In the matter of Academy Construction & Development Pty Ltd (subject to Deed of Company Arrangement)

By Originating Process filed on 11 December 2023, the Plaintiff, The Owners – Strata Plan 90889 (“Owners Corporation”) seeks an order under s 445D of the Corporations Act 2001 (Cth) (“Act”) or under s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPSC”) that a Deed of Company Arrangement dated 23 October 2023 (“DOCA”) entered into by the Second Defendant, Academy Construction & Development Pty Ltd (subject to Deed of Company Arrangement) (“ACD”), be terminated and an order that ACD be wound up. The Owners Corporation is the owners corporation in respect of a strata property situated in Botany in New South Wales, which comprises three separate buildings comprising 104 residential apartments (“Building”) that were designed and constructed by ACD under an agreement with a developer, Great Tang Brothers Pty Ltd (“Great Tang”). The relief sought by the Owners Corporation was elaborated, not necessarily for the better, by paragraph 40 of its Amended Statement of Claim filed on 8 February 2024 (“ASC”), which also sought an order that a resolution approving the entry into the DOCA (“Resolution”) be set aside and an order that the DOCA be terminated under s 447A of the Act, as an alternative to the relief sought under s 445D of the Act.

The First Defendant in the proceedings are the former voluntary administrators appointed to ACD, Messrs Spring and Moore, who are now the deed administrators under the DOCA; I will refer to them as the “Administrators” in both capacities. Mr Krochmalik, with whom Mr Ryan appears for the Administrators, recognises that they have a limited role in the proceedings. He indicates that they defend the proceedings on the basis that they have a duty to uphold the DOCA, but acknowledge that they are obliged to conduct that defence fairly and in a balanced manner, and refers to the observations of the Full Court of the Federal Court in Sino Group International Ltd v Toddler Kindy Gymbaroo Pty Ltd (2023) 168 ACSR 311; [2023] FCAFC 110 (“Sino Group”) at [69]-[70] in that regard. I should note that any such duty of the Administrators to uphold the DOCA was likely here displaced by the fact that, as Mr Krochmalik fairly acknowledged in opening submissions, the DOCA in its present form was not authorised by Pt 5.3A of the Act.

Mr Krochmalik notes that significant aspects of the Administrators’ submissions would be directed to defending their conduct, including responding to allegations that there were material errors or omissions in the information provided to creditors and as to the exercise of Mr Spring’s casting vote in favour of the DOCA. The significance of those matters was reduced when the parties recognised that the DOCA in its present form was not authorised by Pt 5.3A of the Act, where that deficiency did not depend on any conduct of Mr Spring, beyond his involvement in preparing a DOCA in that form. Mr Krochmalik also noted that the Administrators would assist the Court with the relevant facts and legal principles, and I am grateful for the substantial assistance that the Administrators’ legal representatives provided in that respect. Mr Krochmalik also pointed out that the Administrators had invited the Owners Corporation to withdraw its allegations about their conduct, following which the Administrators would take a neutral role in the proceedings, but that invitation was not taken up by the Owners Corporation. At least with hindsight, that was unfortunate where the allegations as to the Administrators’ conduct had limited relevance to the determination of the proceedings, and a significant amount of time was spent, in the cross-examination of Mr Spring, in pursuing them.

Mr Krochmalik also foreshadowed that the Administrators intended to hold the Owners Corporation “precisely to its pleaded case” in the Amended Statement of Claim. I should note that a party to the proceedings does not have an unqualified entitlement to take that course, for the reasons identified by the Full Court of the Federal Court in Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356; [2010] FCAFC 133 at [55] and JR Consulting and Drafting Pty Ltd v Cummings (2016) 329 ALR 625; [2016] FCAFC 20 at [410]. In any event, Mr Krochmalik fairly conceded that it was open to the Owners Corporation to rely on the fact that the DOCA, in its present form, was not authorised under Pt 5.3A of the Act, where that result followed from the application of well-established appellate authority to the uncontested terms of the DOCA. The Administrators do not oppose the appointment of Messrs Weston and Elkerton as liquidators of ACD, as sought by the Owners Corporation (Defence [40]), if the Court makes an order that ACD be wound up.

The Second and Third Defendants in the proceedings are ACD and its current director, Mr John Beaini (“Director”) (together, “ACD Parties”). Mr Ronnie Beaini was also a director of ACD until his resignation on 28 July 2023, immediately before ACD was placed in voluntary administration. Academy Constructions Pty Ltd (“ACPL”), which had the same directors as ACD, was the sole shareholder of ACD until about 8 August 2023. By an Amended Defence filed, by leave, on the second day of the hearing, the ACD Parties sought an order under s 447A of the Act that the DOCA be varied by deleting cll 6.2 and 13.3 of the DOCA, which give rise to its invalidity in its present form. I will address that application below.

The Owners Corporation read the affidavit dated 11 December 2023 of its solicitor, Mr O’Neill, who referred to aspects of the chronology of the voluntary administration and execution of the DOCA, which I will address below, and exhibited relevant documents. Mr O’Neill also referred to the nature of the claim brought by the Owners Corporation against, inter alia, ACD in proceedings in the Construction List (“Defects Proceedings”), relating to alleged defects affecting the common property at the Building, in which the Owners Corporation claims damages against ACD and Great Tang in the amount of approximately $7.8 million. The Owners Corporation there alleged that ACD and Great Tang had breached the statutory warranties in s 18B of the Home Building Act 1989 (NSW) (“HBA”) and the statutory duty of care in s 37 of the Design and Building Practitioners Act 2020 (NSW) (“DBPA”). By its Amended Technology and Construction List Response dated 30 June 2023, ACD denied that the common property of the Building was affected by the alleged defects and denied that it had breached the statutory warranties in s 18B of the HBA and denied breach of the statutory duty of care in s 37 of the DBPA.

Mr O’Neill also exhibited a proof of debt lodged by the Owners Corporation in the voluntary administration and referred to the provision of the evidence relied on in the proof of debt to the Administrators in support of the Owners Corporation’s claim. Mr O’Neill also referred to the conduct of the second meeting of creditors which passed the Resolution and pointed to the differential treatment of Class “A” creditors which were to be paid in full under the DOCA and the Owners Corporation which was to receive (at a maximum) $200,000 against its claim of $7,840,360, being 2.4 cents in the dollar, under the DOCA. He expressed the view, in evidence admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as submission, that:

The Owners Corporation also tendered a consent of Messrs Elkerton and Weston to appointment as liquidators of ACD.

