- Unreported Judgment
SUPREME COURT OF QUEENSLAND
J & E Vanjak Pty Ltd v Palmer Street Developments Pty Ltd & Anor  QSC 293
J & E Vanjak Pty Ltd ACN 158 539 943
Palmer Street Developments Pty Ltd ACN 003 146 174
Mitchell Herrett and Frank Lopilato (as the administrators of the Deed of Company Arrangement)
TS No 605 of 2018
Supreme Court at Townsville
7 December 2018
11 and 19 September 2018
The application is dismissed.
Corporations Act 2001 (Cth), ss 435, 445D, 447A, 600A
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510
Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498
Emanuele v The Australia Securities Commission (1995) 63 FCR 54 at 69
Mediterranean Olives Financial Pty Ltd & Ors v Loaders Traders Pty Ltd (2011) 82 ACSR 300
Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to a Deed of Company Arrangement) & Ors  QCA 405
Vero Insurance Ltd v Kassem (2011) 86 ACSR 607
CORPORATIONS – VOLUNTARY ADMINISTRATION – DEEDS OF COMPANY ARRANGEMENT – TERMINATION OR AVOIDANCE – where the applicant seeks orders that the Deed of Company Arrangement (“the Deed”) executed between the first respondent and second respondents be set aside, and that the first respondent be wound up and liquidators appointed – where the applicant contends that: the Deed is not in the interest of the creditors as a whole; the creditors’ report contained false and misleading information; and the Deed allowed the first respondent to continue to trade while insolvent – where the Deed is ready to be effectuated and there are no funds which remain for distribution – whether there exists a ground for termination under s 445D of the Act – whether the Court should exercise its discretion to terminate the Deed.
Ms Huang (by leave, self-represented) for the applicant
Mr Parton (by leave, self-represented) for the first respondent
D Forbes for the second respondents
Ms Huang (by leave, self-represented) for the applicant
Mr Parton (by leave, self-represented) for the first respondent
Thomson Geer for the second respondents
Issues that must be determined
Since 2000, Palmer St Developments Pty Ltd (Palmer St) has operated a property investment business which owned five serviced apartments in the Grande Apartments complex currently leased to Quest and a commercial property operating as a licensed restaurant and bar.
On 21 December 2017, the applicant, J & E Vanjak Pty Ltd (Vanjak), obtained judgment against Palmer St in an amount of $408,314.40 together with interest. That decision was upheld on appeal. On 5 February 2018, Vanjak issued a statutory demand for payment of the judgment debt. On 26 February 2018, the company appointed Mr Mitchell Herrett and Mr Frank Lopilato as the administrators of the company. At a creditors’ meeting on 29 May 2018, creditors voted in favour of the proposed Deed of Company Arrangement (DOCA). The DOCA was executed on 30 May 2018. On 1 August 2018, Vanjak filed an application to set aside the DOCA. That is opposed by both Palmer St and the administrators.
Vanjak seeks orders that the resolution made by creditors, that Palmer St execute the DOCA, be set aside, and that the DOCA executed on 30 May 2018 between the first respondent and second respondent be set aside, and further an order that the first respondent be wound up and liquidators appointed. Vanjak primarily relies upon s 445D of the Corporations Act 2001 (Cth) (the Act) but also relies on s 600A and s 447A of the Act.
Vanjak raises a number of matters, including that:
The DOCA is not in the interests of the creditors as a whole and the vote was driven by a director of the company, Mr Neville Parton, and related parties, with some parties having proofs of debts admitted to vote which it claims were not genuine, as their claims had not been the subject of the financial accounts prepared by the company’s accountant for the previous 5 years;
Mr Parton held proxies for a number of debtors and should not have voted because he was in a position of conflict of interest;
The creditors’ report contained false and misleading information or material omissions;
The DOCA should be set aside because it permits Palmer St to continue to trade while insolvent in circumstances where the unsecured creditors received only a small return; and
The administrators had acted at the behest of Mr Parton such that they did not carry out their role independently and carry out proper investigations and the DOCA should be terminated.
The Court must therefore determine:
Whether the admission of proofs of debt was unjustified or the vote to enter into the DOCA was driven by related parties votes, such that the DOCA is contrary to the interests of the creditors of the company as a whole or should otherwise be terminated under s 445D of the Act;
Whether the information provided to the creditors in the creditors’ report by the administrators was false and misleading or contained a material omission within the meaning of s 445D of the Act, giving rise to a ground of termination of the DOCA;
Whether there was any misconduct by the administrators such that the DOCA should be terminated for some other reason under s 445D;
Whether, even if a ground justifying termination is made out, the Court should exercise its discretion to terminate the DOCA by reference to matters which include:
- The delay in Vanjak bringing the application;
- The effect on parties who have dealt with Palmer St after the DOCA was executed and Palmer St’s affairs were returned to Mr Parton;
- The benefit that may be provided to creditors by Palmer St being placed in liquidation; and
- The public interest and particularly whether permitting the DOCA to proceed gives rise to any questions of public morality.
Palmer St by leave was represented by Mr Neville Parton. At the time of the hearing, Mr Parton stated that he was a director of Palmer St. That proved to be incorrect. I discuss this further below. Ms Yue Huang by leave appeared on behalf of Vanjak. The administrators were represented by counsel at the hearing.
Rather than providing an outline of submissions, Ms Huang, on behalf of Vanjak, provided an affidavit, which not only sought to depose the relevant evidence relied upon, but contained matters of submission. As such, I ruled that in relation to those parts of the affidavit, they would be treated as submissions and not as evidence.
Affidavits were provided on behalf of Vanjak by Ms Huang and on behalf of Palmer St by Mr Parton. Mr Herrett also provided affidavit evidence. All parties were subject to cross-examination.
The affidavit of the administrator Mr Herrett outlined a number of matters which sought to address the matters raised by Vanjak. The administrators raise the fact that there has been considerable delay in bringing the application of some two months, when Ms Huang was present at the creditors’ meeting of 29 May 2018, during which the creditors voted in favour of the execution of the DOCA. The administrators raised the potential prejudice if the DOCA is now set aside. Mr Parton provided an affidavit refuting a number of the matters relied upon by Vanjak. Mr Parton’s affidavit suffers from the same ill as Ms Huang’s affidavit, insofar as a number of the matters in the affidavit are matters of submission, not evidence. As such, I have treated those matters as submissions, not evidence.
Vanjak seeks to rely on s 600A of the Act. Section 600A of the Act was repealed by s 195 of the Insolvency Law Reform Act 2016 (Cth). There is some overlap between considerations relevant to the exercise of power in s 600A and s 445D(1), particularly where, as in the present case, it is contended that the resolution is not in the interests of the creditors as a whole. I have therefore considered Vanjak’s application by reference to s 445D of the Act. Vanjak also relies on s 447A of the Act however, for reasons outlined below, I do not consider that any matter is raised that requires additional consideration of s 447A of the Act from s 445D of the Act.
Section 445D provides as follows:
“(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
information about the company’s business, property, affairs or financial circumstances that:
was false or misleading; and
can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or
there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or
there has been a material contravention of the deed by a person bound by the deed; or
effect cannot be given to the deed without injustice or undue delay; or
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:
oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
contrary to the interests of the creditors of the company as a whole; or
the deed should be terminated for some other reason.”
The onus of proving that a ground is substantiated on the evidence under s 445D of the Act is on the party who seeks termination of the deed, which is Vanjak in this case. However, even if one of the grounds in s 445D(1) is established on the evidence, that does not of itself lead to the Court making an order terminating a deed. The Court retains a discretion as to whether to order termination. That discretion is to be exercised having regard not only to the interests of the creditors as a whole but to the public interest.
If a DOCA has terminated by performance, there is no power to terminate it under s 445D. In those circumstances, s 447A of the Act, which is a broad power, could still operate. In the present case, while it is contended that most of the steps under the DOCA have been performed and the administrator, Mr Herrett, has stated that the deed is ready to be effectuated and that there are no funds which remain for distribution, there was no submission made that the DOCA has been terminated by performance. In those circumstances, there appears to be no reason why s 447A of the Act would offer any benefit to Vanjak’s case beyond that of s 445D. In any event, no additional grounds are raised which are directed to s 447A as opposed to s 445D.
