FEDERAL COURT OF AUSTRALIA Pasminco Limited (Subject to Deed of Company Arrangement) (No 2) [2004] FCA 656 CORPORATIONS – deed of company arrangement – administrator's discretion – directions sought by administrator – whether administrator can surrender discretion to court PRACTICE AND PROCEDURE – deed of company arrangement – variation by court order – whether creditors need to be joined Corporations Act 2001 (Cth) ss 447A, 447D Law of Property and Trustees Relief Amendment Act 1859 (UK) s 30 Allen-Meyrick's Will Trusts, In re; Magnall v Allen-Meyrick [1966] 1 WLR 499 referred to Ansett Australia Ltd (No 3), Re; (2002)115 FCR 409 discussed Attorney-General at relation of Bishop of London v College of William and Mary in Virginia 1 Ves Jun 243 [30 ER 323] applied Boukydis, Re; [1927] 3 DLR 558 cited Brown, Re; (1929) 35 OWN 335 cited Burger Estate, In re; [1949] 1 WWR 280 referred to Charlotte F. Gisborne v Walter Joseph Gisborne (1872) 2 App Cas 300 cited Collins, Re; [1927] 4 DLR 770 cited Cotterell v Stratton (1872) LR 8 Ch App 295 applied Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (rec & mgr apptd) (1992) 7 ACSR 245 cited Editions Tom Thompson Pty Limited v Pilley (1997) 77 FCR 141 followed Earl D. Cramer, Deceased, In the Matter of the Estate of v Surrogate's Court of New York, Onondaga County 256 NYS 2d 903 (1965) referred to Ford v The Earl of Chesterfield (No.3) 21 Bev 426 [52 ER 924] applied G B Nathan and Co Pty Ltd (in liq), Re; (1991) 24 NSWLR 674 followed Giga Investments Pty Ltd (Admin Apptd), Re (No 2) (1995) 13 ACLC 1,185 followed in part Hare v Rose 2 Ves Sen 558 [28 ER 355] applied Hicks v Wrench 6 Madd 93 [56 ER 1026] applied House of Spring Gardens Ltd v Waite [1991] 1 QB 241 cited John Gilchrist; In the matter of the Trust of the Will of (1867) 6 SCR (NSW) Eq 74 cited Jones, In re; Christmas v Jones [1897] 2 Ch 190 applied Lart, In re; Wilkinson v Blades [1896] 2 Ch 788 cited Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 discussed Midland Land and Investment Corporation, In re; [1887] WN 58 cited Milankov Nominees Pty Ltd v Roycol Ltd (1994) 52 FCR 378 cited MTI Trading Systems Ltd v Winter [1998] BCC 591 cited Mulvaney v Rob Wintulich Pty Ltd (1995) 60 FCR 81 followed in part Odessa Promotions Pty. Ltd. (in liq), Re; Prescod v Harrison [1979] CLC 40-523 referred to Onefone Australia Pty Limited v One.Tel Ltd (In Liquidation) [2003] NSWSC 1228 cited One.Tel Networks Holdings Pty Ltd (Hallas rec and mgr), Re; (2001) 40 ACSR 83 cited Orbie Pty Ltd (in liq) (No 4), Re; (1984) 8 ACLR 967 referred to Pilling, In re; Ex parte Salaman [1906] 2 KB 644 cited Pink v De Thuisey (1871)2 Madd. 155 [56 ER 292] cited Robert E. James, Deceased; In the Matter of the Estate of 208 NYS 2d 303 (1960) cited Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 discussed Shiraz Nominees (in liq) v Collinson (1985) 10 ACLR 7 referred to Warden, Re; (1928) 34 OWN 146 cited 76 Am Jur 2d, Trusts Bogert, Trust and Trustees (2nd ed rev) Restatement, Second, Trusts Stern and Chew, The Revolution in Corporate Finance (3rd ed, 1998) Waters, Law of Trusts in Canada (2nd ed, 1984) IN THE MATTER OF PASMINCO LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 004 368 674 & ORS – see attached schedule PETER DAMIEN McCLUSKEY and JOHN MENZIES SPARK v PASMINCO LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 004 368 674 & ORS – see attached schedule V 484 of 2004 FINKELSTEIN J 25 MAY 2004 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V484 of 2004 IN THE MATTER OF PASMINCO LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 004 368 674 &ORS – see attached schedule BETWEEN: PETER DAMIEN McCLUSKEY and JOHN MENZIES SPARK Plaintiffs AND: PASMINCO LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 004 368 674 & ORS – see attached schedule Defendants JUDGE: FINKELSTEIN J DATE: 25 MAY 2004 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The plaintiffs are the administrators of Pasminco Limited (subject to deed of company arrangement) and most of its Australian subsidiaries. The companies are in a group collectively referred to as the Pasminco group. The administrators are in a quandary. As administrators of one company in the Pasminco group, Savage Resources Limited (subject to deed of company arrangement), they are required to fix the sale price of an asset. The administrators have been given an absolute discretion, which of course is to be exercised in good faith, to fix the price themselves. They say, however, that there are competing interests which they must take into account when fixing the price. There is also a potential conflict of interest. In order to avoid any allegation of improper conduct the administrators wish to surrender their discretion to the court and have the price fixed by a judge. The vehicle for their application is s 447D(2) of the Corporations Act 2001 (Cth). This section permits an administrator to apply "for directions about a matter arising in connection with the operation of, or giving effect to, [a] deed [of company arrangement]". 2 The power of the court to direct an administrator to act or refrain from acting in a particular way or to give guidance about the performance of his duties can be traced back to s 30 of the Law of Property and Trustees Relief Amendment Act 1859 (UK) (commonly known as Lord St Leonard's Act). This provision permitted a trustee or executor to obtain judicial advice, opinion or direction in lieu of a costly and time consuming administration suit. At first the section (and the rules of court which followed it) could only be used in "little matters" (that is, very simple cases) (In the matter of the Trust of the Will of John Gilchrist (1867) 6 SCR (NSW) Eq 74, 78) and then only on questions of law relating to a trustee's powers or matters of procedure: Pink v De Thuisey (1871)2 Madd. 155 [56 ER 292]. The court would not advise a trustee how he should exercise a discretionary power: Charlotte F. Gisborne v Walter Joseph Gisborne (1872) 2 App Cas 300, 307. A fortiori if the discretion involved making a business decision. See, for example, In re Pilling, Ex parte Salaman [1906] 2 KB 644, 647 where the court declined to provide a trustee in bankruptcy with an opinion on a proposed compromise. 