In the matter of Deakin Financial Services Pty Ltd
[2019] VSC 405
•12 June 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2019 02534
IN THE MATTER OF DEAKIN FINANCIAL SERVICES PTY LTD
(SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 084 676 871)
| JOHN ROSS LINDHOLM | First Plaintiff |
| PETER DAMIEN MCCLUSKEY | Second Plaintiff |
| v | |
| DEAKIN FINANCIAL SERVICES PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 084 676 871) | Defendant |
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JUDGE: | CONNOCK J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12 June 2019 |
DATE OF JUDGMENT: | 12 June 2019 |
CASE MAY BE CITED AS: | In the matter of Deakin Financial Services Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 405 |
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CORPORATIONS — Resignation of deed administrators — Appointment of replacement deed administrators — Section 90-15 of Schedule 2 to the Corporations Act 2001 (Cth) — Section 447A of the Corporations Act 2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P Fary | Norton Rose Fulbright Australia |
| For the Defendant | No appearance |
HIS HONOUR:
INTRODUCTION
By an application made pursuant to s 447A of the Corporations Act 2001 (Cth) (Act) and s 90-15 of Schedule 2 (Insolvency Practice Schedule (Corporations)) to the Act (Schedule 2), the plaintiffs, who are the deed administrators of the deed of company arrangement for Deakin Financial Services Pty Ltd (Deakin) dated 15 November 2007 (Deakin DOCA), seek an order that they cease to be the deed administrators of the Deakin DOCA with effect as and from the date upon which they give notice in writing to Deakin of their resignation as deed administrators. They also seek an order that Mr Ross Andrew Blakeley and Mr Paul Allen (Replacement Deed Administrators) be appointed as deed administrators of the Deakin DOCA in their place.[1]
[1]A further order was sought granting liberty to apply to any person who can demonstrate sufficient interest to discharge or modify the orders on the giving of three business days’ written notice to the plaintiffs.
The application was supported by an affidavit of the first plaintiff, Mr John Ross Lindholm, sworn on 6 June 2019, an affidavit of the plaintiffs’ solicitor, Mr Steven John Palmer, affirmed on 11 June 2019, and two affidavits of Ms Lee Pascoe, another solicitor acting for the plaintiffs, each affirmed on 12 June 2019. The plaintiffs also relied on a written outline of submissions filed on 11 June 2019.
The hearing occurred in circumstances involving urgency because of the timing issues associated with a merger agreement between Ferrier Hodgson and KPMG that is due to complete on 14 June 2019.
BACKGROUND AND EVIDENCE
The plaintiffs were appointed as joint and several administrators of Deakin on 8 November 2006. On 15 November 2007, the administration ended and the plaintiffs were appointed as administrators of the Deakin DOCA.
The background was set out in the affidavits and referred to in the plaintiffs’ written submissions.
The facts as deposed to by the first plaintiff were as follows.
The plaintiffs are partners at Ferrier Hodgson.
On 14 March 2019, a confidential agreement was signed between the corporate entities comprising Ferrier Hodgson and KPMG[2] for the sale of the assets of Ferrier Hodgson to KPMG and the transfer of the partners of Ferrier Hodgson to become partners of KPMG (Merger Agreement).
[2]ABN 51 194 660 183.
The Merger Agreement is scheduled to complete on 14 June 2019, subject to the completion of a number of obligations, including the transfer of insolvency matters from Ferrier Hodgson to third parties where agreement has been reached that the insolvency matter will not be transferred to KPMG as a result of an identified conflict (Conflict Matters).
Prior to completion occurring all conditions precedent must be satisfied or waived. There is a condition precedent under the terms of the Merger Agreement, for the benefit of KPMG, that all Conflict Matters must be resolved. Resolution includes Ferrier Hodgson appointees terminating or transferring matters that are not transferring to KPMG.
As part of complying with the obligations under the Merger Agreement it was necessary for the partners of Ferrier Hodgson nationally to identify the potential Conflict Matters.
