Jamieson Louttit v Kolln

[2007] NSWSC 970

CITATION:	Jamieson Louttit v Kolln [2007] NSWSC 970
HEARING DATE(S):	19/10/06, 09/02/07
JUDGMENT DATE :	31 August 2007
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
DECISION:	See paragraph 63 of judgment.
CATCHWORDS:	CORPORATIONS – Voluntary administration – Deeds of company arrangement – Application by administrator for directions under s 447D of the Corporations Act 2001 (Cth) – Powers of administrator under deed – Whether deed administrator has power to declare a dividend – Whether deed administrator has power to effect loans from companies under deeds of administration to enable a shareholder to buy out shares of second shareholder – Held that deed administrator has no power to declare dividend – Held that deed administrator has power to effect loans to shareholder. - CORPORATIONS – Winding up – Application for order under s 447A to modify operation of Part 5.3A of the Corporations Act 2001 (Cth) – Where company clearly solvent – Modification sought inconsistent with object of Part 5.3A – Modification would not operate fairly - Application refused. - (Cth) Corporations Act 2001, ss 447A, 447D
LEGISLATION CITED:	Corporations Act 2001 (Cth) Income Tax Assessment Act 1936 (Cth) Corporations Regulations 2001 (Cth)
PARTIES:	Jamieson Louttit v Kolln; In the Matter of Trician Pty Ltd (subject to deed of company arrangement) v Nollk Pty Ltd (subject to deed of company arrangement)
FILE NUMBER(S):	SC 4477/06
COUNSEL:	Plaintiff: S A Wells 1st Defendant: J E Richards 2nd Defendant: D Durston
SOLICITORS:	Plaintiff: Tresscox Lawyers 1st Defendant: H R Barry 2nd Defendant: N Aussel

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IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Friday, 31 August 2007

In the Matter of Trician Pty Ltd (subject to deed of company arrangement) v Nollk Pty Ltd (subject to deed of company arrangement)

JUDGMENT

1 HIS HONOUR: This is an application under s 447D(2) of the Corporations Act 2001 (Cth). The plaintiff is the administrator of two deeds of company arrangement made on 31 March 2004 and amended on 18 July 2005. He seeks directions as to the operation and effect of a deed dated 26 February 2004 called the Deed of Arrangement between the plaintiff, Trician Pty Ltd (“Trician”) and Nollk Pty Ltd (“Nollk”), the first defendant (Ian Kolln), the second defendant (Patricia Kolln), and a Ms Margaret Robinson. The Deed of Arrangement is a schedule to each deed of company arrangement.

Background

2 The Deed of Arrangement of 26 February 2004 recites that Ian Kolln and Patricia Kolln each held 37.5% of the issued shares in Nollk, and each held 40% of the issued shares in Trician. The balance of the shares were held by Ms Robinson on trust for them in equal shares. The agreement recites that Ian Kolln and Patricia Kolln were involved in litigation and had agreed to resolve their disputes by dividing the real estate assets and proceeds of sale of such assets of Trician and Nollk equally between them and by referring all accounting and non-property issues relating to any of the shareholders to the “arbitrator” for final determination. The plaintiff was the arbitrator. In the Deed of Arrangement he is called “the Administrator”. The Deed of Arrangement included the following terms:

“ 2B.2 The shareholders acknowledge that the underlying principle of settlement between them is that the net assets of Nollk and Trician be divided between IK and PK on an equal basis.
2B.3 The Shareholders agree that IK will be entitled (whether in his own name or as a Purchaser of PK’s shares in Trician) to acquire the following Properties:
(i) 23 Cook Street, Oyster Bay - $ 600,000.00
(ii) 1 Flora Street, Erskineville - $ 575,000.00
(iii) 21-31 McDonald Street,
Erskineville - $2,270,000.00
Total - $3,445,000.00
2B.4 Subject to the provisions set out below PK will be entitled to purchase from Nollk and Trician the following properties:
12 Green Point Road, Oyster Bay - $1,150,000.00
2B.5 The Shareholders agree that IK can purchase all of the shares in Trician in lieu of purchasing the properties in Clause 2B.3. The purchase price of the shares in Trician shall be determined by the Administrator based on the agreed property values (refer to Annexure A) and any adjustment made by the Administrator in accordance with this Deed.
...
2B.7 With the exception of the sale referred to in paragraph 2C the parties agree that the transactions referred to in paragraphs 2B.3 – 2B.5 shall not be completed until the Administrator has issued a final determination in accordance with paragraph 7.6.
2B.8 It is acknowledged that there is a difference of $2,295,000 to PK based on the division of the Properties set out above. The parties acknowledge that the difference shall be taken into account by the Administrator when calculating the distributions to Shareholders on the liquidation of Nollk and when calculating the price of the Trician shares. ”

3 Ian Kolln and Patricia Kolln are brother and sister. On 26 February 2004, they consented to orders that the plaintiff be appointed as administrator of Nollk and Trician “in accordance with the Corporations Act.” That order was not authorised by the Corporations Act. They also consented to orders disposing of then current litigation between them. On 5 March 2004, Ian Kolln and Patricia Kolln, as directors of Trician and Nollk, resolved to appoint the plaintiff as administrator of each of Trician and Nollk pursuant to s 436A of the Corporations Act. At a meeting of creditors of each company convened under s 439A of the Corporations Act, it was resolved that each company execute a deed of company arrangement.

