Hayes v Doran (No 2) - [2012] WASC 486

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: HAYES -v- DORAN [No 2] [2012] WASC 486

CORAM: KENNETH MARTIN J

HEARD: 26-27 & 30 APRIL, 1-2 MAY, 6-10 & 13 AUGUST, 5 SEPTEMBER 2012

DELIVERED : 14 SEPTEMBER 2012

PUBLISHED : 14 DECEMBER 2012

FILE NO/S: COR 185 of 2011

MATTER :ELEMENTREE GROUP LTD (ADMINISTRATORS APPOINTED)

BETWEEN: COURTNEY HAYES
Plaintiff
AND
GARY PETER DORAN
First Defendant
DERMOTT JOSEPH MCVEIGH
Second Defendant
DANNY FAKHRE
Third Defendant

Catchwords:

Corporations law - Administration - Registered charges - Deed of company arrangement - Challenge to validity of appointment of administrators and deed administrators - Convertible loan agreements - Creditor's election to convert loan moneys to shares - Failure of chargor corporation to issue conversion shares - Action for specific performance commenced by chargee to enforce election to convert and obtain conversion shares - Shares not unconditionally delivered to chargee - Status of chargee as creditor for loan after election to convert by Conversion Notice - Acceptance by administrators of appointing chargee as secured creditor - Votes of secured creditor determinative on proposal to approve his deed of company arrangement - Deed of company arrangement proposal approved - Deed of company arrangement discriminates between classes of creditors - Fairness and legitimacy - Certain creditors subscribed funds for share issue but later agreed to proposed use of funds as loans - Relief - Discretion to approve or validate deed of company arrangement notwithstanding deficiencies - Turns on own facts

Legislation:

Corporations Act 2001 (Cth), s 95A, s 436C, s 445D, s 447A, s 447C
Corporations Regulations 2001 (Cth), reg 5.6.21

Result:

Declaration that Administrators validly appointed
Application to terminate DOCA under Corporations Act s 445D refused

Category: B

Representation:

Counsel:

Plaintiff:     Mr M L Bennett & Ms C L Donald
First Defendant             :     Ms P E Cahill SC, Mr C J Steel (from 26 April - 2 May 2012) & Mr C P Blaxill (from 6 August 2012)
Second Defendant         :     Ms P E Cahill SC, Mr C J Steel (from 26 April - 2 May 2012) & Mr C P Blaxill (from 6 August 2012)
Third Defendant           :     Mr J A Thomson & Mr K L Christensen

Solicitors:

Plaintiff:     Bennett & Co
First Defendant             :     Allens
Second Defendant         :     Allens
Third Defendant           :     Gadens Lawyers

Case(s) referred to in judgment(s):

ANZ Executors & Trustees Ltd v Humes Ltd [1990] VR 615
Austman Pty Ltd v Mount Gibson Mining Ltd [2012] WASC 202
Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270
Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540
Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337
Fitzgerald v Masters (1956) 95 CLR 420
Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) [2005] WASC 291; (2005) 228 ALR 598
McCourt v Cranston [2012] WASCA 60
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444
Perpetual Trustee Company Ltd v HIH Holdings (NZ) Ltd (in liq) [2012] NSWSC 611
Re NIAA Corporation Ltd (in liq) (1993) 33 NSWLR 344
Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323
Tailby v Official Receiver (1888) 13 App Cas 523
Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301
Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45

Table of contents

Urgency

Overview
Prelude to the discussion of critical issues
Elementree's business in Western Australia
Mr Fakhre's loans to Elementree
Key provisions within the CLA and two charges of Mr Fakhre
Notice of election to enforce by chargee and notice of appointment of administrator by chargee given by Mr Fakhre on 12 July 2011
Elementree's shareholders
Elementree's historical financial performance
Elementree's creditors
Sources of evidence at trial

The plaintiff's evidence
The first and second defendants' evidence
The third defendant's evidence
Other evidence

Chronology of key events: findings
The evidence of Mr Courtney Hayes
Further observations concerning the CLA and Mr Fakhre's two charges
Section 445D of the Corporations Act

Resolution

Issue 1 - The alleged tripartite non‑conversion agreement
Issue 2 - Elementree's attempted repayment of $1.3 million plus interest
Issue 3 - $650,000 payable personally by Mr Hayes
Issue 4 - Elementree's failure to issue and allot repayment shares
Issue 5 - Lapse of Mr Fakhre's settlement offer
Issue 6 - Elementree's purported acceptance of Mr Fakhre's lapsed offer of settlement
Issue 7 - Mr Hayes' application to the court to validate the written resolution of 7 July 2011
Issue 8 - First event of default
Issue 9 - Insolvency of Elementree
Issue 10 - Events of default subsisting at 12 July 2011
Issue 11 - Mr Fakhre's written notices to Elementree on 12 July 2011
Issue 12 - The basis of Mr Fakhre's election to enforce his charges
Issue 13 - Elementree's failure to repay the Moneys Hereby Secured as an Event of Default
Issue 14 - Validity of the exercise of Mr Fakhre's option to enforce his charges
Issue 15 - The operation of cl 15(a) of the charges
Issue 16 - The validity of Mr Fakhre's appointment of administrators of Elementree
Issue 17 - Mr Fakhre's creditor status
Issue 18 - The effect of Mr Fakhre's election to claim repayment of loan funds
Issue 19 - Accuracy of the statements regarding Mr Fakhre in the administrators' Report to Creditors
Issue 20 - Reliability of Mr Hayes' evidence in relation to verbal agreements allegedly reached on 5 November 2010
Issue 21 - The alleged Matching Funds Agreement
Issue 22 - The alleged Tree Agreement
Issue 23 - Accuracy of the administrators' Report to Creditors in relation to the Matching Funds Agreement and the Tree Agreement
Issue 24 - The position of Mr Cuthill
Issue 25 - Discrimination between creditors under the DOCA
Issue 26 - The court's discretion under s 445D and s 447A

Conclusion

KENNETH MARTIN J:

Urgency

The evidence in this action was heard across 11 days throughout April, May and August 2012. Each side provided extensive written closing submissions which were addressed by counsel for each of the three parties on 5 September 2011.
The plaintiff's action raises complex legal and factual issues concerning the validity of the appointment of the first and second defendants as administrators to the non‑listed public company Elementree Group Ltd (Elementree) on 12 July 2011, pursuant to s 436C of the Corporations Act 2001 (Cth) (the Act) by the third defendant, Mr Danny Fakhre. Mr Fakhre is an international businessman and resident of Grenada. The two administrators were subsequently appointed as deed administrators under a Deed of Company Arrangement (DOCA) for Elementree. The DOCA had been proposed at the instigation of Mr Fakhre. It was approved by requisite majorities of Elementree's creditors (both in fiscal value and numerically, per Corporations Regulations reg 5.6.21(2)(a) and reg 5.6.21(2)(b)) at the second statutory meeting of Elementree's creditors, which was convened on 18 October 2011. The DOCA was executed on 9 November 2011.
The plaintiff's action seeks, further or alternatively to invalidating the first and second defendant's appointments, to have the court terminate the DOCA, by an exercise of power pursuant to s 445D of the Act. The DOCA (as varied by a deed of variation of 4 May 2012) specifies the DOCA's due date, which is now, after one extension, 30 September 2012.
Had 30 September 2012 passed without a decision from this court upon the merits of the plaintiff's action, there were (potentially) serious negative outcomes for a viable implementation of the DOCA (as varied). The liquidation of Elementree could have resulted. It was important for the parties to have my decision as soon as possible during September 2012, in order for them to consider their respective positions.
I proceeded on that basis and delivered a summary of my conclusions and reasons on 14 September 2012. These reasons now expand on those summary reasons and conclusions.

Overview

The plaintiff, Mr Courtney Hayes, is the managing director of the unlisted public company Elementree, which was incorporated on 16 December 2005. Elementree is a fledgling start up business formed to pursue the planting and nurturing of trees in Western Australia and, to a lesser extent, South Australia. It seeks to be a provider of carbon and renewable biomass plantations on land leased from farmers. Its business plan is to capitalise on the very topical issue of climate change.
Administrators were appointed to Elementree pursuant to s 436C of the Act by Mr Fakhre, the third defendant in these proceedings. The administrators are the first and second defendants, Mr Doran and Mr McVeigh. The appointment was made on 12 July 2011.
Section 436C of the Act provides:
(1)A person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company's property may by writing appoint an administrator of the company if the security interest has become, and is still, enforceable.
As of 12 July 2011, Mr Fakhre held two charges granted to him by Elementree over its assets, namely the registered charges of 17 September 2010 and 29 December 2010.
ASIC's historical record for Elementree shows that, at 12 July 2011, Elementree's non‑operative board members included his parents Lynton and Shannon Hayes, who had been appointed to Elementree's board relatively recently on 26 May 2011 (see exhibit 5, pages 33 ‑ 39).
The ASIC record also shows that Mr Gregory Allan Hunt had been a director in the period from 1 July 2008 up to 17 June 2011. So too had Mr Donald Stanley.
The ASIC record shows that Mr Hunt and Mr Stanley were reappointed to Elementree's board on Monday 4 July 2011, eight days before the appointment of Messrs Doran and McVeigh as administrators by Mr Fakhre.
Although Mr Hunt and Mr Stanley accept that they provided their respective consents to be reappointed as directors, both say that no one from Elementree's then board of three (Mr Hayes and his parents) wrote or told them of their reappointment on or after 4 July 2011. The ASIC record shows that Elementree's secretary in the period from 1 May 2010 up to the time of the appointment of the administrators was Ms Karen Teresa Logan. There is some evidence that Ms Logan resigned as Elementree's secretary on Thursday 7 July 2011 (exhibit 20, page 321) but the ASIC record does not refer to any such resignation.
Mr Hayes commenced this litigation by his originating process under the Act on 18 November 2011, following the statutory meetings of Elementree's creditors on 22 July and 18 October 2011.
At the October 2011 creditors' meeting there was a resolution passed approving the terms of a proposed DOCA which was promulgated by Mr Fakhre. The proposed DOCA sees Mr Fakhre, on numerous specified terms and conditions, agree to advance over $1 million to Elementree under compromise arrangements, by which:
(a)Elementree's trade creditors would be paid out 100 cents in the dollar (approximately $228,000);
(b)Mr Fakhre would forego his secured debt of $1.3 million plus interest;
(c)another class of Elementree's creditors referred to as 'shareholder creditors', would receive $10 to share between themselves;
(d)Elementree's tree business would continue; and
(e)a British Virgin Islands' corporation controlled by Mr Fakhre would ultimately receive and hold 100% of the shares in Elementree.
At the second creditors' meeting Mr Fakhre's proposed DOCA was approved by the requisite numbers of creditors attending (or represented by proxy) and by the requisite fiscal value of creditors: see Corporations Regulations reg 5.6.21(2)(a) and reg 5.6.21(2)(b). Mr Fakhre voted his asserted $1.3 million debt in favour of his proposed DOCA. Mr Michael Kerkmans, for his corporation Marlingu Pty Ltd (Marlingu), also voted in favour.
It was not necessary for Mr Doran, the chair of the meetings, to exercise the chair's casting vote (under reg 5.6.21(4)(a) of the Corporations Regulations) by reference to the numerical amount of the value of debts owed. The $1.3 million amount voted by Mr Fakhre in favour of the approval of the proposed DOCA carried the numerical fiscal value requirement of reg 5.6.21(2)(b). But for the $1.3 million value as a creditor that aspect of the required majority resolution would have been lost, by reason of other creditor value votes cast against the proposed DOCA on the poll: see reg 5.6.21(3)(b).
Had the resolution not been carried, then the chairman's casting vote would have been relevant. Mr Doran's evidence is that he then would have exercised the chair's casting vote in favour of the resolution approving Mr Fakhre's proposed DOCA.
By Mr Hayes' further amended originating process of 17 February 2012, he asserts:
This application is made under the inherent jurisdiction of this Honourable Court and in the alternative section 445D of the Corporations Act 2011.
1.The plaintiff's claim arises in respect of:
1.1the purported appointment of the defendants as administrators of Elementree Group Ltd;
1.2the conduct and admissions of the First and Second Defendants in their roles as the joint administrators of the Elementree Group Ltd in providing information in a Report to Creditors;
1.3the conduct and omissions of the First and Second Defendants constituting matters relevant to the Court's inquiry pursuant to section 445D of the Corporations Act 2001; and
1.4the terms of the Deed of Company Arrangement.
2.In respect thereof and arising therefrom the Plaintiff claims:
2.1a declaration that the defendants were not validly appointed pursuant to Section 436C of the Corporations Act as Administrator[s] of Elementree Group Limited;
2.2alternatively an order terminating the DOCA;
2.3costs.
For reasons which follow I am of the view that the first and second defendants were validly appointed as administrators to Elementree by Mr Fakhre pursuant to s 436C of the Act on 12 July 2011.
However, the more problematic issue is whether the 9 November 2011 DOCA should be terminated pursuant to s 445D. Under the DOCA the administrators were appointed as the deed administrators.
Mr Hayes seeks declarations pursuant to s 447C of the Act.
Conversely, the first and second defendants seek declarations pursuant to s 447C that their appointments, first as administrators, then from 9 November 2011 as deed administrators, were valid.
In seeking an order for the termination of the DOCA, Mr Hayes invokes s 445D(1) of the Act, which relevantly provides:
(1)The Court may make an order terminating a deed of company arrangement if satisfied that:
…
(c)there was an omission from such a report or statement [under s 439A(4)] and the omission can reasonably be expected to have been material to such creditors in so deciding [to approve the DOCA]; or
…
(f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii)contrary to the interests of the creditors of the company as a whole.
Pursuant to s 445D(2) orders can be made on the application of parties including 'any other interested person'. No challenge is made before this court to Mr Hayes' standing as managing director of Elementree to bring these proceedings.
Objection is taken, however, to the amount of time taken for Mr Hayes to commence proceedings, particularly in the aftermath of the 18 October 2011 creditors' meeting he attended where only Mr Fakhre's proposed DOCA was available for consideration by creditors. It is said these proceedings should have been commenced earlier, given the considerable level of funds advanced by Mr Fakhre to the administrators and subsequently to the deed administrators up to August 2012, in order for them to continue Elementree's business. This includes funds expended to plant tree seedlings in 2011 and 2012 (see exhibit 18, pars 6 ‑ 7 and attachment GPD51).
Discretionary considerations also arise under s 445D, even were I to be satisfied that one or more transgressions contrary to s 445D(1) have occurred.
Further, the first and second defendants (supported by the third defendant) themselves invoke s 447A of the Act, raising further potential discretionary considerations as regards pt 5.3A of the Act being applied or not. Section 447A provides:
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
As to the remedial scope of the provision, see Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 [17], [18].
Thus, even were I to identify transgressions pursuant to s 445D(1), I must nevertheless consider a potential further exercise of residual discretion not to set aside the DOCA. Many arguments at trial over potential discretionary considerations by reference to the porous nature of this legislation considerably expanded the duration and dimensions of the trial. So also has the fact that the case has proceeded on affidavits, without the discipline of pleadings. The parties instead exchanged statements of facts, matters and contentions, which I summarise for the state of the record, found within a document which became the second amended papers for the judge. The relevant documents setting out the three parties' positions are:
(a)plaintiff's statement of fact and contentions of 13 January 2012 (amended 13 July 2012);
(b)first and second defendants' statement of facts and contentions of 20 January 2012 (amended 24 July 2012);
(c)third defendant's statement of facts and contentions of 20 April 2012;
(d)first and second defendants' s 447A and s 447C application statement of facts and contentions of 23 February 2012; and
(e)plaintiff's second further amended plaintiff's statement of facts and contentions in response to the defendants' s 447A and s 447C application statement of facts and contentions of 2 April 2012.
Whilst there are certain factual controversies to resolve, in the main the core underlying facts were not in dispute. Furthermore, there was a staggering quantity of uncontentious contemporary documentation put in evidence, including volumes of emails, from which basic underlying facts can be extracted with minimal controversy.

