In the matter of WFH Enterprises; Ridley Agriproducts v Nicholls

NEW SOUTH WALES SUPREME COURT

CITATION: In the matter of WFH Enterprises; Ridley Agriproducts v Nicholls [2006] NSWSC 1033

CURRENT JURISDICTION: Equity

FILE NUMBER(S): 6424/05

HEARING DATE{S): 5 May & 9 May (submissions) 2006

DECISION DATE: 03/10/2006

PARTIES:
Ridley Agriproducts Pty Ltd (P)
Alan Richard Nicholls as Deed Administrator of WFH Enterprises Pty Ltd (under Deed of Company Arrangement) (D)

JUDGMENT OF: Austin J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:
S Golledge (P)
J T Johnson (D)

SOLICITORS:
Mark O'Dea (P)
Sally Nash & Co (D)

CATCHWORDS:
CORPORATIONS - deed of company arrangement - whether deed administrator was in a position of conflict of interest - whether deed should be terminated on ground that its purposes have failed

ACTS CITED:
Bills of Sale Act 1898 (NSW) ss 4, 5C, 6
Corporations Act (2001) (Cth) ss 445D, 449B
Security Interests in Goods Act 2005 (NSW) s 37, Schedule 4

DECISION:
Defendant's application for termination of deed dismissed; new deed administrator appointed.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 3 OCTOBER 2006

6424/05IN THE MATTER OF WFH ENTERPRISES PTY LTD (UNDER DEED OF COMPANY ARRANGEMENT); RIDLEY AGRIPRODUCTS PTY LTD V ALAN RICHARD NICHOLLS (AS DEED ADMINISTRATOR)

JUDGMENT

HIS HONOUR: WFH Enterprises Pty Ltd ("the Company") is subject to a deed of company arrangement dated 2 June 2004 ("the DOCA"). The Deed Administrator is the defendant, Mr Nicholls. The plaintiff is a Deed Creditor. In October 2001 it entered into a written agreement to supply stockfeed to the Company on 30 days' credit, guaranteed by two directors of the company, Mr Frank Hands and Mr Rodney Hands. It supplied stockfeed under the agreement, for which it was not paid, and in September 2005 it obtained judgment against Mr Rodney Hands in the District Court of New South Wales for $266,345.76. That amount remains owing to the plaintiff.
By its Amended Originating Process, the plaintiff seeks orders concerning compliance with the DOCA and orders arising out of its complaints about Mr Nicholls' conduct as Deed Administrator. The primary relief sought by the plaintiff is an order under s 449B of the Corporations Act 2001 (Cth) removing Mr Nicholls as Deed Administrator and replacing him with its nominee, Mr Paul Brake. As an alternative, the plaintiff seeks the appointment of a special purpose administrator or trustee to take control of certain assets of the Deed Administration. Another order sought in the Amended Originating Process is an order for the appointment of a referee to report to the court on the state of the Company's loan account. Other orders sought in the Amended Originating Process were not pressed at the hearing.
At the hearing of the Amended Originating Process, Mr Nicholls moved on an interlocutory process seeking directions as to the further conduct of the Deed Administration, and (as principal relief) a declaration and orders for the termination of the DOCA, the winding up of the Company, and the appointment of Mr William Rangott as liquidator. Counsel for Mr Nicholls informed the court that his client did not wish to continue to act in the administration of the Company. Hence, if the DOCA was not terminated, Mr Nicholls would tender his resignation as Deed Administrator, and if it was terminated and the Company moved into liquidation, Mr Nicholls would not wish to be liquidator. Consequently, it ceased to be necessary for the court to decide whether Mr Nicholls should be removed as Deed Administrator, though the question whether there are grounds for his removal remains relevant to the question of costs. The primary substantive issue for determination is whether (as Mr Nicholls advocates) the DOCA should be terminated and the Company wound up, or (as the plaintiff submits) it should be continued under another Deed Administrator.

Formation and trading history of the Company

The Company was formed in June 2000 and carried on a piggery business. Initially its directors were Frank Hands, his wife Thelma Hands, and their son Rodney Hands, and they held the shares in the Company equally. The Company granted a series of charges to Rabobank Australia Ltd, Landmark Operations Ltd and Landmark (Qld) Ltd during the period from February 2002 to July 2003.
The Company's piggery business was carried on at premises owned by the Company known as Woodlands (also referred to in the evidence as Bristowe). The three directors also carried on an associated piggery enterprise in partnership in equal shares, trading under the registered business name "F & T Hands and Son" ("the Partnership"). The Partnership operated two piggeries, one at a property known as Tamanna and the other at a property known as Warwick Downs.
There was substantial plant and equipment used for the piggeries. Most of it was owned by the Partnership, apparently because the partnership was in business and acquired the equipment before the company began in the year 2000.
There is substantial evidence about the Company's financial statements during the period from 2000 to 2004, which it is unnecessary to canvass here. The Company experienced trading difficulties for various reasons, including drought in 2002/3, reductions in the price per kilo for pork and decline in export markets. On 8 April 2004 the directors resolved to place it in voluntary administration, and Mr Nicholls was appointed administrator.
When it received notice of the appointment of an administrator to the Company, the plaintiff ceased supplying the Company with stockfeed, and on 14 April 2004 it entered into a new supply agreement with the Partnership. Thereafter until about 5 July 2004 the plaintiff supplied stockfeed to the Partnership under substantially the same delivery arrangements as previously obtained.