It is important to bear in mind the objects of Part 5.3A, which are contained in s 435 of the Act. The object of the part is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or, if it is not possible for the company or its business to continue in existence, that results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Events leading to the approval of the DOCA
According to the report to creditors of 28 March 2018 (the March Report), Mr Parton informed the administrators that the reasons for Palmer St’s financial difficulties were that $610,000 had been stolen by a former solicitor and that a legal dispute with Vanjak had resulted in a judgment of $411,754.31 against Palmer St. The culmination of its financial difficulties arose when Vanjak served a statutory demand on Palmer St. The preliminary view of the administrators was that there were additional factors at play as well, namely: a lack of working capital, net asset deficiency and trading losses.
The director, Mr Parton, had proposed that Palmer St execute a DOCA. In the March Report, the administrators did not recommend that the creditors accept the DOCA. Instead, they recommended to the creditors that the company be wound up, which they considered to be in the best interests of the creditors. In the March Report, the administrators estimated that the dividend to unsecured creditors under the proposed DOCA was 7 cents in the dollar. They estimated that the dividend under a liquidation scenario was between nil and 1 cent. They expected a dividend would be paid to the NAB in a liquidation scenario. The proposed DOCA did not specifically exclude related party creditors, although the administrators were informed by Mr Parton that related parties would not participate in any dividend paid to creditors.
The administrators initially recommended the creditors not accept the proposed DOCA for a number of reasons, including that:
Preliminary investigations had been limited to available records which were insufficient;
The estimated return was 7 cents in a dollar, subject to verification of proofs of debts from unsecured creditors and Parnev Pty Ltd paying the administrator’s reasonable costs; and
Based on the available information and estimated cash flow, the company could not trade profitably during the course of the DOCA, the company had no working capital to continue to trade, any surplus after the discharge of the NAB’s debt would not form part of the deed fund, and there was no guarantee that the contributor could meet its ongoing obligations under the proposed DOCA.
The NAB provided a proxy for the creditors’ meeting of 11 April, which stated it would vote against the DOCA and in favour of the company being wound up. According to the administrator’s March Report, the NAB holds security over all present and after-acquired property of the company. The debt owing to it was $2.86 million. If the motion had been put at the meeting, the NAB’s vote inevitably would have resulted in Palmer St being wound up. Ms Huang on behalf of Vanjak submits that the meeting was not told of the NAB’s position. The minutes of the meeting of 11 April 2018 record that the chairperson, Mr Herrett, did inform the meeting of that fact. Vanjak in cross-examination challenged the fact that Mr Herrett had told the meeting of the NAB’s position. Mr Herrett maintained his view that he did. It is recorded in the minutes that the April meeting was informed of the NAB’s position. The minutes of meeting were prepared and signed by Mr Herrett on 13 April 2018, soon after the meeting. I accept that the minutes were accurate and Mr Herrett’s evidence that he did inform the meeting of the NAB’s intention.
The creditors’ meeting was adjourned on 11 April 2018, prior to any vote on whether the creditors resolved to accept or reject the DOCA. The motion for the adjournment was favoured by a majority of 14 in favour and one against, Vanjak being the one against.
Vanjak submits that the adjournment was unreasonable and submits that the vote supports the fact that there was a scheme between Mr Parton and the administrators to allow more time for Mr Parton to come up with the proposal. That was rejected by Mr Herrett. The motion for the adjournment of the meeting came from one of the creditors and was voted upon at the meeting. There is no evidence to support any suggestion that the adjournment was instigated or somehow allowed by the administrators to permit Mr Parton more time to gain support for the DOCA.
The next meeting of creditors to consider the proposed DOCA occurred on 29 May 2018.
Mr Herrett deposed to the fact that between the April and the May meeting, the administrators did further work and subsequently changed their opinion. At the May meeting, the administrators recommended the acceptance of the DOCA. The administrators provided a report to creditors dated 16 May 2018 (the May Report). According to the May Report and Mr Herrett’s affidavit, the reason that the administrators changed their opinion and recommended the creditors vote in favour of the DOCA included:
That there was a settlement of a claim of Palmer St against the Queensland Law Society fidelity fund;
The payment of rent that had previously been withheld by Quest Acquisitions No. 3 and Quest Townsville Tenancy Pty Ltd;
The payment of the arrears owing to the NAB and information provided by Mr Parton to the administrators that he had negotiated an arrangement with the NAB which would enable Palmer St to continue to trade during the DOCA;
That the NAB had changed its position and was not voting in favour of Palmer St being wound up;
The receipt of a valuation of Herron Todd White of the five apartments and commercial property in the Grande Apartments in the sum of $3,010,000; and
That Palmer St would retain $24,000 as working capital.
Unlike the first proposed DOCA, the terms of the DOCA put to the May creditors’ meeting provided that the NAB was not bound by the DOCA and that Palmer St would continue to honour all outstanding and future payments to the NAB.
At the date of the administrators’ appointment, they identified that Palmer St had two assets which had realisable value: first, a claim on the fidelity fund of the Queensland Law Society associated with theft of company funds held by the company’s former solicitor, and secondly, property interest in the Grande Apartments at 30-34 Palmer Street, Townsville.
In between the April and the May meetings, the administrators caused Palmer St to settle the fidelity fund claim for $260,000, thus giving the company cash in bank.
Palmer St leases apartments in the Grande Apartments to Quest Townsville Tenancy Pty Ltd. Palmer St also leases commercial premises to an entity called Ross River Spices Pty Ltd, which traded as the Paradise Bar and Café. The properties were subject to claims for outstanding strata levies, outstanding rates and a claim for $192,500 by Quest Acquisitions No. 3 Pty Ltd in respect of refurbishment costs which were the subject of a caveat over the tenancies. Quest Acquisitions No. 3 claimed a right of set off against the rent owing to Palmer St. Between the April and May meetings, Quest did not continue to claim that it could refuse to pay rent pending determination of whether it had a set off and agreed with the administrators to pay all outstanding rent owing to Palmer St. According to the administrators, the rent was duly paid. According to the May report, Paradise Bar and Café was proposing to enter into an arrangement to pay its arrears in rent for January and February 2018, but no actual arrangement had been entered into at that time. The receivables set out in the May report show rent was received from Paradise Bar and Café and Quest in April and in early May in the case of the latter.
Ms Huang cross-examined Mr Parton about what had occurred since the administrators had handed back control of Palmer St to the directors. It was submitted on behalf of Vanjak that Palmer St had failed to prove that rent was being paid and that was relevant to Vanjak’s contention that Palmer St was permitted to continue to trade after the adoption of the DOCA when it was insolvent. Mr Parton gave evidence that rent was being paid since the directors had retaken control of Palmer St’s affairs. There was no evidence to the contrary. While Ms Huang was critical of the fact that Palmer St did not provide supporting documentation, it was a matter only raised in cross-examination by Ms Huang, and had not been the subject of any prior allegation that it was not being paid nor a subpoena. Although I found Mr Parton to be an unsatisfactory witness, there was no evidence controverting that it had been paid and I accept his evidence in this regard.
The properties in the Grande Apartments were valued by Herron Todd White at $3,010,000. On the basis of that valuation, the administrators formed the view that there would be no equity in the Townville properties in a mortgagee sale should Palmer St be placed into liquidation. In the March Report, using a valuation of $2,840,000, there was an estimated deficiency of approximately $287,000 from the sale of the secured properties. In the May Report, the administrators estimated a deficiency of $114,468, using the Herron Todd White valuation. Mr Herrett however, stated that that figure did not include selling costs, appointment costs or holding costs.
The administrators concluded in the May Report that, based on the valuation, no equity would be available for unsecured creditors to participate in as part of a liquidation and that a liquidator would not have any funds to carry out investigations into any voidable transactions. The March and May Reports requested that any creditors inform the administrators if they were prepared to fund investigations, and also outlined other funding possibilities.
It was only in the context of this application that Ms Huang on behalf of Vanjak stated that Vanjak would fund a liquidator’s investigations. Vanjak had not indicated, prior to the signing of the DOCA, that it would fund investigations.
According to Mr Herrett, between the creditors’ meeting on 11 April 2018 and the creditors’ meeting on 29 May 2018, Mr Parton told the administrators that he had negotiated with the NAB such that an arrangement would be put in place that would enable Palmer St to continue to trade during the DOCA. According to Mr Herrett, he was told that Palmer St was to revert to paying interest only. The NAB subsequently sent an email to the administrators on 28 May 2018 and stated that it would abstain from voting and would withdraw its proof of debt if it was not bound by the DOCA (and its debt and security were not affected by the DOCA). This is consistent with some arrangement being reached between Palmer St and the NAB. The administrators did not obtain any evidence from the NAB of that arrangement.
