Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd

(1986) 67 ALR 215
19 ACSR 160
14 ACLC 366
1996 WL 1093715
[1996] BPIR 614

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(Decision by: Branson J.)

Molit (No 55) Pty Ltd
v Lam Soon Australia Pty Ltd

Court:

Judge: Branson J

Hearing date: 2 November 1995, 3 November 1995; 16 February 1996
Judgment date: 16 February 1996

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Decision by:
Branson J.

The application

The applicant, by application dated 7 April 1995, seeks certain declarations and orders. Argument before me was limited to the following claims contained in the application:

"1. A declaration that the Deed of Company Arrangement does not release Lam Soon Australia from the obligations to pay the Future Rent.

2. A declaration that the Applicant is not bound by the Deed of Company Arrangement in respect of the Future Rent.

3. In the alternative an order that the Deed of Company Arrangement is void.

4. In the further alternative an order determining the Deed of Company Arrangement."

Background

The background to the application is as follows. Lam Soon Australia Pty Ltd (the Company) was incorporated on 31 October 1989 and commenced trading on 1 May 1990. It operated two supermarkets: one at the Adelaide Central Market, hereafter referred to as "the Market Plaza supermarket", and one in North Adelaide, hereafter referred to as "the North Adelaide supermarket". The applicant is the lessor of the Market Plaza supermarket premises.

The lease of the Market Plaza supermarket premises (the lease) was entered into on 30 September 1990 and registered at the Lands Titles Office on 1 July 1991. The Market Plaza supermarket did not prove to be a profitable venture for the Company, although the North Adelaide supermarket apparently did trade profitably.

The financial accounts of the Company show a net asset position which deteriorated from the negative figure of ($79,160) in the financial accounts for the period ending June 1990 to a negative figure of ($3,103,763) for the period ending 31 December 1993. The financial accounts for the financial year ending 30 June 1991 include the following note:

"The holding company, Lam Soon Properties Pte Limited has pledged its support in the form of a letter of undertaking to provide financial support until such time as the company returns to a net tangible asset position, and will continue to ensure the company will be able to meet its financial commitments as and when they fall due."

Such accounts for the year ending 31 December 1993 include the following note:

"The ultimate holding company has given a written undertaking that it will continue to provide financial support such that the economic entity will be able to pay its debts as and when they fall due."

In mid-1994 there were negotiations between the applicant and the Company concerning possible rent reductions and alternative uses for the Market Plaza supermarket premises. Such negotiations were unsuccessful.

In late 1994 the Company consulted Mr Peter Macks (Mr Macks), a chartered accountant. Following the receipt of advice from Mr Macks, on 30 December 1994 the directors of the Company resolved to appoint Mr Macks as administrator of the Company pursuant to s 436A of the Corporations Law. On the same day Mr Macks advised creditors of the Company, including the applicant, of his appointment.

The financial accounts of the Company for the year ending 31 December 1994 recognise the appointment of the administrator, and include the following note:

"The ultimate holding company is Lam Soon Properties Pte Ltd. This company has agreed to provide sufficient support so as to enable the Administrator to pay creditors in accordance with the Deed of Arrangement."

Sometime between 31 December 1994 and 3 January 1995 Mr Macks closed the Market Plaza supermarket and removed stock and fittings. On 4 January 1995 Mr Macks gave notice to the applicant pursuant to s 443B(3) of the Corporations Law that the Company did not propose to exercise rights in relation to the property the subject of the lease.

On 6 January 1995 the first meeting of creditors of the Company was held. A claim by the applicant in respect of future obligations under the lease was admitted for the purpose of voting at that meeting and the solicitor for the applicant, Mr Patel, was appointed as one of a four-person committee of creditors. The minutes of the meeting include the following paragraph:

"Mr Patel asked whether the Administrator was terminating the lease at Central Market [ie the lease of the Market Plaza supermarket]. The Administrator advised that he had vacated the premises but he was obtaining legal advice in relation to the termination of the lease due to the sub-lease which was in place."

The second meeting of creditors was held on 3 February 1995. It was adjourned until 17 February 1995 and then further adjourned until 3 March 1995. On that day the creditors resolved that the Company execute a deed of company arrangement to the effect of a draft deed tabled at the meeting. Nineteen creditors voted in favour of the resolution: Mr Patel, representing the applicant, was the only person to vote against the resolution. Mr Macks was appointed administrator of the deed of company arrangement (the DOCA). The deed of company arrangement was entered into on 23 March 1995. On the same day the applicant gave notice to Mr Macks of its intention to file an application pursuant to s 445G of the Corporations Law for an order declaring the DOCA to be void. As mentioned above, these proceedings were instituted on 7 April 1995.

Is the applicant bound by the DOCA?

Section 444D of the Corporations Law is in the following terms:

"(1) A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).

