Blue Ring Pty Ltd v Landshore Pty Ltd (Subject to a Deed of Company Arrangement)
[2006] WASC 245
BLUE RING PTY LTD -v- LANDSHORE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) & ANOR [2006] WASC 245
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2006] WASC 245 | |
| Case No: | COR:131/2006 | 5 OCTOBER 2006 | |
| Coram: | MASTER NEWNES | 10/11/06 | |
| 16 | Judgment Part: | 1 of 1 | |
| Result: | Casting vote set aside | ||
| B | |||
| PDF Version |
| Parties: | BLUE RING PTY LTD (ACN 081 061 369) LANDSHORE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 100 928 281) GLENN DOUGLAS TRINICK |
Catchwords: | Corporations Section 600B Application to set aside casting vote of administrator to enter into deed of company arrangement Whether administrator carried out sufficient investigation into affairs of company Deed provided no benefit to unsecured creditors Whether casting vote properly exercised Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 600B |
Case References: | Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd (2001) 37 ACSR 394 Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498 Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453 Kirwan v Cresvale Far East Ltd (In Liq) (2002) 44 ACSR 21 R v Bradford City Metropolitan Council; Ex parte Corris [1989] 3 All ER 156 Re Coalleen Pty Ltd [2000] 1 Qd R 245 Re Martco Engineering Pty Ltd (1999) 32 ACSR 487 Young v Sherman (2001) 40 ACSR 12 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 Natarajan v ACIB Accumulus Pty Ltd (2006) 56 ACSR 356 Network Exchange Pty Ltd v Mig International Communications Pty Ltd (1994) 13 ACSR 544 Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370 Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
LANDSHORE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 100 928 281)
First Defendant
GLENN DOUGLAS TRINICK
Second Defendant
Catchwords:
Corporations - Section 600B - Application to set aside casting vote of administrator to enter into deed of company arrangement - Whether administrator carried out sufficient investigation into affairs of company - Deed provided no benefit to unsecured creditors - Whether casting vote properly exercised - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 600B
(Page 2)
Result:
Casting vote set aside
Category: B
Representation:
Counsel:
Plaintiff : Mr K L Christensen
First Defendant : Mr A J Lloyd
Second Defendant : Mr K J Edwards
Solicitors:
Plaintiff : Slee Anderson & Pidgeon
First Defendant : Anthony James Lloyd
Second Defendant : Kevin Edwards
Case(s) referred to in judgment(s):
Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd (2001) 37 ACSR 394
Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498
Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453
Kirwan v Cresvale Far East Ltd (In Liq) (2002) 44 ACSR 21
R v Bradford City Metropolitan Council; Ex parte Corris [1989] 3 All ER 156
Re Coalleen Pty Ltd [2000] 1 Qd R 245
Re Martco Engineering Pty Ltd (1999) 32 ACSR 487
Young v Sherman (2001) 40 ACSR 12
Case(s) also cited:
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139
Natarajan v ACIB Accumulus Pty Ltd (2006) 56 ACSR 356
Network Exchange Pty Ltd v Mig International Communications Pty Ltd (1994) 13 ACSR 544
Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370
Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707
(Page 3)
1 MASTER NEWNES: This is an application by the plaintiff under s 600B of the Corporations Act 2001 (Cth) ("the Act") for an order that the casting vote of the second defendant, by which it was resolved that the first defendant enter into a deed of company arrangement, be set aside, and an order that the first defendant be wound up in insolvency. The plaintiff is a creditor of, and holds one of the two issued shares in, the first defendant.
2 The second defendant was appointed administrator of the first defendant by the directors on 4 July 2006. The first meeting of creditors took place on 10 July 2006. The second meeting of creditors was held on 25 July 2006.
3 In the interim, the second defendant prepared a report to creditors, dated 14 July 2006. In the "Executive Summary" in his report, the second defendant said that there had "been a dispute and allegations over the mismanagement of the [first defendant] resulting in unpaid tax obligations of approximately $300,000 to the Commissioner of Taxation causing the insolvency of the [first defendant]." He went on to recommend that the first defendant enter into a deed of company arrangement "as this will give a better return to the creditors as to liquidation. I base this recommendation on my investigations in the limited time and company records that were available to me."
