Young v Sherman

COUNSEL : M Aldridge SC with J K Chippindall (P) T Castle (D) SOLICITORS : Rodd Peters, Lawyers (P) Henry Davis York (D) CATCHWORDS : CORPORATIONS - voluntary administration - whether application to challenge validity of deed of company arrangement or to terminate it requires leave of Court - whether chairman of creditors' meeting properly rejected creditors' claim for voting purposes, and whether chairman should have adjourned meeting - whether chairman correctly exercised his casting vote - whether deed providing for premium dividend to creditors from proceeds of litigation, if successful, was properly a 'deed of company arrangement' - whether deed should be terminated for non-disclosure or unfair prejudice LEGISLATION CITED : Corporations Act ss 435A, 435C, 439C, 440D, 444E, 445D, 445G, 447A, 600B Cresvale Far East Ltd (in liquidation) v Cresvale Securities Ltd (2001) 37 ACSR 394 Kalon v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593 CASES CITED : Paton v Campbell Capital Ltd (1993) 46 FCR 30 Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 Zantiotis v Andrew (No.2) (1988) 80 ALR 299 DECISION : Originating process dismissed

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J TUESDAY 13 NOVEMBER 2001 2077/01 DEREK BERNARD YOUNG AS REPRESENTATIVE OF THE AUSTRALIAN PARTNERSHIP KNOWN AS ACCENTURE V STEVEN SHERMAN IN HIS CAPACITY AS ADMINISTRATOR OF AGRICULTURE.COM PTY LIMITED & ANOR Judgment

The parties 1 The plaintiff, Mr Young, sues as a representative of a partnership pursuant to Part 8 rule 13 of the Supreme Court Rules. The partnership, which is called "Accenture", comprises some 38 persons. Their business is the supply of consulting services in management, information technology and the implementation of systems and technologies. The business was formerly conducted by Andersen Consulting Pty Ltd. 2 The second defendant is a company incorporated on 5 August 1999. Its directors are Stephen Mackay and Mark Mason. There are only two shareholders, corporate entities which are associated respectively with the two directors. 3 The second defendant carried on the business of a procurement agent for agricultural products. It sourced products for its rural customers, endeavouring to afford its customers a more competitive rate because of the volumes of orders given to suppliers. The business operated similarly to that of a buying group. 4 Fundamental to the directors' business development and growth strategy was the development of an e-commerce platform and website. According to a report by the first defendant as administrator, dated 27 February 2001, the pursuit of the e-commerce strategy and the breakdown in negotiations between the company and the plaintiffs (who were retained to develop, inter alia, the e-commerce platform and website) were the major contributors to the failure of the business. 5 On 9 February 2001 the directors of the second defendant resolved that in their opinion the company was likely to become insolvent at some future time, and they appointed the first defendant as administrator of the company pursuant to s 436A of the Corporations Law. 6 I should note (since it will become relevant to the intentions of the parties as to the prospects of recovery in insolvent administration) that on 25 January 2001 the second defendant gave a fixed and floating charge to the Australia and New Zealand Banking Group Ltd. The charge was registered on 9 February 2001, the day upon which the first defendant was appointed administrator of the company.

The commercial relationship between the parties 7 The second defendant was dormant (in terms of trading) until April 2000, but the directors were planning its business operations from an earlier time. The directors approached the plaintiffs in February 2000, for assistance in raising funds for the operation and subsequent expansion of the business, and for crystallising the value of the business through an initial public offering or trade sale. This degree of optimistic forward-planning may seem with the benefit of hindsight to have been highly unrealistic and uncommercial, but it must be remembered that the directors formed their plans at the height of the period of highly speculative investment in dot.com companies, during which it seemed that any dot.com stock market flotation was bound to succeed. 8 In March 2000 the directors engaged the plaintiffs to pursue funding, prepare an expansion/diversification policy for the business, and develop an initial public offering/business sale strategy. A letter of engagement dated 21 March 2000 and signed by the directors of the second defendant (the first of several such letters prepared by the plaintiffs, but the only one signed on behalf of the second defendant) contemplated deferred payment of fees, which would bear interest until paid. According to the directors of the company, the plaintiffs were aware that remuneration for their services would come only from the proposed capital raising. 9 The business began to trade in April 2000, from premises in St Leonards. Work relating to the first letter of engagement was carried out between late March and May 2000. The plaintiffs say the development of a global expansion strategy was the largest component of the work, carried out by a manager, a senior consultant and a business analyst over a period of approximately 12 weeks. Again, incurring expenditure of such a level for a "global expansion strategy" is best understood in the context of the dot.com financial bubble. 10 There were further discussions between the plaintiffs and the directors of the second defendant during April 2000, leading to the plaintiffs providing an interim Chief Technology Officer (Mr Tony Jaensch) for the second defendant for the period from May to September 2000. 11 In June 2000, upon the plaintiffs' advice, the directors terminated the services of Inter-market, which had previously provided information technology services to assist the second defendant to develop its e-commerce platform. The plaintiffs offered to build the second defendant's e-commerce platform and website, making a presentation on 5 June 2000 at which estimates of costs were given, and (they say) the directors agreed. The arrangement was that the website would be ready on 15 September 2000, in time for the peak period for the cotton crop. The plaintiffs submitted a standard form Consulting Services Agreement but it was never signed on behalf of the second defendant. 12 The plaintiffs say that from about May 2000 various tasks were undertaken by them at the second defendant's request, to develop the business. In order to formalise their engagement in respect of those various tasks, the plaintiffs prepared a letter of engagement dated 26 June 2000, setting out the terms of their engagement for "building out" the second defendant's business. They say that Mr Mackay, one of the directors, agreed to that letter of engagement, and that the tasks set out in the letter were completed by them. However, the letter was never signed on behalf of the second defendant. 13 In June 2000 the plaintiffs ordered hardware, purportedly on behalf of the second defendant, from a company called Southmark, a Compaq distributor. They say Mr Mackay authorised the order, which was at a favourable discount negotiated by the plaintiffs. Southmark supplied the hardware and claims $257,169.16 from the second defendant by way of payment. 14 The website was not completed by the scheduled date of 15 September 2000. The plaintiffs say they would have done so, but for the second defendant's failure to sign various letters of engagement and the Consulting Services Agreement, notwithstanding demands that the directors should do so. 15 The plaintiffs say that early in September 2000 they agreed with Mr Mackay on behalf of the second defendant to provide interim financial assistance to "migrate" financial information from the second defendant's existing accounting system across to the new website. They submitted a letter of engagement dated 11 September 2000 but it was never signed. However, according to the plaintiffs a financial officer provided to the second defendant by the plaintiffs did the work. 16 By September 2000, the plaintiffs say, it was becoming apparent to them that it would be difficult to raise equity finance for the second defendant, due to a change in the international marketplace for new Internet companies. In the absence of raising capital, the second defendant did not have the financial capacity to pay the plaintiffs' fees. Therefore the plaintiffs endeavoured to negotiate an equity participation agreement with the second defendant, to give them a realistic opportunity to secure payment of their fees. 17 Negotiations between the directors and the plaintiffs took place between September 2000 and late January 2001. The directors say that as well as exploring proposals for the plaintiffs to take equity in lieu of fees, the negotiations also covered arrangements for the plaintiffs to pay creditors associated with development of the website. The plaintiffs say that it was never contemplated that they would take equity in lieu of their out-of-pocket expenses, which by September 2000 amounted to in excess of $200,000. Over the period of the negotiations, various terms sheets were prepared, but they were never agreed. The negotiations failed when Mr Hawkins, a business adviser to the second defendant, sent an e-mail to the plaintiffs threatening the commencement of legal proceedings. The plaintiffs have given evidence, however, that the website could still be supplied to the second defendant on 10 days' notice, if proper arrangements were made for payment of fees and the execution of agreements. 18 An entity called Professional Advantage provided an accounting package for the project, at the request of the plaintiffs. When it was not paid, Professional Advantage commenced proceedings for the winding up of the second defendant, on the ground of insolvency, claiming to be owed approximately $97,000. The directors hoped that, if suitable arrangements could be made with the plaintiffs, the plaintiffs would pay this claim. The hearing of the application for winding up was adjourned after the appointment of the first defendant as administrator, and was eventually dismissed by consent on 2 April 2001. 19 The plaintiffs did not render any accounts for the various services they claim to have provided to the second defendant, until after the appointment of the first defendant as administrator. On 12 February 2001 the plaintiffs submitted three tax invoices to the directors, all dated 7 February 2001, totalling $536,538.20. One invoice was for "professional services for provision of interim Chief Technology Officer", another was for "professional services for provision of assistance with Building out the Business", and the third was for "professional services for providing an interim financial assistant". The plaintiffs lodged an interim proof of debt for that amount and attended the first meeting of creditors. 20 On 22 March 2001 the first defendant received two additional tax invoices, addressed to one of his partners. One invoice was for "developing a website (Phase 1) including office technology, deploying the website to agronomists and customers, and reimbursement of relevant technology costs and out of pocket expenses", in the total amount of $1,924,462.10. The other was for "professional fees to assist in developing the Initial Scoping & Strategy and Developing a Global Expansion Strategy", together with out of pocket expenses and interest for deferred payment of professional fees, in the total sum of $475,116.40. Consequently the plaintiffs now claim to be owed $2,936,116.70 (plus, presumably, accruing interest) with respect to five invoices. No part of this sum has been paid. The plaintiffs have not instituted legal proceedings for recovery.

