Supreme Court New South Wales Medium Neutral Citation: TNT Building Trades Pty Limited v Benelong Developments Pty Limited (administrators appointed) [2012] NSWSC 766 Hearing dates: 12 and 13 June 2012 Decision date: 09 July 2012 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Parties to bring in short minutes to give effect to judgment within 14 days. Plaintiff to pay the costs of the proceedings. Catchwords: CORPORATIONS - Creditors' meeting - Resolution of meeting - Corporations Act 2001 (Cth) s 600A(2)(a) - Application to set aside resolution of creditors' meeting. CORPORATIONS - Termination of deed of company arrangement - Whether deed should be terminated by Court - Interests of creditors of company as a whole - Whether winding up would allow more favourable outcome or better return to creditors than deed of company arrangement and whether deed of company arrangement would be contrary to the interests of or prejudicial to creditors as a whole. Legislation Cited: - Building and Construction Industry Security of Payment Act 1999 (NSW) - Corporations Act 2001 (Cth) Pt 5.3A, ss 435C, 439A, 439C, 445D, 445D(1), 445D(1)(f), 445D(1)(g), 447A, 447A(2), 461(k), 600A, 600A(1)(a), 600A(1)(b), 600A(1)(c), 600A(1)(c)(ii), 600A(2), 600(2)(a) - Duties Act 1997 (NSW) s 211 - Partnership Act 1892 (NSW) s 20(1) - Real Property Act 1900 (NSW) s 42 - Stamp Duties Act 1920 (NSW) s 84 Cases Cited: - ACN 075 911 410 Pty Ltd v Almaty Pty Ltd [2011] NSWSC 333 - Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99; 12 ACLC 237 - Arnautovic v Cvitanovic [2011] FCA 809; (2011) 199 FCR 1 - B & B Forklifts Pty Ltd v CBFC Ltd [2008] NSWSC 271; (2008) 216 FLR 294 - BGC Contracting Pty Ltd v Kimberley Gold Pty Ltd [2000] WASC 264; (2000) 35 ACSR 633; 18 ACLC 894 - Bellissimo v JCL Investment Pty Ltd [2009] NSWSC 1260 - Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 - Boral Recycling Pty Ltd v Wake [2009] NSWSC 712 - Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22; (1974) 131 CLR 321 - Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4;(1998) 192 CLR 226 - Composite Buyers Ltd v State Bank of New South Wales (1990) 3 ACSR 196 - Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 - Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189; 16 ACSR 266; 13 ACLC 469 - Emanuele v Australian Securities Commission (1995) 63 FCR 54; 141 ALR 506; 19 ACSR 1 - Emanuele v Australian Securities Commission [1997] HCA 20; (1997) 188 CLR 114; 144 ALR 359 - Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598 - Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139; 13 ACLC 885 - Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 - Kantfield Pty Ltd v Plastamatic (Australia) Pty Ltd (1994) 14 ACSR 687 - Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21; (2003) 21 ACLC 371 - Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 - Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126 - Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 - McVeigh v Linen House Pty Ltd (No 2) [2000] VSCA 4; (2000) 1 VR 31; 18 ACLC 311 - M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (admin apptd) (1995) 19 ACSR 27 - Mills v United Counties Bank Ltd [1912] 1 Ch 231 - Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 - Raulfs v Fishy Bites Pty Ltd [2012] NSWCA 135 - Re Connolly Bros Ltd (No 2) [1912] 2 Ch 25 - Re Mustang Marine Australia Services Pty Ltd (admins apptd) [2010] NSWSC 1429 - Re Paradise Constructors Pty Ltd (admin apptd) [2004] VSC 92; (2004) 8 VR 171; 182 FLR 135 - Security Trust Co v Royal Bank of Canada [1976] AC 503; [1976] 2 WLR 437 - Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1 - Southern Wine Corporation Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162 - Spacorp Australia Pty Ltd v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 979 - Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 - United Builders Pty Ltd v Mutual Acceptance Ltd [1980] HCA 43; (1980) 144 CLR 673 - Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319 Texts Cited: - W D Duncan and W M Dixon, The Law of Real Property Mortgages, The Federation Press, 2007 Category: Principal judgment Parties: TNT Building Trades Pty Limited (Plaintiff) Benelong Developments Pty Limited (administrators appointed) (First Defendant) Burbank Montague Pty Limited (Second Defendant) Riad Tayeh (Third Defendant) Antony de Vries (Fourth Defendant) Representation: Counsel: G. Carolan (Plaintiff) D. Smallbone (Defendants) Solicitors: Harris & Co (Plaintiff) Somerset Ryckmans (Defendants) File Number(s): 11/393181 Judgment 1By its Amended Summons filed in these proceedings, TNT Building Trades Pty Limited ("TNT") seeks an order under s 600A(2)(a) of the Corporations Act 2001 (Cth) that a resolution passed at a meeting of creditors of Benelong Developments Pty Limited (in administration) ("Benelong") on 20 January 2012 be set aside. TNT also seeks consequential orders that Benelong be wound up under s 461(k) of the Corporations Act and that a liquidator be appointed provisionally to Benelong. 2The Amended Summons also sought a declaration that Benelong was entitled to be indemnified from the assets of the Benelong Crescent Unit Trust ("Trust") in respect of a judgment debt owed by Benelong to TNT in certain proceedings in the District Court of New South Wales and as to the costs of these proceedings and an order that the Second Defendant, Burbank Montague Pty Limited ("Burbank Montague") (which is presently the trustee of the Trust) pay to the liquidator of TNT the judgment debt and the costs of these proceedings from the assets of the Trust. Those orders were not pressed in submissions before me and it is not necessary for me to address them further. Factual background 3Benelong was appointed as trustee of the Trust under a Deed of Appointment dated 21 July 2006 and remained as trustee until September 2011. The shareholders of Benelong were Mr Desmond Lee, as to one share, and another entity Benelong Montague Pty Limited, which is associated with Mr Lee, as to three shares. Mr Lee is the sole director of Benelong. Benelong, in its capacity as trustee of the Trust, was the registered proprietor as tenant-in-common in equal shares with Gornoa Pty Ltd ("Gornoa") of land situated at Benelong Crescent, Bellevue Hill, at which townhouses were being developed by those entities in partnership. TNT undertook construction work on those townhouses. 