Federal Court of Australia

R.W. Pascoe Pty Ltd v Crimson Fresh Produce Pty Ltd (subject to deed of company arrangement) [2023] FCA 705

ORDERS

THE COURT ORDERS THAT:

1.    The Deed of Company Arrangement entered into by the defendant company on 3 March 2023 be terminated.

2.    The defendant company be wound up in insolvency.

3.    Justin Howlett and Andrew MacNeill be appointed as liquidators of the defendant company.

4.    The plaintiff’s costs be its costs in the winding-up of the defendant company.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    This application is brought by the plaintiff, R.W. Pascoe Pty Ltd (R.W. Pascoe), which seeks orders pursuant to the Corporations Act 2001 (Cth) (Corporations Act) for the termination of a Deed of Company Arrangement (DOCA) entered into by the defendant company, Crimson Fresh Produce Pty Ltd (subject to a deed of company arrangement) (Crimson Fresh).

2    In broad terms R.W. Pascoe relies on the following grounds:

(a)    that the DOCA offers the creditors no benefit, as the fund to be constituted under it (the “Deed Fund”) is to be sourced from the company’s own assets;

(b)    the maximum return for unsecured creditors is, at best, 2.5 cents in the dollar, but is quite likely to be nil;

(c)    that there are significant potential insolvent trading claims against the director of Crimson Fresh and other voidable transactions which could be investigated and pursued if the company were placed into liquidation; and

(d)    that the return to creditors in liquidation is likely to be higher than the optimistic prediction of 2.35 cents in the dollar under the DOCA.

3    The matter came before this Court in March of this year and directions were given to ensure that notification of the application was given to interested parties. The deed administrators were duly served though they have not attended to oppose or support it. Their position in relation to the application will be discussed later.

4    The deed administrators, at the plaintiff’s request, also gave notice of the application to all of Crimson Fresh’s known creditors, and the evidence establishes that they were suitably notified and were afforded access to copies of the application and the material intended to be relied upon.

5    No creditor appeared to take part in the proceedings. However, one, QC-Fresh Pty Ltd, which claims a debt of $156,910, gave written notification that it supports the application. It indicated that it had voted against the DOCA in the belief that it offered little or no benefit to it or the other creditors. It further indicated that it was of the view that Crimson Fresh should be wound up.

Background

6    Crimson Fresh operated a produce growing and export business in and around Mildura in Victoria. However, as is revealed by the evidence, it held few assets of its own and owned no real property. Rather, it conducted its fruit growing business on land leased from other entities. Any assets that it did own, such as farming machinery and the like, were apparently subject to securities which it had granted in favour of various entities.

7    It is not insignificant that Crimson Fresh ceased to trade prior to the appointment of the administrators. Mr Padia, the company’s director, informed the Court that the company is neither trading nor carrying on any business. There is nothing to indicate that there is any intention for it to trade in the future.

8    The administrators were appointed to Crimson Fresh on 4 November 2022 by a resolution of Mr Padia, as the company’s sole director.

9    On 2 December 2022, the administrators delivered to creditors their “Voluntary Administrators’ Report” in relation to the company’s affairs. It conveyed a bleak picture of Crimson Fresh, in that it indicated that:

(a)    it appeared that the company had been insolvent from at least 30 June 2020;

(b)    the company had ceased to trade before it was put into administration;

(c)    any return to unsecured creditors was unlikely; and

(d)    there was no proposed deed of company arrangement, such that winding up was recommended.

10    The summary of the company’s financial position was also bleak. In contrast to the director’s report as to the company’s affairs and property, prepared by Mr Padia, the administrators indicated that there was an excess of liabilities over assets of approximately $5.8 million; that the financial position of the company was, in part, due to poor management; that, importantly, the company had been trading at a loss since 1 July 2018; that there were 21 creditors that the administrators identified as having received possible preferential payments; that unreasonable director-related transactions totalling $139,100 may have been entered into; that there was a potential claim against Mr Padia for insolvent trading worth approximately $1.8 million; and that there was an estimated return to unsecured creditors in a best-case scenario of 53.63 cents in the dollar. In relation to that final conclusion, it should be observed that an arithmetical error appeared to have occurred in the report and, on the figures provided, the best-case scenario for unsecured creditors would, in fact, be a return of 100 cents in the dollar to unsecured creditors.

11    The notice of the second meeting of creditors was due to be held on 9 December 2022. However, a few days prior to that meeting, Mr Padia advised the administrators that he intended to propose a DOCA, and that proposal was received shortly thereafter. The meeting of 9 December was ultimately adjourned until 10 February 2023, so as to allow the creditors time to consider the proposal.

