YOUNG (As representative for the Australian Partnership known as ACCENTURE) v SHERMAN & ANOR

Derek Young (As representative for the Australian Partnership known as Accenture) - Appellant PARTIES : Steven Sherman in his capacity as Administrator of Agriculture.Com Pty Ltd - First Respondent Agriculture.Com Pty Ltd - Second Respondent JUDGMENT OF : Sheller JA at 1; Hodgson JA at 70; Davies AJA at 79

LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT 20770/01 FILE NUMBER(S) : LOWER COURT Austin J JUDICIAL OFFICER :

COUNSEL : M Aldridge SC/D Ash - Appellants P M Wood/T D Castle - Respondents SOLICITORS : Rodd Peters Lawyers - Appellants Henry Davis York - Respondents CATCHWORDS : CORPORATIONS LAW - deed of company arrangement - premium payment to creditors to enter into deed - premium payment contrary to public policy - exercise of casting vote by administrator - requirement to disclose relevant matters to creditors - Corporations Act 2001 (Cth), ss 445D, 600B - Corporations Regulations 2001 (Cth), reg 5.6.21 LEGISLATION CITED : Corporations Act 2001 (Cth) Corporations Regulations 2001 Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd & Ors (2001) 37 ACSR 394 R v Bradford City Metropolitan Council; Ex parte Corris [1990] 2 QB 363 Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487 CASES CITED: Re Coalleen Pty Ltd [2000] 1 QdR 245 Paton v Campbell Capital Ltd (1993) 46 FCR 30 Re Jacobs; Ex parte O'Connor (1984) 1 FCR 1 Khoury v Zambeena Pty Ltd [1999] NSWCA 402 Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 DECISION : 1 Appeal allowed; 2 Set aside the orders of Austin J of 19 November 2001 dismissing the originating process and ordering the plaintiffs to pay the defendants' costs; 3 In lieu thereof, order; (a) that pursuant to s445D the deed of company arrangement made on 12 April 2001 between the company, Mr Sherman, MJ Mason Holdings Pty Limited and SRM Holdings Pty Limited be terminated forthwith; (b) that the proceedings be remitted to the Equity Division for further consideration.; 4 The respondents to pay the appellants' costs of the hearing before Austin J and of this appeal.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40991/01 ED 2077/01

SHELLER JA HODGSON JA DAVIES AJA

YOUNG (As representative for the Australian Partnership known as ACCENTURE) v SHERMAN & ANOR The proceedings involved a deed of company arrangement (the deed) entered into by creditors on the advice of the company's administrator, a respondent in these proceedings. The deed was opposed by the appellant, who was the company's largest creditor and the defendant in proposed litigation by the company. The essence of the deed was that a "premium" of 10 cents in the dollar would be paid to creditors if litigation proposed against the appellant was successful and the award of damages exceeded admitted claims by at least 10 per cent. The litigation could only be commenced if funding was obtained. The deed protected creditors in that a failure to obtain funding within six months of execution of the deed would mean the company would be placed into liquidation. When the creditors voted as to whether the deed should be adopted, the appellant voted against the motion. The value of the appellant's debt admitted for voting purposes exceeded the sum of the value of all other debts, but the number of creditors who voted for the proposal exceeded the number of creditors who voted against and abstained. As such, there was a "split" result and the administrator used his casting vote in favour of the resolution. The administrator justified this decision on the basis that he had used his vote consistent with the ten votes to one result of the poll and was mindful of the vested interest that the appellant had in relation to the approval or otherwise of the deed. At the same meeting a poll was taken as to whether the administrator should be replaced. The appellant voted "for" the proposal and the other creditors voted "against". As with the first motion the administrator used his casting vote in favour of the majority of shareholders. The trial Judge found that the deed would operate consistently with the objectives of s435A of the Corporations Act 2001 (Cth) (the Act). It was accepted that the substance of the deed could be achieved by an immediate winding up, except for the premium distribution and the probability that the litigation against the appellant would be commenced and prosecuted with speed. The trial Judge also accepted that the deed was not proposed by the directors to protect themselves from scrutiny of their own conduct and that there were no facts pointing to impropriety. This finding was challenged on appeal. The appellant also appealed those parts of the trial Judge's decision which dealt with:

• whether the administrator was entitled to exercise his casting vote on the motion to adopt the deed and replace him as deed administrator;
• whether or not those motions should be reversed;
• whether the deed was a proper deed within the meaning of the Act; and
• whether the deed should be set aside because of the "premium" distribution. The appellant sought to invoke the Court's power to terminate the deed pursuant to s445D of the Act because effect could not be given to it without injustice or undue delay or because the deed or the provision of it relating to the premium was oppressive or unfairly prejudicial to or unfairly discriminatory against the appellant as a creditor. HELD (per Sheller JA, Hodgson JA and Davies AJA concurring):

1. Regulation 5.6.21 of the Corporations Regulations 2001 (Cth) does not indicate in any way the circumstances in which the person presiding should exercise a casting vote or the circumstances in which if the person presiding does exercise a casting vote it should be in favour of the resolution or it should be against the resolution. There was no doubt that the administrator had the power under the regulation to exercise a casting vote on both resolutions. The question was whether he did so properly. In order to resolve this question it is necessary to weigh up all relevant factors to determine whether the casting vote was exercised appropriately: see R v Bradford City Metropolitan Council; Ex parte Corris [1990] 2 QB 363 at 371, Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487 at 489.
2. The trial Judge did not derive from the evidence any explanation for the premium other than that it was an inducement to all the creditors except the appellant to support the arrangement. The premium was a gratuity to which none of the creditors was otherwise entitled in law whether or not the company was wound up. It is indefensible to offer a gratuity to some creditors, albeit to the majority numerically, to be paid if the deed was entered into and the litigation was successful to an extent which allowed the gratuity to be paid. A practice seeking to achieve results at a creditors' meeting by offering gratuities to other creditors, however publicly, would open up a fertile field for abuse. Such a practice would be contrary to the policy of the Act and the public interest.
3. Pursuant to s445D(1), the Court terminated the deed because of the provision for the payment of the premium. Accordingly the company is taken to have passed a special resolution under s491 of the Act that the company be wound up voluntarily; see s446B(1) of the Act and Regulation 5.3A.07 of the Corporations Regulations 2001. Per Hodgson JA:
4. If the respondent was seeking a positive finding that the deed was not proposed by the directors in order to protect themselves from scrutiny evidence should have been presented to that effect. The positive finding made by the trial Judge that the directors had no such intention could not be justified in the absence of evidence from them.
5. There is nothing improper in shareholders of a company offering compensation to creditors for delay in payment, even where the creditors would not otherwise be entitled to interest, so long as this is done openly and does not affect creditors unequally. In this case, the premium did affect creditors unequally, had no substantive justification and operated as an inducement to some creditors to agree to a result favourable to the directors and unfavourable to another creditor. As such, the deed should be terminated.
6. When creditors vote on the entry into a deed of company arrangement all relevant matters should be put fairly to the meeting. In this case the administrator should either have disclosed the factual circumstances and legal propositions said to give a reasonable cause of action against the appellant, but not the legal advice, or else disclose the whole of the legal advice, subject to appropriate undertakings so as to avoid the loss of privilege. Also, if the administrator has the prospect of legal funding to finance proceedings against one creditor the likely terms of that funding should, if known, be disclosed. Per Davies AJA:

