Paddington Gold Pty Ltd v Wave Pty Ltd (Subject to a Deed of Company Arrangement) - [2023] WASC 263

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   PADDINGTON GOLD PTY LTD -v- WAVE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) [2023] WASC 263
CORAM:   LEMONIS J
HEARD:   10 JULY 2023
DELIVERED          :   11 JULY 2023
PUBLISHED           :   17 JULY 2023
FILE NO/S:   COR 109 of 2023
BETWEEN:   PADDINGTON GOLD PTY LTD
Plaintiff
AND
WAVE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)
First Defendant
WAVE PROJECTS PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)
Second Defendant
JACK JAMES, PAULA SMITH AND NICOLE ALLMARK AS JOINT AND SEVERAL DEED ADMINISTRATORS OF WAVE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)
Third Defendant
JACK JAMES, PAULA SMITH AND NICOLE ALLMARK AS JOINT AND SEVERAL DEED ADMINISTRATORS OF WAVE PROJECTS PTY LTD(SUBJECT TO A DEED OF COMPANY ARRANGEMENT)
Fourth Defendant

Catchwords:

Deeds of company arrangement - Resolutions to enter into deeds passed by casting vote of the administrators - Proceedings commenced by a significant creditor for orders terminating the deeds and setting aside the resolutions passed to enter into them - Deeds due for effectuation 3 business days after resolutions were passed - Plaintiff seeks interlocutory injunctions to restrain effectuation of the deeds - Two other significant creditors support the grant of interlocutory injunctions - Proponent of deeds opposes the grant of such relief and administrators abide the result - Consideration of whether there is a serious question to be tried as to the relief sought - Consideration of the balance of convenience - Interlocutory injunctions granted

Legislation:

Corporations Act 2001 (Cth)

Result:

Interlocutory injunctions granted

Category: B

Representation:

Counsel:

Plaintiff	:	T J Langdon
First Defendant	:	P Edgar & J Abberton
Second Defendant	:	P Edgar & J Abberton
Third Defendant	:	P Edgar & J Abberton
Fourth Defendant	:	P Edgar & J Abberton
Interested Parties	:	Kobalt Enc Pty Ltd & Eire Total Access Pty Ltd: D Greenberg
Interested Party	:	Karli Pty Ltd: T Porter

Solicitors:

Plaintiff	:	Minter Ellison
First Defendant	:	Lavan
Second Defendant	:	Lavan
Third Defendant	:	Lavan
Fourth Defendant	:	Lavan
Interested Parties	:	Vincent Young
Interested Party	:	Hamilton Locke

Cases referred to in decision:

Adelaide Brighton Cement Ltd v Concrete Supply Pty Ltd (No 4) [2019] FCA 1846
Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63; (2001) 208 CLR 199
Clifton (Liquidator) v Kerry J Investment Pty Ltd t/as Clenergy [2020] FCAFC 5
Decon Australia Pty Ltf v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139
In the matter of Connections Total Fitness for the Family Pty Limited (administrator appointed) [2014] NSWSC 75
J & E Vanjak Pty Ltd v Palmer Street Developments Pty Ltd [2018] QSC 293
Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509
Pilot Advisory Pty Ltd v ACN 137 806 574 Pty Ltd [2019] FCA 2171
Sino Group International Ltd & Anor v Toddler Kindy Gymbaroo Pty Ltd (administrators appointed) & Ors (2022) 160 ACSR 56
Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110
Vero Insurance Ltd v Kassem [2011] NSWCA 381

LEMONIS J:

(These reasons were delivered orally on 11 July 2023. They have been amended to correct matters of language and to include full citations).

