FEDERAL COURT OF AUSTRALIA

TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company

arrangement) [2014] FCA 789

Citation: TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789

Parties: TIVO, INC and TIVO BRANDS, LLC v VIVO INTERNATIONAL CORPORATION PTY LIMITED (ACN 087 480 171) (SUBJECT TO DEED OF COMPANY ARRANGEMENT), ADAM EDWARD PATRICK FARNSWORTH (IN HIS CAPACITY AS THE DEED ADMINISTRATOR OF VIVO INTERNATIONAL CORPORATION PTY LIMITED (ACN 087 480 171) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)) and DAVID DAI

File number: VID 232 of 2014

Judge: GORDON J

Date of judgment: 29 July 2014

Catchwords: CORPORATIONS – administration – deed of company administration – whether deed should be terminated – some other reason – non-disclosures – public interest – commercial morality – Corporations Act 2001 (Cth), s 445D(1)

Legislation: Corporations Act 2001 (Cth)

Cases cited: Alabama, New Orleans, Texas and Pacific Junction Railway Co; Re [1891] 1 Ch 213Bathurst City Council v Event Management Specialist Pty Ltd (admin apptd) (2001) 36 ACSR 732Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358Data Homes Pty Ltd (in liq) and the Companies Act; Re [1972] 2 NSWLR 22Denistone Real Estate Pty Ltd and Companies Act; Re [1970] 2 NSWR 327Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to deed of company arrangement); Deputy Commissioner of Taxation v Silindale Pty Ltd (subject to deed of company arrangement); Deputy Commissioner of

- 2 -

Taxation v Dalvale Pty Ltd (subject to deed of company arrangement) (2000) 34 ACSR 391DSG Holdings Australia Pty Ltd v Helenic Pty Ltd (2014) 307 ALR 143Emanuele v Australian Securities Commission (1995) 63 FCR 54Flatau; Re [1893] 2 QB 219Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) (2005) 228 ALR 598Hester; Re (1889) 22 QBD 632JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593Mascot Home Furnishers Pty Ltd (in liq);Re; Re Spaceline Industries (Australia) Pty Ltd (in liq) [1970] VR 593Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300Mustang Marine Australia Services Pty Ltd (admin apptd); Re [2010] NSWSC 1429Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427Telescriptor Syndicate Ltd; Re [1903] 2 Ch 174Tivo Inc v Vivo International Corporation Pty Ltd [2012] FCA 252TiVo Inc v Vivo International Corporation Pty Ltd [2013] FCA 1340Vivo International Corporation Pty Ltd v TiVo Inc (2012) 294 ALR 661Young v Sherman (2002) 170 FLR 86Zero Population Growth (Formerly David Roy Hughes); Re (unreported, Federal Court of Australia, Burchett J, 30 May 1990)

Keay, AR, McPherson’s Law of Company Liquidation, (3rd ed, Sweet & Maxwell, 2013)

Date of hearing: 21 July 2014

Date of last submissions: 24 July 2014

Place: Melbourne

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 81

- 3 -

Counsel for the Plaintiffs: JWS Peters QC and O Bigos

Solicitor for the Plaintiffs: Davies Collison Cave Law

Counsel for the First and Third Defendants:

PD Crutchfield QC and DF McAloon

Solicitor for the First and Third Defendants:

Kemp Strang

Counsel for the Second Defendant:

CT Moller

Solicitor for the Second Defendant:

Bridges Lawyers

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION VID 232 of 2014 BETWEEN: TIVO, INC

First Plaintiff

TIVO BRANDS, LLCSecond Plaintiff

AND: VIVO INTERNATIONAL CORPORATION PTY LIMITED (ACN 087 480 171) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)First Defendant

ADAM EDWARD PATRICK FARNSWORTH (IN HIS CAPACITY AS THE DEED ADMINISTRATOR OF VIVO INTERNATIONAL CORPORATION PTY LIMITED (ACN 087 480 171) (SUBJECT TO DEED OF COMPANY ARRANGEMENT))Second Defendant

DAVID DAIThird Defendant

JUDGE: GORDON J

DATE OF ORDER: 29 JULY 2014

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT:

1. On or before 12 noon on 31 July each party is to file and serve a short submission

limited to 2 pages directed to who should be appointed liquidator and whether that

person consents to being appointed, the question of costs and orders to give effect to

these reasons for judgment.

2. The proceeding be adjourned until 2.00 pm on 31 July 2014.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).

- 2 -

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION VID 232 OF 2014

BETWEEN:

TIVO, INCAND:

VIVO INTERNATIONAL CORPORATION PTY LIMITED (ACN 087 480 171) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

JUDGE: GORDON J

DATE: 29 JULY 2014

PLACE: MELBOURNE

REASONS FOR JUDGMENT

A INTRODUCTION

1 Vivo International Corporation Pty Ltd (ACN 087 480 171) (Vivo) entered into a Deed of

Company Arrangement (DOCA) on 7 March 2014. TiVo, Inc and TiVo Brands, LLC (the

Plaintiffs) seek to terminate the DOCA and seek an order that Vivo be wound up pursuant to

the provisions of the Corporations Act 2001 (Cth) (the Corporations Act).

2 The orders sought by the Plaintiffs were opposed by Vivo. The third defendant, Mr David

Dai (Mr Dai), informed the Court that he would abide the Court’s decision. The second

defendant, Mr Adam Farnsworth of Farnsworth Shepard (the deed administrator under the

DOCA) (Mr Farnsworth), neither consented to, nor opposed, the orders sought by the

Plaintiffs. Mr Farnsworth filed written submissions “to provide explanation or clarification

of particular factual matters” and appeared by Counsel at the hearing.

- 2 -

3 For the reasons that follow, the DOCA should be terminated and Vivo wound up.

Those orders will be subject to certain conditions addressed in Section E below.

B BACKGROUND

Incorporation, Legal Proceedings and Subsequent Steps

4 Vivo was incorporated on 7 May 1999. Its sole shareholder is Vivo International Pty Limited

(Vivo International). Mr Dai was the sole director of Vivo from 27 June 2013. Prior to that

date, Mr Fabio Grassia (Mr Grassia) was the sole director of Vivo from 11 May 1999. Until

mid-November 2012, Vivo was an importer and wholesaler of televisions and other audio-

visual goods which bore the trade mark VIVO. Until 7 December 2012, Vivo was the

registered owner of the VIVO trade mark in Australia.

5 The Plaintiffs are incorporated in the United States of America. TiVo, Inc was incorporated

in August 1997 as “Teleworld, Inc”. Since 1999, TiVo, Inc has been listed on the NASDAQ

Stock Market. TiVo Brands, LLC was incorporated on 22 March 2005 and is a wholly

owned subsidiary of TiVo, Inc. The Plaintiffs manufacture and sell personal video recorders

under the trade mark TIVO. TiVo Brands, LLC owns the trade mark registration for TIVO in

Australia in respect of various audio-visual goods and related services.