4 The deed of company arrangement for each of Trician and Nollk provided that Ian Kolln and Patricia Kolln agreed that any debts owed by Trician or Nollk to them should be subordinated to debts of all other creditors. The plaintiff was appointed deed administrator. The deed provided for the plaintiff as deed administrator to apply the “deed fund” in payment of the administrator’s remuneration and expenses, in payment of those companies’ share of the costs of the arbitration, in payment of employees and other admitted creditors, other than Ian Kolln and Patricia Kolln, and finally in distribution to Ian Kolln and Patricia Kolln of payment of their debts in full. The “deed fund” comprised all of the assets of each company which were to be realised by the administrator pursuant to the terms of the deed. Clause 3.2 provided that the deed fund would be under the sole control of the administrator.

5 Each deed of company arrangement contains a clause dealing with termination of the deed of company arrangement. Clause 15.1(a) of each deed provides that upon payment to the “Admitted Creditors” of their “Creditor Entitlements” the administrator must certify to that effect in writing and must within 28 days lodge with the Australian Securities and Investments Commission a notice of termination of the deed. Execution of that notice terminates the deed.

6 Clause 15.1(b) provides that the deed also terminates if a resolution is passed for its termination at a meeting convened for that purpose. The deed terminates upon the earlier of those events. The Nollk deed of company arrangement, but not the Trician deed of company arrangement, provides that on the deed terminating pursuant to clause 15.1(b) (that is on the passing of a resolution for its termination) the company shall be deemed to have passed a resolution pursuant to s 491 of the Corporations Act 2001 that it be wound up voluntarily and the administrator be appointed as liquidator of the company.

7 The property of the company remains under the sole control of the administrator until the deed of company arrangement is terminated. In the absence of a resolution of creditors resolving to terminate the deed, the deed would not be terminated until the administrator has executed the notice required under clause 15.1.

8 As contemplated by the Deed of Arrangement, the plaintiff was also appointed as an arbitrator. That appointment was effected pursuant to an arbitration agreement dated 26 February 2004. That agreement recites that the parties had agreed to resolve their disputes by dividing the real estate assets of Trician and Nollk equally between them and referring all of the accounting and non-property issues to the arbitrator for final determination. By clause 5.1, the parties acknowledged that the plaintiff was appointed primarily, but not solely, to determine the financial claims relating to Nollk and Trician including, but not limited to, disputes as to payments made to and from the companies and loans made to and from both companies. The arbitrator was appointed to present to shareholders a complete set of financial statements and income tax returns for the companies.

9 As amended on 31 March 2004, clause 5.4 of the arbitration agreement provides:

“ 5.4 After completion of the accounts and the review process set out below the Shareholders expressly authorise the Arbitrator to thereafter calculate the distribution of the balance of the funds owing to IK and PK having regard to:
(a) The agreement for the division of the Property set out in [Clause 2B of the Deed of Arrangement].
(b) The repayment by Nollk and/or Trician of any loans made to either Company by IK, PK or any third party.
(c) The payment to Nollk or Trician of any money whether by loan or otherwise that the Arbitrator determines is owed to either company by IK or PK or Zehra George.
(d) Any adjustment or order made by the Arbitrator as a result of the determination of any of the Arbitration issues. ”

10 There was no issue before me as to the validity of the plaintiff’s appointment as administrator of Trician and Nollk pursuant to the resolution of directors of 5 March 2004. There was no issue that the deeds of company arrangement were not validly adopted at a meeting of creditors. On 5 March 2004, Ian Kolln and Patricia Kolln must have resolved that, in their opinion, Trician and Nollk were insolvent or likely to become insolvent at some future time. On the figures presented on the present application, it seems highly unlikely that they could properly have formed that opinion. However, that was not an issue before me. It is theoretically possible that they may each have had claims on the companies which, if upheld in the arbitration, may have meant that the companies were insolvent, although the arbitrator’s determination of those claims does not suggest that that could be so.

