FEDERAL COURT OF AUSTRALIA Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178 Citation: Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178 Parties: MEDITERRANEAN OLIVES FINANCIAL PTY LTD AND ORS (ACCORDING TO THE ATTACHED SCHEDULE) v LOADERS TRADERS PTY LTD (ACN 069 549 042) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) AND ORS (ACCORDING TO THE ATTACHED SCHEDULE) File number: VID 927 of 2009 Judge: DODDS-STREETON J Date of judgment: 4 March 2011 Catchwords: CORPORATIONS – companies subject to deeds of company arrangement ("DOCA") – application to set aside resolutions of creditors and to terminate DOCA – whether resolutions to enter DOCA contrary to interests of the creditors as a whole within meaning of s 600A(1)(c)(i) of Corporations Act 2001 (Cth) ("the Act") – whether material omissions from administrators' reports under s 445D(1)(c) of the Act – whether administrators' investigations and reports on avenues for recovery inadequate – major independent creditors preferred liquidation but outvoted by supporters of DOCA, including related parties – whether greater benefits for creditors from investigation and pursuit of claims on winding up – where plaintiffs undertake to pay creditors participating in dividend under DOCA an equivalent sum if companies wound up – inadequacies in administrators' investigations or material omissions from reports not established – not established that liquidation may produce greater return or offer benefits exceeding those under DOCA – relief sought refused. Legislation: Corporations Act 2001 (Cth), ss 445D, 445G(3), 600A and 1321 Corporations Regulations 2001 (Cth), reg 5.6.26(3) Cases cited: Augustyn v Putnin (1988) 83 ALR 514 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235 Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 Deputy Commissioner of Taxation v Schmierer [2002] QSC 262 Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232 Emanuele v Australian Securities Commission (1995) 141 ALR 506 Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 Hoath v Comcen Pty Ltd (2005) 53 ACSR 708 Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) (recs and mgrs apptd) (2010) 267 ALR 613; [2010] FCA 352 JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527 Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (admin apptd) (1997) 24 ACSR 47 Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) [2007] SASC 296 Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139 Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707 Re Mills, ex parte Lloyd's v Prentice & Mills (1997) 73 FCR 551 Spiteri v Georges [2002] VSC 473 Date of hearing: 16 December 2010 Date of last submissions: 21 December 2010 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 253 Counsel for the Plaintiff: Mr G.T Bigmore QC with Mr P Fary Solicitor for the Plaintiff: Herbert Geer Counsel for the First and Fourth Defendants: Mr J Korman Solicitor for the First and Fourth Defendants: Dov Silberman Counsel for the Second, Third, Fifth and Sixth Defendants: Mr S Rubenstein Solicitor for the Second, Third, Fifth and Sixth Defendants: Macpherson+ Kelley IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 927 of 2009 BETWEEN: MEDITERRANEAN OLIVES FINANCIAL PTY LTD AND ORS (ACCORDING TO THE ATTACHED SCHEDULE) Plaintiff AND: LOADERS TRADERS PTY LTD (ACN 069 549 042) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) AND ORS (ACCORDING TO THE ATTACHED SCHEDULE) Defendant JUDGE: DODDS-STREETON J DATE: 4 march 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT introduction 1 In this proceeding, the major independent unsecured creditors apply to terminate a deed of company arrangement ("DOCA") for which related creditors voted, principally alleging that the resolutions to enter the DOCA were preceded by an inadequate investigation and were contrary to the interests of creditors as a whole. 2 By originating process filed on 23 December 2009, the plaintiffs, Mediterranean Olives Financial Pty Ltd, Mediterranean Olives Estate Limited, Albany Financial Pty Ltd and WA Blue Gum Pty Ltd, seek, pursuant to ss 445D, 445G(3), 600A and 1321 of the Corporations Act 2001 (Cth) ("the Act") and reg 5.6.26(3) of the Corporations Regulations 2001 (Cth), against the first defendant, Loaders Traders Pty Ltd ("Loaders"), and the fourth defendant, Lederberger Investments Pty Ltd ("Lederberger"), two companies subject to a single deed of company arrangement, and against Messrs Rathner and Coyne, the deed administrators (who are the second, third, fifth and sixth defendants), orders terminating the DOCA and setting aside the resolutions that it be executed. 3 The plaintiffs seek the following orders: 1. The court make the order setting aside the following resolutions: (a) the resolution of creditors of the first defendant ("Loaders") made on 1 December 2009 that the company execute a deed of company arrangement; (b) the resolution of creditors of the fourth defendant ("Lederberger") made on 10 December 2009 that the company execute a deed of company arrangement. 2. Further or in the alternative to 1, orders terminating alternatively avoiding: (a) the deed of company arrangement executed by Loaders; (b) the deed of company arrangement executed by Lederberger. 4 The application is supported by the affidavits of Anthony Henry May, a director of the plaintiff creditors, sworn on 23 December 2009 and 1 December 2010. 5 The application is opposed by the defendants. The affidavit of Gideon Rathner, one of the administrators, was sworn on 21 April 2010 in opposition. 6 At the hearing of the application, the first and fourth defendants, although represented by counsel, led no evidence and made no submissions. Neither Mr May nor Mr Rathner was crossexamined. 7 In essence, the plaintiffs seek that the resolutions made on 10 December 2009 at a concurrent meeting of creditors under s 435A of the Act, that Loaders and Lederberger each enter a DOCA, be set aside under s 600A(1)(c)(i) of the Act and that the DOCA be terminated under ss 445D(1)(c) and (g) of the Act. The plaintiffs allege that as the administrators' investigation of potential avenues of recovery was inadequate and their reports revealed material omissions, it was "contrary to the interests of the creditors as a whole" that the major independent creditors' preference for further investigation on liquidation should be defeated by the votes of related creditors. 8 The plaintiffs are the major independent unsecured creditors of Loaders and Lederberger, in a total amount of $1,007,819. The liabilities arose from Loaders' investment in managed investment schemes conducted by the plaintiffs in June 2006 and June 2007 respectively. Due to crosssecuritisation and crossguarantees, the liabilities of Loaders and Lederberger were identical. The companies' unsecured liabilities to the plaintiffs totalled approximately $1 million, unsecured liabilities to trade creditors and the Commissioner of Taxation totalled approximately $106,000, and unsecured liabilities to related creditors totalled approximately $1.57 million. The National Australia Bank ("NAB") had a fixed and floating charge over the companies' assets and undertaking, securing a liability estimated at $2,131,437 (ie: the total sum of $1,100,207 plus $1,031,230 owed under facilities secured by charges over Loaders and Lederberger respectively). The plaintiffs were the only creditors who voted against the resolutions that the companies enter the DOCA, under which unrelated unsecured creditors, including the plaintiffs, would receive an estimated 11 cents in the dollar (subsequently revised to 7.5 to 8.9 cents) as opposed to an estimated nil return should the companies be wound up. The related creditors, the secured creditor and employee creditors would receive no distribution under the DOCA. 9 The creditors related to Loaders and Lederberger voted on the resolutions in favour of entry into the DOCA. 10 The voting was as follows: Loaders In favour 19 creditors with a value of $1,630,719.33 (Six were related entities with a value of $1,576,172.19) (Thus, 13 nonrelated creditors with debts of $54,547.14 voted in favour.) Against Four creditors (the plaintiffs) with a value of $1,007,819 Lederberger In favour 17 creditors with a value of $1,624,666.98 Six were related entities with a value of $1,576,172.19 (Thus, 11 nonrelated creditors with a value of $48,494.79 voted in favour.) Against Four creditors (the plaintiffs) with a value of $1,007,819 BACKGROUND AND EVIDENCE 11 The background and facts, which appear from the affidavits and exhibits, are as follows. 12 The business known as "Loaders Manufacturers and Traders" was founded by Hirsch Lederberger in about 1949. Initially it sold men's sweaters and, ultimately, camping gear through army disposal stores. 13 Samuel Lederberger and Gital WolfLederberger are and were at all material times the directors of Loaders. Samuel Lederberger is and was at all material times the sole director of Lederberger. 14 In 2003, Hirsch Lederberger died. Gita Lederberger was the executrix of his will and the sole trustee of the deceased estate. Probate of Hirsch Lederberger's will was granted in September 2003. 15 Hirsch Lederberger's interest in the business known as Loaders Manufacturing & Traders was an asset of his deceased estate. On 1 October 2003, Lederberger and the Deceased Estate of Hirsch Lederberger were registered as a partnership under the name Loaders Manufacturers & Traders. On 28 November 2003, Loaders, by a declaration of trust, recited: (a) that it acted as a bare trustee for the partnership between the Estate of Hirsch Lederberger deceased and Lederberger, "which carried on business under the name or style of "Loaders Manufacturers & Traders" ("the partnership"); and (b) that it acted as bare trustee for the partners so that all of the assets of the partnership were held by the trustee on trust for the partners absolutely in the proportions of one third equity to the Estate of Hirsch Lederberger deceased and two thirds to Lederberger. 16 From 2003, Loaders conducted the business as a bare trustee or agent for the partnership. 17 The business made profits of approximately $1.4 million in 2005, $1.1 million in 2005 and $1 million in 2006. Samuel Lederberger, in a statement tabled at the meeting of creditors held on 18 November 2009 ("Mr Lederberger's statement"), asserted that in June 2006, Loaders commenced investing in managed investment schemes operated by the plaintiffs as a tax effective investment. According to Samuel Lederberger, the business could not sustain the annual cost of about $540,000 to maintain the investments in the schemes, but for which it would have been profitable in the 2008 financial year. In late 2009, the directors determined that the business was, or was likely to become, insolvent. 18 On 9 November 2009, Messrs Rathner and Coyne were appointed voluntary administrators of Loaders and Lederberger pursuant to s 436A of the Act. 19 Mr Rathner deposed that following the administrators' appointment, he and his staff conducted the following investigations of Loaders' and Lederberger's affairs: Between 9 November 2010 and about 23 November 2010, I conducted investigations into the Companies' affairs. As is my ordinary practice, I completed investigations including: (a) obtaining a company search; (b) attending the companies' premises; (c) meeting with the companies' financial advisor and accountant; (d) meeting with the companies' secured creditor and kept them informed of events and issues; (e) obtaining copies of the companies' financial records, including but not limited to (i) all outstanding invoices; (ii) an aged stock listing; (iii) a list of creditors; (iv) a list of debtors; (v) a list of assets; (vi) a list of liabilities; (vii) details of insurance held; (viii) details of leases held. A file note containing a summary list of all the investigations undertaken was compiled by Julie Seow, Manager of Corporate Insolvency and Reconstruction at Lowe Lippmann Chartered Accountants. I have read that file note and confirm that it is an accurate summary of the investigations that were undertaken. … As the First Defendant was relocating premises at the time, it was not practical to conduct a stock take. However, the First Defendant retained perpetual aged stock records which I reviewed. 20 The file note of Ms Seow (referred to by Mr Rather) stated that on 9 November 2009, she (together with other administrators' staff) attended the company's premises, met with the company's accountant and financial adviser, and obtained the company's financial records and records on other matters. The file note stated, inter alia, that the administrators' staff: - interviewed the director and verified his comments [where] possible or identify contradictions with company's books and records, bank statements and correspondence, external accountants and Financial Advisor. - communication with company's external accountants and communication with company's Financial Advisor to verify company's financial reports and financial position. - walked through the company's premises to view the stock, and plant and equipment to obtain a preliminary assessment of the company's assets. - reviewed company's accounting backup files and verified their accuracy and reasonableness from bank statements, interview of director, accountants and Financial Advisor plus and bank's correspondence. - Reviewed company's financial reports for prior financial years; and management accounts for recent financial period to assess the company's historical financial performance … … - met with, and explained the company's financial position to, the secured creditor…also kept the secured creditor regularly informed; and reviewed the company's banking correspondence. … - reviewed orders on hand and stock… - reviewed company's stock report with the director, including stock aging to assess the estimated recoverable value. … - reviewed the company's financial reports and company's management structure and history to assess the company's saleability and goodwill, if any. … - Related and associated entities: - reviewed lease agreement and reconciled company's rent on premises (related entity landlord) and reconstructed the outstanding rent accounts and assessed the impact on related entity loan accounts. - reconstruction of related entities' loan accounts from company's bank statements, to identify the actual movement of the loan accounts and traced actual receipts of the loan funds from the related entities to ensure they are consistent with the company's financial reports. - meeting with company's external accountants to clarify the relationship between Lederberger Investments Pty Ltd, the deceased estate of Hirsch Lederberger and Gita Lederberger, the partnership issue and Loaders Traders Pry Ltd; and to assess Gita Lederberger's claim against the company, if any. 21 On 23 November 2009, Mr Rathner sent a circular enclosing documents, which included the reports to creditors for both Loaders and Lederberger, a notice of a concurrent meeting of creditors of the companies to be held on 30 May 2009 and a summary of proposed terms of a DOCA. The letter requested creditors to provide any information which could assist with the administrators' investigations. The reports under s 439A of the Act The Loaders report 22 The Loaders report to creditors under s 439A of the Act, dated 23 November 2009, identified the company's officers, shareholder and secured creditor. It set out the company's history and background to the administrators' appointment. 23 In relation to causes of failure, the report referred to and annexed Mr Lederberger's statement, and stated: According to the director, the Company failed for the following reasons: - the downturn of the economy and falling sales adversely impact on the profitability of the Company's business. - the payments of ongoing fees relating to the MIS, the cost of servicing and repaying loans related to the MIS. - the inability to negotiate to terminate the MIS agreements. Based upon our investigations, we are of the opinion that the costs of servicing the MIS loans and the ongoing MIS fees were the main factors leading to the Company's failure. While the business, excluding the MIS, remained profitable, the Company did not generate sufficient cash flow to make the MIS payments. 5. Continuation The Company is currently trading, subject to the outcome of the meeting of creditors scheduled to be held on 1 December 2009. 6. Trading History A review of the Company's records for the last four years has disclosed the following trading performance: 6.1 Profit & Loss: Year ended Sales Gross Profit Profit/(Loss) 30 June 2006 $4,356,311 $2,406,574 $492,041 30 June 2007 $3,482,738 $1,923,911 ($410,316) 30 June 2008 $3,099,863 $1,875,653 ($275,596) 30 June 2009* $2,872,204 $1,754,876 ($ 3,394) period to $1,126,119 $($132,768) ($770,789) 9 November 2009* * management accounts Below is an analysis of the Company's profit and loss position before MIS costs: Year ended/Period Net Profit/(Loss) after MIS costs MIS costs included in Profit & Loss Stock write off Net Profit/(Loss) before MIS and stock write off 30 Jun 2006 $492,041 $503,500 $995,541 30 Jun 2007 ($410,316) $446,851 $36,535 30 Jun 2008 ($275,596) $340,639 $65,043 30 Jun 2009* ($3,394) $258,816 $255,422 1 Jul to 9 Nov 2009* ($770,789) $47,589 $754,332 $31,132 * management accounts 6.2 Balance Sheet: Year ended Assets Liabilities Net Assets (Liabilities) 30 June 2006 $5,506,873 $ 633,792 $4,873,080 30 June 2007 $5,658,948 $1,780,730 $3,878,218 30 June 2008 $5,533,630 $2,529,307 $3,004,323 30 June 2009* $5,299,943 $2,596,198 $2,703,744 period to9 November 2009* $4,720,084 $2,821,161 $1,898,923 * management accounts Included in the balance sheets are the following items: Assets Liabilities Year/Period Goodwill Related parties MIS Related Parties loans 30 Jun 2006 $3,232,144 nil $443,080 30 Jun 2007 $3,232,144 $257,996 $739,711 2008 $3,232,144 $277,160 $645,778 $722,579 2009* $3,232,144 $611,687 $501,857 $1,466,456 (@9Nov2009*) $3,232,144 $600,261 $1,007,816 $1,496,295 * management accounts 24 The creditors' report referred to the report as to affairs ("RATA") as at 9 November 2009, as follows: 7. Report as to Affairs Following our appointment as Joint and Several Administrators, we issued demands upon the directors of the Company to provide us with a report as to affairs as at 9 November 2009. The report as to affairs of the Company reflects the following: 7.1 Assets 7.1.1 Cash at Bank - $492 The bank has indicated that it would set off this amount against the debt of the Company. 