Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2)

[2021] FCA 32

FEDERAL COURT OF AUSTRALIA

Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32

File numbers:

NSD 684 of 2020
NSD 817 of 2020

Judgment of:

MCKERRACHER J

Date of judgment:

29 January 2021

Catchwords:

CORPORATIONS – application to set aside Deeds of Company Arrangement (DOCAs) pursuant to s 445D of the Corporations Act 2001 (Cth) – where plaintiff is a creditor for a judgment debt under the Building and Construction Industry Security of Payment Act 1999 (NSW) against two single purpose companies in relation to a property development – where both companies entered into numerous financial agreements and facilities with related and unrelated entities after completion of the development – where both companies contest the plaintiff’s judgment debt and seek to fund a cross-claim through the DOCAs – whether the companies’ administrators’ reports contained materially misleading information – whether omissions from the administrators’ reports were material to the decision whether to support the DOCAs – whether the terms of the DOCAs are oppressive, unfairly prejudicial or unfairly discriminatory – whether the DOCAs are contrary to the interests of creditors as a whole – whether the DOCAs are detrimental to commercial morality – in circumstances where it was not demonstrated that further investigation into certain transactions by liquidators under a winding up would provide a better return to creditors than the DOCAs

CORPORATIONS – application to set aside creditors’ resolutions to approve DOCAs pursuant to s 75-41 of the Insolvency Practice Schedule – where but for the votes of related creditors approval of the DOCAs would have been decided by the casting vote of the administrators – where the administrators gave evidence that they would have cast their vote to approve the DOCAs in any event – in circumstances where the administrators’ reports had recommended the DOCAs on the basis that they would achieve a better return to creditors than a winding up

Legislation:

Corporations Act 2001 (Cth) ss 256B(1), 257A, 435A, 440D, 445D, 445D(1), 445D(1)(a), 445D(1)(b), 445D(1)(c), 445D(1)(e), 445D(1)(f), 445D(1)(f)(i), 445D(1)(f)(ii), 445D(1)(g), 446AA, 447A, 459A, 459P, 459T, 544FB, 503, 553C, 588FB, 588FC, 588FDA, 588FE(3), 588FE(4), 588FE(6A), 600A, Pt 2J; Pt 5.3A, Pt 5.7B, Div 2

Corporations Act 2001 (Cth) Sch 2 (Insolvency Practice Schedule) ss 75-41, 75-41(1)(a), 75-41(1)(b), 75-41(1)(c), 75-41(1)(d)

Insolvency Practice Rules (Corporations) 2016 (Cth) s 75-115

Building and Construction Industry Security of Payments Act 1999 (NSW) ss 14(4), 32, 32(1), 32(2), 32(3)(b),

Home Building Act 1989 (NSW) Pt 2C

Supreme Court Act 1970 (NSW) s 23

Cases cited:

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846

AMP Music Box Enterprises Ltd v Hoffman [2002] BSC 996

Apple Computer Australia Pty Ltd v Wily [2003] NSWSC 719; (2003) 46 ACSR 729

Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707

Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235, (2005) 226 ALR 510

Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 45 ACSR 612

Britax Childcare Pty Ltd v Infa Products Pty Ltd [2016] FCA 848; (2016) 115 ACSR 332

Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; (2005) 145 FCR 220

Re Connections Total Fitness for the Family Pty Ltd [2014] NSWSC 75

Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2020] FCA 1085

Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453

Deputy Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232

DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 86 NSWLR 293

Emanuele v Australian Securities Commission (1995) 63 FCR 54

Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd  (1997) 72 FCR 450

Falgat Constructions Pty Ltd v Equity Australia Corp Pty Ltd [2005] NSWCA 49; (2005) 62 NSWLR 385

Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261

Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139

Hamilton v National Australia Bank Ltd (1996) 66 FCR 12

Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) [2010] FCA 352; (2010) 267 ALR 613

Re Iris Diversified Property Pty Ltd (in liq) [2018] NSWSC 834

JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691

Kalifair Pty Ltd v Digi-Tech (Aust) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737

Re Keypak Homecare Ltd [1987] 3 BCC 558

Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21

Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34

Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178; (2011) 82 ACSR 300

Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1997) 24 ACSR 47

Re Molopo Energy Ltd [2014] NSWSC 1864; (2014) 294 FLR 13

Multi-Core Aerators Ltd v Dye [1999] VSC 205

Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544

Re Octaviar Ltd (No 8) [2009] QSC 202; (2009) 73 ACSR 139

Re Pan Pharmaceuticals [2003] FCA 855; (2003) 47 ACSR 139

Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151; (2017) 95 NSWLR 82

Sands Contracting Pty Ltd v Foodcorp (VIC) Pty Ltd [2020] FCA 1274

Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11; (2019) 9 NSWLR 317

Re St Gregory’s Armenian School Inc (in liq) [2012] NSWSC 1215; (2012) 8 BFRA 306

TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93

TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118

TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (Administrators Appointed) [2012] NSWSC 766

University of Sydney v Australian Photonics Pty Ltd [2005] NSWSC 412; (2005) 53 ACSR 579

Vanella Pty Ltd v TFM Epping Land Pty Ltd [2019] NSWSC 1379

Vanella Pty Ltd v TFM Epping Land Pty Ltd [2020] NSWSC 659

Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 41 VR 445

Vero Insurance Ltd v Kassem [2011] NSWCA 381; (2011) 86 ACSR 607

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Number of paragraphs:

218

Date of hearing:

7-8 September 2020

Counsel for the Plaintiff:

Mr JC Giles SC with Mr E Ball

Solicitor for the Plaintiff:

Piper Alderman

Counsel for the First Defendant:

The First Defendant did not appear

Counsel for the Second Defendant:

The Second Defendant did not appear

Counsel for the Third and Fourth Defendants in NSD 817 of 2020:

Ms V Whittaker SC with Mr N Mirzai

Solicitor for the Third and Fourth Defendants in NSD 817 of 2020:

Henry William Lawyers

ORDERS

NSD 684 of 2020

BETWEEN:

DECON AUSTRALIA PTY LTD ACN 078 021 333

Plaintiff

AND:

TFM EPPING LAND PTY LTD ACN 605 600 253

First Defendant

KATOOMBA RESIDENCE INVESTMENT PTY LTD ACN 606 106 405

Second Defendant

ORDER MADE BY:	MCKERRACHER J
DATE OF ORDER:	29 JANUARY 2021

THE COURT ORDERS THAT:

1.Unless within 10 business days of the date of this order, further or different steps are taken in this proceeding to list the matter for directions in light of the outcome of proceeding NSD 817 of 2020, this proceeding be dismissed. 

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

NSD 817 of 2020

BETWEEN:

DECON AUSTRALIA PTY LTD ACN 078 021 333

Plaintiff

AND:

TFM EPPING LAND PTY LTD ACN 605 600 253

First Defendant

KATOOMBA RESIDENCE INVESTMENT PTY LTD ACN 606 106 405

Second Defendant

STEPHEN JOHN MICHELL
Third Defendant

JOHN MELLUISH
Fourth Defendant

ORDER MADE BY:	MCKERRACHER J
DATE OF ORDER:	29 JANUARY 2021

THE COURT ORDERS THAT:

1.The application be dismissed.

2.The parties file submissions on costs not exceeding 3 pages within 7 days.

3.Unless the Court otherwise orders, costs be determined on the papers. 

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

TABLE OF CONTENTS

INTRODUCTION	[1]
THE VARIOUS ENTITIES	[14]
BACKGROUND	[18]
First meeting of creditors and the reports	[46]
The second meetings of creditors and the DOCAs	[56]
RELIEF SOUGHT BY DECON	[59]
Setting aside the DOCAs: s 445D of the Corporations Act	[62]
Materially misleading information provided to creditors: s 445D(1)(a) of the Corporations Act	[63]
Material omissions from reports to creditors: s 445D(1)(c) of the Corporations Act	[66]
Unfairly prejudicial or discriminatory against Decon and Vanella: s 445D(1)(f)(ii) of the Corporations Act	[69]
Detriment to commercial morality: s 445D(1)(g) of the Corporations Act	[70]
Setting aside the DOCAs: s 75-41 of the Insolvency Practice Schedule	[76]
POSITION TAKEN BY TFM AND KRI	[80]
CONSIDERATION	[98]
Overview	[98]
Application of principles in more detail	[132]
Creditors and estimated returns	[148]
Voting	[151]
Land acquisition	[153]
Cross-claim	[158]
The CLG Share Agreement	[160]
The Atlas Loan Facility	[165]
The Shanghai Yilian Loan	[168]
The Weili Jia Loan	[177]
The Binah Group Loan	[181]
Guarantees for TFM Rushcutters Bay	[188]
The TDH Loans	[192]
Findings on the relief sought by Decon	[196]
Injustice – s 445D(1)(e)	[200]
Oppressive or unfairly prejudicial, or unfairly discriminatory against – s 445D(1)(f)(i)	[202]
Contrary to the interests of the creditors of the company as a whole – s 445D(1)(f)(ii)	[205]
Commercial morality – s 445D(1)(g)	[206]
Relief pursuant to s 75-41	[207]
Removal of the Administrators – s 446AA	[214]
Costs	[218]

MCKERRACHER J:

INTRODUCTION

1. The plaintiff, Decon Australia Pty Ltd, is a substantial judgment creditor of the first defendant, TFM Epping Land Pty Ltd, and the second defendant, Katoomba Residence Investment Pty Ltd (KRI).  TFM and KRI dispute their indebtedness and raise cross-claims against Decon.  The issues in this case raise the question of the extent to which the third and fourth defendants, appointed to TFM and KRI as Administrators, should have explored, or the Court should require a liquidator to explore transactions of those companies, which Decon suggests are dubious. As will be seen, while the complexity of the transactions is mysterious, the Administrators are confident that the prospects of a better return for creditors will be attained through the administration rather than proceeding to liquidation.  That is based partly upon their assessment of the comparative prospects of recovery.  They do not purport to have exhaustively analysed all elements of each transaction, nor do they have the statutory power to do so.  Complaining about the Administrators’ assessment and other matters, Decon seeks relief including the appointment of a liquidator.  For reasons that follow, I do not consider it is appropriate to grant such relief.