The Administrators read the affidavits dated 11 April 2024 and 6 June 2024 of Mr Andrew Spring, one of the Administrators. In his first affidavit, Mr Spring addresses the circumstances in which he and Mr Moore were appointed jointly and severally as the voluntary administrators of ACD and refers to the first meeting of creditors in respect of the voluntary administration. He addresses the circumstances in which he became aware of the Owners Corporation’s claim against ACD, from ACD’s books and records and by investigations including discussions with the Director and ACD’s former director, Mr Ronnie Beaini and ACD’s former solicitors. Mr Spring also outlines the work undertaken by the Administrators in considering the Owners Corporation’s claim against ACD, which included discussions with Mr Ronnie Beaini and ACD’s solicitor, where Mr Spring was informed that:

The ACD Parties did not seek to establish the truth of that proposition by evidence led in these proceedings. Mr Spring also refers to information provided to him that ACD denied that it was liable to the Owners Corporation with respect to the claims in the Defects Proceedings and that the Director and ACD’s former solicitor expressed a view that ACD had prospects of success in defending the Defect Proceedings by reference to several matters. Again, the expression of that view does not establish its truth.

Mr Spring also referred to the Administrators’ consideration of ACD’s financial position and possible claims against third parties, and identified possible insolvent trading claims against both the Director and ACPL, but expressed the view that the Administrators “were unable to state with any confidence whether any such claim was viable or had a good chance of succeeding”. Presumably, any claim that was available against the Director would also have been available against Mr Ronnie Beaini, where he had resigned as a director only shortly before ACD was placed in voluntary administration. Mr Spring also noted the possibility of a preference claim against the Commissioner of Taxation. He noted that searches did not disclose any real property owned by the Director or Mr Ronnie Beaini, although that plainly left open the possibility that property was held in trusts or by family members, and that the Administrators had not identified any directors’ and officers’ liability insurance which may have responded to any claim against the Director or Mr Ronnie Beaini.

Mr Spring’s evidence (Spring 11.4.24 [27]) was that “[i]n the course of the administration, I had a number of communications with [the Director] and his in-house solicitor, Ms Mikhael, in relation to a possible proposal for a deed of company arrangement”. I will address those communications, and other communications which occurred prior to the commencement of the voluntary administration, in setting out a chronology below. Mr Spring also referred to the proposal (“DOCA Proposal”) which Mr John Beaini was prepared to advance in respect of a DOCA. His evidence (Spring 11.4.24 [28]) is that, based on those discussions, he and his staff prepared the DOCA Proposal and provided that to the Director and Ms Mikhael and that, on 27 September 2023, he received the DOCA Proposal (in the form that he and his staff had previously prepared) signed by the Director, to be put to creditors for approval at the second meeting of creditors. Plainly, Mr Spring had a substantial involvement in the development of the DOCA Proposal. Mr Krochmalik pointed to the judgment of the Court of Appeal of the Supreme Court of South Australia in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48-49; (1996) 22 ACSR 169 as accepting a voluntary administrator’s involvement in formulating a deed of company arrangement which was then recommended to creditors; however, standards of independence may have become more demanding in the nearly 30 years since that judgment was delivered. It is neither necessary or appropriate to reach a finding as to the Administrators’ independence, where it is not necessary to do so to determine these proceedings.

Mr Spring also refers to the assessment that he and Mr Moore formed that all creditors, including the Owners Corporation, would be better off if the DOCA was entered into than on a winding up. There were plainly difficulties with that assessment, including the fact that, as Mr Spring fairly recognised, he and Mr Moore had not had regard to a substantial and apparently straightforward preference claim against an associated entity of ACD, Academy Parramatta Pty Ltd, in undertaking that analysis; the information which was available to them to reach an assessment of the prospects of recoveries in the liquidation was limited; and they had assumed that substantial costs would be incurred to assess the Owners Corporation’s claims in a liquidation but not a deed administration, where it is not apparent that a proper assessment of a proof of debt could have been performed more cheaply in the deed administration than in the liquidation. I return to those matters below. Mr Spring also referred to the preparation of a report to creditors for the second meeting of creditors; to steps taken by the Administrators to adjudicate the Owners Corporation’s proof of debt for voting purposes at the second meeting of creditors; and to the conduct of the second meeting of creditors. He also outlined (Spring 11.4.24 [52]) the matters to which he had regard in exercising his casting vote in favour of the Resolution at the second meeting of creditors. Mr Spring then referred to the execution of the DOCA and payments into the deed fund, and identified further matters which would be relevant to the assessment of the amount available for distribution to creditors in a liquidation.

By his second affidavit dated 6 June 2024, Mr Spring corrected a minor error in his first affidavit, relating to the description of the accounting software used by ACD. Mr Spring was cross-examined at substantial length. A substantial part of that cross-examination was directed to issues which it will not be necessary to decide, given the conclusions which I reach on other grounds, and it is not necessary to reach any finding as to credit given those conclusions.

As I noted above, the ACD Parties did not lead evidence in the proceedings, including any evidence to support the availability of the defences for which they contended in the Defects Proceedings.

I now turn to a chronology of events, which I have partly drawn from the common ground in the pleadings and partly from the affidavit evidence and the documents tendered in the proceedings. It appears (ASC [15], ACD Parties’ Defence [15]) that the building works in respect of the Building were completed in December 2014 or January 2015 and an interim occupation certificate was issued by City of Botany Bay Council in January 2015. On 5 March 2021, the Owners Corporation commenced proceedings against ACD as First Defendant and Great Tang as Second Defendant in the Technology and Construction List of this Court, alleging that the Common Property (as defined) had defects arising from residential building works performed by ACD when it constructed the Building; and ACD denied those claims and pleaded that they were commenced outside of the relevant statutory warranty period (ASC [18]-[19], Administrators Defence [18]-[19], ACD Parties Amended Defence [18]-[19]). On 9 June 2023, consent orders were made in those proceedings that required ACD to file the lay and expert evidence on which it relied by 17 November 2023.

By an email dated 6 June 2023 (Ex P3, documents 4, 7), sent shortly before those orders were made, an accountant acting for ACD forwarded Mr Spring an email from Ms Mikhael (an inhouse legal adviser to ACD) to the accountant, which requested the accountant to:

By an email dated 14 June 2023 (Ex P3, document 4) to ACD’s accountant, which was copied to Ms Mikhael and to Mr Ronnie Beaini, Mr Spring advised that:

Mr Spring then requested further information in respect of ACD. Unsurprisingly, Mr Spring was cross-examined as to the reference in this email to a “defensive strategy on commercial grounds”, and he initially accepted in cross-examination (T57) that he was “undertaking, or considering undertaking, an appointment of an administrator as a defensive strategy, for the benefit of [ACD]”, although he then sought to put that proposition in a less direct way, by reference to the interests of all creditors of ACD, in response to questions that followed (T58-59). It seems to me that this reference is plainly to a means which ACD could respond to the Owners Corporation’s claim in the Defects Proceedings.

