Mark Francis Xavier Mentha & Ors v G E Capital Ltd & Anor [1997] FCA 1579 (12 December 1997)

Last Updated: 4 May 1998

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - external administration - leave to administrator to dispose of charged assets - directions to administrator - consolidation of assets and liabilities of two or more companies - meaning of s 447A of Corporations Law

PRACTICE AND PROCEDURE - jurisdiction of the Court to make a declaration - whether there must be a controversy - judicial power - accrued jurisdiction

Corporations Law sz 442C, 447A, 447E(1)

Federal Court of Australia Act 1976 (Cth) s 21

Ainsworth v Criminal Justice Commission [1992] HCA 10; (1991-1992) 175 CLR 564 applied
Alabama Federation of Labor et al v McAdory et al [1945] USSC 107; (1945) 325 US 450 applied Anmi Pty Ltd v Williams (1981) 52 FLR 309 mentioned Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 mentioned
Brash Holdings Ltd (Admr apptd) v Katile Pty Ltd (1994) 13 ACSR 504 applied Re Brashs Pty Ltd (1994) 15 ACSR 477 applied
British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758 mentioned
Cawthorn v Keira Constructions Pty Ltd (1994) 13 ACSR 337 considered Dean-Wilcocks v Soluble Solution Hydroponics Pty Ltd (1987) 15 ACLC 833 mentioned
Fencott v Muller (1983) 152 CLR 570 applied
Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) & Ors (1991) 7 ACSR 365 mentioned Forster v Jododex Australia Pty Ltd & Anor [1972] HCA 61; (1972) 127 CLR 421 applied
G.B. Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1291 applied Grollo v Palmer [1995] HCA 26; (1995) 184 CLR 348 applied
Hamilton v Hunter (1982-1983) 7 ACLR 295 mentioned Hamilton & Anor v National Australia Bank Limited & Anor (1996) 19 ACSR 647 mentioned
Hanson v Radcliffe Urban District Council [1922] 2 Ch 490 mentioned
Huddart, Parker & Co Pty Ltd v Moorehead [1909] HCA 36; (1909) 8 CLR 330 applied Lowe v Lombank [1960] 1 WLR 196 mentioned
McGarrigle v The Public Service Board [1979] 1 NSWLR 292 considered
Maryland Casualty Co v Pacific Coal and Oil Co [1941] USSC 28; 312 US 270 considered Milankov Pty Ltd v Roycol Ltd [1994] FCA 1276; (1994) 14 ACSR 296 mentioned Philip Morris Inc & Anor v Adam P Brown Fashions Pty Ltd [1981] HCA 7; (1981) 148 CLR 457 mentioned Precision Data Holdings Ltd & Ors v Wills & Ors [1991] HCA 58; (1991) 173 CLR 167 applied
R v Davison [1954] HCA 46; (1954) 90 CLR 353 considered
Re A & K Holdings Pty Ltd [1964] VR 257 mentioned Re Bank of Credit and Commerce International SA (No 3) (1993) BCLC 1490 mentioned
Re Charter Travel Co Ltd (1997) 26 ACSR 337 mentioned Re GIGA Investments Pty Ltd (admr appointed) (1995) 17 ACSR 547 mentioned
Re Guardian Assurance Co [1917] 1 Ch 431 mentioned Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 mentioned Re International Harvester Co of Australia Pty Ltd [1953] 3 VLR 669 mentioned
Re Tooth & Co Ltd [1978] FCA 9; (1978) 31 FLR 314 applied Re Trix Ltd; Re Ewart Holdings Ltd [1970] 3 All ER 397 mentioned
Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 applied Stack v Coast Securities (No 9) Pty Ltd [1983] HCA 36; (1983) 154 CLR 261 applied
The Alabama, New Orleans, Texas and Pacific Junction Ry. [1891] 1 Ch 213 mentioned Torzillu Pty Ltd v Brynac Pty Ltd (1983-1984) 8 ACLR 52 mentioned MARK FRANCIS XAVIER MENTHA & 0RS v GE CAPITAL LTD & ANOR VG 3345 of 1997 FINKELSTEIN J MELBOURNE 12 DECEMBER 1997
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 3345 of 1997

BETWEEN:	MARK FRANCIS XAVIER MENTHA & ORS Applicants
AND:	GE CAPITAL LTD & ANOR Respondents
JUDGE:	finkelstein j
DATE:	12 December 1997
PLACE:	melbourne

REASONS FOR JUDGMENT

HIS HONOUR: This case requires the urgent resolution of a number of difficult questions that arise as a result of the insolvency of a group of companies which for convenience I will refer to as the DIM Group.