(2) Subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security, except so far as:

(a)

the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b)

the Court orders under subsection 444F(2).

(3) Subsection (1) does not affect a right that an owner or lessor of property has in relation to that property, except so far as:

(a)

the deed so provides in relation to an owner or lessor of property who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b)

the Court orders under subsection 444F(4)."

The Appeal Division of the Supreme Court of Victoria considered s 444D of the Corporations Law in Brash Holdings Ltd v Katile Pty Ltd (1994) 13 ACSR 504 (the Brash Holdings case). After a careful consideration of the general operation of Pt 5.3A of the Corporations Law the Full Court (at 513-515) stated as follows:

"In our opinion, the reference to "all creditors' in s 444D(1) must be read and understood in the context of all other references to "creditors' in Pt 5.3A. What has so far been described is sufficient to show that the general scheme of the part is to involve the company's creditors, without further limitation or description. The word "creditors' should, in the absence of any good reason otherwise, be read as used in the same sense throughout Pt 5.3A, and it is difficult to suppose that sections, drawn so widely as, for instance, s 435A (describing the object of the Part) had in mind anything less than all of the creditors for the time being of the company ... It may be that under Pt 5.3A"the creditors' have greater power as regards the initiation of the winding up of the company than they do under Pt 5.5; but that only provides more, rather than less, reason for supposing that "the creditors' are not substantially different under the two Parts ...

It is unnecessary, and we do not attempt, to consider whether the expression "creditors' must apply, throughout Pt 5.3A, to the same persons at all times; obviously, there will be argument about who are "the company's creditors' at the time when the deed terminates, say, under s 445C, as distinct from the time when the deed is entered into in pursuance of a resolution passed under s 439C. All we do for present purposes is to reject the respondents' submission that in s 444D(1) the words "all creditors' are limited to those who have claims for sums becoming due or payable on or before the day specified in the deed. The expression includes, in our opinion, all of the creditors for the time being of the company ... Once it is decided, for the reasons we have given, that the expression "all creditors' in s 444D(1) should not be confused to those having claims for money sums due and payable on or before the day specified in the deed, we see no alternative but to treat the creditors of the company for the purposes of Pt 5.3A as those who would have been creditors had the company gone into liquidation and the relevant date for the purposes of s 553 been the day specified in the deed."

It is convenient to set out the terms of s 553(1) of the Corporations Law which are unchanged from those considered by the Full Court in the Brash Holdings case:

"Subject to this Division, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company."

Section 9 of the Corporations Law defines "relevant date" as follows:

""relevant date', in relation to a winding up, means the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun."

The High Court pointed out in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492 that:

"... uniformity of decision in the interpretation of uniform national legislation such as the [Corporations Law] is a sufficiently important consideration to require that an intermediate appellate court - and all the more so a singe judge - should not depart from an interpretation placed on such legislation by another Australian intermediate appellate court unless convinced that the interpretation is plainly wrong."

I am not convinced that the interpretation placed on s 444D(1) of the Corporations Law by the Full Court of the Supreme Court of Victoria is wrong. I do not propose to depart from it.

However, the Full Court in the Brash Holdings case was not required to, and did not, decide whether a lessor's claim for future rent and possible future breaches of covenant were claims arising on or before the day specified in the deed, and thus claims in respect of which the lessor will be bound by a deed as a result of s 444D(1) of the Corporations Law.

This case was argued before me on the basis, the validity of which I accept, that the lessor must either have a claim under the DOCA for its future rent and future breaches of covenant or, not being bound by the DOCA, it will be free to institute proceedings against the Company as its claims for rent and breaches of covenant arise from time to time in the future.

Clause 6 of the DOCA specifies 30 December 1994, the date of the appointment of Mr Macks as the administrator of the Company, as the day on or before which claims must have arisen to be admissible under the DOCA. The lease provides for the payment of rent monthly in advance on the first day of each month. It is accepted that as at 30 December 1994 no moneys were owing to the applicant pursuant to the lease. It is also accepted that the Company did not repudiate the lease on or before 30 December 1994.

The evidence of Mr Macks as to when he determined that the Market Plaza supermarket should close was somewhat confused by his obvious uncertainty as to dates. He acknowledged that well before 30 December 1994 the directors of the Company had decided that the supermarket should be closed. However, he denied that he had reached the same decision by 30 December 1994. He stated that he did not reach the conclusion that the supermarket had to close until after he physically inspected it. He did this, on his evidence, on 30 December 1994, his assistant having done so the day before. Mr Macks made it clear that the lack of custom which he observed on his inspection was striking. In his words, he "formed the view that it just absolutely had to close straight away". Mr Macks further gave evidence that:

"... the last thing I wanted was for the landlord to be able to distrain so all of that just fell into the melting pot and I could not see how we could continue to trade for even a short period of time. It would have cost considerable dollars."

