Feisst v Salan Pty Ltd (Under Administration)
[2001] WASC 270
FEISST -v- SALAN PTY LTD (UNDER ADMINISTRATION) [2001] WASC 270
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2001] WASC 270 | |
| 04/10/2001 | |||
| Case No: | COR:206/2001 | 12 SEPTEMBER 2001 | |
| Coram: | MASTER BREDMEYER | 28/09/01 | |
| 10 | Judgment Part: | 1 of 1 | |
| Result: | Deed of company arrangement varied | ||
| B | |||
| PDF Version |
| Parties: | GRAHAM FRASER FEISST SALAN PTY LTD (UNDER ADMINISTRATION) (ACN 052 291 791) |
Catchwords: | Corporations Deed of company arrangement Application to set aside deed |
Legislation: | Corporations Law, s 445D, s 445G and s 447A |
Case References: | Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 14 ACLC 1737 Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707 Deputy Commissioner of Taxation v Comcorp Australia Ltd (1969) 14 ACLC 1,616 Deputy Commissioner of Taxation v Woodings (1995) 13 ACLC 469 JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 Sydney Land Corp v Kalon Pty Ltd (No 2) (1998) 16 ACLC 93 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
and
SALAN PTY LTD (UNDER ADMINISTRATION) ACN 052 291 791
BETWEEN : GRAHAM FRASER FEISST
- Plaintiff
AND
SALAN PTY LTD (UNDER ADMINISTRATION) (ACN 052 291 791)
Defendant
Catchwords:
Corporations - Deed of company arrangement - Application to set aside deed
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Legislation:
Corporations Law, s 445D, s 445G and s 447A
Result:
Deed of company arrangement varied
Category: B
Representation:
Counsel:
Plaintiff : Mr K M Penkin
Defendant : Mr F Carles
Solicitors:
Plaintiff : Kevin Penkin & Associates
Defendant : Carles Solicitors
Case(s) referred to in judgment(s):
Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 14 ACLC 1737
Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707
Case(s) also cited:
Deputy Commissioner of Taxation v Comcorp Australia Ltd (1969) 14 ACLC 1,616
Deputy Commissioner of Taxation v Woodings (1995) 13 ACLC 469
JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691
Sydney Land Corp v Kalon Pty Ltd (No 2) (1998) 16 ACLC 93
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1 MASTER BREDMEYER: This is an application by the plaintiff, Mr Feisst, which, as amended, is to have a deed of company arrangement dated 27 June 2001 set aside and the defendant company placed into liquidation. The application is made under s 445D, s 445G and s 447A of the Corporations Law. Mr Feisst is a shareholder and creditor of the company and is eligible to bring this application.
2 I relate some of the facts to set the scene for this dispute. In October 1995 Mr Feisst loaned $80,000 to the company. He was one of a number of lenders who did that. He was to get a lending fee of $20,000 plus reimbursement of his costs of borrowing the money, that is the interest and any bank fees he paid in order to get the loan. It was a foolish investment because it was unsecured. In January 1996 he agreed with the company that the principal would be repaid on 27 January 1997. It was not paid. His debt with the lending fee and interest is now $134,082.86.
3 On 17 May 2001 he attended a meeting of the company shareholders. The minutes of that meeting are found at "GFF 10" of his affidavit. The meeting was convened to pass two resolutions. The first resolution permitted Mrs Hetty Verolme to become 50 per cent owner of the defendant company in satisfaction of quashing her loans to the company of $372,000. That resolution was passed by a majority. Three shareholders voted against it: Mr Feisst, Mr V Duncan and Mr J Prior. Together, those three represented 0.7 per cent of the share capital. The second resolution permitted Mrs Verolme to redeem her 22,801 shares in the company for $22,801. That motion was passed with Mr Feisst, the only shareholder opposing.
4 On 22 May 2001 the company appointed Mr Peter Melsom and Mr George Lopes to be administrators of the company. Mrs Verolme, the managing director, prepared a report as to affairs and the creditors held a first meeting, which I need not discuss.