2. On 22 June 2020, Decon applied for orders winding up TFM and KRI.  Eight days later, on 30 June 2020, the common sole director of the defendant companies resolved to place each of them in voluntary administration.  The third and fourth defendants were appointed as Administrators of both companies.

3. Decon sought urgent interim relief restraining TFM and KRI from holding a second meetings of creditors, or from executing deeds of company arrangement (DOCAs) recommended by the Administrators in reports to creditors.  That application was heard urgently before Stewart J and dismissed on the morning of 28 July 2020 with the second meetings proceeding later that day:  Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2020] FCA 1085 (Decon v TFM (No 1)). At that time, his Honour did not consider the balance of convenience to favour intervention by the Court in the administrations. His Honour did however grant leave for Decon’s principal claim to be continued pursuant to s 440D of the Corporations Act 2001 (Cth) and brought the matter back on urgently to program the hearing of the final relief on an expedited timetable. Accordingly, the matter proceeded to a two day trial before me on 7 and 8 September 2020.

4. Decon alleged then, as it does now, that information provided to creditors by the Administrators in the Administrators’ reports on which the creditors relied in voting on the proposed DOCAs includes information that is materially misleading.  It says that its claims against each of the companies have been incorrectly analysed so as to give it only nominal voting rights by value at the first creditors’ meeting when in fact it should have had majority voting rights by value. 

5. Although the interim relief was dismissed, the permanent relief Decon seeks in these urgently listed proceedings comprises orders:

   (a)terminating the administrations of each of TFM and KRI;

   (b)setting aside the entry into the DOCAs executed by each of TFM and KRI on 17 August 2020; and

   (c)for the winding up each of TFM and KRI, and the appointment of a Mr Mansfield of Deloitte (accountants) as liquidator of each.

   This is the relief sought by Decon in proceeding NSD 817 of 2020 and is referred to in these reasons as the DOCA Application. 

6. Many of the facts underlying the relief sought in the DOCA Application and the points of claim (POC) are admitted in the points of defence (POD). Decon also filed points of reply (POR).

7. Decon relied upon an affidavit of Mr Daniel Saab, affirmed 13 August 2020 and an affidavit of the fourth defendant, Mr John Melluish, sworn 27 August 2020 (the First Melluish Affidavit).

8. There is also an application filed by Decon on 22 June 2020 in separate proceedings NSD 684 of 2020, in which it seeks orders that each of TFM and KRI be wound up under ss 459A, 459P, and 459T of the Corporations Act (the Winding Up Application). However, if the relief sought by Decon on the DOCA Application is granted, the Winding Up Application would fall away. If the DOCAs are terminated by the Court, then each of the companies would be deemed to have passed a resolution that they be wound up voluntarily: s 446AA of the Corporations Act.

9. TFM and KRI were each incorporated on 1 May 2015, and their principal activity was the development of a complex in Epping, New South Wales comprising 99 residential apartments (the Epping Development). Decon was engaged by TFM and KRI to design and build the Epping Development, which was completed in September 2018.

10. Decon says that from about early 2018 and, to a greater extent, from about October 2018 onwards, TFM and KRI engaged in a course of conduct that included their entry into multiple financial agreements and security arrangements, some of which involved related parties and for many of which the purpose (and benefit to TFM and KRI) was opaque. The companies also repeatedly sought to resist (through the course of no less than four hearings in the Supreme Court of New South Wales) the payment of a $6.3 million judgment debt due to Decon following completion of the Epping Development (Decon’s Judgment Debt).

11. According to the Administrators, both companies were insolvent by July 2019, if not earlier.

12. Decon says the Administrators did not attempt to discuss, consider, investigate or otherwise analyse the purpose and propriety of the multiple financial agreements and security arrangements entered into by the companies in 2018 and 2019, including their effect on potential recoveries to creditors. They recommended that the companies execute the DOCAs, which would have the effect of extinguishing Decon’s Judgment Debt while providing funding for litigation by the companies of alleged claims against Decon. In that respect, Decon says it has been treated differently from other creditors.

13. Decon contends that the companies’ actions leading up to their ultimate failure (and culminating in their entry into the DOCAs) are suspicious and indicative of a considered attempt to render themselves judgment-proof from Decon and to otherwise avoid a frank investigation into the circumstances of their failure. The DOCAs should not be allowed to stand in these circumstances, and the administration of the companies should come to an end, Decon says. The parties have not sought to provide the ultimate detail in relation to many of these transactions.  Decon suggests that they are so obviously suspicious that greater exploration and explanation of them is necessary.  The Administrators take a relatively neutral role but defend the approach they have taken thus far.

    THE VARIOUS ENTITIES

14. Since August 2016:

    (a)Tasman Development Holdings Ply Ltd (TDH) has held 62 out of 100 of the ordinary shares in TFM;

    (b)Sino-AU Property Investments Ply Ltd has held the remaining ordinary shares in TFM; and

    (c)TDH has held all of the ordinary shares in Sino-AU.

15. Since December 2015, TDH has held all of the ordinary shares in KRI.

16. Mr Yihao Zhang (also known as Mr Eric Zhang):

    (a)was a director of TFM and  KRI until 19 June 2020 (the now-sole director of those companies since 2 April 2016 is a ‘Guoqiang Zhang’ whose precise relationship to Mr Eric Zhang is not known);

    (b)is the sole director of TDH (and has been since March 2014) and has been its sole shareholder since 18 September 2018; and

    (c)is the sole director of Sino-AU (and has been since August 2016).

17. There are also several other companies in the ‘Tasman Group’.

    BACKGROUND

18. The following undisputed background is mainly provided by Decon and the documents in evidence.  The facts are not particularly contentious but as will be seen, the Administrators point to other facts and suggest that other inferences and conclusions equally flow on examination of the totality of the events. 

19. Certain objections were raised to evidence adduced on affidavit for the Administrators. Those objections were resolved by rulings made by consent which were ordered by the Court at the conclusion of the hearing on 8 September 2020.

20. In May 2016, TFM and KRI acquired the land located at 2, 4, 6, and 8 Hazelwood Place, Epping for the purpose of developing that land into the Epping Development. The total purchase price was $16,650,000. According to the Administrators, TFM and KRI’s internal ledger accounts and a letter from their former solicitor indicate that a further $6,961,669.46 was spent in connection with the purchase of the land between May 2015 and January 2018, which costs included stamp duty, consulting fees, a ‘novation procurement fee’, and various other fees discussed in further detail below. The consulting fees included $81,818.18 paid to Tasman Funds Management Pty Ltd (another company in the Tasman Group and of which Mr Eric Zhang is the sole director and shareholder) and $136,363.64 to a company then known as ‘A Land Realty’, now known as ‘Northwalker Realty Pty Ltd’, and which previously shared a registered office with TFM, KRI, and their parent companies (indeed, at one point, Northwalker Realty’s registered address was ‘Tasman Funds’).

21. Precisely how the land purchases for the Epping Development were financed is not entirely clear. According to the Administrators, those purchases were financed by debt finance of $18,500,000 and equity finance of $6,000,000. The companies’ former director, Mr Eric Zhang, however, previously deposed, in an affidavit affirmed on 24 July 2019 (Mr Eric Zhang’s 24 July 2019 affidavit), a more complicated financing structure, with an additional $3.3 million or so in funding.

1. In December 2016, TFM and KRI (as principals) entered into a construction contract with Decon (as contractor) for the design and construction of the Epping Development.

2. In January 2017, TFM entered into a construction contract with a company related to Decon, Vanella Pty Ltd, for Vanella to provide project management services in relation to the Epping Development.  Vanella is related to Decon and also established a judgment debt against TFM and KRI on the same basis as Decon. Unless the context otherwise dictates in these reasons, I refer to the two related companies jointly as Decon.  Their relevant interests are the same, however Vanella is not a party to these proceedings. 

3. Work then progressed on the Epping Development during 2017 and 2018. The work was financed primarily by a loan facility that TFM and KRI obtained from the National Australian Bank Limited (NAB) in March 2017. Decon was paid $19.5 million from this facility. Decon has also received some payments from Tasman Funds for construction work. Each payment to Decon was in partial discharge of the obligations owed by TFM and KRI to Decon under its contract with the companies. To date, Vanella has not been paid any amount under its contract with TFM.

4. In February 2018, KRI (as borrower) entered into a loan agreement with Ms Weili Jia (as lender) for an amount of $4,980,000 (the Weili Jia Loan). The Administrators have concluded that the purpose of this loan was, amongst other things, to repay liabilities incurred by TFM and that a year later, in February 2019, TFM entered into an ‘Extension Agreement’ whereby it assumed the obligations owed by KRI under the Weili Jia Loan. The circumstances of that loan were not explained in the report to creditors of TFM.

5. In April 2018, TFM entered into a share subscription agreement with its then director, Mr Eric Zhang and a company known as CLG Corporate Pty Ltd, according to which CLG agreed to pay $8.3 million to TFM to subscribe for shares in TFM (the CLG Share Agreement).

6. In August 2018, an interim occupation certificate was issued for the Epping Development, and in September 2018 the strata plan was registered. The Epping Development was, at that time, completed. As of August 2020, TFM and KRI had sold a total of at least 49 of the apartments in the Epping Development to buyers, and were otherwise leasing all or some of the remaining apartments to tenants. According to the Administrators, the gross revenue from sales of the apartments was slightly under $41 million, all of which was received before their appointment.

7. In October 2018, TFM purported to repay CLG the $8.3 million paid to it under the CLG Share Agreement. According to the Administrators, most of that $8.3 million ($7.95 million) came out of a $10,510,000 loan made by La Trobe Financial Management Ltd to both KRI and TFM (the La Trobe Loan), guaranteed by KRI and secured by mortgages over ten apartments in the Epping Development. According to Mr Eric Zhang’s 24 July 2019 affidavit, La Trobe Financial Management was the manager for Perpetual Corporate Trust Ltd, and the purpose of the La Trobe Loan was to repay CLG (it is unclear for what purpose the remaining $2,560,000 of the La Trobe Loan was applied). Later in October 2018, Perpetual Corporate Trust Ltd obtained a mortgage over 19 apartments in the Epping Development.

