New South Wales Supreme Court CITATION : Bidald Consulting v Miles Special Builders; Bidald Consulting v Miles Special Builders [2005] NSWSC 1235 HEARING DATE(S) : 23/9/05, 26/9/05 & 2/11/05 JUDGMENT DATE : 9 December 2005 JURISDICTION : Equity JUDGMENT OF : Campbell J DECISION : Deed terminated. Company wound up. CATCHWORDS : CORPORATIONS – voluntary administration – Deed of Company Arrangement – termination of – construction of section 445D(1) Corporations Act 2001 – circumstances of application of section 445D(1)(a) and (b) – interrelationship of section 445D(1)(a) and (b) – meaning of "false or misleading" – meaning of "material" – role of informal seeking of views of creditors in deciding materiality – whether failure to call meeting of creditors in circumstances when Deed required it to be called is a material contravention of the Deed – whether winding up proceedings being on foot prevents Deed Administrator from calling meeting of creditors to consider placing company into liquidation – whether a Deed can provide for the de facto winding up of the company – in what circumstances payment of different amounts to creditors bound by a Deed is permissible – role of good faith between creditors in operation of Deed - section 445D(1)(e) does not apply to action contrary to the Deed – relevance of a Deed allowing an insolvent company to continue to trade – relevance of substantial departure in practice from proposal put to creditors at time Deed was adopted – operation of discretion to set aside Deed – relevance of interests of creditors – relevance of public interest – public interest factors which can be taken into account – significance of provision of false or misleading information – whether termination to be affected on application by person said to be a disputed creditor – procedure to achieve winding up by the Court when Deed terminated – BANKRUPTCY – arrangements with creditors without sequestration – composition under the general law – whether, and in what circumstances, special benefits can be provided to one creditor bound by a composition – juristic basis of prohibition on one creditor bound by a composition receiving a special benefit – role of consideration in compositions – CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – consideration – role of consideration in composition between debtor and creditors – juristic basis on which Court prevents one creditor bound by a composition from receiving a special benefit – PROCEDURE – contempt, attachment and sequestration – action out of Court frustrating litigation in Court – when a contempt Annual Holidays Act 1944 Bankruptcy Act 1966 (Cth) Corporations Act 2001 (Cth) Corporations Law LEGISLATION CITED : Corporations Regulations 2001 (Cth) Industrial Relations Act 1996 Long Service Leave Act 1955 Trade Practices Act 1974 (Cth) AG Australia Holdings Limited v Burton & Anor [2002] NSWSC 170; (2002) 58 NSWLR 464; (2002) 58 IPR 268 Argyle Art Centre v Argyle Bond & Free Stores [1976] 1 NSWLR 377 Re Bartlett Researched Securities Pty Ltd (1994) 4 ACSR 707 Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307; 52 FLR 384 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 397 Bidald Consulting v Miles Special Builders [2005] NSWSC 171 Brambles Holdings Ltd v Trade Practices Commission (1980) 32 ALR 328 Re Carey Builders Pty Ltd (1997) 23 ACSR 754 Commissioner of Taxation v Comcorp Australia Ltd and others (1996) 70 FCR 356; 14 ACLC 1616 The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Commonwealth of Australia v Rocklea Spinning Mills [2005] FCA 902 Cook v Lister (1863) 13 CB (NS) 543 Copyright Agency Limited v Department of Education of New South Wales (1985) 4 IPR 5; 59 ALR 172 Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544 Dallinger v Halcha Holdings Pty Ltd (in admin) & Anor (1995) 14 ACLC 263 Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 Deputy Commissioner of Taxation (Cth) v Comcorp Australia Ltd (1995) 13 ACLC 1671 Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 Deputy Commissioner of Taxation v Comcorp Australia Ltd [1997] 4 Leg Rep SL3 Deputy Commissioner of Taxation v Markment Pty Ltd (in liq) [2005] NSWSC 1123 Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266 Re Denistone Real Estate Pty Ltd v Companies Act [1970] 3 NSWR 327 E. T. Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd (1940) 64 CLR 84 Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125 Emanuele v Australian Securities Commission (1995) 63 FCR 54; (1995) 19 ACSR 1 CASES CITED : Ex parte Milner; In re Milner (1885) 15 QBD 605 Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 Hall v Dyson (1852) 17 A & E 785 Hills v Mitson (1853) 8 Exch 751 Hirachand Punamchand v Temple [1911] 2 KB 330 Re Jacobs; ex parte O'Connor (1984) 1 FCR 1 James v ANZ Banking Group Ltd (1986) 64 ALR 347 Jones v Schiffmann (1971) 124 CLR 303 Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593 Khoury v Zambena (1997) 23 ACSR 344 Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 22 ACSR 169 Lancaster v NZI Capital Corporation Ltd (Sheppard J, Federal Court of Australia, 3 September 1991, unreported) McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2 NZI Capital Corporation Ltd v Lancaster (1991) 30 FCR 441 Paton v Campbell Capital Ltd (1993) 46 FCR 30 Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460 Scuderi v Morris (2001) 39 ACSR 592 Re Segal; Lensworth Finance Ltd v Segal (1975) 9 ALR 154; 45 FLR 85 In re Septimus Parsonage & Co Ltd [1901] 2 Ch 424 Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427 University of Newcastle and Others v Audio-Visual Copyright Society Limited (1999) 43 IPR 505 Welby v Drake (1825) 1 C & P 557; 171 ER 1315 Wynsix Hotels (Oxford Street) Pty Ltd v Toomey [2004] NSWSC 236 Young v Sherman (2002) 170 FLR 86; (2002) 20 ACLC 1559 Bidald Consulting Pty Ltd - Plaintiff PARTIES : Miles Special Builders Pty Ltd - Defendant FILE NUMBER(S) : SC 2858/04; 2583/05 M R Aldridge SC; V E Whittaker - Plaintiff COUNSEL : G Lucarelli - Defendant Kemp Strang - Plaintiff SOLICITORS : Colin Biggers & Paisley - Defendant LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J 9 DECEMBER 2005 2858/04 BIDALD CONSULTING PTY LTD v MILES SPECIAL BUILDERS PTY LTD 2583/05 BIDALD CONSULTING PTY LTD v MILES SPECIAL BUILDERS PTY LTD JUDGMENT HIS HONOUR: Nature of the Case 1 This judgment relates to two sets of proceedings. One is an application by a creditor seeking to terminate a Deed of Company Arrangement ("the Deed Termination Application"). The other is an application by the same creditor, seeking to wind up the same company in insolvency ("the Winding Up Proceedings"). The Parties 2 Miles Special Builders Pty Ltd ("the Company") carried out certain specialised tasks in the building industry. Its particular speciality involved steel and aluminium fabrication and installation. It had two directors, Mr Mile Kovacic, and his wife, Mrs Jasna Kovacic. It had a paid up capital of two shares of $1 each. Mr and Mrs Kovacic held the shares. The Company carried on business from premises owned by Mr and Mrs Kovacic. 3 The plaintiff in each of the proceedings ("Bidald") trades under a business name of "Forstaff". It supplies labour to contractors in the building industry. The Winding Up Proceedings 4 In 2003 Bidald had supplied labour to the Company, for the purpose of a modification of the Western Distributor in Sydney. Bidald served a statutory demand on the Company on 11 December 2003 for an amount slightly over $420,000, largely related to that project. 5 The Company applied to the Court to have that statutory demand set aside. On 30 April 2004 Master Macready decided that application, holding that there was a genuine offsetting claim for $84,700, but upholding the statutory demand in an amount of nearly $337,000. The time for compliance with it was extended to 7 May 2004. The demand was not complied with. 6 On 13 May 2004 Bidald filed the Originating Process in the Winding Up Proceedings. The Company opposed that application, asserting it was solvent. To support that assertion, it filed an affidavit of Peter Rodgers, a specialist accountant, which annexed a report which he had made on 30 June 2004 concerning the solvency of the Company. 7 The Winding Up Proceedings were before the Registrar on 27 August 2004. Even though the Company had earlier been directed to file all its affidavits by 30 July 2004, on 27 August 2004 the Company indicated it wanted to file a further affidavit, and a further timetable was set for filing affidavits to enable it to do so. On 25 October 2004, the Winding Up Proceedings were set for hearing commencing on 1 March 2005 before Gzell J. 8 The Company had various loans from the ANZ Bank, in connection with which the ANZ Bank held a charge over all of the assets of the Company. During December 2004 Mr and Mrs Kovacic borrowed money from BankWest, on the security of their own assets. On 20 December 2004 they used the money so borrowed to discharge the indebtedness of the Company to the ANZ Bank. At that date that indebtedness stood at around $1.126m. In consequence, the ANZ Bank released its charge over the assets of the Company. 9 On 24 February 2005 the Company instructed Mr Anthony Warner, an accountant specialising in insolvency, to prepare a report on the solvency of the Company. On the basis of the information given to him, Mr Warner came to the view that the Company was then insolvent, but that its solvency would be restored in the course of March or April of 2005. 10 There were various companies shown as creditors in the books of the Company for a total of over $540,000, but whose debts the Company disputed. Bidald was one of those disputed creditors. It claimed over $466,000. The imprecision in Mr Warner's estimate of the time at which the solvency of the Company would be restored arose because he did not try to decide whether the disputed creditors were in truth creditors of the Company – rather, he came to the view that the solvency of the Company would be restored in March 2005 if the disputed creditors were not in truth creditors of the Company, and would be restored in April 2005 if the disputed creditors in truth were creditors of the Company. 11 On 28 February 2005 – the day before the Winding Up Proceedings were due to be heard – the directors of the Company resolved to place it into voluntary administration, and to appoint Mr Warner and his then partner Mr Worrell as administrators. 12 On 1 March 2005 Mr Warner swore an affidavit in the Winding Up Proceedings which set out his then views about the financial prospects of the Company. It exhibited a report which he had made on 28 February 2005 which set out the reasoning by which he had reached his conclusions concerning the solvency of the Company. The affidavit stated that the directors and shareholders had resolved to propose a Deed of Company Arrangement. Mr Warner's affidavit stated: "8. … The Deed will involve a subordination of the directors' claim against the company of approximately $1,062,000. This will ensure that creditors receive a higher return under a Deed compared to liquidation. Mr Kovacic has also confirmed that he will make a cash contribution to the Deed to ensure that creditors receive a better return under a Deed. The quantum of this cash contribution cannot be determined until the administrators have had sufficient time to finalise the Estimated Outcome Statement but I was informed by Mr Kovacic at the time of my appointment that it will be at least $40,000.00. 9. My investigations of the company have demonstrated to me that there are in excess of 12 employees employed full-time by the company. Additionally, currently, approximately 50 sub-contractors who appear to deal mainly with the company. 10. Based on my current analysis of the company it is my intention to either trade the company or allow the director to license the business of the company so as to allow the business of the company to remain on foot during the course of any Voluntary Administration." 13 The affidavit set out a summary of the expected outcomes of such a Deed of Company Arrangement, and of a liquidation. According to that summary, under the Deed of Company Arrangement all creditors would receive one hundred cents in the dollar (even if the disputed creditors were ultimately found to be in truth creditors of the Company), while under a liquidation the dividend to unsecured non-priority creditors would be of the order of twelve cents in the dollar if all the disputed creditors were admitted to proof. 14 The affidavit also annexed a "directors' undertaking" which Mr and Mrs Kovacic had signed on 28 February 2005, which stated: "1. That the claim by Bidald Pty Ltd t/a Forstaff against the Company is not a valid one and is disputed in its entirety; and 2. We wish to propose a Deed of Company Arrangement which we will formulate in detail within the next few days, but will involve subordinating our claims (as shareholders and directors) until all remaining legitimate creditors have been paid in full; and 3. We acknowledge that the Deed Administrator if appointed will adjudicate on all claims submitted by the creditors; and 4. We understand that any decision that the Deed Administrator makes in relation to claims may be reviewed by the court within 21 days." 15 The hearing of the Winding Up Proceedings on 1 March 2005 was adjourned to the next day. On 2 March 2005 a contested application for a further adjournment was made. Gzell J granted an adjournment until 11 April 2005: Bidald Consulting v Miles Special Builders [2005] NSWSC 171. 16 In McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2 Barrett J had held that an order for costs against a company in administration in favour of a creditor that had sought its winding up in insolvency was not provable in the company's subsequent creditors winding up. This was because it was not an expense properly incurred by the administrators or liquidators which fell within section 556(1)(a) or (d) Corporations Act 2001 (Cth), nor was it a debt the circumstances giving rise to which occurred before the commencement of the administration, such that it fell within section 553(1) Corporations Act 2001 (Cth). To take account of the effect that that decision would have on any costs connected with the Winding Up Proceedings which the Company might ultimately be ordered to pay to Bidald, Gzell J imposed two terms on the adjournment: "21 Pursuant to the Corporations Act 2001 (Cth), s 447A, I direct that s 444A operate in relation to Miles Special Builders Pty Ltd so that the instrument referred to therein must specify that Bidald Consulting Pty Ltd's costs of these proceedings be paid by the administrators in priority to all other amounts payable by them. 22 Pursuant to the Corporations Act 2001 (Cth), s 447A, I further direct that s 439B and s 439C operate so that no resolution that Miles Special Builders Pty Ltd be wound up may be put to a meeting of creditors unless Bidald Consulting Pty Ltd has been given seven days' written notice of such intention." The First Meeting of Creditors 17 The first meeting of creditors of the Company was held on 4 March 2005. In the notice to creditors which convened that meeting, creditors were informed: "It is the intention of the Administrators to license the operations of the company's business to the directors. Alternatively, the Administrators may continue to trade the business of the company during the Voluntary Administration period." 18 At the first meeting of creditors, the appointment of Mr Warner and Mr Worrell as administrators was confirmed. The Licence to Mr Kovacic and the New Company 19 By 16 March 2005 Mr Kovacic had come to be in control of a company called Miles Special Builders & Services Pty Ltd ("the New Company"). On 16 March 2005 Mr Warner and Mr Worrell, as administrators, entered into a license agreement, under which they granted to Mr Kovacic and the New Company an exclusive license to operate the business of the Company. That license took effect from 28 February 2005 (though it was a license only to Mr Kovacic during the period from 28 February 2005 to 4 March 2005), and lasted until 5 April 2005 or the date when the Company was placed into liquidation, whichever was the earlier. It provided for the Licensee to be responsible for meeting all costs of trading the business during the license period. The Licensee was to pay a royalty of $2,000 per week. There was provision that the employment of the employees of the Company would be taken to have continued without interruption to their service period, during the time that the license was on foot. The Licensee promised to pay all claims of employees: "… for termination pay, severance pay, unpaid wages, continuing wages, PAYG Tax, Superannuation Guarantee levy payments, pay in lieu of notice, statutory entitlement and any fines, liabilities and imposts related to employment." 20 The Licensee warranted that during the license period it "shall complete all current contracts entered into by MSB at a pre-determined price to be agreed by the licensor and licensee. Payments to the licensee from the licensor for work done to complete existing contracts are to be made only after the licensor has been paid in full by the contract client." 21 There was a printed clause in the agreement which provided that if the Licensee carried out any work in the steel fabrication trade under any other company or in their own capacity the license would terminate. However, there was also a handwritten clause which permitted the New Company to undertake new contracts of its own accord. As a matter of construction, the handwritten clause would prevail. The Second Report to Creditors 22 Mr Warner decided that the second meeting of creditors would be called for Monday, 4 April 2005. Perhaps because of the intervention of Easter (as Good Friday fell on 25 March 2005) Mr Warner also took the view that 22 March 2005 was the last day for dispatching to creditors the Notice of Meeting and the Report to Creditors required by section 439A(4) Corporations Act 2001 (Cth). As Mr Warner had sent a brief report to creditors before the first meeting of creditors, I shall refer to the report of 22 March 2005 as "the Second Report to Creditors". Those documents were dispatched on 22 March 2005. 23 The Second Report to Creditors was less optimistic than Mr Warner had been in his affidavit of 1 March 2005. It estimated that employee priority creditors would receive 100 cents in the dollar under either a Deed of Company Arrangement or in a liquidation. It estimated that, if disputed creditors were entitled to prove, non-priority unsecured creditors would receive 57 cents in the dollar under a Deed of Company Arrangement, and 7 cents in the dollar on a liquidation. If disputed creditors were not entitled to prove, non-priority unsecured creditors would receive 91 cents in the dollar under a Deed, and 9 cents in the dollar on a liquidation. 24 The Second Report to Creditors estimated that the amounts which would be available for distribution under a Deed of Company Arrangement from realisation of assets of the Company were as follows: Work in progress $626,500 Retention debtors $288,592 Stock on hand $104,855 Total $1,019,947 The "retention debtors" were companies for whom the Company had completed work, who retained part of the contract sum for that work until a defects liability period had run out. 25 In addition to the amount distributable from realisation of assets, a further $55,680 would be distributable amongst creditors, made up of the $40,000 contribution from Mr Kovacic, and $15,680 for the licence fee and stock purchased. Thus, the total resources available under a Deed were estimated to be $1,075,627. 26 The report stated unequivocally "the Company will continue to trade under the terms of the proposed Deed." It stated that, though the Company had plant and equipment which had been valued at a little over $21,000 on a forced sale basis, and had been included in the list of assets realisable on a liquidation "the Plant and Equipment would not become available under the Proposed Deed as it would be required for continued operations." 27 The report explained how the figure attributed to each of the asset categories which was expected to be realisable was made up. Concerning the work in progress, it said: "There are 3 major contracts currently on foot with respect to 5 building sites in and around the Sydney metropolitan area. The contracts are in various stages of completion. We have provided a summary of the current contracts on the following page of this report with our estimate as to the amounts to be collected under liquidation compared to the proposed Deed . Deed Scenario Under the Proposed Deed we have assumed that given the Company will continue to trade it will be able to complete the contracts and collect the monies currently outstanding in the normal course of business. Liquidation Scenario Under the Liquidation scenario we have assumed that the company will cease to trade and would not be able to complete the projects. Out of the 5 projects, 4 are complete (or substantially complete). As such, the builder would need to engage the services of another sub-contractor to complete the unfinished project. This would significantly reduce the amount payable by the builder and the builder may have a cross claim against the Company for the value of the unfinished works. In our experience, once a company is wound up and the contract is terminated it is not uncommon for a cross claim to exceed the value of the claimed progress payments. If the Company was wound up the amount recoverable may be significantly less, particularly if warranty work is required to be carried out. For the purposes of estimating a return to creditors under a liquidation scenario, we have made a significant allowance for bad debts of approximately 40%. Depending upon any warranty claims this estimate may be ambitious and the amount recoverable may be significantly less. Set out below is a summary of the current projects and the estimated amounts collectable under the Proposed Deed compared to Liquidation. Percent Complete Liquidation Value DOCA Builder Location % WIP Costs to Complete $ Value $ Barclay Mowlem Talavera Road 100% 400,000 Nil 240,000 400,000 Vie City Quarters John Holland Taronga Zoo 90% 95,000 Unknown Nil 95,000 Lucas Heights 90% 38,000 Unknown Nil 38,000 Leighton Contractors Sydney Hilton 90% 128,500 35,000 Nil 93,500 Totals $661,500 $35,000 $240,000 $626,500 28 Concerning the retention debtors, the report said: "At the date of our appointment there were retention debtors of approximately $392,300. During the period of the administration we have received $42,192. Should the Company continue to trade under the proposed Deed we estimate that the balance should be collected in the ordinary course of business, however, it should be noted that warranty work may be required to preserve the amounts payable. The warranty work would be paid for by the Company under the proposed Deed . If the Company was wound up the amount recoverable may be significantly less, particularly if warranty work is required to be carried out. For the purposes of estimating a return to creditors under a liquidation scenario, we have made a significant allowance for bad debts of approximately 40%. Depending upon any warranty claims this estimate may be ambitious and the amount recoverable may be significantly less. Set out below is a summary of the projects subject to retention monies and the estimated amounts collectable under the Proposed Deed compared to Liquidation. Contract Total due Liquidation DOCA Value Value $ $ $ ABI Group 18,000 10,800 18,000 Art Gallery NSW 25,200 15,120 25,200 Barclay Mowlem 65,013 39,008 65,013 Bovis Lend Lease 22,800 13,680 22,800 John Holland – Lucas Heights 70,000 42,000 70,000 John Holland – Taronga Zoo 51,800 31,080 51,800 Leightons 35,779 19,560 35,779 Totals 288,592 171,248 288,592 Less: Collected (42,192) (42,192) (42,192) Amount Collectable 246,400 129,056 246,400 29 The amount attributed to stock on hand, in the list of recoveries, was explained as being a valuer's valuation of the stock on hand. 30 The report also gave a précis of the license agreement which had been entered into. 31 The report attached a copy of the proposed Deed of Company Arrangement, and summarised its provisions as follows: " That the Administrators (Anthony Warner and Ivor Worrell) be appointed the Deed Administrators. · That the control of the Company will revert back to the directors upon execution of the Deed; · That the assets of the Company as at the date of the appointment of the voluntary administration be held as security by the Deed Administrators until the DOCA successfully completes; · That all receipts from debtors, work in progress and retentions (that were outstanding at the time of the appointment of the Voluntary Administrators) and stock are to be applied to the Deed Fund until the Deed Administrator deems realisations are no longer commercially viable to collect; · That the directors contribute a fixed sum of $40,000 into the Deed Fund within a period of 6 weeks from the execution of the DOCA; · That any asset realisation monies received by the Administrators be included in the Deed Fund; · That Miles Special Builders & Services Pty Limited will bill the company for labour incurred and any additional materials purchased for the purposes of completing any projects that were uncompleted at the date of the voluntary administrators appointment; · That the shareholders, directors and their related parties will not prove in the Deed with the exception of their claim for superannuation. · That the Deed Fund be distributed under the same provisions set out in the Corporations Act, as if the Company was wound up; · That the creditors receive a final dividend under the Deed of Company Arrangement in full and final satisfaction of any and all claims against the Company and release the Company from the residual of those debts. · That the Deed will terminate either when; creditors resolve that the Deed be terminated; the Deed is terminated upon a default under the Deed; by an order of a Court; or after a final dividend is paid. · That the remuneration of the Administrators be calculated on a time basis using the Solvency Management Rates as set by the firm from time to time (refer part 7 of this Report)." 