David John Beatty & Anor v Brashs Pty Ltd & Ors [1998] FCA 128 (19 February 1998)

Last Updated: 4 March 1998

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - Part 5.3A - deed of company arrangement - validity of appointment of administrator to company already subject to deed of company arrangement

STATUTES - statutory construction - whether implication of a provision should be made

Corporations Law: ss 513B(b) and (c)

Austereo Ltd v Trade Practices Commission [1993] FCA 301; (1993) 41 FCR 1 followed

Chorlton v Lings (1868) 4 CP 374 referred to

Cooper Brookes (Woollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 referred to

Mark Francis Xavier Mentha & Ors v G E Capital & Anor (Federal Court, unreported, 12 December 1997, Finkelstein J) referred to

Salomon v Salomon & Co [1897] AC 22 referred to

Tokyo Mart Pty Ltd v Campbell & Anor (1988) 15 NSWLR 275 applied

DAVID JOHN BEATTY & ANOR v BRASHS PTY LTD & ORS

VG 3045 of 1998

FINKELSTEIN J

MELBOURNE

19 FEBRUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY GENERAL DIVISION	VG 3045 of 1998

BETWEEN:	DAVID JOHN BEATTY (in his capacity as Deed Administrator) Applicant
AND:	BRASHS PTY LTD; (administrators appointed) (subject to deed of company arrangement) LINDSAY PHILIP MAXSTED (In his capacity as administrator appointed); and MICHAEL JOSEPH DWYER (in his capacity as administrator appointed) Respondents
JUDGE:	FINKELSTEIN J
DATE OF ORDER:	19 February 1998
WHERE MADE:	melbourne

THE COURT DECLARES THAT:

1. The appointment by Brashs Pty Ltd (administrators appointed) (subject to deed of company arrangement) on 7 February 1998 of Lindsay Philip Maxsted and Michael Joseph Dwyer to be its administrators is valid.

THE COURT FURTHER ORDERS THAT:

2. The second applicant cease to be an applicant pursuant to Order 6 Rule 9 of the Federal Court Rules and that the title of the proceedings be amended accordingly.

3. The further hearing of this application be adjourned to 1 April 1998.

4. The costs of the application to date are reserved.

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY GENERAL DIVISION	VG 3045 of 1998

BETWEEN:	DAVID JOHN BEATTY (In his capacity as Deed Administrator) Applicant
AND:	BRASHS PTY LTD (administrators appointed) (subject to deed of company arrangement); LINDSAY PHILIP MAXSTED (In his capacity as administrator appointed); and MICHAEL JOSEPH DWYER (In his capacity as administrator appointed) Respondents

JUDGE:	FINKELSTEIN J
DATE:	19 FEBRUARY 1998
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

The applicant (the deed administrator) is the administrator of a deed of company arrangement executed under Part 5.3A of the Corporations Law by Brashs Pty Ltd (administrators appointed) (subject to deed of company arrangement), the first respondent, (Brashs) and its then administrators, the deed administrator and Michael James Humphris. The applicant seeks a declaration under s 447C(2) of the Corporations Law whether or not Lindsay Philip Maxsted, the second respondent, and Michael Joseph Dwyer, the third respondent, were validly appointed as the administrators of Brashs. The deed administrator also seeks directions under s 447D as follows, (a) whether he should defer calling a meeting of the creditors of Brashs as required by clause 17.2 of the deed and (b) whether he should defer making an application to the Court to wind up Brashs as contemplated by clause 17.2.

During the course of the hearing, which commenced on Monday, the parties agreed that first I should consider whether the declaration should be made and that I should delay hearing the application for directions to enable the respondents to tender evidence in relation to them.

The facts that give rise to the application are as follows. Brashs was one of a number of companies in a group conveniently referred to as the Brashs group. On 2 May 1994 the deed administrator and Mr Humphris were appointed under s 436A(1) of the Corporations Law to be the administrators of each company in the group. The administrators conducted an investigation into the affairs of each company and formed the opinion that it would be in the interests of the creditors that each company execute a deed of company arrangement. A separate meeting of the creditors of each company in the group was convened as required by
s 439A(1) and at those meetings, which were held on 30 June 1994, the creditors resolved that each company execute a deed of company arrangement: see s 439C. The appropriate deeds were then drawn up and executed in the manner and within the time required by s 444B. The deed for Brashs was executed on 5 July 1994.

Certain features of the scheme established by the deeds should be mentioned. Each company in the group, other than Brashs, assigned all of its property (as defined) to Brashs. In return Brashs assumed liability to discharge the debts of those companies. The Brashs deed created a number of notional funds out of which payments would be made to creditors. By the deed certain creditors were accorded preferential treatment in relation to the payments to be made to them but most unsecured creditors ranked equally and were to receive a sum estimated to be around $0.38 cents in the dollar. The deed provides for what is to occur to the unpaid balance of the debts due to those unsecured creditors. The unpaid balance is to be assigned to a company that is controlled by Brashs or by the major shareholder of Brashs. That assignment will take place on the termination of the deed but only if Brashs is not wound up before then. The deed will terminate upon the occurrence of the first of a number of defined events. One of those events is if the creditors pass a resolution to terminate the deed at a meeting convened under s 445F of the Corporations Law. None of the defined events has yet occurred.

In accordance with the deed the preferential creditors have been paid out. The unsecured creditors have been paid a large portion of the amount due to them but they may receive further payments. This will depend upon whether Brashs is successful in actions to recover money that has been allocated to meet the claims of the unsecured creditors.

Subsequent to the execution of the deed of company arrangement, Brashs continued to carry on business and yet again it is in financial difficulty. The board of directors formed the opinion that Brashs was likely to become insolvent. Accordingly, on 7 February 1998 Brashs appointed Messrs Maxsted and Dwyer under s 436A(1) to be its administrators. It is the validity of this appointment that is called into question by the deed administrator.

I should explain why the deed administrator brings the issue of the validity of the appointment before the Court. Clause 17.2 of the deed of company arrangement provides:

"Upon the occurrence of an Event of Default the Deed Administrator will call a meeting of creditors in accordance with section 445F of the Law to consider termination of this Deed and the winding-up of Brashs Pty Ltd in accordance with section 445E of the Law or may, in the Deed Administrator's sole and absolute discretion, apply to the Court on notice to Brashs Pty Ltd for the appointment of a liquidator to Brashs Pty Ltd."

It is common ground that the appointment of an administrator is an Event of Default as defined. If that has occurred the deed administrator must convene a meeting of the creditors of Brashs in accordance with clause 17.2. He is also required to consider whether to make an application to the Court to have Brashs wound up. For present purposes I will assume that the deed administrator is a person who has standing to make such an application. An invalid appointment of an administrator may also result in an Event of Default as defined. That is a matter that requires further investigation by the deed administrator. If it turns out that the appointment is invalid the deed administrator must carry out that investigation. So, resolving the validity of the appointment will inform the deed administrator what steps he must take in order to carry out the obligations that are imposed upon him by clause 17.2.

There is only one matter that is put forward to contest the validity of the appointment. It is said that by necessary implication Part 5.3A does not permit the appointment of an administrator to a company that is subject to a deed of company arrangement. To determine whether this contention is correct requires close examination of a number of provisions of the Corporations Law and an understanding of the objectives that lie behind Part 5.3A. Even then, as will become apparent, the answer to the point of construction that is raised is not without difficulty.

Part 5.3A was inserted into the Corporations Law by the Corporate Law Reform Act 1992 with effect from 23 June 1993. The object of the new Part as stated in s 435A and as explained in the Explanatory Memorandum that accompanied the Bill is to provide for a speedy, inexpensive and flexible method of dealing with an insolvent company that may be able to continue in business rather than being wound up or, if it is not possible to avoid a winding up, to provide a better return for creditors. The provisions of Part 5.3A that give effect to this object are detailed. For present purposes it will suffice if I indicate in broad outline how they operate.

If a company is or is likely to become insolvent an administrator may be appointed. That appointment can be made by the company (s 436A), by a liquidator or provisional liquidator of the company (s 436B) or by a person who holds a charge over the assets of the company
(s 436C). Upon appointment the administrator takes charge of the affairs of the company
(s 437A) to the exclusion of all other officers (s 437C). By s 437A the administrator is given power to continue to conduct the business of the company. The administrator is also charged with the responsibility of investigating the affairs of the company (s 438A) with a view to forming an opinion whether it would be in the interests of its creditors that the company enter into a deed of company arrangement, whether the administration should end or whether the company should be wound up (s 438A). The administrator is required to convene a meeting of the creditors of the company who are to consider which of these three alternative courses should be adopted (s 439C). In the meantime the assets of the company are protected by the provisions found in Division 6. These include the suspension of the rights of a second creditor to enforce his security (s 440B) and a stay of all proceedings against the company (s 440D). If the creditors resolve that the company should execute a deed of company arrangement the administrator must prepare an appropriate deed (s 444A(3)) and it must be executed by the company and by the deed's administrator (s 444B) who will usually be the administrator of the company.

Section 444A(4) sets out what the deed must contain. It gives an indication of the nature of the arrangements that are contemplated by Part 5.3A. The experience of schemes of arrangement propounded for insolvent companies and approved under s 411 and its predecessors is evident in the drafting of this section. Basically, three types of arrangements are envisaged. One is where a moratorium is imposed on the payment of debts by the company. Another is where the debts of the company are to be released presumably on the payment of a sum that is less than the amount of those debts. A third is an arrangement which incorporates both a moratorium on the payment of debts and a release of debts. No doubt other types of arrangements are also possible. In Mark Francis Xavier Mentha & Ors v G E Capital & Anor (unreported 12 December 1997) I expressed the obiter opinion that the power to enter into a deed of company arrangement is sufficiently broad to permit any arrangement which could be agreed between a company and its creditors.

There is one aspect of s 444A(4) which should be noticed. It requires the deed to specify the circumstances in which a deed is to terminate: see s 444A(4)(g). Reference should also be made to s 444A(5) which provides that a deed will include the prescribed provisions except to the extent that they are excluded. The prescribed provisions are to be found in Schedule 8A of the Corporations Regulations: see reg 5.3A.06. These provisions confer extensive powers upon the administrator of a deed and are sufficient to enable the deed's administrator to carry on the business and the affairs of a company which is under a deed of company arrangement. Thus, whether under the control of the directors if the prescribed provisions are excluded or under the control of the deed's administrator if the prescribed provisions are incorporated, the company is able to continue in business.

There is of course the risk that when an insolvent company continues to carry on its business while under a deed of company arrangement that is designed to restore the company to financial health its position may not improve or it may even become worse. What can be done in those circumstances? How can the creditors that have come into existence since the commencement of the deed be protected? Is it permissible for those creditors to be afforded the opportunity of taking advantage of Part 5.3A? Or are they to be denied that opportunity because of an implication to be found in the statute? It is to these issues that I will now turn.

The power to appoint an administrator is not unlimited. In the case of an appointment by the company or by its liquidator an opinion must be formed, either by the directors or the liquidator as the case requires, that the company is insolvent or likely to become so:
ss 436A(1)(a), and 436B(1). If the appointment is to be made by a chargee the charge must be enforceable: s 436C(1). The assumption made in that circumstance is that the company is likely to be insolvent. However, even where the condition upon which the power to appoint an administrator depends has been satisfied there are circumstances when that power cannot be exercised. Neither the company nor a chargee can appoint an administrator if the company is already being wound up: ss 436A(2), and 436C(2). In that event it is for the liquidator to decide whether an administrator should be appointed. Then there is s 436D which provides that an administrator cannot be appointed if the company is already under administration. The period during which a company is under administration is defined in s 435C. The administration commences on the appointment of an administrator and ends on the happening of the first of a number of events, ten in all, which are set out in the section. One of those events is that a deed of company arrangement is executed. The reason why an administrator cannot be appointed when a company is under administration is clear enough. If a company already has an administrator there is no need for the appointment of another administrator.

What conclusion can be reached from these provisions? The legislature has seen fit to prohibit the appointment of an administrator in particular circumstances. If other circumstances justify such a prohibition it might reasonably be expected that the Parliament would have provided for them. That is to say, prima facie at least it appears that the only circumstances in which an administrator cannot be appointed are those that have been expressly mentioned in the Statute. On this view, there being no express prohibition against the appointment of an administrator to a company under a deed of company arrangement, an administrator may lawfully be appointed in that circumstance. However, as one has come to expect, questions that come before the courts concerning the proper construction of a statute rarely admit of obvious conclusions.

Here the deed administrator points to a number of provisions in Part 5.3A and in other parts of the Corporations Law, being provisions that were inserted at the same time as Part 5.3A, that are said to lead to the conclusion that Parliament did not contemplate that an administrator would be appointed to a company under a deed of company arrangement. It follows from this, so the argument goes, that it is both reasonable and necessary to imply into the text of Part 5.3A an additional prohibition against an appointment.

Whether it is necessary to establish that the implication is both reasonable and necessary is doubtful. Certainly that was the traditional view. In Salomon v Salomon & Co Ltd [1897] AC 22 at 38 Lord Watson said that:

"... what the legislature intended to be done or not to be done can only be legitimately ascertained from what it has chosen to enact either in express words or by reasonable and necessary implication."

See also Chorlton v Lings (1868) 4 CP 374 at 38 per Willes J who spoke of an implication that is "necessarily or properly" made.

The modern approach to statutory construction is more flexible than this. Mr Bennion in his text, "Statutory Interpretation" (2nd ed) at 367, wrote:

"The question of whether an implication should be found within the express words of an enactment depends on whether it is proper or legitimate to find the implication in arriving at the legal meaning of the enactment, having regard to the accepted guides to legislative intention. It is for the court to decide whether a suggested implication is `proper'. This may involve a consideration of the rules of language or the principles of law, or both together. Where the point is doubtful it will, as always in interpretation, call for a weighing and balancing of the relevant factors".

This is the approach that was approved by the Full Court in Austereo Ltd v Trade Practices Commission [1993] FCA 301; (1993) 41 FCR 1 at 36-37 and that I must follow.

The first group of provisions to which reference must be made concern the winding up of a company under administration and the winding up of a company under a deed of company arrangement. A company under administration may be wound up if its creditors so resolve under s 439C(c) or if a deed of company arrangement approved by the creditors is not executed: see s 446A(1)(a) and (b). A company under a deed of company arrangement may be wound up if, at a meeting convened under s 445F, the creditors resolve that the deed be terminated and that the company be wound up: see s 446A(1)(c). In each case the company is taken to have passed a special resolution under s 491 that the company be wound up voluntarily (s 446A(2)) and the administrator or the deed's administrator (as the case requires) is taken to be nominated as the liquidator of the company unless the creditors nominate some other person: s 446A(4). A company that is under a deed of company arrangement may also be wound up by the Court.

One consequence of the winding up of a company is that its liquidator can avoid certain transactions that were entered into by the company and can recover certain dispositions of the company's property so as to add to the estate that is to be distributed to the creditors. For example, what are called unfair preferences and uncommercial transactions are made voidable: see generally Part 5.7B, Div 1. Whether or not a transaction is an unfair preference or an uncommercial transaction will depend upon, among other things, whether that transaction occurred during a specified period before the commencement of the winding up. For this and other purposes the Corporations Law specifies when a winding up is taken to have commenced. If a company is wound up voluntarily the specification is found in s 513B. In the case of a company under administration or under a deed of company arrangement immediately before the winding up the section provides that the winding up will commence-

"(b) if, immediately before the resolution [to wind up the company] was passed, the company was under administration - on the section 513C day in relation to the administration or

(c) if, immediately before the resolution [to wind up the company] was passed, a deed of company arrangement has been executed by the company but had not yet terminated - on the section 513C day in relation to the administration that ended when the deed was executed."

Section 513C defines the section 513C day to be, so far as is presently relevant, the day on which the administration began. If a company is wound up by order of the Court s 513A specifies when that winding up is taken to have commenced. It is, relevantly, in terms identical to s 513B: see s 513A(b)(i) and (ii).

Another consequence of the winding up of a company is that certain officers of the company are liable to be examined about the company's affairs. The officers that are liable to be examined include those who were "examinable officers" during or after the two year period ending, relevantly, on a day that is to be ascertained in precisely the same way as the day on which a winding up is taken to have commenced: see s 596A See also s 597A where the Court is given power to require an examinable officer to file an affidavit about the examinable affairs of the company. Another instance of this language being employed is s 266 pursuant to which a liquidator, an administrator or a deed's administrator may set aside a security granted by a company unless notice of the charge was given at least 6 months before the "critical day". The definition of "critical day" includes the language of s 513B(b) and (c)

Read literally each of paragraphs 513B(b) and (c) applies to the case of a company under a deed of company arrangement that has an administrator appointed to it during the currency of the deed. This results in two different dates on which the winding up is taken to have commenced. The same problem arises in the case of ss 513A, 596A, 597A and 266. The deed administrator argues that this demonstrates that the Parliament did not intend an administrator to be appointed to a company under a deed of company arrangement and the only way to implement that intention is to imply a prohibition against its occurrence.

The deed administrator also points to other factors which he submits would make Part 5.3A unworkable if a company was both under a deed of company arrangement and under administration to make good his contention that there should be an implication of the prohibition. These are the factors. By s 437A the administrator would take control of the affairs of the company to the exclusion of the directors and the deed's administrator if the deed confers on the deed's administrator power to control the affairs of the company. This would be the case if the prescribed provisions formed part of the deed. The deed's administrator would not be able to deal with the property of the company even if that property was required to meet obligations imposed by the deed: see s 437B. The administrator would take possession of the books of the company by virtue of s 438C and this may inhibit the deed's administrator carrying out his obligations under the deed. There is also the possibility that, as a result of the administration, another deed of company arrangement is approved by the creditors. Depending upon the terms of the first deed those creditors may or may not include the creditors bound by the first deed. The second deed may be inconsistent with some or all of the provisions of the first deed. The legislation does not prevent such an inconsistency arising unless by some process of implication.

The foregoing might appear to be an impressive attack against the possibility of a company concurrently being under a deed of company arrangement and under administration. But it is not sufficient to support the implication that there should be a prohibition against the appointment of an administrator.

In the first place, while the text of the provisions to which reference has been made suggests that the legislature overlooked the need to make provision for the concurrence of a deed and an administration it is not possible to say what additional words would have been inserted by the Parliament had its attention been drawn to the omission. That is to say, the omission may have been made good by provisions resolving the potentially inconsistent sections and avoiding the difficulties that have been identified. Or the omission may have been made good by the addition of the suggested implication. Because it is not possible to say which course would have been followed (although, for my own part, I think the former is likely.) the omission cannot be repaired: see Tokyo Mart Pty Ltd v Campbell & Anor (1988) 15 NSWLR 275 at 283.

In the second place, if a necessity test or something like it is to be applied, there is plainly no need for the implication. Take for example the problem raised by s 513B and the other sections that are in identical terms to it. On one view, the literal constructionist view, an unworkable situation arises. But as Aristotle has written contradictory statements cannot both at the same time be true. If two provisions of an enactment contradict each other they cannot both be applied literally. It is necessary to reconcile them. And it is not at all difficult to reconcile paragraph 513B(b) with paragraph 513B(c). Paragraph 513B(b) can be applied to the case of a company under administration that is not also under a deed of company arrangement. Paragraph 513B(c) can be applied to the case of a company under a deed of company arrangement whether or not it is also under administration. This reconciliation does no violence to the language of s 513B. Nor does it bring about an irrational, by which I mean absurd, unfair or illogical, result. Of course it means that a liquidator can avoid dispositions made by a company a considerable time before its winding up. But when regard is had to the principle that lies behind the avoidance provisions, namely that creditors of an insolvent company should not obtain payment of or take security for their debts so as to advantage themselves over other creditors, the result is quite a satisfactory one in my opinion. After all what is being considered is the position of a company that was insolvent or was likely to be insolvent when an administrator was first appointed to it. Importantly on this construction the position of those creditors who have obtained payment under a deed of company arrangement will always be protected: see s 468(2)(ab). It also means that more officers may be examined about the affairs of a company. This could hardly be described as unfair, at least not by the creditors of the company who may benefit from the results of the examination.

Turning to the potential for competition between two (or it might even be more than two) deeds of company arrangement this can also be overcome without the implication being made. The Court retains power to terminate any deed of company arrangement. The power is found in s 445D. There is no doubt that the power may be exercised if one deed of company arrangement is inconsistent with another and that inconsistency is oppressive, unfair or prejudicial to creditors.

The other matters which were relied upon and to which I have referred, although they may create some difficulty in the administration of a deed and may cause hardship to the creditors bound by that deed, are not in themselves sufficient to warrant the conclusion that it is necessary to make the implication. I do not think this requires further elaboration.

There is in any case one overriding consideration that operates against acceptance of the suggested implication. If made, the implication would deny to a group of creditors of a company (that is those creditors who came into existence after the execution of a deed of company arrangement) and to the company itself the benefits that would otherwise be conferred upon them by Part 5.3A. The creditors would be denied the opportunity of seeking a better return and the company would be denied the opportunity of continuing in existence. In other words, the object of Part 5.3A would, in part at least, be defeated by the implication.

In Cooper Brookes (Woollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at 320 Mason and Wilson JJ said that:

"(t)he fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts looked to the operation of the statute according to its terms and to legitimate aids to construction."

Viewing the enactment as a whole and taking into account the accepted guides to legislative intention I cannot discern a need to imply into Part 5.3A the words "an administrator cannot be appointed under ss 436A, 436B or 436C if the company is under a deed of company arrangement that has not yet terminated".

Accordingly, I will grant a declaration that the appointment of Messrs Maxsted and Dwyer is valid.

I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein

Associate:

Dated: 19 February 1998

Counsel for the Applicant:	S. Whelan QC J Dodds-Streeton
Solicitor for the Applicant:	Arnold Bloch Liebler
Counsel for the Respondent:	J D Merralls QC E Woodward
Solicitor for the Respondents:	Mallesons Stephen Jacques
Date of Hearing:	16, 17 February 1998
Date of Judgment:	19 February 1998