Khoury v Zambena Pty Ltd

[1999] NSWCA 402

CITATION:	Khoury v Zambena Pty Limited [1999] NSWCA 402
FILE NUMBER(S):	CA 40253/97
HEARING DATE(S):	12/07/99 13/07/99
JUDGMENT DATE:	28 October 1999
PARTIES :	Joseph Khoury & Sons Zambena Pty Limited
JUDGMENT OF:	Beazley JA at 1; Fitzgerald JA at 6; Davies AJA at 89

LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S) :	2680/96
LOWER COURT JUDICIAL OFFICER:	Young J

COUNSEL:	Appellant: P King/ K Hawes Respondent: R B S Macfarlan QC/ M Wigney
SOLICITORS:	Appellant: Cropper Parkhill Respondent: P A Somerset & Co
CATCHWORDS:	Deed of arrangement; Resolution of creditors failure to give notice of meeting; Termination of deed; Unexplained delay; Lack of financial benefit
DECISION:	Appeal Dismissed

THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40253/97
CD 16285/92
CD 50385/93

BEAZLEY JA
FITZGERALD JA
DAVIES AJA

Thursday, 28 October 1999


KHOURY v ZAMBENA PTY LTD

JUDGMENT

1    BEAZLEY JA: I have had the advantage of reading in draft the judgments of Fitzgerald JA and Davies AJA. I agree with the reasons of Davies AJA save in respect of his Honour’s concluding comments in relation to delay and the lack of financial benefit to be gained by setting aside the deed. It follows that I do not agree with the orders proposed by his Honour.

2    Whilst it is true that some four years has now passed since the Deed was entered into, a part only of that time was due to delay in commencement of proceedings. The resolution approving the Deed was passed on 6 June 1995. Proceedings were commenced on 9 July 1996 seeking to have the Deed of Arrangement set aside, some thirteen months into the effective life of the Deed. There was no evidence as to when the appellants received notice of the meeting. The most that can be said is that it was after 6 June 1995. To that extent, the appellants have failed to explain their delay.

3 Delay is relevant to the exercise of the Court’s discretion: Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR 160 at 171. However, the delay or lapse of time relied upon to defeat the appellants’ claim is the delay up to the time of the hearing of the appeal. Only about twenty five per cent of that time is directly attributable to delay at the hands of the appellants. The remainder of the length of time was due to the exigencies of the court process. It is extraordinary to me that parties who invoke the court process to either assert their rights or to vindicate a wrong done to then are defeated by delay within the court system itself.

4    In this case, as Davies AJA has identified, there were serious deficiencies in this Deed. I consider those deficiencies to be of such magnitude that the appellants should not be defeated by the delay in commencing proceedings. I am also unconvinced that Zambena would necessarily be put into liquidation if the order was set aside.

5    I would order that the scheme of arrangement be set aside and that the respondent pay the costs of the appeal.

6    FITZGERALD JA: As part of the consideration for its purchase of a laundry business from Capitol Laundry Pty Ltd (“Capitol”), the respondent promised to discharge a large secured debt owed by Capitol to Morlend Finance Corporation (Vic) Pty Ltd (“Morlend”). That debt had been guaranteed by a number of people including the appellants, who had mortgaged their homes to Morlend. The respondents’ promise to discharge those mortgages was made to Capitol as a term of the respondent’s purchase of the laundry business, and to the fifth and sixth appellants and their son, Mr Harry Sarkis, and his wife, by an ancillary agreement. Mr Harry Sarkis had effectively controlled Capitol, which Morlend initially placed in receivership and subsequently went into liquidation.

7    Having acquired Capitol’s business, the respondent refused to pay Morlend the amount necessary to discharge the mortgages. Litigation in the Common Law Division and the Commercial Division ensued. Both actions were heard by Giles J, who gave judgment on 13 April 1995.

8    In the action in the Common Law Division. No.16285 of 1992, Morlend sued the appellants and other guarantors of Capitol’s debt (but not Capitol). Orders made on 21 April 1995 gave Morlend “… leave to enter judgment against the Defendants in the sum of $1,407,416.40” and “…judgment for possession …” of the mortgaged homes. It was also ordered that the respondent, against whom some of the defendants in that action, including the fifth and sixth appellants, had cross-claimed, “… discharge the mortgages referred to in paragraph 1 of the Orders entered today” in the other action in the Commercial Division, and the orders entitling Morlend to possession of the mortgaged homes were “stayed for 3 months from today”. The respondent was further ordered to pay the costs of the successful cross-claim against it, and to indemnify the successful cross-claimants, including the fifth and sixth appellants, against costs which they had been ordered to pay to Morlend.

9    In the other action in the Commercial Division, No.50385 of 1993, Capitol (which was in receivership and liquidation) sued the respondent and Morlend and the respondent cross-claimed against Capitol and Morlend. None of the appellants were parties. In Capitol’s action, the respondent was ordered to discharge the mortgages over the appellants’ homes “forthwith”. Unless Morlend otherwise agreed - and there is no suggestion of that - that order effectively required the respondent to pay Morlend the amount secured by those mortgages. In addition, the respondent’s cross-claims were dismissed, and it was ordered to pay all costs, some on an indemnity basis.

10    At least by 17 May 1995, it was apparent that the respondent was insolvent. On that day, a chartered accountant, John Edward Star, was appointed Administrator of the respondent.

11    The respondent did not make any payment towards the debt secured by the mortgages even after it had been ordered to discharge the mortgages. It has the laundry business, which it operates at a profit, while the appellants’ homes have been sold and the proceeds appropriated by Morlend towards the debt which the respondent was effectively ordered to pay. Understandably, the appellants would like to recoup their losses from the respondent. This proceeding has been conducted on the basis that the appellants’ rights against the respondent are limited by a deed of company arrangement which the respondent executed following a resolution at a meeting of its creditors on 6 June 1995. Corporations Law of NSW, subs 439C(a).

12 As the primary judge correctly found, the appellants would have lost their homes even if the deed of company arrangement had not been entered into. The respondent was then insolvent and, on the evidence, if it had been placed in liquidation the disposal of its assets would not have realised sufficient to pay a secured creditor, Orix Australia Finance Corporation Ltd, which had a charge over all its assets. Unsecured creditors, including the appellants, would have received nothing. The deed of company arrangement took advantage of the respondent’s ability to trade profitably. However, it differentiated between Capitol and the guarantors of its debt to Morlend and the respondent’s other major unsecured creditors. The terms of the deed and the contents of the associated report of the Administrator under subs 439A(4)(a) of the Corporations Law of NSW (the “Law”) suggest that it was a primary objective of the deed to achieve that differentiation .

13    The question which this Court must answer on grossly incomplete, confusing, and, in some respects, patently inaccurate evidence is whether a summons which the appellants filed in the Equity Division on 9 July 1996 was correctly dismissed. By that summons, the appellants claimed:

“1. An order that the resolution of creditors of [the respondent] passed on 6 June, 1995 whereby the [respondent] resolved to enter into a Deed of Company Arrangement pursuant to Section 439C(e) of the Corporations Law be set aside.
2. Alternatively to (1), a declaration that the [appellants] are not bound by the terms of the Deed of Company Arrangement entered into by the [respondent] and dated 6 June, 1995.
3. Costs
4. Such other order as to the Court shall seem fit.”

14 Young J, who dismissed the appellants’ summons, held that they had failed to satisfy the requirements of subs 600A(1)(c) of the Law, and said that in relation to the other bases on which they sought relief “… the two factors which make me consider that I should not give any relief in my discretion are that (a) so much time elapsed before the making of the application and (b) I cannot really see how the [appellants] could be any better off even if I did make the order setting aside the deed”.

15    As set out in their notice of appeal, the appellants seek the following orders from this Court:

“1. Appeal allowed.
2. Order that the deed of company arrangement dated 6 June, 1995 be set aside or be declared void.
3. Alternatively to 2, order terminating the deed in so far as it affects the Appellants.
4. Costs of the appeal and of the proceedings before Young J.”

16    The first four appellants face a threshold difficulty which was completely overlooked by the parties in argument in this Court and, it seems, before Young J. His Honour said that, on page 106 of his judgment in the actions which he decided, Giles J “… came to the conclusion that there was a direct agreement between Mr Harry Sarkis, the guarantors and [the respondent], that [the respondent] would discharge the mortgages. He concluded that Capitol and the [appellants] were entitled to orders that [the respondent] discharge the mortgages. Short minutes were brought in on 21 April 1995 and the Judge made formal orders in accordance with his judgment. These orders … include judgment for Capitol against [the respondent] for $1,704,416.40 and a series of orders that specified mortgages given by the appellants be discharged by [the respondent].” At at least two subsequent points in his judgment, Young J made statements which were similarly mistaken. (Underlining added).