32 The report recommended that the creditors vote for the Deed rather than for liquidation, and identified the benefits of the Deed as being: " The major benefit of the proposed Deed is the greater dividend compared to liquidation as a result of both enhanced asset realisations and the shareholders' subordinated claims; · The time expected to receive the dividend compared to a more protracted and costly liquidation; · The continued operations of the Company providing for the continued employment for the staff and further trading opportunities for customers and suppliers." The Addendum to the Second Report to Creditors 33 At some time, not precisely proved by the evidence but which Mr Warner described in a report on 12 September 2005 as being "shortly after we were appointed as administrators", the two contracts which John Holland had with the Company came to an end. Even by the time of the trial, Mr Warner had not received a Notice of Termination of the John Holland contracts, and was only inferring that they had been terminated. Mr Warner himself did not bring the contracts to an end. He assumed, without knowing, that the end came during the period the business was licensed by him. The only reason Mr Kovacic gave him for not completing the contracts was that he did not have the money to fund the working capital. 34 On 31 March 2005 John Holland sent to Mr Warner a proof of debt for $150,000, said to relate to the cost of rectifying defective works and completing the contract works. Upon receiving that document, Mr Warner took the view that the recoveries from John Holland of both work in progress, and retention money, which had been estimated in the Second Report to Creditors, should be reduced to nil. As well, he had discovered some accounting errors which were relevant to the report, and his estimate of the likely amount of the administrators' fees had risen from the $100,000 disclosed in the Second Report to Creditors to $115,000. 35 To deal with all these matters he prepared, on 31 March 2005, an Addendum to the Second Report to Creditors. The bottom line of that Addendum was that the return to creditors under a liquidation had shrunk to an amount of "up to 3 cents in the dollar", while the return to creditors under a Deed of Company Arrangement had shrunk to "up to 28 cents in the dollar". Each of those amounts was calculated on the assumption that the disputed creditors were admitted in full for dividend purposes. 36 The Addendum gave revised figures for the assets of the Company which would be distributable under a Deed of Company Arrangement: Work in progress $458,900 Retention debtors $127,092 Stock on hand $104,855 Total $690,847 37 The make up of the figure for work in progress was: Percent Complete Liquidation Value DOCA Builder Location % WIP Costs to Complete $ Value $ Barclay Mowlem Talavera Road 100% 400,000 4,000 240,000 396,000 Vie City Quarters John Holland Taronga Zoo 95% 100,400 12,500 Nil Nil Lucas Heights 90% 64,700 20,000 Nil Nil Leighton Contractors Sydney Hilton 90% 78,400 15,500 Nil 62,900 Totals $643,500 $52,000 $240,000 $458,900 38 The make up of the figure for retention debtors was: Contract Total due Liquidation DOCA Value Value $ $ $ ABI Group 18,000 10,800 18,000 Art Gallery NSW 12,600 7,560 12,600 Barclay Mowlem 26,400 15,840 26,400 Bovis Lend Lease 11,500 6,900 11,500 John Holland – Lucas Heights 35,000 Nil Nil John Holland – Taronga Zoo 26,000 Nil Nil Leightons 16,400 9,840 16,400 Totals 145,900 50,940 84,900 Less: Collected (42,192) (42,192) (42,192) Amount Collectable 188,092 93,132 127,092 One of the accounting errors Mr Warner had identified in the Second Report to Creditors, and corrected in the Addendum, was that in the column of the table which calculated the DOCA value of retention debtors he had deducted the amount of $42,192 from the total of amounts yet to be collected, instead of adding it on, in deriving the figure for the amount collectable. 39 To deal with the possibility that there might be further shrinkage in the amount received from asset realisations, Mr Warner instructed his solicitor to amend the Deed of Company Arrangement to include a provision which he explained to the creditors, in the Addendum, as being: "If $500,000 in asset realisations is not achieved then the Deed Administrators will call a meeting of creditors, giving creditors the option of terminating the Deed and liquidating the Company." 40 The report of 31 March 2005 listed verbatim the same three benefits of a Deed as had been listed in the report of 22 March 2005 (para [32] above). 41 The conclusion of the Addendum was: "Following the recent developments giving rise to this report the Administrators have lost a degree of confidence in the level of potential asset realisations. Despite this the Deed of Company Arrangement is still considered to be in the creditors' best interests. Given the circumstances, the Administrators now believe that it is appropriate that a minimal level of asset realisations of $500,000 be incorporated into the DOCA. If $500,000 in asset realisations is not achieved then the Deed Administrators will call a meeting of creditors, giving creditors the option of terminating the Deed and liquidating the company. Please note that the directors have not yet given their consent to this change to the proposed DOCA." 42 At 7:44 pm on 31 March 2005 Mr Warner sent a copy of his Addendum Report to all the creditors for whom he had an email address, as an attachment to an email. The evidence does not make clear for what particular creditors or what proportion in either number or value of creditors, he had an email address. A printed copy of the Addendum Report was sent to all creditors, by being placed in an Express Post box at 9:00 pm on 31 March 2005. 31 March 2005 was a Thursday. The Second Meeting of Creditors 43 The second meeting of creditors took place starting at 10:40 am on the morning of Monday, 4 April 2005. At that meeting Mr Warner stated, twice, that if the Deed Fund did not reach $500,000 the administrators would call a meeting of creditors to enable the creditors to decide whether to accept a lower amount, or to place the Company into liquidation. 44 At that meeting, a poll was called. The creditors resolved that the Company should enter into the Deed. Nineteen creditors, with admitted claims totalling $1,813,961.12 voted in favour of the resolution, and four creditors, with admitted claims totalling $774,272.26 voted against the resolution. One creditor, admitted for $17,696, abstained. Three of the creditors who voted in favour of the Deed were related parties. These were Mr Kovacic, (admitted as a creditor for $1,180,823.03, made up of $14,180.15 for unpaid superannuation, $40,197.85 for unpaid holiday pay, and the balance for the amount he had lent to the Company to pay out the loan from ANZ), his daughter Sandra Kovacic for $83,873.53, and Mrs Kovacic for $1. Those three related parties together made up 48% of the dollar value of the vote. Mrs Kovacic had claimed to be a creditor for $669,424.93, but Mr Warner had admitted her claim, for the purposes of that meeting, at $1.00. 45 Nine of the remaining sixteen creditors who voted in favour of the resolution were employees, whose claims ranged in size individually from a little over $400 to a little over $10,000. The claims of those employees totalled $44,118.13. 46 Another creditor whose claim was admitted was Mr Ford, the accountant for the Company, whose proof of debt for $3,316 had been admitted. The admission of his proof for that amount was an error, as it included some work which he had carried out for the administrators, and his proof should have been admitted for approximately $500. 47 The various figures which I have stated in paras [44]-[46] are derived from Annexure B to Mr Warner's affidavit of 22 September 2005. I prefer that Annexure to other contrary evidence, because it is more systematic and thorough than that other evidence. The Deed of Company Arrangement 48 Following that vote, the Deed was executed on 6 April 2005. Clause 1.1 contains the following definitions: "Associated Creditors" means the director of the Company, their relatives, shareholders and any associated persons or related entitles and its executors, administrators, heirs, transferees and assigns whose claim against the Company would have been a provable debt if the Company had been wound up. "Commencement Date" means 28 February 2005, the date of the appointment of the Voluntary Administrators now Deed Administrators. "Creditor" means any person whose claim against the Company would have been a provable debt if the Company had been wound up and its executors, administrators, heirs, transferees, and assignees, other than Associated Creditors. "Deed Fund" means the Fund, which shall be set up by the Deed Administrator under Clause 2.1. 49 Clause 2.1 defined the Deed Fund as consisting of: "(a) All monies received from debtors, stock, work in progress and retentions from the Commencement Date to the date of this Deed. (b) Any other monies which may be realised from any assets of the Company, which come into existence prior to the Commencement Date, including but not limited to any legal claims. (c) All proceeds received in respect of royalty payments relating to the Licence Agreement. (d) A lump sum contribution of $40,000 from Mile Kovacic, to be received within 6 weeks of the execution of the deed." 50 Clause 2.3 provided: "In the event that the proceeds received from the Company pursuant to Clause 2.1 herein is less than the amount of $500,000.00 the Deed Administrators shall call a meeting of creditors to determine whether the Deed should be set aside and whether the Company should be placed into liquidation." 51 The manner of distribution of the Deed Fund was governed by Clause 2.5, which said: "The Deed Fund shall be distributed as soon as practicable in the priority as set out in Section 556 of the Corporations Act as if the company was wound up under Part 5.6 of the Corporations Act 2001 as set out below: (a) Assessed or agreed costs of Bidald Consulting Pty Limited, in relation to Supreme Court Proceedings No. 2858 of 2004; (b) All costs, expenses and remuneration of the Voluntary Administrators, incurred in connection with the voluntary administration including any amounts payable pursuant to Section 443A, 443B and 443BA of the Corporations Act 2001 including GST if applicable; (c) All costs, expenses and remuneration of the Deed Administrators, incurred in connection with the voluntary administration and administration of this Deed, including any amounts payable pursuant to Section 443A, 443B and 443BA of the Corporations Act 2001 including GST if applicable; (d) All outstanding compulsory superannuation entitlements which have not been met by the Company prior to the commencement date; and (e) all claims proved by Creditors and admitted by the Deed Administrators on a pro rata basis, excluding payments referred to in Clause 2.5(b) above, whose debts are proven and admitted by the Deed Administrators in accordance with the terms of this Deed." 52 Clause 2.7 barred Mr Kovacic and the Associated Creditors from proving, with the exception of any superannuation entitlements. 53 Clause 6 provided: "The Creditors must accept their entitlements under this Deed in full satisfaction and complete discharge of all debts or claims present or future, actual or contingent which they claim to have against the Company as at the Commencement Date and each claim against the Company before the Commencement Date is extinguished." 54 Clause 8.1 provided: "Employee entitlements as at the Commencement Date will continue to accrue as claims against the Company notwithstanding the Voluntary Administration or Deed of Company Arrangement of the Company. These entitlements (except for superannuation contributions as outlined in Clause 2.5) will be paid by the Company in the ordinary course of business." The Deed Termination Application Begins 55 The Deed Termination Application was begun on 22 April 2005, by filing an Originating Process. The making of that application had been foreshadowed in open court, however, on 11 April 2005, when the Winding Up Proceedings were before Barrett J. On that day both Bidald and the Deed Administrator appeared. His Honour stood the Winding Up Application over to 26 April 2005, and directed that any Originating Process filed by Bidald seeking to set aside the Deed also be returnable on 26 April 2005, before the Corporations List Judge. 56 Since then, the Winding Up Proceedings have been adjourned from time to time, and the period during which they must be determined has been extended, pursuant to section 459R(2) Corporations Act 2001 (Cth). Problems Discovered with Recovering the Barclay Mowlem Debt 57 On 20 April 2005 (by a letter mistakenly dated 25 April 2005) an assistant to the administrator wrote to Barclay Mowlem requesting payment "by return" of eight invoices, copies of which were attached. Those invoices were ones which the Company had sent to Barclay Mowlem. There were three invoices relating to a project at Talavera Road North Ryde, dated from 8 July 2003 to 12 November 2003. There were five invoices relating to a project at Vie City Quarters, dated from 1 April 2003 to 27 February 2004. The invoices total $361,940.48. Those invoices were assumed, in the way the case was run, to be ones which went towards the amount of $400,000 which had been listed, in the report to creditors of 22 March 2005 (para [27] above) and the Addendum of 31 March 2005 (para [37] above), as being owing by that company. No explanation for the difference between the total of those invoices and $400,000 was given. 58 Barclay Mowlem wrote back on 21 April 2005 categorically denying that any of the invoices were outstanding. The letter enclosed a document dated 22 August 2003 relating to the Talavera Road contract, entitled "Statement of Final Subcontract Value". That document appears to be signed on behalf of both Barclay Mowlem and the Company, with the signature on behalf of the Company bearing a strong pictorial resemblance to the signature of Mr Kovacic. It stated that the agreed final value of the sub contract was $710,000, of which $242,726 was outstanding, and that retention monies of $35,406 would be retained from the balance. Barclay Mowlem's letter of 21 April 2005 asserted that, according to its records, the Agreed Final Value of $710,000 had been paid in full. 59 The letter of 21 April 2005 also enclosed a letter which Barclay Mowlem had sent to Mr Kovacic on 4 May 2004, concerning the Vie City Quarter Project, and said that "the details attached to this facsimile indicate that an amount of, at least, $954,892.00 is owed" to Barclay Mowlem by the Company. The enclosed letter of 4 May 2004 asserted that no money was owing to the Company in relation to the Vie City Quarter project, whether for work done, or for retention. Further, that letter attached a copy of Barclay Mowlem's back charges and variations register relating to the project, which asserted that an amount of $954,892 was owing by the Company to Barclay Mowlem. Barclay Mowlem's letter of 4 May 2004 had said that that register: "… is still not complete as defects registration is currently underway. Since you have been notified about the extent of the back charges on previous occasions, BMCL cannot comprehend why you would assume any money would be payable to MSB." 60 Barclay Mowlem's letter of 21 April 2005 also included a facsimile transmission record dated 4 May 2004, which showed that Barclay Mowlem's letter of 4 May 2004 had been successfully transmitted to the facsimile number which appears on the invoices of the Company. 61 26 April 2005 was the first time Mr Warner realised that there was any problem about recoverability of the amounts of work in progress and retention which had been attributed to Barclay Mowlem in the report of 22 March 2005 and the Addendum of 31 March 2005. Mr Kovacic had not previously shown him, or told him about, the "Statement of Final Subcontract Value" concerning the Talavera Road job, or the letter of 4 May 2004 concerning the Vie City Quarter job. Concerning those documents, Mr Warner says: "Q. Now, I take it that Mr Kovacic hadn't shown you either of those documents? A. No, he had not. Q. And had you seen either of those documents, you certainly wouldn't have regarded Barclay Mowlem as a sure source of $400,000; would you? A. No, I wouldn't have. Q. So, with the benefit of hindsight - this is no criticism of you - your report is entirely wrong in that regard because Mr Kovacic did not provide you with the necessary information? A. Yes." The Shortfall Guarantee 62 On 6 June 2005 Mr Warner asked Mr Kovacic whether he was prepared to provide a guarantee for any shortfall under the Deed Fund. Mr Kovacic agreed (on a date which does not appear from the evidence) to provide the guarantee, on the basis that Mr Warner gave him an authority to collect the debtors of the Company on behalf of the Deed Administrators. On 13 July 2005 Mr Kovacic and the New Company jointly and severally promised that if the Deed Fund did not receive $500,000 from payments deposited in accordance with Clause 2.1 of the Deed, then they would make up the shortfall. They would pay half the amount due on 1 December 2005, and the balance on or before 28 February 2006. However, all obligations under the guarantee would cease if, within six months of the date of the Deed, the Company was placed in liquidation, the Deed of Company Arrangement was set aside, or the Court declared that the Deed of Company Arrangement was void. The Updating Report of 12 September 2005 63 On 12 September 2005 Mr Warner prepared an updating report for creditors. It reported that the Deed Administrators had recovered a total of $332,226, inclusive of GST, from all sources available to them. By that time, Mr Warner was of the view that it was not worth incurring the legal expenses which would be involved in seeking to recover more. His estimate of the distribution under the Deed was that creditors would receive a dividend of "up to 5 cents in the dollar" if all disputed creditors were admitted to prove, and "up to 11 cents in the dollar" if the disputed creditors' claims were rejected. Part of the reason for the reduction was the expected cost of the Deed Administrator concerning these proceedings, which were expected to cost the creditors "at least 9 cents in the dollar" even if an order for costs were to be made against Bidald. That report identified the distributable tangible assets as follows: Asset DOCA DOCA Best Case Worst Case Work in Progress 471,617 71,617 Retention Debtors 98,922 87,422 Stock on Hand 65,408 65,408 Plant & Equipment 55,341 55,341 Total 691,288 279,788 64 Mr Warner's account of the work in progress was as follows: "Since our last report to creditors, Mr Kovacic has completed the Sydney Hilton contract. We have collected all of the monies due under this contract in full, including the retention. Mr Kovacic did not charge us to complete this contract as originally agreed. That is why the amount paid exceeds the amount claimed. Barclay Mowlem has refused to pay the amount outstanding. They claim that they have a counter claim in excess of $1 million. I have serious doubts as to the legitimacy of this counter claim as they didn't raise the counter claim before they paid us a retention claim during the administration period. I am continuing to work with Mr Kovacic in an attempt to collect this debtor. Builder Amount Amount Amount Claimed Paid Outstanding $ $ $ Barclay Mowlem 400,000 Nil 400,000 Leightons 62,900 71,617 Nil 65 The "DOCA Worst Case" figure for the retention debtors was the amount which had at the date of the report been actually collected. The "DOCA Best Case" relating to retention debtors added to that amount $11,500 still said to be outstanding from Bovis Lend Lease. 66 The stock on hand had, by the time of this report, been sold to the New Company. $65,408 was the amount collected for it. That was what the stock had cost. 67 Plant and equipment was included as a distributable asset in the Updating Report to creditors, when it had not been included in either of the earlier reports as a source of funds for creditors under the Deed. The Updating Report stated that the plant and equipment had been sold at valuation to the New Company, and that $55,341 had been collected for it. 68 The Updating Report included, in calculating the amounts which would ultimately be distributable amongst the creditors, an amount of $11,000 which had been paid for a license fee, an amount of $226,262 payable by the director (made up of the $40,000 he had agreed under the Deed itself to contribute, plus the amount which would fall due under the guarantee) some bank interest and a GST refund. The "Virtual Meeting" of Creditors 69 The Update Report invited the creditors to take part in a "virtual meeting of creditors" by completing and returning a voting slip which was attached to the report. That voting slip made provisions for the creditor to state its name, the amount of its debt, and to mark boxes marked "for", "against" and "abstain" in relation to two resolutions. The first resolution was: "That the Deed Administrators defend the Deed of Company Arrangement to allow it to continue. The second resolution was: "That a meeting of creditors be called immediately to consider terminating the Deed of Company Arrangement and liquidating the Company." 