Legislation cited: Corporations Act 2001 (Cth) Corporations Regulations 2001 Cases cited: Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd & Ors (2001) 37 ACSR 394 R v Bradford City Metropolitan Council; Ex parte Corris [1990] 2 QB 363 Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487 Re Coalleen Pty Ltd [2001] 1 QdR 245 Paton v Campbell Capital Ltd (1993) 46 FCR 30 Re Jacobs; Ex parte O'Connor (1984) 1 FCR 1 Khoury v Zambeena Pty Ltd [1999] NSWCA 402 Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707

ORDERS 1. Appeal allowed; 2. Set aside the orders of Austin J of 19 November 2001 dismissing the originating process and ordering the plaintiffs to pay the defendants' costs; 3. In lieu thereof, order (a) that pursuant to s445D the deed of company arrangement made on 12 April 2001 between the company, Mr Sherman, MJ Mason Holdings Pty Limited and SRM Holdings Pty Limited be terminated forthwith; (b) that the proceedings be stood over for further mention before Sheller JA at 9.30am on 17 October 2002 with liberty to any party to apply to Sheller JA on 48 hours notice to the other parties.. 4. The respondents to pay the appellants' costs of the hearing before Austin J and of this appeal.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40991/01 ED 2077/01

SHELLER JA HODGSON JA DAVIES AJA

Wednesday, 28 August 2002 YOUNG (As representative for the Australian Partnership known as ACCENTURE) v SHERMAN & ANOR Judgment 1 SHELLER JA:

Chapter 5 of the Corporations Act 2001 (Cth) (the Act) concerns the external administration of bodies corporate. Part 5.3A provides for the administration of a company's affairs with a view to executing a deed of company arrangement. The object of the Part is, inter alia, to provide for the business, property and affairs of an insolvent company to be administered in a way that "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." [s435A(b)] 2 Section 435C(1)(a) provides that such administration of a company begins, relevantly, when an administrator of the company is appointed under s436A, and ends on the happening of whichever event of a kind referred to in, inter alia, subs (2) happens first after the administration begins. Section 435C(2) provides that the normal outcome of the administration of a company is that, inter alia, (a) a deed of company arrangement is executed by both the company and the deed's administrator.

3 In Division 2 of Part 5.3A, s436A(1) provides that a company may, by writing, appoint an administrator of a company if the board has resolved to the effect that "(a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

(b) an administrator of the company should be appointed."

The administrator must convene a meeting of the company's creditors within five business days after the administration begins to determine whether to appoint a committee of creditors and, if so, who are to be the committee's members; s436E. 4 Division 3 provides for and describes the administrator's control of the company's affairs. Division 4 requires the administrator to investigate the company's affairs. 5 Section 439A provides that within the convening period - which is either twenty-one days or twenty-eight days (subs (5)(a) and (b), depending on the time of year) from the day when the administration begins - the administrator must convene a meeting of the company's creditors. The Court can extend the convening period only on an application made within the period referred to in para (5)(a) or (b). "Court" is defined in s58AA of the Act to mean, inter alia, the Supreme Court of a State. At that meeting the creditors may resolve that the company execute a deed of company arrangement specified in the resolution or that the administration should end or that the company be wound up; s439C. 6 Division 10 concerns the execution and effect of a deed of company arrangement. The administrator of the company is to be the administrator of the deed unless the creditors at the meeting appoint someone else; s444A(2). Pursuant to s444A(3), the administrator must prepare an instrument setting out the terms of the deed (s444A(3)). The company must execute the instrument within twenty-one days after the end of the meeting of creditors, unless the Court extends that time (s444B(2)) and the administrator of the deed must execute the instrument before, or as soon as practicable after, the company executes it; s444B(5). When executed by both the company and the deed's administrator, the instrument becomes a deed of company arrangement; s444B(6). 7 Division 11 concerns the variation, termination and avoidance of deeds. Section 445D provides, relevantly: " When Court may terminate deed

(1) The Court may make an order terminating a deed of company arrangement if satisfied that:

… (e) effect cannot be given to the deed without injustice or undue delay; or (f) the deed or a provision of it is … (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more [of the] creditors [of the company]; or (ii) contrary to the interests of the creditors of the company as a whole; or (g) the deed should be terminated for some other reason.

(2) An order may be made on the application of: (a) a creditor of the company; or (b) the company; or (c) any other interested person." 8 Section 445E enables the company's creditors at a meeting convened under s445F to terminate the deed and to resolve that the company be wound up. 9 Division 13 concerns the powers of the Court. Section 447A provides, relevantly, as follows: "(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or

(b) because provisions of this Part are being abused; or

(c) for some other reason; the Court may order under subsection (1) that the administration is to end.

(4) An order may be made on the application of: (a) the company; or

(b) a creditor of the company; …" 10 In Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 the High Court considered the ambit of the powers of the Court under this section. In particular at para 24 the Court said that the section permitted the making of orders which would alter how s439A was to apply. The Court dismissed an appeal against an order pursuant to s447A that Part 5.3A of the Act was to operate in relation to the company as if the effect of, inter alia, s439A(2) was modified in respects set out in the order; see para 13. 11 Division 14 concerns the qualifications of administrators and Division 15 the removal, replacement and remuneration of an administrator. 12 Part 5.7B concerns the recovery of property or compensation for the benefit of creditors of an insolvent company. Section 588FC describes insolvent transactions. Division 3 deals with a director's duty to prevent insolvent trading. 13 In Part 5.9 headed "Miscellaneous" is Division 3 "Provision applying to various kinds of external administration". Sections 600B and 600C provide as follows: "600B Review by Court of resolution of creditors passed on casting vote of person presiding at meeting (1) This section applies if, because the person presiding at the meeting exercises a casting vote, a resolution is passed at a meeting of creditors of a company held: (a) under Part 5.3A or a deed of company arrangement executed by the company; or

(b) in connection with winding up the company. (2) A person may apply to the Court for an order setting aside or varying the resolution, but only if: (a) the person voted against the resolution in some capacity (even if the person voted for the resolution in another capacity); or

(b) a person voted against the resolution on the first-mentioned person's behalf. (3) On an application, the Court may: (a) by order set aside or vary the resolution; and

(b) if it does so - make such further orders, and give such directions, as it thinks necessary. (4) On and after the making of an order varying the resolution, the resolution has effect as varied by the order. 600C Court's powers where proposed resolution of creditors lost as casting vote of person presiding at meeting (1) This section applies if, because the person presiding at the meeting exercises a casting vote, or refuses or fails to exercise such a vote, a proposed resolution is not passed at a meeting of creditors of a company held: (a) under Part 5.3A or a deed of company arrangement executed by the company; or (b) in connection with winding up the company. (2) A person may apply to the Court for an order under subsection (3), but only if: (a) the person voted for the proposed resolution in some capacity (even if the person voted against the proposed resolution in another capacity); or (b) a person voted for the proposed resolution on the first-mentioned person's behalf. (3) On an application, the Court may: (a) order that the proposed resolution is taken to have been passed at the meeting; and (b) if it does so - make such further orders, and give such directions, as it thinks necessary. (4) If an order is made under paragraph (3)(a), the proposed resolution: (a) is taken for all purposes (other than those of subsection (1)) to have been passed at the meeting; and (b) is taken to have taken effect: (i) if the order specifies a time when the proposed resolution is taken to have taken effect - at that time, even if it is earlier than the making of the order; or (ii) otherwise - on the making of the order."