17    In this Court, the parties appropriately agreed that Giles J did not give judgment for Capitol against the respondent for a money sum (the right amount would have been $1,407,416.40, not $1704,416.40). However, they erroneously proceeded on the assumption that Young J was correct in his statement that Giles J had concluded that “… there was a direct agreement between Mr Harry Sarkis, the guarantors, and [the respondent], that [the respondent[ would discharge the mortgages”, and “… Capitol and [the appellants] were entitled to orders that [the respondent] discharge the mortgages”. (Underlining added).

18    The first four appellants were not parties to any claim against the respondent in either action decided by Giles J, and, for obvious reasons, no order was made in favour of any of them against the respondent in either action. Further, Giles J did not conclude that “… there was a direct agreement between Mr Harry Sarkis, the guarantors and [the respondent], that the [respondent] would discharge the mortgages”, or that “… Capitol and the [appellants] were entitled to orders that [the respondent] discharge the mortgages”. (Underlining added). His Honour held that the “…direct agreement … that [the respondent] would discharge mortgages” was between Mr Harry Sarkis, his wife and parents, (the fifth and sixth appellants) and the respondent, and that there was also an agreement between Capitol and the respondent that the respondent would do so. The genesis of the error is incorrect information which the Administrator placed before Cohen J shortly before the meeting of the respondent’s creditors on 6 June 1995 (see below), which misled his Honour into mistakenly directing the Administrator that he would be justified in treating all guarantors of Capitol’s debt to Morlend “as bound by a Deed of Company Arrangement which may be entered into by the [respondent] pursuant to s444B of the Corporations Law”. The only orders made by his Honour that the respondent discharge the mortgages were made in favour of Capitol, Mr and Mrs Harry Sarkis, and the fifth and sixth appellants.

19    Similarly, no costs orders were made against the respondent in favour of any of the first four appellants by Giles J.

20    In summary, the first four appellants failed to establish any entitlement or claim against the respondent which made them or any of them a creditor of the respondent at any material time. Since a contention that they were creditors of the respondent and bound by the deed of company arrangement is the foundation of their present proceeding, the appeal by the first four appellants must fail. It is unnecessary to consider whether the first four appellants might be entitled to challenge the deed of company arrangement on the ground that, since it affects the amount recoverable by the fifth and sixth appellants, it affects the adjustment of contributions between the various guarantors. No issue was raised concerning contribution between the guarantors, and, in any event, the evidence would not enable the Court to decide such an issue.

21    Although other, legally incomprehensible grounds were also asserted, the substantial basis of the other appellants’ From this point on, reference to the appellants will include only the fifth and sixth appellants, Merhi Sarkis and Mannoche Sarkis, unless otherwise stated. contention that they were creditors of the respondent as at 6 June 1995 appeared to be the orders for costs in their favour against the respondent and that the respondent indemnify them in respect of costs they had been ordered to pay to Morlend, and that Giles J had found that the respondent had agreed with them to discharge the mortgages given by the guarantors of Capitol’s debt to Morlend and had ordered the respondent to do so, that it was in breach of its obligation to discharge the mortgages which it did not intend to perform (and which on the evidence it did not have the money to perform), and that it was accordingly open to the appellants to recover damages from the respondent, including damages for loss occasioned by the respondent’s delay to that point Carr v J A Berriman Pty Ltd (1953) 89 CLR 327, 349. and, if the appellants accepted the respondent’s breach as a repudiation of its obligation to discharge the mortgages, damages for their loss of the benefit of its performance of that obligation. Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 445. Because the respondent had been ordered to discharge the mortgages, on the present state of authority the appellants could not have obtained a right to damages for loss of the benefit of the respondent’s performance of that obligation unless they obtained the Court’s leave before terminating the agreement which created the obligation. Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245. See also Meagher, Gummow and Lehane: “Equity Doctrines and Remedies”, 3rd ed., para 2053; Jones & Goodhart: “Specific Performance”, 2nd ed., pp258-259.

22 The respondent did not dispute that the appellants were contingent creditors of the respondent as at 6 June 1995, or that, as contingent creditors, they were creditors of the respondent within the meaning of Division 5 of Part 5.3A of the Law. Those concessions appear to be correct, and their basis need not be explored in detail. The explanation in McPherson, “The Law of Company Liquidation” 3rd Ed. (J O’Donovan), pp43-46. See also Brash Holdings Ltd (Administrator appointed) v Katile Pty Ltd (1994) 13 ACSR 504; Molit (No.55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR, 160, 171-172. is applicable to the Law. See ss 459D and 553E.

23    The respondent accepted that it follows that the appellants were entitled to notices of a meeting of its creditors under s436E of the Law which was held on 23 May 1995 and of the meeting of its creditors under s 439A of the Law on 6 June 1995 at which it was resolved that the respondent execute the deed of company arrangement. It was also accepted that the appellants did not receive notices of those meetings.

24    Young J held that the respondent inadvertently omitted to give the appellants notice of the meetings. The respondent challenged the finding that it was responsible for the appellants not receiving notice, but the evidence amply justifies an inference that the Administrator, or those engaged by him to send out the notices to creditors, did not forward copies to the appellants. The appellants also challenged Young J’s finding, submitting that his Honour should have found that notices of the meetings were deliberately not sent to them. Only two potentially material witnesses for the respondent were cross-examined by the appellants, and the matter now asserted was not put to either of them. There was no proper basis for a finding by Young J that notices of the meetings were deliberately not given to the appellants.

25    The respondent also conceded that the appellants were entitled to vote at the meeting of creditors of 6 June 1995, but argued that, on the poll conducted at that meeting, the value of their debt was only $1.00.

26    The foundation of that surprising submission was a proposition that $1.00 was a “just estimate of [the] value” of the respondent’s debt to the appellants within the meaning of Reg 5.6.23 of the Corporations Regulations of NSW (the “Regulations”). Both parties assumed that all potentially material regulations are valid, and I will proceed on that footing, although it is not clear to me that the regulation-making power See the Corporations Act 1989 (Cwlth), s22, especially subs22(b) and (f), and the Corporations (New South Wales) Act 1990, ss8 and 10. authorises all the wide-ranging provisions which, arguably, qualify the statutory rights of creditors to vote at meetings under the Law. See the Corporations (NSW) Act, s7.

27    So far as I could tell, the respondent’s argument that the value of the appellants’ debt was $1.00 was put on three bases. One was that, on an ex parte application by the Administrator, Cohen J had so directed the Administrator under s447D of the Law on the morning of 6 June 1995, the date of the respondent’s creditors resolution that it execute the deed of company arrangement. Another was that, either by virtue of his office as Administrator or his role as chairperson of the meeting at which that resolution was passed, the Administrator had a “discretion” to set the value of the respondents’ debt to the appellants in the amount of $1.00. The remaining ground, which perhaps partially overlaps with the second, is that Capitol voted against the resolution in respect of the full amount of $1,407,416.40 for which judgment had been given in favour of Morlend against the appellants at the meeting on 6 June 1995 at which the resolution that the respondent execute the deed of company arrangement was passed.

28    Each of the three grounds is completely untenable.

29    The direction given to the Administrator by Cohen J was based on incorrect information sworn to by the Administrator in support of his ex parte application. There is no excuse for the Administrator’s errors, which concerned straightforward, uncomplicated facts. Those who prepare, swear and rely on affidavits are under an obvious obligation to ensure their accuracy, if anything more so when an affidavit is used on an ex parte application. Necessarily, that requires that on an affidavit be read before it is signed. In any event, Cohen J’s decision did not bind the appellants. Coats v Southern Cross Airlines Holdings Ltd (In liquidation) (1986) 16 ACLC 1393, 1400-1401; See also Re Grose (1949) SASR 55, 60; Marley v Mutual Security Merchant Bank & Trust Co Ltd [1991] 3 All ER 198.

30    The Administrator’s “discretionary” estimate of the appellants’ debt, if such an exercise was performed as distinct from the Administrator’s reliance on Cohen J’s mistaken direction, was based on the same erroneous view of the facts as the Administrator had sworn to in his affidavit which was used before Cohen J. That affidavit was sworn only shortly before the ex parte application was made to Cohen J and the Administrator was still persisting in the same mistaken view of the facts some months later when he swore another affidavit in the present proceeding.

31    Assuming that the Administrator was entitled to estimate the value of the appellants’ debt, the estimate was required to be “just”. Quite apart from what is said below in relation to the respondent’s third ground, it is absurd to suggest that the orders with respect to costs in favour of the appellants against the respondent did not give the appellants a claim worth more than $1.00 against the respondent. The appellants also had the benefit of the order that the respondent discharge the mortgages. A regulation which purported to bestow a “discretion” to value the appellant’s debt at $1.00 could not validly be made under the regulation-making power referred to above.