Voluntary administration of the company 21 After his appointment as administrator, the first defendant immediately ceased to conduct the company's business and vacated the St Leonards premises. The first meeting of creditors of the company in administration was held on 16 February 2001. When he gave notice of that meeting, the first defendant invited lodgment of informal proofs of debt and proxies. 22 For voting purposes at the meeting, the first defendant accepted the plaintiffs' claim for the face value of the three invoices that had been received up to that time, $536,538.20, although it was not necessary to have reference to the dollar value of creditors' claims at that meeting.

First meeting of creditors 23 The only resolution passed at the first meeting of creditors was for the appointment of a committee of creditors. There was no challenge to the position of the first defendant as administrator. 24 According to the minutes: "The Chairman [the first defendant] gave a brief overview of the Agriculture.com business. He provided a background to his appointment, and stated that the two key issues to be discussed were the dispute with Accenture (and the possibility of a resolution), and the winding up order [scil, the application] filed by Professional Advantage (and the Court ruling as to the dispute of the claim in relation to this). The Administrator stated that the real purpose of the Administration was twofold: firstly, to solidify the position of the company in relation to its debtors and creditors; and secondly to investigate the possibility of restructuring the company through a deed of company arrangement in conjunction with looking at the validity or otherwise of the claims that have been made against the company. … The Chairman added that by the time the winding up order from Professional Advantage was heard in Court on Wednesday, 21 February 2001, a clearer position on the status of debtors and creditors would be achieved. … The Chairman then restated his prime focus in the administration was to arrive at a position in relation to the debtors and creditors of Agriculture.com, including the possibility of a set off."

First defendant's report to creditors 25 The second meeting of the creditors of the company in administration was convened to be held on 8 March 2001. 26 In his report to creditors under s 439A dated 27 February 2001, accompanying the notice convening the meeting, the first defendant reported that recent discussions with the directors suggested to him that a proposal for a deed of company arrangement would soon be submitted. In the course of the report's review of "key issues impacting the return to creditors", the first defendant referred to a claim for damages by the company against the plaintiffs and said: "The Directors allege that the company incurred substantial debts to Andersens/Accenture and to third party service and hardware providers (by and large retained by Andersens/Accenture on behalf of the company). The Directors also allege that these debts were incurred notwithstanding that Andersens/Accenture were aware that the company had no means to fund such expenses other than with externally obtained finance. No finance was obtained by the company. The administrator's legal advisers are considering whether actionable claims exist against Andersens/Accenture. Because of the financial circumstances of Ag.com, pursuit of any claims will necessarily require funding from a source other than Ag.com. Subject to an opinion about the merits of any such action from my lawyers, I intend discussing further the issue of funding options with creditors." 27 In the typical fashion of such reports, the first defendant's report reviewed potential causes of action against the directors and individual creditors. The first defendant expressed the view that the books and records of the company complied with the Corporations Law. He said that he had investigated potential unfair preferences and had identified payments that may constitute unfair preferences, collectively totalling $40,000. No specific mention was made of the charge in favour of the ANZ Bank. Having reviewed the major agreements entered into by the company, he said he had formed the preliminary view that there were no material transactions that would constitute uncommercial transactions or unfair loans. He said that he was not aware of any event that would constitute a breach of the directors' duties to the company, and that his investigations had not revealed any transactions of a material nature with directors. 28 On the question of insolvent trading, the first defendant made a comparatively lengthy comment, in which he reported that the directors believed at all material times that the company remained solvent, having regard to the following: · a substantial element of the "creditors" of the company related to the engagement of the plaintiffs; · in initial discussions with the plaintiffs, the development costs of the business strategy were to be financed through funding arrangements to be facilitated by the plaintiffs, and in later negotiations, a debt for equity swap by the plaintiffs was proposed; · after negotiations with the plaintiffs broke down in late January 2001, the directors appointed an administrator. 29 The first defendant observed that in the course of a liquidation, further investigations may be merited, to establish amongst other issues the date of insolvency. He noted the defences that would be available to the directors under s 588H. He concluded that there could be no certainty of a return in relation to any action for insolvent trading, that the prospective success or otherwise of any action needed to be weighed against the capacity of the defendants to pay an award of compensation, and that in considering whether further action should be taken, it would be necessary to consider the question of funding.

Directors' report as to affairs 30 By the time of the meeting on 8 March 2001, the directors had submitted their report as to affairs, and there was a brief report to the meeting on the document. 31 The report as to affairs disclosed a contingent asset in the sum of $19,500,000 (being an estimate of the recovery from the plaintiffs if legal proceedings were brought successfully), and what were called contingent liabilities owing to certain creditors. The claim that the plaintiffs had made at that stage, in the sum of $536,535.20, was described in the report as to affairs as a contingent claim.

The second meeting of creditors on 8 March 2001 32 Copies of a proposal for a deed of company arrangement ("DOCA"), prepared by the directors, were circulated to the creditors in attendance at the meeting on 8 March 2001. The proposal, in the form of a short letter from the directors to the first defendant, claimed that the company had a cause of action for considerable damages against the plaintiffs. The directors proposed a DOCA under which the deed administrator would seek funding for proceedings against the plaintiffs, and would take those proceedings, on the basis that admitted creditors would be entitled to a dividend of 110 cents in the dollar if recovery in the proceedings exceeded the debts owing to them. 33 The proposal evidently contemplated that the assets of the company would be realised at their liquidation values, since the business had ceased to trade and the directors did not intend to recommence operations. If the litigation was successful, control of the company, and therefore control of the fund represented by the excess of recovery from the plaintiffs over the premium distribution to creditors with admitted debts, would revert to the directors. 34 Since the first defendant had not had the opportunity to consider the proposal, the meeting was adjourned to 23 March 2001.

First defendant's supplementary report 35 On 16 March 2001 the first defendant as administrator gave creditors a supplementary report, accompanying a notice of the adjournment to 23 March. 36 The report stated that · the financial circumstances of the company precluded the pursuit of the claim against the plaintiffs in the absence of funding from an external source; · the first defendant had had preliminary discussions with parties who had expressed an interest in funding the proceedings; · the first defendant had received legal advice that the company appeared to have strong prospects of succeeding against the plaintiff and that damages may exceed $16 million; · the first defendant had asked the directors to tell him what involvement they had had, if any, in a like business that may have commenced following the failure of the company, and the directors had provided a letter (annexed to the report) saying they had no such involvement; and · the first defendant recommended to creditors that the proposed DOCA be entered into, because it would provide a financial outcome at least equal to liquidation, and the prospect of a superior dividend, while protecting creditors by providing that if no funding was obtained within six months, the company would be placed in liquidation. 37 The supplementary report did not add to the initial report, as regards potential claims against directors and individual creditors.

