In the Matter of New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd

[2015] NSWSC 1060

Supreme Court

New South Wales

Medium Neutral Citation:	In the Matter of New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd [2015] NSWSC 1060
Hearing dates:	21, 22 May 2015; 17 June 2015
Decision date:	05 August 2015
Jurisdiction:	Common Law
Before:	Sackville AJA
Decision:	1. The proceedings be dismissed. 2. The Plaintiff pay the Defendants’ costs of the proceedings.
Catchwords:	CORPORATIONS LAW – deed of company arrangement (DOCA) – related company forgives portion of debt in return for an issue of shares – effect is to dilute interests of minority shareholders – whether the administration and execution of the DOCA involved an abuse of Pt 5.3A of the Corporations Act 2001 (Cth) – whether relief should be granted under s 447A having regard to the financial position of the company after termination of the administration – whether injunctive relief should be granted under s 1324
Legislation Cited:	Corporations Act 2001 (Cth), ss 9, 95A, 182, 260A, 260D, 435A, 436A, 437A, 437D, 439A, 439C, 444D, 445C, 445FA, 444G, 445G, 445H, 447A, 664C, 1317E, 1317F, 1324; Pt 5.3A; Pt 6A.2 Civil Liability Act 2002 (NSW), s 5D Evidence Act 1995 (NSW), s 140
Cases Cited:	Aloridge Pty Ltd (prov liq apptd) v Christianos [1994] FCA 123; 13 ACSR 99 Al-Shennag v Statewide Roads Ltd [2008] NSWCA 300 Argyle Art Centre Pty Ltd v Argyle Bond and Free Stores Co Pty Ltd [1976] 1 NSWLR 377 Australasian Memory Pty Ltd v Brien [2000] HCA 30; 200 CLR 270 Australian Beverage Distributors Pty Ltd v The Redrock Co Pty Ltd [2007] NSWSC 966; 213 FLR 450 Australian Securities and Investments Commission v Mauer-Securities Ltd [2002] NSWSC 741; 42 ACSR 605 Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; 226 CLR 256 Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) [2003] NSWSC 883; 47 ACSR 391 Chappel v Hart [1998] HCA 55; 195 CLR 232 City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130; 260 ALR 199 Commodore Business Machines Pty Ltd v Trade Practices Commission (1990) 92 ALR 563 Dowling v Colonial Mutual Life Assurance Society Ltd [1915] HCA 56; 20 CLR 509 Emanuele v Australian Securities Commission (1995) 63 FCR 54 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 231 Honest Remark Pty Ltd v Allstate Exploration NL [2006] NSWSC 735; 58 ASCR 234 Industrial Equity Ltd v Blackburn [1977] HCA 59; 137 CLR 567 John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; 241 CLR 1Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; 44 ACSR 21 Kyle House Pty Ltd v ACN 000 016 213 Pty Ltd [2007] NSWSC 224 Maylord Equity Management Pty Ltd v ReelTime Media Ltd [2008] NSWSC 1045 McIntosh v Williams [1979] 2 NSWLR 543 Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13; 205 CLR 1 Morley v Australian Securities and Investments Commission [2010] NSWCA 331; 274 ALR 205 Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186; 71 ACSR 65 Re AFG Insurances Ltd [2002] NSWSC 735; 20 ACLC 1588 Re Capital General Corporation Ltd; Rodgers v Radly [2000] VSC 570; 37 ACSR 158 Re Pasminco Ltd; McCluskey v Pasminco Ltd (No 2) [2004] FCA 656; 49 ASCR 470 Rosenberg v Percival [2001] HCA 18; 205 CLR 434 Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621; 53 NSWLR 213 Spacorp Australia Pty Ltd v Fitzgerald [2001] VSC 61; 19 ACLC 979 TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 Walker v Commonwealth Trading Bank of Australia [1985] 3 NSWLR 496 Walker v Wimborne [1976] HCA 7; 137 CLR 1 Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; 162 CLR 285 Williams v Spautz [1992] HCA 34; 174 CLR 509
Texts Cited:	Ford’s Principles of Corporations Law (Looseleaf ed, LexisNexis)
Category:	Principal judgment
Parties:	Winpar Holdings Limited (Plaintiff) Baron Corporation Pty Limited (First Defendant) Peter Paul Krejci (As the Administrator of the Deed of Company Arrangement between New Bounty Pty Limited and Baron Corporation Pty Limited dated 12 May 2014) (Second Defendant) Brian Raymond Silvia (As the Administrator of the Deed of Company Arrangement between New Bounty Pty Limited and Baron Corporation Pty Limited dated 12 May 2014) (Third Defendant) New Bounty Pty Limited (Fourth Defendant)
Representation:	Counsel: T Brennan / Ms V O’Halloran (Plaintiff) M Condon SC / M Stevens (First and Fourth Defendants) Submitting appearance (Second and Third Defendants)   Solicitors: SBA Lawyers (Plaintiff) Somerset Ryckmans (First and Fourth Defendants)
File Number(s):	2014/226909

IN THE MATTER OF NEW BOUNTY PTY LTD

INDEX

PARAGRAPH
Statutory Basis for Relief	11
The DOCA	26
Winpar’s Pleaded Case Founded on Abuse of Part 5.3A	34
Factual Background	41
New Bounty: 1992-2007	42
The 2007 Deed of Consolidation until the 2011 Deed of    Variation	51
2012 until October 2013	64
Events Leading to the Administration of New Bounty	83
New Bounty in Administration	92
The 439A Creditors Report	108
New Bounty’s Financial Position at 31 March 2014	109
Explanation for Failure	113
New Bounty’s Financial Position at 4 April 2014	115
Insolvency Trading Summary	116
Options	117
New Bounty’s Financial Position on Termination of the DOCA	121
Submissions	127
Scope of the Case	127
Winpar’s Submissions	135
The Defendants’ Submissions	143
The Witnesses	150
Findings Concerning Mr Bart’s Actions	156
Mr Bart’s Motivation	156
Mr Bart’s Conduct	174
The Principles	178
Australasian Memory Pty Ltd v Brien	179
Authorities on Abuse of Part 5.3A	189
Application of Principles	198
Abuse of Part 5.3A	198
Mr Bart’s Purposes as the Controlling Purpose	207
Objective Purpose	214
Officer of a Corporation	215
Should Relief be Granted?	220
The Orders Sought	220
Difficulties with Proposed Orders 1-5	221
Discretionary Considerations: Proposed Orders 1-5	231
Proposed Orders 6-10	260
A Contravention of 260A?	262
Other Proposed Orders	266
Proposed Order 7	266
Proposed Orders 6 and 8-10	269
Principles	269
Procedural Issues	270
Exercise of Discretion	278
Orders	281

JUDGMENT

1. SACKVILLE AJA: The Plaintiff (Winpar) is a minority shareholder in the Fourth Defendant (New Bounty). At all material times, the First Defendant (Baron) has been the majority shareholder in New Bounty and since September 2012 it has held more than 90 per cent of the shares. The Second and Third Defendants (Administrators) were the administrators of New Bounty when it was placed in voluntary administration. The Administrators were appointed on 4 April 2014 and continued in that role until the administration of New Bounty came to an end on 4 July 2014.

2. Mr Bart controls Baron and a number of other companies involved in transactions that were the subject of evidence. Those companies include Newbart Holdings (Newbart), Australian Weaving Mills Pty Ltd (AWM) and Colerand Pty Ltd (Colerand). Mr Bart is not a party to the proceedings.

3. Mr Bart was a director of New Bounty until 31 March 2014, when he resigned. On 3 April 2014, three days later, Mr Bart caused Baron to make a written demand on New Bounty to pay Baron the sum of $4,552,710 in principal and interest under loans secured on New Bounty’s assets (Demand). The Demand caused New Bounty to become insolvent, since it was no longer able to pay its debts as and when they became due.

4. The following day, 4 April 2014, the sole continuing director of New Bounty, Mr Parker, arranged for the appointment of the Administrators to New Bounty. The creditors of New Bounty subsequently approved the execution of a Deed of Company Arrangement on 12 May 2014 (DOCA). Pursuant to the DOCA, the Administrators issued 1,511,954,800 shares in New Bounty to Baron at $0.0025 per share. In return, Baron forgave New Bounty $3,779,887 in accrued but unpaid interest. The balance of the New Bounty Loan remained owing by New Bounty to Baron.