Prelude to the discussion of critical issues

As managing director of Elementree from its inception and as a significant shareholder (13,500,000 shares), Mr Hayes first challenges the validity of the appointment by Mr Fakhre on 12 July 2011 of Messrs Doran and McVeigh as administrators to Elementree. He contends Mr Fakhre held no rights under his two charges to exercise any enforcement rights against Elementree, let alone to appoint administrators pursuant to the two charges. According to Mr Hayes, this is because over four months earlier, on 25 February 2011, Mr Fakhre unequivocally elected, in accordance with the terms of the Convertible Loan Agreement (the CLA) then in existence between Elementree and Mr Fakhre, to convert his loans to Elementree (at principal of $1.3 million in February 2011) into equity, namely 62,628,470 shares (a 53% majority shareholding in Elementree).
I mention the terms of the CLA and a subsequent deed of variation of 29 December 2010 shortly. But I should point out immediately that there is no dispute at all that, on 25 February 2011, Mr Fakhre, through his Perth solicitor, Mr Greg Wheatley of Gadens Lawyers, sent this communication (referred to as 'the Conversion Notice') to Elementree, in terms:
Convertible Loan Agreement - Conversion Notice
I refer to the Convertible Loan Agreement between myself as 'Investor' and Elementree Group Limited as 'Borrower' dated 29 September 2010, as varied by a Deed of Variation executed on or around 29 December 2010 (Agreement).
Under clause 8.1 of the Agreement, upon the written election of the Investor given to the Borrower (Conversion Notice), the Loan Amount, or any part of it, (Conversion Amount), must be converted into shares in the capital of the Borrower.
This letter is a Conversion Notice for the whole of the Loan Amount.
Yours faithfully
Danny Fakhre
[Signature]
[25th February 2011]

Subsequently, in early April 2011 Mr Fakhre through his Perth solicitors rejected an attempted tender to him by Elementree and Mr Hayes of $1.3 million plus $65,184.11 in interest. In response, Mr Fakhre maintained that he had, on 25 February 2011, validly exercised his right to convert under the CLA as varied. He rejected the attempted tender of the principal and interest on the basis that he had never agreed to forego his right to convert under the CLA (as varied).
During March and early April 2011 it was being contended by Mr Hayes that a verbal agreement (between Mr Hayes, Elementree and Mr Fakhre) had been reached on about 24 February 2011. Mr Hayes contended that the agreement (the alleged Tripartite Non‑Conversion Agreement) arose from a telephone conversation that took place on 23 February 2011 between Mr Stanley and Mr Fakhre. Mr Hayes contended that during this conversation Mr Fakhre offered to not exercise his conversion rights in exchange for a payment of $650,000 from Mr Hayes personally, payable by 30 June 2011, and repayment by Elementree of its debt, including interest, to Mr Fakhre. Mr Hayes contended that he accepted Mr Fakhre's offer on 24 February 2011 by an email sent to Mr Fakhre's Perth solicitors, Gadens.
Mr Fakhre's position was that he had never made any such offer and that he was fully entitled to exercise the right to convert his loans to shares in Elementree, as he did on 25 February 2011.
By 15 April 2011, in the face of Elementree's sustained refusal and continuing failure to issue and allot to Mr Fakhre a 53% shareholding following his election to convert, Mr Fakhre commenced proceedings, namely action CIV 1664 of 2011 in the Supreme Court. In that action, which was case managed by me in the Commercial and Managed Cases List, Mr Fakhre sought orders for specific performance compelling Elementree to issue his conversion shares. By the terms of the CLA to which I will refer shortly, shares issuable to Mr Fakhre in the event of his election to convert are referred to as 'Repayment Shares'.
Mr Fakhre's action for specific performance was defended by Elementree. It resisted the claim for the Repayment Shares on the basis of the alleged Tripartite Non‑Conversion Agreement.
Mr Fakhre's action for specific performance was afoot, but undetermined as at 12 July 2011. Pleadings were essentially closed.
The consequence of a valid appointment of administrators to Elementree on that day, pursuant to s 440D(1) of the Act, was to prevent Mr Fakhre's specific performance action against Elementree proceeding further, except with the administrators' written consent or by the leave of the court.
A similar position ensued after the appointment of deed administrators, as a stay of proceedings by an approved DOCA: see s 444E(3)(a) and (c).
Independently of the disputes as to validity, Mr Hayes in the alternative seeks orders pursuant to s 445D(1)(a) terminating the DOCA in any event. This is on the basis of what is alleged to be false or misleading information given to creditors in the written report to creditors (RTC) prepared by the first and second defendants and dated 10 October 2011. The RTC was considered by the creditors attending the second creditors' meeting on 18 October 2011, resolved to accept the proposed DOCA then promulgated by Mr Fakhre.
Mr Hayes contends that the RTC contains false or misleading information that would have been material to Elementree's creditors on 18 October 2011 in considering and then agreeing to Mr Fakhre's proposed DOCA.
Essentially, Mr Hayes asserts that Elementree's creditors were misled first as to Mr Fakhre's creditor status as at 12 July 2011, in circumstances where Mr Fakhre's 25 February 2011 election and Conversion Notice under the CLA, maintained by his action for specific performance against Elementree up to 12 July 2011, meant that Mr Fakhre was not a creditor. He was, says Mr Hayes, at best, someone who was an Elementree shareholder, or a person who had rights to become a shareholder in Elementree. (It will be seen that this is something of a volte‑face from the resistance between March and 12 July 2011 to providing Mr Fakhre with his shares by reason of the Tripartite Non‑Conversion Agreement.)
It is now contended by Mr Hayes that Mr Fakhre's unequivocal 25 February 2011 conversion election, his rejection of the $1.3 million plus interest that was tendered to him in March 2011 on the basis that he had exercised conversion rights, and the commencement and pursuit by Mr Fakhre of the Supreme Court action for specific performance to compel Elementree to issue and allocate to him a 53% majority shareholding in Elementree, was all material information and materially misstated to creditors. They instead were told that Mr Fakhre was a secured creditor for $1.3 million plus interest.
Mr Hayes also contends that the RTC misled creditors by describing Mr Fakhre as a creditor of Elementree, rather than as a debtor. Mr Hayes makes this contention on the basis of oral agreements he says were consummated by Elementree (through him) and Mr Fakhre in London in November 2010. Mr Hayes contends that Mr Fakhre was a net debtor to Elementree for over $1 million by reason of:
(a)an oral agreement pursuant to which Mr Fakhre agreed to match, to the extent of $500,000, any further share capital that was raised from Elementree's existing shareholders, during the capital raising rights issue Elementree pursued during December 2010 and January 2011 with its existing shareholders, which closed for subscription on 28 January 2011 (Matching Funds Agreement); and
(b)independently of (a), a second oral agreement also concluded in London in November 2010, pursuant to which Mr Fakhre would secure an investor or, in the event that no external investor was found, would personally advance $1 million to fund the planting of seedlings in 2011 by Elementree on leased farmland, to be nurtured by Elementree and sold at a profit after about 12 months (Tree Agreement). The profits were then to be split, with 40% going to the investor (who may or may not have been Mr Fakhre - no decision had been made on this point by this stage, according to Mr Hayes), 30% going to Mr Fakhre and 30% going to Elementree (exhibit 5, page 18 [4.4.4]).
After an investigation and cursory exploration of these alleged oral agreements, Mr Doran, as administrator, dealt with them in the RTC. In essence, the RTC assesses Mr Hayes' claim that Mr Fakhre is a net debtor of Elementree to be unmeritorious. Alternatively, they were assessed as expensive and uneconomic to pursue by litigation against Mr Fakhre (Mr Fakhre, of course, being appointer of the administrators pursuant to his charges, as well their indemnifier and, by October 2011, the promoter of the sole proposed DOCA that had emerged for genuine consideration by Elementree's creditors).
Mr Hayes' case is that Mr Fakhre, by reference to the Matching Funds Agreement and the Tree Agreement, ought nevertheless to have been assessed by the administrators in their RTC as a net debtor to the extent of over $1 million.
Mr Hayes says, invoking s 445D(1)(c), that these alleged omissions from the RTC can reasonably be expected to have been material to Elementree's creditors on 18 October 2011.
Further and alternatively, Mr Hayes seeks, pursuant to s 445D(1)(f)(i), orders that the DOCA be terminated, on the ground that it unfairly discriminates against the shareholder creditors. Elementree owes the shareholder creditors an aggregate debt of $790,163. Under the DOCA, the shareholder creditors receive $10 to share as between themselves. Mr Hayes contends that this ground alone is sufficient to justify the DOCA's termination.
Messrs Doran and McVeigh, the first and second defendants, pursue what is effectively a cross‑claim by an application advanced within the proceedings seeking to support and uphold the validity of their appointments, first as administrators and then, from 9 November 2011, as deed administrators. They point to the very significant funding now provided by Mr Fakhre to date, including the funding of a further tree planting in 2012.
Mr Doran and Mr McVeigh ask the court, in the event that any deficiency is found in their appointments, or with the DOCA, to nevertheless exercise the very wide discretion afforded by s 447A to validate their appointments or the DOCA, if it is necessary to do so.
As matters developed at trial, Messrs Doran and McVeigh also ask the court, as a matter of its discretion under s 445D, not to set aside the DOCA even if Mr Hayes' s 445D contentions are established. They refer to the Corporations Regulations reg 5.3A.07(1)(a). This regulation is said to generate the outcome, upon an order being made terminating a DOCA pursuant to s 445D, of thereby bringing about a deemed special resolution by Elementree in favour of voluntary winding up. The administrators say that winding up is plainly not in the best interests of Elementree, its creditors or employees and, further, that this assessment is to be made at the date of judgment, not at the time of the second creditors' meeting (18 October 2011) or of the DOCA (9 November 2011). They also contend that they have acted at all times in good faith and that their bona fides should not be questioned, having acted upon proper advice in accordance with the objectives of pt 5.3A of the Act. They seek that their appointments for the DOCA be validated if that is necessary pursuant to s 447A(4)(c) or (d).