At the May meeting, the minutes record that Ms Huang on behalf of Vanjak raised how Palmer St could trade profitably if it was paying principal and interest to the NAB. The minutes of the 29 May 2018 meeting record Mr Lopilato’s response as stating, amongst other things, that if an interest only arrangement had been reached with the NAB, Palmer St could trade profitably.
In cross-examination, Mr Parton stated that Palmer St was up to date with its payments to the NAB but that the NAB had not entered into an arrangement with the company to pay interest only because of this application. It was not put to him on behalf of Vanjak that no such arrangement had ever been agreed in principle with the NAB.
In the May Report, the administrators calculated the dividend to be 5 cents in the dollar under the DOCA, as opposed to the estimated return to creditors of 7 cents in the dollar calculated in the March Report. This was said by Mr Herrett to be the result of further professional costs and holding costs. However, the administrators considered that it was a better return than would result from winding up the company, which was likely to be nil, and also gave the company the best chance to continue in existence.
According to the evidence of Mr Herrett, he also negotiated an amendment of the DOCA at the meeting of 29 May 2018, to remove uncertainty for creditors under the deed proposal which related to Parnev Pty Ltd making contributions via a promissory note to a deed fund, which would be used to pay any dividend to the creditors. Parnev Pty Ltd was a trustee company for the Parton family trust.
It had previously been proposed that the property available for distribution to creditors would comprise of a contribution by Parnev Pty Ltd, which was to be used to pay administrators and deed administrators reasonable costs and expenses; $500 within 14 days of the execution of the DOCA and a contribution of up to $84,500 payable over three years via 6 monthly instalments. Under an amendment negotiated by Mr Herrett to the provision for the payment of the dividend and provision for some working capital, the DOCA provided that the amount was still to be paid by Parnev Pty Ltd to Palmer St, but not as part of the deed fund. The amount to be paid is to survive the administration but not to be provable in the administration.
The funds to pay the dividend to creditors and provide capital were to be principally obtained from the remaining settlement monies from the fidelity fund claim and the payment of outstanding rent by Quest Townsville. Mr Herrett considered that those funds could be made available to pay the unsecured creditors. Mr Herrett stated in evidence that, in a liquidation, those funds would not have been available to unsecured creditors as they are charged to the NAB.
On the basis of the events that had occurred and the amendment of the DOCA, Mr Herrett was satisfied that the amended DOCA was in the best interests of the creditors and met the objectives of Part 5.3A of the Act. While I found Mr Herrett tended to be somewhat broad-brush in some of his responses to cross-examination, I accept the evidence he gave and that the administrators carried out adequate investigations and independently evaluated the evidence before them, albeit that they did place reliance on information provided by Mr Parton, the then director of Palmer St. 
The DOCA proposed by Mr Parton, which was supported by the majority of creditors on 29 May 2018, in summary provided that:
The administrators will become the deed administrators and establish a deed fund;
The property available for distribution to creditors in accordance with the DOCA will be from company funds (which was subject to amendment at the meeting and reflected in cl 20.4 of the DOCA.). Any surplus is to be paid to an account of the company controlled by the board of the company.
Upon the conclusion of the DOCA, Palmer St will be released from all its debts excluding debt owed to the NAB and creditors accept the return provided in the DOCA in full and final settlement of their claims;
The NAB is not bound by the terms of the DOCA;
Control of Palmer St will return to the director upon execution of the DOCA;
Palmer St will continue to honour all outstanding and future payments to the NAB and loan payments to the NAB continue during the period of the DOCA;
The DOCA terminates once the administrators declare that the DOCA is wholly effectuated;
Clause 20.3 also provides that related party creditors will not prove for dividend purposes, although they shall prove for voting purposes; and,
Clause 9.3 provides that a claim of the secured creditor is not released by operation of the deed with the provisos contained in that clause. A secured creditor is defined as any creditor having security.
At the meeting of 29 May 2018, the vote carried 13 in favour and one against the execution of the DOCA by Palmer St. The votes in favour totalled $1,451,589.59, whereas the vote against, which was that of Vanjak, was $408,314.40. Quest Acquisitions No. 3 Pty Ltd, which had a proof of debt admitted for voting in the sum of $192,500, did not attend the meeting and when contacted by the administrators had stated that they did not intend to participate. Mr Parton and Dr O’Hair held the majority of proxies on behalf of creditors at the meeting. Dr O’Hair was a creditor. He was also the barrister who had acted on behalf of Palmer St in the appeal from the judgment in favour of Vanjak. The chairperson, Mr Herrett, held a proxy for the Body Corporate of the Grande Apartments and voted in favour of the DOCA. The only other person to attend on behalf of a creditor and vote against the DOCA was Ms Huang on behalf of Vanjak.
All creditors should not have been permitted to vote
Vanjak’s complaint relevant to this ground seems to be on two bases: first, that the vote in favour of the DOCA was driven by related parties, and secondly, that proofs of debt were accepted when they should not have been because they were not genuine debts. If either of those bases are established, that could establish a ground for termination under s 445D(1)(f) or s 445D(1)(g) of the Act.
According to Vanjak, seven related creditors made up 56% of the vote who voted in favour of the resolution. Vanjak contends that the AMJ Group, Mr Pointing and Wide Bay Removals were related creditors. That is rejected by Mr Herrett. The administrators identified related parties in section 7.3 and 7.7 of their March and May Reports to creditors respectively.
Vanjak also submits that some creditors’ proofs of debts were admitted for voting purposes when they had not been recorded in the financial statements for Palmer St for the period 2012 to 2017. Vanjak’s complaint appears to be that they were not genuine debts and should not have been admitted for voting purposes. These were the claims by AMJ Group Pty Ltd, Reswick Pty Ltd, Toogoom Beach and Wide Bay Removal. The debt claimed by Parnev Pty Ltd was $471,717.89, whereas the financial statements of Palmer St reflected a debt of $230,000. There were debts claimed by other creditors which Vanjak submits were inconsistent with the financial statements, namely those of Access Legal, Ontime Tax & Accounting, McDuff & Daniel and Dr O’Hair.
The minutes for the 29 May 2018 meeting record that Mr Herrett informed the meeting of reasons for noting objections to some of the creditors’ claims at the meeting of 11 April 2018, including Parnev Pty Ltd which had provided a promissory note to the AMJ Group which was said to deal with the whole of the Parnev Pty Ltd debt owing by Palmer St, and AMJ, which held promissory notes for both the debt owing by Palmer St to Parnev Pty Ltd and Stephen Parton, but had not provided evidence for the quantification of the Stephen Parton claim.
In his affidavit, Mr Herrett has set out the process for admitting creditors’ proofs of debts for the purpose of voting by reference to the creditors that voted at the May meeting. He also refutes that the parties identified by Vanjak as related creditors were in fact related creditors.
Where an objection had been made, Mr Herrett noted each of the creditors’ proofs of debt. Although there were some disputes in relation to some of the amounts which he had considered, he decided to note the objections and allow those parties to vote to the full amount of their claims, subject to the objection being sustained and the vote being declared invalid.
Mr Herrett states that, insofar as Vanjak contends that Mr Pointing was a related creditor who was admitted for voting in the amount of $36,500 and was a director of AMJ, there is no evidence of that. Both Mr Herrett and Mr Parton deny that Mr Pointing was a related creditor. The company search exhibited to Mr Herrett’s affidavit does not indicate that Mr Pointing is a related party. I do not consider that Mr Pointing was a related party.
The administrators admitted the AMJ Group Pty Ltd (AMJ) to vote to the extent of $433,500. Mr Pointing was also a director of AMJ, which claimed to hold promissory notes from Palmer St, promising to pay Parnev Pty Ltd and Stephen Parton. Ms Huang claims that the promissory notes were given by Palmer St on 23 February 2018 for no business value.
The promissory notes which were assigned to AMJ relate to amounts that Palmer St promised to pay Parnev Pty Ltd and Mr Stephen Parton, which were issued just prior to the appointment of the administrator. The timing of the promissory notes does raise suspicions about their veracity. Both Parnev Pty Ltd and Mr Stephen Parton are related parties of Palmer St and were identified as such by the administrators in their reports. The debt owed by Palmer St to Parnev Pty Ltd for $230,000 was recorded in the financial accounts of Palmer St as a debt owing, but was subsequently amended. I discuss this further below. There was no substantiation of the debt apparently owed to Mr Stephen Parton.
