Commissioner of Taxation v Comcorp Australia Ltd
[1996] FCA 848
•24 SEPTEMBER 1996
C A T C H W O R D S
CORPORATIONS - administration of company's affairs - deed of company arrangement under Part 5.3A of Corporations Law - administrator's report to creditors - whether such report must provide creditors with information as extensive as that given to creditors considering a scheme of arrangement - whether administrator's report and the statement required by s.439A(4)(b) of the Corporations Law may be in the same document - whether administrator's statement of opinion must refer expressly to each of the three matters referred to in that sub-paragraph - whether material omissions from report - whether statement set out sufficient details of the proposed deed - whether deed sufficiently specified in creditors' resolution - whether Court should declare deed valid despite contraventions - whether provisions substantially complied with and no injustice will result - whether declarations of validity should be made under s.1322 of the Corporations Law.
Corporations Law ss.439A(4), 439C, 445D, 445G, 1322
Hagenvale Pty Ltd v. Depela Pty Ltd (1995) 17 ACSR 139
Re Cufari; Ex parte Commissioner of Taxation v. Huppatz (1992) 34 FCR 544
Re News Corporation Ltd (1993) 11 ACLC 733
Re Asset Risk Management Ltd (1995) 130 ALR 605
Dandy Power Equipment Pty Ltd v. Mercury Marine Pty Ltd (1982) 64 FLR 238
Re Vanfox Pty Ltd (1994) 13 ACSR 209
DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v. COMCORP AUSTRALIA LIMITED & ORS and
DEAN ROYSTON McVEIGH (As Administrator of the Deed of Company Arrangement of ACN 053 013 255)
VG 834, 835, 836, 837, 838, 839, 840 of 1995
LOCKHART, SHEPPARD & CARR JJ
SYDNEY
24 SEPTEMBER 1996
IN THE FEDERAL COURT )
OF AUSTRALIA )
VICTORIA DISTRICT REGISTRY ) No. VG 834, 835, 836, 837, GENERAL DIVISION ) 838, 839, 840 of 1995
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
B E T W E E N : DEPUTY COMMISSIONER OF
TAXATION OF THE
COMMONWEALTH OF
AUSTRALIA
Appellant
and
COMCORP AUSTRALIA
LIMITED & ORS
First Respondents
and
DEAN ROYSTON McVEIGH
(As Administrator of the Deed of Company Arrangement of ACN 053 013 255)
Second Respondent
Coram: Lockhart, Sheppard & Carr JJ
Place: Sydney
Date: 24 September 1996
MINUTE OF ORDERS
THE COURT:
A.Orders that in each of the above matters:
1.The appeals be dismissed.
2.The appellant pay the respondents' costs.
B.Declares that the Deed of Company Arrangement made on 20 February 1995 between the first respondent and the second respondent in each of the above matters is valid despite the further contraventions referred to in the within reasons.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY )Nos. VG 834, 835,
)836, 837, 838, 839 and
GENERAL DIVISION )840 of 1995
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
AND:COMCORP AUSTRALIA LIMITED & ORS.
First Respondents
DEAN ROYSTON McVEIGH (As Administrator of the Deed of Company Arrangement of ACN 053 013 255)
Second Respondent
COURT:LOCKHART, SHEPPARD and CARR JJ.
DATE:SYDNEY
PLACE:24 SEPTEMBER 1996
REASONS FOR JUDGMENT
LOCKHART J.
I agree with the reasons for judgment of Carr J. and the orders proposed by him.
I certify that this page is a true copy of the reasons for judgment herein of the Honourable Justice Lockhart.
Associate
Dated: 24 September 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY ) No. VG 834, 835, 836,
) 837, 838, 839, 840
GENERAL DIVISION ) of 1995
On appeal from the judgment of a judge of the
Federal Court of Australia
BETWEEN:DEPUTY COMMISSIONER OF
TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Appellant
AND:COMCORP AUSTRALIA LIMITED & ORS
First Respondents
AND:DEAN ROYSTON McVEIGH
(As Administrator of certain Deeds of Company Arrangement)
Second Respondent
CORAM: LOCKHART, SHEPPARD and CARR JJ
PLACE: MELBOURNE
DATE: 24 September 1996
REASONS FOR JUDGMENT
SHEPPARD J: These are appeals brought against orders made by a judge of this Court (Sundberg J) on 25 October 1995. The orders were made in seven applications brought by the Deputy Commissioner of Taxation against seven companies and Mr D.R. McVeigh, the administrator of deeds of arrangement entered into by the companies. In each case his Honour made orders declaring that a meeting of creditors of each company held on 10 February 1995 and a resolution passed at that meeting were not invalid by reason of contraventions of subsec. 439A(4) of the Corporations Law, and that the deeds of company arrangement made in January or February 1995 between each company and Mr McVeigh were valid despite contraventions of subsec. 439A(4). It was also ordered that the application in each matter be dismissed with costs. The declarations of validity were made pursuant to s.445G of the Law upon the application of the respondents in each matter.
Each of the applications was said to be made under s.445G, s.445D, s.447A, s.459P, s.459A and subsec. 472(2) of the Law. I have stated the sections in the order in which they are referred to in the applications. Each application sought an order pursuant to subsec. 445G(2) of the Law declaring that the relevant deed of company arrangement was void. Alternatively, an order was sought pursuant to paras. 445(D)(1)(a), (b) and (c) of the Law terminating the deed. Further alternative orders sought were orders pursuant to s.447A of the Law ending the administration of the company and/or terminating the deed. A consequential order sought was that the company be wound up in insolvency. Finally, there were sought orders appointing an official liquidator provisionally of each company and orders pursuant to s.459P and 459A of the Law that the companies be wound up in insolvency.
The matters to be resolved require reference to the meetings which were held before the deeds were executed and to
the deeds themselves. It will also be necessary to make detailed reference to the relevant provisions of the Law.
The background of the matter is referred to in the judgment of Carr J which I have had the advantage of reading. I do not repeat what his Honour there says under the heading, "Factual Background".
Against that background I can come to the report sent by Mr McVeigh to the creditors of each of the companies pursuant to para. 439A(4)(a) of the Law. The reports are not in identical terms but, in relation to the matters in question in these appeals, they are in similar terms. It is thus sufficient to refer to the report provided in respect of the respondent, Comcorp Australia Limited. It is dated 26 January 1995. The report says that a deed of company arrangement is proposed between the company and its creditors and that the report is submitted in accordance with s.439A of the Law and regulation 5.3A.02. The report discloses assets of $24,896 and liabilities of $614,988. Under the heading "Background to Current Financial Position" the report says:
"The Comcorp Group of companies was formed in October, 1991 after the receivership of Pro-image Studios Limited. Comcorp Australia Limited is one of eight companies in the Group. The only company not under control of an Administrator in the Group is Comcorp Outside Broadcast Pty. Ltd.
Comcorp Australia Limited was the parent company in the Comcorp Group. Receivers and Managers were appointed by the Commonwealth Bank of Australia and Bank of New Zealand on 16th September, 1993. There were no saleable assets in the company.
The Receivers and Managers retired on 16th December, 1994 after paying the secured creditors in full. The company, together with surplus funds, was returned to the directors who have taken the step to appoint an Administrator."
There is then set out the company's proposal which was that it enter into a deed of company arrangement which would provide that the creditors accept in full and final settlement of their debts the proceeds, after costs of administration, of cash at bank, plant and equipment, investment in Comcorp Outside Broadcast Pty Ltd, inter-company accounts and the share of proceeds, if any, of the "legal action" brought against the banks and receivers. The report says that creditors would be required to execute formal releases, if requested, on completion of the deed of arrangement. There follows a table which is introduced by the sentence, "The following chart compares estimated proceeds of liquidation with the proposal." That chart, really a tabulation, has two headings for figures, one entitled "Liquidation" and the other, "Deed of Company Arrangement". I do not set out the tabulation in full. For present purposes the critical item in it is, "Proceeds of legal action against banks and Receivers (based on $1 million proceeds)". The table shows that under a liquidation nothing would be recovered in respect of this item but that, assuming $1 million were recovered in the action, $56,000 would be recovered under a deed of company arrangement. A deed was also said to be likely to bring to account increased sums in respect of an item, "Inter-company trading accounts", than would be the case if a liquidation took place. The table concluded with a statement that, in the event of a liquidation, the likely recovery of creditors would be 18 cents in the dollar whereas, if there were a deed of company arrangement, the likely recovery would be 41 cents in the dollar.
The report proceeded as follows:
"Creditors are reminded that if proceeds available to the Comcorp Group from the legal action against the banks and Receivers exceeds the amount of $1 million shown above, the dividend in a Deed of Arrangement would increase proportionately. The claim is for an amount of approximately $10 million.
The Legal Action Against Banks and Receivers
The Comcorp Group companies and Gonam Pty. Ltd., a company associated with the directors, have initiated legal action against Commonwealth Bank and Bank of New Zealand for, in layman's terms, wrongful appointment of Receivers and Managers with resultant damages and also against the Receivers and Managers for causing loss and damage to the Group by their actions during the receivership.
I have not been contacted by either of the banks or their solicitors but I am of the impression that the legal action against both banks will be defended. The Receivers have contacted me directly both verbally and in writing. They have advised me that they will be vigorously defending the action against them and are of the opinion that the claim against them is without foundation.
The legal advisers for the companies have indicated that they consider that both of the legal actions are soundly based.
Creditors are reminded of the inherent risks of litigation in terms of costs and the uncertainty of success for any party to legal actions generally.
On the assumption that the action is successful to some extent, the Group proposes to apportion its share of the proceeds as follows:
Firstly, reimbursement of costs to each company which advanced monies to pursue the legal action, or rateably apportioned if proceeds are insufficient to fully cover costs;
Secondly, 50 percent of the proceeds after costs to be shared rateably amongst the companies which provided monies in direct proportion to the monies advanced; and
(iii)Thirdly, the remaining 50 percent of the proceeds after costs to be apportioned equally over all eight companies in the Group.
The intention of this method of disbursement is to reward those creditors in companies where monies have been risked but to provide a return to creditors in those companies which could not afford to provide monies without resorting to requesting advances from creditors.
The amount of damages claimed is approximately $10 million."
The report goes on to deal with potentially voidable transactions and rights of contribution. I do not need to refer to the detail of these paragraphs. The report concludes with a recommendation which is as follows:
"The return available to creditors from the proposal by the company clearly exceeds that available in a liquidation.
