Central Data Networks Pty Ltd v Global Diagnostics Ltd
[1998] FCA 770
•30 JUNE 1998
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - insolvency - company under administration - Deed of Company Arrangement - validity of resolution - execution of Deed by administrator in dual capacity on behalf of company and in his own right - whether Deed should be terminated - further investigation of possible insolvent trading - no provision for right of set off - extinguishment of royalty entitlements under contractual agreements - no extension of time for administration sought.
Corporations Law
Corporations Regulations
Brash Holdings Limited v Katile Pty Ltd (1994) 12 ACLC 472, cited
Winterton Constructions Pty Ltd v M.A. Coleman Joinery Co Pty Ltd (1996) 20 ACSR 671, discussed
Mulcon Pty Ltd v MYT Engineering Pty Ltd (1996) 14 ACLC 1054, distinguished
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78, distinguished
CENTRAL DATA NETWORKS PTY LTD v GLOBAL DIAGNOSTICS LTD & ANOR
NG 3097 OF 1998
FRENCH J
PERTH
30 JUNE 1998
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 3097 of 1998
BETWEEN:
CENTRAL DATA NETWORKS PTY LTD
APPLICANT
AND:
GLOBAL DIAGNOSTICS LTD & ANOR
RESPONDENT
JUDGE:
FRENCH J
DATE OF ORDER:
30 JUNE 1998
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
The application is dismissed.
It is hereby declared that the Deed of Company Arrangement executed on 28 May 1998 is valid.
The Applicant to pay the Respondent’s costs of the application.
There is no separate order for costs on the cross-claim.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 3097 of 1998
BETWEEN:
CENTRAL DATA NETWORKS PTY LTD
APPLICANT
AND:
GLOBAL DIAGNOSTICS LTD & ANOR
RESPONDENT
JUDGE:
FRENCH J
DATE:
30 JUNE 1998
PLACE:
PERTH
REASONS FOR JUDGMENT
Introduction
This case arises out of two competing proposals for Deeds of Company Arrangement considered at a meeting of the creditors of a company under administration pursuant to Part 5.3A of the Corporations Law. Questions relating to the validity of the resolution placing the company in administration, the execution of the Deed and the fairness of the Deed are all raised in this case.
Factual Background
Global Diagnostics Pty Ltd (GDL) was incorporated on 3 December 1996. It was formed to develop and provide teleradiology software for medical diagnostic purposes. The directors were John Walker, Michael Dake, Kim Slatyer, Leon Ivory and Steven Cole. The company’s history is brief and unspectacular. It was funded from the outset by private subscriptions. From 3 December 1996 until 30 June 1997 it made an operating loss before tax of $199,914. By 30 November that loss had risen to $639,768. In January 1998 the company issued a prospectus seeking to raise $600,000 to continue product development. However on 9 February 1998 the directors passed a resolution in the following terms:
.That it is the opinion of the directors voting for this resolution that the company either is insolvent or is imminently likely to become insolvent and that an administrator of the company be appointed in terms of s 436A of the Corporations Law.
.That Geoffrey Totterdell of Price Waterhouse be approached to act as administrator and failing him a qualified person recommended by the company’s auditor.
.That the common seal of the company be affixed to the administrator’s instrument of appointment.
Mr Totterdell consented to the appointment on the same day.
On 13 June 1997, GDL had entered into three agreements with Central Data Networks Pty Ltd (CDN). They were designated:
1.Sale/Purchase of Intellectual Property and contract rights.
2.Consultancy Service Agreement.
3.Patent Assignment Deed.
The Sale/Purchase Agreement involved the assignment by CDN to GDL of intellectual property and other rights to a product called “Screenlink” and associated products. The purchase price was $100,000 together with an entitlement to royalties on product sales by GDL calculated as follows:
.$3,000 per unit for the first 100 unit.
.$2,250 per unit for the next 300 units.
.$1,500 per unit for all further units.
The royalties were to apply for a three year period or until 1,200 units had been sold if it took longer than three years to sell that many.
Clause 5.5 of the Agreement gave CDN a right of first refusal for the reacquisition of the intellectual property in the event of the insolvency of GDL at any time during the currency of the Agreement and in the event of a proposed sale by GDL to a third party.
By the Consultancy Service Agreement CDN was to provide computer software programming and development, system development, installation and support and product promotion and presentation. An annual fee of $320,000 was payable for these services.
The third agreement was a Patent Assignment Deed, whereby CDN agreed to assign its rights in the Screenlink invention at the direction of the inventors, Robert Frizza and Robert Zanier. This was ancillary to the Sale/Purchase Agreement and did not involve additional consideration.
A report on the affairs of the company as required by the Corporations Law was signed by the director, Steven Cole, on 10 February 1998. It disclosed assets of an estimated realisable value of $377,593, unsecured creditors of $442,954 and contingent liabilities of $34,800. The assets figure included $260,000 for intellectual property calculated on the basis of a $100,000 acquisition cost and $160,000 capital development expenditure.
The first meeting of creditors was held on 16 February 1998. The report of affairs was tabled and the meeting appointed a committee of creditors.
On 27 February, the administrator sent his first report to creditors under s 439A of the Corporations Law. He reviewed the financial history of the company and provided a summary of the report of affairs. The estimated deficiency was $100,161.