Statement of facts 14 Agriculture.Com Pty Limited (the company) was incorporated on 5 August 1999. Stephen Raymond MacKay and Mark Joseph Mason were its directors. Its two shareholders were M J Mason Holdings Pty Limited and SRM Holdings Pty Limited, corporate entities associated with the directors. The company carried on the business of a procurement agent for agricultural products. It sourced products for its rural customers endeavouring to afford them a more competitive rate because of the volumes of orders given to suppliers. The business was similar to that of a buying group. Fundamental to the development of the business and its growth was the development of an e-commerce platform and website. Accenture (also referred to as Andersens/Accenture) was the name of a partnership of thirty-eight persons who were retained to develop, inter alia, the e-commerce platform and website. The pursuit of the e-commerce strategy and the breakdown in negotiations between the company and Accenture were the major contributors to the failure of the company's business. 15 On 9 February 2001 the company's directors resolved that in their opinion the company was likely to become insolvent at some future time and appointed Steven Sherman administrator of the company pursuant to s436A of the Act. 16 Until April 2000 the company's trading was dormant. In February 2000 the directors approached Accenture for assistance in raising the 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. In March 2000 the company's directors engaged Accenture to pursue funding, prepare an expansion/diversification policy for the business and develop an initial public offering/business sales strategy. A letter of engagement dated 21 March 2000 was signed by the company's directors. This contemplated deferred payment of fees which would bear interest until paid. Accenture was probably aware that remuneration for their services would come only from the proposed capital raising. 17 In April 2000 the business began to trade from premises in St Leonards. Work relating to the letter of engagement was carried out between late March and May 2000. According to Accenture 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 about twelve weeks. During April 2000 further discussions took place between the parties. Accenture offered to build the company's e-commerce platform and website and made a presentation about that on 5 June 2000. An arrangement was made that the website would be ready on 15 September 2000 in time for the peak period of the cotton crop. Accenture submitted a standard form Consulting Services Agreement which was never signed on the company's behalf. According to Accenture from about May 2000 tasks were undertaken by them at the company's request to develop the business. Accenture prepared a letter of engagement dated 26 June 2000 setting out the terms of their engagement for "building out" the company's business. They claim that Mr MacKay, one of the directors, agreed to that letter of engagement and the tasks set out in it were completed by Accenture. However, the letter was never signed on behalf of the company. 18 In June 2000 Accenture ordered hardware on behalf of the company from Southmark, a Compaq distributor. Accenture claimed that Mr MacKay authorised the order which was at a favourable discount negotiated by Accenture. Southmark supplied the hardware and claimed $257,169.16 from the company. The website was not completed by the scheduled date of 15 September 2000. Accenture said they would have done so but for the company's failure to sign various letters of engagement and the Consulting Services Agreement notwithstanding demands that the directors should do so. 19 According to Accenture, early in September 2000 they agreed with Mr MacKay on behalf of the company to provide interim financial assistance to "migrate" financial information from the company's existing accounting system across to the new website. They submitted a letter of engagement dated 11 September 2000 but that was never signed. A financial officer provided to the company by Accenture did the work. 20 Accenture said that by September 2000 it was becoming apparent to them that it would be difficult to raise equity finance for the company due to a change in the international marketplace for new internet companies. In the absence of raising capital the company did not have the financial capacity to pay Accenture's fees. Therefore Accenture endeavoured to negotiate an equity participation agreement with the company to give them a realistic opportunity to secure payment of their fees. Between September 2000 and late January 2001 negotiations took place. According to the company's directors, as well as exploring proposals for Accenture to take equity in lieu of fees, negotiations covered arrangements for Accenture to pay creditors associated with the development of the website. Accenture said it was never contemplated that they would take equity in lieu of their out-of-pocket expenses which, by September 2000, exceeded $200,000. Various terms sheets were prepared but never signed. The negotiations failed when Mr Hawkins, a business adviser to the company, sent an e-mail to Accenture threatening the commencement of legal proceedings. Accenture gave evidence that the website could still be supplied to the company on 10 days' notice if proper arrangements were made for payment of fees and the execution of agreements. 21 An entity called Professional Advantage provided an accounting package for the project at the request of Accenture. When this was not paid for, Professional Advantage began proceedings to wind up the company on the ground of insolvency claiming to be owed approximately $97,000. The company directors hoped that, if suitable arrangements could be made with Accenture, Accenture would pay this claim. The hearing of the winding up was adjourned when Mr Sherman was appointed administrator and eventually dismissed by consent on 2 April 2001. 22 Accenture did not render any accounts for the services they claimed to have provided to the company until after the appointment of Mr Sherman as administrator. On 12 February 2001 Accenture submitted three tax invoices to the company's directors all dated 7 February 2001 and totalling $536,538.20. One invoice was for "professional services for provision of interim Chief Technology Officer", another 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". Accenture lodged an interim proof of debt for that amount and attended the first meeting of creditors. 23 On 22 March 2001 Mr Sherman received two additional tax invoices, one 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, and the other 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. The consequence was that Accenture claimed to be owed $2,936,116.70 (plus, presumably, interest) under five invoices. No part of this sum was paid. Accenture did not take legal proceedings for recovery. 24 After Mr Sherman was appointed administrator on 9 February 2001 he ceased to conduct the company's business and vacated the St Leonards premises. On 16 February 2001 the first meeting of creditors of the company was held. With the notice of that meeting Mr Sherman invited lodgement of informal proofs of debt and proxies. At that meeting Mr Sherman accepted Accenture's claim for the face value of the three invoices, $536,538.20. The only resolution passed was for the appointment of a committee of creditors. There was no challenge to Mr Sherman's position as administrator. 25 According to the minutes Mr Sherman said that the two key issues to be discussed were the dispute with Accenture (and the possibility of a resolution) and the winding up application filed by Professional Advantage. Mr Sherman stated that the real purpose of the administration was 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 claim that had been made against the company. 26 On 8 March 2001 the second meeting of the creditors of the company was convened. 27 In his report to creditors under s439A of the Act dated 27 February 2001, Mr Sherman reported that his investigations primarily focused on whether voidable transactions or other actions might be recoverable by a liquidator pursuant to Part 5.7B of the Act. Due to time constraints, he was not in a position to carry out as detailed a review as a liquidator normally would in the conduct of a liquidation. The purpose of his investigation and reporting was to allow creditors the opportunity of comparing the benefits of any proposed deed of company arrangement against potential recoveries that might be available through a winding up. At that time he had not received a proposal for such a deed. Mr Sherman outlined the history of the company and the nature of its operations, much as I have already described. 28 On the topic of insolvent trading Mr Sherman said that his investigations had been limited. Discussion with the directors indicated that they believed that at all times the company remained solvent. He concluded that any action in relation to insolvent trading was detailed and there could be no certainty of a return in relation to any such action. The prospective success or otherwise of any action must also be weighed against the capacity of the defendants to pay an award for compensation. 29 On the topic of "claim for damages" Mr Sherman reported that the directors had provided details of the facts and circumstances surrounding the company's retaining of Accenture and Accenture's conduct in purported fulfilment of its consultancy obligations. He 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." 30 On the topic of liquidation Mr Sherman expressed his view that as a result of preliminary investigations to date the powers accorded to a liquidator by Part 5.7B of the Act would result in limited recoveries, if any. He understood that a deed of company arrangement was proposed and awaited its receipt. 31 By the time of the meeting of 8 March 2001 the company's directors had submitted their report as to affairs and there was a brief report to the meeting on the document. The report disclosed a contingent asset in the sum of $19,500,000, which was an estimate of the recovery from Accenture if legal proceedings were brought successfully, and what were called contingent liabilities owing to certain creditors. The claim that Accenture had made at that stage, in the sum of $536,535.20, was described in the report as a contingent claim. 32 By letter dated 8 March 2001 the company's directors wrote to Mr Sherman proposing a deed of company arrangement at the meeting for that date. The term of the deed was to be for three years subject to earlier termination if the admitted creditors were paid a dividend in accordance with the deed and no further assets could be recovered for the benefit of creditors or the administrator was unable to obtain funding to commence litigation against Accenture. The deed was also to provide that admitted creditors should be entitled to prove for a dividend payable of 110 cents in the dollar for each dollar of debt. Such a premium was an unusual, if not unique, feature of the proposal. The directors said that fundamentally any material returned to stakeholders of the company would only arise from a successful cause of action against Accenture. The cause of action was for considerable damages. The meeting was adjourned to 23 March 2001. 33 On 16 March 2001 Mr Sherman gave creditors a supplementary report accompanying a notice of the adjournment. In that report Mr Sherman stated that the financial circumstances of the company precluded the pursuit of the claim against Accenture in the absence of funding from an external source. He had had preliminary discussions with parties who had expressed an interest in funding the proceedings and had received legal advice that the company appeared to have strong prospects of succeeding against Accenture and that damages might exceed $16 million. He had asked the directors to tell him what involvement they had, if any, in a like business that might have commenced following the failure of the company and the directors had provided a letter saying they had no such involvement. Mr Sherman recommended to creditors that the proposed deed of company arrangement 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. 34 Mr Sherman chaired the meeting of creditors held on 23 March 2001. It was attended by representatives of seven creditors, including Accenture, and proxies were given for another five creditors. Accenture's claimed debt of $2,936,116.20 was 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 of Southmark for $257,169.16. ANZ Banking Corporation claimed $151,656.32, Ebsworth and Ebsworth claimed $119,047.09, Nipro Products claimed $65,000 and one of the directors, Mr Mason, claimed $11,500. The remainder of the debts were each under $10,000. 35 Full minutes of the meeting of 23 March 2001 were prepared and adopted by Mr Sherman. He noted the proof of debt that Accenture had lodged and advised that it would be admitted for voting purposes for $536,538.20 only for reasons he gave. In particular he said there was not sufficient supporting detail relating to the two additional invoices. Mr Sherman's associate, Tony Crawford, reviewed the supplementary report to creditors dated 16 March 2001. Mr Crawford said that the administrator had obtained legal advice as to the likelihood of success in pursuing litigation against Accenture and stated the essence of the proposal before the meeting. · A premium of 10 cents in the dollar would be paid to creditors if the proposed litigation against Accenture was successful and the award of damages exceeded admitted claims by at least 10 per cent. · In the event that litigation against Accenture was not successful, then the assets available to creditors would equate to that presently available in the event of a liquidation. · The litigation against Accenture could only be commenced if litigation funding was obtained. The deed proposal protected creditors in that a failure to obtain funding within six months of execution of the deed would mean the company would be placed into liquidation.