The Deakin matter was identified as a Conflict Matter. Since that time Mr Lindholm has been liaising with representatives of KPMG, either directly or through Norton Rose Fulbright Australia,[3] in an attempt to better understand the conflict and, in particular, whether there was any step that could be taken to avoid the need to transfer the matter to a third party.
[3]The solicitors for Ferrier Hodgson.
On 31 May 2019, Norton Rose Fulbright Australia was finally informed by Jones Day, on behalf of KPMG, that it was unlikely that the plaintiffs would be able to transfer the Deakin matter to KPMG. Mr Lindholm immediately formed the view that the plaintiffs would need to resign as deed administrators prior to the completion of the Merger Agreement on 14 June 2019. He also formed the view that it was not appropriate, or in the best interests of the creditors of Deakin, that the resignation occur without having replacement deed administrators appointed.
The Deakin DOCA is ‘all but complete’, with the final dividend cheques having been sent to creditors on 28 May 2019. Many of the creditors of Deakin are elderly, and prior to the matter being formally finalised the plaintiffs wished to allow an appropriate period of time for cheques to be presented and, if unpresented, followed up, to allow creditors the maximum opportunity to receive their final dividend. Consequently, prior to the Deakin DOCA being formally finalised there will be a period of approximately six months where the Replacement Deed Administrators will need to remain appointed to manage the final administrative matters in relation to the Deakin DOCA, including the return of any unpresented dividend cheques, which will need to be cancelled and redrawn for payment to ASIC as unclaimed moneys, although there will be no material amounts in question. The Replacement Deed Administrators will also need to certify that the Deakin DOCA is fully complied with and lodge any relevant ASIC forms.
The matters that require the Replacement Deed Administrators to be appointed are largely administrative. The plaintiffs have fee approval from the creditors of Deakin for $10,000 to finalise the administrative steps necessary for the Deakin DOCA to be fully complied with. The $10,000 will be transferred to the Replacement Deed Administrators.
Mr Lindholm’s view is that appointing the Replacement Deed Administrators to Deakin, by way of the orders sought, is the most effective way of ensuring that the Deakin DOCA is smoothly finalised on the basis that:
(a) the application is being made at no cost to creditors with all costs being borne under the terms of the Merger Agreement;
(b) prior to resigning, and at no cost to creditors, Mr Lindholm intends to take steps to ensure that the Replacement Deed Administrators are provided with all relevant information necessary to allow them to take over responsibility for the final steps under the Deakin DOCA, including meeting with the Replacement Deed Administrators and preparing a handover note;
(c) Mr Lindholm has been informed by the Replacement Deed Administrators, and believes, that they will not charge any time to Deakin for time required by them to familiarise themselves with the Deakin DOCA; and
(d) due to Mr Lindholm’s professional relationship with the Replacement Deed Administrators, he will be available to provide assistance or information about the Deakin DOCA, following the resignations of the plaintiffs.
The Replacement Deed Administrators are considered by the plaintiffs to be highly experienced practitioners and more than capable of assuming responsibility for the final steps to be taken prior to certifying that the Deakin DOCA is effectuated. Mr Blakeley, who will lead the appointment, is a former employee of Ferrier Hodgson and well known to Mr Lindholm. Mr Blakeley has been a Registered Liquidator since 8 February 2002 and is capable of accepting the position as deed administrator of the Deakin DOCA and has significant experience in conducting formal insolvency appointments and the preparation of expert insolvency reports. Mr Allen is also well known to Mr Lindholm. Mr Allen has been a Registered Liquidator since February 2017 and is capable of accepting the position as deed administrator of the Deakin DOCA. He was a senior employee of Taylor Woodings between 2009 and 2013 and is currently the Managing Director at FTI Consulting and has significant experience in conducting formal insolvency appointments.[4]
[4]Mr Blakeley’s and Mr Allen’s curriculum vitaes were exhibited to Mr Lindholm’s affidavit as exhibit ‘JRL-3’.
