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.