A summary of detailed assets and liabilities was put to the meeting with an assessment of them at liquidation values on a high and low basis. 36 In the course of discussion Mr Crawford referred to a conversation he had had with Mr Rod Peters, a solicitor representing Accenture, in which he had advised Mr Peters that it would not be appropriate to divulge the contents of advice received about the claim against Accenture because Accenture was both potentially a creditor and defendant in any proceedings. Mr Crawford indicated to the meeting that 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 an Accenture representative. Mr Crawford observed that in the event of a liquidation of the company the litigation would not necessarily go away but the liquidation option would deny the creditors the possibility of receiving a dividend in excess of 100 cents in the dollar. On a call by Mr Peters for all details regarding the Accenture litigation and the proposed course of action the chairman asked the administrator's legal representative from Henry Davis York, solicitors, to talk generally to the heads of damage detailed in the advice. 37 The chairman put the following resolution to the meeting: "That Agriculture.com Pty Limited (Administrator Appointed) enter into a Deed of Company Arrangement in accordance with the deed as proposed by the Directors of the Company and outlined to the creditors." 38 The motion was moved and seconded and the chairman declared it carried on the voices noting the abstention of the ANZ Bank and Accenture voting against the motion. Mr Peters called for a poll. The chairman stated that despite the motion being carried on the voices he would acquiesce to Mr Peters' request for a poll. The chairman advised that a poll with respect to the resolution for the company to execute a deed of company arrangement would be held. The results of the poll were: Value No of Creditors $ For 483,531.30 10 Against 536,538.20 1 Abstaining 151,656.32 1 Total 1,171,725.82 12

39 The chairman advised the meeting there was a split result of the poll and that he would use his casting vote in favour of the resolution. He then declared the motion was carried. Asked by reference to the Insolvency Practitioners Association of Australia guidelines to explain what the extraordinary circumstances were that would lead him to exercise his casting vote other than to support value, the administrator stated: · He had used his casting vote consistent with the ten votes to one result of the poll; · He was mindful of the vested interest that Accenture had in relation to the approval or otherwise of the deed of company arrangement; · He had cast his vote in line with the recommendation made in the report to creditors that the best interests of creditors was represented by the deed of company arrangement. 40 Accenture moved that Mr Vanda Gould replace Mr Sherman as the deed's administrator of the company. On a show of hands the vote was recorded as five against, Accenture in favour of the motion and the ANZ Bank abstaining. The chairman declared that the motion was lost. Mr Peters called for a poll. The poll result reversed the "for" and "against" values in the previous poll. The "abstaining" value and the total value were the same. The chairman declared that the poll was split and that he would use his casting vote against his own replacement as administrator. Accordingly, he declared the motion lost. When Mr Peters stated he wished the guidelines to be noted again the chairman reiterated the possible vested interest of Accenture in seeking his replacement as deed administrator. Motions were put relating to the remuneration of the administrator, one of which was carried on a poll and two of which were lost. 41 The deed of company arrangement (DOCA) was executed by all parties - namely the company, Mr Sherman and the two shareholders of the company - and was dated 12 April 2001. The objectives of the arrangement were: "2.1 To provide a framework for the Administrator to obtain funding for, commence and then conduct, the Accenture Litigation on behalf of the Company and its Creditors; 2.2 To provide for a premium dividend of $1.10 per $1 of Creditors' Claims after the conclusion of the Accenture Litigation; 2.3 To provide a better return for the Company's Creditors and shareholders than would result from an immediate winding up of the Company." 42 Mr Sherman was the administrator of the deed. His powers included the power to negotiate arrangements for the funding of the Accenture litigation with any person on reasonable commercial terms and to enter into a deed, arrangement or other document on behalf of the company which was necessary to obtain funding for the Accenture litigation. Clause 4 provided for the establishment of a fund and an order of priority for distribution from the fund which after payment of remuneration due to and costs, fees, expenses and liabilities incurred by the administrator, the costs, disbursements and charges of any litigation funder and the payment of priority claims was, fourthly, to be distributed in payment to participating creditors up to $1.10 per $1 to participating creditors claims and, fifthly, as to any remaining funds in payment to the shareholders. 43 The term of the DOCA was to be three years, subject to extension by creditors but early termination if Mr Sherman 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 was terminated because of completion of the distribution. In the latter case the company would be returned to the control of its directors. 44 On 11 May 2001 Accenture lodged a formal proof of debt with Mr Sherman in respect of the total amount claimed for the five invoices. Attached were copies of various letters of engagement including the Consulting Services Agreement. In July 2001 Mr Sherman took proceedings for the examination of various of Accenture's officers under s596B of the Act.