The sixteen corporate applicants make up the DIM Group. Each of them, apart from D.I.M. Furniture (Aust) Pty Ltd (DIM (Aust)) and D.I.M. Furniture (Vic) Pty Ltd (DIM (Vic)) is a subsidiary of DIM (Vic). The group is controlled by Mr Apostolos Dimarelos and his wife Mrs Christina Dimarelos. They hold more than 50 per cent of the issued shares in DIM (Vic) and all of the issued shares in DIM (Aust).

The DIM Group is involved in the manufacture, wholesaling and distribution of furniture products. The group has an annual turnover of more than $70 million. But for some time the group has been trading at a loss and each company in the group has a significant deficiency of assets over liabilities. The unsecured creditors, excluding creditors who are members of the group, are owed approximately $26 million and the largest single creditor, the Commissioner of Taxation, is owed approximately $8 million. There are two secured creditors of the group, the first respondent (GE Capital) and the second respondent (HG & R). The secured creditors advanced $2.7 million and $1.8 million respectively to DIM (Vic) the repayment of which has been guaranteed by the remainder of the group. Each member of the group (apart from The Furniture Spot Pty Ltd in the case of GE Capital) has created a charge over its assets in favour of each secured creditor to secure the performance of its obligations to that creditor. The financial position of the group is such that if each company is wound up and the secured creditors paid out it is anticipated the unsecured creditors will receive somewhere between $0 and $0.45.7 cents in the dollar in repayment of their indebtedness depending upon which company in the group is the debtor.

Part 5.3A of the Corporations Law (comprising ss 435A to 451D) was introduced by the Corporate Law Reform Act 1992 (Cth) with effect from 23 June 1993. The object of Pt 5.3A is to provide a means by which an insolvent company can be administered in a way that will maximise the chances of that company continuing in existence or, if that is not possible, to secure a better return for the company's creditors and members than would result from an immediate winding-up: see s 435A.

On 11 August 1997 the first applicant and the second applicant (the administrators) were appointed by each company in the DIM Group to be its joint administrators. The appointment of the administrators had two immediate consequences. The first was that the administrators took control of the business, property and affairs of each company in administration: s 437A. The second consequence was that the administrators assumed the obligation to conduct an investigation of the affairs of each company in administration and to form an opinion about each of the following matters: whether it would be in the interests of each company's creditors for the company to execute a deed of company arrangement; whether it would be in the creditor's interests for the administration to end; whether it would be in the creditor's interest for the company to be wound up: s 438A. The purpose of the investigation was to enable the administrators to prepare and send to each company's creditors a report about the affairs of the company together with a statement of the administrators opinion (with reasons) on each of the matters that the administrators were required to form an opinion about: see
s 439A(4)(a) and (b). In the event that the administrators formed the view that it would be in the interests of the creditors that a deed of company arrangement be executed by the company the administrators were also required to send to each creditor a statement setting out the details of the proposed deed: see s 439A(4)(c). The report and statement were to be provided to the creditors of each company in administration so that at a meeting which must be convened by the administrators the creditors can determine whether the company should execute a deed of company arrangement or whether the administration should end or whether the company should be wound up: see s 439C.

