Deputy Commissioner of Taxation v Portinex Pty Ltd

[2000] NSWSC 99

Reported Decision: [2000] 156 FLR 453
[2000] 34 ACSR 391

New South Wales

Supreme Court

CITATION:	DCT v Portinex/Silindale/Dalvale [2000] NSWSC 99
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4210/98; 4211/98; 4494/98
HEARING DATE(S):	5 & 6 May, 23 August 1999
JUDGMENT DATE:	7 June 2000
PARTIES :	Deputy Commissioner of Taxation (P) Portinex Pty Ltd (Subject to a Deed of Company Arrangement) (D1) John Edward Star (Administrator) (D2) Silindale Pty Ltd (Subject to a Deed of Company Arrangement) (D) Deputy Commissioner of Taxation (P) Portinex Pty Ltd (Subject to a Deed of Company Arrangement) (D1) John Edward Star (Administrator) (D2) Dalvale Pty Ltd (Subject to a Deed of Company Arrangement) (D) Deputy Commissioner of Taxation (P) Portinex Pty Ltd (Subject to a Deed of Company Arrangement) (D1) John Edward Star (Administrator) (D2)
JUDGMENT OF:	Austin J

COUNSEL :	J T Johnson (P) P A Somerset (Sol) (D)
SOLICITORS:	Australian Government Solicitor (P) P A Somerset & Co (D)
CATCHWORDS:	CORPORATIONS - voluntary administration - invalid resolution to appoint administrator - curative order under s 447A - not procedural irregularity under s 1322(2) - curative order under s 1322(4)(a) - relevant criteria for application under s 600A to set aside resolution to enter into deed of company arrangement - relevant criteria for application to terminate or set aside deed of company arrangement under s 445D(1)(a), (f) and (g) and s 445G
LEGISLATION CITED:	Corporations Law, ss 9, 436A, 439A, 445D, 445G, 447A, 588FB, 588G, 600A, 1322
CASES CITED:	Australasian Memory Pty Ltd v Brien [2000] HCA 30 Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789 Deputy Commissioner of Taxation v ACN 001 330 203 Pty Ltd (in liq) [1999] NSWSC 798 Deputy Commissioner of Taxation v Comcorp Australia Ltd (1996) 21 ACSR 590 Deputy Commissioner of Taxation v Gruber (1997) 97 ATC 4970 Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266 Didovich v Australian Securities and Investments Commission (1998) 29 ACSR 122 Emanuele v ASC (1995) 19 ACSR 1 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 Hamilton v National Australia Bank limited (1996) 19 ACSR 647 Jordan v Avram (1997) 141 FLR 275 Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687 Khoury v Zambena Pty Ltd (1997) 23 ACSR 344 Khoury v Zambena Pty Ltd [1999] NSWCA 402 Konica Australia Pty Ltd v Aprolab Flashpoint (Australia) Pty Ltd [1999] VSC 257 Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 22 ACSR 169 M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (1995) 19 ACSR 27 M & S Butler Investments Pty Ltd v Granny May's Franchising Pty Ltd (1997) 24 ACSR 695 Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR 160 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 30 ACSR 705 Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38 Network Exchange Pty Ltd v Mig International Communications Pty Ltd (1994) 13 ACSR 544 Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 Re Brashs Pty Ltd (1994) 15 ACSR 477 Re Carey Builders Pty Ltd (1997) 23 ACSR 754 Re Jacobs; ex parte O'Connor (1984) 1 FCR 1 Re Vanfox Pty Ltd (1994) 13 ACSR 209 Sipad Holding ddpo v Popovic (1995) 18 ACSR 436 Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201 Sydney Appliances Pty Ltd (in liq) v Robert Bosch (Australia) Pty Ltd (2000) 33 ACSR 680 Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No.2) (1997) 26 ACSR 427 Wagner v International Health Promotions Pty Ltd (1994) 15 ACSR 419 Wood v Laser Holdings Ltd (1996) 19 ACSR 245
DECISION:	Summons dismissed in each case; on defendants' applications in 4210/98 and 4211/98, orders made under ss 447A(1) and 1322(4)(a)

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

WEDNESDAY 7 JUNE 2000

4210/98/4211/98/4494/98 . DEPUTY COMMISSIONER OF TAXATION V PORTINEX PTY LTD/SILINDALE PTY LTD/DALVALE PTY LTD

JUDGMENT

HIS HONOUR:

Introduction

1 This judgment relates to three proceedings brought by the Deputy Commissioner of Taxation for similar relief in respect of three companies within the same corporate family. I shall use the non-technical phrase ‘family’ in order to leave open for the time being the questions whether the companies are related bodies corporate within the meaning of Part 1.2 Division 6 of the Corporations Law, and whether they are ‘related entities’ for the purposes of s 600A.

2   The ‘family’ of companies comprised Portinex Pty Ltd, Silindale Pty Ltd and Dalvale Pty Ltd, the defendants in the three proceedings, and three other companies. The other companies were A Nolasco Pty Ltd, A Nolasco Building Pty Ltd and Glenmore Management Pty Ltd. Evidence was also given about another Nolasco company called Benesi Pty Ltd. The business of the group was mainly building and construction work, with some joinery work as well. The three defendants have ceased to carry on business. The other three companies were still in operation at the time of the hearing. A complex web of inter-company loan accounts had the consequence of tying the financial fortunes of the companies together, so that the winding up of one company in insolvency would be likely to bring down others. Specifically (but without being comprehensive) Portinex and Dalvale owed substantial debts to Silindale, Silindale owed a substantial debt to A Nolasco Pty Ltd, A Nolasco Pty Ltd owed substantial debts to A Nolasco Building Pty Ltd and Portinex, and Portinex owed a substantial debt to Dalvale.

3   In proceeding No 4210 of 1998 the Deputy Commissioner seeks against Portinex and its administrator, Mr John Star, relief which includes an order setting aside a deed of company arrangement purporting to have been signed on 17 July 1998. Proceeding No 4211 of 1998 is an identical proceeding brought by the Deputy Commissioner against Silindale and its administrator, also Mr Star, to challenge a deed of company arrangement for that company which was also purportedly signed on 17 July 1998. Proceeding No 4494 of 1998 is a generally similar proceeding brought by the Deputy Commissioner against Dalvale and its administrator, also Mr Star, to challenge a deed of company arrangement for that company which was approved by creditors at a meeting on 9 October 1998. Although (as I shall explain) the facts relating to Dalvale are different in some ways from the facts concerning Portinex and Silindale, there was sufficient similarity for me to make orders at the beginning of the hearing that the three proceedings be heard together and that evidence in each proceeding be evidence in the other proceedings.

4 The Deputy Commissioner seeks orders that the resolutions for entry into the deeds be set aside under s 600A. That section gives the Court some specific powers, and the power to make other orders which it thinks necessary, where it is satisfied that a resolution has been passed at a meeting of creditors with the help of votes of one or more related creditors, and that the resolution is contrary to the interests of creditors as a whole or is reasonably likely to prejudice the interests of those who voted against it to an unreasonable degree, having regard to some stated factors. The Deputy Commissioner submits that the creditors' resolutions approving the deeds of company arrangement would not have been passed but for ‘related creditor’ votes, and that his interests as a creditor have been prejudiced having regard to the benefits which flow to the family of companies which includes the defendants.

5 Alternatively, the Deputy Commissioner says that the deeds should be set aside under ss 445D(1)(a), 445D(1)(f) or 445D(1)(g) of the Corporations Law. Regulation 5.3A.07 of the Corporations Regulations has the effect that if the Court makes an order under s 445D terminating a deed of company arrangement, the company is taken to be under a creditors' voluntary winding up, and unless the creditors decide otherwise the administrator is the liquidator.

6   The Deputy Commissioner's grounds for challenging the deeds are that, in the case of Portinex and Silindale, there was no valid resolution of the board of directors to appoint Mr Star as voluntary administrator; the external accountants for the companies, Turnbull and Turnbull, were incorrectly treated as creditors and were wrongly permitted to vote at the creditors' meetings; Mr Star has not diligently or adequately carried out investigations which he should have carried out as voluntary administrator, especially with respect to the possibility of preferences and insolvent trading by the directors; consequently the deeds of arrangement were approved upon the basis of a report by Mr Star that was misleading and failed to give a true and fair view of the relevant affairs of each company; and the effect of each deed is to forestall a proper investigation of the affairs of each of the companies and the conduct of their directors, former directors and advisers. He submits that it is therefore in the public interest that the deeds be terminated.

7 In the alternative, the Deputy Commissioner seeks orders that the deeds be declared void under s 445G. That section states that where there is a doubt, on a specific ground, whether a deed of company arrangement is entered into in accordance with Part 5.3A or complies with that Part, certain persons including a creditor such as the Deputy Commissioner may apply to the Court for an order declaring the deed to be void. But under s 445G(3) the Court may declare the deed to be valid despite a contravention of a provision of Part 5.3A if it is satisfied that the provision was substantially complied with, and no injustice will result for anyone bound by the deed if the contravention is disregarded.

8 The Deputy Commissioner contends that the deeds should be declared void under s 445G(2) because Mr Star failed to carry out his duties diligently and his reports were misleading, and consequently the creditors voted to approve the deeds without adequate information.

9 In each of the three proceedings the defendants have filed a notice of motion seeking an order under s 1322 of the Corporations Law declaring that Mr Star's appointment as administrator of the three companies has not been invalidated by reason of any contravention of a provision of the Corporations Law or the constitution of the company concerned. In the alternative the defendants seek an order under s 447A of the Corporations Law that the appointment of Mr Star as administrator of each company has not been invalidated by virtue of any defect in his appointment, however it may have arisen. Section 1322 is a general provision which allows the Court to make an order correcting an irregularity of a procedural kind. Section 447A permits the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. Broadly, the defendants' notices of motion invite the Court to make a curative order if it finds that the appointment of the administrator under the deed of company arrangement is in some way defective.

10 The defendants also invite the Court to make a declaration under s 445G(3) that each of the three deeds is valid despite any contraventions. Additionally they argue that since 102 days passed, after approval of the deeds of company arrangement for Portinex and Silindale, before summonses were filed to terminate or avoid the deeds, it is too late for the Court to grant any such relief.

11   As one would expect, the defendants contest the Deputy Commissioner's allegations of incompetent administration, and they deny that it would be in the public interest to terminate the deeds. The defendants also argue that the Court should not exercise any relevant discretion in favour of the Deputy Commissioner, because he has failed to avail himself of alternative remedies against the directors of each of the defendant companies. The defendants say that the Deputy Commissioner might have proceeded under default notices issued against the directors.

