1.2 Audit of laws impacting on directors' liability  

On 17 April 2009, Corporate Law Minister Senator Nick Sherry announced that the Commonwealth will conduct an audit of its laws that impact on the issue of company director liability and will do so against the principles developed by the Council of Australian Governments (COAG).

COAG referred a set of principles to the Ministerial Council for Corporations and tasked the Commonwealth, State and Territory members of the Ministerial Council to assess the principles and conduct such an audit.

The COAG principles state:

• where companies contravene statutory requirements, liability should be imposed in the first instance on the company itself;
• personal criminal liability of a corporate officer for the misconduct of the corporation should generally be limited to situations where the officer encourages or assists the commission of the offence (accessorial liability); and
• in exceptional circumstances, where there is a public policy need to go beyond the ordinary principles of accessorial liability, a form of deemed liability could be imposed on a corporate officer only using a "designated officer" approach (for minor offences) or a "modified accessorial" approach (for more serious offences).

The Commonwealth aims to conduct the audit in the second half of 2009.

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1.3 Supervisory guidance for assessing banks' financial instrument fair value practices  

On 15 April 2009, the Bank for International Settlements (BIS) published a paper titled "Supervisory guidance for assessing banks' financial instrument for value practices". The application of fair value accounting to a wider range of financial instruments, together with experiences from the recent market turmoil, have emphasised the critical importance of robust risk management and control processes around fair value measurements. Moreover, given the significance of fair value measurements for regulatory capital adequacy and internal bank risk management it is equally important that supervisors assess the soundness of banks' valuation practices through the Pillar 2 supervisory review process under the Basel II Framework.  

The paper provides guidance to banks and banking supervisors to strengthen valuation processes for financial instruments. The principles promote strong governance processes around valuations; the use of reliable inputs and diverse information sources; the articulation and communication of valuation uncertainty to internal and external stakeholders; the allocation of sufficient banking and supervisory resources to the valuation process; independent verification and validation processes; consistency in valuation practices for risk management and reporting purposes, where possible; and strong supervisory oversight around bank valuation practices.  

 The consultation paper is available on the BIS website.

On 16 April 2009, the Australian Securities and Investments Commission (ASIC) released an investor and consumer guide on term deposits to help investors and consumers get the best out of their term deposits. ASIC is also announcing that it will be conducting a "health check" in the form of a marketing and disclosure review of the term deposit market.

Term deposits have experienced significant growth, with total term deposits in Authorised Deposit-taking Institutions (ADIs) growing by 39% from June 2007 to September 2008. ASIC estimates that total term deposits in ADIs now exceed $500 billion. This makes them one of the most used investments by investors and consumers.

ASIC will update the investor and consumer guide based on the findings of the review and issue additional guidance as necessary.

The guide is available on the FIDO website.

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3.2 Update on changes to core capital requirements  

ACH has announced that it will extend the timetable for implementation of increases to minimum core capital requirements for ACH Participants as follows:

• Increase in minimum core capital requirements to $5 million effective 1 July 2010; and
• Increase in minimum core capital requirements to $10 million effective 1 January 2012.  

Further information is available on the ASX website.

3.3 Rule amendment - CHESS Release 7.0 - Stock lending and RBA changes to the Financial Stability Standards

ASTC Participants and CHESS System Vendors have been advised that an effective date of 5 October 2009 has been scheduled for CHESS Release 7.0.  

The Business and Technical Description Overview for CHESS Release 7.0 has also been announced.  

The key driver of CHESS Release 7.0 is a variation of the Reserve Bank of Australia's Financial Stability Standards for Securities Settlement Facilities requiring additional disclosure of settlement information by ASTC.

The release will deliver CHESS enhancements to support ASTC's compliance with its regulatory obligations and measures to reduce settlement risk.  Enhancements to improve both investor and participant communications also feature in the release.

3.5 Working paper - The value proposition of central counterparty clearing houses  

CCP12, the global association of central counterparties has published a working paper entitled The Value Proposition of Central Counterparty Clearing Houses.

The paper explains the role of counterparty clearing houses (CCPs) and the significant contribution they make to the efficiency of financial markets, cutting the average costs of trading and increasing the profitability of their users. It also explains the role of CCPs in providing risk mitigation, a role that has been vital during the global financial crisis.

3.6 ASX group monthly activity report  

The March report is available on the ASX website.

3.7 ASX market supervision quarterly group activity report  

The ASX Group Monthly Activity Report - March 2009 is available on the ASX website.

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4.3 Interpretation of section 536 of the Corporations Act 2001 - Supervision of liquidators

(By Sara Mirabella, DLA Phillips Fox)  

Hall v Poolman [2009] NSWCA 64, New South Wales Court of Appeal, Spigelman CJ, Hodgson JA, Austin J, 31 March 2009  

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2009/march/2009nswca64.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

This case involved an analysis of the proper construction of s. 536 of the Corporations Act 2001 No. 50 (Cth) (the Act) and whether the trial judge, Justice Palmer, had properly invoked that provision in making his order that an inquiry be conducted into the liquidators conduct.  The appeal also raised important issues about the circumstances in which it may be proper for a liquidator to embark upon and prosecute recovery proceedings with the assistance of a litigation funder, in circumstances where there is really no prospect of any worthwhile recoupment for creditors.  

(b) Facts    

The liquidators of two companies in voluntary winding up commenced legal proceedings against two directors (Mr Poolman and Mr Irving).  Approval from the Committee of Inspection was obtained to enter a funding agreement between the liquidators and a litigation funder, even after the liquidators disclosed that any returns to creditors from the proceedings would be very low.  The liquidators were successful in the proceedings.  

In the course of defending the action the directors argued that they should not be held liable when the bulk of the proceeds of the litigation would go to the liquidators and litigation funders, with negligible returns to the creditors (relying on s. 1317S and s. 1318 of the Act).  While rejecting this argument Palmer J did consider that there was evidence before him which warranted further inquiry into the actions of the liquidators, and therefore he ordered an inquiry pursuant to ss. 536(1)(a), 536(1)(b) and 536(3) of the Act.   

The liquidators appealed this decision to order an inquiry.  The application for leave to appeal and the appeal itself were heard concurrently.  The appeal proceeded without a contradictor.  ASIC was invited to appear because the case raised important questions about the scope of s. 536 of the Act but declined without providing reasons.  Their Honours described this decision as "regrettable".  

(c) Decision   

Leave to appeal was granted and the order made by his Honour Justice Palmer was set aside.  The matters relied upon by Palmer J as justifying an order for an inquiry were, on the whole, concerns that should support an order for further investigation.  However, the Court of Appeal did find that Palmer J erred in two respects, but that he may well have reached the same conclusion had those matters been correctly addressed.

The Court of Appeal elected not to re-examine its discretion under s. 536 primarily because the initial proceedings had been settled (and therefore the purpose of the inquiry envisaged by Palmer J no longer existed) and because ASIC did not take up the invitation to appear in the proceedings.  

The Court of Appeal made various findings in relation to the interpretation of s. 536 of the Act, some of which are discussed below.  

(i) Were litigation funding and lack of benefit to creditors relevant to Mr Irving's defence?  

Palmer J rejected Mr Irving's submission that the unlikelihood of any dividend to creditors was relevant to his defence under ss. 1317S and 1318 of the Act.  His Honours noted that Palmer J considered the factors raised by the minority in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41, but that he ultimately followed the majority decision: the outcome being that it will not be an abuse of process if liquidators engage litigation funders and it turns out that the return to creditors is very small or nothing at all.  

(ii) The liquidators' conduct and the grounds for an inquiry  

Palmer J was concerned about the possibility that the creditors would not receive any or any significant returns from the proceedings, and also that the liquidators' costs of the proceedings were in the order of $2 million.  

Palmer J was of the opinion that if the liquidators had acted improperly then the Court could correct that impropriety by the granting of a costs limiting order.  It was for these purposes that His Honour ordered the inquiry under ss. 536(1)(a), 536(1)(b) and 536(c) of the Act.  

In interpreting s. 536 the Court of Appeal considered the principles established by relevant case law that have a bearing on the exercise of the court's discretion to order an inquiry.  

(iii) The "prima facie case" submission  

The applicants submitted that the court could not order an inquiry unless the court is satisfied that there is a "prima facie" case of failure to perform duties or observe requirements (relying on Burns Philp Investments Pty Ltd v Dickens (1993) 11 ACLC 272).  However, the Court of Appeal preferred the observations made in Leslie v Hennessy [2001] FCA 371 and found that an applicant only has to demonstrate something about the liquidator's performance of duties or observance of requirements that is a "sufficient basis" for making an order for inquiry.   

(iv) The court's supervisory role over the conduct of liquidators

The earlier proceedings involved a voluntary winding up and as such the liquidators were not officers of the court, as would be the case if the liquidators were appointed in a compulsory winding up.  The Court of Appeal found however that where there is a statutory authority extending to liquidators (such as under s. 536), there should be no lesser degree of supervision of liquidators by virtue of the fact that they are not court-appointed liquidators.  