The administrators did conduct an extensive investigation into the affairs of each company in the DIM Group. That investigation led the administrators to form the opinion that an arrangement might be made that would be more beneficial to the creditors than a winding-up of each company. The arrangement is complex and for present purposes I need to do no more than identify its essential features. Each company in the DIM Group other than DIM (Vic) would transfer to DIM (Vic) all of its assets other than its interest in real estate. DIM (Vic) would also take over the employees of all of the companies; the group has about 470 employees. Thereafter Dim (Vic) would operate the various businesses that had previously been carried on by the other companies. DIM (Vic) would assume responsibility for all of the liabilities of the group other than liabilities arising out of the ownership of real property (that is rent, rates and land taxes and the like). A deed of company arrangement would be executed pursuant to which a fund would be established to partially satisfy the liabilities of DIM (Vic) including the liabilities of the group that will be assumed by DIM (Vic). The fund would comprise $6 million to be provided by Mr and Mrs Dimarelos. A fund of that amount would enable a payment to be made to the unsecured creditors of approximately $0.31.1 cents in the dollar. If Mr and Mrs Dimarelos are unable to provide the $6 million then the assets of the group would be sold over a period of six months and the proceeds paid into the fund to be applied in discharge of the liabilities. In that event the payment to the unsecured creditors would be approximately $0.21.7 cents in the dollar. The deed of company arrangement would provide that upon payment to the unsecured creditors of their entitlements from the fund the balance of each creditor's claim against each member of the group would be discharged.

On 7 November 1997 a meeting of the creditors of each company considered the proposal. Those creditors who were present and voted were overwhelmingly in favour of the proposal. On a consolidated basis approximately 97 per cent of the creditors by value were in favour of the proposal. If the vote is considered on a company by company basis there were only two meetings where there was a significant vote against the proposal. Those were the meetings of the creditors of The Furniture Spot Pty Ltd and D.I.M. Furniture (WA) Pty Ltd where the vote by value against the proposal was approximately 26 per cent. The secured creditors abstained from voting as did a number of other creditors. In total approximately 90 per cent of the creditors by value abstained from voting.

Three deeds have been prepared to give effect to the proposal. One is a deed of assignment by which each member of the group other than DIM (Vic) will assign to DIM (Vic) all of its assets whatsoever and wheresoever situated (present or future, tangible or intangible) other than any right, title or interest in real property. The second deed is a deed poll and is entitled "Deed Poll of Novation". It provides that DIM (Vic) will assume "all of the liabilities of each member of the group as at 11 August 1997 whatsoever and howsoever arising (present, certain or contingent, ascertained or sounding in damages only) other than any liabilities of any (assigning company) in relation to real property". Finally, there is a deed of company arrangement. It is a very substantial document. It provides for the establishment of the fund to be applied to pay out the creditors. It deals with the rights of those creditors pending payment to them of their entitlements. There are detailed provisions concerning the manner in which proofs of claim are to be made against DIM (Vic). There are also detailed provisions concerning the manner in which DIM (Vic) is to carry on its business activities. The deed deals with many other procedural and substantive matters. In addition the deed provides that certain conditions must be satisfied before the deed will become binding on the parties and on the creditors. One condition is that "a declaration is made by the Court to the effect that the Assignments and Novations are valid and effectual and would not be liable to be set aside in a winding-up of any DIM company (and) the Securities of GE Capital and HG & R will not be invalidated by reason of the Assignments or Novations." The reference to "Assignments" and "Novations" is a reference to the proposed deed of assignment and the proposed Deed Poll of Novation respectively and the reference to the Court includes the Federal Court of Australia: the terms are defined in clause 1.

That is a sufficient description of the background and I can now turn to the orders which the applicants seek from the Court.

First, the administrators ask for an order under s 442C(2) giving them leave to dispose of the property of each company in the DIM group other than DIM (Vic) by entering into and giving effect to the deed of assignment. It is said that there is a need for such order if the assets of the companies are to be assigned to DIM (Vic). The reason given is that s 442C provides that the administrator of a company in administration must not dispose of property of a company that is subject to a charge except in the ordinary course of the company's business, or with the written consent of the chargee or with the leave of the Court. The proposed assignment would not be in the ordinary course of any assigning company's business and it does not have the consent of the secured creditors. However it should be noted that while the secured creditors do not consent to the assignment of the property of the group to DIM (Vic) they do not oppose the grant of leave under s 442C(2).

