Helenic Pty Ltd as trustee of the Mastrantonis Family Trust v Retail Adventures Pty Ltd (Administrators Appointed) - [2013] NSWSC 1973

Supreme Court

New South Wales

Medium Neutral Citation: Helenic Pty Ltd as trustee of the Mastrantonis Family Trust v Retail Adventures Pty Ltd (Administrators Appointed) [2013] NSWSC 1973
Hearing dates: 12-15, 18 and 20 November 2013
Decision date: 23 December 2013
Jurisdiction: Equity Division - Corporations List
Before: Robb J
Decision:
(1)Order that the resolution made by the creditors of the first defendant on 2 September 2013 to the effect that the first defendant execute a deed of company arrangement as outlined in the second defendants' Report to Creditors dated 26 August 2013, be set aside.
(2)Order that the first defendant be wound up.
(3)Order that the winding up shall operate as if s 446A of the Corporations Act 2001 (Cth) applies, and the first defendant is taken to have passed a resolution under s 491 that the first defendant be wound up voluntarily,
(4)Order that the second defendants be appointed as the liquidators of the first defendant.
(5)Give the parties leave to apply to the court on three days' notice to vary or supplement orders (3) and (4).
(6)Reserve the costs of the proceedings for further submissions.

Catchwords: DEED OF COMPANY ARRANGEMENT - whether resolution of creditors executing deed of company arrangement be set aside - whether the proposed resolution of creditors unreasonably prejudices the interests of creditors - whether company should be wound up - matters relevant to the making of a winding up order.
Legislation Cited: Corporations Act 2001 (Cth)
Corporations Regulations 2001 (Cth)
Cases Cited: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510
Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391
Deputy Commissioner of Taxation v Schmierer [2002] QSC 262
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139
Hamilton v National Australia Bank Ltd (1996) 66 FCR 12
Hoath v Comcen Pty Ltd (2005) 53 ACSR 708
Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687
Khoury v Zambena Pty Ltd [1999] NSWCA 402
Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300
Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Admin Apptd) (1997) 24 ACSR 47
Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544
Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139
Ravenswood Resort Pty Ltd (in liq) v Kammal (2006) 60 ACSR 507
Re Le Meilleur Pty Ltd [2011] NSWSC 1115
Strawbridge v Retail Adventures Pty Ltd (administrators appointed) (2013) 95 ACSR 121
Vero Insurance Ltd v Kassem (2011) 86 ACSR 607
Yeshiva Properties No 1 Pty Ltd [2011] NSWSC 25
Category: Principal judgment
Parties: Helenic Pty Ltd as trustee of the Mastrantonis Family Trust formerly trading as Tasty Treats (First plaintiff)
JFK Group Company Limited (Second plaintiff)
Retail Adventures Pty Limited (Administrators Appointed)(First defendant)
Vaughan Strawbridge, John Lethbridge Greig and David John Frank Lombe as Administrators of Retail Adventures Pty Ltd (Administrators Appointed)(Second defendants)
Retail Adventures Holdings Pty Ltd (Administrators Appointed)(Third defendant)
Vaughan Strawbridge, John Lethbridge Greig and David John Frank Lombe as Administrators of Retail Adventures Holdings Pty Ltd (Administrators Appointed)(Fourth defendants)
DSG Holdings Australia Pty Ltd (Fifth defendant)
Bicheno Investments Pty Ltd as trustee for the Jan Cameron Trust (Sixth defendant)
Representation: Counsel:
R Newlinds SC and V Whittaker (Plaintiffs)
R Dick SC and F Assaf (Second and fourth defendants)
D Studdy SC and E Holmes (Fifth and sixth defendants)
Solicitors:
Colin Biggers & Paisley (Plaintiffs)
Herbert Smith Freehills (Second and fourth defendants)
Russells (Fifth and sixth defendants)

File Number(s): 2013/275639

Judgment

Parties

The plaintiffs are creditors of Retail Adventures Pty Ltd (Administrators Appointed) (RAPL).

RAPL is the first defendant.

The second defendants, Messrs Strawbridge, Greig and Lombe of Deloitte Touche Tomatsu, have been appointed administrators of RAPL under Part 5.3A of the Corporations Act 2001 (Cth).

The third defendant is Retail Adventures Holdings Pty Ltd (Administrators Appointed) (Holdings). All of the shares in RAPL are held by Holdings.

Holdings is also in administration under Part 5.3A. The second defendants have been appointed as administrators of Holdings, and for that purpose they have separately been named as the fourth defendants.

DSG Holdings Australia Pty Ltd (DSG) is the fifth defendant. It owns all of the shares in Holdings.

The sixth defendant is Bicheno Investments Pty Ltd as trustee for the Jan Cameron Trust (Bicheno). Bicheno owns all of the shares in DSG.

It will be convenient to call the second and fourth defendants the "Administrators". Unless I indicate to the contrary, references to the Administrators will be in their capacity as administrators of RAPL.

I will call DSG and Bicheno the "defendants", unless it is necessary to refer to them individually.

Relief claimed

The plaintiffs commenced these proceedings on 11 September 2013, and by their amended originating process they seek the following principal relief:

"1. An order pursuant to section 600A of the Corporations Act 2001 (Cth) that the resolution of creditors, passed at the meeting of creditors of the first defendant held on 2 September 2013, to the effect that the first defendant execute a deed of company arrangement as outlined in the second defendants' Report to Creditors dated 26 August 2013, be set aside.

2. An order that the first defendant be wound up."

At the hearing the plaintiffs were represented by Mr Newlinds of Senior Counsel and Ms Whittaker. Mr Dick of Senior Counsel appeared for the Administrators with Mr Assaf. Mr Studdy of Senior Counsel appeared with Ms Holmes for the defendants.

Background

RAPL was incorporated on 17 March 2009 with Ms Jan Cameron as the company's sole director and secretary. On 23 March 2009 RAPL purchased the Australian Discount Retail Group of companies, which operated various discount retail stores, under the trading names "Crazy Clarks", "Go Lo Discount Stores", "Sam's Warehouse" and "Chicken Feed".

In addition to Ms Cameron, Ms Penny Jane Moss was appointed as a director of RAPL on 3 December 2010, and resigned on 10 September 2012. Mr Bruce Robertson Irvine was appointed as a director on 26 October 2009 and resigned on 22 July 2012. Mr Robert John Hastings was a director between 23 March 2009 and 27 November 2009. It is not clear from the evidence whether Mr Norman Leslie Draper was appointed as a director or the secretary of RAPL.

Bicheno provided substantial financial support to RAPL. Between May 2000 and January 2012 Bicheno made various advances to its subsidiaries, which were ultimately applied to the benefit of RAPL. The total amount was $77.49 million. The loans are described more fully in par 9.6.2 of the report prepared by the Administrators under s 439A(4) (Creditors Report). Additionally, Bicheno provided supplier guarantees in respect of stock supplied to RAPL. Bicheno's proof of debt claimed $8,542,689.53 in respect of its liability under these guarantees. The Administrators allowed an amount of $8 million of this claim for voting purposes. I will consider the claims made by Bicheno, DSG and Holdings against RAPL in more detail below.

The Administrators were appointed as administrators of RAPL under s 436A of the Corporations Act on 26 October 2012.

At the date of the Administrators' appointment RAPL operated 268 retail stores spread across all Australian states. These stores, two distribution centres, and a head office, all operated from leased premises and each was the subject of separate lease arrangements. RAPL had approximately 5000 staff at that time.

On 26 October 2012 the Administrators entered into a license agreement with DSG under which DSG was granted a licence to operate the business of RAPL. The licence extended to the possession of the properties occupied by RAPL, the use of the assets of the business, and the operation of the business. The licence covered 240 of RAPL's stores. The remaining 28 stores were closed down by the Administrators.

On 11 February 2013 the Administrators caused RAPL to enter into a sale agreement with DSG, under which RAPL sold its business as a going concern. The sale agreement was completed on 13 March 2013.

The sale agreement was subject to a condition precedent for the benefit of DSG that the convening period for the creditors' meeting required by s 439A of the Corporations Act be extended for a period of not less than 180 days in order to allow for DSG to complete negotiations with the lessors of the properties from which RAPL's business was conducted, in respect of the head office, distribution centres and store premises. The necessary extensions were granted by the Federal Court of Australia, and the sale agreement became absolute.

The sale agreement contained terms which had the following effect, so far as is relevant to the present proceedings:

(1) The purchase price for the business was $58.9 million less:

(a) the value of the employee entitlements assumed by DSG;

(b) $3 million previously advanced to the Administrators as a pre-payment under the licence agreement; and

(2) All employee entitlements will either be assumed by DSG or be subject to a cash payment by DSG to the Administrators.

(3) DSG must either make offers to existing employees prior to the date of the second meeting of creditors or pay the termination entitlements to the Administrators in respect of any employees who are not offered employment by DSG.

(4) All cash held by the Administrators is excluded from the assets being sold.

(5) The balance of the purchase price will be provisionally applied against DSG's secured debt. In the event that DSG's security is found to be wholly or partially voidable and secured debt is reduced to an amount below the adjusted purchase price then;

(d) the shortfall amount is payable in cash;

(e) DSG must make an immediate payment of 50% of the shortfall amount;

(f) the balance of the shortfall amount will be applied against the liquidation dividends which would otherwise have been payable to DSG, Holdings and Bicheno; and

(g) if the liquidation dividends payable to those entities is less than 50% of the shortfall amount, the balance is to be paid in cash by DSG.

(6) DSG's obligations to make the above payments will be secured by a first ranking charge on the assets and undertaking of DSG for an amount calculated by the Administrators as being sufficient to meet any cash payment that may be required in full."

At the date of the sale agreement the Administrators had identified the possibility that, of the secured debt of $77.49 million apparently owed by RAPL to Holdings, the security may be voidable for an amount up to $49.77 million. That part of the total debt related to advances that were subordinated to the entitlements of the other unsecured creditors of RAPL, and initially unsecured and made before 1 July 2011. That was the date on which RAPL granted the security to Holdings. If, as the Administrators believed, RAPL was insolvent on 1 July 2011, the security may be voidable by a liquidator of RAPL in relation to $49.77 million.

Under the sale agreement DSG received in the first instance credit for the whole of the secured debt owed by RAPL to Holdings, as a set off against the purchase price for RAPL's business. That arrangement was without prejudice to the right of any liquidator of RAPL to seek to challenge the validity of the security granted by RAPL. If the security was later declared void in respect of any part of RAPL's debt, the effect of the sale agreement was that to the extent that the amount validly secured was less than the net purchase price, DSG would be liable to RAPL for the shortfall. If otherwise entitled to do so, Holdings would be entitled to prove in the winding up of RAPL for any unsecured part of the debt.

It was agreed that, if a liquidator successfully challenged the validity of the security granted by RAPL to Holdings in respect of part of the debt, the amount payable by DSG to RAPL would be quantified at $13.8 million, less any liquidation dividend otherwise payable to DSG or its related entities.

RAPL and DSG entered into an agreement called the General Security Agreement, which among other things, secured the obligation of DSG to pay the $13.8 million less any dividend to RAPL. A term of the agreement was that RAPL would release the security on 30 June 2014. Bicheno entered into a deed of priority with RAPL under which RAPL's security would take priority over any security granted by DSG to Bicheno, until the release date of RAPL's security.

