Re Green (as voluntary administrators of Bevillesta Pty Ltd) - [2011] NSWSC 417

Supreme Court

New South Wales

Medium Neutral Citation: In the matter of Bevillesta Pty Limited (In Voluntary Administration) Application under Corporations Act: Martin John Green and Peter Paul Krejci as Voluntary Administrators of Bevillesta Pty Limited (ACN 008 428 162) [2011] NSWSC 417
Hearing dates: 11 and 13 April 2011, 17 May 2011, 9 June 2011
Decision date: 10 June 2011
Jurisdiction: Equity Division - Corporations List
Before: Bergin CJ in Eq
Decision:
Directions given

Catchwords: [CORPORATIONS] - Application by Administrators for directions - nature of proceedings - proposal for Deed of Company Arrangement and Creditors' Trust Deed - ASIC Regulatory Guide - Status of Guide - whether "compelling commercial or legal reason" for structure exists - whether such reason may be gleaned from factors other than proposer's intentions - whether reason needs to be "compelling".
Legislation Cited: Corporations Act 2001 (Cth)
Trustee Act 1925 (NSW)
Cases Cited: Parkview Constructions Pty Ltd v Tayeh and Others [2009] NSWSC 186; 71 ACSR 65
Ansett Australia Ltd and Others (all admin apptd) and Korda and Another (as admin) (2002) 40 ACSR 433
Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) (2003) 47 ACSR 391
Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612
Editions Tom Thompson Pty Ltd v Pilley (1997) 24 ACSR 617
Gray v BNY Trust Company of Australia Limited (Formerly Guardian Trust Australia Limited) (2009) 76 NSWLR 586
In Re Dartnell; Sawyer v Goddard [1895] 1 Ch 474
Krejci as liquidator of Eaton Electrical Services (2006) 58 ACSR 403
Re J W Murphy & P C Allen; Re BPTC Ltd (In liq) (1996) 19 ACSR 569
Re Open Telecommunications Ltd (subject to Deed of Company Arrangement) [2003] NSWSC 1198
Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115
Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427
Young v Sherman (2002) 170 FLR 86
Category: Principal judgment
Parties: Martin John Green and Peter Paul Krejci as Voluntary Administrators of Bevillesta Pty Limited (Plaintiffs)
Representation: Counsel:
C Harris SC (Plaintiffs)
F Assaf (Australian Securities and Investments Commission)
RD Marshall (Top Ryde Funding Pty Limited)
Solicitors:
Colin Biggers & Paisley (Plaintiffs)

File Number(s): 2011/99655

Judgment

By Originating Process filed on 28 March 2011 the plaintiffs, Martin John Green and Peter Paul Krejci as Voluntary Administrators of Bevillesta Pty Limited (the Company), seek orders under s 447A of the Corporations Act 2001 (Cth) (the Act) that s 447D(1) of the Act operates in respect of the Company to enable the Court to give certain directions. The plaintiffs also seek an order under s 447D(1) that the plaintiffs would be justified in putting to the meeting of creditors of the Company to be convened pursuant to s 439A(1) of the Act the Deed of Company Arrangement (DCA) and associated Creditors Trust Deed (the Trust Deed) in the form provided to the Court and making a recommendation to the creditors that it would be in their interests for the Company to execute the DCA and the Trust Deed.

The proceedings were heard on 11 and 13 April 2011 when Mr C Harris SC appeared for the plaintiffs. On 11 April 2011 leave was granted to Mr F Assaf, of counsel, to make submissions as amicus curiae instructed by the Australian Securities and Investments Commission (ASIC). On 13 April 2011 leave was granted to Mr RD Marshall, of counsel, to make submissions on behalf of Top Ryde Funding Pty Limited (the Funder). Judgment was reserved on 13 April 2011 and the matter was listed on 17 May 2011 for delivery of judgment. On that day Mr Harris made an application that the delivery of judgment be deferred because of some recent events, the relevance of which the plaintiffs had not had time to properly assess. The delivery of the judgment was deferred and the matter was listed on 9 June 2011. On 9 June 2011 Mr Harris called evidence outlining the recent events (referred to later) and I once again reserved my judgment.

Background

The Company was registered on 20 February 1962. It is the registered proprietor of the land on which the Top Ryde Shopping Centre is constructed. On 16 February 2011 the plaintiffs were appointed Administrators of the Company. On the same day Receivers were appointed pursuant to a fixed and floating charge given under a Syndicated Note Facility Deed between the Company and a number of banking institutions (the syndicated banks). Clause 2 of that Deed provides that the banks' recourse to the Company is limited to the ability of the Company to be indemnified from the assets of the trust that "compose or relate to" the Top Ryde Shopping Centre. The plaintiffs have received advice that the syndicated banks would not be entitled to prove in the winding up of the Company.

Mr Krejci has investigated the affairs of the Company and has formed the view that it does not have any assets beyond those to which the syndicated banks have recourse under the Syndicated Note Facility Deed with the result that if the Company were to go into liquidation, the unsecured creditors would receive nothing. The Report as to Affairs prepared by the director of the Company shows the total non-related unsecured debts as approximately $2.5 million. There are three contingent creditors who have commenced proceedings against the Company and a fourth creditor who has made a claim that is yet to be quantified. However, it would appear that the additional claims would amount to at least $3.4 million.

The first meeting of creditors took place on 28 February 2011. The plaintiff, Mr Krejci, advised the meeting that the syndicated banks had significant claims against the Company under a limited recourse construction loan facility in respect of a debt of approximately $700 million provided to the Company for the development of the Top Ryde Shopping Centre. It was also noted that the limited recourse construction loan meant that any loss that the syndicated banks suffered on the sale of the asset could not be claimed against the Company. There have been communications between the plaintiffs' solicitors and the solicitors for the syndicated banks for the purpose of reaching some certainty that the recourse of the banks is so limited. It has not been possible because the banks have reserved their positions.

The former director of the Company, Mr Beville, addressed the meeting and advised that: the Company had suffered significant cash flow difficulties in the previous three years; the construction of the shopping centre was completed within the construction budget but the leasing process was proving to be quite difficult with the necessity for extra financial incentives to prospective tenants; the economic situation following the global financial crisis had resulted in the greater need for those financial incentives; and it is generally accepted that this particular type of development needs to be retained for three years after completion to maximise the value of the asset.

On 10 March 2011 the plaintiffs received the draft DCA and Deed from the solicitors for the Deed proposer, the Funder. After reviewing those documents the plaintiffs' solicitors replied on 14 March 2011 in terms that included the following (the response to which dated 21 March 2011 is included in italics):

I have looked at the draft documents and whilst I appreciate they do not represent your client's final position, I have serious concerns with them. To assist me would you please give consideration to the following and let me have your responses.

1. I note the company is not trading. What is the justification for a Creditor's Trust in those circumstances? I attach a copy of ASIC's Guideline with respect of Creditor's trusts. In my view, given the guideline, it is very important that a coherent and cogent justification be provided for the use of a Creditor's Trust.

The DoCA being proposed by our clients is somewhat unique in that it offers 100c in the dollar. Given this fact, the size of the business being operated by the Company and the nature of the various claims against the Company, our client expects that the finalisation and payment of creditors' claims will take a lengthy period of time. For example, we are aware of at least 2 litigation claims against the Company (which you are currently investigating). Adjudicating on these claims for dividend purposes will likely take considerable time and may also involved (sic) disputes about the adjudication decision. Our clients do not want the Company subject to DoCA throughout that lengthy process and wish to retain control of the Company free from its creditors so it can be used for other purposes if our clients so choose (bearing in mind the receivers and managers are not appointed to the entire Company but only to the assets of the John Beville (Bankstown Trust).

The parties continued negotiations in respect of the wording of the DCA and the Deed until these proceedings were commenced. Those negotiations continued throughout the proceedings and further drafts of the DCA and the Deed have been provided to the Court. Mr Krejci's affidavit evidence included the following:

29. I have seen financial accounts of the Company for previous years which indicate that it has accumulated tax losses of approximately $185m as at 30 June 2010, and the director of the Company, to whose control the Company will be returned on execution of the deed of company arrangement, may want to be able to obtain the benefit of those losses, and may consider that he would be better able to protect them from any action the banks might take by utilising a creditors' trust, but this is speculation on my part and, on the facts known to me, I cannot see any advantage to him in adopting this course which would not be available if the payments, intended to be made by Top Ryde Funding Pty Limited, were made pursuant to a deed of company arrangement instead of an associated creditors' trust.

