RICHARD ALBARRAN, BRENT KIJURINA AND CAMERON SHAW AS JOINT AND SEVERAL ADMINISTRATORS OF COOPER & OXLEY BUILDERS PTY LTD (ADMINISTRATORS APPOINTED)
[2018] WASC 161
•29 MAY 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RICHARD ALBARRAN, BRENT KIJURINA AND CAMERON SHAW AS JOINT AND SEVERAL ADMINISTRATORS OF COOPER & OXLEY BUILDERS PTY LTD (ADMINISTRATORS APPOINTED) [2018] WASC 161
CORAM: VAUGHAN J
HEARD: 25 MAY 2018
DELIVERED : 29 MAY 2018
FILE NO/S: COR 81 of 2018
EX PARTE
RICHARD ALBARRAN, BRENT KIJURINA AND CAMERON SHAW AS JOINT AND SEVERAL ADMINISTRATORS OF COOPER & OXLEY BUILDERS PTY LTD (ADMINISTRATORS APPOINTED)
Plaintiffs
Catchwords:
Voluntary administration - Deed of company arrangement - Eligible employee creditors - Application for approval of non–inclusion of priority provision - Corporations Act 2001 (Cth) s 444DA
Legislation:
Corporations Act 2001 (Cth) s 439A, s 439C, s 444A, s 444DA, s 556, s 560, s 561
Result:
Application granted
Category: B
Representation:
Counsel:
| Plaintiffs | : | C S Gough |
Solicitors:
| Plaintiffs | : | Mills Oakley |
Case(s) referred to in decision(s):
Adsett v Berlouis (1992) 37 FCR 201
Advanced Healthcare Group Ltd (Administrators Appointed) [2008] FCA 1604; (2008) 68 ACSR 349
BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322
Killarnee Civil & Concrete Contractors Pty Ltd (in Liq); Jones (Liquidator) v Matrix Partners Pty Ltd [2018] FCAFC 40; (2018) 124 ACSR 568
Soul Outlet Pty Ltd (in Liq); Ex parte Jack as Liquidator of Soul Outlet Pty Ltd (in Liq) [2015] WASC 307
Vouris and Tonks as Deed Administrators of Good Impressions Offset Printing Pty Ltd [2012] NSWSC 603
VAUGHAN J:
Application
Ordinarily, as a result of s 444DA(1) of the Corporations Act 2001 (Cth), a deed of company arrangement must contain a provision to the effect that, in the application of the company's property coming under the deed administrator's control, the eligible employee creditors are entitled to a priority at least equal to what they would have been entitled to if the property were applied in accordance with s 556, s 560 and s 561 of the Corporations Act 2001 (Cth).
Section 556, s 560 and s 561 afford a priority in a winding up to various categories of creditors and claimants. Among others, those priority creditors include creditors who meet the criteria to be an 'eligible employee creditor'.[1]
[1] As defined in s 9 of the Corporations Act 2001 (Cth).
By originating process dated 15 May 2018 the plaintiffs, voluntary administrators of Cooper & Oxley Building Pty Ltd (Administrators Appointed),[2] sought an order under s 444DA(5) of the Act approving the non-inclusion of the priority provision otherwise required by s 444DA(1) in a deed of company arrangement to be executed by the company.
[2] Referred to as Cooper & Oxley.
On 25 May 2018 I made orders which, in substance, granted the plaintiffs the relief sought. I stated that the reasons for my orders would be published in due course. These are the reasons for my orders made on 25 May 2018.
Factual background
The plaintiffs were appointed as joint and several administrators of Cooper & Oxley on 7 February 2018.
Cooper & Oxley had traded as a commercial builder. As at the time of the plaintiffs' appointment it employed approximately 70 employees. Immediately before the plaintiffs' appointment the company had seven ongoing projects. Work had been suspended on each project. The plaintiffs considered that it would be advantageous to recommence work. They did so on all but one site.
The plaintiffs were unable to negotiate terms for Cooper & Oxley to recommence works on a site at 500 Hay Street, Subiaco. The principal for those works, Dradgin Pte Ltd, is in dispute with the company as to the project. The director of Cooper & Oxley believes that the company has a significant claim against Dradgin.
As a consequence of the recommenced projects, Cooper & Oxley's business has continued and some of the employees continue to be employed in the business. As at 15 May 2018 Cooper & Oxley continued to employ approximately 30 employees.
