In the matter of WFH Enterprises; Ridley Agriproducts v Nicholls [2006] NSWSC 1033

New South Wales Supreme Court

CITATION : In the matter of WFH Enterprises; Ridley Agriproducts v Nicholls [2006] NSWSC 1033

HEARING DATE(S) : 5 May & 9 May (submissions) 2006

JUDGMENT DATE : 3 October 2006

JURISDICTION : Equity

JUDGMENT OF : Austin J

DECISION : Defendant's application for termination of deed dismissed; new deed administrator appointed.

CATCHWORDS : CORPORATIONS - deed of company arrangement - whether deed administrator was in a position of conflict of interest - whether deed should be terminated on ground that its purposes have failed

Bills of Sale Act 1898 (NSW) ss 4, 5C, 6 LEGISLATION CITED : Corporations Act (2001) (Cth) ss 445D, 449B Security Interests in Goods Act 2005 (NSW) s 37, Schedule 4

Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235 CASES CITED : Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612 City & Suburban Pty Ltd v Smith (1998) 28 ACSR 328

PARTIES : Ridley Agriproducts Pty Ltd (P) Alan Richard Nicholls as Deed Administrator of WFH Enterprises Pty Ltd (under Deed of Company Arrangement) (D)

FILE NUMBER(S) : SC 6424/05

COUNSEL : S Golledge (P) J T Johnson (D)

SOLICITORS : Mark O'Dea (P) Sally Nash & Co (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