30. However, subject to the matters referred to in the next paragraph, the proposed creditors' trust deed would provide repayment of 100 cents in the dollar to unsecured creditors in circumstances where, as set out above, it is my belief that there would be no distribution to them at all if the Company went into liquidation. The expected 100 cents in the dollar distribution to creditors is however a best case scenario. While a 100 cents distribution is better than what the creditors could otherwise expect to receive from the liquidator, there are circumstances covered at clause 4.2 of the Creditors Trust Deed in which it has identified that creditors would receive no distribution.

After referring to three contingent claims Mr Krejci continued:

32. In all the circumstances, it therefore seems to me that the ordinary unsecured creditors are likely, should the deed fund of $2.5M be provided, to receive a dividend at or close to 100 cents in the dollar and certainly significantly more than they would if a liquidation were to occur. In that regard I have undertaken my investigations for the purpose of the preparation of the section 439A report into any potential clawback actions. Whilst, if I were appointed liquidator, I would conduct further investigations, I have not been able to find any potential "clawback" action which might arise by operation of Part 5.7B or Sections 180 to 183 inclusive of the Corporations Act which might give rise to a claim against the directors, any potential preferential creditors or any other entity. I have also undertaken an analysis of the assets which are caught by the charge .. and it appears to me none of the Company's assets are available to the ordinary unsecured creditors so that if the Company were to go into liquidation, ordinary unsecured creditors would receive, in my view, nothing.

Nature of the application

An administrator may apply to the Court for directions about a matter "arising in connection with the performance or exercise of any of the administrator's functions and powers": s 447D. This entitlement is in substance the same as that afforded to liquidators under s 479(3) of the Act: Editions Tom Thompson Pty Ltd v Pilley (1997) 24 ACSR 617 at 624. It is a non-adversary proceeding: Re J W Murphy & P C Allen; Re BPTC Ltd (in liq) (1996) 19 ACSR 569. However the Court's discretion to allow interested parties to take part in the proceedings either on a limited or wider basis is not fettered by the nature of the proceeding. It will depend on the circumstances of the individual case as to whether such leave is granted. In this instance ASIC was granted leave to appear as amicus curiae, however its submissions referred to below seemed more adversarial than disinterested or friendly. I also allowed the Funder to appear on a limited basis to tender an amended draft Creditors' Trust Deed and to make submissions.

The "well-established principle" is that the Court will not give directions approving of a commercial/business decision well within an administrator's power where there is no challenge to it or other issue arising in relation to it such as the propriety or reasonableness of the exercise of the power: Re Ansett Australia Ltd and Others (all admin apptd) and Korda and Another (as admin) (2002) 40 ACSR 433 at 451. However it is appropriate to give directions to provide guidance to the administrator on matters of law or principle or to protect the administrator against accusations of acting unreasonably: Sanderson v Classis Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117.

Proposed DCA/Creditors Trust Deed

The proposed DCA is between the Company, the Administrators and the Funder. The "Background" section of the DCA records matters including that upon termination of the DCA, the creditors' claims against the Company will become claims against the Trust Fund. The "Trust Fund" is defined as the assets held by the Trust and the "Trust" is defined as the creditors' trust established under the "Trust Deed". The "Trust Deed" is defined as the deed to be executed substantially in the form annexed to the DCA.

In a further draft tendered during the hearing, it is proposed that a condition precedent to the execution of the DCA and the Trust Deed is the execution of a Deed of Undertaking by the Funder and the payment of $2.5 million to be held on trust.

Although the initial draft DCA allowed the Funder to be repaid distributed amounts in certain circumstances, that proposal has now been abandoned. It is intended that the $2.5 million (referred to as the "First Deed Contribution") be available to creditors under the Trust Deed. The "Interim Dividend" ($1.25 million) is defined as a dividend paid in accordance with clause 7.1 of the Trust Deed, that is after the 12 month anniversary of the execution of the DCA and the Trust Deed. The "Final Dividend" is defined as the distribution from the Trust Fund by which the Admitted Beneficiaries receive a final dividend of not less than 100 cents in the dollar on their Admitted Claims but less any amount paid to those Admitted Beneficiaries as part of the Interim Dividend.

The "Purpose and objects" section of the DCA reflect part of s 435A of the Act in that it provides as follows:

The purposes of objects of this Deed are to provide for the business, property and affairs of the Company to be administered in a way that:

(a) maximises the chances of the Company, or as much as possible, its business continuing in existence, or if this is not possible provides the best return for Creditors and a return that is better than would result from an immediate winding up of the Company; and

(b) provides for the implementation of the Trust Deed.

The DCA will continue in operation unless terminated pursuant to any of its clauses or by order of the Court. The DCA provides that upon execution of the Trust Deed, the DCA will immediately terminate. The "Available Assets" (available to satisfy the Admitted Claims) comprise: (i) the First Deed Contribution ($2.5 million);(ii) the Security Deposit ($115,000) which the Trustees acknowledge under the Trust Deed has already been paid; and (iii) payment by the Funder to the Trustees of any further amount over and above the First Deed Contribution and the Security Deposit as is necessary to ensure that: (A) the reasonable remuneration and expenses of the Deed Administrators and Trustees is paid in full; (B) Admitted Beneficiaries receive 100 cents in the dollar for Admitted Claims.

The payment of the additional amounts are only to be made following the determination of all admissible proofs by the Trustees and after written demand has been made for that amount from the Trustees to the Funder, giving the Funder not less than 21 days from the date of the demand to pay the required amount: cl 3(b) of the Trust Deed.

On and from the termination of the DCA the Trustees are to hold and deal with the Available Assets in accordance with the Trust Deed and distribute the Available Assets and the Trust Fund in accordance with the terms of the Trust Deed. The day-to-day control of the Company is to return to the director of the Company at the date of the DCA and the DCA is to bind every creditor.

Upon the termination of the DCA (on the basis of the execution of the Trust Deed):

(a) the Company will be released from all Claims of Creditors;

(b) the Claims of the Creditors against the Company are forever extinguished and shall become a claim against the Trust Fund in accordance with the provisions of the Trust Deed, including that each Creditor will be entitled to lodge a claim under the Trust Deed in accordance with the Trust Deed;

(c) Creditors agree to be bound by the Trust Deed;

(d) Creditors must accept their entitlements under this Deed in full satisfaction and complete discharge of all Claims which they have or claim to have against the Company as at the Appointment Date (provided that any Creditor's right to claim under insurance held by the Company shall not be prejudiced as a result) and each Creditor will, if called upon to do so, execute and deliver to the Deed Administrators or the Company such forms of release of any such claim as the Deed Administrators or the Company require;

(e) Creditors acknowledge that the release, discharge and covenants contained in clauses 10 and 11 of this Deed are fundamental to the provision of the Available Assets to the Trust Fund and that but for them, the Funder would not have agreed to provide the Available Assets.

The Trust Deed is between the Funder, the plaintiffs as Deed Administrators of the Company and the plaintiffs as Trustees of the Bevillesta Creditors' Trust Deed. The present draft includes the following:

7. Distribution of Trust Funds

7.1 Interim Dividend

(a) Within 1 month after the Anniversary the Trustees may pay the Interim Dividend Amount, or such part of the Interim Dividend Amount that the Trustees see fit, to the First Admitted Beneficiaries pari passu, having regard to the amount of each of the First Admitted Beneficiaries' Admitted Claims.

(b) Any Trust Beneficiaries who are not First Admitted Beneficiaries as at the Anniversary will not be entitled to participate in the Interim Dividend.

7.2 Final Dividend

(a) The Trustees shall pay the balance of the Admitted Claims, which have not been paid as a result of the Interim Dividend, as a Final Dividend and are not entitled to make interim distributions of the Trust Fund other than in payment of any amounts referred to in clauses 4.2(f), 7.a, 7.3(a) and 7.3(b) of this Deed.

(b) Subject to clause 10.5 of this Deed, the Trustees can pay the amounts referred to in clauses 7.3(a) and 7.3(b) of this Deed as and when they see fit.

(c) Subject to clause 7.2(d) of this Deed, the Trustees must declare and distribute the Trust Fund as soon as practicable.

(d) The Trustees shall not be required to make any distributions from the Trust Fund in accordance with 7.3 of this Deed unless they are satisfied that they have sufficient assets in the Trust Fund to do so.