3 The court's approach is now more flexible. In an appropriate case the court will give a trustee advice regarding the manner in which he might exercise a discretionary power. In In re Allen-Meyrick's Will Trusts; Magnall v Allen-Meyrick [1966] 1 WLR 499, 503 Buckley J said that if a trustee sought directions from the court as to whether a particular exercise of power was the proper one for him to take the court would enlighten him. This approach was sanctioned by the Privy Council in Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198. There the administrators of the estate of the late Bob Marley, the well known reggae performer and composer, brought to court the question whether they should sell the musical rights relating to his songs on certain terms to which the beneficiaries (Bob Marley's widow and eleven children) had objected. Lord Oliver said (at 201) that "[a] trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court." He cautioned (at 201) that on such an application the trustee was required to put the court "into possession of all the material necessary to enable that discretion to be exercised" and noted that the court's jurisdiction to give directions required it to determine "what ought to be done in the best interests of the trust estate and not in determining the rights of adversarial parties". 4 A stricter approach is taken in other common law jurisdictions. In the United States, for example, a trustee may only apply to the court for advice when there is reasonable doubt as to his duties or powers: Restatement, Second, Trusts, § 259. Moreover, a court will not ordinarily instruct a trustee as to the exercise of his discretion. Bogertin Trusts and Trustees (2nd ed rev) § 559 puts the matter this way: "The power of court does not extend to advising the trustee how to exercise a discretion which the settlor has vested in him, nor does it include deciding business questions such as what investments to make or whether to sell or retain trust realty. There must be a legal problem arising from uncertainty of the settlor's intent or from applicable law." See also 76 Am Jur 2d, Trusts §332. 5 However the bar on giving advice on matters of discretion is not absolute. In In the Matter of the Estate of Earl D. Cramer, Deceased v Surrogate's Court of New York, Onondaga County 256 NYS 2d 903 (1965) the Surrogate Court of New York was asked to give advice and directions in relation to a proposed sale of shares. The court decided that there was the power to sell the shares. Then the court (at 907) said that it would not, "in the absence of unusual or peculiar circumstances substitute its judgment for that of the fiduciary in determining the advisability of such a sale", a matter which fell to be resolved by reference to issues requiring the exercise of "sound business judgment". In the event, the court declined to substitute its judgment for that of the trustee aided by his lawyers, because there was no circumstance which required the court's intervention. See also In the Matter of the Estate of Robert E. James, Deceased 208 NYS 2d 303 (1960). 6 In Canada courts have consistently refused to accept the surrender of a trustee's discretion: Waters, Law of Trusts in Canada (2nd ed, 1984) at 897; Re Boukydis [1927] 3 DLR 558, 560; Re Collins [1927] 4 DLR 770, 772; Re Warden (1928) 34 OWN 146, 147; Re Brown (1929) 35 OWN 335, 337. In In re Burger Estate [1949] 1 WWR 280 Boyd McBride J, while recognising (at 284-285) that trustees are entitled "in generous measure to the protection, advice and direction of the Court", refused to give advice regarding the price at which certain shares should be sold. He said (at 285-286) that the issues involved were solely for the executors and trustees who "cannot conveniently shelve them on to a Court by an application [for directions]". 7 I have referred to the trustee cases because it is appropriate to apply the practice and procedure applicable in those cases to comparable applications by liquidators under s 479(3) of the Corporations Act and administrators under s 447D: Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 679 (which was a liquidator's case); Editions Tom Thompson Pty Limited v Pilley (1997) 77 FCR 141, 149 (where an administrator sought directions). The court's power to give directions to liquidators and administrators may be wider than for trustees. This is because Australian courts have held that the right given to liquidators and administrators to approach the court "is designed to facilitate [their work] by giving them direct access to the Court, … and should be interpreted as widely as possible to give effect to that intention": Re Odessa Promotions Pty. Ltd. (in liq); Prescod v Harrison [1979] CLC 40-523, 32,106. See also Deputy Commissioner of Taxation v Best & Less (Wollongong) Pty Ltd (rec & mgr apptd) (1992) 7 ACSR 245, 247; Re One. Tel Networks Holdings Pty Ltd (Hallas rec and mgr) (2001) 40 ACSR 83, 90. Therefore, it is at least theoretically possible that a liquidator or administrator may obtain advice in circumstances where a trustee may not. But such cases will be rare. 8 Despite this broad power, courts have been particularly reluctant to accept the surrender of a liquidator's or administrator's discretionary power in relation to a business decision: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, 117; Shiraz Nominees (in liq) v Collinson (1985) 10 ACLR 7, 13; Re Ansett Australia Ltd (No 3) (2002)115 FCR 409, 422. The reasons for this reluctance are obvious. First the decisions have been specifically committed to the liquidator or administrator (as the case may be): Re Ansett Australia Ltd (No 3) (2002)115 FCR 409, 422. Secondly, for all his (or her) purported wisdom, a judge's professional background and experience is quite unsuited to making business decisions: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115, 117. Thirdly, rarely will the judge have available all the information upon which to base a significant and sound business decision: Shiraz Nominees (in liq) v Collinson (1985) 10 ACLR 7, 13. Moreover, the judge is not entitled to supplement whatever information he has by calling his own accountant, broker, financial adviser, valuer, or even a business acquaintance to seek assistance or advice. In other words, in a difficult case (and it is usually only difficult cases which are brought to court) there is no guarantee that the judge will arrive at a decision which is any better informed than the decision of a liquidator or administrator. Nor is there any certainty that the judge's decision will be in the best interests of creditors or contributories whose interests the court must uphold. 