CJ Graham Pty Ltd v Focus Funding Pty Ltd - [2022] WASC 89

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   CJ GRAHAM PTY LTD -v- FOCUS FUNDING PTY LTD [2022] WASC 89
CORAM:   MASTER SANDERSON
HEARD:   15 DECEMBER 2021
DELIVERED          :   15 MARCH 2022
PUBLISHED           :   15 MARCH 2022
FILE NO/S:   COR 59 of 2021
BETWEEN:   CJ GRAHAM PTY LTD
Plaintiff
AND
FOCUS FUNDING PTY LTD
First Defendant
STRIPEBAY HOLDINGS PTY LTD
Second Defendant
WENTWORTH INTERNATIONAL CAPITAL PTY LTD
Third Defendant

Catchwords:

Corporations law - Application by creditor to prevent company entering into a Deed of Company Arrangement - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff	:	M L Bennett
First Defendant	:	H West
Second Defendant	:	G J O'Shannessy
Third Defendant	:	P Van Der Zanden & S Penglis SC

Solicitors:

Plaintiff	:	Weeks & Co
First Defendant	:	Hall & Wilcox
Second Defendant	:	Murcia Pestell Hillard
Third Defendant	:	Hotchkin Hanly

Case(s) referred to in decision(s):

Fleet Broadband Holdings Pty Ltd & Anor v Paradox Digital Pty Ltd (Subject To A Deed Of Company Arrangement) [2005] WASC 261
Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509
Re Buildmat (Australia) Pty Ltd and the Companies Act (1981) 5 ACLR 689
Re Glendale Land Development Ltd (In Liq) [1982] 2 NSWLR 563
Re International Harvester Co of Australia Pty Ltd [1953] VLR 669

MASTER SANDERSON:

By originating process filed 9 April 2021, the plaintiff sought orders winding up the first defendant. The second defendant was included as a party to the proceedings presumably because it was a shareholder of the first defendant. By interlocutory process filed 20 September 2021, the third defendant (at that stage designated as 'the applicant') sought the following orders:

1.Wentworth International Capital Pty Ltd be added as the third defendant to these proceedings;
2.an order setting aside the resolution passed at a meeting of the creditors of the First Defendant on 9 September 2021 that the First Defendant enter into a Deed of Company Arrangement proposed by the Plaintiff on 9 September 2021;
3.the administration of the First Defendant end forthwith;
4.the First Defendant be wound up;
5.such further or other orders as the Court thinks just; and
6.costs.