6 In January 2011, the Plaintiffs commenced trade mark infringement proceedings in this Court

against Vivo and Mr Grassia. Judgment was delivered on 19 March 2012: Tivo Inc v Vivo

International Corporation Pty Ltd [2012] FCA 252 (the Infringement Proceedings).

On 23 March 2012 the following orders were made:

1. [Vivo’s] Trade Mark Registration No. 1223930 for VIVO (the VIVO mark) be cancelled and the Registrar of Trade Marks rectify the Register of Trade Marks accordingly.

2. [Vivo], whether by itself, its directors, employees or agents or howsoever otherwise, be restrained from infringing [TiVo Brands, LLC’s] Trade Mark Registration No. 813297 for TIVO (the TIVO mark) by using in respect of televisions, portable DVD players, computer monitors, digital set-top boxes, digital photo frames, remote controls or home theatre systems, the VIVO mark or any other mark substantially identical with or deceptively similar to the TIVO mark.

3. The operation of orders 1 and 2 be stayed for 14 days.

4. The Fast Track Cross-Claim dated 9 March 2011 be dismissed.

- 3 -

5. The monies deposited by [the Plaintiffs] as security for costs pursuant to order 1 of her Honour Justice Dodds-Streeton’s orders dated:

(a) 15 June 2011; and

(b) 18 July 2011,

be released to [the Plaintiffs], together with any interest accrued thereon.

6. [Vivo] pay [the Plaintiffs’] costs of and incidental to the proceeding, including the Cross-Claim, on the following basis:

(a) assessed or taxed up to and including 11am on 29 July 2011 on a party and party basis;

(b) assessed or taxed thereafter on an indemnity basis.

7. Despite order 6, [the Plaintiffs] pay [Mr Grassia’s] costs exclusively attributable to the claim against the [Mr Grassia] for accessorial liability, assessed on a party and party basis.

The Plaintiffs thus obtained judgment against Vivo, but not Mr Grassia.

7 On 14 November 2012, an appeal was dismissed and Vivo and Mr Grassia were ordered to

pay the Plaintiffs’ costs: Vivo International Corporation Pty Ltd v TiVo Inc (2012) 294 ALR

661 (the Appeal).

8 The Plaintiffs allege that during the course of the Appeal they requested Vivo to provide

security for the Plaintiffs’ costs of the Appeal. In response to this request, it is alleged that

Vivo, through its then lawyers, provided various assurances that Vivo had sufficient assets to

satisfy any costs orders made against it. It is alleged that Vivo specifically referred to a term

deposit held with HSBC (the HSBC Account). On 8 June 2012, the Plaintiffs’ solicitors

ascertained from an organisation search of the Personal Property Securities Register that

HSBC had a charge over the HSBC Account. The charge over that account was fixed and

floating. The Plaintiffs did not make an application for security for their costs of the Appeal.

9 By a Business Sale Agreement dated 31 December 2012, Vivo sold, and Viano Corporation

Pty Ltd (ACN 161 320 378) (Viano) agreed to buy, Vivo’s “Business” for the “Cash

Component”. (At that time, Viano was called Vivo Australia Pty Ltd.) Mr Grassia was and

remains the sole director of Viano and the sole shareholder of Viano’s parent company,

Veloce Holdings Pty Ltd.

- 4 -

10 Under the Business Sale Agreement, the “Cash Component” was $251,897.80. The Business

was sold on a “going concern basis”: cl 2.1. Title to and the property of the Business passed

to Viano on and from “Completion”: cl 2.7. “Completion” was defined as the completion of

the sale and purchase of the Business under the agreement: cl 1. “Completion Date” was

defined as 31 December 2012 or such other date as the parties agreed: cl 1. There was no

evidence that any other date was agreed. Viano took possession of the Business on the

Completion Date: cl 3.1.

11 Viano agreed “to pay to [Vivo] the Cash Component at any time after the date of this

Agreement but before 31 December 2013”: cl 3.1, see also cl 3.3. Vivo’s obligations on

Completion were to give to Viano possession of the Business free from all Security Interests:

cl 3.2(a). Viano acknowledged and agreed that Vivo was not required to physically deliver

any part of the Business to Viano, that Viano took the components of the Business as and

where they may be located as at Completion and that the Business was deemed to have been

delivered by virtue of Completion: cl 3.2(b). The “Business” was defined to include

identified activities and assets: see cl 1. One defined asset was “any other asset agreed

between Vivo and Viano to be transferred under this Agreement”: sub-clause (m).

Particular assets were separately addressed in the Business Sale Agreement. Clause 3.4

provided that on Completion Vivo had to do all that was necessary to transfer the Cash Assets

(any cash in hand held by Vivo) that belonged to Vivo at Completion. Viano also took the

Goodwill and took over the employees: cll 5 and 6.

12 Debtors were addressed in cl 8. It provided that Viano was “entitled to the payment of and

collection of all Debts owing to the Business as at Completion and the interest in the Debts

[was] transferred to [Viano]”. “Debts” was defined to mean all debts and any other monies

owing to Vivo at Completion in connection with the Business: cl 1.

13 After the Appeal was determined, the Plaintiffs took steps to pursue their claim for monetary

relief arising from the judgment in the Infringement Proceedings. On 24 April 2013, orders

were made which included:

1. An order that [Vivo] (by an officer with sufficient personal knowledge of the affairs of the company) serve within 28 days of 24 April 2013 an affidavit setting out the matters in (a) to (e) and annexing to the affidavit all documents relevant to the matters referred to in paragraphs (a) to (e).

(a) the total number of goods bearing the VIVO mark sold and otherwise disposed of by it in Australia on and from 23 March 2012 (Vivo goods);

- 5 -

(b) the price at which each of the Vivo goods was sold or otherwise disposed of;

(c) the cost to [Vivo] of the sale and disposal of the Vivo goods;

(d) the approximate amount of profit [Vivo] contends it has made by the sale or disposal of the Vivo goods; and

(e) the steps or reasoning by which the approximate amount referred to in paragraph (d) above has been calculated.

14 Vivo did not comply. On 26 June 2013, the Plaintiffs filed a further interlocutory application.

That application was determined on 30 July 2013 and Vivo was ordered to pay the Plaintiffs’

costs of and incidental to that application on a solicitor and client basis: Tivo Inc v Vivo

International Corporation Pty Ltd (No 3) [2013] FCA 797.

15 On 10 September 2013, the Plaintiffs filed an application for contempt against Vivo,

Mr Grassia and two related companies – Red 88 Pty Ltd (Red 88) and Viano. Viano had

bought Vivo’s Business: see [9] above. On 12 December 2013, Vivo, Mr Grassia, Red 88

and Viano were found guilty of contempt: TiVo Inc v Vivo International Corporation Pty Ltd

[2013] FCA 1340 (the Contempt Proceedings). The respondents (Vivo, Mr Grassia, Red 88

and Viano) were ordered to pay the Plaintiffs’ costs on an indemnity basis.