7.1.2 Debtors - $1,145,502 The book value of debtors is $1,496,790 with an estimated recoverable amount being approximately $1,145,502, calculated as follows: Trade Debtors Trade debtors $818,294 Less: debtors > 90 days ($110,894) $707,400 At the date of this report, a total sum of $123,014.92 has been recovered represented by $119,761.82 deposited into the bank account set up under the Administration and a sum of $3,253.10 credit card payments banked into the Company's pre-appointment bank under its merchant facility. Other Debtor Outback Properties Pty Ltd is a related entity of the Company with a debt to the Company of $429,099 reflected in the balance sheet of the Company's management account as at 9 November 2009. Outback Properties Pty Ltd is also the landlord of the Company's premises at 7-11 Ives Road, Altona North, Victoria. Outback Properties purchased the premises from Meat Industry Employees Superannuation Fund Pty Ltd in 2007. The Company executed a lease on the premises on 27 September 2006. At that time, the landlord was Meat Industry Employees Superannuation Fund Pty Ltd. Under the lease, the rent was $33,333 per month plus GST. Our investigations of the Company's records reveal that there are arrears of rent owing to Outback Properties based upon the lease. The rent arrears total $240,394. Outback Properties has claimed a set off of the rent arrears against its loan account. Our investigations reveal that the National Australia Bank ("NAB") market facility ($249,397) that the Company borrowed and on-lent to Outback Properties was omitted in the Company's financial accounts, however, is included as a liability in the financial statements of Outback Properties. A reconstruction of the Outback Properties loan account, based upon set off of the rent arrears and adjustment for the NAB market facility reflects the following: Date Description Dr Cr Running Balance 30 June 2009 Opening balance $414,699 $414,699 dr 30 June 2009 Adjustment for bankdebt (market rate facility) on-lent to Outback Properties $249,396 $664,095 dr 30 June 2009 Rent arrears 2008/2009 $148,426 $515,669 dr 1 Jul 2009 Rent arrear Jul 2009 $22,992 $492,678 dr 1 Aug 2009 Rent arrear Aug 2009 $22,992 $492,686 dr 31 Aug 2009 Repayment $365,850 $103,386 dr 1 Sept 2009 Rent arrear Sept 2009 $22,992 $80,844 dr 17 Sept 2009 Land tax $14,400 $95,244 dr 1 Oct 2009 Rent arrear Oct 2009 $22,992 $72,252 dr 12 Oct 2009 Advance $365,850 $438,102 dr Based upon the above reconstruction, Outback Properties owes the Company $438,102. 7.1.3 Plant and Equipment - $65,988 The book value of the plant and equipment is $164,971 and the estimated realisable value is $65,988 (i.e. 40% of book value). These assets include plant and equipment, office equipment and motor vehicles. There are no finance agreements for any of the assets. 25 The report stated that closing stock, which was recorded in the company's management accounts at a value of $1,600,293, had a total estimated realisable value of between $462,362 and $839,527. 26 The report stated that closing stock included obsolete stock with a book value of $851,962, with an estimated realisable value of only 10% (ie. $85,196). 27 Plant and equipment had an estimated realisable value of $65,387. 28 Work in progress was valued at $65,387. 29 The report referred to and adjusted the value of assets, given the company's management report, as follows: 7.1.6 Other Assets - $nil The Company's management report reflects the following: - Loan to Lederberger Investments Pty Ltd, a related entity, of $171,162 with nil recovery. This entity has appointed us as joint and several administrators on 9 November 2009. - Goodwill valued at $3,232,144. This is the director's valuation created when the director bought out his brother in 2003. In considering the realisation of any goodwill, we have considered the saleability of the business. In our opinion, the goodwill is only recoverable if a purchaser is able to retain the services of the director. The director is responsible for all purchases, including suppliers overseas. According to the director, he has all contacts with overseas suppliers and is the responsible person for purchases. The director also claims that given how long the business has been operating, he also has significant relationships with many of the customers. In view of the above, it is our opinion that the goodwill has little or no recoverable value without the co-operation of the director. The director has indicated that he is unlikely to cooperate in any sale of the business but likely to recommence in business himself if the business is sold without his agreement. 30 The company's liabilities included $1,100,207 to the secured creditor, NAB, which had a fixed and floating charge granted 28 November 2003 and registered on 2 January 2004. Of the secured debt, the report stated: 7.2.1 Secured Creditor - $1,100,207 The National Australia Bank ("NAB") holds a fixed and floating charge over the Company's assets and undertakings. The Charge was granted on 28 November 2003 and registered with ASIC on 2 January 2004. Documents from NAB disclosed banking facilities to the Company as follows: Balance Limit - Overdraft bank account $504,503 $595,000 - Trade finance $346,307 $405,000 - Market facility $249,397 $250,000 Total $1,100,207 $1,250,000 The Company's financial reports disclose the debt to NAB as follows: 30 Jun 2007 30 Jun 2008 - Overdraft bank account $439,463 $421,228 - Trade finance $310,356 $442,762 We note that NAB's market facility is not disclosed in the financial statements which means the liabilities are understated by approximately $250,000. Our enquiry of the director and his financial advisor reflects that the NAB market facility relates to funds borrowed by the Company and on-lent to Outback Properties Pty Ltd to assist in funding the purchase of the premises ... Our investigations reveal that the NAB market facility was recorded as a liability in the financial statements of Outback Properties Pty Ltd. In our opinion, this is an error and the debt is owed by the Company as borrower and not Outback Properties Pty Ltd. Outback Properties Pty Ltd owes the Company $249,397. 31 The report stated: 1.6 Right of Indemnity from Partnership We note that Loaders Traders Pty Ltd acts as bare Trustee for Loaders Manufacturers and Traders being a partnership between Lederberger Investments Pty Ltd and the Deceased Estate of Hirsh Lederberger. As a result, Loaders Traders Pty Ltd has a right of indemnity against the Partners. As the Administrators of Lederberger Investments Pty Ltd, we have assessed the value of the indemnity as nil. We requested from the accountant for the Deceased Estate of Hirsch Lederberger details of the Estate's financial position to assess the value of the indemnity. According to the accountant, the only interest of the Estate is its interest in the Partnership. As at 30 June 2008, the Estate's interest was recorded as a deficiency of $224,067. Consequently, it appears to us that the value of the indemnity is nil. (b) Employee claims with priority were $72,289. (c) Excluded employees (as defined under s 556(2) of the Act) had an unsecured balance of $89,415. (d) Unsecured creditors claims totalled $2,766,033 as follows: Trade suppliers $106,281 Related parties $1,496,296 Australian Taxation Office- PAYG $21,512 Australian Taxation Office - GST $44,710 MIS creditors $1,007,819 Excluded employees $89,415 Total $2,766,033 32 The related entity loans were as follows: 8. Related Entity Loans A review of the financial statements has disclosed the following movement in related entity loan accounts. Year Ended Debtor Creditor 30 June 2006 nil nil 30 June 2007 $257,996 nil 30 June 2008 $277,160 $ 722,579 30 June 2009* $611,687 $1,466,456 period to 9 November 2009* $600,261 $1,496,295 * Management accounts The debtor balance shown in the management accounts needs adjustment for the arrears of rent claimed by Outback Properties Pty Ltd [see point (6.1.2) above]. The amount of $1,496,295 is owed to: Lotte Fruendenberg $309,451 Saminna Pty Ltd $610,496 S&M Lederberger $211,984 S&M Lederberger $192,000 Joel Fuenderberg $172,364 Total $1,496,295 33 The contingent liabilities were $1,031,230, as Loaders had guaranteed NAB's loan to Lederberger. The report stated that "[t]he guarantee appears to be secured by the bank's charge over the Company". The DOCA 34 The report summarised the directors' proposal for a DOCA as follows: 11. Director's Proposal for a Deed of Company Arrangement The director has discussed with us a proposal for a Deed of Company Arrangement ("Deed"). A summary of the proposed terms of the Deed is attached. The proposal provides for the following: - There is to be one Deed for Loaders Traders Pty Ltd and Lederberger Investments Pty Ltd. - The director is to procure a contribution of $250,000 payable within 5 days of execution of the Deed. - The director will obtain the agreement of the related parties, including the following parties not to participate for a dividend under the Deed. * Lotte Fruenberger $309,451 * Saminna Pty Ltd $610,497 * S&M Lederberger $211,984 * S&M Lederberger $192,000 Joel Freunbeger $172,363 Total $1,496,295 - The employees' claims totalling approximately $68,006 (excluding superannuation) will be paid in the normal course of their continuing employment with the Company and, except for superannuation, will not claim under the Deed. - The unsecured creditors' claims will further be reduced by the excluded employees' unsecured claims totalling approximately $89,415 not participating for a dividend under the Deed. - The contingent debt to the National Australia Bank will not crystallise. Under the director's proposal, the dividend to creditors is estimated to be between 10 cents in the dollar ($118,717 ÷ $1,180,321) and 11 cents in the dollar ($135,717 ÷ $1,180,321) calculated as follows: Deed of Company Arrangement High Low Deed Fund $250,000 $250,000 Less: Administrators and Deed Administrators fees ($100,000) ($110,000) Less: Administrators and Deed Administrators expenses ($10,000) ($17,000) Less: Employees superannuation ($4,283) ($4,283) Fund available for dividend $135,717 $118,717 Participating creditors: $1,180,321 $1,180,321 Estimated dividend 11¢ in the dollar 10¢ in the dollar We set out below a calculation of the estimated return to creditors under the proposed Deed and from a winding up of the Company Deed of Company Arrangement Winding Up High Low High Low Deed Fund $250,000 $250,000 na na RATA Assets na na $2,116,897 $1,739,732, Less: - Administrators/Liquidators fees ($100,000) ($110,000) ($100,000) ($110,000) - Administrators/Liquidators' expenses ($10,000) ($17,000) ($10,000) ($17,000) - Employees priority entitlements ($4,283) ($4,283) ($72,289) ($72,289) - Secured creditor's claims na na ($2,131,437) ($2,131,437) Balance $140,000 $123,000 nil nil Fund available for dividend $135,717 $118,717 nil nil Total participating creditors $1,180,321 $1,180,321 $2,766,031 $2,766,031 Estimated dividend in $1 11¢ 10¢ nil nil 35 The report estimated the return to unsecured creditors on winding up would be nil, as the following additional claims would participate: - secured creditors claims: $2,131,437 - employees' priority claims: $68,000 - related parties' claims: $1,496,295 - excluded employees' claims: $89,415 Total: $3,785,153 36 In contrast, the report estimated that under the proposed DOCA, the participating creditors would receive 10-11 cents in the dollar. 37 The report stated that, according to the RATA, the total estimated deficiency, subject to costs and expenses, was between $3,230,028 and $2,852,862. 38 The report stated: 12. Interests of Creditors As stated above, in the event that the Company is wound up, then it is our view that the unsecured creditors are likely to receive nil cents in the dollar as dividend. Accordingly, it is our opinion that it is not in the creditors' interests for the Company to be wound up. In forming our opinion on the options available to creditors we can only consider the commercial outcomes, that is which proposal is likely to provide for a better return for the Company's creditors. Creditors may have other reasons and issues in considering their interests. Creditors are required to decide whether: i) the administration should come to an end; or ii) the Company should be wound up; or iii) the Company should execute a Deed of Company Arrangement. i) It is our opinion that it is not in the interests of creditors that the administration of the Company come to an end as the Company is insolvent or is likely to become insolvent. iii) In agreeing to the Deed of Company Arrangement, the fund available for disbursement to participating creditors will be greater than in a liquidation as a result of: - The director will procure the sum of $250,000 which sum is greater than the amount available for unsecured creditors in a winding up. - The excluded priority employees' claims will not participate for a dividend. The balance of the excluded employees' claims will not participate as an unsecured creditor. - The employees' entitlements will be paid in the course of their continuing employment with the Company (excluding superannuation owing of $4,283 which will be paid under the Deed). -The secured creditor will not participate under the Deed. - The claims of the unsecured creditors will be further reduced by the agreement of the related parties not to participate for a dividend. - The claims of the contingent creditors are unlikely to crystallise. 39 The report stated that the administrators had investigated the books, business, property, affairs and financial circumstances and, at that stage, they had not identified any offences. They considered it unlikely that there were voidable transactions or that a claim against the directors for insolvent trading would be successful. 40 The report stated that the administrators had asked the directors for a statutory declaration on their personal financial position which had not yet been provided, so, to date, the administrators could not determine whether the directors had available assets should an action against them be successfully pursued. Lederberger report 41 The s 439(4) report in relation to Lederberger was in similar terms to the Loaders report. It noted that the sole director was Samuel Lederberger and the sole shareholder was Saminna Pty Ltd. The report noted that Lederberger had a two thirds interest in the partnership and conducted a business as a partner 42 The report stated that the NAB had a fixed and floating charge securing the company's liabilities to it. Further, Lederberger had guaranteed to the NAB repayment of the loan to Loaders, which guarantee was secured by the charge. Lederberger had an estimated deficiency between $4,984,299 to $5,361,465. The plaintiffs' questions 43 On 30 November 2009, Anthony May, a director of the plaintiff companies, emailed a number of questions to the administrators regarding their report. The questions particularly relevant to this proceeding were as follows: Other debtor - Outback Properties Pry Ltd • What benefit to the company was there in making this loan? Was interest paid on it? Who paid the interest to the bank? Was there ever any attempt made by the company to recover the loan to Outback? • In the Administrator's reconstruction of the loan account, has the Administrator factored in interest paid by the company on the bank loan taken out to benefit Outback Properties Pty Ltd Estimated realisable value of plant and equipment at 40% of book value. • Whose estimate is this? The directors? Based on what? • What is "estimated realisable value - auction value? Going concern value? What efforts have been made by the Administrator to ascertain if this estimated realisable value of plant and equipment is accurate? Was an independent valuation by a qualified valuer obtained by the Administrator for both going concern and auction values? If not why not? Estimated realisable value of stock. • On what basis what the stock valued? • Was a stock take made? If so, by whom and when? What efforts have been made by the Administrator to ascertain if this estimated realisable value of stock is accurate? Was an independent valuation by a qualified valuer obtained by the Administrator for both going concern and auction values? Did the administrator perform his own stock take? If not, why not? Goodwill is estimated to be of no value without the cooperation of the director What efforts have been made by the Administrator to ascertain whether the director's assertions are true? Many times directors assert their indispensability to their business and subsequently this has been found not to be the case. Has the Administrator advertised the business for sale? Has he prepared an information memorandum? Has he contacted people in that industry re saleability? Has he contacted existing competitors whether they may be interested in the business? Or has the Administrator merely accepted at face value the directors' assertions? Secured creditor and contingent liability The Administrator states "the guarantee to the National Australia Bank" appears to be secured by the bank's charge over the company. • Has the Administrator examined the bank's charge to ascertain whether it is indeed secured? • Has he obtained legal advice on the matter? • What are the terms of the guarantee? • When was the guarantee entered into? • When does it become enforceable? • Who signed the guarantee on behalf of the company? • Which other entity/person/persons guaranteed the loan to Lederberger Investments? What are the terms of those guarantees? When were those guarantees entered into? What security/securities does the bank have for those guarantees? When do they become enforceable? • Should Lederberger Investments default, why shouldn't the bank call on those guarantees/securities as well as on Loader Traders' guarantee? Offences Has the Administrator considered the following offences by the directors: • Not keeping proper books and records, including omitting from the accounts the amount of $249,397 borrowed from NAB, not recording properly rents owing and not writing off obsolete stock. • Not acting in the best interests of the company, including procuring the company to guarantee the debt owed by Lederberger Investments when there was no benefit to the company in so doing. • Not acting in the best interests of the company, including procuring the company to lend funds to an associated entity, Outback Properties, thereby affecting adversely its cash flow and financial stability. • Not complying with the Administrator's request for information regarding their personal financial positions. Has this been reported to ASIC? Voidable transactions Has the Administrator considered the following possible voidable transactions: • Repayment to Outback Properties - a related entity - of $365,850 on 31 August 2009, only 2 months before the appointment of an Administrator. The recovery of such a transaction would be available to all creditors not just the secured creditor. • The guaranteeing of the debt owed by Lederberger Investments when there was no benefit to the company in so doing is either an uncommercial transaction or an unreasonable director related transaction or both. Directors' personal financial position It is insupportable that the director has not given the Administrator details of their personal financial position. In light of the above it is imperative that full details are given, including their interest in any companies and trusts, before creditors can make an informed decision. Were the directors informed of the penalties for not cooperating with the Administrator? Right of indemnity from Partnership Has the Administrator been given any documentation regarding the Deceased Estate's financial position or is he simply relying on the accountant's verbal advice? The proposal includes the term that the contingent debt to the National Australia Bank will not crystallise • How is the non crystallisation to be achieved and what is the guarantee/evidence that it will happen? The Administrator in para 12 on page 13 states that the claims of the contingent creditors are unlikely to crystallise. Which is it - "will not crystallise" or "unlikely to crystallise"? • What discussions have been held with the NAB on this matter by the directors, their advisers and the Administrator? • Has an agreement been reached with NAB either in relation to this proposed DOCA or separate to this proposed DOCA? If so what are its terms, when was the agreement reached, who are the parties to it and who negotiated it? General • When was the Administrator and/or his staff first approached by the directors and/or their advisers and/or any other party regarding the company? • How many meetings/conversations were held between the Administrator and/or his staff before his appointment? • What advice was given by the administrator and/or his staff to the directors and/or their advisers and/or any other party regarding the company both before and after appointment? As by far the largest unsecured unrelated entity I require answers to the above queries. Many of those queries should have been in the first instance addressed by the Administrator and reported on by the Administrator and should not have had to be raised by me. The second meeting of creditors 44 On 1 December 2009 at the concurrent meetings of creditors, Mr Rathner told Mr May that he had considered his questions and verified that all issues had been dealt with in the investigation. Mr Rathner, as chairman, having put a resolution that Lederberger should execute the DOCA, declared it carried. Mr May, however, asked that the resolution be put again and, when that was refused, sought that a poll be taken. As a result, the resolution was carried. 