Selim v McGrath

[2003] NSWSC 806

CITATION:	Selim v McGrath [2003] NSWSC 806
HEARING DATE(S):	26 August 2003
JUDGMENT DATE:	26 August 2003
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Orders made under s 437F
CATCHWORDS:	CORPORATIONS - voluntary administration - court's approval of transfer of shares - relevant considerations
LEGISLATION CITED:	Corporations Act 2001 (Cth) s 437F
PARTIES :	James Selim (P1) Buzrio Pty Ltd (P2) Anthony Gregory McGrath and Christopher John Honey (D)
FILE NUMBER(S):	SC 4456/03
COUNSEL:	S J Stanton (P1, P2) J Sheahan SC (D)
SOLICITORS:	Aitken McLachlan Thorpe (P1, P2)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 26 AUGUST 2003

4456/03 JAMES SELIM & ANOR V ANTHONY GREGORY McGRATH & ANOR

JUDGMENT (Ex tempore; revised 28 August 2003)

1 HIS HONOUR: By an originating process filed on 22 August 2003 the plaintiffs seek orders that a transfer of shares by the first plaintiff (Mr Selim) to Selim Foundation Pty Limited, as trustee, and the further transfer by the second plaintiff (Buzrio) to Selim Foundation Pty Limited be approved under s 437F of the Corporations Act. Section 437F states that a transfer of shares in a company that is made during the administration of the company is void except so far as the Court otherwise orders.

2 Counsel’s research has not identified any reported cases on that provision. It appears to me probable that the legislative purpose in enacting the provision is to protect the creditors of the company and to ensure that the administration can proceed so as to effectuate the objects contained in s 435A of the Act. One of those objects is to maximise the chance that the company will continue in existence. One can envisage circumstances in which a transfer of shares might reduce, rather than maximise, that prospect.

3 The application is supported by two affidavits by Mr Hartigan, who is the plaintiff’s accountant. It appears, according to his affidavits, that Mr Selim has been a director of Buzrio since 1983 and he and June Selim each own 50% of the shares in that company. Mr Selim has been a director of Pan Pharmaceuticals Limited (Administrator Appointed) (“the company”) since its incorporation in 1999 and was a director of its predecessors from 1976 until that time. The company entered into external administration on 22 May 2003 and the defendants were appointed the administrators.

4 Meetings of creditors of the company have been held and a further meeting is scheduled for 1 September 2003. It has been foreshadowed that at that meeting, the creditors will vote on a proposal for a deed of company arrangement (“DOCA”). A copy of the proposed DOCA is in evidence.

5 It is, in some respects, an unusual proposal but there are some familiar features. It provides for the identification of participating creditors by a process of what might broadly be described as calling for and adjudicating upon claims. The process is a little more elaborate than one sometimes finds, presumably because it is anticipated that, the company having been a public listed company in respect of which there were some highly publicised product recalls by the Therapeutic Drugs Administration prior to the appointment of the voluntary administrators, there may be an unusually large number of claims.

6 The proposed DOCA provides for the establishment of an employees’ fund, and it is contemplated that employee claims will be paid in full. It provides for a trade creditors’ fund and makes provision for the group of companies of which the company forms part (the Pan Group), to pay into that fund the sum of $12,000,000. The sources of that payment, and the next payment to which I shall refer, may include retained cash held by the voluntary administrators and provided for in clause 13.2 of the draft. Clause 5.3 of the draft contemplates that the deed administrator will pay to trade creditors up to fifty cents in the dollar of admitted claims. Then the deed provides, in clause 6, for the establishment of a sponsors’ fund into which the Pan Group will pay a further $12,000,000, and there are provisions, somewhat more complex than in the case of trade creditors, for payments out of that fund.

7 I was informed from the bar table that the voluntary administrators anticipate that the claims of trade creditors will be in the vicinity of $20,000,000 and the claims on the sponsors’ fund will be in the region from $60,000,000 to $160,000,000.

8 As is common in deeds of company arrangement, there is a provision that the creditors identified by the process I have described must accept their entitlements to payment out of the respective funds in full satisfaction of their claims, and the claims of those claimants are extinguished by force of the DOCA and the Act. Claims against directors will also be extinguished.

9 The draft DOCA also contains provisions for the replacement of the existing board of directors of the company with new directors and for the sale by Mr Selim of most of his shares in the company. It appears that the intention is that the company will, under the provisions of the deed, be returned to management by its board, but under the control of new directors, and the existing employees will be offered employment by the company under new arrangements.