On 23 September 2021 I made orders adding the present third defendant as a party to these proceedings. I also made certain other programming orders including an order that the time for execution of the Deed of Company Arrangement (DOCA) be extended until 31 January 2022. By order made 25 January 2022 that order was amended to extend the time for execution of the DOCA until after the publication of these reasons.
The application is brought under s 447A of the Corporations Act 2001 (Cth) (Corporations Act) which provides the court with wide powers to make orders as to how pt 5.3A of the Act is to operate. Section 445D of the Corporations Act deals with the powers of the court to terminate a DOCA. In this case, the DOCA has not been executed. The third defendant says that the power in s 447A is wide enough to allow the court to make orders preventing the execution of the DOCA where the DOCA would be liable to be set aside under s 445D if it was signed. There appears to be no reason why that should not be so.
Section 445D of the Corporations Act reads as follows:
When Court may terminate deed
(1)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 document that accompanied a notice of the meeting at which the resolution was passed; or
(c)there was an omission from such a document 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:
(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
(ba)ASIC; or
(c)any other interested person.
The third defendant's application relied upon s 445D(1)(e) and (f). It was the third defendant's position if the DOCA was executed it would be unjust to the third defendant. Further, and in the alternative, the third defendant said the deed would result in an act which was unfairly prejudicial to or oppressive of the third defendant. It was the third defendant's position the facts in this case fell within either or both of those subsections.
Turning then to the relevant background facts, the position may be summarised as follows. The application to wind up the first defendant was brought on just and equitable grounds. Colin James Graham is and was the sole director of the plaintiff. The originating process was supported by an affidavit of Mr Graham sworn 9 April 2021. The third defendant is a creditor of the first defendant. Timothy David Mahony is and was the sole director of the third defendant.
The first defendant was incorporated on 10 May 2016. It had a share capital of 100 ordinary fully paid shares, 50 of those shares were held by the plaintiff and 50 shares were held by the second defendant. Mr Graham was the sole director of the first defendant from the date of its incorporation until 4 May 2017. On that date, Thomas Michael Gladwin-Grove was appointed an additional director. Mr Graham ceased to be a director of the first defendant on 13 December 2017.
The first defendant carried on business as a litigation funder. It ceased to trade in February 2021. Mr Grove owns the 100 ordinary shares in the second defendant and has been its sole director since 23 October 2017. On 2 June 2021, shortly before the first return date of the plaintiff's winding up application, Mr Grove appointed Giovanni Maurizio Carrello as the voluntary administrator of the first defendant. Mr Carrello issued a first report to creditors on 4 June 2021.
The plaintiff's winding up application was listed for a special appointment on 20 August 2021. The first meeting of creditors of the first defendant was held on 15 June 2021. Mr Carrello issued a second report to creditors dated 30 June 2021. A second meeting of creditors of the first defendant was held on 8 July 2021. The meeting was adjourned for a period of 45 business days and was required to be held by 9 September 2021 at the latest. On 17 August 2021 the plaintiff filed its submissions in support of its winding up application. I will make further reference to these submissions below. On 19 August 2021 the second defendant filed submissions indicating it no longer resisted the first defendant being wound up. It contended Mr Carrello should be appointed the liquidator. On 20 August 2021 by agreement between the plaintiff, the second defendant and Mr Carrello the plaintiff's winding up application was adjourned to 7 September 2021.
The third defendant in its written submissions referred to certain paragraphs of the plaintiff's written submissions filed in support of its winding up application. In particular, it referenced the following paragraphs:
1.The plaintiff (CJ Graham) seeks orders that the first defendant (Focus Funding) be wound up pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) on the basis that it is just an (sic) equitable to do so. Focus Funding has ceased operations. It is currently in voluntary administration, which commenced after this winding up application had been served. Investigations by the current administrator have revealed potential breaches of the Corporations Act and potential misuses of company funds. It is appropriate that a liquidator is appointed to investigate the affairs of the company and take necessary enforcement steps, if required.
19(d).Mr Carrello has identified possible breaches of the Corporations Act by Mr Graham and Mr Grove as directors of Focus Funding. Given the strong impression of the misuse of company funds, it is appropriate that breaches of the Corporations Act are investigated by a liquidator.