7.3 Order of distribution of the Trust Fund

The Trustees shall distribute the Trust Fund in the following order:

(a) firstly, in reimbursement and payment of the Deed Administrators' and Trustees' remuneration, fees, costs and expenses pursuant to the Corporations Act, the DOCA and this Trust Deed including for the avoidance of doubt in their capacity as administrators of the Company;

(b) second, in payment of all Employee Entitlements;

(c) third, as an Interim Dividend to the First Admitted Beneficiaries; and

(d) fourth, as a Final Dividend to the Admitted Beneficiaries.

7.4 Claims of Admitted Beneficiaries rank equally

The Admitted Claims of any Admitted Beneficiaries referred to in clause 7.3 of this Deed will rank equally between themselves.

7.5 Eligible Employees

Any Eligible Employees will be entitled to a priority at least equal to what they would have been entitled if the Trust Fund were applied in accordance with sections 556, 560 and 561 of the Corporations Act.

...

7.8 Applications to the Court under the Trustee Act

If the Trustees choose to make an application to the Court pursuant to section 63 of the Trustee Act or any other law:

(a) the Trustees will provide the Funder with 14 days notice in writing before making any such application; or

(b) if any such application is required to be made on an urgent basis, the Trustees will provide the Funder with no less than 48 hours notice in writing of their intention to make any such application.

...

9. Trust Claims

9.1 Admissibility and adjudication of Trust Claims

(a) Upon termination of the DOCA all Claims of Creditors against the Company shall extinguish and shall become Trust Claims against the Trust Fund pursuant to this Deed.

(b) The Trustees shall call for formal proofs of debt in support of any Trust Claims from Trust Beneficiaries pursuant to those parts of the Corporations Act and Corporations Regulations incorporated into this Deed by clause 9.2 of this Deed for the purpose of deciding whether to admit that Trust Claim pursuant to this Deed as an Admitted Claim.

(c) Interest shall not accrue or be payable on any Trust Claim from the Appointment Date.

(d) A Trust Beneficiary has 21 days from being notified of the Trustees' decision under clause 9.1(b) of this Deed to file with the Court and serve on the Trustees any appeal or other application in relation to the Trustees' decision. The Trustees will not pay a Final Dividend until the Court appeal or application has been determined.

(e) Only Admitted Beneficiaries are entitled to participate in any Interim Dividend or Final Dividend and the Trustee shall reject any proof of debt for a Trust Claim which is not an Admissible Proof or to which clause 9.6 of this Deed applies and shall ignore that Trust Claim for the purpose of calculating the value of the Admitted Claims and the amount of the Interim Dividend or Final Dividend.

(f) The rights of the Admitted Beneficiaries are limited to the Trust Fund.

9.2 Application of the Corporations Act

Section 544 and Subdivisions A, B, C, D and E (other than sections 563B and 564) of Division 6 of Part 5.6 of the Corporations Act, Corporations Regulations 5.6.37 and 5.6.39 to 5.6.72 (inclusive and other than Corporations Regulations 5.6.43A, 5.6.54 and 5.6.70A) of the Corporations Regulations are incorporated into this Deed and the Trustees and Trust Claims under this Deed, as if they were fully set out herein and as if:

(a) references to the liquidator were references to the Trustees;

(b) references to winding up were references to the operation and performance of this Deed;

(c) references to creditor were references to Trust Beneficiary; and

(d) references to the court were references to Court as defined in this Deed.

9.3 Trustees to notify Funder

(a) The Trustees must notify the Funder in writing of any decision made by them pursuant to clause 9.1 of this Deed in relation to:

(i) whether a Trust Beneficiary has lodged an Admissible Proof in accordance with this Deed; and

(ii) the amount that the Trustees have admitted a Trust Beneficiary to prove for as part of the Interim Dividend or the Final Dividend,

within 7 days of any such decision being made.

(b) The Funder may challenge any decision made by the Trustees under clause 9.1 of this Deed in relation to the matters set out in clause 9.3(a) of this Deed by making an application to the Court within 21 days from the date of the notification in clause 9.3(a) of this Deed for a declaration or other relief from the Court about the matters set out in clause 9.3(a) and (b) of this Deed and/or whether the Trustees have made their decision under clause 9.1(b) of this Deed consistent with the requirements of this Deed.

(c) If the Funder makes an application to the Court pursuant to clause 9.3(b) of this Deed, the Trustees will not take any steps to pay a Final Dividend until the Court has determined the application (including any appeals) and Trust Beneficiaries will have no ability to compel the Trustees to pay a Final Dividend until the Court has determined the application (including any appeals).

(d) The Trustees must not pay any dividend for a Trust Claim until at least 21 days after the notification in clause 9.3(a) of this Deed.

9.4 Court proceedings

In relation to any Court application or appeal in accordance with clauses 9.1(d) or 9.3(b) of this Deed or regulation 5.6.53(2) of the Corporations Regulations:

(a) the Trustees and the Trust Beneficiaries acknowledge and agree that, in view of the payments made by the Funder pursuant to this Deed, the Funder has a legitimate commercial interest in the outcome of any such Court application or appeal;

(b) the Trust Beneficiaries will join the Funder as a party to any Court application or appeal; and

(c) in the event that the Funder does not file a submitting appearance in any such Court application or appeal, the Trustees will have no right of indemnity out of the Trust Fund for their legal fees incurred in defending such Court application or appeal.

9.5 Register of Admitted Beneficiaries

(a) The Trustees shall maintain a register of Admitted Beneficiaries including, but not limited to, a register of distributions made by the Trustees to the relevant Admitted Beneficiaries.

(b) The Register maintained by the Trustees under clause 9.5 of this Deed shall be made available for inspection by the Funder within 24 hours of a request being made by the Funder to the Trustees.

9.6 Abandonment and release of Trust Claims

Despite anything contained in the Corporations Act or Corporations Regulations to the contrary, a Trust Beneficiary will have abandoned and released, and will be taken for all purposes to have abandoned and released, all Trust Claims and all other entitlements (if any) in the Trust Fund if:

(a) an Admissible Proof for that Trust Claim has not been lodged with the Trustees within 30 days from the date this Deed is executed by all parties to it, in the form required by the Trustees; or

(b) that Trust Claim has been rejected by the Trustees (including as a result of any Court application pursuant to clauses 9.1(d) or 9.3(b) of this Deed).

...

The Trustees are able to resign at any time by giving not less than 14 days prior written notice to the Funder. The Trustees must resign if the Admitted Beneficiaries resolve to remove the Trustees and appoint new Trustees: clause 12.1-12.2. The Trust and the Trust Deed terminate immediately upon the payment of the Final Dividend.

The ASIC Guide

The ASIC Regulatory Guide 82 entitled "External Administration: Deeds of company arrangement involving a creditors' trust: A guide for registered liquidators appointed under Part 5.3A" (the Guide) was issued in May 2005. The Guide purports to explain ASIC's "interpretation of the administrators' obligations under s439A, 445F and 1292(2) and the general law" and the information that ASIC considers is "material" to creditors and should therefore be disclosed to them when a DCA proposal involves a creditors' trust: [2]. ASIC issued the Guide to outline its views on the then "relatively recent" and "increasing" practice of the use of creditors' trusts in DCAs because it was concerned that administrators appeared not to be aware of or not properly considering all the relevant issues raised by the use of such trusts: [3]-[4].

ASIC warns that the use of creditors' trusts creates special risks for creditors and in some cases may be "an abuse" of the Part 5.3A process or be otherwise contrary to the public interest: [6]. Although it is noted that the Guide is not intended to be comprehensive and does not describe ASIC's views about how administrators should perform all their relevant duties and functions, it warns that if an administrator asks creditors to vote on a DCA proposal involving a creditors' trust and fails to follow the Guide in a material respect, ASIC may seek orders from the Court against the administrator and/or make application to the Companies Auditors and Liquidators Disciplinary Board for cancellation or suspension of the administrator's status as a registered liquidator: [8]-[10].

The Guide explains that a creditors' trust is a mechanism to accelerate a company's exit from external administration and typically involves deeds pursuant to which a trust entity is created and the company's obligations to creditors bound by a DCA are compromised and transferred to the trust. It also explains that the company and/or third parties promise to make payments or transfer property to the trustee in satisfaction of the creditors' claims against the company and in return the creditors' rights against the company are extinguished: [1.1]-[1.3]. The trustee and the new trust then become solely responsible to the former creditors of the company: [1.4]. It also explains that a DCA is terminated on the execution of the trust deed and the directors regain full control of the company: [1.5]-[1.6].