16 On 24 October 2013, orders were made for the filing and serving of evidence in relation to

the Plaintiffs’ claim for monetary relief. As at 22 November 2013, Vivo’s liability to the

Plaintiffs for an account of profits was estimated at $224,137.55. As at the date of Vivo’s

administration, the Plaintiffs estimate Vivo’s costs liability to them to be $971,542.74,

bringing their total clam to $1,195,680.29.

17 On 11 November 2013, the Plaintiffs’ solicitors ascertained from an organisation search of

Vivo on the Personal Properties Securities Register that HSBC’s security interest over the

HSBC Account had been released on 4 September 2013: see [8] above. On 18 November

2013, the Plaintiffs’ solicitors requested confirmation that the funds in the HSBC Account

were still available to satisfy any adverse costs order made against Vivo.

18 On 22 November 2013 (some 11 months after the Completion Date), Viano paid the Cash

Component to Vivo under the Business Sale Agreement. On the same day, Vivo’s solicitors

told the Plaintiffs’ solicitors they had been unable to obtain instructions and would respond

by 25 November 2013. Vivo was placed into voluntary administration on 22 November

2013. The order in which those events occurred is not clear.

- 6 -

19 Mr Adam Shepard, also of Farnsworth Shepard, was appointed as administrator of Vivo on

22 November 2013 pursuant to s 436A of the Corporations Act. (That section relevantly

provides that an administrator may be appointed if the directors are of the opinion the

company is insolvent, or is likely to become insolvent at some future time, and an

administrator of the company should be appointed). The second defendant, Mr Farnsworth,

replaced Mr Shepard as administrator of Vivo on 4 December 2013.

First Meeting of Creditors

20 The first meeting of creditors was held on 4 December 2013. Ten creditors were represented

at the meeting. All creditors (except the Plaintiffs and Kemp Strang, Vivo’s lawyers) were

represented by the chairman. The Plaintiffs filed a Proof of Debt for voting purposes.

21 After that meeting, the Plaintiffs’ solicitors received a copy of Vivo’s Report as to Affairs

dated 2 December 2013 (RATA). The RATA was signed by Mr Dai and Mr Grassia. The

RATA did not disclose details of the HSBC Account, but revealed that Vivo had cash at bank

of $216,871.95. Between 5 December and 16 December 2013 the Plaintiffs’ solicitors and

the solicitors acting for Mr Farnsworth corresponded about the HSBC Account.

Mr Farnsworth’s solicitors advised that Mr Farnsworth would report the findings of his

investigations into the HSBC Account in his report to creditors before the next meeting of

creditors.

22 On 21 January 2014, the Plaintiffs submitted a revised Proof of Debt of $1,195,680.29.

Section 439A Report

23 The Section 439A Report to creditors was issued on 6 February 2014. That Report stated,

inter alia, that:

1. in Mr Farnsworth’s opinion, Vivo was insolvent from at least 31 December 2012;

2. according to Vivo’s trial balances, its profit and loss position before tax was:

2.1 net profit of $2,398,839 for the financial year ended 30 June 2010;

2.2 net profit of $1,691,532 for the financial year ended 30 June 2011;

2.3 net loss of $24,220 for the financial year ended 30 June 2012; and

2.4 net loss of $980,170 for the financial year ended 30 June 2013,

3. according to Vivo’s trial balances, its net asset position was:

3.1 net assets of $1,720,718 as at 30 June 2010;

- 7 -

3.2 net assets of $1,004,592 as at 30 June 2011;

3.3 net assets of $372 as at 30 June 2012; and

3.4 net liabilities of $979,798 as at 30 June 2013.

24 Section 7.5.3 of the Section 439A Report addressed related party loan accounts. There were

three – Mr Grassia, an entity named Vivo Technology International Pty Limited (Vivo

Technology International) (that could not be located on the Australian Securities and

Investments Commission (ASIC) Database) and Vivo International Pty Ltd

(Vivo International). Vivo International is the sole shareholder of Vivo. Mr Grassia was

and remains the sole director and shareholder of Vivo International. The Section 439A

Report summarised the Vivo International loan account as follows:

The Company’s trial balance for financial years ended 30 June 2011, 30 June 2012 and 30 June 2013 disclose the following:

30/06/2010$

30/06/2011$

30/06/2012$

30/06/2013$

Opening balance - - 5,525,979 CR 1,899,238 CRNet movement - 5,525,979 CR 3,626,741 DR 2,046 DRClosing balance - 5,525,979 CR 1,899,238 CR 1,897,192 CR

Vivo International is disclosed in the RATA as a creditor for the amount of $1,932,271.

I have not received all of the source documentation, ledgers and journals for this loan account however I make the following comments:

1. Sometime in the financial year ending 30 June 2011 it appears that the credit balance loan account of Mr Grassia ($3,191,677) was assigned to Vivo International.

2. The dividend declared in the 30 June 2011 accounts ($1,900,000) was credited to the loan account on 30 June 2011.

3. The dividend declared in the 30 June 2012 accounts ($980,000) was credited to the loan account on 30 June 2012.

4. On 30 June 2012 there was a series of journal entries made in relation to [Vivo’s] bank accounts including a term deposit in the sum of approximately $3,500,000 which resulted in a net reduction in the loan account of some $3,626,741 in this financial year.

5. [Vivo’s] accounts disclosed a net reduction in the loan account for the financial year ending 30 June 2013 of $2,046.

25 In short,

- 8 -

1. Vivo International claimed to be an unsecured creditor in the amount of $1,932,271 in

relation to a loan account but Mr Farnsworth could not verify that account because not

all source documentation had been provided to him;

2. During the 2011 financial year, Mr Grassia’s loan account credit of $3,191,677 was

assigned to Vivo International and dividends totalling $2,880,000 were credited to

Vivo International’s loan account in 2011 and 2012;

3. During the 2012 financial year, there were a series of journal entries in relation to

Vivo’s bank accounts including a term deposit of approximately $3.5 million which

resulted in a net reduction in the Vivo International loan account of $3,626,741.

26 Next, the Section 439A Report addressed the Business Sale Agreement. Mr Farnsworth

expressed the view that it was unlikely that the sale transaction would be set aside by a

liquidator. That statement needs to be understood in the context in which it was made.

27 Prior to the administration, Vivo had commissioned third party valuations of its plant, its

intangible assets and goodwill. Mr Farnsworth engaged third parties to review those

valuations. They were confirmed. Mr Farnsworth was also provided with Vivo’s stocktake

at Completion (under the Business Sale Agreement). It disclosed stock at hand with a book

value of $519,449. Pickles Auctions appraised the stock (on a sight unseen forced liquidation

basis with no rebranding costs) at $51,944 or, assuming 65% rebranding costs, at $18,180

(inclusive of GST). It is worth noting that the firm that valued the intangible assets and

goodwill stated in their report that there was a limitation on the financial and other

information available to them, and that if that information had been available their valuation

assessment may have been materially different.

