Andersens Home Furnishing Co Pty Ltd, Re [1996] QSC 175 (1996) 14 ACLC 1710

IN THE SUPREME COURT OF QUEENSLAND ROCKHAMPTON Misc. No. 18 of 1996 O.S. No. 14 of 1996 IN THE MATTER of the Rules of the Supreme Court of Queensland - and - IN THE MATTER of the Corporations Law - and - IN THE MATTER of an Application and Appeal by Andersens Home Furnishing Co Pty Ltd (ACN 009 733 617) DELIVERED the 16th day of August, 1996 CATCHWORDS: Corporations - Part 5.3A deed of Company arrangement - Deed purporting to bind creditors in respect of personal guarantees given by directors - Deed terminated - Company wound up. COUNSEL: MR P. W. HACKETT Applicant MR M. POPE Respondent SOLICITORS: McNamara & Associates Applicant Nehmer Davenport Dean McKee Defendant HEARING DATES: Twenty-Fifth day of July, 1996. -- 1 of 12 -- IN THE SUPREME COURT OF QUEENSLAND MACKAY DISTRICT REGISTRY Misc. No. 18 of 1996 O.S. No. 14 of 1996 IN THE MATTER of the Rules of the Supreme Court of Queensland - and - IN THE MATTER of the Corporations Law - and - IN THE MATTER of an Application and Appeal by Andersens Home Furnishing Co Pty Ltd (ACN 009 733 617) JUDGMENT - DEMACK J. DELIVERED the 16th day of August, 1996 This application by Andersens Home Furnishing Co. Pty. Ltd. ("Andersens") concerns a resolution of the creditors of Edshar Pty Ltd (Administrator Appointed) ("Edshar") made on 23 May 1996 approving a Deed of Company Arrangement ("the Deed"). On 1 May 1992, Andersens, which supplies and markets floor coverings, entered into a franchise agreement with Edward and Sharon Lacy ("Lacys"). The agreement gave Lacys the right to use the business name "Andersens Carpets - Mackay" within the Mackay region. Andersens agreed to supply and Lacys agreed to purchase floor coverings which would then be sold from premises at 3 Tennyson Street, Mackay. The agreement included a guarantee by Lacys that they would punctually perform all the obligations in the franchise agreement. This was not necessary as they had incurred -- 2 of 12 -- 2 personal liability under the franchise agreement, but the guarantee was printed on pages 22 and 23 of the franchise agreement and Edward Lacy signed it. The showroom and warehouse complex at 3 Tennyson Street, Mackay ("the premises") is owned by seven people ("the landlord"). The material does not disclose the terms upon which Lacys leased the premises in May 1992. Edshar was acquired by Lacys on 2 March 1994, and they both became directors of Edshar that day. On 5 July 1994, with the consent of Andersens, Lacys transferred their interest in the franchise agreement to Edshar. The document used is called a "deed of covenant". It is drawn very widely so that both Edshar and Lacys are responsible for the performance of past and future obligations. In addition, Lacys signed a guarantee in the following terms:- "IN CONSIDERATION of ANDERSENS HOME FURNISHING CO. PTY LTD ("Andersens") entering into the foregoing Deed of Covenant with the Transferee referred to therein at the request of EDWARD GRAHAM LACY and SHARON CATHERINE LESLEY LACY (hereinafter together with their executors and administrators called "the guarantor") the guarantor jointly and severally HEREBY GUARANTEES unconditionally to Andersens the payment of the sums of money payable from time to time to Andersens in terms of the Franchise Agreement dated 1st May, 1992 and the due and punctual performance by the Transferee of the terms and covenants and obligations on the part of the Transferee under the said agreement including the obligation to indemnify Andersens in all cases where indemnities are granted by the Transferee and the guarantor does hereby acknowledge and declare that this guarantee shall be a continuing guarantee and shall not be affected or avoided in any way by any agreement or arrangement between the parties whether or not with the consent of the guarantor or by granting of any time or other indulgence or forbearance by Andersens and Andersens shall be at liberty to regard the guarantor in all respects as principal debtor and shall not be obliged to take action first against the Transferee and the obligation of the guarantor shall not merge in any judgment obtained against the Transferee. In the event that - (a) the Transferee sells or transfers its business; or (b) upon termination of the agreement Andersens offer to the Transferee an extension to the term of this agreement for a period of not less than one year and if such offer is not accepted within thirty (30) days of the making of such offer, -- 3 of 12 -- 3 then the guarantor shall not exercise carry on or be in any manner whatsoever either directly or indirectly concerned or