FEDERAL COURT OF AUSTRALIA

 

Deputy Commissioner of Taxation v Wellnora Pty Limited [2007] FCA 1234

CORPORATIONS – application by Deputy Commissioner of Taxation (DCT) to set aside Deed of Company Arrangement (DOCA) – resolution passed at creditors’ meeting in favour of execution of DOCA on casting vote of company administrator presiding at meeting – extent of obligations on that person in deciding how to cast vote – company was one of many in a group of companies, a large number of which had either gone into liquidation or executed a DOCA owing tax – DCT was the only unsecured creditor, and voted against execution of DOCA –  all creditors who voted in favour of DOCA were associated with company – whether person presiding at meeting of creditors must take into account the public interest and commercial morality when deciding how to exercise casting vote – discretionary considerations – whether DOCA had already terminated by reason of DOCA fund having been exhausted – whether order for “termination” of DOCA remained an available remedy.

 

Held:  (1) DOCA had terminated under s 445C(c) of Corporations Act 2001 (Cth) and specification in DOCA; (2) company administrator was limited to considering the interests of creditors as a whole in having the debts owed to them paid; (3) Court has a wider discretion under ss 600B and 447A, enabling Court to take into account public interest and commercial morality; (4) parties allowed opportunity to make further submissions with respect to, inter alia, any purpose to be served by a winding up in absence of an undertaking by DCT to fund a liquidator’s investigations, public examination and recovery proceedings.

 

Corporations Act 2001 (Cth) ss 445C, 445D, 445G, 445H, 447A, 600B

 

Bidald Consulting v Miles Special Builders (2005) 226 ALR 510 referred to

Blue Ring Pty Ltd v Landshore Pty Ltd (Subject to a Deed of Company Arrangement) [2006] WASC 245 cited

Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (2001) 37 ACSR 394 referred to

Deputy Commissioner of Taxation (Cth) v PDDAM Pty Ltd (1996) 19 ACSR 498 referred to

Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 referred to

Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 referred to

Lewis v Doran (2004) 208 ALR 385 cited

 

Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707 referred to

R v Bradford Metropolitan City Council; ex parte Corris [1989] 3 All ER 156 cited

Re Coaleen Pty Ltd (Administrator Appointed) (1999) 30 ACSR 200 referred to

Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commisioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487 referred to

Re Rugs Galore Australia Pty Ltd; Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126 referred to

Young v Sherman (2002) 170 FLR 86 referred to

DEPUTY COMMISSIONER OF TAXATION v WELLNORA PTY LIMITED

(ACN 084 651 936) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) AND WILLIAM JAMES HAMILTON AND PINO FIORENTINO (IN THEIR CAPACITY AS ADMINISTRATORS OF THE DEED OF COMPANY ARRANGEMENT)

NSD 502 OF 2006

 

 

DEPUTY COMMISSIONER OF TAXATION v WELLNORA PTY LIMITED

(ACN 084 651 936) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)

NSD 2335 OF 2005

 

 

LINDGREN J

15 AUGUST 2007

SYDNEY

 

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 502 OF 2006

 

IN THE MATTER OF WELLNORA PTY LIMITED (ACN 084 651 936)

(SUBJECT TO A DEED OF COMPANY ARRANGEMENT)

 

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Plaintiff/Cross Defendant
AND:	WELLNORA PTY LIMITED (ACN 084 651 936) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) First Defendant   WILLIAM JAMES HAMILTON AND PINO FIORENTINO (IN THEIR CAPACITY AS ADMINISTRATORS OF THE DEED OF COMPANY ARRANGEMENT) Second Defendants/Cross Claimants
JUDGE:	LINDGREN J
DATE OF ORDER:	15 AUGUST 2007
WHERE MADE:	SYDNEY

 

 

THE COURT ORDERS THAT:

 

1.                  The plaintiff file and serve submissions by 29 August 2007.

2.                  The defendants file and serve submissions by 12 September 2007.

3.                  The plaintiff file any submissions in reply by 19 September 2007.

4.                  The proceeding be listed on 26 September 2007 at 2.15 pm for any oral elaboration on the written submissions. 

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

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY

NSD 2335 OF 2005

 

IN THE MATTER OF WELLNORA PTY LIMITED (ACN 084 651 936)

(SUBJECT TO A DEED OF COMPANY ARRANGEMENT)

 

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Plaintiff
AND:	WELLNORA PTY LIMITED (ACN 084 651 936) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) Defendant

 

JUDGE:	LINDGREN J
DATE OF ORDER:	15 AUGUST 2007
WHERE MADE:	SYDNEY

 

 

THE COURT ORDERS THAT:

 

1.                  The plaintiff file and serve submissions by 29 August 2007.

2.                  The defendant file and serve submissions by 12 September 2007.

3.                  The plaintiff file any submissions in reply by 19 September 2007.

4.                  The proceeding be listed on 26 September 2007 at 2.15 pm for any oral elaboration on the written submissions. 

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

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY

NSD 502 OF 2006

 

IN THE MATTER OF WELLNORA PTY LIMITED (ACN 084 651 936)

(SUBJECT TO A DEED OF COMPANY ARRANGEMENT)

 

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Plaintiff/Cross Defendant
AND:	WELLNORA PTY LIMITED (ACN 084 651 936) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) First Defendant   WILLIAM JAMES HAMILTON AND PINO FIORENTINO (IN THEIR CAPACITY AS ADMINISTRATORS OF THE DEED OF COMPANY ARRANGEMENT) Second Defendants/Cross Claimants
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY		NSD 2335 OF 2005

 

IN THE MATTER OF WELLNORA PTY LIMITED (ACN 084 651 936)

(ADMINISTRATOR APPOINTED)

 

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Plaintiff
AND:	WELLNORA PTY LIMITED (ACN 084 651 936) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) Defendant

 

JUDGE:	LINDGREN J
DATE:	15 AUGUST 2007
PLACE:	SYDNEY

REASONS FOR JUDGMENT

INTRODUCTION

1                     This case raises questions concerning the duty of a company administrator when exercising a casting vote on the question whether the company is to execute a deed of company arrangement (DOCA) under Pt 5.3A of the Corporations Act 2001 (Cth) (the Act). 

2                     The case presents a not uncommon picture – a conflict between creditors favourably disposed to those individuals who control the company and to the proposed DOCA on the one hand, and a substantial unrelated creditor who would prefer a winding up on the other.  Questions raised include the question whether the administrator is obliged, in the public interest and in the interests of enforcing standards of commercial morality, to inquire into and to take account of, the conduct of the company’s controllers and of persons associated with them, including their conduct in relation to the affairs of associated companies.  The opposing view is that the administrator is limited to addressing the commercial question whether the proposed DOCA is likely to give creditors a greater return than a winding up would do. 

3                     There are two proceedings before the Court – proceeding NSD 502 of 2006 in which the plaintiff (the Deputy Commissioner of Taxation) seeks to have the DOCA set aside (the DOCA proceeding) and proceeding NSD 2335 of 2005 in which the plaintiff (also the Deputy Commissioner of Taxation) seeks a winding up (the winding up proceeding).  I will sometimes use the abbreviation “ATO” for the Australian Tax Office, rather than “the Deputy Commissioner of Taxation” (DCT).

4                     The DOCA was between the first defendant, Wellnora Pty Limited (Administrator Appointed) and the second defendants to the DOCA proceeding.  I will call Wellnora Pty Limited, Wellnora Pty Limited (Administrator Appointed) and Wellnora Pty Limited (Subject to a Deed of Company Arrangement), simply “Wellnora”.  The second defendants are the administrators of the DOCA, and I will call them “the Administrators”.  Of the Administrators, it is Mr William James Hamilton who has been chiefly involved in the administration of Wellnora and who has given evidence.  I will often refer simply to “Mr Hamilton” rather than to “the Administrators”.

5                     The winding up proceeding was commenced on 25 November 2005.  It was based on Wellnora’s failure to comply with a statutory demand in a sum of $556,571.94 served on it by the DCT.  On 18 January 2006, Wellnora, acting through its sole director, Ms Desley Soong, appointed the Administrators as administrators of Wellnora, pursuant to s 436A of the Act (see also s 451A of the Act).  On 24 January 2006, Ms Soong proposed that Wellnora enter into a DOCA.

6                     It was common ground that the winding up proceeding should remain in abeyance pending the resolution of the DOCA proceeding.  The DCT concedes that if she fails in the DOCA proceeding she must also fail in the winding up proceeding.

7                     On 3 February 2006, the return date of the Originating Process in the winding up proceeding, that proceeding was adjourned to 24 February 2006 to permit Wellnora’s creditors to consider the proposed DOCA at a meeting of creditors to be held on 14 February 2006.

8                     At that meeting held on 14 February 2006 Wellnora’s creditors resolved that Wellnora execute the DOCA.

9                     The creditors’ resolution was passed on the casting vote of the chairman, Mr Hamilton.  Five creditors, all of whom were represented at the meeting by Venus Cassimaty and were associated with Wellnora, voted in favour of the motion that Wellnora execute the proposed DOCA.  Their debts admitted for voting purposes totalled $3,130,289.27.  The DCT, who was represented (by telephone) at the meeting by Leisa Kelly, voted against the motion.  The DCT’s debt admitted for voting purposes was $3,957,519.62.  Thus, it could not be said that a majority in both number and in value voted for or against the resolution.  In these circumstances, Mr Hamilton, as the person presiding over the meeting (see s 439B(1) of the Act), was entitled to exercise a casting vote for or against the resolution (seereg5.6.21 of the Corporations Regulations 2001 (Cth) (the Regulations)).  He voted in favour of it.

10                  The DOCA was executed on 17 February 2006, as was a related “Deed of Funding” by which Ms Soong undertook to deliver to the Administrators an unendorsed bank cheque made payable to Wellnora for $65,000 (the Creditors’ Fund) on or before 24 February 2006. 

11                  The DCT commenced the DOCA proceeding on 9 March 2006.  The amended originating process in the DOCA proceeding states that the DCT applies under ss 445D, 445G, 447A, 600B and 1321 of the Act for an order setting aside the DOCA. 

12                  The Administrators have filed a cross claim in the DOCA proceeding, seeking monetary relief against the DCT.  In substance, they say that the DCT had a duty to disclose to them certain information that she had but they did not have concerning Wellnora and Mr and Ms Soong, and that if she had done so Mr Hamilton would have followed a different course and would or might have voted against the motion.  Accordingly, so they say, the passing of the resolution on Mr Hamilton’s casting vote was attributable to the DCT’s conduct, and, in particular, to her non-disclosure.  The Administrators say that if the DCT obtains some or all of the relief she seeks in relation to the DOCA, the Administrators may have to reimburse or refund the amount of the Creditors’ Fund to Ms Soong out of their own monies, as the Creditors’ Fund has long since been exhausted, and that they will have suffered other losses.  They also seek an order that the DCT pay their costs and expenses of acting as administrators.

LEGISLATION

13                  Part 5.3A of the Act is headed “Administration of a Company’s Affairs with a view to executing a Deed of Company Arrangement”.  The first section in Pt 5.3A, s 435A, provides relevantly:

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

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

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

It is Mr Hamilton’s case that when he exercised his casting vote in favour of the DOCA, he was acting in accordance with para (b).

14                  Within Pt 5.3A, s 436A(1) provides that a company may, by writing, appoint an administrator of the company if the board has so resolved, and has resolved that in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time.  As noted above, the one and only director of Wellnora, Ms Soong, resolved in accordance with s 436A(1) on 18 January 2006, and appointed the Administrators as administrators.  

15                  Pursuant to s 438A of the Act, Mr Hamilton promptly set about investigating Wellnora’s business, property, affairs and financial circumstances and forming an opinion about whether it would be in the interests of its creditors for Wellnora to execute the DOCA proposed by Ms Soong, for the administration to end, or for Wellnora to be wound up.

16                  Pursuant to s 436E of the Act, the Administrators convened a first meeting of Wellnora’s creditors, which was held on 25 January 2006.  No motions were put at that meeting and the Administrators continued in office.

17                  As required by s 439A of the Act, the Administrators convened a second meeting of Wellnora’s creditors, which was held on 14 February 2006.  The Administrators’ notice (dated 25 January 2006) of that meeting was accompanied by their report, a statement setting out their opinion on various matters, and a statement setting out details of the proposed DOCA, as required by s 439A(4). 

18                  On 8 February 2006 the Administrators provided a supplementary report to creditors.

19                  Section 439C provides that at a meeting convened under s 439A, the creditors may resolve that the company execute a DOCA specified in the resolution or that the administration should end or that the company be wound up.  As noted earlier, on Mr Hamilton’s casting vote the creditors resolved that the company execute the DOCA.

20                  Regulation 5.6.21 of the Regulations, which applies to a poll taken at a meeting of creditors, provides in subregs (2), (3) and (4) that a resolution is carried if a majority in number and value of the creditors voting vote in favour of the resolution; that a resolution is not carried if a majority and number and value of the creditors voting vote against the resolution; and that if neither of those results is reached, the person presiding at the meeting may exercise a casting vote for or against the resolution, in which case it is carried or not carried as the case may be.

21                  Section 444H of the Act provides that a DOCA releases the company from a debt only in so far as (a) the DOCA provides for the release; and (b) the creditor concerned is bound by the DOCA.  As noted below the present DOCA provided for such a release in certain circumstances.  The DCT is bound by the DOCA.

22                  Although the DCT relies on ss 445D, 445G, 447A, 600B and 1321 of the Act, the debate has concerned mainly ss 445D, 445G and 600B.  Sections 445D and 445G occur in Div 11 (ss 445A–445H) of Pt 5.3A. That Division is headed “Variation, termination and avoidance of deed”.  Section 447A falls within Div 13 (“Powers of Court”) also of Pt 5.3A.  Section 600B, on the other hand, falls within Div 3 (“Provisions applying to various kinds of external administration”) within Pt 5.9 (“Miscellaneous”) of the Act.

23                  Section 445D provides that the Court may make an order terminating a DOCA if it is satisfied that:

(a)        information about the company’s business, property, affairs or financial circumstances that:

            (i)         was false or misleading; and

     (ii)        can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

            was given to the administrator of the company or to such creditors; or

 

(b)       such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or

 

(c)        there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or

 

(d)       there has been a material contravention of the deed by a person bound by the deed; or

 

(e)        effect cannot be given to the deed without injustice ...; or

 

(f)         the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

(i)        oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii)        contrary to the interests of the creditors of the company as a whole; or

 

(g)        the deed should be terminated for some other reason.

It will be noted that s 445D provides for the termination of a DOCA, whereas s 600B provides, relevantly, for the setting aside or variation of a resolution.  Section 445D provides for an application for an order under the section to be made by the company, a creditor of the company, or “any other interested person”.  Therefore, if a submission by the Administrators that the DCT is no longer a creditor of Wellnora (see [174] should be accepted), she nonetheless has standing to apply under s 445D.  Section 445H provides that the termination of a DOCA does not affect its previous operation.

24                  Section 445G of the Act empowers the Court in certain circumstances to declare a DOCA or a provision of a DOCA to be void or not void.  The DCT’s standing to apply under s 445G depends on her being a “creditor” of Wellnora.  While she relies on s 445G, the DCT accepts that that section provides no ground not available to her under s 445D.  Counsel for the DCT accepted that on the authorities s 445G was concerned with procedures touching the entering into of a DOCA.  He addressed no submissions specifically to s 445G. 

25                  Section 447A empowers the Court to make such orders as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company.  The DCT’s standing to apply under s 447A, as under s 445D, depends on her being a “creditor” or “any other interested person” (s 447A(4)).  The DCT submits that if the DOCA is to be terminated under s 445D, an order should be made under s 447A to the effect that reg 5.3A.07 of the Regulations does not apply in relation to Wellnora.  The reason is that reg 5.3A.07 provides that if the Court makes an order under s 445D terminating a DOCA, the company is deemed to have passed a special resolution that the company be wound up voluntarily.

26                  Section 600B of the Act provides in subss (1), (2) and (3) as follows:

(1)       This section applies if, because the person presiding at the meeting exercises a casting vote, a resolution is passed at a meeting of creditors of a company held:

 

(a)          under Part 5.3A or a deed of company arrangement executed by the company; or

(b)          in connection with winding up the company.

 

(2)        A person may apply to the Court for an order setting aside or varying the resolution, but only if:

 

(a)          the person voted against the resolution in some capacity (even if the person voted for the resolution in another capacity); or

(b)          a person voted against the resolution on the first-mentioned person’s behalf.

 

(3)        On an application, the Court may:

 

(a)          by order set aside or vary the resolution; and

(b)          if it does so – make such further orders, and give such directions, as it thinks necessary.

27                  In terms, the Court’s power to order a resolution of creditors be set aside (or varied) is enlivened in all cases where a DOCA was entered into pursuant to a resolution passed on the casting vote of the person who presided at the meeting of creditors.  The section gives no guidance as to the grounds on which the discretion might be exercised. 

28                  Since the DCT voted against the resolution, she has standing to apply under s 600B.  If the resolution should be set aside, s 600E would have the effect that an act done pursuant to the resolution as in force before the making of the order setting aside is as valid and binding on or after the making of that order as if the order had not been made.  Accordingly, execution of the DOCA and the expenditure of the DOCA Fund by the Administrators under the authority of the DOCA would remain in place, but for the provision in s 600B(3) that if the Court makes an order setting aside or varying a resolution, it may also make such further orders as it thinks necessary.

