FEDERAL COURT OF AUSTRALIA Safe Effects Technologies Ltd v London Partners Australia Pty Ltd [2006] FCA 463 CORPORATIONS – application for leave to proceed against a company subject to a deed of company arrangement – whether applicant a creditor bound by the deed. Corporations Act 2001 ss 181, 444D(1), 444E(1), 444E(3), 1317H, Pt 5.3A FCT v Simionato Holdings Pty Ltd (1997) 15 ACLC 477 referred to Forshaw v Thompson (1992) 35 FCR 329 referred to Re: R L Child & Co Pty Ltd (1986) 10 ACLR 673 referred to Re McLean (1992) 108 ALR 360 referred to Petrochemical Industries Ltd v Dempster Nominees Pty Ltd (1994) 15 ACSR 468 referred to Smith v Carr (1993) 10 ACSR 427 referred to SAFE EFFECTS TECHNOLOGIES LTD v LONDON PARTNERS AUSTRALIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) WAD 312 of 2005 LEE J 12 APRIL 2006 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 312 OF 2005 BETWEEN: SAFE EFFECT TECHNOLOGIES LTD (ACN 099107 623) APPLICANT AND: LONDON PARTNERS AUSTRALIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 057 549 925) RESPONDENT JUDGE: LEE J DATE OF ORDER: 12 APRIL 2006 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The applicant have leave to proceed with the proceeding. 2. Costs reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 312 OF 2005 BETWEEN: SAFE EFFECT TECHNOLOGIES LTD (ACN 099107 623) APPLICANT AND: LONDON PARTNERS AUSTRALIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 057 549 925) RESPONDENT JUDGE: LEE J DATE: 12 APRIL 2006 PLACE: PERTH REASONS FOR JUDGMENT 1 By an application filed on 3 November 2005 the applicant ("SETL") sought, "to the extent that it may be required", leave pursuant to s 444E of the Corporations Act 2001 (Cth) ("the Act") to begin and proceed with a proceeding against the respondent ("London Partners"). In that proceeding, SETL seeks a declaration that the issue of shares in SETL to London Partners was invalid and orders for the delivery up and cancellation of the relevant share certificate or certificates and rectification of the SETL share register by expunging London Partners therefrom. 2 Section 444E of the Act provides that until a deed of company arrangement is terminated a person bound by the deed cannot, except with the leave of the Court, begin or proceed with a proceeding against the company that is subject to the deed. 3 Section 444D(1) of the Act provides that a deed of company arrangement binds all creditors of the company so far as concerns claims arising before the date of commencement of the administration or a prior date fixed by the deed. 4 SETL operates a business which carries out research, development, manufacture and distribution of braking systems. SETL was incorporated in Western Australia in December 2001 and in May 2002 its securities were admitted to the official list of the Australian Stock Exchange ("ASX") for trading. SETL securities were traded on the ASX from 28 May 2002 to 5 August 2003. Since 5 August 2003 trading in SETL securities has been suspended. 5 London Partners is incorporated in Western Australia and at relevant times carried on a business as a finance broker. 6 In about December 2001 SETL and London Partners executed an underwriting agreement under which London Partners agreed to fully underwrite the subscription of shares and options to be offered to the public by a prospectus under which SETL would undertake to make application to the ASX to have the securities admitted to the official list of the ASX. The prospectus was issued to the public on 21 February 2002. 7 In the proceeding brought by SETL against London Partners it is alleged, in effect, that certain directors of SETL, acting in concert with London Partners, caused SETL to issue 10,000,000 SETL securities to London Partners on 18 February 2002 for the improper purposes of providing an undisclosed benefit to London Partners and to enable London Partners to use those securities to induce persons to subscribe to SETL securities pursuant to the prospectus. 8 SETL pleads that to the knowledge of London Partners the directors in so acting breached their fiduciary duties to SETL and contravened s 181(1)(b) of the Act by failing to exercise their powers for a proper purpose. 9 On 31 October 2003 London Partners entered a Deed of Company Arrangement pursuant to Pt 5.3A of the Corporations Act 2001 (Cth) the arrangement being varied by further deeds executed on 31 October, 2003, 20 April 2004 and 8 November 2004. 10 London Partners remains the registered owner of the SETL securities issued to it on 18 February 2002. 