The plaintiffs have determined that at the date of their appointment the total amount of employee entitlements owed by Cooper & Oxley was some $2.119 million. Of that, the terminated employees are owed $849,662 and the continuing employees are owed $1,269,368.
The convening period for the second meeting of the company's creditors was extended to 17 April 2018.
On 16 April 2018 the plaintiffs received a proposal for a deed of company arrangement from the sole director of Cooper & Oxley. The key features of the proposed deed of company arrangement as adduced in evidence were that:
•a creditors' trust would be established (cl 3);
•claims against the company would be extinguished and transferred to claims against the creditors' trust (cl 6);
•the creditors' trust fund - being the available property under the proposal - would comprise cash at bank, trading receipts and the realisations of pre‑appointment debtors, retentions and certain investments and real property together with an additional amount of $300,000 to be realised from the sale of two properties owned by the director (cl 8); and
•control and management of the company would revert to the director (cl 9).
One of the plaintiffs, Cameron Shaw, has sworn an affidavit in support of the application. Mr Shaw deposes that:
28.… [the deed of company arrangement proposal] provided, among other things that certain eligible employee creditor claimants would be excluded from participating … Specifically, employees who continued to be employed by the Company would be excluded from participating and receiving a dividend under the creditors trust for any amounts due to them under subsections 556(1)(g) (leave of absence payment) and (h) (retrenchment payments) of the Act with those amounts instead accruing via the employees continued employment with the Company.
29.The Director proposed that the DOCA fund/creditors trust fund be applied in two ways.
30.The Director proposed that the net amount received from their pursuit and prosecution of the Company's potential claim against Dradgin following deduction of certain costs, expenses and other specific claims … be applied by the trustees of the creditors trust as follows:
(a)firstly, in the payment of (the otherwise unsecured) creditors (sub‑contractors and suppliers) associated with the 500 Hay Street project for their certified or approved January claims; and
(b)secondly, in accordance with the order of priority provided for in the DOCA proposal which is consistent with the priorities under section 556, 560 and 561 of the Act.
31.The Director proposed that the balance of the DOCA fund/creditors trust fund be applied in accordance with sections 556, 560 and 561 of the Act.
32.There was no provision in the [proposal] that eligible employees be entitled to a priority at least equal to what they would have been entitled to if the Dradgin Litigation Contribution were applied in accordance with sections 556, 560 and 561 of the Act.
I have considered the initial proposal for a deed of company arrangement as verified by Mr Shaw in his affidavit. It is an attachment to Mr Shaw's affidavit sworn 15 May 2018 (attachment CHS‑5). It is correct that the proposal does not provide for the priority provision mandated by s 444DA(1). But I am unable to identify the other features deposed to by Mr Shaw at pars 28 to 31 of his affidavit.
All that was provided as to the application of the property available under the proposal was that (cl 17):
[The fund] shall be applied by the Administrators as follows:
(a)Firstly, in payment of the remuneration, costs, disbursements, trading liabilities (if any) expenses of the Administrators, for acting in their capacity as their Administrators of the Company including that of their partners and staff;
(b)Secondly, in payment of the remuneration, costs, disbursements and expenses of the Administrators for acting in their capacity as the Deed Administrators of the Company and Trustees of the Creditors Trust including that of their partners and staff;
(b)Thirdly, the Unsecured Creditors of the Company.
The plaintiffs issued their report to creditors on 16 April 2018. This referred to the director having made a proposal in different terms to that attached to Mr Shaw's affidavit at attachment CHS‑5. Instead of the contribution of $300,000 from the sale of the director's properties, the properties were to be sold with the balance of the net proceeds after $300,000 becoming part of the available property under the creditors' trust (cl 8(j)). The available property was also to include an amount described as the 'Litigation Contribution'. This was to be the net amount received from any successful prosecution of the potential claim against Dradgin in respect of the 500 Hay Street, Subiaco project (cl 8(l)).
More specific provisions were included as to the application of the available property. As contained in the report to creditors, the proposal was that:
12.The eligible employees (Employed Eligible Employees) as at the execution of the DOCA be excluded from participating under the DOCA for any employee entitlements owing under subsections 556(1)(g) and (h) of the Act with those amounts to continue in the ordinary course of business. The Administrators will convene a meeting of the Employed Eligible Employees prior to the Second Creditors Meeting at which these Employed Eligible Employees will vote on being excluded from under the DOCA for these claims.