8. Also in October 2018, KRI (as borrower) entered into a loan facility agreement with a limit of up to $15 million secured by mortgages over the Epping Development, while TFM (as grantor) entered into a ‘General Security Agreement’. The counterparty to both agreements was Australian Executor Trustees Limited, the (then) custodian for the CQAX Australian Property Income Fund. Later in October 2018, Australian Executor Trustees Limited registered two mortgages over 22 apartments in the Epping Development.

9. In November 2018, TFM and KRI (as guarantors) entered a loan agreement between Shanghai Yilian Investment Management Co Ltd (as lender) and Tasman Funds (as borrower) valued at $4,751,455 secured by mortgages over the Epping Development (the Shanghai Yilian Loan). Shanghai Yilian subsequently, in December 2018, registered seven mortgages over apartments in the Epping Development.

10. In March 2019, TFM (as borrower) entered into a loan agreement with Binah Group Pty Limited for $364,525 secured by a mortgage over the Epping Development. The Administrators maintain that, despite these matters, TFM never actually drew down on the loan. TFM’s (then) solicitors on the other hand said that the loan was drawn down, that monies remain outstanding, and that interest had accrued on the outstanding amount.

11. In June 2019, Decon served a payment claim on TFM and KRI pursuant to the Building and Construction Industry Security of Payments Act 1999 (NSW) (the SOP Act) in the amount of $6,355,352.46 (the SOP Claim).

12. TFM and KRI did not subsequently provide a payment schedule within the time limit specified by the SOP Act, nor did they pay the amount claimed.

13. The effect of this failure, pursuant to the SOP Act, was that TFM and KRI were liable to pay Decon the amount of the SOP Claim.

14. In July 2019, TFM and KRI (as guarantors) entered into a loan agreement between Secured Lending Pty Ltd, Longevity Property Pty Ltd, ALS256 Ply Ltd and ALS257 Ply Ltd (as lenders), and TFM Rushcutters Bay Pty Ltd (as borrower) for over $23 million and secured by mortgages over the Epping Development.  TFM Rushcutters Bay was, at that time, a company controlled by Mr Eric Zhang which was in the course of completing a 40 apartment residential development in Darlinghurst (the Rushcutters Bay Development).  A series of caveats registered by the lenders to this loan agreement in July 2019 record the existence of mortgages over 49 apartments in the Epping Development.  According to those caveats, the date of the mortgage was 5 July 2019 (earlier than the date of the loan agreement, 11 July 2019). Further, and according to the Administrators, it appears, Decon says, that the only benefit that either of TFM or KRI obtained in return for these substantial mortgages securing that very substantial loan was the sum of $650,000 paid to TFM which was then repaid partly out of the proceeds of the sale of an apartment in the Epping Development and partly out of the proceeds of a further loan.

15. In September 2019, TFM Rushcutters Bay (as borrower) entered into another loan agreement with ALS256 Ply Ltd and ALS257 Pty Ltd (as lenders) valued at over $23 million and secured by mortgages over two apartments in the Epping Development.  According to the Administrators, however, neither TFM nor KRI were party to this loan agreement, despite their property being used as the security in respect of it.

16. On 11 October 2019, Decon obtained a judgment in the Supreme Court (Henry J) against TFM and KRI under the SOP Act in the amount of $6,355,352.46 with costs (Decon’s Judgment Debt): Vanella Pty Ltd v TFM Epping Land Pty Ltd [2019] NSWSC 1379.

17. Shortly after judgment for Decon’s Judgment Debt was entered, on 18 October 2019, KRI entered into a secured loan agreement with its parent company TDH (as lender), valued at over $2.7 million, which the Administrators claim was in respect of previous unsecured advances made to KRI and to ‘formalise’ those advances. Decon asserts that this is a remarkable proposition for the Administrators, who are registered liquidators, to advance.

18. In November 2019, TFM (as borrower) entered into a loan agreement with its parent company, TDH (as lender), for over $3.2 million and secured by mortgages over the Epping Development, which the Administrators claim was in respect of previous unsecured advances made to TFM and to ‘formalise’ those advances.  Again, Decon says this is a remarkable proposition for a registered liquidator to advance.

19. On 14 May 2020, the New South Wales Court of Appeal (Basten and Meagher JJA, and Emmett AJA) dismissed with costs an appeal by TFM and KRI against Decon’s Judgment Debt: TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 93.

20. On 29 May 2020, in the Supreme Court, Stevenson J dismissed with costs an application by TFM and KRI to stay Decon’s Judgment Debt pending the determination of a cross-claim against Decon in separate proceedings: Vanella Pty Ltd v TFM Epping Land Pty Ltd [2020] NSWSC 659. In his reasons for judgment, Stevenson J observed that, despite TFM and KRI having acknowledged their debt to Decon ‘as long ago as 11 October 2018’ they had ‘since then taken every step available to them to resist paying anything to [Decon] on account of that acknowledged debt’ (at [43]-[44]). His Honour was also critical of aspects of an alleged cross-claim by TFM and KRI against Decon. Those findings (and others made in the course of the previous litigation between Decon and the companies) are relied upon by Decon to prove matters that ‘must have been known’ to the Administrators when they prepared their reports to creditors.

21. On 16 June 2020, the Court of Appeal (Bell P, Macfarlan, and Leeming JJA) dismissed with costs an appeal by TFM and KRI against Stevenson J’s judgment: TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118.

22. On 19 June 2020, Mr Eric Zhang ceased to be a director of each of TFM and KRI.

23. On 22 June 2020, Decon filed the Winding Up Application.

24. On 30 June 2020, the remaining (and sole) director of each of TFM and KRI, Mr Guoqiang Zhang, resolved to place the companies into voluntary administration and appointed the Administrators.

    First meeting of creditors and the reports

25. On 2 July 2020, the Administrators issued notices for the first meetings of creditors for each of TFM and KRI.  Decon subsequently, on 6 July 2020, submitted proofs of debt in the amount of its Judgment Debt ($6,355,352.46) in respect of each company.

26. The first meetings of creditors were held on 10 July 2020. At each of those meetings, Decon was admitted to vote for only $1, while all other creditors were admitted for the full amount of their claims, with the exception of Vanella, who had lodged a proof of debt in respect of TFM for over $1.5 million but which, like Decon, was admitted to vote for only $1.

27. On 20 July 2020, the Administrators issued notices of the second meeting of creditors and reports to creditors in respect of each of TFM and KRI.  The purpose of those reports was to permit creditors to make an informed choice as to what should happen to the companies: see DSG Holdings Australia Pty Ltd v Helenic Pty Ltd (2014) 86 NSWLR 293 per Leeming JA (Meagher JA and Bergin CJ in Eq agreeing) (at [90]).

28. Decon complains that the reports to creditors were defective, deficient, and erroneous. Significantly it says, those reports made no attempt to discuss, consider, investigate, or otherwise analyse the purpose and propriety of the multiple financial agreements and security arrangements entered into by the companies from 2018 onwards and in the lead up to their administration. Further, and symptomatic of this more general failure, according to Decon, the reports failed to disclose the nature of many of those transactions as equity dealings with entities related to the companies. No consideration appears to have been given, for example, to the propriety of what the Administrators now allege was an $8.4 million share redemption paid by TFM to CLG in October 2018, including, Decon says, with respect to Pt 2J of the Corporations Act dealing with share capital reductions.

29. Decon complains that the reports also represented to creditors that, despite Decon’s Judgment Debt (and the multiple failed attempts by each of TFM and KRI to avoid paying that Judgment Debt), Decon had no claim against either of the companies because they had a cross-claim against Decon worth ‘approximately $17 million [which] includes defects for rectification works identified by independent experts that total $7,759,642’.  Decon says the reports do not mention Stevenson J’s earlier critique of that cross-claim. Elsewhere, the Administrators acknowledged, however, that they were ‘not aware of the prospects of recovery against Decon’ and had ‘sighted no legal advice about the merits of both claims’.

30. Decon says that the only evidence the Administrators appear to have in their possession in respect of the alleged cross-claim against Decon goes to the quantum of the claim (comprising evidence from a quantity surveyor in respect of the quantum of alleged defects, and from an officer of the companies in lost sales), which they say supports (alongside otherwise unidentified ‘information received from representatives of the Companies’) the conclusion that the size of the cross-claim against Decon ‘exceeds $17 million’. Further, Decon says that in reaching this conclusion, the Administrators appear to have had no regard to the earlier concessions made by TFM and KRI’s (then) senior counsel to the Court of Appeal that it was ‘totally mistaken’ to suggest the cross-claim was millions of dollars above Decon’s Judgment Debt ($6,355,352.46) and that it was instead only ‘slightly above’ that amount.

31. Decon argues that, more fundamentally, the Administrators also appear to have no evidence of (and have given no consideration to) the significant underlying question of whether any liability or claim arises against Decon in the first place, including:

    (a)whether the quantum evidence relied upon is in respect of any actual and proven defects in the Epping Development; and

    (b)why, even if there are found to be defects, TFM and KRI have any standing or basis of claim against Decon in circumstances where such a claim instead lies with the owners corporation for the registered strata plan consistently with Pt 2C of the Home Building Act 1989 (NSW), which provides for statutory building warranty claims by owners of property against both builders and developers of that property.

32. The report to creditors for KRI also contains two factual errors, which are now admitted by the Administrators. First, it incorrectly recorded that Shanghai Yilian was a secured creditor of KRI in an amount of $1,404,000.  Secondly, it stated:

    On 3 April 2018, the company entered into a share subscription agreement loan with [CLG] and [Mr Eric] Zhang for the amount of $8,300,000 maturing on 3 October 2018, to finance the residual amount of the Yilian Loan (in the amount of $6,720,000 plus interest and fees) and to assist with project costs (CLG Facility).

    ... In addition to the above, on or about October 2018 ... the company and TFM, obtained a loan in the amount of $10,510,000 from Latrobe Financial Management Ltd. (La Trobe Loan 2). The proceeds of this loan were applied to discharge the balance of the NAB Loan and CLG Facility.

33. Neither of those statements is correct.  Shanghai Yilian was not a secured creditor of KRI, and there was no CLG Facility.

