Employers' Mutual Indemnity (Workers' Compensation) Ltd v J.S.T. Transport Services Pty Ltd & Anor [1997] FCA 66 (14 February 1997)

CATCHWORDS

CORPORATIONS - administration - deed of company arrangement - whether resolution of creditors that company execute the deed of company arrangement validly passed - whether administrator holding a special proxy may vote in favour of a resolution that the company execute a deed of company arrangement - whether second respondent used special proxies to vote in favour of his appointment as administrator of the deed within the meaning of reg. 5.6.33(3)(a)

CORPORATIONS - administration - creditors' meeting - alleged irregularities in the execution of proxy forms

CORPORATIONS - administration - creditors' meeting - whether lessors with a future debt were entitled to vote for a deed of company arrangement

CORPORATIONS - administration - creditors' meeting - whether irregularities in relation to the meeting have caused substantial injustice - whether the deed of company arrangement invalid

CORPORATIONS - administration - whether effect can be given to the deed of company arrangement without injustice or without being oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the creditors

Bankruptcy Act 1966 (Cth)

Workers Compensation Act 1987 (NSW)

WorkCover Administration Act 1989 (NSW)

Corporations Law ss 8A(1), 82A, 109U, 182(7), 249, 250, 436A, 436B, 436C, 436E, 444A, 445D, 445G, 1322

Corporations Regulations 5.6.21, 5.6.29, 5.6.33, 5.6.35

Hagenvale Pty Ltd v Depela Pty Ltd & Anor (1995) 17 ACSR 139

Sipad Holdings ddpo & Anor v Popovic & Ors (1995) 61 FCR 205

Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler & Ors (No. 2) (1994) 51 FCR 425

Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498

Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No. 55) Pty Ltd (1996) 22 ACSR 169

Brash Holdings Ltd (admin apptd) v Katile Pty Ltd (1994) 13 ACSR 504

Deputy Commissioner of Taxation (Cth) v Comcorp Australia & Ors (1996) 21 ACSR 590

Paton v Campbell Capital Limited [1993] FCA 526; (1993) 46 FCR 30

EMPLOYERS' MUTUAL INDEMNITY (WORKERS' COMPENSATION) LIMITED v

J.S.T. TRANSPORT SERVICES PTY LIMITED & ANOR

No. NG 3548 of 1996

CORAM: BRANSON J

PLACE: SYDNEY

DATE: 14 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3548 of 1996

GENERAL DIVISION )

BETWEEN: EMPLOYERS' MUTUAL INDEMNITY

(WORKERS' COMPENSATION) LIMITED

(ACN 003 201 885)

Applicant

AND: J.S.T. TRANSPORT SERVICES PTY LIMITED

(ACN 054 826 238)

First Respondent

RON DEAN-WILLCOCKS

Second Respondent

CORAM: BRANSON J

PLACE: SYDNEY

DATE: 14 FEBRUARY 1997

MINUTES OF ORDER

THE COURT ORDERS THAT:

The application be dismissed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3548 of 1996

GENERAL DIVISION )

BETWEEN: EMPLOYERS' MUTUAL INDEMNITY

(WORKERS' COMPENSATION) LIMITED

(ACN 003 201 885)

Applicant

AND: J.S.T. TRANSPORT SERVICES PTY LIMITED

(ACN 054 826 238)

First Respondent

RON DEAN-WILLCOCKS

Second Respondent

CORAM: BRANSON J

PLACE: SYDNEY

DATE: 14 FEBRUARY 1997

REASONS FOR JUDGMENT

By an application dated 1 August 1996 made pursuant to ss445D and 445G of the Corporations Law, the applicant claims a declaration that a certain deed of company arrangement was not entered into in accordance with Part 5.3A of the Corporations Law and a declaration that the deed of company arrangement is void, or alternatively an order terminating the deed of company arrangement.

Each of ss445D and 445G appears in Part 5.3A of the Corporations Law.

Section 445G of the Corporations Law authorizes the Court to resolve uncertainties where there is doubt concerning the validity of a deed of company arrangement that was purportedly entered into under Part 5.3A of the Corporations Law. Its terms are as follows:

"(1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or the Commission, may apply to the Court for an order under this section.

(2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground.

(3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that:

(a) the provision was substantially complied with; and

(b) no injustice will result for anyone bound by the deed if the contravention is disregarded.

(4) Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator."

The ground specified in the application as the ground relied upon for the purposes of s445G is "that the resolution of creditors that the first respondent execute the deed of company arrangement was not validly passed". The submissions of the applicant placed reliance in this regard on -

(a) the second respondents having acted under certain special proxies in voting in favour of the resolution in alleged contravention of reg. 5.6.33 of the Corporations Regulations;

(b) alleged irregularities in the execution of certain of the proxy forms under which the second respondent acted in voting in favour of the resolution;

(c) the decision of the second respondent to permit the lessor of vehicles leased by the first respondent to vote in respect of the resolution for an amount estimated by him to be the current pay-out value of the leases when no amount was owing under the leases as at the date of the resolution and the leases had not been repudiated; and

(d) the decision of the second respondent to disallow in part the proof of debt of the applicant for the purpose of voting.