Proceedings in Court 45 Accenture by its representative, Derek Young, began proceedings by originating summons on 5 April 2001. The originating summons was amended on 25 June 2001. The application was stated to be made under ss447A and 600B of the Act. Directions were sought pursuant to s447A of the Act. In the alternative, an order pursuant to s445C or, alternatively, s445D that the deed of company arrangement be terminated was sought. In the further alternative, orders under s445D(1)(f) and (g) that the deed be terminated were sought. The affidavit evidence filed on behalf of Accenture was that of Mr Peters of 9 May 2001, Ian Stanley Gibson, a partner of the Accenture partnership, of 18 May 2001 and Mr Peters in reply of 6 July 2001. The defendants, Mr Sherman and the company, relied upon the affidavits of Mr Sherman of 14 June 2001 and Jason Alexander Mustermann, a solicitor in the employ of the solicitors for Mr Sherman and the company, of 27 July 2001. 46 The matter came on for hearing before Austin J on 2 August 2001. Mr Gibson was required for cross-examination. Mr Sherman was not cross-examined. On 13 November 2001 Austin J gave judgment dismissing the proceedings. Accenture appeals from those parts of Austin J's decision which deal with · whether Mr Sherman was entitled to exercise his casting vote on the motion to adopt the DOCA and to replace him as deed administrator; · whether or not those motions should be reversed; · whether the DOCA was a proper deed of arrangement within the meaning of the Act; and · whether the DOCA should be set aside because of the "premium distribution".

There were thirteen grounds of appeal in the notice as filed. The Court gave leave to Accenture to add a fourteenth ground on 9 August 2002.

Reasons for judgment 47 The appeal was directed, in essence, to invoking the Court's power to terminate the DOCA pursuant to s445D of the Act because effect could not be given to it without injustice or undue delay or because the deed or the provision of it relating to the premium was oppressive or unfairly prejudicial to or unfairly discriminatory against Accenture as a creditor. Pursuant to s600B, Accenture sought an order setting aside or varying the resolution passed that the company enter into the DOCA on the casting vote of Mr Sherman. The summary of facts I have in large measure taken from Austin J's reasons for judgment. His Honour discussed issues before him which were not further ventilated on the appeal. The questions posed by Austin J relevant to the appeal were whether Mr Sherman was entitled to exercise his casting vote on the motions to execute the DOCA and to replace him as deed administrator and whether the DOCA was a deed of company arrangement within the contemplation of Part 5.3A. 48 In Part 5.6 of the Corporations Regulations 2001, which deals with winding up generally, regulation 5.6.21 deals with the carrying of resolutions after a poll has been demanded at a meeting of creditors. Sub regulation (2) provides that a resolution is carried if a majority of the creditors voting vote in favour of the resolution and the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting. Sub regulation (3) provides that a resolution is not carried if a majority of creditors voting vote against the resolution and the value of the debts owed by the corporation to those voting against the resolution is more than half the total debts owed to all creditors voting. Neither sub regulation provided a result on the motion for the company to enter into the deed of company arrangement or for the replacement of Mr Sherman. On the first resolution the majority of creditors voted in favour but the value of the debts owed by the corporation to those creditors was less than half the total debts. In the case of the second motion the majority of creditors voted against it but the value of debts owed to those creditors was less than half the total. Sub regulation (4) provides: "If no result is reached under sub regulation (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." 49 The regulation does not indicate in any way the circumstances in which the person presiding should exercise a casting vote or the circumstances in which if the person presiding does exercise a casting vote it should be in favour of the resolution or it should be against the resolution. However, if the person presiding at the meeting exercises a casting vote, s600B enables a person to apply to the Court for an order setting aside or varying a resolution passed at a meeting of creditors of a company and s600C enables a person to apply to the Court for an order that the proposed resolution is taken to have been passed if the person presiding at the meeting exercises a casting vote, or refuses or fails to exercise such a vote, where the proposed resolution is not passed at the meeting of creditors. 50 As Austin J said, there could be no doubt that Mr Sherman had the power under the regulation to exercise a casting vote on both resolutions. The question was whether he did so properly. Accenture urged the Court to use the provisions of these two sections to reverse the effect of Mr Sherman's casting vote. 51 In Cresvale Far East Limited (In Liquidation) v Cresvale Securities Ltd & Ors (2001) 37 ACSR 394 at 414-425 Austin J discussed the regulation. His Honour referred to R v Bradford City Metropolitan Council; Ex parte Corris [1990] 2 QB 363, a case about the exercise by a person presiding at a meeting of a local authority of a second or casting vote conferred on that person by statute. At 371 Neill LJ, with whose judgment May and Nourse LJJ agreed, said: "A person who has a second or casting vote is clearly under a duty to exercise it honestly and in accordance with what he believes to be the best interests of those who may be affected by the vote. Subject to this, however, it seems to me that the person presiding at a meeting is fully entitled to use his vote as he thinks fit. Though Mr Allen struggled valiantly to find some sound basis for his principle of impartiality I am afraid that I for my part remain unpersuaded."

