McVeigh v Linen House Pty Ltd & Rugs Galore Australia Pty Ltd (Subject to deed of company arrangement)

SUPREME COURT OF VICTORIA

COURT OF APPEAL Not Restricted

No.4963 of 1999

DEAN ROYSTON McVEIGH & COLIN RAYMOND McDONALD	Appellants
v
LINEN HOUSE PTY. LTD. & RUGS GALORE AUSTRALIA PTY. LTD. (SUBJECT TO DEED OF COMPANY ARRANGEMENT)	Respondents
No.5765 of 1999
DEAN ROYSTON McVEIGH & COLIN RAYMOND McDONALD	Appellants
v
RUGS GALORE AUSTRALIA PTY. LTD. (SUBJECT TO DEED OF COMPANY ARRANGEMENT)	Respondent

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JUDGES:	TADGELL, PHILLIPS and BUCHANAN, JJ.A.
WHERE HELD:	MELBOURNE
DATES OF HEARING:	8, 9, 10 November, 1999
REASONS FOR JUDGMENT HANDED DOWN:	14 February, 2000
DATE OF JUDGMENT:	21 February, 2000
MEDIUM NEUTRAL CITATION:	[2000] VSCA 4

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Corporations – Insolvency – Deed of company arrangement – Appointment of administrator by secured creditor – Failure of administrator to inform creditors fully – Order for termination of deed but order stayed pending appeal– Whether stay effective – Whether termination justified – Appointment by company of second administrator with a view to a second deed – Whether second appointment valid – Whether second administration permissible – Corporations Law ss.436A, 436C, 438A, 439A, 439C, 445D, 445E, 446A, 446B, 447C, Reg.5.3A.07.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	Mr. P.R. Hayes QC and Mr. I.D. Martindale	Deacons Graham & James
For the Respondent Rugs Galore	Mr. R.M. Garratt QC and Mr. P.D. Crutchfield	White Cleland
For the Respondent Linen House	Mr. J.G. Larkins QC and Mr. M.S. Osborne	Rosendorff Lawyers

TADGELL, J. A.:

I agree with Phillips, J.A., whose draft reasons I have had the advantage of reading, that for the reasons he has assigned each appeal should be dismissed with costs.

PHILLIPS, J. A.:

These two appeals were heard together, each of them arising out of an application under the Corporations Law in respect of the company Rugs Galore Australia Pty. Ltd. (which I shall call “RGA”). In both cases the appellants are Dean Royston McVeigh and Colin Raymond McDonald who were appointed administrators of RGA by one of its secured creditors on 17 February 1999. Whether RGA is still in administration is a question on these appeals.

Background

RGA was incorporated on 23 January 1997 as Podmar Investments Pty Ltd and, after a change of name, on 14 March 1997 it purchased the business of Rugs Galore Pty. Ltd. (formerly called Bondmoor Pty. Ltd.) According to the findings at first instance, the latter company was insolvent by the beginning of 1997 and on 26 May 1997, with unsecured debts by then of about $2 million, Rugs Galore Pty. Ltd. entered into a deed of company arrangement under which it undertook to pay to the administrator under the deed, for distribution to its unsecured creditors in satisfaction of their debts, the sum of $200,000 by means of monthly instalments of $3,000 over three years and a final payment of $92,000. These obligations, which at some stage were taken over by RGA as successor to the business of Rugs Galore, were never wholly fulfilled. Linen House Pty. Ltd. which was one of the creditors bound by this deed received a dividend of about 2 cents in the dollar. At all material times one Dowson was the only director of Rugs Galore Pty. Ltd. and until 22 March 1999, he was the only director of RGA too.

The business of RGA, as successor to Rugs Galore Pty. Ltd., was the selling of rugs through 13 retail outlets in leased premises. RGA had an annual turnover, it was claimed, of about $8 million. The shares in RGA were all owned by Habatron Pty. Ltd., Mr. Dowson’s company. The National Australia Bank held a charge over the assets of RGA, as did Pindos International Imports Pty. Ltd. (“Pindos”) whose directors were Messrs. Lagas, Economou and Bourke, three men who were also the directors and shareholders of Pindos Trading Pty. Ltd., the parent of Pindos. (The shares in Pindos Trading were held as to 95% by Lagas and Economou and 5% by Bourke). By virtue of the charges they held, both the National Australia Bank and Pindos were secured creditors of RGA, and so too was Real Enterprises Pty. Ltd. which on 9 December 1997 it was agreed should also be given a debenture over the assets of RGA. The only director of Real Enterprises was one O’Brien, another member (with Mr. Bourke) of the firm of Bourke, O’Brien & Co., the accountants for Pindos and Real Enterprises. Real Enterprises, it seems, was a $2 company which is sole trustee of the Real Enterprises Unit Trust. Who were the owners of the units in that trust was not vouchsafed at trial.

Again according to the findings below, RGA traded at a loss from the time when it purchased the business of Rugs Galore Pty. Ltd. and in September 1997, Mr. Dowson, the only director of RGA, approached Pindos for financial assistance. (As later described to the administrators, Pindos was a major supplier of RGA - as previously of Rugs Galore Pty. Ltd. - and it had already advanced some working capital to RGA for which it held its debenture.) On 9 December 1997 Heads of Agreement were executed by or on behalf of RGA, Habatron, Real Enterprises and Mr. Dowson. In substance, Dowson agreed to arrange an alteration to the memorandum and articles of association of RGA and then, as sole director, to allot a further 18 A-class shares to Habatron (already the holder of two) and 80 B-class shares to Real Enterprises, no further shares to be issued without the unanimous resolution of all shareholders. Share certificates dated 9 December 1997 were duly issued and notice of allotment was signed, it too dated 9 December 1997. The notice of allotment was not filed, however, until 26 March 1999 – some 15 months later.

The Heads of Agreement of 9 December dealt with more than just the shareholding and thus the ownership of RGA. Further funds were to be provided to RGA by Real Enterprises in return for debenture security; Mr. Dowson’s authority to enter into contracts for the supply of goods or services worth more than $1,000 was denied unless with the prior approval of Real Enterprises; a joint purchasing committee was established and cheques for sums exceeding $500 had to be signed by representatives of both Habatron and Real Enterprises; contracts other than in the ordinary course of business required the approval of both Habatron and Real Enterprises and “administration assistance” was “to be provided to RGA” by both Real Enterprises and Messrs. Bourke, O’Brien & Co., including, by the latter, “normal accounting services” for which RGA would pay. In the subsequent administrators’ report to creditors for a meeting held on 16 March 1999, the co-signatory, with Mr. Dowson, on RGA cheques (in fact Mr. O’Brien) is described (somewhat simplistically in light of all the foregoing) as having signed simply as RGA’s “external accountant”, a description which is itself at odds with Mr. O’Brien’s own affidavit of 30 April 1999 in which he describes himself as having been co-signatory as “a representative of Real Enterprises” in accordance with the Heads of Agreement. At trial, as at the creditors’ meeting itself, a question arose whether in consequence of the Heads of Agreement Messrs. O’Brien and Bourke became de facto directors of RGA. That question was never resolved.

During 1998, Linen House Pty. Ltd., apparently a competitor of Pindos in the rug market, was another who was supplying rugs to RGA for sale and by the end of 1998 Linen House was owed by RGA almost $139,120 for goods sold. By 10 February 1999 RGA was “hopelessly insolvent” (so the trial judge found) and the solicitor for Pindos initiated some discussion with Mr. McVeigh, to which Lagas and Bourke were both party, about possible administration. On 17 February Pindos appointed Messrs. McVeigh and McDonald administrators of RGA under s.436C of the Corporations Law. As at 5 March 1999 RGA owed, it was found, $121,064 to employees for wages, holiday pay and the like; $1,536,871 to 97 unsecured creditors; and $1,851,919 to its three secured creditors, the National Australia Bank ($230,000), Pindos ($1,151,919) and Real Enterprises ($470,000).

On 22 February 1999 the first meeting of creditors was held: see s.436E. A second meeting of creditors (see s.439A) was convened by notice dated 5 March 1999. That notice contained no details of any proposed deed, but the outline of a proposal was supplied to creditors some days later, by circular dated 11 March 1999. The proposal, which was from Pindos and which in terms did not affect secured creditors, was for payment by RGA to the administrators of a lump sum of $260,556 which included $150,000 for distribution amongst unsecured creditors in return for which their debts would stand discharged. By this means unsecured creditors might expect to receive about 10 cents in the dollar which was to be compared with the administrators’ estimate that there would be no dividend at all to unsecured creditors should the company go into liquidation, given the possible value of the business on the one hand and the much larger sums owed to the three secured creditors on the other. The second meeting of creditors was held on 16 March and, over objection from some creditors including Linen House, it was resolved that RGA execute a deed of company arrangement: see s. 439C(a). Undoubtedly Pindos was going to fund the payment required of RGA under the deed and both Pindos and Real Enterprises, it appears, voted in favour of the deed, as did some of RGA’s employees.