Mr Nicholls' report to creditors as voluntary administrator

Mr Nicholls' written report to creditors under s 439A was dated 5 May 2004. It is, on its face, a thorough and detailed report. He said that the assets of the company comprised the property at Woodlands, for which he gave an "estimated remissible value" of $1,158,750, pigs which he valued at approximately $389,000, debtors of approximately $986,000, and a small amount of plant and equipment. The debtors comprised a trade debtor of about $25,000 and the Partnership, said to owe the Company $961,000. According to Mr Nicholls, this liability related to feed supplied but not paid for.
Mr Nicholls reported that Landmark held security over the pigs in the sum of approximately $423,000, and Rabobank held security by mortgage on Woodlands for $1.225 million. At a later stage it emerged that the three partners had guaranteed repayment of the Company's loan to Rabobank and had mortgaged the Partnership's properties at Warwick Downs and Tamanna to secure the guarantee.
According to the s 439A report, unsecured creditors of the Company stood at approximately $1.242 million. The report attached a list from which it appears that there were over 40 arms' length unsecured creditors and no related creditors. The Company's estimated deficiency was nearly $354,000.
The report also gave information about the financial position of the Partnership. The estimated realisable values of Warwick Downs and Tamanna were about $963,000 and $500,000 respectively. Plant and equipment was valued at about $445,000. There was a budgeted cashflow surplus after the sale of the Partnership pigs of nearly $677,000. A partnership loan by Rabobank was shown as a secured debt of approximately $384,000, and the liability to the Company of $961,000 was also shown as a secured debt (although there is no other evidence to suggest that the Company held any security over Partnership assets for this debt). There were employee entitlements of about $47,000 and unsecured creditors of the Partnership of about $550,000. The estimated excess of assets over liabilities was about $637,000, and the estimated surplus after taking into account unpaid creditors of the Company was about $298,000.
The report included a sensitivity analysis which indicated the percentage change needed in respect of each of a series of key variables in order to reduce the budgeted consolidated surplus to a zero balance. The variables included debtors, pigs, the value of the properties, cashflow and plant and equipment.
Mr Nicholls said in the report that his investigations to that time had not identified any payments a liquidator would be able to recover as unfair preferences, and he expressed the view that the Company had maintained a proper accounting system and adequate records. However, he was of the opinion that further investigation could reveal that the Company may have traded whilst insolvent.
Mr Nicholls had before him a proposal by the directors for a deed of company arrangement, under which both the Company and the Partnership would exit the pig industry by growing out the existing pig stock, with trading operations to be ceased in December 2004 or January 2005. The directors would continue to operate the piggeries, using their expertise for effective extraction from the industry. As the operations were wound down, surplus assets would be realised and the directors would account to the Deed Administrator for the sale proceeds. The proposal was that the Company's creditors, and the Partnership's creditors, would be paid out of the realisation of the assets of the Company and the Partnership, and to that end of the Company would be provided with second mortgage security over the Partnership's assets including Warwick Downs and Tamanna.
Mr Nicholls observed in his report that "the proposed course of action will benefit creditors of the company as it will remove any question of the partners becoming bankrupt and allow creditors of the company to receive the funds from the partnership without the potential of a Trustee in Bankruptcy clawing the funds back". He added:
"For the creditors of the company to be paid in full the creditors of the partnership must also be paid in full. If the partnership fails, the proposed Company Deed would be void against a Trustee in Bankruptcy pursuant to section 120 of the Bankruptcy Act 1966. In this event, the company would be returned to being a creditor in the bankrupt estate for the balance of moneys owed to the company and participate in a dividend on a pari passu basis with all other ordinary unsecured creditors of the bankrupt estate."
A copy of a draft deed of company arrangement to implement the directors' proposal was attached to Mr Nicholls' report. He recommended that the creditors accept the proposal. At their meeting on 12 May 2004 the creditors resolved that the company execute the proposed deed of company arrangement. The Deed was executed on 2 June 2004.