It is convenient to consider these grounds before giving consideration to s445D of the Corporations Law.

Regulation 5.6.33 of the Corporations Regulations provides as follows:

"(1) Subject to subregulations (2) and (3), a person acting under:

(a) a general proxy; or

(b) a special proxy;

must not vote in favour of any resolution which would directly or indirectly place:

(c) the person; or

(d) the person's partner; or

(c) the person's employer;

in a position to receive any remuneration out of assets of the company except as a creditor rateably with the other creditors of the company.

(2) If a person holds a special proxy to vote for an application to the Court in favour of his or her appointment as liquidator, he or she may use the proxy and vote accordingly.

(3) If a person holds a special proxy to vote:

(a) in favour of his or her appointment as the administrator of a company under administration or of a deed of company arrangement; or

(b) against the termination of his or her appointment as the administrator of a company under administration or of a deed of company arrangement;

he or she may use the proxy and vote accordingly."

It is not disputed that the second respondent voted in favour of a resolution that the first respondent be required to execute a deed of company arrangement ("the resolution") and that the deed of company arrangement with which this proceeding is concerned ("the DOCA") was executed by the first respondent pursuant to such resolution. It also is not disputed that in so voting the second respondent acted under special proxies.

The resolution did not itself provide that the second respondent be the administrator of the deed of company arrangement. Nor did it deal with the question of the remuneration of the administrator of the deed of company arrangement. A separate resolution was put to the meeting of creditors on the issue of the remuneration to be paid to the administrator of the deed of company arrangement. It is agreed that the second respondent abstained from using proxies to vote on that resolution.

The DOCA itself is in evidence. It is dated 26 July 1996 and the parties to it are the first and the second respondents. The DOCA does not in terms appoint the second respondent as the administrator of the DOCA: its recitals note his appointment as administrator of the first respondent on 2 July 1996. The drafter of the DOCA no doubt placed reliance on s444A(2) of the Corporations Law which provides that the administrator of a company is to be the administrator of a deed of company arrangement unless the creditors at the s439A meeting resolve to appoint someone else to be the administrator of the deed. The DOCA does, however, contain the following definition:

"'Administrator' means Ronald John Dean-Willcocks and any successor to that office appointed pursuant to the Corporations Law."

The DOCA provides for a fund to be paid to the "Administrator" by the first respondent and for him to apply such fund to pay admitted claims against the first respondent in accordance with the terms of the DOCA. The DOCA gives certain powers to the "Administrator" for the purposes of administering the DOCA.

As to the remuneration of the "Administrator", the DOCA provides as follows:

"8.7 The Administrator shall be:

(a) remunerated by the Company in respect of any work done by the Administrator and any partner or employee of the Administrator on and from the Fixed Date and until the termination of this Deed, at the rates from time to time set forth in the Guide to Hourly Rates published by the Insolvency Practitioners Association of Australia for the Sydney District and to draw such remuneration from time to time from monies held by him for the purposes of this Deed; and

(b) reimbursed by the Company in respect of all trading and other costs, fees and expenses (other than the remuneration referred to in the preceding paragraph (a) of this Clause) incurred in connection with the performance of his duties, obligations and responsibilities under this Deed and as Voluntary Administrator."

Having regard to the terms of s444A(2) of the Corporations Law, in the absence of a resolution to appoint someone else to be the administrator of the deed, or of any notice of intention to move such a resolution, the resolution must be regarded, in my view, as a resolution which would directly or indirectly place the second respondent and his partners in a position to receive remuneration out of the assets of the first respondent otherwise than as a creditor rateably with other creditors of the first respondent. Regulation 5.6.33(1) of the Corporations Regulations would thus proscribe the second respondent from acting under special proxies to vote in favour of such resolution unless, on its proper construction, reg. 5.6.33(3)(a) authorized him to do so.

It is contended on behalf of the applicant that reg. 5.6.33(3)(a) is to be construed as authorizing a person who holds a special proxy to vote in favour of his or her appointment as the administrator of -

(i) a company under administration, or

(ii) a deed of company arrangement.

On behalf of the respondents it was contended that reg. 5.6.33(3)(a) is to be construed as authorizing a person who holds a special proxy to vote in favour of -

(i) his or her appointment as the administrator of a company under administration, or

(ii) a deed of company arrangement.

Apart from the fact that on the construction contended for on behalf of the respondents one might expect words such as "the execution by a company of ..." to appear in reg. 5.6.33(3)(a), nothing in the grammatical construction of reg. 5.6.33(3)(a) provides any assistance in choosing between the above alternative readings of the regulation. Nor does there appear to be any authority directly bearing on this aspect of the construction of the regulation. It is thus necessary to consider the statutory background against which reg. 5.6.33 was intended to operate.

Sections 436A, 436B and 436C authorize the appointment of an administrator of a company. The methods of appointment provided for by these sections do not give rise to circumstances in which proxies might be used.

