In the matter of Tesrol Walsh Bay Pty Limited (subject to a Deed of Company Arrangement)

[2016] NSWSC 374

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Tesrol Walsh Bay Pty Limited (subject to a Deed of Company Arrangement) [2016] NSWSC 374
Hearing dates:	14 March 2016
Decision date:	14 March 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	- Order that the Deed of Company Arrangement be terminated.
Catchwords:	CORPORATIONS — Deed of company arrangement — Orders sought for termination of deed of company arrangement — where the conditions specified in the termination clause of the deed of company arrangement was unlikely to be satisfied – whether the deed of company arrangement should be terminated for “some other reason” under s 445D(1)(g) of the Corporations Act 2001 (Cth) – whether the deed fund should be distributed in circumstances where it would operate unfairly between creditors.
Legislation Cited:	- Corporations Act 2001 (Cth) ss 439A, 445D, 447A, 447D, Pt 5.3A
Category:	Principal judgment
Parties:	Ian James Purchas in his capacity as deed administrator of Tesrol Walsh Bay Pty Limited (subject to a Deed of Company Arrangement) (First Plaintiff) Tesrol Walsh Bay Pty Limited (subject to a Deed of Company Arrangement) (Second Plaintiff)
Representation:	Counsel: V Whittaker (Plaintiffs)   Solicitors: Bridges Lawyers (Plaintiffs)
File Number(s):	2015/157212

Judgment – ex tempore

1. By Originating Process filed on 27 May 2015, Mr Ian Purchas, in his capacity as deed administrator of Tesrol Walsh Bay Pty Limited (subject to a deed of company arrangement) ("Company"), sought directions and orders about the operation and termination of a deed of company arrangement ("DOCA") executed by the Company on 6 February 2012 as varied, or, alternatively, orders terminating the DOCA and winding up the Company.

2. Mr Purchas initially sought a direction under s 447D of the Corporations Act 2001 (Cth) that he would be justified in distributing the deed fund that is the subject of cl 5.1 of the DOCA in accordance with cl 6.1 of the DOCA and then lodging a notice of termination of the DOCA. Alternatively, Mr Purchas raised the possibility that the Court might make an order under s 447A of the Act to facilitate that course. A third possibility raised by the Originating Process was that an order should be made under s 447A of the Act that the DOCA be terminated, the Company be wound up and Mr Purchas be appointed as its liquidator. In the event, Ms Whittaker, who appears for Mr Purchas, has rightly recognised that any order terminating the DOCA would preferably be made under s 445D(1)(g) of the Act, on the basis that there was some other reason why the DOCA should be terminated. I will return to that question below.

3. The application is supported by two affidavits of Mr Purchas, which provide a detailed history of relevant events, although the issues raised are ultimately in relatively narrow compass. Receivers and managers were appointed to the Company's property on 30 September 2011 and, shortly thereafter, Mr Purchas was appointed as its voluntary administrator. He was subsequently appointed deed administrator of the DOCA on 6 February 2012. The receivers subsequently ceased to hold office, although, as will emerge below, the secured debt owed by the Company to its lender, Westpac Banking Corporation (“Westpac”), has not been repaid, or at least not been repaid in full.

4. The Company entered the DOCA, in terms originally set out in a report under s 439A of the Act that was issued to the Company's creditors in November 2011. That report noted the level of secured debt of the Company, then in excess of $17 million, and that unsecured creditors of the Company, of which a number were related company creditors, were then owed in excess of $1.9 million. The proposed DOCA referred to in that report contemplated that Westpac as secured creditor would not be bound by or participate in the DOCA with respect to the secured debt; that certain creditors, including the Company's holding company, would defer their claims and not require repayment until at least 12 months after the DOCA was effected; and that the Company would pay, from a deed fund, the administrator's remuneration and disbursements and dividends to each of participating priority creditors and ordinary unsecured creditors at one hundred cents in the dollar.

5. By a supplementary report to creditors dated 22 December 2011, Mr Purchas provided further information as to Westpac's claim, noted the possibility that Westpac's shortfall would be significantly less than the amount of the secured debt, and noted his understanding that Westpac had informally indicated to the director of the Company that it would negotiate the repayment, implicitly with the director, of any shortfall from asset realisations, and that the director had personally guaranteed Westpac’s debt and that Westpac may call on that guarantee in respect of any such shortfall. The implication of that observation was that Westpac's debt would, potentially, be paid out of sources other than the Company's assets.