4 In the body of his report, under the heading "Reason for Company's Failure", the second defendant said simply that there had been allegations of misappropriation of funds and a failure to meet tax obligations. The second defendant said his investigations "have been limited in finding the reasons for the company [sic] failure".
5 On the financial state of the first defendant, the second defendant said that, based on what appeared to be valuations by the directors, the first defendant's plant and equipment had a written down value of $18,500. The creditors appeared from the directors' report as to affairs to have made claims totalling $1,261,471.64, but the directors considered that only $618,100.29 of the claims were legitimate claims. There were two secured creditors, Westpac Banking Corporation, in the sum of $30,000, and Forrest Nursery Pty Ltd ("Forrest Nursery"), in the sum of $283,970. The second defendant noted that the charge held by Forrest Nursery was not registered and was not more than six months old, and accordingly it would not be enforceable in a liquidation.
(Page 4)
6 In relation to the books and records of the first defendant, the second defendant said simply that he had received "some books and records of the Company mostly comprising of computer data".
7 The second defendant then described the options available to creditors, namely a deed of company arrangement, winding up or termination of the administration. In summarising what might be involved in a winding up, the second defendant noted that "[t]o date my limited investigations have not been able to identify any potential preferences."
8 The second defendant said in the report that a deed of company arrangement had been proposed by which Forrest Nursery was to fund a dividend to be paid to unsecured creditors. The dividend would not exceed $10,000. No secured creditor was to receive a dividend.
9 The second defendant went on to say that at the meeting of creditors on 25 July 2006 he would recommend that the deed of company arrangement be entered into. The reasons he gave were as follows. The assets of the first defendant would not be available to creditors if the first defendant was wound up due to the Westpac charge. The estimated fees of liquidation would be approximately $10,000 plus expenses and GST, and he had not been able to identify any preference payments that would be available to the creditors in a winding up. It was unlikely that, if investigations revealed any misconduct by officers of the company, ASIC would prosecute the offenders. It was therefore clear that the only benefit available to the unsecured creditors was the $8000 to $10,000 dividend - amounting to approximately 4 cents in the dollar - under the deed of company arrangement.
10 The question of how much investigation the second defendant did into the first defendant's affairs was canvassed at some length in the course of argument and it is necessary to refer to what the second defendant said in that regard in the report.
11 In setting out the progress of the administration to the date of the report, the second defendant said he had attended a first meeting of creditors, prepared the minutes of the meeting, requested proofs of debt from creditors, lodged statutory reports, reviewed the insurance requirements of the company, had meetings with directors and discussions with some creditors, conducted an "investigation into the affairs of the company", prepared a report for the second meeting of creditors and prepared a circular and notices for the second meeting.
(Page 5)
12 The second defendant estimated that his fees for the voluntary administration period would total $8870, plus out of pocket expenses and GST. He said that his fees were being paid by Forrest Nursery. The second defendant estimated that a total of 20 hours would be spent by him in meetings with directors and creditor representatives, investigating and preparing reports and consulting with creditors and directors. The total amount of those fees would be $6000. He estimated that a manager from his office engaged in the administration would spend a total of 20 hours on preparing meeting notes and minutes, liaising with creditors, setting up a proof of debt register and updating it, drafting reports and circulars to creditors and ensuring that ASIC requirements were met. The total amount of those fees would be $2000. There would, in addition, be secretarial fees of $870.
13 At the creditors' meeting on 25 July 2006, the plaintiff's representative asked the second defendant why he had not mentioned to creditors that the first defendant was suing a former director for an amount of approximately $180,000. The second defendant said he had undertaken investigations in the limited time available by interviewing the solicitors for the former director and had been told that the matter was a family dispute and it was doubtful that there was any substance in the claim. The representative of another creditor, the Australian Taxation Office, queried the debts claimed by the creditors and suggested that the creditors' claims had not been investigated properly. The second defendant said there were still some questions over various creditor claims.