…
23.The Deed Fund excluding the Litigation Contribution shall be applied by the Administrators as follows:
(a)Firstly, in payment of the remuneration, costs, disbursements, trading liabilities (if any) expenses of the Administrators, for acting in their capacity as the Administrators of the Company including that of their partners and staff;
(b)Secondly, in payment of the remuneration, costs, disbursements and expenses of the Administrators for acting in their capacity as the Deed Administrators of the Company and Trustees of the Creditors Trust including that of their partners and staff;
(c)Thirdly, in the order of priority for payment of the claims of the priority creditors which are admitted to prove under the terms of the Deed of Company Arrangement by the Administrators, as specified in Part 5.6 Division 6 subdivision D of the Act, with any reference to the winding up of the Companies to be treated as the Company being subject to the Deed of Company Arrangement and the relevant date being the date of appointment of the Administrators, with the exception to the payment of leave entitlements and termination/redundancy payments being Section 566(1)(g) and (h) of the Act for employees employed by the Company as at the execution of the DOCA, and
(d)Fourthly, the Unsecured Creditors of the Company.
(e)Fifthly, the Company.
…
25.The Litigation Contribution shall be applied as follows:
(a)Firstly, to claims of creditors (sub‑contractors and suppliers) associated with the 500 Hay Street project for their January claims that had been certified or approved; and
(b)Secondly, in accordance with the order set out in paragraph 23.
Accordingly, while the director's initial proposal at attachment CHS‑5 was not in the terms deposed to by Mr Shaw, the proposal as reported to creditors was in the terms specified in Mr Shaw's affidavit.
Relevantly, there was no priority provision in the terms mandated by s 444DA(1). And, in two critical respects, the deed of company arrangement proposal as reported to creditors departed from the priorities under s 556, s 560 and s 561. First, continuing employees were to be excluded from proving for and receiving a dividend in respect of leave payments and retrenchment payments. Second, any amount by way of Litigation Contribution ‑ being the net proceeds from the prosecution of Cooper & Oxley's claim against Dradgin ‑ were to be applied first to January claims of creditors associated with the 500 Hay Street, Subiaco project.
In both of those respects the usual priority regime applicable to a winding up would not apply, thus potentially disadvantaging the eligible employee creditors.
The plaintiffs identified that the proposed provision to partially exclude the continuing employees as to their leave and retrenchment payments was incompatible with s 444DA(1).
Accordingly, on 16 April 2018 the plaintiffs convened a meeting of the eligible employee creditors seeking a resolution in accordance with s 444DA(2)(a) agreeing to the non‑inclusion of the priority provision. A resolution of the eligible employee creditors was obtained before the second creditors' meeting. However, it was a resolution in limited terms. The resolution, as passed unanimously at a meeting on 24 April 2018, was in the following terms:
That eligible employee creditors will not participate in a distribution of funds by the Deed Administrators for leave of absence and retrenchment payments with such entitlements being paid by the Company in the ordinary course of business.
The report to creditors that preceded the second creditors' meeting recorded the plaintiffs' opinion that it was in the creditors' interests for Cooper & Oxley to execute a deed of company arrangement. It was said that, based upon the greater expected return under, and greater certainty of receipts of funds from, the deed of company arrangement proposal, it was the plaintiffs' opinion that it was not in the creditors' interests for the company to be wound up. The opinion was supported by detailed analysis as to the expected returns from a winding up as compared to the expected returns under the deed of company arrangement proposal.
In terms of comparison the expected position under a liquidation as opposed to the deed of company arrangement proposal was as follows:
Liquidation (cents in $)
DOCA (High) (cents in $)
DOCA (Low) (cents in $)
Return to secured creditors
100c
100c
100c
Priority creditors (inc eligible employee creditors)
18c
100c
100c
Unsecured creditors
Nil
13c
6c
There were three significant factors that informed the plaintiffs' view that the deed of company arrangement proposal would provide a better return for creditors than an immediate winding up.
First, under the deed of company arrangement proposal the sale of the director's properties was estimated to result in an additional $800,000 contribution to the available property for distribution to creditors.
Second, the estimated recoveries from debtors was some $1.265 million under the deed of company arrangement proposal but only approximately $634,000 in liquidation. Similarly, proceeding with the deed of company arrangement proposal was thought to assist in recovery of progress claims (approximately $250,000 under a deed of company arrangement compared to nil in a liquidation) and retention amounts (approximately $365,000 under a deed of company arrangement compared to nil in a liquidation). These were partly off‑set by the circumstance that the company's plant and equipment would not be available for realisation under the deed of company arrangement proposal.
