In the Matter of Rugs Galore Australia Pty Ltd
[1999] VSC 250
•9 July 1999
SUPREME COURT OF VICTORIA
CORPORATIONS JURISDICTION Do not Send for Reporting Not Restricted
No. 5765 of 1999
In the Matter of The Corporations Law of Victoria
| RUGS GALORE AUSTRALIA PTY LTD (subject to deed of company arrangement) (ACN 007 203 779) | Applicant |
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JUDGE: | Gillard J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 16 and 18 June 1999 | |
DATE OF JUDGMENT: | 9 July 1999 | |
CASE MAY BE CITED AS: | In the Matter of Rugs Galore Australia Pty Ltd | |
MEDIA NEUTRAL CITATION: | [1999] VSC 250 | |
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Administration under Part 5.3A of Corporations Law – Application under s.447C to declare appointment of administrator valid – Company already subject to deed of company arrangement – Order made to terminate – Order stayed – Whether court has jurisdiction – Should court exercise it when necessary to grant a stay which may be permanent.
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APPEARANCES: | Counsel | Solicitors |
For the Applicant | Mr R.M. Garratt QC with | Wisewoulds |
| For the Creditor | Mr N. Wallace | Rosendorff Lawyers |
| For Dean Royston McVeigh & Colin McDonald (by leave) | Mr P.R. Hayes QC | Deacons Graham & James |
HIS HONOUR:
This is an application by notice of motion by a company which is subject to a deed of company arrangement seeking a declaration pursuant to s.447C of the Corporations Law, that the appointment by the company of Andrew James McLellan as administrator of the company on 15 June 1999 is valid.
Parties
The applicant, Rugs Galore Australia Pty Ltd (subject to deed of company arrangement) ("Rugs Galore") is a company which carries on the business of selling rugs and associated products through a number of retail outlets in Victoria and New South Wales.
As at 5 March 1999 Rugs Galore owed $121,064.43 for wages, holiday pay and long service leave to its employees, the sum of $1,536,871.53 to 97 unsecured creditors and $1,851,919 to three secured creditors. Its assets were valued at between $300,000 and $1M. At that date it was hopelessly insolvent. Indeed it had been insolvent for a period in excess of 12 months.
On 16 March 1999 a majority of its creditors resolved pursuant to s.439C(a) of the Law that the company execute a deed of company arrangement which it did on 26 March 1999.
Linen House Pty Ltd ("Linen House") is a company carrying on the business of selling products, some of which it sold to Rugs Galore, and as at 5 March 1999 it was owed $139,119.91. It opposed the motion that the company execute a deed of company arrangement.
It issued a notice of motion on 1 April 1999 seeking an order pursuant to s.445D of the Law that the deed of company arrangement be terminated on the grounds that not all material information was given to the creditors and some material information given was false or misleading.
It was served with the notice of motion and supporting material in the present application and appeared by counsel. No application was made to join it as a party to the proceeding and even though I did not grant leave at the time it is appropriate to grant leave to Linen House to be heard in the proceeding pursuant to Rule 3.17 of the Corporation Rules 1992.
Messrs Dean Royston McVeigh and Colin McDonald were appointed deed administrators of Rugs Galore and executed the deed on 26 March 1999 in that capacity and also on behalf of the company.
I granted them leave to be heard in the present proceeding pursuant to Rule 3.17 of the Corporation Rules 1992.
The Australian Securities and Investments Commission was also served with the notice of motion and the supporting material but it did not appear.
Background
This is an unusual proceeding. Despite the fact that Rugs Galore executed a deed of company arrangement on 26 March 1999 and Messrs McVeigh and McDonald are the deed administrators, the company resolved to appoint Andrew James McLellan as the administrator of the company on 15 June 1999 pursuant to s.436A(1) of the Law. The proceeding is unusual because the court on 2 June 1999 ordered that the deed of company arrangement executed on 26 March 1999 be terminated, the order made has been stayed and in the meantime another administrator has been appointed.
By reason of the stay the original deed has not been terminated. It has not been fully performed, is under threat of termination, and Rugs Galore and the deed administrators Messrs McVeigh and McDonald have stated an intention to appeal the order made. The company in the meantime has activated the procedure in Part 5.3A of the Law, namely, administration of a company's affairs with a view to executing a deed of company arrangement.
In order to understand the issues it is necessary to briefly summarise the facts.
Facts
As at 17 February 1999 Rugs Galore was hopelessly insolvent and had been so for many, many months. It was being propped up by the provision of funds through two companies called Pindos International Imports Pty Ltd ("Pindos") and Real Enterprises Pty Ltd ("Real Enterprises").
These companies are directly and indirectly controlled by Messrs Harry Lagas, Peter Economou, Patrick Bourke and his partner, Shane O'Brien. Messrs Bourke and O'Brien conduct an accountancy practice.
On 17 February 1999, Pindos appointed as administrators Messrs McVeigh and McDonald pursuant to s.436C of the Law pursuant to a charge it had over the assets of the company.
