Hamilton v National Australia Bank Ltd

CATCHWORDS

Corporations Law - company under administration - application by administrator under subs 444F(2) of the Law for an order that a secured creditor not realise or otherwise deal with its security - whether the Court should make such an order - proposed deed of company arrangement - deed would be frustrated if order not made - consequential amendments to deed sought - whether court has power to amend deed - whether interests of secured creditor would be adversely affected - whether interests of secured creditor adequately protected - whether the orders sought would extinguish the secured creditor's security or deprive it of a proprietary right - whether the secured creditor would recover anything under its security in a liquidation - whether the Court should refuse the application on discretionary grounds - complex course of dealings between relevant parties - allegations of breach of fiduciary duties and director's duties - whether intermingling or insolvent trading occurred - whether claims available which may be brought by the company - probability of fruitful success - whether likely that a challenge to the debt owed to the first chargee would succeed - impact on calculations in administrators' report - whether the deed would sanction misconduct - whether deed is discriminatory as between creditors - whether discrimination unfair in the circumstances - whether administrators had shown a lack of independence or were acting complicitously with persons who had wronged the company

Corporations Law s 280, s 436A, s 438D, s 439A, s 444A, s 444B, s 444C, s 444D, s 444E, s 444F, s 447A, s 597

Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195

Barnes v Addy (1874) 9 Ch App 244
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707
J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172 at 180, 181, 182
Brash Holdings Ltd v Katile Pty Ltd (1994) 13 ACSR 504 at 507, 508, 513, 514
Molit (No. 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 135 ALR 280 at 289, 290
United Savings Association of Texas v Timbers of Inward Forest Associates Ltd 98 L ed 2d 740 (1988) at 746
Re Atlantic Computer Systems plc [1992] 1 All ER 476
Ferrier v Bottomer (1972) 126 CLR 597
Re Yagerphone Ltd [1935] 1 Ch 392
Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 at 611
Re Brashs Pty Ltd (1994) 15 ACSR 477 at 480-483
Re Giga Investments Pty Ltd (1995) 17 ACSR 547 at 548, 549
Milankov Nominees Pty Ltd v Roycol Ltd (1994) 14 ACSR 296 at 301
Mulvaney v Rob Wintulich Pty Ltd (1995) 18 ACSR 384

WILLIAM JAMES HAMILTON AND PINO FIORENTINO in their capacity as joint administrators of KISORO PTY LIMITED & ANOR v NATIONAL AUSTRALIA BANK LIMITED & ANOR
No. NG 3095 of 1996

CORAM:Lehane J
PLACE:Sydney
DATE:3 May 1996

IN THE FEDERAL COURT OF AUSTRALIA              )
NEW SOUTH WALES DISTRICT REGISTRY             )
GENERAL DIVISION  )     No. NG3095 of 1996

IN THE MATTER OF KISORO PTY LTD (ADMINISTRATOR APPOINTED)
(A.C.N. 002 202 084)

BETWEEN:WILLIAM JAMES HAMILTON
AND PINO FIORENTINO
in their capacity as joint
administrators of KISORO PTY LIMITED
(ADMINISTRATOR APPOINTED)
(A.C.N. 002 202 084)
Applicants

AND:NATIONAL AUSTRALIA BANK LIMITED
(A.C.N. 004 044 937)
First Respondent

IVANS BUTCHERY (NSW) PTY LIMITED
(A.C.N. 070 093 202)
Second Respondent

CORAM:Lehane J
PLACE:Sydney
DATE:3 May 1996

MINUTE OF ORDERS

THE COURT ORDERS:

THAT until the deed of company arrangement proposed to be entered into by Kisoro Pty Ltd ceases to have effect, National Australia Bank Limited is not to realise or otherwise deal with the security constituted by a debenture granted to it by Kisoro Pty Ltd dated 13 April 1994 and registered on 26 April 1994 under the number 436205.

THAT the deed of company arrangement be varied by the omission of clause 2(a) and by the amendment of clause 2(d) so that it will read:

2(d)The Administrator receives evidence to his satisfaction of condition 2(c) having occurred.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA              )
NEW SOUTH WALES DISTRICT REGISTRY             )
GENERAL DIVISION  )     No. NG3095 of 1996

IN THE MATTER OF KISORO PTY LTD (ADMINISTRATOR APPOINTED)
(A.C.N. 002 202 084)

BETWEEN:WILLIAM JAMES HAMILTON
AND PINO FIORENTINO
in their capacity as joint
administrators of KISORO PTY LIMITED
(ADMINISTRATOR APPOINTED)
(A.C.N. 002 202 084)
Applicants

AND:NATIONAL AUSTRALIA BANK LIMITED
(A.C.N. 004 044 937)
First Respondent

IVANS BUTCHERY (NSW) PTY LIMITED
(A.C.N. 070 093 202)
Second Respondent

CORAM:Lehane J
PLACE:Sydney
DATE:3 May 1996

REASONS FOR JUDGMENT

LEHANE J:

Introduction

The applicants, who are the joint administrators of Kisoro Pty Ltd (the Company), seek an order under subs 444F(2) of the Corporations Law and certain consequential relief. Later in these reasons I shall discuss in more detail the precise nature of the relief sought; for the present it is sufficient to say that the applicants ask the Court to
order the first respondent (NAB or the Bank), a secured creditor of the Company, not to realise or otherwise deal with certain security which it holds.

The circumstances are complex and must be described in some detail.

Facts

(a)The Company

The Company has only two issued shares. One is held by Ivan Spehar, the other by his wife Zelka Spehar. Mr and Mrs Spehar have, during most of the Company's life (or at least that part of it which is relevant for present purposes), also been its directors; on 16 December 1994 Kire Ristevski replaced Mrs Spehar as a director but on 25 October 1995 Mr Ristevski ceased to be a director and Mrs Spehar was reappointed. The Company carried on business at premises in Yennora owned by Mr and Mrs Spehar: there seems to have been no formal lease between the Spehars and the Company. Its business comprised the manufacture of smallgoods and the supply of smallgoods and meat products to what may be loosely described as a group of companies to which I shall refer as the retail companies. The Company also conducted, at the Yennora premises, a retail shop from which it sold meat and smallgoods. Until 13 October 1995, when it adopted its present name, the name of the Company was Ivan's Butchery Pty Ltd.

(b)The retail companies

The retail companies owned a chain of retail butcheries in various Sydney suburbs. Each company operated one butchery and, with one exception, each was named "Ivan's Butchery" followed, in parentheses, by the name of the suburb in which the shop was situated: for example, Ivan's Butchery (Marrickville) Pty Ltd. The exception was a shop at Top Ryde, which was known as Top Ryde Meat Market Pty Ltd. Generally the shops were leased, but there appears to have been little correspondence between the identity of the lessee of a shop and the company which carried on business there. For example, the Company was apparently the lessee of a shop at Fairfield conducted by Ivan's Butchery (Fairfield) Pty Ltd, Mr and Mrs Spehar were the lessees of a butchery at St Marys and Ivan's Butchery (St Marys) Pty Ltd seems to have been the lessee of a shop at Campbelltown conducted by Ivan's Butchery (Campbelltown) Pty Ltd. Since 13 March 1995 the sole shareholder in each of the retail companies has been Matua Pty Ltd, the shareholders in which are Anita Spehar and Joseph Spehar. Before 13 March 1995 the Company held all the shares in one of the retail companies, a majority of the shares in another, minority holdings in two and no shares in the others; the remaining shareholders apparently included various members of the Spehar family, and others. Ivan Spehar seems at all relevant times to have been a director of each of the retail companies; the other directors appear to have included members of the Spehar family and a number of other persons. The evidence does not enable me to set out with precision the shareholdings and
directorships in each of the retail companies but that, I think, does not matter for the purposes of this case.

(c)Banking arrangements: Westpac, then NAB

Until April 1994 Westpac Banking Corporation (Westpac) was the banker of the Company and of Mr and Mrs Spehar (and, apparently, of at least a number of the retail companies as well). Westpac provided substantial loan and bill facilities both to the Company and to the Spehars. Correspondence which has been tendered shows, however, a rapidly deteriorating relationship with Westpac and in April 1994 NAB replaced Westpac as banker to the Company and to the Spehars: NAB then provided accommodation out of which the remaining indebtedness to Westpac of the Company and the Spehars was repaid. I shall have to return to some details of the arrangements between NAB on the one hand and the Company and the Spehars on the other.

(d)Another financier: Mr Damjanovic

Meantime, another, and apparently sympathetic, financier had appeared on the scene. Mr Spehar signed a document by which he certified "that on the 30.9.1992 I received from Mr Mojmir Damjanovic the sum of $580,000". Bank account entries show that on 30 September 1992 $480,000 was deposited into an account of Mr and Mrs Spehar with Westpac. On the same day, $100,000 was transferred from that
account to the Company's operating account with Westpac; it appears to have been used, in turn, to pay creditors of the Company. On the following day, 1 October 1992, two transactions occurred: a further sum of $100,000 was paid by Mr Damjanovic directly into the Company's operating account and $340,000 was transferred from the Spehars' account to a cash management account of the Company with Westpac. The balance ($40,000) of the sum paid on 30 September to the Spehars' account was applied in reduction of that overdraft. Over the following month, or thereabouts, a series of sums amounting in total to $340,000 was transferred from the Company's cash management account to its operating account. Both that amount and the sum of $100,000 deposited into that account on 1 October were disbursed promptly, and mostly in relatively small sums.

Then on 3 February 1993 Mr Damjanovic advanced a further $870,000. Of that advance, $850,000 was paid to an unpaid bills account of the Company with Westpac; $10,714.35 was absorbed in various costs and disbursements; and the balance appears to have been paid to Mr and Mrs Spehar. Of the $850,000 received by the Company, $800,000 was applied in repaying what seems initially to have been a loan provided by Westpac to the Company and apparently, later, by a process which the evidence does not fully disclose, was transmuted into a bill acceptance facility. The balance of $50,000 was transferred for application in reduction of a housing loan facility which Westpac had provided to Mr and Mrs Spehar (that facility related to the Strathfield property, discussed below).