20.These matters give rise to serious and justified concerns about the operations and management of Focus Funding. It also raises possible misconduct by Mr Graham and Mr Grove and breaches of the Corporations Act. The public interest will favour winding up on just and equitable grounds in order to prevent and condemn repeated breaches of the law.
21.In circumstances where Focus Funding is no longer carrying on business, there is no identified reason for Focus Funding continuing to exist. The issues identified by Mr Carrello warrant investigation by a liquidator. The only purpose achieved by allowing Focus Funding to continue in existence and be revived through a deed of company arrangement is that those investigations do not occur.
26.If the external administration is an abuse of Pt 5.3A in order to avoid the scrutiny of a winding up and avoid these proceedings, that further indicates that there is lack of confidence in the conduct and management of the affairs of Focus Funding. Where there has been misconduct in the affairs of a company requiring investigation by a liquidator, it is detrimental to commercial morality to prevent such steps being taken through a deed of company arrangement put forward by those who ought to be the subject of those investigations.
28.Mr Carrello has identified misconduct and misappropriated funds. Those are matters that should be investigated by a liquidator. … The company should not be allowed to be reborn, devoid of purpose, through a deed of company arrangement so that those investigations cannot be pursued.
On 1 September 2021 Mr Carrello circulated a supplementary report to creditors and gave notice that a reconvened second meeting of creditors would be held on 9 September 2021. In the supplementary report to creditors, Mr Carrello recorded a number of matters which the third defendant says are relevant. First, Mr Carrello said he had been advised that a DOCA proposal was forthcoming. Second, he said his investigations had identified breaches of the Act by Mr Grove and Mr Graham that would require further investigation should a liquidator be appointed. Second, he said the nature and existence of the breaches revolved around obligations and duties of Mr Grove and Mr Graham to the first defendant. Finally, Mr Carello said Mr Grove had acknowledged the third defendant's debt and this was done at the time of Mr Carello's appointment. On 8 September 2021 Mr Carello circulated a further report to creditors attaching a proposal by the plaintiff for a DOCA and a proposal by the second defendant and Mr Grove for a DOCA.
The reconvened second meeting was held on 9 September 2021. Mr Carello chaired the meeting. At that meeting a further proposal by the plaintiff for DOCA dated 9 September 2021 was provided to the third defendant. Three creditors attended the meeting. Mr Mahony represented the third defendant, a Mr Greg O'Shannessy from solicitors, Murcia Pestell Hillard, represented Mr Grove and Mr Domenic Tartaglia represented Aspen Corporate Pty Ltd (Aspen). Peter Weeks and Charles Dallimore of Weeks & Co attended the meeting as observers and representatives of the plaintiff.
At the reconvened second meeting, Mr Carello admitted for voting purposes the third defendant's proof of debt in an amount of $555,459.93. Mr Groves' proof of debt in the sum of $1,361,750 and Aspen's proof of debt in an amount of $10,899.40. Save in the case of Aspen, the amounts admitted by Mr Carello were reduced. Mr Grove had submitted a proof of debt in an amount of $1,779,686.20 and the third defendant had submitted a proof of debt in an amount of $720,459.93.
At the reconvened second meeting, a resolution was passed that the first defendant enter into the DOCA proposed by the plaintiff on 9 September 2021 as amended after discussion between Mr O'Shannessy and Mr Weeks at the meeting. Mr O'Shannessy, on behalf of Mr Grove, moved the resolution and Mr Tartaglia, on behalf of Aspen, seconded the motion. Mr Mahony opposed the motion on behalf of Wentworth. The motion was passed on the votes in numbers and value. At the time of the reconvened second meeting, the second defendant was a related creditor for the purposes of 75‑41 of the Insolvency Practice Schedule, Corporations Act. The second defendant was a related entity of the first defendant and a creditor of the first defendant.
The third defendant says if the vote of the second defendant had been disregarded for the purposes of determining whether the DOCA resolution was passed, the resolution would not have been passed or the question would have been decided on a casting vote. If the DOCA resolution had not been passed, the first defendant would have been wound up.
In the period between 20 August 2021 and 9 September 2021, Mr Graham, the plaintiff, Mr Grove and the second defendant made an agreement referred to by the third defendant as the 'DOCA agreement'. The third defendant says the DOCA agreement contain among other things, the following terms:
(a)the plaintiff would not press the application to wind up the first defendant;
(b)one of the parties would propose a DOCA;
(c)the second defendant as the major creditor of the first defendant would vote in favour of the DOCA;
(d)the second defendant would receive an immediate payment of $1.1 million from the first defendant and a further payment from Mr Graham of $200,000 within three months;
(e)the second defendant would transfer its shares in the first defendant to the plaintiff;
(f)the second defendant and Mr Grove would receive a release of any claims the first defendant might have against them;