Elementree's business in Western Australia

Mr Courtney Hayes founded Elementree as a tree nurturing business in December 2005.
Elementree's first plantings commenced on rural properties mainly in Western Australia and in South Australia in 2010, across approximately 1,000 ha of farming land. Elementree's business premises were in the Perth suburb of Osborne Park. According to the administrators' RTC, Elementree:
(a)specialised in the design, establishment and management of integrated agro‑forestry systems for the production of carbon sequestration and renewable biomass (ie tree plantations);
(b)entered into long term leasing arrangements over privately owned farmland for the development of tree plantations; and
(c)sourced investment in its tree plantations from corporations and institutional investors who were seeking to secure a long term supply of high quality carbon credits and/or renewable biomass.
Elementree provided a planting and nurturing service for seedlings, particularly mallee trees. It appears that its business operation involved acquiring seeds for particular varieties of trees. It would then enter arrangements to have the seeds propagated by various local nurseries, for a fee. Elementree would then acquire the germinated seedlings from the nurseries and plant them on leased land. Elementree's first substantive tree planting venture was in the winter of 2010 and extended across approximately 1,000 ha of various holdings leased from farmers in Western Australia and South Australia. Part of the initial CLA funds of $1.2 million first obtained from Mr Fakhre in September 2010 had facilitated the expenses of the 2010 planting.
In the last quarter of 2010 Mr Hayes had plans for the planting of a further 1,000 ha of seedlings in 2011. But this would require more funds to be obtained in order to meet the expenses of that exercise. In particular, the local nurseries would require a deposit for the seedlings some time around November or December.
According to the RTC, Elementree had 490 ha of seedlings planted across 952.7 ha of tree plantations on farming properties with whom there were leasing arrangements. There was a further 588.3 ha of plantings on another rural property owned by a Mr Nicoletti (this is the property referred to as 'Bacopak').
As regards the Bacopak planting, there was at the time of the RTC a serious security of tenure issue by reason of Elementree's failure to obtain the consent of the property's first mortgagee, the ANZ Bank. Mortgagee consent was an invariable prerequisite of farming lease arrangements entered by Elementree but, for reasons unexplained, it had not been obtained in respect of the Bacopak planting. This problem, in the opinion of the administrators in the RTC, meant that 'it may be difficult to perfect title and the asset may not be recoverable'. This security of tenure problem also had repercussions in respect of the charged assets which secured Mr Fakhre's $1.3 million loan.

Mr Fakhre's loans to Elementree

On 29 September 2010 Elementree and Mr Fakhre executed the CLA, pursuant to which Elementree was lent $1.2 million on terms. The loan was secured by the fixed and floating charge earlier granted by Elementree over its assets and undertaking of 17 September 2010.
By the CLA, Mr Fakhre held the option of exchanging his $1.2 million loan to Elementree for 51% of the shares in Elementree. The CLA's terms provided that the $1.2 million loan was repayable 30 days after Mr Fakhre made a demand for repayment. Mr Fakhre was permitted under the terms of the CLA to make a demand for repayment 90 days after the CLA was entered (ie after 29 December 2010). Thus, the loan would need to be repaid by roughly the end of January 2011, assuming demand was made at the end of December 2010. If Mr Fakhre wished to convert the $1.2 million loan to a 51% majority shareholding in Elementree, he had to elect to do so prior to the expiry of the 90 day period (in other words, by the end of 2010).
On 9 December 2010 Mr Fakhre advanced a further $100,000 to Elementree. The purpose of these funds was to enable Elementree to pay a deposit to nurseries for the acquisition of new seedlings for a 1,000 ha planting in the middle of 2011. In the end, the parties agreed to treat the $100,000 as a further advance of funds by Mr Fakhre governed by the terms of the CLA. The $100,000 was advanced on 9 December 2010, and the CLA varied by a deed of variation on 29 December. As a consequence, the total of Mr Fakhre's secured loans now amounted to $1.3 million. By the terms of the CLA as varied, if Mr Fakhre elected to convert his loans to equity, he would receive a 53.01%, rather than 51% shareholding in Elementree. Furthermore, as a result of the variation arrangements, the repayment date for all loan funds was now deferred until 28 February 2011, in the event Mr Fakhre did not elect to convert his $1.3 million in loans made to Elementree to equity. This also meant that 28 February 2011 was the date by which Mr Fakhre had to indicate whether or not he would elect to convert. If he did not elect to convert then Elementree would need to repay him $1.3 million and interest by approximately the end of March 2011.
This tight repayment timeline made it important, in the last quarter of 2010, for Mr Hayes and the board of Elementree (which, at that time, included Mr Greg Hunt and Mr Ian Stanley), that Mr Fakhre decide whether he would convert his loans to equity in Elementree before the end of February 2011.
The further $100,000 in funds advanced on 9 December 2011, the subject of the deed of variation, also occasioned the granting by Elementree of a second charge to Mr Fakhre, dated 29 December 2010.
Mr Fakhre's additional $100,000 advance on 9 December 2010, and its subsequent documentation, gave rise to tension between Mr Hayes and Mr Fakhre. Issues arose as to the need for a second charge, the amount of the charge, and whether the charge unduly fettered Elementree's rights to raise funds elsewhere. An issue also arose over the $100,000 being tied up with the Tree Agreement. There was also an issue over Mr Hayes being difficult to contact in the period between Christmas 2010 and the New Year as regards the deed of variation and second charge.

Key provisions within the CLA and two charges of Mr Fakhre

Of particular significance to arguments concerning the disputed status of Mr Fakhre as a secured creditor of Elementree following his election to convert are provisions within the CLA and the charges. As regards the CLA, I refer to the definitions of 'Conversion Notice' and the definition of 'Event of Default'. 'Conversion Percentage' under the CLA 'means 51%, subject to adjustment under clause 9'. See also the definitions of 'Loan Amount', 'Moneys Hereby Secured' and, as regards the payment of interest, the definition of 'Specified Rate'.
I also mention 'Repayment Shares', which means 'fully paid ordinary shares in the capital of [Elementree] in an amount determined under clause 8.2(a)'. I refer without quoting to substantive cl 2 concerning conditions precedent, cl 4 as to the purpose of the funds advanced, cl 5 as to draw down of the loan amount, and cl 6 as to the payment of the Moneys Hereby Secured by reference to the 'manner specified in Schedule 3'.
By cl 6(a) of the CLA the obligation to 'pay' the Moneys Hereby Secured is qualified by the word 'except', regarding any part of the Loan Amount in respect of 'which the Investor has exercised its rights of conversion under clause 8.1' (my emphasis). See also cl 6(b) of the CLA concerning the obligation to pay interest at periodic rests 'and in the manner specified in Schedule 3'.
Clause 8.1 of the CLA provides:
Conversion
(a)Subject to clause 8.1(b), upon the written election of the investor given to the Borrower ('Conversion Notice'), the loan amount, or any part of it, ('Conversion Amount'), must be converted into shares in the capital of the borrower by the issue of Repayment Shares to the Investor by the Borrower in accordance with this clause 8.
I also mention cl 8.2(a), which applies where the borrower is required to issue Repayment Shares to the Investor under cl 8.1(a):
(i)The Borrower shall issue a number of Repayment Shares to the Investor …
(ii)The Repayment Shares must be issued and allotted to the Investor or its nominee within two Business Days after the date of a Conversion Notice or within two Business Days after the date of a meeting required under clause 8.3(b).
(iii)The Borrower must:
A.procure that the board of directors of the Borrower resolves to issue the Repayment Shares and to enter the Investor into the register of shareholders of the Borrower;
B.duly execute, issue and deliver to the Investor a share certificate for the Repayment Shares; and
…
Also relevant is cl 8.4:
Further Issues
So long as the Loan Amount, or any part of it, remains outstanding and not subject to a Conversion Notice as contemplated in clause 8.1(a) the Borrower shall not issue, allot or grant options over any of its shares or effect any alteration in its capital structure or issue any convertible notes without the consent of the Investor.
Clause 10 of the CLA deals with defaults:
10.1Events of Default
Default under this instrument shall be deemed to have occurred in any one or more of the following circumstances:
(a)If default is made in the due and punctual payment of any of the Moneys Hereby Secured at the time and in the manner prescribed by this instrument, or any other instrument or if default is made in the due and punctual performance or observance of any of the covenants, agreements, conditions or obligations contained or implied by any statute in this instrument, the Fixed and Floating Charge, or any security, guarantee, agreement or other instrument which is supplemental or collateral to or which varies the provisions of this instrument or which was executed by the Borrower in favour of the Investor or which was made between the Borrower and the Investor.
(b)If, prior to conversion of all or any part of the Loan Amount in accordance with clause 8:
…
(xiii)an event occurs whereby the Borrower is deemed, pursuant to subsection 460(2) of the Corporations Act, to be unable to pay its debts;
…
10.2Cross Default
A default by the Borrower of the Fixed and Floating Charge or this instrument shall be deemed to be a default by the Borrower under each of the Fixed and Floating Charge and this instrument.
10.3Consequences of an Event of Default
(a)If an Event of Default occurs that is capable of being remedied by the Borrower, the Moneys Hereby Secured shall immediately become due and payable if 7 Business Days after written notice of the Event of Default is given by the Investor to the Borrower, the Borrower has not remedied that default.
(b)If an Event of Default occurs that is not capable of being remedied by the Borrower, the Moneys Hereby Secured shall immediately become due and payable on demand.

See also, in cl 13.1 of the CLA, Borrower's Covenants including cl 13.1(f) as regards the Borrower's covenant with the Investor to carry on business in a lawful, proper and efficient manner. See also sch 3 to the CLA entitled 'Repayment'. Somewhat curiously, sch 3 proceeds on the basis of a structure which reads:
The moneys Hereby Secured shall be paid by the Borrower to the Investor as follows
(c)…
(d)…
(e)…
There is an obvious error in CLA sch 3. Its three subclauses are identified as (c), (d) and (e). They should obviously read (a), (b) and (c) for it to be coherent. In my view it is easy to make that correction without requiring the instrument to be rectified in the face of an obvious error: see generally Fitzgerald v Masters (1956) 95 CLR 420, 426 ‑ 427.
Pursuant to annexure A to the CLA there was a commitment for various amendments to be made to the constitution of Elementree under a special resolution of its members. In particular this carried provisions applicable to Mr Fakhre's position should he convert and thereby become a 'Majority Shareholder'.
I note that in the deed of variation of 29 December 2010 as between Mr Fakhre and Elementree, substantive variations to the CLA are found within cl 3.1.
Clause 3.1(g) varies sch 3 by:
[D]eleting the words 'the date which is 3 calendar months after the date of this instrument' in paragraph (d) of Schedule 3 of the Convertible Loan Agreement and replacing them with the words '28 February 2011'.
Each of the charges between Mr Fakhre and Elementree of 17 September 2010 and of 29 December 2010 are in very similar terms as the other. I refer first to cl 1 which contains definitions.
Clause 1 defines the term 'Event of Default'. It reads, '"Event of Default" includes any of the circumstances described in Clause 12'. From the body of the charge it is plain that this is also an error, since cl 12 deals with miscellaneous provisions. However cl 14 deals with Events of Default. Clause 14 clearly was the intended reference for the definition of Events of Default. Again it is easy to construe the charge instruments as drawn to correct a minor error, without a formal order for rectification.
I also refer to the definition of 'the Moneys Hereby Secured', and 'the Mortgaged Premises'. The 'Primary Instrument', by reference to the schedule to the charge, is identifiable as a 'Convertible Loan Agreement dated on or about the date of this instrument between the Mortgagee and the Mortgagor'. This is to be read as a reference to the CLA of 29 September 2010, notwithstanding that it followed the charge in point of creation.
Within the body of the charge I note cl 3 which says:
The Mortgagor covenants with the mortgagee to pay and satisfy the Moneys Hereby Secured at such times and in such manner and including interest at such rate as are prescribed by the Primary Instrument and by this instrument and, insofar as neither the Primary Instrument nor this instrument so provides, then on demand, with interest at the Specified Rate, computed from the date the same become due until payment thereof.
Clause 12 provides:
The Parties further agree as follows:
…
(e)That this security is collateral to and secures the same moneys as are secured by any instrument described in the Schedule hereto as 'Collateral Security'.
In fact the schedule refers to 'Collateral Security' as meaning 'the Primary Instrument'. As regards default, cl 14 provides:
Default under this security should be deemed to have occurred in any one or more of the following circumstances:
(a)If default is made in the due and punctual payment of any of the Moneys Hereby Secured at the time and in the manner prescribed in this instrument, the Primary Instrument or any other instrument or if default is made in the due and punctual performance or observance of any of the covenants, agreements, conditions or obligations contained or implied by any statute in this instrument, the Primary Instrument or any security, guarantee, agreement or other instrument which is supplemental or collateral to or which varies the provisions of this instrument or if any event shall occur upon the happening of which the time for payment of any moneys payable thereunder or secured thereby may be accelerated or any security thereby created may be enforceable.
(my emphasis)
…
(d)…
(xi)If the Mortgagor or any Surety is or becomes insolvent within the meaning of that expression in section 95A(2) of the Corporations Act.
Of key significance to these proceedings is cl 15 within each charge which is in the following terms.
From and at all times after the occurrence of any Event of Default, notwithstanding the currency of any negotiable instrument, the following provisions shall apply:
(a)The Moneys Hereby Secured shall immediately become due and payable without any demand or notice being required.
(b)This security shall, at the option of the Mortgagee, become enforceable and, at the like option, the right of the Mortgagor to deal with the Mortgaged Premises for any purposes shall forthwith cease.
Within the charge provisions I particularly note that, by cl 15(a), the Moneys Hereby Secured immediately become due and payable without the need for any demand or notice after the occurrence of any Event of Default (however defined). Events of Default are defined in very wide terms by cl 14. From cl 14(a) that would manifestly extend to embrace a default in providing Mr Fakhre with his Repayment Shares under the CLA once he had elected to convert and had given a Conversion Notice, in accordance with the Primary Instrument (ie the CLA).
The Moneys Hereby Secured, as a term used within the charges, includes all moneys owing or prospectively owing either under the charge or under the CLA (as the Primary Instrument). Under the charges that is the case by cl 15(a), notwithstanding that in order to enforce the charges, the chargee must first exercise the option under 15(b) to make the charge enforceable such as for instance by the appointment of a receiver (see cl 15(c) of the charges).
Clause 15(a) of the charges, as regards the Moneys Hereby Secured becoming immediately due and payable without demand or notice being required upon the occurrence of an Event of Default, stands in contrast to cl 10.3 in the CLA, as regards remedial or irremediable Events of Default and the requirement of a written notice of an Event of Default under cl 10.3(a). In that case moneys become payable seven business days after written notice of the Event of Default is given, if the default is not remedied in the meantime. Moneys become repayable 'on demand' under cl 10.3(b) of the CLA if the Event of Default is not capable of being remedied by the Borrower.
These provisions are of some consequence to the conclusions I ultimately reach concerning whether or not Mr Fakhre was, or was not, a creditor of Elementree as at 12 July 2011.