Under the deed of company arrangement, management and control of RGA were to remain with the directors. On 22 March 1999 the administrators of RGA removed Mr. Dowson as the sole director of RGA and appointed in his place Messrs. Lagas, Economou and Bourke (all directors of Pindos). Four days later, on 26 March, the deed of arrangement was executed by RGA and it was on that same day that notice of the allotment of shares in RGA on 9 December 1997 (giving Real Enterprises an 80% stake in RGA) was filed. Meanwhile Pindos had delivered to the administrators a cheque for the $260,556 required of RGA under the deed, although presentation of the cheque was deferred at the request of Pindos when these proceedings erupted. (We were told this about the cheque by means of a supplementary statement of agreed facts which was delivered to the Court at our request when it appeared during the hearing that the facts of this payment were not yet clear. Also according to that statement, payment on the cheque was actually stopped by Pindos on 18 June 1999, a fact not communicated to the appellants or Linen House before the hearing of these appeals.)

On 1 April 1999 Linen House Pty. Ltd. filed notice of motion in the Trial Division of this Court (proceeding No. 4963 of 1999), seeking to have the deed of company arrangement terminated under s.445D(1) of the Law. Only RGA was named as respondent. But shortly afterwards, at a directions hearing before Gillard, J., the judge himself raised the question of parties and directed that all Court documents be served on the administrators also. In due course, on 13 May 1999, the notice of motion came on for hearing before Gillard, J. and both Linen House (the applicant) and RGA (the respondent) were represented by counsel. The judge soon expressed some concern about the conduct of the administrators and asked they be told of these concerns. On the following day Mr. Hayes sought to appear for the administrators (I think by leave) and a number of affidavits were filed on behalf of the administrators, including a detailed affidavit of Mr. McVeigh, sworn on 19 May 1999 specifically by way of response to the judge’s concerns. On 21 May the hearing resumed and Mr. Hayes was heard on behalf of the administrators. His Honour took time for consideration and on 2 June, delivering comprehensive reasons for judgment, he announced that the deed would be terminated. In short, this was put on the grounds that the creditors had not been given all of the information which they should have been and that some of the information given them was misleading. Counsel then addressed on the form of the orders to be made and on 4 June orders were made, for reasons given more fully on 8 June.

The orders made on 4 June 1999 were that the deed of company arrangement be terminated and that RGA pay the applicant’s costs. These orders were stayed until 5 p.m. on 18 June 1999 subject to certain conditions – that RGA “not seek to enforce the deed of company arrangement” and “not deal with any of its assets or incur any debts except in the normal course of business”. On 16 June (not 15 June as stated in the authenticated order) Gillard, J. extended the stay until 23 July and so too the time for appealing. On 18 June the administrators, who until this point had not been made parties and had not sought to be made parties, were joined as respondents to the notice of motion in case they wished to appeal and on 23 July 1999 the administrators did serve notice of appeal, seeking to have the orders of 4 June set aside and Linen House’s application for termination dismissed. (That is the first appeal now before us, in which the administrators are appellants, Linen House is the first respondent and RGA is the second.) The stay has since been extended more than once; it is now in place, upon the same conditions as first imposed, pending the hearing and determination of these two appeals.

Meanwhile, the struggle to avoid winding up did not end with the orders made on 4 June 1999. RGA which had continued trading after the appointment of the administrators on 17 February 1999, continued to trade too after 26 March when it executed the deed of company arrangement, although by then the management and control of RGA lay with Messrs. Lagas, Economou and Bourke (the administrators having appointed them directors on 22 March in place of Mr. Dowson). On 15 June 1999, there was a meeting of the new directors of RGA at which a resolution was passed that “in the opinion of the directors the company is insolvent or is likely to become insolvent” and one A.J. McLellan was appointed administrator in reliance upon s.436A(1) of the Law.

Also on 15 June, RGA filed an application in the Trial Division (proceeding No. 5756 of 1999) seeking, under s.447C of the Law, to have the appointment of Mr. McLellan on 15 June declared valid (and as well for an extension of the stay granted in the other proceeding on 4 June). It was the intention of the directors of RGA to propose another (but similar) deed of company arrangement for consideration by the unsecured creditors after fuller disclosure of the relevant facts, but first they wished to know that the appointment of Mr. McLellan was valid. The application of 15 June, which was contested by the administrators under the existing deed but in the event not opposed by Linen House Pty. Ltd., was heard by Gillard, J. on 16 and 18 June. After taking time for consideration, on 9 July 1999 his Honour delivered judgment, granting the application and making a declaration of validity for the reasons then given (at the same time further extending the stay in the first proceeding until 10 September). On 23 July, the administrators served notice of appeal, seeking to have the declaration of validity set aside and replaced by a declaration of invalidity. That is the second appeal now before us, the administrators being again the appellants and RGA the respondent.

While the administrators under the existing deed of company arrangement were served by the applicant with the notice of motion of 15 June and treated by the judge as respondents to this second application (although at the same time described as having been given leave to be heard under Rule 3.17 of the Corporations Rules 1992), Linen House Pty. Ltd. was also one on whom the notice of motion of 15 June had been served by the applicant. It, too, appeared before Gillard, J. on 16 June but only for the purpose, it appears, of seeking to protect its order for costs in the earlier proceeding. Linen House was anticipating, I suppose, that the appointment of a second administrator could only herald a second deed of company arrangement and that if there was to be a second deed the first would have to be terminated not by the Court but by the creditors (as to which see s.439C(b)), if only to avoid winding up. And if that were so, the orders of 4 June might be stayed forever.

Be that as it may, on 9 July (and in addition to declaring that the appointment of Mr. McLellan was valid) Gillard, J. gave Linen House “leave to appear” in this second proceeding; ordered that its costs be paid by RGA “subject to deed of company arrangement”; and took an undertaking from RGA through counsel that RGA would not appeal against the orders of 4 June and (according to the authenticated order) an undertaking through “counsel for Pindos” that Pindos would satisfy the order for costs made on 4 June (the order that had been made against RGA in favour of Linen House). As no separate appearance for Pindos is recorded in the order as authenticated, I suppose that Pindos was making common cause with RGA by this stage; Pindos was of course behind the proposal for a second deed of company arrangement, just as it was behind the proposal for the first.

Having now described the background to the two appeals it is convenient at this point simply to pursue the narrative, as it was disclosed to us. The stay which on 9 July was extended by Gillard, J. to 10 September 1999, was extended, it appears, for the purpose of allowing time for a second meeting of creditors in the second administration, with a view to a second deed. A second meeting was held on 4 August and on that date the creditors did resolve that RGA execute a second deed, again a deed under which a lump sum would be paid to the administrator, this time by Pindos directly, for distribution among unsecured creditors in return for a release of all unsecured debts. As before secured creditors were expressly not affected. The vote on 4 August, we were told in the course of argument, was not achieved until after some “horse-trading” had taken place during which those putting up the money for distribution agreed to increase the sum of $150,000 previously mentioned (for payment under the first deed for distribution among unsecured creditors) by $30,000, although it was not altogether clear to me whether this was intended to increase the dividend payable under the new deed to unsecured creditors, or simply to cope with the extra payments needed for debts arising from RGA’s continuing to trade since the first deed was executed. Nor does the suggestion of “horse trading” at the meeting of creditors on 4 August sit comfortably with the documents, for the proposal from Pindos as described to creditors in a circular of 21 July included the sum of $180,000 for unsecured creditors in full and final satisfaction of their debts, reflecting the contents of a letter from Pindos to Mr. McLellan dated 15 July. But I pass that by; what is presently important is that the amount to constitute the fund for unsecured creditors was greater under the second deed than under the first.

It was a condition of the second deed that the first be terminated under s.445C by resolution of the creditors bound thereby and Pindos and others gave notice to the present appellants, as administrators under the first deed, to call a meeting accordingly. When they did not do this, on 25 August 1999 Pindos filed notice of motion (proceeding No.6622 of 1999) seeking an order that such a meeting be convened: see s.445F. On 9 September the appellants filed their own notice of motion, seeking an order that they not be required to convene any such a meeting until after the two appeals now before us had been heard and determined. This proceeding came before Mandie, J. and after twice extending the stay granted in proceeding No.4963 of 1999, on 23 September 1999 his Honour adjourned the application upon the appellants’ undertaking to call a meeting of creditors no later than 7 days after the hearing and determination of these two appeals, the meeting to take place within 21 days thereafter. At the same time his Honour further extended the stay on the order for termination of the first deed of company arrangement until the hearing and determination of these appeals or further order. And that is where the matter now rests.

First appeal: the stay

According to their notice of appeal in proceeding No. 4963 of 1999, the appellants were contending on this appeal that, in making an order terminating the deed of company arrangement which RGA executed on 26 March 1999, the judge fell into a number of errors, not the least of which was his finding fault with the conduct of the administrators in their providing information – or perhaps more accurately in their failing to provide certain information – to the creditors before they voted on the deed on 22 March. According to the notice of appeal, the appellants sought to have the order for termination set aside and thus, it would appear, administration under the deed of 26 March continued, an administration which would be in the hands of the appellants themselves.

In the course of argument, however, the question was raised by the Bench whether the stay, first ordered on 4 June 1999 and later extended more than once, was effective or whether, the order for termination having been made, the deed was now at an end notwithstanding the attempt to stay. Mr. Hayes, who with Mr. Martindale appeared for the appellants, quickly embraced the latter idea, submitting that the stay was in truth ineffective to prevent the operation of the legislation. He relied upon the regulations made under s.446B of the Law, and in particular reg.5.3A.07.

