BGC Contracting Pty Ltd v Kimberly Gold Pty Ltd (Administrators Appointed)
[2000] WASC 264
•10 NOVEMBER 2000
BGC CONTRACTING PTY LTD -v- KIMBERLY GOLD PTY LTD (ADMINISTRATORS APPOINTED) [2000] WASC 264
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2000] WASC 264 | |
| 10/11/2000 | |||
| Case No: | COR:29/2000 | 20 & 21 JULY 2000 | |
| Coram: | MASTER BREDMEYER | 4/08/00 | |
| 30 | Judgment Part: | 1 of 1 | |
| Result: | Applications granted | ||
| PDF Version |
| Parties: | BGC CONTRACTING PTY LTD (ACN 008 766 407) KIMBERLY GOLD PTY LTD (ADMINISTRATORS APPOINTED) |
Catchwords: | Corporations Application to set aside deed of company arrangement as unfairly prejudicial to one of the creditors Application to wind up company |
Legislation: | Corporations Law, s 60, s 95A, s 435A, s 439A, s 445D, s 553C, s 556, s 564, s 588G, s 588H, s 588M, s 588R, s 588V, s 588W, s 600A Trade Practices Act, s 51, s 52 |
Case References: | Hungerford v Walker (1989) 171 CLR 12 Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 14 ACLC 1737 Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 832 Re ACN OO753700 (1997) 25 ACSR 560 RHD Power Services (1993) ACSR 261 ACP Syme Magazines Pty Ltd v Tri Automotive Components Pty Ltd (1997) 144 ALR 517 Bank of Australasia v Hall (1907) 4 CLR 1514 Barclay's Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Bell Group Finance (Pty) Ltd (In Liq) v Bell Group (UK) Holdings Ltd [1996] 1 BCLC 304 Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64 Commonwealth v Verayen (1990) 170 CLR 394 Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 Delaine Pty Ltd v Quarto Publishing plc (1990) 8 ACLC 1026 Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1997) 26 ACSR 629 Deputy Commissioner of Taxation v Comcorp Australia Limited (1995) 13 ACLC 1671 Domino Hire Pty Ltd v Pioneer Park Pty Ltd (In Liq) (2000) 18 ACLC 13 Downey v Aira Pty Ltd (1996) 14 ACLC 1068 Employers Mutual Indemnity (Workers Compensation) Ltd v JST Transport Services Pty Ltd (1997) 23 ACSR 197 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885 Hamilton v National Australia Bank Ltd (1996) 14 ACLC 1202 Jelin Pty Ltd v Johnson (1987) 5 ACLC 463 Julzar Pty Ltd v Rodgers [1999] NSW SC 1999 Khoury v Rosemist Holdings Pty Ltd (1999) 17 ACLC 1013 Levi v Guerlini (1997) 24 ACSR 159 Ogilvie v Adams [1981] VR 1041 Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLC 1293 Re Bond Corporation Holdings Limited (1990) 1 WAR 465 Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 Re Tweed Garages Ltd [1962] Ch 406 Re Universal Management Limited (In Liq) (1971) 1 NZCLC 950026 Rees v Bank of New South Wales (1964) 111 CLR 210 Refrigerated Express Lines v The Australian Meat & Livestock Corporation (1980) 44 FLR 455 Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150 Sandell v Porter (1966) 115 CLR 666 Shephard v ANZ Banking Corp Ltd (1997) 15 ACLC 1802 Standard Chartered Bank of Australia v Antico & Ors (1995) 13 ACLC 1381 Stanley Street & Ors v Retravision (1995) 13 ACLC 757 Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343 Taylor v Carroll (1991) 9 ACLC 1593 Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642 Versteeg v Versteeg (1988) 36 A Crim R 68 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Applicant
AND
KIMBERLY GOLD PTY LTD (ADMINISTRATORS APPOINTED)
Respondent
Catchwords:
Corporations - Application to set aside deed of company arrangement as unfairly prejudicial to one of the creditors - Application to wind up company
Legislation:
Corporations Law, s 60, s 95A, s 435A, s 439A, s 445D, s 553C, s 556, s 564, s 588G, s 588H, s 588M, s 588R, s 588V, s 588W, s 600A
Trade Practices Act, s 51, s 52
(Page 2)
Result:
Applications granted
Representation:
Counsel:
Applicant : Mr M J Buss QC & Mr C A Ryder
Respondent : Mr C J L Pullin QC & Ms K F Banks-Smith
Solicitors:
Applicant : Corrs Chambers Westgarth
Respondent : Freehills
Case(s) referred to in judgment(s):
Hungerford v Walker (1989) 171 CLR 12
Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 14 ACLC 1737
Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 832
Re ACN 00753700 Pty Ltd (In Liq) (1997) 25 ACSR 560
Re RHD Power Services Pty Ltd (In Liq) (1990) 3 ACSR 261
Case(s) also cited:
ACP Syme Magazines Pty Ltd v Tri Automotive Components Pty Ltd (1997) 144 ALR 517
Bank of Australasia v Hall (1907) 4 CLR 1514
Barclay's Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Bell Group Finance (Pty) Ltd (In Liq) v Bell Group (UK) Holdings Ltd [1996] 1 BCLC 304
Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61
Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64
Commonwealth v Verayen (1990) 170 CLR 394
Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625
Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456
Delaine Pty Ltd v Quarto Publishing plc (1990) 8 ACLC 1026
(Page 3)
Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1997) 26 ACSR 629
Deputy Commissioner of Taxation v Comcorp Australia Limited (1995) 13 ACLC 1671
Domino Hire Pty Ltd v Pioneer Park Pty Ltd (In Liq) (2000) 18 ACLC 13
Downey v Aira Pty Ltd (1996) 14 ACLC 1068
Employers Mutual Indemnity (Workers Compensation) Ltd v JST Transport Services Pty Ltd (1997) 23 ACSR 197
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885
Hamilton v National Australia Bank Ltd (1996) 14 ACLC 1202
Jelin Pty Ltd v Johnson (1987) 5 ACLC 463
Julzar Pty Ltd v Rodgers [1999] NSW SC 1999
Khoury v Rosemist Holdings Pty Ltd (1999) 17 ACLC 1013
Levi v Guerlini (1997) 24 ACSR 159
Ogilvie v Adams [1981] VR 1041
Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLC 1293
Re Bond Corporation Holdings Limited (1990) 1 WAR 465
Re Kerisbeck Pty Ltd (1992) 10 ACLC 619
Re Tweed Garages Ltd [1962] Ch 406
Re Universal Management Limited (In Liq) (1971) 1 NZCLC 950026
Rees v Bank of New South Wales (1964) 111 CLR 210
Refrigerated Express Lines v The Australian Meat & Livestock Corporation (1980) 44 FLR 455
Russell Halpern Nominees Pty Ltd v Martin [1987] WAR 150
Sandell v Porter (1966) 115 CLR 666
Shephard v ANZ Banking Corp Ltd (1997) 15 ACLC 1802
Standard Chartered Bank of Australia v Antico & Ors (1995) 13 ACLC 1381
Stanley Street & Ors v Retravision (1995) 13 ACLC 757
Switz Pty Ltd v Glowbind Pty Ltd (2000) 18 ACLC 343
Taylor v Carroll (1991) 9 ACLC 1593
Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642
Versteeg v Versteeg (1988) 36 A Crim R 68
(Page 4)
1 MASTER BREDMEYER: I have before me two applications. The first is an application to set aside a deed of company arrangement approved by a meeting of creditors of the respondent, held on 2 February 2000. The applicant, a creditor, voted against the resolution but was out-voted. The second is an application by the same applicant to wind up the company.
