FEDERAL COURT OF AUSTRALIA Edward Gem Pty Ltd, in the matter of ACN 005 973 688 Pty Ltd (ACN 005 973 688) (In liq) [2005] FCA 74 CORPORATIONS – company in liquidation – whether the Court's power to make orders altering the operation of the Corporations Act extends to orders that have the effect of validating an invalid Deed of Company Arrangement and terminating the liquidation of the company Corporations Act 2001 (Cth) s 447A Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 - applied IN THE MATTER OF ACN 005 973 688 PTY LTD (ACN 005 973 688) (IN LIQUIDATION) EDWARD GEM PTY LTD (ACN 007 281 870) VID 77 OF 2005 MERKEL J 16 FEBRUARY 2005 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 77 OF 2005 IN THE MATTER OF ACN 005 973 688 PTY LTD (ACN 005 973 688) (IN LIQUIDATION) EDWARD GEM PTY LTD (ACN 007 281 870) PLAINTIFF JUDGE: MERKEL J DATE OF ORDER: 16 FEBRUARY 2005 WHERE MADE: MELBOURNE THE COURT ORDERS: 1. Pursuant to s 447A(1) of the Corporations Act 2001 that s 444B(2)(a) of the Corporations Act 2001 (Cth) ("the Act") is to operate in relation to ACN 005 973 688 Pty Ltd ("the company") as if the reference to '21 days' in the subsection was a reference to '22 days'. 2. The liquidation of the company be terminated as from the making of this order. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 77 OF 2005 IN THE MATTER OF ACN 005 973 688 PTY LTD (ACN 005 973 688) (IN LIQUIDATION) EDWARD GEM PTY LTD (ACN 007 281 870) PLAINTIFF JUDGE: MERKEL J DATE: 16 FEBRUARY 2005 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Edward Gem Pty Ltd ("the plaintiff"), a creditor of ACN 005 973 688 Pty Ltd (ACN 005 973 688) ("the company"), has applied to the Court for an order pursuant to s 447A(1) of the Corporations Act 2001 (Cth) ("the Act"). If the order is made it would have the effect of validating the Deed of Company Arrangement ("the Deed") that was required to be executed by the company on or before 3 February 2005, notwithstanding that it was executed on 4 February 2005, and terminating the liquidation of the company. 2 In the normal course little would turn on the one day delay. The difficulty, however, was that the Act required the Deed to be executed on or prior to 3 February 2005, failing which the company is taken to have resolved that it be wound up voluntarily. Consequently, on 4 February 2005 the company was in liquidation and had neither the capacity nor the entitlement to execute the Deed. 3 The questions arising are whether, in those circumstances, the Court has power under s 447A(1) to make an order altering the time within which the Deed was required to be executed and, if so, whether the liquidation of the company constitutes an insuperable discretionary obstacle to the making of that order. The questions have arisen in the following circumstances. 4 On 19 August 2004 the company resolved to appoint an administrator. On the same day Craig David Crosbie and Nicholas John Martin ("the administrators") accepted appointment as joint and several administrators of the company. Subsequently, the administrators recommended the execution of the Deed. On 13 January 2005 the creditors of company resolved that the company execute the Deed. Seventeen creditors, whose proof of debt had been admitted for voting purposes in the sum of $3,388,526, voted in favour of the proposal and three creditors, whose proof of debt had been admitted in the sum of $477,354, voted against the proposal. As a result of certain unexpected delays, and a mistaken view as to the time within which the Deed was required to be executed, the Deed was not executed by the company until 4 February 2005. 5 On 7 February 2005, after the mistake had been recognised the creditor applied to the Court under s 447A(1) for the following orders: "1. An order pursuant to section 447A(1) of the Corporations Act 2001 that section 444B(2)(a) of the Corporations Act 2001 is to operate in relation to ACN 005 973 688 Pty Ltd as if the reference to '21 days' in that sub section was a reference to '22 days'. 2. A declaration pursuant to section 445G(3) of the Corporations Act 2001 that the Deed of Company Arrangement executed by ACN 005 973 688 Pty Ltd on 4 February 2005 is valid. 3. If necessary, an order pursuant to section 482(1) of the Corporations Act 2001 that the winding up of ACN 005 973 688 Pty Ltd be terminated. 4. A direction that the Administrators of the Deed of Company Arrangement forthwith notify in writing all creditors of the Company of the making of this Application, the terms of the orders made (and enclosing a copy) and that any creditor prejudiced by the making of the orders has liberty to apply to the Court by no later than Friday 25 February 2005 for orders vacating the orders." 6 When the matter came on for directions on 7 February 2005 senior counsel for the plaintiff sought orders 1, 2 and 4. The administrators, who had become liquidators of the Company, supported the application. In the circumstances, which included a serious question of whether the Court had the power to make the orders sought and the opposition to the Deed on the part of some creditors who were unaware of the present application, I indicated that the appropriate course was for the matter to be adjourned for a short period to enable notice of the application to be given to the creditors of the company. When the matter came on for final hearing there was no opposition to the making of the orders sought. 7 The relevant statutory provisions are as follows. Under s 444B(2)(a) of the Act the company was required to execute the Deed within 21 days after the meeting of creditors. Section 444B(2)(b) provides for the Court to extend the period of 21 days but only if an application is made within those 21 days. As no such application was made, the period within which the company was required to execute the Deed expired on 3 February 2005. Section 444B(7) states that Div 12 provides for the consequences of any company contravening s 444B(2). 