Both liquidation and proposal scenarios are prepared on a conservative optimism basis i.e. the proposal result includes some return on the claims against the Banks and Receivers without showing an overly optimistic view of such a return.
Legal advice indicates that the claim against the Banks and Receivers is a commercially acceptable risk.
The liquidation scenario shows expected maximum returns from recoveries although inter-company returns are based on liquidation of all companies in the Group (a likely scenario if insufficient
companies have proposals accepted by creditors) with minimal contribution claims included in total creditors.
Based on the contents of this report and my review of company records, I recommend the proposal for acceptance by creditors."
Some of the reports are more complicated than that in relation to Comcorp. But that is because they deal with matters relevant to each company's affairs and not because of differences relating to the considerations for and against pursuing the action against the banks and the receivers. So far as it is concerned, each company is in a similar position subject to the fact that there will be variations in the amounts which will be received by each company if the action is successful.
The deed of company arrangement executed by Comcorp on 20 February 1995 contains a number of recitals and a number of definitions to which I need not refer. Clause 2 of the Deed says that its object is to endeavour to obtain a better return for creditors by allowing the company to pursue the cause of action brought against the banks and receivers for the benefit of creditors and to pay to the administrator the company's share of the proceeds of that action and for the administrator to distribute the proceeds in accordance with the terms of the deed. Clause 3 provides that the deed is to bind all creditors. Clause 4 provides that the administrator shall be the administrator of the deed and that as from its commencement date, the directors of the company are to resume control of the company and be responsible for all statutory or other legal obligations of the company. Clause 7 contains an undertaking by the company promptly and expeditiously to prosecute the action and that the litigation fund to be set up is to be used for the sole purpose of prosecuting the action. The company is not to enter into any settlement of the action without the consent in writing of the administrator. Clause 7.5 of the deed is as follows:
"7.5Upon receipt of the Group Asset, the Administrator shall apportion the Group Asset to each Company in the Comcorp Group as follows:-
7.5.1First, to reimburse the Administrator of any Deed of Company Arrangement of any such company or (if such a company is not under a Deed of Company Arrangement) the company itself, as the case may be, in respect of monies advanced to the Litigation Fund either before or after the Fixed Date, provided that if the Group Asset is insufficient fully to effect such reimbursement, the entitlement of each company or Administrator, as the case may be, shall abate ratably.
7.5.2Secondly, 50% of the remaining Group Asset (if any) shall be apportioned according to the same formula set out in Clause 7.5.1 above.
7.5.3Thirdly, the other 50% of the remaining Group Asset (if any) shall be apportioned equally among the members of the Comcorp Group."
Clause 9 provides for the augmentation of the litigation fund and Clause 10 for the remuneration of the administrator.
Again there are differences in the detail of some of the deeds but it is unnecessary to refer to these for the purpose of dealing with the various matters raised by the parties in their submissions.
I now turn to the relevant provisions of the Law. The provisions are contained in Chapter 5 of the Law which deals with external administration. Part 5.3A of that Chapter deals with the administration of a company's affairs with a view to executing a deed of company arrangement. Section 435A of the Part provides that the object of the Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if it is not possible for 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. Section 435C provides that the administration of a company begins when an administrator of the company is appointed under s.436A, 436B or 436C and ends on the happening of the first of the events specified in subsecs 435C(2) or 435C(3). Subsection 435C(2) provides for "the normal outcome" of the administration of the company. There are three alternatives. The first is that a deed of company arrangement is executed by both the company and the deed's administrator, the second that the company's creditors resolve under para. 439C(b) that the administration should end, and the third that its creditors resolve under para. 439C(c) that the company be wound up. It is unnecessary to refer to the provisions of subsec. 435C(3).
It would seem that the provisions of subsecs 435C(1) and (2) bring about a situation in which the administration ends where a deed of company arrangement has been executed by both the company and the deed's administrator. That occurred in the present cases with the consequence that the administrations came to an end before these applications were made.
Sections 436A, 436B and 436C provide for the appointment of an administrator. Section 436E provides for the purpose and timing of the first meeting of creditors. The administrator of a company under administration must convene a meeting of the company's creditors in order to determine whether to appoint a committee of creditors and, if so, who are to be the committee's members. The meeting must be held within five business days after the administration begins.
Section 437A provides that, while a company is under administration, the administrator has control of the company's business, property and affairs and may carry on that business and manage that property and those affairs. He may also terminate or dispose of all or part of the business and may dispose of any of the property and he 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. Section 437B provides that, when performing a function or exercising a power, the administrator is to be taken as acting as the company's agent. Conversely, section 437C provides that, while a company is under administration, a person other than the administrator cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company except with the administrator's written approval.
Section 438A provides that the administrator, as soon as practicable after the administration of a company begins, must investigate the company's business, property, affairs and financial circumstances and form an opinion about each of three matters, namely, whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement, whether it would be in the creditors' interests for the administration to end, and whether it would be in the creditors' interests for the company to be wound up.
Division 5 of Part 5.3A of the Law is entitled, "Meeting of creditors decides company's future". Subsection 439A(1) provides that the administrator of a company under administration must convene a meeting of the company's creditors within the period fixed by subsec. 439A(5) or extended under subsec. 439A(6). Normally the period for the convening of the meeting is the period of 21 days beginning on the day when the administration begins. The Court is empowered to extend the convening period. Nevertheless, subsec. 439A(2) provides that the meeting must be held within five business days after the end of the convening period provided for in subsec. 439A(5). Subsection 439A(3) provides for the procedure for the convening of meetings. Subsection 439A(4) is as follows:
"439A(4) [Documents to accompany notice] The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:
(a)a report by the administrator about the company's business, property, affairs and financial circumstances; and
(b)a statement setting out the administrator's opinion about each of the following matters:
whether it would be in the creditors' interests for the company to execute a deed of company arrangement;
whether it would be in the creditors' interests for the administration to end;
whether it would be in the creditors' interests for the company to be wound up;
and his or her reasons for those opinions; and
(c)if a deed of company arrangement is proposed---a statement setting out details of the proposed deed."
I point here to the repeated use of the word "must" in a number of these provisions. Prima facie the use of the word "must" is intended to be emphatic and to indicate that there is a positive obligation on those affected by the provisions to comply strictly with them. It is also to be observed that the language of para. 439A(4)(b) follows the language used in para. 438A(b). This latter provision requires the administrator to form an opinion about each of the matters referred to.
I respectfully agree with Carr J in thinking that Parliament intended administration to be what might be termed "a streamlined alternative to an arrangement or reconstruction under Part 5.1 of the Law or a winding up in insolvency under Part 5.4". This is to be gathered not only from the terms of the explanatory memorandum and the second reading speech to which his Honour refers but also from the terms of the legislation itself, especially bearing in mind the time constraints which the Law imposes. Relevant in this regard are the words of the second reading speech which say that the emphasis is on informality and flexibility and also on speed of action. In contrast, it is said that the procedure does not allow the indefinite administrations which can occur, for example, under the United States Chapter 11 approach; see Hansard, House of Representatives, for 3 November 1992 at 2404.
Notwithstanding submissions made on behalf of the Commissioner to the effect that Cohen J in Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 was in error when he said what he did, I indicate my complete agreement with the dictum from his judgment which is quoted by Carr J and which I do not repeat except to emphasise his Honour's words that one result is that an administrator, constrained as he or she is by the time limits imposed, cannot carry out a detailed investigation of a company in the same way as can a liquidator. Accordingly, the administrator's actions must be looked at in the light of that more restricted time frame within which he confined.
Of course, there will be cases in which the administrator will not be able to gather sufficient information in the time available to enable him to form the opinions provided for in subsecs 438A(4) and 439A(4). If that be so, the administrator needs to inform the meeting of this. Almost certainly the consequence will be that, at least at that stage, administration under Part 5.3A of the Law will not be an available course. This may lead to the winding up of the company. If that be so, the intention of the legislature will have been achieved. The purpose of the Law read as a whole discloses that the legislature wished to ensure, so far as possible, that insolvent companies, unless it were appropriate for them to be placed in administration or to be made the subject of reconstruction or an arrangement, not continue to trade. The provisions of the Law operate to discourage directors from continuing to operate insolvent companies. Section 592 of the Law is perhaps the strongest indication of this. And, of course, there are the strict provisions of Part 5.4 of the Law, which deals with winding up in insolvency, relating to the setting aside of statutory demands; see particularly s.459G and the decision of the High Court in David Grant & Co. Pty Limited v Westpac Banking Corporation (1995) 184 CLR 265. The legislature's intention in this respect provides a reason in itself why one would not give to provisions such as s.439A an operation which would tend to relieve those obliged to comply with them of the need to do more than engage in a colourable attempt to provide creditors with the sort of report and the information which the provisions of s.439A require. If one were to adopt a construction of that kind, so it seems to me, one would run the risk of defeating the purpose and object of the Law.
These various considerations mean that one must give effect to the overall intention of the legislature which was contemplated by s.439A. One must give full effect to its provisions. Consistently with the object of Part 5.3A of the Law to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company or its business continuing in existence or, if that not be possible, results in a better return for the creditors and members than would result from an immediate winding up of the company, it is plain that the legislature intended that creditors should be as well informed as they could be of the position of the company and the options which were open to them to ensure a maximum return either by the continued operation of the company or otherwise. The provisions of subsec. 439A must be read in the context of the object of Part 5.3A but, subject to that matter, it must be interpreted so as to ensure, so far as possible, that creditors act on adequate and reliable information. If this does not occur, the overall intention of Part 5.3A will be defeated.
Section 439C provides that, at a meeting convened under s.439A, the creditors may resolve 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; or that the administration should end; or that the company be wound up.
Division 6 of Part 5.3A deals with the protection of the company's property during administration. I do not need to refer to the details of this Division nor of Division 7 which deals with the rights of a chargee, owner or lessor. Division 8 of Part 5.3A provides for the powers of the administrator and Division 9 with the administrator's liability and indemnity for the debts of the administration. Again I do not need to refer to the provisions of these Divisions.
Division 10 provides for the execution and effect of a deed of company arrangement. Section 444A provides that the administrator of the deed must prepare an instrument setting out its terms. The instrument must specify a number of matters which are referred to in subsec. 444A(4). Section 444D provides that a deed of company arrangement binds all creditors of the company so far as concerns claims arising on or before the day specified in the deed. Section 445C provides that a deed of company arrangement terminates when the Court makes an order under s.445D terminating the deed, the company's creditors pass a resolution terminating the deed at a meeting that was convened under s.445F, or, if the deed specifies the circumstances in which it is to terminate, those circumstances exist.
