Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd

[1996] FCA 899

CATCHWORDS

Corporations Law - interpretation of s 444D(1) - whether the phrase "claims arising on or before the day specified in the deed" comprehends future or contingent debts or claims - whether claims for future rent payable under a lease in existence on the day specified are claims "arising on or before" that day - whether deed of company arrangement should be terminated under s 445D - whether deed unfairly prejudicial or discriminatory - whether deed can be unfairly prejudicial to or unfairly discriminatory against a creditor who receives benefits of a value at least equal to those which would be received if the deed were not executed - whether an insolvency practitioner who has given a company, or its parent, advice is necessarily disqualified from acting as administrator under s 436A

Corporations Law s 445D, s 447A, s 436A, s 443B(3), 436E, s 439A, s 588W, s 588M, s 445G, s 444A, s 444D, s 447A, s 553, s 435A, s 109H, s 444E, s 444F

Brash Holdings Ltd v Katile Pty Ltd (1994) 13 ACSR 504
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492
J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172
Hamilton v National Australia Bank Ltd (1996) 137 ALR 231 at 250)
McLeay v IRC (1963) 9 AITR 265
Shepherd v Commissioner of Taxation (Cth) (1965) 113 CLR 385
Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17
Re New Oriental Bank Corporation (No. 2) [1895] 1 Ch 753
James Smith & Sons (Norwood) Ltd v Goodman [1936] 1 Ch 216
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, 152
Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 709, 710

LAM SOON AUSTRALIA PTY LTD (ADMINISTRATOR APPOINTED) v MOLIT (NO 55) PTY LTD
No. SG 32 of 1996

CORAM:von Doussa, O'Loughlin and Lehane JJ

PLACE:Adelaide

DATE:18 October 1996

IN THE FEDERAL COURT OF AUSTRALIA  )
SOUTH AUSTRALIA DISTRICT REGISTRY  )
GENERAL DIVISION  )              No. SG 32 of 1996

ON APPEAL FROM A SINGLE JUDGE OF
  THE FEDERAL COURT OF AUSTRALIA

BETWEEN:LAM SOON AUSTRALIA PTY LTD

(ADMINISTRATOR APPOINTED)

(A.C.N. 008 273 069)

Appellant

AND:MOLIT (NO 55) PTY LTD

(A.C.N. 008 214 739)

Respondent

CORAM:von Doussa, O'Loughlin and Lehane JJ

PLACE:Adelaide

DATE:18 October 1996

MINUTE OF ORDERS
THE COURT ORDERS THAT:

1. The orders made by the trial judge be set aside.

1. The matter be remitted to the trial judge for further hearing and determination having regard to the reasons enunciated in this judgment.

1. The respondent pay the appellant's costs of the appeal.

NOTE:           Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA  )
SOUTH AUSTRALIA DISTRICT REGISTRY  )
GENERAL DIVISION  )              No. SG 32 of 1996

ON APPEAL FROM A SINGLE JUDGE OF
  THE FEDERAL COURT OF AUSTRALIA

BETWEEN:LAM SOON AUSTRALIA PTY LTD

(ADMINISTRATOR APPOINTED)

(A.C.N. 008 273 069)

Appellant

AND:MOLIT (NO. 55) PTY LTD

(A.C.N. 008 214 739)

Respondent

CORAM:von Doussa, O'Loughlin and Lehane JJ

PLACE:Adelaide

DATE:18 October 1996

REASONS FOR JUDGMENT

THE COURT: This is an appeal from an order made under s 445D of the Corporations Law (the Law) terminating a deed of company arrangement and a consequential order made under s 447A of the Law. It raises some important and difficult questions about the operation of Divisions 10 and 11 of Part 5.3A of the Law.

Background

The appellant (to which we shall refer as Lam Soon Australia) is an Australian company wholly owned by a parent company incorporated in Singapore.  Its business comprised the operation of two leased supermarkets, one at the Central Market in Adelaide, the
other at North Adelaide.  The respondent (Molit) is the lessor of the Central Market supermarket.  Lam Soon Australia commenced trading in 1990.  The lease of the Central Market supermarket is dated 10 September 1990 but the commencement date of its 10 year term is expressed to have been 1 July 1990.  From the beginning that supermarket was a loss making venture.  It incurred losses in each year during which Lam Soon Australia operated it.  The North Adelaide supermarket, by contrast, at least by 1994 was profitable.  It never, however, produced profits sufficient to outweigh the continuing losses at Central Market.  The result was that in each year during which it carried on business, up to and including the 1994 calendar year, Lam Soon Australia suffered substantial losses so that by 31 December 1994 its accumulated losses were $5,584,986 and its total liabilities exceeded its total assets by $4,684,486.  The deficiency appears to have been funded by a combination of advances and forbearances by parties (mainly corporations) associated with Lam Soon Australia: the 1994 accounts show current liabilities of $2,951,036, and non current liabilities of $3,913,352, to associated parties.  The accounts for each year up to and including 1993 included a note substantially to the effect that the ultimate holding company had given a written undertaking that it would continue to provide financial support such that Lam Soon Australia would be able to pay its debts as and when they fell due.  There is in evidence a letter dated 31 March 1994 from Lam Soon Properties Pte Ltd (the holding company of Lam Soon Australia) addressed to the auditor of Lam Soon Australia which reads as follows:

LAM SOON AUSTRALIA PTY LTD AND SUBSIDIARY COMPANY

In connection with your audits of the above companies for the year ended 31st December 1993, we hereby acknowledge our continuing financial support for these companies and confirm that this support will be extended for the next twelve months.

Despite the date of that letter, no doubt "the next twelve months" is to be read as the year ending on 31 December 1994.