11 Following the arbitration, and the resolution of the claims of each of Ian Kolln and Patricia Kolln on the companies, both companies have a very substantial surplus of assets over liabilities. Adopting the values for the real property contained in clause 2B.3 and 2B.4 of the Deed of Arrangement of 26 February 2004, the financial position of the companies was summarised by the plaintiff as follows:

Company	Current
Position $
Trician Cash Property – 23 Cook Road and Erskineville properties Property – 12 Green Point Road, Oyster Bay Loan Account – Ian Kolln Loan Account – Patricia Kolln Motor Vehicle Paintings Shares in Listed Companies Provision for Taxation Provision for Z George (creditor) Loan from Trician to Nollk	1,817,009 3,445,000 1,150,000 603,207 (330,678) To be determined 10,065 To be determined (472,692) (300,000) 151,404
Net Asset Value Nollk Cash Property Loan Account – Ian Kolln Loan Account – Patricia Kolln Shares in Listed Companies Provision for Taxation Loan from Trician to Nollk	6,073,315 4,458,779 0 255,247 50,000 To be determined (400,000) (151,404)
Net Asset Value 4,112,622
Total 10,185,937

12 The dispute about which the plaintiff seeks directions is as to how the surplus assets of Trician and Nollk should be distributed to the shareholders consistently with clause 2B of the Deed of Arrangement of 26 February 2004. The administrator seeks the following directions pursuant to s 447D(2) of the Corporations Act:

“ 1. Directions as to the proper construction of Clause 2B.5 of the Deed of Arrangement made on 26 February 2004.
2. A direction that on the proper construction of the Deed of Arrangement the plaintiff is justified in determining the purchase price of the relevant shares in Trician Pty Limited by paying a dividend equally to Ian Kolln and Patricia Kolln in their capacity as shareholders of Trician Pty Limited after Patricia Kolln purchases the property known as 12 Green Point Road, Oyster Bay from Trician Pty Limited but before Ian Kolln purchases Patricia Kolln’s shares in Trician Pty Limited.
3. A direction that on the proper construction of clause 2B.5 of the Deed of Arrangement that, in determining the agreed property values referred to therein, the plaintiff is justified in determining the value of the properties by reference to the amounts set out in cl. 2B.3 and cl. 2B.4 of the Deed of Arrangement.
4. A direction that on the proper construction of the Deed of Arrangement the plaintiff is justified in making distributions from the Trician Deed Fund in the following manner:
(a) Selling the property situated as 12 Green Point Road, Oyster Bay for $1.15 million and the paintings for $10,065 to Patricia Kolln;
(b) Including the cash funds from the sale of 12 Green Point Road in the accounts of Trician;
(c) Finalising the accounts and paying all tax liabilities of Trician and other valid creditor claims;
(d) Transferring funds from Nollk to Trician in order to discharge the loan owed by Nollk to Trician;
(e) Distributing all the cash held by Trician in the following manner:
(i) pay Patricia Kolln’s loan owed to her by Trician;
(ii) pay to Patricia Kolln and Ian Kolln from the remaining cash balance an equal dividend but taking into account the $603,207 owed by Ian Kolln to Trician;
(f) Valuing the remaining assets of Trician being properties at 23 Cook Road and Erskineville, a motor vehicle and shares;
(g) Transferring Patricia Kolln’s 50% shareholding in Trician to Ian Kolln for 50% of the value of Trician assets calculated under (f). It is envisaged that Nollk will advance funds to Ian Kolln to enable him to fund this purchase of shares;
(h) Placing Nollk into liquidation pursuant to cl 2D.2 of the Deed of Arrangement and cl. 15.1 and 15.2 of the Deed of Company Arrangement for Nollk. ”

13 The Deed of Arrangement is a schedule to each deed of company arrangement and is amended by each deed of company arrangement. Whilst there is no express provision in the deeds of company arrangement that the plaintiff, as deed administrator, will carry out his functions under the Deed of Arrangement in relation to surplus assets under his control, that can be implied. It was common ground between the plaintiff, Patricia Kolln and Ian Kolln that the plaintiff should do so. The application for directions under s 447D(1) was premised on that assumption. No issue was taken about that assumption and I am prepared to adopt it. However, the termination provisions of the deeds of company arrangement have to be taken into account in the directions to be given.

14 Patricia Kolln objects to the proposal, which envisages the payment of a dividend by Trician to the shareholders.

15 Ian Kolln has elected to acquire Patricia Kolln’s shares in Trician rather than to purchase from Trician the properties at 23 Cook Street, Oyster Bay and the Erskineville properties. The reason the plaintiff proposes payment of a dividend by Trician is to provide funds to Ian Kolln to purchase Patricia Kolln’s shares in Trician.

16 An alternative proposal put forward by the plaintiff, which would not involve the declaration and payment of a dividend, was that instead of Trician declaring a dividend, it should lend Ian Kolln all available moneys which it held in cash to Ian Kolln, and that that amount, together with moneys to be borrowed by Ian Kolln from Nollk, would be used to purchase Patricia Kolln’s shares in Trician.

17 Ian Kolln does not agree with this proposal.

18 The directions sought will not determine the rights of the defendants. The only binding effect of the directions will be that, provided the plaintiff has made full disclosure of material matters, he will be protected from liability for alleged breach of duty as deed administrator if he acts in accordance with the directions given. Patricia Kolln and Ian Kolln were made parties to the application. They made submissions and, in the case of Ian Kolln, adduced evidence on the application.