Section 446B and, so far as relevant, reg. 5.3A.07 should be set out. Section 446B reads:-

“(1) The regulations may prescribe cases where:
(a) a company under administration; or
(b)a company that has executed a deed of company arrangement (even if the deed has terminated);

is taken to have passed a special resolution under section 491 that the company be wound up voluntarily.”

Regulation 5.3A.07 commences:-
"(1)For the purposes of subsection 446B(1) of the Corporations Law, a company that has executed a deed of company arrangement is taken to have passed a special resolution under section 491 that the company be wound up voluntarily:
(a)if the Court at a particular time makes an order under section 445D of the Corporations Law terminating the deed of company arrangement; or
(b)if the deed of company arrangement specifies circumstances in which the deed is to terminate and the company is to be wound up – if those circumstances exist at a particular time.

(2)The company is taken to have passed the special resolution:
(a)at the time referred to in paragraph (1)(a) or (b), as the case may be; and
(b)without a declaration having been made and lodged under section 494 of the Corporations Law.”

Mr. Hayes submitted that by reason of this section and this regulation the stay was necessarily ineffective. He put it quite simply: an order under s.445D terminating the deed of company arrangement was made on 4 June and, that being so, the regulation operated, without more, to put the company into voluntary liquidation. Paragraph (1)(a) of the regulation used the phrase “at a particular time” to qualify the making of the order, not the termination of the deed; and para.(2)(a) accordingly deemed the special resolution for winding up to have been passed on 4 June. Under this legislative scheme, he said, a judge had no power to postpone the operation of the regulation and so RGA was now in liquidation, and had been so since 4 June 1999.

It cannot be said that that was the intention of the judge, or indeed the parties, on 4 June. In delivering his reasons for judgment on 2 June Gillard, J. had indicated that he would order winding up (as sought in Linen House’s notice of motion), though appointing a liquidator other than the then administrators. On 4 June counsel addressed and his Honour was referred to reg.5.3A.07. That made an order for winding up inappropriate, as his Honour acknowledged in the reasons he delivered on 8 June. The judge was particularly concerned that one consequence of reg.5.3A.07 was that the administrators would become the liquidators by force of the regulation, but his Honour rejected an application by counsel for Linen House that he make a different order under s.447A. (His Honour did not decide whether s.447A could be so used.) It was in that context that his Honour was then asked by RGA for a stay.

What happened is best described by his Honour in the reasons he published on 8 June. He said, in paras.15 and 16:-

"The respondent sought [on 4 June] an order staying the operation of the orders pending appeal. In accordance with the nugatory principle I granted a stay of 14 days subject to conditions. However, in so doing, no argument was addressed to the court that there was any error in the reasons for judgment. Mr. Crutchfield [counsel for RGA] informed the court he was not in a position to make submissions in respect of any errors but later indicated that it would be argued that the order terminating the deed could not be made because a party to the deed, namely, the administrators were not joined as parties in the proceeding.
This argument was not raised or put at the hearing and in the light of the orders made at the first directions’ hearing and discussions at the hearing, is surprising. If raised no doubt steps could have been taken to address the issue.”

None the less a stay was granted and the reason for it seems to me perfectly obvious from the foregoing. The judge saw the stay as necessary to ensure that an appeal, if one was brought, was not rendered nugatory, or (to put it another way) to preserve the subject matter of the dispute for the time being. In context that meant that RGA was not to go into liquidation immediately. The administrators were represented before Gillard, J. on 4 June; Mr. Hayes had already been heard on their behalf (“by leave” as the judge described it in his reasons of 8 June) and the authenticated order of 4 June describes their solicitor, Mr. Palmer, as giving an undertaking on their behalf. Yet, so far as one can tell, nothing was said to his Honour by anyone to suggest that he had no power under this legislative scheme to delay the winding up of RGA and in all the circumstances I am quite satisfied that on 4 June nobody intended that, by virtue of the orders made that day, the winding up should be immediate. Whether the judge had power on 4 June to achieve that result was the threshold question agitated before us.

During argument I confess to having been attracted at first to the proposition that, termination having been ordered as contemplated by s.445D, there was nothing left to stay. If the order for termination operated like a declaration of status, an attempt to “stay” the operation of the order was no more than an empty gesture. But the consequence of that view is that no appeal would be possible, or at all events no appeal having the consequence of avoiding liquidation altogether. Mr. Hayes acknowledged this, asserting that once liquidation supervened by virtue of the regulation, the only course then open was to stay the liquidation if appropriate, putting an end to the liquidation but not, of course, denying its occurrence: see s.482 of the Law and the remarks made in passing by the High Court in MYT Engineering Pty. Ltd. v. Mulcon Pty. Ltd. (1999) 162 A.L.R. 441 at 451. He contended, too, that with a deed of company arrangement like the present one, which was dependent upon the constitution of a fund for distribution to creditors, staying the liquidation would be unnecessary because both the scheme constructed by the deed and the liquidation could coexist.

It may be that in certain circumstances a deed of company arrangement can coexist with liquidation. After all, s.436B contemplates that a liquidator may initiate administration under a deed. But that is not this case. Mr. Hayes’ submission must confront two obstacles. First, the deed of company arrangement executed on 26 March 1999 provided not for the payment by some third party of the money necessary to constitute the fund for distribution to creditors, but for payment by RGA itself – a step that must create at least a difficulty if the company, required to make the payment, was wound up in insolvency. (At first we were told from the Bar table conflicting things about whether the payment required of RGA under the deed had in fact been made before 4 June 1999; it then turned out that a cheque for the right sum had been delivered by Pindos to the administrators, but at the request of Pindos not presented pending the outcome of the application for termination: see para.[9] above.) The second obstacle is a logical one. Liquidation depends upon the making of an order for termination, whereas the continued existence of the deed of company arrangement would depend upon that order being rendered ineffective. It is difficult to see how the two consequences could coexist.

Be that as it may, I would reject for other reasons the contention that liquidation followed immediately upon the making on 4 June of the order for termination, the stay being ineffective to delay that result. Mr. Garratt, who with Mr. Crutchfield appeared for RGA, persuaded me that such a stay can be effective. As he pointed out, an order that a company be wound up may be wholly delayed in its operation if stayed by an order made at the same time as the order for winding up: for example, Brinds Ltd. v. Offshore Oil NL [1986] V.R. 635 especially at 638 (a decision affirmed by the Privy Council (1985) 10 A.C.L.R. 419), although it is otherwise if the stay is granted afterwards: Krextile Holdings Pty. Ltd. v. Widdows [1974] V.R. 689 at 693-4; Arafura Finance Corporation Pty. Ltd. v. Kooba Pty. Ltd. (No.2) (1987) 12 A.C.L.R. 331 at 332. And if an order for winding up may be effectively delayed in its operation from the outset, it is difficult to see why the same should not be so of an order that a deed of company arrangement be terminated. The analogy is not then with a declaration of status but with an order that a status be changed, and the operation of such an order can surely be delayed, if appropriate. That seems to me the more sensible operation to give to the Corporations Law and to the order which is authorised by it; for at least it permits an appeal which, if it succeeds, precludes the untoward consequence which otherwise follows by virtue of the regulation. As Mr. Garratt pointed out, that such an appeal is possible seems to have been assumed in Lam Soon Australia Pty. Ltd. (Administrator appointed) v. Molit(No.55)Pty. Ltd. (1996) 70 F.C.R. 34 where the Full Court of the Federal Court overturned an order made below for termination of a deed of company arrangement: Molit (No.55) Pty. Ltd. v. Lam Soon Australia Pty. Ltd. (1996) 63 F.C.R. 391 (Branson, J.); and after Young, J. made an order terminating such a deed in Sydney Land Corporation Pty. Ltd. v. Kalon Pty. Ltd. (1998) 26 A.C.S.R. 427, an appeal was carried to the Court of Appeal (sub. nom. Kalon Pty. Ltd. v. Sydney Land Corporation (1998) 26 A.C.S.R. 593) and it is not apparent from the report that a stay was granted pending appeal: compare 26 A.C.S.R. at 432 and 599. In the circumstances I think that we should adopt a construction of the Law which promotes such a sensible result, rather than impedes it.

It is possible, of course, as Mr. Hayes demonstrated, that the words “at a particular time” in para.(1) of reg.5.3A.07 can found an argument that para.(2) must operate when the order for termination is first made, but a number of things can be said in answer. First, it is a heavy weight to place upon what otherwise might have been a casual addition in drafting, indicative more of technique with a view to para.(2) than any substantive intention. Moreover, the regulation was surely not intended to operate irrespective of the actual terms in which the order for termination was couched. It is still open, I think, to treat the order itself as an order not of termination but for termination - not as an order that the deed is terminated, but as an order that it be terminated. When so regarded there seems to be no reason why the operation of the order might not properly be delayed by the judge, expressly, until a future date or time. I think that the Law itself permits such an approach and I do not think that reg.5.3A.07 should be read as standing against it; if it did, its own validity might have to be questioned. I add that in speaking of a stay, I refer to a temporary stay; it was not suggested in argument that on 4 June, when the order for termination was first made, a permanent stay might also have been ordered at the same time. A permanent stay made on 4 June would have contradicted directly the order that the deed be terminated; should a permanent stay be made hereafter in these proceedings, it will be justified by altered circumstances arising after 4 June.