2 The first application is made under s 445D and s 600A of the Corporations Law which I quote:
"SECTION 445D WHEN COURT MAY TERMINATE DEED
445D(1) [Power of Court to terminate deed] The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company's business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(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
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(Page 5)
- (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; 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."
"SECTION 600A POWERS OF COURT WHERE OUTCOME OF VOTING AT CREDITORS' MEETING DETERMINED BY RELATED ENTITY
600A(1) [Related entity vote affected passing of resolution] Subsection (2) applies where, on the application of a creditor of a company or Park 5.1 body, the Court is satisfied:
(a) that a proposed resolution has been voted on at:
(i) in the case of a company - a meeting of creditors of the 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; or
(ii) in the case of a Part 5.1 body - a meeting of creditors, or of a class of creditors, of the body held under Part 5.1; and
(b) that, if the vote or votes that a particular related creditor, or particular related creditors, of the company or body cast on the proposed resolution had been disregarded for the purposes of determining whether or not the proposed resolution was passed, the proposed resolution:
(i) if it was in fact passed - would not have been passed; or
(ii) if in fact it was not passed - would have been passed;
(Page 6)
- or the question would have had to be decided on a casting vote; and
(c) that the passing of the proposed resolution, or the failure to pass it, as the case requires:
(i) is contrary to the interests of the creditors as a whole or of that class of creditors as a whole, as the case may be; or
(ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable having regard to:
(A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution, or from the failure to pass the proposed resolution, as the case may be; and
(B) the nature of the relationship between the related creditor and the company or body, or of the respective relationships between the related creditors and the company or body; and
(C) any other relevant matter.
(a) if the proposed resolution was passed - an order setting aside the resolution;
(b) an order that the proposed resolution be considered and voted on at a meeting of the creditors of the company or body, or of that class of creditors, as the case may be, convened and held as specified in the order;
(c) an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:
(Page 7)
- (i) then proposed resolution; or
(ii) a resolution to amend or vary the proposed resolution;
- (d) such other orders as the Court thinks necessary.
600A(3) ['related creditor'] In this section:
'related creditor', in relation to a company or Part 5.1 body, in relation to a vote, means a person who, when the vote was cast, was a related entity, and a creditor, of the company or body."
3 By way of background, the respondent, formerly called PMA Gold Pty Ltd, is, and was at all material times, a wholly owned subsidiary of Precious Metals Australia Ltd ("PMA"). It has a share capital of $2 fully paid. Its directors are Messrs R J H Smith, A K McKee and T R Kestel. These men are also directors of PMA, together with two others. PMA is a related entity to the respondent in terms of the definition in s 9 of the Corporations Law (par (d) and par (k)). By a contract dated 1 March 1995, the applicant was engaged by the respondent to mine ore and waste from March 1995 to June 1997 at the respondent's Butcher's Creek Gold Mine near Halls Creek in the Kimberley region of Western Australia ("the mining contract"). By an undated contract made in or about March 1996, the respondent also engaged the applicant to upgrade and operate a crusher and supply crushed ore from March 1996 to June 1997 to the respondent's mill. The applicant had no guarantee from PMA, the parent company, guaranteeing the performance of Kimberly Gold Pty Ltd ("Kimberly") of its obligations under the two contracts.
4 In March 1997, the respondent suspended the mining contract. At about the same time, the respondent defaulted in making payment under both contracts. The parties entered into discussions.
5 In May 1997, the negotiations between the parties broke down. The respondent made a number of allegations against the applicant which the applicant disputed. On the basis of those allegations, the respondent refused to make certain payments, including part of the last progress payment due under the mining contract and several payments due under the crushing contract.
6 The applicant finished the crushing contract, attempted to reach an arbitration agreement with the respondent to resolve the disputes under both contracts but failed to do so. In November 1997, it issued
(Page 8)
- proceedings against the respondent in this Court, CIV 2192 of 1997. Those proceedings were entered for trial in July 1999. In November 1999, the trial was set down to commence on 4 February 2000 and was expected to last eight days.
7 A month before the trial, on 6 January 2000, the respondent appointed two administrators. The respondent's creditors comprised the following:
(a) PMA - $22,135,989.05;
(b) the applicant - $1,356,668.69; and
(c) 17 other trade creditors - $56,641.03.
8 At the second creditor's meeting on 2 February 2000, the creditors resolved that the respondent enter into a deed of company arrangement in the terms described in the administrator's report under s 439A. Only the applicant voted against the resolution.
9 A deed of company arrangement has now been executed and it provides as follows:
(a) PMA will pay the administrators $183,600 in two tranches;
(b) The respondent has $16,400 in cash. The total fund available for distribution therefore is $200,000.
(c) The administrators will distribute this fund as follows:
(i) administration costs in full;
(ii) priority creditors under s 556 of the Corporations Law in full;
(iii) statutory or government creditors in full;
(iv) creditors less than $10,000 in full (ie all creditors other than the applicant and PMA). These total $56,641.03;
(v) all creditors greater than $10,000 other than PMA (ie only the applicant) on a pro-rata basis;
(vi) PMA nil.
(d) The applicant's debt is admitted in full and the respondent's counterclaim is abandoned.
(e) PMA's claim is released.
(Page 9)
10 The matters to be considered under the two sections are somewhat similar. By s 445D, the court must examine if the deed is "unfairly prejudicial" or "unfairly discriminatory" against a creditor, in this case the applicant, BGC. Under s 600A(1)(c)(ii), in addition to the matters set out in (1)(a) and (b), the court must look at the proposed resolution to see if it has prejudiced, or is likely to prejudice the interests of the creditor which voted against it (in this case BGC) to an extent which is "unreasonable", having regard to the benefits of the resolution passing to the related creditors (in this case, PMA) and the other matters set out in that subsection.
11 There are said to be three reasons why the resolution and the deed is unfairly prejudicial to BGC.
12 The first is that the unrelated minor creditors who were owed $56,641, get paid 100 cents in the dollar, whereas the applicant, as at 31 January 2000, would only get 8.5 cents in the dollar. I do not consider that the plaintiff can be heard to complain about that act of prejudice or discrimination between the creditors, because it has likewise undertaken to pay those small creditors 100 cents in the dollar as a condition of getting the orders it seeks.