Also on 3 February 1993, or thereabouts, three documents were entered into. The first is described as a loan agreement, the parties to which are Mr Damjanovic as lender and the Company and Mr and Mrs Spehar, collectively described as borrowers. The agreement recites that the lender has lent to the borrowers certain sums of money and is to advance certain further sums, making a total advance of $1,450,000 (being, obviously enough, the sum of the $870,000 then advanced and the $580,000 advanced previously). The document then provides that the lender "does hereby lend" to the borrowers the total sum of $1,450,000, that the loan is for a term of two years and that interest on it is to be paid monthly at the rate of 8% per annum reducible to 4% per annum on prompt payment (subject to a proviso that the interest rate is to fluctuate in accordance with fluctuations in certain interest rates charged by Westpac). The loan agreement includes a term that the loan is to be secured by a fixed and floating charge of the assets of the Company and a mortgage (by the Spehars) of the Yennora property.

The second document was a deed of charge under which the Company charged its assets in favour of Mr Damjanovic (described as the "Mortgagee"); the charge was expressed to be fixed as to certain assets and floating as to others. It recited the loan agreement, the loan of $1,450,000 to which the loan agreement applied and that as a condition of the loan the Company agreed to provide "a fixed and floating charge over all its assets, property and undertaking to better secure to the Mortgagee its obligations under the Loan Agreement." By its first operative clause the deed was expressed to charge the assets of the Company "with due and punctual payment to the Mortgagee of all monies now or hereafter to become owing or payable by the Mortgagor to the Mortgagee, whether by way of replacement (sic) of principal payment of interest or of fees, costs, charges, duties or expenses or otherwise". The deed of charge was registered under the Corporations Law on 10 February 1993.

The third document, if one may judge from the apparently incomplete copy in evidence, was a somewhat cryptically expressed mortgage by the Spehars to Mr Damjanovic of the Yennora property, presumably also securing the same debts.

Mr Damjanovic claims to have made at least three further advances to the Company and the applicants' investigations appear to support that claim. The first of those was an amount of $25,000 received on 22 September 1994 "to pay wages", according to the journal entry. The second and third were two amounts each of $50,000 received respectively on 7 October 1994 and 30 June 1995. There may be a question, one of construction of the deed of charge, whether those further advances are secured by the deed.

(e)"Intermingling"

It is apparent from the circumstances already mentioned that a certain amount of intermingling occurred between the financial affairs of the Company and those of Mr and Mrs Spehar. That is a topic on which a little more needs to be said.

First, the Yennora property, from which the Company carried on its business. That property was acquired by the Spehars in October 1989. It was financed by a term loan of $1,000,000 provided by Westpac on the security of a mortgage of the Yennora property itself and of mortgages of properties at Strathfield and Newtown (see below). Of the sum lent, $822,678.03 was applied to settle the purchase: of the balance, $116,400 was credited to the Spehars' account and $60,921.97 to the Company's operating account.

It is worth mentioning that by that time the Company already had substantial financial support from Westpac. In particular, under an agreement dated 23 June 1989, Westpac had lent the Company $800,000 on the security of guarantees by Mr and Mrs Spehar and mortgages over the properties which they owned at Strathfield and Newtown. By 29 May 1991, the Company had, from Westpac, an overdraft limit of $80,000, a commercial bill facility of $1,220,000 (increased, at about that time, from $700,000) and a bank guarantee facility of $22,000. At the same time the term loan of $1,000,000 to the Spehars remained outstanding, as did a savings bank loan of $282,141.

Of the increased amount of the bill facility, $100,000 was to be used, in accordance with the conditions imposed by Westpac, "to clear excess" in the account of Mr and Mrs Spehar; the rest was to be used to discharge liabilities of the Company to Westpac. There were variations from time to time in the details, particularly the amounts, of advances or accommodation provided by Westpac to the Company and to Mr and Mrs Spehar; what is clear, however, is that at the time when Mr Damjanovic advanced the $870,000, there remained outstanding a bill line extended to the Company of $800,000 and a similar facility extended to Mr and Mrs Spehar of more than $1,000,000. It seems clear also that the liability discharged, by application of $800,000 of the amount advanced by Mr Damjanovic, was that of the Company, not that of Mr and Mrs Spehar. Following the discharge of the Company's bill facility liability, Westpac discharged its mortgage over the Yennora property (a mortgage over which was then given to Mr Damjanovic). That mortgage had, of course, been held by Westpac, like its other securities, as security for indebtedness both of the Company and of the Spehars.

Secondly, the Strathfield property, which was Mr and Mrs Spehar's home. The land at Strathfield was purchased by the Spehars in 1986. In June 1989, Westpac lent them $300,000 for the purpose of building on the land. Additionally, out of a loan of $800,000 made by Westpac to the Company on the same day, the Company - so the applicant's investigations reveal - lent to Mr and Mrs Spehar a sum of between $300,000 and $400,000 which also was applied in building the house. On 21 April 1994, when NAB supplanted Westpac as banker to the Company and the Spehars, Westpac was paid a total of $879,275.48 which, in addition to minor sundry fees and other amounts, was applied, as to $778,363.48, to discharge Mr and Mrs Spehar's liability in an unpaid bills account and, as to $100,778.29, in payment of the Company's liability on its operating account. Westpac then discharged its mortgage of the Strathfield property. The funds came from NAB, principally from the proceeds of
two bill facilities granted to Mr and Mrs Spehar but, as to a balance of $7,645.74, from an overdraft account of the Company with NAB. Finally, the Strathfield property was sold. The sale was settled on 1 May 1995. The proceeds of sale went, as to $832,000, to discharge liabilities to the Bank of Mr and Mrs Spehar and, as to the balance ($393,580.93), to an account of the Company with the Bank.

Thirdly, the property at 531 King Street, Newtown. That property belonged, also, to Mr and Mrs Spehar. It was sold at about the same time as Mr Damjanovic provided the second advance of $870,000. The sale was completed on 8 February 1993. The net proceeds received were $361,137.20; of that amount, $281,083.10 was applied in discharging liabilities of the Spehars to Westpac, and the balance of $80,666.10 was paid to the Company's operating account with Westpac.

(f)The NAB's security

When NAB refinanced the debts owing to Westpac it took a number of securities. The security of principal relevance, for present purposes, is a debenture of the Company dated 13 April 1994. By that document the Company charged in favour of NAB all its present and future property as security for the Company's indebtedness to NAB from time to time. The debenture was registered under the Corporations Law, on 26 April 1994. It thus ranks as a second charge, after the charge in favour of Mr Damjanovic: Corporations Law s 280. Certain other securities taken by the Bank in the following months remain outstanding: they are a mortgage dated 30 June 1994 over a parcel of land of which Mr Spehar is the registered proprietor, a mortgage dated 16 June 1994 of a policy of assurance on Mr Spehar's life and a guarantee by Mr Spehar dated 11 July 1995.

(g)"Assumption" of business of Company and retail companies

I can turn now to more recent events. The Company has not prospered. In the year ended 30 June 1995, the operating loss revealed by the Company's accounts was $2,654,531.13, as compared with $23,693 shown in the accounts for the previous year. As at 30 June 1994, the accounts of the Company had shown total shareholders' equity of $1,633,132.80. As at 30 June 1995, a negative shareholders' equity of $1,021,398.33 was shown. On 11 October 1995, solicitors acting for Mr Damjanovic wrote to the solicitors for the Company as follows:

As you are aware, we act for Mr Damjanovic who has an Equitable Floating Charge over your client's business, together with a mortgage over the freehold.

Our client instructs us that your client is in arrears in excess of 3 months and proposes to take action.

We should be pleased if you could advise whether your client is prepared to voluntarily allow our client to take possession of the premises and business due to the default. If we do not hear from you with (sic) 8 days from the date hereof our client instructs us to commence legal proceedings for the recovery of the premises.

To that communication the solicitors for the Company sent, on 25 October 1995, the following submissive reply:

We refer to your letter of 11th October 1995.

We are instructed that our client is prepared to voluntarily allow your client to take possession of the premises and business as Mortgagee/Chargee. In fact, we understand that your client has already taken possession.

That, apparently, was true. Mr Damjanovic did not lodge with the Australian Securities Commission a notice that he had taken possession until January 1996, when apparently his solicitors were reminded by correspondence from the applicants' solicitors of his obligation to do so. He was not slow, however, to take other steps. The precise detail of what happened is unclear, because the transactions apparently are not documented (except by some book entries to which I shall refer) and Mr Damjanovic has been reticent about providing explanations requested through his solicitors. The main elements, however, are clear enough. The applicants' enquiries reveal the following:

Entries in the Company's general ledger, all dated 31 October 1995, were made showing respectively "debtors taken over by Mr Damjanovic" $119,146.11, "stock taken over by Mr Damjanovic" $106,485 and "fixed assets taken over by Mr Damjanovic" $189,242.02. The ledger shows the Company's indebtedness to Mr Damjanovic as reduced on that day by the sum of those amounts, i.e. $414,873.13.

A company called Ivan's Butchery (NSW) Pty Ltd now conducts the previous business of the Company at Yennora.
The retail butchery businesses, formerly of the retail companies, which continue in operation are now carried on, as to one of them by Ivan's Butchery (NSW) Pty Ltd and as to the others by four newly incorporated companies called Carelia Pty Ltd, Habanta Pty Ltd, Shelbrie Pty Ltd and Sontaria Pty Ltd.

The directors of Ivan's Butchery (NSW) Pty Ltd are Adam Grujcic and Ljuba Grujcic; the directors of the other companies are Joseph Spehar and Anita Ivancic.