The Guide refers to the "special risks" for creditors in such an arrangement as including the extinguishment of their rights against the company before the amount for distribution has been ascertained or received by the trust and before any amounts are received by the creditors from either the administrators or the trustees: [1.7-[1.8]. It also refers to the prospects of creditors having "less (or no) legal rights" if the DCA proposal is not fully complied with by all parties. It also refers to the prospect of creditors agreeing to DCA proposals without informed consent: [1.8].

The Guide includes the following in relation to administrators' obligations in evaluating a proposal for a creditors' trust:

1.11 Before submitting any DCA proposal to creditors, administrators should consider whether there is a proposal suitable for submission. For example, it will rarely be appropriate for an administrator to submit to creditors a DCA proposal where the administrator does not have sufficient concrete details to comply with all their disclosure obligations: see paragraphs 1.15-1.18.

1.12 Where the DCA proposal involves a creditors' trust, administrators should specifically consider whether such a mechanism is appropriate in the company's circumstances. We think this includes considering whether the DCA proposal (if accepted) may be an abuse of Part 5.3A or otherwise contrary to the public interest. If so, it may be appropriate for the administrator to seek directions from the court before submitting the DCA proposal to creditors.

1.13 It has been asserted to ASIC that s435A (particularly paragraph (a)) always justifies the use of creditors' trusts in DCAs.

Note: Section 435A states that the object of Part 5.3A is for the business, property and affairs of an insolvent company to be administered in a way that:

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

(b) if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

1.14 In our view, s435A does not justify in a DCA every kind of mechanism that would produce one of the outcomes referred to in that section. We consider that any mechanism intended to achieve one of those outcomes should only be included in a DCA if it is:

(a) in the interests of creditors as a whole;

(b) in accordance with the purpose and policy of Part 5.3A; and

(c) consistent with the public interest.

Note 1: We consider, for example, that it is likely to be an abuse of Part 5.3A or otherwise contrary to the public interest for a DCA to involve a creditors' trust where:

(a) there is no proper and compelling legal or commercial reason why the continued existence of the company or its business could not be achieved under a DCA that does not involve a creditors' trust. This includes cases where the underlying reason for using a creditors' trust is to circumvent the effect of s450E(2); or

(b) the DCA proposal contemplates that the company would or could (after the DCA has been effectuated in accordance with its terms) continue in existence in an insolvent financial condition See Report No 45, General Insolvency Inquiry , Australia Law Reform Commission, 1988 (the Harmer Report), vol 1, page 62-3.

Note 2: See also Sydney Land Corp P/L v Kalon P/L (1998) 26 ACSR 427 at 430; Young v Sherman (2002) 170 FLR 86; Bovis Lend Lease P/L v Wily (2003) 45 ACSR 612; Blacktown City Council v Macarthur Telecommunications P/L (2004) 47 ACSR 391.

The Guide also refers to administrators' obligations to disclose all material information to the creditors that will enable them to understand a DCA proposal and appreciate the legal and practical implications for them of authorising the company to execute the proposal: [1.18; 2.2]. Where a DCA proposal involves a creditors' trust, administrators are said to have an obligation to provide information that enables creditors to understand the actual and potential implications and specific risks for them of the proposed creditors' trust arrangements including whether they are likely to receive a better return under the particular DCA proposal, under a DCA that does not involve a creditors' trust, or under a winding up: [2.3]. The Guide explains that much of this information will describe the administrators' understanding of the law and should therefore be based on legal advice received by them that is applicable to the particular DCA proposal: [2.4]. It is also suggested that by reason of the additional complexity of a DCA proposal involving a creditors' trust, creditors should be given adequate opportunity, if they wish, to obtain professional advice about the proposal, its implications and risks before they vote on the proposal: [2.5].

The Guide records that administrators should provide an explanation to the creditors of the reasons why the DCA proposal involves a creditors' trust instead of a DCA where creditors' claims and rights would be dealt with directly under the DCA and the Act, including identification of any legal or commercial reasons and a discussion of why it is considered to be in the interests of creditors as a whole to use the proposed creditors' trust: [2.7]-[2.8]. There are numerous other areas referred to in the Guide in respect of which it is said that administrators should provide explanation and information to the creditors including: the anticipated sequence and relative timing of key events; the anticipated return to creditors/beneficiaries under the proposal; details relating to the proposed trustee; remuneration and anticipated expenses of the administrator and proposed trustee; how the creditors' claims against the company will be dealt with under the proposal and in what priority; a comparison of the protections and rights that creditors would have under the Act compared to those they would have as beneficiaries of the proposed trust; the detail of the enquiries made about the capability of the company and any relevant third-party to comply with their obligations under the proposal and the information the administrators received in response thereto with the administrators' opinion as to whether such compliance is likely; and whether they have formed the opinion that the company would be solvent at the date of the termination of the DCA: [2.7]-[2.27].

The Guide is categorised as a "Regulatory Guide". It is a policy document to which the Court will have regard in a particular case, if relevant. However, it obviously does not have any binding effect on the Court. Prior to its publication Hamilton J considered an application similar to the present application before the Court in Re Open Telecommunications Ltd (subject to Deed of Company Arrangement) [2003] NSWSC 1198 and observed at [4]:

The mechanism proposed by the deed administrator is quite ingenious. It is for the adoption of an amended DCA coupled with a creditors' trust deeds. This would remove the sums promised to creditors from the ambit of the DCA to the ambit of a deed of trust. When this is done, the DCA could be discharged; the company would no longer be subject to a DCA; and it is likely that it could be restored to the Stock Exchange Board and the contemplated additional capital sums raised, both to feed the promised amount into a scheme for the creditors and to restore the company to viability. Although this would take the management of the money outside the ambit of the [Act], it would be held and supervised in the creditors' interests according to the general law of trusts and their position would then be thus protected. Even disputes as to entitlement, if they arose, would have a mechanism for their resolution through the provisions of s 63 of the Trustee Act 1925.

In that case his Honour said that the administrator would be justified in executing and giving effect to the arrangement.

Some years later in Parkview Constructions Pty Ltd v Tayeh and Others [2009] NSWSC 186; 71 ACSR 65 Barrett J said:

A comment on creditors' trusts

[73] Mr George referred to Regulatory Guide 82 published by Australian Securities and Investments Commission entitled "External administration: Deeds of company arrangement involving a creditors' trust". He did so for the purpose of suggesting that creditors' trusts are a recognised mechanism available in cases of the present kind. The basic message in Regulatory Guide 82 is, however, one of caution. ...

[74] Paragraphs 1.5 and 1.6 of this summary refers to the matter brought into stark relief by the circumstances in the present case: once the creditors' trust has been constituted and the deed of company arrangement pursuant to which it was established as an independent source of rights and obligations has terminated, the protective mechanisms created by Pt 5.3A cease to apply. The trust and the covenants associated with it are not governed by Pt 5.3A. The various aspects of the court's statutory jurisdiction intended to underwrite the integrity of the Pt 5.3A processes are no longer operative.

[75] A scheme such as the present could have been implemented wholly within a deed of company arrangement. Had that approach been taken so that a deed of company arrangement remained the governing instrument throughout, the supervisory and remedial jurisdiction of the court under ss 445D, 447A and other applicable provisions of Pt 5.3A would have been preserved. In the events that happened, the scheme is being implemented outside Pt 5.3A and creditors are denied those safeguards.

[76] Administrators recommending to creditors the adoption of a deed of company arrangement that will give birth immediately to a creditors' trust and then itself promptly die bear a heavy burden of explaining to creditors the implications of the shift from a regime incorporating a court administered scheme of creditor protection to one in which creditors become passive trust beneficiaries.

Report to creditors

The proposed Report to Creditors under s 439A of the Act (the Report) includes a detailed analysis of the history of the Company's operations and the plaintiffs' opinion that the Company was at the time of their appointment insolvent; that the director did not allow the Company to trade whilst insolvent; and [7.4]:

While it could be argued that the quantum of the unpaid unsecured creditors at the date of appointment could give rise to a doubt, at least, that some of these debts were incurred at a time that the director knew, or should have known, that they would not be paid we are conscious that the proposal to be put to creditors at the upcoming meeting allows for all of these creditors, in a best case scenario, to be paid in full and in circumstances where creditors reject such a proposal and resolve to wind up the Company a future Liquidator would need funding to pursue such a claim which I would categorise in a best case scenario as "speculative".