13 The second act of prejudice or discrimination to BGC which voted against the deed is said to be that it will get less under the deed than if the company went into liquidation. The effect of the deed is, of course, to extinguish the applicant's claim against the respondent. The applicant says that if the resolution had not been passed and the deed not signed, the respondent would have gone into liquidation. The applicant would have lodged its claim with the liquidator and would have sued, or got the liquidator to sue, the directors of Kimberly for insolvent trading. The applicant says it would have recovered more from this course than it gets under the deed.
14 I think it most likely that the respondent would have gone into liquidation if the deed had not been offered. It was clearly insolvent and not trading. BGC's claim would have been lodged with the liquidator and in considering it he would need to consider Kimberly's large counterclaim. Alternatively, BGC could have offered to indemnify the liquidator and thereby got a right to a priority payment under s 564 of the Corporations Law and then the liquidator would have sued the directors of Kimberly for insolvent training. As another alternative, BGC as a creditor, could have sued the directors of Kimberly direct for insolvent trading under s 588M of the Corporations Law. That course would need the consent of the
(Page 10)
- liquidator under s 588R, which I consider it was likely to get, particularly in view of its offer to pay out the minor creditors and to indemnify the liquidators against any costs. See Mr Teo's second affidavit.
15 Whichever alternative is taken, I have to consider what are the chances of success of the applicant in an action against the directors on the claims and counterclaims as set out in action CIV 2192 of 1997. I now turn to consider those claims as set out in the pleadings in that action.
"1. MARCH 1997 MINING CHARGES"
16 The first claim is one for debt for mining done by BGC in March 1997 for $304,142.37. This claim is reasonably strong subject to the defendant's counterclaim which I consider later.
"2. SWITCH TO SINGLE SHIFT MINING"
17 This claim for $9338 is for damages for breach of an oral contract. I consider this claim is reasonably strong.
"3. COST OF SUSPENSION DAMAGES/ COMPENSATION $56,100"
18 I consider it arguable that the suspension was due to an "act" of the principal which entitled BGC, the contractor, to compensation under cl 14(4)(c) of the general conditions. I consider that a claim for compensation for suspension is well founded and would be likely to succeed.
"4. DEMOBILISATION $54,500"
19 This is a claim for debt under the contract. The defendant admits this term of the contract and not having paid this sum. The claim is well founded, subject however to the defendant's counterclaim.
"5. AUSDRILL CLAIM"
20 This is a claim for damages or compensation of $57,274.77. BGC suspended its contract with its subcontractor, Ausdrill, when the respondent suspended its contract with BGC. Ausdrill therefore claimed compensation for the suspension. As I read cl 14(4)(c) of the general conditions, this is arguably a direct loss which needs to be compensated.
"6. ADDITIONAL COSTS AT THE CRUSHER"
(Page 11)
21 These are claims against the respondent for breaching its obligations and to maintain the machinery which affects the operation of the crusher (including tunnels and tunnel feed shoots under the stockpile). The obligation was to keep this equipment fully operational. The plaintiff claims extra loader costs of $58,440 and wasted labour doing what the defendant should have done in the amount of $68,000.
22 I consider these claims are weak. The plaintiff relies on two terms - see par 22(b) and (c) of its statement of claim which are not express. They are said, in particulars, to arise from a correct interpretation of the contract. In my view they do not. The express terms of the "Scope of the Work" require the contractor (the applicant) to maintain the stockpile and ensure continuity of supply of ore and to use a front-end loader for these purposes. It says that the rates per tonne to be paid to the contractor for the crushing of the ore take into account the costs of the contractor of using the front end loader. I consider these two claims are weak and could fail.
"7. CRUSHING CHARGES - UNDER PAID"
23 The plaintiff crushed ore in March, April, May, June 1997 and charged it out at $2.74 per tonne. It says it was underpaid $165,602.71. The claim is arguable, but I will consider it again in connection with the defendant's counterclaim that the plaintiff was overpaid because it only crushed ore to 14 millimetres and not 10 millimetres, therefore it should not have been paid at the 10 millimetre rate.
"8. REDUCED VOLUME COMPENSATION"
24 The applicant's next claim is for reduced volume compensation. This is a claim for compensation or damages for premature termination of contract. The claim is for $136,219.60. The crushing contract was to complete on the earlier of the day when the earthmoving contract reached completion, or when the one million tonnes of ore was crushed. The earthmoving contract did not reach completion on its due date, which was 30 June 1997, nor was one million tonnes of ore crushed, so some compensation is payable. How to calculate it? That question is answered by special condition 5 of the crushing contract. The plaintiff is to be paid 40 cents per tonne for each tonne short of a million tonnes. The total tonnage crushed during the life of the contract was 659,451 tonnes, so this claim is for the balance at 40 cents per tonne, which equals $136,219. I consider this claim is arguable. I think it is a strong claim and the defence on it is weak. It is a liquidated claim and as such a claim for a debt.
(Page 12)
- "9. ADDITIONAL HOURLY HIRE $52,572"
25 This is a separate contract entered into in April 1997, part oral and part written, for the hire of equipment and labour at hourly rates. It is a claim for debt and is arguable.
26 The plaintiff's claims total $982,569.50.
27 Further moneys are claimed for interest and Hungerford v Walker (1989) 171 CLR 125 damages and costs of approximately $0.4 million.
28 I turn now to the defendant's counterclaim and set-off.
(1) Crushing overcharge
29 The defendant says the plaintiff crushed 661,017 tonnes of ore. This is fairly close to the plaintiff's figure of 659,451 tonnes. The agreed schedule of rates was as follows: crushing and handling to minus - I do not know whether that is a dash or a minus - 10 millimetres, $2.74 a tonne; crushing and handling to 14 millimetres, $2.44 a tonne for the period 1 March 1996 to 31 March 1996; and crushing and handling to 14 millimetres, $2.14 a tonne after 31 March 1996. It says:
"The company will sample and calculate a daily moisture content of the feed mill. The daily moisture will be accumulated to determine the average moisture content … "
- I mention that because I later say that the company - that is, the respondent - also sampled the size of ore.
30 The defendant says there was a common assumption formed about April 1996, or an implied term of which particulars are given, that the plaintiff would install a double screen so that by 1 April 1996 or within a reasonable period after 1 April 1996, 100 per cent of the ore would be crushed to 10 millimetre size.
31 The defendant says the plaintiff never did that so it failed to achieve crushing of 100 per cent of the ore at 10 millimetre size or less. It says in March, May, June, July, August, October, November and December 1996 and in January, February, March, April, May and June 1997 the plaintiff calculated invoices to the defendant using the rate of $2.74 a tonne being 60 cents in excess of the correct rate per tonne.