It would appear that the authorization of the holder of a special proxy to vote in favour of his or her appointment as the administrator of a company under administration is intended to apply in the circumstances envisaged by s436E(4) of the Corporations Law. That is, circumstances in which at a meeting of the creditors of a company a resolution is put to the meeting that the administrator of the company be removed and another person appointed in his or her place.

Section 444A(2) of the Corporations Law is discussed above. There is some analogy between its provisions and those of s436E(4) of the Corporations Law. Such analogy provides support for the construction of reg.5.6.33(3)(a) for which the applicant contends.

In Hagenvale Pty Ltd v Depela Pty Ltd & Anor (1995) 17 ACSR 139 at 146-147 Cohen J considered the validity of the use by certain creditors of proxies in voting in favour of a company executing a deed of company arrangement. It had been contended before his Honour that as some unsecured creditors were to be paid 100 cents in the dollar and others only 30 cents in the dollar, those who were to receive 100 cents in the dollar had exercised proxies to vote in favour of a resolution which would put them in a position to receive remuneration out of the assets of the company otherwise than as a creditor rateably with the other creditors of the company.

His Honour rejected the contention referring to the ordinary meaning of the word "remuneration" as a payment usually given for labour or services supplied. Although the question of construction argued before me was apparently not argued before Cohen J, his Honour may be taken to have assumed an interpretation of reg. 5.6.33(3)(a) in line with the contention of the applicant before me.

The construction of reg. 5.6.33(3)(a) for which the respondents contend could theoretically give rise to a situation in which a person other than the proposed administrator of the deed might use special proxies in voting in favour of a company executing a deed of company arrangement which provided for him or her to be paid for labour or services supplied. It seems to me to be unlikely that reg. 5.6.33(3)(a) was intended to have this effect.

I accept that the construction of reg. 5.6.33(3)(a) for which the applicant contends is the correct construction.

It remains necessary to consider whether the second respondent used the proxies to vote in favour of his appointment as the administrator of the deed of company arrangement within the meaning of reg. 5.6.33(3)(a).

As is mentioned above, s444A(2) of the Corporations Law provides that in circumstances such as those here under consideration, the administrator of a company is to be the administrator of a deed of company arrangement executed by it. In a sense, therefore, it is true that in using the special proxies to vote in favour of the company executing the deed of company arrangement, the second respondent did not use the proxies to vote in favour of his appointment as administrator of the deed of company arrangement. His becoming the administrator of the deed was, however, the likely, and it seems, the intended consequence of the resolution that the company execute the deed of company arrangement. If the second respondent was not to become the administrator of the deed of company arrangement, reg. 5.6.33(1) would have had no operation so far as he was concerned.

In my view, at least in circumstances where no resolution has been passed that a person other than the administrator of the company be appointed as the administrator of the deed of company arrangement, and no notice of an intention to move such a resolution has been given, a resolution that a company execute a deed of company arrangement is a resolution in favour of the appointment of the administrator of the company as the administrator of the deed within the meaning of reg. 5.6.33(3)(a). To conclude otherwise would result in the regulation allowing any person other than an administrator of a company to use special proxies to vote in favour of his or her appointment as administrator of a deed of company arrangement whilst preventing an administrator of a company from using special proxies to vote in favour of the company executing a deed of company arrangement in circumstances which parliament envisaged as the norm (i.e. that he or she should be the administrator of the deed). I am not persuaded that regulation 5.6.33(3)(a) was intended to have this effect.

I turn to consider the alleged irregularities in the execution of proxy forms relied upon in voting on the resolution that the first respondent execute the DOCA.

Regulation 5.6.29 of the Corporations Regulations provides that the appointment of a person as a proxy must be by instrument in writing in accordance with Form 532 and the person appointing the proxy must, except in circumstances not here relevant, sign the instrument of proxy. Regulation 5.6.29 appears in Part 5.6 of the Corporations Regulations which is headed "WINDING UP GENERALLY". This case was argued on the basis that the regulation had application in the circumstances of this case. I shall deal with the matter on the same basis.

The forms of proxy used in this case were in accordance with Form 532 except in their provision for signature or execution under common seal. Form 532 concludes with provision for a date and a signature. The forms of proxy in this case conclude more elaborately. After making provision for a date they conclude as follows:

"...........................

(name of creditor)

............................

(signature)

...........................

(capacity of person signing)

...........................

(signature of witness)

...........................

(name of witness)

--------------------------------------------------------

(if proxy form is to be executed under common seal)

THE COMMON SEAL of

........................ LIMITED

was hereunto affixed by the

authority of the Board of

Directors in the

presence of:

...............

director

...............

secretary"

As to the deviations between the forms of proxy used in this case and Form 532, it is to be noted that s109U of the Corporations Law provides as follows:

"Where this Law prescribes a form, strict compliance with the form is not required and substantial compliance is sufficient."

By reason of s8A(1) of the Corporations Law, the above reference to "this Law" is to be read as including a reference to Corporations Regulations. In my view the forms of proxy relied upon in this case, which deviate from Form 532 only in providing for more detailed or formal authentication, do substantially comply with Form 532. They are therefore sufficient as to form.