11 The primary submission made by SETL is that it is not a creditor of London Partners and, therefore, leave of the Court is not required for SETL to proceed with a proceeding that seeks declaratory orders binding London Partners in respect of the securities issued to it. 12 The Deed of Company Arrangement defines a creditor who is bound by the Deed in the following terms: 'Creditor means any person or company who at the Appointment Date had a pecuniary claim against either or both of the Companies, whether present or future, certain or contingent or ascertained or sounding only in damages, including (but not limited to) any person who would have been entitled to prove in the winding up of either or both of the Companies had an order been made for the winding up of the company concerned by the Court upon an application filed on the Appointment Date and who is admitted by the Administrators as having a provable debt.' 13 To the extent that the statement of claim in this proceeding does not identify a money claim made by SETL against London Partners it is argued that SETL is not a creditor of London Partners and, therefore, not a person bound by the Deed of Company Arrangement. 14 However, the width of the meaning of the term creditor in the Deed is likely to bring SETL within the class of creditors to which s 444D(1) and 444E apply. (See: Smith v Carr (1993) 10 ACSR 427 per Debelle J at 432). The material facts recited in the pleading show that notwithstanding the limited relief sought by SETL against London Partners in this proceeding, it is plainly arguable that SETL may be a person who has a cause of action against London Partners at law or in equity that sounds in damages albeit at this point it may be of uncertain measure. It may be a claim for equitable compensation or compensation under s 1317H of the Act for involvement in a contravention of s 181 that exists independently of rectification of the register, or it may be a contingent claim that, for example, may arise in the event that it is the fact that London Partners holds the securities on trust for a bona fide purchaser for value without notice and is unable to deliver up the securities. In either circumstance it would follow that SETL would be a creditor of London Partners in respect of an unliquidated sum. (See: Re: R L Child & Co Pty Ltd (1986) 10 ACLR 673, per McLelland J at 674; FCT v Simionato Holdings Pty Ltd (1997) 15 ACLC 477 per Mansfield J at 481; Re McLean (1992) 108 ALR 360; Forshaw v Thompson (1992) 35 FCR 329; Petrochemical Industries Ltd v Dempster Nominees Pty Ltd (1994) 15 ACSR 468 per Murray J at 475-476). 15 The fact that at this point SETL does not pursue such a claim in the proceeding does not remove the claim from the scope of the proceeding. Given that the proceeding may include such a pecuniary claim and is brought against London Partners, or in relation to the property of London Partners, by a creditor bound by the Deed it follows that the proceeding is a proceeding in respect of which SETL must obtain leave to proceed. 16 It is now necessary to consider whether leave should be granted. In that regard it is clear that the issue raised by the proceeding cannot be resolved under the terms of the Deed of Company Arrangement and is a matter properly brought to the Court. 17 Counsel for London Partners opposed leave on two grounds. First it was submitted that SETL has, by a Deed of Release executed in May 2002, released London Partners from liability to an order of the type sought in the application. That may be an arguable point but it involves an issue of construction that is not clear-cut and is a question to be determined at trial if the point is raised in any defence filed. 18 It is, however, a point that may be taken into consideration with other matters to ascertain whether there is a preponderant balance against the grant of leave. 19 The second point of opposition is the contention that SETL has unduly delayed the commencement of this proceeding to the prejudice of other creditors of London Partners. The prejudice appears to be the delay that would ensue in the realising of the asset the subject of the proceeding and the consequent postponement of any distribution to creditors. If, however, London Partners possesses property that has been obtained by its participation in conduct that breached the Act there will be a substantial public interest in exposing that conduct and in examining the entitlement of London Partners to hold the property so obtained. The creditors will have to stand by and await that determination if that is the case. 20 As to the delay in bringing the proceeding it can be said there has been a period of several months since change occurred in the control of the board of directors of the applicant by replacement of allegedly delinquent directors but that delay is consistent with the obtaining of appropriate legal advice and is not such as to deny a right to bring this proceeding having regard to the degree of public interest therein. I would not deny the grant of leave on that basis and nor do I consider the combination of that issue with a claimed defence under a Deed of Release to be sufficient to justify refusing the leave sought. Therefore, leave will be granted to SETL to proceed with the proceeding brought against London Partners. The costs of the application will be reserved. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee. Associate: Dated: 28 April 2006 Counsel for the Applicant: K A Dundo Solicitors for the Applicant: Q Legal Counsel for the Respondent: T Lyons Solicitors for the Respondent: Gibson Lyons Lawyers Date of Hearing: 12 April 2006 Date of Judgment: 12 April 2006