32    Further, when the deed of company arrangement is considered in conjunction with such limited information as is available with respect to the respondent’s financial affairs at the material time, it is manifest that the Administrator realised that the appellants were entitled to payment of more than $1.00 by the respondent. Indeed, one might reasonably query why the respondent would have thought it necessary to prohibit enforcement of a small number of $1.00 debts by a deed of company arrangement, and why, if such a small amount is involved, the respondent is still seeking to insist that the appellants are bound by the deed.

33    One might also reasonably question how the appellants’ debts could be valued at $1.00 when, as occurred, Capitol’s debt was valued at the full amount secured by the appellants’ mortgage, i.e., $1,407, 416.40. The material orders made by Giles J in favour of the appellants and Capitol were indistinguishable except for variations between the costs orders. In both cases, the respondent was ordered to discharge the same mortgages. If the appellants were a contingent creditor of the respondent, so was Capitol.

34    It is necessary only to add that it is beyond argument that the respondent was not entitled to deny the appellants’ right to vote in respect of the “just value” of their debt on the footing that it permitted Capitol to vote in respect of the full amount secured by the material mortgages. Other considerations aside, Capitol might have voted against the appellants’ wishes (although it did not do so).

35    There is no purpose to be served by a detailed consideration of how the “just value” of the appellants’ debt from the respondent should have been estimated. Broadly speaking, what was required was an assessment of the likely loss to the appellants from the respondent’s failure to discharge the mortgages in circumstances in which Capitol could not do so because it was insolvent and the appellants had had judgment entered against them for the amount secured by the mortgages and requiring them to give possession of their home to the mortgagee, Morlend. Such an exercise was possible, cf Malec v Hutton (1990) 169 CLR 638. and the probable loss was patently substantial, as subsequent events have confirmed. The amount of the costs for which the respondent was liable to the appellants also was required to be estimated and included in the amount in respect of which they were entitled to vote.

36    This Court does not have the evidence required to determine the amount of the appellants’ claim against the respondent. Nor did the Administrator have the information needed at the meeting of creditors on 6 June 1995 which resolved that the respondent execute the deed of company arrangement. He deprived himself of the opportunity to obtain that information by his inadequate preparation for that meeting, his misstatements to Cohen J, and his failure to send notice of the meeting to the appellants, See Regulation 5.6.23(1). which of course denied them opportunities to attempt to influence the voting of other creditors at the meeting and to correct inaccuracies in the information which the Administrator gave the creditors. Interestingly, as Young J pointed out, information given by the Administrator to the creditors’ meeting on 6 June 1995 at which the resolution that the respondent execute the deed of company arrangement was passed differed in some respects from his affidavit used before Cohen J a day or so earlier.

37    Broadly stated, the definition of “Creditor” Clause 1.1. in the deed of company arrangement executed by the respondent following the resolution of its creditors at the meeting on 6 June 1995 included all persons who had or claimed to have a claim against the respondent at the date of the Administrator’s appointment (17 May 1985), whether their claim arose:

“(a) because of anything which occurred or failed to occur before [that] Date; [or]
(b) at law or in equity, whether liquidated or unliquidated, present or future, contingent or certain, and whether ascertained in amount or sounding only in damages ...”.

38    However, different groups of creditors were identified in the definitions in sub-clause 1.1, which included the following:

“1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
…
‘Administration Creditors’ means the creditors to whom the Administrator is indebted because of section 443A, section 443B or section 443BA of the Law;
…
‘Cash Payments’ means the money paid to the Administrator by the Company under clause 8;
…
‘Employee Entitlements’ means any amount that would be paid by a liquidator of the Company, under sections 556(1)(e), (g) and (h) of the Law;
‘Excluded Creditor’ means:
(a) the Preserved Creditors; and
(b) any secured Creditor; and
(c) employees of the Company whose employment is continuing as at the Commencement Date; and,
(d) any creditor which claims to retain title to any goods supplied by it to the Company before the Fixed Date (including, without limitation, Bev Martin Textiles Pty Limited), but only to the extent that the Administrator in his absolute and uncontrolled discretion determines that this claim is valid and enforceable.”

…
‘Fund’ means the fund established and held under Clause 7.
…
‘Participating Creditors’ means the Creditors who are admitted to proof under Clause 10, but shall not include any excluded Creditors;
‘Post Deed Creditors’ means any person who has or claims to have any Claim or Claims against the Company arising;
(a) because of a thing which occurred or failed to occur after the Fixed Date; and
(b) at law or in equity, whether liquidated, or unliquidated, present or future, contingent or certain, and whether ascertained or unascertained in amount or sounding only in damages.

…
‘Preserved Creditors’ means:
(a) Dr and Mrs Gregg; and,
(b) Gamble; and,
(c) Macquarie Ice Rink (NSW) Pty Limited; and,
(d) Australian Bullion Co Pty Limited; and,
(e) New Kalls; and,
(f) Northern Districts Staff Placements Pty Limited (except to the extent that its Claim or Claims relate to those of any of the Company’s employees);

and each of them,
except to the extent that their Claim or Claims against the Company arise from any lease, hire purchase, or other financing of plant and equipment used by the Company in its business;
…
‘Proposed Profit Contribution’ means an amount equal to 30.0% of the Net Profit After Tax earned by the Company during he 12 months ended 30 June in each of the relevant years;
…
‘Secured Creditor’ has the meaning set out in section 5 of the Bankruptcy Act 1966 (Cth) and shall, in all events include:
(a) Orix; and,
(b) Gamble and Mrs Gregg, but only to the extent that their Claim or Claims are in respect of amounts due by them to Orix arising from any lease, hire purchase, or other financing of plant and equipment used by the Company in its business.”

“Orix” is a reference to Orix Australia Finance Corporation Limited.

39    Like other aspects of the exercise in which the respondent has engaged, the deed of company arrangement is flawed. For example, the definition of “Participating Creditors” is related to ‘Creditors who are admitted to proof under clause 10”, but sub-clause 10.1 is circuitously concerned only with “… the proof and ranking of claims of Participating Creditors …”. Although sub-clauses 10.2, 10.3 and 10.4 refer to “Creditors”, the context, especially perhaps the final sentence of sub-clause 10.3, indicates that sub-clauses 10.2 and 10.3 are at least primarily concerned with “Participating Creditors”, who are the only creditors referred to in sub-clauses 10.5 and 10.6.

40    Clause 11 continues the imprecision of clause 10. Sub-clauses 11.1 and 11.2 seem wide enough to prevent any Creditor, including “Excluded Creditors”, which include “Preserved Creditors”, “Secured Creditors” and the respondent’s continuing employees, at least in respect of their pre-17 March 1995 entitlements, from taking any steps to enforce a claim while the deed of company arrangement continues to operate. However, the term “Excluded Creditors” suggests an intention to exclude some creditors from the deed of company arrangement’s restraints, and sub-clause 2.2(h) limits “creditors bound by the deed” to those entitled to a distribution under the deed, i.e., from the ‘… proceeds of realising the property referred to in [sub-clause 2.2] (b)…”. Sub-clauses 2.2(b), (c) and (d) provide:

“2.2 For the purposes of section 444A(4) of the [Corporations Law of New South Wales] the following matters are specified:
…
(b) the property of the Company that is to be available to pay Creditors’ claims is the property referred to in clause 6 ;and,
(c) the nature and duration of the moratorium period is set out in clause 11; and
(d) the Company is released from its debts if they are not the debts of an Excluded Creditor but only to the extent provided for in clause 11; …”

41    Further, the notice of the meeting of the respondent’s creditors on 6 June 1995 at which the resolution that it execute the deed of company arrangement was passed contained a summary of the deed’s “terms and conditions” which stated:

“…
(vii) Secured creditors will be excluded from the Deed.
(viii) Related parties/persons and entities’ claims will be deferred until such time as the terms and conditions of the Deed have been met”.

Similar statements were made in a “Statement regarding Proposed Deed” provided to creditors of the respondent who received notice of, and/or attended the meeting. Neither summary mentioned of other “Excluded Creditors” such as continuing employees of the respondent.

42    In any event, only “Participating Creditors” effectively have their claims extinguished and transformed into an entitlement to share in the Fund by the deed of company arrangement. Sub-clause 15.1 provides for the deed to terminate on the “Termination Date”. Unless terminated earlier by the respondent’s creditors or the Court, the “Termination Date” is defined In sub-clause 1.1 (para (c) of the definition). as “the day 30 days after the date when the Administrator makes the Final Distribution”, which is in turn defined In sub-clause 1.1. as “the final payment made by the Administrator to Participating Creditors under clause 9.1”. Sub-clauses 11.3 and 11.4 provide:

“11.3 Right to prove
Creditors (except for Excluded Creditors) accept the right to prove in accordance with the provisions of this deed and the distribution of the Fund in full discharge and satisfaction of their claims against the Company.

