Reported Decision : (2003) 21 ACLC 1661 New South Wales Supreme Court CITATION : MULTELINK AUST. LTD (Admin Appt) IN THE MATTER OF [2003] NSWSC 836 HEARING DATE(S) : 08/09/2003 JUDGMENT DATE : 10 September 2003 JURISDICTION: Equity JUDGMENT OF : Bryson J at 1 DECISION : The Originating Process is dismissed. CATCHWORDS : CORPORATIONS - DEED OF COMPANY ARRANGEMENTS - use of words "subject to d.c.a." - administrator of company in voluntary administration applied for order under s.447A enabling the company to enter deed of company arrangement and trade without using words "subject to deed of company arrangement" on documents - in opinion of directions who proposed d.c.a. use of those words would make it unlikely that the company would trade successfully - business was provision of telecommunications services to customers most of whom prepaid and maintained a float - minimum $50 - held - it was not just to allow trade without using the words required by subs.450E(2) - the risk to persons dealing with the company under d.c.a. would not be balanced out by new capital brought in or in any other way - order under s.447A refused. s.436A of the Corporations Act 2001 LEGISLATION CITED : s.447A of the Corporations Act 2001 subs.450E(2) of the Corporations Act 2001 CASES CITED : Australasian Memory Pty Ltd v. Brien (2000) 200 CLR 270 Re Brashs Pty Ltd (1994) 15 ACSR 477 PARTIES : Giles Geoffrey Woodgate FILE NUMBER(S) : SC 4581/2003 COUNSEL : M.A. Wigney - Applicant SOLICITORS : Piper Alderman - Applicant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BRYSON J. WEDNESDAY 10 SEPTEMBER 2003 4581/2003 IN THE MATTER OF MULTELINK AUSTRALIA LIMITED (ADMINISTRATOR APPOINTED) APPLICATION OF GILES GEOFFREY WOODGATE JUDGMENT 1 HIS HONOUR: The Company (referred to as Multelink) passed into administration on 27 June 2003 when the plaintiff Mr Woodgate was appointed administrator pursuant to a resolution of its Board of Directors under s.436A of the Corporations Act 2001. Mr Woodgate made a report to creditors on 17 July 2003. There have been meetings of creditors; a second meeting was held on 24 July 2003 and was adjourned for a period of up to 60 days to enable consideration of any proposals for a Deed of Company Arrangement. The directors of Multelink are prepared to propose, at an adjourned meeting of creditors on a date which has not yet been appointed, a Deed of Company Arrangement in accordance with a proposal dated 25 August 2003, produced with the affidavit of Mr G.R. Horth, the Managing Director of Multelink. However the directors are only prepared to make this proposal if Mr Woodgate obtains an order from the Court to the effect that Multelink is not required to have the words "Subject to Deed of Company Arrangement" after its name in every public document and negotiable instrument. The requirement for a special form of words is made by subs.450E(2) of the Corporations Act 2001: "Until a deed of company arrangement terminates, the company must set out, in every public document, and in every negotiable instrument, of the company, after the company's name where it first appears, the expression ("subject to a deed of company arrangement")." 2 Subsection 450E(1) requires a company under administration to set out the expression ("administrator appointed") as Multelink must now do. 3 Mr Woodgate now applies by Originating Process dated 29 August 2003 for an order in these terms: Pursuant to section 447A(1) or otherwise, an order that if Multelink enters into a Deed of Company Arrangement pursuant to the Act, it is not required to have the words "Subject to Deed of Company Arrangement" set out after its name on every public document and negotiable instrument as required by section 450E(2) of the Act. 4 Subection 447A(1) provides: The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. Section 450E is found in Pt.5.3A, so s.447A applies to it. 5 The judgment of the High Court of Australia in Australasian Memory Pty Ltd v. Brien (2000) 200 CLR 270 shows that it is correct to take a very broad view, although not an unlimited view of what the Court is empowered to order by s.447A. It had earlier been held, in Re Brashs Pty Ltd (1994) 15 ACSR 477 (Hayne J) that s.447A enabled the Court to dispense with the requirement in s.450E(2). It is in my opinion clear that the Court has power under s.447A to make the order which the plaintiff seeks. 6 The affidavit of Mr Horth has explained the case put forward by the directors including himself as reasons for the condition on which they bring forward their proposal. Mr Horth has had about 11 years' experience working in the telecommunications industry and became first General Manager of Multelink (about September 2001) and then (in December 2002) Managing Director; and still is. His extensive experience in senior management roles in the telecommunications industry has included experience in managing the Business Systems Service Division of Alcatel Australia Ltd, and other extensive business relating to finance, retail sales and advertising in this and related industries. Mr Horth describes Multelink's business as "a telecommunications service provider." Multelink operates throughout Australia and its business includes purchasing telecommunication services in bulk from enterprises such as Optus, Telstra and AAPT, and on-selling those services to residential and business customers. Most of its business has been generated by direct sales to customers through account personnel; business has also been obtained by a reward program for customers who introduce new customers, and by advertising, and since about March 2003, through persons or companies with whom Multelink has dealership arrangements so that they deal in Multelink products, and obtain new customers; these are referred to as Channel Partners. 