The DOCA

The parties to the DOCA are the Company; Mr Nicholls as voluntary administrator and Deed Administrator; and Frank, Thelma and Rodney Hands as "the Funders". The provisions of the DOCA include the following:
(a) upon execution of the DOCA, Mr Nicholls ceased to be voluntary administrator and became the Deed Administrator (clause 2), acting as agent for and on behalf of the company (clause 3);
(b) the Deed gave the Deed Administrator broad powers, including powers of sale and distribution (clause 4 and Schedule 1), and the power to use funds in any bank account established under the Deed for the purpose of giving effect to the Deed (clause 6.7);
(c) during the continuance of the DOCA, the Deed Administrator was to take no part in the management operation of the Company's business (clause 5), and the real property of the Company and the Partnership were to be marketed for sale by the Company and the Funders (clause 6.4);
(d) the Company's piggery business would be wound down by the sale of all livestock, plant and equipment and the property at Woodlands (clauses 6.1 and 6.2);
(e) the Partnership's piggery business would be wound down by the sale of all livestock, plant and equipment and the properties at Warwick Downs and Tamanna (clauses 6.1 and 6.2);
(f) the Funders covenanted and agreed to create mortgages in registrable form over the Warwick Downs and Tamanna properties and a Traders Bill of Sale in registrable form over the assets and undertaking of the Partnership in favour of Mr Nicholls as Deed Administrator, for the purpose of securing the due and punctual performance of the obligations of the Funders and the Company under the DOCA (clause 7.1);
(g) the Company covenanted and agreed to create a mortgage in registrable form over the Woodlands property and a Traders Bill of Sale in registrable for over the assets and undertaking of the Company, in favour of Mr Nicholls as Deed Administrator, for the purpose of securing the due and punctual performance of the obligations of the Company and the Funders under the DOCA (clause 7.2);
(h) in the event that the Company's assets were not sold by the Company or the Partnership's assets were not sold by the Partnership by 1 February 2005, the Deed Administrator was to have such assets valued and sold (clause 6.5);
(i) the net proceeds of sale of the company's assets after payment of secured creditors (clause 6.1) and deduction of trading costs and direct selling costs, were to be paid to a bank account operated by the Deed Administrator (which I shall call "the Company Deed Fund Account") (clauses 6.3 and 9.1);
(j) the proceeds of sale of the Partnership Assets, less payments to secured creditors (clause 6.1) and less direct selling costs, were to be paid to a second bank account operated by the Deed Administrator (which I shall call "the Partnership Asset Realisation Account") (clauses 6.3 and 9.2);
(k) the funds in the Partnership Asset Realisation Account were to be applied, first, by pro rata payments to satisfy debts properly due by the Partnership and each of the partners individually to their creditors (clause 6.6(a)); second, to the Company Deed Fund Account to meet the remaining amount outstanding by the Partnership to the Company (clause 6.6(b)); third, to the Company Deed Fund Account to the extent of the remaining amount owing under the Deed (that is, the amount owing by the Company to its creditors) (clause 6.6(c)); and finally, to the Funders in equal shares;
(l) the funds in the Company Deed Fund Account were to be applied, first, in payment of the Administrator's costs and disbursements; and second, pari passu in payment of all Deed Creditors (clause 8);
(m) the DOCA established a Committee of Inspection and made provisions for the Deed Administrator to report to the Committee and consult with it (clause 21), and modified the provisions of the Corporations Regulations so that they applied to the holding of meetings of creditors under the Deed (clause 20);
(n) there were provisions obliging the Deed Administrator to convene a meeting of creditors, and enabling him to initiate a procedure by giving a notice to the Company and the Funders, which would lead to the termination of the Deed, if the Funders did not comply with the requirements of clause 6 or circumstances arose where the Deed Administrator formed the view that the Company or the Funders may not be able to comply with the obligations imposed upon them under clause 6 (that is, the obligations relating to the realisation of the assets of the Company and the Partnership, and the payment of the net proceeds to the Deed Administrator) (clause 24);
(o) the Administrator was empowered to settle debts of the Funders should any creditors of the Funders commence bankruptcy proceedings (clause 25);
(p) the Funders each irrevocably appointed the Deed Administrator as their attorney to execute such instruments and do such things as the attorney deemed speedy and for further and better assuring the performance of the obligations of the Company and each of the Funders under the terms of the Deed or in any security given pursuant to the Deed, or for carrying out or in connection with the exercise of any of the powers of the Deed Administrator or for the protection, benefit or improvement of any asset or property the subject of any security given under the Deed (clause 29);
(q) there were the usual provisions for a moratorium (clause 13), the acceptance by Deed Creditors of their distributions in full satisfaction of their claims (clauses 14 and 15), termination of the deed upon achievement of its purpose (fourth 26) and other miscellaneous provisions.
In June 2004 Mr Nicholls' solicitors forwarded to the plaintiff's solicitor by e-mail the text of a mortgage by the Funders to Mr Nicholls as Deed Administrator over the Warwick Downs and Tamanna properties, a mortgage by the Company over the Woodlands property, and a Bill of Sale over Partnership plant and equipment (including the Partnership 's feedmill) and livestock. It is not clear whether these documents were ever executed by all three Funders, especially having regard to the fact that Mr Frank Hands died shortly afterwards. Mr Nicholls subsequently lodged a caveat against the real property, to protect his interest under the DOCA rather than any asserted interest under unregistered mortgages.

Events after the execution of the DOCA, up to the bankruptcy of Mr Rodney Hands

Death of Mr Frank Hands

Mr Frank Hands died on 5 July 2004. Under his will, his widow and son were appointed executors of his estate. It appears from a business names search conducted by the plaintiff's solicitor that Messrs Frank, Thelma and Rodney Hands registered the business name "F & T Hands & Son", effective from 1 July 2000, as a "family partnership", although no written partnership agreement has been found. The "family partnership" referred to in the public records is "the Partnership" for the purposes of this case. Unless there was an agreement to the contrary (and there is no evidence of any such agreement), the Partnership was dissolved on 5 July 2004, upon the death of one of the partners (Partnership Act, 1892 (NSW), s 33(1)).
Another business names search reveals that Messrs Thelma and Rodney Hands registered the same business name, effective from 6 July 2004, again as a "family partnership". This limited evidence suggests that a new partnership was created between Thelma and Rodney Hands after the death of Frank Hands, and that the new partnership continued the business activities of the former partnership, which by that time involved to winding up and sale of assets of the Partnership piggery business. I am not in a position to say, on the evidence before me, whether and to what extent the new partnership assumed the liabilities of the previous partnership.
On about 30 July 2004 the plaintiff was provided with an ABN number for the new partnership between Thelma and Rodney Hands, and it ceased to supply stockfeed under the previous agreement with the Partnership. It opened a new trading account for the new partnership, and continued to supply stockfeed under substantially the same arrangements as had previously obtained.
Alleged unauthorised withdrawal by Mr Nicholls
One of the matters which was the subject of complaint in the Amended Originating Process was the transfer by Mr Nicholls on 5 November 2004 of two amounts totalling $37,312.45 from the Partnership Asset Realisation Account to the Company Deed Fund Account, from which Mr Nicholls then withdrew various amounts totalling $33,920.41 on 10 November in payment of his costs and disbursements. The plaintiff's complaint was that the transfer was not authorised by clause 6.6 of the DOCA, which deals with the application of funds held in the Partnership Asset Realisation Account and does not make any provision for the use of those funds for the Deed Administrator's costs and disbursements.