70 The result of that "virtual vote" is that, of those creditors whose votes Mr Warner counted, 28 in number and 74% in value were in favour of the Deed of Company Arrangement, while 4 in number and 26% in value were in favour of liquidation. Of those in favour of the Deed, 2 in number, representing 49% in value of the total value of votes cast, were related parties. Thus, of those in favour of the Deed, it was 26 in number, representing 25% in value of the creditors whose votes were counted, who were not related to the directors. In other words, of the unrelated creditors, there was a small majority in value who favoured liquidation, though a majority in number continued to favour the Deed. Matters Now Known About Barclay Mowlem Debt 71 The report of Mr Rodgers of 30 June 2004 (para [6] above) had discussed the debtors of the Company. While that report treated the Barclay Mowlem debt as being a debt due to the Company, and not as a disputed account, it noted that Barclay Mowlem had withheld payment of $201,936.90 concerning the Vie City Quarters project, and of $238,028.78 concerning the Talavera Road project. The report set out the assumptions on the basis of which Mr Rodgers had included the Barclay Mowlem debts amongst the debtors of the Company: " Vie City Quarters Project Mile advised that the Defect Notice Period for this contract expires on 15 July 2004. After rectifying any defects notified, he will ask for the debt to be adjudicated [by the Plumbers Association]. The matter will be heard 3 weeks later. He believes that MSB will be successful, in which case the debtor will be required to pay within 7 days. He therefore expects to receive payment in the week ending 3 September 2004. Talavera Road Project Mile advised that the Defect Notice Period for this contract expires on 2 August 2004. After rectifying any defects notified, he will ask for the debt to be adjudicated [by the Plumbers Association]. The matter will be heard 3 weeks later. He believes that MSB will be successful, in which case the debtor will be required to pay within 7 days. He therefore expects to receive payment in the week ending 20 August 2004." 72 Those expectations of Mr Kovacic did not come to fruition. There is no evidence to suggest that the foreshadowed adjudications by the Plumbers Association ever took place. 73 On 15 February 2005 the Company received from Barclay Mowlem an invitation to tender for a new job at Liverpool Hospital. Barclay Mowlem also asked Mr Kovacic to tender for another project at North Ryde in April or May of 2005. At the time of making those invitations to tender, nothing was said about the Company owing money to Barclay Mowlem for the alleged back charges, and indeed it was not until its letter to the administrator of 21 April 2005 that Barclay Mowlem let the administrator know about those alleged back charges. On 8 March 2005 Barclay Mowlem had sent the administrator a cheque for $39,012.60, in payment of retention money that had been held in connection with the Talavera Road project. 74 When Mr Warner was preparing his report dated 28 February 2005, Mr Kovacic gave him a listing of the work in progress of the Company, dated 25 February 2005. It totalled $437,800, and did not include anything from Barclay Mowlem. However, the eight invoices to Barclay Mowlem referred to in para [57] above were included in a listing of debtors of the Company which was provided to Mr Warner and exhibited to his report of 28 February 2005. That statement is subject to the qualification that one of the eight invoices referred to in para [57] above, identified as 5391TAL, is for an amount of $148,311.79, while the record of invoices annexed to Mr Warner's report of 28 February 2005 shows the invoice bearing that number as being for an amount of $187,324.39. The difference of $39,012.60 might provide an explanation for where the figure of $400,000 appearing in the Second Report to Creditors as being the amount of work in progress of Barclay Mowlem came from, but that question was not explored in the evidence. 75 The evidence does not establish with clarity what the prospects of recovering anything from Barclay Mowlem are. Mr Warner gives evidence (which I accept) that Mr Kovacic: "… remains adamant that the claim from Barclay Mowlem is completely recoverable and I don't necessarily have the same view of course …" 76 Mr Warner has received legal advice in May 2005 to the effect that the claim is good for at least $200,000. However that advice was not tendered, and I do not know on the basis of what factual assumptions it was given, so no weight can be placed upon the fact that it was given. 77 Even though there is this uncertainty about what ultimately might be recovered from Barclay Mowlem, Mr Warner gave evidence, which I accept, about the way in which, in the light of knowledge at the time of the trial, the amount of $400,000 included in the 31 March 2005 Addendum Report for work in progress from Barclay Mowlem should be regarded: "Q. I am saying as of today that $400,000 should have come out? A. It should have been seriously discounted and, as you put it, put into debtors. Q. And valued pretty much at nil? A. Yes, of course because of the cross-claim." 78 If the Barclay Mowlem "work in progress" claim was valued at nil, that would mean that the amount of work in progress which should have been included in the DOCA value of work in progress in the Addendum Report (para [37] above) was $62,900 recoverable from Leighton, not $458,900. 79 By the time of his Updating Report of 12 September 2005, Mr Warner was estimating that nothing more should count on being recovered from Barclay Mowlem for retention debtors, and the only amount which had been recovered from Barclay Mowlem was the amount which was paid to him in March 2005 (para [73] above). It necessarily follows that, with the knowledge he now has about the Barclay Mowlem cross-claim, the amount of $26,400 ascribed to Barclay Mowlem in the Addendum Report as a still outstanding retention debt, ought not have been included. Estimated legal costs 80 The estimate of costs sent to the creditors in the Updating Report of 12 September 2005 has not been specifically updated in the evidence. These proceedings came on for hearing on 23 September 2005 in the Corporations List, with a seriously inadequate estimate of the likely hearing time. They continued on 26 September 2005, and 2 November 2005. It is not unusual for litigation the hearing of which is interrupted to prove more expensive than the same litigation would have been if it concluded in a single run of days. While a positive finding cannot be made about it, it would be no surprise if the estimate of costs made on 12 September 2005 proved inadequate. Transfer of Business Operations to the New Company 81 Mr Warner at no time paid any employee of the Company any wages or other entitlements in connection with ongoing work. From the start of the administration Mr Kovacic, or the New Company, paid the employees, and directed their work. After the appointment of the administrator, Mr Kovacic terminated the services of two or three of them, but kept the rest on. 82 Mr Warner has received a total of $11,000 in license fees from Mr Kovacic or the New Company. The license contained a term that it would run from 28 February 2005 to 5 April 2005 inclusive, or until the liquidation of the Company, which ever was earlier. The period from 28 February 2005 to 5 April 2005 is approximately 5½ weeks, so a basis for the payment of that sum of $11,000 can readily be inferred. 83 At the commencement of the administration Mr Warner was undecided about whether he would conduct trading operations himself as administrator, or whether he would license the Company's business to the directors. When Gzell J directed, on 2 March 2005, that any Deed of Company Arrangement should pay Bidald's costs of the Winding Up Proceedings in priority to all other amounts payable by them, Mr Warner was given an estimate that those costs could be between $50,000 and $60,000. He explained: "What that meant was the first or $50 or $60,000 that was covered in the administration had to be reserved for those costs. In other words, the first $50 or $60,000 recovered could not be used by me to trade the business. What that meant from a practical point of view was I didn't have any money to trade the business because of that order." 84 That led him to decide in favour of licensing the business. At the time of granting the license, it was his intention that, while the Company would operate under that license during the period of the administration, if a Deed of Company Arrangement could be agreed upon, the Company would then continue operations in its own right. 85 The reader will recall that, in his affidavit of 1 March 2005 Mr Warner was expecting that all creditors, including disputed creditors, could be paid in full, from the ordinary operations of the Company, by the end of April 2005. As well, Mr Kovacic had informed Mr Warner that he would make a cash contribution of at least $40,000, and subordinate the directors' claims against the Company. 86 By 17 March 2005 the proposal for a deed being discussed between Mr Warner and Mr Kovacic had the following elements: (a) The directors would contribute a minimum amount of $500,000 to the deed administrators within six months, up to a maximum of $600,000 depending on debtor collections; (b) The source of the funds would be the company's pre-appointment assets including debtors and any shortfall below $500,000 made up by directors personally; (c) The directors were not, however, prepared to give any personal security over their assets to secure their promised shortfall contribution; (d) The deed administrators would hold security over the company's assets until the required payments were made; (e) All loans payable to the directors and related parties entitlements would not participate in the deed fund; (f) Except for superannuation claims, accrued employee entitlements would not participate in the deed fund but would be satisfied from results of future trading; (g) That control of the Company would revert back to the directors upon execution of the Deed; and (h) That the New Company would undertake to pay all employee entitlements in the ordinary course of business. 87 Quite what had caused Mr Warner's view to alter between 1 March 2005 and 17 March 2005, from one where the Company's own resources could meet completely all non-related creditors, to one where up to $600,000 might be needed depending on debtor collections, was not explored in the evidence. Drafts of a Deed of Company Arrangement, containing the elements I have just set out, were prepared. 88 On the morning of 22 March 2005 Mr Kovacic put a revised deed proposal to Mr Warner. The new proposal differed from the previous one in that: (a) The directors would contribute a fixed sum of $40,000 into the Deed Fund within 6 weeks from execution of the DOCA, and (b) The New Company would bill the Company for labour incurred and additional materials purchased for the purpose of completing any projects that were uncompleted at the date of the appointment of the administrators. 89 On 22 March 2005 Mr Warner revised a draft of the Second Report to Creditors to take account of this change in the deed proposal. 90 The stock of the Company (which had been valued at $369,000 in Mr Warner's affidavit of 1 March 2005, but which had come to be valued at $104,855 by the time of the Second Report to Creditors) was at all times in the physical possession of Mr Kovacic and the New Company. The administrator sold it to the New Company at some stage, receiving payment for it in August 2005, of $65,408. The stock of the Company was specialised stock, made for a particular job. 91 Likewise, the plant and equipment of the Company remained in the physical possession of Mr Kovacic and the New Company throughout the administration. The plant and equipment was sold by the administrator to either Mr Kovacic or the New Company at a time fixed no more precisely than "maybe July". 92 As demonstrated by the handwritten clause in the license agreement (para [21] above), from the time of the license agreement being entered it was contemplated that it was possible that the New Company could undertake contracts on its own accord. In fact, the New Company is carrying on business and getting new work. There is at least an overlap between the sorts of customers, the employees, and the suppliers that the Company had, and that the New Company now has. 93 Once the John Holland contracts were brought to an end (which I infer had happened at some stage prior to 31 March 2005) the only work which remained to be done to complete the contracts of the Company was to finish the Leighton job, and possibly (if one accepts that there was $4,000 of work still to do concerning Barclay Mowlem) to do that small amount of work for Barclay Mowlem. The total costs to complete those contracts, as estimated in the Addendum of 31 March 2005, was $19,500. That is unlikely to provide a workforce of nine or ten with work for very long. 94 The Company could not have resumed operations once its plant and equipment had been sold in "maybe July". However, Mr Warner's assessment went further than that: "Q. * There was no possibility this company was going to continue to trade once the unfinished work was completed? A. The intention was to finish the contracts which it had. HIS HONOUR: Try answering the question, please. ABOVE QUESTION MARKED * READ BACK BY COURT REPORTER. A. No." I accept that evidence. 95 While the license agreement was on foot, it provided a legal justification for the New Company to be regarded as not employing the employees, but rather as being an entity to which the employees were lent. That analysis could apply even if the employees were to some extent, or perhaps even entirely, doing work which was for the benefit of the New Company. Even if it was the New Company which was paying their wages, the license agreement would provide a justification for that payment being regarded as being on account of the Company. However, once the license agreement had come to an end, that basis for regarding the employment of the employees by the Company as continuing disappears. In the absence of any other evidence, it is most likely that the employees ceased to be employees of the Company no later than 6 April 2005. Once it had lost its workforce, the likelihood of the Company continuing in business was for that reason alone slight. 96 I mention here that Mr Aldridge SC submitted that votes of the employees had been improperly admitted at the Second Meeting of Creditors, because by that time their employment had transferred to the New Company, and therefore, the New Company had become responsible for the statutory entitlements of the transferred employees, and the Company relieved from responsibility for those entitlements: section 4 Long Service Leave Act 1955, sections 101, 102 Industrial Relations Act 1996, section 4B Annual Holidays Act 1944. I do not give effect to that argument because Bidald has not proved that the transfer of employees had taken place by the time of the Second Meeting of Creditors. 97 There is another reason as well why it is unlikely that the Company would have resumed trading once the period of administration had come to an end. Even though the debts owed to Mr Kovacic and Sandra Kovacic, and the debt claimed by Mrs Kovacic, were not debts which were provable under the Deed, they remained debts of the Company. There is no evidence of any specific arrangement in relation to when they would be paid, so the legal inference is that they were payable upon demand. As things were presented to the creditors in the Second Report to Creditors, all the readily available resources of the Company, apart from its stock, plant and equipment, were to be consumed by the Deed Fund. The plant and equipment had a value quite inadequate to pay the debts owed to the associated creditors, and in any event if the plant and equipment were to be sold, the Company would cease trading. There was no contract or arrangement for the loans owing to the related parties to be capitalised, or made payable only at some fairly distant future time. Thus, the Company would, if it had resumed trading, been trading while insolvent. 98 Mr Aldridge SC submitted that it had been proposed since 9 March 2005 that Mr and Mrs Kovacic would purchase the stock, plant and equipment, and that, therefore, as early as 9 March 2005, it was clear the Company would not continue to trade. The factual basis of that submission is a letter which Mr Warner wrote to Mr and Mrs Kovacic on 9 March 2005 putting a proposal that they buy the stock, plant and equipment for an agreed sum. However, that proposal is one which Mr Warner made in the context of making suggestions to Mr Kovacic about how his objective of paying all legitimate creditors in full could be carried out. The proposal for Mr and Mrs Kovacic to buy the stock, plant and equipment was coupled with a proposal that that sale be for a sum which would be sufficient, along with work in progress realisations, debtor realisations and licence agreement royalties, "to discharge the costs of the administration, the costs of the DOCA, the claims of the priority creditors and provide a return to all remaining creditors (including disputed creditors) of 100 cents in the dollar." While that is a proposal which Mr Warner put to Mr and Mrs Kovacic, they never accepted it. I do not accept that it was clear, as early as 9 March 2005, that the Company would cease to trade. The Liquidation Comparison 99 An important element of the Second Report to Creditors, the Addendum of 31 March 2005 and the Updating Report has been to compare the return to creditors which, at the date of the report, was estimated under a Deed, with the return estimated in a liquidation. Liquidation Comparison in Second Report to Creditors 100 The Second Report to Creditors compared the resources available in a liquidation and a Deed of Company Arrangement as follows: Deed of Liquidation Company Arrangement Tangible Assets Available Cash Nil Nil Work in Progress 240,000 626,500 Retention Debtors 171,248 288,592 Stock on Hand 37,320 104,855 Plant & Equipment 21,713 Nil Total Tangible Assets 470,281 1,019,9047 Insolvent Transaction Recoveries Preferential/Uncommercial Transactions 50,000 Nil Insolvent Trading 100,00 Nil Other Voidable Transaction Nil Nil Assets Available 620,281 1,019,947 Licence Fee and stock purchased 15,680 15,680 Directors Contribution to DOCA Nil 40,000 Total Resources Available 635,961 1,075,627 101 That table then deducted the priority payments for a liquidation, and a Deed, respectively. It estimated that those priority payments would total $450,255 in a liquidation, and $319,593 under a Deed. The difference arose because $80,662 of employee entitlements would be provable on a liquidation, but were said to be excluded under the proposed Deed, and because it was assumed that the remuneration of a liquidator would be $100,000, while the remuneration of a Deed Administrator would be $50,000. That resulted in $185,706 being distributable amongst non-priority creditors in a liquidation, and $756,034 being distributable amongst non-priority creditors under a deed. 102 The total unsecured non-priority creditors in a liquidation were estimated to be $2,544,111 in a liquidation, and $1,336,158 under a deed. The difference arose because $119,389 of employee entitlements would rank as non-priority in a liquidation, but were said to be excluded under the deed, and because a shareholder's loan account totalling $1,088,564 was provable in a liquidation, but was excluded under the Deed. 103 I have set out, at para [27] and [28] above, the reasoning which lay behind the adoption of lower figures for work in progress and retention debtors in a liquidation than under a deed. As things worked out, that reasoning proved mistaken, when the John Holland contracts were not continued with (and the evidence does not enable a finding to be made about whether the John Holland contracts were not continued with on a date before or after 22 March 2005), no work of substance appears to have been actually done concerning the Barclay Mowlem project, and in any event Barclay Mowlem proved unwilling to pay the amount of the claimed "work in progress". 104 Likewise, the actual recoveries from retention debtors proved to be much less under the Deed of Company Arrangement than was estimated, with only $87,422 actually collected by 22 September 2005, and only an additional $11,500 remaining outstanding at that date. 105 Likewise, the estimate for recovery on account of stock on hand proved excessive, with only $65,408 being actually recovered. On the other hand, the recovery actually made for plant and equipment exceeded the estimate for that item in a liquidation, as $55,341 was recovered on that count. 106 Recoveries of $50,000 were estimated in the Second Report to Creditors for preferential/uncommercial transactions in a liquidation. Mr Warner had identified a total of nearly $72,000 in possibly preferential payments, stretching back to 7 February 2004. Beyond a reference to the law concerning recovery of preferential payments being complicated and that defences are sometimes available, no firm basis for the figure of $50,000 was provided. 107 The figure of $100,000 recovered for insolvent trading proceeded on an assumption (which was explicitly stated not to have been proved) that the Company was insolvent from 1 July 2004. That date was chosen because Mr Rodgers' report had found that the Company was solvent as at 30 June 2004, and Mr Warner assumed, as a possible worst case, that the Company had become insolvent some time in July 2004. In the period from July 2004, $804,000 had been paid to unsecured creditors. As well, Mr Warner took into account, in fixing this date, that Mr Kovacic had put about $120,000 of his own money into the Company between 1 July 2004 and early April 2005, even though there was apparently no pre-existing legal obligation for him to do so, or any legal obligation for him to continue to make any such payments in the future. 108 Mr Warner had carried out some investigations of the ability of the directors to satisfy any judgment against them for insolvent trading, which disclosed that Mr and Mrs Kovacic owned five lots of land, each of which was mortgaged for an unknown amount, and Mrs Kovacic and Sandra Kovacic together owned another lot of land which was not mortgaged. At the time of the report Mr Warner did not have funding available to proceed with any preference recovery or insolvent trading actions, but he adverted, in the Second Report to Creditors, to the possibility of funding from creditors or a litigation lender. No firm basis appears in the report for the estimate of $100,000 as the likely return from insolvent trading actions in a liquidation. 109 There might possibly be a basis for the Company having been insolvent at an earlier date than July 2004. The Company had traded at a loss from 1 July 2003, and at the time of Mr Warner's appointment the BAS returns of the Company had not been lodged since June 2004. Mr Warner conceded in cross-examination that it was possible that insolvency could go back to 1 July 2003, which would increase the amount of any insolvent trading claim. 110 Some contrary evidence is that the accountant of the Company, Mr Ford, prepared some accounts of the Company up to 31 May 2004, which concluded that in the eleven months ended 31 May 2004 the Company had made a profit after tax of $454,647. Those accounts are not, however, ones which have ever been adopted by the directors. 