14 The resolution to enter into the deed of company arrangement was put to creditors with a proviso, moved by the Australian Taxation Office representative, that the deed be amended to include the superannuation guarantee charge as a priority payment. A total of 14 creditors voted in favour of the deed of company arrangement and four against. One of those who voted against was the Australian Taxation Office whose debt was $380,000. Another was the plaintiff with a debt of $110,000. Those voting against represented debts totalling $601,513 and those voting in favour represented debts totalling $559,090. The second defendant then used his casting vote in favour of the resolution.
15 The deed of company arrangement was executed on 7 August 2006. The transactions required by it were completed on 8 August and termination of the deed was lodged with ASIC on 26 August 2006.
(Page 6)
16 In an affidavit in opposition to the application, the second defendant has said that his investigation into the affairs of the first defendant revealed that it had been dormant for some months, had no cash assets and no foreseeable cash flow prospects. Upon his appointment, he was advised by the directors of existing litigation against a former director, Mr Fowler. He says that from the information provided to him and enquiries he made of the solicitors for Mr Fowler, and from his general experience in similar matters, he came to the view that a liquidator would be unable to pursue the claim. It would be complex, costly and not necessarily likely ultimately to be successful. Even if the claim was successful, the likelihood of recovery would be extremely doubtful. The basis upon which those conclusions were reached is not further explained.
17 The second defendant says that, having regard to his experience of liquidation sales, he also formed the view that the total recovery from plant and equipment would be insufficient to cover the fees of an administrator and considerably less than the sum required to meet the costs of a liquidation.
18 The second defendant says that as a result of his overall assessment of the affairs of the first defendant, he concluded that the best option to ensure some recovery for the unsecured creditors was to recommend the deed of company arrangement proposed by Forrest Nursery. The second defendant says that, at the meeting on 25 July 2006, he exercised his casting vote based upon his belief that the deed of company arrangement was in the best interests of the unsecured creditors, including the Australian Taxation Office.
19 The adequacy of the second defendant's assessment of the value of the assets of the first defendant was in issue between the parties on this application.
20 In relation to the value of the first defendant's claim against Mr Fowler, the first defendant has filed an affidavit of Mr Barry Richardson, a director of the first defendant, who says that in October 2005 he was instructed by Mr Lindsay Forrest, the other director of the first defendant, to investigate the books of the first defendant. Mr Richardson says that, as at 30 June 2005, they showed the balance of Mr Fowler's loan account to be $202,012.74, including transactions in the sum of $177,783.40 for the financial year ended 30 June 2005. The latter sum included a payment of $130,000 made to Mr Fowler on 20 June 2005.
(Page 7)
21 Mr Richardson says that, on 19 November 2005, the first defendant wrote to Mr Fowler enquiring how much in total Mr Fowler had borrowed from the first defendant and requesting payment of the sum of $130,000 by 23 November 2005. There was then a meeting between, among others, Mr Forrest and Mr Fowler, and, following the meeting, Mr Forrest wrote to Mr Fowler requesting further information regarding Mr Fowler's borrowings. No response was received.
22 In February 2006, the first defendant instructed a solicitor to write to Mr Fowler demanding payment of the total sum of $236,466.60. That letter was returned to the solicitors unclaimed. Mr Richardson says that in the absence of any response the directors of the first defendant did not know whether Mr Fowler had any defence to the claim.
23 Ultimately, the first defendant caused a writ to be issued against Mr Fowler, claiming the amount of the borrowings in the financial year to 30 June 2005, namely $177,783.40, on the basis that Mr Fowler would then be forced to disclose any defence he claimed to have. The writ was served on 6 March 2006 and an appearance entered on 15 March 2006. A statement of claim was filed on 2 May 2006 and what is described as a "holding defence" was filed on behalf of Mr Fowler. Mr Richardson says the solicitors for Mr Fowler have said that Mr Fowler has a substantive defence, but have not disclosed the nature of it.
24 The claim against Mr Fowler was apparently discounted entirely by the second defendant as it was not referred to in his report to creditors. As I have mentioned, it was, however, raised by the representative of the plaintiff at the creditors' meeting on 25 July 2006.
25 I should add that by a chamber summons dated 17 August 2006, Mr Fowler applied for security for costs in the sum of $97,087. That application has been adjourned pending the outcome of the current application.
