Case: TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830
Outcome: followed
and Mrs Cassimatis drew attention to observations concerning s 440A(2) made by Hamilton J in TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830. After noting that Creevey's Case was the only intermediate appellate authority, Hamilton J conducted a critical analysis of later authorities in various original jurisdictions concerning the subsection. His Honour (at [18]) reached this conclusion: What I derive from a consideration of the foregoing authorities ... is that it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer. I respectfully agree with this conclusion as to what is to be derived from the authorities to which he refers. Further, there is nothing in it which is inconsistent with the observations made of s 440A(2) in Creevey's Case . The long and the short of it is that s 440A(2) means what it says; it is for the person seeking the adjournment to satisfy the Court that in the circumstances of the particular case, it is in the interests of the company's creditors for it to continue under administration rather than be wound up. In some cases that may be able to be done by a comparative exercise as between prospective returns to creditors; in others such an exercise may be premature but it may nonetheless be in the interests of creditors for there to be a short adjournment so as to allow the position to be investigated. These are but non-exhaustive examples. TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830 has present utility for another reason. I was informed that, even were the DOCA approved at the creditors' meeting, it was "highly likely" that ASIC would seek its termination under s 445D. ASIC is an eligible applicant for such an order: s 445D(2)(ba) of the Act. Of this contingency and its relevance Hamilton J observed (at [19]): It is no part of the Court's function to decide prospectively a s445D application which has not been made, or to consider whether or not in considering such an application it would require a guarantee to assure the dividend of third party creditors who wished the DCA to proceed before it would grant the application. However, the determination of a party, whose word in the context is not lightly to be doubted, offers yet another complicating factor in the situation in which the interests of the creditors must be assessed. I do not accept Mr Hayter's submission that these considerations are wholly irrelevant. They seem to be yet another factor to be taken into account in determining whether an adjournment is in the interests of the creditors. Again, I respectfully agree with his Honour. The contingency, in this case the "high likelihood", of an application under s 445D is another factor which it is not irrelevant to take into account in determining whether an adjournment is in the interests of creditors. It was conceded in the written submissions made on behalf of Mr and Mrs Cassimatis that it was "unclear" whether an administration under the DOCA (and I understood this also to be as it was proposed to be presented in amended form) would result in a better return to creditors than an immediate winding up. For their part, the administrators went rather further in their report. They do not see the DOCA as offering the prospect of a better return. Though the further excerpt is lengthy, it is again desirable that their opinion be set out: 8. The Administrators Recommendations The options available to creditors are: (a) To accept the proposed deed of company arrangement; (b) To wind up the company; or (c) To end the administration and hand the company bank to its directors Under Section 439A, Administrators must provide a recommendation to creditors based on the information available to them. Whether to Accept the Proposal for a Deed of Company Arrangement The Administrators recommend that creditors do not accept the proposal for a Deed of Company Arrangement. The Administrators reasons for recommending against accepting the proposal for a Deed of Company Arrangement are as follows: The proposal is subject to a condition precedent which, on the basis of legal advice received by them, the Administrators do not expect to be fulfilled. The condition precedent states, in effect, that the sum of $2 million to be paid in under the proposal will only be paid if the current injunction over those funds (which was obtained by the ASIC) expires or is removed and the CBA takes not step to prevent the monies being paid to the Deed Administrators. In the event that the condition precedent is fulfilled (within up to 120 days), that is the injunction expires or is removed and the CBA takes no action, again on the basis of legal advice received the Administrators believe that it is likely that a liquidator of storm would be able to recover the $2 million for the benefit of creditors, and to do so without agreeing to conditions such as are contained in the proposal. The proposal therefore provides no extra benefit in terms of the payment of the $2 million. In the event that the proposal is rejected and Storm is placed into liquidation priority employee entitlements will be paid by the Receivers or through the federal government funded General Employee Entitlement &amp; Redundancy Scheme (GEERS). The proposal therefore provides no additional benefit to employees. Although the Administrators agree that a Public Examination of all relevant parties should be carried out, and agree that any decision to commence or continue litigation should be based primarily on evidence gathered at such Public Examination, they are of the view that such a process can be carried out, at least as efficiently, by a liquidator as a Deed Administrator. In the vent that Storm is placed into liquidation it is likely that the liquidators will be able to seek recovery for the payment of $444,711 paid on the 22 of December 2008 to the Westpac Bank, from Emmanuel and or Julie Cassimatis. That benefit will be lost if the proposal for a Deed of Company Arrangement is accepted. In the event that Storm is placed into liquidation the liquidators will be able to seek compensation from the directors of the company for any debts incurred after the commencement of the insolvency and which remain unpaid. That benefit will be lost if the proposal for a Deed of Company Arrangement is accepted. In the opinion of the Administrators the directors of Storm (defined in the proposal as being Emmanuel and Julie Cassimatis) have an inappropriate level of control. For example: (a) By clause 11 of the proposal the Deed Administrators must obtain the directors written agreement by the 17 of April 2009 (that is a date before the expiration of the date on which the $2 million is required to be paid in) for a budget for the costs and expenses of the proposal examinations or alternatively accepted the budget contained in that clause. Bearing in mind that the directors will be among the parties to be examined this limitation is, in the opinion of the administrators, inappropriate. (b) By clause 21 of the proposal any legal action taken by Storm against the CBA will be conducted by