The relationship between Lam Soon Australia and Molit deteriorated and by 1994 could be described without exaggeration as unhappy.  There had apparently been litigation between them.  Attempts were made, but without success, to renegotiate the rent payable under the lease.  By the closing months of 1994 those who controlled Lam Soon Australia had formed the view that it would not be possible to trade profitably at the Central Market supermarket, at least if the lease could not be renegotiated, that they were not prepared to continue supporting the losses at Central Market beyond that year and that, accordingly, a means should be found of ridding Lam Soon Australia of the continuing drain on its (and its parent's) resources at Central Market while retaining the profitable operation at North Adelaide.  In December 1994 the auditor of Lam Soon Australia consulted Mr Peter Macks, a chartered accountant and specialist in insolvency matters.  A meeting took place on 14 December between Mr Colin Khor (a director of Lam Soon Australia), the auditor, Mr Macks and an assistant of his.  According to a letter of advice subsequently written by Mr Macks, the subject matter of the meeting was:

... the restructure of the Lam Soon Pte group of companies and in particular ... closing of the Central Market Foodland supermarket and finalising all respective lease obligations for that supermarket.

After describing the structure of the Lam Soon group, the letter continues:

The requirement is to close the Central Market supermarket, which is unprofitable, and finalise all lease obligations for that supermarket, at the same time continuing to operate the North Adelaide supermarket and maximizing the value of all trading losses within the group.  I am of the opinion that the simplest and most cost effective way of achieving this requirement is to appoint a Voluntary Administrator over Lam Soon Australia Pty Limited.

In brief, the advice which Mr Macks gave was that the stated objective would most conveniently be achieved by the appointment of an administrator under Part 5.3A of the Law followed by the execution of a deed of company arrangement which would provide for the payment in full of debts due by Lam Soon Australia at the commencement of the administration, the payment to Molit of an amount calculated by reference to the dividend it might expect to receive in a winding‑up of Lam Soon Australia and the deferral of the claims of persons associated with it.

The advice was accepted. By a resolution purportedly passed on 30 December 1994 (but apparently adopted earlier, a copy of it having been sent to Mr Macks, by fax from Singapore, on 28 December) the directors of Lam Soon Australia resolved in accordance with s 436A of the Law that Mr Macks be appointed as administrator of Lam Soon Australia. Although the evidence is unclear as to precise times, it seems that Mr Macks visited the Central Market supermarket on 30 December, immediately following his appointment, and formed the view in the course of that visit that the supermarket should be closed forthwith. Over the next few days Mr Macks arranged for the removal of stock, plant and equipment belonging to Lam Soon Australia. On 4 January 1995 he gave notice to Molit, under subs 443B(3) of the Law, that he did not propose to exercise rights in relation to the property so that Mr Macks ceased to be personally liable for rent (though Lam Soon Australia itself, of course, remained liable). The trial judge found - the finding is not challenged and is undoubtedly correct - that the company, by the actions of Mr Macks as administrator, repudiated the lease. Molit changed the locks and locked the premises; it informed Mr Macks, however, that keys for the new locks were available to him. Her Honour found, and again the finding is not challenged, that Molit did not accept the repudiation of the lease.

The first meeting of creditors, required by s 436E of the Law, took place on 6 January 1995. No proposal was put to the meeting to remove or replace Mr Macks as administrator. A committee of creditors was formed, which included a representative of Molit.

On 25 January 1995 Mr Macks sent a report to creditors under s 439A of the Law. The report includes the following statement about the circumstances and purpose of Mr Mack's appointment and its outcome:

The directors have attributed the insolvent position of the company to the poor trading of the Central Market Foodland combined with that supermarket's high overheads.  The purpose of my appointment was to review the trading position of that supermarket and, if necessary, close the supermarket and settle all claims in relation to it.  I have since closed that supermarket.  As part of my appointment I have also reviewed the operation of the North Adelaide Foodland.  That supermarket is currently trading profitably and, accordingly, I have continued its operation.  The directors have prepared a proposal to be put to all the company's creditors to settle their claims ...

After describing the assets of the company, Mr Macks says that, having considered "whether or not there have been any transactions or actions that may be able to be pursued by a Liquidator", he has formed the view that no additional recoveries would be available in a winding‑up.  He then sets out the directors' proposal.  Substantially, the proposal was in accordance with the advice which Mr Macks had given.  It divided creditors into three classes described as follows:

(i)Non associated creditors as at the date of my appointment.

(ii)Future non associated creditors as at the date of my appointment.

(iii)Associated creditors.

The only substantial creditor intended to be included in the second of those categories was Molit: there was a suggestion, during the hearing of the appeal, that the class also included a sub‑lessee, referred to during argument as the "kebab man".  The proposal then was that creditors in class (i) should be paid in full, the holding company providing funds to the extent necessary to ensure that that could be done.  The claims of creditors in class (iii) would be deferred, that is to say not paid, in whole or in part, during the term of the proposed deed of company arrangement.  Creditors in class (ii) would receive a
dividend calculated by dividing by the total claims of all three classes of creditors the total assets of the company less the costs of the administration.  The value of the Central Market assets was to be taken to be the amount realised by their sale; the North Adelaide assets were to be valued.

Mr Macks informed creditors that in his opinion it would be in their interests for Lam Soon Australia to execute a deed of company arrangement giving effect to the proposal: this was because creditors in class (i) would be paid in full and immediately (whereas that would not happen in a liquidation) and creditors in class (ii) would receive more, and would receive it more quickly, than in a liquidation (the report gave a reason for this which was incorrect, but it was subsequently corrected and nothing turns on the mistake).