45 Mr Rathner nevertheless adjourned the meeting to 10 December 2009, in order to provide a written response to Mr May's email. 46 On 3 December 2009, the administrators sent a further notice to creditors attaching, inter alia, a further report in substantially the same terms as those already provided, save that it reduced the estimated dividend under the DOCA to 7.5 to 8.9 cents in the dollar due to an estimated increase in administration costs from the adjournment of the second meeting of creditors. 47 On 9 December 2009, Mr Rathner sent Mr May an email responding to Mr May's questions (set out above at para 42) relevantly as follows: (4) Other debtors - Outback Properties Pty Ltd. - It is our opinion that the Outback loan is recoverable but is subject to the debenture charge held by the Bank. (5) Estimated realisable value of plant and equipment at 40% of book value. - We are of the opinion that this is a reasonable estimate made by the directors. (6) Estimated realisable value of stock. - The stock is valued at cost. - At the time of our appointment, the Company was in the process of relocating its premises and a stock take or valuation was not feasible in the particular circumstances. (8) Goodwill is estimated to be of no value without the co-operation of the director. - Based upon our experience the comments made in our Report are considered reasonable. - As the objective of Part 5.3 of the Corporations Act 2001 is to save businesses capable of being saved; and as the proposed Deed seeks to achieve this objective we consider that it is not a requirement that we advertise the business for sale in circumstances where we do not wish to mislead prospective buyers as to a sale. (10) Secured creditor and contingent liability. - Our report sets out the position in relation to the secured creditor. It is not up to us to determine how the secured creditor should act in relation to guarantees or enforcing securities. That is the decision of the secured creditor. (11) Offences - Our report sets out our opinion on offences. - In relation to the request by us for a statutory declaration of the director's assets and liabilities, please note that this is not a request in relation to the financial affairs of the Company. The director has no statutory obligation to provide the information. It has been requested from him but we cannot compel him to provide it. (12) Voidable transactions. - Our opinion on voidable transactions is set out in our Report. (14) Director's personal financial position. - We have responded to this above. (15) Right of indemnity from Partnership. - We have received documentation from the accountant to verify the financial position of the deceased's estate which has been set out in our Report. (16) The proposal includes the term that the contingent debt to the National Australia Bank will not crystallize. - We have met with the Bank who have confirmed that they will not participate under the Deed. In any event, this is a requirement of the Deed for it to continue. (17) General. - We were first approached by the Company's accountant to provide insolvency advice to the Company on 7 October 2009. We met again with the director and his accountants on 13 October 2009 to provide further advice in relation to the financial position of the Company. I refer to your concluding paragraph in your memo. I dispute that our Report is deficient. In our opinion, the Report complies with our obligations set out in Section 439A of the Corporations Act 2001. Due to both the privacy provisions and commercial confidentiality, some of the specific information about the Company's affairs and financial position details cannot be provided. … 48 On 10 December 2009, the adjourned concurrent second meeting of creditors of Loaders and Lederberger reconvened. 49 In his affidavit, Mr Rathner gave the following account of the reconvened meeting on 10 December 2009: 17. The reconvened meeting of creditors took place on 10 December 2009, and Mr May was present. Mr May told me that he had received my email, but that he had been "too busy" to read it. I again told Mr May that I was satisfied that the content of my report was correct and set out my opinion on the subject of the DOCA. 18. At the reconvened meeting a resolution was put by Mr Benjamin Nicholls, as proxy for M&N Corporate trading as Elite Strategies and seconded by Benjamin Nicholls as special proxy for Green & Sternfeld Pty Ltd that the proposed DOCA be executed by the Companies. Mr May as proxy for the Plaintiffs voted against the resolution and called for a poll. 19. I declared the resolution carried in relation to the First Defendant company, with 19 creditors to the value of $1,630,719.33 in favour and 4 creditors to the value of $1,007,819 against. 20. 1 declared the resolution carried in relation to the Fourth Defendant company, with 17 creditors to the value of $1,624,666.98 in favour and 4 creditors to the value of $1,007,819 against. 21. Upon a request from Mr May to identify how many of the creditors in favour of the resolution were related persons, I notified him that there were 6 related creditors to the value of $1,576,172.19. 22. At the reconvened meeting, I recorded which creditors voted in favour and which creditors voted against the proposal for the Deed of Company Arrangement. Now produced and shown to me marked "GR-7" is a copy of the minutes of meeting held on 10 December 2009 including my notes recording the results of the vote. 50 The DOCA was executed on 10 December 2009. 51 On 11 December 2009, Mr Rathner sent the following letter to creditors: 11 December 2009 TO THE CREDITOR AS ADDRESSED Dear Sir/Madam … At the reconvened concurrent meeting of creditors of the above Companies held on 10 December 2009, it was resolved that the Companies execute a Deed of Company Arrangement. On 10 December 2009 the Companies executed the Deed and Gideon Isaac Rathner and David John Coyne were appointed Joint and Several Administrators of the Deed. We enclose for your information and attention the following: - Form 509E - Notice to Creditors of Execution of the Deed of Company Arrangement; - Summary of Terms of Deed of Company Arrangement; and - Notice calling for proof of debt to be lodged with us no later than 29 January 2010. Also enclosed is the relevant form for this purpose (Formal Proof of Debt or Claim - Form 535). Please ensure that the form is completed and returned to us by 29 January 2010. A copy of the Deed of Company Arrangement may be inspected at this office during normal business hours and is also available by searching the Company's file at ASIC. Should you have any questions please contact this office. Yours faithfully Gideon Rathner JOINT AND SEVERAL DEED ADMINISTRATOR The present proceeding The pleadings 52 On 23 December 2009, the plaintiffs issued the present proceeding. In their points of claim the plaintiffs alleged that the resolutions to enter a DOCA were, inter alia, contrary to the interests of the creditors as a whole pursuant to s 600A(1)(c)(i) of the Act, or had prejudiced or were reasonably likely to prejudice the interests of the creditors who voted against them to an extent that was unreasonable within the meaning of s 600A(1)(c)(ii). Alternatively to the s 600A claims, the plaintiffs alleged, under s 445D(1)(c) of the Act, an omission from the Loaders and Lederberger reports which could reasonably be expected to have been material to the creditors' decision, that the DOCA was contrary to the interests of the creditors, and/or that it should be terminated "for some other reason". 53 The particulars of both those allegations under ss 600A and 445D of the Act in relation to the Loaders resolution were as follows: Particulars Loaders Resolution Contrary to the Interests of Creditors i) The administrators failed to adequately investigate and report on Loaders' business, property, affairs and financial circumstances. ii) The effect of the Loaders Resolution is to prevent the company being wound up and its business, property, affairs and financial circumstances being further investigated. iii) The administrators failed to adequately respond to questions attached to the email from Tom May to the administrators dated 30 November 2009 (exhibit "AHM31") ("Loaders Questions"), Loaders Report Para 6.2 iv) The administrators failed to adequately investigate and report on the Loaders Related Party Creditors Claims in relation to the matters set out in the Loaders Questions. Loaders Report Para 7.1.2 v) The administrators failed to adequately investigate and report on the recoverability of trade debtors in relation to the matters set out in the Loaders Questions. vi) The administrators failed to adequately investigate and report on the Outback Properties Pty Ltd debt in relation to the matters set out in the Loaders Questions. vii) The administrators failed to adequately investigate and report on the payment of $365,850 which is recorded as a credit made on 12 October 2009 in the "reconstruction". Loaders Report Para 7.1.3 viii) The administrators failed to adequately investigate and report on the value of plant and equipment in relation to the matters set out in the Loaders Questions. Loaders Report Para 7.1.4 ix) The administrators failed to adequately investigate and report on the value of stock in relation to the matters set out in the Loaders Questions. Loaders Report Para 7.1.5 x) The administrators failed to adequately investigate and report on the value of work in progress in relation to the matters set out in the Loaders Questions. Loaders Report Para 7.1.6 xi) The administrators failed to adequately investigate and report on the value of goodwill in relation to the matters set out in the Loaders Questions. Loaders Report Para 7.2.2.1 xii) The administrators failed to adequately investigate and report on the claims of excluded employees in relation to the matters set out in the Loaders Questions. Loaders Report Para 7.2.4 xiii) The administrators failed to adequately investigate and report on the secured and contingent liabilities in relation to the matters set out in the Loaders Questions. Loaders Report Para 9.2 xiv) The administrators failed to adequately investigate and report on voidable transactions in relation to the matters set out in the Loaders Questions. xv) The administrators failed to adequately investigate and report on whether any of the transactions set out in the "reconstruction" under para 7.1.2 were voidable; particularly having regard to the fact that the peak indebtedness of $664,095 (30 June 2009) was reduced to $438,102 (12 October 2009). Loaders Report Para 9.3 xvi) The administrators failed to adequately investigate and report on solvency as set out in the Loaders Questions. Loaders Report Para 9.4 xvii) The administrators failed to adequately investigate and report on the directors' personal financial position in relation to the matters set out in the Loaders Questions. Loaders Report Para 9.6 xviii) The administrators failed to adequately investigate and report on the legal relationship between Loaders, Lederberger Investments and Gita Lederberger as executrix of the deceased estate of Hirsh Lederberger. xix) The administrators failed to adequately investigate and report on the right of indemnity from the Partnership as set out in the Loaders Questions. xx) The administrators failed to adequately investigate Loaders' right of indemnity from the Partnership; particularly the value of claims against Gita Lederberg as executrix of the deceased estate of Hirsh Lederberger. xxi) The administrators failed to make any or any adequate enquiries as to the' financial position of Gita Lederberger. xxii) In assessing the value of the indemnity as "nil", the administrators appear to have ignored the personal liability of Gita Lederberger. Loaders Report Para 11 xxiii) The administrators failed to adequately investigate and report on the proposal that the debt to the National Australia Bank not crystallise as set out in the Loaders Questions. Conclusion xxiv) It is in the interests of creditors that there be a full investigation of the company's business, property, affairs and financial circumstances in the context of a winding up of the company. Loaders Resolution Prejudicial to the Interest of Creditors xxv) The plaintiffs refer to and repeat the matters set out in i) to xxiv), above. 54 The points of claim set out a reduced number of the above particulars in relation to the Lederberger resolution. Supreme Court proceeding 55 On 17 March 2010, the plaintiffs commenced a proceeding in the Supreme Court of Victoria against Mrs Lederberger, in which they seek to recover the same amounts they claim from the companies on the grounds that Mrs Lederberger, as the "executrix of the will of Hirsch Lederberger, deceased, and sole trustee of his estate", is personally liable to indemnify Loaders to whose right of indemnity the plaintiffs are subrogated; or alternatively, that Mrs Lederberger is directly liable to the plaintiffs for liabilities Loaders incurred as the agent of an undisclosed principal. At the time of the hearing, the Supreme Court proceeding had not yet been set down for trial. No dividend yet paid under DOCA 56 Although the DOCA provides for a payment to the participating creditors initially estimated at about 11 cents (subsequently revised to about 8 cents) in the dollar, no dividend has yet been paid, due to a standstill agreement reached after the commencement of this litigation. Relevant Legislation and case law 57 Section 445D of the Corporations Act 2001 (Cth) ("the Act") provides: 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. 58 Section 445G(3) of the Act provides: (3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that: (a) the provision was substantially complied with; and (b) no injustice will result for anyone bound by the deed if the contravention is disregarded. 59 Section 600A of the Act provides: 600A Powers of Court where outcome of voting at creditors' meeting determined by related entity (1) Subsection (2) applies where, on the application of a creditor of a company or Part 5.1 body, the Court is satisfied: (a) that a proposed resolution has been voted on at: (i) in the case of a company—a meeting of creditors of the company held: (A) under Part 5.3A or a deed of company arrangement executed by the company; or (B) in connection with winding up the company; or (ii) in the case of a Part 5.1 body—a meeting of creditors, or of a class of creditors, of the body held under Part 5.1; and (b) that, if the vote or votes that a particular related creditor, or particular related creditors, of the company or body cast on the proposed resolution had been disregarded for the purposes of determining whether or not the proposed resolution was passed, the proposed resolution: (i) if it was in fact passed—would not have been passed; or (ii) if in fact it was not passed—would have been passed; or the question would have had to be decided on a casting vote; and (c) that the passing of the proposed resolution, or the failure to pass it, as the case requires: (i) is contrary to the interests of the creditors as a whole or of that class of creditors as a whole, as the case may be; or (ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable having regard to: (A) the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution, or from the failure to pass the proposed resolution, as the case may be; and (B) the nature of the relationship between the related creditor and the company or body, or of the respective relationships between the related creditors and the company or body; and (C) any other relevant matter. (2) The Court may make one or more of the following: (a) if the proposed resolution was passed—an order setting aside the resolution; (b) an order that the proposed resolution be considered and voted on at a meeting of the creditors of the company or body, or of that class of creditors, as the case may be, convened and held as specified in the order; (c) an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on: (i) the proposed resolution; or (ii) a resolution to amend or vary the proposed resolution; (d) such other orders as the Court thinks necessary. (3) In this section: related creditor, in relation to a company or Part 5.1 body, in relation to a vote, means a person who, when the vote was cast, was a related entity, and a creditor, of the company or body. 60 Section 1321 of the Act provides: 1321 Appeals from decisions of receivers, liquidators etc. (1) A person aggrieved by any act, omission or decision of: (a) a person administering a compromise, arrangement or scheme referred to in Part 5.1; or (b) a receiver, or a receiver and manager, of property of a corporation; or (c) an administrator of a company; or (ca) an administrator of a deed of company arrangement executed by a company; or (d) a liquidator or provisional liquidator of a company; may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit. (2) Paragraph (1)(b) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation. RELEVANT CASE LAW 61 Relevant authority recognises that the standards required of an administrators' investigation are necessarily modified by the tight timeframe and associated constraints. 62 In Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 ("Hagenvale"), Cohen J stated (at 145-146): As a preliminary matter, it should be noted that Pt 5.3A has its objects as set out in s 43A, namely the provision for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. The intention was, as has been indicated in several cases, to provide a more expeditious and less expensive way of assisting those creditors and members than under the greater formality of a winding up or of the entry into a scheme of arrangement. One result, however, is that an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator's actions must be looked at in the light of that more restricted range of activities which are available to him. A further result, when dealing with a deed of company arrangement under Pt 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly. 63 In Hagenvale the plaintiffs alleged, inter alia, that the administrator's report failed adequately to examine the relationship between the defendant companies or to quantify the amount of the preferences, and that the company failed to give sufficient information in relation to an action against the directors under s 588G of the Act. Cohen J did not consider that the alleged deficiencies, or alternatively their materiality, were established. His Honour reiterated that the administrator did not have the time or resources for investigation as in liquidation. 