Each of the first and second defendants (respectively Wave and Wave Projects) is currently the subject of a deed of company arrangement, those companies having been placed into administration on 12 May 2023. The requisite resolutions that each of them execute a deed of company arrangement were made at the second meeting of creditors held on 6 July 2023.
Each resolution was passed on the casting vote of the chairman of the meeting, Mr James, who is a joint and several administrator of the first and second defendants. In respect of each company, a majority of creditors by number voted in favour of the requisite resolution but a majority of creditors by value voted against the resolution.
The Plaintiff (Paddington) is a substantial creditor of each of the first and second defendants, its claim being for $16,699,741. It voted against the resolutions. It now applies for an order setting aside each resolution or alternatively orders terminating the deeds of company arrangement and also orders that the first and second defendants be wound up.
The critical legislative provisions upon which Paddington relies are cl 75‑42 of sch 2 of the Corporations Act 2001 (Cth), being the insolvency practice schedule for corporations and s 445D of the Corporations Act which gives the court power to make an order terminating a deed of company arrangement.
The deeds of company arrangement themselves were proposed by Karli Holdings Pty Ltd (Karli). It is not a creditor of the first and second defendants. It has, however, the same directors as Wave.
Wave and Wave Projects were part of the same group of companies. Paddington's claim against them arises out of an engineering, procurement and construction contract made between Paddington and Wave Projects. Wave guaranteed Wave Projects' obligations under the contract. Paddington's claims arose from Practical Completion not being effected on time by 2 December 2022, and its claims include liquidated damages and amounts for defects and costs to complete.
By a share and asset purchase agreement made between Karli and Wave on 23 May 2023, Wave effected to Karli what for present purposes can be best described as a management buy out of Wave's operations. The administrators authorised the making of that agreement, although I do not know who signed it on behalf of Wave. The effect of that agreement is that Wave and Wave Projects no longer have any operational businesses and do not have any employees.
The matter was brought on urgently before me for hearing on 10 July 2023 for interlocutory orders restraining the first and second defendants from effectuating, or to use perhaps a more straightforward word, implementing, the deeds of company arrangement. The urgency arises because pursuant to the deeds, 'effectuation' is to be carried out today (11 July 2023), upon which the deeds terminate and the companies would be returned to the directors. Karli does not agree to any extension beyond today. Also, part of Karli's arguments put on the injunction hearing is that if effectuation is not carried out in time, the deeds cease to be capable of operation.
I gave leave to Karli to be represented on the hearing of the urgent application and it may be appropriate that it be joined as a party to the proceedings given that it is a party to the deeds. Leave has also been granted to other creditors, being Eire Total Access Pty Ltd and Kobalt Enc Pty Ltd, to be heard in support of Paddington's application. Eire is a creditor of Wave Projects in the sum of approximately $2.2 million. Kobalt is a creditor of Wave Projects in the sum of approximately $1.46 million.
Further, pursuant to s 444E of the Corporations Act and to the extent necessary, I give leave to Paddington to bring and continue with these proceedings, such leave being operative back to their actual date of commencement. In making that assessment, I have had regard to the following reasons and also that it is clear that the matters Paddington ventilated needed to be considered urgently. I will also grant leave to Paddington to amend its Originating Process in the form of the Amended Originating Process dated 7 July 2023, the original form of that document incorrectly containing the interlocutory relief sought, not the final relief.
Paddington has given the usual form of undertaking as to damages. There is also an undertaking in the usual form from its parent company, Norton Gold Fields Pty Ltd, which the evidence demonstrates has substantial assets.
The defendants will abide the outcome of the interlocutory application and in their submissions pointed to certain aspects which they say highlight that any serious question is not strong and also pointed to matters of prejudice in particular in relation to the creditors of the first and second defendants who were not represented at the hearing. The administrators point out that there was only one proponent of a deed, being Karli. While that is the case, Paddington's application has to be assessed on what in fact was before the meeting and the effect of the deed proposals.
Karli strongly opposes the grant of the injunction in respect of both defendants.
In terms of how the voting played out at the creditors' meetings, in respect of Wave Projects, 63 creditors voted in favour, representing a total of $12,861,981 and 24 creditors voted against, representing a total value of $29,473,060 (page 162 of Ms Gepp's affidavit). Thus, approximately 69.5% of creditors in value voted against the resolution. In respect of Wave, 20 creditors voted in favour, representing a total value of $413,146 and one creditor, being Paddington with its claim of $16,699,741, voted against the resolution (page 31 of Ms Gepp's affidavit). Thus, approximately 97.5% of creditors in value voted against the resolution.
In respect of Paddington's claim, the quantum of it was disputed by the directors of Wave and Wave Projects and its vote was admitted subject to that dispute. On the information before me, I have not been able to discern what the extent of that dispute is, in particular whether a substantial amount is in dispute.
Against that background, it is useful to now refer to the relevant principles of law applicable to Paddington's application.
I will start by addressing s 445D(1) of the Corporations Act. Paddington principally relies upon subparagraphs (a), (f) and (g). They each set out matters that enliven the court's discretion to terminate a deed.
Relevantly to this case, paragraph (a) enlivens the court's discretion to terminate a deed if the court is satisfied that misleading information about the company's affairs or financial circumstances that can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution was contained in the administrators' report accompanying the notice of meeting for the second creditors' meeting. As Paddington's counsel points out in his written submissions, it is not necessary to establish that someone was actually misled.[1]
