FEDERAL COURT OF AUSTRALIA

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) [2018] FCA 315

ORDERS

THE COURT ORDERS THAT:

1.    Leave be granted nunc pro tunc pursuant to s 444E(3) of the Corporations Act 2001 (Cth) to the plaintiff to begin and proceed with the proceeding against the first defendant in relation to the claims made in paragraphs 9, 10, 11, 13 and 14(a) of the Originating Process.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BESANKO J:

Introduction

1    This is an application by Adelaide Brighton Cement Limited (ABCL) for leave under s 444E(3) of the Corporations Act 2001 (Cth) (the Act) to begin and proceed with a proceeding against Concrete Supply Pty Ltd (subject to Deed of Company Arrangement) (Concrete Supply). The “proceeding” for which leave is sought is, in fact, part of a broader proceeding involving Concrete Supply, the administrators and the directors of Concrete Supply. The defendants to the proceeding are Concrete Supply, Domenic Charles Cantone and Nicholas David Cooper in their respective capacities as administrators and deed administrators of Concrete Supply (the administrators), Pelegrino Obbiettivo, Genesio Obbiettivo and Tina Obbiettivo. The fourth, fifth and sixth defendants are directors of Concrete Supply and I will refer to them as the directors.

2    ABCL carries on business in South Australia supplying cement and lime. Concrete Supply is a private company incorporated in Australia which carries on business in South Australia supplying cement. ABCL supplied cement to Concrete Supply between July 2008 and November 2017. The administrators are deed administrators under a Deed of Company Arrangement executed on 21 December 2017 by Concrete Supply, the administrators and the directors (DOCA).

ABCL’S CLAIMS

3    In its Originating Process issued on 12 January 2018, ABCL seeks the following orders and directions against the defendants, or one or more of them:

1.    Pursuant to section 440D or section 444E of the Corporations Act the plaintiff have leave to begin and proceed with this proceeding against the Company.

2.    Pursuant to section 75-42 of sch 2 of the Corporations Act that the resolution that the Company execute a deed of company arrangement, passed on the casting vote of second defendant, be set aside.

3.    In the alternative to paragraph 2, pursuant to section 90-15 of sch 2 of the Corporations Act setting aside the second defendant’s decision to exercise his casting vote in favour of the resolution that the Company execute the deed of company arrangement.

4.    In the further alternative to paragraph 2, pursuant to section 445D or 447A of the Corporations Act that the deed of company arrangement executed by the Company be terminated.

5.    Pursuant to section 75-43 or 90-15 of sch 2 of the Corporations Act that the proposed resolution that Company be wound up, defeated on the casting vote of the second defendant, be taken to have been passed and that Messrs Martin Lewis and David Kidman be appointed as joint liquidators.

6.    In the alternative to paragraph 5, pursuant to section 447A of the Corporations Act that the Company wound up and Messrs Martin Lewis and David Kidman be appointed as joint liquidators.

7.    In the further alternative to paragraph 5, pursuant to section 90-15 of sch 2 of the Corporations Act that the second and third defendants be removed as external administrators of the Company and Messrs Martin Lewis and David Kidman be appointed as external administrators.

8.    Pursuant to section 483 of the Corporations Act, that the second to sixth defendants deliver, convey or surrender the Company’s books to the liquidators of the Company as soon as practicable.

9.    A declaration that the Company owes the plaintiff $12,457,472.22;

10.    A declaration that the Company failed to maintain adequate books and records in contravention of section 286 of the Corporations Act.

11.    A declaration that the Company engaged in misleading or deceptive conduct or unconscionable conduct in contravention of sections 18 and 20 of the Australian Consumer Law or unconscionable conduct under the general law.

12.    A declaration that the fourth to sixth defendants were involved in conduct by the Company which contravened Chapter 2 of the Australian Consumer Law within the meaning of sections 2, 236 and 237 of the Australian Consumer Law.

13.    A declaration that the Company held cement which was received but not paid for, and any income generated using that cement, on trust for the plaintiff.

14.    A declaration that (a) the Company breached its fiduciary duty to the plaintiff by disposing of property held on trust for the plaintiff; and (ii) the fourth to sixth defendants procured or knowingly assisted or benefited from that breach of trust by the Company.

15.    Damages.

16.    Equitable compensation.

17.    Interest.

18.    Costs.

19.    Such further or other order as the Court thinks fit.

4    The claims for which leave is sought are those claims made in paragraphs 9, 10, 11, 13 and 14(a) of the Originating Process. All of those claims are claims against Concrete Supply and all relate in one way or another to the supply of cement by ABCL to Concrete Supply for which the latter (it is alleged) has not paid ABCL.

