ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited;... [2009] FCA 454 | Case summary

REASONS FOR JUDGMENT 1 The first plaintiffs, who are the administrators of the second plaintiffs (the Administrators), appointed under the Corporations Act 2001 (Cth) (the Act), have applied for a further extension of the convening period for the second meeting of creditors of ABC Learning Centres Limited and the companies in the ABC Learning Centres Group (the ABC Group). The Administrators were appointed to the ABC Group on 6 November 2008. On 27 November 2008, the Court ordered that the convening period for the second meeting of creditors, which would have expired on 4 December 2008, be extended up to and including 31 March 2009. The Administrators now seek a further extension of the convening period up to and including 30 September 2009. The full length of the extension would then be in the order of 10 months. 2 The Administrators' application has been made at the request of the receivers and managers of the members of the ABC Group (the Receivers), who were appointed by secured creditors. The application is supported by the Commonwealth and by the court-appointed receivers of ABC 2 Group Pty Limited, to which I shall refer shortly. However, while an extension is supported by Austock Childcare Fund (Austock), to whom I shall refer shortly, Austock opposes an extension of six months. 3 I have considered the evidence provided by the affidavits of Peter Murray Walker of 12 March and 19 March 2009, Christopher John Honey of 6 March 2009, David Paul Cowling of 19 March 2009 and Scott Geoffrey Hedge of 20 March 2009. 4 Soon after their appointment, the Receivers formed the view that the most appropriate way to carry out their duties as receivers would be to continue to trade the child care centres operated by the ABC Group and to sell the business as a going concern. The Receivers continue to be of that opinion and they have continued to trade the child care centres. 5 The Receivers' plan for the receivership is to continue trading the businesses for a sufficient time to allow them to review the operations completely, to make operational changes where necessary to improve profitability, and then to engage in a sale process. The Receivers propose three broad steps. 6 First, the Receivers have reviewed the child care centres operated by the ABC Group and identified those that are valuable to the continuing business and those that are unprofitable. The second step is to assess the organisational structure of the ABC Group and to make changes, where necessary, so as to improve the overall efficiency of the businesses. The third step is to trade the restructured business for as long as it is necessary to establish the business as a viable, saleable asset, whether as a whole or in part, and then to effect the sale of the enterprise or enterprises as going concerns. At this stage, the Receivers have completed the first and substantially completed the second of those steps. They are planning the third step. 7 In implementing the first step, the Receivers undertook a review of all of the child care centres operated by the ABC Group. On the basis of that review, the Receivers took the view that they should continue the operations at 721 of the centres, that 55 centres should be closed and the enrolled children be accommodated in nearby ABC Centres that were among those 721 centres that were to continue in operation. The 55 centres were subsequently closed on 31 December 2008. Two hundred and sixty-two of the centres were considered to be unprofitable and, therefore, unviable. The Receivers considered that continuing to operate them would be detrimental to the remainder of the ABC Group business. At the request of the Commonwealth, those 262 centres were transferred to a wholly owned subsidiary of the ABC Group, over which neither the Receivers nor the Administrators had control. That subsidiary is ABC2 Group Pty Limited. On 18 December 2008, Stephen James Parbury and Daniel Bryant (the Court-appointed Receivers), were appointed receivers and managers of ABC2 by order of the Supreme Court of New South Wales. Following that appointment, the 262 centres were transferred to ABC2 pursuant to the terms of an operation deed between the Receivers, Court-appointed Receivers and the Department of Education, Employment and Workplace Relations of the Commonwealth (the Department). ABC2 continues to operate those 262 centres with the support of the Department, while the Court-appointed Receivers engage in the process of endeavouring to find buyers for those centres. 8 As part of the second step, the Receivers conducted a review of the head office cost centre of the ABC Group. The head office cost centre includes the head office in Queensland, as well as regional and state offices. As of the date of the appointment of the Receivers, there were 448 staff employed within that cost centre. The Receivers determined that the core business of running the 715 child care centres could effectively operate with approximately 120 fewer head office staff and, accordingly, a number of employees' services have been terminated. A further aspect of the second step was to investigate those aspects of the business that were not necessary to support the ABC Group's central business of operating child care centres. The Receivers reviewed the operating cost base of the ABC Group business and, where possible, have reduced or eliminated what were considered to be unnecessary costs in order to improve profitability, without impacting on the quality of care provided to the children in the continuing centres. 9 So far as step three is concerned, the Receivers have largely settled upon which of the child-care centres will continue to trade. They do not see, at present, any need to close further centres. They expect that the 715 centres currently operated by the ABC Group will be those eventually put to the market. They are now proceeding with the planning of step three, in preparation for the sale of the enterprise. That step necessarily involves the continued trading of the businesses. 10 The businesses are now trading with a positive cash flow. The Receivers expect that situation to continue, at least until the completion of the sale process. The Receivers have sufficient undrawn funding available to them under existing facilities and that, together with normal cash flow, is expected to be adequate to continue to trade the 715 centres until they are sold, without the need to seek further funding. 