32 In April, June and October 1996 and in January 1997 the plaintiff calculated invoices to the defendant at $2.44 a tonne being 30 cents in
(Page 13)
- excess of the correct rate and in these circumstances the plaintiffs have invoiced the defendant $365,565.90 in excess of the correct amounts.
33 The plaintiff in its reply has admitted that about March 1996 it agreed to modify the plant to achieve 10 millimetre size, but denies that 100 per cent of the stones had to be of that size. It pleads four specific agreements and I quote one of them. In paragraphs 18(f) and (g) of the reply:
"(f) The defendant was not satisfied the plaintiff was crushing and handling to 10 millimetre during the period 1 April 1996 to 8 June 1996.
(g) By an agreement reached on about 12 June 1996 the parties agreed that the defendant would pay for the plaintiff's crushing from 1 March 1996 to 8 June 1996 at the following rates and thereafter at the rate of $2.74 per tonne; from 1 March 1996 to 30 March 1996, $2.44 a tonne; from 1 April 1996, $2.14 per tonne; from 2 April 1996 to 8 June 1996, $2.44 a tonne."
35 Three other instances of variation are given and I will take the third instance as set out in par 18(j) and par 18(k) of the reply.
"(j) On or about 30 January 1997 the plaintiff informed the defendant it was experiencing problems crushing wet ore. The parties agreed the plaintiff would try using larger aperture screens on the crushing equipment and the defendant would monitor the crushed ore size and immediately inform the plaintiff if it was dissatisfied with the size of the crushed ore.
(Page 14)
- The agreement was reached between Mark Breingan, Phil Baker, Dave Cooper and Terry Mitchell on behalf of the plaintiff and Bob Brennan on behalf of the defendant during a meeting at the plaintiff's office on 30 January 1997.
(k) By an agreement reached on 12 February 1997 the parties agreed the defendant would pay the plaintiff for the January crushings in the following amounts: 700 tonnes at $2.14; 2654 tonnes at $2.44; and 38,015 tonnes at $2.74."
36 This amounts to a variation not only as to the agreed rates but also as to the size requirements. It was an agreement after the event. The agreement about pay was reached on 12 February and related to the crushing done in January when the size of the ore crushed was known, so what the defendant did is said, "You'll get paid full pay for 38,015 tonnes," implying the size was okay, no complaints about that, "but you'll get the lesser rates of $2.14 for 700 tonnes and $2.44 for 2,654 tonnes."
37 The fact that all payments up to and including February 1997 were charged at the contract rates as varied by these three agreements mentioned and was certified and paid by the defendant without complaint as to size is good evidence that the plaintiff's claim on this is strong and that the counterclaim is weak.
38 The same cannot be said for the March, April, May and June 1997 claims. All those were charged at the top rate of $2.74 a tonne but were not paid at that rate. The defendant says all the ore crushed was over 10 millimetres and should have been charged at $2.14 per tonne. Some of the bills the defendant paid at $2.14 per tonne, for example March and June 1997. For that 4-month period the plaintiff crushed 197,541 tonnes and charged $2.74 a tonne, a total of $541,262.34. The defendant paid or gave credits for that for $346,343.72, leaving a balance owing of $165,602.72, according to the plaintiff. On the defendant's evidence it should have paid for 197,541 tonnes at $2.14, which equals $422,737.74. As I have said, it actually paid $346,343.72. So, on its figures it still owes $76,394. I consider its counterclaim for crushing overcharge is good for that figure, but is otherwise weak. This would have the effect of reducing
(Page 15)
- the plaintiff's claim 7 for crushing underpaid in the period March-June 1997 from $165,602 to $76,349, a reduction of $89,253.
(2) Reimbursement of loader hire, $63,777
39 This was a sum invoiced to the defendant and paid by it. The defendant says it was not checked; it was paid under a mistake of fact and under a mistake of law, that it was actually not required to pay it.
40 The plaintiff, in par 22, has quoted the relevant clauses of the crushing contract which it is said that the defendant breached and which resulted in this charge, and as I read the terms of the contract, in particular the scope of work provisions:
"The obligation to maintain the stockpile and to ensure continuity of supply of the ore to the crushers is on the plaintiff, as is the obligation to maintain the front-end loader."
41 I consider this counterclaim is strong and would be likely to succeed.
(3) Misrepresentation of value of plant and equipment
42 This is a claim that the plaintiff represented its crushing equipment was worth $650,000 and the crushing contract was drafted on that basis. Under it, PMA could purchase the crushing equipment at any time for $250,000 and if the crushing contract was terminated prematurely the plaintiff was to be compensated on a formula, namely 40 cents for each tonne of ore crushed at the time of termination short of 1,000,000 tonnes. Thus, for example, if the contract was terminated at the 500,000 tonne mark the contractor would get 500,000 times 40 cents, which equals $200,000.
43 The defendant says in par 13.5 and par 13.6 of its defence that the $650,000 was a misrepresentation because in fact the plaintiff purchased the crushing equipment for $485,000; that is, for $165,000 less. So, this is a misleading and deceptive conduct claim for $165,000.
44 The defendant says, "We fixed the deemed depreciation at 40 cents per tonne based on $400,000 depreciation and $250,000 residual value, making up the total of $650,000." I consider this claim is very weak and would fail.
45 The causal connection between the representation and the loss is not there. The defendant has found out the equipment cost $485,000 and not
(Page 16)
- $650,000. All right. So, it can act on that by not buying the equipment for $250,000. It is only an option to buy. It has found out the equipment is not worth that, it is worth less than what was paid for it, it is not worth $250,000, so its remedy is not to buy it on termination because it is not worth it. So, it has not suffered an actual loss. I point out that the 40 cents deemed depreciation is expressed as compensation for the contract for early termination. It is not a purchase price.
(4) Oversize mill feed
46 The fourth part of the counterclaim, the major part, is set out in paragraphs 10, 11, 12 and 21 of the defence, I think. It is for $573,779 for oversize mill feed. The crushing contract in that part of it called "Scope of Work" said that the plaintiff had to supply crushed ore at 100 per cent production size of 10 millimetres.
47 The plea is that in conversations between certain named representatives of the plaintiff and of the defendant in November and December of 1995 and before the crushing contract began, the plaintiff agreed to fit screens to achieve a crushing size of 10 millimetres. The plaintiff breached that. It failed to install the screens. As a result, the crushed ore failed to achieve the standard of 100 per cent passing 10 millimetre, and the additional cost to the defendant of processing at its mill the oversized ore was $573,779, and that figure comes from an expert's report, the expert being a Stewart Marsh, which is before me. That loss is said to be both a breach of contract and misleading and deceptive conduct.
48 Mill feed sizings were done on a daily basis for most of the contract period, and Mr Marsh has analysed this data and averaged it out at 4.02 per cent in excess of 10 millimetres between 1 July 1996 and 30 July 1997. He has calculated that the extra costs of milling those larger stones produces more wear and tear on the steel balls, more fuel, more wear on the rubber lines, etcetera, and those items come to $45,633.
