In the Matter Of Nukleen Int Pty Ltd (in Liquidation)(Subject To A Deed Of Company Arrangement) ACN 158 147 767 - [2014] SASC 30

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
IN THE MATTER OF NUKLEEN INT PTY LTD (IN LIQUIDATION)(SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 158 147 767
[2014] SASC 30
Reasons of Judge Dart a Master of the Supreme Court
6 March 2014
CORPORATIONS - WINDING UP
Application by liquidator for order terminating winding up - liquidator previously appointed administrator by the creditors - Deed of Company Arrangement entered into - relevant considerations - s 439A report to creditors - Corporations Act 2001 (Cth) s 482.
Corporations Act 2001 (Cth) s 436B, s 439A, s 445D, s 482 and Part 5.3A, referred to.
Mercy & Sons Pty Ltd and Others v Wanari Pty Ltd (subject to deed of company arrangement)(in liq) (2000) 35 ACSR 70; Re SMITH (in their capacity as joint and several liquidators of MATRIX METALS LTD (in liq) [2011] FCA 1399, applied.

IN THE MATTER OF NUKLEEN INT PTY LTD (IN LIQUIDATION)(SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 158 147 767
[2014] SASC 30

On 3 March 2014 I made an order, pursuant to s 482 of the Corporations Act 2001 (“the Act”), terminating the winding up of Nukleen Int Pty Ltd (“the Company”). The order was made on the application of the liquidator of the Company. At the time I indicated that I would provide some short reasons for making the order.
The Company was wound up in insolvency by an order of this Court on 10 September 2013 and Mr Koch was appointed its liquidator. Shortly after the making of the winding up order the sole director of the company, Mr Peter James, by his solicitors, approached the liquidator with a proposal.
The proposal was that third party investors would provide monies to the Company with the view to the Company being able to re-establish itself and pay its creditors. The liquidator prepared a brief report to creditors dated 17 September 2013 and convened a meeting of the creditors to be held on 3 October 2013.
The purpose of the creditors meeting was to permit the creditors to consider whether the Company should be placed into voluntary administration pursuant to the provisions of s 436B of the Act. The section permits a liquidator to appoint an administrator to a company if the company is insolvent. There is no doubt that the Company was insolvent. The liquidator could have appointed an administrator without calling a creditors meeting.
The Act provides that a liquidator is not to appoint himself administrator unless the company’s creditors pass a resolution approving the appointment, or the appointment is made with the leave of the Court.[1]
[1] Section 436B(2)(f) and (g).
At the meeting held on 3 October 2013 the creditors agreed that the Company should go into administration. They resolved that Mr Koch become administrator of the Company. The Company passed from being wound up to voluntary administration.
The provisions of s 439A of the Act then required Mr Koch to prepare a report to creditors, which he did. The report, dated 31 October 2013, contained a detailed summary of the financial position of the Company and the proposal put forward by Mr James.
The main components of the proposal were that:
1Third party investors would provide the sum of $300,000, to be paid into a fund.
2The fund was to be controlled by Mr Koch.
3From the fund, the sum of $200,000 was to be utilised to renovate and modernise the company’s premises at Winnelli.
4Mr Koch was to be in control of the renovation of the company premises.
5A nominated person was to be appointed to the position of General Manager of the company and a new bookkeeper was also to be appointed.
6The balance of the fund, being $100,000, was to be utilised to pay the liquidator’s fees and make payments to creditors.
7The creditors of the Company were to resolve that the Company enter into a Deed of Company Arrangement (“DOCA”) containing the above terms.
8The DOCA be in existence for 24 months, during which time surplus trading funds be paid to Mr Koch.
9The intent of the DOCA is that the creditors be paid in full by the expiration of the 24 month period.
Mr Koch formed the opinion that the DOCA proposal was in the best interests of the creditors of the Company. That opinion was formed after considering the alternatives of entering into a DOCA or continuing with the winding up process. In his 439A report Mr Koch stated that in the winding up the ordinary unsecured creditors were unlikely to receive any dividend.
The creditors of the Company resolved at a meeting on 8 November 2013 that the Company execute a DOCA encapsulating the terms of the proposal. In the result, different investors from those nominated in the original proposal provided the sum of $300,000. Mr Koch has received and has control over the $300,000.
The intent of the DOCA is that the unsecured creditors of the Company will be paid in full over a period of 24 months. During that period the Company will continue to trade and, at the completion of that period, it should be a viable and solvent entity.
It appears, perhaps counter-intuitively, that the appointment of an administrator to the Company did not bring the winding up to an end. Nor did the resolution of the creditors to have the Company enter into the DOCA.
The explanation for that result is set out by Austin J in Mercy & Sons Pty Ltd and Others v Wanari Pty Ltd (subject to deed of company arrangement)(in liq).[2]In short, a liquidator appointed by the Court is an officer of the company. The effect of s 437A of the Act is that when a company goes into administration, it is only the administrator who is able to assume control of the company’s affairs. The authority of any prior officer of a company, in this case the liquidator, is suspended during the period of the administration. However, the previous office continues to exist in a suspended state.
[2] (2000) 35 ACSR 70.
Once a DOCA has been performed, it will terminate and the authority of the administrator will terminate with it. A company will then return to its previous state. The Company here would return to being in liquidation. It is to avoid that consequence that this application to terminate the winding up has been made.
This application is brought pursuant to s 482 of the Act to terminate the winding up, allow the Company to continue in administration and permit the DOCA to be performed. Section 482 of the Act provides as follows:
482Power to stay or terminate winding up
(1)At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.
(1A)An application may be made by:
(a)in any case—the liquidator, or a creditor or contributory, of the company; or
(b)in the case of a company registered under section 21 of the Life Insurance Act 1995—APRA; or
(c)in the case of a company subject to a deed of company arrangement—the administrator of the deed.
(2)On such an application, the Court may, before making an order, direct the liquidator to give a report with respect to a relevant fact or matter.