[1] J & E Vanjak Pty Ltd v Palmer Street Developments Pty Ltd [2018] QSC 293 [102].
In respect of paragraph (f), it enlivens the court's discretion where the deed or a provision of it would be unfairly prejudicial to or unfairly discriminatory against one or more creditors.
In respect of paragraph (g), this has been held to invite attention to both the interests of creditors and whether it is in the public interest that a liquidator investigate allegations of insolvent trading and voidable transactions. Paragraph (g) can be satisfied where an applicant establishes there is not an unrealistic prospect of a better return in liquidation or that there is a serious case for recovery of assets in a liquidation.[2]
[2] Pilot Advisory Pty Ltd v ACN 137 806 574 Pty Ltd [2019] FCA 2171 [84].
In respect of the operation of (f) and (g), I adopt the application of s 445D as summarised by Campbell JA in Vero Insurance Ltd v Kassem [2011] NSWCA 381 [83] as follows:
It is common ground between the parties to the appeal that a court decides whether to terminate a DOCA in accordance with the following principles, which are taken from the Insurer's written submissions:
'In considering whether to terminate a deed under s 445D(1)(f) of the Act, the Court does not make a judgment " … founded upon mere possibility or speculation; it makes a determination on the characteristics of the deed as they are seen to be at the date of hearing." (University of Sydney v Australian Photonics Pty Ltd (2005) 53 ACSR 579 at [37])
The discretion given by s 445D must be "untrammelled by any overriding considerations. [One] must look at the whole of the effect of the deed and assess its unfairness, if any, to the plaintiff, but in doing so … bear in mind the scheme of Pt 5.3A … and the interests of the other creditors, the company and the public generally." (Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No 2) (1997) 26 ACSR 42 approved on appeal: Kalon Pty Ltd v Sydney Land Corp Pty Ltd (No 2) (1998) 26 ACSR 593)
A deed may be set aside under s 445D(1)(f)(ii) where it precludes creditors from receiving the benefit of recovering voidable transactions. (Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612) It is material "that most of the votes in support of the DOCAs were by parties having an interest in avoiding an enquiry by a liquidator." (Public Trustee (Qld) v Octaviar Ltd (2009) 73 ACSR 139 at [177])
A deed may be set aside under s 445D(1)(g) where there is a public interest in the affairs of a company being examined by a liquidator. It may be considered to be "detrimental to commercial morality" to dispense with the opportunity for the investigation of the affairs of a failed company. (Re Data Homes Pty Limited (in liq) [1972] 2 NSWLR 22 at 26 per Mason JA; Emanuele v Australian Securities Commission (1995) 63 FCR 54 at 69; Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at [290]‑[291]; Public Trustee (Qld) v Octaviar Ltd (2009) 73 ACSR 139 at 192‑193)'
With respect to the expressions "unfairly prejudicial" and "unfairly discriminatory" in s 445D(1)(f)(i), these were considered in Pilot Advisory Pty Ltdv ACN 137 806 574 [2019] FCA 2171 at [85], where reference was made to the observations in In the matter of Connections Total Fitness for the Family Pty Limited (administrator appointed) [2014] NSWSC 75, at [44] that they required:
... a comparison between the return to creditors under the deed and that likely on a winding up, and comparative prejudice suffered by differing groups of creditors. The differential treatment of creditors does not necessarily equate to unfair discrimination or prejudice ... But while a deed of company arrangement may discriminate between creditors or class of creditors, it nevertheless ought to deal fairly with the interests of creditors of an insolvent company and its validity depends on its being reached fairly in the interests of creditors ...
The decision in Pilot Advisory also referred to the observation in Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, that "the test is not merely discrimination but unfair discrimination or unfair prejudice" and that "[i]n order to consider questions of fairness it is necessary to look at the whole of the circumstances and to see if there is overall unfairness in the proposal".
In addition, Karli has referred me to the decisions of Decon Australia Pty Ltf v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 (Decon) at [202] and Sino Group International Ltd & Anor v Toddler Kindy Gymbaroo Pty Ltd(administrators appointed) & Ors (2022) 160 ACSR 56 at [143] to [148].
As these passages emphasise, the test is unfair discrimination or unfair prejudice, with the emphasis being on unfair. Some discrimination is not necessarily unfair. Further, as was stated in Decon at [202], when deciding whether a deed unfairly prejudices or discriminates against a creditor or group of creditors, consideration must be given to what those purportedly prejudiced creditors would receive, or would be likely to receive, on a winding up, and the reasonableness of any conclusions reached by the administrator on that question.
In respect of the exercise of the discretion, there needs to be good reason as to why a court should set aside the resolution, which includes whether the prospects of a better return on liquidation is merely speculative.
Turning then to cl 75‑42 of the second schedule, there are a number of matters to which the court will have regard in reviewing the exercise of a casting vote. These include:
1.whether the proposed deed is opposed by a major creditor, especially when there is a large disproportion between the major debt and other debts;
2.whether the proposed deed is supported by the directors in circumstances where it would deliver some advantage to them;
3.whether creditors who voted in favour of the proposed deed will be prejudiced if the court sets aside the resolution;
4.whether the administrator carried out adequate investigations before exercising the casting vote; and
5.whether the administrator's report contained misleading information.[3]
[3] Adelaide Brighton Cement Ltd v Concrete Supply Pty Ltd (No 4) [2019] FCA 1846 [1229].
Also, there is no general presumption or rule in favour of a majority creditor or the majority in value. The fact that a majority creditor or the majority in value opposed and continue to oppose the deed is a relevant consideration, but it is not decisive.

