubt that the appellant was the major creditor.
170However, it was not established that that right would have produced more dollars and cents than the dividend under the DOCA.
171The same comments apply to the position under s 445D(1)(g).
172A principal thrust of the second respondent's submissions was that the appellant had not established that it was a creditor and therefore the DOCA could not be said to operate unfairly or in a discriminatory way against a creditor even if the appellant suffered prejudice.
173It is difficult to uphold this view in the light of the findings of the primary judge. His Honour determined that the appellant was a creditor in that it had an equitable unliquidated claim which was sufficient for it to satisfy the relevant definition of "creditor".
174The second respondent says that there were two perfect defences to the appellant's claim: (1) circuity of action; and (2) the claim was statute barred.
175As to circuity of action, to succeed the second respondent would have to show that the decision of Einstein J in Owners Strata Plan 56587 v TMG Developments Pty Ltd [2007] NSWSC 1364, which appears to be on all fours with the present case and was decided in the appellant's favour, was wrongly decided. I can see no material which would incline me to take that view.
176As to the limitation defence, this will only succeed if more than seven years passed after completion of the work and the commencement of the action on 8 October 2007. Practical completion was certified to have occurred on 14 December 2000. Practical completion is a good, but not infallible guide as to when work is completed for the purposes of s 18E of the Home Building Act 1989: Owners Corporation SP 64757 v MJA Group Pty Ltd [2011] NSWCA 236. Thus, the probabilities are that this defence would have failed.
177In the circumstances there is no point considering whether the primary judge failed to take sufficient account of the public interest in having a liquidator investigate questionable conduct by the directors.
178Although the public interest is a relevant matter, unless there is strong prima facie evidence of directors' substantial wrongdoing, there is little purpose in a liquidator conducting investigations and examining directors in a case where there is no great likelihood of monetary recovery. Indeed, it would be an abuse of process to permit such a course merely to satisfy a creditor who felt itself betrayed.
179On the evidence before us, there are suspicions raised about what occurred in 2006-7, but there is no strong prima facie case of misconduct.
180Thus, both because the appeal has become moot and also because the appellant has not demonstrated that there is a real chance of the appellant being financially better off with a winding up, the appellant must fail.
181The result, in my view, is that leave to appeal should be granted but that the appeal must be dismissed with costs.
182MEAGHER JA : I have had the opportunity of reading in draft the judgment of Campbell JA. I agree with the orders that he proposes and for the reasons that he gives.