5. The effect of the issue of shares to Baron was to increase its shareholding in New Bounty from about 90.7 per cent of the issued capital to about 99.4 per cent. A corresponding effect was to reduce the interests of the minority shareholders in New Bounty from about 9.3 per cent to about 0.6 per cent, of which Winpar owns approximately two thirds. The minority shareholders derived no benefit from the DOCA.

6. On 15 November 2012, prior to New Bounty entering administration, Baron lodged with the Australian Securities and Investments Commission (ASIC) a compulsory acquisition notice pursuant to Pt 6A.2 of the Corporations Act 2001 (Cth) (Corporations Act). The notice specified a price of one cent per share for the shares held by minority shareholders. Some of those shareholders, including Winpar, lodged notices of objection to the compulsory acquisition. Baron then commenced proceedings in the Supreme Court of Tasmania on 16 January 2013 seeking an order approving the compulsory acquisition of the minority shares on the terms proposed.

7. In the current proceedings, Winpar pleads its case in a Second Further Amended Points of Claim (2FAPC), last amended on the third and final day of the hearing. Winpar alleges that by causing Baron to demand repayment of the moneys due by New Bounty and by causing New Bounty to be placed in administration and to enter the DOCA, Mr Bart used his position as an officer of New Bounty to gain an improper advantage for himself and Baron. Winpar also says that the “effect and purpose” of the DOCA and of the issue of shares to Baron was to dilute the minority shareholdings in New Bounty and to circumvent the compulsory acquisition process provided for in Pt 6A.2 of the Corporations Act. According to Winpar, Mr Bart’s acts constituted an abuse of Pt 5.3A of the Corporations Act (dealing with the administration of a company), entitling Winpar to seek relief under ss 447A and 1324 of the Corporations Act. [1]

   1. Sections 447A and 1324 are reproduced at [20]-[21] below.

8. The relief sought by Winpar in its Amended Originating Process, omitting claims not pressed, is as follows:

“1. An Order pursuant to s.447A of the Corporations Act (Act) that the operation of s.444G of the Act[2] be modified in relation to [New Bounty] so that none of the company, its directors or the Deed Administrator are or were authorised or required to issues shares in the company to [Baron] pursuant to clauses 6.2 or 9 of the DOCA entered into on 12 May 2014

2. See [17] below.

…

3. An Order pursuant to s.447A … setting aside the decision of the [Administrators] made on or about 13 May 2014 to issue 1,511,954,800 shares in the company to [Baron].

4. An Order pursuant to s.447A …:

(a)   cancelling all of the shares issued in [New Bounty] on or about 13 May 2014; and

(b)   directing New Bounty to rectify its share register by cancelling those shares by a date specified in the Order.

5. Further to [Order 1] and in the alternative to Orders 3 and 4 an Order pursuant to s.1324 that:

(a)   [Baron] surrender 1,511,954,800 shares in New Bounty by a date specified in the order; and

(b)   New Bounty rectify its share register by cancelling those shares by a date specified in the Order.”

9. Winpar’s claim is opposed by Baron and New Bounty. The Administrators have filed submitting appearances. Winpar does not allege any wrongdoing on their part.

10. Mr Brennan appeared with Ms O’Halloran for Winpar. Mr Condon SC appeared with Mr Stevens for Baron and New Bounty, the active defendants, to whom I refer as the Defendants. Between them the parties tendered in excess of 3000 pages of documentary exhibits. The parties’ submissions were very helpful, but the difficult task of working through the extensive documentary exhibits would have been rendered more manageable had the documentation been presented to the Court in a more systematic and consistent manner.

Statutory Basis for Relief

11. Numerous provisions of the Corporations Act were referred to in argument. The following are the provisions that bear most directly on Winpar’s claim for relief.

12. Part 5.3A of the Corporations Act deals with “Administration of a company’s affairs with a view to executing a deed of company arrangement”. Section 435A specifies the object of Pt 5.3A:

“The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a)   maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)   if it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members that would result from an immediate winding up of the company.”

13. The effect of placing a company in administration is dealt with by s 437A of the Corporations Act, which provides as follows:

“(1)   While a company is under administration, the administrator:

(a)   has control of the company’s business, property and affairs; and

(b)   may carry on that business and manage that property and those affairs; and

(c)   may terminate or dispose of all or part of that business, and may dispose of any of that property; and

(d)   may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

(2)   Nothing in subsection (1) limits the generality of anything else in it.”

14. Section 439A(1) requires the administrator of a company to convene a creditors’ meeting within specified time limits. The notice to creditors must be accompanied by a report from the administrator about the company’s business, property, affairs and financial circumstances. [3] The report must state the administrator’s opinion on certain matters. [4] If a deed of company arrangement is proposed, the details of the proposal must be included. [5]

    3. Corporations Act, s 439A(4)(a).

    4. Corporations Act, s 439A(4)(b).

    5. Corporations Act, s 439A(4)(c).

15. Section 439C of the Corporations Act states that creditors may resolve at the meeting convened under s 439A:

“(a)   that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or

(b)   that the administration should end; or

(c)     that the company be wound up.”

16. Section 444D(1) of the Corporations Act provides that a deed of company arrangement binds all creditors of the company so far as concerns claims arising on or before the day specified in the deed. However, a secured creditor is not prevented from realising a security interest except insofar as the deed so provides and the secured creditor voted in favour of the resolution of creditors to execute the deed. [6] A creditor of the company may become a member of the company as a result of the deed requiring the creditor to accept an offer of shares in the company. [7]

    6. Corporations Act, s 444D(2).

    7. Corporations Act, s 444D(4).

17. Section 444G of the Corporations Act, referred to in Winpar’s Proposed Order 1, states that a deed of company arrangement binds the company, its officers and members and the deed’s administrators.

18. A deed of company arrangement terminates, relevantly, if the deed specifies the circumstances in which it is to terminate and those circumstances exist or if the administrator executes a notice of termination in accordance with s 445FA. [8] Where the administrator has applied the proceeds from the realisation of assets available to pay creditors, and creditors have been paid in accordance with the deed, s 445FA requires the administrator to certify, inter alia, that creditors have been paid and that all obligations under the deed have been fulfilled. A notice of termination of the deed must be given to ASIC.

    8. Corporations Act, s 445C(1)(c), (d).

19. Section 445H of the Corporations Act provides that the termination or avoidance, in whole or in part, of a deed of company arrangement does not affect the previous operation of the deed.

20. Section 447A of the Corporations Act is within Div 13 of Pt 5.3A. It is headed “General power to make orders”, and provides as follows:

“(1)   The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2)   For example, if the Court is satisfied that the administration of a company should end:

(a)   because the company is solvent; or

(b)   because provisions of this part are being abused; or

(c)   for some other reason;

the Court may order under subsection (1) that the administration is to end.

(3)   An order may be made subject to conditions.

(4)   An order may be made on the application of:

…

(f)   any other interested person.”

21. Section 1324(1) of the Corporations Act confers power on the Court to grant an injunction. It relevantly provides as follows:

“(1)   Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a)   a contravention of this Act; or

…

(e)   being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

…

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

(1A)   For the purposes of subsection (1):

(a)   a contravention of this Act affects the interests of a creditor or member of a company if the insolvency of the company is an element of the contravention; and

(b)   a company’s contravention of:

…

(ii)   paragraph 260A(1)(a) (financial assistance for share acquisition not to prejudice company or shareholders or ability to pay creditors);

affects the interests of a creditor or member of the company …

This subsection does not limit subsection (1) in any way.”

22. Winpar’s case for relief under s 1324 of the Corporations Act rests upon establishing a contravention of either s 182 or s 260A. Those sections provide as follows:

“182.   (1)   A director, secretary, other officer or employee of a corporation       must not improperly use their position to:

(a)   gain an advantage for themselves or someone else; or

(b)   cause detriment to the corporation.

(2)   A person who is involved in a contravention of subsection (1)    contravenes this subsection.

260A   (1)   A company may financially assist a person to acquire shares       (or units of shares) in the company or a holding company of       the company only if:

(a)   giving the assistance does not materially prejudice:

(i)   the interests of the company or its shareholders; or

(ii)   the company’s ability to pay its creditors; or

...

(2)   Without limiting subsection (1), financial assistance may:

(a)   be given before or after the acquisition of shares (or units of shares); and

…

(3)   Subsection (1) extends to the acquisition of shares (or units of shares) by:

(a)   issue; or

(b)   transfer; or

(c)   any other means.”