49 The biggest item is $443,393 for the effect of the coarser mill feed on the milling throughput. Because of the coarser feed, the production of the mill was 58 tonnes per hour, instead of 64 tonnes per hour, a reduction of 6.02 tonnes per hour or of 9.4 per cent, and the fixed operating costs were $7.10 per tonne. So, if you take 9.4 per cent of that, you get a figure of $0.66 or $0.667 per tonne. That is roughly 66 cents per tonne, and you multiply that by the number of tonnes crushed, 664,758 tonnes, and you get a figure of $443,393.
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50 I regard this claim as largely an alternative to the defendant's first counterclaim that the plaintiff overcharged for its crushing $280,848, that it charged the rate for 10-millimetre feed when it only produced 14-millimetre feed.
51 The plaintiff's reply is as outlined above. The contract said 100 per cent passing 10 millimetre size. On the other hand, the schedule of rates allowed for different rates for different sizes; $2.74 a tonne for 10 millimetre, and after 31 March 1996 $2.14 a tonne for 14 millimetre feed and that is, I think, a fair answer to the damages claim. The contract provided specifically for oversize ore; in other words, it is producing liquidated damages. If Marsh's report is for unliquidated damages for having breached the contract, that the contract provided specifically for payment for oversize ore, that kind of equals liquidated damages, so that precludes I think general damages, the specific overriding the general.
52 The plaintiff relies on other matters to answer this breach of contract claim, and I have mentioned those above and they are pleaded in the reply. For example, in 18(f) the defendant was not happy with the crushing to 10 millimetre size in the period 1 April 1996 to 8 June 1996. By agreement recorded in letters, they negotiated a varied price of $2.44 a tonne. If they had stuck to the original contract, this should have been $2.14 a tonne.
53 They also agreed that future rates would be at $2.74 a tonne, and I note that daily sizings were taken so that they agreed on a future rate of $2.74 a tonne even though they knew that the 10 millimetre size was not being achieved. Subject to two other variations of price for variations not connected with the sizing problem, that remained the rate that was agreed and paid by the defendant until March 1997.
54 On 17 March 1997 the defendant raised concern about the size of ore in a letter. An agreement was reached and also put in a letter that new screens be fitted by the defendant. These screens were fitted by the defendant on 8 April 1997 and they were screens to 11.2 millimetres. It was then agreed in writing that if further ore was crushed in the same manner as between 8 April and 7 May, the rate would be $2.74 per tonne, so that is a variation or a consent to paying full money but accepting some stones larger than 10 millimetres.
55 I consider the plaintiff has a reasonable defence to this counterclaim, both for breach of contract and misleading and deceptive conduct. The defendant knew that the oversized ore was produced from day one. The
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- contract was varied subject to exceptions for certain periods. It was varied to pay $2.74 for the oversized ore instead of $2.14 originally agreed.
56 The defendant, I think, cannot now be heard to say that it relied on the plaintiff's initial representation. It took daily sizings. If so, if it was relying on the strict contractual provision, why did it pay the invoices submitted and why confirm on several occasions in writing that it would pay $2.74 for ore produced when the problem reappeared in March 1997, and, when the problem appeared in March 1997, why offer to install screens at 11.2 millimetres and then pay the full rate after that? Why not refuse to pay? I consider this claim is weak.
57 In summary, I consider the plaintiff's claims 1, 2, 3, 4, 5, 7, 8 and 9 are good and they total $835,979. The one I omitted there was 6. I think that is bad. That claim is $835,979 plus interest and costs. I consider the Hungerford v Walker claim is weak. I am not going to give reasons on that at the moment.
58 I consider the defendant's counterclaims are good. Counterclaims 1 and 2 are good only, not 3 and 4, and they total $153,030, so if you take what I regard as the good plaintiff's claims and deduct what I regard as the good counterclaims, the result is $682,949.
59 So, I consider the plaintiff, if it takes litigation or if the liquidator sues, has good prospects of that. However, I must consider a bit further: what are the prospects of recovering that sum from the directors under s 588G and s 588M of the Corporations Law? The liquidator could sue but I imagine the plaintiff would not want that. It would like to sue and it is willing to fund the action. It needs the consent of the liquidator and I think that consent would be given or, if not, leave to sue could be obtained from the Court. There would be no impediment to that. The minor creditors are going to be paid and the liquidator might want some indemnity as to costs but I think that could be granted. What then is the plaintiff's prospects of recovery approximately $680,000, which I think are good claims from the directors? The directors include PMA under a special definition of directors, under s 60 of the Corporations Law as it stood in 1997.
60 The first thing to note about these claims of the plaintiff is that only claims 1, 4, 7, 8 and 9 are for debt. The others are for damages and the claims for debt total $713,000 in round figures, so, when I deduct the
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- good counterclaims of $153,000 the actual claims for debt which I think are good come to $560,000.
61 These debts were incurred in the period March 1997 to June 1997. Was the company insolvent in that period? I am going into some detail here but, to give you the conclusion at the outset, I do accept the respondent's evidence on this. I think it was insolvent in that period and as I have got it prepared here I will go through this in detail.
62 A company is insolvent if it is unable to pay all its debts when they become due and payable, that is s 95A, and in Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 832 Lindgren J said:
"95A of the Law states a 'cash flow test' rather than a 'balance sheet test' of insolvency."
63 A test of insolvency is one of commercial insolvency; that is, of the company being unable to meet current demands upon it. It may have wealth locked up in assets, yet if it has no assets available to meet its current liabilities, it is commercially insolvent. The question is not whether the company would be able if time were allowed to pay its debts out of available assets. It is whether the company is presently able to do so out of it realisable assets. The conclusion of insolvency ought to be clear from a consideration of the company's position in its entirety. The company's inability, using its cash resources or as it has or can command through the use of its assets, to meet its debts as and when they fall due indicates insolvency.
64 The court's examination involves a consideration of the nature of the assets and in the case of a trading company the nature of the business and the debts which are and will become due and payable.
65 Regard may be had to the company's recent trading history , its income, its current assets, other assets, their convertibility into money, its ability to borrow in time to meet its debts and its overall asset and liability situation. A temporary lack of liquidity does not necessarily indicate insolvency. However, an endemic shortage of working capital does.
66 A company's ability to borrow from its parent company without security is a factor to consider in insolvency. It may show strong financial standing. If, however, it can only continue to trade by receiving continual loans from its parents, that can be clear evidence of insolvency. See Re RHD Power Services Pty Ltd (In Liq)(1990) 3 ACSR 261 at 263 to 264 per MacPherson J of the Queensland Supreme Court.
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67 I look at the company's cash flow position and here I rely heavily on the affidavit of Jones and the applicant's submissions, which I accept. Jones prepared a statement of cash flows for the respondent for the years ending 30 June 1996 and 30 June 1997, which were annexed to his affidavit.
