M & S Butler Investments Pty Ltd v Granny May's Franchising Pty Ltd
[1997] FCA 901
•5 SEPTEMBER 1997
FEDERAL COURT OF AUSTRALIA
CORPORATIONS - Application for termination of deed of company arrangement - whether deed is unfairly discriminatory or unfairly prejudicial or oppressive - purpose of the deed was to spare the directors their obligations as guarantors - provision unfairly discriminatory within s 445D(1)(f) of the Corporations Law (‘the Law’) - directors’ proposal provided that “all tangible assets of the company vest in the administrator to be dealt with under the terms of the deed of company arrangement” - no deed in existence at the time of resolution to vote in favour of the execution of the deed - whether provisions of the deed infect the validity of the deed to the extent that it ought to be terminated - administrator obliged to put before the creditors all material facts and circumstances to enable the creditors to make a fully informed decision - non-compliance with s 439A(4)(c) of the Law.
Corporations Law, ss 439A, 445D
Re Andersens Home Furnishing Co Pty Ltd (1996) 14 ACLC 1710
Emanuele v ASC (1995) 63 FCR 54
Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (admr apptd) 19 ACSR 160
Deputy Commissioner of Taxation (Cth) v Comcorp Australia 21 ACSR 591
M & S BUTLER INVESTMENTS PTY LTD & ORS v GRANNY MAY’S FRANCHISING PTY LTD & ORS
QG 136 of 1996
SPENDER J
5 SEPTEMBER 1997
BRISBANE
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
QG 136 of 1996
BETWEEN:
M & S BUTLER INVESTMENTS PTY LTD
ACN 066 688 211
First ApplicantMARK BUTLER & SHAUNA BUTLER
Second ApplicantsJACK STEWART & JANN STEWART
Third ApplicantsAND:
GRANNY MAY'S FRANCHISING PTY LTD
ACN 003 917 879
First RespondentMICHAEL TENNER
Second RespondentROBERT MICHAEL SMITH
Third RespondentJUDGE:
SPENDER J
DATE OF ORDER:
5 SEPTEMBER 1997
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
The Deed of Company Arrangement entered into on 1 October 1996 between M&S Butler Investments Pty Ltd (Administrator Appointed), M&S Butler Investments Pty Ltd, Mark & Shauna Butler and Roger Walker be terminated.
The applicant on the motion have its costs of the motion to be taxed if not agreed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
QG 136 of 1996
BETWEEN:
M & S BUTLER INVESTMENTS PTY LTD
ACN 066 688 211
First ApplicantMARK BUTLER & SHAUNA BUTLER
Second ApplicantsJACK STEWART & JANN STEWART
Third ApplicantsAND:
GRANNY MAY'S FRANCHISING PTY LTD
ACN 003 917 879
First RespondentMICHAEL TENNER
Second RespondentROBERT MICHAEL SMITH
Third Respondent
JUDGE:
SPENDER J
DATE:
5 SEPTEMBER 1997
PLACE:
BRISBANE
REASONS FOR JUDGMENT
By a notice of motion filed on 6 February 1997, each of the respondents in the principal proceedings seeks a declaration under s 445D(1)(f) of the Corporations Law (‘the Law’) that a deed of company arrangement, or its provisions, is oppressive, unfairly prejudicial or unfairly discriminative to the first respondent, Granny May’s Franchising Pty Limited (‘GMF’). Further orders are sought that the Deed of Company Arrangement (‘the Deed’) be terminated pursuant to s 445D(1)(g) of the Law and in the alternative, the first respondent seeks leave pursuant to s 444E(3)(c) of the Law to proceed with a counter-claim against each of the first, second and third applicants. Two other motions were filed in the Court but it was agreed by counsel that in the event that the Deed were to be terminated, those motions would not require determination.
On or about 16 November 1995, the first respondent entered into a Franchise and Licence Agreement with the first applicant, M&S Butler Investments Pty Ltd (‘M&S Butler’), which authorised the first applicant to operate a business known as “Granny May’s” Browns Plains at Shop 91, Grand Plaza Shopping Centre, Browns Plains, Queensland.
Each of the second and third applicants entered into the Franchise and Licence Agreements as personal guarantors of the indebtedness of the first applicant. The second applicants, Mark and Shauna Butler (‘the Butlers’), are the directors of the first applicant. The third applicants, Jack and Jann Stewart (‘the Stewarts’), are the parents of Mrs Shauna Butler. At the request of the Butlers, the Stewarts’ residence was mortgaged to secure a loan from Australian Guarantee Corporation in order to set up the business.