It seems that, following that complaint, Mr Nicholls reimbursed approximately $40,000 to the Company Deed Fund Account. He informed a meeting of creditors held on 12 January 2006 that he had done so, although (he said) his legal advice indicated that he was entitled to retain the money. That indirect evidence was not contested at the hearing, which proceeded on the basis that the problem identified by the plaintiff, if it was one, had been rectified, and no order would be necessary on this matter.
The state of the Company's loan account with the Partnership
One of the crucially important figures in Mr Nicholls' calculation of the Company's financial position in his s 439A report was the debt of $961,000 said to be owing by the Partnership to the Company. On 13 December 2004 Mr Nicholls told the plaintiff's solicitor on the telephone that it appeared that the Partnership was not indebted to the company as first thought. He said the Partnership records showed that the Partnership was owed approximately $200,000 by the Company. He said this was subject to confirmation by the Partnership's accountant. The plaintiff's solicitor followed up this issue by e-mails and facsimiles to Mr Nicholls over the ensuing five months. Information was received from the Partnership's accountant under cover of a facsimile dated 7 June 2005, nearly six months after Mr Nicholls' telephone conversation with the plaintiff's solicitor. Although this represents a substantial delay, I am not in a position to find that the delay was the fault of Mr Nicholls.
According to the accountant's facsimile, "the client" (presumably Mr Rodney Hands) provided him with a summary of charges between the Partnership and the Company, which the accountant attached to the facsimile ("the Client Summary"). This is a single page document, which is undated but appears from the facsimile header to have been transmitted to the accountant in June 2005. The Client Summary treats $961,000 (owing by the Partnership to the Company) as the opening balance in the loan account, and then makes to adjustments to that figure.
The first adjustment is to add "Charges to Loan" in the sum of $504,609.23. According to the accountant's facsimile, this figure is "the movement in the loan account balance during the year as provided by the client from their bookkeeping". I infer that it reflects the cost of stockfeed supplied by the Company to the Partnership during either the calendar year 2004 or the incomplete financial year beginning July 2004. The effect of that adjustment is to increase the Partnership's debt to the Company to $1,465,609.23.
The second adjustment is to deduct "Repayments" in the sum of $816,700, leaving a balance owing by the Partnership to the Company of $648,909.23. The "Repayments" are listed as seven items in the Client Summary. They are not cash transfers, but instead they are adjustments for an alleged overcharging, and various hiring and service fees. There is no evidence as to whether the Company ever agreed with the Partnership to pay these fees, or whether the hiring and services to which they refer ever took place or were carried out. The evidence before me (including evidence that Mr Nicholls told a meeting of creditors that the hiring and service fees were not taken into account in taxation returns of the Partnership) is consistent with the view that the hiring and service fees are ex post facto charges in the nature of ambit claims. The scant evidence that I have would suggest that the state of the loan account is that at least $648,909.23 is owed by the Partnership to the Company, and the amount may well be considerably higher.
That uncertain position is made even less clear by the accountant's worksheet attached to the facsimile of 7 June 2005 ("the Worksheet"). The Worksheet is intended to show "how the loan account balance with F & T Hands & Son has been arrived at". It shows total charges by the Partnership to the Company over the period from 2000 to 2004 (apparently the financial years to June each year) in the sum of $2,019,178.85. If that were correct figure, rather than the Partnership owing money to the Company, the Company would owe the Partnership a net amount of $553,569.62.
It appears that the accountant has treated some of the seven items in the Client Summary as annual charges, and has accordingly repeated them for each of the years from 2000 to 2004, pro-rating the charges for the years when the Company's activities were diminished. In one respect, treating the figures in the Client Summary as annual charges is inconsistent with the Client Summary itself. The first item is described in the Client Summary as "Over-Charged Milling - 100 tonne @ 34 weeks @ $27 = $91,800". Treating the alleged overcharging as a recurring annual phenomenon not confined to a single period of 34 weeks, the accountant has calculated a charge by the Partnership to the Company for this matter at $515,700. More generally, it is surprising that the accountant should have calculated charges by the Partnership on a basis so much in excess of the claim made by the "client". There is nothing in the Client Summary to suggest that any of the hiring or service fee charges were intended by the client to be annual charges. If it were necessary for me to reach any decisions on the evidence that I have, I would be inclined to disregard the Worksheet entirely and to rely only on the Client Summary.
Mr Nicholls' attempts to realise assets, and meetings with creditors
Mr Nicholls reported to creditors on 13 August 2004, enclosing a consolidated cashflow forecast of the Partnership and the Company with a comparison to budgeted cashflow. He circulated another consolidated cashflow forecast on 4 November 2004, with a covering note in which he drew attention to the fact that cashflow for the three months ended 30 September 2004 was substantially below budget but stock numbers were higher than the budgeted number.
The assets of the Company in the Partnership were not sold prior to 1 February 2005, and therefore under the terms of the DOCA, clause 6.5, Mr Nicholls as Deed Administrator was required to have the properties valued and to sell them. For that purpose he was irrevocably appointed attorney for the Funders under clause 29 of the DOCA.
It appears that Mr Nicholls took some steps towards sale of the properties, and discussed some issues arising out of the sale process with the Committee of Inspection and the creditors generally in February 2005.
There was a meeting of the Committee of Inspection on 11 February 2005, followed by a meeting of creditors on 18 February 2005. The meeting of creditors was originally called for 11 February but it was adjourned because of an error in the date given in the notice of meeting. According to the notice of meeting, the purpose of the meeting of creditors was to consider Mr Nicholls' circular to creditors dated 28 January 2005 and to decide upon further instructions to him as to the action to be taken in regard to the sale of properties and to facilitate finalisation of the DOCA. The circular of 28 January 2005 is a brief document enclosing a consolidated cashflow forecast for the Partnership and the Company from April 2004 to January 2005, showing variances between actual results and budget. There was a net cash outflow for that period of $35,565.
Mr Nicholls provided a written report to creditors on the administration of the DOCA, dated 11 March 2005, in which he summarised his discussions with creditors at the February meetings and supplied some additional information that had been requested by creditors. At both meetings Mr Nicholls discussed the marketing and sale of the three properties, and plant and equipment. Tamanna was due to be auctioned on 7 April 2005, and at that stage the plan was to auction Warwick Downs in May 2005. There was discussion about the marketing of Woodlands as a development property because of the potential for subdivision. There was also discussion of the progress of the "trade on" of the piggery business and a proposed clearing sale of plant and equipment scheduled for 12 March 2005.
In his March report, Mr Nicholls reported that his budget estimate was that, after all secured and unsecured creditors had been paid out in full, there would be a surplus of $204,000, if the properties were sold at the prices projected by the directors. He said that the proceeds of sale of the properties at Warwick Downs and Tamanna would go to pay out the secured creditor, Rabobank, and that the funds from the sale of Woodlands would then be available to be distributed to unsecured creditors.
Mr Nicholls reported that the Deed was set to expire in June 2005 but, as Deed Administrator, he had the option of extending it after resolution of a meeting of creditors. In fact there is no expiry date in the DOCA. I take Mr Nicholls to have been referring (perhaps with some confusion) to clause 24, which required the Deed Administrator to take certain steps if the Company or the Funders were not able to comply with their obligations under clause 6, including the convening of a meeting of creditors. Mr Nicholls said he would hold a meeting of creditors in June 2005 to discuss options.
Some problems were encountered with the sale of the properties. Tamanna was sold, at a price lower than expected, but the sale fell through. At Warwick Downs and Woodlands there was scrap lying around the properties which needed to be cleaned up.
On 21 June 2005 Mr Nicholls circulated a notice of meeting of creditors, scheduled for 30 June 2005, to consider extending the term of the DOCA to allow further time for the assets of the Partnership and the Company's property at Woodlands to be sold, or alternatively, termination of the DOCA and the placing of the Company into liquidation.
The meeting was duly held and minutes are in evidence. Representatives of a number of creditors, including the plaintiff, attended, and proxies were given by other creditors in favour of Mr Nicholls and others. Mr Nicholls reported on the problems that had been encountered in the course of efforts to sell the properties. He said he did not have the funds to clean up the properties and expressed concern that expenditure on cleaning up might be lost if Rabobank accepted an offer sufficient only to pay out the secured debt. He recommended that Mr Rodney Hands be persuaded to clean up the properties so as to save on costs. He said the sale of plant and equipment had been slow because of the state of the pig industry and that the main piece of equipment, a feedmill, was yet to be sold. He told creditors that if the Partnership was unable to pay Partnership creditors, the exercise of selling the properties would be wasted so far as creditors of the Company were concerned. He said there was a risk that the secured creditor would take possession and then the sale price would be less than expected and there would be little chance of a dividend to creditors.
The plaintiff's solicitor told the meeting that, since the properties and assets had not been sold by 1 February 2005 as required by clause 6.5 of the DOCA, the Deed Administrator was required to take steps to sell the property, including if necessary using the power of attorney provided to him by the Funders under the Deed. Mr Nicholls responded by saying that he had been unable to get Mr Rodney Hands to clean up the property and he was without funds to take the required action.
The creditors resolved, at the suggestion of the plaintiff's solicitor, that a notice be given to Mr Rodney Hands, purportedly under clause 24.1 of the DOCA, requiring the Funders to "do all things necessary to facilitate the sale of the assets" in a timeframe to be determined by the Deed Administrator. They resolved that the notice be accompanied by a letter explaining the personal consequences of not adhering to the requirements of the notice. Mr Nicholls did not place before the meeting any resolution to extend the operation of the DOCA or to put the company into liquidation. One of the creditors suggested that a further meeting of creditors be called within three to four months.
It appears, from the limited evidence before me, that the sale of the three properties was driven by Rabobank as secured creditor. It is not clear from the evidence whether a notice was given to Mr Rodney Hands as envisaged by the creditors at their meeting on 30 June, or whether Mr Hands cleaned up the properties to the satisfaction of Mr Nicholls or Rabobank. It appears, from a circular distributed by Mr Nicholls to creditors, that the sale by auction of Warwick Downs was set down for 3 September 2005. That property and Tamanna were sold, and then Woodlands was sold in December 2005. The proceeds of sale of the properties were applied to reduce the amount owing to the secured creditor, Rabobank, but they were insufficient to cover the whole of that debt.