(2A)If such an application is made in relation to a company subject to a deed of company arrangement, then, in determining the application, the Court must have regard to all of the following matters:
(a)any report that has been given to the Court by:
(i)the administrator, or a former administrator, of the company; or
(ii)the liquidator, or a former liquidator, of the company; or
(iii)ASIC;
and that contains an allegation that an officer of the company has engaged in misconduct;
(b)any report that has been lodged with ASIC by:
(i)the administrator, or a former administrator, of the company; or
(ii)the liquidator, or a former liquidator, of the company;
and that contains an allegation that an officer of the company has engaged in misconduct;
(c)the decision of the company’s creditors to resolve that the company execute a deed of company arrangement;
(d)the statement that was given under paragraph 439A(4)(b) when the company was under administration;
(e)whether the deed of company arrangement is likely to result in the company becoming or remaining insolvent;
(f)any other relevant matters.
(3)Where the Court has made an order terminating the winding up, the Court may give such directions as it thinks fit for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members of the company to elect directors of the company to take office upon the termination of the winding up.
(4)The costs of proceedings before the Court under this section and the costs incurred in convening a meeting of members of the company in accordance with an order of the Court under this section, if the Court so directs, forms part of the costs, charges and expenses of the winding up.
(5)Where an order is made under this section, the company must lodge an office copy of the order within 14 days after the making of the order.
In Re SMITH (in their capacity as joint and several liquidators of MATRIX METALS LTD (in liq)[3] Mckerracher J considered the factors relevant to determining whether or not, in circumstances such as this, the winding up of a company should be terminated. He noted that s 482(2A) of the Act sets out the matters that must be considered. His Honour also stated that, apart from the statutory considerations, the Court should also have regard to:[4]
1Whether the termination of the winding up was in the interests of creditors, including future creditors, the liquidator and contributories, and
2The terms and effects of the relevant DOCA and the extent to which the termination of the winding up will enable the DOCA objects and those of Part 5.3A of the Act to be achieved.
[3] [2011] FCA 1399.
[4] [2011] FCA 1399 at [11].
There appear to be three statutory matters relevant to the Court’s consideration of whether the application should be granted. They are the fact that the creditors of the Company resolved to execute a DOCA, the material contained in the s 439A report of the administrator and whether the DOCA would lead to the company remaining insolvent.
The decision of the Company’s creditors to have the Company execute a DOCA is of paramount importance. I will discuss that further below in relation to the non-statutory matters. It simply needs to be noted that the purpose of Part 5.3A of the Act is to give creditors a greater say in the fate of an insolvent company. It follows that the fact that the creditors of the Company resolved to have it enter into a DOCA is a significant matter.
Likewise, the administrator’s report contains the considered view of an insolvency expert who has investigated the financial position of the company and the terms of the proposed DOCA. It is a requirement of s 439A(4) of the Act that the administrator in his report makes a statement setting out whether, in his opinion, the creditors’ interests are best served by causing the Company to execute a DOCA, or whether their interests would be best served by the Company remaining in liquidation. The opinion of the administrator is that the creditors are better off having the Company execute the DOCA. The Court will, in the usual case, accept that opinion. The other matter to be considered is whether the DOCA is likely to result in the company becoming or remaining insolvent. The express purpose of the DOCA is to have the company return to solvency.
The two non-statutory matters are whether the termination of the winding up is in the interests of creditors and whether the termination of the winding up will enable the DOCA to be performed and the objects of Part 5.3A of the Act to be achieved.
If the winding up is not terminated, the DOCA will not be able to be performed. From the point of view of the investors, there is no point trading the Company on and paying future profits to the administrator, simply to then return to winding up. The termination, therefore, is in the interests of the creditors and will permit the DOCA to be performed.
The objects of Part 5.3A are to maximise the chances of a company continuing in business and achieve a better return for creditors than would result from an immediate winding up of the company.[5] The advantage of an administration is that it is more flexible than a winding up. It allows the people affected by the insolvency of a company, predominantly the creditors of the company, to fashion a more flexible remedy than is available in a winding up. A winding up is usually a blunt instrument. A liquidator will sell the assets, pursue recovery actions if any are available, and then conclude the winding up.
[5] Section 435A of the Act.
The flexibility provided by Part 5.3A has allowed the creditors to agree a moratorium on the repayment of their debt for a period of two years to allow the company to get back on its feet financially. The upside for the creditors is if the DOCA is successfully concluded they will be paid in full. If the Company remains in winding up, they will receive nothing. The DOCA proposal achieves both of the objects of Part 5.3A. That is, maximising the chances of the Company continuing in business and also producing a better return for creditors.
As in all trade-on DOCAs there is an element of risk for creditors. There is an unstated assumption in the DOCA that the Company, which has hitherto been in financial difficulty, will return to profitability. The creditors are entitled to make a considered decision to accept that risk, and they have done so. The Court should not lightly interfere with that process.
If it becomes apparent that the terms of the DOCA will not be able to be performed, there are protections available to the creditors. An application may be made to the Court pursuant to s 445D of the Act for an order terminating the DOCA. If the Court terminates a DOCA, a company is deemed to have passed a special resolution for winding up.[6]
[6] See sections 446B, 491 of the Act and Regulation 5.3A.07.
The creditors may also convene a meeting pursuant to s 445F of the Act. At such a meeting the creditors may pass a resolution terminating the DOCA and may also resolve that the company be wound up.
In my opinion, the relevant considerations establish that this is an appropriate matter in which to order a termination of the winding up of the Company.