34. Finally, Decon notes that the reports to creditors for both TFM and KRI recommended that the companies execute the DOCAs proposed by its parent company, TDH (of whom, the companies’ former director, Mr Eric Zhang is the sole director). Among the reasons given for that recommendation was that the DOCAs proposed a litigation funding arrangement to pursue the alleged cross-claim against Decon which, though ‘highly speculative’ was nevertheless set out in some detail in Appendix C to the reports. What the reports did not say, however, and as the Administrators now allege in the POD, was that the terms of the proposed litigation funding were yet to be negotiated.

    The second meetings of creditors and the DOCAs

35. As noted, on 27 July 2020 Decon’s urgent application for the interim relief was refused. Stewart J declined to make orders restraining the holding of the second meetings of creditors or restraining the execution of the DOCAs.  Later on 28 July 2020, the second meetings of creditors were held. At those meetings, Decon (and Vanella, in the case of TFM) were admitted to vote for the value of the claims they had lodged, apparently because the Administrators ‘considered it appropriate to act upon’ comments made by Stewart J in his reasons for judgment to the effect that it was surprising that Decon and Vanella had previously only been admitted to vote for $1:  Decon v TFM (No 1) (at [12]-[14]). 

36. At these meetings, it was resolved that each of TFM and KRI would enter the DOCAs referred to hereafter as the TFM DOCA and the KRI DOCA (together, the DOCAs). Decon (and Vanella, in the case of TFM) were the only creditors voting against that course. It is agreed by the parties that, but for the votes of related creditors at each meeting:

    (a)a majority of creditors by number, being all creditors with the exception of Decon (and Vanella, in the case of TFM), would still have voted in favour of entry into the DOCAs; and

    (b)a majority of the creditors by value, being Decon (and Vanella, in the case of TFM), would have voted against entry into the DOCAs.

37. The DOCAs were then executed on 17 August 2020. They contained the usual restraints, bars, and releases of claims by creditors (including Decon and Vanella) against the companies, as well as by the company against its directors from time to time. They also provided, however, for the funding and continued conduct of litigation by the companies against Decon, with the proceeds of that litigation to be paid to creditors (after TDH and the companies). The discriminatory effect of the DOCAs, Decon complains, is thus to extinguish Decon’s Judgment Debt (and any other proceedings Decon has on foot against the companies), while simultaneously promoting and facilitating claims against Decon on the other hand.  The Administrators reject this assertion.

    RELIEF SOUGHT BY DECON

38. Section 445D of the Corporations Act relevantly provides that:

    445D   When Court may terminate deed

    (1)The Court may make an order terminating a deed of company arrangement if satisfied that:

    (a)information about the company’s business, property, affairs or financial circumstances that:

    (i)was false or misleading; and

    (ii)can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

    was given to the administrator of the company or to such creditors; or

    (b)such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or

    (c)there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or

    (d)there has been a material contravention of the deed by a person bound by the deed; or

    (e)effect cannot be given to the deed without injustice or undue delay; or

    (f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

    (i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

    (ii)contrary to the interests of the creditors of the company as a whole; or

    (g)the deed should be terminated for some other reason.

    …

39. Section 445D is contained in Pt 5.3A of the Corporations Act which was introduced to improve the speed and efficiency of external administrations.  The following summary by Burley J in Britax Childcare Pty Ltd v Infa Products Pty Ltd [2016] FCA 848 (at [87] and [88]) is, with respect, most helpful:

    87       When the Corporate Law Reform Bill 1992 (Cth) was introduced, the Explanatory Memorandum (Explanatory Memorandum, Corporate Law Reform Bill (Cth) 1992) stated (at [449]) that the new Part was intended to provide for speed and ease of commencement of administration, minimisation of expensive and time-consuming court involvement and formal meeting procedures, flexibility of action and ease of transition to other insolvency solutions where an administration does not by itself offer all of the answers.

    88 It is with these objectives in mind that section 435A was introduced. The administration process operates in circumstances where those controlling the relevant company have accepted that it is insolvent. It has been accepted that the investigation conducted in the administration process is intended by Parliament to be a ‘swift and practical’ one; In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) - Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 (Mustang Marine) at [109]. Consistent with this, the administrator’s investigation is necessarily a preliminary investigation which involves the administrator carrying out his or her investigations in a manner which is modified in light of the tight timeframe and associated constraints provided for by Part 5.3A. An administrator, so constrained, cannot carry out a detailed investigation of at [sic] 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 or her; Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178; (2011) 82 ACSR 300 (Mediterranean Olives) at [61] – [62].

    (Emphasis added.)

1. One of the important features of s 445D is the use of the qualifications such as ‘material’ and ‘unfairly’. ‘Material’ means something which was relevant and did affect, or might have affected, the outcome, and the test of materiality under s 445D is an objective one: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 per Campbell J (at [165]-[166] and the authorities cited therein).

   Setting aside the DOCAs: s 445D of the Corporations Act

2. Decon contends that in the present proceedings, there are a number of grounds upon which the Court should exercise its discretion to terminate the DOCAs in respect of each of TFM and KRI. There is a substantial amount of overlap, it says, between these grounds particularly insofar as matters of the creditor interests, the public interest, and commercial morality are concerned when it comes to investigating the affairs of companies that have failed in the circumstances of those such as TFM and KRI.

   Materially misleading information provided to creditors: s 445D(1)(a) of the Corporations Act

3. It is not in dispute that the reports to creditors for TFM and KRI each contain errors. Chief among them, Decon argues, were the twin errors of the substantial understatement of Decon’s Judgment Debt ($6,355,352.46 represented to be $ nil) and the very substantial overstatement of TFM and KRI’s alleged cross-claims quantified at $17 million, but unsupported by any evidence or consideration of whether there is actually any basis for the claim in the first place. Such an assessment of the cross-claim is also contrary to the companies’ (then) senior counsel’s earlier statement to the Court of Appeal that the value of the claim was only ‘slightly above’ Decon’s Judgment Debt and not millions of dollars above it. The report to creditors for KRI also wrongly reported debts to Shanghai Yilian and under a CLG Facility in the order of $1,404,000 and $8,300,000, (which are now claimed to be mere ‘typographical errors’) while the TFM Report to creditors stated that Ms Weili Jia was a creditor of the company in an amount of $4,980,000 without mentioning the fact (now alleged by the Administrators) that this debt had been assumed from KRI.

4. Decon stresses that the sums comprised by the errors in the reports to creditors for each of TFM and KRI are significant, in excess of several millions of dollars. Moreover, the misleading presentation to creditors of the size and strength of the companies’ alleged claim against Decon is particularly significant in circumstances where the litigation against Decon and the payment of proceeds from that litigation, forms a central plank of the DOCAs. Those matters might, therefore, have affected the outcome of the vote on the DOCAs and therefore justify the exercise of the power in s 445D(1)(a).

5. On that note, one further difficulty with the DOCAs and the litigation arrangements within them is that they proceed on the assumption that the claim against Decon, if realised, will constitute some kind of windfall gain to the companies and creditors. That cannot be so, says Decon, at least and insofar as the claims are in respect of defects. Even putting the claim against Decon at its highest, any proceeds obtained from Decon for alleged defects will either be used to repair those alleged defects (consistently with the evidence obtained by the Administrators) or to discharge any liability of the companies to the owners corporation for the Epping Development arising under Pt 2C of the Home Building Act assuming, of course, that such liability survives entry into the DOCAs, which it would not appear to. The advantages to the companies and their creditors of the litigation funding arrangements therefore appear theoretical and imaginary (or, at least, potentially so). This is a further reason Decon says, why the Court should exercise its discretion under s 445D(1)(a).

   Material omissions from reports to creditors: s 445D(1)(c) of the Corporations Act

6. Decon says that the reports to creditors were also misleading because they failed to identify (as discussed further below) a number of transactions which might be set aside or give rise to claims for breaches of directors’ duties.

7. Each of the reports to creditors contains little or no discussion of a number of the financial agreements and security arrangements entered into by TFM and KRI after completion of the Epping Development, some of which involved related parties, and many of which did not have an apparent purpose that benefitted the companies. These include the loan agreement with Binah Group, the loan arrangements with Ms Weili Jia, the alleged $8.4 million TFM share redemption to CLG, and the multiple mortgages provided by the companies for the benefit of the related company’s Rushcutters Bay Development.

8. Decon argues that had creditors been aware of the companies’ actions in the lead up to their insolvency in July 2019 (if not earlier) then there is a very real likelihood that some or all of them would have voted to wind up the companies so that a liquidator could be appointed to investigate and interrogate whether any of those transactions were defeasible and voidable within the meaning of Pt 5.7B, Div 2 of the Corporations Act. This not only provides justification for the Court to exercise its discretion under s 445D(1)(c), but in the circumstances also constitutes an injustice to creditors (who have otherwise lost the opportunity to make an informed choice as to whether such investigations and interrogations should occur) within the meaning s 445D(1)(e). Furthermore, the combination of these matters renders the DOCAs contrary to the interests of TFM and KRI’s creditors as a whole.

   Unfairly prejudicial or discriminatory against Decon and Vanella: s 445D(1)(f)(ii) of the Corporations Act

9. As noted, Decon complains that the DOCAs extinguish Decon’s Judgment Debt against TFM and KRI, and Vanella’s claim against TFM, while simultaneously providing for the pursuit (by way of funded litigation) against Decon and Vanella of the cross-claims said to be valued somewhere between ‘slightly over’ Decon’s Judgment Debt and $17 million.  This is in circumstances where the cross-claims are alleged to suffer from several problems identified earlier. In this respect, Decon says the DOCAs may be considered simply the latest iteration of TFM and KRI’s previous course (identified earlier by the Supreme Court) of seeking to take ‘every step available to them to resist paying anything’ to Decon, a course which later included refusing to admit Decon (and Vanella in the case of TFM) in the sum of its Judgment Debt prior to the second creditors meeting. No other creditor of the companies has been treated, or will be treated (if the DOCAs are allowed to proceed), in the way that Decon and Vanella have been and will be.

