Re Switch Telecommunications Pty Ltd (in liq); ex parte Sherman

[2000] NSWSC 794

Reported Decision: (2000) 35 ACSR 172

New South Wales

Supreme Court

CITATION:	Switch Telecommunications Pty Limited (in liq) & 1 Ors; ex parte Steven John Sherman and Peter Murray Walker [2000] NSWSC 794 revised - 15/08/2000
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 2506/00
HEARING DATE(S):	29/05/00, 31/05/00, 05/06/00, 10/07/00
JUDGMENT DATE:	10 August 2000
PARTIES :	In the matter of Switch Telecommunications Pty Limited (in liquidation) (ACN 073 878 716) and Switch Operations Pty Limited (in liquidation) (ACN 082 988 850) and the Corporations Law Steven John Sherman and Peter Murray Walker (Plaintiffs)
JUDGMENT OF:	Santow J

COUNSEL :	M Oakes, SC (Plaintiffs)
SOLICITORS:	Kemp Strang (Plaintiffs)
CATCHWORDS:	CORPORATIONS — Means of binding creditors to a pooling of assets and liabilities in a liquidation of two companies where affairs so intertwined they could not be separated and where creditors of each company could not be identified save that they were creditors of one or other — How may dissentients and non voting creditors be bound in absence of s411 scheme where this uneconomic — Use of s510 of Corporations Law and s1322 remedial orders — Alternative of s447A in combination with a compromise approved under s477(1)(c) and s477(2A) of Corporations Law — scope of s447A — are dissentients bound.
LEGISLATION CITED:	Corporations Law Pt 5.1, Pt 5.3A, Pt 5.5, s249, s411, s446A, s447A, s477, s479, s506, s507; s510, s511, s555, s1322
CASES CITED:	In re Albert Life Assurance Company (1871) LR 6 Ch App 381 Re Arrowfield Group Ltd (1995) 13 ACLC 1187 Australasian Memory Pty Ltd v Brien (1997) 149 ALR 393; (1998) 45 NSWLR 111; [2000] HCA 30 Re Austcorp Tiles Pty Ltd (1992) 10 ACLC 62 ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Re Bank of Credit & Commerce International SA (No 3) [1993] BCLC 106 and on appeal [1993] BCLC 1490 Bank of Upper India v Arif Husain AIR 1931 Allahabad 59(2) Bulfin v Bebarfald’s Limited (1938) 38 SR(NSW) 423 Re Charter Travel Co Ltd (1997) 25 ACSR 337 Re Contal Radio Ltd [1932] 2 Ch 66 Dean-Willcocks v Soluble Solution Pty Ltd (1997) 42 NSWLR 209 Re E D White Ltd (1929) 29 SR(NSW) 389 Re Farmers’ Freehold Land Co Ltd (1892) 3 BC(NSW) 39 Re Marra Developments Ltd (1976) 1 ACLR 470 Mentha v G E Capital Ltd (1997) 27 ACSR 696 MYT Engineering Pty Ltd v Mulcon Pty Limited (1997) 25 ACSR 78 Re Robinson & the Trustee Act 1925 [1983] 1 NSWLR 154 Setco Manufacturing Pty Ltd v Sifa Pty Ltd (1982) 7 ACLR 327 Taylor v Morris [1993] BCLC 1343 Re Trix Ltd [1970] 3 All ER 397
DECISION:	Compromise approved with pooling arrangement.

REVISED — 15 August, 2000
IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 2506/00
In the matter of SWITCH TELECOMMUNICATIONS PTY LIMITED (in liquidation) (ACN 073 878 716) and SWITCH OPERATIONS PTY LIMITED (in liquidation) (ACN 082 988 850) and the Corporations Law
STEVEN JOHN SHERMAN and PETER MURRAY WALKER
Plaintiffs
JUDGMENT

10 August 2000

Table of Contents
Page
INTRODUCTION
FACTUAL CIRCUMSTANCES
ANALYSIS OF LEGAL ISSUES
The s447A/477 alternative
Arrangement under s510 of the Corporations Law
History of s510
The procedure
Summing up
INTRODUCTION