9 As always there are exceptions to the general rule. According to Young J in Sanderson Classic Car Insurance Pty Ltd (1985) 10 ACLR 115, 117 it is proper for a liquidator (he would also include an administrator) to come to court "to protect him[self] against accusations of acting unreasonably". This view was reinforced in Re Ansett Australia Ltd (No 3) where Goldberg J (at 428) suggests that the court would give directions if an issue of "propriety or reasonableness" was involved in the decision. He went on to say: "It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment". Accordingly, there must be an exceptional case before the court will assist a liquidator or administrator in dealing with essentially commercial decisions: MTI Trading Systems Ltd v Winter [1998] BCC 591, 595. The case will necessarily be infrequent. It remains to be seen whether this is one of those exceptional occasions. 10 What follows are the facts which bring the administrators to court. The Pasminco group was established in July 1988. Soon it was the world's largest integrated zinc and lead producer as well as the world's third largest silver producer. It owned and operated mines and smelters in Australia, the Netherlands and the United States. The book value of the group's assets was around $3.3 billion. But all was not well. In the early 1990s there was a decline in demand for zinc and a corresponding fall in its price. The group began to suffer trading losses as early as 1991; from profits of $156 million in 1989, Pasminco reported total losses of $289 million for the financial years 1991 through 1994. Its problems were exacerbated by one or two bad investment decisions. By the late 1990s, the group's income was insufficient to service the debt due to its bankers and further funding was required to pay trade creditors. As at 2001 the Pasminco group's indebtedness to its financiers exceeded $2.86 billion, trade creditors were owed $250 million and its employees had claims of approximately $60 million, excluding workers' compensation and redundancy entitlements which stood at around $220 million. It became apparent to the directors that the Pasminco group was insolvent. Accordingly, the administrators were called in to take charge of the group. 11 In due course the companies in administration (including Pasminco Ltd and Savage Resources Ltd) entered into deeds of company arrangement. The several deeds provided for the restructure of the Pasminco group in one of several ways. Each involved the realisation of the group's core assets and the application of the proceeds of realisation towards the payment of the group's creditors. Some creditors were to be paid in full (trade creditors and employees) while others (including secured creditors) would receive only partial repayment in full satisfaction of their claims. 12 The administrators decided upon a restructure, which in broad outline operated in the following way. The first step was the formation of a company, Zinifex Ltd, with an issued capital of 500 million ordinary shares. The shares in Zinifex were held by a subsidiary of Pasminco Ltd. The second step was the transfer to Zinifex of all the shares in companies that operated the Pasminco group's core mining and smelting businesses. Following the transfer, Zinifex became the (indirect) owner of those businesses. Finally, through a public offering, the Zinifex shares were offered to Australian retail investors as well as Australian and overseas institutional investors. 13 The restructure could only be effected if there was a release of pre-administration debts that were owed by the operating companies acquired by Zinifex. To this end the deeds of company arrangement contain terms which provide that each Pasminco subsidiary taken over by Zinifex is released from claims by pre-administration creditors. The claims of those creditors are consolidated (pooled) with the claims of other creditors of the Pasminco group. The liability for all claims is then assumed by the residual Pasminco group (that is Pasminco Ltd and that part of the group not acquired by Zinifex) and is to be discharged out of the float proceeds. 14 This application is concerned with the price that Zinifex is required to pay for the shares in Pasminco Resources (US) Inc ("Pasminco US"), which it purchased from Savage Resources. Savage Resources and a number of its subsidiaries (a Pasminco subgroup) operated a zinc smelter in Clarksville, Tennessee. Savage Resources controlled the subgroup through its shareholding in Pasminco US. Although Zinifex now holds the shares in Pasminco US, the price which it must pay is yet to be determined. Events have occurred which make that determination of particular importance. Aquila Resources Ltd and Aquila EHM Pty Ltd have commenced two actions against Savage Resources and other Pasminco companies. One action relates to an arrangement under which Aquila Resources Ltd agreed to purchase Savage Resources' interest in the Ernest Henry copper mine in North Queensland. In this action the Aquila companies claim damages of $153.7 million. The second action seeks to impugn the validity of the deed of company arrangement made by Savage Resources. 