In accordance with the procedure found in Part 5.3A of the Law the first meeting of creditors was held on 22 February 1999 and on 5 March 1999 notice was given of the second meeting. A report of the administrators to the creditors was sent to them and it expressed the opinion that a deed of company arrangement be executed.
The second meeting of creditors was held on 16 March 1999. Linen House opposed the motion that Rugs Galore execute a deed of company arrangement but the motion was carried and on 26 March 1999 the deed of company arrangement was executed.
By reason of s.444A(2), as a result of the creditors resolving that the company execute a deed of company arrangement, Messrs McVeigh and McDonald as administrators of the company became administrators of the deed.
Linen House issued a motion on 1 April 1999 seeking, inter alia, an order that the deed of company arrangement be terminated pursuant to s.445D of the Law.
The motion came on for hearing before me on 13 May 1999 and both Rugs Galore and Linen House were represented by counsel. On the first day of the hearing I raised some concerns about the conduct of the administrators. I adjourned the matter to the following day when Mr P. Hayes QC appeared seeking to be heard on behalf of the administrators. He sought an adjournment to obtain instructions which I granted and as a result Mr McVeigh swore and filed an affidavit. I heard counsel for Linen House and Rugs Galore and the administrators the following week.
On 2 June 1999 I published my reasons for judgment and ordered that the deed of company arrangement executed by Rugs Galore Australia Pty Ltd on 26 March 1999 be terminated.
Counsel for Rugs Galore, the present applicant, and the administrators indicated that they wished to appeal the decision and accordingly I granted a stay of operation of the orders until 18 June 1999. On 16 June 1999 I extended the stay until 23 July 1999. The stay was subject to two conditions, namely that Rugs Galore not enforce the deed of company arrangement and not deal with its assets or incur debts except in the normal course of business. The administrators undertook not to disburse the funds paid to them pursuant to the deed.
I also extended the time for appeal.
In support of the motion are two affidavits. One, sworn by Patrick Francis Bourke on the 15th June 1999, a director of Rugs Galore, and the other sworn by Paul Wayne Marsh on the 18th June 1999, the solicitor employed by the firm of Wisewoulds acting on behalf of Rugs Galore.
Mr Bourke was cross-examined by Mr Hayes QC on behalf of the administrators.
The evidence revealed that under the terms of the deed of company arrangement as from 26 March 1999 "the management and control of the company and its affairs will be in the hands of the directors of the company". See clause 7.6.
By that date Mr Dowson, who was the only director at the time, ceased to be a director and Messrs Lagas, Economou and Bourke were appointed directors of the company.
In accordance with the deed the sum of $260,556 was paid to the administrators who in turn are to apply the funds in payment of employees' entitlements and to the unsecured creditors. Distribution has not occurred.
The secured creditors' rights are not affected by the deed.
Mr Bourke, in his affidavit, deposed to the fact that the company had continued trading throughout the administration period and as at 15 June 1999 was continuing to trade at its 13 retail outlets. He stated that the business had been trading steadily with all liabilities being met as and when they fell due, except for obligations to Pindos and Real Enterprises. He also stated that Pindos was continuing to fund Rugs Galore as and when necessary.
At a meeting of the directors of the company held on Tuesday 15 June 1999 they resolved that the company was insolvent or likely to become insolvent at some future time and appointed Andrew McLellan as an administrator of the company. The approval of the director Mr Lagas was by telephone.
According to the Minutes the directors formed the opinion that "the company is insolvent or is likely to become insolvent".
Mr McLellan signed a consent to act as administrator on 15 June 1999.
Mr Bourke further deposed to the facts that if the present deed of company arrangement was terminated which would result in Rugs Galore going into liquidation then the end result would be an increase in the amount of the debts and those unsecured creditors who have supplied goods or services on credit since the date of the deed would be added to the list of unsecured creditors. He also said it would be difficult to sell the business as a going concern and there would be no return to the unsecured creditors.
In his oral evidence Mr Bourke stated that there would be very few new creditors since 26 March 1999, being the date of the deed. He said the additional creditors "would be very few and minor only". He stated that were no additional suppliers that came to mind. He stated that some employees have gone and new employees have been employed.
In cross‑examination he stated that Pindos was underwriting any financial requirements of Rugs Galore which also would involve the costs of the first proceeding and also this proceeding.
It will be necessary to return to the cross‑examination of Mr Bourke when considering the submissions of Mr Hayes QC.
Issues
There are two general issues to consider and determine, namely –
(i) Does the court have the jurisdiction to make the declaration sought pursuant to s.447C of the Law in circumstances where there is already a deed of company arrangement which is subject to an order that it be terminated?
(ii) If the court does have the jurisdiction should the court make the declaration in the circumstances?
Jurisdiction
Rugs Galore is a company which is subject to a deed of company arrangement. The deed was executed on 26 March 1999 and was to be implemented within a 60 day period. Some of the terms of the deed have been complied with but no distribution has been made to creditors. Accordingly, the deed is partially executory.
On 2 June 1999 the court ordered that the deed be terminated but the order has been stayed until 27 July 1999.