Section 445D, so far as it is relevant, provides as follows:
"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
can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b)such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c)there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
........ ........ ........ ........ ........ ......"
That is one of the provisions upon which the Commissioner relies in this case.
Section 445G deals with the circumstances in which the court may "void" or validate the deed. The section is in the following terms:
"445G(1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or the Commission, may apply to the Court for an order under this section.
(2)On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground.
(3)On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that:
(a)the provision was substantially complied with; and
(b)no injustice will result for anyone bound by the deed if the contravention is disregarded.
(4)Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator."
It was pursuant to subsec. 445G(3) that the learned primary judge in this case declared that the deeds here were valid despite the contraventions of Part 5.3A which the Court found. In reaching that conclusion, his Honour decided that the relevant provisions of the Law were substantially complied with.
Division 13 of Part 5.3A provides for the powers of the Court. Section 447A confers a general power upon the Court to make such order as it thinks appropriate about "how this Part is to operate in relation to a particular company."
Subsection 447A(3) provides that an order may be made subject to conditions.
Because they are referred to in the applications, I need to mention briefly some further sections. Firstly s.459A, which is in Part 5.4 dealing with winding up in insolvency, provides that on an application under s.459P, the Court may order that an insolvent company be wound up in insolvency. Section 459P provides for the persons who may apply for an order under s.459A. The persons specified include creditors. Subsection 472(2) deals with the appointment of provisional liquidators.
It remains to mention s.1322 which deals with irregularities. The section appears in Part 9.5 of the Law and deals with the powers of courts. Part 9.5 is in Chapter 9 of the Law which deals with a number of miscellaneous matters. Section 1322 has been the subject of a good deal of judicial consideration. So far as it is material, it is in the following terms:
"1322(1) In this section, unless the contrary intention appears:
(a)a reference to a proceeding under this Law is a reference to any proceeding whether a legal proceeding or not; and
(b)a reference to a procedural irregularity includes a reference to:
(i)the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation or at a joint meeting of
creditors and members of a corporation; and
(ii)a defect, irregularity or deficiency of notice or time.
(2)A proceeding under this Law is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.
(3)A meeting held for the purposes of this Law, or a meeting notice of which is required to be given in accordance with the provisions of this Law or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or the Commission, declares proceedings at the meeting to be void.
........ ........ ........ ........ ........ ........ ....
(6)The Court shall not make an order under this section unless it is satisfied:
(a)in the case of an order referred to in paragraph (4)(a):
(i)that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii)that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii)that it is in the public interest that the order be made;
(b)in the case of an order referred to in paragraph (4)(c)---that the person subject to the civil liability concerned acted honestly; and
(c)in every case---that no substantial injustice has been or is likely to be caused to any person."
The paragraphs of subsec. (4) referred to in subsec. (6) are not material for present purposes. Subsection (4) deals with the orders which it is open to the court to make. It is to be emphasised that the section will only operate where the irregularity in question is a procedural irregularity. That is a matter which is emphasised in subsec. (6). That subsection also emphasises the provisions of subsec. (2) which refers to the irregularity causing substantial injustice that cannot be remedied by any order of the court.
In the present case it would seem to be common ground that there are contraventions of s.439A of the Law. Sections 445D and 445G are sections in Part 5.3A intended to deal with problems which arise in relation to non-compliance or possible non-compliance with the provisions of the Part. Importantly, subsec. 445G(3) provides that the court may declare a deed, or a provision of it, to be valid despite a contravention of a provision of Part 5.3A if the court is satisfied, not only that no injustice will result for anyone bound by the deed if the contravention is disregarded, but also that the provision was substantially complied with.
Expressions such as "substantial compliance" are ordinary English expressions and ought to be given their ordinary meaning. Nevertheless, the expression has a history and a significance in relation to problems relating to statutory construction where a question arises whether a provision of an
Act, apparently mandatory in its terms, is in fact mandatory or directory.
The conventional distinction drawn has been to describe statutes which require strict compliance as mandatory and those which do not as directory. This approach has been criticised. I refer, for example, to the decision of the Court of Appeal of New South Wales in Tasker v Fullwood [1978] 1 NSWLR 20 (at 24) where the Court said that the only true guide to the statutory intention is to be found in the language of the relevant provision and the scope and object of the whole statute. The court said that it can be misleading if one substitutes for the question thus posed an investigation as to whether the statute is mandatory or directory in its terms. "It is an invitation to error, not only because the true enquiry will thereby be side tracked, but also because these descriptions have been used with varying significations." The Court's remarks were followed in TVW Enterprises Limited v Duffy (1985) 62 ALR 63. See also Statutory Interpretation in Australia, D.C. Pearce, 4th ed (1996) at 284.
A number of the authorities dealing with this question use the expression "substantial compliance". Thus Stephen J in Victoria v The Commonwealth (1975) 134 CLR 81 said (at 179):
"A directory construction will not assist in securing validity unless, despite the non-compliance
which is the occasion for invoking that construction, there may nevertheless be seen to be substantial compliance with the general object at which the statutory provision aims. Sometimes the stipulation which has not been complied with is, in its context, so relatively unimportant to the attainment of that general object that, although there has been total non-compliance, a directory construction may be appropriate. In such cases it may not matter that the non-compliance is complete, not partial. Indeed the stipulation in question may be of a kind which is incapable of partial compliance; to give to such a stipulation a directory interpretation recognizes that it may be wholly disregarded without prejudice to validity because of its relative unimportance in the attainment of the general statutory object and also, perhaps, because of the far-reaching and undesirable consequences of treating its non-observance as invalidatory.
Where, on the contrary, a stipulation may be seen to be of importance in attaining the general object of the statute its total non-observance cannot be sought to be excused, and its intended effect circumvented, by the adoption of a directory construction. A directory construction may none the less be given to such a stipulation if it is of a kind capable of degrees of non-compliance and if some degree of non-compliance can be seen as not necessarily prejudicing the substantial carrying into effect of the general object. If in such a case a directory construction be adopted, the extent of non-compliance in the particular case must then be examined to determine whether what has in fact occurred nevertheless gives effect to the general object of the statute."
In the present case the Court is saved from the need to determine whether or not the provisions in question, particularly those of subsec. 439A(4), are directory or mandatory. That is because the legislature in s.445G has provided that the Court may, despite a contravention of a provision of Part 5.3A, declare the deed, or a provision of it, to be valid, if the Court is satisfied, inter alia, that the provision was substantially complied with. Nevertheless,
Stephen J in Victoria v The Commonwealth in the second of the paragraphs quoted from his judgment emphasises the importance of considering whether what has been done gives effect to the general object of the legislation. If it does not, there will not be substantial compliance. This case should be approached in that way. Thus, in my opinion, s.445G should not be given a construction which would enable a court to declare a deed valid if the contravention of a provision of the Law were such as to prejudice the substantial carrying into effect of the general object of the legislation. That object is to be gleaned, not only from the express provisions of s.435A, but from an overall consideration of the various provisions which are included in the Part.
With the various matters to which I have referred in mind, it is now possible to come to a consideration of the particular respects in which it is contended by the Commissioner that there have been contraventions of Part 5.3A of the Law.
The obligations of an administrator under subsec. 439A(4) are to provide creditors with a report about the company's business, property, affairs and financial circumstances; to provide a statement setting out the administrator's opinion about the matters specified in para. (b) of the subsection (I shall return to these matters in due course); and, if a deed of company arrangement is proposed, to provide a statement setting out details of the proposed deed. There is not specifically provided for any obligation on the part of the administrator to make full disclosure of all matters which may be reasonably thought relevant to creditors who are asked to vote on whether or not there should be an administration. But the report must include information concerning the affairs and financial circumstances of the company. The question which the report raised for consideration was whether or not a deed of arrangement should be entered into. In my opinion, the creditors were entitled to information of all aspects of the company's financial circumstances relative to the bringing of the action which it was hoped would yield a fund from which creditors could be paid more than they would be paid if the companies were wound up.
My conclusion in that regard is, I think, supported by the provisions of para. 445D(1)(c) of the Law. Subsection 445D(1) empowers the Court to terminate a deed of arrangement. Paragraph 445D(1)(c) provides that the Court may make an order terminating such a deed where there was an omission from a report or statement required by subsec. 439A(4) and the omission can reasonably be expected to have been material to the creditors in making their decision. This provision tends to indicate that the legislature intended that the information to be provided in a report pursuant to para. 439A(1)(a) was to include information which could reasonably be expected to have been material to creditors when making their decision.
One of the submissions made on behalf of the Commissioner was that the creditors were not told in the report of the benefit which the company, Gonam Pty Limited, was to receive. The report states that the Comcorp Group of companies and Gonam Pty Limited, a company associated with the directors, have initiated legal action against the two banks for the wrongful appointment of receivers and managers and against the receivers and managers for causing loss and damage to the group by their actions during the receivership. On the face of the statement, Gonam Pty Limited was therefore not part of the Comcorp Group yet was a company associated with the companies' directors. What its association was is not stated. The Comcorp Group comprises the seven companies which are involved in these appeals and an eighth company, Comcorp Outside Broadcast Pty Limited.
The question arises as to what benefit Gonam Pty Limited is to receive from the action if it is successful. What, if any, arrangement is there between the Group and Gonam Pty Limited as to this matter? The report is silent about these matters. Nor is one told who is to make the decision as to the allocation of the proceeds of any judgment amongst the members of the Group and Gonam Pty Limited. One is told that the amount of damages claimed is $10 million and that, in the case of Comcorp Australia Ltd, the proceeds of the action, if they amounted to $1 million, would result in a payment of $56,000 to that company. Nothing, however, is said about what Gonam Pty Limited is to receive out of the potential recovery
of the sum of $10 million. The report is open to the interpretation that, if $10 million is recovered, the figure of $56,000 may be multiplied by ten yielding $560,000. It is not clear, however, whether that could be so in the light of the fact that it appears intended that Gonam Pty Limited will participate in sharing the proceeds.