For these reasons I reject the appellants’ submission that RGA is in liquidation, and has been so since 4 June, because the judge had no power on 4 June to delay the operation of the order which he then made, which was that the deed of company arrangement be terminated. I say this notwithstanding that paragraph 1 of the order of 4 June, as authenticated, is that the deed “is terminated”; for in view of the stay in paragraph 3 the order as a whole can only mean that the deed be terminated upon the stay’s coming to an end.

There is, however, one remaining difficulty about the form in which the stay was ordered in this instance. Conditions were imposed (as to which see para.[11] above) which, on one view, were uncertain. That there should be a stay so long as the company “did not deal with any of its assets or incur any debts except in the ordinary course of business” is not unlike the condition considered by the N.S.W. Court of Appeal in Fire Nymph v. The Heating Centre (in liq.) (1992) 7 A.C.S.R. 365 where, upon breach, the charge which had been given by the debtor company to the secured creditor automatically crystallised. Obviously, where matters depend upon the company’s continuing to operate “in the ordinary course of business”, there may be room for disagreement about whether the condition is fulfilled or not. Such uncertainty was no impediment to automatic crystallisation in Fire Nymph, but it is uncertainty which ought not to attend the operation of a Court order, particularly a stay. It should be clear at all times whether the stay is or is not in place. Nonetheless, such uncertainty as attended the conditions in this case was not suggested by any of the parties before us to have occasioned any difficulty: it was not put on behalf of any party that the stay had become ineffective, or might have become ineffective, by reason of the conditions. Mr. Hayes put his argument altogether independently of the conditions, and then only by departure from the foreshadowed outline of argument when the question of the effectiveness of the stay was raised by the Bench in the course of oral argument.

If a stay is to be imposed on an order terminating a deed of company arrangement it seems to me, as at present advised, that it would be preferable if it were imposed in the manner adopted by Santow, J. in Re Spargold Enterprises Pty. Ltd. ex parte McDonald (1999) 32 A.C.S.R. 363 at 366; that is, by declaring expressly that the order for termination become effective on such and such a date. Alternatively, and perhaps even more directly, the order might be that the deed be terminated on such and such a date, unless otherwise ordered in the meantime, leaving no doubt that immediate termination is not being ordered and that there is room to alter the date of operation if the Court is persuaded that that should be done. By the conditions imposed in this case his Honour sought, no doubt properly, to preserve the status quo while the stay was in place but it might have been better, I suggest with respect, to have exacted undertakings or, if refused, to have preserved the status quo by means of injunction. The authenticated order of 4 June 1999 reveals that the Judge took an undertaking from the solicitor for the administrators not to distribute under the deed before 5 p.m. on 21 June; but in respect of RGA, the respondent to the notice of motion, he imposed conditions.

First appeal: the order for termination

The main question on the first appeal was whether the order for termination which was made on 4 June should be set aside as having been wrongly made. The order was made in the exercise of a discretion – so much was common ground – and so the usual constraints apply in relation to the appeal, according to the well-known passage in the judgment of Kitto, J. in Australasian Coal and Shale Employees Federation v. Commonwealth (1953) 94 C.L.R. 621 at 627. But in this instance there is an earlier question, the question of jurisdiction.

The conditions which must operate before the jurisdiction to terminate the deed is enlivened are to be found in s.445D(1) itself, and in this case it was paras.(a) and (c) that were determinative. The relevant portions of the subsection read:-

"(1)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; ...

(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 ...”

In his reasons for judgment of 2 June 1999 the judge canvassed in some detail the information which, in his view, might have been, but was not, supplied by the administrators to the creditors before their vote on the deed on 22 March. I will not attempt to set it all out; suffice it for the moment to quote from para. 164 of his Honour’s reasons for judgment, as he summed up on this aspect:-

"In my opinion the failure to inform the creditors as to the true shareholding in the respondent company, the failure to provide information to the creditors as to the prior history of the business when in the hands of the old company and the acquisition by the respondent, the failure to reveal the Heads of Agreement and its effect, the plan for the take over by Real Enterprises and its allies, the omission to refer to the assumption of liability by the respondent of [Rugs Galore Pty. Ltd.’s] obligation under the previous arrangement, the fact that the respondent always traded at a loss, the fact that there was no reference to Pindos, Real Enterprises, Messrs Bourke and O’Brien’s involvement in the business of the respondent, the fact that the administrator had not investigated whether Mr. Dowson could provide any compensation if sued as the sole director and the failure to set out clearly the position of the possible de facto directors was all information that in my opinion was reasonably expected to be material to the creditors’ decision whether to vote in favour of the resolution that the company execute the deed.”

His Honour concluded that the jurisdiction under s.445D was enlivened, saying (in para.165):-
“In my opinion the creditors were deprived of the information which was necessary, they were led to believe in a state of affairs which were incorrect and in my view both the misleading and false information and the information which was omitted were reasonably expected to be material to the creditors’ decision.”

That conclusion seems to me to be more than justified by the detail preceding it, but I focus for the moment on the reference to “the true shareholding” in RGA. That raises the failure of the administrators to tell creditors about the Heads of Agreement entered into on 9 December 1997 and the effect thereof on the shareholding in RGA; for according to the public records as they stood before 26 March 1999 – that is, before the lodging on that day of the relevant notice of allotment - Mr. Dowson’s company Habatron Pty. Ltd. was holding still the only two issued shares; nothing was then shown of the somewhat larger 80 per cent interest in RGA taken by Real Enterprises Pty Ltd. through the new issue that had been agreed in December 1997. Mr. Hayes relied here upon Mr. McVeigh’s affidavit of 19 May 1999, to the effect that he was told that the Heads of Agreement “had been executed but not enforced” (which was understood, I gather, as meaning “implemented”). But s.445D looks to a failure to inform creditors, not the reason for the failure to inform unless it be a lack of materiality.

It is difficult now, of course, to accept that the Heads of Agreement were not implemented at least as to shareholding, if only because it appears that the notice of allotment was signed on or shortly after 9 December 1997, though not lodged for more than 15 months. The creditors were not told of any changes in the issued capital of RGA until, it seems, they were assembled for the second meeting on 16 March 1999, when they learnt something of it through statements from the floor. For example, in response to a direct question from the floor Mr. McVeigh acknowledged the existence of an agreement whereby Pindos (sic) might become owner of 80% of RGA; and a little later, in an objection to Pindos or Real Enterprises voting, it was said from the floor (according to the minutes) that “the same persons that control the Pindos and Real [Enterprises] also control the Rugs Galore”. Mr Hayes submitted that the information that came forth at the meeting was enough, but surely not; in my opinion that sort of thing is far from what s.445D intends. Perusal of the minutes of the meeting of 16 March shows how inadequate the disclosure was, coming from the floor in dribs and drabs, and not in orderly fashion from the administrators themselves; nor, of course, do we know what those who were not present might have thought. True it is that a motion for an adjournment to gain more information was lost, and while, as counsel suggested, that may reflect a lack of interest by other creditors, it may reinforce the need (which the Law seems to me to recognise) for such information to precede the meeting in time to allow for due reflection on its significance.

Perhaps of even more significance than simply the late communication of the information is Mr. McVeigh’s attempt to justify the earlier failure. In the affidavit already mentioned, of 19 May 1999, Mr. McVeigh said, speaking of the initial discussion (which took place before his appointment) about the possibility of administration (and this was quoted by the judge, in para. 32 of his reasons of 2 June):-

“Messrs Axup [of Wisewoulds, solicitors for RGA] and Bourke explained to me that the effect of the agreement, should it have been enforced, was that Pindos and Real Enterprises had shares in the Company and an option to take up the remaining shares if certain requirements were not met. I was informed that those requirements had been met and the deed (and the Charge) were enforceable. I did not enquire further about events of default. I absolutely deny that there was any attempt to hide the existence of the Agreement from creditors, nor did Messrs Axup or Bourke ask me to. With the benefit of hindsight I consider that it may have been better if I had provided some details in my reports to creditors, but only for the sake of completeness or out of abundance of caution, and not because it was material or relevant to the unsecured creditors.” [Emphasis added]

That such information was not material was the response made by Mr. McVeigh at the creditors’ meeting, too, on 16 March.