12   I shall first deal with the questions which relate to the validity of Mr Star's appointment as administrator of Portinex and Silindale. Next, I shall consider whether the Deputy Commissioner's delay in bringing proceedings is fatal. Then I shall deal with the asserted grounds for setting aside the resolutions for entry into the deeds of company arrangement, or for terminating or avoiding the deeds of company arrangement of the three companies, giving an account of the facts relevant to each ground as I proceed.

Were there valid resolutions of the directors of Portinex and Silindale for the appointment of Mr Star as voluntary administrator?


13 Portinex and Silindale were incorporated under the Companies Act 1961 (NSW) in 1981. In each case the articles contained in Table A of the Fourth Schedule to that Act applied, but were varied.

14   In the case of Silindale there were at all relevant times only three issued one dollar ordinary shares, one held beneficially by Arides Nolasco and two by Timothy Phillips. It appears from the evidence that Mr Nolasco was the ‘principal’ of the companies in a commercial sense. Such little evidence as there is indicates that Mr Phillips was at one time an employee of one of the Nolasco companies.

15   In the case of Portinex, Helen Panos beneficially held 7000 ‘A’ Class and two ‘B’ Class shares of one dollar each and Silindale beneficially held 1800 ‘A’ Class shares. Broadly speaking the ‘A’ Class shares were non-voting shares with dividend and equity rights, and the ‘B’ Class shares were voting shares without rights to dividend or participation in surplus equity on winding up.

16   Mr Nolasco was a director of both companies at all relevant times, and Maria Zaharia (his wife) was a director of both companies from 1991 until her resignation on 16 March 1998 in the circumstances discussed below. Helen Panos is Maria Zaharia's sister, and was an employee of one of the Nolasco companies who provided assistance and information to the administrator.

17   On 16 March 1998 a meeting of members of each of the two companies was held. Mr Nolasco and Ms Zaharia were present. The minutes recorded that ‘all members being present’, it was resolved that notice of the meeting be dispensed with, and it was further resolved that the articles of the company be repealed and replaced with new articles which were Annexure ‘A’ to the minutes. In each case the new articles which were Annexure ‘A’ were described on their first page as ‘amendments for one director conversion of’ the relevant company.

18   On the same day there was a meeting of directors of each of the two companies attended by Mr Nolasco and Ms Zaharia. Ms Zaharia tendered her written resignation as a director and secretary at that meeting, and it was resolved that the resignation be accepted and be deemed effective from the termination of the meeting.

19   According to minutes that are in evidence, on 25 March 1998 meetings of the directors of Portinex and Silindale were held. The minutes, which are in identical form, record that only Mr Nolasco was present, and was chairman. The only business of each meeting was the appointment of a voluntary administrator. The meeting resolved that Mr Star be appointed as the voluntary administrator, and that an instrument of appointment (which was tabled) be executed under the common seal of the company. These resolutions were preceded by a recital to the effect that ‘the directors of the company’ were of the opinion that the company was insolvent and that an administrator should be appointed.

20 On the same day the common seals of the respective companies were affixed to instruments of appointment, attested by Mr Nolasco as ‘sole director/secretary’ in the presence of a witness, whose signature appears to be the signature of Ms Zaharia. The instruments of appointment would satisfy the requirement of s 436A that an administrator be appointed by the company by writing, if the preceding resolutions of the boards of directors are valid. Thus, the problem in this case is different from the problem in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 30 ACSR 705, which arose out of non-compliance with a requirement of the company's constitution that the seal be affixed in the presence of two directors or a director and the secretary.

21 The Deputy Commissioner submits that the resolutions at the meetings of members on 16 March 1998 were invalid and consequently that Mr Nolasco was not competent to act as sole director on 25 March 1998, and hence Mr Star was not validly appointed as voluntary administrator of the two companies. I agree with this submission, subject to the questions whether the defect was a procedural irregularity cured by s 1322(2), and whether a curative order should be made under s 1322(4) or s 447A(1).

22 The articles of association of both companies required, subject to any agreement, that 14 days' notice be given of a meeting of members (Regulation 45 of Table A in the case of Portinex, and Article 5 in the case of Silindale). They stated that the quorum for a general meeting of members was two members, present in person or by proxy or representative (Regulation 47 of Table A in the case of Portinex, and Article 6 in the case of Silindale). At the relevant time s 247(3) of the Corporations Law provided that a meeting called on short notice would be deemed to be duly convened if so agreed by the requisite majority, but there is no evidence of any such agreement in the present case.

23   The Deputy Commissioner served notices to produce on Portinex and Silindale requiring production of notices of appointment of representatives and proxies to attend the meetings of 16 March 1998, but nothing was produced. Additionally Mr Turnbull, the external accountant for the companies, gave evidence to the effect that when the signed documents for the meetings were returned to him by the companies, there were no other documents such as instruments of appointment of proxies or representatives. I infer that neither of the individuals present at the meetings, namely Mr Nolasco and Ms Zaharia, was a representative or proxyholder for any member. Consequently only one member of Silindale attended its meeting and no members of Portinex attended its meeting.

24   If, because of the absence of notice and a quorum of members, neither company validly adopted new articles of association on 16 March 1998, then the affairs of each company were governed by the old articles of association both at the time when Ms Zaharia resigned as director and secretary, and at the time when Mr Nolasco purported to appoint Mr Star as administrator. In the case of Portinex, Article 63 stipulated that the number of directors be not less than two. In the case of Silindale, Article 7 set the maximum number of directors at 10 and stated that the subscribers to the memorandum of association must in writing determine the first directors. It appears that two directors, Mr and Mrs Nolasco, were initially appointed. In the case of both companies, Regulation 72(e) of Table A permitted a director to resign by notice in writing, and Regulation 83 of Table A stated that the quorum for a meeting of directors may be fixed by the directors and unless so fixed shall be two. There is no evidence that the directors fixed any number other than two.

25   In the present case, as in Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201, 202, the constitutions of the companies did not give authority to a single director to do what Mr Nolasco purported to do on 25 March 1998. Thus, whether or not the resignation of Ms Zaharia as a director was effective (though I see no reason for doubting its validity), Mr Nolasco's resolutions to appoint Mr Star as administrator of both companies on 25 March 1998 were not authorised by the articles of association of the companies, and were invalid (subject to ss 447A and 1322).

26   Under Regulation 84 of Table A, Mr Nolasco as the single remaining director was empowered to appoint another director to bring the number of directors up to the minimum required. Thus, it was within the power of Mr Nolasco to regularise the situation under the old articles of association, but he did not act, no doubt because it was assumed that the new articles had been validly adopted and therefore no regularisation was needed.

Should the invalid appointments of Mr Star as voluntary administrator of Portinex and Silindale be cured under s 447A or s 1322 of the Corporations Law?


27 By notices of motion filed in all three matters, the defendants seek orders under either s 447A or s 1322 of the Corporations Law, declaring that the appointment of Mr Star as administrator of each of the companies was not invalidated by reason of any contravention of the Corporations Law or the articles of association of the companies, or by virtue of any defect in the appointment however arising. In the cases of Portinex and Silindale, the defect in the appointment arose out of the absence of a quorum of directors at the meetings of 25 March 1998, at which resolutions were adopted for the appointment of Mr Star as administrator, purportedly in compliance with s 436A. That defect, in turn, arose out of an incorrect assumption that the companies had validly adopted new articles of association that would permit them to operate with a single director.

28   The defendants do not seek any curative order with respect to the proposed adoption of new ‘single-director’ articles of association on 16 March 1998. They specifically concede that the failure of both companies validly to convene and hold meetings of their shareholders cannot be regarded as procedural, and must of necessity be regarded as substantive. Consequently both sides have argued the case on the assumption that the only question is whether a curative order should be made so as to overcome the defect in the purported meetings of directors on 25 March 1998. It is not suggested that there is any independent defect warranting an order with respect to Dalvale.

Section 447A


29 Section 447A(1) of the Corporations Law permits the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. The defendants submit that s 447A is available in the cases of Portinex and Silindale, in order to overcome a defect in compliance with the appointment procedure under s 436A, which is within Part 5.3A.

30 The proper interpretation of s 447A was at issue in Australasian Memory Pty Ltd v Brien [2000] HCA 30, dismissing an appeal from the Court of Appeal of New South Wales ((1998) 29 ACSR 344). The following propositions emerge from the cases:
(1) s 447A(1) is a valid exercise of legislative power, because it confers on the courts that exercise jurisdiction under the Corporations Law, powers which are judicial in nature, rather than legislative or administrative ( Australasian Memory , at 29 ACSR 379; the point was not directly considered by the High Court);
(2) the section gives the Court a broad power which is an integral part of the legislative scheme provided for by Part 5.3A, not to be read down or confined to curing defects or remedying consequences of departures from other provisions of Part 5.3A ( Australasian Memory , [2000] HCA 30 at para 17, 23 and 24; note Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607; 13 ACSR 337 at 341, where Young J described the power as ‘plenary’);
(3) the section permits the Court to make orders with respect to a particular provision of Part 5.3A, altering the operation of that provision, even where the provision would on its separate construction exclude such an order ( Australasian Memory , [2000] HCA 30 at para 18, 23, holding that s 447A permits an order that a meeting of creditors be held at a time other than as stipulated in s 439A);
(4) the section may be used to overcome a failure to comply with a requirement of Part 5.3A, such as the requirement of s 439A that the second meeting of creditors not be held until the expiration of the ‘convening period’ (as in Australasian Memory ) or the requirement of s 444B that a deed of company arrangement must be executed within 21 days after the end of the meeting of creditors (as in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78 (Court of Appeal of New South Wales) – on appeal, the High Court of Australia (30 ACSR 705) did not consider the application of s 447A);
(5) the section is not confined to filling in the gaps in the legislative scheme of Part 5.3A, and may be used to exonerate a person from what would otherwise be a contravention of a provision of that Part ( Australasian Memory , [2000] HCA 30, para 17; see also Re Brashs Pty Ltd (1994) 15 ACSR 477, in which Hayne J was dealing with the requirement of s 450E that the company must disclose its administration status in public documents);
(6) the section may be used where, in taking a step required by Part 5.3A (such as the execution of a deed of company arrangement), the company has failed to comply with its constitution (as in the MYT Engineering case before the Court of Appeal);
(7) the section permits a much wider class of orders than some other provisions of Part 5.3A, such as s 447C which allows the Court to make an order declaring whether or not a purported appointment was valid ( Australasian Memory , [2000] HCA 30, para 19);
(8) the section does not empower the Court to make a declaration as to how Part 5.3A does operate, only how it is to operate ( Australasian Memory, [2000] HCA 30 at para 18; Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24; (1994) 13 ACSR 504);
(9) by empowering the Court to make orders about ‘how this Part is to operate’, the section looks to the future rather than the past, but the temporal requirement is satisfied if the orders have effect from the time of their making; it is permissible for the Court to make an order with future effect in respect of past matters or events (Australasian Memory , [2000] HCA 30, para 26; compare 29 ACSR 377 per Sheppard AJA, following the views of Dunford AJA in the MYT Engineering case - the view that s 447A permits orders having retrospective effect must now be taken to have been overruled by the High Court);
(10) since the subject matter with which the section deals is ‘a particular company ’ rather than a particular administration , the section is available even if there is no continuing administration or extant deed of company arrangement, unless following the administration the company has been wound up and dissolved ( Australasian Memory , [2000] HCA 30, paras 25-28);
(11) in some circumstances the section may be used to reinstate an administration that has been terminated; for example, in a case where the parties have assumed the validity of a deed of company arrangement or a resolution to wind up a company in voluntary administration, and have acted on that assumption, orders reinstating the administration under s 447A give ‘legal validity to the premise for the parties' conduct’ and ‘perfect the rights which the parties to the transaction intended to create’ ( Australasian Memory , [2000] HCA 30, paras 31 and 32); but the position may be different if the parties have assumed that the administration of the company has been returned to directors, and subsequently rights have been created (for example, by transfer of the property of the company or dealings in its shares) on that assumption ( Australasian Memory , [2000] HCA 30, paras 29-32);
(12) in the exercise of its discretion under the section, the Court must consider whether any interested party would suffer prejudice if an order were made ( Australasian Memory at 29 ACSR 381 per Sheppard AJA).