The Replacement Deed Administrators have agreed to act as the deed administrators of the Deakin DOCA upon the plaintiffs’ resignations taking effect, and the evidence included signed consent documents, schedules of rates and fees, and a draft ‘Declaration of Independence, Relevant Relationships and Indemnities’ of the Replacement Deed Administrators that is to be circulated to creditors upon the making of the orders sought.
Written notice of the application was given to the committee of inspection and the directors of Deakin and they were informed of the plaintiffs’ intention to resign, the circumstances of the resignations, and the proposal to seek orders appointing the Replacement Deed Administrators. Neither the directors nor any member of the committee of inspection raised any issue or concern with the plaintiffs’ proposed action, or sought to be heard.
Additional factual background was set out in Mr Palmer’s affidavit, including: the circumstances in which the issues of conflict have arisen; the complexities that have arisen and how they have been dealt with during the course of the merger negotiations; details of the plaintiffs’ proactive and open engagement with ASIC and others regarding the Deakin matter and other Conflict Matters; and a comprehensive explanation of the timeline and reasons for urgency.
By its letter dated 11 June 2019, ASIC informed the plaintiffs’ solicitors that it considered that the application was a matter properly left for the determination by the Court and confirmed that it did not propose to intervene in the application or seek leave to appear at the hearing.
SUBMISSIONS
The plaintiffs relied upon their written outline of submissions, which was supplemented orally.
It was submitted that the question of whether to exercise the power contained in s 90-15 of Schedule 2 is informed by reference to the principles that applied to the exercise of the directions power previously contained in ss 479(3) and 511 of the Act,[5] and it was observed that in EI-Saafin & Anor v Franek & Ors (No 2),[6] Lyons J said the following in relation to s 90-15 of Schedule 2:
108Section 90-20(1) of Schedule 2 to the Act came into effect on 1 March 2017. Part 3 is headed ‘General rules relating to external administration’. External administration is defined to include liquidation and administration.
109Section 90-20(1) permits a range of interested persons (relevantly, an officer of a company, which includes administrators of a company) to apply to the Court for orders under s 90-15(1). Under s 90-15(1), the Court may make ‘such orders as it thinks fit in relation to the external administration of a company’.
110The Court’s power under s 90-15 is broad. However, the principles to be applied to the exercise of this power have been very much informed by those that applied to the exercise of the Court’s power to give directions to external administrators under the former analogous provisions of the Act, namely s 447D(1), in the case of administration, and ss 479(3) and 511, in the case of liquidation.
111The ability of administrators or liquidators to approach the Court for directions is intended to facilitate their respective functions and so the provision should be interpreted widely to give effect to that intention. This is in a context where one of the effects of seeking such advice or directions is to provide protection to the administrator or liquidator from liability in respect of actions they seek to take. However the authorities state that the directions sought must be just and beneficial to the liquidation or administration.
[5]Wally, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486 at [41] (Gleeson J).
[6][2018] VSC 683 at [108]-[122]. Footnotes omitted.
The plaintiffs also submitted that s 447A of the Act provided the Court with a general power that had been very broadly interpreted by the courts and used in a wide range of circumstances.[7] Relevantly, these include: appointing, or facilitating the appointment of, a new administrator;[8] appointing an additional administrator;[9] terminating an administration;[10] curing defective appointments;[11] setting aside a deed of company arrangement;[12] varying a deed of company arrangement;[13] and terminating a deed of company arrangement.[14]
[7]See, for example, Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ).
[8]See, for example, Re National Express Group Australia (Bayside Trains) Pty Ltd (2003) 46 ACSR 674 (Finkelstein J); In the matter of Signature Pacific Pty Ltd (Subject to Deed of Company Arrangement) [2010] NSWSC 1160 (White J); Albarran v Geshrai Pty Ltd [2016] FCA 350 (Greenwood J).
[9]ASIC v McDermott; Re Conalpin Pty Ltd (In Liquidation) [2016] FCA 1186 (Moshinsky J).