29                 Finally, s 1321 provides that a person aggrieved by any act, omission or decision of, relevantly, “an administrator of a company” may appeal to the Court in respect of the act, omission or decision, and the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit.  The DCT accepted that this right of appeal was limited and, and I understood her counsel, accepted that success in an appeal depended on a finding of error on the part of the administrator.

WELLNORA

30                  Wellnora is a member of the Soong group of companies.  It is a wholly owned subsidiary of Ashworth Corporation Pty Ltd, which, in turn, is a wholly owned subsidiary of Wyreach Pty Ltd (Wyreach), in which Ms Soong holds 750 ordinary shares and her husband, James Soong, holds 500 ordinary shares.

31                  The Soong companies were engaged in real estate acquisition and development.  It seems that the group’s modus operandi was to have a separate company dedicated to each project.  This may explain why there are so many companies in the group. 

32                  Wellnora was incorporated on 7 October 1998.  At the time of the appointment of Mr Hamilton as voluntary administrator on 18 January 2006, Wellnora’s issued share capital comprised one hundred ordinary shares all of which were owned by Ashworth Corporation Pty Ltd.  As noted earlier, Ms Soong was the only director and she was also the company secretary.  She had been appointed as a director on 14 March 2005, replacing James Christopher Coughlan.  Mr Coughlan had been appointed on 22 December 1999, replacing Mark John Cummins.  Mr Cummins been appointed on 19 October 1998 replacing John Charles Andrews.  Mr Andrews had been appointed on 7 October 1988, the date of incorporation.   

33                  Wellnora’s purpose was to develop and sell five townhouse units at 51–53 Carlotta Road, Double Bay NSW.  Purchase and construction commenced in the year ended 30 June 2001.  Four of the five units were sold in the second half of 2003.  The sale of the last unit to be sold, Unit 1, was settled on 12 August 2005.  It is important to note that Ms Soong was not a director of Wellnora when the units were built or, except for Unit 1, when they were sold.

34                  As at 18 January 2006 when the Administrators were appointed as voluntary administrators, Wellnora had tangible assets disclosed to the Administrators of only $28.40.  Its creditors’ claims as of that date were in excess of $7 million, including the claim of the DCT. 

35                  GST liability arose on the sale of each of the five units.  It is not disputed that Wellnora was indebted to the DCT.  The amount of the debt, including interest and penalties, was $1,403,228.32 as at the date of the second meeting of creditors on 14 February 2006.  The DCT also proved, however, for a further sum of $2,554,291.30 for income tax arising from an assessment made by her, notice of which was given to Wellnora on 18 January 2006.  This amount was objected to and was the subject of an appeal.  The two amounts mentioned totalled $3,957,519.62. 

36                  On selling the units, Wellnora did not disclose the sales to the DCT.  Indeed, to the contrary, according to its BAS statements, it claimed refunds.

37                  In about August 2005, Wellnora lodged amended BAS statements back to August 2003.  By that time, Wellnora’s purpose had come to an end, the sale of the last of the units at Carlotta Road having been completed in that month.  What was left was no assets, a tax debt and related party debts.  Apart from a very small amount, all other non-related party debts, as well as trade creditors and external financiers, had been paid. 

38                  None of the related Soong companies offered to pay Wellnora’s tax debt.  Ms Soong, however, offered $65,000 for the purpose of the DOCA.  However, out of this sum costs would be paid first in the usual way and it would only be what, if anything, remained that would be available to creditors.  The sum of $65,000 has in fact long since been exhausted and the Administrators have been personally funding these proceedings. 

PLEADINGS

39                  There is much common ground revealed by the pleadings, but some areas of dispute.  The Administrators were appointed voluntary administrators of Wellnora on 18 January 2006, and on 17 February 2006 Wellnora executed the DOCA of which they became the administrators.  The Administrators say that the operation of the DOCA terminated on or about 21 June 2006 by reason of cl 14.1(a) of the DOCA upon expenditure of the last of the Creditors’ Fund of $65,000.  The Administrators informed the Australian Securities and Investment Commission (ASIC) of the termination on 28 June 2006.  The Administrators say that upon termination of the DOCA, Wellnora was returned to the control and management of Ms Soong as its director.

40                  The DCT pleads that as at 18 January 2006 she was a creditor of Wellnora in respect of unpaid income tax and Running Account Balance as follows:

Income Tax Outstanding as 18 January 2006	$2,777,428.98
Running balance account deficit debt in respect of BAS amounts as at 18 January 2006	$1,403,228.32 $4,180,657.30

The Administrators admit that the DCT was a creditor of Wellnora as at 18 January 2006, but do not admit these particulars of her debt.  They deny that the DCT continued to be a creditor of Wellnora after 21 June 2006, when the DOCA was terminated.

41                  At the meeting of creditors on 14 February 2006 six creditors were admitted to vote.  In four cases, this was over objection.  In respect of them, Mr Hamilton as chairman marked the proofs of debt as objected to, and allowed the creditor to vote subject to the vote being declared invalid if the objection was sustained.  Regulation 5.6.26(2) of the Regulations provided that the chairman was entitled to follow this course if in doubt whether a proof of debt or claim should be admitted or rejected. 

42                  The result was as follows:

	Name of Creditor	Represented by	Amount for which admitted to vote ($)
	James Soong	Venus Cassimaty	398,440.47
	Fyna Formwork (NSW) Pty Ltd	Venus Cassimaty	307,873.39
Objected to	Wyreach Pty Ltd	Venus Cassimaty	2,067,964.21
Objected to	Ticaart Pty Ltd	Venus Cassimaty	100,000.00
Objected to	Fyna Constructions (Hire & Sales) Pty Ltd Total of these five related creditors	Venus Cassimaty	256,011.20 3,130,289.27
Objected to	Australian Taxation Office Total of all six creditors	Leisa Kelly	3,957,519.62   $7,087,808.89

No other creditors attended the meeting in person or by proxy.  (There are references in the evidence to the debt owed to Fyna Formwork (NSW) Pty Ltd as being $308,873.39, but $307,873.31 is probably the correct figure.)

43                  The DCT alleges that James Soong, Fyna Formwork (NSW) Pty Ltd, Wyreach, Ticaart Pty Ltd and Fyna Constructions (Hire & Sales) Pty Ltd were related entities of Wellnora within the meaning of s 9 of the Act.  The Administrators admit that James Soong was a related entity, but deny that Fyna Formwork (NSW) Pty Ltd was. 

44                  The DCT alleges, but the Administrators deny, that at all times between 2000 and 2006, Wellnora traded at a loss and had an excess of liabilities over assets in amounts that were never less than $1.4 million.

45                  It is common ground that Mr Soong was disqualified by ASIC from managing corporations as at and from 27 February 2005 pursuant to s 206F(3) of the Act, and that prior to his disqualification he had been a director, with Ms Soong, of the following 15 companies:

(i)         Ashworth Corporation Pty Ltd;

(ii)        Ashworth Corporation (Vic) Pty Ltd;

(iii)        Beywood Management Services Pty Ltd, continuing as sole director after Desley Soong resigned on 3 February 1997;

(iv)       Build-Form Pty Ltd continuing as sole director after Desley Soong resigned on 3 February 1997;

(v)        Con-Struct Pty Ltd (in liquidation);

(vi)       Skillform Management Pty Ltd (in liquidation);

(vii)       Skillform Pty Ltd (in liquidation);

(viii)      Formwork Constructions Pty Ltd (subject to DOCA);

(ix)       Tinimi Management Pty Ltd (subject to DOCA);

(x)        Tunsand Constructions Pty Limited (subject to DOCA);

(xi)       Con-Struct Pacific Pty Ltd (subject to DOCA);

(xii)       Fyna Constructions Pty Ltd (subject to DOCA);

(xiii)      Norton Developments Pty Ltd (subject to DOCA);

(xiv)      Parkwind Pty Ltd (subject to DOCA);

(xv)      Red Cliffs Pty Ltd (subject to DOCA).

46                  It is common ground also that prior to his disqualification, Mr Soong had been sole director of the following further seven companies:

(i)         Fyna Formwork Pty Ltd (in liquidation) wound up by the Court on 29 October 2001;

(ii)        Marquelex Pty Ltd (in liquidation) wound up at a meeting of creditors on 24 September 2003;

(iii)       Metroform Pty Limited (in liquidation) wound up at a meeting of creditors on 24 September 2003;

(iv)       Noxequin Pty Ltd (in liquidation) wound up by the Court on 27 July 2004;

(v)        Pacific Constructions (NSW) Pty Ltd (in liquidation) wound up by the Court on 10 October 2003;

(vi)       Tongaling Pty Ltd (in liquidation) wound up by the Court on 7 October 2004;

(vii)      Concrete Formwork Pty Ltd (subject to DOCA entered on 20 June 1996).

The DCT alleges, but the Administrators deny, that Mr Soong was also sole director of an eighth company, Fyna Constructions (Vic) Pty Ltd (in liquidation).  The ASIC company extract for this company shows that James Soong had been a director of it from 10 August 1995 to 21 May 1999.

47                  It is common ground that on the day when Mr Soong was disqualified, Ms Soong became a director in his place of Ashworth Corporation (Vic) Pty Ltd, Ashworth Corporation Pty Ltd (the one hundred percent immediate parent company of Wellnora), Fyna Constructions (Hire & Sales) Pty Ltd (Ms Soong had resigned on 3 February 1997 but was reappointed on 27 February 2005 – this company is one of the creditors of Wellnora and voted for the DOCA), Norton Developments Pty Ltd (subject to a DOCA), Parkwind Pty Ltd (Parkwind) (subject to a DOCA) and Wyreach (the ultimate holding company of Wellnora).

48                  The DCT pleads that the proposed DOCA would deliver a dividend to her of between 0.36 of 1 cent in the dollar and 0.4 of 1 cent in the dollar, whereas the Administrators say that the estimate is between 0.60 of 1 cent in the dollar and 1 cent in a dollar.  The DCT says that the dividend to her would amount to between $5,986.61 and $14,141.47 on her debt of $3,957,519.62, whereas the Administrators say that the dividend to her would lie between $6,819.00 and $19,412.00.  In each case the difference depends on whether the tax assessed on 18 January 2006 and associated penalties will survive Wellnora’s objection and appeal.

The DCT’s Claim

49                  The DCT pleads the grounds for termination of the DOCA at considerable length.  Generally speaking, the allegations are denied.  In summary, she alleges (in para 31 of her points of claim):

(a)                that the DOCA is oppressive, unfairly prejudicial and unfairly discriminatory of the DCT or is contrary to the interests of creditors of Wellnora as a whole;

(b)               that the DOCA is contrary to the public interest and commercial morality such that the Court should terminate it so that a winding up can be undertaken;

(c)                that information about Wellnora’s business, property, affairs or financial circumstances that was misleading and could reasonably be expected to have been material to creditors of Wellnora in deciding how to vote in respect of the DOCA proposal was included in the s 439A(4) report that was circulated to creditors;

(d)               that information about Wellnora’s business, property, affairs or financial circumstances which could reasonably be expected to have been material to creditors of Wellnora in deciding how to vote on the DOCA proposal was omitted from the s 439A(4) report that was sent to creditors;

(e)                that the Administrators, as voluntary administrators, failed or were unable to carry out a full and proper investigation of Wellnora’s affairs;

(f)                 that Mr Hamilton ought to have exercised his casting vote against the DOCA arrangement in accordance with the wishes of the only external creditor, the DCT;

(g)                that Mr Hamilton was prevented, as a result of the inadequate investigation which had been able to be carried out, from giving proper attention to all matters relevant to the exercise of his casting vote; and

(h)                that the only external and unrelated creditor, the DCT, being a creditor for a very significant sum, knowing the two alternatives which were available and of the return offered under the DOCA as opposed to the uncertainty of any dividend in the winding up, was in favour of the winding up. 

50                  Except for paras (f), (g) and (h), these allegations are particularised. 

The Administrators’ points of defence

51                  In their points of defence, the Administrators allege that the DCT did not give them any of the information in her possession on which she now relies (the Information), and that she started to give the Information to them only from 14 March 2006.  They say that the DCT remained silent as to the reasons why she intended to vote against the DOCA and did not tell them that if Mr Hamilton exercised a casting vote in its favour, or if the DOCA was approved by the creditors, there was a real prospect that the she would apply to have it set aside. 

52                  The Administrators say that the DCT knew or should have known that the recommendations made in their s 439A report of 25 January 2006, namely, that Wellnora’s creditors should approve the DOCA, would be made in circumstances in which they would not have the benefit of the Information or of the reasons why, in the DCT’s view, Wellnora should be wound up.

53                  They plead that they were not aware of all of the Information, that the DCT gave them no opportunity to make a supplementary report taking the Information to account, and that she gave them no opportunity to raise the Information with the DOCA proposer, Ms Soong, to see what might be done as a consequence.

54                  The Administrators say that if the DCT had provided the Information to them before Mr Hamilton exercised his casting vote, they would have sought legal advice as to how the casting vote should be exercised after taking into account the Information and the DCT’s reasons for opposing the proposed DOCA. 

55                  In particular, the Administrators say that if the DCT had informed them that should Mr Hamilton exercise a casting vote in favour of the DOCA or the DOCA was approved by the creditors, there was a realistic prospect that she would apply to a Court to set it aside, which application would have exhausted most or all of any DOCA funds in costs and remuneration in dealing with such a dispute, the Administrators would have informed the DOCA funder, Ms Soong, would have weighed up that fact in deciding whether to exercise the casting vote or to execute the DOCA, and would have put the results of their deliberations forward to the creditors at their second meeting.

56                  They say that by reason of the DCT’s conduct they were precluded from having the benefit of the Information, the benefit of legal advice concerning it, and the benefit of being in a position where they would have made their decision concerning the exercise of their casting vote on such a basis.

57                  The Administrators accepted the office of DOCA administrators and carried out their duties and incurred expenses and expended their professional time accordingly throughout the period during which the DOCA operated (in amounts specified in para 24(m) of the points of defence, that total $35,670.50).

58                  The DCT did not seek any remedy from this Court or from the Supreme Court of New South Wales to restrain execution of the DOCA, to procure an adjournment of the second meeting of creditors, or (apart from the DOCA proceeding itself) to seek to have the DOCA terminated or rescinded.

59                  As a result, the Administrators say they will suffer a detriment if the DOCA should now be “rescinded” by the Court. 

60                  The Administrators argue that the DCT is estopped from relying on the Information.  Further, or in the alternative, they say that the Court should not, in the exercise of its discretion, make those orders.  Further, or in the alternative, the DCT is guilty of laches and the Court should exercise its discretion to refuse the orders sought, and the DCT has not offered to do, and is not in a position to do, equity commensurate with the relief that she seeks (avoidance of the DOCA ab initio), including the putting of all affected parties, including the Administrators, into the positions they occupied before the DOCA was entered into (failure to offer restitutio in integrum). 

The Administrators’ cross claim

61                  In their cross claim the Administrators repeat the positive allegations they make in their points of defence relating to the DCT’s failure to disclose the Information to them, and other non-disclosures by her.  They say that if the DCT obtains some or all of the relief she seeks, then depending on the relief she obtains, the Administrators may be obliged to reimburse or refund the Creditors’ Fund to Ms Soong out of their own monies because the Creditors’ Fund has been exhausted otherwise than by paying a dividend to creditors.  The Administrators give as particulars of the loss they would then seek to recover from the DCT particulars of their remuneration as administrators of the DOCA and of their expenses.  It suffices to say that these amounts exceed $100,000, and that is without taking into account any liability they may have to reimburse the amount of the Creditors’ Fund ($65,000) to Ms Soong, or certain other costs and expenses the amounts of which are yet to be determined. 

62                  In her defence to the cross claim, the DCT says that she had no legal or equitable duty or obligation to disclose any information she had about Wellnora’s affairs or about her intentions in respect of voting at the meeting of creditors on 14 February 2006. 

63                  The DCT further says that by reason of s 16(3) of the Income Tax Assessment Act 1936 (Cth) and s 3C(3) of the Taxation Administration Act 1953 (Cth), she was prohibited from disclosing to the Administrators information that was or might have been available to her officers concerning the taxation affairs or history of persons or entities other than Wellnora itself.

64                  In addition, the DCT does not admit that if the factual allegations in the cross claim are established, the Administrators would have exercised their casting vote otherwise than in support of the DOCA. 

OUTLINE OF BACKGROUND FACTS

The Administrators’ Report and Supplementary Report

65                  The Administrators’ report to creditors under s 439A(4) dated 25 January 2006 (the Report) extended over ten pages and was supplemented by Annexures A to H of 16 pages.  The Report was accompanied by two statements by the Administrators under s 439A(4)(b) of two pages and four pages respectively.

66                  An initial impression is that the Report and statements are detailed and thorough.  Indeed, in cross examination, the DCT’s witness, Ms Brennan, agreed that as a technical adviser within the ATO she had read quite a few reports of voluntary administrators and that as they went, the Report was “a reasonable report”.  Ms Brennan accepted that it was of “the standard of a good report to creditors attaching this sort of detail”, and conveyed that the authors were “trying to carefully investigate the financial history of this company to find transactions which may require further investigation”.

67                  Ms Brennan’s complaint was that Mr Hamilton should have gone further and got information relating to all the other companies in the Soong group.  She agreed, however, that he would not have been in a position to ascertain their tax liabilities.

68                  In substance, the DCT’s complaint is that Mr Hamilton should have researched the position of other Soong companies and discovered what Ms Brennan described as a “pattern” of establishing a company for a project, running up debt, then closing down the company.