(v) The appellants' jurisdictional contentions  

The appellants' argued that the matters relied upon by Palmer J to justify ordering an inquiry under s. 536 of the Act were not capable, as a matter of law, of providing a foundation for such an order.  

The Court of Appeal held that the findings of fact upon which Palmer J relied were capable of supporting the conclusion that his Honour reached.  In particular their Honours made reference Palmer J's findings regarding:

• The extent and cost of litigation;
• The lack of balance or proportionality between the liquidators' costs of $2 million and a possible maximum recovery of $6 million;
• The fact that the proceedings would produce, at best, only a token benefit to creditors, and the possibility that the proceedings may have been commenced and prosecuted for the benefit of the liquidators and the funder rather than for the benefit of creditors; and
• The fact that one of the liquidators gave evidence expressing discomfort about the amount of costs.  

In interpreting s. 536(1)(b) the majority (Spigelman CJ dissenting) held that this section does not require that the complaint be a formal initiation of an inquiry: "All that is needed. is that there be criticism expressed to the court, in any context, with respect to the conduct of a liquidator connected to performance of the liquidator's duties" [at 97].  In this case it was senior counsel for Mr Irving who made a submission that "the proceedings were a moneymaking exercise for the litigation funder, the liquidators and the lawyers, rather than seeking to compensate creditors in any meaningful way'"[at 91] which constituted the complaint for the purposes of s. 536(1)(b).  

(vi) Did the exercise of the jurisdiction to order an inquiry miscarry?  

Here the court had to decide whether Palmer J's reasons for ordering an inquiry were deficient in any way.  After reviewing the case law the court held that in determining whether Palmer J's decision was "deficient" they needed to consider "whether he acted on a wrong principle, took into account extraneous or irrelevant matters, mistook the facts, failed to take into account a material matter, or his decision was unreasonable or plainly unjust" [at 114].

The court held that while in most respects Palmer J's reasons for ordering the inquiry were not deficient he did fail to take into account the public interest that would be served in bringing directors to account for allowing the company to trade whilst insolvent, even in circumstances where any amount recovered in the proceedings would be absorbed by costs and expenses and would not benefit creditors.  

(vii) Can liquidators bring and pursue recovery proceedings where the return to creditors is negligible and only the professionals and the funder will benefit?  

The Court of Appeal [at 150] held that, if:

• liquidators had incurred costs in preliminary investigations and in creditors' meetings, and
• they consider that the prospective benefits to creditors justify further investigation in which they will incur more costs and expenses, and
• there are then no assets, in the absence of litigation, to pay the costs already incurred,

then the liquidators may legitimately, in accordance with their duties, pursue litigation with the aid of a litigation funder even where the likelihood of recovery for unsecured creditors may be little or none.  

Some provisos to the above proposition were outlined [at 151]:

• the pre-litigation costs must have been either necessary or reasonably considered to be justified because of the prospective benefits to creditors;
• the litigation costs themselves must have been reasonably incurred and proportionate to the prospective benefits (including not only possible direct benefits to creditors but also the benefits derived through the reimbursement of the liquidator's fees and expenses); and
• the litigation funding agreement must not be on manifestly unreasonable terms.  

(viii) Should the liquidators have applied for directions before entering the litigation funding agreement?

Palmer J said that a liquidator proposing to enter into a litigation funding agreement should apply to the court for directions "as a matter of course" however the Court of Appeal held that there is no obligation upon liquidators to do this and that his Honour erred in this regard.

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4.4 Administrator remuneration given priority over fixed charges  

(By Gerard O'Shaughnessy, Mallesons Stephen Jaques)  

Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68, Supreme Court of Western Australia, Court of Appeal, Wheeler, Pullin and Buss JJA, 31 March 2009  

The full text of this judgment is available at:

 http://cclsr.law.unimelb.edu.au/judgments/states/wa/2009/march/2009wasca68.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

This decision of the Court of Appeal of the Supreme Court of Western Australia has confirmed that administrators have an equitable right of indemnity for expenses and remuneration for work done in preserving and realising a company's assets.  Notably, the Court also concluded that this equitable right may rank higher than a subsisting fixed charge in circumstances where it would be unconscientious for a chargor to assert priority without properly remunerating the administrator.  

(b) Facts  

On 7 July 2006, the appellant, Coad, was appointed as voluntary administrator of a health club business by Vie Inspiree Pty Ltd (the Company).  

At the time of Coad's appointment, the Company's assets were subject to three registered charges.  The respondent, Wellness Pursuit Pty Ltd (in liq) (Wellness), held the third ranking charge which was partly fixed and partly floating over the Company's present and future assets and undertakings (the Third Charge).  Wellness was entitled to appoint a receiver and manager under this charge, however it elected not to do so in the knowledge that Coad had been appointed as voluntary administrator.  

On 14 July 2006, Coad administered the sale of the health club business and its related assets.  The proceeds were used to discharge the first and second ranking charges, however the balance was insufficient to cover both the Third Charge and Coad's expenses and remuneration.  

In the first instance, Master Sanderson found that, as Wellness held a fixed charge, its interest in the balance of the sale proceeds had priority over any right of indemnity of Coad for his expenses and remuneration.  Coad appealed.  

(c) Decision  

The appeal, heard by Wheeler, Pullin and Buss JJA, was allowed after the court concluded that:

• An administrator has a right of indemnity for expenses and remuneration which ranks higher than subsisting fixed charges in circumstances where it would be unconscientious for the chargors to assert priority without properly remunerating the administrator; and
• In this case, Coad was entitled to a higher ranking interest as he had provided an "incontrovertible benefit" to Wellness.  

(i) Priority of an administrator's right of indemnity  

Although administrators are entitled to a statutory lien securing their right of indemnity for expenses and remuneration, this right of indemnity only has priority over unsecured debts and debts secured by a floating charge on company property.  In this instance, the Third Charge took priority over Coad's statutory lien as it was (at least partly) fixed.  

However, the court affirmed existing authority that an administrator may also have an equitable right of indemnity which can be secured by an equitable lien attaching to assets realised during the administration.  

The court also referred to the judgment of Barrett J in Hamilton v Donovan Oates Hannaford Mortgage Corp Ltd [2007] NSWSC 10 which was relied upon by Master Sanderson in the first instance.  Barrett J stated that equity will not give priority to an administrator's equitable lien which is higher than the priority accorded to its statutory counterpart.  However, the Court rejected this statement on the basis that an administrator's equitable lien is distinct from, and has not been excluded by, the statutory regime.  Therefore, if Parliament did not intend to exclude an administrator's equitable lien, it is unlikely that Parliament would have intended that it be subject to the priority provisions applicable to statutory liens.  

The court ultimately concluded that administrators are entitled to an equitable lien securing a right of indemnity for expenses and remuneration for work done in preserving and realising a company's assets.  Furthermore, this lien will have priority over subsisting fixed charges where it would be unconscientious for chargors to assert priority without properly remunerating the administrator.  

(ii) Factors giving rise to priority  

In the current case, if Coad had not preserved and realised the assets, it would have been necessary for another party to have done so.  Furthermore, the costs of that other party's work would have been discharged out of the sale proceeds in priority to the Third Charge.  Therefore, in avoiding those costs, Coad had provided an "incontrovertible benefit" to Wellness and the holders of the first and second ranking charges.  

As such, it would be unconscientious for Wellness to have had the benefit of Coad's work in preserving and realising the relevant assets without providing for the proper remuneration of his services for the following reasons:

• Wellness knew Coad was acting as administrator of the health club business and consented (or at least acquiesced) to him doing so;
• Wellness was entitled to, but elected not to, appoint a receiver under its charge; and
• Wellness had received an incontrovertible benefit as a result of Coad's services.  

The appeal was allowed such that Coad was entitled to an equitable lien securing a right of indemnity for his expenses and remuneration in priority to the Third Charge.  

(d) Implications  

This decision confirms that an administrator has an equitable right of indemnity for expenses and remuneration for work done in preserving and realising a company's assets.  Furthermore, this equitable right may rank higher than subsisting fixed charges in circumstances where it would be unconscientious for chargors to assert priority without properly remunerating the administrator.  

Therefore, the decision may have a number of implications for current and future holders of fixed charges:

• First, the risk profile of transactions involving fixed charges may need to be reassessed given the increased possibility that such charges may be subordinated to an administrator's right of indemnity; and
• Secondly, there is a greater imperative for charge holders to take an active interest in who is appointed as administrator to ensure that their interests are considered during the realisation of assets.

