In the matter of Flow Systems Pty Ltd (subject to deed of company arrangement)

[2019] NSWSC 888

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Flow Systems Pty Ltd (subject to deed of company arrangement) [2019] NSWSC 888
Hearing dates:	8 April 2019
Decision date:	08 April 2019
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Order made pursuant to s 447A of the Corporations Act 2001 (Cth) to vary a deed of company arrangement.
Catchwords:	CORPORATIONS – application to vary deed of company arrangement – where application to vary is made to compromise application to set aside deed of company arrangement.
Legislation Cited:	- Corporations Act 2001 (Cth) Pt 5.3A, ss 435A, 447A - Court Suppression and Non-publication Orders Act 2010 (NSW)
Cases Cited:	- FAI Workers Compensation (NSW) Ltd v Philkor Builders Pty Ltd (No 2) (1996) 21 ACSR 532; 14 ACLC 1574 - Mulvaney v Rob Wintulich Pty Ltd (1995) 60 FCR 81; 18 ACSR 384 - Re GIGA Investments Pty Ltd (admin apptd) (No 2) (1995) 58 FCR 92; 17 ACSR 547; 13 ACLC 1185 - Re Pasminco Ltd (No 2) [2004] FCA 656; (2004) 49 ACSR 470 - Re Tony Michael Mechanical Pty Ltd [2003] QSC 141; [2004] 1 Qd R 186 - Reed Constructions Australia Ltd v DM Fabrications Pty Ltd [2007] NSWSC 1190; (2007) 25 ACLC 1463
Category:	Procedural and other rulings
Parties:	McCloy Group Pty Ltd (Plaintiff) Flow Systems Pty Ltd (subject to deed of company arrangement) (First Defendant) Christopher Clarke Hill (in his capacity as deed administrator) (Second Defendant) Philip Patrick Carter (in his capacity as deed administrator) (Third Defendant) Flow Systems Constructors Pty Ltd (subject to deed of company arrangement) (Fourth Defendant) Flow Systems Operations Pty Ltd (subject to deed of company arrangement) (Fifth Defendant) Cooranbong Water Pty Ltd (subject to deed of company arrangement) (Sixth Defendant) Huntlee Water Pty Ltd (subject to deed of company arrangement) (Seventh Defendant) Central Park Water Pty Ltd (subject to deed of company arrangement) (Eighth Defendant) Discovery Point Water Pty Ltd (subject to deed of company arrangement) (Ninth Defendant) Green Square Water Pty Ltd (subject to deed of company arrangement) (Tenth Defendant) Pitt Town Water Pty Ltd (subject to deed of company arrangement) (Eleventh Defendant) Wyee Water Pty Ltd (subject to deed of company arrangement) (Twelfth Defendant)
Representation:	Counsel: J C Giles SC/N Mirzai (Defendants) D R Sulan (Brookfield FS Holdings Pty Ltd) (Deed Proponent)   Solicitors: MinterEllison (Defendants)
File Number(s):	2019/79349

Judgment – ex tempore

Background

1. By Originating Process filed in these proceedings on 12 March 2019, the Plaintiff, McCloy Group Pty Ltd (“McCloy”) sought orders declaring void, or terminating, or varying, a Deed of Company Arrangement (“DOCA”) in respect of Flow Systems Pty Ltd (subject to a deed of company arrangement) (“Flow Systems”) and associated companies. McCloy contended that the DOCA, or parts of it, were oppressive or unfairly prejudicial to or unfairly discriminatory against it; or would be contrary to the interests of the creditors of Flow Systems as a whole; and, in particular, attacked a provision that excluded McCloy from participating or proving in a creditors’ trust to be established by the DOCA. That application has now been compromised, between McCloy, Flow Systems and its associated companies, the Deed Administrators, and a third party, the deed proponent (“BM”), subject to the Court’s determination of this application.

2. By this application, brought by Amended Interlocutory Process filed on 25 March 2019, the Deed Administrators, Messrs Hill and Carter, seek an order under s 447A of the Corporations Act 2001 (Cth) to amend the DOCA, in effect, to delete paragraph (a) of the definition of “Excluded Contract” in the DOCA. The effect of that amendment would, in substance, reverse the exclusion of McCloy from participating in the creditors’ trust to be established under the DOCA.

3. The application in turn reflects a Deed of Settlement and Release which has been tendered, subject to orders made under the Court Suppression and Non-publication Orders Act 2010 (NSW) which reflects a settlement between an entity within the BM Group, the Deed Administrators, the Flow Systems companies, and McCloy, which contemplates that McCloy would be admitted as a creditor under the DOCA to participate in the creditors’ trust, in respect of a portion of its claim, and that a separate amount would be paid by it by an entity within the BM Group in respect of separate claims advanced against that entity or group.