Notice of election to enforce by chargee and notice of appointment of administrator by chargee given by Mr Fakhre on 12 July 2011

These documents are found as attachments GPD15 and GPD16 to Mr Doran's primary affidavit (exhibit 20, pages 179 ‑ 181). Before turning to them I mention exhibit 20, pages 162 ‑ 162A, being advice from Mr Doran's solicitors, Allens Arthur Robinson, provided by Mr Corey Steel on Monday 11 July 2011 at 2.47 pm (copied to Mr Blaxill and confirmed in Mr Doran's evidence as having been received by him as well). This advice was given openly to Mr Fakhre's Perth solicitor, Mr Greg Wheatley of Gadens, the day before the appointments of Mr Doran and Mr McVeigh on 12 July 2011. The advice to Mr Wheatley included these observations:
Your client has, pursuant to cl 8.1(a) of the Loan Deed, elected to convert the entire loan amount into shares in the capital of Elementree. We understand that a Conversion notice has been issued. This election has been disputed on the basis of a telephone discussion in which your client was alleged to have entered into a further commercial agreement in which he waived his rights of conversion.
Your client otherwise has evidence that Elementree is insolvent.
Your client now wishes to appoint Gary Doran as an administrator. At this stage it is proposed that the basis of the appointment will be either the:
1.default under the Loan Deed for failure to repay or convert the Loan Amount; or
2.Elementree's insolvency.
Either or both of the above matters will therefore need to fit within the definition of an Event of Default under either the Loan Deed or the charges. We address this point below.
…
The election to convert the Loan Amount into equity complicates the situation as it may hinder your client's ability to, at the same time, seek repayment of the Loan Amount. In addition the dispute concerning your client's election to convert clouds that particular default. There is a risk that Elementree may raise these matters to question your client's ability to enforce the charges and therefore the validity of an administrator.
Earlier, on Friday 8 July 2011 at 10.02 pm, Mr Doran received some direct legal advice by email from Mr Blaxill (see exhibit 34) in which he referred to similar key points:
•the loan appears to have repayable at the end of February [2011] and so there appears to be a breach of a monetary obligation to pay;
•the present litigation, however, appears to be seeking, rather than repayment, equity in the company. That claim appears inconsistent with an allegation that there is money owing. Accordingly, it would seem that the lender will need to rely on a breach of the covenant to convert the shares to be the event of default. That is what is the subject of a court challenge. Accordingly, an appointment of an administrator on that basis will likely to be liable to be similarly challenged;
•we recommend you seek details of the defaults that are intended to be relied upon.
By reference to the CLA, Mr Blaxill observed:
It could therefore be that a default is the failure to repay. However, that default is, as noted above, inconsistent with a claim that the debt should be converted to equity. We therefore also recommend you ask Gadens to identify the event of default which is relied upon. If I understand the matter correctly, the default may be the failure to convert the debt to equity, being a default 'in the due and punctual performance or observance of any of the covenants' in the convertible loan agreement. If that is the case, it gives rise to a risk that your appointment could be challenged on the basis that there was no ground for conversion of the debt and therefore no default. We recommend that you question Gadens on these issues.
On 12 July 2011, Mr Wheatley of Gadens, on behalf of Mr Fakhre, issued to Elementree a notice of election to enforce by chargee. It read, relevantly, by reference to both charges:
2.Default has occurred under the Charges in that:
(a)a default has been made in the due and functional payment of the Moneys Hereby Secured referred to in the Charges, in that:
i.the Company did not pay the Moneys Hereby Secured to the Chargee in the manner specified in Schedule 3 of the Primary Instruments; and
ii.the Company has not paid interest to the Chargee in the manner specified in Schedule 3 of the Primary Instruments;
(b)a default has been made in the due and punctual performance of the Company's obligations under the Charges and the Primary Instruments referred to in the Charges in that (among other things):
(i)the Company has not issued the Repayment shares (as defined in the Primary Instruments) to the Chargee in accordance with the Primary Instruments; and
(ii)the Company has not carried on and conducted its business in a proper and efficient manner; and
(c)The Company is insolvent within the meaning of that expression in s 95A(2) of the Corporations Act, in that the Company cannot pay its debts as and when they become due and payable.
3.The Chargor hereby gives you notice that it has elected to enforce the Charges pursuant to clause 15(b) of the Charges. The Charges have therefore become enforceable.
Thereafter on the same day Mr Fakhre issued, pursuant to s 436C, his notice of appointment of administrator by chargee. The instrument appears to carry Mr Fakhre's signature.
Defaults relied upon in the notice of appointment refer to defaults in similar terms to the notice of election to enforce.
It is significant, however, that cl 3 of the notice of appointment refers to default under the 'charges'. By its full terms cl 3 provides:
Default has occurred under the Charges in that:
(a)a default has been made in the due and punctual payment of the Moneys Hereby Secured referred to in the Charges;
(b)a default has been made in the due and punctual performance of the Company's obligations under the Charges and the Primary Instruments referred to in the Charges in that (among other things):
i.the Company has not issued the Repayment shares (as defined in the Primary Instrument) to the Chargee; and
ii.the Company has not carried on and conducted its business in a proper and efficient manner; and
(c)the Company is insolvent within the meaning of that expression in s 95A(2) of the Corporations Act.
(my emphasis)
The notice of appointment continues:
4.The Chargee has elected to enforce the Charges pursuant to cl 15(b) of the Charges, and has issued a notice to the Company to that effect. The Charges have therefore become and still are enforceable.
The defaults relied upon by Mr Fakhre by reference to his charges include a default as regards due and punctual payment of the moneys referred to in the charges, the failure to issue the Repayment Shares in accordance with the Primary Instruments and as well an allegation that Elementree had not carried on and conducted its business in a proper and efficient manner. As to that latter allegation the action was conducted on the basis that it was not relied upon - see ts 262, where counsel for Mr Fakhre made that clear. Elementree's insolvency was also relied upon by reference to s 95A(2) of the Act.
By cl 7 of the notice of appointment Messrs Doran and McVeigh, both registered liquidators, were appointed as joint and several administrators of Elementree.
As regards insolvency, the administrators' RTC indicates the administrators' opinion to that effect. Paragraph 6.5 reads:
As detailed above, the Company had trading losses in FY09, FY10 and FY11 and negative working capital throughout these periods. These are both strong indicators of insolvency.
See further indicators of insolvency at page 13 of the RTC.
The status of Mr Fakhre's loans of $1.3 million and his position as a secured creditor, alternatively as someone who elected to convert those loans to equity on 25 February 2011 and is therefore no longer a creditor, bears upon any insolvency analysis. The removal of $1.3 million from the current liabilities of Elementree would make a significant difference to Elementree's balance sheet. The balance sheet would be further improved by changing the liability status of shareholder creditor loans in the amount of $603,000 to equity, thereby removing them as liabilities. Likewise if Mr Fakhre were alternatively to be assessed as a debtor by reference to obligations either under the Matching Funds Agreement or the Tree Agreement to the extent of $500,000 or $1 million, then those considerations have the potential to affect the balance sheet of Elementree as at 12 July 2011, viewed from a revised perspective of the RTC at 10 October 2011.

Elementree's shareholders

Aside from the position of Mr Fakhre in relation to his rights to obtain a 53.01% shareholding via the CLA (as varied), the other shareholdings in Elementree can be seen in par 2.1.1 of the RTC. I will mention the more important holdings.
Mr Hayes is listed as being a holder of 13,500,000 shares with a subscription value of $1,405. His parents' corporation, Forrestdale Investments Pty Ltd (Forrestdale), trustee of the Forrestdale Unit Trust, is mentioned as holding 28,468,608 shares.
Mr Kerkmans, a director of an associated corporation, Marlingu, and friend of Mr Hayes (see ts 364), is mentioned as a shareholder, both personally and through that corporation. Marlingu is recorded as holding 416,667 shares. The M & DJ Kerkmans Trust as trustee of the Kerkmans Family Trust is mentioned as holding 1,875,000 shares. Mr Max Kerkmans is mentioned as being the holder of 208,333 shares.
Mr Ian Stanley is mentioned as holding 1,108,333 shares
Our Barnyard Pty Ltd as trustee of the Greg Hunt Family Trust is recorded as holding the same amount of shares.
I mention the shareholding of a Mr Andy Cuthill, a professional investor from the UK who was known to Mr Hayes and who, through Citicorp Nominees Pty Ltd, held 833,333 shares with a subscription value of $150,000 (see ts 482 ‑ 483).
Sunquest Pty Ltd, as trustee of the Sunquest Capital Trust, is recorded as holding 66,667 ordinary shares (Sunquest). (This is an entity associated with a Mr Josh Crow: see ts 508.)
In aggregate, the administrators' RTC identifies 55,516,163 ordinary shares on Elementree's share register.
It does not mention any 53.01% shareholding by Mr Fakhre. That is so notwithstanding that on 15 August 2011, in response to a request from the administrators, Ms Karen Logan, Elementree's company secretary, sent to Mr Doran's assistant Ms Marshall a copy of the 'members' register (see exhibit 20, page 321).
Ms Logan also said:
Please note that on 7 July 2011 (subsequent to the passing of the resolution to appoint Ian Stanley and Greg Hunt as director and Chairman of the Board, respectively), I received an instruction from Courtney Hayes to prepare the attached circular resolution, the share certificate and update the members register accordingly.
As previously advised to Gary Doran, I resigned as company secretary on 7 July and handed over all administrative files to Courtney on that day. Consequently, you may wish to confirm with the Company as to whether the circular resolution dated 7 July was passed by the directors.
The attached 'members register' sent by Ms Logan shows as the last entry on the 'register' Mr Fakhre holding 62,628,470 shares, with the date of issue as '7 July 2011' and the 'Total Amount Paid' at $1,300,000 (exhibit 20, pages 324 ‑ 325).
I assess this as very curious indeed. I do not accept its accuracy as proven. The total of shares on the register for Elementree is shown by Ms Logan as being 118,144,633 shares but is out of alignment with the shareholding as specified in the RTC at par 2.1.1 (being total Elementree shares of 55,516,163). It is also out of alignment with the total number of shares for Elementree as ascertained from the ASIC historical record, dated 15 November 2011 (exhibit 5, page 36).
Ms Logan was not called as a witness at trial. She is not recorded as having resigned as the secretary of Elementree on Thursday 7 July although by her email she says that she had.
Ms Logan's email says that she has provided the share register as at Wednesday 6 July 2011, albeit the date of issue to Mr Fakhre is said to be 7 July 2011.
She also refers to the resolution to reappoint Mr Hunt as director and chairman of the board. But that circular resolution bears the date 4 July 2011 (exhibit 5, page 235) and it seems clear that neither Mr Hunt nor Mr Stanley were told by Ms Logan that they had been reappointed to Elementree's board.
It is clear that it was not until 5.02 pm (exhibit 5, page 233) on 11 July 2011 that Bennett & Co advised Gadens by email of another circular resolution of Elementree's directors, signed (it seems) by the three Hayes family directors, but said to be of Thursday 7 July 2011 (exhibit 5, page 236).