After a period of default by the applicants in respect of its obligations under the Franchise Agreement, the solicitors for GMF sent a Notice to Rectify to M&S Butler. By letter dated 16 May 1996, Robert Smith and Michael Tenner, (acting as Joint Managing Directors of GMF), terminated the Franchise and Licence Agreements with M&S Butler on the grounds that M&S Butler had failed to comply with that Notice to Rectify.
The New South Wales Proceedings
On 28 June 1996, GMF issued proceedings out of the District Court of New South Wales against each of the applicants in the principal proceedings, seeking recovery of fees under the Franchise Agreement in the amount of $76,360.82. The substance of those proceedings involved, inter alia, a claim under the guarantee given by each of the second and third applicants.
On 11 July 1996, GMF sought by petition to have the first applicant wound up in the New South Wales Registry of the District Court. Service was effected upon the firstnamed defendant in those proceedings (the first applicant in the principal proceedings) on 19 July 1996 and on the fourth and fifth defendants (the third applicants) on 24 July 1996.
There was no appearance entered by the defendants and judgment was entered against the fourth and fifth defendants on 11 October 1996. No application has been filed to set aside that judgment.
The principal proceedings
On 13 August 1996, each of the applicants in the principal proceedings filed Federal Court proceedings in the Queensland District Registry. Those proceedings sought to have the Franchise Agreement declared void or unenforceable on the grounds of misleading or deceptive conduct by each of the respondents. The applicants allege that certain representations were made by the second and third respondents on behalf of the first respondent concerning the profitability and gross sales figures of the Granny May’s store at Browns Plains. Those representations, it is alleged, were false and as a result, the applicants maintain that they have suffered loss or damage.
The relief under s 87 of the Trade Practices Act 1974 (Cth) sought by the applicants in the principal proceedings relates to the same guarantees which were the subject of contentious provisions in the Deed, sought by the present motion to be terminated.
On 16 August 1996, just prior to the commencement of proceedings in the New South Wales Registry for the winding up of M&S Butler, the directors of M&S Butler placed the company into voluntary administration. Mr Roger Walker of Ernst and Young was appointed administrator pursuant to s 436A of the Law. The evidence shows that the directors attended upon the administrator just one day prior to his being appointed.
The Administrator’s report
Under s 438A of the Law, an administrator is obliged to investigate the company’s affairs, and to form an opinion about certain matters as soon as practicable after the administration begins. Section 436E of the Law provides for a mandatory first meeting of at least two creditors to determine whether to appoint a committee of creditors and if so, who are to be the members of that committee.
The administrator, Mr Walker, conducted an investigation into the company’s affairs and after consultation with the directors and external solicitors, compiled a report, dated 5 September 1996, in purported compliance with s 439A of the Law. That report was said to be based on “information obtained from the company’s books, records and other financial information available to the administrator at the time” but was qualified by the statement that “there may be certain matters of which [the administrator was] not aware”. Schedules to the report containing information about admitted creditors were not enclosed, but were supposed to be made available for inspection at the meeting of creditors.
The report was made available to the directors of GMF, the largest independent trade creditor of the applicant, on 10 September 1996, just two days prior to the second meeting.
On page 3 of the administrator’s report, the assets and liabilities of M&S Butler were set out:
“Assets
Sundry Debtor
Stock (estimated)
Fixtures and Fittings
Contingent Asset
Total AssetsValuation - $
400.00
5,500.00
127,158.00
300,000.00
$433,058.00Estimated
Realisable
Value - $
Unknown
Unknown
Unknown
Unknown
UnknownLiabilities
Priority Creditors - employee entitlements
Unsecured Creditors
-Trade Creditors
-Internal Creditors
-Australian Taxation Office (estimated)Total Liabilities
Estimated
Realisable
Value - $
6,731.00162,240.01
161,000.00
12,000.00341,971.01”
Under the heading of ASSET POSITION, reference is made to “Contingent Asset - Legal Action”. The report states:
“The directors have sought legal advice on a possible action against Granny May’s Franchising Pty Ltd for damages and loss of income. Primarily, damages would be sought for alleged misrepresentation of forecasted sales for the Brown Plains store prior to entering into the franchise agreement.
The directors have advised that a claim for damages would be approximately $300,000.00. Due to the complexity of the action and no available funds, the administrator has not proceeded with the action. Should the directors’ proposal be accepted, the directors would further pursue these legal proceedings.”