The affidavit and other evidence

4. The application is supported by two affidavits of Mr Sommer, a solicitor acting for the Deed Administrators, and by an affidavit of Mr Hill dated 27 March 2019. By his first affidavit, Mr Sommer deals with the factual history of the voluntary administration, including the approval of the DOCA at a second meeting of creditors, and the challenge subsequently brought by McCloy to the DOCA. He refers, on information and belief, to the view formed by the Deed Administrators that the proposal under the DOCA, as varied, is in the interests of the Flow Systems companies and their creditors. This reflects, in particular, the fact that the proposal under the DOCA would allow those companies to continue to trade, in circumstances that they would be recapitalised, and would allow payment of, employee claims in full, and trade creditor claims in substantial part, a much more favourable result than would be achieved in a liquidation. That in turn reflects a view formed by the Deed Administrators that the real value in the business of the Flow Systems companies exists in contracts, which would likely be terminated in a liquidation, as well as any goodwill of the companies being lost.

5. Mr Hill’s affidavit in turn refers to the likely impact on unsecured creditors by the proposed variation to the DOCA which, by allowing a part of the claim by McCloy, would marginally reduce the distribution to other unsecured creditors. That reduction is calculated on several scenarios, by comparison with the position under the DOCA as it stood. Mr Hill sets out the reasons why the Deed Administrators continue to believe that the DOCA, as varied, would be in the interests of creditors generally, despite the compromise proposed to be reached with McCloy, since the marginally reduced return to creditors under the DOCA and creditors’ trust would still be substantially better than that achievable in a liquidation, both in respect of employees and trade creditors.

6. By his further affidavit dated 5 April 2019, Mr Sommer refers to the giving of notice of this application to creditors, in accordance with orders made by the Court, and the fact that, as at the date of this hearing, none of the creditors have indicated any opposition to the application. No creditor sought to appear to oppose the application at the hearing today.

7. The Deed Administrators also tendered an affidavit on which McCloy relied in its application to set aside the DOCA in its original form. That affidavit advanced various allegations as to the conduct of Flow Systems and associated companies, and potentially also as to the conduct of the BM Group, which were intended to establish the basis of a possible claim against Flow Systems, which would in turn be extinguished by the DOCA without any return to McCloy under the DOCA or the creditors’ trust.

8. Mr Giles, who appeared with Mr Mirzai for the Deed Administrators and Flow Systems companies also referred to terms of sale in respect of certain land, which was the origin of the dispute between Flow Systems and McCloy. As Mr Giles pointed out, the construction of that agreement raised issues of some complexity as to the extent to which those terms were binding and in what respect, and also as to the extent to which any obligations of the parties to negotiate a further binding agreement may have been breached. Mr Giles also drew attention to a detailed letter dated 21 February 2019 from the solicitors for McCloy to Flow Systems, which identified a range of allegations against Flow Systems. The relevance of that matter is, in broad terms, that unless those allegations could be said to be without merit, then a challenge to the DOCA may be prospective so far as it allowed no value to them in providing no return in respect of Flow Systems’ claims.

9. Mr Giles also referred to the terms of the original DOCA which, plainly enough, involved a substantial contribution by the BM Group to recapitalising Flow Systems and its associated companies, but, by the definitions of “Excluded Claim”, “Excluded Creditor” and “Excluded Contract”, had the result that McCloy would not be entitled to receive any return from the creditors’ trust, although the terms of the DOCA would expressly provide for release of its claim. Mr Giles pointed out, correctly in my view, that that result followed from the definitional structure of the original DOCA. In any event, it was also made clear by cl 12.10 of the DOCA, which provided that:

“The Excluded Creditors are not entitled to participate in or receive any distribution from and will not prove to recover any Excluded Claim for the purposes of, or in relation to, the Trust Fund.”

10. While the concept of “Excluded Creditors” was not limited to McCloy, it plainly included McCloy under the terms of the relevant provision. Mr Giles also drew attention to the concept of a “Sunset Date” in the DOCA, which, relevantly, is 15 April 2019, with the risk that the DOCA will fail if it is not implemented by that time and that provision is not waived.

