Bartlett Researched Securities Pty Ltd, Re; Re Nova Corp Ltd [1994] QSC 18

~:~:~ State Reporting Bureau~"-' -' TRANSCRIPT OF PROCEEDINGS (Copyright in this transcript is vested in the Crown. Copies thereof must not be made or sold without the written authority of the Director, State Reporting Bureau.) SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION DERRINGTON J Application No 987 of 1993 IN THE MATTER OF THE CORPORATION LAW REV!SED COPiES ISSUED State Reporting Bureau Date oZ-; 3 1 qV IN THE MATTER OF BARTLETT RESEARCHED SECURITIES PTY LTD (Administrators appointed) Application No 990 of 1993 IN THE MATTER OF THE CORPORATIONS LAW IN THE MATTER OF NOVA CORP LIMITED (Administrators appointed) BRISBANE .. DATE 21 I 02/94 JUDGMENT 1 -- 1 of 11 -- 210294 hem (Derrington J) HIS HONOUR: Pursuant to s 447A of the Corporations Law the resolution is passed under Part 535 of the Act on 30 November 1993 be set aside with costs. The applications of the administrator are dismissed with costs with liberty to apply. I publish my reasons. JUDGMENT 2 10 20 30 40 50 -- 2 of 11 -- IN THE SUPREME COURT OF QUEENSLAND HELD AT BRISBANE CATCHWORDS: Counsel: Solicitors: Hearing date: Application No. 987 of 1993 IN THE MATTER of the Corporations Law -and- IN THE MA TIER of Bartlett Researched Securities Pty Ltd (Administrators Appointed) ACN 010 600 558 Application No. 990 of 1993 IN THE MATTER of the Corporations Law -and- IN THE MATTER of Nova Corp Limited (Administrators Appointed) ACN 010 646 456 REASONS FOR JUDGMENT - DERRINGTON I. Delivered the 21st day of February, 1994 Companies. Scheme of Arrangement. Opposed by creditor with majority of debt, but supported· by all other creditors. Casting vote by administrator in favour of scheme. Injection of some funds by principal shareholder. Disproportionate distribution of it. Major shareholder receiving smaller proportion but still more than amount receivable on liquidation. Investigation of company's affairs by administrator not shown to be sufficient. Arrangement set aside. Mr O'Donnell Q.C. for the Applicant Mr jackson Q.C. for the Respondent Carter Newell for the Applicant McCullough Robertson for the Respondent 27th and 28th January, 1994 -- 3 of 11 -- IN THE SUPREME COURT OF QUEENSLAND HELD AT BRISBANE Application No. 987 of 1993 IN THE MATTER of the Corporations Law -and- IN THE MATTER of Bartlett Researched Securities Pty Ltd (Administrators Appointed) ACN 010 600 558 Application No. 990 of 1993 IN THE MATTER of the Corporations Law -and- IN THE MATTER of Nova Corp Limited (Administrators Appointed) ACN 010 646 456 JUDGMENT - DERRINGTON J. Delivered the 21st day of February, 1994 The facts and circumstances and the respective applications in these two cases are identical so they may be considered together. Reference will be made only to Nova Corp Limited ("Nova Corp") except where it is necessary in the context of events to refer to Bartlett Researched Securities Pty Ltd ("Bartlett Researched Securities") which was related to Nova Corp. Nova Corp was a publicly listed company engaged in property development and speculation at the Gold Coast, and in the property collapse of about 1990 it suffered crippling financial blows. Many of its assets were sold off by secured -- 4 of 11 -- 2 creditors but a number of others were disposed of by Nova Corp itself. It was effectively insolvent with a net deficiency of many millions of dollars. It appointed an administrator for the purpose of moving towards a scheme of arrangement under a deed pursuant to s.444A of the Corporations Law. The administrator, Mr Manteit, an accountant of the Gold Coast branch of the firm of Ernst and Young conducted an investigation as required by the Law in that respect and made a report to a meeting of creditors in November 1993 supporting the proposed arrangement. Farrow Mortgage Services Pty Ltd (in liquidation) ("Farrow") was an unsecured creditor for about $27 million in respect of Nova Corp and $2.7 million in respect of Bartlett Researched Securities, being the balances owed to it after the realisation of its securities. The remaining creditors, including some finance houses were owed sums which were trifling on the comparative scale, although in some cases they were modestly substantial on ordinary terms. At the first meeting held by the administrator Farrow raised a number of issues relating to the administrator's report and the meeting was adjourned. On its return date a poll as to acceptance of the deed was conducted and all the creditors except Farrow supported it whilst Farrow opposed it. That meant that a majority in number were in support whilst a majority of debt-holding was opposed. The administrator then used his casting vote provided by the Law to support the deed and the motion was accordingly carried. The administrator's report had said that the assets available to Nova Corp were very small, insufficient even to pay a debt of $57,870.00 