Investigations to that point had not revealed evidence of any payments which could be categorised as voidable or preferential. On the question whether there had been insolvent trading he noted that after excluding loans repayable to directors or associated entities the disclosed net liabilities were about $120,601. The proposed capital raising, if successful, might have produced sufficient capital to continue trading. He concluded that there might be other circumstances of which he was then unaware “to mitigate continued trading by the company and this may be revealed if investigated by a liquidator”.
Alternatives were canvassed in the report. The continuation of business operations was dependent upon an injection of capital into the company. There was only a limited market for the sale of the business whose principal value lay in its intellectual property.
Options available to creditors under s 439C were:
1.The company execute a Deed of Company Arrangement.
2.The administration end.
3.The company be wound up.
Under the heading “Deed of Company Arrangement” Mr Totterdell said that he had received indications from certain directors that they would be providing him with proposals for a Deed of Company Arrangement or purchase of the assets. He had received a proposal from Etchtech Australia Pty Ltd as trustee for J.D. Walker Investment Trust, an entity associated with the director, Dr John Walker. The terms of that offer were:
1. A contribution of $50,000 to the administration.
2. The administrator to have control of the cash at bank and the pool of funds
to be distributed to creditors in accordance with the priorities in the
Corporations Law.3.The directors to resume control of the company and assets on satisfactory execution of the Deed of Arrangement.
It was a condition of the proposal that CDN agree to certain terms including that it would have no further claim against the company. Mr Totterdell noted that CDN advised it did consider it had a claim against the company. He thought it might not be possible to proceed with this proposal until the issue of CDN claim had been resolved. He went on to suggest that creditors might consider it in their interests and that of the company to defer a decision on the various options and to adjourn the meeting albeit it could not be for a period greater than sixty days from the first day on which it was held. He considered this to be the best option.
At the creditors meeting held on 9 March 1998 Mr Totterdell advised that he was expecting a further offer to be received within the next fortnight. A resolution was unanimously carried that:
“... the meeting be adjourned for a period not exceeding 60 days.”
The motion was moved by Mr Louis Nilant who represented Vasse Venture Capital Pty Ltd at the meeting. That company was associated with Messrs. Ivory and Slatyer.
On 30 April 1998 Mr Totterdell gave notice of the adjourned meeting to be held on 8 May 1998. The notice described the purpose of the meeting thus:
“.To consider the Administrator’s Further Report about the business, property, affairs and financial circumstances of the company. A copy of that report is enclosed with this notice.
. To consider the Administrator’s opinion on each of the following matters:
(a)Whether it would be in the creditors interests for the company to execute a Deed of Company Arrangement.
(b)Whether it would be in the creditors’ interests for the administration to end.
(c)Whether it would be in the creditors’ interests for the company to be wound up.
A statement of the Administrator’s opinion on each of the above is enclosed with this notice.
.To consider and if thought fit approve the remuneration and disbursements of the Administrator of the company.
.To consider and if thought fit approve the receipts and payments of the Administrator of the company.
.Any other business arising.”
A report to creditors dated 30 April 1998 accompanied the notice. The executive summary at the beginning of the report said:
“1.1I refer to my report to creditors dated 27 February 1998 and to the meeting of creditors held on 9 March 1998. At that meeting it was resolved to adjourn for the following reasons:
.to allow any parties that have expressed an interest in pursuing a Deed of Company Arrangement to finalise their proposals involving financial support for the continued development and promotion of the product; and
.to allow the Administrator time to investigate the feasibility of realising the assets of the Company, in particular the disposing of the intellectual property rights.
1.2At this stage I am unable to make a recommendation to creditors as to which alternative would best suit their commercial interests. It is anticipated that further details of a proposed Deed of Company Arrangement will be made available at the meeting of creditors on 8 May 1998.”
Section 4 of the report was in the following terms under the heading “Proposed Deed of Company Arrangement:
“4.1As disclosed in the meeting of creditors held on 9 March, 1998, I received a proposal for a Deed of Company Arrangement from a director, Dr John Walker, the principal terms of which are:
(a)an amount of $50,000 will be contributed to the administration;
(b)the Administrator will have control of the contribution and this is to be distributed to creditors in accordance with the Corporations Law;
(c)the directors will resume control of the company and the remaining assets upon satisfaction of the terms of the Deed of Company Arrangement.
4.2On 30 April 1998 I was advised by solicitors, Corrs Chambers Westgarth, of a proposal to be placed before the creditors at the meeting to be held on 8 May 1998. I am informed that their clients are not in a position to provide details of their proposal for a Deed of Arrangement at this time, albeit that the offer envisages a payment of $50,000 and an Administrator Appointed to a Deed of Company Arrangement.
4.3In either case, pursuant to clause 5.5 of the Sale and Purchase Agreement dated 13 June 1997, Central Data Networks, a creditor, have a right of first refusal in respect of any offer under my consideration. A request was made to that company on 7 April 1998 requesting advice whether they had a proposal to acquire the assets. A further letter was sent on 16 April 1998, however, no response has been received.”
In s 6 under the heading “Administrator’s Opinion on Matters to be Decided at the Adjourned Second Meeting of Creditors” it was said:
“6.1Having regard to the information available at the date of this Report and subject to the discussions in Section 5 of this report, in my opinion it is in the best interests of creditors:
(a)for the Company not to execute a Deed of Company Arrangement unless an offer is received sufficient for all unrelated unsecured creditors to receive a dividend on their proven claims;
(b)for the administration NOT to end (ie the Company should not be refunded to its pre-administration status);
(c)for the company to be wound up.”
