FEDERAL COURT OF AUSTRALIA Forth v R Developments Pty Ltd [2019] FCA 1004 File number: ACD 89 of 2018 Judge: JAGOT J Date of judgment: 2 July 2019 Catchwords: CORPORATIONS – whether a deed of company arrangement should be declared void or terminated –whether the deed is prejudicial to the creditors – whether the deed failed to meet requirements of Pt 5.3A of the Corporations Act 2001 (Cth) – whether the deed can be terminated on grounds of an omission or effect of the deed resulting in an injustice – application dismissed with costs. Legislation: Corporations Act 2001 (Cth) ss 415A, 415A(1), 415A(3)(a), 444A(4), 445D(1)(c), 445D(1)(e), 445D(1)(g), 445FA, 445G, 445G(4), 455FA Insolvency Practice Rules (Corporations) 2016 (Cth) Cases cited: In the Matter of Recycling Holdings Pty Limited [2015] NSWSC 1016 Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178 Date of hearing: 4 June 2019 Date of last submissions: 31 May 2019 Registry: Australian Capital Territory Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 24 Counsel for the Applicant: Mr D Robens Solicitor for the Applicant: Kamy Saeedi Law Counsel for the Respondent: Ms A Hogan (for R Developments) Mr Bucklands (for Director, David Rosa) Solicitor for the Respondent: Namadgi Legal (for R Developments) Moray & Agnew Lawyers (for Director, David Rosa) ORDERS ACD 89 of 2018 BETWEEN: ANDREW STEPHEN FORTH First Applicant KSENIJA MARIA NEMET Second Applicant AND: R DEVELOPMENTS PTY LTD ACN 124 680 397 Respondent JUDGE: JAGOT j DATE OF ORDER: 2 JULY 2019 THE COURT ORDERS THAT: 1. The amended originating process dated 21 February 2019 be dismissed. 2. The applicants pay the respondent's costs of the application as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT JAGOT J: 1 The issue in this matter is whether a deed of company arrangement (the DOCA) should be declared void or terminated. 2 The DOCA was executed on 11 February 2019 pursuant to a resolution of a meeting of creditors on 18 January 2019. 3 It is not in dispute that the creditors who voted in favour of the DOCA are all related parties to the company in administration and that the applicants, the unrelated parties who had submitted a proof of debt for $205,294.00, voted against the execution of the DOCA. Pursuant to the DOCA a payment of $50,000 was required to be made. 4 The applicants seek to set aside the resolution to execute the DOCA under s 415A(3)(a) of the Corporations Act 2001 (Cth) (the Act). Section 415A provides as follows: (1) Subsection (3) applies if, on the application of a creditor of a Part 5.1 body, the Court is satisfied of the following matters: (a) a proposed resolution has been voted on at a meeting of creditors, or of a class of creditors, of the body held under this Part; (b) that, if the vote or votes that a particular related creditor, or particular related creditors, of the 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; (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 the matters in subsection (2). (2) The matters are: (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 body, or of the respective relationships between the related creditors and the body; and (c) any other relevant matter. (3) 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 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. (4) In this section: "related creditor" , in relation to a 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 body. 5 The applicants relied on the fact that they are the only non-related creditors of the company who would bear the risk of a liquidation in comparison to a DOCA. They noted that the related creditors had waived their rights to a distribution under a DOCA, with the result that the only impact on those parties will be the possible investigation of previous transactions between them and the company. They contended that the DOCA discriminated against them as a result. 6 The applicants did not, however, venture an explanation as to why the DOCA prejudiced them to an extent that was unreasonable, having regard to the mandatory relevant considerations. The DOCA, by cl 6.3, provides that the related creditors of the company may not participate in any distribution. In that sense, the DOCA, at least, discriminates in favour of the applicants. Further, in circumstances where the thrust of the applicants' submissions was that the resolution enabled the related creditors to avoid investigation of their dealings with the company, it was not apparent that the applicants were willing to fund any such investigations. The fact that the applicants say they are willing to bear the risk of a liquidation does not mean that they are prejudiced by the resolution to an unreasonable extent within the meaning of s 415A(1)(c)(ii) of the Act. 7 The applicants also sought an order that the DOCA be declared void on the ground that it does not comply with Pt 5.3A of the Act. The applicants relied first on s 444A(4)(c), which provides that the DOCA must specify, amongst other things, the "nature and duration of any moratorium period for which the deed provides". The argument is based on an apparent typographical error (the definition of Effectuation Notice refers to a non-existent section of the Corporations Act, s 455FA, instead of s 445FA which deals with the termination of such deeds) and an ambiguity in the operation of the moratorium period (cl 2.3 refers to the definition of Claims instead of Included Claims and thus purports to bar all legal action indefinitely). Both of these matters are readily curable and the respondent has indicated that the DOCA could be varied to correct the errors by