The judge was critical of Mr. McVeigh’s telling the creditors in his written report (which preceded the second meeting on 16 March) that, according to A.S.I.C. records, the only shareholder was Habatron Pty. Ltd., which held two shares. This statement, said the judge (in para.141) was “potentially misleading and on one view was carefully drawn”. Mr. Hayes took exception to this last, but for present purposes the nub lies in what the judge said next:-

“Later facts establish beyond doubt that the statement created a false position and conveyed false and misleading information to the creditors”

For his part, Mr. McVeigh said this (also in para.32 of his affidavit of 19 May) about his statement to the creditors:-
"The report [to creditors for the second meeting], which was prepared by Mr. Giasoumi and checked by me, is (in my respectful submission) technically correct in that it states that the shareholding ‘as detailed in the ASIC records is ...’. Again, in hindsight, the report might have said that the ASIC documents were not necessarily comprehensive because of the Agreement. However, in my respectful opinion the disclosure of this additional information would not have materially affected the creditors’ view on the appropriateness or otherwise of the proposed deed of company arrangement.” [Emphasis added]

The administrators’ claim is thus that, though not fairly and fully communicated, the information about the shareholdings in RGA was not material. The judge rejected that view and I see no error in that. Indeed I should have thought that its materiality was demonstrated when, only days after the creditors’ meeting on 16 March, Mr. Dowson was removed as a director at the behest of Pindos or Real Enterprises and replaced by Messrs. Lagas, Economou and Bourke. But putting that aside, as matters stood on 16 March the proposal for a dividend for unsecured creditors (in return for the discharge of their debts) depended in truth upon a lump sum contribution by Pindos, itself a secured creditor (and for all I know, a fully secured creditor, as it ranked behind only the bank). The creditors were entitled, I agree with the judge, to information about what was prompting this apparent generosity, which (it can now be seen) rested upon the desire of Pindos to secure control of RGA and its business as a going concern, to its own benefit and with a view to continued trading. The creditors were entitled to know, too, of the previous history of Rugs Galore and RGA, which in a sense had now failed twice and was proposing to have a third shot at trading successfully – perhaps at the expense of these very creditors (like Linen House Pty. Ltd.), should it fail again. (For its part the National Bank had insisted upon the provision of additional security from Pindos.) The creditors were entitled to know at least of the relationship, such as it was, already forged (on 9 December 1997) between the old owner, Mr. Dowson, and the newcomers, Pindos and Real Enterprises, a relationship which went to explain Pindos’ support thereafter for a business enterprise that had only been failing to date. (Of this relationship the possibility of de facto directors was but one facet.) Appellants’ counsel submitted that the creditors needed to know only that they faced a choice between a dividend under the scheme and no dividend in a winding up, which was really no choice at all. But I do not see the position in those stark terms, nor do I think it consistent with the Corporations Law. Certainly Mr. Hayes was critical of some of the judge’s more trenchant comments, but counsel fell far short of persuading me that the judge lapsed into error when he concluded that the creditors were not given information to which they were entitled on 16 March 1999 when they voted for the deed of company arrangement.

On one aspect, however, I think that the judge may have erred. Important to Mr. Hayes’ case in relation to the reasons for judgment of 2 June 1999 was his submission that the judge had been too critical of Mr. McVeigh who, if he failed to give all material information to creditors, had nonetheless acted honestly, professionally and competently (said Mr. Hayes) when his conduct was weighed against the very tight time limits created by the Law itself. It is fair to say that the judge did not think much of this as an explanation for default, holding that time limits could not in themselves justify inaction on the part of an administrator - and so much can, of course, be accepted: the imposition of a time limit cannot in itself excuse dilatoriness or inaction. Nonetheless the Law requires a good deal of an administrator. Once appointed he is required to hold two meetings of the creditors (ss.436E, 439A); to consult with the committee of creditors (if one is appointed at the first meeting (s.436F)); to take control of the company’s business, property and affairs, dealing with the company’s property and with power to carry on its business if thought fit (ss.437A, 437D); to investigate “the company’s business, property and financial circumstances” and form an opinion about which of three future courses would be in the best interests of creditors (s.438A), the administrator being expressly given access to the company’s books and the assistance of the directors (ss.438B, 438C); to report to the Commission if he discovers offences by an officer or liability in relation to the company or its property (s.438D); and to report in writing to creditors his findings in regard to “the company’s business, property and financial circumstances” and his opinion on which course would be in the best interests of creditors thereafter, supplying at the same time the details of the deed of company arrangement if one is proposed (s.439A). According to s.439A of the Law, this report to creditors must accompany notice of their second meeting, a meeting which must be convened within “the convening period” – commonly a period of 21 days from the commencement of the administration, unless extended by the Court. Surely the extent to which an administrator can fairly be expected to have fulfilled all of the tasks allotted to him by the Law can only be assessed realistically in the light of the time allowed by the Law for their performance: compare Hagenvale v. Depela (1995) 17 A.C.S.R. 139 at 145-6, Deputy Commissioner of Taxation v. Comcorp Australia (1996) 70 F.C.R. 356 at 378-81. Indeed, if I may say so, it seems to me that the time constraints are such as to make the administrator’s task particularly unenviable.

For years there have been provisions in the relevant companies legislation, governing schemes of arrangement. Under the Companies Act 1961, schemes of arrangement were regulated by ss.181 and 182, some 17 subsections in all. Under s.181 (as under its predecessors, ss. 89-90 of the Companies Act 1958, s.153 of the Companies Act 1938 and s.129 of the Companies Acts of 1928, 1915 and 1910) the first step was an order for meetings and no order for meetings could be obtained until a scheme of arrangement was “proposed”. Ordinarily that involved the preparation of the scheme and the all-important explanatory memorandum for submission to creditors; both documents were commonly prepared before the Court was approached for that first order for meetings. Moreover it was only once the scheme was “proposed” that, in an appropriate case, action to recover a debt might be restrained (under s.181(9) of the 1961 Act) pending the decision of the creditors on the scheme: In re Clements Langford Pty. Ltd. [1961] V.R. 453, In re G.A.E. Pty. Ltd. [1962] V.R. 252 at 255-6. Such a legislative framework allowed those proposing the scheme to concentrate on obtaining the consent of creditors once the order for meetings was obtained: the preparatory work had to be done before the order was applied for.

In the Corporations Law there are still provisions for schemes of arrangement (see especially ss.411 and 412) but it would seem that nowadays they are little used. It was not these provisions but the provisions for Official Management in Part 5.3 that were repealed and replaced by the new Part 5.3A (by s.56 of the Corporations Law Reform Act 1992) as a result of the recommendations of the Harmer Report - and the history of that may be found in a number of articles: for example, Anderson, “Finding the Background of Part 5.3A of the Corporations Law” (1999) 10 Aust. Journal of Corporate Law 108. The new provisions for voluntary administration and deeds of company arrangement appear to be more attractive, no doubt because there is no need for resort to the Court, at least in the first instance, and the administration can be instituted, and with it a moratorium obtained on the enforcement of debts, without consultation or reference to others. That the company itself should be able, so simply, to achieve a moratorium on the enforcement of debts must be attractive to those in control of a company in financial difficulties. But the price to be paid is a significant one; for the administrator must, within the time limits now imposed (which are little more than those which were commonly allowed by order under the former legislation governing schemes of arrangement) do all that hitherto was done before the first order for meetings - and more. Under the new Part 5.3A such things are required of the administrator after the administration commences and, if the administrator is a complete stranger to the company’s affairs, he must start from scratch. The old regime has been criticised as “inflexible, expensive and time consuming” (Crutchfield on Voluntary Administration, 2^nd ed., 1997, p.3); the Harmer Report called it “cumbersome, slow and costly” (para.46). But the new regime seems to me unsatisfactory in requiring so much so quickly of the administrator and, by eliminating the need for a Court order at the outset, postponing all scrutiny by the Court until after the event; see further the criticisms of Part 5.3A by Powell, J.A. in MYT Engineering Pty. Ltd. v. Mulcon Pty. Ltd. (1997) 25 A.C.S.R. 78 at 81 and Australasian Memory Pty. Ltd. v. Brien (1998) 45 N.S.W.L.R. 111 (dissenting) at 115 (criticisms to which I shall return later).

In this instance, if the administrators had problems arising from the time limits imposed by the Law, they can surely have only been exacerbated by Mr. McVeigh’s summary exclusion of Mr. Dowson from the day-to-day operations of RGA immediately upon, or very shortly after, the appointment of the administrators: see the affidavit of Mr. Dowson dated 21 April 1999 para. 3 and the affidavit of Mr. McVeigh dated 19 May 1999 paras. 53 to 57. Be that as it may it will be apparent from my more general comments about Part 5.3A that I have some sympathy for the plea made by Mr. McVeigh at trial that the time constraints were such as to preclude his doing so fully as he might have wished all that he had to do before the second meeting of creditors: with respect, I would not have been quite so dismissive of this plea as was Gillard, J. By the same token, however apt the plea might have been in respect of such tasks as exploring the possibility of de facto directors after the parties entered into the Heads of Agreement in December 1997 and investigating the possibility of offences, it had less force, I think, in relation to other things, such as the entry itself into the Heads of Agreement, an event which was known but which – wrongly in my view - was treated by Mr. McVeigh as immaterial to creditors. For his part Mr. Garratt submitted that, when properly analysed, the reasons for judgment were not so critical of Mr. McVeigh as Mr. Hayes suggested. The judge was determining, said Mr. Garratt, that there had been a failure to put information before the creditors relevant to their decision, rather than apportioning blame for that failure (and indeed the judge himself said as much in para.4 of his reasons of 8 June, when recapitulating then his earlier reasons of 2 June). After all, what enlivens the jurisdiction under s.445D is the giving of false or misleading information or the omission of material information, and culpability or misconduct, even of the administrator, is not as such directly relevant. (Under subs.(1)(a), the giving of misleading information to an administrator is as relevant as the giving of such information to creditors.) In the end, therefore, the argument about who was at fault in this instance seems to me to be a sterile one, for when all is said and done and leaving aside altogether any criticism of Mr. McVeigh for his conduct, it still seems to me plain beyond argument that in this case the creditors were not given the information to which they were entitled before deciding for or against the deed of company arrangement. I am convinced that information, which was available to the company and which was material and ought to have been placed before the creditors, was not provided to them.