I find that it was on 30 December 1994 that Mr Macks determined that the Market Plaza supermarket would have to be closed. It is agreed that the supermarket did not re-open for trading in January 1995. The applicant was informed by Mr Macks of the decision to close the supermarket on 4 January 1995, and on that day he gave to the applicant notice pursuant to s 443B(3) of the Corporations Law that the Company did not propose to exercise rights in respect of the Market Plaza supermarket premises. This, in my view, in the circumstances amounted to a repudiation of the lease by the Company.

An administrator appointed under Pt 5.3A of the Corporations Law does not have the power given to a liquidator by Div 7A of Pt 5.6 of the Corporations Law to disclaim onerous property of a company. The effect of the notice given by Mr Macks pursuant to s 443B(3) of the Corporations Law was to avoid personal liability in him for so much of the rent and other amounts payable by the Company under the lease as is attributable to the period during which the notice was in force. Such notice did not of itself affect the liability of the Company under the lease (s 443B(4)). Under s 443B(5) of the Corporations Law such a notice ceases to have effect if the administrator revokes it in writing or if the Company exercises, or purports to exercise, a right in respect of the property. None of these events has happened in this case.

It was argued on behalf of the Company that the conduct of the applicant after its receipt of the s 443B(3) notice indicated an acceptance of the repudiation of the lease by the administrator on behalf of the Company. The conduct identified was that of the switching off of power to the Market Plaza supermarket on 5 January 1995 coupled with a request to workers employed by the administrator to remove the Company's fixtures and fittings and to leave the supermarket premises. In view of the failure of Mr Macks to advise the applicant in advance of his intention to have the Company's fixtures and fittings removed from the supermarket premises, the terms of the lease and in particular cl 2(v)(ii)(e) thereof, and the exchange between Mr Patel and Mr Macks as to the termination of the lease which occurred at the first meeting of creditors on 6 January 1995, I am not satisfied that the conduct of the applicant identified on behalf of the Company indicated an acceptance by the applicant of the repudiation of the lease by the Company.

It is contended on behalf of the applicant that a right to future rent is a right in relation to the leased property, and that as a consequence s 444D(3) of the Corporations Law limits the generality of s 444D(1). Section 444D(3) provides:

"Subsection (1) does not affect a right that an owner or lessor of property has in relation to that property, except so far as:

(a)

the deed so provides in relation to an owner or lessor of property who voted in favour of the resolution of creditors because of which the company executed the deed; or

(b)

the Court orders under subsection 444F(4)."

It is common ground that the applicant did not vote in favour of the resolution of creditors because of which the Company executed the deed and that no relevant order has been made by the Court under s 444F(4).

In my view the construction of s 444D(3) for which the applicant contends is too wide. Although s 9 of the Corporations Law defines "property" to include a "thing in action", the context in which the term is used in s 444D(3) suggests a narrower meaning. In my view a right in relation to leasehold property within the meaning of s 444D(3) is a right touching on the property itself such as the right of re-entry. It may be that it would also extend to the right to distrain for rent. I accept the submission made on behalf of the respondent that the rights in relation to property referred to in s 444D(3) are the same rights as those referred to in s 444F(4) and (5). This narrow use of the term "property of the company" is, in my view, also reflected in ss 440F and 440G of the Corporations Law.

I reject the argument that a claim for rent is a "right that a ... lessor of property has in relation to that property" within the meaning of s 444D(3) of the Corporations Law.

In the alternative it is argued on behalf of the applicant that it is not bound by the DOCA as its claim for future rent is not a claim which arose on or before 30 December 1994.

The principal argument advanced on behalf of the Company is that the applicant would have been a creditor of the Company in respect of future rent payable under the lease had the Company gone into liquidation and the relevant date for the purposes of s 553 of the Corporations Law been 30 December 1994. Reliance is placed on the authority of the Brash Holdings case to support the contention that in such circumstances the applicant is a creditor bound by the DOCA in respect of such future rent.

Although, as mentioned above, the Full Court of the Supreme Court of Victoria refrained from deciding whether the lessor of premises to a company in liquidation may prove in respect of future rent and future breaches of covenant, it did (at 517) list in chronological order decisions which bear on that question. I do not consider it useful to set out an analysis of each of those cases seriatim.

In practical terms, the analogy between claims in respect of which a deed of company arrangement under Pt 5.3A of the Corporations Law binds that company's creditors, and the claims which are provable in a winding up of a company, is not an easy one. A liquidator of a company may disclaim onerous property including an unprofitable lease. An administrator does not have this power. In practice, in a liquidation, a lease may be expected either to be assigned if it is beneficial or disclaimed if it is onerous.

Where a liquidator disclaims an onerous lease no question arises of whether the lessor's claim is one "the circumstances giving rise to which occurred before the relevant date" within the meaning of s 553(1) of the Corporations Law. The rights of a lessor in such circumstances are founded, in my view, not in s 553(1) but in s 568D(2) of the Corporations Law which provides as follows:

"A person aggrieved by the operation of a disclaimer is taken to be a creditor of the company to the extent of any loss suffered by the person because of the disclaimer and may prove such a loss as a debt in the winding up."