15 The existence of the Aquila proceedings is the primary reason for the administrators' application for directions. The administrators are concerned first about the determination of the price which Savage Resources should be paid for the shares in Pasminco US (in effect the price for the Clarksville smelter), as the Aquila companies may be substantial creditors of Savage Resources. There is an agreement styled "Conditional Deed", made between a number of Pasminco companies and Zinifex, which contains the formula for calculating the price. The Conditional Deed refers to the shares in Pasminco US as the "US Assets". The price to be paid for the US Assets is the "US Assets Value". That expression is defined as a percentage of the proceeds received from the float of Zinifex (the Aggregate Float Proceeds). The particular percentage is "such percentage as the Deed Administrators choose in their absolute discretion, provided always that if any court advises or directs the Deed Administrators that a particular percentage is appropriate the Deed Administrators must choose that percentage." The administrators have selected a particular percentage which they deem to be the appropriate percentage to apply to the Aggregate Float Proceeds. They will not, however, implement their decision. Instead they have asked the court to determine the appropriate price. 16 The second concern arises because the deeds of company arrangement require the immediate distribution of the float proceeds to the Pasminco group creditors. The administrators are, however, unable to distribute the proceeds until the outcome of the Aquila proceedings is known. First the proceedings will determine whether the Aquila companies are creditors of Savage Resources (and according to the deeds of arrangement also of Pasminco Ltd) and, if so, for what amount. Secondly, if the deed of company arrangement made by Savage Resources is set aside, the company's assets may only be applied to discharge its debts and not the debts of the Pasminco group as provided in the deed. Accordingly, the administrators ask that the deeds be amended so that they might defer distribution of the proceeds of the sale of Pasminco US pending the resolution of these issues. 17 Before considering the merits of the administrators' request, I propose to deal with a number of preliminary matters. When the application was instituted the only parties to it were the administrators as plaintiffs and a large number of Pasminco companies as defendants. Perhaps the reason for this was because the application was wrongly commenced as an "interlocutory process" in a concluded proceeding in which the administrators had sought and obtained an extension of the time within which to convene the several second meetings of group creditors. In that proceedings the parties were as described. Be that as it may, the administrators did not seek to add parties who might be affected if the relief sought were granted. 18 This unsatisfactory state of affairs was resolved, at least in part, by Goldberg J before whom the application was first returned. On 27 January 2004 he granted leave to the Aquila companies to "appear and be heard in the proceeding without becoming a party to the proceeding". No doubt the judge made this order because it was obvious to him, as it should have been to the administrators, that the application could not proceed without notice to the Aquila companies. On the other hand, merely giving the Aquila companies notice of the proceeding and an opportunity to be heard, an opportunity which they ultimately took up, may not be enough to ensure that those companies are bound by this judgment or precluded in other litigation from re-agitating lost points: compare In re Lart; Wilkinson v Blades [1896] 2 Ch 788, 794 and House of Spring Gardens Ltd v Waite [1991] 1 QB 241, 252-254 where it was held that a person who is aware of a proceeding, and takes the benefit of the decision, may be estopped from reopening any questions decided in that proceeding. In my view the Aquila companies should be made parties to the application (which at my direction has been recast as an originating process) so that there can be no doubt about the binding effect of these reasons for judgment and of any orders made. 19 This does not dispose of the problem about parties. Clearly it is necessary to ensure that all pre-administration creditors of Savage Resources are bound by this judgment. I have in mind, in particular, an order that amends the deed of company arrangement. The parties have not addressed whether such an order would operate in rem. As yet I have no view on the matter. There are any number of cases where courts (both State and Federal) have ordered an amendment to a deed of company arrangement without the creditors bound by the deed being before the court. Orders have even been made ex parte, without the company being party to the suit. In none of these cases has the judge questioned whether the order could be made without the presence of the creditors or even the company subject to the deed. In each case it was simply assumed that the order would be effective. In the absence of argument I am not prepared to proceed on such an assumption. Given the possibility that an order varying the deed will not operate in rem it should not be made unless all creditors are bound. This can be achieved by a representative order. Initially Goldberg J granted leave to three Pasminco group bankers to appear and be heard in the proceeding. He made that order to protect the interests of the secured creditors. The banks declined to take part in the proceeding because they took the view that regardless of the outcome neither they nor any other secured creditor could be effected adversely by the outcome. In the event Goldberg J joined Perri Silver Company Pty. Ltd. (subject to deed of company arrangement), which is an unsecured creditor of the Pasminco group, as a defendant, in effect to represent the interests of pre-administration creditors of the Pasminco group. Although Perri Silver is not a creditor of Savage Resources, it is appropriate that it represent the interests of that company's unsecured pre-administration creditors (with the exception of the Aquila companies). I presume that an order to this effect will not meet with opposition. 