Rugs Galore has purported to appoint another administrator with a view to executing another deed of company arrangement. What it seeks to do is to place all material and accurate information before the present creditors who are in the main the same creditors of Rugs Galore as at the date of the meeting held on 16 March 1999.
Rugs Galore as applicant seeks a declaration that the appointment of Mr McLellan of administrator on 15 June 1999 is valid.
Section 447C provides –
"447C(1) If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company's creditors may apply to the court for an order under sub-section (2).
(2) On an application the court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground."
It is noted that before the court can make any order declaring the appointment of the administrator of a company valid, it is necessary to show first there is a doubt as to the appointment and secondly, there is a specific ground for that doubt.
Although sub-section (2) requires the ground to be specified in the application, it is clear from reading the sub-section as a whole, that whilst it is necessary to specify a ground the means by which that is achieved can be written or oral.
At the outset it is necessary to note the attitude of Linen House.
Mr N. Wallace of counsel on behalf of Linen House informed the court that the company had no objection to an order declaring the appointment of Mr McLellan valid provided it was paid its costs ordered in its favour in the proceeding brought by it seeking termination of the deed. Mr R. Garratt QC who appeared with Mr Crutchfield on behalf of the company Rugs Galore informed the court that Rugs Galore agreed to pay Linen House the costs of the earlier proceeding and the present proceeding.
Mr P. Hayes QC on behalf of the deed administrators opposed the declaration sought.
The first general question for consideration is whether there is a doubt about the purported appointment of Mr McLellan. The doubts arise because there are already deed administrators and secondly, the effect of an order, presently stayed, that the deed of company arrangement be terminated?
It is important to note the effect of the termination of the deed.
By reason of s.446B of the Law and the regulations made pursuant to that section, when an order is made terminating the deed of company arrangement the company is "taken to have passed a special resolution under s.491 that the company be wound up voluntarily" – see Regulation 5.3A.07(1). Further, by reason of Regulation 5.3A.07(4) the administrators of the deed of company arrangement are taken to have been nominated as liquidators for the purposes of the winding up.
It follows that once the present deed of company arrangement is terminated, by reason of the Law and the regulations, the company goes into voluntary liquidation and the administrators of the deed become liquidators in the winding up.
But at present the termination order has been stayed. The deed of company arrangement is still in place, partially executed and partially executory.
The important features of the deed are that the original director is no longer a director of the company, that three new directors have been appointed, that a sum of $260,556 was to be paid to the administrators prior to 26 May 1999, that the funds were to be applied by the administrators, and that secured creditors are not bound by the agreement. Further, that the management and control of the company was in the hands of the new directors, that during the period of the deed there was a moratorium in favour of the company, and once the administrator had paid the unsecured creditors their full entitlement, all debts were extinguished.
Clause 16 provides for termination of the deed where the arrangements achieve their purpose.
The deed was to terminate on notice once the administrators had distributed the funds and all moneys had been paid into a trust account in respect of employees' entitlement. Within 28 days of that happening the agreement was to terminate upon lodgement of a notice with the Australian Securities and Investments Commission.
As I have stated, certain steps have been carried out but the terms of the deed have not been fully performed. The administrators have undertaken to the court not to distribute the funds to the unsecured creditors.
This brings me to the question whether it is possible to have two deeds of company arrangement operating at the same time?
The order terminating the deed of company arrangement has been stayed. Once the order operates then the deed automatically terminates and the company goes into a deemed voluntary liquidation.
What the directors of Rugs Galore seek to achieve is another deed of company arrangement and has commenced that process by appointing another administrator.
So we have the position that the company is subject to a deed of company arrangement and is also subject to administration pre execution of another deed of company arrangement.
In Beatty (in his capacity as deed administrator) v. Brashs Pty Ltd (a company subject to deed of company arrangement) & Ors (1998) 152 ALR 689, Finkelstein J in the Federal Court held that an administrator could be appointed of a company which was already subject to a deed of company arrangement.
In that case the deed of company arrangement was executed in July 1994. Thereafter the board of directors conducted the business, but by February 1998 there was another body of creditors and the board forming the opinion that the company was likely to become insolvent resolved to appoint two new administrators.
The deed administrator made application to the court seeking a declaration as to the validity of the appointment of the new administrators.
His Honour held that the only circumstances in which an administrator could not be appointed were those expressly stated in the Corporations Law and on that view an administrator might lawfully be appointed to a company under a deed of company arrangement, there being no express provision against such an appointment. The argument in the case proceeded on the basis that there was to be implied in the relevant part of the law, namely, Part 5.3A, a provision to the effect that it was not possible for the appointment of an administrator where the company was already subject to a deed of company arrangement.
His Honour considered the provisions of the Law and noted that the power to appoint an administrator was not unlimited. Having considered the provisions he then posed the following question which he answered –
"What conclusion can be reached from these provisions? The legislature has seen fit to prohibit the appointment of an administrator in particular circumstances. If other circumstances justify such a prohibition it might reasonably be expected that the Parliament would have provided for them. That is to say, prima facie at least it appears that the only circumstances in which an administrator cannot be appointed are those that have been expressly mentioned in the statute. On this view, there being no express prohibition against the appointment of an administrator to a company under a deed of company arrangement, an administrator may lawfully be appointed in that circumstance."
