Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement)
[2007] SASC 296
•10 August 2007
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
MONDELLO FARMS PTY LTD v ANNATOM PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT ) & ORS
[2007] SASC 296
Judgment of The Honourable Justice Layton
10 August 2007
CORPORATIONS - VOLUNTARY ADMINISTRATION - DEEDS OF COMPANY ARRANGEMENT - TERMINATION OR AVOIDANCE
Corporations - application to terminate deed of company arrangement - plaintiff creditor excluded from administration process - related companies/parties allowed to vote for resolution to execute deed of company arrangement - alleged creditor status of related companies/parties queried - plaintiff creditor alleges possible insolvent trading and that more than one of the grounds in s 445D made out - whether court should exercise discretion to terminate deed.
Held: Deed of company arrangement terminated.
Corporations Act 2001 (Cth) s 438A, s 439A(4), s 445D, s 446B, s 447A, s 491, s 553C(2), s 564, s 588G(1), s 600A; Corporations Regulations 2001 (Cth) Reg 5.3A.07(1)(a); Bankruptcy Act 1966 (Cth) s 58, s 116, s 188, s 189A, referred to.
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510, applied.
ASIC v Edwards (2005) 220 ALR 148; Bovis Lend Lease Pty Ltd v Wily & Ors (2003) 45 ACSR 612; Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (subject to Deed of Company Arrangement) (2001) 37 ACSR 394; Fleet Broadband Holdings Pty Ltd & Anor v Paradox Digital Pty Ltd (subject to a Deed of Company Arrangement) & Ors (2006) 228 ALR 598; Hawkins & Ors v Bank of China (1992) 26 NSWLR 562; Powell v Fryer (2001) 159 FLR 433; Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707, discussed.
Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307; Deputy Commissioner of Taxation v Comcorp Australia Ltd & Ors (1996) 70 FCR 356; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453; Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139; McVeigh & McDonald v Linen House (2000) 18 ACLC 311; Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544; Re Segal; Lensworth Finance Ltd v Segal (1976) 9 ALR 154; Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427, considered.
MONDELLO FARMS PTY LTD v ANNATOM PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT ) & ORS
[2007] SASC 296Civil
LAYTON J
Introduction
The plaintiff, Mondello Farms Pty Ltd (“Mondello Farms”), filed an originating process in the Supreme Court of South Australia on 9 May 2007 seeking an order terminating a Deed of Company Arrangement (“the Deed”) over Annatom Pty Ltd (“Annatom”) or alternatively, an order declaring certain offending provisions of that deed void. The Deed is dated 6 November 2006.
In addition, the plaintiff also filed an interlocutory application on 9 May 2007 seeking an injunction restraining the Deed Administrator of Annatom, Mr Tarquin Raoul Koch (“the Administrator”), from distributing any dividend or making payments out of the fund referred to in the Deed.
On 11 May 2007, I made interim orders by consent pending the hearing of the originating process. These orders restrained the Administrator from taking any further steps in the administration, including adjudicating upon and determining or paying any dividend, other than in compliance with his statutory obligations.
On 19 June 2007, there was a further interlocutory application taken out by Tomdan Pty Ltd (“Tomdan”). Tomdan, a creditor of Annatom and a related entity, sought permission to intervene and be joined as defendant. I consequently made an order joining Tomdan as third defendant on 20 June 2007.
The matter then proceeded as a hearing on the originating process.
The parties
At the hearing, the following parties were before me: the plaintiff, Mondello Farms; the second defendant, the Administrator; and the third defendant, Tomdan. There was no appearance by or for the first defendant, Annatom.
The plaintiff and Tomdan put forward submissions. There were no submissions made on behalf of the Administrator who indicated in his affidavit, sworn on 1 June 2007, that he would neither oppose nor consent to the plaintiff’s application and will abide by the decision of this Court. Tomdan opposed this application.
The essential issues
The plaintiff submits that the Deed should be terminated, pursuant to s 445D of the Corporations Act 2001 (Cth) (“the Act”). In essence, the plaintiff argues that:
·The information about Annatom, which was disclosed to the creditors present at the second meeting, was misleading;
·There was a material omission from the Administrator’s s 439A(4) Report;
·There was a material contravention of the Deed;
·Effect could not be given to the Deed without injustice or undue delay; and
·The Deed would be oppressive or unfairly prejudicial to or unfairly discriminatory against the plaintiff.
Tomdan submitted that the Deed should not be terminated and that none of the criteria outlined in s 445D had been breached. In any event, it was argued that the Administrator had the power to decide whether or not the plaintiff could prove itself as a creditor for the purposes of a dividend and, if proved, the plaintiff could receive five cents in the dollar like all other unsecured creditors.
The evidence
The following evidence was before me, subject to reservations indicated by counsel in respect of those affidavits marked with an asterisk:
·Affidavit of Mr Basil Mondello sworn on 8 May 2007 (“the Mondello Affidavit”);
·Affidavit of Mr Tarquin Raoul Koch sworn on 1 June 2007 (“the Administrator’s Affidavit”);
·Affidavit of Mr Michele Polvere sworn on 19 June 2007 (“the Polvere Affidavit”);
·*Affidavit of Mr Marco Tigani sworn on 23 June 2007 (“the First Tigani Affidavit”);
·Affidavit of Ms Terese Ann Wacyk sworn on 29 June 2007 (“the First Wacyk Affidavit”);
·Affidavit of Ms Terese Ann Wacyk sworn on 2 July 2007 (“the Second Wacyk Affidavit”);
·Affidavit of Mr John Roger Crosby sworn on 18 June 2007 (“the Crosby Affidavit”);
·*Affidavit of Mr Marco Tigani sworn on 3 July 2007 (“the Second Tigani Affidavit”); and
·Oral evidence given at the hearing by the Administrator.
Chronology of Events
The Mondello litigation
The plaintiff was in the business of washing, grading and packing potatoes for commercial sale. Annatom owned land on which it grew potatoes for the purpose of sale.
On 17 August 1999, the plaintiff entered into an agreement with Annatom where it was agreed that Annatom would supply potatoes to the plaintiff, who would then wash, pack and sell the potatoes.
On 1 February 2002, the plaintiff issued proceedings against Annatom in the District Court of South Australia for breach of contract arising from Annatom’s alleged failure to supply potatoes to the plaintiff. The plaintiff claimed $312,000 in damages. Annatom defended the claim and also issued a counterclaim for crop expenses and other losses totalling approximately $320,000. The plaintiff defended the counterclaim. In June 2006, the proceedings in the District Court (“the Mondello litigation”) were set down for trial.
In the Mondello litigation, the plaintiff alleged that court orders for costs were made in its favour as follows:
·An order made on 22 April 2003 for $150 for costs of attendance and notifying Annatom;
·An order made on 29 April 2004 for Annatom to pay the plaintiff’s costs thrown away in consequence of the adjournment of the trial; and
·An order made on 21 April 2005 for the plaintiff to have its costs of and incidental to the application to adjourn the trial and any costs thrown away on an indemnity basis, such costs to be taxed and paid forthwith.