   Detriment to commercial morality: s 445D(1)(g) of the Corporations Act

10. Section 445D(1)(g) provides that the Court may make an order terminating a DOCA if satisfied that ‘the deed should be terminated for some other reason’. In Vero Insurance Ltd v Kassem [2011] NSWCA 381 Campbell JA (Meagher JA agreeing) explained (at [82]):

    Of particular relevance to the present case are the provisions that permit a liquidator to investigate the affairs of a failed corporation, and provisions that permit a liquidator in a carefully defined set of circumstances to take legal action to undo certain transactions that the corporation has entered in a period of time before its failure. Those provisions are an important part of the controls that are placed, in the public interest, on the freedom of action of corporations and those who manage them. It has repeatedly been held that in deciding whether to terminate a DOCA the court can take into account the public interest, which includes considerations of commercial morality and the interests of the public at large. …

    (Emphasis added.)

11. According to the Administrators, a possible claim against the companies’ former director, Mr Eric Zhang, was not considered appropriate for reasons including the inherent risks of litigation and the low prospects of recovery against him, on the basis that he purportedly owned only one property in Australia. Mr Eric Zhang is also the current director and sole shareholder of the proponent and litigation funder under the DOCAs, TDH (TFM and KRI’s parent company). Decon says that no investigation appears to have been made into his financial position in this regard.

12. Decon refers to the following aspects of the reports to creditors and the Administrators’ assessments that:

    (a)a limited number of related entity transactions entered between the companies and TDH (with a combined value of slightly over $300,000) might be voidable, but would likely be ‘strenuously defended’ in an action by a liquidator on the basis that the transactions were part of a continuing business relationship;

    (b)the granting of the securities to TDH in late 2019 to (allegedly) formalise prior unsecured loans with the companies might be classified as uncommercial transactions to a degree, but would not be pursued because that would likely not result in a benefit; and

    (c)investigations did not identify any other uncommercial transactions that were also insolvent transactions, save for one transaction between the companies and Shanghai Yilian, entered into in October 2018, which, unless it was proven that the companies were insolvent from at least October 2018, would not be recoverable in a liquidation.

13. Decon says that in respect of the timing of TFM’s and KRI’s insolvency, it should be kept in mind that the companies’ (then) Senior Counsel previously indicated to both Stevenson J and the Court of Appeal that Decon’s Judgment Debt was the cause of their insolvency, while Stevenson J’s judgment further recorded that the companies had acknowledged their debt to Decon ‘as long ago as 11 October 2018’. In those circumstances, Decon says circumstances, it appears reasonably arguable that the companies were indeed insolvent from at least October 2018 (if not earlier).

14. Decon argued initially that the Administrators’ approach to the investigation of the affairs of each of TFM and KRI fell short of what is required having regard to the conduct of those companies (including vis a vis related parties) upon completion of the Epping Development and leading up to the administration. By the close of the case, including cross-examination of the principal administrator, Mr Melluish, Decon’s focus slightly shifted to emphasise that criticism of the handling of the administration was not a necessary finding but nonetheless the deficiencies in the outcome and basis of the DOCA were reasons for granting relief.  It points to the strong likelihood, based upon (among other things):

    (a)the companies’ previous conduct in response to Decon’s Judgment Debt;

    (b)the timing of Mr Eric Zhang ceasing to be a director of the companies;

    (c)the timing of the companies’ appointment of the Administrators; and

    (d)the substantive terms of the DOCAs, proposed by the parent company controlled by Mr Eric Zhang; that

    a key (if not the main) purpose of the companies’ administration and entry into the DOCAs has been to further their attempts to avoid paying Decon’s Judgment Debt.

15. Further, Decon argues the propriety of the following aspects of the companies’ conduct leading up to their failure ought also be investigated, keeping in mind that the Epping Development was completed by September 2018, and the real possibility that the companies were insolvent by October 2018:

    (a)Weili Jia Loan (February 2018 and February 2019): This was, Decon contends, arguably, an uncommercial transaction within the meaning of s 588FB of the Corporations Act insofar as each company assumed and repaid loan obligations (to the value of $4,980,000) both unnecessarily and without any benefits accruing to them. Further, and due to the timing of the repayment and extension of the Weili Jia Loan, it would then be an insolvent transaction within the meaning of s 588FC and voidable under s 588FE(3). The transaction would also, in those circumstances, appear to constitute a breach of directors’ duties;

    (b)CLG Share Agreement (April 2018 and October 2018): The alleged $8.4 million TFM share redemption paid to CLG in October 2018 appears to be, Decon says, a reduction in share capital or share buy-back contrary to Pt 2J of the Corporations Act. No consideration appears to have been given to the limits and requirements of s 256B(1) or s 257A, including, specifically, whether the share redemption materially prejudiced TFM’s creditors (see, generally, Re Molopo Energy Ltd (2014) 294 FLR 13 per White J at [89]-[98]). The share redemption appears, in this way Decon argues, to have been a breach of directors’ duties;

    (c)Shanghai Yilian Loan (November 2018): Decon argues the companies’ provision of mortgages over the Epping Development in their capacity as guarantors of a loan of $4,751,455 made to the related entity, Tasman Funds, appears to have been for no benefit to them and, in that sense voidable by operation of ss 588FB, 588FC and 588FE(3) or 588FE(4). Further, and given the benefit accruing to Tasman Funds (a company of which Mr Eric Zhang is the sole shareholder and director), the transaction may also be considered a related-party transaction or an unreasonable director-related transaction within the meaning of s 588FDA insofar as Tasman Funds was a ‘close associate’ of Mr Eric Zhang (see Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14 per Nettle JA (at [15]-[31]), and thus also voidable pursuant to s 588FE(4) or s 588FE(6A);

    (d)Loan from Binah Group (March 2019): Decon argues it is not apparent how TFM’s entry into the secured loan agreement for $364,525 with Binah Group, more than six months after completion of the Epping Development, was of any benefit to it. Indeed, the circumstances surrounding the entry into that loan are made all the more opaque by the Administrators’ position that the loan was not drawn down (despite some evidence to the contrary). The possibility that the loan and the security provided in respect of it may be uncommercial transactions voidable by operation ss 588FB, 588FC, and 588FE(3) of the Corporations Act ought be investigated, Decon says;

    (e)Rushcutters Bay Development (July and September 2019): The companies’ provision of multiple mortgages over apartments in the Epping Development in connection with over $46 million worth of loans provided to TFM Rushcutters Bay appears to be both a related-party transaction and an uncommercial transaction within the meaning of s 544FB of the Corporations Act (potentially also an unreasonable director-related transaction under s 588FDA), and so voidable by operation of ss 588FC and 588FE(3) or 588FE(4);

    (f)‘Formalised’ loan arrangements with TDH (October and November 2019): Each of TFM and KRI’s entry into secured loan arrangements with their parent, TDH, shortly following the award of Decon’s Judgment Debt in order to ‘formalise’ earlier advances was both of no benefit to them and plainly for the benefit of their parent company, Decon argues. The possibility that those arrangements may be unwound pursuant to ss 588FE(3), 588FE(4), or 588FE(6A) of the Corporations Act on the basis that they are related-party transactions, uncommercial transactions within the meaning of s 588FB, or unreasonable director-related transactions under s 588FDA, is apparent, Decon argues.

    Setting aside the DOCAs: s 75-41 of the Insolvency Practice Schedule

16. The DOCAs may also be set aside by operation of the Court’s discretion under s 75-41 of the Insolvency Practice Schedule, which replaced s 600A of the Corporations Act (and, in respect of the principles of which see generally DSG Holdings and Re Pan Pharmaceuticals [2003] FCA 855).

17. This section provides, relevantly:

    75‑41Outcome of voting at creditors’ meeting determined by related entity—Court powers

    Application of this section

    (1)This section applies if, on the application of a creditor of a company under external administration, the external administrator of the company or ASIC, the Court is satisfied of the following matters:

    (a)a proposal has been voted on by creditors (either at a meeting of the creditors or under section 75‑40 without a meeting);

    (b)if the vote or votes that a particular related creditor, or particular related creditors, of the company cast on the proposal had been disregarded for the purposes of determining whether or not the proposal was passed, the proposal:

    (i)        if it was in fact passed—would not have been passed; or

    (ii)       if in fact it was not passed—would have been passed;

    or the question would have had to be decided on a casting vote;

    (c)the passing of the proposal, or the failure to pass it, as the case requires:

    (i)is contrary to the interests of the creditors as a group or of that class of creditors as a group, as the case may be; or

    (ii)has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposal, or for it, as the case may be, to an extent that is unreasonable having regard to the matters in subsection (2).

    Unreasonable prejudice to interests of creditors—matters to be taken into account

    (2)       For the purposes of subparagraph (1)(c)(ii), the matters are:

    (a)the benefits resulting to the related creditor, or to some or all of the related creditors, from the proposal if passed, or from the failure to pass the proposal, as the case may be; and

    (b)the nature of the relationship between the related creditor and the company, or of the respective relationships between the related creditors and the company; and

    (c)any other relevant matter.

    Court may make orders

    (3)       The Court may make one or more of the following:

    (a)an order that the proposal be considered and voted on at a meeting of the creditors convened and held as specified in the order;

    (b)an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:

    (i)        the proposal; or

    (ii)       a resolution to amend or vary the proposal;

    (c)if the proposal was passed—an order setting aside the resolution passing the proposal;

    (d)such other orders as the Court thinks fit.

    …

18. The conditions for the application of s 75-41 in respect of the DOCAs, as prescribed by s 75-41(1)(a) and s 75-41(1)(b), are satisfied in this case Decon contends because, owing to the split in outcomes voted for by a majority of creditors by number on the one hand, and majority of creditors by value on the other hand, but for the votes of related creditors the resolutions to enter the DOCAs would have had to be decided by a casting vote (by operation of s 75-115 of the Insolvency Practice Rules (Corporations) 2016 (Cth)).  That being so, the relevant inquiry is whether either of the conditions prescribed by s 75-41(1)(c) are satisfied in this case. For the reasons already explained above, Decon contends they are, for either one or both of the following reasons:

    (a)the resolutions passing the DOCAs were contrary to the interests of TFM and KRI’s creditors because the effect of the DOCAs was to deprive them of the opportunity to be properly informed about the myriad problems surrounding the failure of the companies, and to consider whether they should be investigated; or

    (b)the resolutions passing the DOCAs prejudiced (or were reasonably likely to prejudice) the interests of the creditors who voted against them, namely Decon (and Vanella) to an extent that is unreasonable.

19. The appropriate course then, it is submitted for Decon, is for the Court to exercise its discretion to make orders under s 75-41(3)(c) and s 75-41(3)(d) setting aside the DOCAs.