64 In Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 ("Pddam"), Heerey J declined to set aside a DOCA under, inter alia, s 445D(1) of the Act. Despite finding some substantial departures from statutory requirements, his Honour did not consider that the administrators' investigation or report was inadequate. His Honour stated (at 510): I am not satisfied that the administrator failed to carry out the investigation required by s 438A(a). Perhaps more enquiries could have been made. Perhaps what the administrator was told by the directors and the receiver might not have been taken at face value. It is often possible to say of an investigation that, in retrospect, more could have been done. However the case that the applicant seeks to make out is not one of an inadequate or negligent investigation, but of a failure to comply with a statutory requirement, so that there was in truth no investigation at all. The passages already cited from the Harmer Report and the explanatory memorandum indicate that the investigation is intended by Parliament to be a swift and practical one. Part 5.3A assumes that the company in question is either trading while insolvent or likely to be in that position within a predictable period of time: see s 436A(1)(a). It is self-evidently essential that such a state of affairs be brought to an end promptly, either by the execution of a deed or by winding up. The tight time frames set for the convening of the first and second meetings of creditors are consistent with that need. 65 Heerey J also took into account, in the exercise of his discretion, that there was "no basis for concluding that…liquidation would confer any practical benefit on any creditor, including the applicant" (at 512) and that the loss of benefits under the DOCA would impose real hardship on former employees. 66 In Spiteri v Georges [2002] VSC 473, Hansen J reiterated that the administrator must act quickly in relation to both the first and second meeting of creditors, and in investigating and forming an opinion. His Honour dismissed an application by the director of the company to remove the administrator and set aside his decisions allowing a party to vote as a creditor in a particular amount, on grounds including alleged partiality and lack of independence. 67 Hansen J observed that where the director, contrary to the obligations imposed by the statute, had deliberately starved the administrator of information by failing to deliver the books and records, attend the meeting as required or otherwise assist, the administrator necessarily relied on information from creditors, on which the decision to admit the disputed claim was open (at [88]). 68 In Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612, Austin J described the administrator's duty to investigate as follows (at [339]): An administrator has a statutory duty under s 438A to investigate the company's business, property, affairs and financial circumstances. It is possible that he or she may fall under an obligation to obtain legal advice in order to discharge that duty properly in the facts of the case. But in assessing whether any such duty has arisen, the court is bound to take into account the limited time available to an administrator to carry out his or her investigations, the extent and complexity of the tasks to be carried out during that time, and the availability of funds for these purposes: see the Pddam and Portinex [Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391] cases, cited above. In some cases it will be open to the court, bearing in mind such considerations, to conclude that something less than an independent legal assessment will be sufficient. 69 In Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232, Lindgren J concluded (at [198]) that, on the basis of a number of provisions of Part 5.3A, an administrator was required to act with expedition within a tight timeframe, which should be extended or adjourned only exceptionally. 70 His Honour referred to the consistent distinction in relevant authority between the extent and quality of information available and investigations performed in, on the one hand, a voluntary administration and, on the other hand, a liquidation. In the former, the investigation was to be "swift and practical", as stated in Pddam at [226]. 71 In Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) (recs and mgrs apptd) (2010) 267 ALR 613; [2010] FCA 352 ("Independent Cement"), Finkelstein J ordered the removal of liquidators pursuant to s 503 of the Act because, inter alia, they failed while administrators adequately to investigate and report on potential claims which, if successful, might lead to recoveries which would see the creditors better off than under the DOCA they had recommended, but which was subsequently set aside. 72 Finkelstein J stated at [14]: Before dealing with this complaint, it is necessary to say something about the standard of investigation which an administrator is required to undertake. By reason of s 438A of the Corporations Act, an administrator is under a duty to investigate the company's affairs so as to be able to form an opinion about what future course of action is in the creditors' best interests and inform the creditors of that opinion. If the administrator has insufficient time before the second meeting of creditors at which the creditors will consider the administrator's advice to form this opinion, he or she may seek an extension of the convening period for the second meeting. In Bovis Lend Lease Pty Ltd v Wily … Austin J said that there may be circumstances when the administrator needs to go beyond his statutory duties of investigation. The existence of a duty to make further inquiries would depend on "an assessment of the nature of the question to be investigated, the information in the administrator's hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors' decision": at [325]. Equally, however, an administrator is not required to undertake investigations to the same extent as a liquidator, given the time constraints imposed by Pt 5.3A: Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 … at [125]. 73 In the case before him, Finkelstein J identified a number of serious shortcomings in the administrators' investigations of potential recoveries, particularly of large potential claims. Finkelstein J found that the administrators failed to turn their minds at all to the company's potential constructive trust claims for large payments it made for capital improvements to a leased property, may have failed to consider the extent of trust assets and an equitable lien for liabilities incurred as a trustee, failed properly to investigate whether the directors had assets to meet a potential insolvent trading claim (including their failure to conduct a share search indicated on the facts) and probably failed to form a "considered" opinion that the pursuit of actions for insolvent trading would be uncommercial (at [25]). 74 His Honour found it "troubling" that the administrators had recommended a DOCA with a significant risk of being set aside, appeared unduly deferential to the directors and were "too willing to support the DOCA without having fully explored the potential claims if the company were wound up" (at [49-[50]]). 75 His Honour nevertheless recognised at [49] that: Doubtless the administrators were required to take into account the time, cost and uncertainty associated with litigating actions. In some cases, a "bird in the hand" logic may justify the recommendation of a DOCA rather than a liquidation. But that decision should only be reached after careful consideration of the claims which can only be brought following a liquidation. 76 In Independent Cement, Finkelstein J acknowledged that it was a finely balanced question whether "the better conduct of the liquidation" required the removal of the liquidators. The company was already in liquidation and the inadequacy of the investigation conducted in administration was, while important, not the sole reason for his Honour's conclusion that the liquidators should be removed. The plaintiffs' offer to fund its nominee's investigations was, in the context of the case, a significant factor. 77 In Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 ("Kirwan"), the majority of the New South Wales Court of Appeal held that the trial judge erred in finding, inter alia, that an administrator's investigation was inadequate. An important factor, as Giles JA (with whom Meagher JA on that issue agreed) stated at [213], was that: at no time in his cross-examination was it put to [the administrator] that he should have done more by way of preliminary investigation, that he had failed to consider breach of fiduciary or statutory duties as distinct from preference or that his investigation was inadequate to permit him to vote in favour of the [DOCA]. 78 Giles JA also referred to the administrator's account of his actions in his affidavit and reiterated (at [225] - [227]): … I have also earlier identified the cross-examination of [the administrator] as to [a particular] transaction, and said that it did not take up with him that he should have done more to investigate the transaction. … The cross-examination [of the administrator] did not suggest in the slightest that the report was false or misleading… The allegations in the pleadings were particularised. The particulars were not that the passage in the report conveyed the three propositions and the propositions were untrue or without adequate basis. They may have sufficiently covered that by alleging … that the report wrongly represented that [the administrator] had reasonable grounds for expressing the opinions that recovery was highly unlikely and that … it was highly unlikely that offences could be proved. But essential to his Honour's conclusion was that [the administrator] had not made appropriate enquiries, what were appropriate enquiries being judged in the circumstances of a swift and practical investigation and the express reference to incomplete investigations. No doubt [the administrator] could have done more, although even in the proceedings a prima facie case of breach by [the director] of his fiduciary or statutory duties was not found… 79 A number of authorities have considered the relevance of an inadequate investigation by an administrator to the termination of a DOCA pursuant to various potentially overlapping provisions of the Act. 80 In Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707, an inadequate investigation by administrators was an important factor in Derrington J's decision to set aside a DOCA pursuant to s 447A of the Corporations Law. The resolution to execute the DOCA was opposed by the major creditor with a claim for over $27 million but carried by the administrator's casting vote. Under the DOCA, the major creditor would receive $80,000 (as opposed to nothing on winding up) but the other unsecured creditors would receive a higher proportion of their respective debts. Derrington J accepted that the DOCA unfairly discriminated against and prejudiced the plaintiff. Despite the plaintiff's real but small advantage under the DOCA, his Honour found that in a number of areas, the administrator's enquiries were insufficient to justify his recommendation and his casting vote in favour of the DOCA. In particular, the administrator did not adequately investigate the sale of certain substantial company assets, the adequacy of the consideration for shares, the value of an asset subject to security or the reasons for, and adequacy of, the director's contribution. 81 Derrington J stated that the administrator, who acknowledged that his investigation was somewhat superficial, gave very unsatisfactory evidence which did not establish that an adequate enquiry had been undertaken. The administrator produced minimal supporting documentary material and did not assist the court (at 710). 82 His Honour concluded that in the context of the spectacular collapse of the group of debtor companies and the wholesale liquidation of their assets, "a sufficient review" and "profound scrutiny" were reasonably warranted (at 710), particularly in relation to assets "sold well below their apparent value" (especially to the directors' interests) and whether the director's contribution was suitable, given the advantages he obtained from keeping the company out of liquidation. 83 In JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 ("Jonco Holdings"), Santow J terminated, pursuant to, inter alia, ss 445D(1)(a), (b), (c), (e) and (f) of the Act, a DOCA entered by the corporate trustee of a family trading trust, which was narrowly approved by a vote of creditors, contrary to the administrator's recommendation. His Honour found that the company misled the administrator about its entitlement to an indemnity from trust assets, deliberately deprived him of access to essential books and records and dishonestly advanced a scheme to defeat creditors' claims. 84 While those matters alone may have justified setting aside the DOCA, Santow J's decision was fortified by his finding that the return under the DOCA would be likely to be less than on liquidation. That circumstance was relevant both to whether the DOCA operated oppressively or unfairly prejudiced a creditor or creditors, and to the Court's overall discretion to terminate a DOCA. 85 His Honour considered various calculations of returns on both the liquidation and DOCA scenarios. He concluded that liquidation (favoured by the administrator) was likely to afford the better return as, inter alia, the DOCA was based on the false assumption that the trustee had no right of indemnity against trust assets (at [90] [96]). 86 Santow J found that a number of serious improprieties and instances of misconduct were established. The director or his associates furnished a wholly inadequate and false RATA, denied the existence of the indemnity, fraudulently altered the trust deed, arbitrarily distinguished between creditors, acquired sufficient claims to control the statutory meetings, frustrated the administrator's attempts to carry out his statutory duties to investigate the company's affairs and report to creditors, propounded a DOCA which was blatantly oppressive to creditors, prevented the administrator from obtaining access to the Court and used votes to require adoption of the DOCA. The state of production of the books and records was also unsatisfactory. 87 In such circumstances, his Honour concluded that it was important for a liquidator with adequate powers to investigate the transactions identified as potential avenues of recovery. The misfeasance and state of the books impeded a concluded view on those transactions, but there were "sufficient indications in support of it to treat this as an independent basis for setting aside the deed" (at [101]). 88 In Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235 ("Bidald"), Campbell J terminated a DOCA pursuant to s 445D(1)(b), (c) and (g) of the Act, in circumstances where the report to creditors contained materially false and misleading information and omissions, there were material contraventions of, and departures from, the DOCA, and the company would be insolvent when the DOCA came to an end. 89 Campbell J found that the report to creditors contained a materially false and misleading comparison which overestimated the amount likely to be recovered under the DOCA as opposed to winding up. The same misleading information constituted an omission to state the correct position or a reasonable approximation thereof, thus establishing the ground for termination under s 445D(1)(c). 90 Campbell J also held that the DOCA should be terminated under s 445(1)(g), as it was part of a scheme to defeat the legitimate interests of a creditor and permitted an insolvent company to trade. 91 His Honour recognised that even if a statutory ground for termination of a DOCA were made out, the Court retained a discretion whether to make the order, in which, according to some authorities, the primary consideration was the interest of creditors (at [272]). 92 His Honour stated that "[i]n taking into account the interests of the creditors, one factor is whether the creditors would be better off under the deed than in a liquidation: Greek Orthodox Community of Oakleigh & District Inc v Pizzey Noble Pty Ltd (admin apptd) [(1997) 23 ACSR 274] at … 282. In approaching that question, it would be wrong to regard "under the deed" as referring strictly to the benefits which the creditors are entitled to through the operation of the deed according to its terms. … Rather, the court should look at a comparison between the situation that the creditors will be in if the deed is brought to an end, and the situation that they will be in if it is not brought to an end" (at [276]). 93 Campbell J also stated that even where creditors would be better off under a DOCA, the Court might nevertheless, in its discretion, terminate it, having regard to both the interest of the creditors as a whole and the public interest, which included considerations of commercial morality (at [287]). 94 His Honour stated (at [290]) that if a DOCA permitted a director to avoid public examination about the company's affairs and the clawback claims which were possible on winding up, it could be a factor in favour of termination as "[i]t 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] … at 69." 95 In Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139 ("Octaviar"), McMurdo J ordered the termination of certain DOCAs entered into by companies which had suffered a major group collapse, on grounds including (in relation to one DOCA) the provision of misleading information to creditors and the omission of information about the company's financial circumstances which could reasonably be expected to have been material to the creditors who, by a majority, voted for the DOCA (at [112]). 96 Her Honour observed that in the context of the major corporate collapse (at [175]), there were a number of avenues for potential recovery and, although full investigation and prosecution of the claims would be time consuming and expensive, there was evidence that litigation funding would be readily available. Further, most of the votes for the DOCA were by parties with an interest in avoiding a liquidator's enquiry, which, while it did not justify disregarding their views, detracted from arguments that the DOCAs merely represented a commercial decision (at [176]-[177]). 97 Her Honour also considered that in circumstances where, inter alia, the companies made extensive losses shortly after an appearance of good financial health (at [178]), it was in the public interest to set the deeds aside pursuant to s 445D(1)(g) in order to permit a liquidator's examination (at [179]). 98 Her Honour adopted the observations of Campbell J in Bidald (at [180]). She observed that in the case before her, the dividend to creditors under the DOCAs was small and there were prospects of preference, uncommercial transaction or insolvent trading recoveries. Although the evidence was mostly slight and any actual recoveries would depend on obtaining funding (at [180]), given the size of the corporate collapse, its impact on many institutions and individual investors, and the size of the possible recoveries, investigation of the transactions was likely to be financed by investors in outcomes of the litigation which might follow (at [181]). 99 McMurdo J concluded at [182]: Overall, the termination of the DOCAs would be beneficial also for the fact that it would permit some investigation of transactions and conduct which could lead to at least some of the persons responsible for some of the group's demise being brought to account. The public interest is therefore a consideration in favour of terminating the deeds. 100 In Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) [2007] SASC 296 ("Mondello"), Layton J terminated a DOCA under s 445D of the Act for a number of reasons "taken together", including a failure to investigate adequately and to provide full information about whether further funds would be available to creditors (at [117]). 