[10]See, for example, Spacorp Australia Pty Ltd v Fitzgerald [2001] VSC 61 (Beach J).
[11]See, for example, In the matter of Foodora Australia Pty Ltd (Administrators Appointed) [2018] NSWSC 1426 (Black J); Re Wintech Group Limited [2011] VSC 273 (Davies J).
[12]Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 (Derrington J).
[13]See, for example, Re Ten Network Holdings Limited [2017] NSWSC 1529 (Black J); Adelaide Brighton Cement Limited v Concrete Supply Pty Ltd (No 2) [2018] FCA 1003 (Besanko J); Re GIGA Investments Pty Ltd (in administration) (1995) 17 ACSR 547 (Branson J).
[14]Holbrook v Professional Services of Australia Pty Ltd [2012] WASC 444 (Simmonds J); GUO v Song [2018] NSWSC 12 (Black J).
With respect to conflicts of interest, the plaintiffs observed that:[15]
[15]At paragraphs [12] to [16] of their written submissions.
(a) ‘Liquidators and voluntary administrators[16] must be independent and be seen to be independent’.[17]
(b) An administrator’s duties of independence and impartiality have been said to be ‘part of the very marrow of the voluntary administration system’.[18]
(c) As fiduciaries, administrators are subject to a strict rule that they may not enter into engagements which give rise, or which might give rise, to the possibility of a conflict between duties to different people.[19]
[16]The principles of independence and impartiality developed and applied to liquidators are equally applicable to voluntary administrators: Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 at [133] (Austin J).
[17]Australian Securities and Investments Commission v Franklin (2014) 223 FCR 204 at [58] (Jessup, Robertson and White JJ); Re Queensland Stations Pty Ltd (in liq) (1991) 9 ACLC 1341, at 1344 (Ryan J); Re National Safety Council of Australia [1990] VR 29, 34 (Young CJ, Murphy and Marks JJ); Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230, 233-4 (Santow J).
[18]Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 at [133] (Austin J).
[19]See, for example, Agricultural Land Management Ltd v Jackson (No 2) (2014) 285 FLR 121; [2014] WASC 102 at [266] (Edelman J).
The plaintiffs also submitted that the following principles emerge from the authorities in relation to applications for the Court to fill a vacancy in the office of liquidator pursuant to the former s 473(7) of the Act[20] and that, given that there is no equivalent section regarding deed administrators, these matters are also relevant to the relief sought by the plaintiffs:[21]
[20]Repealed with effect from 1 March 2017 but see s 473A of the Act.
[21]See s 449C of the Act in relation to administrators of a company (as opposed to administrators of a deed of company arrangement).
(a) It is appropriate for an application to be made to fill a vacancy, even though the same result could be achieved through a different means (such as through a meeting of creditors).[22]
[22]Re Vouris (2004) 49 ACSR 543 at [10]–[11] (Barrett J). Re Sigelski [2012] NSWSC 449 at [4] (Black J).
(b) The most significant factor in determining whether it is appropriate for a proposed liquidator to be appointed to replace a resigning liquidator is whether it is in the interests of creditors to do so. Courts have placed great emphasis on avoiding unnecessary expense to creditors in determining where the interest of creditors lies.[23]
[23]Re Wily (2003) 49 ACSR 94 at [3]–[4] (Palmer J).
(c) There is a clear benefit in making orders which ensure continuity.
(d) Cases considering the power to fill a vacancy under the predecessor to s 473A(1)[24] of the Act held that the power applies prospectively so that the court can order that a vacancy be filled in anticipation of a pending resignation,[25] and there is no reason why the court would adopt a different approach under the new provisions.
(e) There is no requirement that the court dealing with the replacement of the resigning liquidator be the court that made the original winding up order.[26]
[24]Section 473(7) of the Act — which has been repealed — provided that a vacancy in the office of a liquidator appointed by the court must be filled by the court.