Elementree's historical financial performance

This issue is dealt with in the RTC at par 2.4. Figures for the financial years ended 30 June 2009 and 30 June 2010 were taken from Elementree's signed statutory accounts. In brief summary, the position at 30 June 2010 looked tight, but just solvent. The position 12 months later shows a clear deterioration in Elementree's position.

Elementree's profit and loss accounts show minimal revenue ($5,000 for the 2010 financial year and only $2,000 for the 2011 financial year). But there are significant expenses ($1,274,000 for 2010 and $1,278,000 for 2011), fairly typical of a start up business.
Scrutinising the balance sheets for the same periods, the 30 June 2010 position shows total assets of $1.124 million, total liabilities of $391,000, resulting in a surplus of assets over liabilities amounting to $732,000. However, the balance sheet as at 30 June 2010 indicates that there were current liabilities of $308,000 against current assets of only $5,000. Elementree's liquidity position was, therefore, tight. Its non‑current asset position was made up of property, plant and equipment which, together with so‑called intangible assets, amounted to $1.07 million. Non‑current liabilities reflected some loans and borrowings to the extent of $83,000.
That position may be contrasted to Elementree's 30 June 2011 figures which shows similar (minimal) income, and a similar high annual level of expenses, thereby delivering a similar level of loss ($1.276 million). From the balance sheet figures, Elementree's cash position had deteriorated to a position of negative current assets of $7,000, but with an enhanced non‑current asset position ($2.217 million).
As of 30 June 2011, there was a significant increase in the level of current liabilities, represented by loans and borrowings, which had increased from $15,000 to $1.903 million in that financial year. Elementree's 30 June 2011 financial position showed current liabilities exceeding current assets, to an extent of $2.243 million. There was an overall excess of liabilities over assets in the amount of $93,000.
A juxtaposition of the Elementree balance sheets for 30 June 2010 and 2011 shows Elementree's financial position deteriorated in the 2011 financial year, as reflected by its current liabilities and borrowings. According to par 4.2.2 of the administrators' RTC, Elementree's financial difficulties were the result of:
•the company being undercapitalised for a number of years given the extent of the operating costs and capital investment required to establish a sustainable carbon and renewable biomass plantation business
•the delays by the Federal Government in finalising its carbon tax policy
•proceeding to plant 588.3 ha of trees on a property [Bacopak] without first obtaining complete legal rights from the landowner and their respective mortgagee. As a result this significant investment may not be recoverable
•the breakdown in the relationship between the managing director [Mr Courtney Hayes] and secured creditor [Mr Danny Fakhre] and the subsequent failure to recapitalise the Company through converting the secured loan to equity and completing the proposed equity raising
That I think is a fair assessment.
It will be remembered that at the end of September 2010 Elementree entered the CLA with Mr Fakhre and obtained from him a short term loan for $1.2 million. That loan from Mr Fakhre was increased by a further $100,000, secured under the CLA arrangements, which were extended in duration beyond the end of December 2010 to the end of February 2011.

Elementree's creditors

I mention the position as regards Elementree's creditors as at 30 June 2011. This is significant bearing in mind the fact that the approved DOCA is accepted to discriminate between employees and trade creditors who are paid out in full, and shareholder creditors, who receive virtually nothing. The other significant factor is the treatment by the administrators in the RTC of Mr Fakhre's $1.3 million loan as a secured debt.
Creditor information is set out in par 1.4 of the RTC under the heading 'Administrators' Recommendation'. The following appears:
Assuming the actual amount of all proofs of debt accepted by the Administrators approximates $2,598,597 the estimated dividends to creditors under each alternative is as follows:

Creditor Class

Total Owing

($)

DOCA proposal (cents in the $)

Liquidation optimistic

(cents in the $)

Liquidation pessimistic

(cents in the $)

Employees

196,011

100.00

100.00

0.91

Secured Creditors

1,300.000

100.00

0.33

-

Trade creditors

312,423

100.00

-

-

Shareholder creditors

790,163

0.00001

-

-

For the composition of the shareholder creditors, I refer first to par 4.4 of the RTC as to related entities and observations concerning Forrestdale and Mr Courtney Hayes.
The information in that paragraph is that Forrestdale (Mr Hayes' parents' company) was owed a debt of $510,000 by Elementree, that debt being incurred in the period between 22 July 2009 and 19 May 2011. It is referred to as a 'shareholder loan'.
The entry concerning Mr Hayes personally indicates that he was owed $73,942 by Elementree, incurred in the period between 2 November 2009 and 20 May 2011. This debt is also referred to as a 'shareholder loan'.
So $583,942 within the Shareholder Loan class of debts relates to loans to Elementree from Mr Hayes or from his parents' company, Forrestdale. There is some elaboration concerning this issue at par 7.4.11 of the RTC showing a breakdown of the total shareholder loan figure of $790,163, subdivided by reference to loans per Elementree's books and records or another subcategory for what are referred to as additional shareholder loans.
There are further shareholder loans on Elementree's books referable to the Kerkmans Family Trust, in the amount of $13,000, and Marlingu (a corporation associated with Mr Kerkmans, a witness for the plaintiff at trial, see ts 363 ‑ 406 and Mr Kerkmans' witness statement, exhibit 4) which was a creditor in the amount of $80,000. Hence, there are recorded shareholder loans to Elementree associated with Mr Kerkmans or his related corporation to the extent of $93,000.
By a subcategory, 'Shareholder loans - additional', the report identifies further loans. Two, together comprising $10,000, relate to office rent paid and an invoice met by Forrestdale.
Two additional shareholder loans relate to Mr Courtney Hayes himself in the amount of $53,000 (explained at par 7.4.11.2 of the RTC as Mr Hayes' unsecured claim in respect of outstanding employee entitlements calculated in accordance with s 556 of the Act).
A further loan in this category is mentioned, in the amount of $50,000, from Mr Cuthill, the UK investor. This is explained at par 7.4.11.1 of the RTC:
On 31 January 2011, Mr Andy Cuthill deposited $50k into the Company's general account and was subsequently to be issued shares. No shares were issued and no resolution was passed. We have therefore treated this amount as a loan to the Company.
It is not said why Mr Cuthill's subscription funds for shares were treated as a loan to Elementree. Perhaps this was because his funds were wrongly deposited into Elementree's general account by Mr Hayes. There is no suggestion at all in the evidence that Mr Cuthill, in seeking to subscribe for shares in Elementree, acquiesced in that misconduct. Mr Cuthill's $50,000 subscription funds for shares ought to have been placed in a separate trust account, pending the issue of shares pursuant to Elementree's rights issue which closed at the end of January 2011. In treating Mr Cuthill as an unsecured shareholder creditor, the DOCA effectively sees Mr Cuthill lose all his subscription funds. In the context of discrete arguments by Mr Hayes against the DOCA grounded upon unfair discrimination against Elementree's creditors, the treatment of Mr Cuthill requires particular attention. In that respect, see par 67 of Mr Hayes' first affidavit (exhibit 5), referring to his conversation with a major independent shareholder a professional investor based in London. Mr Hayes explained the reference under cross‑examination (ts 465). Mr Hayes explained that Mr Cuthill, by reference to Elementree's share register, had earlier subscribed for 833,333 shares in Elementree, under what was effectively a trustee acquisition scenario, in the name of Citicorp Nominees for $150,000 (see also RTC par 2.1.1). See Mr Hayes' evidence at ts 483, ts 484, ts 510, ts 519 and ts 531.
In contradistinction to other subscribers for shares under the Elementree rights issue (closing on 28 January 2011) who were mainly friends, such as Mr Kerkmans, or Mr Hayes' parents through Forrestdale, Mr Cuthill was a professional investor in the UK who was concerned about the $50,000 he had subscribed for further shares, especially given that by 23 February 2011 Mr Cuthill had not received his shares and was querying Mr Hayes about what was happening.
According to Mr Hayes, Mr Cuthill was kept apprised and so was 'relaxed' (ts 531). Nothing in the evidence suggests Mr Cuthill, unlike Mr Hayes' parents or Mr Kerkmans, acquiesced in or gave an approval, tacit or otherwise, for his subscription funds being treated as an unsecured loan to be used by Elementree to fund its operations.
It is one thing for Mr Cuthill to possibly lose all the value of a shareholding in Elementree he already held (through Citicorp Nominees Pty Ltd). It is quite another for him to be deprived completely of $50,000 in subscription funds, in circumstances where this money was paid over as the consideration for new shares he never received under the Elementree rights issue.

Sources of evidence at trial

The matter proceeded upon the basis of affidavit evidence adduced on behalf of each of the parties as their evidence‑in‑chief. Deponents were then cross‑examined on the affidavits.