8 Section 446A(1)(b), which is within Div 12, provides that s 446A applies if a company under administration contravenes s 444B(2). Section 446A(2) provides that the company is taken to have passed at the time of the contravention of s 446A(1)(b) a special resolution under s 491 of the Act (which provides for a company to be wound up voluntarily) that the company be wound up voluntarily, and to have done so without a declaration having been made and lodged under s 494. In the events that occurred, the company was taken to have passed a resolution under s 491 that the company be wound up voluntarily at the time it contravened s 444B(2)(a), which was when the company failed to execute the Deed on or before 3 February 2005. Section 446A(6) provides that s 482 applies in relation to the winding up as if it were a winding up in insolvency or by the Court. Section 482 empowers the Court to stay or terminate the winding up. 9 Accordingly, the company was in voluntary liquidation on 4 February 2005. In order to rectify the situation that has arisen the plaintiff applied for relief under s 447A, which provides as follows: "(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. (3) An order may be made subject to conditions. (4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration – the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement – the deed's administrator; or (e) ASIC; or (f) Any other interested person." 10 The operation of s 447A was considered by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 ("Australasian Memory"). In that case the administrator of a company under voluntary administration failed to comply with the time requirements of the relevant statute for the convening of a second meeting of creditors, which had the consequence of rendering ineffective the creditors' resolution at the second meeting to wind up the company. That led to the setting aside by the Court of statutory demands by the liquidators on the basis that the second meeting had not been convened in accordance with the requirements of Pt 5.3A of the Act. Subsequently, an order was made in the Supreme Court of New South Wales, pursuant to s 447A, that had the effect of altering the requirement in Pt 5.3A in relation to the time within which the second meeting was to be convened. As from the date of the order the second meeting complied with the altered requirement and the resolution to wind up the company was therefore effective. 11 The question considered by the High Court in Australasian Memory was whether an order can be made under s 447A(1) to alter the relevant statutory requirement (s 439A(2)) concerning the period within which the second meeting of creditors was to be held. In upholding the order made under s 447A(1) Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ observed at [17] that there is not anything "… on the face of s 447A(1) that suggests that it should be read down. In particular, the words of the provision are wide enough to confer power to make orders which will have effect in the future but which are occasioned by something that has been done (or not done) under the other provisions of Pt 5.3A before application is made under s 447A(1)." 12 And at [24]: "… Section 447A is an integral part of the legislative scheme provided for by Pt 5.3A. In its terms, it enables the making of orders which alter the way in which 'this Part is to operate in relation to a particular company'. That is, it permits the making of orders which would alter how s 439A is to apply. It is not right to seek to characterise s 447A as some general source of power to which resort cannot be had because to do so would 'circumvent' the statutory limitations upon the exercise of the power that is given by s 439A(6) to extend the convening period. So to characterise s 447A is to give to all of the other provisions of Pt 5.3A a fixed and unchanging operation in relation to all companies. Yet the evident legislative intention of s 447A is to permit alterations to the way in which Pt 5.3A is to operate." 13 Their Honours also observed at [26]: "… It may be accepted that the expression 'how this Part is to operate' is an expression that looks to the future, not the past. But this temporal requirement is satisfied if orders made under s 447A are orders that have effect only from the time of their making. It does not preclude the making of an order with future effect, but in respect of past matters or events. Such an order would be an order about how Pt 5.3A 'is to operate' (that is, is to operate thereafter) in relation to the subject company." 14 At [30] - [32] of the joint judgment their Honours distinguished between the case in which third party rights have accrued in the intervening period as a result of an acceptance of the consequences of the non-compliance with the Act, and the case where the parties had mistakenly believed there had been compliance, in which event there would be no inconsistency between the varied operation of Pt 5.3A by reason of an order under s 447A and the rights that have accrued in the intervening period. As with Australasian Memory, the present case falls into the second, rather than the first, kind of case as there is no evidence that any rights, that may be adversely affected by an order under s 447A, have accrued by reason of the liquidation. Of course, some intervening rights might have accrued, such as liquidators' expenses, but the order sought under s 447A is prospective and only operates as from the date of the making of the order. Accordingly, the making of the order would not defeat any rights of the liquidators in respect of their expenses. 15 Further, as with companies placed in administration and taken out of administration (see Australasian Memory at [28]) companies may be placed in liquidation and taken out of liquidation: see, for example, s 482 of the Act. Thus, the fact that the company is in liquidation does not preclude the making of the order sought under s 447A(1). 16 Accordingly, there is no reason for concluding that the Court does not have power to make the order sought under s 447A(1), notwithstanding that the company is in liquidation. Also, there are no insuperable, or other, discretionary barriers to the making of the order. In the circumstances it is appropriate to make the order sought in [1] of the Application. As that order will have the effect of extending the time within which the Deed may be validly executed to the date on which the Deed was executed, it must follow that as from the date of the order the Deed is valid, there has been no relevant contravention of s 444B(2) and therefore Div 12 does not apply. In those circumstances it is unnecessary to make the order sought in [2] of the Application. However, I have decided to make the order sought in [3] in order to avoid any doubt about the liquidation of the company having come to an end as from the making of the order under s 447A. In all the circumstances it is also not appropriate to make any costs orders. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel. Associate: Dated: 16 February 2005 Counsel for the Plaintiff: GT Bigmore QC Solicitor for the Plaintiff: Maddocks Solicitor for the Liquidator: Deacons Date of Hearing: 7, 8 and 16 February 2005 Date of Judgment: 16 February 2005