As a consequence of costs orders being made in its favour, the plaintiff alleges that it is a creditor and/or contingent creditor of Annatom. Further, the plaintiff alleges that it is a contingent creditor in respect of its $312,000 damages claim.
The Administration
Mr Thomas Tigani and his wife Mrs Anna Tigani were the founding directors of Annatom. Mrs Anna Tigani ceased to be a director of Annatom on 31 August 2006, leaving Mr Thomas Tigani as the sole director from that date onwards.
On 18 September 2006, Mr Thomas Tigani consulted with Mr Koch with respect to the company’s financial position. He indicated to Mr Koch that Annatom was insolvent or likely to become insolvent and he had resolved to appoint an administrator.
On 19 September 2006, Mr Koch was appointed Administrator of Annatom pursuant to a director’s resolution made under s 436A(4) of the Act.
Upon his appointment, the Administrator requested that Mr Thomas Tigani provide him with full details of Annatom’s creditors for the purpose of mailing a circular to creditors, dated 20 September 2006, informing them that the first meeting of creditors would be held on 27 September 2006.
Mr Thomas Tigani complied with the Administrator’s request, but failed to inform the Administrator of the Mondello litigation or that the plaintiff claimed to be a creditor of Annatom. As a consequence, the circular to creditors, dated 20 September 2006, was not mailed to the plaintiff.
On 20 September 2006, the Administrator caused the notice of the meeting of creditors, to be held on 27 September 2006, to be published in The Advertiser Newspaper.
On 26 September 2006, Mr Thomas Tigani provided the Administrator with a Report as to Affairs (“the RATA”) purporting to list the assets, liabilities, creditors and debtors of Annatom. The RATA did not list the plaintiff as a creditor of Annatom.
On 6 October 2006, the Administrator issued a second circular to creditors informing them that the second meeting of creditors was scheduled for 16 October 2006. Annexed to this circular was the Administrator’s s 439A Report. In this report, the Administrator recommended that it would be in the creditors’ best interests if Annatom entered into a Deed of Company Arrangement. On 9 October 2006, the Administrator caused a notice of the second meeting of creditors to be published in The Advertiser Newspaper.
The Administrator deposed in his affidavit that Mr Michele Polvere, Annatom’s solicitor, made him (the Administrator) aware of the Mondello litigation on 12 October 2006. This was four days before the second meeting of creditors was held. The Administrator did not make any contact with the plaintiff to ascertain the status and circumstances of the Mondello litigation.
The plaintiff alleges, by its director and shareholder Mr Basil Mondello, that it was not aware of, nor did it attend, the two creditors’ meetings held on 27 September 2006 and 16 October 2006. I interpolate to note that this issue was not contested at the hearing. Mr Basil Mondello deposed that it was not until late November 2006, through correspondence with Annatom, that he became aware for the first time that Annatom was under administration.
The second creditors’ meeting – 16 October 2006
The minutes of the second meeting of creditors recorded the presence of the following creditors, through the named representatives and with their accepted creditor status for voting purposes:
Name of Creditor Proxy Holder Amount Admitted
$
Australian Taxation Office
Ms Di McMullen (via telephone)
8,950.98
C & F International Pty Ltd
Mr Dean Cosenza
1.00
Denco Holdings Pty Ltd
Mr Dean Cosenza
290,000.00
Lion Finance Pty Ltd
Chairperson (the Administrator)
73,981.82
Stix Pty Ltd
Mr Thomas Tigani
381,626.08
Mr Thomas Tigani
Chairperson (the Administrator)
7,128.05
Tomdan Pty Ltd
Mr Thomas Tigani
355,925.74
Total:
1,117,614.47
Although the Administrator was aware of the Mondello litigation by 16 October 2006, he did not disclose this information to the creditors present at the second meeting, nor conduct any further investigation as to the status and circumstances of the litigation. Thus, the plaintiff was denied an opportunity to put its case to the creditors present at the second meeting.
For the purpose of voting at the meeting, Mr Thomas Tigani represented Stix Pty Ltd, also known as Stix Farms Pty Ltd (“Stix”), and Tomdan. These two entities are related to Annatom. As at the date of the meeting, Mr Thomas Tigani was a director of Stix and he had just resigned as secretary of Tomdan and sold his shareholding. Tomdan is a corporate trustee of the Tigani Family Settlement and the Tomdan Trading Trust.
It was at this meeting that the creditors resolved to enter into a Deed of Company Arrangement, as recommended by the Administrator in his s 439A(4) Report. The creditors voted as follows:
Name of Creditor For
$Against
$Australian Taxation Office
8,950.98
C & F International Pty Ltd
1.00
Denco Holdings Pty Ltd
290,000.00
Lion Finance Pty Ltd
73,981.82
Stix Pty Ltd
381,626.08
Mr Thomas Tigani
7,128.05
Tomdan Pty Ltd
355,925.74
Total:
827,613.47
290,001.00
Two creditors, C & F International Pty Ltd (“C & F”) and Denco Holdings Pty Ltd (“Denco”), voted against the resolution to execute a Deed of Company Arrangement. C & F and Denco were both involved in litigation against Annatom. C & F was given voting rights in the sum of $1.00 as it had issued a counterclaim against Annatom in response to a claim issued by Annatom, while Denco was given voting rights in the sum of $290,000, as it had actually obtained judgment against Annatom.
The plaintiff, by its director Mr Basil Mondello, alleges that had it been present at the second creditors’ meeting, it would have voted against the resolution to execute a Deed of Company Arrangement. Further, the plaintiff alleges that the motion to execute a Deed of Company Arrangement would not have been carried if the related entities of Annatom (Stix, Tomdan and Mr Thomas Tigani) had not been allowed to vote. Nevertheless, the Administrator deposes that he had undertaken investigations suggesting that as at 16 October 2006, the related entities were bona fide creditors of Annatom.
The Deed
The Deed was executed on 6 November 2006. Clause 4(a) of the Deed provides that Mr Thomas Tigani was required to supply sufficient funds -approximately $60,187 - to the Administrator within 180 days of the commencement date of the Deed - by 4 May 2007. The contribution amount of $60,187 had been estimated based on the information available to the Administrator at the time of writing the report (“the Deed Fund”). The Administrator noted in the s 439A(4) Report that his fees were estimates only and that he was yet to receive proof of debt forms from all known creditors. In any event, preferred creditors would receive a dividend of 100 cents in the dollar, unsecured/unpreferred creditors would receive a dividend of five cents in the dollar and the Administrator would receive 100 percent of his fees and disbursements.
For the purpose of fulfilling the terms of the Deed, clause 2.1 divided creditors into the following categories:
·Category A creditor: The Australian Taxation Office with respect to unpaid employer superannuation entitlements; and
·Category B creditors: All unsecured creditors of Annatom other than the Category A creditor, excluding Stix and Tomdan.