The meeting of creditors called to consider the administrator's report was twice adjourned so that issues raised by Molit might be considered. The issues related principally to a claim that Lam Soon Australia had been insolvent from the time it commenced trading and that, therefore, if it were wound up its holding company might be liable under s 588W of Law, and its directors under s 588M, for debts which it had incurred. At the adjourned meeting on 3 March 1995 Mr Macks announced that he had received Senior Counsel's opinion that claims of that kind would not be sustainable. Senior Counsel had also advised that the associated creditors (whose claims were far larger than the combined claims of creditors falling within classes (i) and (ii)) were entitled to vote on the proposal that a deed of company arrangement be executed. That proposal was put to the meeting and adopted, Molit being the only creditor voting against it. The deed was executed on
23 March 1995. On that day Molit gave notice to Mr Macks of its intention to file an application under s 445G of the Law for an order declaring the deed to be void. On 7 April 1995 Molit commenced the proceedings against Lam Soon Australia which have led to this appeal.

The proceedings

By its application dated 7 April 1995 Molit sought principally the following relief:

1.A declaration that the Deed of Company Arrangement does not release Lam Soon Australia from the obligations to pay the Future Rent.

2.A declaration that the Applicant is not bound by the Deed of Company Arrangement in respect of the Future Rent.

3.In the alternative an order that the Deed of Company Arrangement is void.

4.In the further alternative an order determining the Deed of Company Arrangement.

"Future Rent" means in substance all rent falling due under the lease of the Central Market supermarket from the date on which Mr Macks was appointed as administrator (30 December 1994) until the expiry of the lease. The second of the two declarations was sought by Molit on the basis that its claim for the Future Rent was not a claim "arising on or before the day specified in the deed under paragraph 444A(4)(i)" of the Law: see subs 444D(1). The trial judge held that the claim was one which had arisen before that day and accordingly refused the declaration. The claim for the declaration that the deed
"does not release Lam Soon Australia from the obligations to pay the Future Rent" may have been intended to raise, as well as the effect of s 444D, a question of construction of the deed. No such question was, however, canvassed in argument on appeal or before the trial judge, or considered by her Honour. Her Honour did, however, record that Molit sought, as an alternative to a declaration that the deed was void under s 445G or s 447A of the Law or its termination under s 445D or s 447A, an order pursuant to s 447A that Molit not be bound by the deed in respect of unpaid rent under the lease. That was, however, considered as a discretionary matter under s 447A. At all events, her Honour declined as a matter of discretion to make an order under s 445G or to make an order, as sought, under s 447A but made an order terminating the deed under s 445D on the ground that the deed was unfairly prejudicial to, or unfairly discriminatory against, Molit. Her Honour made an ancillary order under s 447A that, for the purpose of determining the rights of Molit pursuant to the lease, the deed of company arrangement should be disregarded.

Lam Soon Australia appeals against those two orders made by the trial judge.  It supports, of course, her Honour's refusal to make the declarations sought by Molit in its application.  By an informal notice of contention, Molit says that the trial judge should have found that the deed did not bind Molit in relation to the Future Rent and that on that additional basis her Honour's order terminating the deed, and the consequential order, should be upheld.

Does the deed, if effective, bind Molit as to its claim for future rent?

Subsection 444D(1) of the Law provides as follows:

444D(1) [Deed binds creditors]  A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).

In Brash Holdings Ltd v Katile Pty Ltd (1994) 13 ACSR 504 the Appeal Division of the Supreme Court of Victoria rejected (at 514) a submission that in subs 444D(1) the words "all creditors" are limited to those who have claims for sums becoming due or payable on or before the day specified in the deed of company arrangement. Then, at 515, the Court said this:

Once it is decided, for the reasons we have given, that the expression "all creditors" in s 444D(1) should not be confined to those having claims for money sums due and payable on or before the day specified in the deed, we see no alternative but to treat the creditors of the company for the purposes of Pt 5.3A as those who would have been creditors had the company gone into liquidation and the relevant date for the purposes of s 553 been the date specified in the deed.

The Court proceeded to hold explicitly that the expression in subs 444D(1), "claims arising on or before the day specified in the deed", should be read as having the same content as the expression "debts or claims the circumstances giving rise to which occurred before the relevant date" in s 553 of the Law and thus (at 516) as comprehending future or contingent debts or claims.
It was not suggested that we should decline to follow that decision.  Given what was said by the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492, and given also that we are far from persuaded that the decision of the Appeal Division was plainly wrong - with respect, we think it was right - in our view we should follow the decision and apply it. To do so is not, however, to conclude the appeal on this point in favour of Lam Soon Australia because, having regard to a series of authorities to which we shall have to return, the Appeal Division left open the question whether a claim for future rent under a lease or for damages for future breaches of covenant was a claim admissible to proof under s 553 or in relation to which a creditor is bound by a deed of company arrangement under s 444D.

Section 435A of the Law provides that the object of Pt 5.3A:

... is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

A construction of the provisions of Pt 5.3A which would promote that object is to be preferred to one which would not: s 109H. In accordance with the statutory object, s 444E prohibits a person bound by a deed of company arrangement from applying to wind up the company or proceeding with an application already made; it also prohibits

such a person, except with the leave of the Court, from beginning or proceeding with a proceeding against the company or in relation to its property or with an enforcement process in relation to the company's property.  Next, and more particularly, the provisions of Div 10 of Pt 5.3A, dealing with the effect of a deed of company arrangement, treat similarly, on the one hand, secured creditors and, on the other, owners and lessors of property (real or personal) leased or used by the company.  Thus, subss 444D(2) and (3) provide:

444D(2) [Realisation of securities]  Subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security, except so far as:

(a)the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b)the Court orders under subsection 444F(2).