11. Mr Giles also drew attention to the voluntary administrators’ report to creditors, prior to the approval of the DOCA in its original form. That report is a detailed and comprehensive document, which outlines the matters leading to the administration of Flow Systems and its associated companies. It is not necessary to review that document at any length. The voluntary administrators there expressed the view that the outcome of the DOCA, in its original form, was the best available outcome, comparing it with several proposals received by the voluntary administrators. Importantly, the then voluntary administrators also referred to the exclusion of the claim by McCloy, noting that counterparties to any “Excluded Contract” would not have a claim under the terms of the DOCA. As Mr Giles fairly and frankly acknowledges, that was a fair description of the terms of the DOCA, but did not provide any real explanation or justification of that treatment, other than that was what the DOCA proponent had proposed.

Submissions and determination

12. I have had the benefit of detailed submissions made by Mr Giles and Mr Mirzai, which drew attention to the relevant authorities, as well as to the factual background to which I have referred above. The Court has wide powers under s 447A of the Corporations Act and those powers extend to the power to vary a deed of company arrangement in an appropriate case: Re GIGA Investments Pty Ltd (admin apptd) (No 2) (1995) 58 FCR 92; 17 ACSR 547; 13 ACLC 1185 at 1187; Mulvaney v Rob Wintulich Pty Ltd (1995) 60 FCR 81; 18 ACSR 384 at 386; Re Tony Michael Mechanical Pty Ltd [2003] QSC 141; [2004] 1 Qd R 186; Re Pasminco Ltd (No 2) [2004] FCA 656; (2004) 49 ACSR 470 at [35]; Reed Constructions Australia Ltd v DM Fabrications Pty Ltd [2007] NSWSC 1190; (2007) 25 ACLC 1463. Consideration should be given to the effect on other creditors in considering, as here, a proposal to amend a deed of company arrangement to include additional debts: FAI Workers Compensation (NSW) Ltd v Philkor Builders Pty Ltd (No 2) (1996) 21 ACSR 532; 14 ACLC 1574. The Court should have regard to whether the exercise of those powers will promote the interests of Pt 5.3A of the Corporations Act, and the interests of creditors generally.

13. Mr Giles points out that, in this case, the variation which is sought, so far as it will allow McCloy to participate in the DOCA, will resolve its challenge to the DOCA and avert the risk that that challenge might succeed, or might not be determined in sufficient time to avoid the DOCA failing on its Sunset Date; will promote the interests of Pt 5.3A of the Act so far as it will preserve the businesses of Flow Systems and its associated companies as a going concern; will promote the interests of employees so far as it preserves their livelihoods, or in the case of those employees who do not continue employment, allow their entitlements to be paid in full; and will promote the interests of trade creditors so far as it allows payment to them substantially in excess of the amount they would receive in a liquidation, and allows the opportunity for continuing trading with Flow Systems and its associated companies. Mr Giles also points out that, if the variation to the DOCA is not made, there is a real risk that the Sunset Date would be reached and the DOCA may not remain in effect, and the Flow Systems companies may be forced into liquidation leading to a significantly worse result for creditors. Mr Giles points to the relevance of the fact that there is no opposition to the variation sought, which is perhaps not surprising where the variation involves a modest reduction in the return to other creditors, who achieve the certainty that the DOCA and the creditors’ trust will take effect, and avoid the risk of a potential liquidation.

14. It seems to me that, in this case, it could not be said that McCloy’s challenge to the DOCA was hopeless, where it had articulated grounds for a claim against Flow Systems and associated companies, which would be extinguished without compensation to it, in circumstances where other creditors would achieve significant returns under the DOCA. It seems to me that, in those circumstances, there was a real risk to the DOCA, as it stood, including the risk that the Sunset Date would pass without implementation of the DOCA and it would therefore fail. There is a significant benefit to creditors in the certainty achieved by the proposed amendment, which will allow the DOCA and creditors’ trust to be implemented prior to the Sunset Date, on the basis that the Deed Administrators expect other conditions precedent to be satisfied or waived, and avoid the risk of liquidation. Mr Giles submits, and I accept, that the amended DOCA remains consistent with the objectives of Pt 5.3A of the Act, as recognised in s 435A of the Act, and maximises the prospect that the business of the Flow Systems companies will continue.

15. For these reasons, I am satisfied that an order in the form sought in paragraph 8 of the Amended Interlocutory Process should be made. I am also satisfied that this application was brought in order to promote the interests of the deed administration and that the costs of the Deed Administrators should be costs in the deed administration. As Mr Giles points out, the structure of the DOCA has the effect that those costs will ultimately be paid by the deed proponent rather than being at the expense of other creditors. For these reasons, I make orders in accordance with paragraphs 1-4 of the short minutes of order, initialled by me and placed in the file.

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Decision last updated: 14 July 2019