111 Concerning the availability of funding for preference recovery or insolvent trading litigation, Mr Warner has not asked creditors whether they are willing to provide such funding. Mr Kirkham, the secretary of Bidald, says that Bidald would be prepared to consider any application to provide such funding which might be put. 112 In all these circumstances, there had been insufficient examination of the transactions of the Company, and of the possibilities of obtaining funding for litigation, to enable any firm conclusions to be drawn about amounts which might be recovered in a liquidation under preference or uncommercial transaction litigation, or insolvent trading litigation. The amounts ultimately recovered might be more than the amounts of Mr Warner's estimates, or they might be less. His estimates were little more than guesses. I hasten to say, however, that this is not a criticism of him – in the time which had been available to prepare the report, and with the information at his disposal, he could do little more than guess. Even judges in the course of making an assessment of damages or compensation are required to adopt a figure which is little more than a guess, when the evidentiary basis for adopting a particular figure is very thin, but it would be wrong to use the thinness of the evidence as a reason for valuing that head of damages or item of compensation at zero: Jones v Schiffmann (1971) 124 CLR 303 at 308 per Menzies J; The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83; Copyright Agency Limited v Department of Education of New South Wales (1985) 4 IPR 5; 59 ALR 172 at 183; University of Newcastle and Others v Audio-Visual Copyright Society Limited (1999) 43 IPR 505. Mr Warner can hardly be criticised for doing much the same. Furthermore, an attentive reader of the Second Report to Creditors would appreciate the insubstantial basis which there was for the figures which he had adopted. Mr Warner was right to point out, in the Second Report to Creditors, that the possibility of making these kinds of recovery was something which was open in a liquidation, and would not be open under the proposed deed. 113 In all these circumstances, I do not find that the inclusion of those particular estimates for litigation recoveries was something which amounted to the providing of false or misleading information to the creditors in the report. 114 I mention for completeness that, on the first day when he was being cross-examined, Mr Warner agreed that there were some errors shown in an estimated outcome statement annexed to his affidavit of 1 March 2005 relating to the return expected in a liquidation from open invoice debtors and retention debtors. Those admissions, were, as he explained in evidence on a later day, ones which he had made in error, as a result of not accurately recollecting the methodology he had used in deriving that estimated outcome statement. The figures concerning which he made those mistaken admissions were not repeated in any report to creditors. In these circumstances I shall ignore those mistaken admissions. Liquidation Comparison in Addendum 115 The resources estimated to be available in a liquidation in the Addendum totalled $557,845. The difference from the Second Report to Creditors arose from valuing the John Holland retention debtor at nil. The total resources estimated to be available under a Deed were $746,527. The difference between the Addendum and the Second Report to Creditors in this respect arose not including any recoveries from John Holland, and including a $396,000 recovery from Barclay Mowlem for work in progress instead of the $400,000 which the Second Report to Creditors had estimated. 116 Total priority payments in a liquidation were estimated to be $465,255, and estimated to be $334,593 under a Deed. Essentially, the difference arose from the estimate for administrators' remuneration increasing from $100,000 to $115,000. 117 Thus, the Addendum estimated the funds available for distribution to non-priority creditors in a liquidation at $92,590, and under a Deed at $411,934. Liquidation Comparison in the Update 118 I have set out at para [63] above the estimate of recoveries from asset realisations under a Deed. In this report, Mr Warner showed the recoveries in a liquidation from insolvent trading and various voidable transactions as being "unknown", and allowed nothing as a recovery for them. The total resources available in a liquidation were shown as being $340,262, and under a Deed at $536,276. The difference arose because the shortfall guarantee amount was treated as distributable under the Deed. As well, about $9,000 more of GST refund was available under a Deed than under a liquidation. Payments to Creditors Outside the Deed 119 From the time that the Company made application to set aside Bidald's statutory demand on 2 January 2004, Mr Kovacic has continually maintained that he disputes the debt which Bidald says it is owed. The "directors' undertaking" of 28 February 2005 which Mr and Mrs Kovacic gave to Mr Warner (para [14] above) expressed a wish to propose a Deed of Company Arrangement, which would subordinate their own claims and allow "all remaining legitimate creditors" to be paid in full. Likewise, the estimated outcome statement annexed to Mr Warner's affidavit of 1 March 2005 described the proposed deed as one, "to make a sum available under a DOCA to pay all valid creditors in full and take back control of the company." From the outset in the administration, however, Mr Warner made clear to Mr Kovacic that it would be Mr Warner's task to decide what creditors ought be admitted to participate in the Deed. Each of the reports which Mr Warner has sent to creditors has estimated two different dividends which might be payable under a deed, one dividend being if disputed creditors were admitted, the other being if disputed creditors were not admitted. 120 Bidald's debt is, it seems, shown in the books of the Company. Bidald has submitted a proof of debt, and has been permitted to vote for the full amount of its claimed debt at both the first and the second meetings of creditors, and in the vote resulting from the "virtual meeting". 121 From the beginning of the administration, it was Mr Kovacic or the New Company who paid ongoing wages of the employees. The employees had claims, however, for entitlements which had accrued prior to the date of the administration, concerning which they lodged proofs and voted at the second meeting of creditors. 122 By 13 July 2005 (the date on which Mr Kovacic swore an affidavit in these proceedings) eight of the ongoing employees (excluding Mr and Mrs Kovacic and Sandra Kovacic) had been paid all their employee entitlements, including holiday pay and superannuation entitlements. A ninth employee, Belinda Gilmore, had been paid her holiday pay entitlements, but not her superannuation entitlement. The eight employees who have been paid in full are ones who had given Mr Kovacic their proxy to vote at the second meeting of creditors. The evidence does not disclose precisely when, or in what circumstances, these payments to employees were made. 123 On 31 August 2005 Mr Warner was told for the first time that Mr Kovacic or the New Company had paid out trade creditors of the Company. Mr Kovacic said he had paid them more than $330,000. At the same meeting when he was given this information, Mr Warner requested Mr Kovacic to provide evidence of the payments. Mr Warner and Mr Kovacic did not discuss each creditor on an individual basis, but Mr Kovacic told Mr Warner that it was necessary to pay certain creditors because he had signed director guarantees. Mr Kovacic provided him with a bundle of documents which included some copies of cheque butts, and of bank statements showing that a cheque of the same cheque number and amount as that referred to in the butt had been met on presentation. That bundle did not cover all of the creditors of the Company. 124 On 8 September 2005 Mr Warner wrote to Sandra Kovacic requiring evidence of payment for certain of the creditors, and for the employees. 125 Mr Warner also wrote to various creditors, asking for their written acknowledgement that their debt had been paid and that they had no ongoing claim to make under the Deed. By the time of the trial, he had received back such signed acknowledgements from only three creditors. 126 On 7 September 2005 a letter was faxed to Mr Warner from the fax number of the Company. It was not signed, but at the end it stated "Regards, Mile Kovacic", immediately below a space suitable for signing in. The text of the letter was: "As per conversation Tuesday 6th September a full list of all supplies PAID IN FULL by Miles Special Builders & Services Pty Ltd and have agreed to continue trading with our new company are not to be notified in any form by CRS Partners. Balance of Leighton's and Hilton $12,600.00 & $16,400.00 will be paid by Miles Special Builders & Services and all remaining collectable monies from Leighton & Hilton will be collected & paid to Miles Special Builders & Services Pty Ltd. A letter is required for the acceptance of the above and a Tax Invoice is required for the stock purchased by Miles Special Builders & Services Pty Ltd." CRS Partners is the name of the accountancy firm through which Mr Warner was then operating. 127 Attached to that fax were two lists. One of them was a two-page list which set out various suppliers, and identified in relation to each the amount which had been paid, the cheque number, and the date of payment. Each of those suppliers was shown as having a "balance – nil". The other list was a 14-page document which gave the names of various people and business organisations, identified whether each was a supplier, a customer or an employee, and stated in relation to each "current balance - $0.00". 128 Mr Kovacic's evidence about that document is as follows: "Q. … The question I first asked you is did you yourself prepare that letter or did someone else prepare it?. It is not signed is it but it is over your name. A. No, it is not mine. There was, form in the office. Q. There is attached to it if you turn over the page a list of people who have been paid? A. Yes. Q. Do you know who prepared that list? A. No I didn't and it was partly paid or partly write off partly paid by the borrowed money and partly write off. Companies, I list to you which one, prepared to write off if I continued to trading with them. Q. Did you know who prepared that list? A. I did not prepare it, I did not prepare this list. Q. Did you, [know if] Sandra Kovacic prepared it or the accountant? A. I can't tell. Q. Is there any reason to doubt it is correct [these are] the people who have been paid? A. I said to you they were paid or write off. Not all paid but never ever paid with Special Builders money. Q. Is that the list of people who are paid or written their debt off; that is what I am asking? A. Yes. Q. And have been paid or written their debts off? Some of them have done that so you can keep on trading with them? A. That is correct and most of them have been personal guarantees." 129 The various payments which were identified in the documentation which Mr Kovacic supplied to Mr Warner on 31 August 2005 shows that the suppliers to which those documents referred were paid from the bank account of the New Company. The documents include (though out of order) an almost continuous run of the bank statements of the New Company from 18 March 2005 to 15 August 2005, and it is from that account that the payments were made. The earliest such payment was made on 22 March 2005. The document which Mr Kovacic supplied to Mr Warner on 31 August 2005 did not relate to anything like the number of creditors that the fax of 7 September 2005 related to. 130 Mr Kovacic says, and I accept, that he and his son borrowed money and paid it into the New Company's account, to enable those payments to be made. As well, Mr Kovacic says, and I accept, that Sandra paid some creditors (he does not identify who, or for how much) with her own cheques. 131 Concerning the payment to suppliers pursuant to guarantees, Mr Kovacic gave the following evidence: "Q. Has some and in fact some of those suppliers, as Miles Special Builders and Services Pty Ltd to pay the debt of the earlier company didn't they? A. No. The most of them was on my personal guarantee and we have sheriff calling in to collect money - I pay them. Q. Can you provide you have one document suggesting a guarantee on you or that guarantee was called upon? A. We did. Q. The lawyer for Mr Warner? A. Some of them because we have every companies, guarantee and they have ready to collect." (transcription error corrected) 132 No guarantee which had been called upon, or was threatened to be called upon, was tendered in evidence. When Mr Aldridge SC referred, in the course of address, to the absence of such guarantees, and I remarked that it was never too late to make an application to re-open, still no guarantees were sought to be tendered. 133 It is not at all unusual for a supplier to a company which has few resources to require director guarantees, so there is no inherent unlikelihood in this evidence of Mr Kovacic. While I accept that some suppliers to the Company were paid pursuant to director guarantees, I do not accept that every single payment which was made to a creditor of the Company was pursuant to a guarantee. At least some of the payments to employees were motivated by what Mr Kovacic felt was proper, rather than by any legal obligation: "I paid the workers for because [they] work for me for 30, 35 years and you cannot leave a gentleman who is 65 get on the street without money. I borrowed the money to pay them." 134 I am satisfied that the employees have been paid their entitlements (apart from Ms Gilmore's superannuation), and that some creditors, more than negligible in both number and value, have been paid by Mr Kovacic, or the New Company, or Sandra Kovacic, from 22 March 2005 onwards, but no firm conclusions are possible about precisely which creditors have been paid, for what amount, or when. Creditors who remain unpaid, however, include Bidald, which has lodged a proof for $466,889, and the Australian Taxation Office, which has lodged proofs for unpaid BAS payments and unpaid income tax totalling $248,085.40. The Statutory Provisions Relied On 135 The Corporations Act 2001 (Cth) contains the following provisions: " 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 (c) any other interested person. 445G When Court may void or validate deed (1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or ASIC, may apply to the Court for an order under this section. (2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground. (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. (4) Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator. 447A General power to make orders (1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. (3) An order may be made subject to conditions. (4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration—the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement—the deed's administrator; or (e) ASIC; or (f) any other interested person. 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. The Orders Applied for 136 The particular orders applied for are: (a) an order pursuant to section 445D and 447A terminating the Deed; (b) an order pursuant to section 445G declaring the Deed, or alternatively Clause 6 thereof, is void; and (c) an order pursuant to section 600A that the resolution of 4 April 2005 to enter the Deed be set aside. The Structure of the Plaintiff's Argument on Section 445D 137 The plaintiff alleges that every one of the paragraphs in section 445D(1) has been satisfied in the present case. 138 Before the Court is able to rely upon any particular paragraph of section 445D(1) as a ground for termination, it must be satisfied that that particular ground has been made out. The onus of proving that a ground has been made out is on the party who seeks termination of the deed. However, that a ground has been made out does not of itself lead to the Court making an order terminating a deed – there is always a discretion for the Court to exercise, even if a ground is made out. In exercising that discretion, it can be appropriate for the Court to take into account whether more than one of the grounds listed in the individual paragraphs of section 445D(1) has been made out. Section 445D(1)(a), (b) and (c) Bidald's Particulars – Relationship of Section 445D(1)(a) and 445D(1)(b) 139 Particulars which Bidald provided made clear that the false or misleading information which it was alleging had been supplied was contained in the Second Report to Creditors, and in the Addendum Report of 31 March 2005. 140 Section 439A(3) and (4) have the effect that the Second Report to Creditors must be given at least five business days before the second meeting of creditors. Thus, it is only the Second Report to Creditors, not the Addendum Report, which is the report referred to in section 445D(1)(b). However, Mr Aldridge SC relies upon the Addendum Report, and in particular the differences between the Second Report to Creditors and the Addendum Report, as identifying at least some of the information contained in the Second Report to Creditors which was false or misleading. As well, he submits that the Addendum Report contained information given to creditors, and so to the extent to which it contained false or misleading information it can be, in its own right, a basis for termination under section 445D(1)(a). 141 Mr Lucarelli points out that the plaintiff neither pleaded nor particularised an allegation that information which was false or misleading was given to the administrator of the Company (as opposed to the creditors). He submits that, thus, it should not be open to Bidald to make a case that it was Mr Kovacic who supplied Mr Warner with false or misleading information, which Mr Warner then repeated in the Report to Creditors. 142 There is an element of truth in this submission. I accept that, if Bidald were required to list seriatim the elements of the case it presented for the Court having jurisdiction under section 445D(1)(a) or (b) to terminate the Deed, it could not, in light of its pleading and particulars, include in that list an allegation that it was Mr Kovacic who gave false or misleading information to the administrator. 143 However, the submission will not carry the full distance to which Mr Lucarelli seeks to make it go. It is to be observed that section 445D(1)(a) is in the passive voice – it requires that the information "was given" to the administrator, or to the creditors, and does not specify by whom it was given. 144 One way in which the limb of section 445D(1)(a) which is concerned with false or misleading information being given to the administrator of the Company might have an independent role to play, to the limb concerned with false or misleading information being given to the creditors, is if information was given to the administrator, and relied on by the administrator in forming a judgment, but where that information was not passed on to the creditors. The limb of section 445D(1)(a) which is concerned with false or misleading information being given to the creditors can cover a situation where it is the administrator who provides that false or misleading information to the creditors, or where it is someone else who provides the false or misleading information to the creditors (as might happen if a creditor intent on opposing a proposed deed made direct contact with other creditors of the company). That limb covers the situation where the administrator gives the false or misleading information to the creditors in a report which is formally required by the Act, or where the information is conveyed by some other means, such as at a meeting of creditors or by an informal mail-out to creditors. Thus, the ground contained in section 445D(1)(b) is really a subspecies of the ground contained in section 445D(1)(a). 145 If false or misleading information has been given to the creditors, on the topic identified in section 445D(1)(a), and which meets the materiality test in section 445D(1)(a)(ii), the ground in section 445D(1)(a) is made out, regardless of what might have been the genesis of that information. It is understandable as a matter of policy that this should be so – administrations require important decisions to be made in a short space of time, on the basis of such information as can be gathered in the time, and it is understandable that the ground upon which a deed can be terminated depends upon the adequacy of the information ultimately provided to the administrator, or the creditors, regardless of where that information might have come from. 146 Thus, if information contained in the Second Report to Creditors or the Addendum Report was false or misleading, and on the topic and with the materiality required by section 445D(1)(a), it can provide the jurisdictional basis for an order terminating the deed even if, as it happens, it was Mr Kovacic who provided that information to the administrator. "False or Misleading" 147 Concerning the concept of false or misleading information in section 445D(1)(a) and (b) I accept the submissions of Mr Aldridge SC that - the expression looks at an objective quality of the information, not at whether anyone was actually misled. - The expression looks at whether the information was actually false or misleading, not whether anyone intended it to be false or misleading, or did not care whether or not it was false or misleading. - Whether the information is false or misleading is judged at the time of the hearing, not on the basis of information available at the time of giving the information. 148 In the present case, some of the matters which are alleged to be false or misleading related to events that lay in the future, at the time the Deed was adopted. Even though there are always difficulties about making accurate predictions of the future, it is still possible for a statement about an event which lies in the future at the time the statement is made to be demonstrated, as events unfold, to be a false statement. Further, it is possible for a statement about an event which lies in the future to be misleading, if it is a statement with the capacity to lead a recipient of it into error. 149 In deciding whether a statement about an event in the future ought properly be regarded as one which is false or misleading, the Court should take into account whether or not it purports to be anything more than the present estimate or prediction of the author. 150 Section 445D(1)(a) and (b) is analogous, both in language and purpose, to section 222(4) Bankruptcy Act 1966 (Cth). Section 222(4) permits a court to declare a deed or composition entered into by a debtor to be void if the debtor has (inter alia) omitted a material particular from the statement of affairs or included an incorrect and material particular in that statement. In applying section 222(4), if a debtor has failed to include an estimate of a liability which is close to the actual liability later revealed, that amounts to an "omission of a material particular"; if the debtor has included an estimate of a liability which is likely to arise in the future in a statement of affairs, and that figure proves to be far too low, then the statement of affairs has included "an incorrect and material particular": Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544 at 551. The same approach should be applied to construing section 445D(1)(a) and (b). Any special caution which is exercised about terminating deeds on the basis of statements about the future which turn out to be inaccurate arises at the level of the court's discretion, not at the jurisdictional threshold. 