It is accepted by the applicants and the Bank (though the evidence is somewhat sparse) that Mojmir Pty Ltd is the holding company of Ivan's Butchery (NSW) Pty Ltd and each of the other four companies which now carry on the remaining retail butchery businesses, that the beneficial owner of the shares in Mojmir Pty Ltd is Mr Damjanovic and that the directors of Mojmir Pty Ltd are Mr Damjanovic and a Mr Frank Bronco Zobec. It is not suggested that I should approach the matter on any basis other than that the business of the Company and the businesses of each of the retail companies have been transferred, through the offices of Mr Damjanovic, to parties with whom he is associated. It is also agreed on both sides that no separate consideration appears to have been paid for the butchery businesses formerly carried on by the retail companies.

(h)Administration

On 11 December 1995 the directors of the Company resolved that the Company was insolvent or was likely to become insolvent at some future time and that an administrator of the Company should be appointed. Accordingly, by instrument under its common seal, the Company on the same day appointed the applicants as its administrators, under subs 436A(1) of the Corporations Law. On 29 December 1995 the applicants were appointed administrators of each of the retail companies; the creditors of each of those companies have subsequently resolved that they be wound up and, accordingly, the applicants are now liquidators of each of them. Of the applicants, the evidence indicates that Mr Hamilton has played the primary role in the administration of the Company.

The first meeting of creditors of the Company was held on 18 December 1995. That meeting resolved to appoint a committee of creditors; a proposed resolution for the removal of the administrators was rejected. The committee of creditors met for the first time on 3 January 1996. It had before it three quite detailed reports prepared by the applicants: one was a statement relating to the composition of the debts claimed by Mr Damjanovic and the security which he held; the second dealt with the "Damjanovic sale of assets as mortgagee in possession, including the valuation of goodwill, plant, fixtures & fittings, stock & debtors"; the third concerned possible claims against directors on the footing that the Company incurred debts at a time where there might have been reasonable grounds for suspecting that it was insolvent. There were also tabled some material concerning assets of a former director against whom it was thought possible that claims could be made, a schedule of payments which might be voidable if the Company were wound up and a letter from the solicitors for a substantial creditor of the Company commenting on the matters dealt with in the administrators' three reports. An accountant instructed by Mr Damjanovic foreshadowed a proposal to acquire, as he put it, the tax losses of the Company on a basis that might provide some return to creditors. The committee formed the view that it would be possible to determine whether any proceedings for breach of duty or for insolvent trading were worthwhile only after an examination of relevant parties under s 597 of the Corporations Law; it was agreed that a sum of approximately $27,000 would be needed to meet the cost of examinations of that kind; a number of creditors present agreed to contribute to the fund and the applicants were asked to seek further contributions from other creditors. The committee resolved to recommend that the Company be wound up and that examinations should then be conducted under s 597.

At its second meeting, on 16 January 1996, the committee took a somewhat different view. It had before it a report of the applicants dated 12 January 1996. That report offered a reasonably pessimistic view of a number of matters. It reported on advice received from the applicants' solicitors to the effect that any goodwill relating to the retail businesses belonged to the companies which conducted them and was not, therefore, an asset of the Company the value of which might be recoverable by a liquidator; and that while in theory some recovery might be available to the applicants as liquidators of the various retail companies, considerations of cost and likely difficulties in establishing a "fighting fund" probably made any attempt at recovery impracticable. The applicants also expressed their view that a claim against Mr Damjanovic, on the basis that he had breached his duties as mortgagee, would require first a public examination and would in the end be highly unlikely to result in any return, given the size of the debt owed to Mr Damjanovic, to other creditors. Similarly, the applicants expressed a view that proceedings against directors or former directors for liabilities arising from insolvent trading, while theoretically available, were unlikely to be fruitful. Finally, the applicants informed the Committee of a proposal received from accountants for Mr Damjanovic and Ivan's Butchery (NSW) Pty Ltd to make some funds available for the purpose of a deed of company arrangement: the proposal was that the deed would enable Ivan's Butchery (NSW) Pty Ltd, or persons associated with it, to obtain the benefit of the Company's tax losses: in return Ivan's Butchery (NSW) Pty Ltd would make available to the applicants, as administrators of the deed, a sum of approximately $67,000 which would be available to pay the costs of the administration and to fund a small dividend to creditors. The applicants predicted that the scheme might ultimately have the result that "a dividend of one cent in the dollar would be paid probably in years 2 and 3". The report concluded:

Whether the Committee recommends the Deed of Company Arrangement or winding up is a commercial decision. A winding up is only of use if funds are to be contributed for an Examination under Section 597 involving all Group Company creditors in funding the one examination.
(h)The proposed deed of company arrangement

The applicants proceeded to convene the meeting required by s 439A of the Law. The notice convening the meeting was accompanied by the documents required by subs 439A(4) and a copy of a draft deed of company arrangement. The report as to the Company's business, property, affairs and financial circumstances required by para 439A(4)(a) retraced ground covered in the reports to the committee of creditors and described the way in which the proposed deed would work and its likely results for creditors (and, incidentally, for the applicants themselves: paragraph 14(c) of the report, in the section headed "Conclusion", made it clear that whereas in a winding up the costs of the administration, to date, would not be paid they would be paid under the deed). The concluding paragraph of the report said this:

The decision is a matter for creditors commercial judgment. Certain Creditors have indicated a continuing relationship with the new companies in the group is a commercial consideration for not winding up the Company. We have no comments in this respect but draw this notion to your interest.

It is worth quoting in full the concluding four paragraphs of the applicants' statement under para 439A(4)(b);

3.Under a Deed of Company Arrangement, the attached report shows that approximately one (0.5) (sic) per cent in the $1.00 may be received by participating unsecured creditors at a date no later than October 1998. The calculations are shown in the attached report made by us.

4.A decision as to whether or not to wind up the Company or to participate as an unsecured creditor under the Deed of Company arrangement that is proposed is, we have come to realise by discussion with Creditors, a commercial decision that each creditor has to make, not only based on the mathematics of what the Deed has to offer, which is minimal, but in considering ongoing trading benefits with Ivan Spehar in the new group of companies.

5.A detailed investigation has been carried out and reports made to a Committee of Creditors by the Administrators. To that extent no deeper investigation in a winding up would be likely by a liquidator. To take legal action referred to in our report requires a fighting fund initially in the order of $27,000 for a Public Examination and if advised $100,000 as estimated for legal proceedings. The Creditors Committee are reluctant to commit themselves. Therefore a winding up serves no useful purpose.

6.Creditors are advised to individually consider their commercial position. The Deed of Company Arrangement offers an alternative to winding up even though of little intrinsic value.

The applicants thus made clear their opinion that liquidation was likely to produce nothing of value for creditors whereas the deed would offer a very small return. They also made it clear that, so far as their own costs were concerned, the deed offered advantages to the applicants which would not be available in a liquidation. The concluding phrase of paragraph 4 of the statement relates to a matter which makes a few cryptic appearances in the material tendered in evidence by the applicants, and was given some prominence in submissions: a suggestion that trade creditors, if the scheme proceeded, might obtain some collateral advantages arising from their continued dealings with the chain of butcheries. There is also a suggestion that Ivan Spehar retains a connection with the chain. There is no direct evidence of any such connection. Nor is there direct evidence of any particular connection or relationship between Mr Spehar and Mr Damjanovic. However, the evidence indicates that Mr
Damjanovic was a somewhat generous financier in circumstances where clearly the Company was in financial trouble: he was prepared to lend on terms undoubtedly less stringent (e.g. as to interest rates) than a financier entirely at arms length might have been expected to exact (one has only to compare the rates charged by Mr Damjanovic with those which, on the evidence, were charged by Westpac and NAB). Equally, the acquisition of the businesses by the companies controlled by Mr Damjanovic required the active assistance of Mr Spehar, not just passive submission and, particularly in relation to the retail companies, the evidence shows that active assistance, where necessary, was provided. It is proper to infer that, whatever the precise relationship may be, it is one at less than arm's length and that Mr Spehar retains an active association, again whatever its precise nature may be, with the businesses.

At the meeting of creditors held on 9 February 1996 the creditors resolved:

That the Company execute a Deed of Company Arrangement ("The Deed") a copy of which is tabled and initialled by the Chairman in the margin thereof for identification as amended.

The reference to amendment refers to some particular changes agreed at the meeting. The majority in favour of the execution of the deed was substantial. It should be noted, however, that Mr Damjanovic, who voted in favour, was admitted as a creditor, for voting purposes, in respect of a debt of $1,244,082 (the amount which he claimed as the deficiency remaining after realisation of his security, less $100,000); Mr and Mrs Spehar voted in respect of a debt of $325,899; and the retail companies voted in
respect of debts of much smaller, but nevertheless significant, amounts. NAB was not represented and did not vote. Three substantial creditors, to whom the Company was indebted for $481,680.49, $131,763 and $78,078.02 respectively, voted against the deed. On the other hand, however, it may be noted that there would still have been a majority in favour of the deed, a substantial one in number of creditors though a relatively slight one in amount of debt, if Mr Damjanovic's debt were excluded in whole and NAB had voted against the deed.

The deed itself recites that Ivan's Butchery (NSW) Pty Ltd has agreed under a deed of funding (which I shall describe shortly) to make certain payments to an administration fund to enable the administrators of the deed to make the payments which it contemplates. It is unnecessary to refer to the deed's detailed provisions, except to record that:

(a)There is to be a moratorium for a period of three years (unless the deed itself is terminated earlier) during which creditors are prohibited from taking action against the Company.

(b)The Administration Fund (the money paid to the Company under the deed of funding) is to be applied first in payment of costs and the administrator's remuneration, next in payment of certain liabilities incurred by the Company before the commencement of the deed, then in payment of claims of preferred
creditors, conventionally defined, and finally in payment to participating creditors.

(c)Participating creditors are unsecured creditors of the Company whose claims were in existence at 11 December 1995; they do not, however, include Mr Damjanovic; they do include parties, called "assigning creditors", which are the retail companies, the Spehars, Ivan's Butchery (NSW) Pty Ltd and a small number of others each of whom appears to have some business or other relationship either with the Spehars or Mr Damjanovic.