His Honour then dealt with the argument that there were provisions in Part 5.3A which indicated that Parliament did not intend the appointment of an administrator to a company which was already under a deed of company arrangement.
His Honour refused to imply such a prohibition. He said at p.697 –
"There is in any case one overriding consideration that operates against acceptance of the suggested implication. If made, the implication would deny to a group of creditors to a company (that is those creditors who came into existence after the execution of a deed of company arrangement) and to the company itself the benefits that would otherwise be conferred upon them by Part 5.3A. The creditors would be denied the opportunity of seeking a better return and the company would be denied the opportunity of continuing in existence. In other words the object of Part 5.3A would, in part at least, be defeated by implication."
I respectfully agree with his Honour's reasoning and conclude that the legislation does not preclude the appointment of another administrator to a company which is already subject to a deed of company arrangement.
It was not argued before me that Finkelstein J's decision was wrong or that the court lacked jurisdiction to make an order in the present circumstances.
In my opinion it is a question of whether the court should make the order in the circumstances and that depends on whether it is appropriate to do so.
As Finkelstein J said any competition between deeds can be overcome by suitable orders. In the end it is a question of doing justice between the competing interests of the parties.
His Honour said, supra, at p.696 –
"Turning to the potential for competition between two (or it might even be more than two) deeds of company arrangement this can also be overcome without the implication being made. The court retains power to terminate any deed of company arrangement. The power is found in s.445D. There is no doubt that the power may be exercised if one deed of company arrangement is inconsistent with another and that inconsistency is oppressive unfair or prejudicial to the creditors."
Further, any problems associated with an automatic winding up occurring as the result of an application of a particular provision of the Law can be overcome by suitable orders under s.482 of the Law. – see observations made by the High Court in MYT Engineering Pty Ltd v. Mulcon Pty Ltd (1999) 162 ALR 441 at 451.
The fact that the deed of company arrangement is subject to an order that it be terminated does not in my view preclude the appointment of another administrator or deny the jurisdiction of the court to make the declaration sought. However, it may be relevant to the court's discretion.
Section 447C(2) gives the court a discretion whether it should make an order declaring an appointment valid and there may be grounds why in a given case the court should refuse to declare valid an appointment of an administrator.
Indeed, that is the argument put by Mr Hayes QC on behalf of the administrators.
In considering the exercise of the discretion the court must bear in mind the objects of the procedure in part 5.3A. Two objects are that creditors should be given the opportunity of making their decision on informed material information as to the future of the company and secondly, the company should have the opportunity of continuing in existence if that is thought appropriate by the creditors.
No doubt there are other factors which would be relevant to the exercise of the discretion.
In my opinion, there is no prohibition in Part 5.3A to the appointment of an administrator to a company which is already the subject of a deed of company arrangement. The court clearly has jurisdiction to validate such an appointment.
I am satisfied that there are doubts about the validity of the appointment of the administrator on the grounds that there is already a deed of company arrangement and the deed of company arrangement is subject to an order that it be terminated. Further, Mr Hayes QC has by his submissions which are considered hereafter submitted that the appointment was not valid. His submissions amount to grounds raising doubts about the appointment.
Although the grounds are not spelled out in the notice of motion I am quite satisfied that the grounds were made clear through the material and submissions of counsel. I am of the opinion that the court has jurisdiction under s.447C(1).
Was the purported appointment valid?
The purported appointment was made by the company pursuant to s.436A(1).
That sub-section provides –
"A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:
(a) In the opinion of the directors voting for the resolution the company is insolvent or is likely to become insolvent at some future time; and
(b) An administrator of the company should be appointed."
The evidence clearly established that a meeting of directors was held and the board did resolve that the company is insolvent or is likely to become insolvent.
Mr Hayes QC cross-examined Mr Bourke, a director, seeking to establish that even though the directors had so resolved the fact was that that was not his opinion as a director. He drew attention to the fact that the insolvency depended upon the deed of company arrangement being terminated whereas if it subsists and the unsecured creditors are precluded from claiming their debts then the company was not insolvent. Mr Bourke accepted that the company had been trading since 26 March 1999 and in so doing had been able to pay its debts as they fell due. However, its ability to continue to trade depends upon Pindos continuing to fund the company. Mr Bourke accepted that it had been trading and that there were some small losses but Pindos would continue to fund those losses. The argument was put to him that until the stay was lifted the company was not insolvent. Mr Bourke stated that the company would only be solvent if no creditors were paid and Pindos continued to fund it. He stated that there were losses.
In my opinion the reality is that Rugs Galore is insolvent. The fact is that it cannot pay its debts as they fall due and can only presently do so with the support of the Pindos company. On any view it could not pay its secured creditors.
I am satisfied that the company as applicant has complied with the requirements of s.436A(1).