151 Even though there is some similarity between section 445D(1)(a) and (b) on the one hand, and section 52 Trade Practices Act 1974 (Cth) on the other, there are also very significant differences. The prohibition in section 52 is against engaging in conduct that is misleading or deceptive or likely to mislead or deceive. "Conduct" is necessarily human action, and deciding whether conduct is misleading or deceptive can, particularly when the conduct in question consists of making statements about the future, involve evaluation of the state of mind of the person who makes the statement: James v ANZ Banking Group Ltd (1986) 64 ALR 347 at 372 per Toohey J. 152 In contrast, section 445D(1)(a) and (b) attaches the description "false or misleading" to "information". In that way, section 445D(1)(a) and (b) look at the truth or falsity of the information itself, and whether the information is misleading, without any consideration of the state of mind of the person who provides the information. This is consistent with the concern of section 445D(1)(a) and (b) being with the adequacy of the information base which is presented to the administrator, or to the creditors, to enable them to make decisions. False or Misleading Information in the Second Report to Creditors 153 To describe the Barclay Mowlem work as "work in progress" at all was false or misleading. The Second Report to Creditors said that the costs to complete of the two Barclay Mowlem jobs was "nil", while the Addendum said that the costs to complete them was $4,000. Even if it were true that $4,000 worth of work remained unperformed under the Contract, there was no recency or currency about the $400,000 worth of work said to have been done for Barclay Mowlem which justified it being described at "work in progress". I recognise that both reports said that the two Barclay Mowlem jobs were 100% complete, but there is nothing odd in a builder describing a job which is 100% complete as work in progress if it has only very recently been completed and is not yet invoiced for. That is the impression that a reasonable reader of the two reports would gather, concerning the Barclay Mowlem work. It is an impression that is quite mistaken. 154 Asserting that $400,000 was collectable for the Barclay Mowlem work was also false or misleading. There was no disclosure that there was the slightest cloud over the collectability of that amount – yet, now that he knows all the facts, Mr Warner accepts that the amount recoverable from Barclay Mowlem for work in progress should be "valued pretty much at nil" (para [77] above). 155 To estimate the value of the work in progress due from John Holland, in the Second Report to Creditors, at a total of $133,000, was likewise false or misleading. The evidence does not establish whether it was prior to the date of the Second Report to Creditors that the John Holland contracts came to an end, but, even so, the financial circumstances which led to their coming to an end are likely to have been in existence at the time of the Second Report to Creditors, even if the actual ending of the contracts had not occurred by that date. 156 Mr Warner tried to remedy this error in the Second Report to Creditors, by sending out the Addendum. Even if he had been totally successful in communicating the Addendum to every creditor before the Second Meeting of Creditors, the jurisdictional ground contained in section 445D(1)(b) would still be made out concerning the valuation of the John Holland debt. Success in communicating with the creditors is something which would be given effect to at the level of discretion whether to terminate the Deed by reason of a breach of section 445D(1)(b). 157 The Addendum was sent to creditors in effect one working day before the date of the Second Meeting of Creditors (para [42] above). Those to whom Mr Warner sent it by email would have had it available for their consideration for a full working day before the meeting. However, I cannot reach any conclusion about the number or value of the creditors who received the email version. Nor is it possible to have confidence about the number or value of creditors who received, and had time to consider, the posted version of the Addendum prior to the meeting. There were some creditors who had sent Mr Warner proxies before the Addendum was sent, and who communicated with him to say they wished their proxy to stand notwithstanding the information in the Addendum. BankWest, a creditor for over $409,000, at that time had submitted its proxy on 29 March 2005 as a special proxy in favour of the Deed. Metal Corp Steel, a creditor for $17,696, had submitted a special proxy on 31 March 2005 requiring an abstention on whether a Deed should be approved. Australian Industrial Abrasives, a creditor for $6,161, submitted a proxy on 31 March 2005 requiring a vote in favour of the Deed. However, both BankWest and Australian Industrial Abrasives later confirmed to Mr Warner that they support the Deed notwithstanding the information in the Addendum. Other proxies which were used at the meeting were given on 1 April 2005 or later. There is a possibility that creditors who did not vote, either by proxy or in person, might have been stirred into taking action to vote against the Deed if they had received the Addendum earlier, but the evidence gives no basis for believing that this is anything more than a mere possibility. In all these circumstances, I conclude that it is more likely than not that the comparatively short time between dispatch of the Addendum and the Second Meeting of Creditors did not lead to the result of that meeting being different to what it would have been if more time had been allowed. 158 In those circumstances, while the differences between the Second Report to Creditors and the Addendum are sufficient to establish the ground contained in section 445D(1)(b), success in communicating the Addendum means that it would be a wrong exercise of discretion to use the fact that section 445D(1)(b) had been made out in that way as a sufficient ground for terminating the Deed. 159 The same considerations as that in para [155] above lead to the conclusion that the attribution of a value of $121,800 to the John Holland retention debt in the Second Report to Creditors was also false or misleading. 160 The Second Report to Creditors valued the Barclay Mowlem retention debt as being worth $65,013. The amount ultimately recovered from that source was $39,008, and the view of Mr Warner in the Updating Report that nothing more is likely to be recovered from Barclay Mowlem for retention debts seems likely to be correct. 161 Another respect in which the Second Report to Creditors was false or misleading was in saying that the realisable value of the stock would be $104,855. In fact, the amount ultimately received for the stock was $65,408. 162 Concerning all the statements which I have identified so far as being false or misleading, a reader of the report would realise – and indeed sometimes Mr Warner expressly stated – that the figures given were estimates. However, there was no qualification or doubt expressed concerning the recoverability of any of these amounts (apart from the possibility of having to spend money on warranty work to receive the retention debts). In fact, as is now known, the extent of risk relating to their recoverability was well beyond the sorts of factors which make any estimate of recoverable proceeds of debts to some extent uncertain. The statements were false or misleading even though they were estimates. 163 Another respect in which the report gave false or misleading information was in saying that the company will continue to trade. The reality is that, no later than two days after the Second Meeting of Creditors, the company irretrievably lost its workforce (para [95] above). Under the terms of the license agreement to the New Company, the New Company had the right to enter new contracts in its own right. No new contracts were entered by the Company during the period of the administration. The amount of actual ongoing work for the Company to perform (once the alleged work in progress for Barclay Mowlem and John Holland was discounted) was quite small. 164 Another significant factor concerning the likelihood of the Company continuing in existence is that the debts to the associated creditors, totalling well over $1m, would continue in existence. For the reasons given in para [97] above, there was a high likelihood that, if the Company resumed trading, it would be trading while insolvent. While one does not know whether Mr Kovacic would have regarded that as a serious problem, at the least it is consistent with the conclusion that the Company was unlikely to continue to trade. Mr Warner's assessment, that there was no possibility that the Company was going to continue to trade once the unfinished work was completed (para [94] above) is realistic. Materiality of the False and Misleading Information The Materiality Test Itself 165 In the context of section 445D(1)(a) "material" means something which was relevant and did affect, or might have affected, the outcome: see Re Segal; Lensworth Finance Ltd v Segal (1975) 9 ALR 154; 45 FLR 85 followed in Beard v Prestige Baking Industries Pty Ltd (1981) 36 ALR 307; 52 FLR 384 (in particular per Fox J at FLR 398 and Lockhart J at FLR 418) and Re Cufari; Ex parte Commissioner of Taxation v Huppatz (1992) 34 FCR 544; Commissioner of Taxation v Comcorp Australia Ltd and others (1996) 70 FCR 356 at 392. In the present case, the relevant "outcome" was the decision of the creditors at the Second Meeting of Creditors to adopt the Deed. 166 The test of materiality under section 445D and 445G is an objective one: Commissioner of Taxation v Comcorp Australia Ltd and others (1996) 70 FCR 356 at 385 per Carr J (with whom Lockhart J agreed) (special leave to appeal to the High Court refused 14 February 1997 -- Deputy Commissioner of Taxation v Comcorp Australia Ltd [1997] 4 Leg Rep SL3). 167 On occasions, when there is an application to terminate a Deed, the courts have adjourned the proceedings, and invited the administrators to call a meeting so that the actual views of the creditors can be ascertained on whether, once they have been provided with the material with which they were not provided prior to adopting the Deed, they still wish the Deed to continue to operate: Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274. Ascertaining the views of the creditors in this way is not something which goes to the materiality of the information, but rather goes to discretion. I consider it below at para [283]. 168 The materiality test in section 445D(1)(a)(ii) is also incorporated by reference in section 445D(1)(b) and (c). 169 In deciding whether the materiality test has been passed, all the information about the company's business, property, affairs or financial circumstances that has been found to be false or misleading should be considered collectively. As an example, I doubt that the overvaluation of the stock, if it had been the only false or misleading statement in the report, would pass the materiality test. However, when there are other false or misleading statements, it should be considered along with those other false or misleading statements. Recoveries Under a Deed 170 All of the false or misleading statements which I have found, apart from that the Company would continue to trade, were relevant to a common topic, namely how much was likely to be recovered by the creditors through operation of a Deed. Those false or misleading statements collectively resulted in the assets likely to be realised under a Deed shrinking form the $1,019,947 actually estimated in the Second Report to Creditors, to an amount of $224,447. That last-mentioned figure is derived from the "DOCA Worst Case" figures of the Updating Report (para [63] above), minus the amount included in the Updating Report for plant and equipment, because the plant and equipment was not distributable according to the Second Report to Creditors. As the only difference between the "DOCA Worst Case" and "DOCA Best Case" in the Updating Report is that the "DOCA Best Case" includes a further $400,000 recoverable from Barclay Mowlem, and Barclay Mowlem continues to oppose payment, the "DOCA Worst Case" figures seem to be the more realistic ones to adopt. 171 The Second Report to Creditors had estimated that, under a Deed, additional amounts would be available for the licence fee and stock purchase, and for the directors' contribution, totalling $55,680 (para [25] above). Thus, after correcting for the false or misleading statements, the total resources available under the Deed would have been $280,127. 172 The Second Report to Creditors estimated that from the total resources available under a Deed, priority payments of $319,593 would need to be made. No reason has been shown to doubt that estimate. It follows that, if correct statements of recoverable amounts had been substituted for the false or misleading statements, the outcome of adoption of the Deed shown by the Second Report to Creditors, there would have been no funds available at all for distribution to non-priority creditors. That is clearly material. 173 The reason why the Updating Report continues to show, on the "DOCA Worst Case" a return to non-priority creditors in connection with a Deed is because it provides for amounts to be distributable to the deed creditors which the proposal put forward in the Second Report to Creditors had not counted as distributable – namely, the proceeds of sale of the plant and equipment, the amount payable by Mr Kovacic under the shortfall guarantee, and amounts totalling less than $20,000 for bank interest and GST refund. 174 If the Addendum was corrected for the false or misleading statements, in a similar way to that outlined in para [171] above, and the estimate of the amount of priority payments made in the Addendum is adopted, that set of figures would also show no funds available at all for distribution to non-priority creditors. Company Continuing to Trade 175 Many of the creditors were either suppliers, or employees. That the Company was going to continue to trade was a material matter to them. 176 The materiality test requires the information to "reasonably be expected to have been material to creditors …". That test has some imprecision about it. It does not require the information to reasonably be expected to have been material to all the creditors. In the present case, there were enough creditors who fell into the class of employees and suppliers to satisfy me that the false or misleading information that the Company would continue to trade passes the materiality test. 177 Concerning each of the topics on which false or misleading information was provided, there was an omission to state the correct position, or a reasonable approximation of the correct position. I am satisfied that the ground in section 445D(1)(c) is made out. Section 445D(1)(d) – Material Contravention of the Deed 178 Bidald alleges that there has been a material contravention of Clause 2.3 of the Deed (para [50] above). 179 By the time of the Updating Report on 12 September 2005, Mr Warner was estimating that the total resources available in the "DOCA Worst Case" were $536,276. However, that amount included the proceeds of the plant and equipment ($55,341), and $186,262 estimated as then being payable by Mr Kovacic under his guarantee. Even though the Second Report to Creditors had stated that the plant and equipment would not be sold, the proceeds of the sale of the plant and equipment fall within the terms of Clause 2.1(b) of the Deed, and so are distributable to creditors under the Deed. Thus, the amount then estimated to be recoverable, and which would fall within Clause 2.1 of the Deed, was $350,014. 180 In cross-examination, Mr Warner explained his failure to call a meeting so far, by reference to the cost of doing so, and the fact that Clause 2.3 does not include any statement of when such a meeting is to be called. 181 Neither of those reasons is sufficient to prevent there being a breach of Clause 2.3. The cost of calling a meeting is one of the costs of his properly administering the Deed. At the time he requested the guarantee on 6 June 2005, Mr Warner's view must have been that there was at least enough of a prospect of the Deed Fund not reaching $500,000 to make it worthwhile asking for the guarantee. I recognise that sometimes people request a guarantee as a precaution, rather than because they expect it is likely to be called on. However, by at least the time of the Updating Report collections had been stagnant for sufficiently long for there to be an obligation under Clause 2.3 to call the meeting. Improper for Mr Warner to Call a Meeting? 182 Mr Lucarelli submitted that there was another reason why Mr Warner could not have called the meeting, namely that the pendency of these proceedings made it improper of him to do so. - Because of Gzell J's Directions? 183 The direction of Gzell J of 2 March 2005 (para [16] above), that no resolution that the Company be wound up be put to a meeting of creditors unless Bidald had been given seven days written notice, did not prevent the calling of a meeting of creditors. Mr Aldridge SC correctly submits that various resolutions could have been put to a meeting of creditors which would not have required any notification to Bidald to comply with the direction of Gzell J. Examples he gave were a resolution to vary the Deed to enable the administrator to take the shortfall guarantee, or a resolution that the Deed not be terminated because of the failure of the Deed Fund to reach $500,000. If that latter resolution was lost, it would be necessary to adjourn the meeting before a resolution that the Company be wound up could be put, so that the notice required by Gzell J's direction could be given to Bidald, but that would not stop the meeting being called in the first place. As well, there would be nothing to stop Mr Warner from calling a meeting to consider a resolution to wind the Company up, after giving seven days notice to Bidald. Proceeding in either of those ways would not only involve no breach of the direction, it would carry through the evidence purpose of Gzell J in giving the direction, namely that Bidald should have the opportunity to seek an interlocutory injunction if there were to be a real threat to have the Company wound up pursuant to a creditors' resolution. - Because it Would Have Been a Contempt? 184 Mr Lucarelli also submitted that it would have been improper for Mr Warner to have called a meeting of creditors to consider a resolution to wind up, when the Winding Up Proceedings were still on foot. For the creditors to pass such a resolution would be to thwart the Winding Up Proceedings. For Mr Warner to facilitate that result by calling a meeting would be improper. I do not accept that conclusion follows. 185 There are some circumstances in which the taking of proceedings in a court in itself limits the action which can be taken outside of court, without the need for any court order. For example, the mere initiation of court proceedings brings with it an obligation to not bring pressure to bear on witnesses concerning their testimony, and an obligation to not carry out any of the other kinds of actions which would amount to contempt of court by interfering with the course of justice in those proceedings. Mr Lucarelli's submission is that, if Mr Warner were to call a meeting of creditors to consider an action to wind the Company up, he would be committing that kind of contempt. As that kind of contempt is a crime, and there is lawful excuse for not performing an obligation if to do so would involve a crime, Mr Warner was, he submits, excused from performing the obligation to call the meeting. 186 Mr Lucarelli relied particularly on In re Septimus Parsonage & Co Ltd [1901] 2 Ch 424. It concerned a situation where a petition for winding up had been presented to the Court, and the directors called a meeting to consider a voluntary winding up. The conduct of one of the directors had been the subject of criticism. That director agreed with another director to arrange for an employee of the company, who held 200 preference shares which had been given to him by the director whose conduct was subject to question, to send a circular to other shareholders. That circular was in substance drafted by the two directors, but was signed by the employee and purported to come from the employee's home address. In it, the employee said he was a large shareholder, expressed concern as to the management of the company, said that he proposed, at his own expense, to make a thorough investigation of the management, and solicited proxies. He received proxies from holders of 60,000 shares. Those proxies, together with others which the directors held, commanded a majority. At the meeting, when a shareholder moved an amendment to appoint a committee of investigation, the shareholder who had solicited the proxies did not use them or demand a poll, and the amendment was lost. The resolution for the company to be wound up voluntarily was then put, and was carried on a poll, with the proxy-holding shareholder using those proxies in favour of the resolution. 187 The court made an order for compulsory winding up of the company notwithstanding this resolution, and directed an inquiry into the circumstances relating to the circular. This led to contempt proceedings being brought against the two directors and the employee. The result was that the two directors were committed to prison for contempt. In the course of his reasons for so doing, Wright J held that the shareholders had been trapped into giving their proxies, which were then used in a way different from what was intended, thus depriving them of their representation. The circular had represented that the person soliciting the proxies was a large shareholder, and was independent, when he was neither. 188 Wright J said, at 429, of the two directors: "I think I must give them credit for knowing perfectly well that if the resolution for a voluntary liquidation was passed it would destroy the power of the Court to make the compulsory winding-up order, unless there was proof, which it is sometimes not very easy to obtain, that the petitioning creditor would be prejudiced by the continuance of the voluntary winding up. It seems to me an obvious inference that all that was done by the respondents was done for the purpose of defeating the creditors petition, and that what they wanted to avoid was a compulsory winding up." 189 The purpose of these remarks was to enquire how far the fraud which had been practiced was directed against the court, and therefore amounted to a real interference with the jurisdiction of the court. It was only by interfering with the jurisdiction of the Court that contempt of court would have been committed. The focus of Wright J's reasons was on the fraud that had been practiced on the shareholders who were sent the circular. The case is not authority for the proposition that, simply because a winding up petition is before the Court, shareholders acting honestly are never able to call a meeting to consider the voluntary winding up of the company, without committing a contempt. 190 Mr Lucarelli also relied upon Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460. That case related to a contempt alleged to have been committed by the Trade Practices Commission by issuing notices under section 155 Trade Practices Act 1974 (Cth) to a party which was already the subject of court proceedings relating to the same subject matter as that into which the statutory notices inquired. The Commission was not, however, a party to those proceedings. 191 Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460 was not a case, like the earlier decision in Brambles Holdings Ltd v Trade Practices Commission (1980) 32 ALR 328 where the Trade Practices Commission had itself commenced proceedings seeking pecuniary penalties (a type of proceeding in which discovery and interrogatories were in principle not available), and then served a section 155 notice on the company charged. It was the use of that notice for the purpose of overcoming the inability to get information through compulsory processes under the processes of the Court which led to the conclusion that the serving of the notice was, in Brambles, a contempt. 192 Mr Lucarelli directed my attention to the remarks of Gibbs CJ in Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460 at 467-8, where his Honour said: "No doubt it is right to say that the power conferred by the section might in some cases be used so as improperly to interfere with judicial proceedings. I incline to think that if the power were used to assist a party in proceedings already pending, in a way that would give such a party advantages which the rules of procedure would otherwise deny him, there would be a contempt of court." 