The evidence in the case disclosed that, at the time the reports were made, there was no agreement or arrangement with Gonam Pty Limited or the directors dealing with the way in which any judgment would be apportioned as between members of the Group and Gonam Pty Limited. That being the case, counsel for the respondents submitted that there was no breach of the section because there was nothing to report. There was no agreement about the apportionment. But, in my opinion, that is itself a fact that ought to have been disclosed. In my opinion it is a matter which relates to the financial circumstances of the company because it relates to the action which is being recommended for the purpose of augmenting its assets thus providing more for creditors. Certainly it would have been most material for creditors to know whether and in what way the actual amount which the company in which they were interested might expect to recover would be affected by the need to make provision for whatever sum was to be apportioned to Gonam Pty Limited.
A further matter concerns the costs of the proceedings. At least inferentially, the report contemplates that the companies in the Group will fund the action. This emerges from paras (i), (ii) and (iii) of so much of the report as deals with the action against the banks and the receivers and the paragraph which follows those paragraphs. What is not made clear is that Gonam Pty Limited is not contributing in money towards the costs. It is to provide the services of the directors and other employees in order to pursue the litigation but it was not intended that Gonam Pty Limited itself would make any contribution to the costs of the proceedings. The paragraphs of the report to which I have just referred contemplate that those companies which provide moneys for costs are to share the proceeds rateably amongst themselves, at least in relation to 50 per cent of those proceeds. The remaining 50 per cent of the proceeds are to be apportioned equally over all eight companies in the Group. Nothing, of course, is said about Gonam Pty Limited.
Another submission relied upon by counsel for the respondents was that a creditor reading the report could work all this out for itself on the information which was provided. It may be that some creditors would be able to do this although I do not see on what basis they could be sure of any conclusion which they reached because there is insufficient information in the report to tell them what they would have needed to know. The importance of all this is that the companies in the Group were and are intended to fund the litigation and yet might not recover anything; or they might recover substantially less than $10 million, because the apportionment to Gonam Pty Limited is omitted from account. I think that these matters taken together indicate quite clearly that there was not compliance with the provisions of para. 439A(4)(a).
But that is only part of the problem. In addition to requiring that the notice of meeting must be accompanied by the report provided for in para. (a), para. 439A(4)(a) requires that, if a deed of company arrangement is proposed, a statement setting out details of the proposed deed must be sent. There is a question whether or not the statement made to the creditors did include such details.
I should introduce what I am about to say by mentioning that it was submitted that para. 439A(4) contemplated three separate statements. Firstly, there was the report required by para. (a), secondly there was the statement about the administrator's opinion in relation to the matters specified in para. (b), and finally there was the requirement that there be a statement setting out details of the proposed deed. It was suggested in argument that there had to be three separate documents, i.e. the report mentioned in para. (a) and the two statements specified in the remaining paragraphs. I would reject that submission. I do not myself perceive why the one document may not include each of the statements to be made pursuant to paras. (b) and (c) and itself otherwise comprise the report required by para. (a). It follows that I am prepared to treat the report to which I referred earlier as a document which, if it otherwise complied with the requirements of the subsection, would satisfy it notwithstanding that each of the matters required to be dealt with appeared in the one document.
In relation to the question whether that report sets out details of the proposed deed, I can only say that I have examined the deed and I have examined the report. I do not wish to go into detail. Undoubtedly the deed is referred to but I cannot understand how there can be any reasonable basis for saying that the report sets out the details of the deed. I am prepared to hold, contrary to one of the arguments advanced by the appellant, that the statement sufficiently identifies the deed. I also agree that para. (c) does not require every minute detail of the contents of the deed which is to be entered into to be referred to. Such a conclusion would be impractical and unreal, particularly bearing in mind the time frame in which the various steps are required to be taken. But the paragraph, in my opinion, does require that there be a sufficient account of the deed to enable creditors to make a judgment about what the deed will actually contain as a matter of substance, not as a matter of form or particularity. Having considered the documents to which I have referred, I do not find in the report or statement the slightest indication that any attempt at all has been made to comply with para. (c).
Then one comes to para. (b) which requires a statement setting out the administrator's opinion about three matters. An apparent difficulty with this paragraph is that it requires the administrator's opinion on matters which may, in given circumstances, appear to run counter to his preferred course of action. Each of the specified matters is introduced by the words, "whether it would be in the creditors' interests..." The first matter to be addressed is whether it would be in the creditors' interests for the company to execute a deed of company arrangement. Obviously the administrator in the present case thought that it would be and, to that extent, I think there has been partial compliance with para. (b)(i). I say "partial" because the provision requires a statement of the administrator's reasons for his opinions. I have reservations whether there is a sufficient statement of reasons. This is principally because of the omission of material information from the report. Its omission meant that the administrator did not deal with considerations arising from the omitted material which a comprehensive statement of reasons based upon all relevant material would have been likely to have done.
But what of the remaining paras (ii) and (iii)? These raise the questions whether it would be in the creditors' interests for the administration to end and for the company to be wound up. Paragraph (b)(ii) is at first sight puzzling in the light of s.435C which provides, so far as it is relevant, that the administration of a company ends, inter alia, upon the execution of a deed of company arrangement by both the company and the deed's administrator. It would appear to follow that, if creditors accept an administrator's opinion that it would be in creditors' interests for the company to execute a deed of company arrangement and it is executed, that will bring the administration to an end in itself. But the answer to my puzzlement is, I think, that this is not the only way in which an administration may end and that, for instance, it will also end if there is a decision that the company be wound up in insolvency or if the Court decides to terminate the administration on one of the grounds provided for in s.445D.
That aside, there is a potential tension between the matters specified in subparas. (i) and (iii), the one dealing with the execution of a deed of company arrangement and the other with the company being wound up. One of the problems, I think, that has been perceived with these provisions is, that it is possible in a given case that an administrator may take the view that it could be in the interests of creditors to enter into a deed of company arrangement and that it could also be in their interests for the company to be wound up. There may be competing considerations which would indicate advantages and disadvantages in either course. This is such a case because the acceptance of the recommendation that deeds of company arrangement be entered into would bring about a situation in which assets of the various companies might be used up in prosecuting litigation which would prove, after all, either to be unsuccessful or not to yield as much as might have been hoped. In that regard, the uncertainty about the amount that would be taken by Gonam Pty Limited is one of the factors that one would think ought to be considered. There may be other cases, of course, where it is clear that it would be disadvantageous for the creditors to enter into a deed of company arrangement or circumstances in which it would be advantageous for them to do so and unwise for them to pursue winding up. Every case will depend upon its own facts and circumstances.
The purpose of the provisions of para. (b) are to bring home to an administrator these various considerations so that the meeting of creditors can be fully informed. There was some discussion during the argument as to whether an administrator was bound to comply with each of the subparagraphs of para. (b). Initially I had some doubt about that matter but, on reflection, I am satisfied that it was the clear intention of the legislature - I refer again to the use of the word "must" in the opening words of the section - to require a statement dealing with each of the matters referred to in para. (b). Furthermore, the statement must be accompanied by the administrator's reasons for the opinions which are expressed. These reasons are all important because they will provide the guidance which creditors would need in order to make a sound judgment upon the course of action that should be followed.
In my opinion the report or statement here relied upon as a compliance with para. (b) does not address the matters which the paragraph requires. I regard this failure as a serious departure from the administrator's obligations under the paragraph and is to be taken into account as such when consideration is given to the question whether there has been a substantial compliance with the provisions of subsec. 439A(4).
There were some other matters argued. These are dealt with comprehensively in the judgment of Carr J but I do not find it necessary to go further than I have so far done in order to reach a conclusion on the critical question whether there has been substantial compliance. The matters which I have detected as failures to comply relate to each of the paragraphs of subsec. 439A(4). I do not wish to repeat my conclusions in relation to each of them. I emphasise the fact that there has been an extensive failure to comply. These failures must be accumulated and looked at as a whole. They ought not to be looked at individually and a conclusion reached separately as to substantial compliance in relation to each one. In my judgment the circumstances are such that there has not been demonstrated here any substantial compliance with the provisions to which I have referred. On the contrary, the facts and circumstances of the cases demonstrate, in my opinion, that there was a substantial failure to comply with the obligations for which the subsection provides. These are not cases where the respendents' problems are overcome because of considerations such as were mentioned by Cohen J in his judgment in Hagenvale discussed earlier in these reasons. That is because there was not here even a colourable attempt to comply with important provisions of the Law. In my opinion, therefore, it was not open to the Court to hold, pursuant to s.445G, that the provisions in question were substantially complied with. I do not need to come to the question of injustice because relief under the section is not available unless there has been substantial compliance and no injustice will result for any one bound by the deed if the contraventions are disregarded. Subsection 445G(3) provides for both these matters to be established. Since there has been no substantial compliance, the subsection can have no application. Accordingly, the order made by the primary judge declaring the deeds to be valid ought not to have been made and ought to be set aside. Instead the Court should, in my opinion, have made an order pursuant to s.445G(2) declaring the deeds to be void.
In reaching my conclusion I have taken into account the decision of Heerey J in Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498. His Honour said (at 512) that it was accepted that the Court had a discretion as to whether to set aside the deed of arrangement, quite apart from the establishment of grounds under subsec. 445G(3). His Honour exercised the discretion on a number of grounds. The principal of these was that there was no basis for concluding that setting aside the deed and the consequent liquidation would confer any practical benefit on any creditor, including the applicant. Furthermore, the company had no assets and no realistic prospects for the recovery of assets had been shown. There were some other matters to which his Honour referred.
I think there is a question whether the Court does have a residual discretion. The reason I say that is because of the very specific provisions of subsec. 445G(3) which empower the Court to declare a deed valid provided the provisions of the legislation were substantially complied with and there was no relevant injustice. It does not appear to me that the legislature intended that there should be left to the Court a residual discretion to act, upon the basis of other matters, to avoid the consequences for which the Law appears to provide; cf Ward v Williams (1955) 92 CLR 496 at 506-507.
I do not need to decide the question whether there is any such residual discretion because I take the view that in this case, which is very different from the case before Heerey J, there would have been no occasion to exercise such a discretion favourably to the respondents. There are real questions whether the creditors who voted on these proposals did so with sufficient information to enable them to be properly informed. One can see from the tabulation that, although there may be substantial benefits in prosecuting the litigation, there is a danger that the assets of the companies will be so depleted by that course of action that what little there was at the time of the report will not be available for the benefit of creditors in the event of a winding up. The creditors must, of course, decide matters for themselves, but they are entitled to make their decision on adequate information. This was not provided to them.