Neill LJ pointed out that the wisdom of using the vote in a particular way is a separate question. This question may not be justiciable. 52 In Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487 at 489 Santow J quoted from the Explanatory Statement to the Corporations Regulations (Amendment), Statutory Rule 1993, No 135, para 95, where the point is made that the casting vote in this context effectively decides between the interests of the creditors with the preponderance in numbers and the interests of the creditors with the preponderance in value. Santow J said: "If the effect of the poll is that only one of the two conditions for the resolution being carried is fulfilled, this is deemed to be a situation where 'no result is reached'. That in turn gives rise to the administrator having the discretion to exercise a casting vote, though any creditor may apply to the court for a review of such outcome and appropriate orders: see Re Bartlett Researched Securities Pty Ltd (Admin Apptd) (1994) 12 ACSR 707. This means that instead of such a voting result representing a vote against, as would ordinarily be expected, it is to be taken as a situation akin to deadlock where casting votes are not infrequently allowed. However, it does not follow that the Court would automatically accept the exercise of such a casting vote as appropriate. This will depend on factors such as whether the administrator has properly exercised the casting vote in the interests of creditors as a whole, such as in circumstances where the vote or votes which prevent one of the two conditions being fulfilled would represent an outcome unfair to the remaining creditors if not reversed by a casting vote." 53 In Re Coalleen Pty Ltd [2000] 1 QdR 245 considerations which founded the intervention of the Court to set aside a resolution that a company enter into a deed of company arrangement were that the major creditor sought the winding up of the company. The other creditors would suffer no prejudice if the Court set aside the resolution and it was not clear that the deed would advance the objects of Part 5.3A of the Act in any real practical way. 54 In Cresvale at 417 Austin J said: "But the approach arising out of the case law is to weigh up all relevant factors, including matters not disclosed by the hypothetical example, such as whether any particular class of creditors will be unfairly prejudiced by the proposal, whether the meeting has been given all relevant information, and whether the directors stand to gain an unfair advantage." 55 Austin J referred to Cresvale and the breadth of discretion conferred on the Court by ss600B and 600C. He pointed out that in Cresvale he adopted the proposition that there was 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. The correct approach was to weigh up all relevant factors. 56 As his Honour indicated the facts were very different from the Cresvale case. He said: "105 … 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 entitles 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." 57 It is unnecessary on this appeal separately to consider the motion to replace the deed's administrator. That part of Austin J's decision was not challenged. 58 In coming to what his Honour described as the principal and novel issue in the case, that is, whether the DOCA was a valid deed of company arrangement for the purposes of Part 5.3A of the Act, one of the factors Accenture relied upon was the premium distribution proposed in the DOCA which Accenture argued was an improper and impermissible inducement contrary to public policy. Accenture also pointed out that the effect of the DOCA in circumstances where the company was clearly insolvent avoided scrutiny of the directors' conduct or proper investigation of voidable transactions. Austin J was of opinion that the DOCA would operate consistently with the objectives set out in s435A. Austin J said that 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 Accenture would be commenced and prosecuted with greater speed. On this account he accepted the evidence given on behalf of Mr Sherman and the company. Austin J said: "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 s411, 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 s439C) 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." 59 His Honour acknowledged that the Court must take care to ensure that the deed was not unfairly prejudicial in its effect and not proposed for the improper purpose of conferring a collateral advantage. He said: "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." 60 When considering questions of abuse and unfair prejudice and more generally questions of public policy, his Honour regarded it as important to bear in mind the distinction between inducements to individual creditors (especially secret inducements), and inducements given openly, even if differentially to creditors as a whole. He referred to Paton v Campbell Capital Limited (1993) 46 FCR 30 at 37. The Court (Olney, Hill and Cooper JJ) there 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 agree 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 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." 61 Austin J made these comments about Accenture's submissions in light of the observations of the Full Court. "(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 that 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." 62 This brought his Honour to the question of the propriety of the premium distribution. He said: "124 …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 s447A(2)(b) or possibly s445D(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." 63 In grounds 10, 11 and 12 of the appeal Accenture urged that Austin J erred in finding that a premium distribution to creditors, generally or in the circumstances of this case, was not contrary to public policy and that the premium distribution was not an improper inducement for the purposes of Part 5.3A for creditors to vote in favour of the DOCA and in failing to find that there was no proper reason for there to be a premium distribution to creditors. In the added ground 14, Accenture urged that his Honour erred in finding that the DOCA was not proposed by the directors to protect themselves from scrutiny of their own conduct and that there were no facts pointing to impropriety. The directors of the company did not give evidence. It is not clear upon what basis his Honour found that the DOCA had not been proposed by the directors to protect themselves from scrutiny of their own conduct or to shield a creditor who had benefited from a voidable transaction. It was, of course, open to the Judge to say that he was not satisfied by the evidence that the DOCA had been proposed for those purposes. 64 With due respect, Austin J did not derive from the evidence any explanation for the premium other than that it was an inducement to all the creditors except Accenture to support the arrangement. I must accept that Mr Sherman did not perceive any impropriety in this course. He was not cross-examined to suggest he did. The critical finding, just mentioned, was Austin J's satisfaction that the DOCA was not proposed by the directors to protect themselves from scrutiny of their own conduct or to shield a beneficiary of a voidable transaction. There was no evidence to support that conclusion. 65 The premium was a gratuity to which none of the creditors was otherwise entitled in law whether or not the company was wound up. There were difficult questions to be determined at the meeting, in particular the question whether the company should enter into a deed which gave priority to suing Accenture, themselves the largest creditors, over investigating the directors about insolvent trading. To my mind it is indefensible in such a context to offer a gratuity to some creditors, albeit the majority numerically, to be paid if the deed is entered into and the litigation is successful to an extent which allows the gratuity to be paid. In principle, if gratuities can be offered to induce creditors to vote in a particular way at a creditors' meeting, what is the limit on the amount of the gratuity? What is the difference between a gratuity offered to be paid from the resources of the company and a gratuity offered by another creditor from its own resources to achieve a particular result? It is an entirely different thing for a creditor to vote in a particular way because that creditor expects to receive a greater dividend or perhaps full payment of its debt. 66 A practice seeking to achieve results at a creditors' meeting by offering gratuities to other creditors, however publicly, would open up a fertile field for abuse. Significantly the stated object of Part 5.3A to bring about a better return for the company creditors and members could readily be subverted by gratuities paid to achieve other objects. Such a practice is contrary to the policy of the Act and the public interest. 67 In my opinion, the Court should terminate the deed because of the provision for the payment of the premium. I do not think it necessary to consider whether this falls within either s445D(1)(e) or (f). Paragraph (g) enables the Court to terminate the deed for some other reason and, in my opinion, this is an appropriate reason. For all that is known without the premium other creditors may have voted against the company entering into the deed. I do not think it necessary to investigate the ambit of s600B and in light of the orders that I propose it is undesirable that I should do so.

