Ziziphus Pty Ltd v Pluton Resources Limited (Receivers and Managers Appointed) (Subject to Deed of Company Arrangement)
[2016] WASC 276
•31 AUGUST 2016
ZIZIPHUS PTY LTD -v- PLUTON RESOURCES LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) [2016] WASC 276
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2016] WASC 276 | |
| 31/08/2016 | |||
| Case No: | COR:61/2016 | 20 JULY 2016 | |
| Coram: | MASTER SANDERSON | 21/07/16 | |
| 22 | Judgment Part: | 1 of 1 | |
| Result: | Deed terminated Administrators appointed as liquidators | ||
| B | |||
| PDF Version |
| Parties: | ZIZIPHUS PTY LTD CELTIC CAPITAL PTY LTD PLUTON RESOURCES LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) SAM ANDREW MARSDEN AND DERRICK CRAIG VICKERS in their Capacities as Joint and Several Deed Administrators of PLUTON RESOURCES LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) |
Catchwords: | Corporations law Application to terminate deed of company arrangement Turns on own facts |
Legislation: | Corporations Act 2001 (Cth) |
Case References: | Australian Securities Investments Commission v Midland Highway Pty Ltd (admin apptd) [2015] FCA 1360 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- First Plaintiff
CELTIC CAPITAL PTY LTD
Second Plaintiff
AND
PLUTON RESOURCES LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
First Defendant
SAM ANDREW MARSDEN AND DERRICK CRAIG VICKERS in their Capacities as Joint and Several Deed Administrators of PLUTON RESOURCES LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second Defendants
Catchwords:
Corporations law - Application to terminate deed of company arrangement - Turns on own facts
Legislation:
Corporations Act 2001 (Cth)
Result:
Deed terminated
Administrators appointed as liquidators
Category: B
Representation:
Counsel:
First Plaintiff : Mr A Young QC & Ms E C Hensler
Second Plaintiff : Mr A Young QC & Ms E C Hensler
First Defendant : Mr W C J Zappia
Second Defendants : Mr J M Healy
Solicitors:
First Plaintiff : Piper Alderman
Second Plaintiff : Piper Alderman
First Defendant : HWL Ebsworth Lawyers
Second Defendants : Minter Ellison Lawyers
Case(s) referred to in judgment(s):
Australian Securities Investments Commission v Midland Highway Pty Ltd (admin apptd) [2015] FCA 1360
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235
1 MASTER SANDERSON: By amended originating process dated 8 July 2016 the plaintiffs sought an order that a deed of company arrangement (DOCA) relating to the first defendant be terminated. As a consequential order they sought to have the first defendant wound up in insolvency. After hearing argument I reserved my decision overnight and then ordered the DOCA be terminated and the first defendant be wound up. I indicated I would publish my reasons for that decision. These are those reasons.
2 Unusually in a corporations matter, as part of managing this case I ordered that points of claim be filed by the plaintiffs and points of defence be filed by the defendants. An amended points of claim dated 8 July 2016 was filed. The rather detailed statement of the relevant facts which follows is taken largely from these amended points of claim. Where issues were in dispute I have dealt with them as necessary; however in large measure there was agreement between the parties as to the relevant facts.
3 Both plaintiffs are shareholders and creditors of the first defendant. The first defendant has been engaged in iron ore mining in Western Australia and Tasmania. The plaintiffs say the first defendant is 'hopelessly' insolvent. The defendants have some reservations about whether the first defendant is 'hopelessly insolvent' but agree that it is insolvent and has been insolvent since April 2014. In my view the description of the first defendant as hopelessly insolvent is both justified and accurate. It played a significant part in my decision and I will return to this question later in these reasons.
4 In or about August 2012 Wise Energy Group Company Ltd (Wise) became the holder of 48,845,070 ordinary shares in the first defendant. At that time this was approximately 19.81% of the issued shares of the first defendant. Wise received the shares for no consideration pursuant to an off market transfer. From in or about August or September 2012 the first defendant and Wise proposed to establish a joint venture for the development and operation of the 'Cockatoo Island Iron Ore Project'. It was intended the first defendant would act as manager and Wise would market, sell and arrange the shipping of the iron ore produced.
5 In or about October 2012 the first defendant engaged Watpac Ltd (Watpac) to perform all operational tasks at the mine at Cockatoo Island. On 18 December 2012 the first defendant completed loading its first shipment of iron ore from Cockatoo Island. But funds were tight. In the first defendant's notice of annual general meeting on 29 November 2012 the company foreshadowed the need to raise capital to fund its operations.
6 On or about 5 April 2013 ICA Investments and Consulting Pty Ltd appointed receivers and managers to the property of the first defendant. The receivership lasted only three days with the receivers and managers retiring on 8 April 2013.