10 So far as Mr Selim’s shareholding is concerned, the evidence is that there are approximately 172,000,000 shares issued in the company and of those, Mr Selim owns approximately 91,000,000 shares. The DOCA and related documents provide for the sale of a little over 87,000,000 shares out of Mr Selim’s total holding. The purchasers are identified in the draft and the draft expressly provides that Mr Selim warrants that neither he, nor any company in which he has a relevant interest, has a relevant interest in those purchasers.

11 It was pointed out to me that the expression “relevant interest” is not defined for the purposes of the draft DOCA, but it seems to me probable that a court, invited to construe those words in an instrument prepared and adopted under the provisions of the Corporations Act, would interpret them by reference to the definitions in the Act. The expression “relevant interest” in the Corporations Act is, of course, a defined term with a very wide ambit.

12 Counsel for the defendants pointed out to me that the terms of the sale agreements are not disclosed, and he submitted that disclosure had not been made to his clients, notwithstanding their request for information.

13 The effect of the provisions of the deed, if adopted and implemented, will be that Mr Selim will have disposed of his shares in the company except for a little over 3,000,000 shares, and will have ceased to be a director. I should note that the sale of shares under the DOCA will require various approvals under the Corporations Act and the ASX Listing Rules, because the interest to be disposed of is in the aggregate a high percentage of the issued share capital of the company.

14 The application today relates to approximately 3,000,000 shares of Mr Selim that are not accounted for by the provisions of the DOCA which I have described. The application also extends to 800,000 shares held by Buzrio.

15 Mr Hartigan says in his first affidavit that in mid-2002 Mr Selim approached him for assistance in the establishment of a charitable foundation, intended to be an independently operated charity with certain nominated beneficiaries. Mr Selim told Mr Hartigan that he intended that he and Buzrio would give property to the foundation to be applied for charitable purposes.

16 In November 2001, solicitors were instructed to negotiate with the Australian Taxation Office for the recognition of the proposed foundation as a prescribed private fund and a deductible gift recipient for the purposes of the Income Tax Assessment Act 1997 (Cth).

17 After a substantial period of negotiation, the Australian Taxation Office wrote to the solicitors on 2 July 2003, advising that the Government had approved the foundation for the purposes of the relevant legislation. One of the consequences of that approval is that donations to the foundation are tax deductible because the foundation is recognised as a deductible gift recipient.

18 Mr Hartigan has reviewed the provisions of the foundation deed which is in evidence and he describes the deed as very restrictive. He notes that there are three directors of the trustee company, Selim Foundation, namely himself, a person called Peter Curry of South Pacific Securities and Mr Selim. Under the terms of the deed and the constitution of the trustee company, the directors cannot act without a majority vote. Therefore, says Mr Hartigan, no single director can control the Selim Foundation.

19 In response to submissions I received this morning from counsel for the defendants, the plaintiffs have filed and read an additional affidavit from Mr Hartigan, according to which the shareholders of Selim Foundation Pty Limited, each with one share, are the three individuals who are the directors. In his more recent affidavit Mr Hartigan deposes to that fact and asserts that he and, he believes, Mr Curry will act independently and will in no way allow Mr Selim to have the control of the voting power of the trustee company (and therefore access to the voting power attached to the 3,000,000 shares which are to be transferred to it upon the terms of the charitable trust).

20 Mr Hartigan also says that at no time has Mr Selim sought to have him act in a capacity which was not in accordance with his position as an accountant and his independence as a director of Selim Foundation. He says that to the best of his knowledge Mr Selim brings the application motivated by his wish to have the shareholding transferred to Selim Foundation, for reasons which Mr Selim had decided upon well before the company went into voluntary administration.

21 Mr Hartigan also says that the taxation position established in respect of the foundation, which he outlines in more detail than is necessary now, is that the taxation deduction made available by the Australian Taxation Office’s decision will always equal the value of the shareholding donated to the foundation.

22 There is said to be an urgency attached to the present application. This is because Mr Selim and Buzrio wish to transfer their shares to the foundation prior to the meeting on 1 September 2003, so that Mr Selim will be able to attend the meeting and show creditors that he has no shareholding in the company, other than as detailed in the DOCA, and that he is to become genuinely independent from the company. Mr Hartigan says in his first affidavit that if the shares are not transferred by 1 September 2003 his opinion is that

· the creditors of the company will be sceptical of Mr Selim’s motive;

· he will be unable to show creditors that he has no vested interest in the company;

· he will be unable to have the DOCA considered without extraneous factors such as his independence being influential, if not determinative, in the minds of all or some of the creditors.