By an email in response to Mr Spring’s 14 June 2023 email (Ex P3, document 7(a)), Ms Mikhael advised Mr Spring of the timing for ACD’s evidence in the Defect Proceedings, the amount already spent by ACD on legal fees and estimated costs for the defence going forward. By an email dated 15 June 2023, Ms Mikhael, who was then plainly treating Mr Spring as an adviser to ACD, sought further advice from him as follows (Ex P3, document 8(a)):

Mr Spring responded, by email dated 19 June 2023 (Ex P3, document 9) that:

On 19 June 2023, Mr Spring advised Mr Beaini and Ms Mikhael (Ex P3, document 10) as to the scope of voluntary administration, in uncontroversial terms, referring to the “impending costs of the current litigation and the ongoing project works” and characterising voluntary administration, correctly, as a “[b]usiness rescue procedure – designed to save the company” and rightly also observing that:

By email dated 7 August 2023 (Ex P3, document 11), Ms Mikhael, who likely still understood Mr Spring to be acting as an adviser to ACD, informed him of the content of her discussions with ACD’s solicitors regarding the risks to its builder’s licence and its directors’ licenses on a voluntary administration. She extracted the solicitors’ advice, including the following:

I read that the “intention” referred to in that email was that of the ACD Parties, and do not find that Mr Spring necessarily shared it, where he plainly recognised that creditors would decide the outcome of the voluntary administration. The solicitors there also identified the grounds for disqualification of the Director and Mr Ronnie Beaini from holding directors’ licences, and raised the possibility of removal of the Director and Mr Ronnie Beaini as directors of ACD, plainly in order to seek to avoid the application of the statutory disqualification provisions, and recommended speaking with ACD’s “insolvency adviser” as to the consequences of administration or any other insolvency mechanisms under the HBA. It is striking that, when invited to refer those matters to ACD’s insolvency adviser, Ms Mikhael referred them to Mr Spring, and Mr Spring did not, so far as the evidence goes, take issue with her apparent assumption that he occupied that role.

On 31 August 2023, the Administrators were appointed to ACD under s 436A of the Act. On 11 September 2023, the Owners Corporation lodged a proof of debt in the voluntary administration, quantified as at 31 August 2023, in the amount of $7,127,600 plus GST plus legal and expert costs, with expert’s costs estimated as $500,000 plus GST, on a basis which the Owners Corporation contends reflected the evidence filed in the Defects Proceedings (ASC [24]).

By an exchange of emails on 25 and 26 September 2023, Mr Ronnie Beaini, Ms Mikhael and legal representatives of ACD on the one hand, and Mr Spring on the other, discussed the treatment of the Australian Taxation Office’s claim against ACD under the DOCA Proposal, the treatment of the Owners Corporation’s claim, and the desirability of including releases in favour of at least the Director and Mr Ronnie Beaini in the DOCA Proposal and the DOCA. By an email dated 25 September 2023, (Ex J1, 278), Ms Mikhael advised Mr Spring and others that:

Mr Spring responded to whether the DOCA would release the Director and former director as follows (Ex J1, 276):

Ms Mikhael then advised Mr Spring (Ex J1, 276) that:

Mr Spring then responded, on 26 September 2023 (Ex J1, 276) that:

On 26 September 2023, Ms Mikhael responded to Mr Spring (Ex J1, 275) that:

On 26 September 2023 (Ex J1, 274), Mr Spring emailed a draft of the DOCA Proposal to Ms Mikhael, with a copy to Mr Ronnie Beaini, for consideration by the Director. He referred to the proposed treatment of the Australian Taxation Office’s claims in the DOCA Proposal and observed that:

The DOCA Proposal dated 26 September 2023 (Ex J1, 243) provided for a deed fund to be established including:

Clause 8 of the DOCA Proposal provided that all monies paid under the DOCA would not be refundable to the deed proponent or a third party and they were to be held on trust by the Administrators as property of ACD. No party contended that, on a termination of the DOCA, monies contributed to the deed fund would be repayable to the deed proponents. The DOCA Proposal in turn provided for payment of amounts in a specified order of priority, such that the Class “A” participating creditors were to be paid in full before any payment was made to the Owners Corporation; the priority schedule was maintained in the DOCA and had the consequence that, if the amount paid into the deed fund by the Director (as quantified by 30 November 2023 when it was to be paid) was ultimately insufficient to meet the Administrators’ remuneration and disbursements, including by reason of costs incurred after the date that payment was made, then the Owners Corporation rather than other creditors of ACD would likely bear that shortfall.

Clause 12 of the DOCA Proposal provided that:

The Administrators issued a report to creditors (“Report”) under s 439A of the Act on 27 September 2023 (ASC [25]; Ex J1, 200). The Owners Corporation pleads (ASC [26]) the contents of the Report, and the Administrators largely admit (Administrators Defence [26]) the pleaded content of the Report, but deny that they relied solely on the advice of the Director as to the value of the Owners Corporation’s claim in the Defects Proceedings and contend, inter alia, that, in the limited time available, they reviewed and considered the pleadings and other supporting documents in assessing the value of that claim; they obtained legal advice (which was tendered) as to the steps taken to arrive at a just estimate of the value of the Owners Corporation’s claim in the administration; and that ACD did not comply with the orders made in the Defects Proceedings to file evidence by reason of its “inability to pay legal costs associated with defending the claim in the Defects Proceedings”. The ACD Parties do not admit this paragraph of the pleading (ACD Parties Amended Defence [26]).

Paragraph 4.5 of the Report stated:

Section 9 of the Report summarised the DOCA terms and set out suggested advantages and disadvantages of the DOCA. That summary did not refer to the differential treatment of the Owners Corporation and other creditors of the DOCA, but the Owners Corporation was plainly not misled by that omission. Paragraph 10.3 of the Report set out the Administrators’ reasons for recommending that ACD’s creditors resolve to enter into the DOCA including that, under a DOCA, priority creditors were expected to receive a dividend of one hundred cents in the dollar and employment would continue and entitlements would be paid in the ordinary course of business (although, I interpolate, it appears that ACD then had no employees); under a DOCA scenario, Class “A” ordinary unsecured creditors were expected to receive a dividend of one hundred cents in the dollar, and in liquidation it was unlikely that the return to creditors would exceed zero cents in the dollar; under a DOCA, Class “B” ordinary unsecured creditors were expected to receive a dividend of 2.4 cents in the dollar, whereas in liquidation it was unlikely that the return to creditors would exceed zero cents in the dollar; under a DOCA, ACD would be able to continue trading and all current taxes would be brought up to date; there would be continuity of business, which fulfilled the purpose of the voluntary administration process; there would be preservation of ACD’s employees (although, as I noted above, it appears it did not have any) and subcontractors; there would be continued business for the landlord of ACD (although, I interpolate, it appears that ACD did not lease premises); there would be continued business for the finance creditors of ACD; trade creditors of ACD would be able to continue to trade with it; and ACD would be able to continue as a taxpayer. I will refer below to difficulties with aspects of this analysis, including the comparison between the likely result of a DOCA and a liquidation, generally and for the Owners Corporation particularly. There would be every reason for all creditors other than the Owners Corporation to accept the Administrators’ recommendation to enter into the DOCA where they, but not the Owners Corporation, were likely to be paid in full under it.