Adjourned second meeting of creditors, 23 March 2001 38 The meeting of creditors held on 23 March 2001 was chaired by the first defendant. It was attended by representatives of seven creditors, including the plaintiffs, and proxies were given by another five creditors. 39 The plaintiffs' claimed debt of $2,936,116.20 was far larger than any other debt. Even the amount admitted for voting purposes at the first meeting, $536,538.20, was substantially higher than the next largest debt, the claim by Southmark Solutions for $257,169.16. ANZ Banking Corporation claimed $151,656.32, Ebsworth and Ebsworth claimed $119,047.09, Nipro Products claimed $65,000, and Mr Mason (one of the two directors) claimed $11,500. The remainder of the debts were each under $10,000. 40 Two accounts of the events at the meeting of 23 March 2001 are in evidence. One account is contained in the very full minutes of the meeting that were prepared and adopted by the chairman and lodged with the Commission. The other is an account of the meeting prepared by Mr Peters, the representative of the plaintiffs who attended the meeting. There are only a few differences between the accounts of the meeting that are material to the outcome in this case. The account by Mr Peters does not record that a vote was taken on a show of hands before he demanded a poll, and he claims that when he demanded a poll, the first defendant said "you've got to be joking". According to Mr Peters, the only reasons the first defendant gave for exercising his casting vote were that the vote on the voices was 10 to 1 in favour of the resolution and the plaintiffs had a vested interest in the outcome. On balance, it seems to me likely that the first defendant's account on these points should be accepted, because it is comprehensive and thorough. 41 After opening the meeting, the first defendant ruled that the plaintiffs be admitted for voting purposes only in respect of their initial claim, excluding the two invoices of 22 March 2001. The figure given in the minutes is $536,535.20, but I accept the first defendant's evidence that that is a mistake, and the correct figure is $536,538.20. 42 The first defendant gave the following reasons for his decision: · the invoices dated 22 March 2001 were issued in the name of the administrator rather than the second defendant; · there was not sufficient supporting detail in them; · from the directors' perspective, the claim appeared to be of a contingent nature, and was disputed, and the first defendant had informed creditors in his reports that a dispute existed and he had obtained legal advice about it. 43 The representative of the plaintiffs asked that his objection to the chairman's ruling be noted, and there was some discussion as to the options available to the plaintiffs as a result of the chairman's decision, but there was no change to the chairman's decision. 44 The chairman referred to the purpose of the meeting, for creditors to decide whether to approve the proposed DOCA or place the company into liquidation or terminate the administration. His partner, Mr Crawford, then gave a presentation on the proposed DOCA. He also handed out and spoke to a summary of the administrator's assessment of assets and liabilities of the company, on a high and low basis. He explained that there was some doubt, because of the structure and operation of the business, as to whether debtors of the company could pay suppliers direct. He estimated that in a liquidation, the dividend to creditors would be approximately 20 cents in the dollar on a before costs basis. Costs would include the costs of liquidation and the remuneration of the administrator. 45 The plaintiffs' representative challenged the first defendant with respect to the debt claimed by Professional Advantage, asking why proceedings for recovery had not been contested, and how the directors could have described it as a "contingent" debt in their report as to affairs. Mr Crawford said that the Professional Advantage debt was treated as contingent because it was involved in the dispute with the plaintiffs. The chairman said that the question had no material bearing on the matters before the meeting because Professional Advantage was not represented at the meeting and had not lodged a proof of debt. Later Mr Mackay, a director of the company, said that the company had not contested Professional Advantage's claim because the company had sought to avoid unnecessary legal costs and at the time, the directors considered that they were close to reaching an agreement with the plaintiffs that would result in the plaintiffs paying the Professional Advantage account. 46 The plaintiffs' representative challenged the chairman's ruling to exclude the plaintiffs' invoices of 22 March 2001. He questioned whether the chairman thought that the invoices were fraudulent, and invited the chairman to adjourn the meeting to investigate the plaintiffs' invoices, if he had doubts about them. 47 There was discussion about the proposed proceedings against the plaintiffs, during which Mr Crawford said he had advised the representative of the plaintiffs that it would not be appropriate to divulge the legal advice received by the first defendant, given that the plaintiffs were potentially both a creditor and the defendant in the proceedings. He confirmed that the company would not be able to finance any litigation against the plaintiffs and that funding by an external party would be needed if proceedings were to be taken. He said that two parties had expressed an interest in providing funds of up to $1 million. The chairman later said that these two parties were associated with the company, and he had not had the opportunity to assess any interest that any professional litigation funds provider may have. 48 Mr Crawford indicated that there were several heads of damage identified in the advice that had been received; but it was not in the interests of the company or its creditors generally that the specifics of the prospective actions be detailed in the presence of a representative of the plaintiffs. Nevertheless, Mr Mackay outlined the nature of the relationship between the company and the plaintiffs. The chairman observed that proceedings against the plaintiffs could be taken either in liquidation or under the proposed DOCA, but the liquidation option would deny the creditors the possibility of receiving a dividend in excess of 100 cents in the dollar. 49 The chairman reported that he had received a letter from Mr Vanda Gould, in which Mr Gould said he had been approached by the plaintiffs to act as administrator and that he consented to do so. The chairman treated this as a consent to act as deed administrator, or as the replacement administrator if he were to be removed. 50 The representative of the plaintiffs made an offer, on a "without admissions" basis, that the plaintiffs would be prepared to grant a licence for the Australasian region for the company to utilise the website and programs that had been developed, and that the plaintiffs would negotiate in relation to the payment of their fees. This would permit the company to get on with business. 51 This led to a dispute at the meeting as to the ownership of the technology that had been developed, and as to the nature of the security the plaintiffs would require the directors to supply. The plaintiffs' representative asked for it to be noted that no adjournment was proposed to consider the plaintiffs' proposal. 52 Six motions were moved. First, the representative of the plaintiffs moved that the meeting be adjourned for the purpose of considering the proposal put forward by the plaintiffs. There was no seconder for the motion, and the chairman allowed it to lapse. 53 Secondly, the chairman moved that the company enter into a deed of company arrangement in accordance with the deed proposed by the directors and outlined to creditors. The motion was declared carried on the voices, the chairman noting that ANZ Bank abstained and the plaintiffs voted against the motion. The representative of the plaintiffs then called for a poll, and the chairman stated that despite the motion being carried on the voices, he would acquiesce in the request. 54 The result of the poll was that 10 creditors with debts valued at $483,531.30 voted in favour of the motion (including votes by proxy exercised by the chairman), the plaintiffs voted against the motion, and the ANZ Bank abstained. The plaintiffs purported to vote for $2,936,116.70 on their voting paper, but the chairman admitted them to vote for $536,538.20 as previously announced. 55 The chairman exercised his casting vote in favour of the motion, and declared it to be carried. The representative of the plaintiffs objected, drawing attention to the Code of Professional Conduct and Guidelines for Voluntary Administrations issued by the Insolvency Practitioners Association of Australia, which (he claimed) require an administrator to exercise his casting vote in favour of the majority in dollar value of creditors unless there are extraordinary circumstances for not doing so. In response, the chairman stated that: · he had used his casting vote consistently with the 10 votes to one result of the poll; · he was mindful of the vested interest that the plaintiffs had in relation to the approval or otherwise of a DOCA; · he had cast his vote in line with the recommendation made in the report to creditors that the best interests of creditors were represented by the DOCA. 56 Thirdly, the plaintiffs proposed a motion that Mr Gould replace the first defendant as the deed administrator. The motion was declared to have been lost on a show of hands, five voting against, the ANZ Bank abstaining and only the plaintiffs voting in favour of it. The plaintiffs' representative then called for a poll and the chairman acquiesced in the taking of a poll notwithstanding the declaration that the motion had been lost. The plaintiffs, whose debt was valued at $536,538.20, voted in favour of the motion, and 10 creditors whose debts were valued at $483,531.30 voted personally or by proxy against it, with the ANZ Bank abstaining. 57 The chairman again used his casting vote, this time against his own replacement as administrator, and declared the motion lost. He noted that the plaintiffs had a vested interest in seeking his replacement. 58 Fourthly, a motion approving the remuneration of the first defendant as administrator up to the date of the meeting was carried on a poll, the ANZ Bank voting in favour of it, the plaintiffs voting against it, and the chairman not using the proxies in his favour. 59 Fifthly, a motion to approve the remuneration of the first defendant as administrator for the period from the date of the meeting to the execution of the DOCA was defeated on a poll, after the plaintiffs voted against it and the ANZ Bank abstained. The chairman did not use the proxies in his favour, or exercise his casting vote. He noted that as a consequence of the outcome of the vote he would be required to seek court approval for his remuneration. 60 Sixthly, a motion to approve the first defendant's remuneration as deed administrator was also lost, when the plaintiffs voted against it, the ANZ Bank abstained and the chairman did not use proxies in his favour or exercise his casting vote. Once again, the chairman noted that it would be necessary for him to apply to the Court to have his remuneration approved. The meeting was then closed.