5    ABCL’s case is that between August 2009 and November 2017, it supplied cement to Concrete Supply under an agreement known as the “Bulk Supply Agreement” and that there is an unpaid balance of $11,660,582.86 due and payable by Concrete Supply to ABCL under that agreement. ABCL claims that there was an opening balance of $787,259.72 due as at 30 July 2009 and, therefore, the total debt owed to it by Concrete Supply is $12,477,842.58. This claim is the principal claim made by ABCL.

6    On the evidence adduced by ABCL to this point, in about October 2017, ABCL discovered that there was a shortfall in the amount paid to it by Concrete Supply and it met with representatives of Concrete Supply with a view to discussing the shortfall. Putting the matter very generally at this stage, the representatives of Concrete Supply claimed that the alleged shortfall was and is not a shortfall at all, but a rebate which ABCL provided to Concrete Supply. ABCL denies that it provided or authorised a rebate in the amount claimed.

7    ABCL makes other claims against Concrete Supply which are related to the claim in debt. It claims that Concrete Supply did not record the debt in its books. It claims that the company engaged in misleading or deceptive or unconscionable conduct in connection with the debt and that the company holds any income generated by the cement supplied by ABCL, but not paid for on trust for ABCL.

8    ABCL also claims that the directors of Concrete Supply were involved in the contraventions of ss 18 and 20 of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)) and that they procured or knowingly assisted or benefited from Concrete Supply’s breaches of trust.

9    On 14 November 2017, the administrators, who are members of the firm Worrells Solvency and Forensic Accountants, were appointed administrators of Concrete Supply. For that to occur, the board of Concrete Supply must have resolved that the company was insolvent, or likely to become insolvent at some future time, and that the administrators should be appointed (s 436A(1) of the Act). The first meeting of creditors of the company was held on 24 November 2017. The administrators prepared a report dated 11 December 2017 for the second meeting of creditors. The second meeting of creditors was held on 19 December 2017.

10    ABCL has adduced evidence that a resolution was put to the second meeting of creditors that the company execute a proposed Deed of Company Arrangement and that the administrators be appointed as joint and several administrators under the deed. A solicitor acting for ABCL and holding proxies for other creditors to the total value of $12,718,119.60 (including ABCL’s claim of $12,450,472 which was admitted by the administrators for voting purposes), voted against the resolution. The chair of the meeting was Mr Dominic Cantone and he held special proxies for 32 creditors whose proofs of debt totalled $1,165,504.99. Those creditors voted in favour of the resolution. Mr Cantone announced that the result was deadlocked and that he would exercise his casting vote in favour of the resolution, which was duly passed. According to ABCL’s evidence, Mr Cantone’s stated reasons for voting in favour of the resolution were as follows:

The DOCA would provide a higher return to creditors than liquidation;

The DOCA would provide a quicker return to creditors than liquidation;

Allowing Concrete Supply to keep trading would provide ongoing employment to Concrete Supply’s employees and continue trading with suppliers and customers.

11    A resolution that the company be wound up and that the administrators be appointed joint and several liquidators was defeated upon Mr Cantone announcing that the result was deadlocked and that he would exercise his casting vote against the resolution.

12    ABCL claims relief in relation to the DOCA. It claims that the resolution that Concrete Supply execute a Deed of Company Arrangement passed on the casting vote of Mr Cantone should be set aside, or that Mr Cantone’s decision to exercise his casting vote in favour of the resolution that Concrete Supply execute the DOCA should be set aside, or that the DOCA executed by Concrete Supply be terminated. In support of those claims for relief, ABCL claims the following: the report to creditors dated 11 December 2017 was deficient; the investigation carried out by the administrators was inadequate; the report to creditors contained misleading or inadequate information; and the administrators’ conduct of the administration was unreasonable. It is common ground that ABCL does not need leave to pursue its claims in relation to the DOCA. Such claims involve the company, but are not claims against the company. Nevertheless, it is proper to join the company to such claims (Young v Sherman [2001] NSWSC 1020; (2001) 166 FLR 96 at [72]-[75] per Austin J).

13    Clearly, ABCL’s claims against the directors do not require leave.

14    It is necessary to say more by way of introduction about the relationship between ABCL’s claim in debt and its claim that the DOCA should be set aside or terminated. The reason for this is because ABCL contends that it is inevitable or, at least highly likely, that the existence of the debt will be central to the challenge to the DOCA and this is a powerful reason to grant leave. The company and the administrators on the other hand, contend that the challenge to the DOCA can be determined without determining the existence of the debt.

15    The Points of Claim contain the following allegations against the administrators:

Inadequate Investigation by the Administrators

42.    The Administrators knew or ought to have known (based on the matters referred to at paragraphs 18 to 38 above) that:

42.1.    the Plaintiff alleged that the First Defendant had underpaid for Purchased Product by more than $12 million between 2012 and 2017;

42.2.    the Fourth to Sixth Defendants acknowledged the underpayment but asserted that they were entitled to a “rebate” in the sum of the Shortfall;

42.3.    there was no written agreement or other basis for the alleged “rebate”;

42.4.    the First Defendant had effected the “rebate” by self-generated credit notes which were never provided to the Plaintiff;

42.5.    the First Defendant was solvent if it was entitled to the “rebate”, but was insolvent if it was not entitled to the rebate;

42.6.    the Plaintiff’s claim for the Shortfall was the largest claim in the administration and represented in excess of 90% of the total claims in the Administration; and

42.7.    the books and records of the First Defendant did not reflect the First Defendant’s obligation to pay the Shortfall.

43.    …

44.    In the above circumstances, any reasonable insolvency practitioner appointed as administrator of the First Defendant would have:

44.1.    obtained and reviewed the First Defendant’s trading budgets, cash budgets, management statements, quarterly financial statements and detailed aged creditors’ ledger;

44.2.    undertaken a careful investigation of the books and records of the First Defendant to ascertain whether there was any basis for the “rebate” alleged by the Fourth to Sixth Defendants;

44.3.    sought an explanation from the Fourth to Sixth Defendants as to the basis on which the First Defendant had issued the Credit Notes and failed to pay the Shortfall;

44.4.    obtained advice from senior counsel concerning whether the First Defendant owed the Plaintiff the Shortfall;

44.5.    obtained advice from senior counsel concerning when the First Defendant’s obligation to pay for Purchased Product (i) accrued; and (ii) was payable;

44.6.    reconstructed the First Defendant’s books and records to reflect the First Defendant’s obligation to pay for all Purchased Product (Corrected Books);

44.7.    undertaken an analysis of when, based on the Corrected Books, the First Defendant became insolvent, both on a cash-flow basis and on a net deficiency of assets basis;

44.8.    obtained advice from senior counsel concerning (i) whether Part 5.3A applied to the First Defendant at all and, if so, (ii) when the First Defendant became insolvent;

44.9.    undertaken an analysis of whether, on the basis of the Corrected Books, the First Defendant overpaid income tax or paid dividends in breach of Corporations Act s 254T and sought advice on the prospect of the First Defendant recovering any overpaid tax or impermissible dividends;

44.10.    sought advice from senior counsel concerning whether a liquidator appointed to the First Defendant might have a claim against the Fourth to Sixth Directors for breach of duty pursuant to ss 180-182 of the Corporations Act 2001 or the common law, insolvent trading, Void Transactions, or for offences committed by them or the First Defendant; and

44.11.    investigated the capacity of the fourth to sixth defendants to satisfy a judgment on any claim which a liquidator might pursue against them; before forming a view on the merits of the DOCA, recommending to creditors of the First Defendant that they accept the DOCA, or exercising a casting vote in favour of the DOCA.

…

Misleading or inadequate information in the Report

47.    …

48.    …

49.    The Report should also have disclosed the extent of the Administrators’ investigation of the following matters and the outcome of those investigations:

49.1.    whether Part 5.3A applied to the First Defendant;

49.2.    the Plaintiff’s entitlement to payment of the Shortfall;

49.3.    the merits and value of insolvent trading, Void Transactions or preference claims that might be available to a liquidator of the First Defendant;

49.4.    the merits and value of claims which the First Defendant might have against the Fourth to Sixth Defendants for breach of duty pursuant to ss 180-182 of the Corporations Act 2001 or the common law;

49.5.    the value of the business of the First Defendant if sold as a going concern;

49.6.    the recoverability of the First Defendant’s loan of $1,333.930 to Mantina Quarries; and

49.7.    whether the Administrators had undertaken the investigations referred to in paragraphs 43 to 33, and the outcome of those investigations.

…

Unreasonable conduct of the Administration

53.    Any reasonable insolvency practitioner in the position of the Administrators, having regard to the matters referred to at paragraphs 18 to 38 above, would have formed the opinion that:

53.1.    the Plaintiff’s claim that the First Defendant had failed to pay for approximately $12.5 million of Purchased Product between 2012 and 2017 appeared to be accurate and the First and Fourth to Sixth Defendants’ denial of that debt warranted careful forensic examination and advice from senior counsel before the Administrator could provide a meaningful report to creditors or recommend the DOCA proposed by the directors of the First Defendant;

53.2.    it would be appropriate to seek directions from the Court as to the applicability of Part 5.3A to the First Defendant in circumstances where the First Defendant is only insolvent if the Plaintiff’s claim is successful;

53.3.    the First Defendant was either solvent (on the basis that the Plaintiff’s claim for the Shortfall should be rejected) and Part 5.3A did not apply; or

53.4.    the First Defendant was insolvent and had been insolvent for at least 2 years before November 2017.

16    For reasons I will give, I think that these allegations, among others, will mean that on the challenge to the DOCA, the plaintiff will adduce evidence directed to establishing the debt.

17    The company and its directors brought an interlocutory application in the proceeding seeking, among other orders, the summary dismissal of ABCL’s claims against Concrete Supply in relation to the alleged debt owed by the company or, in the alternative, a stay of the claims made against the company and its directors pending the determination of other claims. This prompted ABCL to press its claim in paragraph 1 of its Originating Process for leave to begin and proceed with this proceeding against the company.

Section 444E and the Relevant Principles

18    ABCL’s application is brought pursuant to s 444E of the Act which relevantly provides:

444E    Protection of company’s property from persons bound by deed

(1)    Until a deed of company arrangement terminates, this section applies to a person bound by the deed.

(2)    The person cannot:

(a)    make an application for an order to wind up the company; or

(b)    proceed with such an application made before the deed became binding on the person.

(3)    The person cannot:

(a)    begin or proceed with a proceeding against the company or in relation to any of its property; or

(b)    begin or proceed with enforcement process in relation to property of the company;

except:

(c)    with the leave of the Court; and

(d)    in accordance with such terms (if any) as the Court imposes.

…

19    Leave may be granted under this section nunc pro tunc (Re QMT Constructions Pty Ltd [1999] QSC 2; [2000] 1 Qd R 284).

20    The DOCA in this case provides for a general moratorium and deferral of debts (cl 10) and a bar to any debt or claim (cl 11). In its Points of Defence, Concrete Supply pleads these clauses in answer to ABCL’s claim in debt. Concrete Supply’s pleading refers to s 444D of the Act which provides that a Deed of Company Arrangement binds all creditors of the company so far as concerns claims arising on or before the day specified in the Deed.

21    The provisions of the DOCA give rise to a preliminary point about whether leave should be refused because to grant leave would be futile. The argument is that, absent a variation of the DOCA, legal proceedings are barred and the only way ABCL can proceed to enforce its claim in debt is under the provisions of the DOCA.

22    The approach taken in applications for leave under s 444E(3) of the Act is similar to that taken in applications for leave to proceed against a company in winding up under s 471B of the Act, rather than the stricter approach taken in applications for leave to proceed against a company in administration (Meehan and Another v Stockmans Australian Cafe (Holdings) Pty Ltd and Another (1996) 22 ACSR 123 (Meehan) at 125 per Lehane J; Easey v Grosvenor Constructions (NSW) Pty Ltd [2005] NSWSC 878; (2005) 54 ACSR 820 (Easey v Grosvenor Constructions) at [4] per Barrett J). I do not need to consider whether there might not be circumstances where there is a difference between the principles applied to the two categories of cases. Nothing has been suggested that raises that possibility (see Meehan at 125 per Lehane J).

23    In Vagrand Pty Ltd (in liquidation) v Fielding and Others (1993) 113 ALR 128 at 132, the Full Court of this Court referred to the decision in Thomson v Mulgoa Irrigation Co Ltd (1893) 4 BC (NSW 33) where Manning J of the New South Wales Supreme Court explained the reason for imposing a requirement of leave in the case of litigation against companies in liquidation as follows:

All that s 140 means is that a company in liquidation is not to be harassed and its assets wasted by unnecessary litigation, and the leave of the court is therefore required as a safeguard. Before any action can be brought or continued against a company, the court must investigate the intended litigation.

24    With respect, an illuminating explanation of the purpose of provisions such as s 471B was provided by McPherson J (with whom Wanstall CJ and Sheahan J agreed) in Ogilvie-Grant v East (1983) 7 ACLR 669 at 672; (1983) 1 ACLC 742 at 744 as follows:

The precise purpose and function of provisions similar to [a predecessor of s 471B] have seldom been explained. From time to time the suggestion has been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably amongst all creditors so that none of them will gain an advantage over others … But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well in some cases as unnecessary …

As a matter of history, a winding up by the Court was and remains today an administration conducted by the Court … Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a Judge, who determines that appeal de novo primarily on affidavit material … There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstance that on appeal it is possible under modern rules of procedure for the Judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so.

The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is therefore reduced largely to one of choosing between alternative forms of procedure. The effect of [the section] is to require the claimant to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute … It, of course follows that it is quite impossible to state in an exhaustive manner all the circumstances in which leave to proceed may be appropriate, but in the past they have been said to include factors such as the amount and seriousness of the claim, the degree of complexity of the legal and factual issues involved, and the stage to which the proceedings, if already commenced, may have progressed.

25    In Cassegrain v Gerard Cassegrain & Co Pty Ltd (in liq) [2012] NSWCA 435 (Cassegrain), Ward JA considered an application for leave to proceed against a company in liquidation pursuant to s 471B and identified the relevant factors as follows (at [32]-[34]):

The test for the grant of leave under s 471B requires the applicant to satisfy the court that there is a serious question to be tried (see Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550 per Wilcox, Burchett and Beazley JJ, their Honours referring to the requirement that the Court be “affirmatively satisfied that the claim has a solid foundation and gives rise to a serious dispute”; and Castlemaine Tooheys Ltd v South Australia (1986) 1611 CLR 148 at 153 per Mason ACJ ). This test was applied by Einstein J in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2003] NSWSC 307.

The relevant factors to be taken into consideration include the amount and seriousness of the claims; the degree and complexity of the legal and factual issues involved; the stage to which the proceedings, if commenced, have progressed; the risk that the same issues would be relitigated if the claims were to be the subject of a proof of debt; whether the claim has arguable merit; whether proceedings are already in motion at the time of liquidation; whether the proceedings will result in prejudice to creditors; whether the claim is in the nature of a test case for the interest of a large class of potential claimants; whether the grant of leave will unleash an "avalanche of litigation"; whether the cost of the hearing will be disproportionate to the company's resources; delay and whether pre-trial procedures such as discovery and interrogatories are likely to be required or beneficial (Austin and Black’s Annotations to the Corporations Act at [5.471B]).

It is not necessary that the applicant for leave show “exceptional circumstances” which warrant the grant of leave (Re Gordon Grant and Grant Pty Ltd (in liq) (1982) 6 ACLR 727 at 730 per William AJ).

(See also JF Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 748 (albeit a case of a company in administration, not a company subject to a deed of company arrangement)).

aNALYSIS

The Preliminary Point

26    The issue of whether a grant of leave would be futile because of the terms of a Deed of Company Arrangement arose in Wolstenholme v National Express Group Australia (Swanston Trams) Pty Ltd; Stone v National Express Group Australia (Bayside Trams) Pty Ltd [2003] VSC 476 (Wolstenholme v National Express). Hansen J said a grant of leave would not be effective and, in any event, should be refused for discretionary reasons. Leave would not be effective in that case because the Deed, unless varied (and there was no application to vary), had had the effect that, upon receipt by the administrators of the available property under the deed, the claims were extinguished and replaced by claims under the deed. I note that in this case, extinguishment does not occur until payment to the creditor under the DOCA. Hansen J summarised his reasons for refusing leave as follows (at [44]):

However, in my view, the correct position is that for the reasons I have mentioned, firstly, that there is a bar to these claims in the form of clause 9 of the deed operating in accordance with the other terms of the deed. For that reason, and because for a grant of leave to be effective there would need to be a change to the deed, and there is no application for that, and if such an application were made, it would require its own analysis, the applications must fail. Secondly, I would in any event have refused the applications for discretionary reasons. In each case the application will be refused.

27    In Josia v Horvat Constructions Pty Ltd [2004] NSWSC 1252; (2004) 12 BBR 22,671 (Josia v Horvat Constructions), Campbell J took the view that the moratorium and bar in the Deed of Company Arrangement before him did not preclude a grant of leave under s 444E. His Honour said (at [8]):

One argument which was advanced in correspondence by the administrator of the Deed Fund, was that the moratorium and bar provision in the deed would effectively prevent any proceedings being brought. I do not accept that is so. The moratorium provision in the deed prevents only actions which could not have been taken if the company had been wound up. If the company had been wound up, action could still have been taken against it with the leave of the Court. The bar provision would need to be read with section 444E of the Corporations Act 2001 (Cth), which expressly allows for the possibility that proceedings can be begun against a company the subject of a deed of administration with the leave of the Court. A deed cannot oust that power of the Court.

28    In Easey v Grosvenor Constructions, Barrett J, although not deciding the point, expressed a view in favour of the approach taken by Hansen J in Wolstenholme v National Express at [20]-[22].

29    In Hoath v Connect Internet Services [2006] NSWSC 158; (2006) 229 ALR 566 (Hoath v Connect Internet Services) at [192], White J said:

Normally, proceeding by action with the leave of the court to establish a debt or claim against a company in liquidation or subject to a deed of company arrangement is an alternative procedure to the determination of the claim by submission of a proof of debt and by appeal to the court if the proof is rejected. The deed has to be construed in accordance with Pt 5.3A Div 10, which provides for the procedure of a creditor proceeding by action against the company with leave. If in such a case, the amount of the creditors’ debt is established by judgment, the cause of action will merge in the judgment and, subject to any appeal, the deed administrator would be bound to admit the debt for the amount payable under the judgment. The deed could not bar a creditor from establishing his right to prove in this way if leave to proceed is given under s 444E(3), as that would be inconsistent with the scheme of the legislation. (Josia Pty Ltd v Horvat Construction Pty Ltd [2004] NSWSC 1252 at [6]–[8]; Easey v Grosvenor Constructions (NSW) Pty Ltd (2005) 54 ACSR 820 at 824 [16]). However, the fact that leave was given pursuant to s 444E(3) does not preclude Com-Cen from contending that the deed bars the claim, and that upon payment by the administrator to the Deed Creditors of the Creditor Entitlements all of the deed creditors’ debts are extinguished, including those of Mortgage.

30    With respect to those who hold a contrary view, I prefer the reasoning of Campbell J in Josia v Horvat Constructions and White J in Hoath v Connect Internet Services. In any event, I think the position is similar to that before Barrett J in Easey v Grosvenor Constructions, albeit that case involved a claim in tort. As I will explain, this is a clear case for leave and there is at least a possibility that the DOCA will be seen as a bar which does not apply to proceedings in respect of which s 444E(3) leave has been granted.

Relevant Considerations

31    I start with a brief summary of the submissions made by the parties.

32    ABCL submitted that leave should be granted for a number of reasons. First, it submitted that there are common issues between its application for orders setting aside or terminating the DOCA on the one hand, and the claims against Concrete Supply and its directors on the other. I will return to this important point below. Secondly, it submitted that Concrete Supply will not be harassed by this proceeding, nor will its assets be wasted. ABCL points out that the same solicitors have filed a Notice of Acting for the company and for the directors. Thirdly, it submitted that the administrators have estimated the costs of adjudicating the plaintiff’s claim would be substantial and in the order of $50,000-$80,000. Fourthly, it submitted that the grant of leave will neither distract the deed administrators nor result in a “avalanche of litigation” against Concrete Supply because ABCL’s claims against Concrete Supply are squarely in issue in the plaintiff’s application for orders setting aside or terminating the DOCA. In other words, the deed administrators are defending those proceedings and will be required to address the substance of the plaintiff’s claim against Concrete Supply regardless of whether leave is granted. This submission is similar to the first submission. Fifthly, it submitted that it is preferable for the common or overlapping issues to be dealt with once, rather than having the overlapping issues dealt with by this Court in the proceedings against the directors and administrators, and separately by an administrator or liquidator of Concrete Supply and this Court on any appeal from that decision. Finally, it submitted that ABCL does not seek to obtain an advantage to which it is not properly entitled pursuant to the DOCA if it remains on foot or in a winding up of Concrete Supply. It does not seek leave to proceed against Concrete Supply with respect to its claims for monetary relief (paragraphs 15 to 17) and has undertaken that it will not at this stage be seeking any payment of any debt due from the company.

33    ABCL also submits that its claims against Concrete Supply raise a narrow dispute, being whether Concrete Supply was entitled to the alleged rebate. Other elements of its claim in debt are not in dispute. The dispute with respect to Concrete Supply’s books and records is also a narrow one.

34    As I have said, an important part of ABCL’s argument is that the issues in relation to the claim to set aside or terminate the DOCA overlap with the issues in relation to its debt claim. In its outline of submissions, it made the following submission:

17.    … The plaintiff seeks orders setting aside the DOCA (prayers 2 to 7) on the bases that:

17.1.    Concrete Supply incurred a liability for cement when it took delivery of that cement and the result of its failure to pay for cement was an increasing unpaid liability for the Shortfall (Points of Claim (POC) [13]-[17]);

17.2.     the Administrators knew or ought to have known that there was no “Rebate” and that Concrete Supply was therefore indebted to the plaintiff for the Shortfall of $12.46 million (POC [42]-[43]);

17.3.    the Administrator’s second report to creditors that Concrete Supply [sic] was false and misleading because it stated that (i) Concrete Supply was not insolvent until 13 November 2017; (ii) that Concrete Supply maintained adequate accounts; and (iii) that the value of a potential recoveries by a liquidator were nil (POC [51]);

17.4.    the Administrators acted unreasonably in (i) failing to undertake a careful analysis of the “Rebate” asserted by the Directors, and (ii) concluding that that the value of a potential recoveries by a liquidator were nil (POC [53] and [58]); and

17.5.    creditors with the overwhelming financial interest in the DOCA (comprising more than 90% by value) voted against the DOCA and in favour of liquidation and that, in those circumstances, it was inappropriate for the second defendant to exercise his casting vote as chairman of the meeting of creditors in favour of the DOCA and against liquidation.