23. Section 1317E(1) of the Corporations Act provides that if the Court is satisfied that a person has contravened s 182 (among other provisions), it must make a declaration of contravention. The declaration must specify the provision that has been contravened, the person who contravened it, the conduct that constituted the contravention and the corporation to which the contravention related. [9] A declaration of contravention is conclusive evidence of the matters specified. [10]

    9. Corporations Act, s 1317E(2).

    10. Corporations Act, s 1317F.

23. Any person dishonestly involved in a company’s contravention of s 260A of the Corporations Act commits an offence. [11] However, if a company provides financial assistance in contravention of s 260A, the contravention does not affect the validity of the financial assistance or of any contract or transaction connected with it. [12]

    11. Corporations Act, s 260D(3).

    12. Corporations Act, s 260D(1).

24. Part of Winpar’s pleaded case is that Mr Bart, at all relevant times, was an officer of New Bounty within the meaning of s 9 of the Corporations Act. Section 9 defines “officer of a corporation” to include:

“(b)   a person:

(i)   who makes, or participates in making, decisions that affect the whole, or a substantial part, of a business of the corporation; or

(ii)    who has the capacity to affect significantly the corporation’s inancial standing; or

(iii)    in accordance with whose instructions or wishes the directors of the corporation are    accustomed to act …”

The DOCA

26. The parties to the DOCA were New Bounty, the Administrators and Baron.

27. Clause 2.2 of the DOCA stated its purposes and objects as follows:

“to provide for the business, property and affairs of the Company to be administered in a way that maximises the chances of the Company, or as much as possible of its business continuing in existence, or if this is not possible provides the best return for Creditors and a return that is better than would result from an immediate winding up of the Company.”

28. Clause 6 of the DOCA was headed “Funds available to pay Creditors”. It provided as follows:

“6.1   Deed Fund

(a)   The Deed Administrators will establish a deed fund (“Deed Fund”).

(b)   The Deed Fund will comprise an amount to be paid by Baron which is sufficient to pay in full all of the following:

(i)   the Deed Administrators’ remuneration, costs, fees and expenses of acting as voluntary administrator and deed administrator;

(ii)   the Admitted Claims of Priority Creditors; and

(iii)   all other Admitted Claims of Creditors.

(c)   The Deed Administrators shall hold the Deed Fund on trust for the benefit of the Deed Administrators and those Creditors whose Claims are admitted by the Deed Administrators for distribution purposes.

6.2   Time and Manner of Payment

(a)   The amount comprising the Deed Fund shall be determined by the Deed Administrators and must be paid by Baron within 28 days of written notification.

(b)   The payment to be made by Baron under clause 6.2(a) shall be made by way of subscription for shares in the capital of the Company.

(c)   The Deed Administrator shall cause the Company to issue to Baron fully paid ordinary shares in the capital of the Company at an issue price of $0.0025 per ordinary share.”

29. Clause 7 dealt with the distribution of the Deed Fund:

“(a)   The Deed Fund shall be distributed in the following order of priority:

(i)   first, payment in full of the remuneration, disbursements and trading expenses and liabilities (if any), incurred by the Deed Administrators in acting as voluntary administrators …

(ii)   second, payment in full of the Admitted Claims of Priority Creditors …

(iii)   third, payment of the Admitted Claims of all remaining Creditors.

…

(c)   Creditors shall accept their entitlements (if any) out of the Deed Fund in full settlement of their Claims.

(d)   For the avoidance of doubt a Secured Creditor (including Baron) … shall not be entitled to prove in the Deed Fund for any dividend entitlement.”

30. Clause 9 dealt with the deferment of the “Baron Claim” and the allotment of shares to Baron. The expression “Baron Claim” was defined in cl 1.1 to mean:

“the secured debt owed to Baron in the sum of $4,552,710 which comprises the principal sum of $772,823 and accrued but unpaid interest totalling $3,779,887.”

31. Clause 9 provided as follows:

“9.1   Subject to clause 9.2, Baron covenants with the Company and the Deed Administrators that it will not during the operation of this Deed make any demand or claim upon the Company in respect of the Baron Claim or share or seek to share in any distribution of the Deed Fund pursuant to the DOCA in respect of the Baron Claim.

9.2   Baron may at any time during the operation of this Deed give notice to the Company and the Deed Administrators to issue to Baron ordinary shares in the capital of the Company at a conversion price of $0.0025 per ordinary share in consideration of Baron agreeing to forgive all or part of the accrued interest owing in respect of the Baron Claim.

9.3   In the event that Baron serves a notice under clause 9.2, the Deed Administrators must, subject to any requirement of the Act, allot to Baron ordinary shares in the Company.”

32. As has been noted, pursuant to cl 9.2 of the DOCA 1,511,954,800 shares were issued to Baron. In return Baron forgave New Bounty the accrued interest of $3,779,887. The principal sum of $772,823 remained owing.

33. Clause 15 stated that if the Administrators had paid the creditors their full entitlements under the DOCA and its terms had otherwise been satisfied, the Administrators had to certify to that effect and lodge an appropriate notice with ASIC.

Winpar’s Pleaded Case Founded on Abuse of Part 5.3A

34. By the 2FAPC, Winpar alleges that the sole or predominant purpose of the Demand made by Baron on 3 April 2014 was:

“to procure the administration of New Bounty and the DOCA.” [13]

13. 2FAPC, par 52B.

35. Winpar pleads that the making of the Demand by Baron was a breach of Mr Bart’s duty as an officer of New Bounty. [14] No particulars are provided for this allegation (which was added by way of a late amendment). However, the 2FAPC includes the following:

“Mr Bart in breach of his duty not to do so and in contravention of s.182 of the Corporations Act, improperly used his position as an officer of New Bounty to gain an advantage for himself and the first defendant.

Particulars

a.   If [Baron] is entitled to compulsorily acquire the minority shareholding in New Bounty that is through the Tasmanian Proceedings and not otherwise.

b.   By causing or permitting New Bounty to be placed in administration and to enter into a DOCA, Mr Bart caused [Baron] to acquire an additional 9.3% of the equity in New Bounty to the detriment of the minority shareholders.

c.   The acquisition of the equity referred to in Particular b. was not for the purpose of raising capital that was required by New Bounty.” [15]

14. 2FAPC, par 52C.

15. 2FAPC, par 78.

36. The 2FAPC alleges that at all material times Mr Bart had the capacity to affect significantly New Bounty’s financial standing. [16] The particulars to this pleading are as follows:

“a.   Mr Bart wholly owned and controlled [Baron] which was owed $4,522,710.00 by New Bounty. This amounted to 99.3% of the admitted debts of New Bounty other than the debt owed to New Bounty’s wholly owned subsidiary Colerand.

b.   Mr Bart controlled [AWM] which owed the AWM loan to New Bounty and which constituted its most substantial asset.”

16. 2FAPC, par 58.

37. The 2FAPC pleads that at all relevant times Mr Bart made or participated in making decisions that affected the whole or a substantial part of the business of New Bounty. [17] The particulars to this allegation are as follows:

“(a)   Mr Bart made or participated in making the decisions that [Baron] would make a demand which resulted in administrators being appointed to New Bounty, that the DOCA be entered into and the shares issue pursuant to the DOCA.

(b)   Mr Bart was, and acted as, a director of New Bounty at all relevant times except for the period that he stepped down from 31 March 2014 to 9 June 2014.”

By reason of the matters summarised above, the 2FAPC alleges that at all material times Mr Bart was an officer of New Bounty within the meaning of s 9 of the Corporations Act.

17. 2FAPC, par 76.

38. It is then alleged that:

“the effect and purpose of the DOCA and in particular clauses 6.2 and 9 of the DOCA was to dilute the minority shareholdings in New Bounty from 9.3% to 0.6%.” [18]

18. 2FAPC, par 70.

39. Under the heading “Relief”, the following is pleaded:

“In the premises, the Administration and the DOCA was an abuse of Part 5.3A of the Act and [Winpar] is entitled to relief under s. 447A of the Act.

Particulars

a.   The administration could not achieve an outcome for any creditor that was not available without the administration.

b.   The effect of the DOCA was to convert part of [Baron’s] debt to equity in circumstances where the only purpose or effect of the issue of equity to [Baron] was to dilute the minority shareholding.

c.   The Administration was procured for the purpose as alleged in paragraph 52B above.” [19]

(The point of the reference in ‘Particular c’ to par 52B of the 2FAPC is unclear, since par 52B merely alleges that the purpose of the Demand was to procure the administration of New Bounty and execution of the DOCA.)

19. 2FAPC, par 71.

40. The 2FAPC further alleges that real purpose of the allotment of shares to Baron was not a proper purpose as provided for in s 435A of the Corporations Act. [20] The particulars to this allegation claim that the “real purpose of the allotment of shares … was the dilution of the minority holding”.