69                  The following is a summary account of the contents of the Report.  The Report was uncontroversial as far as it went:  the DCT contends that it should have gone further.

70                  The Report stated that Wellnora is one of a group of five companies that are “related” for the purposes of s 50 of the Act, namely, Wyreach, Birralee Centre Pty Ltd (now called Ashworth Corporation (Vic) Pty Ltd), Parkwind, Ashworth Corporation Pty Ltd and Wellnora itself.  Wyreach is the holding company of the other related companies mentioned, and its holding of Wellnora is interposed through Ashworth Corporation Pty Ltd.  Other companies within the “James Soong Group” closely associated with Wellnora are Norton Developments Pty Ltd (subject to a DOCA) and Ticaart Pty Ltd.

71                  Annexure A to the Report is a comparative balance sheet for Wellnora over the years ended 30 June 2000 to the period ended 3 January 2006, together with comparable profit and loss statements for those periods.  

72                  Annexure B to the Report comprises copies of the settlement sheets in respect of the settlements of the sales of Units 1 to 5.

73                  The Administrators pointed out that the administration and finance expenses over the period 2001 to 2006 amount to about $4.5 million which would lead to losses being made.  They stated that the amounts of GST were not paid on the respective settlements but were retained by the secured creditor.  They stated that in Wellnora’s books, the total of the GST debt owed to the ATO was $593,203.51.  However, they drew attention to Annexure C to the Report, a letter dated 18 January 2006 from the ATO to Wellnora which showed the amount owed to the ATO as $681,990 (including a BAS liability of $454,660 and an administrative penalty of $227,330).  The Report noted that the DCT’s statutory demand showed the amount as $566,571.94 calculated up to 13 September 2005.  The Administrators observed that the integrated running account called “Running Balance Account” statement of the ATO discloses the amount payable at 30 January 2006 to be $1,180,955.53, which included a general interest charge to that date.

74                  The secured creditors of Wellnora under fixed and floating charges were Donovan Oates Hannaford Mortgage Corporation Limited (Donovan Oates), Kotteri Mano Renjan, TM & A Nominees Pty Ltd, and Stacks Managed Investments Ltd (Stacks).  All charges except that of Stacks had been discharged.

75                  In Mr Hamilton’s opinion the books and records kept by Wellnora as from 1 July 2004 complied with s 286 of the Act, but in respect of earlier years he found it difficult to trace through the entries journalised.  (Ms Soong had not been a director of Wellnora during those years (see [32] above) and a Mr Robertson, who was no longer with the company, had been its financial controller.)

76                  Annexure D to the Report was a report as to affairs (RATA) as at 18 January 2006 dated 24 January 2006 certified by Ms Soong in her capacity of sole director.  The RATA showed total assets as $28.40 and total liabilities as $3,812,564.27.  Of this amount, $3,130,289.27 was shown as debts owed to related entities and $682,276 as owed to other unsecured creditors.  This last figure comprised $681,990 admitted as being owed to the ATO and $285.00 admitted as being owed to “O’Sheas Cleaning” (the RATA referred to the total amount claimed by the ATO as $3,235,444).  O’Sheas Cleaning did not prove as a creditor.

77                  In section 7 of the Report, Mr Hamilton noted the objections he had made at the first meeting of creditors on the claimed debts, set out at [42] above.

78                  In section 8 of the Report, Mr Hamilton addressed the question of antecedent transactions that might be voidable.  Annexures E, F and G related to this subject.  He noted that it appeared that three payments by Wellnora, one of $100,000 and two totalling $300,000, might be recoupable preferences.  Mr Hamilton observed that in order for a liquidator to attempt to recover, the liquidator would need to be fully indemnified, that legal costs could be substantial, that an indemnity to the extent of $50,000 would be required, and that recovery of preferences is notoriously difficult to sustain even where the payment was to a related entity.  Mr Hamilton also referred to the defences provided for in s 588FG of the Act.  For these and other reasons, he concluded:

I believe the recovery would be difficult and not justified due to costs and the likely success of a defence.  Insolvency may be difficult to prove as the Related Entities may have an agreement between themselves as to financing.

 

79                  In further sections of the Report, Mr Hamilton addressed the questions of possible breach of fiduciary duty (referring to ss 181 and 79 of the Act), insolvent trading (referring to ss 588G and 588M of the Act), and reportable offences (referring to ss 438D and 533 of the Act).  He expressed the opinion that in a winding up creditors would be unlikely to receive any dividend and that the costs of a winding up would not be paid.  He qualified this opinion, however, by stating that the position might be otherwise if an indemnity were provided enabling a successful action to be taken for the recovery of preferences.  But he thought this unlikely to happen for the reasons previously mentioned.

80                  Turning to the proposed DOCA, Mr Hamilton noted that Ms Soong had undertaken, within seven days of a DOCA being executed (within 21 days of a creditors’ resolution) to establish a “Creditors’ Fund” of $65,000.  Annexure H was a schedule showing Mr Hamilton’s estimate of the likely dividend to creditors as a result.  He observed that the cost of implementing the DOCA might be as high as $22,500, comprising $10,000 for implementing the DOCA, $5,000 for administering its terms, $2,500 for out of pocket expenses, and $5,000 for estimated legal costs.  This would leave $42,500.  If it was necessary to pay the DCT’s legal costs, a further $3,500 would have to be deducted leaving $39,000 available for creditors.  How this was to be divided up between them depended on the amounts ultimately concluded as owing to them.  In particular, there was the question of the ATO’s claim for assessed income tax and associated penalty.  According to Mr Hamilton, the dividend would be one cent in the dollar or 0.60 cents in the dollar.

81                  Mr Hamilton recommended as follows:

Related Entities in the best position stand to receive a dividend of 1¢ in the dollar ($1.00) on their total debts in the sum of $3,130,289.  This 1¢ represents $31,302.89 under the proposed Deed.  It is most likely that there are third party creditors who would benefit in the various companies or through the group and it is therefore to their advantage that there not be a winding up and that the Deed be implemented.  From the Australian Taxation Office point of view, apart from the fact that there is a winding up application before the Court seeking the appointment of Mr Sherman of Ferrier Hodgson as Official Liquidator to be heard on 3 February 2006, the question is would I recommend that the ATO should accept the Deed in place of that winding up.  The benefit to the ATO is an estimated $6,819 at 1¢ in the dollar ($1.00) on its debt in the sum reduced, admitted of $681,990 and at the greater sum claimed should the appeal on the assessments fail, 0.6¢ in the dollar ($1.00) on its increased debt of $3,235,444 which is equivalent to $19,412.  It is a matter for the ATO having considered my report and investigation to decide whether or not there is any advantage of a further investigation by Mr Sherman, a proposed liquidator that would produce a better commercial result.  In my view this is unlikely.  The ATO is capable of making its own mind up and will form its own view on this aspect and my role is to point out the commercial advantages and how I see the position in a winding up having carried out a summary investigation for the purposes of making my report.

 

82                  On 8 February 2006 the Administrators issued a supplementary report to creditors under s 439A(4) of the Act (the Supplementary Report). 

83                  The Supplementary Report was prepared by Jocelyn Williams within Mr Hamilton’s office and settled by James Hamilton, solicitor, during Mr Hamilton’s absence overseas from 26 January 2006 to 14 February 2006 (Mr Hamilton arrived back in time to chair the second meeting of creditors on this last date). 

84                  The Supplementary Report related to a query that Mr Hamilton had raised in the Report touching on payments made by Wellnora on 12 August 2005 out of the proceeds of the settlement of the sale of Unit 1.  Mr Hamilton had left written instructions dated 25 January 2006 for his partner, Mr Fiorentino, and James Hamilton to follow this matter up during his absence.  The two payments were of $160,935.81 and $139,064.19, totalling $300,000.00.  The Supplementary Report records that inquiries had revealed that these two payments had been made to Giles Woodgate of Woodgate Co, who had been appointed DOCA administrator in respect of Parkwind at a meeting of its creditors on 20 December 2004.  Like Wellnora, Parkwind was a subsidiary of Wyreach.

85                  In the Supplementary Report, the Administrators discussed, over some three pages, the possible bases on which a liquidator of Wellnora might attempt to recover these amounts.  The Supplementary Report identified matters that a liquidator would need to prove.  The conclusion reached was that if litigation were to succeed against Parkwind or Wyreach, it remained unclear as to what assets those companies would have from which to satisfy the liability.

86                  The Supplementary Report also addressed questions of the admissibility for voting purposes of the debts of the DCT and of the intercompany creditors at the forthcoming meeting, but apart from referring to the difficulties that confronted Mr Hamilton, the comments did not advance matters substantially beyond the position as it had been described in the Report itself.  The Supplementary Report noted that the objection to the DCT’s assessment of January 2006 was still in the course of preparation.  It stated that until the objection and its substantiating documentation were available to him, Mr Hamilton could not comment further on the extent to which he might admit the DCT’s claim. 

Ms Brennan and her evidence

87                  Most of the evidence relied on by the DCT is found in an affidavit of Sharon Brennan and three sizeable exhibits to that affidavit.  This evidence was directed largely to demonstrating two things:  first, the large number of Soong companies that had failed; and second, their “miserable” record (as it was called) in relation to paying tax.

88                  Ms Brennan is an administrative assistant and technical adviser within the ATO.  She had access to, and was familiar with, the ATO’s records in respect of Wellnora, including its computer system.  She states that Wellnora was indebted to the DCT in respect of a Running Account Balance deficit as at 18 January 2006 for amounts due under the BAS provisions as defined in s 995-1(1) of the Income Tax Assessment Act 1997 (Cth) and the general interest charge payable under s 8AAZF of the Taxation Administration Act 1953 (Cth).  She states (para 5) that the total amount of those debts, as at 18 January 2006, was $4,180,656.98 made up as follows:

Ms Brennan states that Wellnora failed to lodge a tax return for the financial year ended 30 June 2004 until 1 March 2006.

89                  The DCT conducted a GST audit of Wellnora.  In September 2005, an ATO officer met with Wellnora’s Financial Controller, Herbert Ang, and its director Ms Soong.  The ATO officer gave a verbal warning to Ms Soong that Wellnora must lodge its outstanding 2004 income tax return by 16 October 2005.

90                  Ms Brennan exhibits a letter dated 18 January 2006 from the ATO to the Public Officer of Wellnora calling for payment, to which no response was received.  On 13 September 2005, the DCT had posted the creditor’s statutory demand (see [5] above) to Wellnora.  On 25 November 2005, the winding up proceeding had been commenced.

91                  Exhibited to Ms Brennan’s affidavit are voluminous extracts from records maintained by ASIC in relation James Soong, Desley Soong and the Soong group of companies.

92                  As noted earlier, James Soong was disqualified under s 206F of the Act from managing corporations (with effect for four years from 27 February 2005) whereupon he ceased to be a director of companies in the group, and, where necessary, his wife was appointed in his place.

93                  I noted at [45] above the 15 companies of which, prior to his disqualification, James Soong had been, together with his wife, Desley Soong, at various times and various periods, a director, and at [46] above the further seven companies of which, prior to his disqualification, James Soong had also been at various times and for various periods the sole director.

94                  On the day on which James Soong was disqualified, that is, 27 February 2005, Ms Soong became a director in his place of the following companies:

                               (i)      Ashworth Corporation (Vic) Pty Ltd;

                             (ii)      Ashworth Corporation Pty Ltd, the 100 percent shareholder of Wellnora;

                            (iii)      Fyna Constructions (Hire & Sales) Pty Ltd;

                           (iv)      Norton Developments Pty Ltd (subject to a DOCA);

                             (v)      Parkwind (subject to a DOCA);

                           (vi)      Wyreach, the ultimate holding company of Wellnora.

 

It will be recalled that Ms Soong was appointed as sole director of Wellnora on 14 March 2005, succeeding Mr Coughlan.

95                  According to Ms Brennan’s evidence, based on her study of ASIC extracts and the ATO’s computer records, Ms Soong has been a director of 31 companies, including Wellnora, of which the 14 were placed into some form of external administration:  three companies were wound up on the application of the ATO, two companies were placed into a creditors’ voluntary liquidation, and nine companies, including Wellnora, were the subject of DOCAs.

96                  The following table, composed by Ms Brennan, lists those companies in the Soong group that were placed into external administration and the amounts owing by them to ATO at that time:

97                  Again, according to Ms Brennan, the following table prepared by her lists companies of which Ms Soong is a director and which are not currently the subject of any external administration, and of the amounts owing by them to the ATO:

98                  The extent of Mr Hamilton’s much more limited knowledge of the affairs of the Soong group of companies was explored in the evidence in various ways, including in his cross examination, and is discussed below at [116]–[122].

99                  Ms Soong was the sole director of Norton Developments Pty Ltd, and her husband had been a director of that company prior to his disqualification.  Norton Developments Pty Ltd had had a corporate history similar to that of Wellnora.  In particular, in the second half of 2005, that company, acting through its sole director, Ms Soong, had appointed the Administrators as administrators and had proposed a DOCA which aimed to deliver a dividend of 5 cents in the dollar on the claims of creditors.  The ATO was the largest unrelated creditor in that administration.  However, in that case the ATO accounted for approximately 95 percent of unrelated debt. 

100               Ms Brennan sets out in her affidavit a table indicating the amount of dividend available for unsecured creditors of Wellnora taking into account the Administrators’ actual fees approved by creditors at the meeting on 14 February 2006 and estimated future fees as disclosed in the minutes of that meeting.  She points out that on this basis the amounts to be deducted from the Creditors’ Fund of $65,000 are:

This would leave available for distribution to unsecured creditors only $29,960.80, which, according to Ms Brennan’s affidavit, would make for a dividend of between 0.4 and 0.7 cents in the dollar.  Ms Brennan states that this revised dividend estimate was not put to creditors at the meeting.

Mr Hamilton and his evidence

101               The Administrators read four affidavits of Mr Hamilton, the first two having been filed in the winding up proceeding, and the latter two in the DOCA proceeding.

102               The first affidavit in the winding up proceeding was made in support of an application for the adjournment of the winding up proceeding to allow creditors to consider the Report and to determine at their meeting on 14 February 2006 whether to resolve that Wellnora enter into a DOCA or be wound up (see [7] above).

103               Mr Hamilton deposed in his second affidavit (also in the winding up proceeding), as to the result of the meeting of creditors, and attached a copy of the Supplementary Report.  He also discussed the admissibility for voting purposes of the debts claimed by the ATO and related entities (as set out in the table at [42] above), and explained why he adjudicated on the various claims for voting purposes as had been foreshadowed in the Report.

104               It was in Mr Hamilton’s third affidavit, made on 14 August 2006 (his first filed in the DOCA proceeding), that he responded to the grounds on which the DCT relied for an order setting aside the DOCA.  That affidavit is a lengthy and detailed one (43 pages and a voluminous exhibit).

105               Mr Hamilton referred to his extensive experience over a long period as an official liquidator.  He was appointed an official liquidator of the Supreme Court of New South Wales by the Attorney-General in October 1962, as was required under the Companies Act 1961 (NSW) at that time.  He was initially the sole official liquidator for New South Wales.

106               On 30 November 1962 he commenced practice with Ian Ferrier as “Hamilton & Ferrier”.  Since dissolution of that partnership on 30 June 1976, he has practised in partnership under the name “Hamiltons Chartered Accountants” (Hamiltons).

107               Prior to the introduction of Pt 5.3A, Mr Hamilton administered schemes of arrangement as trustee or scheme manager.  When Pt 5.3A was introduced into the Corporations Law by the Corporate Law Reform Act 1992 (Cth) (No 210 of 1992) there was, according to Mr Hamilton, a “natural progression” from schemes of arrangement.  Mr Hamilton states that much of the experience and knowledge he acquired in respect of the former Pt 5.1 schemes of arrangement has stood him in good stead in relation to DOCAs under Pt 5.3A of the Act.

108               Mr Hamilton has completed in excess of 3,000 official liquidations under court orders.

109               There can be no question concerning Mr Hamilton’s considerable experience and knowledge relevant to the responsibilities of a company administrator and a DOCA administrator.

110               Mr Hamilton was contacted about the present appointment in January 2006 by Venus Cassimaty, solicitor.  She told him that Melvyn Myers, accountant and financial adviser to the Soong group, would be coming to speak to him about one of the companies in the Soong group that required an administrator to be appointed.  Mr Hamilton had previously met Mr Myers.  On 17 January 2006 Mr Myers met with Mr Hamilton in his office for about one hour.  Mr Hamilton exhibits his file note of the conversation.  Mr Myers set out the background to the demise of Wellnora.  Mr Hamilton was made aware of the ATO’s pending winding up proceeding.  Mr Myers told Mr Hamilton that Ms Soong was at that time proposing a DOCA to be funded with a sum of $25,000.

111               Also on 17 January 2006, Mr Hamilton obtained an ASIC computer search of Wellnora and sent to Ms Soong a retainer letter, a draft instrument of appointment, and draft minutes of a meeting of the directors of Wellnora.

112               On 18 January 2006, Mr Hamilton:

(a)        received the executed documents from Ms Soong;

(b)        caused to be mailed to Ms Soong a notice of demand for books and records, a blank form of RATA and a questionnaire; and

(c)        prepared and executed a notice of the first meeting of creditors of Wellnora, to which was attached Mr Hamilton’s statement of independence.