(d)There are certain conditions precedent to the deed coming into operation and taking effect that have some significance. They appear in clause 2 of the deed, as follows:

2.CONDITIONS PRECEDENT AND
COMMENCEMENT DATE

This Deed will come into operation and take effect, once the following conditions precedent are satisfied:

(a)National Australia Bank Limited releases the Company from discharges and releases the Company from (sic) the Charge;

(b)this Deed is executed by both the Company and the Administrator in accordance with the provisions of s 444B of the Law;

(c)the Assigning Creditors assign to [Mr Damjanovic] their right, title and interest in and to the debts owed to them by the Company as at [11 December 1995];
(d)the Administrator receives evidence to his satisfaction of conditions 2(a) and 2(c) having occurred.

I have referred to the assignment to which condition (c) refers. It has to do, apparently, with the ability of Mr Damjanovic, or those associated with him, to obtain the benefit of the Company's tax losses. Conditions (b) and (d) are procedural. Condition (a) means the deed will work only if the Bank cooperates by releasing its charge. I shall consider the position of the Bank shortly.

Before doing so, however, I should record that the deed of funding is a deed between Ivan's Butchery (NSW) Pty Ltd, the Company and the applicants. It will operate if the deed of company arrangement is executed. It will require Ivan's Butchery (NSW) Pty Ltd to pay the sum of $101,209 to the applicants, as administrators of the deed, by an initial payment of $10,000 and then by three instalments, each of $30,403. It includes a somewhat obscure provision for the payment of additional sums to the applicants if the benefit of tax losses can be taken to a greater extent than is contemplated at present. There are provisions relating to the quantification of the Company's tax losses and defining what the concept of utilising them is to be taken as meaning.

The Bank's attitude to the deed

The precise amount now owed by the Company to the Bank does not emerge clearly from the evidence. On a schedule of creditors attached to Mr Hamilton's affidavit of 16 February 1996, the amount owing to the Bank is shown as $130,969. Additionally, in that affidavit Mr Hamilton deposes to his understanding that, apparently as at 4 January 1996, the amount owing was $133,730.59. However, the Bank appears to have been admitted as a creditor for voting purposes at the first meeting of creditors for a total debt of $271,823. Mr Boardman denies that he said words attributed to him by Mr Hamilton: "... there may be $30,000 available to meet our debt [from a surplus on sale of other security] in the sum of about $135,000 which the Company is liable for. This leaves us with about $105,000 deficiency." Mr Boardman does not, however, depose as to the true amount of the debt. That may not matter much: it is clear enough within what range the debt falls, and it is obviously very much less than its amount at the time when the Bank replaced Westpac as banker to the group. It is a significant creditor, though (even excluding Mr Damjanovic, the Spehars and other "related" parties) by some distance not the largest.

As I have indicated, the Bank was represented at the first meeting of creditors. Its representative, Mr Richard Hosnell, was appointed a member of the committee of creditors. Mr Hosnell did not attend the first meeting of the committee; Mr Boardman was present in his place and supported the recommendation of the committee that the Company be wound up. The Bank was not among those creditors which agreed at the meeting to provide funds for the purpose of conducting examinations under s 597 of the Law. The Bank was not represented at the second meeting of the committee held on 16 January 1996. When asked why, in cross examination, Mr Boardman replied:

Well, I believed that after the first meeting which seemed to go on and on forever, there was a lot of waffle and so on, the administrator didn't seem to get to the point on various arguments. For instance, he handed out some letter of advice from Harris & Co which had all been stapled together incorrectly, it was difficult to read. I felt he wasn't doing a particularly good job of what was going on and that it was not necessary for me to attend the second meeting because it would be a discussion of the same issues and that as we were the second charge holder, he would have to refer back to me in any event.

Between 16 January and 2 February 1996, Mr Hamilton and Mr Boardman had a conversation. They are not completely at one as to the terms of the conversation, but are in agreement that Mr Hamilton mentioned that a deed of company arrangement was in prospect and asked what attitude the Bank was likely to take. It is agreed also that Mr Boardman replied to the effect that the Bank would take a commercial approach (or might be prepared to go along with a deed if it provided a commercial and realistic return to the Bank). Mr Boardman says that he asked Mr Hamilton to speak to him again before the deed was finalised with details of the expected return to creditors and that Mr Hamilton agreed to do so. Mr Hamilton disputes that. I do not think it is necessary to attempt to resolve the difference.

Again, the Bank was not represented at the second meeting of creditors on 9 February 1996, at which the resolution to enter into a deed of company arrangement was adopted. Mr Boardman's evidence was that he wished and intended to go, but that he was detained by other urgent business. At all events, there was a further telephone conversation on that day between Messrs Hamilton and Boardman. It was by no means free of acrimony, nor are its terms undisputed. What is clear,
however, is that Mr Boardman understood that the creditors had voted in favour of the deed, that it was suggested to him by Mr Hamilton that the Bank should discharge its security and that Mr Boardman replied that the Bank did not intend to do so. On the same day, following the conversation, Mr Hamilton sent to Mr Boardman by facsimile a letter in which he argued vigorously that the Bank had nothing to gain from liquidation and should permit the deed to take effect by discharging its security. He concluded with a threat to seek orders against the Bank, including an order under subs 444F(2) of the Law. There ensued on 12 February 1996 a further acrimonious conversation between Messrs Hamilton and Boardman. Again, there is not complete agreement about what was said and in the end, I think, it does not matter except that it was made clear that the Bank maintained its attitude. There was then a meeting between Mr Boardman, Mr Spehar and Mr Spehar's solicitor and accountant. Again, Mr Boardman made it clear that the Bank would not support the proposed deed but did not rule out favourable consideration by the Bank of a more advantageous proposal.

Initiation of proceedings: relief sought

The applicants commenced the present proceedings by an application dated 16 February and filed on 19 February 1996. The first respondent is the Bank; the second respondent is Ivan's Butchery (NSW) Pty Ltd. The relief which the applicants seek is as follows:

1.An Order that the National Australia Bank Limited be restrained from realising and otherwise dealing with the security held by it described in the schedule hereunder.

2.Alternatively, an Order that the National Australia Bank Limited be restrained from realising or otherwise dealing with the security for the period of the term of the proposed Deed of Company Arrangement between Kisoro Pty Ltd ("the Company") and its unsecured creditors being a period of the "continuation period" in all 1096 days from the date of commencement or, if the Deed terminates at an earlier date up to the date of termination.

3.An Order that the Deed of Company Arrangement be varied by the deletion therein of Clause 2(a) and that Clause 2(d) be amended so that it reads:

"2(d)the Administrator receives evidence to his satisfaction of condition 2(c) having occurred".

4.An Order that the time within which the Company must execute the proposed Deed of Company Arrangement be extended until seven (7) days after termination of these proceedings.

The security referred to is the debenture under which the Company charged its assets in favour of the Bank.

I have already extended to Friday, 10 May 1996 the period within which the deed of company arrangement must be executed by the Company: see para 444B(2)(b) of the Law.

The second respondent, by a document under its common seal, has indicated that it does "hereby consent to submit to such Orders as may be made by the Court notwithstanding that we have not filed a Notice of Appearance nor do we intend to
be represented in this matter". The Bank, however, strenuously opposes the granting of the relief sought.

Issues and contentions

The principal issue is whether this is a case where the Court should make an order under subs 444F(2) of the Law. Subsection (1) of s 444F provides that the section applies where it is proposed that a company execute a deed of company arrangement. The next two subsections then provide:

444F(2) [Secured creditors] Subject to subsection 441A(3), the Court may order a secured creditor of the company not to realise or otherwise deal with the security, except as permitted by the order.

444F(3) [Protection of secured creditors] The Court may only make an order under subsection (2) if satisfied that:

(a)for the creditor to realise or otherwise deal with the security would have a material adverse effect on achieving the purposes of the deed; and

(b)having regard to:

(i) the terms of the deed;

(ii)the terms of the order; and

(iii)any other relevant matter;

the creditor's interests will be adequately protected.

Subsection (6) provides that an order under the section may be made subject to conditions. Under subs (7), the administrators of the Company are the proper applicants.

It is not disputed that if the Bank were to realise or otherwise deal with its security the achievement of the purposes of the Deed would be adversely affected and it is difficult to see how the deed could have its intended result if, for example, the Bank were to appoint a receiver under its security. There is an issue, however, as to whether, if an order were made under subs (2), the Bank's interests would be adequately protected. The Bank also asserts, and the applicant's deny, that this is in any event a case where an order should be refused on discretionary grounds.

There is in addition a question whether, if I were to decide that this is an appropriate case for an order under subs 444F(2), I have power to make a consequential order varying the proposed deed in the way which the applicants seek. The applicants say that the Court has that power under s 447A of the Law. The Bank submitted that it does not, but does not dispute that, if I were to hold that an order should be made under subs 444F(2) and that the Court has power to order the variation of the Deed, it would be appropriate in this case to order the variation.

Contentions and reasoning as to subs 444F(2)
In essence, the case for the applicants is simple. It is that the Company has no remaining assets; there is a very large amount of the first chargee's debt remaining unsatisfied. If there are claims which might be made in a liquidation against directors or former directors or against the first chargee himself, the recoverable amount would not on any reasonable view equal or exceed the amount still owing to the first chargee on the security of his first charge. Similarly, if there are moneys which might be recovered in a liquidation from persons who received preferential payments or the benefit of an uncommercial transaction, then once again the amounts recoverable would be very much smaller than the first chargee's residual debt; and in any event amounts recoverable under this head would be recovered for the benefit of creditors generally: they would not fall within the Bank's security. Thus, the applicants say, the Bank would on no reasonable view recover anything under its security in a liquidation. That being so, the Bank's interests are adequately protected by an administration under which (unlike a liquidation) it will, in common with other creditors, receive a distribution, however small or even derisory it may be.