Under the heading of LIABILITY POSITION, the report deals with outstanding debts owed to both Priority Creditors and Unsecured Creditors. At page 4, reference is made to “Internal Creditors”:
“A joint debt of $160,000 is owing to Mark and Shauna Butler and the parents of Shauna Butler, Jack and Jan Stewart.”
The Stewarts are accordingly described as internal creditors. The report continues:
“Under the directors’ proposal, the ... internal creditors will rank after ordinary unsecured creditors in the event of a dividend being paid under the proposed Deed of Company Arrangement.”
In relation to “Trade Creditors”, the report said:
“As at 16 August 1996, the total amount owing to trade creditors is $85,879.18. This figure is based on Proofs of Debt received from creditors to date and information supplied by the directors. Granny May’s Franchising Pty Ltd have lodged a proof of debt for $76,360.83. The validity of this claim could be subject to the outcome of legal proceedings if pursued by the company against Granny May’s Franchising Pty Ltd.”
In his recommendations to the creditors, Mr Walker advised against a resolution by the creditors to release the company from the control of the voluntary administrator. In relation to the option of placing the company into liquidation, he remarked:
“Should funding not be made available, it is unlikely a liquidator would continue with legal proceedings to recover damages for any alleged misrepresentations made by Granny May’s Franchising Pty Ltd.”
This statement was allegedly made in order to encourage the creditors to adopt a deed of company arrangement so that the company would be able to continue its action in the Federal Court against GMF. However, there was no material put before the creditors to suggest that funds were available to pay for the litigation.
On page 7 of that report, reference is made to a “Deed of Company Arrangement”:
“The directors of M&S Butler have submitted a proposal to the administrator to be voted on by creditors at the meeting on 12 September 1996. The proposal is as follows:
A. All internal creditors (apart from a $5,000 priority entitlement) will rank after ordinary unsecured creditors and ahead of shareholders of the company for any dividends paid.
B. That all tangible assets of the company vest in the administrator to be dealt with under the terms of the Deed of Company Arrangement.
C. The stock and fixtures and fittings in the Browns Plains store be offered to Granny May’s Franchising Pty Ltd and if not sold, then dealt with by the Administrator.
D. Should the legal action against Granny May's Franchising Pty Ltd be successful, an amount of $40,000 or 50% whichever is the less, be distributed to the Deed Administrator for his costs and a dividend to creditors who surrender any personal guarantees or do not have such guarantees.” [emphasis added]
Copies of the Deed were requested by the solicitors of GMF but were not provided. Likewise, a list of admitted creditors was not forthcoming to GMF, nor was the Schedule to the Deed ever completed to include those details. At the hearing of the notice of motion, the schedule was still not completed.
The meeting of 12 September 1996
On 12 September 1996, a meeting was held pursuant to s 439A of the Law. The Chairman put the following resolution for the deed of company arrangement to the meeting:
“That M&S Butler Investments Pty Ltd (Administrators Appointed) execute a Deed of Company Arrangement in the terms of the proposal that was included in the report to the creditors.”
According to the minutes of the meeting, the proposal was seconded by a Mr Steve Keating, representing a creditor, Skansen Giftware. There were twelve proxies who voted in favour of the Deed with GMF and Granny May’s Management Pty Ltd recorded as voting against the proposal. Top Heavy T-Shirts, another trade creditor, lodged a proxy in favour of liquidation of the company.
At the time of the meeting, there was no proposed deed of company arrangement and no director’s written proposal made available for consideration by the creditors, the details of proposal being limited to the terms expressed in the administrator’s recommendation.
That proposal contained in the Administrator’s report at page 7 states that “... all tangible assets of the company vest in the administrator, to be dealt with under the terms of the Deed of Company Arrangement”. When a majority of creditors resolved to vote in favour of the execution of the Deed, they were voting for a proposal the terms of which were then unknown. No detail as to the content of the Deed was put before the creditors; the Deed did not come into existence until 1 October 1996.
The Deed of Company Arrangement
The Deed commenced operation on 1 October 1996. The parties to the Deed are recorded as being M&S Butler Investments Pty Ltd (Administrator Appointed), M&S Butler Investments Pty Ltd, Mark Butler and Shauna Butler and Roger Walker, the Administrator.
Part 3 of the Deed relevantly provided:
“SCOPE OF THIS DEED
3.1This Deed binds all persons: This Deed binds all persons having a Claim to the extent of such Claim.
...