Principles applicable to an injunction

The parties accept that the general principles applicable to the grant of an interlocutory injunction apply in the circumstances of this case. Those principles were helpfully explained in Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 [7] - [12]. Particular matters which I emphasise for the purposes of this application are that:
1.the two main inquiries are whether Paddington had made out a prima facie case (often described as a serious question to be tried) and whether the balance of convenience favours the grant of the injunction. The phrase 'prima facie case' does not mean that Paddington must show that it is more probable than not that at trial Paddington will succeed. It is sufficient that Paddington show a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial. How strong the probability needs to be depends upon the nature of the rights Paddington asserts and the practical consequences likely to flow from the orders Paddington seek; and
2.as the apparent strength of the applicant's case diminishes, the balance of convenience moves against the making of an order. The grant of an injunction involves balancing the injustice which might be suffered by the defendant if the injunction is granted and Paddington later fails at trial, against the injustice which might be suffered by Paddington if the injunction is not granted and Paddington later succeeds at trial.
In addition to these matters, as was noted in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63; (2001) 208 CLR 199 [11] ‑ [15] and [105], Paddington must be able to show a sufficient colour of a right to final relief in aid of the interlocutory injunction it seeks. Thus, the serious question is directed to the relief sought, not just to the complaints made. A serious question that would not result in the deeds being brought to an end would be unlikely to found an injunction.

Serious question to be tried

I turn now to the specific complaints which Paddington makes.
Karli complains that the complaints are not made with sufficient particularity. While the complaints are presently in a more generalised form, this application has needed to be brought and determined with great urgency. Also, in my view, the core substance of the complaints is discernible.
I will start with Wave Projects.
It is useful to start with the projections made by the administrators and also to describe the nature of the contributions to be made by Karli (pages 550 and 570 of Mr Cheong's first affidavit).
The projected return on liquidation is between a low of nil and a high of 0.2 cents. In coming to this assessment, the administrators ascribed a nil value to insolvent trading claims, which is a core complaint made by Paddington.
On the proposed deed of company arrangement, there is a proposed cash contribution of $1,330,000. There are different classes of creditors. Pool A creditors, who are owed $30,000 or less, receive 50 cents in the dollar. Paddington is the sole Pool B creditor and it receives a fixed sum of $50,000. The Pool C creditor is Wave, who receives $10,000 with the balance of its claim deferred. The remaining creditors are in Pool D, which include the supporting creditors on this application. The Pool D creditors are estimated to receive between 5.6 cents and 5.9 cents in the dollar. On the hearing of the application, counsel for the defendants and for Karli were not able to explain the commercial rationale for imposing on Paddington a fixed return of $50,000, equating to 0.3 cents in the dollar, when all other creditors that have claims above $30,000 (other than Wave) receive a dividend of between 5.6 and 5.9 cents in the dollar.