Although this statement refers to the "best case scenario" of creditors being paid in full, it has to be read with the later warnings provided by the plaintiffs referred to below.

The plaintiffs warn that the creditors should ensure that they read and understand the matters set out in the Report which detail the plaintiffs' "concerns and reservations in respect to the Funder's proposal": [8.2]. However they recommend that the creditors resolve that the DCA as proposed be executed by the Company: [8.2].

The plaintiffs refer to the Funder providing the First Deed Contribution of $2.5 million as a "condition precedent" to the execution of the proposed DCA. I am assuming that the Funder has agreed to amend the Deed of Undertaking to reflect what is said in the s 439A report. The plaintiffs also refer to the Available Assets as being the $2.5 million, the Security Deposit of $115,000 and payment by Top Ryde Funding Pty Ltd of any additional amount required to ensure that all reasonable expenses of the Deed Administrators and Trustees are paid in full and Admitted Beneficiaries receive 100c in the dollar for Admitted Claims. The Report warns that [9]:

Creditors should be aware that there has been no security offered by the Funder or any third party to support the Funder's obligations to top up the Deed Fund if required to do so. In these circumstance ( sic ) we consider that creditors should be sceptical as to whether this additional funding will eventuate and base their decision as to whether to support or oppose the proposal on the assumption that no top up funds will eventuate.

In this regard we point out to Creditors:

(i) The Funder has the same shareholder and Director as the Company.

(ii) The Funder has a paid up capital of only $5.00.

(iii) The Funder could go into liquidation at any time.

(iv) for the above reason the guarantee by the Funder should be treated as largely worthless.

The plaintiffs also warn the creditors that the amounts for the administrators', the deed administrators' and the trustees' costs will be paid out of the available funds in full before Trust Creditors receive any payment: [9(5)]. The plaintiffs also warn the creditors that in relation to the distribution of the Trust Fund [9]:

10. Trust beneficiaries will be considered to have abandoned released all claims against the Trust unless they lodge an admissible proof of debt with the Trustees within thirty days of execution of the Creditors' Trust Deed. It is therefore in all Creditors' interests, if the Funder's proposal is accepted, to review their claims to ensure that they lodge any claim or amended claim upon which they seek to rely within the 30 days period after execution of the Creditors' trust deed.

The Report includes reference to the Guide and its indication that there are "different and additional risks" for creditors where a DCA incorporates a creditors' trust. Those additional risks are identified to include that the DCA will be 'effectuated' and creditors' rights against the Company released before the Trust Fund has been received in full by the Trustee. It also warns that this will occur before the creditors of the company/beneficiaries of the Trust have received any payment and that they may have less legal rights or no legal rights if the DCA proposal is not fully complied with by all relevant parties. The creditors are also referred to Barrett J's abovementioned observations in Parkview Constructions Pty Ltd .

The Report emphasises that the Company will be released from unsecured creditors' claims against it and that the Trustee of the new Trust becomes solely responsible to the former creditors for ensuring that the Funder performs the payment and other obligations to the Trustee; determining how much each of the former creditors is entitled to receive from the Trust and making any distribution to those former creditors. It also advises the creditors that when the DCA terminates the Company ceases to be externally administered, the directors regain full control of it and it is no longer required to use the notification 'Subject to Deed of Company Arrangement' on its public documents.

The Report also includes the following:

10.3 Reasons for the use of a Creditors' Trust

The purpose of the Creditors' Trust is to allow the proposed DOCA to be finalised in the shortest possible time frame.

We have not been provided with a compelling commercial reason why Top Ryde Funding Pty Ltd has included a creditors' trust in their deed proposal. We refer to this issue at section 10.13 of this Report.

...

10.4.1 Approval by Creditors

...

Creditors should be aware that the payment of the final dividend will not be possible until all contingent claims against the company have been settled. Therefore the timing of the payment of the final dividend is uncertain and such payment may not be made for many months or potentially years.

10.4.2 Execution of the Creditors' Trust

Where creditors vote in favour of the Deed, we anticipate that a Trust Deed will be executed at the same time.

....

10.5 Implications for Creditors.

Upon creation of the Creditors' Trust (and receipt by the Trustee of the amounts disclosed above) all creditors claims to be bound by the DOCA will be converted from a right to prove as a creditor in the DOCA in to the right to participate in the Trust Fund.

If the Deed is approved all Creditors' rights against the Company will be released.

Creditors will effectively forgo any rights as against the Company including most probably the ability to terminate the DOCA and wind the Company up

The Report also refers to the priority of the payments that the Trustee will make out of the Trust Fund and in particular warns that in the event that the creditors are not paid 100c in the dollar then payment of their admitted claims will be made to them on a pari passu basis. It refers to the supervision of the Trustees and in particular includes the following: [10.7.2]

The Funder's proposal requires the Trustees to notify the Funder within 7 days of any decision made regarding the admissibility and adjudication of Trust claims. The Funder may challenge any decision made by making an application to the Court within 21 days from the date of notification. The Trustees may not take any steps to pay a dividend until the Court has determined the application.

This provision would not be available to a Funder of a Deed of Company Arrangement which did not include a Creditors' Trust.

The Report reiterates that the creditors should make their decision on the basis that no top up payments will be made and should assume that no top up payments will be received: [10.11] and [10.12]. It also includes the following:

10.13 Summary of Recommendations

As previously discussed, all assets of the Trust are under the control of the Receiver.

Further it is unlikely that the debts of the Banking Syndicate will be repaid in the short to medium term, if ever.

As mentioned at paragraph 11 the Australian Securities & Investments Commission has issued a set of what some may describe as "prescriptive guidelines" that need to be followed by Voluntary Administrators when recommending acceptance by creditors of a Deed of Company Arrangement which incorporates a Creditors Trust.

We have not been persuaded that there is a compelling commercial reason why a creditors' trust is appropriate in this matter, however that is what the Deed proposes and in the best interests of creditors of this Company we need to determine whether the deed is one that, given all that it offers, has our support.

We are cognisant of the guidelines issued by the ASIC regarding creditors' trusts and are generally reluctant to support such a proposal.

We are convinced however that this is a circumstance, where we need to support the proposal as it is in the best interests of creditors, particularly where admitted beneficiaries will receive a dividend of 100c in the dollar in circumstances where the Funder tops up the Deed Fund as required, although creditors should be aware that there has been no security offered by the Funder or any third party to support the Funder's obligation to top up the Deed Fund if required to do, and where the rate of return to creditors if the Company is wound up would be nil .

It is therefore our opinion that it would be in the best interests of creditors for the Company to execute the proposed Deed of Company Arrangement.

10.13.1 Additional Comments Regarding Proposed Creditors' Trusts

For the avoidance of any doubt regarding the use of a Creditors' Trust in this matter I draw creditors' attention to the following provisions of the proposed Creditors' Trust Deed which identify the principal differences between beneficiaries rights in the proposed Creditors' Trust Deed and creditors rights in a Deed of Company Arrangement.

Upon execution of the Creditors' Trust Deed and termination of the Deed of Company Arrangement all claims of creditors against the Company shall be released and shall become Trust Claims against the Trust Fund; In a Deed of Company Arrangement all creditor claims remain claims against the Company until a final dividend is declared and paid;

The Trustees are not authorised to pay an interim dividend until 1 month after the anniversary of the execution of the Creditors' Trust Deed; Deed Administrators may declare and pay interim dividend at any time;

Should Trust Beneficiaries not lodge an admissible proof of debt with the Trustees within thirty days of the execution of the Creditors' Trust Deed their clams will be taken to have been abandoned and released; Creditors in a Deed of Company Arrangement are entitled to be paid a dividend from the Deed Fund prior to the payment of a further dividend, subject to funds being available, pursuant to Corporations Regulation 5.6.68. This is commonly referred to as an "Equalising Dividend";

Trust Beneficiaries have twenty one days from being notified of the Trustees' decision to reject their claim, to file with the Court and serve on the Trustees any appeal or other application in relation to the Trustees' decision. The Trustees will not pay a final dividend until the court appeal or application has been determined; Creditors in a Deed of Company Arrangement have fourteen days from being notified of the Deed Administrators' decision to reject their claim to file with the Court an appeal against the Deed Administrators decision. The Deed Administrators will not pay a final dividend until the court appeal has been determined