The Report annexed a copy of the DOCA Proposal as Annexure “D” and annexed a comparison of the position on the DOCA and on a liquidation as Annexure “D”. That comparison allowed a recovery of nil on a low case and $100,000 on a high case, referable to a preference claim against the Commissioner of Taxation; that figure substantially understated the likely preference recoveries on a liquidation. As I noted above, Mr Spring now concedes that it omitted a substantial preference claim available against an associated entity of ACD, Academy Parramatta Pty Ltd, and a preference claim that was potentially available against ACPL, subject to a debate between the parties as to whether a running account defence would have been available, which it is not necessary to resolve. That comparison allowed no return for an insolvent trading claim on a low case in a liquidation and recorded the return on a high case as “TBC”; there was further discussion of that potential return at the second creditor’s meeting, although Mr Spring reduced the maximum recovery he there indicated in his evidence at this hearing. It is not necessary to determine the ultimate position as to these matters in order to determine this application, beyond noting that, on any view, this schedule significantly understated the potential recoveries of a liquidation and overstated the advantage in a DOCA in consequence.

That comparison also significantly overstated the savings of costs in a DOCA, because it allowed for the costs of adjudication of the Owners Corporation’s claim in the liquidation but not in the DOCA. As I will note below, I can see no basis for that approach, where the Administrators would need to undertake a proper adjudication of the Owners Corporation’s claim under the DOCA, where that was required by the DOCA to admit that claim, and could not fail to do so merely because the amount that would ultimately be payable to the Owners Corporation would be so heavily discounted by the DOCA.

On 5 October 2023 (Ex J1, 296) the Administrators took comprehensive advice from their solicitors, Holman Webb, as to the admission of the Owners Corporation’s claim for voting purposes at the second meeting of creditors. Holman Webb there referred to their discussions with ACD’s former solicitor in respect of the prospects of the Defects Proceedings and noted the views expressed by ACD’s former solicitor that “the defence to the claims is a good one and that [ACD] may well have no liability at all” (Ex J1, 299). That advice also noted that, by reason of the timeframes in a voluntary administration, the volume of documents produced and the nature of the issues in dispute, it was not possible to determine the likely outcome of the dispute with any certainty and that it would be necessary to obtain Counsel’s advice and undertake a thorough review of the expert evidence filed by the Owners Corporation in order to do so. Understandably, in the context of the limited timeframe for a voluntary administration, that was not done. That letter also noted that it was arguable that ACD had acknowledged that some amount was payable to the Owners Corporation and noted that a settlement offer had been conveyed by a third party in advance of the second meeting of creditors to the Owners Corporation.

Holman Webb there recognised the likely practical effect of the DOCA Proposal, so far as it provided for all creditors other than the Owners Corporation to be paid in full, since they went on to advise the Administrators (Ex J1, 302-303) that:

At the second meeting of creditors of ACD held on 6 October 2023 (minutes, Ex J1, 304; recorded transcript, Ex J1, 319 with minor corrections, Ex J2), six creditors voted in favour of the Resolution, one of which, Variz Beaini Nominees Pty Ltd, was a related creditor of ACD, and the Owners Corporation voted against the Resolution. The Resolution was passed by a majority of creditors by number and not by value, since the Owners Corporation’s claim represented nearly 90% of the total value of admitted creditor claims, and Mr Spring as chair then exercised his casting vote in favour of the Resolution.

On 23 October 2023, ACD and the Administrators entered into the DOCA which was largely consistent with the DOCA Proposal (ASC [35]; Ex J1, 345) and they became the Administrators. After the DOCA was executed, the control of ACD was returned to the Director pursuant to cl 4 of the DOCA. Clause 6.1 limited the steps to be taken by creditors while the DOCA was in force and cl 6.2 provided that:

Clauses 7 and 8 dealt with the deed fund and contributions to the deed fund; cl 10.1 established a proof of debt process in respect of claims under the DOCA; cl 10.5 established an order for priority as to distributions from the deed fund, consistent with the DOCA Proposal, which again had the effect that the Owners Corporation would be paid only after all other expenses, remuneration, priority employee claims and claims of other creditors of ACD had been paid, and exposed the Owners Corporation to the risk that its claim would not be met if the deed funds were eroded by the Administrators’ claim for remuneration or costs (including by reason of the costs of proceedings challenging the DOCA) after the date of the amount of the Director’s contribution to the deed fund was determined and made.

Clause 13.2 provided for Participating Claims (as defined) to be released and discharged on effectuation of the arrangement provided in the DOCA, even if no distribution was received by the creditor; that provision would operate, for example, even if no payment was made to the Owners Corporation by reason of the priority provision to which I referred above; and that clause also required that creditors, including the Owners Corporation, “execute and deliver to [ACD] such forms of release of any “Claim” as the [Deed] Administrators may require”. Clause 13.3 went further to provide that:

It is common ground that the Resolution was passed at the second meeting of creditors because Mr Spring, as chair of that meeting, exercised a casting vote in favour of that resolution (ASC [32]). The Administrators contend (Administrators Defence [32]) that Mr Spring exercised his casting vote appropriately and conscientiously by reference to several matters, including that the Owners Corporation’s claim was disputed; that creditors stood to receive a greater and more timely return under the DOCA as compared to the likely return to creditors in the event that ACD was to be wound up; that the proposed DOCA was consistent with the objects of s 435A of the Act; and that Mr Spring had reference to the interests of creditors as a whole and the ARITA Code of Professional Practice in exercising his casting vote.

The Plaintiffs plead (ASC [34]) that any reasonable insolvency practitioner would have recommended to creditors against voting in favour of the resolution, for numerous reasons, including that:

The Plaintiffs plead (ASC [36]) that the Resolution should be set aside. The Administrators do not admit that the Resolution should be set aside (Administrators Defence [36]) and the ACD Parties deny that a basis to set aside the Resolution is established (ACD Parties Amended Defence ([36]), but do not plead to establish any additional factual basis for that denial.

It appears that the Owners Corporation’s application to set aside the Resolution is brought under s 75-42 of the IPSC, and possibly also under s 447A of the Act. Both Mr McDonald, who appears for the Owners Corporation, and Mr Krochmalik recognise that the principles applicable to the exercise of a voluntary administrator’s casting vote identified by Besanko J in Adelaide Brighton Cement Ltd, Re Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (subject to deed of company arrangement) (No 4) [2019] FCA 1846 (“Adelaide Brighton Cement”) at [1224]-[1231]. Mr McDonald accepted that it would not be necessary to determine this claim if the Court found that the DOCA should be set aside on other grounds. Mr Krochmalik also submitted that, if there is other reason to terminate the DOCA – a matter that I address below – then little is added by whether the Resolution should be set aside; and that, in any event, Mr Spring has given a thorough and comprehensive explanation of the reasons why he voted in favour of the proposed DOCA, in a manner consistent with what was said at the second meeting of creditors. The ACD Parties adopted the Administrators’ submission as to whether the Resolution should be set aside and whether the DOCA should be terminated pursuant to s 445D(1)(a)-(c) of the Act. As Counsel accepted, it is not necessary to determine this claim given the conclusions that I reach on other grounds below.