11.4 Release by Participating Creditors
Participating Creditors agree that upon the Administrator making the Final Distribution, each of their respective claims shall be extinguished.”

43    By clauses 6 and 7 of the deed of company arrangement, the “only property available to pay the Claims of Participating Creditors” is the “Fund”, consisting of the “Cash Payments”, “any interest earned on the Fund”, Sub-clause 6(1)(d). and “any further money contributed by the [respondent] to the Fund from Net After Tax Profits under clause 8”. Sub-clause 6(1)(c). (Sub-clause 6(1)(b) provided for a further amount to be available in an event which has not occurred).

44    Sub-clause 8.1 and 8.2 of the deed of company arrangement provide:

“8.1 If the Proposed Profit Contribution for the year ended 30 June 1996 is $50,000 or more, then, on 31 December 1996, the Company will pay or cause to be paid to the Administrator, an amount equal to that Proposed Profit Contribution.
8.2 If the Proposed Profit Contribution for the year ended 30 June 1996 is less than $50,000, then, on 31 December 1996, the Company will pay or cause to be paid $50,000 to the Administrator.”

Similar provisions are contained in sub-clauses 8.3 and 8.4 with respect to 1997 , and similar provisions, except that the amount is $75,000, not $50,000, are contained in sub-clauses 8.5 and 8.6 with respect to 1998 and in sub-clauses 8.7 and 8.8 with respect to this year (1999).

45    By sub-clause 8.9, sub-clauses 8.1 to 8.8 (inclusive) are subject to sub-clause 8.10, which permits a sale of the respondent’s business and provides for an amount calculated by reference to a formula to be substituted for any unpaid Cash Payments at the time of sale. The Administrator is given an “absolute and uncontrolled discretion” in relation to the amount of the various components of the formula. Under clause 4 of the deed of company arrangement, the Administrator also has an “absolute and uncontrolled discretion” to pay all his costs and expenses, from the date of his appointment as Administrator to the Termination Date, out of the Fund.

46    It remains to notice sub-clause 9.1 and 9.2 of the deed of company arrangement, which provide:

“9. PAYING OUT THE FUND-THE COMPANY’S OBLIGATIONS
9.1 If and only if the Company performs all of its obligations under this Deed (but subject to clause 4.3(b)) then the Administrator will pay to the Participating Creditors, pari passu in accordance with their claims admitted in accordance with clause 10, all of the money in the Fund at that time (less any amount which he, in his absolute and uncontrolled discretion thinks he should retain in respect of his present and anticipated future remuneration, costs and expenses) within 3 calendar months after each of the following dates:
(a) 31 December 1996; and
(b) 31 December 1997; and
(c) 31 December 1998; and
(d) 31 December 1999; or
(e) the earlier date of the completion of any sale of the Company’s business or assets to which clause 8,10 applies,

9.2 If a payment is made under clause 9.2(e), then the Administrator will have no further obligations under clause 9.1.”

47 Plainly, the deed of company arrangement affords different treatment to different groups of creditors, especially “Participating Creditors” and “Excluded Creditors”, including “Preserved Creditors”. Capitol and the appellants are “Participating Creditors”. All “Preserved Creditors” are related creditors of the respondent within the meaning of subs 600A(3) of the Law.

48    So far as the evidence reveals, the appellants and Mr and Mrs Harry Sarkis were the only creditors of the respondent who were not given notice of the meeting. Mr Harry Sarkis learned of the meeting from another creditor and attended, but was only permitted to vote on the basis that the value of his debt was $1.00. He opposed the resolution.

49    The respondent not only failed to give the appellants notice of the meeting and diminished the value of Mr Harry Sarkis’ vote against the resolution, it promoted votes in favour of the resolution. For example, proxies obtained by the respondent’s laundry manager from other employees, many of whom “did not understand or speak English well or at all”, were used to support the resolution.

50    The minutes of the meeting of the respondent’s creditors on 6 June 1995, which were signed by the respondent’s Administrator as chairperson of the meeting, record that 44 creditors, with debts valued at $2,035,472.68, voted in favour of the resolution that the respondent execute the deed of company arrangement, and that 2 creditors with debts valued at $1,407,417.40, voted against the resolution. Those two creditors were Capitol and Mr Harry Sarkis.

51    Only two creditors which voted in favour of the resolution might have been trade creditors, with debts valued in total at $12,222.64. All other creditors who voted in favour of the resolution were “Excluded Creditors”.

52    Thirty-three of the creditors who voted in favour of the resolution were continuing employees, whose debts were valued at $33,114.57.

53    Another two creditors which voted in favour of the resolution were Secured Creditors; Orix, with a debt valued at $1,004,376.24, and Bev Martin Textiles Pty Limited, with a debt valued at $86, 131.73.

54 The other creditors who voted in favour of the resolution were the Preserved Creditors, who, as stated earlier, were related creditors of the respondents within the meaning of subs 600A(3) of the Law. According to the Administrator’s evidence, there were six related creditors with debts to the total value of $891,831.78. It is possible that there was a seventh related creditor, Gamble Brown & Co, with a debt valued at $7,695.72. Two of the related creditors’ debts might have been partly secured. See para(b) of the definition of “Secured Creditor” in sub-clause 1.1 of the deed of company arrangement.

55 Secured creditors who did not surrender their securities were each only entitled to vote in respect of any balance after the value of the security had been deducted. Regulations, reg.5.6.24. However, Orix, for example, was not so restricted, but was permitted to vote in respect of the full amount of its debt. According to the Administrator’s Report pursuant to subs 439A(4)(a) of the Law, which was available to creditors of the respondent at the meeting on 6 June 1995 at which the resolution that it execute the deed of company arrangement was passed, the assets over which Orix had security were valued at $1,459,400.00 “on a going concern value” and had “an estimated realisable or auction value of $426,447.00”, leaving “… a deficiency … of … $580,562.00” on a forced sale.

56    Just as the evidence does not permit the Court to determine the amounts in respect of which the appellants, Capitol and Harry Sarkis should have been permitted to vote against the resolution that the respondent execute the deed of company arrangement at the meeting of its creditors on 6 June 1995, it is not possible to determine the correct value of the debts of creditors who supported the resolution. However, the respondent conceded that, if the votes of related creditors had been disregarded, the resolution would not have passed, and it was not disputed that the appellants have satisfied the requirements of subss 600A(1)(a) and (b) of the Law.

57 The appellants submitted that, in determining whether subs 600A(1)(c)(i) was satisfied, the question is whether the resolution that the respondent execute the deed of company arrangement was contrary to their interests, as “a class of creditors as a whole”. That is incorrect. When a resolution has been passed at a meeting of creditors within subs 600A(1)(a)(i)(A), the question under subs 600A(1)(c)(i) is whether the passing of the resolution … was “contrary to the interests of the creditors as a whole”. Cf Kantfield Pty Ltd v Plastomatic (Aust) Pty Ltd 91994) 14 ACSR 687, 692. Plainly, the resolution that the respondent execute the deed of company arrangement was not “contrary to the interests of [its] creditors as a whole”.

58 The remaining question under subs 600A(1)(c)(ii) is whether the resolution that the respondent execute the deed of company arrangement “has prejudiced, or is reasonably likely to prejudice, the interest of the creditors who voted against the proposed resolution … to an extent that is unreasonable …”.

59 Although the appellants did not vote against the proposed resolution because they had not been notified of, and were not present at, the meeting at which it was passed, their interests were materially similar to those of Mr Harry Sarkis and Capitol, who were present and voted against the proposed resolution. I can perceive no sufficient reason to deny the appellants resort to s 600A in these circumstances. There is no reason why they cannot take advantage of any prejudice to Capitol or Mr Harry Sarkis, whose interests were similar to the appellants’.

60 In my opinion, the question presented by subs 600A(1)(c)(ii) of the Law does not invite comparison between the effect of the resolution that the respondent execute the deed of company arrangement on the creditors who voted against it and its effect on other creditors, or some one or more of them. What must be considered is whether creditors who voted against the resolution were prejudiced by it, i.e., would have been better off if it had not been passed. Only if that question is answered in the affirmative is attention directed to ss 600A(1)(c)(ii)(A), (B) and (C) to determine whether the extent of the prejudice is unreasonable.

61 In the present case, the appellants have not satisfied subs 600A(1)(c)(ii). They would have received nothing but for the deed of company arrangement, whereas, under it, they are entitled to participate in the distribution of the Fund. It is not permissible, in my opinion, to compare the appellants’ position under the deed of the company arrangement which was executed with some conjectural position which would have ensued if some different, fairer, deed of company arrangement which was never proposed had been executed.