31 The cases before me do not involve failure to comply with a requirement of Part 5.3A that has come to be clearly applicable, or the resolution of a doubt about future compliance with Part 5.3A. The problem in the present cases is that the event which triggers the application of Part 5.3A, namely the appointment of an administrator pursuant to a resolution of the directors of the company, has not been validly authorised in accordance with s 436A. As a matter of first impression, it might appear arguable that the issue is not about how Part 5.3A is to operate, but rather whether anything has happened which validly makes Part 5.3A relevant at all. But the case law (especially propositions (2), (4), (6), (7), (9) and (11)) implies that there is no such limitation on the scope of s 447A.

32   In Australasian Memory , the High Court did not directly deal with whether s 447A may be used to overcome a deficiency in the appointment of an administrator. When considering whether the section may be used to affect vested rights, their Honours referred to cases where the parties have assumed the validity of a resolution to enter into a deed of company arrangement or winding up, but not the case where the parties have assumed the validity of a resolution to appoint an administrator. However, the High Court placed emphasis on the broad scope of s 447A upon its literal construction, as an integral part of Part 5.3A ([2000] HCA 30, paras 23 and 24). Moreover, the High Court appears to have envisaged that s 447A is available to permit a wider class of orders in the area in which s 447C permits the Court to declare whether an administrator has been validly appointed (para 19). Finally, their Honours showed a willingness to use the section in cases where, as here, the parties (the creditors, the administrator and the directors) have assumed the validity of a deed of company arrangement, and have acted accordingly (paras 30-32). I conclude that the High Court's judgment in Australasian Memory is consistent with the use of s 447A to overcome the consequences of a defective resolution to appoint an administrator.

33 If it is appropriate to use s 447A to cure a deficiency in the execution of a deed of company arrangement (as the Court of Appeal held in MYT Engineering ), it is also likely to be appropriate to use the section to cure a lack of quorum at the meeting where the board of directors purports to resolve that the company is insolvent and that an administrator should be appointed. In the present cases I do not have to consider whether s 447A could be used if there was no attempt at all to pass a resolution in compliance with s 436A (cf Wagner v International Health Promotions Pty Ltd (1994) 15 ACSR 419, where Santow J declined to apply s 1322 in such a case).

34 Having decided that s 447A is an available source of judicial power to overcome the deficiency in the resolutions of 25 March 1998, I turn to consider whether I should exercise my discretion under the section. I have decided to do so. It is relevant that the deficiency in quorum at the board meetings of 25 March 1998 arose out of the failure of the purported adoption of ‘single director’ articles of association, and that if the new articles had been validly adopted, the resolutions by Mr Nolasco as sole director of the companies would have been valid. Ms Zaharia resigned immediately after the purported adoption of the new articles. I infer that she could well have participated in the subsequent resolutions of the boards of directors if it had been thought necessary for her to remain on the boards, since it appears that she signed the instruments of appointment as a witness. Mr Nolasco could have regularised the internal management of the companies under the old articles of association by appointing another director, if it had been thought necessary, and had he done so, it is likely that subsequent resolutions for the appointment of an administrator would have been valid.

35   As to whether any person would be prejudiced by the order, Ms Panos was the only shareholder of Portinex other than Silindale, and the evidence is that she provided assistance and information to the administrator and was therefore well aware of the administration. Mr Phillips and Mr Nolasco were the shareholders of Silindale. As I have said, it appears that Mr Phillips was an ex-employee of one of the Nolasco companies. There is no evidence that Mr Phillips made any substantial equity investment in Silindale, or anything to suggest that he would suffer prejudice through the company entering into voluntary administration in insolvent circumstances.

36 The Deputy Commissioner is a creditor who claims to have been substantially prejudiced by Mr Star's administration and the making of the deeds of company arrangement. But his complaints do not, in my view, arise out of the deficiency of quorum at the board meetings on 25 March 1998. His complaints relate principally to alleged inadequacies in Mr Star's administration and alleged unfairness in the terms of the deeds of company arrangement. He would have remedies available to him, if he could make out his case on these matters, under ss 445D and 445G. My making of an order overcoming the deficiency of Mr Star's appointment would not prevent the Deputy Commissioner from seeking to obtain any such relief.

37   The Portinex and Silindale proceedings were commenced on 9 October 1998, over six months after the happening of the relevant meetings. The proceedings were commenced by summons rather than statement of claim, and it does not appear that any issue was raised at that time about deficiencies in Mr Star's appointment. There is in evidence a letter from the Deputy Commissioner to the defendants' solicitors dated 7 October 1998 requesting copies of the constitutions and minute books of the companies, from which I infer that at that stage the Deputy Commissioner was not aware of the deficiency in quorum.

38   The whole of Mr Star's actions as administrator were undertaken in the meantime on the assumption that he was validly appointed to that office in each of the two companies pursuant to resolutions of their boards on 25 March 1998. The consequent meetings of creditors and the preparation of Mr Star's reports have proceeded on that basis, and the deeds of company arrangement have been prepared and executed on that basis. This course of activity purports to affect the rights of the creditors of the company, as well as directors and shareholders, in significant ways. There would be a real risk of prejudice to creditors (including employees and Mr Turnbull as well as related party creditors), and to directors and shareholders, if the assumption of validity of the resolutions authorising the appointment of Mr Star as administrator were to be undermined at this stage.

39 I therefore conclude that it is appropriate for me to make orders under s 447A(1) to the effect that Part 5.3A is to operate in relation to Portinex and Silindale as if the resolutions of the boards of directors of those companies on 25 March 1998 were valid resolutions notwithstanding the absence of a quorum in each case.

Section 1322(2) - ‘automatic’ curing of procedural irregularities


40 Section 1322(2) states that a proceeding under the Corporations Law is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court, and by order declares the proceeding to be invalid. Section 1322(1) makes it clear that the ‘proceedings’ to which subsection (2) refers include the convening and conduct of meetings of directors, and that ‘procedural irregularities’ include the absence of a quorum at a meeting of directors.

41   The defendants submit that the essential defect in the meetings of 25 March 1998 was the absence of a quorum of directors, as required by the old articles of association of the two companies. The absence of a quorum is specifically mentioned in the section (and see also Sipad Holding ddpo v Popovic (1995) 18 ACSR 436). However, in my opinion the problem in the present case was not merely the absence of a quorum at the meetings of 25 March 1998. The problem was that the events of that day proceeded on the assumption that the companies had validly adopted new articles of association which permitted them to operate with a single director. Thus, what was done on that day was purportedly done under the wrong constitutional arrangements. In my opinion this is more than a mere absence of quorum or any other kind of procedural irregularity.

Section 1322(4) - the Court's general power to make curative orders


42 Sub-paragraph 1322(4)(a) empowers the Court to make an order declaring that a thing purporting to have been done in relation to a corporation is not invalid by reason of a contravention of a provision of the constitution of the corporation. But according to s 1322(6) the Court is not to make an order under that sub-paragraph unless it is satisfied that the matter is essentially of a procedural nature; that the persons concerned acted honestly; that it is in the public interest that the order be made; and that no substantial injustice has been or is likely to be caused. The Court's power to make an order under these provisions is available even in cases where s 447A is also available: Australasian Memory Pty Ltd v Brien [2000] HCA 30, para 33; see also the Court of Appeal, (1998) 29 ACSR 344. It appears from the High Court's judgment in that case that unlike s 447A, s 1322(4) may be used to make an order which validates past conduct, rather than declaring how a provision of the Corporations Law is to operate in future.

43 If I am satisfied of the matters referred to in s 1322(6), then I have the power under s 1322(4)(a) to make an order declaring that the resolutions purporting to have been passed at meetings of directors of the two companies on 25 March 1998 are not invalid by reason of any contravention of a provision of their constitutions.

44 For the reasons which I gave for deciding to exercise my discretion to make an order under s 447A, I believe it is in the public interest that curative orders should be made under s 1322(4) and that no substantial injustice has been or is likely to be caused by the making of such orders. The evidence provides no basis for suggesting that the persons concerned in the failure to comply with the articles of association of the two companies and s 436A did not act honestly, and I am satisfied that they did so. The only other matter of which s 1322(6) requires me to be satisfied is that the acts purporting to have been done (that is, the purported resolutions of the boards of the two companies on 25 March 1998) are ‘essentially of a procedural nature’.

45 Although, in my view, the defects in the resolutions are not ‘procedural irregularities’ for the purposes of s 1322(2), they may nevertheless be ‘essentially of a procedural nature’. There are many authorities on the meaning of this phrase. Some of them were discussed by Thomas J in Re Vanfox Pty Ltd (1994) 13 ACSR 209, 216ff; see also Jordan v Avram (1997) 141 FLR 275; Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38).