4A Facility Loan Agreement ("Loan Agreement") dated 5 December 2007 between Benelong (as trustee for the Trust) and Gornoa (together described as the "Borrower") and Mr Lee as lender recited that Mr Lee had already advanced to the Borrower $1,208,630.13 ("First Loan") and had agreed to advance a further $1.5m ("Second Loan") for the purposes of enabling the Borrower to carry out the development. By clause 1.1 of the Loan Agreement, the parties acknowledged that Mr Lee had advanced the First Loan by instalments on specified dates as set out in an annexure to the Loan Agreement. By clause 1.2 of the Loan Agreement, Mr Lee agreed to advance to the Borrower the Second Loan on dates nominated by it, on the terms and conditions of the Loan Agreement. Clause 3.1 of the Loan Agreement provided for interest payable at 20% per annum. It was common ground between the parties that the First Loan and the Second Loan were made to Benelong and Gornoa in their capacity as partners and they were referred to in submissions before me as the "partnership loan". 5The properties are subject to a registered first mortgage to secure a substantial loan made by a third party lender. Benelong (as trustee for the Trust) and Gornoa granted a second unregistered mortgage dated 5 December 2007 ("Mortgage") in favour of Mr Lee, which secured payment to Mr Lee of "all money owing now or at any time in the future" by Benelong (as trustee for the Trust) and Gornoa including money drawn in respect of the Loan Agreement. 6In September 2011, Burbank Montague was appointed trustee of the Trust. On 1 November 2011, Benelong executed a transfer transferring its interest in the property to Burbank Montague for a stated consideration of $1. Mr Lee is also the sole director of Burbank Montague. 7TNT obtained an adjudication in respect of the balance claimed for unpaid construction works under the Building and Construction Industry Security of Payment Act 1999 (NSW) and entered judgment against Benelong for $243,532.76 on 22 November 2011. 8Mr Riad Tayeh and Mr Antony De Vries ("Administrators") were appointed as administrators of Benelong on 8 December 2011 under Part 5.3A of the Corporations Act. 9The Administrators report dated 10 January 2012 under s 439A of the Corporations Act ("Administrators' Report") recommended that creditors approve a Deed of Company Arrangement ("proposed DOCA") at a second meeting of creditors to be held on 20 January 2012. The proposed DOCA provided for a one-off contribution of $35,000 by Mr Lee within 14 days of the proposed DOCA being executed. That amount would be distributed in the order: "1. Any creditors who would be entitled to payment in priority to ordinary unsecured creditors, in a winding up, as provided for by section 556 of the Act; excluding Mr Desmond Lee or people related to Mr Desmond Lee; and 2. In payment of a pari passu distribution in respect of all other admitted claims of creditors." Mr Lee and Baker & Company and Phoenix Lacquers and Paints Pty Ltd ("Phoenix") (which were entities associated with Mr Lee) would not participate in that distribution under the proposed DOCA. The Administrators' Report estimated that the Proposed DOCA would result in a return to ordinary unsecured creditors of 8¢ in the dollar at most and that there would be no return in the event of liquidation. That recommendation was made on the basis that Mr Lee was a secured creditor of Benelong in the amount of at least $9,010,499. Whether the Administrators' Report was misleading 10The proceedings were conducted on the basis that the matters raised by s 445D of the Corporations Act are relevant, at least by analogy, although no question of setting aside the proposed DOCA arises where undertakings were given to defer its execution and it has not yet been executed. A deed of company arrangement can be terminated under s 445D of the Corporations Act if an administrator's report provided to creditors contains false or misleading information or a material omission: McVeigh v Linen House Pty Ltd (No 2) [2000] VSCA 4; (2000) 1 VR 31; 18 ACLC 311; Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391; Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21; (2003) 21 ACLC 371. This provision reflects the importance of the information to be provided to creditors when considering the options provided under s 439C of the Corporations Act, which was emphasised by Gillard J at first instance in Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126 at [64]-[66], where his Honour observed that: "[64] S[ection] 439C makes provision for what the creditors may decide at the meeting. The three alternatives are open to them, namely, that the company execute a deed of company arrangement or the administration should end or the company be wound up. [65] The provisions of Pt5.3A leave the fate of the company in the hands of the creditors and no-one else. The fate of the company is not left to the administrator, nor is it left to the court. The decision is the decision of the creditors at the second meeting. [66] Like all decision makers the creditors must have information which is relevant and accurate. They must have all information that "can reasonably be expected to have been material" to them deciding whether to vote in favour of the resolution that the company execute the deed - see s445D(1)(a)." 