Third, the plaintiffs' fees and disbursements were estimated to be substantially lower as deed administrators (some $1.6 million) compared to their estimated fees and disbursements as liquidators (some $2.5 million).
The second meeting of creditors was held on 24 April 2018.
Shortly before the second meeting the director submitted an amended deed of company arrangement proposal. There was no material change as to proposed terms 12 (exclusion of continuing employees claims for leave and retrenchment payments), 23 (application of property generally) and 25 (application of any Litigation Contribution following successful prosecution of the company's claim against Dragdin). It also remained the case that there was no general priority provision in accordance with s 444DA(1).
At the second meeting of creditors a resolution was passed that Cooper & Oxley execute a deed of company arrangement. The vote was passed by a majority of creditors by value and by number as follows:
•124 creditors with a total combined value of $20,732,150 voted in favour of the resolution; and
•11 creditors with a total combined value of $17,609,136 voted against the resolution.
Fifty four eligible employee creditors attended the second meeting of creditors either in person or by proxy. All voted in favour of the resolution that the company execute the deed of company arrangement. No eligible employee creditor voted against or abstained in relation to the resolution.
On 10 May 2018, having instructed solicitors to prepare a deed of company arrangement for execution by Cooper & Oxley, the plaintiffs became aware of the need to obtain approval from the court for the non‑inclusion in the deed of company arrangement of the priority provision otherwise mandated by s 444DA(1). I infer that the plaintiffs became so aware as a result of advice received from their solicitors.
The plaintiffs acknowledge that they could have sought a more general resolution from the eligible employee creditors agreeing to the non‑inclusion of the s 444DA(1) priority provision as to any Litigation Contribution obtained from the Dragdin claim. Mr Shaw deposes, quite candidly and consistently with his duty to the court, that the failure to do so was 'an oversight'. I accept that the omission was an inadvertent mistake on the part of the plaintiffs.
The proposed deed of company arrangement is now in a final form. It was adduced in evidence as attachment CHS‑6 to the affidavit of Mr Shaw sworn 23 May 2018. The priority provisions of the proposed deed of company arrangement are consistent with the terms of the proposal accepted by creditors as recounted above (see cl 8.2 and cl 10.1 of the proposed deed of company arrangement and cl 6.4 of the draft Trust Deed that is Sch 1 to the draft deed of company arrangement).
Legal framework
The object of Part 5.3A's provisions dealing with voluntary administration is enshrined in s 435A of the Act. The Part provides for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence. Alternatively, if that is not possible, the object is to provide for the business, property and affairs of the insolvent company to be administered in a way that results in a better return for the company's creditors and members than would result from an immediate winding up.
To that end, Div 5 of Part 5.3A provides for a meeting of creditors to decide the company's future.[3] At this meeting, commonly known as the second meeting, the creditors may resolve that:[4]
•the company execute a deed of company arrangement;
•the administration end; or
•the company be wound up.
[3] Corporations Act 2001 (Cth) s 439A.
[4] Corporations Act 2001 (Cth) s 439C.
Where creditors resolve that the company execute a deed of company arrangement, the administrator is to prepare an instrument setting out the terms of the deed.[5] There are a number of things that the instrument must specify. These include:
(1)the property of the company that is to be available to pay creditors' claims;[6] and
(2)the order in which the proceeds of realisation of that property is to be distributed among creditors.[7]
[5] Corporations Act 2001 (Cth) s 444A(3).
[6] Corporations Act 2001 (Cth) s 444A(4)(b)
[7] Corporations Act 2001 (Cth) s 444A(4)(h).
Section 444DA is entitled 'Giving priority to eligible employee creditors'. It provides:
(1)A deed of company arrangement must contain a provision to the effect that, for the purposes of the application by the administrator of the property of the company coming under his or her control under the deed, any eligible employee creditors will be entitled to a priority at least equal to what they would have been entitled if the property were applied in accordance with sections 556, 560 and 561.
(2)However, the rule in subsection (1) does not apply if:
(a)at a meeting of eligible employee creditors held before the meeting convened under section 439A, the eligible employee creditors pass a resolution agreeing to the non‑inclusion of such a provision; or
(b)the Court makes an order under subsection (5) approving the non‑inclusion of such a provision.
Meeting of eligible employee creditors
(3)The administrator of the company must convene a meeting under paragraph (2)(a) by giving written notice of the meeting to as many of the eligible employee creditors as reasonably practicable at least 5 business days before the meeting.