1    What happens when two companies, no longer in administration, are to be wound up, whose affairs are so intertwined, that it is not possible reliably to identify which creditors belong to which nor which assets or liabilities? Can a valid arrangement be made binding all such creditors, present or not, to participate in a combined pool of assets and liabilities, with realisations, costs and distributions shared in an equitable manner? All that is known reliably is that the creditors belong to one or other of the two companies as do the assets and liabilities. 2 The answers are not without complexity. But in the end I am satisfied that s510 of the Corporations Law with appropriate remedial orders under s1322(4) does provide such a means, and without the cost and complexity of a formal creditors’ scheme of arrangement under s411 of the Corporations Law. This is at least so where, as here, those creditors who turn up vote unanimously in favour of the arrangement. This is because the same result would follow — a special resolution unanimously in favour of the arrangement — had those creditors been able to vote separately, as creditors for the particular company. But if the level of dissent were minor, it may well be open to the Court to allow validation under s1322(4). However, that is a question I do not need to determine on this occasion. Because this is a not uncommon situation not fully explored by the cases, I have set out in some depth the basis for that favourable conclusion. In so doing, I have had the advantage of the extensive researches of Counsel for the Applicant, Mr Oakes, SC, to which I acknowledge my indebtedness. 3 These questions underlie an uncontested application by the liquidators of Switch Telecommunications Pty Ltd (In Liq) ("TEL") and Switch Operations Pty Ltd (In Liq) ("OPS") for such orders as may be necessary to combine the realisations, costs and distributions to creditors of both companies. This is a process known as “pooling the liquidations”. Both companies have passed into liquidation following the appointment of the liquidators as administrators under Part 5.3A of the Corporations Law. Thus, by operation of Corporations Law s446A(2) they are to be treated as having been wound up voluntarily.

FACTUAL CIRCUMSTANCES

4    The factual background to the application is that when the liquidators were appointed as administrators of each company they were informed that TEL operated a telephone business and OPS was dormant. After appointment, the administrators discovered that OPS was also an operating company. There were two businesses being operated, described as the "telephone business" and the "interlink business". There was a sale agreement under which OPS acquired the interlink business from a company known as Frame Relay Pty Ltd. Employees had moved on and the liquidators were unable to obtain any substantial assistance from the former employees concerning the structure of each company and how the businesses operated. 5    Specifically the liquidators were unable to obtain any useful information on the following:

(a) Why OPS operated no independent bank account. All receivables and payments for both businesses were conducted through a bank account operated by TEL.

(b) Why employees of both businesses were employed the OPS. TEL had no employees.

(c) The respective roles of TEL and OPS in relation to the operation of each of the telephone business and the interlink business.

(d) The indebtedness owing by OPS to TEL of $41,724,223 recorded in the management accounts of each company.

(e) Why TEL issued invoices for the interlink business apparently operated by OPS.

(f) How the credit balance in the TEL bank account of approximately $3.3 million was to be apportioned between TEL and OPS given the apparent mixing of funds.

6    The liquidators conducted their administration on the basis that the telephone business was an asset of TEL and the interlink business was an asset of OPS. They realised the assets of each business. In January 2000 the liquidators located amongst the records of the companies various documents, the purported effect of which was to record a sale as at 29 June 1998 of the telephone business by TEL to OPS for a consideration of $38 million. This allowed reconciliation of $39,404,464 of the inter-company loan accounts, but still left unexplained $2,319,759. 7    The liquidators considered, and I find, that the affairs of both TEL and OPS are so blended as to render it impractical to keep them separate for the purpose of finalising the liquidation of each of them. Specifically I accept:

(a) The liquidators are unable to apportion how the $3.3 million credit balance in the TEL accounts should be apportioned between TEL and OPS, and are uncertain that the results of any attempted apportionment would be accurate.

(b) It is not clear, despite the documentation, whether the telephone business and the interlink business were operated respectively by TEL and OPS or whether each was operated solely by one company or the other.

(c) There is confusion as to whether the creditors are creditors of one company or the other. Whilst an allocation of creditors can be done by reference to a business, given the way the affairs of the companies were conducted, there is no certainty that any creditor is creditor of a particular company. The only certainty is that each creditor is a creditor of one or other of OPS or TEL (or both of them).

(d) The liquidators are unable to reconcile the balance of the loan account owing by OPS to TEL.

ANALYSIS OF LEGAL ISSUES

8    Given this state of affairs, the liquidators approached the Court for orders to facilitate a pooling. Two alternatives were initially canvassed. The first was orders utilising Corporations Law s447A, permitting the pooling and thus to create a basis for use of the court-approved compromise or arrangement power in Corporations Law s477(1)(c) and s477(2A), in conjunction with the directions power in Corporations Law s479(3). This was in substance the approach taken in Re Bank of Credit & Commerce International SA (No 3) [1993] BCLC 106 (Nicholls VC) and on appeal [1993] BCLC 1490, but without recourse to any UK equivalent of s447A. The second alternative was orders facilitating an arrangement under Corporations Law s510, rendered binding on all creditors by special resolution. 9 After argument, I indicated a preference for utilising Corporations Law s510, an approach which appeared to be the safest course, yielding the least number of legal hurdles. The Corporations Law s447A approach can be left to a case when there may be no other alternatives available. However, I will make some observations on the Corporations Law s447A approach as used to facilitate approval of a compromise under s477(1)(c) with s477(2A) and then endorsed by suitable Court direction under s479(3) to the liquidator sanctioning that course. Section 447A provides that, “the court may make such order as it thinks appropriate about how this Part [5.3A] is to operate in relation to a particular company”. Section 477(1)(c) permits a liquidator to “make any compromise or arrangement with creditors” without creditor vote whilst s477(2A) requires Court approval where the debt compromised is $20,000 or more.