113               At some time that the evidence does not identify, Mr Hamilton received the RATA back from Ms Soong completed in handwriting.  He had it transcribed into typed form and included some material based on his analysis of the records of Wellnora.  This was the document that Ms Soong certified on 24 January 2006.  The certified copy was later to be despatched with the notice of the second meeting of creditors.

114               On 19 January 2006, Mr Hamilton wrote to Mr Ang enclosing a copy of the letter dated 18 January 2006 from the ATO’s solicitors, The Argyle Partnership, asserting ATO’s claim in amounts totalling $3,730,354.10.  Mr Hamilton pointed out that this differed substantially from the figure in the ATO’s statutory demand, which was only $566,871.94.  Mr Hamilton’s letter to Mr Ang included the following paragraphs:

The significance of this is that if the debt [$3,730,354.10] is allowed to stand at that amount for the purposes of voting there is little prospect of any proposal put forward succeeding if the ATO are not in favour of it.  Viz, related entities are approximately $3.1(M) who are creditors of the Company.  For the purposes of the meeting next Wednesday, this will be of no account as no motion can be passed where there is not a majority in number together with value and therefore the ATO has no means of carrying a motion even with a debt of $3.7(M).  However, it will affect the ability to pass a resolution that the Company enter into a Deed of Company Arrangement.  It is inconsistent with the Common Law Cases and Best Practice of ASIC and the IPAA [the Insolvency Practitioners Association of Australia] that a casting vote by me as Chairman in such a circumstance should be made in favour of a motion when the major creditor and for all intents and purposes the only creditors that will receive any benefit out of the Deed of Company Arrangement as the related entities, are not ranking for dividend purposes under the proposal, is against the proposal.

 

Whether the ATO is prepared to accept $25,000 in full satisfaction of $3.7(M), that is highly problematic.  Nevertheless, I will proceed with preparing the proposal and investigation and report which I will have completed by the 25 January 2006 so that it can be used for the purposes of the winding up application on the 3 February 2006.  You should consult immediately with Melvin Myers.

 

For the sake of good order a copy of this letter has been sent to Venus Cassimaty [solicitor, Diamond Conway, Lawyers, who acted for Wellnora].

115               On 24 January 2006, Mr Hamilton received Ms Soong’s proposal of that date for a DOCA and associated establishment of the Creditors’ Fund of $65,000.  The proposal was that after payment of all costs and expenses (including remuneration and out of pocket expenses of the Administrators) of implementing the DOCA, the balance remaining would be distributed pari passu  to creditors.  The proposal stated that if the ATO’s debt for dividend purposes was $681,990, the dividend was estimated at 1 cent in the dollar, and if it was $3,235,444, the dividend was estimated at 0.6 cents in the dollar.  The proposal stated that Ms Soong was to pay the sum of $65,000 to the Administrators within seven days of the commencement date of the DOCA.

116               In paras 16–24 of his affidavit, Mr Hamilton deals with prior work that he has undertaken concerning the Soongs.  He referred to his having been retained by Venus Cassimaty in about May 2005 as an expert to prepare a report in a legal proceeding of Fyna Formwork Pty Ltd (in liq) v James Soong.  That report was never filed or served.  His work in that matter was disclosed in his statement of independence.  Mr Hamilton’s affidavit referred to James Soong as Desley Soong’s father, rather than as her husband.  He knew that she was his wife and the reference to her being his daughter was a slip not picked up by him.

117               When Mr Hamilton prepared his expert’s report in that proceeding, he gained knowledge as to the financial positions of Wyreach  and its consolidated subsidiaries for the years 1996, 1997, 1998 and 1999.  Those consolidated subsidiaries were Parkwind, Fyna Constructions (Hire & Sales) Pty Ltd and Birralee Centre Pty Ltd (now called Ashworth Corporation (Vic) Pty Ltd).  The period the subject of Mr Hamilton’s expert report did not extend beyond 30 June 1999.  For the seven years after that, Mr Hamilton was not directly concerned with any financial matters of the Soong companies.  He may have been privy to more recent financial information but it did not concern him.  For the purpose of preparing his s 439A report on Wellnora, he did not look at the files and documents he had been given in connection with the preparation of his expert report.

118               In cross examination, Mr Hamilton said that he was aware, as at the time of his appointment by Ms Soong as administrator of Wellnora on 18 January 2006, that Fyna Formwork Pty Ltd, of which Mr Soong had been a director, had gone into liquidation.  He became aware, prior to completing the Report on 25 January 2006, that Ms Soong had been a director of Parkwind (subject to a DOCA).  He was aware, from an expert consulting role that he had undertaken in late 1995 that Wellnora was part of a much larger group of special purpose companies either associated with or controlled by Mr Soong.  Mr Hamilton conceded that he had accepted that Mr Soong was probably a de facto director of Wellnora itself in the sense that his knowledge and experience as a builder and developer would have been essential to its functioning.

119               Mr Hamilton had met James Soong on only two occasions, both at meetings at his office attended by Mr Soong, his son Steven Soong, and Venus Cassimaty.  The first meeting had been held on 19 October 2005 and the second on 3 November 2005.  They both related to advice from Mr Hamilton concerning a proposed investment by James Soong.

120               Mr Hamilton had also corresponded with Mr Soong concerning the voluntary administration of Marquelex Pty Ltd and Metroform Pty Limited, of which Mr Soong was a director, in the context of their voluntary administrations.  Both companies had failed, leaving unpaid tax debts.  On 27 August 2003 he and Pino Fiorentino were appointed administrators of those companies, but they were replaced at the first meeting of creditors by a partner of Sims Partners on the exercise of the casting vote by Mr Hamilton.  Mr Hamilton explains the reasons for the change, and there is nothing untoward in this.

121               As administrator (of Marquelex Pty Ltd and Metroform Pty Limited), Mr Hamilton sent Mr Soong formal letters of demand for the books and records of those two companies.

122               Mr Hamilton did not meet with Ms Soong or speak to her regarding Wellnora.  So far as he can recall, she attended his office only once, and that visit had related to Norton Developments Pty Ltd of which he was one of the DOCA administrators.  Mr Hamilton did not disclose in his statement of independence for Wellnora that he had been an administrator of that company.  The reason for this was that Norton Developments Pty Ltd was not, in his view, a related body corporate of Wellnora as defined in s 50 of the Act, so that there was no requirement under para 4.2 of the Statement of Best Practice for the Calling and Conducting of Creditors’ Meetings issued by the Insolvency Practitioners Association of Australia for him to disclose it.

123               At paras 25 to 61 of his affidavit, Mr Hamilton gives a detailed account of his investigations of Wellnora.  I do not think it necessary to summarise in detail the steps he took as some of Mr Hamilton’s conduct in relation to Wellnora has already been summarised above.  Paragraphs 27 to 30 of his affidavit were as follows:

27.       The first step I took was to obtain an understanding about Wellnora’s business, how it operated, was it still trading, or was it an historical situation.  I wanted to know:

(a)        What was the interplay between Wellnora and any other companies who are related entities, either on loan account, shareholdings, or through the appointment of common directors;

(b)       Who controlled the day to day affairs of Wellnora;

(c)        The broad picture of the assets and liabilities, expected realisable values, classes of creditors, priority and otherwise and a feeling for the causes of Wellnora’s failure or cash flow shortage and whether or not this was capable of being corrected by a proposal under a DOCA.

 

28.       I also sought to determine whether or not Wellnora wished to continue to trade and Wellnora be rehabilitated [sic – could be rehabilitated] or whether to wind up Wellnora.

 

29.       I ascertained the matters by asking questions of Herbert Ang, the Controller and Melvyn Myers, accountant and financial advisor to the group.

 

30.       I also sought to ascertain how that would affect creditors and whether there was a basis for giving creditors a better commercial return by using Part 5.3A of the Act than they would obtain in a winding up.

 

124               Mr Hamilton exhibits to his affidavit all of the documents he obtained during the course of the administration of Wellnora.  They number 18, but that number may give a false picture of the extent of them – they include, for example, as single documents, four general ledgers and financial accounts for four years including tax returns, profit and loss statements and balance sheets.

125               Mr Hamilton prepared from Wellnora’s general ledger comparative figures showing the yearly assets and liabilities and profit and loss figures for trading and accumulated losses at the date of his appointment.  He expressed the opinion that, although Wellnora had recorded trading losses, they were partly prior to the year ended 30 June 2004, the year of the sale of the units (with the exception of Unit 1, the sale of which was completed on 12 August 2005).  Carrying charges were written off in the year incurred.  Mr Hamilton states that with the use of a different accounting concept, those charges could, and probably should, have been capitalised.  The losses were in fact incurred in the years 2004 and 2006 (on Unit 1) on the realisation of the units.  He said it was difficult to see how it could be said that at the time of realising the units, Wellnora’s director should have suspected that the company was insolvent or that the director had incurred the debts without any expectation that Wellnora would be able to pay them in the future.

126               In para 35 of his affidavit, Mr Hamilton stated:

The sale of units, half finished, would not have been a commercially good decision.  Hence the financing by the related entities and secured creditors insisted I am told, on the GST being paid to them on settlement.  Whether this was the correct decision is arguable.  A director could have said no, you enter into possession as a controller, sell the units yourself and you will then have to account for the GST to the Plaintiff.  However, this in itself is a double edged sword.  Such a decision would have meant a greater loss in the sale of the units by a mortgagee in possession hence the problem associated in making such a decision.  As a consequence, the Plaintiff has suffered a loss.  So have the related entities.  The loss was caused by the downturn in the unit retail market.

 

127               Paragraph 38 of Mr Hamilton’s affidavit was as follows:

In doing my investigations, I became aware that Wellnora was a company whose only business had been to construct and sell 5 home units in Double Bay, NSW.  It had been funded by loans from unrelated secured creditors and related unsecured party companies.  Wellnora’s demise had been basically caused by the prices from these unit sales not covering the building costs for the units, given the dramatic fall in the unit market.  All those units had been sold by the time of my appointment and the secured creditors’ debts had been discharged under real property mortgages and fixed and floating charges.  One secured creditor, Stacks Managed Investments Limited (...) had not lodged their discharge of charge form at the time when I was appointed administrator.  It was lodges later, during the Wellnora administration.

 

128               Mr Hamilton stated that the DCT was the only external creditor of Wellnora not paid on the sale of the home units, and that the amount of GST payable had formed part of the settlement funds paid to the secured creditors on the settlement of each unit.

129               He stated that in the past Wellnora had proved its ability to carry on its business and to effect the completion of the units, even in “a disastrous unit market such as in this case”, building five units to completion and selling them.  He said that this in itself was one positive sign of Wellnora’s commercial ability.

130               Mr Hamilton acknowledged that certain matters would have given rise to “a moral issue” which he considered would influence any administrator in deciding whether to recommend a DOCA.  The matters to which he referred were:

·         commencement of a project that had not been completed;

·         purchasers off the plan left suffering as creditors;

·         incapacity to complete the project with the capital it employed and assistance from related entities;

·         reckless, wilful and unlawful acts and incurring of debts by a director;

·         embarking upon projects which were hazardous and unlikely ever to succeed;

·         promotion of the units for the benefit of directors and shareholders only.

In cross examination, Mr Hamilton said that if he had known of such matters, he would have sought legal advice and would not have simply exercised his own judgment on “issues of public morality and commercial morality”.

131               Mr Hamilton stated that in Wellnora’s case, according to what Mr Ang told him and he believed, the debt to the DCT arose because the secured creditor under a debenture charge and real property mortgage had insisted on being paid the GST component of the proceeds of sale on the settlement of each unit, but had failed to pay the amounts to the ATO.  He stated that the debts owed to related entities had been incurred in financing the development, and that the loss in trading was capable of explanation by the huge downturn in unit prices that took place in 2003.  He pointed out that the DCT and related entities had suffered loss but that the public had not.

132               Mr Hamilton exhibited to his affidavit his handwritten notes made in the course of preparing the Report.  He said that when preparing the Report, he had ASIC computer searches carried out in respect of companies of which James Soong or Desley Soong had been directors or shareholders, directly or indirectly.  He exhibited those searches to his affidavit.  Those that were relevant to the Report related to Wyreach, Ticaart Pty Ltd and Fyna Constructions (Hire & Sales) Pty Ltd.  They were relevant because they were seeking to prove as creditors.  The debts owed to other related entities or associated companies had been transferred to Wyreach at year’s end.

133               In para 46 of his affidavit Mr Hamilton stated:

In the time available I did not consider it my role to investigate every transaction with other companies related to the Soongs other than [the three just mentioned] as the task becomes unreasonably onerous in the time limits.

 

134               Mr Hamilton did not conduct Land Title Office searches before preparing the Report.  All of the settlements had occurred prior to his appointment and he obtained settlement sheets and some contracts of sale, details of which were referred to in the Report.  Historical information relating to Wellnora’s trading was available to him through Herbert Ang and Melvyn Myers.  Desley Soong was not a debtor of Wellnora on any loan account, and so it was not necessary to establish whether she had an interest in any real property.

135               Mr Hamilton analysed Wellnora’s transactions with those related entities, as defined in s 9 of the Act, that were creditors of Wellnora at the date of his appointment.  He examined those transactions back to 1 July 2001.

136               Mr Hamilton explains how he analysed the five debts claimed by associated entities of Wellnora to be owed by Wellnora to them.  He also explained his consideration of the questions of voidable unfair preferences (s 588FA), commercial transactions (s 588FB), insolvent transactions (s 588FC) and insolvent trading (ss 588G and 588M).  He also explained his consideration of the questions of any breach of fiduciary duty by Desley Soong under ss 181 and 182, aiding and abetting under s 79, and offences which he might be obliged to report to ASIC under s 438D.

137               In paras 62 to 68 of his affidavit, Mr Hamilton addressed the topic of “Commercial Morality and Proposed DOCA”.  He stated:

62.       Having considered all of the above, I then was of the view that I had to give weight to the commercial advantage to creditors of Wellnora as to what may be available to them in a winding up, as against the proposal that was made by Desley Soong for a DOCA which may give a greater return to creditors.  The proposal needed other alternatives to be considered such as a general moratorium for a period to enable Wellnora to recoup its cash flow problems or compounding of creditors debts by an immediate payment or payments over a period of time to participating unsecured creditors or any combination of the beforementioned which will show an advantage to creditors over a winding up, both by way of an immediate return and by continuing ability to deal with Wellnora in the future on a  going concern basis.

 

63.       The steps above only touch upon commercial morality and the public interest by considering the effect on a commercial return to creditors which may be achieved by recouping a loss to the corporation by misrepresentation, malfeasance, breach of fiduciary duty, insolvent trading or voidable preference which relates to any officer of Wellnora or director or related entity with which Wellnora has been involved in entering into transactions with that party.

 

64.       I did not consider it necessary to go beyond those matters I have enumerated above, in forming a decision or determination as to what is in the best interest of creditors, either the proposal and DOCA or a winding up.

 

65.       I did not look beyond those matters which I have taken into account and delve into the past history of companies that have been traded by James Soong and Desley Soong and to ascertain:

(a)        what was their outcome in so far as are they still trading;

(b)       had they been wound up, had they been subject to a DOCA;

(c)        what reports had been made by administrators and liquidators under Section 533 and Section 438D of the Act to ASIC;

(d)       were there incidences of offences in those companies;

(e)        were the DOCAs passed unfairly or improperly;

(f)        were there police proceedings against either of the directors or their family;

(g)        were they being investigated by any statutory authority and if so, for what possible offences such as the Office of Fair Trading.

I did not consider that it was my task or part of the proper performance of my statutory duties to investigate or consider these matters unless they involved Wellnora’s affairs.

 

66.       In undertaking my statutory duties with respect to Wellnora, I did not see an administrator in the role of a policeman or for that matter a liquidator in that role who had to take into account commercial morality in matters outside of the affairs of Wellnora.  The speculation into this area was not one which I believed was expected of me as an administrator of Wellnora.

 

67.       In undertaking my statutory duties with respect to Wellnora, it was not commercially possible for me to examine all of the affairs abovementioned in paragraph 65, before forming an opinion.  I do now and still see this as a police role or the role of the Office of Fair Trading or the role of ASIC or for that matter the role of the Plaintiff, if the Plaintiff believes that there has been a conspiracy to defeat the Commonwealth in Soong’s past dealings in other companies.

 

68.       I say these matters having regard to my experience detailed previously and advice given to me by senior counsel in so far as a liquidator’s role.  I conducted this administration, as well as my other administrations, on this basis.  I did not consider my statutory duties under the Act in acting as a voluntary administrator, required me to take these steps.

 

138               Mr Hamilton relates what transpired at the first meeting of creditors on 25 January 2006.  The four related companies and James Soong were represented by Ron Gorrick and the ATO was represented by Mariza Federico.  At the meeting, Mariza Federico said nothing.  Mr Hamilton called for motions and none were put.  Mr Hamilton was not aware as to what information the DCT had about companies of which James Soong or Desley Soong were directors or shareholders (directly or indirectly) during the Wellnora administration.