Under the sale agreement RAPL licensed its right to occupy the premises from which it had conducted its business to DSG to give DSG time to negotiate new leases or assignments of leases. At the time of completion of the sale agreement there were 180 lessors in respect of 228 stores, excluding the head office and distribution centres. The process of negotiating new leases or assignments is ongoing.

As of 29 September 2013 DSG had made offers of employment to 3034 employees of RAPL. Of those, 2545 had commenced employment with DSG. Some of the others had resigned or been terminated, and the final position in respect of others is as yet uncertain. An effect of the sale agreement was that the former employees of RAPL are now employed by DSG, or DSG has made provision for their termination entitlements.

As the business of RAPL was sold to DSG as a going concern, then the business will continue in existence for the purposes of the statement of the object of Part 5.3A in s 435A(b), unless the setting aside of the resolution and the making of an order winding up RAPL will have a flow on effect in relation to the viability of DSG's business.

Proposal for deed of company arrangement

Bicheno made a proposal to the Administrators on 18 July 2013 that RAPL should enter into a deed of company arrangement. A draft of the proposed terms was provided to the Administrators on 7 August 2013.

Annexure C to the Creditors' Report contained the Draft Proposal For Deed of Company Arrangement (Deed Proposal). It provided, so far as is relevant:

"Background to Proposal

The proposer, [Bicheno] is the ultimate shareholder of [Holdings] and [RAPL] and wishes to propose a pooled deed of company arrangement (Deed).

On the appointment of the voluntary administrators to RAPL, [DSG] licensed (and subsequently purchased) the business and assets of RAPL. DSG entered into a General Security Agreement (DSG Security) to secure certain of its obligations to RAPL under the agreement which governs the sale (Sale Agreement).

All assets of [Holdings] and RAPL are ultimately subject to a General Security agreement in favour of Bicheno.

[Holdings] does not have any assets. The only unrelated creditors of [Holdings] are claimants under guarantees of the obligations of RAPL.

1. Deed Administrators

It is proposed that two of the Administrators of RAPL and [Holdings], Vaughan Strawbridge and David Lombe of Deloitte act as Deed Administrators of a single deed under which the non-related creditors of RAPL and [Holdings] will claim against a single deed fund.

2. Admissible Claims

All debts or claims, whether present or future, actual or contingent the circumstances giving rise to which occurred on or before 26 October 2012 will be admissible under the Deed. Creditors with a claim against RAPL and also the benefit of a guarantee from [Holdings] in respect of the first mentioned claim will be treated as having one claim.

3. Property of Companies available to pay creditors' claims

3.1 The Deed Administrators will establish a single deed fund (Deed Fund)

3.2 The Deed Fund will comprise:

(a) any cash held in the Administrators' bank accounts but for the avoidance of doubt excluding any term deposits supporting bank guarantees issued to creditors of RAPL; and

(b) a contribution from Bicheno, DSG, Jan Cameron, Penny Moss and Bruce Irvine (Contributing Related Creditors) of $5,500,000 (Contribution) which is to be made by 31 January 2014 or such other date as the Deed Administrators may agree (Contribution Date).

4. Nature and Duration of the Moratorium

The moratorium on claims by persons bound by the DOCA (Deed Creditors) will be that provided for by the Corporations Act (especially sections 444C, 444D and 444E) and will continue until the Deed has been terminated.

5. Extent to which the Company's debts are extinguished.

5.1 The claims of the Deed Creditors (other than the Contributing Related Creditors and [Holdings] (Related Creditors)) against the Companies will be extinguished on payment of the final dividend under the Deed.

5.2 The Related Creditors will not participate in the Deed Fund.

5.3 Upon payment of the Contribution, the Contributing Related Creditors will be released from any and all claims arising prior to the commencement of the respective administrations.

...

7. Termination of the DOCA

7.1 The circumstances in which the DOCA terminates;

(a) When the Deed Administrators lodge a notice with ASIC that the deed has been fully effectuated; and

(b) Otherwise, as provided for by the Corporations Act (especially sections 445D and 445F).

7.2 If the Deed Contribution is not made on the Contribution Date the Deed will fail. The Deed Administrators will not be entitled to take formal steps to recover the Contribution from the Contributing Related Creditors.

8. Order property referred to in paragraph 2 will be distributed among creditors bound by the Deed

8.1 Order of payment from the Deed Fund

...

(d) Fourth - any unsecured creditors pari passu.

...

10. Miscellaneous

10.1 The Deed Administrators will not be responsible for the day-to-day management of the Companies and the suspension of the directors' powers will end on execution of the Deed.

10.2 The directors undertake to ensure that, until the Contribution Date, RAPL does not engage in any new business or other activity except as tenant under an existing lease. DSG will be responsible for all amounts payable under any such lease from the day after the second meeting of creditors (or if that meeting is adjourned from the day of the adjourned meeting).

10.3 The directors undertake to ensure that within 10 business days of the second meeting of creditors (or if that meeting is adjourned from the date of the adjourned meeting) RAPL pays any entitlement due to any employee of RAPL who does not receive or does not accept an offer from DSG of employment on the same or better terms as governed by their employment immediately prior to the second meeting of creditors".

The plaintiffs tendered a draft deed of company arrangement, which became Exhibit C. The document was apparently produced in answer to a notice to produce served by the plaintiffs on the Administrators. The document appears to have been prepared by the solicitors for the defendants. The document is undated. The circumstances in which it was prepared, and the use to which it was put have not been established.

The draft deed of company arrangement appears to be generally consistent with the terms of the Deed Proposal. It may be that the draft does not expressly prevent the Administrators taking steps if the deed of company arrangement were entered into to recover the $5.5 million contribution from the Contributing Related Creditors. No party submitted that the terms of the draft deed supplanted the Deed Proposal. The defendants positively submitted that the draft deed is irrelevant; as if a deed of company arrangement executed in the terms of the draft deed was inconsistent with the Deed Proposal upon which the creditors' resolution was based, it would not be binding: see Re Le Meilleur Pty Ltd [2011] NSWSC 1115 at [241] - [270].

In these circumstances I will not give further consideration to the draft deed.

The following aspects of the Deed Proposal should be noted. Under clauses 1 and 2 a single fund would be created for the creditors of RAPL and Holdings. Creditors of RAPL who had the benefit of a guarantee from Holdings would be treated as having one claim. No party suggested that this arrangement was prejudicial to non-related creditors.

The claims of all creditors other than the Contributing Related Creditors and Holdings against RAPL and Holdings would be extinguished on payment of the final dividend under the Deed: clause 5.1. The implementation of this term would have the result that all unrelated creditors of both companies would be limited to a pro rata dividend based upon the cash held by the Administrators, and the Contribution of $5.5 million, if that amount was paid to the Administrators. This term is the basis of the plaintiffs' argument that the creditors' resolution was unreasonably prejudicial to them, because the dividends under the deed of company arrangement are likely to be far less than they would receive in a winding up of RAPL.

Under clause 5.2 the Related Creditors will not participate in the Deed Fund. The plaintiffs make no complaint about this term, as it will increase the dividend received by unrelated creditors from the fund, but the effect of the related clause 5.3 would be that, upon payment of the Contribution, the Contributing Related Creditors will be released from all pre-existing claims. That means that Bicheno, DSG, Ms Cameron, Ms Moss and Mr Irvine will be released from all insolvent trading claims to which they might otherwise be liable. Further, the Administrators will lose the right to challenge the validity of the security granted by RAPL to its holding companies. The Administrators in their Creditors Report assessed the total insolvent trading claims as $48.284 million, and calculated likely realisations to fall within the range $31.385 million to $19.314 million. As noted above, the Administrators have assessed that the security may be voidable as to $49.77 million. The plaintiffs claim that this term is a source of unreasonable prejudice to the non-related creditors who voted against the resolution.

The Deed Fund created by clause 3.1 would contain the property described in clause 3.2, being the cash held by the Administrators plus:

"(b) a contribution from Bicheno, DSG, Jan Cameron, Penny Moss and Bruce Irvine (Contributing Related Creditors) of $5,500,000 (Contribution) which is to be made by 31 January 2014 or such other day as the Deed Administrators may agree (Contribution Date)."

Clause 7.2 provides that if the Deed Contribution is not made on the Contribution Date "the Deed will fail". Further, the Administrators will not be entitled to take formal steps to recover the Contribution from the Contributing Related Creditors.

The plaintiffs make two related complaints about the effect of clause 7.2. The first is that they submit the effect of the Contributing Related Creditors not making the Contribution by the due date will lead the deed of company arrangement to "fail", and the consequence of that happening will be that RAPL will be returned to the control of its directors, and it will not go into liquidation.

The second complaint is that the disentitlement of the Administrators to take steps to recover the Contribution essentially makes the payment of the Contribution discretionary on the part of the Contributing Related Creditors. That is said to create a "structural" prejudice in that it gives an opportunity to the Contributing Related Creditors to buy time, to test the commercial waters over the Christmas trading period, so to speak, and then decide whether or not they will go through with the deed of company arrangement. That is said to give rise to a prejudice as, even if RAPL is subsequently put into liquidation on the ground of insolvency, the relation back date would significantly be delayed compared with the situation where the starting point of the winding up process is the appointment of the Administrators under Part 5.3A.

The plaintiffs' final complaint arises out of the effect of clause 10.1, under which, if the deed of company arrangement is executed, the suspension of the directors' powers caused by s 437C(1) will end, and the directors will regain control of the company. The source of concern is that there is evidence that as soon as that happened the directors would cause RAPL to release the security which DSG has granted to it to secure repayment of any balance of the purchase price that may be found to be payable to RAPL.

It will be convenient to make some preliminary observations about these issues in the context in which they arise. The precise relevance of the issues to the entitlement of the plaintiffs to the relief that they seek will be considered later.

The first issue for consideration is as to what will happen if the Contributing Related Creditors do not pay the $5.5 million by 31 January 2014. Clearly the Administrators would not be able to force them to do so.

The plaintiffs point to the fact that under clause 7.2 the result will be that the deed of company arrangement "will fail". There is, they submit, uncertainty as to the legal meaning of the word "fail" in this context. That context is the operation of Part 5.3A of the Corporations Act. If it were intended that upon non-payment of the Contribution the deed of company arrangement would come to an end prospectively, the natural word to use would be "terminate". As a matter of ordinary usage "fail" does not necessarily mean "terminate". "Fail" could have the same effect as the failure of a condition, with the result that the deed of company arrangement would be determined ab initio.

I agree that the use of the word "fail" in this context is unfortunate, if not inexplicable. Part 5.3A is replete with references to the concept of termination, and there are many provisions that deal specifically with the effect of termination. Detailed submissions were not made by the parties as to the relationship between the concept of failure and the other provisions of Part 5.3A. In particular, there was no consideration of whether there are any impediments within the Part to companies in administration entering into deeds of company arrangement that are wholly conditional in relation to conditions subsequent. In the circumstances I will not attempt an examination of this question. It is sufficient to conclude that the use of the word "fail" introduces an unsatisfactory element of uncertainty into the meaning and effect of a crucial term of the Deed Proposal, and that consideration may be relevant to the entitlement of the plaintiffs to the relief that they seek.

The second point that the plaintiffs make in relation to the use of the word "fail" in clause 7.2 is that even if it means "terminate", if the Contribution is not paid, then the deed of company arrangement will terminate, and control of RAPL will revert to its directors.