11In assessing the adequacy of the information contained in the administrator's report, the court will recognise that an administrator's investigation must be conducted in a short time: Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139; 13 ACLC 885; McVeigh v Linen House Pty Ltd (No 2) above. TNT bears the onus of proof in an application to set aside a deed of company arrangement: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510. 12The Administrators' Report relevantly noted that: "[Mr Lee] also holds an unregistered second mortgage against the Property which was executed on 5 December 2007 as security for his loan of approximately $6.2 million (excluding interest) and $3.6 million to the Company and the partnership respectively." (Ex D6, 1/313) "... Mr Desmond Lee holds an unregistered second mortgage against the Property as security for his loan of approximately $6.2 million (excluding interest) to the Company. This mortgage secures payment to the Mortgagee of all money owing now or at any time in the future by the Company." (Ex D6, 1/314) 13The Administrators' Report observed, in relation to the Mortgage, that: "The points at issue in relation to this mortgage are whether such a transaction is in any way voidable by a Liquidator. It is not uncommon for second ranking mortgagees to hold unregistered mortgages. The fact that these mortgages are not registered on title does not in and of itself render such security invalid. Further, the issue of not noting, on the Company Register, such security interest does not necessarily render such security invalid as against the real property noting that the property is owned by the Trust and not the Company. Further, it is also not uncommon for directors and/or shareholders to secure advances they make to a company by way of mortgages or fixed and floating charges. Such security interests are subject to the same scrutiny for value and commerciality as any other transaction subject of the [Corporations] Act. The other point at issue is whether the interest rate charged at 20% per annum is at a reasonable rate and is not usury. It should also be noted that on the present values the second secured creditor is unlikely to recover the majority of the interest charged." (Ex D6, 1/314-315) 14The Administrators' Report therefore identified issues as to the fact that the Mortgage was not registered, that it had been granted to Mr Lee as a director and as to the rate of interest charged. It did not identify an issue as to whether the Mortgage was then unenforceable because, as was the fact, it was then unstamped. The Administrators' Report also suggested that questions as to the validity of the Mortgage "can only properly be answered by a Court" and: "...if the documents are valid then they would be enforceable against the Property. Such a claim would rank in priority to all unsecured creditors' claims." (Ex D6, 1/315) 15The Administrators also raised the possibility that the creditors could fund an extension of the administration period to obtain legal advice as to the enforceability of the Mortgage. Having raised that possibility, the Administrators then went on to express views on the basis that the Mortgage was enforceable, rather than, for example, on alternative bases that it was and was not enforceable, observing that: "This security and the quantum of the interest rate may be challenged but the cost of such a challenge given the likelihood of success would in our opinion not be warranted." (Ex D6, 1/315) The Administrators' Report also expressed the view that: "... other than being able to invalidate the [M]ortgage, we consider that ordinary unsecured creditors are unlikely to realise a dividend should [Benelong] be placed into liquidation, as the value of the asset in the Trust is not sufficient to discharge the secured claims on the Property." (Ex D6, 1/315) 16The Administrators' Report contained an estimate of net realisable value of the properties which assumed the validity of Mr Lee's security in an amount exceeding $12.6 million (Ex D6, 1/319) and stated that: "Given the quantum of the fixed charges against the Property is significantly higher than the realisable value of the Property as estimated by [an external valuer], the realisation of the Property is unlikely to generate a positive return to the Company. Consequently, the investment has no value to the Company." (Ex D6, 1/319) The Administrators' Report also contained a table setting out the estimated financial position of Benelong on a liquidation and under a DOCA, which made allowance for Mr Lee's "secured claim against the Company for loans advanced" in the amount of $9,010,499. The Administrators' Report compared the projected return to creditors in liquidation and a DOCA proposed by Mr Lee and expressed the view that the proposed DOCA was a better alternative than liquidation. That view depended on the Administrators' treatment of the Mortgage held by Mr Lee as valid and the loans as secured on the properties. 17TNT advanced several criticisms of the Administrators' Report. First, TNT contends that the Administrators' recommendation in the Administrators' Report was flawed in that they failed to consider or take legal advice as to whether the Mortgage amounted to a valid security in respect of any debt owed to Mr Lee in circumstances where it was not then stamped. As I noted above, the Mortgage was at that time unstamped, and s 211 of the Duties Act 1997 (NSW) had the result that it was then unenforceable to the extent of the amount secured, since no duty had been paid on it. Prior to the hearing before me, the Mortgage was upstamped to the amount of the principal stated in the Loan Agreement, $2.7 million. 