Bankruptcy of Mr Rodney Hands

On 22 September 2005 Rodney Hands became bankrupt on the filing of a debtor's petition. In the absence of any contrary agreement (and none is indicated by the evidence) the new partnership formed by Thelma and Rodney Hands after the death of Frank Hands was dissolved by the bankruptcy (Partnership Act, 1892 (NSW), s 33(1). Christopher Chamberlain of Nicholls & Co, having provided a consent to act, was appointed trustee of the bankrupt estate. Mr Chamberlain is a partner of Mr Nicholls in that firm. The plaintiff's solicitor gave evidence that on 26 September 2005, when he contacted Mr Chamberlain by telephone, Mr Chamberlain told him that "for practical reasons the estate will be handled by Alan Nicholls at the Tamworth office".
In his report to creditors of the bankrupt dated 19 October 2005, Mr Chamberlain said that there was a deficiency in the estate of over $1.228 million. He said he had appointed an agent to value and collect the bankrupt's plant and equipment, to which he attributed a value of $93,800. He said that as the majority of the assets of the bankrupt were owned by the Partnership, he was waiting on a letter of authorisation from the remaining partner to proceed with the sale of those items. He said he was not in a position to determine to what extent a dividend would be paid in the administration. He said that queries could be directed to Mr Nicholls and another person at the Tamworth office of Nicholls & Co.
Mr Chamberlain's report did not refer to the DOCA, and specifically made no reference to the obligations undertaken by the Funders, including Mr Rodney Hands, with respect to the sale of Partnership property and payment of the net proceeds of sale to the Deed Administrator.