The plaintiffs rely upon the reasoning of Barrett J (as his Honour then was) in Yeshiva Properties No 1 Pty Ltd [2011] NSWSC 25. Barrett J considered the effect of s 446B(1) of the Corporations Act and Reg 5.3A.07(1)(b) Corporations Regulations 2001, which is that if a deed of company arrangement specifies circumstances in which the deed is to terminate and the company is to be wound up, if those circumstances exist at a particular time, the company is taken to have passed a special resolution under s 491 that the company be wound up voluntarily. His Honour held at [9], [10] that the regulation did not operate if the deed of company arrangement specifies when it is to terminate, but does not provide for the company to be wound up in those circumstances. I agree with his Honour's reasoning. The essential second element is missing from clause 7.2 of the Deed Proposal. Upon non-payment of the Contribution, the deed of company arrangement would terminate by reason of s 445C(c). The prior administration under s 436A will already have terminated under s 435C by reason of the execution of the deed of company arrangement. The suspension of the powers of the directors under s 437C(1) would have ceased to be relevant when the deed of company arrangement was executed. The effect of clause 10.1 of the Deed Proposal would be that the directors would re-take control upon execution of the deed of company arrangement. The termination of the deed would leave that regime in place.

The defendants responded to this argument by relying upon two matters. First, they say that the Administrators said in the Creditors Report that if the deed of company arrangement failed because the Contribution was not made, RAPL would go into liquidation: (Defendants' written submissions par 69). In fact, as the defendants record themselves in pars 79 and 80, the Administrators said to creditors that if the Contribution was not made "the only alternative available to creditors would be to terminate the DOCA and liquidate the Companies". That statement is consistent with what the plaintiffs plead in par 14(a) of their points of claim. It is not a statement that RAPL would automatically go into liquidation if the deed failed.

As I understand it, the Administrators have adjusted their position and now adopt the reasoning of Barrett J.

The defendants' argument does not resolve the problem. The defendants appear to submit, first, that where creditors resolve in favour of a proposal to enter into a deed of company arrangement that is contained in a report to creditors, the intended effect of the proposed deed can be gleaned from representations made by administrators in their report to creditors, or statements made to creditors before they make their resolution, as well as the actual terms of the proposed deed as set out in writing to the creditors. It is not necessary for me to attempt to decide the correctness of this submission, and I will not do so. Its validity is at least highly problematic. My strong inclination is to believe that the submission is wrong. Section 444A deals with the requirement that the administrator must prepare an instrument setting out the terms of the deed, and the matters that are to be specified in the instrument. Under s (1), the section applies where a company's creditors resolve that the company execute a deed of company arrangement. That provision seems to focus on the terms of the resolution. The resolution is likely to be expressed in terms that the company enter into a deed as proposed, and a resolution of that nature will almost always direct attention to what in the present case is the Deed Proposal. There should be no scope for introducing comments made by administrators as to their understanding of the effect of the proposal. In any event, it would be highly inimical to the effective operation of Part 5.3A if opponents of resolutions to enter into a deed of company arrangement were given scope for dispute as to what was intended by basing arguments upon statements made, including oral statements, to creditors as to what the expected effect of the proposed deed would be.

Secondly, the defendants appear to suggest that, if the Contribution were not paid, the creditors could resolve to terminate the deed of company arrangement and place RAPL into liquidation. Section 445E authorises creditors, at a meeting convened under s 445F, to pass a resolution terminating a deed, and where notice has been given, they may resolve that the company be wound up. Section 445C(b) provides that a deed of company arrangement terminates when the company's creditors pass a resolution to that effect at a meeting convened under s 445F. However, s 445CA provides that creditors are not entitled to pass a resolution under s 445C(b) unless there has been a breach of the deed, and the breach has not been rectified before the resolution is passed.

The problem with this aspect of the defendants' argument is that, if the Contribution is not paid, it is unclear whether there will be a breach of the deed. Clause 3.2 provides that the Deed Fund will comprise, in part, the Contribution. The Deed Proposal does not contain any covenant by the Contributing Related Creditors to pay the Contribution. Clause 7.2, in so far as it provides that the Administrators will not be able to recover the Contribution, seems to make it clear that no covenant is intended, and if that is right, the failure to pay the Contribution will not involve a breach of the deed.

In these circumstances it is probable that if a deed of company arrangement were to be entered into consistently with the Deed Proposal, and the $5.5 million was not paid, the deed would be terminated and RAPL would not go into liquidation. Even if that is not the correct result, the outcome is highly uncertain, and there would be considerable scope for legal dispute as to what the effect of non-payment would be.

The plaintiffs accepted that, even if the argument is correct that non-payment of the $5.5 million would not automatically have the effect that the winding up of RAPL would commence, RAPL would still be insolvent and any interested creditor could most likely obtain an order for the winding up of RAPL in new proceedings commenced under Part 5.4. They say, however, correctly in my opinion, that in that case the consequence would be unsatisfactory in that the commencement of the relation back period would be unjustifiably delayed, with unpredictable consequences.

During the course of the hearing on 18 November 2013 the defendants made an attempt to deal with this array of problems by having Ms Cameron give an undertaking to the court (the Undertaking). The Undertaking, which was read out to the court, and provided in written form (MFI 3), was in the following terms:

"5. In light of what has been suggested by the other parties and their legal representatives in court last week, Ms Cameron undertakes to the Court that, if the resolution the subject of these proceedings is not set aside and the DOCA is executed:

(a) she will not (in her capacity as a director of RAPL) release a security which RAPL has over DSG in the amount of $13 million until the $5.5 million DOCA contribution is made in accordance with terms of the DOCA;

(b) she will consent to an order or other arrangement which ensures or facilitates that in the event the $5.5 million contribution is not made in accordance with the DOCA RAPL will proceed into liquidation."

The first four paragraphs in the document contained an explanation as to various parties' intentions and understanding. I ruled at the time that it was not appropriate for me to accept the document as evidence of those matters, and that I would not have regard to them. It is not appropriate that I set out the terms of the paragraphs.

I do not propose to enter upon a detailed analysis or consideration of the effect of the Undertaking. That is because, although in my view what the plaintiffs have called the "structural" deficiencies in the Deed Proposal, and the attempt by the defendants to ameliorate those effects by means of the Undertaking, have some significance, they are not conclusive or even primary considerations in determining whether the plaintiffs are entitled to relief under s 600A. I will return to a consideration of these matters when I consider whether the court should grant the relief sought. At present I will limit myself to the following observations.

The most obvious feature of the Undertaking is that it does not include a promise by Ms Cameron to cause the Contributing Related Creditors to pay the $5.5 million. This was exactly the occasion at which it would be expected that Ms Cameron would make such a promise, if she wanted to defuse the argument that the Contributing Deed Creditors wished to have a bet each way, so to speak, as to whether it was in their interests to make the proposed deed of company arrangement unconditional, or whether they were better off saving their money to use it to defend themselves against any proceedings commenced by liquidators of RAPL.

Senior Counsel for the defendants made a forceful, if not impassioned, submission to the effect that on the probabilities it was inevitable that the $5.5 million would be paid, because no persons in the position of the Contributing Deed Creditors would fail to make such a payment, if the consequence was that RAPL would go into liquidation, and the Administrators as liquidators would unleash a torrent of proceedings against them to recover the best part of $50 million for insolvent trading, as well as other possible claims.

I acknowledge that this argument has some force, but if it were true the obvious course for the Contributing Deed Creditors to take would be simply to promise under the Proposed Deed to pay the $5.5 million. My scepticism in this regard has been fuelled by the fact that Ms Cameron has taken the exceptional course of offering the Undertaking to fix various possible weaknesses in the position of the defendants, but she has not undertaken to fix this one.

Ms Moss is the only one of the Contributing Deed Creditors who gave evidence in the proceedings. She freely acknowledged that she personally was not in a position to pay the $5.5 million, and did not expect to do so. It is reasonably obvious that the money will have to come from Ms Cameron or one of her companies. Ms Cameron did not give evidence.

At best, the position remains highly uncertain. There may well be a high probability that the $5.5 million will be paid. However, it is rational to consider a possibility whereby the Contributing Deed Creditors will wish to have the benefit of the trading figures for the business previously owned by RAPL over Christmas, to make some decision whether or not paying the $5.5 million will be throwing good money after bad.

The plaintiffs urged the court not to accept par 5(a) of the Undertaking as being sufficient because Ms Cameron has only given the undertaking in her personal capacity as a director of RAPL. It must be recognised that at present she is the only director of RAPL. The plaintiffs say, however, that the Undertaking would not prevent additional directors of RAPL being appointed, who might outvote Ms Cameron and cause RAPL to release the security even though the $5.5 million is not paid.

In my view the possible outcome of which the plaintiffs warn is very unlikely, and if that result were to be procured by Ms Cameron, she could be on very dubious ground in relation to the Undertaking. Realistically, it is likely that par 5(a) will have the effect that the security will not be released if RAPL enters into the proposed deed of company arrangement, and the $5.5 million contribution is not paid. I have, however, qualms about this issue, as I do not think that par 5(a) has been worded as directly or unequivocally as it could have been worded.

The effect of par 5(b) of the Undertaking is that if the $5.5 million contribution is not paid, Ms Cameron would consent to an order or other arrangement which ensures or facilitates that RAPL will proceed into liquidation. Ms Cameron's influence in this area would arise from the fact that at present she is the only director of RAPL, and it appears that she is the ultimate controller of Holdings, which is the only shareholder in RAPL. The giving of this aspect of the Undertaking will not automatically or obviously cure the various possible legal difficulties and uncertainties that I have raised above. The effect of the undertaking could be that, if the $5.5 million were not paid, and the Administrators simply proceeded upon the basis that RAPL was to be treated as if the creditors had resolved to wind it up under s 491, Ms Cameron would not oppose that course in either of her capacities. That is obviously an unsatisfactory solution, as the Administrators would only wish to proceed on a solid legal foundation. The alternative is, that the true meaning of the undertaking is that Ms Cameron would use her powers to cause RAPL to go into liquidation. If that were to be the real outcome, then the problem concerning the deferral of the commencement of the relation back period would continue to exist.

Administrators' opinion concerning Deed Proposal

The Administrators advised creditors in the Creditors Report that it was not in their interests to resolve that RAPL enter into a deed of company arrangement in accordance with the Deed Proposal.

The plaintiffs submitted that, in the context of an application under s 600A and similar applications, the court is not required to conduct a wholesale review of the Administrators' analysis to determine the validity of the opinions expressed about the likely outcome or quantum of claims which might be made should a liquidator be appointed. Nor are the Administrators' opinions invalidated by their relatively preliminary nature and the degree of underlying inherent uncertainty: Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 145-6; Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 at 34; Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Admin Apptd) (1997) 24 ACSR 47 at [51]; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 at [89] and Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300 at [194] and at [2012], [2013]. Most notably, Lehane J said in Hamilton at 34:

"In my view the task of the court in a case such as this is to form a view, on all the material before it, as to whether there is a real prospect that in a liquidation claims in which (or in the fruits of which) the second secured creditor has an interest could and would be pursued so as to afford to the second secured creditor recovery of more of the debt owed to it than it would obtain under the proposed deed of company arrangement."