28 Notwithstanding the valuations and the view expressed by Mr Farnsworth, a number of

matters should be noted about the Business Sale Agreement. First, Mr Farnsworth

incorrectly asserted that the Business Sale Agreement did not deal with debtors. It did:

see [12] above. Second, although Mr Farnsworth had asked for a reconciliation of debtors as

at the date of the Business Sale Agreement, he had not received that reconciliation or even a

reply. Third, total debtors received after 31 December 2012 was $5,289,441 of which

$3,548,682 was paid to Vivo International. This was not referred to in the Section 439A

Report. Given the terms of the Business Sale Agreement and each of the matters just

identified (whether taken individually or collectively), there is a serious question about

- 9 -

whether this agreement was an uncommercial transaction. That question was not identified

or addressed in the Section 439A Report.

29 Section 7.5.4(b) of the Section 439A Report dealt with the payment of dividends. The report

recorded that Vivo’s accounts disclosed the following dividends:

Financial Year Net Assets Surplus/ (Deficiency)

($)

Dividend Paid($)

30 June 2011 1,004,592.00 1,900,000.0030 June 2012 372.00 980,000.00Total 1,004,964.00 2,880,000.00

As we have seen, the $2.880 million was paid by Vivo to Vivo International: [24]-[25] above.

The report stated that it appeared as though Vivo and the director (Mr Grassia) may have

breached the Corporations Act in the payment of those dividends. Mr Farnsworth did not

quantify the amount that might have been recovered in relation to the potential breach of

directors’ duties concerning the payment of the dividends.

30 Next, cash at bank. Section 5.1(i) of the Section 439A Report addressed Vivo’s cash at bank.

The RATA disclosed cash at bank of $216,871. This amount was the closing balance of what

was described as Vivo’s “HSBC bank account” and was realised in the administration. It is

not clear which account is being referred to. Annexure 8 of the Section 439A Report records

that Mr Farnsworth received this cash at bank (plus $10.39 in interest income) between 22

November 2013 and 4 December 2013. There are however further unanswered questions

about Vivo’s cash assets.

31 Term deposit statements of Vivo with HSBC for two accounts numbered [***053] and

[***054] were in evidence. Those statements disclosed that account [***053] contained

$3.5 million initially deposited on 16 March 2012 for a one month term. That term deposit

was renewed numerous times. The last renewal was for two months on 16 August 2012.

On 26 September 2012, Mr Grassia instructed HSBC to “break the TD no [***053] and

transfer $1.6m to our 164 account and continue to hold the balance till maturity (16 Oct)”

(Emphasis added). Mr Grassia requested the bank “waver the break up costs considering we

are a long term customer”. It is not clear whether that occurred. A “Term Deposit Full

Withdrawal Confirmation” was issued on 26 September 2012. The net proceeds were

recorded as $3,570,203.01. A “New Term Deposit Confirmation” for account number

[***054] was issued for $1,987,072.58 for the remainder of the term: 26 September 2012 to

- 10 -

16 October 2012. Then, a “Term Deposit Full Withdrawal Confirmation” dated 16 October

2012 recorded that $1,987,072.58 was paid to account number [***164].

32 Reconciliation of the journal entries and the banking records is not readily apparent.

From September to October 2012, approximately $3.5 million from term deposits were

transferred to Vivo’s “164 account” or Vivo’s account number [***164]: see [31] above.

Mr Farnsworth found that during the 2012 financial year (ending 30 June 2012), there was a

series of journal entries in relation to Vivo’s bank accounts including a term deposit in the

sum of approximately $3.5 million which resulted in a net reduction in the Vivo International

loan account of $3,626,741: see [24]-[25] above. These discrepancies were not resolved.

33 Possible recoverable transactions were then addressed in section 8 of the Section 439A

Report. Mr Farnsworth identified transactions as potentially recoverable by a liquidator

including the following transactions involving Vivo’s parent company – Vivo International:

1. The payment of dividends of $2.880 million to Vivo International in the 2011 and

2012 financial years: see [24]-[25], [29] above;

2. The reduction in the loan account of Vivo International of $748,787 during 2011 to

2013: see [24]-[25] and [32] above; and

3. The payment of $2,487,121 to Vivo International after 31 December 2012

(identified from bank statements).

34 From the bank statements, Mr Farnsworth identified that net payments were made to Vivo

International of $3,235,908. These payments included “prima facie, the proceeds of [Vivo’s]

debtor collections”. Mr Grassia told Mr Farnsworth that the payments were “part of a

running balance loan account”. Mr Farnsworth had insufficient information to confirm this.

It appears also to be inconsistent with the reduction in loan account balance recorded in the

accounts: see [24]-[25] above. The potential recoverable transactions listed exceeded

$6 million.

35 In the Section 439A Report, Mr Farnsworth recorded the lack of information which included:

1. Despite requesting a statement of personal assets and liabilities from Mr Grassia,

he had not received any statement at the date of the report. That remained the

position at the time of the hearing.

2. He did not receive all of the source documentation, ledgers and journals for

Mr Grassia’s loan account.

- 11 -

3. Despite requesting a statement of personal assets and liabilities from Mr Dai, he had

not received any statement at the date of the report.

4. Although he received reconciled trial balances for the financial years ended 30 June

2010 – 30 June 2013 and the lodged income tax returns for the years ended 30 June

2011 and 30 June 2012 of Vivo, he had not received all primary records for Vivo

including in relation to related party loan accounts.

5. As at 31 December 2012, the trade debtors of Vivo were unknown. Mr Farnsworth

had asked for a reconciliation of debtors as at the date of the Business Sale Agreement

but did not receive a reply.

6. Despite requesting financial statements from Vivo International, he did not receive

any.

7. He did not receive all of the source documentation, ledgers and journals for the Vivo

International loan account, in relation to which Vivo International claimed an

outstanding debt of $1,932,271. As noted above, Mr Farnsworth did not have

sufficient information to verify Mr Grassia’s assertions about a “running balance loan

account”.

8. Although he had conducted searches on the ASIC database, he could not locate an

entity or business by the name of Vivo Technology International, a related party for

which Vivo had a loan account. Due to the immaterial nature of the transactions, he

did not pursue this investigation further.

9. Despite requesting information from Mr Grassia about payments made by Vivo to

another related party of which he was a director, Sasona Pty Ltd, he did not receive a

reply.

10. Despite writing to HSBC Bank Australia Limited about the general security

agreement over Vivo’s assets which was discharged on 4 September 2013, he had not

received a reply.

36 The Section 439A Report recorded that a DOCA had been proposed under which control and

stewardship of Vivo would revert to Mr Dai, no action would be taken against Mr Dai,

Mr Grassia or related parties, a deed fund would be established of $616,872 of which

$457,372 would be available for distribution among participating ordinary unsecured, partly-

secured and contingent creditors and that Vivo International would not participate in the deed

- 12 -

fund and would release its claim of $1,932,271. The estimated return to creditors under the

DOCA at the time of the Section 439A Report was 17 cents in the dollar.