The s447A/477 alternative

10    In Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 213 and 216, Young J held that pooling could be effected in exceptional circumstances by recourse to Corporations Law s447A calling in aid court directions to the liquidator under s511 (s479 not being available save for a court winding up where the liquidator is amenable to such direction as a court appointee). But this was because, without dissent, the relevant resolution was passed whilst the companies were still under administration at the same time as the resolution to wind up, so that Pt 5.3A and thus s447A were still applicable. The company having passed from administration to liquidation is deemed by s439A and s439C to be under a voluntary winding up. Young J did not attempt to use s447A to have s439C operate as if the winding up were court-approved. This he would have had to do if he had sought to rely on a court-approved liquidator’s compromise under s477(1)(c) and s477(2A). He pointed out that a scheme of arrangement under Corporations Law s411 could have been safely utilised, but would involve not inconsiderable costs, in calling two meetings of creditors and making a two-stage application to the Court. He reviewed other alternatives but left for another day whether a liquidator’s compromise or arrangement could be utilised under Corporations Law s510. 11 Later in Re Charter Travel Co Ltd (1997) 25 ACSR 337 Young J held that pooling could be effected where there were court appointed liquidators to the companies. In the exceptional circumstance where no creditor objected and it is impracticable to keep the assets and liabilities of the two companies separate, the Court could make a direction under Corporations Law s479(3) that the liquidators were justified in pooling. What was being proposed in Soluble Solution was a pooling resolution passed at the same meeting as the earlier resolution to wind up, with the judgment proceeding on the basis that the company was still under administration at the time of the pooling resolution. As I have already observed, such liquidations arising from the termination of an administration are by operation of Corporations Law s446A(2) treated as voluntary liquidations, not court ordered liquidations. But the disadvantage in such a course is uncertainty as to whether all creditors are bound and the possibility one creditor may object. 12 Young J noted in Soluble Solution that the type of direction which a liquidator could obtain from the Court was wider under Corporations Law s479(3) with Court ordered liquidations than under Corporations Law s511(1) with voluntary liquidations. In particular, he was of the view (at 212D) that Corporations Law s511(1) was not wide enough to ground an order that a liquidator would be justified in dispensing with pari passu distribution under Corporations Law s555. 13 The compromise power in the Corporations Law is set out in Corporations Law s477 in the following terms:

“(1) Subject to this section, a liquidator of a company may:
…..
(c) make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding in damages) against the company or whereby the company may be rendered liable; and
(d) compromise any calls, liabilities to calls, debts, liabilities capable of resulting in debts and any claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and a contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the property or the winding up of the company, on such terms as are agreed, and take any security for the discharge of, and give a complete discharge in respect of, any such call, debt, liability or claim.
.....
(2A) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than...$20,000.
.....
(6) The exercise by the liquidator of the powers conferred by this section is subject to the control of the Court and any creditor or contributory, or the Commission, may apply to the Court with respect to any exercise or proposed exercise of any of those powers.”
A liquidator of a company in voluntary liquidation may exercise these powers by operation of Corporations Law s506.

14    In BCCI No 3 it was not practical to have meetings of creditors or determine the true debtors of each company. As Dillon LJ concluded (at 1501) “it is wholly impracticable to hold a creditors’ meeting … with appropriate classes because of conflicting interests”. (There are of course no such conflicting interests here.) The compromise power arose via s167(1) coupled with paras 2 and 3 of Pt I of Sch 4 of the UK Insolvency Act 1986. Section 167 provided that powers in Pt I of Sch 4 could be exercised "with the sanction of the court or the liquidation committee". The relevant powers in Pt I of Sch 4 were:

“2 Power to make any compromise or arrangement with creditors or persons claiming to be creditors, or having or alleging themselves to have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company, or whereby the company may be rendered liable.
3 Power to compromise, on such terms as may be agreed - (a) all calls and liabilities to calls, all debts and liabilities capable of resulting in debts, and all claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the company and any contributory or alleged contributory or other debtor or person apprehending liability to the company, and (b) all questions in any way relating to or affecting the assets or the winding up of the company..."