Grounds of Objection to the Dividend Proposal

19 Patricia Kolln objects to the plaintiff’s proposal that Trician pay dividends on two grounds. First, she contends that the plaintiff does not have the power to declare a dividend and cause the dividend to be paid. Secondly, she contends that if there is such a power, it should not be exercised because of the adverse tax consequences for the parties, and in particular, for her, if dividends are paid. She contends that if the plaintiff has power to declare and pay a dividend, the power would not be exercised for a proper purpose.

20 The amount of the proposed dividend was $2,628,315. Mr Cooper, who has been retained by the plaintiff to provide specialist taxation advice, states that he is advised that the amount of the dividend would be $2,928,315. This may be because a claimed debt of $300,000 for which provision was made may not be owed. However that may be, under the proposal, a dividend of at least $1,314,157 would be paid to each of Patricia Kolln and Ian Kolln. They would be liable to pay tax at the top marginal rate on the moneys so paid. Mr Cooper calculated that if the dividend paid were $2,677,074, then, on the assumption (presumably well-based) that there were franking credits of $81,000, the tax payable by each of Ian Kolln and Patricia Kolln would be $579,085. Patricia Kolln objects to being subjected to such a tax liability.

21 The reason Ian Kolln supports the proposal is that he would have a higher taxation liability if he borrowed from Trician the moneys required to pay Patricia Kolln for her shares in Trician. If Ian Kolln borrowed those moneys from Trician, then they would either be treated as a dividend (and he would be liable to pay tax on the borrowing as a dividend), or the loan would have to comply with the conditions of Division 7A of the Income Tax Assessment Act 1936 (Cth). Those conditions would require that if the loan be made under a written agreement, the interest rate must be no less than a benchmark interest rate determined each year; the loan must be for a certain maximum term; and there must be stipulated minimum payments of interest and repayments of capital (s 109N). The loan from Trician would either have to be repaid, or the borrowings would be treated as a dividend.

22 Ian Kolln objects to incurring tax liabilities which would be associated with a repayment of the loan if the loan is not to be deemed a dividend. Unless Ian Kolln made the required loan repayments from his own resources, he would have to receive payment of dividends from Trician which would be taxable in his hands. There is disagreement between the accountants retained for the plaintiff and for Ian Kolln as to whether interest payments made by him on the loan would be deductible. In any event, the interest on the loan received by Trician would be assessable income in its hands.

23 Although there are disputes between the accountants as to how Ian Kolln’s taxation liabilities should be calculated, it is clear that he would have a significantly higher liability for taxation if he purchased Patricia Kolln’s shares in Trician using moneys borrowed from Trician, and financed the repayment of the loan from dividends paid by Trician to him, than he would have if a dividend were declared and paid by Trician before the purchase of Patricia Kolln’s shares in Trician was completed.

24 Mr Wickenden, an accountant retained by Ian Kolln, opined that if Ian Kolln borrowed $2,025,108, (which he considered was the amount required to be borrowed from Trician to pay the purchase price), and if that loan were treated as a dividend, then he would have a liability for income tax on the dividend of $941,675, and would need income of $1,760,142 to fund that tax liability, which in turn would result in a tax liability of $818,466. If the loan were repaid, and the repayment was funded from after-tax income, Mr Wickenden opined that Ian Kolln’s personal tax liability would also be $1,760,141 or, if paid from franked dividends of Trician, $1,388,141.

25 Mr Cooper was of the view that Ian Kolln would need to borrow only $1,054,644, but did not explain why that would be so. It appears to me that the required borrowing from Trician would be substantially higher, assuming Ian Kolln did not borrow from Nollk more than he would be entitled to receive on a winding-up of Nollk. Mr Cooper opined that if the loan of $1,054,644 were repaid from Ian Kolln’s after-tax income, the income tax he would personally pay would also be $1,054,644, or $682,644 if paid from fully franked dividends of Trician. He said that the liability should be less because Ian Kolln would be entitled to a deduction on the interest paid on the loan, but did not quantify the reduction.

26 Although there was disagreement between the accountants on matters of detail, there was no disagreement that Ian Kolln would face a substantially higher income tax burden if he funded the purchase of Patricia Kolln’s shares by borrowing from Trician, than if Trician paid a dividend before the shares were purchased.

27 Ian Kolln deposed that, in effect, he was destitute, except for his shareholdings in Trician and Nollk. If so, unless a dividend were declared in Trician before he purchased Patricia Kolln’s shares in Trician, his only means of paying for those shares would be by borrowing from Trician and Nollk. However, the evidence shows that Ian Kolln has other assets, to which he did not refer, including land, apparently beneficially owned by him, whose land value has been assessed by the Valuer-General at $1,555,000. I do not assume that Ian Kolln could only complete the purchase of his sister’s shares in Trician by borrowing from Trician. However, my conclusion as to whether the directions sought by the plaintiff on the “dividend proposal” should be given, does not depend on whether that is so or not.

