Bank of New Zealand v Bangaroo Investments Pty Ltd

[1994] FCA 635

63s 9

JUDGMENT No. ..... ,.-...J -.k...

NOT SUITABLE FOR D I S T R I B U U

COURT OF AUSTRALIq	)
1

1 NG 3420 of 1993

)

DIVISION 1

BETWEEN:  W K OF NEW ZEALANQ
Applicant

AND :  BANGAROO I N V E m N T S PTY LIMITED

m n i s t r a t o r ADDointed).

First Respondent

AND :  JCEVIN RICHARD

Second Respondent

RECEIVED

13 SEP 1994 AND : y Y

FEDERAL COURT OF

AUSTRALIA EDWARDS . TROY MAXWELL EDWARDS,

PRlNWAL ARD CFORGE -S. CORTEB

ReOlaTRY ENTERPRISES PTY LIMITED

Third Respondents

CORAM: Burchett J.
PLACE: Sydney

DATE : 9 September 1994

mm:	Settlement and entry of orders is dealt with in Order
36 of the Federal Court Rules.

QRDERS OF THE COURT

THE the costs of the Administrator of

Bangaroo Investments Pty Limited (Administrator Appointed) be paid out of the assets of the company, and that otherwise there be no order as to the costs of any party.

FOR DISTRIBUTION

COURT OF AUSTRALIA )

)	NG 3420 of 1993
)

- )

BETWEEN: -

Applicant

AND I	0 INVESTMENTS PTY LIMITED
Etrator A~~ointedL

First Respondent

AND I & W I N RICHARD SHIFlLAW

Second Respondent

AND :	PAMELA JOY EDWARDS. BRETT M U C O W
DWARDS. TROY MAXWELL EDWARDS, UONARD GEORGE JONES. CORTEZ EPITERWLSES PTY LIMITED

Third Respondents

CORAM: Burchett J.

PLACE: Sydney

DATE I 9 September 1994

PEASONS FOR JUDGMENT

On 21 January 1994, I dismissed an application for the termination of a deed of company arrangement, reserved my reasona, and directed the parties to file written submissions on costa. I now publish my reaaons and my decision on the issue of coats.

Bangaroo Investments Pty Limited (administrator appointed)

("Bangaroo") is the family company of Malcolm Leslie Edwards, who was a director from some time in 1975 until 25 June 1993. Mr Edwards's shares are now held by his bankrupt estate, which is also a creditor. Mr Edwards's wife Pamela Edwards and sons Brett and Troy Edwards are all shareholders and creditors. I shall refer to them as "the Edwarde family". Other creditors of Bangaroo are, relevantly, the applicant ("BNZ") and the State Bank of New South Wales, a contributory and a supporting creditor in respect of this application. The other main protagonist is a Mr Jones, who for a period in 1993 was a director of Bangaroo. He is also a director of Essington Pty Limited, a company the majority of the shares in which are owned by Bangaroo, and which ie allegedly in debt to Bangaroo in the sum of $900,000.

The debt owed by Bangaroo to BNZ can be traced to a judgment in the sum of $400,000 obtained by consent on 4 September 1992. Thia led to BNZ's application for the winding up of Bangaroo, filed on 22 July 1993 pursuant to S. 4591 of the ~ o r ~ o r a t i o ~

LW. Since then, a series of adjournments has occurred, mainly	as a result of the intervention of Mr Jones, who has promised
that a loan of $400,000 (subsequently raised to $500,000) will be extended to Bangaroo "in order to resolve any claims the Applicant has against Bangaroo". Various representations made by him have held out the prospect that receipt of the money was just around the corner, so to speak, and at the first return of
this application before me, on 6 January 1994, a cheque for the amount was proffered in Court. However, the cheque was not honoured, and the money remains outstanding.
A major impediment to the progress of the winding up proceedings was the appointment of an administrator, Mr Shirlaw, by the directors of Bangaroo including Mr Jones, made on 12 October 1993 to have effect from 3 pm on 14 October 1993. This development led to the granting of adjournments in order to allow the relevant statutory meetings to take place. In particular, adjournments were sought to allow consideration of a proposal for a deed of company arrangement contained in the administrator's report filed on 29 October 1993. A draft of a deed was approved by a majority of creditors at a meeting on 22 November 1993. It ie the deed thereafter executed which is now sought to be terminated.
A copy of the deed is reproduced in an annexure to the affidavit of Mr Shirlaw of 20 January 1994. It is expressed to be made between Bangaroo ("the Company"), Mr Shirlaw, the Edwards
Contributor", a company controlled by Mr Jones which was to family ("the Shareholders"), Cortez Enterprises Pty Ltd ("the
provide the loan of $500,000), and Mr Jones ("the Guarantor"). Its recitals are as follows:

"WHEREAS :

A.	The Company is insolvent.
B.	Shirlaw was appointed as administrator of the Company on 14 October 1993 and pursuant to a meeting convened under s 439A of the Corporations Law and held on 22 November 1993 the Company's creditors resolved that the Company execute a Deed of Company Arrangement on the terns and conditions ss set out in this deed.
C.	Under this Deed all assets of the company are to be sold in order to repay in full all amounts owed to the secured and unsecured creditors, except those unsecured creditors who have agreed that their loans shall be subordinated.
D.	The Contributor has agreed to lend to the Company the sum of $500,000 on or before 17 January 1994, such loan to be subordinated to all debts owed by the company as at 14 October 1993 other than the Subordinated Loans.
E.	The Guarantor has agreed to guarantee payment of the Contribution by the Contributor on or before 17 January 1994.
F.	Pursuant to Section 444B of the Corporations Law the Company has agreed to execute this Deed within 21 days of the meeting of creditors and Shirlaw as administrator of the Deed has agreed to execute this Deed before, or as soon as practicable after the Company executes it. The Shareholders, the Contributor and the Guarantor have also agreed to be specifically bound by this
Deed. "

Clause 4.2 provided for Mr Jones to guarantee payment of the $500,000 by Cortez Enterprises Pty Ltd "personally and unconditionally", by a guarantee in a form set out in a schedule

current market value of at least $500,000 to support this	to the deed, and to "provide security over property with a
guarantee". This security was to be enforceable in the event that the $500,000 payment was "not received by 17 January 1994." By cl. 13, the guarantee and the security were to be executed on or before 13 December 1993.

An important provision was cl. 5.1, which provided2

"The Company's Carberry Park property, livestock and other assets at Tugalong Road, Canyonleigh will be immediately placed by the Administrator with a reputable real estate agency and auctioneer for sale by auction at first opportunity, the net proceeds of any such sale are to be applied first in repayment of all mortgages to which the properties may be subject, secondly in repayment of the costs of the sale including agent's commission, with any surplus to be deposited into the Account."

(The account referred to was "an account to be opened with a major Australian trading bank in the name of the Company and controlled by the Administrator".)

Clauee 6.1 is also an important clause. It provided:

"The Shareholders hereby agree to subordinate all of the Subordinated Loans, being all of their shareholders' loans as at 14 October 1993 and rank behind the Unsecured Creditors in respect of any dietributions made by the Administrator under this Deed or in any distribution in any Liquidation of the Company and to rank behind the Contributor in respect to any repayment of the Contribution."

Clause 6.3 provided:

"The provisions of Clause 6 shall continue to apply

notwithstanding that this Deed may be terminated under
any of the provisions of Clauses 9 and 10."

Clauee 7 provided a "Moratorium Period" of six months from the date of execution of the deed, during which

" 7 . 1	No creditor may take any action in respect of the debt owed to it by the Company including making an application for an order to wind up the Company unless this Deed is first terminated in
accordance with section 445C of the Corporations Law.

Clauses 9 and 10 provided:

"9.1 The Deed shall automatically terminate if:

9.1.1 The Contribution has not been paid by the Contributor or the Guarantor by 17 January - -

. .