The deed of company arrangement 61 The DOCA, made between the company, the first defendant, and the two shareholders of the company, was executed by all parties and was dated 12 April 2001. Clause 2 stated that the objects of the arrangements set out in the DOCA were · to provide a framework for the deed administrator to obtain funding for, commence and then conduct, the proposed litigation against the plaintiffs on behalf of the company and its creditors; · to provide for a premium dividend of $1.10 per $1 of the creditors' claims after conclusion of the litigation; and · to provide a better return for the company's creditors and shareholders than would result from immediate winding up of the company. 62 Clause 5.3 of the DOCA authorised the first defendant as deed administrator to negotiate arrangements for the funding of the proposed litigation on reasonable commercial terms, and to bring proceedings in the name of the company. Clause 4 required the first defendant to establish a fund, to be distributed in an order of priority that gave any litigation funder second priority after the first defendant's own costs. 63 The term of the DOCA was stated by clause 6 to be three years, subject to extension by creditors, but the deed could be terminated early if the first defendant was unable to obtain litigation funding within six months, or completed his distribution within the period of operation of the deed. Upon termination of the deed, the company would pass into voluntary winding up unless the deed were terminated because of completion of the distribution. In the latter case, the company would be returned to the control of the directors. 64 On 11 May 2001 the plaintiffs lodged a formal proof of debt with the first defendant, in respect of the total amount claimed for the five invoices. Attached to the proof of debt were copies of various letters of engagement written by the plaintiffs during the period from 21 March 2000 to 11 September 2000, including the Consulting Services Agreement.

The examinations 65 In July 2001 the first defendant took proceedings for the examination of various officers of the plaintiff under s 596B of the Corporations Law. After an unsuccessful application for adjournment, rejected by Deputy Registrar Robinson and, on appeal, Palmer J, examinations were held in July and August 2001. Orders for production of documents were also obtained.

The proceeding 66 The plaintiffs filed their originating process in the present proceeding on 5 April 2001, and it was amended on 25 June 2001. They seek to attack the decisions of the meeting on 23 March 2001, to invalidate the DOCA, thereby to cause the company to move into liquidation, and to replace the first defendant as liquidator. They now propose Mr R Dean-Wilcocks as the replacement. 67 Although the originating process is not a pleaded claim, it appears from its terms and from the plaintiffs' submissions that the plaintiffs seek to raise the following issues, which I shall consider in turn: (1) whether the plaintiffs should be allowed to proceed with the originating process; (2) whether the plaintiffs should have been allowed to vote for the full amount of their claim at the meeting of 23 March 2001, or alternatively whether the meeting should have been adjourned to enable the first defendant to investigate the claim; (3) whether the first defendant was entitled to exercise his casting vote on the motions to execute the DOCA and to replace him as deed administrator; (4) whether the DOCA is a deed of company arrangement within the contemplation of Part 5.3A; (5) whether the Court should order that the resolution to enter into the DOCA is void under s 600B or s 445D, or terminate the DOCA under s 445D or s 447A, of the Corporations Act.

(1) Whether the plaintiffs should be allowed to proceed with the originating process 68 The plaintiffs have invited the Court to consider whether they need to seek leave to commence and maintain this proceeding having regard to ss 440D (1) and 444E (3) (a) of the Corporations Act. If the Court forms the view that leave is needed, then the plaintiffs seek an order granting that leave, nunc pro tunc. The defendants consent to such an order provided that there are no adverse costs consequences in so doing. 69 Section 440D (1) says that during the administration of a company, a proceeding against the company or in relation to any of its property cannot be begun or proceeded with except with the administrator's written consent or with the leave of the Court. Under s 444E (3), a person bound by a deed of company arrangement cannot begin or proceed with a proceeding against the company or in relation to any of its property, except with the leave of the Court and in accordance with such terms (if any) as the Court imposes. Section 440D (1) applies only "during the administration of the company", while s 444E (3) applies only where a person is "bound by" a deed of company arrangement. Both of these prerequisites raise the question whether the DOCA in the present case is a valid deed of company arrangement for the purposes of Part 5.3A. The plaintiffs submit that it is not. I shall deal with their argument later, though it is appropriate to note now that I disagree with the plaintiffs' submission. 70 If (as I believe) the plaintiffs' submission is wrong, then the administration of the second defendant came to an end on 12 April 2001, when the DOCA was executed by the first and second plaintiffs and the shareholder companies. This is because s 435C (2) (a) states that the administration of the company ends when a deed of company arrangement is executed by the company and the deed's administrator. Since the present proceeding was commenced on 5 April 2001, the leave of the Court would be needed under s 440D (1) for the commencement of the proceeding, if the proceeding is properly described as "against the company or in relation to any of its property". 71 Additionally, if we continue with the hypothesis that the DOCA is a valid deed of company arrangement for the purposes of Part 5.3A, contrary to the plaintiffs' submission, the consent of the Court would be needed under s 444E (3) for the plaintiffs to continue with the proceeding, since the DOCA purports to bind them as creditors of the second defendant - provided, once again, that the present proceeding is properly described as "against the company or in relation to any of its property". 72 Assuming, then, that the DOCA is a valid deed of company arrangement for the purposes of Part 5.3A, the key question is whether the present proceeding is a proceeding "against the company or in relation to its property". I have not had the benefit of full submissions on the point, since it is not in contest between the parties, but I am required to decide whether it is necessary to grant leave. 73 Part 5.3A sets up a procedure under which the rights of individual creditors can be dramatically affected by a decision of the creditors as a whole. There are obvious risks that such a powerful procedure can be abused, especially in cases where the administrator and the directors act together against the interests of an individual creditor, and persuade or entice the creditors as a whole to support their point of view. To guard against such abuses, Part 5.3A establishes statutory procedures by which a deed of company arrangement can be challenged in Court. The statutory procedures (specifically, under ss 445D, 445G, 447A, 600A, 600B and 600C) can all be initiated by the application of an individual creditor. It would be undesirable, in my view, to qualify the statutory protection of individual creditors by construing the words "against the company or in relation to any of its property" in ss 440D and 444E (3) so widely that they extend to a proceeding to challenge the validity of a deed of company arrangement or to terminate it. 74 In my opinion, those words do not require such a wide construction. A proceeding to challenge the validity of a deed of company arrangement or to terminate it is not in any substantive sense a proceeding "against" the company. It is better characterised as a proceeding in respect of the company and its affairs, to which it is proper to join the company so that it is bound by the decision. Nor, in my opinion, is such a proceeding one "in relation to any of the property of the company". It is true that a deed of company arrangement affects the property of the company, and therefore its invalidity or termination is, in one sense, "in relation to" the company's property. However, in such a proceeding no relief is sought with respect to particular property, and so on a natural construction of the statutory words, a proceeding to challenge the validity of a deed or to terminate it is not a proceeding in relation to the company's property. 75 If (contrary to the opinion I have formed) the DOCA is not a valid deed of company arrangement for the purposes of Part 5.3A, then the second meeting of creditors failed to pass any of the resolutions contemplated by s 439C, and according to s 435C (3) (e) the administration of the second defendant came to an end at the end of the meeting, that is, on 23 March 2001. On this view, leave would not be required under s 440D (1) because the present proceeding would not have begun during the administration of the second defendant. Nor would leave be required under s 444E (3), because the plaintiffs would not be persons bound by any deed. 76 In summary, my opinion is that leave is not required under either s 440D (1) or s 444E (3), because the present proceeding is not against the company or in relation to any of its property. It is therefore unnecessary for me to make any order granting leave to the plaintiffs to commence or continue the present proceeding.

