Avram Investments P/L

[1992] FCA 738

Re: AVRAM INVESTMENTS PTY LTD
No. V G3235 of 1992
FED No. 738
Corporations
(1992) 10 ACLC 1583, (1992) 8 ACSR 574

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Heerey J.(1)

CATCHWORDS

Corporations - scheme of arrangement - application for order directing meeting - winding up order made - stay - circumstances in which court will make order - approval of statutory majority of creditors - public policy considerations - insolvency of company - future plans of company - financial benefits of scheme compared to winding up - commercial morality.

Corporations Law: Ss.411(1) and (3)(b) and 412(1)(a) Corporations Regulations: Schedule 8 Part 2

Re Data Homes Pty Ltd (in liquidation) (1972) 2 NSWLR 22

Re Egnia Pty Ltd (in liquidation) (1991) 5 ASCR 781

HEARING

MELBOURNE

#DATE 22:9:1992

Counsel for the applicant Mr D.H. Denton
company:

Solicitors for the applicant Henty Jepson and Kelly
company:

Counsel for the Australian Mr M. Steward
Securities Commission

Solicitor for the Australian Regional General Counsel
Securities Commission: For Victoria

JUDGE1

This is an application by Avram Investments Pty Ltd (the company) under s.411(1) of the Corporations Law for an order directing a meeting to be held to consider a scheme of arrangement between the company and its creditors.

1. The company was a substantial shareholder in Interwest Limited, a property developer, which collapsed in late 1989 with a net deficiency of $133 million and was ordered to be wound up by an order of the Supreme Court of Victoria on 25 May 1990. The company has not traded since October 1989. Its only activity since then has been litigation against Tricontinental Corporation Limited in the Supreme Court of Victoria. These proceedings were settled on 24 December 1991. One of the terms of the settlement was that a debt owed by the company to Tricontinental was assigned by Tricontinental to Mr Peter Avram and Mr Warwick Kerridge. As a consequence those two gentlemen became the largest creditors of the company.

2. In August 1991 the Deputy Commissioner of Taxation commenced winding up proceedings against the company in the Supreme Court of Victoria. These proceedings were adjourned by consent pending the outcome of the Tricontinental litigation. On 14 August 1992 the Deputy Commissioner applied to bring on the winding up application. In the meantime the company had on 10 August brought this application in the Federal Court.

3. On 27 August Senior Master Mahony made a winding up order. A stay was granted pending appeal. The hearing of the appeal commenced on 10 September before Harper J and was adjourned to 16 October to enable the present application to be heard. The stay of the winding up order was continued.

4. The company's paid up capital is $3,466,841. All this has been lost. It has a deficit of liabilities over assets of $119.7 million. Creditors are as follows:
   

$m Australian Taxation Office 2.2 Peter Avram and Warwick Kerridge 88.0 BCC Australia Limited (in liquidation) 10.2 ANZ Bank 3.2 First National Finance Limited 2.5 P and T Avram Pty Limited 12.1 Wyndham Street Trust 1.4

1. There are two other minor creditors with debts of $700 and $500 respectively. Some creditors hold guarantees but otherwise all debts are unsecured. The only assets are a debt from the estate of J and K Avram, $4000, and a loan of $316.

2. The essential elements of the proposed scheme are as follows. The creditors will receive the existing assets of $4,316. Mr Peter Avram will contribute a further $10,000 to the assets of the company. Mr Avram, Mr Kerridge, P and T Avram Pty Limited and the trustee of the Wyndham Street Trust, who together represent 84.85 per cent of the company's debts, will "gift to the administrator (of the scheme) the distribution received by them." The company will be released from all debts.

3. The purposes of the scheme are described in the draft explanatory statement as follows:
   

"(a) To preserve capital and revenue losses; and

(b) To enable the company to retain paid up capital with a view to assisting in the reconstruction of an associated public company;

(c) To enable the company to take advantage of the depressed property market and continue to trade."