I accept as a general principle that in many cases it may be necessary for the court to take the report of an administrator at face value, and to make an assessment of the strength of the opinions expressed, having regard to the role of the administrator and the investigations undertaken, and the inherent limitations in the scope for investigations imposed by the regime in Part 5.3A. That I have followed a somewhat different course in this case should not be taken to be a departure from the views expressed in the cases upon which the plaintiffs rely. In the present case, however, the Creditors Report was subject to serious attack, and stringent analysis, on the basis of detailed evidence.

Two preliminary matters require consideration before I address the opinions expressed by the Administrators, as they concern the use to which the court may properly put the Creditors Report. The first concerns the effect of an attack mounted by the defendants on the validity of the reasoning and the correctness of the opinions expressed by the Administrators. The second concerns an argument put by the defendants that, in an application under s 600A, the court should proceed upon the basis that the contents of the Creditors Report "have not been proved", and that "no special evidential weight should be placed on" the report.

Attack on Creditors Report

As to the first of these issues, the defendants initially attempted to destroy the foundations and conclusions in the Creditors Report root and branch.

The attack was based upon an expert report provided by Mr Brian Silvia, of BRI Ferrier, that became Exhibit D8. It extends to some 79 pages with a significant number of appendices.

I infer that the Administrators were initially joined as defendants by the plaintiffs, because they are clearly proper parties and ought to be bound by the orders made in the proceedings. However, the attack which the defendants mounted on the validity of the steps taken by the Administrators in the performance of their duties was so extensive that the Administrators took the view that their professional competence had seriously been questioned. That explains the fact that the Administrators were represented by senior and junior counsel at the hearing. Mr Dick carefully adopted the course throughout the hearing, in so far as he intervened in the carriage of the dispute between the plaintiffs and the defendants, of restricting his involvement to supporting the work done by the Administrators, and resisting the implied attacks on their professional competence. In this endeavour Mr Dick and Mr Assaf provided the court with very considerable assistance. In the result the Administrators, principally in the person of Mr Strawbridge, who provided comprehensive evidence to the court, and was cross-examined at length, obviated a considerable part of the need for the plaintiffs to cover the same ground. I am satisfied that, to the extent that the Administrators participated in the hearing with one eye on attacks on their professional competence, they did not overstep the mark by intruding too greatly into the merits of the dispute between the other parties.

In the events that have happened there is no utility in my analysing the opinions expressed by Mr Silvia, or describing the nature of the evidence that he gave. It would be wrong in the circumstances for me to outline the attacks that he made on the validity and appropriateness of the course taken by the Administrators or the opinions they expressed to creditors. I note, however, that it led to Mr Strawbridge being cross-examined over some 35 pages of transcript, and Mr Silvia over about 80.

Following an enquiry that I made of Mr Studdy before he commenced the defendants' final submissions, the defendants stated in par 6 of their final written submissions that the defendants "do not seek to rely upon Mr Silvia's evidence" in order to "challenge particular aspects of the analysis contained within the [Creditors Report]."

I regard this statement as having the effect that the defendants accept that the evidence given by Mr Strawbridge to the court is essentially unchallenged. Furthermore, it is not necessary for the court to deal with any criticism formerly made by the defendants concerning the process of reasoning, or opinions expressed by the Administrators in the Creditors Report.

I acknowledge that, notwithstanding this stance taken by the defendants, they included in their written submissions arguments that the Administrators were entitled to regard as a continuation of the attacks that had been made upon their professional competence, albeit of less extremity than the criticisms originally made by Mr Silvia. Mr Dick consequently felt obliged in oral submissions on behalf of the Administrators to respond to the residual attacks. It was proper for Mr Dick and his clients to take that course. I do not propose to deal with these residual submissions at all, as it is unnecessary. I find that the remaining criticisms of the Administrators' professional work are unfounded.

I made the observation during the course of submissions, and I will repeat it now, that it is clear that the Administrators were very assiduous in the performance of their duties, and that they acted in an entirely professional and competent manner in all respects.

I should also say that in my view Mr Studdy and Ms Holmes are to be commended for their adherence to their duty to the court, and indeed their courage and prudence, in making the decision to withdraw the defendants' reliance upon Mr Silvia's evidence. To the extent that the defendants may have given instructions for that course to be taken, they are to be commended as well.

Significance of Creditors Report

These considerations are relevant to the second preliminary matter raised by the defendants, being their submission that the court should not rely upon the Creditors Report as if its contents had been proved, that no special evidential weight should be placed upon it, and that the report does nothing more than to record the "Administrators' view".

The defendants relied on the observations made in Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 145 that an administrator "cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him." They also relied upon the statement in Vero Insurance Ltd v Kassem (2011) 86 ACSR 607 at [114] that "an administrator must necessarily make decisions on the basis of skimpy evidence." I have not ignored the other authorities referred to by the defendants in par 55 n 13 of their written submissions.

This is not the occasion to attempt any comprehensive consideration of the relevance, admissibility or utility of reports prepared by administrators for the purposes of s 439A(4) of the Corporations Act, for the purposes of Part 5.3A, or any other part of the Act such as s 600A.

The circumstances in which the court may be asked to act upon an administrator's report are likely to be extremely varied. I doubt that it is possible to formulate any rules that would be found to be adequate in all possible situations. The forensic problem is such that the issue should probably be left to the individual judgment of the court in each case.

The reason why there is no point in my considering in detail the use to which an administrator's report to creditors may be used on an application such as the present one under s 600A is that the present case is special in relative terms.

The Administrators were appointed on 26 October 2012, and they provided their Creditors Report to creditors on 19 August 2013. Fortune allowed them 10 months to prepare their report, largely because of the term of the sale agreement that required that they obtain an extension of the convening period for the second creditors' meeting by at least 180 days.

I reject the submission made by the defendants in their written submissions in pars 57 to 59 to the effect that the Administrators used the extra time to engage in administrative matters that did not improve the reliability of their report or the opinions that they reached.

One effect of the defendants testing the work of the Administrators so strenuously was that the Administrators were obliged to respond by tendering evidence that provided the court with a real insight into the length to which the Administrators went in preparing the Creditors Report. The work done by the Administrators is described in pars 49 to 57 of Mr Strawbridge's 22 October 2013 affidavit, as well as in Mr Strawbridge's 11 November 2013 affidavit in response to Mr Silvia's evidence. I accept Mr Strawbridge's evidence.

No point is to be served by my relating the effect of this evidence, although some flavour of the work done may be obtained from a brief consideration of the evidence in par 55 of Mr Strawbridge's first affidavit as to "the key steps in the review and analysis phase". This included a review of approximately 250,000 emails containing correspondence between RAPL and its suppliers, related parties, advisers, bank and other parties such as credit insurers. 55,000 emails and attachments were identified and organised into electronic issue binders. Creditor reports were reconstructed to identify payments made to both related and unrelated party creditors in the relation back period. As RAPL did not maintain an aged creditor listing, such a listing was recreated by supplier through the extraction of raw data from RAPL's account system from the commencement of the business up until the date of the administration. This led to the creation of in excess of 350,000 line items in Microsoft Excel, which were then analysed together with individual supplier terms in order to create an aged creditor listing. This brief outline does not do justice to the extent of the work carried out by the Administrators.

While it is true that the attack on the work of the Administrators foundered when Mr Silvia's evidence was abandoned, the process by which the exercise was attempted should not be ignored.

Whatever conclusions may be reached about the worth of Mr Silvia's evidence, there is no doubt that Mr Silvia and his assistants had access to an electronic data room that contained an enormous amount of the information that had been compiled by the Administrators. Exhibit D7 consisted of 18 volumes of documents from the Administrators' data room that was tendered by the defendants on the basis that it was material to which Mr Silvia had regard.

The point of these observations is simple and obvious. The Creditors Report in this case is not the result of a frantic effort undertaken by administrators to comply with the extreme time limitations imposed by Part 5.3A. The Administrators had ample time, and they used that time profitably. They gathered an immense amount of information in a professional way, and diligently analysed that information to support the conclusions that they expressed. Much, if not all, of that information was made available to Mr Silvia and the defendants, who did their best to undermine it to the fullest extent possible. The attack was then subjected to Mr Strawbridge's detailed response, and to intense analysis in the cross-examination of Mr Silvia. In consequence, the attack collapsed. The court should, of course, be wary of being too impressed by evidence that administrators and their staff have analysed 250,000 emails or produced 350,000 line items of analysis. In the present case I had the benefit of listening to Mr Strawbridge's evidence in the witness box, which has caused me to reach the comfortable conclusion that, within the bounds of natural fallibility, the Creditors Report warrants a high level of acceptance by the court.

Results of Administrators' investigations

In all of these circumstances it will be sufficient for me to record the principal features of the Creditors Report that led the Administrators to recommend to the creditors that they should not resolve for RAPL to enter into a deed in terms of the Deed Proposal, but should resolve that RAPL be wound up. In relying primarily on the Creditors Deed, I have not ignored the contents of the PowerPoint presentation given to creditors, or the position paper that was provided by the Administrators to Ms Cameron and the defendants.

First, the Administrators expressed the opinion that, on a winding up, the low estimate of return was 20.71 cents and the high estimate was 45.12 cents, in each case in the dollar. It is significant that the high estimate was not the highest return calculated by the Administrators. That amount was 58.08 cents in the dollar. The Administrators therefore made an allowance of 12.96 cents to allow a margin for risk.

The Administrators assessed that RAPL in liquidation may have a claim of $48.284 million for insolvent trading against its directors, who were Ms Cameron, Ms Moss and Mr Irvine. They also concluded that each holding company of RAPL might be liable for insolvent trading under s 588V of the Corporations Act.

Of this possible insolvent trading claim, the Administrators allowed for a likely recovery in the vicinity of 45% to 65%, less the costs of litigation, to allow for the uncertainties and expenses of prosecuting insolvent trading claims. The estimated recovery therefore was placed in the range $19.314 million to $31.385 million.

They also discovered that RAPL had maintained director and officers liability insurance that expired on 28 February 2013. The Administrators lodged a notification with the insurers regarding the potential claim before the expiry of the policy. The Creditors Report did not disclose the limit on the policy "due to confidentially restrictions", and the evidence does not establish that limit.

The Creditors Report expressed the view, based upon certain confidential and other unidentified information, that the Administrators had satisfied themselves that "our current assessment is that sufficient assets are likely to be available to satisfy a judgment of, at least, the low end of our estimated recovery for an insolvent trading action." Additional recoveries may be available from Ms Moss and Mr Irvine.

The Administrators' opinion that RAPL in liquidation would have a good insolvent trading claim was based in part upon the view that there was a strong case on the available evidence that RAPL traded while being insolvent from no later than 1 July 2011.

After Ms Moss was given a certificate under s 128 of the Evidence Act, 1995, she gave evidence in cross-examination that in my opinion was a clear acceptance that RAPL was unable to pay its debts as and when they fell due over the whole of the period following 1 July 2011.