26 I should also say that it appears from an affidavit filed by his solicitor in this application that Mr Fowler contends the money shown as owing by him is in fact reimbursement of expenses incurred by him on behalf of the first defendant and payment of wages.
27 There is also a dispute between the parties as to the adequacy of the investigations by the second defendant in relation to the physical assets of the first defendant.
(Page 8)
28 An affidavit in support of this application has been sworn byMr Fowler, a director of the plaintiff. Mr Fowler says that from approximately June 2002 to 24 November 2005 he was a director of the first defendant and worked as its manager. He was removed as a director by Mr Forrest on 24 November 2005. Mr Fowler says he was aware that, just prior to his removal as a director, the first defendant owned a number of items of equipment, a list of which he has set out in his affidavit. Mr Fowler says that, in August 2006, while working on a plantation near Rockhampton in Queensland for another entity with which he is associated, he saw working on the same plantation most, if not all, of that equipment.
29 Mr Forrest, however, says in his affidavit in opposition to the application that the plant and equipment referred to by Mr Fowler is owned by DDT Plant Hire Pty Ltd ("DDT Plant Hire"). Mr Forrest says that, in March 2000, Mr Fowler and interests associated with Mr Forrest arranged for the incorporation of DDT Plant Hire. Mr Fowler had the day-to-day management and financial control of that company until 24 November 2005. On the formation of the first defendant, the ownership in the plant and equipment of the partnership was transferred to DDT Plant Hire and the business was transferred to the first defendant as trustee for a unit trust. Subsequently, when plant and equipment to be used by the first defendant was purchased or built, it would initially be paid for by the first defendant on behalf of DDT Plant Hire and entries would then be made in both companies' books to reflect ownership of the plant and equipment by DDT Plant Hire.
30 Mr Forrest says that, apart from five items, all of the items referred to by Mr Fowler are the property of DDT Plant Hire. Of the remaining five items, one is in the possession of the first defendant, one has nominal value only and the other three cannot be located.
31 There is also before me an affidavit of Harriette Benz, a solicitor for the plaintiff, in which Ms Benz says that, on 14 July 2006, in the course of a telephone conversation she told the second defendant that Mr Fowler had instructed her that the first defendant had purchased a bus which was registered in Mr Fowler's name. The bus was apparently not included in the list of assets of the first defendant nor otherwise referred to by the second defendant in his report to creditors.
32 Ms Benz says that she heard nothing further until, on 9 August 2006, the solicitor for the first defendant wrote to her requiring Mr Fowler to provide the first defendant with a signed transfer of the bus within
(Page 9)
- 14 days. Ms Benz says that in the meantime she had been told by Mr Fowler that the bus had been sold at auction in Rockhampton on 4 August 2006, while the first defendant was under administration.
The plaintiff's submissions
33 It was submitted on behalf of the plaintiff that the second defendant's report to creditors was deficient in a number of significant respects. It made a bald recommendation to enter into the deed of company arrangement, although the facts on which that recommendation was based are not evident. There was no substantiation of the allegations of misappropriation to support what is said to be a reason for the first defendant's failure. There was also no indication at all as to when the first defendant became insolvent. Unless that had been ascertained, the creditors could not be reliably informed as to the potential for voidable transactions. In addition, unless some reasonable investigation had been done into the company's affairs, there was, in any event, no basis upon which the creditors could be provided with any useful information as to the respective merits of the deed of company arrangement and a winding up.
34 On the basis of the amount of work and remuneration referred to in the report, it was in fact evident that the second defendant had done very little investigation into the affairs of the first defendant. And what investigation had been done was not disclosed. But the nature of the investigations was evident from the enquiries made into the claim against Mr Fowler, where the second defendant simply discussed it with Mr Fowler's solicitors. He apparently did not even discuss it with the first defendant's solicitors who issued the writ.
35 While the second defendant referred in the report to mismanagement, he apparently did not investigate it. Nor was there any reference to investigations into the whereabouts or value of the plant and equipment of the company. There was also no evidence that the second defendant had looked independently at the claims of the creditors of the first defendant. It seems that he simply relied on the views of the directors.