Further events in 2006

On about 23 December 2005, Mr Nicholls sent a circular to creditors of the Company and a notice convening a meeting of creditors to be held on 12 January 2006. In the circular Mr Nicholls said that the two sources of funds for the DOCA were funds from the Partnership and equity from the sale of property held by the Partnership and the Company. He said that the Partnership was insolvent and no surplus funds were available for the benefit of creditors of the Company. He reported that the last of the properties, Woodlands, was sold by Rabobank at auction on 8 December 2005 for $585,000. Since all three properties had been sold, Rabobank had incurred a shortfall. He said there was no potential for any funds to become available for the benefit of the creditors of the Company. He reported that the DOCA had failed and he recommended that the company be placed in liquidation. The notice of meeting gave notice of resolutions recording that the DOCA had failed and should be terminated and placing the company into voluntary liquidation.
On 9 January 2006 Mr Nicholls sent a further circular to creditors informing them that he had been served with the originating process in the present proceeding. He said he had instructed his solicitors to defend the proceeding, and that he would not be putting any resolution to the meeting of creditors.
The meeting of creditors was held on 12 January 2006. There are minutes signed by the chairman of the meeting, and a fuller report on the meeting based upon notes taken by the plaintiff's solicitor, who attended. Subject to one point, the chairman's minutes are not materially inconsistent with the plaintiff's solicitor's report, which was not challenged at the hearing, although each account contains information not replicated in the other. I generally accept both accounts for the purposes of this judgment, and on the one point of inconsistency I accept the account by the plaintiff's solicitor for reasons I shall explain.
Various creditors attended by representatives or by proxy. Mr Chamberlain did not attend. The Partnership purported to appoint a solicitor as proxy, supported by a proof of debt claiming approximately $1.558 million in relation to the loan account between the Partnership and the Company. It appears from the evidence that the proof of debt was based on the Worksheet to which I have referred. Two sums were deducted from the debt of $961,000 owed by the Partnership to the Company: namely, the sum of approximately $2,019,000 for services provided by the Partnership to the Company (the figure calculated in the Worksheet), and the sum of $500,000 described as "Contribution made by Partnership towards Company Liability to Rabobank". No reference was made to the additional loan charge of $504,609.23 acknowledged in the Client Summary to which I have referred. After debate, Mr Nicholls decided to defer his decision on whether to accept the Partnership's proof of debt, and later he decided not to allow a proxy vote to be cast on behalf of the Partnership on the resolutions that were put to the meeting.
The plaintiff's solicitor addressed the meeting, summarising his understanding of the administration to that time. He said that the three properties of the Partnership and the Company had been sold but there were insufficient proceeds to satisfy the secured creditor, Rabobank. He contended that the Deed Creditors had not been informed of the current position regarding the proceeds of sale of livestock and the sale of Company and Partnership plant and equipment. He referred to Mr Chamberlain's report on the bankrupt estate of Rodney Hands and he alleged that most of the assets identified in that report were assets of the Partnership that were to be sold under the DOCA, to which the partners had agreed. He alleged that Mr Nicholls had failed to make proper disclosure to Deed Creditors of the existence of remaining Partnership assets or sale proceeds, and he said that the proposal of Mr Chamberlain to deal with Partnership plant and equipment under the bankruptcy administration would disadvantage Deed Creditors because of additional costs.
Mr Nicholls addressed the meeting. He told the meeting that the sole surviving partner had authorised him to collect and sell remaining plant and equipment and account, apparently to the Partnership Asset Realisation Account. He said that the trustee in bankruptcy had not received any money from the administration of the Company or the Partnership. He expressed the belief that the trustee in bankruptcy could not deal with partnership assets.
According to the account of the meeting given by the plaintiff's solicitor, Mr Nicholls denied that Partnership assets would be dealt with under the bankruptcy administration. He said that approximately $40,000 from the sale of Partnership assets remained in the auctioneer's trust account, and that the Partnership's feedmill (valued at anywhere between $0 and $250,000) was still to be sold. He said there was approximately $72,000 in the Partnership Asset Realisation Account and approximately $40,000 in the Deed Fund Account.
The chairman's minutes do not record that these things were said, but it seems to me on balance probable that they were. The plaintiff's solicitor's record of the meeting was forwarded to Mr Chamberlain at Nicholls & Co after the meeting. It was specifically put to Mr Chamberlain that Mr Nicholls had told the meeting that Mr Chamberlain did not intend to administer the Partnership assets or sale proceeds under the bankrupt estate. Mr Chamberlain replied, saying that if for whatever reason the bankruptcy were to be placed into funds from the realisation of assets of the Partnership or any subsequent partnership interest the bankrupt may have had, the funds would not be disbursed until he received an appropriate direction or consent from the court as to the estate's entitlement. Neither he nor Mr Nicholls challenged the account of the meeting.