It remains to mention s.1322 of the Law. Some reliance was placed on that provision. In my opinion it does not apply because s.445G is expressly designed to deal with the matter. Furthermore, only irregularities of a procedural kind are able to be cured by s.1322. In my opinion, the irregularities here are not in that category. They are matters of substance. It follows that s.1322 cannot assist the respondents.
My conclusion then is that the appeals should be allowed and that there should be orders pursuant to subsec. 445G(2) declaring the deeds to be void. It may be that other relief should also be granted. There may, for instance, be the need to make an order pursuant to s.445D terminating the deeds and also to make an order for the winding up of the companies. There is a question concerning the extent of the discretion the Court may have under s.445D. I have not felt it necessary to deal with that matter because I consider that there should be a declaration of invalidity under subsec. 445G(2). If that declaration be made, I do not comprehend how there could be room for the exercise of the Court's discretion under s.445D to refuse to terminate the deed. In relation to discretion, I should also mention s.447A which provides that the Court may make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. No doubt this provision confers a wide discretion on the Court to make appropriate orders. But again I have difficulty in perceiving how it can overcome the problem which I have found to exist in the present case.
I would not make orders at this time but would propose that the matters stand over for a short time to enable the parties and their legal representatives to consider what has been said. When the matter is next in the list, counsel for the appellant should bring in short minutes of order to give effect to the Court's decision.
I certify that this and the 37 preceding pages are a true copy of the reasons for judgment herein of the Honourable Justice Sheppard.
Associate
Dated: 24 September 1996
IN THE FEDERAL COURT )
OF AUSTRALIA )
VICTORIA DISTRICT REGISTRY ) No. VG 834, 835, 836, 837, GENERAL DIVISION ) 838, 839, 840 of 1995
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
B E T W E E N : DEPUTY COMMISSIONER OF
TAXATION OF THE
COMMONWEALTH OF
AUSTRALIA
Appellant
and
COMCORP AUSTRALIA
LIMITED & ORS
First Respondents
and
DEAN ROYSTON McVEIGH
(As Administrator of the Deed of Company Arrangement of ACN 053 013 255)
Second Respondent
Coram: Lockhart, Sheppard & Carr JJ
Place: Sydney
Date: 24 September 1996
Carr J.
REASONS FOR JUDGMENT
Introduction
These are appeals from decisions of a single judge of this Court to:
.dismiss applications by the appellant ("the Commissioner") for declarations that certain deeds of company arrangement are void, or for orders terminating those deeds, or ending the administration which is the subject of the deeds and for orders that the seven respective first respondent companies be wound up in insolvency; and, instead,
.make declarations of validity in respect of the deeds and the meetings of creditors which approved them notwithstanding non-compliance with two of the relevant provisions of the Corporations Law ("the Law").
The appeals raise questions about the information which should be contained in an administrator's report when a meeting of creditors of a company under administration is convened under Chapter 5.3A of the Law. In summary, the issues are whether the administrator's reports in these matters included statements which sufficiently set out the administrator's opinions (and reasons for those opinions) concerning which of the alternative courses of action would be in the creditors' interests, whether the administrator had provided creditors with a statement which set out details of the proposed deed of company arrangement, whether his reports contained information that was false or misleading, whether there were material omissions from those reports and whether the deeds entered into by the respective companies involved should be terminated under s.445D of the Law or should be declared void or valid under s.445G(2) or (3) respectively, of the Law. There is also the question whether the Court should make orders, under the general powers conferred upon it by s.447A of the Law, about how Part 5.3A should operate in relation to each particular company.
Factual Background
The following factual background is taken largely from the reasons for judgment of the trial judge.
There are eight members of the Comcorp Group of Companies ("the Comcorp Group"). Some have changed their names but in these proceedings they have been
referred to by their former names. The companies are Comcorp Australia Ltd ("Comcorp"), Apocalypse Post (Vic.) Pty Ltd ("Apocalypse"), Duplication Centre Pty Ltd ("Duplication"), CEL Home Video Pty Ltd ("CEL"), Apocalypse Post Pty Ltd ("Apocalypse Post"), Video Sell-Through Australia Pty Ltd ("Video Sell-Through"), Vision Home Video Pty Ltd ("Vision Home") and Comcorp Outside Broadcast Pty Ltd ("Outside Broadcast").
In October 1991 the Commonwealth Bank of Australia and the Bank of New Zealand ("the Banks") agreed to provide financial accommodation to Comcorp. The other member companies of the Comcorp Group executed charges in favour of the Banks to secure that financial accommodation. In certain proceedings in the Supreme Court of Victoria, details of which are set out below, the plaintiffs [the eight companies of the Comcorp Group and a company called Gonam Pty Ltd ("Gonam")] allege that in September 1992 an agreement was made between Comcorp and Gonam of the one part and the Banks of the other part ("the Share Agreement") under which Gonam agreed to subscribe for half the share capital of Comcorp. One of the terms of the Share Agreement was that the Banks would continue to support the Comcorp Group until it was trading profitably "or alternatively until 31 October 1993 or after 31 October 1993 until CBA and BNZ had found a buyer for those shares ... if no buyer had been found by 31 October 1993". Another term pleaded was that the Banks would not take any steps to call up the loans or terminate the financial facility or enforce the charges consequent on any default thereunder, without giving Gonam the opportunity to remedy the default. Gonam subscribed $500,000 for half of Comcorp's shares, and the Banks continued to support the Comcorp Group notwithstanding Comcorp's failure
to pay interest due under the facility.
A further agreement is alleged to have been made in March 1993 ("the March Agreement") whereby the Banks agreed to forego or, alternatively, defer until such time as the Comcorp Group was trading profitably, the payment of interest and other charges in respect of the facility, to continue to support the Comcorp Group in the manner promised in the Share Agreement and not to exercise their rights of enforcement in respect of the facility or charges until certain conditions were satisfied.
On 16 September 1993 the Banks appointed receivers to the companies in the Comcorp Group. The receivers retired on 16 December 1994. On 4 January 1995 the Comcorp Group and Gonam sued the Banks and the receivers in the Supreme Court of Victoria, claiming damages. The basis of their respective claims is that by reason of the Share Agreement and the March Agreement there had been no default under the facility or charges and accordingly the Banks were not entitled to enforce their rights by appointing the receivers. The Comcorp Group and Gonam claim to have suffered loss and damage as a result of the Banks' actions. The Comcorp Group's loss is quantified as the value of their assets ($28 million) less the amount owing to the Banks, together with loss of profits. The losses which Gonam claims are said to include the loss of the value of its shares in Comcorp. There are also alternative claims based upon deceit, negligence, contravention of s.52 of the Trade Practices Act, breach of contract and conversion.
On 11 January 1995 Mr McVeigh (the second respondent to each of these appeals) was
appointed administrator of the Comcorp Group, other than Outside Broadcast. The first meetings of creditors of those companies were held on 16 January 1995. On 26 January 1995 Mr McVeigh forwarded to creditors of each of the companies in the Comcorp Group under administration a report, as he was required to do under s.439A(4)(a) of the Law. On 3 February 1995 the creditors of Apocalypse resolved to enter into a deed of company arrangement. On the same day a meeting of Comcorp's creditors was adjourned to 10 February 1995. On 6 February 1995, separate meetings of creditors of Video Sell-Through, Vision Home, CEL, Duplication and Apocalypse Post were held. In each case the creditors resolved to enter into a deed of company arrangement. At the resumed meeting on 10 February 1995, Comcorp's creditors resolved to enter into a deed of company arrangement. On 20 February 1995 each company executed a deed of company arrangement.
On 14 September 1995 the Deputy Commission of Taxation ("the Commissioner") filed seven identical applications in this Court against each of the seven companies of the Comcorp Group which had become parties to the respective deeds of company arrangement. The Commissioner sought the following orders:
.a declaration under s.445G(2) of the Law that the deed of company arrangement is void;
.alternatively an order under s.445D(1)(a), (b), and (c) of the Law terminating the deed;
.further or alternatively, orders under s.447A of the Law ending the administration or terminating the deed and an order that the company be wound up in insolvency; and
.further or alternatively, an order appointing an official liquidator provisionally and an order under s.459A of the Law that the company be wound up in insolvency.
The Statutory Framework
Section 435A states the object of Part 5.3A of the Law in the following terms:
"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."
It was common ground that it was not possible for the Comcorp companies under administration or their respective businesses to continue in existence. The relevant issue for the creditors of the respective companies was whether there would be a better return from entering into and implementing the terms of the proposed deed of company arrangement than would result from an immediate winding up of the company.
Section 435C(2) provides that "the normal outcome" of the administration of a company is that either a deed of company arrangement is executed or that the company's creditors resolve that the administration should end or that the company's creditors resolve that the company be wound up.
There are provisions [s.436A-s.436C] concerning who may appoint an administrator. There are also provisions governing the convening of meetings of creditors and the legal effect of the appointment of an administrator. The following are the provisions of the Act with which these appeals are particularly concerned (other than those which contain exculpatory provisions or discretionary provisions to excuse non-compliance, which are set out later in these reasons):
"439A(4)[Documents to accompany notice] The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:
(a)a report by the administrator about the company's business, property, affairs and financial circumstances; and
(b)a statement setting out the administrator's opinion about each of the following matters:
(i)whether it would be in the creditors' interests for the company to execute a deed of company arrangement;
(ii)whether it would be in the creditors' interests for the administration to end;
(iii)whether it would be in the creditors' interests for the company to be wound up;
and his or her reasons for those opinions; and
(c)if a deed of company arrangement is proposed - a statement setting out details of the proposed deed.
. . .
SECTION 439C WHAT CREDITORS MAY DECIDE
439CAt 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.
. . .
SECTION 445D WHEN COURT MAY TERMINATE DEED
445D(1)[Power of Court to terminate deed] The Court may make an order terminating a deed of company arrangement if satisfied that:
(a)information about the company's business, property, affairs or financial circumstances that:
(i)was false or misleading; and
(ii)can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b)such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting
at which the resolution was passed; or
(c)there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d)there has been a material contravention of the deed by a person bound by the deed; or
(e)effect cannot be given to the deed without injustice or undue delay; or
(f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(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.
445D(2)[Application for order] 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."
The Decisions at First Instance
The learned trial judge held that, in convening the respective meetings of creditors, there had been two contraventions of s.439A(4) and at least one omission from Mr McVeigh's respective reports being an omission or omissions which fell within s.445D(1)(c).
