Shivnani v Australian Foods Co Pty Ltd (Receiver & Manager Appointed) (in Liquidation) - [2006] WASC 85

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: SHIVNANI -v- AUSTRALIAN FOODS CO PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQUIDATION) & ANOR [2006] WASC 85

CORAM: BLAXELL J

HEARD: 5 MAY 2006

DELIVERED : 18 MAY 2006

FILE NO/S: COR 306 of 2005

MATTER :AUSTRALIAN FOODS CO PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQUIDATION) (ACN 081 404 686)

BETWEEN: PAVAN SHIVNANI
Plaintiff
AND
AUSTRALIAN FOODS CO PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQUIDATION) (ACN 081 404 686)
First Defendant
GLENN DOUGLAS TRINICK
Second Defendant

FILE NO/S :COR 235 of 2005

MATTER :Section 447A of the Corporations Act 2001 (Cth)
and
AUSTRALIAN FOODS CO PTY LTD
(ACN 081 404 686)

BETWEEN :PAVAN SHIVNANI
Plaintiff
AND
AUSTRALIAN FOODS CO PTY LTD (RECEIVER & MANAGER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 081 404 686)
Defendant

Catchwords:

Corporations - Administration with a view to executing a deed of company arrangement - Creditors' meeting resolving that company be wound up - Prior rejection by Administrator of 69 instruments of proxy favouring continuation of administration - Appeal from Administrator's decision rejecting proxies - Validity of instruments of proxy - Whether order should be made reinstating administration

Legislation:

Corporations Act 2001 (Cth), s 439A, s 439B, s 439C, s 1321

Corporations Regulations 2001, reg 5.6.28, reg 5.6.29, reg 5.6.31

Result:

Appeal allowed
Declaration that resolutions purportedly passed at creditors' meeting are invalid
Order reinstating administration of company

Category: B

Representation:

COR 306 of 2005

Counsel:

Plaintiff:     Mr J C Vaughan
First Defendant             :     No appearance
Second Defendant         :     Mr R C Ioppolo

Solicitors:

Plaintiff:     Galic & Co
First Defendant             :     No appearance
Second Defendant         :     Wojtowicz Kelly

COR 235 of 2005

Counsel:

Plaintiff: Mr J C Vaughan
Defendant: No appearance

Solicitors:

Plaintiff: Galic & Co
Defendant: No appearance

Case(s) referred to in judgment(s):

Employers' Mutual Indemnity (Workers Compensation) Ltd v JST Transport Services Pty Ltd (1997) 23 ACSR 197
Fast Scout Ltd v Bergel [2001] WASC 343; (2001) 25 WAR 244
Re Huon Valley Springs Pty Ltd (1986) 10 ACLR 883

Case(s) also cited:

Cawthorn v Keira Constructions Pty Ltd (1994) 13 ACSR 337
Easterday v The State of Western Australia (2005) 30 WAR 122
In Re LOCM Pty Ltd (Admin Apptd) (1997) 25 ACSR 349
In Re Taylor (1995) 16 ACSR 774
Link Agricultural Pty Ltd v Shanahan [1999] 1 VR 466
Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611
Mercy v Wanari (2000) 35 ACSR 70
Re Nardell Coal Corporation Pty Ltd [2004] NSWSC 281

BLAXELL J: The first defendant ("the company") is in liquidation pursuant to an order for winding up made in the Supreme Court of South Australia on 18 January 2005. Between 12 July and 5 December 2005 the company was also subject to administration by the second defendant following an appointment made by the liquidator under s 436B of the Corporations Act 2001 (Cth) ("the Act"). At all material times the plaintiff has been the sole director, and a shareholder and creditor of the company.
The second defendant's administration of the company came to an end on his recommendation and as a result of a resolution of creditors pursuant to s 439C of the Act. At the meeting that passed that resolution the second defendant rejected some 69 instruments of proxy from creditors appointing the plaintiff to vote on their behalf. If those proxies had been accepted, a majority of creditors would have resolved to adjourn the meeting, and the administration of the company would have continued.
The plaintiff now appeals (pursuant to s 1321 of the Act) from the decision of the second defendant to reject the instruments of proxy. The plaintiff also applies for an extension of the period fixed by s 439B(2) for an adjournment of the second meeting of creditors of the company, but the outcome of this second application obviously must turn upon the result of the appeal.