As the Full Court pointed out in the Brash Holdings case at 517, many text writers cite Re New Oriental Bank Corporation (No 2) [1895] 1 Ch 753 (the New Oriental Bank case) as authority for the proposition that where the lease has not been disclaimed the lessor cannot prove in the lessee's bankruptcy for rent until it has become due and payable (see for example C Darvall and N T F Fernon (eds), McDonald, Henry and Meek, Australian Bankruptcy Law and Practice (5th ed, 1977), par 387; Halsbury's Laws of England (4th ed, 1989), Vol 3(2), par 481).

The New Oriental Bank case was decided before liquidators were given the statutory power to disclaim onerous property. It was also decided before the authorities recognised that damages for future breaches of covenant can be estimated (Re Lucania Temperance Billiard Halls (London) Ltd [1966] Ch 98). The factual circumstances with which it was concerned involved the refusal of a lessor to accept a surrender of a lease by the liquidator of an insolvent company. In the circumstances that the lessee had given up possession of the lease, although the lessor did not accept the surrender, Vaughan Williams J held that the lessor could claim for the whole of the future rents but prove only in respect of breaches which had actually taken place up to the time of judgment. It may be important to note that in the New Oriental Bank case the liquidator had remained in possession of the premises, paying the rent under the lease, for more than a year after the winding up commenced.

The respondent in this case has submitted that the lessor in the New Oriental Bank case was only allowed by the court to prove for breaches of covenant up to the liquidation and not for future breaches. I do not so read it. In my view, Harvey CJ in Equity accurately represented the effect of the New Oriental Bank case in Re London Furnishing Co Ltd (1930) 48 WN (NSW) 27 at 29 in the following passage:

"The case of Re New Oriental Bank Corporation (No 2) ... shows that if the lessor is not willing to accept the surrender of his lease he may in his proof claim for rent due and breaches of covenant committed up to the date of the proof, and he can also put in a claim for future rent though he cannot prevent the assets being distributed on the footing of the proof from time to time admitted in favour of other creditors. As further instalments fall due he may prove again from time to time and receive dividends out of assets still undistributed. This unsatisfactory position of affairs can, however, be avoided if he agrees to surrender his lease on fair terms and it is the duty of the liquidator to accept a proposal of surrender in terms that the lessor be allowed to prove for the loss occasioned to him by the determination of the lease: Re Panther Lead Co [1896] 1 Ch 978."

In Re Panther Lead Co [1896] 1 Ch 978 was a case in which the lessors did offer to arrange with the liquidator of the insolvent lessee for the determination of the lease on terms of the lessors being allowed to prove for the loss thereby sustained by them. Romer J stated that in such circumstances it was the duty of the court to assist the lessor in proving in respect of the obligations of the lessee on the footing of the lease being determined or treated as determined. He saw no difficulty in allowing the proof or in estimating its value.

In Re Heinecke & Fox Ltd (In liq) (1893) 15 ALT 55, A'Beckett J accepted that:

"... where [a] company is insolvent and the lessor's rights are in conflict with those of other creditors he is allowed to prove for future payments of rent but it is not the duty of the liquidator to reserve assets out of which a dividend on [those] future payments is to be paid."

In my view, to the extent that the decision of Cussen J in Re Tru-grain Co Ltd [1921] VLR 653 reflects an understanding of the New Oriental Bank case which is not in accord with the above passages from Re London Furnishings Co Ltd and Re Heinecke & Fox Ltd (In liq), such understanding is inaccurate.

Re House Property & Investment Co Ltd [1954] Ch 576 is authority for the proposition that where a company has assigned a lease prior to its going into liquidation, the lessor is entitled to prove in its liquidation in respect of its original covenants in the lease which has been assigned. Roxburgh J in that case held that in such circumstances a proof could be lodged for the difference between the market value of the particular lease at the relevant date for the purpose of claims in the liquidation with the benefit of the original lessee's covenants, and of the same lease without the benefit of the original lessee's covenants. This is not a direct authority on the issue of whether a lessor may claim against a lessee in liquidation in respect of future rent, or as to when any such claim arises. Nonetheless, useful insight may, in my view, be gained from it. (See also James Smith & Sons (Norwood) Ltd v Goodman [1936] 1 Ch 216.)

Professor J O'Donovan, the learned author of McPherson: The Law of Company Liquidation (3rd ed, 1987), pp 376-377 in contrast to the other text writers referred to above, asserts that:

"The prevailing view now is that the value of contingent claims for possible future breaches of covenant should be estimated and admitted to proof in a winding up, the basis of estimation being the difference between the market value of the lease with and without the benefit of the covenants which will be lost on dissolution of the company."