68 Cash flow is a measure of cash coming into and going out of a business. It measures all cash, not just cash profit. For example, receipt of loan moneys, equity contribution from shareholders and cash from the sale of assets will all be regarded as cash flows, as incoming cash as also would the normal cash generated from the company's business activities. Cash outflows may represent cash spent on purchase of assets, repaying loans, paying dividends as well as normal cash payments for its expenses in the course of the company's business.
69 The cash flow statements are therefore the best indicator of a company's ability, physically, to pay its debts and therefore is a good indicator of a company's solvency. He notes the following about this company's cash flow:
"(a) The respondent reported a net cash flow increase in the year ending 30 June 1996 of [I will use rounded figures] $1.6 million with the result its cash position at the end of the year was $3.9 million. That is, the amount of cash it received from any source exceeded the cash it spent by $1.6 million. During the year the cash in-flows were derived from its trading activities and the loan from PMA of $444,000.
(b) Secondly, the respondent's cash flow deteriorated in the year ended 30 June 1997. Its net cash flow decreased by $4.3 million with the result of a cash in hand deficiency at the end of the year of $429.000.
(c) The respondent reported a cash deficiency in the year ended 30 June 1997, notwithstanding that it received cash by way of loans from PMA in an amount of $4.6 million to assist its funding its activities. Without that advance the respondent would have suffered a cash deficiency in its own right of $5 million. In other words, if the respondent had not been able to borrow from PMA, it would have had to find approximately $5 million in cash from other sources to survive. It is quite clear therefore
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- the respondent was entirely reliant upon support from its parent, PMA, during the year ending 30 June 1997."
70 In preparing these figures, Jones has not taken into account the applicant's claimed debt of $560,000. If that were taken into account its position is even worse. The respondent prepared cash flow forecasts at various times in 1997 and these have been analysed by Jones and I accept his analysis.
71 The respondent's cash flow forecast prepared on 12 February 1997, indicates the respondent's cash flow predictions prior to its decision to suspend mining and ultimately cease mining altogether. It shows a cash flow position at the beginning of February of approximately $789,000 and predicts a positive cash flow at the end of every month until August 1997, except for March and April 1997.
72 As at 8 April 1997, the picture was completely different. The closing cash balance from the operating activity showed significant cash deficits at the end of April 1997 and May 1997. It is more or less a break-even operating cash position at the end of 1997 and its positive operating cash position thereafter was dependent primarily on a reduction in creditors as a result of the mining operation ceasing and the relatively stable gold prices.
73 Significantly, in order to achieve positive actual cash positions at the end of the months of April, May and June 1997 the respondent planned to borrow a total of $1.45 million in the form of a directors' loan. The loan would be repaid from the proceeds of a rights issue by PMA which was to produce cash in July 1997.
74 In fact, it is clear that by 10 June 1997 instead of a closing cash position of somewhere in the vicinity of $102,524, being the closing cash position for the end of May 1997 predicted by the April forecast, the closing position as at that date was closer to a deficit of $238,300. This is, of course, without consideration of the applicant's debt, which would make it worse.
75 The deficit arises notwithstanding a directors' loan of $800,000. The fact that the full loan of $1.45 million predicted at 8 April 1997 was not advanced is significant and I infer that no more than $800,000 was available because either the directors could not afford to lend more, or they were not willing to do so. Either way, the respondent did not have a sufficient cash flow to meet the creditors.
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76 I now turn to the company's working capital as shown on the balance sheets in Jones' analysis, which I accept. The respondent's net assets deteriorated from a surplus of $492,000 at 30 June 1996 to a deficiency of $10,000,000 as at 30 June 1997. I note in both years the respondent reported a working capital efficiency of $2,000,000 to 30 June 1996 and $2,000,000 to 30 June 1997. I am using round figures here.
77 The working capital deficiency is the difference between current assets and current liabilities. A current asset is one that is expected to be realised within 12 months of the reporting date or in the normal course of the entity's operating cycle or that is held primarily for trading purposes or that is cash or a cash equivalent asset. A current liability is also defined as one that is expected to be settled within 12 months of the reporting date or in the normal course of the entity's operating cycle. A working capital deficiency of $2,000,000 is a strong indication the company was unable to pay its debts either in 1996 or in 1997.
78 The Palm Springs mine ceased mining at the end of March and crushing and milling continued to 30 June 1997. The impact of these events is reflected in the respondent's balance sheet in 1997 where the net assets deteriorated from a surplus of $492,000 at 30 June 1996 to a deficiency of $10.4 million at 30 June 1997.
79 Mr Jones' annexure 11 shows a significant write-down on the value of the plant and equipment, excavation and development expenditure as an asset. Such write-downs are made in accordance with accounting standards AAS7, accounting for extractive industries, and AAS10, accounting for revaluation of non-current assets. It indicates that the anticipated return on the investment of the mine which had been carried in the balance sheets as assets in previous years was not now going to be realised and had to be written down to the respective realisable values.
80 As previously stated, the respondent had a working capital deficiency of more than $2,000,000 as at 30 June 1996 and likewise at 30 June 1997. In the year ended 1997 it had a cash-on-hand deficiency of $429,000, notwithstanding having received loans from PMA in that year of $4.6 million. In that year, in the year ended 30 June 1997, PMA made a provision for the full amount of its lending to the respondent which then was $12,359,515. It is highly likely that the respondent's working capital deficiency was endemic during the latter 4 months of 1997.
81 I turn now to its trading position. Consistent with an approach requiring the court to consider the respondent's position in its entirety, and
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- the nature of its business debts and assets, the court should consider the mechanism by which the respondent managed to survive. Firstly, it raised a number of disputes with the applicant which allowed it to delay payment of those debts; secondly, it borrowed money from its directors; and, thirdly, it raised capital through a rights issue to repay the directors their loans.
82 In each of these stages the respondent had a working capital deficiency of around $2,000,000. Its only trading asset, the goldmine, had been written off. Its only source of future income, the goldmine, had been closed. Consequently it had no prospect of generating any cash through trading or sale of assets in the short-term. Of course it was still milling ore in the latter months of 1997.
83 The circumstances in which PMA raised capital are significant. It issued a prospectus on 23 May 1997, that is, after the decision had been made to suspend mining and after funds had been borrowed from the directors. The prospectus lists five uses to which the respective capital would be put. The first two items have the potential to produce income in the long term and they dominate the prospectus. The last three items are essentially to keep the respondent from being wound up.
84 It is clear from the respondent's own budget two weeks later, however, that approximately $2.1 million, which was 63 per cent of the capital to be raised, would be used to stave off bankruptcy. Only $1.2 million would be available to generate future income opportunities. Additionally, the prospectus includes an unaudited balance sheet. It shows a surplus of assets over liabilities of $10,000,000. In fact the reported year end net asset position is $5.6 million after receipt of capital. More importantly, the non-current assets are shown on the prospectus at approximately $12,000,000.