Ms Huang cross-examined Mr Parton at the hearing. In cross-examination, Mr Parton claimed that the promissory note for Mr Stephen Parton, his son, represented work done by his son in the sale of the Quest apartments some time ago, which he had not claimed because Palmer St had not been performing well financially. Mr Parton stated that the money relating to Parnev Pty Ltd was a loan. That had some support from work done by Palmer St’s accountants. I found Mr Parton’s explanation to be unconvincing and consider that there is real doubt as to whether the debt to Stephen Parton was genuinely owed.
In cross-examination, Ms Huang suggested to Mr Parton that AMJ was a related party by reason of the fact that Ms Drewsen was a director of that group. A company search reveals that Ms Drewsen was appointed as a director of AMJ on 15 July 2018, the same day she was also appointed as director of Palmer St. That postdates the May meeting of the creditors at which the resolution for Palmer St to execute the DOCA was carried. The shareholder of AMJ is still Mr Pointing. At the time of the vote, Mr Pointing was a director of AMJ. Ms Drewsen was appointed as a director subsequent to the DOCA having been executed.
It was suggested to Mr Parton in cross-examination that Ms Drewsen was his life partner. He denied that and asserted that she was his business partner. I note the company search of Palmer St has the same address listed for Mr Parton and Ms Drewsen. She is also a director of Parnev Pty Ltd, the trustee of the Parton family trust. While that raises some questions, there was no evidence before me supporting the fact that Ms Drewsen was Mr Parton’s life partner. I do not find that Vanjak has established that she is Mr Parton’s life partner. In any event, she was not a director of AMJ at the relevant time. I do not find that AMJ was a related party at the relevant time.
Mr Herrett states that he sought clarification from AMJ as to the assignment. Mr Herrett obtained clarification from Mr Pointing that those promissory notes were held by his company. Mr Pointing confirmed by email that he had negotiated to obtain the promissory notes in good faith and that they were held by AMJ. According to Mr Herrett, he understood this to mean that Mr Pointing had purchased the promissory notes for the value of the debt.
The administrators allowed AMJ to vote in the full amount of its claim, subject to the objection being sustained and the vote being declared invalid.
The minutes of the meeting of 29 May 2018, which I accept as accurate, record that the administrators had stated to the meeting that there was nothing to support the claim of Mr Stephen Parton which was the subject of the promissory notes, as well as the fact that AMJ’s claim included a promissory note from Parnev Pty Ltd.
While the timing of the promissory notes and the fact that they were given by Palmer St to related parties and subsequently assigned to AMJ again raises some questions, the administrators did seek clarification of the debt from Mr Pointing and admitted it subject to objection. There is no evidence that Mr Pointing was a related party. Mr Herrett, sought clarification of the debt from Mr Pointing and admitted it subject to objection.
The administrators’ March Report referred to the amount of $230,000 as being alleged to be owing to Parnev Pty Ltd. That was the amount of the original proof of debt. Subsequently, that was amended to be an amount of $471,717.89 as at June 2017.
The administrators received a copy of an email from Palmer St’s accountant, Mr Woodington, confirming that there had been an error in the financial statements of Palmer St and that he had only detected that a greater amount was owing in preparing the financials of Palmer St going back six years for the administrators after the March creditors’ meeting, and that the correct financials as at 31 December 2017 were that the amount owing to Parnev Pty Ltd was $491,717.89. The May Report noted the updated amount in the creditors’ claims.
The debt of $230,000 owed to Parnev Pty Ltd for which AMJ held a promissory note would appear to be a part of the debt the subject of Parnev Pty Ltd’s claim of $471,717.89. The reasons for noting objections to the creditors’ claims for voting purposes identified by the administrators and recorded in the minutes of 29 May 2018 referred to the claim by Parnev Pty Ltd and that there was a promissory note to AMJ which deals with the whole of the Parnev Pty Ltd debt. Notwithstanding the apparent overlap in the claim by Parnev Pty Ltd and AMJ in relation to the amount of $230,000, Mr Herrett admitted both claims for voting purposes.
Mr Herrett states that, given the related parties did not receive the dividend, he did not rule on Parnev Pty Ltd’s debt for dividend purposes. Consistent with his approach to other proofs which were the subject of objections, he admitted the debt subject to objection, entitling Parnev Pty Ltd to vote to that level of debt.
The concern of Vanjak in relation to the debts of AMJ consisting of promissory notes provided by Palmer St to Parnev Pty Ltd and Stephen Parton is a justifiable one, given the timing of the promissory notes provided and the preliminary view of the administrators that Palmer St was at least exhibiting financial and commercial indicators of insolvency at that time. Mr Parton gave unconvincing evidence in relation to those debts. I consider Mr Parton was an unreliable witness who sought to give self-serving evidence on behalf of Palmer St. In particular, he denied Parnev Pty Ltd, his family’s superannuation trustee, was a related party when it clearly was. However, while unreliable, his cross-examination did not bring to light any additional evidence which materially changed the position reflected in the administrators’ May Report.
As was recognised by the New South Wales Court of Appeal in Vero Insurance Ltd v Kassem, a Court must take into account that an administrator must make expeditious decisions about matters such as whether a particular creditor is entitled to vote at a creditors’ meeting, with the result that those decisions are often made in a summary fashion. The Court must also test the adequacy of inquiries and investigations made by administrators against the fact that the investigations carried out by administrators are meant to be swift and practical and are restricted by the time limits imposed under part 5.3A of the Act.
I do not consider that the admission of the AMJ debt was unreasonable or that the administrators failed to make proper inquiries, notwithstanding that the debts underpinning the promissory notes assigned to AMJ by Parnev Pty Ltd were questionable, given the clarification sought by the administrators from Mr Pointing.
While Mr Herrett could have made further inquiries of Mr Parton as to the apparent overlap in respect of the claim by Parnev Pty Ltd and the promissory note prior to admitting the claim of Parnev Pty Ltd for voting purposes, and given consideration to only admitting part of the claim of Parnev Pty Ltd, reducing it by the $230,000 which was the subject of the assignment to AMJ, I do not consider, given the timeframes involved, that the administrators failed to carry out adequate investigations or acted improperly in not doing so. Further, Mr Herrett informed the creditors meeting of 29 May 2018 that he had noted an objection to Parnev Pty Ltd’s debt on the basis that the promissory note to AMJ dealt with the whole of the Parnev Pty Ltd debt.
In relation to Wide Bay Removals, Vanjak submits that it was a related party that was admitted to vote in the sum of $9,900. Mr Herrett states that there is no evidence that Wide Bay was a related party. That is supported by the company extract provided of that business, which records Mr Gordon Merchant as the sole proprietor. There is no evidence that it was a related party. I do not find that Wide Bay removals was a related party.
Mr Parton had a claim for $65,173.90. He was recognised as a related creditor but the claim was admitted for the purpose of voting. At the meeting of 29 May 2018, the administrators noted that Mr Parton was subject to a personal insolvency agreement entered into subsequently to the April 2018 meeting. The administrators did not confirm whether his trustee wished to vote in the same way as Mr Parton or objected to him voting. That should have been done. Mr Herrett has, however, carried out an analysis which shows that the vote which included that debt did not alter the outcome.
Vanjak submits that Access Legal Group’s debt of $282,287 was an unusual and unexplained expense, however it did act on behalf of Palmer St in the appeal from the judgment in favour of Vanjak.
Mr Herrett accepted that in relation to Access Legal’s proof of debt, he did not take into account the amount of $45,000 paid by the administrators to discharge Access Legal’s lien over the settlement of the fidelity fund claim. Mr Herrett’s evidence was that this was inadvertent and he had overlooked it as the payment was made prior to the April meeting but the proof was admitted at the May meeting. He contends however, that it would not have changed the outcome of the vote if the amount had been reduced.
Vanjak points to the fact that a number of creditors’ claims were not referred to in the financial statements of Palmer St from 2012 to 2017, which the administrators requested Palmer St’s accountant to prepare. Vanjak contends that that indicates that they were not genuine debts. Insofar as there is a discrepancy between debts reflected in the financial statements of Palmer St and the proofs of debt, Mr Herrett’s evidence is that he did not consider that was unusual, because the financial statements rely on information provided by Mr Parton, and trade creditors make claims which are not necessarily contained in the financial statements, noting that company records can deteriorate when a company is in financial stress. In cross-examination, Mr Herrett also referred to the fact that the company accounted on a ‘cash basis’ in response to a question of why Access Legal’s fees were not included in the profit and loss statements of Palmer St for the period from 1 July to 31 December 2017. The administrators also submitted that a further explanation for any discrepancy was that the financial statements account for the period up until December 2017 whereas proofs of debt were submitted at a later point in time.