15    The Court in BCCI No 3 was of the view (Nicholls V-C at [1993] BCLC 111f, and Dillon LJ (with whom the other members of the Court agreed) at [1993] BCLC 1509-1510) that a pooling compromise or arrangement under this power could with the Court’s sanction be used to bind all creditors and depart from the pari passu rule. The Court recognised there needed to be "special circumstances" to avoid seeking the views of creditors and found that there were such special circumstances. That conclusion, however convenient, with the greatest of respect, does seem at odds with earlier authority and a legislative history in the United Kingdom to which I make reference later; see para 20 below. 16    In Taylor v Morris [1993] BCLC 1343 the Court of Session held that where the liabilities of companies and a director could not be disentangled, the compromise power in s245(1)(f) of the UK Companies Act 1948 (similar to Corporations Law s477(1)(c)) could be used to enter into an arrangement that each would pay a proportion of the total liabilities. 17 Australasian Memory Pty Ltd v Brien [2000] HCA 30 held that Corporations Law s447A orders could be made in certain circumstances even though a company had passed from administration into liquidation: see 26. However, it was evident from Australasian Memory at 18 and 24 that any Corporations Law s447A order needed to be framed so that it was clear how it was to operate in relation to a particular company. Mr Oakes, SC on behalf of the Plaintiffs, submitted the following order might be made. This was in order to satisfy the statutory conditions of winding up or by a court, but not voluntarily, being the necessary precursor to a liquidator making a compromise within s477(1)(c):

“Order pursuant to section 447A of the Corporations Law , that Part 5.3A of the Corporations Law operate in relation to each of the defendant companies as if the effect of:
(a) subsection 446A(2) of the Corporations Law were that, as at the time referred to in paragraph 446(1)(a), each defendant company had been wound up in insolvency by order of the court; and
(b) subsection 446A(4) of the Corporations Law were that the administrators had consented in writing to act as liquidators of each defendant company for the purposes of subsection 532(9) of the Corporations Law.”

18 Mr Oakes submitted that a court direction might then be made under s479 of the Corporations Law that the liquidators were justified in acting upon a resolution of a combined meeting of all known creditors of the defendant companies in these terms. "That the recoveries, costs and distribution to creditors of Switch Telecommunications Pty Ltd and Switch Operations Pty Ltd be combined." This was provided such resolution was passed unanimously (which was expected and occurred) by those attending the meeting and approved by the Court. The form of the resolution would have been in substance that passed in Soluble Solution: see 211D-E. 19    The effect of these steps, it was submitted, was that Corporations Law Pt 5.3A would be made to operate in relation to each company as if the liquidation of each company were a court ordered winding up. The pooling proposal could then be endorsed by court direction under Corporations Law s479(3) (not available in the case of a members voluntary winding up as it requires recourse rather to s511). This would essentially trace what was done in the Charter Travel case where the compromise was then approved under Corporations Law s477(2A). 20 There are at least three matters which would require determination for this approach to be made good. As the Corporations Law s447A approach was ultimately not taken, I merely note them. The first of these is the limitation on the scope of the compromise power in Corporations Law s477(1) to bind dissentients, adverted to in In re Albert Life Assurance Company (1871) LR 6 Ch App 381. James LJ, at 386, held that ss159 and 160 of the English Companies Act 1862, the forbear of Corporations Law s477(1), only operated between the company and those creditors who chose to accept it, and did not bind creditors to accept a compromise against their will. So too as stated in Stiebel “Company Law and Precedents” (Sweet & Maxwell, 1929) Vol. 2 at 940-1. This inability to bind all creditors ultimately led to the passing of the arrangement and reconstruction legislation which in the United Kingdom commenced with the Joint Stock Companies Arrangement Act 1870. Section 2 is readily recognisable as the progenitor of the modern scheme of arrangement provisions in the United Kingdom and Australia binding all creditors, once the necessary majorities were obtained and court approval. The current Australian counterpart appears in Corporations Law s411 in Pt 5.1. But Australian progenitors are of long standing dating back to the NSW Companies Act 1899, s160 and the earlier Joint Stock Companies Arrangement Act 1891 of New South Wales. 21    The second matter is whether the Corporations Law s447A order proposed is within the ambit of the admittedly wide power to make orders under Corporations Law s447A. That point was adverted to in the Court of Appeal judgment in Australasian Memory at (1998) 45 NSWLR 111 at 148-150. It and my earlier judgment ((1997) 149 ALR 393 at 433-4) point to a possible limitation. Here there is not merely the conventional dispensation from particular provisions such as time limits. Rather there is an attempt in the liquidation to have a pooling regime apply. It is wholly dependent upon the attempted use of s447A to preclude the deemed voluntary winding up which s446A(2) would otherwise deem to have occurred when an administration passes into liquidation. Is this a mandatory requirement beyond the scope of the power to vary under s447A? Compare the reasoning of Handley JA in MYT Engineering Pty Ltd v Mulcon Pty Limited (1997) 25 ACSR 78 at 80 concerning the requirement to execute a deed of arrangement within a prescribed time where he questioned whether a s447A order could be made having the consequence of affecting status, namely the transition from voluntary administration to deemed voluntary liquidation. In the present case the company would remain in liquidation, having so passed from administration, but the s447A order would purport to change its character to a court appointed liquidator rather than voluntary. Moreover Brien in the High Court (paras 27-32) is authority for the proposition that s447A is capable of authorising an order which does affect status. That is to say, an order may be made under s447A which would reinstate an administration that would otherwise have ended, though subject to a possible absolute or discretionary bar by reason of the intervening rights of third parties whose dealings may have taken place on a premise which would be altered by that order if made. That is, however, a question for another day. 22 The third matter is that there is existing Australian authority against use of the compromise power in the way contemplated, in preference to a scheme of arrangement capable of binding dissentients: Re Austcorp Tiles Pty Ltd (1992) 10 ACLC 62 following Plowman J in Re Trix Ltd [1970] 3 All ER 397. That case would need to be considered in the light of BCCI No 3, and against the backdrop of the comity principle espoused by the High Court in ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492. 23 Albert Life was considered in BCCI No 3 at 1509 in the Court of Appeal judgment. These are the propositions which I consider emerge from BCCI No 3, decided in circumstances of overwhelming chaos that the Court was under enormous pressure to avert, via the pragmatic solution before it:

(a) in those “special circumstances” where a conventional scheme of arrangement is impracticable, the compromise power is wide enough to bind dissentients to a pooling arrangement (thereby implicitly not following Albert Life ) if exercised with the sanction of the Court;

(b) departure from the pari passu rule was permissible if "ancillary to an exercise of any of the powers which are exercisable with the sanction of the Court" (at 1510);

(c) approval of the creditors is not necessary as part of the process, so long as "special circumstances" can be proved; and

(d) examples of special circumstances include the impossibility of determining the true debtors of each company and the impossibility, going beyond mere inconvenience, of going through the scheme meeting procedure under the UK equivalent to Corporations Law Pt 5.1.

24    It is, however, open under Corporations Law in Australia to make remedial orders under s1322. This may make it possible in Australia to go through the scheme meeting procedure so aided, notwithstanding these practical difficulties which proved insuperable in the UK and which were relied on by the court to open the way to use of the compromise power. However, that does not in my judgment mean that only a conventional scheme of arrangement is available and cannot be bypassed for reasons of cost and convenience. 25    The assumption made in the BCCI No. 3 case is that the approval of the court suffices to make the compromise binding on dissentients. But in Australia other Corporations Law sections explicitly render a compromise or arrangement binding on dissentients: thus the scheme provision Corporations Law s411(4); the liquidator’s reconstruction and amalgamation provision in Corporations Law s507(3); and the voluntary liquidation arrangement provision in Corporations Law s510(1). That provides a powerful reason based on the expressio unius maxim not to rely on the Australian counterpart provision (s477) as providing a means to bind dissentients, when that section, in contrast, has no express provision that dissentients are to be so bound. 26    Furthermore, the BCCI liquidation was a Court ordered liquidation, not a voluntary liquidation as is the case with the defendant companies. There is likewise no equivalent to Corporations Law s510 in the UK Insolvency Act 1986. It is significant that, as I explain below, it is possible in Australia to go through the fast track simplified scheme procedure under Corporations Law s510 if orders are made under Corporations Law s1322(4) so as to permit the combined meeting of creditors as occurred. Finally, I do not have the text of the BCCI pooling deed which might have enabled me to consider whether the actual mechanics of the pooling would make a difference. One example of different mechanics to those in the present case appears in Mentha v G E Capital Ltd (1997) 27 ACSR 696 at 699.