18There is some authority that the effect of later upstamping is that the Mortgage becomes enforceable from the point at which it occurs: Boral Recycling Pty Ltd v Wake [2009] NSWSC 712; Bellissimo v JCL Investment Pty Ltd [2009] NSWSC 1260 at [21]; ACN 075 911 410 Pty Ltd v Almaty Pty Ltd [2011] NSWSC 333 at [18]. The contrary view, which has considerable force, is that the failure to stamp the Mortgage could be, and ultimately was, cured with retrospective effect by the upstamping of the mortgage prior to the hearing: McCallum v National Australia Bank Ltd [2000] NSWCA 218 at [18]-[20] (dealing with s 84 of the Stamp Duties Act 1920 (NSW)); Arnautovic v Cvitanovic [2011] FCA 809; (2011) 199 FCR 1 (dealing with s 211 of the Duties Act). It is not necessary to decide this question for the purposes of these proceedings. So far as the present position is relevant to the exercise of the Court's discretion, the Mortgage is on any view now enforceable at least to the amount of the principal of $2.7 million for which it has been stamped. So far as the issue is whether the Administrators' Report was misleading or contained material omissions, that is to be determined at the time that report was provided to creditors and the Mortgage was on any view then unenforceable. 19In my view, the Administrators' assumption as to the "prima facie" validity of the Mortgage and their assessment of the likelihood of a successful challenge to Mr Lee's security was misleading (in the sense that they were opinions expressed without a reasonable basis) and contained material omissions where they had not taken account of the fact that the Mortgage was then unstamped and unenforceable for the entire amount secured by reason of s 211 of the Duties Act. The analysis of financial outcomes contained in that report also generally assumed the validity of Mr Lee's mortgage, without the Administrators having taken any advice as to the enforceability of the Mortgage which would support the validity of that assumption. In my view, that analysis was also materially misleading. 20Mr Smallbone, who appears for the Administrators, contends that whether the Mortgage was then enforceable was not an issue of particular significance because the Administrators had to be concerned with the future position in an administration or a winding up and it was likely that Mr Lee would upstamp the Mortgage in order to protect his secured position. That reasoning has some force but, if that was the Administrators' reasoning, it should have been disclosed in their report so that creditors were informed of the issue and could make their own assessment of the likelihood that Mr Lee would take that course. In my view, the non-disclosure of these matters is of greater significance where TNT's solicitors had requested a copy of the Mortgage and the Administrators had not provided it (Ex P2, tab 12), thereby depriving TNT of the ability to identify for itself the fact that the Mortgage was then unstamped and unenforceable and raise that issue at the second creditors' meeting. 21The deficiencies in the analysis contained in the Administrators' Report, in respect of the enforceability of the Mortgage, were not corrected at the second meeting of creditors held on 20 January 2012. In discussion at that meeting, Mr Tayeh, one of the Administrators, expressed the view that: "In the administrators' opinion the question is whether the mortgage secures property to Mr Lee ahead of the other unsecured creditors. Creditors were requested to fund the Administrators to obtain independent legal advice on the validity of Mr Lee's second unregistered mortgage. Based on evidence available the Administrators considers [sic] prima facie that that [sic] Mr Lee has a valid second mortgage in respect of the property which extinguishes any equity that may be available in the property and therefore the right of indemnity has no commercial value." (ex D6, 1/357) It is difficult to see how the Administrators had any reasonable basis for a "prima facie" view as to the validity of the Mortgage when they had not obtained advice as to whether the Mortgage was enforceable. Objectively, the view which Mr Tayeh expressed was incorrect since the Mortgage was then unstamped and unenforceable. 22Second, TNT pointed to inconsistencies in the information provided by Mr Lee concerning the amount of the loan. Mr Lee's proof of debt in respect of the loan is supported by ledger records which record advances made by Mr Lee, his firm, Baker & Company, and an associated entity, Phoenix in a greater amount than claimed by Mr Lee in the proof of debt. TNT also pointed out that bank records suggest that various amounts treated in the ledger as advances by Mr Lee were in fact made by associated entities. There were significant inconsistencies in the amounts contained in various calculations by Mr Lee but they were largely explained by his evidence explaining the different bases of the calculations. For example, he did not include interest pursuant to the Loan Agreement in his calculation of the debt owed to him of $6,169,544 submitted to the first meeting of creditors (Ex D3, tab 5; Lee 16.3.12 [23]), and the proof of debt submitted at the second meeting of creditors in the amount of $9,237,219 (Ex D3, tab 6) included interest and corrected a duplicate item in the first proof of debt and also included loans made by Mr Lee to Benelong in 2012 (Lee 16.3.12 [24]). 