A meeting of creditors was held on 8 May 1998. At the meeting Mr Totterdell advised the creditors that he had now received two proposals for the purchase of the company’s intellectual property. One was the proposal from Dr Walker in association with Dr Dake which had been foreshadowed at the previous meeting. A document explaining the proposal had been prepared by Mr Totterdell and was circulated at the meeting. It was headed:
“Proposal for Deed of Company Arrangement submitted by Drs J. Walker and M. Dake”.
It involved payment of priority creditors ($21,638), full repayment of unsecured creditors with claims less than $2,500 ($12,565) and 11 cents in the dollar to the Ordinary Unsecured Creditors other than CDN and the various director related entities ($22,206).
Administrator’s fees ($8,000) and legal costs for preparation of the Deed ($6,000) were also to be met. There was a precondition with respect to CDN to be met which was in the following terms:
“(i)CDN are prepared to renegotiate an ongoing mutually beneficial relationship with a restructured GDL Board with the assurance that on entering any such arrangement all prior contracts, deeds and formal arrangements between the two parties become null and void and no longer legally binding other than where specifically referred to below;
(ii)GDL acknowledge that the Intellectual Property for the “Radlink” and related “Viewlink” and “Reportlink” systems will revert in total to CDN;
(iii)GDL will be offered an International exclusive sub-licence for the marketing, sales, installation, service and maintenance of the above systems;
(iv)CDN to preserve their own corporate autonomy as developers of software technologies and telemedicine systems;
(v)CDN to be offered preferentially without prejudice or obligation on an independent sub-contract basis all ongoing software development and networking requirements of GDL;
(vi)GDL agrees to drop all legal, financial and professional claims without qualification against CDN;
(vii)CDN agrees to drop all legal, financial and professional claims without qualification against GDL.”
Other conditions included retention of Drs Walker and Dake as directors of GDL. Slatyer and Ivory were to relinquish certain additional shares given to them and to resign as directors of GDN but otherwise remain as shareholders.
Also circulated at the meeting was a document entitled “Explanatory Memorandum in Relation to Resolution put by Messrs. Leon Ivory and Kim Slatyer”. It had been prepared by them. The Memorandum, under the heading “Attachment”, said:
“Attached to this memorandum is a Deed of Company Arrangement. The schedule to the Deed of Company Arrangement is a copy of a letter of offer. The offer, by Vasse Venture Capital Pty Ltd (“Vasse”) is for the purchase of the whole of the Company’s business for the following consideration.
1.$130,000.00 cash.
2.The release of indebtedness of at least $162,000.00”
And under the heading “Resolution” it said:
“The Resolution Messrs Ivory and Slatyer propose is as follows:
THAT the Company and the Administrator execute a Deed of Company arrangement in terms of or substantially similar to the attached draft.”
The effect of the resolution was explained in terms that:
“... the Company and the Administrator will execute a Deed of Company Arrangement in terms of the attached draft.”
A draft Deed of Company Arrangement was circulated with the memorandum.
The minutes of the meeting which commenced at 10am on 8 May record that those present included the administrator, Messrs. Cole, Ivory and Walker from among the directors of the company, Mr D.J. Timmins and Ms M.J. Humann from the administrator’s office and thirty nine ordinary unsecured creditors represented personally and by proxy. Vasse Venture Capital, with a number of other creditors, was represented by Louis Nilant, an accountant who is himself a registered liquidator.
According to the minutes the meeting adjourned at 10.30am to enable the creditors to consider both proposals and reconvened at 12.10pm.
When it reconvened, Mr Zanier, representing CDN, said there had been insufficient time to consider the proposal from Messrs. Ivory and Slatyer and moved the meeting be further adjourned to 3pm to enable time to consider the proposal. Mr Cole sought an amendment that the adjournment be conditional on Ivory and Slatyer not withdrawing their offer prior to the adjournment. No such undertaking was forthcoming. It was then resolved that the meeting be adjourned at 12.25pm for ten minutes.
The meeting reconvened at 12.40pm. The minutes then record that it was moved by Mr Nilant that:
“The proposal submitted by Messrs. Ivory and Slatyer being for the purchase of the business and assets of the Company for a sum of $130,000 conditional on the release of certain creditors and amended to include payment in full of all creditors whose debts did not exceed $3,000 be approved.”
The motion was carried on the voices. According to the minutes Mr Nilant then moved:
“Mr G F Totterdell be appointed Administrator of the Deed of Company Arrangement.”
That motion was carried unanimously on the voices.
The meeting was declared closed at 1pm.
There was some difference of recollection about the terms of the resolution passed by the meeting. Mr Totterdell told the Court that the minutes were prepared from notes taken at the meeting by David Timmins, a manager working with Price Waterhouse. Mr Totterdell had no reason to, and could not question, what the minutes’ secretary had recorded. Timmins had been a manager at Price Waterhouse for eight and a half years and was experienced in the conduct of creditor’s meetings.
Louis Nilant also gave evidence by affidavit on which he was cross-examined. He said he had been engaged by Vasse Venture Capital Pty Ltd and its directors, Messrs. Ivory and Slatyer, in relation to the administration. It was his evidence that when the meeting reconvened after the short adjournment he proposed a motion. He said:
“I specifically recall the motion I proposed was short and to the point and was as follows:
“That the Ivory/Slatyer proposal for a deed of company arrangement be accepted.””
He said he recalled that the meeting had dragged on and that he considered it was an appropriate time to put the resolution as simply as possible and have the matter voted on.
