Westpoint Corporation Pty Ltd v Stuart Karim Ariff

[2003] NSWSC 1205

CITATION:	Westpoint Corporation Pty Ltd v Stuart Karim Ariff & Anor [2003] NSWSC 1205
HEARING DATE(S):	28 November 2003
JUDGMENT DATE:	28 November 2003
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Order refused
CATCHWORDS:	CORPORATIONS - voluntary administration - second meeting of creditors' votes for execution of deed of company arrangement - company claiming to be creditor seeks interlocutory order restraining execution of deed of company arrangement - power to make order - whether order desirable in the circumstances
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270
PARTIES :	Westpoint Corporation Pty Ltd - Plaintiff Stuart Karim Ariff - First Defendant Carlovers Carwash Ltd (Administrator Appointed) - Second Defendant
FILE NUMBER(S):	SC 5965/03
COUNSEL:	D R Pritchard - Plaintiff C R C Newlinds SC; R Glasson - Defendants
SOLICITORS:	Kemp Strang - Plaintiff Clayton Utz - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

FRIDAY 28 NOVEMBER 2003

5965/03 WESTPOINT CORPORATION PTY LTD v STUART KARIM ARIFF & ANOR

JUDGMENT – Ex Tempore

1 HIS HONOUR: These are proceedings which are brought by Westpoint Corporation Pty Ltd (“Westpoint”), a company which claims to be a creditor of Carlovers Car Wash Limited (administrator appointed). That latter company (“the Company”) is one which operates car washes at various sites. As well, it has some wholly owned subsidiaries, which between them operate other car washes, and have granted franchises for car washes at various other sites. The usual modus operandi of companies in the group is to lease the sites on which the car washes are constructed.

Westpoint’s Relation to the Company

2 Westpoint claims to be a creditor of the Company by reason of some circumstances which are the subject of litigation between Westpoint and the Company in the Supreme Court of Western Australia. In that litigation Westpoint pleads that it has entered into licence agreements under which the Company became liable, where Westpoint was granted the right to identify, build, and lease to the Company appropriate sites for car wash businesses in Western Australia, South Australia, and New South Wales. Westpoint alleges that those agreements were repudiated and that in consequence it has lost the profits it would have made. One of the Company's defences is that it disputes that the agreements are valid. Westpoint says that if that is so, it is entitled to recover back from the Company licence fees which it has paid.

3 The total claim of Westpoint for damages is of the order of $7.5 million, including interest. Its alternative claim for recovery of licence fees is for much less than $7.5 million. The proceedings were due to be heard in the Supreme Court of Western Australia in August of this year, but that hearing was vacated when the Company was placed in administration.

The Report to Creditors

4 On 10 July 2003 an administrator was appointed to the Company, and its subsidiaries. After having obtained some extensions of the convening period, the administrator issued a report to creditors on 24 October 2003. That report recommended that the Company enter into a deed of Company arrangement. The deed of Company arrangement was one which provided for two separate deed funds to be set up. The first deed fund was one on which potential participating creditors, including landlords, franchisees, Westpoint, and any other creditors who could not claim on the second deed fund would participate.

5 The administrator estimated that if the Westpoint claim was ultimately admitted as nil, there would be a distribution of approximately 16.99 cents in the dollar to participating creditors, while if the Westpoint claim was admitted in full at $7.5 million, there would be a distribution of approximately 2.17 cents in the dollar to participating creditors. The second deed fund was one in which priority employee creditors, and certain third party trade and other creditors who were listed on the schedule, would participate. The administrator estimated that there would be a distribution from that fund of 100 cents in the dollar to the priority employee creditors and a distribution of approximately 15.7 cents in the dollar to the third party trade and other creditors which were listed.

6 By comparison, the administrator's estimate contained in the report to creditors was that if the Company were to be wound up the priority employee creditors would receive 100 cents in the dollar. If the Westpoint claim was admitted for nil, then the ordinary unsecured creditors would receive 1.697 cents in the dollar, while if the Westpoint claim was admitted in full, ordinary unsecured creditors would receive 0.979 cents in the dollar.

The Second Meeting of Creditors

7 On 3 November 2003 the second meeting of creditors took place. Mr Michael Horton was at that time the solicitor acting for Westpoint. He sent to the administrator, prior to the meeting, a facsimile which contained about eight pages of text. That facsimile argued that the meeting had been called on inadequate notice, and made very detailed criticisms of the administrator's report.

8 Mr Horton attended the second meeting of creditors, as a proxy for Westpoint. He addressed the meeting, and raised in general terms the issues which he had set out in his facsimile of that day. The proposal for execution of a deed of company argument was passed at the meeting on the voices. There were nine creditors who voted in favour of it, and two who voted against. One of the creditors voting against it was Westpoint. Mr Horton's understanding is that the other creditor who voted against was a lessor. There was no demand for a poll at the meeting.

9 On 21 November 2003 Palmer J made an order extending the time for execution of the deed of company arrangement. There was evidence before his Honour that the deed which was proposed involved quite complex documentation.

Claims Made in These Proceedings

10 On Wednesday of this week, 26 November 2003, the present proceedings were begun. The plaintiff in the proceedings is Westpoint, and the defendants are the capital company and its administrators. The orders which are sought are, first, an order that Palmer J's order of 21 November 2003 extending the time for execution of the deed of company arrangement be vacated. If that order were to be granted, the Company would, retrospectively, go into liquidation. A second alternative order which is sought is an order setting aside the resolution of creditors of 3 November 2003. As I understand from counsel, it is intended that the basis for that order be section 447A of the Corporations Act 2001. It may be that the order needs some redrafting to be able to fit under section 447A, but it seems, without having gone into the matter too deeply, that such redrafting ought in principle be possible. The third order which is sought is an order further extending the convening period for a meeting of the creditors. The fourth order is an order directing the administrator to do all things necessary to report to the creditors concerning topics which are listed, over about a page and a half of text. Those topics are ones concerning which it is submitted the administrator ought to have reported in his report to creditors, but failed to report.

Claims Made in the Interlocutory Process

11 At the same time that the originating process was filed, an interlocutory process was filed, seeking an order restraining the first and second defendants from signing a deed of company arrangement to give effect to the resolution of creditors which was passed on 3 November 2003, until further order. The application before me today is that interlocutory process.

Admissibility of Mr Francis’ Report

12 There has been tendered a report of Mr Ian Francis. Mr Francis has extensive experience as a liquidator and administrator. His report is a commentary on the administrator's report of 24 October 2003. Mr Francis' report places some reliance on a Statement of Best Practice concerning the contents of an administrator's report, which has been prepared by the Insolvency Practitioners Association of Australia. That Statement of Best Practice has also been tendered. Objection has been taken to the tender of both Mr Francis' report, and the Statement of Best Practice. Mr Francis' report asserts various facts which are not otherwise proved. It identifies various pieces of information which in the author's view would be material to a creditor's decision with respect to the future of the Company, and which the administrator's report does not state.

13 When there are problems about proof of the basis of the report, that creates some difficulties about its ability to ultimately assist in resolution of the case. Further, the report, insofar as it identifies topics said to be material, seems to me to be a mixture of material which could truly be the subject of expert opinion, and advocacy. The course I propose to adopt is to admit Mr Francis' report, and the statement of business practice, on the basis that it is only a statement of contentions which the plaintiff wishes to advance.

Existence and Source of Power to Make Orders Now Sought

14 The deed of company arrangement has not yet been executed. However, it appears, from correspondence between the solicitors, that its execution is imminent. Because the deed has not yet been executed, the present application is not one which is made under section 445 D, or 445 G of the Corporations Act 2001. Rather, it is one which is made under section 447A. It is common ground between the parties that, given the extremely broad ambit which section 447A has, as explained in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270, the court has power to make the order.

The Balance of Convenience

15 The disputed question is whether making the order is appropriate. The making of the order depends upon whether there is a serious question to be tried concerning the claims made in the originating process, and the balance of convenience. I propose to assume without deciding that there is a serious question to be tried and turn to the balance of convenience.

16 The most significant of the criticisms of the administrator's report which the plaintiff advances is that the report contains no valuation of the business of the Company on a going concern basis, and the report does not indicate that any consideration was given to a possible sale of the business. Part of the evidence in the case includes a letter which the administrator wrote, in reply to Mr Horton’s facsimile of 3 November 2003. A matter which was of particular importance, in the criticism of the administrator for not having valued the business on a going concern basis, was that the Company had accumulated very significant losses. There were accumulated losses as at 30 April 2003 of something over $29 million. One of the contentions which Mr Francis made was that these would result in tax losses being available, which ought to have a value. That contention is one which had also been made in Mr Horton's letter of 3 November.

17 The liquidator's response to this part of Mr Horton's letter included the statement that as a result of legal advice which he had received in relation to provisions in the various leases entitling the landlords to terminate upon the appointment of a voluntary administrator and as a result of his discussions with the various landlords, he had formed the view that there was not a viable business to sell as a going concern. He notes that this issue was raised at the meeting of creditors on 3 November 2003, and this it was open to the meeting to either (a) adjourn the meeting whilst the business was advertised for sale, (b) direct the administrator by a resolution to advertise the business for a sale; or (c) adopt some other course of action. The administrator says that none of the above occurred, and that it was clear from the meeting that the will of the creditors was that the deed of company arrangement be approved. He also says, that in relation to the tax losses, as a result of the acquisition and disposal of a portion of the business which had been connected with operating a video rental franchise, the Company's external tax advisers advised that the Company may be unable to satisfy the continuity of business test for the years up to and including the year in which the disposal occurred.

18 A hypothesis on which the plaintiff's criticism of the lack of a valuation of the business on a going concern basis seems to proceed is that if the Company were to be wound up, its parent company would be willing to pay for the business, at a price which would result in the creditors receiving more than they would receive under the proposed deed of arrangement. On the evidence, admittedly incomplete, which is before me today, there is nothing to suggest that that prospect is a realistic one.

19 The plaintiff points out that the arrangements which are proposed to be entered into are complex ones - as is shown by the fact that Palmer J regarded the complexity of the arrangements as being sufficient to justify extending the time for execution of the deed. The plaintiff points out that the administrator has had an unusually long time in which to prepare his report. It also points out that once the deed has been put into place third party rights will intervene and, if the court were to decide, in an application under section 445D or 445G to set the deed aside, it would be harder to disentangle the rights of the parties. The plaintiff suggests that a fairly prompt final hearing should be available, and proffers an undertaking as to damages.

20 The defendant submits that the Act contains its own regime about the process by which a deed can be rendered ineffective, contained in section 445D, and 445G. It also points out that section 444C(2) which provides:

“Insofar as a person would be bound by the deed if it had already been executed, the person ... must not do anything inconsistent with the deed, except with the leave of the court",

means that creditors are, save to the extent that the court might rule otherwise, already bound from the time of the resolution.

21 In my view it is of considerable importance that the other creditors have resolved that the deed should be executed. Further, they have so resolved after Mr Horton has had the opportunity to put to them the matters which he now asks the court to act upon. It is always open to creditors to decide that they want to follow a particular course of action, even though they appreciate that the basis of knowledge, on which they are taking that course, is incomplete. It seems as though that is what has happened here.

22 Also, the plaintiff appears to have some other complaints about the deed, concerning the way it sets up different funds, and different classes of creditors will receive different dividends from those funds. The defendants submit that all of the complaints about the deed should be dealt with together. That submission has substance.

23 As well, the administrator is presently running the business of the Company, and is incurring personal liability in doing so. The time during which an interlocutory injunction, if granted, would run is likely to be of the order of six weeks, at the least, and is more likely to be two months or more. That is because of the way that there are three weeks of the legal term left, and the likelihood is that the matter would not be able to be heard until February of next year at the earliest.

24 Another matter which is relevant, it seems to me, is that what the plaintiff is asking for is nothing more than that the creditors should have further information placed in front of them. The evidence does not go so far as to suggest that if that further information were to be placed in front of them, it would result in any different recommendations being made by the administrator, or any different decision arrived at by the creditors. Also relevant is that it is at present unclear whether the plaintiff will be admitted as a creditor, or for how much.

25 For these reasons, in my view, the balance of convenience favours the refusal of the interlocutory injunction. I, therefore, dismiss the interlocutory process.

26 I order the plaintiff to pay the costs of the defendant of the interlocutory process. I stand the originating process over to the Corporations List on Monday 1 December 2003 and note that on that occasion the parties expect to agree on an interlocutory timetable.

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Last Modified: 12/23/2003