the matters being put to a meeting of creditors and that the administrator also consents to the Court making an order to vary the DOCA as provided for in s 445G(4) of the Act in order to correct the errors. As the respondent also noted, the applicants could have raised any concern about these matters with the administrator so that another meeting of creditors could be convened to vary the DOCA but instead, without notice until its submissions were filed for the hearing, sought to rely on the typographical error and ambiguity as a reason to void the entirety of the deed. 8 In these circumstances the defects in the DOCA, which are of a minor and technical nature, do not provide a sufficient reason to exercise a discretionary power to declare the DOCA or any part of it void. Rather than doing so and the Court varying the DOCA, the first proposal of variation of the DOCA by a meeting of creditors should be pursued. 9 The applicants also contended that the contribution of $50,000 required under the DOCA has not been paid because $10,000 was paid before the DOCA came into force and $40,000 subsequently. The $10,000 payment, however, was paid on trust for the purpose of the DOCA. I do not accept that the mere fact of payment in advance of execution of the DOCA, on trust for the purposes of the DOCA, means that the required payment has not been made. 10 The applicants also sought termination of the DOCA on the grounds in s 445D(1)(c), (e) and (g). By those provisions a DOCA may be terminated on an application by a creditor if the Court is satisfied that (c) there was an omission from, relevantly, the report to creditors and the omission can reasonably be expected to have been material to such creditors in so deciding, (e) effect cannot be given to the deed without injustice or undue delay or (g) the deed should be terminated for some other reason. 11 The applicants said the report to creditors omitted many important matters as there was: 1. Limited or no investigation into the Company's past trading prior to June 2014 and specifically as to any projects other than the Applicant's construction. 2. Failure to investigate trading of the Company post-June 2014 and specifically to identify residential construction projects up to the date of appointment (4 December 2018). 3. A failure to investigate the operations of entities controlled by either the director or his family members, or those family members individually. 4. Limited or no investigation into the assets of the Company, specifically two vehicles registered in the Company's name, machinery owned by the Company, other tools owned by the Company or accumulated assets from previous trading. 5. Limited or no investigation into the assets of Mr Rosa or related entities, including assets received from the Company or claims as made against the Company as Creditors. 6. No information regarding Mr Rosa's trading income since June 2014. 7. Limited or no investigation into voidable transactions in the face of the evidence of the director continuing to work in construction via construction related companies and his family being involved in construction. 8. No explanation of the benefit of the DOCA to the Director or related creditors. 12 According to the respondent, these complaints of omissions do not fairly reflect the report as a whole which included the following information: (a) Mr Rosa was the only director of the defendant at the time of the administrator's appointment, there are no former directors recorded with ASIC and preliminary investigations have not identified any potential shadow directors. (b) Mr Rosa owns real property in the ACT. (c) The transfer of an excavator and Porsche Cayenne in 2017 could be uncommercial transactions if insolvency is proven and no defences are available. (d) Another vehicle- a Mercedez Benz- was not included as an asset of the defendant in its books and records even though it was registered in the defendant's name; however, the defendant paid no expenses for it. (e) Mr Rosa denies insolvent trading. (f) The defendant exhibited signs of insolvency in June 2015, however, the defendant reported sufficient working capital between 1 July 2014 and 30 June 2017. (g) The unaudited financial statements and management accounts for the defendant were prepared to 30 June 2017 and it appears that the defendant has complied with section 286 of the Corps Act. (h) Any liquidator would need to make further enquiries into voidable transactions and prospects of recovery which were currently unclear. Any voidable transaction litigation would be inherently risky and costly. Funding would be required, and a liquidator may decide that it was uncommercial to proceed. (i) The estimated return to creditors under the DOCA was 10 cents in the dollar compared to a highly speculative 7 cents in the dollar return to ordinary unsecured creditors in a liquidated scenario. 