It follows that in my opinion the jurisdiction to terminate the deed under s.445D(1) was enlivened. The question is then whether the exercise of discretion under that subsection miscarried. Arguably, the discretion was not properly exercised below because the judge was too quick to dismiss altogether the plea made by the administrators that they had not had sufficient time to explore all that might have been explored before the second meeting of creditors. If on that ground it now falls to us to re-exercise the discretion under s.445D(1), I think it clear that an order for termination of the deed for non-disclosure of material information was, and is, called for. Before us nobody sought to argue against that result save for the administrators themselves; and although the administrators contended that they were putting that submission in the interest of creditors, no creditor appeared to support them. At one stage in the argument the administrators suggested that as we now knew that the creditors had voted a second time, and on full information, to approve the entry by RGA into the deed of company arrangement, we should not now make an order for termination. But the second vote was on a second deed under which the amount for unsecured creditors was greater, even if for distribution among a numerically larger class; and however that second vote might have weighed if we were being required to terminate the second deed, in the altered circumstances taken as whole I consider that an order for termination of the first deed is still the proper order.

Through their counsel the administrators put an argument that they had been denied natural justice by the judge who, though calling on them for some explanation of the matters that were troubling him, had not mentioned some of the things which were later referred to, or referred to with more particularity, in his reasons for judgment. Both sides spent some time describing from the Bar table the way in which the proceedings had gone below, and the judge himself, when giving judgment on 9 July 1999 in proceeding No.5765 of 1999, canvassed the objection that natural justice had earlier been denied as indirectly bearing upon the discretion to withhold a declaration of validity in respect of Mr. McLellan’s subsequent appointment: see paras. 158 to 166 of those reasons of 9 July. Moreover, what was said and done in Court in the course of the first proceeding was one of the subjects canvassed in three further affidavits, sworn after 9 July – one by each of the administrators (of 25 August 1999 and 2 September respectively) and one by their solicitor (sworn on 23 July) – to which the appellants took us without objection. I will not attempt to repeat the submissions that were made on this aspect by counsel on the appeal. Suffice it to say that, despite Mr. Hayes’ protestations about a want of procedural fairness, I am far from satisfied that there was any such denial of natural justice in this case: it seems to me that the administrators had ample opportunity to put their case, if they so wished. Indeed there is much to suggest that it was their deliberate decision not to seek to be joined as parties in the proceeding below, a course which, it seems, was at least consistent with what Mr. McVeigh conceived to be the duty of the administrators, given that they had not been joined as parties by the applicant: see his affidavit of 19 May 1999 para.31.

In the result I would dismiss this first appeal.

The second appeal

As Mr. Garratt pointed out, the validity of the second deed of company arrangement is not an issue on the appeal in proceeding No. 5765 of 1999. On this appeal the only question is whether the appointment of the administrator by resolution of the board of RGA on 15 June 1999 was valid, as declared by the judge at first instance. The judge was asked by RGA only to pass upon the validity of that appointment: what happened thereafter (and particularly after 9 July when judgment was given) was not before his Honour, otherwise than in prospect.

The administrators under the first deed opposed the application made by RGA, objecting that the appointment of a second administrator was contrary to law, and now as appellants they repeat that submission, seeking to have the declaration of validity set aside and replaced by a declaration of invalidity. As for Linen House Pty. Ltd., the papers were served on it as applicant in proceeding No.4963 of 1999 and, like the administrators, Linen House appeared in the second proceeding by counsel (by leave, it was said, under Rule 3.17). Linen House, however, did not oppose the making of the declaration of validity which RGA sought, provided only that it kept the benefit of the order for costs made in its favour on 4 June 1999 in the earlier proceeding - an outcome which the judge ensured by the orders he made on 9 July. On this appeal Linen House was not made a respondent.

The declaration that Mr. McLellan’s appointment was valid was sought and made under s.447C of the Law. That section reads as follows:

"(1)If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company’s creditors may apply to the Court for an order under subsection (2).
(2)On an application, the Court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground.”

Gillard, J. found that there was doubt, on a specific ground, about whether the purported appointment of McLellan was valid, and (as will soon become apparent if it is not already so) that was obviously the fact if only because of the existence of the first deed of company arrangement, the order for termination and the stay. Although contested below, the existence of such doubt is not now challenged; the difficulty is in resolving that doubt. Thus, although canvassed below, the question of jurisdiction to make an order under s.447C on application is not now an issue.

One point that was agitated on this appeal can be quickly despatched. Mr. Garratt argued that a declaration of invalidity could not be made on an application under s.447C, which in subs.(2) allows only for a declaration of validity. That submission should be rejected. The section is not so limited. Once the application has been made, the Court is free to declare validity or invalidity as seems appropriate, and the section itself provides no bar to the relief sought on this appeal.

Another point, too, can be quickly despatched. It was submitted on behalf of the appellants, as the administrators under the first deed, that the appointment of a second administrator had been an abuse of the stay which was first ordered on 4 June and later extended. That stay, Mr. Hayes contended, had been granted for the purpose of the parties’ considering whether to appeal from the order for termination made on 4 June and that accordingly it was an abuse of process to use for an altogether different purpose the time thereby allowed (on the assumption that the stay was effective to delay the operation of the order for termination of the deed of company arrangement). Again we were told from the Bar table something of the way in which the matter proceeded below and certainly the judge saw no abuse in what was done: he seems to have been kept fully cognisant of it. Nor, I think, should we, after the event, declare that what was done was an abuse of the order made by the judge, if his Honour saw no ill in it. In the end, I think, the appellants’ submission in this regard is no more than a reflection of their disagreement with what was done, and their disagreement does not make what was done an abuse.

The critical question is whether the order declaring valid the appointment of the second administrator was one that ought not to have been made, as the appellants contended. The appointment was purportedly made by RGA under s.436A of the Law, and that section reads:-

"(1)A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:
(a)in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and
(b)an administrator of the company should be appointed.

(2) Subsection (1) does not apply to a company that is already being wound up.”

As for the meaning of “insolvent”, s.95A(1) defines solvency as the ability to pay one’s debts as and when they become due and payable and, according to subs.(2), a person who is not solvent is insolvent.

Subsection (2) of s.436A is not now relevant. Once the effectiveness of the stay ordered by the judge on 4 June 1999 was raised during argument, the appellants put at the forefront of their argument (as already mentioned) the submission that the stay was ineffective and that therefore RGA had been in liquidation since 4 June. If that was so, then any appointment by RGA of an administrator thereafter must have been invalid. That argument fails once it is decided that the stay was effective to delay the winding up and that on that account the company was not yet in liquidation. I turn therefore to the other arguments of the appellants, which focussed on the resolution that was passed by the board of RGA on 15 June.

In terms that resolution followed the wording suggested by s.436A(1) itself. According to the board minutes it commenced (after two obvious errors in typing are corrected):-

“That in the opinion of the Directors the Company is insolvent or is likely to become insolvent and therefore an Administrator should be appointed to the Company in accordance with Part 5.3A of the Corporations Law.”

The appellants contended that that resolution was not bona fide, having been passed simply in compliance with legal advice and not after any consideration of whether RGA was or was not insolvent. The judge found that RGA was indeed insolvent and that the resolution was sufficient to satisfy the requirements of s.436A(1), but both these findings, the appellants contended, were contrary to the evidence given by Mr. Bourke and were not in fact open, given in particular the fact that the first deed of company arrangement was still in place, affecting the rights of all unsecured creditors in respect of debts which arose before 17 February 1999. It is necessary therefore to say something more about the evidence that was before the judge in this second proceeding.

As was to be expected, in his reasons for judgment of 9 July 1999 the judge rehearsed the history of the first deed of company arrangement, noting the orders made on 4 June and in particular that the order for termination was presently stayed. Again his Honour said that as at 17 February 1999 RGA was “hopelessly insolvent and had been so for many, many months”, adding that RGA “was being propped up by the provision of funds through two companies called [Pindos] and Real Enterprises Pty. Ltd.”, companies which were “directly and indirectly controlled by Messrs. Harry Lagas, Peter Economou, Patrick Bourke and his partner Shane O’Brien”. His Honour turned then to the two affidavits filed in support of the notice of motion, one sworn on 15 June 1999 by Mr. Bourke (in his capacity as a director of RGA) and the other on 18 June 1999 by one Paul Wayne Marsh, a solicitor in Wisewoulds who were acting for RGA. Mr. Bourke told of the directors’ resolution of 15 June and also of RGA’s continuing to trade after 17 February (when the appellants were first appointed as administrators) and he was cross-examined about the latter by appellants’ counsel.