20 This is a convenient point to mention another difficulty I have in dealing with the application. I am not satisfied that the basis upon which it has been argued, which has on all sides been assumed to be appropriate, is in fact appropriate. The case has been presented as one in which the administrators are entitled to the court's guidance because they may have conflicting responsibilities and perhaps even a conflict between interest and duty. The administrators have identified two conflicts. Each is described as a "contingent conflict". The first conflict is between the creditors of Savage Resources and the creditors of the other Pasminco companies. They say that the conflict arises because they must determine the percentage of net float proceeds which represents the value of the Clarksville smelter; general creditors of the Pasminco group may be disadvantaged as against the creditors of Savage Resources by a higher percentage and the position will be the opposite in the case of a lower percentage. The second contingent conflict identified by the administrators is between duty and interest. They say that it is their duty to repatriate all proceeds of the asset sales and effect a parri passu distribution to creditors. If, however, the Aquila companies succeed in their claims and find Savage Resources without assets (or less assets than it should have) they may be justifiably aggrieved by the administrators' conduct. It is the existence of these two "contingent" conflicts which forms the basis of the administrators' request for guidance. 21 The so-called "contingent" conflicts are possibly more apparent than real. An administrator must often take account of disparate interests when performing his duties. This does not mean that there is conflict in the strict sense. On the other hand, the administrators may well have a conflict of interest albeit one which they do not recognise. The administrators formed the view that they would realise a better price for the Clarksville smelter by selling it to Zinifex than by offering it for private sale. They formed this view in part because they have made several unsuccessful attempts to sell the Clarksville smelter. For their part, however, the Aquila companies do not accept that a sale of the Clarksville smelter to Zinifex will achieve the best price. Moreover, the Aquila companies have made veiled threats to take action against the administrators for their decision to sell the smelter to Zinifex. The possibility of legal proceedings gives rise to an immediate conflict. The more the administrators can realise for the Clarksville smelter (that is the higher proportion of float proceeds they decide should represent the US Assets Value) the less likely it is that the Aquila companies will bring a claim against them for breach of duty or, if there is a claim, the quantum of damages will be lower. That is, it is in the administrators' personal interests to obtain the highest possible price for the Clarksville smelter to avoid or diminish any personal liability they may have at the suit of the Aquila companies. On the other hand, the lower the price the better for Zinifex and those interested in its fortunes. 22 The conflict that I have identified could be avoided without the administrators surrendering their discretion. The proper solution (short of resignation which seems not to be warranted) is to appoint a special purpose administrator to determine the price. In a liquidation, a special purpose liquidator is sometimes appointed to perform a particular task which the liquidator is unable to perform, where it would not be in the interests of creditors and contributories for the existing liquidator to resign from office. The advantage of such an appointment is that the expense and loss of expertise involved in the resignation of an existing liquidator, in a partially completed administration, is avoided: Re Orbie Pty Ltd (in liq) (No 4) (1984) 8 ACLR 967, 971. The practice can be traced back to In re Midland Land and Investment Corporation [1887] WN 58. It has been employed when the liquidator faces a conflict: Onefone Australia Pty Limited v One.Tel Ltd (In Liquidation) [2003] NSWSC 1228. The practice can be applied to an administration, perhaps with some amendment to the deed of company arrangement if there is a deed. In this case neither the administrators, the Aquila companies nor Perri Silver has called for the removal of the administrators nor for the appointment of a special purpose administrator. As I say, the parties appear to be satisfied that it is appropriate for the administrators to seek the court's guidance. In those circumstances I propose to act on the same basis. 23 I am now in a position where I can describe what the administrators say is the appropriate method for determining the proportion of the float proceeds that should be attributed to the Clarksville smelter. During the course of the administration, the administrators have been required to value the Pasminco group assets for a variety of purposes, though not for the sale to Zinifex. For this they have used the discounted cash flow method of valuation. A discounted cash flow analysis is not the only way of determining the value of a company's business. Certainly it is one of the most straightforward methods of valuation. It is, however, subject to trenchant criticism: see for example Stern and Chew, The Revolution in Corporate Finance (3rd ed, 1998). That said, its utility is that it can be applied in virtually any situation. And here the parties are content that the method be applied. Put simply, the discounted cash flow method of appraisal involves projecting the future net cash flow that a business will earn and then discounting that cash flow to its current value. The approach is based on the assumption that an investor will pay for the projected cash receipts regardless of the activities