(2) Whether the plaintiffs should have been allowed to vote for the full amount of their claim at the meeting of 23 March 2001, or alternatively whether the meeting should have been adjourned to enable the first defendant to investigate the claim 77 The plaintiffs proposed a motion for adjournment, but the chairman declined to put that motion, on the ground that it had not been seconded. The defendants have criticised this ruling, saying that the seconding of the motion was not necessary and the motion should have been put to the meeting. They pointed out that other resolutions were passed at the meeting for which no seconder was required. 78 In my opinion it is within the discretion of the chairman of a meeting to refuse to take a motion for adjournment (which is a procedural motion for which, typically, no notice is given), provided the chairman acts in good faith, reasonably and for proper purposes. The primary task of a chairman is to ascertain the will of the meeting on the matters for which it has been convened, and therefore the meeting should be conducted, in a procedural sense, with that objective in mind. While a seconder is strictly not required as a precondition to the chairman putting a procedural motion before the meeting (in the absence of a special constitutional or other requirement), it is open to the chairman to regard the absence of a seconder as a consideration relevant to the exercise of his or her discretion. 79 In the present case, it does not appear that any other creditors present at the meeting expressed any support for the plaintiffs' proposed adjournment. The meeting had been convened within the strict time limits set up for creditors' meetings under Part 5.3A, and had already been adjourned once. Clearly there was a general need to move on to a decision about the future of the company. 80 The representative of the plaintiffs sought an adjournment so that the plaintiffs' offer to settle the dispute could be further explored. In my opinion, however, it was not unreasonable for the chairman to proceed to a decision about the proposed DOCA rather than to pursue negotiations, in view of major unresolved issues about intellectual property and director guarantees in the plaintiff's' proposal. 81 The plaintiffs also say that an adjournment was warranted so that the first defendant could properly investigate the plaintiffs' debts claimed in the invoices of 22 March 2001. In my view it was not unreasonable for the chairman to reject the plaintiffs' claim based on those invoices, given the lack of particulars in the invoices and the fact that he had already investigated the dispute between the plaintiffs and the second defendant and had taken legal advice on it. 82 The evidence before me provides no basis for legitimate concern that the first defendant's decision about adjournment was taken in bad faith or for improper purposes. My conclusion, therefore, is that there is no basis for concluding that the chairman wrongfully exercised his discretion by not putting the plaintiffs' adjournment motion to the meeting. 83 The plaintiffs also challenge the chairman's decision to admit them for voting purposes only as regards the claims made in the first three invoices (the invoices dated 7 February 2001) and not in relation to the two invoices dated 22 March 2001. 84 The convening and conduct of, and voting at, a meeting convened under Part 5.3A is governed by regulations 5.6.12 to 5.6.36A of the Corporations Regulations: see reg 5.6.11 (2). According to reg 5.6.23 (1), a person is not entitled to vote as a creditor unless his or her debt or claim has been admitted wholly or in part by the administrator, or he or she has lodged with the chairman particulars of the debt or a formal proof of debt. A creditor must not vote in respect of an unliquidated or contingent debt or claim, or a debt of a value which is not established, unless a just estimate of its value has been made: reg 5.6.23 (2). By reg 5.6.26 (1) the chairman has the power to admit or reject a proof of debt for the purposes of voting. If the chairman is in doubt whether a proof of debt or claim should be admitted or rejected, he or she is required by reg 5.6.26 (2) to mark the proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained. A decision by the chairman to admit or reject a proof of debt or claim for the purposes of voting may be appealed against to the Court within 14 days: reg 5.6.26 (3). 85 In the present case the first defendant did not call for formal proofs of debt to be lodged prior to the second meeting of creditors. Therefore persons claiming to be creditors were required to provide "particulars": see reg 5.6.23 (1) (b). 86 In my opinion the invoices of 22 March 2001 and the informal proof of debt lodged by the plaintiffs on that day fell well short of providing adequate particulars of the plaintiffs' claim. They gave scant information about the amounts claimed. There was, in each case, nothing more than a very broad generic description of the work followed by an assigned amount, and then a GST calculation. The lack of specificity is striking given the amounts claimed, $1,924,462.10 and $475,116.40 respectively. They did not indicate what work was done, nor identify or give the number of the personnel employed to do the work, or their hourly rates, nor disclose the amount of time spent by the relevant personnel in carrying out the work. The out-of-pocket expenses, claimed on both invoices (for $175,917 and $14,558), were simply described as "out-of-pocket expenses" and were not itemised. 87 I do not mean to suggest that it was necessary to list every task carried out, or to list the destination of every dollar expended. The amount of detail will depend on the circumstances. As Beaumont J in remarked in the analogous bankruptcy context in Zantiotis v Andrew (No 2) (1988) 80 ALR 299, 302-3, the requirement that the creditor supply particulars of the debt "is a practical safeguard designed to ensure that, for instance, frivolous claims cannot give any right to vote." But by any standard, the invoices in the present case were inadequate. It is relevant that there had not previously been interim invoices or memoranda of account to which reference might have been made by the first defendant, and the very fact that the invoices were rendered the afternoon before the adjourned meeting, for work done no later than the end of January 2001, provided grounds for legitimate suspicion. 88 The first defendant had been investigating the dispute between the plaintiffs and the second defendant, and had been given information by the directors. It is likely that he had the various letters of engagement issued by the plaintiffs, and the draft consultancy agreement. He had obtained legal advice. But the evidence does not enable me to conclude that the information in the first defendant's possession was sufficient to fill in the gaps in the "particulars" of the plaintiffs' claim. It would be wrong in principle to suggest that the directors of a company in administration have a duty to complete the particulars omitted by the claimant. At least as a general proposition, and as a proposition adequate for the purposes of this case, it is up to the claimant to provide sufficient particulars before the meeting, to enable the chairman to decide whether to accept or reject the claim for voting purposes. 89 The first defendant rejected the invoices for voting purposes for three reasons, according to the minutes of the meeting and his affidavit evidence. The first reason, that the invoices of 22 March 2001 were addressed to Mr Crawford in a manner that might suggest that they were lodged as a debt of the administration, would not be a satisfactory reason for rejecting the invoices if it were considered in isolation. Although the invoices were directed to Mr Crawford, there cannot have been any real doubt that they related to work done before the administration commenced, having regard to the amounts claimed and the general descriptions given. There is no suggestion that the first defendant had any dealings with the plaintiffs that might have been construed as a retainer. At most, the fact that the invoices were addressed to Mr Crawford, considered in light of the fact that they were lodged the afternoon before the adjourned meeting and were for very large amounts, tended to confirm their irregularity. 90 The first defendant's second reason was that the informal proof of debt and invoices were not submitted with sufficient supporting information to enable him to determine how the amounts claimed had been calculated and whether the amounts reflected arrangements in place between the plaintiffs and the second defendant. I agree with this reason. It was open to the first defendant to conclude, for the purpose of voting at the adjourned meeting, that "particulars" of the claim in the invoices of 22 March 2001 sufficient for the purposes of reg 5.6.23 (1) (b) had not been given, and therefore that the regulations prohibited the plaintiffs from voting as a creditor in respect of the amount claimed. 91 The plaintiffs contend that the first defendant should have followed the procedure in reg 5.6.26 (2) by marking the informal proof of debt and allowing them to vote in respect of the whole amount claimed. However, that regulation applies only if the chairman is "in doubt whether a proof of debt or claim should be admitted or rejected". A chairman who concludes that a claimant has failed to provide particulars of the claim is not, by virtue of that conclusion alone, "in doubt" whether the claim should be admitted or rejected. It is rationally open to a chairman in such a position to decide to reject the claim for the purpose of voting at the meeting, without further investigation. That is what the chairman did on this occasion. To the extent that his decision was based upon the lack of adequate particulars, there is nothing in the evidence to indicate that he was in fact in doubt, or should as a reasonable person have been in doubt, about whether to admit or reject the claim. 92 The first defendant's third reason for rejecting the plaintiffs' claim was that he was aware of the dispute between the plaintiffs and the second defendant, which he had been investigating and upon which he had obtained legal advice. He had formed the view that because a "significant dispute" existed between the plaintiffs and the second defendant, the plaintiffs' claim was contingent upon the resolution of the dispute. 93 In my opinion the fact that a debt is disputed does not make it, ipso facto, a "contingent" debt for the purposes of reg 5.6.23 (2). It is not open to the debtor company to prohibit a creditor from voting in respect of a debt simply by contesting it. Where the chairman is informed that there is a genuine dispute about the existence or amount of a debt claimed by creditor, it seems to me there are at least three possible approaches that can be taken. 94 First, the existence of a genuine, unresolved dispute about a debt of which the creditor has given particulars will frequently provide reasonable grounds for doubt as to whether the creditor's claim should be admitted or rejected. Where that is so, the proper approach for the chairman will normally be to mark the proof as objected to and allow the creditor to vote, under reg 5.6.26 (2). Secondly, where the chairman receives a claim that has not been adequately particularised, and believes that the claim (whatever precisely it may be) is disputed, the correct approach may be to reject the claim for voting purposes on the ground of lack of particulars. Finally, it may happen, though probably much less frequently, that the chairman recognises the existence of a genuine dispute but decides on reasonable grounds that he or she is in a position to form a view as to the merits of the dispute, in which case the proper approach may be to admit the proof for the amount (if any) which the chairman believes is the correct amount. 95 In the present case, it appears on the evidence before me that the directors' complaint is wholly or principally that they have causes of action in damages against the plaintiffs, for breach of duty, breach of contract and under the Trade Practices Act. The evidence does not indicate that the directors claim not to have retained the plaintiffs to work for them on the matters which are the subjects of the invoices, or that the plaintiffs did not do substantial work on the second defendant's behalf. Indeed, such evidence as there is suggests that Mr Mackay may have agreed with the plaintiffs' proposals to undertake work without imposing any particular limits on the amount to be expended, his principal concern being that recovery of the plaintiffs' fees should be deferred until funds had been raised. That is to say, the evidence indicates that, subject to any legitimate set-off or cross-claim, the plaintiffs had a claim to recover payment for services provided, the only real dispute being as to the quantum of the debt and the amount of the alleged cross-claim. In Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478, the Full Federal Court accepted that it was appropriate, in the analogous bankruptcy context, to make an allowance for an established cross-claim in calculating the amount of the creditor's debt for voting purposes. 96 In these circumstances, although the first defendant had access to a great deal of information about the dispute, I very much doubt that he was in a position to resolve the uncertainty about the amount of the debt and the cross-claim, by determining an amount for voting purposes. If he had received adequate particulars of the matter, the correct approach for him would probably have been to admit and mark the plaintiffs' informal proof of debt under reg 5.6.26 (2). But in my opinion the plaintiffs had failed to give particulars of their claim, for the purposes of reg 5.6.23, at least as regards the invoices of 22 March 2001. That being so, it was open to the first defendant to reject their claim in respect of those invoices. The first defendant's second reason for his decision on the plaintiffs' claim was, in effect, the lack of particulars. In my opinion he was right to base his decision on this ground, but not on the ground of "significant dispute" 97 The plaintiffs submit that the first defendant acted inconsistently by accepting the claim in the first three invoices at the first meeting of creditors, and again at the second meeting, while rejecting the claim in the other two invoices. I agree that there was an element of inconsistency in the first defendant's actions. However, given his explanation of his conduct, his inconsistency provides no adequate ground for me to interfere with the exercise of his discretions. It is probable that the first defendant would have been entitled to reject the plaintiffs' claim in respect of the other three invoices at those meetings, since those invoices were also uninformative and lacking in particularity. He decided, however, that (having admitted the plaintiffs for voting purposes with respect to those invoices at the first meeting of creditors) to do so would only antagonise the plaintiffs and could disrupt proper consideration of the proposed DOCA. I regard this decision as reasonable in the circumstances. 98 I therefore conclude that the first defendant's decision to reject the invoices and informal proof of debt of 22 March 2001 for voting purposes at the adjourned second meeting was a valid exercise of his discretion as chairman of the meeting under reg 5.6.26 (1), which should not be overturned by the Court. I note that if I had reached the conclusion that his decision was invalid or should be overturned, my conclusion would not affect the outcome of the votes on the motions to enter into the DOCA and to replace the first defendant as deed administrator. This is because the first defendant has given evidence, which I accept, that he would have exercised his casting vote in the same way on each of those motions, even if the plaintiffs had been admitted to vote for their full claim.