11 In order to prepare the enterprise for sale, the Receivers intend to continue to improve the performance and profitability of the businesses. They will consider the appointment of an investment bank to advise on the sale process. They will prepare an information memorandum to provide to prospective buyers. They intend to advertise the business for sale both locally and internationally, and to assemble information necessary to facilitate due diligence investigations on behalf of prospective buyers. 12 The Receivers consider that it is possible that the enterprise will be able to be sold as a whole, or at least in a large group, and that such a sale could be achieved in the second half of 2009, or possibly early 2010. The Receivers consider that the receivership is a very significant and complex external administration. It involves 39 companies and initially over 1000 child care centres in Australia, which process over 100,000 child care transactions each week. In addition to securing and restructuring the ABC Group's assets, the Receiver's investigations have also extended to identifying assets that may have been improperly transferred to third parties. Those investigations are ongoing. 13 All of the 715 centres that continue to trade operate from premises leased from third parties. Austock is one of those third parties and is the landlord in respect of some 245 centres. It is also the landlord of something in excess of 100 centres that have been transferred to ABC2. The rent payable in respect of the premises that continue to be used is being paid in advance. 14 The Receivers are continuing to obtain goods and services from various suppliers. The Receivers do not expect that any of those suppliers would be detrimentally affected by an extension such as is now under consideration. 15 The Receivers are of the view that the further extension of the convening period is in the best interests of all creditors, and it is for that reason that the Receivers requested the Administrators to make this application. The Receivers consider that the granting of the further extension is in the interests of all creditors for a number of reasons. 16 First, it will allow the Receivers adequate time to achieve the best price for the sale of the ABC Group's business. That is to say, they will be in a position to continue to assess the operations and make operational changes, where necessary, to improve profitability and to maximise the value of the business as a going concern. They will be able to permit the businesses to trade in order to demonstrate a consistent level of earnings and profitability as well as, they hope, rising occupancy. The Receivers regard that as a crucial step in generating interest in prospective buyers. The delay will enable them to engage in a sale process in relation to the business. In order to achieve the best price, the Receivers wish to ensure that there is flexibility in the structure and timing of the sale process. At this stage, they are of the view that the sale process should not be commenced until the second half of 2009 and that it may have to be later. 17 Next, the Receivers have taken into account that the Administrators have not yet received any proposal concerning a possible deed of company arrangement for the ABC Group. The Receivers do not regard that as unusual, at this stage, having regard to the complexity of the administration. The Receivers consider that a liquidation would not be in the best interests of creditors, because of the negative perception that the market would have in association with liquidation. Those negative perceptions could hinder the Receivers' ability to permit the businesses to continue to trade to achieve the best price. 18 Further, if the ABC Group were to go into liquidation, the various companies occupying child care centres would lose the benefit of the moratorium afforded by the legislation, and landlords may be able to evict the companies and re-enter the premises presently occupied by them. Steps would be need to be taken in those circumstances to seek relief against forfeiture. The Receivers consider that, if that were to occur, the ability of the ABC Group to generate revenue would be significantly impaired because, as I have said, all of the 715 centres are occupied under tenancy arrangements. That could severely impact on the price that might be obtained. 19 The Receivers consider that a period of up to six months is a practical and realistic estimate of the time required by them to carry out the steps that I have described. The Administrators consider that a further extension of the convening period is reasonable and in the interests of the majority of creditors, including employees. The Administrators consider that the benefit to creditors outweighs any argument that the statutory moratorium would adversely affect the interests of some of the creditors. 20 The administration and receivership of the ABC Group is unusual. In the Administrators' opinion, the nature and extent of the assets that the Receivers are seeking to sell, by their very nature, require a significant period of marketing to achieve maximum value. The Administrators therefore consider that all interested parties are likely to be advantaged by the further extension. The Administrators have had regard to the interests of creditors and employees as well as the Government, parents and landlords. The Administrators considered that the position of ordinary, unsecured creditors will not be damaged by the extension, having regard to the conclusion of the Receivers that the businesses are now operating with a positive cash flow. Funds presently available to the Receivers are therefore sufficient to meet the expenses of operating the businesses and the position of unsecured creditors will not worsen. 21 Since the making of the orders on 27 November 2008, extending the convening period to 31 March 2009, the Administrators have continued their investigations into the affairs of the ABC Group. Those investigations are necessary to enable the Administrators to prepare a report pursuant to section 439A(4) of the Act and to enable the Administrators to consider what, if any, recovery actions might be available for the benefit of creditors generally. However, as I have said on earlier occasions, the Administrators have no funds available to them other than funds made available by the Receivers or third parties. The Administrators have entered into an arrangement with IMF (Australia) Limited, the detailed terms of which are not presently relevant. That funding will permit the preparation of a preliminary report of the solvency of the ABC Group as at June 2008. It is hoped that the preliminary report will be available by early April 2009. The entering into of the funding agreement was approved by the committee of creditors. If a further extension is granted, the Administrators will be able to continue their investigations into the affairs of the ABC Group and consider any possible recovery actions that may be available. 