101 The plaintiff claimed to be a creditor of the defendant company (subject to a DOCA) in respect of costs orders made in certain litigation and to be a contingent creditor in respect of a damages claim. 102 After the litigation with the plaintiff had been in progress for several years, the defendant company's director resolved to place it into voluntary administration. The director did not inform the administrator of the litigation or the plaintiff's claim to be a creditor. The administrator became aware of the litigation only four days before the second meeting of creditors, at which he recommended the DOCA. The plaintiff was not advised of, and did not attend, the creditors' meeting. 103 The administrator had not investigated the status of the litigation and did not disclose its existence at the meeting at which the creditors resolved to enter a DOCA. The director, who held proxies for two related parties with substantial debts, voted for the DOCA. Two external creditors voted against the DOCA. The plaintiff asserted that, had it attended, it would also have voted against the DOCA and, but for the votes of the related entities, the resolution would not have been carried. 104 The DOCA was based on an estimated contribution from the director to pay specified proportions of the claims of preferred creditors, unsecured creditors and the administrator's fees. The related creditors agreed not to claim under the DOCA. Due to the director's subsequent bankruptcy, it was unlikely that he could fulfil his obligations under the DOCA, which were assumed by his son. 105 The plaintiffs alleged that the administrator failed to investigate the litigation and include it as a creditor, that the DOCA was contravened because the bankrupt director did not make the specified payment, and that the DOCA was oppressive to those who did not vote for it. If there were a breach of s 445D of the Act, the discretion to terminate the DOCA should be exercised in order to allow the proper investigation of the company's affairs. The plaintiff indicated that it would provide reasonable funding to the liquidator for that purpose. 106 Layton J found that concerns about the director's status, the creditor status of the related parties and possible insolvent trading, which were not referred to in the s 439A report, required further investigation. Further, the failure to inform creditors of the litigation and the director's impending bankruptcy, which were material matters, was misleading. 107 Layton J stated at [117]: In my view, the preceding discussion and the breaches of s 445D which I have found, together, gives rise to the desirability of the termination of the Deed and the liquidation of Annatom. Many questions have been raised which suggest that the creditors did not have complete and candid information before them. In particular, whether further funds may be available for distribution to creditors after a full investigation. I consider that these matters taken together satisfy me that it would be appropriate to terminate the Deed pursuant to s 445D(1)(g). 108 Layton J concluded: [124] Having considered these arguments, I conclude that the need for appropriate investigation into the financial position of the company and the creditor status of a company are important in the public interest. In my view it is not in the public interest for the continuation of the implementation of the Deed for reasons that I have discussed. The non-related companies do not wish to proceed with the Deed and there is therefore no unfairness to those creditors to terminate the Deed. [125] As far as the interests of particular creditors are concerned, I do not consider there would be any financial unfairness to the related creditors (Mr Thomas Tigani, Stix and Tomdan), given that at the present time, the related creditors have indicated they intend to forego any dividend. To the extent that an investigation by a liquidator may verify their creditor status, the related creditors would be entitled to a distribution. The related creditors would financially be no worse off by reason of liquidation. [126] In such circumstances I consider that the public interest and the interests of the creditors as a whole favours the termination of the Deed, which will enable an investigation upon the appointment of a liquidator. 109 In Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (admin apptd) (1997) 24 ACSR 47, Branson J rejected an application to terminate a DOCA under s 445D(1) of the Act, based on the alleged inadequacy of the administrator's investigation of the likelihood of recovery from the holding company or the directors in liquidation. The applicant creditor alleged that the DOCA would provide a lower return than a liquidation and constituted an attempt to "ride roughshod" over the creditor's rights. 110 Branson J found that although the administrator's report was deficient in failing to specify whether voidable transactions were apparent, the omission was not material, as the administrator advised the creditors' meeting of legal advice that actions against the holding or associated companies and the directors in a liquidation were not sustainable. Her Honour also found that the statement in the administrator's report that property had been valued as a going concern was false but not material in the relevant sense. 111 The applicant also alleged that the administrator failed properly to consider potential claims against the directors and the holding company under various statutory provisions in a liquidation. Branson J noted "obvious difficulties with, and limitations on, inquiries as to the reasonableness of conclusions reached by administrators on the question of the likelihood of recoveries by a liquidator should one be appointed" (at 51). Her Honour recognised that she could not reach a final conclusion as to the results of claims which might be made under Part 5.7B of the Corporations Law should a liquidator be appointed. 112 Her Honour (at 51) referred to Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 at 34, where Lehane J stated: In my view the task of the Court in a case such as this is to form a view, on all the material before it, as to whether there is a real prospect that in a liquidation claims in which (or in the fruits of which) the second secured creditor has an interest could and would be pursued so as to afford to the second secured creditor recovery of more of the debt owed to it than it would obtain under the proposed deed of company arrangement. 113 Branson J stated (at 53): I am not satisfied on the evidence before me that there is a real prospect that a liquidation claim in which the applicant has an interest could and would be pursued were the company to go into liquidation so as to afford the applicant recovery of more of the debt owed to it than it would obtain under the DOCA. 114 Branson J rejected the allegation that an asset was inaccurately valued. Her Honour accepted the administrator's evidence about the information he provided to the independent valuer. Her Honour found that the applicant had not queried the valuation and, had it done so, the administrator would not have opposed obtaining a further valuation. 115 Branson J declined to terminate the DOCA under s 445D of the Act. 116 In Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527; [1999] NSWCA 402 ("Khoury"), the New South Wales Court of Appeal, by a majority, upheld the primary judge's refusal to set aside resolutions under s 600A(1)(a) and to terminate a DOCA which discriminated against the appellant creditors. The appellants were not notified of the meeting of creditors, for which the administrator's preparation and information were inadequate (at [36]). The appellants claimed that they would have voted against the resolution to enter a DOCA, which would not have passed if the votes of related creditors were disregarded (at [56]). The primary judge declined relief principally due to the appellants' delay in issuing proceedings, but also observed that there was no evidence that they would be better off if the DOCA were set aside . 117 On appeal, Fitzgerald JA, with whose disposition Davies AJA agreed, stated (at [57]) in relation to s 600A(1)(c)(i) that: The appellants submitted that, in determining whether s 600A(1)(c)(i) was satisfied, the question is whether the resolution that the respondent execute the deed of company arrangement was contrary to their interests, as "a class of creditors as a whole". That is incorrect. When a resolution has been passed at a meeting of creditors within s 600A(1)(a)(i)(A), the question under s 600A(1)(c)(i) is whether the passing of the resolution … was "contrary to the interests of the creditors as a whole": cf Kantfield Pty Ltd v Plastomatic (Aust) Pty Ltd (1994) 14 ACSR 687 at 692. Plainly, the resolution that the respondent execute the deed of company arrangement was not "contrary to the interests of [its] creditors as a whole". 118 In relation to s 600A(1)(c)(ii), Fitzgerald JA stated at [61]: In the present case, the appellants have not satisfied s 600A(1)(c)(ii). They would have received nothing but for the deed of company arrangement, whereas, under it, they are entitled to participate in the distribution of the fund. It is not permissible, in my opinion, to compare the appellants' position under the deed of the company arrangement which was executed with some conjectural position which would have ensued if some different, fairer, deed of company arrangement which was never proposed had been executed. 119 Fitzgerald JA acknowledged that the DOCA's discrimination and the company's grossly unsatisfactory conduct in relation to the meeting favoured the grant of relief. His Honour considered that due to the misuse of the statutory process, absent the considerable delay, relief would have been justified, even if the appellants would not have benefited from the failure of the resolution (at [78]). 120 Fitzgerald JA (at [68]) adopted the opinion of the Full Federal Court in Emanuele v Australian Securities Commission (1995) 63 FCR 54, which held that the Court's discretionary powers under ss 445D and 445G(2) are "to be exercised having regard to both the interests of the creditors as a whole and the public interest", which could include considerations of commercial morality. Fitzgerald JA noted that other matters could also be material to the discretion, including, for example, unexplained delay, other disentitling conduct by an applicant for relief, or the exclusion of or unfairness to a creditor or group of creditors. 121 In Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to deed of company arrangement) (2000) 34 ACSR 391 ("Portinex"), the plaintiff creditor, the Deputy Commissioner of Taxation, sought to terminate or set aside DOCAs entered into by several companies, alleging, inter alia, that the administrator was invalidly appointed, wrongly admitted a party to vote as a creditor and failed to investigate the companies' affairs diligently. 122 In particular, the plaintiff alleged that the administrator's investigations of possible preferences and insolvent trading by the directors were inadequate. The DOCAs were thus approved on the basis of a misleading report, which failed to give a true and fair view of the relevant affairs of the companies and "the effect of each deed [was] to forestall a proper investigation of the affairs of each of the companies and the conduct of their directors, former directors and advisers" (at [6]), so that the public interest required their termination. The plaintiffs sought declarations that the DOCAs were void under s 445G(2) of the Act based on the same allegation. 123 In the case of one company, the related creditor abstained from voting on the resolution to enter a DOCA and all creditors save the plaintiff voted in its favour, including a creditor the value of whose debt exceeded that of the plaintiff's debt. The resolutions for the other two companies to enter a DOCA were supported by all creditors save the plaintiff. 124 Under the DOCAs, a deed fund was established for distribution to creditors save for the related parties. 125 Austin J refused to terminate the DOCAs due to a combination of factors, including the risk of prejudice occasioned by unexplained delay in bringing the application (at [78]). 126 Austin J considered relevant authority, including Khoury. His Honour observed at [86] that s 600A(1)(c)(i) of the Act appeared to direct attention to the interests of the company's creditors as a whole, rather than the interests of a class of creditors such as the dissenting creditors. 127 His Honour stated that some judicial approaches to s 600A(1)(c)(ii) appeared to require a comparison between the position of the dissenting creditors under the DOCA with their position if that DOCA had not been executed and the company had been liquidated (at [87]). In contrast, other approaches apparently contemplated a comparison between the existing DOCA and a different or amended DOCA. Austin J observed that where no "third" option was available, the dissenting creditor's position under the DOCA should be compared with its position under winding up (at [90]). If it were not feasible to negotiate a different kind of DOCA, the question of prejudice boiled down to whether the creditors were better off with the proposed DOCA or liquidation, as there would be no alternative on the facts (at [89]). Nevertheless, a difference between the treatment of one group of creditors and other creditors did not, in itself, constitute unreasonable prejudice within the meaning of s 600A(1)(c)(ii), as creditors could agree openly and in good faith on other than equality of treatment. 128 In Portinex, Austin J concluded that the plaintiff was better off under the DOCA, as it received a small distribution and payments of tax from two companies, which, in winding up, might constitute preferences. Further, the DOCAs kept the two principal operating companies afloat, offering creditors distributions better than they would receive on winding up, supported by a guarantee. His Honour also took into account that entry in the DOCAs was part of a package of benefits (including some payments for arrears of tax) for which the plaintiff had negotiated and received (at [94]). 129 Austin J recognised that the plaintiff lost the potential benefit of any recoveries a liquidator might obtain from directors for insolvent trading or from other related creditors for voidable transactions, but in refusing to grant relief under s 600A of the Act, concluded (at [92]): However, given the cost of proceedings for recovery and the evidence suggesting that the Deputy Commissioner would be reluctant to fund proceedings, it is not only uncertain that proceedings would be successful, but doubtful that they could be taken at all. 130 His Honour also refused to terminate the DOCA under s 445D of the Act. 131 In Portinex, the plaintiff alleged that the administrator failed to conduct any proper investigation of the affairs of each company and to verify materials supplied to him. The s 439A reports contained assessments which assumed the accuracy of the financial information supplied by the external accountant, who in turn obtained it from the director, yet neither the administrator nor the external accountant adequately investigated or verified the information supplied. 132 Austin J noted that the administration was handled by a manager employed by and reporting to the administrator, who gave evidence that they relied on books and records of the company and information provided by the director and the external accountant. 133 The administrator's manager and the external accountant gave evidence that they would have followed up on any apparent discrepancies. The manager also testified that he had ensured that the intercompany loan accounts balanced, and reviewed the director's questionnaire, source documents and correspondence to which he had access. He also attempted to investigate the extent of employees' debts. 134 Austin J concluded that, although very limited, there was a degree of critical review by the external accountant and the manager (at [112]). 135 The s 439A reports stated that the administrator was unable to form an opinion on whether the books and records were kept in accordance with s 289 of the Corporations Law, as he had received only limited source documents and data was corrupted or lost. 136 The reports recognised that the company may have traded insolvently but investigation of that issue would necessitate the examination of directors at an estimated cost. 137 The reports stated that the administrator had requested statutory declarations from the directors as to their assets and liabilities. Austin J found that as the administrator had not requested a statutory declaration from one of the directors, to that extent the statement was false but the inaccuracy could not reasonably be expected to have been material to creditors (at [127]). Further, his Honour stated (at [117]): The Deputy Commissioner complains of Mr Star's [the administrator's] failure to obtain the statutory declaration, after having raised an expectation that it would be forthcoming in the reports. However, while an administrator has the power to conduct an examination, there is no power for an administrator to demand a statutory declaration of assets from a director. The possibility of embarking upon an examination, and the cost of doing so, were set out in the reports. The lack of funds in the administration to pursue the directors was specifically noted in the reports. It would have been open to the Deputy Commissioner, as the principal external creditor of the companies, to offer to fund the examination process, but he did not do so. While it was unsatisfactory for Mr Star not to approach Ms Zaharia [a director] for a statutory declaration, and while he may not have been insistent or persuasive in seeking to obtain one for Mr Nolasco [a director], my opinion is that his failings in these respects fall well short of a basis for curial intervention. 138 The s 439A report regarding one company noted evidence of potential preference payments, which required further clarification. Austin J stated at [121]: [T]he need for further investigation was specifically noted in Mr Star's report, and it was open to any creditor to pursue the matter with Mr Star at the meeting of creditors. Obviously the problem was the lack of funds in the administration for further investigations to be undertaken. It was open to the Deputy Commissioner, as the principal external creditor, to make arrangements to provide funding for further investigations, but he did not do so. At the hearing the Deputy Commissioner failed to identify any specific additional steps which Mr Star should have taken at his own expense in order to clarify the position. It is hard to see how the position could have been satisfactorily clarified by Mr Star in the absence of examinations under the Corporations Law. In any event, recovery proceedings could be taken only if the company was placed in liquidation, but the creditors validly resolved to enter into a deed of company arrangement instead. 139 In Portinex, the plaintiff also alleged that payments to NAB to reduce secured liabilities were unexplained and that there was no proper inquiry into recoverability of a debt to a related company. Austin J found that the payments related to a very small amount which was immaterial and that although the administrator did not comprehensively investigate the recoverability of the debt, his treatment was not misleading. 