The Funder may challenge any decision made by the Trustees to admit a Beneficiary's claim by making an application to the Court within twenty one days of being notified by the Trustees of the decision to admit the claim; There is no such appeal mechanism in a Deed of Company Arrangement;

The Trustees must make a demand on the Funder for payment, within twenty one days, of any additional amount required to enable all Administrators' Deed Administrators & Trustees' costs and disbursements to be paid and for all Beneficiaries to be paid at a rate of 100c in the dollar. Creditors should be aware that a payment of 100c in the dollar to admitted beneficiaries will only be paid in circumstances where the Funder satisfies such a demand and there has been no security offered by the Funder or any third party to support the Funder's obligation to top up the Deed Fund if required to do so; The Funder has paid up capital of only $5.00. Where all or part of a Deed Fund in a Deed of Company Arrangement is to be established from "future funds" a period of time is usually allowed from when the payment falls due to when it has to be paid;

Should the Funder not make such payment the Trustees are authorised to pay a final dividend based on funds held at a rate to be determined; In a Deed of Company Arrangement should promised funds not be received the Deed Administrators will convene a meeting pursuant to Section 445F of the Act at which creditors will determine whether to vary the Deed of Company Arrangement or terminate the Deed of Company Arrangement and wind up the Company;

The funder must consent to any new trustee who is appointed by the admitted beneficiaries; Pursuant to Section 449A of the Act the appointment of a person as Administrator of a Company or of a Deed of Company Arrangement cannot be revoked. Pursuant to Section 449B of the Act on the application of the ASIC, a creditor, a liquidator or a provisional liquidator the Court may remove from office the Administrator of a Deed of Company Arrangement and appoint someone else;

The Funder must approve any variations made to the trust; In a Deed of Company Arrangement the Deed Administrators will convene a meeting pursuant to Section 445F of the Act at which creditors will determine whether to vary the Deed of Company Arrangement;

If the Trustees resign the Admitted Beneficiaries must convene a meeting of Admitted Beneficiaries for the purpose of nominating a replacement Trustee(s); Pursuant to Section 449D when an Administrator of a Deed of Company Arrangement resigns the Court may appoint someone else as the Administrator of the Deed on the application of the ASIC, a creditor, a member or an officer of the Company;

The First Deed Contribution is repayable to the Funder if, prior a final dividend being paid and the Creditors' Trust Deed terminating, the Company is placed into liquidation or a subsequent voluntary administration (other than by the Company's director) or the Creditors' Trust Deed is terminated by Court Order or the admitted beneficiaries pass a resolution terminating the Trust. There is no provision in a Deed of Company Arrangement for a Funders contributions to be repayable.

The Report also compares the difference between the proposed DCA with a Creditors Trust and a liquidation. That section includes the following [11]:

If the Funder makes no further contributions to the Deed Fund there are three possible minimum outcomes for creditors:

If the contingent creditors are not admitted and admitted beneficiaries can expect to receive a dividend of approximately 90c in the dollar.

If the contingent creditors are admitted in full admitted beneficiaries can expect to receive a dividend of approximately 33c in the dollar.

If a Voluntary Administrator or Liquidator is appointed to the Company or the Creditors' Trust Deed is terminated by the Court or the admitted beneficiaries prior to a final dividend being paid admitted beneficiaries will only receive a dividend in circumstances where an interim dividend has already been paid.

In relation to the final point above the Creditors' Trust Deed at Clause 4.2 states that:

"If at any time prior to the Trustees paying a final dividend and this Deed terminating:

one or more of the finance creditors, the OSR or creditors of the Company place the Company or obtain from the Court orders for the Company to be placed into liquidation or administration, the Court orders the Deed to be terminated or the admitted beneficiaries pass a resolution terminating the Deed then the Trustees are required to retain and not distribute the First Deed Contribution or any other amounts received from the Funder pursuant to the Deed until notified in writing by the Funder that the restriction no longer applies.

Further not later than 7 days after written demand by the Funder, the Trustees must repay all funds held, less Administrators', Deed Administrators', & Trustees' time costs, disbursements and legal costs to the Funder".

This means that in circumstances where after the DOCA has been terminated the Banking Syndicate appoints a Voluntary Administrator to the Company or successfully applies to the Court to have the Company wound up the Funder is entitled on providing a written demand to the Trustees to have all funds contributed to that point refunded less Administrators', Deed Administrators', & Trustees' time costs, disbursements and legal costs.

This would result in there being no funds available in the Trust Fund to meet the claims of admitted beneficiaries whose claims against the Company had been released when the DOCA was terminated.

We have asked the Funder to either amend this Clause to include a provision that the director will seek to have any subsequent appointment to the Company set aside prior to any refund being payable or to remove the Clause altogether but this request has been refused.

For completeness I note that the provisions of Clause 4.2 of the Creditors' Trust Deed specifically exclude "members voluntary liquidation" or "a liquidation occasioned by the actions of the Related Creditors or a Related Entity of the Related Creditors".

ASIC:

The ASIC opposed the initial Creditors Trust Deed proposed. The ASIC's concerns were:

No condition precedent to the payment of the First Deed Contribution prior to the Deed of Company Arrangement being executed. This has been amended in a subsequent proposal so that the payment of the First Deed Contribution is a condition precedent.

Repayment of Trust Fund in circumstances where the Company is subsequently wound up or a Voluntary Administrator is appointed. The Funder is not prepared to vary this condition.

The period of time allowed for Trust beneficiaries to lodge admissible claims being only 30 days. The ASIC considers that trust beneficiaries are not adequately protected by the timeframe imposed. The Funder is not prepared to vary this condition.

The Funder can direct the Trustee to resign. This condition has been removed in the subsequent proposal. The Funder still retains the right to agree to any replacement Trustee in circumstances where the Trustees resign.

No security provided by the Funder to support the provision of any further funds required to ensure admitted beneficiaries receive 100c in the dollar.

Recent events

On 5 May 2011 Mr Krejci received an e-mail from the receivers acting in the interests of the syndicated banks attaching a schedule of payments totalling $1.25 million made to some of the creditors. Those creditors had provided services to the Company in respect of the development of the Top Ryde Shopping Centre prior to the appointment date of the receivers.

On 19 May 2011 the plaintiffs wrote to the receivers requesting clarification as to whether the payments were made so that the receivers could continue trading the business of the Company. The plaintiffs also asked the receivers to indicate what, if any, rights the syndicated banks asserted in respect of the payment of $1.25 million. The receivers have not responded to the plaintiffs' letter.

Mr Marshall submitted that there has been a major reduction in the unsecured creditors of the Company by reason of these payments. It is not possible to know whether the payments were made in accordance with the syndicated banks recourse or whether the payments were made in return for an assignment of the unsecured debts that were paid out. The plaintiffs have been unable to ascertain the true position from the receivers.

Mr Harris submitted that the plaintiffs will not know the true position until the next meeting of creditors is held. However he also submitted that there will either be a lesser number of creditors because the syndicated banks have paid out the other creditors or the syndicated banks will also be present at the meeting having taken assignments of the debts of the creditors they paid out. Mr Harris also submitted that the position as it was on 17 May 2011 when judgment was to be delivered "may be better" but it would not be "any worse". That was a reference to the amount of the total debt. It has either remained the same or it has been reduced by $1.25 million.

The plaintiffs will have to assess the position at the time of the next creditors meeting. If the number of creditors is less by reason of the syndicated banks not having taken assignments of those debts then the remaining creditors will be informed of that fact. Alternatively the position will be the same as it was, as at 17 May 2011 except that the syndicated banks will have taken the place of the original unsecured creditors who have been paid out by the receivers.

Should directions be given?

Mr Assaf submitted that ASIC took the view that what was being proposed was an abuse of Part 5.3A of the Act because the proposal seeks to undermine the policy of Part 5.3A. It was submitted that the proposal involves moving from a statutory regime that has protections and procedures in place designed to protect the creditors to a procedure that is not regulated by statute.

It does not seem to me that the proposal is an "abuse" of Part 5.3A. The Guide indicates that administrators in the position of the present plaintiffs must make every effort to make the creditors aware of the special risks that may be encountered should they opt to accept such a proposal. However, it does not suggest that the acceptance of such a proposal is an "abuse" of the Act. Mr Assaf emphasised paragraph 1.14 of the Guide and submitted that the proposal must be in the interests of creditors as a whole; in accordance with the policy and purpose of Part 5.3A; and consistent with the public interest. It was submitted that ASIC's main concern was that there is no compelling commercial or legal reason for the proposal to be implemented. It was also submitted that the Company's desire to be free of the DCA as quickly as possible was not a compelling commercial or legal reason.