28 There would be a significantly lower taxation liability for both Ian Kolln and Patricia Kolln if Trician were placed into liquidation. However, Ian Kolln does not consent to such a course. Under clause 2B.5 of the Deed of Arrangement, he is entitled to purchase all of the shares in Trician in lieu of purchasing the properties. It is not suggested that he could be compelled to accept an in specie distribution of Trician’s assets on a winding-up, as he is entitled to purchase Patricia Kolln’s shares. The adverse tax consequences he faces if he uses Trician’s funds to purchase his sister’s shares in Trician arise because he has exercised his right to acquire his sister’s shares in Trician and he seeks to use Trician’s financial resources to provide him with the money to pay for the shares. Such tax consequences are simply the result of his decision as to how to proceed.

29 As I have said, Patricia Kolln objects to the directions sought by the plaintiff on the grounds that he has no power to declare a dividend or, if he does have such a power, he does not propose to exercise the power for a proper purpose.

30 On 12 July 2006, the plaintiff wrote to the parties advising of his provisional intention to declare a dividend. He also advised that if the parties were not unanimous on a course to be taken, he would seek directions. After setting out the terms of clause 2B.5 of the Deed of Arrangement of 26 February 2004, he said:

” My task pursuant to clause 2B.5 is to determine the purchase price to be paid by IK for PK’s shares in Trician. Clause 2B.5 should not be taken in abstract and it should be noted that it is part of section 2B relating to the terms of settlement. Clause 2B.2 states that the underlying principle of settlement is that the net assets values of Nollk and Trician be divided between IK and PK on an equal basis.
Issue
In the discussions I have had with the parties’ representatives it appears that the issue is whether I am required to determine the value of the shares prior to making adjustments or whether I can value the shares in Trician after making the adjustments, e.g. Dividends to IK and PK. On my interpretation of clause 2B.5 I am to make the adjustments first and then to value the shares based on their property values and having regard to the adjustments I have previously made.
Proposed adjustments
I have indicated that one of the adjustments I propose to make is for a Dividend to be paid to IK and PK, in their capacity as shareholders of Trician. The Dividend is to be paid after PK purchases 12 Green Point Road, Oyster Bay NSW but before IK purchases PK’s shares. ”

31 It is clear that the plaintiff does not have power under the Deed of Arrangement to declare a dividend. There is no clause in the Deed of Arrangement purportedly empowering him to declare a dividend. The Deed of Arrangement is a curious document. The plaintiff is appointed to act as agent for and on behalf of the company for the purpose of exercising powers conferred by the deed and carrying out duties arising under the deed (clause 1). The deed purports to operate as if it were a deed of company arrangement authorised by the Corporations Act. For example, clause 7 provides that the deed can be pleaded by the company against any creditor in bar of any debt that was admissible under the deed. It purports to apply various subdivisions “of Part 5.6 of the Corporations Law” (sic). It purports to bind creditors. Clause 2 set out powers similar to those contained in clause 2 of schedule 8A to the Corporations Regulations, being the prescribed provisions for a deed of company arrangement. There is no express power to declare a dividend.

32 The reference in clause 2B.5 to the plaintiff making adjustments in accordance with the deed is a reference to adjustments which are made by the plaintiff in determining the share price following his determination of issues for arbitration. The declaration and payment of a dividend is not an “adjustment” to be made to the calculation of a share price. If it could be so considered, it is not an adjustment which could be made by the plaintiff in accordance with the Deed of Arrangement.

33 On no view could the Deed of Arrangement have empowered the plaintiff to declare a dividend. When that deed was entered into, that is, on 26 February 2004, the company was not in administration. There had been no meeting of directors pursuant to s 436A. At that time, the power to declare a dividend was a power vested in the board, and could not have been delegated to the plaintiff. The Deed of Arrangement did not purport to delegate such a power.

34 Schedule 8A of the Corporations Regulations 2001 (Cth) prescribes the powers of administrators under a deed of company arrangement which are taken to be included in such a deed “except so far as [that deed] provides otherwise” (s 444A(5), Corporations Act). The powers of the plaintiff are set out in schedule 1 of the deeds of company arrangement, and are similar to those set out in schedule 8A. It was submitted for the plaintiff that he has a power to declare and pay a dividend pursuant to paras (s) and (ff) of schedule 1 which correspond with paras (s) and (ff) in clause 2 of schedule 8A. Those paragraphs provide:

“ (s) to do all things as are necessary for selling, calling in or converting into money any of the property of the Company and applying the same in accordance with this Deed and otherwise effectively and properly carrying out its duties as Administrator;
(ff) to do anything else as is necessary for the purpose of administering this Deed. ”

35 Counsel for the plaintiff submitted that once a dividend was declared, it became a debt and could be distributed pursuant to subparas (n) and (ff) and clause 10.1(f) of the deed of company arrangement. However, the question is not whether there is a power to pay a dividend once declared, but whether the administrator has the power to declare such a dividend.