(3) Whether the first defendant was entitled to exercise his casting vote on the motions to execute the DOCA and to replace him as deed administrator 99 As chairman of the meeting of 23 March 2001, the first defendant exercised his casting vote in favour of the motion to enter into the DOCA, and against the motion that he be replaced by Mr Gould as the deed administrator. The chairman's casting vote, conferred by reg 5.6.21 (4), arises when a poll is taken at a meeting of creditors: reg 5.6.21 (1). It is accepted by both parties that a poll was validly demanded and conducted in the present case. 100 Regulation 5.6.21 (2) says that a resolution is carried if a majority of creditors vote in favour of it and the value of the majority's debts is more than half of the value of the total debts owing. That was not the case for either motion. A numerical majority of creditors voted in favour of entering into the DOCA but more than half of the value of the debts owed by the corporation (the value of the plaintiffs' debt, even though it was limited to $536,538.20) was against the motion. More than half of the value of the debts (the plaintiffs' debt) voted in favour of replacing the deed administrator, but a numerical majority opposed the motion. 101 Regulation 5.6.21 (3) says that a resolution is not carried if a majority of creditors vote against it and the value of the majority's debts is more than half of the value of the total debts owing. That was not the case for either motion here. 102 In exercising a casting vote in favour of the motion to enter into the DOCA, and against the motion for replacement of the deed administrator, the first defendant relied on the power conferred upon the chairman by reg 5.6.21 (4). Regulation 5.6.21 (4) is in the following terms: "If no result is reached under subregulation (2) or (3), then: (a) the person presiding at the meeting may exercise a casting vote in favour of the resolution, in which case the resolution is carried; or (b) the person presiding at the meeting may exercise a casting vote against the resolution, in which case the resolution is not carried." 103 There is no doubt that the first defendant had the power, under this provision, to exercise a casting vote. The question is whether he did so properly. Section 600B applies if a resolution is passed at a meeting of creditors under Part 5.3A because the person presiding at the meeting exercises a casting vote. It therefore applies to the resolution to enter into the DOCA. Under this section, a person who votes against the resolution may apply for an order setting it aside or varying it, and the Court may by order set aside or vary the resolution and, if it does so, make such further orders and give such directions as it thinks necessary. Section 600C is the mirror image of s 600B, applying where the proposed resolution is not passed because the person presiding at the meeting exercises a casting vote. That was the fate of the motion to replace the deed administrator. A person voting for the proposed resolution may apply to the Court, and the Court may order that the proposed resolution is taken to have been passed and if it does so, make such further orders or give such directions as it thinks necessary. The plaintiffs urge the Court to use these provisions in order to reverse the effect of the first defendant's casting votes on the two motions. 104 I considered these provisions in Cresvale Far East Ltd (in liquidation) v Cresvale Securities Ltd (2001) 37 ACSR 394 (especially at 414-425), to which both parties have referred. I emphasised the breadth of the discretion conferred on the Court by ss 600B and 600C. At the meeting of 23 March 2001 the representative of the plaintiffs placed some emphasis on the guidelines issued by the Insolvency Practitioners' Association of Australia, one of which was to the effect that when exercising his casting vote, the chairman should have regard to the wishes of the creditors with the greatest pecuniary interest. That suggests that, in the normal case, the chairman should vote in the same manner as the high-value minority and against the lower-value numerical majority. Amongst the propositions of principle that I adopted in Cresvale was the proposition that there is no general rule that the administrator should exercise the casting vote to prefer the view of the majority in value over the view of the majority in number (at 417). The approach arising out of the case law is to weigh up all relevant factors. 105 In my opinion the facts of the present case are very different from the facts of the Cresvale case. In that case the deed of company arrangement had the effect of delivering control of the company to interests associated with a director who had failed to negotiate an acquisition of control from the majority shareholder. The deed provided for an issue of shares to the director's interests for a consideration just sufficient to pay the external creditors, dramatically diluting the majority shareholder's holding, and also operated in a manner prejudicial to that shareholder and other related entities as creditors. I found that the directors had proposed the deed for an improper purpose, and I also found that the adoption of the deed had the effect of preventing further investigations into a transaction between the director and the company that had conferred a substantial benefit on the director. In these circumstances, I held that the Court should not allow the deed to stand when it had been adopted by a resolution carried, contrary to the votes of the creditors whose debts were of the higher value, by the votes of the numerical majority of creditors and the casting vote of the administrator. 106 In the present case there is no credible evidence that the DOCA has been proposed to protect the directors from investigation or recovery, or to achieve some collateral purpose such as a change of control. The evident and proclaimed purpose of the DOCA is to set up an arrangement to permit legal proceedings to be taken against the plaintiffs. Although details of the causes of action have not been provided, for the obvious reason that by providing information to the creditors the first defendant would provide it to the plaintiffs, I have no doubt that, at the time of the meeting, the directors and the first defendant believed in good faith that there were strong causes of action available to the second defendant against the plaintiffs. They had legal advice to support their view. They conveyed to creditors their views and the fact that there was legal advice supporting them. There was adequate disclosure in the circumstances. For reasons I shall explain below, I do not regard the DOCA as unfair or oppressive to the plaintiffs. Fundamentally, this was a case where the high-value creditor had a personal interest, as a potential defendant, which was in conflict with the interests of creditors as a whole to maximise their return in the insolvent administration of the company. In these circumstances, there is no case for me to intervene as regards the resolution to enter into the DOCA. 107 The motion to replace the deed administrator raises slightly different considerations. Generally the Court will be suspicious of an exercise of the casting vote by the administrator, where the effect is to preserve him or her in office: see Cresvale at 423. In the Cresvale case, however, I found that the administrator had failed to make adequate disclosure to the creditors in his report and at the meeting, and had acted in a manner biased in favour of the directors and against the liquidator of the company's parent. In the present case, there was a contest at the meeting on 23 March 2001 between the representative of the plaintiffs, on the one hand, and the directors and supporting creditors on the other hand. The first defendant had formed the view that the proposed DOCA was in the interests of creditors and had recommended it. For reasons I shall discuss below, there is no proper ground for contending that he failed to make adequate disclosure to the creditors or that he was unfairly prejudiced against the plaintiffs. The purpose of the DOCA was, as I have said, to set up arrangements for proceedings to be taken against the plaintiffs. Those proceedings would be taken by the deed administrator. Unless the deed administrator was prepared to prosecute those proceedings vigorously there would be no point in proceeding with the DOCA at all. That being so, to engage the plaintiffs' nominee as the deed administrator would be to risk undermining the DOCA. 108 This was not, therefore, a case of simple self-interest by an incumbent administrator seeking to use the casting vote to retain office. Having used the casting vote to ensure that the resolution to enter into the DOCA was carried, it was reasonable for the first defendant to use the casting vote to defeat the replacement motion. Indeed, it would have been irrational not to do so. In the Cresvale case (at 423) I said "It is not easy to think of circumstances in which it would ever be appropriate for an administrator to [vote to keep himself in office notwithstanding that the largest creditor by far wished to remove him]". The facts of the present case are the circumstances that I could not think of on that occasion. Experience has once again trumped imagination. 109 The plaintiffs draw attention to the fact that they were the major creditor, in terms of value, by a substantial margin, even if their claim was admitted only for $536,538.20. They point out that of the other creditors, two were related parties of the second defendant, two were for debts of trivial amounts, and only three were for debts in excess of $10,000. All of this is true, but it does not detract from the analysis I have presented. My conclusion is that there is no reason to interfere with the first defendant's exercise of his casting votes in this case.