Declaration
Should the declaration be made?
In considering this question it is necessary to state what the directors of the company hope to achieve.
The directors wish to place before all creditors, including the creditors present at the meeting on 16 March 1999, all material information so that the creditors can reconsider the question of entry into a deed of company arrangement and make an informed decision on proper, accurate and correct information. In so doing they are seeking to give effect to the objects of external administration under Part 5.3A.
The new administrator has given notice to all creditors which include all the creditors who attended the meeting on 19 March 1999, of his appointment and the fact that he proposes to call a meeting to consider whether a deed of company arrangement should be executed. If the creditors decide that a deed of company arrangement should be entered into then the deed would be executed and the question would arise as to what is to be done with the present deed of company arrangement which is still alive but has the sentence of termination hanging over its head.
Mr Garratt QC who appeared with Mr Crutchfield for Rugs Galore submitted that if the creditors resolved to enter into a deed of company arrangement then steps could be taken to deal with the present deed of company arrangement.
He referred to s.445A which gives power to the company's creditors to vary a deed of company arrangement by resolution passed at a meeting.
Section 445A provides –
"445A A deed of company arrangement may be varied by a resolution passed at a meeting of the company's creditors convened under s.445F, but only if the variation is not materially different from a proposed variation set out in the notice of the meeting."
Under s.445F the administrator of a deed of company arrangement may convene a meeting of creditors but must convene such a meeting if so requested in writing by creditors the value of whose claims is not less than 10% of the value of all the creditors' claims against the company.
Mr Garratt QC submitted that it would be open to the creditors to vary the deed of company arrangement to the point where it would no longer have any content which would be inconsistent with a new deed of company arrangement.
The difficulty I see is the fact that there is a court order which operates immediately once the stay is lifted with the result that the company goes into deemed voluntary liquidation.
Mr Garratt QC submitted that the problem can be overcome by the court granting an indefinite stay of the orders made in the other proceeding. He emphasised that if the creditors did not resolve to enter into another deed of company arrangement then the stay could be lifted and the order operate. But if the creditors resolve in favour of a new deed then an application may be made to stay the order permanently.
When I pointed out to him that his client wished to appeal those orders and that this arguably constitutes an inconsistent course of conduct, he informed me that his client was prepared to undertake that if the administrator's appointment was declared valid it would not proceed with the appeal.
A further matter of some importance is that Linen House does not oppose the present application provided its costs are paid and Mr Garratt QC indicated that those costs would be paid. It follows it consents to a stay of the order in the other proceeding.
As a general proposition, when a court makes an order it should be complied with. It would be only in exceptional circumstances that the court would permit an interested party to obtain a stay which could have the effect of nullifying the effect of the judgment or order. Judgments of the court and orders apply until they are either set aside on appeal or the court exercises its jurisdiction in appropriate circumstances to set aside the order.
But the question is whether the court has the jurisdiction to grant a stay in these circumstances, a stay which initially would be for a definite period but with a possibility that application will be made to stay it permanently.
At the moment Rugs Galore seeks a stay of the execution of the order in the other proceeding for a period of at least 60 days. Depending on the outcome of the meeting of creditors, application may be made later for a permanent stay.
Whilst the present application is for a stay for a definite period, the fact is there is the possibility of a later application for a permanent stay and this involves the court in considering at this stage whether such an order could be made because if it could not then the court may in its discretion refuse the declaration sought in this proceeding.
The two questions for consideration and determination are-
(i) Has the court power to order a stay of an indefinite duration which may result in a permanent stay?
(ii) If it does should the court do so?
In determining the first question I put to one side the question of granting a stay for a fixed period, albeit a lengthy one. Clearly the court does have the jurisdiction to grant a stay for a fixed period.
The problem is a stay of an indefinite duration which may result in a permanent stay of the order of the court.
The court has an inherent jurisdiction to grant a stay of a proceeding. This inherent jurisdiction has existed since earliest times.
The jurisdiction is now the subject of statute.
Section 30 of the Supreme Court Act 1986 provides –
"Nothing in this Act affects the power of the court to stay a proceeding in the court, either of its own motion or on the application of any person, whether or not a party."
This section has been part of the statute law of this State since the Judicature Act 1883. – see proviso to s.8(5).
It can be seen that the court is entrusted with a wide discretion to stay a proceeding. The section does not set out any criterion for the exercise of the discretion and it is not for the court to seek to fetter what is a wide and beneficial jurisdiction. No doubt the discretion should be exercised where the interests of justice dictate.
The section is similar to s.49(3) of the English Supreme Court Act 1981.
The English cases recognise that in appropriate circumstances a judgment or order can be stayed for an indefinite period.
In Taylor v. Mostyn (1883) 25 Ch. D. 48 mortgagees brought an action for foreclosure seeking declarations and the taking of accounts. They obtained a decree giving them the declarations sought and the decree directed the usual accounts in the case of mortgagees in possession with directions for foreclosure in default of payment. A summons was taken out by the defendants to proceed with the judgment and a direction was given that the plaintiffs bring in their accounts by a certain day. The plaintiffs refused to bring in their accounts on the ground that the moneys remaining due to them were many times more than the value of the mortgage property and that taking the accounts would therefore be useless and a waste of money.