The funds provided by Mr Thomas Tigani would be distributed as follows:
·To pay 100 percent of the Administrator’s and Deed Administrator’s remuneration and disbursements (clauses 4(a)(i) and (ii));
·To the Category A creditor at a rate of 100 cents in the dollar (clause 4(a)(iii)); and
·To Category B creditors at a rate of five cents in the dollar (clause 4(a)(iv)).
The Deed also provided, in clauses 8 and 9, that Mr Thomas Tigani, Stix and Tomdan agreed not to make any claim for dividend purposes under the Deed.
The plaintiff submitted that the Deed had been drawn very broadly such that it was likely to sweep up all manner of creditors, regardless of whether those creditors were given the appropriate notice as required by the Act. It was also alleged that the exact extent of Annatom’s creditors was unknown because Mr Thomas Tigani had not been necessarily straightforward about these matters. In other words, there was a possibility that there are other creditors of whom Mr Thomas Tigani had failed to inform the Administrator and who may well be wishing to lodge proofs of debt at some later stage.
The plaintiff alleges that it was not until late November 2006, after the Deed had been executed, that it became aware that Annatom was under administration.
The Administrator declared that a dividend would be paid on 11 May 2007. However on 11 May 2007, after these proceedings were issued, the Administrator gave an undertaking to the Court that he would refrain from taking any further steps in the administration.
On 30 May 2007, the Administrator sent a further circular to Annatom’s creditors informing them of the recent developments in the administration as a result of these proceedings.
Mr Thomas Tigani’s bankruptcy
Whilst the Administration of Annatom was unfolding as set out above, on 25 September 2006, Mr Anthony Matthews of Anthony Matthews & Associates, was appointed Controlling Trustee of Mr Thomas Tigani pursuant to s 188 of the Bankruptcy Act 1966 (Cth). Mr Anthony Matthews is employed in the same firm of accountants as the Administrator.
On 17 October 2006, being a day after the creditors agreed to enter into the Deed, Mr Anthony Matthews prepared a report, pursuant to s 189A of the Bankruptcy Act 1966 (Cth), which stated that Mr Thomas Tigani had nil assets and liabilities in excess of $1 million. The Deed was not entered into until 6 November 2006.
On 20 November 2006, only 14 days after the Deed was executed, Mr Thomas Tigani presented a debtor’s petition and declared bankruptcy. His wife, Mrs Anna Tigani also declared bankruptcy on the same date.
On 7 December 2006, Mr Stephen Duncan of KordaMentha was appointed Trustee of Mr Thomas Tigani’s bankrupt estate.
The plaintiff has submitted that the Trustee of Mr Thomas Tigani’s bankrupt estate may have an interest in funds supplied by Mr Thomas Tigani in his own right, or on his behalf, to fund the Deed, as stipulated by clause 4(a) of the Deed. In a letter dated 19 June 2007, the Trustee of Mr Thomas Tigani’s bankrupt estate wrote to the plaintiff’s solicitors confirming that he had an “interest in any contribution payments made pursuant to clause 4(a) of the Deed”. The plaintiff has also alleged that a loan to Mr Thomas Tigani to fund the Deed is after acquired property as outlined in s 116 of the Bankruptcy Act 1966 (Cth) and under s 58 of the same act, it is property that would vest in his Trustee in Bankruptcy.
Mr Marco Tigani’s Involvement
On 30 October 2006, Mr Thomas Tigani ceased to be a director and secretary of Annatom. His son, Mr Marco Tigani, became the sole director of Annatom from that date onwards.
Mr Thomas Tigani’s bankruptcy has meant that he is unable, or at least highly unlikely to be able to meet his obligation to fund the Deed in his own right. On 5 December 2006, the board of directors of Annatom, after noting that Mr Marco Tigani was aware of and understood the terms of the Deed, resolved that Mr Marco Tigani, in consideration of fulfilling the terms of the Deed, would receive one ordinary share for every $1.00 contributed to the Deed Fund. The effect of this Resolution does not bind Mr Marco Tigani to payment under the Deed. Mr Thomas Tigani still remains legally liable.
Mr Marco Tigani deposes that he is yet to pay any monies into the Deed Fund due to the uncertainty created by the plaintiff’s application and because the Administrator is yet to advise him of the exact amount to be paid. He also deposes that he would be in a position to make the payment required by the Deed within seven days of the resolution of this action and after he is advised of the final amount payable.
Summary of the submissions by the parties
The plaintiff’s case
The plaintiff relies on s 445D of the Act as a basis for terminating the Deed and does not seek any orders pursuant to s 600A of the Act. Section 445D relevantly provides as follows:
(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; or
(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii)contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
(2) An order may be made on the application of:
(a) a creditor of the company; or
(b) the company; or
(c) any other interested person.
The key arguments put forward by Mr Livesey QC, appearing on behalf of the plaintiff, were that the Deed should be terminated:
·Pursuant to s 445D(1)(a) because Mr Thomas Tigani did not disclose the Mondello litigation to the Administrator or that Annatom owed the plaintiff money; and the Administrator was alerted to the Mondello litigation but did not investigate it or disclose it to creditors prior to the second resolution of creditors.
·Pursuant to s 445D(1)(c) because the Administrator’s s 439A(4) Report did not include that the plaintiff was either a creditor or a contingent creditor of Annatom. Further, there was no reference to Mr Thomas Tigani’s personal financial status and how the monies for the Deed Fund were to be paid.
·Pursuant to s 445D(1)(d) because there was a material contravention of clause 4(a) of the Deed as Mr Thomas Tigani was legally liable to make a minimum payment of $60,000; he is bankrupt; and did not make the payment due within 180 days of the execution of the Deed.
·Pursuant to s 445D(1)(e) because effect could not be given to the Deed without injustice or undue delay as the plaintiff was not represented as a person who was either a contingent creditor of Annatom or a creditor for a small amount of the costs.
·Pursuant to s 445D(1)(f) because the Deed would be oppressive and unfairly prejudicial or discriminatory against not only the plaintiff, but also against C & F and Denco, who were supportive of the winding up of Annatom rather than continuing with the implementation of the Deed.
·Pursuant to s 445D(1)(g) that the Deed should be terminated for some other reason, including the need to investigate:
-A preference and/or uncommercial transaction claim against Mr Thomas Tigani for $30,200 arising from his invoice to Annatom, dated 30 August 2006, for legal services undertaken on Annatom’s behalf;
-Potential insolvent trading and/or breach of directors’ duties claim against Tomdan and Stix as de facto directors of Annatom; and
-A claim against Tomdan and Stix for knowingly assisting any breaches by Annatom’s director(s).
If there is a breach of s 445D, the plaintiff claims that the Court should exercise its discretion to terminate the Deed for reasons including the need to allow a proper investigation of the affairs of Annatom, particularly the alleged creditor status of Mr Thomas Tigani, Stix and Tomdan. For this purpose, the plaintiff, though its counsel, indicated that it was prepared to provide reasonable funding to any liquidator of Annatom to investigate the availability of recovery claims, including claims of insolvent trading on the basis of conditions set out in the Act. The plaintiff did not seek a ruling under s 564 of the Act, which vests the Court with a discretion regarding the distribution of property acquired in circumstances where one of the creditors has provided an indemnity for costs.