    POSITION TAKEN BY TFM AND KRI

1. TFM and KRI did not appear at the hearing of this application but filed written submissions.  As will be apparent, the submissions do not engage with many of the issues raised by Decon but focus primarily on their cross-claims against Decon.

2. They stress that Decon’s entitlement to its Judgment Debt arises by reason of the SOP Act in the way already discussed.  They make the point that the right given by s 14(4) of the SOP Act is an interim right. They submit that the SOP Act is, in many ways, ‘draconian’ and ‘rough and ready’ (see, for example, Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82 per McColl JA at [106], Beazley ACJ agreeing at [1], and Macfarlan JA agreeing at [146]), but s 32 of the SOP Act expressly provides for, and contemplates, the reversal of the interim rights that the Act otherwise provides for. Section 32 seeks to effectively reverse any interim entitlement to monies claimed through the SOP Act. They say it recognises the fundamental right of the respondent to an SOP Act claim in recovering any monies owed under a construction contract.

3. TFM and KRI make the point that they have in fact brought final and substantive proceedings against Decon claiming that Decon was, on a final basis, entitled to none of the claimed amount and that, in fact, Decon owes TFM and KRI amounts in the millions of dollars by reason of breach of the contract and otherwise, for monies not owing under their contract. Those final proceedings are by way of the cross-claim.

4. TFM and KRI say that their final claims against Decon, include:

   (a)claims for millions of dollars for defective work (including for flammable cladding and structural defects);

   (b)claims that Decon was not entitled to the amounts it claimed in respect of retention and variation work;

   (c)claims that Decon’s work was incomplete; and

   (d)claims that Decon was delayed in achieving practical completion and, as a result, TFM and KRI incurred substantial holding costs and were unable to sell the units at the ‘height’ of the market.

5. In their cross-claim, TFM and KRI contend that Decon’s work was riddled with defects, which will require significant rectification work. TFM and KRI say that in the proceedings before Stevenson J (and in the Court of Appeal) and in proceeding NSD 1834 of 2019 before Markovic J of this Court to set aside a creditor’s statutory demand issued by Decon for the debt, they adduced expert evidence from:

   (a)a civil engineer, Mr Deters (addressing general defects and cladding defects);

   (b)a structural engineer, Mr Topolinsky (addressing and costing structural defects at $2,400,000 to $3,700,000);

   (c)a scientist, Mr Nightingale (who had tested the cladding); and

   (d)a quantity surveyor, Mr Madden (costing the rectification of the general and cladding defects at $2,861,381).

6. There are also disputes about retention and variations. In the SOP Claim, Decon claimed $1,512,526.40 for variations. TFM and KRI deny any liability for such payments and say they have good evidence to support their case.

7. An amount of $1,551,826 of the SOP Claim amount was a claim for release of retention.  TFM and KRI explain why they say that amount is not due.

8. TFM and KRI also seek substantial damages arising from Decon’s delay in completing the works. The basis of this claim is a contention that TFM and KRI have been hampered in their ability to sell units in the development while the work was (and is) incomplete.

9. That, in turn, it is asserted, has led to holding costs including ongoing substantial interest payments to financers. TFM and KRI did not quantify those damages. However, they indicate that the specific figures that TFM and KRI do put forward are conservative and do not reflect the entirety of their claim.

10. Against that background, TFM and KRI note that the DOCAs contemplate that the proponent,  TDH (who is also a creditor), will fund the prosecution of the cross-claim. If TFM and KRI are successful in the cross-claim, Decon’s Judgement Debt could be reversed and any monies awarded by the Court in the cross-claim could flow back to the companies and the creditors.

11. TFM and KRI argue that the creditors under the DOCA have an opportunity to recover their losses through any award by the Supreme Court in favour of TFM and KRI.  If the DOCA is set aside, the companies may arguably enter liquidation, and the companies’ claims to final relief reversing Decon’s Judgement Debt will be stultified. Essentially, the interim right may become a final one.

12. TFM and KRI contend that the issue is not whether the liquidators could in law pursue the cross-claim. Rather, the question is a practical one, namely, whether there is a sufficient prospect that they would not do so:  Kalifair Pty Ltd v Digi-Tech (Aust) Ltd (2002) 55 NSWLR 737 per Handley, Sheller and Ipp JJA (at [21]-[25]), see also Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 9 NSWLR 317 per Sackville AJA (at [254]).

13. TFM and KRI say that they intend to ensure that the cross-claim proceedings, and the Supreme Court’s jurisdiction to determine the cross-claim is not frustrated before it can be exercised. They say that Decon’s Judgment Debt is an interim right, designed to be so by the provisions of the SOP Act. In the final proceedings on the cross-claim, the Supreme Court is expressly directed to treat the interim right as having no relevant effect on either rights or the proceedings: see s 32(1) and s 32(2) of the SOP Act.

14. TFM and KRI assert they are entitled to challenge Henry J’s judgment by which Decon is entitled to its Judgment Debt. In the cross-claim, TFM and KRI seek a declaration pursuant to s 32(3)(b) of the SOP Act or s 23 of the Supreme Court Act 1970 (NSW), that certain amounts (for example, retention) ‘are not owing to Decon by reason of the orders of the Supreme Court dated 11 October 2019’. This is permissible they argue, in the final cross-claim proceedings: Falgat Constructions Pty Ltd v Equity Australia Corp Pty Ltd (2005) 62 NSWLR 385 per Handley JA (at [22]), with whom Santow and Pearlman JJA agreed, and where it was said that ‘[t]he power under s 32(3)(b) to make such orders as it considers appropriate would probably allow the court to set aside or vary any judgment entered under s 25’.

15. Under the TFM DOCA and KRI DOCA, TDH is committed to contributing the following amounts to the respective Deed Funds:

TFM DOCA	KRI DOCA
a.        On execution of the DOCA	$70,000	$30,000
b.        6 months after execution of DOCA	$70,000	$30,000
c.        18 months after execution of DOCA	$70,000	$30,000
d.        Supplementary Contribution Amount	$315,000 (maximum)	$135,000 (maximum)
Total Deed Fund contributions	$525,000	$225,000

1. If the DOCAs are terminated, the creditors of TFM and KRI will not be able to access these contributions.

2. TFM and KRI further submit that in addition to the detriment to creditors, the setting aside of the DOCAs would also prejudice the rights and interests of the proponent, ‘TDH’. For present purposes, cl 4.1(a) of the TFM DOCA requires TDH to pay $70,000 into the TFM Deed Fund at the time of the execution of the DOCA (which execution has already taken place). The equivalent clause in the KRI DOCA requires a payment of $30,000 into the KRI Deed Fund. Therefore, the Administrators would presumably already hold at least an amount of $100,000 which comprises the Deed Fund, contributed by TDH as proponent. Clause 6.3(a) of each of the TFM DOCA and the KRI DOCA provides that monies in the respective Deed Funds are non-refundable once paid, will vest with the companies should the DOCAs be terminated, and are subject to the Administrators’ rights and indemnities under cl 18. Clause 18 of each of the TFM DOCA and the KRI DOCA provides that the Administrators are entitled to an indemnity against the Deed Fund for, amongst other things, their remuneration and costs associated with the voluntary administration process and the deed administration process.

3. On that basis, should the DOCAs be set aside and terminated, TFM and KRI say that TDH would undoubtedly suffer prejudices which includes all of the $100,000 non-refundable contribution made to the TFM and KRI Deed Funds by TDH.

   CONSIDERATION

   Overview

4. Before dealing with the detail of the various facts and transactions raised by Decon, I propose setting out some general considerations which are relevant to the approach I have taken to the complaints raised.

5. Having regard to authorities such as Britax and Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178, the key question is whether the Administrators have adequately performed their statutory duty to investigate such that they have a sufficient basis to recommend a DOCA instead of liquidation. The broad canvass of authorities by Dodds-Streeton J in Mediterranean Olives is, with respect, very helpful. In that case, her Honour referred (at [62]) to Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 where Cohen J (at 145-146) said:

   As a preliminary matter, it should be noted that Pt 5.3A has its objects as set out in s 435A, namely the provision 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 that is not possible, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company. The intention was, as has been indicated in several cases, 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 Pt 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.

   (Emphasis added.)

6. Dodds-Streeton J then said (at [63]-[67]):

   63.In Hagenvale the plaintiffs alleged, inter alia, that the administrator’s report failed adequately to examine the relationship between the defendant companies or to quantify the amount of the preferences, and that the company failed to give sufficient information in relation to an action against the directors under s 588G of the Act. Cohen J did not consider that the alleged deficiencies, or alternatively their materiality, were established. His Honour reiterated that the administrator did not have the time or resources for investigation as in liquidation.

   64.In Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 (“Pddam”), Heerey J declined to set aside a DOCA under, inter alia, s 445D(1) of the Act. Despite finding some substantial departures from statutory requirements, his Honour did not consider that the administrators’ investigation or report was inadequate. His Honour stated (at 510):

   I am not satisfied that the administrator failed to carry out the investigation required by s 438A(a). Perhaps more enquiries could have been made. Perhaps what the administrator was told by the directors and the receiver might not have been taken at face value. It is often possible to say of an investigation that, in retrospect, more could have been done. However the case that the applicant seeks to make out is not one of an inadequate or negligent investigation, but of a failure to comply with a statutory requirement, so that there was in truth no investigation at all. The passages already cited from the Harmer Report and the explanatory memorandum indicate that the investigation is intended by Parliament to be a swift and practical one. Part 5.3A assumes that the company in question is either trading while insolvent or likely to be in that position within a predictable period of time: see s 436A(1)(a). It is self-evidently essential that such a state of affairs be brought to an end promptly, either by the execution of a deed or by winding up. The tight time frames set for the convening of the first and second meetings of creditors are consistent with that need.

   64.Heerey J also took into account, in the exercise of his discretion, that there was “no basis for concluding that...liquidation would confer any practical benefit on any creditor, including the applicant” (at 512) and that the loss of benefits under the DOCA would impose real hardship on former employees.

   66.In Spiteri v Georges [2002] VSC 473, Hansen J reiterated that the administrator must act quickly in relation to both the first and second meeting of creditors, and in investigating and forming an opinion. His Honour dismissed an application by the director of the company to remove the administrator and set aside his decisions allowing a party to vote as a creditor in a particular amount, on grounds including alleged partiality and lack of independence.