Orders 68 Accenture asked this Court to wind up the company. I do not think the Court should without further argument. Section 435C(1)(b) operated to end the administration of the company on the execution of the deed of company arrangement by both the company and Mr Sherman as the deed's administrator. The termination by the Court of the deed of company arrangement means that there is neither an administrator of the company nor an administrator of a deed of company arrangement. Accordingly control of the company reverts to the directors and shareholders. It is a matter for those persons and the creditors of the company to put submissions to the Court about what further steps, if any, should now be taken in these proceedings. To allow this to be done, the proceedings should be remitted to the Equity Division. 69 I propose the following orders: 1. Appeal allowed; 2. Set aside the orders of Austin J of 19 November 2001 dismissing the originating process and ordering the plaintiffs to pay the defendants' costs; 3. In lieu thereof, order (a) that pursuant to s445D the deed of company arrangement made on 12 April 2001 between the company, Mr Sherman, MJ Mason Holdings Pty Limited and SRM Holdings Pty Limited be terminated forthwith; (b) that the proceedings be remitted to the Equity Division for further consideration. 4. The respondents to pay the appellants' costs of the hearing before Austin J and of this appeal. 70 HODGSON JA: I agree with the orders proposed by Sheller JA and, subject to the following comments, with his reasons. 71 In so far as the appellant sought to invoke the Court's power to terminate the Deed of Company Arrangement under s.445D of the Corporations Act, I agree that the primary judge erred in not finding that the 10% premium offered to creditors was an improper inducement justifying termination. 72 In my opinion, if the respondent was seeking a positive finding below that the Deed was not proposed by the directors in order to protect themselves from scrutiny, he was in a position to have the directors give evidence to that effect; and although in the absence of such evidence an inference that it would not have assisted the respondent's case (cf. Ho v. Powell (2001) 51 NSWLR 572) need not necessarily have been drawn, I do not think that the positive finding made by the primary judge that the directors had no such intention could be justified in the absence of evidence from them. 73 The conceivable justification for the 10% premium could be that it was compensation for the delay which would necessarily ensue before creditors would be paid; but the creditors were not giving up rights to interest which they otherwise would have had, and one justification advanced for the Deed was that there would be less delay in pursuing recovery than in the case of a liquidation. There is nothing improper in shareholders in a company offering compensation to creditors for delay in payment, even where the creditors would not otherwise be entitled to interest, so long as this is done openly, and either is consented to by all creditors or at least does not affect creditors unequally. In the circumstances of this case, the 10% premium did affect creditors unequally, had no substantive justification, and operated as an inducement to some creditors to agree to a result favourable to the directors and unfavourable to another creditor. In my opinion, it was an improper inducement and, particularly having regard to the circumstances of the approval of the Deed, this justifies termination of the Deed. 74 That view makes it unnecessary to rule finally on various other matters debated before us. However, I wish to comment on some of them. 75 Where creditors are asked to vote on the entry into a deed of company arrangement, particularly where this would be to the detriment of one or more creditors, it is important that matters relevant to the decision of creditors be put fairly to the meeting. Where, as in this case, the administrator has legal advice that the company has good grounds for taking legal proceedings against one creditor, there may be a question whether it is fair to advise the meeting of this but withhold the legal advice on the ground of legal professional privilege. It is possible that to do so may amount to the disclosure of the substance of the legal advice, so as to make the advice admissible in evidence pursuant to s.122(2) of the Evidence Act 1995 (see Ampolex Ltd. v. Perpetual Trustee Co. (Canberra) Ltd. (1996) 40 NSWLR 12), and possibly to lose legal professional privilege at general law. 76 It might be contended that such disclosure is under compulsion of law, because the administrator is bound to disclose material matters to the meeting, so that s.122(2)(c) applies. However, the disclosure of material matters must be fair to the creditors, and it may be that an administrator proposing to take proceedings against one creditor has the alternatives of either disclosing the factual circumstances and legal propositions said to give a reasonable cause of action, but not the legal advice, or else disclosing the whole of the legal advice, subject if appropriate to undertakings ensuring that the disclosure is treated as confidential so as to avoid wider loss of privilege. In either case, the creditor facing a disadvantageous vote could then make an informed submission as to the merits of the proposal, which it could not do if all that is disclosed is that there is legal advice that there are good grounds for legal proceedings. 77 Similarly, there may be a question whether, if the administrator has the prospect of litigation funding to finance proceedings against one creditor, the likely terms of that funding should if known be disclosed. I think it would be relevant for creditors to know if the funding is to be by the directors or by an outside party, and to know what if any proportion of any amount recovered may have to go to the funder. 78 In so far as the appellant sought a review pursuant to s.600B of the Corporations Act of the exercise of the casting vote, there is a question as to the role of the Court. However, whether the role extends to reconsideration of matters of commercial judgment, or is limited to intervention if some other serious error is detected, I am inclined to think that the Court should have available to it all the material that was available to the administrator in deciding how to exercise the casting vote. In this case, that included the instructions given by the directors as to the facts alleged to give rise to the cause of action, the legal advice on which the administrator acted, and (if known) the terms of the proposed litigation funding. However, I note that this point was not taken either below or on appeal, and could not have been give effect to in this decision. 79 DAVIES AJA: I have had an opportunity to read the reasons for judgment of Sheller JA with which I agree. I need not set out the facts and legislation to which his Honour has made reference. 80 The law with respect to creditors' schemes of arrangement has a long history, particularly in bankruptcy. Courts have shown reluctance to interfere with such schemes unless an element such as secrecy or lack of good faith has intruded. Nevertheless, courts have emphasised the importance of fair dealing and equality. In Re Jacobs; Ex Parte O'Connor (1984) 1 FCR 1 at 7, Fisher J said: "The essence of a composition between the debtor and his creditors is that the creditors be offered equality of treatment ( Re Milner; Ex parte Milner (1885) 15 QBD 605). As the Master of the Rolls said on p 612: 'In my opinion it is of the very essence of a composition of this nature that all the creditors who come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that, so far as he is concerned, all of them shall come in upon a footing of equality. This equality is implied by law from the very nature of the transaction …' I have added the emphasis. However, neither in this case nor the earlier decision of Dauglish v Tennent (1866-1867) LR 2 QB 49 where, as was said in Ex parte Milner , the grounds of the principle were fully set out, was it suggested that it would be improper for the creditors to agree between themselves for something other than equality of treatment. So long as the creditors act in good faith towards each other and make no secret bargains with any other creditor or the debtor, there can be no complaint about such an agreement. Secrecy and lack of good faith are of the essence of any objection." 81 The principle stated by Brett MR in Re Milner was also expressed by Bowen LJ who, at 616, mentioned that: "….the creditors who take part in the scheme act upon the faith and understanding that they are all coming in upon terms of equality …." 82 In the last sentence of the remarks of Fisher J in Re Jacobs, his Honour commented that secrecy and lack of good faith are of the essence of any objection. However, I consider that the underlying principle of equality and fairness is the crucial point and that factors such as secrecy and lack of good faith are indicators that the principle has been breached. 83 That point was made in Paton v Campbell Capital Limited (1993) 46 FCR 30 where Olney, Hill and Cooper JJ said at 37: "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 '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." 84 Moreover, modern legislative provisions such as s 445D(1)(f) of the Corporations Act, which uses the expression "oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more creditors", specifically direct attention to the "footing of equality", the need for which was recognised in Re Milner. 85 In Khoury v Zambeena Pty Ltd [1999] NSWCA 402, Beazley JA and I held that a scheme of arrangement was improper, although I declined to interfere due to the long delay which had occurred in bringing proceedings. In that case, a group of creditors had obtained a judgment from Giles J for the payment of monies. The scheme of arrangement differentiated between "Excluded Creditors", (who included "Preserved Creditors", secured creditors and employees) and other creditors. The debts of "Preserved Creditors", who included the persons having control of the company and others associated with them, were to be deferred during the three years of the scheme but were to reactivate on the termination of the scheme. The remaining creditors were to receive a very modest distribution over the three years of the scheme but their debts were otherwise to be extinguished. 86 Although there was a degree of secrecy about the scheme, due to lack of notice, it was the element of unfairness and discrimination which influenced Beazley JA and myself. 87 In my reasons for judgment I said, inter alia: "105. Part 5.3A ought not to be used as an instrument of oppression against one or more creditors. An arrangement under Part 5.3A may discriminate between creditors or classes of creditors; but nevertheless it ought to deal fairly with the interests of creditors of an insolvent company. This is clear not only from provisions such as s 445D(1)(f) and s 600A but also from the general operation of Part 5.3A which provides that a deed of arrangement, drafted having regard to the objects propounded by s 435A, will be approved by the creditors. If approved, the scheme will be a creditors' scheme. To be valid, a deed of arrangement must be fairly reached and in the interests of creditors. 112. In my opinion, the deed of arrangement was not designed to achieve a legitimate end but was designed to extinguish the debts of those who were judgment creditors under the orders made by Giles J. The deed was oppressive to and unfairly discriminatory against Capital and the appellants, of whom at least Harry Sarkis, his wife and his parents were creditors in fact, the others being creditors as defined. Moreover, the deed prejudiced the interests of Capital and Harry Sarkis, who voted against the resolution, to an extent that was unreasonable, having regard to the matters to be taken into account for the purposes of s 600A." 88 The objects of Part 5.3A are expressed in s 435A, which provides: "The object of this Part 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." 89 In the present case, the company's business was finished. It was not proposed that the company be reactivated. Apart from the 10% inducement, which Sheller JA has discussed, it was not shown that a better return for the company's creditors and members would result from the scheme rather than an immediate winding up of the company. Indeed, a winding up would have maximized the company's opportunities to recover funds. 90 What was required was a winding up of company's affairs. The assets of the company were few and these could be dealt with equally under a scheme of arrangement or in a liquidation. Although a liquidation might delay matters a short time, no element of urgency was involved. 91 There were three possible sources of funds: the bringing of proceedings against the appellants, the investigation of insolvent trading and the investigation of the circumstances in which the charge in favour of the secured creditor, the ANZ Bank had been registered. All these matters could have been pursued in a liquidation. Examination of the directors for insolvent trading or otherwise could not be undertaken under a scheme of arrangement. 92 Examination of directors for insolvent trading is not a matter to be lightly overlooked. In Paton v Campbell Capital Ltd at 32, the Court cited the following remarks of Sheppard J in NZI Capital Corporation v Lancaster (unreported, Federal Court, 3 September 1991): "… in the absence of complete agreement by creditors, and the petitioning creditor which is owed a substantial sum does not agree, there is something which, if not shocking, is at least something which takes one aback about a suggestion that somebody who owes almost 5.5 million dollars can offer $15,000 and walk away without there being any appropriate investigation of his affairs. An examination of the relevant provisions of Part X show that if a deed of composition is entered into neither the provisions of s 69 of the Act which provides for the public examination of bankrupts, nor the provisions of s 81 thereof, which gives trustees in bankruptcy wide powers to examine other persons and to compel the production of documents, will apply." 93 A liquidation would have given greater scope for the achievement of the object of Part 5.3A that the interests of the creditors be maximized. It was proposed that, under the scheme of arrangement, the only proceedings taken would be proceedings against the appellants. 94 The scheme of arrangement was discriminatory against the appellants. They received no significant benefit from it. Any significant moneys to be recovered were to come from them. Moreover, their prospects of challenging the directors for insolvent trading and of challenging the registration of the charge were frustrated. 95 The position therefore was that the scheme of arrangement was discriminatory against and oppressive to the appellants. To make things worse from the appellants' point of view, the debts of the creditors who voted in favour of the scheme were less in total than the debt for which the appellants were admitted to vote. The scheme was not a scheme which dealt with all creditors on a footing of equality and in which the view of the majority, in number and quantum, prevailed. The case is similar to Khoury for, in that case, the creditors who voted in favour of the scheme were "Excluded Creditors". Their debts were not extinguished by the scheme. 96 I have discussed these points in order to emphasize the impropriety of the provision that creditors be paid 110% of their debts if funds became available from proceedings brought against the appellants. This provision did not treat the appellants equally with other creditors. If the appellants are held liable to pay the amount mentioned by the Administrator, any moneys due by the company to them will be set-off and extinguished. The term was an improper inducement or "bribe" to creditors to vote in favour of the scheme, which, if adopted, would preclude examination of the directors for insolvent trading and like matters. Having no commercial rationale, the 10% inducement did not fall within that category of cases where it was proper for the creditors to agree on something other than equality of treatment. 97 In my opinion, as the scheme of arrangement lacked the inherent character of fairness and equality, as a liquidation could achieve for creditors full payment of their debts if funds be recovered and as a liquidation would widen the scope for recovery of funds, the Administrator ought not to have exercised his casting vote in favour of the scheme of arrangement. Other cases in which the exercise of a casting vote has been reviewed are Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 and Re Coalleen Pty Ltd [2000] 1 Qd R 245. In that latter case, Moynihan J took into account the fact that the scheme did not advance the objects of Part 5.3A in any real, practical way. If the scheme did so in the present case, the manner in which that was to be achieved was not explained by the Administrator. In my opinion, the promise of paying 110% of the debts was not a benefit which s 435A has in mind. 98 An appropriate order is that the scheme be terminated under s 445D. In this event, it is not useful to make an order of review with respect to the exercise of the casting vote. 99 I agree with the orders proposed by Sheller JA.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40991/01 ED 2077/01