due to the Commissioner of Taxation which had priority. However, in order to promote the settlement, Mr Bartlett, the leading shareholder and director of the company, -- 5 of 11 -- 3 proposed to inject a sum of approximately $205,000 into Nova Corp and Bartlett Researched Securities which would have the effect of enlarging the payment to creditors; but of course it was so far short of the total indebtedness as to be trifling by comparison. He also insisted that each of certain small creditors such as solicitors and accountants who had had a prior association with the companies should receive a significant proportion of their respective debts. Other more substantial creditors, particularly finance houses, were also to receive from this fund rriore than a share apportioned to the proportion of their respective debts to the total liability of the company. This led to Farrow's receiving less than its proportionate share of this injected sum. It was acknowledged by the applicant's witnesses that part of the purpose behind this malapportionment was to secure the support of those preferred creditors to the scheme by offering to them a significant inducement in the form of a recoupment which was clearly more than they would have received through liquidation of the company. It worked. The deed resulting from the resolution at the meeting was not signed until three days after the time limited by the Law for that step, due mainly to the activity generated by Farrow's opposition to it, and the administrator has now brought an application for a suitable extension of time. Save for its general opposition to the entire scheme, Farrow does not oppose such an extension if the deed were to be upheld. This is reasonable. However, as it is entitled to do under the Act, Farrow applies under the Law to have the deed disallowed and set aside upon the basis that it was unfairly discriminated against and prejudiced by the scheme. It should be noted that it must show not only discrimination or prejudice but also that it was unfair. -- 6 of 11 -- 4 Its arguments take two different streams and although they are said to merge, they are really quite distinct except that the second may operate to assist the first. However if the second succeeds, there is really no occasion to have reference to the first and conversely the first was advanced substantially in its own right without the need to rely upon the effect of the second. They are- 1. That Farrow was unfairly discriminated against because, in proportion to the amount of their respective debts, the share of the distribution which it was to receive was less than that to be received by each of the other creditors; and 2. That the investigation by the administrator was insufficiently thorough to justify his exercise of his casting vote against the wish of so substantial a creditor. The merged proposition is that the investigation left open the possibility of the existence of substantial unrecovered assets which, if taken into account, may have meant that Farrow was discriminated against in the sense that the recovery of such assets may have provided it with much more than it was to receive under the proposed arrangement, a difference which was not so serious in the cases of the other creditors. Although it is true that the effect of the arrangement was to diminish the share which Farrow was to receive from Bartlett's contribution, however in the result it would still have received about $80,000.00 through it whereas upon a liquidation it would receive nothing or very little. While this advantage is trivial compared with the very large amount of its debt, it was still an advantage and represented an increase in its recovery that is larger than the increase in recovery enjoyed by any other creditor if the bare amount of the benefit is considered rather than their respective proportions. If this were the only issue then the arrangement might be regarded as reasonable enough and Farrow's opposition could have been -- 7 of 11 -- 5 attributed to obstructiveness designed to extract its maximum return without regard to reasonable compromise, a certain flavour of which is detectable in the material. Moreover, in circumstances such as this where every party is to benefit from the proposed arrangements, the Court would not be obliged to discountenance an administrator's overriding of the dissent of a major creditor simply because there is disproportion in the spread of the benefit. The purpose of the statutory scheme 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. When such a case comes before the Court for review, the criteria that will guide it are the fairness and practicality of the scheme as a whole rather than its adherence to strict technical entitlements, although they too must be considered in assessing the quality of fairness. The difficulty about the present arrangement lies in another direction that has probably been picked up