In my opinion it is clear that the proposed assignments cannot take place without the leave of the Court. Speaking strictly the prohibition against assignment that is imposed by
s 442C(1) is a prohibition that is directed against the administrator of a company in administration and not against the company itself. But in the context of Pt 5.3A the prohibition should be understood as one that is directed to the administrator in his or her capacity as agent of the company in administration thereby preventing the administrator, on behalf of the company, from disposing of its charged assets. Let me explain. Upon appointment an administrator takes control of the company's business, property and affairs to the exclusion of all other officers of the company: see s 437A(1) and s 437C(1). The powers that are given to the administrator include the power to dispose of any property of the company (s 437A(1)(c)) but in the exercise of that and other powers the administrator is taken to be acting as the agent of the company (s 437B). In other words any disposition of the assets of a company in administration will not be a disposition of those assets by the administrator but will be a disposition by the company itself. There would only be a disposition of the assets of a company by an administrator if those assets had become vested in the administrator. The Corporations Law does not provide for the vesting of the property of a company in administration in an administrator during the period of administration. It follows that for s 442C(1) to have any practical operation it must be construed as referring to a disposition of property by a company in administration that was effected by the administrator on behalf of the company or that was effected by the company with the administrator's consent.

In what circumstances should the Court grant leave to an administrator to dispose of charged assets? Section 442C(3) provides that the Court may only grant that leave if the Court is satisfied that arrangements have been made to adequately protect the interests of the chargee. But that is not the only matter that the Court can take into account before granting leave. The Court should also be satisfied that the disposition will not prejudice or will not be likely to prejudice the interests of other creditors or the interests of the company although the occasion for such prejudice will not often arise in the case of a disposition of charged assets. In deciding whether leave should be granted it is not necessary to consider the reasonableness of the proposal which requires the disposition to take place. If I was dealing with a scheme of arrangement propounded under s 411 the position would be different. I would then be required to consider the reasonableness of the scheme before giving leave to take a step in its implementation if leave was required: see generally The Alabama, New Orleans, Texas and Pacific Junction Ry. [1891] 1 Ch 213 at 239; Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 396. But in the case of an arrangement under Pt 5.3A it is for the creditors to decide upon the reasonableness of the proposal. Here the legislature has recognised that it is the creditors who are best placed to decide what course of action is in their interests. Of course the Court has certain overriding powers which would permit it to intervene if an arrangement was unfair or contrary to the interests of the creditors or the company as a whole: see eg s 445E (f) and (g). I imagine this power that would not often be exercised against the will of a majority of independent creditors.

This is a case where I should make an order under s 442C(2) so that the proposal can be implemented in accordance with the wishes of the creditors unless I was of the view that the interests of the secured creditors were not adequately protected. Here I have no difficulty in reaching the conclusion that those interests will be protected. In the first place while the secured creditors have not voted in favour of the proposal (for the reason see
s 444B(1) and (2)) they have participated in the preparation of the three deeds and, as far as I can determine, they are satisfied that they would not be prejudiced by the arrangement. In the second place, the proposed deed of assignment contains a provision designed to ensure that the position of the secured creditors remains unaffected by the assignment. Thus, clause 5 provides that the validity of the securities granted to the secured creditors will not be affected by the assignment nor will those securities cease to have application to the assigned assets. True it is that the secured creditors are not parties to the deed of assignment so that clause 5 would not be a promise in their favour; it does not seem to be a promise in any event: see Lowe v Lombank Ltd [1960] 1 WLR 196. But as between assignors and assignee clause 5 has been inserted to make it clear that what is being assigned is no more than the limited interest that the assigning companies have in the assets that are being assigned. In the third place, the proposed deed of company arrangement contains an acknowledgment on the part of all the group companies, their shareholders and creditors that the assignment will not affect the validity of the securities granted to the secured creditors. In these circumstances there appears to be little doubt that DIM (Vic) will take the assigned assets subject to the equitable rights of the secured creditors: see generally Hamilton v Hunter (1982-1983) 7 ACLR 295; Torzillu Pty Ltd v Brynac Pty Ltd (1983 - 1984) 8 ACLR 52; Fire Nymph Products Ltd v The Heating Centre Pty Ltd (in liq) & Ors (1991) 7 ACSR 365. In any event, each secured creditor has a charge over the assets of DIM (Vic) which would attach to the assigned assets if for some unforeseen reason the charges granted by the assigning companies cease to bind those assets.

Next, the administrators seek a direction that it is proper for them to execute and give effect to each of the three deeds. The Court has power to give a direction to an administrator about any matter arising in connection with the performance of any of the administrator's functions or powers: see s 447E(1). The administrators seek the direction in order to protect themselves from liability for any alleged breach of duty as administrators to a creditor, a member of each company in administration or each company in administration. That protection will exist provided the administrators have made a full and fair disclosure to the Court of all material facts: see G.B. Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1291.

For reasons that I will explain I will give the direction that is sought with respect to the proposed deed of assignment and the proposed deed poll but not for the proposed deed of company arrangement. I should mention why it is that the administrators seek the direction. The proposal that has been accepted by the creditors of the DIM group has some unusual features about it. What is unusual is that the proposal will bring about a "pooling" of assets and liabilities in the sense that all of the assets of the group are to be "pooled" in one company and the liability to all of the unsecured creditors of the group are to be assumed by that company. It is said that such an arrangement might be regarded as controversial. Presumably the reason for any controversy is that in insolvency the unsecured creditors of a company are usually only entitled to a rateable share of the assets of their insolvent debtor: see s 555 of the Corporations Law; British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758. But it is easy to envisage situations that might arise where a "pooling" of assets and liabilities is both just and equitable if not essential. Take for example the case of a group of companies where the assets have been so intermingled that their separation is practically impossible. In bankruptcy where estates are inextricably blended as to render it impracticable to keep them distinct the court has power to order the estates to be administered in consolidation: see Anmi Pty Ltd v Williams (1981) 52 FLR 309. One day it will be necessary to determine to what extent, if at all, a court can make a similar order in the case of insolvent companies: in Re Charter Travel Co Ltd (1997) 26 ACSR 337 Young J expressed the obiter opinion that such an order could be made. There is no doubt that "pooling" is permitted in a scheme of arrangement approved by the court under s 411 of the Corporations Law. That section enables the court to approve any arrangement between a company and its creditors which could be agreed between them: see Re Guardian Assurance Co [1917] 1 Ch 431; Re International Harvester Co of Australia Pty Ltd [1953] VLR 669; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 500-511. Schemes of arrangement which have consolidated assets and creditors have been approved under this provision or the equivalent provision in the United Kingdom: see for example Re Trix Ltd; Re Ewart Holdings Ltd [1970] 3 All ER 397; Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1490 and see generally Dean-Wilcocks v Soluble Solution Hydroponics Pty Ltd (1987) 15 ACLC 833. In my opinion the power to enter into a deed of company arrangement under Pt 5.3A is sufficiently broad to permit an arrangement binding on two or more insolvent companies pursuant to which their respective assets and creditors will be consolidated. There is no justification for a construction of this part of the Corporations Law that would lead to the conclusion that arrangements made pursuant to Pt 5.3A must be more narrowly confined than arrangements made under s 411.

Once it is accepted that each step in the proposal is within the power of all of the relevant parties and given the fact that the creditors wish to see the proposal implemented it is appropriate that the administrators obtain the direction that they seek in respect of the deed of assignment and the deed poll. The reason why a similar direction concerning the deed of company arrangement should not be given is that s 444A(3) imposes an obligation on the administrators to prepare the deed and s 444B(2) and s 444B(5) requires each company and the administrators to execute the deed. When there is a mandatory obligation imposed on the administrators to ensure that the deed of company arrangement approved by the creditors comes into existence no purpose would be served in giving a direction that the administrators execute that deed. The administrators would not gain any protection against liability by executing the deed in conformity with a direction when they must execute it whether or not the direction is given.

Finally, the applicants seek a declaration in the terms contemplated by the proposed deed. Here two questions arise. The first is does the Court have power to make the declaration? The second question is, if the Court does have the power to make the declaration should the Court do so? As I will demonstrate the answer to the first question will throw some light on the answer to the second.

Section 71 of the Constitution vests in the High Court the judicial power of the Commonwealth and empowers the Commonwealth Parliament to create federal courts and to invest the judicial power of the Commonwealth in those courts as well. The Federal Court of Australia Act 1976 (Cth) established the Federal Court (see s 5(1)) and by s 19(1) conferred on the Federal Court "such original jurisdiction as is vested in it by laws made by the Parliament". In addition by s 21 the Federal Court may "in relation to a matter in which it has original jurisdiction make binding declarations of right whether or not any consequential relief is or could be claimed".

What is the nature of the judicial power that has been conferred on the Federal Court? The concept has been discussed in many cases but its definition is elusive. Commonly reference is made to the definition put forward by Griffith CJ in Huddart, Parker & Co Pty Ltd v Moorehead [1909] HCA 36; (1909) 8 CLR 330. There his Honour described the power as one that every sovereign must have "to decide controversies between its subjects, or between itself and its subjects, whether the rights relate to life, liberty or property": 8 CLR at 357. This does not mean that a court will only exercise judicial power when it resolves a controversy: R v Davison [1954] HCA 46; (1954) 90 CLR 353 at 380-381. For example, orders relating to the maintenance and guardianship of infants, the consent to the marriage of a ward of the court, orders for letters of administration and orders giving advice or directions to a trustee while not cases involving a controversy between parties do involve an exercise of judicial power because these powers have traditionally been vested in courts. Nevertheless it is generally accepted that the exercise of judicial power involves an adjudication of disputes about rights and obligations: Precision Data Holdings Ltd & Ors v Wills & Ors [1991] HCA 58; (1991) 173 CLR 167 at 188; Grollo v Palmer [1995] HCA 26; (1995) 184 CLR 348 at 394.

The Federal Court has been invested with original jurisdiction with respect to matters arising under the Corporations Law: see s 56(2) of the Corporations Act 1989 (Cth) and the definition of Court in s 58AA of the Corporations Law of each state and territory. Strictly the declaration that the applicants seek does not arise under the Corporations Law because the Law does not provide for such a declaration to be made. However, when the Federal Court has jurisdiction with respect to a matter, the Court has jurisdiction to deal with all questions which form part of that matter including questions which in themselves would not be federal in nature: see Philip Morris Inc & anor v Adam P Brown Fashions Pty Ltd [1981] HCA 7; (1981) 148 CLR 457, Fencott v Muller (1983) 152 CLR 570; Stack v Coast Securities (No 9) Pty Ltd [1983] HCA 36; (1983) 154 CLR 261. The proper approach to determine whether there are non federal aspects of a matter with which the Federal Court has jurisdiction to deal is to enquire whether there is a single controversy of which the federal aspects form an integral part: see Stack 154 CLR at 294. It may often be difficult to determine whether a matter or aspects of a matter are within the accrued jurisdiction of the Federal Court. In Fencott v Muller the majority explained the approach to be taken in answering this question (152 CLR at 608):

"What is and what is not part of the one controversy depends on what the parties have done, the relationships between or among them and the laws which attach rights or liabilities to their conduct and relationships. The scope of a controversy which constitutes a matter is not ascertained merely by reference to the proceedings which a party may institute, but may be illuminated by the conduct of those proceedings and especially by the pleadings in which the issues in controversy are defined and the claims for relief are set out. But in the end, it is a matter of impression and of practical judgment whether a non-federal claim and a federal claim joined in a proceeding are within the scope of one controversy and thus within the ambit of a matter".

The view that I have formed is that the validity and effectiveness of the proposed deed of assignment and the proposed deed poll are relevantly inseparable from the federal matters that are before the Court. Those federal matters are whether leave should be granted to the administrators to dispose of the assets of the assigning companies (i.e. the application under
s 442C(2)) and whether there should be a direction given that it is appropriate for the administrators to enter into the three deeds or procure the companies to enter into those deeds (i.e. the application under s 447E(1)). The prima facie validity of the deeds (if executed) is a matter that necessarily falls for consideration when dealing with those applications for if one or other of them appeared to be invalid or ineffectual (if there be a difference) then little point would be served in giving a direction that the administrators may execute them. Thus, during the course of submissions I expressed the view that in its original form the deed poll, which provided that DIM (Vic) was to assume responsibility for the payment of debts owed to creditors by the assigning companies whether past, present or future, may not be valid. The reason for that doubt was that the deed poll contained a promise in favour of persons who would be non-existent at the date of the deed: see the discussion in Re A & K Holdings Pty Ltd [1964] VR 257 at 261-262. As a consequence the deed poll has been altered so as to remove the assumption of liability to any future creditors of the assigning companies. Even if the prima facie validity of the deeds was not a necessary enquiry to undertake when dealing with the federal matters before the Court the question of their validity would nevertheless form a part of those federal matters. The continuing validity of the charges is also inseparable from the federal matters before the Court or at least inseparable from the application under s 442C(2) where the interests of the secured creditors must be considered.