The legislative background

The second defendant's administration of the company was pursuant to Pt 5.3A of the Act. The object of such an administration is that the business, property and affairs of an insolvent company should be administered in a way that:
"(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members then would result from an immediate winding up of the company." (s 435A)
The Act also mandates that this object is to be achieved quickly and efficiently. In this regard s 436E requires that a meeting of creditors be convened within five business days after the administration begins for the purpose of determining whether to appoint a committee to consult with the administrator. Section 439A then requires that a second meeting of creditors be convened (ordinarily) within 21 days of the administrator's appointment for the purpose of considering resolutions:
"(a)that the company execute a Deed of Company Arrangement specified in the resolution (even if it differs from the proposed Deed (if any) details of which accompanied the notice of meeting); or
(b)that the administration should end; or
(c)that the company be wound up." (s 439C)
Section 439B(2) provides that this second meeting of creditors may be adjourned from time to time, but cannot be adjourned to a day that is more than 60 days after the first day on which the meeting was held. However, the Court has a discretion under s 439A(6) to extend the convening period upon application being made within the 21 day period referred to above. The Court also has a general power (under s 447A) to make such order as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company.
As can be expected, the administrator has full powers over a company during the period of administration (s 437A), and the powers of its directors and other officers are suspended (s 437C). As soon as practicable after the administration of a company begins, the administrator must:
"(a)investigate the company's business, property, affairs and financial circumstances; and
(b)form an opinion about each of the following matters:
(i)whether it would be in the interests of the company's creditors for the company to execute a Deed of Company Arrangement;
(ii)whether it would be in the creditors' interests for the administration to end;
(iii)whether it would be in the creditors' interests for the company to be wound up." (s 438A)
The directors of a company are required to assist the administrator in completing this task, and a failure to do so constitutes an offence of strict liability (s 438B). The administrator's report and statement of opinion as to the above matters is required to accompany the notice convening the second meeting of creditors (s 439A).
Accordingly, in circumstances such as the present, the fundamental purpose of an administration under Pt 5.3A is that there should be a relatively swift assessment of the prospects of the company or any part of its business surviving. The administrator is then required to report to a meeting of creditors and provide an opinion on such prospects including whether or not there should be a deed of company arrangement. Following such report, it is for the creditors to decide whether there should be a deed of company arrangement, or alternatively whether the liquidation should proceed.