7 On or about 11 September 2013, Mr Raul Goel, a resident of India, became a director of the first defendant. Mr Goel is head of projects planning and business development with General Nice Recursos Comercial Offshore De Macau Limitada (GNR). On 1 May 2013 Mr Yu Lau, a resident of Hong Kong, became a director of the first defendant. Mr Lau is the managing director of GNR.
8 On or about 1 May 2013 the first defendant announced to the Australian Stock Exchange that it had completed a US$24 million debt funding package with GNR. Allied to that funding package it also announced Mr Lau had become a non-executive director of the first defendant. On or about the same day the first defendant granted to GNR security for the performance of its financial obligations to GNR. Still the first defendant was short of funds. On 9 September 2013 it announced to the ASX that it intended to raise further capital. This was confirmed in the first defendant's half yearly report for the half year ended 31 December 2013.
9 As at 31 March 2014 the value of the first defendant's current assets totalled $15,081,000. This included cash of $185,000. Its current liabilities total $53,755,000. This included current liabilities in respect of borrowings for approximately $12,468,000.
10 On 3 June 2014 the first defendant asked the Australian Securities Exchange to suspend trade in its shares 'pending the release of an announcement regarding a capital raising'. The shares were duly suspended and have remained suspended ever since.
11 Throughout 2014 the first defendant sought to raise capital to fund its operations. Between April 2014 and October 2014 the first defendant issued a number of prospectuses or supplementary prospectuses. The attempt to raise capital met with limited success. In or about October 2014 Watpac became the holder of 300 million ordinary shares in the first defendant.
12 On or about 30 October 2014 the first defendant received from Wise correspondence purporting to remove the first defendant as manager of the Cockatoo Island iron ore project. In other words, the first defendant was to cease operations at Cockatoo Island. On or about 31 October 2014 receivers and managers were appointed to the first defendant by a secured creditor Rizhao Ports Group Logistics Co Ltd (Rizhao). On or about 3 November 2014 GNR also appointed receivers and managers to the first defendant.
13 It is worthy of note that GNR and the receivers they appointed entered into a written deed of indemnity of receivers and managers dated 3 November 2014. Pursuant to this deed GNR indemnified the receivers against any liability under s 419 and s 419A of the Corporations Act and all 'claims' as defined in that deed. GNR also agreed to be responsible for the due payment of all remuneration, cost charges and expenses which the receivers and managers were entitled to under the terms of their appointment.
14 On 3 November 2014 Watpac suspended the mining services between Watpac and the first defendant and that agreement has since been terminated.
15 By Tomlin Orders made on 28 November 2014 and varied by orders made on or about 29 April 2015 in the Supreme Court of Western Australia action CIV 2540 of 2014 the Supreme Court of Western Australia dismissed an action on the basis that Rizhao, the first defendant, GNR and the receivers appointed by GNR, observed and performed the following obligations (among others):
(a) on the making of the Tomlin Orders and similar orders Rizhao would procure the retirement of the receivers it had appointed;
(b) by way of repayment of amounts owing between Rizhao and the first defendant, the first defendant would pay Rizhao $2.8 million by 30 December 2014, just over US$3.5 million by 12 May 2015 and $16,675,000 by way of 23 equal monthly instalments, the first instalment being made before 28 June 2015. Further, GNR would procure a guarantee on normal commercial terms guaranteeing to Rizhao the payments the first defendant was to make with these payments to be made by General Nice Resources (Hong Kong) Ltd (GNR Hong Kong). In the event of default all money agreed to be paid on terms would become due and payable and the first defendant would pay a further $7 million over and above what it was to pay by way of instalments.
16 Between about 3 November 2014 and 23 March 2015, whilst the first defendant was under the management and control of receivers appointed by GNR, the first defendant incurred unsecured liabilities totalling $8,546,600. Further, the receivers caused or permitted the first defendant to incur liabilities totalling $7,642,794 and these liabilities remain unpaid. Of course, pursuant to s 419(1) of the Act the GNR receivers became personally liable to pay the liabilities incurred. The amount owed by the first defendant to GNR increased by in order of $10 million by reference to the funding provided by GNR to the receivers.
17 On or about 8 January 2015 the Rizhao receivers retired. On or about 23 March 2015 the GNR receivers retired. When they did so they entered into a written deed of retirement with GNR and GNR Hong Kong. That deed provided that the termination of the appointment in no way prejudiced the receivers' rights to be indemnified under the indemnity deed. Further, GNR Hong Kong indemnified the receivers on the same terms contained in the indemnity deed. GNR Hong Kong also agreed to be responsible for all the remuneration and expenses incurred by the receivers to which they were entitled under the terms of their appointment.