Arrangement under s 510 of the Corporations Law

27    This section provides as follows:

“(1) An arrangement entered into between a company about to be, or in the course of being, wound up and its creditors is, subject to subsection (4): (a) binding on the company if sanctioned by a special resolution; and (b) binding on the creditors if sanctioned by a resolution of the creditors.
(1A) The company must lodge a copy of a special resolution referred to in paragraph 1(a) with ASIC within 14 days after the resolution is passed.
(2) A creditor shall be accounted a creditor for value for such sum as upon an account fairly stated, after allowing the value of security or liens held by the creditor and the amount of any debt or set-off owing by the creditor to the company, appears to be the balance due to the creditor.
(3) A dispute about the value of any such security or lien or the amount of any debt or set-off may be settled by the Court on the application of the company, the liquidator or the creditor.
(4) A creditor or contributory may, within 3 weeks after completion of the arrangement, appeal to the Court in respect of the arrangement, and the Court may confirm, set aside or modify the arrangement and make such further order as it thinks just.”

28    The section is located in Corporations Law Pt 5.5 on “Voluntary Winding Up”, within Division 4 entitled “Voluntary Winding Up Generally”. The defendant companies are voluntarily wound up by operation of Corporations Law s446A(2). Corporations Law s510 is applicable to both creditors’ and members’ voluntary liquidations. 29 Use of Corporations Law s510 had the advantage that if the appropriate resolutions are passed, the arrangement becomes "binding" on non voting and minority dissentient creditors and contributories. But it poses two potential problems. First, when it is not possible, as here, to isolate the creditors of each company though the Court could rely on them being creditors of one company or the other. I indicated that if a resolution of a combined meeting of creditors were passed, subject to hearing any objections, I would be minded to make a remedial order under Corporations Law s1322(4) that the combined meeting of creditors of both companies be treated as a meeting of each company, thus allowing satisfaction of Corporations Law s510(1)(b). 30 Secondly, the section had been drafted to cover both creditors’ voluntary liquidations and members’ voluntary liquidations. In the latter case there would ordinarily be a surplus for contributories, thus giving them the interest recognised in Corporations Law s510(1)(a). But the presence of Corporations Law s510(1)(a) operated to give the member contributories an anomalous power of veto over the creditors’ arrangement (via the requirement for a special resolution) as might be exercised where there was no surplus for contributories. That was the case with the defendant companies here, but they did pass the necessary special resolutions. Each company has a sole shareholder and resolutions have been passed utilising Corporations Law s249B. 31 If contributories had voted against the arrangement in a situation where they had no economic interest as contributories in a creditors’ arrangement, it would have been necessary to consider whether both paragraphs (a) and (b) needed to be satisfied for Corporations Law s510(1) to become operative; that is to say to have both a creditors and shareholders’ resolution. Alternatively, whether it would be sufficient for a liquidator to bind a company utilising the powers under Corporations Law s477(1), obtained via Corporations Law s506, where there is no surplus available to contributories, thus only requiring a resolution of creditors for Corporations Law s510(1) to become operative. It is not necessary to decide this matter in this application. I note the decision in Bank of Upper India v Arif Husain AIR 1931 Allahabad 59(2) drawn to my attention by Counsel, on a section of the Indian Companies Act 1913, similar to s510, which held that the provisions of the section were mandatory in that context.

History of s 510

32    Corporations Law s510 has appeared in the legislation and its predecessors for over 125 years. It was s412 of the Companies Code, s273 of the Companies Act 1961, s285 of the Companies Act 1936, s159 of the Companies Act 1899 and ss187 and 188 of the Companies Act 1874. Its genesis was ss136 and 137 of the UK Companies Act 1862. Maugham J observed in Re Contal Radio Ltd [1932] 2 Ch 66 that those sections and their successors had remained unconstrued in the UK prior to that case. There had been limited consideration in NSW in 1892 in Re Farmers’ Freehold Land Co Ltd (1892) 3 BC(NSW) 39 (Manning J). A feature of the section’s structure is that it operates primarily extra-curially: the Court plays no part in the process unless a creditor or contributory appeals to the Court within three weeks "after the completion of the arrangement". 33    The section in my experience has not been widely used. Mr Oakes informed me that he was aware of its use in part of the winding up of the Hooker Group, but that he was not aware of any other example of its use, other than the few instances in the case law. 34    The principles which emerge from the case law on Corporations Law s510 are as follows:

(i) To be binding on non-voting or dissentient creditors, they must be paid pari passu with the voting creditors: Farmers’ Freehold ;

(ii) otherwise the non voting or dissentient creditors need to consent to the arrangement;

(iii) the concept of "arrangement" is to be liberally construed and can embrace any proposal "such as a reasonable business man might carry out bona fide in the course of his business": Re E D White Ltd (1929) 29 SR(NSW) 389 at 391 (Harvey CJ)

(iv) as such, it may include a compromise: see Young J in Soluble Solution at 214C-D following E D White which is contra Contal Radio at 69;