Mr Assaf submitted that ASIC was also concerned that the discretion of the trustee was fettered or potentially fettered by the provisions of the Trust Deed. In support of this submission Mr Assaf referred to the report of the Law Reform Commission of Australia on the General Insolvency Enquiry (ALRC 45) (The Harmer Report) in particular to the following recommendation at page 29:

The introduction of a new voluntary procedure for insolvent companies which integrated the procedure for the voluntary winding up of a company and for a scheme of arrangement. The procedure proposed was designed with the aim that it would be:

capable of swift implementation

as uncomplicated and inexpensive as possible and

flexible, providing alternative forms of dealing with the financial affairs of the company.

It was submitted that the plaintiffs were taking up Court time and not really acting in accordance with Part 5.3A. It was submitted that the Court should not be troubled by these types of applications because Part 5.3A was designed to avoid them. It was also submitted that "these quite exotic type arrangements" involving trust structures fall foul of Part 5.3A.

On the second day of the hearing Mr Assaf indicated that ASIC neither consented to nor opposed the relief sought by the plaintiffs. However there were some concerns that he wished to highlight including ASIC's concern with clause 9.6 in respect of the abandonment and release of trust claims. In this regard Mr Assaf referred to regulation 5.6.68. Under clause 9.6 there is a 30 day time limit whereas under regulation 5.6.68 there is no such time limit. Mr Assaf conceded that this was a matter that the plaintiffs intended to point out to the creditors in the Report and then reiterated that there was no compelling commercial or legal reason why such a proposal was being put forward. He also emphasised the loss of the supervisory and remedial jurisdiction of the court under s 445D and 447A for the termination of a deed.

Counsel for the Funder, Mr Marshall, submitted that the Court should not entertain this application because it seeks an intrusion into the territory of commerciality into which the courts are or should be loathe to trespass. It was submitted that this is really a decision for the plaintiffs with all their experience to exercise judgments in working out whether or not to propose the DCA and the Trust Deed to the creditors.

When Mr Marshall was asked whether it was possible to advise the Court of the purpose of the proposal he said (tr 66):

My instructions are that Bevillesta wishes to, for want of a better expression, clean up its balance sheet and remove some creditors and deal with the situation without those creditors and is prepared the people that I act for are prepared to pay for that privilege. I can't put it any other way. It's a business decision your Honour.

Mr Marshall indicated that there would not be any security for any additional funds by way of "top up" being advanced (tr 66).

I do not agree with ASIC's criticisms of the plaintiffs for taking up the Court's time with this application. There are strict time frames within which administrators have to investigate the affairs of a company and report to the creditors. It is perfectly understandable that the plaintiffs have some anxiety about recommending a proposal that they obviously regard to be in the best interests of the Creditors as a whole, but in respect of which neither the Company nor the Funder has provided to them what has been described in the Guide as a "proper and compelling legal or commercial reason" for the particular structure. It is difficult to understand why ASIC would criticise the plaintiffs in this way, particularly having regard to the fact that the Guide makes specific reference to seeking directions from the Court in these very circumstances: [1.12]. It must also be remembered that the Guide makes a rather unveiled threat that it might seek to have administrators suspended from practice or worse still, barred from practice if the administrators fail to follow the Guide in any material respect in relation to the recommendation of a proposal for a DCA with a Creditors' Trust Deed: [8]-[10]. I am satisfied that the plaintiffs are justified in bringing this application.

The Object of Part 5.3A of the Act is as follows:

435A Object of Part

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

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

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

The various obligations imposed on administrators under Part 5.3A of the Act include the convening of meetings of the company's creditors to appoint a committee of creditors who will consult with the administrator about matters relating to the administration of the company and receive reports from the administrator: s 436E, s 436F. The committee may make reasonable requests of the administrator to report to it about matters relating to the administration.

There are no such statutory processes available to the beneficiaries of a trust. However subject to the specific provisions of the trust deed, beneficiaries are entitled to seek and be provided with information as to the amount of the trust property: In Re Dartnell; Sawyer v Goddard [1895] 1 Ch 474 (CA); and to inspect trust documents in certain circumstances: Gray v BNY Trust Company of Australia Limited (Formerly Guardian Trust Australia Limited) (2009) 76 NSWLR 586. If a trustee refuses to provide information or grant access to documents, a beneficiary is able to seek relief from the court under the general law of trusts. As Hamilton J pointed out in Re Open Telecommunications Ltd (subject to Deed of Company Arrangement) , there are avenues available to the trustee to obtain advice from the Court under the Trustee Act 1925 (NSW). However beneficiaries are only able to make an application under s 63(10) of the Trustee Act as a consequence of the trustee seeking advice. There is no independent entitlement under s 63 of the Trustee Act for the beneficiaries to seek relief from the Court. A point made by ASIC was that the statutory regime under Part 5.3A of the Act is far more efficient.

Under Part 5.3A of the Act the administrator has the control of the company's business, property and affairs and has broad discretionary powers similar to those given to liquidators and receivers. The administrator's role was described by Barrett J in Krejci as liquidator of Eaton Electrical Services (2006) 58 ACSR 403 as follows:

[9] This emphasis the point that a Pt 5.3A administrator is both a fiduciary and an "officer" within the s 9 definition of that term. The latter status attracts the statutory duties in Pt 2D.1.

[10] A Pt 5.3A administrator occupies a position in which there arises an obligation to act in the interests of others. The administrator supplants the other decision making organs of the company while the administration continues and obtains sole jurisdiction over the company's property: ss 437A - 437F. The administrator's task is to promote the object stated in s 435A ... The task is thus one of administrating and applying the company's property for the benefit of others.

...

[12] It is an incident of a fiduciary's duties that he or she must subordinate personal interests to those of the person or group whose interests are to be served. Any profit derived from the fiduciary office without the informed consent of the person or group concerned may not be retained. A related aspect of the expectations to which fiduciaries are subject requires that they not put themselves in a position where their duties conflict with their interests.

Under the proposed arrangement of the DCA and the Trust Deed the creditors become beneficiaries of the Trust that is created and the Trustee will have fiduciary obligations to the beneficiaries. It seems to me that one of the "safeguards" that Barrett J may have had in mind in Parkview Constructions was the creditors' capacity to make an application under s 445D of the Act to terminate the DCA: s 445D(1)(c). There is no such safeguard available to the beneficiaries under the Trust Deed. There is also a "safeguard" contained in s 437E of the Act. The Court may order compensation to the Company or to any other person as a result of loss or damage caused by the administrator or other person entering into a transaction on behalf of the Company.

Should the present proposals be adopted by the creditors, Part 5.3A of the Act will no longer apply to the Company. The Company will be able to trade without the debts that are presently the subject of the creditors' claims. If the creditors agree to the proposal, their claims against the Company will be extinguished and their only recourse is as beneficiaries of the Trust to be created. There is no doubt therefore that the safeguards that may exist under Part 5.3A of the Act will not be available to the creditors who then become beneficiaries of the Trust. The law of trusts will govern the relationship between the Trustee and the beneficiaries in respect of any claims that, if admitted, will be converted to an entitlement to a distribution of the Trust Fund.

The section of the Guide that appears to have triggered the plaintiffs' application is repeated here for convenience:

1.14 In our view, s435A does not justify in a DCA every kind of mechanism that would produce one of the outcomes referred to in that section. We consider that any mechanism intended to achieve one of those outcomes should only be included in a DCA if it is:

(a) in the interests of creditors as a whole;

(b) in accordance with the purpose and policy of Part 5.3A; and

(c) consistent with the public interest.

Note 1: We consider, for example, that it is likelyS to be an abuse of Part 5.3A or otherwise contrary to the public interest for a DCA to involve a creditors' trust where:

(a) there is no proper and compelling legal or commercial reason why the continued existence of the company or its business could not be achieved under a DCA that does not involve a creditors' trust. This includes cases where the underlying reason for using a creditors' trust is to circumvent the effect of s450E(2); or

(b) the DCA proposal contemplates that the company would or could (after the DCA has been effectuated in accordance with its terms) continue in existence in an insolvent financial condition See Report No 45, General Insolvency Inquiry, Australia Law Reform Commission, 1988 (the Harmer Report), vol 1, page 62-3.