18 On or about 11 April 2015 pursuant to a deed of guarantee and assignment in writing between GNR Hong Kong and Rizhao, GNR Hong Kong guaranteed to Rizhao payment of the amounts due or payable by the first defendant to Rizhao under the Tomlin Orders. Rizhao for its part assigned to GNR Hong Kong all right, title and interest in, among other debts, the debts due from the first defendant to Rizhao. Pursuant to the deed if GNR Hong Kong failed to pay after demand from Rizhao any amount then outstanding Rizhao could require the reassignment from GNR Hong Kong to Rizhao of the right title and interest in the debts assigned and GNR Hong Kong would do all acts, matters and things necessary to affect the reassignment to Rizhao. On or about 11 April 2015 Rizhao gave the first defendant written notice of the assignment and the assignment became effective on that day.
19 On 12 May 2015 in breach of the Tomlin Orders and the guarantee and assignment the first defendant and GNR Hong Kong failed to pay $3,075,000 to Rizhao. The following day Rizhao served a written notice of demand under the guarantee and assignment requiring GNR Hong Kong to remedy the breach. That breach remains unrectified. The effect of the breach is that the first defendant and GNR Hong Kong are liable to make payment to Rizhao of some $26,541,200.
20 On or about 9 June 2015 the first defendant suspended the Cockatoo Island iron ore project and suspended full time operations at Cockatoo Island. Since at least mid-2015 the first defendant has failed to discharge its royalty obligations to the State of Western Australia. Between 23 March 2015 and 8 September 2015 the first defendant incurred further unsecured liabilities of just over $8 million.
21 In August 2015 the first defendant attempted again to raise funds. On 8 September 2015 it announced to the Australian Stock Exchange it had reached agreement with GNR on what it called a 'recapitalisation proposal'. Pursuant to that proposal GNR was to provide $28 million by way of a debt facility to the first defendant. This would be done by a 36 month convertible loan. The funding was contingent upon the first defendant entering into administration and its creditors approving a recapitalisation proposal by way of DOCA on terms satisfactory to GNR. On the same day voluntary administrators were appointed to the first defendant. On the same day GNR appointed another set of receivers to the first defendant.
22 On 18 September 2015, the administrators convened the first meeting of creditors. At that meeting the receivers informed the creditors of the first defendant that its 'holding' or 'operating' costs of Cockatoo Island were approximately $500,000 per week. On 5 October 2015 the second defendants replaced the first appointed administrators.
23 On 15 October 2015 the first defendant's directors signed a report as to affairs in respect of the first defendant. As at 8 December 2015 they estimated the realisable value of the first defendant's assets as $3,654,190 of which $524,190 was cash at bank. The first defendant was liable to pay claims of priority unsecured creditors (that is employees) totalling $1,819,522. There were further unsecured creditors in an amount of $39,377,791 and the ordinary unsecured creditors including trade creditors totalled $52,207,816. Further, the first defendant was liable to pay contingent claims of creditors totalling $52,600,000. All up the first defendant had an estimated deficiency before taking into account costs of administration of $142,350,945. In other words it was hopelessly insolvent.
24 On or about 1 December 2015 pursuant to s 439A(4)(a) of the Corporations Act the administrators produced a 'Report to Pluton's Creditors'. That report suggested there were a number of transactions which might be voidable by a liquidator. The administrators estimated that $3,721,000 might be recoverable by way of unfair preferences, $4,180,000 might be recoverable as uncommercial transactions and $16,700,000 might be recoverable as a claim for insolvent trading. That gave a potential recovery of $24,601,000. The administrators' report also contained the following:
If Pluton were wound up, we believe there would be a substantial shortfall to the secured creditor. Despite this, employees and unsecured creditors may still receive a return dependant on recoveries from debts and voidable transactions and insolvent trading claims. In a mid-scenario, we have estimated employees would receive payment of their entitlements in full and other unsecured creditors would receive a return of 6.9 cents in the dollar.
25 A second meeting of creditors was held on 9 December 2015. At that meeting the creditors resolved to 'execute a deed of company arrangement in terms specified in the statement accompanying the notice of meeting'. At that second meeting of creditors certain entities were admitted to vote for a certain dollar value. By way of example GNR Hong Kong was admitted to vote for $36,822,000. The first and second plaintiffs were admitted to vote at $1 each. The reason why the plaintiffs were not admitted to vote for full amounts to which they claimed to be entitled are not presently of concern. What is worthy of note is that there has been no appeal by the plaintiffs against the decision of the administrators to reduce their voting entitlement to the value of $1.