193 However Gibbs CJ went on to recognise, at 468, that "… not every investigation into facts which are the subject of pending proceedings constituted a contempt of court … In the present case it was not shown that the person who gave the notice had any intention to interfere with the course of justice, or that there was a real risk that the exercise of the powers under s155 would in the circumstances have that effect." 194 Brennan J, at 475, reserved his opinion on the question of whether the service of the notice for the purpose of obtaining information for use in proceedings already commenced by the Commission against the person to whom the notice is directed would amount to a contempt. Murphy J said nothing on this question. Mason J, at 474, gave as his reason for there being no contempt, that: "… here there is no reason to suppose that the Commission seeks information for other than a legitimate reason, that is, to perform its functions under the Act." 195 Thus, the remarks of Gibbs CJ quoted at para [192] above, which were in any event obiter dicta, are not concurred in by the rest of the Court. Further, any principle about the extent to which illegitimate advantages cannot be obtained for the purpose of court proceedings does not translate directly to the situation now under consideration, where action out of court would be likely to have the practical effect of making pending court proceedings redundant. 196 Sometimes, actions out of the court in which proceedings are on foot, which have an effect on how those proceedings are carried on, is not contrary to public policy: AG Australia Holdings Limited v Burton & Anor [2002] NSWSC 170; (2002) 58 NSWLR 464; (2002) 58 IPR 268 at [88]-[172], 491-512 of NSWLR. In the present case, for the creditors to consider a resolution to wind the company up would not amount to a contempt of court, even though the Winding Up Proceedings were on foot. It is part of the statutory scheme relating to Deeds of Company Administration under the Corporations Act 2001 (Cth) that a creditor bound by a Deed cannot make or proceed with winding up proceedings until the Deed terminates (section 444E(1) and (2).) Consistently with that, section 444A(5) says that the deed "… is taken to include the prescribed provisions, except so far as it provides otherwise.". Pursuant to Regulation 5.3A.06 Corporations Regulations 2001 (Cth), the prescribed provisions (set out in Schedule 8A of those Regulations) include: "7. … a creditor … must not before the termination of this deed: (a) take or concur in the taking of any step to wind up the company …" 197 While section 444E(3) permits the Court to grant leave to begin or proceed with a proceeding against the Company or in relation to any of its property, that general provision would give way to the specific provision in section 444E(2), which does not admit even of the possibility that the Court could grant leave to a person bound by a deed to begin or proceed with an action to wind the company up, while the deed remained on foot. 198 Section 445C says: "A deed of company arrangement terminates when: (a) the Court makes under section 445D an order terminating the deed; or (b) the company's creditors pass a resolution terminating the deed at a meeting that was convened under section 445F by a notice setting out the proposed resolution; or (c) if the deed specifies circumstances in which it is to terminate—those circumstances exist; whichever happens first." 199 Section 446A(1)(c) contemplates that a meeting of creditors convened under section 445F could pass a resolution terminating the deed, and a resolution that the company be wound up. 200 Thus, the legislation contemplates it as being one of the ordinary and proper ends of a Deed of Company Arrangement that the creditors resolve that the company should be wound up. It also contemplates that any winding up proceedings should be subject to a statutory stay unless and until the deed has come to an end. 201 The Deed in the present case, in Clause 19, says, "The Prescribed Provisions to the extent that it is possible are expressly excluded in this Deed", but Clause 18 includes a prohibition on a creditor taking or concurring in the taking of any step to wind up the Company. 202 In these circumstances, it would not have been a contempt of court for Mr Warner to call a meeting of creditors for the purpose of considering a resolution to wind the Company up, provided only that he complied with the restriction imposed by Gzell J. 203 I note that there is a separate line of cases which hold that the ability of a litigant which has itself commenced court proceedings seeking a particular order, to take self-help action outside court to achieve the same objective is restricted. Such cases justify their conclusion by saying that the person who has brought the action has made an election not to pursue the extra curial remedies: Argyle Art Centre v Argyle Bond & Free Stores [1976] 1 NSWLR 377 at 386; Wynsix Hotels (Oxford Street) Pty Ltd v Toomey [2004] NSWSC 236 at [62]. When neither Mr Warner, nor the Company, have instituted any legal proceedings, that line of cases does not apply to them. 204 For these reasons, I conclude that Mr Warner's failure to call a meeting of creditors is a contravention of the Deed. Materiality of the Contravention – The "Virtual Meeting" 205 The ground in section 445D(1)(d) requires not only a contravention of the Deed, but also that the contravention be a material contravention. The question arises whether, in light of the results of the "virtual meeting" (para [70] above), the contravention should be regarded as a material one. 206 In my view, the "virtual meeting" does not provide a procedure which is a substitute for a meeting of the conventional kind. It does not provide the opportunities which a conventional meeting provides, for one creditor to seek to put information before the other creditors, or to persuade others, or to ask questions. There is no opportunity for interaction through oral discussion – something which the Court's own everyday procedures demonstrate can deepen the understanding and modify the initial views of all participants. Meetings of creditors to decide the fate of companies which have been through an administration are by no means empty formalities. The Second Meeting of Creditors in the present case lasted three hours and five minutes. The means by which the legislation itself provides that creditors shall reach decisions concerning the fate of a company which has been through an administration is a meeting, not an opinion poll amongst creditors 207 Mr Aldridge SC submitted that there is doubt about whether various of the creditors whose "votes" were counted are ones who continue to have a claim against the Company. There were some entities which voted at the virtual meeting, whose names appeared in one or other of the lists of entities which was faxed to Mr Warner on 7 September 2005 (para [126] above). These were: Entity Amount for which admitted to vote Australian Industrial Abrasive $6,162.92 JJ Richards & Son Pty Ltd $229.06 Team Couriers Pty Ltd $11,165.89 York Precision Plastics Pty Ltd $2,218.11 Robert J Ford $500.00 Rodgers Reidy $9,079.73 Total $29,355.71 208 The total amount of creditors who Mr Warner counted for the virtual meeting was $3,037,376.54. Thus, the creditors I have just listed, the status of whose debt is shown by comparison between the list of voters and the fax of 7 September 2005 to be uncertain, represented less than 1% of the votes counted. Each of the creditors whose status was uncertain in this way voted in favour of the continuation of the Deed. Even if their votes were disregarded, this would not affect the pattern of results obtained in the "virtual meeting", namely that a significant majority of all the creditors who voted were in favour of the Deed, but a small majority in value of the unrelated creditors were opposed to the Deed. 209 The reader will recall that the provision in the Deed whereby a meeting of creditors would be called if the Deed Fund fell below $500,000 was something which Mr Warner specifically referred to in the Addendum as being the remedy for a shortfall in recoveries (para [41] above) and referred to twice at the Second Meeting of Creditors (para [43] above). It is not a mere machinery provision in the Deed. 210 In all these circumstances, the outcome of the virtual vote does not lead me to conclude that the contravention of Clause 2.3 of the Deed was not material. In my view, the contravention was a material one. Section 445D(1)(e) – Deed Cannot be Given Effect to Without Injustice or Undue Delay De facto Winding Up and Departure from Equality of Division 211 There is authority that the mere fact that a Deed of Company Arrangement itself provides for creditors to be treated unequally is not always a reason for setting it aside, at least provided that the Deed in question is one which facilitates the objectives of Part 5.3A by allowing the business of the company to continue in whole or part: Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 22 ACSR 169 at 183-4; Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, 152; Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 709, 710. Similarly there is no prohibition on a deed of composition under the Bankruptcy Act (Cth) which, in an open fashion, provides for unequal treatment of creditors: Re Jacobs; ex parte O'Connor (1984) 1 FCR 1, at 7-8. 212 Consistently with that principle, Finkelstein J in, Commonwealth of Australia v Rocklea Spinning Mills [2005] FCA 902 recognises that where the business of the company is to continue there can be circumstances when it is commercially sensible to differentiate between particular creditors, in the amount that is paid to them. However, his Honour says that where a Deed achieves a de facto winding up fairness requires that the property be distributed as in an actual winding up. 213 Mr Aldridge relies strongly on that case, and says that in the present case there has been a de facto winding up. Mr Lucarelli says that, rather, there has been an "orderly winding down" of the affairs of the company, that it was better for that to occur under a deed than in a liquidation, as a way of maximising debt recoveries, and that it is quite consistent with Part 5.3A for a Deed to do that. The unstated assumption in these submissions is that for a Deed to operate outside the proper scope of Part 5.3A would be a relevant form of injustice. Is Achieving an Orderly End to a Company's Business Outside Part 5.3A? 214 The objectives of the Part are set out in section 435A: "The object 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." Thus, section 435A(b) in its terms contemplates that a Deed of Company Arrangement might be one under which a company or its business comes to an end. 215 That has been recognised in the case law. 216 In Dallinger v Halcha Holdings Pty Ltd (in admin) & Anor (1995) 14 ACLC 263 at 268 Sundberg J said: "The machinery provided by the Part should be available in a case where, although it is not possible for the company to continue in existence, an administration is likely to result in a better return for creditors than would be the case with an immediate winding up." 217 In particular, it has been recognised that there can be a deed of company arrangement under Part 5.3A which intends "… that the company or corporation should be buried as efficiently and economically as possible under some arrangement which enables the creditors to get more than if it were to go directly into liquidation.": Scuderi v Morris (2001) 39 ACSR 592 at 597, [13] per Ormiston JA. 218 However, while section 435A(b) contemplates that a Deed of Company Arrangement might be one which supervises the coming to an end of the company or its business, it contemplates that that will occur "if it is not possible for the company or its business to continue in existence". As Young J said in Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427, at 430: "It would be wrong to pare down each of the words and analyse them, as a broad brush approach is needed with respect to s 435A, as stating an aim. However, it is significant that the 1992 amendments did not generally repeal the rule that the creditor was entitled to a winding up, but it focused upon the company – or the company's business. One of the reasons for this was undoubtedly because the company's business was employing Australians and it was in the interests of Australia that as much employment as possible be maintained. Thus, things were to be structured so as to maximise that chance. It is only if that is not possible that the secondary consideration of the best return to creditors comes about." 219 An appeal from that decision was dismissed: Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593, in the course of which the Court of Appeal (Priestley Meagher and Sheller JJA) expressed, at 599, the same thought in more compressed form: "Thus the deed failed to achieve the object set out in s 435A(b), that is to say in the situation where it was not possible for Kalon or its business to continue in existence, the deed did not achieve a better return for Kalon's creditors and members than would result from an immediate winding up of the company." 220 Section 435A regards it as something to be aimed at that the company or its business continue in operation, in whole or part. This includes the possibility that, even though the company does not continue in existence, the business or part of it continues, perhaps run by some other entity. It is within the policy of the Part for the business to be kept alive so far as it can, regardless of who might be running it, rather than have the destruction of the business which sometimes comes with a liquidation where it is not possible for the liquidator to sell the business as a going concern. 221 In the present case, at least still a large extent the business of the Company has continued, run by the New Company. It was an objective of the Deed that the business of the Company would continue, and that has been achieved. In that context, the mere fact that there has been a de facto winding up of the company is not enough to show that the Deed is not the type of deed contemplated by Part 5.3A. 222 What section 445D(1)(e) is concerned with is injustice or delay which arises in giving effect to the Deed. Such injustice might be inherent in the terms of the Deed itself, or might arise when the terms of the Deed are sought to be applied to circumstances which have arisen. 223 There is nothing in the terms of the Deed itself which requires the Company to continue in existence after the termination of the Deed. The nub of the Deed is that the proceeds of certain assets will be distributed amongst those creditors who are entitled to prove under it. The Deed in its terms admits of the possibility that the Company might not continue its business - Clause 3.3 starts with the words "In the event that the Company continues to trade …". Thus, the fact that the Company has ceased to trade is not an injustice in giving effect to the Deed because either ceasing to trade is outside what Part 5.3 contemplates, or because it is outside what the Deed itself contemplates. 224 I accept that the cessation of the business of the Company, and the effective transfer of the business to the New Company was not part of the proposal put to the creditors before the Deed was entered. It might be said that a significant departure from the proposal put to creditors before a Deed was entered amounts to "injustice" within section 445D(1)(e), but, without deciding that point, I shall consider departures from the proposal put to creditors in connection with section 445D(1)(g). Arrangements to Pay Favoured Creditors Outside the Deed 225 Mr Aldridge SC submits that, as well as there being a de facto winding up, there has been a de facto winding up in which the proper principles for division of assets amongst creditors have been significantly departed from. This departure comes, he says, from Mr Kovacic or the New Company having paid out, or come to special arrangements with, the trade creditors whom they favour, while leaving the rest of the creditors to receive a tiny dividend, if anything, under the Deed. 226 I accept that, if there were to be a de facto winding up, and a Deed of Company Arrangement provided for a significant departure from the order for division of assets in a winding up, in many cases a court would regard that as a reason for terminating the Deed. However, the Deed, in its terms, largely complies with the statutory order of priorities in section 556. There has been a departure from that statutory order in that the claims of employees are in some respects not given as high a priority as they would have in a winding up, but, in circumstances where all of the employees have voted in favour of the Deed, and have in any event now been paid out, I would not regard that as a sufficient reason to terminate the Deed. No other departures from the statutory order of priority, in the Deed itself, were pointed to. 227 Mr Aldridge SC submits that, even though the payments to the favoured creditors have been made other than under the terms of the Deed itself, the very fact that they have been made provides a reason for terminating the Deed. He submits that it is hardly fair that the Deed has become binding as a result of the votes of these favoured creditors, against the opposition of Bidald, and that the favoured creditors now do not have to live with the consequences of the Deed, while Bidald remains compelled to do so. Special Benefits to Some Creditors Bound by a Composition 228 It is important to identify the legal principles by which any such argument needs to be judged. The relevant principle had its origin in the situation where, under the common law, a debtor enters into a composition with some or all of his or her creditors, under which the debtor agrees to pay, and the creditors agree to accept, a certain proportion of the debts as a satisfaction of the totality of them. In Ex parte Milner; In re Milner (1885) 15 QBD 605 Brett MR said, at 612: "… it is of the very essence of a composition of this nature that all the creditors that come in under it oblige themselves to each other, and the debtor obliges himself to every one of them, that so far as he is concerned, all of them shall come in upon a footing of equality. This equality is implied by law from the very nature of the transaction, and, if it is carried out by means of a deed, then, unless there is something in the deed which is plainly to the contrary, equality between the creditors becomes an implied condition of the deed, and if any breach of this condition is committed by the debtor the deed becomes voidable by every creditor who has executed it." 229 In accordance with that principle, in Ex parte Milner; In re Milner (1885) 15 QBD 605 a creditor who had signed a composition, one term of which disentitled the creditor from taking bankruptcy proceedings in relation to his debt, was held entitled to take bankruptcy proceedings with respect to that debt when he discovered that other creditors had received benefits, concerning their debt, which were greater than the dividend which the composition provided. Those benefits were ones which were provided to the fortunate creditors not by the debtor personally, but by the debtor's brother, though with the knowledge of the debtor. Even so, the making of the payments stopped the composition from being binding. 230 In Ex parte Milner; In re Milner (1885) 15 QBD 605 at 613 Brett MR said, concerning the implied condition of equality in the composition deed: "… if this condition is not carried out, any creditor who has executed the deed is no longer bound by it, even if the breach of the condition takes place after his execution ." (emphasis added) That principle came to be applied in Milner because of the procedures through which the deed of composition was entered – the deed was drawn up, and presented to creditors for their signature one after the other. The plaintiff in Milner signed the deed before the creditors who were promised the extra benefits signed the deed. Even so, their execution of the deed was induced by the promise of the debtor's brother to pay the extra benefit, and indeed (at 612) they actually received the payments before they executed the deed. Thus Milner is not an authority concerned with extra benefits which are neither promised, nor actually provided, before the composition has become binding. 231 Concerning a composition operating under the general law, Williams J (with whom Rich A-CJ agreed) in E. T. Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd (1940) 64 CLR 84 at 104 – 105 saw no necessary problem in a debtor, after a composition had been entered, making a new agreement with a particular creditor which gave a special advantage to that creditor: "[a] creditor who enters into a composition acts properly so long as he makes full disclosure at the time to all the other creditors of any agreements he may have with the debtor for a preference. After the deed has been executed the debtor is freed from the balance of the debts beyond the dividends he has agreed to pay. Each creditor has forborne to sue for the balance of his debt in consideration of the other creditors forbearing to sue for the balance of their debts, and the debtor has been released from the original debts and therefore from all these balances. The debtor is left the master of his assets so far as they are not charged or otherwise dealt with by the composition. It is to his interest to pay the creditors the amount of the composition and discharge his obligations to them. It is to their interest to be paid. To raise the necessary funds to pay the creditors the debtor can make any new bargain he likes, and if he makes a bargain with one of the creditors he can agree to pay the balance of that creditor's old debt. The creditor who executes a composition deed only agrees to forbear to sue for the balance of his debt under a then existing right. He does not agree not to acquire a new right to recover the balance for some new consideration such as a further advance. In Ex parte Barrow; In re Andrews (1881) 18 Ch. D., at p. 471 Lord Selborne pointed out that there have been many decisions against the validity of underhand dealings in favour of particular creditors contemporaneous with a composition by the general body of the creditors." 232 However there can be some arrangements which a debtor enters into while a composition is still on foot to give a benefit beyond that provided by the composition to a particular creditor, which are not valid. Williams J continued, at 105: " It is established that a promise given upon a new consideration to repay the balance of the old debt is valid if made when the composition agreement has been fully executed by payment and the discharge of the debtor: See Knight v Hunt (1829) 5 Bing 432 [130 ER 1127]; Wild v Tucker (1914) 3 KB 36 . There does not appear to be any distinction in principle between an agreement by the debtor with one of his creditors to pay the balance made after payment of the composition and such an agreement made subject to payment thereof. If the agreement was to pay such balance in priority to or in competition with the composition, then the creditors would be prejudiced because the debtor would be employing assets for his purpose which would otherwise be available for the creditors generally, and such an agreement might be unlawful." 233 The principle stated by Starke J in E. T. Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd (1940) 64 CLR 84 at 93, was not only that: " a private dealing in favour of a particular creditor contemporaneously with a composition for the general body of creditors is inconsistent with good faith", but also that there could be cases where a "… private agreement … for the benefit of a particular creditor, though not made contemporaneously with the composition agreement, could not stand together with the composition for the benefit of all the creditors for it was inconsistent with good faith." 