444D(3) [Owners and lessors of property]  Subsection (1) does not affect a right that an owner or lessor of property has in relation to that property, except so far as:

(a)the deed so provides in relation to an owner or lessor of property who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b)the Court orders under subsection 444F(4).

Section 444F then provides, in a way that assimilates the positions of secured creditors, owners and lessors, that the Court may, if satisfied as to certain matters, make orders limiting the rights which they might otherwise exercise under s 444D.

There is nothing surprising in that. There are obvious practical and commercial similarities between the situation of a mortgagee of property of a company and that of the owner or lessor of property of which the company has possession or which it uses. The similarity is, no doubt, particularly striking where the arrangements concern goods used by the company: where the comparison is, for example, between a lender who holds a bill of sale over goods or a chattel mortgage and an owner of goods who lets them to the company on hire purchase. But clearly, so far as subss 444D(2) and (3) and s 444F are concerned, no distinction is to be drawn between an owner or lessor of goods and a lessor of land. In J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172 at 179-182, Hodgson J treated the provisions as operating in the same way as regards both mortgagees and lessors: his Honour concluded (at 181, 182) that the "preferable view" was that the provisions were intended to "set up something of a code relating to court proceedings in relation to matters concerning claims arising on or before the day specified in the deed" so that, where secured creditors or lessors had claims of that kind, s 444E prohibited their enforcement, except with the leave of the Court, by proceedings in Court, including proceedings in which the assistance of the Court is sought in the enforcement of a mortgagee's or lessor's rights over mortgaged or leased property: the field thus left for the operation of subss 444D(2) and (3) and s 444F was that of the extra curial or "self‑help" rights and remedies of a mortgagee, owner or lessor (see also Hamilton v National Australia Bank Ltd (1996) 137 ALR 231 at 250).

There can be no doubt that where a financier has, before a company becomes subject to administration under Part 5.3A, lent money to it on the security of a mortgage of its property, the claim of the financier for the principal sum lent, and its claim for interest, are "claims arising on or before the day specified" in the deed (assuming, of course, as seems to be customary, that the day so specified is the day on which an administrator was appointed).  That is so even if the contract of loan provides that payments are to be made by instalments, over a substantial period.  Equally, there can be no doubt that those claims would, if the company were wound up, be provable in its liquidation (the test which Brash v Katile held to be applicable); and certainly the claims to both principal and interest are to be regarded, at the day specified in the deed, as present rather than future property (see, e.g. McLeay v IRC (1963) 9 AITR 265; Shepherd v Commissioner of Taxation (Cth) (1965) 113 CLR 385) and it is no misuse of language to describe them as claims which have arisen on or before that day. Indeed, any other conclusion would apparently exempt from the restrictions in s 444E any creditor of the company whose debt was contractually payable later than the specified day: such a conclusion is hardly consistent with the statutory object. To return to the mortgage loan: if the terms of the contract provide that upon the appointment of an administrator, or if an instalment of principal or interest is not paid, the lender may require immediate payment of the total sum outstanding and if the lender, after an administrator is appointed or after a deed is entered into, actually does so, that does not eliminate the claim which arose on or before the specified day and cause a different claim to arise in its place. It simply quantifies the claim and brings forward the due date for its payment.

So much may be thought so obvious as not to require mention. These matters were, however, to some extent canvassed in argument and they form, we think, a useful introduction to a consideration of the statutory treatment of a claim to rent payable in the future under a lease. It is apparent from what we have already said that if on the true construction of subs 444D(1) the position of a lessor was substantially different from that of a mortgagee, that might be thought a result somewhat at odds with the expressly stated object of Pt 5.3A and certainly at odds with the apparent assimilation of the positions of lessors and mortgagees by the other subsections of s 444D and s 444F. Clearly enough a claim under an existing lease for rent payable in the future is an existing right, not a mere expectancy: if authority is needed, Shepherd provides it.  There is thus in our view no misuse or straining of language in saying of a claim to rent payable after the specified day under a lease in existence on the specified day that it is a claim which has arisen on or before that day.  Once that is accepted, it is in our view no less such a claim if the amount payable in respect of it becomes ascertained or crystallised, either in accordance with the terms of the lease itself or as damages at law, in circumstances where after the appointment of the administrator (whether before or after a deed of company arrangement is entered into) the lease is terminated by the lessor in exercise of a contractual right to do so or upon acceptance by the lessor of a repudiation by the lessee.  Of course, those considerations do not arise here, where it has been found that the repudiation of the lease, by the administrator on behalf of Lam Soon Australia, has not been accepted by Molit.

On this aspect of the case Molit placed considerable reliance on the decision of the High Court in the Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; there is, however, in our opinion nothing in that case which is inconsistent with the views which we have expressed. There was also a suggestion that it was unreasonable that a company which had entered into a deed of company arrangement might have the benefit of leased property without paying for it, particularly when the property concerned was depreciating property, for example computer equipment. The answer, in our view, is one which we have already indicated: there can be no serious doubt as to the position where computer equipment is acquired with the proceeds of a loan and there is a bill of sale or chattel mortgage over the equipment securing repayment of the loan. The Law clearly contemplates that the holder of a bill of sale and a lessor are to be treated similarly, and we can see no particular unfairness in that. Mortgagee and lessor are both protected by their ability to exercise their extra curial rights and remedies in relation to the property. Mortgage and lease documents can, and no doubt usually do, empower the mortgagee or lessor to terminate the arrangement and take possession following the appointment of an administrator; certainly they are likely to do so where there is a failure to pay an instalment of principal, interest or rent. We can see no reason to think that provisions of that sort are deprived of practical effect by a statutory provision (s 444E) which merely precludes court proceedings to recover, among other things, debts: such a provision does not prevent debts falling due for payment in accordance with contractual provisions or require the non payment of such a debt to be treated otherwise than as a failure to pay for the purposes of a contractual provision conferring rights on a lessor or mortgagee exercisable where there is such a failure.