Counsel for the applicant drew attention to s249(3) of the Corporations Law and reg. 5.6.35 of the Corporations Regulations. Section 249(3) provides as follows:

"249 (3) A body corporate may, by resolution of its board, authorize a specific person to act as the body's representative at specified meetings that the body would, if it were a natural person, be entitled to attend as a member or creditor (including debenture holder) of a company."

Regulation 5.6.35 is in the following terms:

"A document:

(a) purporting to be a copy of a resolution under subsection 249(3) of the Corporations Law authorising a person to act as a proxy at a meeting; and

(b) that has been verified as a true copy of the resolution or that is under the seal of the corporation;

is conclusive evidence of his or her authority to do so."

Although reg. 5.6.35 of the Corporations Regulations appears to have been drawn on the contrary assumption, a person authorized pursuant to s249(3) to act as the representative of a body corporate at specified meetings is not, in my view, thereby appointed as the body's proxy within the meaning of s250 of the Corporations Law. Sections 249 and 250 of the Corporations Law when read together seem to me to make it plain that there are significant differences between a representative of a body corporate appointed pursuant to s249(3) and a proxy appointed pursuant to s250(1) (see, for example, s249(1), 249(5) and 250(2)). I note that in Sipad Holdings ddpo & Anor v Popovic & Ors (1995) 61 FCR 205, Lehane J drew a distinction between a person appointed as the representative of a body corporate pursuant to s249(3) of the Corporations Law and an appointed proxy of the body corporate. See also Gummow J in Re New World Alliance Pty Ltd (Receiver and Manager Appointed); Sycotex Pty Ltd v Baseler & Ors (No. 2) (1994) 51 FCR 425 at 440. It is even more plain that a person appointed as the proxy of a body corporate is not thereby appointed as the representative of the body pursuant to s249(3) of the Corporations Law.

Regulation 5.6.35 of the Corporations Regulations is not, in my view, of assistance in resolving the issues which here arise for determination.

Section 182(7) of the Corporations Law provides as follows:

"A document or proceeding requiring authentication by a company may be authenticated by the signature of an officer of the company and need not be authenticated under the common seal of the company."

It was contended on behalf of the applicant that, notwithstanding the above provision, the fact that the forms of proxy actually used in this case provided the option of execution under common seal, had the consequence that they could not validly be executed by bodies corporate other than under common seal. It was also contended that as they provided for a signatory to indicate the capacity in which he or she signed and for signatures to be witnessed, these requirements had to be met in all cases in which the creditor was not a body corporate. I reject these contentions. The Corporations Regulations by reg. 5.6.29 prescribe the form of an instrument of appointment of a proxy: it is not open to an administrator or liquidator to compel additional formality or a greater measure of authentication. The validity of the instruments of appointment of proxies in this case are to be measured against the requirements of the Corporations Law and the Corporations Regulations.

Section 82A of the Corporations Law provides that, subject to an exception not here relevant, an "officer" of a body corporate includes "a director, secretary, executive officer or employee of the body ...". I do not understand it to have been suggested on behalf of the applicant that any relevant instrument of appointment of a proxy in this case was, where given by a company, not signed on behalf of that company by an officer of the company. Rather, the contention was that some such proxies "were obviously not signed by people with the relevant authority and should not have been relied upon by the chairman". No authority for this proposition was cited. Nor was it suggested how the chairman might at the meeting have sought to establish the actual authority of those who signed with the apparent authority of the company of which they were officers as defined by s82A of the Corporations Law.

Counsel for the applicant also drew attention to certain forms of proxy which do not make it plain whether the creditor is a company or an individual trading under a business name. He further drew attention to a form of proxy where the creditor may have been either a partnership or a business name: if the creditor was a partnership, the authenticating signature was apparently not that of one of the partners.

The second respondent was not cross-examined as to his acceptance of any of the forms of proxy. No positive evidence of lack of proper authority in any of the signatories to forms of proxy was placed before the Court. As Heerey J pointed out in Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 at 512, it is not sufficient for an application under s445G to show that there is a doubt: the existence of a doubt merely confers jurisdiction. The court must then apply the law (including any discretion conferred by the law) to the facts as found. I am not able to conclude that any of the forms of proxy relied on by the second respondent was invalid on the basis that it was not signed by a person with appropriate authority to sign it.

The third alleged irregularity said to invalidate the resolution that the first respondent execute the DOCA arises out of the decision of the second respondent to allow the lessors of vehicles under lease to the first respondent to vote for an amount estimated by him to be the total current pay-out value of the leases.