46   The facts of Wagner's case (cited above) have some similarity with the facts of the present cases. There the directors held a meeting by telephone in which they resolved to appoint a named person as administrator, but they did not purport to resolve that in their opinion the company was insolvent, as required by s 436A(1)(a). Santow J held that s 1322 could not be used to overcome that deficiency. He said (at 422):
‘Whatever be the scope of that remedial provision, including such scope as it might have to deem the relevant meeting of directors itself to have been valid were that necessary (and I conclude that not to be necessary), it cannot cure failure to comply with a mandatory requirement of s 436A(1) for a resolution. This was not a ‘procedural irregularity’ but one which went to the very underlying statutory basis for the appointment of an administrator. In that sense, what is sought to be cured by s 1322 of the Corporations Law is not an irregularity concerning the calling of a meeting or its procedures. Rather it is to fill a gap in what actually occurred at the meeting, namely failure to pass a resolution and this s 1322 cannot do.’

47 In the present cases the resolutions which Mr Nolasco purported to adopt addressed the matters which s 436A(1) required to be addressed. Section 1322 has been invoked to cure the lack of a quorum in the purported meetings of directors. It is not invoked to supply a step that no one has attempted to take. I therefore regard the Wagner case as distinguishable. Indeed, I note that Santow J expressly contemplated that s 1322 might be used to deem the relevant meeting of directors to have been valid, as is sought in the present cases.

48   Santow J returned to the issue in Deputy Commissioner of Taxation v ACN 001 330 203 Pty Ltd (in liq) [1999] NSWSC 798. In that case the company's constitution required two directors, but a single director purported to resolve to appoint an administrator. There had been no attempt to adopt ‘single director’ articles. Santow J observed that the purported resolution of the board to appoint the administrator was a nullity, ‘since such an appointment required a resolution of the board and there was no properly constituted board’. As to the making of a curative order, he said (at paragraph 9) that s 1322(4) could not be applied in the circumstances before him. He continued:
‘This is primarily as a matter of jurisdictional reach but in any event as a matter of discretion. Thus even if the section were otherwise capable of application, a remedial order would have a prejudicial effect on creditors seeking to set aside earlier insolvent transactions and thus could not be made. The same reasoning applies mutatis mutandis to any application of s 447A of the Corporations Law.’

49 The application before his Honour was for declaratory relief to clarify the relation-back period, and was an uncontested ex parte application. His Honour gave no reasons for his opinion that the jurisdictional reach of s 1322(4) did not extend to the case before him. In any event, his Honour's decision is clearly distinguishable, since in that case there was no attempt to adopt ‘single director’ articles, whereas in the present cases there was.

50 As to discretionary matters, his Honour was influenced, in the facts of the case before him, by the prejudicial effect which a remedial order would have on creditors seeking to set aside earlier insolvent transactions. In the present cases there is an element of prejudice to the Deputy Commissioner, but in considering whether ‘substantial injustice’ has been or will be caused to him (s 1322(6)(c)) I am entitled to take into account other matters which do not appear to have been present in the case considered by Santow J. Those are the discretionary matters to which I referred when considering s 447A.

51   Indeed, Santow J has subsequently decided that an element of prejudice caused to a creditor by the making of a remedial order (in the case before him, the prejudice of having to face a claim for recovery of an unfair preference) may be outweighed by the substantial injustice that would be suffered by other creditors if no remedial order were made: Sydney Appliances Pty Ltd (in liq) v Robert Bosch (Australia) Pty Ltd (2000) 33 ACSR 680. In that case the constitution of the company was validly amended to adopt ‘single director’ provisions, but the new constitution required that the number of directors be not fewer than two unless the company in general meeting resolved otherwise. His Honour found that the sole shareholder's informal assent to a single director satisfied this requirement, and therefore the single director's decision to appoint an administrator was effective. However, Santow J indicated that if it had been necessary to do so, he would have cured the lack of quorum of the board meeting which resolved to appoint the administrator by making remedial orders under s 447A or s 1322(4).

52   In the MYT Engineering case, Bryson J at first instance ((1996) 20 ACSR 606) declined to apply s 1322. The claim under s 1322 was not pressed before the Court of Appeal (see 25 ACSR at 99) or the High Court (30 ACSR 705), and so his Honour's observations stand as authority on that point. Bryson J observed (at 611) that ‘the lack of effect of the purported deed is not produced by a procedural irregularity, there was a substantial failure to decide to execute the deed and to execute it, and not a mere irregularity in following the procedures required’.

53   Nevertheless, I have concluded that the defective resolutions purportedly adopted at the board meetings of 25 March 1998 are acts or matters which are essentially of a procedural nature. The word ‘procedural’, in contrast with the word ‘irregularity’, does not connote triviality - voluntary administration, like liquidation, is a procedure although it has profound legal consequences. The lack of a quorum for the resolutions was not only a procedural irregularity - it arose out of misapprehension about the efficacy of the new ‘single director’ articles, and was therefore related to the substantive failure of the companies to convene meetings of their members. But the resolutions themselves were of a procedural nature, because they were designed to authorise the taking of a procedural step, namely the appointment of an administrator. In contrast, the act or matter to which Bryson J's remarks in the MYT Engineering case were directed, was the purported execution of a deed of company arrangement by a single director contrary to the constitution of the company. The execution of a deed binding the company, its creditors and others is not a step of a procedural nature even though it brings the company within the deed of company arrangement procedure.

54 It is therefore open to me to make orders under s 1322(4)(a), declaring that the resolutions purporting to have been adopted by the boards of Portinex and Silindale on 25 March 1998 under s 436A of the Corporations Law are not invalid by reason of any contravention of any provision of the constitutions of the respective companies. I am persuaded, in the exercise my discretion, that it is appropriate to make those orders, for the reasons which have also persuaded me to make orders under s 447A.

55 That being so, it is necessary to consider the Deputy Commissioner's challenges to the deed of company arrangement under ss 600A, 445D and 445G. But before doing so, I need to consider a factual question which bears on those matters, namely whether Mr Turnbull was a creditor entitled to vote at the meetings of the creditors of Portinex and Silindale.

Was Mr Turnbull a creditor of Portinex and Silindale?


56   Turnbull and Turnbull were the external accountants for the Nolasco family of companies. Peter Turnbull, a partner in the firm, did the work. The firm claimed to be creditors of Portinex, Silindale and Dalvale, and purported to participate in creditors' meetings of the three companies.

57   Thus, Peter Turnbull attended the meeting of creditors of Portinex held on 28 April 1998 as representative of the firm, which claimed to be owed $6000. At the meeting of creditors of Portinex convened for 26 June 1998 and adjourned to 29 June 1998, Mr Turnbull held his firm's proxy in respect of a debt then claimed to be $5000. The records for the meeting of creditors of Silindale convened for 26 June 1998 and adjourned to 29 June 1998 indicate that Mr Turnbull purported to attend both (personally or by telephone) as the representative of his firm, and as its proxy holder, in respect of an alleged debt of $5000. At the meeting of creditors of Dalvale on 24 July 1998 Mr Turnbull is recorded as holding his firm's proxy for an alleged debt of $10,000, and at the subsequent meeting of creditors of Dalvale convened for 14 August 1998 and adjourned to 9 October 1998, his firm appointed the chairman to be its proxyholder in respect of an alleged debt of $10,649.

58   This evidence implies that Turnbull and Turnbull was a creditor of each of the three companies. However, the Deputy Commissioner draws attention to some invoices rendered by the firm during 1997 and 1998. The invoices show that as a general rule, the firm directed its accounts to A Nolasco Pty Ltd, rendering accounts to Portinex, Silindale and Dalvale only in respect of work specifically done for those companies, such as the preparation of their respective annual returns and associated minutes of meetings. An invoice (No 1461) was rendered to Silindale on 27 March 1998 for the preparation of management reports ‘for the purpose of John Star’ and also for the preparation of a taxation return. A similar invoice (No 1462) was rendered to Portinex on the same date, both invoices being for $2500. On 27 April 1998 an invoice (No 1516) was rendered to Mr Nolasco at A Nolasco Pty Ltd for preparation of the 1997 financial statements for that company as well as Portinex, Silindale and Dalvale, and for attending to various matters in relation to the appointment of an administrator, and also for other work. The amount of the invoice was $12,951, less a sum of $5000 already paid, leaving a balance due of $7,951.

59   Mr Turnbull gave evidence to the effect that accounts for fees were raised by reference to time sheets entered into a work in progress ledger, and also by reference to diary notes. The work in progress ledger shows that between 1 February 1998 and 6 April 1998 there were entries totaling $10,147.20. The Deputy Commissioner submits that the discrepancy between the work in progress ledger and invoice No 1516 shows that the amount stated in the invoice was not the correct amount outstanding; and further, that the $5000, shown as having been paid, must have been payment of the amounts outstanding to Portinex and Silindale as per their invoices numbered 1461 and 1462. Putting these propositions together, the Deputy Commissioner submits that Turnbull and Turnbull was not a creditor entitled to vote at the creditors' meetings of Portinex, Silindale and Dalvale.

60   I cannot reach this conclusion, on the evidence before me. The evidence shows that the firm was a creditor from time to time in respect of professional services rendered by Mr Turnbull to companies in the Nolasco family of companies. There is no basis for any inference that the accounts rendered by the firm were excessive or did not relate to work actually done. The evidence does not demonstrate that the firm was a creditor in the exact amounts set out in the records of the meetings, but it is consistent with the firm being a creditor for approximately those amounts. Specifically, the evidence does not demonstrate that the payment of $5000 recorded in invoice No 1516 meant that the firm was not a creditor of Portinex or Silindale in April or June 1998. Indeed, the evidence of Mr Turnbull was that the invoices numbered 1461 and 1462 have not been paid, the payment of $5000 was a payment on account which was not attributable to those invoices, and that the figures he entered in the records of the meeting were estimates of current outstanding fees not confined to the amounts of the two invoices. I accept Mr Turnbull's evidence.

Are the applications to terminate the deeds defeated by delay?

61 The defendants contend that the proceedings against Portinex and Silindale should be dismissed on the simple ground that there has been inordinate and unjustified delay on the part of the Deputy Commissioner. They say it is unnecessary for the Court to consider any other aspects of Mr Star's conduct, or the scope and application of ss 600A, 445D or 445G. They refer to observations by Young J in Khoury v Zambena Pty Ltd (1997) 23 ACSR 344, a case where there was a delay of 13 months between the making of the deed and the commencement of proceedings. His Honour said (at 353):
‘In these cases, people's positions can be affected by activity under a deed in much less than one month, let alone 13 months. There must be a point in time when the company and its creditors can consider that as there has been no challenge filed, the deed is to be the final wash-up of the commercial relations. As I have said, in the Lam Soon case [ Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 22 ACSR 169] even a month was thought to be too long a time. A month appears to be about the maximum time for entertaining such an application.’