We were referred, as was the trial Judge, to Re New Oriental Bank Corporation (No. 2) [1895] 1 Ch 753 which, as the Appeal Division points out in Brash v Katile at 517, is cited in a number of texts as authority for the proposition that where a lease has not been disclaimed the lessor cannot prove in the lessee's bankruptcy for rent until it has become due and payable.  The case concerned a dispute, in the winding up of a bank, between the liquidator and a lessor.  The parties could not agree on terms for the surrender of the lease.  Under the legislation then in force, the liquidator had no power to disclaim.  In a very brief judgment, Vaughan Williams J held that he could only allow a proof for breaches which had occurred "up to the present time".  His Lordship added:

In my judgment, if a company which is in liquidation remains in beneficial occupation of a lease - that is to say, if it occupies the demised premises, or takes the rent, and thus obtains the benefit of the lease - the Court ought to do its very best to make the company pay the rent in full, and not merely a dividend ... and if the company is in beneficial occupation, I go further, and say that the lessors can enter a claim for the full rent.  I say this to assist the parties to come to an agreement; but the most reasonable course would be for the bank to surrender the lease now, and allow the lessors to prove for the rent till the end of seven years.

Counsel informed his Lordship that the lessor claimed rent to the end of 14 years and could not be forced to accept a surrender.  Vaughan Williams J then said:

Then you must enter a claim for the whole of the future rent, and prove for the breaches which have taken place up to the present time.  That is all I have to decide now.

A list of cases both preceding and following Re New Oriental Bank Corporation (No. 2), dealing with this topic, is set out in the judgment in Brash v Katile at 517.  We have considered those authorities.  They do not all by any means point in precisely the same direction: in particular, we find it difficult to see how Re New Oriental Bank Corporation (No. 2) can stand with the decision of the Court of Appeal in James Smith & Sons (Norwood) Ltd v Goodman [1936] 1 Ch 216, especially at 234, 235 per Maugham LJ. Be that as it may, however, the question now is one as to the construction of the Law, particularly subss 553(1) and 444D(1). Where at the relevant date, for the purposes of its winding‑up, a company has a contractual obligation under an existing lease to pay rent in the future we can see no reason to doubt that the lessor entitled to the benefit of that obligation has a claim "the circumstances giving rise to which occurred before the relevant date" (subs 553(1)); equally, if the company executes a deed of company arrangement and the lease was in existence on the day specified in the deed, it has a claim "arising on or before the day specified in the deed".

A good deal of the difficulty in this area of the law has resulted, we think, from a tendency to consider together claims for future rent and claims for possible breaches of covenant and to treat both as "contingent" or "future". For instance, the following passage (most of which was quoted by the trial judge) appears in Professor O'Donovan's article "Which Claims are Admissible under Deeds of Company Arrangement?" (1995) 69 ALJ 905 at 907, 908:

The administrator of a deed of company arrangement, unlike a liquidator, has no express statutory right to disclaim a lease, so the loss of bargain damages claimed by the lessor against a company under a deed of company arrangement may not be discounted to take into account a likely disclaimer of the lease by the administrator.  If the lessee's repudiation of the lease occurs after the admissible claim date, the lessor's claim to future rent is unlikely to be regarded as having "arisen" on or before the admissible claim date.  While it is true that contingent claims are admissible under s 444A(4)(i), claims which might never arise should not be regarded as admissible claims.  Only where the basic foundation of the contingent claim has arisen by the admissible claim date should the claim be admissible.  In this situation, it should be immaterial that the triggering event (for example, making a demand), which converts the contingent claim into an actual debt or claim, does not occur until after the admissible claim date.  But it should be necessary for the lessee's repudiation of the lease to have occurred on or before the admissible claim date.  Similar principles should also govern equipment leases because they are essentially contracts, although it may be different in relation to hiring agreements where the equipment can be readily hired to another hirer.

It should follow that if the lessee company did not repudiate the lease on or before the administration began [sic], the lessor's claim to future rent would not be admissible and the lessor would not be bound by the deed of company arrangement in respect of its claim for future rent. The lessor is a "creditor" for the purposes of s 444D(1) but its claim did not arise on or before the admissible claim date. The same comment could be made about the lessor's contingent claims for possible future breaches of covenant.

To suggest that because a contract might be, but has not yet been, repudiated means that an existing contractual obligation to pay money in the future should be treated as giving rise not even to a contingent claim but to a claim "which might never arise" seems to us, with respect, simply wrong.  It would apply equally, in principle, to a mortgage debt or terms sale.  In truth, there is in each case an existing right; in each case it does not follow, because the right will bear fruit in the future when money is required to be paid, and may be defeasible in certain events, that it is not a claim which has arisen.  A question may arise as to the valuation of the claim: in the case of a winding‑up that question will be answered by reference to s 554A; in the case of a deed of company arrangement, it may be answered by reference to the terms of the deed.