5 The second meeting of creditors was held on 18 June 2001. At that meeting Mr Feisst was there and was represented by his solicitor Mr Penkin who spoke up for him on a number of matters. The administrator had prepared a report for that meeting which is dated 1 June 2001. It was sent out with the notice of meeting. In it he recommended that the creditors enter into a deed of company arrangement as proposed by Mrs Verolme. The meeting went on for two hours and the minutes cover 11 pages. At the meeting the creditors voted that the company execute the deed of company arrangement proposed by
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- Mrs Verolme and the administrators. It was passed by a comfortable majority. Mr Feisst, Mr V J Duncan and J and M Cook voted against it.
6 The deed permits the company to continue trading. It allows the directors to regain their powers. The administrators have an advisory role to the company. They can make recommendations. They can inspect the accounts at any time. They can convene a meeting of creditors. The company owns a half interest in the Princess Nusa Duao Hotel in Bali. It owns that half interest indirectly through shares in an Indonesian company PT Salan Indonesia. Under the terms of the deed, Mrs Verolme is to run the hotel for the next two or three years. She is to indemnify the administrator absolutely in respect of any costs or loss in running the hotel. She is to try to get the hotel up to a 40 per cent occupancy level. She is to try and get the profitability level up to US$200,000 per annum. Upon achieving a profitable trading she is to sell the hotel for US$2 million, or above. Her remuneration as manager is pegged. She has an option to buy the company's half interest in the hotel for A$2 million. She can exercise that within 18 months. The deed of company arrangement is to expire on 31 December 2003 but, with the consent of the creditors, that can be extended. While the deed is in place there is a moratorium on the creditors getting paid their debts.
7 I now turn to the plaintiff's objections to the deed and to the way it was created. The first is that the administrators have failed to report on any voidable transactions. I was referred to Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 14 ACLC 1737 and to Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707.
8 The administrators prepared a report to creditors, as they are required to do, dated 1 June 2001. The question of voidable transactions is considered by the administrators at pages 5 and 6 of their report. Only one transaction is examined, namely the debt-for-equity swap approved by the members at their meeting held on 17 May 2001. I quote from the report:
"The question is then whether the transfer of this 50% shareholding to Mrs H Verolme is for market value consideration or is an uncommercial transaction which could be set aside under the Corporations Law. In return for the 50%, Mrs H Verolme is relinquishing a loan for $372,000 plus the shareholding of $22,801 making a total of $394,801. In return she is receiving a 50% shareholding with an uncertain value.
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- As indicated under paragraph 2.1 above, Mrs Verolme's view is that the resort would be worth at least US$1,000,000 (approximately AU$2,000,000) in its present state. This suggests that the 50% shareholding she is receiving may be worth close to AU$1,000,000. If this is correct, then the transaction would be voidable as the consideration provided by Mrs H Verolme would be well below the market value of what she has received. However, it is not possible for us to state with any certainty that there has been a voidable transaction given the uncertainty as to the true value of the resort and the absence of any valuation (as discussed under paragraph 2.1 above)."
9 The last sentence is fairly generous to Mrs Verolme because, on her estimate of the resort's value, the transaction is uncommercial and therefore could be set aside. But the unusual feature of this case is that the creditors/shareholders approved it before it was entered into. I know it was approved at the shareholders' meeting held in May but in this case the shareholders are also the creditors.
10 In considering whether the deed should be set aside as unfairly prejudicial to the plaintiff and unfairly favourable to another creditor, Mrs Verolme, I note that the administrators raised this transaction in their report. Mr Melsom also raised it at the meeting. I quote from the minutes at page 6:
"Mr Melsom emphasised to the meeting that creditors should understand that if the company was placed in liquidation at this meeting, it may be possible to reverse the decision previously passed by shareholders regarding the transfer of the 50% shareholding to Mrs Verolme on the basis that as such it may be viewed as a voidable preference in a liquidation."
11 Despite this discussion at the meeting, the creditors did not vote for liquidation. They voted that the deed be signed. The situation in this case is most unusual because, in the vast majority of cases, an unfair or voidable preference is unknown to the creditors at the time of its making. If, for example, Mrs Verolme had sold a company car to herself at an undervalue prior to the appointment of the administrators, that transaction would remain a secret unless and until uncovered by the administrators. This transaction, on the other hand, was approved by the shareholders/creditors before it was entered into.