(v) the section only applies to voluntary liquidations: Contal Radio at 68-69;

(vi) but, an arrangement which renders a company solvent so that a winding up resolution is not passed, is not covered by the section: Contal Radio, Setco Manufacturing Pty Ltd v Sifa Pty Ltd (1982) 7 ACLR 327 (McLelland J) and Re Robinson & the Trustee Act 1925 [1983] 1 NSWLR 154 (Needham J): and such an arrangement needs to utilise the scheme provisions in Corporations Law Pt 5.1;

(vii) another way of putting this is that although Corporations Law s510(1) permits an "arrangement" between a company and its creditors where the company is "about to be...wound up", an actual winding up resolution is an integral part of the process;

(viii) the arrangement resolution may be passed before the winding up resolution, because of the presence of the words "about to be wound up", but the arrangement resolution will have no efficacy unless the winding up resolution is passed: Contal Radio at 69; and

(ix) the voting majority on the resolution of creditors provided for in Corporations Law s510(1)(a) is, by operation of Corporations Law s510(2), by value, and by operation of Regulation 5.6.21 of the Corporations Regulations, by number. (The source of the regulation power is s 80 of the Corporations (New South Wales) Act 1990.)

35    To this list I add my own view that "completion of the arrangement" in Corporations Law s510(4) means the date of passing the last of the sanctioning resolutions under Corporations Law s510(1) and not completion of the implementation steps set out in the arrangement.

The procedure

36    The plaintiffs drafted an explanatory memorandum to accompany the notices of meeting. Such a document should be drafted on the principle of clear, complete and not misleading content propounded in Bulfin v Bebarfald’s Limited (1938) 38 SR(NSW) 423 at 440, and the cases it has spawned. A good guiding principle here, as Wootten J observed in Re Marra Developments Ltd (1976) 1 ACLR 470 at 479.24-36, is from the Old Testament (King James) Habbakuk 2:2: "Write the vision, and make it plain, upon tablets, that he may run that readeth it." 37 The explanatory memorandum set out the implementation steps, gave the reasons for pooling and finally a cents in the dollar summary of the effect of pooling and not pooling in table form. The not pooling options set out the assumptions on which the calculations were made, given the difficulties with allocating assets and creditors. Finally it included the supporting recommendation of the liquidators. 38 The arrangement itself was set out in a pooling deed between the companies and their liquidators, a copy of which was forwarded with the explanatory memorandum, which covered the following concepts:

(a) all realisations are deposited in a single bank account;

(b) the order of distribution from the account - the statutory priority was left undisturbed save that those entitled at each level with each company are grouped together;

(c) mutual releases are given by the liquidators and the companies save for the provisions of the pooling deed and claims by the liquidators for remuneration; and

(iv) the operation of pooling deed is subject to conditions precedent, being a Court direction to the liquidators under Corporations Law s511(1) that they are justified in entering into the pooling deed, a combined meeting of the pooled creditors sanctioning the deed, and the Court approving any compromise which the pooling deed might be said to contain (primarily that set out in the release clause) under Corporations Law s477(2A). The sanctioning resolution was in the following terms:

That the creditors sanction the arrangement set out in the Pooling Deed between [names of companies] and their respective liquidators dated [date of pooling deed].

39    Because the liquidators sought a direction under Corporations Law s511(1) that they were justified in entering into the pooling deed, and because this was mentioned in the explanatory memorandum, it was specifically mentioned in the explanatory memorandum in italicised script:

"The direction does not limit in any way the Supreme Court’s discretion to give or withhold any approval or other order to be sought under any of the other steps in the implementation steps. The Supreme Court may give or withhold approval or other order having regard to the circumstances and evidence (including the result of the combined [creditors’ meeting]) then before the Court."

40    The Corporations Law s511(1) direction was sought and given ex parte following Young J’s analysis as to the appropriateness of this procedure in Soluble Solution at 212G-213B. 41 The explanatory memorandum also specifically mentioned the hearing date for the proposed further applications by the liquidators before the Supreme Court and stated that any creditor who opposed the arrangement and compromise set out in the pooling deed could appear before the Court on that date; see Corporations Law s510(4). I consider inclusion of the court hearing date is a desirable practice with explanatory material for meetings which are part of a process which will involve a subsequent court hearing, given the type of problem as to notice of the hearing date which emerged in Re Arrowfield Group Ltd (1995) 13 ACLC 1187 at 1196-1197. As dissentients may well wish to both attend meetings and hearings, I am inclined to the view that disclosing the hearing date in explanatory material is more likely to bring any court hearing date to their attention than any advertisement. In saying this I am not advocating that advertising is unnecessary. It still serves a role, particularly that of alerting any creditors whose claims may not have appeared in company records. 42 At the conclusion of argument on the Corporations Law s511(1) application I gave the following directions to the liquidator plaintiffs:

1 Pursuant to section 511(1) of the Corporations Law, that they are justified in entering into the Pooling Deed, in the form of the draft which is Exhibit PX1 annexed hereto.
2 Pursuant to section 511(1) of the Corporations Law, that they are justified in convening a combined meeting of all known creditors of the defendants for the purpose of the meeting approving the Pooling Deed.