    20. 2FAPC, par 74.

Factual Background

41. There was no dispute as to many of the events leading to the decision to place New Bounty in administration, although the purpose of the Demand and of the administration was very much in dispute. The following account is very largely based on matters that were not in contest.

New Bounty: 1992-2007

42. New Bounty was incorporated on 30 July 1992 under the name Silkwane Pty Ltd. It subsequently changed its name to National Textiles Ltd and, on 2 February 2004, to New Bounty. Mr Bart was a director of New Bounty from 30 June 1997 until his resignation on 31 March 2014. He was reappointed as a director on 9 June 2014.

43. AWM was incorporated in 1945. In the 1980s, it commenced business as a textile manufacturer from premises located in Devonport, Tasmania (Devonport Premises). At its height, AWM had over 500 employees. At one stage a Tasmanian Government instrumentality held a 49 per cent stake in AWM, but on 31 August 2004 New Bounty acquired that stake and AWM thereafter became a wholly owned subsidiary of New Bounty.

44. On 1 October 1999, Oldtex Pty Ltd (Oldtex), a company controlled by Mr Bart, advanced $3.7 million to New Bounty (then known as National Textiles Ltd) pursuant to a Deed of Loan (New Bounty Loan). New Bounty granted Oldtex a fixed charge over its assets to secure the New Bounty Loan. The Deed of Charge provided that interest would accrue on unpaid amounts due and payable by New Bounty.

45. Prior to January 2000, New Bounty operated a textile mill in New South Wales. At this stage it was listed on the Australian Stock Exchange (ASX). The minority shareholders seem to have acquired their shareholdings while New Bounty was listed on the ASX.

46. On 20 January 2000, New Bounty ceased trading as a textile manufacturer and was placed into voluntary administration. It remained under administration until October 2003.

47. On 14 June 2001, New Bounty (then known as National Textiles Ltd) and AWM executed a deed whereby New Bounty advanced $1.75 million to AWM, secured by a charge over all AWM’s assets (AWM Loan).

48. New Bounty was delisted from the ASX on 16 July 2001.

49. Between 20 January 2000 and 23 July 2007, New Bounty did not carry on any active business. During this period it acted as the non-trading holding company of AWM and another subsidiary, and provided loan funds to AWM. In December 2004, it changed its status from a public company to a proprietary limited company.

50. Oldtex made further advances to New Bounty in 2000, 2004 and 2005. An Amended Deed of Loan in 2000 provided for an advance of $2.25 million for New Bounty to invest in AWM. Interest was payable on the basis provided in the original deed providing for the AWM Loan. A Further Deed of Loan in 2004 provided for an advance up to $2.375 million, which was to be free of interest. An Additional Further Deed of Loan in 2005 stated that the additional advance made at that time “at the option of [Oldtex] would be free of interest”. However, Oldtex could charge interest on the additional advance outstanding from time to time “should it so desire”.

The 2007 Deed of Consolidation until the 2011 Deed of Variation

51. On 30 April 2007, Oldtex and New Bounty entered into a Deed of Variation and Consolidation (2007 Deed of Consolidation) which was said to confirm an oral agreement made between the parties on 30 June 2006. The 2007 Deed of Consolidation recited that the amount due by New Bounty to Oldtex pursuant to the 1999 Deed of Loan and the subsequent Deeds of Loan amounted to $5.241 million as at 30 June 2006. The 2007 Deed of Consolidation provided for the consolidation and variation of the previous loans. New Bounty was required to repay all moneys due on 30 days written notice, an event of default or 1 October 2009, whichever was the earliest.

52. Although Mr Condon suggested that the 2007 Deed of Consolidation provided for Oldtex to charge interest on the New Bounty Loan retrospectively from 1999, it is clear enough that, subject to certain exceptions, the 2007 Deed of Consolidation contemplated that interest would accrue only in respect of periods after execution of the Deed. The exceptions included the following: [21]

• unless Oldtex determined otherwise, no interest was to accrue on the advance;

• if Oldtex elected to exercise its rights in an “Event of Default”, interest would be deemed to have accrued during the “Interest Period”, defined to mean a period commencing on 1 July 2006.

  21. 2007 Deed of Consolidation, cll 5.1, 5.4.

53. On 23 July 2007, New Bounty purchased weaving looms and commenced weaving textile fabrics at the Devonport Premises. The business ceased after about 12 months. In July 2008, New Bounty leased the weaving looms to Bruck Textile Technologies Pty Ltd (Bruck), a company also controlled by Mr Bart.

54. On 7 April 2008, New Bounty purchased the Devonport Premises from AWM. The purchase price of $6.8 million was satisfied by offsetting the price against AWM’s indebtedness to New Bounty, which had increased over time. On 24 September 2008, New Bounty leased the Devonport Premises back to AWM for a term of three years from 1 May 2008, at an annual rental of $180,000.

55. On 27 January 2009, Newbart offered to purchase the shares in New Bounty held by Winpar and Mr Elkington, a director of Winpar. The price offered was 3.75 cents per share. Since Winpar held 2,554,682 shares, the offer valued its shareholding at $95,800.58. The offer was not accepted.

56. On 26 October 2009, Newbart acquired about 1.25 million shares in New Bounty, but not from Winpar or Mr Elkington. At this point Baron and Newbart between them held more than 90 per cent of New Bounty’s shares.

57. A Deed of Assignment of Charge dated 4 November 2010, recorded that Oldtex had assigned the New Bounty Loan and the Deed of Charge to Newbart on 12 March 2010. The Deed of Assignment recorded that the New Bounty Loan amounted to $5.6 million as at 4 November 2010. New Bounty subsequently repaid to Newbart some of the moneys owed under the New Bounty Loan.

58. On 14 February 2011, Mr Bart signed New Bounty’s financial statements for the year ended 30 June 2010. New Bounty’s balance sheet as at 30 June 2010 showed net assets of $7.772 million. The New Bounty Loan was recorded as a current liability of $5.665 million. The Notes to the financial statements indicated that the New Bounty Loan was secured over the assets of New Bounty and that interest had not been charged on the New Bounty Loan during the year.

59. Mr Parker was appointed a director of New Bounty on 21 June 2011.

60. In an email exchange in August 2011, Mr Bart informed an advisor that he was thinking of returning about $8 million in capital to New Bounty from AWM. Mr Bart thought that this would produce a capital gain of about $4 million which could be offset against New Bounty’s accumulated capital losses. Mr Bart also indicated that he was looking at “privatisation of New Bounty at some stage”.

61. On 4 November 2011, Mr Bart signed New Bounty’s financial statements for the year ended 30 June 2011. The balance sheet at 30 June 2011 showed that New Bounty had net assets of $9.396 million. The Notes to the financial statements indicated that the amount owed to Newbart under the New Bounty Loan at that date was $2.9 million, down from $5.665 million in the previous year. The Notes also recorded that Newbart had not taken up the option to charge interest on the New Bounty Loan, but did have the right to charge interest on the outstanding balance from 1 July 2004. The contingent liability for interest payable was $3.329 million.

62. On 17 October 2011, shortly before the 2011 New Bounty financial statements were signed off, Newbart (as “Lender”) and New Bounty (as “Borrower”) entered into a Deed of Variation (2011 Deed of Variation). The 2011 Deed of Variation recited the history of the New Bounty Loan up to and including the Deed of Assignment of Charge of 4 November 2010. The recitals included the following rather curious statements:

“I.   In consideration of the Lender and Borrower agreeing to the assignment of the Loan Deeds, the Borrower agreed to pay interest (if called by the Lender) on the loan commencing from 1 October 1999 when the loan was first made available by Oldtex (prior to the assignment) up until the date of the Deed of Assignment and then interest is to accrue as provided for in clause 5 of the Loan Deeds.

J.   It is acknowledged by the parties that at the time the Deed of Assignment was entered into the parties omitted to incorporate the interest calculation into the agreement.” (Emphasis added.)

63. The 2011 Deed of Variation varied the 2007 Deed of Consolidation by inserting a provision [22] requiring New Bounty to repay the Advance and all other moneys due by it within 10 days of a written demand by Newbart. The 2011 Deed of Variation also inserted a new clause as follows:

“5.5   Interest Owing by [sic] Oldtex

(a)   Subject to (b), the Borrower acknowledges that the Lender and the Borrower agreed that the Lender may call for interest to be paid on the Advance from the date the Advance was made available by Oldex [sic] … to the Lender [sic] (the Origination Date) as if the Lender was the lender of the Advance from the Origination Date.