…
Court approval
(5)The Court may approve the non‑inclusion of such a provision if the Court is satisfied that the non‑inclusion of the provision would be likely to result in the same or a better outcome for eligible employee creditors as a whole than would result from an immediate winding up of the company.
(6)The Court may only make an order under subsection (5) on the application of:
(a)the administrator, or proposed administrator, of the deed; or
(b)an eligible employee creditor; or
(c)any interested person.
(7)The Court may make an order under subsection (5) before or after the meeting convened under section 439A.
The term 'eligible employee creditor' means a creditor whose debt or claim would, in a winding up, be payable in priority to other unsecured debts and claims in accordance with s 556(1)(e), (g) or (h), s 560 or s 561. Such creditors will ordinarily be current or former employees or persons who are subrogated to the position of employees.
Section 444DA was not included in the original Part 5.3A provisions when introduced into the then Corporations Law on 23 June 1993. It was introduced with effect from 31 December 2007. The Explanatory Memorandum to the Bill that introduced s 444DA emphasised that the new section was to 'mandate the priority of employee entitlements in a DOCA'.[8]
[8] Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth) [4.10].
In the context of insolvency the consistent policy of Australian and the United Kingdom Parliaments has been to introduce measures to protect employees. The historical exposition of this clear and consistent legislative policy is described by Farrell J in Killarnee Civil & Concrete Contractors Pty Ltd (in Liq).[9] Her Honour describes how priority was first given to wages and salaries of employees in bankruptcy legislation in the United Kingdom in 1825.[10] The preferred position accorded to employees in insolvency reflects a long held position of legislatures that it works undue hardship on employees to fail to afford them priority.[11]
[9] Re Killarnee Civil & Concrete Contractors Pty Ltd (in Liq); Jones (Liquidator) v Matrix Partners Pty Ltd [2018] FCAFC 40; (2018) 124 ACSR 568 [216] ‑ [221].
[10] Re Killarnee Civil & Concrete Contractors Pty Ltd (in Liq); Jones (Liquidator) v Matrix Partners Pty Ltd [218].
[11] Re Killarnee Civil & Concrete Contractors Pty Ltd (in Liq); Jones (Liquidator) v Matrix Partners Pty Ltd [216].
Section 444DA is consistent with the legislative policy identified by Farrell J. It entrenches, in a deed of company arrangement context, the priorities that would otherwise prevail for the eligible employee creditors in a winding up. But it also provides for two circumstances in which the priority provision may not be included.
Non-inclusion of the priority provision is permitted where:
•the eligible employee creditors resolve to agree to the non‑inclusion of the priority provision (s 444DA(2)(a)); or
•the court makes an order approving the non‑inclusion of the priority provision (s 444DA(2)(b)).
Those exceptions are required to prevent a potential compromising of the general object of Part 5.3A as provided for in s 435A. In certain insolvencies it might not be possible to effect a deed of company arrangement, thereby keeping a company or its business in existence, if priority must be given to the employees. That may be to the disadvantage not only of the eligible employee creditors but also the creditors as a whole.[12]
[12] Cf Re Advanced Healthcare Group Ltd (Administrators Appointed) [2008] FCA 1604; (2008) 68 ACSR 349 [13].
In most cases it will be preferable to obtain the eligible employee creditors' resolution agreeing to the non‑inclusion of the priority provision rather than an order of the court under s 444DA(5).
The employees are the best judges of what is in their interests. That is particularly so as s 444DA(4) requires that the eligible employee creditors be given a statement providing the administrator's opinion, with reasons, as to whether the non‑inclusion of the priority provision will likely result in the same or a better outcome for the eligible employee creditors as a whole than would result from an immediate winding up. The eligible employee creditors are also to be provided with such other information as will enable them to make an informed decision.
Also, in most cases it would be expected that the costs of an application to the court will be significantly higher than conducting a meeting of the eligible employee creditors. It is preferable that such an impost not be imposed on the creditors of an insolvent company.
However, it is not possible to obtain the eligible employee creditors' resolution agreeing to the non‑inclusion of the priority provision after the second creditors' meeting.[13]
[13] Corporations Act 2001 (Cth) s 444DA(2)(a).
Accordingly, an administrator in the position of the plaintiffs can only seek to obtain an order from the court approving the non‑inclusion of the priority provision. Such an order may be made before or after the second meeting.[14]
[14] Corporations Act 2001 (Cth) s 444DA(7).