The contraventions of s.439A(4) so found were:
.failure to provide the reports referred to in s.439A(4)(a)
separately from the statements required by s.439A(4) (b); and
.that the reports were deficient in failing to state certain details of the proposed deeds. Those details were:
.that the directors of each respective company were to have control of the Supreme Court litigation and that the administrator had only the power to veto any proposed settlement and to decline "for good reason" to contribute further money to the Litigation Fund (a term defined in the deeds of company arrangement).
Failure to set out these details was held to be a contravention of s.439A(4)(c) and a material omission within the meaning of s.445D(1)(c).
On one reading of his Honour's reasons for judgment it would seem that he found a further contravention of s.439A(4)(c) and a co-extensive consequent material omission within s.445D(1). This was a failure to state in the reports that Gonam was to get a share of the proceeds of the Supreme Court litigation without having contributed to the costs of the action and that no agreement had been reached as to the sharing of such proceeds between Gonam and the Comcorp Group [see Appeal Book pages 652(.2) and 663(.5)]. However, at page 660 there is a reference to only two contraventions of s.439A(4). It is not necessary to resolve this problem because the Commissioner relies upon this matter as a ground of appeal - see in particular Ground 7.
His Honour granted, in each of the seven cases, a declaration under s.445G(3) that each deed was valid notwithstanding the contraventions of s.439A(4). His Honour also made similar declarations under s.1322 in respect of those contraventions.
His Honour held that s.445D(1)(c) does not impose obligations on any person. There being no obligation on any person, there was no contravention of a provision which
might give rise to the potential application of s.1322. However, his Honour exercised the discretion conferred by s.445D(1) to refuse the Commissioner's claims for relief in respect of the information omitted from the reports and described above.
Grounds of Appeal
The Commissioner raised fifteen grounds of appeal, fourteen of which related to matters of specific complaint considered by his Honour. The fifteenth ground of appeal concerned his Honour's refusal to allow the Commissioner to advance a case, in the course of final submissions, based on the contention that the Comcorp Group directors and Mr McVeigh were fiduciaries and consequently were obliged to disclose relevant matters. I now proceed to consider each of those grounds of appeal.
Ground 1 - Whether there is a difference between the information to be provided to creditors considering a deed of arrangement and the information to be provided to creditors considering a scheme of arrangement
The Commissioner contends that his Honour erred in following the approach taken in Hagenvale Pty Ltd v. Depela Pty Ltd (1995) 17 ACSR 139. In that case, at pp.145-146, Cohen J. said:
"The intention [behind Part 5.3A] was ... to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or of the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Part 5.3A, is that the amount of detailed information which would be given to
creditors in a scheme of arrangement under s.411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly."
The Commissioner accepts that the time limits must be taken into account when assessing the conduct of an administrator. However, he contends that Cohen J's dictum is wrong insofar as it stands for the proposition that the time limits have the further result that the amount of detailed information which would be given to creditors under a scheme of arrangement is not available where a deed of arrangement is proposed under Part 5.3A of the law. This would restrict the operation of s.445D and, so it was submitted, it was wrong for the primary judge to follow that dictum. The Commissioner refers to the fact that part of the obligations to supply material information rests upon the directors who propose a scheme. Furthermore, s.445D "quite clearly" includes matters of which the administrator is not informed. Thus, so it is said, there is no basis for limiting the operation of s.445D to those matters uncovered by an administrator's investigation and no reason to limit the operation of that section by reference to the time constraints on an administrator. In any event, so it is further submitted, the time constraints on an administrator are not so significant because the administrator may seek an extension of time, or report to creditors that he is unable to meet the statutory requirements.
The Approach Taken By the Trial Judge
Before referring to the above passage in Hagenvale, the learned trial judge observed:
"It is clear from s.444D(1) [obviously a reference to s.445D(1)] that they [the creditors] are to be provided with information that can reasonably be expected to be material to them in
deciding whether to vote in favour of the resolution that the company execute a deed of company arrangement."
His Honour then expressed the view that an administrator is not required to give creditors the same detailed information to which they would be entitled prior to voting on a scheme of arrangement, citing the passage above from Cohen J's reasons in Hagenvale.
It is clear from the second reading speech and the Explanatory Memorandum delivered when part 5.3A was enacted, (and, as Sheppard J points out, from the terms of this legislation itself), that Parliament intended administration to be what might be termed a streamlined alternative to an arrangement or reconstruction under Part 5.1 of the Law or a winding up in insolvency under Part 5.4. The second reading speech contains the following passage (at p.2404 of Hansard, 3 November 1992):
"The emphasis is on informality and flexibility. The emphasis is also on speed of action. The procedure does not allow the indefinite administrations which can occur, for example, under the United States chapter 11 approach."
The above passage was referred to and its intent reflected in the decisions of Thomas J. in Re Vanfox Pty Ltd (1994) 13 ACSR 209 at p.215 and Young J. in Cawthorn v. Keira Constructions Pty Ltd (1994) 12 ACLC 396 at p.399.
Section 435A, which I have set out above, makes it clear that the object of Part 5.3A is to provide a further alternative, in addition to those already contained in the Law, for companies in financial difficulty. Paragraph 449 of the Explanatory Memorandum reads:
His Honour found that this was an important feature of the deeds and should have been
set out in the reports. The appellant contends that other details were omitted. In his written submissions, the appellant sets out quite an exhaustive series of extracts from the Oxford English Dictionary which, so it is submitted, defines "detail" in a way which "defies any attempt for it to be satisfied by generalisation or summary or gist of the deed".
In particular the appellant complains that the following details were omitted:
.the obligation to continue the supply of moneys for the Supreme Court litigation;
.the elevation of the administrator's right of remuneration to a level of priority higher than prescribed by s.556 of the Law;
.the omission of the fact that there was to be no committee of inspection.
Section 444A of the Law deals with the preparation and execution of the instrument which becomes a deed of arrangement. Section 444A(5) provides that the instrument is taken to include the prescribed provisions, "except so far as it provides otherwise". The prescribed provisions can be found by reference to regulation 5.3A.06 and Schedule 8A to the regulations. Schedule 8A contains four pages of provisions.
In my opinion, a proper construction of s.439A(4)(c) cannot require each and every detail of the provisions of the proposed deed to be set out in the administrator's statement. As the second respondent submits, the subsection speaks of "details", not "every detail" or "all of the details". Once it is accepted that the statement need not include each and every detail in the proposed deed, then the next step is to qualify what is meant by "details". In my view, the best description of that qualification is
that they be "material details". In the comparable context of whether the omission of a particular in a statement of affairs tabled at a meeting of creditors convened under Part X of the Bankruptcy Act 1966 (Cth) was a material omission, it has been held that "material" means something which was relevant and did or might have affected the outcome: see Re Segal; Lensworth Finance Ltd v. Segal (1975) 45 FLR 85 followed in Beard v. Prestige Baking Industries Pty Ltd (1981) 52 FLR 384 (in particular per Fox J. at p.398 and Lockhart J. at p.418) and Re Curfari at p.459. In the present matters, I would suggest that the details which s.439A(4)(c) requires to be set out are those details which can reasonably be expected to have been material to creditors in deciding whether to vote in favour of the resolution that the company execute the deed. In that manner, s.439A(4)(c) functions consistently with s.445D which confers power on the Court to terminate a deed of company arrangement where there are material omissions from the administrator's report. I now turn to what the appellant says were details omitted over and above those found by the trial judge to have been omitted.
I think that there is merit in and I accept the appellant's submission that the statement of details of the proposed deed was deficient by failing to set out each company's obligation to continue funding the Supreme Court litigation. The second respondent, in his written submissions concedes that his Honour implicitly found such a deficiency of detail. The second respondent submits that his Honour erred in so finding, but no notice of contention was filed. As I have said, I would uphold this part of Ground 10 of the Grounds of Appeal.
I also agree with the appellant that the matters of elevating the administrator's
entitlement to his fees to a level of priority greater than that prescribed by s.556 of the Law and not having a committee of inspection (i.e. excluding clause 11 of Schedule 8A) were details which should have been contained in the statement. In my opinion, they were details which can reasonably be expected to have been material to creditors of the respective companies. However, as the second respondent points out, these were not matters of complaint before his Honour and the appellant did not apply for leave to raise them at the hearing. In those circumstances I do not think that they should be taken into account in disposing of the appeals.
Ground 11 - Whether the deed of company arrangement was sufficiently specified in the creditors' resolution?
Section 439C provides:
"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" (emphasis added).
The evidence was that in the case of the companies other than Apocalypse, the creditors resolved "that the company enter into a Deed of Arrangement". The appellant challenged his Honour's finding that in the case of these companies the draft proposed deed was circulated to all creditors at or prior to the relevant meeting. The appellant submits that the evidence shows that drafts were sent only to those who attended the first meeting and not to all creditors. The evidence is that at the meetings of creditors a draft deed was tabled. His Honour found that only one deed was the
subject of discussion at each of the meetings.
In those circumstances I respectfully agree with his Honour that when read in context, the resolution specified (i.e. identified) the deed that was to be executed. In the case of Apocalypse there was no such draft tabled. Normally, unless the administrator's report and statements contained the material details of the proposed deed, I would regard a resolution in the above terms, in the absence of a draft deed being tabled at the meeting, as not being sufficiently specific to comply with s.439C(a). However, in the context of the present matter where there were six other meetings of related companies at which identical deeds were tabled and given the degree of detail set out in the administrator's report forwarded to Apocalypse's creditors, I consider that the deed which the creditors were approving for Apocalypse was sufficiently "specified" for the purposes of the section.
The Commissioner argues that Parliament did not intend the creditors to be "... bound by a resolution the content of which can be determined only by having regard to what took place at the meeting...". It is not necessary to decide that point in the present matter. However, it seems to me that the creditors might well be so bound. Section 439C(a) contemplates that the creditors may resolve that the company execute a deed of company arrangement even if that deed differs from the proposed deed, details of which accompanied the notice of meeting. Section 444C(2) provides for the extent to which persons are bound by it before its execution. That person (if he or she would be bound by the deed if the company and the administrator had already executed the deed) must not do anything inconsistent with the deed, except with the leave of the
Court. One can well imagine circumstances in which the extent of that restraint could only be assessed by having regard to what took place at the creditors' meeting.
I feel compelled to add that it is so easy to specify the proposed deed (for example by describing it in the resolution as the draft document which was tabled, initialled by the chairman, or amended at the meeting and initialled by the chairman, as the case may be) that it would normally be desirable for a resolution to contain that degree of specification. Not only would this tend to avoid any possibility of confusion but, as in the present case, it would prevent fruitless argument.