62    The other provisions of the Law relied on by the appellants are ss445D, 445G and 447A. By the conclusion of their argument, it was at least implicitly accepted that the latter provision offers them no practical assistance. See also Molit (No.55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR, 160, 171-172. The appellants seek an order terminating or avoiding the deed of company arrangement, in either case from the date of the order, leaving its operation to that time effective in accordance with s445H of the Law.

63    The appellants submitted that, if a ground for relief under s445D is established, the Court must terminate the deed. Reliance was placed on statements by Brennan J in Public Service Association of South Australia v Federated Clerks Union of Australia, South Australian Branch (1991) 173 CLR 132, 136, 137, 144. for the proposition that “may” means “must” in s445D was not only do Brennan J’s statements give no support to the appellant’s submission, but it is contrary to the judgment of the Full Federal Court in Emanuele v Australian Securities Commission. (1995) 19 ACSR 1,15. (An appeal to the High Court on another point was dismissed: Emanuele v Australian Securities Commission (1997) 188 CLR 114). See also Molit (No.55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR, 160, 175. Since I consider that Court’s opinion that the Court exercises a discretionary power under s445D was not “plainly wrong” Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, 492. but correct, I will, of course, adopt it. Accordingly, the appellants can only succeed under s445D if they show that Young J’s discretion miscarried in accordance with established principles. House v R (1936) 55 CLR 499.

64 However, the appellants argued that, if a deed of company arrangement was not “entered into in accordance with” Part 5.3A of the Law or does not comply with that part, This alternative was not advanced. the Court must declare the deed to be void under subs 445G(2) unless the conditions for a declaration that the deed is valid under subs445E(3) “despite a contravention of a provision of … Part [5.3A]” are satisfied. The respondent did not argue that, if the appellants are otherwise entitled to succeed, a different outcome would result from the application of either s447A or s1322 of the Law. See the decision of this Court in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 25 ACSR 78 (reversed by the High Court on another ground: [1999] HCA 24); Brien v Australian Memory Pty Ltd (1997) 25 ACSR 1; ST (2) Pty Ltd v Lockwood !9998) 27 ACSR 667. Cf MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24, per Kirby J at para 42.

65    As Kirby J observed in his dissenting judgment in MYT Engineering Pty Ltd v Mulcon Pty Ltd, [1999] HCA 24, para 54. “… the meaning of s 445G of the Law is not unarguably plain”. For example, there is a question whether, under subs445G(2), the Court’s intended function is to avoid a deed or a provision of a deed (where that is warranted) or to declare that, subject to the operation of subs 445G(3), a deed or a provision of a deed is or is not void by the operation of Part 5.3A of the Law. The reference to “avoidance” in s445H lends some support to the view that the power in subs 445G(2) is a power to avoid a deed. On the other hand, subs 445G(3) proceeds on the basis that a deed of company arrangement is void and requires validation unless Part 5.3A of the Law has been strictly complied with. Even if there has been substantial compliance, validation is necessary and only permissible if “no injustice will result for anyone bound by the deed if the contravention is disregarded”. Law, subs 445G(3)(b). This is a strong indication that the Court’s power under subs 445(2) is a power to decide whether a deed or provision of a deed is or is not void by the operation of Part 5.3A of the Law. That was the view of Kirby J in MYT Engineering Pty Ltd v Mulcon Pty Ltd, [1999] HCA 24. who said that subs 445G(2) “… permits the Court, in effect, to declare the true legal position so as to dispel the doubt” [1999] HCA 24, para 64. See also in this Court per Dunford AJA: 25 ACSR 78, 99. spoken of in subs 445G(1).

66 Even if the Court’s power under subs 445G(2) is a power to avoid a deed of company arrangement, the argument that the discretion is limited to circumstances in which validation is permissible under subs 445G(3) has substance. If the Court’s power under subs 445(2) is a power to decide whether or not a deed or a provision of a deed is void by the operation of Part 5.3A of the Law and, subject to subs 445G(3) made a declaration to that effect, it is also arguable that the only discretion involved is that which exists because declaratory relief is discretionary.

67    However, in Emanuele, (1995) 19 ACSR 1. the Full Federal Court held that the Court has identical discretions under subs 445D and 445G(2). 19 ACSR 1,15. While not confident that that is correct, it is not “plainly wrong”. Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, 492. I therefore propose to proceed on the basis of the Federal Court’s opinion.

68    Similarly, I propose to adopt the Federal Court’s opinion in Emanuele (1995) 19 ACSR 1. that, under both ss 445D and 445G of the Law, the Court’s discretionary powers “… are to be exercised having regard to both the interests of the creditors as a whole and in the public interest”, 19 ACSR 1, 15. which the Court went on to indicate includes considerations of commercial morality. I do not consider that the Federal Court intended to suggest that other circumstances might never be material to the Court’s discretion. For example, unexplained delay, which was taken into account in this case by Young J, or other disentitling conduct by an applicant for relief, would ordinarily be relevant, except perhaps when the public interest is involved. Further, the exclusion of, or unfairness to, an individual creditor or group of creditors might also be relevant, even if not commercially immoral.

69 It is not argued that the deed of company arrangement does not comply with Part 5.3A of the Law, so that, to warrant an order under subs 445G(2) the appellants must have established that the deed was not “entered into in accordance with” that Part.

70    The appellants’ principal complaints concern the failure to give them notice of the meeting at which the resolution that the respondent execute the deed of company arrangement was passed on 6 June 1995 and the Administrator’s errors concerning the value of the debts in respect of which votes were cast at the meeting. Subsection 444A(1) requires that such a resolution be passed by a company’s creditors “at a meeting convened under section 439A”. By subss 439A(1) and (3)(a), the Administrator of the company must convene the meeting by “giving written notice of the meeting to as many of the company’s creditors as reasonably practicable”. There is no suggestion that it was not “reasonably practicable” to give written notice of the meeting to the appellants, so that subs 439A(3)(a) was breached. Young J found that the breach was inadvertent, but that is material only to the exercise of the Court’s discretion under subs 445G(2); it does not mean that the breach did not occur.

71    Conversely, it is not presently necessary to decide whether there was also a breach of subs 439A(4), Cf Emanuele v Australia Securities Commission (1995) 19 ACSR 1, 15. or whether the Administrator’s misconduct of the meeting of creditors of the respondent which resolved that it execute the deed of company arrangement, which plainly contravened the Regulations , provides a further reason why the deed was not “entered into in accordance with” Part 5.3A of the Law within the meaning of subs 445G(1). While such matters are material to the exercise of the Court’s discretion under subs 445G(2), it is sufficient for the appellants’ purposes that that discretion was activated by the respondent’s breach of subs 439A(3)(a).

72    If the appellants are entitled to an order under subs 445G(2), in the circumstances of this case they would also be entitled (in the alternative) to an order under subs 445D(1) because the discretionary considerations which would lead to an order under subs 445G(2) would also support conclusions in favour of the appellants under subss 445D(1), (e), and/or (g). Those parts of s 445D are as follows:

“SECTION 445D WHEN COURT MAY TERMINATE DEED
445d(1) [Power of Court to terminate deed] The Court may make an order terminating the deed of company arrangement is satisfied that:
…
(e) effect cannot be given to the deed with injustice …; or
(f) the deed or a provision of it is …
(i) oppressive or unfairly prejudicial to or unfairly discriminatory against, one or more … creditors; or
…
(g) the deed should be terminated for some other reason.”

It is unnecessary to consider whether the appellants could also satisfy other requirements of subs 445D(1).

73    The disposition of this appeal therefore depends upon whether the appellants have established that Young J’s discretion miscarried. If they are successful in that, it will be necessary to decide whether the deed of company arrangement should be terminated under subs 445D(1) or declared to be void under subs 445G(2). The former provision might provide greater flexibility; for example, it might permit the deed to be terminated from a future date, thereby allowing an opportunity for the respondent and its creditors to seek a solution in preference to the liquidation of the respondent on the ground that, without the deed, it would be insolvent.

74    On 6 June 1995, when the resolution was passed that the respondent execute the deed of company arrangement, it had two groups of major creditors; its related creditors, who are Preserved Creditors, and Secured Creditors, both of which groups were Excluded Creditors, and Capitol, Mr and Mrs Harry Sarkis and the appellants, whose debts arose out of the transaction by which the respondent acquired its business, who are Participating Creditors. The deed discriminated between them, effectively limiting the Participating Creditors to a share of the profits of the business for four years, estimated to provide a total of about 10cents in the dollar of the amounts of their debts, Based on the Administrator’s mistaken view of the amounts owed by the respondent to Participating Creditors. while merely postponing the claims of Preserved Creditors and perhaps other Excluded Creditors, or some of them, until the expiration of period during which the Participating Creditors, including the appellants, are to receive their distribution from the Fund. No rational explanation for the different treatment of Participating Creditors was given.