13 The respondent also submitted, correctly, that the applicants had filed no evidence proving that the putative voidable transactions were reasonably arguable and reasonably likely to yield a greater return to them under a liquidation compared to the DOCA or that there would be a greater distribution if further investigations were undertaken. The highest the case for the applicants goes is that they are the only creditors who stand to lose or gain by a liquidation and that they choose to take on that risk. Further, as the respondent noted, s 445D(1)(c) is concerned with the report given to creditors, the requirements for which are in the Insolvency Practice Rules (Corporations) 2016 (Cth), s 75-225(3) which says: If the meeting is convened under section 439A of the Act, the notice must also be accompanied by: (a) a report by the external administrator about the company's business, property, affairs and financial circumstances; and(b) a statement setting out the following: (i) whether, in the administrator's opinion, it would be in the creditors' interests for the company to execute a deed of company arrangement; (ii) whether, in the administrator's opinion, it would be in the creditors' interests for the administration to end; (iii) whether, in the administrator's opinion, it would be in the creditors' interests for the company to be wound up; (iv) the reasons for the opinions referred to in subparagraphs (i) to (iii); (v) such other information known to the administrator as will enable the creditors to make an informed decision about each matter covered by subparagraph (i), (ii) or (iii); (vi) whether there are any transactions that appear to the administrator to be voidable transactions in respect of which money, property or other benefits may be recoverable by a liquidator under Part 5.7B of the Act; (vii) if a deed of company arrangement is proposed—details of the proposed deed. 14 Mr Lo Pilato, the administrator, was not required for cross-examination on his affidavit. The affidavit explains why Mr Lo Pilato considered that he was (and remains) of the view that any litigation against the director would require proof of insolvency of the company at significant cost as the presumption of insolvency would not be available. He assessed such claims to be uncommercial in the sense that the cost of pursuing them would exceed the likely quantum claimed. According to Mr Lo Pilato: 40. By operation of clause 6.3 of the DOCA, none of the related creditor claims are admissible to proof for the purpose of distributions under the DOCA and the related creditors are not entitled to participate or receive any distribution. This means that the applicants and any other unsecured creditors which I may admit to proof will benefit from the available fund to the exclusion of the related creditors. That adjustment to priorities would not necessarily be reflected in the distribution of dividends in a liquidated scenario. 41. In sections 10 and 11 of the Relevant Report I calculated and assessed that the DOCA Proposal would deliver a return to unsecured creditors of about 10 cents per dollar within three months. I also calculated and assessed that the maximum dividend in a liquidated scenario would be around 7 cents per dollar within 12 months depending on seven major contingencies which I outlined on page 24 of the Relevant Report. In my opinion, I consider it to be highly unlikely that those contingencies would be met and that such a return would materialise. 42. As I explained in section 12.1.2 of the Relevant Report, I formed the view that it was most appropriate for creditors to accept the DOCA proposal for two main reasons: it provided for payment to unsecured creditors in a shorter period of time and at less expense than a winding up; and the estimated return to creditors is greater than the estimated return in a winding up scenario. 43. I maintain that the above recommendation was the only appropriate recommendation to make, although I note that the additional costs which I have incurred in connection with the present litigation are such that my previously estimated return of 10 cents per dollar is now highly unlikely. 44. In my professional opinion, including for the reasons articulated by me at paragraphs 18, 19, 20, 40, 41 and 42 above, the DOCA is substantially beneficial to the applicants. 15 In paragraphs 18, 19 and 20 of his affidavit Mr Lo Pilato said: The provisions specifically relating to voluntary administration and the entry of a deed of company arrangement are contained in Part 5.3A of the Corps Act which runs from section 435A to s 451D. The object of Part 5.3A is described in section 435A of the Corps Act, as follows: The objection of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence- results in a better return for the company's creditors and members than would result from an immediate winding up of the company" (emphasis added) Whenever I am appointed as administrator under Part 5.3A, the timeframes for my investigations are tight and resources scant. As a result, my investigations must be swift and practical. I cannot carry out a detailed investigation in the same way I am able to where appointed as liquidator. I always aim to achieve the object stated in section 435A even though I am constrained by time and resources. As noted by me in section 8.3.3 of the Relevant Report, my preliminary view is that the Company first exhibited financial and commercial indicators of insolvency on or about June 2015. 16 In Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178 Dodds-Streeton J summarised the relevant principles: (1) "Relevant authority recognises that the standards required of an administrators' investigation are necessarily modified by the tight timeframe and associated constraints": [61]. (2) The objects of Pt 5.3A are relevant, in particular the object of maximising the chances of the company continuing in existence: [62] citing Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139. (3) The fact that it will always be possible to say more could have been done should be borne in mind given that the "the investigation is intended by Parliament to be a swift and practical one": [64] citing Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 at 510. (4) There is a distinction 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": [70] citing Deputy Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232 at [198]. (5) The administrator's duty is 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": [72] quoting from Independent Cement & Lime Pty Limited v Brick and Block Company Ltd (In Liquidation) (Receivers and Managers Appointed) [2010] FCA 352; (2010) 267 ALR 613 at [14]. In Independent Cement and Lime Finkelstein J continued to this effect at [49]: 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. 