The Bank's first submission was that the Court has no power under s 444F to extinguish the proprietary right of a secured creditor: the power under subs 444F(2) extends only to ordering a secured creditor not to realise or deal with its security. The Bank contended that the condition precedent to the deed taking effect - that the Bank release its charge - would have the effect of extinguishing the Bank's proprietary rights. The Court should not, it was said, sanction a deed which would have that effect. This was by no means the Bank's main argument, and I can deal with it briefly. If the deed were executed and the condition stood, then even if the Court were to make an order that the Bank should not realise or deal with its security, the condition would not extinguish the Bank's security or deprive it of its proprietary right. It is a condition only and does not compel the Bank to do anything. Its only consequence is that if the Bank does not in fact release its security, the deed will not, though executed, take effect. Thus, of course, an order against the Bank under subs 444F(2) will not assist the applicants unless the consequential order amending the deed, which they seek, is made as well; and if that order is made, then the condition precedent will be removed from the deed and the deed will take effect even if the security is not released. The Court will not, however, if it makes the orders contemplated, have extinguished the Bank's security: it will simply have made an order of the kind which subs 444F(2) in terms contemplates and a consequential order necessary to give it practical effect.

The Bank's substantial submissions are to the effect that the Court cannot in the circumstances be satisfied that, if the orders sought are made, the Bank's interests will be adequately protected, and that for what may be characterised as discretionary reasons, the Court ought not grant the relief which the applicants seek. Those submissions share a foundation in the evidence, particularly in the evidence relating to the dealings between the Company and Mr Damjanovic.

A helpful starting point is a mathematical calculation set out in supplementary submissions filed on behalf of the Bank which is said to demonstrate that, far from there being a substantial amount still owing by the Company to Mr Damjanovic, there
is in fact a substantial balance owed the other way which would be recoverable in the Company's winding up.

Item

1.

Adopt Mr Hamilton's "balance at 31.10.95" of amount apparently owing to Damjanovic secured under the charge (p.170 of his big affidavit)

$1,344,081.87

2.

Deduct pre-charge advance to directors Ivan and Zelka Spehar

$ 480,000.00

$ 764,081.87

3.

Allow for interest on loan to directors (say)

$ 100,000.00

$ 664,081.87

4.

Adjust for plant and equipment: Value of plant and equipment (on a going concern basis as disclosed in Exhibit A2 p. 404)

Less amount credited by Damjanovic (according to Hamilton affidavit p.170)

On all accounts, the goodwill of the business should equal or exceed this sum.

However it seems that further adjustments to the figures on p. 170 may well be necessary as follows:

474,500.00

189,242.00
285,242.00

$ 285,242.00
$ 378,839.87

5.

Deposit of $100,000 in the name of the company on 1.10.92 - use of funds not explained

$ 100,000.00

$ 278,839.87

6.

7.10.94 Unexplained advance

$ 50,000.00

$ 228,839.87

7.

30.6.96 Journal 14 unexplained loan advance credit to Ivan's account

This balance of account is derived before any adjustment is made on account of the fact that the funds which were advanced to the company when the charge was given appear to have been largely used to repay indebtedness incurred by the company for the purpose of handing over funds to the directors.

$ 50,000.00

$ 178,839.87

8.

If goodwill realises the amount stated in Kisoro's 30 June, 1995 account (Ex.R7) (based on valuation) the relevant amount available for distribution to the second respondent and creditors generally is:

$ 991,828.91

$ 812,989.04

The Bank's explanation of item 2 is that the moneys concerned were (as I have said) paid by Mr Damjanovic not to the Company but to Mr and Mrs Spehar. In those circumstances, if the payment gave rise to a debt owing to Mr Damjanovic it should be regarded as a debt of the Spehars, not of the Company. If the Company purported to charge its assets as security for money owing by the Spehars, then it did so as a result of a breach of duty by its directors and Mr Damjanovic should be treated as having notice, of a relevant kind, of that breach so that he cannot claim the amount as a secured debt of the Company. Item 3 is a consequential interest adjustment.

Item 4 rests on a different basis. Its starting point is that it is at least arguable that the transaction by which (apparently) Mr Damjanovic, in exercise of his powers as chargee, sold to Ivan's Butchery (NSW) Pty Ltd the Company's business and assets was carried out in a way which breached Mr Damjanovic's duties and is therefore
voidable; and equally, the argument runs, Mr Damjanovic is accountable as mortgagee in possession. This is so because the transaction was not one at arm's length with an independent party; and not only is there no evidence of appropriate steps to obtain a proper price but, says the Bank, in certain important respects it is clear that a proper price was not in fact obtained. That is said to be so in the case of the Company's plant and equipment. There is evidence that at about the time when the sale to Ivan's Butchery (NSW) Pty Ltd took place, a valuation of the plant and equipment was obtained on an auction basis and the sale was made at that valuation. The exhibit referred to in the Bank's calculation, however, is a valuation as at 13 July 1995 of the plant and equipment on the basis of market value for existing use. The Bank says that the first chargee could and should have sold the business as a going concern.

Items 5, 6 and 7 are included, as I understand it, simply on the basis that they are advances recorded as having been made to the Company by Mr Damjanovic but where there is no particular evidence as to the way in which the money was applied.
I shall return shortly to the paragraph immediately following item 7.

Item 8 refers to the fact that the value attributed to goodwill in the balance sheet of the Company as at 30 June 1995 is $991,828.91. The explanation given in note 9 to the accounts is not very informative:

9.Intangibles
Goodwill$341,828.91
Goodwill - at valuation $650,000.00
$991,828.91

The evidence does not show where those figures came from or how they are arrived at. The Bank's suggestion, however, is that the best evidence of the value of the goodwill of the Company is the value stated in the accounts and that, if the business were sold as a going concern, it is reasonable to suppose that that value would be substantially realised. The reference to goodwill in item 4 relates to a view expressed by the applicants in reporting to creditors, to the effect that a proper realisable value of the plant and goodwill (combined) of the entire business could not on any reasonable view exceed the going concern value of the plant, i.e. $474,500.00.

On the basis of those calculations, the Bank says that the Company has claims against Mr Damjanovic which, if they were pursued by a liquidator, might result in a return for the Bank and, incidentally, for other creditors, substantially greater than that which they would receive under the deed. It says that, on the evidence, the Company has a clear right, under the principles applied by the High Court in Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195, to set aside Mr Damjanovic's purported exercise of his power of sale. Equally, the Bank contends, the Company has a clear right to require Mr Damjanovic to account as mortgagee in possession.

The Bank submits, additionally, that the evidence indicates that a liquidator has prospects of successfully pursuing claims against Mr and Mrs Spehar based on the "intermingling" to which I have referred: that is, use of funds belonging to the Company for their private purposes. And, the Bank says, not only is there a prospect that the Spehars will be held liable on that basis but Mr Damjanovic, also, is likely to be implicated, applying the principle in Barnes v Addy (1874) 9 Ch App 244: Counsel for the Bank referred particularly to Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. Counsel pointed to the apparently close relationship between the Spehars and Mr Damjanovic, to the fact that of the initial advances $480,000 was paid to the Spehars rather than the Company ($40,000 of which was retained by them), and to the circumstance that the loan agreement is oddly drawn so as to purport to make both the Spehars and the Company liable as "Borrowers", i.e. as coordinate principal debtors.

That is not the only basis on which the Bank says that Mr Damjanovic may be liable to the Company as a fiduciary. It was suggested also that he had been able to acquire, for the companies which he controls, the business of the retail companies by virtue of his position as mortgagee of the assets of the Company: it followed, so it was said, that the Company has a claim that that acquisition, arising from that opportunity, must be taken to have been made for its benefit. Thus, the submission runs, Mr Damjanovic is accountable to the Company not only for his dealings, as mortgagee in possession, with the assets of the Company but also for the assets (such as they may have been) of the retail companies.

Finally, as to the possible claims of the Company against Mr Damjanovic, the Bank says that a liquidator might pursue a claim that the first charge itself is voidable. If the granting of a charge securing liabilities not just of the Company but also of the Spehars was an improper exercise of the power of the directors, then, in the circumstances which I have already mentioned, Mr Damjanovic may have had notice of the impropriety so that the charge itself is capable of avoidance.

Apart from potential claims against Mr Damjanovic, the Bank points to actions which might be taken against directors for allegedly insolvent trading (and, as I have indicated, for breach of fiduciary duty). When faced with the suggestion that pursuit of any of these claims is likely to involve substantial cost, the Bank says that a "fighting fund" could be amassed through the recovery of preferential payments and that creditors, including the Bank, may well be prepared to fund a liquidator in whom they had confidence.

On discretionary matters, the Bank makes the following submissions:

On the evidence, there are clearly a number of matters which would properly be the subject of full examination in a liquidation. The effect of making the orders sought is to permit the scheme to proceed, so that there will (at least during the three year moratorium period) be no liquidation. The result would be that the first chargee, the directors and their associates will, at small cost and with the prospect of significant benefit, through the use of the tax losses, escape the full investigation of their conduct which ought to take place. The Court should not sanction this. Counsel referred particularly to Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707. Thus, as counsel vigorously put it, the effect of the Court authorising the proposed deed would be to ratify and sanction grievous misconduct by the first mortgagee, and probably by the directors, and effectively preclude opportunities for further investigation of such misconduct. Another colourful way of putting the same point was to characterise what was done as an innovative attempt by interests associated with the first mortgagee to "snooker" the Company's obvious claims against him by offering an amount just above the administrators' expenses, securing at the same time significant prospective tax advantages: an attempt which should not be condoned by the Court.

The deed is discriminatory as between creditors, and particularly as to way in which it affects the Bank. The Bank would be deprived of any priority and would rank simply as an unsecured creditor. More than that, however, it was said that it was possible under the deed that certain unsecured creditors would gain advantages over others, including the Bank. For example, the deed provides that unsecured creditors owed less than $1,000 may receive the full amount owing or a greater amount, proportionately, than other unsecured creditors; and trade creditors may, on the evidence, obtain a collateral advantage through continuing dealings with the Ivan's Butchery group. Furthermore, the administrators themselves will, if the deed proceeds, be its principal beneficiaries: they, unlike anyone else, will be paid in full. Indeed, the Bank criticised the applicants somewhat harshly for what its counsel
described as a readiness, in order to obtain payment of their fees and expenses, to act complicitously with wrongdoers.