"Future breaches of covenant" may be quite another matter.  No doubt it is true, for example, that the right of a lessor under an existing covenant to keep leased premises in repair is an existing right or claim which may in theory have a value.  A right to sue for damages for a particular future breach of that covenant, however, is we think, looked at before the breach occurs, not even a contingent claim: it is a mere expectancy and could not be the subject of proof.  But that is a question which does not arise in this case.  Finally, in this context, it may be instructive to return to James Smith & Sons (Norwood) Ltd v Goodman.  In that case the question was whether a lessor could prove in the liquidation of the lessee for the value of future instalments of rent in circumstances where the lease had, before the winding up of the lessee, been assigned.  Bennett J and the Court of Appeal held that such a proof was admissible; the liability was treated as contingent not because the dates of payment of instalments of rent had not arrived but because the lessor was treated substantially as if it were a guarantor having an accessory liability only, the assignee being the party principally liable.

For those reasons, on this aspect of the case we agree with the conclusion of the learned trial judge: Lam Soon Australia's claim for the "Future Rent" is one which arose on or before the day specified in the deed.

Should the Deed be terminated?

Section 445D of the Law empowers the Court, if satisfied as to any of a number of matters, to terminate a deed of company arrangement. The section provides:

445D(1) [Power of Court to terminate deed]  The Court may make an order terminating a deed of company arrangement if satisfied that:

(a)information about the company's business, property, affairs or financial circumstances that:

(i)was false or misleading; and

(ii)can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

was given to the administrator of the company or to such creditors; or

(b)such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or

(c)there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or

(d)there has been a material contravention of the deed by a person bound by the deed; or

(e)effect cannot be given to the deed without injustice or undue delay; or

(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; or

(ii)contrary to the interests of the creditors of the company as a whole; or

(g)the deed should be terminated for some other reason.

445D(2) [Application for order]  An order may be made on the application of:

(a)a creditor of the company; or

(b)the company; or

(c)any other interested person.

In seeking an order under that section, Molit relied on five grounds summarised by the trial judge as follows:

1.That the DOCA [i.e. the deed of company arrangement] is not for a purpose authorised by s 435A;

2.That the DOCA is not fair to the applicant;

3.That the s 439A report by Mr Macks was deficient;

4.That Mr Macks' inquiry and investigation was not sufficient to justify his recommendation that the DOCA be executed; and

5.That the DOCA is an attempt to "ride rough shod" over the applicant's rights.

The first specified ground may justify an order under s 445G avoiding a deed; it is not explicitly a ground of termination under s 445D, though it may well in some circumstances be an "other reason" of the kind referred to in para 445D(1)(g). The second and fifth grounds appear to invoke sub‑para 445D(1)(f)(i) and were considered by the judge on that basis. The third and fourth grounds presumably invoke a combination of paras 445D(1)(a), (b) and (c).

At all events, her Honour's order terminating the deed was based on para 445D(1)(f).  The two crucial findings are expressed as follows:

I find that the DOCA is unfairly prejudicial to the applicant in that it binds the applicant in respect of claims for future rent under the lease when such lease was repudiated during the administration of the Company without notice to, or consultation with, the applicant.  I further find that the DOCA is unfairly discriminatory against the applicant in that no reasonable grounds, in the sense discussed above, for the strikingly differential treatment thereunder of the different classes of creditors have been demonstrated.

In relation to reasonable grounds for discrimination between creditors, her Honour had said this:

It appears that Mr Macks may have received and accepted legal advice to the effect that provided the applicant did not receive under the DOCA less than it would receive on a winding up of the Company, it would have no ground of legal complaint. In my view, particularly having regard to s 445D of the Corporations Law, the position is not so simple. A deed of company arrangement may in certain circumstances be valid notwithstanding that there is differentiation between the treatment of different classes of creditors. Reasonable grounds for such differentiation, consistent with the object and spirit of Pt 5.3A of the Corporations Law, need to be able to be demonstrated. In my view, the grounds here relied upon are not sufficient to justify the disparity between the treatment under the DOCA of the claims of the applicant and the claims of all other creditors.

The contentions of the respondent are summarised in a phrase which counsel repeated in argument on appeal: that the arrangement represented by the deed was an attempt to "ride roughshod over our rights".  Mr Macks had been asked to advise Lam Soon Australia and its parent and his brief had been to consider means by which the company could retain its profitable North Adelaide supermarket but be freed from the burden of Central Market, which the parent company was no longer willing to support.  Mr Macks advised that this could be done by the appointment of an administrator followed by the execution of a deed of company arrangement.  Having given that advice, he was appointed as administrator and took the steps necessary to carry his advice into effect.  He was thus neither independent nor objective, particularly in his dealings with Molit and in relation to the Central Market supermarket and especially the removal of stock and plant with the intention of depriving Molit of a possible right of distraint.  His lack of independence and objectivity was, it was submitted, evidenced further by his continuing reports and advice to the parent company after the commencement of the administration.  Counsel pointed also to a number of other matters as indicating unfair discrimination or oppression: for instance, the fact that the arrangement enabled the company to maintain large prior trading losses as a potential taxation benefit; and that associated creditors, in whose interests it was to retain North Adelaide and the benefit of the losses, were permitted to vote in favour of the deed with non‑associated creditors who could, of course, be expected to favour it also as they were to be paid in full, thus ensuring that the deed would be approved whatever the attitude of Molit might be.  Counsel relied particularly on what was claimed to be a prospect that in a winding‑up a liquidator might make substantial recoveries on the basis of preferences and insolvent trading; in that respect Molit relied on expert evidence of a Mr Swan to the effect that Lam Soon Australia had, from the time it commenced trading, been insolvent.  In all those circumstances, counsel submitted that a deed which did not offer Molit "a proper sum" was unfairly prejudicial to it, or unfairly discriminatory against it: a proper sum was said to be one substantially greater than that which the deed offered.