I will deal first with the complaint raised that goes to how the administrator dealt with potential claims for insolvent trading if Wave Projects was placed into liquidation.
The administrators in their report assess the quantum of such a claim as being in the vicinity of $6.1 million to $12 million (section 7.1.9 of the report) with the prospect that the company was insolvent from January 2023. Further, on the affidavits filed by the supporting creditors, they started experiencing delays in payments by February 2023. Their claims in total add up to $3.66 million. An administration precludes them from bringing their own insolvent trading claim, which they could do with a liquidator's consent under s 588R of the Corporations Act.
The administrators in their report do not suggest that the directors do not have assets available that would allow for at least a material recovery if a claim was brought and successful.
The administrators in their report do not consider whether or not the directors have or may have a viable defence to insolvent trading claims. In that respect, the administrators in their report at 7.1.9 state their opinion that the directors may attempt to rely on the safe harbour provisions, which are contained in Pt 5.7B of Div 3 of the Corporations Act. The administrators then refer to the difficulties of obtaining funding for such a claim and ultimately attribute nil value to the claim.
In essence, Paddington's complaint is that this is misleading to creditors as it suggests that there was a proper basis to attribute a nil value, when in all of the circumstances there was not such a proper basis. Further, Paddington contends that this can reasonably be expected to have been material to creditors in deciding how to vote.
Prior to the second creditor's meeting, Paddington's solicitors wrote to the administrators addressing concerns regarding the attribution of a nil value to the insolvent trading claims. That letter was annexed to a supplementary report. Karli points out that therefore the creditors were aware of Paddington's concerns. However, while the letter was before the creditors, the administrators maintained their view of attributing a nil value and maintained their recommendation to adopt the deed. Thus, creditors may well have understood the administrator's position to be that they had rejected Paddington's assertions.
In my view, on the material before me, there is a serious question that there was not a proper basis for the administrators to form the view that they did regarding the claim for insolvent trading. Further, I also consider that there is a serious question that this can reasonably be expected to have been material to creditors in deciding how to vote. In this respect, I take account of the potential quantum of that claim and that the administrators did not suggest the directors do not have assets available that would allow for at least a material recovery if a claim was brought and successful. This then raises a serious question as to whether there is a real prospect of a greater recovery in a liquidation than under a deed. In my view, there is also a serious question as to whether there is arguably insolvent trading of such gravity that there is a public interest in it being investigated.
I am satisfied that this gives rise to a serious question as to whether or not the relief sought should be granted. I also take account that at paragraph 45 of Mr Cheong's first affidavit, he says to the effect that Paddington will fund the reasonable costs of investigating the insolvent trading claims. As was noted though by Campbell JA in Vero at [118], it would be expected that this be in the form of an undertaking by the time of the final hearing.
Furthermore, in my view there is a serious question that the deed in respect of Wave Projects is unfairly prejudicial to or unfairly discriminatory against Paddington to such an extent that there is a serious question as to whether the deed should be terminated. The deed in effect provides to Paddington as an unsecured creditor a fixed return of $50,000, being 0.3 cents in the dollar compared to a return of between 5.6 cents and 5.9 cents in the dollar to other unsecured creditors. To achieve this end, a special class of unsecured creditors is created by the deed within which Paddington is the only creditor. To illustrate the imbalance of this treatment, the supporting creditors have a total claim of approximately $3.66 million. Their total dividend will be between approximately $205,000 and $216,000. Paddington's claim is for approximately $16.699 million, so about 4.5 times that of the supporting creditors, yet it only receives $50,000.
Also, the benefit to Paddington of the Deed is marginal, given the size of its claim. On a liquidation, it is estimated to receive between nothing and approximately $33,000, while under the deed it gets a fixed sum of $50,000.
As I have indicated, at the hearing counsel for both the administrators and for Karli did not explain the commercial rationale for treating Paddington in the way it is under the deed.
Absent such an explanation, an inference is open that the deed was structured in this way to entice other creditors to vote in favour of the resolution, and to allow for an argument to be put that the return to Paddington on the deed was better than on liquidation, being 0.3 cents, compared to 0.2 cents. While that might be a legitimate tactical approach to be taken by Karli as the proponent of the deed, it does not alter its affect on Paddington and its capacity to be unfairly prejudicial to, or unfairly discriminatory against, Paddington.
In my view there is a serious question as to whether this discrimination is of such a magnitude as to be unfairly prejudicial to, or unfairly discriminatory against, Paddington. This prejudice is of potentially sufficient magnitude that there is a serious question whether it warrants termination of the deed.
For these reasons, therefore, I am satisfied that there is a serious question to be tried that Paddington will obtain the relief sought at trial in respect of Wave Projects.
I turn then to Wave.
I will start with the projections made by the administrators and also to describe the nature of the contributions to be made by Karli (pages 450 and 469 of Mr Cheong's first affidavit).
On a liquidation, the estimated return to unsecured creditors is between 4.9 and 5.2 cents. This on the basis of a nil value being ascribed to insolvent trading claims.