TUESDAY 3 OCTOBER 2006

6424/05 IN THE MATTER OF WFH ENTERPRISES PTY LTD (UNDER DEED OF COMPANY ARRANGEMENT); RIDLEY AGRIPRODUCTS PTY LTD V ALAN RICHARD NICHOLLS (AS DEED ADMINISTRATOR) JUDGMENT 1 HIS HONOUR: WFH Enterprises Pty Ltd ("the Company") is subject to a deed of company arrangement dated 2 June 2004 ("the DOCA"). The Deed Administrator is the defendant, Mr Nicholls. The plaintiff is a Deed Creditor. In October 2001 it entered into a written agreement to supply stockfeed to the Company on 30 days' credit, guaranteed by two directors of the company, Mr Frank Hands and Mr Rodney Hands. It supplied stockfeed under the agreement, for which it was not paid, and in September 2005 it obtained judgment against Mr Rodney Hands in the District Court of New South Wales for $266,345.76. That amount remains owing to the plaintiff. 2 By its Amended Originating Process, the plaintiff seeks orders concerning compliance with the DOCA and orders arising out of its complaints about Mr Nicholls' conduct as Deed Administrator. The primary relief sought by the plaintiff is an order under s 449B of the Corporations Act 2001 (Cth) removing Mr Nicholls as Deed Administrator and replacing him with its nominee, Mr Paul Brake. As an alternative, the plaintiff seeks the appointment of a special purpose administrator or trustee to take control of certain assets of the Deed Administration. Another order sought in the Amended Originating Process is an order for the appointment of a referee to report to the court on the state of the Company's loan account. Other orders sought in the Amended Originating Process were not pressed at the hearing. 3 At the hearing of the Amended Originating Process, Mr Nicholls moved on an interlocutory process seeking directions as to the further conduct of the Deed Administration, and (as principal relief) a declaration and orders for the termination of the DOCA, the winding up of the Company, and the appointment of Mr William Rangott as liquidator. Counsel for Mr Nicholls informed the court that his client did not wish to continue to act in the administration of the Company. Hence, if the DOCA was not terminated, Mr Nicholls would tender his resignation as Deed Administrator, and if it was terminated and the Company moved into liquidation, Mr Nicholls would not wish to be liquidator. Consequently, it ceased to be necessary for the court to decide whether Mr Nicholls should be removed as Deed Administrator, though the question whether there are grounds for his removal remains relevant to the question of costs. The primary substantive issue for determination is whether (as Mr Nicholls advocates) the DOCA should be terminated and the Company wound up, or (as the plaintiff submits) it should be continued under another Deed Administrator. Formation and trading history of the Company 4 The Company was formed in June 2000 and carried on a piggery business. Initially its directors were Frank Hands, his wife Thelma Hands, and their son Rodney Hands, and they held the shares in the Company equally. The Company granted a series of charges to Rabobank Australia Ltd, Landmark Operations Ltd and Landmark (Qld) Ltd during the period from February 2002 to July 2003. 5 The Company's piggery business was carried on at premises owned by the Company known as Woodlands (also referred to in the evidence as Bristowe). The three directors also carried on an associated piggery enterprise in partnership in equal shares, trading under the registered business name "F & T Hands and Son" ("the Partnership"). The Partnership operated two piggeries, one at a property known as Tamanna and the other at a property known as Warwick Downs. 6 There was substantial plant and equipment used for the piggeries. Most of it was owned by the Partnership, apparently because the partnership was in business and acquired the equipment before the company began in the year 2000. 7 There is substantial evidence about the Company's financial statements during the period from 2000 to 2004, which it is unnecessary to canvass here. The Company experienced trading difficulties for various reasons, including drought in 2002/3, reductions in the price per kilo for pork and decline in export markets. On 8 April 2004 the directors resolved to place it in voluntary administration, and Mr Nicholls was appointed administrator. 8 When it received notice of the appointment of an administrator to the Company, the plaintiff ceased supplying the Company with stockfeed, and on 14 April 2004 it entered into a new supply agreement with the Partnership. Thereafter until about 5 July 2004 the plaintiff supplied stockfeed to the Partnership under substantially the same delivery arrangements as previously obtained. Mr Nicholls' report to creditors as voluntary administrator 9 Mr Nicholls' written report to creditors under s 439A was dated 5 May 2004. It is, on its face, a thorough and detailed report. He said that the assets of the company comprised the property at Woodlands, for which he gave an "estimated remissible value" of $1,158,750, pigs which he valued at approximately $389,000, debtors of approximately $986,000, and a small amount of plant and equipment. The debtors comprised a trade debtor of about $25,000 and the Partnership, said to owe the Company $961,000. According to Mr Nicholls, this liability related to feed supplied but not paid for. 10 Mr Nicholls reported that Landmark held security over the pigs in the sum of approximately $423,000, and Rabobank held security by mortgage on Woodlands for $1.225 million. At a later stage it emerged that the three partners had guaranteed repayment of the Company's loan to Rabobank and had mortgaged the Partnership's properties at Warwick Downs and Tamanna to secure the guarantee. 11 According to the s 439A report, unsecured creditors of the Company stood at approximately $1.242 million. The report attached a list from which it appears that there were over 40 arms' length unsecured creditors and no related creditors. The Company's estimated deficiency was nearly $354,000. 12 The report also gave information about the financial position of the Partnership. The estimated realisable values of Warwick Downs and Tamanna were about $963,000 and $500,000 respectively. Plant and equipment was valued at about $445,000. There was a budgeted cashflow surplus after the sale of the Partnership pigs of nearly $677,000. A partnership loan by Rabobank was shown as a secured debt of approximately $384,000, and the liability to the Company of $961,000 was also shown as a secured debt (although there is no other evidence to suggest that the Company held any security over Partnership assets for this debt). There were employee entitlements of about $47,000 and unsecured creditors of the Partnership of about $550,000. The estimated excess of assets over liabilities was about $637,000, and the estimated surplus after taking into account unpaid creditors of the Company was about $298,000. 13 The report included a sensitivity analysis which indicated the percentage change needed in respect of each of a series of key variables in order to reduce the budgeted consolidated surplus to a zero balance. The variables included debtors, pigs, the value of the properties, cashflow and plant and equipment. 14 Mr Nicholls said in the report that his investigations to that time had not identified any payments a liquidator would be able to recover as unfair preferences, and he expressed the view that the Company had maintained a proper accounting system and adequate records. However, he was of the opinion that further investigation could reveal that the Company may have traded whilst insolvent. 