The defendants applied on summons for an order that the plaintiffs might bring them in in four days.
On appeal it was held that the plaintiffs having taken a foreclosure decree the defendant were entitled to have the accounts brought in but any such order should be prefaced with a statement that they required them to be brought in.
The Court of Appeal considered the question of whether it would grant a stay as the taking of accounts would be a waste of money.
Cotton LJ at p.53 said –
"It may be thought that on a proper case being made, and a court being satisfied that the taking of the accounts would be a mere waste of money, and that it is reckless on the part of the defendants to insist upon it (of which there is no evidence to satisfy us now) the court would stay all proceedings under the decree, not altering the decree but staying proceedings under it on the ground that the prosecution of the accounts direct by it would produce nothing but vexation and expense. I do not say whether the court would do so or not, but the plaintiffs ought not to be precluded by this order from taking any proceedings they may think desirable to stay the proceedings under the decree; and to prevent any contention that it has that effect, it will be expressed without prejudice to such application, if any as the plaintiffs may be advised to make for staying of all further proceedings under the decree or for discontinuing part of the action."
His Lordship made it clear that the court would have jurisdiction when he said –
"It must not be supposed that because we insert those words, we in any way favour such application, or consider that if any such application is made it ought to be granted. Such application if made must be dealt with by the court below and by the Court of Appeal entirely without any prejudice from anything that has passed on the present occasion."
Lindley LJ at p.54 said –
"I cannot conceive that there is a want of power or jurisdiction in the court to stay proceedings upon a proper application and on proper materials. I therefore accede to this, that whatever order we make now should be without prejudice to any application to stay those proceedings."
In Exchange and Hop Warehouses Limited v. Association of Land Financiers (1886) 34 Ch. D. 195 North J, in a similar type case gave the option to the defendants to provide security for the taking of accounts and if it was not forthcoming granted a stay until further order.
His Lordship said at p.198 -
"Unless, therefore, the defendants will give the security which I suggested, I shall stay the taking of the accounts and the making of the enquiries until further order, reserving liberty to the defendants to apply."
Where there is judgment for specific performance with costs and the failure by the purchaser to comply with the judgment, it is open to the vendor to seek a stay of the original order except for the recovery of costs. See Olde v. Olde (1904) 1 Ch. 35.
I am satisfied that the court does have the jurisdiction to grant an indefinite stay or a stay until further order which may have the effect of being a permanent stay of the execution of an order. The question is whether the court should grant such a stay in the exercise of its discretion.
A very important factor in the exercise of the present jurisdiction and the granting of a stay in the other proceeding is the fact that Linen House Pty Ltd which brought the application and obtained the order to terminate the deed of company arrangement has consented to the course proposed in the present proceeding and consents to an order staying the other proceeding for a further period of 60 days. It is clear from what Mr Wallace of counsel said on behalf of Linen House that it would consent to a further stay if necessary.
With those principles in mind it is appropriate to consider whether the court should in the exercise of its discretion grant the declaration sought.
This is an unusual case. However, the court, in considering the exercise of its discretion, should take into account the purpose of Part 5.3A.
The objects are set out in s.435A, one of which is to apply the legislation to maximise "the chances of the company or as much as possible of its business continuing in existence".
What the directors of the company seek to achieve which was not achieved with the first deed of company arrangement is an informed decision by the creditors as to the future of the company. One thing is very clear in respect of the legislative scheme found in Part 5.3A of the Law and that is that the ultimate decision as to the future of an insolvent company is left with the creditors. The Legislature has taken the view that they are in the best position to make an assessment as to that question. They should not be denied that opportunity.
What the present directors of Rugs Galore seek to achieve is a proper consideration and determination by the creditors with respect to the future of the company. In my opinion the court should give effect to the clear object of the scheme which leaves the decision to an informed body of creditors. There are new directors and management in charge of Rugs Galore and they have been managing the business for in excess of three months. They have been doing so without increasing the debts of the company and this augurs well for the future. The company, its employees and the creditors should have a second opportunity.
Those behind Rugs Galore are prepared to pay the expense.
In my opinion, in the unusual circumstances of this case, the creditors of Rugs Galore should be given a second opportunity to consider all material facts and make their decision based upon true and accurate facts. The court should not stand in the way of that proposal unless precluded by some provision of the law. By that I mean not only the Corporations Law but the law generally.
The court should grant a stay pending the outcome of the performance of the new administrator's duties and if necessary grant a indefinite stay if a new deed of company arrangement is entered into. This would be on the basis that the creditors would resolve to vary the original deed of company arrangement so that it was not inconsistent with the second deed.
But even if the court was not able to grant a permanent stay, the same result could be achieved by another route. The first deed of company arrangement could be terminated in any event by lifting the stay.
Once terminated the company would go into voluntary liquidation but application could be made pursuant to s.482 of the Law which gives power to the court to terminate a winding up. This power is extremely wide.