62 An appeal from Young J's judgment was dismissed: [1999] NSWCA 402. Fitzgerald JA and Davies AJA delivered separate judgments agreeing that the appeal should be dismissed, though for different reasons. Beazley JA dissented, disagreeing on the question of the effect of delay.

63   Davies AJA noted that, by the time the case came before the Court of Appeal for decision, four years had passed since the execution of the deed. He considered whether anything of real substance would be gained by requiring the administration process to commence again. On the facts before him, a fair deed of company arrangement would not be likely to benefit the appellants financially, but would simply extinguish the debts due to related creditors along with the appellants' debts. While there would be merit in demonstrating that deeds of company arrangement which are not procedurally and substantially fair are liable to be set aside, he decided that in the circumstances of the case, the best course was to give the company a chance of continuing in business, by dismissing the appeal.

64   Fitzgerald JA was influenced by the appellants' delay to conclude that there was no justification for interfering with Young J's exercise of his discretion. His Honour was not influenced by mere delay, but by the fact that the delay was unexplained and would lead to potential adverse consequences, particularly for new trade creditors and employees. Beazley JA, dissenting, took the view that there were serious deficiencies in the deed of company arrangement that was before the Court, of such magnitude that the appellants should not be defeated by their delay in commencing proceedings.

65 In light of the Court of Appeal's judgment, the ‘rule of thumb’ of one month stated by Young J is no longer a part of the law. Nevertheless delay is a matter to be taken into account in the exercise of the Court's discretions under ss 445D, 445G and 600A. The weight to be placed upon delay will depend upon whether the delay is lengthy, whether it is unexplained, and most importantly, whether the delay has led to the consequence that if an order terminating or setting aside the deed were made, adverse consequences would be suffered by third parties such as creditors and employees.

66   There are other less specific judicial observations to the effect that delay in commencing proceedings to set aside a deed of company arrangement is a weighty factor against granting that relief: for example, M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (1995) 19 ACSR 27 (McLelland CJ in Eq); Wood v Laser Holdings Ltd (1996) 19 ACSR 245 (Hansen J); Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR 160, 171 (Branson J) (reversed on appeal, 22 ACSR 169, though not on this point); Re Carey Builders Pty Ltd (1997) 23 ACSR 754, 777 (White J).

67   Before dealing with the defendants' submission, it is necessary that I explain the facts relevant to the question of delay. The Deputy Commissioner's claims against Portinex and Silindale relate to unpaid group tax and penalties for the years ended 30 June 1996 and 30 June 1997. A statutory demand for $139,586.22 was served on Silindale on 8 August 1997, and a statutory demand for $108,777.54 was served on Portinex on 9 October 1997. In each case an application was made to set aside the statutory demand, and in each case the application was dismissed on 11 December 1997.

68   On 10 March 1998 an application to wind up each company was filed in this Court, with initial return dates of 30 April 1998. The companies went into administration on 25 March 1998, as I have said. The winding up summonses were adjourned until after the second meetings of creditors of the two companies were held on 29 June 1998. At those meetings the creditors approved deeds of company arrangement. On 2 July 1998 the proceedings were again adjourned to 18 August 1998.

69   The deeds of company arrangement for Portinex and Silindale were similar. Each deed provided for the establishment of a deed fund. A Nolasco Pty Ltd and A Nolasco Building Pty Ltd (the ‘Contributors’) were obliged to make an immediate payment of $15,000, and two further payments at later times representing five cents in the dollar of creditors' claims plus the administrator's remuneration and expenses, subject to a cap of $34,000 for each payment in the case of Portinex and $28,000 for each payment in the case of Silindale. The later payments were to increase according to a formula, if A Nolasco Pty Ltd succeeded in recovering a debt which was the subject of litigation, and they were also to increase if the net proceeds of sale of a property by A Nolasco Pty Ltd were to exceed a stated threshold.

70   The deed fund was in each case to be distributed to creditors (but not related party creditors) according to stated priorities. Employee creditors had priority over other creditors, but at least in some cases employees of the two companies received payment of statutory entitlements from A Nolasco Pty Ltd.

71   The payment obligations of the Contributors were guaranteed by Mr Nolasco, and in the case of each company there was a Related Party Deed by which the same Contributors covenanted to make the payments provided for in the deeds of company arrangement and Mr Nolasco guaranteed their obligations.

72   The deeds contained the usual provisions providing for the extinguishment of the claims of creditors once distributions had been made.

73   On 27 July 1998 there was a meeting between officers of the Deputy Commissioner and Mr Star. Mr Star informed the officers that he had executed the deeds of company arrangement. He handed them a letter which enclosed tax remittance advices for Portinex, Silindale, A Nolasco Pty Ltd and A Nolasco Building Pty Ltd. He also handed over cheques for outstanding taxes for A Nolasco Pty Ltd and A Nolasco Building Pty Ltd, for approximately $160,000. He told them that the payments were made on the understanding that if the relevant company was wound up, they would constitute clear preferences which would be repayable to the liquidator.

74   When the winding up proceedings returned to Court on 18 August 1998, Mr Star applied unsuccessfully for the summonses to be dismissed. Counsel for the Deputy Commissioner foreshadowed an application to set aside the deeds of company arrangement, and a direction was made that the Deputy Commissioner file and serve any affidavits on which he relied by 24 August 1998. The Deputy Commissioner's evidence is that he was not able to file affidavits by that date. The winding up summonses were dismissed on 27 August 1998. As I have said, the present proceedings were commenced on 9 October 1998 in both cases. The Deputy Commissioner has not explained why he was not able to file affidavits by 24 August 1998, or why there was a further delay of about six weeks before the commencement of the present proceedings.

75   The defendants say that the Deputy Commissioner's delay in commencing proceedings to set aside the deeds of company arrangement - 102 days between the date of approval of the deeds and the date of filing of the summonses - has caused substantial prejudice. If the Deputy Commissioner's applications were successful in bringing the deeds of company arrangement to an end, Portinex and Silindale would have gone into insolvent liquidation. The defendants submit that this would have brought down the Nolasco companies because the inter-company indebtedness meant that each company in the corporate family depended upon the others for their survival. If the applications had been made promptly after the deeds were executed, they would have been heard within six months of 27 July 1998, the date upon which the Nolasco companies made apparently preferential payments to the Deputy Commissioner totaling approximately $160,000. In that event the liquidator of the two Nolasco companies (in liquidation by that stage because of the ‘chain reaction’ produced by termination of the Portinex and Silindale deeds) would have had reasonable prospects of recovering the alleged preferential payments of $160,000 from the Deputy Commissioner. But the Deputy Commissioner's delay has destroyed that prospect, according to the defendants.

76   Additionally, the defendants draw attention to the slow progress of the Deputy Commissioner's winding up applications, and the fact that the present applications were foreshadowed at the hearing on 24 August 1998 but were not made until 9 October 1998. There is no explanation for this delay.

77   I have decided that the Deputy Commissioner's applications to set aside or terminate the deeds of company arrangement should fail, having regard to a number of factors. I do not rely exclusively on any single factor. However, I regard the Deputy Commissioner's delay as a significant factor weighing against the applications, for the reasons advanced by the defendants. I accept the submission that as a practical matter, the financial fortunes of the Nolasco family of companies were tied together by inter-corporate indebtedness, so that if the Deputy Commissioner had succeeded and consequently Portinex and Silindale went into liquidation, the liquidation of A Nolasco Pty Ltd and A Nolasco Building Pty Ltd would be likely to follow; and I also accept that the liquidator of the latter two companies would be likely to pursue the Deputy Commissioner to recover the payments of $160,000 as unfair preferences. I cannot reach any firm conclusion as to the prospects of such a claim, but at least it appears to be a plausible one on the evidence before me. Therefore the delay in commencement of the proceedings, not adequately explained, created a risk of prejudice which would not have arisen if the applications had been more timely.

78 Since, in my view, the Deputy Commissioner's delay is not conclusive against him, though it is a factor weighing against him, I must turn to consider the Deputy Commissioner's claims for relief under s 600A or orders terminating or setting aside the deeds of company arrangement under ss 445D or 445G.

Should the deeds be terminated under section 600A?


79   By virtue of Regulation 5.6.11(2), voting at a meeting of creditors to approve a deed of company arrangement is governed by Regulation 5.6.19 of the Corporations Regulations. The regulation provides that a resolution put to the vote at a meeting of creditors must be decided on the voices unless a poll is demanded. Where a poll is demanded, the resolution is carried if a majority of the creditors who vote on the resolution vote in favour of it, and the value of their debts is more than half of the total debts owing to all creditors who vote: Regulation 5.6.21.

80   In the case of Portinex, the creditors considered the proposed deed of company arrangement at their meeting on 29 June 1998. The meeting was attended by Mr Nolasco who represented A Nolasco Building Pty Ltd and Dalvale (creditors for $20,204 and $376,251 respectively), Mr Turnbull by telephone (a creditor for $5000), Mr Star as the administrator of the company and also the representative of Silindale (creditor for $28,295) and Ms Kuzmanovski representing the Australian Taxation Office (a creditor for $165,319.94). The motion that Portinex enter into a deed of company arrangement was carried on a poll, all creditors other than Silindale voting. Ms Kuzmanovski voted against the motion, while the others voted for it.

81   In the case of Silindale, the creditors considered the proposed deed of company arrangement at a meeting also held on 29 June 1998. The meeting was attended by Mr Nolasco who represented A Nolasco Pty Ltd (a creditor for $237,191), Mr Turnbull by telephone (a creditor for $5000), Mr Star as administrator of the company and Ms Kuzmanovski representing the Australian Taxation Office (a creditor for $196,665.72). It appears that a poll was taken, upon which all creditors voted. The motion was carried, Ms Kuzmanovski voting against it and all other creditors voting for it.

82   In the case of Dalvale, the creditors considered the proposed deed of company arrangement at a meeting held on 9 October 1998. The meeting was attended by Mr Nolasco who held proxies from Silindale (a creditor for $264,866) and A Nolasco Pty Ltd (a creditor for $201,404) and Ms Kuzmanovski representing the Australian Taxation Office (a creditor for $168,612.88). Mr Star was the chairman of the meeting and held proxies from Turnbull and Turnbull (a creditor for $10,649) and Premium Packaging (a creditor for $264.63). The motion for entry into the deed of company arrangement was carried, the creditors other than the Australian Taxation Office voting for the motion (although it is not clear whether Mr Star exercised the proxy from Premium Packaging) and Ms Kuzmanovski voting against it.