36 As appeared from the report to creditors, in the 21 days of the administration only 20 hours in total were spent on it by the second defendant and the same amount of time was spent by a manager from his office. There was no suggestion that there were constraints which limited the time available to that amount. Why so little was done was not explained. But it was reasonable to conclude that the second defendant did next to nothing by way of investigations into the affairs of the first
(Page 10)
- defendant in order to found his recommendation to enter into the deed of company arrangement.
37 Although the recommendation to enter into the deed of company arrangement was made on the basis that unsecured creditors would receive a dividend in the order of 4 cents in the dollar, in fact only one creditor - the Australian Taxation Office - received any payment under the terms of the deed and that was only in respect of the unpaid superannuation charge, which the payment only partly satisfied. No ordinary unsecured creditor received anything. When the resolution was put, the second defendant must have been aware that they would receive nothing.
38 It was therefore not evident how the deed of company arrangement could have been regarded as being in the best interests of unsecured creditors. It was also submitted that Forrest Nursery, the proponent of the proposed deed of company arrangement, avoided the consequence of a winding up in which its charge would have been unenforceable.
39 In the circumstances, the exercise of the discretion of the second defendant could not be described to be for the benefit of creditors. Everything pointed to a winding up of the company and an investigation into its affairs.
The first defendant's submissions
40 It was submitted on behalf of the first defendant that the investigations carried out by the second defendant were appropriate and reasonable in the circumstances. If there was any complaint about the adequacy of the investigation into the claim against Mr Fowler, that could have been remedied by disclosure by Mr Fowler, who was a director of the plaintiff. Similarly, Mr Fowler was in a position to know when the first defendant was insolvent, but he had not offered any view or evidence as to that.
41 It is also the case that, although Mr Fowler has asserted in his affidavit in support of this application that a number of assets of the company were not taken into account by the second defendant, Mr Fowler did not make those assertions at any time before the resolution to enter into the deed of company arrangement was passed. In any event, it has been answered by Mr Forrest. Although Mr Fowler has had the opportunity to do so, he has not sought to contradict Mr Fowler's evidence.
(Page 11)
The second defendant's submissions
42 It was submitted on behalf of the second defendant that the time constraints imposed by the Act do not allow an administrator to conduct a detailed, much less an exhaustive, investigation of the company or to provide detailed information to creditors. The second defendant appropriately summarised the information available from his investigations and that led to an inevitable conclusion that the creditors had negligible prospects of any recovery in a winding up.
43 The second defendant took adequate and reasonable steps to inform himself of the prospects of realisation and reached a conclusion, based on his experience, as to the prospects of actual recovery being made from the action against Mr Fowler - the only possible substantive asset of the first defendant. There was no prospect that the unsecured creditors of the company would be better off if the first defendant were wound up and neither the plaintiff nor any other creditor has demonstrated any prejudice to it, or a benefit to any other creditor, by the deed of company arrangement as opposed to a winding up.
The relevant principles
44 The relevant law is relatively well settled and I did not understand there to be any material dispute about it on this application.
45 A casting vote is a device to resolve a deadlock, not a deliberative vote. In Kirwan v Cresvale Far East Ltd (In Liq) (2002) 44 ACSR 21 at [361], the Court approved the following passage from the judgment in R v Bradford City Metropolitan Council; Ex parte Corris [1989] 3 All ER 156 at [160]:
"A person who has a second or casting vote is clearly under a duty to exercise it honestly and in accordance with what he believes to be the best interests of those who may be affected by the vote. Subject to this, however, it seems to me that the person presiding at a meeting was fully entitled to use his vote as he thinks fit."
46 The power of the Court under s 600B permits it to review the administrator's reason for the exercise of the casting vote. The Court need not confine itself to whether the administrator has acted honestly, as it is given a specific statutory power to hear an application to set aside or vary the resolution: Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd (2001) 37 ACSR 394 at [111].