23It is sufficient for present purposes that Mr Lee (or associated entities, on his behalf) had advanced at least the amount specified in the Loan Agreement. It was not suggested that that Loan Agreement was a sham and there is substantial evidence that the relevant payments had in fact been made by entities associated with Mr Lee. Mr Lee is the sole or majority shareholder in the entities which made those payments and holds a two-thirds interest in Baker & Company and the whole of the interest in Phoenix (Lee 16.3.11 [30]); the payments made by Baker & Company were made from one of the operating accounts of the firm of which Mr Lee is the sole signatory (Lee 16.3.11 [32]); and entries were made in those entities' accounts which reflected corresponding liabilities of those entities to Mr Lee. I readily infer that those payments were made by those entities in performance of Mr Lee's obligations under the Loan Agreement and should be treated as loans made by Mr Lee for the purposes of that agreement. 24Third, TNT contends the interest rate of 20% payable under the Loan Agreement did not reflect market rates. There is no evidence that this interest rate was disproportionate to the risk which Mr Lee assumed in lending on a second unregistered mortgage as noted above. The views expressed by the Administrators in the Administrators' Report are to the contrary, and Mr Lee's evidence was that he considered 20% to be a reasonable interest rate considering the risk of taking a second mortgage over the properties (Lee 16.3.12 [19]). 25Fourth, TNT contends that the Administrators failed to give consideration to Benelong's right of indemnity in respect of debts incurred in its capacity as trustee of the Trust, although that issue had been raised by letter dated 13 December 2011 from TNT's solicitor to the Administrators (Ex P2, tab 3). TNT also contends that the Administrators' Report failed to give consideration to any right of contribution that Benelong may have had against Gornoa. I will refer to the complexities of these issues below. Given the significant complexity of these issues, the time constraints in which the Administrators' Report had to be prepared and the fact that the Administrators had made clear that they had not taken legal advice, and creditors (including TNT) did not offer to fund such advice, I do not consider that their report was misleading or contained a material omission in this regard. 26TNT also contends that the Administrators wrongly proceeded on the basis that Benelong had an asset in terms of its alleged investment in the development, whereas money advanced to the project by related creditors should have been treated as advances to the Trust, with the result that unsecured creditors amounted to $359,761 (Ex D6 1/318) and Benelong's only asset was $209.41 by way of cash at bank. I do not accept this contention, since a debt incurred by Benelong in its capacity as a trustee is enforceable against it, with it having a right of indemnity against the assets of the Trust to which I refer below. The creditors were properly treated as creditors of Benelong albeit it had borrowed in its capacity as trustee of the Trust and had a right of indemnity and exoneration as against Burbank Montague. The exercise of the Court's discretion 27Even if the court is satisfied that one of the grounds under s 445D(1) of the Corporations Act were established, it has a discretion whether to terminate a deed of company arrangement which is to be exercised having regard to the interests of the creditors as a whole and the public interest: Emanuele v Australian Securities Commission (1995) 63 FCR 54; 141 ALR 506; 19 ACSR 1, appeal dismissed [1997] HCA 20; (1997) 188 CLR 114 at 139; 144 ALR 359; Deputy Commissioner of Taxation v Portinex Pty Ltd above at [105]; Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598 at [105]. 28A comparison between the outcome of the proposed DOCA and the likely outcome of a liquidation is relevant to the exercise of the Court's discretion. This comparison requires analysis of the present position of Benelong, which is complicated by the fact that Benelong was replaced by Burbank Montague as trustee of the Trust in September 2011. It is not necessary to address all of the complexities of this analysis (which were the subject of supplementary submissions by the parties) but it is necessary to note some aspects of it. 29As noted above, Benelong (in its capacity as trustee of the Trust) and Gornoa granted the Mortgage to Mr Lee to secure, relevantly, the partnership loan in their capacity as partners. The partners' interest in the properties was held for the purposes of the partnership. Section 20(1) of Partnership Act 1892 (NSW) provides that: "All property, and rights and interests in property, originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement." 30In Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 at 453, Kitto J observed that a partner: "... has a beneficial interest, which the law will recognize and enforce, in every piece of property which belongs to the partnership ... ; and none the less so because the nature of the interest is peculiar in that his share in the partnership, by virtue of which the interest in a given asset exists while the asset belongs to the partnership, consists not of a title to specific property but of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership. ... that is to say, not a "definite" share or interest in a particular asset, no "right to any part" of it, but an interest which "can be finally ascertained only when the liquidation has been completed, and ... consists of his share of the surplus"." (citations omitted) 31In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22; (1974) 131 CLR 321 at 327-8, McTiernan, Menzies and Mason JJ observed that: "The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a "beneficial interest", notwithstanding its peculiar character. The assets of a partnership, individually and collectively, are described as partnership property (Partnership Act 1892 as amended (NSW) s 20). This description acknowledges that they belong to the partnership, that is, to the members of the partnership." 