83 Section 600A allows the Court to set aside a resolution of creditors, or make other orders, where the resolution has been procured by the exercise of votes by related creditors. The Deputy Commissioner has standing to make an application under the section, because he is a creditor of each of the three companies. The Court may make orders if it is satisfied of the matters set out in s 600A(1)(a), (b) and (c). The defendants concede that subparagraphs (a) and (b) are satisfied in the three cases before me. In each case, the resolution to approve the deed of company arrangement was voted on at a meeting of creditors under Part 5.3A, and if the votes cast by particular related creditors of the company had been disregarded, the resolution would not have been passed unless the chairman exercised a casting vote and no poll was demanded. The question is whether I should be satisfied that the necessary ingredients of subparagraph (c) are present.

84   Subparagraph 600A(1)(c), as far as it is relevant, requires the Court to be satisfied:
‘that the passing of the proposed resolution … :
(i) is contrary to the interests of the creditors as a whole … ; or
(ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution … to an extent that is unreasonable having regard to:
(A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution … ; and
(B) the nature of the relationship between the related creditor and the company … , or the respective relationships between the related creditors and the company … ; and
(C) any other relevant matter.’

85 ‘Related creditor’ is defined in s 600A(3), which refers to the definition of ‘related entity’ in s 9. The latter definition has the effect that Mr Nolasco, being a director of each company, was a related entity of those companies, and since he was also a director of A Nolasco Pty Ltd and A Nolasco Building Pty Ltd, the latter two companies were also related entities of Portinex, Silindale and Dalvale. The related entities who voted as creditors at the meetings to approve the deeds were ‘related creditors’ for the purposes of s 600A.

86 It appears that s 600A(1)(c)(i) directs attention to the interests of the company's creditors as a whole, rather than the interests of a class of creditors such as the dissenting creditors: Khoury v ZambenaPty Ltd [1999] NSWCA 402, para 57 per Fitzgerald JA. As to the ‘unreasonable prejudice’ ground (s 600A(1)(c)(ii)), the mere fact that the deed treats a group of creditors differently from other creditors is not sufficient to attract the sub-paragraph, since it is open to the creditors to agree on something other than equality of treatment, provided that they act in good faith towards each other and make no secret bargains: Khoury v Zambena Pty Ltd [1999] NSWCA 402, per Davies AJA at para 106, citing the bankruptcy case, Re Jacobs; ex parte O'Connor (1984) 1 FCR 1, at 7; compare similar remarks by Young J in Khoury's case at first instance: (1997) 23 ACSR 344.

87   In Khoury's case, apparently different approaches were taken by Fitzgerald JA and Davies AJA regarding the correct approach to ‘unreasonable prejudice’ under s 600A(1)(c)(ii). At first instance Young J had compared the position of the dissenting creditors under the deed with their position if the deed had not been approved and consequently the company had gone into liquidation. Young J had concluded that the position of the dissenting creditors under the deed and under a liquidation would not be materially different, and in fact they may have obtained more under the deed than in a liquidation.

88 Davies AJA, with whom Beazley JA agreed on this point, disagreed with Young J's approach. In his Honour's view the creditors were not limited in their options to either approving the deed put forward or voting for liquidation ([1999] NSWCA 402, at para 109). They might have insisted that the proposed deed be amended so as to remove the unreasonable prejudice. Fitzgerald JA took a different approach. In his view, what must be considered under s 600A(1)(c)(ii) is whether the creditors who voted against the resolution were prejudiced by it - that is, would have been better off if it had not been passed ([1999) NSWCA 402, at para 60). He said (at para 61):
‘It is not permissible, in my opinion, to compare the appellants' position under the deed of company arrangement which was executed with some conjectural position which would have ensued if some different, fairer deed of company arrangement which was never proposed had been executed’.

89 It may be that the difference of approach has more to do with different perceptions of the facts of the case than divergent legal principles. Davies AJA evidently regarded it as feasible for the creditors in the case before him to reject the proposed deed and insist upon amendments, whilst avoiding liquidation. In many cases the third choice will not be available, as a practical matter. In such cases, the question of ‘unreasonable prejudice’ seems to boil down to whether the creditors are better off with the proposed deed or liquidation, as there is no other alternative on the facts. Such an approach would be consistent with other cases dealing with the application of s 600A: see Network Exchange Pty Ltd v Mig International Communications Pty Ltd (1994) 13 ACSR 544; Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687; M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (1995) 19 ACSR 27; Wood v Laser Holdings Ltd (1996) 19 ACSR 245; Konica Australia Pty Ltd v Aprolab Flashpoint (Australia) Pty Ltd [1999] VSC 257.

90 In my view it was not feasible for the Deputy Commissioner in the present cases to negotiate a different kind of deed proposal from the one placed before creditors, and it is appropriate, therefore, to compare his position under the deed with his position on a winding up. It is clear on the evidence that the Deputy Commissioner is better off under the deed, receiving a small distribution as well as payment of tax by A Nolasco Pty Ltd and A Nolasco Building Pty Ltd, than in a liquidation which would be likely to lead to the liquidation of other companies and the potential recovery of those tax payments as preferences. But I do not base my decision on s 600A on this ground alone.

91   I am not satisfied, on the evidence, that the ingredients of subparagraph (c) have been satisfied in any of the three cases. The deeds of company arrangement were intended to keep the two principal operating companies (A Nolasco Pty Ltd and the A Nolasco Building Pty Ltd) afloat, offering creditors some distributions that would be better than they would receive in winding up, with the prospect of more if A Nolasco Pty limited succeeded in its litigation or sold its property for more than a threshold amount. These obligations were supported by Mr Nolasco's guarantee.

92   The Deputy Commissioner lost the potential benefit of any recoveries which a liquidator might make from Mr Nolasco for insolvent trading, and from other related creditors for voidable transactions. However, given the cost of proceedings for recovery and the evidence suggesting that the Deputy Commissioner would be reluctant to fund proceedings, it is not only uncertain that proceedings would be successful, but doubtful that they could be taken at all.

93   It is true that the obligation of an employer to remit group tax that has been deducted from wages, and the obligation of a building contractor to remit amounts deducted from payments to sub-contractors under the prescribed payments system, are serious obligations that have some general similarity with the obligations of a trustee: Cullen v Corporate Affairs Commission(NSW) (1988) 14 ACLR 789, 795; Didovich v Australian Securities and Investments Commission (1998) 29 ACSR 122 . But the nature of the debts does not outweigh the other considerations that lead me to conclude that the deeds of company arrangement were not unfair to any of the creditors including the Deputy Commissioner.

94   There is another consideration. As I explained earlier, the Deputy Commissioner received payments totalling approximately $160,000 from A Nolasco Pty Ltd and A Nolasco Building Pty Ltd for arrears of tax shortly after the deeds of company arrangement for Portinex and Silindale were executed. The evidence indicates that Mr Star negotiated with the Deputy Commissioner that these amounts would be paid in conjunction with the making of the deeds of company arrangement. I therefore regard the payments as part of the package of benefits that the Deputy Commissioner received in connection with the deeds. The Deputy Commissioner denies that the payments were benefits, since the paying companies and their public officer and directors had statutory ‘trust-like’ obligations to pay in any event. However, in my opinion the Deputy Commissioner received a benefit in that the deeds of company arrangement forestalled the liquidation of Portinex and Silindale, and therefore (as I have held) also forestalled the collapse of the family of companies. That, in turn, forestalled the appointment of liquidators to A Nolasco Pty Ltd and A Nolasco Building Pty Ltd, and any recovery actions against the Deputy Commissioner by those liquidators.

95 My conclusion, therefore, is that these are not appropriate cases for relief under s 600A. I shall next consider whether the deeds should be terminated or set aside under s 445D or 445G.


The scope of s 445D(1)(a), (f) and (g) and s 445G

Section 445D

96 Section 445D authorises the Court to make an order terminating a deed of company arrangement on several grounds, three of which are:
‘(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
(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.’

97 In recommending the adoption of the voluntary administration provisions which became Part 5.3A of the Corporations Law, the Harmer Committee (Law Reform Commission Report No 45, General Insolvency Inquiry (AGPS, 1988), Volume 1, paragraph 123) observed that the bases for termination of a deed (other than non-compliance with the legislation) could be divided into three types. First, there were ‘factors which go to the heart of the effective operation of the legislation’, such as where there has been a contravention of the deed, or the arrangements under it cannot be carried out without injustice or undue delay. These factors are not in issue in the present case.

98 Secondly, there were ‘factors which reflect public policy criteria developed by the courts for invalidation of schemes of arrangement’, such as false or misleading information given to the administrator or creditors which was material to the acceptance of the proposal, or an omission of a material particular. These factors became s 445D(1)(a), (b) and (c), the first of which is invoked by the Deputy Commissioner.

99   The third category was ‘a general provision for termination of the deed 'for some other sufficient reason'‘. The Harmer Committee remarked:
‘This will enable the court to draw on the case law which has been developed in respect of our schemes of arrangement. Examples of public policy reasons which may lead a court to avoid or to terminate the deed and which have been cited in cases concerning schemes of arrangement are

· the proposal has a fraudulent or wrongful purpose
· the terms of an arrangement do not comply with the companies legislation generally ...
· the deed contemplates that the company would, after the arrangement set out in the deed has been carried out, continue commerce in an insolvent financial condition’.

100 The Deputy Commissioner seeks to rely on the ‘some other reason’ criterion (s 445D(1)(g)). He also seeks to rely on sub-paragraph (f) (the ‘oppression’ ground), as well as sub-paragraph (a) (the ‘false and misleading’ ground). Sub-paragraph (f) was not part of the Harmer Committee's recommendations. The Explanatory Memorandum to the Corporate Law Reform Bill 1992 (which introduced the voluntary administration provisions) does not explain why it was thought necessary to add subparagraph (f) to the grounds for intervention which the Committee recommended, though it indicates that sub-paragraph (f) may be satisfied where, for example, ‘a particular 'class' of creditors has been oppressed or unfairly prejudiced by the decision of the majority of creditors’. Sub-paragraph (f) is obviously similar to the grounds for relief under the oppression provisions of the Corporations Law, which are now found in Part 2F.1. Presumably the case law in that field may be of assistance, if one bears in mind that in the present context the oppression may be of creditors by other creditors rather than of members by directors or other members. The typical circumstances of oppression or unfair prejudice in the present context were described by Young J in Sydney Land Corp Pty Ltd v Kalon Pty Ltd(No.2) (1997) 26 ACSR 427, 430; on appeal (1998) 26 ACSR 593.