(4) Whether the DOCA is a deed of company arrangement within the contemplation of Part 5.3A 110 The principal issue in the case, a novel one, is whether the DOCA is a valid deed of company arrangement for the purposes of Part 5.3A of the Corporations Act. The plaintiffs draw attention to a number of factors that make the DOCA unusual and (they say) objectionable: (i) the business ceased to trade as soon as the first defendant was appointed as administrator, most of the realisable assets have been realised, and there is no intention to resume business; (ii) the essential effect of the DOCA is to freeze creditor claims so as to permit the deed administrator to raise funds for litigation, and then to conduct the litigation; (iii) the source of funding has not been identified and may be related to the second defendant; (iv) no formal advice on the viability of the proposed litigation has been given to the creditors; (v) the premium distribution proposed by the DOCA is an improper and impermissible inducement, contrary to public policy; (vi) the DOCA achieves a winding up by another name, in circumstances where the second defendant is clearly insolvent, but it does so without scrutiny of the directors' conduct or proper investigation of voidable transactions or the charge to the ANZ Bank. 111 Before considering each of these points, I should make some observations about the plaintiffs' overall claim that an arrangement of the present kind is beyond the contemplation of Part 5.3A and contrary to public policy. Section 435A says that the object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 112 In my opinion the DOCA in the present case will operate consistently with these objects. As regards s 435A (a), it is true that the business of the company ceased upon the appointment of the administrator. But the business was a start-up business the development of which depended upon the successful launch of an e-commerce platform and website, which were never made available to it on a basis satisfactory to the directors, given the dispute between them and the plaintiffs. This may well have been a case where there was no practical chance of saving the business of the company once negotiations between the directors and the plaintiffs broke down and an administrator was appointed. Section 435A (a) contemplates that there may be cases where it is not possible to save the business of the company. 113 Even so, the DOCA contemplates that the company (though not its previous business) may continue in existence. Its continuation depends upon the successful conclusion of the proposed litigation, for if the litigation is successfully concluded and a premium distribution of 110% is paid to the creditors, the company (including any surplus of the verdict) will be returned to the directors. If, as a result of the litigation, the website is made available to the second defendant, the pre-administration business may well be reinstated and even expanded. 114 As regards s 435A (b), the plaintiffs say the question is whether the DOCA will result in a better return to the creditors and members than would result from an immediate winding up of the company. However, it cannot be the case that a deed of company arrangement can only qualify as a valid deed for the purposes of Part 5.3A if it is demonstrable on the facts that the criteria in s 435A (b) are satisfied. Given that s 435A is a statement of objects rather than prerequisites, and bearing in mind that the whole thrust of Part 5.3A is to allow the creditors to make a commercial decision about the future of the company, the highest the plaintiffs can put the significance of s 435A is to say that the deed must be such than that reasonable commercial people in the shoes of the creditors and members could form the view that they would be better off under the deed than in a winding up. 115 Creditors acting in their commercial interests would have to balance the advantages and disadvantages of the DOCA, as they would have to do whatever proposal came forward. The substance of the arrangements achieved by the DOCA could be achieved by an immediate winding up, except for the premium distribution and the probability that the litigation against the plaintiffs would be commenced and prosecuted with greater speed. As to the likelihood of greater speed in a deed administration than in a winding up, I accept the evidence given on behalf of the defendants, Exhibit D3, Tab 6, paragraph 5. 116 If the litigation is successful, the creditors will be better off under the DOCA, to the extent that they will receive a premium distribution that cannot be paid in a liquidation. On the other hand, if the litigation is unsuccessful, or untimely, the company will be wound up and the creditors will be in the same position as upon an immediate winding up, except for the intervening costs of the deed administration, which could be substantial. Additionally, if the company is administered under the DOCA the creditors will lose the prospect of recovery proceedings for insolvent trading and voidable transactions. The plaintiffs say that these recoveries could be of substantial value. 117 In my view, there would be adequate grounds for a reasonable creditor, acting in its own interests, to prefer the DOCA to an immediate winding up. The speed of litigation under the DOCA as compared with litigation in the course of a winding up could well be regarded as a considerable advantage. Given the first defendant's statement to creditors as to the strength of the claim against the plaintiffs, creditors could well regard the prospect of gaining a premium distribution to be worth the risk of losing the costs of administration under the DOCA, including the costs of unsuccessful litigation. The prospect of recovery on the ground of insolvent trading would be tied up with the dispute between the directors and the plaintiffs, and a creditor could well form the view that defences would be available to the directors in view of the nature of the plaintiffs' claims and the fact that until late January 2001, shortly before the appointment of the administrator, the directors were negotiating with the plaintiffs with a prospect that most of the company's debts would be funded by the plaintiffs. It would be rational for creditors to regard the prospect of recovery of voidable transactions valued at no more than $40,000 as questionable, because the costs of litigation would be disproportionate to the prospect of recovery. No real ground has been advanced for questioning the charge in favour of the ANZ Bank, except for the proximity of registration of the charge to the appointment of the administrator. That is not enough to justify proceedings to challenge the security. 118 As far as the members are concerned, it is not clear that the return to them under the DOCA would be better than in a winding up, but reasonable commercial people in their shoes could form a view in favour of the DOCA. If the litigation is not successful or makes insufficient progress, the company will be wound up and they will be in the same position as upon an immediate winding up, except for the intervening costs of the deed administration, and so they will be worse off than in an immediate liquidation. If the litigation is successful, the surplus available to the members could be less than in a winding up because of the premium distribution, but it could be more than in a winding up if the costs of liquidation would be significantly higher than the costs of the deed administration. Again, as with creditors, rational shareholders might be sceptical of the prospect of recovery for insolvent trading and voidable transactions, and could take the view that the litigation would be more likely to come to a speedy resolution under the DOCA than in a winding up - that itself would be an advantage to shareholders, who will have the ultimate say in the disposition of any surplus in the litigation proceeds. 119 There is nothing in Part 5.3A inconsistent with the terms of the DOCA, nor indicative of a public policy that the DOCA contravenes. The deed of company arrangement procedure was adopted as a cheap and efficient alternative to creditors' schemes or arrangement under s 411, but the two forms of arrangement share, in my view, the capacity for great flexibility. Entry into a deed of company arrangement is seen (for example, in s 439C) as one of the three normal outcomes of voluntary administration, to be determined by the commercial judgment of creditors. The Court should be careful not to clothe deeds of company arrangement in any straitjacket that might impede their flexible realisation of the objects of Part 5.3A, and should also be careful not to substitute its judgment for the commercial judgment of creditors on a deed proposal. Specifically, I see no basis for holding that it is improper to use the deed of company arrangement procedure to achieve an outcome that might have been achieved, perhaps less efficiently and flexibly, by the use of some other procedure such as winding up. 120 Section 444A (4) and the Corporations Regulations Schedule 8 set out some matters that must be specified in the deed, but the list is not intended to be exhaustive and it is not especially restrictive. The deed may provide for other matters, such as the issue of shares or the making of commercial arrangements between the parties who are bound by the deed. Creditors are bound, so far as concerned claims arising before the day specified in the deed (s 444D (1)), and the deed also binds the company, its officers and members, and the deed administrator (s 444G). 121 It is true that a deed of company arrangement may be open to objection if it operates oppressively or unfairly prejudicially as regards a creditor or class of creditors, and this may occur if a third party, or a creditor in some other capacity, derives a collateral advantage: Kalon v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593; 599. The statute recognises the risk of abuse and provides remedies: see, in particular, s 447A (2) (b) and 445D (1) (f). The Court must take care to ensure that the deed is not unfairly prejudicial in its effect, and that is not proposed for the improper purpose of conferring a collateral advantage. But the mere fact that the creditors or members as a whole derive an advantage from the operation of the deed that is out of the ordinary is no ground for denying legitimacy to the deed. 122 It seems to me that when considering questions of abuse and unfair prejudice, and more generally questions of public policy, one must bear in mind an important distinction between inducements to individual creditors (especially secret inducements), and inducements given openly, even if differentially, to the creditors as a whole. The matter was well expressed, in the bankruptcy context, by the Full Federal Court in Paton v Campbell Capital Ltd (1993) 46 FCR 30, at 37, where their Honours said: "In our view, secrecy of itself is not an essential ingredient in treating an arrangement or composition as being void where an inducement is given to a particular creditor to secure his vote, that inducement being over and above the other benefits which accrue to all creditors under the arrangement or composition. No doubt if all creditors agreed there would be no difficulty about an arrangement openly disclosed which provided benefits to some creditors greater than others and in circumstances where the greater benefits acted as an inducement to the creditors preferred to vote for the arrangement. But where there is not such unanimity, the giving of an inducement to a creditor, or in the more colourful language of Lush J in Dauglish [ Dauglish v Tennent (1866) LR 2 QB 49] "a bribe" operates to render void a deed entered into on that basis. In such a case the necessary good faith between the debtor and the whole of the creditors would be missing." 123 In light of these observations, my comments on the plaintiffs' first four submissions are: (i) the fact that the business ceased to trade upon the appointment of the administrator and that there is no intention to resume business is no obstacle to the adoption of a deed of company arrangement under Part 5.3A; (ii) it is true that the essential effect of the DOCA is to freeze creditor claims and permit the deed administrator to raise funds for litigation, and then to conduct litigation, but I see no ground for holding that this makes the DOCA contrary to public policy or otherwise than a deed for the purposes of Part 5.3A; (iii) it was unnecessary for the first defendant to disclose the source of funding before the DOCA was entered into, since a primary purpose of the DOCA was to establish a framework within which than suitable funding could be negotiated and obtained; (iv) it was unnecessary for the first defendant to disclose his formal advice on the viability of the proposed litigation to creditors, given that he conveyed to creditors the fact that he had advice which indicated that there were strong grounds for proceeding, and given also the need to preserve the confidentiality of that advice from the potential defendants. 124 Submission (v) raises the question of the propriety of the premium distribution. The research of counsel has not turned up any other case in which a deed of company arrangement has provided for a premium distribution. One can well imagine factual circumstances in which provision for a premium distribution would be regarded as objectionable. I have in mind cases where, on the facts, the offer of a premium distribution amounts to an offer by the directors of a bribe, to induce creditors to support an arrangement under which the conduct of the directors will not be investigated. Such an arrangement would be struck down under s 447A (2) (b) or possibly s 445D (1) (f) (ii). But in my opinion the possibility or even the probability that abuse may occur is not itself sufficient to deny creditors the opportunity to approve arrangements including a premium distribution in a case where the facts do not point to any such impropriety. 125 In the present case, I am satisfied by the evidence that the DOCA has not been proposed by the directors to protect them from scrutiny of their own conduct, or to shield a creditor who has benefited from a voidable transaction. The DOCA has been proposed as an efficient means of enabling the company to realise what the directors regard as its most valuable asset, namely its causes of action against the plaintiffs. In my opinion there is nothing in Part 5.3A or even considerations of public policy that would justify my invalidating or striking down these arrangements, just because they involve a premium distribution that could not be made in winding up. 126 The plaintiffs' challenge to the DOCA is an attempt by them to close off an avenue for prosecuting the litigation that has been regarded by the directors, and the administrator and the creditors who voted in favour of the DOCA, as an efficient means of moving forward. In my opinion merit lies on the side of those propounding the DOCA rather than on the side of the challenger. 127 Submission (vi) is that the DOCA achieves a winding up by another name. But there is no obligation on creditors to pursue winding up rather than a deed of company arrangement when both are available (the matter being left to their commercial judgment). The fact that under the DOCA there is likely to be less scrutiny of the directors' conduct or proper investigations of voidable transactions is a weighty consideration, but under the scheme of Part 5.3A this is primarily a matter to be taken into account by the creditors in the exercise of their commercial judgment in considering whether to authorise the deed proposal. 128 If a deed is adopted but challenged, the Court will be concerned to ensure that adequate disclosure has been made to the creditors so that their commercial judgment is an informed one, and it will also be concerned to ensure that the deed is not oppressive or unfairly prejudicial. There is a real risk that the directors may propose a deed of company arrangement for the improper purpose of seeking to avoid recovery at the hands of an external administrator of their company. I found that this was the case in Cresvale. But it will not always be the case, and in my opinion it is not the case here.