Mr. Bourke’s evidence about RGA’s trading since 17 February was summarised thus by the judge in para. 31 of his reasons for judgment of 9 July:-

"Mr. Bourke, in his affidavit, deposed to the fact that the company had continued trading throughout the administration period and as at 15 June 1999 was continuing to trade at its 13 retail outlets. He stated that the business had been trading steadily with all liabilities being met as and when they fell due, except for obligations to Pindos and Real Enterprises. He also stated that Pindos was continuing to fund Rugs Galore as and when necessary.
Mr. Bourke further deposed to the facts that if the present deed of company arrangement was terminated which would result in Rugs Galore going into liquidation then the end result would be an increase in the amount of the debts and those unsecured creditors who have supplied goods or services on credit since the date of the deed would be added to the list of unsecured creditors. He also said it would be difficult to sell the business as a going concern and there would be no return to the unsecured creditors.
In his oral evidence Mr. Bourke stated that there would be very few new creditors since 26 March 1999, being the date of the deed. He said the additional creditors ‘would be very few and minor only’. He stated that there were no additional suppliers that came to mind. He stated that some employees have gone and new employees have been employed.
In cross-examination he stated that Pindos was underwriting any financial requirements of Rugs Galore which also would involve the costs of the first proceeding and also this proceeding.” [Emphasis added]

At least on the face of it, there appears to be some inconsistency in this evidence about new creditors, but emphasising the testimony that such creditors “would be very few and minor only” appellants’ counsel submitted that the evidence did not demonstrate insolvency as defined in s.95A of the Law. As at 15 June the secured creditors, he said, were not calling for their money; the unsecured creditors as at 26 March were bound by the first deed of company arrangement, the order for termination made on 4 June being still subject on 15 June to a stay; and current trade creditors were being paid. True it was that this was being achieved only with the assistance of Pindos which was continuing to fund RGA as and when required, but, said counsel, there was no indication on 15 June that that support might be withdrawn and the question of solvency should be determined after taking such assistance into account. He referred to Sandell v. Porter (1966) 115 C.L.R. 666, Calzaturificio Zenith Pty. Ltd. v. N.S.W. Leather & Trading Co. Pty. Ltd. [1970] V.R. 605 at 608 and Standard Chartered Bank v. Antico (1995) 38 N.S.W.L.R. 290 at 329, a case on the liability of officers for incurring debts without reasonable expectation of being able to pay them. I am not sure that these cases are of much assistance to the appellants but at least this can be said: so long as RGA continued to trade I suppose that there was every reason to think that Pindos would continue to support RGA as it had been doing for some time, especially if, as was sometimes claimed, Pindos was doing so in order to recover something of its not insubstantial “investment” to date in RGA. After all, by this time Mr. Dowson had been replaced and the management and control of RGA was in the hands of the new directors, Messrs. Lagas, Economou and Bourke, all of them directors of Pindos, the first-ranking secured creditor after the bank.

In his reasons for judgment of 9 July the judge dealt with the appellants’ argument about the directors’ resolution of 15 June in this way. After finding that a meeting of directors was held and that “the board did resolve that the company is insolvent or is likely to become insolvent” his Honour continued (in paras.87 and 88):-

"Mr. Hayes QC cross-examined Mr. Bourke, a director, seeking to establish that even through the directors had so resolved the fact was that that was not his opinion as a director. He drew attention to the fact that the insolvency depended upon the deed of company arrangement being terminated whereas if it subsists and the unsecured creditors are precluded from claiming their debts then the company was not insolvent. Mr. Bourke accepted that the company had been trading since 26 March 1999 and in so doing had been able to pay its debts as they fell due. However, its ability to continue to trade depends upon Pindos continuing to fund the company. Mr. Bourke accepted that it had been trading and that there were some small losses but Pindos would continue to fund those losses. The argument was put to him that until the stay was lifted the company was not insolvent. Mr. Bourke stated that the company would only be solvent if no creditors were paid [an obvious mistake for “if creditors were paid”] and Pindos continued to fund it. He stated that there were losses.
In my opinion the reality is that Rugs Galore is insolvent. The fact is that it cannot pay its debts as they fall due and can only presently do so with the support of the Pindos company. On any view it could not pay its secured creditors.”

There was no dispute about these last two propositions; the continuing support of Pindos was critical to RGA’s trading and paying current debts and on any view RGA could not pay its secured creditors, had they called for payment. But it was not these factors, I think, that moved the board; the directors formed the opinion that RGA was insolvent or was likely to become insolvent because, once the first deed of company arrangement was terminated, RGA was beyond argument insolvent.

The appellants submitted that, given the cross-examination of Mr. Bourke, it was plain enough that the board of RGA was considering insolvency in the event that the stay was lifted and the first deed terminated. I agree that this is what the board did. During the cross-examination counsel was obviously concerned to establish that until the stay was lifted the company was not insolvent because it was paying all those debts that were becoming due and payable during trading, albeit with the assistance of Pindos. Even that, Mr. Bourke was not prepared directly to concede; but I pass it by, for it seems to me of no immediate consequence. Mr. Bourke agreed that there was nothing yet to suggest that Pindos would withdraw its support and he agreed, too, that the wording of the resolution was in accordance with advice received from RGA’s solicitors. He said, too, that there was no “direct debate about the degree of solvency or insolvency”, but this is explicable on the footing (as counsel submitted) that the board was considering RGA’s financial position if the current stay was lifted and the first deed was terminated. And so much is confirmed, I think, by the board’s own minutes of 15 June which immediately after recording the critical resolution continued:-

"The Chairman noted that if the current deed of company arrangement was terminated and the Company automatically placed into liquidation, the Company would be unable to pay its debts as and when they fell due and there was little prospect of sufficient assets being available for there to be a return to unsecured creditors.
The Chairman noted further that the appointment of a further administrator was necessary so as to maximise the chances of the business continuing. It was noted that under the Corporations Law, an administrator was invested with wide powers and it would be up to the administrator to decide the fate of the Company by reference to what was in the best interests of creditors.”

The board was looking to put in place a proper administration under Part 5.3A as an alternative to winding up, winding up that would otherwise follow immediately upon termination of the first deed.

On that basis the position of current trade creditors was only marginally relevant; the real deficiency lay elsewhere, in those unsecured debts that were subject to the first deed of company arrangement in respect of which the Court had made its orders on 4 June 1999. Mr. Hayes put an argument to us that those unsecured creditors were not in truth “creditors” for the purpose of any second administration, being bound for the time being (as at 15 June at all events) by the first deed. I am not myself clear that their being bound deprived them of their status as “creditors”; that must have depended upon the terms of the deed by which they were bound (see s.444H) and under that deed they were creditors whose debts would be discharged only if and when there was a dividend paid under the first deed. In reply, Mr. Martindale relied upon the moratorium to which those creditors were subject by reason of the very existence of the first deed of company arrangement, pending performance under it (see ss.435C(1), 440C, 440D, 440F) but again it is possible that the impediment placed by the Law in the way of those creditors claiming against RGA for the time being does not deny them their character as creditors, nor their debts existence. However that may be, the answer to both the argument put by Mr. Hayes and that put by Mr. Martindale is the same: the board was expressing its opinion about the insolvency of RGA upon the termination of the first deed, and on that score there was not the slightest doubt. RGA was hopelessly insolvent, as the judge said.

It is consistent with the foregoing that the scheme now being put forward was to deal with all unsecured creditors, not just those whose debts had arisen after execution of the first deed (on 26 March). The judge was conscious of this; for in para.42 of his reasons of 9 July (and see also paras. 92 and 93) he described the new proposal in this way:-

"Rugs Galore has purported to appoint another administrator with a view to executing another deed of company arrangement. What it seeks to do is to place all material and accurate information before the present creditors who are in the main the same creditors of Rugs Galore as at the date of the meeting held on 16 March 1999.”

It is true, as Mr. Hayes pointed out, that in his first circular to creditors dated 1 July 1999, Mr. McLellan mentioned his having received “provisional legal advice” to the effect that only creditors whose debts had arisen subsequent to the execution of the first deed of company arrangement on 26 March were entitled to participate in his administration. None the less (he told the creditors), because of uncertainty he was proposing to treat all creditors of the company alike, at least for the time being; and it seems from what later transpired (according to evidence to which we were referred by the appellants themselves) that that was done. For instance, at the meeting held on 4 August 1999 when creditors voted on the second deed of company arrangement, those who voted included many if not all of those who were otherwise bound by the first deed of company arrangement. As stated earlier (in para.[47]), Mr. Garratt emphasised to us that the validity of the second deed of company arrangement was not presently before us for consideration, and I mention the voting only to indicate that what the judge said about the second proposal proved to be so. It was indeed a second deed of company arrangement to replace the first.

Of course, whether there could be a second deed of company arrangement while the first was still in existence (albeit subject to an order for termination which itself was subject to a stay) was not a point that was overlooked below and Gillard, J. necessarily gave a good deal of consideration to this problem in his reasons of 9 July. It is convenient to set out what appears in paras.98 to 102 in this respect:-

"Mr. Garratt QC submitted that it would be open to the creditors to vary the deed of company arrangement to the point where it would no longer have any content which would be inconsistent with a new deed of company arrangement.
The difficulty I see is the fact that there is a court order which operates immediately once the stay is lifted with the result that the company goes into deemed voluntary liquidation.
Mr. Garratt QC submitted that the problem can be overcome by the court granting an indefinite stay of the orders made in the other proceeding. He emphasised that if the creditors did not resolve to enter into another deed of company arrangement then the stay could be lifted and the order operate. But if the creditors resolve in favour of a new deed then an application may be made to stay the order permanently.