For those reasons the deed, if it had been executed, was one which the Court would terminate under s 445D of the Law: and the Court would not sanction a deed which, on an application under that section, it would terminate.

I shall deal separately with the two limbs of the Bank's argument.

Adequate protection of the Bank's interests

This question must be considered in the light of the character and effect of an order under subs 444F(2) and the place of s 444F in the statutory scheme.

Where creditors of a company resolve under s 444A that the company execute a deed of company arrangement, the company is obliged, under s 444B, to execute the deed. Once the resolution has been passed, creditors are required, pending execution of the deed, not to do anything inconsistent with it: s 444C. Once the deed is executed, it binds all creditors of the company in relation to pre‑administration claims. Creditors for that purpose obviously include secured creditors. Subsection 444D(2) qualifies, in a significant respect, that binding nature of a deed. It provides:

444D(2) [Realisation of securities] Subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security, except so far as:

(a)the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b)the Court orders under subsection 444F(2).

Section 444E then provides that a person bound by the deed cannot apply to wind up the company (or proceed with an application already made) and cannot begin or continue a proceeding against the company or in relation to any of its property, or begin or continue an enforcement process in relation of the company's property, except with leave of the Court. On the footing that a secured creditor is a person bound by the deed it is clear enough, I think, that the prohibitions in s 444E affect a secured creditor just as they affect an unsecured creditor.

That brings me to the place of subs 444F(2) in the statutory scheme. The order which the Court may make under the subsection is one which precisely reflects the terms of subs 444D(2): that is, the Court may order a secured creditor of the company not to realise or otherwise deal with the security, except as permitted by the order. Given that s 444E prohibits a secured creditor, as a person bound by the deed, from making an application for winding up or taking proceedings against the company, it is evident that the exception in subs 442D(2) to the binding effect of a deed on a secured creditor, and equally an order under subs 444F(2), is directed towards the exercise of proprietary and contractual rights and powers that the secured
creditor has under its security in relation to the property which it affects: i.e., the rights and powers identified by Hodgson J as self‑help or extra‑curial enforcement or recovery procedures (J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172 at 181, 182). I respectfully agree with his Honour's analysis of the provisions. In other words, where the provisions speak of realising or otherwise dealing with a secured creditor's security, they are referring to steps that the creditor may take without assistance from the Court. If a secured creditor requires the assistance of the Court in order to enforce its rights in relation to the property in which it has an interest - for example, if an order for sale is required (no sale out of Court being possible) or the appointment of a receiver is sought (no such appointment out of Court being possible) - then, it follows, leave will be required in accordance with para 444E(3)(c): although the question does not arise in this case, no doubt leave would more readily be granted in such a case than where, for instance, a secured creditor seeks leave to apply for an order for winding up, or to sue on a personal covenant. See also Brash Holdings Ltd v Katile Pty Ltd (1994) 13 ACSR 504 at 513, 514; Molit (No. 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 135 ALR 280 at 289, 290.

The other preliminary comment which should be made, obvious as it may be, is that one of a number of innovations in division 10 of Part 5.3A is that, unlike the old procedure where a scheme of arrangement was proposed, a deed of company arrangement may be resolved upon and executed, and will take effect, without any assistance from the Court. The only approval required is that of the creditors, under s 444A. It should be added that the Law seeks to ensure that in coming to their decision the creditors will be properly informed (s 439A(4)), and one of the grounds on which the Court may terminate a deed is that creditors were misinformed or not fully informed (ss 445D(1)); but the time limits in divisions 4 and 5 of Part 5.3A contemplate that the information will be obtained by the administrator and put before creditors promptly. It is clear that the process is not intended to be a leisurely one.

Though the Bank certainly does not concede that its self help, extra‑curial remedies are not required for its adequate protection, it is fundamental to the Bank's argument that the appropriate fate of the Company is immediate liquidation. In effect, it asserts that the result of the Court declining to make the orders sought by the applicants will be the appointment of a liquidator. If, on the other hand, the applicants are successful, the deed will take effect and the Bank's interests will not be adequately protected, so the Bank says, not because it will be unable to appoint a receiver or exercise a power of sale, but because steps that might be taken in a liquidation, for the benefit of all creditors, will not be taken.

The matters which the Court should have in mind when deciding whether a secured creditor's interests will be adequately protected if an order under subs 444F(2) is made have not been the subject of consideration in any case which counsel or I have been able to discover. I was referred to two authorities in other jurisdictions, one the decision of the US Supreme Court in United Savings Association of Texas v Timbers of Inward Forest Associates Ltd 98 L ed 2d 740 (1988), particularly at 746, the other the decision of the English Court of Appeal in Re Atlantic Computer Systems plc [1992] 1 All ER 476. Because of the very considerable differences between the provisions of the Corporations Law and the legislation of other jurisdictions, it is necessary to treat authorities from other jurisdictions with some care. Nevertheless, in so far as the authorities indicate a reluctance to deprive a secured creditor of its proprietary rights or to sanction an arrangement which will cause those rights to depreciate substantially in value, that approach is, no doubt, equally applicable under the Law: it is unlikely to be the case that a secured creditor who, in a significant way, is deprived its interest, or the value of its interest, without substantially equivalent compensation, is adequately protected. Making allowances for differences between circumstances and statutory regimes, and bearing in mind particularly that under the English provisions with which the case was concerned the application was one by a lessor of goods for leave to exercise its self help contractual remedies rather than one seeking an order prohibiting a secured creditor from doing so, the following passage from the judgment of the Court of Appeal in Atlantic Computer Systems (at 501) is, I think, indicative of the correct approach under the Corporations Law:

(2)The prohibition [on the exercise of contractual rights] is intended to assist the company, under the management of the administrator, to achieve the purposes for which the administration order was made. If granting leave to a lessor of land or the hirer of goods (a "lessor") to exercise his proprietary rights and repossess his land or goods is unlikely to impede the achievement of that purpose, leave should normally be given.

(3)In other cases where a lessor seeks possession the court has to carry out a balancing exercise, balancing the legitimate interests of the lessor and the legitimate interests of the other creditors of the Company (see Peter Gibson J in Royal Trust Bank v Buchler [1989] BCLC 130 at 135).

The metaphor employed here, for want of a better, is that of scales and weights ... It must be kept in mind that the exercise ... is not a mechanical one; each case calls for an exercise in judicial judgment, in which the court seeks to give effect to the purpose of the statutory provisions, having regard to the parties' interests and all the circumstances of the case. As already noted, the purpose of the prohibition is to enable or assist the company to achieve the object for which the administration order was made. The purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply.

(4)In carrying out the balancing exercise great importance, or weight is normally to be given to the proprietary interests of the lessor. Sir Nicolas Browne‑Wilkinson V‑C observed in Bristol Airport plc v Powdrill [1990] 2 All ER 493 at 507, [1990] Ch 744 at 767 that, so far as possible, the administration procedure should not be used to prejudice those who were secured creditors when the administration order was made in lieu of a winding‑up order. ... The underlying principle here is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable and even then this will usually be acceptable only to a strictly limited extent.

The difficulty here is that the Company has no property which, under its debenture, the Bank could sell, or of which it could take possession or appoint a receiver, other than the (possible) rights of action to which I have referred. There is no reason to doubt that claims which the Company may have against Mr Damjanovic as first chargee fall within the property charged in favour of the Bank by the debenture. The same may be true of claims which the Company may have against directors or Mr Damjanovic on the basis of breach of fiduciary duty: that may depend on whether those claims are property capable of assignment, particularly by way of charge in favour of the Bank, a question not canvassed in argument and which it is not necessary to pursue. It may at any rate be accepted that the fruits of an action on such a claim would fall within the Bank's security: see, e.g., Ferrier v Bottomer (1972) 126 CLR 597. The Bank asserts that the claims which the Company apparently has are likely to have considerable value and that its interests will not be adequately protected if an order is made the substantial effect of which is to prevent the realisation of those claims. The applicants, on the other hand, say that it is evident that the likely value of the claims is significantly less than the residual debt owed to the first chargee of all of a company's property and that, therefore, their realisation would afford no benefit to the Bank or any other creditor.

In my view, the mere fact that the Bank seeks to have the Company wound up rather than exercise its powers out of Court has little bearing on the question whether its interests would be adequately protected if an order were made or, more generally, whether an order under subs 444F(2) should be made. Even if the deed did not include condition 2(a), the continuing power of the Bank to exercise its remedies under the debenture would, I think, enable the Bank to frustrate the deed and thereby, as a practical matter, compel liquidation. The making of the orders sought would deprive the Bank of that power. If the substance of the matter is that the Bank would thus be deprived of its rights (prior to those of unsecured creditors) in respect of property recoverable in a liquidation, there is much to be said for the view that such an order would leave the Bank with its interests inadequately protected.

On the other hand, if the situation were that a first chargee of all of a company's property had exercised its power of sale in a way which was clearly proper, though leaving a substantial deficiency, and if it were clear also that any claims that the company might have against other persons would not realise an amount at least equal to the deficiency, I do not think that the adequate protection of a second chargee (whose proprietary rights would in those circumstances be worthless) would require that a proposed deed of company arrangement give to the second chargee any priority or advantage over unsecured creditors; nor do I think that in that situation an order under subs 444F(2) would ordinarily be refused merely because, for example, creditors owed small amounts, or possibly other creditors in particular categories, might receive under the deed a proportionately greater distribution than the second chargee. The relevant "interests" which a secured creditor has are those which it derives from its interest in the company's property; if those are of no value, it may be expected that nothing will be required for their adequate protection.