Accordingly, it is clear that in an appropriate case a declaration can be made that the deeds are valid and effectual. But it does not follow from the fact that the Court is able to make such a declaration that it is permissible for it to do so in this case.

Before I deal with the legal principles involved it is necessary to mention why the declaration is sought. The immediate reason is that the proposed deed of company arrangement is conditional on the declaration being made and the parties wish to see the arrangement become unconditional. But the true reason is that the secured creditors, for their own private purposes, have insisted that the grant of this declaration is to be one of the conditions of the deed. I assume that what motivates the secured creditors is that if the declaration is made this would arm them with a weapon for use in negotiations with or proceedings in some court or tribunal against a person such as a liquidator of one or other of the companies in administration. This is no doubt a sensible position for the secured creditors to take. But in McGarrigle v The Public Service Board [1979] 1 NSWLR 292 at 295 Moffitt P held that this was not a legitimate basis for seeking a declaration.

What are the circumstances in which a court will make a declaration? It is true that the power to make a declaration is a very wide one and it has been said that where it is a question of defining the rights of parties the power is almost unlimited; limited only by its discretion: see Hanson v Radcliffe Urban District Council [1922] 2 Ch 490 at 507. But there are limits to the power. The cases establish that one condition upon which the exercise of the power depends is that there must be some controversy which would be resolved if the declaration was made.

In the United States federal courts are limited by Article III of the US Constitution and the Declaratory Judgment Act to giving relief only in a case of an actual controversy. So in Maryland Casualty Co v Pacific Coal and Oil Co [1941] USSC 28; 312 US 270, Justice Douglas, in delivering the opinion of the Supreme Court, said (at 273):

"The difference between an abstract question and a `controversy' contemplated by the Declaratory Judgment Act is necessarily one of degree, and it would be difficult, if it would be possible, to fashion a precise test for determining in every case whether there is such a controversy. Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of a sufficient immediacy and reality to warrant the issuance of a declaratory judgment".

Superior courts of record are subject to the same constraint. I only need refer to a few authorities to demonstrate this. In Forster v Jododex Australia Pty Ltd & Anor [1972] HCA 61; (1972) 127 CLR 421 Gibbs J traced the history of the jurisdiction to make declarations. His Honour concluded that it was neither possible nor desirable to fetter the broad discretion that exists in considering when a declaration should be made. However, Gibbs J identified as the relevant principles that should be satisfied before the discretion is exercised in favour of making a declaration those summarised by Viscount Dunedin in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438. In that case Viscount Dunedin said that before the discretion should be exercised "(t)he question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, some one presently existing who has a true interest to oppose the declaration sought": 2 AC at 448. The matter was also considered by the High Court in Ainsworth v Criminal Justice Commission [1992] HCA 10; (1991-1992) 175 CLR 564. There, Brennan J referred to the statement by Viscount Dunedin in Russian Commercial and Industrial Bank and said that, notwithstanding the wide discretion that exists in deciding whether a declaration should be made, it was not appropriate to grant a declaration if there was no real controversy to be determined: 175 CLR at 596. His Honour had expressed the same view in Re Tooth & Co Ltd [1978] FCA 9; (1978) 31 FLR 314 in the following passage (at 331): "A declaration cannot be made if there is no real controversy, or if the declaration sought is incapable of determining a real controversy". The same position was taken in the joint judgment in Ainsworth (CLR at 582):

"However, (the power to make a declaration) is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have `a real interest' and relief will not be granted if the question `is purely hypothetical', if relief is `claimed in circumstances that [have] not occurred and might never happen' or if `the Court's declaration will produce no foreseeable consequences for the parties'. (citations omitted)

The function of a superior court is to resolve controversies by ascertaining facts, by application of the law and by the exercise of judicial discretion: Fencott v Muller 152 CLR at 608. The requirement for a controversy is no less strict in a suit for a declaration than in any other proceeding: Alabama Federation of Labor et al v McAdory et al [1945] USSC 107; (1945) 325 US 450 at 461.