(Page 12)
47 The Court does not automatically accept the honest exercise of the casting vote as an appropriate one. The Court's attitude will "depend on factors such as whether the administrator has properly exercised the casting vote in the interests of creditors as a whole": Re Martco Engineering Pty Ltd (1999) 32 ACSR 487 at [8]. The Court should therefore have available to it the material that was available to the administrator in deciding how to exercise the casting vote: Re Martco Engineering Pty Ltd (supra).
48 In Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd (supra), Austin J, at [112] - [113], referred to the following, non-exhaustive, considerations:
1. opposition to the proposal by the major creditor, especially when there is a large disproportion between the major debt and other debts;
2. support of the proposal by the directors where the proposal will deliver some advantage to them;
3. misleading information in the administrator's report;
4. whether creditors who voted in favour of the deed will be prejudiced if the court sets aside the resolution; and
5. whether the administrator has made adequate investigations before deciding on the casting vote.
49 In the end, the Court must weigh up all the relevant factors: Young v Sherman (2001) 40 ACSR 12 at [104].
50 In deciding whether an administrator's investigation is sufficient, the Court must take into account the circumstances in which such an investigation is to be undertaken. In Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498 at 510, Heerey J pointed out that the investigation intended by Pt 5.3A of the Act is to be a swift and practical one. For example, it is often not practicable for the administrator to use the powers of compulsory examination in the Act, given the limited time available for the administration. Whether the nature of the investigation, and the time spent and cost incurred, was reasonable must be assessed with regard to the limits of practical proportionality in the circumstances.
51 In Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453, Austin J observed (at 481) that the balance between speed and accuracy of investigation is a delicate one, and the distinction between an adequate preliminary investigation which concludes that there are grounds
(Page 13)
- for suspecting wrongdoing but goes no further, and inadequate investigation which fails to assemble available information with respect to wrongdoing, is a matter of degree.
52 Where the casting vote is used to pass a resolution that the company execute a deed of company arrangement and the Court considers that the scheme proposed is not in accordance with the objects of Pt 5.3A, that is an appropriate basis on which to set aside the casting vote: see Re Coalleen Pty Ltd [2000] 1 Qd R 245.
Should the casting vote be set aside?
53 It is apparent from the second defendant's report that he was aware that allegations had been made of the misappropriation of funds of the first defendant. That is one of the reasons he ascribes to the first defendant's insolvency. In his report, the second defendant does not, however, elaborate in any way on those allegations nor does he indicate the amount said to have been involved, any enquiries he has made into the allegations or the result of any such enquiries. Nor does he do so in his affidavit in opposition to this application.
54 If the allegations related to the first defendant's claim against Mr Fowler, it seems the second defendant's enquiries went no further than discussions with Mr Fowler's solicitors, who assured him (perhaps not surprisingly) that on their instructions the claim had no substance. While it appears that, following Mr Richardson's investigations of the accounts and the subsequent meeting between Mr Forrest and Mr Fowler, the directors of the first defendant remained uncertain whether Mr Fowler had any defence to the claim, they apparently considered there was a sufficient basis for the claim to warrant instructing a solicitor to issue legal proceedings against Mr Fowler. The solicitor, in turn, apparently considered that there was a proper basis upon which proceedings could be issued. But although potentially the largest identified asset of the first defendant, it seems that, following his discussions with Mr Fowler's solicitors, the second defendant attributed no significance to it at all, no mention of it being made in his report to creditors.
55 On the evidence before me, it is not apparent that any other investigations were carried out into the allegations of misappropriation.
56 It is also not apparent whether the second defendant arrived at any conclusion as to the date upon which the first defendant became insolvent and therefore whether he ascertained the relevant date for determining whether transactions were, or were likely to be, voidable or whether the
(Page 14)
- first defendant had traded while insolvent. That was obviously likely to be a critical element in any assessment of potential recovery action by the first defendant in a winding up and therefore in assessing whether the interests of creditors would be best served by an immediate winding up or the deed of company arrangement. In the absence of any conclusion as to the likely date of insolvency, it is not apparent how the second defendant could form any useful view as to possible recoveries that might be available on a winding up.