The difficult question in this case is whether on the evidence I should be satisfied that if I make the orders sought the interests of the Bank will be adequately protected. Counsel for the Bank submitted, in my view correctly, that the applicants bear the onus of satisfying the Court that, having regard to the matters referred to in para 444F(3)(b), a secured creditor's interests will be adequately protected if an order is made: J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172 at 180. The issue is, therefore, whether I should be satisfied on the evidence that the Bank's proprietary rights under its deed of charge are, in a liquidation, so likely to prove valueless that if the deed of company arrangement takes effect nothing further is needed for the adequate protection of its interests.
I cannot, of course, in these proceedings between the Company and its second secured creditor and on the evidence before me, come to any final conclusions as to the results of claims which might be prosecuted on behalf of the Company against its first secured creditor, its present or past directors or others. But I do not think necessarily it follows, once it appears that there are circumstances on which such claims might be based, that the Bank is entitled to succeed. In my view the task of the Court in a case such as this is to form a view, on all the material before it, as to whether there is a real prospect that in a liquidation claims in which (or in the fruits of which) the second secured creditor has an interest could and would be pursued so as to afford to the second secured creditor recovery of more of the debt owed to it than it would obtain under the proposed deed of company arrangement. In this case, that involves an assessment of the evidence (and inferences which may properly be drawn from it) relevant to the amounts of the claims of the two secured creditors, the prospects and likely value of the various claims which might be made in a liquidation and the likelihood of the claims being initiated and pursued to a successful conclusion. Indeed, the Bank's submissions - including the calculation to which I have referred - proceeded on the basis that the Court would undertake an exercise of that kind.

On the evidence, I do not think that the prospects of successfully challenging, to a significant extent, the amount of the debt owed by the Company to Mr Damjanovic are very high. It is convenient to start with the sum of $480,000, which (as item 2 in its calculation) the Bank seeks to exclude from the debt secured by the first charge. The evidence is that of that sum, $440,000 was transferred within 24 hours to bank
accounts of the Company. The total amount is treated in the Company's books as an advance by Mr Damjanovic to the Company, not one by the Spehars to the Company. In the loan agreement the Company (jointly and severally with the Spehars) acknowledges its indebtedness in respect of it. Such evidence as there is of the application of the $440,000 does not suggest a misapplication. Clearly there is a question - on which the evidence throws no real light - as to the $40,000 retained by the Spehars. On the material before me, however, I cannot conclude that there are substantial prospects of establishing that the sum of $440,000 is not owing by the Company to Mr Damjanovic, or is not secured by the first charge. There may be greater difficulty, from the point of view of the first chargee, about the $40,000 which the Spehars retained: much may, in that respect, depend upon how that sum was treated in the directors' loan account with the Company. In any event, I think it is appropriate to restore $440,000 of the $480,000 which the Bank would deduct, with the consequence that the allowance for interest should be considerably smaller than the Bank suggests.

As to the Bank's item 5, the deposit of $100,000, it is again somewhat difficult to see an easy basis on which to attack it. The Bank says that the use of the funds is not explained; the evidence is, however, that the funds came from Mr Damjanovic and were paid to the Company's operating bank account, and the evidence does not suggest that the operating account was not used as one would expect such an account to be used. I think the two advances of $50,000, on 7 October 1994 and 30 June 1996, fall into a similar category though there is, in the case of those advances, possibly an argument available to the effect that they are not secured by the first charge. It is an argument which one would not expect the first chargee readily to concede: it depends upon what might be decided as a boldly restrictive construction, by reference to a recital, of otherwise general words in the operative part of the deed of charge.

The note immediately under item 7 in the Bank's calculation refers to the sum of $870,000 lent on 3 February 1993. But for a relatively small amount applied in payment of various costs and disbursements and a smaller balance which was apparently paid to Mr and Mrs Spehar, that sum was received by the Company. $50,000 of it appears to have been advanced by the Company and applied in reduction of the Spehars' housing loan. $800,000 was applied in discharging what appears, clearly enough, to have been a liability of the Company to Westpac. If (as seems to be the case) the liability to Westpac thus discharged arose from advances a good part of which was lent by the Company to the Spehars to assist with the construction of their home, it does not necessarily follow that that was improper. As is not uncommon, the directors had a loan account with the Company and the extracts from the general ledger which are in evidence show that numerous payments were made by the Company to the directors and vice versa. It is, of course, to be noted that a substantial sum was paid to the Company (and applied in reduction of the loan amount) out of the proceeds of sale of the Strathfield property. Similarly, as I have mentioned, part of the proceeds of sale of a property in Newtown, owned by the Spehars, was paid to the Company. But even on the assumption that there was impropriety in the advances made to the Spehars (several years before the advance by Mr Damjanovic out of which the liability to Westpac was repaid), it is a long and difficult further step to establish that Mr Damjanovic was affected by that impropriety. Particularly, it is difficult to see why the apparent collaboration between Mr Damjanovic and the Spehars in more recent transactions should be thought to throw any light on that. Consequently, I think it would be difficult to establish that the $870,000 does not represent a debt, and a secured debt, of the Company to Mr Damjanovic. That is, of course, particularly so in the case of the $800,000 used to discharge the Company's debt to Westpac and probably also the amount applied in payment of costs and disbursements. In saying that, I have not overlooked the discharge, when the $870,000 was advanced, of Westpac's mortgage over the Yennora property. I cannot see, however, why any adverse inferences ought to be drawn simply because, when the Company discharged one of its substantial liabilities to Westpac, Westpac released a security which it held, for the Company's liabilities, over property belonging to directors: particularly where the lender of the funds out of which the liability was discharged proceeded to take a corresponding security.

In short, my conclusion is that a liquidator is likely to encounter serious difficulty in seeking to establish that a substantial part of the debt claimed by Mr Damjanovic is not owing or is not secured. I can see no reason to suppose that any efforts of a liquidator to establish either of those matters would not be strenuously resisted.

That then brings me to the countervailing claims. The first of these is the potential claim against Mr Damjanovic to avoid the sale of the property subject to the first charge or to require him to account as mortgagee in possession. The property was sold to a company related to the chargee; there is no evidence that any attempt was made to test the market. The Company was credited with the face amount of its debtors and with the auction value of its plant and equipment. Nothing was credited to it for goodwill. Obviously enough, the transaction may well be one which the Court would set aside. Equally, there is an obvious basis for a claim against the first chargee for an account. The Bank asserts that the sale might be set aside and that there is a real prospect that a price would, on resale, be obtained for the assets reflecting the going concern value of the business in which they are employed. It also says that the first chargee is likely to be found liable to account for the assets of which it had possession on the basis of their going concern value: that is, particularly, plant and equipment would have attributed to it substantially the value set out in item 4 of the Bank's calculation. Given matters to which I shall refer in discussing goodwill, I am somewhat sceptical about this. For reasons which will appear, however, it is perhaps not a matter on which I need form a firm view.

The other principal matter is goodwill. I have referred to the value attributed to the Company's goodwill in its 1995 accounts and it is reflected as item 8 of the Bank's calculation. The Bank says that the accounts provide the best evidence available of the value of the Company's goodwill. The applicants, on the other hand, say that the Company has no goodwill, or at least none approaching the value attributed to it in the accounts. As I have mentioned, the applicants say that, if the Company has (or had) any goodwill, the "going concern" value of the plant and equipment already incorporates it. If, however, as the evidence shows, the business of the Company was almost exclusively the manufacture and supply of products to the retail companies, it is somewhat difficult to see how the Company could have had any substantial separate goodwill. Mr Damjanovic's security did not extend to assets of the retail companies. The Bank argued that the first chargee was accountable to the Company, as a fiduciary, for the assets of the retail companies taken over by companies controlled by the first chargee, on the basis that the opportunity to acquire the assets was derived by the first chargee through its position as chargee; in other words, the first chargee was accountable to the Company, as a fiduciary, for the assets of the retail companies. Precisely how the opportunity was derived is not, in fact, clear on the evidence before me: the transactions are shrouded in mystery. In any event, however, a mortgagee is generally not liable as a fiduciary in that sense: see P D Finn Fiduciary Obligations 1977, p 10. Nor is there evident any special basis which might found an argument that the first chargee is accountable to the Company on that suggested basis.

I am thus satisfied, on the material before me, that there is no real prospect that proceedings against Mr Damjanovic based on his conduct as chargee would yield a return to the Bank or to other creditors. The high probability is, in my view, that following any such action there would still be a substantial debt owing to Mr Damjanovic and secured by the first charge. If one then adds to the picture any remedies that might be available against directors for breach of duty in relation to the
sale of the Company's assets, or against Mr Damjanovic as a knowing participant, I am unable to see a basis on which compensation might be recovered additional to whatever amount might be recouped in proceedings against Mr Damjanovic as mortgagee. The likelihood of fruitful success in other claims against directors or former directors based on breach of duty also seems remote. The only claims suggested (apart from those based on insolvent trading) are those which might arise out of the "intermingling" to which I have referred. Although, however, the evidence does not by any means eliminate all discrepancies, it is plain that the practice was to record the transactions concerned in the directors' loan account and that large sums (particularly those applied in constructing the Strathfield house) used for private purposes of the directors were repaid.

Another group of possible claims of the Company considered by the applicants and by the committee of creditors comprises claims against directors, or former directors, for "insolvent trading" - i.e., claims for compensation for loss arising from the incurring of debts in circumstances where s 588G of the Law applies. Again, however, it is evident on the material before me that any claims of that kind are by no means straightforward and are unlikely to be conceded or to be fruitful to an extent which would result in a return to the Bank as a secured creditor.

Finally, the applicants have conducted some investigation into the question whether certain payments made, or transactions entered into by the Company might be voidable in a liquidation under Division 2 of Part 5.7B of the Law. If any such payments or transactions were voidable under s 588FE, neither the right to avoid them nor the fruits of doing so would fall within property subject to the Bank's charge: Re Yagerphone Ltd [1935] 1 Ch 392.