26 On or about 4 January 2016 the first defendant entered into a DOCA. The parties to the DOCA were the second defendants on their own behalf and as administrators of the first defendant, Watpac and World System Capital Investment Ltd. It is worth noting the signatories on behalf of World System Capital were Mr Lau and Mr Goel. Pursuant to the DOCA the second defendants were to be its administrators. World System Capital was to make a 'first deed payment' comprising $10,642,794 and a 'second deed payment' of $1,965,988. The first deed payment was to be distributed to 'first category creditors'. These comprised Rizhao as to an amount of US$3 million and the creditors of the first defendant to whom the GNR receivers were personally liable as to the sum of $7,642,794. It is to be noted that amount is subject to the indemnities provided by GNR and GNR Hong Kong in favour of the receivers. The second deed payment was to be distributed to the 'second category creditors' who were the DOCA administrators in respect of their costs and remuneration said to be an amount of $1,965,988. The remaining funds (and it is difficult to see how there could have been any remaining funds) were to be distributed to the first defendants priority unsecured creditors and the ordinary unsecured creditors. The 'end date' that is the date upon which the DOCA will terminate was said to be 31 March 2016 or such other date as may be agreed in writing between the deed administrators World System Capital and Watpac. There were certain 'conditions precedent' found in the deed and the deed was to automatically terminate if these conditions were not satisfied or waived by the end date. The DOCA contained no provision for any transition from a deed administration to a creditors' voluntary winding up.
27 On or about 17 February 2016 Mr Ashley D'Sylva a director of the first defendant, resigned his position. That meant the first defendant had less than the minimum number of directors for a public company and no director ordinarily resident in Australia. In other words the first defendant was in breach of s 201A of the Corporations Act.
28 Between 8 September 2015 - that is the date of appointment of the receivers - and 7 March 2016 the debt owed by the first defendant to GNR increased from $8,650,021 to $12,917,525. The receivers and managers appointed by GNR were paid remuneration and expenses totalling $970,821. The amount owed by the first defendant to GNR increased by at least $2,928,340 by reference to funding provided by GNR for the receivers.
29 On or about 31 March 2016 the DOCA administrators informed the first defendant's creditors Watpac had ceased to work and 'demobilised' from the Cockatoo Island iron ore project. Creditors were also advised World System Capital was unable to comply with the terms of the DOCA by the 'end date'. World System Capital had requested a meeting of the first defendant's creditors be convened to consider a variation of the terms of the DOCA. Under the then proposed variation to the terms the first tranche payment of $3.5 million would be paid to the first defendant on or before the date of the meeting of creditors. A meeting of creditors was set for 8 April 2016 and the end date in the DOCA was extended until 11 April 2016.
30 At the meeting of creditors on 8 April 2016 the meeting was adjourned for no longer than 20 business days. This was because World System Capital had not made the payment of $3.5 million which the administrators required as a sign of good faith be paid prior to the creditors' meeting.
31 On or about 29 April 2016 the DOCA administrators informed the creditors of a number of things. First, the creditors' meeting would be reconvened on 9 May 2016. Second, pursuant to s 445F of the Corporations Act a new meeting of creditors would also be convened on 9 May 2016 to consider a resolution to vary the terms of the DOCA. Third, as at 29 April 2016 the only relevant money paid by World System Capital was $500,000 that was said to have been paid to Watpac. Finally, the administrators said should the $3 million (the balance of the first tranche of $3.5 million) not be received by the meeting to be held on 9 May 2016 the first defendant's creditors would be required to resolve whether to terminate the DOCA and to appoint the DOCA administrators as liquidators of the first defendant.
32 On 9 May 2016 two meetings of the first defendant's creditors were convened. The DOCA administrators informed the creditors that since 9 April 2016 World System Capital had paid $500,000 to Watpac and $200,000 to the DOCA administrators. They had paid no other sum. The creditors were advised World System Capital had asked for further time to make payments. They were also advised the first defendant's debt to Rizhao was 'no longer assigned' to GNR or any entity related to GNR. It was proposed to 'close' each of the meetings and convene a new meeting of creditors on or before 23 May 2016. At that point both meetings were terminated.
33 On or about 13 May 2016 the DOCA administrators informed creditors that a new meeting of creditors would be convened on 23 May 2016. The purpose of the meeting was said to be for the first defendant's creditors to decide whether to resolve to vary the terms of the DOCA or whether to terminate the DOCA and appoint liquidators to the first defendant. On 23 May 2016 at the meeting of creditors it was resolved:
That the terms of the Deed of Company Arrangement be varied in accordance with the correspondence from WSCI dated 29 March 2016 with the following changes:
(a) $3.2 million has been paid;
(b) WSCI will pay the balance of the $3.5 million being $300,000 within seven days of the date of this meeting;
(c) that the first deed payment as defined in the varied DOCA being $3.5 million be made immediately available for distribution in accordance with the terms of the DOCA and of those funds paid and held by the receivers such funds are to be held upon trust and for the specific purpose of distribution in accordance with the DOCA terms.
34 One of the issues which bedevilled this application was the question of which DOCA was actually under consideration. After the 23 May meeting a revised DOCA was prepared. That document first came to light as an annexure to an affidavit of Mark Richard Hyde sworn 20 July 2016. The DOCA anticipates a 'first deed payment' and a 'second deed payment'. It is worth quoting the provision relating to deed payments in full. They read as follows:
13.1 First Deed Payment
The proponent must, on or before the execution of this Deed:
(a) pay the sum of A$1,500,000 to the Administrators on a non-refundable basis and for the purpose of paying the Admitted Claims of the Participating Creditors (excluding Rizhao and the Former Receivership Creditors) in the order of priority specified in sections 444DA, 556, 560 and 561 of the Act; and
(b) pay the sum of A$1,000,000 to the Company and the Company must then pay those funds (without set-off, counterclaim or deduction) to the Former Receivership Creditors on a non-refundable basis and in reduction of their Participating Claims (and no other claims), such funds to be distributed in accordance with the directions of the Former Receivers to the Company as soon as is practicable; and
(c) pay the sum of A$1,000,000 to the Company and the Company must then pay those funds (without set-off, counterclaim or deduction) to Watpac on a non-refundable basis in consideration for the agreements within this Deed as soon as is practicable with A$500,000 of the payment to be applied in reduction of the Watpac DOCA Claim, and for the avoidance of doubt, none of the A$1,000,000 can be netted off, or otherwise applied in reduction of, the Watpac Surviving Claim,
(together, the First Deed Payment).
The Company and the Administrators hereby acknowledge receipt of the First Deed Payment and Watpac acknowledge receipt of the payment referred to at 13.1(c).
13.2 Second Deed Payment
Subject to the satisfaction or waiver of the Conditions Precedent in accordance with clause 12, the Proponent must:
(a) pay to the Trustees at Completion (to be dealt with by the Trustees in accordance with the terms of the Creditors' Trust Deed) an amount sufficient to enable the Trustees to pay the Admitted Claims of Priority Creditors in full (that is, to the extent that such Claims have not by that time been paid by or out of the First Deed Payment, or otherwise) provided that any surplus of funds (being funds over and above the amount sufficient to enable the Trustees to pay the Admitted Claims of Priority Creditors in full in accordance with this Deed) must be repaid to the Company after the Admitted Claims of Priority Creditors are paid in full in accordance with this Deed and the Creditors' Trust Deed and such funds will be held on trust for the benefit of the Company and will not be available for distribution to any Creditors pursuant to the terms of this Deed or the Creditors' Trust Deed;
(b) pay to the Trustees at Completion (to be dealt with by the Trustees in accordance with the terms of the Creditors' Trust Deed) the sum of $1,100,000 such that each of the Participating Creditors (excluding Priority Creditors, Rizhao and the Former Receivership Creditors) are paid the lesser of:
(i) the full value of their Admitted Claim against the Company; and
(ii) where their Admitted Claim against the Company is greater than $10,000, the first $10,000 of their Admitted Claims against the Company (reducing accordingly in the event that the balance of the Trust Fund is insufficient to fund such payments in full);
(c) provide the Company with sufficient funding to enable the Company to pay the sum of $6,142,794 to the Former Receivership Creditors in respect of those of the Claims of the Former Receivership Creditors that have not been paid from the 'First Deed Payment' (which payment will be satisfactorily evidenced by provision, by the Company to the Administrators, of written confirmation of electronic funds transfer from the Company's bank account to the relevant Former Receivership Creditors' bank accounts or similar); and
(d) provide the Company with sufficient funding to enable the Company to pay Rizhao an amount equal to the Rizhao DOCA Claim,
(together, the Second Deed Payment).
13.3 First Deed Payment and Second Deed Payments an advance under the Convertible Note
(a) The First Deed Payment will constitute an advance by the Proponent to the Company pursuant to the Convertible Note.
(b) The Second Deed Payment will constitute an advance by the Proponent to the Company pursuant to the Convertible Note.
Rizhao's Non-participating Claim (being the Rizhao Surviving Claim) must be rescheduled on repayment and interest terms to be agreed between the Company, the Proponent and Rizhao prior to Completion pursuant to this Deed.
36 There is also a particular reference to Watpac's claims. Watpac is said to be a creditor in the amount of $29,514,352 but would participate in the DOCA only to the extent of $3,705,552. The Watpac Surviving Claim would then have been just under $26 million. Clause 7 deals with the effect of the deed on Watpac. It anticipates just under $9,000,000 of the debt being converted into equity at the rate of one fully paid ordinary share for every one cent of debt. The debt is further reduced by $4,500,000 for reasons stated. The company and Watpac then agreed to reschedule the remaining $12.5 million debt on terms acceptable to the parties.
37 Against that factual background the plaintiffs allege the administrators failed to provide Pluton's creditors with adequate information in respect of the first defendant's financial position and its prospects. The complaints are set out in some detail in [62] of the amended points of claim. I will not go through these in detail - a sample will suffice. In [62(a)] the plaintiffs complain the administrators failed to detail how and why the first defendant's financial position deteriorated from 2014. By [62(d)] they complain that full details of mining leases and other significant contracts to which the first defendant is a party have not been disclosed. By [62(k)] the plaintiffs complain the administrators have not advised whether the first defendant is likely to be insolvent or to be at risk of again becoming insolvent and within what timeframe even if the obligations under the DOCA were fulfilled.
38 Section 445D of the Corporations Act sets out the powers of a court to terminate a deed of company arrangement. It is in the following terms:
445D When Court may terminate deed
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company's business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii) contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
(2) An order may be made on the application of:
(a) a creditor of the company; or
(b) the company; or
(ba) ASIC; or
(c) any other interested person.
Section 447A of the Act provides that the court may make such order as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company.
Section 447A provides the court with power to terminate the administration and to order a winding up in the public interest. In Deputy Cmr of Taxation v Woodings (1995) 16 ACSR 266 at 279, Wallwork J said:
'I am satisfied that s 447A gives power to the court to order a winding up of the company in the public interest in a case such as this. Such a power is not inconsistent with the provisions in Pt 5.3A, and in the light of the decided cases which are referred to in these reasons, it is in the public interest that the company be wound up and not be allowed to be further manipulated by Mr Morris or his associates.'
In the case of a prima facie insolvent company, it may be appropriate to order its winding up, particularly where a proposed DOCA will not restore the company to financial health, potentially has the purpose or effect of quarantining third parties from investigation and recovery proceedings, and has little realistic tangible upside for all creditors. It is against the public interest to allow such a company to operate in the market place.
The court's power under s 447A is to be exercised having regard to, inter alia, the interests of the creditors as a whole and the public interest. But in an unusual case, the public interest may override the creditors’ interests and favour liquidation.
The public interest includes considerations of commercial morality and the interests of the public at large (Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at [287] per Campbell J). Where there has been misconduct in the affairs of a company requiring appropriate investigation by a liquidator and appropriate recovery proceedings being considered and undertaken, it is detrimental to commercial morality to prevent or hinder such steps through the device of a DOCA propounded by entities and individuals who ought be the subject of investigation and the target of such proceedings. A winding up will be beneficial from a public interest perspective where investigations and recovery proceedings are likely to be funded and the investigations and appropriate recovery proceedings could realistically lead to the relevant persons who have engaged in the suspect transactions being brought to account: Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement )(2009) 73 ACSR 139 at [182] per McMurdo J.
More specifically and of direct relevance to the present context, the court has power under s 447A to set aside a resolution to enter into a DOCA and to order the winding up of the company. In exercising such a power, the court can apply by analogy any one or more of the principles applicable to s 445D. In other words, if a DOCA if entered into pursuant to the relevant resolution could be terminated under s 445D, then by analogy in the scenario where a DOCA has not yet been executed pursuant to that resolution, s 447A can be used to prevent the DOCA from being entered into. But none of this is to deny or limit the broader ambit of s 447A. Section 447A can be used to make the orders sought by ASIC, whether or not any element of s 445D could be hypothetically or contingently invoked, although I accept that s 445D(1)(g) is broad and on one view unconstrained, save by its context and s 435A generally, such that this proposition may only be of theoretical interest. But it is correct to say that even if none of the elements of s 445D could be satisfied, the orders sought could still be made under s 447A. But let me address s 445D for a moment.
The court may set aside a DOCA pursuant to s 445D even where creditors may be better off under the DOCA than with a liquidation: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd at [286]–[291] per Campbell J. It may do so in the public interest.
Where the relevant company is not trading and there is no likelihood of its resuming its former business, the public interest in placing the company in the hands of a liquidator may prevail over the interests of creditors (see Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admin apptd )(2009) 71 ACSR 81 at [69] and [71] per Logan J).
In QBI Corporation Pty Ltd v Plantation Rise Pty Ltd (admins apptd) (recs and mgrs apptd) (2010) 77 ACSR 573 a DOCA was set aside where there was no continuing business preserved and the structure designed and enshrined in the DOCA was to allow and facilitate the director of the company and third parties who were susceptible to voidable transactions to be protected from relevant action.