(5) Whether the Court should order that the resolution to enter into the DOCA is void under s 600B or s 445D, or terminate the DOCA under s 445D or s 447A, of the Corporations Act 129 The plaintiffs contend that the Court should make an order terminating the DOCA on the following grounds: · that information about the company's business, property, affairs or financial circumstances that was false or misleading, and 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 the creditors (s 445D (1) (a)); · that such information was contained in the administrator's report that accompanied notice of the second meeting of creditors at which the impugned resolutions were passed (s 445D (1) (b)); · that there was an omission from such a report and the omission could reasonably be expected to have been material to such creditors in so deciding (s 445D (1) (c)). 130 All these grounds relate to alleged deficiencies in the information supplied to the creditors at or prior to the meeting of 23 September 2001. I have given a fairly full account of the information that was presented to the creditors. In my opinion, there was no deficiency of information of a kind that would justify termination of the DOCA. 131 There was discussion about the general nature of the causes of action of the second defendant against the plaintiffs at the meeting of 23 March 2001, and more briefly at earlier meetings, and Mr Mackay made a presentation on the directors' dealings with the plaintiffs. In my view it was reasonable for the first defendant not to provide to the creditors, in a manner that would put it into the hands of the plaintiffs, the legal advice that had been received with respect to the proposed litigation against the plaintiffs. Enough was said to convey to creditors the belief held by the directors and the first defendant that there were good grounds to take proceedings with a serious prospect of very substantial recovery. 132 The nature and effect of the proposed DOCA was adequately explained. The first defendant's report contained, in my view, an ample presentation of the prospects of success against the directors for insolvent trading, and briefer statements of the first defendant's views on other prospects of recovery, which were adequate in the circumstances. The evidence does not suggest that there was any particular issue about these matters, apart from the issues raised under the general heading of "insolvent trading" with respect to the dispute between the directors and the plaintiffs. 133 The plaintiffs also contend that the DOCA should be terminated under s 445D (1) (f) or (g) on the grounds that the deed or things proposed to be done under it would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, the plaintiffs as creditors, or contrary to the interests of the creditors as a whole, or on the ground that the deed should be terminated for "some other reason" (the other reason essentially being that the DOCA is an abuse of the deed of company arrangement procedure (see also s 447A (2) (b)). I have already dealt with and rejected the "abuse" argument, which is really part of the submission that the DOCA is not a valid or proper deed of company arrangement for the purposes of Part 5.3A, because of its unusual features including the premium distribution to creditors. 134 As to the questions of oppression, unfairly prejudice, unfair discrimination or action contrary to the interests of the creditors as a whole, it seems to me important to bear in mind that the DOCA is in its terms, non-discriminatory. While it expressly contemplates that litigation will be initiated against the plaintiffs, it does not seek to treat them differently from others to the extent that they have a legitimate claim to be a creditor (see the definitions of "Claims" and "Participating Creditors" and "Pre-Administration Contracts", and clauses 4.3.4 and 8.2"). That being so, my opinion is that none of these grounds has been made out. There is nothing objectionable in discriminating against the plaintiffs on the ground that the company has significant and valuable causes of action against the plaintiffs. That is not "unfair" discrimination or prejudice. The very purpose of the DOCA is to fund and prosecute proceedings against the plaintiffs.

Conclusions 135 In my opinion, it is unnecessary to grant leave to the plaintiffs to permit them to bring the present proceeding. However, the plaintiffs have failed to make out any of the substantive grounds for which they have contended. The originating process should be dismissed accordingly. I shall hear the submissions of the parties with respect to costs. *******************

Last Modified: 11/16/2001 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.