Vanjak’s contention that a number of the creditors’ claims were not reflected in the financial accounts is borne out by a comparison of the creditors’ claims with the financial accounts. However, it was at the administrator’s request that the financial accounts be prepared from 2012 until 2017 in the context of the administration. They also stated in their March and May Reports that they could not determine whether the company records were complete. I accept the explanation of Mr Herrett that the discrepancy between the claims made and the financial accounts does not of itself suggest that the debts the subject of the creditors’ claims were not genuine debts. While Vanjak refers to the creditors such as Reswick Pty Ltd, Toogoom Beach Realty Pty Ltd, Wide Bay Removal Pty Ltd, Dr O’Hair or Ontime Tax and Accounting as associated creditors, there is no evidence to suggest that they were not genuine creditors or that they provided proxies to Dr O’Hair or Mr Parton in order to defeat the interests of creditors such as Vanjak.
Vanjak’s submission that the related creditors make up 56% of the dollar value of the vote claiming $1,034,489.79 is incorrect, given that the calculation includes parties I have found are not related parties. Mr Herrett’s analysis demonstrates that if the related parties which the administrators had identified, namely Mr Parton, Parnev Pty Ltd, Reswick Pty Ltd and Toogoom Beach Realty, were excluded from voting, the vote would have still carried, with the nine unrelated creditors voting in favour being to a value of $896,999.80 and the one unrelated creditor voting against being to a value of $408,314.40. I accept that calculation.
Mr Herrett provides a further analysis of what the position would have been had the related creditors and AMJ also been excluded. His analysis shows that the vote still would have carried in favour of executing the DOCA, although by a much smaller margin of approximately $45,000. On that analysis, the vote would have still been carried $463,449.62 as opposed to $408,314.40. I accept that to be the case.
I do not find that Vanjak has established that the debts admitted by the administrators for voting purposes were improperly admitted. However, even if that was the case, the evidence indicates that the vote would still have been passed even if related parties and AMJ had been excluded from voting. The related parties were excluded from any dividend payment under the DOCA. I do not find that the DOCA prejudiced the interests of Vanjak, who voted against the resolution, or was unfairly prejudicial or oppressive as a result of the related creditors voting or the admission of the creditors’ proofs of debts for voting purposes, albeit subject to objection. While Vanjak was a major creditor of Palmer St, there is nothing to suggest that it was unfairly discriminated against under the DOCA compared to other creditors, nor that it would have been in a better position had Palmer St been liquidated. As was stated by Heerey J, the law provides for the possibility of a deed of company arrangement being imposed against the will of the creditors holding as much as 49% of the company’s debt.
While some errors were made by the administrators, they were not material. I do not find that the administrators failed to carry out adequate inquiries in considering the claims by creditors.
The administrators paid dividends upon the basis of the proofs admitted subject to objection which were not in respect of related parties. Mr Herrett states that he did so on the basis of his commercial judgment. Mr Herrett considered that, as the dividend payable to the creditors was fixed under the DOCA, the dividend payable would not have changed from 5 cents in the dollar and that the costs saved to the company by reason of any of the rejections, in part or in full, would have been significantly outweighed by the costs of conducting those investigations and dealing with any appeals against rejections.
Given the analysis of Mr Herrett as to the position if related parties had been excluded from voting, I do not find that the related parties drove the voting outcome unfairly to the detriment of other creditors. Further, the evidence does not support the fact that the claims of related creditors served to defeat Vanjak.
No ground under s 445D is established by the above matters raised by Vanjak.
Did administrators fail to carry out their duties?
Vanjak also contends that the administrators were acting at the behest of Mr Parton and failed to act independently in discharging their duties, in allowing Mr Parton to vote on behalf of those he held proxies for, allowing an insolvent company to continue to trade, admitting proofs of debts of Palmer St and omitting it from the report, making false and misleading recommendations to accept the DOCA and acting in the interests of Mr Parton. None of these matters are borne out by the evidence and I do not find that the administrators failed to act independently. I have addressed the question of admission of the AMJ debts above. I address the remaining issues below.
Vanjak contends that the administrators acted with Mr Parton to defeat creditors in adjourning the creditors’ meeting of 11 April 2018, in circumstances where the administrators had recommended that the creditors reject the DOCA and Palmer St be wound up and the NAB had provided a proxy in favour of winding Palmer St up. Given the NAB and Vanjak favoured the winding up of Palmer St and were its largest creditors, Palmer St would have been wound up had the resolution as to the DOCA been voted upon. However, the motion to adjourn was raised by another creditor, Dr O’Hair, not the administrators. The motion was put and carried. Pursuant to s 439B(2), a meeting convened under s 439A may be adjourned from time to time, but the period of adjournment must not exceed 45 days. There is no evidence to suggest that the administrators permitted the resolution of the adjournment to be put to assist Mr Parton and defeat creditors. Indeed, the fact that they had recommended that Palmer St be wound up in their March report is inconsistent with that suggestion.
Vanjak also contends that the changes in the position of Palmer St between the two meetings was insignificant and did not justify the administrators’ change in position. The administrators’ May Report and Mr Herrett’s affidavit identify a number of changes between the two meetings which caused the administrators to change their recommendation in favour of the DOCA. There is nothing to suggest that the administrators’ recommendation was not based on an independent assessment by them and their view genuinely held.
Vanjak also raises the fact that Mr Parton was a director of Palmer St and had a conflict insofar as he had proxies provided to him and he should not have been permitted to vote at the meeting. Mr Herrett in his second affidavit contends that he did not understand Mr Parton was prevented from acting as proxy under rr 75 to 97 of the Insolvency Practice Rules (Corporations) 2016 (Cth). That appears to be correct, as there is no evidence that Mr Parton or his partner would be placed in a position to receive any remuneration out of the assets of Palmer St under the DOCA except as a creditor rateably with other creditors of Palmer St, such that rr 75 to 97 would not exclude him from voting. Under the DOCA, related creditors were not to be paid a dividend and their debts were to be released upon the execution of the DOCA. As noted below, Mr Parton was subject to a personal insolvency agreement at the time of the creditors’ meeting on 29 May 2018. That did not disqualify him from holding proxies. Vanjak complains that the administrators failed to act independently in permitting Mr Parton to vote on the proxies. This complaint is unsubstantiated.
I do not consider that the above establishes any of the grounds in s 445D for terminating the deed.
Was the vote in the interests of the creditors as a whole?
Vanjak contends that the DOCA was not in the interests of the creditors as a whole because some creditors would have been better off if Palmer St was placed into liquidation and further investigations were carried out by the liquidator. Vanjak further contends that notwithstanding the terms of the DOCA, Palmer St is insolvent as it has no working capital to trade.
The analysis of the administrators in the May Report shows that if Palmer St was placed into liquidation, the unsecured creditors would receive nothing, given the administrators’ predicted likely outcome that, once the properties in the Grande Apartments were sold and used to meet the debts of secured creditors, nothing would remain for unsecured creditors or to fund a liquidator to carry out further investigations into possible voidable transactions. NAB was owed $2.8 million by Palmer St at the time and held security over all of its property.
Vanjak also seeks to contend that the NAB was placed in a better position by the DOCA. The NAB was a secured creditor and its position was a superior position by virtue of that security and it would have been in the same position had Palmer St been liquidated. There is no evidence or analysis provided by Vanjak to show that the NAB was placed in a better position as a result of the DOCA. It was excluded from the DOCA, however it abstained from voting at the meeting of 29 May 2018 and indicated it would withdraw its proof of debt if excluded from the DOCA, which occurred.
Vanjak also contends that other secured creditors were disadvantaged as a result of the DOCA. That does not appear to be borne out by the evidence. The secured creditors are made an exception and to be excluded from the operation of the DOCA. While Ms Huang contend that they would be better off if Palmer St were placed in liquidation, if it is not bound by the DOCA as it contends, Vanjak’s submission is incorrect. Quest Acquisitions No. 3 Pty Ltd is one such creditor. It claimed in an email to Ms Huang that it had the benefit of a statutory right pursuant to s 32 of the Body Corporate and Community Management Act, which preserved its debt. That position, if correct, will continue to be the position, and would have always been the position whether or not the DOCA was entered into.
The outcome of the DOCA is that the unsecured creditors other than those which are related parties will be paid out 5 cents in the dollar. That is certainly not a significant amount. However, a comparison with the position if Palmer St was in liquidation shows that the estimated outcome in that circumstance is nil. The evidence supports the recommendation of the administrators that the DOCA was in the interests of the creditors as a whole, given that a small dividend would be paid.