The effect of terminating the Deed, as outlined is regulation 5.3A.07(1)(a) and s 446B of the Act, is that Annatom will be taken to have passed a special resolution under s 491 of the Act that it be voluntarily wound up.
Tomdan’s case
The key arguments put forward on behalf of Tomdan by its counsel, Mr Dart, were that:
·Contrary to the submissions of the plaintiff, it had not satisfied the criteria in s 445D;
·The creditor status of the plaintiff was questionable and it may not have changed the outcome of the second creditors’ meeting;
·Even if there had been a breach of any of the grounds outlined in s 445D, the court’s discretion should not be exercised to terminate the Deed because:
-The plaintiff had significantly delayed taking action;
-The status of the plaintiff as a potential creditor of Annatom, by reason of the Administrator’s powers under the Deed, would enable the Administrator to decide whether or not the plaintiff could prove itself as a creditor for the purposes of a dividend;
-If the plaintiff was accepted as a creditor, it could get five cents in the dollar like all other unsecured creditors;
-The additional costs involved in putting Annatom under liquidation were unwarranted and not in the best interests of either the creditors or the public, as the Deed Fund was proffered only if Annatom did not go into liquidation.
In considering the respective submissions of the parties, it is necessary to discuss further contentious facts.
The plaintiff’s knowledge of Annatom’s administration
Mr Basil Mondello, a director of the plaintiff, deposes that it was not until late November 2006 that he first became aware that Annatom was under administration. He refers, without specificity, to “correspondence”.
Correspondence annexed to the Administrator’s affidavit and the two affidavits of Ms Terese Wacyk of Websters Lawyers, being the solicitors for the plaintiff, indicate the following chronology.
At a hearing on 12 October 2006 in relation to the Mondello litigation, Annatom’s solicitors, Carbone, Polvere and Co, indicated in court that Annatom had made a decision to enter into voluntary administration.
On 18 October 2006, the plaintiff's solicitors wrote to Carbone, Polvere and Co requesting information on the current status of Annatom. No response was received to that letter and the plaintiff’s solicitors wrote a further letter dated 3 November 2006. A response was received from Annatom’s solicitors on 5 December 2006, advising that Annatom had gone into administration.
On 25 January 2007, there was further attendance by the plaintiff's solicitors at the District Court at which time the matter was adjourned. On 2 February 2007, the plaintiff's solicitors subsequently sent a letter to Annatom’s solicitors, who had not been in attendance, advising of the adjourned date. The letter also advised that the plaintiff was investigating the matter with a view to reformulating its claim. That same letter also advised that the Master of the District Court had indicated that Annatom or its Administrator was required to inform the Court of its decision with regard to the continuation or otherwise of the counterclaim.
On 5 February 2007, the plaintiff’s solicitors also sent a letter to the Administrator acknowledging their understanding that the Administrator had been appointed. The letter also advised of the adjourned date for hearing in the Mondello litigation and indicated they were currently considering the plaintiff's position with regard to the Administration.
On 11 April 2007, the plaintiff’s solicitors wrote to the Administrator indicating a number of matters, which included the following:
·Their client was a creditor but not included in amongst the creditors;
·Their client had not had an opportunity to participate at creditors’ meetings, nor approve the Deed;
·Their client indicated an intention to institute proceedings under Part 5.3A of the Act; and
·A request for information on seven specific points within seven days.
Although Mr Basil Mondello deposed that it was not until late November 2006 that he became aware that Annatom was under administration, it would appear from the correspondence annexed to the aforementioned affidavits that it was not until 5 December 2006 that he and his solicitors had confirmation of the administration.
Tomdan submits that there was significant delay between the time when the plaintiff became aware of Annatom’s administration and the time when the plaintiff took action. I will refer to this alleged delay later in these reasons.
Creditor status of the plaintiff
The plaintiff referred to three court orders made in its favour in the District Court action, as set out in paragraph [14] above.
In response to these claims of creditor status, Tomdan agreed that in addition to those three orders, further costs orders were made in Annatom’s favour on 14 March 2006 and 6 June 2006.
Tomdan through its director, Mr Marco Tigani, deposes that the costs order made on 29 April 2004, in the sum of $4,466.65, was taxed and paid. Further, he deposes that Annatom has received no request in respect of payment of the costs ordered on 21 April 2005, 14 March 2006 or 6 June 2006. Therefore, the only specific costs order outstanding, as a debt immediately payable to Annatom, is that of 22 April 2003 for $150. In relation to this amount and indeed any costs orders incurred in court proceedings, Tomdan submits that such costs are not listed in the categories of debts, for insolvent trading purposes, under s 588G(1) of the Act. The plaintiff disputes this submission.
With regard to the other contingent liability claimed, the plaintiff claims damages of $312,000 in the District Court for breach of contract in relation to which there is a counterclaim by Annatom against the plaintiff for the sum of $320,000. At a hearing on 19 April 2007 in relation to the Mondello litigation, the Administrator informed the court that he had decided not to pursue the counterclaim. This leaves only the plaintiff’s claim against Annatom.
Considering only the isolated issue of the creditor status of the plaintiff, I am satisfied that Mr Thomas Tigani did not fully disclose the financial circumstances or affairs of the company to the Administrator as to the creditor status of the plaintiff as required. Further, the Administrator did not take any steps to investigate the Mondello litigation and did not disclose his knowledge of the Mondello litigation and the creditor status of the plaintiff prior to the second creditors’ meeting, at which the resolution to enter into the Deed was made.
I now turn to whether the costs orders in the plaintiff’s favour are debts for the purposes of s 588G(1) of the Act. I note that it is not necessary to make a finding on this issue given the Administrator’s oral evidence to the effect that if the plaintiff had lodged a proof of debt, he would have admitted the amount of $1.00 to the plaintiff, for voting purposes at the second creditors’ meeting, based on the plaintiff’s contingent liability of $312,000.
In any event, s 588G applies only to debts that have been incurred while the company is insolvent or because of incurring that debt, the company becomes insolvent. In Hawkins & Ors v Bank of China,[1] Glesson CJ held that “[t]he words ‘incurs’ and ‘debt’ are not words of precise and inflexible denotation”.[2] In adopting this reasoning, Olsson J in Powell v Fryer,[3] aptly noted that the word “debt” has not been defined in the Act, and that:
… the normal meaning of the word is simply “a liability or obligation to pay or render something; that which one person is bound to pay to or perform for another” … “[A] debt is simply an obligation of one party to pay a sum of money to another”. The obligation may be present and absolute, or contingent.
There is nothing in the Corporations Law to suggest that any other special meaning is intended. [Footnotes omitted]
[1] (1992) 26 NSWLR 562.
[2] Ibid, 572.
[3] (2001) 159 FLR 433, 443 [64].