35    ABCL submits that each of the above matters is contested and will require an analysis of whether Concrete Supply was entitled to the rebate alleged by the directors and, if it was not entitled to such rebate, the consequences of its failure to pay $12.47 million for the supply of cement on Concrete’s Supply solvency and record keeping and the accuracy of the administrators’ reports to creditors.

36    ABCL also submits that Concrete Supply’s entitlement to the alleged rebate is directly relevant to the issue of whether Part 5.3A of the Act applied to the company at all. ABCL submits that if Concrete Supply was entitled to the rebate and its directors genuinely believed it was entitled to the rebate, then the question arises as to whether, on 13 November 2017, the directors genuinely believed that Concrete Supply was insolvent or may become insolvent in the future. This is because, absent the liability to ABCL, Concrete Supply appears to be solvent.

37    ABCL pointed out that the claims for misleading or deceptive conduct and unconscionable conduct against Concrete Supply also involve a claim for knowing involvement in relation to the directors.

38    Finally, ABCL submitted that the directors were likely to give evidence on the application to set aside or terminate the DOCA and that this would overlap with the company’s case as to its entitlement to a rebate.

39    The administrators submitted that if the Court finds that the DOCA should be terminated pursuant to s 445D of the Act, then the effect of s 446AA is to deem the company to have passed a resolution to wind up the company voluntarily. They submitted that it is therefore the usual course that where a Deed of Company Arrangement is terminated, the company is instead wound up in insolvency. That will follow in this case unless the Court exercises its discretion under s 447A of the Act to vary the outcome. ABCL will need the leave of the Court to begin or proceed with a proceeding against Concrete Supply in liquidation.

40    The administrators submitted that the Court must, or alternatively should, first determine the application to set aside or terminate the DOCA prior to any application for leave to issue the substantive proceeding is determined. They submit that the outcome of the DOCA application will determine the appropriate matters to be taken into account in any subsequent application for leave. The administrators submitted that there is no precedent for, what they called, the joint engagement of ss 444E and 445D of the Act. They submit that s 444E(3) has historically applied to circumstances where the Deed of Company Arrangement stands uncontested, but an exception pursuant to a grant of leave is contended to be appropriate upon the evidence in a particular case.

41    The administrators submitted that the application to determine whether the DOCA should be set aside or terminated is determined first, and if the DOCA is not set aside or terminated, then it will be a case of ABCL pursuing a claim under the DOCA which may or may not involve an appeal to this Court. There is no sufficient reason to depart from the ordinary and orderly administration of claims under the DOCA. If, on the other hand, the DOCA is set aside or terminated, then the most likely consequence is that the company will be in liquidation (s 446AA) and a further requirement for leave will arise. The defendants submitted that the administrators accepted ABCL’s debt claim for voting purposes so that there is no issue in that respect. Furthermore, the claim against the administrators in relation to the setting aside or termination of the DOCA does not require proof of the debt to ABCL. The debt may be assumed for the purposes of the application to set aside or terminate the DOCA.

42    The administrators may be found to have acted in full accordance with their obligations.

43    The administrators made five submissions which I will identify and address at this stage.

44    First, the administrators submitted that a grant of leave carries a risk of “artificially elevating the importance of potential merit of claims which may be available to the plaintiff as (wrongly) determinative of the s 445D point”. I reject this submission. The Court is well able to draw the necessary distinction between the evidence in support of ABCL’s debt claim and other claims on the one hand, and the evidence in support of its claim to set aside or terminate the DOCA on the other.

45    Secondly, the administrators submitted that a grant of leave carries a risk of creating a trial within a trial which diverts from “the proper and confined considerations relevant to a decision under s 445D”. I reject this submission. It assumes that the claims against the directors for which leave is not required, do not proceed at the same time as the claim to set aside or terminate the DOCA. That decision has not been made. Insofar as it does not proceed on that assumption, then it must be rejected because the issues will not be confined to whether the DOCA should be set aside or terminated. In a sense, the submission assumes the answer to the issue I must consider.

46    Thirdly, the administrators submitted that a grant of leave carries a risk of undermining the scheme of the Act with respect to Deeds of Company Arrangement which are presumed to be valid until impeached and intended to bind existing creditors. The purport of this submission is not clear. To the extent that it means that the Court will ordinarily only exercise the discretion for good reason, so much may be acknowledged.