43    When the matter came back before the Court after consideration by the creditors and contributories, the evidence disclosed that the pooling deed had been appropriately sanctioned. The end result was thus achieved more quickly and easily and more economically, than a creditors scheme of arrangement under Corporations Law s411. In the present case, its use would be like breaking a peanut with a sledge-hammer, and would not have assisted creditors whose funds were already sufficiently depleted. There being no additional matters that I needed to consider, on 10 July 2000 I made the following further orders, with reasons to follow:

1 Declare pursuant to Section 1322(4) of the Corporations Law, that the combined meeting of creditors of the defendants held on 23 June 2000, purporting to be a meeting for the purposes of Section 510(1)(b) of the Corporations Law of each defendant, is not invalid as a meeting of each Defendant, by reason of any contravention of any provision of the Corporations Law.
2 Order pursuant to Section 477(2A) of the Corporations Law, that the compromise of debts constituted by the Pooling Deed dated 6 June 2000 between the plaintiffs and the defendants, a copy of which is annexed hereto, be approved, such order to take effect from the date that the period has expired under Section 510(4) of the Corporations Law without appeal in respect of the arrangement constituted by the said deed, or if there be appeal within the time prescribed by Section 510(4) of the Corporations Law, then it shall take effect from the date such appeal is dismissed.
3 Order that the plaintiffs’ costs be costs in the liquidation of each defendant.
Summing up

44    At the conclusion of Young J’s comprehensive judgment in Soluble Solution (at 216-7) he summarised the basic principles helpfully in these terms:

“1. That where there is to be consolidation of the assets and creditors of a group of companies, normally that result should be obtained by a formal scheme of arrangement under s411 or some other appropriate section of the Corporations Law .
2. In exceptional cases, the liquidator can obtain approval of a compromise bringing about consolidation which he has entered into under s477(1)(c).
3. the bankruptcy rule that where it is impracticable to keep the assets and liabilities of different companies in a group separate they may be consolidated if the consolidation is for the benefit of creditors generally if no creditor objects, applies in a corporate winding up.
4. Where a company has been under administration and the resolution is passed when Pt 5.3A of the Corporations Law is still applicable, the court may make the appropriate directions to the liquidator under s447A.
5. It would be possible for the court to advise a liquidator in a court winding up that he should consolidate debts, but it would be unlikely that the court would do so unless every creditor agreed or a regime was put in place for creditors to object.”

45    To that summary I would add just this, by way of principles 6 and 7:

6. s447A might conceivably be called in aid in deeming the winding up to be by a court appointed liquidator rather than voluntary, where a company goes from administration to liquidation via s439A and C. That is to bring into play the alternative of a court approved liquidator’s compromise or arrangement for pooling under s477(1)(c), approved by the Court under s477(2A), and endorsed by court direction under s479. But this depends on s447A accommodating such an order, a proposition which has still to be tested though recent High Court authority suggests s447A orders may affect status at least where third party rights are not unfairly prejudiced. However, such a compromise or arrangement may not bind dissentients. That may lead either to a conventional scheme of arrangement or the s510 alternative below. The latter may be chosen for reasons of cost and convenience, and does not require that a conventional scheme be practically impossible.

7. Subject to what follows, a combination of remedial orders under s1322(4) of the Corporations Law and a liquidator’s compromise or arrangement under s510, when passed by the necessary creditors’ and contributories’ resolutions and if then not successfully challenged, would permit such a consolidation of assets and liabilities and would bind all creditors. That is clear enough where all creditors at the creditors’ meeting vote in favour, though they have voted in combination. It remains for a future case to decide whether, where there is minor dissent, a remedial order under s1322(4) can and should still be made to permit that voting in combination. In approaching these issues, I agree with Young J in Re Charter Travel Co Ltd at 338 that:

“So long as there is a power under the Corporations Law or otherwise available to the court, the court is anxious to see that liquidations are conducted with commercial efficiency and will not allow any technical rules to frustrate that attempt.”

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Last Modified: 09/26/2000