140 Austin J stated: [124] Do these various matters, considered in isolation or together, provide grounds for orders under s 445D or 445G? [125] If an insolvent company is to be saved and restored to health, the commercial reality is that decisions about its future must be taken speedily after its insolvency has been identified. Additionally, speed is required because rights of enforcement against the company are suspended during the period of administration, and it would be unfair to extend the period of suspension for longer than is absolutely necessary. Therefore Pt 5.3A sets a very short timetable for the creditors' decision about the future of the company. It is an unfortunate but unavoidable consequence of the scheme established by Pt 5.3A that the creditors must make their decision on the basis of information that is likely to be imperfect. 141 His Honour referred to Cohen J's statement in Hagenvale. He emphasised that in the context of an administration, there was a delicate balance between speed and accuracy (at [126]) and noted that the distinction "between an adequate preliminary investigation, … suspecting insolvent trading and unfair preferences but going no further, and an inadequate preliminary investigation…is a matter of degree" (at [127]). His Honour stated (at [128]): That is the context in which the court must assess what Mr Star and Mr Malanos did and did not do. In my opinion, the reports and investigations in the present case were sufficient, though perhaps only barely so, to satisfy the requirements set out by Cohen J in the Hagenvale case. 142 Austin J observed that "the [plaintiff] was the principal external creditor of all three companies" but stated (at [131]): If: • the principal external creditor, presented with a report which reflects an adequate though preliminary investigation, wishes to have further investigations made; • the administrator is willing to conduct an additional investigation if costs and expenses are met; and • no arrangements are made for costs and expenses to be covered, there is no adequate basis for the creditor to criticise the administrator for not undertaking those investigations. 143 His Honour observed at [134]: In the present cases it is probable that on the winding up of the Nolasco companies, there would have been either no dividend or a very small dividend to creditors, unless the liquidator of A Nolasco Pty Ltd were able to find funds to pursue successfully the litigation to which the deeds refer, or any liquidator were to pursue recoveries for insolvent trading and unfair preferences and to do so successfully. Under the deeds of company arrangement the minimum anticipated dividend was likely to be 10c in the dollar, with the possibility of a higher payment. While the deeds forestall further steps for recovery for insolvent trading and unfair preferences, they produce real benefits to the creditors (including the Deputy Commissioner) and it would be reasonable for the creditors to prefer those benefits to the uncertainty and cost of third party litigation and recovery proceedings. 144 Austin J also noted (at [135]) that the deeds were in the interest of the companies' employees, as they had been transferred to other companies in the group which would probably also fail if the companies were wound up. 145 Austin J concluded (at [137] – [138]): This is a case where by far the most substantial unrelated creditor has been outvoted by related creditors and now finds himself bound to arrangements to which he objects. He objects broadly on the grounds that the arrangements unduly benefit the director of the companies and that the administrator has made inadequate investigations. If there were nothing more to the case than this, the creditor may have at least a sound moral case for assistance. But Pt 5.3A clearly contemplates that the wishes of an individual creditor may be overridden, and permits related creditors to take part in the decision to do so, subject to s 600A. Moreover, this is not a simple case of a substantial creditor's reasonable objections going unheeded. The arrangements which have been put in place confer benefits on the creditors generally, and employees have been catered for collaterally. The arrangements keep some Nolasco companies on foot and therefore keep some employees in employment. The Deputy Commissioner was made aware of the administrator's lack of funds to engage in more substantial investigations but did not offer to provide funds for that purpose. In my opinion, the Deputy Commissioner has failed to make out adequate grounds for orders setting aside the resolutions to enter into the deeds, or orders terminating or setting aside the deeds of company arrangement for the three companies. Consequently in each case the summons will be dismissed. 146 In Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 ("Network"), Hayne J refused the application pursuant to s 600A(1)(c)(i) of the Act by a major creditor of a company subject to a DOCA to remove the administrator. His Honour held, inter alia, that an applicant for relief under s 600A of the Act must satisfy the Court that the outcome of the resolution passed at the meeting is contrary to the interests of the creditors as a whole. The fact that the resolution thwarted the preference of a major creditor did not, without more, suffice. In Network, the plaintiff, the major creditor of the company, sought an order under s 600A of the Act that a resolution to remove the administrator should be considered and voted on. The plaintiff had previously attempted to remove the administrator, but was outvoted by the majority of creditors in number (but not value), some of whom were related creditors. 147 The plaintiff submitted that there was prejudice to creditors arising out of the inability of the biggest bona fide creditor of the company to seek appointment of its own choice as administrator to preserve the undertaking of the company. 148 Hayne J stated that s 600A(1) of the Act required the Court to be satisfied of three matters before it could make any order under subs (2) of s 600A of the Act. First, that a proposed resolution had been voted on at a meeting of creditors of the company held under Pt 5.3A of the Corporations Law. Secondly, that if the vote or votes of a particular related creditor or creditors had been disregarded, the proposed resolution would not have been passed, or would have been passed, or the question would have had to be decided on a casting vote. Thirdly (at 548), that: the outcome of the proposed resolution in fact achieved at the meeting either is contrary to the interests of the creditors as a whole or has prejudiced or is reasonably likely to prejudice the interests of the creditors who voted in the contrary sense, having regard to, amongst other things, the benefits resulting to the related creditors from the decision made at the meeting and the nature of the relationship between the related creditors and the company concerned. 149 Hayne J found that the plaintiff had not discharged its onus of proving that the failure to remove and replace the administrator was contrary to the interests of the creditors as a whole or relevantly prejudicial to the plaintiff. There was no suggestion that the administrator lacked integrity or competence or was incapable of adequately performing the relevant tasks for the benefit of all creditors and to preserve the undertaking of the company. The plaintiff, as the major creditor, had established only that its decided preference for its own nominee was not satisfied. 150 In the present case, the plaintiffs relied on Re Mills, ex parte Lloyd's v Prentice & Mills (1997) 73 FCR 551 ("Re Mills") and Augustyn v Putnin (1988) 83 ALR 514 ("Augustyn"), two cases decided under Part X of the Bankruptcy Act, as authority for the proposition that certainty of benefit on winding up was not a prerequisite for setting aside a resolution to enter a DOCA under s 600A(1)(c)(i). In Re Mills, the applicant Lloyd's, the major creditor (with an estimated claim of over $1.2 million), applied under s 222 of the Bankruptcy Act 1966 (Cth) for a declaration that a debtor's composition with creditors was void and an order for sequestration. Apart from Lloyd's and related or family creditors, the debtor had only two independent trade creditors for a very small amount. 151 The debtor incurred liabilities to Lloyd's in her capacity as an underwriting member known as a Lloyd's name. The debtor's husband provided $10,000 to pay unsecured creditors pursuant to a composition under Part X of the Bankruptcy Act. 152 Although Lloyd's opposed the composition, it was unable to vote, as the trustee insisted on the return of its original proxy document from overseas, which Lloyd's could not achieve in time for the meeting. 153 Merkel J found that the trustee's report on his investigation of the debtor's financial affairs was misleading and deficient in a number of material aspects. It gave the false overall impression that a reasonably thorough investigation had been competently carried out with due care and diligence, assuring creditors that the composition was the best result they could achieve because the debtor had no divisible or other property available to a trustee in bankruptcy. 154 The evidence established, however, that the trustee had accepted without inquiry that advances made to the bankrupt by her husband and family entities were secured loans, despite a serious question or suspicion that the advances were gifts. Further, if they were loans, the evidence suggested that the security (which was given some years after the advances) was invalid. 155 Merkel J was satisfied that the trustee's investigations of these matters for the purpose of his report were unsatisfactory and, at best, perfunctory. The investigations did not warrant or justify the confident conclusions conveyed to creditors in the trustee's report. His Honour stated (at 556): The report proffered an opinion, purportedly based on reasonable grounds after a proper investigation by a competent chartered accountant, when the fact was that the grounds relied upon were not, in my view, reasonable nor was the investigation properly or competently carried out. 156 The evidence did not permit conclusions on the suspicions of those opposing the composition (raised in the course of the crossexamination of the trustee) but established that they were not "unworthy of consideration" (at 556-7, citing Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384 at 390 per Gibbs J). 157 Further, as the debtor appealed to the Court's discretion in opposing the bankruptcy petition, and given the difficulty faced by petitioning creditors in proving preferences and like matters, Merkel J took into account that neither the debtor nor her husband gave evidence to rebut the opposing creditor's suggestions. 158 In Augustyn, the Full Federal Court dismissed a bankrupt's appeal from the primary judge's decision declaring void a deed of assignment he had executed under Part X of the Bankruptcy Act and making a sequestration order against his estate. The primary judge found that the bankrupt had not disclosed his substantial beneficial interest in a property in his statement of affairs or to the meeting of creditors. The primary judge concluded that the bankrupt's concealment of his interest until confronted by the trustee suggested the existence of other undisclosed interests and could justify sequestration to permit further examination of the debtor (at 517 to 518). 159 The Full Federal Court upheld his Honour's holding that it was in the interests of creditors, within the meaning of s 225(5) of the Bankruptcy Act, to declare the deed of assignment void "to provide the creditors with the opportunity of probing the [appellant's] affairs and of assessing his ability to make contribution to his estate from his income" (at 520). 160 French J (with whose reasons Spender J agreed and Jenkinson J substantially agreed) observed that "the conflicting and untested material" before the primary judge did not "enable him to form any concluded view as to what, if any, financial return the creditors would receive in the event of the sequestration", but the "evidence in the case" suggested that a public examination of the bankrupt concerning his assets and an assessment of his ability to make contributions "might result in the creditors being better off" (at 520). 161 French J stated (at 520): Where the court is able to form the clear view that no financial benefit will accrue, that may be a basis upon which the court will fail to be satisfied that avoidance is in the interests of the creditors. 162 His Honour concluded, on the basis of relevant authorities, that it was unnecessary to show a positive financial benefit to creditors in order to satisfy the requirements of s 222(5). The parties' submissions The plaintiffs' submissions 163 The plaintiffs seek relief primarily under s 600A(1)(c)(i) of the Act and alternatively under s 445D(1)(c) and (g) of the Act, in reliance on the fundamental allegation that the administrators failed adequately to investigate and report on a number of matters. 164 The plaintiffs' principal case, as I understood it, was that the administrators' investigation left unanswered legitimate questions which reasonably required pursuit, and based their reports and recommendations on the director's untested assertions. In such circumstances, it was contrary to the interests of the creditors as a whole, within terms of s 600A(1)(c)(i) of the Act, that the resolutions to enter a DOCA, supported by related creditors, had defeated the overwhelmingly largest independent creditors' preference for liquidation, and the associated potential for a more thorough investigation and additional recovery. The plaintiffs submitted that it was unnecessary, in that context, to establish that winding up offered any, or any greater material, benefit to creditors. Liquidation was in the interests of creditors, even if it were purely speculative whether: (a) further investigation on liquidation would be funded; (b) further investigation would disclose any potential avenues for recovery; (c) funding for litigation or other means to prosecute identified claims on winding up would be available; and (d) the potentially liable parties had sufficient assets to satisfy the prospective claims. 165 Although the plaintiffs' argument assumed that an investigation would occur on winding up, they submitted that the relevant authority focussed on "the prospects for investigation rather than the prospects for funding it". The plaintiffs submitted that in the context of the discretion, it sufficed that a further investigation was not unlikely and it was unnecessary to identify a secure source of funding for it. The Court in this case should, the plaintiffs submitted, be satisfied that the plaintiffs would be motivated to go further. 166 The plaintiffs did not press their pleaded claim under s 600A(c)(ii) of the Act, which would have required consideration of the prejudice or likely prejudice to the plaintiffs from the resolution to enter the DOCA, and whether it were unreasonable when weighed against the related parties' benefits (who will receive no distribution under the DOCA) from the resolution. The plaintiffs ultimately relied only on s 600A(c)(i). 167 As an alternative and subsidiary claim, the plaintiffs submitted that the DOCA should be terminated on the basis of omissions from the s 439A reports or statement which, within the meaning of s 445D(1)(c), could reasonably be expected to have been material to the creditors' decision, and further, that the DOCA should be terminated for "some other reason" under s 445D(1)(g). The plaintiffs advanced no detailed argument in relation to s 445D(1)(g) but invoked it as a basis to terminate the DOCA if the primary case under s 600A(1)(c)(i), with which it overlapped, were made out. 168 The plaintiffs' characterisation of the alleged inadequacy in the administrators' investigation and reports appeared to differ in their subsidiary case under s 445D(1) of the Act from that in their primary case under s 600A(1)(c)(i). By and large, the plaintiffs did not appear to allege any breach of duty or lack of care or competence by the administrators, but merely that investigations conducted in administration, when compared with the investigations possible on liquidation, were inherently inferior and inadequate. At other points, however, in the context of their submissions on s 445D, they alleged a degree of default. 169 The plaintiffs did not allege that there was false or misleading information within the meaning of s 445D(1)(a) or (b). Rather, they characterised the alleged deficiencies as omissions from the reports within the meaning of s 445D(1)(c) of the Act. 170 The plaintiffs' points of claim alleged a great many deficiencies which mirrored Mr May's questions, but in their written and oral submissions, despite formal reliance on all pleaded deficiencies, they identified only a limited number of significant complaints. 171 In their written submissions, the plaintiffs alleged that the administrators failed adequately to investigate the following two "critical" matters: 1. Potential claims of Loaders or Lederberger against the estate of Hirsch Lederberger and against Gita Lederberger as trustee of that estate. The plaintiffs contended that administrators failed adequately to investigate whether there were partnership assets to support Loaders' indemnity as a trustee, failed to investigate whether Mrs Lederberger were personally liable to indemnify Loaders as a trustee, and whether if so, she had assets sufficient to discharge her liability under it. 2. Whether the NAB charge extended to partnership property. 172 In addition, before me, the plaintiffs submitted that the following omissions were material to the creditors' decision: 1. Omission of a sufficient explanation of the depreciation of the stock. 2. Omission of a sufficient explanation for the total writing off of goodwill. The statement in the reports that the director would not cooperate in a sale of business did not, it was said, adequately explain the write off. 3. Omission of an adequate account of the value of the deceased estate. Initially, the plaintiffs submitted that the reports failed to disclose the apparent prosperity of the business reflected in the partnership accounts 18 months before the date of administration. Although the reports stated that the accountant had asserted that in December 2009 the deceased estate had a deficiency of $224,000, that sum was shown as the carry forward loss in its 30 June 2008 tax return, while the partnership accounts indicated that the deceased estate had, at June 2008, equity of about $1.6 million in the partnership. Although 18 months had elapsed, the prosperity was sufficiently recent that the administrators should not have accepted without further investigation the nil value attributed to the deceased estate and their reports should, at least, have questioned it. The steady decline in equity over several years was not explained, save by references to the stock write down. Had the reports disclosed the 30 June 2008 accounts and the partnership's then net equity of over $3 million (implying that the deceased estate could indemnify the debtor companies), the independent creditors might have taken a different view of the proposed resolutions to enter the DOCA. Instead, the reports simply created the impression, and did not question, that there was a deficiency in the deceased estate. 173 The plaintiffs ultimately conceded that the schedule of the accounts and the management accounts included in the reports disclosed the decrease in the partnership's net worth between June 2008 and the date of the administration. They maintained, however, that the reports omitted to highlight or explain a relatively sudden decline in the prosperity of the partnership as recently as June 2008 to the present deficiency. 