6. As I noted above, the DOCA was subsequently executed, dated 6 February 2012. As Ms Whittaker notes, the DOCA expressly provided in cl 8 that Westpac would not participate in the deed fund and would not be bound by the DOCA. Clause 5 provided for contributions to the deed fund, which was estimated to be in the order of $536,668, sufficient to pay the administrator's disbursements and remuneration, and the amount of the claims of priority and participating creditors. An amount was due to be paid into the deed fund on execution of the DOCA and the balance on the earlier of 6 May 2012 or the date on which Westpac notified the deed administrator that the debt had been satisfied in full and its security had been discharged. The balance payable was not paid on 6 May 2012, and the date for that payment was subsequently extended on several occasions, but that balance, or, at least, the large part of it, was ultimately paid. Westpac did not notify Mr Purchas that the debt had been satisfied in full, or the security had been discharged, and it appears that did not occur.

7. Clause 6.1 of the DOCA in turn provided for the distribution of the deed fund, first, in payment of the administrator's disbursements; second, in payment of the administrator’s remuneration; third, in payment of priority creditors; and fourth, in payment of participating creditors in respect of their admitted claims. As Ms Whittaker points out, that clause was not, in terms, limited to providing for a distribution of the deed fund after Westpac's debt had been paid. Clause 7, in turn, provided for several creditors to defer any claims they had during the arrangement period, but did not extinguish those claims. Clause 10.3 provided for termination of the DOCA once all the payments required to be made to the deed administrator pursuant to the DOCA had been made; the deed administrator had distributed the deed fund pursuant to cl 6 of the DOCA; and Westpac had notified him in writing that its debt had been satisfied in full and that its security had been discharged. In the event, it appears that the last of those conditions is now highly unlikely to be satisfied, since Westpac has not been paid out to date and there is no reason to think that it will be paid out in the future, and the present position is that the DOCA is unlikely to be able to be terminated on that basis.

8. At the same time as the DOCA was executed, a Deed of Deferral dated 6 February 2012 was executed with several creditors, including the holding company of the Company, which provided for deferral of those creditors' debts until 12 months after the termination date of the DOCA.

9. As Ms Whittaker pointed out, in the unlikely event that some event, which is not foreshadowed by the evidence, were now to occur to discharge Westpac’s debt, so that the DOCA could be terminated, the Company's debt to its holding company and those other creditors would remain in place, and would be enforceable 12 months after the termination of the DOCA.

10. The question, therefore, arises whether, in these circumstances, Mr Purchas would be justified in distributing the deed fund, which he would strictly be entitled to do under cl 6.1 of the DOCA, although the DOCA could not then be terminated because the other condition to its termination, namely the discharge of Westpac’s debt and the discharge of its security, could not be satisfied, or whether the DOCA should be terminated and the Company placed in liquidation.

11. Mr Purchas has given notice of these proceedings to Westpac and other creditors of the Company, including the holding company, and updated the position in respect of the administration in his affidavit dated 14 March 2016. When the proceedings were originally commenced, at least part of the relief sought contemplated there may be a payment out of the deed fund, notwithstanding the inability to effect the DOCA. By the time the proceedings commenced, Westpac confirmed, by its solicitors, that the security granted in favour of it had not been discharged and that Westpac reserved all of its rights against the Company and would have no objection to a liquidator being appointed, but did not wish to be heard in the proceedings. By a further letter dated 28 September 2015, Westpac's solicitors indicated that Westpac did not consent to the deed fund being distributed to participating unsecured creditors, and contemplated that that issue would be resolved by the Court, although Westpac did not seek to appear. The liquidator appointed to the Company's holding company, in turn, confirmed that the Company was indebted to its holding company in an amount of approximately $1,157,247 and that the DOCA was, in its view, incapable of being effected, and the holding company had no objection to a liquidator being appointed over the Company, but also did not wish to be heard in the proceedings.

12. Mr Purchas also gave notice to unsecured creditors of the application, indicating that he was unsure whether he was entitled or obliged to distribute the deed fund without Westpac having been paid and had sought Court directions with respect to that issue and there expressed the view that, if he was to distribute the deed fund and the DOCA was terminated, or the Company subsequently placed in liquidation, that course could unfairly prejudice the position of deferred or non-participating creditors. None of the unsecured creditors have also sought to be heard in the application.