139               Mr Hamilton states that he and Mr Fiorentino had previously received legal advice in relation to the exercise of the casting vote by an administrator to approve a DOCA.  They received that advice in connection with the Norton Developments Pty Ltd administration.  Mr Hamilton relates the nature of that advice as follows:

76.       The opinion of Counsel in that matter in conference was that from the point of view of the Administrator’s report to creditors, he had to consider any breaches of fiduciary duty related to the company the subject of his report which may have the effect of an officer of the  company being liable for any loss to the corporation.  Also the administrators had to consider their ability to recover such a loss and the overall effect that that has on any distribution that would be available to creditors in a winding up.  The broader aspect of the unjust treatment of the Plaintiff in the conduct of the company’s affairs unless that led to a commercial result emanating from an action against a director, or an incidence of an offence which should be reported to ASIC, were not matters which an administrator should concern himself with in making a determination of what was in the best interest to creditors as a whole.  The Plaintiff had its own remedies under taxation legislation and criminal legislation if criminal offences were involved.  The Plaintiff was not in a special or preferred position over other outstanding unsecured creditors.

 

77.       This accorded with my understanding of the duties and role of an administrator under the Act.

 

140               In cross examination Mr Hamilton elaborated on the understanding that he had of his duties in exercising a casting vote at a creditors’ meeting as follows:

... at the end of the day my determination is a commercial one and it’s not based on public interest or commercial morality.  It’s simply on the commercial interest of what I think shows a better return.  Even though, as you say, it’s a peppercorn, that’s what the duties laid down are.  If they want to change that, they should change the legislation.

 

141               He further explained his position during cross examination:

Counsel:  Well, did you ever say anything to those proposing the deed, I cannot possibly support a deed of company arrangement that offers less than a cent in the dollar over $6 million worth of debt?

Mr Hamilton:  No because according to my legal advice it can be a peppercorn providing it shows a better return than the winding up.

 

Counsel:  So that is the sole determinant in your mind?

Mr Hamilton:  That is the statute.  If you want to change it, change it.  And frankly I would be very happy to see it changed.  At the moment administrators are put in the position that having done an investigation if the offer shows a better return they have to recommend it.

 

Counsel:   So even if your investigation discovered the most heinous breaches of the Corporations Act if the directors’ proposal offered one cent more than you could be confidently predicting in a winding up that would pass muster as a deed proposal, would it?

Mr Hamilton:  No, if it is heinous and it is capable of being a loss to the corporation, then there is a chance of recoupment of an asset in a winding up, so there wouldn’t be the proposition that you put forward.  It would never arise.

 

142               Finally, he said:

My view was that the role of an administrator is to work out after an investigation what he considers the likely recovery in the winding up would be.  He has to match that against what is offered, [carry out] a balancing act ... as to which is the better.  He then recommends that which gives the better commercial return.  At the same time he has to make the creditors [aware] of all the instances of offences, anything that’s – all of the facts and evidence that’s influencing his decision that moneys won’t be recovered in a winding up or will be and of course if there is any instance of offences in the course of his investigations which have to be reported to ASIC he should make that report.  At that stage I don’t believe an administrator has any duty to consider ... commercial morality or [the] public interest.  On the other hand if he comes across ... instances of both he should put it in his report, so that even if he doesn’t have to consider it creditors can weigh it up in their own minds and that should be done and of course he should report to ASIC the instances of offences that he may have come across during the course of his investigations.  He is not a policeman.  He is not put in there to investigate this company with a view to finding offences, with a view to prosecutions of directors and this type of thing.  It’s quite clear that he’s put in there to establish what are the best realisable values of assets both from the point of view of the tangible assets and voidable dispositions or antecedent transactions.

 

143               Mr Hamilton states that he formed the opinion and made the recommendation in the Report that Wellnora’s creditors should support the proposed DOCA having regard to:

(a)        his investigation and analysis of Wellnora’s affairs, the nature of its business activities, his understanding of the nature and duties of the office of administrator, and the matters he was required to investigate and form opinions and make recommendations about under Pt 5.3A of the Act; and

(b)        the advice he had previously received from counsel and other legal advice as to how to exercise the casting vote and the nature and duties of the functions of his office.

144               In a matter that was taken up with Mr Hamilton in cross examination, he states that he travelled overseas on 26 January 2006 (the day after the first meeting of creditors) and returned to his office on 14 February 2006 (the date of the second meeting of creditors).  Before leaving for overseas, he was aware that there was a real possibility that he may need to exercise the casting vote at the second meeting to be held on 14 February because the creditors of Wellnora that were related entities might well vote in support of the proposed DOCA because they would benefit from it and Ms Soong may have ascertained the prospect of this occurring before putting up the funding proposal which formed the basis of the proposed DOCA; and the DCT might well vote against the proposed DOCA as she had already commenced a proceeding to wind up Wellnora.  Accordingly, Mr Hamilton contacted the solicitor who had settled the Supplementary Report and was in possession of a copy of the Report.  The solicitor advised him that he (Mr Hamilton) had no particular duty of care to the DCT and that his duty of care as administrator was owed to all creditors of Wellnora;  that there was no need for him to give greater weight or emphasis to the DCT’s position; and that there was no broader public interest or commercial morality that he had to consider.  The solicitor advised him that he should exercise his casting vote in accordance with the recommendation he had made in the Report.  That advice, according to Mr Hamilton, was consistent with his understanding of his statutory duties as administrator and the advice that he had previously received from counsel.

145               Between the date of the Report (25 January 2006) and the date of the second meeting of creditors (14 February 2006), Jocelyn Williams of Mr Hamilton’s office obtained information from Giles Woodgate, the administrator of Parkwind.  This led to the preparation of the Supplementary Report addressing the transaction with Parkwind involving the two amounts totalling $300,000 (see [84] above).  No other information was made known or available to Mr Hamilton, including by the DCT, prior to the Supplementary Report being despatched.

146               The second meeting of creditors lasted no more than about five minutes.  Mr Hamilton describes the meeting as being “in substance, mechanical in nature”. As noted above, Leisa Kelly who attended on behalf of the DCT did not raise any concerns she had about the matters now raised in the DCT’s points of claim, either prior to or at the meeting. 

147               Because there was no discussion by any of the creditors of the Report, the Supplementary Report or Mr Hamilton’s recommendation, he understood that each creditor was satisfied with the content of the documents and accepted or rejected his recommendation, having formed their own opinions and views about whether or not Wellnora should enter into the proposed DOCA.

148               The passing of the resolution on Mr Hamilton’s casting vote was not the only decision taken at the meeting on 14 February 2006.  A resolution approving the Administrators’ remuneration from 18 January 2006 to 14 February 2006 in a sum of $18,672 ex GST was passed unanimously.  Thus, Leisa Kelly, representing the DCT, did not take the opportunity of expressing any misgivings about the quality of Mr Hamilton’s work or about the Report.  A further resolution approving the hourly rates for Mr Hamilton and his staff of administering the DOCA, the approval being capped at $10,000 ex GST was passed with Ms Kelly abstaining.  On the basis that this cap would be reached, we can see that Mr Hamilton’s fees would total $28,672 ex GST.

149               In his affidavit Mr Hamilton responds to the individual allegations made in the DCT’s points of claim.  For example, he states that he did not know and was not told by any person on behalf of the DCT that the DCT had formed the view that the proposed DOCA, if approved, would be an example of a “pattern” of behaviour by Ms Soong or Mr Soong undertaken in respect of a large group of companies designed to avoid liabilities, including, in particular, taxation liabilities.  He states that his own investigation and analysis of the affairs of Wellnora did not lead him to conclude that Wellnora had been established for the purpose of avoiding tax or that there had been a deliberate avoidance of tax.  He states that it would have been “particularly significant” for him to have been told this by a creditor because it could go to “the very purpose [for] which the proposed DOCA was to be entered into”.

150               Mr Hamilton was cross examined in relation to this last statement.  It was put to him that it amounted to an acknowledgment by him that considerations of commercial morality might properly influence the way in which he voted.  His explanation emerges in the following passage:

… All right.  What I’m saying is this.  I’ve already taken legal advice and been told that Part 5.3A is really a matter of balancing on a set of scales what’s in the best interest of creditors: the winding up or the proposal in the DOCA.  I’ve already been told that I have no special duty to the Australian Taxation Office as distinct from other creditors.  I have a duty to creditors as a whole, not just one creditor.  If at that meeting, it had been brought to my attention that there was a likelihood that Mr Soong, through misuse of Part 5.3A and liquidations and other means of external administration, was taking advantage of the law by appointing administrators and liquidators to defeat the Tax Department being paid its debt and that there were 36 instances of this in the past, I would not have used the casting vote but I would have adjourned that meeting to get further legal advice as to my position because it’s not a position I’ve ever been in before.

 

Counsel:  So in some circumstances, matters beyond the direct commercial return might be relevant?

Mr Hamilton:  Yes, but it’s a matter of law more than – it’s something I need legal advice – as an administrator, I’m not confident to take on a semi-judicial function.

 

151               I do not think it necessary to address all of Mr Hamilton’s responses to all of the allegations made in the DCT’s points of claim.  The substance of Mr Hamilton’s response is set out at [51]–[60] above.

152               Mr Hamilton states that the ATO is frequently a creditor of companies that go into administration who votes upon whether a proposed DOCA should be approved.  He states that he has been involved in well over 100 administrations where this has occurred, yet he has never previously been in a situation in which the ATO has adopted the course it has adopted in relation to the administration of Wellnora.  Mr Hamilton states that on at least two occasions, he has exercised a casting vote in relation to a proposed DOCA where the ATO has voted against it.  He states that when he exercised his casting vote in the present administration, he had an expectation that, if the ATO possessed material information or views relevant to the exercise of the casting vote, the ATO representative would have informed him of them before casting her vote.  He states that he acted on this basis.

153               Mr Hamilton states that he is now faced with a situation in which, by reason of the allegations made in the DCT’s point of claim, his good standing and reputation as an administrator is to be investigated in respect of his conduct of the administration of Wellnora and his exercise of the casting vote.  Mr Hamilton asserts that he is being placed in this position because the DCT did not inform him of the matters which the DCT now alleges, thereby precluding him from considering those matters in deciding how to exercise his casting vote.

154               Mr Hamilton exhibits to his affidavit time sheets showing that a total sum of $38,525 is owing based on the hourly rates for himself and his staff in connection with the defence of this proceeding.  He refers to counsel’s advice to him that if the DOCA is set aside and the DCT is not required to reimburse the full amount of the Creditors’ Fund, he (Mr Hamilton) may face a liability in that amount ($65,000).  Finally, he notes that the DCT seeks an order for costs against himself and Mr Fiorentino personally.

155               I do not think it necessary to summarise paras 150 – 184 of Mr Hamilton’s affidavit, in which he addresses the various subparagraphs of para 31 of the DCT’s points of claim outlined above at [49].

156               Time sheets are exhibited to Mr Hamilton’s affidavit in respect of work done by him and his staff on the Wellnora administration.  Those covering the period 18 January 2006 to 14 February 2006 show remuneration and out of pocket expenses totalling $26,259, of which $18,672 (excluding GST) was approved by creditors at the meeting on 14 February 2006.  Those covering the period from 17 February 2006 to 28 June 2006 show work done pursuant to the DOCA and remuneration in a sum of $26,797.  That amount still requires approval by creditors or by the Court.

157               Mr Hamilton refers to cl 14.1(a) of the DOCA which provides to the effect that the DOCA terminates on the completion of the distribution of the Creditors’ Fund.  In paras 189 – 196, he explains how and when the amounts were paid constituting the Creditors’ Fund and how and when the Creditors’ Fund was disbursed.  Mr Hamilton states that on or about 21 June 2006, the Creditors’ Fund was exhausted. 

158               In Mr Hamilton’s fourth affidavit (the second one filed in the DOCA proceeding) he deals with the DOCA relating to Parkwind, the subject of the Supplementary Report.  As noted at [84] above, on or about 12 August 2005, two payments totalling $300,000 were made out of the settlement proceeds of Unit 1, 51-53 Carlotta Road, Double Bay to the Parkwind Pty Ltd DOCA administrator.  Mr Hamilton explains in some detail why, in his view, these amounts would not be recoverable by a liquidator of Wellnora.

CONSIDERATION

1.  General

159               In this section I will refer to some considerations of a general nature.

160               First, I was impressed by Mr Hamilton as a witness.  He was frank and forthcoming and had good recall.  I accept that he had a clear understanding, on the basis of legal advice that he had received previous matters, that the role of an administrator was limited by reference to the interests of the creditors as a whole, and, in particular, that an administrator was not required or at liberty to range widely into questions of the public interest or commercial morality.  This question is discussed at [210] ff below, but I note at once that it cannot be correct that an administrator is required by s 438A to carry out an investigation to the extent that was reflected in the detailed and probing analysis, all of course with the benefit of hindsight, that took place in the present hearing.

161               Second, the DCT does not suggest bad faith on the part of Mr Hamilton or that he was biased in favour of the Soong interests.  I find that Mr Hamilton stood ready, willing and able to recommend a winding up, and would have done so if he had thought this was in the interests of the creditors.

162               Third, the ATO officers did not, at or before either meeting of creditors, communicate to Mr Hamilton any concerns of the ATO or any information that was in the ATO’s possession.  In particular, they did not advise him (a) that the view was held in the ATO that there was a pattern of behaviour of Mr and Mrs Soong by which a company would be established for a project and go into external administration (liquidation or a DOCA) owing tax, or (b) that the DCT would apply to have the DOCA set aside.

163               Fourth, I accept that Mr Hamilton did not understand that Mr and Mrs Soong were deliberately engaging in a course of conduct of the kind just described.  There was a gross discrepancy between the extent of information held within the ATO and the understanding of ATO officers on the one hand, and the extent of information possessed by Mr Hamilton and his understanding on the other.

164               Fifth, the DCT has not indicated that she is prepared to fund investigations, public examinations or recovery proceedings by a liquidator of Wellnora.  I have no ground at present for thinking that any of these steps would be taken if Wellnora were to be wound up.

165               Sixth, the DCT did not lead expert evidence from a registered liquidator or official liquidator with relevant experience directed to showing that Mr Hamilton’s investigation, reporting or the exercise of his casting vote in favour of the DOCA were not supportable.

166               Seventh, there is no suggestion that Wellnora will resume trading.  It is finished as an operating entity.  Whether Ms Soong should be disqualified under Pt 2D.6 of the Act from managing a corporation is for ASIC to consider.

2.  The sections giving the Court power to intervene

167               Section 445C of the Act provides that a DOCA terminates when a Court makes an order under s 445D terminating it, or the company’s creditors pass a resolution terminating it, or, if the DOCA specifies circumstances in which it is to terminate, those circumstances exist, whichever of the three should happen first.  A DOCA is an instrument and it is therefore an infelicitous use of language to speak of terminating a DOCA.  The reference must be to terminating the operation of a DOCA.  Clause 14.1 of the present DOCA specified that the DOCA was to terminate, relevantly, “on the completion of the distribution of the whole Creditors’ Fund in accordance with [the DOCA]”.  In her amended originating process the DCT seeks an order “setting aside” the DOCA, not “terminating” it.  As appears below, I think that the operation of the DOCA terminated on 21 June 2006 when the Creditors’ Fund was exhausted.

168               Section 445G, noted at [24] has no application in the present case, and the DCT is right not to seek a declaration that the DOCA or a provision of it is void.

169               Section 600B empowers the Court to “set aside or vary” a resolution passed on the casting vote of the person presiding at the meeting of creditors.  In its terms, the amended originating process seeks, not an order setting aside the resolution of 14 February 2006, but an order setting aside the DOCA.  However, I treat the application, in so far as it relies on s 600B, as one for an order setting aside the resolution under s 600B and a consequential further order setting aside the DOCA.

170               The Administrators make a general submission that s 600B cannot be invoked to overcome a lack of power in the Court found in Div 11 of Pt 5.3A.  I do not agree that any limitations found within particular provisions in Div 11 of Pt 5.3A are to be read into s 600B.  In any event, since s 445D(1)(g) provides that the Court may make an order terminating a DOCA “for some other reason”, that is to say for any reason not found in paras (a) to (f) of s 445D(1), it is not obvious what limitations could be said to be “transferred” from Div 11 into s 600B.

171               In my view, the power conferred on the Court by s 600B is an ample one which can be exercised by reference, not only to the interests of creditors, but also by reference to the public interest and commercial morality.  A similar observation applies in relation to the power conferred on the Court by s 447A.  Although Bidald Consulting v Miles Special Builders (2005) 226 ALR 510 concerned an application to set aside under s 445D, I treat what Campbell J said in that case at [286] ff about the relevance of public interest considerations to the exercise of the Court’s discretion as applicable, generally speaking, to the discretion under the two sections just mentioned. 

3.  The issue of termination of the DOCA and constitution of the Creditors’ Fund

172               The Administrators contend that the DOCA terminated on 21 June 2006 when the Creditors’ Fund was fully exhausted:  see s 445C(c) of the Act and cl 14.1(a) of the DOCA.  As already observed, s 445C provides that a DOCA terminates when the first of three events identified in the section occurs, one of the events being “(c) if the deed specifies circumstances in which it is to terminate – those circumstances exist”.  Clause 14.1(a) of the DOCA specified that the DOCA was to terminate “on the completion of the distribution of the whole Creditors’ Fund in accordance with [the DOCA]”.

173               The Administrators say that the termination has two relevant effects.  The first is that since the DOCA had no further scope for operation after 21 June 2006, from that time the Court lacked power to terminate it.  I agree that if the DOCA terminated at that time, by the operation of s 445C(c) and cl 14.1(a), the Court no longer has power to terminate the DOCA under s 445D.  The first reason is the general consideration that it would not be possible to terminate a DOCA that had already terminated.  Second, s 445C makes it clear that a DOCA terminates when any one of the three events specified in the section first occurs, and one of those events is the making of an order under s 445D terminating the DOCA (para (a)), while another is that the DOCA specifies circumstances in which it is to terminate and those circumstances exist (para (c)).  They are alternatives: if a DOCA terminates by reason of the operation of s 445C(c) and the existence of the circumstances specified in the DOCA as those in which it is to terminate, it is no longer possible for the Court to terminate it under s 445D.

174               The Administrators also submit that an effect of termination of the DOCA on 21 June 2006 is that the DCT thereupon ceased to be a creditor of Wellnora, and so ceased to have standing to apply under s 445D or 445G.

175               Section 444H provides that a DOCA releases the company from a debt only in so far as the DOCA provides for a release and the creditor concerned is bound by the DOCA.  The present DOCA did provide for a release of debts.  Clause 6.3 provided that on the payment out of the entire Creditors’ Fund in the order of priority provided for in the DOCA, creditors released and forever quitted Wellnora from all claims they had or claimed to have against it.  Although the language of cll 14.1 and 6.3 is not identical, in substance the descriptions are the same: there must be a complete distribution (payment out) of the whole (entire) Creditors’ Fund in accordance with the DOCA (or in the order of priority provided for in the DOCA).

176               It is not disputed that the DCT was bound by the DOCA.

177               Accordingly, termination of the DOCA and release of the debt owed by Wellnora to the DCT are coincident.

178               The DCT submits, first, that the DOCA did not terminate on 21 June 2006, and, second, that if it did, the Court may nonetheless make orders pursuant to ss 445D, 445G or 600B of the Act.  I have already said that in my view, termination of the DOCA on 21 June 2006 would mean that the Court could not now make orders under s 445D or s 445G.

179               However, termination of the DOCA on 21 June 2006 and the DCT’s thereupon ceasing to be a creditor of Wellnora do not deprive the Court of its jurisdiction under s 600B.  Section 600B(2) provides that a “person” may apply to the Court for an order under s 600B setting aside or varying a resolution carried on the casting vote of the person presiding at a meeting of creditors, provided the intending applicant voted against the resolution.  The DCT therefore has standing to apply under s 600B. 

180               Section 600B(3) empowers the Court, if it sets aside the resolution, to make such further orders, and give such directions, as it thinks necessary.  It seems reasonable to think that if a Court thought it proper to make an order setting aside the resolution, the Court would think it necessary to make a further order setting aside the DOCA – the very instrument that the Act required to be executed and to which the Act gave certain effects by reason of the resolution (see ss 439C(a) and 444A–444H).  The setting aside of the resolution and of the DOCA go hand in hand.  Section 600E preserves the validity and binding effect of acts done pursuant to the resolution before the making of the order.  It was not suggested that this provision extended to preventing the Court from making an order setting aside the DOCA under s 600B(3)(b) and I do not think it does: under the Act, the passing of the resolution and execution of the DOCA are so closely interrelated that it would be irrational to provide for the resolution to be set aside without permitting the resulting DOCA to be set aside too.  In any event, s 447A of the Act is another source of the Court’s power to set aside the DOCA which may be invoked by “any ... interested person” (s 447A(4)(f)), such as the DCT.

181               It is necessary now to turn to the DCT’s submission that the Creditors’ Fund was never duly constituted because Ms Soong did not pay $65,000 to the Administrators by 24 February 2006 as required by the DOCA.

182               Clause 4.1(b) of the DOCA provided:

The Proposer [Ms Soong] must pay $65,000.00 to the Administrator by an unendorsed bank cheque, by 5.00pm on the day 7 days after the Commencement Date [17 February 2006] pursuant to the Deed of Funding which shall form the Creditors Fund.

 

The funds were to be held in trust by the Administrators and paid into a separate bank account which was to include in its name the term “Creditors Fund”. According to the definition of “Deed of Funding” in cl 1.1 of the DOCA, the Deed of Funding was the deed annexed to the DOCA and marked “A”. 

183               It is clear that Ms Soong did not perform the obligation she undertook by cl 4.1(b); nor did she comply with cl 3.1 of the Deed of Funding which was to a similar effect.  However, her failure did not automatically bring about a termination.  Clause 14.1(d) provides that one of the events that will occasion termination of the DOCA is a failure by Ms Soong to comply with cl 4.1(b) and the Administrators forming the view that they will be unable to recover the sum of $65,000 from her.  That is to say, the DOCA is not to terminate by reason of nothing more than Ms Soong’s failure to comply with cl 4.1(b):  the Administrators must also form a view that they will be unable to recover that sum from her.

184               The establishment of the Creditors’ Fund was undoubtedly irregular.  It is necessary to outline the evidence. 

(1)        On 17 January 2006, Melvyn Myers met with Mr Hamilton and briefed him in relation to Wellnora and the desire that a DOCA be entered into with a fund of $25,000 plus costs.  Mr Hamilton said that $5,000 would have to be paid into Hamiltons’ trust account on account of their fees.  He also quoted a fee of $10,000 plus out of pockets of $3,000 plus legal costs in relation to dismissal of the winding up application.

(2)        On 18 January 2006, Fyna Formwork (NSW) Pty Ltd paid $5,000 into Hamiltons’ trust account.  I infer that it did so pursuant to Mr Hamilton’s request of the preceding day.

(3)        On 18 January 2006, the Administrators were appointed administrators of Wellnora.

(4)        On 24 January 2006, Ms Soong submitted her proposal for a DOCA involving her creating a Creditors’ Fund of $65,000.

(5)        On 24 January 2006, Mr Hamilton requested Mr Myers to pay $5,000 into the trust account of Purcell Insolvency Lawyers (Purcells) as an advance on the Creditors’ Fund to enable the winding up proceeding to be defended.

(6)        On 25 January 2006, the first meeting of Wellnora’s creditors was held.

(7)        On 27 January 2006, through the Commonwealth Bank’s “NetBank”, Fyna Formwork (NSW) Pty Ltd transferred $5,000 from its bank account direct to Purcells’ trust account.  (Purcells recorded the amount as having been received on 31 January 2006, but the discrepancy as to the date does not matter.)

(8)        On 8 February 2006, the Administrators transferred $5,000 from Hamiltons’ trust account to establish a new account at the ANZ Bank, being the “Creditors’ Fund” account, apparently in anticipation of the creditors resolving that the proposed DOCA be executed.

(9)        On 14 February 2006, the second meeting of Wellnora’s creditors was held.

(10)      On 17 February 2006, the DOCA and the Deed of Funding were executed.

(11)      On 20 February 2006, 3 March 2006 and 12 April 2006, Purcells transferred, in sums of $1,661.83, $1,984.13 and $1,354.04 respectively, the sum of $5,000 from their trust account in payment of their legal costs.  In fact, the third payment ($1,354.04) did not cover all of their fees outstanding.  All three transfers were authorised in writing by Mr Hamilton as one of the two Administrators.

(12)      On 27 February 2006 Ms Soong or Fyna Formwork (NSW) Pty Ltd paid $25,000 into the Creditors’ Fund account.  In her covering letter to Hamiltons, Ms Soong stated with reference to the amount of $65,000 that $35,000 had been paid to date (referring no doubt to the two sums of $5,000 paid to Purcells and to Hamiltons respectively, and the present payment of $25,000).  She said that she expected that the balance of $30,000 would be paid electronically on Monday 6 March 2006.  She concluded “trusting this arrangement meets with your approval”.

(13)      On 9 March 2006, the remaining sum of $30,000 was paid into the Creditors’ Fund account.  Apparently the payment was made by Fyna Formwork (NSW) Pty Ltd or by Ms Soong.

185               A copy of a statement of the transactions on the Creditors’ Fund account demonstrates that the payments of $5,000 on 8 February 2006, $25,000 on 27 February 2006, and $30,000 on 9 March 2006 were paid into that account.  The only sum that was not paid into it was the sum of $5,000 that was paid to Purcells on 27 (or 31) January 2006 by direction of Mr Hamilton and transferred in payment of that firm’s costs over a period from 20 February to 12 April 2006.

186               The last payment out of the Creditors’ Fund was made on 21 June 2006, leaving a nil balance at that date.

187               The DCT submits that the DOCA did not authorise Mr Hamilton to pay $5,000 to Purcells.  However, I think it was a cost of the Administrators.  Clause 7.3(m) gave the Administrators power to do anything necessary or convenient for the purpose of administering the DOCA.  It is clear that the Administrators found it necessary and convenient to pay Purcells to appear in, and apply for an adjournment of, the winding up proceeding.

188               No doubt, the payment of $5,000 that went to Purcells should have gone through the Creditors’ Fund account.  However, the Administrators took no steps to terminate the operation of the DOCA because of the breach by Ms Soong, and could hardly have done so since it was they who requested that she pay Purcells.

189               While there were irregularities touching the payment of the sum of $65,000, the Administrators were satisfied the amount was provided by or on behalf of Ms Soong.  I am not satisfied that there was a failure to constitute the Creditors’ Fund that prevented the DOCA from having effect.

190               Since the distribution of the Creditors’ Fund was completed on 21 June 2006, the operation of the DOCA terminated on that date.

4.  The creditors would not have voted differently

191               Neither the DCT who voted against the DOCA nor the creditors who voted for it would have voted differently if Mr Hamilton’s report had referred to the considerations touching the Soongs and their companies that the DCT contends should have been addressed in the s 439A report.  A file note made by Leisa Kelly on 15 February 2006 records as follows the reasons why she had voted against the DOCA the previous day:

There are many adverse features in the deed being accepted they are as follows;

·         The compliance history of the company and the compliance history of other corporation’s [sic] which the director of the debtor company has been associated with.

·         The tangible benefit to the commonwealth revenue is minimal under the DOCA with a dividend of between .6 to 1 cent in the $.

·         The fact that 3 of the related party claims have not been substantiated which Mr Hamilton admitted to in the meeting but advised that he would allow for voting purposes, but would note in his minutes that they have been objected to.

·         The fact that the ATO has been prejudice [sic] against in the fact that we had no chance of winning the vote due to the related creditors claims (as far as I can see there are no other creditors of the company).  Mr Hamilton used his casting vote in favour of the related parties even though he knew that they would have a vested interest in the company.

·         The fact that if the deed is allowed to remain then the director is free of any scrutiny of the company which can only be done if the company is placed into liquidation.

 

Given the fact of this director’s poor compliance history and that of her Husbands, [sic] I believe that the deed should be overturned to allow the liquidator access to further investigate the books & records of the company for uncommercial transactions and trading whilst insolvent, if the liquidator can prove that the company was trading whilst insolvent, then there is a possibility that the director can be made bankrupt which will stop her from being a director of any other company.  I would also like a court appointed Practitioner to take over the administration of the company as I believe the current administrator favours the director and the related parties.

 

The following day, 16 February 2004, Ms Kelly wrote a memo to Ms Brennan setting out her reasons in terms identical to the above.  Ms Brennan recorded her concurrence in a file note in the following terms:

I concur with Leisa the client has a history of debt and then liquidating or entering into a deed of arrangement.  The current deed is only offering 0.6 cents in the dollar.  The deed was only passed as the other creditors were related parties with an interest in allowing the company to enter into a deed.  The director has a history of non-compliance with debts from all the companies the director has been associated with totalling more than 7 million.  I also agree with appointing a court appointed liquidator as the administrator liquidator should have been aware of the director’s history and the size of the ATO debt yet still supported a deed of less than 1 cent in the dollar another liquidator could investigate any insolvent trading activity by the director.

 

Also in cross examination, Ms Brennan said that Leisa Kelly had indicated to her that her concern was the compliance history of Wellnora, and that the DCT was not going to vote for the DOCA because of the compliance history of Wellnora and of related entities.  Nothing Mr Hamilton might say in the Report would change Wellnora’s compliance history or the low level of dividend offered by the proposed DOCA.

192               I also infer that the five related creditors would not have been influenced to vote differently by anything Mr Hamilton might have said in his report.  In any event, it is part of the DCT’s case that they would not have been.  The creditors who supported the DOCA were part of the Soong group and were committed to the DOCA, just as the DCT was committed against it.

193               The DCT’s case is, therefore, that Mr Hamilton’s investigations under s 438A into Wellnora’s business, property, affairs and financial circumstances should have been more extensive than it was so that he himself would have been better informed and better placed to exercise his casting vote.

5.  Scope of an investigation under s 438A

194               In the concluding words of the Report, Mr Hamilton drew attention to the fact that he had “carried out a summary investigation” (see [81] above).  Was this enough?

195               Pt 5.3A was introduced into the Corporations Law in 1992 by the Corporate Law Reform Act 1992 (No 210 of 1992) as a result of a recommendation of the Australian Law Reform Commission’s Report 45, General Insolvency Inquiry (1988) (the Harmer Report).  The Harmer Report stated (at para 46):

A scheme of arrangement requires court proceedings.  An order of the court is necessary to convene a meeting of creditors and another order is necessary to ratify the decision of that meeting if the proposal for a scheme is accepted.  The CAC [Corporate Affairs Commission] must be given notice of the proceedings.  The CAC may make submissions to the court on the proposed scheme.  The procedure for a scheme of arrangement is cumbersome, slow and costly and is particularly unsuited to the average private company which is in financial difficulties.  The time taken to implement a scheme varies but in general is at least two to three months.  The legal and accountancy costs of even a relatively straightforward scheme are substantial.  Despite time and cost, the procedure if the proposed scheme is rejected by creditors or not approved by the Court, will not, of itself, result in an alternative form of insolvency administration, such as a winding up. 

 

The reference to a “scheme of arrangement” was a reference to a compromise or arrangement between a company and, relevantly, its creditors or any class of them under Pt 5.1 of the Corporations Law (on the more recent use of schemes of arrangement to effect change of control transactions, see Damian T and Rich A, Schemes, Takeovers and Himalayan Peaks (Ross Parsons Centre of Commercial, Corporate and Taxation Law, Faculty of Law, The University of Sydney, 2004)).

196               The Explanatory Memorandum for the Corporate Law Reform Bill 1992 stated (para 449) that the new Pt 5.3A was intended to provide for:

·         speed and ease of commencement of administration;

·         minimisation of expensive and time-consuming court involvement and formal meeting procedures;

·         flexibility of action at key stages in the administration process; and

·         ease of transition to other insolvency solutions where an administration does not by itself offer all the answers

197               The objectives stated in the Explanatory Memorandum are reflected in Pt 5.3A.  The circumstance that a company may appoint an administrator only if the board has resolved that in the opinion of directors voting for the resolution, that the company is either already insolvent or likely to become insolvent (s 436A), suggests some urgency.  In the present case, the only choice was between a DOCA and an immediate winding up.

198               There are other indications in Pt 5.3A that a company administrator is required to act with expedition.  Section 436E requires the administrator to convene the first meeting of creditors within five business days after the administration begins (it begins when the administrator is appointed – in the present case on Wednesday 18 January 2006).  Section 438A provides that “[a]s soon as practicable after the administration begins”, the administrator must investigate the company’s business, property, affairs and financial circumstances, and form an opinion as to whether it would be in the creditors’ interests for the company to execute a DOCA, for the administration to end, or for the company to be wound up.  Section 438B provides that “[a]s soon as practicable after the administration begins”, each director must deliver all books in his or her possession to the administrator and tell the administrator where other books are.  Section 438B(2) provides that within seven days after the administration begins, the directors must give the administrator a statement about the company’s business, property, affairs and financial circumstances.  Most importantly, s 439A requires the administrator to convene within (in the circumstances of the present case) a period of 21 days beginning on the day when the administration begins, a meeting of the company’s creditors to be held within five business days after the end of that convening period.

199               In the present case the convening period ended on Wednesday 8 February 2006 and the meeting had to be held by Wednesday 15 February 2006.  Accordingly, the Administrators were required by 8 February 2006 to complete their investigation and form the opinions referred to in s 438A, and also to prepare the notice to creditors of the second meeting of creditors, together with the Report, statement of opinion and statement setting out details of the proposed DOCA that were required to accompany that notice: see s 439A(4).

200               It would, however, have been open to the Court to extend the convening period on an application made by the Administrators within the convening period (see s 439A(6)) or for the creditors to adjourn the meeting to a day not later than 60 days after the first day on which the meeting was held (s 439B(2)).

201               Notwithstanding those possibilities, it would frustrate the legislature’s intention if extensions and adjournments were anything other than exceptional.  So much has been recognised in the cases.

202               In Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 (Hagenvale), Cohen J stated in relation to Pt 5.3A (at 145–146):

... an administrator, constrained as he or she is by the time limits imposed under the Part, cannot carry out a detailed investigation of a company in the same way as can a liquidator, and accordingly the administrator’s actions must be looked at in the light of that more restricted range of activities which are available to him [or her].  A further result, when dealing with a deed of company arrangement under Pt 5.3A, is that the amount of detailed information which would be given to creditors in a scheme of arrangement under s 411 of the Corporations Law is not available, again because of time restrictions and the need to have material sent to the creditors quickly.

 

203               Similarly, in Deputy Commissioner of Taxation (Cth) v PDDAM Pty Ltd (1996) 19 ACSR 498, Heerey J observed that the Harmer Report and the Explanatory Memorandum referred to above, indicated that the investigation was to be “a swift and practical one” (at 510).  His Honour observed that Pt 5.3A assumed that the company was either trading while insolvent or was likely to be trading while insolvent within a predictable period of time, citing s 436A(1)(a).  His Honour considered that it was self-evidently essential that such a state of affairs be brought to an end promptly, either by the execution of a DOCA or by a winding up.  Heerey J observed (at 510) that “[t]he tight timeframes set for the convening of the first and second meetings of creditors are consistent with that need”.