It was formally contended on behalf of the applicant that as the leases had not been repudiated, and indeed as the DOCA assumed that they would continue, the lessors were not creditors for the purposes of the DOCA and were not entitled to vote. Counsel for the applicant recognized, however, that in this Court the decision of Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No. 55) Pty Ltd (1996) 22 ACSR 169 constituted a probably insuperable obstacle to the contention. In the Lam Soon Australia Pty Ltd case, the Full Court of this Court followed the decision of the Appeal Division of the Supreme Court of Victoria in Brash Holdings Ltd (admin apptd) v Katile Pty Ltd (1994) 13 ACSR 504 in holding that "the creditors of the company for the purposes of Pt 5.3A [of the Corporations Law] are those who would have been creditors had the company gone into liquidation and the relevant day for the purposes of s553 been the day specified in the deed" (see Brash Holdings Ltd v Katile Pty Ltd at 515). On this basis creditors of the company for the purposes of Part 5.3A of the Corporations Law include persons who as at the relevant date had future or contingent debts or claims. The Full Court in the Lam Soon Australia Pty Ltd case held that in circumstances in which the company is a lessee under a lease, its landlord is a creditor of the company for the purposes of Part 5.3A of the Corporations Law for rent falling due under the lease from the date of the appointment of the liquidator (or such other date specified under the deed under s444A(4)(i)) until the expiry of the lease. In so holding the Full Court at 176 said that -

"[t]here are obvious practical and commercial similarities between the situation of a mortgagee of property of a company and that of the owner or lessor of property of which the company has possession or which it uses. The similarity is, no doubt, particularly striking where the arrangements concern goods used by the company: where the comparison is, for example, between a lender who holds a bill of sale over goods or a chattel mortgage and an owner of goods who lets them to the company on hire purchase. But clearly, so far as subs 444D(2) and (3) and s444F are concerned, no distinction is to be drawn between an owner or lessor of goods and a lessor of land."

The Full Court's decision in the Lam Soon Australia case did not turn on the issue of the attempted repudiation in that case of the lease. The Court at 177 stated:

"Clearly enough a claim under an existing lease for rent payable in the future is an existing right, not a mere expectancy: if authority is needed, Shepherd provides it. [Shepherd v FCT [1965] HCA 70; (1965) 113 CLR 385] There is thus in our view no misuse or straining of language in saying of a claim to rent payable after the specified day under a lease in existence on the specified day that it is a claim which has arisen on or before that day. Once that is accepted, it is in our view no less such a claim if the amount payable in respect of it becomes ascertained or crystallised, either in accordance with the terms of the lease itself or as damages at law in circumstances where after the appointment of the administrator (whether before or after a deed of company arrangement is entered into) the lease is terminated by the lessor in exercise of a contractual right to do so or upon acceptance by the lessor of a repudiation by the lessee. Of course, those considerations do not arise here, where it has been found that the repudiation of the lease, by the administrator on behalf of Lam Soon Australia, has not been accepted by Molit"

In my view, in the circumstances of this case, the second respondent rightly allowed the lessors of vehicles under lease to the first respondent to vote as creditors of the first respondent for the purposes of Part 5.3A of the Corporations Law. No challenge was made by the applicant to the adoption by him of the total current pay-out value of the leases as an appropriate method of valuing the lessors' claims for future payments under the leases.

The fourth alleged irregularity said to invalidate the resolution that the first respondent execute the DOCA involves consideration of a similar issue. The applicant, the worker's compensation insurer of the first respondent, was treated by the second respondent for the purposes of a poll on the resolution that the first respondent execute a deed of company arrangement, as a creditor only in respect of premiums payable to the date of the appointment of the second respondent as administrator of the first respondent. That is, he rejected in part the proof of debt lodged by the applicant in respect of all unpaid premiums under the policy of insurance.

The decision of the Full Court in the Lam Soon Australia case has made it plain that this decision of the second respondent was incorrect. The applicant was a creditor of the first respondent for the full amount of future premiums payable under the policy of insurance.

The power of the Court to declare a deed of company arrangement to be void is a discretionary power. Regulation 5.6.21 of the Corporations Law provides so far as is here relevant as follows:

"(1) This regulation applies to a poll taken at a meeting of creditors.

(2) A resolution is carried if:

(a) a majority of the creditors voting (whether in person, by attorney or by proxy) vote in favour of the resolution; and

(b) the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting (whether in person, by proxy or by attorney)."

The above regulation, as well as regs. 5.6.23 - 5.6.26 which deal with the admission and rejection of proofs of debt for the purposes of voting, appear in Part 5.6 of the Corporations Regulations which is headed "WINDING UP GENERALLY". It was not contended that such regulations had no application to the circumstances of this case and I shall assume that they do have such application.

If the second respondent had treated the value of the debt owed by the first respondent to the applicant as being the amount for which the applicant had submitted a proof of debt, the resolution would still have been carried: that is, a majority of the creditors voting would still have voted in favour of the resolution and the value of the debts owed by the first respondent to those voting in favour of the resolution would still have been more than half the total debts owed to all the creditors voting.

I am prepared to assume, but without deciding, that a wrongful rejection of a proof of debt for the purposes of voting would result in the resolution that a company execute a deed of company arrangement being carried otherwise than in accordance with Part 5.3A of the Corporations Law. However, in the circumstances of this case, I decline to declare the DOCA void by reason of the decision of the second respondent to reject the applicant's proof of debt in part for the purpose of the vote on the resolution that the first respondent execute a deed of company arrangement.

The respondents have by a cross-claim dated 26 August 1996 sought certain declarations including declarations that, in effect, any irregularities found to have incurred in relation to the meeting at which the resolution that the first respondent execute a deed of company arrangement was carried are procedural irregularities which have not caused substantial injustice and that the DOCA is valid.