Further, in ASIC v Edwards,[4] Barrett J, after referring to the abovementioned cases, concluded that “[c]ase law indicates … that ‘incurring’ is the act, omission or other circumstance which causes the company to owe the debt”.[5]
[4] (2005) 220 ALR 148.
[5] Ibid, 172 [81].
With these authorities in mind, it is reasonable to conclude that continuing to engage in litigation and becoming liable to pay adverse costs orders, when there were reasonable grounds to suspect that Annatom would not be able to meet these obligations, was “incurring a debt” for the purposes of s 588G(1) of the Act. This is reinforced by the fact that a related company Tomdan, as trustee of the Tigani Family Settlement, paid certain legal fees of Annatom as discussed hereafter.
Creditor status of Mr Thomas Tigani
Mr Thomas Tigani’s accepted creditor status for the purpose of voting at the second creditors’ meeting was $7,128.05. The circumstances that led to Mr Thomas Tigani becoming a creditor of Annatom are outlined in the subsequent paragraphs.
Prior to 30 August 2006, Mr Thomas Tigani owed Annatom $23,080. On 30 August 2006, Mr Thomas Tigani rendered an invoice to Annatom for $30,200 for the alleged time he spent preparing and assisting with litigation on Annatom’s behalf. This invoice of 30 August 2006 was then set-off against Mr Thomas Tigani’s debt to Annatom.
The ultimate result of this transaction, as counsel for the plaintiff noted, is that Mr Thomas Tigani converted himself from someone who owed Annatom money to someone who was owed money by Annatom and could vote at the second creditors’ meeting. The plaintiff submitted that the Administrator had not appropriately investigated this transaction and had made no allowance for the recovery of voidable transactions.
The plaintiff further submitted that the set-off provision outlined in s 553C of the Act will not assist Mr Thomas Tigani in circumstances where he well knew of the solvency or otherwise of Annatom. Section 553C(2) does not allow set-off if one has notice of a company’s insolvency.
Further, to the extent that Mr Thomas Tigani indicated in the Deed that he did not seek to recover the alleged debt of $7,128.05, this indication was given at a time when his bankruptcy was imminent. Prior to the execution of the Deed, Mr Anthony Matthews had already been appointed Mr Thomas Tigani’s Controlling Trustee and it was foreseeable that once Mr Thomas Tigani became bankrupt, an event that occurred 14 days after the Deed was executed, his Trustee in Bankruptcy could well have an interest in that transaction.
Further, to the extent that Mr Thomas Tigani rendered the invoice dated 30 August 2006 in relation to legal fees, these fees may well have included the Mondello litigation in which the plaintiff was involved. The plaintiff submitted that this factor is linked to the concern that Tomdan is the trustee of the Tigani Family Settlement, which funded the Mondello litigation to the extent of some $100,000, at time when Annatom had already ceased trading.
The plaintiff submitted that each of these matters required appropriate investigation. I agree. I think there are concerns about the creditor status of Mr Thomas Tigani, which are of relevance and should have been disclosed to creditors prior to the second resolution being passed.
Creditor Status of Stix Pty Ltd and Tomdan Pty Ltd
At the second creditors’ meeting, the accepted creditor status for voting purposes for Tomdan and Stix was $355,925.74 and $381,626.08 respectively. With respect to these amounts, the Administrator deposed that he had formed the view that as at the date of the second creditors’ meeting, Tomdan and Stix were bona fide creditors of Annatom. The plaintiff disputes this characterisation as being accurate and also contends that the Administrator did not investigate the elevation of the alleged creditor status.
In a letter dated 27 June 2007, the plaintiff’s solicitors wrote to the Administrator’s solicitors inquiring about the Tomdan and Stix loans. The plaintiff’s solicitors also requested to inspect Annatom’s accounts.
On the Administrator’s instructions, the Administrator’s solicitors replied by a letter dated 29 June 2007. The letter explained that:
·The Stix loan predominately related to an agreement between Annatom (as lessee) and Stix (as lessor) to lease the land known as section 20 of Kingsford. This liability had accrued over several years with rent accruing at varying rates over the years - between $35,000 to $44,000 per annum.
·The Tomdan loan, as trustee of Tigani Family Settlement, predominately related to accounts paid by Tigani Family Settlement on account of Annatom. MYOB extracts relating to the Tigani Family Settlement loan showed loan account movements of $69,579.16 in 2005 and $50,419.31 in 2006. These movements mainly related to legal fees paid by Tomdan, as trustee of Tigani Family Settlement, on account of Annatom.
At the hearing before me, the Administrator was questioned on the Tomdan and Stix loans.
Given that the Tomdan loan had increased steadily since late 2001, Mr Livesey QC, counsel for the plaintiff, asked the Administrator whether it could be said that Annatom had engaged in any trading since that year. The Administrator stated that he was of the view that because Annatom had not actively traded in the business of primary production since late 2001, he did not believe there was any trading for all purposes under the Act. The Administrator further stated that based on the information available to him, the fact that Tomdan had been incurring costs on behalf of Annatom in relation to various pieces of litigation in the District Court, did not form the basis of an insolvent trading claim. Nevertheless, the Administrator conceded that his view might have changed if he had been persuaded that engaging in litigation for a period of over five years and incurring debts with solicitors, counsel and other parties to the litigation was a form of trading which could attract the insolvent trading provisions.
The Administrator also accepted that without the support of Tomdan, Annatom did not have the resources to continue to be involved in the various pieces of litigation in the District Court. The Administrator also informed the Court that Mr Thomas Tigani had not given him a specific reason as to why Tomdan was so willing to expend sums in excess of $100,000 in respect of the litigation. Mr Thomas Tigani’s only explanation was that his family members were happy to support him financially.
The Administrator further admitted that he had not considered that if Annatom had gone into liquidation, it might have been possible for claims to be made against persons who might have been controlling the affairs of Annatom and providing it with money which allowed the company to incur debts over a number of years. The Administrator conceded that there might be some possible return if an action was commenced either directly against Tomdan, as a de facto director, and Tomdan is found to have engaged in insolvent trading through Annatom.
With regard to the Stix loan, the Administrator informed the Court that this was old debt that had accrued for unpaid rent. The rent had been accruing at various rates over the years in amounts of between $35,000 and $44,000 per annum. The Administrator stated that he had requested further and better particulars from Annatom’s accountant as to the basis upon which the rent was charged. Annatom’s accountant had responded by providing the Administrator with some correspondence between Stix and Mr Thomas Tigani pertaining to the rental amounts. Further, Annatom’s accountant had put through loan account entries taking the accrued rent up to a certain date. The Administrator presumed this date to be 30 June 2001. The Administrator informed the Court that there had been no movement in the loan account from that date as the company had ceased trading.
The Administrator conceded that he had not put this additional information pertaining to the Stix loan in his s 439A(4) Report. Further, the Administrator admitted that he had not explained in his report that this rental amount was apparently accruing, at least in relation to interest over the years, and that Stix had not demanded repayment. However, the Administrator stated that he had certainly discussed these issues with all creditors present at the second meeting, as he had made an undertaking to do so at the first creditors’ meeting.