85 However, a month later, as at 30 June 1997, just after the prospectus had been issued, their value dropped to $7.5 million. The difference is because of the write-off of the value of the property, plant and equipment, and the mine development costs following the closure of Palm Springs mines. However, that write-off had already occurred between February and March 1997, a month before the prospectus was issued. It is possible that had those who subscribed to the rights issue been fully apprised of the respondent's commercial and financial position they might not have subscribed to the capital.
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86 I consider the respondent was unable to pay its debts as and when they fell due from its own sources and was unable to obtain sufficient borrowing from its directors to pay the debts, including of course the BGC debt. Quite clearly the directors caused the respondent to appoint administrators when the respondent's indebtedness to the applicant was the respondent's only significant external debt.
87 It follows that even if the directors could resist an insolvent trading claim generally by arguing that the respondent was able to borrow from related entities, PMA's or the directors' support of the respondent did not extend to cover the respondent's indebtedness to the applicant.
88 I summarise all that by saying that I think it likely that BGC could prove the debts were incurred when the company was insolvent and - and I am even more sure of this - that by incurring these debts that the BGC debts would become insolvent.
89 There are risks in suing directors for insolvent trading. I have considered that an action would succeed to the extent of about $560,000 on debts, which are debts and not damages, because the company, I have already said, was insolvent or likely to become insolvent by incurring these BGC debts over that period, March-June 1997.
90 There are defences open to directors under s 588H and I doubt if the directors could get themselves under any of those defences but I suppose it is a possibility. There is also a chance that the three directors, Smith, McKee and Kestel, will have no money. I am speaking here of the personal directors.
91 No evidence has been led as to their means, but from information from the annual reports which lists their shareholdings and their directors' fees from these companies and their CVs, etcetera, they appear to be men of financial substance, but that could be misleading. Their apparent wealth could be kept in trusts or in the names of family members and not be available to creditors.
92 However, in this case it does not matter because there is a very high chance of recovering from them, whatever their personal assets. The 1999 annual report for PMA, Teo's affidavit 339, states that they have been given an indemnity by the company for third party liabilities for carrying out their duties as directors, except for gross negligence, lack of good faith and criminal intent. The same annual reports note that the company has taken out an insurance policy to cover the directors for liabilities as
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- directors, including legal costs. So, their personal wealth does not matter. They could recover under that indemnity.
93 I consider PMA can be sued as a director and I note from its 1998 and 1999 annual reports that it is building a new mine at Windimurra, the Windimurra vanadium project. It has a joint venture partner which has contributed $35,000,000 to that. This mine is expected to start production in November 1999 and it is raising capital, I think $41,000,000, by shares and rights issues and is going reasonably well.
94 With this project progressing well I think two things: (1) it is a company now of substance and could pay the claim of BGC; and (2) I think it unlikely the directors would want PMA sued as a director. I think the directors of PMA, with its vanadium project going well, would not want to have it put into liquidation by a creditor like BGC for non-payment of these debts and would not want to appoint administrators to defeat the plaintiff's claims. So, the company now has financial strength and I think it is highly likely that the claim, if it succeeded in the court, would be paid by them and PMA.
95 If BGC sues PMA as a deemed director under s 588M I do not consider that PMA can offset its inter-company loan from the BGC debt. The suit is between BGC and PMA, not Kimberly and PMA. A suit for insolvent trading would be between BGC and PMA and their debt is between Kimberly and PMA, so it cannot be offset.
96 The position, however, is otherwise under 588V and W. The applicant argued that if it were not for the deed of company arrangement the company Kimberly could sue its parent under these sections. So it could, but in that case only the liquidator can sue and in that case PMA's loan to Kimberly could be offset. The authority for that is Re ACN 00753700 Pty Ltd (In Liq) (1997) 25 ACSR 560, and that fact would make it not worthwhile to sue.
97 Likewise, with possible claims suggested by the applicant against PMA for estoppel and misleading and deceptive conduct. The estoppel claim is that Kimberly incurred the debts to BGC, relying on an assumption indicated by PMA that it would continue to lend it money to keep it afloat. Kimberly relied on this assumption and incurred the debts to BGC. It would be unconscionable to allow PMA now to depart from that assumption.
98 The s 52 claim is similar: that PMA made a continuing representation to Kimberly that it would lend it money to fund its debts to
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- third parties and in reliance on that Kimberly incurred the debts to BGC and suffered a loss and the representation was false as the funding was withdrawn. Both of these possible claims are by the company Kimberly against PMA and they are worthless because PMA is entitled to offset its debt against them and the debt far exceeds the claim. It is entitled to do that, offset its debt under section 553C of the Corporations Law.
99 To return to the possible claims by BGC against the directors, including PMA, for insolvent trading, I consider it has reasonable chances of success. However, there is always a risk in litigation. My analysis of the claims could be wrong and the claim may founder at some point. It may founder on the question of insolvency.
100 The trial Judge may think that PMA had enough funds and was able to, through its loan funds, keep it solvent when it incurred the BGC debts and to allow for these contingencies I consider the BGC claim for insolvent trading would have a 60 to 70 per cent chance of success.
101 To summarise the possible prejudice to BGC through being prevented from pursuing this claim, I think it has a 60 to 70 per cent chance of recovering $560,000 plus interest from the directors and from PMA, less solicitor/client costs which are over and above party/party costs, and less approximately $56,000 which is its undertaking to pay the minor creditors.
102 So, that is the prejudice. But to offset that prejudice and to look at its net prejudice under the deed of company arrangement it gets about $115,345, or a little bit less because the administrator's fees have increased since then.
103 That figure is worked out in this way: under the deed BGC gets $200,000 less the small amount owing to creditors and less the administrator's costs. The small creditors total $56,641. The administrator's costs were $28,014 as at 31 January 2000 but they are increasing, but taking them at the 31 January figure, the result to BGC would be $115,345.
104 I consider the prejudice outweighs the benefits to BGC and that ultimately it suffers a net prejudice because of this deed. To see whether it is an unfair prejudice under s 445D I need also to look at the benefits and the prejudices suffered by PMA and to weigh up the two. To see whether the prejudice to BGC is an unreasonable one under s 600A(2), I need to look at certain matters in the section, including the benefits of the
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- resolution of the deed which flow to PMA, so I am now going to look at the benefits of this deed which flow to PMA.
105 Firstly, it has avoided a court case with a real risk of losing $560,000 plus interest and then having the directors and PMA, as a deemed director, sued for insolvent trading. Secondly, it has avoided the costs of one or two court cases by the deed. The action listed for trial on 4 February 2000 was CIV 2192 of 97. If it had lost that action it would have had to pay the costs; and the second action is an action by the liquidator, or more likely by BGC, for insolvent trading against the directors.