Under the proposed deed, Karli will provide a cash contribution of $70,000 and what is described as a Document Contribution to Paddington of $303,655. Under the proposal, the pool A creditors, who are those with claims of $30,000 or less, will receive 50 cents in the dollar. Pool B is a special class of creditor of which Paddington is the only creditor. It receives a fixed return of $900,000 equating to 5.4 cents in the dollar. The Document Contribution is estimated at $303,655, which equates to 1.8 cents in the dollar, thus a total of 7.2 cents in the dollar. The remaining unsecured creditors will receive between 10.8 and 25.1 cents in the dollar. Again, it is not clear why Paddington was dealt with differently to other creditors, although the extent of the differentiation is not as significant as with Wave Projects. I will return to the issue of the Document Contribution.
The complaints which Paddington makes regarding Wave are principally directed to the sale agreement and the assessment by the administrators that Wave was not insolvent.
Dealing first with the sale agreement, Paddington in effect complains that it was entered into with undue haste and it is arguable that it was entered into by the administrators and also the directors of Wave in contravention of their duties. I do not have the sale agreement before me. On the information before me, it was entered into by or under the authority of the administrators and therefore the transaction is not voidable if Wave was to be wound up - see s 588FE(2B).
The complaint arises in circumstances where expressions of interests were sought by an advertisement placed in the Australian Financial Review seeking that those expressions of interest be submitted within two business days and on the basis that the interested parties would need to fund wage costs during any due diligence period. Such an approach at least has the risk that it substantially reduces the pool of interested parties. However, on the information before me, it is not possible for me to assess the strength of any claim that might arise from the entering into of that agreement.
In relation to the insolvency of Wave, the administrators expressed the view that it was not insolvent, having regard to a payment arrangement being made by it with the Commissioner of Taxation.
Paddington points out though that such an arrangement does not alter the date on which the debts fell due (see Clifton (Liquidator) v Kerry J Investment Pty Ltd t/as Clenergy [2020] FCAFC 5). Paddington also points out that the need for Wave to enter into such an arrangement itself demonstrates it was unable to pay its debts as and when they fell due. The haste with which the sale agreement was entered into also is a factor relevant to the assessment of insolvency.
Taking into account these factors, it seems to me there is a serious question as to whether the administrators did not have a proper basis to conclude that Wave was not insolvent at any relevant time and that there is therefore a serious question that the creditors were mislead in this respect. I consider that the creditors being mislead as to whether or not Wave was trading while insolvent does give rise to a serious question as to whether this can reasonably be expected to have been material to creditors in deciding how to vote and whether there is a real prospect of a greater recovery in a liquidation than under a deed.
However, that does not mean that there is a serious question that the deed ought be terminated. The administrators in their report also expressed the preliminary view that the directors were able to rely on the safe harbour provisions.
The nature of the claims themselves would possibly be a maximum of between $300,000 to $400,000, so they are potentially not insignificant when compared to the contribution of $70,000 in cash to be made by Karli under the deed.
Further, Paddington contends that because the administrators incorrectly formed the view that Wave was solvent, this then infected their view that there were not any insolvent transactions that might be voidable by a liquidator of Wave, with the result that the creditors were not properly apprised as to the nature and extent of any such claims that might be available to a liquidator.
A further factor to consider is the potential for an error as to insolvency to then affect the assessment of the safe harbour defences, as they are interrelated.
Reflecting on these matters in total, I do consider there is a serious question to be tried as to whether or not the deed ought be terminated, although I do not consider it to be as strong as with Wave Projects.
Turning then to the documents. Under the deed, Karli is to procure Wave International to provide certain documents to Paddington. As I understand the position, Wave Projects says it engaged Wave International to prepare the documents in respect of work that Wave Projects was doing for Paddington, and Wave International claims a lien over them. Paddington contends it is entitled to the documents.
The deed defines the documents as being the Document Contribution. Clause 14.1(a)(ii) of the deed provides that Karli will procure Wave International to provide Paddington with the Document Contribution on the basis that Paddington will have no claim or cause of action whatsoever against Karli or Wave International arising from, or in relation to, the Document Contribution. Paddington does not agree to receive the documents on this basis and this clause was not negotiated with it.
I raised with the parties during the hearing whether the deed could properly contain a clause operating as a release by a creditor of entities other than the subject company. In fairness to the parties, this is a concern I raised and was not the subject of submissions. That being so, there was no ready answer to my query. It is not presently clear to me whether or not such a clause is effective and if it is not effective, what consequential impact there is to the deed. While in reply, the supporting creditors did refer me to the decision of the High Court in Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11; (2010) 240 CLR 509, there was not any substantial argument as to how that decision might apply to the precise terms of the Wave deed. Given that, I will not address this further, except to say it is another factor to consider in the exercise of the discretion whether to grant the interlocutory injunction sought.
I should also say that the arguments at the hearing focused predominantly on whether the deed should be terminated, the consequence of that being that each company is taken to have passed a special resolution that the company be wound up voluntarily - see s 446AA of the Corporations Act.