[25]In the matter of BSA Executives Pty Ltd (in liquidation) & Ors [2016] VSC 576 at [8] and [14] (Gardiner AsJ). Re Dean-Willcocks (2006) 61 ACSR 356 at [2] (Gyles J). Free & Ors [2010] NSWSC 1079 at [11] (Barrett J).
[26]Condon v Watson (2009) 69 ACSR 350 at [45] (Lindgren J), In the matter of BSA Executives Pty Ltd (in liquidation) & Ors ]2016] VSC 676 at [9] (Gardiner AsJ), applying Re Ambridge Investments Pty Limited [2015] NSWSC 1671 (Bergin CJ in Eq).
With respect to the facts and circumstances in question, the plaintiffs submitted that:
(a) Because KPMG will continue in the role of auditor of the ultimate holding company of Deakin following the merger, the partners at KPMG[27] cannot be officers of Deakin or a related entity that has direct or indirect control over Deakin, including managing an administration or administering a deed of company arrangement.
[27]Which the plaintiffs will be if the Merger Agreement completes as expected on 14 June 2019.
(b) By reason of s 448C(1)(f) of the Act, following the merger the plaintiffs will be disqualified from continuing to act as deed administrators of the Deakin DOCA without leave of the Court. Further, whilst a grant of leave in favour of the plaintiffs continuing to act as deed administrators of the Deakin DOCA may have the effect of ‘curing’ the plaintiffs’ conflict, it cannot address any reciprocal conflict that the auditors within KPMG may have as a consequence of their role as auditors of the company.[28]
[28]See s 448C(1) of the Act.
(c) Orders appointing the Replacement Deed Administrators as deed administrators of the Deakin DOCA will avoid the conflict of interest that will otherwise occur upon the completion of the Merger Agreement.
(d) There is no equivalent to ss 473 and 473A of the Act in relation to deed administrators. Accordingly, the relevant power is to be found in s 90-15 of Schedule 2 and s 447A of the Act.
(e) It is in the interests of the creditors of Deakin that the vacancy created by the resignation of the plaintiffs be filled with the appointment of the Replacement Deed Administrators for reasons that include the following:
(i) upon the completion of the Merger Agreement a conflict of interest would arise such that the plaintiffs could not continue to act as deed administrators of the Deakin DOCA;
(ii) the Replacement Deed Administrators are qualified and experienced and have agreed to accept the appointment;
(iii) prior to resigning, the plaintiffs intend to take steps to ensure that the Replacement Deed Administrators are fully briefed;
(iv)the application is being made at no cost to creditors because all costs will be borne under the Merger Agreement; and
(v) the Replacement Deed Administrators will not charge for the time taken to familiarise themselves with the Deakin DOCA.
As to matters of timing, the plaintiffs observed that the present conflict was just one of a number of conflicts or potential conflicts identified by Ferrier Hodgson and KPMG in connection with the Merger Agreement, and stated that the resolution of the Conflict Matters (including Ferrier Hodgson appointees terminating or transferring matters that are not transferring to KPMG) was a condition precedent for the benefit of KPMG that is required to be satisfied prior to completion of the Merger Agreement. The urgency was said to arise because the date for completion of the Merger Agreement is 14 June 2019.
A further matter addressed in oral submissions was the operation of clause 6 of Annexure 1 of the Deakin DOCA. That clause forms part of the prescribed provisions included in the Deakin DOCA pursuant to s 444A of the Act[29] and, in substance, provides that where the creditors have been paid their full entitlements, any further claims are extinguished. As was evident from Mr Lindholm’s affidavit, the final dividend was paid to creditors on 28 May 2019.
[29]See also regulation 5.3A.06 and Schedule 8A to the Corporations Regulations 2001 (Cth).
DISPOSITION
Having regard to the evidence, the submissions made, the broad powers of the Court under s 90-15 of Schedule 2[30] and s 447A of the Act, in my view it is appropriate to make orders to the effect of the orders sought regarding the appointment of the Replacement Deed Administrators as deed administrators of the Deakin DOCA upon the resignation of the plaintiffs.