SHELLER JA HODGSON JA DAVIES AJA

Tuesday, 3 September 2002 YOUNG (As representative for the Australian Partnership known as ACCENTURE) v SHERMAN & ANOR [NO 2] Judgment 1 THE COURT: The Court gave judgment in this appeal on 28 August 2002. In para 68 of his judgment, with which on this point Hodgson JA and Davies AJA agreed, Sheller JA said: "The termination by the Court of the deed of company arrangement means that there is neither an administrator of the company nor an administrator of a deed of company arrangement. Accordingly control of the company reverts to the directors and shareholders." 2 Order 3 that Sheller JA proposed and with which the other members of the Court agreed was in part that in lieu of the orders of Austin J of 19 November 2001 the proceedings be remitted to the Equity Division for further consideration. 3 After judgment had been handed down counsel for the respondents brought to our attention Division 12 in Part 5.3A of the Corporations Act 2001 (Cth) which is headed "Transition to creditors' voluntary winding up". Section 446A provides for an administrator to become a liquidator in certain cases. Section 446B provides: "446B Regulations may provide for transition in other cases (1) The regulations may prescribe cases where: (a) a company under administration; or (b) a company that has executed a deed of company arrangement (even if the deed has terminated); is taken to have passed a special resolution under section 491 that the company be wound up voluntarily. (2) The regulations may provide for Part 5.5 to apply with prescribed modifications in cases prescribed for the purposes of subsection (1). (3) Without limiting subsection (2), the regulations may provide, in relation to such cases, for matters of a kind provided for by any of subsections 446A(2) to (7), inclusive. (4) Regulations in force for the purposes of this section have effect accordingly." 4 Regulation 5.3A.07 of the Corporations Regulations 2001 (Cth) provides, so far as presently relevant, as follows: "(1) For subsection 446B(1) of the Act, a company that has executed a deed of company arrangement is taken to have passed a special resolution under section 491 that the company be wound up voluntarily: (a) if the Court at a particular time makes an order under section 445D of the Act terminating the deed of company arrangement; … (2) The company is taken to have passed the special resolution: (a) at the time mentioned to in paragraph (1)(a) … and (b) without a declaration having been made and lodged under section 494 of the Act. (3) Section 497 of the Act is taken to have been complied with in relation to the winding up. (4) For subsection 499(1) of the Act: (a) the company is taken to have nominated the administrator of the deed of company arrangement to be liquidator for the purposes of the winding up; and (b) the creditors are taken not to have nominated anyone. (5) The liquidator must: (a) within 7 days after the day on which the company is taken to have passed the resolution, lodge a written notice stating that the company is taken because of this regulation to have passed such a resolution and specifying that day; and (b) cause a notice of that kind to be published, within 21 days after that day: (i) in a national newspaper; or (ii) in each State or Territory in which the company has its registered office or carries on business, in a daily newspaper that circulates generally in that jurisdiction. (6) Section 482 of the Act applies in relation to the winding up as if it were a winding up in insolvency or by the Court."

The orders made by the Court on 28 August 2002 have not been taken out. 5 Under the slip rule para 68 of the judgment of Sheller JA is amended by omitting the sentences: "Accordingly control of the company reverts to the directors and shareholders. It is a matter for those persons and the creditors of the company to put submissions to the Court about what further steps, if any, should now be taken in these proceedings. To allow this to be done, the proceedings should be remitted to the Equity Division."

and omitting order 3(b) and substituting in their place: "Accordingly the company is taken to have passed a special resolution under s491 of the Act that the company be wound up voluntarily; see s446B(1) of the Act and Regulation 5.3A.07 of the Corporations Regulations 2001. It will be a matter for the parties and the creditors of the company to put submissions to the Court about what further steps, if any, should now be taken in these proceedings. To allow this to be done, and with the consent of the parties, the proceedings will be stood over for further mention before Sheller JA at 9.30am on 17 October 2002."

and the following order 3(b): "(b) That the proceedings be stood over for further mention before Sheller JA at 9.30am on 17 October 2002 with liberty to any party to apply to Sheller JA on 48 hours notice to the other parties." 6 The Court is grateful to counsel for bringing this error to the Court's attention. 7 The orders of the Court will be: ORDERS 1. Appeal allowed; 2. Set aside the orders of Austin J of 19 November 2001 dismissing the originating process and ordering the plaintiffs to pay the defendants' costs; 3. In lieu thereof, order (a) that pursuant to s445D the deed of company arrangement made on 12 April 2001 between the company, Mr Sherman, MJ Mason Holdings Pty Limited and SRM Holdings Pty Limited be terminated forthwith; (b) that the proceedings be stood over for further mention before Sheller JA at 9.30am on 17 October 2002 with liberty to any party to apply to Sheller JA on 48 hours notice to the other parties. 4. The respondents to pay the appellants' costs of the hearing before Austin J and of this appeal. **********

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