(b)   The Borrower acknowledges that Interest, if called pursuant to (a), will accrue from the Origination Date and be calculated as accruing from that date until the loan is repaid in full.”

The “Origination Date” was defined to mean 1 October 1999.

22. Clause 4.1.

2012 until October 2013

64. On 23 April 2012, the then directors of AWM (Mr Bart and Mr Parker) resolved that AWM should return $8.653 million of its issued capital to the shareholder (New Bounty) “to increase the loan”.

65. In mid 2012, the board of AWM determined that the business should be relocated from Devonport to Wangaratta in Victoria. The proposed move involved closing down the operations in Devonport.

66. On 21 June 2012, AWM and New Bounty entered into a written Agreement. The Agreement recited the 2001 deed by which New Bounty lent AWM $1.75 million and recorded that the amount owing under the deed as at 21 June 2012 was $1.839 million. The Agreement also recited that New Bounty had agreed to lend AWM a further $8.653 million (Additional Sum), subject to the security already in place. The total loan therefore amounted to $10.492 million. The loan was repayable at the expiration of twelve months, but the term of the loan could be extended. New Bounty could demand interest on the Additional Sum calculated at 4 per cent above the 90 day bank bill rate.

67. By an “Agreement for Sale of Shares” dated 27 August 2012, New Bounty sold its 100 per cent interest in AWM to another company controlled by Mr Bart, Mark Foys Pty Ltd (Mark Foys). The consideration for the sale was $1.00. According to Mr Bart, the sale price recognised that Mark Foys was to bear the cost of relocating AWM’s business from Tasmania to Victoria and that, accordingly, it was appropriate that Mark Foys should acquire a controlling interest in AWM.

64. On 10 September 2012, Newbart sold its shareholding in New Bounty to Baron at a price of one cent per share. Following the sale, Baron held 90.68 per cent of New Bounty’s shares.

65. On 15 November 2012 Baron lodged a Notice of Compulsory Acquisition with the ASIC pursuant to s 664C(1) of the Corporations Act. The notice stated that Baron proposed to acquire all shares it did not hold at a price of one cent per share.

66. Between 15 November and 18 December 2012, Winpar and eleven other shareholders, who collectively held 5.77 per cent of the shares in New Bounty, lodged with the ASIC Notices of Objection to the proposed compulsory acquisition of their shares.

67. Baron instructed RSM Bird Cameron Corporate Pty Ltd to prepare an independent expert’s report in connection with Baron’s intention to acquire all shares in New Bounty that it did not own. RSM Bird Cameron prepared a report dated 12 November 2012, in which it assessed the fair market value of New Bounty shares at $nil. The report assessed the fair value of the AWM Loan at between $1.358 million and $1.458 million.

68. As previously noted, on 16 January 2013, New Bounty and Baron commenced proceedings in the Supreme Court of Tasmania against the objectors seeking approval for the compulsory acquisition of their shares in New Bounty. New Bounty and Baron filed an amended originating application in those proceedings on 18 February 2013.

69. On 22 January 2013, Mr Bart signed the financial statements for New Bounty for the year ended 30 June 2012. The balance sheet recorded New Bounty’s net assets on that date at $7.982 million. However, it had lost $1.414 million for the year. The Notes to the accounts recorded that the New Bounty Loan amounted to $2.3 million as at 30 June 2012. Interest had not been charged during the year, but Newbart had the right to charge interest at any time on the outstanding balance from 1 July 2004. The contingent liability for interest payable was $3.551 million.

70. AWM’s balance sheet as at 30 June 2012 showed a net deficiency of $0.975 million. The financial report for the year ended 30 June 2012 noted that its weaving operations in Tasmania had been moved to a related company in Victoria. The report also noted that AWM owed New Bounty $10.492 million. New Bounty had not yet elected to charge interest on the loan but had the right at any time to charge interest on the outstanding balance from 7 April 2008 onwards. As at 30 June 2012, the contingent liability for interest payable was $0.95 million.

71. On 17 January 2013, an application was lodged on behalf of Newbart and New Bounty to rezone the Devonport Premises for future development for “Bulky Goods Sales”. It appears that the application was adopted by the Devonport City Council and forwarded to the Tasmanian Planning Commission. However, in late 2013, before the Commission could deal with the matter, a new planning scheme was adopted. The result was that the re-zoning application effectively lapsed.

72. On 31 January 2013, Baron wrote to Newbart stating that Baron agreed to assume responsibility for the repayment of the New Bounty Loan (apparently meaning that Baron would take an assignment of the New Bounty Loan). Mr Bart signed the letter on behalf of both Baron and Newbart.

73. Between 15 January 2013 and 12 February 2013, Winpar (through Mr Elkington) and New Bounty (through Mr Bart) engaged in correspondence concerning Baron’s Notice of Compulsory Acquisition.

74. By a Deed of Assignment dated 24 April 2013 between New Bounty, Baron and Newbart, Newbart agreed to assign to Baron the New Bounty Loan and the benefit of the charges held by Newbart over New Bounty’s assets. The Deed of Assignment recorded that as at January 2013 the total of the New Bounty Loan was $2.3 million. Mr Bart signed the Deed of Assignment on behalf of all three parties.

75. Mr Bart signed New Bounty’s financial statements for the year ended 30 June 2013 on 11 December 2013. The balance sheet as at 30 June 2013 recorded the New Bounty Loan as a current liability of $4.594 million, up from $2.3 million the previous year. Trade and other receivables were reduced from $9.517 million in the 2012 balance sheet to $2.636 million, reflecting a provision for impairment of amounts advanced to related entities, including AWM. The Profit and Loss Statement for the 2012-2013 year included impairment losses for New Bounty of $7.8 million.

76. The Notes to the 2013 financial statements recorded that interest was payable for the life of the New Bounty Loan. Although the New Bounty Loan had not been called at 30 June 2013, “due to the weaker position of the group a provision has been included for interest payable on this loan”. Mr Bart gave evidence that he was responsible for including the provision for interest in the financial statements for 2012-2013.

77. On 23 October 2013, AWM informed the Tasmanian Environment Protection Authority (EPA) that textile bleaching, dyeing and printing operations at the Devonport Premises would cease at the end of 2013. The EPA informed AWM on 31 October 2013, that a Decommissioning and Rehabilitation Plan would be required for the site. On 5 November 2013, a Tasmanian consultant provided AWM with a two page report estimating the remediation cost for the site at $4.442 million. Ten days later, Baron’s solicitors forwarded the estimate to the solicitors for the minority shareholders. The covering letter asserted that the cost of remediation had not been factored into previous valuations and that if “there was any doubt whatsoever about the certainty of failure of your clients [sic] case, that doubt should now be removed”.

78. On or about 31 October 2013, as advised to the EPA, AWM ceased to trade from the Devonport Premises. Thereafter it paid no further rent to New Bounty.

Events Leading to the Administration of New Bounty

83. On 5 and 19 March 2014 Mr Bart met with Mr Nicodemou of BRI Ferrier. Rather curiously Mr Nicodemou kept no notes of the meetings. However, Mr Bart prepared an undated document entitled “Notes for meeting” which, as he confirmed in evidence, set out his thoughts in advance of the meetings. Mr Nicodemou accepted that he received a copy of the notes at the first meeting and that they provided the basis for discussions between Mr Bart and himself.

84. The notes recorded that the process for the compulsory acquisition of the minority shareholdings had been opposed by a group of shareholders marshalled by Mr Elkington. According to the notes, Mr Elkington had extensive experience with the process and had adopted “a strategy of dragging the matter out ad infinitum” with a view to increasing costs. The notes suggested that the strategy was designed to cause the acquiring company to buckle to “greenmailing” and pay more for the shares than they were worth. However, Mr Bart was hopeful that Baron would not end up paying the costs of the litigation, although the costs already dwarfed the value of the shares.

85. The notes continued as follows:

“[Baron] may lose interest in protracted litigation, and simply call its loan from [New Bounty], necessitating the appointment of an administrator.

As a potential liquidation of [New Bounty’s] illiquid assets would cause shareholders to see nothing (as foreshadowed in the Independent Expert report), and even [Baron], as sole secured creditor to see part of its debt evaporate, [Baron] would propose a DOCA, whereby it would agree to stand still, and NOT press for its money, and would offer to pay all existing creditors (but not contingent creditors) 100cts on the dollar, and pay the shareholders a token value (perhaps slightly more than the compulsorily acquisition price), moving [Baron] to 100% ownership.