32In United Builders Pty Ltd v Mutual Acceptance Ltd [1980] HCA 43; (1980) 144 CLR 673 at 688 Mason J (Barwick CJ, Gibbs and Wilson JJ agreeing) explained the way in which a charge over one partner's interest in the partnership operated: "... the partner's interest is in truth a chose in action, which, as Everett acknowledged, "consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership" (1980) 143 CLR at p 446. A mortgage or charge is considered to vest rights over that chose in action but it is not considered to carry any title to the specific assets until dissolution. ... A fixed charge is appropriate to create a security over a partner's share. It gives rise to a present security over the chose in action which is the partner's share. Although it creates no specific interest in the partnership assets until dissolution, this is not because the charge is dormant; it is because the rights conferred by the charge relate to the existing chose in action and that the security over the chose in action confers no entitlement to the assets of the partnership until dissolution." These authorities were recently reviewed and summarised by the Court of Appeal in Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 at [53]ff. 33On dissolution of the partnership and sale of the properties, and subject to the prior registered mortgage of the third party lender, Mr Lee would (once the Mortgage was upstamped as noted above) have security over Gornoa's and Benelong's entitlements on realisation of the assets of the partnership including the properties. Benelong in turn held its interest in the partnership on trust for the Trust, but the claims of the third party lender under the prior registered mortgage and Mr Lee against the proceeds of sale of the partnership assets (including the properties) would need to be satisfied before Benelong (as trustee of the Trust) would receive any payment on a dissolution of the partnership and sale of the partnership assets. 34Benelong is also personally liable for any debt it incurred to Mr Lee as trustee of the Trust: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153. Where Benelong became subject to a liability under the Loan Agreement to Mr Lee in performing its duties as trustee, it would have a right of indemnity out of the assets of the Trust in respect of that liability, in the nature of a right of exoneration from its liability to repay that loan: Octavo Investments above at [367]; Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226 at 245; Trim Perfect Australia v Albrook Constructions above at [20]. That right of indemnity and exoneration is supported by security in its favour over the assets of the Trust in the form of an equitable lien or equitable charge, which arises as a matter of law rather than by agreement between the parties: Octavo Investments above at [367]; Buckle above at [246]. Benelong's loss of office as trustee, whether by retirement or removal, does not deprive it of an accrued right of indemnity or exoneration: Southern Wine Corporation Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236 at [30]; (2005) 31 WAR 162; Trim Perfect Australia v Albrook Constructions above at [20]; Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550. 35When Burbank Nominees was appointed as trustee of the Trust in place of Benelong, it acquired no greater interest in the partnership than Benelong itself held in that capacity: Re Connolly Bros Ltd (No 2) [1912] 2 Ch 25; Security Trust Co v Royal Bank of Canada [1976] AC 503; [1976] 2 WLR 437 at 446-447; Composite Buyers Ltd v State Bank of New South Wales (1990) 3 ACSR 196 at 200; Sogelease Australia Ltd v Boston Australia Ltd (1991) 26 NSWLR 1 at 6-7; B & B Budget Forklifts Pty Ltd v CBFC Ltd [2008] NSWSC 271; (2008) 216 FLR 294 at [50]ff. Burbank Montague as transferee of the properties is also under an obligation in equity to indemnify Benelong for its continuing personal liability under the Loan Agreement and Mortgage: Mills v United Counties Bank [1912] 1 Ch 231 at 237ff; Simpson v Forrester (1972) 132 CLR 499 at 514; W D Duncan & W M Dixon, The Law of Real Property Mortgages, The Federation Press 2007 p 163. No party contended before me that I should treat the transfer of Benelong's interest in the properties to Burbank Nominees, purportedly for a consideration of $1, as having the effect that Burbank Nominees took indefeasible title in the properties free of Mr Lee's mortgage under s 42 of the Real Property Act 1900 (NSW) and I therefore need not address that possibility. 36I should add that the Administrators contended that Burbank Montague was under an obligation to enter a new mortgage in favour of Mr Lee, relying on clause 34.3 of the trust deed for the Trust which provides that: "A new Trustee appointed under paragraph 34.2 shall execute a Deed whereby such new Trustee shall undertake to the Unit Holders jointly and severally all of the obligations of the retiring Trustee hereunder except any personal liability attaching to the retiring Trustee arising out of any breach of trust committed by the said retiring Trustee and from the date of the Deed the retiring Trustee shall be released from all further obligations under this Deed." (Ex D6, 1/22) I do not understand that clause to impose any obligation upon Burbank Montague, as an incoming trustee, to grant a new mortgage in favour of a lender, where the clause is directed to undertakings in favour of unitholders. However, it is not necessary to reach a concluded view as to that issue given the other findings I have reached. 