[30]It is to be noted that an ‘officer’ includes an administrator of a deed of company arrangement, and that the circumstances where a company is taken to be under ‘external administration’ include where it is the subject of a deed of company arrangement: see s 5-15(b) of Schedule 2 of the Act.
First, I accept the submissions made that the Court has the power to make the orders, noting also that Part 5.3A does not contain an express provision in relation to the resignation or replacement of deed administrators.[31]
[31]See s 449C of the Act in relation to a vacancy in office of an ‘administrator of a company’ and the definition of ‘administrator’ in s 9 of the Act.
Second, given the evidence regarding the Merger Agreement between Ferrier Hodgson and KPMG and its scheduled completion on 14 June 2019, the conflict matters raised by the application in relation to the Deakin DOCA is an issue of substance that needs to be addressed.
Third, it is apparent that the conflict issue has been carefully considered by the plaintiffs and that they have been openly and actively engaged with ASIC in relation to this and related matters. It is also apparent that the plaintiffs have explored options to see if the issue could be addressed in an alternative way, which in part explains why this matter has now had to come before the Court as a matter of urgency.
Fourth, and as the plaintiffs point out in their submissions, issues of conflict, independence and impartiality are of high importance in the context of the role and duties of administrators.
Fifth, I accept that even if the facts are such that s 448C of the Act could be relevantly engaged, and the conflict position of the plaintiffs could be ‘cured’ by the grant of leave under s 448C of the Act, that does not address the position of the auditors. In any event, given the conflict issues identified in the evidence and submissions, it would not appear to have been appropriate in the circumstances to grant leave under s 448C of the Act if such leave had been sought. However, I shall say nothing more on the topic because there was no application of that kind before the Court.
Sixth, the course proposed by the plaintiffs will address the conflict issue.
Seventh, the Replacement Deed Administrators are suitably qualified, have consented to the appointment, and will make and circulate appropriate declarations.
Eighth, although a final dividend has been paid, Mr Lindholm’s evidence reveals that the administration of the Deakin DOCA is ‘all but complete’, and that the tasks that remain are largely administrative tasks that may arise following payment.
Ninth, it is apparent that the plaintiffs have carefully considered the interests of creditors and approached the issue in a way that has sought to be cost effective. This is evidenced by, among other things: the $10,000 fund approved by the committee of inspection being proposed to be transferred to the Replacement Deed Administrators; the plaintiffs not charging fees or costs or expenses associated with the bringing of this application; the plaintiffs being willing to assist the Replacement Deed Administrators free of charge; and the Replacement Deed Administrators indicating that they do not propose to charge fees in connection with familiarising themselves with the Deakin DOCA and that which remains to be done.
Tenth, on the evidence before me it is apparent that the urgency of the matter is real and the background and reasons for it have been fully explained. In these circumstances, it is appropriate that the matter be dealt with expeditiously.
Eleventh, having regard to the matters referred to and the evidence as a whole, in my view it is in the creditors’ interests to make the orders and there is no evidence or suggestion that others may suffer prejudice. I note also the operation of clause 6 of Annexure 1 to the Deakin DOCA, that final payments have been made to creditors, and that none of the committee of inspection, the directors, or ASIC has raised any issue or objection.[32] Further, the orders proposed by the plaintiffs include an order reserving liberty to apply to persons that may be affected, and I propose to make such an order.
[32]Although Deakin was named on the originating process as a defendant, the plaintiffs sought and obtained an order that it cease to be a party on the basis that the plaintiffs were acting in their capacity as deed administrators of the Deakin DOCA, and, although notice had been given to the directors, Deakin was not regarded by the plaintiffs as a necessary party and had not been served.
CONCLUSION
Having regard to the evidence, it is appropriate to make orders to the effect of the orders sought that facilitate the Replacement Deed Administrators becoming the deed administrators of the Deakin DOCA upon the resignation of the plaintiffs as deed administrators.
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