In a footnote on p 376 the learned author queries whether the New Oriental Bank case would now be followed. In the article "Which claims are admissible under deeds of company arrangement?" (1995) 69 ALJ 905, in a footnote at 907, Professor J O'Donovan puts the view even more strongly. The footnote reads, in part:

"It is doubtful whether Re Oriental Bank Corp (No 2) ... will be followed in a winding up partly because a liquidator now has a statutory power to disclaim a lease ..."

I am also doubtful whether the New Oriental Bank case would now be followed. Not only does a liquidator now have the statutory power to disclaim, but the decision in that case, in my view, was strongly influenced by the view, which no longer prevails, that damages for future breaches of covenant cannot be estimated.

Yet even in the New Oriental Bank case, Vaughan Williams J recognised that the lessor could claim in the lessees' liquidation for the whole of the future rents, albeit that it could only prove in respect of breaches which had already occurred. That is, his Honour drew the distinction between the claim and the proof of the amount of the claim. See also Re Heinecke & Fox Ltd (In liq) and Re London Furnishing Co Ltd.

As is mentioned above, at the time that the winding up commenced in the New Oriental Bank case, the lessee was in occupation of the premises paying the rent due under the lease. It was more than a year later that the liquidator sought to surrender the lease. Yet the claim for future rents was allowed in the winding up.

In my view, Re Panther Lead Co and Re London Furnishing Co Ltd similarly recognised, albeit inferentially, that a claim in respect of future rent can arise in a liquidation at a time prior to the determination of the lease pursuant to which such future rent is payable. In each of these cases the lease in question was on foot at the time that the winding up commenced but abandoned by the liquidator thereafter. In each case a claim for rent not due and payable as at the commencement of the winding up succeeded.

I return to the terms of s 444D(1) of the Corporations Law. The applicant is by such terms bound by the DOCA: "... so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i)." As the Brash Holdings case makes clear, such claims are not confined to claims for money sums due and payable on or before the day specified in the deed: they extend to future claims, to contingent claims and to claims sounding only in damages.

The lease provided for the payment of an annual rent by calendar monthly payments in advance. It included a covenant by the lessee to pay such rent on the first day of each month during the term of the lease. In my view such covenant created future claims in the applicant with respect to such payments, contingent upon the lease not being determined pursuant to the terms of the lease or otherwise by agreement. Such claims, in my view, are not different in character, although they may well be different in value, to the class of claims considered in cases such as Re House Property & Investment Co Ltd and James Smith & Sons (Norwood) Ltd v Goodman. In each of those cases it was held that a proof could be lodged by a lessor in the liquidation of a lessee company which had assigned the lease in question prior to going into liquidation. The basis of such proof in each case was the lessee company's covenant to pay future rent due under the lease. The method of valuation adopted in respect of each such proof is referred to above.

Having regard to the authorities, and to the object of Pt 5.3A of the Corporations Law, I conclude that the applicant is in this case a creditor of the Company bound by the DOCA so far as its claims for future rent under the lease are concerned.

I note the views expressed in the article referred to above by Professor J O'Donovan, "Which claims are admissible under deeds of company arrangement?" at 907-908 where he states:

"If the lessee company's repudiation of the lease has occurred on or before the admissible claim date (generally the date of the administrator's appointment), then the lessor should be bound by the deed of company arrangement as a creditor under s 444D(1) of the Corporations Law. Furthermore, the lessor's claim for the future rent should be admissible under the deed of company arrangement pursuant to s 444A(4)(i) of the Corporations Law.

... If the lessee's repudiation of the lease occurs after the admissible claim date, the lessor's claim to future rent is unlikely to be regarded as having "arisen' on or before the admissible claim date. While it is true that contingent claims are admissible under s 444A(4)(i), claims which might never arise should not be regarded as admissible claims. Only where the basic foundation of the contingent claim has arisen by the admissible claim date should the claim be admissible. In this situation, it should be immaterial that the triggering event (for example, making a demand), which converts the contingent claim into an actual debt or claim, does not occur until after the admissible claim date. But it should be necessary for the lessee's repudiation of the lease to have occurred on or before the admissible claim date ...

It should follow that if the lessee company did not repudiate the lease on or before the administration began, the lessor's claim to future rent would not be admissible and the lessor would not be bound by the deed of company arrangement in respect of its claim for future rent. The lessor is a "creditor' for the purposes of s 444D(1) but its claim did not arise on or before the admissible claim date. [Original emphasis.]"