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4.5 Winding up storm: Protecting the interests of creditors and the public

(By Cecilia Mehl, Freehills)

Australian Securities and Investments Commission, in the matter of Storm Financial Limited (Receivers and Managers Appointed)(Administrators Appointed) v Storm Financial Limited (receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 269, Federal Court of Australia, Logan J, 26 March 2009 

The full text of this judgment is available at:

 http://cclsr.law.unimelb.edu.au/judgments/states/federal/2009/march/2009fca269.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

The Australian Securities and Investments Commission (ASIC) applied to the Federal Court seeking the winding up of Storm Financial Limited (Storm). ASIC applied on two alternative grounds:

• that Storm was insolvent; and
• that it was just and equitable for Storm to be wound up, rather than continuing in administration.  

Storm's two key directors, Mr and Mrs Cassimatis opposed the application on the basis that Storm's creditors would be in a stronger financial position if Storm were allowed to continue in administration.

ASIC was ultimately successful on both grounds.  

Justice Logan ordered that:

• ASIC be granted leave to apply to the court for an order that Storm be wound up in insolvency;
• Storm be wound up in insolvency and on the just and equitable ground under s. 461(1)(k) of the Corporations Act 2001 No. 50 (Cth) (the Act);
• Storm's administrators be appointed as liquidators; and
• Mr and Mrs Cassimatis' application to have ASIC's winding up proceedings adjourned, be dismissed.  

(b) Facts     

Incorporated in May 1994 and operating primarily out of Townsville, Storm was a financial planning firm. For most of the relevant period, Storm was operated by six directors, four of whom resigned in December 2008. On 23 December 2008, Mrs Cassimatis' sister was appointed as Storm's third director in order for Storm to comply with the statutory minimum number of directors.   

Storm's audited financial report for the year ended 30 June 2008 indicated that the company was in a strong position, and the auditors did not include any adverse comments. Importantly, the auditors noted in their report that the audit "did not involve an analysis of the prudence of business decisions made by directors or management".  

On 8 January 2009, having declined into insolvency, Storm appointed voluntary administrators. One week later, on 15 January 2009, Storm was placed into receivership by the Commonwealth Bank of Australia (CBA), a secured creditor with a total claim of $27,094,547. In addition to the CBA debt, claims against Storm's assets, totalling $43,470,526.38, were made by other creditors.   

A creditors' meeting was originally scheduled to occur on 23 March 2009. On 16 March 2009, a document prepared by Mr and Mrs Cassimatis and published on a website maintained by the couple, came to ASIC's attention. The document, "A Simple English explanation of the DOCA" (the Memorandum), contained statements that, in ASIC's view, were misleading. On 19 March 2009, following its review of the Memorandum and other information published by Mr and Mrs Cassimatis, ASIC filed a winding up application, with the court's leave. In response to ASIC's application, the court adjourned the creditors' meeting until 30 March 2009.  

(c) Decision   

(i) Grounds for applications  

ASIC sought the winding up of Storm on two alternative grounds. The first was on the basis of insolvency (under ss. 459A and 459P(1)(f) of the Act) and the second was on the basis that it would be "just and equitable" for Storm to be wound up (under s. 461(1)(k) of the Act). In particular, ASIC sought:

• leave to begin the winding up proceeding in reliance on the ground of insolvency (leave was not required in respect of the "just and equitable" ground);
• that the court appoint the administrators jointly and severally as liquidators of Storm pursuant to section 472 of the Act;
• that the meeting of creditors scheduled for 23 March be adjourned;
• that Mr and Mrs Cassimatis immediately remove the Memorandum from their website, replace it with a court-approved notice correcting the misleading nature of the Memorandum and forward the court-approved notice to each of Storm's creditors; and
• liberty to apply.  

In response, Mr and Mrs Cassimatis applied to the court for:

• relief in respect of alleged deficiencies in the report to creditors prepared by the administrators;
• and adjournment of the hearing of the winding up application to enable the creditors' meeting to proceed as scheduled on 23 March 2009.  

(ii) Questions for the court  

Justice Logan dealt briefly with the question of whether leave should be granted to ASIC in respect of the insolvency ground. He stated that he was satisfied that a prima facie case of insolvency existed and that s. 459P(3) of the Act was therefore satisfied, enabling ASIC to bring its application on both grounds.  

Accordingly, the court turned to the question of whether the application should be adjourned pursuant to s. 440A(2) of the Act, which required the court to adjourn the application if the court is satisfied that it would be in the interests of creditors for the company to continue under administration rather than be wound up.  

Section 440A(2) states that the party opposing the winding up application bears the onus of satisfying the court that it is in the best interests of creditors that the company continue in administration.  

(iii) Reasoning and conclusion  

Having considered submissions from ASIC and Mr and Mrs Cassimatis, Justice Logan held that he was not satisfied that Storm should continue in administration as requested by Mr and Mrs Cassimatis. He ordered that Storm be wound up in insolvency, as to continue in administration would not offer creditors the most favourable monetary return. He also ordered that Storm be wound up under the "just and equitable" ground, as this outcome was in the public interest.  

In reaching his conclusion, Justice Logan considered, among other things, the following factors:

• Storm was not trading and had no realistic prospect of resuming its former business;
• the administrators, in their report, clearly stated that the DOCA did not offer the prospect of a better return for creditors;
• Mr and Mrs Cassimatis failed to satisfy the court pursuant to s. 440A(2) that the company should continue under administration. Rather, they submitted that it was "unclear" whether administration under the DOCA or winding up offered the superior return to creditors;
• ASIC indicated that it intended to seek orders terminating the DOCA under s. 445D of the Act, presumably in reliance on the grounds contained in paragraph 445(1)(f), being that the DOCA was contrary to the interests of creditors as a whole, and this would further prolong the administration; and
• there is an overwhelming public interest in particular matters being investigated, specifically: whether the actions of the directors were appropriate, whether the investments recommended to clients were appropriate and whether the fund managers managing client investments acted appropriately, and while they cannot be investigated in the context of an administration, these matters can and should all be investigated in the context of a liquidation.  

Justice Logan commented that Storm had failed "spectacularly". That it did so in the context of a large and sustained drop in the Australian share market did not, in his opinion, excuse the failure or detract from the need for the company to be wound up. Rather, it emphasised that need.

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4.6 Creditors' trusts considered by court  

(By Stephen Magee)  

Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186, Supreme Court of New South Wales, Barrett J, 24 March 2009  

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2009/march/2009nswsc186.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

A disgruntled creditor could not have a creditors' trust terminated, because termination was beyond the statutory power of the court.  

The creditors' trust had been established under a deed of company arrangement, and the deed of company arrangement had terminated upon commencement of the trust. This meant that the statutory power to terminate deeds of company arrangement was no longer available to the court.  

(b) Facts    

A creditors' trust is a spin-out from voluntary administration. Rather than setting up a system for compromise and payment of creditors within the confines of a deed of company arrangement (DOCA), a creditors' trust establishes a mechanism outside a DOCA. Essentially, it involves the establishment of a standalone trust fund for the payment of creditors; the creditors' claims against the company are extinguished and replaced by a claim against the trust fund. This immediately frees the company from its debts (as opposed to a DOCA, under which the company would remain indebted to its creditors until the DOCA had run its course).  

Although they operate separately from a DOCA, creditors' trusts are initiated through a DOCA. Once the trust is established, the DOCA usually terminates.  

The creditors of Sydney Civil Excavation agreed to a DOCA which would establish a creditors' trust. The creditors' trust was duly established.  

One creditor applied to the court for a s. 445D order to terminate the DOCA (and hence the creditors' trust).  

(c) Decision   

(i) A terminated DOCA cannot be terminated  

Sydney Civil Excavation relied on s. 445C(c) of the Corporations Act 2001 No. 50 (Cth):

"A deed of company arrangement terminates when: . If the deed specifies circumstances in which it is to terminate - those circumstances exist".  

In this case, the DOCA said that it would terminate once the creditors' trust was established.  

The court agreed with Sydney Civil Excavation, and held that it could not terminate a DOCA which had already ceased to be.  

The creditor then asking for an order terminating the DOCA ab initio, under s. 447A, but the court said that it was too late to change its argument:  

"The only case Parkview ever foreshadowed, regarding termination of the deed of company arrangement, was a case based squarely on s 445D(1).  It was to the meeting of that case that Sydney Civil's submissions were directed.  It was not open to Parkview to shift in submissions in reply to some new case based on s 447A."  

In obiter, the court expressed considerable doubt about whether s. 447A would actually have allowed an order to void the DOCA ab initio.  

(ii) Creditors' trusts in general  

In obiter, the court expressed strong misgivings about creditors' trusts, largely because they replace creditors' statutory rights and protections with private law rights and remedies. It issued a warning to administrators who propose a creditors' trust that they "bear a heavy burden of explaining to creditors the implications of the shift from a regime incorporating a court administered scheme of creditor protection to one in which creditors become passive trust beneficiaries".  

 The court also raised concerns about creditors' trusts at a public policy level:  

"[I]t is a matter for concern, at a public policy level, that the protective aspects of Part 5.3A in relation to deeds of company arrangement, including the role of the court, can be and have been avoided by the creation through a deed of company arrangement of a parallel but essentially unregulated regime of administration."