The creditors win (there are only a handful of them), because they get all of their money, rather than nil; the shareholders win, because they get something (more than the offer, and far more than the expert valued the shares at), and the company wins, because it sidesteps the vexatious litigation, and continues in business.

The vexatious litigant, who, because there has not been a decision, or a costs order, may end up bearing the costs himself, or [Baron], as the acquirer, may have to pay the costs ‘to date’.”

(In his evidence Mr Bart said that when preparing the notes he had not appreciated that Pt 6A.2 of the Corporations Act does not permit a party lodging a compulsory acquisition notice to alter the terms of the offer under the notice while the compulsory acquisition process is under way. [23] )

23. See Corporations Act, s 664D(1).

86. Mr Bart asked Mr Nicodemou whether he had missed anything and sought Mr Nicodemou’s advice on a number of matters:

“A.   Baron is considering appointing an administrator to protect its interest.

B.   A DOCA may see him [Mr Elkington] getting nothing for his shares (because they clearly have no value).

C.   The compulsory acquisition would be halted, and it is likely that no cost order would be made, leaving him with his whole legal bill.

Baron would prefer not to go down that path, but will, if sensible arrangement is not made.”

87. According to Mr Nicodemou, whose evidence was not challenged, Mr Bart informed him at the first meeting that Baron intended to make the Demand and that New Bounty would then be insolvent. Mr Nicodemou asked Mr Bart why Baron had decided to call up the loan facility and Mr Bart had replied as follows:

“Baron holds approximately 91% of the shares in New Bounty. In 2012 Baron sought to compulsorily acquire the remaining shares in New Bounty. There are proceedings on foot in Tasmania which have been going for more than a year. Baron was interested in supporting New Bounty to develop a property in Devonport. However, Baron is unwilling to advance further moneys to New Bounty unless it owns 100% of New Bounty. Given that the proceedings in Tasmania are unlikely to settle any time soon Baron has now run out of patience and no longer wishes to support New Bounty. New Bounty is only able to operate with the continued support of related companies providing loan funds to New Bounty. More than 90% of the company’s liabilities are owed to related parties. As Baron does not wish to continue supporting New Bounty I expect the company will have to go into voluntary administration.”

88. Mr Bart resigned as a director of AWM on 28 March 2014. As has been noted, he resigned as a director of New Bounty on 31 March 2014. In his evidence, Mr Bart said that he resigned as a director of New Bounty because he believed that he would have a conflict of interest if he continued to act as a director in circumstances where he had formed the view “as a director of Baron” to call in the New Bounty Loan.

89. Shortly before Mr Bart resigned as a director of New Bounty he had a conversation with Mr Parker, to the following effect:

“Geoff, I have decided it may be best if I resign as a director of New Bounty. As you know Baron is a creditor of New Bounty. Given the problems with the closure of the Devonport mill, the inability for New Bounty to redevelop the site and New Bounty’s current financial difficulties I have formed the view that Baron is not prepared to extend further financial support to New Bounty and I plan to have Baron call in the loan. I’m also annoyed that the Tasmanian proceedings haven’t been resolved and this is costing Baron a lot of money. I can’t see why Baron should continue supporting New Bounty. Given that I plan to have Baron call in the loan I think it may be best if I resign so you can decide what should happen to New Bounty. If you decide to put the company into voluntary administration I think Baron may be prepared to support an arrangement which involves Baron converting part of its debt into equity. Baron is willing to support a deed of company arrangement to allow New Bounty to continue to pursue the possible redevelopment of the Devonport site as this is the only prospect for Baron to be repaid the whole of its debt.”

90. On 3 April 2014, Mr Bart wrote to Mr Parker, by then the sole remaining director of New Bounty, as follows:

“As I have advised you, I have resigned as the director of New Bounty Pty Ltd (New Bounty).

I have done this, so as not to create a conflict of interest, as this letter is, in fact, a Notice of Demand for New Bounty to repay its total debt plus interest, to Baron Corporation Pty Ltd (Baron).

Baron has simply lost patience with the shenanigans being played in the compulsory acquisition process, and needs its debts repaid promptly.

I note the amount is $4,552,710.

I recognise that the company does not have the liquid resource to repay this debt on demand.

Perhaps a sensible solution would be to consult an insolvency practitioner regarding a voluntary administration.

I await your urgent response.”

91. After receiving this letter, Mr Parker formed the view that since Baron had withdrawn its support, New Bounty was insolvent. He then contacted BRI Ferrier (it is not entirely clear whether he spoke to Mr Nicodemou). On 3 April 2014 the Administrators (both principals of BRI Ferrier) signed a Consent to Act as Administrators.

New Bounty in Administration

92. On 4 April 2014, Mr Parker as the sole director of New Bounty resolved pursuant to s 436A of the Corporations Act to appoint the Administrators as Joint and Several Voluntary Administrators of New Bounty.

93. The Administrators prepared their First Report to Creditors (First Creditors Report) on 8 April 2014. The First Creditors Report noted that New Bounty was a non-trading entity. It recorded that Baron had two fixed and floating charges over New Bounty’s assets.

94. An annexure to the First Creditors Report stated that the “appointment was referred to us by Philip Bart, a former director of the Company”. The annexure informed creditors that prior to the Administrators’ appointment, Mr Bart had held two meetings with Mr Nicodemou, a member of BRI Ferrier’s staff.

95. The first Meeting of Creditors, held pursuant to s 436E of the Corporations Act, took place on 16 April 2014 in Sydney. The meeting was chaired by Mr Nicodemou. Mr Bart attended as an observer.

96. On 24 April 2014, Mr Ryckmans, a solicitor, confirmed in an email to Mr Nicodemou that he had been asked by Mr Bart to prepare a draft deed of company arrangement. On 29 April 2014, Mr Ryckmans sent the draft DOCA “proposed by the director of New Bounty” to Mr Garofano of BRI Ferrier, with copies to Mr Nicodemou and Mr Bart (but not to Mr Parker). The following day, Mr Garofano raised queries with Mr Ryckmans concerning the effect of the draft DOCA on related party claims. The queries were answered by Mr Bart in an email sent directly to Mr Garofano.

97. On 2 May 2014 the Administrators presented a Report to Creditors (439A Creditors Report) as required by s 439A of the Corporations Act. I refer to the Report to Creditors in more detail later. [24] However, it is convenient to note that the Report to Creditors attributed a value of $4.553 million to Baron’s claim against New Bounty in respect of the New Bounty Loan. The Administrators reported that Baron had exercised its right to receive an interim distribution from assets subject to its security interests. Accordingly, it had received an interim distribution of $250,000, thereby reducing its claim to $4.302 million. The Administrators expressed their opinion that it was in the interests of creditors to execute the DOCA annexed to the 439A Creditors Report.

    24. See at [108]-[120] below.

98. On the same day as the Administrators presented the 439A Creditors Report, AWM was placed in voluntary administration.

99. The second Meeting of Creditors of New Bounty took place on 9 May 2014. The Meeting resolved to execute the DOCA in the form annexed to the 439A Creditors Report.

100. On 12 May 2014, the DOCA was executed. Its terms have been set out earlier. [25]

     25. See at [27]-[33] above.

101. Following execution of the DOCA, New Bounty paid $119,278 into the Deed Fund. The unsecured creditors of New Bounty were paid in full out of the Deed Fund.

102. On 13 May 2014, New Bounty issued 1,511,954,800 shares to Baron, thereby increasing Baron’s shareholding in New Bounty from about 90.7 per cent of the issued capital to about 99.4 per cent.

103. The administrators of AWM (the same Administrators) provided their report to creditors under s 439A of the Corporations Act on 29 May 2014. The administrators’ valuation as at 2 May 2014 revealed that AWM had a deficiency of liabilities over assets of $8.429 million. New Bounty was recorded as a secured creditor in the sum of $12.119 million. AWM’s largest asset was $5.242 million in pre-administration debtors, of which $3.708 million represented the administrators’ valuation of AWM’s impaired loan to Australian Weaving Pty Ltd. The administrators stated that if AWM was placed into liquidation, there would be no return to unsecured creditors, largely because of New Bounty’s secured advance of $12.119 million.

104. As previously noted, Mr Bart was reappointed as a director of New Bounty on 9 June 2014. He was reappointed as a director of AWM on the same day.