In considering whether the interests of creditors as a whole favour liquidation, consideration is given to the position of creditors and whether a liquidator would be in a position to investigate and presumably seek recovery of any voidable transactions. In considering whether to set aside a DOCA to enable further investigations to be carried out, the applicant must show that there is a real practical point in conducting the further investigations. The applicant has not presented any evidence showing that there is any prospect of a return if further investigations were to be carried out by a liquidator. Mr Herrett, however, has sworn an affidavit deposing to further investigations he has carried out since the DOCA was executed in relation to voidable transactions.
The administrators addressed their very preliminary findings in the March and May reports as to potential voidable transactions. The March and May Reports identified several large asset reductions between 1 January 2017 to 31 December 2017, which were to be further investigated.
That was a reduction of Palmer St’s loan account in the amount of $209,846 which occurred during the financial year ending 30 June 2017. The administrators considered that it was prima facie voidable. The estimated outcome statement comparing the liquidation scenario with the DOCA was premised on it being recoverable.
The administrators also considered that Palmer St may have been insolvent since 30 June 2017, but directors of a company may only be sued for insolvent trading if the company was placed in liquidation. The May Report did not indicate that their investigations in relation to voidable transactions had altered, however, the May Report stated that it was unlikely that Mr Parton had any capacity to satisfy any successful claim by liquidators for the reasons discussed below.
At the time of the May report, the administrators noted that there was a disposal of units in MG Riverview and in the Branded Unit Trust between 1 July 2017 and 31 December 2017 which had resulted in a significant asset reduction, but they provided no conclusion in relation to them and indicated that the investigations were ongoing. Mr Herrett provided a further affidavit sworn 10 September 2018, deposing as to the outcome of further limited investigations in relation to the disposal of those two assets, which were significant, totalling an amount of $1,305,300. His investigations revealed that the trustee of the Branded Unit Trust (of which Mr Parton was one of the directors), was in liquidation and that there was a net deficiency of assets in excess of $1.5 million with no likely dividend to unsecured creditors. He also considered that the units in MG Riverview were of no worth. MG Riverview referred to units held by Palmer St in MG Riverway Unit Trust. The trustee, MG Riverway Pty Ltd had, according to the ASIC search, been deregistered in February 2013.
Mr Herrett also deposes to having investigated Palmer St’s holding of one of ten units in the Townsville Equity Developments Unit Trust No. 2 (TED Unit Trust). He was advised by Mr Parton that Palmer St no longer had its interest in the TED Unit Trust, having transferred it over 6 years ago, which is consistent with Palmer St’s accounts from 2012 until 2017 which did not refer to the interest. Its estimated value was $180,000 according to the accounts for the TED Unit Trust. Mr Herrett states that he cannot see any basis upon which a liquidator could recover such an interest, given the effluxion of time, absent it being a fraud on the creditors, which his investigations did not reveal. Even if it was recoverable, Mr Herrett opines that the costs of seeking its recovery outweigh the value of the asset.
The administrators’ March Report stated the results of their preliminary investigations, that Palmer St exhibited financial and commercial indicators of insolvency on or before 30 June 2017. That opinion was not changed in the May Report.
Ms Huang, on behalf of Vanjak, contends that Mr Parton may be liable for trading while insolvent. The May Report stated that a controlling trustee had been appointed over the estate of Mr Parton. The administrators’ searches showed that Mr Parton held no real property, had given at least one personal guarantee, and was subject to a formal arrangement with his creditors. The administrators were informed by the Trustee in Bankruptcy that creditors of the director were estimated to get a return of less than two cents in the dollar. The administrators concluded that pursuing Mr Parton may prove an uncommercial venture and recommended against litigation being commenced against Mr Parton. On the information that the administrators had obtained in relation to Mr Parton, that conclusion was a reasonable one.
Given the above matters, I do not find that the DOCA precludes creditors from receiving the benefit of recovering voidable transactions.
Mr Herrett states that by the time of the administrators’ May Report, it was clear to him that if Palmer St was placed in liquidation, any liquidator would have no funds with which to investigate such matters. Ms Huang, on behalf of Vanjak, states that Vanjak would provide a liquidator with funds to carry out such investigations. Whether Vanjak is in a position to do that is not evident on the material which Vanjak has provided. However, assuming Vanjak would fund the required investigations, the evidence does not support that, if the company was placed in liquidation and investigations were carried out in relation to those matters by a liquidator, there is any likelihood that the creditors of Palmer St would have any prospect of receiving a greater return.
Even if the administrators had failed to carry out their general duties of investigation and disclosure in relation to the above transactions, I am satisfied that the appointment of a liquidator would not result in additional recoveries being made. As to Mr Parton, while there is some evidence that he may avoid scrutiny in relation to insolvent transactions as a result of the DOCA, that possibility must be weighed against the evidence supporting the fact that there is no likelihood of any recovery from him, given his financial position. I am unpersuaded that the purpose of the DOCA was for Mr Parton to avoid such scrutiny, even though the DOCA was proposed by Mr Parton.
There is no compelling case for a forensic investigation to vindicate the commercial morality or the public interest, as was advanced. The DOCA should not be terminated as contrary to the interests of the creditors as a whole, unless there are reasonable prospects of securing recoveries productive of greater returns to the creditors on winding up. I am not satisfied that the administrators’ investigations or reports were inadequate or the report inadequate such that the statutory process was flawed.
Vanjak also raises the conflict of interest of related parties. Under the DOCA, related parties were not to be entitled to any dividend. Thus the conflicting interests of related parties did not result in any gain as a result of the DOCA.
Vanjak has not established that the DOCA was contrary to the interests of the creditors of the company as a whole and that the DOCA should be set aside on this basis.
False and misleading information
For the purposes of s 445D(1)(a), information about the company’s business, property, affairs or financial circumstances must be shown to be false and misleading and material to the creditors in deciding whether to vote in favour of a resolution. The expression “false and misleading” refers to an objective quality of the information, not whether anyone was actually mislead. Whether information is false and misleading is to be judged at the time of hearing.
Vanjak claims that the administrators’ reports to the creditors were misleading because the administrators were aware of the removal of $2.86 million dollars from the company account, but omitted to include that information in the report. Ms Huang on behalf of Vanjak submits that the basis of the contention is that Palmer St had been involved in the development of the Quest Apartments and had received the 5 apartments which were the subject of the security of the NAB. Even if that was correct, that does not establish that Mr Parton removed the $2.86 million from Palmer St’s accounts. The suggestion that $2.86 million had been removed from Palmer St was not put to either Mr Parton or Mr Herrett in cross-examination. There is no evidence of removal of $2.86 million from Palmert St’s account by the directors. The facility of the company with St George Bank and ANZ was refinanced in favour of the NAB and according to Mr Herrett, the properties had been subject to a secured debt in the amount of $2.86 million for the previous 5 years, according to the financial statements. There is nothing to support the suggestion that there was an omission or that the creditors’ Reports are false and misleading on this basis. Nor was the estimated outcome under the DOCA, which included a column which said “0” for the NAB, misleading. The reference to real property which was the subject of the security was also removed. As the NAB was not to be paid under the DOCA and was excluded from the DOCA, it accurately states the position.
Vanjak also contends that the administrators should not have recommended that the DOCA be accepted because the company had insufficient capital to continue to operate and was insolvent. Mr Herrett was cross-examined in that regard. He rejected that suggestion on the basis that the arrears owing to the NAB had been paid, and after the dividend was paid under the DOCA, Palmer St would still maintain $24,000 as working capital. Further, while there was no evidence of what arrangement had been made with the NAB, there was some evidence that the NAB would support Palmer St to continue to trade, given its decision to abstain from voting at the May meeting and offering to withdraw its proof of debt if it was unaffected by the DOCA.
Mr Herrett also gave evidence that he anticipated that Palmer St would continue to receive rental payments in respect of the apartments and the restaurant, given his negotiations with the relevant parties. Vanjak questioned whether those rental payments would continue.
That scepticism is not without basis in relation to Paradise Café. Paradise Café was in arrears for January and February 2018 and while the administrators in their May Report stated that the Café had proposed to enter into a payment arrangement for the outstanding amount with Palmer St to be paid in full across a four month period beginning on or about June 2018, no arrangement had been finalised. There is however, evidence of rent being paid by both Paradise Café and Quest in April 2018. That provided some support for the belief of the administrators that payments would continue, as well as the negotiations they had had with the tenant. Mr Parton in cross-examination stated that the rent was being received from the Paradise Bar and Café, although he noted in submissions that the Café was behind for some payments in respect of rates and other levies.