opportunistically by Farrow's advisers for apart from one feature which was partly answered at the time by the administrator without further complaint by Farrow, none of the issues now raised were the subject of complaint by Farrow at the time. It now alleges that the administrator did not make enquiry in a number of areas sufficient to justify his recommendation of the arrangement and his subsequent use of his casting vote. These matters include enquiry into the reason for Bartlett's contribution towards the arrangement, the possibly related question as to whether the tax loss benefit remaining to the company to the benefit of Bartlett was such as to render the contribution inadequate as compared with the benefit which Bartlett -- 8 of 11 -- 6 would receive by avoiding the liquidation of the company, the sale of certain substantial assets in the company, including the sale of a boat to Bartlett, the sufficiency of the consideration for the sale of shares in related companies that had substantial tax loss benefits and, in one case, the value of the equity in a substantial asset which was subject to security for loans. In his report at the time the administrator acknowledged a certain superficiality in his investigation of the company's affairs though this is not necessarily fatal for the degree required would depend upon the circumstances of the case. He correctly had regard to the audited accounts of the company but clearly these would not have been sufficient for present purposes if there were some reason to conduct serious enquiry in respect of specific issues. In respect of the value of tax losses as an asset in the sale of the shares in related companies, a general form of response was given by the partner of the administrator at the time, and no criticism has been levelled at it so that for present purposes it might be regarded as sufficient. However in respect of other features, it might reasonably be said that the spectacular fall of the company and its associates and the wholesale liquidation of its assets, mainly by secured creditors but sometimes by the company itself under stress would warrant a sufficient review and then profound scrutiny where necessary of the disposition of assets where they have been sold well below their apparent value, particularly to Mr Bartlett's interests. Moreover it would not be unreasonable to exp·ect that some enquiry should be directed to the advantages to Mr Bartlett of keeping the company out of liquidation in order to determine whether the amount of his contribution was suitable to that benefit. -- 9 of 11 -- 7 It may be that some investigation has been made into these matters and even sufficient to indicate that further enquiry on some or even all would be pointless or excessive in the discovered circumstances. However, the evidence advanced for the administrator and particularly his own evidence under cross-examination was very unsatisfactory and insufficient to establish that adequate enquiry had been undertaken. This is not to criticise his honesty either in the conduct of the matter generally or in his evidence; but he was most inadequate in his responses due to his lack of memory of the matters under discussion or because they were the work of one of his subordinates. Though he was aware of the purpose of his evidence, it seems that no provision was made to enable him to provide adequate information to the Court, the supporting documentary material was minimal, and his attitude, at least at the beginning of his evidence, did not manifest any great desire to provide assistance to the Court. This may have been the result of the acknowledged paucity of his investigation, but a better response as to the subjects of investigations and what they revealed may have provided better confidence in the result. It is also necessary that an administrator be independent and objective. The magnitude of Farrow's loss is not entirely compelling because of the great likelihood that whatever happens its loss will still remain very large. However, it does have some relevance in the sense that any reasonably possible recoupment of substance should not easily be overlooked. The state of the evidence prevents any conclusion that the administrator has given to the issues referred to that degree of enquiry which Farrow is entitled to expect in this case. Its relatively small benefit by sharing in the funds provided by Bartlett, reduced by the disproportionate nature of the allocation, emphasises the desirability that there be such enquiry as should -- 10 of 11 -- 8 reasonably satisfy it. Because that has not been shown to have been done, its applications should succeed. Accordingly it is ordered that pursuant to s.447A of the Corporations Law the resolutions passed under part 5.3A of that Law on 30 November 1993 be set aside with costs. The applications of the administrator are dismissed with costs. There is liberty to apply. -- 11 of 11 --