1. I was told that the "associated public company" referred to is Interwest. The leading figure in Interwest was Mr John Avram. Mr Peter Avram is his father. If the scheme is implemented creditors will received $789 per million dollars of debt as opposed to $119 on a winding up.

2. It is common ground that ordinarily the court will not order meetings unless the scheme is of such a nature that if it were approved by the statutory majority the court would be likely to approve the scheme on an unopposed application: Re Data Homes Pty Ltd (in liquidation) (1972) 2 NSWLR 22.

3. It is also clear that the court is able to take into account matters of public interest in the exercise of the discretion including, but not limiting to, considerations of commercial morality. The opinion of the statutory majority of creditors is not determinative. Were this not the case there would seem to be little point in Parliament conferring on the court a discretion to make an order for meetings.

4. Counsel for the Australian Securities Commission (ASC) raised a number of arguments against the order sought. It was said there is no capital to be preserved. It has all been lost. It is against public policy to allow hopelessly insolvent companies to carry on business. There is no evidence of any proposal to raise equity or loan capital for future trading. The balance sheet would show $3.5 million issued capital which would "deceive" future creditors.

5. Further it was said that there were no details disclosed as to the future plans for the company. Since the company was not the largest shareholder in Interwest, such plans as there were must be "part of a much larger scheme". The company's interest in Interwest was wrongly valued in the draft explanatory statement as nil since the shell of the corporate structure of a listed company must have some value. Finally it was pointed out that the amounts indicated as being owed to various creditors would appear to be free of interest whereas in a winding up creditors would be able to prove for interest accrued to the date of winding up.

6. I do not find these arguments persuasive. If the scheme is implemented the company will be freed of all its debts. Thus the court is not being asked to approve a scheme which will enable a hopelessly insolvent company, or even a slightly insolvent company, to commence trading. I respectfully adopt in this regard the approach of Anderson J in Re Egnia Pty Ltd (in liquidation) (1991) 5 ASCR 781 at 784. It may well be appropriate, as counsel for the company conceded, that an application be made to approve a reduction of capital. However, the logical sequence seems to be to ascertain first whether the scheme is to proceed. If it does not, no reduction would be necessary.

7. In the meantime I think it unlikely that a potential creditor or investor making the most rudimentary investigations of the company will be under any illusion that its issued capital represents realisable assets of comparable value.

8. Nor do I think the lack of detail as to the company's future plans tells against making the order as sought. There is no evidence, nor did counsel for the ASC contend, that the company or its directors would, if the scheme is finally approved, commit any breach of the law in its trading operations. The Corporations Law now requires certain information to be given creditors asked to consider a scheme of arrangements; see Corporations Law ss.411(3)(b) and 412(1)(a) and schedule 8 part 2 of the Regulations. The information so prescribed does not include details as to the future plans for the company's trading should the scheme be approved. The reason is no doubt that a creditor being asked to approve a scheme of arrangement is in a different position from an investor considering a prospectus or a Part A statement. Usually, as here, the choice will be between the scheme involving a compounding of debts or a winding up. Certainly the creditor should be fully informed as to facts relevant to that choice, and the Law so provides. But the creditor is not being asked to risk funds on a future venture.

9. As to matters said to affect the comparison between the financial benefits of the scheme as against a winding up, namely the value of the interest in Interwest and the question of interest, while stressing again the primacy of the court's discretion these particular matters are I think questions of detail on which the commercial judgment of the creditors seems to be the best guide.

10. On the more general questions of commercial morality and public policy, the present exercise of course only makes sense as a means of making use of large tax losses which the company has accumulated. There are detailed provisions in the taxation statutes which regulate the circumstances in which a company can deduct past losses so as to reduce the tax which would otherwise be payable. If the scheme is approved and if the company makes profits from future trading and if it meets the terms of that legislation, then it will be rewarded with a tax benefit. There is nothing new about this. I do not see that any question of commercial morality or public policy is involved. If there is, then it is up to Parliament to enforce a different view by amendment to the taxation legislation.

11. I will hear counsel as to the appropriate form of order. I do not think it is appropriate to order a separate meeting of the creditors other than those who will be gifting back their distribution.