The Owners Corporation pleads (ASC [37]) that an order should be made terminating the DOCA because there were significant defects in the information provided to creditors prior to the passage of the Resolution on the Chair’s exercise of his casting vote. The Administrators contend (Administrators Defence [37]) that the information provided by them to creditors was sufficient for the creditors to make an informed decision as to ACD’s future and whether to vote in favour of the Resolution and that the alleged defects cannot reasonably be expected to have been material to creditors in deciding whether to vote in favour of the Resolution. The ACD Parties deny that this ground for termination of the DOCA is established (ACD Parties Amended Defence ([37]) but do not plead any additional factual basis for that denial. It is also not necessary to determine this claim, given the conclusions that I reach on other grounds below.

For completeness, the Owners Corporation also devoted significant attention in the cross-examination of Mr Spring and in submissions to a claim that the Administrators should have disclosed, in the Report, a restructuring by ACD, prior to the appointment of the Administrators, which appears to have been intended to minimise the potential impacts of the voluntary administration on the builders’ licences held by ACD, ACPL and associated companies, and by the Director and Mr Ronnie Beaini. I have referred to correspondence concerning that matter in the chronology above and Mr Spring plainly knew of the steps which were taken in that respect. It is again not necessary to determine any question whether those matters were material, and whether they should have been disclosed in the Report, in order to determine these proceedings.

The Owners Corporation also pleads (ASC [38]) that the DOCA is oppressive, or unfairly prejudicial to, or unfairly discriminates against, the Owners Corporation. The Administrators take a neutral position as to this claim and do not seek to be heard other than to assist the Court. The ACD Parties deny that this ground for termination of the DOCA is established (ACD Parties Amended Defence ([38]) but do not plead to establish any additional factual basis for that denial.

I summarised the principles applicable in an application to set aside a deed of company arrangement under, inter alia, s 445D the Act in Re Citadel Financial Corporation Pty Ltd (subject to Deed of Company Arrangement) (2020) 146 ACSR 220; [2020] NSWSC 886 (“Citadel”) at [16]ff and again in Re ACN 613 909 596 Pty Ltd (formerly Minle Wine Negociants of Australia Pty Ltd) (subject to Deed of Company Arrangement) [2023] NSWSC 753 at [42]ff and [56]ff, on which I have drawn for the summary that appears below.

In Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527; [1999] NSWCA 402, Fitzgerald JA (with whom Beazley JA and Davies AJA agreed) observed (at [80]) that:

In Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391; [2003] NSWSC 883, Barrett J terminated a voluntary administration where a company’s sole director placed the company in voluntary administration with a view to adopting a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value that would bar particular claims already being litigated against the company.

An order terminating a deed of company arrangement may be made under s 445D(1)(f) of the Act if that deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the company’s creditors or is contrary to the interests of the creditors of the company as a whole. In JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147 at [90], Santow J observed that, where it is clear that it is not possible for the company or its business to continue in existence, then those who support a deed of company arrangement bear an onus to show that it would result in a better return for the company’s creditors and members than would result from an immediate winding up. In University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) (2005) 53 ACSR 579; [2005] NSWSC 412 at [37], Palmer J observed that:

That passage was treated as common ground between the parties in Vero Insurance Ltd v Kassem (2011) 86 ACSR 607; [2011] NSWCA 381, where Campbell JA (at [83]) (with whom Meagher JA agreed) and Young JA (at [144]) expressed no disagreement with it, and was also approved in Re Pilot Advisory Pty Ltd (2019) 141 ACSR 458; [2019] FCA 2171 at [82].

Whether a deed of company arrangement should be set aside on this basis will be determined by reference to the general principles underlying Pt 5.3A, including a creditor’s right to be paid or wind up a company or have the company administered by the administrator in a way which will see the creditor paid from the company’s property: Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (2005) 228 ALR 598; [2005] WASC 261 (“Fleet Broadband”) at [59]-[60]; Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) (2007) 64 ACSR 91; [2007] SASC 296 at [114]; Re Recycling Holdings Pty Ltd (2015) 107 ACSR 406; [2015] NSWSC 1016 (“Recycling Holdings”) at [60]–[61]; Guo v Song; Re SG Capricorn Investments Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12 at [148]; Citadel at [21]; Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (subject to a Deed of Company Arrangement) [2024] FCA 112 (“Canstruct”) at [207]–[208].

In Britax Childcare Pty Ltd (ACN 006 773 600) v Infa Products Pty Ltd (ACN 092 222 994) (admins apptd) (2016) 115 ACSR 322; [2016] FCA 848 (“Britax”) at [115], Burley J identified matters relevant to determining whether a deed of company arrangement is oppressive or unfairly prejudicial, including the objects of Pt 5.3A; the interests of other creditors, the company and the public; the comparable position of the creditor on a winding up compared with their position under the DOCA; and other relevant facts such as the relative position of all creditors under the DOCA (that is, whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the DOCA.

In Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 (“Decon”) at [202]-[203] (approved in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54 at [168], Sino Group at [64]–[65] and Canstruct at [205]ff), McKerracher J observed that:

In Canstruct, Derrington J would have terminated a deed of company arrangement under this paragraph (had she not terminated it under s 445D(1)(g) which I address below) where it allowed an insolvent company to avoid a third party’s claim against it under an adjudication award, while maintaining its relationships with other arm’s length creditors which were paid in full. The similarity with the structure adopted in the DOCA in this case is obvious, although I recognise that ACD was here placed in voluntary administration before the Owners Corporation had the opportunity to have its claim in the Defects Proceeding determined on the merits.

Turning now to the parties’ submissions, Mr McDonald submits that:

Mr McDonald also submits, in opening, that:

I recognise the amount of the Owners Corporation’s claim would potentially have been admitted for a lesser amount than the face value of that claim, on the adjudication of that claim for the purposes of the DOCA. However, the Administrators and the ACD Parties made no attempt to establish that a pari passu distribution as between other creditors and the Owners Corporation, after the Owners Corporation’s claim was properly assessed, would result in a distribution of $200,000 or less to the Owners Corporation. The Administrators and the ACD Parties also did not establish any rational distinction between the position of Class A creditors whose claims were allowed in full, and the position of the Owners Corporation, where any uncertainty in the amount recoverable by the Owners Corporation would necessarily have been addressed in the valuation of that claim in the proof of debt process. There is here no suggestion that there was any proper commercial imperatives in respect of any future trading by ACD to prefer all creditors other than the Owners Corporation, by paying their claims in full, to the Owners Corporation, although that approach no doubt encouraged other creditors to vote in favour of the Resolution.

As I noted above, the Administrators do not join issue with the Owners Corporation’s contention that the DOCA is unfairly prejudicial to the Owners Corporation, and leave that matter for the Court to determine, while addressing the facts and the applicable legal principles. Mr Krochmalik submits, and I accept, the fact that the DOCA is not supported by the Owners Corporation as the majority creditor is not in itself sufficient basis to set it aside, and Mr McDonald did not contend to the contrary. Mr Krochmalik refers to Britax [107], where Burley J observed that:

I also have regard to the observations of McKerracher J in Decon at [152], referring to Britax, that:

However, I do not read these decisions as establishing, conversely, that a deed proponent is free to determine, without any proper commercial basis, that one creditor should receive a minimal return so that other creditors may be paid in full, and that the other creditors are then free to approve that result at the second meeting of creditors. That approach is potentially oppressive, irrespective of whether it is directed to a majority or minority creditor.