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12 The administrators did not report on any other insolvent transactions but, with the exception of the transaction already mentioned and the payment to certain creditors in mid 2000, no other suspicious transactions were raised. I contrast that to the position in Bartlett, already referred to. In that case the trial Judge, Derrington J, had suspicions of other transactions. At 710 he referred to the spectacular fall of the company and its wholesale liquidation of assets which were sold well below their apparent value, particularly to Mr Bartlett's interests. He said that needed some inquiry. I add that Mr Bartlett was the man running the company. Also the Judge thought an enquiry necessary into the benefits Mr Bartlett gained by keeping the company out of liquidation, and here he referred to the company's high tax losses.
13 In the present case the administrators' report flagged the only suggested unfair transaction which might be set aside on a liquidation, namely the sale of the company's half interest in the hotel business to Mrs Verolme.
14 On the face of it, that debt-for-equity swap was unfairly generous to Mrs Verolme. She gained from it as a creditor. I note it was not a deal offered to anyone else. It was not offered to other creditors. It was not offered to Mr Feisst. Would Mr Feisst want that? I think not. I see him primarily as a lender sucked in by the promise of high interest (the $20,000 bonus), rather than a committed investor in the company for the long haul. I note that he owns 1,611 shares in the company out of 62,562.
15 I mention another point in favour of Mrs Verolme. The debt-for-equity swap she got at the shareholders' meeting is not simply a financial transaction between the company and Mrs Verolme as a lender/shareholder. It is bound up with the deed of company arrangement and part of the consideration moving from her to the company to gain this benefit is that she stay on as manager of the company until 31 December 2003 at pegged wages. She is to use her personal money for day-to-day working capital until the company's occupancy rate enables it to pay its own way.
16 Mr Penkin, for the plaintiff, argued that the administrators failed to comply with s 444A(3) of the law in that the deed of company arrangement was prepared by James Macdonald, the solicitor for Mrs Verolme and not by the administrator. This failure, he says, puts the independence and objectivity of the administrators in doubt. That subsection says that the administrator must prepare the deed. I do not think there is much substance in this criticism. Whether Macdonald
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- prepared it or the administrators' solicitor prepared it, is not so important. The deed represents Mrs Verolme's proposal. It seems to me that whoever drafted it, given the instructions, was likely to produce a deed in that form.
17 The plaintiff has argued that the administrators failed in their duties to assess adequately the options for these creditors before recommending the Verolme proposal, by not getting an independent valuation of the hotel. If an independent valuation showed that the value of the hotel exceeded the debts of $1.27 million then the meeting might well have decided to appoint a liquidator and sell the hotel immediately.
18 That is a fair criticism. A valuation of the assets of a small company would be a normal step. Nevertheless it would not be easy to do. The hotel is in Bali. It would be expensive. If an Australian valuer was sent there it would take him some time to find out local values and would thereby make his services more expensive. Also, who would want to pay for it? A previous valuation by Colliers obtained by the company had cost US$5,000. Mrs Verolme could possibly pay for the valuation but she did not offer to pay. The administrators could have asked the creditors to pay for it. The administrators are not expected to pay for it out of their own pocket. A valuation could have been obtained from an Indonesian, probably at a cheaper price than a valuation from an Australian. But would the creditors be satisfied with an Indonesian valuation? I do not know. The failure to get an independent valuation was raised at the creditors meeting by the plaintiff. It was his first criticism raised when general business was opened. There was much discussion of the need of a valuation in the minutes of the meeting. As I have said, no creditor or group of creditors offered to finance it. I think the creditors are partly to blame for its absence. They chose not to fund it; not to defer consideration of Mrs Verolme's proposal, until a valuation had been obtained.
19 The plaintiff criticised the administrators' failure to investigate Mrs Verolme's ability and competence to manage this hotel knowing that her own forecast stated in her report of about February 2001 had not been achieved. Also, reservations as to her competence were raised because of her age. She is said to be now 74 years. In that report, found at pages 56 - 58 of Mr Feisst's affidavit (which accompanies the accounts to 30 June 2000), she said that as at December 2000, all 50 rooms had been refurbished and they achieved a 90 per cent occupancy rate over the period December 2000/January 2001.
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20 In that letter she said it would take 12 months, or perhaps 18 months, of trading to achieve a 40 per cent occupancy rate. She spoke of the plan to sell the hotel at, say, US$2 million when it reached a 40 per cent occupancy rate. She said that a sale in the order of US$2 million would see a return of all shareholders' funds, together with the reasonable return on the investment. She said: "It is my hope that this will be realised within 18 months, ie by 30/6/02." I will return to that expression of hope in a moment.