It is not clear whether by their cross-claim the respondents seek to invoke s445G(3) or s1322 of the Corporations Law. Section 445G(3) is set out above. So far as is here relevant s1322 provides as follows:

"1322 (1) In this section, unless the contrary intention appears:

(a) a reference to a proceeding under this Law is a reference to any proceeding whether a legal proceeding or not; and

(b) a reference to a procedural irregularity includes a reference to:

(i) the absence of a quorum at a meeting of ... creditors of a corporation ...; and

(ii) a defect, irregularity or deficiency of notice or time.

(2) A proceeding under this Law is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid."

The meeting of creditors of the first respondent convened under s439A of the Corporations Law was a proceeding under the Corporations Law. The manner of taking the poll and the method used to determine the result of the poll were, in my view, matters of procedure within the meaning of s1322 so far as that meeting was concerned (Deputy Commissioner of Taxation (Cth) v Comcorp Australia & Ors (1996) 21 ACSR 590 per Carr J, with whom Lockhart J agreed, at 630-631). I am not of the opinion that the procedural irregularity which resulted from the wrongful disallowance by the second respondent of the proof of debt of the applicant as to part of the debt claimed caused or may cause any substantial injustice. In such circumstances, the meeting, and the resolutions carried at the meeting, are not invalidated by such procedural irregularity. On the assumption that a declaration of validity pursuant to s445G(3) may appropriately be made in the circumstances of this case, no such declaration is required. Nor, in my view, is an order pursuant to s1322(4)(a) required.

Section 445D of the Corporations Law provides as follows:

"445D (1) The Court may make an order terminating a deed of company arrangement if satisfied that:

(a) information about the company's business, property, affairs or financial circumstances that:

(i) was false or misleading; and

(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

was given to the administrator of the company or to such creditors; or

(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or

(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or

(d) there has been a material contravention of the deed by a person bound by the deed; or

(e) effect cannot be given to the deed without injustice or undue delay; or

(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii) contrary to the interests of the creditors of the company as a whole; or

(g) the deed should be terminated for some other reason.

(2) An order may be made on the application of:

(a) a creditor of the company; or

(b) the company; or

(c) any other interested person."

Reliance in this case was placed on paras (c), (e), (f) and (g) of s445D(1).

The applicant first placed reliance on the failure of the second respondent to disclose to the meeting of creditors that the Randwick Council was taking proceedings to evict the company from one of its two trading premises. Under the deed of company arrangement proposed for the company it was to continue trading. The unchallenged evidence of the second respondent is that he was not aware before the s439A meeting of the proceedings commenced against the company by the Randwick Council. However, a representative of the Council attended the meeting and the issue of the proceedings was there discussed. Steve Tzaneros ("Mr Tzaneros"), a director of the company, gave evidence, which I accept, that the company has an offer of suitable alternative premises from which to trade and that its present landlord has agreed to release it from its obligations under the lease of its present premises subject to its satisfying modest conditions. The company has already vacated one of two sites which it occupied as at the date of the s439A meeting, thus reducing the overhead expenses.

In the circumstances, I am not satisfied that the failure of the second respondent to disclose to the meeting of creditors that the Randwick Council was taking proceedings to evict the company from one of its trading premises "can reasonably be expected to have been material" to the creditors of the company for the purposes of the s439A meeting. Even if it were, I would not be prepared now to make an order terminating the deed of company arrangement by reason of such failure.

Secondly, the applicant places reliance on the failure of the second respondent -

"adequately to disclose the full extent and nature of the recovery action referred to in his report against the directors for insolvent trading and breach of duty and against other creditors for preferences. The means by which those actions could be funded were not discussed and the options not given to creditors. The assets of the directors were not the subject of investigation or report so as to determine whether or not they would be able to meet any judgment awarded against them."

In his report to creditors, the second respondent dealt explicitly with the issue of possible preferences. He reported as follows:

"Payments to creditors made after 2nd January 1996 have been reviewed to determine whether they are voidable as unfair preferences. However small amounts are not considered to be recoverable by a liquidator as recovery costs may outweigh potential benefits. Moreover, the nature of certain payments render it likely that one of the statutory defences afforded by Section 588FH of the Corporations [Law] may be applicable and therefore bar recovery by a liquidator.

Following a review of payments made in the preference relation- back period, I have identified payments totalling approximately $304,960 as potentially voidable and consequently potentially recoverable by a liquidator as unfair preferences. I have concentrated on payments of 'round' amounts which may indicate that such payments were part of a repayment plan or may suggest knowledge by the creditor of the company's insolvency at the time of payment. These payments number 34 and were made to 6 creditors in total. Should the company proceed to liquidation, a liquidator would make further enquiry, including issuing letters of enquiry/demand, to determine whether such payments may be recoverable prior to initiating recovery proceedings.

A liquidator would further need to consider the commerciality of any proceedings, particularly given that costs would need to be funded by creditors."

As to possible insolvent trading, the second respondent set out certain financial information in his report upon which he concluded that "it is extremely likely that the company had been insolvent for a significant period of time prior to 2nd July 1996". He went on -

"Should it be that the company did incur debt without reasonable expectation of being able to repay then such monies may be recoverable from directors on liquidation."

The second respondent noted in his report that the directors of the company had each received remuneration which could be claimed as excessive and that recovery of the excess might be possible. He also reported that given the overall deficiency and the likely trading losses of the company it was likely that the directors had breached their respective obligations to act with due care and diligence in the discharge of their duties. The report goes on:

"If the matter does proceed to liquidation and it was contemplated that recovery action be considered against the directors or creditors in relation to potential preferences, in the first instance I would recommend an examination of directors and all relevant parties pursuant to section 596 of the Corporations Law. I would estimate the cost of same would approximate $15,000- $25,000, thereafter in the event that a decision was taken to pursue directors, legal fees assuming the matter would be defended would approximate $20,000-$50,000. Funding would be required from creditors to pursue this course of action.

Creditors and the liquidator would need to bear in mind the commerciality of any proceedings.

Directors have advised they have limited net personal assets however I have not verified this statement."

In the Hagenvale case, Cohen J stated (at 150) in respect of a similar complaint:

"The recovery of preferences by liquidators is sometimes hazardous because it frequently occurs that little is known of the circumstances of the payment. It is accordingly regarded as slightly risky for a liquidator to make any claim in respect of a preference until he has had an examination of the creditors concerned, in order to find out the circumstances and any possible defences. It would therefore be somewhat speculative and of no great assistance for an administrator, with only limited investigation having taken place, to try to quantify the amounts which he thought might be recoverable on liquidation and I do not consider that his failure to attempt that exercise could amount to a material omission.

In respect of possible claims against the directors, the administrator indicated that he had obtained legal advice and that this indicated that there may be minimal return to the creditors because the directors may have little or no personal assets and the principal creditor who would benefit most from any actions would be an associated company. Complaint was made that the administrator failed to advise the creditors of certain other sections which in fact deal with the ability of a liquidator to make claims in respect of breaches of s588G. There does not seem anything further that the administrator should have said in his report in this regard."

As was pointed out by the Full Court of this Court in Deputy Commissioner of Taxation (Cth) v Comcorp Australia & Ors, the emphasis or speed is part of the context in which s445D must be construed (per Sheppard J at 596-597 and Carr J, with whom Lockhart J agreed at 612-613). Carr J at 613 stated:

"Information which is material to creditors considering a scheme of arrangement may not, given all the circumstances and the need for expedition, be reasonably expected to have been material to creditors considering a deed of company arrangement."

In the circumstances of this case I am not satisfied that there was an omission from the second respondent's report of the kind suggested by the applicant which "can reasonably be expected to have been material" to the creditors in deciding whether to vote in favour of the resolution that the company execute a deed of company arrangement.

The applicant next placed reliance on a number of factors which, it was contended, meant that effect cannot be given to the DOCA without injustice or, alternatively, the deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the creditors.

The first factor relied upon was that the finance companies which leased vehicles to the company voted in favour of the company executing a deed of company arrangement, but under the DOCA they retain their security over the vehicles and will receive their full entitlements under the lease agreements rather than the small dividend to be received by unsecured creditors. It cannot, in my view, be successfully contended that such differential treatment of creditors of itself leads necessarily to unfair discrimination against the unsecured creditors. It may be presumed that the company required the leased vehicles to continue to trade as the DOCA envisaged.

In the Lam Soon Australia case, the Full Court upheld differential treatment between different classes of unsecured creditors in circumstances in which the company proposed to deal with certain classes of such creditors only on an ongoing basis. The Full Court treated as a relevant consideration the issue of whether the deed of company arrangement is less beneficial to any creditor than liquidation of the company would be likely to be. It has not been established here that any unsecured creditor will receive less under the DOCA than if the company were to go into liquidation. In my view this complaint cannot be upheld.

The second such factor relied upon was that the directors are guarantors of the vehicle leases and thus the continuing meeting by the company of its obligations under such leases has the effect of reducing the directors' liabilities under their guarantees whilst disadvantaging creditors to whom they have not given guarantees. I note that under the terms of the DOCA it is not apparent that the other creditors will necessarily be disadvantaged in the way suggested. The fact that the directors had guaranteed the vehicle leases was disclosed at the creditors' meeting. The existence of such guarantees is not uncommon when deeds of company arrangement are proposed. The significance of such guarantees is a matter for creditors to take into account in considering whether to support a resolution that the company execute a deed of company arrangement. A deed of company arrangement is not, in my view, shown to be oppressive, or unfairly prejudicial to, or unfairly discriminatory against one or more creditors merely because a creditor or creditors whose debts are guaranteed by directors receive advantageous treatment under the deed of company arrangement when compared with other creditors, with the consequence that the directors' interests are thereby advanced. I do not consider that the DOCA should be terminated by reason of this factor.