75    This discrimination, taken with the grossly unsatisfactory conduct of the respondent in relation to the meeting on 6 June 1995 at which the resolution that it execute the deed of company arrangement was passed, the doubt whether it would have been passed if the meeting had been properly convened and conducted by the Administrator, and the fact that the resolution would certainly not have been passed but for the votes of the related creditors who were amongst those left with their full claims after the Fund distribution period has expired, provide cogent reasons for an exercise of the Court’s discretion in the appellants’ favour.

76    Such a conclusion is also supported by the public interest. The respondent’s entire exercise involved a misuse of the statutory process, and calls into doubt the suitability of legislative provisions which can be utilised so easily to avoid or diminish legitimate liabilities, at least unless those adversely affected are willing and able to engaged in expensive litigation against their debtor which, commonly, is already insolvent, as was the position here.
77    The factors against an order avoiding terminating the deed of company arrangement are those identified by Young J.

78    However, it seems to me that one of those matters, namely, that the appellants would not have benefited from the failure of the resolution that the respondent execute the deed of company arrangement, would be of limited significance but for the appellants’ delay and its potential consequences.

79    In the first place, whether or not the appellants would have benefited if the respondent’s creditors had not passed the resolution that it execute the deed of company arrangement at the meeting on 6 June 1995 involves an element of conjecture concerning what the respondent’s directors, shareholders and related creditors would have done if for example, they could not have procured the deed which they desired but could have procured a deed which treated all unsecured creditors equally. It might not be without significance that some of the transactions in respect of which Orix held security were in the names of related creditors, not the respondent, and the directors of the respondent were guarantors of its debt to Orix.

80    Secondly, the Court should not the encourage the notion that “anything goes” provided only that that a deed of company arrangement provides some benefit for dissatisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the Court’s refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently.

81    The respondent’s most persuasive argument is founded on the appellants’ unexplained delay. Consistently with the general conduct of this litigation, the issue was totally unexplored. The Court does not even know when the appellants first became aware of the deed of company arrangement, but it is a reasonable inference that it was soon after the meeting of creditors on 6 June 1995 at which the resolution was passed that the respondent execute the deed. Their son, Harry Sarkis, was present at the meeting, and it was from him that they learned of the deed.

82    It might be inferred that initially the appellants did nothing because of impecuniosity caused by the respondent’s failure to discharge the mortgages over their home in accordance with the order of Giles J. While that seems likely, I do not think that the inference can legitimately be drawn when the appellants could so simply have given evidence to that effect. While the Court does not know whether payments have been made to the appellants under the deed, the litigation has been conducted without any evidence or argument that they have not been paid, and the Court must proceed on the basis that that has occurred.

83    On the other hand, there is no evidence that the respondent has been disadvantaged by the appellants’ delay.

84    However, the deed of company arrangement has continued for more than four years and is almost at an end. This appeal proceeded on the assumption that the respondent has continued to trade profitably, but would be insolvent if the deed were terminated or declared to be void and no other deed of company arrangement was entered into. There are likely to be trade creditors, who will have dealt with the respondent in good faith but would have no priority if they were unpaid when the deed was terminated or declared void if the respondent then went into liquidation. There is also likely to be a substantial body of employees, who stand to lose their jobs in that event, and might also be unsecured creditors. Neither the trade creditors nor the employees, nor others potentially affected by the orders sought by the appellants, have been heard in support of, or opposition to, the relief which they claim.

85    Regrettably, the Court has no power to vary the deed without the consent of the Administrator, and there is no suggestion that his consent would be forthcoming.

86    If either of the orders sought by the appellants is made, the respondent will go into liquidation unless its creditors resolve that it execute another deed. As noted earlier, there are practical reasons for at least some Related Creditors to prefer a different deed, more favourable to the appellants, to liquidation. However, I do not think that this Court is justified in proceeding on the assumption that, if the appeal succeeds, that would occur.

87    In the circumstances, therefore, principally because of the appellants’ unexplained delay and the potential adverse consequences for others without discernible benefit to the appellants of an order terminating the deed of company arrangement or declaring it to be void, I do not consider that this Court is justified in interfering with Young J’s exercise of his discretion.

88    Accordingly, I would dismiss the appeal, but, in all the circumstances, make no order as to costs.
89    DAVIES AJA: I have had an opportunity to read the reasons for decision of Fitzgerald JA. I need not repeat the many facts which his Honour has described. I agree generally with the views stated by his Honour; save as to the view which his Honour has expressed as to the operation of s 600A(1)(c) of the Corporations Law.

90 In order to discuss the issue arising under s 600A, it is necessary to mention in a little more detail some of the facts which led in April 1995 to the making of orders by Giles J against Zambena Pty Limited (formerly Sanpen Pty Limited) requiring Zambena to pay to Capitol Laundry Pty Ltd (“Capitol”) the sum of $1,407,416, which was a sum owed by Capitol to Morlend Finance Corporation (Vic) Pty Ltd (“Morlend”), and to discharge certain mortgages given by Harry Sarkis, his wife and certain of his relatives which secured the repayment of the sum due by Capitol to Morlend. The appellants include the parents and other relatives but not Harry Sarkis or his wife.

91    When, in December 1992 and January 1993, Zambena negotiated with Capitol to purchase its laundry business, Harry Sarkis, who had been the principal officer of Capitol, was insistent that Zambena should take over responsibility for the debt owed by Capitol to Morlend. Dr Gregg and Mr Gamble, the two persons principally directing the affairs of Zambena, sought to acquire the laundry business for Zambena and wanted Harry Sarkis to continue to work in the business for Zambena. An early offer contained in a letter of 14 December 1992 from Zambena to the provisional liquidator of Capitol set out basic terms of an offer including the term, “That Morelend withdraw their charge over the assets of the company [Capitol] and that Morelend enter into an agreement with the third party mortgagors not to realise upon their security so long as all payments, including arrears of payments, are made in accordance with the terms of their facility from the date of settlement hereon.” Ultimately, clause 7.1(3) was drafted and appeared in the final agreement for the purchase by Zambena of the laundry business. The clause provided, inter alia, that completion was “subject to … the Purchaser discharging the following real estate Mortgages within six (6) calendar months from the date hereof.” The various mortgages granted to Morlend by Harry Sarkis, his wife and relatives were listed.

92    Mr Sarkis had originally sought a guarantee from both Zambena and its directors that the condition as to the discharge of the mortgages would be fulfilled. The directors were unwilling to give a guarantee. There were negotiations with Morlend and, ultimately, an arrangement was made between those acting for Zambena and Morlend that Morlend would allow Zambena six months to refinance the debt. Although Harry Sarkis gave way on the issue of a guarantee, the result of his discussions with Dr Gregg and Mr Gamble was that there came into existence an oral agreement between Mr Sarkis acting for himself, his wife and his parents on the one hand, and Zambena on the other, that Zambena would pay out the mortgages.

93    When the matter came on for trial before Giles J in 1995, Zambena, Dr Gregg and Mr Gamble denied that there had been any agreement that Zambena would undertake responsibility to pay out Capitol’s debt to Morlend or to discharge the mortgages. In their evidence, Dr Gregg and Mr Gamble denied that they had ever come to such an arrangement. Their evidence on this point was rejected by his Honour.