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4.7 The oppression provisions of the Corporations Act 2001- Finding an appropriate remedy  

(By Charlotte Ryan, Blake Dawson)  

Re Hollen Australia Pty Ltd [2009] VSC 95, Supreme Court of Victoria, Robson J, 23 March 2009  

The full text of this judgment is available at:

 http://cclsr.law.unimelb.edu.au/judgments/states/vic/2009/march/2009vsc95.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary  

This case concerns an appeal from a decision of an Associate Judge.  By way of background, Mr Holt and Mr Burnside were the sole directors of Hollen Australia Pty Ltd.  Following the breakdown of their relationship and the ensuing collapse in the management of the company, the parties sought court intervention.  Holt (in his capacity as a member) argued that he had suffered oppression on various grounds sufficient to invoke s. 232 of the Corporations Act 2001 No. 50 (Cth).  

Burnside, on the other hand, sought the winding-up of the company pursuant to s. 461(k). At first instance, the Associate Judge ordered the winding-up of Hollen, finding this remedy to do justice to both parties. He qualified his decision by instructing the appointed liquidator to make certain adjustments in order to deal with any compensatory relief to which Holt was entitled. It was further ordered that Burnside pay 70% of Holt's costs and that Hollen cover Burnside's costs in the winding-up proceedings.  

Holt appealed this decision, arguing that the Associate Judge erred in finding certain acts by Burnside insufficient to constitute oppression. Holt argued that should leave to appeal be granted, the appeal should be heard instanter, whereas Burnside contended that the Court of Appeal would be the most appropriate forum.  On appeal, Robson J was satisfied that Holt had sufficient grounds on which to appeal the earlier decision. He found that a hearing de novo to be heard instanter was appropriate in the circumstance. Robson J agreed with the decisions of the Associate Judge regarding the acts that did and did not constitute oppression, but reversed the winding-up decision, instead ordering Burnside to purchase Holt's shares in the company.  

(b) Facts    

Holt argued that there were numerous grounds on which he had been oppressed in his capacity as a member of Hollen. These were:

• Diversion of business from Hollen by Burnside to a third-party controlled by Burnside;
• Outsourcing from Hollen to a third-party, to the gain of Burnside's son and daughter-in-law;
• Relocation of one part of Hollen's business to Burnside's property;
• Payment of a directors loan by Burnside to himself but not to Holt;
• Payment of Hollen's money by Burnside to purchase a car;
• Payment of Hollen's money by Burnside to repair a shed on his property;
• Exclusion by Burnside of Holt from management;
• Burnside's exclusive relations with a prominent UK client of Hollen; and
• Burnside's establishment of a bank account without Holt's knowledge.  

Holt also submitted that the following grounds were incorrectly deemed by the Associate Judge not to constitute oppression:  

• Payment of Hollen's money by Burnside for his own superannuation entitlements ($490,000) without the approval of Holt;
• Burnside's opening of a competing business; and
• Burnside's refusal to pay a dividend to members, despite prior agreement to the contrary.  

It was further submitted by Holt that a winding-up order would be financially advantageous to Burnside, potentially allowing him to purchase the business for much less than its worth.  Additionally, Burnside's relationships with clients and staff would be a deterrent to any potential purchaser.  

(c) Decision   

Robson J agreed with the Associate Judge in respect of the acts undertaken by Burnside that were found to constitute oppression.  In considering the three additional grounds, he referred to recent analogous case law.  

While diverting business from the company to a third-party in which the oppressor had an interest but the applicant did not may constitute oppression, this case was distinguishable in that Burnside did not commence the third-party business at the expense of Hollen, but rather because Hollen was not prepared to do so. No evidence was led to suggest that Hollen was being treated unfairly or achieving other than a satisfactory return for the benefits and advantages it was providing to the third-party. While such conduct may have been in breach of Burnside's duties as a director, for the purposes of s. 232, the conduct was not "commercially unfair".  

Similarly, whilst acknowledging that there are occasions in which paying unreasonably high remuneration to directors can be oppressive, in this case, the payments were not unreasonable given the work undertaken by Burnside. It was also held that in circumstances where the parties are in deadlock and the payment of the dividend required the agreement of the parties, the refusal by one party to pay was not unfair, nor did it constitute oppression.  

In this way, the judgment of the Associate Judge was upheld insofar as the various grounds of oppression were considered. Robson J agreed that Burnside should pay 70% of Holt's costs, given that the consideration of the unsuccessful grounds on which oppression was alleged took up a substantial amount of the hearing.  

However, Robson J was ultimately of the view that the Associate Judge was in error in his decision regarding a final remedy. Robson J explained that generally speaking, there are two objectives in granting remedies for oppression; to bring an end to the oppressive conduct and to compensate the injured party for the injury done to him or her by the oppressive conduct.  The Associate Judge failed to give sufficient weight to the desirability of compensating Holt for the injury suffered by the oppression.  

In determining an appropriate remedy, Robson J agreed with Holt's submission in that the value of the business to Burnside was in excess of what it might be to a third-party and that winding-up should only be viewed as an appropriate remedy in extreme cases. The just and equitable remedy in this case was to take the mid-point between the net value of the assets of the company and have Burnside pay Holt for his share.

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4.8 An analysis of the requirements of a partnership  

(By Sara Mirabella, DLA Phillips Fox)  

Momentum Productions Pty Limited v Lewarne [2009] FCAFC 30, Federal Court, Full Court, Spender, Jessup and Middleton JJ, 19 March 2009  

The full text of this judgment is available at:

 http://cclsr.law.unimelb.edu.au/judgments/states/federal/2009/march/2009fcafc30.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

This case involved an analysis of the surrounding circumstances and communications between various parties to determine whether their relationship was one of partnership, as defined in ss. 1 and 2 of the Partnership Act (55 Vic. No. 12) 1892 No. 12 (NSW) (Act), among other relevant matters.  

(b) Facts    

Mr Scotts wanted to purchase a hotel business, using his company Momentum Productions Pty Limited (Momentum) as the purchase vehicle.  He entered into a contract for the purchase of the hotel business for $1.7m but was unable to raise the necessary funds.  Requiring an additional $400,000 he approached his brother and Richard Lewarne (the respondent) with a proposal that they should take up "equity" in the business.  The brother was to contribute $100,000 and the respondent $300,000.  In return for this investment "into the business", the respondent was to receive "a 15% share of the equity of the pub and 15% of the profits" for his contribution.  

The purchase of the business was financed by vendor finance ($200,000) and by a loan from the Commonwealth Bank ($1.53m).  The $300,000 was paid by the respondent, at the request of Mr Scotts, via a bank cheque made out to Westpac. Mr Scotts used the $300,000 to discharge a mortgage over a property owned by his mother. He then transferred the registered title from his mother to himself and used this property to contribute to the security for the bank loan made to Momentum.  

About a year after the purchase of the hotel business the respondent expressed concerns about his investment and the management of the hotel, and sought to extract himself from the business.  He argued that various representations made by Mr Scotts for the purpose of obtaining the respondent's equity participation in the hotel business were misleading or deceptive.  

At trial, it was held that a partnership existed between the three men and Momentum, and various orders that were generally favourable to the respondent were also made.  Mr Scotts and Momentum (the appellants) appealed this decision on various grounds.  

One of the key issues on appeal was the nature of the agreement pursuant to which the money was paid, and the nature of the relationship between the respondent and Mr Scotts and/or Momentum - in particular, whether the relationship was one of partnership or something else (e.g. an incorporated joint venture).  

(c) Decision  

On appeal the court upheld the decision of the single judge, finding that the relationship of the equity holders in the hotel business was one of partnership.  Their Honours did however decide that Momentum was not a party to that partnership.  Among other matters, Mr Scotts was held to have breached his fiduciary duty by using the respondent's $300,000 to discharge the mortgage over his mother's home.  

(i) Facts relevant to the business structure issue  

Mr Scotts made various representations to the respondent to the effect that he had sufficient money to cover the purchase price but required the extra money from the respondent to assist in funding the working capital.  He also said that he would run the business on behalf of his brother and the respondent and would consult with both of them about any major decisions, although he would have the final say.  

An "Outline Agreement" between Mr Scotts and the Respondent was sent to the respondent by Mr Scotts.  A week or so later Mr Scotts sent to the respondent a "Heads of Agreement" between Mr Scotts/Momentum and the respondent.  The respondent sought legal advice and referred to the arrangement as one of partnership whereby he (and Mr Scotts' brother) would be silent partners and Mr Scotts would be responsible for day to day operations.  The respondent specifically did not want to become a director of Momentum, but only "a shareholder", on the basis that assuming office as a director would expose him to greater potential liability should Momentum have any "skeletons in the closet".  A draft shareholders' agreement was prepared but never finalised.  

(ii) Business models contended for by the appellants  

The appellants' primary contention was that the respondent entered into a contract to purchase from Mr Scotts 15% of the share capital of Momentum for $300,000.  The fact that Momentum had only two shares on issue made this contention unlikely.  