In fairness to the appellant, I should state that this ground was put forward as part of a combination of matters which, so it is submitted, precluded there having been substantial compliance with the requirements of Part 5.3A and hence the application of s.445G(3). Too much had not been done, so it was put, for there to have been substantial compliance. This was the combination of not giving details to creditors before they went to the meeting, leaving out details of the proposed deed and then not specifying which deed was to be executed. However, in my opinion, this ground of appeal has not been made out.
Ground 12 - Interpretation and application of s.445G(3)
Section 445G provides as follows:
SECTION 445G WHEN COURT MAY VOID OR VALIDATE DEED
445G(1)[Doubt about deed] Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in
accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or the Commission, may apply to the Court for an order under this section.
445G(2)[Court may declare deed void] On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground.
445G(3)[Court may declare deed valid] On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that:
(a)the provision was substantially complied with; and
(b)no injustice will result for anyone bound by the deed if the contravention is disregarded.
445G(4)[Court may vary deed] Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator.
His Honour found two contraventions of s.439A(4). The first was the failure to provide separate reports and statements. Counsel for the appellant had told his Honour that if that had been the only deficiency there would have been no opposition to the making of a declaration under s.445G(3).
In my view, and with the greatest respect to his Honour, there is nothing to preclude the report and the statements referred to in s.439A(4)(a),(b) and (c) respectively being contained in the one document. I think that s.439A(4)(c) deals separately with the statement of details only because it will not always be the case that a deed of company arrangement is proposed. Frequently it might well be convenient both to the administrator and to the creditors to have the report and statements combined in the one document. The whole tenor of Part 5.3A is, as I have previously mentioned, one
of a speedy, efficient and convenient procedure for the creditors to consider what is to be done with an insolvent company. In my opinion there was no contravention in combining the report and statement in the one document.
The second contravention, as found by his Honour, was the failure to state that the directors would have the running of the Supreme Court litigation and that the administrator's role was indirect and limited. His Honour held that despite these contraventions s.439A(4) had been substantially complied with and that the most important features of the proposed deed were adequately set out. His Honour then went on to consider whether any injustice would result for anyone bound by the deed if the contravention were disregarded. His Honour noted that there was nothing in the evidence to suggest that it would be in the interests of creditors for the deeds to be terminated and for the companies to be wound up. His Honour held that the administrator's calculations showed that a winding up would not be in the creditors' interests. His Honour referred to certain evidence from Mr Papadimitriou conceding that the appellant's attack on the deeds was not based on any perceived benefit to creditors resulting from the deeds coming to an end. Finally, his Honour referred to evidence from five creditors who said that they did not consider that it would be in their interests for the deeds to be overturned.
The Commissioner submits that his Honour should not have considered the matter of injustice because that only arose when there had been substantial compliance with the relevant provision or provisions. If the Court were satisfied that there had been no separate opinions, insufficient details and deficiencies in the resolution then, so it is
submitted, there could not be substantial compliance with the relevant provision or provisions.
On my view of the matter, his Honour found one contravention too many (the report and the statement being in the one document) and rejected three other matters which I would regard as contraventions. Those three matters were:
.failing to set out in the statement that Gonam was not expected to contribute any money to the Litigation Fund;
.failing to set out in the statement the administrator's opinion about each of the three matters described in s.439A(4)(b) and his reasons for those opinions; and
.failing to set out in the statement each company's obligation to continue funding the Supreme Court proceedings.
The question is whether, in these circumstances s.439A(4)(b) and s.439A(4)(c) respectively were substantially complied with.
We were not referred to any authority on the question of substantial compliance in this context. That is not particularly surprising, given that Part 5.3A came into effect less than three years ago.
However, a similar exculpatory provision can be found in s.205(11) of the Law in the context of removal of the prohibition against a corporation providing financial assistance in relation to the acquisition of shares in itself.
In Re News Corporation Ltd (1993) 11 ACLC 733 at p.734, Hill J. observed:
"Ultimately, it seems to me the matter is one of degree in a case such as the present, namely whether the compliance is such that it can fairly be said to be a substantial compliance". [emphasis original]
In Re Asset Risk Management Ltd (1995) 130 ALR 605 at p.607, Burchett J. cited the above passage and added:
"I agree that substantial compliance is a matter of degree. What the court is concerned with is the practical effect of what has been done, which should be compared with the practical effect the legislature appears to have sought to achieve. But each case is likely to raise its own problems, and it will always be necessary to apply afresh the statutory language. I shall not attempt to place a gloss upon it."
I agree respectfully with those views. I propose also to draw some guidance on the meaning of the word "substantially" from some of the decisions under Part 4 of the Trade Practices Act 1974 (Cth). For example, in Tillmanns Butcheries Pty Ltd v. Australasian Meat Industry Employees' Union (1979) 42 FLR 331 at p.348 Deane J. observed:
"The word `substantial' is not only susceptible of ambiguity: it is a word calculated to conceal a lack of precision. In the phrase `substantial loss or damage', it can, in an appropriate context, mean real or of substance as distinct from ephemeral or nominal. It can also mean large, weighty, or big. It can be used in a relative sense or can indicate an absolute significance, quantity or size."
When used in s.445G(3)(a), the word "substantially" involves a matter of the degree of compliance. It is used in a relative sense rather than any absolute sense. In making the required assessment, I propose to adopt an approach similar to that taken by Smithers J. in his seminal decision in Dandy Power Equipment Pty Ltd v. Mercury Marine Pty Ltd (1982) 64 FLR 238 at pp.259-260:
"To my mind one must look at the relevant significant portion of the market, ask oneself how and to what extent there would have been competition therein but for the conduct, assess what is left and determine whether what has been lost in relation to what would have been, is seen to be a substantial lessening of competition. I prefer not to substitute other adverbs for `substantially'. `Substantially' is a word the meaning of which in the circumstances in which it is applied must, to some extent, be of uncertain incidence and a matter of judgment. There is no precise scale by which to measure what is substantial."
Applying that approach, one assesses what has been lost by each respective contravention compared to what would have been if there had been no contravention. Is the difference between the two such that one cannot fairly say that the provision was "substantially complied with"?
First I consider that s.439A(4)(b) was substantially complied with. Although the administrator's opinions were not set out separately in respect of each of the three matters referred to in that subsection, I agree with his Honour that the administrator, by recommending that it would be in the creditors' interests for a deed to be executed because the return available to creditors under the terms of the deed would exceed that available in the liquidation, in substance, also expressed the opinions that it would be in the creditors' interests for a deed to be executed and that it would not be in their interests for the company to be wound up or for the administration to end.
Furthermore, I consider that there was substantial compliance with s.439A(4)(c) notwithstanding the absence of the details identified by his Honour and the additional details which I consider should have been set out in the administrator's statement.
So far as the former are concerned, I respectfully agree with his Honour's conclusion that the most important features of the proposed deed were adequately set out. The omission of the detail that Gonam was not expected to contribute any money to the Litigation Fund was, in my opinion, a fairly serious matter. To some extent I think it is reasonable to infer that the effect of the omission would have been lessened by express reference to the non-monetary contributions which Gonam and its directors were going to make to the prosecution of the Supreme Court litigation. However, putting that aspect to one side and weighing all of the details omitted, in my view they do not assume sufficient significance to preclude the conclusion, which I have drawn, that s.439A(4)(c) was substantially complied with. I should add that each company's obligation to continue funding the Supreme Court litigation (a detail which I consider should have been set out) was not an absolute obligation, but was qualified in the manner referred to above.
I should not be taken as suggesting that the matter of substantial compliance with each of these provisions is clear-cut or obvious. In each case the matter is one of degree. However my view is that, in respect of each relevant provision of the law concerned the practical effect of what has been done substantially equates with the practical effect which the legislature appears to have sought to achieve. I have borrowed some of Burchett J's language in Re Asset Risk Management Ltd.
His Honour said that he was satisfied that no injustice would result for anyone bound by the deeds if the contraventions were disregarded. As mentioned in argument, that is a high threshold. The appellant put some submissions to the following effect,
namely that:
.the administrator had not taken possession of or inspected the books of account of the various companies when he prepared his report;
.the administrator had not assessed, independently of the directors, the prospects of success in the Supreme Court litigation;
.the possible fruits of the Supreme Court litigation were likely to be greater for each individual company should that litigation be pursued in liquidation, than under the deed of company arrangement because in that case a liquidator would deny any participation by Gonam in the proceeds; and
.there was a real or substantial risk that under the control of the directors, the litigation would be conducted in a manner to enhance the benefit of Gonam to the detriment of the other plaintiffs.
The appellant submitted that there would be a "real economic advantage" to the creditors in having separate liquidators for each company. Furthermore, so it was put, his Honour erred in having regard to the evidence of five creditors who said that they did not consider it was in their interests for the deeds to be set aside. This was because those creditors had not been fully informed, were minor in number and value and were not creditors of all the companies in the Comcorp Group.
I would reject the submission concerning the evidence of the five creditors, because they were not cross-examined.
Whether the administrator had taken possession of or inspected the books and whether he had assessed the prospects of success of the litigation do not, in my view go to the question whether any injustice will result for anyone bound by the deed if the
contraventions are disregarded.
Nor do I consider that error has been demonstrated in the other respects referred to above. It may be that some companies in the Comcorp Group have a stronger case than others and some companies might have greater resources to fund litigation in the Supreme Court of Victoria. However, the proposal put to the creditors was that they should join forces in the Supreme Court litigation and pool their resources. Such an approach was to be cemented by excluding claims for rights of contribution (a matter expressly referred to, for example, at the top of page 3 of the Comcorp Report). There is no basis for assuming that his Honour had not taken into account the costs of what might have been up to seven separate liquidations. Finally, we were not taken to any evidence which might justify the assertion that there was a real or substantial risk that under the control of the directors the litigation would be conducted in a manner to benefit Gonam at the detriment of the other plaintiffs.
No other creditor intervened to suggest any injustice. So far as any injustice to the Commissioner might have been suggested, the respondents drew our attention to evidence that the Commissioner's representative attended all but one of the creditors' meetings and voted in favour of the resolution passed. In fact at one of the meetings the Commissioner's representative seconded the motion. Even allowing for the submission that the creditors had not been fully informed, there does not seem to me to be any injustice to the Commissioner in applying s.445G(3) to the present matter. I would reject this ground of appeal.