12    In summary, the substance of the proposed DOCA was that Mr Padia would make a contribution of $200,000 to constitute a “Deed Fund”. That contribution was referred to as the “Director’s Contribution”. However, in reality the money to constitute the fund was to be sourced from the company’s assets and not from Mr Padia himself. In particular, it was to be derived from the net proceeds received from the sale of certain crops, then under cultivation. Those crops were growing on land owned by other companies controlled by Mr Padia and there existed a very real question as to whether the company would recover $200,000 in net proceeds from those crops or, indeed, anything. In effect, any recovery under the DOCA was contingent upon the outcome of that farming venture.

13    Pursuant to the proposed DOCA, once the Deed Fund was constituted, the money would first be used to meet the expenses of the administration, including the administrators’ remuneration and other costs. A consequence of that was that, the amount of money that might be available to meet the company’s indebtedness to creditors would be minimal and estimated to be around 2.35 cents in the dollar.

14    Sometime after their receipt of the proposed DOCA, the administrators issued a “Supplementary Report” to the creditors for the purposes of the reconvened second meeting. In it they indicated that they believed the company was insolvent and had been for some time, and they recommended that it be placed into liquidation. They further identified that Mr Padia and his company, Mallee Citrus Pty Ltd, had breached a licence agreement entered into with the administrators, by which Mr Padia and his company were permitted to use certain plant and equipment in order to maintain the value of the farmland and crops. The administrators also expressed doubt as to whether there would be sufficient surplus from the crops that Crimson Fresh was then growing to provide an amount of cash sufficient to constitute a Deed Fund of $200,000. Finally, they identified that the company did not intend to keep trading.

15    In that Supplementary Report, the administrators undertook a further comparison between the positions of the company if it entered into a DOCA on the one hand and if it were wound up on the other. They expressed the view that the creditors could receive 2.35 cents in the dollar in the first scenario, assuming that a Deed Fund was constituted. In relation to the winding up scenario, they substantially downgraded their previous forecasts set out in the Voluntary Administrators’ Report in relation to the existence and value of any causes of action concerning voidable transactions or insolvent trading, which might be pursued on liquidation. In the prior report, they had indicated that there were preferential payment claims which might be pursued that totalled $530,000 in value, potential unreasonable director-related transactions worth $139,100, and a potential insolvent trading claim, based on the company being insolvent from 30 June 2020, valued at $1.8 million. However, in the Supplementary Report, the total recoveries were estimated to be much lower with the return from actions in relation to any voidable transactions revised down from $2,469,100 to $650,000. This had the consequence that the best-case scenario on a winding up was a return of 23.72 cents in the dollar to unsecured creditors. Unfortunately, no explanation was provided in the Supplementary Report as to why the potential recoveries from the actions were downgraded so significantly.

16    Subsequently, HopgoodGanim, the solicitors for the plaintiff, made enquiries of the administrators as to why the potential recoveries had been downgraded. It is worthy of comment that no real satisfactory answer was given. It might be inferred that the administrators had recognised some potential difficulties in recovering against Mr Padia, were the actions to be brought. In any event, they still perceived a chance of recovering over 23 cents in the dollar for unsecured creditors, and they recommended that Crimson Fresh be wound up.

17    At the reconvened second meeting of creditors on 10 February 2023, a resolution was put for the winding up of Crimson Fresh. Two creditors, including the plaintiff, voted in favour of it and the value of those votes was approximately $434,000 in total. Seven creditors voted against it, and the value of those creditors’ claims totalled approximately $416,000. Therefore, the resolution was lost on the numbers. Subsequently, Mr Padia’s DOCA was put to the creditors. Six creditors voted in favour of it and their debts totalled approximately $290,000. Five voted against it and their debts totalled just over $690,000. No poll was called for in relation to the outcome of the voting.

18    As Mr Copley submitted on behalf of the plaintiff, there is very little likelihood of the DOCA progressing in that it is unlikely that the Deed Fund will be constituted. Even if it is, any return to the unsecured creditors is likely to be minimal. Conversely, the administrators have identified the potential for significant recoveries that might be pursued upon liquidation. It is not known why some creditors voted in favour of the DOCA in these circumstances, though it may be that they were averse to being asked to fund litigation.

19    In any event, the DOCA was entered into on 3 March 2023. In its final form, it provided that the “Contribution” constituting the Deed Fund was to be paid by Mr Padia to the administrators by 30 June 2023. It also provided that the costs of the administration of Crimson Fresh be paid first from the Deed Fund, then the administrators’ remuneration and other costs incurred in their capacity as administrators of the DOCA second, and the creditors last. Presently, the costs of the administration are around $139,500. The DOCA included a provision that, if the Deed Fund was not constituted, that would amount to an event of default, giving the administrators a right to determine the DOCA. In the usual way, apart from any payments to the creditors under the DOCA, the company’s debts would be released on its completion.

20    The financial position of Mr Padia is relevant to this matter, as he is perceived by the administrators to be a target of potential recovery claims. The administrators had ascertained and believed that Mr Padia owned some real property but the plaintiff’s solicitors indicated that they had undertaken searches and had not been able to identify any.

21    In the course of his submissions, Mr Padia indicated that he was a trustee of a family trust, such that it may be that any property he owns is held on trust. That, of course, is a possibility, but it needs to be investigated further. From the available evidence, there is reason to believe that the corporate structure, which appeared only vaguely on this application, shows that Mr Padia may have interests in several companies that hold assets, which may provide avenues for recovery. As is not unusual on applications of this nature, the inquiries as to his asset-holding have not yet been completed, and one might not expect that process to conclude until some future time.

Should the DOCA be set aside?

22    The plaintiff applies for termination of the DOCA under s 445D of the Corporations Act, and in particular s 445D(1)(e) and (1)(f). Those subsections relevantly provide:

445D When Court may terminate deed

(1)    The Court may make an order terminating a deed of company arrangement if satisfied that:

…

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

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

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

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

23    In relation to s 445D(1)(e), on the authorities, the element of injustice may be established if the effect of the deed would be to avoid a proper investigation of relevant transactions: Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (2001) 37 ACSR 394, 431 [190] – [191] per Austin J; Re Citadel Financial Corporation Pty Ltd (subject to a deed of company arrangement) (2020) 146 ACSR 220, 227 – 228 [21] per Black J. This is somewhat similar to a DOCA being entered into for a collateral purpose, in that it has been entered into not to achieve a possible higher return to creditors and to keep the company on foot, but instead to avoid the company being put into liquidation, which would instate the usual tasks and obligations of the liquidator to investigate the company’s management and affairs. However, it should be noted that s 445D(1)(e) is properly concerned with the effect of the deed, not its purpose.

24    Section 445D(1)(f) of the Corporations Act is concerned with those circumstances where the deed is oppressive or prejudicial or discriminatory in relation to one or more of the company’s creditors, or the deed is otherwise contrary to the interests of the creditors as a whole. This provision was discussed in Re Recycling Holdings Pty Ltd (2015) 107 ACSR 406, where Brereton J (as his Honour then was) at 426 – 427 [60], identified the circumstances in which a DOCA might be found to be oppressive, and emphasised:

[60]    Whether a deed of company arrangement is oppressive or unfairly prejudicial is determined primarily by reference to the general principles underlying Pt 5.3A, including first, the creditors’ right to be paid or to have the company wound up or to have the company administered by an administrator in a way that will see creditors paid from the company’s property.

25    In the same paragraph of his reasons, his Honour referred to the observations of Young J (as his Honour then was) in Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427, 430 where it was held:

Accordingly, when one is looking at what is oppressive or unfairly prejudicial under s 445D, one looks at it in the background of the general right of a creditor to be paid or to wind the company up, or to have the company administered by the administrator under the deed in a way which keeps the company’s business going and will see the creditor paid something out of the property of the company. If a scheme in a deed deviates from that, then the creditor is more easily able to say that it is operating oppressively, than otherwise.

26    In the present case, a significant factor is that the DOCA under consideration does not contemplate in any way, shape or form the continuation of Crimson Fresh. Indeed, the company ceased trading prior to the administration, and there is no suggestion that it is to trade in the future.

27    There is no element of the DOCA that seeks to rehabilitate Crimson Fresh as a trading entity. On the contrary, Mr Padia confirmed that it is not trading at all and does not carry on any business. That is significant.

28    Moreover, an important consequence of the DOCA being entered into is that Mr Padia, in his capacity as a director, will be shielded from the processes of liquidation. This includes, in particular, the powers that might be brought to bear by a liquidator engaging in public examination and then pursuing recovery proceedings in respect of director-related transactions or insolvent trading. None of this will occur if the DOCA goes ahead.

29    Additionally, if the DOCA proceeds and the Deed Fund is constituted, the plaintiff will recover only a very small amount, 2.35 cents in the dollar, if anything, and will forgo any balance. Its opportunity to recover a greater amount of its entitlement would be substantially enhanced if the company was placed into liquidation and the investigative processes under that regime were to occur.

30    It is also relevant that no other creditor of Crimson Fresh has sought to oppose the orders sought by the plaintiff. One creditor, QC-Fresh Pty Ltd, supports it.

31    There seems to be sufficient grounds to conclude that giving effect to the DOCA will involve injustice to the plaintiff; being, specifically, the injustice of a proper investigation of the transactions identified by the administrators being avoided. Therefore, an order for termination of the DOCA is available under s 445D(1)(e).

32    Similarly, it is possible to conclude that the DOCA is unfairly prejudicial to the plaintiff, or is contrary to the interests of creditors as a whole, because the plaintiff and the creditors generally are denied the opportunity to pursue the processes that are available in liquidation. The power to terminate the DOCA is in this way enlivened under s 445D(1)(f).

33    The plaintiff also applied under s 447A of the Corporations Act. That section provides as follows:

447A General power to make orders

(1)    The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2)    For example, if the Court is satisfied that the administration of a company should end:

(a)    because the company is solvent; or

(b)    because provisions of this Part are being abused; or

(c)    for some other reason;

the Court may order under subsection (1) that the administration is to end.

(3)    An order may be made subject to conditions.

(4)    An order may be made on the application of:

(a)    the company; or

(b)    a creditor of the company; or

(c)    in the case of a company under administration—the administrator of the company; or

(d)    in the case of a company that has executed a deed of company arrangement—the deed’s administrator; or

(e)    ASIC; or

(f)    any other interested person.

34    In relation to this provision, the plaintiff referred to the observations of Brereton J (as his Honour then was) in In the matter of Sales Express Pty Ltd (Administrators Appointed) [2014] NSWSC 460 [19], where his Honour succinctly identified the scope of that wide section as follows:

19    It is clear from s 447A(2)(b) that the Court may make an order that an administration end, if the administration provisions of the Corporations Act are being abused. In Workers Compensation Nominal Insurer v Perfume Empire Proprietary Limited [2011] NSWSC 379, Barrett J, as his Honour then was, observed (at [22]) that the cases in which the Court had intervened under that provision to terminate a voluntary administration were cases in which there had been what might be termed as some ulterior element or purpose. His Honour referred to cases in which the directors had put the company into administration not for a purpose envisaged by the legislation but with a view to installing an administrator who might be more compliant than the provisional liquidator already in office [Aloridge v Christianos (1994) 13 ACSR 99]; where a secured creditor had imposed an administrator when an appeal by the company was pending against the dismissal of its application for an order setting aside a statutory demand served by that creditor, [Spacorp v Australia Pty Ltd v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 1979]; where a sole director imposed voluntary administration with a view to the adoption of a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value, which would bar particular claims already being litigated against the company [Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2007) 47 ACSR 391; and where an administrator was imposed by the sole director in the face of a pending winding up application, in order to manipulate the relation-back day to his own personal advantage [St Leonards Property Pty Limited v Ambridge Investments Pty Ltd (2004) 210 ALR 265; (2004) 50 ACSR 443; [2004] NSWSC 851]. His Honour distinguished (at [25]) the case then under consideration from one in which there had been an attempted distortion or manipulation or one where any enhancement of the return to creditors generally would be at the expense of persons who had been innocent bystanders in the event leading to voluntary administration and ultimate winding up.

35    Most significantly for the present purposes, it can be taken from this passage that part of the scope of s 447A includes the granting of relief where directors have put a company into administration:

… not for a purpose envisaged by the legislation but with a view to installing an administrator who might be more compliant than a provisional liquidator –

or where the director:

… imposed voluntary administration with a view to the adoption of a deed of company arrangement by a decision of creditors of doubtful value, which would bar particular claims … being litigated against the company.

36    It can be taken that this section is available to terminate a DOCA where it is entered into for an improper purpose. Here, no part of the DOCA is directed towards the continuation of the company. In fact, the company has ceased trading, and there is no suggestion that it is intended to trade ever again. Part 5.3A of the Corporations Act is not intended to assist companies in this position. The process of administration, and the execution of a DOCA, should not be used as a de facto winding up for the purpose of avoiding the real and important consequences of a properly conducted liquidation.

37    In these circumstances, s 447A is enlivened and relief can also be granted under that provision.

38    In the result, on any of the sections in respect of which the application is brought, the plaintiff is entitled to the relief that it seeks. There were no circumstances indicating that any contrary course be adopted. It should be ordered that the DOCA entered into by the defendant company on 3 March 2023 be terminated.

39    The consequence of the termination of the DOCA is that the company should be wound up in insolvency, it being clear that it is insolvent.

40    In the circumstances, the following orders should be made:

(1)    The Deed of Company Arrangement entered into by the defendant company on 3 March 2023 be terminated.

(2)    The defendant company be wound up in insolvency.

(3)    Justin Howlett and Andrew MacNeill be appointed as liquidators of the defendant company.

(4)    The plaintiff’s costs be its costs in the winding-up of the defendant company.

Associate:    

Dated:    26 June 2023