In considering the application the court applies the test under s 444DA(5). The court may approve non‑inclusion if satisfied that doing so would be likely to result in the same or a better outcome for eligible employee creditors as a whole than would result from an immediate winding up of the company.
The application of s 444DA(5) involves a four stage process:
(1)First, there must be a determination of the likely outcome for the eligible employee creditors as a whole in the event that the deed of company arrangement as proposed proceeds with the non‑inclusion of the priority provision.
(2)Second, there must be a determination of the likely outcome for the eligible employee creditors as a whole in the event of an immediate winding up of the company.
(3)Third, there must be a determination of whether the likely outcome in scenario 1 (under the proposed deed of company arrangement) is 'the same or better' than the likely outcome in scenario 2 (immediate winding up). This necessarily involves an evaluative judgment based on a comparison of the two likely outcomes.
(4)Fourth, assuming that the third step is resolved satisfactorily, there must be consideration of whether, as a matter of discretion, the court ought to approve the non‑inclusion of the priority provision. The use of the word 'may' in s 444DA(5) imports a residual discretion as to whether or not to grant approval.
The 'outcome' will include the likely financial return to the eligible employee creditors. And, in this respect, the outcome may include consideration of the likely timing of a distribution to the eligible employee creditors. It is better to receive an immediate distribution of 'x' cents in the dollar than it is to wait for the same distribution at an indeterminate time in the future.
The term 'outcome' is, however, not confined to the likely financial return to the eligible employee creditors. The use of the term 'outcome' in s 444DA(5) should be contrasted with the term 'return' in s 435A. Continued existence of the company or its business, leading to the continued employment of some or all of the eligible employee creditors, is also an outcome that may be taken into account under s 444DA(5).
In considering the questions arising on an application pursuant to s 444DA(5) the court is entitled to give weight to the administrator's opinion.[15]
[15] ReVouris and Tonks as Deed Administrators of Good Impressions Offset Printing Pty Ltd [2012] NSWSC 603 [9].
Notice to the eligible employee creditors
The plaintiffs brought their application on 15 May 2018. They sought an immediate hearing. The matter was listed before me on 16 May 2018 at 9.30 am. The matter was urgent as, due to the operation of s 444B(2)(a), 16 May 2018 was the final day for execution of the proposed deed of company arrangement.
In the originating process the plaintiffs sought orders that approval to non‑inclusion of the priority provision be made forthwith. However, the plaintiffs proposed that the order be made on terms that: (1) notice of the order be given to the eligible employee creditors; and (2) the eligible employee creditors have liberty to apply to set aside the order. In that way it was sought to preserve the eligible employee creditors' ability to be heard on the application.
The plaintiffs' solicitors nevertheless proceeded to give notice of the application to the eligible employee creditors. They did so by email. The emails were sent after 5.00 pm on 15 May 2018. By 9.30 am on 16 May 2018 responses had been received from 19 of the eligible employee creditors. Sixteen consented to the proposed non‑inclusion order; three sought further information. Understandably, given the short time frame, nothing was received from the majority of the eligible employee creditors.
I considered the eligible employee creditors should be given reasonable notice of the application, and therefore an opportunity to be heard, before the hearing of the application. As a matter of procedural fairness, a person with an interest in the making of such an order should, in normal circumstances, be given an opportunity to make submissions prior to the order being made, rather than having to apply to have an ex parte order set aside.[16]
[16] Cf BP Australia Ltd v Brown [2003] NSWCA 216; (2003) 58 NSWLR 322 [134] - [136].
The position may be otherwise where urgency does not permit the giving of reasonable notice. But here the urgency was due to the imminent expiration of the time limited for the execution of the proposed deed of company arrangement. It was possible to extend the time for execution of the deed of company arrangement.[17] Accordingly, I made orders extending the time for execution of the deed of company arrangement to 4.00 pm on 28 May 2018, listed the application for determination at 9.00 am on 25 May 2018, and required that further notice of the application and the hearing date be provided to the eligible employee creditors.
[17] Corporations Act 2001 (Cth) s 444B(2)(b).
The plaintiffs gave notice to the eligible employee creditors in accordance with my orders of 16 May 2018. Only one further response has been received from an eligible employee creditor. That response, from an eligible employee creditor who is unidentified save for an email address, states:
NOT agreeing to your request pending further legal advice. (original emphasis)
Neither that eligible employee creditor nor any other appeared seeking to be heard in opposition to the plaintiffs' application.