It is neither necessary nor appropriate that I attempt to make a finding concerning the solvency of RAPL at any times. It is therefore not necessary for me to examine the information upon which the Administrators relied to form their opinions, and the likely range of recoveries by a liquidator under insolvent trading claims, in any detail. Mr Strawbridge set out the detail of the information gathering exercise conducted by the Administrators at pars 50 to 54 of his 22 October 2013 affidavit. He set out the key steps in the review and analysis phase at pars 55 to 57. The Administrators prepared a position paper that was provided to the solicitors for the defendants by the Administrators' solicitors on about 3 May 2013. The position paper and supporting work papers became Exhibit B in the proceedings. Mr Strawbridge gave evidence that the defendants did not provide any response to the position paper. It is sufficient for me to observe that the contents of the position paper give the court a high level of confidence as to the validity of the investigations and analysis carried out by the Administrators, and the strength of the opinions that they have stated in the Creditors Report as to the period over which there is a strong claim that RAPL traded while it was insolvent.

The Administrators' opinion that $49.77 million of the $77.49 million secured by the charge granted by RAPL on 1 July 2011 is likely to be void against a liquidator of RAPL is also supported by the investigations and analysis detailed in Mr Strawbridge's affidavit, and the position paper, as the success of that claim is largely dependent upon the liquidator establishing that RAPL was insolvent on 1 July 2011.

There are also grounds for the court to have a high level of confidence that the opinions expressed by the Administrators in the Creditors Report concerning the entitlement of a liquidator of RAPL to recover preference payments from creditors are sound. The Administrators identified possible preference payment recoveries of $50.120 million, but for practical reasons set the range of likely recoveries between a high estimate of $32.578 million and a low estimate of $22.554 million.

In the Creditor claims section of their table setting out the basis of the range of dividends to unsecured creditors in a winding up that they have calculated, the Administrators have made due allowance for the fact that the successful partial avoidance of the security granted by RAPL will lead to an increase in related party unsecured creditors of between $10.900 million and $24.713 million. Successful preference recoveries will increase unsecured creditors entitled to a distribution by between $32.578 million and $22.554 million.

On 14 August 2013 Mr Strawbridge received a letter from IMF that advised that if RAPL was placed into liquidation, IMF was prepared to fund examinations and a claim by the liquidator for trading whilst insolvent against Ms Cameron and RAPL's ultimate holding company, and that IMF may be prepared to fund claims against others subject to further discussion. Mr Strawbridge discusses the issue at par 85 of his affidavit. IMF's letter is in evidence. While the letter is subject to conditions, those conditions appear to be conventional, and the likelihood is that a liquidator of RAPL will be able to obtain the funding necessary to prosecute the claims discussed by the Administrators in the Creditors Report. The Administrators have allowed for litigation funding costs in their calculation of the likely range of dividends to unsecured creditors from the winding up of RAPL. Mr Strawbridge also gave evidence, which I accept, that a liquidator of RAPL should be able to prosecute preference recovery claims sequentially, so that the exercise is largely self-funding.

DSG's 18 July 2013 circular

The evidence includes a document dated 18 July 2013 written by Ms Cameron on behalf of DSG addressed simply to "Dear Sir/Madam." It is clear from the terms of the letter that DSG sent letters in the terms of the document to creditors of RAPL, and possibly also Holdings, who had received an earlier letter from DSG dated 13 May 2013, or attended presentations to suppliers on 21 and 23 May 2013. The names and the identities of the addressees are not known. That is immaterial, as it is the content of the circular that is of most relevance.

The terms of the circular showed that it was sent to creditors in order to encourage them to support the deed of company arrangement that Bicheno proposed to the Administrators on 18 July 2013, which was the date of the circular.

It is necessary to extract relevant parts of the circular:

"...

As we advised in the presentation to suppliers, we are in the process of finalising a proposal to submit a Deed of Company Arrangement. If successful, the Deed of Company Arrangement will eliminate any action against suppliers for alleged preference payments, and settle claims against directors.

In the recent minutes of the sixth Committee of Creditors Meeting held on 18 June 2013, the Administrators indicated to the Committee that the dividend in a Liquidation could be between 22.2 and 48.6 cents, depending on the recovery of both preferences $50.0M and insolvent trading claims of between $48.0M - $98.0M. Further advice indicated that in order to achieve an equivalent dividend in a Deed proposal, this would require a further contribution of $18.8M.

This dividend distribution is factored on significant recoveries from suppliers for preference claims of $50.0M, whilst related party unsecured claims of $91.8M would be the beneficiary of the bulk of any distribution as the major creditor.

The deed we propose to submit would amount to $5.5M, less than that indicated by the Administrators, but assumes that there are no recoveries from suppliers, and that Bicheno Investments Pty Ltd and its associated companies do not participate in dividends distribution.

Whilst the 6% dividends distribution in our Deed proposal is less than the range proposed by the Administrators, it will result in significantly less litigation for suppliers defending against preference recoveries, and a faster distribution to suppliers from the Deed Fund, which is likely to happen within the next 6 - 9 months. A copy of our dividend estimate is enclosed..."

The circular then referred to the forthcoming second meeting of creditors and the creditors report that would be issued by the Administrators, and solicited the support of creditors, including by granting a proxy to, it may be inferred, DSG.

The enclosure, which was described in the circular as the "dividend estimate" (Dividend Estimate), sets out the basis of DSG's calculation of the expected dividend to unsecured creditors under the proposed deed of company arrangement, as well as DSG's assessment of the high and low range returns that unsecured creditors might expect to receive in the liquidation of RAPL.

The significance of the Dividend Estimate is that it proves how DSG justified to creditors the proposed contribution of $5.5 million to the deed fund under the proposed deed of company arrangement, and demonstrates the assumptions that were made in order to derive the $5.5 million figure.

The structure of the Dividend Estimate is the same as that which is contained in the table par 11.2 on page 63 of the Creditors Report, and is a standard way to provide information to creditors to enable them to make a decision whether to support a deed of company arrangement or the winding up of a company. The document provides for three scenarios; being high range return on a liquidation, low range return on a liquidation, and return under the deed of company arrangement. For each scenario amounts are included for estimated realisations, estimated costs and estimated creditor claims. Each of realisations, costs and creditor claims is broken up into individual components. For the purposes of this case, the most significant components are "Preference payment" and "Insolvent trading" under the heading "Realisations".

It is not necessary to set out the detail in the Dividend Estimate of the estimates included for each component of each scenario. The reason is that, although there are critical differences between the estimates set out in the Dividend Estimate and the estimates made by the Administrators for the purposes of the Creditors Report, the defendants in this case made no attempt in the evidence to explain or support the estimates made in the Dividend Estimate.

Two comparisons are, however, worth noting. While the Administrators estimated recoveries for preference payments within the range $32.578 million to $22.554 million, the equivalent estimate in the Dividend Estimate was $12.530 million to $8.019 million. The Administrators estimated realisations in respect of insolvent trading in the range $31.385 million to $19.314 million. The equivalent estimate in the Dividend Estimate was $9.657 million to $6.036 million.

It is necessary to set out a comparison between the estimates in the Creditors Report and the Dividend Estimate as to the range of returns to creditors. It will be convenient to include at the same time the equivalent estimates made by Mr Silvia.

Liq. High
Liq. Low
DOCA
Administrators
45.12 c/$
20.71 c/$
$0.06
DSG
9.04 c/$
2.57 c/$
$0.06
Mr Silvia
0.70 c/$
0.00 c/$

The Dividend Estimate contained the following important explanation of the significance of the estimates made by DSG.

"Scenario 1 and 2 represent the high and low range in liquidation depending on the estimated recoveries from preference payments and insolvent trading claims.

The deed is pitched at the mid range of these recoveries."

The defendants made no attempt in their evidence to support the validity of the process of estimation undertaken by DSG to produce the figures in the Dividend Estimate to the 18 July 2013 circular. Instead they initially relied upon the evidence of Mr Silvia. As can be seen from the comparison in the table set out above, Mr Silvia claimed that the probable range of recoveries by unsecured creditors in a winding up of RAPL was substantially less even than that which was estimated by DSG.

The effect of the collapse of the reliance by the defendants on Mr Silvia's evidence is not only that there is no support for his estimates, but also there is no support for the estimates made by DSG contained in the Dividend Estimate. The only estimates left standing in the ring, so to speak, are those made by the Administrators. It does not follow that the court must accept the estimates made by the Administrators, just because they are the only estimates that have any support in the evidence. However, once it is accepted, as I do, that the estimates made by the Administrators are supported by the evidence (making due allowance for the uncertainties that are involved) a rational approach to the evidence requires the court to accept broadly the estimates made by the Administrators.

The explanation of the reasoning in the circular that has been extracted above has the clear meaning that the proposed return to creditors of 6 cents in the dollar under the proposed deed of company arrangement was calculated on the basis that a contribution to the deed fund of $5.5 million was necessary to achieve that result. Six cents was selected on the basis that it was in the mid range of the high liquidation recovery of 9.04 cents and the low range of 2.57 cents.

The commercial logic of that approach depends upon the validity of the high and low liquidation recovery estimates.

As I have said, the defendants tried to justify a lower range of liquidation recovery estimates than was contained in the Dividend Estimate. When that attempt collapsed, the evidence has logically lead the court to accept broadly the Administrators' estimates of a range between 45.12 cents and 20.71 cents. The midpoint of this range is 32.915 cents.

If DSG's logic as expressed in the Dividend Estimate is applied to this figure, by a simple arithmetical calculation, the contribution to the deed fund would need to be $30.17 million.

This simple arithmetical approach may well be misleading. I note the statement in the circular that suggests that the Administrators may have stated that the contribution to the deed fund should be $18.8 million more than the $5.5 million that was proposed. That gives a total of $24.3 million.

The parties did not explore in the evidence the amount that would be an appropriate contribution to the deed fund to give the unrelated secured creditors a proper return under a deed of company arrangement. The calculations that are set out above do not provide a valid substitute for the assessment of the proper contribution if the estimates made by the Administrators of the range of likely returns on a winding up are accepted. It may be that considerations of risk and the opportunity cost caused by the inevitable delay in the winding up process should be taken into account in a way that would reduce the amount of the contribution that would be appropriate.

Nonetheless, these considerations suggest that, once the estimates of the Administrators are accepted, even if only broadly, the contribution of $5.5 million that is proposed is insufficient, and insufficient by a substantial margin.

The circular explicitly makes the points, which are in any case obvious from the terms of the Deed Proposal, that a substantial object of the defendants has been to free the Contributing Related Creditors from all possible attacks by a liquidator of RAPL, and also to remove the risk of preference recovery proceedings from creditors. The significance of the second objective lies in the likely encouragement it would provide to creditors to support the Deed Proposal.

Voting for resolution at second creditors' meeting

For the purposes of voting on the proposed resolution that RAPL enter into a deed of company arrangement in the terms of the Deed Proposal the Administrators accepted a proof of debt lodged by Bicheno for $8 million of the $8,542,689.53 claimed. Of the $8 million, $3 million arose under a deed of settlement dated 25 October 2012 between Bicheno, RAPL, DSG and a supplier of RAPL called Dats Pty Ltd (Dats). It appears that Bicheno had guaranteed the obligations of RAPL to Dats. The deed of settlement also provided for DSG to take an assignment of purchase orders that RAPL had placed with Dats, and set out the terms upon which Dats would continue to trade with DSG notwithstanding default in payment by RAPL. The other $5 million arose under a deed of agreement dated 17 October 2012 between Bicheno, RAPL, DSG and Test Rite Pty Ltd (Test Rite), another former supplyer to RAPL. It appears that Bicheno had guaranteed the obligations of RAPL to Test Rite, and Bicheno agreed to pay $5 million in full and final settlement of its obligation under the guarantee. The terms of the deed of agreement were otherwise similar in effect to the deed entered into with Dats. The Administrators rejected the other claims included in Bicheno's proof of debt on the ground that insufficient information was provided to support them.