37 The Section 439A Report also recorded that the proposed DOCA was to be funded by

contributions from Mr Grassia. The Section 439A Report stated:

Mr Grassia has not provided me with a statutory declaration of his personal assets and liabilities and has not provided me with any supporting documents indicating his ability to fund the proposed deed. …

38 Despite the proposed DOCA, Mr Farnsworth recommended Vivo be wound up under the

provisions of the Corporations Act for three reasons – the unknown ability of Mr Grassia to

fund the payment under the DOCA, missing source documentation particularly in relation to

the Vivo International loan account and possible recoverable transactions. If Vivo was

wound up, Mr Farnsworth estimated recoveries to creditors of between 1 cent and 54 cents in

the dollar. A schedule of likely recoveries was annexed to the Section 439A Report. A copy

of that schedule is Annexure 1 to these Reasons. The notes referred to in the Annexure have

been omitted.

39 In that context, it is necessary to refer to what Mr Farnsworth had to say in the Section 439A

Report about funding. The Section 439A Report contained the following statement:

If [Vivo] proceeds into liquidation and it was contemplated recovery action be considered … in the first instance I would recommend the examination of the director and all relevant parties pursuant to section 596 of the [Corporations] Act. I estimate the cost of same would approximate not less than $50,000. In the event that a decision was subsequently taken to pursue recoveries, legal fees … would be substantial, the funding of which may be required from unsecured creditors depending on recoveries in the administration. …

…

Any creditor who would consider funding in connection with any possible recovery action should advise me of same in writing within seven days.

(Original emphasis.)

Second Meeting of Creditors

40 The second meeting of creditors was held on 14 February 2014. Mr Farnsworth chaired the

meeting. In relation to the Plaintiffs’ claim, Mr Farnsworth allowed it to prove for

$1,074,931.17 of the revised Proof of Debt: see [22] above. Mr Farnsworth disallowed the

costs claimed in relation to the Contempt Proceedings. He admitted the Plaintiffs’ claim in

- 13 -

relation to the account of profits but objected to it. Mr Farnsworth admitted Vivo

International’s claim for $1,932,271 but objected to it.

41 A resolution was moved that Vivo execute the DOCA. Mr Farnsworth declared the

resolution carried. The Plaintiffs and one other creditor, E-Cycle Solutions Pty Ltd, totalling

$1,279,494.44 voted against the proposed DOCA. Ten creditors totalling $3,529,124.56

voted in favour of the proposed DOCA as follows:

1. Vivo International for $1,932,271;

2. Personal Finance Services Pty Ltd for $215,000. Mr Sam Panucci represented this

company. Mr Panucci was the Sales Manager for Vivo. The registered address for

this company is Bruzzano & Associates;

3. Bruzzano & Associates, for $11,000, Vivo’s accountants;

4. Kemp Strang, for $53,716.37, Vivo’s solicitors;

5. Polczynski Lawyers for $9,079, Vivo’s previous solicitors;

6. Hena Group Company Limited for $138,928.84, a trade creditor;

7. Irico (Foshan) Video Technology Co., Ltd for $92,513.89, a trade creditor;

8. Shenzhen Homecare Technology Co., Ltd for $172,550.94, a trade creditor;

9. Shenzhen Qiyue Optronic Co. Ltd for $ 162,874.58, a trade creditor;

10. Zhuhai Anyu Digital and Technology Co., Ltd for $741,189.93, a trade creditor.

42 There was evidence that Irico (Foshan) Video Technology Co., Ltd, Shenzhen Homecare

Technology Co., Ltd and Zhuhai Anyu Digital and Technology Co., Ltd continued to trade

with Viano. For example, on 4 April 2014, Viano placed a purchase order for stock worth

$135,000.00 with Shenzhen Homecare Technology Co., Ltd.

DOCA and subsequent steps

43 On 7 March 2014, Vivo executed the DOCA and Mr Farnsworth became the deed

administrator. On that day, Vivo, Mr Farnsworth and Vivo International executed a Deed of

Release where Vivo International released its claim of $1,932,271 with respect to the deed

fund: see [36] above. The DOCA required Vivo to procure that the “Fixed Sum” of $400,000

be paid to the administrator by 21 April 2014, but that sum was not received by that date.

These proceedings were commenced on 23 April 2014. On 5 May 2014, the General

Manager of E-Cycle Solutions Pty Ltd wrote stating that E-Cycle Solutions Pty Ltd supported

- 14 -

the Plaintiffs’ application to terminate the DOCA and wind up Vivo. A further meeting of

creditors was held on 28 May 2014 to consider a proposal to vary the DOCA. The variation

was necessary to extend the time for payment of the “Fixed Sum” and to preserve the status

quo pending the outcome of this proceeding. The creditors resolved to vary the DOCA and

the Deed of Variation was executed on 25 June 2014.

44 On 25 June 2014, Vivo’s solicitors confirmed that the “Fixed Sum” had been paid into their

trust account and they had received an irrevocable direction to pay the “Fixed Sum” to

Mr Farnsworth within fourteen days after the Final Determination of these proceedings,

where Final Determination was defined to mean the later of:

a. the date on which the Proceedings are dismissed;

b. the date on which the Proceedings are brought to an end to the satisfaction of the Company in its absolute discretion; or

c. the period of time prescribed by an appellate court in which an appeal can be filed with respect to the Proceedings has expired.

45 Also on 25 June 2104, Mr Farnsworth provided sworn evidence that if he was appointed

liquidator to Vivo and “was to complete [certain] investigations”, the likely cost of those

investigations (including liquidator’s fees and legal costs) would be:

a) conducting public examinations, including issuing orders for production: $50,000.00 to $100,000.00;

b) liaising with funders and / or creditors regarding potential actions, and further investigations: $20,000.00 to $100,000.00;

c) commencement of litigation: $50,000.00 to $300,000.00.

The total funding required was between $120,000 and $500,000.

46 On 10 July 2014, a bankruptcy notice was issued at the request of the Plaintiffs against

Mr Grassia. The Plaintiffs informed the Court that they served this bankruptcy notice on

Mr Grassia in respect of the amount they are owed under a Certificate of Taxation issued on

4 June 2014 for the sum of $175,233.30, for which Mr Grassia and Vivo are jointly and

severally liable.

47 The Plaintiffs’ application to terminate the DOCA was heard on 21 July 2014. On the

morning of the hearing, the Plaintiffs provided the following undertaking:

- 15 -

… [T]o fund public examinations by the liquidator in the estimated sum of AU$50,000 on terms acceptable to the liquidator. The Plaintiffs expect that, as a term of the funding, the liquidator will consider favourably an arrangement for the Plaintiffs to receive priority under section 564 of the Corporations Act 2001 (Cth) (Act).

