Lo Pilato v Eden [2002] NSWSC 832

Reported Decision : (2002) 20 ACLC 1744

New South Wales Supreme Court

CITATION : Lo Pilato v Eden [2002] NSWSC 832 CURRENT JURISDICTION: Equity Division Corporations List FILE NUMBER(S) : SC 4485/02 HEARING DATE(S) : 09/09/02 JUDGMENT DATE : 12 September 2002

PARTIES : Frank Lo Pilato - Plaintiff Eden Construction Pty Limited - Defendant JUDGMENT OF : Barrett J

COUNSEL : Mr M Ryckmans, Solicitor - Plaintiff SOLICITORS : Abbott Tout - Plaintiff CATCHWORDS : CORPORATIONS - voluntary administration - deed of company arrangement - deed states events in which deed is to terminate but does not say company to be wound up in such events - no transition to winding up on happening of event - not appropriate for court to accept undertaking of sole director to renew administration LEGISLATION CITED : Corporations Act 2001 (Cth) Corporations Regulations 2001 (Cth) DECISION : See paras 18 and 19

- 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

THURSDAY, 12 SEPTEMBER 2002

4485/02 – FRANK LO PILATO v EDEN CONSTRUCTION PTY LIMITED JUDGMENT 1 The plaintiff, Mr Lo Pilato, became the administrator of the defendant, Eden Construction Pty Ltd ("the company"), on 25 July 2001 under Pt 5.3A of the Corporations Act 2001 (Cth) which had come into operation ten days earlier. On 18 October 2001, creditors resolved that a deed of company arrangement be entered into. Such a deed was executed on 22 October 2001. The deed was afterward varied in accordance with a resolution of creditors passed on 17 April 2002. References to "the deed" are references to the deed of company arrangement as so varied. 2 The parties to the deed are the company, its creditors, Mr Lo Pilato and Mr Ces Filardo, defined as "the Director". He was and is the sole director of the company. Mr Lo Pilato became the administrator of the deed. Clause 4.4 of the deed is as follows: "The Director will purchase the plant and equipment of the Company for $94,075 (plus GST). This amount is payable to the Administrator. The purchase of the plant and equipment by the Director must be finalised, and the monies paid to the Administrator, by 17 July 2002." 3 Clause 29.1 reads: "This Deed will continue in operation until it is terminated on the earlier of: (a) an order of the Court under section 445D of the Corporations Act; (b) a Resolution of the Creditors at a meeting convened under section 445F of the Corporations Act and in accordance with clause 25; (c) the payment to all Creditors of the Dividends; (d) the Director failing to purchase the plant and equipment of the Company by 17 July 2002 as outlined in clause 4.4 of this Deed; or (e) the happening of events which are by the terms of this Deed expressed to terminate this Deed automatically without resource to the Court or to a meeting of the Creditors." 4 Mr Filardo, being "the Director", did not purchase the plant and equipment in accordance with clause 4.4 by 17 July 2002 or at all. In those circumstances, Mr Lo Pilato seeks to clarify the present status of the deed and of the company. 5 I was informed that Mr Filardo had been given notice of Mr Lo Pilato's present application but had indicated that he would not seek to be heard. Mr Ryckmans, who appeared for Mr Lo Pilato, tendered to the court, at Mr Filardo's request, a written undertaking that, should it be found that the deed had been terminated and his powers as sole director had revived, Mr Filardo will forthwith cause the company to make a new appointment of Mr Lo Pilato as administrator. 6 The first relevant provision of the Act is s.445C. It says that a deed of company arrangement terminates upon the first of several events to happen. In a case where the deed specifies circumstances in which it is to terminate, the existence of those circumstances results in termination. This is the effect of s.445C(c) : "A deed of company arrangement terminates when: (a) …..; or (b) …..; or (c) if the deed specifies circumstances in which it is to terminate---those circumstances exist;" 7 I read clause 29.1 as a provision specifying circumstances in which the deed "is to terminate". It is true that the clause approaches the matter of termination somewhat indirectly by saying that the deed "will continue in operation until it is terminated on the earlier of", but I do not read this as contemplating some positive act of termination after one of the nominated circumstances arises. Rather, the clause says that termination is to occur on any of the specified circumstances arising and that the deed will not thereafter continue in operation. 8 On this basis, s.445C caused the deed to terminate when 17 July 2002 passed without Mr Filardo having made the purchase of plant and equipment in accordance with clause 4.4. 9 Division 12 of Pt 5.3 (ss.446A and 446B) deals with transition from administration to creditors' voluntary winding up. It does not make any specific provision about a case where a deed of company arrangement is terminated by operation of s.445C(c). Rather, that case is left to be dealt with in the non-specific way provided for in s.446B which allows regulations to be made prescribing cases where a company that has executed a deed of company arrangement is to be taken to have passed a special resolution under s.491 that the company be wound up voluntarily. Regulation 5.3A.07(1)(b) of the Corporations Regulations 2001 (Cth) is in the following terms: "For [sic] subsection 446B(1) of the Act, a company that has executed a deed of company arrangement is taken to have passed a special resolution under section 491 that the company be wound up voluntarily: (a) …..; or (b) if the deed of company arrangement specifies circumstances in which the deed is to terminate and the company is to be wound up – if those circumstances exist at a particular time." 10 The case dealt with in reg 5.3A.07(1)(b) is that where the deed "specifies circumstances in which the deed is to terminate and the company is to be wound up". The deed specification thus contemplated is wider than that referred to in s.445C(c). The latter has the first element (specification of circumstances in which the deed is to terminate) but not the second ("and the company is to be wound up"). On the face of the legislation, therefore, s.445C causes a deed to terminate but s.446B, coupled with reg 5.3A.07(1), does not effect transition to a creditors' voluntary winding up where there arises a circumstance which the deed defines as one in which it is to terminate but the deed does not go the extra step of also identifying the circumstance as one in which "the company is to be wound up". 