94    Giles J made the following findings:

“(a) Although it was not entirely clear how it had come about, save that a relevant factor was a desire on Sanpen’s [Zambena’s] part to retain the services of Mr Harry Sarkis in running the laundry business, Sanpen had conveyed to the receiver (and to Morlend) that it would refinance the Morlend mortgages within six months as one of the terms on which it would buy the business, with Morlend for its part to hold its hand on any action to enforce its rights under the mortgages provided interest was paid during the six months and to waive any impost on early repayment. This underlay the condition in Sanpen’s offers of 14 and 23 December 1992 concerning Morlend’s conduct, was the subject of the conversations with Mr Lombe on 10 December 1992 and 11 January 1993 and Mr Rubina on 12 January 1993, and was expressed with reasonable clarity in Mr Rubina’s letter to Sanpen of 13 January 1993. The relevant central element of the transaction was stated in the lastmentioned letter, that the Morlend mortgages would be discharged within six months.
(b) The only changes that came about thereafter were that it became clear that Sanpen would not have to pay interest during the six months (although unless someone paid the interest Morlend could proceed to enforce its rights under the mortgages) and that neither Sanpen nor its directors were to become directly liable for the Morlend loan as guarantors. Sanpen was still to discharge the Morlend mortgages within six months, but the added requirements of the draft guarantee had gone.
(c) Dr Gregg and Mr Gamble knew that it had been, and remained, an element of the transaction that Sanpen was to discharge the Morlend mortgages within six months.
It may fairly be asked, as a matter relevant to the probabilities, why Dr Gregg and Mr Gamble would have taken on the burden of an obligation to discharge the Morlend mortgages. Sanpen was paying over $900,000 for the laundry business, and if Sanpen had to pay out the Morlend mortgages it would have to find another $900,000 or thereabouts: on one view, Sanpen was paying over $1,800,000 for the laundry business. A reaction that it was unlikely that Dr Gregg and Mr Gamble would have taken on the additional burden must be tempered, however, by regard to the following. Even on their own evidence, they had seriously contemplated doing so - it was not so obviously an excessive obligation as to be rejected out of hand. The evidence showed that the other significant potential purchaser of the business had also seriously contemplated doing so. As I later indicated in a little more detail, I am satisfied that they saw retention of Mr Harry Sarkis’ services as important and, when he said he would work for them if they ‘saved the houses’, were moved to agree to discharge the mortgages. And, as has been seen, they had in mind that the mortgages might be discharged by arranging for the existing mortgagors to refinance, leaving the existing mortgagors with the financial burden. It may have been unwise on the part of Dr Gregg and Mr Gamble, but in my view they were prepared to take on the burden of an obligation to discharge the Morlend mortgages in the expectation that they could make some such arrangement and/or that Sanpen could obtain finance for itself and pay it off out of the profits of the business which at the time was thought to be profitable. I am not persuaded against the conclusion summarised above by the suggestion that Dr Gregg and Mr Gamble would not have agreed to pay a wholly excessive price for the laundry business.”

95    Settlement of the transaction occurred on 23 January 1993. Zambena did not thereafter pay off Capitol’s debt to Morlend, nor did it refinance the transaction. Ultimately, proceedings, in which all relevant persons were parties, came on for hearing before Giles J. On 21 April 1995, Giles J ordered that Morlend have possession of the properties owned by Harry Sarkis and his relatives which secured the debt due by Capitol to Morlend. His Honour ordered that Zambena discharge those mortgages. Later, he gave judgment for Capitol against Zambena in the sum of $1,407,416. The intent of the orders made by Giles J was that the payment by Zambena would discharge the debt due by Capitol to Morlend and would lead to the discharge of the supporting mortgages. Although the monetary order was expressed as an order for the payment by Zambena to Capitol, it must be read in the context in which it was made. It was not intended that that sum would be payable to Capitol for the general purposes of the creditors of Capitol, which was in liquidation and which also had had a receiver and manager appointed. The intent and effect of the order was that Zambena was to discharge the liability from Capitol to Morlend and thereby to effect the discharge of the supporting mortgages. This is what Zambena had promised to do and it is what the orders made by Giles J ordered it to do.

96 The immediate response of the directors of Zambena was to appoint an administrator to Zambena under the provisions of Part 5.3A of the Corporations Law. There can be no criticism of that action. Presumably, the judgment in favour of Capitol rendered Zambena insolvent in the sense that it was unable to pay its debts as and when they became due and payable: see s 95A of the Corporations Law. It is the terms of the deed of arrangement which were proposed by the Administrator, Mr John Star, and the conduct of and in relation to the meeting of creditors which approved the deed of arrangement which give rise to concern. The intent and effect of the deed of arrangement was to avoid the obligations which Giles J had found to be obligations of Zambena. Prior to the orders made in April 1995 by Giles J, Zambena was trading satisfactorily and the directors were able to pay all trading debts as they fell due.

97    The deed of arrangement was drawn so that the debts and obligations due to Dr Gregg, Mr Gamble and the associated parties were excluded obligations. They were not affected by the deed of arrangement save that they were to be deferred for the three years during which the scheme was to operate. The obligations to the employees were also specifically excluded. As those obligations were ongoing obligations in respect of holiday pay, it may be assumed that, although in terms those obligations were deferred, in practice the employees continued to take their holidays and to receive their pay.

98    Trade creditors, other than two creditors claiming title to goods supplied, fell into the group of debts which, together with the moneys due to Capitol and to the appellants, were the subject of the deed of arrangement. They became entitled to the payment of an estimated 10 per cent or perhaps more over a three year period less the costs of administration but they were otherwise to be extinguished. Although that is what the deed said, one may wonder whether or not the trade creditors did not continue to be paid in the ordinary course of business. The accounts in evidence for subsequent years show that the level of trade debtors reduced from $279,654.94 as at May 1995 to $162,776.11 as at 31 July 1996. The names of many of the 1995 creditors disappeared and the debts of others reduced. In any event, the trade creditors were not a significant factor in what occurred.

99    Looking at the scheme as a whole, its purpose and effect was to extinguish the debt due to Capitol and to the appellants but otherwise to leave Zambena operating as previously it had done, with the debts due to Dr Gregg, Mr Gamble and their associates, to the employees and to creditors which claimed title untouched, save for a possible deferment. This point is made clear not only by the definition of “Excluded Creditor” but also by the definition of “Creditor”, which was directed specifically at the obligations which were the subject of the orders by Giles J. The definition read:

“‘ Creditor ’ means a person who has or claims to have any claim or claims against the Company arising:

(a) because of anything which occurred or failed to occur before the Fixed Date; and

(b) at law or in equity, whether liquidated or unliquidated, present or future, contingent or certain, and whether ascertained in amount or sounding only in damages;
and shall, in all events, include Capital Laundry Pty Limited (Receiver & Manager appointed), specifically in respect of all rights available to it under any judgment or order (including a costs’ order) made in the Proceedings, and any other person affected adversely by any such judgment or order;”

Note the width of the last few words, which encompass all of the appellants.

100    Although the intent of the scheme was to extinguish the obligation in which Harry Sarkis, his wife and his relatives participated, these persons were not given notice of the meeting in which the deed of arrangement was approved. This matter was put as the principal argument in the appeal. I agree with Fitzgerald JA that, as only Harry Sarkis, his wife and his parents were creditors, the absence of the wife and the parents from the meeting was not of sufficient importance to justify setting aside the deed on this ground. I also agree with Fitzgerald JA that, although Mr Gamble held proxies from all the employees and voted on their behalf notwithstanding that, on the evidence before the Court, the reason for and the nature of the meeting had been misrepresented to the employees, this also was not, in itself, a significant matter because the debts were low, although, like the failures to give notice, it does add to the atmosphere of the events.

101 I turn now to s 600A of the Corporations Law. The trial Judge found that the provisions of paragraphs (1)(a) and (b) were satisfied in that the resolution to adopt the deed of arrangement had been voted on at a meeting of creditors, under Part 5.3A, of the Corporations Law and that, if the votes of the related creditors had been disregarded, the resolution would not have been passed. The trial Judge found that, “Mr Star’s evidence makes it plain that the resolution would not have been passed if the related creditors were disregarded”. His Honour accepted Mr Star’s evidence that, had the related creditors not voted, thirty-eight creditors representing $1,143,000 would have voted in favour of the deed of arrangement and two creditors for $1,407,000 would have voted against, so that the resolution would have failed.

102    Of the thirty-eight creditors voting in favour of the resolution, most were the employees voting through Mr Gamble. The sums in respect of which their votes were counted were small, representing contingencies for holiday pay. One creditor, Orix Australia Corporation Limited, was owed $1,004,376; but it was a secured creditor. The related creditors, including Dr Gregg and Mr Gamble, had lent sums to Zambena totalling $877,622. Of this sum, $471,178 was due in relation to plant used by Zambena but formally leased from Orix by Mr Gamble and a person related to Dr Gregg. In addition, there were four trade creditors with debts totalling $112,562 who voted in favour of the scheme. The two creditors who voted against the scheme were Capitol and Harry Sarkis, Capitol’s debt being accepted at $1,407,416 and Harry Sarkis being admitted to vote for $1.

103 Section 600A(1)(c)(ii) provides:

(c) that the passing of the proposed resolution, or the failure to pass it, as the case requires:
…
(ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable having regard to:


(A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution, or from the failure to pass the proposed resolution, as the case may be; and

(B) the nature of the relationship between the related creditor and the company or body, or of the respective relationships between the related creditors and the company or body; or

(C) any other relevant matter.

104 Another provision having an analogous operation in a case such as the present, which is a case of discrimination against particular creditors, is s 445D(1)(f) of the Corporations Law, which provides, inter alia, that the Court may set aside a deed of arrangement where:

(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; …

105 Part 5.3A ought not to be used as an instrument of oppression against one or more creditors. An arrangement under Part 5.3A may discriminate between creditors or classes of creditors; but nevertheless it ought to deal fairly with the interests of creditors of an insolvent company. This is clear not only from provisions such as s 445D(1)(f) and s 600A but also from the general operation of Part 5.3A which provides that a deed of arrangement, drafted having regard to the objects propounded by s 435A, will be approved by the creditors. If approved, the scheme will be a creditors’ scheme. To be valid, a deed of arrangement must be fairly reached and in the interests of creditors.