Ground 13 - Application of s.1322
Section 1322 of the Law provides as follows:
SECTION 1322 IRREGULARITIES
1322(1)["Proceeding" and "procedural irregularity"] In this section, unless the contrary intention appears:
(a)a reference to a proceeding under this Law is a reference to any proceeding whether a legal proceeding or not; and
(b)a reference to a procedural irregularity includes a reference to:
(i)the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation or at a joint meeting of creditors and members of a corporation; and
(ii)a defect, irregularity or deficiency of notice or time.
1322(2)[Proceeding not invalidated] A proceeding under this Law is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.
1322(3)[Invalidation of meetings] A meeting held for the purposes of this Law, or a meeting notice of which is required to be given in accordance with the provisions of this Law, or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or the Commission, declares proceedings at the meeting to be void.
1322(4)[Court may make orders] Subject to the following provisions of this section but without limiting the generality of any other provision of this Law, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a)an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Law or in relation to a corporation is not invalid by reason of any contravention of a provision of this Law or a provision of the constitution of a corporation;
(b)an order directing the rectification of any register kept by the Commission under this Law;
(c)an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);
(d)an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Law or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;
and may make such consequential or ancillary orders as the Court thinks fit.
1322(5)[Scope of power] An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence.
1322(6)[Court to be satisfied] The court shall not make an order under this section unless it is satisfied:
(a)in the case of an order referred to in paragraph (4)(a):
(i)that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii)that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii)that it is in the public interest that the order be made;
(b)in the case of an order referred to in paragraph (4)(c) - that the person subject to the civil liability concerned acted honestly; and
(c)in every case - that no substantial injustice has been or is likely to be caused to any person."
His Honour applied s.1322 to make declarations that the creditors' meetings and resolutions passed at them were not invalid by reason of the contraventions of s.439A(4) which he identified and which I have described above. His Honour stated
that he was satisfied that:
.the contraventions in question were of a procedural nature being defects in relation to the calling of meetings;
.that there was nothing to suggest that any person had acted other than honestly and that it was in the public interest that orders be made under s.1322 to give effect to the wishes of creditors [although these two matters, as his Honour acknowledged, were alternatives which it was not necessary for his Honour to consider in the application of s.1322(6)(a)]; and
.that no substantial injustice has been or is likely to be caused to any person.
His Honour declined to make orders under s.1322 in relation to the two omissions which he had found under s.445D(1)(c) because there had been no "contravention" of a provision of the Law. His Honour followed the decision of Zeeman J. in Re W. Coogan (1993) 11 ACLC 388.
The appellant contends that his Honour erred in applying s.1322 to excuse the two contraventions of s.439A(4) which he had found. First, there was a complaint about his Honour's finding that the persons concerned in the contraventions acted honestly in circumstances where his Honour had also found that the administrator knew at the time of preparing his report that the directors would be conducting the Supreme Court litigation and that Gonam would benefit from the litigation but did not inform the creditors of those matters. I accept the second respondent's submission that we should not consider this argument because the appellant did not contend before the primary judge that the administrator had acted other than honestly in and about the preparation of his reports. Additionally, the evidence referred to above, upon which the appellant
relies, does not in my view suggest that his Honour was in error in finding that those concerned acted honestly.
I agree, respectfully, with his Honour's conclusion that the contraventions found by him were of a procedural nature and I would similarly characterise the additional contraventions which I have identified above. However, I have some difficulty in applying s.1322(4)(a) when read with s.1322(6)(a)(i). Declarations were made that the creditors' meetings and the resolutions passed at them were not invalid by reason of the contraventions of s.439A(4). Section 1322(4)(a)(i) contemplates that the act, matter or thing, or the proceeding to be declared "not invalid" is "essentially of a procedural nature": see s.1322(6)(a)(i) In my view, the conduct of a creditors' meeting and the passing of a resolution at such a meeting are essentially of a procedural nature and thus fall within s.1322(6)(a)(i). As Thomas J. noted in Re Vanfox Pty Ltd (1994) 13 ACSR 209 at p.216 a wide view of matters capable of being viewed as irregularities in procedure has been taken in the cases which his Honour listed at that page. My point is that it is not sufficient, in order to validate (for example) a creditors' meeting and the resolutions passed at that meeting, for the contravention to be "essentially of a procedural nature". The "act, matter or thing or the proceeding" sought to be validated must itself be of a procedural nature. In any event, I agree with his Honour's conclusions in respect of the two further alternatives contained in that subsection and for the reasons given by his Honour. The Commissioner suggests that the public interest required more than "simply attending to the wishes of creditors". It would, so it was put, be contrary to the public interest to use Part 5.3A as an instrument of oppression to force a compounding of debt on a
creditor, no matter how small the creditor's debt may be. I think that argument may be safely left for another day. I have referred above to the Commissioner's role at the meetings. This is not a case of a compounding of debt being forced on a minority creditor. In my opinion his Honour did not err in making declarations under s.1322 in these matters.
Ground 14 - Interpretation and application of the discretion in s.445D(1)
The appellant contends that his Honour erred in considering how the creditors would have voted if they had received the information omitted from the administrator's statement. In my view that was a matter which his Honour was entitled to take into account when considering whether to exercise the discretion conferred by s.445D to terminate the deed. The Commissioner attacks his Honour's reasoning on the basis that having found that the information omitted could reasonably be expected to be material to the creditors in making their decision the inevitable consequence was that they would have voted against the execution of the deed. I do not think that necessarily follows, as a matter of logic.
However, this was not the only basis upon which his Honour exercised that discretion. His Honour stated that the primary consideration in determining how the discretion should be exercised was the interests of creditors, and I respectfully agree with his opinion in that regard, so far as the present matters are concerned. His Honour also took into consideration the manner in which he had exercised his discretion under s.445G(3) and s.1322(4). The exercise of those discretions and the reasons for exercising those discretions all pointed against the exercise of the discretion under
s.445D(1) to terminate the deeds.
Next the appellant refers to findings of fact upon which his Honour is said to have exercised his discretion. This ground of appeal was particularised in terms of his Honour wrongly relying upon matters said not to have been established by the evidence or taking into account matters which were irrelevant or immaterial. Some eight separate matters were given by way of particulars. An examination of each of those eight particulars reveals that the essence of the complaint is that either his Honour preferred some part of the evidence to other parts (for example whether it would be in the interests of creditors to terminate the deeds and wind up the companies) or that his Honour gave more weight to the respondents' evidence than, in the appellant's view, he should have done. As there were no findings of credibility, this Court is in as good a position as the primary judge to draw inferences from the evidence adduced by the parties. I have examined each of the eight particulars put forward by the appellant and the matters which his Honour took into account in the exercise of his discretion. The principal factor which it seems clear influenced his Honour was the interests of creditors, a matter to which his Honour referred three times in the space of two pages. In my view no error on his Honour's part has been demonstrated in the exercise of his discretion under s.445D(1).
Ground 15 - Refusal to allow the Commissioner to make a case by reference to the status of the directors and administrator as fiduciaries
The appellant contends that his Honour erred in not allowing him to advance his case by reference to the status of the directors and the administrator as fiduciaries and what was described as "their consequent obligation to disclose where they propose to profit
from the scheme". It appears from his Honour's reasons that these matters were raised by counsel for the Commissioner in the course of final submissions. The respondents objected to this course on the basis that this was a new case being mounted without notice, after the evidence had closed. His Honour upheld the respondents' submissions and refused to allow what he described as the new ground to be relied on.
The appellant says that this was not a new case but fell within the particulars of complaint contained in affidavits already filed on his behalf. Secondly, the appellant says that these submissions were put by way of reply. Finally, the appellant says that these matters were relevant and material to the exercise of the discretions in ss.445D, 445G(3) and 1322.
There is nothing in the affidavits filed on behalf of the Commissioner which refers to any fiduciary duties owed by either the directors of the companies in the Comcorp Group or the administrator. I have read the submissions which his Honour refused to consider. In my view they go beyond a response to the respondents' submissions concerning materiality of the omissions. In any event, if the fiduciary duties were felt to bear on the question of materiality then, as the second respondent submitted, they should have been raised as alternative submissions at the outset. The same reasoning applies to the argument that these matters were relevant to the exercise of discretion under the sections mentioned above. In my opinion his Honour did not err in excluding the Commissioner's submissions concerning fiduciary duties. It would have been unfair to the respondents to allow these matters to have been raised at such a late stage. In any event, I do not consider that the exclusion resulted in any injustice to the
appellant. The case was to be decided on the construction and application of the various statutory provisions and in particular those which required information to be provided or details to be set out. One cannot safely say that a breach of fiduciary duty should not be taken into account in the exercise of any of the discretions. Even so, given the prime concern of what is in the interests of creditors and the degree of codification of what was required, one would have expected the matter of breach of fiduciary duty, in that overall context, to have been subsumed in the matter of whether there had been substantial compliance with the statutory requirements.
Postscript
At a late stage in the hearing of the appeal, the first respondent sought to tender an affidavit with a view to establishing that the administrator has virtually no funds left. This was said to be relevant if the Court thought that abandoning the Supreme Court proceedings might make available to the creditors "a pool of money" (see page 148 of the transcript). The Court granted leave for the affidavit to be filed. The appellant was also granted leave to file any affidavits or written submission in response thereto. There ensued a flurry of submissions and counter-submissions which were not confined to the subject of how much money remained in the administrator's hands. For my part, I would disregard the contents of the first respondent's affidavit and the submissions which it provoked. The case can be properly decided without recourse to those matters.
Conclusion
For the above reasons, I would dismiss all of the appeals with costs.
I certify that this and the preceding fifty-six
(56) pages are a true copy of the Reasons for
Judgment of Justice Carr.
Associate:
Date: 24 September 1996
Counsel for the Appellant: Mr D Meagher QC with Ms J Davies
Solicitors for the Appellant: Australian Government Solicitor
Counsel for the First Respondents: Mr J Burnside QC with Ms J Horan
Solicitors for the First Respondents: Deacons Graham & James
Counsel for the Second Respondent: Mr M Derham QC with Mr D Williams
Solicitors for the Second Respondent: J M Smith & Emmerton
Dates of Hearing: 6 & 8 March 1996
Date of Judgment: September 1996
Key Legal Topics
Areas of Law
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Corporate Law & Governance
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Commercial Law
Legal Concepts
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Breach of Contract
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Unconscionable Conduct
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Judicial Review
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Statutory Interpretation
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Contract Formation
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