the directors, but subject to such assistance and supervision of the Administrators and their independent solicitors as the Administrators think fit. It is not clear to the Administrators what the terms "conducted by" and "supervision" mean for the purposes of the proposed Deed and they are concerned that, in effect the directors will have full control (see below). Further, given that the directors may be joined as a party in any action commenced by Storm (or any action by Storm on behalf of clients of Storm) in the opinion of the Administrators the directors may lack the required level of independent to conduct such proceedings. (c) The event that a dispute arises between the directors and the Administrators regarding any decision of the Administrators (see clause 31) and that dispute is not settled by the process set out in the clause 34 the directors may by clause 34 replace the Administrators as trustees of the Storm Client Recovery Fund and require the Deed Administrators' to repay the balance of the funds held by them. (d) The general scheme of the proposal provides for action on behalf of clients to be conducted by the directors but subject to such assistance from and supervision of a Client Committee assisted by an independent legal advisor or advisors. It is not clear to the Administrators what the terms "conducted by" and "supervision" mean for the purposes of the proposed Deed and they are concerned that, in effect that directors will have full control of the proceedings. Further, given that the directors may be joined as a party in any action commenced by Storm (or any action by Storm on behalf of clients of Storm) in the opinion of the Administrators the directors may lack the required level of independent to conduct such proceedings. Whether to liquidate the Company It is the Administrators' recommendation that the company then be wound up. The company is insolvent in that it has insufficient current assets to meet its commitments. Placing the company into liquidation will also provide the Liquidator with powers to conduct further investigations into the affairs of the company; look at the matter of Insolvent Trading; recover any Preferential Payments made to creditors; examine and recover any other Insolvent Transactions and examine the general affairs of the company. In liquidation the possibility exists that the liquidators may have access to funding to recover assets and prosecute claims from: The Assetless Administration Fund administered by the ASIC Contributions from creditors Litigation Funders Whether to End the Administration In the Administrators view it would not be in the interest of the creditors for the Administration to end. Should the company's creditors resolve that the Administration be ended, the control of the company would revert to the directors. The company is insolvent and the affairs of the company should be formally resolved. It is likely that a creditor would apply to have the company wound up shortly after the Administration is ended as the company is unable to pay its debts. Other Information We confirm that pursuant to Section 439A(4)(b) of the Corporations Act , there is no other information that we are aware of at this time that will assist creditors in making the decision as to whether or not they should accept the proposal for a Deed of Company Arrangement that has been put forward. 9 Dividend Possibilities Priority employee creditors will be paid their entitlements by the Receivers and, to the extent necessary, by GEERS, should the company be placed into liquidation. Should the proposal for a Deed of Company Arrangement be accepted priority employee creditors will be paid their entitlements by the Receivers and by the Deed Administrators. Storm carried Professional Indemnity Insurance. Clients of Storm who are able to demonstrate that they have incurred losses as a result of negligence by Storm may be paid, or partly paid, by Storms insurers provided the claims lodged are not subject to any of the policies exclusions. Any dividend to ordinary creditors is dependent upon: Read on behalf of Mr and Mrs Cassimatis was an opinion provided by a Mr W J Hamilton, a chartered accountant. Like Messrs Worrell and Kahtri, he is an experienced insolvency practitioner and official liquidator. He offers a critique of their report. Though directed to the subject of the relief sought in the separate application made by Mr and Mrs Cassimatis, its tender on their behalf was not limited to that context. For reasons he sets out in his opinion, he expresses the view that it "is difficult to readily arrive at a decision on reading [the administrators' report] as to creditors' best interests, a winding up or a DOCA. A great deal of homework needs to be done in arriving at the status of all classes of creditors claiming, secured and unsecured, with likely comparative returns, cents in the dollar ($1.00) and over what period in the winding up or DOCA". Mr Hamilton, I note, was not set any such "homework" by Mr and Mrs Cassimatis. The point of all this is that there is something of an understatement in the concession by Mr and Mrs Cassimatis that it is "unclear" that Storm Financial's creditors would be any better off under the DOCA than they would be if the company were ordered to be wound up. Put bluntly and to borrow from language which commended itself to Hamilton J in TCS Management , there is no good case that there will be a greater or more accelerated return from the course contended for on behalf of Mr and Mrs Cassimatis than there would be if Storm Financial were liquidated. In voicing that conclusion it is neither necessary and nor would it be appropriate to reach a conclusion about whether the DOCA sum is in law available to ECA for it to pay it in accordance with the terms of the DOCA. The fate of the $2 million is a matter for the Supreme Court of Queensland. It is enough to note the conceded serious question to be tried and that it is by no means certain either that the interlocutory injunction will not be continued or that the substantive proceeding will be heard and determined in that court within 120 days, to say nothing of the fate or likelihood of disposal within that time frame of any appeal. Both Mr Russell and Mrs Cassimatis were cross-examined on their affidavits. To the extent that their evidence was relevant to the likelihood that ECA would come within the time allowed by the DOCA to be able to pay the DOCA sum and the question of adjournment, I consider that it is neither necessary nor desirable to do anything other than observe that their evidence underscored in my mind the prudence of the concession made on behalf of Mr and Mrs Cassimatis in this Court that, at the behest of the receiver and manager, Storm Financial has raised a serious question to be tried in the Supreme Court about ECA's entitlement to retain the $2 million. Their evidence certainly did not persuade me that the trial in the Supreme Court would be anything other than lengthy and complex and hence correspondingly difficult to hear and determine within the maximum permissible time for the payment of the DOCA sum.