36 The declaration of a dividend is not a sale, calling in or converting into money of any of the property of the company. The power to declare a dividend would only arise if it were a power “necessary” for the administrator effectively and properly to carry out his duties (para (s)), or was “necessary” for the purpose of administering the deed (para (ff)). Even if it be assumed that the purpose of administering the deeds of company arrangement, and the execution of the plaintiff’s duties as administrator of the deeds of company arrangement, extends to things to be done to implement fully the terms of settlement in clause 2B of the Deed of Arrangement, it is not necessary that the plaintiff have a power to declare a dividend. Ian Kolln can purchase Patricia Kolln’s shares in Trician whether or not a dividend is declared and paid. That he may incur a higher taxation liability if he pays for Patricia Koln’s shares using moneys borrowed from Trician, does not mean that it is necessary in order to implement the Deed of Arrangement that a dividend be declared and paid by Trician before her shares are purchased.

37 Clause 2(r) of the Deed of Arrangement conferred upon the plaintiff powers in the following terms:

“ (r) to sell, call in or convert into money any of the property of the company, to apply the money in accordance with this deed and otherwise effectively and properly carry out his or her duties as administrator. ”

38 That power, arguably, was in wider terms than the power found in para (s) of schedule 1 to the deeds of company arrangement. However, it is unnecessary to resolve that question as it is clear that both provisions do not apply. Clause 16.2 of the deeds of company arrangement provides that where there is any inconsistency or duplication between the deed of company arrangement and the Deed of Arrangement, then the provisions of the deed of company arrangement prevail, and the inconsistent or duplicated provisions of the Deed of Arrangement are of no force or effect. The terms of para (s) and (ff) of the deeds of company arrangement make it clear that the incidental powers of the plaintiff as administrator of those deeds are limited to doing those things which are necessary for the effective and proper carrying out of his duties.

39 I agree with the submission of counsel for Patricia Kolln that the administrator does not have the power to declare a dividend to give effect to the proposal for which approval is sought.

40 Nor should an order be made under s 447A of the Corporations Act to modify the operation of Pt 5.3A of the Act to confer power on the plaintiff to declare and pay a dividend. The object of Pt 5.3A is to provide for the business, property and affairs of an insolvent company to be managed in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or otherwise maximises a return to creditors and members than would result from an immediate winding-up (s 435A). I have already expressed my reservations as to whether Patricia Kolln and Ian Kolln properly invoked Pt 5.3A. However, assuming that there was nothing improper in the resolution of directors of 5 March 2004, nonetheless it is now quite clear that the companies are solvent. The plaintiff will perform his tasks under the deeds of company arrangement by applying the companies’ assets, that is the “Deed Fund”, in the payment of his remuneration and expenses and the payment of debts and liabilities incurred by him in the course of his administering the deed, and by payment of the company’s debts (Clause 10.1). No order is required in relation to the payment of dividends in order to complete the administration contemplated by the deeds of company arrangement. The parties have proceeded on the basis that the incorporation of the Deed of Arrangement as a schedule to the deeds of company arrangement means that the plaintiff, as administrator under the deeds of company arrangement, should determine the share price, and do what is necessary to implement the terms of settlement in clause 2B of the Deed of Arrangement. There was no dispute about that matter and I assume that to be the correct interpretation of the deeds of company arrangement. Nonetheless, assuming that to be the correct interpretation, I see no reason why Pt 5.3A of the Act, which is now being used for an object for which it was not designed, should be modified to allow the proposal to proceed in a way which will prejudice one shareholder to the benefit of the other.

41 Considerations of fairness do not indicate that the plaintiff should be given such a power, or, if he has such a power, (contrary to my view), that he should exercise it in the manner proposed. I do not see that it is fair to reduce the taxation liability that Ian Kolln will incur if he borrows moneys from Trician to pay for the purchase of his sister’s shares in Trician, but impose a higher taxation liability on Patricia Kolln than she would otherwise incur if the profits of Trician are not distributed by way of dividend before the share purchase is completed. The Deed of Arrangement made no provision, as it well might have, for the distribution of profits by way of dividend. I do not think the parties could objectively be taken to have assumed that the plaintiff could declare and pay a dividend. To the contrary, in the absence of an express power under the Corporations Act, and in the absence of an express conferral of power in the deeds of company arrangement or in the Deed of Arrangement, it is objectively unlikely, whatever their subjective beliefs, that the shareholders would have intended such a course. The fact, if it be a fact, that Ian Kolln does not have assets of value other than his shares in Trician and Nollk, does not indicate otherwise.

42 The higher incidence of taxation which Ian Kolln will incur is a direct result of his decision to purchase his sister’s shares in Trician. Even now, his sister is willing for both companies to be wound up voluntarily. On the evidence, that would result in a reduced taxation liability for both parties. Ian Kolln does not accept that Trician, as well as Nollk, should be wound up. He is entitled not to vote in favour of a winding-up of Trician. But he cannot complain that he should be required to bear a higher incidence of taxation if, as he appears to contend, he needs to borrow moneys from Trician to complete the purchase of his sister’s shares. That is the price of his election.