Mr Krochmalik submits, and I accept, that differential treatment of creditors is not necessarily unfairly prejudicial or unfairly discriminatory to a particular creditor, although it may be prejudicial and discriminatory in the particular case: Fleet Broadband at [59]ff; Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd (2020) 149 ACSR 1; [2020] FCA 1395 at [408] (“Habrok”); Decon at [202]-[203]; Sino Group at [64]-[65]. Again, it seems to me that there is a greater likelihood that a deed of company arrangement will be found to be unfairly prejudicial to, or unfairly discriminatory against, a particular creditor where the relevant prejudice or discrimination has no commercial or principled justification.

Mr Krochmalik also submits that:

Mr Krochmalik also seeks to distinguish the position here from the position in Canstruct and submits that:

I do not accept this submission. First, while there was a dispute as to the Owners Corporation’s claim in the Defects Proceedings, the DOCA required that the Owners Corporation’s proof of debt be adjudicated and admitted before it could receive any payment under the DOCA. That process was an essential step under the DOCA and, whether it was expensive or not, it would have resulted in the admission of the Owners Corporation’s proof of debt for a specified amount, resolving any previous uncertainty as to the amount for which it should be allowed. Mr Krochmalik’s submission that the DOCA would bring about a saving in the costs of adjudication, and the Administrators’ corresponding assumption in comparing the return in a liquidation and under the DOCA in the Report, both turn on the false premise (to which I referred above) that the Administrators would not need to undertake a proper adjudication of the Owners Corporation’s claim under the DOCA, implicitly because the amount that would ultimately be payable to the Owners’ Corporation had been so heavily discounted by the DOCA. I do not accept that premise. Both the Administrators and a liquidator would and could seek to minimise the costs of an adjudication, so that they were proportionate to the amount of the Owners Corporation’s claim and the amount of assets available for distribution to creditors. However, the fact that a creditor’s claim is large and complex, and may be relatively costly to adjudicate, provides no basis for arbitrarily capping it to a figure chosen by a deed proponent to avoid or minimise the need for a proper adjudication of the claim; and such a cap does not avoid then need for an adjudication of that claim which is required to admit it under the DOCA. This submission is also substantially undermined by the lack of any objective justification for the $200,000 cap, which was no more and no less than the amount chosen by the ACD Parties as the basis on which the Owners Corporation’s claim would be extinguished.

Mr Notley, who appears for the ACD Parties, submits that:

I have not accepted the latter submissions above, where the amount that should be allowed for the Owners Corporation’s claim would be determined in the proof of debt process, so that its claim and claims of other unsecured creditors would then have the same character; and the fact that a claim is large does not, without more, justify capping it in an arbitrary amount, even if that will have the consequence that other creditors can be paid in full.

Mr Notley also relies on the Administrators’ estimate of returns under the DOCA and the liquidation to submit that, under the DOCA, the Owners Corporation was expected to receive a dividend of 2.4 cents in the dollar, and it was unlikely to receive any return in a liquidation. Both aspects of that calculation are uncertain, where the former did not take account of the fact the return to the Owners Corporation would be eroded by further costs and expenses in the deed administration or the costs that would properly be incurred in adjudicating the Owners Corporation’s proof of debt and the latter did not take account of the available preference claim against Academy Parramatta Pty Ltd and there were real uncertainties in assessing the prospect of preference claims and claims for insolvent trading to which I have referred above.

I am comfortably satisfied here that a basis for termination of the DOCA under s 445D(1)(f) of the Act is established, on the ground that it is oppressive and unfairly prejudicial to or unfairly discriminatory against the Owners Corporation, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below. It is not necessary to address all of the criticisms of the DOCA advanced by the Plaintiffs or the detail of Mr Spring’s cross-examination in order to reach that conclusion. It is sufficient, for that basis, that, first, that no party was able to point to any objective basis for the DOCA to impose a cap of $200,000 on the recovery by the Owners Corporation, which appears to have been chosen for not better reason than that the ACD Parties wished to extinguish the Owner’s Corporation’s claim for that amount.

Second, as I noted above, the DOCA defers the Owners Corporation’s claim to rank in priority behind the claims of all other creditors, so that the Owners Corporation would not recover the amount of $200,000 which was purportedly to be made available to it if that amount was eroded by further costs or expenses of the voluntary administration or these proceedings after the contribution made by the ACD Parties. There was a real risk that that would occur; at least the Administrators and their solicitors had recognised the risk that an application would be made by the Owners Corporation to set aside the DOCA as oppressive; and the Administrators would likely incur further work and further costs in respect of such an application. Neither the Administrators nor the ACD Parties contended that the ACD Parties were under any continuing top-up obligation, under the terms of the DOCA, so as to require them to make further contributions to avoid the erosion of any amount available to the Owners Corporation by the Administrators’ further costs and expenses, and the terms of the DOCA do not provide for any top-up after the point at which the Director’s contribution was to be made. No party identified any objective basis on which the Owners Corporation and not other unsecured creditors should bear that risk. It seems to me that it is plainly oppressive, unfairly prejudicial to and unfairly discriminatory against the Owners Corporation to require it, to the exclusion of other creditors, to bear the risk of erosion of any return under the DOCA, where its claim (for the amount admitted in accordance with the terms of the DOCA) would be no less certain than that of other unsecured creditors of ACD.

It also seems to me that oppression, unfair prejudice or unfair discrimination is here established by reason of the lack of a rational basis for the different treatment of the Owners Corporation and other unsecured creditors, even if (which has not been established) that there would be a better return to other creditors or the Owners Corporation under the DOCA by comparison with a liquidation. I will address the Court’s discretion whether to terminate the DOCA on this ground below.

The Owners Corporation contends (ASC [39]) the DOCA should be terminated because it is against the public interest, and particularises that contention as follows:

The Administrators again take a neutral position (Administrators Defence [39]) and do not seek to be heard as to this claim other than to provide assistance to the Court. The ACD Parties deny that this ground for termination of the DOCA is established (ACD Parties Amended Defence ([39]) but do not plead to establish any additional factual basis for that denial.

An order terminating a deed of company arrangement may be made under s 445D(1)(g) of the Act if the Court is satisfied that the deed should be terminated for some other reason. In Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) 110 ACSR 203; [2015] FCA 1360 at [69]-[74], Beach J noted (and I followed these observations in Citadel at [20]) that:

In Habrok, Beach J observed (at [410]) that:

His Honour also there observed (at [412]) that, even if any of the criteria in s 445D are satisfied, the Court retains a discretion whether to terminate a DOCA, having regard to the creditors’ interests and the public interest; see also Re SBL Solutions Pty Ltd (subject to a deed of company arrangement) [2021] NSWSC 1002 at [81]ff. In Canstruct, Derrington J terminated a deed of company arrangement, under s 445D(1)(g) of the Act as an abuse of Pt 5.3A of the Act, in the circumstances noted above. As I also noted above, the similarity with the structure adopted in this case is obvious, although ACD was here placed in voluntary administration before the Owners Corporation had the opportunity to have its claim in the Defects Proceeding determined on the merits.

Turning now to the parties’ submissions, Mr McDonald submits in opening, inter alia, that the DOCA is against the public interest because “[t]here is no explanation of why the DOCA was structured with two classes of creditors and for the plaintiff to be the sole member of one class.” Mr McDonald also addresses several other matters which it is not necessary to determine given the conclusions which I reach below.

As I noted above, the Administrators do not join issue with the Owners Corporation’s contention that the DOCA is an abuse of Part 5.3A of the Act, or is contrary to the public interest and leave that matter for the Court’s determination. Mr Notley refers to the Owners Corporation’s submission that the DOCA is against the public interest because there is no explanation why the DOCA was structured with two classes of creditors and with the Owners Corporation as the sole member of one class. He submits and I accept that, as I noted above, a deed of company arrangement may, in principle, provide for differential dividends amongst creditors and that Pt 5.3A does not require a pari passu distribution, although it does not follow that any differentiation between creditors on any basis will be permitted. He also submits that the debts of unsecured creditors in Class “A” were not disputed, and the amount owing by ACD to the Owners Corporation was disputed and “vastly exceeded” the total of the undisputed debts to the unsecured creditors in Class “A”. As I noted above, it seems to me that the former does not provide a proper basis for the differential treatment of the Owners Corporation, which could only recover the amount for which it was admitted to proof under the DOCA, in an amount that would necessarily reflect any uncertainties in its claim; and the latter does not support a differentiation, because the fact that a claim is large does not, without more, provide a rational basis to cap it to an arbitrary amount and pay smaller claims in full.

I am also comfortably satisfied that a basis for termination of the DOCA under s 445D(1)(g) of the Act is established, given the lack of rational basis for the differential treatment of the Owners Corporation under the DOCA, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below, and has the consequence that the DOCA is an abuse of Pt 5.3A of the Act of a similar character to that considered in Canstruct.

Mr Krochmalik also submits, and I accept that the structure of s 445D of the Act involves a two-stage enquiry: first, whether one of the grounds referred to in section 445D(1) is established, as is the case here; and secondly, which arises only if the first is established, whether as a matter of discretion the deed of company arrangement should be terminated: Recycling Holdings at [29]; Britax at [90]; Decon at [144]. He also submits and I accept that the Court has a discretion to terminate (or not to terminate) a deed of company arrangement, where the jurisdictional criteria for doing so are established, and that discretion is exercised on the facts of each case and depends on all the various considerations before the Court, including the interests of the creditors as a whole and the public interest: TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (admin apptd) (2012) 91 ACSR 17 at [27]; [2012] NSWSC 766; Hayes v Doran (No 2) [2012] WASC 486 at [291]; Decon at [111]. I also recognise that the several factors identified in Sino Group at [72] are relevant to the exercise of the Court’s discretion. However, it seems to me that where, as here, a deed of company arrangement operates to the advantage of the majority of creditors, and the substantial disadvantage of a single creditor or minority creditors, then the advantage of the deed of company arrangement for creditors generally is of lesser relevance, and issues relate to the proper use of Pt 5.3A of the Act are of greater significance.

Mr Krochmalik raises the possibility that the Court would exercise its discretion not to terminate the DOCA on the basis that creditors other than the Owners Corporation will “definitely” be worse off in a liquidation than under the DOCA and the Owners Corporation will “likely” be worse off under the DOCA, and financial contributions to the deed fund have been made which exceed $500,000. I would not decline to terminate the DOCA on that basis, where it seems to me that the structure of the DOCA involves a high level of oppression and discrimination against the Owners Corporation, even apart from the fact that it is now common ground that the DOCA in its present form is not authorised by Pt 5.3A of the Act. The factual basis of that submission is also undermined by the Administrators’ understatement of the prospects of recoveries in a liquidation in the Report, by reason of the error which Mr Spring now acknowledges was made in omitting the substantial preference claim against Academy Parramatta Pty Ltd in assessing the outcome of a liquidation, and their overstatement of the return in a DOCA by their assumption that they would not incur the costs of an adjudication of the Owners Corporation’s claim under the DOCA, where such an adjudication was a prerequisite to allowing that claim.

I recognise that recoveries in a liquidation would require that the liquidator be funded to make them and that the ACD Parties or their related parties have sufficient assets to meet a judgment against them. However, that matter has less weight, as matters stand, where it is now common ground that ACD would be entitled to retain monies paid into the deed fund under the DOCA, even if the DOCA is now terminated, and those funds would be available to a liquidator to pursue investigations and commence any recovery action. I also recognise that the Director has made a contribution to the deed fund, but the DOCA parties elected to adopt the differential treatment of the Owners Corporation in the DOCA; had plainly recognised difficulties with the third parties releases, although not the consequential invalidity of the DOCA in its present form; and they took upon themselves the risk that the DOCA would later be set aside. It also seems to me that it would substantially undermine the public purpose served by Pt 5.3A and s 445D of the Act if the Court were to give substantial weight to the fact of a contribution to a deed fund as immunising a deed of company arrangement against being set aside for oppression, discrimination or abuse of Pt 5.3A of the Act.

Mr Notley also submits that the Court would not exercise a discretion to terminate the DOCA if one of the grounds referred to in s 445D was established, and he submits, inter alia, that creditors other than the Owners Corporation voted to enter into the DOCA, only one of them was a related party creditor, and the continuation of the DOCA would not have the effect of eroding commercial morality or public confidence or permit an insolvent company to continue to trade. I give little weight to the former matter, where the majority’s support for the DOCA is the likely consequence of the advantage which they obtained at the cost of the Owners Corporation under its terms, and it seems to me that the differential treatment of the Owners Corporation would here erode commercial morality or public confidence, at least so far as it is inconsistent with the proper use of Pt 5.3A of the Act for all the reasons I have noted above.

For completeness, I recognise that criticisms are also made by the Owners Corporation of the Administrators’ investigations into possible recovery claims against the Director and the former director, Mr Ronnie Beaini, and ACPL. The Administrators in turn respond to those criticisms in evidence and, at length, in Mr Krochmalik’s submissions. Those criticisms raise complex issues as to the extent of information available to the Administrators; the impact of the limited time that was available for them to conduct such investigations; whether ACD was insolvent, where it had previously received financial support from ACPL but had no entitlement to such support; and whether the dealings between ACPL and ACD could properly be characterised as a running account, for the purposes of a defence to a preference claim against ACPL. I recognise that Mr Spring was cross-examined at considerable length as to these matters, and the parties have obviously devoted substantial thought to them. However, it is preferable that I do not address those matters, where they will likely be in issue at any proceedings which may ultimately be brought by a liquidator appointed to ACD against the Director, Mr Ronnie Beaini, ACPL, or their related parties. A determination of those matters is not necessary to determine these proceedings given the conclusions that I have reached, where a finding that the Administrators’ investigations were adequate would not avoid the DOCA being terminated, and a finding that they were not would only provide a further basis for the orders that will be made in any event; all parties now accept that the DOCA is not authorised by Pt 5.3A in its present form; and a basis for severance or an order under s 447A to sever the third party releases is not established for the reasons set out below.