The material facts

The company was incorporated in 1998 and at all material times was based in Perth and conducted business as a trader and exporter of grain. The supplies of grain were purchased directly from primary producers, and it is those primary producers who now constitute the bulk of the creditors of the company.
On 29 October 2004 the Australian Securities and Investments Commission obtained an order (pursuant to s 1323 of the Act) for the appointment of Mr Barry Honey as interim Receiver and Manager of the company. Not long afterwards, an application by a creditor resulted in the order made on 18 January 2005 appointing Alan Geoffrey Scott as Liquidator of the company.
The second defendant ("Mr Trinick") is a certified practising accountant, and he first became involved in the affairs of the company in early February 2005 when he was consulted by the plaintiff ("Mr Shivnani"). Mr Shivnani outlined a proposed Deed of Company Arrangement ("DOCA") for the company involving a debt for equity swap, whereby the creditors would accept shares in satisfaction of their debts. At Mr Shivnani's request, Mr Trinick on 23 February 2005 consented to act as Administrator of the company.
On 12 July 2005 Mr Scott appointed Mr Trinick as Administrator of the company pursuant to s 439B(1) of the Act, and at the same time resigned as Liquidator. Shortly afterwards, Mr Trinick met with Mr Shivnani and advised on his requirements if he was to be in a position to recommend the DOCA to creditors. These requirements comprised budgeted cash flow projections in respect of the proposed future business of the company, evidence of likely income and expenditure for that business, and a tax opinion as to the taxation consequences of the proposed debt for equity swap ("the requested information").
The first meeting of creditors was held on 18 July 2005 and it resolved to confirm Mr Trinick's appointment as Administrator of the company. The meeting did not appoint a committee of creditors.
A second meeting of creditors was held on 9 August 2005 and Mr Trinick recommended that it be adjourned to enable him to investigate the affairs of the company and the DOCA proposed by Mr Shivnani. The creditors accepted this recommendation and resolved to adjourn the second meeting for 60 days.
The adjourned meeting was set down for 7 October 2005 and Mr Trinick gave Mr Shivnani a deadline of 15 September to provide the requested information. Subsequently, Mr Shivnani was unable to meet that deadline, and with Mr Trinick's consent applied to the Court for an order under s 447A that the period fixed by s 439B(2) for the adjournment of the second meeting of creditors be extended by 60 days. That application resulted in an order by Master Newnes on 23 September 2005 extending the period within which the second meeting of creditors could be adjourned until 5 December 2005.
On 18 November 2005 Mr Trinick sent a circular to creditors advising that the adjourned second meeting would be held on 5 December 2005. Mr Trinick also advised that he had not received the requested information from Mr Shivnani and was recommending that the company be placed into liquidation. With that circular, Mr Trinick also forwarded a blank "Appointment of Proxy" form which allowed each creditor to indicate a required manner of voting on a number of resolutions including the following:
"1.The company execute a Deed of Company Arrangement.
2.The administration be terminated.
3.The company be wound up."
After the circular was sent to creditors, Mr Shivnani obtained an ex parte order from Commissioner Sanderson on 28 November 2005 extending the s 439B time period by a further 60 days from 5 December 2005. Although that ex parte order could only have been made by consent, Mr Trinick was personally unaware that the application for the second extension was being made, and there is a dispute between the solicitors for the parties as to whether or not consent was given.
After obtaining the order on 28 November 2005, Mr Shivnani took it upon himself to circulate to creditors a new form of appointment of proxy which provided for directions to be given as to the manner of voting in respect of resolutions including the following:
"1.The second meeting be adjourned for a further 60 days.
2.The company execute a Deed of Company Arrangement.
3.Pavan Shivnani continue on as a director of the company.
4.The administration be terminated.
5.The company be wound up."
67 of the creditors completed and returned these proxy forms to Mr Shivnani and appointed him as their proxy. Of these, 64 creditors specified that there should be votes in favour of the first three of the above resolutions and votes against the remainder. The remaining three creditors indicated votes in favour of the first four resolutions and a vote against the fifth.
A further two creditors completed Mr Trinick's proxy form and appointed Mr Shivnani as their proxy. They each indicated that there be a vote in favour of the company executing a deed of company arrangement and votes against the remaining resolutions. Accordingly, a total of 69 creditors forwarded proxies to Mr Shivnani opposing the winding up of the company.
When the meeting was convened on 5 December 2005 seven or eight creditors were present in person and up to a dozen creditors had appointed Mr Trinick as their proxy. Mr Trinick rejected each of the 69 proxy forms which appointed the plaintiff as proxy, and he has deposed that his reasons for doing so were as follows:
"56.I believed that:
(a)it was necessary for Mr Shivnani's proxy form to be provided to all of the creditors of the company; and
(b)not all of the creditors of the company had received Mr Shivnani's proxy form.
57.The ground for my belief set out in sub‑paragraph (b) ... was that I was informed by two people present at the meeting, ... that they had not received a copy of Mr Shivnani's proxy form.
58.The ground for my belief set out in sub‑paragraph (a) ... was that it would be impracticable in this administration, and in administration generally, to have different proxy forms stating:
(a)different resolutions, or
(b)resolutions that by their different wording differed in their material substance,
due to difficulties in accumulating votes on materially different resolutions.
59.Rather, I considered that the proper course was as follows:
(a)For the creditors to be provided with a single proxy form stating a single set of alternative resolutions.
(b)For the administrator to provide that form to the creditors.
(c)For all interested persons to liaise with the administrator with a view to having the administrator include their proposed resolutions in the single proxy form.
60.I also believed that it was necessary for the administrator, in this administration and in administrations generally, and no other person, to provide creditors with a proxy form.
61.The ground for my belief in this regard was my understanding that the Corporations Regulations required:
(a)every creditor to be provided, by an administrator, with a proxy form, with such a form required to be provided with the notice of any meeting, and
(b)an administrator to confirm, by a Form 530, that the proxy form and notice of meeting had been provided to every creditor,
together with the fact that, in administrations generally, it is only the administrator who has a complete and up to date list or database of creditors, by reason of creditor‑initiated contact with the administrator following the administrator's appointment.
62.A further ground for my belief is that I had consulted by telephone with a female person at an ASIC enquiry line, whose name I cannot recall, who informed me that she agreed that it is the administrator who must send out proxy forms to all of the creditors, for all of the reasons set out above."
The meeting on 5 December 2005 resolved to wind up the company, but this resolution was not really necessary given that the company was already subject to a winding‑up order. However, as the meeting did not resolve in favour of a further adjournment, s 435C(3) had the effect that the administration came to an end.
Although I have not been provided with detailed information as to the creditors of the company, I understand that it has total liabilities of approximately $5,000,000. Mr Shivnani has deposed that the 69 creditors who appointed him as their proxy represented approximately $3,500,000 of that total liability of $5,000,000, and Mr Trinick has not disputed that assertion.
Mr Shivnani contends that at all material times Mr Trinick and the creditors were in possession of his proposed DOCA, but he acknowledges that there were delays in providing all of the requested information. In this regard, as at 5 December 2005 the matters still outstanding were a ruling from the Australian Taxation Office, further due diligence to comply with the disclosure requirements of unlisted public companies, and finalised cash flow projections and budgets.
According to Mr Shivnani, his ability to provide the requested information was compromised by health problems at the time. In this regard he underwent eye surgery on 18 October 2005 to correct a condition of myopia. His ophthalmologist certified (on 15 November 2005) that this problem had caused difficulties with near vision likely to affect Mr Shivnani's ability to read and use a computer for "a few months".
In an affidavit sworn on 16 February 2006 Mr Shivnani has also deposed that "the DOCA proposal has the support of approximately 169 creditors constituting approximately $4,000,000 worth of unsecured debt". The affidavit annexes numerous completed copies of a standard form "letter of support" signed by creditors. However these letters are relatively old, and mostly bear dates in February 2005. Furthermore the contents of the letters indicate that the support of each signatory is based upon assumptions as to the likely outcome of the proposed DOCA that may or may not be correct.