Note 2: See also Sydney Land Corp P/L v Kalon P/L (1998) 26 ACSR 427 at 430; Young v Sherman (2002) 170 FLR 86; Bovis Lend Lease P/L v Wily (2003) 45 ACSR 612; Blacktown City Council v Macarthur Telecommunications P/L (2003) 47 ACSR 391.

None of the cases mentioned in Note 2 to paragraph 1.14 of the Guide relate to a DCA with a creditors' trust. Sydney Land Corp Pty Ltd v Kalon P/L (1997-1988) 26 ACSR 427 was a case in which Young J, as Young JA then was, considered whether a DCA was unfair to one of the creditors, the plaintiff in those proceedings. Young v Sherman (2002) 170 FLR 86 was a case in which it was sought to terminate a DCA on various grounds including that a premium had been offered to creditors and was an improper inducement. Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 was an application to set aside the purported appointment of an administrator of a company that was a subcontractor to the plaintiff together with a claim for declaratory relief in relation to the status of that company. Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391 was a case in which it was held that although there may have been theoretical benefits to the creditors, the DCA had been used to "stave off" proceedings in the District Court and forestall the obvious and inevitable fact of insolvent winding up of the company: [21]-[23].

Although these cases did not involve a DCA with a creditors' trust, they each focus on the importance of the statutory regime under Part 5.3A and the protections or advantages provided to creditors including; the capacity for investigation of the company's affairs including investigating the directors' conduct: Young v Sharman per Davies AJA at [92]; Bovis v Wily at [189]; the capacity to seek relief from the Court to terminate the DCA; Sydney Land Corp P/L v Kalon P/L at 429; and the regulation of the administrators' conduct: Bovis Lend Lease P/L v Wily.

ASIC's opinion in Note 1 to paragraph 1.14 of the Guide that it is "likely to be an abuse of Part 5.3A or otherwise contrary to the public interest" where the DCA proposal contemplates that the company would or could (after the DCA has been effectuated in accordance with its terms) continue in existence in an insolvent financial condition needs no further explanation. The other opinion in the Note that it is "likely to be an abuse of Part 5.3A or otherwise contrary to the public interest" for a DCA to involve a creditors' trust where there is no proper and compelling legal or commercial reason why the continued existence of the company or its business could not be achieved under a DCA that does not involve a creditors' trust, needs further analysis. It is not in the same category as using the statutory regime that is designed in part to prevent insolvent trading to achieve the opposite result.

The Guide does not expressly explain why ASIC used the expression "compelling" commercial reason. In its role as regulator ASIC would obviously be keen to ensure that a company in administration does not escape the rigours of the statutory regime under Part 5.3A without proper reasons. However where administrators are put on notice that failure to comply with the Guide may put their professional futures at risk, it would be prudent to provide for more flexibility so that the administrators can exercise their commercial judgment without the need to seek directions from the Court. It seems to me that if there is a "sound", but not "compelling", commercial reason that persuades the administrators that in all the circumstances, it is in the best interests of the creditors to adopt a DCA with a creditors trust deed to obtain a better return than from an immediate winding up of the company, the administrators should be able to recommend such a proposal to the creditors without having to seek the Court's imprimatur. Such ability is subject to the "heavy burden of explaining to creditors the implications" of adopting such a proposal: Parkview Constructions Pty Ltd v Tayeh and Others at [76].

It will not be an abuse of Part 5.3A to recommend such a structure where it is consistent with the objects outlined in s 435A of the Act . Obviously if such a structure were intended to achieve a result that enabled the Company to trade on insolvently, it would be an abuse, but where the purpose of the structure is not to achieve such a result, albeit that it may be very risky for the creditors to adopt it, it does not seem to me to be an "abuse" of Part 5.3A if they do so with informed consent.

The DCA in the present case survives only until the Trust Deed is executed. It is not intended that the Company's business will provide any property out of which the creditors will be paid. Rather the Company will continue on, debt free, and the former creditors will have no recourse to the Company should it trade on profitability. As I have already said the creditors, as beneficiaries under the Trust Deed will be dependent upon the Funder adhering to its promise to pay the "top up" and of course, not going into liquidation. The creditors will be giving up any right to make an application to terminate the DCA because the DCA will be terminated almost immediately on the execution of the Trust Deed. An application to the Court of the kind made in Sydney Land Corp P/L v Kalon Pty Ltd is predicated on the basis that a DCA is extant. That will not be the case should the creditors resolve to enter into the DCA and the Trust Deed.

The plaintiffs have candidly disclosed to the Court and in the draft Report the fact that they have not been provided with a "compelling" commercial reason for the choice of structure. However there is a sound commercial imperative or reason that the plaintiffs have identified as warranting their proposed recommendation to the creditors to adopt the proposal notwithstanding that the Company and the Funder have not provided a compelling commercial reason for the structure. It is that the creditors stand a chance of receiving something under the Trust regime whereas they stand no chance of receiving anything under the liquidation regime. This position may have to be reassessed once the true basis upon which the receivers for the syndicated banks paid the $1.25 million to the creditors is known.

However where creditors stand a chance of receiving something under a structure that is somewhat controversial and prima facie unsafe (the DCA and Trust Deed) but nothing under a structure which is conventional (liquidation under the Act) there seems to me to be a commercial reason that may present as "compelling" and if not certainly "sound". I am satisfied that the plaintiffs have discharged the "heavy burden" of explaining to the Creditors in the draft Report the implications of the shift from the statutory regime and have appropriately drawn attention to the differences between the regime under the Act and the proposal for the DCA with the Trust Deed.

Subject to the plaintiffs ascertaining the position of the debts paid out by the receivers for the syndicated banks and including an explanation of that position, I am satisfied that the plaintiffs would be justified in recommending to the creditors that they adopt the proposal on the basis set out in the draft Report to Creditors. Subject to that I make the orders in paragraphs 1, 2 and 5 of the Originating Process.

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Decision last updated: 10 June 2011

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Citations

Re Green (as voluntary administrators of Bevillesta Pty Ltd) [2011] NSWSC 417

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Medium Neutral Citation:	In the matter of Bevillesta Pty Limited (In Voluntary Administration) Application under Corporations Act: Martin John Green and Peter Paul Krejci as Voluntary Administrators of Bevillesta Pty Limited (ACN 008 428 162) [2011] NSWSC 417
Hearing dates:	11 and 13 April 2011, 17 May 2011, 9 June 2011
Decision date:	10 June 2011
Jurisdiction:	Equity Division - Corporations List
Before:	Bergin CJ in Eq
Decision:	Directions given
Catchwords:	[CORPORATIONS] - Application by Administrators for directions - nature of proceedings - proposal for Deed of Company Arrangement and Creditors' Trust Deed - ASIC Regulatory Guide - Status of Guide - whether "compelling commercial or legal reason" for structure exists - whether such reason may be gleaned from factors other than proposer's intentions - whether reason needs to be "compelling".
Legislation Cited:	Corporations Act 2001 (Cth) Trustee Act 1925 (NSW)
Cases Cited:	Parkview Constructions Pty Ltd v Tayeh and Others [2009] NSWSC 186; 71 ACSR 65 Ansett Australia Ltd and Others (all admin apptd) and Korda and Another (as admin) (2002) 40 ACSR 433 Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) (2003) 47 ACSR 391 Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 Editions Tom Thompson Pty Ltd v Pilley (1997) 24 ACSR 617 Gray v BNY Trust Company of Australia Limited (Formerly Guardian Trust Australia Limited) (2009) 76 NSWLR 586 In Re Dartnell; Sawyer v Goddard [1895] 1 Ch 474 Krejci as liquidator of Eaton Electrical Services (2006) 58 ACSR 403 Re J W Murphy & P C Allen; Re BPTC Ltd (In liq) (1996) 19 ACSR 569 Re Open Telecommunications Ltd (subject to Deed of Company Arrangement) [2003] NSWSC 1198 Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427 Young v Sherman (2002) 170 FLR 86
Category:	Principal judgment
Parties:	Martin John Green and Peter Paul Krejci as Voluntary Administrators of Bevillesta Pty Limited (Plaintiffs)
Representation:	Counsel: C Harris SC (Plaintiffs) F Assaf (Australian Securities and Investments Commission) RD Marshall (Top Ryde Funding Pty Limited) Solicitors: Colin Biggers & Paisley (Plaintiffs)
File Number(s):	2011/99655