22 The Administrators have given specific consideration to the position of employees and landlords. In the normal course of an administration, employees who either are retrenched or leave are not entitled to payment of any unpaid employee entitlements pursuant to the General Employee Entitlements and Redundancy Scheme of the Commonwealth (GEERS)until such time as the company is ordered to be wound up or a provisional liquidator is appointed. 23 On 22 December 2008, the Court gave directions that the Administrators may properly and justifiably execute and give effect to a deed with the Commonwealth governing the advance of money under GEERS. On 19 January 2009, the Administrators and the Commonwealth executed a deed. Approximately 519 employees have resigned or have been made redundant from 6 November 2008 to 31 January 2009. Those employees have received or will receive payments under GEERS as if the ABC Group were in liquidation. As a result of the deed that has been entered into between the Administrators and the Commonwealth, any further employees who may resign or be retrenched will have similar benefits. 24 As I have already said, all of the centres operated by the ABC Group are occupied under tenancy arrangements with third parties. The Administrators have notified the owners of the premises upon which a number of centres were operated that they do not wish to exercise any rights in relation to those premises. The Receivers continue to pay rent and outgoings to landlords on a monthly basis. The Administrators have received a number of requests from landlords that the Administrators consent to the landlords' taking possession of premises pursuant to section 440C of the Act. At present, the Administrators have provided no such consents. Only 18 landlords have made such requests, which represents a fairly small proportion of the combined total of 715 centres and the 262 unprofitable centres that have been transferred to ABC2. 25 Following the orders made by the Court on 13 November 2008, there is a single committee of creditors, which has been empowered to sit as a single committee of 14 members in respect of all companies in the ABC Group. At a meeting held on 4 February 2009, the Committee was informed that the Receivers proposed to request that the Administrators apply to the Court for a further extension of the convening period. Thirteen of the 14 members of the Committee have indicated they have no opposition to the extension. The fourteenth is Austock, which has indicated that, while it would support an extension, it would prefer an extension limited to three months. The basis for that qualification is Austock's concern that the period of the extension is inordinately long. I shall come back to that shortly. 26 The Administrators consider that, having regard to the complexity of the affairs of the ABC Group companies, there are strong commercial and practical reasons for the further extension to be granted. They consider that it is in the interests of the overwhelming majority of creditors to permit the Receivers a period of time to complete their restructuring plans and complete the three steps to which I have referred, before engaging in the sale process. 27 The total extension contemplated of 10 months is a long one. The power to extend the convening period should not be exercised as a matter of course, since it is an important objective of the provisions of the Act that creditors be fully informed about the company's position as soon as possible and have an opportunity to vote on the future of the company as soon as possible. 28 An application for an extension is to be assessed by reference to whether an extension is necessary to enable the Administrators to prepare and provide the report and statements that are required by the Act and, in particular, inform creditors adequately, so that they will be in a position to choose whether to return the company to the directors, execute a deed of company arrangement or place the company into liquidation. As I have indicated on previous occasions, the Administrators are very much in the hands of the Receivers because they have no control over the assets and have no funding. The complexity and difficulties of the administration are factors that can be taken into account in determining whether to grant an extension and the extent of an extension. 29 I have considered the position taken by Austock which is a significant player in the arrangements that are before me. However, it was not suggested by Austock that three months was sufficient time for the Receivers to complete the steps that they have proposed. Rather, the concern of Austock, which is clearly a legitimate one, is to ensure that the Receivers and the Administrators proceed with all possible expedition to complete the administration. At present, I do not consider there is any basis for any concern that the Receivers or the Administrators are not proceeding with the administration with due expedition. 30 The matter is listed before me for directions again on 8 May 2009 to ensure that the Court retains a degree of control over the administration. If, by that stage, Austock or any other creditor is concerned that there is a lack of diligence being displayed in the administration, those matters could be raised at that time. If need be, a further order could be made varying the orders that have already been made, the effect of which would be to curtail the extension. At present, I do not see any basis for concern but that is a possibility that is left open for any creditor who wishes to make an application. 31 The present application is supported by the Commonwealth Government, which has an interest in the way that I have indicated, and by the Court-appointed Receivers, who have an indirect interest. Their object is to achieve a sale of the unprofitable centres that have been transferred to ABC2. That is likely to be promoted by the success of the sale of the profitable centres. 32 A final matter that has been raised by the Administrators concerns the manner in which interested parties should be notified of the orders of the Court. The evidence is that the normal printing and postage costs of notification would be quite significant. In the circumstances, the Administrators seek orders qualifying the way in which notification is to be made and given to interested parties. I consider that it is appropriate to accede to that request. In all of the circumstances, I propose to accede to the application by the Administrators made by the interlocutory application of 13 March 2009. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No. 7) [2009] FCA 454

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Judgment (12 paragraphs)

Legislation Cited (1)

Cited By (24)