106 The costs of defending these actions if they went on, I think, could be in the vicinity of $100,000 to $200,000. Kimberly's solicitor, Mr Haydn Robinson, in an affidavit sworn on 17 January 2000 in CIV 2192 of 1997, estimated Kimberly's costs of that action as over $100,000. The company's then counsel or proposed counsel, Mr Zelestis QC, estimated an eight-day trial.
107 Thirdly, PMA has retained its gold-mining asset. Its mine and its other tenements are worthless in dollar terms (see the administrator's report) but to a public company they have a benefit. It is better to have a goldmine on a care and maintenance basis, ready to be reopened if the gold price jumps, than not to have one at all. To retain it, I think, would please the shareholders.
108 The 1998 Annual Report states, and it is found at the affidavit of Teo at 286:
"The Palm Springs gold project is located near Halls Creek in the Kimberley region of WA. Mining halted in March 1997 with the plant placed on care and maintenance in July 1997. Since that time, the plant has continued to be well maintained and is capable of being recommissioned in a matter of weeks with minimal expenditure.
As the Company is focussing its efforts on the development of the Windimurra Vanadium Project, it is currently reviewing alternatives for the Palm Springs Gold Project including an outright sale or joint venture. Presumably if PMA decide to re-open the mine, they will resume the loan funding which they terminated just prior to January 2000."
109 Fourthly, a public company like PMA would not like to have a subsidiary go into liquidation. It harms its public image. It suggests poor
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- management or lack of financial strength. Likewise, it would not like a subsidiary to go into administration because that is also a sign of financial weakness, but that is a lesser evil, it is a temporary thing if a deed is signed as in this case, and the assets are retained.
110 The bad publicity of a subsidiary going into liquidation would dampen capital-raising from the company which PMA is engaged in and needs to do for its vanadium project. It is probably for the reason of keeping its public image good that in December 1999, when PMA decided to withdraw funding of its subsidiary and put it into administration, the directors decided to change the name from PMA Gold Pty Ltd, an obvious subsidiary, to the less obvious Kimberly Gold Pty Ltd. It is not possible to put a dollar value on matters 3 and 4 here but I think they are real benefits, nevertheless, to PMA.
111 Fifthly, PMA may have gained tax advantages because of the losses which it can offset from any profits realised from its Windimurra vanadium project. I have rival affidavits on this from Mr Minosora for the applicant, Mr Corbett for the respondent, and also one from Mr Hughes, which is his second affidavit.
112 I do not propose to evaluate these affidavits and choose between them. I do not consider that is necessary and it is difficult because there are a number of unknown and speculative factors. Mr Minosora says the tax loss advantage is greater under the deed of companies' arrangement than if Kimberly is wound up and I consider that is possible and, indeed, likely.
113 Why else did PMA recently decide to charge interest on its loans to Kimberly? I ask "Why else?" because Kimberly had almost no assets and PMA was never likely to recover the principal debt, yet in 1998 and 1999 it decided to charge interest. In a 1997 Annual Report, to go back a bit (Teo at 251) the loans to Kimberly totalled $12,359,515. The report states:
"Less provision for deficiency net assets of $12,359,515."
114 That is the same sum. That is an acknowledgment that the loan is irrecoverable, yet in 1998 PMA decided to charge interest on its loans to Kimberly, and they are the two loans that were interest-free, and the interest charged was at 9.5 per cent backdated to 30 June 1993, and for that five-year period it came to $4,725,983, and in 1999, quoting Teo 356, interest was charged again, this time at 9 per cent for that year, in the amount of $1,833,106.
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115 I accept Minosora's view that the probable reason why PMA decided to charge interest backdated as well on this irrecoverable debt is that it thinks it will gain some tax advantage by thereby increasing the debt. The directors of PMA have not offered any evidence to support a different view. Whether it will get tax losses or not I am unable to say because of the conflicting expert evidence and the number of conjectures. It is sufficient if I say that I consider PMA thinks it will get tax advantages for the write-off of its loans in the DOCA, possibly more tax advantages than it would get in a write-off in another way.
116 What are the detriments suffered by PMA through the deed? First, it has abandoned its claim for $22,000,000. I do not regard that as significant. It was not a sacrifice. It was just an acknowledgment of reality. It was never likely to recover any part of that debt. It at all times loaned money to its $2 subsidiary knowing of its true financial position over the years. It knew the loan was irrecoverable and its 1997 Annual Report makes provision for that. Secondly, it has paid $183,600 to fund the deed, so that is a detriment.
117 I consider the net benefits - that is the benefits less the detriments - to PMA through the deed exceed the net benefits received by BGC. I also consider other factors, for example, the interest of outsiders or the public interest, in keeping the company in business, said to be a goal under s 435A. I consider they are not significant. Many mining tenements in WA are worthless or produce very little. This mine made a loss every year. I do not consider that all the minor creditors are trade creditors in the sense that they will benefit by the business remaining and they will be ready to supply their services to the company if the mine reopens. Some of the creditors are not trade creditors at all, not to do with the mine anyway. The two largest bills are from lawyers for legal services. I do not regard the Department of Land Administration as a trade creditor.
118 If a mining lease is sold someone else will buy it. If the tenements are sold someone else will buy them and pay the fees. One of the creditors, Worley, is not really a trade creditor. He wrote a report, an expert report, for use in the trial and has charged $5000 for that.
119 This deed keeps the company and its assets in existence. It does not keep the company's business of a goldmine in existence. The business of its mine at Palm Springs ceased in mid-1997. If it loses its mining tenements someone else may get them. The company has a number of tenements in the Kimberly. The administrators in the report say that the
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- value of the tenements held is less than the amount of the bonds for rehabilitation and so they are worthless.
120 These minor creditors are not like those in the case of Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd(1996) 14 ACLC 1737, who benefited by the deed which was designed to keep one of two supermarkets remaining in business.
121 Weighing up these matters I consider that the deed should be terminated under s 445D as unfairly prejudicial to BGC. I also consider the applicant has made out a case under s 600A. I go through the different parts of that section: namely, (a) the resolution to enter into the deed was passed at a meeting of creditors; (b) PMA is a related creditor, the resolution would not have been passed if its vote had been disregarded; (c) the passing of the resolution has prejudiced the interests of BGC, a major creditor who voted against it, to an extent which is unreasonable having regard to the benefits flowing to PMA from the passing of the resolution. The nature of the relationship between PMA and Kimberly are the relevant matters. I consider that this resolution should be set aside.
122 It does not follow from these orders that Kimberly should automatically be wound up, but an application to wind up an insolvency and on the just and equitable ground is before me. It was filed in February and it has been heard, although not much has been said of it. It has been heard in this same appointment. It needs leave to proceed because of the deed, but now that the deed has been terminated there is no impediment to its consideration. It has been advertised. The registrar's certificate is in reasonable order and I heard the two things together and I consider the two grounds for winding up have been made out and I propose to wind up the company.
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