   67.Hansen J observed that where the director, contrary to the obligations imposed by the statute, had deliberately starved the administrator of information by failing to deliver the books and records, attend the meeting as required or otherwise assist, the administrator necessarily relied on information from creditors, on which the decision to admit the disputed claim was open (at [88]).

7. Dodds-Streeton J then turned to Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 45 ACSR 612, where Austin J described the administrator’s duty to investigate as follows (at [339]):

   An administrator has a statutory duty under s 438A to investigate the company’s business, property, affairs and financial circumstances. It is possible that he or she may fall under an obligation to obtain legal advice in order to discharge that duty properly in the facts of the case. But in assessing whether any such duty has arisen, the court is bound to take into account the limited time available to an administrator to carry out his or her investigations, the extent and complexity of the tasks to be carried out during that time, and the availability of funds for these purposes: see the Pddam and Portinex [Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391] cases, cited above. In some cases it will be open to the court, bearing in mind such considerations, to conclude that something less than an independent legal assessment will be sufficient.

8. Her Honour also noted that in Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232, Lindgren J concluded (at [198]) that, on the basis of a number of provisions of Pt 5.3A, an administrator was required to act with expedition within a tight timeframe, which should be extended or adjourned only exceptionally. Her Honour continued (at [70]):

   His Honour referred to the consistent distinction in relevant authority between the extent and quality of information available and investigations performed in, on the one hand, a voluntary administration and, on the other hand, a liquidation. In the former, the investigation was to be “swift and practical”, as stated in Pddam at [226].

9. Next, Dodds-Streeton J referred to Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) [2010] FCA 352, where Finkelstein J ordered the removal of liquidators pursuant to the former s 503 of the Corporations Act because, inter alia, they failed while administrators to adequately investigate and report on potential claims which, if successful, might have led to recoveries which would see the creditors better off than under the DOCA they had recommended, but which was subsequently set aside. In that case Finkelstein J stated (at [14]):

   Before dealing with this complaint, it is necessary to say something about the standard of investigation which an administrator is required to undertake. By reason of s 438A of the Corporations Act, an administrator is under a duty to investigate the company’s affairs so as to be able to form an opinion about what future course of action is in the creditors’ best interests and inform the creditors of that opinion. If the administrator has insufficient time before the second meeting of creditors at which the creditors will consider the administrator’s advice to form this opinion, he or she may seek an extension of the convening period for the second meeting. In Bovis Lend Lease Pty Ltd v Wily ... Austin J said that there may be circumstances when the administrator needs to go beyond his statutory duties of investigation. The existence of a duty to make further inquiries would depend on “an assessment of the nature of the question to be investigated, the information in the administrator’s hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors’ decision”: at [325]. Equally, however, an administrator is not required to undertake investigations to the same extent as a liquidator, given the time constraints imposed by Pt 5.3A: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391 ... at [125].

10. In Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395, as Dodds-Streeton J noted, the majority of the Court of Appeal held that the trial judge erred in finding, inter alia, that an administrator’s investigation was inadequate. An important factor, as Giles JA (with whom Meagher JA on that issue agreed) stated at [213], was that:

    at no time in his cross-examination was it put to [the administrator] that he should have done more by way of preliminary investigation, that he had failed to consider breach of fiduciary or statutory duties as distinct from preference or that his investigation was inadequate to permit him to vote in favour of the [DOCA].

11. Dodds-Streeton J also examined a number of authorities which had considered the relevance of an inadequate investigation by an administrator to the termination of a DOCA pursuant to various potentially overlapping provisions of the Corporations Act. For example as her Honour stated, in Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707, an inadequate investigation by administrators was an important factor in Derrington J’s decision to set aside a DOCA pursuant to s 447A of the Corporations Act. The resolution to execute the DOCA was opposed by the major creditor with a claim for over $27 million but carried by the administrator’s casting vote. Under the DOCA, the major creditor would receive $80,000 (as opposed to nothing on winding up) but the other unsecured creditors would receive a higher proportion of their respective debts. Derrington J accepted that the DOCA unfairly discriminated against and prejudiced the plaintiff. Despite the plaintiff’s real but small advantage under the DOCA, his Honour found that in a number of areas, the administrator’s enquiries were insufficient to justify his recommendation and his casting vote in favour of the DOCA. In particular, the administrator did not adequately investigate the sale of certain substantial company assets, the adequacy of the consideration for shares, the value of an asset subject to security or the reasons for, and adequacy of, the director’s contribution.  Derrington J stated that the administrator, who acknowledged that his investigation was somewhat superficial, gave very unsatisfactory evidence which did not establish that an adequate enquiry had been undertaken. The administrator produced minimal supporting documentary material and did not assist the Court (at 710).

1. It is difficult to see how any further investigation or interrogation of the transaction concerning TDH presents any realistic prospect of a better return to creditors in a winding up scenario than what is presented by the DOCAs. Potential recoveries against TDH were brought to the attention of the voting creditors prior to the second meeting of creditors and the creditors voted in the way that they did in any event.

   Findings on the relief sought by Decon

2. I have discussed the question of onus above (at [125]).  It is not incumbent on an administrator to prove the sufficiency of their report. In cases such as the present, an estimated comparison between the outcome of the DOCA and the likely outcome of a liquidation is relevant to the exercise of the Court’s discretion. This comparison requires analysis of the position of the company as at the time of the making of the application.

3. In circumstances where no contrary analysis has been presented as to the return to creditors on a liquidation as opposed to the return under the DOCAs, and given the explanations provided by the Administrators, it is difficult to be satisfied that Decon is entitled to relief.  However valid its suspicions as to transactions may be, it is most important to also consider the likely benefits of liquidation to creditors.

4. Decon also complains of the omission of information with reference to s 445D(1)(c) of the Corporations Act. Decon maintains in substance that certain matters were either not sufficiently investigated or omitted from the Creditors’ Reports.

5. Bearing in mind throughout the need for Administrators to provide a timely and practical service, I consider that the Creditors’ Reports provide a sufficient degree of detail of the funding arrangements made available by the TFM DOCA and the KRI DOCA for the Company to pursue the cross-claim. In any event, this potential recovery was immaterial to the Administrators’ recommendation.

   Injustice – s 445D(1)(e)

6. For the reasons set out above, contrary to [92(c)] of the POC, there is no injustice caused by creditors voting in favour of the TFM DOCA and the KRI DOCA instead of electing to further investigate and potentially pursue speculative causes of action which face uncertainties and difficulties in terms of their funding, prospects of success, and prospects of enforcement and recovery.

7. None of these matters was hidden or concealed from the creditors of either TFM or KRI and, indeed, formed the basis of the Administrators’ recommendations expressed in the Creditors’ Reports in the first instance.

   Oppressive or unfairly prejudicial, or unfairly discriminatory against – s 445D(1)(f)(i)

8. In respect of s 445D(1)(f)(i) of the Corporations Act, and whether the DOCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more creditors, the following propositions of law are applicable to the current circumstances:

   (a)Part 5.3A of the Corporations Act assumes that the creditors are best placed to judge their interests so a setting-aside will not be ordered lightly: University of Sydney v Australian Photonics Pty Ltd (2005) 53 ACSR 579 (at [34]);

   (b)the mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed.  The mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement:  Fleet Broadband (at [57] and the authorities cited therein);

   (c)the test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice. Some degree of discrimination is not necessarily unfair. Thus, it is clear that a DOCA may provide for differential dividends among creditors:  Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 (at 38E). Part 5.3A does not require a pari passu distribution. What is required is a better return to creditors than an immediate winding up. That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up:  Fleet Broadband (at [62]); and

   (d)when deciding whether a deed unfairly prejudices or discriminates against a creditor or group of creditors, consideration must be given to what those purportedly prejudiced creditors would receive, or would be likely to receive, on a winding up, and the reasonableness of any conclusions reached by the administrator on that question:  Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 (at 50); TNT Building (at [43]).

9. In respect of determining what is unfairly discriminatory:

   (a)there must be reasonable grounds for differentiation between creditors of an equal class (for example, ordinary unsecured creditors) that accord with the object and spirit of Pt 5.3A: Lam Soon (at 46-48).  Circumstances may exist where certain creditors must be paid in full to ensure their continued support for the company to allow it to continue to trade:  Employers’ Mutual Indemnity (Workers’ Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450 per Branson J (at 464-465 applying Lam Soon);

   (b)there will be circumstances when ordinary commercial common sense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination: Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 per Finkelstein J (at [25]);

   (c)where a deed proposes to preserve the company to achieve the objects of Pt 5.3A of the Corporations Act, there should be no expectation of equal treatment of unsecured creditors where such treatment would defeat that purpose: Rocklea per Finkelstein J (at [30]).

   (d)ultimately, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination, and the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation, and indirect or collateral benefits from the survival of the company’s business; and no worthwhile avenues for further recovery in liquidation are identified, a major creditor’s curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole: Mediterranean Olives (at [195]).

10. In terms of unfair discrimination, none of the concerns surrounding different treatment of the dissenting creditors which arise where a DOCA attempts to deviate from the usual pari passu distribution to creditors of the same class, arises in the present case.

    Contrary to the interests of the creditors of the company as a whole – s 445D(1)(f)(ii)

11. It follows that for these reasons, and particularly in respect of s 445D(1)(f)(i), contrary to [92(e)] of the POC, the TFM DOCA and the KRI DOCA are not contrary to the interests of the creditors of the company as a whole. The Administrators’ well-founded position is that the unsecured creditors are likely to receive a higher return under the DOCA than if the company proceeds to a liquidation.

    Commercial morality – s 445D(1)(g)

12. In relation to [92(f)(i)] of the POC, the circumstances concerning the investigation of the ‘relevant transactions’ are dealt with above (at [160]-[195]). The Administrators’ position is that there is no obvious basis for the provisions of s 445D(1)(g) to be invoked. I accept this contention for the reasons stated in relation to each of the transactions that Decon seeks to impugn.

    Relief pursuant to s 75-41

13. At [91] of its POC, Decon alternatively seeks relief pursuant to s 75-41 of the Insolvency Practice Schedule setting aside each of the TFM DOCA Resolution and the KRI DOCA Resolution.