11 According to its express terms, the deed in the present case does not satisfy the description in reg 5.3A.07(1)(b). Mr Ryckmans raised the possibility that the words referring to winding up might be implied but I must say that I see no scope for implication. The words in the regulation are "specifies circumstances in which … the company is to be wound up". Unless something is actually said to show that winding up is to occur, the specified circumstances are not of this description. 12 There is not, in the abstract, anything startling about the proposition that a deed of company arrangement may specify an event in which it is to terminate but there is to be no transition to creditors' voluntary winding up. The most obvious case in which such an outcome is sensible is where the purpose the deed sets out to achieve – such as a composition with creditors – is fully realised and the financial pressure which gave rise to the administration and the deed of company arrangement is thereby relieved. In such a case, there will be no reason for the deed regime to be replaced by winding up. 13 In the circumstances of the present case, the only available conclusion is that the deed has terminated by operation of s.445C and the combination of s.446B and reg 5.3A.07(1) has not produced a deemed special resolution under s.491 for voluntary winding up. Furthermore, the administration which began on 25 July 2001 ended when the deed was executed (see ss.435C(1)(b) and 2(a)) and there is nothing in the statutory scheme to cause it to be revived in the events which have now happened. The present situation, therefore, is that the company is not in administration, is not subject to a deed of company arrangement and is not in the course of being wound up in consequence of the deemed passing of a special resolution under s.491. 14 I turn now to another aspect of the evidence. On 14 August 2002, Mr Lo Pilato sent to the company's creditors what purported to be a report by him as deed administrator. He did so without having realised that the situation I have just described had arisen. In that report, Mr Lo Pilato recommended that creditors approve a further variation of the deed. A further meeting of creditors was purportedly held on 23 August 2002 at which all creditors present are recorded as having voted in favour of a resolution to effect the further variation. Have afterwards realised that the deed had terminated, Mr Lo Pilato has not acted in any way to implement that supposed resolution. 15 I have already mentioned that Mr Filardo has tendered to the court a written undertaking. It is as follows: "I, CES FILARDO of 14 Murray Street, Queanbeyan in the State of New South Wales, Company Director hereby undertake to the Supreme Court of New South Wales that in the event that the Court declares that the Deed of Company Arrangement between Eden Construction Pty Limited and Frank Lo Pilato as Administrator and myself as Director and the unsecured creditors of the Company has been terminated and if it be found that the control of the Company has been re-vested in me by virtue of such termination that I will forthwith upon the making of a finding to the above effect cause the aforesaid company to immediately appoint Frank Lo Pilato as Administrator pursuant to the provisions of Section 436A of the Corporations Act. I confirm that the effect of this undertaking has been explained to me by a solicitor of my choosing who is not the solicitor for Mr Lo Pilato in these proceedings and it has been explained to me that breach of this undertaking my constitute contempt of Court." 16 For reasons I have described, the company is not now under any form of external administration. As the undertaking proffered by Mr Filardo puts it, "control of the company has been re-vested in" him. That being so, Mr Filardo, as sole director, has a clear and pressing responsibility to consider the state of the company's solvency. He must turn his mind at once to the question whether incurring of debts by the company will entail the commission by him of an offence and expose him to personal liability under Division 3 of Pt 5.7B. If he forms the opinion that the company is still affected by insolvency, he must take immediate steps to address the situation, perhaps by appointing an administrator or seeking to place the company in liquidation. These are his responsibilities. It is not appropriate that he pre-judge matters by an undertaking in the form that has been tendered on his behalf. It may well be that he should move now to appoint an administrator; and it may also be that Mr Lo Pilato would be an appropriate appointee. But they are matters to which Mr Filardo must consciously and deliberately turn his mind in exercise of his own duties and without the form of pre-emption that would be produced by the proposed undertaking. The undertaking that has been offered to the court is not accepted. 17 It is unfortunate that the deed provided as it did. It can scarcely have been intended that the deed would terminate without the sequel of winding up in the event specified in clause 29.1(d). But that is what the deed provided. And it did so in clear terms. 18 No application is made for an order under s.447A causing a creditors voluntary winding up to arise or somehow modifying or negating the effect of s.445C. Nor have I considered whether such an order, if sought, would be either available or appropriate. In view of the way in which Mr Lo Pilato's claim for relief is framed, I make the following declarations: