In the matter of Recycling Holdings Pty Limited

1. [1]

   The first defendant company Recycling Holdings Pty Limited was wound up in insolvency by order of the Court made in proceedings 2014/135889 (“the winding-up proceedings”) on 18 June 2014 on an originating process filed on 6 May 2014 by a creditor Remondis Australia Pty Limited, whereupon Andrew Barden, an official liquidator, was appointed its liquidator. On 15 September 2014, the liquidator appointed the second defendants Messrs Hosking and Hurst as administrators of the company pursuant to (Cth) Corporations Act 2001, s 436B. Mr Hosking had primary carriage of the matter. At the second meeting of creditors, held on 22 October 2014, a resolution was carried that the company execute a deed of company arrangement (“DOCA”), and on 27 October 2014, the company executed a DOCA, the broad effect of which was to return control of the company to its sole director, the third defendant Jason Ryan; and to establish a deed fund for distribution pro rata to creditors, comprising the proceeds of sale of its plant and equipment (which Mr Ryan effectively guaranteed would be not less than $131,000, which would suffice to pay the liquidators’ and administrators’ expenses) together with a “funding agreement asset”, being the entitlement to receive from the proceeds of litigation the company had pending against the plaintiffs Salmat Limited (“Salmat”), Salmat Mediaforce Pty Ltd (“Mediaforce”) and Fuji Xerox Businessforce Pty Ltd (“Fuji”) – to be funded by another company owned and controlled by Mr Ryan, the fourth defendant Front Foot Project Funding Pty Limited (“Front Foot)” – a n amount sufficient to provide a dividend for creditors of one hundred cents in the dollar. For convenience, I refer to the plaintiffs compendiously as “Salmat”, and to the company’s cause of action against them as “the Salmat cause of action”.

2. [2]

   By an amended originating process filed in proceedings 2014/354864 (“the DOCA proceedings”) on 19 December 2014 (the original having been filed on 2 December 2014), Salmat, Mediaforce and Fuji - who are also creditors of the company - apply for an order pursuant to Corporations Act, s 445D, terminating the DOCA; alternatively, an order pursuant to s 445G(2) declaring the DOCA to be void; and alternatively, an order pursuant to s 449B(2) removing the deed administrators. By an amended interlocutory process filed on 19 November 2014 in the winding up proceedings, Mr Ryan seeks an order that the winding up be terminated.

3. [3]

   The main issues are:

   1. (1)

      Whether the information provided to creditors by the administrators, particularly in the s 439A(4) report and at the second creditors meeting, contained misleading statements, or omissions, that were material;

   2. (2)

      Whether the DOCA is unfairly prejudicial to, or contrary to the interests of, the creditors as a whole;

   3. (3)

      If so, whether as a matter of discretion the DOCA should be terminated pursuant to s 445D;

   4. (4)

      Whether the same matters constitute a ground on which the DOCA may be declared void under s 445G;

   5. (5)

      Whether the deed administrators should be removed for lack of independence under s 449B; and

   6. (6)

      (on the interlocutory process) whether the winding up should be terminated.

Background

1. [4]

   The company has creditors of approximately $2.9 million. The Salmat cause of action is its only asset of significance. There is no acceptable evidence valuing that cause of action, but Mr Ryan and the company have at various times asserted that it may result in recovery of between $10 million and $15 million. The rationale of the DOCA is that Mr Ryan, through Front Foot, would fund that litigation which, if successful, will generate a deed fund sufficient to pay creditors 100 cents in the dollar.

2. [5]

   The executive summary in the administrators’ s 439A(4) report contained the following:

3. [6]

   Part 7 of the report, entitled “Administrators’ Investigations”, included, under the heading “Specific Matters Identified”, included the following:

4. [7]

   Part 7(b), entitled “Current Financial Position of the Company”, included the following:

5. [8]

   Part 9, entitled “Deed of Company Arrangement”, summarised the effect of the proposed DOCA, and included the following:

6. [9]

   Part 10 annexed a schedule comparing the estimated return under a winding up scenario against the estimated return available under the proposed DOCA. It attributed a value of $2.931 million to the deed fund. It also included the following:

7. [10]

   Attached to the report was a “Statement by director regarding the deed proposal”. That statement contained an outline of the dealings between the company and Salmat, including the emergence of an issue with Salmat that waste material that ought to have been provided to Recycling was delivered to other recyclers, and that after this issue was emphasised in early 2012, “the volumes of materials for recycling in Sydney rebounded and increased by around 300 per cent”. The statement continues:

8. [11]

   And further:

9. [12]

   On 20 October 2014, the solicitor for Salmat sent to the administrators a letter raising a number of issues, the effect of which was summarised at the creditors’ meeting. That letter included the following relevant material:

10. [13]

    The administrators replied by a letter dated 21 October 2014, which was received by Salmat’s solicitor electronically during the creditors’ meeting on 22 October. The reply, which was read aloud at the creditors’ meeting, included the following:

11. [14]

    At the creditors’ meeting on 22 October 2014, there were present, in addition to Mr Hosking and his staff and the liquidator and his staff, Mr Ryan’s father, Gregory James Ryan, holding proxies for 10 creditors totalling about $1,000,082; Mr Ryan’s solicitor, Ms Chris Perry, holding his proxy and proxies for other creditors totalling $530,000; Debbie Singleton, a related creditor, for $9,500; the solicitor acting for the company and Mr Ryan in the Salmat proceedings, Mr Emanuel, for $220,000; the company’s accountant, Ross Chapman, for $179,452; an apparently independent creditor, Concept Wire Industries, for $11,264; Joseph Nicholas, representing the company’s landlord Lisbon Waste Depot Pty Limited for $371,000; Katherine Jones, solicitor, holding proxies for Fuji Xerox and Salmat totalling $85,000; and an officer of the Australian Taxation Office holding a proxy for it for $44,843.

12. [15]

    In respect of the Salmat litigation, the minutes record:

13. [16]

    There was some controversy before me as to precisely what was said in this respect. Ms Jones (Salmat’s solicitor, who was present at the meeting) at first attributed to Ms Perry the statement:

14. [17]

    Ms Perry deposed that she said, in the context of a longer or more detailed outline of the deed proposal:

15. [18]

    In a later affidavit, responding to Ms Perry’s affidavit, Ms Jones accepted that Ms Perry had made statements generally to the effect of the second paragraph set out above, other than the statement that Salmat had sought to delay the proceedings at every turn. Thus she accepted that Ms Perry had said that she did not have a crystal ball and could not project into the future.

16. [19]

    In my view, there is no material inconsistency between what the minutes record and what Ms Perry claims to have said. What was potentially important was when the case would come to hearing, and on either view Ms Perry did not say “early to mid next year”, but “as early as mid next year”. It would have been plain to any member of the audience – as indeed it was to Ms Jones – that Ms Perry was expressing an opinion or making a prediction, using such knowledge and expertise as she had, but not making any kind of promise, as to when the case would come to hearing.

17. [20]

    The minutes later record that having updated creditors on the outstanding matters in his report, Mr Hosking tabled a copy of the letter dated 20 October 2014 received from the solicitors acting for Salmat, and his written response of 21 October 2014, and that he then spoke to those matters as follows:

18. [21]

    Under the heading “Questions from Creditors”, the following is recorded:

19. [22]

    Then the minutes record, under the heading “Resolution Regarding the Future of the Company”:

20. [23]

    The resolution was moved by the company’s accountant and seconded by Mr Ryan’s father and carried by majority on the voices. Other evidence establishes that all creditors and proxies present other than Lisbon Waste, the ATO, and Ms Jones on behalf of Fuji and Salmat, voted in favour of the resolution, and there were no abstentions.

21. [24]

    The DOCA recites that the Director (Mr Ryan) had agreed to covenant to use his best endeavours to ensure the obligations of the Company and as otherwise set out in the DOCA are satisfied (recital G). Although it contains no express covenant (as distinct from the recital) to that effect, the covenant is implicit in the recital. It provides for the constitution of a “Deed Fund” (clause 1.1(n)) comprising receivables owing to the company (estimated at $885,810), plant and equipment owned by the company, any GST refunds due to the company, and the “Funding Agreement Asset”, being the Company’s rights and interests under the Funding Agreement in respect of the Salmat proceedings made on the same date between Front Foot, the company and the company’s lawyers, including its right to receive part of the balance, if any, of the proceeds of the proceedings if it is successful, pursuant to the terms of the Funding Agreement (clause 1.1(r), (s)). If the administrators form the view that the company or other parties are unable or unwilling to comply with any of the fundamental provisions of the DOCA and remain so for a period exceeding one month, they may convene a meeting of creditors which may resolve to vary the DOCA or terminate it and wind up the company, or enforce the terms of the DOCA (clause 4.4(b)). Clause 4.4(c) provides that any discretion conferred on the administrators is unfettered:

22. [25]

    The Director is obliged within 14 days to cause an application to be made to the court for termination of the winding up (clause 5.1); however, nothing in the DOCA is conditional upon that application succeeding. If the plant and equipment is not realised by the administrators within eight weeks for $131,000 net, the Director is obliged to pay to the administrators the difference between the net sale price and $131,000, of which $50,000 was paid on account (clause 5.6). Provision is made for the lodgement and determination by the administrators of proofs of debt (clause 6). The Deed Fund is to be distributed first, in payment of the administrators’ expenses; secondly, in payment of administrators’ remuneration; thirdly, in payment of priority creditors; and fourthly, in payment of “Participating Creditors”, pro rata (clause 7.4). Clause 8.4 provides as follows:

23. [26]

    Control and stewardship of the company reverts to Mr Ryan (clause 9.1). The DOCA binds all creditors, who must accept its terms in full satisfaction of their claims on the company (clause 10).

24. [27]

    Also on 27 October 2014, contemporaneously with the DOCA, the company entered into the Funding Agreement with Front Foot, under which Front Foot is obliged to pay “Project Costs” (defined to include the company’s legal costs and disbursements of conducting the Salmat proceedings, any security for costs obligations, and any adverse costs orders) (clause 4.1); any adverse costs order in the proceedings (clause 4.5); and provide any security for costs that might be ordered in the proceedings (clause 4.6). Under clause 8.1, upon receipt of an amount pursuant to a settlement or judgment in the proceedings, Front Foot is entitled to recoup all Project Costs, a “Project Management Fee”, being 25% of the Project Costs, an amount for GST in respect of any supply made by Front Foot under the Funding Agreement, and between 35% and 45% (depending on the time-frame) of the fruits of the litigation, provided that the balance of the resolution sum (after Project Costs, the Project Management Fee, and GST) – to a maximum sufficient to ensure payment in full of costs and expenses of the administration and liquidator, petitioning creditors’ costs, and payment in full of creditors – must first be paid to the administrator. There was some debate as to whether this was the proper construction of clause 8.1 and 8.2 of the Funding Agreement. In my view, the proviso to clause 8.1.4, in referring to “the above payments”, refers to the payments in 8.1.1, 8.1.2 and 8.1.3, so that the requirement to pay sufficient to the administrator to enable (inter alia) payment of creditors in full prevails over the funder’s entitlement to its percentage of the resolution sum. Otherwise, the proviso would do no work, but would simply indicate the next level of priority. That construction is fortified by clause 8.2.1, which makes clear that the amount payable under clause 8.1.4 to the deed administrator was not assigned to the funder. In any event, an amended funding agreement was signed and tendered in the course of the hearing to put beyond doubt that that was the intent. Thus Front Foot is entitled to its success fee (as distinct from the Project Management Fee) only after creditors are paid in full.

Should the DOCA be terminated under s 445D?

1. [28]

   Corporations Act, s 445D, relevantly provides as follows:

2. [29]

   An inquiry under s 445D involves two stages, though they are not unrelated. The first is whether one of the grounds referred to in s 445D(1) is established. The second, which arises only if the first is established, is whether as a matter of discretion the DOCA should be terminated. That establishment of one of the grounds enlivens a discretion but does not of itself require that the DOCA be terminated has been recognised in many authorities [Emanuele v Australian Securities Commission (1995) 63 FCR 54; 19 ACSR 1; 141 ALR 506; 14 ACLC 244; appeal dismissed [1997] HCA 20; (1997) 144 ALR 359; 23 ACSR 664; 188 CLR 114, 139; Deputy Commissioner of Taxation v Portinex Pty Limited (subject to a deed of company arrangement) [2000] NSWSC 99; (2000) 156 FLR 453; 34 ASCR 391; Fleet Broadband Holdings v Paradox Digital (subject to a deed of company arrangement) [2005] WASC 261; (2005) 228 ALR 598, [105]; Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (subject to a deed of company arrangement) [2013] QCA 405; (2013) 97 ACSR 390]. In due course it will be necessary to elaborate what informs the exercise of that discretion.

3. [30]

   The plaintiffs contend that there were material omissions from or misstatements in the information provided to creditors in the s 439A(4) report and at the second creditors’ meeting (which resolved to require the company to enter into the DOCA) in the following respects:

   1. (1)

      No or inadequate information was provided as to the nature and merits of the Salmat cause of action;

   2. (2)

      Misleading information was provided as to the progress and status of the Salmat litigation;

   3. (3)

      The personal interest of Mr Ryan and his consequent conflict of interest was not disclosed;

   4. (4)

      The capacity of Front Foot to fund the Salmat litigation and its interest under the funding agreement (including the priority to which it was entitled against the company) was not disclosed;

   5. (5)

      The administrators’ statement that the plant and equipment would likely be sold to an unrelated entity was misleading; and

   6. (6)

      The availability of viable claims against Mr Ryan for unfair preferences or uncommercial transactions in the order of $500,000 was not disclosed.

4. [31]

   Section 445D(1)(a) speaks of information which was false or misleading and “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”, and s 445D(1)(c) speaks of an omission that “can reasonably be expected to have been material to such creditors in so deciding”. The reference to “reasonably be expected” and to “creditors” as distinct from “all creditors” or “the creditors”, contemplates consideration of the position of the hypothetical reasonable creditor, as distinct from particular creditors; thus, the test of materiality is an objective one, and involves something which could potentially rationally influence the decision of the hypothetical reasonable creditor [cf Deputy Commissioner of Taxation v Comcorp Australia Ltd (1996) 70 FCR 356; 14 ACLC 1616; 21 ACSR 590, 618-619 (Carr J); Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510, [165]–[166] (Campbell J)]. The notion of a material omission thus depends on the objective quality and potential of the information, and not whether anyone was in fact misled [Bidald Consulting v Miles Special Builders, [147]–[166]; Deputy Commissioner of Taxation v TMPL Pty Ltd (subject to a deed of company arrangement) (no 3) [2011] FCA 1403; (2011) 289 ALR 69, [62] (Perram J)], though its actual subjective impact may be relevant once one reaches the second, discretionary, stage of the inquiry.

5. [32]

   It is to be observed that s 445D(1)(a) is concerned with the provision of false or misleading information to the administrator or to creditors (without limitation as to the context in which it is provided), while s 445D(1)(b) is concerned with the inclusion of such information in the context of a s 439A(4) report. The only reference to omissions (as distinct from the provision of false or misleading information) is in s 445D(1)(c), which is concerned only with a s 439A(4) report: s 445D(1)(c) speaks of an omission “from such a report or statement”, which in turn is a reference to “a report or statement under subsection 439A(4)” referred to in s 445D(1)(b). Whether there is an omission from such a report is necessarily influenced by what such a report is required to include, as specified in s 439A(4); namely:

6. [33]

   But while a material omission may be established by the omission of a matter referred to in s 439A(4), one may also be established by the omission of “a matter of significance which should have been included in the report or statement and which would be highly material in the decision to be made by the creditors” [Hagenvale Pty Ltd v Depela Pty Ltd (1995) 13 ACLC 885; 17 ACSR 139, 148 (Cohen J)]. Thus an administrator may need to make inquiries to obtain relevant information beyond the duty to investigate under s 438A, depending on “an assessment of the nature of the question to be investigated, the information in the administrator’s hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors' decision”, and a DOCA may be set aside if failure to make such inquiries results in a material omission [Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 21 ACLC 1737; 45 ACSR 612, [325] (Austin J)]. However, in assessing the adequacy of the information contained in a report, the court must recognise that the administrator’s investigation has to be conducted in a short timeframe, and with limited resources and limited powers of compulsion. Together with the reference in s 439A(4)(b)(v) to “such other information known to the administrator” as will enable the creditors to make an informed decision, this is indicative that, at least generally speaking, there will not be an omission if the information in question is not known, or reasonably capable of being ascertained, by the administrator.

7. [34]

   The plaintiffs complain that the creditors were not told the basis or nature of the cause of action, any explanation as to how the claim was quantified, any assessment of its merits, or any information as to the capacity of the funder, and were given misleading information as to its status and likely hearing time. In circumstances where the creditors were effectively being asked to vote for the DOCA proposal in order to enable the cause of action to be prosecuted, its prospects and value were highly relevant to the creditors’ informed decision. In Bovis Lend Lease v Wily, Austin J discussed the extent to which it was necessary to disclose in a s 439A(4) report the nature and merits of a cause of action that was central to a decision whether or not to accept a DOCA:

8. [35]

   Although, as it happens, Salmat was represented at the meeting by Ms Jones, who was an active participant, and she could if so minded have pointed out any shortcomings in the cause of action, that is not a substitute for the administrators providing sufficient information for the creditors to make an informed decision. But in judging whether there was a material omission in this respect, it is unhelpful to speak in terms of generality. In particular, that creditors were given insufficient information to form a sound judgment as to the prospects and value of the litigation, and how the administrators attributed to it the value they did, does not necessarily mean that there was an omission from the report, particularly if the creditors were given the best information available, even if more would have been desirable. The administrators’ task is a difficult one, given the limited time available for investigation, their limited resources, their inability to compel provision of information, and the constraint of not jeopardising the cause of action by excessive disclosure. Creditors should be enabled to make as informed a judgment as possible, but it is not sufficient to allege that insufficient information was provided to enable creditors to make an informed decision; it is necessary to identify what additional information could and should have been, but was not, included in the report.

9. [36]

   In this case, the creditors were informed (1) of the nature of the cause of action, in general terms (namely, that it arose out of the recycling contract and an alleged repudiation by Salmat); (2) that the director believed that it enjoyed good prospects; (3) that the administrators estimated that there would be a likely net return of $2.9 million; (4) at least in the course of the meeting, that the proceedings were presently the subject of a stay because of the security for costs order; and (5) that the matter could come to hearing in the latter half of 2015 - which has not been shown to be other than a genuine or reasonable prediction.

10. [37]

    Moreover, the administrators’ report included caveats:

11. [38]

    And:

12. [39]

    And:

13. [40]

    In those circumstances, what more should the administrators have reported? It was, on the authorities to which I have referred, permissible not to disclose the effect of counsel’s advice as to the prospects, as doing so would have risked waiving privilege. It was also reasonable not to canvass the strengths and weaknesses of the litigation, in circumstances where the defendants in that very litigation would have access to the discussion. Information that suggested that the cause of action was unlikely to succeed would plainly have been material and ought to have been included; but the evidence does not establish that there was any such information, let alone that it was known or reasonably ought to have been known by the administrators. Likewise, information that the Salmat litigation was not likely to generate a return sufficient to pay creditors 100 cents in the dollar would have been material and ought to have been included; but it is not established that any such information existed, or was or ought reasonably to have been known to the administrators.

14. [41]

    In short, information, other than privileged communications, which adversely impacted on the potential of the cause of action and was not otherwise known to creditors ought, if known to the administrators, to have been included in their report. But there is no evidence that there was any such information. Thus in my view, it has not been established that there was a material omission from the report in respect of the nature, prospects and status of the Salmat litigation. Nor has it been established that such information as was provided, particularly with respect to the status of the litigation (that is to say, its readiness and likely hearing dates) was materially misleading.

15. [42]

    It is apparent from the evidence in the proceedings that Front Foot is a creature of Mr Ryan, has no assets of its own, and is entirely dependent on Mr Ryan for its capacity to fund the proceedings. It would have been relevant to creditors to know, if it were the case, that Front Foot did not have the capacity to fund the proceedings, as that could have affected their decision whether to prefer allowing the Salmat litigation to proceed over an immediate winding up.

16. [43]

    The administrators disclosed that Mr Ryan was also the director of the funder and that (despite their requests) he had not provided evidence of the funder’s capacity to meet its obligations, though he had given assurances that the funder had the capacity to do so. In the course of the creditors’ meeting, Ms Perry made very clear – in answer to questions from Ms Jones – that Mr Ryan would not disclose the terms of the funding agreement. The creditors were therefore informed that this was not an arm’s length external litigation funder, and that Mr Ryan was not prepared to provide further information. The administrator advised creditors to factor in the inherent uncertainties in making their decision.

17. [44]

    The administrators disclosed all the information they had been able to obtain about Front Foot. In any event, I do not consider that omission of information that Front Foot was dependent upon Mr Ryan for its capacity was material; once creditors had been informed that Front Foot was a related company of Mr Ryan, and that he had had given assurances of its capacity to fund the proceedings but declined to provide documentary proof, hypothetical reasonable creditors would have assumed that its capacity was likely to be dependent on him.

18. [45]

    The funding agreement provided a substantial reward for Front Foot: it was entitled to a “Project Management Fee” equivalent to 25% of the legal costs it had to pay, and to between 35% and 45% (depending on when resolution occurred) of the amount recovered – provided that the balance of the resolution sum (after Project Costs, Project Management Fee, and GST) to a maximum sufficient to ensure payment in full of costs and expenses of the administration and liquidator, petitioning creditors’ costs, and payment of creditors in full, is first paid to the administrator.

19. [46]

    As the administrators did not have and were not able to obtain this information, it cannot be said that it amounted to an omission from their report. In any event, the terms of the funding agreement did not impact upon the entitlement of the creditors, who would be paid in full before any success fee. Moreover, in circumstances where Mr Ryan was the sole shareholder in the company and the funding agreement provided for payment of creditors in full in priority to Front Foot’s entitlement to a share of the proceeds, that Front Foot had a stake in the litigation under the funding agreement was not material because it did not significantly change the position – otherwise, Mr Ryan personally had a stake, as a shareholder in the company, who would benefit from any recovery over the amount necessary to pay costs and creditors. And the existence of such a stake would incentivise Front Foot to prosecute the litigation, as much for the benefit of the creditors as for itself.

20. [47]

    The report did not explain that Mr Ryan was personally a cross-defendant in the Salmat proceedings, along with the company, both of which were sued (Mr Ryan as a guarantor) for moneys said to be due and owing to Salmat. In many ways, Mr Ryan’s personal interest in the proceedings – not only through Front Foot, but also as a cross-defendant – would incentivise him to prosecute the proceedings. His position as a cross-defendant would be enhanced by the company’s success on the main claim.

21. [48]

    But it is true that there are some circumstances in which his exposure to the cross-claim might act as an incentive to compromise the company’s claim on a less favourable basis, in order to be freed of the cross-claim. I cannot say that a hypothetical reasonable creditor could not have been influenced by knowledge that Mr Ryan had a potential conflict in the context of his exposure as a cross-defendant. As that was a matter known to or reasonably discoverable by the administrators, there was, in that respect, a material omission.

22. [49]

    The minutes record that in the course of the creditors’ meeting, Ms Sheikh (for the ATO) asked whether the plant and equipment would be sold to any related entities, and Mr Hosking advised the meeting “that while the identities of any prospective purchasers were unknown at present, it was more likely that the assets would be sold to unrelated entities that operated in the industry, given their nature”. In fact, the plant and equipment was ultimately sold to a related entity of Mr Ryan. While a range of values was attributed to the plant and equipment, the independent valuation obtained by the administrators (from Grays) was in the order of $67,850. The DOCA proposal involved the proceeds of sale being used essentially to fund liquidation and administration costs, and Mr Ryan being responsible to top up the proceeds to $131,000 if they were less than that. He eventually negotiated a sale to a related entity for $125,500 inclusive of GST.

23. [50]

    The administrator deposed that when he made the statement at the meeting, it reflected his honest belief, based on the information then available to him. It was, at the highest, an expression of opinion as to what the “more likely” course was. The plaintiffs criticised this on the basis that it was reckless, insufficient steps having been taken to exclude the possibility of a sale to a related entity. However, I see no reason to doubt that it was the administrator’s genuine opinion when offered, and such an expression of opinion is not rendered misleading merely by reason that the contrary, less likely, outcome ensued. In any event, given that the impact of any sale was to relieve (to the extent of the proceeds of sale) Mr Ryan from the personal obligation to provide a fund of $131,000, it could have made no difference to the hypothetical reasonable creditor whether the purchaser was related to Mr Ryan or not.

24. [51]

    The administrator’s statement that it was more likely that the assets would be sold to unrelated entities was neither misleading, nor material.

25. [52]

    The s 439A(4) report included standard general information about unfair preferences, uncommercial transactions, uncommercial related party transactions, insolvent transactions, unfair loans, and insolvent trading. In addition, as to unfair preferences, the report stated:

26. [53]

    The report stated that to date no specific uncommercial transaction, insolvent transaction, or unfair loan had been identified. As to insolvent trading, the report stated:

27. [54]

    Reasons for that conclusion were provided, and in addition it was stated:

28. [55]

    Although in the comparison of a liquidation scenario with a DOCA scenario, voidable preferences and insolvent trading recovery was shown as “unknown”, at the creditors’ meeting the administrator advised that his preliminary investigations into whether any unfair preferences had been paid by the company within the relation-back period had revealed a number of transactions totalling $86,600 which required further investigation, and as to the director’s capacity to satisfy a claim said that he had become aware that the director had sold his property and that settlement was imminent, with the proceeds to be applied towards the costs of the Salmat litigation.

29. [56]

    However, at his first (pre-appointment) meeting with Mr Ryan on 24 June 2014, Mr Hosking had been advised that the company had received proceeds of an insurance claim on a policy with Dual Insurance in respect of theft of material in December 2013 for $400,000 and defence costs of $100,000. Evidence at the hearing established that $420,726.43 was paid into the company’s solicitors’ trust account on 17 December 2013 (within the relation-back period), and thereafter disbursed, in part on legal costs and disbursements and counsel’s fees, but in part to Mr Ryan. $71,000 appears to have been paid to the Deputy Commissioner of Taxation on account of a superannuation guarantee debt. $80,000 was transferred to the solicitors’ office account, apparently on account of security for costs ordered in the Salmat proceedings; it was not however actually applied to that purpose until many months later.

30. [57]

    All those funds, though assets of the company, never passed through its accounts. This payment away of the company’s moneys in December 2014 was plainly a potential unfair preference or uncommercial transaction. The administrators did not investigate it – apparently because they did not realise that it was in the six month relation-back period. There is no evidence that the liquidator investigated it. It was not referred to in the s 439A(4) report, nor otherwise in information provided to creditors. Even disregarding the superannuation guarantee debt (which is likely not to be recoverable as a preference), there was a potential claim in the order of $350,000. It cannot be said that the reasonable hypothetical creditor could not have been influenced by knowledge of the availability of such a claim, notwithstanding the difficulties that it might encounter.

31. [58]

    In this respect, there was a material omission from the administrators’ report.

32. [59]

    The plaintiffs also contended that the DOCA is unfairly prejudicial to creditors or contrary to the interests of the creditors as a whole, within s 445D(1)(f).

33. [60]

    Whether a deed of company arrangement is oppressive or unfairly prejudicial is determined primarily by reference to the general principles underlying Part 5.3A, including first, the creditors’ right to be paid or to have the company wound up or to have the company administered by an administrator in a way that will see creditors paid from the company’s property [Re Bartlett Researched Securities Pty Limited (admin apptd) (1994) 12 ACSR 707, 710 (Derrington J); Hagenvale v Depela, 151; Molit (No 55) Pty Limited v Lam Soon Australia Pty Limited (Administrator Appointed) (1996) 19 ACSR 160; 63 FCR 391; 185 ALR 280; 14 ACLC 366; [1996] ANZ ConvR 475; Winterton Constructions Pty Limited v M A Coleman Joinery Co Pty Limited (1996) 20 ACSR 671; 132 FLR 247; 14 ACLC 1168; Fleet Broadband Holdings v Paradox Digital; Sydney Land Corp Pty Limited v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427; 16 ACLC 95; affirmed (1998) 26 ACSR 593; 16 ACLC 540]. In Sydney Land Corporation v Kalon, Young J (as he then was) put it in these terms (at 430):

34. [61]

    Relevant considerations include a comparison between the likely return to creditors under the deed and in a winding up, and comparative prejudice suffered by differing groups of creditors. While there are no doubt benefits for Mr Ryan in a DOCA – in particular, in that he is not exposed to claims for unfair preferences or insolvent trading, and while he assumes the burden of funding, through Front Foot, the Salmat litigation, there is no obligation personally enforceable against him to do so – the inquiry focuses not on his interests, but on those of the creditors.

35. [62]

    In any event, these grounds necessitate a comparison of the position of creditors in a liquidation and their position under the DOCA. (The present is not a case in which the deed deals differently with different classes of creditors).

36. [63]

    In a liquidation, it would be open to a liquidator to pursue Mr Ryan for any preference claims, and for insolvent trading. The preference claims – combining the $86,000 referred to at the creditors’ meeting and the $350,000 from the Dual Insurance claim – might amount to $435,000, although it is unlikely that the whole amount would be recovered in full, and there are reasons for thinking that at least some aspects might be the subject of valid defences. However, a liquidator would first have to secure funding to advance those claims. There is no present indication of a willing funder. Having obtained funding and prosecuted the claims, the liquidator would then have to enforce any judgment against Mr Ryan. The extent to which Mr Ryan would be able to satisfy any such judgment is unknown. From any successful recovery, the liquidator would have to pay the costs of the proceedings, his remuneration and expenses, and the funder’s fee, and then the balance would be available for dividend, or to fund the Salmat litigation. It is difficult to think that more than about $100,000 would remain available for that purpose.

37. [64]

    It would also be open to a liquidator to seek funding from other sources for the Salmat litigation. However, prior to the appointment of the administrators, the liquidator had not secured any such funding, and there is no evidence that he endeavoured to do so. The only potential funder who has so far emerged is Mr Ryan, via Front Foot. There would be no obligation on him to fund the liquidator, and while – given his position as sole shareholder and his exposure as a cross-defendant – he would have some incentive to do so, he has not to date shown any inclination to do so if the company remains in the hands of an external administrator.

38. [65]

    Under the DOCA, there is no potential to recover preferences, nor compensation, for insolvent trading. There is, however, the potential to recover, from pursuit of the Salmat litigation at no cost to the company or creditors, sufficient to fund a dividend of 100 cents in the dollar. While there is no guarantee that that will be the outcome – and the deed as presently drawn does not appear to reflect the intention of the creditors’ meeting that in the event that the litigation does not generate sufficient to fund a dividend of 100 cents in the dollar, the matter be returned to creditors for further consideration, including of the option of liquidation (a matter which I further consider below) – Mr Ryan has undertaken (by Recital G in the DOCA) to use his best endeavours to ensure the obligations of the company as otherwise set out in the deed are satisfied. He has already demonstrated a commitment to the litigation by selling assets to fund the security for costs, and by ensuring the payment of $131,000 in respect of plant and equipment.

39. [66]

    I do not accept that the comparison is so stark as was advanced on behalf of Mr Ryan: it is not a case of “certainty of nothing” from a liquidation against the prospect of a substantial dividend at no cost to the creditors from a DOCA. This is because, even if it might have appeared at the time of the creditors’ meeting that there was a practical certainty of nothing from a liquidation, exposure of the Dual Insurance claim indicates that there is now a prospect of something, if not very much, from a liquidation – unless that something enables funding of the Salmat litigation. The evidence before me does not enable a view to be formed as to the prospects of the Salmat litigation beyond a conclusion that it is neither doomed to fail nor assured of success. On the other hand, the prospects of securing funding for relatively small preference claims against a director are not prima facie strong. While the views of individual creditors could readily differ as to whether the DOCA was to be preferred to liquidation, the view that they would be better off by waiting to allow the Salmat litigation to be prosecuted at no cost to them with some prospect of recovering the whole of their debts, rather than by proceeding immediately with a liquidation in which they might well receive a much smaller if any dividend, was a reasonable one.

40. [67]

    It is an important consideration that (at least as intended by the creditors) the DOCA preserves to them the right to terminate it and place the company in liquidation in the event that the Salmat litigation does not generate sufficient to fund a dividend of 100 cents in the dollar. In that event, the combined effect of s 513B(c), (d), s 513C(a) and s 513A, and the definition of “relation-back day” in s 9, is that the relation-back day would be the same day as would be the case if the present liquidation remained on foot. Once that is recognised, the effect of the DOCA, at least as intended, is to preserve the ability of the creditors to pursue a winding up with all of the liquidator’s remedies, in the event that the DOCA does not generate a 100 per cent dividend.

41. [68]

    In that context, I am unable to see – even knowing, which the creditors did not know, of the availability of additional preference claims of up to $350,000 – how the creditors can be worse off under the DOCA than otherwise. Their remedies in a liquidation are preserved in the event that the DOCA does not generate a 100 per cent dividend.

42. [69]

    Accordingly, I do not accept that the DOCA is unfairly prejudicial to creditors or contrary to the interests of the creditors as a whole within s 445D(1)(f).

43. [70]

    I have therefore concluded that, for the purposes of s 445D(1)(c), there were material omissions from the s 439A(4) report, in that the report did not disclose (a) that Mr Ryan personally was a cross-defendant in the Salmat litigation and as such had a potential conflict of interest, and (b) that the company had received some $500,000 proceeds of the Dual Insurance claim within the relation-back period, which had been disbursed and might be recoverable in a liquidation. No other ground under s 445D(1) has been established.

44. [71]

    Once one or more of the grounds referred to in s 445D(1) is established, the discretion to make an order terminating a DOCA is enlivened. The exercise of that discretion is informed by two principal considerations; namely the interest of the creditors and the public interest. The relationship between establishment of one of the grounds and the exercise of the discretion varies between the grounds. Thus, for example, if it were established that the deed was oppressive or unfairly prejudicial or contrary to the interests of the creditors as a whole under s 445D(1)(f), it may be anticipated that the court would ordinarily make an order terminating the deed – although if there had been delay, or persons had acted in reliance on the deed, or third party interests had intervened, it might decline as a matter of discretion to do so. If the court were satisfied that the deed should be terminated “for some other reason” under s 445D(1)(g), it may be thought that little role would remain for the exercise of the discretion. On the other hand, if it were established that there had been a material contravention of the deed under s 445D(1)(d), it would not follow that there would be a predisposition in favour of terminating the deed.

45. [72]

    Similarly, and relevantly, where it is established that material misleading information has been provided or that there has been a material omission under s 445D(1)(a), (b) or (c), it does not follow that the court would be predisposed in favour of termination. Relevant considerations include the importance of the information in question to the creditors’ decision, whether the creditors were actually mislead (a conclusion which does not follow from a finding that the information or omission was material), and the present attitude of the creditors once disclosure is made. That information can be material without being decisive was explained by Campbell J in Bidald Consulting v Miles Special Builders:

46. [73]

    It follows from my conclusion that the omissions in question were material that it must be accepted that the information could potentially have rationally influenced creditors in deciding whether or not to prefer a DOCA to liquidation. Viewed objectively, knowledge that in circumstances where the proposed funder would have to rely on Mr Ryan to resource the litigation, his status as a cross-defendant meant that his interest could in some circumstances differ from that of the company and the creditors, could affect a creditor’s judgment as to whether the most attractive course of action was to support the DOCA. Likewise, knowledge that there were potential recoveries from voidable transactions in the order of $450,000 might have made a liquidation more attractive than it appeared from the s 439A(4) report. Taken together, those matters logically and rationally might have reduced the attraction of the DOCA and increased the attraction of liquidation.

47. [74]

    However, those matters now have to be viewed in a wider context in order to evaluate their importance to the creditors’ decision. First, it is a conspicuous feature of this case that the protagonists are not the notional reasonable arm’s length creditor, but creditors who have a distinct interest in a different capacity. The resolution that the company execute a DOCA was carried on the votes of creditors related to Mr Ryan. While that would often diminish the weight to be given to their judgment, this is not one of those cases in which related creditors carry a DOCA, notwithstanding that it provides no benefit for them, over the opposition of unrelated creditors who oppose it, notwithstanding that it provides some slight benefit for them. There is nothing to suggest that the related creditors in this case do not have a real interest in the outcome, and the cause of action against Salmat provides a prospective means of obtaining repayment of their debts.

48. [75]

    On the other hand, the resolution that the company execute the DOCA was opposed by unrelated creditors, but predominantly by Salmat. Salmat, of course, has a very great interest in opposing the DOCA, not because of its interest qua creditor, but because it is the defendant in the Salmat proceedings, which are unlikely to proceed if the DOCA is terminated.

49. [76]

    Secondly, under the DOCA, at least as it was intended to operate, the creditors retained the ability to decide that the company should return to liquidation in the event that they did not receive a 100 cent dividend. In that event, the ability of the liquidator to recover the proceeds of the voidable transactions was preserved. Thus it is not as if those rights were surrendered by the DOCA, nor Mr Ryan immunised from recovery proceedings – unless the intent of realising 100 cents in the dollar for creditors was achieved.

50. [77]

    The potential conflict arising from Mr Ryan’s status as a cross-defendant is that he might cause Front Foot to accept a relatively cheap settlement in order to escape personal liability as a cross-defendant. While this is theoretically possible, Mr Ryan has demonstrated a significant commitment to prosecuting the Salmat litigation that extends beyond merely resisting any personal exposure. More significantly, if he were to settle the litigation for a sum that did not produce 100 cents in the dollar for creditors, the DOCA and such benefits as it gives Mr Ryan would be jeopardised. For those reasons, viewed objectively, the omission of Mr Ryan’s position as a cross-defendant in the Salmat litigation, though it cannot be said to be immaterial, would not likely have affected the votes of the related creditors who supported the DOCA and carried the meeting. And in a context where the creditors, whose claims amounted in all to some $2.9 million, had found the possibility of recovery of voidable transactions of up to $86,600 (of which they had been informed) less attractive than the prospect of recovering $2.9 million from Salmat, it is improbable that the possibility of recovering up to an additional $350,000 (before deducting costs and remuneration) from voidable transactions would have affected the votes of the related creditors who carried the meeting, or at least sufficient of them to change the outcome – not merely because of their relationship with Mr Ryan, but because there appeared to be better prospects of ultimate recovery through pursuit of the Salmat litigation than through action to recover the proceeds of voidable transactions. The weightier factors were that the DOCA offered creditors the prospect of full recovery; the Salmat litigation would be funded by Mr Ryan through Front Foot, at no cost to the company or its creditors; Mr Ryan had a personal incentive (as a shareholder and through Front Foot’s interest) to prosecute the litigation; and the ability of the creditors to revert to a liquidation was preserved in the event that enough to generate a 100% dividend was not recovered. Even properly informed, creditors would have been faced with the prospect of choosing between the possibility of recovering 100 cents in the dollar from the successful prosecution of the Salmat litigation at no cost to themselves, against the possibility of a dividend if the liquidator were able to obtain funding to bring proceedings to recover the proceeds of the voidable transactions, succeed in those proceedings, and realise a surplus after payment of his costs, remuneration, and the return to the funder. While any such surplus might be available to fund the Salmat proceedings, that would be a far more complicated and precarious route to recovery from Salmat than reliance on Front Foot, at no cost to the company or the creditors. Moreover, the liquidator had given no indication up to the time when the administrators were appointed of any intention to pursue that course of action, and whether the Salmat proceedings could be sustained without a funder during pursuit of recovery proceedings against Mr Ryan must be doubted. In that context, the probabilities are that that disclosure of the matters omitted from the s 439A(4) report would not have influenced sufficient of those creditors who supported the DOCA to change their vote as to produce a different outcome.

51. [78]

    This view derives some support from the circumstance that no other creditor has appeared to support the relief claimed by Salmat. Further, since the institution of the present proceedings, the solicitors for Mr Ryan have circularised creditors with the Points of Claim and Points of Defence and sought an indication as to whether they would now vote any differently. While the petitioning creditor Remondis – whose proxy was not voted at the original creditors’ meeting – has indicated that it would oppose the DOCA, and while the responses are far from complete, there is no indication of any substantial shift in the attitude of creditors, particularly on the part of the related creditors whose vote carried the DOCA. As I have observed, this is not a case in which the weight to be attributed to the interest of the related creditors is to be discounted because they do not have a real interest in the outcome, while the interest of Salmat needs to be viewed in the light of its status as defendant in the Salmat litigation.

52. [79]

    It is no doubt in the interest of creditors that they be properly informed and receive accurate information. There is also undoubtedly a significant public interest in the provision of accurate information to creditors and in creditors being enabled to make an informed judgment, as there is in the proper investigation of voidable transactions and their recovery for the benefit of creditors. Mr Henskens SC, for the plaintiffs, emphasised the importance of considerations of commercial morality, and the facility of a liquidator (but not an administrator) to take legal action to undo certain transactions. In Bidald Consulting v Miles Special Builders, Campbell J (as his Honour then was) said (at [286]) (in a passage that was approved by the Court of Appeal in Vero Insurance Limited v Kassem (as joint administrators of Ungul Properties Pty Ltd) [2011] NSWCA 381; (2011) 86 ACSR 607 (at [82])):

53. [80]

    The decisive consideration is that under this DOCA, at least as it was intended to operate, the creditors retain the ability to decide that the company should return to liquidation in the event that they did not receive a 100 cent dividend, in which case the ability of the liquidator to recover the proceeds of the voidable transactions is preserved. In those circumstances, the only party whose position is prejudiced by the DOCA is Salmat, and the prejudice to it is not qua creditor, but qua defendant in the Salmat proceedings. As the DOCA is not unfair or contrary to the interests of the creditors as a whole, it is not in the interests of creditors generally that it be terminated. The public interest in full and accurate disclosure to creditors does not, in those circumstances, dictate that it must be, especially where on balance disclosure of the omitted matters would not have affected the outcome. The public interest in the investigation and recovery of voidable transactions is not compromised because, if creditors are not paid in full, they retain the ability to return the company to liquidation and have those transactions investigated.

54. [81]

    Accordingly, notwithstanding that there were material omissions from the s 439A(4) report, as a matter of discretion I would not terminate the DOCA.

Should the DOCA be declared void under s 445G?

1. [82]

   The plaintiffs also invoked s 445G, which provides as follows:

2. [83]

   Section 445G is the appropriate source of jurisdiction where there is a complaint relating to some contravention of, or non-compliance with, Part 5.3A, whereas s 445D is appropriate where there is no allegation of such a contravention, but the complaint is centred on unfairness, rather than on non-compliance with the law [Deputy Commissioner of Taxation v Portinex Pty Ltd, [107]].

3. [84]

   It was faintly suggested that the matters relied on under s 445D amounted to non-compliances with Part 5.3A; in particular, the requirements of a report to creditors under s 439A(4). However, although there may have been omissions from the report, it did not fail to meet the basic requirements of s 439A(4). It was also faintly suggested that the administrator did not adequately investigate the company’s affairs under s 438A, but having regard to the confined timeframes within which an administrator must operate, and the circumstance that these administrators were appointed by a liquidator who had already presumably conducted some investigation himself, I do not think it can be said that the administrator conducted no investigation under s 438A. None of the matters relied on by the plaintiffs raise doubt as to whether the DOCA was entered into in accordance with, or complies with, Part 5.3A, and s 445 is not engaged.

4. [85]

   However, s 445G is relevant for another reason. I have observed that, at least as the DOCA was intended to operate, creditors reserved the right to return the company to liquidation if they did not receive 100 cents in the dollar under the deed. That follows from the question asked, and answered by Ms Perry, at the meeting:

5. [86]

   It also and more specifically follows from the terms of the resolution of the creditors’ meeting:

6. [87]

   However, what ultimately appeared in the deed, relevantly, did not reflect that: clause 8.4 provided that if the Salmat proceedings do not result in a payment to be received by the Company of an amount sufficient to cause an outcome by which Participating Creditors are able to be paid a dividend of 100 cents in the dollar, then the administrators may at their discretion convene a meeting of creditors to consider variation or termination of this Deed and/or take steps to enforce the obligations of this Deed. That does not preserve to creditors the right contemplated by the resolution, but instead confers on the administrators a discretion to call a creditors’ meeting in that event. As has been observed, clause 4.4(c) of the DOCA provides that any discretion conferred on the administrators is unfettered. That does not give creditors the type of assurance that the resolution envisaged.

7. [88]

   Section 439C provides that at a s 439A meeting, the creditors may resolve, inter alia, “that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting)”. Section 444A(4) provides that where the creditors resolve that the company execute a DOCA, “The administrator of the company must prepare an instrument setting out the terms of the deed”. “The deed” referred to in s 444A(3) must mean the deed “specified in the resolution” as mentioned in s 439C. A deed that did not accord with the resolution would not be “the deed”. Section 444B provides that where an instrument is prepared under s 444A, the company and the deed administrator must execute it and when so executed, it becomes a deed of company arrangement. Accordingly, a deed that does not accord with the terms of the creditors’ resolution at the s 439A meeting is not entered into in accordance with or compliance with Part 5.3A.

8. [89]

   Clause 8.4 of the DOCA does not reflect the terms of the resolution. If it were possible to declare that provision void and vary the deed to include a provision that reflects the resolution, that would bring the deed into conformity with what the creditors’ meeting intended and meet the justice of the case while avoiding the consequence of declaring the deed wholly void – which would not accord with that intention. The court can bring about that result under s 445G(4), but only with the consent of the deed’s administrator. I understand, from the submissions made, that such consent would be forthcoming.

9. [90]

   This issue was not raised by the plaintiffs, but emerged in the course of the hearing, although it was the plaintiffs who referred in their application to s 445G. In order to address it, I propose to grant leave to Mr Ryan (a member and creditor of the company) to apply under s 445G for a declaration that clause 8.4 of the deed is void, and an order pursuant to s 445G(4) varying the deed by substituting a new clause 8.4 in the following form:

10. [91]

    On that application, subject to the administrators confirming their consent, I would make the orders sought.

Should the administrators be removed?

1. [92]

   Further, and alternatively, the plaintiffs contended that the administrators should be removed under s 449B, which provides as follows:

2. [93]

   Lest I reach that conclusion, the consent dated 25 March 2015 of Neil Robert Cussen of Deloitte Touche Tohmatsu to act as deed administrator in place of the administrators was tendered.

3. [94]

   It is not in doubt that, like liquidators, administrators and deed administrators are expected to be free of actual or potential conflicts of interest and actual or apparent bias [Commonwealth of Australia v John Irving (1996) 65 FCR 291; 144 ALR 172; 14 ACLC 645; 19 ACSR 459, 462 (Branson J); Bovis Lend Lease v Wily, [133]-[141]; Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104, 106 (Burchett J); Re Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201, [15]]. Apprehended bias will be established if a fair minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of questions they may be called upon to decide [ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204; 101 ACSR 87, [58]-[64] (White J)]. That said, the court will remove and replace an administrator only if satisfied that to do so would be “for the better conduct of the administration” [Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 12 ACLC 594; 13 ACSR 544, 549-551 (Hayne J); Re Central Spring Works Australia Pty Ltd (admin appointed); Tubemakers of Australia Ltd v McLennan (as admin of the company) [2000] VSC 145; (2000) 34 ACSR 169; Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga In Australia Inc (admins apptd) [2012] NSWSC 214; (2012) 260 FLR 348; 87 ACSR 658, [45] (Black J)]. That requires that attention be given to the stage of the administration, and the remaining functions of the administrator or deed administrator. In the present case, now that a DOCA is in place, the main remaining functions of the deed administrators are receiving and adjudicating proofs, distributing the deed fund, and exercising such discretions as they have under the DOCA. The essential question is whether the reasonable bystander would, in the context of the DOCA, apprehend that the administrators might not bring to those functions an impartial mind.

4. [95]

   There is nothing to suggest that, before they were approached to act as administrators, the administrators had any prior association with or commitment to the company or the Ryan interests. However, the plaintiffs contend that a reasonable apprehension that they are biased in favour of the Ryan interests and against the Salmat interests arises from pre-appointment discussions between the administrators and Mr Ryan; the apparent alignment of the administrators with Mr Ryan in endeavouring to persuade the liquidator to appoint administrators; the failure to investigate the proceeds of the Dual Insurance claim notwithstanding that Mr Ryan had informed Mr Hosking of their receipt in the course of the pre-appointment meeting on 24 June 2014; the practically inexorable progress of the administration towards a recommendation in favour of a DOCA, secure in the knowledge that it would be supported by the majority of (related) creditors; the absence of rational analysis of the Salmat cause of action and its prospects in the s 439A report; and the subsequent conduct of the administrators in drawing to the attention of the solicitors acting for the company in the Salmat proceedings matters adverse to the Salmat interests with the intention of advancing the interests of the company and Mr Ryan.

5. [96]

   Although the plaintiffs submitted that the matters discussed in the pre-appointment meetings held on 24 June, 25 June and 9 September went beyond explaining the process of voluntary administration, the procedure for appointment of administrators by a liquidator and general advice in relation to a DOCA proposal as indicated in the DIRRI, the question is not whether what took place was fully described in the DIRRI, but whether what took place manifests a want of independence. The pre-appointment process involves administrators considering whether or not they will consent to an appointment. Administrators are entitled, before consenting to appointment, to have some idea of what it is that they are being asked to take on. It is to be expected, and it is unexceptionable, that the matters addressed will include the assets and liabilities of the company. And as one of the potential outcomes is a DOCA - particularly where the appointment is to be made by a liquidator under s 436B – pre-appointment discussions will not unreasonably involve a discussion of the potential terms of a DOCA with the proponent. It is to be expected that in the course of considering whether or not to accept an appointment, administrators will think about and perhaps form some preliminary views in respect of a DOCA. Essentially, in this case – as in many – the most important issue for the administrators was their recommendation to the creditors meeting. Predisposition towards a DOCA – particularly in the context of an appointment by a liquidator under s 436B – does not indicate disqualifying bias in favour of one interest or against another.

6. [97]

   It is true that discussions went somewhat further than this. It is clear enough that Mr Ryan wanted to remove the company from liquidation, with a view to prosecuting the Salmat litigation. He informed Mr Hosking that he controlled the majority of the creditors. They discussed that if the liquidator did not agree to appoint administrators, Mr Ryan could use that voting power at a creditors’ meeting to remove the liquidator. But I do not accept that a fair minded lay observer would form the view that the administrators were effectively making common cause with the Ryan interests to achieve the appointment of administrators and the approval of the DOCA. Indeed, although when first approached by Mr Hosking and Mr Ryan, the liquidator did not agree to appoint administrators, indicating that he would do so only if persuaded that to do so would be in the interests of creditors, it does not appear that any such threat of removal was ever conveyed to him. Thereafter, it took from July to September for him to be persuaded, during which period Mr Hosking had no further contact with Mr Ryan or anyone on his behalf, or the liquidator. Ultimately, the appointment was made by the liquidator under s 436B. The fact that the possibility was discussed does not provide ground for a reasonable apprehension that the deed administrators will not discharge their remaining functions impartially.

7. [98]

   Nor do I accept that such an observer would conclude that the oversight in respect of investigation of the Dual Insurance transaction was attributable to alignment with the Ryan interests. While unfortunate, the administrator’s explanation that it did not occur to him that it was within the six month relation-back period from the date of the application for a winding up order is plausible; moreover, in the context of a s 436B appointment, an administrator may not unreasonably assume that the liquidator will already have carried out appropriate investigations of potential voidable transactions.

8. [99]

   Where the effect of a DOCA is that litigation is to be pursued by the company against a person who happens to be a creditor, it is inevitable that the deed administrator will be perceived to be adverse to the interests of that creditor. Although the appropriateness of proposing the use of extraneous information potentially adverse to the Salmat interests to the company’s solicitor in the Salmat proceedings might be questioned, any administrator of this deed responsible for oversight of its implementation (which necessarily includes that litigation, albeit that Mr Ryan has control of the litigation), would appear adverse to the interests of Salmat, and it is positively in the interests of the due administration of the deed that they take such steps as may be calculated to advance the company’s interests in that litigation. The circumstance that this gives the appearance of alignment against Salmat is in this context no ground for a reasonable apprehension of bias in the relevant sense.

9. [100]

   Nor does the administrators’ predisposition in favour of a DOCA, in a context where that was the rationale for their appointment by the liquidator, reasonably found an apprehension that they would be other than impartial in dealing with proofs of debt, or that they would exercise such discretions as they are given under the DOCA other than genuinely and honestly in the interests of the creditors as a whole. And although it is not in this case a major consideration, their removal and replacement would inevitably incur some duplication of work and additional cost. I am therefore unpersuaded that a fair minded lay observer might reasonably apprehend that the deed administrators might not bring an impartial mind to the resolution of the questions they may in the future be called upon to decide in that capacity, or that their removal would be for the better administration of the DOCA.

Should the winding up be terminated?

1. [101]

   By his interlocutory process, Mr Ryan seeks an order that the winding up be terminated, pursuant to Corporations Act, s 482. That application is made pursuant to and in discharge of his obligation to do so under clause 5.1 of the DOCA. However, as has been mentioned, nothing in the DOCA is conditional upon that application succeeding.

2. [102]

   If the winding up is not terminated, it remains on foot, notwithstanding the subsequent execution of a DOCA, but the liquidator is bound by the DOCA by operation of s 444G [Mercy & Sons Pty Ltd v Wanari Pty Ltd (subject to a deed of company arrangement) (in liq) [2000] NSWSC 756; (2000) 157 FLR 107; 35 ACSR 70; Re Nardell Coal Corp (rec and mgrs apptd) (in liq) (subject to deed of company arrangement) [2004] NSWSC 281; (2004) 182 FLR 290; 22 ACLC 652; 49 ACSR 110, [75] (Austin J)]. In the event that the creditors resolve to terminate the deed, it is unnecessary and inappropriate for them also to resolve that the company be wound up; upon termination of the deed the pre-existing winding up continues, no longer subject to or constrained by the DOCA, as Austin J explained in Re Nardell Coal Corp:

3. [103]

   Corporations Act, s 482(2A), specifies a list of matters which the court must consider in determining an application for a stay or termination of a winding up in relation to a company that is subject to a deed of company arrangement:

4. [104]

   “Any other relevant matters” will typically include those established by authority to be relevant on such an application generally, including whether the conditions or circumstances that required that the company be wound up no longer exist and whether the company can safely be entrusted to the control of the directors. The court will also have regard to the terms of the DOCA and the extent to which termination of the winding up will facilitate achievement of its objects and those of Pt 5.3A [Mercy & Sons v Wanari, [53] (Austin J)].

5. [105]

   It may be said that, in requiring that Mr Ryan apply for the termination of the winding up, the DOCA contemplates that the winding up would be terminated. However, termination of the winding up is not necessary to permit implementation of the DOCA. I cannot at present be satisfied that the condition that required that the company be wound up, namely its insolvency, will no longer exist. It is quite uncertain at present whether the company will no longer be insolvent upon implementation of the DOCA, that question being largely dependent on the outcome of the Salmat litigation: if the company succeeds in that litigation it may well be solvent; but if it does not it is likely to remain insolvent. While termination of the winding up is unlikely to prejudice the position of current creditors – as, in the event they were to decide to terminate the DOCA, the relation-back provisions to which I have referred would have the result that in the winding up that ensued, the relation-back day would be the same as in the present court-ordered winding up – the solvency of the company is of concern from the perspective of the public interest and potential future creditors as well as current creditors, and the apparent protection of the position of current creditors does not relieve the court from the need to be satisfied that the company would no longer be insolvent if the winding up were terminated. At this stage, I cannot be so satisfied, although it is quite possible that the Court could be so satisfied once the DOCA has been fully implemented.

6. [106]

   Save that two concurrent administrations would remain on foot, there does not appear to be any disadvantage in not at this stage terminating the liquidation, leaving the issue to be revisited when the result of the DOCA is known. The persistence of the winding up will not interfere with the implementation of the DOCA, as the liquidator is bound by the DOCA. Moreover, it will secure the interests of the creditors, in the event that the DOCA is later terminated.

7. [107]

   However, it seems undesirable and unnecessary to inflict the costs of parallel insolvency administrations on the company and its creditors in the meantime. The preferable course is to stay (but not terminate) the winding up while the DOCA remains on foot. If the DOCA produces the desired result, the application for termination of the winding up can then be renewed. If the DOCA is terminated, or any other sufficient reason for doing so appears, the stay can be lifted.

Conclusion

1. [108]

   My conclusions may be summarised as follows.

2. [109]

   The DOCA has not been entered into in accordance with Part 5.3A, because it does not conform with the deed as specified in the resolution of the s 439A meeting, in that clause 8.4 merely confers on the administrators a discretion to convene a meeting of creditors if the Salmat litigation does not generate a dividend of 100 cents in the dollar, whereas the resolution specified that in such event there be a creditors’ meeting to consider termination or variation of the DOCA and the winding up of the company. Leave should be granted to Mr Ryan to apply for relief under s 449G. Clause 8.4 of the DOCA should be declared void and, with the consent of the administrator, the DOCA should be varied by substituting clause 8.4 in the following form:

3. [110]

   There were material omissions from the s 439A(4) report, in that the report did not disclose (a) that Mr Ryan personally was a cross-defendant in the Salmat litigation and as such had a potential conflict of interest, and (b) that the company had received the proceeds of an insurance claim within the relation-back period, which had been disbursed, and might be recoverable in a liquidation.

4. [111]

   It has not been established that the DOCA is oppressive or unfairly prejudicial to or unfairly discriminatory against one or more creditors, or contrary to the interests of the creditors as a whole.

5. [112]

   Although there were material omissions, disclosure of the matters omitted would not have produced a different outcome at the creditors meeting. Moreover, a fundamental feature of the DOCA, as intended and as varied, is that creditors retain the right to revert to liquidation in the event that they do not receive a dividend of one hundred cents in the dollar as a result of the Salmat litigation, in which event the liquidator’s ability to recover voidable transactions is preserved. Essentially for that reason, the general interest of creditors is better served by not terminating the deed, and the public interest in the investigation and recovery of voidable transactions is not compromised as those remedies will remain available in the event that the DOCA does not produce the intended result. Accordingly, as a matter of discretion, the DOCA should not be terminated.

6. [113]

   I am unpersuaded that a fair minded lay observer might reasonably apprehend that the deed administrators might not bring an impartial mind to the resolution of the questions they may in the future be called upon to decide, or that their removal would be for the better conduct of the administration. Apparent bias against Salmat as the defendant in the Salmat litigation is not relevant bias.

7. [114]

   As it cannot be predicted at this stage whether or not the company will as a result of the DOCA be solvent, it would be premature to terminate the winding up; and as the liquidator will be bound by the DOCA, which is not conditional upon termination of the winding up, there is no difficulty in the winding up remaining on foot while the DOCA is implemented. However, in order to avoid incurring the costs of concurrent insolvency administrations, the preferable course is to stay the winding up while the DOCA remains on foot.

8. [115]

   Accordingly I propose to make orders to the effect that:

   1. (1)

      The third defendant (Mr Ryan) have leave to apply to the Court under Corporations Act, s 445G, for an order declaring void clause 8.4 of the deed of company arrangement upon the ground that it is not in accordance with the deed specified in the resolution of the s 439A meeting, and that the deed be varied by substituting for it the following:

   2. (2)

      It be declared pursuant to s 445G(2) that clause 8.4 of the deed is void.

   3. (3)

      Pursuant to s 445G(4), and subject to the consent of the deed administrator, the deed be varied by substituting for clause 8.4 the following:

   4. (4)

      The originating process be otherwise dismissed.

   5. (5)

      Pursuant to Corporations Act, s 482, the winding up of Recycling Holdings Pty Limited by order of the Court made on 18 June 2014 be stayed until the termination of the Deed of Company Arrangement dated 27 October 2014 or further order.

   6. (6)

      There be liberty to renew the application for an order terminating the winding up when the DOCA has been implemented.

9. [116]

   Before formally making those orders, I will allow the parties an opportunity to consider the form of the proposed orders, for the administrators to confirm their consent to the amendment of the DOCA, and to address on the question of costs.