7 Businesses is conducted in most cases on the basis of pre-payment by the customer to Multelink; approximately 80% of Multelink's revenue is derived from pre-paying customers. A customer is required to establish a pre-paid float and the minimum amount of the float is $50. That is to say, much of the revenue is received by payments in advance of rendering services, and a great majority of customers are, at most times and typically, creditors of Multelink. In many of these cases however the amount of pre-payment is not very large; probably in the order of $100. 8 Multelink operates in an extremely competitive industry; Mr Horth believes that there are 250 potential competitors in Australia. In his belief having the words "Subject to Deed of Company Arrangement" after Multelink's name in documents which reached customers and the public would have an extremely adverse impact on the business and hamper its ability to compete in the industry. It was his belief that the words had an extremely negative stigma associated with them, particularly arising from the collapse of the One.Tel business and other significant corporate collapses and that customers would be disinclined to do business if Multelink had these words after its name, particularly in an industry where customers have a very wide range of choice of other suppliers of similar products and services. He also believed that there would be disinclination of Channel Partners to present Multelink to their own contact bases if these words were involved. Mr Horth believed that the use of the words would significantly impede the ability of Multelink to prospect for new clients. He is in a good position to form a view about this. 9 Mr Horth produced figures illustrating the size of Multelink's business, which has declined slightly since voluntary administration commenced. Voluntary administration has had some adverse affects in that some permanent employees have left and the generation of new business has been less than had earlier been forecast; approximately 650 new lines were forecast for July and August but only 250 new lines were achieved. He produced two projections of the business which he expected to achieve, in one case with and in the other case without the words "Subject to Deed of Company Arrangement" after the company's name, and, according to these projections there was little prospect of revenue growth if the words were used, with the consequence that it could not be expected that Multelink would escape from the situation which led it into voluntary administration. 10 The proposal for a Deed of Company Arrangement contemplates the continuation of the business of the company, and giving a fixed and floating charge to enable business to continue. In the proposal small unsecured creditors under $1000 would be paid, unsecured creditors under $45,000 would receive a dividend of 60 cents in the dollar over four months, and other unsecured creditors would receive a dividend of 60 cents in the dollar over 18 months. However related party creditors are excepted; seven companies and persons (including Mr Horth himself) are named as related party creditors and repayment of their debts was to be deferred and they are to be subordinated to other claims until the Deed of Company Arrangement is terminated. 11 Mr Woodgate gave evidence which in a general way supports the proposal. He produced minutes of a meeting of the Committee of Creditors which took place on 26 August at the which the creditors present stated that they had no objection to the present application. He also produced correspondence from the Australian Taxation Office which indicated that the Deputy Commissioner of Taxation was unable to agree with the proposal, and gave evidence of communications with a representative of Telstra Corporation in which it was stated that Telstra opposed the application and believed that the company should go into liquidation and the business should go on the market; however Telstra's position appears to be open to reconsideration. 12 The plaintiff also produced correspondence indicating the views of Australian Securities Investments Commission, which knew of the proceedings but chose not to appear at the hearing before me. ASIC referred to the risk of prejudice to the interest of creditors whose debts arise while the company trades subject to the Deed of Company Arrangement. ASIC also referred to the decision in Re Brashs Pty Ltd and suggested that concerns raised by Hayne J in that case had not been addressed. ASIC commented "It is not entirely clear that the interest of creditors who would deal with the company, unaware that the company is subject to a Deed of Company Arrangement, are safeguarded." 