There is no controversy in the present case. All of the parties that are before the Court, that is to say the administrators, the companies in administration and the secured creditors, who are all named as parties, and the Commissioner of Taxation and Mr and Mrs Dimarelos who, while not named as parties, appear through Counsel, are in agreement that, if executed, the deeds would be valid. What is being sought is no more than the advice of the Court that their view is correct. It is not appropriate for a court to give that advice. The proper function of a court is to determine the rights, duties and liabilities of parties when the occasion for their determination arises. Generally, that occasion will only arise when there is a dispute about those rights, duties and liabilities.

Perhaps anticipating that I might decline to make the declaration, the applicants have suggested an alternative order. What they seek is an order under s 447A of the Corporations Law that Pt 5.3A to operate in relation to each applicant company as if the creditors of that company had resolved to execute a deed of company arrangement which did not contain as a condition to its operation the making of the declaration.

Section 447A provides that "the Court may make such order as it thinks appropriate about how (Part 5.3A) is to operate in relation to a particular company". The power that is conferred upon the Court by this section is very wide indeed. According to Young J in Cawthorn v Keira Constructions Pty Ltd (1994) 13 ACSR 337 at 341 s 447A gives to the court "plenary powers to do whatever it thinks is just in all the circumstances". I doubt whether this statement can be taken literally for it is clear that s 447A does not go that far. Precisely how wide the power is need not now be considered. For present purposes it is sufficient to note that the section empowers the Court to make orders altering what otherwise would be the operation of Pt 5.3A: see Brash Holdings Ltd (Admr apptd) v Katile Pty Ltd (1994) 13 ACSR 504 at 507-8; Re Brashs Pty Ltd (1994) 15 ACSR 477 at 481. Thus, the Court could make an order that a particular company need not comply with one or other provision in Pt 5.3A. It may also be possible for the court to make an order that modifies the operation of a specific provision of Pt 5.3A in relation to a particular company. Some cases have gone so far as to hold that the Court has power to vary the terms of a deed of company arrangement if the circumstances require that step: see Milankov Pty Ltd v Roycol Ltd [1994] FCA 1276; (1994) 14 ACSR 296; Hamilton & Anor v National Australia Bank Limited & Anor (1996) 19 ACSR 647; Re GIGA Investments Pty Ltd (admr appointed) (1995) 17 ACSR 547.

The order that the applicants seek does not require s 447A to be given the widest construction that has been applied to it. I am satisfied that the language of s 447A, namely that the Court can make an order "about how (Pt 5.3A) is to operate", permits an order to be made in this case that Pt 5.3A is to operate as if the creditors had resolved to execute a deed which did not contain the condition requiring the declaration to be made. Further, I think that such an order should be made. If it is not made the deed will not come into effect and the proposal, which will see significant benefits accruing to the creditors, will be thwarted. The Court has the power to avoid that result and that power should be exercised unless it is evident that unfair prejudice would result to either the creditors or the companies in administration. It is clear that their interests will not be prejudiced in that way.

I will direct the applicants to bring in short minutes of orders to give effect to these reasons.

I certify that this and the preceding fourteen (14) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein

Associate:

Dated: 12 December 1997

Counsel for the Applicants:	S Whelan QC J Dodds Streeton
Solicitor for the Applicants:	Arnold Bloch Liebler
Counsel for the first Respondent Solicitor for the first Respondent	J Beach Madgwicks
Counsel for the second Respondent	RA Brett QC J Paterson
Solicitor for the second Respondent:	Herbert Geer & Rundle
Counsel for the Commissioner of Taxation Solicitor for the Commissioner of Taxation Counsel for Mr and Mrs Dimarelos Solicitor for Mr and Mrs Dimarelos	J Davies Australian Government Solicitor SE Marks Minter Ellison
Date of Hearing:	2 December 1997
Date of Judgment:	12 December 1997