The law as to appointment of proxies

Regulation 5.6.11(2) and the following regulations specify the procedure to be followed by an administrator when convening a meeting of creditors under Pt 5.3A of the Act. A quorum for the meeting can be constituted by creditors "present in person or by proxy or attorney" (reg 5.6.16). Resolutions at the meeting are decided "on the voices" unless a poll is called for in accordance with reg 5.6.19(1). When a poll is taken, a resolution is carried if a majority of the creditors voting (in both number and value) vote in favour whether personally, by attorney or by proxy (reg 5.6.21).
Regulation 5.6.28 provides that "a person entitled to attend and vote at a meeting may appoint a natural person over the age of 18 years as his or her proxy to attend and vote at the meeting". A proxy appointed under the regulation has the same right to speak and vote at the meeting as the person who made the appointment.
The appointment of a proxy must be by an instrument in accordance with Form 532 (reg 5.6.29). Regulation 5.6.30 provides that:
"An instrument appointing a proxy may specify the manner in which the proxy is to vote on a particular resolution, and the proxy is not entitled to vote on the resolution except as specified in the instrument."
It is a further requirement of the Regulations that an administrator convening a meeting of creditors must send a form of proxy with each notice of the meeting (reg 5.6.31).
It should be noted that the Regulations do not prescribe that a creditor can only appoint a proxy by completing the form forwarded with the notice of the meeting. Furthermore, there are a number of authorities to the effect that a liquidator or administrator convening a meeting of creditors cannot impose any greater requirements for the appointment of a proxy than those to be found in the Act. For example, in Employers' Mutual Indemnity (Workers Compensation) Ltd v JST Transport Services Pty Ltd (1997) 23 ACSR 197, Branson J held (at 204) that:
"The Corporations Regulations by regulation 5.6.29 prescribe the form of an instrument of appointment of a proxy: It is not open to an administrator or liquidator to compel additional formality or a greater measure of authentication. The validity of the instruments of appointment of proxies in this case are to be measured against the requirements of the Corporations Law and the Corporations Regulations."

Similar expressions of the same principle can be found in the decisions of Templeman J in Fast Scout Ltd v Bergel (2001) 25 WAR 244 at [41] and [46], and of Underwood J in Re Huon Valley Springs Pty Ltd (1986) 10 ACLR 883, 888.
It follows that in the present matter, all that was required for each instrument of proxy to be valid was that it comply with the Regulations.