There was debate at the meeting as to whether the DOCA had failed and the Company should be placed into liquidation, as Mr Nicholls recommended, when funds remained in various bank accounts and a potentially valuable feedmill was yet to be sold. Mr Nicholls expressed the view that Deed Creditors would not receive any benefit from the remaining funds and assets. The plaintiff's solicitor criticised him on the ground that there was a conflict of interest in Mr Nicholls acting as Deed Administrator while his partner was the trustee in bankruptcy of Rodney Hands, and on the ground that he had not given disclosure of the true state of affairs to creditors in the circular calling the meeting. Mr Nicholls denied that allegation of conflict but referred to the difficulty posed by the fact that there was conjecture over the correct loan account balance between the Partnership and the Company. He told the meeting that if he remained as Deed Administrator he would agree to have Mr Chamberlain resign as trustee in bankruptcy. In response to criticisms, Mr Nicholls said he would not charge fees for the convening of the meetings of creditors on 30 June 2005 and 12 January 2006.
Two motions were put to the meeting. The first, "That the Deed Creditors, having lost confidence in Alan Nicholls, call upon Alan Nicholls to resign as Deed Administrator", was carried by 18 votes ($853,495.51) to 2 ($91,478.50) with two abstentions. The second, "That the Company Deed of Arrangement be terminated and the Company be placed into liquidation" was lost, with no votes in favour and 20 votes (for an amount of either $1,076,433.70 or $944,974.21) against.
On 30 January 2006 Mr Nicholls' solicitors wrote to the plaintiff's solicitor proposing consent orders for the termination of the DOCA and the winding up of the Company, and the appointment of Mr Rangott as liquidator. This was on the basis that there had been a total failure of the DOCA and the company was incapable of being managed because one of the directors was dead, another was bankrupt and the third was an elderly woman. The plaintiff's solicitor responded on 11 February 2006, disagreeing with the assertion that the DOCA had failed and refusing to consent to the proposed orders.
Mr Nicholls made another report to creditors as Deed Administrator of the Company on 23 February 2006. He reiterated his opinion that the DOCA had failed and it was in the interests of creditors that the Deed be terminated and the Company wound up, notwithstanding the contrary opinion of the creditors at the meeting on 12 January. He referred to the death of Mr Frank Hands and the bankruptcy of Mr Rodney Hands, and noted that Mrs Thelma Hands had purported to resign as a director on 17 February 2006. He concluded that there was no person able or prepared to fulfil the role as a director or officer of the Company and therefore the purpose envisaged by s 435A of the Corporations Act, of the Company being able to continue to trade, had in substance failed. He noted that the proceeds of sale of the three properties of the Partnership and the Company, which were substantially less than envisaged in his s 439A report, had been applied to reduce debts to the holders of prior ranking securities. He said that, having regard to the criticism that had been levelled against him, which he did not accept, it was appropriate that an independent person be appointed as liquidator. He foreshadowed the interlocutory application that he in fact made at the hearing.

Should the DOCA be terminated?