1994
z o c e e a for recovery of the $500,000
aaainst Jones in respect of the su~~ortina - - -

security pv Mondav. 51 Januarv 1994, or

10.1	Subject to Clause 9 above, the Deed will terminate on the first to occur of:
10.1.1	Repayment in full of all Unsecured Creditors claims, including principal and interest accrued to the date of payment; or
10.1.2	Expiry of the Moratorium Period."

(Emphasis added.)

As I have noted, Mr Jones has not procured payment of the
$500,000. Nor has he provided security pursuant to cl. 4.2, and

it appears the only evidence of his execution of the guarantee,

Shirlaw from Mr Jones on 13 December 1993, purporting to include	as required by cl. 4.2, is a facsimile message received by Mr
the execution page of the guarantee "completed in accordance with my executed deed".
I should point out that counsel for BNZ, after some deliberation, chose not to contest the validity of the deed, although some issues pertaining to this question were raised in the course of argument, particularly in regard to some apparently
unilateral alterations made by Mr Jones to the copy signed by all parties. According to Mr Shirlaw, this copy was executed by Mr Jones and the Edwards family on 6 December, by himself on 7 December, and by Bangaroo on 13 December. Although there was doubt as to how many counterparts existed, and whether they had been altered in the same way, the Edwards family have declared themselves to be bound by the alterations in the version signed by all, notwithstanding doubts whether the alterations were approved by the meeting of creditors.
Counsel for the applicant seeks an order for termination under the following provisions of S. 445D(1) of the CorDoratione
m:

"The Court may make an order terminating a deed of

company arrangement if satisfied that:

(d)	there has been a material contravention of the deed by a person bound by the deed; or
(e)	effect cannot be given to the deed without
injustice or undue delay; or
(g)	the deed should be terminated for some other
reason. "

In support of the ground under para. (d), counsel for BNZ submitted I should find "material contraventions" in the failure of Mr Jones to pay the $500,000, and to provide proper security by the times specified in the deed. I accept that these failures are indeed capable of being regarded as "material contraventions"

of the deed on Mr Jones's part. However, S. 445D does not, of course, require the Court to make an order terminating the deed upon the ground being established, but gives the Court a dimcretion to make such an order where in all the circumstances

it is right to do so. Similarly, in relation to para. (e) , it

was submitted that "delay" would occur if Mr Jones were to be sued for the $500,000, and "injustice" if money were to be expended upon such an action. In my opinion, however, there are, notwithstanding these matters, factors which weigh strongly against the exercise of my discretion in favour of the applicant.

One consideration is that an order for termination would leave the parties exposed to the risk of significant litigation concerning the subordination of the rights of the Edwards family as creditors pursuant to cl. 6.1. Clause 6.3, while continuing the obligations of the shareholders in the event of termination under cl. 9 or cl. 10, is silent about the event of termination by the Court. There is a question whether the "expressio unius"

principle applies. Section 445H of the -orations	Law
provides :

"The termination or avoidance, in whole or in part, of a deed of company arrangement does not affect the

previous operation of the deed." (Emphasis added.)

It is apparent there could be an argument whether the subordination of the rights of the Edwards family is an effect of "the previous operation of the deed", or is to be seen (particularly having regard to cl. 6.3) as a continuing covenant,

that might be released by any order terminating the deed. Finally, there is the question of how the term "any liquidation" in cl. 6.1 should be construed.

Whateverthe correct answer to these problems, atemination would raise a distinct possibility of unpredictable consequences in the arena of litigation. If the subordination of rights remained ultimately effective, despite the loss by the termination of the benefits the pursuit of which occasioned it, that would be a severe blow for the Edwards family. On the other hand, the avoidance of the subordination of rights would be a prejudice to the creditors generally.