106    A similar approach has been taken in relation to bankruptcy compositions. In Re Jacobs; Ex parte O’Connor (1984) 1 FCR 1 at 7, Fisher J said:

“The essence of a composition between the debtor and his creditors is that the creditors be offered equality of treatment ( Re Milner; Ex parte Milner (1885) 15 QBD 605). As the Master of the Rolls said on p 612:
‘In my opinion it is of the very essence of a composition of this nature that all the creditors who come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that, so far as he is concerned , all of them shall come in upon a footing of equality. This equality is implied by law from the very nature of the transaction …’ I have added the emphasis.
However, neither in this case nor the earlier decision of Dauglish v Tennent (1866-1867) LR 2 QB 49 where, as was said in Ex parte Milner , the grounds of the principle were fully set out, was it suggested that it would be improper for the creditors to agree between themselves for something other than equality of treatment. So long as the creditors act in good faith towards each other and make no secret bargains with any other creditor or the debtor, there can be no complaint about such an agreement. Secrecy and lack of good faith are of the essence of any objection.”

107    One aspect of the present case is that it discriminates against and is oppressive to Capitol and the appellants. The trial Judge described the argument put on behalf of the appellants as follows:

“As a result of the acceptance of the deed of arrangement, these debts will never be paid save that Capitol will receive some part of the profits of the continued trading. The houses of the plaintiffs have already been sold by Morlend to partly pay for all the moneys that it lost on its loan to Capitol. Despite his agreement and despite the loss of the expensive court case before Giles, J, Dr Gregg is now in control of the business with no liabilities, making profits, and the persons whom he or his company agreed to exonerate, have lost their houses.”

As a result of the deed of arrangement, Zambena was not in fact left without liabilities. The liability to Orix remained, for it was a secured creditor, and the liabilities to the related creditors, those associated with Dr Gregg and Mr Gamble, remained although they were deferred. However, what the scheme proposed to do, and will do if it is not set aside, was to totally extinguish the debts of those who succeeded under the orders made by Giles J.

108 In my opinion, the deed of arrangement prejudiced the interest of the creditors who voted against the proposed resolution to an extent that was unreasonable having regard to the benefits resulting from the scheme to the related creditors and their relationship with Dr Gregg and Mr Gamble, the persons principally controlling the affairs of Zambena. Dr Gregg was the beneficial owner of the shares in Zambena. Mr Gamble was one of the two trustee shareholders. By using their votes, the related creditors were able to arrange for the extinguishment of the debts found to be due by Giles J, thereby expecting to overcome the effect of his Honour’s orders and to do so without having their own debts extinguished by the deed of arrangement. Although $471,178 of the moneys due to related parties fell into a special category, for it related to plant used by Zambena, the balance of the moneys due to Dr Gregg, Mr Gamble and their associates has not been shown to have any special character which would justify its being treated differently from the debts due to Capitol and the appellants. It has not been shown that a deed of arrangement, discriminating as this deed did, was necessary to achieve the objects of Part 5.3A.

109    The argument to the contrary, put to the trial Judge, was as follows:

“The contrary argument to this is that the houses would have been lost in any event. Had there not been any deed, Zambena would have gone into liquidation and it had no assets of any real worth so that no moneys would have been paid to Capitol, Capitol still would have defaulted on the loan to Morlend and the guarantors’ houses would have been lost.”

The trial Judge agreed with the submission stating, “… if one analyses the position under the deed and the position under a liquidation, the position of the plaintiffs is not materially different; indeed, it may be that so far as the order for costs is concerned, they obtain more under the deed than they would in a liquidation.” However, this approach misses the point. The creditors were not limited in their options to either approving the deed put forward or voting for liquidation: see s 439C. It was the terms of the particular scheme that prejudiced Capitol and Harry Sarkis and his family, because its effect was to operate in a discriminatory manner upon those debts. The interests of those creditors were prejudiced to an extent that was unreasonable because the scheme discriminated. It was not fair to all creditors. Had the related creditors been dealt with in a similar way in which the debts due to Capitol, Harry Sarkis, his wife and his parents were dealt with, then, although there may still have been prejudice because the scheme would have precluded recovery of the debts, nevertheless, the prejudice would not have been unreasonable. The scheme would then have applied equally to creditors who voted in favour of the scheme, including the related creditors, as it did to those who voted against the scheme.

110    Another aspect of the matter is that of secrecy. Not only were the appellants not given notice of the creditors’ meeting, but the draft deed of arrangement was not made available until shortly before the meeting of creditors commenced at 10am. A motion for adjournment made on behalf of Capitol was rejected. Nothing was said at the meeting which made it plain that the deed of arrangement had the discriminatory effect which I have mentioned. Noone reading the lengthy minutes of the meeting, which are ten pages in length, would understand that, although the deed provided in clause 11.4 that the debts due to participating creditors would be extinguished, the term “Participating Creditors” was defined so as not to include “Preserved Creditors”, the related parties, or any “Secured Creditor”, Orix, or “employees of the Company” or “any Creditor which claims to retain title to any goods supplied by it to the Company before the Fixed Date”. It was not made clear at the meeting that the debts of the “Participating Creditors” were to be extinguished while the debts of others were to be treated differently. Nor was it explained that the term “Participating Creditors”, a term which one usually sees in schemes of arrangement as referring to creditors generally, was applicable to only a small group, in particular, to Capitol and the mortgagors.

111    Nor was this distinction made clear in the notice earlier sent out to creditors giving notice of the meeting. That notice outlined principles upon which the deed would be based, but it did not make clear that the deed would operate in the manner described. The notice was a notice to creditors generally and included these two relevant provisions:

“(vii) Secured creditors will be excluded from the Deed.

(viii) Related parties/persons and entities’ claims will be deferred until such time as the terms and conditions of the Deed have been met.”

The reference there to related parties would not suggest to a reader that the related parties were to be given a benefit. Rather a reader would be likely to understand that a detriment was to be imposed upon them. Of course, a careful consideration of the word “deferred” would have led an inquiring mind to conclude that the debts due to the related parties were to be deferred and to an inference that other debts were to be extinguished. But the notice of meeting said nothing about extinguishment of debts and an unquestioning reader of the notice would have missed the point.

112 In my opinion, the deed of arrangement was not designed to achieve a legitimate end but was designed to extinguish the debts of those who were judgment creditors under the orders made by Giles J. The deed was oppressive to and unfairly discriminatory against Capitol and the appellants, of whom at least Harry Sarkis, his wife and his parents were creditors in fact, the others being creditors as defined. Moreover, the deed prejudiced the interests of Capitol and Harry Sarkis, who voted against the resolution, to an extent that was unreasonable, having regard to the matters to be taken into account for the purposes of s 600A.

113 Had the proceedings been instituted promptly, I would have expected the deed to have been set aside under s 445D(1)(f)(i) of the Corporations Law. However, the application was not lodged promptly. Four years have passed since the execution of the deed. The issue remains whether anything of real substance is to be gained by requiring that the process commence again. Presumably, the position now is the same as in 1995, that Zambena’s debts exceed its liabilities and thus, if there were a liquidation, there would be no distribution to creditors. A fair deed of arrangement could only put the debts of the related creditors, perhaps excluding the debts in relation to the plant leased from Orix, in the same position as the appellants’ debts, namely that, on a final distribution they would be extinguished. The basis on which the case was fought by counsel for the appellants, namely that a setting aside of the deed would require Dr Gregg and Mr Gamble to refinance the company so that it was able to pay out the debt secured by the mortgages, seems to have no foundation. There was no evidence before the trial Judge that such a result would be likely to occur. It is to be remembered that the directors had declined to give a personal guarantee. A fair deed of arrangement would not be likely to benefit the appellants financially, but simply to extinguish the debts due to the related parties along with the appellants’ debts. Other factors to be taken into consideration are that Capitol and Harry Sarkis are not parties to the proceedings and that, of the appellants, only the parents, the fifth and sixth appellants, appear to be creditors of Zambena. On the other hand, there would be merit in demonstrating that deeds of arrangement that are not procedurally and substantively fair are liable to be set aside. Taking all matters into consideration, particularly the delay that has occurred and the lack of financial benefit to be gained by setting aside the deed, I consider that the appeal should be dismissed so that an object of Part 5.3A, that the company’s chances of continuing in business be maximised, is achieved.

114    I would dismiss the appeal. I would not make any order as to costs. The terms of the deed and the circumstances of the creditors’ meeting justify a refusal of costs to the respondent.

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