37The parties agreed that I should proceed on the basis that the assets available to the Trust are limited to whatever, if anything, can be realised for the Trust from the properties. Benelong relies on a valuation provided by Mr Sukkar, who was not cross-examined, that the value of the townhouses constructed on the properties as at February 2012 exclusive of GST was $12,205,000 and that a further 10% discount would be required for a sale on a forced sale basis. Mr Sukkar calculates proceeds of sale on a forced sale basis, inclusive of GST, to be $11,655,000. Mr Smallbone, who appears for Benelong, submitted that the forced sale value of the townhouses exclusive of GST would be $11,027,273, having regard to the margin scheme in respect of the application of GST to the property. I do not understand TNT to contest that calculation and it did not advance a contrary calculation. It has proved difficult to sell the townhouses constructed on the properties. Contracts for the sale of Unit 2 in the development were exchanged on 1 June 2012 for significantly less than Mr Sukkar's valuation of that unit. That suggests that the amount that would be realised on a sale of the land would be less than Mr Sukkar's valuation as at February 2012. 38Benelong points out that, taking the valuation of Mr Sukkar prepared in February 2012 and excluding GST, and adjusting that valuation in accordance with the reduced sale price achieved for the sale of Unit 2 in June 2012, the likely realisation on a sale of the properties would be in the order of $10,423,070. Benelong then deducts selling costs and legal fees of approximately $335,000 to leave a balance of $10,085,378. A first registered mortgage in favour of a third party lender over the land secures the amount of $8.4 million (although part of the monies borrowed were placed in an account to pay interest in the first year, which have not yet all been expended, which would be released on repayment of the loan), leaving a balance of $1,685,378 (on Benelong's calculation) which would be realisable on the sale of the properties by Burbank Montague and Gornoa. (That amount could be increased by up to about $100,000 by the release of monies set aside for interest, but that would depend on how quickly a sale of the properties occurred to allow the third party lender's loan to be repaid). That amount is substantially less than the amount presently due to Mr Lee by the partnership and secured under the Mortgage. On this calculation, and without allowing for the costs of an administration of the partnership or any costs in enforcing Benelong's right of indemnity and exoneration against Burbank Montague, neither Burbank Montague or Benelong (to the extent that it exercised a right of indemnity and exoneration or any other right against Burbank Montague) would receive any payment on sale of the properties. 39TNT prepared alternative calculations purporting to establish a better result for creditors than that which arises under the calculation which I have set out above. For example, one of those calculations assumes Mr Sukkar's February 2012 valuation and does not adjust that valuation for the evidence of the lower sale price achieved on the sale of Unit 2 in June 2012. It assumes that the amount of $8 million would be payable in respect of the first mortgage; that assumption must be corrected, since (as noted above) only up to about $100,000 would remain available from the amount set aside for interest. It then assumes that no interest is secured by the Mortgage. I do not consider that assumption can be justified, in circumstances that the Loan Agreement imposes an interest obligation and it was not established that the rate of interest was disproportionate to the risk which Mr Lee bore in lending on a second unregistered mortgage as noted above. These adjustments would together extinguish the balance which TNT contends would be available on a distribution to the partners on sale of the properties. 40TNT makes alternative calculations based on a sale price in accordance with Mr Sukkar's February 2012 valuation and a mortgage of $1.2 million. I cannot accept that calculation, where the recitals and terms of the Loan Agreement and the evidence of advances made by interests associated with Mr Lee indicate that at least the amount of $2.7 million was lent. TNT also makes other calculations based on a sale price in accordance with the valuation report obtained by the Administrators on their appointment which was higher than Mr Sukkar's February 2012 valuation. I see no basis for adopting that calculation, where the February 2012 valuation is more current; Mr Sukkar was not cross-examined and TNT did not lead evidence contrary to his February 2012 valuation; and the subsequent sale of Unit 2 suggests that the value of the properties has now declined further. 41TNT also makes calculations on the basis that there is no mortgage on the property. Again, I cannot accept that calculation, where the Loan Agreement and evidence of advances made by interests associated with Mr Lee indicate that at least the amount of $2.7 million was lent by Mr Lee and the Mortgage has now been upstamped. 