21 At the creditors' meeting no one criticised or queried her competence. I think that a number of the shareholders/creditors knew Mrs Verolme very well. A number are related to her. She said approximately 50 per cent of the shareholders, whom I will call "shareholders/creditors", had visited the hotel. She said they are well pleased with it. Given all these factors, I consider this criticism fails.
22 One of the plaintiff's criticisms was that certain payments made to creditors in mid 2000 was unfairly prejudicial to the plaintiff. The company recovered AU$500,000 from Mas Partini from an Indonesian court action. Part of that money, $365,471 was used to discharge short term loans to shareholders and third parties. A list of recipients is given on p 63 of Mr Feisst's affidavit. He was not one of them.
23 All creditors were notified of these payments by writing. It was not the subject of any comment by the administrators in their report, nor the subject of any questions or discussion at the meeting of creditors held on 18 June 2001. It is possible that these payments could be re-opened and the money recovered as void preferences. According to the list, most of the repayments were of "short term loans", as distinct from the 1995 and 1996 lenders, such as Mr Feisst, who voted at the June 2000 meeting, whom the company regarded as long term creditors.
24 I now attempt to sum up. The lack of an independent valuation is a problem. It would have been better if one had been obtained. But it was raised at the meeting by Mr Feisst's representative and Mr Duncan and debated at length. The creditors were not willing to adjourn the meeting to obtain a valuation, nor were they willing to fund the administrators to get one. In those circumstances, the lack of an independent valuation is not a winning point.
25 The share-for-debt swap for Mrs Verolme was approved at a meeting of the shareholders/creditors in May 2001. It was apparent from Mrs Verolme's figures presented to that meeting that the deal was
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- advantageous to her, $1 million of equity for a surrender of $394,801 of debt. But there was some other consideration given by Mrs Verolme to get this generosity from the company. She had been funding the company up until then to pay its day-to-day bills because it had been running at a loss. She had agreed to continue to do that and stay on as manager at $2,000 per month plus expenses. I think it very hard for a court to undo that transaction when the creditors approved of it before it was made. As previously stated, most unfair preferences are by a liquidator undoing a transaction made by the directors (for example, a payment to a third party or a sale of an asset at an undervalue) which has been made without the knowledge or approval of the creditors. It is only after the liquidator has been appointed and investigates the affairs of the company that he uncovers the preferential deal. Here the deal was done with the prior approval of the shareholders/creditors.
26 Weighing up all the arguments put to me, I am not persuaded that this deed was unfairly prejudicial to the plaintiff, such that it should be set aside. I am also not persuaded that the information given to the meeting of creditors was misleading or so deficient that it should be set aside and the company placed into liquidation.
27 I consider the plaintiff has made out a sufficient case that the deed be varied. I consider the deed is unfairly prejudicial in that it requires the creditors to wait up to 31 December 2003 before getting paid. The 50 rooms were refurbished by December 2000 and the hotel achieved a 90 per cent occupancy rate over the December/January period. Mrs Verolme has said consistently that if the company can achieve a 40 per cent occupancy rate, which she says is a modest and achievable target, for a period it could be sold for around US$2 million or AU$4 million. The company would get half of this, that is AU$2 million, which would be more than enough to pay out the creditors whose debts stand at $1.27 million but are ever increasing with interest. In about February 2001, in her report which accompanied the 2000 accounts, Mrs Verolme predicted that that goal would be achieved within 18 months, that is by 30 June 2002. That was her "hope and intention" - the 18 months being 18 months from the refurbishment.
28 The deed of company arrangement provides for the sale of the hotel within 30 months of the commencement of the deed, that is by 31 December 2003. I think that too long and unfair to the creditors. I think it should be offered for sale after 30 June 2002, that is 18 months after the refurbishment, which was her original idea. By then it will have had 18 months of trading since refurbishment. I consider it should be
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- marketed for sale, say, within a three month period following 30 June 2002. If a purchase price is offered sufficient to pay out the creditors, and the administrators and the creditors at a meeting approve it, then it should be sold at that price. If a good price is not offered then Mrs Verolme can continue running the hotel until 31 December 2003 when the deed terminates unless extended.
29 I have power to vary a deed under s 445G(4) which provides:
"Court may vary deed
Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator."
30 I will hear the parties on the terms of this order and on the question of costs.
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