101   Unfair prejudice or unfair discrimination may be present, for the purposes of sub-paragraph (f), if the administrator's investigations of a company's affairs fall short of the degree of care the creditor is entitled to expect ( Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707), or if the deed alters contractual rights which a creditor enjoys in some other capacity ( Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR 160).

102   Sub-paragraph (f) does not apply unless the prejudice or discrimination is ‘unfair’. It is not necessarily unfairly discriminatory that the deed treats a secured creditor in the same way as other creditors ( Hamilton v National Australia Bank limited (1996) 19 ACSR 647, 674). However, the mere fact that dissatisfied creditors receive some benefit under the deed does not prevent the court from concluding that the deed is unfairly prejudicial to them, for ‘the Court should not encourage the notion that ‘anything goes’ provided only that a deed of company arrangement provides some benefit for dissatisfied creditors’: Khouryv Zambena Pty Ltd [1999] NSWCA 402, para 80 per Fitzgerald JA.

103   The Court of Appeal considered the question of unfair prejudice in Khoury's case, along with the similar question arising under s 600A(1)(c)(ii) (namely whether the resolution to approve a deed of company arrangement has prejudiced the interests of creditors who voted against it, to an extent that is unreasonable having regard to stated factors). The statutory provision about ‘unfair prejudice’ in s 445D(1)(f) is not identical with the provision about ‘unreasonable prejudice’ in s 600A(1)(c)(ii). For one thing, the former provision looks to the prejudicial effect of the deed or a provision of it, or an act or omission under the deed, while the latter concentrates on the passing of a resolution, or the failure to pass it. Another difference is that the former provision extends to oppressive or unfairly discriminatory conduct, while the latter speaks only of prejudice, but requires the Court to have regard to stated matters. Finally, the former provision extends to prejudice to one or more of the creditors, while the latter requires the prejudice to relate to the interests of the creditors who voted against (or for) the resolution.

104 Given these differences, it is not clear that the observations about s 600A(1)(c)(ii) in Khoury's case are automatically applicable to s 445D(1)(f). Specifically, it appears more difficult to read s 445D(1)(f) as limited to comparing prejudice under the deed with prejudice in a winding up (cf Khoury's case [1999] NSWCA 402 at paras 60-61, per Fitzgerald JA), since the inquiry extends to all conduct pursuant to the deed affecting any one or more of the creditors. The issue seems to be whether one or more creditors has been unfairly prejudiced by the conduct, compared with the position they would have been likely to occupy if the conduct had not occurred. The latter position may have been that of creditors in a winding up, but it may be reasonable to conclude on the facts that some other outcome would have been reached (cf Khoury's case at para 109 per Davies AJA).

105 Several cases have stressed that s 445D gives the Court a wide discretion, to be exercised having regard to the interests of the creditors as a whole and to the public interest: Emanuele v ASC (1995) 19 ACSR 1 (an appeal to the High Court on another point was dismissed, (1997) 188 CLR 114); Khoury v Zambena Pty Ltd [1999] NSWCA 402, paras 67-68 per Fitzgerald JA. In Emanuele's case the Court drew an analogy between its powers under s 445D and 445G and the power of the Court to refuse a stay of a winding up order, citing dicta to the effect that the Court has a duty to have regard to commercial morality as well as the interests of the public at large. Relevant considerations include the overall policy of the law, that insolvent companies should not continue to trade unless it is appropriate for them to be made the subject of an arrangement ( Deputy Commissioner of Taxation v Comcorp Australia Ltd (1996) 21 ACSR 590, 597 per Sheppard J (dissenting, but not on this point)). Relevant considerations also include the need for the administrator to be independent and objective, both as between the directors and creditors and as between the creditors inter se, in preparing his or her report to creditors and in making recommendations to them ( Molit's case at 174; M & S Butler Investments Pty Ltd v Granny May's Franchising Pty Ltd (1997) 24 ACSR 695).

Section 445G


106 The Harmer Committee recommended that the Court be empowered to declare that a deed, or a provision of a deed, is void if there is a doubt on a specific ground as to compliance with the legislation containing the administration procedure (paragraph 122). Section 445G substantially follows the Harmer Committee's recommendation. An example of a possible contravention, according to the Explanatory Memorandum to the Corporate Law Reform Bill 1992, is failure to notify creditors of the meeting of creditors which has resolved to enter into the deed of company arrangement.

107 As with s 445D, s 445G(2) gives the Court a wide discretion, to be exercised in the interests of creditors as a whole and in the public interest: see Emanuele's case and Khoury v Zambena, cited above. Although it is common for the applicant to invoke both sections, the wording of s 445G makes it particularly appropriate where the complaint relates to a serious contravention of Part 5.3A. Section 445D is available, on the other hand, where there is no allegation of a contravention of Part 5.3A and the complaint is centered on unfairness rather than breach of the law.

108 Section 445G(2) is available where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with Part 5.3A or complies with that Part. The Court's power under s 445G(2) is to make an order declaring the deed, or a provision of it, to be void or not void. There is an issue, noted by Kirby J in his dissenting judgment in MYT Engineering Pty Ltd v Mulcon Pty Ltd , as to whether the section empowers the Court to make an order avoiding or setting aside a provision of the deed, or merely empowers it to declare that the provision is or is not void by the operation of Part 5.3A. In Khoury's case ([1999] NSWCA 402, paras 65-66), Fitzgerald JA preferred the latter, broader approach.

Are there sufficient grounds for terminating the deeds under section 445D or section 445G?


109 The Deputy Commissioner submits that Mr Star's conduct of the administration of the three companies falls far short of what might fairly be expected, for various reasons. He says that the deficiencies supply the grounds for judicial intervention under s 445D(1)(a), (f) and (g), and s 445G(2).

110 First, he complains that Mr Star did not conduct any proper investigation of the affairs of each company, and failed to verify materials supplied to him. He submits that Mr Star's assessments, expressed in his s 439A reports for the three companies, were predicated on an assumption that the financial information supplied by Mr Turnbull was accurate. In turn, Mr Turnbull obtained his information from Mr Nolasco. The Deputy Commissioner says that neither Mr Star nor Mr Turnbull adequately investigated or verified the information supplied.

111   The administration of the companies was handled by Mr Malanos, a manager employed by and reporting to Mr Star. Mr Malanos gave evidence that he relied on the books and records of the company and the information provided by the director and Mr Turnbull, the external accountant. However, both he and Mr Turnbull gave evidence to the effect that if there were any apparent discrepancies in the information supplied, they would make further inquiries. Mr Malanos said he ensured that inter-company loan accounts balanced. The report as to affairs and the last balance sheet in each case were reconciled in the form of deficiency statements appearing in each of the reports to creditors. He reviewed the director's questionnaire and the source documents and correspondence to which he had access. He attempted to investigate the extent of employees' debts, although employees were ‘transferred’ to other Nolasco companies and were not bound by the deed.

112   In summary, there was a degree of critical review of the information supplied by Mr Nolasco, both on the part of Mr Turnbull and Mr Malanos, though in each case the review was very limited. Mr Turnbull made it clear that in order to obtain reliable figures it would have been necessary for him to do a full audit, and plainly he had not done so.

113   The financial statements reproduced in the reports to creditors were prepared by Mr Turnbull. They were attached to a compilation report by Turnbull and Turnbull containing a ‘disclaimer’, which asserted that the information contained in the financial statements was provided by the company; that the firm's procedures did not include verification or validation procedures; that no audit or review had been performed; and accordingly ‘no assurance [was] expressed’.

114   In each report to creditors, Mr Star stated that the information contained in the report had been prepared from the books and records of the company and other information provided by the directors and the company's external accountant, Turnbull and Turnbull. Each of the reports then said:
‘Whilst we have endeavoured to determine the accuracy or otherwise of the information and projections provided, we are unable to warrant the accuracy, completeness or reliability of same. We have not conducted a final and complete investigation and/or audit of the company's financial affairs. This was mainly due to cost and time constraints. However, should creditors require a more detailed investigation and/or have more information they consider relevant please raise these matters at the creditors' meeting or beforehand.’
115   Each of the reports to creditors dealt in equivalent terms with the inadequacy of books and records, saying:
‘I have perused books and records and source documents of the company. I am unable to form an opinion that the company has maintained proper books and records in accordance with Section 289 of the Corporations Law given that I have only received limited source documents. Further, the company's computer system experienced a major breakdown in 1996 and some data was corrupted and/or lost’.

The report to creditors of Dalvale added the comment that ‘the affairs of the group appear to be intricately interwoven and therefore, we query the reliability/accuracy of the records’.


116 Each of the reports to creditors expressed the opinion that the company may have traded insolvently prior to the administrator's appointment. The reports noted that examinations of the directors and some other parties would be required if the question were to be investigated, and estimated the cost of the examination to be in the range of $25,000 to $50,000. The reports noted that Mr Star had requested ‘each of the directors’ to submit statutory declarations detailing their assets and liabilities, so that he could establish the commerciality of pursuing possible breaches of s 588G or other relevant laws. In fact it appears that a statutory declaration was sought only from Mr Nolasco, not from Ms Zaharia (who was a director until 25 March 1998, as previously noted). The reports are therefore inaccurate in this respect, suggesting a degree of carelessness by Mr Star or Mr Malanos. Further, Mr Nolasco never provided a statutory declaration as requested.

117   The Deputy Commissioner complains of Mr Star's failure to obtain the statutory declaration, after having raised an expectation that it would be forthcoming in the reports. However, while an administrator has the power to conduct an examination, there is no power for an administrator to demand a statutory declaration of assets from a director. The possibility of embarking upon an examination, and the cost of doing so, were set out in the reports. The lack of funds in the administration to pursue the directors was specifically noted in the reports. It would have been open to the Deputy Commissioner, as the principal external creditor of the companies, to offer to fund the examination process, but he did not do so. While it was unsatisfactory for Mr Star not to approach Ms Zaharia for a statutory declaration, and while he may not have been insistent or persuasive in seeking to obtain one for Mr Nolasco, my opinion is that his failings in these respects fall well short of a basis for curial intervention.

118   I note in passing that the Deputy Commissioner also criticised Mr Malanos for not realising that Helen Panos (with whom he dealt) was Ms Zaharia's sister, but in my opinion nothing turns on that.

119   Each of the reports to creditors contains comments about unfair preferences. In the cases of Portinex and Silindale, the report expresses the opinion that there is no evidence of potential preference payments made by the company within six months of the (possible) commencement of winding up. The reports state that if there had been evidence of recoverable preference transactions, the administrator would have recommended the examination of relevant parties, but they note that it is not easy to achieve success in recovery proceedings.