The appellants also argued that the Heads of Agreement gave rise to a contract whereby the respondent purchased a share in the profits of Momentum.  The trial judge held that there was no evidence that the respondent accepted the terms of the Heads of Agreement.  On appeal, the court held that even if it was assumed that the provisions in the Heads of Agreement were the terms of the contract between the parties, such terms were not inconsistent with the contract being one of partnership.  The conclusion to be drawn was that the respondent acquired a share in the capital of the business (subject to the finding that the agreement was one of partnership being upheld).  

(iii) Analysis of whether there was a partnership  

After referring to the statutory definition of a partnership and the rules for determining a partnership in s. 1(1) and s. 2(1) of the Act, the court held that there was clearly a business being carried on for profit, the issue being whether the respondent was carrying on that business in common with Mr Scotts and/or Momentum.  

Among other submissions considered and rejected by the court, the appellants submitted that "mutuality" was essential in any contract of partnership but was lacking in this case because: (a) the parties were not conducting the business as agents for each other; (b) they had not agreed to share in the losses of the business; (c) the obligations of the respondent and Mr Scotts under the agreement between them were asymmetrical in that the respondent's only obligation was to contribute money, while Mr Scotts had no obligations because all the obligations in relation to the conduct of the business were imposed upon Momentum; (d) the respondent had no right to partake in the management of the venture; and (e) the respondent had no say on the matter of the admission of the new equity participants in the business.  

The court held:

• Whether a partnership exists must be determined by reference to sections 1 and 2 of the Act and the authorities relied on by the appellants did not require proof of agency over and above the matters to which s. 1(1) of the Act refers.  Ultimately, the conduct and communications of the parties showed an intention that Mr Scotts would act as agent for them all, and that each party to the agreement would have rights and obligations to each other under the agreement.  

• The fact that the respondent did not want to be a director of Momentum was not sufficient evidence to suggest that he did not want to share in the losses of the business.  

• It is not uncommon for partners to make contributions which differ both in kind and in quantum.  This was a case where the respondent and Mr Scotts' brother were to be silent partners after having contributed capital.  

• It was clearly established that Mr Scotts would consult with his brother and the respondent on strategic decisions but that he would have the final say (as is commonly the case for a party having an 80% equity share).  

• The fact that the respondent had no say as to the admission of any new equity participants in the business was in no way inconsistent with the agreement being one of partnership and may simply have reflected the respondent's minority stake in the business.  

Overall, the court held that the communications between the parties (Mr Scotts, his brother and the respondent) supported the conclusion that they intended their relationship to be one of partnership.  

(iv) The position of Momentum  

The trial judge found that Momentum was a party to the partnership.  The difficulty with this finding was that it was very unlikely that Mr Scotts would have intended to be in partnership with his own service company, and also that there was no specification as to the respective equity shares of Momentum and Mr Scotts.  

The facts suggested that there was a partnership between Mr Scotts, his brother and the respondent and that Momentum was simply used as the corporate vehicle through which they carried on the hotel business (the company holding legal title on trust for the partnership).  As such the appeal was upheld to the extent necessary to vary the trial judge's declaration that Momentum was also a partner.  

(v) Mr Scotts' obligations regarding the respondent's contribution of $300,000  

Mr Scotts argued that he had not been in breach of his fiduciary duties by using the respondent's $300,000 to discharge the mortgage, on the basis that those transactions were for the benefit of the hotel business.  This was rejected by the court.  Among other matters, the court rejected Mr Scotts' argument that the respondent's action was, or was analogous to, an action on a debt allegedly owing to him from the partnership.  Rather, it was in the nature of a suit by a person beneficially entitled to hold a fiduciary accountable for his breach of duty.

Mr Scotts was ordered to account to the partnership for the sum of $300,000 plus interest ($416,276.71) and a further ground of appeal relating to the trial judge's assessment of damages under the Trade Practices Act 1974 No. 51 (Cth) was also rejected.

The appellants were ordered to pay the respondent's costs.

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4.9 A liquidator in a members voluntary winding up may go behind a judgment debt  

(By Kathryn Finlayson, Minter Ellison)  

Ilhan v Cvitanovic [2009] NSWSC 160, New South Wales Supreme Court, Barrett J, 18 March 2009  

The full text of this judgment is available at:

 http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2009/march/2009nswsc160.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

A liquidator may go behind a proof of debt to determine whether there is a true liability.   The circumstances that the winding up is a members voluntary winding up and that the debt sought to be proved is a judgment debt do not, of themselves and without more, preclude rejection of a proof of debt.  

(b) Facts    

In 2006, the plaintiffs purchased from HR MD Pty Limited (formerly Hartrez Pty Limited) two air-conditioning units for their home.  The units were delivered and installed but disputes about their quality arose.  The plaintiffs commenced proceedings against Hartrez in the Consumer, Trader and Tenancy Tribunal.  

On 21 March 2007, without hearing the merits of the application, the Tribunal ordered that Hartrez pay the plaintiffs $8,135.00.  On 28 March 2007, the Registrar of the Tribunal issued a certified copy of the order which the plaintiffs then filed in the registry of the Local Court at North Sydney.  Upon filing, the order operated as a judgment of the Local Court by force of s. 51(3) of the Consumer, Trader and Tenancy Tribunal Act 2001 No. 82 (NSW).  

On 30 November 2007, the defendant was appointed as liquidator of Hartrez upon a members voluntary winding up.  

The plaintiffs lodged with the defendant a proof of debt dated 18 December 2007 for $9,607.48 (the amount of the judgment debt plus associated costs and interest).  The proof of debt was rejected by the defendant on 22 August 2008.   

On 5 September 2008, the plaintiffs filed an application under s. 1321 of the Corporations Act 2001 No. 50 (Cth) (the Corporations Act) for an order that the proof of debt be admitted.  

On 9 March 2009, his Honour Justice Barrett ordered that the following question be separately determined:

"Whether it is open to the defendant to reject the plaintiffs' proof of debt in the winding up of HR MD Pty Limited based on a judgment debt in circumstances where the company is in the course of members voluntary winding up".

(c) Decision   

Justice Barrett answered the separate question as follows:

"The circumstances that the winding up is a members voluntary winding up and that the debt sought to be proved is a judgment debt do not, of themselves and without more, preclude rejection by the defendant of the plaintiffs' proof of debt".

His Honour did not accept the plaintiffs' contention that in a members voluntary winding up the liquidator must take a judgment debt as he finds it and cannot seek to go behind the judgment, even where it may be liable to be set aside. Justice Barrett noted that the essential characteristics of the scheme for dealing with the assets of a company do not differ between a compulsory or a voluntary winding up.   

His Honour also noted that although the rule allowing the circumstances behind a judgment to be examined to determine whether there is in truth a liability is today regarded as a rule of bankruptcy, it had its origins in equity and may be regarded as reflecting an equitable principle applying generally to cases in which an estate falls to be administered for the benefit of persons interested in it.  

In his Honour's view, s. 553 of the Corporations Act (which lays down a general rule that in the winding up of an insolvent company the same rules are to be observed with regard to debts provable as are in force for the time being under the Bankruptcy Act 1966 No. 33 (Cth)) does not cause the rule allowing a trustee to go behind a judgment to apply in the winding up of an insolvent company and was irrelevant and inoperative in relation to the matter before the court. 

Accordingly, Justice Barrett held that the rule allowing the circumstances behind a judgment to be examined to determine whether there is a true liability may be applicable to a solvent winding up such as a members voluntary winding up.

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4.10 Intentions and expert opinion may affect price sensitivity and disclosure obligations

(By Graham Bannerman, Freehills)  

Jubilee Mines NL v Riley [2009] WASCA 62, Supreme Court of Western Australia, Court of Appeal, Martin CJ, McLure JA, Le Miere AJA, 18 March 2009  

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/wa/2009/march/2009wasca62.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

Kim Riley (Riley) claimed damages against Jubilee Mines NL (Jubilee) under section 1005 of the Corporations Act 2001 No. 50 (Cth) (the Corporations Act). Riley argued that Jubilee failed to disclose price-sensitive information under s. 1001A(2) of the Corporations Act and rule 3A(1) of the ASX Listing Rules. The information in question related to the 1994 results of exploratory drilling on Jubilee's tenement, which indicated that further exploratory drilling for nickel may be appropriate. As a former shareholder, Riley claimed that timely disclosure would have influenced him to retain his shares in Jubilee, and later sell them at a much higher price. At first instance, Riley was successful and was awarded $1,856,000 in damages and $1,005,133.33 in interest, plus costs.  

On appeal, Jubilee successfully argued that:

• if Jubilee had disclosed the information, it also would have been required to disclose that it had neither the means nor intention of conducting further exploratory drilling; and
• the information, which properly included Jubilee's drilling intentions, did not meet the threshold for price sensitivity.