In my opinion it would be open to the court if the deed was terminated with the resultant voluntary winding up to make an order that the winding up be terminated so that the company could have the opportunity to appoint another administrator with a view to executing another deed of company arrangement under Part 5.3A of the Law.
This is a course that commended itself to the High Court as being an appropriate means to overcome difficulties resulting from automatic transition into liquidation that follows from the operation of a provision of Part 5.3A. Although the remarks were obiter, nevertheless they demonstrate in my respectful opinion a practical course to follow to overcome possible problems.
In MYT Engineering Pty Ltd v. Mulcon Pty Ltd (1999) 162 ALR 441 the High Court was concerned with whether or not a deed of company arrangement had been properly executed. The court was initially concerned with the application of s.445G(3) but in the end held that on the facts the deed had been properly executed. At p.451 the majority said –
"No question then arises of making an order under s.445G(3): there has been no contravention of Part 5.3A. It follows that no question arises about whether an order could be made under that sub-section in a case where there has been the automatic transition into liquidation that follows from the operation of s.446A(1)(b). (It should be noted that some, perhaps all, of the difficulties in making an order under s.445G(3) might be met if it were a case proper for making an order under s.482 terminating the winding up) Those are, however, not questions that need now be answered."
[Emphasis added]
To follow such a course would be, in my opinion, the long way home. The fact is that the court can grant an indefinite stay of its orders and if it was not prepared to do that then it still would be open to the directors to apply for an order terminating the voluntary winding up under s.482 and then proceed to activate the procedure under Part 5.3A. A winding up even for a short period could have disastrous effects upon the business. This should be avoided.
Subject to considering the submissions of Mr Hayes QC it seems to me it would be appropriate in the present circumstances to make the declaration as to the validity of the appointment and extend the stay of the operation of the orders in the earlier proceeding on the understanding that there would be no appeal against the original orders. If the body of creditors do not resolve to enter into a deed of company arrangement then the stay would be lifted. Alternatively, if the creditors do resolve to enter into a deed of company arrangement a permanent stay be granted and the creditors could then resolve to vary the original deed of company arrangement to avoid any inconsistency with the second deed of company arrangement.
I am re-inforced in reaching this conclusion by the fact that Rugs Galore is now directed and managed by new directors who have in the past through Pindos provided financial support to the company. There is a degree of confidence that Rugs Galore can with proper management trade profitably.
Opposing argument
That brings me to considering the arguments put forward by Mr Hayes QC as to why the court should not make the declaration sought.
The first submission put was that under s.436A it was necessary for Rugs Galore's directors to resolve that the directors were of the opinion that the company was insolvent or likely to become insolvent. He referred to the affidavit of Mr Bourke and the cross‑examination. However, for the reasons which I have already stated, in my view the applicant has established compliance with s.436A(1) of the Law.
The second submission was that by reason of s.437C(1) the directors of Rugs Galore needed the present administrator's written approval before making the application to the court.
Section 437C(1) provides –
"While a company is under administration a person (other than the administrator) cannot perform or exercise and must not purport to perform or exercise a functional power as an officer of the company except with the administrator's written approval."
I am satisfied that the reference to "the administrator" is intended to relate to the new administrator. Clearly the new administrator has no objection to the present application. It is brought to remove any doubt to his appointment.
This application is brought by the company and there is the interesting question whether s.437C(1) applies. No officer is exercising a function or power as an officer of Rugs Galore in bringing the application.
However, it is unnecessary for me to consider this because the administrator has given written approval, admittedly tacit approval by a letter he wrote to the company's solicitors on 17 June 1999.
Mr Hayes QC also submitted that it was not established that there was doubt on a specific ground required under s.447C(1). His submission with respect to the directors' resolution raises a doubt. For reasons which I have already stated I reject that submission also.
He also submitted that I was functus officio with respect to the original proceeding and any change to the present stay should be left to the Court of Appeal. It is clear that as the trial judge I have authority to grant a stay in relation to the operation of the orders and in any event Mr Hayes, on behalf of the administrators, joined in the application to extend the stay until 23 July 1999. In my view I still have the power to continue to extend the stay and if necessary grant an indefinite stay. For reasons stated I am prepared at this stage to grant a stay for a fixed period.
The final argument put forward by Mr Hayes QC was that if the declaration was made on the basis that Rugs Galore would not appeal, then his clients, Messrs McVeigh and McDonald, who wished to appeal the reasons for judgment because they reflected adversely on their conduct, would be denied their right to appeal.
There is clear authority that a person whose reputation and conduct is adversely affected by a judgment in a proceeding in which they are not parties has the right to appeal. However, to put the matter beyond doubt I granted an application by Mr Hayes QC on behalf of his clients to join them, at this late stage, as parties in the original proceeding.
It follows that they are parties and have the right to appeal. The declaration of the validity of the new appointment and the abandonment of any appeal by Rugs Galore in the other proceeding will not affect the right of appeal of Messrs McVeigh and McDonald.