105. On 2 July 2014, New Bounty’s solicitors sent a letter to the solicitors representing the minority shareholders in the proceedings in the Supreme Court of Tasmania. The letter referred to the terms of the DOCA which called on Baron to forego its “capital and accrued interest” of $3.7 million in exchange for an issue of new shares. It continued as follows:

“Given the minimal value of the remaining shares that your clients now hold, there is little purpose in proceeding with the compulsory acquisition for such a diminutive share parcel.

…

The simple fact is that your clients [sic] shares are virtually worthless.”

The letter proposed that the proceedings be discontinued with no order as to costs.

106. The administration of New Bounty ceased on 4 July 2014. The Administrators duly certified to ASIC that the DOCA had been wholly effectuated by its terms and thus had terminated by virtue of s 445C of the Corporations Act.

107. Winpar commenced the current proceedings in the Equity Division on 1 August 2014.

The 439A Creditors Report

108. The 439A Creditors Report prepared by the Administrators recorded a number of significant matters.

New Bounty’s Financial Position at 31 March 2014

109. The 439A Creditors Report set out New Bounty’s financial position at 31 March 2014. The company’s Current Assets were $369,704, apparently entirely consisting of cash. Current Liabilities were recorded as $4.583 million of which $4.553 million (or an amount very close to that figure) comprised the New Bounty Loan due to Baron, inclusive of interest. The Administrators stated that the Company Secretary had advised that New Bounty:

“had not accounted for interest on the Baron loan until 30 June 2013 due to the Company’s Directors believing it more likely than not that it would only be a matter of time that Baron would call on the interest due by the Company. This was due to the deterioration of AWM’s financial position which was leading to the impairment of the Company’s loan to AWM.”

110. New Bounty’s Current Ratio (Current Assets compared to Current Liabilities) was therefore 0.08. The Administrators stated that a Current Ratio below one suggests that Current Assets are insufficient to meet Current Liabilities as they fall due. The Administrators noted that the Current Ratio was 0.05 on 30 June 2011, 0.06 on 30 June 2012 and 0.05 on 30 June 2013. Thus New Bounty’s Current Assets had been insufficient to meet its Current Liabilities from at least 30 June 2011. Clearly this assessment took account of the New Bounty Loan, inclusive of interest, even though Baron had made no demand for payment until 3 April 2014.

111. The 439A Creditors Report also stated that it was arguable that Baron’s debt should be excluded from New Bounty’s working capital position:

“The reason being that the debt due to Baron was not due and payable until called upon. Baron issued a demand to the Company on 3 April 2014 and at that date Baron’s debt became due and payable. The fact that the debt due to Baron has an originating date of 1 October 1999 also suggests this debt was not immediately due and payable by the Company prior to Baron’s demand being served.”

83. Hanson Construction Materials Pty Ltd v FEC Civil Pty Ltd [2009] NSWSC 231 at [15] (Barrett J).

248. The principles governing the assessment of a company’s solvency were helpfully summarised by Palmer J in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation. [84] The propositions stated by his Honour include the following:

     84. [2001] NSWSC 621; 53 NSWLR 213 at [54].

“(i)   whether or not a company is insolvent for the purposes of [s 95A], is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole;

(ii)   in considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than case are realisable by sale or borrowing upon security, and when such realisations are achievable;

…

(v)   in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court’s satisfaction, that:

●   there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or

●   there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or

●   there has been a well-established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors’ terms of trade or are payable only on demand;

(vi)   it is for the party asserting that a company’s contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence.” (Citations omitted.)

249. Mr Brennan is correct to submit that unless and until Baron again calls upon the New Bounty Loan, New Bounty, as a commercial reality, will remain solvent. It is also correct that Mr Bart was motivated to call up the New Bounty Loan because he wished to bring about the dilution of the minority’s interests. When Mr Bart did so, the only commercially feasible action at the time was to place New Bounty in administration.

250. But the fact that if the New Bounty Loan is restored in full, the company’s liabilities will greatly exceed its assets. If the New Bounty Loan is regarded as a Current Liability (as it was in the accounts for 2012-2013 and 2013-2014 years), Current Liabilities will exceed Current Assets by over $4 million.

251. The evidence does not enable a finding to be made as to whether Baron will make a further demand for payment of the New Bounty Loan, should the Proposed Orders be made. Mr Bart repeatedly asserted that Baron was no longer prepared to act as New Bounty’s financier. Whether he would maintain that position if the Proposed Orders were to be made was not explored in the evidence. No doubt his future actions should the Proposed Orders be made, will be determined to a considerable extent by his response to the continued existence of the minority shareholders.

252. I am prepared to infer from Mr Bart’s evidence, and from the way New Bounty’s affairs have been conducted, that the directors would ensure, so far as practicable, that the interests of New Bounty’s few unsecured creditors would not be prejudiced. However, that would be true whether or not the Proposed Orders were made.

253. It is a matter of speculation whether, if the Proposed Orders are made, Baron will make a further demand and, if so, whether New Bounty will remain in existence. Given that its ability to remain solvent is entirely dependent on Baron’s forbearance, I cannot conclude that the making of the Proposed Orders would restore New Bounty to solvency as a matter of commercial reality. Nor can I conclude, despite the unattractiveness of liquidation as an option in the circumstances prevailing on 3 April 2014, that New Bounty will not be placed into liquidation in the different circumstances prevailing if the Proposed Orders were to be made.

254. The uncertainty as to New Bounty’s solvency and continued existence should the Proposed Orders be made is a factor militating against the exercise of the statutory discretion in favour of making the Proposed Orders.

255. The third consideration is related to the second. The utility of making the Proposed Orders (or granting other relief) is not apparent. Winpar did not attempt to lead evidence of the true market value of its shares. The 439A Creditors Report and the Statement of Financial Position suggest that the shares are valueless and were valueless at the time New Bounty was placed in administration. (This was the conclusion reached in the expert report prepared on Baron’s behalf in the Tasmanian proceedings in November 2012.)

256. Mr Brennan pointed to uncertainty as to the realisable value of the Devonport Premises and the possibility that New Bounty might utilise its accumulated tax losses. But even on a favourable view, it is difficult to see how these considerations alone could produce value for the minority shareholders.

257. It is undoubtedly true that Mr Bart would not have attempted to dilute the interests of the minority shareholders unless he thought that there was an advantage to him in doing so. But if the minority shareholders remain on the register, I cannot conclude that Mr Bart will take action to restore New Bounty to a position where its net assets exceed its liabilities. I therefore cannot find that the dilution of Winpar’s minority interest has had any significant effect on the value of its shares.

258. Mr Brennan suggested that the prejudice suffered by Winpar was that it had been denied the opportunity to negotiate a fair price for its shares. The evidence suggests that the price it was offered in the compulsory acquisition proceedings was at least arguably fair. In any event, in the absence of evidence that the shares were worth more than the price offered, I do not think that the lost opportunity carries substantial weight in relation to the exercise of discretion.

259. For these reasons, if the Court has power to make the Proposed Orders, in the exercise of my discretion I would decline to do so.

Proposed Orders 6-10

260. Winpar relies on what it describes as the general “catch all” terms of s 1324 of the Corporations Act to support Proposed Orders 6-10. Mr Brennan contends that Proposed Orders 6-8 and 10, which are directed against Baron are within the power conferred by s 1324 because Mr Bart’s conduct constituted a contravention of s 182 of the Corporations Act and Baron was a person knowingly concerned in Mr Bart’s contravention. [85] Mr Brennan further contends that Winpar is entitled to seek an order under s 1324 because Winpar is a person whose interests have been affected by the conduct. [86] That is so because an element in Mr Bart’s contravention of s 182 was the insolvency of New Bounty. [87]

     85. Section 182(1)(a), (b), reproduced at [22] above.

     86. Corporations Act, s 1324(1).

     87. Corporations Act, s 1324(1A).

261. Winpar supports Proposed Order 9 on the ground that New Bounty contravened s 260A of the Corporations Act by financially assisting Baron to acquire shares in New Bounty.

A Contravention of s 260A?

262. Winpar’s case that New Bounty contravened s 260A of the Corporations Act changed in the course of the proceedings. The original contention seemed to be that the Deed Fund was used to finance at least part of the allotment of shares to Baron. When it became apparent that no portion of the Deed Fund was used directly for this purpose, the argument changed. As finally formulated, it was that since New Bounty provided the moneys for the Deed Fund and since the Deed Fund paid the Administrators’ costs, New Bounty had financially assisted Baron to acquire shares in itself. I think it fair to say that the argument was not strongly pressed.