174 The plaintiffs conceded that they could not establish that an investigation on winding up would disclose any avenue for recovery or that any probable material benefit would result, whereas under the DOCA, participating unsecured creditors, including the plaintiffs, would receive about 8 cents in the dollar. The plaintiffs submitted that although the outcome of liquidating the companies was a matter of "sheer speculation", according to Re Mills and Augustyn (decided under Part X of the Bankruptcy Act), where further investigation is called for, the votes of related parties should not be permitted to defeat a major creditor's bona fide preference for sequestration or liquidation in order to achieve it. 175 The plaintiffs submitted that Part X of the Bankruptcy Act was analogous to Part 5.3A of the Act, sharing substantially the same goals and structure. Both legislative schemes were designed to rehabilitate debtors on the vote of the specified majorities and created "an environment where if related parties gang up on a genuine arms length creditor, especially one that raises sensible inquiries and points to things that should be investigated, as distinct from one who just wants vengeance, then the court should be quick to put in train the conventional administration, which involved investigation through liquidation". Thus, even if there were no significant prospect that an investigation on winding up would unearth any relevant matters or produce any benefit, a major creditor's bona fide preference to satisfy its curiosity about incompletely investigated issues should be upheld. 176 The plaintiffs conceded that on 10 December 2009, prior to the vote on the resolution, Mr May did not assert that he was dissatisfied with the administrators' responses to his queries, required any particular matter to be further investigated, specified any additional steps to be taken, or offered to fund any additional investigations or inquiries should the companies be wound up. The plaintiffs submitted that funding for investigations on winding up would, however, be available in the present case, as the reports indicated that the administrators had collected debts to the value of $123,000. 177 At a late stage of the hearing, the plaintiffs undertook, if the DOCA were terminated, to pay the liquidator a sum sufficient to pay the other participating creditors an amount equivalent to the highest dividend they were estimated to receive under the DOCA. Administrators' submissions 178 The administrators submitted that: 1. A determination of whether the resolutions to enter a DOCA were contrary to the interests of creditors as a whole under s 600A(1)(c)(i) of the Act focused on the outcome and the impact on the creditors as a whole. Network established that the critical enquiry in that context is whether a winding up would have been more advantageous to creditors than the DOCA, without which the DOCA should not be set aside. 2. In the present case, the plaintiffs had not established that the resolution to execute the DOCA was contrary to the interests of creditors as a whole. In order to discharge the onus under s 600A(1)(c)(i) of the Act, the plaintiffs must lead evidence of the likely outcome of a winding up, which would permit the necessary comparison. Instead, they relied only on speculation. The Court should not set aside the resolutions unless it was certain that the identified alternative (here, winding up) would be more advantageous for the creditors. The administrators' reports constituted the only evidence before the Court of the likely outcome of winding up. They indicated that on liquidation, after payment of the priority creditors and the secured creditor, the unsecured creditors would receive nothing. 3. Further, the administrators' reports were not based on inadequate investigations. The alleged omissions and shortcomings were not established, so the DOCA should not be terminated under s 445D(1) of the Act. To the contrary, the evidence established that the administrators undertook a robust and detailed investigation, set out the results in their reports and responded fully to Mr May's questions. discussion 179 The plaintiff bears the onus of establishing the criteria under s 600A(1)(c)(i) of the Act. It also bears the onus of making out the relevant grounds under s 445D(1) of the Act, which if established, confer jurisdiction to terminate a DOCA, subject to the Court's discretion (see Bidald at [138]). 180 In the present case, the plaintiffs did not crossexamine Mr Rathner, who deposed in detail to his investigations and conduct of the administration, maintained the accuracy and adequacy of those investigations and the s 439A reports, and upheld the soundness of the recommendations. The plaintiffs submitted, however, that the deficiencies of the administrators' investigation, assessments and reports were evident on the face of the reports. They also submitted that in the circumstances of this case, they were not required to prove a positive case of benefit on liquidation, relying on similarities with Re Mills where the debtor's failure to rebut raised by a major creditor's suspicions weighed in favour of avoiding the composition. In Re Mills, however, as his Honour made clear, Merkel J took into account the debtor's failure to lead evidence, in a context where the trustee (who was crossexamined) had provided a misleading report to creditors and the debtor sought the favourable exercise of the Court's discretion in order to avoid sequestration. 181 The reasoning in Re Mills could not, as the plaintiffs conceded, reverse the statutory onus to satisfy the criteria for relief under s 600A and s 445D(1) of the Act, to which, in this case, the inadequacy of the administrators' investigations and reports was critical. The administrators did not bear the onus of establishing the adequacy of their investigation and reports. The plaintiffs' failure to crossexamine Mr Rathner confined their allegations to deficiencies apparent on the face of the reports, and significantly weakened their challenge to the administrators' conduct, for the reasons stated by Giles JA in Kirwan at [225]-[227] (discussed above at paras 77 to 78). 182 It was not disputed that the first two elements of a claim under s 600A(1)(c)(i) of the Act were established in this case. The defendants conceded that related creditors voted and, but for their votes, the casting vote of Mr Rathner (which they presumed would have favoured entry into a DOCA) would have determined the vote. Contrary to the interests of creditors as a whole? 183 As Austin J in Portinex and Fitzgerald JA in Khoury held, the creditors of the company as a whole in s 600A(1)(c)(i) constitute the entire body of creditors, not just the dissenting creditors. The creditors are, however, restricted to those holding claims as at the date of the impugned resolution (Hoath v Comcen Pty Ltd (2005) 53 ACSR 708). The comparison is not, as it would be under s 600A(1)(c)(ii), between the prejudice to the dissentients' interests and the benefits to related creditors under the DOCA, as opposed to winding up. Rather, under s 600A(1)(c)(i), it is necessary, in the present context, to compare the position of the creditors as a whole under the DOCA with their position on winding up (see Bidald, supra). 184 The creditors of the company as a whole in this case are the independent unsecured creditors (including the plaintiffs), related creditors, employee creditors and the secured creditor. 185 In their reports, the administrators compared the probable position of the companies' creditors under the DOCA with their probable position on a hypothetical winding up. They concluded that the DOCA was in the interests of the companies' creditors, although only some unsecured creditors would receive any dividend under it. Under the DOCA, the director procured a fund of $250,000 from which related creditors would receive no dividend for their unsecured claims of approximately $1.5 million, the employee priority creditors would receive no dividend for their claims of $68,000 and the excluded employees would receive no dividend for their claims of approximately $89,000. The secured creditor would receive no dividend for its claim estimated at over $2.1 million and would not enforce its change. 186 On the administrators' estimate, the participating creditors would receive a better return under the DOCA than on winding up, as the DOCA afforded the independent unsecured creditors (of whom the plaintiffs were by far the largest in terms of value) an estimated 11 cents in the dollar, whereas neither they nor any other ordinary unsecured creditors would receive any return at all on winding up. 187 The administrators' reports stated that while the employee creditors would not receive a payment (other than $4,283 in superannuation) under the DOCA, their claims would nevertheless be satisfied indirectly in the course of their continuing employment, which the DOCA made possible. 188 The administrators' reports did not otherwise specify any particular benefits from the DOCA for those creditors who would not participate in the dividend, as opposed to winding up. The administrators stated that they could consider only the commercial outcomes and which proposal would produce better returns, while creditors may have "other reasons and issues in considering their interests". 189 The legislation does not prescribe or limit the factors relevant to determining whether a resolution to enter a DOCA is contrary to the interests of the creditors as a whole under s 600A(1)(c)(i) of the Act. Some guidance is provided by the authorities, although analysis of s 600A(1)(c)(i) is relatively sparse. In the present case, when comparing the position of the creditors under the DOCA as opposed to liquidation, both the benefits to creditors specified under the terms of the DOCA and those arising collaterally from the company's survival under it are relevant. Any detriment to creditors from either the continuation of the DOCA or its termination (winding up) is also relevant. 190 The dividend payable under either scenario, while frequently central, is not, in every case, the sole or most important consideration. The interests of creditors may lie in the survival of the company rather than receipt of a dividend, whether it be larger under the DOCA or winding up. Thus, other factors favouring either alternative may also be relevant, or indeed, more important. The employees' interests in securing continued employment, the interest of customers or suppliers in further trading opportunities and the prospect of more timely payment or greater certainty of benefits, may favour a DOCA. In contrast, the desirability of further investigation and examination or recoveries by a liquidator may favour winding up. Conflict between the interests of particular groups which together constitute the creditors of the company as a whole may further complicate the equation. "The interests of the creditors as a whole" is, as Giles JA observed in Kirwan (in relation to the phrase "for the benefit of the company as a whole"), a "difficult phrase" and is "not a satisfactory criterion when there is a conflict of interests. Deciding what is for the benefit of the company as a whole may require selection between competing interests…" (at [124]). 191 Relevant case law, whether decided under s 600A(1)(c)(i) of the Act, potentially overlapping provisions such as ss 445D(1)(c) and (g), or analogous sections of the Bankruptcy Act, confirms that the avoidance or forestalling of investigation may be significant to the criterion "contrary to the interests of the creditors as a whole" under s 600A(1)(c)(i), like considerations under s 445D(1)(g) and the general discretion under s 445D(1). 192 In the present case, the plaintiffs could not establish viable causes of action or negative the administrators' estimates of the probable nil return to unsecured creditors on winding up. They submitted, however, that as the administrators' investigations were inadequate and the DOCA depended on the support of related creditors, the Court should, if outstanding issues reasonably called for further investigation, readily uphold their bona fide preference, as the major independent creditors, for liquidation. 193 As Network and Portinex make clear, however, unless the outcome of the relevant resolution is contrary to the interests of the creditors as a whole, the defeat of a major creditor's preference by the votes of related creditors is irrelevant. 194 The comparison between the position of creditors under a DOCA and on winding up respectively necessarily incorporates a hypothetical element and typically requires a balancing of multiple factors. An administrator's inadequate preliminary investigation does not ensure that superior additional investigations (and associated recovery) will occur on winding up. Conversely, in some cases, investigation on liquidation could achieve better recovery even if the administrator's investigations were adequately performed. The cases indicate that deficiencies in investigation may be immaterial or outweighed by coexisting circumstances. Conversely, in some cases, including misfeasance by the administrator, the misleading of the administrator or misconduct suggesting an abuse of the statutory process, the need for further investigation and action by a liquidator may be compelling, although, on the existing state of knowledge, there is no assurance that winding up will produce any or greater return to creditors. 195 The interests of creditors as a whole in the relevant context do not, as the plaintiffs submitted, necessarily require certainty of greater material benefit on winding up. Nevertheless, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination; the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation and indirect or collateral benefits from the survival of the company's business; and no worthwhile avenues for further recovery on liquidation are identified, a major creditor's curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole. 196 In contrast, where, for example, the dividend or other benefits to creditors under, or as a result of, a DOCA are small; there are potential claims which, on a preliminary view, warrant further investigation because they afford reasonable prospects of greater returns on winding up; funding is probably available for an investigation; there are reasonable prospects that litigation or other necessary steps to prosecute the claims can be funded; and the defendants appear capable of satisfying their liability; termination of the DOCA may be in the interests of the creditors as a whole. 197 Each case will depend upon its own facts and combination of circumstances, which must be mutually balanced. 198 In the present case, in contrast to Bidald, Octaviar, Jonco Holdings and like authorities (discussed above), the plaintiffs did not allege, and there was no evidence of, misfeasance, concealment, misleading information or abuse of the statutory scheme which could justify termination of the DOCA in the interests of creditors as a whole irrespective of good prospects of improved returns on winding up. 199 Under the DOCA, relatively few creditors receive any dividend. The participating creditors, including the plaintiffs, receive a real but modest benefit which (if the administrators' estimate is correct) exceeds the nil amount they would receive on winding up. If, as the plaintiffs allege, the administrators failed adequately to explore avenues of recovery on winding up, and such avenues exist, they would have to produce very considerable returns in order to enlarge the participating creditors' returns on winding up, because the secured creditor's charge would crystallise and the claims of other unsecured creditors, including priority and related creditors, who receive no dividend under the DOCA, would be admitted to compete. Thus, even if the administrators overlooked avenues of recovery, that omission would be unlikely to alter the accuracy of administrators' estimate of a nil return on winding up to the unsecured creditors, including those participating in a dividend under the DOCA. 200 Moreover, it is also necessary, in this context, to consider the interest of the other creditors who receive no dividend under the DOCA. 201 As the administrators' reports stated, the claims of the employee creditors would be satisfied outside, but in consequence of, the DOCA from the continued operation of the business. The employee creditors would also obtain improved prospects of continued employment as a result of the companies' survival, which is a legitimate interest within the objectives of Part 5.3A (see Bidald at [275]). 202 While there was no direct evidence of the benefits the secured creditor derived from or in consequence of the DOCA, which it supported, the plaintiffs conceded that it could be inferred that the NAB was being paid from the revenue of the business and was "happy to see the business continue…" which tended to suggest "a pretty good business". 203 There was no direct evidence of the benefits derived by related creditors from entry into the DOCA under which they received no dividend. The related creditors were also estimated to receive nothing on winding up due to the crystallisation of the charge. In the present case, there was no suggestion that the related creditors voted for an illegitimate ulterior purpose, such as avoidance of examination and their interests cannot be disregarded simply by reason of their related status. From their support of the DOCA, it may be inferred that they considered that the companies' survival would better serve their interests. The DOCA was supported by the requisite statutory majority (albeit including related creditors) which is itself a factor in favour of not terminating it under s 445D (see Bidald at [272]). 204 In my opinion, as no compelling case for a forensic investigation to vindicate commercial morality or the public interest was advanced, the DOCA should not be terminated as contrary to the interests of the creditors as a whole unless there are reasonable prospects of securing recoveries productive of greater returns to creditors on winding up, and/or the inadequacy of the administrators' investigation and report materially distorted or flawed the statutory process. While the prospect of better returns and the inadequacy of the administrators' investigation are distinct, they largely coincide in this case, as the alleged deficiencies in the administrators' investigation and reports were failures to identify and follow up potential avenues of recovery. The adequacy of the administrators' investigations 205 In my opinion, the plaintiffs have established neither that the administrators' investigations or reports were materially inadequate, nor prospects of greater recovery on winding up which warrant the setting aside of the resolutions and the termination of the DOCA. 206 First, there can be no assurance that any investigation (a necessary precursor of any ultimate recovery) would occur on winding up, as no sufficiently certain source of reasonable funding for it was identified. While the plaintiffs pointed to $123,000 in debts received by the administrators, that sum would be subject to the administrators' lien, and book debts would otherwise be subject to NAB's fixed and floating charge, which would crystallise on liquidation (see below). As Austin J stated in Portinex, where a major creditor seeks to terminate a DOCA to pursue further investigations, its willingness to provide funding may be relevant. The relief, if granted, may otherwise prove futile and any benefits under the DOCA may be lost without a countervailing gain. 207 While the party seeking to terminate a DOCA cannot be expected to provide a blank cheque, in this case the means of funding for an investigation were simply too uncertain. The plaintiffs relied solely on the challenged availability of recovered debts and the asserted likelihood that they would provide some funding in the event of liquidation. 