The contrary position is taken by P Crutchfield in his Annotated Corporate Voluntary Administration Law (1994), p 132 where he expresses the following views:

"... it is submitted that the correct position is that such future claims [ie claims for future rent and futures breaches of covenant] are admissible to proof in a winding-up. This appears to be clear from the terms of s 553 itself and s 554B, which provides for the discounting in accordance with the Regulations of debts payable on a future date. See also McPherson, The Law of Company Liquidation (3rd ed), p 376. If the position were otherwise, the clear intention of Pt 5.3A to enable a company, the subject to a deed of company arrangement, to make a "fresh start', free of the claims of creditors arising out of pre-administration dealings, would be frustrated."

As is apparent from my above conclusions, it seems to me that the views of Mr Crutchfield are in closer accord with the object of Pt 5.3A of the Corporations Law as specified by s 435A than the views of Professor O'Donovan.

Should the deed be terminated?

It was argued on behalf of the applicant that, if it were bound by the DOCA in respect of future rent due under the lease, the DOCA should be terminated pursuant to s 445D or 447A of the Corporations Law or declared void in whole or part pursuant to s 445G or 447A of the Corporations Law. Alternatively, the applicant sought an order pursuant to s 447A of the Corporations Law that the applicant not be bound by the DOCA in respect of unpaid rent under the lease.

Section 445G of the Corporations Law is in the following terms:

"(1) Where there is doubt, on a specific ground, whether a deed of company arrangement was entered into in accordance with this Part or complies with this Part, the administrator of the deed, a member or creditor of the company, or the Commission, may apply to the Court for an order under this section.

(2) On an application, the Court may make an order declaring the deed, or a provision of it, to be void or not to be void, as the case requires, on the ground specified in the application or some other ground.

(3) On an application, the Court may declare the deed, or a provision of it, to be valid, despite a contravention of a provision of this Part, if the Court is satisfied that:

(a)

the provision was substantially complied with; and

(b)

no injustice will result for anyone bound by the deed if the contravention is disregarded.

(4) Where the Court declares a provision of a deed of company arrangement to be void, the Court may by order vary the deed, but only with the consent of the deed's administrator."

The application in this case makes no reference to a "specific ground" giving rise to doubt whether the DOCA was entered into in accordance with Pt 5.3A or complies with Pt 5.3A. Nor does the notice given by the applicant to Mr Macks in purported compliance with s 445G refer to any such ground. The affidavits filed in support of the application raise numerous grounds of complaint against the terms of the DOCA and the conduct of Mr Macks and directors of the Company prior to the execution of the DOCA. Some of them might amount to "specific grounds" sufficient to support an application pursuant to s 445G; others plainly would not.

In Emanuele v Australian Securities Commission (1995) 63 FCR 54 the Court pointed out that a failure to specify a particular ground of doubt in the application to the Court: "... would not render the application invalid: the omission would be essentially of a procedural nature: see s 1322." Nonetheless, the power of the Court under s 445G(2) of the Corporations Law is discretionary. Specific grounds of doubt within the meaning of s 445G were not, in my view, clearly set out in this case in a way which would ensure that prejudice or injustice was not caused to the respondent. In any event, in my view, the significant delay between the execution of the DOCA and the hearing of this matter would tend to suggest against the Court now exercising its discretion pursuant to s 445G to declare the DOCA, or a provision of it, to be void. Proceedings pursuant to s 445G involve interests beyond those of the parties themselves. It is necessary for such proceedings to be instituted and brought to a hearing promptly. I decline to make any order pursuant to s 445G of the Corporations Law.

I have considered the width of the power given to the Court by s 447A of the Corporations Law in Re Giga Investments Pty Ltd (No 2) (1995) 13 ACLC 1185 and in Mulvaney v Rob Wintulich Pty Ltd (1995) 60 FCR 81. I do not propose here to reconsider the authorities to which I referred in those cases. Notwithstanding my view that the section gives the Court wide powers, I do not consider it appropriate for the section to be invoked, in effect, in lieu of s 445G of the Corporations Law. On the assumption, and without deciding, that, in the circumstances of this case, an order could be made pursuant to s 447A of the Corporations Law declaring a deed of company arrangement to be void, I do not consider it appropriate to make such an order.

I turn to consider s 445D of the Corporations Law. Section 445D is in the following terms:

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

(a)

information about the company's business, property, affairs or financial circumstances that:

(i)

was false or misleading; and

(ii)

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

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

(b)

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

(c)

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

(d)

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

(e)

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

(f)

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

(i)

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

(ii)

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

(g)

the deed should be terminated for some other reason."

The grounds relied upon by the applicant in seeking to have the DOCA terminated are the following:

(1)

that the DOCA is not for a purpose authorised by s 435A;

(2)

that the DOCA is not fair to the applicant;

(3)

that the s 439A report by Mr Macks was deficient;

(4)

that Mr Macks' inquiry and investigation was not sufficient to justify his recommendation that the DOCA be executed; and

(5)

that the DOCA is an attempt to "ride rough shod" over the applicant's rights.

I consider first, whether the DOCA was "oppressive or unfairly prejudicial to, or unfairly discriminatory against" the applicant within the meaning of s 445D of the Corporations Law.