In my view, a number of significant issues have been raised in relation to the creditor status of Tomdan and Stix, as well as concerns about possible insolvent trading. These matters require further investigation. These matters were not referred to in the Administrator’s report. These matters may also affect the amount, which may be available to creditors. Whilst it is understandable that the Administrator may not have fully appreciated the situation, particularly without full knowledge of the Mondello litigation, this was nonetheless an omission, which was relevant to the creditors in entering into the Deed.
In the light of these findings, I will turn now to the provisions of s 445D.
Section 445D – Legal principles
The ambit of the section
The plaintiff relies on all the paragraphs in s 445D(1), with the exception of s 445D(1)(b).
A plaintiff creditor has the onus of proving that a ground outlined in s 445D(1) has been made out.[6] Section 445D(1) states that a court “may make” an order terminating a Deed of Company Arrangement if satisfied that a ground or grounds enumerated in s 445D(1) have been made out. There is a discretionary element to this section. Consequently, even if a plaintiff creditor successfully makes out a ground, the court still has to exercise its discretion in deciding whether to terminate a deed.[7] In some situations, it may be necessary to consider, for the purpose of exercising the court’s discretion, whether more than one of the grounds listed in s 445D(1) have been made out.[8]
[6] Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510, 539 [138].
[7] Ibid.
[8] Bidald Consulting Pty Ltd v Miles Special Buildings Pty Ltd (2006) 226 ALR 510, 539 [138].
Section 445D(1)(a) and (b)
Section 445D(1)(a) has two limbs. A court may terminate a deed if false or misleading information is given to the administrator of the company or if false or misleading information is given to the creditors. Where false or misleading information is given to creditors, s 445D(1)(a) can be invoked in two situations: where the false or misleading information is given by the administrator or where the false or misleading information is given by some other person.[9]
[9] Ibid, 540 [144].
Information that is determined to be false or misleading must also meet the materiality test outlined in s 445D(1)(a)(ii). The materiality test is discussed later in these reasons.
The court is not concerned with the origins of the false or misleading information. As Campbell J recently stated in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd,[10] (“Bidald”) the policy behind this reasoning is that:
… administrations require important decisions to be made in a short space of time, on the basis of such information as can be gathered in the time, and it is understandable that the ground upon which a deed can be terminated depends upon the adequacy of the information ultimately provided to the administrator, or the creditors, regardless of where that information might have come from.
[10] (2006) 226 ALR 510, 540, [145].
The question is whether creditors were given the information to which they were entitled so as to make an informed decision to enter into a deed, and not who was at fault.[11]
[11] McVeigh &McDonald v Linen House (2000) 18 ACLC 311, 325.
Section 445D(1)(b) is a subspecies of s 445D(1)(a). A deed may be terminated if the false or misleading information is contained in the administrator’s s 439A(4) Report or the false or misleading information is relayed to the creditors by some other means, such as a notice of a meeting.
False or misleading information under s 445D(1)(a) and (b) – an objective test
In Bidald,[12] Campbell J held that the court employs an objective test in determining whether information is false or misleading for the purposes of s 445D(1)(a) and (b) and does not concern itself with the state of mind of the person who provides the information. [13] As His Honour said:[14]
-The expression looks at an objective quality of the information, not at whether anyone was actually misled.
-The expression looks at whether the information was actually false or misleading, not whether anyone intended it to be false or misleading, or did not care whether or not it was false or misleading.
-Whether the information is false or misleading is judged at the time of the hearing, not on the basis of information available at the time of giving the information.
[12] Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510.
[13] Ibid, 540, [147] and 541, [152].
[14] Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510.
Further, as Campbell J discussed in Bidald,[15] statements about a future event may be misleading, “if it is a statement with the capacity to lead a recipient of it into error”.[16] In determining whether such a statement ought to be properly characterised as false or misleading, Campbell J also held that “the court should take into account whether or not it purports to be anything more than the present estimate or prediction of the author”.[17]
The materiality test – s 445D(1)(a), (b) and (c)
[15] Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510.
[16] Ibid, 540, [148].
[17] Ibid, 540, [149].
For a ground to be made out under s 445D(1)(a), (b) or (c), the paragraphs require that the information or omission to “reasonably be expected to have been material to creditors”. This test does not require the information or omission to reasonably be expected to have been material to all the creditors, but it must affect a sufficient number.[18] The test is an objective one.[19] Accordingly, the actual views of the creditors do not go to the materiality of the information or omissions, but are instead relevant to the exercise of the court’s discretion.[20]
[18] Ibid, 545, [176].
[19] Ibid, 544, [166], citing Deputy Commissioner of Taxation v Comcorp Australia Ltd and others (1996) 70 FCR 356, 385 per Carr J (with whom Lockhart J agreed).
[20] Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510, 544, [167].
For the purposes of s 445D(1)(a), and its subspecies s 445D(1)(b), information that is false or misleading will be material if it “would be relevant to and might be likely to affect the making of the decision of creditors …”.[21] In Bidald,[22] Campbell J held that the creditors’ decision to enter into a deed of company arrangement was one such relevant decision. His Honour went on to hold that in determining whether the information was material:[23]
… all the information about the company’s business, property, affairs or financial circumstances that has been found to be false or misleading should be considered collectively.
[21] Re Segal; Lensworth Finance Ltd v Segal (1976) 9 ALR 154, 157; followed in Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307; Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544; Commissioner of Taxation v Comcorp Australia Ltd and others (1996) 70 FCR 356,392; and Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510, 543, [165].
[22] (2006) 226 ALR 510.
[23] Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2006) 226 ALR 510, 544, [169].
Undoubtedly, the same considerations would apply to whether omissions were material under s 445D(1)(c).
Section 445D(1)(a) and (b) application
Applying these principles to the facts in this case, I consider that the information that Mr Thomas Tigani gave to the Administrator was misleading because he failed to disclose information with regard to the Mondello litigation. I also consider that the information, which was subsequently given to the Administrator about the Mondello litigation, should have been passed on to the creditors. In my view, it was misleading to the creditors not to be informed about the Mondello litigation at the time of the second resolution and before the creditors voted to enter into the Deed. I am satisfied that such information could reasonably be expected to have been material to the creditors of the company in voting for the resolution that the company execute the Deed. These actions were a breach of s 445D(1)(a) of the Act.
I am also satisfied that the information about the Mondello litigation should have been contained in the Administrator's s 439A(4) Report and that the failure of this information to be in the report was a breach of s 445D(1)(b) of the Act.
I am further satisfied that the failure by Mr Thomas Tigani to disclose to the creditors at the second meeting on 16 October 2006, that a Controlling Trustee had been appointed in relation to his personal estate pursuant to s 188 of the Bankruptcy Act1966 (Cth), was misleading. The failure to report this development was misleading to the creditors, at the time when they entered into the Deed, as the Deed provided that Mr Thomas Tigani was liable to pay monies into the Deed Fund for the purpose of distribution to creditors. In my view, this was material information that creditors needed to know at the time of deciding whether to vote for a resolution to execute the Deed. I am satisfied that this amounts to a breach of s 445D(1)(a) of the Act.