43 For these reasons, I decline to make the directions sought in paras 2 and 4 of the Originating Process.

44 In para 3 of the Originating Process the plaintiff sought a direction that, in determining the agreed property values referred to in clause 2B.5 of the Deed of Arrangement, the plaintiff is justified in determining the value of the properties by reference to the amounts set out in clauses 2B.3 and 2B.4 of the deed of arrangement. No submissions were made about this proposed direction by any party. Clause 2B.5 provides for the purchase price of the shares in Trician to be determined by the administrator based upon property values which were then agreed upon by the parties and said to have been set out in annexure A to the deed. The deed exhibited to the administrator’s affidavit does not contain an annexure A. The administrator deposed that the document referred to in clause 2B.5 as annexure A was not attached to the Deed of Arrangement. He said that he had relied upon clauses 2B.3 and 2B.4 for the values of the respective properties.

45 It is clear from clause 2B.1 that the agreed values said to be set out in annexure A were as stated in a valuer’s report of John Brookes Real Estate. No party tendered those valuations.

46 As neither Patricia Kolln nor Ian Kolln submitted that the shares should be valued by adopting any other figures as the value of the real estate, I think that the plaintiff should be given the directions sought so that he is protected from any potential future claim if either Ian Kolln or Patricia Kolln later contends that the shares should have been valued on a different basis. The construction he has adopted is one which is clearly open. In the absence of any contrary view being expressed, he is justified in proceeding on that basis.

Direction in Relation to Proposal 2

47 Although it was not sought in the Originating Process, counsel for the plaintiff submitted that if the Court were to find that he was not empowered to take the steps required to implement the “dividend proposal”, then he sought a direction that he is justified in taking the steps required to implement the “loan proposal”.

48 The steps involved in the “loan proposal” are as follows:

1. Repayment by Nollk of a loan owed to Trician;

2. Purchase by Patricia Kolln of 12 Green Point Road, Oyster Bay in accordance with clause 2B.4 of the Deed of Arrangement, using money borrowed from Nollk for the purchase and payment of stamp duty on that purchase;

3. Acquisition of certain paintings by Patricia Kolln in accordance with the valuation contained in the Arbitrator’s final determination;

4. Repayment by Trician of a loan from Patricia Kolln;

5. Payment by Nollk and Trician of outstanding taxation liabilities;

6. Loan by Trician to Ian Kolln of all available moneys held in cash with the cheque to be indorsed to Patricia Kolln for the purchase of 50% of the Trician shares;

7. Nollk’s lending Ian Kolln the balance of the purchase price for the Trician shares (with the cheque to be indorsed to Patricia Kolln);

8. Ian Kolln to purchase Patricia Kolln’s shares in Trician for 50% of the net value of the assets of Trician;

9. Nollk to lend to Ian Kolln moneys to pay the stamp duty on the purchase of the shares; and

10. Loans to be made to Ian Kolln and Patricia Kolln to equalise “ the loans owed to (sic) each party ”.

49 In principle, the proposal seems to be workable, provided that the total debt which Ian Kolln incurs to Nollk does not exceed the amount which he would be entitled to receive on the winding-up of Nollk, that is, 50% of its net assets. On the figures in the plaintiff’s affidavit, it would seem that if Ian Kolln borrowed about $1,800,000 from Nollk, then, after taking into account the existing loan debt, he would have borrowed as much as he would expect to receive on a winding-up. The balance of the funds to pay for Patricia Kolln’s shares would have to be provided by borrowings from Trician, or from third party sources, or by Ian Kolln realising his own assets. Although not referred to in his affidavit, there is evidence that he is the beneficial owner of a property at 22 Green Point Road, Oyster Bay whose land value was assessed by the Valuer-General at $1,555,000. Hence, he may well be able to raise the necessary funds to purchase Patricia Kolln’s shares without needing to borrow from Trician.

50 To the extent it is sought to borrow funds from Trician, then the provision by Trician of financial assistance to Ian Kolln for him to purchase his sister’s shares is permitted by s 260A(1)(a) of the Corporations Act provided that the assistance does not materially prejudice the interests of Trician or its shareholders, or its ability to pay its creditors. On the material before me, it is clear that the financial assistance proposed, although its extent is unclear, would not materially prejudice the company or its shareholders, or its ability to pay its creditors. Hence, it would not be precluded by s 260A. Whether Ian Kolln is prepared to borrow money from Trician, having regard to the taxation implications, is a matter for him.

51 Provided that the deed of company arrangement is still on foot, the proposed steps under this proposal are all within the powers conferred by the deed of company arrangement. The first step, repaying the loan from Trician, is authorised by clause 10.1(e). The second step involves lending the purchase price of 12 Green Point Road, Oyster Bay to Patricia Kolln for her to use the moneys to pay Trician. Schedule 1 of the deed of company arrangement contains no general power to make loans. The administrator does have power under para (w) of schedule 1 to draw, accept or endorse any bill of exchange or promissory note on behalf of Nollk. The power to draw a bill of exchange extends to drawing a cheque that is a bill of exchange drawn on a bank payable on demand. In the peculiar circumstances of this case, there is no reason that power should not extend to making a loan by the drawing of such a cheque. Such a cheque can be drawn payable to Patricia Kolln.