234 However it is not inevitable that an agreement made while a composition is still in force, and which is made between a debtor and creditor who are bound by the composition and confers an extra benefit on the creditor, is contrary to good faith -- the particular agreement which was considered in E. T. Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd (1940) 64 CLR 84 was held not to be contrary to good faith, in substance because it gave the debtor the means of performing the composition. 235 Mr Lucarelli submits that the principle in operation when a court does not enforce a composition which has been obtained by promising special benefits to one of the creditors is that of fraud in equity, arising from the arrangement being secret at the time of the making of the agreement for a composition. He points out that one of the categories of fraud which Lord Hardwicke LC identifies in Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125 at 156; 28 ER 82 at 100 is fraud which is "… an imposition and deceit on the other persons not parties to the fraudulent agreement", one example of which his Lordship states is: "So where a debtor enters into a deed of composition with his creditors for 10 s in the pound, or any other rate, attended with a proviso that all creditors executed this within a certain period, if the debtor privately agrees with one creditor to induce him to sign this deed, that he will pay or secure a greater sum in respect of his particular debt: in this there can be no particular deceit on the debtor, who is party thereto: but it tends to deceit of the other creditors, who relied on an equal composition, and did it out of compassion to the debtor. This court therefore relieves against all such underhand bargains …" 236 Mr Lucarelli submits (correctly) that there is, in the present case, no proof that, at the time the Deed was entered, there was any arrangement or understanding between Mr Kovacic and any of the creditors who voted in favour of the Deed that Mr Kovacic or the New Company would provide any of them with a special benefit additional to the benefits flowing under the Deed itself. He says, again correctly, that it was never put to Mr Kovacic in cross-examination that he had any side agreement with any creditor to pay them more than the dividend under the Deed. 237 I do not accept that it is only as a matter of equitable principle that compositions derived by promising special benefits to certain only of the creditors can be struck down. 238 In E. T. Fisher & Co Pty Ltd v English Scottish and Australian Bank Ltd (1940) 64 CLR 84 at 103 Williams J said a contract to accept a composition was a contract uberrimae fidei. Attempts to go behind such a contract by agreeing to provide one creditor with an extra benefit were recognised at common law as a species of conduct contrary to public policy which could vitiate the contract under which the creditor received the extra benefit, and also disentitle the creditor from participating in the composition: Fisher at 91, 103, Scuderi v Morris (2001) 39 ACSR 592 at 594, [4], 613 [60]. The preferable analysis seems to be that, even though no consideration flows from the debtor for the composition agreement, it is still binding in practical effect because the court will regard any attempt by a creditor to go behind it as contrary to public policy. In the same way, if a debtor owes a creditor a sum of money, and a third party promises the creditor to pay a lesser sum of money in return for the creditor not suing the debtor for the balance, the common law regarded any later attempt by the creditor to sue the debtor for the balance as a fraud or abuse of process which it would not permit, even though the debtor had provided no consideration for that promise: Welby v Drake (1825) 1 C & P 557; 171 ER 1315; Cook v Lister (1863) 13 CB (NS) 543 at 595; 143 ER 215 at 235; Hirachand Punamchand v Temple [1911] 2 KB 330; Sheahan v Carrier Air Conditioning Pty Limited and Others (1997) 189 CLR 407 at 431. The public policy involved has similar objectives to that under which a creditor who has undertaken the task of being a party to litigation in which he acts as in practice the representative of all creditors is prevented from dropping the action in return for money: Hall v Dyson (1852) 17 A & E 785 at 791, 792; Hills v Mitson (1853) 8 Exch 751. Special Benefits to Some Creditors Bound by a Deed of Company Arrangement 239 There are significant differences between the way in which a composition at common law operates, and the way a Deed of Company Arrangement operates. A common law composition operates as a matter of contract between the debtor and those creditors who participate in it, and requires all creditors who are bound by the composition to agree to it. A Deed of Company Arrangement has binding force by virtue of the statute, can become binding if a bare majority of creditors agrees to it, and binds all creditors whether or not they have chosen to vote concerning it. Equality of treatment of all the creditors bound by it is a necessary condition of a composition, while sometime inequality of treatment is permitted under a Deed (para [211] above). 240 Even so, while the principles concerning compositions at common law cannot be translated in their entirety to a Deed entered under a statutory regime for relieving a debtor of debts, it has been recognised that, even in relation to the entering of such deeds, there is a requirement of good faith between the various creditors: Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 36 – 37 (deed of arrangement under the Bankruptcy Act 1966 (Cth)); NZI Capital Corporation Ltd v Lancaster (1991) 30 FCR 441 (composition under Part X Bankruptcy Act 1966 (Cth)). Breach of that requirement of good faith between creditors has on occasions led to a Deed of Company Arrangement being set aside: Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266; Young v Sherman (2002) 170 FLR 86. 241 Whatever might be the root of the principle under which compositions at common law are set aside, I do not accept Mr Lucarelli's submission that it is the secrecy of the arrangement between the debtor and the creditor which is the root of the principle on which a Deed of Company Arrangement under which one creditor receives an extra benefit can be set aside. In Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266 Wallwork J ordered a company to be wound up, when a resolution to adopt a deed of company arrangement had been passed after the de facto director had obtained proxies from certain creditors by promising them that he would pay them the difference between their debt and the distribution under the deed. This was ordered even though the fact that the director had obtained the proxies in this way was disclosed at the meeting of creditors. 242 In the context of statutory arrangements whereby a majority of creditors can bind all creditors to a deed, there is an opportunity for the majority to vote for a proposal detrimental to the interests of the minority of the creditors, and sometimes such conduct can amount to a lack of good faith. It is a lack of good faith because the majority are abusing the opportunity the legislation gives them to bind the minority – and it can be an abuse of that opportunity even if done with complete openness. In Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 37, concerning a deed of arrangement under the Bankruptcy Act 1966 (Cth), the Full Federal Court held that secrecy was not the root of the principle -- that if all creditors agreed to there being differential treatment, that would create no difficulty, but if they did not all agree there would be a lack of good faith between the creditors, and the deed would be set aside. 243 In Young v Sherman (2002) 170 FLR 86; (2002) 20 ACLC 1559 the creditors of a company in administration had put to them a proposal for a Deed under which, if funding could be obtained for litigation against the largest creditor of the company, and succeeded, a premium of ten cents in the dollar would be paid to the participating creditors. That proposal was accepted by the meeting. The Deed was set aside, with Sheller JA (with whom Hodgson JA and Davies A-JA agreed) saying at [65]-[66]: "The premium was a gratuity to which none of the creditors was otherwise entitled in law whether or not the company was wound up. There were difficult questions to be determined at the meeting, in particular the question whether the company should enter into a deed which gave priority to suing Accenture, themselves the largest creditors, over investigating the directors about insolvent trading. To my mind it is indefensible in such a context to offer a gratuity to some creditors, albeit the majority numerically, to be paid if the deed is entered into and the litigation is successful to an extent which allows the gratuity to be paid. In principle, if gratuities can be offered to induce creditors to vote in a particular way at a creditors' meeting, what is the limit on the amount of the gratuity? What is the difference between a gratuity offered to be paid from the resources of the company and a gratuity offered by another creditor from its own resources to achieve a particular result? It is an entirely different thing for a creditor to vote in a particular way because that creditor expects to receive a greater dividend or perhaps full payment of its debt. A practice seeking to achieve results at a creditors' meeting by offering gratuities to other creditors, however publicly, would open up a fertile field for abuse. Significantly the stated object of Pt 5.3A to bring about a better return for the company creditors and members could readily be subverted by gratuities paid to achieve other objects. Such a practice is contrary to the policy of the Act and the public interest." See also at [95] per Davies A-JA. 244 In my view, where it has not been shown that any creditor voted in favour of the Deed because she, he, or it had been promised or even led to believe it might receive some benefit beyond that arising under the Deed itself, the fact that Mr Kovacic or the New Company later provides extra benefits to certain favoured creditors does not demonstrate any lack of good faith between the creditors. 245 This point is made more clearly if one considers what the situation would have been if the Deed had been performed, and had operated so that recoveries and distributions were exactly those which had been envisaged in the Second Report to Creditors. In that situation, it is hard to see that there would be any breach of good faith if Mr Kovacic had decided, after the Deed was entered, to pay, from his own pocket, extra money to certain of the creditors whom he favoured, and whom he had not led to expect any such benefit. When Bidald is in the situation of receiving, as things have eventuated, either no dividend, or a very small dividend, it is not Mr Kovacic's making of the payments to favoured creditors outside the Deed which gives Bidald cause for complaint – rather, it is the Deed having been entered on the basis of the false or misleading information which I have earlier found. 246 I do not accept that the making of these extra payments outside the Deed establishes the ground in section 445D(1)(e). The Terms of the Deed have been Varied in an Unfair Manner 247 Section 445A and 445B Corporations Act 2001 (Cth) provide: "445A A deed of company arrangement may be varied by a resolution passed at a meeting of the company's creditors convened under section 445F, but only if the variation is not materially different from a proposed variation set out in the notice of the meeting. 445B Court may cancel variation (1) Where a deed of company arrangement is varied under section 445A, a creditor of the company may apply to the Court for an order cancelling the variation. (2) On an application, the Court: (a) may make an order cancelling the variation, or confirming it, either wholly or in part, on such conditions (if any) as the order specifies; and (b) may make such other orders as it thinks appropriate." 248 Mr Aldridge SC submits that, in the present case, there has been what amounts to a variation of the Deed, by a procedure which is not the statutorily approved one. The matter said to amount to such a variation is the failure to call a meeting when the Deed Fund did not reach $500,000, and the taking of the shortfall guarantee. 249 I do not accept that this ground is made out. What the ground in section 445D(1)(e) is concerned with is what the consequences will be of the working through of the Deed itself. This ground is not concerned with injustice or delay which arises from a cause other than effect being given to the Deed. Clause 6 of the Deed is Unjust 250 Clause 6 of the Deed is quoted at para [53] above. 251 The Deed defines "Creditor" as meaning, in effect, everyone who would have had a provable debt against the company in a winding up, other than the Associated Creditors. 252 The argument that Clause 6 is unjust depends upon what is the correct construction of Clause 6. The injustice that is referred to is one which would arise if Clause 6 were effective to extinguish creditors' debts immediately upon execution of the Deed. 253 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 397 is a decision of Barrett J on 29 April 2005, giving reasons for the adjournment of the Winding Up Proceedings. The Company had contended that the adjournment could not be granted, for two reasons. The first was that the adjournment application was precluded by section 444E(2)(b) of the Act. His Honour held that was not so, because to make an adjournment application was not to "proceed with" the application for winding up. The Company's second contention was that Clause 6 of the deed had removed the status of Bidald as a creditor, and so it did not have the standing to continue the Winding Up Proceedings in any way. His Honour rejected that contention, on the basis that even when a creditor who has begun winding up proceedings has been paid after the commencement of those proceedings, the proceedings did not lapse, and that was sufficient to enable the court to adjourn them. At [18] His Honour expressly stated that whether Bidald was a creditor of any kind at that date was unimportant for his basis of decision. Thus, his Honour did not need to consider the effect of Clause 6 of the deed. 254 As a matter of construction, clause 6 means that the claims of creditors are extinguished when the Deed has been fully performed. It is not a well drafted clause. However, to construe it as meaning that the creditors' debts were extinguished at the time the Deed was entered would be ludicrously uncommercial. It would mean that, if immediately after the Deed had been adopted it was demonstrated that it was impractical and the creditors would receive nothing under it, the creditors would have no other right to be paid their debts. I doubt that any reasonable creditor would agree to that proposition. As well, a construction under which clause 6 extinguished all debts immediately on execution of the Deed is inconsistent with Clause 2.3, which proceeds on the basis that there would be some point in placing the Company into liquidation – if all the debts of all non-associated creditors had already been extinguished, there would be no such point. As well, Clause 3.2 makes provision for the Company to be liable for any outstanding employee entitlements during the period of the Administration. Those employees who are not Associated Creditors would have no such entitlements, if Clause 6 operated immediately on entry of the Deed. Clause 18 of the Deed provides for a moratorium on creditors enforcing debts or claims, before the termination of the Deed, or after termination unless the Deed is terminated pursuant to a default on behalf of the Company in compliance with its obligations under the Deed. There may well be room for argument about whether the terms of that moratorium, both as to whether it applies to a determination of the Deed by the court rather than a party, and also concerning whether, insofar as it restricts creditors' rights of recovery after the deed is terminated, are ones which the court would regard as unjust. However those questions have not been argued in the present case, and it was probably premature to argue them. The point, for present purposes, is that Clause 18 contemplates that, at least sometimes, the moratorium will cease to have effect after the Deed has been terminated, and that is inconsistent with all claims of creditors having been extinguished immediately upon the Deed having come into operation. 255 When the argument that Clause 6 establishes the ground in section 445D(1)(e) depends upon a construction of Clause 6 which is not correct, that argument itself fails. Section 445D(1)(f) – Oppression or Unfair Prejudice or Unfair Discrimination 256 This ground for setting aside the Deed contemplates that the oppression, prejudice or unfair discrimination arises from the terms or operation of the Deed itself. In substance, Bidald relies upon the same matters as it relied upon under section 445D(1)(e). The reasons why section 445D(1)(e) is not made out (subject to the matter I left undecided in para [224] above) also show that (subject to the same matter left undecided) section 445D(1)(f) is not made out. Section 445D(1)(g) – Termination for Some Other Reason The Deed is Part of a Scheme to Defeat the Legitimate Claims of the Plaintiff as a Creditor 257 Mr Aldridge SC points out, from at least the time when Bidald served a statutory demand on the Company in December 2003, the Company has contended that Bidald's claimed debt is not really due. From the time that Mr and Mrs Kovacic first proposed a Deed in February 2005, their intention was that legitimate creditors would be paid, but not the disputed creditors. Mr Aldridge SC submits that the way in which the payments will end up having been made, both under the Deed and outside it, has worked out fairly close to what Mr Kovacic wished to happen. Further, it has worked out that way through Mr Kovacic deciding to not proceed with the John Holland contracts, taking over the employment of nearly all employees, and acquiring the plant and equipment for the New Company. 258 Mr Kovacic in cross-examination denied that his aim was to ensure that all employees and trade creditors were paid, but that Bidald and other disputed creditors were not paid. I do not accept that denial. Rather, in my view, Mr Kovacic has at all relevant times had a desire to see Bidald not paid if that were possible. 259 However, that does not provide a reason for terminating the Deed. Just as consistently as Mr Kovacic has maintained his view, Mr Warner has made it clear that he will carry out first the Company administration, and then the Deed administration, in accordance with his own views and duties. Once Mr Warner was in charge of the administration of the Company, and, later, of the Deed, Mr Kovacic did not have the capacity to carry his own aim out, other than by making payments to creditors additional to those the Deed provided, or by action which prevented money which would otherwise flow into the Deed Fund from reaching it. Action of the former kind is permissible when (as here) those benefits are not shown to have been given or held out before the Deed was entered. While termination of the John Holland contracts is of the latter kind, it has not been shown to have been done as a means of lessening payments to the Deed Fund. I am not persuaded that it provides a reason to terminate the Deed. The Deed Allows an Insolvent Company to Continue to Trade 260 The availability of insolvency as a ground for winding a company up is part of a policy in the Corporations Act 2001 (Cth) that insolvent companies ought not be allowed to continue to trade. It is predictable that at least some people in the community will deal with a company on the assumption that the company is able to pay its debts as they fall due, and if the company is insolvent the making of such an assumption may well cause such people loss. The opportunity for a company to go into administration when it is insolvent, or the directors are of the view that it is or may become insolvent, is likewise consistent with the policy that insolvent companies should not trade. Consistently with that policy, it is established that it is undesirable, because of the risks to future creditors, to stay a winding up if it would allow the company to go forth free of the winding up but in a continuing state of insolvency: Re Denistone Real Estate Pty Ltd v Companies Act [1970] 3 NSWR 327. Proof of solvency is likewise a requirement for a termination of a winding up: Deputy Commissioner of Taxation v Markment Pty Ltd (in liq) [2005] NSWSC 1123 at [6]. 261 The express words of section 445D(1)(g) are very broad, and should be applied in a way consistent with the policy of the Corporations Act 2001 (Cth), and other public policies to which the law gives effect. Giving effect to the general policy of the corporations law that insolvent companies should not continue to trade is well within a legitimate use of section 445D(1)(g). 262 Part 5.3A was introduced into the Corporations Law in 1992, on the recommendation of the Harmer Committee (Australian Law Reform Commission General Insolvency Inquiry Report No 45). The recommendation of that Committee concerning the enactment of section 445D(1)(g) was: "This will enable the court to draw on the case law which has been developed in respect of our schemes of arrangement. Examples of public policy reasons which may lead a court to avoid or to terminate the deed and which have been cited in cases concerning schemes of arrangement are: • the proposal has a fraudulent or wrongful purpose; • the terms of an arrangement do not comply with the companies legislation generally …; • the deed contemplates that the company would, after the arrangement set out in the deed has been carried out, continue commerce in an insolvent financial condition." (quoted from Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453; (2000) 34 ACSR 391; [2000] NSWSC 99 at [99].) 263 Thus it was not only consistent with the general policy of the Corporations Law, it was within the intention of Parliament in enacting section 445D(1)(g) itself, that a good reason for setting aside a deed of company arrangement is that the deed allows an insolvent company to be in a position to continue trading. 264 This Deed clearly allows the Company to trade once the Deed has worked its course. Further, if it were to do so, it would be trading while insolvent. That provides a further ground for a termination of the Deed. 265 In the witness box, in supplementary oral evidence-in-chief, Mr Kovacic proffered an undertaking to the Court that, if the Deed were not terminated, he would release the debt which the Company owed him. 266 Cross-examination established that the day when Mr Kovacic gave that evidence was the first time that the question of any such release had been raised with him, and that he had not had any independent legal advice about it. Even if I were to accept his undertaking (which I would hesitate to do, given the circumstances in which it was proffered) there is still a significant debt outstanding to Sandra Kovacic, and an even larger debt claimed by Mrs Kovacic, which are not covered by that undertaking. Sandra Kovacic's debt alone, in its present state of being due on demand, would be enough to make the Company insolvent as soon as the Deed came to an end. 267 Thus, this ground is made out. Departure in Practice From the Terms of the Deed 268 A repeated theme of Mr Aldridge's submissions is that the affairs of the Company are not being administered in the way that was represented to the creditors would occur before the Deed was adopted. Quite apart from the shortfall in recoveries and distributions, the Company has not continued in existence and will not do so (though the New Company will carry on the core of the business of the Company), the plant and equipment has been sold rather than retained, the employees have all transferred to the New Company, there has been no meeting of creditors called pursuant to Clause 2.3, and in lieu Mr Warner has obtained the shortfall guarantee. Thus, quite independently of the shortfall in distributions, the creditors are now presented with a significantly different situation to that which was presented to them before they adopted the Deed. The difference is so substantial that what is actually happening is fundamentally different to the arrangement the creditors voted to accept. 