undertaken by the business. There are three components to estimating the discounted cash flow value of a business. First, year by year cash flows must be forecast into the future. The sales forecast is generally the most important element of the cash flow forecast. In the case of businesses like those conducted by the Pasminco group (mines and smelters), another important element of the cash flow forecast is the forecast price of metals (lead and zinc). Future metals prices are notoriously difficult to predict. While they often move cyclically, they can also be very volatile. Moreover, as sales of lead and zinc are in US dollars the cash flow forecast is affected by fluctuations in the exchange rate between the Australian and US dollar which must also be forecast into the future. Secondly, a terminal date must be selected at which time the cash flow forecast stops and the continuing value of the business (if any) is estimated. Finally, a discount rate must be chosen. The choice of a discount rate will usually take into account the unreliability of the cash flow forecast and the premium for the risk undertaken by an investor. 24 The administrators propose to use the discounted cash flow method of valuation in determining the proportion of the Zinifex float proceeds that should be attributed to the Clarksville smelter. The administrators have calculated a range of values (five in all) for the assets transferred to Zinifex using the discounted cash flow method. They have also obtained a range of values for the Clarksville smelter using the same method. A range of values was obtained because the inputs for the valuations (the future metals price and the exchange rate) were provided by five different institutions and in each case the inputs were different. The values for all assets ranged from $2,753 million to $539 million. The value of the Clarksville smelter ranged from $140 million to $22 million. As a proportion of the total value of the Zinifex assets the Clarksville smelter represented between 5.09 per cent and 3.44 per cent, the mean of the five valuations being 4.19 per cent. The administrators propose that the mean should be applied to the Net Float Proceeds to arrive at the US Assets Value, that is at the price for the Clarksville smelter. 25 There are inherent difficulties in determining value according to the discounted cash flow approach. The difficulties are highlighted by the different values which were obtained as a result of different inputs from the institutions. Cash flow forecasting takes into account many things including industrial economics, accounting principles and statistical analysis. Cash flow forecasting also requires practical experience and involves a good deal of judgment. As the inputs obtained from the institutions demonstrate, views about future metals prices and the exchange rate can differ, sometimes quite significantly. The problem is that even relatively small changes in the inputs (or assumptions) can have an enormous impact on estimated values. 26 The potential unreliability of the discounted cash flow method of valuation in this case is highlighted when regard is had to the public offering of the Zinifex shares. The prospectus contains a consolidated statement of the financial position of the Zinifex group as at 31 December 2003. According to the pro forma balance sheet, which forms part of the consolidated statement, the fair value of the operating assets acquired by Zinifex (which include the Clarksville smelter) is $1,239.6 million (after eliminating intercompany transactions). An independent accountant's report confirms this to be fair value. Although not mentioned in the prospectus, the evidence discloses that the Clarksville smelter contributed $56.8 million (that is 4.58 per cent) of the total. 27 The value of the assets for inclusion in the balance sheet was determined by the discounted cash flow method. The inputs (including the forecast of future metal prices and the exchange rate) have not been identified, but obviously they are different from the inputs used by the administrators when they determined their range of values. On one view the difference may be capable of easy explanation. It may, for example, reflect changed market circumstances or that the forecasts were performed by different organisations whose personnel had different opinions about what the future holds. 28 On the other hand the explanation might not be so obvious. While it is not absolutely clear, the prospectus contains information which suggests that at least one of the inputs for the valuation, the metals price, was provided by one of the five institutions. Indeed, it seems to be the institution whose inputs produced the highest valuation for the Pasminco assets, namely $2,753 million. 29 This is not the only institution which has changed its forecast. Another of the five institutions published a research paper which analysed the Zinifex float. The paper recorded the institution's estimate of the value of the Zinifex assets to be between $1,872 million to $940 million. After taking into account net debt, the equity value of Zinifex was said to be $1,405 million. On a discounted cash flow, the enterprise value of the Zinifex assets was $1,377 million out of which the Clarksville smelter, which was valued at $73 million, represented 5.3 per cent of the total asset value. 30 The position is even further complicated by the fact that the "market" did not accept the "fair value" which Zinifex placed on its assets. The float raised only $960 million, downgrading Zinifex' value of its assets by some $279.6 million. It is, of course, impossible to determine the value that the "market" placed on the Clarksville smelter in the process of downgrading the value of the Zinifex assets. It is extremely unlikely that the "market" separately valued the assets owned by Zinifex. It is more probable that the float proceeds of $960 million represent the market's view that there should be a pari passu reduction in the claimed value of those assets. 