57 There is no reference to the date of insolvency in the second defendant's report or in his affidavit in opposition to this application. What does appear from his report, however, is that the books and records the second defendant obtained were mostly "computer data", the nature and contents of which he does not further describe; that he had been able to carry out only "limited investigations", which again he does not further describe; and that the description of the work he actually did, and the total time spent, appears to leave little time indeed for investigations into the company's affairs of a sort that might reveal facts on which an assessment of any reliability could be made of potential recoveries in a winding up.
58 I do not accept the argument of the defendants that it is not for the plaintiff to criticise the adequacy of the second defendant's investigations when it was incumbent upon Mr Fowler to volunteer such information as was known to him. It was first and foremost the obligation of the administrator to conduct such enquiries as were reasonably practicable to enable him to reach his own conclusion. I should also say that it is not suggested that the second defendant ever sought any relevant information from Mr Fowler.
59 It is also not evident what investigations the second defendant carried out to ascertain the value and whereabouts of the physical assets of the first defendant. His report is silent as to that but, on the evidence of Ms Benz, it seems that the issue of the bus, which was specifically brought to his attention some 10 days before the second creditor's meeting, was not followed up until after the resolution had been passed and effect had been given to the provisions of the deed of company arrangement. That tends to suggest there is room for concern as to the assiduousness with which enquiries into the plant and equipment were pursued.
60 Ultimately, the basis upon which the second defendant recommended that the deed of company arrangement be entered into was that the unsecured creditors would thereby receive a total dividend in the order of
(Page 15)
- $10,000, whereas in a winding up it was likely they would recover nothing.
61 In fact, it should have been apparent to the second defendant before the resolution to enter into the deed of company arrangement was put that, because of the amendment to the deed to give priority to the payment of the superannuation guarantee charge, the only creditor who stood to benefit at all was the Australian Taxation Office. The other creditors would receive nothing. And, as I have mentioned, notwithstanding the amendment, the Australian Taxation Office voted against the resolution.
62 In Young v Sherman (supra), Hodgson JA observed, albeit in a different context to the present, that where creditors are asked to vote on the entry into a deed of company arrangement it is important that matters relevant to the decision of creditors be put fairly to the meeting.
63 Whether in the present case the creditors who voted in favour of the resolution appreciated that the effect of the amendment was that they would receive no dividend at all is not apparent. But certainly, on the evidence before me, the second defendant, who ought to have appreciated that that would be the case, did not raise it nor did he qualify his recommendation in any way. There is nothing to suggest that it was alluded to at all before the creditors' vote or before the second defendant exercised his casting vote.
64 In the absence of any evidence to the contrary, it is, I think, reasonably to be inferred that it simply did not occur to the creditors before they voted or, more pertinently for present purposes, to the second defendant before he exercised his casting vote, that the basis upon which he had recommended the deed be entered into had disappeared.
65 On the material before me, the deed of company arrangement did not advance the objects of Pt 5.3A. Apart from a reluctant Australian Taxation Office, the unsecured creditors not only received no benefit at all but also forwent the possibility that upon a winding up further investigations would be conducted into the affairs of the first defendant that may lead to recoveries for insolvent trading, unfair preferences or uncommercial transactions which would result in some dividend payable to them.
66 In that respect, it is notable that upon a winding up, the only secured creditor was Westpac Banking Corporation in the sum of $30,000. The charge held by Forrest Nursery, the proponent of the deed, would be unenforceable.
(Page 16)
67 It seems to me there is substance in the submission by counsel for the plaintiff that, having regard to the contents of his report to creditors and particularly in the light of the nature and amount of the work actually done by or on behalf of the second defendant as administrator, the proposal for a deed of company arrangement was too readily recommended by the second defendant. Despite the unequivocal nature of the recommendation, in fact the investigations carried out by the second defendant were not sufficient to enable him to reach a firm conclusion that the interests of creditors would be best served by the deed of company arrangement.
68 Moreover, the recommendation was made on the basis of a benefit that, as a result of the amendment to the deed, had effectively disappeared by the time the vote was taken, without, it seems, that fact having been drawn to the attention of the creditors at the meeting or having occurred to the second defendant when he exercised his casting vote.
69 In my view, in the circumstances the second defendant did not properly exercise his casting vote and I would set it aside.
70 I will hear the parties on the consequential orders and on the costs of the application.
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