(g)the first defendant would come out of administration, with control of the company to revert to Mr Graham immediately upon execution of the DOCA; and
(h)the third defendant's claim would be quarantined such that, to the extent it survived Mr Carello's assessment of the third defendant's proof of debt, Wentworth would then be forced to either settle with or litigate against the plaintiff.
The third defendant says the effect of carrying out the DOCA agreement is that the first defendant will not be wound up and a liquidator will not be appointed to carry out investigations and examinations. In other words, the potential breaches of the Corporations Act identified by Mr Carrello will not be pursued. As a consequence, the matters raised by the plaintiff and argued in its submissions in support of the winding up application would not be pursued. At the reconvened second meeting, Mr O'Shannessy confirmed there was an agreement between Mr Grove, the second defendant and the plaintiff with respect to the first defendant entering into a DOCA. Mr Carrello noted he was uncomfortable dealing with the DOCA proposal where there was another arrangement sitting behind it which he had not seen. The terms of the DOCA agreement were not revealed in the proposed DOCA. In his written submissions, counsel for the third defendant, summarised in colourful fashion the consequence of the first defendant entering into the DOCA and the DOCA agreement.
36.Under the DOCA Agreement, Focus Funding will be reborn, under the control of Mr Graham, with the previous irregularities swept under the carpet, Mr Grove riding into the sunset and with the only apparent purpose to leave a shell to force Wentworth to litigate with.
The third defendant says the regime for dealing with its claim puts it at a considerable disadvantage. It says under the proposed DOCA, the second defendant receives an immediate payment of $1,100,000 and a further sum of $200,000 from Mr Graham within 90 days. Aspen is paid in full. So far as the third defendant is concerned, it must have its proof of debt assessed by the deed administrator. This will establish a cap on the claim. If the deed administrator determines that the amount that 'is claimable' by the third defendant is less than its proof of debt then the third defendant either has to appeal or accept the deed administrator's cap. Then the third defendant has to engage in litigation with the first defendant to establish that it is entitled to the amount of its proof of debt (or the capped amount) or the amount established on appeal of the deed administrator's determination. The third defendant says the proposed DOCA and the process for determining the third defendant's proof of debt is far more disadvantageous than rights that would ordinarily be afforded under the Act to the third defendant as a creditor.
The third defendant also points out implementation of the DOCA is contingent upon Mr Graham making a payment of $200,000 within 90 days. The third defendant says there is no evidence Mr Graham will be able to meet that commitment. With respect, this point does not seem to me to be relevant to determination of this application. If Mr Graham does not make the $200,000 payment then the DOCA will terminate and the liquidation of the first defendant will follow. In other words, the third defendant will have achieved its aim albeit by another means. It is commonly the case DOCA's require payment by a DOCA proponent subsequent to the DOCA being signed. I can see no reason why this proposed arrangement should be regarded as unfairly prejudicial to the third defendant.
The plaintiff maintains there would be no practical benefit to any creditor in carrying out further investigations into the affairs of the company. The plaintiff says there is no certainty that investigations would result in any valuable cause of action. Even if surplus funds could be recovered by a liquidator, those funds would ultimately be returned to the shareholder entities controlled by the alleged wrongdoers themselves. The plaintiff says the only sure outcome of the third defendant's application succeeding is the need to incur expenditure of funds, already set aside in the DOCA, on lawyers and insolvency practitioners.
The plaintiff submits that the third defendant's true complaint is that it would prefer to take its chances in a liquidation rather than exposing its claim to scrutiny within the formal processes of the court. The plaintiff says this is borne out when the third defendant's claim is examined. In effect, the plaintiff alleges the third defendant is acting with an ulterior motive.
It is the plaintiff's position, the third defendant has misconstrued the way in which its claim will be handled under cl 17(a) of the DOCA. The plaintiff says cl 17(a) provides that the administrator will assess the 'maximum amount' to be claimable by the third defendant as a creditor. That amount will then be set aside in the Deed Fund ‑ effectively as security for the claim. That amount is then to be applied against any judgment or agreed settlement figure in favour of the third defendant. The plaintiff says cl 17(a) does not cap or limit the amount the third defendant can claim against the company and it is not an assessment by the administrator of the third defendant's proof of debt. Rather, it provides a form of security for the third defendant's claim the third defendant did not have prior to administration and will not have in liquidation.