23 In my opinion this evidence is sufficient to discharge the onus that the plaintiffs bear, implied in s 437F, of establishing that the transfers of shares now proposed are in the interests of the creditors of the company and will not defeat the objects of Part 5.3A.

24 In his submissions earlier today counsel for the defendants drew my attention to five factors. First, counsel noted the absence of information about the contents of the share agreements by which it is proposed that Mr Selim will sell the bulk of his shares. I invited counsel to assist me by speculating as to how the contents of the share agreement might affect the matter before me now. Counsel hypothesised that it would be possible, under the share agreements, that Mr Selim might retain some power to require the purchasers from him to place the shares with someone else. I do not regard that as a realistic hypothesis because it is a hypothesis under which Mr Selim would retain a relevant interest, contrary to the warranty in the DOCA. In any event, it seems to me that such a possibility is not relevant to the much more narrow issue I have to consider, which is whether the transfer of the remaining 3,000,000 shares is or is not in the creditors’ interests and consistent with the objects of Part 5.3A.

25 Secondly, counsel submitted that the 3% of shares held in the foundation may be crucial to control of the company, having regard to the fact that three purchasers will acquire the whole of the very substantial interest of Mr Selim. That is coupled with counsel’s third submission, which is that on the evidence before me this morning, it was impossible to say who the shareholders of the share foundation company were and, consequently, there was a risk that those shareholders might be able to replace the directors and enhance Mr Selim’s control of the foundation. Now that the evidence establishes that the shareholders are as independent of Mr Selim as are the directors of the share foundation company, it appears to me that this concern falls away. According to the evidence before me, both Mr Curry and Mr Hartigan are independent of Mr Selim and I am not in a position to assume, therefore, that the 3% of shares vested in the foundation will be devoted in some manner that might be contrary to the interests of the creditors or the objects of Part 5.3A.

26 Fourthly, counsel for the defendants noted that there was no provision in the deed, as is common in deeds of company arrangement, for the injection of new capital into the Pan Group. That is not quite true, because there is a provision for working capital which envisages that there may be a rights issue in future. But that aside, it appears to me that the absence of any provision for injection of capital to pay creditors is beside the point, given the narrow application I must consider today. There is nothing to suggest that the Pan Group will be unable to provide the sums required to constitute the funds that I have described. In any event, those matters are for the creditors, rather than for me on the present application.

27 Fifthly, counsel drew attention to the fact that there are potentially very large quantities of claims against the sponsors’ fund, and the claims of trade creditors are likely substantially to exceed the trade creditors’ fund. Again, it seems to me those are matters for creditors, not relevant to the Court in considering whether to approve a transfer of the 3,000,000 shares which is to take place outside the terms of operation of the proposed DOCA.

28 There is one other matter to which attention should be drawn. The effect of the proposed deed of company arrangement, if it is approved and executed, will be to provide a release to Mr Selim in respect of any claims made against him, by virtue of the provisions of clause 8 of the agreement. While that again is a matter which may be relevant to the consideration of the proposal by the creditors, it is not a matter which is relevant to my determination of the application concerning transfer of the 3,000,000 shares.

29 There are obviously many issues for debate at the creditors’ meeting, concerning the desirability of approving the proposed DOCA. It is important that I make it clear that nothing in my reasons for judgment is intended to influence that outcome, or to express any view as to the desirability of the DOCA in any general sense. What appears to me to have been established is a much narrower proposition, namely, that the approval of the transfer of 3,000,000 shares, out of a total of about 170,000,000, into a trustee company of which Mr Selim is one of three directors and one of three shareholders, is not contrary to the interests of the creditors or to the objects of Part 5.3A, such that I ought to refuse to approve the transfer. It must be borne in mind that the shares will, upon transfer, be held in trust for charitable purposes and that the two other directors and shareholders are independent of Mr Selim and in a position to outvote him.

30 On the question of costs, this is a case where the plaintiffs come before the Court seeking a dispensation. It is frequently the case that in those circumstances the costs involved in obtaining that dispensation, including the costs of the party who appears to answer the application, are borne by the person seeking dispensation.

31 Here a number of features of the case are particularly pertinent. First, counsel was not able to refer to any reported case on section 437F. Secondly, in those circumstances it was particularly of assistance to the Court to have the voluntary administrators present as defendants to draw attention to their concerns. Thirdly, it appears to me that in the circumstances the conduct of the voluntary administrators was entirely reasonable.

32 Therefore, my decision is that the plaintiffs be ordered to pay the defendants’ costs of today’s hearing.

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Last Modified: 09/05/2003