269 I accept that submission. In my view what is being put into effect is not the proposal which was put to the creditors, but rather an ad hoc improvisation which has had a historical starting point in the proposal which was put to the creditors. I am satisfied that this basis for termination is made out. Discretion to Set Aside 270 Even if one or more of the statutory preconditions for terminating a deed are made out, there is a further step, of the court actually deciding in its discretion that it should do so: Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527 at 540 (Fitzgerald JA). 271 In exercising the discretion, the court should bear in mind "the maxim that an underpaid creditor is entitled ex debito justiciae to a winding up order is now subject to the substantial qualification that the law provides for the possibility of a deed of company arrangement being imposed against the will of creditors holding as much as 49% of the company's debt.": per Heery J, Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 at 512. Interests of the Creditors 272 There is some authority that the "primary consideration" is the interest of creditors: Deputy Commissioner of Taxation (Cth) v Comcorp Australia Ltd (1995) 13 ACLC 1671 at 1684 (appeal on other grounds dismissed: (1996) 70 FCR 356; (1996) 14 ACLC 1616); Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 at 289. Indeed, the fact that a majority of creditors favour the deed is itself a factor in favour of not terminating it under section 445D: Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 at 282 or avoiding it under section 445G: Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 at 512. 273 In deciding what weight to attribute to the vote of the creditors, the court can take into account the extent to which the voting "was influenced by, if not dependent upon, the votes of those having an interest in resisting any potential proceedings for recovery of preferences … or insolvent trading." (per Santow J, Bathurst City Council v Event Management Specialist Pty Ltd (admin apptd) and Others (2001) 36 ACSR 732 at [6].). 274 In the present case, that entitles lesser weight to be accorded to the votes of the related creditors. However, to the extent that the proofs of Mr Kovacic and Sandra Kovacic were admitted to vote, while I am not making any final decision about their entitlement to the debt which they claim, I do decide that Mr Warner correctly decided on the material before him that there was a sound basis for admitting those proofs. As well, no suggestion has been made in these proceedings that the debts claimed by Mr Kovacic or Sandra Kovacic are non-existent or exaggerated. Thus, when they are creditors, it would be wrong to discount their votes completely. There is no suggestion that either of them have received any preferential payments from the Company or entered any uncommercial transactions with it – indeed, Mr Kovacic has been putting his own money into the Company in the period immediately before presentation of the winding up summons. The extent of any discounting of their votes depends upon the extent of the apparent risk that they were subjected to of being subject to an insolvent trading action. And concerning that, no basis has been suggested for any possible insolvent trading action against Sandra Kovacic. 275 In my view it is also open to the Court, in deciding what weight to attribute to the vote of creditors, to take into account the extent to which the voting was influenced by, or dependent upon, the votes of creditors for whom it was a matter of complete monetary indifference whether there was a winding up or a Deed because they would receive the same amount under either alternative. That has particular application in the present case to the votes of the employees. However, in the present case it does not warrant the discounting of the votes of the employees, because, even though their dividends would be the same under a winding up or a Deed, they had an interest in the Deed being adopted, because it would better ensure their continued employment. That is the type of interest which the objectives of Part 5.3A recognise as legitimate. 276 In 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 and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (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. If that approach were taken, the amount payable by Mr Kovacic under the shortfall guarantee would not be taken into account. 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. Even though the payment under the shortfall guarantee is not distributable to creditors in accordance with the strict terms of the Deed, there is no real doubt that, when and if it is received by Mr Warner, it will be held by him on trust for distribution amongst the creditors. 277 The more likely scenario for operation of the Deed is that the disputed creditors will be admitted. Thus, total distributions to creditors, if the Deed remains on foot, are likely to be not more than five cents in the dollar. Even that figure depends upon Mr Kovacic making the payments under the shortfall guarantee. There has been no real examination of his capacity to pay, but neither has an attack been made upon it. However, Mr and Mrs Kovacic have significant indebtedness to BankWest, which is secured (para [8] above). As well BankWest is a creditor of the Company for (now) around $378,000, and Mr and Mrs Kovacic have given a secured guarantee of that debt. There is a very real possibility that expenses (and in particular legal costs and other expenses connected with these present proceedings) will exceed Mr Warner's estimate in the Updating Report (para [80] above). Even in the Updating Report, Mr Warner estimated the likely maximum distribution under a Deed, without committing himself to a view about what the actual recoveries were likely to be. In my view, whether the non-priority creditors will receive anything at all if the Deed continues is a matter of speculation. 278 It is not possible to reach any firm conclusions about the amounts that are likely to be recovered under a liquidation (para [100] ff above). 279 While prediction of the likely outcome in a liquidation cannot be made at the present time, it can, however, be said that there was a real risk that Mr Kovacic would be subject to an insolvent trading claim if the Company were to go into liquidation. He has been prepared to give the shortfall guarantee, although under no obligation to do so, rather than see the Company go into liquidation. These factors justify a discounting of his views, in considering the interests of the creditors. 280 Another factor is whether the extent of the loss which creditors would sustain if the company were to be in liquidation rather than under a deed constitutes a hardship to those creditors: Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 at 282. 281 Of the creditors who voted against liquidation in the "virtual meeting" Mr Kovacic was by far the largest creditor. He voted for the Deed even though he would receive no distribution under it at all. The next largest creditor was BankWest, with its claim for $378,139. That claim is secured by the assets of Mr and Mrs Kovacic, as well as being owed by the Company. The next largest creditors who voted against liquidation are John Holland (claiming $273,600) and Sandra Kovacic (claiming around $84,000), followed by Malouf Solicitors (claiming around $25,000) and two other corporations claiming around $19,000, and $13,000 respectively. Other creditors are for smaller amounts. There is no reason to believe that termination would impose a detriment so severe that it counted as hardship on any of them, even if it meant that they received no dividend instead of a 5% dividend. For Malouf Solicitors, for instance, termination of the Deed would mean that it would receive nothing, instead of at the very maximum $1,281.09. 282 In an application to terminate a deed of arrangement under the Bankruptcy Act 1966 (Cth), the fact that the dividend to creditors under a scheme of arrangement will be relatively insignificant is a factor which the court can take into account in deciding, in the exercise of its discretion, whether it should order the termination of the arrangement (Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 32-33); that same principle applies here. Any dividend to creditors if the Deed continues in existence is likely to be small. 283 The holding of the virtual meeting has relevance for the exercise of discretion. Even though an administration comes to an end once a Deed of Company Arrangement has been executed, and it is no longer possible for there to be a meeting of creditors for the purpose of the administration (Emanuele v Australian Securities Commission (1995) 63 FCR 54; (1995) 19 ACSR 1 at 14), it can be appropriate in some cases for the court to seek the views of the majority of creditors and to give weight to them: Emanuele v Australian Securities Commission (1995) 19 ACSR 1 at 15; Deputy Commissioner of Taxation (Cth) v Comcorp Australia Ltd (1995) 13 ACLC 1671 at 1684 (appeal on other grounds dismissed: (1996) 70 FCR 356; (1996) 14 ACLC 1616); Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 at 512; Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 at 287-288. Likewise, it can be appropriate for the administrator of the deed to seek out the views of those creditors, and to do so by circular rather than by an actual meeting: Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 at 288-289. 284 However, when the virtual vote has the difficulties which I have identified at para [205] ff above, and when its outcome (para [70] above) was that a small majority in value of the unrelated creditors favoured liquidation, I do not regard the result of that meeting as a very important factor in deciding where the interests of the creditors lies. 285 In all these circumstances, I do not find that the interests of the creditors favour either termination of the Deed, or its remaining on foot. Public Interest 286 It by no means follows that if the creditors would be better off under the Deed than with a liquidation, the Deed will be allowed to stand. As Fitzgerald JA (with whom Beazley JA and Davies A-JA agreed on this point) said in Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 at 543-4, [80]: " … the Court should not the encourage the notion that "anything goes" provided only that that a deed of company arrangement provides some benefit for dissatisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the court's refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently." While that principle applies "especially" when different groups are treated differently, its application is not restricted to that situation. 287 There are decisions of both the Full Federal Court and the New South Wales Court of Appeal, which are hard to reconcile with the notion that there is any "primary consideration" – rather, the discretionary power is to be exercised having regard to both the interest of the creditors as a whole and in the public interest, which latter expression includes considerations of commercial morality and the interests of the public at large: Emanuele v Australian Securities Commission (1995) 63 FCR 54; (1995) 19 ACSR 1 at 15; Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527 at 541, [68] per Fitzgerald JA. To the same effect is Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427 (Young J). In my view, the discretion is to be exercised in accordance with these decisions of appellate courts, and not with any concept of there being any "primary consideration". 288 The "interests of the public" which the court can take into account include applying public policy. Just as a termination of the winding up which is agreed to by all creditors can be refused by the court if it is contrary to public policy (Re Denistone Real Estate Pty Ltd v Companies Act [1970] 3 NSWR 327), so the court can apply public policy in deciding whether to bring an administration to an end: Deputy Commissioner of Taxation v Woodings (1995) 16 ACSR 266 at 275 (Wallwork J). Likewise, public policy can be applied in deciding to bring a Deed of Company Arrangement to an end. 289 One public policy which can be applied is the policy against allowing an insolvent company to continue to be in a position to trade: para [260] ff above). That policy applies in the circumstances of this case. 290 For a director to avoid public examination about the affairs of the Corporation, and the possibility of the type of clawback litigation which is possible in a winding up, by making a payment to creditors, can also be a factor in favour of termination: cf Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 32. It 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; (1995) 19 ACSR 1 at 15. 291 How much weight is given to the fact that the affairs of the company will not be investigated depends upon whether there are circumstances which suggest that investigation is called for. Sometimes, the fact that only a small dividend will be paid to creditors is itself such a circumstance: Lancaster v NZI Capital Corporation Ltd (Sheppard J, Federal Court of Australia, 3 September 1991 unreported, but quoted and approved in Paton v Campbell Capital Ltd (1993) 46 FCR 30 at 32). Sometimes, the fact that it appears that there may be prospects of preference or uncommercial transaction or insolvent trading recoveries can be such a circumstance. In the present case, it is clear that only a small dividend will be paid to creditors, if any dividend at all. There is some basis for believing that insolvent trading recoveries might be possible, but the evidence concerning that topic is fairly slight, and any actual recoveries would depend on a liquidator obtaining the funding to sue. Importance of the False or Misleading Information 292 Even if there has been false or misleading information included in a report, or if material information has been omitted from the report, it does not follow that, if the creditors had full and accurate information, they would have voted against the deed: Commissioner of Taxation v Comcorp Australia Ltd and others (1996) 70 FCR 356 at 400 per Carr J (with whom Lockhart J agreed). It is possible for false or misleading information given to creditors to be material, but still not of sufficient importance to justify terminating the Deed. What matters is how important that information is likely to have been in arriving at a decision how to vote: Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) and others (1997) 23 ACSR 274 at 282. 293 In the present case, the false or misleading information, if corrected, was likely to lead to an estimate that the Deed would result in no return to non-priority creditors at all. That is a matter likely to have been highly important. Indeed, when Mr Warner wrote to Mr and Mrs Kovacic on 9 March 2005 about the possibility of proposing a Deed he said: " The DOCA must give creditors a better return than if the company was wound up (ie liquidated). Under the liquidation scenario the creditors will not receive a dividend. Consequently a DOCA providing a distribution to creditors that exceeds this (say 1 cent in the dollar) could be put to the creditors. However it is unlikely the creditors would agree such a compromise. In my experience creditors rarely accept an offer unless it is commercially attractive. A return of thirty to forty cents in the dollar being a minimum that the creditors might accept." That underlines the importance of the mistaken recovery estimate in the Second Report to Creditors. 294 Even though the information that the Company would continue to trade was false or misleading, in circumstances where the New Company is continuing to trade, and is thereby fulfilling the same purposes relevant to the interests of the creditors that would have been fulfilled if the Company itself had continued to trade, I do not regard that mis-statement as one which is entitled to weight in deciding whether or not to terminate the Deed. Acting on an Application by a Disputed Creditor 295 Another factor which Mr Lucarelli submits I should take into account in is that the courts should be reluctant to exercise the power to terminate a Deed at the behest of a creditor whose debt is disputed. While he cited no authority, I accept that the fact that a debt is said to be disputed can be a proper factor to take into account. 296 However, the weight to be given to that factor will depend upon the apparent strength of the dispute. In the present case, there has already been a trial before Master Macready on the question of whether the debt is disputed, on which the Company lost. I recognise that the evidence presented on that issue at that trial was sketchy, and much of it was rejected as inadmissible, but I see no reason why the Company should not be regarded as having put such case as it had forward on that occasion. The question of whether Bidald was in truth a creditor of the company was never raised as a preliminary issue in these present proceedings. Bidald is shown as a creditor in the books of the company. Mr Warner is clearly of the view that Bidald has enough of a claim to be a creditor to warrant it voting at the second meeting of creditors. On the present evidence, what Mr Kovacic regards as a dispute about the existence of Bidald's debt appears to be without substance. 297 I mention that under section 445D(2), an order under section 445D may be made on the application of, inter alia, a creditor of the company, or any other interested person At the least, if it is not actually a creditor, Bidald has standing to apply for an order under section 445D as "any other interested person". Delay 298 Delay in bringing the application is a particularly important discretionary factor: Re Carey Builders Pty Ltd (1997) 23 ACSR 754; Khoury v Zambena (1997) 23 ACSR 344 at 352. Here, the application was brought promptly. Other Matters 299 Some other factors which can in some circumstances be relevant to the exercise of discretion, but which are not relevant in the circumstances of the present case, are listed in Khoury v Zambena (1997) 23 ACSR 344 at 352-353 (Young J) (decision affirmed in Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527). Conclusion on Discretion 300 In all these circumstances, the appropriate course is to terminate the Deed. Other Matters Arising 301 In light of that conclusion, it is not necessary to give separate consideration to whether the Deed should be set aside under section 445G, or 600A. 302 While both counsel recognised the limitation which section 444E(2) imposed on proceeding with the Winding Up Proceedings while the Deed was on foot, they agreed, very sensibly, that it was appropriate to make, at the hearing, such submissions as they would wish to make if the Deed were to be terminated. Mr Aldridge SC drew attention to section 446B(1), which provides: "The regulations may prescribe cases where - … (b) a company that has executed a Deed of Company Arrangement (even if the deed has terminated); is taken to have passed a special resolution under section 491 that the company be wound up voluntarily." 303 Regulation 5.3A.07(1)(a) of the Corporations Regulations 2001 (Cth) prescribes one such case as being where the Court makes an order under section 445D terminating the deed. He also points out that Regulation 5.3A.07(4) deems the company to be taken to have nominated the administrator of the Deed of Company Arrangement to be liquidator for the purposes of the winding up, and deems the creditors to be taken not to have nominated anyone. In the ordinary course, if a Deed were to be terminated, the effect would, therefore, be that Mr Warner and Mr Worrell, as Deed Administrators, would be taken to have been nominated as liquidators for the purposes of the winding up. 304 Mr Aldridge SC submits that it would be inappropriate that the administrators become liquidators, or that the Company be taken to be wound up voluntarily. Instead, Bidald seeks to have the Company wound up in insolvency in the Winding Up Proceedings. He therefore submits that an order should be made under section 447A that Regulation 5.3A.07 does not operate with any effect in relation to the Company, that an order should be made in the Winding Up Proceedings that the Company be wound up under section 459A of the Act, and that Bidald's nominee, Mr Sheahan, be appointed as liquidator. 305 Mr Lucarelli submitted that, if a liquidator other than the Deed Administrators was to be appointed, it should be someone other than Mr Sheahan. He gave two reasons. The first was that maintaining the appearance of impartiality would favour the appointment of someone nominated by neither party. The second was that Mr Sheahan's fees, at $500 per hour for a partner's time, were at the higher end of the market range of fees for liquidators. 306 When Mr Sheahan is not alleged to have any connection with the Company or Bidald previously, other than indicating his consent to act if appointed, and he is otherwise qualified to act, the mere fact that he has been nominated by Bidald is not a reason for declining to appoint him. 307 Very soon after the second criticism was made, Mr Aldridge SC obtained and tendered a consent by Mr Sheahan to act for lower fees than those at which he had originally consented. Those fees are around the middle of the market range. 308 The substantial ground for a winding up under section 459A is made out, in that the Company is clearly insolvent. In my view it is appropriate that it be wound up by the Court, and that Mr Sheahan be appointed as liquidator. 309 To minimise costs so far as possible, I propose to make a costs order now. However, I do so without having heard the parties, and on the assumption that no principle or factual circumstance bears upon the costs order other than that costs should follow the event. I shall reserve leave to the parties to otherwise argue. Orders In Proceedings 2583 of 2005 1. That the Deed of Company Arrangement made 6 April 2005 between Miles Special Builders Pty Limited (joint administrators appointed) (ACN 060 644 966), Mile Kovacic, and Anthony Warner and Ivor Worrell (joint administrators of Miles Special Builders Pty Limited) be terminated. 2. That Part 5.3A Corporations Act 2001 (Cth) is to operate in relation to Miles Special Builders Pty Ltd (subject to a Deed of Company Arrangement) so that Regulation 5.3A.07 does not operate with any effect in relation to the Company. 3. That the plaintiff's costs of these proceedings be paid by the Company. 4. That order 3 not be entered until 21 days after the date of delivery of reasons for judgment in this matter. 5. That either party have leave, on not less than two (2) days written notice to the other, to argue that order 3 should be revoked or varied. In Proceedings 2858 of 2004 1. That any further compliance with the Rules concerning this matter be dispensed with. 2. That the Company be wound up in insolvency. 3. That John Sheahan be appointed as liquidator of the Company. 4. That the costs of the plaintiff of these proceedings be paid from the assets of the Company. 5. That order 4 not be entered until 21 days after the date of delivery of reasons for judgment in this matter. 6. That either party have leave, on not less than two (2) days written notice to the other, to argue that order 3 should be revoked or varied. ********** 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.