Generally, the breadth of s 445D(1)(g) is such that in a particular case the public interest can justify the termination of a DOCA even where it is not established that this would necessarily be in the creditors’ interests.
Finally, in any event, the preclusion of an effective investigation by a liquidator into relevant transactions and the opportunity for greater returns may render a DOCA contrary to the creditors' interests overall (see Canadian Solar v ACN 138 535 832 Pty Ltd [2014] FCA 783 at [37] per Perry J) [64] - [74].
40 It is worthy of note that in this decision his Honour was concerned with an application by ASIC. His Honour makes a number of references to the public interest. This issue was dealt with in some detail by Campbell J in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235. His Honour said at [286] - [291]:
It by no means follows that if the creditors would be better off under the Deed than with a liquidation, the Deed will be allowed to stand. As Fitzgerald JA (with whom Beazley JA and Davies A-JA agreed on this point) said in Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 at 543-4, [80]:
'the Court should not encourage the notion that "anything goes" provided only that that a deed of company arrangement provides some benefit for dissatisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the court’s refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently.'
While that principle applies 'especially' when different groups are treated differently, its application is not restricted to that situation.
There are decisions of both the Full Federal Court and the New South Wales Court of Appeal, which are hard to reconcile with the notion that there is any 'primary consideration' - rather, the discretionary power is to be exercised having regard to both the interest of the creditors as a whole and in the public interest, which latter expression includes considerations of commercial morality and the interests of the public at large: Emanuele v Australian Securities Commission (1995) 63 FCR 54; (1995) 19 ACSR 1 at 15; Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527 at 541, [68] per Fitzgerald JA. To the same effect is Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427 (Young J). In my view, the discretion is to be exercised in accordance with these decisions of appellate courts, and not with any concept of there being any 'primary consideration'.
The 'interests of the public' which the court can take into account include applying public policy. Just as a termination of the winding up which is agreed to by all creditors can be refused by the court if it is contrary to public policy (Re Denistone Real Estate Pty Ltd v Companies Act [1970] 3 NSWR 327), so the court can apply public policy in deciding whether to bring an administration to an end: Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266 at 275 (Wallwork J). Likewise, public policy can be applied in deciding to bring a Deed of Company Arrangement to an end.
One public policy which can be applied is the policy against allowing an insolvent company to continue to be in a position to trade: para [260] ff above). That policy applies in the circumstances of this case.
For a director to avoid public examination about the affairs of the Corporation, and the possibility of the type of clawback litigation which is possible in a winding up, by making a payment to creditors, can also be a factor in favour of termination: cf Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 32. It is in a relevant sense 'detrimental to commercial morality' to dispense with the opportunity which the winding up law provides for the investigation of the affairs of a failed company: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 26; Emanuele v Australian Securities Commission (1995) 63 FCR 54; (1995) 19 ACSR 1 at 15.
How much weight is given to the fact that the affairs of the company will not be investigated depends upon whether there are circumstances which suggest that investigation is called for. Sometimes, the fact that only a small dividend will be paid to creditors is itself such a circumstance: Lancaster v NZI Capital Corporation Ltd (Sheppard J, Federal Court of Australia, 3 September 1991 unreported, but quoted and approved in Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 32). Sometimes, the fact that it appears that there may be prospects of preference or uncommercial transaction or insolvent trading recoveries can be such a circumstance. In the present case, it is clear that only a small dividend will be paid to creditors, if any dividend at all. There is some basis for believing that insolvent trading recoveries might be possible, but the evidence concerning that topic is fairly slight, and any actual recoveries would depend on a liquidator obtaining the funding to sue.
41 There are a number of factors in this case which favour the DOCA being terminated. First, a certain lack of disclosure. For instance, no royalty payments have been made to the State of Western Australia since 2014. It is not clear what the effect of this failure to pay royalties may have on the standing of the mining leases from which the iron ore is extracted. In fact there is no evidence at all as to the standing of the tenements - always a significant issue in any mining related case. It could perhaps be inferred that as no mention is made of the tenements by the administrators they have not been in any way compromised. But to my mind this is an issue which should have been addressed.
42 There is also substance in the complaint that nowhere has it been explained why the company got into such serious financial difficulties from 2014 onwards. It can perhaps be assumed the collapse of the iron ore price impacted significantly on the company's profitability. But if that has been the case since 2014 why should the situation be any different now? There may have been a slight recovery in the iron ore price but it is nowhere explained how that will return the company to profitability.