Whether the instruments of proxy were valid

It is not in issue that each of the 69 disputed instruments of proxy complied with Form 532. Each instrument also appointed Mr Shivnani as proxy, and he was a natural person over the age of 18 years. The Regulations do not impose any other requirements for appointment of a proxy, and it necessarily follows that each of the instruments was valid.
Although Mr Trinick had bona fide concerns as to the circumstances surrounding the disputed proxies, his reasons for rejecting them did not accord with the law. In this regard, it did not matter that 67 of the appointments of proxy were made on forms not forwarded with the notice of meeting. Similarly, it was not necessary that Mr Shivnani's form of proxy be circulated to all creditors, because each individual creditor was free to make an appointment and to specify the manner of voting on particular resolutions as he or she wished.
As to the contents of Mr Shivnani's form of proxy, the first proposed resolution (that the second meeting be adjourned for a further 60 days) was open to the creditors by reason of the order made by the court on 28 November 2005. The third proposed resolution (that Mr Shivnani continue as a director of the company) was meaningless, because he continued to be a director regardless of any resolution. This was so even though his powers were suspended under s 437C.
The remaining resolutions as set out in Mr Shivnani's form of proxy were exactly the same as those specified in the form of proxy that accompanied the notice of meeting. Nothing turns upon the fact that these proposed resolutions were inconsistent with each other, because they simply offered the creditors a choice in accordance with s 439C. All that matters for present purposes is that the 69 creditors whose proxies were rejected, all opposed the resolution that the company be wound up.

The appropriate orders

It follows that the appeal against Mr Trinick's decision to reject the 69 disputed instruments of proxy must be allowed. As to the orders that should be made, I note that I have a very wide discretion under s 1321, namely to:
" ... confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as [I] think fit."
An obvious first step in exercising this discretion is to determine whether or not the resolutions passed on 5 December 2005 should be allowed to stand. In this regard, the resolutions were a "proceeding", and the rejection of the proxies was a "procedural irregularity" within the meaning of s 1322. Accordingly, the resolutions will only be invalid if I am of the opinion that the irregularity "has caused or may cause substantial injustice that cannot be remedied ... ".
In my opinion, the rejection of the proxies has caused a substantial injustice, because a majority of creditors (in both number and value) who were entitled to vote at the meeting, were denied that right to vote. Furthermore, if those creditors had been permitted to vote the resolutions as passed would have been rejected; and instead, the meeting would have adjourned for up to 60 days and the administration would have continued.
Unfortunately, there is no order that can be made which will restore the creditors to the position that they would have been in if the 69 instruments of proxy had been accepted. Too much time has elapsed since then, and there is no evidence before me to indicate whether or not at this late stage a majority of creditors still want the administration to continue.
Given that the administrator was appointed some 10 months ago, I am reluctant to make an order which will prolong the administration for a period well beyond that envisaged by the Act. However, it seems to me that the justice of the case inevitably requires that the creditors must be given the opportunity to decide what should happen in all of the circumstances. They are in the best position to determine what is in their own best interests, and the further delay that will be necessary for them to make that decision is relatively short when compared to the time already lost.
Accordingly, I intend to make orders which will have the effect of bringing about an early meeting of creditors for the purpose of determining whether or not the administration should continue.
I will hear further submissions as to the precise wording of those orders, but I am tentatively of the view that the following would be appropriate:
1.The appeal against the second defendant's decision to reject the 69 instruments of proxy (copies of which are Annexure "A" to the plaintiff's affidavit sworn 27 February 2006) ("Instruments of Proxy") be allowed.
2.The second defendant's decision to refuse to admit the instruments of proxy for the purposes of the meeting of the first defendant's creditors held on 5 December 2005 ("the meeting") be set aside.
3.All resolutions purportedly passed at the meeting are declared to be invalid and of no force or effect.
4.Pursuant to s 447A(1) of the Corporations Act 2001, Pt 5.3A of that Act is to operate in relation to the first defendant as if:
(1)the first defendant had continued in administration from 5 December 2005 until the date of this order;
(2)the time limited by s 439B(2) of the said Act for the adjournment of the first defendant's creditors' meeting under s 439A had been extended until 60 days after the date of this order; and
(3)there had been a meeting of the first defendant's creditors under s 439A of the said Act on the date of this order which passed a resolution that the meeting be adjourned for up to 60 days after the date of this order.
I will also hear submissions as to whether I should make an order appointing the second defendant as Liquidator (to fill the vacancy brought about by Mr Scott's resignation on 12 July 2005). I understand that Mr Trinick consents to that appointment which would obviously expedite the winding up in the event that the creditors decide against a continuation of administration.