3.3Restrictions on persons bound by this Deed of Company Arrangement: Subject to Part 4, during the Deed of Company Arrangement Period a person having a Claim shall not:
(a)make an application for an order to wind up the Company;
(b)proceed with such an application made before this Deed became binding on the Admitted Creditor;
(c)begin or continue any proceeding against the Company or in relation to any of its property or under any Guarantee:
(d)begin or continue with any Enforcement Process in relation to the Company’s property or the property of any Guarantor under a Guarantee, except, in the case only of paragraphs (c) and (d), with the leave of a Court and in accordance with such terms (if any) as a Court imposes. For the purposes of this clause 3.3, 'property' includes property used or occupied by, or in the possession of, the Company.
...” [emphasis added]
“Guarantee” is defined in Part 15 to mean:
“... any guarantee, indemnity, letter of credit, correspondence giving rise to legal liabilities or suretyship or any other obligation (whatever called and on whatever terms):
(a) to pay, to purchase or to provide funds for the payment or discharge of;
(b) to indemnify against the consequences of default in the payment of; or
(c) otherwise to be responsible for
any obligation in respect of any financial indebtedness, dividend, capital or premium on shares or stock, or the insolvency or financial condition of the Company.
...”
Part 6 of that Deed deals with the manner of distribution of admitted claims:
“PART 6
PAYMENT OF ADMITTED CLAIMS
6.1Distribution: during the Deed Period, the Administrator shall endeavour to ensure that the company pays -
(a)first, any income Tax Priority Claim:
(b)second, the debts and claims described in sub-sections 556 (a), (c), (dd) (de), (e), (f), (g) and (h) of the Corporations Law in accordance with the order of priority set out therein on the proviso that the Directors of M&S Butler Investments Pty Ltd only be entitled to receive $5,000 in respect of claims pursuant to this sub-clause and that the balance of any Claims by them under this clause be paid pursuant to sub-clause (c); and
(c)third, the Admitted Claims by making distributions in respect of the Entitlement of each Admitted Creditor in accordance with the priority provisions of Schedule 2.
6.3Administrator’s discretion: The Administrator may in his absolute discretion, pay any Claim in preference and priority to any other Claim if he considers it desirable to do so, having regard to (among other things) the interests of the Admitted Creditors.
…
PART 11
THE BOARD
…
11.6Should the company be paid money from any of Granny May’s Franchising Pty Ltd, Robert Smith or Michael Tenner by way of an amount paid pursuant to any court order or settlement in relation to Federal Court Proceedings then the amount which represents 50 per centum of the amount of that money or $40,000, whichever is the lesser, shall be paid to the Administrator for the purposes of the Administration and distribution in accordance with Part 6.” [emphasis added]
Part 6 must be read together with the Second Schedule to the Deed, which provides:
“SCHEDULE 2
PRIORITY OF DISTRIBUTIONS FOR PAYMENT OF ADMITTED CLAIMS
Without limiting the effect of the provisions of Part 6, the order of priority of payment of Admitted Claims pursuant to clause 6.2 shall be as follows -
FIRST, Out of the funds available to the Administrator other than those funds made available under paragraph 11.6 of this Deed, the Admitted Claims other than the Admitted Claims of the Internal Creditors.
SECOND, Out of the funds available to the Administrator under paragraph 11.6 of this Deed, the Admitted Claims other than the Admitted Claims of the Internal Creditors and who either:
(a) Do not hold any Guarantees in respect those Claims; or
(b)Have surrendered any Guarantees that they hold in respect of those Claims.
THIRD, the Admitted Claims of the Internal Creditors.
All payments made by the Administrator in priority to the above shall be made out of the funds available to the Administrator other than those funds made available under paragraph 11.6 of this Deed.”
Counsel for the respondents, Mr North, relies upon two distinct bases to support an order for termination of the Deed.
The primary contention advanced by Mr North is that there is no power under the Law for a company to compel, by a majority vote of creditors, the private protection of directors from the enforcement of personal guarantees entered into in respect of a company’s obligations. It is alleged on behalf of the respondents that Part 3 of the Deed purports to prevent GMF from claiming against the directors under a personal guarantee which is property other than that of the company.
The second ground relied upon as a basis for termination of the Deed is the company administrator’s alleged non-compliance with the requirements of Part 5.3A of the Law. It is alleged by Mr North that the administrator failed to disclose certain material facts to the creditors and that the Deed was constructed exclusively in the interests of the directors, contrary to the spirit of Part 5.3A of the Law.
Mr North contends that either or both of these grounds taint the legal validity of the Deed to the extent that an order for termination of the Deed should be made.