15 Mr Nicholls had before him a proposal by the directors for a deed of company arrangement, under which both the Company and the Partnership would exit the pig industry by growing out the existing pig stock, with trading operations to be ceased in December 2004 or January 2005. The directors would continue to operate the piggeries, using their expertise for effective extraction from the industry. As the operations were wound down, surplus assets would be realised and the directors would account to the Deed Administrator for the sale proceeds. The proposal was that the Company's creditors, and the Partnership's creditors, would be paid out of the realisation of the assets of the Company and the Partnership, and to that end of the Company would be provided with second mortgage security over the Partnership's assets including Warwick Downs and Tamanna. 16 Mr Nicholls observed in his report that "the proposed course of action will benefit creditors of the company as it will remove any question of the partners becoming bankrupt and allow creditors of the company to receive the funds from the partnership without the potential of a Trustee in Bankruptcy clawing the funds back". He added: "For the creditors of the company to be paid in full the creditors of the partnership must also be paid in full. If the partnership fails, the proposed Company Deed would be void against a Trustee in Bankruptcy pursuant to section 120 of the Bankruptcy Act 1966. In this event, the company would be returned to being a creditor in the bankrupt estate for the balance of moneys owed to the company and participate in a dividend on a pari passu basis with all other ordinary unsecured creditors of the bankrupt estate." 17 A copy of a draft deed of company arrangement to implement the directors' proposal was attached to Mr Nicholls' report. He recommended that the creditors accept the proposal. At their meeting on 12 May 2004 the creditors resolved that the company execute the proposed deed of company arrangement. The Deed was executed on 2 June 2004. The DOCA 18 The parties to the DOCA are the Company; Mr Nicholls as voluntary administrator and Deed Administrator; and Frank, Thelma and Rodney Hands as "the Funders". The provisions of the DOCA include the following: (a) upon execution of the DOCA, Mr Nicholls ceased to be voluntary administrator and became the Deed Administrator (clause 2), acting as agent for and on behalf of the company (clause 3); (b) the Deed gave the Deed Administrator broad powers, including powers of sale and distribution (clause 4 and Schedule 1), and the power to use funds in any bank account established under the Deed for the purpose of giving effect to the Deed (clause 6.7); (c) during the continuance of the DOCA, the Deed Administrator was to take no part in the management operation of the Company's business (clause 5), and the real property of the Company and the Partnership were to be marketed for sale by the Company and the Funders (clause 6.4); (d) the Company's piggery business would be wound down by the sale of all livestock, plant and equipment and the property at Woodlands (clauses 6.1 and 6.2); (e) the Partnership's piggery business would be wound down by the sale of all livestock, plant and equipment and the properties at Warwick Downs and Tamanna (clauses 6.1 and 6.2); (f) the Funders covenanted and agreed to create mortgages in registrable form over the Warwick Downs and Tamanna properties and a Traders Bill of Sale in registrable form over the assets and undertaking of the Partnership in favour of Mr Nicholls as Deed Administrator, for the purpose of securing the due and punctual performance of the obligations of the Funders and the Company under the DOCA (clause 7.1); (g) the Company covenanted and agreed to create a mortgage in registrable form over the Woodlands property and a Traders Bill of Sale in registrable for over the assets and undertaking of the Company, in favour of Mr Nicholls as Deed Administrator, for the purpose of securing the due and punctual performance of the obligations of the Company and the Funders under the DOCA (clause 7.2); (h) in the event that the Company's assets were not sold by the Company or the Partnership's assets were not sold by the Partnership by 1 February 2005, the Deed Administrator was to have such assets valued and sold (clause 6.5); (i) the net proceeds of sale of the company's assets after payment of secured creditors (clause 6.1) and deduction of trading costs and direct selling costs, were to be paid to a bank account operated by the Deed Administrator (which I shall call "the Company Deed Fund Account") (clauses 6.3 and 9.1); (j) the proceeds of sale of the Partnership Assets, less payments to secured creditors (clause 6.1) and less direct selling costs, were to be paid to a second bank account operated by the Deed Administrator (which I shall call "the Partnership Asset Realisation Account") (clauses 6.3 and 9.2); (k) the funds in the Partnership Asset Realisation Account were to be applied, first, by pro rata payments to satisfy debts properly due by the Partnership and each of the partners individually to their creditors (clause 6.6(a)); second, to the Company Deed Fund Account to meet the remaining amount outstanding by the Partnership to the Company (clause 6.6(b)); third, to the Company Deed Fund Account to the extent of the remaining amount owing under the Deed (that is, the amount owing by the Company to its creditors) (clause 6.6(c)); and finally, to the Funders in equal shares; (l) the funds in the Company Deed Fund Account were to be applied, first, in payment of the Administrator's costs and disbursements; and second, pari passu in payment of all Deed Creditors (clause 8); (m) the DOCA established a Committee of Inspection and made provisions for the Deed Administrator to report to the Committee and consult with it (clause 21), and modified the provisions of the Corporations Regulations so that they applied to the holding of meetings of creditors under the Deed (clause 20); (n) there were provisions obliging the Deed Administrator to convene a meeting of creditors, and enabling him to initiate a procedure by giving a notice to the Company and the Funders, which would lead to the termination of the Deed, if the Funders did not comply with the requirements of clause 6 or circumstances arose where the Deed Administrator formed the view that the Company or the Funders may not be able to comply with the obligations imposed upon them under clause 6 (that is, the obligations relating to the realisation of the assets of the Company and the Partnership, and the payment of the net proceeds to the Deed Administrator) (clause 24); (o) the Administrator was empowered to settle debts of the Funders should any creditors of the Funders commence bankruptcy proceedings (clause 25); (p) the Funders each irrevocably appointed the Deed Administrator as their attorney to execute such instruments and do such things as the attorney deemed speedy and for further and better assuring the performance of the obligations of the Company and each of the Funders under the terms of the Deed or in any security given pursuant to the Deed, or for carrying out or in connection with the exercise of any of the powers of the Deed Administrator or for the protection, benefit or improvement of any asset or property the subject of any security given under the Deed (clause 29); (q) there were the usual provisions for a moratorium (clause 13), the acceptance by Deed Creditors of their distributions in full satisfaction of their claims (clauses 14 and 15), termination of the deed upon achievement of its purpose (fourth 26) and other miscellaneous provisions. 19 In June 2004 Mr Nicholls' solicitors forwarded to the plaintiff's solicitor by e-mail the text of a mortgage by the Funders to Mr Nicholls as Deed Administrator over the Warwick Downs and Tamanna properties, a mortgage by the Company over the Woodlands property, and a Bill of Sale over Partnership plant and equipment (including the Partnership 's feedmill) and livestock. It is not clear whether these documents were ever executed by all three Funders, especially having regard to the fact that Mr Frank Hands died shortly afterwards. Mr Nicholls subsequently lodged a caveat against the real property, to protect his interest under the DOCA rather than any asserted interest under unregistered mortgages. Events after the execution of the DOCA, up to the bankruptcy of Mr Rodney Hands