47    Fourthly, the administrators submitted that a grant of leave carries a risk of adding unduly to the cost of the proceeding and of causing inefficiency. The administrators submitted that the litigation of the Substantive Proceedings will necessarily significantly add to the time, cost and complexity of the determination of the s 445D application. The administrators’ submissions indicate that by “Substantive Proceedings”, the administrators mean not only the claim in debt (and associated claims) against the company, but also the claims against the directors. This is an application for leave to proceed against the company, although the interlocutory application issued by the company and the directors, seeks a stay of the claims against the directors and, in the alternative to the strike out application, a stay of the claims against the company. This creates something of a dilemma for the defendants. It would not be sensible to refuse leave to proceed against the company in circumstances where the claims to set aside or terminate the DOCA and the claims against the directors proceed together. The difficulty in staying the proceeding against the directors is that the only basis one might do that is that the claims against the company might later proceed in the Court, and it would be more convenient to hear the claims against the directors with those claims. If it is said that the claims against the directors need not be stayed, but should be disengaged from the claims to terminate or set aside the DOCA, then that raises the somewhat alarming prospect of three trials.

48    Finally, the administrators submitted that a grant of leave carries a risk of bringing the administration of justice into disrepute because the proceeding against the company and the directors “seek only declarations clearly in a manner intended to be anterior to later relief which will impermissibly, if successful, be hazard-binding to the hand of a future liquidator and/or future court asked to consider the same subject matter. This gives the potential for alternative factual findings, credibility findings and inconsistent rulings on matters of law”. I am not sure the plaintiff ever said that it was only seeking declarations against the directors at this stage. Even if that were to be the case, that does not affect whether leave to proceed against the company should be granted.

49    Although Concrete Supply and the directors are represented by the same firm of solicitors, only the company appeared on the application for leave. The company’s general submissions were similar to those made by the administrators.

50    The company pointed to the relevant factors on an application for leave under s 444E(3). It made submissions in support of its argument on the preliminary point. It submitted that if the DOCA is set aside or terminated, then the company is likely to go into liquidation and the question of leave would be appropriately considered at that stage. It submitted that the reasonableness of the administrators’ conduct can be determined without making factual findings as to whether the debt is owed. A trial as to whether the debt is owed will add to the cost and complexity of a proceeding to determine whether the DOCA should be set aside or terminated.

51    In my opinion, the decisive factor in this case is that there is a substantial overlap between ABCL’s claim to set aside or terminate the DOCA and ABCL’s claim in debt. I do not think that the two issues can be compartmentalised in the way suggested by the defendants. I refer to ABCL’s pleadings set out above (at [15]). The matter can be put reasonably simply in the following way. ABCL alleges that the administrators failed to carry out sufficient investigations into the debt and their report was misleading in relation to it and, in those circumstances, ABCL’s case will include evidence of what proper investigations would have revealed and what should have been disclosed to the second meeting of creditors. That will include evidence as to the existence of the debt. It may be possible to determine ABCL’s case concerning the setting aside or termination of the DOCA without deciding whether the debt exists, but that cannot be predicted with confidence at this stage and, in any event, the evidence common to both issues is likely to be substantial. In reaching the conclusions which I have, I have not overlooked the fact that proof of the existence of the debt does not mean that the DOCA will be set aside or terminated.

52    As far as the other relevant considerations are concerned, the administrators rightly point to the objects of Part 5.3A of the Act which include maximising the chance of the company continuing in existence (s 435A) and to the fact that there must be a good reason to grant leave. Furthermore, it is not as if the legal proceedings are about to proceed to trial. In fact, they were instituted after the DOCA had been entered into. In addition, I think that despite the overlap, the claims against the company and its directors will add to the cost and expense of the trial. I think that outcome is inevitable, although it has to be said that it is very difficult to quantify. Overall, there is a good deal to be said for the submission that the hearing to determine whether the DOCA should be set aside or terminated should proceed and each party will know where it stands, so to speak. It may be that the company is in liquidation and a further application for leave can be made under that regime.

53    On the other hand, there are matters which favour a grant of leave. A large amount of money is involved and the issues, both factual and legal, could well be complex. There is a good chance that ABCL would appeal to the Court against an unfavourable decision. There is a real dispute and ABCL has a sufficiently arguable case to warrant a grant of leave. Whilst some additional costs may be incurred by creditors, there is force in the submission that is lessened somewhat by the fact that the company and the directors have common representation.

54    In the end, the matter which brings the scale down in favour of a grant of leave is the overlap between the claims. In my opinion, the existence of the debt and the circumstances in which it was incurred (if it was incurred) is a common and underlying theme in respect of all three categories of the claim and the Court should take steps to ensure, so far as it is possible to achieve at this stage, that that issue should be examined by a court only once.

Conclusion

55    I will grant leave nunc pro tunc pursuant to s 444E(3) of the Corporations Act 2001 (Cth) to the plaintiff to begin and proceed with a proceeding against the first defendant in relation to the claims made in paragraphs 9, 10, 11, 13 and 14(a) of the Originating Process.

Associate:    

Dated:    14 March 2018

SCHEDULE OF PARTIES