17 Dodds-Streeton J also referred to Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21, saying at [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]. 18 Her Honour considered Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707 at [80]-[81], on which the applicants relied in the present case, noting in particular that the administrator in Re Bartlett: … 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). 19 At [181] Dodds-Streeton J said: The administrators did not bear the onus of establishing the adequacy of their investigation and reports. The plaintiffs' failure to cross‑examine 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). 20 In In the Matter of Recycling Holdings Pty Limited [2015] NSWSC 1016 Brereton J identified the following matters: (1) "An inquiry under s 445D involves two stages, though they are not unrelated. The first is whether one of the grounds referred to in s 445D(1) is established. The second, which arises only if the first is established, is whether as a matter of discretion the DOCA should be terminated. That establishment of one of the grounds enlivens a discretion but does not of itself require that the DOCA be terminated has been recognised in many authorities": [29] (2)"…s 445D(1)(c) speaks of an omission that "can reasonably be expected to have been material to such creditors in so deciding". The reference to "reasonably be expected" and to "creditors" as distinct from "all creditors" or "the creditors", contemplates consideration of the position of the hypothetical reasonable creditor, as distinct from particular creditors; thus, the test of materiality is an objective one, and involves something which could potentially rationally influence the decision of the hypothetical reasonable creditor…": [31]. (3)"…while a material omission may be established by the omission of a matter referred to in s 439A(4) [now the Insolvency Practice Rules (Corporations) 2016 (Cth), s 75-225(3)], one may also be established by the omission of "a matter of significance which should have been included in the report or statement and which would be highly material in the decision to be made by the creditors" [Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885; 17 ACSR 139, 148 (Cohen J)]": [33]. 21 Having regard to these principles, in the context of Mr Lo Pilato's report and affidavit, and the forensic decision the applicants made not to cross-examine Mr Lo Pilato, I am not prepared to find that the report to creditors contained any omission that would have been material to the creditor's decision as provided for in s 445D(1)(c). The applicants did not point to any prescribed matter omitted from the report. The matters said to be omitted might not have been able to be investigated within the time constraints under which the administrator was working. It is also not immediately apparent that any of the allegedly omitted matters would yield a greater return to the unrelated creditors than the DOCA. The applicants say they would be deprived of the right to a greater distribution should proper investigations be undertaken, but this is by no means apparent from the evidence. At best, the putative greater distribution on liquidation is speculative dependent not only on funding for the investigations to be forthcoming but also proof of voidable transactions, which may well require proof of insolvency involving costs which Mr Lo Pilato assessed would render the potential pursuit of such claims as commercially unviable. 22 In these circumstances, and given Mr Lo Pilato's unchallenged conclusions based on the matters in the report that the estimated dividend for unsecured creditors under the DOCA would exceed the return in a liquidation, as well as the information he provided about options for funding further investigations through a liquidation and the lack of any indication of the applicants being willing to fund those investigations, even if there had been a material omission from the report, the discretionary factors in play would weigh in the balance against terminating the DOCA on that ground. 23 It follows from the above conclusions that I am also not satisfied that s 445D(e) or (g) of the Corporations Act are engaged. Effect can be given to the DOCA without injustice or undue delay. There is not some other reason why the DOCA should be terminated. The effect of the applicants' case is that as they are the unrelated creditor who stands to benefit under the DOCA they should be permitted to choose the risk of liquidation. But Pt 5.3A has as its object, if possible, allowing the company to remain in existence. It is only if there is some ground provided for in the legislation to void or terminate the DOCA that the power to make such an order arises. The preference of a creditor to take the risk of a liquidation is not such a statutory matter. The preference would be a relevant discretionary consideration but it does not, of itself, engage the relevant statutory powers. 24 For these reasons the amended originating process dated 21 February 2019 should be dismissed with costs. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 2 July 2019