The plaintiff says based on the amount the third defendant was admitted to vote for and the preliminary views of the administrator, there is a strong inference to be drawn that the amount the administrator will set aside as security would be a minimum of $555,459.93. If that was so, before litigation is commenced between the first defendant and the third defendant to determine its claim, the third defendant would already have what amounts to a freezing order against the company for, if not the entirety of its claim, a substantial proportion thereof. It would also have security for costs in amount of $90,000. Further, in the event the company does not have sufficient funds to meet any judgment in the third defendant's favour, a personal indemnity is provided by Mr Graham and Mr Grove with respect to any shortfall. The plaintiff says the commercial and strategic advantages of this situation are obvious and greatly to the benefit of the third defendant.
In its written submissions, the plaintiff refers to two cases. The first is the High Court decision in Lehman Brothers Holdings Inc v City of Swan.[1] The court said at [39]:
The word "arrangement", when used in the collocation "deed of company arrangement", could readily be understood as encompassing many kinds of compromise.[2] A priori, there is no reason, or at least no compelling reason, to confine the ambit of the terms and conditions upon which a creditor may lawfully agree to compromise a debt or claim against the company. Prima facie, it is for the majority of creditors to decide what terms are an acceptable price for compromising their claims. That is, whether compromising debts or claims on particular terms and conditions is commercially more desirable than the company going into liquidation is, according to the structure and content of Pt 5.3A, a question for creditors. It is for them to make their own commercial judgment. That being so, the evident scheme of the Act is that the will of the requisite statutory majority is imposed on all creditors. Neither considerations of the speed with which such an arrangement must be proposed, agreed in and concluded, nor the observation that dissenting creditors are bound by the decision of a majority in number and value, require any narrow or confined reading of those provisions that govern the making and content of a deed of company arrangement.
[1]Lehman Brothers Holdings Inc v City of Swan(2010) 240 CLR 509.
[2] cf Re International Harvester Co of Australia Pty Ltd [1953] VLR 669; Re Buildmat (Australia) Pty Ltd and the Companies Act (1981) 5 ACLR 689; Re Glendale Land Development Ltd (In Liq) [1982] 2 NSWLR 563, more fully reported at (1982) 7 ACLR 171.
The second case referred to is Fleet Broadband Holdings Pty Ltd & Anor v Paradox Digital Pty Ltd (Subject To A Deed Of Company Arrangement).[3] Master Newnes (as he then was) said at [57]:
When considering whether to terminate a deed under s445D, the Court must approach the discretion provided under s 445D(1) by looking at the whole of the effect of the deed and assessing its unfairness, if any, to the plaintiff, but in doing so, must bear in mind the scheme of Pt 5.3A of the Act and the interests of other creditors, the company and the public generally : Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1997) 16 ACLC 95; Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 16 ACLC 540 at 544; Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48. The mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed; the mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement: Lam Soon Australia (supra); Khoury v Zambena (1997) 15 ACLC 620 at 627.
[3] Fleet Broadband Holdings Pty Ltd & Anor v Paradox Digital Pty Ltd (Subject To A Deed Of Company Arrangement) [2005] WASC 261.
In any corporate restructuring there must be some give and take. The very fact a company has gone into administration is a reflection of the fact it is likely not all the creditors can be fully satisfied. It is incumbent upon the court to ensure that so far as possible, the creditors are treated fairly. The very wording of s 445D of the Corporations Act and the reference to 'unfairness' is the key to the way in which DOCAs should be approached. In my view, the arrangement proposed here is fair and reasonable. It offers the third defendant a degree of security which is unusual in situations such as this. It may well be the third defendant will not receive its full entitlement. The deed administrator may decide on a reserve which is less than the eventual judgment obtained by the third defendant in the judicial process. The costs awarded to the third defendant may be greater than the $90,000 reserved in the DOCA. But any litigation involves risks. At any time, a defendant may fail financially with the result a successful litigant will not recover its judgment in full. The way in which this DOCA is structured offers the third defendant a better chance of a full recovery than is available in most cases.
In the event, I am satisfied the DOCA should be signed, and the first defendant should not go into liquidation. The third defendant's interlocutory application will be dismissed. The parties should file short submissions on costs within seven days of the publication of these reasons.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AH
Associate to Master Sanderson
15 MARCH 2022