The principal provisions of the DOCA show that it was intended to achieve the following outcomes:

(1)

the establishment of a moratorium period of 12 months from the date of the DOCA, or until the termination of the DOCA, during which no person could institute legal proceedings against the Company or take any steps towards the winding up of the Company;

(2)

the deferral of the rights of creditors associated with the Company (the associated creditors) until after the termination of the DOCA, preserving the possibility that such rights might thereafter be met in full from future profits of the Company;

(3)

the payment in full promptly of all creditors of the Company other than the applicant and the associated creditors;

(4)

the granting to the applicant of the right to be paid an amount calculated by reference to a formula which, in effect, involved competition between the claim of the applicant and the claims of both the associated and the non-associated creditors for payment from the assets of the Company less the administrator's costs.

The DOCA recognises the closure of the Market Plaza supermarket. It records agreement that from the commencement of the DOCA Mr Macks would hand over to the Company the management and control of the North Adelaide supermarket. It further provides that the "administration of the Company shall cease as soon as the Deed has been entered".

The respondent argues that the DOCA is not oppressive or unfairly prejudicial to, or unfairly discriminatory against, the applicant because the amount payable to the applicant under the DOCA is at least as much as the applicant would have received had the Company be wound up on or about 30 December 1994. It is suggested on behalf of the respondent that the DOCA advantages the applicant over a winding up as the applicant could expect to be paid more promptly under the DOCA, it would not under the DOCA have to compete with possible secured creditors, and it could also expect to receive slightly more under the DOCA than on a winding up because the costs of the administration are less than the likely costs of a winding up.

The distribution rate to the applicant under the DOCA is calculated by Mr Macks at 7.7 cents in the dollar. It is contended on behalf of the respondent that had the Company been placed in liquidation on 30 December 1994 the applicant would have received either 6.6 cents in the dollar or nothing, depending on whether Lam Soon Properties Pte Ltd (the holding company) was able to claim in the winding up in respect of a payment made by it on behalf of the Company to the Company's banker, apparently a secured creditor.

The applicant contends that amounts would be recoverable from the holding company and from the Company's directors in a winding up of the Company: the respondent denies that any such amounts would be recoverable. I am not prepared in these proceedings to make determinations in this regard. All interested parties are not represented before the Court. Moreover, the issues may arise for determination in future proceedings.

Important matters of fact are not seriously in dispute in these proceedings. They include the following:

(1)

the only purpose of the DOCA was to deal with the problem of the unprofitability of the Market Plaza supermarket;

(2)

Mr Macks did not consult with the applicant with respect to a possible renegotiation of the lease or his plans to close the Market Plaza supermarket - indeed Mr Macks, as I understand him, deliberately withheld information from the applicant as to his plans with respect to the Market Plaza supermarket because he feared that it might exercise a legal right of distraint;

(3)

the DOCA allows the Company to maintain trading losses in the order of $4,500,000 as a potential taxation benefit;

(4)

the Company has always traded at a loss and was able to continue trading as long as it did only with support from the holding company: all creditors of the Company which were not associated with it, other than the applicant, benefited under the DOCA from support provided by the holding company.

On behalf of the respondent the differential treatment of the Company's creditors under the DOCA is sought to be justified on three bases. First, that the holding company had guaranteed the debts of the creditors whose debts became due and payable on or before 31 December 1994 - in the case of all such creditors other than the landlord of the North Adelaide supermarket premises, by reason of the notes to the financial accounts set out above, and, in the case of such landlord, by a guarantee incorporated into the lease of the North Adelaide supermarket premises. Secondly, on the basis that the debts of all creditors other than the applicant were incurred before the appointment of Mr Macks, whilst the debts of the applicant were incurred thereafter. Thirdly, on the basis that the other creditors who were not associated with the Company were suppliers to the North Adelaide supermarket or statutory bodies or suppliers of essential services with which the Company would have ongoing dealings because of the North Adelaide supermarket.

I accept the evidence which shows that the holding company had injected $900,000 of capital into the Company and given it full support for almost five years. I also accept that the holding company was not prepared to continue providing support to the Company given the unprofitable nature of the Market Plaza supermarket, which unprofitability was judged by the Company to bear a relationship to the high rent payable under the lease. The respondent characterised the attitude of the applicant to endeavours in mid-1994 to renegotiate the lease as unreasonable and inflexible. I accept that such attitude was firm and essentially unsympathetic to the position of the Company. There was, however, nothing improper in the stand taken by the applicant during the endeavours to renegotiate the lease. The respondent did not suggest otherwise.

The evidence discloses ongoing antagonism between directors and employees of the applicant and directors of the Company. The origins of such antagonism appear to precede the endeavours to renegotiate the lease although events at that time may have exacerbated the antagonism.