204               In Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 (Portinex), Austin J noted (at [125]) that it was “an unfortunate but unavoidable consequence of the scheme established by Pt 5.3A that the creditors must make their decision on the basis of information that is likely to be imperfect”.  After referring to Hagenvale 17 ACSR 139, his Honour stated (at [126]–[127]):

[126] The balance between speed and accuracy is a delicate one.  An administrator who accepts the company’s information uncritically and without exercising judgment, cutting corners to complete the administration and receive his fee, will be treated harshly by the court, since the whole scheme of Pt 5.3A depends on the independence, competence, professionalism and hard work of the insolvency practitioners who accept appointments as voluntary administrators.

 

[127] The distinction between an adequate preliminary investigation, leading to the conclusion that there are grounds for suspecting insolvent trading and unfair preferences but going no further, and an inadequate preliminary investigation which fails to assemble available information with respect to insolvent trading and unfair preferences, is a matter of degree.  If the administrator has conducted an adequate preliminary investigation in accordance with the principles in the Hagenvale case, his obligation is to bring the results of the investigation to creditors so that they can decide what is to be done next.  If the administrator’s preliminary investigation has been adequate, he is entitled to decline to embark upon further substantial investigations unless funds are made available to cover his fees and expenses of doing so. 

 

205               The DCT has, however, rightly drawn attention to the note of caution sounded by Gillard J in Re Rugs Galore Australia Pty Ltd;  Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126 (Rugs Galore) at [75]–[79]:

[75] The extent of the investigation is in the end a matter for the administrator.  Hence the importance of his impartiality, independence and requirement to act carefully in the interests of the creditors.

 

[76] Whilst there are strict time limits and the administration is intended to proceed speedily there is no excuse for failing to carry out a full and proper investigation.  What is a full and proper investigation will depend on all the circumstances but matters of concern to creditors are preferences, possible directors’ breach of duty, possibility of recovering compensation from directors who conduct the company’s business knowing it is insolvent, and recovery of compensation from de facto directors.  Another matter of importance is the recovery of any of the corporation’s property which has been unlawfully transferred.

 

[77] In my opinion it is no excuse to limit a full and careful investigation by reference to the time limits set out in the Law.  Time limits require expedition, and a full investigation may require further resources being used and if necessary the second meeting be adjourned or an application for extension of time be made.  Further resources would include the employment of enough personnel to adequately perform the task.  The fact that the second meeting can be adjourned from time to time supports the view that the administrator should not refuse to investigate fully a matter because of time constraints.  In the end result the creditors must know.  They are entitled to a thorough investigation.  They rely on the administrator performing his task.  Failure to properly investigate puts at risk the whole object of Part 5.3A which ultimately leaves the decision to the creditors making an informed decision.  If the administrator is unable to make a proper investigation in respect of matters of importance to the creditors’ decision he should tell them.  He should alert them that there are matters relevant to their interests which should be further investigated.  Much can be gained by shareholders, directors and others from a deed of company arrangement “wiping the debts” and putting beyond the reach of the law the delinquencies of directors and others involved with the company’s business.  It behoves an administrator to properly fulfil his duty.

 

[78] There are dicta in the cases suggesting that the time limits imposed for the convening of the second meeting can affect the amount of information that should be provided to the creditors.  An administrator should not take those observations as being an excuse for failing to properly, adequately and carefully investigate matters which are material to the decision of the creditors or failing to inform the creditors on material matters.

 

[79] The administrator has extensive powers and it is no excuse not to fully, carefully and adequately investigate a matter which would bear on the decision of the creditors.  There is a tendency to assume that if any money is available to a creditor pursuant to a deed of company arrangement which is in excess of any amount that would be recovered on a liquidation, that is a proper basis for opining the view that company arrangement is the best alternative.  Therefore there is no necessity to concern the creditors about other issues.  The argument is the bottom line is money, and irrespective of how much, a receipt of something is better than nothing.  But there are other factors which may influence creditors.  They should have the benefit of a proper investigation. 

 

206               As I think Austin J implied in Portinex 34 ACSR 391, it must often be a difficult question for company administrators how far to go in their investigations and report.  An administrator does not have the powers of a liquidator, and I do not understand Gillard J in Rugs Galore [1999] VSC 126 to have suggested that an administrator should be held to standards applicable to a liquidator.  Much will depend on what comes to the administrator’s notice in the course of his or her investigations, and how much will come to notice will be influenced by, among other considerations, the fact that he or she is not expected to conduct a moral crusade (see [210] ff below).  It will often be appropriate, as Mr Hamilton did, to draw the creditors’ attention to lines of inquiry that it would be open to a liquidator to pursue, to the likely cost of pursuing them, to the need for funding, and to the issue whether the prospective defendant would have the means to satisfy a judgment.

207               Mr Hamilton allowed himself a period of eight days (18 January 2006 to 25 January 2006) for preparation of the Report.  He was to be overseas from 26 January to early on 14 February 2006.  He expected that the circumstances of Wellnora would conform to those of Norton Developments Pty Ltd, of whose DOCA he and Mr Fiorentino had been administrators as recently as from 5 September 2005 to 21 October 2005.  Mr Hamilton firmly maintained that the period from 18 January to 25 January 2006 was adequate for him, denied that it was artificially shortened because of his overseas trip, and pointed out that pursuant to instructions left by him, the Supplementary Report was issued on 8 February 2006.  Mr Hamilton said that he spent 23.6 hours in carrying out the investigations and forming the opinions preceding the Report, and in preparing the Report.

208               I summarised the Report at [65]–[81] and the Supplementary Report at [82]–[86] above.  Subject to what I say at [234] ff below concerning Wellnora’s failure to pay GST, I think that Mr Hamilton’s investigations, forming of opinions and reporting to creditors did not fall short of the requirements imposed on him by the Act.  Relevant to this conclusion is my view expressed below at [210] ff that the scope of an administrator’s investigations and reporting are limited by reference to the interests of the creditors as a whole in having their debts paid.

209               Unfortunately, Mr Hamilton faced the special difficulty that notwithstanding the adequacy of the Report and the Supplementary Report, the creditors did not resolve one way or the other, and his casting vote became crucial.  This circumstance did not oblige him to revise his position from a different perspective.  As will appear, subject to the same reservation, I think he was entitled to vote in conformity with the Report.

6.  The question of the public interest and commercial morality

210               In my opinion it was not incumbent on Mr Hamilton to take it upon himself to pursue a wide ranging inquiry into the public interest and commercial morality in the context of the DOCA proposal.  He was not required to assume the role assigned to ASIC, the ATO, and other public authorities invested with powers and responsibilities of law enforcement.  His proper concern was the interests of Wellnora’s creditors in having their debts paid.  Section 438A of the Act makes this clear.  It obliges an administrator to “investigate the company’s business, property, affairs and financial circumstances” (para (a) – emphasis added) and to form an opinion about the interests of “the company’s creditors” (para (b) – emphasis added).  The scope of the former duty is to be understood in the light of the latter.  That is to say, when one asks why the administrator is required to “investigate the company’s business, property, affairs and financial circumstances”, the answer is: “in order to form an opinion about each of the” matters relating to the interests of the company’s creditors referred to in subparas (i), (ii) and (iii) of para 438A(b).

211               It is the interests of the company’s creditors as creditors with which an administrator must be concerned.  Accordingly, if it appeared to an administrator that a proposed DOCA would be in the interests of certain creditors in a different capacity, such as the capacity of directors, it would be impermissible for the administrator to support the proposed DOCA by reference to those interests.  Mr Hamilton acknowledged this aspect of the general principle.

212               This position is not, however, as extreme as it may first appear to be.  First, as Mr Hamilton makes clear in the Report, the notion of the interests of creditors embraces reference to the recoverability by a hypothetical liquidator from third parties for the benefit of creditors.  Second, again as he accepted, an administrator must not support a proposal for a DOCA that constitutes an abuse of the process provided by Pt 5.3A, an invocation of that process for an improper purpose alien to Pt 5.3A.

213               The DCT submits, and Ms Brennan believed, that Mr Hamilton could and should have discovered the information about the numerous Soong companies that was publicly available through ASIC, as the DCT did, and should have been persuaded, as Ms Brennan was, that there was a “pattern” of deliberately setting up a company for a particular project, running up debt, then closing down the company by way of an external administration with tax outstanding.  But Mr Hamilton was not obliged to go further than he did, in the absence of any suggestion from the materials before him and matters coming to his notice, that the Pt 5.3A mechanism was being abused.  He knew only about the DOCAs relating to Norton Developments Pty Ltd, Marquelex Pty Ltd and Metroform Pty Limited, and that one other Soong company had gone into external administration owing a substantial tax debt – a small fraction of the troubled Soong companies that were referred to at [95]–[96] earlier.

7.  The power to exercise a casting vote

214               In R v Bradford Metropolitan City Council; ex parte Corris [1989] 3 All ER 156 at 160 Neill LJ said:

A person who has a second or casting vote is clearly under a duty to exercise it honestly and in accordance with what he believes to be the best interests of those who may be affected by the vote.  Subject to this, however, it seems to me that the person presiding at a meeting is fully entitled to use his vote as he thinks fit.

 

According to this passage, Mr Hamilton was required to exercise his casting vote honestly and in accordance with what he believed to be the best interests of the creditors.  He did so.

215               Unlike her colleague, Leisa Kelly, who seems to have thought that Mr Hamilton was committed to favouring the DOCA, Ms Brennan disavowed any such view.  She seems to have accepted that Mr Hamilton acted in good faith and without bias when he voted in the way he did.  In any event, I find that he did.

216               Mr Hamilton had calculated that the DOCA would give creditors a marginally better return than a winding up would do.  The dividend that the proposed DOCA promised was paltry, but it exceeded what creditors would receive on a winding up.  Mr Hamilton considered the likelihood of recoveries by a liquidator and dealt with the matter in the Report and the Supplementary Report, concluding that the likelihood of a successful claim was so small as not to outweigh the tiny dividend offered by the proposed DOCA.  On what basis should Mr Hamilton have exercised his casting vote to deny creditors the promised dividend, very small though it was? 

217               The question of the considerations that are relevant to a company administrator’s exercise of a casting vote under reg 5.6.21 and of applications under s 600B to set aside a resolution passed on the casting vote has been considered in Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707 (Bartlett),  Re Coaleen Pty Ltd (Administrator Appointed) (1999) 30 ACSR 200 (Coaleen),  Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487,  Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (2001) 37 ACSR 394 (Cresvale),  Young v Sherman (2002) 170 FLR 86, and Blue Ring Pty Ltd v Landshore Pty Ltd (Subject to a Deed of Company Arrangement) [2006] WASC 245 (Blue Ring).

218               These authorities show that:

(1)        Good faith alone will not necessarily shield the resolution from a setting aside (or variation) under s 600B (Cresvale 37 ACSR 394at [111]);

(2)        A factor that may justify setting aside the resolution is a statement in or omission from the administrator’s report under s 439A that is apt to have misled creditors when  they cast their deliberative vote (Blue Ring [2006] WASC 245);

(3)        Inadequacy and superficiality of an administrator’s investigation of the company’s business, property, affairs and financial circumstances, at least as disclosed by the evidence before the Court, may warrant a setting aside of the resolution (Bartlett12 ACSR 707; Cresvale 37 ACSR 394at [113]);

(4)        There is no presumption in favour of the majority in value, although any large disproportion between the values of the debts of the numerical minority and the numerical majority will be a factor to be taken into account (Coaleen 30 ACSR 200; Cresvale 37 ACSR 394 at [115]); and

(5)        Payment of a premium to the creditors who supported the DOCA but not to a dissident creditor will justify a setting aside by the court (Young v Sherman 170 FLR 86).

219               In Coaleen 30 ACSR 200, the plaintiff accounted for 96.3 percent of the company’s indebtedness.  In the present case the DCT represented 55.84 percent of the total amount for which creditors were admitted to vote.  If the amount truly owing to the DCT was only $681,990 as admitted by Ms Soong in the RATA, the percentage would be far below 50 percent.  However, if the amounts truly owing to Mr Soong and the Soong companies were less than the amounts for which those claims were admitted for voting purposes, the DCT’s debt could account for far more than 55.84 percent.  I can only consider the position on the basis that the amount owing to the DCT was just over 50 percent – a position vastly different from that in Coaleen 30 ACSR 200.

220               Mr Hamilton has given affidavit evidence in considerable detail of his course of reasoning and of the materials that led him to exercise the casting vote in the way in which he did.  He treated all creditors equally; carried out a thorough investigation; indicated lines of inquiry that could be pursued by a liquidator; formed the view that recovery proceedings by a liquidator would face hurdles and might well be fruitless, even if nominally successful; and exercised his casting vote in favour of the marginally better return that the DOCA offered.

221               It is difficult to understand the basis on which his vote can be impugned unless it should be on the ground that Mr Hamilton did not properly inform himself with respect to (a) the Parkwind/Wyreach transaction, or (b) Wellnora’s failure to pay GST to the DCT.  I will now turn to these two matters.

8.  The Parkwind/Wyreach transaction

222               In para 31(c) of his Points of Claim, the DCT complains that information about Wellnora’s business, property, affairs and financial circumstances that was misleading and could reasonably be expected to have been material to creditors in deciding how to vote was included in the Report.  The first particular given of this allegation concerns what has been referred to as the Parkwind/Wyreach transaction.  The particular is as follows:

The administrator’s [sic] first report to creditors pursuant to section 439A of the Corporations Act incorrectly describes a potential preference action against Wellnora’s ultimate holding company Wyreach Pty Limited, a company in which the director of Wellnora is also a director.  In their report the administrators incorrectly assess this as a potential preference action against Parkwind Pty Limited (subject to a deed of company arrangement) and then suggests [sic] that this claim is of no value as this company is unlikely to have any assets.  There is no reason to expect that Wyreach would not have significant assets.  This claim, if successful and if recovery was achieved from Wyreach (the holding company for the Soong Group of companies) has, at least, the potential to produce, as a result of this single transaction and without more, a greater return to creditors than is produced by the Deed of Company Arrangement.

 

223               As noted previously, it would have made no difference to the way in which the creditors voted if Mr Hamilton had reported that there were reasonable prospects of recovering the sum of $300,000 from Wyreach.  I will treat the complaint as one that Mr Hamilton misinformed himself in the manner particularised, and that, in effect, he exercised his casting vote because of a misapprehension on his part.

224               In their submissions, the Administrators have sought to support in detail the Report and the Supplementary Report in so far as they relate to the Parkwind/Wyreach transaction.  I do not propose to descend to the same level of detail. 

225               Parkwind, like Wellnora, is a wholly owned subsidiary of Wyreach.   When Giles Woodgate was appointed administrator of Parkwind on 25 November 2004, it owed Wyreach $1,832,241, and Wellnora owed Wyreach $2,420,414.59.

226               On 6 December 2004 (the timing is important) James Coughlan, then the sole director of Wellnora, signed an irrevocable authority addressed to the proposed purchaser (whose name was left blank) of Unit 1, 51–53 Carlotta Road, Double Bay, to pay up to a limit of $350,000 to the intended Parkwind DOCA administrator out of the proceeds of sale of that unit to be used for the purpose of distribution in accordance with Parkwind’s DOCA.  The DOCA for Parkwind was executed on 10 January 2005.  Clause 3 of the Parkwind DOCA provided for the constitution of a “first fund” and a “second fund”.  Clause 3.1 provided that the first fund was to consist of up to $350,000 to be paid by Wellnora upon the sale of Unit 1.  On 11 January 2005 a deed was executed between Parkwind, Wellnora, James Soong and Giles Woodgate by which Wellnora authorised Mr Woodgate to complete the irrevocable authority by inserting the name of the purchaser of Unit 1, and Wellnora charged all of its real property in favour of Parkwind and its DOCA administrator to secure the monies owing pursuant to the deed and the Parkwind DOCA (cl 3.2).  On 25 January 2005 Mr Woodgate signed a caveat in respect of the title to Unit 1 asserting an equitable charge over Unit 1 dated January 2005, apparently founded on the Deed.

227               Upon the settlement of the sale of Unit 1 on 12 August 2005, the purchaser paid $300,000 to the Parkwind DOCA administrator, Giles Woodgate, in accordance with the arrangement made by Mr Coughlan on 6 December 2004 and confirmed in the Deed of 11 January 2005.  The amount was paid in two instalments of $160,935.81 and $139,064.19 (a total of $300,000).  In Wellnora’s general ledger, the payment of $300,000 was treated as a reduction in the amount owing by Wellnora to Wyreach by two entries in those amounts.

228               In summary, on 12 August 2005, Wellnora was treated as having paid $300,000 in reduction of the debt it owed to its ultimate parent, Wyreach, by reason of the payment made to Wyreach’s subsidiary Parkwind, on that date, but this was the outworking of a transaction that had been entered into by Mr Coughlan on behalf of Wellnora earlier on 6 December 2004 or, at the latest, 11 January 2005.

229               In his submissions, Mr Hamilton explains why repaying part of its debt to Wyreach by funding the Parkwind DOCA was not necessarily “uncommercial”.  Whether there was a voidable unfair preference given by Wellnora to Wyreach would depend on whether Wellnora was insolvent at the time of the transaction (at 6 December 2004 or 11 January 2005).  Consideration of that question would require consideration of the matters mentioned by Palmer J in Lewis v Doran (2004) 208 ALR 385.  It would require a detailed and thorough investigation of the relationship and financial arrangements as between Wellnora and other companies within the Wyreach sub-group.  Mr Hamilton was not in a position as company administrator to pursue those inquiries.