The effect of cl 3.3(c) and the definition of “guarantee” in Part 15 of the Deed is to prevent creditors from bringing or continuing proceedings against M&S Butler in respect of its own property or in respect of any guarantee of the company’s indebtedness.
It is accepted on behalf of the applicants in the principal proceedings that there is no power under the Law to enable a majority of creditors to extinguish the personal obligations under guarantees of directors of a company, assumed in respect of some of the debts of that company.
A deed of company arrangement can only deal with company property; it is not competent for an administration under Part 5.3A of the Law to exempt directors from their personal guarantees.
This much is made clear from s 440J which restricts the enforcing of any guarantee against the directors of a company during the administration of a company. However, a director’s obligations under a guarantee continue to exist: this is implied by the fact that the Court may give leave to proceed against a director to enforce those obligations. There is accordingly no power in a majority of creditors to restrain the enforcement of personal obligations under guarantees.
The question then arises as to whether cll 3.3, 6.1(c) and the Second Schedule infect the validity of the Deed such that the Deed ought to be terminated as the respondent submits, or, as the applicants submit, whether the Deed should remain on foot but be varied, so that all references to the director’s guarantees are removed.
The Corporations Law
Part 5.3A of the Law is headed “ADMINISTRATION OF COMPANY’S AFFAIRS WITH A VIEW TO EXECUTING A DEED OF COMPANY ARRANGEMENT”. The scheme of Part 5.3A is to put the future of the company into the hands of the creditors under the guidance of the administrator. Its object is to maximise the chances of a company continuing in existence or, if that is not possible, to obtain a better return for the creditors than would result from the immediate winding up of the company: Re Andersens Home Furnishing Co Pty Ltd (1996) 14 ACLC 1710.
The power of this Court to terminate a deed of company arrangement is found in s 445D(1) of the Law, which relevantly provides:
“The Court may make an order terminating a deed of company arrangement if satisfied that:
...
(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.
...”
Section 444E of the Law relevantly provides:
“(1)Until a deed of company arrangement terminates, this section applies to a person bound by a deed.
...
(3) The person cannot:
(a)begin or proceed with a proceeding against the company or in relation to any of its property; or
(b)begin or proceed with enforcement process in relation to property of the company;
except:
(c) with leave of the Court; and
(d) in accordance with such terms (if any) as the Court imposes.
...”
The power of the Court to terminate a deed of company arrangement under s 445D of the Law is discretionary. It is to be exercised having regard to the interests of the creditors as a whole, and in the public interest: Emanuele v ASC (1995) 63 FCR 54.
It is convenient to deal first with that ground relied upon by the respondents as a basis for an order of termination of the Deed, which asserts the alleged non-compliance with Part 5.3A of the Law.
Section 439A of the Law relevantly provides:
“(1)The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6).
(2)The meeting must be held within 5 business days after the end of the convening period.
(3)The administrator must convene the meeting by:
(a)giving written notice of the meeting to as many of the company’s creditors as reasonably practicable; and
(b)causing notice of the meeting to be published;
...
at least 5 business days before the meeting.
(4)The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:
(a)a report by the administrator about the business, property, affairs and financial circumstances; and
(b)a statement setting out the administrator’s opinion about each of the following matters:
(i)whether it would be in the creditors’ interests for the company to execute a deed of company arrangement;
(ii)whether it would be in the creditors’ interests for the administration to end;
(iii)whether it would be in the creditors’ interests for the company to be wound up;
and his or her reasons for those opinions; and
(c)if a deed of company arrangement is proposed - a statement setting out details of the proposed deed.
(5)The convening period is:
...
(b)otherwise - the period of 21 days beginning on the day when the administration begins.” [emphasis added]
Section 439C provides:
“At a meeting convened under s 439A, the creditors may resolve:
(a)that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or
(b)that the administration should end; or
(c)that the company be wound up.”
Section 439A(4) of the Law focuses attention on the interests of the creditors of the company. The terms of the present Deed are heavily directed to the interests of the directors of the company, a concern quite distinct from the interests of creditors.
Section 439A(4)(c) requires that, if a deed of company arrangement is to be proposed, a statement setting out details of the proposed deed must accompany the written notice.
Having regard to the fact that no detail was provided as to the content of the Deed, nor as to the manner in which the assets of M&S Butler were to be dealt with, it was submitted on behalf of GMF that the report prepared by the administrator failed to comply with the requirements of s 439A(4)(c) of the Law.