DSG was admitted as a creditor for voting purposes in the total amount of $26,986,958. The Administrators admitted DSG for the sum of $25,678,538.68, which was the total of amounts paid by DSG to trading creditors of RAPL under settlement deeds before the appointment of the Administrators, and amounts paid to creditors for the assignment of their debts after the appointment. The Administrators also allowed a claim by DSG under a deed of settlement with Cargo Services Limited in the amount of $1,308,419.49.

Holdings lodged two proofs of debt for voting purposes totalling the amount of $148,491,785. One proof of debt was for $80,491,785 that was secured by the charge granted by RAPL on 1 July 2011. The second proof of debt concerned $68 million in respect of subordinated convertible notes issued by RAPL on 4 April 2009 with a maturity date of 4 April 2011.

On 2 September 2013 Jacobson J, in the Federal Court of Australia, gave directions to the Administrators under s 447D of the Corporations Act that to the extent necessary they were justified in rejecting the two proofs of debt lodged by Holdings in the administration of RAPL: Strawbridge v Retail Adventures Pty Ltd (administrators appointed) (2013) 95 ACSR 121. It is not necessary for the court to examine the reasoning in that case in detail. Furthermore, as no appeal was taken from his Honour's decision the direction that he made must be taken to have been given correctly. In essence, Jacobson J held that Administrators were justified in not accepting Holdings' proofs of debt because Holdings attempt to prove for voting purposes in the administration of RAPL was inconsistent with the terms in the leases entered into by RAPL with a significant lessor under which Holdings had covenanted not to compete with the lessor in a winding up or administration of RAPL.

The Administrators also sought a direction as to whether they would separately be justified in rejecting the proof of debt lodged by Holdings for voting purposes concerning the $68 million issued by RAPL as subordinated convertible notes on the ground that the debt was subordinated to the entitlements of unsecured creditors. In view of the directions that he gave, Jacobson J held that it was not necessary to deal with this issue.

For present purposes it should be noted that, if an order is made that RAPL be wound up, the dividends available to unsecured creditors should not be reduced to accommodate any claim made by Holdings in respect of the debt due on the subordinated convertible notes, as that debt is subordinated. If the administrator succeeded in establishing that the security granted by RAPL on 1 July 2011 is void against the liquidator in respect of $49.77 million of the $80,491,785 claimed by Holdings under the first proof of debt, the dividends payable to unsecured creditors will not be reduced to the extent that the debt of $49.77 million was subordinated.

I will now turn to an analysis of the voting of creditors at the second creditors meeting on 2 September 2013.

There appears to be an issue between the plaintiffs and the defendants as to the precise number of creditors who voted for and against the resolution, and the total value of the debts of those creditors. The plaintiffs put their submissions on this issue in their final written submissions at pars 42 to 45. The defendants set out the calculation of votes in a table that is referred to in par 27 of the defendants' written submissions. Apparently, the calculation in the plaintiffs' submissions is based upon information that is slightly different to that which is contained in the minutes of the meeting, and reflects some adjustments made by the Administrators that were carried out after the minutes were prepared. The defendants submit that the information contained in the minutes should be adopted, and there is no justification for using the adjusted information provided by the Administrators. On my reading of the defendants' table the differences are marginal, and do not make a difference of any significance to the determination of the issues raised in these proceedings.

In the circumstances I will use the adjusted figures given by the Administrators and supported by Mr Strawbridge's affidavit. I have done that principally for the practical reason that Mr Strawbridge's analysis of the position concerning trade creditors, landlord creditors and employee creditors is more extensive than that which is set out in the defendants' table. If I adopted the figures in the defendants' table, I would not be in a position to establish the number and value of the creditors in the subclasses as given by Mr Strawbridge. That does not mean that I have made a finding on the evidence that the adjusted information is to be preferred over the information taken from the minutes set out by the defendants.

On the Administrators' figures 606 creditors voted in favour of the resolution with a total value of $46,052,678. 122 creditors voted against the resolution with a total value of $36,490,655.

If the related party votes of Bicheno and DSG had been disregarded, the result would have been that 604 creditors voted in favour of the resolution with a total value of $11,065,720. The number of creditors voting against the resolution would have been 122 with a value of $36,490,655.

It is important that it be borne in mind in resolving these proceedings that 604 creditors who were unrelated creditors with a value of $11,065,720 of debt voted in favour of the resolution.

Mr Strawbridge further gave evidence that of the 167 trade creditors admitted to vote in the sum of $32,583,506.89, 112 trade creditors to the value of $23,835,992.03 voted against the resolution, 52 trade creditors to the value of $8,132,066.49 voted in favour of it, and 3 trade creditors abstained.

Further, of the 48 landlord creditors admitted to vote in the sum of $9,558,236.72, 39 landlord creditors to the value of $9,124,383.97 voted against entry into the proposed deed of company arrangement, 7 landlord creditors to the value of $357,977.47 voted in favour, and 2 landlord creditors abstained. The landlord creditors who voted in favour of the resolution were lessors of ongoing stores for which it is likely that leases will either be assigned to DSG, or new leases entered into.

545 employee creditors were admitted to vote in the total sum of $2,575,675.71. They all voted in favour of the proposed deed of company arrangement. The Administrators have determined that, as at 29 September 2013, all but 18 of those employees had accepted employment by DSG. Mr Strawbridge states in his affidavit at par 44(c) that the 527 former employees "were no longer creditors of RAPL" at 29 September 2013. I take that evidence to mean that, while on 2 September 2013 the 527 employee creditors were entitled to vote, before the end of September they had accepted employment with DSG and by some means their entitlements had been paid to them, presumably by DSG in performance of its obligations under the sale agreement. 499 of the 545 employee creditors who voted at the meeting used the DSG proxy form.

The Administrators voted in favour of Holdings entering into the proposed deed of company arrangement, as that was in Holdings' interest, as it was included in the definition of Related Creditors in clause 5.1 of the Deed Proposal.

Legal principles

The plaintiffs allege, and the defendants accept, that the requirements of s 600A(1)(a) and (b) of the Corporations Act are satisfied in this case.

The parties are at issue as to whether the requirements of s 600A(1)(c) are satisfied. That paragraph relevantly provides:

"(1) Subsection (2) applies where, on the application of a creditor of a company...the Court is satisfied:

...

(c) that the passing of the proposed resolution,...

(i) is contrary to the interests of the creditors as a whole...; or

(ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution... to an extent that is unreasonable having regard to:

(A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution...; and

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

(C) any other matter."

The plaintiffs bear the onus of establishing that the requirements of s 600A(1)(c) are made out: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at [138]; Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300 at [179].

The plaintiffs submit that subparagraphs (i) and (ii) are both satisfied, in that the resolution is contrary to the interests of the creditors as a whole, and is reasonably likely to prejudice the unrelated creditors who voted against the resolution to an extent that is unreasonable having regard to the necessary matters.

In Bidald (a case that dealt with s 445D(1)) Campbell J (as his Honour then was) considered at [272] to [285] how the interests of the creditors should be taken into account for the purpose of the exercise of the court's discretion as to whether to make an order terminating a deed of company arrangement. His Honour dealt with the relevance of the public interest at [286] to [291], particularly in relation to the effect of deeds of company arrangement that prevent the proper investigation of the affairs of the company.

Campbell J said:

"[290] For a director to avoid public examination about the affairs of the corporation, and the possibility of the type of clawback litigation which is possible in a winding up, by making a payment to creditors, can also be a factor in favour of termination: cf Paton v Campbell Capital Ltd at 32. It is in a relevant sense "detrimental to commercial morality", to dispense with the opportunity which the winding up law provides for the investigation of the affairs of a failed company: Re Data Homes Pty Ltd (in liq)... Emanuele v Australian Securities Commission...

[291] How much weight is given to the fact that the affairs of the company will not be investigated depends upon whether there are circumstances which suggest that investigation is called for... Sometimes, the fact that it appears that there may be prospects of preference or uncommercial transaction or insolvent trading recoveries can be such a circumstance. In the present case, it is clear that only a small dividend will be paid to creditors, if any dividend at all. There is some basis for believing that insolvent trading recoveries might be possible, but the evidence concerning that topic is fairly slight, and any actual recoveries would depend on the liquidator obtaining the funding to sue."

McMurdo J recited these passages with approval in Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139 at [180].

The observations that Martin CJ made in Ravenswood that are set out above suggest that the issues that Campbell J and McMurdo J considered in the context of s 445D(1) in relation to the exercise of the court's discretion have relevance to the consideration of whether any prejudice that exists is reasonable for the purposes of ss (1)(c)(ii).

Significance of Undertaking

As the undertaking that Ms Cameron has offered to the court was not made at the time the creditors of RAPL voted on the resolution, there is an issue as to whether, and if so how, the court can take the undertaking into account in determining whether to grant the relief sought by the plaintiffs: see Mediterranean Olives at [241] to [249]. Her Honour referred to the decision of Barrett J in Hoath v Comcen Pty Ltd (2005) 53 ACSR 708 where his Honour held s 600A is "concerned with circumstances pertaining at and in relation to the meeting and the passing of the resolution and thus has in contemplation the creditor constituency as it existed at that time". An applicant for relief who was not a creditor at the time of the meeting but obtained an assignment of a debt afterwards cannot apply for relief under s 600A. Dodds-Streeton J referred to the decision of Fryberg J in Deputy Commissioner of Taxation v Schmierer [2002] QSC 262 where his honour asked himself the question at 8 whether: "...when I am here exercising power under s 600A I should regard the position of those who conduct the vote on the resolution from the point of view of how things then seemed to them or whether I should approach the matter as a complete merits review assessing what is in the interests of the creditors as a whole not in the light of what was then known but in the light of what is now known." His Honour's conclusion was that he should assess the interest of the creditors on the basis of the evidence that was before him.

In the present case the plaintiffs submitted that the court should not act upon the Undertaking because it was inadequate and likely to be ineffective. They did not submit that there were any reasons in legal principle why the court could not act upon the Undertaking. My provisional view is that, where s 600A(1)(c)(ii) says: "the passing of the proposed resolution...has prejudiced, or is likely to prejudice" it speaks as at the date the resolution is put to the creditors at the meeting. Subsequent events do not determine whether the requirements of the provision have been satisfied, although they may have some forensic relevance to the issue of what was "likely". However, the power of the court to make orders under s 600A(2) is clearly discretionary, and in my view the court may take into account all of the events and circumstances that exist at the date an order is made to determine what relief should be given where s 600A(1)(c)(ii) is satisfied as of the date the resolution is passed, or not passed, as the case may be.

Consideration

The resolution passed by the creditors of RAPL on 2 September 2013 prejudiced, or was reasonably likely to prejudice, the creditors who voted against it, because if the $5.5 million Contribution is paid into the Deed Fund, the dividend under the deed of company arrangement will be about 6 cents in the dollar, whereas, if the creditors had resolved to wind up the company, it is highly probable that the creditors would have received a substantially higher dividend. That conclusion is supported, in the manner that I have considered above, not only by the contents of the Creditors Report, but also by the effect of the forensic attack on that report. It is also supported by the analysis of the Dividend Estimate made by DSG that I have examined above.