In addition, while it was too late to hold a formal meeting of the eligible employee creditors to pass a resolution under s 444DA(2)(a), the plaintiffs nevertheless decided to convene a meeting of the employees. That meeting was held on 21 May 2018. Thirteen of the company's eligible employee creditors attended the meeting.
At the 21 May 2018 meeting the plaintiffs, by Mr Shaw, informed the eligible employee creditors of the oversight which had led to the application and the employees' right to appear at the hearing on 25 May 2018 if they considered fit.
In the circumstances I am satisfied that the eligible employee creditors have had reasonable notice of the application. I am also satisfied that no eligible employee creditor actively opposes the non‑inclusion order as sought. To the extent that three employees sought further information, and one did not immediately agree to the non‑inclusion order pending legal advice, none of those four eligible employee creditors have appeared to be heard in opposition to the plaintiffs' application.
Disposition
The circumstances of Cooper & Oxley's administration presented as a case in which the application for approval of the non‑inclusion of the priority provision had overwhelming force.
Mr Shaw's affidavit evidence confirmed the plaintiffs' estimates of the likely returns to the eligible employee creditors. Consistently with what was stated in the report to creditors, the plaintiffs estimated the likely outcomes to the eligible employee creditors as:
•under the proposed deed of company arrangement - 100 cents in the dollar on either the pessimistic or optimistic view of the outcome of the deed of company arrangement;
•in an immediate winding up - 18 cents in the dollar.
Those estimates in the affidavit evidence were provided without explication. However, I infer that they are based on the detailed analysis in the plaintiffs' report to creditors. That analysis was comprehensive. Also, as a matter of logic and common sense the key features of the deed of company arrangement proposal make it inherently likely that the eligible employee creditors will receive the same or a better return under the proposed deed of company arrangement when compared to that in an immediate winding up. In particular, under the deed of company arrangement the director will, in effect, make an $800,000 contribution that will not be available in a winding up.
Accordingly, I accept Mr Shaw's evidence as to the estimated likely return to the eligible employee creditors in the two alternative scenarios. In doing so I apply the principle that I am entitled to give weight to the administrator's opinion.
There are two other respects in which the likely outcomes for the eligible employee creditors differ depending on whether the deed of company arrangement proposal is effectuated or there is an immediate winding up.
First, the plaintiffs, through Mr Shaw, have suggested that a dividend to the employees may be brought forward through the deed of company arrangement mechanism.
Second, while only relevant to the 30 continuing employees rather than the whole of the 70 eligible employee creditors, the deed of company arrangement proposal will see the company and its business continue in existence. The continuing employees are likely to have continued employment. That employment would inevitably be terminated in an immediate winding up.
In my view, continued employment for 30 out of the 70 eligible employee creditors is a sufficient proportion to take that into account in determining which outcome is better for the relevant creditors as a whole.
In the circumstances I was satisfied that non‑inclusion of the priority provision in the deed of company arrangement as proposed is likely to result in a better outcome for eligible employee creditors as a whole than would result from an immediate winding up of Cooper & Oxley.
I acknowledge that there is a risk that, following effectuation of the deed of company arrangement, Cooper & Oxley may not meet its obligations to the continuing employees as to leave payments and retrenchment payments (if there are any retrenchment payments).
The expectation is, however, as Mr Shaw deposes to at par 32 of his affidavit sworn 15 May 2018, that continuing employee creditors are estimated to receive the entirety of their employment entitlements. That is to be compared to the estimate of the likely 18 cents in the dollar in an immediate winding up. The comparison required by s 444DA(5) is to be based on the likely resultant outcome rather than possible risks.
My conclusion that the deed of company arrangement proposal is likely to result in a better outcome for the eligible employee creditors as a whole is itself a significant discretionary factor that favours the grant of approval under s 444DA(5). However, there are other material factors that compel a favourable exercise of the discretion.
First, the order will better achieve the object of Part 5.3A under s 435A. It will allow Cooper & Oxley and its business to remain in existence. Moreover, it is likely to result in a better return for the company's general creditors, and not solely the eligible employee creditors, than would result from an immediate winding up.
Second, at the meeting on 24 April 2018 the eligible employee creditors resolved, in effect, to agree to the non‑inclusion of the priority provision so far as it concerned the continuing employees' entitlements to leave and retrenchment payments. The only other departure from the usual priorities that prevail in a winding up are those that will apply to any Litigation Contribution derived from successful prosecution of the claim against Dragdin. Whether there will be any Litigation Contribution is a matter of speculation. In any case, the likely outcome under the proposed deed of company arrangement is that the eligible employee creditors will be paid in full whether or not any Litigation Contribution is recovered.