263. While New Bounty paid moneys into the Deed Fund, none of those moneys were used to provide financial assistance to Baron to acquire the shares. While the predominant purpose of the administration, as I have found, was to dilute the interests of minority shareholders, the consideration for the issue of the shares to Baron was the forgiveness of a genuine debt due to Baron by New Bounty. The Administrators were validly appointed and they exercised their statutory function in good faith. The payment of their fees out of the Deed Fund cannot in my view be characterised as providing financial assistance to Baron to acquire shares in New Bounty.

264. In any event, a contravention of s 260A does not invalidate the acquisition of shares for which the financial assistance was provided. Section 260D(1) of the Corporations Act states that if a company provides financial assistance in contravention of s 260A, the contravention does not affect the validity of the financial assistance or any transaction connected with it. In view of s 260D(1), it is difficult to see how Winpar’s claim for injunctive relief under s 1324, insofar as it is founded on a contravention of s 260A, could succeed.

265. Insofar as Winpar’s claim for injunctive relief rests on a contravention of s 260A of the Corporations Act, it must be rejected.

Other Proposed Orders

Proposed Order 7

266. Among the principles which govern the grant of injunctive relief pursuant to s 1324 of the Corporations Act is that the order must not be expressed in terms which leave unclear the form of conduct that will expose a party to the consequences of breaching a court order. [88] A party bound by a final injunction must know what is expected as a matter of fact. [89] Thus an injunction must be in clear and unambiguous terms which leave no room for the persons to whom they are directed to wonder whether or not their future conduct falls within the scope or boundaries of the injunction.

     88. Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13; 205 CLR 1 at [60] (Gleeson CJ, Gummow, Hayne and Callinan JJ).

     89. Commodore Business Machines Pty Ltd v Trade Practices Commission (1990) 92 ALR 563 at 575 per curiam.

267. Proposed Order 7 does not meet these criteria. It would leave Baron (and Mr Bart) in doubt as to whether a demand for payment of the New Bounty Loan, or any part of it, is made “for the purpose of procuring the issue of equity in [New Bounty]”. I did not understand Mr Brennan to argue to the contrary.

268. Proposed Order 7 should not be made.

Proposed Orders 6 and 8-10

Principles

269. In Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd, [90] Palmer J summarised the principles governing the exercise of the jurisdiction conferred by s 1324 of the Corporations Act to grant injunctive relief to a person whose interests have been affected by conduct constituted as a contravention of the Act. Among the propositions stated by Palmer J are the following:[91]

     90. [2002] NSWSC 741; 42 ACSR 605.

     91. ASIC v Mauer-Swisse Securities at [36]. See also Ford’s Principles of Corporations Law (Loosleaf ed, LexisNexis) at [10.310.21].

“● the jurisdiction which the court exercises under CA s 1324 is a statutory jurisdiction, not the court’s traditional equity jurisdiction;

● Parliament has made it increasingly clear by successive statutory enactments that the court, in exercising its statutory jurisdiction under s 1324, is not to be confined by the considerations which would be applicable if it were exercising its traditional equity jurisdiction;

● among the considerations which the court must take into account in an application for an injunction under CA s 1324 are the wider issues referred to by [other authorities]; they may be gathered under the broad question whether the injunction would have some utility or would serve some purpose within the contemplation of the Corporations Act;

● these considerations are to be taken into account regardless of whether the application is for a permanent injunction under s 1324(1) or for an interim injunction under s 1324(4);

● where an application under s 1324(4) is made by ASIC rather than a private litigant the court is more likely to give greater weight to the broad question whether the injunction would serve a purpose within the contemplation of the Corporations Act.”

Procedural Issues

270. Proposed Orders 6, 8 and 10 seek orders against Baron. Proposed Order 9 seeks an order requiring New Bounty to rectify its share register, presumably on the ground that such an order is consequential on the relief granted against Baron.

271. The 2FAPC pleads that Mr Bart, in contravention of s 182 of the Corporations Act, improperly used his position as an officer of New Bounty to gain an advantage for himself and New Bounty. The advantage is said to be enabling Baron to dilute the interests of minority shareholders and to increase its proportionate shareholding in New Bounty.

272. There is no allegation in the 2FAPC that Baron was knowingly involved in Mr Bart’s alleged contravention of s 182 of the Corporations Act. Winpar’s opening written submissions advanced no such contention. The opening written submissions appear to have been framed on the assumption that a contravention by Mr Bart of s 182 of the Corporations Act would support orders under s 1324(1) against the Defendants.

273. If that was the assumption underlying the submissions, it is wrong. Section 1324(1) applies (relevantly) where a person has engaged in conduct that constituted a contravention of the Corporations Act. If such a contravention is established, the Court may grant an injunction restraining that person from engaging in the conduct or requiring that person to do something. A contravention of s 182 by Mr Bart, of itself, would not support Winpar’s claim for injunctive relief against Baron or New Bounty.

274. The first reference to Baron being knowingly involved in Mr Bart’s contravention is Winpar’s closing submissions. It is there asserted, without elaboration, that as Baron was knowingly involved in the contravention, it is open to the Court to make the orders sought by Winpar under s 1324 of the Corporations Act. Presumably because the issue was raised late in the proceedings, neither party gave close consideration to whether Baron could be said to have been knowingly involved in Mr Bart’s contravention when in Winpar’s case Mr Bart was acting as an “officer” of New Bounty when he contravened s 182.

275. A further procedural issue, although not one identified by the parties, is whether Mr Bart should have been joined by Winpar as a defendant. The linchpin of Winpar’s claim for relief under s 1324(1) of the Corporations Act is that Mr Bart contravened s 182 by improperly using his position as an officer of New Bounty to gain an advantage for himself or to cause detriment to the minority shareholders in New Bounty.

276. Winpar does not seek relief against Mr Bart personally. Ordinarily, this would eliminate the need to join him as a defendant since he would not be a person whose rights or liabilities would be directed affected by the Proposed Orders. [92] However, there may be circumstances in which a third party whose interests are adversely affected by the orders sought in the proceedings ought to be joined as a party. [93]

     92. See John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; 241 CLR 1 at [131]-[132] per curiam.

     93. McIntosh v Williams [1979] 2 NSWLR 543 at 561 (Hutley JA, Moffitt P and Samuels JA agreeing); cf Walker v Commonwealth Trading Bank of Australia [1985] 3 NSWLR 496 (Needham J).

277. As neither party has raised the issue I do not think it appropriate to say more than that it is arguable that Mr Bart should have been joined as a defendant. It is an essential element of Winpar’s case for injunctive relief (once s 260A of the Corporations Act is put to one side) that Mr Bart contravened s 182. Section 1317E(1) of the Corporations Act requires the Court, if satisfied that a person has contravened s 182, to make a declaration to that effect. I appreciate that the application of s 1317E, where the person concerned is not a party to the proceedings, may present issues not explored in the present proceedings. I also appreciate that any finding made in these proceedings, given that Mr Bart is not a party, would not bind him and that, as a practical matter, he has had an opportunity to resist the claims advanced by Winpar. Nonetheless, Winpar’s case does seem to me to give rise to a real question as to whether Mr Bart should have been joined.

Exercise of Discretion

278. I have found that Mr Bart was an “officer” of New Bounty from 31 March 2014 until he resumed his position as a director on 9 June 2014. Because I propose to refuse relief under s 1324(1) of the Corporations Act on discretionary grounds and because I have concerns about the procedural matter to which I have referred, I do not think it appropriate to make a finding that Mr Bart contravened s 182 of the Corporations Act, as alleged by Winpar. [94] I am prepared to assume that he contravened s 182 by exercising his de facto authority as an officer of New Bounty to procure the dilution of the interests of minority shareholders.

     94. In determining whether to find that Mr Bart contravened s 182 of the Corporations Act, it would be necessary to have regard to s 140 of the Evidence Act 1995 (NSW). Section 140(2)(c) requires the Court, in deciding whether a matter is established on the balance of probabilities, to take into account the gravity of the matters alleged.

279. Winpar’s claim to injunctive relief rests on essentially the same factual foundation as its claim for an order under s 447A or the Corporations Act. Having refused relief under s 447A on discretionary grounds, it is inappropriate to exercise the discretion conferred by s 1324 to make orders having the same practical effect. Specifically, the reasons I have given for declining relief under s 447A apply equally to Winpar’s claim for injunctive relief under s 1324.

280. I therefore decline to make Proposed Orders 6 and 8-10 as sought by Winpar.

Orders

281. The proceedings must be dismissed. Winpar must pay the Defendants’ costs.

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Endnotes

Decision last updated: 05 August 2015