The plaintiff's evidence

Evidence for the plaintiff was adduced from three witnesses. First is the evidence of the plaintiff himself, Mr Hayes. Most of his evidence is found in his main affidavit sworn 17 November 2011 (exhibit 5). It contains Mr Hayes' evidence across 84 paragraphs accompanied by 43 attachments. Mr Hayes also swore a further affidavit which became exhibit 6. It spans 54 paragraphs and a further eight attachments.
I should observe that there were objections to many paragraphs of the affidavits adduced on all sides. Sensibly, most of these were resolved between counsel before the affidavits were admitted into evidence. All admitted affidavit exhibits have been marked, showing excisions or augmentations where made by the deponents. On a few occasions leave was given for further evidence‑in‑chief to be adduced viva voce after successful objection had been made to the content of an affidavit.
A distinct section in these reasons deals with the evidence of Mr Hayes. I should state at the outset that in the main I found his evidence to be unsatisfactory and unreliable. As a result I will only accept it in instances where it is independently corroborated by another witness or by an unchallenged document.
But as regards the critical issue concerning Mr Fakhre's status as a creditor of Elementree as at 12 July 2011, the basic underlying facts are largely uncontroversial and no issues of credibility arise. Essentially the critical issue hinges upon an exercise in contractual construction and rationalisation concerning the CLA, the deed of variation and Mr Fakhre's two charges. These written instruments speak for themselves. Their meanings raise questions of law. Needless to say, the extensive legal argument that has raged as to different meanings satisfies the required ambiguity threshold for an admission of relevant evidence of surrounding circumstances: McCourt v Cranston[2012] WASCA 60 [13] ‑ [26]; Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337, 352; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45. The required assessment as to Elementree's insolvency as at 12 July 2011 raises a mixed question of fact and law. In other areas however, particularly concerning the so called Tripartite Non‑Conversion Agreement, the Matching Funds Agreement and the Tree Agreement, my inability to accept Mr Hayes' uncorroborated evidence does not assist his case.
The plaintiff adduced the evidence of Mr Michael Kerkmans through an affidavit which became exhibit 4. Mr Kerkmans is a close friend and supporter of Mr Hayes and the corporate objectives of Elementree. In the main I found his evidence credible. Significantly, however, Mr Kerkmans gave some evidence in cross‑examination about selling one of his farms and settling on that transaction some time around the middle of 2011. Mr Kerkmans' evidence was intended to suggest that from the perspective of assessing Elementree's solvency, Mr Kerkmans would have been a source of further funding either by way of loans to Elementree or by subscribing for further capital. It seemed to me that the verbal evidence on this point (not in Mr Kerkmans' affidavit) was simply too loose and vague to be counted in an assessment of Elementree's solvency as at 12 July 2011. In par 16 of his affidavit Mr Kerkmans refers to a demand for repayment of subscription funds which he made to Elementree pursuant to its capital raising proposal which closed on 28 January 2011. Attachment MK4 is Mr Kerkmans' letter of 13 June 2011 to Elementree's company secretary, Ms Logan. The letter is sent on behalf of Mr Kerkmans' corporation Marlingu. He and his wife Deborah Kerkmans write to Elementree as directors of Marlingu to Elementree in these terms:
Since making that offer we have deposited a total of $93,000 with the Company and have not received any shares. Since providing these funds we have authorized their use as loan funds in recognition of the Company's urgent need for capital.
We wish to inform the board that we have now withdrawn the offer of providing those funds in exchange for equity, and are requesting their immediate repayment.
Evidence emerged at trial that Mr Hayes had actually been the instigator of the demands received by Elementree for repayment of subscription funds which had been consensually used as loan funds thereafter. This consideration applies as well to demands for repayment of funds advanced by his parents' corporation Forrestdale. In Mr Kerkmans' affidavit at par 16 he says:
Despite making the request for the repayment of funds, if I had been informed that doing so would have rendered Elementree insolvent I would have not required immediate payment of the loans and would have agreed a later repayment date so as to enable Elementree to raise equity or other funds. I was passionate about the business and Marlingu was a significant shareholder - I ultimately wanted to do what was in the best interests of Elementree.
Notwithstanding the expressed support, the demands for repayment sent to Elementree must, on my assessment, be viewed as meaning what they say. There can be no equivocation about such matters, even though I find the demand was sent at the instigation of Mr Kerkmans' close friend, Mr Hayes. The demands were part of a Hayes' family strategy to manufacture a position which would place more pressure upon Mr Fakhre in the then pending litigation which he had commenced against Elementree seeking an issue and allotment to him of his 53% majority shareholding pursuant to the CLA as varied. Mr Kerkmans' conduct through Marlingu to demand repayment of his loans must bear upon the solvency analysis. Notwithstanding what he says in par 16 there can be no approbating and reprobating on this point. Demand was made. It was a valid demand. The valid demand was not withdrawn at any relevant time. The RTC accepts this debt as legitimate in the category of a loan from a 'Shareholder Creditor'.
It also appears that Mr Kerkmans attended the second creditors' meeting of 18 October 2011. At that meeting he, on behalf of himself and Marlingu, voted in favour of accepting the proposed DOCA. This was on the basis that he appreciated that shareholder creditors such as Marlingu would receive a negligible dividend under the DOCA. That is a relevant consideration to be weighed subsequently as regards the s 445D challenge asserting unfairly discriminatory treatment of creditors under the DOCA. It is also a factor going to my discretion under s 447A of the Act to effectively validate a defective DOCA.
The last witness for the plaintiff was Mr Hayes' mother, Mrs Shannon Hayes. Her affidavit, sworn 29 March 2012, became exhibit 17 (with excisions).
Under cross‑examination Mrs Hayes was forced to accept that the demand for repayment which Forrestdale had made upon Elementree requiring repayment of its share subscription funds, which had subsequently been consensually treated as loan funds, was valid. Earlier, she said the Forrestdale demand was a 'ploy' implemented at her son's instigation to apply some pressure to Mr Fakhre in the subsisting litigation.
Like the position I reach with Mr Kerkmans I reject any attempt by par 14 of Mrs Hayes' affidavit to suggest that Forrestdale's demand for repayment of funds (amounting to $520,074) was anything less than a valid demand for immediate repayment of those loans. That is so notwithstanding that Mrs Hayes says at par 14:
Despite Forrestdale making the request for repayment of the funds loaned to Elementree, I would not have insisted [on] immediate repayment of the loans made to the Company if I had been informed that doing so would render Elementree insolvent. My willingness to provide ongoing investment to the Company through this difficult period was always intended to prevent the Company from becoming insolvent. I believed in the Company and wanted it to continue to trade. It was my belief, and my preference at the time, that I would convert the amount loaned to the Company as equity in the Company.
But Mrs Hayes too cannot approbate and reprobate as regards the funds in respect of which Forrestdale demanded repayment from Elementree. I have not overlooked the fact that Mrs Hayes became a director of Elementree with her husband Lynton and they continued as directors of Elementree at the appointment of the administrators on 12 July 2011 (exhibit 5, page 34). Nevertheless, Forrestdale's demand for repayment speaks for itself.

The first and second defendants' evidence

For the first and second defendants the sole witness at trial was the first defendant, Mr Gary Doran. His evidence was adduced within the framework of his affidavit sworn 31 January 2012, which comprised 143 paragraphs and 1,578 pages of material across three volumes. More than 1,000 pages of that material was contained within attachment GPD32, referred to in par 77 of Mr Doran's affidavit. Much of this material was disorganised, repetitious or irrelevant. No real thought seems to have been given to the nature of what was required. GPD32 was essentially a 'document dump'. Any practice of adducing evidence in this fashion should be actively discouraged, albeit this part of the affidavit was not objected to.
Mr Doran's primary affidavit and attachments became exhibit 20.
There were two further affidavits from Mr Doran introduced into evidence. His affidavit sworn 20 April 2012 (which contains attachments GPD46 and GPD47 comprises annotated transcripts of creditors' meetings, chaired by Mr Doran and held on 22 July and 18 October 2012) was uncontentious and became exhibit 21. In a long cross‑examination of Mr Doran by counsel for the plaintiff I did not discern any questions challenging the reliability of the content of exhibit 21.
Mr Doran swore a third affidavit of 6 August 2012. It became exhibit 18. This affidavit was said to update financial matters for the purposes of the second phase of this trial, to the time of Mr Doran's cross‑examination and particularly concerning the operations of Elementree under the DOCA with Mr Doran and Mr McVeigh in charge of Elementree's affairs. Aspects of it were heavily challenged.
Although required on occasion to make some corrections to this affidavit, the corrected deficiencies were on my assessment (essentially matters concerning the annexures to exhibit 18) excusable by reason of time pressures. I draw no sinister inferences. Overall, I found Mr Doran to be open, straightforward and reliable as a witness and to have acted properly and professionally in his tasks concerning Elementree.

Accordingly, I find that Elementree was insolvent as at 30 June 2011 and at all times up to and including 12 July 2011.
Insolvency provides the existence of a second clear Event of Default for the purposes of the CLA (as varied) and, as well, under Mr Fakhre's two charges as at 12 July 2011.

Issue 10 - Events of default subsisting at 12 July 2011

Accordingly, as at 12 July 2011 there were at least two clear Events of Default subsisting under the CLA and Mr Fakhre's two charges, namely:
(a)breach of the performance covenant of the CLA by reason of Elementree's failure to issue and allot to Mr Fakhre his Repayment Shares; and
(b)Elementree's insolvency.

Issue 11 - Mr Fakhre's written notices to Elementree on 12 July 2011

On 12 July 2011 I find that Mr Fakhre caused two crucial written notifications to be given to Elementree based upon these two (and some further asserted) Events of Default by Elementree. The two notices were:
(a)a notice of exercise by Mr Fakhre of his option to enforce his two charges, pursuant to cl 15(b) of each charge; and
(b)a notice of the appointment to Elementree of the first and second defendants as administrators, pursuant to s 436C of the Act and the two charges.
The two written notifications to Elementree both of 12 July 2011 were given in that sequence.

Issue 12 - The basis of Mr Fakhre's election to enforce his charges

The two 12 July 2011 written notifications by Mr Fakhre relied upon the two clear Events of Default, namely Elementree's insolvency and its failure to issue and allot the Repayment Shares. They provided a proper and sufficient basis on 12 July 2011 for Mr Fakhre to invoke cl 15(b) and give Elementree notice of the exercise of his option to enforce his two charges. But the notice of enforcement of the charges also relied upon a third alleged Event of Default in respect of an alleged failure to repay the Moneys Hereby Secured pursuant to the CLA and the charges. That ground would, if shown, be a further Event of Default. But its invalidity or non‑subsistence at that time would not affect Mr Fakhre's election to enforce the charges, given by reference to the two established Events of Default.

Issue 13 - Elementree's failure to repay the Moneys Hereby Secured as an Event of Default

Whether Mr Fakhre's loan of $1.3 million plus interest (the Moneys Hereby Secured) was due, owing and unpaid, with its non‑payment therefore constituting an Event of Default under the CLA, at the time Mr Fakhre issued notice of his election to enforce his charges, is a different issue. I am not the only person to identify the problems. Mr Doran's legal advisor clearly did (exhibit 34; exhibit 37). I would not reach that conclusion as to the working of the CLA. It seems to me to be inconsistent with Mr Fakhre contemporaneously giving notice that there is an Event of Default by reason of Elementree's failure to issue and allot to Mr Fakhre his Repayment Shares.

Issue 14 - Validity of the exercise of Mr Fakhre's option to enforce his charges

Nevertheless, the two clear Events of Default (insolvency and failure to issue and allot the Repayment Shares to Mr Fakhre) in existence as at 12 July 2011 provide in their own right a proper and sufficient basis to sustain Mr Fakhre's exercise of his option to enforce his two charges on 12 July 2011.

Issue 15 - The operation of cl 15(a) of the charges

The legal consequence on Tuesday 12 July 2011 of Mr Fakhre's two charges becoming enforceable by reason, first, of two proven Events of Default, then, second, Mr Fakhre's notice of his exercising his option to enforce his charges, is that cl 15(a) in each charge was clearly engaged and that clause became effective, if it was not already. The words of cl 15(a) in each charge must be given operative meaning and effect in a process of construing and sensibly reading the terms of the two charges in operation alongside the CLA (as varied). The CLA is the Primary Instrument and the two charges are collateral thereto. But there are cross‑default provisions as regards common Events of Default as specified in substantially equivalent terms.
The wording of cl 10.3(a) and (b) of the CLA requires a demand to be made in respect of a subsisting Event of Default in order to render the Moneys Hereby Secured due and owing under the CLA. But in the two charges, cl 15(a) does not specify the need for a demand or notice concerning an Event of Default in order to render the Moneys Hereby Secured immediately due and owing. There is thus some tension as to the need for a demand between the CLA as varied and the two charges at least, I think, in any period within which the charges have not become enforceable.
But on my analysis, once both Mr Fakhre's charges became enforceable after he exercised his option to enforce on 12 July 2011, the position as to the Moneys Hereby Secured being immediately due and repayable by Elementree under the charges was now clear.
Consequently, by reason of the operation of cl 15(a) of both charges, Mr Fakhre's exercise of his option to enforce his charges by reference to cl 15(b) rendered the Moneys Hereby Secured due and owing without the need for any demand. As a result on 12 July 2011 the Moneys Hereby Secured were immediately due and repayable.

Issue 16 - The validity of Mr Fakhre's appointment of administrators of Elementree

Consequently, the appointment by Mr Fakhre of the first and second defendant on Tuesday 12 July 2011 under his notice of appointment of administrators was valid and efficacious. I would be amenable to declare to that effect pursuant to s 447C of the Act, as I am requested to do by the first and second defendants.

Issue 17 - Mr Fakhre's creditor status

I also find that, by reason of cl 15(a) in each enforceable charge of Mr Fakhre being operative when Mr Fakhre appointed the administrators on 12 July 2011, the Moneys Hereby Secured (as defined in the CLA and in the charges and representing $1.3 million plus interest) became immediately due and repayable that day. Hence Mr Fakhre was from that point on 12 July 2011 a creditor of Elementree for $1.3 million plus interest.

Issue 18 - The effect of Mr Fakhre's election to claim repayment of loan funds

Mr Fakhre, by asserting on 12 July 2011 a claim for the repayment of his loan funds as debts immediately repayable pursuant to the terms of his two charges, elected as between inconsistent rights (ie debt or equity in Elementree). This was a permissible course pursuant to the terms of cl 15(a) his charges. Mr Fakhre, from 12 July 2011, was now seeking to be repaid his loan in full plus interest. The corollary is that Mr Fakhre, as from that point, could no longer also contend at the same time that he was entitled to the issue and allotment of Repayment Shares under the CLA as varied. Thus, on 12 July 2011, his pending action against Elementree for specific performance would have had to be amended to reflect his change of position if the action was to be pursued. That course would have been permissible.
However, on 12 July 2011, CIV 1664 of 2011 became the subject of a statutory stay of proceedings pursuant to s 440D of the Act, on 12 July 2011.
Mr Fakhre, on 12 July 2011, was now a creditor of Elementree and still secured by his two charges.

Issue 19 - Accuracy of the statements regarding Mr Fakhre in the administrators' Report to Creditors

My conclusion that Mr Fakhre was a creditor of Elementree on 12 July 2011 and thereafter, resolves a major point of controversy in this action. The consequence of this conclusion is that there was, under s 445D(1) of the Act, no material omission or misstatement on this creditor issue within the RTC that could have potentially been material to the vote taken at the second creditors' meeting, at which Mr Fakhre's proposed DOCA was approved.

Issue 20 - Reliability of Mr Hayes' evidence in relation to verbal agreements allegedly reached on 5 November 2010

As to Mr Hayes' further arguments invoking s 445D(1), by contending that Mr Fakhre was effectively a net debtor of Elementree because of two verbal agreements reached at the Pelham Hotel in London on 5 November 2010 (the alleged Matching Funds Agreement and Tree Agreement) and that as a result there were material errors in the RTC about those agreements, such questions raise mixed questions of fact and law to be assessed. To the extent that facts are in dispute and I need to assess the reliability of Mr Hayes' evidence I reiterate that I did not find his evidence reliable. Accordingly, I do not accept it save where it is uncontentious, or where it is corroborated by an independent, reliable source.

