Section 447A & The Missing Link by Pieter Oomens | October 2006
A Part 5.3A second meeting that wasn’t a second meeting. A deed of company arrangement that wasn’t a deed of company arrangement. Where did that leave the creditors, the company, the director and the “deed administrator” after they had been operating happily under the “deed” for six months? The versatility of section 447A has once more been demonstrated...
Facts The case of Willy Kruger Re: Kruger Engineering [2006] NSW SC 1063 concerned a novel sequence of events:
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Kruger Engineering had been in operation for 20 years when a voluntary administrator was appointed on 16 February 2006 by its sole director, Mr Kruger.
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In due course, the administrator (L) convened a second meeting which was held on 15 March 2006 and at which a deed of company arrangement was proposed.
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The terms of the proposal were amended to the advantage of creditors and in a split decision, creditors voted to accept the proposal.
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A deed of company arrangement was prepared but the director was reluctant to sign it having had second thoughts about his ability to generate sufficient cash to enable the deed to be implemented.
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The delay in obtaining execution of the deed necessitated an application to the Supreme Court to extend time for its execution. Time was extended to 26 April 2006. This deed was, however, never signed.
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On 5 April 2006, the administrator convened a further meeting of creditors to take place on 13 April 2006. At the meeting another insolvency accountant (W) separately consulted by the director addressed the meeting about variations to the proposed deed. The meeting was adjourned to allow this further proposal to be developed.
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On 18 April 2006, the administrator called a further meeting of creditors to be held on 26 April 2006.
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At the meeting on 26 April 2006, the new proposed deed of company arrangement was discussed and creditors voted to accept the new proposal. The deed proposed at the meeting on 26 April 2006 was signed later that day. W, and not L, was stated to be the “deed administrator”.
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On 15 September 2006, a further meeting of creditors was held. It was purportedly convened pursuant to section 445F of the Corporations Act 2001 and creditors approved a minor variation to the deed purportedly pursuant to section 445A.
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In accordance with the deed of 26 April (the “Signed Deed”) the company, through the director, pursued various claims against former customers of the company and in particular claims under the Building and Construction Industry Security of Payment Act 1999 (“SOPA”).
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One of the respondents to a claim under SOPA contended that the company was not in fact operating subject to a deed of company arrangement, but was in liquidation and the person who had originally been appointed as administrator was its liquidator. The respondent contended that the SOPA claim by the company was consequently flawed.
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The director and the person purporting to act as administrator of the Signed Deed immediately approached the Supreme Court for relief under section 447A.
T U R KSLEGAL
The Missing Link The sequence of events had a missing link. As Barrett J noted: “The meeting held on 26 April 2006 was not a meeting convened under section 439A. The meeting convened under that section had proceeded to business and concluded on 15 March 2006. That meeting had, as envisaged by section 439C(a), resolved that the company execute a deed of company arrangement. But the deed executed on 26 April 2006 was not executed in conformity with the resolution. It was in different terms. Failure of the company to execute, within the period specified in section 444B(2) (that is, in the particular circumstances, the period ending on 26 April 2006), the deed the subject of the resolution of creditors passed on 15 March 2006, caused section 446A(1)(d) to operate at the expiration of that period. The effect of section 446A(1)(b) was to cause the company to enter the particular form of creditors voluntary winding up imposed by section 446A, with Mr Louttit (the person originally appointed administrator) as liquidator. The resolution of 26 April 2006 that the company execute the revised deed of company arrangement ‘pursuant to section 439C of the Corporations Act’ was not effective for the purposes of Part 5.3A since, having regard to section 439C, a resolution that the company execute a deed of company arrangement can be passed only at a meeting convened under section 439A. The meeting held on 26 April 2006 was not such a meeting.”
Substance v Form The Court was urged to consider that the scenario in which all parties assumed they were operating until the respondent to the SOPA claim exposed the problem was precisely the same as if a slightly different process had been adopted by the relevant parties. Assume that if an instrument incorporating the terms accepted by creditors at the meeting on 15 March had been executed but thereafter varied by creditors under section 445A following a meeting convened under section 445F. The Signed Deed would be effective. Of course, the deed arising from the resolution on 15 March 2006 had not been signed, and no meeting had been convened under section 445F for the purpose of obtaining a resolution of creditors under section 445A to remedy such a deed.
The Reach of Section 447A To give effect to the plain wishes of creditors expressed at the meeting on 26 April and subsequently, the Court had to consider whether section 447A could support orders to the effect that Part 5.3A should operate in relation to the company as if the resolution with respect to the deed of company arrangement passed at the meeting of 26 April had been passed at a meeting convened and held in accordance with section 439A. Barrett J referred to the important case of Australasian Memory Pty Limited v Brien (2000) 200 CLR 270. He noted in particular that the section does not create a general power standing apart from Part 5.3A, but rather it is ‘an integral part of the legislative scheme provided for by Part 5.3A’. As he said: “Because of the inclusion of section 447A, Part 5.3A carries within itself the means of its modification, with the result that its own modification in relation to a particular company is part of the scheme created by Part 5.3A.” Australasian Memory underscored the power of section 447A. There, the administration had terminated at a time and in a manner other than that which was intended because of a failure to comply with Part 5.3A. Section 447A was used in that case to alter the relevant provision (that is, the time fixed by such provision) to cure the irregularity and to achieve what was originally intended and rescue the intermediate transactions: Re Centaur Mining & Exploration Limited (2005) 55 ACSR 293 (at p.302).
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T U R KSLEGAL
Application of Section 447A Barrett J noted the resolution for the adoption of the deed proposed on 26 April had been passed by a significant majority and that the creditors had done so on the understanding that the resulting deed would be a deed of company arrangement. The use of section 447A would, as in Australasian Memory, operate as a rescue of the result of a clear expression of creditors’ wishes from the consequences of non-compliance with Part 5.3A. Orders were made that pursuant to section 447A, Part 5.3A should operate as if the meeting of creditors of the company held on 26 April was a valid meeting convened under section 439A of the Act.
Conclusion The case is important for two reasons: •
It reinforces earlier decisions as to the scope of section 447A, that it can have the effect of altering a provision within Part 5.3A to cure an irregularity.
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To take advantage of the power of section 447A one must look at what was originally intended by the relevant parties. Would the intervention of the section rescue the result of a clear expression of creditors’ wishes from the consequences of non-compliance with Part 5.3A?
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