31 Returning now to the present application, I propose to give some guidance to the administrators. My principal reason for taking this course is that I am convinced that it would be wrong to adopt the approach suggested by the administrators, namely that they should attribute (the mean of the inflation based time valuations) 4.19 per cent of the net float proceeds to the Clarksville smelter. 32 There are a number of reasons why I have reached this conclusion. The first is that the valuations based on the institutions' forecasts may not be proximate to the sale of Pasminco US. It is true the assumptions were updated from time to time. But there is no evidence to show they were brought up to date for the purposes of determining the price of the Clarksville smelter. Second, the valuations based on the institutions' forecasts are significantly different from one another. The highest value for the Zinifex assets is more than five times greater than the lowest value. The difference is the result of different views about the medium to long-term zinc price. Third, and this is the most significant factor for present purposes, the two highest and the lowest of the five values are materially different from the value Zinifex placed on its assets for the purpose of the public offering. They are also materially different from the value which the "market" placed on those assets. These extremes caused Mr Korda, the administrator of Perri Silver, to put forward a proposal to deal with the situation. He said that one should disregard the values which are materially different from the Zinifex valuation. On this basis only two valuations would be used. Those values are $1,514 million and $1,483 million, of which the Clarksville smelter contributed $54 million and $51 million respectively; the mean is 3.51 per cent. 33 If one were to stay with the institution based valuations it would be necessary to adopt the procedure suggested by Mr Korda. I am not, however, disposed to make any use of these valuations. The only valuations which, to my mind, are relevant to calculating the price of the Clarksville smelter are the Zinifex valuation and the value which the "market" placed upon Zinifex' assets. It is of course impossible simply to adopt the Zinifex valuation of the smelter because the result of the public offering suggests that the valuation overestimated the true value of the assets. On this basis, the relevant value of Zinifex' assets for which the value of the smelter must be determined is $960 million, which is the amount realised on the float. The next step is to determine the percentage of the float proceeds which should be attributed to the Clarksville smelter. This is not an easy task. One approach is to work from the net float proceeds. But as the administrators point out, knowing only that the market has, for example, valued 3 assets at, say, 6 units does not disclose whether the market's view of each individual asset is: 0 plus 1 plus 5; or 1 plus 2 plus 3; or 2 plus 2 plus 2. While I accept that there is some arbitrariness in working backward, it is, I think, still a rational approach to use the Zinifex valuation to determine the percentage of the float proceeds that should be attributed to the smelter. This is the only directly helpful evidence on which to base the calculation. Its only vice is that it operates on the untested assumption that the "market" would maintain the relativities in value. Although untested the assumption is neither irrational nor unreasonable. On this basis the price of the Clarksville smelter should be fixed at 4.58 per cent of the net float proceeds, and a direction to that effect will be made. 34 This result may not be perfect. The calculation of a hypothetical valuation never is. In this case, for example, it is possible to produce a different value for the Clarksville smelter if, as the Aquila companies suggest should be done, a different discount rate is applied to a smelter than is applied to a mine because smelters have a longer life. One could also reach a different value if the Clarksville smelter was given a positive terminal value as may have been the case with the other smelters. For present purposes I am prepared to assume that a uniform set of assumptions were used to value the various assets and that no positive terminal value was included in the value of the Clarksville smelter. I make these assumptions even though the evidence does not establish them to be correct. It is, I think, necessary in this case to disregard these and other like arguments. I propose to disregard them because the factors which it is said should be taken into account in fixing the value of the smelter seem not to have played any part in the "market's" assessment of value. If these factors were now to be taken into account and, as a result, the value of the Clarksville smelter increased, it could well lead to an artificially high proportion of the net float proceeds being attributed to the Clarksville smelter. I will not allow this to occur. 35 This brings me to the application to vary the deed of company arrangement. The Corporations Act contemplates that a deed of company arrangement may be varied by creditors at a meeting convened under s 445F. The administrators, however, wish to shortcut this procedure and have the deed varied by an order made under s 447A. In Milankov Nominees Pty Ltd v Roycol Ltd (1994) 52 FCR 378, 383 Lee J suggested that this could be done. In two decisions in the following year Branson J expressly found the power to exist. The decisions are Re Giga Investments Pty Ltd (Admin Apptd) (No 2) (1995) 13 ACLC 1,185, 1,187 and Mulvaney v Rob Wintulich Pty Ltd (1995) 60 FCR 81, 83. Many cases have followed these decisions. On the basis of these authorities I am satisfied that the power to make the variation exists. On the facts of the case there is no reason to refuse the application. The variation was not opposed by the Aquila companies (which is hardly surprising because it would operate in their favour) or by Perri Silver, the company that speaks for the unsecured creditors. Even if the order were to be opposed it is plainly in everyone's interests that it be made. The only effect of the variation is to defer the distribution of the Clarksville smelter proceeds until the court identifies the creditors who should receive those proceeds. 