Section 445D(1)(c) – material omissions
The ground in s 445D(1)(c) covers the situation where “material” information, reasonably necessary for creditors to make a decision to approve a deed, has been omitted from the administrator’s s 439A(4) Report or statement. As Austin J noted in Bovis Lend Lease Pty Ltd v Wily,[24] the enquiry as to whether there was a material omission is objective in nature.[25] The court is not concerned with the administrator’s state of knowledge or the fact that the administrator was ignorant of the material information.[26] Moreover, s 445D(1)(c) “is to be understood in conjunction with the administrator's statutory and other duties to make investigations and inquiries”.[27]
[24] (2003) 45 ACSR 612.
[25] Ibid, 694, [345].
[26] Ibid, 694, [345].
[27] Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612.
Austin J further pointed out that in some circumstances, an administrator, in discharging his or her duties, may be required to make certain inquiries beyond his or her statutory duty to investigate under s 438A.[28] His Honour held: [29]
The existence of a duty to make further inquiries must depend on an assessment of the nature of the question to be investigated, the information in the administrator's hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors' decision.
These duties must be considered in light of the special position in which the administrator is placed under Part 5.3A. It is well established that pressure of time or the complexity of administration may excuse an administrator from undertaking detailed investigations. [Footnotes omitted]
Section 445D(1)(c) application
[28] Ibid, 690, [325].
[29] Ibid, 690 - 691, [325] – [326].
In the present case, the Administrator had very little funds available in which to undertake a full investigation of the creditor status of Mr Thomas Tigani, Stix and Tomdan. Further, the significance and interrelatedness of these three entities only became more overtly in need of investigation after the Mondello litigation process became known.
It is understandable that the Administrator may not have fully appreciated the questionable loan arrangements between the related companies and the effect that they may have on Annatom and the availability of funds for distribution to creditors. I consider that there was a material omission from the report with regard to the creditor status of the three related entities and that this information could reasonably be expected to have been material to the creditors in deciding to enter into the Deed. I am therefore satisfied that there has been a breach pursuant to s 445D(1)(c) of the Act.
Section 445D(1)(d) – material contravention of the deed
The plaintiff alleges that there has been a material contravention of clause 4(a) of the Deed. It is important to note that the contravention of the Deed must be “material”, in the sense of the meaning discussed in paragraph [99] above.
Section 445D(1)(d) application
In the present case, the plaintiff alleges Mr Thomas Tigani’s failure to pay $60,000 or indeed any monies into the Deed Fund is in contravention of clause 4(a) of the Deed.
In the circumstances which have arisen, I am not satisfied that there has been a contravention of the Deed. There was no specific amount set out under the Deed to be paid into the Deed Fund. Additionally, the required amount to be paid into the Deed Fund is still uncertain, particularly having regard to the Mondello litigation and the outcome of these proceedings. Whilst it is likely that the sum of $60,000 is the minimum which may be required to be paid into the Deed Fund, and that it would have been preferable for monies to have been paid into the Deed Fund to give some comfort to the creditors that a distribution could be made on the basis of the information disclosed to the creditors at the time of the second resolution, there has in my view been no material contravention of the Deed pursuant to s 445D (1)(d) of the Act.
Section 445D(1)(e) – deed cannot be given effect without injustice or undue delay
Section 445D(1)(e) allows the Court to terminate a deed if effect cannot be given to the deed without injustice or undue delay. There is no significant case law that assists in the interpretation of this subsection. Nevertheless, in deciding whether a deed should be terminated under this subsection one must draw attention “to the effect of the deed rather than the purpose of the deed or any of its provisions, or the purpose of those who implement the deed”.[30] In Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (subject to Deed of Company Arrangement),[31] Austin J held that the ground in s 445D(1)(e) had been made out because entering into a Deed of Company Arrangement had “effectively removed the possibility of proper investigation” of certain transactions.[32]
Section 445D(1)(e) application
[30] Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (subject to Deed of Company Arrangement) (2001) 37 ACSR 394, 430, [188].
[31] (2001) 37 ACSR 394.
[32] Ibid, 431, [191].
I am satisfied that effect could not be given to the Deed without injustice or undue delay because the plaintiff was not represented as either a creditor or a contingent creditor of the Annatom and should at the very least been given the same voting status as C & F. I also consider there will be in injustice if there are no appropriate investigations into the creditor status of Mr Thomas Tigani, Stix and Tomdan. I am therefore satisfied that the ground pursuant to s 445D(1)(e) has been made out.
Section 445D(1)(f) – oppression or unfair prejudice or unfair discrimination
Section 445D(1)(f) allows the Court to terminate a deed where there has been oppression, unfair prejudice or unfair discrimination against a creditor or group of creditors. In determining whether a deed is oppressive or unfairly prejudicial or unfairly discriminatory, the background of the general principles underlying Pt 5.3A of the Act must be considered. [33] A creditor has the basic right to payment, to the winding up of a company, or to the administration of the company in a manner that keeps the business of the company going which ultimately resulting in the creditor receiving payment out of the property of the company.[34] The court will look at the whole of the effect of the deed and assess “its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Pt 5.3A, the interests of the other creditors, the company and the public generally”.[35] It is necessary to consider the total circumstances of the case so as to determine whether there is overall unfairness.[36] In Re Bartlett Researched Securities Pty Ltd,[37] Derrington J held that the criteria that will guide the court:[38]
… are the fairness and practicality of the scheme as a whole rather than its adherence to strict technical entitlements, although they too must be considered in assessing the quality of fairness.
Section 445D(1)(f) application
[33] Fleet Broadband Holdings Pty Ltd & Anor v Paradox Digital Pty Ltd (subject to a deed of company arrangement) & Ors (2006) 228 ALR 598, 608, [59].
[34] Ibid.
[35] Ibid, 608, [60] citing Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427, 429.
[36] Fleet Broadband Holdings Pty Ltd & Anor v Paradox Digital Pty Ltd (subject to a deed of company arrangement) & Ors (2006) 228 ALR 598, 608, [60] citing Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139, 151; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453.
[37] (1994) 12 ACSR 707.
[38] Ibid, 710.
I am satisfied that implementing the proposed Deed would be unfairly prejudicial and discriminatory against the plaintiff. I also note that the other two creditors, C & F and Denco, are supportive of the winding up of Annatom. This would mean that a majority of the creditors, accepting the plaintiff as a creditor of the purpose of voting, do not wish to implement the Deed.
Section 445D(1)(g) - the deed terminated for other reasons
In Bidald,[39] Cambell J noted, with respect to the principles underlying the operation of s 445D(1)(g), that: [40]
The express words of s 445D(1)(g) are very broad, and should be applied in a way consistent with the policy of the Corporations Act and other public policies to which the law gives effect. Giving effect to the general policy of the corporations law that insolvent companies should not continue to trade is well within a legitimate use of s 445D(1)(g).