I am comfortably satisfied that the matters noted above, which here provide grounds for termination of the DOCA under s 445D(1)(f) and 445D(1)(g) of the Act, also warrant the exercise of the Court’s discretion to terminate the DOCA, even apart from the fact that its inclusion of third party releases is not authorised by Pt 5.3A of the Act for the reasons noted below.

A further and important issue arose in the course of the hearing. Mr McDonald referred in opening submissions to the third party releases contained in the DOCA and to the decision of the Full Court of the Federal Court of Australia in City of Swan v Lehman Brothers Australia Ltd (2009) 74 ACSR 191; [2009] FCAFC 130 (“Lehman FCAFC”), which was upheld by the High Court of Australia in Lehman Bros Holdings Inc v City of Swan (2010) 240 CLR 509; [2010] HCA 11 (“Lehman HC”). As I noted above, all parties now accept that the DOCA, in its present form, is not authorised by Pt 5.3A of the Act.

Mr Krochmalik acknowledged on behalf of the Administrators that the third party releases contained in cll 6.3 and 13.2 of the DOCA were inconsistent with the operation of Pt 5.3A of the Act and recognised the reasoning of the plurality of the High Court in Lehman HC at [50]-[53] that:

In supplementary submissions, Mr Notley also accepted that the third party releases contained in cll 6.2 and 13.3 of the DOCA are not permitted or authorised by Pt 5.3A of the Act and the DOCA was invalid in its present form.

Mr Krochmalik identified a question whether or not the third party releases contained in cll 6.3 and 13.2 of the DOCA could be excised or severed from the DOCA with the balance of the DOCA remaining in effect, although he emphasised that the Administrators did not propound that course, and only drew relevant authorities to the Court’s attention. Mr Krochmalik rightly recognised that:

Mr Notley also refers to the severance of third party releases in Re Eastmark Holdings Pty Ltd (2015) 109 ACSR 116; [2015] NSWSC 1437. However, that decision is plainly distinguishable where Brereton J there severed those releases on the basis that that they were not referred to in the relevant DOCA proposal, were not discussed at the second creditors meeting, and did not reflect the intent of the relevant deed of company arrangement. The position here is entirely different, where the third party releases were included in the DOCA Proposal and the DOCA, although both Mr Spring and the ACD Parties’ had recognised difficulties with them, although not that they were not authorised by Pt 5.3A of the Act by reason of the matters noted in the Lehman Bros cases. Here, the third party releases plainly reflected the subjective intent of the ACD parties and the objective intent of the DOCA Proposal and the DOCA.

Mr Krochmalik and Mr Notley also rightly recognised that a deed of company arrangement is not merely a contract, and drew attention to the consideration of principles of severance by Rees J in Re Antquip Hire Pty Ltd (subject to deed of company arrangement) (in liq) [2020] NSWSC 487 at [66]-[71] (“Antquip”), where her Honour observed that:

I recognise that, as Mr Notley points out, these observations were approved by Colvin J in Goldus Pty Ltd (Subject to Deed of Company Arrangement) v Cummins (No 4) (2021) 157 ACSR 118; [2021] FCA 1095 at [183], with which the Full Court of the Federal Court agreed, in dismissing the appeal, in Goldus Pty Ltd (subject to deed of company arrangement) v Australian Mining Pty Ltd (recs and mgrs apptd) [2023] FCAFC 27 at [82]. Mr Notley also fairly acknowledges that these decisions did not relate to questions of severance of third party releases contained in a deed of company arrangement.

Mr Krochmalik also referred to PK Riddell Investments Pty Ltd v Onwards Up and Gone Pty Ltd [2024] VSC 159 and submitted that:

Mr Krochmalik summarised the Administrators’ position in respect of severance as follows:

Mr Notley in turn contended for severance of these clauses from the DOCA so as to preserve its operation.

I am satisfied that the Court cannot or at least should not sever cll 6.3 and 13.2 of the DOCA. First, the position here seems to me to be analogous with that considered by the Full Court of the Federal Court in Lehman Bros FCAFC, because the third party releases were an essential aspect of the DOCA, included to address an identified risk that, if the Owners Corporation could not pursue its claim against ACD, it would pursue that claim against its Director, former director and associated entities involved in the construction of the Building. The DOCA was structured to release all of those parties, and not only ACD. The severance of those provisions would, objectively, leave “substantially a different [DOCA] from what it would otherwise be” (using the language quoted in Antquip), bringing about a substantial change to the arrangement contained in the DOCA to exclude a real benefit to the ACD Parties and a real detriment to the Owners Corporation. The position here is plainly distinguishable from that considered by Brereton J in Eastmark, where the exclusion of the third party releases would not here restore any earlier intent of the DOCA that they not be included, but alter the intended operation of the DOCA, which was to include those releases at least in respect of the Directors and later the related parties of ACD. Moreover, while the absence of a severance clause in the DOCA does not prevent severance, it provides no support for a finding that the parties’ objective intention was to permit the exclusion of particular clauses (including the third party releases) rather than maintain the DOCA in the form in which it was executed.

As I noted above, in an Amended Defence filed the second day of the hearing, the ACD Parties alternatively sought an order under s 447A of the Act that the DOCA be varied by deleting cll 6.2 and 13.3 of the DOCA. Mr Notley there referred to the observations of Besanko J in Adelaide Brighton Cement at [11]-[13] as to the scope of that section, as follows:

Mr Notley submitted that:

I can deal with that submission briefly. It seems to me that, first, the Court should not make an order under s 447A of the Act to delete those clauses, where the objective intent of the DOCA and the subjective intent of the Director and the ACD Parties was to include them, for the same reasons that those clauses would not be severed. Second, the severance of those clauses would not promote the objectives of Pt 5.3A of the Act, where the DOCA would still be oppressive of the Owners Corporation and contrary to the public interest for the reasons noted above. Third, there would be no utility in an order under s 447A of the Act to delete those clauses, where I would terminate the DOCA, irrespective of its invalidity by reason of those clauses, for the reasons set out above.

For these reasons, the DOCA should be terminated and the Owners Corporation’s nominees should be appointed as liquidators of ACD. My preliminary view is that costs should follow the event, as between the Owners Corporation and the ACD Parties, and the ACD Parties should pay the Owners Corporations’ costs of the proceedings as agreed or as assessed. My preliminary view is that there should no order for costs in favour of, or against, the Administrators in respect of these proceedings. However, I will allow the parties an opportunity be heard as to costs.

I direct the parties to bring in short minutes of order to give effect to this judgment, including as to costs, within five business days and, if there is no agreement between them, their respective draft orders and submissions as to the differences between them, not exceeding 5 pages in Arial font in one and a half spacing.