52 The third step involves Patricia Kolln acquiring paintings in accordance with the valuation contained in the Arbitrator’s final determination and this amount being added to her loan account. The sale of the paintings at valuation is authorised by para (s) of schedule 1. In the circumstances of this case, the plaintiff is justified in deferring collection of the purchase price and adding that to Patricia Kolln’s loan account.

53 The fourth step involves Trician repaying its loan to Patricia Kolln. According to the plaintiff’s schedule of net assets, she is owed in excess of $330,000 by Trician. That step is authorised by clause 10.1(f) of the deed of company arrangement.

54 The next step is payment by Nollk and Trician of outstanding taxation liabilities. That step is authorised by clause 10.1(d) of each deed of company arrangement. It should be noted that if all debts are paid, the administrator is required to give the certificate provided for by clause 15.1(a) and to execute a notice of termination of the deed which is to be lodged with ASIC within 28 days. I think clause 15.1(a) contemplates that there may be a delay of up to 28 days between the payment of the last creditor (whereupon the administrator must certify in writing to the effect that creditor entitlements payable to admitted creditors have been paid) and the execution and lodgment of the notice of termination of the deed.

55 Step six contemplates Trician’s lending Ian Kolln all available moneys held in cash by a cheque to be indorsed to Patricia Kolln for the purchase of 50% of the Trician shares. This step is authorised by para (w) of schedule 1.

56 The seventh step involves Nollk lending Ian Kolln the balance of the purchase price of the Trician shares, again by a cheque to be endorsed to Patricia Kolln. Again, in the peculiar circumstances of this case, that step is authorised by the power to draw any bill of exchange in para (w).

57 The next step is for Ian to purchase Patricia Kolln’s Trician shares for 50% of the net value of the assets of Trician. That step does not involve an exercise of power by the plaintiff.

58 The next step is for Nollk to lend Ian Kolln the moneys needed to pay the stamp duty on the purchase of the shares. That payment would also be by cheque and the administrator would have authority to draw the cheque under para (w).

59 The last step would be to equalise the loans to be made by Nollk to Patricia Kolln so that Ian Kolln and Patricia Kolln owe the same amount to Nollk. Those debts would be the only assets of Nollk which would be wound up. Again, the plaintiff could effect the loan by drawing a cheque in accordance with the power given by para (w).

60 In the peculiar circumstances of this case, where no party contends that the deeds of company arrangement were improperly entered into, or that the plaintiff’s powers under the deeds of company arrangement do not extend to implementing the steps needed to complete the settlement in clause 2B of the Deed of Arrangement, then, provided the necessary steps are taken prior to the termination of the deed of company arrangement, the plaintiff would be justified in taking the steps envisaged by the second proposal. That is not to say that Ian Kolln is required to follow that proposal. He may wish to pay for Patricia Kolln’s shares in Trician otherwise than by borrowing the moneys from Trician. If Ian Kolln decides to pursue the second proposal, the plaintiff would be justified in taking the steps described in para [48] above to give effect to that proposal.

Costs

61 Ian Kolln and Patricia Kolln were made parties to the application. The plaintiff is entitled to be indemnified in respect of his costs of the application out of the assets of Trician and Nollk as an expense of the administration. Patricia Kolln’s opposition to the dividend proposal has been successful. That success should not deprive the plaintiff of his costs out of the assets of the companies. The question is whether Ian Kolln should be ordered to pay the plaintiff’s costs or Patricia Kolln’s costs, or both.

62 Justice will be done by Ian Kolln’s having to pay only one set of costs. Whilst his position on the dividend proposal has been unsuccessful, the need for some such application was almost inevitable and is the result of both parties seeking to adapt the provisions of Pt 5.3A of the Corporations Act to resolve their inability to reach agreement. I think the plaintiff’s costs should be regarded as an incidental expense of that endeavour, to be borne by the companies, and hence indirectly by both shareholders. However, Ian Kolln should pay the costs of Patricia Kolln.

63 For these reasons, I make the following directions and orders:

1. I make a direction in accordance with para 3 of the Originating Process;

2. Direct that, provided all the steps to be taken by the plaintiff are taken prior to the termination of the deeds of company arrangement pursuant to clause 15.1 thereof, the plaintiff is justified in dealing with the Nollk deed fund and the Trician deed fund (being the deed funds referred to in the deeds of company arrangement dated 31 March 2004 and amended 18 July 2005 for each of Trician and Nollk) by implementing the steps referred to in para [48] of these reasons;

3. Order that the plaintiff’s costs be paid on the indemnity basis from the assets of Trician and Nollk;

4. Order that the second defendant pay the first defendant’s costs;

5. Order that the Originating Process be otherwise dismissed;

6. Exhibits may be returned after 28 days.

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