Accordingly, Jubilee had not breached its continuous disclosure obligations.  

(b) Facts   

(i) Jubilee's activities in 1994  

In 1994, Jubilee Mines NL (Jubilee) was engaged in gold exploration on the McFarlanes Find tenement in Western Australia. Mr William Crossley (Crossley), the managing director, and Mr John Cooke (Cooke), a geologist, had the day to day management of the company. Jubilee's focus at the time was gold exploration, and it had very limited cash resources.  

(ii) Accidental drilling on McFarlanes Find  

McFarlanes Find shared a boundary with a tenement held by Western Mining Corporation (WMC). Due to discrepancies between the plans held by the Department of Mines and Energy and the actual co-ordinates of the tenements, WMC inadvertently conducted exploratory drilling on McFarlanes Find. Once the discrepancy was discovered, WMC sent the results of the accidental drilling on McFarlanes Find (Drilling Results) to Jubilee.  

(iii) Jubilee's reaction to the drilling results  

The Drilling Results showed nickel deposits on McFarlanes Find, and that there was the potential for further exploratory drilling. However, Cooke determined that in spite of the potential indicated by the Drilling Results, further exploratory drilling would not be appropriate given Jubilee's focus on gold and its limited cash resources. Cooke told Crossley of his views, and Crossley determined that the information in the Drilling Results was neither of interest nor significance to Jubilee. The Drilling Results were not disclosed to the market.  

At first instance, the Master found that Cooke in fact did not appreciate the true significance of the Drilling Results, and that finding was not challenged on appeal.  

(iv) Changes to Jubilee's board and subsequent disclosure  

In 1996, following changes in the composition of Jubilee's board, WMC initiated discussions with Jubilee regarding the Drilling Results, and provided Jubilee with both cross-sections of the Drilling Results, and its interpretation of their significance. On the business day following that meeting, Jubilee made an announcement to the ASX disclosing both the Drilling Results, and an intention to undertake further exploratory drilling on McFarlanes Find. Following the announcement, Jubilee's share price jumped significantly.  

(c) Decision   

While all judges allowed the appeal, two separate sets of reasons were handed down. Martin CJ, with whom Le Miere AJA agreed, delivered the majority judgment. McLure JA gave her own set of reasons.  

(i) The test for price sensitivity under the Listing Rules and Corporations Law  

In determining whether the Drilling Results should have been disclosed, the court looked at the tests for price sensitivity under both the Listing Rules and the Corporations Act. Under both ss. 1001A(2) and rule 3A(1), the relevant test was whether a reasonable person would expect the information to have a material effect on the price or value of the securities. However, all the judges accepted that the test under s. 1001A(2) was, in effect, supplanted by s. 1001D of the Corporations Act, which was analogous to a "deeming provision" to be applied in assessing price sensitivity. Accordingly, a reasonable person would expect information to have a material effect on price or value if that information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, or buy or sell those securities.  

Noting a lack of authority on the issue, the two judgments differed on whether the deeming provision under s. 1001D could also supplant the test in rule 3A(1), and consequently disagreed on the test to be applied in assessing price sensitivity under the Listing Rules.  

Looking to the history of continuous disclosure legislation in Australia, Martin CJ found that the legislative intent behind the relevant sections of the Corporations Act was to build on and strengthen the ASX Listing Rules. The clear sentiment in the structure of the two regimes was to ensure that they were consistent, and an unduly constrained and technical approach should be rejected. Accordingly, the deeming provision in s. 1001D of the Corporations Act was applicable in assessing price sensitivity under the Listing Rules. For McLure JA, on the other hand, substantive differences between the provisions of the Listing Rules and the Corporations Act meant that the deeming provision in s. 1001D did not supplant the "material effect on price or value" test in the Listing Rules.  

(ii) Price sensitive information may include expert opinion and intentions  

Both the Chief Justice and McLure JA upheld the appeal on the ground that the Drilling Results were not sufficiently price sensitive to trigger disclosure obligations given Jubilee's circumstances, namely:

• Jubilee's focus on exploration for gold;
• Cooke's opinion that the Drilling Results were of little commercial significance;
• Jubilee's intention not to conduct further exploratory drilling; and
• in any event, the lack of available funds to conduct further exploratory drilling.  

Crucially, all the judges agreed that it may be necessary to go beyond what was termed "core information" in discharging continuous disclosure obligations. In particular, McLure JA stressed that where price sensitivity depends upon the company having an expert assessment of core information and business decisions are made based on that expert assessment, the disclosure of only the core information may be misleading.  

Martin CJ found that, in the circumstances, in order to avoid misleading the market, Jubilee would have been required also to disclose the fact that it did not intend to conduct further drilling. Accordingly, an announcement of the Drilling Results, properly including the drilling intentions, would not have influenced a hypothetical investor to trade in Jubilee's securities, and the information was not relevantly price sensitive. Jubilee had no obligation to announce the Drilling Results until it altered its position and decided to undertake further exploratory drilling.  

McLure JA, on the other hand, was not persuaded that the focus on gold exploration and the lack of funds for further exploration were relevant in assessing price sensitivity. Her Honour concluded that an expert opinion on the Drilling Results should have been and in fact was part of the information of which Jubilee was aware in assessing the price sensitivity. Given Cooke's honest and reasonable expert opinion that the Drilling Results were of little commercial significance, the information was not price sensitive and consequently Jubilee had not breached its disclosure obligations.  

Further, for McLure JA, had Jubilee had been aware of the true significance of the Drilling Results, then prima facie, drilling intentions were part of the mix of relevant information on which to assess price sensitivity. In principle, however, Jubilee could not rely on its intention in relation to drilling (based, as it was, on a failure to appreciate the true significance of the Drilling Results) to prevent a disclosure obligation from arising.  

All the judges agreed that market practice was irrelevant in determining the ambit of the information that must be disclosed to the ASX.

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4.11 The ability of a bank to protect its interests is not always unlimited

(By Zoe Leyland, Mallesons Stephen Jaques)  

Suncorp-Metway Ltd v Bellairs [2009] NSWSC 135, New South Wales Supreme Court, Rothman J, 12 March 2009  

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2009/march/2009nswsc135.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

(a) Summary  

The decision concerned an application by the plaintiff, Suncorp-Metway Limited (Suncorp), for possession of property for which it was a mortgagee following default by the defendants.  While the defendants did not challenge the possession orders sought by Suncorp, the defendants sought relief from various other orders on the basis that the loan agreement was unjust within the meaning of the Contracts Review Act 1980 No. 16 (NSW).  

Rothman J agreed that the loan agreement was unjust as it:

• imposed conditions that Suncorp knew were impossible for the defendants to fulfil;
• contained terms and conditions significantly different from those under which finance was initially offered;
• did not represent a negotiated outcome; and
• contained further conditions not reasonably necessary for the protection of Suncorp's interests.  

The decision, particularly where it applies, is a warning to lending institutions that their ability to contract so as to insulate themselves from default is not absolute.   

Lenders should be aware that they may not be able to impose conditions on borrowers which are not reasonably necessary for the protection of their interests.  This may prove alarming for lenders given the current economic climate.  

Lending institutions should be prudent when drafting conditions precedent and ought to consider whether, on the material provided to them, those conditions are capable of being satisfied.  Lenders should also take care when renegotiating terms of an offer of finance so as not to be seen to be abusing their bargaining power.  

(b) Facts    

The defendants, Mr Bellairs and Mr Pike, entered into a loan agreement with Suncorp for $535,000 in order to purchase, as equal partners, the land and business known as the Valleyview Nursery.   

Suncorp was initially informed by Mr Bellairs, on behalf of the defendants, that the defendants required an interest-only loan due to concerns about their ability to reduce the principal in the early years of the loan.  Mr Bellairs testified that the defendants wished to ensure that there was sufficient cash flow to "build the Nursery business up".

Suncorp sent to the defendants an indicative proposal for a borrowing of $490,000 on an interest-only basis.  The defendants completed the loan application form seeking a loan of $535,000.  

The loan was approved for internal purposes. The internal approval memorandum stated that the loan was to be interest-only for a period of two years, with the possibility of a further interest-only period, and that the valuation of the Nursery was to be based on land and buildings only.  An offer of finance on these terms was sent to the defendants.  A condition precedent stipulated that there be a valuation of the Nursery from a bank-approved valuer of not less than $675,000.   

The defendants were not informed at any point that the valuation was to be conducted without regard to the value of the business.  

On 15 September 2003, the defendants executed the offer of finance.  

The valuation without reference to the value of the business resulted in a shortfall of security which Suncorp remedied by requiring the defendants to make a reduction of principal in the first 12 months.  

The defendants subsequently executed the revised offer which included the same conditions precedent as the initial offer. Mr Bellairs attested that he had no choice but to accept given that the contracts for the sale of the property and business had already been executed.   

The defendants were not able to meet the required repayments as a consequence of cash flow issues.  The defendants did, however, make repayments of approximately $95,000 in the first two years.  Had the loan been interest-only, the defendants would have repaid all interest owing for that period and some reduction in principal would have occurred.  