When I pointed out to him that his client wished to appeal those orders and that this arguably constitutes an inconsistent course of conduct, he informed me that his client was prepared to undertake that if the administrator’s appointment was declared valid it would not proceed with the appeal.
A further matter of some importance is that Linen House does not oppose the present application provided its costs are paid and Mr. Garratt QC indicated that those costs would be paid. It follows it consents to a stay of the order in the other proceeding.”

Thus, RGA itself was proposing that, should the second deed of company arrangement be approved by creditors, those creditors should then vary the first deed to remove any inconsistency (that is, vary the first deed to render it wholly complementary to the second which would take effect according to its terms otherwise) and, for its part, the Court would simply stay forever its order for termination. Such a stay would presumably rest on the altered circumstances arising after 4 June when the order for termination was first made. His Honour after giving the matter consideration, concluded that the Court had jurisdiction to grant an indefinite stay, if appropriate (see para.127). It was to that end that he further extended the stay for the time being, so that the Court might see how events developed.

As it turned out, when the proposal for a second deed was formulated by Pindos, a different suggestion was made for resolving the conflict between the first deed and the second deed. That proposal is to be found in the letter of 15 July 1999 addressed by Pindos to Mr. McLellan: $180,000 was to be paid under the second deed for distribution among unsecured creditors (plus other sums for other creditors) but that was expressly made conditional upon the first deed’s being terminated (without winding up) by a meeting of those creditors to whom the second deed applied. Such a course is contemplated by the Law: see ss.445C and 445E. In the events which happened, on 4 August 1999 the creditors of RGA did resolve upon the execution by RGA of a second deed of company arrangement in accordance with the second Pindos proposal and, as mentioned earlier in para.[17], application was made to the appellants, as the administrators under the first deed, to call a meeting to pass a resolution terminating the first deed. When the appellants did not act upon that request, application was made to Mandie, J. for an order for such a meeting and that led, in the end, to his Honour’s postponing any such meeting, and extending the current stay on the order for termination until the hearing and determination of these appeals. All that matters for present purposes is that there were, thus, two solutions suggested for the conflict between the first deed and the second deed: the first, by the creditors’ varying the first deed to remove any conflict and the second, by the creditors’ terminating the first deed without winding up. Either way, the Court would ultimately be asked for a permanent stay of the order for termination made on 4 June, but, as already mentioned, the judge saw no reason why the Court would lack the jurisdiction, in the altered circumstances, to grant such a stay if otherwise appropriate.

In all of these circumstances, I am not persuaded that the judge fell into error in accepting that the resolution of the board of RGA on 15 June 1999 satisfied the requirements of s.436A(1). The board was considering the financial position of RGA on the footing that the first deed of company arrangement was terminated and, given the very unusual circumstances of this case, I am not persuaded that the board was in error in that respect. After all, s.436A(1)(a) requires an opinion that the company “is insolvent or is likely to become insolvent at some future time” and even if the former was not plainly so as at 15 June (by reason of the first deed of company arrangement) then the latter was certainly so, given that the first deed was already subject to an order for termination. It is true that as at 15 June there was a stay in place, but that was there for the purpose of permitting an appeal and, when asked either on 16 or 18 June about the appeal, counsel for RGA readily undertook not to appeal. The administrators had not even been joined as parties by that stage and, whether or not that was a necessary step before they could appeal (on which I express no opinion), it is the fact that their appeal was not instituted until 23 July – two days after Mr. McLellan’s circular to creditors of RGA telling them of the second proposal from Pindos.

Next, the appellants submitted that the scheme of Part 5.3A of the Corporations Law was such as to require liquidation upon termination and that that legislative scheme would be subverted if, pending termination of the first deed which had already been ordered (subject to the stay), some second deed could be put in place before the liquidation commenced. Two things may be said of this. First, the scheme of the Law is to let the creditors decide the fate of the company. As set out in s.435A, one of the objects of Part 5.3A is to maximise “the chances of the company, or as much of its business as possible, continuing in existence” and to that end the creditors are given the power to choose. Secondly, the scheme of Part 5.3A is not always that liquidation must be the consequence of termination; for, as we have seen already, if termination is resolved upon by the creditors, no winding up need follow. It may, but it need not: see ss.445C, 445E. If the creditors themselves do decide to terminate the first deed of company arrangement, the Court’s order for termination would presumably lapse; for there would then be nothing upon which it might operate (though the stay might still be needed to overcome the effect of reg.5.3A.07). But to my mind there is nothing in the scheme of the Law to preclude the creditors, if willing to vote for the termination of the first deed, agreeing upon the second deed of company arrangement in its place. Undoubtedly this proceeding has followed a somewhat curious course and it may be that the events as they occurred here will not be repeated. I am not prepared to conclude, however, that the Corporations Law itself stands in the way of the appointment of the second administrator. The judge referred to Beatty (in his capacity as administrator) v. Brashs Pty Ltd (a company subject to deed of arrangement) (1998) 152 A.L.R. 689 but, with respect, I agree with the appellants: that was a very different case, in which a second and quite discrete class of creditors had arisen since the first deed was executed some years previously and the possibility of a second deed could not be surprising.

Finally, there is the question of discretion. I have said that in my view the Law does not positively stand in the way of a second administration in the present case, but in so far as the appellants submitted that the scheme of Part 5.3A of the Law tends against the somewhat elaborate course which has evolved in this instance, I have some sympathy for that view. I should have thought that Part 5.3A was intent upon the creditors achieving a solution one way or the other fairly quickly; yet in this case the appellants were appointed administrators last February and the matter is still not finally resolved. The notice of appeal complains that the order validating Mr. McLellan’s appointment ought not to have been made because, in substance, the Court is thereby acquiescing in “a course of action designed to lead to a second deed of company arrangement binding the same creditors as were bound by the deed of company arrangement executed on 26 March 1999”. That in itself is no reason for refusing to declare Mr. McLellan’s appointment valid, if only because the course of action which was proposed here was designed, in one way or another, to remove any conflict between the first and second deeds. None the less, I see some force in the submission that the Law does not envisage this “second bite at the cherry” simply because there was some significant defect in the information put before the creditors at the first round of meetings. In the end it will probably better conduce to achieving the legislative purpose for the Courts to regard the creditors as having had their say once and for all when they vote on a deed of company arrangement, than to treat that exercise as but a first attempt which, if necessary can be repeated. Moreover, it must be acknowledged that the mere passage of time in this case is of some concern. According to Young, J. in Cawthorn v. Keira Constructions Pty. Ltd. (1994) 33 N.S.W.L.R. 607 at 610, the Harmer Report mentioned that the procedure for voluntary administration should be “impartial, efficient and expeditious”. As Powell, J.A. observed in the two cases to which I referred above in para.[42], MYT Engineering v. Mulcon and Australasian Memory v. Brien, the declared object of providing a procedure which is efficient and expeditious is scarcely fulfilled when resort to Part 5.3A leads only to the door of the Court. Yet in part at least, this is the direct result of a legislative scheme which deliberately postpones any curial examination or scrutiny of what is put before the creditors until after they have agreed upon the execution by the company of the deed. Whether that is an improvement on previous legislation is for others to consider.

In the present case, the judge considered all of the matters relied upon by the present appellants as militating against the relief being sought by RGA and, in the light of them, came to the view that he should not, in the exercise of discretion, decline to make an order declaring Mr. McLellan’s appointment valid. The decision whether to exercise the jurisdiction to grant declaratory relief is always discretionary, to some extent at least, and the context in which this application was made, the purpose to which any declaration of validity would be put and the real possibility that further assistance would be needed from the Court before a second deed was finally in place were such as to give pause. But in the end I have come to the conclusion that his Honour’s exercise of discretion was not attended by such error as would entitle us to set it aside. If it matters, we in this Court now have the advantage of knowing that the unsecured creditors, in the light of full information, have approved again the proposal from Pindos, albeit with some variations. I would only say again that the circumstances of this case are most unusual and it should not simply be assumed that whenever the Court acts under s.445D to terminate a deed on the ground that information given to creditors about the company’s business, property, affairs or financial circumstances was false or misleading or in some other way deficient, the Court will be willing to make orders to enable those promoting the deed of company arrangement having a second try, as it were, by reconvening the meeting of creditors and putting the proposal again but on more complete information. In another case the stay on the order for termination might well be refused so that winding up will follow; indeed it might well be that in another case the public interest will so require.

For the reasons I have given, however, in this instance I am not persuaded that any of the grounds taken by the appellants to sustain the second appeal has been made out.

Conclusion

Accordingly I think that both appeals should be dismissed, with costs. Linen House was party only to the first appeal but it made its position plain on both. On the second appeal it was concerned to do no more than to preserve the orders for costs that were made below in its favour. That will be achieved if both these appeals are now dismissed as I suggest.

BUCHANAN, J.A.:

I agree that each appeal should be dismissed for the reasons stated by Phillips, J.A.

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[2000] VSCA 4

21 February 2000