Counsel for the applicant, Ms Downes, submitted that the absence of information as to the manner in which the assets of the company were to be dealt with under the Deed at the creditor’s meeting on 12 September 1996 does not preclude compliance with s 439A of the Law. Ms Downes relies on s 444A(5) which provides that the “instrument” (a document which sets out the terms of the deed), is taken to include the prescribed provisions, “except so far as it provides otherwise”. That is to say, that, by virtue of reg 5.3A.06, the standard provisions of Schedule 8A are incorporated into the Deed. It was submitted for the applicant that, in accordance with normal industry practice, the terms of the Deed are determined at the second meeting.
Ms Downes also points to the recommendations made by the administrator on pages 6, 7 and 8 of the report to assert that there was sufficient compliance with the requirements of s 439A(4) of the Law.
As to the information which must be provided to the creditors, the learned authors of Ford and Austin’s “Principles of Corporations Law” Butterworths, Sydney (7th ed, 1995) say at page 995:
“If the administrator proposes that the company execute a deed of company arrangement, the administrator must give creditors details of the proposed deed. If the information supplied omits a report or statement and the omission can reasonably be expected to have been material to creditors in reaching their decision, that could be a ground for the court later terminating a deed under s 445D. At their meeting creditors will canvass provisions that should be in the deed.” [emphasis added]
At no time did the administrator in the present case have any discussion with GMF about the prospects of litigation. The judgment of Branson J in Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (admr apptd) 19 ACSR 160, does not suggest that each creditor (or at least GMF, the largest independent trade creditor) is entitled to private consultation as to the terms of the proposal and ultimate deed. Nor must the administrator consult with every trade creditor in writing its report and making a proposal to the body of creditors. Sheppard J, in his dissent in Deputy Commissioner of Taxation (Cth) v Comcorp Australia 21 ACSR 591, noted that since an administrator is constrained by the time limits imposed by the Corporations Law, an administrator cannot carry out a detailed investigation of a company in the same way as can a liquidator.
An administrator has nonetheless, an obligation to put before the creditors all material facts and circumstances to enable the creditors to make a fully informed decision.
Comcorp (supra) was concerned with the details required to be set out in the administrator’s statement under s 439A(4)(c). Lockhart and Carr JJ held that the Court’s task, when considering the application of s 445D of the Law, was to evaluate whether, in all the circumstances of the matter, the information provided by the administrator, (which was said to be false or misleading or which had not been disclosed to creditors), can reasonably be expected to have been “material” to the creditors in deciding whether to vote in favour of the resolution that the company execute the Deed.
In that case the Court refused to terminate a deed of company arrangement because there had been six other meetings of related companies at which identical deeds were tabled. The considerable degree of detail in the administrator’s report was also a significant consideration in the reaching of their Honour’s conclusion.
Carr J said at 624 that s 439A(4)(c) of the Law cannot require each and every detail of the provisions of the proposed deed of company arrangement to be set out in the administrator’s report. Rather, only the “material details” must be included in the statement. His Honour said:
“... I would suggest that the details which s 439(4)(c) requires to be set out are those details which can reasonably be expected to have been material to creditors in deciding whether to vote in favour of the resolution that the company execute the deed.”
Sheppard J, in his dissent, said that since an administrator is constrained by the time limits imposed by the Law, an administrator cannot be expected to carry out a detailed investigation of a company in the same way as can a liquidator. It is for this reason that his Honour commented at 596:
“the administrator’s actions must be looked at in the light of that more restricted time frame within which he is confined.”
But his Honour continued at 597:
“Of course, there will be cases in which the administrator will not be able to gather sufficient information in the time available to enable him to form the opinions provided for in subss 438A(4) and 439A(4). If that be so, the administrator needs to inform the meeting of this. Almost certainly the consequence of this will be that, at least at that stage, administration under Part 5.3A of the Law will not be an available course. This may lead to the winding up of the company.... The purpose of the Law read as a whole, discloses that the legislature wished to ensure, so far as possible, that insolvent companies, unless it were appropriate for them to be placed in administration or to be made the subject of reconstruction or an arrangement, not to continue to trade. The provisions of the Law operate to discourage directors from continuing to operate insolvent companies.”
In my opinion, material details have not been supplied to the creditors in the present case. It cannot be said that the creditors had an informed view before voting if the proposal that they were voting for, said that “the tangible assets of the company will be dealt with in accordance with a deed”, the terms of such deed unknown at the time.
I regard as further material omissions the fact that no reference was made in the administrator’s report to the pre-existing New South Wales proceedings commenced by the respondents and that the personal applicants stood to be liable for this debt under the guarantee executed by them.