The third factor relied upon by the applicant was that the subordinated creditors, as defined by the DOCA, being largely related entities of the company, have their debts deferred by the DOCA and not extinguished. That is, at the conclusion of the DOCA they will be entitled to seek from the company full payment of their debts. Precisely such a circumstance was considered by the Full Court in the Lam Soon Australia case where all associated creditors had their claims deferred. The Court at 184-185 said:

"[W]here as in this case a deed which is proposed will discriminate between creditors and there is no community of interest between the groups, it is important that an administrator examine the proposal carefully and critically in order to ensure that the less advantaged group is not unfairly prejudiced. This must involve at least that the administrator take steps to ensure, so far as it is possible, that the deed is no less beneficial to all creditors than liquidation is likely to be."

Nothing was identified in this case which, in my view, could amount to unfair prejudice, having regard to the approach adopted by the Full Court in the Lam Soon Australia case. I am not satisfied that this ground of complaint is made out.

A fourth factor, or possibly group of factors, relied upon by the applicant is that the company is continuing to carry on business and incur debts, yet, it is asserted, it has not traded profitably for at least three years. Consequently, it is argued it is not clear how the funds to be paid under the DOCA are to be raised and that this aspect of the DOCA is unexplored and unsatisfactory. These factors are apparently put forward as "some other reason" why the DOCA should be terminated (s445D(1)(g)).

The second respondent has expressed confidence, on grounds not shown to be unreasonable, in the ability of the company to raise the funds required under the DOCA. There is no suggestion of false or misleading information having been provided to creditors on the issue of the capacity of the company to raise the funds required under the DOCA. I am not satisfied that the asserted doubt at to the capacity of the company to raise the funds required under the DOCA is a reason for the DOCA to be terminated.

The fifth factor relied on by the applicant relates to benefits derived by the directors by reason of the company having executed the DOCA. The applicant called in aid decisions under the Bankruptcy Act 1966 (Cth), such as Paton v Campbell Capital Limited [1993] FCA 526; (1993) 46 FCR 30, which make it clear that the fact that a dividend to creditors under a scheme of arrangement will be relatively insignificant is a factor which the Court may validly take into account in the exercise of its discretion whether it should order the termination of the arrangement. Such termination allows the debtor to be examined in bankruptcy and a more comprehensive explanation of the circumstances surrounding his or her financial circumstances obtained than would be likely under a scheme of arrangement. In this case it is pointed out on behalf of the applicant that if the DOCA is not terminated the directors will be advantaged in that they will avoid prospective liability in respect of insolvent trading, they cannot be subjected to examination under s596B of the Corporations Law and they do not face the risk of having a notice served on them under s600(3) of the Corporations Law prohibiting them from managing a company.

I have given consideration to the relatively low dividend payable to the unsecured creditors of the company whose debts are not deferred and to the advantages which accrue to the directors from the execution of the DOCA. However, having regard to the object of Part 5.3A of the Corporations Law as expressed by s435A, I am not satisfied that the matters identified by the applicant are sufficient to amount to "some other reason" why the DOCA should be terminated.

Finally the applicant placed reliance on its own peculiar position so far as the company is concerned. It is the workers compensation insurer of the company. It is presently on risk and it was not disputed that it is likely to so remain (Workers Compensation Act 1987 (NSW) ss155, 157, 168 and 172). Yet it is restricted to proving under the DOCA for its unpaid premiums. The applicant contrasts its position with other creditors who continue to supply the company who may expect to be paid. In particular it contrasts its position with that of the lessors of vehicles leased by the company.

I have considerable sympathy for the position in which the applicant finds itself. Such position is largely a consequence of the provisions of the Workers Compensation Act 1987 (NSW) and, I presume, the administrative policy of the WorkCover Authority constituted under the WorkCover Administration Act 1989 (NSW). Such position is, I consider, a factor which I am entitled to take into account for the purposes of s445D of the Corporations Law, but it cannot, in my view, be regarded as a factor necessarily calling for termination of the DOCA.

I have had regard to the totality of the circumstances of this case in the light of the objective of Part 5.3A of the Corporations Law. In particular I have had regard to the relatively short period of time that the DOCA is intended to be operative and to the steps available to be taken, and apparently being taken, to restore the company to profitability. I am not prepared to exercise my discretion under s445D to terminate the DOCA by reason of the position in which the applicant finds itself as the company's workers compensation insurer.

Having considered each of the grounds upon which the applicant places reliance in seeking an order pursuant to s445D of the Corporations Law, I am not satisfied that any of them warrants an order of termination pursuant to s445D. I have also given consideration to the cumulative effect of such grounds. I am not satisfied that the cumulative effect of such grounds is such as to warrant an order of termination pursuant to s445D.

The application will be dismissed. I will hear counsel as to costs.

I certify that this and the preceding thirty four (34) pages are a true copy of the reasons for judgment of the Honourable Justice Branson.

Associate:

Date:

Counsel for the applicant: Mr M.R. Aldridge

Solicitors for the applicant: P.W. Turk & Associates

Counsel for the 1st and 2nd

respondents: Mr P.M. Fordyce

Solicitors for the 1st and 2nd

respondents: P.A. Somerset & Co.

Hearing day: 18 November 1996