In cross examination Mr Nilant said that his recollection of the form of resolution he had put was “very distinct” and that was the way he would normally frame a resolution if he were putting it. He did not look at notes of the meeting to refresh his memory as there was no need to. He said he “knew exactly” what he had moved. He had also been conscious of the variation to the proposal that creditors whose debts were less than $3,000 would receive 100 cents in the dollar.
Doctor Walker said in his affidavit that a motion was carried in favour of the Ivory/Slatyer proposal. He had wanted more time to consider the proposal and had asked for the meeting to be adjourned to 3pm but this had not occurred. Mr Cole said in his affidavit that “the minutes fairly reflect what was discussed at the meeting”.
Although it makes no difference to the outcome of this application, I am satisfied on the evidence before me that the terms of the resolution were as recalled by Mr Nilant. He had considerable experience as an insolvency practitioner. Mr Timmins who drafted the minutes was not called as a witness. His recollection was not able to be tested. He would have been making his notes immediately after the event and there is the possibility that the form of resolution as he recorded it involved an element of reconstruction. Mr Totterdell’s answers in cross-examination indicated that rather than relying upon his own recollection he was placing his faith in what the minutes recorded. Mr Cole’s affidavit suggested he was making a value judgment about the connection between the minutes and the resolution as passed.
On 12 May, Vasse Venture Capital Pty Ltd sent a proposed revised Deed of Company Arrangement to Mr Totterdell’s solicitors, Jackson McDonald, together with a draft offer dated 8 May. The offer was in accordance with that outlined at the meeting of 8 May. The proposed completion date was 8 June 1998 or such other date as the parties might agree.
An exchange of correspondence took place between Griffith Hack and later Nash O’Neill Tomko on behalf of CDN and Jackson McDonald on behalf of Mr Totterdell. CDN raised concerns, inter alia, that the resolutions recorded in the minutes did not accurately reflect what was decided at the meeting. Assertions were made about Mr Totterdell’s obligations to honour GDL’s obligations to CDN under the Sale/Purchase Agreement. Undertakings were sought.
On 28 May, Mr Cole was telephoned by Mr Slatyer and the solicitor for Vasse requesting that he convene a meeting of the board of directors of GDL to execute the Deed.
Mr Cole formed the view that Messrs. Ivory and Slatyer had a conflict of interest between their positions as directors of GDN and their involvement with the proposal which had been approved by the meeting of creditors. He had previously tried to get in touch Dr Dake in the USA where he resides. He was unable to make contact with him. In the available time within which he was informed the Deed was required to be executed under the Corporations Law (ie by 29 May 1998) and having regard to the prospective conflict of interest on the part of Dr Dake in relation to the Walker/Dake proposal, he did not seek to contact him again concerning the convening of a board meeting to execute the Deed. He also telephoned Dr Walker on the same day and was informed by Dr Walker that he believed he also had a conflict of interest between his position as director of GDL and his interest in the Walker/Dake proposal. Mr Cole then informed Mr Totterdell that a meeting of the board of directors of GDL would not be able to be convened in accordance with its Articles of Association and the Corporations Law to pass a resolution to authorise the Deed to be executed. Mr Totterdell proceeded on that day, 28 May, to sign the Deed of Company Arrangement in his capacity as administrator of the deed. He also caused the common seal of GDL to be affixed to it and witnessed the affixing as administrator of GDL and on its behalf.
On the same day these proceedings were commenced in the New South Wales District Registry of this Court. Orders were sought extending the time for execution of the Deed and restraining the company and Mr Totterdell from executing any instrument under s 444A until further order. Declarations were sought including a declaration that the resolution of the creditors of 8 May did not comply with s 439C of the Corporations Law.
Madgwick J heard an ex parte application for interlocutory relief, which he denied. He directed a change of venue to Perth and made the application returnable on 3 June 1998. Leave was given to commence and maintain proceedings against GDL.
On 3 June Madgwick J made further orders relating to the filing of an amended application and affidavits and for a hearing date to be arranged with the District Registrar in Perth.
On 8 June Mr Totterdell made an application on short notice to the Supreme Court of Western Australia seeking directions under s 447D of the Corporations Law on whether he could accept the offer made by Vasse Venture Capital Pty Ltd on 8 June 1998 and on other questions related to the Deed of Company Arrangement, the status of the administration and the disposition of the intellectual property rights.
On the same day Corrs Chambers Westgarth, on behalf of Vasse Venture Capital Pty Ltd, wrote to Jackson McDonald varying that company’s offer of 8 May 1998 by extending its completion date to 9 June. It varied cl 3 of the earlier offer by acknowledging CDN’s right of first refusal as arising pursuant to cl 5.5 of the Sale/Purchase of Intellectual Property Rights Agreement. It also added a new clause undertaking to be bound by cl 5.5 and agreed to enter into a covenant with CDN to comply with the terms of the Sale/Purchase Agreement.
Templeman J made ex parte orders on 9 June in the following terms:
“1.Pursuant to Section 447D of the Corporations Law (or in the alternative pursuant to Section 511 of the Corporations Law if the applicant is held to be a liquidator of Global Diagnostics Limited the applicant is at liberty to accept the amended offer made by Vasse Venture Capital Pty Ltd dated 8 June 1998 to acquire the intellectual property as defined therein on the terms thereof.
2. The costs of the application be reserved.
3. The matter otherwise be adjourned sine die.”
On 11 June these proceedings came before me for further directions and the application was set down for hearing on 23 June.