In making that finding I have not been able to determine any particular amount that the unsecured creditors of RAPL will be likely to receive on a winding up of the company, and the finding acknowledges the uncertainties that are inherent in the process of investigation, analysis and judgment performed by the Administrators. I also accept that some discount from the returns estimated by the Administrators, perhaps substantial, could have been justified in the context of a deed of company arrangement to allow for the reduction in risks and the delay in receipt of payment.

However, in my judgment the amount of $5.5 million is plainly too low by a significant margin.

This prejudice is sufficient in itself to satisfy the requirement for prejudice in s 600A(1)(c)(ii).

The opposing creditors were further prejudiced by the fact that a deed of company arrangement in the terms of the Deed Proposal would not impose an obligation on the Contributing Related Creditors to pay the sum of $5.5 million into the Deed Fund at all. It is a matter for speculation whether or not the payment would be made. For the reasons considered above, there is a doubt as to whether the outcome of the failure to pay the $5.5 million would be that RAPL would go into liquidation under Part 5.3A, or whether the return of the company into the hands of its directors effected by clause 10.1 of the Deed Proposal would simply be confirmed. If the money was not paid, and it became necessary for proceedings to be commenced for the winding up of RAPL in insolvency, then unpredictable and possibly disadvantageous consequences could arise by reason of a deferral of the commencement of the relation back period. The dividends available to creditors in that winding up might be reduced because of, for example, a reduction in recoverable preference claims.

Deeds of company arrangement should desirably be absolute, unambiguous and final. The existence of these uncertainties creates a prejudice that in a real way reduces the net present value of the return from the deed of company arrangement, even if the $5.5 million is ultimately paid. It is of further relevance that the uncertainties as to the legal outcome create scope for further litigation, which could significantly reduce the funds that are ultimately available for distribution to the unsecured creditors.

The release of the charge now held by RAPL over the assets of DSG to secure that company's obligations under the sale agreement would also prejudice the opposing creditors, even though that security may be of limited utility as it will be released on 30 June 2014.

The issue of whether the forms of prejudice that I have identified are unreasonable requires that I first have regard to: "(A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution."

The related creditors, Bicheno and DSG, who voted for the resolution, will if a deed of company arrangement is entered into in the terms of the Deed Proposal, be freed from potential attack by a liquidator of RAPL based upon a claim that RAPL traded whilst insolvent from no later than 1 July 2011. The nominal amount of that claim was assessed by the Administrators as $48.284 million, with the likely recovery falling within the range $31.385 million to $19.314 million.

DSG will also be freed from the claim that the security granted by RAPL on 1 July 2013 is void against a liquidator as to $49.77 million. As a result of the agreement between the Administrators and DSG in respect of the sale agreement, that claim will be limited to $13.8 million less any dividend to which DSG might be entitled in the winding up of RAPL.

The value to the related creditors of being able to avoid the risk of being subjected to these claims by a liquidator of RAPL greatly exceeds the value of the promise, albeit contingent, to pay $5.5 million into the Deed Fund under the Deed Proposal. The amount of $5.5 million is a substantially inadequate price for the release of the obligations of the related creditors, and accordingly the prejudice imposed by the proposed deed of company arrangement is to that extent unreasonable.

The defendants point to the countervailing consideration that, if the resolution is set aside, and an order is made for the winding up of RAPL, that may in some way jeopardise the financial viability of DSG's continuing operation of RAPL's former business, impede its raising the necessary finance to carry on, and ultimately put DSG itself at risk of being wound up.

While these risks may to some extent be real, the evidence that the defendants have put forward does not satisfy me either that there is a definite risk of these outcomes occurring, or if in fact there is, that it is likely to be the winding up of RAPL that will be the catalyst for the collapse of DSG's enterprise.

The evidence upon which the defendants rely is substantially that given by Ms Moss, who is the chief financial officer. Primarily, Ms Moss opined that if the deed of company arrangement is not passed, DSG is unlikely to be able to secure the working capital that it needs from any external party. That opinion seems to have been based anecdotally on conversations that Ms Moss has had from time to time with potential lenders. Ms Moss also opined that the commencement of the winding up of RAPL would have an unsettling effect on DSG's staff, because many of them may believe that DSG's winding up would be likely to follow that of RAPL.

The concerns expressed by Ms Moss should not be ignored, but they are not sufficient to establish in any positive way that the undesirable outcomes to which she refers are likely to occur.

Furthermore, the suggestion that the winding up of RAPL will lead to a domino effect that causes DSG to go into liquidation is largely based upon the likelihood that lenders, trade creditors, employees, and perhaps others will act irrationally in response to RAPL being wound up. The court should be careful not to place too much weight on potential irrational behaviour by third parties. There is one respect, however, in which the making of a winding up order of RAPL could lead to the winding up of DSG. That may occur if the liquidator of RAPL makes a very substantial claim against DSG, as well as other related parties, in relation to insolvent trading by RAPL. That may lead to the winding up of DSG. It is quite possible, depending upon the financial resources of DSG and its parent company, that if a liquidator of RAPL obtains a very substantial judgment against DSG, that could lead to the liquidation of that company.

However, the effective cause of that outcome would not be the setting aside of the resolution that RAPL enter into the proposed deed of company arrangement, and the consequent order that RAPL be wound up. The effective cause would be that DSG is liable to a liquidator of RAPL because of its involvement as a holding company of RAPL in substantial insolvent trading by RAPL.

Ultimately, if the matter is considered from a commercial perspective, in one sense the reason why the passing of the resolution is prejudicial to the opposing creditors is that the $5.5 million that may be paid into the Deed Fund if the deed of company arrangement is entered into is too small an amount of money by a substantial margin. The defendants have done nothing to prove that they have not been in a position to contribute more than $5.5 million. In fact, DSG's 18 July 2013 circular suggested that the $5.5 million fell within the midpoint of a justifiable range. The problem for the defendants has been that the evidence wholly fails to justify the adequacy of that range. The defendants' preservation was in their own hands. What they had to do to secure the release of the claims that RAPL appears to have against them was to offer to make a contribution to the Deed Fund that was either sufficient to gain the support of 50% of unrelated creditors, or to satisfy the court that the amount did not unreasonably prejudice opposing creditors, if the votes of related creditors were necessary to pass the resolution. The defendants did not do so. They cannot then expect the court to hold that the prejudice that they have caused to the opposing creditors is reasonable.

The evidence supports the conclusion that Bicheno paid some $8 million to creditors whose debts it had guaranteed, and DSG paid some $27 million to creditors in order to acquire title to enough of the debt owed by RAPL to cause the resolution that was put to creditors on 2 September 2013 to be passed. The evidence also suggests that, at least generally, the creditors who received full payment were considered by the defendants to be essential for the ongoing success of the business that DSG acquired from RAPL. The terms of the deeds that Bicheno entered into with Dats and Test Rite make that clear at least in relation to those to creditors.

The plaintiffs, and the other unsecured creditors who might receive 6 cents in the dollar from the deed of company arrangement, if the $5.5 million is paid into the Deed Fund, have been consciously discriminated against by the defendants on the basis of a commercial judgment as to whether their ongoing supply of products to DSG is necessary or desirable for its future operations. Accordingly, the creditors whose debts were acquired by the defendants were paid all, or substantially all, of the amounts that RAPL owed to them, while the remaining creditors were left to their fate under the proposed deed of company arrangement, which may give the 6 cents in the dollar return.

The defendants decided to pay out, and acquire the debts of, creditors valued at some $35 million, so that the defendants would have the votes necessary to ensure the passage of the resolution. They then offered $5.5 million to contribute to the Deed Fund, which may lead to the balance of the unsecured creditors only receiving 6 cents in the dollar. The defendants consciously caused this result. It does not lie in the mouth of the defendants to say that the prejudice suffered by the discarded creditors is reasonable notwithstanding the patent inadequacy of the amount of $5.5 million.

In all of these circumstances the prejudice that the creditors who voted against the resolution have suffered, or will suffer, is unreasonable for the purposes of S 600A(1)(c)(ii).

In coming to this view I have not ignored the position of the unrelated creditors who voted in favour of the resolution. I accept the validity of the defendants' submission that the evidence does not enable the court to examine in any depth what the motivation was for those creditors to vote in favour of the resolution. The 52 out of 167 trade creditors who voted in favour of the resolution may have been influenced by a concern about possible preference recoveries, but that is a matter for speculation, and the court cannot act on that basis. The 7 out of 48 landlord creditors who voted in favour of the resolution may have been influenced by an expectation that they would soon become lessors to DSG. The evidence does not prove that possibility. Finally, the evidence does appear to prove that 527 out of 545 employee creditors had an expectation of imminent employment by DSG, and 499 of them gave a proxy to DSG.

There is no evidence that the setting aside of the resolution, though contrary to the voting of these unrelated creditors, will cause them significant prejudice, although it must be acknowledged that some of the trade creditors may suffer preference claims that they would avoid if the deed of company arrangement was entered into.

I have come to the conclusion that I should make an order that the resolution passed by creditors on 2 September 2013 be set aside.

I have not found it necessary to rely upon the criteria in pars (B) or (C) of s 600A(1)(c)(ii).

I have not given further consideration to the significance of the Undertaking, because the undertakings that Ms Cameron has given clearly do not obviate the prejudice that the opposing creditors will suffer, or make that prejudice reasonable. My reasons for that view will appear from the discussion of the effect of the Undertaking that I have set out above.

In coming to this view I have had in mind the statements of principle made by Davies AJA in Khoury, which attracted the agreement of Beazley JA. I have not found it necessary to rely upon those principles in making the decision that I have made. However, in this case, for the reasons that I have generally explored above, there is a strong basis for a conclusion that the terms in the Deed Proposal, and the manner in which the defendants went about securing a majority in support of the resolution, by selectively discriminating between creditors who did, and who did not, remain important for the continuing operation of the business, are inimical to the objects of Part 5.3A of the Corporations Act.

Winding up of RAPL

The plaintiffs seek in par 2 of their Amended Originating Process an order that RAPL be wound up.

Neither the plaintiffs nor the defendants deal with this claim for relief in their opening or closing oral or written submissions. Nor do the Administrators, but in their case it would not be expected that they deal with the issue, given their limited interest in the outcome of the proceedings.

In response to an enquiry that I made during the course of the hearing, senior counsel for the plaintiffs confirmed that the court is asked to make the winding up order sought under s 600A(2)(d) of the Corporations Act, which empowers the court to make "such other orders as the Court thinks necessary", if the court is satisfied that one of the matters set out in s 600A(1) has been established. Senior counsel noted that the plaintiffs could apply for an order that RAPL be wound up in insolvency, but that would require a separate application.

In these circumstances I am entitled to proceed upon the basis that the defendants do not challenge the appropriateness of making the winding up order sought by the plaintiffs, if the court makes the order sought in par 1 of the Amended Originating Process setting aside the resolution of the creditors at the second creditors' meeting. However, given the silence of the parties on the issue, I should make the following brief observations on the matters relevant to the making of a winding up order in the present circumstances.

At the second creditors' meeting convened under s 439A, the creditors are authorised by s 439C to make one of three resolutions; namely (a) that the company execute a deed of company arrangement specified in the resolution; (b) that the administration should end; or (c) that the company be wound up.

