In the matter of Galtari Pty Limited (ACN 098 823) (in Liquidation)

Case •

[2016] NSWSC 1972

•

26 February 2016

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of Galtari Pty Limited (ACN 098 823) (in Liquidation) [2016] NSWSC 1972
Hearing dates:Friday, 26 February 2016
Date of orders: 26 February 2016
Decision date: 26 February 2016
Jurisdiction:Equity - Corporations List
Before: Brereton J
Decision:

Section 447A applied so that s445CA did not apply and DOCA terminated by resolution of creditors on 11 August 2015, and companies were wound up on that date.

Catchwords: CORPORATIONS – winding up – status of liquidation and liquidator – where interests of creditors better served by deferring winding up – whether procedure to terminate deed and transition to winding up was defective – availability of (CTH) Corporations Act 2001, s 445C – where circumstances specified in deed did not exist, and deed not terminated so that company was not wound up and deed administrator remained, whether that should be rectified – application of (CTH) Corporations Act 2001, s 447A
Legislation Cited: (CTH) Corporations Act 2001, s 436A, s 445C, s 445CA, s 445C(c), s 445F, s 445E, s 446A, s 447A, s 556, s 1322(4)
Cases Cited: Angus Carnegie Gordon in the Matter of Macquarie Towns Partners Real Estate Pty Ltd (subject to Deed of Company Arrangement) [2011] NSWSC 806
Frenchy's Bread Pty Limited, In the matter of [2015] NSWSC 2031
Category:Principal judgment
Parties: Cheskaye Pty Limited (first plaintiff)
Damon Joseph Moloney (second plaintiff)
Brett Raymond Smith (third plaintiff)
David Gregory Young (first defendant/first applicant)
Galtari Pty Limited (in liquidation)(second defendant/second applicant)
Representation:

Counsel:
S Golledge (defendants/applicants)
J O’Connor (creditor)

  Solicitors:
Marque Lawyers (plaintiffs)
File Number(s):2015/00363059

Judgment (ex tempore)

  1. HIS HONOUR: The companies Galtari Pty Limited and Jota Holdings Pty Limited are related entities. Galtari operated a childcare centre business, from premises which were owned by Jota. On 5 May 2014, Buckra Pty Limited served a statutory demand on both companies, demanding payment of a debt of $2.39 million which was not paid in accordance with the demand. Buckra commenced proceedings to have both companies wound up in insolvency, which are first returnable on 16 September 2014. Shortly prior thereto, the directors appointed voluntary administrators, pursuant to (CTH) Corporations Act 2001, s 436A. The director proposed a deed of company arrangement (“DOCA”), but this proposal was not accepted by Buckra, which represents virtually the whole of the creditors in respect of Jota and 96% of the creditors in respect of Galtari. Buckra in due course itself made a DOCA proposal, which ultimately the creditors accepted at a meeting on 3 November 2014, when the present applicant David Gregory Young was appointed deed administrator in respect of both companies.

  2. The deed provided for the constitution of a deed fund comprising essentially all the property of the relevant company, save what was recoverable only by a liquidator; for the application of $20,000 for costs of administration, and the balance to be applied in accordance with the statutory order of priorities under Corporations Act, s 556. The deed did not contain a release of debts but provided for a moratorium for its duration.

  3. As deed administrator, Mr Young sold the business of Galtari and the land of Jota, and paid a small dividend in the case of Galtari.

  4. The administrators had identified a number of transactions which they considered worthy of further investigation. Any potential further distribution to creditors depends on recovery in respect of those transactions, which course is open to a liquidator but not a deed administrator. Mr Young, having realised the assets that constitute the deed fund and distributed them, has formed the view that the DOCA had achieved its purpose in each case and that the companies should now be wound up.

  5. Each DOCA, being identical, contained provisions for termination in cl 19:

19. Termination of this Deed

19.1 Termination generally

This Deed will continue in operation until it is terminated by the happening of one of the following events

The Deed Administrator has distributed the Fund in accordance with this Deed so that all payments due to be made from the Fund to all parties entitled to receive such payments (including the Administrator and the Deed Administrator but excluding the payment to any Liquidator which will occur after the Company is wound up) have been paid and the Deed Administrator has complied with sub-clauses 19.2 and 19.3 below;

By an order of the Court under section 445D of the Act;

By a Resolution of Creditors at a meeting convened under section 445F of the Act and in accordance with clause 17; or

If the Deed Administrator determines in his discretion that the Deed should be terminated and the Company be wound up then that determination will be taken to be specified circumstance that exists at the time for the purpose of section 445C(c) of the Act and Regulation 5.3A.07(1)(b) of the Corporations Regulations 2001.

19.2 Notice of Termination Where Arrangement Achieves Purpose

In the happening of the events in sub-clause 19.1(a) above, the Deed Administrator must certify to that effect in writing and must within 28 days lodge with ASIC final accounts and a notice of termination of this Deed in the form prescribed under clause 12 of Schedule 8A of the Regulations.

19.3 Determination on other grounds and winding up of the Company

If the Deed Administrator determines that it is no longer practicable or desirable to implement this Deed, the Deed Administrator can make a determination pursuant to section 445C(c) and Corporations Regulations 5.3A.07(b) that it is no longer practical to proceed with the Deed and issue a notice to that effect in which case the Company will be deemed to be wound up and the Deed Administrator appointed Liquidator.

  1. Although Mr Young apparently had formed the opinion referred to in cl 19.1(d) and/or cl 19.3, he did not make any formal determination of the kind referred to in those provisions. Rather, on 31 July 2015, he sent a circular to creditors in which he included the following:

4. WINDING UP OF THE COMPANY

As the sale of the business is now completed, I am of the opinion that the DOCA has served its purpose in preserving the value of the business compared to if the Company had to have been placed into liquidation.

Creditors are directed to the Administrators report dated 27 October for further information regarding the recoveries available to a Liquidator. As such, I now consider that it is no longer practical to proceed with the DOCA given the possible recoveries available to a Liquidator which will ensure a higher return to creditors.

In accordance with clause 19.1(d) and 19.3 of the DOCA, if the Deed Administrator determines that it is no longer practicable or desirable to implement the DOCA, the Deed Administrator can make a determination pursuant to section 445C(c) of the Corporations Act 2001 and Corporation Regulations 5.3A.07(b) that it is no longer practical to proceed with the DOCA and issue a notice to that effect in which case the Company will be deemed to be wound up and the Deed Administrator appointed Liquidator.

Pursuant to s445E of the Act, where:

At meeting convened under section 445F, the company’s creditors pass a resolution terminating the deed; and

The notice of the meeting set out a proposed resolution that the company be wound up

As such, at the forthcoming meeting, creditors will be asked to consider the following resolutions:

“That the Deed of Company Arrangement be terminated.”

“That the Company be wound up”

  1. The circular was accompanied by a notice of meeting of creditors, pursuant to Corporations Act, s 445F, the agenda for which included "to consider and resolve, pursuant to Corporations Act, s 445E, that the DOCA be terminated, and that the company be wound up”.

  2. At the meeting held on 11 August 2015, the creditors unanimously resolved that the DOCA be terminated, and also that the company be wound up. On 12 August 2015, Mr Young lodged with ASIC notices of termination of the DOCA and commencement of winding up, and of appointment of liquidator, together with notice under Corporations Act, s 446A, of a special resolution to wind up the company.

  3. Subsequently, in November 2015, Mr Young caused to be issued summonses for examination and orders for production, addressed to officers and related parties, for examinations to be conducted on or about 7 March 2016. Some of those examinees instituted these proceedings by originating process for a declaration that the resolutions of creditors on 11 August 2015 were invalid, and that consequently the appointment of Mr Young as liquidator was invalid, and sought consequential orders setting aside the summonses for examination and orders for production. Other relief also sought included variations to the DOCAs by deleting cl 9.1(d) and cl 19.3.

  4. In response, Mr Young filed an interlocutory process on 23 December 2015 to seek relief that confirmed the termination of the DOCAs, the winding up of the companies, and his status as liquidator. The application contained in the originating process brought by the proposed examinees has been settled between the parties, and I have this morning, by consent, made an order that that originating process be dismissed. However, as it has had the consequence of raising doubt about the status of the liquidation and the liquidator, Mr Young presses for the relief sought in the interlocutory process.

  5. Notice – albeit short – has been given to the creditors. One creditor appears to observe the proceedings, but neither consents to nor opposes the relief sought; the other creditors do not appear. However, bearing in mind the unanimous resolution of the creditors' meeting that the DOCA be terminated and the company wound up, it is a safe inference that the creditors would not seek to oppose the relief sought at least if it does not prejudice their position.

  6. The doubt that attends the status of the liquidation and the liquidator arises on account of two arguments foreshadowed by the former applicants. The first concerns the nature and effect of the DOCAs, in that it was to be contended that they were an abuse of process not being for the proper purposes of Part 5.3A of the Corporations Act. The second concerns defects in the procedure which was engaged to terminate the deed and transition to a winding up.

Nature and effect of DOCAs

  1. As to the first, it appears that the former applicants would have contended that because the DOCAs did not envisage preserving indefinitely the companies or their businesses or part of them, but always contemplated a transition to a winding up and did no more than defer it for some time, that was somehow not a proper purpose in conformity with Part 5.3A.

  2. As that argument was not pressed, it is not necessary to deal with it in much detail. However, DOCAs are flexible instruments that provide opportunities for the development of different ways of achieving the objects of Part 5.3A. It will be remembered that those objects, as stated in Corporations Act, s 435A, include not only maximisation of the chances of the company, or as much as possible of its business, continuing in existence, but also "if it is not possible for the company or its business to continue in existence", producing a better return for creditors than would result "from an immediate winding up" of the company.

  3. The objects of the Part thus themselves explicitly contemplate a distinction between an immediate winding up and a deferred winding up, and the possibility that a return might be maximised by deferring winding up, preserving the existence of the company in the meantime. That is exactly what this DOCA sought to do, by preserving the opportunity for the realisation of the business of one company and the land of the other, in conjunction as a going concern.

  4. Often the interests of creditors or members will be served by preserving an opportunity to realise assets as a going concern, rather than proceeding directly to a winding up. There is no inconsistency with the objects of Part 5.3A, let alone impropriety or abuse of purpose, in that course. To the contrary, it entirely accords with the objects of Part 5.3A. No doubt attends the validity of the deed, and consequent transition to liquidation, on that ground.

Procedure to terminate deed and transition to winding up

  1. The second question, however, requires more elaborate consideration.

  2. The circumstances in which a DOCA terminates are contained in Corporations Act, s 445C which provides as follows:

When deed terminates

A deed of company arrangement terminates when:

the Court makes under section 445D an order terminating the deed;

the company’s creditors pass a resolution terminating the deed at a meeting that was convened under section 445F by a notice setting out the proposed resolution; or

if the deed specifies circumstances in which it is to terminate – those circumstances exist; or

the administrator of the deed executes a notice of termination of the deed in accordance with section 445FA;

whichever happens first.

  1. No question arises in this case under s 445C(a), because the Court has not made any s 445D order; nor under s 445C(d), because neither do the circumstances referred to in s 445FA exist, nor has the administrator executed a notice of termination in accordance with that section. While s 445C(b) has the effect that a DOCA will terminate if the creditors pass a resolution terminating the deed at a meeting convened under s 445F, that is subject to the limitation imposed by s 445CA, namely that creditors are not entitled to pass such a resolution unless there has been a breach of the deed, and the breach has not been rectified before the resolution is passed. There is no suggestion of any breach of the deed here; thus, s 445C(b) is not available.

  2. That leaves s 445C(c). The deed did indeed specify circumstances in which it was to terminate, and those specifications and circumstances are to be found in cl 19 of each deed, which I have set out above.

  3. Save insofar as cl 19.1(a), (b) and (c) effectively duplicate provisions of s 445C, those specifications involve "determinations" by the deed administrator. In this case, the deed administrator formed, and expressed in the circular to creditors, opinions in conformity with cl 19.1(d) and 19.3 of the DOCAs. However, rather than unilaterally determining that the deed should be terminated under those provisions, he called a meeting of creditors, which in turn resolved that the deed be terminated. In that way, the circumstances referred to in cl 19.1(d) and 19.3 did not exist, because the deed administrator did not make the relevant determination. Had he done so, there would have been no difficulty with the transition to a winding up, because (CTH) Corporations Regulations 2001, Part 5.3A.07 provides, pursuant to Corporations Act s 446B(1)(b), that a company that has executed a DOCA is taken to have passed a special resolution that the company be wound up voluntarily if the DOCA specifies circumstances in which the deed is to terminate and the company is to be wound up, and those circumstances exist at a particular time. However, for the reasons I have just given, it seems to me that the circumstances specified in the deed did not exist, and thus the deed was not terminated. The company was not wound up, and the deed administrator in fact remains a deed administrator.

  4. The question then becomes whether – and if so, how – that should be rectified. First, both companies are plainly insolvent. Secondly, it is both the recommendation of the deed administrator and the desire of the creditors that the company be wound up, and there is utility in that course – through the availability to a liquidator of means of recovery not available to a deed administrator. Thirdly, as a matter of practicality, creditors and the administrator have been proceeding since August last year on the footing that the company was in liquidation, and no-one has identified any prejudice to any person from that course continuing. The possible contradictors in that respect would be the examinees, and their objections have been resolved and settled. The one who continues to appear does not oppose the relief sought, and in any event a deed administrator has the same powers of examination as a liquidator. Further, as the administrator has indicated, the purpose of the DOCAs has now been achieved and exhausted, through the realisation of the property that constitutes the deed fund. It is therefore desirable that the de facto status of liquidation be confirmed.

  5. There are a number of possible courses which could be utilised to produce this result. One would be, based on the evidence of insolvency to make a winding up order now. However, that would depart radically from what the deed really contemplated, and also necessitate dispensation with normal processes and formalities.

  6. Alternatives include treating what has happened as a procedural irregularity and making a validating order under Corporations Act, s 1322(4), or making an order under Corporations Act, s 447A, varying the operation of Part 5.3A in the context of this particular case to the intent that the deed be treated as terminated and the winding up as having commenced pursuant to the resolutions of 11 August 2015.

  7. Ultimately, I think s 447A provides the neatest course to achieving that result. That section has not uncommonly been utilised to remediate the consequences of inadvertent failures to comply with the requirements of Part 5.3A or of particular deeds. [1] While caution should be used in using s 447A to rewrite Part 5.3A by the removal of provisions and safeguards otherwise imposed by that Part, in this case it seems to me that in effect s 445CA can be disapplied without prejudice to any person, and to give effect to what appears to have been the intention of all involved. The purpose of s 445CA is to ensure that if a company complies with a DOCA, the creditors cannot terminate it in the absence of breach. Effectively, it is the company's assurance that, having entered into a DOCA, and so long as it performs its obligations under the DOCA, then it is entitled to the protections and benefits the DOCA gives it. On the other hand, s 445C(c) means that if the deed itself provides for circumstances in which it is to terminate, then the deed will terminate in those circumstances, and those circumstances can include, for example, a decision of creditors.

    1. Cf Angus Carnegie Gordon in the Matter of Macquarie Towns Partners Real Estate Pty Ltd (subject to Deed of Company Arrangement) [2011] NSWSC 806; In the matter of Frenchy's Bread Pty Limited [2015] NSWSC 2031

  8. In the present case, cl 19.1(c) and cl 19.3 show that the company and the creditors intended that once the purpose of the deed was served, the DOCA would be terminated and the company would transition to a winding up. It entrusted that termination to the administrator. The administrator, rather than unilaterally making that determination – as perhaps he ought – instead submitted the matter to the decision of creditors. If he had consulted the creditors and then made his own determination pursuant to their decision, s 445C(c) would have been engaged. What has happened in this case is that while in substance the intent reflected in the deed has been fulfilled, as a matter of process it has not.

  9. In those circumstances, the most straightforward way of bringing what has happened into line with the true underlying intent of those involved is to permit the creditors to have passed the resolution that they passed, notwithstanding that there has not been a breach of the deed.

Conclusion

  1. The Court therefore orders that:

  1. Pursuant to (CTH) Corporations Act 2001, s 447A(1), Part 5.3 operate in relation to Gatari Pty Limited and in relation to Jota Holdings Pty Limited, as if section 445CA did not apply;

  1. The Court declares that:

  1. Upon the true construction of the deeds of company arrangement, and in the events which have happened, including order (1) above:

  1. the deeds of company arrangement terminated by operation of the resolution of creditors on 11 August 2015;

  2. The companies were wound up pursuant to (CTH) Corporations Act 2001, s 445E on 11 August 2015.

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Endnote

Decision last updated: 25 May 2018

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