13. The issues that arise in the application could be approached in two ways, although it seems to me that both approaches lead to the same result. The first, which was adopted by Ms Whittaker in submissions, is to address, first, the question whether there is some reason to direct Mr Purchas that he may distribute the deed fund in accordance with cl 6.1 of the DOCA and then lodge a notice of termination of the DOCA. As the Originating Process recognises, it seems likely that that could only occur if the Court were also to make an order under s 447A of the Act because, under the terms of the DOCA, Mr Purchas would presently be entitled to distribute the deed fund, since the provision for him to do so is not expressly conditional on Westpac’s debt being discharged, but would not be entitled to lodge a notice of termination because the conditions for termination would not have been satisfied.

14. It does not seem to me that Mr Purchas could be directed both that he was entitled to distribute the deed fund and lodge a notice of termination, without invoking s 447A of the Act because the condition for the latter is not satisfied. It also does not seem to me that the Court should make an order under s 447A of the Act to permit both the distribution and the notice of termination, where that would bring about a significant alteration to the effect of the terms of the DOCA, which contemplated both a distribution to unsecured creditors and the repayment of Westpac before the DOCA was terminated. It does not seem to me that the purposes of Part 5.3A of the Act would be promoted by making an order under s 447A of the Act to permit a step which the DOCA would not permit, where that would be to significantly alter the intended operation of the DOCA. I am reinforced in that view because, as Ms Whittaker points out, the effect of terminating the DOCA in that situation would be to return the Company to the control of its director, in circumstances that it would no longer have any assets, its director is apparently now overseas, and it would have debts to its holding company and other deferred creditors due in 12 months, which it would have no apparent means of paying, such that there is a real prospect that it would then be, or would shortly thereafter be, insolvent. All of these reasons are reasons not to make an order under s 447A of the Act to permit that course.

15. If the Court is not to permit that course by an order made under s 447A of the Act, then it is plain enough that the DOCA cannot be effected, as matters stand, because of the unlikelihood that Westpac will be paid out so as to allow the condition for its termination to be achieved. In those circumstances, it seems to me that there is some other reason to terminate the DOCA under s 445D(1)(g) of the Act. In the present case, that other reason is not any wrongful purpose or impropriety in the DOCA, but the fact that it cannot be effected in the relevant circumstances, without significant alterations to its structure of a kind that the Court should not make, and, as Mr Purchas notes, that a distribution in present circumstances has the capacity to operate unfairly where the other steps contemplated by the DOCA cannot be effected. The same result could have been reached on the basis of s 445D(1)(e) of the Act, namely that effect could not be given to the DOCA without injustice or undue delay, in circumstances that the events, as they have developed, meant that it ultimately could not be terminated.

16. I noted, before commencing that analysis, that two alternative approaches were available which might lead to the same result. The second approach is simply to note that, as matters stand, there is reason to terminate the DOCA, either because it cannot be effected without injustice or undue delay for the purposes of s 445D(1)(e) of the Act, or should be terminated for some other reason under s 445D(1)(g) of the Act. In circumstances where Mr Purchas has rightly recognised that matter, and brought the matter before the Court for such an order to be made, there is no reason that that order should be deferred to permit a distribution to be made, which would affect part only of the purpose of the DOCA, and would operate unfairly as between creditors as Mr Purchas has noted. In that case, the direction permitting Mr Purchas to distribute the deed fund also should not be made, because there is no reason to permit such a distribution in circumstances that the relevant facts warrant the termination of the DOCA for the reasons that I have noted. That ultimately leads to the same result as the approach which Ms Whittaker put in submissions, commencing with asking the question whether Mr Purchas should be directed to make the distribution, before turning to the question whether the DOCA should be terminated.

17. For these reasons, I am satisfied that Mr Purchas is correct in the approach which is put, as one of the potential approaches, namely that the DOCA should be terminated under s 445D(1)(g) of the Act. Accordingly, I make orders in accordance with the short minutes of order initialled by me and placed in the file. I note that a question of the costs of this application was raised but not determined where it was not the subject of notification given to persons affected by the application, and where it can be left to be determined in accordance with the statutory priorities applicable in a winding up in the ordinary course.

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Decision last updated: 07 April 2016