I do consider that for the same reasons that I have given for there being a serious question to be tried that the deeds ought be terminated, there is a serious question to be tried as to whether the resolutions ought be set aside. The serious question as to there not being a proper basis for the views expressed and the serious question that Paddington is unfairly prejudiced by or unfairly discriminated against by the Wave Projects deed are such that they are capable of giving rise to a serious question as to whether the resolutions ought be set aside, having regard to the factors outlined in Adelaide Brighton.
I turn then to the question of the balance of convenience. There are some general observations I will make which are applicable to both companies.
The principal matters relied upon by Paddington are that if the injunction is not granted, then in effect their claims are either defeated or their prospects of success substantially eroded. In this respect, the deeds of company arrangements each provide that effectuation is to occur today. Clause 12.5 of the Wave Projects deed provides that upon effectuation, the claims of creditors are released. Further, cl 16.6 of the deed provides that upon termination of it, cl 12.5 survives. The net effect of these provisions is that if the deed is terminated, the releases are still effective. Similar provisions apply under the Wave deed - see cls 11.5 and 15.6. Upon effectuation, creditors' trusts are created and the creditors' rights arise under the trusts. It is not clear to me why this approach was thought necessary or appropriate, however I am not able on the information before me to assess whether or not it is appropriate or prejudicial.
A principal matter raised by Karli as to prejudice is that if the effectuation steps are not carried out within the time prescribed, so that is today, then the respective deeds are no longer capable of being carried into effect.
I will start with the relevant clause in respect of Wave Projects, which is cl 15.1. It provides for certain steps to occur 'subject to any contrary order of the court, as soon as reasonably practicable following satisfaction of the Conditions Precedent and in any event no later than three business days after the Effective Time'. Clause 15.4(a) then provides that at the same time as completion of all the effectuation steps in cl 15.1 the deed will be automatically effectuated and, in effect, the administration then comes to an end and the control of the company returned to the directors.
Karli submits that the manner in which cl 15.1 operates is that if the relevant steps do not occur within three business days after the effective time, then the deed in effect comes to an end as that is the only way in which those steps can be brought into effect. The administrators do not embrace this argument. Karli accepts though that it does not have a unilateral right to terminate if the steps are not completed in time, that being set out in the letter from Karli's solicitors, dated 11 July 2023 to the administrators.
Clause 15.1 is to be contrasted to a condition precedent - in this respect see the analysis in Cheshire and Fifoot's Law of Contract (12^th Aust ed, 2023) at [20.1] - [20.8].
This itself is evident from the words of the clause, which expressly refer to the conditions precedent to the deed. Plainly the parties did not regard cl 15.1 as a type of condition precedent. Further, the matters required to be effected are all within the control of the parties to the deed, so there is no suggestion that they cannot be brought into effect.
In my view, when regard is had to the terms of the clause, putting to one side for the moment the words 'subject to any contrary order of the court', it does not operate in a way that brings the deed to an end if the effectuation of the relevant matters is delayed. It may enliven a right, and I emphasise may, to seek to apply to vary the deed or have it terminated under the provisions of the Corporations Act, however it is not self‑operative in the sense that the deed immediately comes to an end if those steps are not carried out in time.
In this respect, a point made quite forcefully by the supporting creditors is that there is no reference in the creditors' reports to such a result. In my view, the significance of this is that it effects the interpretation of the deed. That is, the deed is to be interpretated with an understanding of what was put before the creditors. What was put before the creditors did not suggest that such a clause would have that self‑determining operation.
In my view, the introductory words of the clause 'subject to any contrary order of the court' reinforce that interpretation. Considering that the releases operate immediately upon effectuation and then survive termination, in my view the introductory words to the clause illustrate that the parties recognise there may be the need for an order of the court that either extends the time for performance or restrains performance, so as to avoid that immediate effect.
Further, cl 15.2(b)(ii) of the Wave Projects deed requires a party to notify the other parties if they become aware that an effectuation step has not been satisfied or is not capable of being satisfied. The requirement to do so envisages that the deed does not come to an end because a step is not capable of being satisfied. This further reinforces my view that the effectuation clause does not operate in the way contended for by Karli.
The position in respect of Wave is slightly different because there is no condition precedent. However, bearing that in mind, I do not think that alters the position primarily for the reasons that I have just given in respect of Wave Projects. The clauses are otherwise substantially the same. Further as I understand it, Karli has the ability to control Wave International, so the relevant steps are not outside the parties' control and Karli is ready today to hand over the documents. Also, in respect of Wave, the position contended for by Karli is not a result that it would seem the parties intended. For example, if the Document Contribution was delayed through no fault of Karli, it is not immediately apparent that the parties intended that the deed was no longer capable of being fulfilled.
Therefore, I do not accept the submissions made on behalf of Karli in this respect. I do note though this is an interlocutory ruling based on the material before me and arrived at within the urgency in which this application had to be heard and considered.
There is an obvious prejudice to the creditors, in that distribution is delayed by the grant of an injunction. However, it is possible for this matter to be listed for hearing in either August or September this year, so the delay should not be extensive, depending on the time needed to prepare reasons. So, my best estimate is the prejudice may only be a matter of months.