There is nothing in the evidence to explain why the most significant independent creditor of the company was not told about the meeting until two days before, notwithstanding that the administrator had twenty-one days to notify the parties concerned. The administrator failed to consult with the one significant independent creditor of the first applicant. There is the further fact that at the meeting, those who voted in favour of adopting the Deed were not personally present: they were represented by a proxy vote given to the administrator prior to the meeting.
Role of the Administrator
The administrator is required to take into account the views of the creditors of a company in making a decision which directly affects them.
In Molit (supra), Branson J discussed the role of the administrator under Part 5.3A of the Law. In that case, a company operated two supermarkets, the second of which was the subject of a lease. The applicant was the lessor of those premises. The net assets of the company deteriorated over time and an administrator was appointed pursuant to s 436A of the Law. One year later, notice was given to the applicant, pursuant to s 444B(3) of the Law, that no rights were to be exercised by the company in relation to the lease. At a meeting of the creditors, it was resolved that the company execute a deed of company arrangement. The applicant was the only one to vote against the resolution. The appointed administrator of the company, Mr Macks, was appointed administrator of the deed of company arrangement.
Prior to entry into the deed of company arrangement, Mr Macks did not enter into negotiations with the applicant. Information as to the administrator’s plans concerning the leased premises was deliberately withheld from the applicant because it was feared a legal right of distraint might be exercised. Apart from the applicant, all other creditors of the company were creditors with whom the company was likely to have a continuing involvement through the continued operation of its other successful supermarket.
Branson J terminated the deed of company arrangement under s 445D of the Law on the grounds that it was unfairly prejudicial to the applicant in that it bound the applicant in respect of claims for future rent under the lease when that lease was repudiated during the administration of the company without notice to, or consultation with, the applicant. The deed was also held to be unfairly discriminatory against the applicant because no reasonable grounds for the “strikingly different” treatment of different classes of creditors under the deed had been demonstrated.
At 174, Branson J said:
“Mr Macks sought to justify his failure to seek to negotiate with the applicant as to the ongoing rent payable under the lease by reference to information given to him by persons involved with the Company. Nothing suggests that Mr Macks sought to balance this information obtained from any source independent from the Company.
...
As Derrington J pointed out in Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707 at 710:
'The purpose of the statutory scheme [ie Part 5.3A] is to enlarge as far as possible the benefits to the creditors while at the same time providing for a method of avoiding obstruction to a beneficial scheme by particular creditors who may wish to improve their position by threat of defeating the whole scheme.'
I agree with the observation by Derrington J at 711 of the above case that it is “... necessary that an administrator be independent and objective”. In such a role he or she is, in my view, obliged to consider not only means to maximise the chances of the company, or as much as possible of its business, continuing in existence (s 435A), but also issues of fairness between the company and its creditors, and between the company’s creditors inter se. The administration of a company under Pt 5.3A of the Corporations Law is a process in which its creditors are plainly intended to be closely involved. Ordinarily, in my view, the administrator will be required to take into account the respective views of such creditors in the making of decisions which directly affect them.
In this case I consider that Mr Macks, whether consciously or unconsciously, carried into administration negative attitudes towards the applicant which he had developed during the period when he was retained by the Company to advise it in respect of possible corporate restructure.”
Her Honour continued at 175:
“I find that the Deed of Company Arrangement 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 administration of the Company without notice to, or consultation with the applicant.
...
This is not a case, in my view, in which the court would gain any assistance by seeking the views of the majority of creditors: the interests of the Company as at 30 December 1994, other than the applicant, will not be affected by a termination of the Deed of Company Arrangement. In my view, the public interest will not be adversely affected by a termination of the Deed of Company Arrangement.”
In Re Andersens (supra), Demack J was faced with the question of whether to vary or to terminate a deed of company arrangement. In that case, the directors of a company, Edshar Pty Ltd (‘Edshar’), had guaranteed its obligations under a franchise agreement. Edshar appointed an administrator. The administrator drew up a deed of company arrangement under which the directors, (‘Lacys’), were to sell their house in order to pay Edshar’s creditors. In return, Edshar’s creditors were deemed to have released the directors from any personal guarantees of Edshar’s liabilities. A majority of the creditors voted in favour of the deed, but the franchisor voted against it and applied to have the deed terminated, on the grounds that the deed was unfairly discriminatory against it.
Clause 5.3 of the deed in that case provided:
“5.3Upon carrying out of the terms of this Deed the Creditors shall be deemed to have absolutely released and discharged the Directors in relation to any personal obligations of the Directors in respect of any liability of the company to the Creditors.”