The matter alleged to fall under S. 445D(l) (g) was a "secret agreement" expressed by counsel for BNZ as follows:

"The Deed approved by the creditors [at] the meeting did not encompass an arrangement whereby the $500,000 to be introduced by a corporate vehicle of Mr Jonee and to be guaranteed by Mr Jones himself would be used to partly discharge the debt owing by Essington Pty Ltd to Bangaroo Investments in return for certain

transferred to the beneficial ownership of Mr Jones." interests in Essington Pty Ltd or its assets to be

According to Mr Shirlaw, in cross-examination on 21 January 1994, the $500,000 was actually to be applied to reduce the debt to Bangaroo of Essington Pty Limited, of which Mr Jones was a director and Bangaroo held a majority of the shares, although he conceded that this may not have been the understanding of the creditors when approving the deed. He also conceded that this point might eventually be litigated, now it had come to be appreciated, after the execution of the deed, that the creditors might not be paid in full.

There was some evidence before me that this arrangement was, at any rate, one of a number of ideas floated before the creditors prior to their approval. Counsel for Bangaroo maintained that the matter was not secret; and he also argued that in any case it was not binding as the deed did not reflect it. Further, he submitted the possibility that Mr Jones might be a "man of straw" was contemplated at the meeting, as reflected in the adoption of cl. 4.2, providing for enforcement of the eecurity if the $500,000 should not be provided by 17 January 1994. It is possible Mr Jones could still be sued as a guarantor, on the basis of his statement in the facsimile to Mr Shirlaw that he had executed the personal guarantee "in accordance with my obligations under the deed".

Mr Shirlaw advised the Court on 21 January 1994 that it is his intention to sue Mr Jones . If the $500,000 is ever recovered

there may be some conflict over whether it is in reduction of or	in addition to the money owed by Essington Pty Limited. But
whatever the answer to that question, the amount claimed against Mr Jones, if recovered, would constitute a substantial benefit to the creditors as compared with the possibility of a recovery from Eesington Pty Limited.
Mr Shirlaw also made it clear that he sees, as the immediate goal of the administration, the realisation of all assets pursuant to the terms of the deed. In his opinion, the sale of Bangarools biggest asset, "Carberry Park", soon to be auctioned in accordance with cl. 5.1 of the deed, would be likely to be prejudiced if it were to become, and to be seen as, a liquidation sale rather than one carried out under a voluntary administration. Mr Shirlaw, whose expertise is not in doubt, is in a better position than others before the Court to make such an assessment. Counsel for BNZ was unable to point to any benefits of installing a liquidator at the present juncture which could outweigh this consideration.
Accordingly, I was not satisfied at the hearing that I should exercise my discretion so as to terminate the deed of arrangement, nor that I, as counsel for the applicant alternatively submitted, should make an order pursuant to S. 4471, ending the administration of Mr Shirlaw.
It is now necessary to consider the question of costs. The respondents seek an order for their costs against the applicant.
However, it will be apparent from the foregoing that many factors, not all adverse to the applicant, were involved in my
decision. Ultimately, the applicant failed on an issue of discretion. In my opinion, the Administrator should have his costs out of the company's assets, and otherwise there should be no order as to costs.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Burchett.

Asmociatez f+%o&&&

Date: 9 September 1994

Counsel for the Applicant:	Mr D. Robinson
Solicitors for the Applicant:	Messrs Freehill, Hollingdale 6 Page

Counsel for the First Respondent: Mr M. Oakes

'Solicitors for the First	Messrs-Norton Smith &
Respondent:	Co.
Counsel for Pamela Joy Edwards,	Mr J. Chippindall
Brett Malcolm Edwards and Troy Maxwell Edwards (three of the Third Respondents):
Solicitors for Pamela Joy	Messrs Price Brent
Edwards, Brett Malcolm Edwards and Troy Maxwell Edwards (three of the Third Respondents):
Solicitor for Leonard George	MS R. Ibrahim of
Jones and Cortez Enterprises	Messrs Solomon
Pty Limited (two of the Third	Partners
Respondents):
Solicitor for Supporting	Mr R. Fernandez of
Creditor (State Bank of New	State Bank of New
South Wales):	South Wales
Counsel for estate of Malcolm	Mr S.D. Epstein
Edwards I
Solicitors for the estate of	Messrs Holmes & Bevan
Malcolm Edwards:
Date of hearing:	21 January 1994