In early 2005, Mr Pike wished to sell his share due to ill health.  The proposed sale was subject to refinancing of the original acquisition.  Suncorp, however, did not allow the differential to be charged to an increased credit card limit on a card issued through it.  As a consequence, the sale and refinancing did not occur.   

In March 2006, Suncorp commenced enforcement proceedings.  

(c) Decision   

(i) Reasoning  

Rothman J concluded that the loan agreement was unjust within the meaning of s. 7(1) of the Contracts Review Act 1980 (NSW).  

In order to come within that section, the terms of the contract must, by their own operation or by the circumstances which gave rise to them, be "contrary to the ordinary standards of fair play".  

The terms and conditions of the loan agreement were significantly different from those contained in the initial offer, which involved an interest-only loan. 

The agreement, moreover, did not represent a negotiated outcome, thus reflecting the material inequality of bargaining power between the parties.  

Furthermore, Suncorp was aware or ought to have been aware, that the initial offer contained conditions which were impossible for the defendants to fulfil. 

Suncorp had accepted that the price paid for the land and business represented fair market value yet imposed a condition that the value of the land and buildings (without the value of the business) be equal to the purchase price.

It was also apparent from internal memorandums that Suncorp was aware that the imposition of a requirement to reduce principal would be likely to cause the defendants financial difficulty in the start-up phase of their business.  

Rothman J determined that the reduction of principal requirement was not reasonably necessary for the protection of Suncorp's legitimate interests.  Rothman J was influenced by the fact that the loan/value ratio was 72%.  

The contract was therefore unjust as a result of both its terms and the circumstances in which it was made.  

(ii) Remedy  

Rothman J ordered a stay on the writ of possession for a period of six months to allow the defendants to regularise their affairs.   

Suncorp was ordered to remit to the defendants all higher rates of interest, imposed as a result of default, from the inception of the loan to the date of judgment.  

Any fees payable on account of non-compliance with the loan were also to be excluded from the determination of the total sum owed by the defendants.  

Rothman J explicitly rejected Suncorp's argument that the defendants ought to have breached the contracts for the sale of the land and business, executed after the initial offer of finance, so as to have mitigated their losses.  

(d) Note  

The Contracts Review Act 1980 (NSW) applied here as the Nursery was a horticultural undertaking and, by definition, a farming undertaking and was thus excluded from the trade or business carve out within s. 6(2).  

The Contracts Review Act 1980 (NSW) applies only in New South Wales.

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4.12 Court widens category of registrable instruments relating to charges

(By Mallesons Stephen Jaques)  

Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37, McMurdo J, 6 March 2009

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/qld/2009/march/2009qsc37.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp  

The Queensland Supreme Court decision in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 is widely regarded as surprising because it appears to cut across current market practice.

The decision is likely to be appealed, but pending resolution, serious questions have been raised about the scope of the moneys (and/or obligations) secured by certain registered charges, particularly those where the secured moneys or obligations are defined by reference to moneys or obligations owing under designated specific documents external to the charge (i.e. as opposed to "all moneys" or "all obligations" charges).  

(a) The facts  

The case involved, as relevant, a charge given by a guarantor, Octaviar Ltd (the Charge) to a lender, Fortress Credit Corporation (Australia) II Pty Ltd (Fortress), which secured money due, owing or payable under or in relation to a "Transaction Document". The term "Transaction Document", in turn, was defined in the related Facility Agreement between Fortress, the borrower and Octaviar (and another guarantor) to mean certain specifically identified documents, and (through a specific designation process) "each other document which the Lender and the Borrower or a Security Provider agree in writing is a Transaction Document for the purposes of [the Facility] Agreement". On 22 January 2008, Octaviar Ltd and the borrower agreed with Fortress that Octaviar Ltd's liability under another guarantee not otherwise connected with the Facility Agreement should also be secured by the Charge, and agreed that it was a "Transaction Document" for the purposes of the Facility Agreement (the 22 January Agreement). The Public Trustee of Queensland, as trustee for certain noteholders of Octaviar Ltd, argued, among other things, that the 22 January Agreement was a variation of the charge for the purposes of s. 268(2) of the Corporations Act 2001 No. 50 (Cth) (the Act) and ought to have been registered as such.  

(b) The decision  

The Court held that the 22 January Agreement did indeed constitute a "variation in the terms of the charge having the effect of increasing the amount of the debt or increasing the liabilities . secured by the charge", as contemplated by s. 268(2)(a) of the Act, and so a notice in relation to it should have been lodged with ASIC within 45 days. As no such notice was lodged, s. 266(3) of the Act rendered the Charge void to the extent that it purported to secure the amount of the increase in debt or liability.

(c) Implications

The decision has potentially far-reaching implications for charges that secure liabilities by reference to money or obligations owing under designated specific documents outside the charge (as opposed to non-specific "all moneys" or "all obligations" charges). At the very least, it means that documents not specifically identified in the charge but added into the ambit of the secured obligations by a later "variation" via a designation mechanism need to be separately notified to ASIC as a variation under s. 268(2) of the Act.  

But it may go wider than this. There are suggestions in the judgment that even those documents which are specifically identified and in existence at the date of the charge might need to be registered with the charge under s. 263(1)(c) as the "instruments" which "created or evidenced" the charge (despite the Facility Agreement not being lodged with the Charge, no decision was made on this point in Octaviar because ASIC had issued a certificate in respect of initial registration and the court held that the "conclusive evidence" rule in s. 272(4) applied).  

This aspect of the decision would seem also potentially to capture arrangements where documents containing liabilities to be secured are specifically identified as being within the "secured money" (or equivalent) definition in the charge but are not executed until some later time, as well as documents not so identified but brought into the secured obligations net by any kind of "designation notice" style procedure at a later time, where they have the effect of increasing the amount of the debt or the liabilities (present or prospective) secured by the charge. It is fair to say that it is not common market practice to lodge notices in relation to those documents at present.  

(d) What should you do as a chargor or chargee?  

As mentioned, the case is likely to be appealed. In the meantime, it is recommended that those who granted or who enjoy the benefit of charges registered at ASIC take the following actions:

• Conduct a review of all such charges, whether prepared internally or by external counsel, to identify those where the "secured money" (or equivalent) definition is of the "specific document" type including those which contain a designation mechanism (i.e. as opposed to the non specific "all moneys" type).

• In relation to each of those charges, identify all of the documents which would be within the ambit of the "secured money" (or equivalent) definition, whether executed before, at the same time as or after the charge (which, in the case of the latter, have the effect of increasing the amount of the debt or the liabilities (present or prospective) secured by the charge), and which have not been the subject of a lodgement with ASIC under Part 2K of the Act.

• Where those documents were in existence before the charge was executed, or were executed at the same time as the charge, then (assuming the charge has been registered) consider whether s. 272(4) applies or whether those documents should now be lodged and registered.

• Where those documents were executed after the charge, then (assuming the charge has been registered):
• consider lodging, or procuring the lodgement of, a notification (ASIC Form 311B) in respect of those document(s) for each charge. If in respect of any such document, it is less than 45 days after the date of the "variation", the matter is resolved by such lodgement, but if it is later, then lodgment will at least set time running for the six month "cure" period implied by s. 266(3) of the Act; and
• where it is later than 45 days after the date of the "variation", consider also applying to the Court for an extension of the 45 day registration period under s. 266(4) of the Act.
  

• In relation to pending transactions where the charge has not yet been executed, consider converting any proposed "secured money" (or equivalent) definitions which are of the "specific document" type to a non specific "all moneys" type. If that is not possible, consider carefully whether you need to lodge all of the "specific documents" with the ASIC Form 309 on initial registration of the charge (noting that, of course, all those documents then become a matter of public record).

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4.13 Voluntary administration: Extension of the convening period for a second meeting of creditors

(By Laura Keily and Haley Aprile, Corrs Chambers Westgarth)  

Lombe re Australian Discount Retail Pty Ltd [2009] NSWSC 110, Supreme Court of New South Wales, Barrett J, 3 March 2009

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2009/march/2009nswsc110.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This case concerned an application by the administrators of Australian Discount Retail Pty Limited and 38 wholly-owned subsidiaries (the ADR Group) for a substantial extension of the convening period of the second meeting of creditors under Part 5.3A of the Corporations Act 2001 No. 50 (Cth) (the Act).  The court had previously made an order effecting a short extension of time pursuant to s. 439A(6) of the Act.  

The question to be determined was whether there was good cause for departing from the time limits set down by the Act for the convening of such a meeting.  That is, would the extension of time maximise the chances of the company or as much as possible of its business continuing in existence, or if continuation was not possible, to achieve a better return for creditors and members than would result from an immediate winding up.  