Lam Soon Australia contended that there is nothing unfair in the degree of discrimination for which the deed provides.  It was said that the debts claimed by the "non‑associated creditors as at the Appointment Date" were, by contrast with the future rent under the lease, payable in full at the time Mr Macks was appointed as administrator; they had the benefit of a "guarantee" of the parent company whereas, at least after the end of 1994, that "guarantee" was not available to Molit; and all the non‑associated creditors, other than Molit, were suppliers or other persons whose continued support was necessary for the continuation of the North Adelaide operations.  It was submitted also that the trial judge had, in effect, reversed the onus of proof: that whereas the section permits the Court to make an order terminating a deed (only) if it is satisfied that certain circumstances exist, her Honour appeared to require fairness to be positively demonstrated.  Counsel contended that discrimination as between creditors is not of itself necessarily unfair; that criticisms of the conduct of Mr Macks were unjustified; that, particularly, a decision as to the continuation or closure of the business at Central Market had to be made within a very short time, and the interests of the company and its creditors generally properly protected on its closure and that, by the time when the deed came to be considered by the creditors, closure was a fait accompli; and that, if Mr Macks for good reason had not seen fit to negotiate with Molit before closing the supermarket, equally Molit had seen fit not to canvass with Mr Macks the possibility that the deed might provide it with a greater dividend.  In any event, counsel submitted, the question whether a deed is unfair is to be judged by reference to the terms of the deed and their effect, not by reference to things done before the deed was entered into.

It is, of course, true that the occasion for the deed was the desire on the part of Lam Soon Australia and its parent to "deal with" the "problem" at Central Market in the sense of enabling Lam Soon Australia to discharge its obligations to Molit as cheaply as possible while continuing to trade at North Adelaide. There is nothing necessarily wrong with the use of the mechanism provided by Pt 5.3A to bring about that result. The business of Lam Soon Australia could not continue in existence, as it stood before 30 December 1994, without the continuing support of its parent company: without that support Lam Soon Australia would certainly have been insolvent. The parent company had decided that it would not continue its support beyond the end of 1994 unless Central Market could be closed on terms satisfactory to it. In those circumstances a deed which facilitated the closure of Central Market while maintaining North Adelaide could be justified: the object stated by s 435A is, in part, "to provide for the business, property and affairs of an insolvent company to be administered in a way that ... maximises the chances of ... as much as possible of [the company's] business, continuing in existence". Where the basis of a deed of company arrangement is a proposal that an unprofitable part of a company's business will be closed and a profitable part continued, it would be surprising to find that the deed did not discriminate between those creditors who were likely to have a continuing relationship with the company and those who, because their connection was only with the part of the business to be closed, were unlikely to do so. There is authority which supports the proposition, which seems to us clearly correct, that some degree of discrimination in such circumstances is not necessarily unfair: Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, 152; Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 709, 710.
General propositions are dangerous where, as here, the Court is given a discretionary power to exercise, having regard to the statutory criteria and the circumstances of individual cases.  Nevertheless, we do not find the benchmark adopted by Mr Macks in this case particularly surprising.  In circumstances where a deed of company arrangement involves the closure of part of a business and the continuation of another part, and a consequent discrimination between groups of creditors, it may be expected that the creditors whose connection is with the continuing business will receive, if not all that they are owed, then at least more than they would receive in a winding‑up.  The alternative to a deed being liquidation, it is likely that the creditors whose connection is solely with the business to be closed will justifiably claim to be unfairly discriminated against, or unfairly prejudiced, if the scheme gives them less than they would have in a winding‑up.  But if the continuing creditors are to be paid more than they would have in a winding‑up, it is likely that funding from some external source - perhaps, as here, a parent with adequate resources - will be required in order to enable the others to be dealt with in a way that does not involve unfair prejudice or discrimination.  We cannot see why fairness necessarily demands that significantly more be contributed than the amount necessary to ensure that all creditors receive benefits of a value at least equal to those which they would receive if the deed were not executed.  The use of the word "necessarily" is deliberate: the judgment in each case is discretionary and will be made in the light of particular circumstances; including no doubt the circumstance (if it is the case) that a contributor of funds will itself benefit substantially from that proposal, perhaps through a likelihood of the availability of tax benefits.

It is necessary to consider the circumstances of this case against that background.  First, there is the question of objectivity and independence.  In Bartlett Derrington J said, at 711, that it is "necessary that an administrator be independent and objective" and the trial judge applied that observation in this case.  We do not doubt that that is true, in the sense particularly that, in reporting to creditors and making a recommendation as to which of the alternative causes of actions they should pursue, the administrator must act objectively and having regard to creditors' interests.  We do not, however, at all think it follows that an insolvency practitioner who has given a company, or its parent, advice of the kind which Mr Macks gave is disqualified from acting as administrator or that such a practitioner cannot properly recommend to creditors, if he or she honestly believes it is proper to do so having regard to their interests, a deed which will substantially give effect to the advice.  Nor can we see anything necessarily wrong with what we understand to be a reasonably common practice whereby an insolvency practitioner who has been, or who it is contemplated will be, appointed as administrator of a company works with the company, and persons associated with it, in formulating a deed which is then recommended to creditors.  The essential requirement in every case is that the insolvency  practitioner at all times before appointment as administrator, and after the appointment, act objectively in a manner which gives due regard and balance to the interests of all creditors, including different classes of creditors where different classes exist.