13 In his Report to Creditors pursuant to s.439A(4), dated 17 July 2003, the plaintiff expressed views generally supportive of consideration of a Deed of Company Arrangement; these views are expressed only in general term and it was not, of course, possible for Mr Woodgate to express a clear or concluded view on a proposal which had not been fully formulated. 14 Subsection 450E(2) and the requirement for special notification of the company's circumstances should be understood to have been enacted primarily for the protection of persons who deal with the company and become creditors while the company trades under the Deed of Company Arrangement. It was not enacted to protect existing creditors of the company, or other persons interested in its affairs; the proceedings relating to placing the company in voluntary administration have given them the opportunity to protect themselves as best they may in the company's present circumstances. The company is caught in a fork between embarking on carrying on business under a Deed of Company Arrangement while complying with s.450E and giving a warning to all persons with whom it deals, and carrying on business without giving the warning and imposing risk on persons who have not hitherto been dealing with the company and are not concerned in its affairs. The first alternative is one which the directors do not wish to take and as I understand it will not take. It seems to be the director's view that if the company attempted to carry on business in that way, it could not be expected to succeed. The second alternative involves giving up protection for which the legislation has provided, for persons who are not at present interested in the company, and do not stand to be advantaged by the continuation of the company's business, except in the most indirect and oblique sense that they would have available to them one more of many competitors in an industry where many different persons offer services of much the same kind. The class of persons who would incur disadvantages is quite different to the company and the persons interested in the company's affairs who might potentially gain advantages from the order which I am asked to make. 15 The proposal to raise capital which the company is to use to carry on its business is no more than limitation of the debts to be paid to existing unsecured creditors to 60%, payable over a period of some months in the case of larger creditors, and indefinite deferral of the debts of a number of related parties; there is no proposal to bring in and risk any further money as capital with which the company is to conduct its business. In effect, the company is to attempt to trade its way out of trouble, with the benefit of a moratorium on a large part of its existing debt. The expectation that this may be successful is supported by the views of the directors, is not uniformly supported by the views of creditors, and not the subject of any clear support, or indeed opposition, of the voluntary administrator. Under the Deed of Company Arrangement the company would continue the business which it had earlier conducted, the historical experience being that it did not conduct it with success, and will do so on the basis of the directors' expectation that they will be able to conduct its business in such a way that the customer base and the revenue will increase and the company will eventually escape from its predicament. 16 In my judgment it is not just to act in this way and to impose risks on persons who come to deal with the company and will not be told, in the manner for which the legislation provides, that risks exist arising from the company's carrying on business under a Deed of Company Administration. Most of the customers will make deposits or payments in advance of receiving services; not indeed for particularly large amounts, although cumulatively it may be expected that the amount collected from customers in advance of services will be large. Receiving pre-payment is an advantage not always obtained in commerce. The company carried on business in that way in the past and still ran into difficulties. In my judgment it is not just to allow the company to test its commercial prospects in the future under the Deed of Company Arrangement at the expense of the warning which in the ordinary workings of the law persons who come to deal with the company in the future would have. The potential advantages go in one direction, and the potential disadvantages go in another direction; the two do not meet. No one is bringing any new money into the company which might be thought to balance out the money proposed to be brought in by new customers and the risk which they would incur. In my judgment I should not make the order which I have been asked to make. 17 ORDER: The Originating Process is dismissed. ********** Last Modified: 09/15/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.