The application was amended pursuant to the leave granted by Madgwick J and a cross-claim filed by Mr Totterdell and GDL was amended at the hearing by consent.
The Deed of Company Arrangement
The Deed began by reciting the appointment of the administrator, the resolution of the creditors and the agreement of the administrator and the company to execute the Deed.
Clause 5 provided that the company should accept “the Offer” defined in cl 1.1 as:
“...the letter of offer to the Company for the purchase of the Business from Vasse Venture Capital Pty Ltd (ACN 080 369 106) dated 8 May 1998, a copy of which is attached as a schedule to this Deed;”
Clause 6 provided that:
“The property of the Company that is available to pay Creditors’ claims is all amounts accruing to the Company upon completion of the agreement resulting from an acceptance of the Offer and any other agreement entered into by the Company in respect of the assets of the Business.”
Clause 7 said that subject to s 444D of the Law the Deed might be pleaded by the Company against any creditor in bar of any debt or claim admissible under the Deed.
By cl 8 the company was, pursuant to the terms of the Deed, released from all debts and claims admissible to proof.
Clause 11 provided:
“The Administrator shall apply the property of the Company coming under his control under this Deed in order of priority specified in section 556 of the Law EXCEPT THAT unsecured Creditors who prove in an amount not exceeding $3,000.00 shall be paid in priority to all other unsecured debts and claims. For the purposes of this clause all of the costs and expenses of the Administrator and the costs of the administration shall be regarded as costs falling within section 556(1)(a) of the Law.”
Under cl 13 the creditors were required to accept their entitlements under the Deed in full satisfaction and discharge of all debts and claims against the company as at 9 February 1998. Creditors’ claims may be revived if the Deed is terminated other than by payment of a dividend to unsecured creditors and lodgment of the appropriate notice by the administrator at the Australian Securities Commission (cl 16.1).
Clause 4 referred to provisions prescribed by Schedule 8A to the Corporations Regulations and excluded paragraphs 5, 6 and 8 of those provisions. This left in place, inter alia, paragraph 4 which says:
“The administrator must apply the property of the company coming under his or her control under this deed in the order of priority specified in section 556 of the Corporations Law.”
The Application and the Cross Claim
By its application, CDN sought declarations that the resolution of creditors of 8 May 1998 did not comply with s 439C of the Corporations Law and that GDL ceased to be under administration upon the expiration of the convening period under s 439A. Alternatively, declarations were sought that the Deed of Company Arrangement was not prepared in accordance with s 444A of the Corporations Law and was not validly executed by or on behalf of GDL. Further in the alternative, a declaration was sought that GDL is and has been since 30 May 1998 in liquidation and that Mr Totterdell is, in truth, its liquidator.
A further declaration was sought that in the event of a sale to a third party of the intellectual property rights whether pursuant to a Deed of Company Arrangement or otherwise, Mr Totterdell and GDL must comply with the terms of cl 5.4 of the Agreement and either ensure that the third party purchaser covenants with CDN to comply with the terms of the agreement or otherwise secures to the reasonable satisfaction of CDN the compliance by any third party purchaser with the Purchaser’s Undertaking as defined in the Sale/Purchase Agreement.
A declaration was also sought that the offer of first refusal contained in the letter from Jackson McDonald on behalf of Mr Totterdell and GDL purporting to have been given under paragraph 5.5 of the Agreement was not a valid offer and in the alternative an order pursuant to s 445D of the Corporations Law terminating the Deed of Company Arrangement which was executed on 28 May.
By the cross-claim, Mr Totterdell sought a declaration as to the validity of the Deed of Company Arrangement and further and in the alternative, a declaration under s 1322(4) of the Corporations Law that the resolution was not invalid by reason only of any alleged contravention of s 439C. A similar declaration is sought by GDL.
Statutory Framework
The provisions of the Corporations Law relevant for present purposes are, for the most part, found in Part 5.3A entitled “Administration Of A Company’s Affairs With A View To Executing A Deed Of Company Arrangement”. The Part was enacted to create a mechanism by which a company which is or maybe insolvent can be subjected to control by an administrator to the exclusion of its normal officers for a strictly limited period during which the administrator is charged to investigate the affairs of the company in order to ascertain which of three courses should be adopted; execution of a Deed of Company Arrangement, winding up or cessation of the administration. Part 5.3A contemplates that at the end of the period of administration the creditors will decide which of these three steps should be taken. In the meantime there is a moratorium on actions or proceedings against the company - Brash Holdings Limited v Katile Pty Ltd (1994) 12 ACLC 472 at 476. The object of Part 5.3A is set out in s 435A:
“435A The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence - results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”
The beginning and the ending of the company administration is defined according to rules set out in s 435C of the Corporations Law which provides, in the relevant parts:
“435C(1) The administration of a company:
(a)begins when an administrator of the company is appointed under section 436A, 436B or 436C; and
(b)ends on the happening of whichever event of a kind referred to in subsection (2) or (3) happens first after the administration begins.
(2) The normal outcome of the administration of a company is that:
(a)a deed of company arrangement is executed by both the company and the deed’s administrator; or
(b)the company’s creditors resolve under paragraph 439C(b) that the administration should end; or
(c)the company’s creditors resolve under paragraph 439C(c) that the company be wound up.
(3) However, the administration of a company may also end because:
.
.
.
(b)the convening period, as fixed by subsection 439A(5), for a meeting of the company’s creditors ends:
(i)without the meeting being convened in accordance with section 439A; and
(ii)without an application being made for the Court to extend under subsection 439A(6) the convening period for the meeting; or
.
.
.
(e)such a meeting convened under section 439A ends (whether or not it was earlier adjourned) without a resolution under section 439C being passed at the meeting; or
(f)the company contravenes subsection 444B(2) by failing to execute a proposed deed of company arrangement; or
.
.
.
(4) During the administration of a company, the company is taken to be under administration.”
Section 436A provides for the appointment of an administrator of the company where the board has so resolved and in the opinion of the directors voting for the resolution the company is insolvent or likely to become insolvent at some future time.
Section 436E relates to the purpose and timing of the first meeting of creditors and imposes an obligation on the administrator to convene such a meeting within five business days after the administration begins in order to determine whether to appoint a committee of creditors and, if so, who are to be the committee’s members.
The role of the administrator is set out in s 437A in the following terms:
“437A(1) While a company is under administration, the administrator:
(a)has control of the company’s business, property and affairs; and
(b)may carry on that business and manage that property and those affairs; and
(c)may terminate or dispose of all or part of that business, and may dispose of any of that property; and
(d)may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.
(2) Nothing in subsection (1) limits the generality of anything else in it.”
In addition, by virtue of s 437B:
“437B When performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company’s agent.”
And while a company is under administration, no person other than the administrator can perform or exercise a function or power as an officer of the company except with the administrator’s written approval. This does not involve removal of an officer of a company from his or her office.
The administrator is required, as soon as practicable after the administration of the company begins, to investigate its business, property, affairs and financial circumstances. He is also required to form an opinion about whether it is in the interests of the company’s creditors for it to execute a Deed of Company Arrangement or for the administration to end or for the company to be wound up (s 438A). There is a duty on directors to assist the administrator in the provision of information relating to the company (s 438B). The administrator has a right to the company’s books which overcomes any lien on those books (s 438C) and may report on whether officers or members of the company have been guilty of any offence in relation to it among other things.
Provisions for the convening of a meeting of creditors and informing creditors in relation to their options are to be found in s 439A. The meeting is to be held within five business days after the end of the “convening period” (s 439A(2)). The convening period is defined relevantly for present purposes as the “period of 21 days beginning on the day when the administration begins” (s 439A(5)). The administrator is required to convene the meeting by giving written notice to the company’s creditors and causing notice of the meeting to be published at least five business days before it occurs (s 439A(3)). The notice given to creditors is to be accompanied by an administrator’s report and a statement of his opinion about the options of execution of the Deed of Company Arrangement, termination of the administration and winding up of the company (s 439A(4)). There is provision for extension by the Court of the convening period (s 439A(6)).
Section 439B relates to the conduct of the meeting and provides:
“439B(1) At a meeting convened under section 439A, the administrator is to preside.
(2) A meeting convened under section 439A may be adjourned from time to time, but cannot be adjourned to a day that is more than 60 days after the first day on which the meeting was held, even if no resolution under section 439C has been passed at the meeting.”
At a meeting convened under s 439A the powers of the creditors are as follows:
“439C At a meeting convened under section 439A, the creditors may resolve:
(a)that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or
(b)that the administration should end; or
(c)that the company be wound up.”
Provisions relating to the execution and effect of a Deed of Company Arrangement are found in Division 10 of Part 5.3A. Section 444A relevantly provides:
“444A(1) This section applies where, at a meeting convened under section 439A, a company’s creditors resolve that the company execute a deed of company arrangement.
(2) The administrator of the company is to be the administrator of the deed, unless the creditors, by resolution passed at the meeting, appoint someone else to be administrator of the deed.
(3) The administrator of the deed must prepare an instrument setting out the terms of the deed.”
Subsection 444A(4) sets out the matters to be specified in the deed and under s 444A(5) it is taken to include Prescribed Provisions (under Schedule 8A of the Corporations Regulations) except so far as it provides otherwise.
Execution of the deed is governed by s 444B:
“444B(1) This section applies where an instrument is prepared under section 444A.
(2) The company must execute the instrument within:
(a)21 days after the end of the meeting of creditors; or
(b)such further period as the Court allows on an application made within those 21 days.
(3) The board of the company may, by resolution, authorise the instrument to be executed by or on behalf of the company.
(4) Subsection (3) has effect despite section 437C, but does not limit the functions and powers of the administrator of the company.
(5) The administrator of the deed must execute the instrument before, or as soon as practicable after, the company executes it.
(6) When executed by both the company and the deed’s administrator, the instrument becomes a deed of company arrangement.
(7) Division 12 provides for consequences of the company contravening subsection (2).”
Division 11 relates to the variation, termination and avoidance of a deed and relevantly for present purposes s 445D provides:
“445D(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
.
.
.
(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,
(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.
(2) An order may be made on the application of:
(a)a creditor of the company; or
(b)the company; or
(c)any other interested person.”
Section 447B provides for the administrator of a company under administration or of a Deed of Company Arrangement to apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator’s functions and powers.
Ground 1 of the Application - The Validity of the Resolution
It was submitted for CDN that the resolution recorded in the minutes of 8 May 1998 was not a resolution that GDL enter into a Deed of Company Arrangement consistent with the requirements of s 439C(a). The point at issue appears to be the narrow one, that the resolution related to the sale of assets but did not say that the company enter into a Deed of Company Arrangement. This it was said by counsel for CDN “is an integral part of the resolution that is required to be passed under s 439C if subparagraph (a) is to be relied upon - that the resolution itself say that the company enter into a deed of company arrangement”. There was, it was said, a resolution that approved the company disposing of its business and assets in terms of what was a draft proposal at the time and which subsequently became a formal proposal even though in a varied form.
Section 439C(a) provides that creditors may resolve that the company execute a Deed of Company Arrangement specified in the resolution. But this does not impose upon creditors an obligation of semantic conformity with the words of the section. The resolution must, as a matter of substance, fall within the authority of the section. Assuming that the resolution was in the terms set out in the minutes, it referred to approval of a proposal submitted by Messrs Ivory/Slatyer. That proposal had been circulated at the meeting in the form of a memorandum attaching a Deed of Company Arrangement. There is no doubt that on the resolution recorded in the minutes the creditors were approving the execution of a specified Deed of Company Arrangement. This is reinforced by the subsequent resolution appointing Mr Totterdell as administrator of the Deed. And on Mr Nilant’s version of the resolution, which I consider to be the more accurate, the case is stronger for the proposition that the resolution fell within the scope of s 439C(a).
In my opinion therefore, the first ground of the application fails.
Ground 1A - Cessation of GDL as a Company Under Administration
Paragraph 1A of the application seeks a declaration that GDL cease to be a company under administration upon the expiration of the convening period under s 439A of the Corporations Law. This proposition appears to depend upon the provisions of s 435C(3)(e) which specifies as a basis for the termination of the administration of a company that the meeting convened under s 439A ends without a resolution under s 439C being passed at the meeting.
That depends critically upon the first ground of the application namely, that no resolution complying with the requirements of s 439C was passed. That having been decided adversely to the applicant, it follows that ground 1A also fails.
Ground 1B - Non-compliance with Section 444A of the Corporations Law
Ground 1B of the application asserts that the Deed of Company Arrangement dated 28 May 1998 was not prepared in accordance with s 444A of the Corporations Law. This was not the subject of either written or oral submissions on behalf of CDN. In GDL’s written submissions reference is made to the various clauses of the Deed which meet the requirements of s 444A. In comparing these clauses with the provisions of the section, it is apparent that each of its requirements is reflected in the Deed. Ground 1B also fails.
Ground 1C - Invalid Execution of the Deed of Company Arrangement
It was submitted for CDN that there was no meeting of the directors of GDL for the purpose of considering and/or approving the execution of the Deed of Company Arrangement by the company under the common seal as contemplated by s 444B(3).
The requirement of the Act is that both the company and the administrator must execute the Deed (s 444B(2) and (5)). Section 444A(c) authorises the administrator of a company under administration to execute a document in the company’s name or do anything else in the company’s name and on its behalf. And pursuant to s 442A(d) the administrator can do “whatever else is necessary for the purposes of this Part”.
There is no doubt that the execution of a Deed of Company Arrangement may be done pursuant to a resolution of the board of the company under s 444B(3). But that provision is by way of facultative exception to suspension of the directors’ powers during the period of administration which is effected by s 437A and 437C read together. It does not operate to limit the powers of the administrator where the directors are unable or unwilling to execute the Deed. As s 437A makes clear, the administrator, while the company is under administration, “may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration”.
It may be questionable whether in exercising the company’s power to enter into the Deed of Company Arrangement Mr Totterdell was required to affix the common seal given that he was exercising a power on behalf of the company which power was conferred by statute.
In any event, in my opinion, the Deed was validly executed by the administrator in his own right and on behalf of the company as required by s 444B.
Counsel for CDN did refer to the decision of Young J in Winterton Constructions Pty Ltd v M.A. Coleman Joinery Co Pty Ltd (1996) 20 ACSR 671, and in particular his Honour’s observation at 672 about the deed of company arrangement in that case:
“The deed, which was termed a deed of company arrangement, was executed under the common seal of the first defendant by the administrator, who also signed for himself. There has been some debate before me as to whether that was appropriate, mainly I must confess engendered by myself. The directors have power to execute such a deed under section 444B(3) of the Corporations Law. The administrator’s general power to bind the company would give him or her the right to sign on behalf of the company. To my mind, there is a question as to whether the administrator can sign such a deed on behalf of the company, or if he or she can, whether he or she should. However, as no point is taken in this case, that question should be left for another day.”
The point taken before me was not taken before his Honour and his Honour did not decide the question which he himself had raised.
Reference was also made to Mulcon Pty Ltd v MYT Engineering Pty Ltd (1996) 14 ACLC 1054 (on appeal MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78). But that was a case of improper affixing of the seal by one person in his dual capacities as company director and secretary. It has no application to the present case.
For the reasons I have outlined above, ground 1C of the application fails.
Ground 1D - Company in Liquidation
Under this ground a declaration is sought that GDL is and has been since 30 May 1998 in liquidation and that Mr Totterdell is its liquidator. No written or oral submissions were made in support of this ground. It appears that it would have relied upon s 446A(1)(b). That is to say if there had been a failure to comply with s 444B(2) requiring execution of the Deed by the company, the company would be taken to have been the subject of a resolution for a voluntary winding up and the administrator appointed as liquidator. But that is contingent upon the success of the previous ground which has failed. Thus ground 1D also fails.
Grounds 2, 3 and 3A of the application were not separately pursued.