In the present case the creditors made resolution (a) but the effect of the order that I will make in response to par 1 of the Amended Originating Process is that the creditors' resolution will be set aside. Consequently, the meeting convened under s 439A will end without a resolution under s 439C being passed at the meeting. The result will be that under s 435C(3)(e) the administration of RAPL will come to an end. The control of RAPL would then pass back into the hands of its directors, as the suspension of the directors' power effected by s 437C(1) will cease to operate.

That result will obtain unless some other provision of the Corporations Act, or some order made by the court under such a provision, leads to a different outcome.

Section 446A stipulates circumstances in which the company will be taken to have passed a special resolution under s 491 that the company be wound up voluntarily. The making of an order by the court under s 600A setting aside the resolution of the creditors that RAPL enter into a deed of company arrangement is not one of those circumstances.

Under s 446B the regulations may prescribe cases where, so far as is relevant to the present case, a company under administration is taken to have passed a special resolution under s 491 that the company be wound up voluntarily.

Regulation 5.3A.07 has been made in exercise of the power conferred by s 446B. This regulation was considered by Barrett J (as his Honour then was) in Yeshiva Properties No 1 Pty Ltd, which has been considered above. The regulation lists two situations in which a company that has executed a deed of company arrangement is taken to have passed a special resolution under s 491. The regulation does not apply to the present case because RAPL has not executed a deed of company arrangement, and the effect of the setting aside of the creditors' resolution is that it will not do so.

Paragraph (a) of the regulation is nonetheless instructive. It provides that where a company has executed a deed of company arrangement, if the Court makes an order under s 445D terminating the deed of company arrangement, then the company is taken to have passed a special resolution under s 491 that the company be wound up voluntarily.

One of the grounds set out in s 445D(1) for the court to make an order terminating a deed of company arrangement is if it is satisfied that:

"(f) the deed or a provision of it is,...

(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;..."

The wording of par (f) of s 445D(1) clearly differs from that in s 600A(1)(c). The provisions are, however, broadly cognate, and it is not necessary for present purposes to consider in detail how they may operate differently in related circumstances. It is sufficient to note that, if in the present case an application had been made under s 445D to terminate the deed of company arrangement proposed in the resolution, after it had been entered into, on the grounds that it was unfairly prejudicial to the non-related creditors who voted against the resolution, the court may have terminated the deed of company arrangement. In that event the effect of s 445D and reg 5.3A.07(1)(a) would have been that RAPL would have been taken to have passed a special resolution under s 491 that the company be wound up voluntarily.

In the present case no party has made an application under s 600A(2)(b) and (c) for an order convening a new meeting, or an order directing that the related creditors are not entitled to vote at such a meeting on the resolution. The only application is that a winding up order be made under par (d).

The circumstances are that RAPL no longer has any trading assets. Its assets are limited to cash at bank. It may have an entitlement to make recoveries from creditors and directors under the Corporations Act, but any such rights will only be able to be realised if a winding up order is made. RAPL has no employees. There is no intention, at least on the evidence, that it will engage in trade in the future. It is totally insolvent.

The making of a winding up order will not be contrary to the object of Part 5.3A stated in s 435A. The first object is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chance of the company, or as much as possible of its business, continuing in existence. If the winding up order is made, RAPL will not continue in existence. However, the evidence does not suggest that if it were returned to the control of its directors, it would continue in business. The effect of the sale agreement entered into on 11 February 2013 is that the business of RAPL has already been preserved. Furthermore, the fact that most of the employees of RAPL have been re-employed by DSG means that those employees will have the benefit of the continuation of the business formerly undertaken by RAPL.

It is possible that the winding up of RAPL will jeopardise the effective conduct of the business by DSG, because of the response of DSG's present and future funders, its suppliers and its employees to the fact of the winding up. Those responses may occur, although if they do, the outcome will probably be somewhat irrational, as the mere fact of RAPL going into liquidation should not directly affect the operation of the business by DSG.

It should be acknowledged that, once the winding up order is made, it is probable that the Administrators, as the new liquidators of RAPL, will challenge some of the payments that RAPL made to creditors before the Administrators were appointed, on the grounds that the creditors obtained preferential treatment. Subject to funding being confirmed, it is likely that the liquidators will challenge the security that RAPL granted to Holdings, and will also commence actions against RAPL's directors and holding companies to recover losses caused by insolvent trading. In the marketplace there will be a chance that these actions will jeopardise the viability of the continuing conduct of the business by DSG.

It is necessary to accept that these risks are real. However, the evidence does not persuade me that their existence is sufficient to deny the plaintiffs, and the other non-related creditors who voted against the resolution that RAPL enter into the proposed deed of company arrangement, an outcome that is not unreasonably prejudicial to them.

The second object stated in s 435A is that, if it is not possible for the company or its business to continue in existence, the outcome should result in a better return for the company's creditors and members than would result from an immediate winding up of the company. As I have said, in the present case the likelihood is that the business of RAPL will continue in existence, I have acknowledged that the making of the winding up order will jeopardise that outcome. For the reasons I have given above, the making of the winding up order should result in a better return for the non-related creditors who voted against the resolution, than if I dismiss the plaintiffs' claim and permit RAPL to enter into the proposed deed of company arrangement. The terms of s 600A have the effect that the general object stated in s 435A(b) must be adjusted to conform with the need to protect creditors who suffer unreasonable prejudice in the manner dealt with by the section.

In these circumstance it is appropriate that an order be made for the winding up of RAPL. Given the absence of submissions made to the contrary by the parties, I can see no reason why the general words of s 600A(2)(d) are not wide enough to empower the court to make the order sought.

In the circumstances it is appropriate that the winding up should operate as if s 446A had applied in the circumstances and the company was taken to have passed a special resolution under s 491 that the company be wound up voluntarily, and that the consequential matters dealt with in s 446A(3) to (7) (ss (4) having been repealed) will have effect in relation to the winding up. I will make an order of that nature now, but give the party's liberty to apply, if they wish to move the court to vary the precise order made for any reason that is consistent with these reasons for judgment. I am concerned that, as no submissions have been addressed to the issue of the making of a winding up order at all, the precise terms of the order that I make in those circumstances may have some undesirable, unintended effect.

There should also be an order that the Administrators, or at least some of them, be appointed as liquidators of RAPL. Neither the plaintiffs nor the Administrators have addressed the question of whether all of the Administrators should be appointed as liquidators. The defendants did not address this issue, and in particular did not proffer any reason why it would be inappropriate to appoint the Administrators as liquidators. In these circumstances the leave that I will give should extend to the issue of the identity of the liquidators.

Costs

The plaintiffs and the Administrators should at least have orders that the defendants pay their costs on the ordinary basis. After the defendants abandoned their reliance on the evidence of Mr Silvia, the plaintiffs and the Administrators informed the court that they wished to apply for special costs orders. In the circumstances I will hear the parties as to costs.

Orders

I make the following orders:

(1) Order that the resolution made by the creditors of the first defendant on 2 September 2013 to the effect that the first defendant execute a deed of company arrangement as outlined in the second defendants' Report to Creditors dated 26 August 2013, be set aside.

(2) Order that the first defendant be wound up.

(3) Order that the winding up shall operate as if s 446A of the Corporations Act 2001 (Cth) applies, and the first defendant is taken to have passed a resolution under s 491 that the first defendant be wound up voluntarily,

(4) Order that the second defendants be appointed as the liquidators of the first defendant.

(5) Give the parties leave to apply to the court on three days' notice to vary or supplement orders (3) and (4).

(6) Reserve the costs of the proceedings for further submissions.

Decision last updated: 06 February 2014

Medium Neutral Citation:	Helenic Pty Ltd as trustee of the Mastrantonis Family Trust v Retail Adventures Pty Ltd (Administrators Appointed) [2013] NSWSC 1973
Hearing dates:	12-15, 18 and 20 November 2013
Decision date:	23 December 2013
Jurisdiction:	Equity Division - Corporations List
Before:	Robb J
Decision:	(1)Order that the resolution made by the creditors of the first defendant on 2 September 2013 to the effect that the first defendant execute a deed of company arrangement as outlined in the second defendants' Report to Creditors dated 26 August 2013, be set aside. (2)Order that the first defendant be wound up. (3)Order that the winding up shall operate as if s 446A of the Corporations Act 2001 (Cth) applies, and the first defendant is taken to have passed a resolution under s 491 that the first defendant be wound up voluntarily, (4)Order that the second defendants be appointed as the liquidators of the first defendant. (5)Give the parties leave to apply to the court on three days' notice to vary or supplement orders (3) and (4). (6)Reserve the costs of the proceedings for further submissions.
Catchwords:	DEED OF COMPANY ARRANGEMENT - whether resolution of creditors executing deed of company arrangement be set aside - whether the proposed resolution of creditors unreasonably prejudices the interests of creditors - whether company should be wound up - matters relevant to the making of a winding up order.
Legislation Cited:	Corporations Act 2001 (Cth) Corporations Regulations 2001 (Cth)
Cases Cited:	Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 Deputy Commissioner of Taxation v Schmierer [2002] QSC 262 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 Hoath v Comcen Pty Ltd (2005) 53 ACSR 708 Kantfield Pty Ltd v Plastamatic (Aust) Pty Ltd (1994) 14 ACSR 687 Khoury v Zambena Pty Ltd [1999] NSWCA 402 Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300 Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Admin Apptd) (1997) 24 ACSR 47 Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139 Ravenswood Resort Pty Ltd (in liq) v Kammal (2006) 60 ACSR 507 Re Le Meilleur Pty Ltd [2011] NSWSC 1115 Strawbridge v Retail Adventures Pty Ltd (administrators appointed) (2013) 95 ACSR 121 Vero Insurance Ltd v Kassem (2011) 86 ACSR 607 Yeshiva Properties No 1 Pty Ltd [2011] NSWSC 25
Category:	Principal judgment
Parties:	Helenic Pty Ltd as trustee of the Mastrantonis Family Trust formerly trading as Tasty Treats (First plaintiff) JFK Group Company Limited (Second plaintiff) Retail Adventures Pty Limited (Administrators Appointed)(First defendant) Vaughan Strawbridge, John Lethbridge Greig and David John Frank Lombe as Administrators of Retail Adventures Pty Ltd (Administrators Appointed)(Second defendants) Retail Adventures Holdings Pty Ltd (Administrators Appointed)(Third defendant) Vaughan Strawbridge, John Lethbridge Greig and David John Frank Lombe as Administrators of Retail Adventures Holdings Pty Ltd (Administrators Appointed)(Fourth defendants) DSG Holdings Australia Pty Ltd (Fifth defendant) Bicheno Investments Pty Ltd as trustee for the Jan Cameron Trust (Sixth defendant)
Representation:	Counsel: R Newlinds SC and V Whittaker (Plaintiffs) R Dick SC and F Assaf (Second and fourth defendants) D Studdy SC and E Holmes (Fifth and sixth defendants) Solicitors: Colin Biggers & Paisley (Plaintiffs) Herbert Smith Freehills (Second and fourth defendants) Russells (Fifth and sixth defendants)
File Number(s):	2013/275639

Liq. High	Liq. Low	DOCA
Administrators	45.12 c/$	20.71 c/$	$0.06
DSG	9.04 c/$	2.57 c/$	$0.06
Mr Silvia	0.70 c/$	0.00 c/$