36 The final matter is costs. Here again it is, I think, appropriate to have regard to the trustee cases. As a general rule in the case of a fund or an estate under the administration of the court, the trustee is entitled to his litigation costs, including an application for directions, out of the fund. He is entitled to those costs as a matter of course without any order: Attorney-General at relation of Bishop of London v College of William and Mary in Virginia 1 Ves Jun 243 [30 ER 323]. The costs are taxed on an indemnity basis so that the trustee is not out of pocket: Cotterell v Stratton (1872) LR 8 Ch App 295; In re Jones; Christmas v Jones [1897] 2 Ch 190. Not only is the trustee entitled to his costs out of the fund, but so also is every person who is a necessary or proper party to the litigation: Hicks v Wrench 6 Madd 93 [56 ER 1026]. The cases say that these parties may have their costs prior to the administration of the fund, that is that they are a charge upon the fund: Hare v Rose 2 Ves Sen 558 [28 ER 355]; Ford v The Earl of Chesterfield (No.3) 21 Bev 426 [52 ER 924]. 37 The instant proceeding is sufficiently akin to a trustee's application for directions that the old chancery rules should be applied. It is therefore appropriate to order that the costs of the Aquila companies and Perri Silver be paid on an indemnity basis, out of the float proceeds. In the case of an administration, the administrator has a statutory right to recover his costs out of the assets under administration (s 443D). When the company is subject to a deed, then in the absence of provisions to that effect, equity would give him a similar right. Thus, the administrators do not need an order for their costs; they will be entitled to them out of the float proceeds or the other assets under their control. There will, however, be one exception to the full recovery of costs. In support of their application the administrators tendered 144 exhibits which found their way into nine lever arch folders (some fuller than others). Before the trial I looked at the papers and it was evident that only a handful of exhibits would be relevant. A day or so before the hearing my associate invited the administrators' solicitors to identify the particular exhibits which would be relied upon and the parts of those exhibits which would be read. The invitation was ignored. At the commencement of the hearing I announced that I would not treat as evidence any exhibit which was not read or its contents explained. In the result only sixteen or so exhibits (less than 10 per cent of those tendered) were referred to. In these circumstances I will not permit the administrators to charge the creditors with the cost of producing and copying so many irrelevant exhibits. They will have to bear those costs themselves or come to some arrangement with their solicitors, who are unlikely to be blameless in what has occurred. 38 The administrators should within three days bring in short minutes of orders to give effect to these reasons. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 25 May 2004 Counsel for the Plaintiff: Mr J Santamaria QC Mr R Peters Solicitor for the Plaintiff: Minter Ellison Counsel for the Defendants: Mr R A Dick Solicitor for the Defendants: Kemp Strang Counsel for Aquila Resources Ltd and Aquila EMH Pty Ltd: Mr G Murphy SC Mr A P Young Solicitor for Aquila Resources Ltd and Aquila EMH Pty Ltd: Fearis Salter Power Shervington Date of Hearing: 31 March 2004 Date of Judgment: 25 May 2004 SCHEDULE OF DEFENDANTS PASMINCO LIMITED First defendant ACN 004 368 674 (Subject to Deed of Company Arrangement) PASMINCO INVESTMENT HOLDINGS PTY LIMITED Second defendant ACN 082 291 736 (Subject to Deed of Company Arrangement) PASMINCO CENTURY MINE LIMITED Third defendant ACN 006 670 300 (Subject to Deed of Company Arrangement) PASMINCO COCKLE CREEK SMELTER PTY LIMITED Fourth defendant ACN 000 083 670 (Subject to Deed of Company Arrangement) PASMINCO METAL PTY LIMITED Fifth defendant ACN 005 565 284 (Subject to Deed of Company Arrangement) PASMINCO FINANCE LIMITED Sixth defendant ACN 007 289 296 (Subject to Deed of Company Arrangement) PASMINCO PACIFIC PTY LIMITED Seventh defendant ACN 005 416 008 (Subject to Deed of Company Arrangement) PASMINCO AUSTRALIA LIMITED Eighth defendant ACN 004 074 962 (Subject to Deed of Company Arrangement) PASMINCO PORT PIRIE SMELTER PTY LIMITED Ninth defendant ACN 008 046 328 (Subject to Deed of Company Arrangement) PASMINCO INTERNATIONAL PTY LIMITED Tenth defendant ACN 004 934 534 (Subject to Deed of Company Arrangement) PASMINCO INTERNATIONAL (HOLDINGS) PTY LIMITED Eleventh defendant ACN 066 088 159 (Subject to Deed of Company Arrangement) THE EMU BAY RAILWAY COMPANY LIMITED Twelfth defendant ACN 009 475 790 (Subject to Deed of Company Arrangement) PASMINCO INVESTMENTS PTY LIMITED Thirteenth defendant ACN 082 291 674 (Subject to Deed of Company Arrangement) PASMINCO BROKEN HILL MINE PTY LIMITED Fourteenth defendant ACN 000 005 774 (Subject to Deed of Company Arrangement) PASMINCO GROUP TREASURY PTY LTD (FORMERLY PASMINCO GLOBAL TRADING PTY LTD) Fifteenth defendant ACN 082 932 116 (Subject to Deed of Company Arrangement) SAVAGE RESOURCES LIMITED Sixteenth defendant ACN 009 551 624 (Subject to Deed of Company Arrangement) RAMALA HOLDINGS PTY LIMITED Seventeenth defendant ACN 056 689 117 (Subject to Deed of Company Arrangement) SAVAGE AUSTRALIAN EXPLORATION PTY LTD Eighteenth defendant ACN 071 375 169 (Subject to Deed of Company Arrangement) SAVOX PIGMENTS PTY LTD Nineteenth defendant ACN 003 035 694 (Subject to Deed of Company Arrangement) SAVAGE EHM PTY LTD Twentieth defendant ACN 071 375 114 (Subject to Deed of Company Arrangement) SAVAGE EHM FINANCE PTY LTD Twenty‑first defendant ACN 071 375 221 (Subject to Deed of Company Arrangement)