Ground 3B - Termination of the Deed
Under this broad heading it was said in the written submissions for CDN that the Deed ought to be terminated having regard to the circumstances of the conduct of the meeting of creditors on 8 May 1998 and the circumstances in which votes were cast by those attending and voting on behalf of proxies who were not present by an officer of the relevant creditor. It was contended that the proposal submitted to the meeting of creditors had not been circulated to any creditor who did not attend at the meeting prior to the resolution being passed. All creditors were bound by the Deed and having regard to the fact that CDN is both a creditor and a debtor of GDL it is adversely affected by the Deed. Moreover, it was submitted, CDN is affected by the operation of the Deed in respect of the royalty flow provided for in the Sale/Purchase of Intellectual Property Rights Agreement if no action had been taken to ensure that the third party purchaser adopted the requirement to pay “royalties”.
These grounds were elaborated upon and added to in oral argument, in part it was said, on the basis of oral testimony given at the hearing. Summarising as best I can the points advanced, they were as follows:
1.Placing the company in liquidation would allow a proper investigation, not hitherto carried out, into whether the directors of the company had traded while the company was insolvent prior to resolving to appoint an administrator.
2.The Deed of Company Arrangement made no provision for a right of set off which would have been available to CDN in a liquidation.
3.The Deed of Company Arrangement would extinguish any right that CDN might have contingently to the royalty stream under the Sale/Purchase of Intellectual Property Rights Agreement.
4.The right of first refusal communicated to CDN was communicated in circumstances which placed CDN at a disadvantage.
5.No attempt was made by the administrator to seek an extension for the period of administration beyond the sixty days provided for in s 439B. This meant that a number of creditors were effectively disenfranchised from making a decision in relation to the proposal ultimately accepted.
The suggestion that placing the company in liquidation would allow a proper investigation into possible insolvent trading on the part of the directors is speculative. If accepted on the evidence available in this case, it would be difficult to limit its general application to companies going into administration. It was a matter which had been considered by Mr Totterdell. He raised it at the creditors’ meeting. He pointed out that the loan funds owing in large part borrowings from directors or shareholders and related entities. In the full circumstances of the company it seemed that the activities of the directors were appropriate.
The second basis advanced for setting aside the Deed was that it made no provision for setting off moneys due to CDN against moneys owed to it by GDL and would affect the setoff right which could be invoked by CDN under s 553C in the event of a liquidation.
By a supplementary submission in writing dated 29 June 1998 CDN argued that the provisions of the Deed of Company Arrangement as executed provided that paragraphs 5, 6 and 8 of the Prescribed Provisions did not form part of the instrument constituted by the Deed. Thus it was accepted that the priority provided for in paragraph 4 of the Prescribed Provisions remained applicable and the order of priority provided for in s 556 of the Corporations Law would apply. It was, however, submitted that the provisions of s 553C relating to mutual credit and set off were not incorporated within the regime nor were expressly referred to as having been incorporated in the contract evidenced by the Deed of Company Arrangement by the Prescribed Provisions.
The report as to the affairs of GDL dated 10 February 1998 showed CDN to be a sundry debtor to the extent of $72,000. Information about the debt was given to Mr Totterdell by the former manager of GDL. It was not disputed by representatives of CDN who attended the meeting of creditors and it was dealt with as a set off for voting purposes at the meeting held on 8 May. Mr Totterdell was asked in cross-examination if he gave any thought to the effect that the Deed might have upon rights of set off granted in the legislation under s 553C. Mr Totterdell said he could not see “any reason for that to differ than in the way that proofs of debt are nominally dealt with (sic)”.
There is nothing in the Deed which provides for a right of set off. On the other hand, there is nothing in the Deed to prevent the administrator from applying a set off in dealing with claims against creditors who are also debtors of the company. No doubt the entitlements of CDN as a creditor under the Deed would be calculated having regard to any off setting debt. The mutual set off argument offers no basis for terminating the Deed.
The third submission for termination was that the Deed of Company Arrangement would extinguish any right that CDN might have contingently to the royalty stream under the Sale/Purchase of Intellectual Property Rights Agreement. However this complaint is met by the direction given by Templeman J on 9 June authorising Mr Totterdell to accept the amended offer made by Vasse Venture Capital Pty Ltd which included undertakings to be bound by the Sale/Purchase of Intellectual Property Rights Agreement.
The fourth complaint relating to the right of first refusal has also, as counsel for GDL submitted, been met in terms of the revised offer from Vasse Venture Capital Pty Ltd.
On the fifth point which related to the administrator not seeking an extension for the period of administration, it is my opinion that the administrator acted reasonably in the circumstances. It is to be borne in mind that the purpose of Part 5.3A includes subjecting the company to control by an administrator to the exclusion of its officers for a strictly limited period. The Court should not lightly impose upon the administrator an obligation to seek extensions of time particularly where the majority of creditors have voted in favour of a proposed Deed of Company Arrangement.
In the circumstances no basis has been shown under s 445D for terminating the Deed of Company Arrangement.
CONCLUSION
For the preceding reasons, the application will be dismissed and a declaration made in accordance with the cross-claim that the Deed of Company Arrangement executed on 28 May 1998 is valid.
I certify that this and the preceding twenty-eight (28) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice French
Associate:
Dated: 30 June 1998
Counsel for the Applicant: Mr J.T. Johnson Solicitor for the Applicant: Nash O’Neill Tomko Lawyers Counsel for the Respondent: Mr A.N. Siopis Solicitor for the Respondent: Jackson McDonald Date of Hearing: 23 June 1998 Date of Judgment: 30 June 1998
0
3
0