In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) - Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 (10 December 2010)

Last Updated: 3 June 2011

NEW SOUTH WALES SUPREME COURT

CITATION:
In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) - Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429

JURISDICTION:
Equity

FILE NUMBER(S):
10/249314

HEARING DATE(S):
23 and 24 November 2010

JUDGMENT DATE:
10 December 2010

PARTIES:
Perpetual Trustee Company Ltd (Plaintiff)
Mustang Marine Australia Services Pty Ltd (First Defendant)
Cliff Sanderson (Second Defendant)
Alan Topp (Third Defendant)

JUDGMENT OF:
Ward J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable

COUNSEL:
B Coles QC with S Golledge (Plaintiff)
C R C Newlinds SC with J A Watson (Defendants)

SOLICITORS:
Paul Bard Lawyers (Plaintiff)
Blake Dawson (Defendants)

CATCHWORDS:
CORPORATIONS
application for termination of deed of company arrangement and winding up of first defendant under s 445D
consideration of operation of s 588Y of Corporations Act
HELD
deed of company arrangement terminated and winding up of first defendant ordered

LEGISLATION CITED:
Corporations Act 2001 (Cth)
Explanatory Memorandum and Second Reading Speech, 3 November 1992 to Corporate Law Reform Bill 1992

CASES CITED:
Bathurst City Council v Event Management Specialist Pty Ltd (2001) 36 ACSR 732; [2001] NSWSC 34
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235
Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61
Commissioner of Taxation v Comcorp (1996) 70 FCR 356; (1996) 21 ACSR 590
Cresvale Far East Ltd (in Liq) v Cresvale Securities Ltd [2001] NSWSC 89; (2001) 37 ACSR 394
Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498; (1996) 14 ACLC 659
DCT v Portinex (2000) 156 FLR 453; (2000) 34 ACSR 391; [2000] NSWSC 99
Emanuele v ASIC (1995) 63 FCR 54; (1995) 141 ALR 506; (1995) 19 ACSR 1; (1995) 14 ACLC 244
Fleet Broadband Holding Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598
In Re Diamond Press Australia Pty Ltd [2001] NSWSC 313
International Greetings UK Ltd v Stansfield [2010] NSWSC 1357
Khoury v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527
Lam Soon Australia Pty Ltd v Molit (No 55) (1996) 70 FCR 34
Lehman Brothers Holdings Inc v City of Swan; Lehman Brothers Asia Holdings Ltd (in liq) v City of Swan (2010) 240 CLR 509; (2010) 265 ALR 1; (2010) 84 ALJR 275; (2010) 77 ACSR 489; [2010] HCA 11
Lewis v Doran (2004) 208 ALR 385; (2004) 184 FLR 454; (2004) 50 ACSR 175; (2004) 22 ACLC 1009; [2004] NSWSC 608
Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126
Maylord Equity Management Pty Ltd v ReelTime Media Ltd [2008] NSWSC 1045
New World Alliance Pty Limited, Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425
Public Trustee (Qld) v Octaviar Ltd (No 8) (2009) 73 ACSR 139; [2009] QSC 202
Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385
Strazdins, in the matter of DNPW Pty Ltd (subject to DOCA) ACN 107 484 711 v Birch Carroll & Coyle Limited [2009] FCA 731
Tolcher v National Australia Bank [2003] NSWSC 207
Young (as representative for the Australian partnership known as Accenture) v Sherman (2002) 170 FLR 86; (2002) 20 ACLC 1559; [2002] NSWCA 281

TEXTS CITED:
ALRC General Insolvency Inquiry (Harmer Report)

DECISION:
Deed of Company Arrangement terminated. Order for the winding up of the first defendant. Liquidator appointed to the first defendant.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WARD J

FRIDAY 10 DECEMBER 2010

10/249314 IN THE MATTER OF MUSTANG MARINE AUSTRALIA SERVICES PTY LTD – PERPETUAL TRUSTEE COMPANY LTD V MUSTANG MARINE AUSTRALIA SERVICES PTY LTD

JUDGMENT

1. HER HONOUR: By an Amended Originating Process filed on 20 September 2010, the plaintiff (Perpetual) seeks orders pursuant to s 445D and s 447A of the Corporations Act 2001 (Cth) for the termination of a Deed of Company Arrangement entered into on 11 June 2010 (DOCA) in respect of Mustang Marine Australia Services Pty Ltd (MMAS) and for the winding up of MMAS. Consents to act as liquidator, signed by two persons put forward as alternatives for appointment as liquidator if the current application is successful, were filed in court.
   
2. Perpetual (as custodian of the Abacus Diversified Income Fund No 2) is a creditor of MMAS (claiming moneys under a lease granted to MMAS in February 2008). Its proof of debt was partially admitted in the administration for an amount in excess of $2m. Distribution of the deed fund in accordance with the DOCA has largely been completed. Perpetual (at its own insistence) has received no dividend under the DOCA, which is therefore not fully effectuated.
   
3. Perpetual complains as to the adequacy of material made available to creditors at or prior to the second meeting of creditors held pursuant to s 439A of the Corporations Act on 24 May 2010 (at which meeting entry into the DOCA was approved). In particular, Perpetual complains as to the adequacy of the consideration given by the then voluntary administrators (now deed administrators) to (and lack of information provided to creditors in respect of) the existence of any alternative to the proposal recommended by the administrators that creditors accept the DOCA promoted by Standard Bank Asia Limited (SBAL). SBAL is the largest creditor of MMAS with a secured debt in the order of $26m.
   
4. The voluntary administrators reported to creditors that they could expect a nil return from a winding up (as opposed to somewhere in the order of 3-6 cents per dollar under the DOCA) and recommended acceptance of the DOCA. Mr Sanderson, one of the voluntary administrators, who gave evidence in these proceedings, accepts that the material put before the creditors in relation to the DOCA, and the conclusions reached in the 14 s 439A May Report to the creditors, proceeded on the basis of the stated conclusion that MMAS became insolvent on 18 March 2010 (very shortly before the company went into voluntary administration on 19 March 2010). Senior Counsel for Perpetual (Mr Coles QC) alliteratively described this as a contestable and contentious proposition. Mr Sanderson accepted that as a consequence of that conclusion he did not draw attention to the possibility of actions under s 588D and s 588W of the Act (T 20.33) and that the conclusion as to the company’s solvency until 18 March 2010 had permeated his entire approach to creditors (T 20.38).
   
5. It is submitted by Mr Coles that the effect of the DOCA was to facilitate the withdrawal by SBAL (and/or its parent company) from an unsuccessful business venture without it having to meet the full extent of the losses which it had allowed its de facto subsidiary to accrue and without any exposure to it or its appointed directors for claims by any liquidator. In that regard, it is said that the investigation by the administrators failed to give proper attention to the possibility of recovery actions being brought in a winding up against the directors, SBAL and/or Standard Bank Plc, and of the benefits that might be received by creditors in such a winding up in comparison to the amount payable as a dividend under the deed (variously described in submissions as “derisory” and as “modest”).
   

Summary

6. In essence, the case was argued on discretionary issues, Senior Counsel for the defendants (Mr Newlinds SC) broadly conceding the jurisdictional ground(s) for the grant of relief. As to discretion, it was said that there was no realistic prospect of an insolvent trading claim and, even if there was such a claim, no realistic prospect of a better outcome for creditors. Various other matters were raised as going to discretion but it seems to me that the force of Mr Newlinds’ submissions lies in whether, at the end of the day, there is a realistic prospect of a better outcome than that provided under the DOCA.
   
7. As far as the investigation carried out by the administrators is concerned, Mr Newlinds submits that no criticism can be made, given that the objective of the Act is for a swift investigation. Here, it is said that the administrators carried out an investigation, formed a view as to the matters they were required to and expressed an opinion based on that view. It is not necessary for me to come to any conclusion as to the conduct of the investigation. That said, there is some force in the observation that the administrators seem somewhat uncritically to have accepted a matter essential to the formation of the opinion of insolvency or its timing – namely the existence of financial support from SBAL (whether or not provided by way of a legally binding obligation) sufficient to conclude that the company would be in a position to meet its debts as and when they fell due at all times up to 18 March 2010.
   
8. A view as to the existence of such financial support over the relevant period seems to have been drawn from the fact that payments were made from time to time to the company by SBAL but seemingly without reference to the basis on which that support was provided so as to enable a view to be formed as to whether it was reasonable at any point to expect that it would continue (or that it would be in an amount sufficient to meet ongoing trading debts). Mr Sanderson’s enquiries, other than satisfying himself that advances had been provided from time to time by SBAL, were seemingly limited to a review of the ageing of the debts and as to whether there had been demands for payments made by creditors.
   
9. From the far more detailed review since carried out by Perpetual, it seems to me that there is more than a mere theoretical possibility that it might be found that MMAS was insolvent at an earlier (and perhaps much earlier) time (the company’s own directors having been sufficiently concerned about this to raise the issue on more than one occasion). If so, that raises the spectre of insolvent trading which the administrators seem somewhat summarily to have dismissed in their report to creditors (albeit qualifying this by saying this was a “preliminary” view and adverting to the possibility of a more thorough investigation if there were to be a winding up).
   
10. Perpetual having now adduced evidence which suggests that there is a real issue as to the date of solvency of the company, it seems to me that I cannot assume that creditors (had they been informed as to the concerns in relation to an earlier date of insolvency and the possibility of insolvent trading claims and recovery of funds as a result of those) would necessarily have voted in the same way as they did, particularly if (as is now the case) Perpetual is prepared to fund an investigations into the prospect of a suit that might result in a better return to creditors.
    
11. Is there a realistic prospect of a recovery for creditors? Mr Sanderson’s more recent calculations prepared for the purposes of these proceedings, which assume insolvency (contrary to the opinion expressed in his report) at two earlier dates suggest that the end result of the two processes would be approximately the same if insolvent were to be established at July 2009 (and worse under a DOCA if insolvency were not established until January 2010). That end result would presumably change in favour of the DOCA result if insolvency were to be established at a date earlier than July 2009 (which is possible, though described by Mr Newlinds as fanciful). Mr Sanderson’s calculations further assume that SBAL would relinquish any debt incurred in the insolvent trading period and could then prove in the process of recovery from any insolvent trading claims as an unsecured creditor for the balance of its debt (which is contested by Perpetual).
    
12. Mr Newlinds submits that the source of funding for any insolvent trading claim is unclear since all Perpetual has said is that it will fund $50,000 for an investigation. It is said that if proceedings do follow from such an investigation, then while there is a possibility of litigation funding, there is nothing to suggest that it will necessarily be available (and that if it were this would be likely effectively to reduce the pool of funds from which creditors might ultimately recover). Mr Newlinds points to the prospect that defences might be established to any such claim and there might be difficulties of enforcement. All of this can be assumed to be part of the uncertainties of litigation. Creditors who have accepted dividends under the DOCA will not, however, be prejudiced by this (given an undertaking proffered to the court by Perpetual).
    
13. Mr Newlinds accepts that the only creditors likely to be prejudiced in this regard are Perpetual (which has chosen not to accept a dividend under the DOCA and asks for the DOCA to be set aside) and SBAL, which he says is the likely target of the investigation. As to the latter, if SBAL has (and I am certainly in no position to assess whether that is the case) engaged in conduct which gives rise to a genuine suspicion that it has acted as a de facto director in insolvent trading, it seems to me that SBAL cannot be heard to complain when a creditor seeks to challenge it on that basis. I accept there is an incentive for parties who may have a concern in relation to preferential payments or the like to put forward a DOCA and that this is not inconsistent with the objectives of the legislation to maximise recovery for unsecured creditors. However, when, in so doing, disclosure in relation to DOCA is limited or does not adequately take into account other recovery options, as is here said to be the case, then it does not seem to me that the party putting forward the DOCA can confidently rely on it remaining in place.
    
14. For the reasons set out below, I am satisfied that the DOCA should be set aside and, since nothing in the evidence before me suggests that there is any belief on the part of SBAL (or the deed administrators for that matter) that the company is solvent or, following full effectuation of the deed, would be solvent, the appropriate order is for a winding up on insolvency.
    

Background Facts

15. Tendered in evidence were two volumes of email communications, including emails between various persons at SBAL and MMAS and emails within the respective companies. I admitted as Exhibit E only those emails in the two volumes to which reference was made in the detailed Chronology handed up at the outset of the hearing by Mr Coles QC, together with five additional pages of the bundle as later notified by Mr Coles’ instructing solicitor. Mr Coles took me through various of the email communications, which broadly paint a picture of concerns as to the solvency of MMAS from as early as July 2008 (or, at the very least, show that the solvency of MMAS was a matter of discussion within and between the two entities from that time).
    
16. Mr Coles relies upon the email correspondence not only as indicating that further investigation into the time at which MMAS became insolvent is warranted (since that may give rise to potential claims by a liquidator either for insolvent trading or to enforce any claim MMAS may have had to be put in funds by SBAL to meet the outstanding debts) but also as showing the pattern of correspondence between the MMAS and SBAL (in effect, as I understand it, to demonstrate what he asserts to have been SBAL’s de facto control of MMAS and its potential liability for the debts of that company).
    
17. Apart from facts emerging from the documents tendered as the Court Book (and admitted as Exhibit D) or the affidavit and oral evidence, the following summary is based on the material appearing in Exhibit E (and referred to by page number in those bundles as ‘ETB _’).
    
18. MMAS was incorporated on 8 January 2008, following the appointment in October 2007 of receivers (from the firm Ferrier Hodgson) to another company, Mustang Marine Pty Ltd (“Mustang Marine”), which had carried on a boat building business. (The transaction history summarised in a draft SBAL Investment Committee Paper of 11 July 2008 (ETB 246ff) suggests that Mustang Marine was one of a number of companies in the Mustang group acquired as part of a ‘Management Buy Out in December 2005’ that was then placed into receivership in October 2007. Hence, as I understand it, the description of Mustang Marine in Mr Coles’ opening submissions as the former ‘emanation’ of MMAS.)
    
19. On its incorporation, the directors of MMAS were Mr Russell Watkins and Mr Martin Lodge. Mr Lodge was, at the time, a director of SBAL (a subsidiary of Standard Bank Plc, a bank incorporated in South Africa). SBAL is a company incorporated in Hong Kong. As I understand it, SBAL has no place of business in Australia and is not registered as a foreign corporation under the provisions of the Corporations Act. (A suggestion was made during the course of the hearing that enforcement of any judgment for insolvent trading might be problematic.)
    
20. The issued shares in MMAS were held, on incorporation, by Mr Watkins though this was subject to a share option arrangement between SBAL and Mr Watkins pursuant to which SBAL had an option to acquire Mr Watkins’ shares in MMAS. (That option was subsequently waived by SBAL.) Mr Watkins was indemnified by SBAL in respect of liabilities incurred by him in connection with the operation of the business by MMAS (as emerges from a draft submission to SBAL’s management in July 2008 – in evidence at ETB 82). Mr Coles informed me that the shareholding was held in this way so as to overcome the need to obtain permission from the Reserve Bank of South Africa, which would have been required had MMAS been a subsidiary of SBAL.
    
21. In January 2008, SBAL (through what was described as a distressed business acquisition division) acquired Mustang Marine’s boat building business and related assets from the receivers appointed to Mustang Marine for a price paid on 15 January 2008 of approximately $3.8 million. At about the time of that acquisition, SBAL licensed those assets (including the goodwill of the Mustang Marine boat building business) to MMAS. (As I understand it, the price paid on acquisition of the business was reflected in the amount of the debt to SBAL (then unsecured), presumably under the licence arrangements.)
    
22. It is contended by Perpetual that, during the period of MMAS’ operation of the Mustang Marine boat building business, key management decisions were made by officers of SBAL; officers of SBAL directed MMAS as to which creditors should be paid (and when those creditors should be paid); and MMAS’ finance controllers (initially Mr Pulvirenti and subsequently Mr Purss) reported regularly to officers of SBAL (including Mr Philip Armstrong and Mr Lodge, both directors of SBAL, and Mr Tien Tien Ong, a manager of SBAL) as to the company’s cash flow requirements and financial position. There is certainly material before me which provides a basis for such a submission to be made but there is no need for me to determine that question on this application and I was not called upon to do so.
    
23. In late January 2008, Mr Christopher Heaton was appointed as General Manager of MMAS. Mr Heaton was apparently employed by SBAL and reported to Mr Ong, Mr Lodge and Mr Armstrong.
    
24. Shortly after MMAS’ incorporation, Perpetual entered into a lease with MMAS for premises in Queensland, the lease term commencing on 1 February 2008, for a period of 5 years with a 5 year option. As noted above, Perpetual’s debt relates to the rent under that lease. Perpetual has, as I understand it, lodged a proof in respect of the rent payable over the term of the lease (although, of course, in the ordinary course while the lease was on foot rent would have been payable on a periodic basis at the rate specified in the lease). It seems that MMAS was in default in payment of rent due under the lease from an early stage.
    
25. There is no dispute that the boat building business was conducted at a loss over the relevant period, nor is it disputed that SBAL largely funded the operation of the business. The trading losses incurred from January 2008 to 30 June 2008 were $9,022,735. The amount owing by MMAS to SBAL at that time (said to relate to the initial purchase of the business that was licensed to MMAS and further advances made for working capital purposes) amounted to approximately $9,853,763. Towards the end of June 2008 (ie within six months of trading), MMAS’ then financial controller (Mr Pulvirenti) was already reporting a suspension of payments to creditors (ETB 1).
    
26. On 1 July 2008, Mr Pulvirenti reported, in an e-mail to Mr Lodge and Mr Ong of SBAL, that things were “not good” on a range of fronts and that many creditors were “very agitated” (ETB 30), noting also that end of month accounts and seven-day accounts (some more than three weeks old) totalled $386,000. In that email, Mr Pulvirenti advised that approximately two thirds of that amount was going to be paid that day “Holding back $130k” (and noting that no rent was being paid). The email further noted that by the end of the following week approximately $1,000,000 in debt would be outstanding.
    
27. There is no suggestion that at that stage there was any facility agreement, as such, in place between SBAL and MMAS, nor was there evidence as to any funding arrangements in place between them at that time. (I note that there is an email forwarded internally within SBAL by Mr Lodge on 1 May 2008 (ETB 107) that refers to the “authority” to undertake the investment in Mustang as having been given under a delegated USD12.5m limit of a Mr David Feld – Mr Lodge noting that there was therefore no need for credit approval. Mr Lodge at that stage sought approval to transfer the current cash advances (said to be around AUD5m to date) under the umbrella of a facility agreement secured by a fixed and floating charge. To that point, therefore, it seems that Mr Lodge was operating on the assumption that funds would be provided by SBAL without the need for credit approval within the limit of Mr Feld’s authority, though it is not clear on what terms or with what promptness that was expected to occur – nor indeed what other amounts were being paid out of that authority so as to reduce the amount available for MMAS.)
    
28. At about that time, a draft facility deed was prepared by Minter Ellison (described as counsel to ‘PT’). Mr Ong sent an e-mail on 1 July 2008 to Minter Ellison (ETB 102) referring to the definition of insolvency event in the draft facility deed and noting that “MMAS requires SBA [SBAL] to provide funding for its operations. As such to maintain solvency of MMAS for funding to take place is neither practical nor reflective of MMAS current capacity” (my emphasis), and requesting that the “insolvency event clause in the draft facility agreement be deleted”. (This suggests that, within SBAL, as at July 2008 there was a recognition that MMAS was dependent on funding from SBAL and a belief that MMAS, without SBAL funding, would not meet the test of solvency.)
    
29. By that time there seems also to have been a recognition within MMAS that Perpetual was (or soon would be) pressing for payment of rent arrears (ETB 40). (To the extent that Mr Newlinds suggests that the existence of outstanding debts will not necessarily indicate insolvency, because the debts might not be immediately payable or there might be arrangements in place for the deferral of payment – or because there might be a dispute as to the existence of the debt, there is nothing in the correspondence to suggest that the debt owed to Perpetual in respect of rent was other than due and payable in accordance with the terms of the lease – and outstanding at relevant times throughout the period.)
    
30. On 3 July 2008, Mr Heaton reported to Mr Lodge (ETB 65/67) (in an email copied to Mr Pulvirenti, Mr Watkins and Mr Weston) as to the status of Mustang, indicating what he saw as the positives and negatives in relation to the company, and advising under the heading “General position” that “We do not see that sales will increase for another 6 months. With the cash flow situation the senior management are gravely concerned that MMAS are trading insolvently, and will not be prepared to be part of that.”(my emphasis). Mr Heaton expressed optimism on the part of the senior management if the company could ‘withstand’ the next six months of slow sales financially but went on to say that “...there is no option other than to apply for additional funds to see us through the next six months, which could be in excess of $5,000,000” (again, my emphasis). Mr Heaton indicated that senior management saw no way forward without the cash limit (whatever that may then have been) being extended.
    
31. The immediate response to that (hardly likely to provide encouragement to those members of MMAS senior management harbouring the grave concerns expressed by Mr Heaton) was that Mr Lodge forwarded (ETB 65) by email a copy of an ASIC insolvency guide, which, among other things, set out the penalties for insolvent trading.
    
32. On 4 July 2008 (ETB 229), Mr Watkins is recorded, in the MMAS board minutes, as having expressed concerns as to the possibility that MMAS was trading while insolvent (thus confirming the position as stated the day before by Mr Heaton) and Mr Lodge is noted as confirming that he had received assurances from Standard Bank (with specific reference to Mr Feld, who I infer was a bank officer, and Mr Armstrong as well as a Mr Vassiliou) that the bank would fund up to Mr Feld’s limit (there noted as AUD12.9 million) against a current exposure of in excess of AUD12 million) and that ‘Ico’ approval for an increase was to be sought. It was resolved that the Board would re-examine if trading limit was reached or likely to be reached (suggesting that at that stage there was some assurance that trading was within the limits set for SBAL funding).
    
33. Included in Exhibit E (from ETB 246) are copies of what appears to be a draft report to SBAL’s Investment Committee (Headed Investment Committee Paper – Principal Trading) dated 11 July 2008 to be signed by Mr Lodge, summarising the transaction history in relation to Mustang and evaluating the options then available to SBAL six months into the ‘operation’. (The paper noted that Mr Lodge, as a director’s representative of SBAL on the board of MMAS, had veto rights and was a co-signatory to Mr Watkins. The paper also noted attempts that had earlier been made to effect a sale out of the receivership to a different bidder.)
    
34. The options there canvassed included: first, liquidation of MMAS; secondly, “mothballing the business” (recognizing that the Mustang brand name could be of some value in the future but not in the near immediate term); and, thirdly, “right sizing” the business for the current market. The draft report (apparently prepared for or on behalf of Mr Lodge, having regard to the proposed signatory of the report) recommended the last option. In relation to the option for liquidation of MMAS, the draft report noted:
    

Liquidation calls for a demise of the Mustang brand name as the factory and dealership network are terminated. There are eight finished boats (five or six after the sales and probable sales noted above post 7/7) that could be sold for cash relief but given that Mustang would not be around to service the customers, the boats would at best be monetized at 50 cents on a dollar (possibly less). This liquidation route is the most extreme and should only be considered if there is no value at all in retaining the Mustang brand. (my emphasis)

35. The draft report expressed the opinion that liquidation would require SBAL to incur an additional cost of $2.55 million “on top of the AUD11.94 million invested in the business to date” and estimated total loss of the business at about AUD12.6 million, saying “This loss could be reduced further by selling the business to a third party but given that the business came out of receivership just at the beginning of the year, there would likely be no nominal value for the sale of the assets of a twice failed business.”
    
36. Thus, within about six months of incorporation, liquidation of MMAS seemed to be seriously under consideration, albeit not proposed to be recommended, by at least one of its directors (that director being the SBAL representative). (I also note that, insofar as Perpetual now seeks to draw an adverse inference from the course later adopted by the directors of MMAS, when placing MMAS into voluntary administration rather than receivership, preservation of the value of the brand name may have been a factor taken into account given the perceived possible future value of the brand name as at mid 2008. That said, the administrators’ present understanding is that there is not an intention for the company on effectuation of the DOCA to resume active commercial life – T 22.21.)
    
37. Around 15/16 July 2008, Mr Lodge was pressing Mr Watkins to sign the financing and servicing agreement in relation to MMAS. In so doing, he wrote to Mr Watkins (ETB 331) noting that he (Mr Lodge) was not going to sign anything causing him personal exposure (apparently responding to perceived concerns that Mr Watkins might have in that regard). More relevantly, for present purposes, the email notes that Mr Watkins had been provided with an indemnity from SBAL.
    
38. The Facility Agreement between SBAL and MMAS was executed on 23 July 2008 and made provision for an $8.5 million facility (see definition of “Commitment”) (CTB 874). It was acknowledged to be a revolving cash advance facility under which MMAS could obtain draws (not exceeding the available commitment) during the commitment period. However, it was acknowledged that, of that amount, funds of $7.5 million had already been advanced and were to be treated as drawn under the facility. In effect, therefore, MMAS had no more than a $1 million facility at that stage to support its ongoing ability to pay debts as and when they fell due.
    
39. On 25 July 2008, Mr Lodge resigned as a director of MMAS. It is not clear what was the reason for his resignation. Mr Coles submits that an inference can be drawn that he was uneasy about the position with MMAS. If so, that did not stop Mr Lodge continuing to play a role on behalf of SBAL in relation to the bank’s exit from MMAS. In any event, officers and employees of MMAS (such as Mr Heaton and Mr Pulvirenti) continued to report to Mr Lodge in relation to MMAS after his resignation as a director.
    
40. On 31 July 2008, MMAS granted SBAL a fixed and floating charge over the whole of its assets to secure repayment of the outstanding debt and one A Class preference share was issued by MMAS to SBAL.
    
41. On 5 August 2008 (ETB 462) Minter Ellison e-mailed Mr Ong (copied to Mr Lodge, Mr Watkins and others), confirming having received executed documents including facility agreements and fixed and floating charges. (There is no suggestion that there was more than one facility at that stage – that being the $8.5m facility).
    
42. On 12 August 2008 there was an MMAS board meeting (minutes of which are at ETB 481-484) in which it was noted that there was a monthly “cash burn” of about $400,000 (though that month an additional $100,000 had already been spent). The minute noted that there was a need to see if the company could get rent relief. (There is no suggestion that Perpetual had agreed to any rent relief.)
    
43. SBAL entered into a further facility agreement with MMAS (CTB 326) on 18 June 2009 for an amount of $1.25 million to be used for research and development for the building of two new boats. There was another facility granted on 25 June 2009 for the funding of construction of a boat (CTB 496). Mr Coles points out that these facilities were for specific and limited purposes, not available to meet general creditors of the company.
    
44. It is submitted by Mr Coles (and seems to be the case) that there was no facility agreement in place which amounted to unconditional or unequivocal financial support (at least once the $8.5m facility was exhausted). While Mr Newlinds submits, and I accept, that it is not essential for there to be in place a binding funding agreement in order for a company in the position of MMAS to be able to show that it is in a position to meet its debts as and when they fall due, what a review of the documents leaves open is the question whether the directors of MMAS could reasonably have been satisfied, when continuing to incur debts over part or all of the relevant period, that the “drip feed” arrangement for funding (or the provision of funding being dependent on SBAL’s favourable response to requests from time to time from MMAS for funding) would enable all debts to be paid as and when they fell due. (As Mr Coles points out, the test of insolvency does not focus on a company’s ability to pay only those creditors who are “screaming”).
    
45. By 30 June 2009, the total accrued losses of MMAS amounted to $10,784,254. The amount due to SBAL (which had by August 2008 been a secured creditor) had increased to $17,181,181.
    
46. On 16 July 2009, Mr Watkins received a director penalty notice from the ATO in relation to PAYG amounts due for January and March 2009 totalling $111,000. The total amount on the notice was $217,000. By e-mail (at ETB 786) Mr Mischewski, a lawyer from Minter Ellison noted:
    

This is a problem. See the comments I found below. This must be resolved before next Wednesday 22nd July or you'll become personally liable for the debt. I don't think an instalment arrangement can be finalised before Wednesday. Finalised means signed by both the company and the ATO. Other than liquidation the only real option is for the payment to be made of the outstanding $280,291.

47. On 17 July 2009, Mr Mischeswki advised (ETB 790) that SBAL should be instructed to make the payment directly to the ATO, noting that if the funds to be made payable to the ATO were remitted to MMAS (and MMAS paid the debt then payable) this might be treated as a preferential payment some time in the future and the ATO would remain entitled to recover from Mr Watkins personally. He advised that:
    

This raises the issue of insolvent trading under the Corporations Act. ... In my view the company is currently under severe financial distress and without continued funding from SBA the company would be trading while insolvent. At the moment the SBA funding is not coming in a sufficiently timely manner to reduce the risk that you could become personally liable for the debts of the Company.

For the foreseeable future and while the company is not generating sufficient income to meet its cash flow requirements you need SBA to provide more timely access to funds to ensure the company can pay all of its creditors routinely and in accordance with trading terms. In my view this is the core issue that you must have resolved without delay. (my emphasis)

48. An email from Mr Armstrong to Mr Watkins on 16 July 2009 (ETB 784) (responding to an email in which Mr Watkins had relayed advice from Minter Ellison that the withholding of payments from the ATO would not be covered by the SBAL indemnity) said:
    

I won’t instruct the withholding of the payment [seemingly the tax payment]. I intend for us to make it. I only pointed out the cover of the indemnity (by the way, Kevin is wrong as you have informed the bank of the letter) so you didn't need to worry. I wanted to make sure I understand what money can be claimed back by SBA (ie not already funded to MMAS and claimed by SBA). If we can match this with the shortfall, it will make life a lot easier.

49. Mr Armstrong had earlier promised Mr Watkins that if there was some shortfall he would “beat the bank up to pay” (ETB 785). (Nothing in this exchange suggested that there was any more than a moral obligation on the part of SBAL to fund MMAS debts.)
    
50. On 8 August 2009, Mr Lodge was reappointed (and Mr Armstrong was newly appointed) as a director of MMAS. Mr Coles submits that Mr Lodge was re-appointed to the Board of MMAS so as to manage SBAL's exit from its investment in that company (reference being made to an article in which Mr Lodge was so described – CTB 1024). Mr Coles submits that at least from the date of these appointments it can be concluded that SBAL was no longer committed to operating the boat building business as a long term proposition and that this change of approach had a bearing on the extent to which SBAL was prepared to make further advances to MMAS to enable it to pay its liabilities.
    
51. On 9 October 2009, Mr Watkins resigned as a director of MMAS and on 28 November 2009 Mr Heaton was appointed a director.
    
52. By 19 November 2009, the cash flow records (ETB 970) showed that an influx of $3.139 million was needed to close out all debts as at December 2009. Mr Coles points out that by the time it is clear that the company was not paying what was due and payable, and needed to do so immediately or risked trading while insolvent. On 30 November 2009 (ETB 974), Mr Lodge ‘s analysis of the backlog of “due & payable creditors” was that the company had slipped over $1m behind for two weeks alone. He referred to the financial controller’s estimate that a net $3.1m of committed and/or payable sums was needed simply to close out December and said:
    

Applying a strict solvency test, we need to have secured funding to meet this obligation before we commit to it. As a minimum we need we need $1-1.6m or we risk trading whilst insolvent. This pre-supposes that no additional funds – beyond the $1-1.6m – are needed to complete the boats currently assumed to be coming off the floor plan: I am not sure that we can suppose this?”

53. Mr Coles also notes that Mr Armstrong’s response (at ETB 973), while disagreeing with the analysis of creditors (particularly the amount said to be needed to finish the boats for sale), did not dispute the $1.6 million backlog of creditors. Mr Armstrong advised that MMAS should live from the working capital account (although it is by no means clear that this advice was followed or, indeed, manageable without ceasing to trade at that point).
    
54. What seems by then at least to have been the situation was that there was a focus on “drip feeding” enough funds to enable boat construction to finish so that funds could be realised from the eventual sale of the two boats then under construction (Mr Armstrong offering personally to underwrite one particular debt of $15,000 if the company was unable to pay it off in time – ETB 965) but there is no suggestion in the correspondence that there was any dispute as to the validity of the underlying debts or that there was any “arrangement” generally in place with creditors to defer the time at which their debts were payable. (There has certainly been no suggestion that Perpetual was prepared to extend the time for payment of the rent due.)
    
55. Cash flow issues appear to have become pressing towards the end of November 2009. There was an instruction to stop or recall a payment on 30 November 2009 until SBAL had “established” the position (ETB 978) and weekly (or on occasion daily) cash flows were forwarded from the then financial controller of MMAS (Mr Adam Purss) to Mr Armstrong.
    
56. On 1 December 2009, Mr Purss outlined what he saw as the risks associated with the then current cash position of the company (ETB 990) including the “Increased risk of insolvent trading” (my emphasis). On 3 December 2009 (ETB 1025/1026) Mr Purss emailed Mr Heaton, Mr Armstrong and Mr Lodge a revised cashflow and noted that:
    

Am trying to drip feed some of the super screaming creditors

57. On the same day Mr Purss e-mailed Mr Armstrong that SBAL needed further financial support (ETB 1029):
    

We’ll get there but I really think that in order for the business to support itself & for the Bank to recover its investment in due course, given the current environment we are unfortunately in, the Bank will need to take a step backwards & part with a bit more cash in order to take much bigger steps forward.

58. On 4 December 2009 Mr Purss e-mailed Mr Armstrong (ETB 1034) expressing a real concern (albeit apparently as to the effect on his personal position) as to whether the bank might decide to cut its losses and [not] provide further assistance “without which I can't see the business making it to Christmas”.
    
59. On 10 December 2009 Mr Purss prepared a memorandum detailing accounting issues (ETB 980, ETB 1061); noting that cash was very tight at the moment (driven primarily by, among other things, the ongoing global financial crisis); and noting the limited availability of funding. In his memorandum, Mr Purss noted that MMAS operated the business under licence from SBAL, without which MMAS would not be in a position to operate the business; that SBAL was the sole financial to MMAS; and that SBAL had always been a significant contributor to significant operating decisions; and concluded that, despite the actual ownership of the MMAS, the practical influence of SBAL over the operations of MMAS indicated that SBAL had controlled MMAS since incorporation.
    
60. On 17 December 2009, Mr Purss advised Mr Heaton (ETB 1222) that:
    

As you are aware the number and intensity of creditors chasing outstanding monies continues to grow by the day. We are doing our best to drip feed those most critical or screaming the loudest but this is becoming increasingly difficult to manage as many creditors are due amounts as far back as October.

61. He listed amounts outstanding and advised that in the absence of significant sales (which he considered unlikely) a minimum cash injection of $2m was required to clear current outstanding creditors and meet cash requirements to the end of January. He expressly adverted to issues previously raised such as risk of insolvent trading.
    
62. On 18 January 2010, Mr Ong (ETB 1197) sought confirmation from Mr Purss of his understanding that, as at the cash flow to week 49, there was a total shortfall of A$2.8 million made up of an immediate creditors outstanding of A$1.3 million and A$1.5 million of working capital required, if projected sales were realized (and that if projected sales were not realized, then the shortfall would increase from A$2.8 million to A$5 million). On 19 January 2010, Mr Armstrong advised that the bank had agreed to support the $1.35m funding request (ie not the minimum $2m that Mr Purss had considered to be necessary) but with conditions and said that there could not be any deviation from projected cash flow (ETB 1209). (Mr Coles points out that there was an advance of funds of $1.35 million around this time – but that it was insufficient for the company’s purposes.)
    
63. On 20 January 2010 (ETB 1216), Mr Purss sent an e-mail to Mr Heaton expressing concern about lack of funding. In it he noted that his 17 December email had outlined his opinion that the minimum additional funding required was $2m in order properly to fund the business and noted that the impacts of delayed creditor payments had magnified since then. He said that short term funding of $300,000 in December had been repaid but did not address his concerns. He also referred to an email he had sent on 12 January 2010 that had noted the (then increased) requirement for additional funding of $3m in order properly to fund the business and that the response to this was the $1.35 million approved “with a yet to be advised repayment date”. Mr Purss noted that the “lower than requested funding” will address only very short term issues and not provide an adequate solution to the ongoing funding and related creditor issues.
    
64. On 29 January 2009 (ETB 1253), Mr Armstrong sent an e-mail to Mr Heaton questioning whether there was enough money to pay wages (having received an email from Mr Purss stating that “we MAY have sufficient funds to cover wages on Monday after which we will not be in a position to pay any further creditors, including contractors next week, until other cash inflows are received”).
    
65. On 2 February 2010 Mr Purss sent an e-mail to Messrs Watkins, Western and Armstrong advising that no creditors would be paid until sale proceeds were received (ETB 1261). There was communication in relation to what creditors should be paid and as to what the following Monday’s wages bill was (ETB 1277). On 5 February 2010 an amount of $140,000 was received from SBAL.
    
66. Mr Purss sought advice on 8 February 2010 as to what he should tell creditors who were “all screaming their heads off” about payment delays, noting that “At the moment we have absolutely no idea whether we’ll be here tomorrow yet alone when (if) creditors will be paid” (ETB 1279).
    
67. On 9 February 2010, Mr Armstrong sent an e-mail advising that SBAL had approved funding of $560,000 (ETB 1282) on the basis that it had to be repaid in seven days from the proceeds of sale of one of the boats. (Mr Coles points to the repayment terms on which this amount was to be available as depriving this funding of force in establishing solvency.) On 23 February 2010, Mr Armstrong sent an e-mail to Mr Purss (ETB 1367) advising that there was no point paying off the creditors if they did not supply and that deals needed to be done with them for supplies required to keep the boats moving in production.
    
68. Against the background of the above communications, it is hard to say that one could confidently assert solvency right up to 18 March 2010, at least in the absence of evidence from the relevant company officers as to the arrangements or understandings then in place with SBAL.
    
69. On 24 February 2010 SBAL assigned its charge over MMAS to Standard Bank Plc (CTB 576; 620). (The proximity of this event to the time at which administrators were appointed to MMAS is a matter to which reference was made by Mr Peter Strain (the property director of Abacus Funds Management Limited, the responsible entity of the Fund of which Perpetual is custodian) as one of the matters which, had he known or understood at the time of the second meeting of creditors, would have led him to attend and vote against the DOCA – see paragraph 10(b) of his 9 November 2010 affidavit.)
    
70. On 9 March 2010 the ATO sent an e-mail (ETB 1372) to Mr Purss (in relation to an apparent proposal for payment of tax in instalments), saying that “The financials provided do not support the company's capacity to pay its future obligations as well as an instalment to the existing debt” and noting that tax returns for 2008 and 2009 did not appear to have been lodged.
    
71. On 15 March 2010, Mr Armstrong directed Mr Purss to include additional funding in the cash flow for the ATO and advised that “The bank is considering the request over the next 48 hours based on the full $8 million” (ETB 1381). (Pausing there, it should be noted that there is no suggestion in this response that SBAL was already committed to providing funding in any particular amount or as necessary to ensure that MMAS was in a position to pay all its debts as they fell due.)
    
72. On 19 March 2010, the second defendants (Mr Alan Topp and Mr Cliff Sanderson) were appointed as voluntary administrators of MMAS. As at the date of their appointment, the net balance sheet deficiency was $18,014,114 and the total unsecured creditors of MMAS amounted to $4,065,087.76 (including Perpetual’s claimed debt of around $2m). (Although the later report to creditors noted that the reason for the appointment was the withdrawal of support from the secured creditor following the cessation of negotiations for sale of the business, and Mr Sanderson agreed that there was a time when the bank had sought an investor – T 18.20, I was not taken to any material in relation to any such negotiations.)
    
73. Mr Coles points out that each of Mr Topp and Mr Sanderson was given an indemnity from Standard Bank Plc for liabilities incurred in the conduct of the administration and that Standard Bank Plc consented to their approved remuneration being paid from assets which were subject to that bank's security.
    
74. It is submitted by Mr Coles that, from the commencement of the administration, it was made clear to the administrators that SBAL wanted to propose a deed of company arrangement in respect of the affairs of MMAS. Mr Newlinds emphasises, and I accept, that there is nothing sinister about a secured creditor putting forward an arrangement of this kind. (That said, the expectation is that there will be proper and adequate disclosure to creditors of the matters on which administrators are reuiqred to report so that they can consider such an arrangement.)
    
75. Tendered and marked Exhibit C is a volume containing copies of the proofs of debt lodged by creditors in the administration. The earliest of those debts (leaving aside that of Perpetual) dates back to 2008. (Perpetual lodge a proof of debt in the administration in the sum of $4,161,938.96, which I understand related to the whole of the rent payable over the term of the lease. Its proof was admitted by the deed administrators in the sum of $2,429,914.) The total unpaid debt of unsecured creditors post July 2009 has been calculated at $135,536.79.
    
76. According to the subsequent (14 May) s 439A report to creditors, and this was accepted by Mr Sanderson in the witness box, between the time of their appointment on 18 March 2010 and 5 May 2010 the main task or focus of the administrators was on maintaining the business operation and negotiating a sale of the business and the related assets (though he says that he was “gathering knowledge as well” T 10.38). That sale was in due course achieved and on 30 April 2010, the assets of MMAS (including the assets licensed from SBAL) were sold by the administrators for the sum of $2,700,000. Of that amount, $150,000 was paid into a trust account for payment to selected creditors of MMAS. (It is submitted by Mr Coles that this arrangement, when considered in light of the deed proposal, has had the effect of preferring some creditors of MMAS over those who did not receive the benefit of any payment from the purchaser, on the basis that SBAL reduced the amount it proposed to contribute to the deed fund by reference to the amount paid directly by the purchaser to some of the creditors.) As I understand it, the payment of selected creditors was intended to preserve trading/supply arrangements necessary for the ongoing trading of the business and therefore in the interests of the purchaser.
    
77. Following the sale of the business, the administrators prepared the statutory report to creditors required pursuant to s 439A of the Act (there having been an extension of time granted for that purpose). Mr Coles suggested, by reference to the report (CTB 926), that Mr Sanderson had only commenced his investigation into the history of MMAS on 5 May 2010. Mr Sanderson in the witness box accepted that the initial period of the administration was focused mainly on maximising the return to the secured creditors (as a result of which there was apparently a surplus of about $2.5 million that was available to secured creditors). Mr Sanderson did not accept that he had only commenced his investigation into the company’s history on that date (but said that date was when he had started filling out the investigating checklist – T 10). A little over a week after he commenced filling out the checklist, the Report was issued (on 14 May 2010).
    
78. In the Report, the administrators recommended to creditors that the deed proposal propounded by SBAL be accepted. The Report concluded that ordinary unsecured creditors would receive a nil dividend in a winding up of MMAS. It dismissed the prospect of liability of any party either for insolvent trading or for breach of duty on the basis of the stated conclusion of the administrators that MMAS became insolvent on or shortly before 18 March 2010.
    
79. Relevantly, the Report included the following:
    

4.4 Reason for the Appointment of the Administrator

We understand the ultimate shareholder of the company was seeking an equity participant or an outright sale of the business during January, February and March 2010. On or about 18 March 2010 we understand all negotiations ceased and at that time the ultimate shareholder and the secured creditor withdrew financial support.

This withdrawal of support caused the company to become insolvent and directors immediately moved to appoint us as Voluntary Administrators.

80. The information as to the withdrawal of support was given to Mr Sanderson by Mr Armstrong (T 8.35). Mr Sanderson accepted that he was not shown any document or given any indication as to how that state of affairs came about (T 8.39).
    
81. In relation to the possibility of further action a liquidator might be able to take for the benefit of creditors, the Report noted (in relatively formulaic terms):
    

8.1 Preferential Payments

...

Our preliminary investigations did not identify any preferential payments that may be recoverable from preferential payments. Should the company be wound up we will undertake a more thorough analysis of potential preferential payments.

8.2 Uncommercial Transactions

Our preliminary investigations have not identified any uncommercial transactions.

8.3 Unfair loans

... Our preliminary investigations have not identified any unfair loans.

8.4 Uncommercial Director Related Transactions

...

Our preliminary investigations have not identified any unreasonable director transactions.

8.5 Insolvent Trading by Directors

Directors may be liable for debts which they incur whilst the company was insolvent. Section 588G provides the Liquidator with powers to recover compensation from a director for debts that were incurred when the company was insolvent. [Mr Coles pointed out that there was no reference to any potential for claims against the holding company under s 588D or 588W – Mr Sanderson accepted that this was a consequence of his conclusion as to the date of insolvency.]

Our investigations [not described as preliminary in this instance] have confirmed that the company was provided with substantial funding by its secured creditor, which is a related company of the ultimate shareholder. Prior to 19 March 2010, the company was in negotiations with two prospective equity investors and anticipated further funding to be provided by the new investor. On or around 18 March 2010 the prospective investors withdrew their interest and thereafter the secured lender withdrew its financial support.

It is our preliminary view that there would be no claim for insolvent trading should the company be placed into liquidation.

Should the company be wound up we will undertake a more thorough analysis. (emphasis added)

82. On 24 May 2010, a meeting of creditors convened pursuant to s 439A of the Corporations Act passed a resolution approving the execution of the DOCA. Mr Topp and Mr Sanderson were appointed as Administrators of the DOCA. Perpetual did not attend that meeting of creditors. The evidence from Mr Strain is that he had formed the view from reading the s 439A report that, inter alia, the administrators did not believe that there was any claim of insolvent trading and the most substantial creditor (Standard Bank Plc) supported the proposal (without knowing that it had acquired its secured interest only at the end of February 2010). Mr Strain (who was not cross-examined) said that had he known or understood, after reviewing the s 439A Report, among other things that possible claims existed against SBAL for insolvent trading, then he would have attended the meeting and voted against the proposal. (While Mr Newlinds notes that the Perpetual vote would not have been sufficient to prevent the resolution from being carried, that assumes that whatever position Perpetual adopted at the meeting would not have found favour with other creditors.)
    
83. According to the plaintiff’s chronology of events, on 26 May 2010, (before the DOCA was signed) SBAL advanced the sum of $800,000 to the administrators to meet the administrators' expenses and employee entitlements. The DOCA was signed on 11 June 2010.
    
84. Under the DOCA, a deed fund of $150,000 was to be established (the whole of which was provided by Standard Bank Plc) for distribution pro-rata to unsecured creditors (employees’ entitlements having earlier been paid out in full); claims of unsecured creditors were to be released upon payment of a dividend under the deed (it was estimated by the administrators that the dividend would be in the sum of the between 3 and 6 cents in the dollar); the secured debt to Standard Bank Plc was not discharged or waived; the deed administrators were to continue to trade MMAS for the purpose of completing present work in progress but the proceeds of that trading were not to be available for unsecured creditors under the deed; and inter-company loan transactions between MMAS and its subsidiaries were waived as were any claims directors had against MMAS.
    
85. The commencement of these proceedings was preceded by an exchange of correspondence between the respective parties’ solicitors. By letter of 17 June 2010, the solicitors acting for Perpetual wrote to the deed administrators foreshadowing proceedings to have the deed set aside. These proceedings were commenced on 30 July 2010. At that date, the administrators had not completed the process of ruling upon creditors’ claims. (In fact that process was not completed until some time after the proceedings had been commenced and Mr Coles notes that the administrator were by then on notice of the relief being sought by Perpetual).
    
86. A dividend has been paid to all creditors with provable claims under the deed except for Perpetual (which had sought an injunction in these proceedings to restrain the distribution of any dividend to it under the DOCA - that order being not opposed by the defendants and short minutes of order to that effect being made on 22 October 2010). Thus, the DOCA remains on foot.
    
87. Consistent with the practice considered appropriate by Santow J in Bathurst City Council v Event Management Specialist Pty Ltd (2001) 36 ACSR 732; [2001] NSWSC 34, during the course of the hearing before me Mr Coles filed in court (and I marked as Exhibit F) an undertaking to the court given by Perpetual, through its solicitor Mr Bard, designed to alleviate the possibility of prejudice to those creditors who have derived dividends under the DOCA. The terms of the undertaking are as follows:
    

In the event the Court makes

(a) an order terminating the Deed of Company Arrangement (DOCA) executed by the Defendants,

(b) an order that the First Defendant [MMAS] be wound up, and

(c) an order that a liquidator (other than the second and third defendants) be appointed to the First Defendant

the Plaintiff by its solicitor, Paul Bard, undertakes to the Court that within 28 days of the date of the orders it will pay to each ordinary unsecured creditor (Creditor) in the list of the creditors attached to this undertaking, and marked for identification with the letter “UX1” (the List), the estimated dividend the Creditor would have received if the dividend pursuant to the DOCA had been paid (the dividend being the dollar amount opposite the name of the Creditor in the List) on terms that that dividend will be repaid to the plaintiff by each Creditor from any further dividend paid or payable to them from the proceeds of any recovery action conducted in the winding up of the First Defendant.

88. Mr Newlinds quite fairly conceded that this removed the need for his clients (as contradictor to the present application) to make submissions in relation to prejudice to creditors in general and accepted that I could be satisfied that creditors who did vote for the DOCA will not be prejudiced by any orders of the kind sought. (Although it was initially suggested that they might be prejudiced by the prospect that a liquidator might seek to recover, as preferential, payments made to them during any relevant period as a consequence of a finding that the company was insolvent at a date earlier than 18 March 2010, this submission was later withdrawn.) (As to any prejudice suffered by SBAL as a result of its conduct being scrutinized more closely by a liquidator (or court) than may have been done by the administrators, this seems hardly to be prejudice of which it could complain.)
    

Claim by Perpetual

89. I turn then to the basis of the claim by Perpetual.
    
90. Section 445D of the Corporations Act, relevantly, provides that:
    

(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. (my emphasis)

91. The first issue which arises is whether any of the jurisdictional grounds set out in s 445D(l) (a) - (g) have been established. Once the jurisdictional threshold is satisfied, the question then becomes whether, in the exercise of its discretion, the deed should be set aside (Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235, at [270]).
    
92. Perpetual invokes sub-sections (c), (f) and (g) of s 445D (italicized in the extract above) as giving the court jurisdiction to set aside the DOCA (and, in essence, Mr Newlinds did not seek to argue that there was no jurisdiction to set aside the DOCA on the facts of this case – his submissions focussing rather on the question whether I should exercise the discretion to do so).
    
93. Perpetual’s principal complaint is that the DOCA does not serve the statutory purposes which underpin Part 5.3A of the Corporations Act. Section 435A provides:
    

The object of this Part [5.3A] is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company or as much as possible of its business continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

94. Filed in court on 23 November 2010 were Amended Points of Claim in which Perpetual seeks orders under ss 445D and 447A of the Act on the grounds specified in paragraph 31 of the Amended Points of Claim, that:
    

(a) the DOCA is oppressive, unfairly prejudicial and unfairly discriminatory of Perpetual or contrary to the interests of creditors of MMAS as a whole; (the particulars of which include that the dividend for creditors under the DOCA is derisory compared with the benefits that could be expected to be received by SBAL, its parent and the directors and that the adoption of the DOCA deprives Perpetual of the opportunity for a detailed investigation of MMAS’ affairs and from pursuing claims that might be available in a winding up);

(b) the DOCA is contrary to the public interest and commercial morality; (in submissions variously put as being on the basis that there should be a proper investigation into insolvent trading where the creditors have been presented with an inadequate investigation by administrators who might be seen as acting as agents for the secured creditor who stands to benefit from avoiding a winding up and that insolvent companies should not be permitted to continue in existence after effectuation of a deed of company arrangement, as discussed in Bidald.)

(c) information concerning MMAS’ business, property, affairs or financial circumstances, and which could reasonably be expected to have been material to creditors of MMAS in deciding how to vote in respect of the deed proposal, was omitted from the section 439A report which was sent to creditors; (the particulars to this sub-paragraph identifying this information as the nature of the understanding or arrangement between MMAS and SBAL pursuant to which SBAL had provided funding; the extent to which this was relied upon by directors of MMAS in continuing to trade the business; the arrangements between SBAL and nominee directors for an indemnity of the latter; the assignment of the charge to Standard Bank plc in February 2010; and the relationship between MMAS and the two Standard Bank entities)

(d) that the administrators failed or were unable to carry out a full and proper investigation of MMAS’ affairs; and

(d1) that there is and was at the time of the investigation by the voluntary administrators reason to investigate various of those matters and the possibility of the insolvency of MMAS at an earlier period (as a result of which it is said there was a substantial basis for forming a view that a subsequently appointed liquidator may have been able to produce a greater return for creditors than provided for under the DOCA).

95. Insofar as the Amended Points of Claim also contain paragraph 31(e):
    

Such other further grounds relating to the adequacy of the administrators’ investigation and report as are discovered as a result of discovery in these proceedings and the issue of Notices to produce and subpoenas to third parties including SBAL and Standard Bank plc.

it was submitted by Mr Newlinds that Perpetual ought to be confined on this application to the issues for determination as identified in the Amended Points of Claim and not permitted to go beyond those grounds. (I agree and, in fairness, Mr Coles did not seek to do so.) (In passing, in relation to discovery I also note that I was informed during the course of the hearing that there had been extensive discovery (resulting in the folders of documents tendered before me) and Mr Newlinds made the point that the administrators should not be criticised for not having carried out the investigative process that Perpetual undertook for the purposes of this proceeding.)

96. The deficiency identified by Perpetual in the information provided to creditors (and in the investigation carried out by the administrators) relates to the potential for insolvent trading claims to be brought against directors (or SBAL as an alleged de facto director) or, if MMAS were to have been in the position where it had a claim against SBAL in relation to the provision of funding (on which it might rely to gainsay an allegation of insolvency), such a claim against SBAL. The prejudice or oppression Perpetual will suffer as a creditor if the DOCA is not set aside is articulated as the loss of the opportunity to have a thorough investigation carried out of the company’s affairs and the potential benefit of recoveries by way of compensation to the company for insolvent trading (prejudice of a kind recognised in a number of the cases in this area).
    
97. Perpetual criticises Mr Sanderson on the basis that he came to his view as to the time at which MMAS became insolvent (which Mr Sanderson conceded had then informed his view as to whether any insolvent trading claims might lie) on the basis of what he was told by Mr Armstrong as to the withdrawal of support by Standard Bank Plc, without adequate investigation of what he was told. Mr Sanderson confirmed (at T 8.35) that Mr Armstrong had told him that SBAL would no longer fund MMAS (and that he was not shown any document to that effect or given any indication as to how that state of affairs had arisen (T 8.39)).
    
98. Mr Sanderson was cross-examined as to the basis on which he formed his view as to the company’s insolvency and as to the steps he took to confirm the information he was given as to the timing of the decision by Standard Bank Plc to withdraw its support. Broadly speaking, Mr Sanderson said that he addressed in his mind the company’s ability to pay its debts before 18 March 2010 (T 10.4); that he was aware that there was a charge with the bank (T. 10.50), presumably meaning SBAL, but was not aware of its terms (T. 11.9); that he was aware that there were a number of facility agreements between the companies (T.11.18) but did not enquire into nor was he aware of their terms (T.12.16;.31;.44); that he was aware that funds had been received from SBAL at various times (his examination being to see whether the bank had in fact paid money – T. 11.18; his mantra being to “follow the money” T. 11.9); that he had enquired into the ageing of debts (an end-date analysis - T.14.18) and did not see anything there of particular significance (T 15.24/30) or particularly bad (T 16.14); and that he had enquired as to the existence of demands by creditors (T 16.14.)
    
99. Perpetual contends that acceptance of insolvency as at 18 March 2010 overlooks the fact that, whatever level of support had been made available by SBAL to MMAS prior to 18 March 2010, it was not based on an enforceable obligation to provide sufficient advances to ensure that all debts which were incurred prior to that date did actually get paid and it had clearly been insufficient to ensure that those debts were in fact paid.
    
100. Mr Coles submits that this case is to be distinguished on the facts from that in Lewis v Doran (2004) 208 ALR 385; (2004) 184 FLR 454; (2004) 50 ACSR 175; (2004) 22 ACLC 1009; [2004] NSWSC 608, at [112]-[116] where Palmer J held that a company could be considered to be solvent on the basis that it had available to it, as a resource from which debts could be paid, ongoing support from related entities or the directors and which had historically resulted in those creditors actually being paid. (Here, the support from SBAL is said to have been sporadic and had not resulted (for some time it would seem) in creditors being paid.)
     
101. In that regard, Mr Newlinds submits that the administrators’ opinion of the potential claim against SBAL was, and still is, correct; and that Perpetual’s approach to proof of insolvency is simplistic and wrong, insofar as it assumes that it is necessary (for a company to be solvent) that it have a legally enforceable “guaranteed” source of funding. Mr Newlinds submits that the court must look to “commercial reality”, citing Lewis v Doran, at [106]-[112] and [119]. Reference was made to Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 where it was said that the issue of insolvency is a question of fact to be decided as a matter of commercial reality in the light of all the circumstances and to what was said by Gummow J, then in the Federal Court of Australia in New World Alliance Pty Limited, Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425, to the effect that a situation must be viewed as it would be by someone operating in a ‘practical business environment’. Reliance was also placed on Lam Soon Australia Pty Ltd v Molit (No 55) (1996) 70 FCR 34 where there was “financial support” from the parent company.
     
102. It is not for me, on the present application, to make any finding as to the date of insolvency of MMAS. However, it seems to me that there is sufficient in the material before me to suggest that a finding of insolvency at a time earlier than 18 March 2010 could be made. By way of example, the apparent response to Mr Purss’ emails towards the end of 2009 and early 2010 (in which he had stated very clearly what he saw as the minimum funding requirement for the company as at those times), which did not apparently result in the provision of that minimum level of funding, suggests that there may be a question as to the assurance MMAS and its directors could reasonably have had as to the timely and sufficient provision of funds. In any event, it makes it difficult to accept Mr Newlinds’ submission that there was nothing in the evidence to suggest that, had MMAS asked SBAL for money so as to pay all outstanding debts as at any particular date, then SBAL would not have done so. That seems to be precisely what Mr Purss had asked, to no avail (beyond the lesser level of funds then provided).
     
103. Mr Newlinds submits that Perpetual’s approach is also flawed in that it wrongly assumes that the debts were payable immediately upon issue of invoices and that it ignores the possibility of other explanations as to why invoices are not paid on time (such as disputes as to the existence of a debt, contractual disputes, oversight, or a course of dealing other than on strict terms). There is, of course, as Mr Newlinds emphasised, a distinction between an inability to pay debts as and when they fall due, and whether a company chooses to pay its debts. There might also be explanations as to why particular debts were not paid by SBAL. However, there was no suggestion in the correspondence I reviewed that the withholding of payment (as a general matter) to creditors had anything to do with a dispute by MMAS as to the particular debts or the existence of arrangements with creditors – rather, the correspondence by late 2009/early 2010 is replete with the suggestion that creditors were to be “drip fed” such that those who screamed the loudest (or who supplied goods and hence who may have been regarded as important to placate) were the ones that were paid in priority to or instead of others. Mr Sanderson accepted that payment of creditors seemed to be on the basis that those who ‘pressed’ were paid (T 17.16) and his understanding of SBAL funding as a “matter of grace and favour not of right” T 17.48).
     
104. Mr Newlinds also submitted that the lack of demands by creditors (something that Mr Sanderson says he investigated) is telling. However, there may be a number of reasons why a creditor does not take the step of issuing a formal demand – that it does not do so is not necessarily because it accepts that the debt is not due and payable. Therefore, I doubt that much weight can be placed on the lack of creditors’ demands (particularly when MMAS’ officers were aware from an early time that creditors were pressing (and many were “very agitated” and “screaming”) for payment).
     
105. In my view, the question as to whether MMAS was insolvent at an earlier date than the administrators concluded is one that is by no means bound to be answered in the negative.
     
106. As to the investigation in fact carried out by the administrators, Mr Coles submits that there were a number of matters in relation to MMAS that called for a close examination of the arrangements that existed between it and SBAL: first, that MMAS had traded unsuccessfully since incorporation (and would have collapsed much earlier than it did but for the sporadic advances made by SBAL, after it had incurred liabilities to third parties); secondly, that the question whether MMAS, and its directors, had the benefit of an enforceable promise from SBAL to provide sufficient funding to meet all accruing liabilities was relevant not only in considering the exposure of directors or de facto directors of the company to insolvent trading claims but also to the possibility of calling upon any such enforceable promise for the benefit of creditors; and thirdly, that SBAL, as a secured creditor, had chosen to initiate a process which had as its logical conclusion an outcome that avoided a winding up, rather than adopting the so-called conventional approach of appointing a receiver.
     
107. Mr Coles submits that the administrators too readily characterised the dealing between MMAS and SBAL as a traditional financing arrangement and therefore did not give serious consideration to insolvent trading claims or claims to enforce an indemnity given to directors. It seems to me that there is some force in that submission, though again it is not a matter that I need to determine for the purposes of this application.
     
108. I was urged not to make any adverse findings in relation to the administrators’ conduct of the administration (and I think it was conceded by Mr Coles that it was not necessary for me to do so in order to come to the view that the DOCA should be set aside). I do not do so. Nevertheless, insofar as Mr Newlinds maintains that the administrators’ duty imposed by statute (ss 438A and 439A(4)(b)) is simply to form (and then express) an opinion about a proposed deed, in comparison to a winding up, and that this is what the administrators did and therefore there was no need for further information in relation to the matters in paragraph 31(c) to be contained within the report, it seems to me to be difficult to suggest that creditors should not be provided with sufficient information to enable them properly to assess the recommendations so made.
     
109. Mr Newlinds referred to the clear intent of the legislature that the administration process will happen quickly and that there will be a "swift and practical" review and analysis by a voluntary administrator (Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 19 ACSR 498; (1996) 14 ACLC 659, at 500 and 510 (quoting the ALRC General Insolvency Inquiry (Harmer Report) regarding the preceding 5.3A), at 501 (quoting the Explanatory Memorandum to Corporate Law Reform Bill 1992); Commissioner of Taxation v Comcorp (1996) 70 FCR 356, at 363D-G; 379G-380D (also referring to the Explanatory Memorandum and Second Reading Speech, 3 November 1992, to the Corporate Law Reform Bill 1992)). Mr Newlinds submits that what Perpetual now contends should have been the focus of enquiry was well outside what can be expected and required of an investigation by any voluntary administrator under Part 5.3A.
     
110. In that regard, it is not suggested by Perpetual (as I understand it) that the administrators should have reviewed the 17,000 odd discovery documents but what seems to be suggested is that they should have done more to test the information given to them (by those who might be thought to have had an interest in avoiding scrutiny of the conduct of the company by a liquidator) or at the very least have made plain the limits of their investigation in relation to issues relevant to any recovery that might have been possible in a liquidation.
     
111. I note that it has been recognised (In Re Diamond Press Australia Pty Ltd [2001] NSWSC 313), albeit there in the context of whether to grant an extension of time in relation to the convening period for creditors’ meetings in an administration, that there is a balancing exercise in the conduct of an administration such as this – between “the expectation that administration will be a relatively speedy and summary matter and, on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders” (per Barrett J at [10]).
     
112. I accept that it is not necessary for an administrator to investigate every potential or possible claim for which there is no realistic prospect of recovery (Cresvale Far East Ltd (in Liq) v Cresvale Securities Ltd [2001] NSWSC 89; (2001) 37 ACSR 394, at [130], [141], per Austin J and see Commissioner of Taxation v Comcorp, at 363). However, as I apprehend it, the criticism by Perpetual of the efforts made by the administrators in this case is that they did not seem to take sufficient steps in order to see whether an investigation would be warranted even having regard to that test. I think such criticism is not without some force in this case.
     
113. Mr Newlinds submits that Perpetual must show that there is a realistic prospect of an insolvent trading claim, referring to Bidald, at [279], where Campbell J referred to a “real risk” that the relevant person “would be subject to an insolvent trading claim”. Mr Newlinds also points to Public Trustee (Qld) v Octaviar Ltd (No 8) (2009) 73 ACSR 139; [2009] QSC 202 where McMurdo J spoke in terms of a “serious case for the recovery of assets in a liquidation” (and not, as Mr Newlinds emphasises, a theoretical possibility or something merely arguable). Mr Newlinds notes that in Pddam, at 510, Heery J refused to set aside a deed of company arrangement where the company had no assets and his Honour was satisfied that no realistic prospect for the recovery of assets had been shown, even though there had been a failure by the administrator properly to report to creditors.
     
114. That said, as Mr Coles observes, it has also been said that the possibility of recoveries for insolvent trading or otherwise in a winding up should not be lightly overlooked (Young (as representative for the Australian partnership known as Accenture) v Sherman (2002) 170 FLR 86; (2002) 20 ACLC 1559; [2002] NSWCA 281, at [91] per Davies AJA).
     
115. As a matter of public policy, creditors are entitled to a proper investigation of such matters notwithstanding the practical constraints faced by an administrator (DCT v Portinex (2000) 156 FLR 453; (2000) 34 ACSR 391; [2000] NSWSC 99, at [101] and [126]). Hence, Mr Coles’ submission that the failure to carry out such an investigation undermines the purpose of Part 5.3A because it deprives creditors of the opportunity to make an informed decision as to the company’s future (Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126, at [75]-[80]).
     
116. Is there a reasonable prospect in this case of a claim for insolvent trading? It seems to me that the answer to that must be yes. The correspondence discloses cash flow difficulties and concerns as to funding from a very early point in the company’s history. There seems no doubt that MMAS was dependent on SBAL funding. Although it is not necessary that there be a concluded financing agreement in place, in the absence of such an agreement there must be scope for review of the arrangements that were in fact in place to enable MMAS to pay its debts as and when they fell due. Indeed, insofar as it seemed to be suggested at one stage that there was no insolvency because MMAS had in place a series of facilities with SBAL which provided the company with funds so as to pay its trading debts over the whole of the relevant period, the material before me does not appear to support such a broad proposition.
     
117. It may well be that the directors can point to informal arrangements in place for funding and assurances given in that regard, or even to the history of support previously given by SBAL. However, in the absence of a complete investigation of the position it seems to me that there remains a not unrealistic prospect that MMAS was insolvent before 18 March 2010.
     
118. Mr Newlinds submits that there is no suggestion that if a more complete description of the administrator’s investigations (or perhaps one should say as to the limits on those investigations) and reasoning into a potential claim against SBAL had been set out in the report it would have made any difference to any creditor’s decision to vote for the DOCA (and whether the information in question would have made a material difference had it been known is accepted as a relevant factor to take account in the exercise of discretion; Bidald, at [292]). However, the prospect of recoveries in a winding up of the company must be a fundamental point of comparison between the position under the DOCA and the position in a winding up and I cannot conclude that information as to any doubt in respect of the date of insolvency and potential for claims against directors or others would not have been material to a decision by creditors in relation to the DOCA. What seems clear is that they were not given that opportunity to consider that information in their decision to vote for the DOCA (and the fact that a question might have been raised of the administrators during the course of the meeting goes no further if it would have been answered by them to the same effect as the position stated by Mr Sanderson in the witness box).
     
119. It is not necessary, and I do not do so, to attribute blame to the administrators in relation to the conduct of their investigation into the circumstances leading up to the insolvency of MMAS and as to the date on which it became insolvent. The fact is that the report did not disclose the information now available in relation to the company’s affairs and which could in my view reasonably have been expected to be material to the creditors’ decision whether or not to approve entry into the DOCA. In those circumstances Perpetual has been deprived of an opportunity to investigate whether or not a better return could have been achieved in a winding up.
     
120. I am satisfied that Perpetual has established the grounds under s 445D(c), (f) and (g) so as to enliven the jurisdiction to set aside the DOCA. The question then is whether I should exercise my discretion to do so.
     
121. Apart from the question as to what defences might be able to maintained by those against whom an insolvent trading claim might be thought (after the conduct by a liquidator of an investigation into this issue) to lie, Mr Newlinds submits that there is no reasonable prospect of a better recovery under an insolvent trading claim. He points out that it can be expected that the litigation would be expensive, time consuming and require funding (of which there said, presently at least, to be none). (As to the issue of funding, Mr Strain’s affidavit deposes to Perpetual’s willingness to fund up to $50,000 for an investigation into insolvent trading or other claims but says nothing about the funding of any litigation that might ensue – though it was submitted by junior Counsel for Perpetual, Mr Golledge, that I could infer that Perpetual having taken the steps to date in relation to this matter would be likely to continue to fund proceedings that a liquidator might consider appropriate.) Even if such a claim were to be brought and to succeed, it is said by Mr Newlinds that the vast bulk of the proceeds (after deduction of accounting and legal fees) would find its way back to SBAL as the largest creditor.
     
122. In that regard, Mr Sanderson has carried out an assessment (said to be on an extremely conservative analysis) both of a potential insolvent trading claim and the likely costs involved, which it is said shows that the actual return to creditors of such proceedings would be comparable to that under the DOCA (paragraph 68(h) of his affidavit and the schedules attached thereto).
     
123. Mr Sanderson’s calculations were carried out assuming insolvency at two points in time earlier than the time at which his report says the company became insolvent (namely January 2010 and July 2009). (Mr Newlinds submits that it is fanciful to suggest that insolvency could be made out from the date of commencement of the business.) On Mr Sanderson’s calculations, if MMAS was insolvent for the whole of the 2010 calendar year then there is assumed there might be a claim for $523,247 in respect of trade creditors debts incurred. If so, it is said that proceedings to recover this amount would result in a return of 1.1 cents to creditors. If the date of insolvency is 3 July 2009, the total claim is $886,247 and the return to creditors would be 3.3 cents in the dollar.
     
124. Mr Coles, however, submits that there could be significant returns to creditors from successful insolvent trading under s 588M or claims against the holding company under s 588D and s 588W, having regard to what is contended to be the operation of s 588Y of the Corporations Act. To the extent that Mr Sanderson has now given consideration to insolvent trading claims, it is submitted by Mr Coles that he has substantially underestimated the potential benefit to ordinary creditors (being creditors other than SBAL). This is based on the contention (which Mr Newlinds says is flawed) that if claims based on insolvent trading were to succeed, unsecured creditors would share in the proceedings from those claims ahead of SBAL, as a secured creditor.
     
125. Section 588Y provides that:
     

Application of amount paid as compensation

(1) An amount paid to a company under section 588J, 588K, 588M or 588W is not available to pay a secured debt of the company unless all the company's unsecured debts have been paid in full.

(2) Where:

(a) under section 588J or 588K, or in proceedings under section 588M or 588W, a court orders a person to pay to the company compensation, or an amount, equal to the amount of loss or damage suffered by a person in relation to a debt because of the company's insolvency; and

(b) the court is satisfied that, at the time when the company incurred the debt, the person who suffered the loss or damage knew that the company was insolvent at that time or would become insolvent by incurring the debt, or by incurring at that time debts including the debt, as the case requires;

the court may order that the compensation or amount paid to the company is not available to pay that debt unless all the company's unsecured debts (other than debts to which orders under this subsection relate) have been paid in full.

(3) Subsection (2) does not apply in relation to proceedings under section 588M in relation to the incurring of a debt by a company if the proceedings are begun by a creditor of the company (as provided for in Subdivision B of Division 4).

(4) Subsection (2) does not apply in relation to a liability that is taken to be a debt because of section 588F.

126. The Explanatory Memorandum and the Harmer Report indicate that the policy underlying the enactment of this section is to provide a pool of quarantined funds (being funds recovered under ss 588J, 588K and 588M(2) and (3)) to which unsecured creditors can have access, in priority over secured creditors, the purpose of which being to provide some protection to those considered to be most at risk from the consequences of insolvent trading.
     
127. In the Explanatory Memorandum to the Corporate Law Reform Bill 1992, it is said at [1132] – [1133]:
     
     1132. Proposed section 588Y provides that the amount paid to a company under proposed sections 588J, 588K, 588M or 588W not be available to pay a secured debt of the company unless all the company’s unsecured debts have been paid in full. The Harmer Report recommended any amount recovered be available for distribution only among unsecured creditors because insolvent trading will generally have its major impact upon that class, secured creditors having access to their security for any money owed to them. (my emphasis)
           
     1133. Proposed subsection 588Y(2) enables a court to order that compensation paid to the company not be available to pay a particular unsecured debt (until after the payment of all other unsecured debts), where the Court is satisfied that at the time when the company incurred that particular debt the creditor knew that the company was, or would become insolvent.
           
     1134. Proposed subsection 588Y(3) provides that 588Y(2) has no application where a creditor brings an action under proposed Division 4.
           
128. The Harmer Report referred (at paragraph 320) to those who may receive the benefit of moneys recovered under the insolvent trading provisions:
     

Proposal in DP 32. In DP 32 (para 14) the Commission proposed that the amount received by the company be applied for distribution in the winding up. The amount recovered is to be available for distribution only among unsecured creditors because insolvent trading will have its major impact upon them. Neither the cause of action available to a company under these provisions nor the proceeds of any such action should be available to the holder of a floating charge over the property for the company (except to the extent that such a charge holder is unsecured). This proposal was not a matter of controversy in the submissions.

129. I have not been able to find any extensive judicial consideration of this section in the present context (or indeed much consideration at all, though I note that it was referred to in International Greetings UK Ltd v Stansfield [2010] NSWSC 1357 by Barrett J as making it clear that a winding-up in which assets may be applied must continue to be in force when the recovery occurs).
     
130. In Strazdins, in the matter of DNPW Pty Ltd (subject to DOCA) ACN 107 484 711 v Birch Carroll & Coyle Limited [2009] FCA 731, Lander J stated:
     

Mr Strazdins was also cross-examined on the opinion the administrators offered to DNPW’s creditors that it was in the creditors’ interests for the company to execute the DOCA. In particular, Mr Strazdins was asked about his opinion regarding claims that might be available against DNPW’s directors for insolvent trading having regard to the administrators’ expressed opinion that DNPW was insolvent as at 30 June 2006. He agreed that the administrators expressed an opinion in their report that any return on a claim for insolvent trading, estimated at $500,000, would be to the benefit of the secured creditor. He agreed that assumption was contrary to s 588Yof the Corporations Act.

131. In Tolcher v National Australia Bank [2003] NSWSC 207 Palmer J stated (from [15]):
     

The decisions in Kratzmann and SJP Formwork relate to recoveries for preferences but their reasoning is equally applicable to recoveries for claims for insolvent trading under s588M. This conclusion is fortified by the express statement of a legislative intention that if a liquidator institutes proceedings under s588M(2) and recovers a judgment, the proceeds are not available in priority to a secured creditor.

132. A distinction is clearly drawn in the section between a “secured debt” and an “unsecured debt”, the focus being on the status of a creditor as unsecured or secured. Ordinarily, one would look to whether SBAL has, as a matter of fact, a secured debt (or is a secured creditor) and, if the answer were to be yes, then it would rank behind unsecured creditors on a distribution of the proceeds of recovery from insolvent trading claims.
     
133. That said, there is nothing in the legislation or the Explanatory Memordandum to suggest that a secured creditor who waives its rights as secured creditor cannot participate in a distribution of such proceeds with other unsecured creditors on a pro rata basis, nor would this seem to infringe upon the objectives enunciated in respect of this provision. (Of course, if SBAL has already exercised its rights as a secured creditor there may be an issue as to whether it remains open to it now to retain the benefit of that exercise and at the same time give up its security in relation to the balance of its debt. I have not been able to find any consideration of that scenario in the authorities or in commentary on the legislative provisions.) Moreover, it is by no means clear that it would not be affected to some extent at least by s 588Y(2) so as to be postponed in respect of part or all of its debt if it was incurred at a time when it had knowledge of the circumstances in which the relevant insolvent trading occurred. However, Mr Newlinds submits that this would not alter the result emerging from Mr Sanderson’s calculations because (on the hypothesis adopted by Mr Sanderson) the first thing that SBAL would do when sued for any debt incurred in an insolvent period would be to relinquish that debt but that it would still remain entitled to prove as an unsecured creditor for other debts.
     
134. What can be gleaned from Mr Sanderson’s calculations is that if the insolvency commenced at a time earlier than July 2009 then the return to creditors from a successful insolvent trading proceeding (and assuming the costs estimates he has adopted) is likely to be at least on a par and probably better than the return under the DOCA. (And, insofar as creditors have the benefit of the Perpetual undertaking, the return under the DOCA is now described by Mr Golledge as a “floor”, not a “ceiling” on recovery.)
     
135. Mr Sanderson’s calculations (on which Mr Newlinds relies for the submission that it is unlikely creditors will be any better off than under the DOCA even if insolvent trading claims are pursued) rest on the two broad assumptions adverted to above – first, that insolvency could be established no earlier than July 2009 and, secondly, that SBAL would waive the benefit of its secured debt and then be able to share pro rata with unsecured creditors for such of its (by then unsecured) debt as was incurred prior to the insolvency out of the proceeds of recovery. As to the first, the actual date of insolvency remains to be established and whether insolvency occurred earlier than July 2009 is likely to depend on the arrangements between MMAS and SBAL (as to which there is only incomplete information to hand). As to the second, this depends on the operation of s 588Y and whether, in the circumstances, SBAL could now waive its security. Both of those matters may well be the subject of contention in any insolvent trading proceedings and would best be determined there.
     
136. Suffice it to say that I am satisfied that there is a not unrealistic prospect that there may be a return to creditors on a winding up that is better than under the DOCA (having regard to the fact that creditors who have received dividends in the administration now have the benefit of the Perpetual undertaking) (being a factor relevant to the exercise of discretion, as discussed in Bidald, at [276]).
     
137. As to the other discretionary matters, Mr Coles submits that if the intention is to wind up MMAS following termination of the deed, then there is no reason for me not to make an order now for that purpose. One basis put forward for terminating the DOCA (under s 445D(g)) was that it is contrary to commercial morality to allow an insolvent company to go back into the commercial world (Bidald, at [289]).
     
138. Mr Coles also pointed to the public interest or benefit for the community generally, and for creditors in particular, that the circumstances and history of an insolvent company be properly investigated. It was submitted that where the process which has led to the adoption of the DOCA is marked by an inadequate investigation or a deficient s 439A Report, the DOCA should not be left in place (relying on Linen House, at [101]; and Pddam).
     
139. In response, Mr Newlinds submitted that for there to be an argument based on commercial morality of this kind, there must be shown to be real moral turpitude or misconduct involved by those in control of the company warranting taking the matter out of the hands of the creditors to pursue a more detailed investigation (referring to Emanuele v ASIC (1995) 63 FCR 54; (1995) 141 ALR 506; (1995) 19 ACSR 1; (1995) 14 ACLC 244, per Mason JA, at 69-70). He submits that there is no need for investigation as the cause of the insolvency is obvious (it being attributed to the global financial crisis and reference being made to other boat building company failures within this country). A business that has failed twice in as many years is said not to warrant investigation in this regard.
     
140. I accept that it has not been suggested that there has been moral turpitude in this case. However, here, it seems to me that it is not necessary to ground the application for relief on the suspicion of moral turpitude. There are real issues in relation to the date at which the company became insolvent and as to the conduct of those continuing to trade in the light of the concerns being consistently expressed as to the insolvency of the company. In those circumstances, where there is a prospect of a better recovery for unsecured creditors, and the investigation carried out by the administrators has been the subject of what on its face is not altogether unwarranted criticism, I think the public interest factor invoked by Mr Coles supports the grant of relief in this case.
     
141. (I should note that although there was reference made in the particulars to paragraph 31 of the Amended Points of Claim to the ‘derisory’ returns and in submissions to the ‘modest relief’ under the DOCA - and Mr Coles submitted that neither an administrator nor the court should conclude that “anything goes” in a deed of company arrangement provided dissatisfied creditors get some return, however modest (citing Khoury v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527, per Fitzgerald JA at [80]), to which Mr Newlinds’ response was that one should not “second guess” commercial decisions made by creditors (citing Lehman Brothers Holdings Inc v City of Swan; Lehman Brothers Asia Holdings Ltd (in liq) v City of Swan (2010) 240 CLR 509; (2010) 265 ALR 1; (2010) 84 ALJR 275; (2010) 77 ACSR 489; [2010] HCA 11, at [31], [33]; Fleet Broadband Holding Pty Ltd v Paradox Digital Pty Ltd [2005] WASC 261; (2005) 228 ALR 598, at [92]; Pddam, at 512; Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385, at 409), ultimately the level of relief under the DOCA was not a matter pressed as a reason for the exercise of discretion to terminate the DOCA and I do not therefore need to consider that factor.)
     
142. I turn then to the significance of the delay in commencement of these proceedings. Mr Newlinds raised the question of delay as going to the exercise of discretion and in Portinex delay was said to be a weighty consideration in these cases (per Austin J, at [65], [66]). Mr Newlinds noted that in Cresvale, at [230], it was said that “Even a small delay in the commencement of proceedings to set aside or terminate a deed of company arrangement can be fatal to the claim for relief”. Mr Newlinds submitted that Perpetual showed no interest in the administration or the proposed deed at the relevant time, did not attend either of the creditors’ meetings, did not ask relevant questions of the administrators and did not offer funding for further investigations and delayed too long in bringing its complaints forward. (Reliance was placed on Khoury v Zambena, at 352-353). (Perpetual for its part says that it did not attend the relevant meetings because of the view it formed based on the incomplete information conveyed to it by the administrators.)
     
143. Here, the proceedings were commenced within approximately 6 weeks of the DOCA being signed, and after the deed administrators had been notified of the intention to commence the proceedings. No real prejudice has been pointed to as a result of the delay. Reliance is placed on Maylord Equity Management Pty Ltd v ReelTime Media Ltd [2008] NSWSC 1045; Portinex, at [65] for the proposition that there is no absolute rule in this regard. Mr Coles concedes that delay may, in a particular case, be a relevant factor but submits that here it is of no significance. I agree. Of relevance in this regard is that the administrators were on notice of the intention to seek relief and that unsecured creditors’ interests are not prejudiced having regard to the undertaking now proffered. (SBAL, as the party suspected of partaking in insolvent trading, surely cannot be heard to say it is prejudiced by the fact of such an investigation.)
     
144. In circumstances where the investigation, however adequate it might otherwise have been, does not seems to have focussed carefully on the date of insolvency, and where real questions as to that issue are now thrown up by the material before the court, I am satisfied that it is appropriate for there to be a proper investigation into the circumstances in which the company became insolvent and the period, if any, when it was trading while insolvent. I accept that there is a prospect of a greater recovery for creditors. I note that the investigation is to be funded by Perpetual at least up to a set amount (and I would infer that if any proceedings are to be pursued it would be to Perpetual that a liquidator would look for further funding in the first instance – given that if there is no funding the liquidator could not be expected to pursue recovery of any moneys under the insolvent trading provisions of the kind that Perpetual seems anxious should be pursued).
     
145. Finally, I note that it seems to be accepted by the deed administrators that this is a situation where the business of the company cannot be saved. Insofar as Mr Coles suggested that the court should not as a matter of commercial morality allow an insolvent company to continue to subsist (and hence to leave open the prospect that others might be similarly left with outstanding debts in the future), Mr Newlinds suggested that if this were to be the determining factor then I should permit SBAL to make submissions as to its intention in that regard. SBAL, I should add, has not sought to intervene in the proceedings to put any submissions in this regard. In any event, my decision to terminate the DOCA is not based on the prospect of the company resuming trading after the DOCA has been fully effectuated. Rather, it is based on the matters referred to above.
     
146. I am not satisfied that creditors were adequately informed as to the basis on which the comparison between the DOCA and the winding up was to be made or as to the prospect of a greater return from a winding up. The effect of the DOCA was to deprive creditors (and, in particular, Perpetual) from the opportunity for there to be a thorough investigation of the conduct of the company’s affairs in the short time between incorporation and insolvency. In those circumstances I think that the DOCA should be terminated and a liquidator appointed to the company.
     
147. I will make orders accordingly. Of the alternative proposed liquidators, in the absence of any preference expressed by Perpetual but having regard to the potential for an argument as to a conflict arising with one of the proposed liquidators, I propose to approve Mitchell Ball as liquidator.
     

Orders

148. I therefore order, on the basis of the Undertaking to Court proffered by Perpetual in these proceedings, that:
     
     1. The Deed of Company Arrangement executed on 11 June 2010 be terminated.
        
     2. The first defendant, Mustang Marine Australia Services Pty Ltd (administrator appointed) ACN 129 124 223, be wound up.
        
     3. Mitchell Ball of BPS Recovery, Level 20, Tower 2, Darling Park, 201 Sussex Street, Sydney NSW be appointed as liquidator to the first defendant.
        
     4. Costs be reserved.
        

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LAST UPDATED:
3 June 2011