Given that Quest had paid all monies due to Palmer St since the commencement of the administration, following the administrators obtaining legal advice that Quest was not entitled to withhold rental payments, there was no reason for the administrators to consider that that would not continue.
Both Quest Acquisitions No. 3 and the Body Corporate for Grande Apartments submitted proofs of debt to the administrators, although they did not vote at the meeting of 29 May 2018. The suggestion that they were not bound by the DOCA was only raised in an email from the Body Corporate’s lawyer on 7 September 2018, notwithstanding that it stated it had received $3,436.04 allocated under the DOCA. Section 32 of the Body Corporate and Community Management Act states that the Corporations Act does not apply to a body corporate, it is doubtful that would mean that it would not be bound by the DOCA. While if the whole of those amounts did have to be paid in full, the solvency of Palmer St post DOCA may be doubtful, the matter was not raised prior to the hearing as a ground upon which the DOCA should be set aside, nor is there any sufficient evidence provided by Vanjak for me to conclude that such a debt is outside the DOCA.
The continuing support of the NAB and additional funds obtained by the administrators for arrears owing in rent from Quest and the settlement of the fidelity fund claim and the fact that Quest and Paradise Bar and Café had recommenced paying rent in April and the limited estimated capital of $24,000, could reasonably all support the administrators’ view that Palmer St could continue to trade, consistent with the objectives of Part 5.3A, and would not be insolvent if the DOCA was executed. In the circumstances, Vanjak has not established that the administrators allowed the company to trade while insolvent, notwithstanding that it had been making a net loss of $3,601 per month prior to administrators being appointed.
The evidence supports the fact that the outcome of the DOCA is that the company has some prospect of continuing to trade and that the administrators’ recommendation to accept the DOCA was not false or misleading.
Vanjak further claims that the information about creditors’ claims was false or misleading because of the inconsistency from Palmer St’s financial statements as at 31 December 2017.
While the creditors’ claims which were admitted for the purpose of voting at the May creditors’ meeting were different from Palmer St’s financial statements as at 31 December 2017, there is no basis upon which I can conclude that the information about the creditors’ claims in the March or May reports or provided at the meeting was false or misleading. The administrators’ reports did not suggest that the proofs of debt were consistent with the financial statements.
The administrators’ report stated that they had received unsigned financial accounts and tax returns from 2012 to 2017 prepared externally, as well as financial accounts for the half year ending 31 December 2017. The administrators stated however, that they were not in a position to determine whether Palmer St had kept written financial records that correctly recorded and explained its transactions and financial position such that s 286 of the Act had been complied with by Palmer St. The analysis of the balance sheet in the March Report also stated that Palmer St was prima facie balance sheet insolvent from on or before 30 June 2013 as the financial accounts did not appear to record as current liabilities the amounts owed to the unsecured creditors. It also states that the available records indicated $1,823,734 was owed to trade creditors and that a schedule of unsecured creditors’ claims were set out in Annexure A. While Vanjak said there was no evidence supporting the debts claimed, proofs of debt had been provided and some investigations made.
There is no omission within the meaning of s 445D. The administrators had noted the disparity in the debts claimed as owing by the unsecured creditors and the financial statements. As set out above, Mr Herrett had made an assessment of the debts for voting purposes and while he had admitted them, he had noted that there was a basis for objection. Further, the proofs of debt were provided after the appointment of the administrators which was at a later point in time from the financial statements such that the two would not be expected to necessarily mirror each other. Given that Palmer St operated on a cash basis that would, as Mr Herrett stated in cross examination, also give some explanation to the disparity. The administrators raised issues as to the debts claimed by AMJ and Parnev Pty Ltd at the May meeting when ruled upon for the purposes of voting.
Termination for any other reason
Vanjak submits that there has been some misconduct by the administrators and Mr Parton and that a scheme had been conducted by them to defeat the creditors. I have addressed the bases upon which Vanjak made such a submission in the reasons above. None of the matters suggested by Vanjak as indicating that the administrators had engaged in misconduct in carrying out the administration and recommending at the May meeting that the DOCA be accepted, or that they acted to benefit Mr Parton in not recommending that Palmer St be placed in liquidation, are supported by the evidence in this application.
Vanjak also sought to raise in oral submissions further evidence of collaboration between the administrators and Mr Parton by contending that the administrators’ appearance in response to this application was being funded by Mr Parton or one of his companies. That was denied by Mr Parton and also by Mr Herrett. I accept their evidence in that regard. In his affidavit, Mr Herrett stated that while the administrators did not have funds to support their resistance of the application, they were doing so because of the serious allegations made against the administrators. The allegations made by Vanjak against the administrators are of a serious nature and I have no reason to doubt that the administrators defending the application to set aside the DOCA is genuine and not the result of any collusion with Mr Parton.
Vanjak also contended that it was in the interests of the public that any insolvent company should not continue to trade. I have already addressed the question of a lack of evidence supporting misconduct as between Mr Parton and the administrators. I have accepted that the opinion of the administrators, which was again stated to be the position by Mr Herrett in cross-examination, was that Palmer St could continue to trade if the DOCA was adopted with a small working capital of $24,000. I accept the administrators’ recommendation, that Palmer St could continue to trade with a small amount of working capital if the DOCA was accepted, was reasonably based on the evidence.
Directors of Palmer St
In reviewing the material for this matter, it came to my attention after the hearing that it appeared that Mr Parton was not a director of Palmer St at the time of the hearing of this matter, even though he had announced that he was a director of Palmer St at the outset of the hearing. I subsequently relisted the matter to raise this with the parties. I was subsequently informed by Mr Parton that he had made a mistake when he announced his appearance as a director. He provided an affidavit attaching a letter from Ms Drewsen, who is now a director of Palmer St, dated 7 September 2018, which sought to request that he appear on behalf of Palmer St at the hearing and to give evidence as necessary. I subsequently directed that an affidavit be provided by Ms Drewsen verifying Mr Parton’s authority to act on behalf of Palmer St and to make submissions on its behalf. An affidavit to that effect was provided accordingly. Counsel for the administrators stated that he had not heard Mr Parton state that he was a director of Palmer St at the outset of the hearing. I accept that to be the case.
When the matter was relisted there was a question raised whether Mr Parton was automatically disqualified from acting as a director pursuant to s 206B of the Act, as a result of him becoming bankrupt. In that regard, Counsel pointed out that the administrators’ May Report referred to the fact that the director had entered into a personal insolvency agreement. It was also announced by Mr Herrett at the May creditors’ meeting that a controlling trustee had been appointed to Mr Parton’s estate. At the time, he was the only director of Palmer St. Ms Drewsen was subsequently appointed as a director of Palmer St on 4 July 2018. Given that occurred prior to the execution of the DOCA, and there was a gap in time between when Mr Parton was disqualified from acting as a director and when Ms Drewsen was appointed, that raised the question of whether his disqualification affected the validity of the DOCA, I called for further written submissions to be made by the parties.
Ms Huang submitted that the DOCA was invalid as a result, because Mr Parton proposed and signed the DOCA as director.
Counsel for the administrators submitted that, while Mr Parton had entered into a personal insolvency agreement which was referred to by the administrators in their report, which had also been identified by Ms Huang at the May creditor’s meeting, under s 206B(4), a person is only disqualified from being a director if he or she has executed a personal insolvency agreement and the terms have not been fully complied with. Although Ms Huang, as a director of Vanjak, was aware of Mr Parton having entered into such an agreement, she did not raise it as a ground supporting termination of the DOCA or it otherwise being set aside in her affidavit supporting the application. Counsel for the respondent submitted that she could not seek to raise it now.
Mr Parton was not a party to the DOCA, nor was any obligation imposed upon him under it. As such, the DOCA operated independently of him. Further, the administrators submitted that it could make no reasonable difference to the creditors who the directors of Palmer St were, or whether one of them might have been disqualified, insofar as their claims against Palmer St terminated under the DOCA. It is therefore submitted that under s 445D(1)(c), there is no basis to infer that there was any omission from the administrators’ May Report which could reasonably be expected to have been material to creditors in deciding whether to accept or reject the DOCA. Further, the administrators submit that there was no basis under s 447A for setting aside or terminating the DOCA on account of a controlling trustee having been appointed to Mr Parton’s estate six weeks prior to the DOCA being executed, where the evidence demonstrates that the creditors were informed of that fact by virtue of the administrators’ May Report and the announcement at the creditors’ meeting on 29 May 2018.