Vivo submitted that the Plaintiffs’ undertaking was unsatisfactory and should not be

accepted. It complained that it was limited to $50,000, the scope of the funding was too

narrow, there was no evidence of the financial capacity of the Plaintiffs to provide the

undertaking and it was too late.

48 On the day following the hearing, the Plaintiffs increased the sum to $100,000 on the same

terms. The Plaintiffs undertook, within 7 days of 22 July 2014, to transfer $100,000 to the

trust account of their Australian solicitors and provide an irrevocable direction to the firm to

transfer the sum to the liquidator appointed by the Court for the purpose of funding public

examinations as described in [45(a)] above, within 21 days of the Court making any order to

terminate the DOCA and appointing a liquidator, or such shorter period as the liquidator and

Plaintiffs may agree. The Plaintiffs provided a copy of TiVo, Inc’s most recent Form 10-Q

filing with the United States Securities and Exchange Commission which contained

information about the company’s financial position.

49 Given the passage in time and the events since the entry into the DOCA, the likely return to

creditors has changed. At the hearing, Mr Farnsworth provided an updated schedule

comparing the likely return under both the DOCA and liquidation. After the hearing,

Mr Farnsworth provided a memorandum with a further breakdown of additional items,

and the effect that various costs had on the likely return to creditors. That schedule is

attached as Annexure 2 to these Reasons. Part 1 of the Annexure includes the items that were

not in the Section 439A Report under the heading “Deed Administrator’s additional estimated

costs re TiVo proceedings”. Part 2 provides a further breakdown of those items using figures

prepared by Mr Farnsworth. Part 3 outlines the effect that the additional costs would have on

the likely return to creditors under the DOCA and a liquidation using figures prepared by

Mr Farnsworth.

50 The Plaintiffs had one complaint about this additional information. They contended that the

heading “Deed Administrator’s additional estimated costs re TiVo proceedings” was

incorrect as it improperly included amounts that relate to (a) amounts attributable to the TiVo

proceedings and (b) amounts attributable to the amendments of the DOCA necessitated by

- 16 -

the failure of the proponent of the DOCA to provide funds by the due date. Vivo’s position

was that, save for the costs referable to the application to extend the convening period, all of

the costs set out in Part 2 (including the costs of the “variation meeting”) were attributable to

the proceeding commenced by the Plaintiffs.

51 Other aspects of the schedule should be noted. The subtotals for “Return on Liquidation

High 1” and “Return on Liquidation High 2” (in both Annexure 1 and Annexure 2) appear

not to include the amount of $39,736 in preference payments. This would have a small effect

on the outcome under those scenarios and would marginally increase the estimated

distribution to creditors. The subtotal for “Return on Liquidation Medium 1” also appears to

be arithmetically incorrect. These considerations do not have a material impact on the use of

these schedules as a guide to the likely returns under different scenarios. This schedule

demonstrates that the likely return to creditors under a liquidation may be significantly

greater than under the DOCA. The tentative expression is required by the lack of disclosure:

see [35] above.

C LEGISLATIVE FRAMEWORK

52 Section 445D(1) of the Corporations Act provides that a Court may terminate a DOCA if it is

satisfied, amongst other things, that:

(a) information about the company’s business, property, affairs or financial circumstances that:

(i) was false or misleading; and

(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

was given to the administrator of the company or to such creditors; or

(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or

(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or

(d) there has been a material contravention of the deed by a person bound by the deed; or

(e) effect cannot be given to the deed without injustice or undue delay; or

- 17 -

(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii) contrary to the interests of the creditors of the company as a whole; or

(g) the deed should be terminated for some other reason.

53 The Plaintiffs relied upon s 445D(1)(f) and (g).

Oppressive etc – s 445D(1)(f)

54 In deciding whether a DOCA is oppressive, unfairly prejudicial and/or unfairly

discriminatory, and/or contrary to the interests of the creditors as a whole, the courts have

regard to factors including:

1. the object of Pt 5.3A;

2. the interests of other creditors, the company and the public;

3. the comparable position of the creditor on a winding-up, compared with their position

under the deed; and

4. other relevant facts such as the relative position of all creditors under the deed

(ie whether they are better off), the existence of a collateral benefit to the shareholders

and the whole of the effect of the deed.

See, for example, Sydney Land Corp Pty Ltd v Kalon Pty Ltd (No 2) (1997) 26 ACSR 427;

appeal dismissed: Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593.

55 Section 435A is important. It describes the object of Pt 5.3A. Here, the relevant object is to

ensure that the business, property and affairs of Vivo, as an insolvent company, are

administered in a way that results in a better return for Vivo’s creditors and members than

would result from an immediate winding up of the company. As it has sometimes been said,

s 435A effectively places the onus on those who support the DOCA to show positively that it

“results in a better return for the company’s creditors and members than would result from an

immediate winding up of the company” (emphasis added): JA Pty Ltd v Jonco Holdings Pty

Ltd (2000) 33 ACSR 691 at [90].

56 The New South Wales Court of Appeal recently reiterated that “the interests of creditors”

falls to be construed in such a way as would best promote the express object of Pt 5.3A as

- 18 -

contained in s 435A: DSG Holdings Australia Pty Ltd v Helenic Pty Ltd (2014) 307 ALR 143

at [91]. However, as the Court of Appeal recognised, s 435A must be construed

harmoniously with other related provisions in the Act and, in particular, with s 445D(1)(f)

which “repeats the interests of the creditors as a whole, but introduces a category of

oppression or unfair prejudice to or unfair discrimination against any particular creditor or

group of creditors”: at [92].

57 These propositions relate to the “interests of creditors”. And, as will be explained at [60]

below, it is important to recognise that these are not the only relevant interests. It is

necessary to take account also of wider public interests.

Termination for some other reason – s 445D(1)(g)

58 Section 445D(1)(g) may be available “where the proposal for the [deed of company

arrangement] has a fraudulent or wrongful purpose or the [deed of company arrangement]

offers an unconscionable premium, contrary to public policy, as a bribe to creditors to support

an arrangement under which the conduct of the directors will not be investigated”:

Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company

arrangement) (2005) 228 ALR 598 at 609 [63] (citations omitted); Young v Sherman (2002)

170 FLR 86 at 104 [67] and 109 [92]. So, for example, if the DOCA was used to avoid or

forestall an investigation, that may be significant to the criterion “contrary to the interests of

the creditors as a whole”: Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd

(subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300 at [191].

59 The circumstances in which a DOCA may be terminated are not closed. Each case will

depend upon its own facts and combination of circumstances, which must be mutually

balanced: Mediterranean Olives at [197].

Discretion

60 The Court’s power under s 445D(1) is discretionary. There is some authority that the

“primary consideration” is the interest of creditors: Bidald Consulting Pty Ltd v Miles

Special Builders Pty Ltd (2005) 226 ALR 510 at [272]. What is clear is that the discretion is

to be exercised having regard not only to the interests of creditors as a whole but also the

public interest: Emanuele v Australian Securities Commission (1995) 63 FCR 54 at 69-70;

Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to deed of company

arrangement); Deputy Commissioner of Taxation v Silindale Pty Ltd (subject to deed of

- 19 -

company arrangement); Deputy Commissioner of Taxation v Dalvale Pty Ltd (subject to deed

of company arrangement) (2000) 34 ACSR 391 at [105] and Bidald at [287].