42In these circumstances, although I have held that the Administrators' Report was misleading and contained material omissions in respect of the enforceability of the Mortgage, TNT has not established that a winding up would allow a more favourable outcome to creditors than the proposed DOCA. I therefore do not consider that the Court would exercise its discretion to set aside the proposed DOCA under s 445D of the Corporations Act were it to be executed. Whether the proposed DOCA would be oppressive or unfairly prejudicial to creditors 43An order terminating a deed of company arrangement can also be made if the deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the company's creditors or is contrary to the interests of the creditors as a whole: s 445D(1)(f). TNT contends that the provision in the proposed DOCA to limit creditors' recovery to the sum of $35,000 is oppressive or unfairly prejudicial, will unfairly discriminate against TNT, is contrary to public interest and commercial morality and is contrary to the interests of creditors of Benelong as a whole. Matters relevant to whether a deed of company arrangement is unfairly prejudicial for the purposes of s 445D(1)(f) include a comparison between the return to creditors under the deed of company arrangement and the likely return on a winding up and the prejudice suffered by differing groups of creditors: BGC Contracting Pty Ltd v Kimberley Gold Pty Ltd [2000] WASC 264; (2000) 35 ACSR 633; 18 ACLC 894. For the reasons set out above, TNT has also not satisfied me that it the proposed DOCA would be set aside on that basis. 44An order terminating a deed of company arrangement can also be made if the Court is satisfied that it should be terminated for some other reason: s 445D(1)(g). A deed may be set aside under s 445D(1)(g) if, for example, the proposal has a wrongful purpose or the deed would allow an insolvent company to continue trading or the administrator's report does not adequately address relevant issues and there are not unrealistic prospects of a better return to creditors in liquidation than under the deed of company arrangement: Deputy Commissioner of Taxation v Portinex Pty Ltd above at [99]; Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd above; Re Mustang Marine Australia Services Pty Ltd (admin apptd) [2010] NSWSC 1429. For the reasons set out above, TNT has also not satisfied me that a winding up would provide a better return to creditors than the proposed DOCA and no other basis for terminating the proposed DOCA on this ground was established. Claim for relief under s 447A of the Corporations Act 45TNT also relied in submissions, although not in its Amended Summons, on the Court's power to make orders under s 447A of the Corporations Act. The Court may make an order under s 447A(2) of the Corporations Act that an administration should end if the provisions of Pt 5.3A are being abused or for some other reason: s 447A(2); Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99; 12 ACLC 237; Spacorp Australia Pty Ltd v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 979; Re Paradise Constructors Pty Ltd (admin apptd) [2004] VSC 92; (2004) 8 VR 171; 182 FLR 135. If the court orders that the administration be terminated, it may also order that the company be wound up in the public interest: Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189; 16 ACSR 266; 13 ACLC 469; Re Paradise Contractors Pty Ltd above. The matters to which I have referred above do not establish the basis for such an order. Claim for relief under s 600A of the Corporations Act 46The Court may make orders under this section if a vote cast by a related entity affected the passage of a resolution in a manner contrary or prejudicial to the interests of creditors as a whole or a class of creditors. Each of the conditions in ss 600A(1)(a), (b) and (c) need to be satisfied in order to make an order under this section: Kantfield Pty Ltd v Plastamatic (Australia) Pty Ltd (1994) 14 ACSR 687 at 691. Relevant matters include the benefits which the related creditor achieved from the resolution or failure to pass the resolution; the nature of the relationship between the related creditor and the company; and whether any deed of company arrangement entered into by reason of the resolution prejudiced the interests of the creditors who voted against the resolution to an extent that was unreasonable, having regard to the matters to be taken into account for the purposes of s 600A(1)(c)(ii): M & G Oyster Supplies Pty Ltd v Nonchalont Pty Ltd (admin apptd) (1995) 19 ACSR 27; 14 ACLC 415; Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 at [108]-[112]. 47TNT's claim for relief under s 600A(2) of the Corporations Act depends on the fact that the proposed DOCA was approved at the second meeting of creditors on the vote of Mr Lee in his own capacity and exercising a proxy on behalf of other creditors. TNT relies on the fact that the two creditors who voted against the proposed DOCA, TNT and Marco Sheet Steel Pty Ltd, represented $334,236, and one non-related creditor had given a proxy to Mr Lee, who voted in favour of the proposed DOCA, with a value of $67,234. However, TNT has not established that the votes cast by related entities in fact affected the passage of the resolution. Mr Tayeh's evidence, which was read without objection, was that, of the 12 creditors present in person or by proxy with a total value of $9,364,903 who voted for the acceptance of the proposed DOCA, only two of those creditors were related entities to Mr Lee, being Phoenix with an admitted claim of $40,913 and Baker & Company with an admitted claim of $19,540 (Tayeh 14.3.2012 [36]-[37]). For the reason set out above, it has also not been established that the proposed DOCA is contrary to the interests of or prejudicial to creditors as a whole or to creditors not associated with Mr Lee in particular. Orders and Costs 48I direct the parties to bring in short minutes of order to give effect to this judgment within 14 days. In the ordinary course TNT should pay the costs of the proceedings. However, I will hear Counsel as to costs. ********** 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. Decision last updated: 16 July 2012