01 Nov The obligations of deed administrators to inquire into all claims
ION Ltd, in the matter of ION Ltd (subject to deed of company arrangement)  FCA 1119, Federal Court of Australia, Dodds-Streeton J, 15 October 2010
Following ION Limited (ION) and its subsidiaries being placed into administration, the deed administrators invited proofs of debt or claim from the present and former shareholders of ION and its subsidiaries. The deed administrators sought directions from the Court under subsection 447D of the Act regarding the best course of action to satisfy their obligation to inquire into all the claims of the present and former shareholders of ION and its subsidiaries. The deed administrators proposed to offer shareholders who purchased shares on or after 10 September 2004 to elect to prove for a discounted 80 percent of the value of their claim in exchange for which specific details of causation of the loss for those claimants would not need to be proved. This was because the forensic investigation of the deed administrators revealed that ION should have been placed into administration on 10 September 2004, had it complied with its legal obligations. The deed administrators also proposed that other shareholders who had already lodged proofs of debt or claim be provided with an updated report on the forensic investigation of the deed administrators and the opportunity to revise their claims, especially in relation to the requirement that those shareholders establish causation in their proofs.
ION was a public company listed on the Australian Stock Exchange, and it was the ultimate parent company of 22 Australian companies, as well as four New Zealand companies and three companies incorporated in the United States of America.
On 7 December 2004, voluntary administrators were appointed for ION and its 22 Australian subsidiaries. At meetings held for ION and its Australian subsidiaries on 6 May 2005, the creditors of ION and 17 of its 22 subsidiaries resolved that each company would execute a deed of company arrangement (the Plaintiff Companies). The creditors of the five other subsidiaries resolved that those entities would be wound up.
Deeds of company arrangement were executed by the Plaintiff Companies on 27 May 2005. In accordance with a regime under clause 12.6 of the deeds of company arrangement, which effectively incorporated regulation 5.6.48 of the Corporations Regulations 2001 (Cth) (the Regulations), the deed administrators invited formal proofs of debt or claim. Advertisements were also published in The Australian newspaper and on the deed administrators’ website. The deed administrators received around 3,300 proofs of debt from present and former shareholders of ION, who made a variety of allegations frequently based on misleading and deceptive conduct contrary to section 52 of the Trade Practices Act 1974 (Cth) and on ION’s contravention of its disclosure obligations as a publicly listed company under section 67A of the Corporations Act 2001 (Cth) (the Act) and ASX Listing Rule 3.1 over the period October 2003 to December 2004.
The majority of the shareholders’ claimants, represented by DC Legal, alleged that they had taken action (such as acquiring and maintaining their shares) based on the alleged contravening conduct, causing them to suffer loss and damage. Another large group of shareholders, represented by Slater & Gordon, claimed that causation of loss would be established if ION’s share price was inflated due to the contravening conduct, whether or not they relied on it.
The deed administrators undertook forensic investigations of the shareholders’ allegations in accordance with the procedure set out in the High Court decision of Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160. The conclusion of the deed administrators was that had ION complied with its legal obligations, it would probably have ceased trading and been placed into administration on 10 September 2004. The deed administrators therefore decided to admit post 10 September 2004 shareholders to proof for 80 percent of the value of their shareholding without having to submit specific evidence of causation, because such shareholders were most likely to be able to successfully establish loss and damage as a result of ION’s contravening conduct.
Subsection 447D(1) of the Act provides “[t]he administrator of a company under administration, or of a deed of company arrangement, may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator’s functions and power.” Proofs lodged by over 3,300 current and former shareholders of ION, claiming approximately $122 million in loss and damage, constituted the only significant category of proofs of debt under the deeds of company arrangement that had not yet been determined. All priority creditors had been paid in full.
The deed administrators therefore applied to the Court seeking directions regarding the claims of the current and former shareholders of ION. As far as the deed administrators were aware, the only people who might be creditors who had not yet lodged a proof of debt form were those shareholders who had purchased shares on or after 10 September 2004. The deed administrators therefore proposed to notify these post 10 September 2004 shareholders of their right to submit proofs of debt and to offer these new claimants the option of securing admission to their proof for 80 percent of the value of their shareholding. They also proposed to provide other claimants who had already lodged proofs that had not been rejected in full with an updated report outlining the conclusions that the deed administrators reached in their forensic investigations and with the opportunity to revise their proofs.
The two groups of shareholder claimants opposed the immediate determination of the application of the Plaintiff Companies. The deed administrators had advised the shareholder claimants that claimants who purchased shares after 10 September 2004 had 21 days to elect to make the discount proof of election. Shareholders who had already submitted proofs also had 21 days to submit revised proofs. The claimant shareholders argued that this period was far too short given the complexity of the material to be considered and the unsettled nature of the law governing claims for shareholder losses, especially given the different nature and extent of evidence required to establish a connection between the company’s conduct and the loss suffered. It was also argued that the material the deed administrators had provided did not contain sufficiently detailed guidance as to what proofs of causation they would accept from new claimants or from claimants that had already submitted proofs of debt.
Counsel for the Plaintiff Companies argued that the application should be immediately determined as offering post 10 September 2004 shareholders the opportunity to submit a proof and to secure admission to proof at a discount, along with allowing other shareholder claimants the opportunity to revise proofs that had already been submitted exceeded any obligations imposed by the Act, the Regulations or the deeds of company arrangement. Further, the shareholders had received the benefit of information in the form of a report sent in 2005 when the invitation for proofs of debt or claim were sent out to current and former shareholders, and the updated report would permit any appropriate revision.
Dodds-Streeton J adjourned a hearing that took place on 17 August 2010 to allow shareholders time to consider the material provided by the deed administrators, given the complexity of the material to be assessed by the claimant shareholders.
During the period of adjournment, discussions took place between the deed administrators and Slater & Gordon. The significant changes that the deed administrators proposed were to:
extend the time for lodgement of new or revised proofs of debt from 21 days to 45 days;
amend the proof of debt form “to reduce the information required to be provided by shareholders to the extent that this information would otherwise overlap with information provided by shareholders in the shareholder claim form”; and
send to current claimants a notice providing claimants or their professional advisors with an updated report on the forensic investigations of the deed administrators and the opportunity to revise their proofs of debt or claim (except in the case of shareholders represented by Slater & Gordon or DC Legal where the notice will be sent to the shareholder’s legal adviser).
No application or material opposing the plaintiffs’ application was filed. The Court therefore determined that it was reasonable for the deed administrators to seek directions and appropriate for the Court to make them. As clause 12.6 of the deeds of company arrangement effectively incorporated regulation 5.6.48 of the Regulations, the deed administrators were permitted to set a deadline for formal proofs by adopting a specified method. More importantly, a deed administrator has an obligation to inquire into all claims under regulation 5.6.48 of the Regulations. Citing Harry Goudias Pty Ltd v Port Adelaide Freezers Pty Ltd (1992) 7 ACSR 303 to support her ruling, Dodds-Streeton J found that the deed administrators could invite proofs from the new shareholder claimants and could offer the discounted proof election. Further, while there is no obligation to provide an updated report to creditors nor to allow an opportunity for creditors to revise proofs of debt already submitted under the Act, the Regulations or the deeds of company arrangement, it was appropriate for the deed administrators to take this course of action in these circumstances.
Co-authored by Olivia Draudins.
Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.