14. As noted above (at [77]), s 75-41 of the Insolvency Practice Schedule provides as follows:

    75‑41Outcome of voting at creditors’ meeting determined by related entity—Court powers

    Application of this section

    (1)This section applies if, on the application of a creditor of a company under external administration, the external administrator of the company or ASIC, the Court is satisfied of the following matters:

    (a)a proposal has been voted on by creditors (either at a meeting of the creditors or under section 75‑40 without a meeting);

    (b)if the vote or votes that a particular related creditor, or particular related creditors, of the company cast on the proposal had been disregarded for the purposes of determining whether or not the proposal was passed, the proposal:

    (i)        if it was in fact passed—would not have been passed; or

    (ii)       if in fact it was not passed—would have been passed;

    or the question would have had to be decided on a casting vote;

    (c)the passing of the proposal, or the failure to pass it, as the case requires:

    (i)is contrary to the interests of the creditors as a group or of that class of creditors as a group, as the case may be; or

    (ii)has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposal, or for it, as the case may be, to an extent that is unreasonable having regard to the matters in subsection (2).

    Unreasonable prejudice to interests of creditors—matters to be taken into account

    (2)For the purposes of subparagraph (1)(c)(ii), the matters are:

    (a)the benefits resulting to the related creditor, or to some or all of the related creditors, from the proposal if passed, or from the failure to pass the proposal, as the case may be; and

    (b)the nature of the relationship between the related creditor and the company, or of the respective relationships between the related creditors and the company; and

    (c)any other relevant matter.

    Court may make orders

    (3)       The Court may make one or more of the following:

    (a)an order that the proposal be considered and voted on at a meeting of the creditors convened and held as specified in the order;

    (b)an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:

    (i)        the proposal; or

    (ii)       a resolution to amend or vary the proposal;

    (c)if the proposal was passed—an order setting aside the resolution passing the proposal;

    (d)such other orders as the Court thinks fit.

    Definition-related creditor

    (4)       In this section:

    ‘related creditor’, for the purposes of a vote, in relation to a company, means a person who, when the vote was cast, was a related entity, and a creditor, of the company.

15. In respect of s 75-41(1)(c), in Re Iris Diversified Property Pty Ltd (in liq) [2018] NSWSC 834, Black J stated (at [29]):

    … having regard to the matters specified in s 75-41(2). The case law in respect of former s 600A of the Corporations Act 2001 (Cth) suggests that unreasonable prejudice and not merely prejudice is likely required to satisfy this paragraph: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 at [89]-[92]. …

16. In respect of s 75-41(1)(b), contrary to [79] and [87] of the POC, had the vote of related party creditors been omitted such that the Administrators would have had to exercise a casting vote, the Administrators say they would have exercised that vote in favour of the passing of the TFM DOCA Resolution and the KRI DOCA Resolution consistent with their recommendations in the Creditors Reports and having also considered the matters raised in the POC.

17. As to the application of (now repealed) s 600A of the Corporations Act (the predecessor provision to s 75-41), in DSG Holdings, Leeming JA (Meagher JA and Bergin CJ in Eq concurring at [1] and [144], respectively) emphasised that the Court needs to take into account the interest of creditors in their capacity as creditors (at [79]-[81]):

    79There is an important consequence flowing from the fact that the principles governing class definitions in schemes do not apply. It was well put by David Richards J, of the comparable English legislation, in Re T&N Ltd [2004] EWHC 2361 (Ch); [2005] 2 BCLC 488 at [81]:

    “The crucial difference with a [creditors’ voluntary arrangement as opposed to a scheme] is that there is just one meeting of creditors, so that necessarily means that there may be sub-groups who would constitute separate classes for a scheme.”

    80That is to say, the premise of the new procedure is that creditors will be able to meet and vote on their common interest in the company executing a deed of company arrangement or being wound up, subject to the protections given by s 600A (and s 445D). This informs the construction to be given to “interests of creditors” in this context, as considered further below.

    81In short, s 600A is part of the protection given to creditors who are disadvantaged by a deed of company arrangement (cf Young v Sherman [2001] NSWSC 1020; 40 ACSR 12 at [73]). The legislation contemplates that a related entity may vote decisively on certain specified matters (resolutions to wind up a company, or to execute a deed of company arrangement, or other votes under Pt 5.3A) together with other creditors. The effect is that a discretion is conferred upon the Court to set aside the outcome, or require a further vote, perhaps under different conditions. That reflects a legislative recognition that the reasons for the voting of related entities may diverge from those of other creditors, in a way that should be subjected to curial oversight. However, the fate of the company and its creditors insofar as it is determined by the deed of company arrangement is determined by those creditors voting in a single group, even though those same creditors would, if they were asked to approve a scheme of arrangement, meet and vote in separate meetings.

18. In the present case, it has been demonstrated that the DOCAs are not oppressive or unfairly prejudicial or discriminatory for the purpose of s 445D(1)(f)(i). As noted by Brereton J in respect of the former s 600A in Re Connections Total Fitness for the Family Pty Ltd [2014] NSWSC 75 (at [42]-[43]) there is significant overlap and parity of consideration between the provisions:

    42… However, the similarity between s 445D(1)(f) and s 600A(1)(c) means that what is prejudicial to an unreasonable extent under the latter is likely also to be unfairly prejudicial or unfairly discriminatory under the former. Moreover, if one were to conclude that the deed, if executed, would be liable to be terminated under s 445D, that could be very relevant to what consequential orders should be made under s 600(2).

    43Whether a deed of company arrangement is oppressive or unfairly prejudicial or discriminatory is determined primarily by reference to the general principles underlying Part 5.3A, including, first, the creditor’s right to be paid or to have the company wound up or to have the company administered by an administrator in a way that will see creditors paid from the company’s property [Re Bartlett Researched Securities Pty Limited (1994) 12 ACSR 707, 710; Hagenvale Pty Limited v Depela Pty Limited (1995) 17 ACSR 139; 151; Molit (Number 55) Pty Limited v Lam Soon Australia Pty Limited (Administrator Appointed) (1996) 19 ACSR 160; Winterton Constructions Pty Limited v MA Coleman Joinery Co Pty Limited (1996) 20 ACSR 671; Sydney Land Corporation Pty Limited v Kalon (1997) 26 ACSR 427; affirmed (1998) 26 ACSR 593; Fleet Broadband Holdings v Paradox Digital Pty Limited (2005) 228 ALR 598]. In Sydney Land Corporation v Kalon, Young J put it in these terms (at 430):

    Accordingly when one is looking at what is oppressive or unfairly prejudicial under section 445D, one looks at it in the background of the general right of a creditor to be paid or to wind the company up or to have the company administered by the administrator under the deed in a way which keeps the company’s business going and will see the creditor paid something out of the property of the company. If a scheme and a deed deviates from that, then a creditor is more easily able to say that it’s operating oppressively than otherwise.

19. For these reasons, the passing of each of the TFM DOCA Resolution and the KRI DOCA Resolution was not unreasonably prejudicial within the meaning of, and for the purpose of s 75-41(1)(c).

    Removal of the Administrators – s 446AA

20. In the event that Decon had been successful in its arguments for termination of the DOCAs under s 445D (which it has not), Decon also sought the removal of the Administrators and the appointment of new liquidators in the winding up that would be deemed by operation of s 446AA of the Corporations Act.  In any event, I consider that the removal of the Administrators and their replacement in the circumstances of two factually detailed and complex voluntary administrations would be of detriment to the creditors of TFM and KRI on the whole, particularly in circumstances where no misfeasance or impartiality on the part of the Administrators has been made out and where their replacement would inevitably occasion duplication of costs as against limited funds.

21. In Apple Computer Australia Pty Ltd v Wily [2003] NSWSC 719 (2003) 46 ACSR 729, Barrett J stated (at [37]) (in the analogous context of s 503 of the Corporations Act concerning the replacement of a liquidator) that:

    It is thus clear that “cause shown” is a broad concept concerned not so much with a search for particular instances of wrong or inappropriate conduct (although a particular event of that kind may be sufficient) but with a more general enquiry into what is for the benefit of the administration and the body of persons interested in it, as well as the maintenance of confidence in the integrity, objectivity and impartiality of that administration. Removal is warranted, in a situation such as the present, if, taken as a whole, the conduct of the liquidator can be seen to be such as to ground in the mind of a reasonable observer a perception of lack of impartiality as among the interests he is committed to serve and lack of objectivity in serving those interests.

22. Similarly, in analogous circumstances in Sands Contracting Pty Ltd v Foodcorp (VIC) Pty Ltd [2020] FCA 1274 (at [79]), I recently held that (amongst the more comprehensive analysis which appears between [78] and [88]):

    (a)a court may remove a liquidator when it is satisfied that it is for the better conduct of the liquidation or for the general advantage of those interested in the assets of the company:  (at [78]); see also Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 (at 550);

    (b)the burden is on the plaintiff to establish that it is in the interests of the liquidation that the liquidators are removed: (at [80]); see also Re Keypak Homecare Ltd [1987] 3 BCC 558 (at 563);

    (c)it is not sufficient for a plaintiff to prefer another liquidator or to be unhappy with a liquidator’s decisions:  at [82]; see also Multi-Core Aerators Ltd v Dye [1999] VSC 205;

    (d)a Court should be cautious about making a decision to remove a liquidator:  at [81]; see also AMP Music Box Enterprises Ltd v Hoffman [2002] BSC 996; and

    (e)it is not sufficient that a court remove a liquidator merely because of levels of feeling and rancour between parties especially where the hostility has, at all times, emanated from the party seeking the removal:  at [82]; see also Multi-Core Aerators (at [48]); Re St Gregory’s Armenian School Inc (in liq) [2012] NSWSC 1215 (at [29]).

23. In the present case, no basis for removal has been demonstrated, nor would the Court remove the Administrators in circumstances where, as the course of the hearing has demonstrated, there is considerable complexity to the affairs of TFM and KRI which any new appointee would need to get across.

    Costs

24. The application must be dismissed.  The parties will have a brief opportunity to address the question of costs. 

I certify that the preceding two hundred and eighteen (218) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McKerracher.

Associate:

Dated:       29 January 2021