“Public interest” includes, in this context, whether the continuation of the DOCA is

conducive or detrimental to commercial morality and to the interests of the public at large:

Emanuele at 69 citing Re Data Homes Pty Ltd (in liq) and the Companies Act [1972]

2 NSWLR 22 at 26. The Court has a duty with regard to the commercial morality of the

country. That duty is longstanding and exists in relation to schemes of arrangement

(Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 229-

230 and 239 and Re Mascot Home Furnishers Pty Ltd (in liq); Re Spaceline Industries

(Australia) Pty Ltd (in liq) [1970] VR 593 at 596), the bankruptcy of an individual

(see Re Telescriptor Syndicate Ltd [1903] 2 Ch 174 at 180-1, Re Flatau [1893] 2 QB 219 at

223 and Re Zero Population Growth (Formerly David Roy Hughes) (unreported, Federal

Court of Australia, Burchett J, 30 May 1990) at pg 4), the winding up of a company

(Re Denistone Real Estate Pty Ltd and Companies Act [1970] 2 NSWR 327 at 329; Re Data

Homes at 26 and Keay AR, McPherson’s Law of Company Liquidation, (3rd ed, Sweet &

Maxwell, 2013) [17-007]) and deeds of company administration (Emanuele at 69).

61 Two statements in Re Hester (1889) 22 QBD 632 are worth restating. At 639 Lord Esher MR

stated:

[The Court] will consider not only whether what is proposed is for the benefit of the creditors, but also whether it is conducive or detrimental to commercial morality and to the interests of the public at large ...

And at 641 Lord Justice Fry stated:

It is an idle notion that the Court is bound by the consents of the creditors. The Court has far larger and more important duties to perform than merely to consider whether the creditors have consented to the rescinding of the order. We are bound in the exercise of our discretion in such a matter, and I think I might almost say in all matters under this Act, to take a wider view. We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country.

62 In Re Flatau at 222-223, Lord Esher MR referred to his judgment in Re Hester in these terms:

“The cases are clear that the Court is not bound by the consent of all the creditors. Although the consent of all the creditors has been obtained, the Court will still consider whether what they have agreed to” (that is, all the creditors) “is for the benefit of the creditors as a whole,” that is, for their benefit, although they have consented. The Court will protect them against their own carelessness and folly, because we know perfectly well that over and over again the creditors of a debtor are quite willing to write off their debts as bad, to write off the whole thing, and let the

- 20 -

debtor begin again, and incur fresh debts. …

Although the context was different, the statements by the Master of the Rolls and Lord

Justice Fry are equally applicable to the exercise of the discretion under s 445D(1).

D PARTIES’ RESPECTIVE POSITIONS

63 The Plaintiffs relied on ss 445D(1)(f) and (g) for terminating the DOCA. They relied on the

following facts and circumstances, both individually and in combination, in support of their

contention that the DOCA ought be terminated under s 445D(l)(f) and/or (g):

1. the comparative likely returns in a winding up are much greater than under the

DOCA;

2. there are circumstances in the conduct of Vivo’s affairs which call for further

investigation by a liquidator;

3. some of the creditors that voted in favour of the DOCA have special connections with

Vivo;

4. other creditors that voted in favour of the DOCA appear to stand to receive economic

benefits as a result of the DOCA beyond the estimated dividend, because of their

continued trade with the acquirer of Vivo’s business (namely Viano) (which would be

investigated in a winding up);

5. termination of the DOCA is in the interests of creditors, as well as the public interest.

64 Vivo objected. Its position was that the Court ought not terminate the DOCA in

circumstances where:

1. all of the voting creditors of Vivo (other than the Plaintiffs and one other creditor who

gave a proxy to the solicitors for the Plaintiffs) had on two separate occasions voted

overwhelmingly in favour of the DOCA; and

2. the creditors’ choice is commercially sound, and was reached on essentially the same

material now put before the Court.

65 As Senior Counsel for Vivo put the argument, Courts will not terminate a DOCA to satiate

someone’s vengeance at least in circumstances where there is no evidence that there is any

utility in doing so and the winding up would be inutile. Vivo’s contention that a winding up

of Vivo would be inutile was not made on the basis that Mr Grassia did not have resources

available to meet any recovery proceedings. No such submission was made. Instead, Vivo’s

- 21 -

submission was that there was “no evidence whatsoever that the liquidator [was] going to

have any money to pursue the legitimate concerns”. The reference by Vivo’s Counsel to the

legitimate concerns was not an error. As Senior Counsel for Vivo accepted, properly in my

view, any one reading the Section 439A Report would have concerns about aspects of the

Section 439A Report. Those legitimate concerns must extend to include, for example,

the numerous instances of lack of disclosure (see [35] above) and the serious questions about

the Business Sale Agreement: see [28] above.

66 It is against that background, that the issues are addressed.

E ANALYSIS

67 Whether one or more of the jurisdictional grounds in s 445D(1)(f) and (g) has been

established and, if so, whether, in the exercise of the Court’s discretion, the DOCA should be

set aside can be treated as two distinct issues: Bidald at [270] and Re Mustang Marine

Australia Services Pty Ltd (admin apptd) [2010] NSWSC 1429 at [91]. At least in the case of

termination "for some other reason" under s 445D(1)(g), however, the identification of “some

other reason” and the determination of whether that reason warrants termination of the

DOCA are necessarily interconnected.

68 What then is the position here? Vivo is not trading. Vivo is insolvent. The Section 439A

Report recorded 10 instances of non-disclosure or lack of essential information. There were

legitimate concerns at the time of the Section 439A Report. Those concerns remain. At the

time of the Section 439A Report, there was no proper disclosure by those in charge of Vivo.

It is unnecessary to determine whether that non-disclosure was deliberate. The fact is that

there was no proper disclosure and that non-disclosure concerned facts and matters which

underpin the legitimate concerns. By reason of those facts, there was a serious risk that

creditors may have been materially mislead. That risk has arguably crystallised by reason of

the fact that it has subsequently became apparent that some essential aspects of the Section

439A Report were inaccurate (see [28] above) or at the very least incomplete (see [35]

above).

69 In the particular circumstances of Vivo, the public interest demands that the DOCA be

terminated under s 445D(1)(g) and an independent third party, namely a liquidator,

conduct an inquiry, at least, in respect of the legitimate concerns.