Third, all eligible employee creditors present and voting at the second creditors' meeting voted in favour of the resolution that Cooper & Oxley execute a deed of company arrangement on the terms proposed. The proposal as recorded in the plaintiffs' report to creditors clearly specified the particular priority waterfall that would apply to any Litigation Contribution. No eligible employee creditors, or for that matter anyone, commented adversely on that aspect of the proposal.
Fourth, there is no opposition to the non‑inclusion of the priority provision on the part of eligible employee creditors notwithstanding that those creditors have now been provided with reasonable notice of the application.
Finally, I consider it is likely that, if a meeting of eligible employee creditors had been convened in accordance with s 444DA(3) and s 444DA(4) seeking a resolution agreeing to non‑inclusion of the priority provision as to the Litigation Contribution, then the appropriate resolution would have passed.
Had such a meeting been convened the eligible employee creditors would have received a report setting out the likely outcomes for the employees under the deed of company arrangement as proposed and in an immediate winding up. The expected financial return under the two scenarios would have been consistent with the expected returns as detailed in the plaintiffs' report to creditors. The eligible employee creditors, acting rationally, would then more likely than not have passed the resolution agreeing to non‑inclusion. The choice would have been between likely payments in full (under the deed of company arrangement proposal) or 18 cents in the dollar (in an immediate winding up).
There is no reason to believe that the eligible employee creditors would have acted other than rationally. Insofar as a resolution was sought and obtained as to the leave and retrenchment payment the employees acted rationally.
The likelihood that, had a meeting of eligible employee creditors been convened, there would have been a resolution agreeing to non‑inclusion, is a strong discretionary consideration in favour of making the order.[18]
[18] Re Vouris and Tonks as Deed Administrators of Good Impressions Offset Printers Pty Ltd [16].
For these reasons I approved the non‑inclusion of the priority provision.
The proposed order in the application sought approval in qualified terms. It suggested an order in terms that the deed of company arrangement be approved without inclusion of the priority provision only with respect to the Litigation Contribution. As I read s 444DA(5), however, the power is to approve the non‑inclusion of a provision to the effect of that specified in s 444DA(1). As a practical measure, while it may be that the priority in which any Litigation Contribution is distributed is the only remaining aspect in which the deed of company arrangement as proposed is offensive to s 444DA(1), I considered it prudent to follow the language of s 444DA(5). Accordingly, I made an order in those terms.
Costs
Initially the plaintiffs sought an order that the costs of the application be costs in Cooper & Oxley's administration.
Such an order provides the court's imprimatur to the costs of the application being paid out of the assets of the insolvent company as an expense 'properly incurred' by the plaintiffs as administrators.
Where the line is drawn between an expense properly incurred and one not properly incurred is to be determined on the facts of the particular case and in the exercise of judgment.[19]
[19] Adsett v Berlouis (1992) 37 FCR 201, 212.
There is no doubt that the plaintiffs acted properly in bringing the application. But the application was only necessary because of the plaintiffs' oversight. The application, and its attendant costs, would have been unnecessary if a resolution of the eligible employee creditors had been sought and obtained agreeing to the non‑inclusion of the priority provision. For the reasons previously given I am satisfied that it is more likely than not that such a resolution would have passed had it been sought.
I have accepted that the failure to seek and obtain a resolution of the eligible employee creditors was an inadvertent mistake on the part of the plaintiffs. But it was nevertheless a mistake. The costs of that mistake should not be borne by the creditors of Cooper & Oxley - that being the practical effect of the costs order as sought by the plaintiffs.
The appropriate costs order was that the costs of the application were to be borne by the plaintiffs personally and not be costs in the administration of Cooper & Oxley.[20] That was the costs order that I made on 25 May 2018. I note that, once I expressed my concern as to the costs order as initially sought, the plaintiffs quite properly determined that they would no longer seek the order that the costs of the application be costs in the administration.
[20] Cf Re Soul Outlet Pty Ltd (in Liq); Ex parte Jack as Liquidator of Soul Outlet Pty Ltd (in Liq) [2015] WASC 307 [91].
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AD
ASSOCIATE TO THE HONOURABLE JUSTICE VAUGHAN
29 MAY 2018
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