230               Predictably, the DCT submits that this shows why a winding up and the appointment of a liquidator are desirable.  However, in his Supplementary Report Mr Hamilton emphasised the need for funding to be provided to a liquidator and also the fact that it was unclear what assets would be available to satisfy a successful recovery action by a liquidator.  Notwithstanding the specific mention of the need for a liquidator to be funded, Ms Kelly did not at the second meeting of creditors on 14 February 2006 say that the DCT was or even might be prepared to fund a recovery action.

231               I accept the following submissions of the Administrators (paras 3.18, 3.19):

3.18     In summary, the evidence [of] Hamilton concerning this transaction, showed that he reported the following to creditors in the first report:

(i)         The Wyreach ledger needed further investigation: …

(ii)        The Parkwind Transaction may constitute a loan or a preference: …

(iii)       There is a question as to whether Parkwind has any assets: … (iv)         The full facts need to be established and further investigation carried out, the ability to recover the amounts, the legal fees involved and whether a public examination is justified and at what cost: …

(v)        Liquidator would need to be fully indemnified: …

(vi)       At the end of the day preferences are notoriously difficult to sustain: …

(vii)      The good faith defence of the recipient of the fund – Parkwind;

(viii)     The problems of related party funding and understandings.

 

3.19     In the Supplementary Report his analysis above was expanded, including as follows …

(i)         A ledger adjustment in Wellnora’s books shows a reduction in the intercompany debt owed by Wellnora to Wyreach for the $300,000 Wellnora paid to Parkwind;

(ii)        Hamilton obtained relevant documents surrounding the circumstances of the Parkwind DOCA and the payment by Wellnora, from its administrator G Woodgate;

(iii)       Books of a company are prima facie evidence of matters they record, so it might be inferred that Wyreach was a party to the transaction;

(iv)       The timings of the transaction need to be investigated;

(v)        The whole group of companies may need to be analysed to prove whether there was insolvency at a particular time;

(vi)       Creditor funding would be needed for the examination of directors;

(vii)      Even if a claim was successful, the recovery potential is unknown. 

 

232               Mr Hamilton is criticised as having taken an unduly pessimistic view in his statement in the Report that it is “notoriously difficult” to recover unfair preferences.  I disagree.  The DCT did not lead expert evidence to the contrary.  Mr Hamilton has vast experience in the area.  I take judicial notice of the difficult issues that commonly arise in a fully contested proceeding for the recovery of unfair preferences.

233               In exercising his casting vote, Mr Hamilton was not required to leave out of account practical considerations with which his considerable experience made him familiar.  His vote is not successfully impugned on the basis of the Parkwind/Wyreach transaction.

9.  Wellnora’s failure to pay GST to the DCT

234               In his third affidavit (the first filed in the DOCA proceeding) Mr Hamilton addressed Wellnora’s failure to pay GST to the DCT.  He said that Herbert Ang, the Financial Controller of the Soong group of companies, told him that the mortgagee, Donovan Oates, had insisted on receiving the full proceeds of the sales of the Units.

235               Annexed to the Report were five settlement sheets – one in respect of each Unit.  They show, in chronological sequence, the following details:

Unit No:	Date of Settlement	Sale Price	GST
2	9 July 2003	$2,823,000	$172,592.89
4	23 July 2003	$1,950,000	$119,219.32
5	10 September 2003	$1,700,000	$107,297.39
3	19 November 2003	$1,820,000	$111,271.36
1	12 August 2005	$1,790,000 ---------------	$109,437.22 ---------------
		$10,083,000 =========	$619,818.18 =========

It will be noted, and Mr Hamilton made much of it, that although they were “mirror images” of each other, Unit 1 and Unit 2 were sold for vastly different prices –  Unit 2 having been sold in mid-2003 for $2,823,000, and Unit 1 having been sold in mid-2005 for only $1,790,000.  Mr Hamilton attributed the difference to a fall in the real estate market by 30 percent.

236               In cross examination, Mr Hamilton’s attention was drawn to figures in the balance sheets which suggested that Mr Ang had misinformed him.  The evidence shows that out of the deposit paid on the sale of Unit 2, the first sale to be completed, $49,527.92 was paid into Wellnora’s bank account.  In addition, out of the settlement money, $100,000 was paid to Pacific Constructions Pty Ltd which had constructed the block of home units, and which was a company related to Wellnora.  Thus, while nearly all of the proceeds of sale went to Donovan Oates, $49,527.92 went to Wellnora itself.

237               On the second sale completed (Unit 4) it appears that the entire deposit and settlement proceeds went in payment of expenses associated with the sale and in payment to Donovan Oates.

238               On the third settlement (Unit 5) $175,673.92 was paid to Wellnora.

239               On the fourth settlement (Unit 3) two payments were made to Wellnora of $487,597.63 and $49,527.92, totalling $537,125.55.

240               Finally, on the fifth settlement (Unit 1) no payment was made to Wellnora, but the two payments of $160,935.81 and $139,064.19 (totalling $300,000) previously referred to were paid to Mr Woodgate as Administrator of the Parkwind DOCA.

241               The amounts which, according to the settlement sheets, were paid to Wellnora ($49,527.92 from Unit 2, $175,673.92 from Unit 5, and $537,125.55 from Unit 3) total $762,327.39.  It was pointed out to Mr Hamilton that this would have been sufficient to pay the GST.

242               Mr Hamilton frankly conceded that he had not picked up the discrepancy between the settlement statements and what Mr Ang had told him.  He thought he may have been influenced by the fact that in the case of the Norton Developments Pty Ltd DOCA of which he had been an administrator, and of another matter of which he was aware, Donovan Oates had insisted on being paid the entire proceeds of sale. On 17 January 2006, when Herbert Ang initially retained Mr Hamilton in relation to the proposed Wellnora DOCA, Mr Hamilton noted that it was to be the “same as Norton”. It is not clear whether Mr Ang told Mr Hamilton that the Wellnora DOCA was to be the “same as Norton” or whether Mr Hamilton was recording his own observation.

243               In receiving these payments then expending the amounts of them, Wellnora may have been paying other unsecured creditors in preference to the DCT, or it may have been paying in exchange for value (goods or services) presently supplied.  Mr Hamilton said that if he had appreciated that certain amounts that appeared as credits in Wellnora’s bank statements were amounts that had come from the settlements of the sales of the Units, he would probably have concluded that Wellnora was able to pay its debts, at least its GST debt to the ATO.  Of course, if Wellnora was solvent at the time and simply paid one creditor rather than another, that would not make the payment a voidable transaction:  see ss 588FA, 588FC, 588FE, 588FF of the Act.

244               This particular issue has caused me some anxiety – there remains the problem that on the evidence a winding up would be futile.  It is not as if the DCT has suggested anything more than that some kind of inquiry should be conducted.  The DCT has not, for example, pointed to any particular payee that has resources which might provide a basis for recovery.  More importantly however, the DCT has not offered to fund an investigation, public examinations, and, if appropriate, recovery proceedings by a liquidator.

245               I am not persuaded that the resolution, and thus the DOCA, should be set aside and Wellnora wound up so long as the DCT does not evince any interest in funding a liquidator’s investigations, public examinations and, if recommended,  recovery proceedings (see [261] below).

10.  Non-disclosure by the DCT

246               In respect of all of the grounds on which the DCT relies, the Court has a discretion whether to grant the relief sought.  The defendants submit that I should withhold relief on the ground that the DCT did not, prior to execution of the DOCA and Deed of Funding on 17 February 2006, disclose to Mr Hamilton the matters on which she now relies (see above at [60]).

247               In her memo to Sharon Brennan of 16 February 2006, Ms Kelly stated:

I have checked ATO records & have come up with a number of company’s [sic] that Mrs Desley Soong is a director of which have also either gone into liquidation or a deed of company arrangement has been accepted (in all cases of a DOCA bar 1, the ATO has always voted against but has been outvoted).  Listed below are some of the company’s [sic] I have found that Mrs Soong is the director of ...

 

There followed details concerning the following companies:

Build-Form Pty Ltd

Norton Developments Pty Ltd

Tunsand Constructions Pty Limited

Fyna Constructions Pty Ltd

Skillform Management Pty Ltd

Dimpara Pty Limited

Entarmi Pty Limited

Palamarac Pty Limited

Parkwind Pty Ltd

Marquelex Pty Ltd

Metroform Pty Limited

Beywood Management Services Pty Ltd

In relation to each of these companies, Ms Kelly recorded considerable information including the period or periods when Mr or Mrs Soong had been a director, the amount owed to the ATO, whether the ATO voted against a DOCA, the identity of the DOCA administrator or liquidator, and the amount of any dividend.

248               After recording the details concerning those 12 companies, Ms Kelly, in her memo to Ms Brennan, quoted from a note dated 20 January 2004 by Helen O’Sullivan, an ATO officer, in relation to Marquelex Pty Limited:

James Soong has a long history of being a director of companies that have failed to comply with their tax obligations.  The phoenix type activities of the Fyna group (Desley Soong was also a director of this group) were subject to scrutiny during the Royal Commission into the building and construction industry.

 

Since 1991 a number of companies have been liquidated, with a total loss to the revenue of about $7m.

 

In the case of the Fyna Group of companies, the company accountant, Edward Pearce, was convicted of defrauding the commonwealth in respect of three financial years, by the evasion of tax.  He served a jail sentence as a result of the conviction.

 

Mr Soong is presently facing similar charges by the DPP for the same offence.

 

There are still other companies trading which have tax liabilities.  These are being monitored by the phoenix team, and are subject to legal proceeding for recover of the debt.  Yet again liquidation of these companies is inevitable.

 

Given all these demands for payment and legal expenses for defending his criminal charges it may well be that there are insufficient assets to pay the liquidator’s demands.  However, even bankruptcy would be a good result for the revenue, as it stops Mr Soong from being a director of any company. 

 

249               In cross examination, Ms Brennan agreed that on 15 February 2006 Leisa Kelly had conveyed to her Ms Kelly’s concern over “the compliance history of the company” and that she (Ms Brennan) had replied to the effect that she was “pretty sure” the ATO could have the DOCA “overturned”.

250               It is clear that at the time of voting, the ATO had in its possession much information which it thought then and thinks now was relevant to the way in which Mr Hamilton should exercise his casting vote.  An “ATO Receivables Policy” instructed ATO officers (para 20.3.7) that they should question a voluntary administrator’s recommendations, and had a right to inquire and should clarify issues of concern about the recommendations by questioning the administrator before a meeting (or raising issues at the meeting).  The Policy gave illustrations of the kinds of issues that ATO officers might wish to clarify.

251               In cross examination, Ms Brennan agreed that there was no policy precluding ATO officers from having communication with a company administrator about a particular administration.

252               We do not know why Ms Kelly did not communicate with Mr Hamilton before, at or following, the second meeting of creditors.  She was not called as a witness.

253               In my view, s 16(3) of the Income Tax Assessment Act 1936 (Cth) and s 3C(3) of the Taxation Administration Act 1953 (Cth) did not prohibit the ATO officers from at least informing Mr Hamilton of the general nature of the ATO’s concerns (details of the external administrations of Soong companies were publicly available from ASIC) and certainly those provisions did not prohibit them from telling Mr Hamilton that if the DOCA went ahead, the DCT would apply to have it set aside on grounds, the detail of which would be disclosed in the affidavits to be filed in support of the application.  Indeed, the detail could have been disclosed in affidavits filed in the existing winding up proceeding in opposition to Wellnora’s application for an adjournment.

254               Ms Brennan agreed that she knew at the time that the Creditors’ Fund was very small in terms of the total amount of Wellnora’s liabilities and that the costs and expenses of the Administrators would have to be paid before creditors received anything.  She also knew that if the DCT sought to have the DOCA set aside, the Creditors’ Fund would go towards the Administrators’ defence of the proceeding and that after the Creditors’ Fund was exhausted, the Administrators would be left to meet their costs and expenses personally because there were no other assets in Wellnora.

255               I accept Mr Hamilton’s evidence that if the ATO had conveyed to him the information that it had and on which it later came to rely for the purpose of challenging his casting vote, he would have considered the information, obtained Ms Soong’s response to it, and sought legal advice in relation to it, rather than simply exercising his casting vote in favour of the DOCA on 14 February 2006.  I also readily accept his evidence that he would not have exercised his casting vote in the way he did if he had known that the DCT intended to apply to have the DOCA set aside, leaving him to bear the considerable cost of defending the DOCA out of his own pocket.  While I do not agree with the Administrators that the DCT’s non-disclosure must be treated as determinative, it is one discretionary factor to be taken into account on her application.

11.  Summary and exercise of discretion

256               I accept that Mr Hamilton exercised his casting vote in good faith and in what he believed to be the interests of the creditors in general.  However, this is not the end of the matter in relation to the Court’s discretion under ss 600B and 447A.  As noted at [171] above, the Court can take into account the public interest and commercial morality, whereas Mr Hamilton was not entitled to do so.

257               In favour of setting aside the resolution, and therefore the DOCA, are the following considerations:

·         the paltriness of the amount to be paid by Ms Soong, and therefore of the prospective dividend to creditors;

·         the facts now known that were not known to Mr Hamilton at the time relating to:

(a)    the number of external administrations (DOCAs or windings up) of companies with which Ms Soong or Mr Soong, who I infer had been heavily involved in Wellnora’s affairs, had been controllers; and

(b)   the amounts of tax that many of those companies had owed when they went into liquidation or executed DOCAs.

258               Considerations against the exercise of the Court’s discretion to set aside the resolution, and therefore the DOCA, are as follows:

·         in the absence of any indication from the DCT, in effect the one unrelated creditor, that she is prepared to fund investigations, public examinations and recovery action by a liquidator, a liquidation will achieve nothing;

·         the DCT’s failure, in a timely manner, to inform Mr Hamilton of the grounds of the DCT’s opposition to the DOCA and of her intention to have any DOCA set aside.

259               There is a further aspect to be mentioned.  If the DOCA is not set aside, the Administrators may be “out of pocket” for outstanding remuneration and costs as company and DOCA administrators (I am not referring here to the legal costs of the two proceedings).  If the DOCA is set aside and Wellnora wound up, and if the DCT were not to fund the liquidator, they would remain out of pocket to the same extent.  If, on the other hand, the DCT was to fund a liquidator to carry out investigations, conduct public examinations and launch successful and fruitful recovery action, a question would arise as to whether the Administrators would enjoy priority in the winding up in relation to the outstanding remuneration and costs.

260               This question is related to (a) the Administrators’ cross claim, and (b) the question of the costs of these proceedings.

261               At present I am disposed:

(a)    not to set aside the DOCA, primarily because in the absence of evidence or an undertaking to the Court by the DCT that she will fund investigations and public examinations, and, if recommended, recovery proceedings by a liquidator, a winding up would serve no useful purpose; and

(b)   to have the Registrar of the Court refer the Reasons for Judgment to ASIC for it to take such action, if any, as it may see fit.

262               I think that the parties should have the opportunity of making further submissions in relation to the following:

·         whether, even at this late stage, the DCT is willing to proffer an undertaking to the Court of the kind mentioned, and, if so, whether she should be permitted to do so;

·         the priority that the Administrators would enjoy in a winding up in respect of any outstanding remuneration and costs payable to them as company administrators and DOCA administrators; and

·         the parties’ costs of the two proceedings (at the hearing the parties joined in requesting me to defer making any order as to costs in order to allow them an opportunity to make submissions on the matter).

CONCLUSION

263               I will publish these reasons and invite further submissions on the questions raised in the immediately preceding paragraph.  Accordingly, the only directions that will be made at present will be for the making of such written submissions and the fixing of a date for the hearing of any oral elaboration of them.

I certify that the preceding two hundred and sixty-three (263) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate:

Dated:         15 August 2007

Proceeding NSD 2335 of 2005 (the winding up proceeding)

Counsel for the Plaintiff:	Mr S Golledge
Solicitor for the Plaintiff:	The Argyle Partnership
Counsel for the Defendant:	Mr JT Svehla (on 16, 18 August, 27, 28 November 2007) Mr DEJ Ryan SC, Mr JS Mendel and Ms A  Bartlett (on 14 February 2007)
Solicitor for the Defendant:	Purcell Insolvency Lawyers
Dates of Hearing:	16, 18 August, 27, 28 November 2006, 14 February 2007
Date of Judgment:	15 August 2007

Proceedings NSD 502 of 2006 (the DOCA proceeding)

Counsel for the Plaintiff/Cross Defendant:	Mr S Golledge
Solicitor for the Plaintiff/Cross Defendant:	The Argyle Partnership
Counsel for the First Defendant:	Mr JT Svehla (on 16, 18 August, 27, 28 November 2007) Mr DEJ Ryan SC, Mr JS Mendel and Ms A Bartlett (on 14 February 2007)
Solicitor for the First Defendant:	Diamond Conway Lawyers
Counsel for the Second Defendants/ Cross Claimants:	Mr JT Svehla (on 16, 18 August, 27, 28 November 2007) Mr H Insall SC and Mr JT Svehla (on 14 February 2007)
Solicitors for the Second Defendants/ Cross Claimants:	Purcell Insolvency Lawyers then RBHM Commercial Lawyers
Dates of Hearing:	16, 18 August, 27, 28 November 2006, 14 February 2007
Date of Judgment:	15 August 2007