Issue 21 - The alleged Matching Funds Agreement

As to the alleged Matching Funds Agreement, it is clear that if any such agreement was reached, it was contingent, at that time, upon Mr Fakhre making an affirmative decision by the end of December 2010 to convert his $1.2 million in loans to equity. Any commitment to 'match' other shareholders, by Mr Fakhre buying shares in Elementree, from a commercial prospective, must have been dependent upon Mr Fakhre, first, deciding to exercise his right to convert and, second, actually converting and receiving his Repayment Shares. The underlying commercial rationale for Mr Fakhre 'matching' the subscriptions of other Elementree shareholders would clearly be so that Mr Fakhre's 51% majority shareholding in Elementree, if he converted, would not become diluted by the late 2010/early 2011 capital raising, thereby potentially seeing Mr Fakhre lose his position as majority shareholder.
However, as things turned out, Mr Fakhre was not able to convert, in the sense of receiving his Repayment Shares in Elementree. Even though he unequivocally communicated on 25 February 2011 his decision to convert and gave his Conversion Notice in accordance with cl 8.1 of the CLA, Mr Fakhre was quite wrongly denied his Repayment Shares by Elementree for a period of over four months. That breach of the CLA was a renunciation and clear repudiation of Elementree's obligations under the CLA which continued for over four months.
Full responsibility for Elementree's unfathomably stupid decision not to provide Mr Fakhre with the Repayment Shares, on the basis of the so‑called Tripartite Non‑Conversion Agreement, must be laid squarely at the door of Elementree's managing director. Notwithstanding the clear terms of the CLA, from February 2011 to July 2011 Mr Hayes pursued his own agenda and resisted conversion. That change of course arose after Mr Hayes' falling out with Mr Fakhre, following Mr Fakhre's frank criticisms of Mr Hayes in his email to Mr Hunt of 4 February 2011.
Hence, even if there was a binding legal commitment by Mr Fakhre to match the funds raised during Elementree's capital raising from its existing shareholders in December 2010/January 2011, Mr Fakhre's commitment never became operative. This was because Mr Fakhre was never able to convert, and never received his Repayment Shares. To expect him to match funds in circumstances where Elementree had breached and repudiated its obligations to him under the CLA would be naïve.
Furthermore, I doubt whether, from a legal perspective, there can be identified sufficient legal consideration passing from Elementree to Mr Fakhre, Elementree being the promisee, to support an enforceable Matching Funds Agreement. I have no doubt Mr Fakhre would have honoured a commitment to advance up to $500,000 in subscription funds so as to receive further Elementree shares, had he received his Repayment Shares. But on my analysis, Mr Fakhre was receiving nothing at all from Elementree in return for his commitment to match funds. In other words, nothing moved back to Mr Fakhre from Elementree as a legal consideration in return for Mr Fakhre matching the subscription funds put up by other shareholders and buying more shares. Receiving more Elementree shares which he would pay for would not amount, in my view, to legal consideration passing from Elementree to Mr Fakhre. The so‑called Matching Funds Agreement is not made out.

Issue 22 - The alleged Tree Agreement

As to the so‑called Tree Agreement, which is also said to have been reached with Mr Fakhre in the lobby of the Pelham Hotel on 5 November 2010, the seedlings for a 1,000 ha 2011 planting had been ordered from Western Australian nurseries by Mr Hayes shortly after that London meeting. It is clear as I have already said that at that time Elementree did not have sufficient money to fund a further tree planting for 2011. It was looking to Mr Fakhre to provide all those funds, including deposit funds of approximately $100,000. Unlike the Matching Funds Agreement, I find that the Tree Agreement could potentially validly subsist in circumstances where Mr Fakhre chose not to convert.
As to the alleged Tree Agreement there are at least three fundamental obstacles to finding a binding and enforceable agreement, namely:
(a)Discussions surrounding the 2011 tree planting proposal with Mr Fakhre in London at the Pelham Hotel and by email thereafter were always conducted on the basis that the arrangement might involve an investor other than Mr Fakhre participating. Because of a proposal to attract an investor, the working capital requirements for Elementree for the 2011 calendar year and this planting needed to be secured. The route by which security for Elementree's working capital requirements for 2011 was proposed to arrive was via the capital raising from existing shareholders in Elementree, planned for December 2010/January 2011. However, that capital raising was never finalised or completed at any point.
Accordingly, the working capital requirements of Elementree were not secured for 2011. The 2010/2011 capital raising proposal by Elementree to its shareholders was conditional upon and tied to the Matching Funds Agreement with the UK investor (Mr Fakhre). Because (as I have now explained) the asserted Matching Funds Agreement must fall over, due essentially to Elementree's failure to issue and allocate to Mr Fakhre his 53% Repayment Shares pursuant to the CLA as varied, the 2010/2011 capital raising was never completed. As a consequence, Elementree's working capital position was not secured for 2011. In consequence, any asserted 2011 Tree Agreement, upon that underlying secured capital premise, falls as well by reason of the failure of that condition.
(b)From the evidence and passing communications I find that the 2011 tree proposal was always dependent upon it being documented within a Forestry Services Agreement as required by Mr Fakhre. This was a requirement Mr Fakhre clearly discussed in London, then repeated subsequently by email. It was a requirement that was accepted by Mr Hayes. But it was not fulfilled. Failure to follow through on this documentation condition was again a failure of Mr Hayes. It was a point of detail he let slip after the meeting in London. A FSA for the 2011 tree planting would have clarified the terms, arrangements and basis upon which an investor who may have been introduced by Mr Fakhre would advance funds. A FSA would provide the investor some security as to its position with the planted trees under the arrangement.
The absence of a completed Forestry Services Agreement is a second fatal deficiency in the plaintiff's argument that the alleged Tree Agreement existed and was binding on Mr Fakhre.
(c)Failure to document the 2011 proposed tree planting arrangements with Mr Fakhre throws up another flaw. The evidence from the parties concerned (Mr Fakhre, Mr Hunt and Mr Hayes) shows they disagreed over a fundamental term of their proposed deal, concerning each party's return once the trees were sold off (anticipated to be at profit in a period of about 12 months). Mr Fakhre was of the view that if he or another investor was to advance about $1.1 million to fund the 2011 tree planting, he expected a return on investment of 40% (40% ROI), come what may. Hopefully any ROI would have been paid out of profits after the 2011 nurtured trees had been sold off as more mature seedlings. But Mr Fakhre sought for himself or for his investor a 40% ROI on the funds advanced, irrespective of whether or not the sale of the trees was ultimately profitable. According to Mr Fakhre, if there was profit then, after a 40% ROI, any residual profit would be split 50/50 between Elementree and Mr Fakhre or the investor. However, that was not Mr Hayes' view of the arrangements. From his perspective, the verbal 2011 tree planting deal was that Mr Fakhre, or the investor he introduced, would receive 40% of the profits once the 2011 trees were resold, with the remaining profit split between Mr Fakhre and Elementree. That, of course, is a far cry from a guaranteed 40% ROI.
The parties' disagreement over such a fundamental point concerning either a 40% ROI or a 40% cut of profits demonstrates that any agreement of this ilk that the parties may have thought had been consummated in November 2010 or thereafter was far too uncertain to be enforcable at law. The fundamental issue of disagreement over a profit split or a guaranteed ROI shows that the parties were quite wrong if they believed (and the legal test, of course, is not subjective, but objective) that they had reached a legally enforceable agreement. As to the authorities concerning uncertainty see Austman Pty Ltd v Mount Gibson Mining Ltd [2012] WASC 202 [329] ‑ [335], where I discussed the authorities including a recent decision in the Court of Appeal of Western Australia in Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191 and the observations of Gleeson CJ in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548.
I conclude that there was no binding or enforceable Tree Agreement.

Issue 23 - Accuracy of the administrators' Report to Creditors in relation to the Matching Funds Agreement and the Tree Agreement

By reason of the negative conclusions concerning the existence and enforceability of the alleged Matching Funds Agreement and alleged Tree Agreement between Elementree and Mr Fakhre, I correlatively conclude that there was no material omission or misstatement in the RTC in those respects.
Accordingly, that further aspect of the plaintiff's s 445D(1) case must also fail.

Issue 24 - The position of Mr Cuthill

As to Mr Hayes' challenge concerning alleged oppressiveness, unfair prejudice or unfair discrimination by the DOCA as between creditors under s 445D(1), I must say at the outset that irrespective of all else, I would have been most concerned about the position of one so‑called shareholder creditor, Mr Cuthill, who advanced $50,000 in subscription funds for further shares in Elementree pursuant to the December 2010/January 2011 capital raising proposals. This is a concern I raised in the trial. It had not been raised by the plaintiff.
Unlike the Hayes family (through their family company, Forrestdale) and its rather loose family support to Elementree for a subscription for shares commitment of $500,000 and a similarly loose subscription commitment by Mr Hayes' close friend Mr Kerkmans (through his corporation Marlingu), I find Mr Cuthill had never agreed with Mr Hayes or anyone else at Elementree to permit his $50,000 subscription funds to be used as unsecured loans to Elementree. Nevertheless, that is exactly what happened. What occurred was completely wrong and unacceptable. Mr Cuthill's subscription funds clearly should have been held in escrow pending the issue to him of shares, or their return upon a failure or cancellation of Elementree's 2010/2011 capital raising proposal. Instead, Elementree, under Mr Hayes' guiding hand, used Mr Cuthill's subscription funds to ameliorate its strained financial circumstances. Worse, Mr Hayes knew he was doing the wrong thing by causing Mr Cuthill's funds to be consumed by Elementree. He had been advised that subscription funds should have been kept in escrow. Nevertheless, Mr Hayes knowingly acted to the contrary (exhibit 20, page 871). In the cases of subscription funds promised by his parents' company and by Mr Kerkmans' company, there was permission given for the funds to be used as short term loans to Elementree. But that was never the case with Mr Cuthill's funds. Accordingly, Mr Cuthill has essentially been a victim of a defalcation. It is deeply concerning that Australia's reputation for corporate probity and secure dealing and investment might be damaged by misconduct as regards a UK investor.

Pursuant to the DOCA, Mr Cuthill is classed as a shareholder creditor. Under the DOCA, shareholder creditors receive only $10 between them. Effectively, then, Mr Cuthill loses his $50,000 investment, in circumstances where the Elementree 2010/2011 share issue was never implemented. This is unsatisfactory. However, my concerns about this outcome, which would otherwise have been produced on the implementation of the DOCA, have been assuaged by an undertaking offered by the third defendant to repay Mr Cuthill his funds in full. On the basis of my acceptance of that undertaking I can proceed to evaluate the balance of the plaintiff's challenges concerning the treatment of the other shareholder creditors. I reach that view irrespective of me noticing that Mr Cuthill had given his proxy to Mr Doran for the 18 October 2011 creditors meeting, thereby supporting Mr Fakhre's proposed DOCA. He is nevertheless entitled to have his own interests considered at this time.