But in any event, even if it did, that, in my opinion would not be a reason to deny what justice requires in the present proceeding. In making that observation it is appropriate to consider the chances of the administrators succeeding on any such appeal.
It is asserted that Mr McVeigh was denied natural justice in the earlier proceeding in the sense that he was denied an opportunity to refute any finding that adversely reflects on his conduct and reputation as an administrator.
In the first proceeding at the first directions hearing after the notice of motion by Linen House was filed, Mr McGirr, a partner of Wisewoulds acting for the company, was also at that stage acting for the administrators. He attended the first directions hearing and I raised with the parties the question of a joinder of additional parties. I raised the question of the administrators' position. Mr McGirr did not announce his appearance for them. However, I made an order that all documents should be served on the administrators and Mr McGirr did not deny the statement made by Mr Wallace of counsel who appeared for Linen House that Mr McGirr was also acting for the administrators and the documents would come to their attention.
In an affidavit sworn by Mr Dowson, the then only director of Rugs Galore, a serious allegation was made against the administrators and in particular Mr McVeigh. The allegation was to the effect that Mr McVeigh was actively assisting the interests in Pindos to take over the company and the inference is that Mr McVeigh was not performing his duties as an administrator under Part 5.3A of the Law in a proper, careful and impartial manner. Mr McVeigh swore an affidavit on behalf of Rugs Galore. He did not seek to appear at the hearing.
At the beginning of the hearing before me I raised concerns about the conduct of the administrators and whether they should be involved in the hearing. I requested Mr Crutchfield of counsel on behalf of Rugs Galore to inform the administrators of my concerns and he informed me after the luncheon adjournment that he was unable to make contact with them because they were interstate. I reiterated my concern again at the end of the hearing on the first day, and on the following day Mr Hayes QC appeared before me after I had set out in summary form the concerns I had about their conduct, in particular Mr McVeigh's conduct. My remarks were recorded and a transcript was made available to Mr McVeigh's solicitors prior to the following Friday. Mr Hayes QC sought an adjournment to enable him to get instructions which was granted and on the following Friday Mr Hayes QC appeared before me, filed an affidavit of Mr McVeigh explaining his conduct and made submissions on his behalf.
In the light of those events I find it difficult to accept that Mr McVeigh, who had the conduct of the administration, was denied any opportunity, to appear and put his side of the case.
In any event, I did not make any finding of wrong doing on the part of Mr McVeigh. However, it was necessary in deciding whether or not the creditors were given material accurate and correct information to make findings in respect to this. In so making the findings it was necessary to consider and record the conduct of the administrators and in particular Mr McVeigh. It was necessary for the court to consider and determine the issues before it. This I did. Those issues involved the conduct of the administrators and in particular Mr McVeigh. The findings were necessary to determine the issues before the court.
There is authority for the proposition that the proper person who has the carriage of any application on behalf of the company where an order is sought terminating the deed, is the administrator. See Sydney Land Corporation Pty Ltd v. Kalon Pty Ltd (1998) 16 ACLC 93. The administrator, despite allegations being made against him, left the carriage of the defence to the new directors whom he had appointed. That was his decision.
In the circumstances the suggestion that he was denied natural justice is fanciful. I note that this is not the first time that Mr McVeigh has been an administrator of a deed of company arrangement which was the subject of an application to terminate. He is no stranger to the issues involved – see D.F.C. of T v. Comcorp Australia Ltd (1996) 14 ACLC 1,616 especially the dissenting judgment of Sheppard J.
I have carefully considered the submissions made by Mr Hayes QC on behalf of the administrators and in particular Mr McVeigh, and none of them persuade me that I should not exercise the jurisdiction that the court has to declare the appointment of the administrator as valid.
I am satisfied there is doubt about the purported appointment of the new administrator of Rugs Galore and having considered the matters raised I am of the opinion that the court should exercise its jurisdiction and declare the purported appointment, valid.
I do so on a number of bases. They are, that Rugs Galore will not pursue its appeal in proceeding No. 4963 of 1999 in which Linen House Pty Ltd is applicant and Rugs Galore Australia Pty Ltd is Respondent, that it pays the costs of the applicant Linen House Pty Ltd in that proceeding, and also its costs in the present proceeding. Further, that Linen House Pty Ltd consents to the grant of the stay in the other proceeding.
I am prepared to grant a stay in the other proceeding but in my opinion it should be to a fixed date so that the court still has control of the matter.
The court will require undertakings to be given in respect of the above matters.
Subject to submissions of counsel and the undertakings I propose to make the following orders –
(i) Declare pursuant to s.447C of the Corporations Law that the appointment by Rugs Galore Australia Pty Ltd (subject to a deed of company arrangement) of Andrew James McLellan as administrator of Rugs Galore Australia Pty Ltd on 15th June 1999 is valid;
(ii) That the applicant Rugs Galore Australia Pty Ltd (subject to deed of company arrangement) pays the costs of Linen House Pty Ltd of the proceeding including reserved costs;
(iii) Otherwise there be no order as to costs.
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