120   The report to creditors of Dalvale is different with respect to unfair preferences. The administrator notes that there is evidence of potential preference payments made by the company totaling $34,700, and that there are substantial ‘internal’ payments to A Nolasco Pty Ltd (apparently totaling $43,044) which require further clarification.

121 The Deputy Commissioner complains that Mr Star did not pursue investigations in relation to the potential preference payments by Dalvale. That is true. On the other hand, the need for further investigation was specifically noted in Mr Star's report, and it was open to any creditor to pursue the matter with Mr Star at the meeting of creditors. Obviously the problem was the lack of funds in the administration for further investigations to be undertaken. It was open to the Deputy Commissioner, as the principal external creditor, to make arrangements to provide funding for further investigations, but he did not do so. At the hearing the Deputy Commissioner failed to identify any specific additional steps which Mr Star should have taken at his own expense in order to clarify the position. It is hard to see how the position could have been satisfactorily clarified by Mr Star in the absence of examinations under the Corporations Law. In any event, recovery proceedings could be taken only if the company was placed in liquidation, but the creditors validly resolved to enter into a deed of company arrangement instead.

122 The Deputy Commissioner also complains of unexplained payments to the National Australia Bank Ltd so as to reduce liabilities secured against the assets of Silindale and Dalvale. He says that the debt was not reflected in any report as a secured debt, and there was no investigation of benefits which the director and former director may have obtained (for example, if they had guaranteed the debt) as a result of the possible use of company funds to satisfy the debt. But the amount involved is very small and while it appears to have been incorrectly recorded as unsecured rather than secured, the mistake cannot be regarded as material for the purposes of s 445D(1)(a).

123 The Deputy Commissioner also refers to a debt of $50,000 owed to Portinex by Benesi Pty Ltd, another of the Nolasco family of companies. He submits that no proper inquiry was made as to the financial circumstances of that company, or as to the recoverability of the debt, and suggests that the debt was created upon terms which may make it an uncommercial transaction within s 588FB. I agree that Mr Star did not comprehensively investigate that asset, before bringing it to account as fully recoverable. But in my opinion his treatment of it was not misleading. It was clear from the report to creditors of Portinex that Benesi was part of the Nolasco family of companies, and they must have realised that, as a practical matter, there would be a question as to whether the debt would be fully recovered given the financial difficulties of the corporate family. To the extent that the debt would not be fully recoverable, the financial position of Portinex was all the bleaker and the advantages of the deed were, if anything, enhanced.

124 Do these various matters, considered in isolation or together, provide grounds for orders under s 445D or s 445G?

125 If an insolvent company is to be saved and restored to health, the commercial reality is that decisions about its future must be taken speedily after its insolvency has been identified. Additionally, speed is required because rights of enforcement against the company are suspended during the period of administration, and it would be unfair to extend the period of suspension for longer than is absolutely necessary. Therefore Part 5.3A sets a very short timetable for the creditors' decision about the future of the company. It is an unfortunate but unavoidable consequence of the scheme established by Part 5.3A that the creditors must make their decision on the basis of information that is likely to be imperfect. As Cohen J said in Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139, at 145-6:
‘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 the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Part 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly.’

126 The balance between speed and accuracy is a delicate one. An administrator who accepts the company's information uncritically and without exercising judgment, cutting corners to complete the administration and receive his fee, will be treated harshly by the Court, since the whole scheme of Part 5.3A depends on the independence, competence, professionalism and hard work of the insolvency practitioners who accept appointments as voluntary administrators.

127   The distinction between an adequate preliminary investigation, leading to the conclusion that there are grounds for suspecting insolvent trading and unfair preferences but going no further, and an inadequate preliminary investigation which fails to assemble available information with respect to insolvent trading and unfair preferences, is a matter of degree. If the administrator has conducted an adequate preliminary investigation in accordance with the principles in the Hagenvale case, his obligation is to bring the results of the investigation to creditors so that they can decide what is to be done next. If the administrator's preliminary investigation has been adequate, he is entitled to decline to embark upon further substantial investigations unless funds are made available to cover his fees and expenses of doing so.

128   That is the context in which the Court must assess what Mr Star and Mr Malanos did and did not do. In my opinion, the reports and investigations in the present case were sufficient, though perhaps only barely so, to satisfy the requirements set out by Cohen J in the Hagenvale case.

129 Mr Star's statement in the reports that he had requested statutory declarations from the directors, though in fact he had asked only Mr Nolasco to provide one, was false. But in my view the inaccuracy of the statement could not reasonably be expected to have been material to the creditors, and in any event I would not exercise my discretion to grant relief under s 445D(1)(a) on that basis.

130 Although the administrator's preparation of the reports to creditors, and his investigation of information supplied to him for that purpose, were not entirely satisfactory to the extent that I have indicated, his work was not so deficient as to justify the Court intervening to set aside the deeds of company arrangement on the ‘oppression’ grounds set out in s 445D(1)(f). Nor do the facts warrant intervention for ‘some other reason’ under s 445D(1)(g). For the same reasons, there is no adequate factual basis for intervening to set aside the deeds under s 445G.

131   In reaching my conclusions I have taken into account the fact that, although there were various other creditors of Dalvale, the Deputy Commissioner was the principal external creditor of all three companies. If
· the principal external creditor, presented with a report which reflects an adequate though preliminary investigation, wishes to have further investigations made, and
· the administrator is willing to conduct an additional investigation if costs and expenses are met, and
· no arrangements are made for costs and expenses to be covered,
there is no adequate basis for the creditor to criticise the administrator for not undertaking those investigations.


132   The defendants contend that the Deputy Commissioner was in a special position because it has at all relevant times been open to him to pursue alternative means of recovery. The alternative means include the issuing of default notices against directors. The responsible officer of the Deputy Commissioner admitted that although notices were issued, and apparently some fresh notices were issued in light of the difficulties exposed by Deputy Commissioner of Taxation v Gruber (1997) 97 ATC 4970 (Graham A-J); on appeal, (1998) 43 NSWLR 271), no proceedings had been taken for recovery against any of the directors. In my opinion the fact (if it be so) that a creditor has an avenue of recovery against other persons which would reduce or eliminate the debt, is not a valid ground for refusing relief to that creditor under s 445D or 445G if an entitlement to relief has otherwise been made out. The Deputy Commissioner's problem in this case is that he has not made out his entitlement to relief on the facts.

133   In the present cases intervention is not warranted by considerations relevant to the public interest. There is no justification for the companies to have failed to pay group tax and tax under the prescribed payments system, and the Deputy Commissioner was entirely justified in seeking to recover the unpaid amounts. But the evidence does not support the view that Mr Nolasco has embarked upon a deliberate scheme, through the use of numerous corporate entities, to avoid payment of tax: cf Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266.

134   In the present cases it is probable that on the winding up of the Nolasco companies, there would have been either no dividend or a very small dividend to creditors, unless the liquidator of A Nolasco Pty Ltd were able to find funds to pursue successfully the litigation to which the deeds refer, or any liquidator were to pursue recoveries for insolvent trading and unfair preferences and to do so successfully. Under the deeds of company arrangement the minimum anticipated dividend was likely to be ten cents in the dollar, with the possibility of a higher payment. While the deeds forestall further steps for recovery for insolvent trading and unfair preferences, they produce real benefits to the creditors (including the Deputy Commissioner) and it would be reasonable for the creditors to prefer those benefits to the uncertainty and cost of third party litigation and recovery proceedings.

135   Moreover, there is evidence that the interests of employees have been catered for by arrangements for their ‘transfer’ to other Nolasco companies. If it is true, as I have found it to be, that the liquidation of any of the three companies which are the subjects of these proceedings would be likely to cause the two Nolasco operating companies to fail, it follows that the arrangements reflected in the deeds are in the interests of the employees of the Nolasco family of companies.

136   It has not been necessary for me to decide, the purpose of reaching my conclusions on the facts of the present cases, whether an assessment of ‘unfair prejudice’ requires that I compare the position of the Deputy Commissioner under the deeds with his position in winding up, rather than his position under some alternative deed scheme. The thrust of the Deputy Commissioner's complaints is that he has been forced to abide by arrangements entered into without proper investigations. He has not propounded any alternative scheme as a real possibility.

Conclusions


137 This is a case where by far the most substantial unrelated creditor has been outvoted by related creditors and now finds himself bound to arrangements to which he objects. He objects broadly on the grounds that the arrangements unduly benefit the director of the companies and that the administrator has made inadequate investigations. If there were nothing more to the case than this, the creditor may have at least a sound moral case for assistance. But Part 5.3A clearly contemplates that the wishes of an individual creditor may be overridden, and permits related creditors to take part in the decision to do so, subject to s 600A. Moreover, this is not a simple case of a substantial creditor's reasonable objections going unheeded. The arrangements which have been put in place confer benefits on the creditors generally, and employees have been catered for collaterally. The arrangements keep some Nolasco companies on foot and therefore keep some employees in employment. The Deputy Commissioner was made aware of the administrator's lack of funds to engage in more substantial investigations but did not offer to provide funds for that purpose.

138   In my opinion, the Deputy Commissioner has failed to make out adequate grounds for orders setting aside the resolutions to enter into the deeds, or orders terminating or setting aside the deeds of company arrangement for the three companies. Consequently in each case the summons will be dismissed.

139 The defendants have persuaded me that it is appropriate to make orders under ss 447A(1) and 1322(4) for the purpose of overcoming defects in the resolutions for the appointment of Mr Star as administrator of Portinex and Silindale, and any consequent risks of invalidity of the deeds of company arrangement. In the case of s 447A, my orders will be, in both cases, to the effect that Part 5.3A is to operate in relation to the company as if the resolution purportedly passed by Mr Nolasco as director on 25 March 1998 was a valid resolution of the board of directors of the company for the purposes of s 436A, notwithstanding the absence of a quorum. Since that order can operate only for the future, as explained by the High Court in the Australasian Memory case, orders should also be made under s 1322(4)(a). Therefore in both cases I shall make a declaration to the effect that the resolution purportedly passed by Mr Nolasco as director on 25 March 1998 in relation to the corporation is not invalid by reason of any contravention of a provision of the constitution of the corporation.

140 I am inclined to the view that no order is needed under s 445G(3), in light of my findings.

141   I shall direct the defendants to bring in short minutes of orders to give effect to these reasons for judgment, and stand the matter over for the purposes of making orders, and hearing and dealing with submissions as to costs.
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Last Modified: 09/26/2000