I accept the administrators’ submissions that the evidence does not permit me to conclude that Mr Parton had been disqualified as a director under s 206B of the Act and that his directorship had ceased under s 206A of the Act at the time of the May creditors’ meeting and the execution of the DOCA. If there had been such evidence, the position may well have been different, given the affairs of Palmer St were to be controlled by Palmer St upon its execution of the DOCA. At that time, Mr Parton was the only director.
Even if a ground for termination under s 445D of the Act had been made out, there remains a discretion to be exercised by the Court in order to determine whether the DOCA should be terminated. That discretion has regard to the interests of the creditors as a whole and to the public interest. In the present case, there are several factors which weigh against the exercise of the Court’s discretion being exercised to terminate the DOCA.
One of the matters relevant to the exercise of the Court’s discretion is the question of delay. Ms Huang was cross-examined by Counsel for the administrators. She was a candid witness. She confirmed that she had received the administrators’ reports and attended the creditors’ meetings on behalf of Vanjak. She was at the meeting of 29 May 2018 and voted against the DOCA. The minutes of the meeting of 29 May 2018 record that Ms Huang raised that Palmer St was still going to trade at a deficit and that it did not have sufficient monies to pay the principal and interest to the NAB as secured mortgagee. She also stated that she would be applying to the Court and expressed concerns about the legitimacy of creditors’ claims. She also raised the twenty year friendship between Mr Parton and Mr O’Hair, who held a number of proxies of creditors, and queried why AMJ Group Pty Ltd was not treated as a related party creditor when it held promissory notes of amounts owed to related parties. Ms Huang did not challenge the accuracy of the minutes of the 29 May 2018 meeting which record her stating she would be applying to the Court because of her concerns regarding the legitimacy of the creditors’ claims.
Vanjak did not however file the application to set aside the DOCA until 1 August 2018. No reason has been provided for the delay. The period of two months between the meeting passing the resolution for Palmer St to execute the DOCA and the filing of the proceedings is significant in the present case, given the short time frame in which the steps under the DOCA were required to be taken.
Payments have been made to the unsecured creditors by way of the 5 cent dividends. Mr Herrett has stated that the dividends payable to the unsecured creditors under the DOCA have been paid, the affairs and assets of Palmer St have reverted to its directors and the deed is ready to be effectuated.
The evidence of Mr Herrett, which I accept, is that all obligations required to be undertaken under the DOCA have been fulfilled and relevant monies have been paid to creditors by the deed administrators and that he is ready to execute the notice of termination of the Deed under s 445FA of the Act.
A further matter related to delay is whether third parties may have changed their position in reliance on the execution of the DOCA. Palmer St has continued to trade from the execution of the DOCA. It has done so with the apparent support of the NAB. The evidence indicates that Palmer St’s operations are presently of a limited nature insofar as it relates to continuing to deal with its tenants and its secured creditor. It may however be inferred that the liquidation of the company, which would have effect from the time of the May creditors’ meeting, would prejudice the interests of those who have continued to deal with Palmer St since that time in its day to day conduct of its affairs and particularly any parties not involved in voting for the DOCA who have dealt with Palmer St since that time.
Mr Parton’s evidence in relation to the NAB was that they had put on hold entry into future arrangements with him pending the outcome of the present application. At present, I do not however have any evidence to suggest that Palmer St will not continue to be supported by the NAB.
Further, the evidence supports the fact that even if Palmer St was placed in liquidation, there would be no estimated benefit to its participating creditors. A matter which weighs against the exercise of the Court’s discretion is that termination would not be capable of providing a practical benefit for the creditors. While the dividend that has been paid to creditors is small, there is no evidence that liquidation will result in a greater return.
No other creditors have attended the hearing to support or oppose the present application. Relevant to the exercise of the Court’s discretion is not only the interests of creditors but the public interest and whether the DOCA would be detrimental to commercial morality.
While Vanjak complains that Palmer St and Mr Parton may have engaged in conduct that offends commercial morality, such that Mr Parton should not escape public examination and clawback provisions, the evidence that there are such questionable transactions is scant and supports the fact that there is little prospect of any additional recovery if Palmer St was wound up and liquidators were able to carry out investigations of the affairs of Palmer St. I regarded the additional evidence of Mr Herrett as to the further transactions which he had not previously investigated to be persuasive.
The position in the present case is similar to that found by Young J in Vero Insurance Ltd v Kassem:
“Although the public interest is a relevant matter, unless there is strong prima facie evidence of directors' substantial wrongdoing, there is little purpose in a liquidator conducting investigations and examining directors in a case where there is no great likelihood of monetary recovery. Indeed, it would be an abuse of process to permit such a course merely to satisfy a creditor who felt itself betrayed.”
Insofar as the administrator Mr Herrett has, in his affidavit for this proceeding, now given consideration to whether some transactions may have constituted uncommercial transactions, the evidence does not suggest that there is more than a slight chance that they would constitute uncommercial transactions or that there is any real prospect of any recovery in relation to those transactions.
While Vanjak has indicated that it would provide funding for the liquidator to carry out further investigations, no amount has been deposed to, nor any estimate given, as to the likely cost of such investigations. Putting that to one side, the additional investigations carried out by the administrator since 1 August 2018 indicate that those investigations would likely prove fruitless. There also appears to be no prospect of any recovery based on insolvent trading from Mr Parton, who was the director at the relevant time and who has entered into a personal insolvency agreement.
While the conduct of Palmer St, which was the subject of the successful claim by Vanjak which has unfortunately proved fruitless, could be regarded as egregious, that does not establish any relevant misconduct relevant to this question.
Vanjak raised a number of general assertions about Mr Parton failing to provide information as to various matters in relation to debts the subject of the claims by creditors. To the extent relevant to any ground upon which the DOCA could be set aside, they have been considered in that context but otherwise do not raise matters which require determination in this application.
While Ms Huang presented as an able advocate I am unpersuaded on the evidence that there is any basis upon which the Court should terminate or set aside the DOCA.
The application is dismissed.
  QDC 311.
  QCA 111.
 Affidavit of Y Huang, filed 23 August 2018, CFI 3.
 Mediterranean Olives Financial Pty Ltd & Ors v Loaders Traders Pty Ltd (2011) 82 ACSR 300 at  and .
 Emanuele v The Australia Securities Commission (1995) 63 FCR 54 at 69; Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd ( Subject to a Deed of Company Arrangement) & Ors  QCA 405.
 Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232.
 Independent verification is not always required: Mediterranean Olives Financial Pty Ltd & Ors v Loaders Traders Pty Ltd (2011) 82 ACSR 300 at .
 See definition of ‘related party’ in s 9 of the Corporations Act 2001 (Cth).
 Although I note that the accountant states that the amount was $491,277.13 as at December 2017.
 Given the amount of the claim was less than this the disparity is of no consequence.
 (2011) 86 ACSR 607 at .
 Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498.
 Deputy Commissioner of Taxation (Cth) v Pddam Pty Ltd (1996) 19 ACSR 498 at 512.
 Vero Insurance Ltd v Kassem (2011) 86 ACSR 607 at .
 Mediterranean Olives Financial Pty Ltd & Ors v Loaders Traders Pty Ltd (2011) 82 ACSR 300 at .
 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at .
 One could infer on the basis of its actions that the NAB was happy for Palmer St to continue and considered that its business was viable: Mediterranean Olives Financial Pty Ltd & Ors v Loaders Traders Pty Ltd (2011) 82 ACSR 300 at .
 See  of Ms Huang’s affidavit which was inadmissible as evidence and treated as a submission.
 Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at ; Affidavit of Ms Huang .
 Delay in bringing an application is a particularly important discretionary factor: Bidald Consulting v Miles Special Builders (2005) 226 ALR 510 at .
 Khoury v Zambena Pty Ltd (1997) 23 ACSR 344 at 353 (upheld in Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527).
 (2011) ACSR 607 at .
- Published Case Name:
J & E Vanjak Pty Ltd v Palmer Street Developments Pty Ltd & Anor
- Shortened Case Name:
J & E Vanjak Pty Ltd v Palmer Street Developments Pty Ltd
 QSC 293
07 Dec 2018
|Event||Citation or File||Date||Notes|
|Primary Judgment|| QSC 293||07 Dec 2018||Application to set aside Deed of Company Arrangement and an order that the first respondent be wound up and liquidators appointed; application refused: Brown J.|
|Primary Judgment|| QSC 103||24 Apr 2019||Costs judgment: Brown J.|