From Karli's perspective, its strong preference is for the deeds to be concluded today. However, that is a preference only. The explanation given for that preference is to allow the directors of Wave and Wave Projects to pursue their new ventures with 'clear air'. There is however in the material before me no commercial imperative from Karli's perspective.
In terms of the companies themselves and the administrators, the companies are now in effect shells. They are not operating and have no staff. There is no suggestion that the costs of them remaining under the deed of company arrangements will be excessive if they are not returned to the directors immediately as envisaged by the deeds.
Another matter to address is whether there has been any delay in bringing the application for interlocutory relief. The resolutions were passed on 6 July 2023, and Paddington was informed on 7 July 2023 at 11.50 am that the deeds had been executed and also that Karli would not agree to extend out the time for effectuation. Proceedings were brought within an hour and an urgent injunction hearing listed for that afternoon, at which an interim injunction order was made and the matter listed for hearing on 10 July 2023 (which was the next business day). Further, Paddington was entitled to consider and get advice on what had happened at the meetings before deciding what to do. There is no delay.
I deal now with each company separately.
In respect of Wave Projects, I consider there is a serious question to be tried which, on the material before me, is of some strength. The manner in which the deed operates is that if the injunction is not granted, Paddington's rights fall into the creditors' trust. The prejudice to creditors from the grant of the injunction is not overly significant if the matter can be heard and determined urgently. There is no substantive prejudice to the defendants and Karli's desire to complete the transaction today is not due to any particular commercial imperative. I am of the view that the balance of convenience favours the grant of an injunction. In addition, in exercising my discretion I also take account that there are currently unexplained matters, which on their face call for explanation, in particular the rationale for treating Paddington in the manner in which it is treated by the deed. Taking into account all of these matters, I am of the view that it is appropriate to grant the interlocutory injunction. However, I am only prepared to grant such injunction until further order. The orders sought seek that it apply until the hearing and determination of the matter. In my view, that is too rigid. Further, the injunction should allow for the parties to come back in the event that the circumstances change between now and the hearing. I will grant leave to the parties and to Karli to apply to vary or discharge the injunction on giving at least one business day's notice to each other of their intention to do so.
In respect of Wave, I consider there is a serious question to be tried, although I do not consider it to be as strong as with Wave Projects. However, the prejudice from the grant of the injunction is not overly significant if the matter can be heard and determined urgently. And, as with Wave Projects, if the injunction is not granted, Paddington's rights fall into the creditors' trust. There are also matters that call for further explanation, in particular whether the proposed position regarding the Document Contribution is effective and if not, what is the consequence. Taking account of all of these matters, I am of the view that it is appropriate to grant the interlocutory injunction. However, as with Wave Projects, I am only prepared to grant such injunction until further order. Further, the injunction should allow for the parties to come back in the event that the circumstances change between now and the ultimate hearing. I will grant leave to the parties and to Karli for leave to apply to vary or discharge the injunction on giving at least one business day's notice to each other of their intention to do so.
My preliminary view is that the costs on the injunction hearing should be reserved, preferably to be dealt with by the trial judge.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CA
Associate
17 JULY 2023