- 22 -

70 The fact that the majority of creditors voted in favour of the DOCA on two occasions (Vivo’s

first ground of opposition) (see [64] above) is but an element in the exercise of the discretion

under s 445D(1) of the Act: Bidald at [272] and the authorities cited. In the present case,

that consent must be viewed in the context of the non-disclosures and the nature of them

(see [35] above), the identity of the creditors who voted in favour of the DOCA (see [41]

above), the connections those creditors had with Vivo, Mr Grassia and Viano (see [41]-[42]

above) and that the consent was not unanimous (see [41] above). These circumstances

remained in play when the creditors voted to vary the DOCA on 28 May 2014. Those factors

require less weight to be accorded to the votes of the creditors: Bidald at [273] and the

authority cited.

71 Vivo’s second ground of opposition was that the creditors’ choice was and remained

commercially sound, and was reached on essentially the same material now put before the

Court. That contention is flawed factually and legally. The contention that the creditors’

choice was (1) commercially sound and (2) reached “on essentially the same material now

put before the Court” ignores or avoids a significant issue in this case – the non-disclosures.

The non-disclosures existed at the time of the Section 439A Report and remained at the

hearing. By its contention, Vivo asked the Court to endorse, or at the very least ignore,

the non-disclosures and the nature of them (see [35] above). That is neither appropriate nor

possible: see [60] above.

72 It is difficult to understand how the DOCA can be commercially sound given the non-

disclosures and the nature of them (see [35] above) and that by reason of those non-

disclosures, there could be no real examination of any capacity to pay. The matter may be

tested this way. In taking into account the interests of creditors, one factor is whether

creditors would be better off under the DOCA or a liquidation: Bidald at [276] and the

authorities cited. The comparison is between the position the creditors would be in if the

DOCA is terminated and the position they would be in if it is not terminated. That position is

addressed at [51] above. Here, subject to the question of funding, it cannot be said that the

creditors will be better off under the DOCA because we simply do not know. As has been

just stated, we do not know because of the non-disclosures and the nature of them (see [51]

above). There could be no real examination of any capacity to pay. That view is reinforced

by the fact that counsel for Vivo did not make any submission that there was no capacity to

pay.

- 23 -

73 Vivo’s opposition to the application to terminate the DOCA also relied on the delay in, and

limited scope of, the funding to be provided by the Plaintiffs. The timing of the funding

offered by the Plaintiffs is addressed at [47]-[48] above. The offer of funding was late.

However, that delay must be considered in context. These proceedings were issued on

23 April, two days after the Fixed Sum was to be paid but was not: see [43] above.

The Fixed Sum has not been paid to Mr Farnsworth and is dependent on the outcome of these

proceedings: see [43] above. The amount and scope of the funding is limited: see [48]

above. However, subject to the outcome of the public examinations, the Plaintiffs have

informed the Court that they would consider funding recovery proceedings.

74 Counsel for Vivo also submitted that the Plaintiffs were acting out of self-interest and that the

funding would therefore be used to “satiate [the Plaintiffs’] vengeance” rather than in the

interests of the creditors as a whole. There is no doubt that the Plaintiffs seek to recover from

Vivo and that fact is a reason, probably the substantial reason, for the funding offer.

However, the funding provided is the maximum amount said to be necessary to conduct the

examinations and possibly double the amount necessary. In the circumstances, it is

appropriate that termination of the DOCA be conditional. Within seven days of these orders

the Plaintiffs will need to deposit $100,000 in their Australian solicitors’ trust account

together with an irrevocable direction to that firm to transfer that sum to Vivo’s liquidator at

the request of the liquidator. That funding will be available by the liquidator to primarily

fund examinations and, to the extent possible, any recovery actions. It will not be limited to

funding the examinations. Of course, that would not prevent the liquidator seeking

alternative funding from the liquidation or other third parties.

75 In this context, Vivo referred to the fact that the Plaintiffs have served a bankruptcy notice on

Mr Grassia: see [46] above. That may be put to one side. The debtor is different and the debt

which underpins the bankruptcy notice is far smaller than the amount that the Plaintiffs were

allowed to prove for in their revised Proof of Debt: see [40] above.

76 Counsel for Vivo submitted that “questions of commercial morality” should not override the

wishes of the majority of Vivo’s creditors particularly where there is no evidence of an

adequate source of funding and when any return in a liquidation is speculative. In support of

that contention, they referred to the decision of Finkelstein J in CSR Limited, in the matter of

CSR Limited (2010) 183 FCR 358 at [82] and [86] where his Honour stated (in dealing with a

scheme of arrangement):

- 24 -

A consideration of what is contrary to ‘public policy’ cannot extend beyond considering the interests of members, creditors and persons who in the future might deal with the scheme company or invest in its shares.

…

… [N]otions of commercial morality should be jettisoned from the matters to be considered in approving a scheme. It is dangerous to bring to decision-making an ill-defined and largely subjective set of criteria purporting to represent the views of the community, when, in reality, no one can be sure of that.

It is neither necessary nor appropriate (and on one view dangerous) to seek to pigeon hole a

case into a box labelled ‘public policy’ or ‘commercial morality’. Each case must be

considered on its own facts. Here, the facts and matters identified by the parties have been

addressed including the creditors (and their identity and views) at [41] above, the legitimate

concerns at [68] above, the funding at [47]-[48] above and the likely return to creditors at

[16] above.

77 The problem here would not have arisen if the proposed DOCA had not been put to creditors.

As Santow J said in Jonco Holdings at [113]:

While the administrator is not to be criticised for this, … the present circumstances highlight the importance of the administrator seeking directions and if necessary the court’s intervention when unsatisfied that a deed of company arrangement should yet be put to creditors when creditors could not be properly informed for lack of essential corporate records and there is a serious risk that they may be materially misled.

78 In the particular circumstances of this case and for the reasons set out above, the DOCA

should be terminated by the Court pursuant to s 445D and Vivo should be wound up. As a

condition of those Orders, within seven days of these orders the Plaintiffs must deposit

$100,000 in their Australian solicitors’ trust account together with an irrevocable direction to

that firm to transfer that sum to Vivo’s liquidator at the request of the liquidator.

79 Given the identity of the majority of the creditors (other than the Plaintiffs and the other

creditor that opposed the DOCA (see [41] above)) and the legitimate concerns, it is neither

appropriate nor necessary for there to be a further condition of the termination of the DOCA

that the Plaintiffs pay the remaining creditors the amount they would have received under the

DOCA: cf Bathurst City Council v Event Management Specialist Pty Ltd (admin apptd)

(2001) 36 ACSR 732 at [12]-[13].

- 25 -

80 The Plaintiffs’ solicitors will be required to file and serve a letter confirming receipt of the

$100,000 and the irrevocable direction by 4.00pm on 5 August 2014. If that letter is not

filed, the orders will be discharged under a self-executing order.

81 The parties may have until 12 noon on 31 July 2014 to file a two page submission on the

identity of the liquidator and the question of costs. The proceeding will be adjourned until

2:00pm on 31 July 2014.

I certify that the preceding eighty one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate:

Dated: 29 July 2014

- 26 -

- 28 -

- 28 -

- 29 -

- 30 -