Mr Macks sought to justify his failure to seek to negotiate with the applicant as to the ongoing rent payable under the lease by reference to information given to him by persons involved with the Company. Nothing suggests that Mr Macks sought to balance such information by information obtained from any source independent of the Company. In any event, once a decision had been taken by the holding company not to provide continuing support to the Company, the background against which any such negotiations would take place became different from that against which the earlier negotiations had taken place. Once the administrator was appointed such background became even more dramatically different.

As Derrington J pointed out in Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 710:

"The purpose of the statutory scheme [ie Pt 5.3A] is to enlarge as far as possible the benefits to the creditors while at the same time providing for a method of avoiding obstruction to a beneficial scheme by particular creditors who may wish to improve their position by threat of defeating the whole scheme."

I agree with the observation of Derrington J (at 711 of the above case) that it is "... necessary that an administrator be independent and objective". In such role he or she is, in my view, obliged to consider not only means to maximise the chances of the company, or as much as possible of its business, continuing in existence (s 435A), but also issues of fairness between the company and its creditors, and between the company's creditors inter se. The administration of a company under Pt 5.3A of the Corporations Law is a process in which its creditors are plainly intended to be closely involved. Ordinarily, in my view, the administrator will be required to take into account the respective views of such creditors in the making of decisions which directly affect them.

In this case I consider that Mr Macks, whether consciously or unconsciously, carried into his administration negative attitudes towards the applicant which he had developed during the period when he was retained by the Company to advise it in respect of possible corporate restructure. I find that his objective, so far as the applicant was concerned, was to ensure that it received under the DOCA its "legal entitlement" as he understood it to be but not more. I find that he reached a deliberate decision not to involve himself in negotiations with the applicant, and indeed, as to his intentions with respect to the Market Plaza supermarket, to withhold information from it.

It was not suggested in this case that a DOCA was necessary to deal with the claims of creditors associated with the Company. It seems plain that it was not. A DOCA was, of course, unnecessary in respect of creditors to be paid promptly in full. In reality the DOCA was necessary in this case only to deal with the claims of the applicant for future rent under the lease. In such a circumstance, in my view, the decision of Mr Macks not to involve himself in discussions with the applicant was inappropriate.

It appears that Mr Macks may have received and accepted legal advice to the effect that provided the applicant did not receive under the DOCA less than it would receive on a winding up of the Company, it would have no ground of legal complaint. In my view, particularly having regard to s 445D of the Corporations Law, the position is not so simple. A deed of company arrangement may in certain circumstances be valid notwithstanding that there is differentiation between the treatment of different classes of creditors. Reasonable grounds for such differentiation, consistent with the object and spirit of Pt 5.3A of the Corporations Law, need to be able to be demonstrated. In my view, the grounds here relied upon are not sufficient to justify the disparity between the treatment under the DOCA of the claims of the applicant and the claims of all other creditors.

I find that the DOCA is unfairly prejudicial to the applicant in that it binds the applicant in respect of claims for future rent under the lease when such lease was repudiated during the administration of the Company without notice to, or consultation with, the applicant. I further find that the DOCA is unfairly discriminatory against the applicant in that no reasonable grounds, in the sense discussed above, for the strikingly differential treatment thereunder of the different classes of creditors have been demonstrated.

The power of the Court to terminate a deed of company arrangement under s 445D of the Corporations Law is discretionary: it is to be exercised having regard to the interests of the creditors as a whole, and in the public interest (Emanuele v Australian Securities Commission). This is not a case, in my view, in which the Court would gain any assistance by seeking the views of the majority of creditors: the interests of creditors of the Company as at 30 December 1994, other than the applicant, will not be affected by a termination of the DOCA. In my view, the public interest will not be adversely affected by a termination of the DOCA.

There will be an order of the Court that the DOCA is terminated.

In the circumstances it is unnecessary for me to consider the additional grounds upon which the applicant relied in seeking to have the DOCA terminated.

There is room for argument as to the effect of an order terminating the DOCA on the rights of the applicant with respect to unpaid rental under the lease. The applicant has sought an order pursuant to s 447A of the Corporations Law that the applicant not be bound by the DOCA in respect of unpaid rent under the lease. In the two cases identified above, I have referred to authorities which have identified the powers of the Court pursuant to s 447A of the Corporations Law as, for example, "immense", "broad" and "unfettered". In Milankov Nominees Pty Ltd v Roycol Ltd (1994) 52 FCR 378 at 383 Lee J concluded that pursuant to s 447A the Court could by order vary the terms of a deed of company arrangement if it appeared to the Court to be in the interests of creditors to do so.

In my view, in the circumstances of this case, it is appropriate for the order terminating the DOCA to be accompanied by a further order that, for the purpose of determining the rights of the applicant pursuant to the lease, the DOCA is to be disregarded.

Counsel will have the opportunity to speak to minutes of order.

Orders accordingly