Issue 25 - Discrimination between creditors under the DOCA

As to assertions of oppressiveness, unfair prejudice or unfair discrimination concerning other shareholder creditors (essentially Mr Hayes' parents through their corporation, Forrestdale, and Mr Kerkmans through his corporation, Marlingu) as to the amount of approximately $600,000, I do not consider it appropriate to interfere with the DOCA as it was accepted by Elementree's creditors on 18 October 2011.
I accept that there is a demonstrated commercial rationale to support an evident discrimination as between creditors in the DOCA, comparing Elementree's trade creditors and employees (who are paid out 100 cents in the dollar under the DOCA) and the shareholder creditors. The discriminatory rationale centres around an obvious need to continue Elementree's business and reputation and to maintain the commercial goodwill and trust of trade creditors of Elementree in the future conduct of its tree planting and nurturing businesses in rural Western Australia. Clearly that same business goodwill/trading reputation rationale does not apply as regards shareholder creditors. These parties were effectively supportive prospective subscribing shareholders loosely indicating an amenability to take up shares under the capital raising proposal of December 2010/January 2011; in the end, however, they agreed for their funds to be used as short term loans.
It is a fact that on 18 October 2011 at the second creditors' meeting Mr Kerkmans voted on behalf of Marlingu to accept the proposed DOCA (exhibit 21, page 31). He did so even though it meant Marlingu, as a shareholder creditor, would effectively receive nothing under the DOCA's implementation. Mr Kerkmans supports the continuance of the Elementree business as a good thing for rural Western Australia. In those circumstances I do not find oppression or unfair prejudice or unfair discrimination concerning Mr Kerkmans' and Marlingu's loans in their position as a shareholder creditors under the DOCA.
That effectively leaves the position of Mr Hayes' parents, Mr Lynton Hayes and Mrs Shannon Hayes through Forrestdale, and the approximate $500,000 they advanced to Elementree to assist Elementree and their son throughout 2011. I feel great sympathy concerning the financial position to which Mr Hayes' parents and Forrestdale have been left exposed by the DOCA, receiving virtually nothing. But my conclusion is, in the end, that they and Mr Kerkmans would have been no better off as creditors of Elementree under a pari passu scenario in which a liquidator had been appointed to Elementree by creditors for winding up.
Once I factor in Mr Fakhre's position as a secured creditor (concerning his loans of $1.3 million plus interest) as at 12 July 2011, the unenforceability of the asserted Matching Funds Agreement and Tree Agreement, and the most unfortunate situation concerning Elementree's plantings in 2010 on certain Bacopak lands, the problems involved in a pari passu distribution to creditors become obvious.
The Bacopak land's questionable value as an Elementree asset arises by reason of a failure to obtain consent to the planting from the land's first mortgagee, the ANZ Bank. That was poor business practice by Elementree's management and this area of planting has been left in jeopardy as an asset.
The end conclusion is that the shareholder creditors would have been no better off by a likely nil return on liquidation scenario rather than under the DOCA, pursuant to which they will still effectively receive nothing.
Furthermore, it is clear by reference to decided case authority in this court that the mere fact that a DOCA discriminates between creditors does not make it oppressive or unfairly discriminatory or unfairly prejudicial. Provided there is a legitimate business rationale for discrimination between classes of creditor there will be no basis to impugn such arrangements. See the decision of Master Newnes (as he then was) in Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) [2005] WASC 291; (2005) 228 ALR 598 [57] and [62], and the application of those observations more recently by Martin CJ in Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301 [76] and [79].
Accordingly, my conclusion is that the DOCA does not (upon receipt of the undertaking of Mr Fakhre as to a repayment of $50,000 in subscription funds to Mr Cuthill), operate oppressively or in an unfairly discriminatory or unfairly prejudicial way as against shareholder creditors.
On that basis, all the plaintiff's s 445D(1) challenges against the DOCA, seeking to have it terminated, fail.

Issue 26 - The court's discretion under s 445D and s 447A

Strictly speaking, then, it is unnecessary for me to consider the lengthy arguments put to me about the court's discretion under s 445D, had I ascertained a transgression of those provisions or the even wider discretion as to a potential rehabilitation of a transgression by reason of powers pursuant to s 447A of the Act.
Nevertheless, I render some brief observations as to some matters bearing upon discretion. Where an administrator such as Mr Doran is injected into a situation with a failed corporate business and then tries urgently to understand and to untangle what is inevitably a messy situation, a good measure of tolerance for error will generally be extended by a court towards the quick commercial decision making required in that situation. It is sometimes tempting to second‑guess such decisions with the benefit of hindsight. That temptation should be resisted. I would have been prepared in the exercise of my discretion to overlook and excuse any ascertained errors made concerning the legal enforceability of alleged oral agreements as asserted with Mr Fakhre such as the Matching Funds Agreement or the Tree Agreement, had I reached contrary conclusions. Of course, I did not, but it is easy to see how errors of judgment might be made by an administrator quickly trying to verify the existence of an allegedly enforceable oral agreement where the documentation is deficient, unsatisfactory or non‑existent. But there were in the end no errors concerning those asserted oral agreements and Mr Fakhre's asserted status as a net debtor.
As to the issue of the $1.3 million loan plus interest and Mr Fakhre's status as a creditor as at 12 July 2011, my decision in the end has been that the first and second defendants have proceeded correctly, on what I assess to be a difficult legal issue. Had I reached a different conclusion as to that issue then its repercussions would in my view have been profound for the RTC and the DOCA advanced by Mr Fakhre. Given that the inconsistency between being both a creditor and a putative shareholder by conversion was clearly seen and apprehended by the advisors providing legal advice to Mr Doran throughout July 2011, I would have struggled, particularly given the brief and essentially unreasoned legal advice seen in exhibit 37, to excuse error on this issue in the exercise of a discretion pursuant to s 445D or s 447A, unless it was shown that Mr Doran had acted upon much more reasoned legal advice, such as senior counsel's opinion, on the issue.
In the end, however, the advice, perhaps somewhat fortuitously, was correct. So any question of a discretion being exercised to excuse error is academic.

Conclusion

Accordingly, I dismiss the plaintiff's claims.
I will grant the first and second defendants' cross‑claims for declarations as to the validity of their appointments pursuant to s 447C of the Act.
As successful parties, the first and second defendants and the third defendant have a prima facie right to receive their taxed costs of this trial. But I will hear argument as to appropriate dispositive orders, including as to costs, if they cannot be agreed in due course after the parties' conferral.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: HAYES -v- DORAN [No 2] [2012] WASC 486 (S)

CORAM: KENNETH MARTIN J

HEARD: ON THE PAPERS BY SUBMISSIONS OF 28 JULY 2014

DELIVERED : 12 NOVEMBER 2014

FILE NO/S: COR 185 of 2011

MATTER :ELEMENTREE GROUP LTD (ADMINISTRATORS APPOINTED)

BETWEEN: COURTNEY MATTHEW HAYES
Plaintiff
AND
GARY PETER DORAN
First Defendant
DERMOTT JOSEPH MCVEIGH
Second Defendant
DANNY FAKHRE
Third Defendant

Catchwords:

Costs - Defendants' application for indemnity costs - Defendants successful at trial - Indemnity costs ordered - Turns on its own facts

Legislation:

Nil

Result:

Application granted

Category: B

Representation:

Counsel:

Plaintiff:     No appearance
First Defendant             :     No appearance
Second Defendant         :     No appearance
Third Defendant           :     No appearance

Solicitors:

Plaintiff:     In Person
First Defendant             :     Gaden Lawyers (WA)
Second Defendant         :     Gaden Lawyers (WA)
Third Defendant           :     Gaden Lawyers (WA)

Case(s) referred to in judgment(s):

Hayes v Doran [No 2] [2012] WASC 486
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S)

KENNETH MARTIN J: I delivered 117 pages of reasons for decision determining this action (see Hayes v Doran [No 2] [2012] WASC 486) on 14 December 2012. At the time I dismissed the plaintiff's action.
At [489] I said:
As successful parties, the first and second defendants and the third defendant have a prima facie right to receive their taxed costs of this trial. But I will hear argument as to appropriate dispositive orders, including as to costs, if they cannot be agreed in due course after the parties' conferral.
The action of the plaintiff against all defendants has been dismissed at the end of 2012. But the question of the defendants' entitlement to costs against Mr Hayes still remains unresolved. That issue has lain dormant since December 2012, only to be recently awoken from its slumbers by the application of the third defendant (Mr Danny Fakhre), who finally moves for costs orders in his favour, given the trial outcome of the action favouring himself as well as the other defendants against Mr Hayes.
In the interim since the trial was resolved, the first and second defendants have, on 10 June 2013 (see affidavit of Ms Fei Fei Xue, attachment FX3), assigned the benefit of any costs entitlements they hold against the plaintiff, to the third defendant.
Accordingly, Mr Fakhre now moves the Court that Mr Hayes, as the unsuccessful plaintiff, meet the costs of all defendants who were successful against him at the trial. Also, in the meantime, Mr Hayes' trial solicitors obtained leave to remove themselves from the court record, on 2 July 2014.
Currently, therefore, Mr Hayes does not have any solicitors of record acting for him. Additionally, it would appear that Mr Hayes has entered bankruptcy at some point during 2014. Correspondence has recently been received via my Associate from Mr Hayes' trustee in bankruptcy. The trustee appears to be Mr Graham Lean of G T Lean & Associates. Mr Lean's recent correspondence to the solicitors for the defendants, as copied to my Associate, dated 22 October 2014, indicates Mr Hayes' trustee in bankruptcy will abide by whatever decisions the Court reaches concerning costs orders relating to this trial. Mr Lean effectively, therefore, does not wish to participate beyond that indication.
Having defeated Mr Hayes at the trial, all defendants, as I have indicated at [489] of my original reasons, hold a prima facie entitlement to receive their taxed costs against him. However, the defendants seek to obtain an order for costs even beyond that. They move the Court for exceptional costs orders against Mr Hayes, pressing, in effect, for orders granting them indemnity costs, in respect of their solicitor/client trial expenses, in each instance.
An indemnity costs order is, generally speaking, an atypical outcome after a contested trial. But nevertheless, the defendants all seek indemnification for their actual legal costs in this instance (if that is worth anything given Mr Hayes' bankruptcy), and essentially on the basis of the Court applying a costs sanction to its mark of displeasure against Mr Hayes by reason of his institution, conduct of, and then behaviour in the litigation. In effect, the defendants seek to invoke principles concerning the award of indemnity costs by way of sanction against a party as explained in the Court of Appeal's reasons in Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S) [10].
Accordingly, the only substantive issue that really arises on this application, in the absence of any degree of participation by or on behalf of Mr Hayes or his trustee in bankruptcy, is whether, above and beyond usual orders for taxed costs, the defendants should, for this case, receive what would be special costs orders in their favour awarding them, in effect, their solicitor/client costs against Mr Hayes?
The defendant applications as regards, in effect, indemnity costs are founded from an evidentiary perspective upon two affidavits of a solicitor employed with the solicitors of record for the third defendant, Ms Fei Fei Xue, being sworn respectively on 6 February, then 24 June 2014. I have considered the content of both affidavits of Ms Xue, which stand, effectively, unanswered.
In order to facilitate a determination of costs issues on the papers, I have also received an extensive written submission filed on behalf of the defendants of 28 July 2014. Essentially, the written submissions dissect my reasons for decision of December 2012 highlighting numerous instances of recorded criticisms of Mr Hayes under those reasons, leading to the ultimate rejection of most of his trial evidence and ultimately a dismissal of his action against all defendants, as unmeritorious. Helpfully, the written submissions of the defendants contain a schedule of extracts from the lengthy reasons, collecting across some seven pages numerous extracts from the reasons critical of Mr Hayes, and it is put supporting the basis for a cost sanction to be imposed. I accept those submissions.
For convenience, I will simply attach the extract document as a schedule to these reasons.
The written submissions of the defendants relate that the first and second defendants ultimately incurred solicitor/client trial costs in defending Mr Hayes' action of $1.2 million and that the third defendant, Mr Fakhre, who was joined to the action at a later point before trial, incurred legal expenses of close to $400,000 (submissions, 28 July 2014, par 22). Those levels of fees, it is clear, substantially exceed the recoverable amounts that would be allowed under the uncapped limits of the scale determinations applicable to a taxation scenario for the defendants' costs.
It is appropriate, in the rather unique circumstances of the present litigation, that all the defendants receive an award of their costs against Mr Hayes on the indemnification basis, as sought. As case manager of the action from inception and then as the trial Judge, I remain (notwithstanding the time that has passed since December 2012) well aware of the underlying features of what was urgent, complex and ultimately unsuccessful litigation as initiated by Mr Hayes. However, I agree with the core submission of the defendants, in general terms, that the defendants' solicitor/client legal expenses incurred were needlessly and unreasonably suffered by them, due to Mr Hayes - who effectively put them to the high expense of defending his ultimately meritless action. The attached schedule of instances of criticism of Mr Hayes in my reasons, as collected more than amply demonstrates the unreasonable character of Mr Hayes' conduct. Those remarkable circumstances, in my view, do at the end warrant a costs sanction by an indemnity costs order, notwithstanding its exceptional character.
In the end, therefore, there will be orders as to the defendants' costs against Mr Hayes favouring each defendant on an indemnity basis and in the terms as set out below.
This now resolves all outstanding issues, at least as regards any requirement for further case management on my part. I will therefore remove the matter from the CMC list.
I propose then, upon the publication of these reasons, to issue orders in these terms:
1.The plaintiff pay the first, second and third defendants' costs of the proceedings including the costs of the first and second defendants' cross‑claims and any reserved costs to be taxed, if not agreed.
2.Such costs are to include all costs except insofar as they are of an unreasonable amount or have been unreasonably incurred so that, subject to the above exceptions, the first, second and third defendants will be completely indemnified by the plaintiff for their costs.
3.The amount of such costs be taxed on rates agreed by the first, second and third defendants with their respective solicitors and without regard to the limits imposed by scale item 11 of the applicable Legal Practitioners (Supreme Court) (Contentious Business) Determination.
4.The matter be removed from the CMC list.

Creditor Class	Total Owing ($)	DOCA proposal (cents in the $)	Liquidation optimistic (cents in the $)	Liquidation pessimistic (cents in the $)
Employees	196,011	100.00	100.00	0.91
Secured Creditors	1,300.000	100.00	0.33	-
Trade creditors	312,423	100.00	-	-
Shareholder creditors	790,163	0.00001	-	-