Demack J terminated the deed pursuant to s 445D of the Law on the grounds that the provision was unfairly discriminatory against the franchisor. His Honour refused to vary the deed by deleting the offending provision because the deed still provided for the use of the proceeds of the sale of the directors’ house. The net proceeds from the sale of the house were not assets of the company to be distributed to the company’s creditors but were the directors’ assets available to meet their personal obligations only.
His Honour said at 1714:
“... by this Deed [of Company Arrangement], the creditors’ meeting has purported to release Lacys from personal obligations they have assumed towards Andersens and the landlord. There is no statutory authority to do this. There is no common law or equitable basis for doing this. Consequently, cl 5.3 is beyond the power of the creditors’ meeting, unless of course, the creditors who are affected by the clause vote in favour of the execution of the deed. The provision, cl 5.3, is unfairly discriminatory against Andersens, which voted against the motion to execute the Deed of Company Arrangement.”
Counsel for the applicants submit that Re Andersens’ case (supra) can be distinguished in that, accepting that there was no authority either by statute, under the common law or in equity to bind the guarantees from pursuing personal guarantees against the directors, the deletion of any references to the guarantees by blue-pencilling in the present case would leave a valid deed because there is no reference to any other assets of the directors.
Ms Downes further submitted that GMF would obtain no material advantage whether the Deed is terminated or varied. The Deed ought to be varied in her submission, to allow the other creditors a possible share in the proceeds of the litigation against GMF.
As I see it, the purpose of the Deed, considered objectively, was to spare the directors their obligations as guarantors. The proposed resolution did not distinguish between creditors who had guarantees and those who did not. It appears that the object of the drafting was to ensure that sufficient votes from the creditors could be obtained to ensure the adoption of the Deed. Such an object is not consistent with the scheme of Part 5.3A of the Law.
In my opinion, GMF received “strikingly different” treatment, due to the fact that GMF is the sole independent and significant trade creditor who was given personal guarantees by the personal applicants.
Clauses 6.1(c), 11.6 and Schedule 2 of the Deed demonstrate that the essence of the director’s proposal was that, if any funds are obtained out of the litigation pursued in the principal proceedings, those funds are to be paid in priority to those creditors who either do not hold any guarantees in respect of those claims, or have surrendered any guarantees that they hold. This means that the only those who are prepared to give up their guarantees or those who did not have a guarantee at the beginning will benefit from the Deed as it stands. This provision, in my judgment, is unfairly discriminatory within s 445D(1)(f) of the Law against GMF: any entitlement of GMF under this provision depends upon GMF surrendering its guarantees for the directors.
A further consequence of the Deed is that GMF is adversely affected in a dramatic way: it is exposed to litigation which the directors could still have brought under s 87 of the Trade Practices Act 1974 (Cth), while being precluded from continuing with proceedings against the company.
I am satisfied that there has been non-compliance with s 439A(4)(c) of the Law.
I respectfully agree with the observations by Sheppard J in Comcorp (supra) at 597 - 598:
“... it is plain that the legislature intended that creditors should be as well informed as they could be of the position of the company and the options which were open to them to ensure a maximum return either by the continued operation of the company or otherwise. The provisions of subs 439A must be read in the context of Pt 5.3A but, subject to that matter, it must be interpreted so as to ensure, so far as possible, that creditors act on adequate and reliable information. If this does not occur, the overall intention of Pt 5.3A will be defeated.” [emphasis added]
It is my opinion that those creditors who voted in favour of the execution of the Deed did so on an uninformed basis as a result of material omissions in the report of the administrator.
I am further satisfied that the Deed of Company Arrangement executed on 1 October 1996 is plainly unfairly prejudicial to GMF. Amongst other things, it purports to prevent GMF seeking to enforce personal guarantees given by the directors of the company. The excision of this provision would not meet the valid objections that relate to cll 6.1(c), 11.6 and Schedule 2.
On each of the bases advanced on behalf of GMF, the Deed of Company Arrangement should be terminated. I so order. The applicant on the motion should have its costs of the motion, to be taxed if not agreed.
I certify that this and the preceding twenty-one (21) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.
Associate:
Dated: 5 September 1997
Counsel for the Applicants: Miss K Downes Solicitor for the Applicants: Bowdens Counsel for the Respondents: Mr TJ North Solicitor for the Respondents: LS Davis & Associates Date of Hearing: 11 March 1997 Date of Judgment: 5 September 1997
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