Certainly in a liquidation public examinations might, as was submitted, be held under Division 1 of Part 5.9 of the Law and those examination might reveal evidence which would assist in pursuing claims such as I have described to a successful conclusion. That, however, is speculation. Examinations, obviously, would require the expenditure of money; the Company has none. The Bank suggested that the recovery of preferential payments might provide a "fighting fund"; but the recovery of preferential payments would itself require funding. The Bank put to me that creditors might be prepared to fund a liquidator who was not one of the applicants in whom, the Bank said, it had lost confidence. I think, however, I am entitled to treat this with a considerable degree of scepticism. The committee of creditors at its first meeting resolved that liquidation was appropriate and that a fund for the conduct of examinations should be established. A second meeting of the committee reversed its decision and resolved to recommend the deed. The creditors accepted that recommendation. The Bank does not claim to have lost confidence in the applicants as administrators before the emergence of the proposed deed; that emergence occurred after the meeting of the committee at which liquidation (with the support of the Bank) was considered to be the appropriate course. The Bank was, however, not a contributor to the proposed fighting fund. The Bank subsequently was absent from the crucial meetings of the committee and of the creditors.
I think the appropriate conclusion on the evidence is that there is no real prospect that in a liquidation claims in which (or in the fruits of which) the Bank has an interest could and would be pursued so as to afford the Bank recovery of more of the debt owed to it than it will obtain under the proposed deed. Accordingly, in my view, the Bank's interests as a secured creditor will be adequately protected if an order under subs 444F(2) is made.

Discretionary matters

I have described the grounds on which the Bank submits that, as a discretionary matter, an order under subs 444F(2) should be refused. The Bank relied particularly on Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707. That was a case in which a resolution that a company execute a deed of company arrangement was set aside by an order under s 447A of the Law. It is a case which bears some superficial similarity to this. The company concerned was hopelessly insolvent and the effect of the deed was to provide a very small return to creditors from funds contributed by persons associated with the company who sought to derive an advantage from the use of its tax losses. It is important to notice, however, that that case was one where the applicant was by far the company's largest creditor. It had voted against the deed with the result that, though there was a majority in number of creditors voting in favour of the deed, the amount owing to the opponent of the deed was much greater than the aggregate amount owing to its supporters. In those circumstances the administrator exercised its casting vote in favour of the deed. There, as here, there were a number of transactions which had been entered into between the company and those associated with it which, it was suggested, might at least be questionable and required investigation. It was held in that case that the inquiries which had been made by the administrator as to those matters were insufficient to justify his use of the casting vote in favour of the scheme or his recommendation of it. In this case, of course, the administrator did not exercise a casting vote; there was a clear majority in favour of the deed both in number and in amount. Secondly, here the applicants in fact did not recommend the deed (though certainly they printed out what they saw to be a lack of advantage in a liquidation): they expressly left it to the commercial judgment of creditors. Thirdly, it is evident from the relatively brief account of the facts in Bartlett that the extent of investigation and disclosure there, in relation to the transactions concerned, was very substantially less than here. In short, Bartlett is in my view clearly distinguishable.

The Bank relied, more particularly, on an argument that the deed discriminated against it and cited in support of that argument Mollit (No. 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 135 ALR 280. There, however, a particular creditor was singled out for discrimination in a way and to an extent which have no parallel here. Indeed, Derrington J in Bartlett (whose observations are cited with approval in Mollit at 294) recognised that a degree of discrimination in favour of particular creditors of a company might be unobjectionable, even if the purpose of that discrimination were to induce those creditors to support a deed: see at 709. I do not think that the provision that small creditors (i.e. those to whom less than a $1,000 is owed) may receive a proportionately greater distribution than other creditors is to be regarded as discrimination of a sort which would cause the Court to terminate a deed (or, as in Bartlett, to order under s 447A that the creditors' resolutions be set aside); nor, in circumstances where there are no available assets covered by the Bank's security, is it in my view unfair discrimination for a deed to treat the Bank in exactly the same way as other unsecured creditors. Nor, a fortiori Bartlett, is an extraneous arrangement under which trade creditors may receive some benefit from continued trading to be regarded, in my opinion, as unfair discrimination which the Court would not permit.

The Bank argued that the Court should not countenance a deed which had the effect that wrongdoers would, by a modest outlay, avoid the consequences of their wrongdoing. That is a colourful way of describing the circumstances, but one which does not, I think, lead to a conclusion favourable to the Bank. The applicants as administrators have an obligation to make a report under s 438D of the Law if it appears to them that offences or other misconduct of kinds to which that section refers may have been committed. The execution of the deed does not remove the obligation so to report, or prevent the Commission from taking action on such a report. That apart, it may be that the Company has, as I have said, rights of action arising out of things that have occurred: but I can see nothing wrong with the notion that creditors, reasonably informed, might properly resolve upon a course which would result in the Company not pursuing those rights. There is no duty to pursue them; and, indeed, the Court, if it were to refuse an order under s 444F, and thus in effect
bring about liquidation, would by no means necessarily ensure that any claims were in fact pursued.

Finally, on this aspect of the case, the Bank made severe criticisms of the applicants as administrators. The effect of the criticisms was that by promoting the deed, the principal beneficiaries of which were the applicants themselves, the applicants had shown a lack of independence and were acting complicitously with persons who had wronged the Company. On the material before me, I do not think that those criticisms can be supported. It is clear, of course, that the Bank and the applicants have fallen out and that the Bank has no confidence in the applicants as administrators. My view is, however, that given the constraints to which they were subject, particularly constraints of time, the applicants have made appropriate investigations and reported appropriately to the committee of creditors and to creditors generally. As I have said, the applicants did not in fact recommend the scheme to creditors: they pointed out its effect, they expressed their views as to the likelihood of substantial recoveries in a liquidation and gave their reasons for those views; and they left the matter on the basis that it was one for the commercial judgment of creditors. Neither was there any attempt at secrecy concerning the obvious fact that whereas under the deed the administrators would be paid, in a liquidation they might be left without payment. That fact was clearly stated.

For those reasons, the discretionary basis on which the Bank submitted that I should refuse an order also fails. Accordingly, I consider it appropriate to make an order under subs 444F(2).

Amendment of Deed

An order under subs 444F(2) will be of no utility unless a consequential order, substantially as sought in paragraph 3 of the application, is made: that is, an order deleting condition 2(a) from the deed and the reference to condition 2(a) in condition 2(b).

The applicants argued that the Court has power to make such an order under subs 447A(1) of the Law, which provides:

447A(1) [General powers of court] The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

Subsection 447A(2) then gives, as an example of the sort of order which the Court may make, an order that the administration of a company should end.

Particularly in the light of the provisions for variation in ss 445A and 445B, I was at first inclined to doubt that an order amending a deed of company arrangement, which creditors have resolved that a company enter into, is properly to be described as an order about how Part 5.3A of the Law is to apply in relation to a company. I am persuaded, however, that my initial reaction was wrong. There is ample authority to the effect that the powers conferred on the Court by s 447A are wide indeed. In Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 at 611 Young J referred to s 447A as giving the Court "plenary powers to do whatever it thinks is just in all the circumstances"; see also the discussions in Brash Holdings Ltd v Katile Pty Ltd (1994) 13 ACSR 504 at 507, 508, Re Brashs Pty Ltd (1994) 15 ACSR 477 at 480‑483, Re Giga Investments Pty Ltd (1995) 17 ACSR 547 at 548, 549. More particularly, however, in Milankov Nominees Pty Ltd v Roycol Ltd (1994) 14 ACSR 296 Lee J explicitly contemplated (at 301) that an order amending a deed might be made under s 447A. His Honour's observations were explicitly approved by Branson J in Giga and then applied by her Honour in Mulvaney v Rob Wintulich Pty Ltd (1995) 18 ACSR 384.

If, as I have held, this is a case where it is appropriate to make an order under s 444F, it must equally be a case where it is appropriate to make an order, under s 447A, for the purpose of amending the deed in a way which does not affect the substance of what was before the creditors but is merely necessary in order to enable it to take effect.

Conclusion

For those reasons I make the following orders:

That until the deed of company arrangement proposed to be entered into by Kisoro Pty Ltd ceases to have effect, National Australia Bank Limited is not to realise or otherwise deal with the security constituted by a debenture granted to it by Kisoro Pty Ltd dated 13 April 1994 and registered on 26 April 1994 under the number 436205.

That the deed of company arrangement be varied by the omission of clause 2(a) and by the amendment of clause 2(d) so that it will read:

2(d)The Administrator receives evidence to his satisfaction of condition 2(c) having occurred.

I can see no obvious reason why costs should not follow the event. The position is somewhat complicated, however, as the costs of a motion of the applicants, which I heard and dismissed after reserving this judgment, have yet to be dealt with. I shall, accordingly, hear the parties on the question of costs.

I certify that this and the preceding 59 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane.
Associate:

Dated: 3 May 1996

Heard: 21 March 1996 and 4 April 1996

Place: Sydney

Decision: 3 May 1996

Appearances: Mr J T Svehla of counsel appeared for the applicants.

Mr J E Thomson of counsel instructed by Dibbs Crowthers & Osborne appeared for the first respondent.

1.	Adopt Mr Hamilton's "balance at 31.10.95" of amount apparently owing to Damjanovic secured under the charge (p.170 of his big affidavit)	$1,344,081.87
2.	Deduct pre-charge advance to directors Ivan and Zelka Spehar	$ 480,000.00 $ 764,081.87
3.	Allow for interest on loan to directors (say)	$ 100,000.00 $ 664,081.87
4.	Adjust for plant and equipment: Value of plant and equipment (on a going concern basis as disclosed in Exhibit A2 p. 404) Less amount credited by Damjanovic (according to Hamilton affidavit p.170) On all accounts, the goodwill of the business should equal or exceed this sum. However it seems that further adjustments to the figures on p. 170 may well be necessary as follows:	474,500.00 189,242.00 285,242.00	$ 285,242.00 $ 378,839.87
5.	Deposit of $100,000 in the name of the company on 1.10.92 - use of funds not explained	$ 100,000.00 $ 278,839.87
6.	7.10.94 Unexplained advance	$ 50,000.00 $ 228,839.87

[1996] FCA 318

3 MAY 1996