Mutual Holdings Pty Ltd V Shepard in his capacity as the administrator of Quest Minerals Ltd

27 January 2016

In the 12th edition of the Insolvency Quarterly, we discussed the inherent complexity in a liquidator discharging their duty to adjudicate proofs of debt arising out of litigious claims (see Proofs of debt arising out of litigation: Tricky Business).

Similar to proofs of debt arising out of litigious claims, there is very little detailed guidance in case law or statute that assists liquidators in discharging  their duty in adjudicating on proofs of debt arising out of such claims asserted by a company’s purported creditors that arise from instruments that may contravene provisions of the Corporations Act 2001(Cth) (Act).

The recent decision of Mutual Holdings Pty Ltd v Shepardin his capacity as the administrator of Quest Minerals Ltd 1 provides some useful insight into the adjudication of proofs of debt in such situations.

Background

This matter was an appeal of the decision of the deed administrator of Quest Minerals Ltd (Subject to a Deed of Company Arrangement) (Quest) to refuse two proofs of debt on the basis that the underlying agreements giving rise to the purported debt contravened section 208 of the Act.

The deed administrator was originally appointed by the directors of Quest as voluntary administrator of Quest on 9 May 2014 (Appointment Date).

In short, this dispute arose as a result of the deed administrator’s adjudication of debts arising out of the following agreements:

  1. An agreement dated 4 May 2007 between Corporate Admin Services Pty Ltd (CAS) and Quest pursuant to which CAS agreed to provide administrative services to Quest (Administrative Services Agreement); and
  2. An agreement dated 23 October 2009 between Mutual Holdings Pty Ltd (Mutual) for the transfer to Quest of rights associated with an exploration licence application (Tenement Sale Agreement).

For the purpose of this discussion, the complexities of the above agreements need not be discussed, save to note that they:

1.    Conferred a financial benefit to Mutual and CAS;
2.    Were entered into prior to the Appointment Date; and
3.    Gave rise to debts existing on or before the Appointment Date.

The parties’ respective positions

The deed administrator alleged that both Mutual and CAS were related entities of Quest, by way of the sole shareholder of Mutual and CAS being a ‘shadow’ director of Ques t2.

The plaintiffs, Mutual and CAS denied that the director was ever a ‘shadow’ director and, in any event, that both the Tenement Sale Agreement and the Administrative Services Agreement fell within the exception contained in section 210 of the Act (that is, that they were both “arms-length” transactions).

The deed administrator contended that the alleged contravention of section 208 of the Act would render the Tenement Sale Agreement and the Administrative Services Agreement unenforceable and, as a result, should not be admitted to proof in the DOCA.

Relevant provisions
Section 1321 of the Act

When an aggrieved creditor appeals the adjudication of their proof of debt pursuant to section 1321 of the Act, it is referred to as an “appeal”, however these proceedings are originating in nature and a court approaches the proceedings de novo –  “on facts afresh” 3. It is not merely a review of the initial adjudication of the proof of debt, and the court will consider and review all relevant facts relating to that particular proof in reaching its decision.

Need for member approval for a financial benefit

Section 208 provides that in order for a public company to give a financial benefit to a party related to that company, the public company must obtain the approval of the company’s members in accordance with sections 217 to 227 of the Act.

Particularly relevant to this discussion are sections 209(1) and 103 of the Act. Both provisions provide that a contravention of section 208 of the Act does not, in insolation, affect the validity of a contract connected with the giving of the benefit to the related party.

The expression used in section 103 of the Act is instructive, and states that an agreement is not invalid “merely because” of a contravention of section 208 of the Act (amongst other provisions).

Further, sections 209(2) and 209(3) of the Act outline the consequences for a breach of section 208 of the Act by a person “involved” in that contravention 4.

The relevant authorities

In support of its position, the deed administrator relied on the decision of Habersberger J in Orrong Strategies Pty Ltd v Village Roadshow Ltd5, which involved an adjudication of a proof of debt with respect to termination bonuses and incentives  that were found to have been entered into in contravention of the related party provisions of the then Corporations Law (Corporations Law).

In Orrong, Habersberger J distinguished between the validity and enforceability of a contract, and contrasted these notions with the adequacy of mechanisms expressly provided for by the Act (for contraventions of provisions such as section 208 of the Act) to achieve the purpose of protecting the interests of its members.

In this case, Mitchell J relied upon HCK China Investments Ltd v Solar Honest Ltd 6, which related to contraventions of sections 206 and 615 of the Corporations Law. He further relied on Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd 7 in relation to section 256D(2) of the Corporations Law, which provision resembles section 209(2) of the Act).

The pivotal issue

Mitchell J considered that the pivotal issue for determination was whether the contravention of section 208 of the Act, if established by the deed administrator, provided a valid basis for the deed administrator refusing to admit the proofs of debt.

Mitchell J stated that:

“The question becomes whether the debts [purportedly owed to Mutual and CAS] either do not exist or were unenforceable at 9 May 2014 because the agreements giving rise to the debts gave a financial benefit to a related party in contravention of s 208 of the Act.”

The decision

Particular emphasis was placed upon the provisions of section 103 of the Act, which expressly provides that an agreement is not invalid “merely because” of a contravention of section 208 of the Act. That is, an agreement that was entered into in contravention of section 208 of the Act cannot, in isolation, render that agreement invalid.

Additionally, Mitchell J noted that the provisions of section 209 of the Act do not impose a sanction on a public company which gives a financial benefit to a related party, but rather on persons “involved” in that contravention.

In summarising the scheme of the Act, Mitchell J determined that:

  1. A public company is not subject to any sanction as a result of giving financial benefits to a related party;
  2. Other persons may be subject to sanction if they are involved  in a contravention of section 208 of the Act; and
  3. Importantly, that the validity and unenforceability of a contract are not affected by the fact that it provides for the giving of a financial benefit to a related party (in light of, in particular, section 103 of the Act).

In concluding on this issue, Mitchell J stated that enforceable debts existed as at the Appointment Date and that position could not be affected by a contravention of section 208 of the Act.

Conclusion

Adjudication of proofs of debt that arise out of instruments that may contravene the Act need to be considered in the context of the legislative scheme and the statutory sanctions provided for by that scheme. In particular, primacy must be given to the statutory text (in this case, the Act) provided, of course, that the relevant provisions are substantive and achieve the stated objective.

This decision serves as another timely reminder for insolvency practitioners to discharge their (somewhat problematic) duty to adjudicate proofs of debt on the basis of well reasoned, impartial adjudication utilising all guidelines (either in statute or case law) available.

This article was written by Richard Johnson, Partner and Justin Naidu, Solicitor.


1 [2015] WASC 412.
2 Ibid.
3 Pursuant to Section 228(4) of the Act.
4 Re Galaxy Media Pty Ltd (in liq) (2001) 167 FLR 149.
5 As defined in section 79 of the Act.
6 [1999] FCA 1156; (1999) 165 ALR 680.
7 [2001] NSWCA 427; (2001) 166 CLR 144.

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