Section 445D of the Corporations Act permits the court to make an order terminating a deed of company arrangement on various grounds, including the ground that effect cannot be given to the deed without injustice or undue delay, and the ground that the deed should be terminated for some other reason (s 445D(1)(e) and (g)). The principles upon which the court acts under those provisions were thoroughly explored by Campbell J in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235. In the present case no issues of general principle arise, the question essentially being a pragmatic one on the facts.
Mr Nicholls asserts that the Deed has failed, in the sense that its purposes cannot be effectuated. If his contention is correct, there can be no doubt that the court has jurisdiction to make an order terminating the DOCA.
Mr Nicholls gave no evidence at the hearing and in particular, he has not provided the court with any statement of the funds held by him as Deed Administrator and his estimate of the value of assets remaining to be sold. I am left to rely on the statements attributed to him at the meeting of creditors of 12 January 2006 by the plaintiff's solicitor. From that evidence it is obvious that to a substantial degree, the purposes of the DOCA have indeed failed and cannot now be effectuated. The original intention, based upon property valuations that have proved to be unrealistically high, was that the Funders would contribute proceeds of the realisation of Partnership assets to funds that would be available to meet the claims of Deed Creditors, who would also have access to the proceeds of realisation of the Company's assets. In fact, most of the assets, including all of the real estate of the Company and the Partnership, have been realised but the proceeds of realisation have gone to the secured creditor and (contrary to Mr Nicholls' expectation when he wrote his s 439A report) nothing remains for the Deed Creditors.
It appears that there is approximately $150,000 in cash, apparently prior to the deduction of costs, and an unsold feedmill that may prove to be valuable or to have no value. There do not appear to be any other items of plant and equipment of any significant value. I infer that the remaining pigs have been sold and therefore there is no need for continuing supplies of stockfeed, and no continuing trading activity.
There is considerable uncertainty surrounding the balance of the loan account between the Partnership and the Company, as I have explained. It seems to me, however, that this may prove to be a lesser difficulty than some of the evidence and the submissions implied. The establishment of a different loan account balance from the one stated in the s 439A report is a matter for those asserting the variation, namely the remaining Funders. The Client Summary, which (as I have said) appears to be the document of Rodney Hands, asserts that although the full amount of $961,000 is not owing by the Partnership, nevertheless a substantial amount is owing. The onus of establishing, notwithstanding the Client Summary, that in fact a substantial amount is owing by the Company, has not been discharged.
There are effectively no directors of the Company but on the other hand, there is nothing left for the Company to do, other than fulfil its statutory and perhaps its taxation obligations. I say this because there is no trading activity and the authority of the directors is not needed for the sale of the remaining plant and equipment or for dealing with the balance of funds held. Although one of the objects of administration under Part 5.3A of the Corporations Act is to maximise the chances of the company or as much as possible of its business continuing in existence (s 435A(a)), there was never any proposal to continue the piggery business other than for the purpose of winding it up, and so the only issue in this case has been to produce the best return for the Company's creditors (s 435A(b)).
The trustee in bankruptcy of Rodney Hands, who was not represented at the hearing, may have a claim in respect of realisation of the remaining assets of the Partnership for recovery of the bankrupt's share of the net assets of the Partnership or of the subsequent partnership between Thelma and Rodney Hands. It was conceded by the plaintiff's solicitor in cross-examination that the Bill of Sale over the Partnership's plant and equipment, if executed by the Funders, was not registered.
Consequently it was contended on behalf of Mr Nicholls that, according to ss 4, 5C and 6 of the Bills of Sale Act 1898 (NSW) (continued in operation by s 37 and Schedule 4 Part 2 para 3 of the Security Interests in Goods Act 2005 (NSW)), the Bill of Sale and the promise to give a bill of sale contained in the DOCA have no validity for any purpose against the trustee of the bankrupt estate of Rodney Hands, in the absence of an order of the court under s 4B relating to registration "out of time".
It was submitted on behalf of the plaintiff that the question of validity of the Bill of Sale is a red herring because, even if the Bill is now ineffective, the assets that were the subject of the Bill would not be released from the claim by the Deed Administrator, which is based upon the equitable charge created by the terms of the DOCA (an instrument on which Mr Nicholls himself relied when he registered his caveat). It was contended that nothing in the Bills of Sale legislation would prevent the Deed Administrator asserting a claim over a Partnership asset against the sole remaining partner. According to this submission, although the Partnership appears to have been dissolved upon the death of Frank Hands, the administration of the partnership assets falls to the solvent partner or partners and accordingly, in the present circumstances, to Thelma Hands. As to s 4, it was submitted that according to s 4(2) the Bills of Sale Act does not render a bill of sale null and void against the grantor (in this case the Partnership). As to s 5C, it was contended that the Funders were not traders within the definition of that term and accordingly the Bill of Sale did not take effect as a traders' bill of sale.
Unfortunately (having regard to the limited amount of money involved), the court is not in a position to resolve these relatively complex questions about the validity and effect of the Bill of Sale. This is because a person with a direct interest in the issue, Mr Chamberlain as trustee in bankruptcy for Rodney Hands, is not before the court. Nor is the court able to make any finding as to whether the Bill of Sale, though unregistered, was ever executed by all appropriate parties.
If the arguments advanced on behalf of the plaintiff are correct, there is a point in continuing with the DOCA for the limited purpose of resolving this issue and making a final distribution under the Deed. In my opinion those contentions are sufficiently plausible that I should not dismiss them out of hand, but I am not in a position to rule upon them in the absence of the trustee in bankruptcy. Since Mr Nicholls does not wish to continue in his position as Deed Administrator, and has been subjected to criticism for his conduct in that position, continuation of the DOCA even for this limited purpose will involve his replacement. That will lead to costs that might otherwise have been avoided. But it is relevant to take into account that the persons directly affected by incurring additional costs, namely the Deed Creditors, have voted overwhelmingly in favour of the continuation of the DOCA in the hands of a new Deed Administrator, and against liquidation.
In these circumstances, it seems to me the best course is to give effect to the wishes of the Deed Creditors, even though the effect of doing so may be to consume a substantial part or even all of the available funds in fees and expenses, leaving nothing for distribution to them. For this reason I have decided, very much on balance, that the correct course is to dismiss Mr Nicholls' application for termination of the DOCA and the appointment of a liquidator to wind the Company up. As I have said, given that Mr Nicholls intends to resign it is unnecessary for me to decide whether to make an order to remove him. Given that a new Deed Administrator will be appointed, it is unnecessary for me to address the alternative prayers for relief in the Amended Originating Process, although I should observe that in my opinion, the alternative orders for addressing the balance of the loan account appear to me to be likely to be more expensive than the simple continuation of the DOCA under a new Deed Administrator, especially having regard to the view I have expressed on the question of the loan account balance.

Costs

The plaintiff made allegations against Mr Nicholls which I have not found it necessary to determine for the purpose of deciding upon substantive relief. So far as the question of costs is concerned, my view is that the allegations made against Mr Nicholls generally under the rubric of failure to exercise due care or incompetence have not been made out. I have given a relatively full account of the facts proved by the evidence, from which it appears that Mr Nicholls' s 439A report was a thorough document and he gave a series of reports during the course of the administration. The problems that were encountered in the sale of the assets do not appear to me to have been of his making. On the contrary, it seems to me that Mr Nicholls' conduct was generally reasonable with respect to the administration, subject only to the question of conflict of interest.
So far as the question of conflict of interest is concerned, the principles are not in issue (see, for example, City & Suburban Pty Ltd v Smith (1998) 28 ACSR 328; Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612). In my view there was a clear conflict of interest involved in Mr Chamberlain, the partner of Mr Nicholls, accepting appointment as trustee in bankruptcy of the estate of Rodney Hands while Mr Nicholls continued as Deed Administrator, especially when there was no attempt to erect any "Chinese wall" or other arrangement for separating determinations in the bankrupt estate from determinations under the DOCA. Indeed, the day-to-day administration of the bankrupt estate appears to have been given to Mr Nicholls’ and a colleague in the Tamworth office. There was an inherent conflict between the interests of the Deed Creditors in preserving a fund available for distribution to them, and the interest of the trustee in bankruptcy in asserting claims to assets in the hands of the Deed Administrator or under his control for the benefit of the creditors of the bankrupt.
In my opinion, given that the plaintiff has succeeded on the principal substantive issue before the court, the appropriate course as to costs is to order Mr Nicholls in his capacity as Deed Administrator to pay the plaintiff's costs of the proceeding, subject to his right of indemnity against the assets of the Company; and to order that, having regard to his failure to obtain the substantive relief which he sought, and also the conflict of interest that arose upon the appointment of Mr Chamberlain, Mr Nicholls' own costs of the proceeding after the date of that appointment not be recoverable by him out of the assets of the Company.

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LAST UPDATED: 03/10/2006

[2006] NSWSC 1033

3 October 2006