Section 445D(1)(g) application
[39] (2006) 226 ALR 510.
[40] Ibid, 561, [261].
In my view, the preceding discussion and the breaches of s 445D which I have found, together, gives rise to the desirability of the termination of the Deed and the liquidation of Annatom. Many questions have been raised which suggest that the creditors did not have complete and candid information before them. In particular, whether further funds may be available for distribution to creditors after a full investigation. I consider that these matters taken together satisfy me that it would be appropriate to terminate the Deed pursuant to s 445D(1)(g).
Discretion
It is not sufficient for me to simply find that there have been either breaches or a failure to comply with the provisions of s 445D. There is also a need to have regard to matters of public interest, the creditors’ interests and allegations of delay. I will now address Tomdan’s submissions as to why the Court should not exercise its discretion to terminate the Deed.
The plaintiff’s delay
Counsel for Tomdan, Mr Dart, submitted that to the extent that the plaintiff is alleging a creditor or contingent creditor status, it is yet to lodge a proof of debt. It was submitted that this situation, coupled with the earlier delay in failure to act until May 2007, amounts to a significant delay affecting the overall administration of Annatom. In all of the circumstances, there should be no termination of the Deed by virtue of the actual or alleged creditor status of the plaintiff. Further, Mr Dart submitted that in any event, the Administrator presently has the authority to entertain the plaintiff’s creditor status. This could be done in the usual way by the plaintiff lodging a proof of debt, which could then be determined by the Administrator more speedily than determination in court proceedings.
In reply, Mr Livesey QC submitted that delay has had no prejudice on any of the parties. The concept of delay does not simply involve time; one must also take into account the various events that might occur by reason of this time. The plaintiff submitted that this was the distinguishing point in this case. With regard to failing to lodge a proof of debt, Mr Livesey QC submitted that it would be quite wrong for the plaintiff to “approbate and reprobate”. The plaintiff’s main contention is that the current administration process is flawed and should not continue. Thus, participating in the proof of debt regime, with the logical consequence of a five cent dividend, would be an inconsistent act on the plaintiff’s part.
Varying the Deed to accommodate the plaintiff
Whether or not the Administrator may, under the present Deed, entertain a further potential creditor, who is not the subject of the Deed, is in my view doubtful, absent a variation to the Deed following a meeting of creditors pursuant to clause 25 of the Deed. The named creditors entered into the Deed on the understanding of the parameters of the alleged debt, which did not include a possible large contingent debt of $312,000 plus costs, now being sought by the plaintiff. There has been no legally binding agreement or undertaking by Mr Marco Tigani to pay money into the Deed Fund. The resolution of 5 December 2006 simply records that if Mr Marco Tigani pays money into the Deed Fund, he will receive one ordinary share for every $1.00. The affidavit of Mr Marco Tigani does not amount to an undertaking to pay, but simply records why he has not paid and that he has the means to pay. Mr Dart submitted that if the Court was “concerned about whether the Deed will, in effect, be performed, that is, the money paid; the way to deal with that is [the] proof of a pudding [is] in the eating, … [that is] simply … adjourn [the] matter …” to allow time for payment.
Mr Livesey QC also submitted that if there were some other arrangement for payment into the Deed Fund not reflected in the Deed, it would require an amendment to the Deed and the meeting of creditors. If that were the case, creditors would need to know a lot more about where that money was coming from. Mr Livesey QC further submitted that even if the Administrator was prepared to entertain a proof of debt in relation the plaintiff, there would have to be a further meeting of creditors in order to decide whether the Deed already executed should be amended to include the plaintiff on the same basis as Denco. If such a meeting was called, it is unlikely that the majority of creditors would agree to pursue a Deed of Company Arrangement, as neither C & F nor Denco wished for the matter to proceed by implementing a Deed of Company Arrangement.
I agree with the plaintiff’s submissions on this point.
Conclusion on s 445D
Having considered these arguments, I conclude that the need for appropriate investigation into the financial position of the company and the creditor status of a company are important in the public interest. In my view it is not in the public interest for the continuation of the implementation of the Deed for reasons that I have discussed. The non-related companies do not wish to proceed with the Deed and there is therefore no unfairness to those creditors to terminate the Deed.
As far as the interests of particular creditors are concerned, I do not consider there would be any financial unfairness to the related creditors (Mr Thomas Tigani, Stix and Tomdan), given that at the present time, the related creditors have indicated they intend to forego any dividend. To the extent that an investigation by a liquidator may verify their creditor status, the related creditors would be entitled to a distribution. The related creditors would financially be no worse off by reason of liquidation.
In such circumstances I consider that the public interest and the interests of the creditors as a whole favours the termination of the Deed, which will enable an investigation upon the appointment of a liquidator.
In relation to the delay, I do not consider there has been any undue delay by the plaintiff in taking this action and in any failure to lodge a proof of debt to the Administrator. There has been no prejudice caused by the passage of time and I agree with the arguments which were put on behalf of the plaintiff that it is inappropriate at this point for a proof of debt to be submitted on its behalf.
I therefore conclude that the Deed should be terminated.
An alternative approach under s 447A
At the hearing before me, the plaintiff put forward an alternative argument based on s 447A of the Act. The section gives the Court a general power to make an order it thinks appropriate. Section 447A relevantly provides:
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3) An order may be made subject to conditions.
(4) An order may be made on the application of:
(a) the company; or
(b) a creditor of the company; or
(c) in the case of a company under administration—the administrator of the company; or
(d) in the case of a company that has executed a deed of company arrangement—the deed’s administrator; or
(e) ASIC; or
(f) any other interested person.
Mr Livesey QC submitted that s 447A(2)(a) – (c) is very wide in terms and the phrase “some other reason” under s 447A(2)(c) is broad enough to encompass the desirability of investigation of the company’s affairs by a liquidator. Further, it was submitted that s 447A is broader in reach than s 445D.
In reply, Mr Dart submitted that s 447A should not be invoked as the plaintiff’s complaint can be dealt with under s 445D. He submitted that a wide and general provision such as s 447A, which authorities say is a very wide and broad discretion, should not be used when there are specific provisions in the legislation, which allow the Judge to deal with the problem at hand.
Given my finding that the Deed should be terminated for the reasons set out above in relation to s 445D, it is not necessary to make a finding as to whether the Deed should terminated pursuant to s 447A.
Orders
1That the Deed of Company Arrangement executed on 6 November 2006 between Annatom Pty Ltd (Administrator Appointed), Mr Tarquin Raoul Koch (in his capacity as Administrator of Annatom Pty Ltd), Mr Thomas Tigani, Stix Farms Pty Ltd, Tomdan Pty Ltd in its own right and in its capacity as trustee of the Tigani Family Settlement and Tomdan Pty Ltd in its capacity as trustee of the Tomdan Trading Trust be terminated.
2I will hear the parties as to any further orders, including costs.
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