Barrett J held that due to the particular circumstances of the case, the interests of creditors would be best served by granting the extension of the convening period, rather than forcing the meeting to occur at an early date.  His Honour further held that the proper statutory basis for effecting the extension is s. 447A of the Act, as it is unclear whether the amendments to s. 439A, as provided for in the Corporations Amendment (Insolvency) Act 2007 No/ 132 (Cth) (the Amendment), allow several extensions to be granted under s. 439A(6).  

(b) Facts  

Administrators were appointed to the ADR Group on 20 January 2009.  On 16 February 2009 the administrators obtained a short extension of the convening period for the second meeting of creditors until 9 March 2009. The administrators then sought a further extension until 18 August 2009. This added up to a total extension of six months.  

On the same day the administrators were appointed, secured creditors appointed receivers of the assets and undertakings of the companies.  The receivers undertook to sell the assets and undertakings as a going concern, believing this would achieve a better outcome for creditors than would result from selling the property in parts. For example, the sale of the ADR Group as a going concern would likely result in most of the 10,000 employees of the ADR Group being retained, as well as enabling suppliers and other contractors to continue to do business with the new owner.  

The receivers supported the application for an extension of the convening period.  One of the receivers deposed that a large number of persons had expressed interest in the sale of the ADR Group and a number had submitted non-binding indicative offers.  The receivers expected a successful bidder to be chosen and to have entered into a sale and purchase agreement around the end of March 2009.  After this, the successful bidder would require a considerable period of time within which to make arrangements with lessors of the premises of the 39 companies.  Accordingly, a substantial extension of the convening period was required.  

(c) Decision  

(i) Extension of the convening period  

Barrett J began by noting that the approach to be taken in such applications is for the time limits set down by the Act to be adhered to, unless good cause is shown.  The good cause must be such as to promote the objects of Part 5.3A as stated in s. 435A. Therefore, the ability to maximise the chances of the company or as much as possible of its business to continue in existence, must be weighed against the expectation that voluntary administration will be effected quickly, so that there is a speedy resolution of creditors' positions.  

Here, each of the 39 companies in the ADR Group had a committee of creditors, 38 of which had unanimously resolved to support the application for an extension of the convening period.  Further, his Honour felt it would be counterproductive for the administrators to be compelled to convene the second meeting too quickly, as such a meeting is best held at a time when it is possible to give creditors definitive financial information that will assist them in their decision-making.  Barrett J held that creditors' decision-making would be made more difficult and complicated if they were compelled to make a decision about their company's future based on speculation about the possibility of a going concern sale.  Further time for the formulation and digestion of recommendations based on established realities would avoid the possibility of what might be a premature decision in favour of winding up as the only practically available option. In this case, although the creditors would not be left waiting unduly, the creditors were content for additional time to be taken to achieve a more certain and hopefully profitable outcome.  

For these reasons, his Honour held that the interests of creditors would be best served by granting the extension sought by the administrators.

(ii) Statutory basis for effecting the extension of the convening period  

His Honour stated that the court's power of extension under s. 439A(6) had previously been exercised in this matter and a number of cases held that s. 439A(6) permits only one extension of the convening period to be made.  In one such case, Re Henry Walker Eltin Group Ltd [2005] FCA 984, Hely J referred to cases in which a second extension was made pursuant to s. 447A - Re Western National Earthmoving Corporation Pty Ltd (1997) 141 FLR 121 and Re Envirostar Energy Ltd [2002] NSWSC 1246.  However, Barrett J noted that these cases had all been decided before the introduction of the Amendment.  

The Amendment allows an extension of the convening period to be made at any time if the court believes it would be in the best interests of the creditors.  Barrett J found that while it is unclear whether the amended form of s. 439A(6) allows subsequent extensions of the convening period to be made, it is likely that the Amendment was only intended to allow a second meeting to be held outside the convening period because of technical defects discovered after a meeting had been held.  Therefore, his Honour expressed doubt about whether the Amendment created a general jurisdiction to make multiple extensions under s. 439A(6), although he did not decide the matter. Section 447A (which permits the court to make any such order it thinks appropriate about how Part 5.3A operates in relation to a particular company) may be used to allow for subsequent extensions (according to the cases).  His Honour preferred to rely on s. 447A and held that the proper statutory basis for effecting the extension was s. 447A. His Honour was satisfied that it was in the best interests of creditors that the convening period be so extended.  

Barrett J also allowed an order under s. 447A to enable the administrators to hold the second meeting at any time during the extended period, or within five business days after its end, rather than strictly in accordance with s. 439A(2).  Section 439A(2) provides that the meeting must be held within five business days before or after the end of the convening period.  His Honour stated this order would allow the administrators to bring the meeting on promptly, should a sale be completed earlier than expected, without having to wait for the end of the extended period.

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4.14 Delaware Supreme Court clarifies Revlon standard and rejects challenges to sale process  

(By Jonathon Redwood, Victorian Bar)  

Lyondell Chemical Company v Ryan, Supreme Court of the State of Delaware, CA No 3176, 25 March 2009, judgment revised 16 April 2009  

The full text of this judgment is available at:

http://www.courts.delaware.gov/opinions/(yfcbraec5eoituaekhk0uneo)/download.aspx?ID=119350  

On 25 March 2009, in another significant decision (Lyondell Chemical Corp. v Ryan) siding with directors in the current turbulent economic climate, Delaware's highest court emphatically rejected a shareholder class action seeking to impugn board members for allegedly failing in their Revlon duties and duties of good faith by not taking sufficient action to prepare for an impending offer and not considering a market check before entering into a merger agreement. The Court affirmed the board's significant latitude and discretion in managing a sale process.  

The case concerned a post-merger claim by shareholders against directors for breaching their duty of loyalty by failing to act in good faith in conducting a sale process for Lyondell Chemical Co. Specifically, upon the filing of a Schedule 13D by an affiliate of the eventual merger partner, it was contended that the company was "in play". A Schedule 13D is required to be filed with the Securities and Exchange Commission by any person acquiring a 5% or greater beneficial interest in the equity securities of a company. The Schedule 13D must disclose any intentions to acquire control of the company.   

The shareholders argued that once the company was "in play" the directors had a duty to actively solicit competing acquisition proposals. Instead, the directors apparently took no action to prepare for a possible acquisition proposal. A merger agreement with the Schedule 13D filer was eventually negotiated in less than a week, during which time the directors met for only seven hours to consider the matter. They did not conduct a limited market check or solicit competing superior proposals.

At first instance, the Court of Chancery decided that "unexplained inaction" permits a reasonable inference that the directors may have consciously disregarded their fiduciary duties. It expressed concern about the speed with which the merger agreement was consummated, the directors' failure to negotiate better terms, and their failure to seek potentially superior bids. The Court referred to the directors' "two months of slothful indifference despite knowing the company was in play". It held the directors may have breached their fiduciary duty of good faith and denied summary judgment to the directors.  

On appeal, the Delaware Supreme Court reversed the lower court ruling and ordered summary judgment in favour of the directors, ruling that the board had essentially done nothing wrong during the period subsequent to the Schedule 13D filing or the week following the merger proposal.  

The decision concerned the so-called Revlon duty, named after Revlon Inc v MacAndrews & Forbes Holdings Inc 506 A 2d 173 (Del 1986) where the Delaware Supreme Court said that an enhanced judicial review applied to directors in transactions involving a "sale" of control of the corporation.  In such a case "the directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the shareholders at a sale of the company".   

Significantly, the Court rejected the view that Revlon duties are triggered simply because a company is "in play". Rather, Revlon duties only arose when the directors choose to begin negotiating the sale of the company. A board has no duties under Revlon to seek the "best price" in a sale or other business combination transaction simply because a stockholder or other potential bidder tries to put the company "in play".   

The court stressed that Revlon did not create new fiduciary duties, but that the board must perform its fiduciary duties in the service of a specific objective: maximising the sale price of the enterprise. The standard required no single "blueprint" (or exclusive list of blueprints) that a board must adhere to in structuring and responding to an acquisition proposal. Failure to conduct a pre-signing market check is entirely consistent with Revlon duties, which can be satisfied by other means, such as an appropriate fiduciary-out in the merger agreement.  

The claim for breach of fiduciary duty was based on the higher standard of breach of loyalty - not breach of duty of care - because the directors had the benefit of a charter exculpatory provision for breach of duty of care. By operation of s. 102(b)(7) of the Delaware General Corporate Law, however, companies cannot exculpate directors from personal liability for violations of fiduciary law predicated on a breach of the duty of loyalty or actions or omissions not in good faith.  

The Court held that breach of the duty of loyalty to act in good faith requires "conscious disregard" of "known duties". The Court concluded that "[i]n the transactional context, [an] extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties".  

Along with Citibank (noted in Corporate Law Bulletin No.139 of March 2009), Lyondell highlights the extreme difficulty of demonstrating breach of a duty of loyalty in the takeover context, even in the current challenging economic environment. Delaware courts remain very deferential to directorial decision-making and will not conduct overly critical hindsight review of business decisions made in the takeover context.

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