43 Second, there appears to be no plan or structure in place - or at least none disclosed in the evidence presently available - as to how the company will be run and how it expects to meet its obligations into the future. Assuming the terms of the DOCA are met all that will happen is a dysfunctional company with no real prospect of ever being a going concern will be put out in the public arena with the likelihood it will incur liabilities which will never be met.
44 Thirdly, and allied to the second point, there is the uncertainty over how claims of Watpac and Rizhao preserved under the DOCA will be met. The amounts of these claims are not insubstantial and some unspecified form of refinancing will be necessary. How that might be achieved is unclear.
45 Finally, there is the question of directors. At present the company does not comply with the requirements of the Corporations Law and nowhere is it disclosed how this omission will be rectified. So at present even if the terms of the DOCA were satisfied the company could not operate because it would not be permitted to do so under the Corporations Law.
46 On behalf of the defendants it was submitted that all necessary and relevant disclosures had been made by the administrators and nothing more could have been expected of them. As indicated above I do not accept that is the case. In reaching that conclusion I am not in any way being critical of the conduct of the administrators. They have provided what they see as relevant material. It simply seems to me there is a level of uncertainty about the future health of this company which might have been assuaged by further information. If it were simply the case the plaintiffs' complaints were limited to an alleged failure by the administrators to provide sufficient information before the creditors voted on the DOCA it is unlikely I would have terminated the DOCA. It is a combination of factors including a lack of information which led me to the conclusion the company should be wound up.
47 The defendants make two further points. First, the creditors are likely to be better off if the DOCA was allowed to proceed. Given the complexities of this case it is very difficult to assess whether or not that is so. But for present purposes I will assume that is correct. After all, any return to creditors is dependent upon the liquidators being able to recover monies paid as unfair preferences and the like. Such recoveries are notoriously difficult - funding would need to be obtained, examinations held and it may be years before the matters are settled or work their way through the courts. So it is not unreasonable to assume if the DOCA was to proceed the creditors would be better off.
48 The authorities I have cited make it plain the public interest can outweigh the benefits to creditors when it comes to determining whether the DOCA ought be terminated. Having said that, it is worth bearing in mind the objects of pt 5.3A of the Corporations Act. These are set out in s 435A. It is in the following terms:
435A Object of Part
The object of this Part is to provide for the business, property and affairs of an insolvent company to 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 than would result from an immediate winding up of the company.
49 It may be that the authorities presently place too much emphasis on the public interest and do not fully respect the objects enshrined in the legislation. But as always it is a balancing act. This is not a case where it seems to me the public interest required the company to go into liquidation so the liquidators could examine the directors and others as to the affairs of the company. Rather it seemed to me it was not in the public interest to have a company such as this which has struggled for years doing business and incurring debts which it may not be able to pay. So while I would accept there is a strong argument in favour of allowing the DOCA to continue to better protect the interests of the creditors that is not sufficient to carry the day.
50 There is one final point raised by the defendants which does require attention. As I have indicated above the plaintiffs are admitted creditors only for $1 each. As such they have minimal interest in the outcome of this litigation. They might be characterised as officious bystanders. But the fact is they are entitled under the Act to bring these proceedings. There is nothing in the legislation or in the case law which suggests a creditor for a nominal amount is in any different position from a creditor for a significant sum. Of course when weighing all issues in the balance the financial interests of a plaintiff must be a factor to be taken into account. In this case I have taken it into account and the fact the plaintiffs have such a small interest as creditors is a factor against granting the application. But weighed in the balance it does not seem to me to be sufficient reason to refuse the application. The fact is the plaintiffs made good their arguments.
51 There was one further point which arose after I had indicated to the parties I would make orders terminating the DOCA. All parties agreed the first defendant should be liquidated. There was a question as to who should be the liquidator. The plaintiffs proposed a firm who had not had any dealings with the first defendant either as receivers and managers or in any other capacity. The second defendants suggested they should be the liquidators. I determined that the second defendants should be the liquidators and I indicated I would give brief reasons for that decision.
52 Essentially I appointed the second defendants for two reasons. First, they have been administrators of the first defendant for some time and they have an understanding of the company's affairs and its operations. The appointment of an alternative liquidator who has had no contact with the company would mean cost and expense would necessarily have been incurred in the new liquidator coming to grips with the first defendant's affairs. It seemed to me prudent not to waste shareholder's funds by not utilising the knowledge already gained by the second defendants.
53 Second, although I took the view further information could have been provided to the first defendant's creditors there was nothing in the conduct of the second defendants which compromised their position. There is no suggestion they will have a conflict of interest or that they will conduct the liquidation in a manner which is inconsistent with proper practice. True it is they are a creditor of the company and the orders I made recognised that to be the case. But in the circumstances of this application that did not disqualify them from acting as liquidators of the first defendant.
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