Secondly, there are the questions arising out of the way in which Mr Macks dealt with the lease of the Central Market supermarket and with Molit.  Given the attitude of Molit as found by the trial judge, there is no obvious reason, we think, to criticise Mr Macks
for failing to approach Molit during the relatively brief period when he acted as an adviser, before his appointment as administrator.  Once he had been appointed administrator, the evidence is clear that he very quickly concluded (and with the benefit of background information he already had from Lam Soon Australia) that the supermarket must be closed.  That being so, he had to take prompt action to avoid personal liability under s 443B.  It may be - but it was not established - that Molit might, had it been aware of what was happening and taken action in time, have been able to distrain against property which Mr Macks removed from the supermarket.  In any event, at the first meeting of creditors a representative of Molit was appointed a member of the committee of creditors.  The evidence makes it clear that there followed discussions and correspondence between Mr Macks and those acting for Molit.  The meeting called to consider the administrator's report, and the deed, was adjourned twice so that matters raised by Molit might be considered.  There is no evidence that Molit proposed what its counsel now asserts would solve the problem, that is that a greater dividend be paid to it then it would receive in a liquidation.  In sum, we do not find the criticisms of Mr Macks, in relation to his dealings with Molit, by any means convincing.

Nor, with respect, do we think it adds anything of substance to point out that the deed was necessary to deal only with the position of Molit and not with that of other non‑associated creditors who were to be paid one hundred cents in the dollar or with associated creditors who were in any event willing to defer their claims.  It would, we think, be an odd conclusion that a deed which gave the non‑associated creditors, say, ninety cents in the dollar and Molit a little more than it would receive in a liquidation was
in some sense fairer than one which paid the non‑associated creditors the full amount owing to them but nevertheless gave Molit little more than it would receive in a winding‑up.  However, where as in this case a deed which is proposed will discriminate between creditors and there is no community of interest between the groups, it is important that an administrator examine the proposal carefully and critically in order to ensure that the less advantaged group is not unfairly prejudiced.  That must involve at least that the administrator take steps to ensure, so far as it is possible, that the deed is no less beneficial to all creditors than liquidation is likely to be.

For completeness, we should perhaps mention two other matters.  One of the justifications offered by Lam Soon Australia for the discrimination in favour of creditors whose debts were due for payment at the commencement of the administration was that those creditors had the benefit of the equivalent of a guarantee by its parent company: the parent company's obligation said to arise from the notes, to which we have referred, in Lam Soon Australia's annual accounts.  We do not think it is by any means established that the note gave rise to any such obligation as a matter of law, but, given the views we have expressed, it is unnecessary to pursue that question further.  Secondly, counsel for Molit referred in argument to the position of the lessor of the North Adelaide premises and asked was the position of that lessor not, on the face of the deed, precisely the same as that of Molit?  Again, we do not think that the answer to that question, or any arrangement which may have been made for the payment of rent for the North Adelaide property, is relevant to the issue of unfair prejudice to, or discrimination against, Molit.

For the reasons we have given, we do not think, with respect, that what we have referred to as the two crucial findings of the trial judge can stand.  It follows in our view that the appeal should be allowed.  The question then arises whether it is appropriate simply to substitute for the orders made by her Honour an order that the application be dismissed or whether, on the other hand, it is necessary or appropriate to remit the matter to her Honour for further consideration of outstanding matters.  Counsel for Lam Soon Australia urged us to take the former course; counsel for Molit contended for the latter.

We think the matter should be remitted to the trial judge. First, in the light of her conclusions about unfair prejudice or discrimination, her Honour found it unnecessary to consider other grounds on which Molit submitted that the deed should be terminated. It is implicit in what we have already said that in our view the first ground - that the deed is not for a purpose authorised by s 435A - is not made out. There remain, however, the claims that the s 439A report was deficient and that the administrator's inquiry and investigation were not sufficient to justify a recommendation that the deed be executed. It does not follow from the conclusion that her Honour's decision should not stand that the deed necessarily should not be terminated on the ground of unfair prejudice or discrimination; particularly, her Honour explicitly refused to make findings as to the likelihood of recoveries, in a liquidation, from the holding company or from directors.

The complaint that the deed was an attempt to ride roughshod over Molit's rights had at its core the allegation that the deed would provide a lower monetary return to Molit than
would occur in a liquidation.  Questions concerning the adequacy of the administrator's investigation as to the likelihood of recovery are central to that allegation.

The reasons for her Honour's refusal to deal with those questions were that interested parties were not represented before the Court and that the issues might arise for determination in future proceedings.  The difficulty with that approach is that it is impossible to form a view as to whether what is proposed unfairly prejudices, or discriminates against, Molit without reaching a conclusion as to what it is likely to receive in a liquidation and, particularly, as to the reasonableness of the conclusions reached by the administrator on that subject.  There are obvious difficulties with, and limitations on, inquiries of that sort particularly when parties against whom rights of recovery are asserted to exist by opponents to the deed are not before the Court, but we do not think that in a case such as this such inquiries can be avoided entirely: see Hagenvale at 150; Hamilton v National Australia Bank Ltd at 253.

Other matters

It will be recalled that the trial judge declined to make an order under s 445G or under s 447A of Law declaring the deed of company arrangement void in whole or in part. Those decisions of her Honour were not attacked and were in our opinion correct.

Conclusion

The appeal should be allowed.  The orders made by the trial judge should be set aside and the matter should be remitted to her Honour for further hearing and determination having regard to these reasons.  The respondent should pay the appellant's costs of the appeal.

I certify that this and the preceding 32 pages are a true copy of the Reasons for Judgment of the Court.

Associate:

Dated:  18 October 1996

Heard:  8 May 1996

Place:  Adelaide

Decision:  18 October 1996

Appearances:  Messrs D E Clayton QC and P A Britten‑Jones of counsel instructed by Barratt Lindquist appeared for the appellant.

Mr J M Wilkinson of counsel instructed by Patel & Co appeared for the respondent.