208 Similarly, no source of any funding for litigation or other necessary steps to recover pursuant to any identified potential claims was identified or offered. 209 The plaintiffs did not lead evidence in relation to the validity or strength of the identified claims and their potential for successful recovery on liquidation. They relied on the alleged inadequacy of the administrators' preliminary investigations. As stated above, a materially inadequate investigation may justify termination of a DOCA even if winding up is unlikely to produce a better return or other specific benefits. In my opinion, however, the plaintiffs did not establish that the administrators' preliminary investigation, including of the potential claims, was deficient or defective, or that there were related material omissions from their s 439A reports or statements within the meaning of s 445D(1)(c). The potential impediments to effective recovery on liquidation include the legal weakness or uncertainty of a relevant claim, possible defences to it, the complexity and costs of the litigation or other necessary steps to prosecute the claim, and the capacity of any liable parties to satisfy it. 210 In the present case, the administrators, in their reports, concluded that due to some or all of those factors, there was no likelihood of successful recovery on any of the potential claims they identified. They did not recommend further investigation of any claim or matter. 211 The evidence does not establish that their conclusions are or were not reasonably based on an adequate preliminary investigation. The plaintiffs did not crossexamine Mr Rathner's account of his actions and investigations. His assertions of their adequacy and maintenance of the soundness of the administrators' reports and opinions were not challenged. No evidence of subsequent developments or revelations after the date of the reports indicated that more extensive investigation by a liquidator is warranted. 212 The administrators' investigation must meet the standards articulated in Hagenvale and other relevant authorities, which entail, inter alia, the exercise of a critical and evaluative perspective. The investigation is necessarily preliminary, being performed within the time constraints and other typical limitations, including funding. 213 An administrator necessarily depends to some extent on information from the directors, officers and other parties associated with the company, such as accountants and financial advisers. The administrator must not, however, uncritically accept at face value insiders' information or accord the directors undue deference. He or she must independently evaluate information by reference to an examination of books, records and other evidence, and must identify and follow up contradictions, inconsistencies or unresolved issues. Nevertheless, the administrator may properly accept a director's information and assessments if, in the light of the administrator's expertise and experience, and the surrounding circumstances, it is reasonable to do so. In the absence of circumstances which should provoke further inquiry, an administrator is not obliged to conduct forensic investigations, accept only independently verified information, routinely commission independent valuations, engage experts or implement external processes to test the veracity of manifestly credible information. 214 In the present case, Mr Rathner's staff member's file note sets out in detail the steps and investigations undertaken. The file note (the accuracy of which Mr Rathner confirmed) indicates that the administrators did not rely solely or uncritically on information obtained from the director, the companies' accountant or financial adviser, but looked for inconsistencies and verified the information. Mr Rathner was not challenged on those matters. 215 Further, Mr Rathner consented to an adjournment, during which time he considered and responded in writing to Mr May's numerous questions, albeit without detailed reasons and in some cases merely confirming the report. Specific Inadequacies 216 Nor, in my opinion, were the plaintiffs' overlapping specific allegations of the inadequacies of the investigation and material omissions from the reports established. Depreciation of stock 217 I am not persuaded that the administrators failed satisfactorily to investigate or report on the depreciation of the stock or that the s 439A reports omitted a sufficient explanation of it. 218 The reports noted that the management accounts as at 30 June 2009 valued the stock at $1,606,293, but the administrators valued it at between $462,362 and $839,528 on the basis of the director's estimation of its realisable value. The director advised that obsolete stock held since 1 July 2007 (about two and a half years old), with an estimated realisable value of only 10% of book value, was included. Current stock was valued at cost. 219 In the letter to Mr May, the administrators stated that at the time of their appointment, a stock take or valuation was not practical, as Loaders' premises had been sold and it was in the process of relocation. 220 The administrators' opinion and reliance on the director's assessment of the age and realisation of value of stock was not challenged in crossexamination and there is no evidence to suggest that the assessment was, given the director's experience, unreasonable. Mr Rathner deposed that he attended the companies' premises and reviewed the aged stock listing. The file note stated that the staff viewed the stock and reviewed the stock report including "stock aging", with the director. In the circumstances, the administrators were not required to obtain an independent valuation or to take further action. Extent of charge 221 The allegation that the administrators failed adequately to investigate, assess and report on the extent of the NAB charge is not, in my view, made out. 222 The administrators' acceptance that the charge extended to the partnership property was reasonable as it evidently secured business facilities, including the trade finance accounts and overdraft accounts, and the deed of trust disclosed that Loaders held its assets as bare trustee for the partners. The reports made clear that the companies had given crossguarantees which resulted in identical liabilities. Mr Rathner deposed that he met with the secured creditors and kept them informed of events and issues. In the letter to Mr May (whose query related only to whether the contingent liability as guarantor of the $1,031,230 loan to Lederberger was secured), he affirmed the conclusion in the reports. Write down of good will 223 The plaintiffs have not established that the administrators failed adequately to investigate, assess, report on or explain the total write down of goodwill. 224 The administrators' opinion that the goodwill (estimated at $3,232,144 in the management accounts as at the director's valuation in 2003) was worthless unless the purchaser could retain the director's services was reasonable and open to them in the light of the matters specified in the reports, including the lengthy operation of the business and the director's plausible claim that he had the contacts with overseas suppliers, significant relationships with many customers and sole responsibility for purchases, including from overseas. There was nothing to contradict the director's assertion that he would not cooperate with a sale, but would probably establish a competing business. Mr Rathner was not challenged on the relevant matters in crossexamination. The administrators were not required (against their own judgement) to advertise the business or take additional steps to test their opinion by reference to independent expertise or advice. Value of deceased estate 225 The allegation that the administrators failed adequately to investigate, assess and report on the value of the deceased estate was not established. 226 The accountant informed them, and it was not, in the circumstances, unreasonable to accept, that the deceased estate's sole asset was its interest in the partnership. The value of the interest in the partnership in turn depended on the net asset position of the business. 227 I am not persuaded that the reports failed to reveal, or alternatively explain, an apparently sudden gulf between the recent prosperity of and sizeable equity in the partnership reflected in the 30 June 2008 accounts, and the position as at December 2009. The accounts included in the reports make clear, on a fair reading, the net asset position attributed to the business itself (which, in management the accounts, was $2.7 million as at 30 June 2009) at the different times, that the decrease as at 9 November 2009 was explained by the write down of the aged stock and that the ultimate decrease as at December 2009 was due principally to the administrators' write down of goodwill. 228 The report included a summarised form of the net asset position as shown in the RATA, which reduced progressively from $4.73 million as at June 2006 to $1.89 million as at 9 November 2009. 229 In the reports, the administrators adjusted the summarised figures from the RATA (which was based on the company's management reports) to reflect the realisable value of the assets on liquidation. They excluded, inter alia, the value attributed to goodwill in the partnership accounts 18 months earlier. The administrators did not consider it realisable and estimated that goodwill had a nil value. As stated above, that conclusion was open to them. Asset position of director/executor of deceased estate 230 The allegation that the administrators failed adequately to investigate and report on the asset position of Mrs Lederberger was not established. The administrators had no power to compel Mrs Lederberger to provide a statutory declaration about her personal financial circumstance. In order to pursue such matters further, it would have been necessary to conduct an examination. 231 In the context of the reports, the significance of Mrs Lederberger's personal financial position was not compelling, as the administrators assessed the prospects of successful actions against her for insolvent trading as negligible or nil and identified no relevant offences. The plaintiffs assert, however, that the real significance of Mrs Lederberger's financial standing lay in her potential personal liability to indemnify Loaders, which the reports did not recognise. The deficiency in failing to ascertain Mrs Lederberger's financial status thus essentially depends on an alleged antecedent failure or omission to identify an avenue of recovery. 232 The reports stated that Loaders, as a bare trustee, had a right of indemnity against the partnership property and the partners. Although Mrs Lederberger was not a partner, the plaintiffs allege that she was personally liable as trustee of the Deceased Estate of Hirsch Lederberger and the party to whom, according to the accounts, the income due to the Estate was paid. 233 The application of the principle of Hardoon v Belilios [1901] AC 118 and Mrs Lederberger's status as the sole beneficiary in such circumstances were not, in my opinion, obvious. 234 The plaintiffs conceded the complexities and uncertainties of the indemnity claim against Mrs Lederberger and the unusual nature of the business structure underpinning it. In their Supreme Court action against Gita Lederberger, the plaintiffs alternatively claim pursuant to her liability as the undisclosed principal of Loaders, which their senior counsel acknowledged might be "the better characterisation". 235 The plaintiffs' claim against Mrs Lederberger personally to indemnify Loaders will be determined in the Supreme Court of Victoria. The defences and relevant evidence are not before this Court and the outcome of the Supreme Court proceeding is necessarily unknown. No evidence was led to establish that the administrators should have identified the claim, or at least a potential claim, which warranted obtaining a legal opinion. 236 Mr May's questions did not raise Mrs Lederberger's potential personal liability to indemnify Loaders and his query regarding the failure to compel her provision of a statutory declaration was correctly answered by the administrators. While an administrator may conduct an examination, potential difficulties, including of funding, apply (see Portinex at [117], referred to above at para 137). Mr May did not propose that either or both of the directors should be examined. In the relevant context, the utility of further steps to assess Mrs Lederberger's worth was not evident. Potential preference 237 Although it was not identified in the written or oral submissions in chief, or in Mr May's questions (which referred to an August 2009 payment), the plaintiffs alleged in their reply that the administrators failed adequately to investigate a potential preference of $365,850 on 12 October 2009, paid to Outback Properties after the companies received advice from Mr Rathner's firm, which was unlikely to be set off. Alternatively, the plaintiffs submitted that the juxtaposition of payments of identical amounts in August and October 2009 required, but did not receive, an explanation. Given the late stage at which the specific allegations were raised, the defendants, in my view, had insufficient notice or opportunity to answer them. Moreover, the reports stated that the administrators reconstructed the companies' mutual accounts and Mr Rathner was not crossexamined on the relevant matters. The allegations in relation to the treatment of the October payment or the juxtaposition of the payments to Outback Properties were not, in my opinion, made out. 238 In the circumstances, the plaintiffs have not established that the administrators' investigation of the above matters was inadequate or that there were related material omissions from the reports. The undertaking 239 At a late stage in the hearing, the plaintiffs proffered the undertaking, described in para 177 above, in relation to the discretion under s 445D(1) of the Act. 240 The Court's discretion under s 445D(1) of the Act would arise only if, contrary to my findings, a relevant precondition were established. 241 Further, as the undertaking was not offered at the date of the resolutions, its relevance to determining whether the resolutions were contrary to the interests of creditors as a whole under s 600A of the Act is unclear. 242 It has been held that s 600A of the Act is directed at the interests of creditors as at the date when the resolutions were passed and incorporates a temporal element. In Hoath v Comcen (2005) 53 ACSR 708, Barrett J held (at [15]-[17]) that a person who was not a creditor at the date of the resolution to enter a DOCA but subsequently took an assignment of debt, lacked standing to apply to set aside or terminate it under s 445D(1), s 445G or s 600A of the Act, due to the combined effect of ss 445D(1), (2) and (3) and 444A(4)(1) of the Act. 243 While a temporal precondition in relation to standing should not preclude consideration of subsequent events under s 445D(1), Barrett J's observations suggest that only circumstances at the date of the resolutions are relevant to a determination under s 600A. 244 His Honour stated at [18]: In the case of s 600A and its focus on the interests of creditors, it is in my view plain that the section is concerned with persons who were creditors when the resolution was passed. The section is concerned with circumstances pertaining at and in relation to the meeting and the passing of the resolution and thus has in contemplation the creditor constituency as it existed at that time. 245 In Deputy Commissioner of Taxation v Schmierer [2002] QSC 262, however, Fryberg J considered that s 600A required an assessment of the interests of the creditors on the basis of the evidence before the Court rather than on what was known at the date of the resolution. 246 Due to the late stage at which the undertaking was proffered, there were no detailed submissions on the extent to which subsequent matters may be relevant to applications under ss 445D(1) and 600A. It is, however, unnecessary for present purposes to determine that issue because the undertaking would not, in any event, tip the balance in favour of holding that the resolutions to enter a DOCA were contrary to the interests of creditors as a whole within the meaning of s 600A(1)(c)(i), or that the Court's discretion under s 445D(1) should, if the preconditions are made out, be exercised to terminate the DOCA. 247 The undertaking would ensure that the creditors other than the plaintiffs participating in a dividend under the DOCA would receive at least an equivalent payment on winding up, but it does not address the position either of the creditors of the companies as a whole as at the date of the resolutions or creditors whose claims have arisen after that date. Potential prejudice to subsequent creditors to whom the companies incurred liabilities after the date of the resolutions would, in my opinion, be relevant to the discretion under s 445D(1) of the Act. 248 The employee creditors receive no benefit under either the undertaking or the DOCA, but under the DOCA their claims would be satisfied from, and their prospects of continuing employment maximised by, the continued operations of the companies. Even if the claims of the employee creditors as at the date of the resolutions have now been satisfied (of which there was no evidence), winding up would prejudice their prospects of continuing employment. 249 Further, the undertaking does not address the loss of benefits resulting from the companies' continued existence under the DOCA by those creditors, including the NAB and the related creditors, who supported it. conclusion 250 In the circumstances, and on the evidence before the Court, material inadequacies in the administrators' investigations or material omissions from the reports were not established. Nor am I satisfied that there are sufficient prospects that further investigation of the identified matters would occur on liquidation, would identify any claims with reasonable prospects for recovery, or that such claims would be prosecuted and, if established, result in substantial recovery. 251 The evidence did not establish that liquidation has satisfactory prospects of producing a greater return to the participating creditors under the DOCA or offers benefits to any other creditors exceeding those arising from the companies' continued existence under the DOCA. 252 In my opinion, the plaintiffs have not established that the resolutions to enter the DOCA were contrary to the interests of the creditors as a whole under s 600A(1)(c) of the Act, that there are material omissions from the reports under s 445D(1)(c), or other grounds for termination of the DOCA under s 445D(1)(g) of the Act. 253 It follows that the relief sought in the originating process be refused. I certify that the preceding two hundred and fifty-three (253) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice DoddsStreeton. Associate: Dated: 4 March 2011 SCHEDULE OF PARTIES Mediterranean Olives Financial Pty Ltd Mediterranean Olives Estate Limited Albany Financial Pty Ltd WA Blue Gum Ltd Plaintiffs Loaders Traders Pty Ltd (ACN 069 549 042) (Subject to Deed of Company Arrangement) First Defendant Gideon Rathner and David Coyne (as Deed Administrator of Loaders Traders Pty Ltd (ACN 069 549 042) (Subject to Deed of Company Arrangement)) Second and Third Defendants Lederberger Investments Pty Ltd (ACN 106 050 462) (Subject to Deed of Company Arrangement) Fourth Defendant Gideon Rathner and David Coyne (as Deed Administrator of Lederberger Investments Pty Ltd (ACN 106 050 462) (Subject to Deed of Company Arrangement)) Fifth and Sixth Defendants