interested with by himself or in partnership with or as manager servant or agent or any other person company or corporation in the trade or business of the retailing or wholesaling of carpets or any other business of a similar nature within a radius of fifty (50) kilometres of the premises referred to in clause 2 of the Schedule of the Franchise Agreement dated 1st May, 1992 during a period of three (3) years from the date of such sale or transfer, or making of offer." On 16 January 1995, the landlord executed a lease of the premises to Edshar. The term was for five years from 1 August 1994, and the rental $3,015 per calendar month. The lease document includes a guarantee by Lacys in the following terms:- "WHEREAS: A. At the request of EDWARD GRAHAM LACY and SHARON CATHERINE LESLEY LACY of 3 Tennyson Street, Mackay in the State of Queensland (hereinafter referred to as "the Guarantors"), the Lessor has agreed to lease the property described as Lot 12 on RP745921 in the County of Carlisle Parish of Howard being the whole of the land contained in Certificate of Title volume N1012 Folio 172 to EDSHAR PTY. LTD. A.C.N. 063 753 202 (hereinafter referred to as "the Lessee"). B. In consideration of the lessor agreeing at the request of the Guarantors to lease the property herein described to the Lessee upon the terms and conditions appearing in the annexed Lease, the Guarantors have agreed to enter into this Agreement. THIS AGREEMENT WITNESSES that for the consideration aforesaid the Guarantors for themselves, their executors, administrators and assigns DO HEREBY JOINTLY AND SEVERALLY GUARANTEE to the Lessor the due and punctual performance by the Lessee of all the terms and conditions of the aforementioned Lease including, but without limiting the generality of the foregoing, the payment of all monies payable by the Lessee thereunder AND do further covenant and agree that they will indemnify and keep the Lessor indemnified from and against any loss or damage howsoever arising which the Lessor may suffer in consequence of any failure of the Lessee to perform its obligations under the aforementioned Lease and that this Guarantee shall not be affected or discharged by the granting to the Lessee of any time or other indulgence or other consideration or transaction whatsoever whereby our liability as Guarantors would but for this present provision have been affected or discharged. Nothing herein shall prevent the Lessor from making claim against the Guarantors for any default of the Lessee under the said Lease without first having made claim against the Lessee." While the guarantees are expressed in different words, it was not suggested that -- 4 of 12 -- 4 their effect is different. The effect of each is that Lacys guarantee the performance by Edshar of its obligations under the franchise agreement and the lease. On 19 March 1996, the directors of Edshar appointed Ian David Jessup as administrator ("the administrator") under Part 5.3A of the Corporations Law. On 20 March 1996, Andersens purported to terminate the franchise agreement and requested Edshar to transfer the business name "Andersens Carpets Mackay" and to remove all traces of that name from the premises and from the business. Apparently, Edshar also carried on a business "Lacy's Tile Centre" from the premises. In his report to the first meeting of creditors, called for 26 March 1996, the administrator expressed the hope that the business could trade in the short term and be sold as a going concern. At the first meeting, Andersens was the creditor with the largest claim, $112,855.83, and Queensland Industry Development Corp. ("QIDC") the creditor with the second largest claim, $100,854.94. Four other creditors attended, three with claims of less than $1000 and another with a claim of $3,345. A committee of creditors consisting of a representative of Andersens and a representative of the creditor owed $3,345 was appointed. QIDC held a fixed and floating charge over all the assets of Edshar. In his report to the second meeting of creditors, called for 23 April 1996, the administrator recommended that the creditors adopt a deed of company arrangement. One of the sources of funds for such a deed was to be the net proceeds from the sale of Lacy's home at 4 Domino Crescent ("Domino Crescent"). When this proposal became known to Andersens, its solicitors wrote to Lacys putting them on notice that Andersens would exercise its rights under the guarantee so that Lacys should not make any personal assets available to meet Edshar's debts. -- 5 of 12 -- 5 At the second meeting, the landlord was the creditor with the largest claim, $122,850. Edshar had ceased trading on 18 April 1996. Four additional creditors with claims of less than $1000 were represented and those who had previously attended were also present. Before the meeting was held on 23 April 1996, the administrator had prepared a third report to creditors. In it, he asserted that "QIDC's liability will be extinguished from the proceeds of the sale of" Domino Crescent. The minutes of the meeting of 23 April 1996 show that the chairman (a nominee of the administrator) advised that QIDC had a mortgage over Domino Crescent. There was debate about the personal liability which Lacys had, and whether a deed could effectively prevent creditors pursuing personal guarantees that Lacys had given. The chairman advised that cl 5.3 of the proposed deed prevented creditors pursuing personal guarantees. Clause 5.3 provides: "5.3 Upon carrying out of the terms of this Deed the Creditors shall be deemed to have absolutely released and discharged the Directors in relation to any personal guarantee of the Directors in respect of any liability of the company to the Creditors." The second meeting was adjourned and reconvened on 23 May 1996. At this meeting the amount of the landlord's claim was questioned. The chairman admitted it at $117,040. Part of the premises had been relet for four months and the likelihood of reletting the whole of the premises for much of the balance of the lease was discussed. The proposed deed had been revised, but not in respect of cl 5.3. The motion that the Deed be executed was carried, with 14 creditors in the amount of $152,712.54 in favour and 4 creditors in the amount of $120,820.38 against. This "appeal" from that decision is brought under three provisions of the Corporations Law, ss. 445D,, 445G and 510. It is only necessary to consider this Court's powers under s. 445D which provides:- -- 6 of 12 -- 6 "The Court may make an order terminating a deed of company arrangement if satisfied that:- (f) the deed or a provision of it is . . . . .: (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors." To support the contention that the Deed is unfairly prejudicial to Andersens, Mr Hackett referred to two matters which were raised in the second meeting of creditors, the effect of cl. 5.3 and the manner in which the amount of the landlord's claim is to be calculated. It is not necessary to reach a concluded opinion on the second point. The issues involved were considered by the Appeal Division in Brash Holdings Ltd v. Katile Pty Ltd (1996) 1 V.R. 25 and by Branson J. in Molit (No. 55) Pty Ltd v. Lam Soon Australia Pty Ltd (1996) 135 A.L.R. 280. I do not propose to refer to the cases there discussed. Here there was no rent owing when the administrator was appointed. When the business closed there was almost three and a half years of the term of the lease remaining in respect of which the landlord might make a claim. However, it would seem to me that that amount should not only be calculated on the basis of its value at the date when the business ceased, if that be the correct date, but also the prospect of the landlord reletting the premises should be assessed, and the present value reduced proportionately. As I have said this is not a concluded opinion, but it raises doubts about whether in fact the motion was carried by a majority in value of the creditors. The other issue, namely the effect of cl 5.3, is not open to doubt. The object of Part 5.3A is to maximise the chances of a company continuing in existence or, if that is not possible, to obtain a better return for the creditors than would result from the immediate winding up of the company (s. 435A). However, there is no provision in Part 5.3A which enables the majority of creditors to extinguish the personal obligations which Lacys may have assumed in respect of some of Edshar's debts. -- 7 of 12 -- 7 Section 440J restricts the enforcing of the guarantee against Lacys during the administration of Edshar. The fact that the Court may give leave to proceed against a director to enforce a director's obligations under a guarantee (s.440J(1)) assumes that those obligations continue to exist and are not caught up in the administration. Indeed, a secured creditor of a company is not bound by a deed unless that creditor voted in favour of its execution (s. 444D(2)), so that a secured creditor's rights continue to exist and are not necessarily caught up in the administration. The Court has power under s. 444F to limit the rights of a secured creditor, but throughout that section the reference is to a secured creditor for the company. In this case, QIDC, which had taken security from the Lacys personally by a mortgage over Domino Crescent, could not be prevented from selling that property, unless it was security for the performance of a guarantee Lacys had given. If Andersens had agreed to accept some part payment of Edshar's debt in full discharge of that debt, Lacys would have been relieved of the obligations they assumed under the guarantee, subject to the effect of the words of the guarantee. However, that if the discharge of Edshar's debt is by operation of law, Lacys' obligation remains. This is explained by Dixon J. (as he then was), in McDonald v. Dennys Lascelles Ltd (1933) 48 C.L.R. 457, at p. 479:- "The consequences of the dissolution of the principal obligation are described in Pothier on Obligations, Evans' translation (1806), vol. I., p. 235, as follows:- "It results from the definition of a surety's engagement, as being accessory to a principal obligation, that the extinction of the principal obligation necessarily induces that of the surety; it being of the nature of an accessory obligation, that it cannot exist without its principal; therefore, wherever the principal is discharged, in whatever manner it may be, not only by actual payment or a compensation, but also by a release, the surety is discharged likewise; for the essence of the obligation being, that the surety is only obliged on behalf of a principal debtor, he therefore is no longer obliged, when there is no longer any principal debtor for whom he is obliged." In the civil law this general proposition is subject to qualifications and exceptions, but it formulates a leading principle. As a general principle, subject to similar qualifications -- 8 of 12 -- 8 and exceptions, it appears to be well recognized in English law, although it is evidenced by decisions giving it particular applications and by dicta rather than by formal pronouncements (Lakeman v. Mountstephen (1874) L.R. 7 H.L. 17, per Lord Selborne, at p. 24, Bechervaise v. Lewis (1872) L.R. 7 C.P. 372, per Willes J., at pp. 377, 378, Finch v. Jukes (1877) W.N. 211, per Hall V.C., Mortgage Insurance Corporation v. Pound (1894) 64 L.J. Q.B., per Wright J., at p. 396, Stacey v. Hill (1901)1 Q.B. 660, per Collins L.J., at p. 666, and Morris & Sons Ltd. v. Jeffreys (1932) 148 L.T. 56, per Swift J., at p. 58. It does not extend to a discharge of the principal debtor's personal liability by operation of law when the discharge is for the purpose of liquidating his affairs or transforming the rights of the creditor against him into rights against or in respect of his assets. The doctrine should be understood to look rather to the continuance of a just claim in the creditor to receive payment in respect of the principal debtor's obligation than to the latter's relief from actual personal liability." In Hill v. Anderson Meat Industries Ltd (1972) 2 N.S.W.L.R. 704, the Court of Appeal held that when a debt is extinguished pursuant to the terms of a scheme of arrangement approved by the Court under s. 181 of the Companies Act, that extinguishment is by operation of law because it is that section which gives the scheme its operative effect and not the agreement of the parties. Thus a guarantee given to a creditor by a third party for the payment of the debts of the company which had entered into the scheme of arrangement was not discharged by the scheme. In Gan v. Sanders (1994) 15 A.C.S.R. 298, Mandie J., applied that decision to a Part 5.3A deed of arrangement. The decision has also been followed in New Zealand in Re Southern World Airlines Ltd. (1993) 1 N.Z.L.R. 597 and Buttle v. Allen as Official Liquidator of Buttle & Co. Sharbrokers Ltd (In Liquidation) (1994) 1 N.Z.L.R. 396. Applying that decision here, Lacys have given a guarantee to Andersens that they will meet Edshar's debts. If the Deed operates as a discharge of Edshar's obligations to Andersens, it does so by virtue of s. 444D and not by virtue of any agreement between Edshar and Andersens. In those circumstances it does not discharge Lacy's obligations to Andersens. In the words of s. 444D(1), the deed binds -- 9 of 12 -- 9 all creditors of the company so far as it concerns claims arising on or before the day specified in the deed. The claims that are referred to are claims against the company, not claims a creditor might make against a person who has guaranteed the payment of the debts of the company, cf. Brash Holdings Ltd v. Katile Pty Ltd (1996) I.V.R. 24. The person who has given the guarantee, ie Lacys, is a contingent creditor of the company, and so is bound by the Deed: Re Zambena Pty. Ltd. (1995) 13 A.C.L.C. 1020. All of this is clear in s. 444H which speaks of the extent to which the deed "releases the company from a debt". The first purpose of Part 5.3A is to release the company from debt and to allow it a fresh start. If that is not possible then the second purpose is to provide a better return for the creditors than would be obtained from immediate winding up (s.435A). This also releases the company from debt. The latter purpose may be achieved if the business of the company is sold as a going concern. However, by this Deed, the creditors' meeting has purported to release Lacys from personal obligations they have assumed towards Andersens and the landlord. There is no statutory authority to do this. There is no common law or equitable basis for doing this. Consequently, cl 5.3 is beyond the power of the creditors' meeting, unless, of course, the creditors who are affected by the clause vote in favour of the execution of the deed. The provision, cl 5.3, is unfairly discriminatory against Andersens, which voted against the motion to execute the Deed. What should follow from this? Mr Pope, who appeared for the administrator, submitted that cl 5.3 should be deleted and the administration should continue so that the creditors can be paid out. The difficulty with that course lies in the fact that the net proceeds from the sale of Domino Crescent are not assets of Edshar to be distributed to the creditors of Edshar. They are Lacys' assets which are available to meet part of -- 10 of 12 -- 10 their personal obligations. To delete cl 5.3 and allow the administration to proceed would still give the Deed a wider effect than Part 5.3A permits. It may be that the administrator could have treated the net proceeds of the sale of Domino Crescent as a discharge of Lacys' obligations to repay loans made to them. The loans, said to be worth $128,257, are discussed in the report of 21 March 1996. The second report of 12 April 1996 notes, "I have reviewed the directors loan account and believe that there will be no realisation forthcoming". The Deed refers to the net proceeds of the sale of Domino Crescent as being Lacys' property, (cls. 3.7, 3.8). In those circumstances the power given to this Court by s. 445D(1) should be exercised, and the Deed terminated. What should happen when the Deed is terminated? The scheme of Part 5.3A is to put the future of Edshar into the hands of the creditors under the guidance of the administrator. The creditors may vote to wind up Edshar (s. 445E). The administrator may become the liquidator (s.446A). The administration ends when a deed of company administration is executed (s.435C). It is not said that if the Court orders the termination of a deed, the administration is re-instated. It is implicit that if the Court so orders, the administration as well as the deed is terminated. In any case s. 435C(3)(g) provides that the administration ceases if the Court orders that the company be wound up. This implies a power to order winding up, presumably if the company is in fact insolvent. There is no doubt that Edshar is insolvent and should be wound up. Who should be appointed liquidator? Andersens ask to have Stephen Leonard Denby appointed and his consent has been filed. It is apparent from the minutes of the meetings that there has been tension between the administrator and Andersens' -- 11 of 12 -- 11 representatives. I am not satisfied that that is sufficient reason for refusing to appoint the administrator as a liquidator. Andersens' action in terminating the franchise agreement the day after the administrator was appointed meant that there was little prospect of the business being sold as a going concern. The majority of the creditors have supported the administrator's recommendations so far, there is little money left for the creditors and the transformation of the administrator into liquidator would seem to be the cheapest way of securing any distribution of assets of creditors. I have come to the view that no order should be made for costs. The dividend to unsecured creditors will be modest, and participation in the administration has involved some of the creditors in legal expense. Andersens made this application to protect their interests rather than to facilitate the aims of Part 5.3A. It does not seem to me to be just to have any burden of costs fall on the other creditors and the administrator is protected by ss. 443D and 443E. I order, that the deed of company administration executed on 23 May 1996 be terminated, that Edshar Pty Ltd be wound up, that Ian David Jessup be appointed liquidator, that the administrator's costs of this application be costs incurred in the administration, that Andersens Home Furnishing Co Pty Ltd bear its costs of this application. -- 12 of 12 --